PAGENO="0001" S. Hrg. 102-579 CURRENT TRENDS IN MONEY LAUNDERING HEARING BEFORE THE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS OF THE COMIMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED SECOND CONGRESS SECOND SESSION FEBRUARY 27, 1992 Printed for the use of the Committee on Governmental Affairs U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 1992 For sale by the U.S. Government Printing Office Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 ISBN 0-16-038507-5 c~c~ I PAGENO="0002" COMMITTEE ON GOVERNMENTAL AFFAIRS JOHN GLENN, Ohio, Chairman WILLIAM V. ROTH, Jr., Delaware TED STEVENS, Alaska WILLIAM S. COHEN, Maine WARREN B. RUDMAN, New Hampshire JOHN SEYMOUR, California Leonard Weiss, Staff Director Franklin G. Polk, Minority Staff Director and Chief Counsel Michal Sue Prosser, Chief Clerk SAM NUNN, Georgia, Chairman JOHN GLENN, Ohio, Vice Chairman WILLIAM V. ROTH, Jr., Delaware TED STEVENS, Alaska WILLIAM S. COHEN, Maine WARREN B. RUDMAN, New Hampshire JOHN SEYMOUR, California Eleanore Hill, Chief Counsel Daniel F. Rinzel, Chief Counsel to the Minority Mary D. Robertson, Chief Clerk (II) SAM NUNN, Georgia CARL LEVIN, Michigan JIM SASSER, Tennessee DAVID PRYOR, Arkansas HERBERT KOHL, Wisconsin JOSEPH I. LIEBERMAN, Connecticut DANIEL K. AKAKA, Hawaii PERMANENT SUBCOMMITTEE ON INVESTIGATIONS CARL LEVIN, Michigan JIM SASSER, Tennessee DAVID PRYOR, Arkansas HERBERT KOHL, Wisconsin JOSEPH I. LIEBERMAN, Connecticut PAGENO="0003" CONTENTS Opening statements: Page Senator Nunn 1 Senator Roth 4 Senator Cohen 6 WITNESSES THURSDAY, FEBRUARY 27, 1992 Kim L. Wherry, Staff Counsel, Permanent Subcommittee on Investigations, accompanied by Harold B. Lippman, Staff Investigator, Permanent Subcom- mittee on Investigations 8 Arturo Gomez, Previous Owner of a Casa de Cambio 18 Ronald G. Woods, U.S. Attorney, Southern District of Texas 29 Charles Lewis, Assistant U.S. Attorney, Southern District of Texas, and Coor- dinator, High Intensity Drug Trafficking Area, Houston, Texas 30 James D. Dutton, Deputy Attorney General, Special Prosecutions Unit, Office of the Attorney General, State of California 35 Ron Eatinger, Chief, Criminal Investigations Division, Internal Revenue Serv- ice, Houston, Texas 40 Dennis E. Crawford, Chief, Criminal Investigations Division, Internal Reve- nue Service, Los Angeles, CA 42 ALPHABETICAL LIST OF WITNESsEs Crawford, Dennis E.: Testimony 42 Prepared Statement 165 Dutton, James D.: Testimony 35 Prepared Statement 106 Eatinger, Ron: Testimony 40 Prepared Statement 157 Gomez, Arturo: Testimony 18 Prepared Statement 89 Lewis, Charles: Testimony 30 Prepared Statement 97 Lippman, Harold B.: Testimony 8 Prepared Statement 53 Wherry, Kim L.: Testimony 8 Prepared Statement 53 Woods, Ronald G.: Testimony 29 Prepared Statement 94 APPENDIX 53 Prepared statements of witnesses in order of appearance (III) PAGENO="0004" Iv Page EXHIBITS 1. SEALED EXHIBIT: Affidavit signed by "Arturo Gomez" under his true name 2. Video tape presented at hearing by Charles Lewis, Assistant U.S. Attor- ney, Southern District of Texas, regarding casas de cambio 3. Chart entitled, "Casas de Cambio Identified in Texas," presented at hearing by Charles Lewis, Assistant U.S. Attorney, Southern District of Texas 179 4. Material presented at hearing by James D. Dutton, Deputy Attorney General, Department of Justice, State of California: a. Chart entitled "California Money Transmitter Law (Effective 11/90)" 180 b. Photos of Storefronts of California Non-Bank Financial Institutions (Casas de Cambio) 181 5. Statement for the Record of Brian M. Bruh, Director, Financial Crimes Enforcement Network, Department of the Treasury 182 6. Statement for the Record of Peter G. Djinis, Director, Office of Finan- cial Enforcement, Department of the Treasury 197 7. Statement for the Record of the U.S. Customs Service 211 8. SEALED EXHIBIT: Material received from the Department of the Treasury * 9. Statement for the Record of Cameron H. Holmes, Unit Chief, Financial Remedies Unit, Criminal Division, Arizona Attorney General's Office.. 224 10. Statement for the Record of the Los Angeles (California) Police Depart- ment 262 11. Statement for the Record of Thomas M. Menino, Boston (Massachusetts) City Council 271 12. Statement for the Record of James R. Zazzali, Chairman, State of New Jersey, Commission of Investigation 273 13. Statement for the Record of Jose M. Garza, Jr., Sergeant Criminal Investigator, Texas Department of Public Safety, Narcotics Service 284 14. Statement for the Record of the American Bankers Association 294 15. Statement for the Record of American Express Travel Services Compa- ny, Inc 337 16. Statement for the Record of Charles A. Intriago, Publisher and Editor, Money Laundering Alert 343 17. Statement for the Record of The National Check Cashers Association, Inc. (NaCCA) 354 18. Additional Statement for the Record of The National Check Cashiers Association, March 31, 1992 362 19. Statement for the Record of Travelers Express Company, Inc 366 20. Statement for the Record of Western Union Financial Services, Inc 387 21. Department of the Treasury, Financial Crimes Enforcement Network, Newsletter, "Trends in Money Laundering," December, 1990 399 22. Department of the Treasury, Financial Crimes Enforcement Network, "Briefing Report on Casas de Cambio," February 11, 1991 410 23. Department of the Treasury, Financial Crimes Enforcement Network, Newsletter, "Trends in Money Laundering," Issue #2, May, 1991 413 24. Department of the Treasury, U.S. Customs Service, "Typology of Money Laundering," and "Typology of Money Laundering: Non-Traditional Financial Institutions," May 31, 1991 (excerpts) 425 25. New Jersey Commission of Investigation, "Public Hearing Report and Recommendations on the Subversion by Organized Crime and Other Unscrupulous Elements of New Jersey's Check Cashing Industry," August, 1988 * 26. Letter to Senator Sam Nunn, Chairman, Permanent Subcommittee on Investigations, dated February 17, 1992, from Harris Stolin, Chief Executive Officer, The Sadler Group, regarding Subcommittee's money laundering hearing 460 * Retained in the files of the Subcommittee. PAGENO="0005" CURRENT TRENDS IN MONEY LAUNDERING THURSDAY, FEBRUARY 27, 1992 U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, COMMITTEE ON GOVERNMENTAL AFFAIRS, Washington, DC. The Subcommittee met, pursuant to notice, at 9:35 a.m., in room SD-342, Dirksen Senate Office Building, Hon. Sam Nunn, Chair- man of the Subcommittee, presiding. Present: Senators Nunn, Lieberman, Roth and Cohen. Staff Present: Eleanore J. Hill, Chief Counsel; Mary D. Robert- son, Chief Clerk; Alan Edelman, Counsel; Kim Wherry, Counsel; Eleni P. Kalisch, Counsel; David B. Buckely, Chief Investigator; Harold B. Lippman, Investigator; John F. Parker, Investigator; Cynthia Comstock, Executive Assistant to Chief Counsel; Declan Cashman, Staff Assistant; Daniel F. Rinzel, Minority Chief Counsel; Stephen H. Levin, Minority Counsel; Carla J. Martin, Minority As- sistant Chief Clerk; Rosemary Warren (Senator Sasser); Kim Corth- ell and Matthew Ballard (Senator Cohen); Richard Ashooh (Senator Rudman); Nina Bang-Jensen (Senator Lieberman). OPENING STATEMENT OF SENATOR NUNN Senator NUNN. The Subcommittee will come to order. Today the Permanent Subcommittee on Investigations turns our attention once again to the subject money laundering. It is difficult to comprehend current estimates of the vast amount of drug profits generated from the sale of illegal drugs. The Internal Revenue Service and other law enforcement agencies estimate that over $100 billion is generated per year nationwide by sales of illegal drugs, and in some way virtually all of this cash has to be laun- dered. In response to the magnitude of this problem, Congress has cre- ated stiff Federal penalties for money laundering and increased re- porting requirements for certain cash transactions. These efforts have been acclaimed by law enforcement agencies as very success- ful measures which have armed them with the resources needed to attack the money laundering problem. Most of these statutes, however, focused on preventing money laundering through traditional banking institutions. Until that leg- islation was passed, drug dealers had been walking into the lobbies of banks across the country and depositing garbage bags and suit- cases full of cash, with few questions asked. Once in the banking system, the money was transferred from account to account or (1) PAGENO="0006" 2 wire-transferred out of the country. This way the source of the funds could no longer be traced to the initial depositor. With the passage of the 1986 Money Laundering Control Act, banks became criminally liable under Federal law for knowingly failing to file reports for cash transactions over $10,000. In the wake of several successful prosecutions of traditional banks and bank officials under these provisions and growing knowledge among bankers of this societal problem, bankers have now for the most part become actively involved with law enforcement authori- ties in ferreting out money laundering activities. Money laundering, however, still continues. It is like a river whose course is altered with the changing landscape. To avoid the increased enforcement efforts in the banking community, drug dealers are now turning to business that, while not themselves "banks," perform many of the services of traditional banking insti- tutions such as cashing checks, selling money orders and wire- transferring money. These quasi-financial institutions exist with minimal State or Federal regulation and oversight, making them all the more attractive to drug traffickers and other members of the criminal underworld. This morning we will hear testimony explaining the role that these non-bank financial institutions play in assisting money laun- derers in washing their ill-gotten profits. While regulators focus elsewhere, many of these oftentimes small, storefront operations are able to conceal, disguise, or mask the identity of drug dealers while funneling untold amounts of dollars in illegal profits into the United States and international banking systems. These "fringe" businesses that are the topic of this hearing in- clude "casas de cambio" (money exchange businesses); "giro" houses (wire transfer businesses); sellers of money orders and trav- elers checks, and businesses that cash checks. Although most of these types of businesses have been in existence for many years, their numbers have increased significantly in the last 5 years. Law enforcement agencies believe this expansion reflects their increas- ing use by drug dealers for money laundering activity and the asso- ciated shift away from traditional banks for this purpose. Although many check cashers operate legitimately, and I want to emphasize that-we certainly do not cast doubt on the whole indus- try here-although many operate legitimately and certainly pro- vide an important service to individuals who do not have a rela- tionship with regular banks, the evidence suggests that many of these businesses are also being used by money launderers. Law enforcement authorities estimate that billions of drug dol- lars are laundered yearly through these types of non-bank finan- cial institutions. The Financial Crimes Enforcement Network, which is the U.S. Treasury Department's new law enforcement in- telligence gathering arm, estimates that casas de cambio alone may be laundering billions of dollars per year. In testimony today we will hear that an average casa de cambio can launder $5 million per month and that the largest cases are capable of laundering as much as $200 million or more in a 6-month period. We will also hear testimony about a check cashing business in Los Angeles that was part of an organization that moved hundreds of kilos of cocaine, exchanging the cash from the sale of the cocaine PAGENO="0007" 3 for legitimate checks. Over a one-year period in the late 1980s, the business in question laundered $4 million. More and more States are reporting the use of these types of businesses to launder money. Investigations have been conducted and cases have been prosecuted in New York, New Jersey, Massa- chusetts, Texas, Arizona, California and Illinois. We will hear testi- mony today, however, that much more needs to be known about the illegal activities of some of these businesses. While most States have anti-money laundering statutes, very few have laws or regulations for oversight of the day-to-day activities of these types of financial institutions. Outside the scope of tradition- al bank regulation, law enforcement efforts in this area are still in the very early or preliminary stages. If these businesses are in fact ripe for money laundering activity to the tune of billions of dollars annually, we must clearly focus more attention on the problem and more attention to potential solutions. PREPARED STATEMENT OF SENATOR NUNN Today, the Permanent Subcommittee on Investigations turns its attention once again to the subject of drug money laundering. It is difficult to comprehend current estimates of the vast amount of drug profits generated from the sale of illegal drugs. The Internal Revenue Service and other law enforcement agencies estimate that over $100 billion is generated per year by nationwide sales of illegal drugs, and in some way virtually all of this cash has to be laundered. In response to the magnitude of this problem, Congress has created stiff Federal penalties for money laundering and increased reporting requirements for certain cash transactions. These efforts have been acclaimed by law enforcement agencies as very successful measures which have armed them with the resources needed to attack the Tony laundering problem. Most of those statutes, however, focused on preventing money laundering through traditional banking institutions. Until that legislation was passed, drug dealers had been walking into the lobbies of banks across the country and depositing garbage bags and suitcases full of cash, with few questions asked. Once in the banking system, the money was transferred from account to account or wire-transferred out of the country. This way, the source of the funds could no longer be traced to the initial depositor. With the passage of the 1986 Money Laundering Control Act, banks became crimi- nally liable under Federal law for knowingly failing to file reports for cash transac- tions over $10,000. In the wake of several successful prosecutions of traditional banks and bank officials under those provisions, banks have now, for the most part, become actively involved with law enforcement authorities in ferreting out money laundering activities. Money laundering, however, still continues. It is like a river whose course is al- tered with the changing landscape. To avoid the increased enforcement efforts in the banking community, drug dealers are now turning to businesses that, while not themselves "banks," perform many of the services of traditional banking institu- tions, such as cashing checks, selling money orders, and wire transferring money. These quasi-financial institutions exist with minimal State or Federal regulation and oversight, making them all the more attractive to drug traffickers and other members of the criminal underworld. This morning, we will hear testimony explaining the role that these non-bank fi- nancial institutions play in assisting money launderers to "wash" their ill-gotten profits. While regulators focus elsewhere, many of these oftentimes small, storefront operations are able to conceal, disguise, or mask the identity of drug dealers, while funneling untold amounts of dollars in illegal profits into the U.S. and international banking systems. These "fringe" businesses that are the topic of this hearing include casas de cambio or money exchange businesses, "giro" houses or wire transfer businesses, sellers of money orders and traveler's checks, and businesses that cash checks. Al- though most of these types of businesses have been in existence for many years, their numbers have increased significantly in the last five years. Law enforcement agencies believe this expansion reflects their increasing use by drug dealers for PAGENO="0008" 4 money laundering activity and the associated shift away from traditional banks. Al- though many check cashers operate legitimately and provide an important service to individuals who do not have relatiOnships with regular banks, the evidence sug- gests that many of these businesses are also being used by money launderers. Law enforcement authorities estimate that billions of drug dollars are laundered yearly through these types of non-bank financial institutions. The Financial Crimes Enforcement Network, which is the U.S. Treasury Department's new law enforce- ment intelligence gathering arm, estimates that casas de cambio alone may be laun- dering billions of dollars per year. In testimony today, we will hear that an average casa de cambio can launder $5 million per month and that the largest casas are capable of laundering as much as $200 million or more in a six-month period. We will also hear testimony about a check cashing business in Los Angeles that was part of an organization that moved hundreds of kilos of cocaine, exchanging the cash from the sale of the cocaine for legitimate checks. Over a one-year period in the late l980s, the business laundered $4 million. More and more States are reporting the use of these types of businesses to laun- der money. Investigations have been conducted and cases have been prosecuted in New York, New Jersey, Massachusetts, Texas, Arizona, California, and Illinois. We will hear testimony today, however, that much more needs to be known about the illegal activities of some of these businesses. While most States have anti-money laundering statutes, very few have laws and regulations for oversight of the day-to- day activities of these types of financial institutions. Outside the scope of traditional bank regulation, law enforcement efforts in this area are still in the early stages. If these businesses are in fact ripe for money laundering activity-to the tune of bil- lions of dollars annually-we clearly need to address more attention to the problem and more attention to potential solutions. As always, I am pleased to express my appreciation to Senator Roth for his sup- port in preparations for this morning's hearing, and to his able staff for their usual professionalism and cooperation. Senator Roth, I am delighted to have your support and that of your staff in preparation for this morning's hearing, and we wel- come any opening comment you may have as well as any opening comment Senator Cohen may have. OPENING STATEMENT OF SENATOR ROTH Senator ROTH. Thank you very much, Chairman Nunn. I want to, in turn, commend you for calling these hearings and again focusing the attention of the Subcommittee on the important issue of money laundering. Money laundering is a subject of long- standing interest to PSI. I can recall, Mr. Chairman, working to- gether with you on several investigations when our seats were re- versed, involving money laundering by banks in Boston as well as by offshore banks and companies. I was concerned then, and I remain concerned about the deluge of dirty dollars flooding into the stream of legitimate commerce. And despite our long battle against money laundering, this hearing will make it clear that the fight is not over, but simply shifted to a different front. Money laundering is essential to the success of organized crimi- nal activity, particularly drug trafficking, and drug money is clear- ly the driving force behind most money laundering activities. Drug trafficking remains a cash-and-carry business. As sophisti- cated as drug traffickers have become in every other aspect of their operations, they cannot avoid the fact that their product is pur- chased on the street on a cash-only basis. Physically transporting cash in such vast quantities is cumbersome and risks attracting at- tention. According to a Justice Department prosecutor, Colombian cocaine cartel leader Pablo Escobar once had $400 million in cash sitting in the basement of a Los Angeles house. While he was PAGENO="0009" 5 trying to figure out how to smuggle it out of the country, the money got wet and rotted. Thus it is easy to see why drug traffick- ers are always looking for more efficient ways to move and launder their money. The big boys in narcotics traffic seldom get near the "product," as they call narcotics. But the big boys always end up with the profit. That is why I have long been of the view that we will have more success in the war against drugs if we devote more law en- forcement effort to seizing the profits rather than the product- that is, more effort to seizing the money generated by narcotic traf- ficking rather than the narcotics themselves. It should be noted that we have made substantial progress in the battle against money laundering, and that Congress has armed our law enforcement and financial regulatory agencies in recent years with additional tools and resources. And our law enforcement and regulatory agencies have responded with increased enforcement. As a result of these efforts, a significant reduction in money laundering through traditional financial institutions appears to have occurred. We must remain vigilant in identifying new schemes to launder the proceeds of. criminal activities. That is why these hearings are important. We must ensure that our law enforcement efforts, which have proven successful thus far, are aggressively pursued against any and all new challenges in this area. We will hear today how money launderers are apparently taking advantage of enforcement gaps to evade current regulatory require- ments. Any law or regulation is, of course, only as effective as its enforcement. In the big bucks business of money laundering, we need a vigorous enforcement effort to effectively meet these chal- lenges. Again I commend you, Mr. Chairman, and your staff for the fine work you have done jn this area. I regret that I am going to have to be in and out because the Finance Committee is meeting this morning as well. Thank you. PREPARED STATEMENT OF SENATOR ROTH Thank you, Mr. Chairman. I want to commend you for calling these hearings and again focusing the attention of the Subcommittee on the important issue of money laundering. Money laundering is a subject of longstanding interest to PSI. I can recall, Mr. Chairman, working together with you on several investigations when our seats were reversed, involving money laundering by offshore banks and companies, as well as domestic money laundering by banks in Boston. I was con- cerned then and I remain concerned now about the deluge of dirty dollars flooding into the stream of legitimate commerce. Despite our long battle against money laundering, this hearing will make clear that the fight is not over-it has simply shifted to a different front. Money launder- ing is essential to the success of organized criminal activity, particularly drug traf- ficking. And drug money is clearly the driving force behind most money laundering activities. Drug trafficking remains a "cash and carry" business. As sophisticated as drug traffickers have become in every other aspect of their operations, they cannot avoid the fact that their product is purchased on the street on a "cash only" basis. Physically transporting cash in such vast quantities is cumbersome and risks at- tracting attention. According to a Justice Department prosecutor, Colombian co- caine cartel leader, Pablo. Escobar, once had $400 million in cash sitting in the base- ment of a Los Angeles house. While he was trying to figure out how to. smuggle it out of the country, the money got wet and rotted~ Thus, it is easy to see why drug PAGENO="0010" 6 traffickers are always looking for more efficient ways to move and launder their money. The big boys in narcotics trafficking seldom get near the "product" as they call narcotics, but the big boys always end up with the "profit". This is why I have long been of the view that we will have more success in the war against drugs if we devote more law enforcement effort to seizing the profits rather than the product, that is, more effort to seizing the money generated by narcotics trafficking rather than the narcotics themselves. It should be noted that we have made substantial progress in the battle against money laundering. The Congress has armed our law enforcement and financial reg- ulatory agencies in recent years with additional tools and resources and our law en- forcement and regulatory agencies have responded with increased enforcement. As a result of these efforts, a significant reduction in money laundering through tradi- tional financial institutions appears to have occurred. We must remain vigilant in identifying new schemes to launder the proceeds of criminal activities. And that is why these hearings are important, we must ensure that our enforcement efforts which have proven successful thus far are aggressively pursued against any and all new challenges in this area, we will hear today how money launderers are apparently taking advantage of enforcement gaps to evade current regulatory requirements. Any law or regulation is only as effective as its enforcement. in the big bucks business of money laundering, we need a vigorous en- forcement effort to effectively meet these new challenges. Again Mr. Chairman, I commend you and your staff for the fine work you have done in this area. I look forward to continuing to work with you on what is obvious- ly a continuing problem and I look forward to the testimony we will hear today. Senator NUNN. Thank you very much, Senator Roth, and thank you for your longstanding leadership in this area. Senator Cohen has also been one who has been involved in this effort for many years. Senator Cohen, we appreciate your leader- ship and would welcome any statement you'd like to make. OPENING STATEMENT OF SENATOR COHEN Senator COHEN. Thank you, Mr. Chairman. I do have a statement that I'd like to submit for the record and add my own commendation to the Chairman and to Senator Roth for their efforts in this field. I think what these hearings will reveal is that one of the most creative elements in our society is the criminal mind and that no matter how hard we work at this end to plug the various leaks in the dam, as soon as we plug one leak, the criminal mind devises ways to chip into that wall and create new crevices through which their illegal activity can flow. And I suspect, Mr. Chairman, that no matter what we do, we can never reach a plateau of eliminating the criminal element in our society. We are destined to be like Sisyphus, forever rolling the rock up the~ hill, nearly reaching the top, to have it roll back down again. But I do think that we have no choice but to make every effort that we can to stop the flow of illegal drug profits into our society. We know that many of these activities take place offshore. None- theless, I think we have an opportunity to plug another hole in the dam, but be aware that there will be an effort made to circumvent whatever we do through legislation. PREPARED STATEMENT OF SENATOR COHEN Once again this Subcommittee, under the able leadership of Senator Nunn, has helped to identify and bring to the attention of the Senate and the public an issue of criminal activity that is not being adequately addressed by State and Federal au- thorities. PAGENO="0011" 7 The Permanent Subcommittee on Investigations has a long and commendable his- tory of such investigations. The testimony we will hear this morning underscores the necessity and importance of just this type of ongoing oversight. For as quickly as Congress-through the efforts of PSI and others-can identify and respond to the latest methods used by criminal enterprises to circumvent Federal laws and enforce- ment efforts, criminals find new ways of making it more difficult for law enforce- ment officials to track and shut them down. As soon as Congress plugs one leak in the dam, as we did with the enactment of anti-money laundering legislation in the late l980s, criminals start chipping away at other cracks, opening new passages through which the tainted proceeds from their trade can flow. As the Chairman has indicated, anti-money laundering statutes, increased en- forcement efforts, and greater industry compliance, have reduced the amount of money laundering conducted through traditional banks. In response, drug traffick- ers have begun to utilize less-regulated kinds of financial institution,. These "non- bank" banks-check cashers, money exchangers, wire transfer businesses-have provided drug dealers and other criminals with a convenient and relatively safe means of laundering their illegally obtained cash. With an estimated one billion dol- lars being laundered through these "non-bank" banks annually, it seems that drug dealers and those who aid them in their crimes are among the few Americans still enjoying good times during this recession. Efforts to address this problem have not been very successful. In many cases, Fed- eral, State, and local authorities have neither the staff nor legal resources necessary to combat the problem of money laundering in "non-bank" banks. Federal and State regulations are lax or non-existent; even simple licensing or registration require- ments exist only in a handful of States. Federal recordkeeping and reporting re- quirements which have been made more stringent in recent years either do not apply or are ignored by many of these "non-bank" banks. In addition to weaknesses in existing law, most agencies that would investigate money laundering allegations in "non-bank" banks are seriously understaffed. Be- cause many of the proprietors of these businesses are understandably careful in so- liciting their laundering services, uncovering a money laundering operation at a "non-bank" bank can take considerable time and resources. It is clear that greater cooperation, particularly access to information, between Federal and State law en- forcement officials is absolutely critical if we are to successfully respond to this problem. It is also clear that many of these "non-bank" banks have ties outside the United States. As a result, greater cooperation must not only take place inside our own borders, but also in our dealings with foreign law enforcement officials, particu- larly in Mexico and Colombia. Again, I wish to thank the Chairman for bringing this very important subject to the attention of the Senate and the public. In my view, the widespread use of illegal drugs is as harmful to our entire nation as it is to the individual drug user. Those who choose to sell drugs should not be able to wash their hands of their crime by way of a simple trip to a check casher or money exchanger. In my view, the only laundering drug traffickers and those that assist them should be doing is that which involves soap, water, and a soiled prison uniform. I look forward to hearing the sug- gestions of our witnesses as to how we might respond to this problem. Senator NUNN. There is no doubt about that, Senator Cohen. I have worked on the law enforcement side of this overall drug prob- lem now for about 14 years, and I have over the years come to the conclusion that while we have to tighten law enforcement in every possible way, we also have to do everything we can in the educa- tion and health areas. Someone has said that we are being invaded by a foreign army, and asked why don't we act like it. Well, in one way we are, but in another way we have people coming out on the streets to greet that army and to pay for that product. And when armies invade, countries don't behave that way. So there is a fun- damental difference. As long as we have the kind of demand we have, you are right, the criminal mind will find new ways. Never- theless, we do have to do everything we can in law enforcement to catch up with them in this case and to get ahead of them in other cases. I think Senator Roth's statement about going after the money has been my long-term philosophy for a long time. I think PAGENO="0012" 8 going after the money is the most productive use of Federal law enforcement efforts-and that includes vigorous efforts-and I hope we're seeing an increase in such efforts by the Internal Reve- nue Service. So, Senator Roth, when you are over in the Finance Committee, you may be on top of one of the great areas~ of potential anti-drug activity, because as you said, the criminals at the top always touch the money; if they didn't, they wouldn't be involved. Our Subcommittee has been responsible for getting the IRS in- volved in this again, and sometime during this year I want to hear from them as to how they are doing. Perhaps you could inquire into that over in the Finance Committee this morning, as well. I thank you and Senator Cohen for your statements and for your leadership. Senator NUNN. This morning, our first witnesses are Mr. Hal Lippman and Ms. Kim Wherry. We are proud to have them on our staff. I think they have done a very good job in this area. We'll ask you both to stand. As I understand it, you will both be testifying, and we swear in all the witnesses before this Subcom- mittee. Do each of you swear you will tell the truth, the whole truth, and nothing but the truth, so help you God? Ms. WHERRY. I do. Mr. LIPPMAN. I do. Senator NUNN. Mr. Lippman, are you going to lead off this morn- ing? Mr. LIPPMAN. Yes, sir. Senator NUNN. OK. TESTIMONY OF KIM L. WHERRY,' STAFF COUNSEL, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS; ACCOMPANIED BY HAROLD B. LIPPMAN, STAFF INVESTIGATOR Mr. LIPPMAN. Mr. Chairman and members of the Subcommittee, for the last 10 months we have been looking into recent and cur- rent developments in money laundering. In conducting this investi- gation, we have heard repeatedly from many different sources that money laundering activity is analogous to a water-filled balloon- push it in one place and it bulges somewhere £lse. We have also been told that increased industry compliance and expanded enforcement of reporting requirements and related pros- ecutions have brought about a significant reduction in the amount of money laundering through traditional banks. Laundering activi- ty, however, has continued in at least one way, by simply moving into less regulated and less supervised kinds of financial institu- tions. These less regulated and less supervised kinds of financial insti- tutions, commonly referred to as "non-bank" financial institutions, include businesses that are the subject of today's hearing; those that exchange money, wire-transfer money, cash checks, and sell money orders and travelers checks. Unlike their traditional coun- terparts, these institutions operate essentially free of meaningful 1 The prepared statement of Ms. Wherry and Mr. Lippman appears on page 53. PAGENO="0013" 9 Federal and State regulation and oversight. Their only reporting requirement is to file Currency Transaction Reports (so-called CTRs) for cash transactions over $10,000. Yet with the exception of accepting deposits and making loans, they can provide many of the other services offered by regular banks. All such transactions, moreover, can be done with minimal, if any, customer identification, as would normally be required at a traditional bank. Indeed, this is the unique advantage that attracts money launderers to non-bank financial institutions. By being able to retain almost complete anonymity in transactions at such busi- nesses, traffickers and their agents go unnoticed as they convert their illegal drug proceeds to legitimate financial instruments. The non-bank financial institutions on which today's hearing fo- cuses include casas de cambio, which are money exchange business- es located near or directly adjacent to the United States border in Texas, New Mexico, Arizona and California. Their primary func- tion is to exchange pesos for dollars and vice versa, but they can also sell money orders and cashier's checks, wire transfer funds, ex- change currency for checks, and make payments for customers from their own business accounts. The second category of non-bank financial institutions we will examine today is giro houses. These are wire transfer businesses lo- cated in the Houston area, which. provide communications devices and related facilities-such as beepers, cellular phones, interna- tional long-distance lines, and fax machines-along with wire transfer capability and check cashing services. The third area is money transmitters, including Western Union, American Express and Travelers Express, which engage in the business of transferring funds domestically or internationally, by wire, check, computer network or other means. Finally, there are check cashing businesses, an estimated 4,000 to 5,000 of them nationwide. In addition to cashing pay checks and other personal checks, these businesses sell money orders and trav- elers checks. Money laundering through non-bank financial institutions is gen- erally accomplished by one or two techniques, used singly or in combination, to evade currency reporting and recordkeeping re- quirements. The first of these is called "structuring," whereby large cash sums are divided into amounts below the Bank Secrecy Act-mandated $10,000 threshold. These smaller sums are then ex- changed for other monetary instruments, or are transferred by wire to bank accounts, using individuals referred to as "smurfs" to conduct the various transactions at different times and/or at differ- ent locations. According to Internal Revenue Service criminal in- vestigators, using this method, a well-organized team of "smurfers" operating from one vehicle can easily move $250,000 in less than one hour. The second major way non-bank financial institutions launder money is by failing to file CTRs or filing falsified CTR forms. Mr. Chairman, in our statement we discuss in detail the numer- ous ways these non-bank financial institutions launder money. The common thread, whatever the particular method, is that they effec- tively act as a front to disguise drug dealers' identities and distance PAGENO="0014" 10 them from the illicit cash. Additional details in this regard will be provided by the witnesses that follow. Turning to the extent of the problem, while precise summary data on the extent of money laundering being conducted through non-bank financial institutions do not exist, there are many indica- tors that attest to estimates that such activity amounts to billions of dollars annually. A recent Government study estimates that among the 1,000 casas de cambio operating along the border from Texas to California, a typical one can easily launder $5 million or more per month. Other law enforcement sources in the Houston area have estimated that as many as 80 percent of the 1,000 casas are somehow engaged in money laundering. Moreover, one casa de cambio, owned by a witness who will testi- fy later today, alone laundered more than $50 million in a 6-month period. His casa de cambio was only the fourth-biggest among those operating in the southwestern city where they were located in the late 1980s, and he believes the biggest casa de cambio was doing at least four times as much money laundering as he was, or $200 mil- lion. Estimates of money laundering on the part of Houston's giro houses suggest patterns of activity similar to the casas de cambio. In Houston, IRS criminal investigators noted an almost 100 percent increase in the amount of U.S. currency being moved through the giros industry between 1989 and 1990. They noted further that re- garding this movement of currency, not a single required CTR form was filed by a giro business. In addition, according to a former New York State Assistant At- torney General, in the New York metropolitan area, travel agen- cies capable of wire transferring money may be laundering as much as $1 billion per month. Recent reports of money laundering through check cashing busi- nesses have come from Boston, New Jersey cities located near or directly adjacent to the New York City metropolitan area, and Los Angeles. When the New Jersey Commission of Investigation looked into the relationship between its check cashing industry and orga- nized crime, its chairman characterized these business as, "being tapped at will by mobsters and other unscrupulous individuals, a number form New York, whose objectives include such notorious activities as money laundering, income tax evasion, embezzlement, loan sharking, and other frauds." In Los Angeles, casas de cambio and check cashing businesses are being used increasingly to launder money: Last year, for exam- ple, the owner of a company that operated four casas de cambio in the Los Angeles area was convicted of using them to launder drug money. According to IRS criminal investigators, this company was laundering as much as $30 million a month during the late 1980s, but that amount didn't even rank it in the top 10 among the area's casas de cambio involved in money laundering. Ms. WHERRY. In the areas of regulation and law enforcement, non-bank financial institutions are being afforded entirely different treatment by Federal and State agencies. While non-bank financial institutions can provide many of the services traditional banks do, they are almost completely unregulated or unsupervised by Federal and State authorities. This comparatively unregulated status is PAGENO="0015" 11 why non-bank financial institutions are so attractive to money launderers and others bent on criminal activity. For instance, only six States-Connecticut, Georgia, Illinois, Minnesota, New Jersey and New York-license check cashing businesses. As for money transmitters, most States require the companies that issue and sell payment instruments to be licensed. Therefore, American Express, Travelers Express, and Western Union are li- censed in States where their products are sold. However, those States do not require the agents of these companies, such as a check casher, to be licensed. This loophole contributes to licensing problems and indirectly helps to facilitate money laundering. Even in States where there is some regulation, it is not uncom- mon for supervision or enforcement to be minimal, especially as a result of inadequate resources and/or a corresponding lack of Fed- éral assistance. For example, a New York bank regulatory official told us that his State's efforts are hampered because Federal law enforcement agencies are reluctant to share background informa- tion on individuals applying for a license. Also, a former New York assistant attorney general said that for all of New York, there are only four investigators to oversee the activities of the State's check cashing businesses. Beyond the fact that there is virtually no Federal regulation of non-bank financial institutions, and thus no oversight of their ac- tivities by Federal bank regulatory agencies, law enforcement action against them for their money laundering activities is also in- adequate. For example, IRS is severely hampered in is efforts be- cause of insufficient staff and/or problems associated with non- bank financial institutions' poorly maintained, falsified, or non- existent records. As a result, it appears that the vast majority of non-bank financial institutions may be evading or otherwise failing to comply with Bank Secrecy Act reporting requirements, since in 1991, out of a total of 1.2 million CTRs filed by all financial institu- tions, only 30,406 were from non-bank financial institutions. In addition, when IRS officials detect noncompliance and make a referral to the Treasury Department's Office of Financial Enforce- ment, the latter has often failed to act expeditiously and, until re- cently, has not made full use of available fines and penalties. Federal law enforcement efforts are also hampered by the diffi- culty entailed in making cases against non-bank financial institu- tions. First, IRS criminal investigators have to rely on tips from outside sources, such as banking personnel, to alert them to suspi- cious activity that may involve money laundering. Also, it is diffi- cult for investigators to target non-bank financial institutions be- cause there is no way to determine exactly how many exist. Final- ly, when non-bank financial institution cases are undertaken, they typically entail extremely complicated, expensive and labor-inten- sive investigations. According to one knowledgeable official, the costs associated with this process can average a minimum of $40,000 monthly, exclusive of any amounts that have to be laid out for drug buys or money laundering. The largest private sellers and issuers of payment instruments, such as money orders and travelers checks, are Travelers Express and American Express. The largest private wire transfer business is Western Union. Representatives of all three of these corpora- PAGENO="0016" 12 tions said that they had anti-money laundering policies in effect and were strongly opposed to the use of their products in illicit schemes. However, when details were revealed about the number of their agents, how they are selected, and whether the agents are checked to see that they file CTRs where appropriate, it was appar- ent that opportunities do exist for criminal elements, and particu- larly money launderers, to be associated with the corporate struc- ture and thereby capitalize on the financial opportunities present- ed. For example, American Express does not run a criminal baék- ground check on its agent applicants. Neither does it check their agents to make sure they are filing CTRs where appropriate. Addi- tionally, American Express does not ask either its agents or law en- forcement authorities if any of its agents have been charged, pros- ecuted, or convicted of fraud or any money laundering violation. As a result, an agent could conceivably be fined for CTR noncompli- ance and continue on with the company as if nothing had hap- pened. Western Union selects its agents in much the same manner as American Express, focusing on the financial stability of the agent applicant, but also failing to do a criminal background check on the owner operator. According to a former Western Union official, its wire transfers may be susceptible to abuse by money laun- derers. The main industry organization for check cashers is the National Check Cashers Association. For the most part, the organization's leader were reluctant to recognize that money laundering activities are occurring at check cashing locations. To support their view, they maintain that their businesses are under close scrutiny by the banks that hold their corporate accounts and that IRS reviews their operations often and carefully. In fact, however, IRS told us that in 1990 they did just 500 compliance checks of the estimated 4,000 to 5,000 check cashing businesses. In conclusion, Mr. Chairman, our investigation has found that as stepped-up law enforcement efforts against traditional banks and growing banking industry compliance have occurred in recent years, casas de cambio, giro houses, check cashing businesses and money transmitters have become increasingly active and important parts of money laundering operations in the United States. Knowl- edgeable law enforcement and industry sources estimate that bil- lions of dollars annually are being laundered through these non- traditional financial institutions. Our investigation has also revealed that the major increase in money laundering on the part of non-bank financial institutions is the result of their being essentially unregulated or inadequately su- pervised at the Federal and State levels. Indeed, in the case of casas de cambio and giro houses, the evidence regarding the depth of their money laundering involvement is so clear and compelling that most of the law enforcement officials with whom we spoke be- lieve that they should simply be outlawed or, at the very least, be placed under such strong regulation that only the legitimate few could survive. While the evidence is less clearly on precisely how many check cashing businesses are engaged in money laundering, there is no PAGENO="0017" 13 doubt that significant numbers of them are so involved and that enormous amounts of illicit cash are being moved through them. Insofar as check cashers are also essentially unregulated, those with whom we spoke were unanimous in calling for the establish- ment of uniform minimum standards that would bring them under some form of Federal regulation and supervision. Finally, we also found that while non-bank financial institutions are required to comply with Federal anti-money laundering stat- utes, many are failing to do so, primarily because of an apparent lack of interest and/or allocation of resources on the part of re- sponsible Federal and State law enforcement and regulatory au- thorities. Based on our investigation, it is equally clear that in ad- dition to increased regulation of these entities, more Federal and State resources need to be brought to bear regarding their illicit ac- tivities. Mr. Chairman, we would like to offer our entire statement for the record, along with a number of other statements that have been provided by other individuals and interested parties. We would also like to submit for the record a sealed affidavit signed by Mr. Arturo Gomez under his true name. Mr. Gomez is the witness who will testify next. We would be happy to answer any questions at this time. Senator NUNN. Without objection, your statement and the at- tached statements will be made a part of the record and will be ap- propriately numbered. Senator NUNN. In your statement you mentioned that law en- forcement and other officials with whom you spoke were unani- mous in calling for the establishment of uniform minimum stand- ards that would bring check cashing operations under some form of regulation and supervision. Could you elaborate on this point? Do you share that view, based on your investigation? Do you think that is what should be done? If so, should it be Federal or State or both? I'll ask these questions of either of you, whoever would like to respond. Ms. WHERRY~ Yes, Mr. Chairman. I think we both are in agree- ment that these businesses do require more licensing and regula- tion. To begin with, the States need to become aware of the prob- lems that these businesses are causing. When Mr. Lippman and I were in Los Angeles, we rode with Los Angeles County Police De- partment officials who showed us the Watts area and how many of these check cashing businesses are out there. They were unaware that so many of them had just popped up and they really didn't understand why this increase had taken place. And of course, now they know that they are related to money laundering, or at least many of them are. It is difficult to understand exactly how many of these businesses are engaged in money laundering activities be- cause States don't even know how many exist. Senator NUNN. Do you have any estimate of how many non-bank kinds of financial institutions we are talking about in this country? Mr. LIPPMAN. Senator, there is a statistic based on Treasury De- partment computer files, which says there are 30,000; But, this only includes people who have filed some sort of a CTR reporting document. Senator NUNN. That does not include banks, then? PAGENO="0018" 14 Mr. LIPPMAN. That excludes banks. Senator NUNN. Excludes banks? Ms. WHERRY. Correct; excludes. Senator NUNN. So 30,000 is the only estimate you know of. You sound like that's a pretty soft estimate. Mr. LIPPMAN. I'd say so, sir, yes. Senator NUNN. Did you finish your answer on the question of regulation? Mr. LIPPMAN. Could I just add something, Senator? While we were in New Jersey, one of the problems that we really noticed that was extremely important was that if there was a strong licens- ing regime in one State and not a similar kind of regime in an ad- jacent State, then the traffic and the illegal activity would just move to the State that had the weaker requirements. And that was the case in New Jersey, since New York has a strong check cashing regulatory scheme and New Jersey does not. We assume that since only six States have some sort of licensing requirements, that in moving from one State to the next, you will have similar potential for illicit activity if there is no uniform ap- proach to all States. Ms. WHERRY. And law enforcement points out that this makes the problem national in scope. Senator NUNN. Is the problem lack of regulation or lack of en- forcement or both? Ms. WHERRY. We believe that the problem is both. Senator NUNN. In other words, the existing regulations, even if aggressively enforced, would not be sufficient. Is that what you're saying? Ms. WHERRY. That's correct. For instance, IRS Civil Exam is in charge of checking the CTR compliance of non-bank financial insti- tutions. The problem is that not enough resources are devoted to checking non-bank financial institutions for that compliance. Mr. LIPPMAN. Senator, it is also very, very easy for these kinds of non-bank financial institutions to evade the reporting require- ments. They are notorious for keeping virtually no records, or poor records, which makes it virtually impossible for law enforcement people to follow the track. Senator NUNN. What other suggestions did law enforcement offi- cials have, or did people that you contacted have, about dealing with this growing problem? Mr. LIPPMAN. Senator, we received a number of suggestions, which we have not fully analyzed, although they seem to make sense to us. So, I'll just repeat a few of them. It was suggested, for example, to increase southbound border searches for currency going from the United States to Mexico. It was also suggested that non-bank financial institutions be re- quired to file suspicious transaction reports. We often hear that non-bank financial institutions act like banks-and certainly they do-then why shouldn't they be regulat- ed just as banks are. That was another suggestion. Senator NUNN. They don't hold people's money for long, though. That's the big distinction, isn't it? It is really a transfer. They are not in a trustee relationship holding sums of money for depositors; correct? PAGENO="0019" 15 Ms. WHERRY. The distinction between a non-bank financial insti- tution and a traditional financial institution is that non-bank fi- nancial institutions do not take deposits and do not make loans. However, in our discussions with law enforcement, they have found cases where these non-bank financial institutions are in fact taking deposits and making loans, and paying the bills of their customers, et cetera. Senator NUNN. Do you have examples of that? Ms. WHERRY. Law enforcement officials who will be testifying later this morning will be able to give specific case examples. Senator NUNN. They are acting virtually like banks in some cases. Ms. WHERRY. Exactly.~ Mr. LIPPMAN. Senator, the witness who~ will testify next did pre- cisely that. He received large sums of money and just held them for a period of time until he could dispose of them for his own prof- itable ends. Senator NUNN. I have a statement that I'll ask be placed in the record at this point from the National Check Cashers' Association. In their statement they assert that "a check casher is no more likely to be funded by illegal cash than any other business." Do you agree with that statement? Ms. WHERRY. Senator, we do not agree with that, and I think that when the law enforcement representatives testify they will not agree with it, either. There is a big distinction between these check cashers and casas de cambio, and other businesses which handle a high volume of cash on an everyday basis. The distinction is that these non-bank financial institutions provide all types of fi- nancial services that a grocery store, for example, does not. They sell payment instruments and therein lies the problem and the dif- ference. Senator NUNN. The National Check Cashers' Association's state- ment also says that "given the banking relationship necessary to operate a check cashing business, this money laundering activity could not go undetected for long. A bank would quickly realize that the check casher was not borrowing sufficient funds to cover the checks that banks received in deposits. Banks are generally not in- terested in processing checks unless they get the loan business from the check casher." What would be your comment on that statement? Ms. WHERRY. Senator, we do not agree with that statement, either, and I think law enforcement would be with us on that too. The check cashers are making it appear that the banks are put- ting them under such strict scrutiny that there is no way that money laundering activity would go on without the banks being aware of it. That simply is not true. Banks are doing all that they can to know their customers and to be aware of suspicious activity, and when it is noted, they do contact law enforcement and file CTRS. However, they have no way of knowing the source of the cash that the check cashers are bringing in. That is another big problem; the banks don't know the source. Senator NUNN. Senator Cohen? ~ Senator COHEN. Just a couple of qUestions, Mr. Chairman. PAGENO="0020" 16 You indicated that most of the law enforcement personnel would recommend that we either shut down or closely regulate the casas de cambio and giro houses. Are there any legitimate business func- tions that these houses perform? Mr. LIPPMAN. Senator, originally, when they began to proliferate in the early 1980s, there was a legitimate function because the peso had been devalued. At this point, there doesn't really seem to be any such function. In the case of tourism-of a person going across the border and wanting to stop and exchange $100-they can go elsewhere. According to what law enforcement people have told us, in effect there really is no reason any longer for there to be so many casas de cambio, especially since major devaluations by the Mexican Government are no longer being done. Ms. WHERRY. Senator, they do have some legitimate customers, although law enforcement has told us that the ratio might be one legitimate customer to 99 illegitimate customers. Senator COHEN. Assuming they were shut down, are there any other lawful business operations that can provide these types of service? Ms. WHERRY. Yes. I think banks are providing all of these serv- ices to the customers. Senator COHEN. You also mentioned that we need to increase su- pervision along the border, the southern border I assume you meant at that point. I was watching television the other day, and I saw literally tens if not hundreds of people rushing across the border at the border stations, running against traffic coming into the country. Now, exactly what kind of supervision do you envision that we are going to be able to provide with this type of activity when we can't stop human beings from coming across in droves? Mr. LIPPMAN. Senator, there will be a tape shown by a member of the law enforcement panel which will accentuate your point. The amount of the traffic makes it extremely difficult, but it is the kind of thing you alluded to in your opening statement-you've got to do it, and you've got to do more of it. Senator COHEN. Do you recommend electronic surveillance? Is that one of the recommendations from law enforcement personnel that will be forthcoming in the testimony-increased electronic surveillance to try to monitor the type of banking transactions or non-banking transactions, as it were? Ms. WHERRY. They have not mentioned that to us specifically so far. Senator COHEN. Mr. Lippman, what is your feeling about that? Mr. LIPPMAN. Sir, I know there are regulations under consider- ation in the Treasury Department, but they are extremely contro- versial because the applicable volume of transactions, I believe, is in the trillions annually and billions daily. So, you get into a re- porting requirement situation that might be virtually impossible to effectively administer. Senator COHEN. Thank you. That's all I have, Mr. Chairman. Senator NUNN. Senator Cohen, the question of whether other services are available if something happened to close a lot of this down is an interesting question. I don't know if we have anybody here from the American Bankers Association, but as you recall, PAGENO="0021" 17 there has been a real controversy for some time about whether banks should be required to cash checks for people who are non- depositors. And one of the things that has happened over the last 20 years_and I'd like someone to check the history on this because I'm not sure when it started-is that an awful lot of people do not have access to banks, and a lot of banks-not all of them, but a lot of them-feel that they are public servants, and they should cash checks, and do. But an awful lot of banks in a lot of areas will not cash checks unless there is a deposit, and that means that they have opened the door for this kind of activity. So, in addition to the drug money laundering problem, there is the problem of poor people having to pay a large amount of a small check in order to get it cashed. So, I think there is going to have to be some soul-searching among the bankers of this Nation about what they are doing to serve the larger community, and that is something I have thought about for some time. I'd hate to see a regulatory scheme coming out of this and a mandate dictating to banks who they must serve. But, that is one part of the problem, and I think there are no sub- stitutes in some areas for these check cashing and non-bank kinds of institutions. Senator COHEN. As a matter of fact, during the banking legisla- tion last year, we had this very amendment on the floor that would have mandated the cashing of checks by non-depositors. * Senator NUNN. Right. We've had it a couple times, and the bank- ers oppose it very vehemently, and I understand why, but I think the bankers have an obligation to say what they're going to do to serve the broader society here. I think someone has to do it. We can see just from this what happens, but there is another whole side of it that is not illegal; it's simply how much money poor people have to pay. We have veterans going down to cash small veterans' checks, and they have to pay a huge fee to get that check cashed. It is also encouraging a lot of cash transactions because people- and maybe there is some tax evasion here, too-but there are a lot of people who are forced to take whatever payment they get in cash for services because of the fee they'd have to pay if they were paid by check. So, I think there has got to be some attention paid to this situa- tion. I don't know what the answer is, but I think it's a pretty broad problem that goes beyond the scope of this hearing. Mr. LIPPMAN. Mr. Chairman, could I just add that we tend to think of money laundering these days in terms of drugs only, but what we found in the check cashing abuses in New Jersey is that they are connected with traditional organized crime and precisely what you just talked about, the underground economy-tax evasion and so on. Senator NUNN. Thank you both. Do you have anything else to add at this point? Ms. WHERRY. No, Mr. Chairman. Mr. LIPPMAN. No, Mr. Chairman. Senator NUNN. Thank you very much. Our next witness will be Mr. Arturo Gomez. Mr. Gomez for rea- sons of personal safety will be testifying under this assumed name PAGENO="0022" 18 and from behind a screen, in order to protect his identity. No cam- eras will be allowed to photograph Mr. Gomez. It is my understanding that members of the media have already been advised as to the location in the room where cameras will and will not be allowed during Mr. Gomez' testimony in order to main- tain security. Prior to clearing the room for Mr. Gomez' entrance, I would direct that all cameras be turned either to the rear of the room or the window side of the room. So if you could go ahead and redirect the cameras, then we will ask that the room be cleared of any indi- viduals other than Senators and staff. It will take approximately 5 minutes, and we'll open the hearing again in approximately 5 minutes before we begin Mr. Gomez' tes- timony. [Recess.] Senator NUNN. If everyone who is coming back in could take their seats as quickly as possible, we are going to start. Mr. Gomez, I'll ask you to remain seated and take the oath. Do you swear the testimony you give before this Subcommittee will be the truth, the whole truth, and nothing but the truth, so help you God? Mr. GOMEZ [Interpreted from Spanish]. Yes, I do. Senator NUNN. Our next witness this morning is Mr. Arturo Gomez. Mr. Gomez is the recently convicted owner of a casa de cambio that laundered tens of millions of dollars in cash derived from drug sales. He is now cooperating with the Government and is testifying under an assumed name for reasons of personal safety. Mr. Gomez will be explaining how his business was used to facili- tate this large-scale money laundering activity. Mr. Gomez, we appreciate you being with us this morning. We look forward to your testimony. We will have translations into English as you speak and for you into Spanish as we ask you ques- tions. If we start going too fast-Southerners don't usually do that, but Senator Cohen may when he starts speaking-we will respect you just raising your hand, and we will slow down. So any time you aren't exactly getting the question, just raise your hand and I, Sen- ator Cohen, or Senator Lieberman will go back over the question. We are delighted to have you here. We believe that you can offer us an insight into what apparently is a growing problem affecting drug trafficking in this country; the latter which has been one of our nation's most serious social problems and is beginning to be an economic problem also. We appreciate your being here and we welcome your statement at this point. TESTIMONY OF ARTURO GOMEZ,' PREVIOUS OWNER OF A CASA DE CAMBIO Mr. GOMEZ [Interpreted from Spanish]. My name is Arturo Gomez. I am testifying today under an assumed name because my family and I were threatened by some drug dealers who were cli- ents of my business and for whom I had laundered money. They `The prepared statement of Mr. Gomez appears on page 89. PAGENO="0023" 19 said that if I were to say anything about their business dealings with me, something bad would happen to me or my family. I am also cooperating with U.S. Government officials to assist them in their efforts to understand and better control money laun- dering by casas de cambio. Between 1985 and 1987, I owned a casa de cambio business in a small southwestern U.S. city located near the border with Mexico. Initially, I did not engage in any illicit activity, but in the first few months of 1985, some individuals that I did not know began to bring in bundles of cash of about $5,000 which they wanted to have sent to Mexico in pesos. I did not realize at first that these individuals were drug traffick- ers with the intent of laundering cash proceeds from drug sales, until they began to bring in suitcases and bags full of cash. Then I understood who they were and why they were bringing their busi- ness to me. Over time, my business with these clients grew to such an extent that in the 6-month period prior to my arrest in June 1987, more than $50 million in illicit cash was laundered through my casa de cambio. In connection with this money laundering activity, I have pleaded guilty to failing to file a currency transaction report, as re- quired by Federal law for cash transactions above $10,000, and I am presently awaiting sentencing on that charge. I got into the casa de cambio business soon after I came to the United States from Mexico in 1984. 1 knew a good deal about money exchange transactions because I had worked for 9 years in a number of banks in Mexico. I had served in various capacities and had even been manager of a large bank near the border. As a result of this, I knew the ins and outs of Mexican laws and regula- tions on banking. This experience also provided me with a network of contacts in the banking sector in Mexico, which I relied on ex- tensively in conducting my casa de cambio business. My banking background also enabled me to see that as the peso declined in value against the dollar-as was happening throughout the 1980s-money could readily be made in exchange transactions if one had enough dollars available. I understood, for example, that if I had $1,000 in the morning and held onto that amount until the following day or sometimes even until later that same day, the value of the peso would drop enough so that I could make a good profit. I will give you an example to show you how profitable this was for me. When I first got into the casa de cambio business, working for someone else who, as far as I know, to the best of my knowl- edge, did not accept drug-related cash, I made $1,200 per month. By mid-1986, when my own casa de cambio was becoming successful, to a large extent as a result of the cash being brought in by drug dealers, I was earning about $4,000 per month. And during the peak period in 1987, when my casa de cambio laundered $50 mil- lion, I was earning somewhere around $20,000 a month. For me, the well-known saying, "It takes money to make money," could not have been more true. This is, moreover, a fact which helps to ex- plain why the ready supply of cash from drug dealers was so neces- sary and so appealing. PAGENO="0024" 20 Mr. Chairman and members of the Subcommittee, to help you understand what I and other casa de cambio owners did and how we did it, I will now describe my casa de cambio and its operations. Typical of many cases, I had two employees in addition to myself. One was a teller whose responsibilities included taking care of small-scale, legitimate, "front-door" exchange transactions, as well as otherwise assisting in a variety of ways in "back door" oper ations, for instance, counting the large, enormous sums of cash brought in by drug dealers. The other employee was used primarily as a "runner," taking cash, checks and the like to banks or other casas de cambio both in the U.S. and Mexico. The services we provided included selling dol- lars, buying and selling pesos, cashing personal checks, cashier's checks and money orders, and we also arranged for wire transfers to different cities in Mexico. Physically, my casa de cambio business was located in a two- room mobile home, which I initially rented for $500 a month. I later rented an office building to be used as my business' counter- part branch across the border in Reynosa, Mexico. The office equipment I had consisted of three telephones with three different lines, two hand-held portable radios, a copying ma- chine, an electric typewriter, six chairs, several tables, two medium-size safes-which, at the time of my arrest, contained more than $2 million in cash-and a money counting machine that could also detect counterfeit bills. When I opened my business, to the best of my recollection, all I was required to do was provide my Social Security number in order to obtain an EIN number. I do not remember having paid a fee for the permit. At the time I began my business, I had $20,000 in cash on hand. At the outset, business was slow. I would average about five to ten customers per day. However, as the casa de cambio became more successful, on an average day somewhere between 25 and 50 customers would come in to do business. In the early stages of my business' growth, the large majority of these customers were there to do legitimate exchange transactions. Over time, and especially as my operations shifted more and more to drug-related cash, up to 60 percent of my customers were there to launder money. Few of my customers were non-Hispanics, and all of those involved in money laundering operations were Mexican, Mexican American or Latin American. As I indicated before, some of my business was with legitimate customers. A typical transaction of this sort would often involve a produce shipment from a Mexican supplier through an import- export broker to a purchaser in the U.S. I would facilitate the transaction by arranging for the purchaser's dollars to be convert- ed into the pesos that would be delivered quickly to the supplier. In addition to any fees I would charge for my services, my profit would come from my ability to use the purchaser's dollars to buy pesos, whose declining value in relation to the dollar and the origi- nally agreed upon transaction exchange rate assured that I would get more pesos than the amount I had delivered to the supplier. I believe that my legitimate customers came to me instead of going to a regular bank primarily because of the personal attention PAGENO="0025" 21 I could give to them, the convenience I offered in terms of being open on weekends and evenings and all hours, and also because I could complete in a matter of hours what regular banks would take days and even weeks, to do. And I also accepted personal checks. Money laundering clients, on the other hand, brought their busi- ness to me and to the more than two dozen other casas dê cambio like mine in the city in which I was located primarily because we could quickly and efficiently process large amounts of their cash and do so in ways that would almost completely mask their identi- ty as the source of that cash. Whatever the circumstances, I was able to protect their identity through a combination of an intricate and complex series of financial transactions and by simply ignoring the currency reporting requirements or, on the occasions when I did fill in the appropriate forms, I would list myself and/or my casa de cambio as the owner of the funds. A typical transaction for these customers would begin when they would come in with $100,000, for example. The client would say that he wanted to have that amount converted to pesos for deposit into a specific bank account in a given Mexican city. In most cases, I did not have enough pesos on hand, since I mainly traded in dol- lars, so I would have to call on one or more casas de cambio in Monterrey, Mexico or in Houston, and then, at a mutually agreed upon exchange rate, I would purchase from them the additional pesos that I needed to then send or wire the money to my money laundering client. Since the latter casas de cambio have dollar accounts in U.S. banks, I would then arrange to have the necessary dollars to cover the purchase of the pesos deposited in my accounts in Mexico. As soon as that was done, I would contact the casas de cambio in Mon- terrey and tell them that the dollars were in their account, where- upon they would send the corresponding amount of pesos at the agreed upon rate to one of several accounts that I had at two Mexi- can banks on the border. Once the pesos had been deposited in my accounts in these Mexican banks, I would instruct that they be wire transferred to my customers' accounts at the banks they would designate in other Mexican cities. There are many variations on this scheme, but the net effect is that it makes it exceedingly difficult for U.S. authorities to follow the trail, back and forth across the border, of the thousands of dif- ferent transactions involved in large-scale money laundering activi- ties. For example, sometimes I or my runner would take the cash brought in by the drug dealer across the border-in other words, to Mexico-and would simply turn around and bring it back into the U.S. At that point, we would fill out the appropriate Customs form and, if asked, we would explain that the cash was the result of le- gitimate business dealings with other casas de cambio located on the border, or the Mexican casas de cambio. With this form in hand, we could then deposit the cash in any of my U.S. bank accounts without generating any suspicion. Once the cash was in my account, I would then wire transfer it to any desti- nation selected by the customer without any problem, since there are no reporting requirements for such transactions, regardless of the amount. PAGENO="0026" 22 Mr. Chairman, I think you and the Subcommittee members may gain added insight into the nature of the role played by casas de cambio if I point out that while I knew that what I was doing was wrong, I did not necessarily understand that I was a money laun- derer. Indeed, it was only when Subcommittee investigators re- ferred to me as a money launderer while they questioned me about my activities that for the first time I came to the painful realiza- tion that I did in fact deserve that label. There are several reasons behind my thoughts and feelings in this regard. First, when U.S. officials came in 1985 to explain the Government's money laundering cash reporting requirements, only one of the two agents spoke Spanish, and she did not speak it very well. I did not speak English well, either. At that time, moreover, I was given the wrong forms, which made it even more difficult for me to understand what was required of me. Nor was it easy for me to understand the rationale for these requirements, since in Mexico, there were then and still are no such requirements, and an important part of the way business is done is an ask-no-questions approach. In addition, all the other casas de cambio operating in the city where my business was located were doing precisely the same thing I was. I know that this is true because when a drug dealer would bring in a particularly large cash amount, it was not uncommon for me and one or two other casa de cambio owners to agree to jointly dispose of it by dividing it into amounts that we could each manage effectively. Also, for a time, all of our city's casa de cambio owners would meet periodically as a group, for among other reasons, to try to fix exchange rates so that customers could not shop around for better rates from one casa de cambio to the next. Coming from Mexico, I also did not readily understand the rela- tionship between what I was doing for these drug dealers and the overall drug problem in the United States. In my eyes, all I felt I was doing was exchanging currency, and that I was different be- cause I did not charge a commission over and above my normal fees for my money laundering services, as many other casas de cambio did. Similarly, I had to wonder how serious U.S. authorities were about the money laundering reporting requirements, since only minimal penalties seemed to be involved if one were caught failing to comply with them. I heard, for example, that in two cases where casa de cambio owners had been charged with currency transaction reporting violations, one was sentenced to a 6-month jail term, and the other received a small fine and a suspended 6-month jail term. Finally, in making these comments, I do not want to suggest that I do not now understand fully the seriousness of what I did. As I mentioned before, I have come to the painful realization that I was indeed a money launderer and that the services I provided aided drug dealers by enabling them to get their profits out of and back into the U.S., in a form that they could use to reap the benefits of their criminal activities. I deeply regret the role that I played in this regard. PAGENO="0027" 23 Thank you for allowing me this opportunity to appear before you, and I will now be pleased to answer any questions that you may have. Senator NUNN. Thank you, Mr. Gomez. You statement is very helpful to us and has given us an insight into your activities. Let me start by asking you whether you could give us a better idea about the drug dealers who brought in money for you to launder. Were they street-level people, or were they the higher-ups in the organizations? Were they major figures in a drug family, or did those major figures send in their own runners to do business with you? Mr. GOMEZ [Interpreted from Spanish]. I believe that most of our drug-trafficking clients were middle-level people and that their main source of drug supplies was the city of Guadalajara. I don't think we ever saw the faces of any of the higher up or important people. That was the situation, at least in my business, since most of the wire transfers were being sent to the city of Guadalajara in Mexico. Senator NUNN. Did these people appear to be part of an orga- nized activity, or were they more or less freelancers? Did this appear to be part of a cartel operation? Mr. GOMEZ [Interpreted from Spanish]. I believe now, looking back, that they were probably working with other people who may have been part of important groups of drug distributors in Mexico, especially in the city of Guadalajara. Senator NUNN. I understand that when you first started your casa de cambio, a person could not deposit U.S. dollars into a Mexi- can bank account, which is one of the reasons why the number of casas de cambio grew so much during the 1980s. Is this still the case today, and if not, what might this suggest about the future of casas de cambio in the United States? Mr. GOMEZ [Interpreted from Spanish]. At the time former Presi- dent Lopez Portillo had established a law for the control of ex- change rate activities in Mexico, and therefore Mexican banks could not have dollar accounts in the country, and that is why casas de cambio were established on the other side of the border in the U.S., to solve the problems of people who needed to have dollar deposits. That is why the business grew. The original purposes were legitimate ones, but over time the purpose changed, and I believe that at the current time, the Gov- ernment of Mexico has authorized dollar accounts on the Mexican border as well as within the country. They are allowing companies, for example, to have dollar accounts inside the country. And in my view, this makes the casas de cambio unnecessary, since all Mexi- can banks can now handle dollar accounts, and they trade them for anybody without asking any major questions. Senator NUNN. Texas has recently passed a law that attempts to regulate casas de cambio by, among other means, providing that they be licensed. Are you familiar with this law, number one, and number two, do you believe it can or will be effective? Mr. G0MEZ [Interpreted from Spanish]. It is a law that was re- cently enacted in the State of Texas, so I am not really familiar with it. But, I believe that just enacting laws is not going to be enough to regulate casas de cambio, since there are ways to engage PAGENO="0028" 24 in money laundering activity through casas de cambio by other means, either by falsifying the names of the people who bring in the dollars or by taking the dollars and simply taking them to Mexico and reporting them there and then bringing them back into the U.S. without revealing the real identity of the source. Senator NUNN. On that latter point, you said in your statement that you smuggled dollars into Mexico and then returned these funds to the United States, declaring the funds when you re-en- tered. Did you feel there was much chance of you being discovered in doing this? Did you have to go through Customs officials on the way to Mexico from the United States? What was the chance of being detected in this regard? Mr. GOMEZ [Interpreted from Spanish]. Well, at the time that my casa de cambio was in operation, usually when you went to Mexico, crossing the U.S. border, there was no type of control; you could go freely. And then, in Mexico there were even fewer controls. Then, when the money would come back into the U.S., as I explained in my statement, you would have to fill out a form, a special form, reporting all the dollars coming into this country, as required by law. Still, at the time, it was fairly easy for anybody to bring money into the country without filling out any form because there was very little control by the U.S. Customs officers, and people could come in freely. Senator NUNN. We will see in a few minutes a videotape of casas de cambio along one part of the Mexican-American border. These businesses seem to be very concentrated, lined up almost one next to another like in a shopping center. How do you account for there being so many casas de cambio in such a small geographic area? Mr. GOMEZ [Interpreted from Spanish]. I believe that, at the start, the growth of the casa de cambio business was due to the le- gitimate activity in the area. As I said in my presentation, my casa de cambio when I first began operating, I was only making $1,500 a month. But there was such a surge in business as a result of drug activities along the border, especially in Texas, that is what led to the proliferation of the casas de cambio, as you said, one next to the other. The truth of the matter is that there are more than 20, 25, or even 30, but four or five casas de cambio control all of the others by providing them the necessary resources to conduct their activi- ties. I believe that four or five casas de cambio have control over all the others. Senator NUNN. Were you one of those being controlled, or were you one of the four or five top operators? Mr. GOMEZ [Interpreted from Spanish]. Originally, I needed the help of the other casas de cambio, at first. But toward the end of 1986 and early in 1987, given the services my casa de cambio was providing, I no longer needed help from any other casa de cambio. We had plenty of resources, plenty of money, and there was no need for us to share our operations with them, so I was operating alone. Senator NUNN. You mentioned how much you make a year; how much did the average casa de cambio owner make a year? Were you one of the smaller ones or one of the larger ones? PAGENO="0029" 25 Mr. GOMEZ [Interpreted from Spanish]. I could be classified as a middle-sized casa de cambio. A small casa de cambio would make about $40,000 per year. A middle-sized one would make from $200,000 to $500,000 a year, and a large casa de cambio could easily make more than $700,000 or $1 million a year. I know that from first-hand experience. I know some of the casas de cambio on the border that make that kind of profit per year. Senator NUNN. You stated that you dealt extensively with Mexi- can banks in your transactions; is that correct? Mr. GOMEZ [Interpreted from Spanish]. Yes. Senator NUNN. Did the banks understand that you were basical- ly handling a lot of drug money? Did the Mexican banks know what they were handling? Mr. GOMEZ [Interpreted from Spanish]. I believe that they did know. They knew what was happening on the border, and they knew when the money came from drugs and when it did not be- cause of the size of the amounts coming from some clients. But when I, as a casa de cambio, came in with a large amount of dol- lars to a Mexican bank, the manager of the bank had to know that it came from drug proceeds, although we never mentioned it or talked about it. They needed it for their banks to grow, to have more resources, and it was convenient for me because they would give me the hundreds of millions of pesos I needed for my oper- ations. Senator NUNN. What about American banks; did you deal with banks on the American side of the border? Mr. GOMEZ [Interpreted from Spanish]. I had two or three ac- counts in U.S. banks. I never met any bank officials in the U.S. I simply dealt with the tellers at those banks, and we really did not need their services. We were regular customers, but we really had no direct dealing with those officials. We simply, I believe, were a good account; we had a good average deposit, and they provided us with good services. Senator NUNN. Senator Lieberman? Senator LIEBERMAN. Thank you, Mr. Chairman. Let me thank you first for the leadership that you once again are showing in investigating the drug underworld's latest schemes to turn their illegal profits into financial empires. I must say that it can fairly be said that the reason we are here today discussing this topic is because of this Subcommittee's past successes in investigating the manner in which criminals have used more conventional banking institutions to launder their prof- its. Your leadership in this regard led to the enactment of two major money laundering statutes and enforcement of those statutes which forced conventional banks out of the business. I am glad to be part of this Subcommittee and to join with you in this latest attempt to close another loophole that allows the drug trade to prosper by making it possible for drug dealers to turn their dirty money into clean money. Ultimately, of course, that cre- ates the lawlessness on the streets of America which threatens the basic security and enjoyment of life of the citizens of this country. So I thank you for that. Senator NUNN. Thank you, Senator Lieberman. And your experi- ence in law enforcement, which has been vast in the past before PAGENO="0030" 26 you got to the U.S. Senate, is extremely helpful in this Subcommit- tee, and we are very proud to have you as a member. Senator LIEBERMAN. Thank you, Mr. Chairman. I'm delighted to be with you on this. Sir, let me ask you a couple of questions, building on what the Chairman has asked. I am wondering if you have any knowledge, although you have been away for a bit, about how many businesses similar to yours are still operating in the immediate area in which your casa de cambio operated. Mr. GOMEZ [Interpreted from Spanish]. I believe there are about 12 businesses in the area where I used to operate, but back then there were 35 such businesses; I think there are only 12 now. Senator LIEBERMAN. Why has the number gone down? Mr. GOMEZ [Interpreted from Spanish]: Mainly because U.S. Gov- ernment officials have been able to find ways to detect money laun- dering activities conducted by the casas de cambio, and some of us have had problems with U.S. authorities, and that has led others to withdraw from this field of activity. Senator LIEBERMAN. Would you say that all of the casas de cambio were and are laundering drug money? Were some of them involved in just strictly legal transactions, or were they all laun- dering drug money? Mr. GOMEZ [Interpreted from Spanish]. I would say that definite- ly a casa de cambio would not be a business if it did not launder money or if it only restricted its activities to legal activities. You would have to invest too much money, and I believe that there are other businesses that would be more profitable than a casa de cambio. The profit really comes from laundering money. Senator LIEBERMAN. So that without the opportunity to launder drug money, operating a casa de cambio is not really a very good business. Mr. GOMEZ [Interpreted from Spanish]. No-that's right, it isn't. As I said in my statement, all Mexican banks now accept and sell dollars independently of the activities on the border. Right now there is really no reason for the casas de cambio to continue to exist. Senator LIEBERMAN. Except to launder drug money-yes? Mr. GOMEZ [Interpreted from Spanish]. Definitely. You are quite right. Senator LIEBERMAN. Let me just again clarify the volume of trade, the volume of transactions in drug laundering. You indicat- ed in response to a question that the Chairman asked that you con- sidered yourself to be a middle-sized casa de cambio. Should I fairly conclude, then, that there were a good number of the casas de cambio that were actually doing more business than you were, even though you have testified that you were laundering at your height $50 million in 6 months? Mr. GOMEZ [Interpreted from Spanish]. Yes, definitely, there were casas de cambio that were laundering much more than that. Senator LIEBERMAN. How are the fees negotiated for drug laun- dering? In other words, how is it determined how much the casa de cambio operating receives for laundering drug money? Mr. GOMEZ [Interpreted from Spanish]. Usually in my case, my casa de cambio did not charge anything for laundering drug pro- PAGENO="0031" 27 ceeds. The only thing we did was try to grow and provide more services. So we provided our services, in other words, our contacts with the Mexican banks. We did things that banks or other casas de cambio took two days to do perhaps in half an hour, by using the phone; we could place their money in any part of Mexico, in any bank in the country. But I have found out that other casas de cambio did charge for that service, and the percentage would range from 2 to 5 percent depending on the amount brought in by the customers. The larger the amount, the higher the percentage, since at the same time they would be giving them $100 bills for the $10 or $20 bills they would bring in. So the percentages were as I men- tioned. Senator LIEBERMAN. So if you could just clarify and explain for the record, when you say that unlike the other casas de cambio you have described, you did not charge a fee, how did you make the money? How did you make that $20,000 a month? Mr. GOMEZ [Interpreted from Spanish]. I was explaining that I got my proceeds from the volume I handled, but other casas de cambio that charged additional fees would make much more than I did for the same type of operation. In other words, they would charge a fee that they would not declare. Senator LIEBERMAN. OK. You indicated to Chairman Nunn that you were making deposits in Mexican banks and, if I heard you correctly, that there were really never any questions asked by the Mexican banks about what your business was, although you pre- sumed that they understood that you were involved in laundering drug money. Is that correct? Is that a good summary of what you testified to? Mr. GOMEZ [Interpreted from Spanish]. Yes, it is. Senator LIEBERMAN. I don't know anything about the Mexican banking business-were these local banks just over the border that you were dealing with that were independent, or were they parts of a national banking system, perhaps a Government system? What were they? Mr. GOMEZ [Interpreted from Spanish]. While the banks were part of a national system, there are branches that are located throughout the country. So that, as I said, there were branches that were located on the border. Senator LIEBERMAN. Your answer is directly responsive to my question; these were branches of larger national banks within Mexico. And I gather that as far as you know, there is no Mexican law that requires Mexican banks to report cash transactions of any size. Mr. GOMEZ [Interpreted from Spanish]. I know that lately, let's say from 1991 onward, it is required that a form be ifiled out, stat- ing the amount of money being deposited, who is depositing it, where it is being deposited, and who the identity of the person is. But I don't know what the bank then does with the form; I think it is only filed away, because the casas de cambio are still not con- trolled in any way in Mexico. Senator LIEBERMAN. OK, that's important. It seems to me that one of the steps that we might be interested in is to raise this ques- tion with the Mexican Government to ask them to do what they can do now to begin to impose some of the requirements on Mexi- PAGENO="0032" 28 can banks that American law now imposes on American banks which have inhibited laundering of drug money as a result of the work of this Subcommittee. We are negotiating a Free Trade Agreement with Mexico right now, and it seems to me from your testimony and what we have learned today that there is an awful lot of free, illegal trade going on between the United States and Mexico when it comes to laun- dering of drug money. * Let me ask a final question, if I may, and that is whether in your casa de cambio you ever acted as an agent for any of the larger American money transfer businesses, such as American Express or Western Union. Mr. GOMEZ [Interpreted from Spanish]. No. In 1986, a Western Union agent came to offer me his services in the town where I was located, and I told him I was not interested because their fee or commission was too high, so it was not of interest for us to work with them. Senator LIEBERMAN. Were any of the casas de cambio in. your community agents for Western Union or any of the larger Ameri- can money transfer businesses? Mr. GOMEZ [Interpreted from Spanish]. No, not really. Senator LIEBERMAN. I want to thank you for your cooperation which is very helpful to us, to say the least. I admire your courage. Thank you, Mr. Chairman. Senator NUNN. Thank you, Senator Lieberman. Mr. Gomez, we appreciate you being here. Do you have anything else you'd like to say today to the Subcommittee before we allow you to depart? Mr. GOMEZ [Interpreted from Spanish]. No; simply to thank you for having allowed me to be here today and to explain how the casa de cambio business works, and again to say that I deeply regret my activities. I never believed that I was laundering money. I knew that I was not filling out some forms, and that was basical- ly all I knew that I was doing wrong. Now I do understand that the only solution for the casas de cambio on the border-well, they really have no reason to exist because Mexican banks now can deal with dollars in any amount. It would be very difficult to control them in the U.S. That is my opinion. Senator NUNN. Thank you very much. You have been very help- ful. We're going to ask that the room be cleared again and all the cameras be turned the other way. As soon as the room is cleared, we'll have Mr. Gomez depart, and then we will resume with our law enforcement panel immediately thereafter. We'll turn the cam- eras before you depart. [Recess.] Senator NUNN. Our closing panel. this morning consists of State and Federal law enforcement officials who will describe from their special vantage point and experience the methods, the nature and extent of money laundering activities on the part of non-bank fi- nancial institutions. From the Southern District of Texas, we have U.S. Attorney Ronald G. Woods, who is accompanied by Assistant U.S. Attorney PAGENO="0033" 29 and High Intensity Drug Trafficking Area Coordinator, Charles Lewis. We are pleased to have both of you here this morning. Also on the panel are James D. Dutton, Deputy Attorney Gener- al, Special Prosecutions Unit, State of California; and Ron Eatinger and Dennis Crawford, Internal Revenue Service Criminal Investi- gations Office Chiefs from Houston and Los Angeles, respectively. Gentlemen, we welcome all of you before the Subcommittee. We swear in all witnesses before our Subcommittee, so I will ask each of you to hold up your hand and take the oath. Do you swear the testimony you will give before this Subcommit- tee will be the truth, the whole truth, and nothing but the truth, so help you God? Mr. WOODS. I do. Mr. LEWIS. I do. Mr. EATINGER. I do. Mr. CRAWFORD. I do. Senator NUNN. Thank you. We are very pleased to have you here. I know you have been very cooperative with our staff, and we are grateful to you for that and also grateful for your efforts in law enforcement. I know all of you face a very tough challenge in this and many other areas, so we are pleased you are here. Mr. Woods, I think we'll start with you and go right down to the end of the table toward Mr. Crawford. TESTIMONY OF RONALD 41 WOODS,' UNITED STATES ATTORNEY, SOUTHERN DISTRICT OF TEXAS Mr. WOODS. Thank you, Mr. Chairman, members of the Commit- tee, ladies and gentlemen. I am pleased to be invited before you to provide an overview of the casa de cambio/giro house industry in Texas. Billions of dollars of cocaine, marijuana and heroin flow across the Texas/Mexico border each year. The 1,200-mile Texas/Mexican border, sadly, has become one of the premier drug smuggling areas of the United States. As these billions of dollars of destruction flow north into our country, billions of dollars of U.S. currency flow south to Texas. A significant amount of this money ends up at cur- rency exchanges in Texas, to be laundered. These businesses, generically referred to as casas de cambio or giro houses, exist in several areas of Texas, but predominantly in Houston, the Lower Rio Grande Valley, and El Paso. Numerous Federal investigations have shown that a significant portion of this industry thrives off of laundering illegal money, pri- marily drug money. In Texas, the legislature recently passed li- censing legislation to try to bring this industry under control. Frequently, these businesses hold themselves out as currency ex- changes, but they also operate under the guise of check cashers, travel agencies, and "multi-service" businesses for persons from Mexico, Central and South America. What they have in common, regardless of their name, is the transmittal of hundreds of millions of dollars of drug money in a manner that disguises the true owner 1 The prepared statement of Mr. Woods appears on page 94. 54-650 0 - 92 - 2 PAGENO="0034" 30 of the funds and the nature of the funds. These businesses also uti- lize false documentation to disguise their activities. As the Committee learns more about this industry in the South- west, I encourage you to seek answers to the following questions: Who runs this industry? Who primarily benefits from it? What is the source of the money it transmits around the Nation and abroad? Can the people of the United States reasonably rely on this industry to discipline itself? My office is glad to assist the Committee in its quest to "turn the lights on" in this industry and will be pleased to continue to assist you in the future. Thank you, Mr. Chairman. Senator NUNN. Thank you, Mr. Woods. Mr. Lewis, I understand you will be the next person to testify, so we welcome you here and look forward to your testimony. TESTIMONY OF CHARLES LEWIS,' ASSISTANT UNITED STATES ATTORNEY, SOUTHERN DISTRICT OF TEXAS, AND COORDINA- TOR, HIGH INTENSITY DRUG TRAFFICKING AREA, HOUSTON, TEXAS Mr. LEwIs. Thank you, Mr. Chairman. I am pleased and honored to be here today to provide insights based on my personal experi- ences with the casa de cambio and giro house industry. As the Committee noted during the opening comments, the ongo- ing battle with drug dealing is a series of thrusts and counter- thrusts, and to understand how this industry grew up to where it is today, I think we need to get a little bit of a historical perspective. In the past, drug dealers, as pointed out during the opening com- ments, carried millions and millions and millions of dollars into banks. As .CTR enforcement grew, and as the banking industry re- sponded to the requirements of the CTRs, the drug dealers found themselves being prosecuted and their moneys being seized based on what they were doing in bank lobbies. So they turned-and you heard the progression from the prior witness today of how he grew up with this industry-the drug industry in Texas turned to the pre-existing casa de cambio industry to act as a "beard" or a dis- guise for the movement of drug moneys. As you could tell from the comments of the witness, once the scheme was set up and established, it was entirely possible, and in fact, based on our investigations we can now demonstrate in specif- ic cases that hundreds and hundreds and hundreds of millions of dollars moved from casas de cambio into U.S. banks that were drug dollars. In the way the schemes operated, the drug dealers' names were kept entirely off the paperwork both at .the casa de cambio and at the bank. The schemes that exist to support the money laundering, I won't say they are infinite, but they are numerous, and they are all es- sentially variations of one theme, which is to move money under somebody else's name. I have set out some of these schemes in my statement, and it's not necessary to go into the variety of schemes at this point. 1 The prepared statement of Mr. Lewis appears on page 97. PAGENO="0035" 31 One of our investigations, though, did disclose really the depth of the penetration of drug dealers into the casa de cambio industry. This investigation was known as "Operation Southwind." This in- vestigation involved a variety of casas de cambio that were all in the Lower Rio Grande Valley of Texas. Earlier during the Committee hearings this morning, some ques- tions were asked or issues raised about whether or not these casas held money in trust for the drug dealers. Our investigation showed that the casas de cambio do hold money. in trust for the drug deal- ers, and for a variety of purposes. In one instance, we disclosed the casa de cambio was holding money for drug dealers so that the drug dealers could quickly go to the casa de cambio any time of the day or night and withdraw the money to meet their emergency needs. Someone may have been arrested. Someone may need to move to another part of the country very quickly. They also held money for the drug dealers to buy assets-a ranch was located, and they need a quick $100,000, so they would go to a casa de cambio and withdraw that money immediately. Another casa de cambio that was involved in that investigation held huge sums of money-in the millions. Law enforcement was fortunate enough to have seized that money, and here is a picture of it today. I was not present during the search of this casa de cambio, but I was told that the safes were stuffed so full you could barely get any more money in the safes. This is approximately $3 million that you're looking at here in this photograph, and the money was double-stacked-in other words, you are seeing the front row of the money, and there is another stack behind it. Casas de cambio, we found, made loans to individuals. One indi- vidual borrowed $2 million from a casa de cambio, and when that individual could not repay that loan, his arm was broken. That in- dividual is now dead. We have a current investigation that has been indicted where yet another casa de cambio laundered about $2.5 million in a sting operation. All of this you heard from other witnesses here this morning, but it indicates that to me this industry is out-of-bounds. This industry is what I call an "outlaw" industry. That is not to say that every dollar that moves through a casa is dirty. We don't believe that to be true-or that everybody involved in this industry in . Texas is committing crimes; we don't think that is true. But a significant portion of this industry is way, way out of bounds. Our investigations have shown us that there are two primary things that stand out with these casas de cambio. First, it is an outlaw industry that exists primarily for the benefit of the drug traffickers; and second, that false and misleading documents are used extensively by the casas de cambio in order to launder the moneys. The casas de cambio exist along the Texas-Mexico border, and they call themselves generally as such, casas de cambio. In Hous- ton, we have what I call the big-city cousin of the casa de cambio, the giro house. "Giro" is Spanish for "wire" as in wire transfer. Giro houses in effect perform the same function for South Ameri- can traffickers in Houston that the casas perform for Mexican traf- fickers in the Lower Rio Grande Valley. That is, they move large PAGENO="0036" 32 amounts of money from a giro into a bank for wire transfer for a fee. The fee in Houston ranges from 5 to 7 percent. As Mr. Woods indicated, casas de cambio and giro houses pre- dominate in two specific areas of our State. In the summer of last year, I requested IRS to make a survey of all known casas de cambio and giro houses in the State of Texas in pursuit of the soon coming Texas State legislation. The chart that I have displayed over here shows the results of that survey (see Exhibit 3). It says "casas de cambio," but that includes giro houses. This data was ac- curate as of the summer of 1991, last summer. There were as per that survey about 150 of these entities that we knew to exist in the. State of Texas. There may have been more, but these are the ones we knew to exist. You can see from the dots placed on the map-each dot repre- sents a known giro house or casa in the summer of 1991-you can see~ that they predominate in two areas. They predominate along the Texas-Mexico border, and they predominate in Houston, Texas. Both of those areas, the Texas-Mexico border and the Houston, Texas area, have been designated by the Office of National Drug Control Policy, the so~ca11ed drug czar's office, as high-intensity drug trafficking areas, that being areas that are most severely im- pacted by drug trafficking. We have made efforts to try to bring this industry to heel in Texas. It is an initiative of the Houston HIDTA program to do something about this industry on an infrastructure basis if neces- sary, and as a result we were able to get, .through providing re- source testimony to the Texas legislature, a Texas statute. In addition, IRS last spring did a study called a Geographical Targeting Order, or "GTO," of approximately 30 giro houses in Houston, Texas. Under a GTO, the CTR amount is lowered from $10,000 to $100. This was done for a 60-day period. During that 60- day period, the amount of moneys that flowed through those 30 giro houses dropped by 75 percent. That is to me yet another indi- cation of what is going on with this industry, that the people who operate this industry and the clients of this industry do not want the light of day. I have brought a film that I would like to show you that shows what these locations look like, and I think one of the things you are going to be surprised at is how many of these entities stand shoulder-to-shoulder in some areas. Another thing you may be sur- prised at is you'll look at this film and. you will think how could these entities be any threat to the citizens of the United States- they don't look like they would move the quantities of money that you have heard us discuss this morning and that you will hear throughout the rest of the day. The point of fact is that they do move that quantity of money. We don't know how much money they move, because heretofore they have been unlicensed, but they do move that quantity of money. [Videotape shown.] Mr. LEWIS. This street shown here goes right into Mexico. It is in Brownsville, Texas. You will notice the very heavy traffic. This casa de cambio has a sign that says "Trust and Money" on it. Here is another casa de cambio right next door, "Bancamer." Notice that this is a knock-off. "Bancomer" is a large Mexican PAGENO="0037" 33 bank. This is a knock-off title that's made to look like it is some- how related to Bancomer by changing one letter, the "o" to the "a" making it "Bancamer." This is in Brownsville, Texas. As the camera scopes on, this is again on the same street, and here is a whole shopping center just packed full of these casas de cambio. The camera is going to zoom up here, and you are going to be able to see the names of these entities. The street you are look- ing at, coming back south, goes right into Mexico about 500 yards away. "La Esquina" being Spanish for "the corner" is a casa de cambio. You can see its peso quote sign there. Shoulder-to-shoulder right next door is "Mayra's" Casa de Cambio. You can see its peso sign. Next door to that one is "La Moneda," meaning "the money," casa de cambio, and you can see its quote sign there. There is the Brownsville Casa de Cambio. Casa de Cambio La Plata-"plata" is Spanish for "silver"-is right next door. And then you are going to turn the corner, and there is Atenas Casa de Cambio; a Mexican food restaurant; the El Paso Casa de Cambio, which is the corner. Then the camera is going to zoom back down, looking into the street that goes to the international bridge. That is Mexican air space you're looking at over the top of the traffic shed there at the bridge. And you notice, of course, the high volume of cars that go up and down that street every day; that is traffic coming out of Mexico. These are now pictures of casas de cambio in Hidalgo County, Texas, where McAllen, Texas is. Here is another casa de cambio, a little hut not much bigger than a shed, called "the corner" or La Esquina Casa de Cambio. There is its quote sign. This casa de cambio is also in Hidalgo County, right on the border. There is a Coke machine right next door to it, and you are going to notice that the casa de cambio is not too much bigger than that Coke machine; also called "La Esquina" meaning "the corner." This casa de cambio is also small, and there is an employee sit- ting in the back of a pickup truck. Many of these casas, as in giro houses, you will notice are four or five person operations. Here is another casa de cambio, "Bangab"; I'm not sure what "Bangab" means in Spanish. You can see its quote sign there. It has a bank-like window. This casa de cambio has a feature that not all share. This has a drive-up window feature. Most of them are walk-in places, but this has a drive-up window. We are now going to switch to giro houses in Houston, Texas. Frequently, the giro houses advertise them as check cashers, also. This is a giro house, a wire house, in Houston. These entities are frequently in shopping centers like the casas de cambio are in the Lower Rio Grande Valley. These entities also hold themselves out more extensively as multi-service-type businesses. Here is another one just across the street, a third one. Notice the name "Giro" on this one, "Aracely Express," and the fortified nature of the business. This is a multi-service one. This one sells auto insurance, and as you scan to the left, you'll see that cellular phones are sold by this PAGENO="0038" 34 one, pagers are sold by this one, travel tickets are sold by this one. It is a fortified position, and on the inside you can go and, of course, wire money for this. Our experience in Houston, cellular phones and beepers are also the trappings of drug traffickers. How much money does this industry move? That question has been asked, and I can tell you we don't really have a fence around that issue at this point because heretofore it has been an unregu- lated industry in Texas. I conservatively estimate that this indus- try moves a half billion to $1 billion a year in and out of Texas bank lobbies. That figure, while it is an estimate, and it is harder than it is soft, and it is on the conservative side, does not stand un- corroborated. You heard this morning from the witness what I thought was dramatic testimony about how they smuggle money out of the United States, U.S. currency, drug dollars, across the border into Mexico, and then they will bring it back and declare it. What he was talking about was the filling out of the CMIR form. FinCEN did a study of the entire U.S.-Mexico border from 1988 to 1990. That study produced in my view shocking results. The study showed that the Brownsville-Laredo area, which is going to be the lowest conjunction of dots up to the next conjunction of dots in the Texas-Mexico border, that the Brownsville-Laredo area led the entire U.S.-Mexico border with declared money files transitting the border. During this 3-year period, $8 billion were filled out or declared as coming into or out of the United States. The second- highest area was Nogales, Arizona, with about $5 billion. Neither of those two areas are known for bustling, robust, legitimate econo- mies. El Paso and San Diego, which are the two largest population centers along the border, came in third and fourth in that study. Does that mean that all $8 billion were drug moneys? No, it doesn't mean that, but it does mean that there is another indicator suggesting that we have, at least in Texas, a billion, if not multi- billion dollar problem on our hands that is in need of being ad- dressed. What are we to. do about this industry? I cannot represent the Department of Justice, nor am I authorized to speak for them in that regard. I would like to point out, though, as has been dis- cussed here this morning, that if we only look at the U.S. end of this problem, we're missing half the problem. It is just as easy for casas de cambio in Mexico that have U.S. bank accounts to launder billions of dollars. as it is if that Mexican casa de cambio were right in the United States. In other words, the physical plant or the busi- ness does not have to be in the United States in order for moneys to be effectively laundered. So obviously, we have to focus on inter- national cooperation in that area. I have been greatly assisted in my work as a prosecutor by three agents who worked on the various cases with me, and I'd like to just briefly acknowledge them for you, Senator, in front of the Committee: Special Agent Don Staggs of the IRS; FBI Special Agent Robert Palacios, and Sergeant Joe Garza of the Texas De- partment of Public Safety. This concludes my comments, and I'll be glad to answer any of your questions. PAGENO="0039" 35 [The prepared statement of Mr. Lewis follows:] Senator NUNN. I'll come back and ask you for your personal rec- ommendations, knowing you aren't speaking for the Justice De- partment. So I'll give you a little time to think about that, but I want to try to get that from each of you. Mr. Dutton, I think that you were not sworn because you weren't in the room at that time. Mr. DUTTON. That's right; I got caught in the security net. Senator NUNN. If you'd raise your right hand, please. Do you swear the testimony you will give before the Subcommittee will be the truth, the whole truth, and nothing but the truth, so help you, God? Mr. DUTTON. I do. Senator NUNN. I believe we are going to hear from you next, Mr. Dutton. We are proud to have you here, and I have already intro- duced you in absentia, so please go ahead with your testimony TESTIMONY OF JAMES D. DUTTON,' DEPUTY ATTORNEY GENER- AL, SPECIAL PROSECUTIONS UNIT, OFFICE OF THE ATTORNEY GENERAL, STATE OF CALIFORNIA Mr. DUTTON. Thank you. I am happy to be here, Senator, and good morning to everybody. I am with the State of California. I prosecute on the State side, and I am also cross-designated on the Federal side, so I do have ex- perience in both State and Federal prosecutions. California is taking over as the center of drug trafficking from Miami. Of course, Miami still has quite a bit of drug trafficking. The Federal Reserve just came out with its 1991 figures that show the Federal Reserve surplus for the Los Angeles region at $7.375 billion. If you want to compare that surplus with just 7 years ago for the Los Angeles region, the surplus was only $374 million in 1984. So we're talking about an incredible increase, over 20 times, as far as the surplus for Los Angeles in just 7 years. Senator NUNN. Tell us a little bit about what you gather from that. What does that surplus mean? I think we need a little back- ground. Mr. DUTTON. OK. It doesn't mean that all that surplus is drug revenues, but there is a correlation. Basically, your surplus is the difference between receipts by Federal Reserve banks and pay- ments by Federal Reserve banks. So that surplus means that there is an excess of $7.375 billion of receipts by these banks in the great- er Los Angeles area, which is definitely a strong correlation to drug revenues in that area. Senator NUNN. Thank you. Mr. DUTTON. In California, mainly through the Federal prosecu- tonal agencies, there have been prosecutions against casas de cambio and money laundering operations. In Operation Greenline, a 2-year investigation in the San Diego area, it was estimated that narcotic-trafficking organizations centered in Los Angeles and Ti- juana were funnelling $2 billion a year through the San Diego region to get the money across the border into Mexico. Not all of 1 The prepared statement of Mr. Dutton appears on page 106. PAGENO="0040" 36 the $2 billion was going through casas, but at least a portion was, and there were convictions of casa owners arising from the investi- gation. The pertinent Federal regulations, which you have already heard about, consist of CTR reporting requirements. The problem is with compliance. IRS, because of their lack of resources, has a goal of examining these nontraditional financial institutions, which in- clude the casas de cambio, of only one audit every 3 years. That is not sufficient for compliance or deterrence considerations. IRS estimates that there are approximately 27,000 of these non- traditional financial institutions. We don't know for sure how many are out there. You can look into the crystal ball and specu- late that there are probably at least twice that amount. I think the IRS locates these financial institutions through the CTR filings, but a lot of these casas do not file CTRs. The first problem that we have as far as the casas de cambio is being able to locate them. They do not advertise in telephone books-some do; but very few do. Then you have to have sufficient requirements and regulations to make sure that there is adequate record keeping of transactions. Then you have to have the man- power out in the field to make sure that the casas are complying with the recordkeeping requirements, or why have the law on the books. What has California done about this? We have passed a money transmitter law that was effective on January 1, 1990 (see Exhibit 4a). It really is not adequate to meet law enforcement needs. The law requires that any business that receives money with the intent to transmit it abroad be licensed by the state. So, transmittals within the United States are not covered by the licensing require- ments. To get their licenses, the businesses have to have $250,000 in equity in the business or a bond of that amount. They also have to undergo a criminal records check to make sure that they do not have any felony convictions. Furthermore, the businesses have to have a corporate structure. In reference to the chart I prepared, the figure of an estimated 1,000 casas de cambio in California is based on a functional defini- tion of casas de cambio. I think there may be a slight confusion and misunderstanding here as far as casas de cambio just being a border problem. Mr. Lewis specified that there are giro houses in Houston, and they obviously are not located on the border. If you use a functional definition of casa de cambio, a business that re- ceives money for the transmittal of that money to a Latin Ameri- can country-whether they call themselves a casa de cambio, whether they call themselves a travel agency, whether they call themselves a money exchange house-then I think you are focus- ing on the real problem. And using that type of functional defini- tion, we have in excess of 1,000 of these generic casas in California, many of them located in the Los Angeles area. There are also some exemptions in the California money trans- mittal law that should be eliminated. Again, referring to the chart, prosecutions by California prosecu- tors-none under the California Money Transmittal law-even though it is felony if you know that you are supposed to have a PAGENO="0041" 37 license and you receive money with the intent to transmit it abroad. The regulatory authority is California State Banking. State Banking has only 8 examiners assigned to the regulatory function. One of the problems in California is that the casas de cambio do not sign up. We cannot locate them. They don't voluntarily say, "Hey, I'm out here, I'm a casa, and I want to pay my fees, and I want to fill out all these forms to become a licensed money trans- mitter." Only 27 licensees are signed up. There are a few pending applications as well. You have agents of licensees; that is where you get the numbers. You have 1,900 agents. There are less exacting qualification re- quirements for the agents than for the licensees. For any proposed Federal statutes or regulations, I recommend that the licensing re- quirements be as strict for agents or branches of agents as they are for licensees, because lots of times the agents are not as scrutinized as much as the actual licensee. As you can see from the chart, there is a total of about 2,600 li- censees, agents and branches. State Banking does not have enough manpower to effectively enforce the regulations. How does State Banking usually find out about nonconforming or noncomplying casas de cambio? Usually a competitor will give them a call and say, "Hey, I had to get a license-why don't they?" So what does State Banking do? They send out cease and desist let- ters, and usually about half the time, the casas de cambio will just fold up right there; that's enough for them to close their doors. The other casas say, "We're not doing it. Prove it." That's where we have some problems. The California regulatory scheme is not tied into criminal law enforcement. It is necessary for an effective en- forcement scheme to have a civil regulatory scheme tied into crimi- nal law enforcement, working hand-in-hand together-because what casas understand is actual criminal penalties. That's what will clean up their act; that's what happened in the banking indus- try in the mid-Eighties, and that's why we have such good CTR compliance with banking now. Could we please see the other chart? (See Exhibit 4b.) I have some photos here-in the State of California we don't do videotapes-we just do 8-by-lOs, and they were kind of tough to get. Here, we have downtown Los Angeles. This casa is listed in the telephone book. It advertises, and you can see in the photo, if you look at it closely, that it advertises that it sends giros to Mexico. The casa is not licensed, it is not an agent of a licensee. It is in defiance of our California money transmitting law. The next picture, in the upper middle, is a casa de cambio six blocks from the U.S. courthouse in L.A. There is a close-up photo of what it advertises. It advertises "girofax to Mexico". It also says that it is licensed by the State of California. One of the problems here is that there are three businesses in just one small office setting. They say they are travel agencies. One of the three travel agencies is in fact an agent licensed by the State of California as a money transmitter business. It is the only one of the three who does not advertise that it performs the service of sending money to Mexico. The other two, who are not licensed in any way, advertise that they can send money to Mexico. It is very PAGENO="0042" 38 difficult to determine who is doing what in these businesses. They are not keeping sufficient records. A lot of times, one relative runs one of the businesses, another relative runs the other, they are all interchangeable. You have hidden ownership problems as well, such as nominee owners. A preliminary telephone call was made to these people, asking who was the owner with the license. No employee could tell the in- vestigator who the real owner was with the license. Another tele- phone number was given, and that number was out of order; no contact was made. So these are some of the practical problems you have. Down on the border, as you can see in the lower pictures, we also have our strip of casas de cambio. In San Diego, we have 50 casas de cambio. Most of them are along San Ysidro Boulevard, which is the boulevard right next to the San Diego/Tijuana border. We also have our "Coke machine"-type casas de cambio, as you can see by the photo on the right. I call it a "portable casa." If you don't want to come to the casa de cambio, we'll move it to you. A casa can be that basic, that minor league, with handmade signs. Under the Bank Secrecy Act, the IRS refers potential civil penal- ties for CTR violations by these nontraditional financial institu- tions to the Office of Financial Enforcement, which is part of Treasury. There has only been one civil penalty levied so far on these nontraditional financial institutions. That was a large one against Oscar's Money Exchange in Texas, a $3 million fine. We just don't have the manpower to really go out there and enforce compliance by nontraditional financial institutions with the Bank Secrecy Act. The good news is that something can be done. In San Diego, we have Municipal Code provisions that apply to casas, and we have local law enforcement spending a lot of time exhibiting a high pro- file in the casa concentrated border area. These particular Munici- pal Code provisions require the casas to send receipts of their transactions to the San Diego Police Department on a weekly basis. They have a licensing bureau that reviews these receipts. They have licensing agents that go down to the casas de cambio each week and a cursory audit of every single casa is done each month. This is helping the San Diego Police Department to clean up the casas in San Diego. We believe that money launderers aren't using casas in the San Diego area now as much as they used to. The San Diego compliance program is one of the reasons. The other reason is due to a couple of very successful prosecutions. What I can recommend-and I can only recommend it on a per- sonal level, I cannot represent the Department of Justice, State of California in making these recommendations-is to pass a compre- hensive Federal legislative/regulatory scheme that targets these nontraditional financial institutions, not just something that says "casa" on the door. Further, that we have strict licensing require- ments where we do criminal background checks on anybody con- nected with the business, anybody who gets any benefit from the business. This would help us with the hidden ownership problem. I also recommend that you require periodic reports sent in, once a month, or once a week, of the casas' financial transactions. Fur- ther, that we have enough manpower out there to actually go into PAGENO="0043" 39 the casas de cambio and look at their books on a basis where they are going to be deterred and are not going to have these illegal transactions. The other thing that I would strongly recommend, even in Feder- al regulations if possible, is to allow local law enforcement to go to the casa and do the leg work-check out the casas de cambio and inspect their books during business hours-because IRS and other Federal agencies do not have the resources and the manpower to do this. It is the locals who are out there on the streets, and they are the ones who keep track of where the casas are, when they open, when they close. The locals should be part of the program. I recommend that you do this as part of an integrated task force approach; that you have a couple of Federal agents as supervisory agents, utilize some of the resources of the Federal agencies, and have State and local members as part of this task force to do the leg work. One other thing which Senator Lieberman mentioned. I strongly recommend that you have to try to work on the Mexican Govern- ment to have them enact currency reporting laws that are at least similar to the United States'. Also to have an equal sharing of fi- nancial information across the border and access to such informa- tion; because Mexico right now is just one big black hole as far as financial documents. For us and our prosecutions, it is very diffi- cult, if not impossible, to get sufficient documents to trace the money through Mexico. The last thing I would like to mention to you in the area of pro- posed Federal legislation and the impact of that legislation, is to consider trades and businesses and the 8300 Forms that are sup- posed to be filled out by trades and businesses for cash receipts in excess of $10,000. If you start shutting down all the casas, which is great, or regulating them so you only have the legitimate casas de cambio operating, money launderers are going to move more and more of their money through other trades and businesses. They are already doing this. They are already going through real estate com- panies, travel agencies, and businesses of that nature, even the en- tertainment business. There is virtually no or very little compliance by businesses with the filing requirements for 8300 Forms. Something like 56,000 8300 Forms were filed for fiscal year 1991. That compared to an excess of 7 million CTR Forms being filed by financial institutions in the same fiscal year 1991. So you need compliance in that area as well, or money launderers are just going to keep running their money through trades and businesses. Further, you need local access to 8300 Forms. Right now, the 8300 Form is classified as a tax docu- ment. It is very difficult, if not impossible, for local law enforce- ment to obtain 8300 information, and this information is impera- tive for law enforcement to do their job as far as detecting money laundering through trades and businesses. Thank you. Senator NUNN. Thank you, Mr. Dutton, very much. We appreci- ate your suggestions and will give them a good deal of thought. We will next hear from Mr. Ron Eatinger, who is the Chief of the Criminal Investigations Division of the Internal Revenue Serv- ice in Houston, Texas. PAGENO="0044" 40 TESTIMONY OF RON EATINGER,' CHIEF, CRIMINAL INVESTIGA- TIONS DIVISION, INTERNAL REVENUE SERVICE, HOUSTON, TEXAS Mr. EATINGER. Mr. Chairman, I want to thank you and the Sub- committee for the opportunity to testify today concerning money laundering activities. For a number of years, the IRS Criminal Investigations Division has been combining their resources with other law enforcement agencies in an effort to combat money laundering. Drug dealers and money launderers who participate in this underground econo- my also invariably fail to report this cash flow on their tax returns, if in fact they file tax returns at all. During the past several years, we have identified and tracked the emergence of an industry in Houston which in large part is a front for Colombian money launderers. The businesses which comprise this industry are known within the Houston community as "giro houses," meaning a business that wire transfers money. These giros businesses are usually two- or three-person oper- ations, and as you saw on the videotape, they occupy only a couple of hundred square feet of office space. Often, the giros operate under a name that identifies the business as a telecommunications company or a telephone pager company, an insurance company, a travel agency, or a combination of any or all of these. It is because of this type of storefront that they put out in this industry that the mere identification of the giros industry and busi- nesses is a severe problem for us in enforcement. We estimate currently that there are approximately 80 giros businesses in the Houston area alone, and further, it is known to us through intelligence that these businesses exist and operate in other major metropolitan areas in the United States. As Mr. Lewis advised you, in early 1991, due to our concern over the large sums of dollars that were being laundered through the giros industry in Houston and the fact that no-and I repeat, no- currency transactions were being filed by any of the giros business- es, we requested through the Secretary of Treasury authority to issue a Geographical Targeting Order (GTO). The authority to issue this order was granted to the Secretary in 1988. It authorizes the Treasury to establish additional recordkeeping and reporting re- quirements in designated geographical areas. Under this authority, the GTO was issued for a 60-day period in mid-1991 and required the giros businesses in Houston to file CTRs for all wire transfers involving U.S. currency in excess of $100. Criminal Investigation implemented, monitored and enforced this GTO. As a result of this GTO, evidence was gathered that large sums were in fact being laundered through the giros industry in Hous- ton. Specifically, based upon the intelligence available, it is esti- mated that in 1991 in excess of $100 million in U.S. currency moved through the giros industry in Houston. Of this $100 million, there is evidence that strongly suggests that $75 million of that $100 million emanated from narcotics trafficking. 1 The prepared statement of Mr. Eatinger appears on page 157. PAGENO="0045" 41 However, even more alarming to us is the fact that the intelli- gence reflects that there has been a 300 percent increase over the time that we have been tracking this in the dollars moving through this industry. In that time frame, we began monitoring that for the years 1989, 1990 and 1991. It is our belief that the money laundering activity currently pro- liferating within the giros industry in Houston is a direct result of a high level of compliance with Federal currency reporting statutes within the traditional banking community. Simply put, this high level of compliance within the traditional banking community has forced the money launderers to establish new routes to move their illicitly-derived proceeds-therefore, the emergence of the giros in- dustry. The schemes in the giros industry are basically twofold. The first scheme is one which is known to us as "smurfing" where individ- uals will go from one location to another, keeping the transactions underneath the $10,000 threshold. And again, as you saw in the videotape, as a result of the close proximity of these locations, two money launderers operating from one vehicle can easily "smur?' $250,000 in one hour's time. And these money launderers doing the "smurfing" activity earn from 2 to 4 percent, so on the $250,000 that they launder, they could earn between $5,000 and $10,000 in one hour's time. When we go in to examine the records that are kept in the giro house, what we find is that their invoices conceal the money laun- derer's identity, and they conceal the criminal structuring viola- tions by having false information on the invoices. We consider this activity on the part of the giros operators to be "willful blindness" and of course deliberate ignorance of it, and if in fact we could prove it beyond a reasonable doubt, we would have a criminal vio- lation of Title 31, section 5324, also known as the "structuring" sec- tion. The second method that they use, Mr. Chairman, is one where an individual would bring in a large sum of money, somewhere around $500,000. However, when we could go in and look at the in- voices of that business, what we would find would be, say, 60 in- voices which reflect 60 transactions instead of one, all of which would be reflected in their records as being under the threshold of $10,000. Again, if in fact we could prove this, we would have a vio- lation of law, and we have been able to executh warrants and make some cases in this area, but not to the degree that we would like. After the receipt of the dollars in the giros business, they turn around and deposit the money, less their commission of 7 to 8 per- cent, into the normal banking channels, and the traditional bank- ing institution does file the CTR, which is how we became aware of the industry and the operation of such. The paper trail, however, that was envisioned by Congress stops at the giro house because in their internal records they reflect that there were no transactions in excess of $10,000, and they do not file any CTRs. In summary, the money laundering currently occurring through the giros industry in Houston is significant. Further, this money laundering activity is proliferating at an alarming rate, and this rate of increase is attributable to the effectiveness of the money PAGENO="0046" 42 laundering schemes used by giro businesses to evade current Feder- al reporting laws. Mr. Chairman, this concludes my prepared statement. Senator NUNN. Thank you very much, Mr. Eatinger. Our final witness is Mr. Dennis Crawford, Chief, Criminal Inves- tigations Division of the Internal Revenue Service in Los Angeles. Mr. Crawford, we're glad to have you here. TESTIMONY OF DENNIS E. CRAWFORD,' CHIEF, CRIMINAL INVES- TIGATION DIVISION, INTERNAL REVENUE SERVICE, LOS ANGE- LES, CALIFORNIA Mr. CRAWFORD. Thank you, Mr. Chairman. I would like to thank you and the Subcommittee for the opportu- nity to testify here today concerning non-bank financial institu- tions such as check cashing establishments and currency exchange houses. I have been asked to put a different spin on it, focusing on the check cashing houses, with a little bit on the casas de cambio. What I would like to do is go directly to four case summaries. Case Investigation Number 1 was a domestic money laundering organization comprised of at least 13 identified participants. At the top of the organization was a Colombian national based in Miami. He used a Los Angeles-based money laundering network to move some of his drug proceeds into East Coast bank accounts con- trolled by foreign currency exchange houses. The money ended up offshore in Central and South America. In just over a year, the Los Angeles network laundered approxi- mately $7 million, using various methods to place funds into the banking system and move them to the East Coast and offshore as quickly as possible. The organization in California was controlled by a man who did not fit the typical profile of a drug money launderer. He was a 71 year-old attorney and law school graduate. He was known and re- spected both in his profession as an international lawyer and in his private life as a good neighbor and president of his church parish. However, on the day we executed the search and arrest war- rants, this respected member of the community stood at his bed- room door as entry was made and fired a 9-millimeter handgun at the entry team, injuring two Los Angeles Police Department SWAT team officers who accompanied us on the raids. He was mortally wounded by return fire. Among other items of documentary and physical evidence, the raids netted $450,000 in seized money, 61 shoulder weapons and handguns from the deceased attorney's residence. The money laundering scheme used front businesses into whose business bank accounts were deposited millions of dollars of drug currency. These businesses included an escrow company, a con- struction firm and a liquor store. As part of the multi-faceted laun- dering scheme, the "non-bank financial institution" liquor store changed the character of the money generated from the street sales of drugs by cashing checks for ordinary customers, using the drug 1 The prepared statement of Mr. Crawford appears on page 165. PAGENO="0047" 43 money. The cashed checks were deposited to the liquor store busi- ness accounts, where the funds were then wire transferred to the East Coast money exchange accounts. The funds were ultimately exchanged for Colombian pesos. The liquor store alone laundered $1.85 million in drug money during the short period of time cov- ered by this investigation, approximately one year. The scheme came to our attention when a bank notified the IRS of the suspicious transactions involving these accounts. We identi- fled the network of players and gained insight into the inner work- ings only after we gained the liquor store owner's confidence, using an IRS undercover agent posing as a crooked bank vice president. We spent hundreds of hours doing intensive surveillance, street work, canine alerts on the deposited currency, and extensive analy- sis of the financial paper trails. As an aside, to show the education of a money launderer, the Los Angeles Daily News reported that in addition to installing heavy security around his home, the deceased attorney kept files on money launderers and narcotics dealers and closely followed the trial of a Los Angeles resident who had been charged with money laundering. It was believed that this was done so the attorney could keep up to date on the Government's efforts to combat money laundering. Investigation Number 2 was reported by Time Magazine in 1988. The principals were moving one ton of cocaine per week. From this, they grossed $4 million in income per month. It was also indi- cated that this was the first direct connection between Colombia's Cali Cartel and Los Angeles street gangs in the United States. Non- bank financial institutions were an integral part of this drug orga- nization's success. In the late 1980s, a combined Federal and local investigation fo- cused on two well-matched drug confederates-one, a 29 year-old South American with direct links to Colombian drug traffickers, and the other, a 25 year-old South Central Los Angeles man with a natural talent for business. The organization's main method for laundering money from their enormous sales of crack cocaine was to use check cashing businesses. They had already established three and were in the process of purchasing more check cashing businesses when law en- forcement shut them down. During this investigation, monitored telephone conversations re- vealed detailed instructions being given to the co-conspirators on how the check cashing businesses were to be established. These conversations and other evidence confirmed the belief that this or- ganization used check cashing businesses to achieve a number of goals. One goal was to have a good cover story in case any of the participants were caught with large amounts of cash, which did ac- tually occur. Another goal, and perhaps the most obvious one, is that the organization's check cashing businesses had cash as an in- ventory. This provided a clean and direct way to exchange drug cash for third party checks. It even generated a small profit as well. The check cashing businesses also gave these criminals a safe place to count and store their drug cash and permitted an entre into banks where they could deal in cash without raising suspicion. PAGENO="0048" 44 Investigation Number 3 involves a casa de cambio that used vari- ous methods. This individual was a shareholder, employee and sig- natory on bank accounts for a San Diego-based casa de cambio. During a 2-year period, this San Diego exchange house had de- posited over $46 million into its business bank accounts, yet it had not filed even one currency transaction report in the ordinary course of its exchange business, thus implying that the entire $46 million had been taken in from customers in less than $10,000 in- crements. Three years later, the principal moved northward and opened three exchange houses in the Los Angeles area. This was when the IRS was able to penetrate his legitimate business exterior using an undercover operative with the Los Angeles Police Department posing as a drug dealer needing a quick way to launder drug money which he wanted to use here in the United States. The prin- cipal spoke to the undercover agent of the difficulties he was having in laundering all the money the Mexican drug lords were sending his way. He also showed the agent some of his secret busi- ness records which backed up parts of his sales pitch. While discussing with the undercover agent the types of money laundering services available, the principal made it clear that those services would not include currency deposits to domestic banks. He said that he knew law enforcement used dogs to detect the scent of narcotics on the deposited money. However, if we wished, he would use our currency to cash checks for customers, but he said that it would take several days longer to use up the cash before we could be repaid. We finally settled on a service he offered whereby our cash would be physically transported across the border and deposited into Mexican banks, such as you have heard previously. In turn, we would receive checks drawn on U.S. banks from accounts con- trolled by the Mexican banks. Prior to taking down the operation, the principal laundered $300,000 of our purported "drug money" in this fashion. We ultimately documented the principal's laundering business volume at about $4 million per month. Mr. Chairman, the final case that I will summarize today will present an industrious individual who coupled the right contacts with his business acumen to become one of the most successful money launderers in Southern California for a period of time. This man entered the United States in the 1980s, having left his native Peru a wanted man. After arriving in South Florida, he set up a money exchange business. He even established himself as the supposed Peruvian Chamber of Commerce. Before long he was forced to leave Florida because of mounting law enforcement scru- tiny with respect to his banking activities. After changing his name, he came to Southern California, where he operated an investment firm, a check cashing service, a money exchange house, and an advertising company. This case really ex- poses the different areas that a money laundering operation can get into. He also created several shell corporations and opened an offshore bank account in a tax haven country. This individual provided a wide array of financial services from which he generated handsome profits. Virtually none of his activi- PAGENO="0049" 45 ties were legal. His lifestyle and spending habits changed, and he began displaying his affluence and success. Again, we first took notice of this individual's activities after being alerted by a bank that he appeared to be structuring curren- cy deposits to avoid the currency transaction report requirements. The IRS monitored his financial activities over a period of months, and finally an opportunity arose for us to move closer. Be- cause of his suspicious currency transactions, a particular bank closed his accounts and stopped doing business with him. In search- ing for another bank to handle his financial activities, he ap- proached a bank which allowed us to pose as one of its employees. Our undercover agent would pretend to service the principal's banking needs as his "private banker." It took 8 months to get close enough to where he finally entertained the idea of laundering illegal money for our "associates." The principal started laundering our money, and it became ap- parent that he was using all of his financial enterprises in one way or another. In addition to "smurfing" deposits, he also structured the purchases of cashier's checks using false names. He gave us checks written on his various business accounts in exchange for our currency, which he noted as business expenses like advertising and marketing research. We even discovered that his check cash- ing businesses opened or closed for business day by day, based on the availability of drug currency to launder. In fact, in setting the principal up for the final execution of arrest and search warrants, we told him that we would be coming in with a load of $500,000 in currency to launder. We later found out that after hearing this, he alerted his check cashing businesses, which were just about to close down to the public due to lack of currency, to remain open because our expected load of money was on the way. Among the items seized pursuant to our search warrants were numerous sets of false identification and passports for the princi- pal; a notebook with the full names and telephone numbers of nar- cotics traffickers in the United States and Colombia; a list of cash- ier's checks purchased; gold, precious stones, money counting ma- chines, and cellular telephones. We also found a 1987 letter from an attorney which was written as a response to questions raised by the principal, in which the attorney explains the provisions of the money laundering statutes, such as Title 18, Section 1956. Mr. Chairman, this concludes my prepared statement. I'd be happy to answer any questions you may have. Senator NUNN. Thank you very much, Mr. Crawford, and I thank all of you for very helpful testimony. Mr. Crawford, let me start with you. The National Check Cashers Association submitted a statement for the record, and in it they asserted that "a check casher is no more likely to be funded by illegal cash than any other business." Do you agree with that statement? Mr. CRAWFORD. No, I do not. I think, as has been previously stated, although we have received some referrals from the banking community on check cashers who were using their businesses to launder drug money, that is a very difficult thing for the banks to identify. PAGENO="0050" 46 In addition, there are several things that I spoke about previous- ly that give the check cashing businesses really more of a cover for their illegal activities, such as the reason to have large amounts of currency in their possession as part of their regular business, a safe place that they go to count and work with this money. And in fact I would say that a check cashing business would be of less suspi- cion to a bank than a normal business. Senator NUNN. Along the same line; the NCC statement also says that, "given the banking relationship necessary to operate a check cashing business, this money laundering activity could not go undetected for long. A bank would quickly realize that the check casher was not borrowing sufficient funds to cover the checks the bank receives in deposits. Banks are generally not interested in processing checks unless they get the loan business from the check casher." Do you agree with that? Mr. CRAWFORD. No, I do not, and I answered part of that previ- ously. I really can't speak to what the banks prefer to do or not to do. However, our experience has been that they do not keep that tight a track of the check casher businesses. Senator NUNN. Let me ask any or all of you this question. When did you begin to notice that many money exchangers, wire transfer agents, money transmitters and check cashers were engaging in money laundering activities? Mr. LEWIS. I first noticed, Mr. Chairman, in the Southern Dis- trict of Texas in June of 1987. Senator NUNN. Do any others want to comment? Mr. DUTTON. In the Southern District in California, there were prosecutions and investigations stemming back to 1985. In 1986 there was an indictment based on the movement of $15.8 million through a casa de cambio within approximately a 4-month period without the filing of any CTRs. Senator NUNN. Do any of you have any kind of good estimate of the numbers of non-bank institutions in your area or overall? Mr. LEwIS. Mr. Chairman, in Texas our count, as I related in our testimony, from the summer of 1991 was 150 of the casas de cambio and giro house type entities. Senator NUNN. What type of cooperation have any of you or all of you received from traditional banks in your investigation of these non-bank financial institutions? Mr. EATINGER. Mr. Chairman, the cooperation has been outstand- ing. They have helped us to identify some. To give you an example, we had one call from a bank whose main complaint was that the giro house had stuffed their night deposit box with so much money that the regular depositors could not get their funds into it. Senator NUNN. They stopped it up with cash? Mr. EATINGER. Yes. Mr. DUTTON. The banking community seems to be very eager to help law enforcement at this point. They have seminars. I have spoken at several of these seminars in regards to their role. The banking community does not seem to be a problem, other than with a few employees. Senator NUNN. What about cooperation between State and Fed- eral law enforcement agencies? What type of cooperation have you PAGENO="0051" 47 had, those of you in the Federal Government, with State banking departments? And Mr. Dutton, how do you view this from your perspective? Mr. DUTTON. Well, at least from the State perspective, I personal- ly found the Federal agencies very cooperative. However, I don't think on the street level that there is as good as communication and cooperation as there could be between local, State and Federal law enforcement. Federal agencies have the resources; they usually have the ex- pertise, and they can also provide training for local law enforce- ment. I think to really effectively fight this problem, local, State, and Federal law enforcement are going to have to work together. Senator NUNN. What about from the Federal perspective? Mr. CRAWFORD. If I could speak for Los Angeles only, our great- est cooperation is with the local law enforcement agencies on joint task forces, where we have identified a problem in the community and we have banded together to try to work that investigation. In those cases the cooperation is excellent, and we usually end up with a successful prosecution. Senator NUNN. Mr. Eatinger? Mr. EATINGER. Yes, Mr. Chairman. In Houston, likewise, the task force is the best evidence where I see that cooperation, in particu- lar in the HIDTA allocations that have come down. The State banking commissions with their limited resources are becoming part of that, so we can expand their fingers so to speak in the en- forcement area. We are providing education to them to assist them in the enforcement of the new regulations and laws that they have passed. I would like to add that the key to it, as I have talked to them, is not just the recordkeeping requirements of that Texas law, but also what are referred to as the suitability checks up front to try to de- termine who goes into those businesses. Mr. WOODS. Senator, I'd like to add to that as to Houston and the Southern District of Texas. We have joint task forces with all the local people in every one of our major areas, and we are co-housed and cooperating very extensively. I think one of the best things that happened was that Congress enacted the equitable sharing asset forfeiture, where they gained by working and cooperating with the Federal Government because we share 80 percent of our seizures back with the locals. For example, we have given the Houston Police Department $27 million in the last 3 years from our seizures of money where they have assisted us. So all the local law enforcement people are bend- ing over backward to join the task forces and work with us, and we are bending over backward to use those resources because we un- derstand that we don't have the numbers of people necessary, and the best way to combat this is to get the locals to work with us in these task forces. It is working very well in Texas. Mr. DUTTON. Senator, in these big cases where certain persons are targeted, and you do have these large money laundering orga- nizations, then the task force system that is already in place gets implemented, and it works out very well. But task forces are needed where the locals can communicate to Federal agencies about what is going on in all the rest of the casas de cambio that PAGENO="0052" 48 are on the same block. There is no structure set up for monitoring and auditing the everyday casa de cambio to make sure that they don't turn into a large money laundering operation, such as the op- eration we heard about in the earlier testimony. Senator NUNN. In conducting your investigations, have you been able to utilize CTR information that is filed with the IRS Detroit computing center? Mr. LEWIS. In the investigations that I have handled, we have used that information extensively, and it is one of the primary tools that we have in this type of investigation. Senator NUNN. We have been told that sometimes it takes a long time to process that information. Have you run into that? Mr. LEWIS. I have not had any problem in getting hundreds and in some instances, thousands, of CTRs back from the Detroit data center or statements from the center that there are no such CTRs on file. And our cases are historic in nature, and they tend to take months, sometimes a year and a half, to get developed. But in my prosecutions I have not had a timeliness problem with IRS re- sponses for CTR data. Mr. EATINGER. Mr. Chairman, I might add that in our requests for and implementation and monitoring of the GTO, we use both FinCEN and the Detroit data base to give us the information we need to justify the request and also to follow through afterward to determine the results that occurred during the GTO. Mr. DUTTON. On the State side, we have MOUs that allow us access to CTR information from Detroit on magnetic tapes. But it takes 90 days from the date of the transaction with the bank or financial institution, for the transaction data to go to Detroit, and then go to our center in Sacramento. Our Sacramento data center does some additional correlations and puts it in their data base. So there is a lag time. Senator NUNN. Let me ask each of you this-and Mr. Dutton, I think we've already gotten your personal recommendations-and understanding that none of you are speaking for your agencies, the IRS or the Justice Department. But what are your personal recom- mendations in this area for the Federal Government? What should the Federal Government be doing that we aren't doing, including any laws or regulations or resources, personnel, and so forth? Mr. Crawford, let's start with you. Mr. CRAWFORD. I believe that if we do end up with Federal regu- lations that will put more emphasis on IRS involvement in these cases, that it would be very difficult to do that with the current staffing that I now have. As with any law enforcement agency, I think we're doing the best we can with what we have now, but our IRS special agents' financial expertise is also used in savings and loan cases, insurance fraud, and white collar tax crimes. To devote more resources to the financial aspects of narcotics cases would likely mean additional re- sources. I agree with Mr. Eatinger that if we could find some way in the cases that I discussed to get unscrupulous characters from being involved in these check cashing businesses in the first place, that would be very useful. They seem to be doing that more than taking over ones that have already been established. PAGENO="0053" 49 Senator NUNN. How many more people would you need in your shop to do what you think needs to be done, based on your present experience in the narcotics area? Mr. CRAWFORD. Mr. Chairman, I am not prepared to answer that at this time, but I can give you an idea that I put about 35 percent of my total agents-I have about 100 special agents in the Los An- geles area-about 35 percent of their time goes into narcotics en- forcement. I couldn't give you a number, but- Senator NUNN. Would you be going too far if you doubled your effort? Is that in the ball park? Is there that much work to be done? Mr. CRAWFORD. Los Angeles was recently designated a High In- tensity Drug Trafficking Area, and I don't think to double it for narcotics would be improper. Senator NUNN. Would be what? Mr. CRAWFORD. It would not be improper; it would be about right. Senator NUNN. Good. Mr. Eatinger? Mr. EATINGER. Yes, Mr. Chairman, I would echo Mr. Crawford's thoughts with regard to staffing, but I would add that this year both Los Angeles and Houston were supplied with some additional resources because we are HIDTA sites. In Houston we have some- what doubled our staffing, although our operation is not as big as Mr. Crawford's. The thing that I would like to emphasize, whether it be with State or Federal regulations, is that to me the key is the up front suitability check of who goes into those businesses, because what we are finding in Houston in the giros operations is that they are subject to CTR regulations; however, they are just totally ignoring them in willful blindness. So that our efforts along with those of Mr. Woods' office went into providing the state with insight into how to write that law, and we did try to get some very strong language and regulations in there about who was allowed in and what their backgrounds would be. I think that's a critical point. Senator NUNN. Mr. Lewis, any personal observations you have would be welcome, and Mr. Woods as well. Mr. LEWIS. Senator, although I am just a prosecutor in the field, I know the Department of Justice is going to be very interested in working with the Committee on any recommendations or proposals that the Committee may be coming up with. My first individual thought is do we need this industry at all; does it serve any public service? Asked another way, do the nega- tives of this industry so outweigh the positive of this industry- Senator NUNN. When you say "this industry" you mean the casas de cambio. Mr. LEWIS. The casa de cambio/giro house industry in the United States. Senator NUNN. Now, are you including check cashing in that, or are you distinguishing? Mr. LEWIS. I do not have particular experience with check cashers. However, some of the giro houses in Houston, as you saw from the video, have got check cashing built into their log. PAGENO="0054" 50 I think that's the first question you have to ask-do we even need this industry. Second, assuming that we need it in some degree or in some part-and I don't necessarily assume that, but assuming we do-then it seems to me you need a tough licensing approach to this, a licensing statute that has teeth in it. Third, you need to have resources to enforce that licensing stat- ute, and I don't want to go into that in terms of how many, because I don't really have the figures or the authority to speak there. My only comment on resources is that adding one more IRS agent to every State in the United States isn't to me the answer. Those re- sources have to be focused on where the problem is. And I think you have seen some of the areas of the United States today where that problem is. And my fourth observation is that you cannot overlook the need for international efforts to prevent creating a safe haven for this industry either in Mexico, Canada or other parts of this area of the world. Senator NUNN. Thank you. Mr. Woods? Mr. WooDs. Mr. Chairman, I think the individuals who have tes- tified have pointed out the areas that need to be addressed. I'm sure the Department of Justice will work with your Committee on what regulation if any needs to be addressed. Everybody in law en- forcement will tell you that we need more resources to do the job, but we all understand there is a limit on the budget, and those are issues that have to be worked out through Congress. That's the extent of my statement. Senator NUNN. I think we've already heard from Mr. Dutton. Do you have any other recommendations, Mr. Dutton? Mr. DUTTON. Nothing to add, Senator. Senator NUNN. While what we're going to do about drugs in- volves law enforcement, health and education, if we just look at law enforcement, how much emphasis should we be placing on going after the cash-and that's what you all are involved in-or going after or trying to prevent the conversion of this cash into useful assets in this country? Is this a top priority, or are there other areas that you believe should be given more priority within the context of limited law enforcement dollars? Where do you rank this one? Mr. LEwIs. In my investigations, that is our theme-money floats. If you follow the money, it's going to float to the top. It will get you to the main people quicker than following drugs. Senator NUNN. So that is your main priority, then, the money flow. Mr. LEWIS. That's the theme of the investigations that I manage. Senator NUNN. Mr. Woods, you have a broader view. How do you view it? Mr. WooDs. I would agree with Mr. Lewis that we're going to catch the "Mr. Bigs" if we follow the money rather than following the drugs. The witnesses have pointed out to you that the people who run these organizations don't normally get near the product, but they do get near the money. We have an effective program in seizing the drugs, but we also try to follow the money. The other co-priority, of course, is reduc- PAGENO="0055" 51 ing demand, but that is something outside of the law enforcement area. Law enforcement is concentrating on seizing the drugs and seizing the money and prosecuting the leaders of these smuggling organizations. Senator NUNN. Mr. Dutton? Mr. DUTTON. Yes, I think it should be a top priority. If you can seize the money and seize the assets, it takes away their profit mo- tivation for engaging in drug trafficking. That's why they are in it in the first place-to make money. Also, it takes away their capital so they cannot get back into the business as easily. Senator NUNN. Mr. Crawford or Mr. Eatinger? Mr. CRAWFORD. I would have to agree with what has been stated before. It seems like the money is the focal point, the choke point, the thing that we can most effectively take out. They seem to have almost unlimited methods outside of the country to make more co- caine, yet if we can get our hands on the money that does seem to slow them down somewhat. Senator NUNN. Mr. Woods, do you believe much of the Federal effort should be focused on the street? Mr. WooDs. Given our limited resources, I think we are more ef- fective in attacking the organizations and seizing their money rather than us focusing on the street-level dealer. We take out sei- zures of 9 tons-that is very commonplace-along the Southern District, and that surely equates into a lot of street dealers. If we can stop it at that level, I think that's where the limited Federal resources ought to be committed. Senator NUNN. Mr. Eatinger, I didn't get to you on that last question about the priority within law enforcement. Mr. EATINGER. Well, with the IRS, again, we do have limited re- sources, but that is the critical point, and that's why we've been requested to get into these investigations because of the financial aspects of it. I would say that our effectiveness has been enhanced substantially since the enactment of the money laundering stat- utes. That has definitely given us an edge. Senator NUNN. Were either you or Mr. Crawford involved in this same area way back in the Seventies when, in effect, IRS was taken out of the business? This Subcommittee spent an awful lot of time trying to get the IRS back into this business. Mr. EATINGER. I have been involved with this since I have been with IRS, which has been over 20 years now, and we have- Senator NUNN. Have you seen a change in the 1980s, since we changed the IRS statute? Mr. EATINGER. Definitely. Like I said, that has allowed us to take our limited resources and use them much more effectively and to be more current with our investigations. Senator NUNN. Mr. Crawford? Mr. CRAWFORD. I have been with CID for 18 years now, and I'd have to echo Mr. Eatinger's comments that once the Bank Secrecy Act laws were increased and really tied down, it gave the IRS a real tool to get involved and do some good in the war on drugs. Senator NUNN. I thank all of you for being here. We'll continue these investigations and deliberate on what to recommend in terms of any legislative changes. We'd welcome your continued input into PAGENO="0056" 52 this process. If you have other ideas that didn't come out today, we'd welcome your getting in touch with us. Thank you for your cooperation. You have all been very helpful. The Subcommittee is adjourned. [Whereupon, at 12:37 p.m., the Subcommittee adjourned.] PAGENO="0057" APPENDIX STAFF STATEMENT U.S. SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS HEARINGS ON CURRENT TRENDS IN MONEY LAUNDERING FEBRUARY 27, 1992 I. Introduction Mr. Chairman and Members of the Subcommittee, between 1979 and the present, the Pernanent Subcommittee on Investigations has conducted six separate investigations on drug money laundering issues. Included among these were investigations of the use of offshore banks and companies, the case of the First National Bank of Boston, and the status of money laundering activity in Puerto Rico and Panama. Pursuant to this long-standing Subcommittee interest in these issues, and notable congressional actions to which these investigative efforts have contributed -- such as the rnoney laundering provisions enacted in the drug bills of 1986 and 1988 -- for the last ten months we have been looking into recent and current developments in money laundering. Our work in this regard has included extensive interviews with officials of Federal, State, and local law enforcement and regulatory agencies in New York, New Jersey, California, Texas, Florida, and Washington, D.C. We have also examined voluminous case files, studies, (53) PAGENO="0058" 54 -2- reports, and related documents provided by the U.S. Departments of Justice and the Treasury, as well as similar materials obtained from their State and local cOunterparts. In conducting this investigation, we have heard repeatedly from many different sources that money laundering activity is analogous to a water-filled balloon -- push it in one place and it bulges somewhere else. Following this analogy, we have been told that increased industry compliance and expanded enforcement of reporting requirements and related prosecutions -- in large part, resulting from the enactment of the Money Laundering Control Act of 1986 and the Money Laundering Prosecution Improvement Act of 1988 -- have brought about a significant reduction in the amount of money laundering through traditional banks. Laundering activity, however, has continued, in at least one way, by simply moving into less-regulated and less-supervised kinds of financial institutions. The less-regulated and less-supervised kinds of financial institutions, commonly referred to as "non-bank" financial institutions include businesses that are the subject of today's hearing, i.e., those that exchange money, wire transfer money, cash checks, and sell money orders and travelers checks.1 Unlike their traditional counterparts, these 1 Non-bank financial institutions also include: precious metals, stones, and artwork dealers and/or brokers; casinos and other gambling establishments; automobile/airplane/boat/real PAGENO="0059" 55 -3- institutions operate essentially free of meaningful Federal and State regulation and oversight. Their only reporting requirement is to file Currency Transaction Reports (CTR5) for cash transactions over $10,000.2 Yet, with the exception of accepting deposits and making loans, they can provide many of the other services offered by regular banks. For instance, their customers can cash their paychecks, purchase money orders to pay their bills, and wire transfer money around the country or the world, all in one stop. All such transactions, moreover, can be done with minimal, if any, customer identification, as would normally be required at a traditional bank. Indeed, this is the unique advantage that attracts money launderers to mon-bank financial institutions. By being able to retain almost complete anonymity in transactions at such estate dealers and/or brokers; insurance companies; securities and commodities brokers and/or dealers; and, professionals, e.g., attorneys and accountants. While these institutions are beyond the scope of today's hearing, we have heard allegations that they have also become increasingly involved in money laundering. 2 In addition to this reportina requirement, non-bank financial institutions are subject to some record-keeping requirements. For instance, they are required to keep records of each extension of credit in excess of $10,000 (31 CFR 103.33 (a)), and money exchangers are required to record cash transactions over $1,000, and list the name and address of the customer (31 CFR l03.37(b)(3)). Unlike filing CTRs, they are not required to verify the information given by a customer. They must also keep a chronological log for money orders, bank drafts, and travelers checks that are sold at $3,000-$lO,000, inclusive (31 CFR 103.29)). PAGENO="0060" 56 -4- businesses, traffickers and their agents go unnoticed as they convert their illegal drug proceeds to legitimate financial instruments. Once the drug money has been converted from cash to negotiable paper, the latter instruments can be deposited into the monetary system without attracting the attention of concerned law enforcement and/or regulatory authorities. While there are no precise figures on the amount of illegal profits being laundered through these non-bank financial institutions, law enforcement and regulatory authorities estimate such activity to be in the billions of dollars annually. The non-bank financial institutions on which today's hearing focuses include: casas de cambio -- money exchange businesses (about 1,000 in number) owned, operated, and/or used largely by Mexicans, Mexican-Americans, or other Hispanics, which are located near or directly adjacent to the U.S./Mexico border in Texas, New Mexico, Arizona, and California. Their primary legitimate function is to exchange pesos for dollars and vice versa, but they also can provide other financial services such as selling money orders and cashier's checks, wire transferring funds., exchanging currency for checks, and making payments for customers from their own business accounts. giro houses -- wire transfer businesses (estimated to be about 30 in number) owned, operated, and/or used primarily by Colombians in the Houston area, which provide communications devices and related facilities (e.g., beepers, cellular phones, international long-distance lines, and FAX machines) along with wire transfer capability and other services, such as check cashing. Giro-like operations are also found in Colombian communities in New York City, Los Angeles, and Miami, but in these latter cities they tend to be part of other businesses, such as travel agencies. PAGENO="0061" 57 -5- money transmitters, such as Western Union, American Express, and Travelers Express, which engage in the business of transferring funds domestically or internationally by wire, check, computer network, or other means. Such businesses can also sell or issue payment instruments, such as drafts, traveler's checks, and money orders, which can be negotiated on site or at a distant location. Western Union, American Express, and Travelers Express money orders and checks are found in money laundering schemes and, in some instances, check cashers and casa owners can be registered agents of one or more of these firms. check cashing businesses -- an estimated 4,000 to 5,000 "locations," 1,800 of which are owned by members of the National Check Cashers Association. In addition to cashing paychecks and other personal checks, these businesses sell money orders and travelers checks. II. Methodology Money laundering through non-bank financial institutions is generally accomplished by one or two techniques, used singly or in combination, to evade currency reporting and record-keeping requirements: -- by structuring -- whereby large cash sums are divided into amounts below the Bank Secrecy Act-mandated $10,000 Currency Transaction Report (CTR) threshold. These smaller sums are then exchanged for other monetary instruments or are transferred by wire to bank accounts, using individuals referred to as "smurfs" to conduct the various transactions at different times and/or at different locations. According to Internal Revenue Service Criminal Investigators (IRS/CID), using this method, a well-organized team of smurfers, operating from one vehicle, can easily move $250,000 in less than an hour; and, -- by failing to file CTRs or filing falsified CTR5, effectively disguising the trafficker's identity and his/her connection to the cash. PAGENO="0062" 58 -6- The non-bank financial institutions that are the focus of today's hearing employ these techniques as follows: A. Casas de cambio Prompted by major devaluations of the peso in the early 1980s and the continuous decline in its value throughout the l980s, casas de cambio have proliferated along the Southwest border during the past ten years.3 Casas de cambio typically consist of simple one- or two-room structures, with crude, hand-lettered signs advertising the nature of the services provided. They are often located side-by-side or across the street from one another, and it is not uncommon to see them being run out of pick-up trucks, trailer homes, and even phone booths. Many casas have as few as two or three employees, including the owner; and since they are virtually completely unregulated, they can go in and out of business in a matter of months. Many of the latter, moreover, will then re-open at another nearby location under a new name, making it very difficult for law enforcement and/or regulatory authorities to track their activity. While a casa de cambio's legitimate function is to exchange dollars for pesos and vice versa, in recent years many of In January, 1982 one dollar was equal to 26 pesos; in January, 1987, the rate had gone to 978 pesos to the dollar, and at the time of our visit to the Texas/Mexico border area earlier this month, the rate had surpassed 3,000 pesos to the dollar. PAGENO="0063" 59 -7- them have gone well beyond this original purpose, beconing deeply enmeshed in large-scale money laundering activities. Their methods of laundering money range from the extremely simple to the most complex and sophisticated. For example, along the Southwest border a method drug dealers often use to launder their money is to run it through a casa s regular bank account. The trafficker gives the casa owner cash -- in amounts ranging typically from the tens of thousands to the hundreds of thousands of dollars -- which the latter deposits in his business' account at a regular bank. When the casa owner deposits this money into his regular account, the bank files a CTR if the transaction is over $10,000. The CTR form, however, lists the casa as the owner of the funds, not the drug dealer. The critical link that ties the drug dealer to the cash is therefore broken, especially since most casas do not keep books to show where they get their cash. Once the money is in the banking system, the casa will direct the funds to be wire-transferred to any account at any bank, as designated by the drug dealer. No reports are required for wire transfers from bank to bank, or from account to account, after the currency has entered the banking system. At this point, the money is effectively laundered. Casas also launder money simply by driving a specific amount across the border, turning around and driving back into the United States. While U.S. law requires a Report of International Transportation of Currency or Nonetary Instruments (CMIR) to be filed whenever cash exceeding $10,000 is transported into or out PAGENO="0064" 60 -8- of the United States, the volume of traffic and limited U.S. Customs resources make it very unlikely that a vehicle will be stopped going South. Thus, a casa owner may take $1 million cash from a trafficker, smuggle it across the border, not filing a CNIR, then turn around and stop at Customs to fill out the requisite CMIR. On the form, the casa owner will claim that the cash is from a business deal conducted in Mexico or that it is being transported from a Mexican casa to a sister casa in the U.S. Once across the border back in the U.S., the $1 million can then be deposited at any U.S. bank with which the case does business. In receiving the cash, the bank will file the required CTR; and if any further questions are raised, the casa owner need only produce the CMIR to prove that the cash came from legitimate business activity. Routinely, no further questions are asked by the bank, and the casa owner is named on the CTR, further masking the identity of the criminal customer. As above, after the cash is deposited in the casa owner's account, it can be wired to any bank requested by the criminal customer. It should be noted that this laundering technique could easily be performed by the drug dealer without the involvement of a casa de cambio. However, drug dealers prefer to use the casas to transport the money to distance themselves from the cash and reduce the risk of being arrested and prosecuted if stopped by law enforcement authorities. In this manner, casas act as a buffer to disguise the true ownership of the cash. Additionally, drug PAGENO="0065" 61 -9- dealers prefer to work through casas because U.S. casas are so well connected with their Mexican counterparts and Mexican banks. Casas also use a variation of the above scheme, wherein after smuggling the $1 million cash out of the country, the owner or his employee drives deeper into Mexico, going to a Mexican bank at which the casa maintains an account. The cash is then deposited and can be wire-transferred to any bank destination requested by the criminal customer. In this scenario, there is virtually no paper trail regarding the transaction, since no CTR is filed and Mexican reporting requirements are negligible. This laundering technique, too, could be performed by the drug dealer without a casa's involvement, but Mexican casas and banks can be hesitant about doing questionable transactions for "unknown" customers. By going through a casa, the U.S. drug dealer~ capitalizes on the "grease" factor and the intertwining network of U.S. casas with Mexican casas and banks. Finally, law enforcement officials have told us that casas can provide a variety of means to mask the identity of their customers, depending on the latter's wishes. A drug dealer, for example, may request that the casa owner arrange for a Mexican bank to issue a cashier's check, money order, traveler's check, or any payment instrument in lieu of a deposit and wire transfer. Again, in such circumstances, no CTR is filed, and the payment instrument can be issued in whatever name the criminal customer specifies. When the customer receives the instrument, he can then 54-650 0 - 92 - 3 PAGENO="0066" 62 - 10 - take it to any U.S. bank for deposit without a CTR being required, since the money is no longer in the form of cash. B. Check cashers Although many check cashers operate legitimately and provide an. important service to individuals who do not have relationships with regular banks, these businesses are also being used by money launderers. Indeed, some law enforcement officials with whom we spoke said that money laundering is rampant in this industry. These same sources explained that money launderers are able tb capitalize on these high-cash businesses, because they receive little or no attention from Federal and State bank regulatory or law enforcement agencies. Of the 50 States, only six require check cashing businesses to be licensed. In many respects, check cashing establishments we saw closely resemble their casa de cambio cousins. }fany of them are situated in small buildings equipped with the barest of necessities in poor, run-down areas. Like a casa, in general, all it takes to operate a check cashing business is a supply of cash on hand, an account at a regular bank, and a place to operate. Under normal circumstances, a check cashing business will withdraw cash from its bank account in an amount approximate to the dollar volume of the checks it expects to cash over a period that typically ranges from several days to a week. When a PAGENO="0067" 63 - 11 - cash withdrawal exceeds $10,000, a CTR is filled out by the bank. Cashed checks are periodically deposited into the business's bank account, at which time, additional cash may also be withdrawn. No CTR is required for deposits of checks. Aided, among other things, by being agents of Western Union, American Express, and other such enterprises, many check cashers are able to assist their criminal customers by helping them convert large amounts of cash, usually in the form of small bills, into checks, cashier's checks, money orders, or traveler's checks. For example, a check casher will service a criminal customer with a large sum of cash by selling him an equivalent amount of money orders or traveler's checks. When this is done, the criminal customer takes the latter to a bank where it is deposited. Again, no CTR is filed by the bank, because the funds are no longer in the form of cash. While the check casher is obligated by law to file CTR5 on customers with whom transactions in excess of $10,000 have been conducted, most check cashers involved in money laundering evade this requirement. They do so either by filing a falsified CTR or by failing to file the CTR altogether. In the latter case, they will account for the cash on their books by creating a number of fictitious names and transactions, all under the $10,000 reporting requirement. In either case, the identity of the criminal customer has been effectively disguised. PAGENO="0068" 64 - 12 - Another way check cashers launder money is by using "street cash" generated by drug sales as their inventory to cash its customers checks. This way, the check casher does not need to make a cash withdrawal from the bank, thereby avoiding CTR reporting requirements. The check casher only needs to deposit the checks -- again, no CTR required -- after which he can issue either a business check or obtain a cashiers, check for the criminal source of the street cash. The criminal customer, in turn, can deposit these "clean" checks into his account, with no CTR required. Furthermore, we were told that some check cashers are so efficient that they seldom need to use banks to withdraw cash or to deposit checks. In a variation of the above scheme, check cashers will use the cash inventory from the street to cash legitimate customers' checks and, then, for a fee that can range anywhere from 2% to 10%, sell those cashed checks to the drug dealer. For example, if a drug dealer routinely needs to launder $50,000 a week, he will make arrangements with the check casher to set aside cashed checks equal to that amount, minus the fee. In addition to laundering drug money, many check cashers in the Northeast have long been and remain key players in tax evasion schemes, gambling, loansharking, and other illicit, non-drug-related traditional organized crime activity. Along these lines, according to the New Jersey State Committee of Investigation, some check cashers operate as unofficial "banks," PAGENO="0069" 65 - 13 - in that they make short-tern loans and collect interest that can go as high as 50% or more. C. Giro houaen Giro houses have been around since the early l900s, having come into being to service licit and illicit commerce between the U.S. and Colombia. Giros are essentially single business entities that are geographically separated -- one or more offices in the U.S. and their counterparts in Colombia. Their main function is to facilitate international business transactions by arranging for the coordination and/or actual transfer of funds to and from U.S. and Colombian individuals and interests. The objective, which is typically accomplished via wire transfers or various other means of electronic communication, is to exchange and/or move funds from the U.S. to Colombia and vice versa. Such funds, it should be noted, do not necessarily have to leave either country. In order to explain how giros launder money, one first must understand how they operate in non-drug related transactions. To illustrate, we will use the hypothetical case of a legitimate businessman ifl Colombia who needs dollars to purchase goods in the U.S. that are unavailable in his country. To avoid bureaucratic red tape and major delays associated with Colombian banks, the businessman turns to~ the black market and the giro owner. If the U.S. goods he is seeking cost $20,000, the PAGENO="0070" 66 - 14 - businessman will tender the giro owner. $20,000 worth of pesos. The giro owner will then contact, by telephone, FAX, or wire communication, his U.S. counterpart to see that the $20,000 is paid to the goods supplier. With payment assured and/or received, the supplier ships the goods to the Colombian businessman. For this service, the businessman pays a fee -- generally between 7% and 10% of the total transaction cost -- which is typically split equally by the two giro locations. In the process, the pesos stayed in Colombia and the dollars in the U.S. Shifting to their illicit involvement in money laundering, and following the illustration described above, giro houses In the U.S. would use the cash proceeds from drug sales as the means for paying for the Colombian businessman's purchase. In effect, the Colombian businessman and the drug kingpin have reciprocal needs: the former has $20,000 in pesos in Colombia, but needs dollars in the U.S.; while the latter has $20,000 in the U.S., but needs pesos in Colombia. In responding to these reciprocal needs, giro houses essentially function as money brokers for the involved parties. Because fast and accurate communication is paramount in these transactions, giros also specialize in making available the most up-to-date communication equipment to its customers. This array of services and/or devices includes . mobile phones, pagers/beepers, FAX machines, international long-distance telephone booths, travel agency services, and private postal PAGENO="0071" 67 - 15 - boxes. Unlike casas de cambio, they have no need to involve traditional banks in their illicit activities. D. Money transmitters Some money launderers facilitate their activities by converting their cash to money orders, traveler's checks, and wire transfers of money. The largest private source of these products are American Express, Travelers Express, and Western Union. At this time, the Subcommittee has received no allegations that these companies are knowingly participating in money laundering or willingly allowing such activity to occur. However, since some casas de cambio and check cashers are agents of one or more of these companies, thereby gaining direct access to their payment instruments, law enforcement officials confirm that the latter are being used in money laundering. Very simply, for example, many drug dealers have a continuous need to convert their cash into payment instruments in order to reduce the bulk and to make it easier to deposit the funds into traditional banks without triggering reporting requirements. In such cases, the dealer will go to a Western Union, American Express, or Travelers Express location and, in exchange for $20,000 in cash, will purchase a series of money orders totaling $20,000. The typical purchase is in the form of a series, since most individual money orders have a maximum individual value of less than $1,000. Thus, if the maximum value PAGENO="0072" 68 - 16 - is $500, the drug dealer will receive 40 money orders worth $500 each. After the dealer has purchased the money orders, in some instances they will then be mailed out of the country, to be ultimately deposited in a foreign bank. In other instances, the money orders stay in the U.S. and are deposited in a traditional bank. In either event, they have become an integral part of the money laundering process, since no *CTR is required for such instruments and, thus, the cash has entered the banking system with its owners identity unrevealed. Also, even, though agents taking in cash amounts in excess of $10,000 are required to file a CTR for the transaction, those among them who are participating in a money laundering scheme will fail to file a. CTR or will file a falsified CTR. In the case of Western Union, the drug dealer would ask the agent to wire our hypothetical $20,000 to a particular person or location anywhere in the world. While the agent is required to file a CTR if the entire transaction is over $10,000, for these clients some agents will ignore this requirement. The transaction is given a Western Union number, which the sender (the drug dealer) relays to the receiver. The receiver of the funds need only know the transaction number to collect the funds; no identification is required at the receiving end. No CTR is filed on the receiving end, because cash is not necessarily disbursed. In most cases, Western Union checks are issued in the amount that PAGENO="0073" 69 - 17 - has been wired. These checks, in turn, can then be deposited at traditional banks, free of CTR reporting requirements. III. Extent of the Problem While precise summary data on the extent of money laundering being conducted through non-bank financial institutions do not exist, there are many indicators that attest to estimates that such activity amounts to the billions of dollars annually. According to the Financial Crimes Enforcement Network (FinCEN, the U.S. Treasury Department's new law enforcement intelligence-gathering arm), for example, casas de cambio alone appear to be laundering billions per year. A recent FinCEN report estimates that among the 1,000 casas operating along the border from Texas to California, a typical one can easily launder $5 million or more per month. Other law enforcement sources in the Houston area have estimated that as many as 80% of the 1,000 casas are somehow engaged in money laundering. IRS/CID and U.S. Customs agents gathered evidence substantiating this claim in major sting operations conducted in Texas' Rio Grande Valley in 1985-86 and 1989-90. In the former operation, of the 10 casas contacted, all but two agreed to accept cash amounts in excess of $10,000 without filing the required CTR repoics. In the latter, Operation Vagabond, the undercover agents laundered more than $2 million through nine casas, which had agreed not to file the requisite CTRs, in transactions ranging PAGENO="0074" 70 - 18 - from $12,000 to $100,000. In this same operation, no casa refused the request to not file the CTR when accepting $10,000 or more in cash. Moreover, one casa, owned by a witness who will testify today, alone laundered more than $50 million in a six-month period. It is instructive to note, according to this witness, that his casa was only the fourth biggest among those operating in the Southwestern city where they were located in the late l980s. He added that he believes the biggest casa was doing at least four times as much money laundering as he was, which translates to as much as $200 million for a similar six-month period. Estimates of money laundering on the part of Houston's giro houses, and their close travel agency cousins in New York and elsewhere, suggest patterns of activity similar to the casas. In Houston, for example, IRS/CID investigators noted an almost 100% increase in the amount of U.S. currency (from $38 million to $76 million) being moved through the giros industry between 1989 and 1990. They noted, further, that regarding this movement of currency not a single CTR was filed by a giro business. To confirm the suspicion that much, if not all, of this activity was money laundering-related, last year the Treasury Department instituted a temporary Geographical Targeting Order (GTO) focusing on Houston's giro houses. The GTO, which lowered the CTR reporting requirement from its $10,000 threshold to $100 PAGENO="0075" 71 - 19 - for a 60-day period, showed a 73% decrease from the preceding two months' activity in the volume of U.S. currency moving through these businesses. In other words, when required to file a CTR for any cash transaction in excess of $100, giro customers simply stopped doing business rather than risk the possibility of being identified. IRS/CID officials believe that this dramatic fall-off in business demonstrates that the vast majority of' giro clients are in fact laundering cash from an unlawful source (i.e., cocaine trafficking). Noreover, our own experience with an owner of one of these giros corroborates the IRS/CID conclusions, in that he told us that during the time the GTO was in effect his business declined by 90%. When we asked him what he attributed this to, he said that the customers that stopped coming in were afraid of being identified because they were involved in money laundering. He also stated that all the giro houses in Houston are involved in money laundering to some extent. In addition, according to a former New York State Assistant Attorney General, in the New York metropolitan area travel agencies capable of wire transferring money may be laundering as much as $1 billion per month. As noted previously, the activities of many of these travel agencies mirror those of the giro houses in Houston, in that they are owned and operated by, and/or cater `to, Colombian drug interests in the U.S. and Colombia. PAGENO="0076" 72 - 20 - Recent reports. of money laundering through check cashing businesses have come from Boston, New Jersey cities located near or directly adjacent to New York City, and Los Angeles. In Boston, authorities have uncovered and prosecuted a number of cases in which check cashers were being used to launder money for traditional organized crime and/or other groups. Currently, for example, the U.S. Attorney in Boston is prosecuting a Brockton, Massachusetts, check casher, alleging that it laundered more than $3 million in gambling and loan-sharking earnings over a period of several years by exchanging the cash for cashier's checks. In 1990, a check cashing business trying to open additional outlets in a Boston neighborhood came under intense public scrutiny when it was revealed that its owners had been charged in Illinois with laundering more than $2 million in cash, apparently derived from drug sales, at their Chicago area locations. One of the owners pleaded guilty to evading CTR reporting requirements in the latter case, which led to the temporary closing of eight of his stores in Boston and a suspension of action regarding his pending applications for two new sites in the city's Roxbury area. According to New Jersey officials, check cashers in their State are notorious for their involvement in laundering prof its from traditional organized crime activity. One reason for this is that New Jersey check cashing laws and regulations are significantly less stringent than those of neighboring New York, which serves to attract tens of millions of dollars of PAGENO="0077" 73 - 21 - transactions to its check cashing businesses. When the New Jersey State Commission of Investigation (SCI) looked into the related question of the relationship between its check cashing industry and organized crime, its Chairman concluded that there is "no doubt that organized crime has taken profitable advantage of New Jersey check cashers and that illegal and otherwise questionable transactions have become commonplace." Emphasizing that New Jersey's billion dollar check cashing industry was under the control of just 80 or so licensees, the Chairman characterized these businesses as: being tapped at will by mobsters and other unscrupulous individuals, a number from New York, whose objectives include such notorious activities as money laundering, income tax evasion, embezzlement, loansharking and other frauds. In Los Angeles, casas de cambio and check cashing businesses are being used increasingly to launder drug money. In one recent case, owners and the operator of a check cashing business were convicted of money laundering violations based on their having used it to cash legitimate checks with funds derived from drug sales. According to the prosecuting attorney, the owners of the check cashing business were moving hundreds of kilos of cocaine and were using its three locations to exchange the cash for legitimate checks which, in turn, were deposited into regular bank accounts. Over a one-year period in the late 1980s, the business laundered $4 million in this fashion. PAGENO="0078" 74 - 22 - The owners also used others to "smurf" their illicit cash for bank cashier's checks. In one day, for example, their smurfs exchanged $45,200 in drug cash for cashier's checks at various Los Angeles area branches of the Security Pacific National Bank and Wells Fargo. The cashier's checks, in turn, were deposited in other banks as legitimate funds and were then wired abroad. Similarly, last year the owner of a company that operated four casas de cambio in the Los Angeles area was convicted of using them to launder drug money. According to IRS/CID investigators, this company was laundering as much as $30 million a month during the late l980s. As much as this was, Justice Department sources explained to us that the amount wouldn't even rank in the top ten among the area's money laundering casas. IRS/CID agents also told us that the company's owner charged drug dealers between 6% and 8% to commingle their cash with his legitimate funds at banks in Tijuana and provide them with cashier's checks from the latter. The owner told IRS agents that he was so inundated with drug money that he did not know how to handle it all. IV. Inadequacy of Law/Regulations, Oversight & Enforcement Historically, traditional financial institutions have been the primary target of money laundering legislation. Initial action in this regard took place in 1970 with the enactment of the PAGENO="0079" 75 - 23 - Bank Secrecy Act (BSA). The impetus for the BSA was the increasing awareness on the part of law enforcement authorities that criminals dealt mostly in cash and that deposits, withdrawals, exchanges and payments of large amounts of currency were usually good indicators of criminal activity by customers. At that time, also, drug dealers were quite literally walking into banks to deposit suitcases full of cash. The BSA required financial institutions to file CTRs with IRS regarding any cash transaction over $10,000 by, or on behalf of, the same person on the same day.4 The BSA was amended in 1986 when Congress enacted the Money Laundering Control Act. Until then, it was not a crime to disguise the source of ownership of funds derived from illegal activity, i.e., if a drug dealer gave a fictitious name to a financial institution in filling out the CTR, the teller was under no obligation to ascertain the source of the large amount of cash. Likewise, the drug dealer was under no obligation to provide his true identity. Under the 1986 Act, it became a crime In addition to requiring banks to file CTR5 (IRS form 4789), the BSA required other information-gathering forms for cash transactions, such as the Report of International Transportation of Currency or Monetary Instruments (CMIR, Customs form 4790) f or transactions over $5,000, and the Report of Foreign Bank and Financial Accounts (FBAR, Treasury form TDF 90-22.1) for transactions over $10,000. Later amendments to the BSA increased the threshold for the CMIR requirement to $10,000 and required additional forms to be filed, such as the Currency Transaction Report by Casino (CTRC, IRS form 8362). Further, the Internal Revenue Code, Section 60501, requires IRS form 8300 to be filed by trades or businesses whose customers conduct transactions over $10,000 in cash. PAGENO="0080" 76 - 24 - (18 U.S.C. 1956 and 1957) for a money launderer to structure a currency transaction to avoid the CTR reporting requirement, or to knowingly give false information tobe included in a CTR. The new law also provided that financial institutions can be held civilly or criminally liable for assisting in structuring transactions or for knowingly taking false CTR information, and/or failing to report suspected BSA violations. In effect, under the 1986 Act, financial institutions could no longer be "willfully blind" to money laundering conducted by their customers, without great risk to themselves and/or their employees. This "willful blindness" offense was tested and interpreted in U.S. v. Bank of New Eng1an~ (821 F.2d 844, 1st Circuit, cert. denied, 484 U.S. 943, 1987), wherein the bank was held criminally liable for "flagrant organizational indifference" to BSA requirements. The Court found that the bank should have known of the false CTR information and that its failure to have in place appropriate procedures to detect or forestall such activity was insufficient grounds to free it from criminal liability. With this landmark case, the general attitude of banks regarding money laundering began to change from one of detachment to one of active involvement with law enforcement authorities in ferreting out money laundering activity. The BSA was amended again in the 1988 Omnibus Anti-Drug Abuse Act. These amendments added recordkeeping and reporting duties for financial institutions, e.g., financial institutions PAGENO="0081" 77 - 25 - could no longer sell or issue bank checks, cashier's checks, traveler's checks, or money orders to any individual for over $3,000, unless they verify the identification of the purchaser. In addition, for purchases of $3,000 to $10,000, inclusive, the information must be recorded in a monthly chronological log. The information must be retained by the financial institution for five years, and although it does not need to be reported to the IRS, must be provided to Treasury upon their request. In addition to these statutory requirements, traditional banks must have either a Federal or a State charter to operate, and, hence, their operations and activities are closely supervised by Federal and/or State regulatory agencies.5 In essence, this means that their conduct is subject to review by regulatory, as well as law enforcement authorities. However, in both areas, i.e., regulation and la~ enforcement, non-bank financial institutions are being accorde entirely different treatment by Federal and/or State agencies. I: the area of regulation, for example, while non-bank financia institutions can provide many of the services traditional bank The Federal Reserve System is responsible for overseeing the activities and status of State member banks; the Federal Deposit Insurance Corporation, for State banks that are not members of the Federal Reserve; the Office of Thrift Supervision, for federally insured savings and loans; the Office of the Comptroller of the Currency, for the examination of national banks; and the National Credit Union Administration, for federally insured credit unions. PAGENO="0082" 78 - 26 - do, they are almost completely unregulated or supervised by Federal and State authorities. Indeed, this comparatively unregulated status is why non-bank financial institutions are so attractive to money launderers and others bent on criminal activity. For instance, only six States -- Connecticut, Georgia, Illinois, Minnesota, New Jersey, and New York -- license check *cashing businesses. Arizona and Texas have recently enacted laws to license casas do cambio. The former's law became effective November 1, 1991. According to Arizona officials, thus far few casas have applied for a license, but it remains unclear how many of them have in fact gone out of business rather than comply with the law' s requirements. The Texas law was to go into effect January 1, 1992, but several casa de cambio owners filed an injunction alleging the statute is unconstitutional. They argue that it is targeting a particular ethnic group and that it will be enforced in a racially discriminatory manner. The case is currently in litigation. As for money transmitters, most States require the companies that issue and sell payment instruments to be licensed. Therefore, American Express, Travelers Express, Western Union are licensed in States where their products are sold. However, those States do not require the agents of American Express, Travelers Express, and Western Union, such as a check casher, to be PAGENO="0083" 79 - 27 - licensed. This loophole contributes to licensing problems, and indirectly helps to facilitate money laundering. Moreover, it is important to note that even in States where there is some regulation, in many cases regulators appear to be unaware of the money laundering being done by these institutions. Also, it is not uncommon for supervision/enforcement to be minimal, especially as a result of inadequate resources and/or a corresponding lack of Federal assistance. For example, a New York bank regulatory official told us that his State's efforts are hampered because Federal law enforcement agencies are reluctant to share background information on individuals applying for a license to operate a non-bank financial institution. Similarly, a former New York Assistant Attorney General said that for all of New York, there are only four investigators to oversee the activities of the State's check cashing businesses. In addition, he explained, even when there are cases that have been developed, they have often had as few as two prosecutors available to take them to court. Indeed, precisely because of this lack of resources, this official said that they often try to get the local U.S. Attorney's office to help handle the cases. However, the response has been generally disappointing; the local Federal prosecutor was only interested in money laundering cases amounting to $1 million or more. PAGENO="0084" 80 - 28 - Beyond the fact that there is no Federal regulation of non-bank financial institutions -- and, thus, no oversight of their activities by Federal bank regulatory agencies -- law enforcement action against them for their money laundering activities is also inadequate. For example, IRS' Civil Examination Office, the Federal law enforcement agency charged with overseeing CTR compliance on the part of non-bank financial institutions, is severely hampered in its efforts because of insufficient staff and/or problems associated with the formers' poorly maintained, falsified, or non-existent records. As a result, therefore, it appears that the vast majority of non-bank financial institutions may be evading or otherwise failing to comply with BSA reporting requirements, since in 1991 out of a total of 7.2 million CTRs filed by all financial institutions, only 30,406 were from non-bank financial institutions. In addition, when IRS Civil Exam officials detect non-compliance and make a referral to the Treasury Departments Office of Financial Enforcement, the latter has often failed to act expeditiously and, until recently, has not made full use of available fines and penalties. Also, when the Office of Financial Enforcement turns over a non-compliance case to the Criminal Investigations Division, in many instances, the latter are given low priority, because CID offices are typically under-staffed. Federal law enforcement efforts are also hampered by the difficulty entailed in making cases against non-bank financial PAGENO="0085" 81 - 29 - institutions. First, since CTR data filed in IRS' Detroit Computer Center are not being used on a proactive basis, IRS/CID investigators have to rely on tips from outside sources, such as banking personnel, to alert them to suspicious activity that may involve money laundering. Also, it is difficult for investigators to target non-bank financial institutions, because there is no way to determine exactly how many exist. Most States, as has been noted above, do not require these businesses to be registered or licensed. Finally, when non-bank financial cases are undertaken, they typically entail extremely complicated, expensive, and labor-intensive investigations. Non-bank financial institutions usually involve individuals who have close family ties or have known or "run" with each other for years. Such individuals are extremely careful about doing business with strangers, and, as a result, most. investigations require undercover operations, in which it can take as long as nine months before the agent is "accepted" by the organization. According to one official with. the Los Angeles High Intensity Drug Trafficking Area office, the costs associated with this process can average a minimum of $40,000 monthly, exclusive of any amounts that have to be laid out for drug buys or money laundering. PAGENO="0086" 82 - 30 - V. Industry Roles The largest private sellers and issuers of payment instruments, such as money orders and travelers checks, are Travelers Express and American Express. The largest private wire transfer business is Western Union. Numerous times during our investigation, we contacted representatives of these businesses regarding information we were receiving on the use of their products in money laundering and allegations that some of their agents were knowingly participating in such activities. Representatives of all three of the corporations said that they had anti-money laundering policies in effect and were strongly opposed to the use of their products in such illicit schemes. However, when details were revealed about the number of their agents, how they are selected, and whether the agents are checked to see that they file CTR5 where appropriate, it was apparent that opportunities do exist for criminal elements, and particularly money launderers, to be associated with the corporate structure and, thereby, capitalize on the financial opportunities presented. For instance, American Express has approximately 37,000 locations where its money orders are sold. Of that number, 13,000 are banks and credit unions and 5,500 are 7-11 stores (Southland Corporation). The remaining 19,000 are uncategorized, including PAGENO="0087" 83 -31- businesses such as, check cashers, money. exchangers, and grocery stores. To become an American Express agent, a prospect must have been in business for at least three years; must verify his/her creditworthiness; and, unless the applicant is a publicly traded company, the contract must be guaranteed by an individual. American Express does not run a criminal background check on its agent applicants. Neither does it check their agents to make sure they are filing CTRs, where required. While they do mandate that their agents know and follow applicable Bank Secrecy Act regulations, their lack of verification of compliance leaves an open road for agents inclined to engage in money laundering or other such criminal activity. Additionally, American Express does not ask either its agents or law enforcement authorities, if any of its agents have been charged, prosecuted or convicted of fraud or any money laundering violation. As a result, an agent could conceivably be fined for CTR non-compliance and continue on with the company as if nothing had happened. Western Union has approximately 17,000 agents, and also has an anti-money laundering program in place. It selects its agents in much the same manner as American Express, focusing on the financial stability of the agent applicant, but also failing to do a criminal background check on the owner/operator. The company averages 63 million customer transactions and 13 million PAGENO="0088" 84 - 32 - payees annually. In 1990, it wire-transferred a total of approximately $7 billion for customers; for which 6,262 CTRs totaling about $58 million were filed. Unlike American Express, Western Union does not rely on its agents to file CTR5. Rather, this is accomplished through the company's main computer data center in St. Louis, Missouri, through which all transactions are routinely processed. According to a former Western Union official, its wire transfers may be susceptible to abuse by money launderers. For example, some Western Union agents may assist money launderers by not requiring identification when the initial "send' transaction is made, or may not "notice" that structuring activity is taking place. Western Union agents have been successfully prosecuted for money laundering offenses, and if corporate headquarters is contacted by law enforcement authorities in the course of such investigations, often the company will also undertake its own internal investigation. However, without being tipped by law enforcement authorities about their agents' alleged criminal conduct, the main office would not necessarily know of such activity. Western Union's policy is not to take action against an agent unless they are convicted of criminal activity. The main industry organization for check cashers is the National Check Cashers Association, Inc. (NCCA). This three-year-old organization is composed of approximately 800 individual members who have about 1800 check cashing locations PAGENO="0089" 85 - 33 - nationwide. They estimate that approximately 4,000 to 5,000 check casher locations exist nationwide, about one-third of which are their members. In addition, there are numerous independent State associations, many of whose Presidents sit on the NCCA board. The NCCA and its participating State associations agree that a majority of their members are agents of money transmitters. In addition to cashing checks, their members sell money orders and dispense wire transfers. NCAA officials estimate that about 2,500 check cashing locations are Western Union agents; 500 are American Express agents; and 2,500 are agents of Traveler s Express. For the most part, NCCA leaders with whom we spoke were reluctant to recognize that money laundering activities are occurring at check cashing locations. To support their view, they maintain that their businesses are under close scrutiny by the banks that hold their corporate accounts and that IRS Civil Exam personnel review their operations often and carefully. In fact, however, IRS Civil Exam staff told us that in 1990 they did just 500 compliance checks of the estimated 4,000-5,000 check cashing businesses. It is worthwhile noting, that while those officials with whom we spoke initially asserted that their businesses are free of money laundering, they have now slightly altered this view, conceding that some such activity might be taking place. However, PAGENO="0090" 86 - 34 - they also maintain that any such activity is isolated and not representative of the industry. One does not expect their perspective to be unbiased; however, we note that a former President of the New Jersey check cashing association was convicted of CTR violations in the mid-l980s. There is no national organization representing the casas de cambio and giro houses. However, there are informal local groups of such business owners, who have organized at various times to make their views known on matters of mutual concern. In Texas, such groups have been very active in recent years; for example, by suing to enjoin the enforcement of the new Texas law requiring casas de cambio to be licensed. A similar coalition also filed suit early last year, in an unsuccessful attempt to forestall the imposition of the above-mentioned Geographical Targeting Order that focused on Houston's giro houses. vi. Conclusions Our investigation has found that as stepped-up law enforcement efforts against traditional banks and growing banking industry compliance have occurred in recent years, casas de cambio, giro houses, check cashing businesses, and money transmitters have become increasingly active and important parts of money laundering operations in the U.S. Knowledgeable law enforcement and industry sources, among others, estimate that PAGENO="0091" 87 - 35 - billions of dollars annually are being laundered through these non-traditional financial institutions. Our investigation has also revealed that the major increase in money laundering on the part of non-bank financial institutions is to a large extent the result of their being essentially unregulated and/or inadequately supervised at the Federal and State levels. Indeed, in the case of the casas de cambio and the giro houses, the evidence regarding the depth of their money laundering involvement is so clear and compelling that most of the law enforcement officials with whom we spoke believe that they should simply be outlawed or, at the very least, be placed under such strong regulation that only the legitimate few could survive. Similarly, while the evidence is less clear on precisely how many check cashing businesses are engaged in money laundering, there is no doubt that significant numbers of them are so involved and that enormous amounts of illicit cash are being moved through them. Insofar as check cashers are also essentially unregulated, those with whom we spoke were unanimous in calling for the establishment of uniform minimum standards that would bring them under some form of Federal regulation and supervision. Finally, we also found that while non-bank financial institutions are required to comply with Federal anti-money laundering statutes, many are failing to do so, primarily because PAGENO="0092" 88 - 36 - of an apparent lack of interest and/or allocation of resources on the part of responsible Federal and State law enforcement and regulatory authorities. Based on our investigation, it is equally clear that in addition to increased regulation of these entities -- for example, in the form of strict licensing procedures -- more Federal and State resources need to be brought to bear regarding their illicit activities. ** * PAGENO="0093" 89 STATEMENT OF ARTURO GOMEZ BEFORE THE SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS HEARINGS ON CURRENT TRENDS IN MONEY LAUNDERING February 27, 1992 *** My name is Arturo Gomez. I am testifying today under an assumed name because I and my family were threatened by some drug dealers for whom I had laundered money. They said that if I were to tell anything about their business dealings with me, something bad would happen to me or my family. I am also cooperating with U.S. government officials to assist them in their efforts to understand and better control laundering by casas de cambio. - Between 1985 and 1987 I owned a casa de cambio business in a small Southwestern U.S. city located near the border with Mexico. Initially, I did not engage in any illicit activity, but beginning in early 1985 individuals I did not know began to bring in bundles of cash of around $5,000 they wanted to have sent to Mexico in the form of pesos. While I did not at first realize that these individuals were narcotics traffickers intent on laundering cash proceeds from drug sales, when they started bringing in suitcases filled with cash I understood who they were and why they were bringing their business to me. Overtime, my business with these clients increased to such an extent, that in the six-month period prior to my arrest in June 1987, more than $50 million in illicit cash was laundered through my casa. In connection with this money laundering activity, I have pleaded guilty to failing to file a currency transaction report required by federal law for cash transactions above $10,000, and am presently awaiting sentencing on this charge. I got into the casa de cambio business soon after I came to the U.S. from Mexico in 1984. I knew a good deal about the money exchanging transactions that casas do because for nine years previously I had worked in various Mexican banks. In one of them, an important one near the border, I rose to the position of president. As a result of this experience, I knew the ins and outs of Mexican laws and regulations on banks. This experience also provided me with a network of banking contacts in Mexico, which I relied on extensively in conducting my casa de cambios business. My banking background also enabled me to see that as the peso declined, in value against the dollar -- as it was doing throughout the early l980s -- money could be readily made PAGENO="0094" 90 -2- in exchange transactions if one had enough dollars available. I understood, for example, that if I had $1,000 in the morning and held onto that amount until the next day, or sometimes even just until the afternoon of the same day, the value of the peso would go down enough so that I could make a good profit. How profitable this was for me is illustrated as follows: when I first got into the casa business, working for someone else who did not, to the best of my knowledge, accept drug-related cash, I made about $1,200 per month; by mid-1986, when my casa was beginning to succeed, in large part as a result of the cash provided by drug dealers, I earned about $4,000 per month; and, during the peak period in 1987 when my casa laundered $50 million, I was earning somewhere around $20,000 monthly. For me, the well-known saying, it takes money to make money, could not have been more true; a fact, moreover, which helps to explain why the ready supply of cash from drug dealers was so necessary and appealing. Mr. Chairman and Members of the Subcommittee, to help you understand what I and other casa de cambio owners did and how we did it, I will now describe my casa de cambio and its operations. Typical of many casas, I had two employees in addition to myself. One was a teller whose responsibilities included taking care of small-scale, legitimate "front-door' exchange transactions, as well as otherwise assisting in a variety of ways in "back-door" transactions; for instance, counting the large sums of cash brought in by drug dealers. The other employee was used primarily as a "runner," taking cash, checks, and the like to banks or other casas both in the U.S. and Mexico. The services we provided included selling dollars, buying and selling pesos, cashing personal checks, cashier's checks, and money orders, and arranging wire transfers to different cities in Mexico. Physically, my casa business was housed in a two-room mobile home, which I initially rented for $500 per month. I later purchased a larger mobile home to be used as my business's counterpart location across the border in Mexico. The office equipment I had consisted of three telephones (with three different lines), two hand-held portable radios, a copy machine, an electric typewriter, six chairs and several tables, two medIum-size safes (which, at the time of my arrest, contained more than $2 million in cash), and a money counting machine that could also detect counterfeit bills. When I opened my business, to the best of my recollection all I was required to do was provide my social security number in order to obtain some kind of a business permit. I do not remember having paid a fee for this permit. At the time I started my business I had $20,000 in cash on hand. At the outset, business was slow and I would average about five to ten customers per day. However, as the casa de PAGENO="0095" 91 -3- cambio became more successful, on an average day somewhere between 25 and 50 customers would come in to do business. In the early stages of my businesss growth, the large majority of these customers were there to do legitimate exchange transactions. Over time, however, and especially as my operations shifted more and more to drug-related cash, up to 80% of my customers were there to launder money. Few of my customers were non-Hispanics, and all of those involved in money laundering operations were Mexican, Mexican-American, or Latin American. As I indicated previously some of my business was with legitimate customers. A typical transaction in this regard would often involve a produce shipment from a Mexican supplier, through an import/export broker, to a purchaser in the U.S. I would facilitate such transactions by -arranging for the purchaser's dollars to be converted into the pesos that would be delivered to the supplier. In addition to any fees I would charge for my services, my profit would come from my ability to use the purchaser's dollars to buy pesos, whose declining value in relation to the dollar and the originally agreed upon transaction exchange rate, assured that I would get more pesos than the amount I had delivered to the supplier. I believe that my legitimate customers came to me, instead of a regular bank, primarily because of the personal attention I could give to them, the convenience I offered in terms of being open on weekends and evenings, and also because I could complete in a matter of hours what regular banks would take days and even weeks to do. Money laundering clients, on the other hand, brought their business to me, and the more than two dozen other casas de cambio like mine in the city in which we were located, primarily because we could quickly and efficiently process large amounts of their cash and do so in ways that would almost completely mask their identity as the source of that cash. Whatever the circumstances, I was able to protect their identity through a combination of an intricate and complex series of financial transactions and by simply ignoring currency reporting requirements or, on those occasions when I did fill in the appropriate form, listing myself and/or my casa as the owner of the funds. A typical transaction for these customers began when one came in with $100,000, for example, saying that he wanted to have that amount converted to pesos for deposit into a specific bank account at a Mexican bank. In most cases, I did not have enough pesos on hand to cover the amount and would therefore call one or more casas de cambio in Moneterrey, Mexico or in Houston and, at a mutually agreed upon exchange rate, purchase the additional pesos needed from that casa. Since the latter casas de cambio have dollar accounts in U.S. banks, I then arranged to have the dollars necessary to PAGENO="0096" 92 -4- cover the purchase of the pesos deposited in my accounts in Mexico. As soon as that was done, I contacted the casa and told them that the dollars were in their account, whereupon they would send the corresponding amount of pesos, at the agreed upon rate, to one of several accounts I maintained at two Mexican banks. Once the pesos had been deposited to my account at these Mexican banks, I directed that they be wire-transferred to my customers' accounts at banks they designated in other Mexican cities. There are many variations of this scheme, the net effect of which is to make it exceedingly difficult for U.S. authorities to follow the trail, back and forth across the border, of the thousands of different transactions involved in largescale money launderIng activities. For example, sometimes I or my runner would smuggle the cash brought in by the drug dealer across the border into Mexico and then simply turn around and bring it back into the U.S. At that point, we would fill out the appropriate Customs form and, if asked, would explain that the cash was the result of legitimate business dealings with our Mexican location or another Mexican bank or casa. With this form in hand, we could then deposit the cash into any of my U.S. bank accounts without generating any suspicion. Once the cash had gotten into my account, I could wire-transfer it to any destination selected by the customer without any problem, since there are no reporting requirements for such transactions, regardless of the amount. Mr. Chairman, I think you and the Subcommittee members may gain added insight into the nature of the role played by casas de cámbio, if I point out that while I knew that what I was doing was wrong, I did not necessarily understand that I was a money launderer. Indeed, it was only when Subcommittee investigators referred to me as a money launderer while they questioned me about my activities that, for the first time, I came to the painful realization that I did in fact deserve this label. There are several reasons behind my thoughts and feelings in this regard. First, when U.S. officials came around in 1985 to explain the government's money laundering cash reporting requirements, only one of the two agents spoke Spanish and that individual did not speak it very well. I did not understand English :very well either. On this occasion, moreover, I was given the wrong form, which made it even more difficult to understand what was required of me. Also, it was not easy for me to understand the rationale for these requirements, since in Mexico there were then and still are no such requirements and an ask-no-questions approach is an important part of the way business is done. In addition, all the other casas operating in the city where my business was located were doing precisely the same thing as I was. I know tI~is to be true because, when a drug PAGENO="0097" 93 -5- dealer would bring in a particularly large cash amount, it was not uncommon for me and one or two other casa owners to agree to jointly dispose of it by dividing it into amounts that we could each manage effectively. Also, for a time, all of our city's casa de cambio owners met periodically as a group, for among other reasons, to try to fix exchange rates so that customers could not shop around for better ones from one casa de cambio to the next. Coming from Nexico, I also did not readily understand the relationship between what I was doing for these drug dealers and the overall drug problem in the U.S. In my eyes, all I felt I was doing was exchanging currency and that I was different because I did not charge a commission over and above my normal fees for my money laundering services, as many other casas de cambio did. Similarly, I had to wonder how serious U.S. authorities were about the money laundering reporting requirements, since only minimal penalties seemed to be involved if one were caught failing to comply with them. I heard, for example, that in two cases where casa de cambio owners and/or operators were charged with currency transaction reporting violations, one was sentenced to a six-month jail term and the other received a small fine and suspended jail term. Finally, in making these comments, I do not want to suggest that I do not now understand fully the seriousness of what I did. As mentioned above, I have come to the painful realization that I am indeed a money launderer and that the services I provided aided drug dealers, by enabling them to get their profits out of and back into the U.S., and/or otherwise into a form that they could use to reap the benefit of their criminal activity. I deeply regret the role I played in this regard. Thank you for giving me this opportunity to appear before you. I will be pleased to answer any questions you may have. # 54-650 0 - 92 - 4 PAGENO="0098" 94 ~tpartmrnt z~ ~u~tict STATEMENT OF RONALD WOODS UNITES STATES ATTORNEY SOUTHERN DISTRICT OF TEXAS BEFORE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE CONCERNING CURRENT TRENDS IN MONEY LAUNDERING ON FEBRUARY 27, 1992 PAGENO="0099" 95 Statement of Ronald G. Woods, United States Attorney, Southern District of Texas, P.O.B. 61129, Houston, Texas, 77208, (713) 220- 2100, before the Permanent Subcommittee on Investigations, United States Senate, Washington, D.C. on February 27, 1992. Mr. Chairman, members of the committee, ladies and gentlemen: I am pleased to be invited before you to provide an overview of the casa de cambio/giro house industry in Texas. Billions of dollars of cocaine, marijuana and heroin flow across the Texas/Mexico border each year. The 1200 mile Texas/Mexico border, sadly, has become one of the premier drug smuggling areas of the United States. As these billions of dollars of destruction flow north into our country, billions of dollars of U.S. currency flow south to Texas. .A significant amount of this money ends up at currency exchanges in Texas, to be laundered. These businesses, generically referred to as casas de cambio (money exchanges) Or giro houses (wire transfer businesses) *exist in several areas of Texas, but predominately in Houston, the lower Rio Grande Valley and El Paso. Numerous federal investigations have shown that a significant portion of this industry thrives off of laundering illegal money, primarily, drug money. In Texas, the legislature recently passed licensing legislation to try to bring this industry under control. Frequently these businesses hold themselves out as currency exchanges, but they also operate under the guise of check cashers, travel agencies, and "multi-service" businesses for persons from PAGENO="0100" 96 Mexico, Central and South America. What they have in common, regardless of their name, is the transmittal of hundreds of millions of dollars of drug money in a manner that disguises the true owner of the funds and the nature of the funds. These businesses also utilize false documentation to disguise their activities. As the committee learns more about this industry in the Southwest, I encourage you to seek answers to the following questions: who runs this industry? Who primarily benefits from it? What is the source of the money it transmits around the nation and abroad? Can the people of the United States reasonably rely on this industry to discipline itself? My office is glad to assist the committee in its quest to "turn the lights on" in this industry, and will be pleased to continue to assist you in the future. 2 PAGENO="0101" 97 ~tpartmtnf ~ STATEMENT OF CHARLES LEWIS ASSISTANT UNITES STATES ATTORNEY SOUTHERN DISTRICT OF TEXAS BEFORE PERNANENT SUBCOMMITTEE ON INVESTIGATIONS COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE CONCERNING CURRENT TRENDS IN MONEY LAUNDERING ON FEBRUARY 27, 1992 PAGENO="0102" 98 Statement of Charles Edwin Lewis, HIDTA Coordinator and Assistant United States Attorney, Southern District of Texas, P.O. Box 61129, Houston, Texas, 77208, (713) 220-2173, before the Permanent Subcommittee on Investigations, United States Senate, Washington, D.C. on February 27, 1992 Mr. Chairman, members of the Committee, ladies and gentlemen: I am pleased and honored to be invited before you today to provide insight into the casa de cambio/giro house industry in Texas. The battle against large scale drug traffickers is a continuous flow of actions and counteractions, thrusts and responses. To understand where we are today with this industry and how we got here, a historical perspective is necessary, for today's casa industry is a response to actions in the past. In 1970 Congress passed the Bank Secrecy Act. This act, and its implementing regulations, required the filing of. currency transaction reports (CTR5) on all currency transactions in excess of $10,000 at financial institutions. These statutes are currently codified under 31 USC 5311, et seq. At first banks were slow to respond to CTR requirements, but the banking industry did ultimately respond. Through the years compliance has grown dramatically. From 1985 to 1990 the number of CTRs filed increased by over 350%. As CTR compliance grew, more and more large scale traffickers found their assets being seized PAGENO="0103" 99 and themselves being charged on the basis of their direct currency deposits at banks. The traffickers soon learned that if they wanted to continue to use American banks, they would have to find someone else, some front, to use to place money into American banks, because they could no longer do it themselves or through their direct underlings without risking exposure. What the traffickers turned to was the casa de cambio industry. Casas de cambio (money exchanges) have existed for years along the Texas/Mexico border. These businesses traditionally served tourists and border businessmen. The traffickers began using this industry during the mid-l980s in the following way: Traffickers carried large sums of drug currency, hundreds of thousands of dollars at a time, into a casa de cambio located in the United States. Although these businesses are and were required to file CTRs, frequently they d~d not. The casa then deposited the currency into a U.S.. bank. The bank filed a CTR, but only the casa's name appeared on the form. Once a drug dealer's money was in the bank in the casa's account it was transferred by wire anywhere in the world as requested by the drug dealer. The key to this whole transaction was that the drug dealer moved very large amounts of money without his name appearing either on bank records orCTR5 sent to IRS. Numerous investigations have shown how prone this industry is to launder illegal money. Beginning in 1985, federal law enforcement agencies in Texas started "sting" operations against PAGENO="0104" 100 this industry. These operations disclosed that the industry was very prone to violate federal currency reporting statutes. Operation Vagabond was the most recent of these operations. In Operation Southwind extensive illegality in this industry was uncovered in the lower Rio Grande Valley, which consists of the southern most border of Texas with Mexico. The Rio Grande Valley is one of the premier drug importation areas of the United States. Oscar's Money Exchange in Hidalgo County, Texas laundered over $5 million in U.S. currency in a few months for drug kingpin Antonio Franco. Records seized from this casa showed that the casa moved tens of millions of dollars and had as its clients several very large scale drug dealers. Oscar's Money Exchange wired millions of dollars to locations in the United States and Mexico for drug dealers, assisted *in acquiring investment and drug enterprise assets for them and held millions of dollars "on account" for their ready use at the business premises, a trailer house. When this exchange was searched the monies of Antonio Franco were being carried on the books of the exchange under the name of "Inversiones Pemex", that is, Pemex Investments. Pemex is the operating name of the oil company owned by the government of Mexico. Operation Southwind also revealed extensive use of Casa de Cambio America in Hidalgo County, Texas where drug dealers kept large amounts of money on "deposit" for ready use for illegal purposes. This casa was also used as a depository for funds of an accused murderer who used the funds from the casa to attempt to 3 PAGENO="0105" lot bribe the judge presiding over his murder trial. The investigation disclosed that a third casa, D'Raul's Casa de Cambio kept his "overnight" funds at Oscar's and borrowed approximately $2,000,000 from yet another casa de cambio. When the owner of D'Raul's Casa de Cambio couldn't repay the loan, his arm was broken. Personnel at another casa in the Rio Grande Valley are currently under indictment for laundering $2.5 million dollars of "drug money" in a sting operation. A very knowledgeable "insider" has recently related that in the insiders's view, every casa de cambio in Hidalgo County, Texas primarily exists for movement of illegal money. The insider further stated that there is not a legitimate business reason for the number of casas that exist in Hidalgo County, Texas. The above episodes, which are only examples of the rampant illegality in this industry, demonstrate *two primary characteristics of the industry: first, significant numbers of these businesses constitute an outlaw industry whose primary customers are drug traffickers. Second, false or misleading documentation is utilized by such outlaw businesses achieve the successful laundering of drug money. The casas exist along the Texas/Mexico border and serve drug trafficking organizations with twin headquarters in Mexico and Texas. In Houston we have the big city cousin of the casa, the giro house. "Giro" is spanish for wire, as in wire transfer. The giro houses are Central and South American in their orientation. 4 PAGENO="0106" 102 As indicated, giro houses specialize in wire transfers to South America and Central America. For a fee, usually 5 to 7% of the amount wired, these entities will move money in their own name to another country. A bank I use in Texas will wire $100,000 to Colombia for $50. A giro house charges $5,000 to $7,000, but provides anonymity for the customer. The U.S. bank that receives the $100,000 in currency can only put the giro house's name on the CTR. It never sees the real party in interest, the drug dealer. Numerous investigations have tied large scale traffickers to wire type operations in Houston. One such operation, posing as a precious metals wholesaler, was open for about 6 weeks and moved about $40,000,000 in currency. Giro houses offer other services as well. A "client" can rent a beeper or cellular phone from such locations. Although some claim that the industry serves as banks for the poor, I have trouble understanding why poor people need beepers and cellular phones. In our experience, such are the trappings of drugdealers, not manual laborers. Through the use of a regulatory devise known as a Geographic Targeting Order ("GTO") IRS in Houston conducted a 60 day study of 29 giro houses in Houston. Under this GTO, the CTR requirement was lowered for these businesses from $10,000 to $100 for a 60 day period and identification requirements were increased. CTR5 were picked up on a daily basis. As expected, the currency flow into these businesses dropped dramatically. The average decrease was 75%. 5 PAGENO="0107" 103 How big is this industry in Texas? In 1991, following the * passage of the Texas statute requiring licensing "money transmitters", IRS provided to the U.S. Attorney's Office lists of all known casa/giro locations in Texas. Approximately 150 were reported. The number today is undoubtedly different, as these businesses heretofore opened and closed with ease. The IRS statewide survey further showed that these businesses proliferate in the areas of: our state that are shown to have the; highest incidence of large scale, multi-ton and mega-million dollar drug trafficking: Houston and the Texas/Mexico border. ~Qth of these areas are designated by the Office of National Drug Control Policy (ONDCP) as High Intensity Drug Trafficking Areas (HIDTA5). There are several locations in the Rio Grande Valley and Houston where these businesses exist in close proximity to each other, including shoulder to shoulder. I have brought a short film that demonstrates some of these locations. How much money do they move? Because they are unregulated, no one knows for sure. I conservatively estimate that they move approximately $500,000,000 to $1,000,000,000 a year into and out of Texas bank lobbies. Indeed, we know of several episodes in Texas that involved $40-50 million in currency in -each episode in just a few months. My estimate does not stand alone or uncorroborated. A Fin-CEN study on declared currency entering or exiting the United States alOng the U.S./Mexico border for the 3 year period of 1988- 1990 showed that the area of the border that encompasses the lower Rio Grande Valley led the entire U.5./Mexico border in CMIR 6 PAGENO="0108" 104 filings. What is remarkable about the figure is that the Rio Grande Valley is an economically depressed area. Yet, this area saw $8 billion in declared currency flow through it during the 3 year period. The next closest was the Nogales, Arizona area with about $ 4.8 billion. Let me say another word about our experience in Texas. In 1991, as part of the Houston HIDTA initiative, the United States Attorney's Office for the Southern District of Texas teamed up with the Texas Department of Public Safety Narcotics Service and the Internal Revenue Service to provide resource testimony for the Texas Legislature. The legislature passed comprehensive licensing legislation that became effective in January of 1992. I have provided a copy of this statute to your staff. The true effect of the statute has not yet been realized as it has just taken effect and is being challenged in Texas courts by 12 Houston giro houses. In this suit, the giro houses assert, among other things, that disclosure of personal and financial background information for purposes of licensing under the Texas statute may tend to incriminate applicants for licenses for violations of the federal money laundering statutes. When the Texas statute is enforced, I expect that those casas and giro houses that thrive off of drug proceeds will move south into Mexico or to other States. consequently, we can not overlook the need for international efforts. If we shut down the illegal aspects of the industry in the U.S., but make no effort to deprive the industry of safe haven in Mexico and other countries, we have 7 PAGENO="0109" 105 done only half our job. Clearly, a casa de cambio abroad that is allowed to have a U.S. bank account can launder just as much drug money through its U.S. bank account as one located right next door to the U.S. bank. In presenting the foregoing to you I have been greatly assisted by my experience in prosecuting a variety of individuals involved in and with this industry. I wish to acknowledge the exceptional efforts of IRS Special Agent . Don* Staggs, FBI Special Agent Robert Palacios and Sergeant Joe Garza of. the Narcotics Service, Texas Department of Public Safety who worked with me on these prosecutions. . 8 PAGENO="0110" 106 STATEMENT OF JAMES D. DWTON DEPUTY AITORNEY GENERAL CALIFORNIA DEPARTMENT OF JUSTICE BEFORE ThE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS COMMI1TEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE PAGENO="0111" 107 I. INTRODUCTION Good morning, Mr. Chairman and members of the Subcommittee. My name is James Dutton. I am a Deputy Attorney General for the State of California, in charge of the Attorney General's Money Laundering Program. I am pleased to appear before your Subcommittee today to present testimony about certain nontraditional financial institutions, such as casas de cambio, that are being used to launder illegal drug proceeds. II. CASAS DE CANBIO Casas de canthio are also known as money exchange houses. A functional definition for a casa de caxnbio is any business that operates as a U.S. dollar/Mexican peso currency exchange or assists customers in transmitting moneys to Latin America. Over the last five years, there has been a substantial increase in the number of casas operating in California. Currently there are over 1,000 casas operating in the Greater Los Angeles area and 50 casas operating in San Diego. The size of a casa de cambio ranges from one teller in a booth no larger than a Fotomat kiosk, to a small bank size building with five tellers, receiving and distributing cash behind barred windows. Casas have been widely used to launder drug revenues. One of the ways this is accomplished is for the casato arrange for the physical transportation of the currency across the Californian/Mexican border for deposit into a Mexican financial 1 PAGENO="0112" 108 institution. The money is then wired back to the United States to a customer-designated bank account. A. Federal Regulations and Enforcement Casas de caxnbio, check cashing businesses, telegraph companies, and issuers of money orders or traveler's checks are required to file Currency Transaction Reports (CTR) on cash transactions in excess of $10,000 pursuant to the Bank Secrecy Act (BSA). Compliance with the CTR filing requirements by nontraditional financial institutions (e.g., casas, check cashing businesses, etc.) is acknowledged by law enforcement to be substantially lower than the compliance level by traditional financial institutions (e.g., banks, savings and loans, and credit unions). (See Department of Treasury Report. to Congress, entitled The Reporting Requirements of the Bank Secrecy Act and Section 60501 of the Internal Revenue Code,, dated December 1991, page 5.) The Internal Revenue Service (IRS) Civil Examination Division is responsible for monitoring the compliance of nontraditional financial institutions with the CTR filing requirements and other BSA record-keeping regulations. The Examination Division's goal is to perform a compliance audit of each nontraditional financial institution every three years. IRS has identified approximately 27,000 nontraditional financial institutions. There are 16,000 business agents of the Western Union Telegraph Company alone. The Civil Examination Division is 2 PAGENO="0113" 109 devoting more and more resources to the monitoring of nontraditional financial institutions in an attempt to keep pace with the rapid influx of these institutions over the years. In 1989, 58 staff years were devoted to the monitoring/auditing of nontraditional financial institutions; in 1991, 83 staff years; and in 1995, 125 staff years are projected for monitoring/auditing. The IRS refers cases of apparent BSA violations to the United States Treasury Department Office of Financial Enforcement for review and possible imposition of civil penalties. Since 1985, the Office of Financial Enforcement has imposed 47 civil penalties for BSA violations by traditional and nontraditional financial institutions. Only one of these penalties has been imposed on a nontraditional financial institution--a fine of $3 million levied in 1988 against Texas-based Oscar's Money Exchange. Casas de cambio operate in all the states which have a common border with Mexico; they are sometimes referred to by different names in different locales, for example, giro houses in Texas. Casas are not subject to any federal licensing requirements. As far as I know, the only federal regulations that casas are subject to are BSA regulations. There have been several federal prosecutions of owners/operators of casas in the State of California for money laundering and BSA reporting violations. A recent conviction for money laundering was obtained in the Central District of 3 PAGENO="0114" 110 California (Los Angeles) in the UnLMex case. In this case a Los Angeles based casa laundered in excess of $26 million in drug proceeds during a six-month period in 1989. As far back as 1986, a federal indictment in the Southern District of California (San Diego) charged the owner of a casa de carnbio with failing to file CTRs on $15.8 million in currency transactions over a four-month period. Twenty-two defendants were indicted in August of 1990 in the Southern District of California on drug trafficking and money laundering charges that involved the laundering of proceeds from cocaine trafficking through two San Diego casas, C & H Honey Exchange and Multi-Pesos Exchange. B. State Regulations and Enforcement California also has a money laundering statute, which acted as a model for one of the federal money laundering statutes (18 USC section 1957). Furthermore, California has currency reporting statutes that are similar to the federal reporting statutes. Pursuant to a Memorandum of Understanding between the Department of Justice, State of California, and the United States Department of Treasury, the Department of Justice receives, via computer tape, data contained in CTRs filed by CalifOrnia financial institutions with the IRS. There have been no prosecutions under the state money laundering or reporting statutes of owners/operators of casas de 4 PAGENO="0115" 111 cambio for a variety of reasons. These reasons include the relatively low degree of severity of the state penalty (maxiinwn exposure only 3 years in state prison), lack of training/expertise in the area,. lack of resources, and the fact that transactions that qualify as money laundering or reporting offenses under state law are more limited in scope than their federal counterparts. On January 1, 1990, California's Honey Transmitter Law went into effect. The law sets forth licensing requirements for certain businesses, including casas de cainbio and telegraph companies, that receive money with the intent to transmit it abroad. A copy of the Honey Transmitter Law is attached as Exhibit A. The California Department of Banking issues the licenses and conducts compliance examinations of the licensees. To qualify for a license, the money transmitter business must have a corporate structure, have at least $250,000 in equity or post a bond of equal value, and all officers and directors must be of good character (no criminal record for moral turpitude offenses). The California law is a consumer protection oriented law. The law's stated. objective is to. protect customers from misappropriation of their money and sharp business practices concerning fees and commissions. Thelaw does not adequately address law enforcement's concerns in the area of money laundering. 5 PAGENO="0116" 112 Although the Money Transmitter Law does make it a felony to knowingly operate a money, transmitter business without a license, the law was not meant to, nor does it effectively, regulate or punish casas de cambio engaged in money laundering. The law is too restrictive in the type of businesses and scope of transactions that it regulates. Only businesses which intend to transmit moneys abroad come within the purview of the law. Casas that purportedly just exchange currency, or transmit money within the United States, are not regulated. Furthermore, businesses that transmit money orders or traveler's checks abroad are exempted from coverage. Casas de cainbio that are engaged in qualifying transactions are not applying to State Banking for licenses. Only 27 licenses have been issued; many of these licensees are large telegraph companies and travel companies. A list of the licensees is attached as Exhibit B. The Money Transmitter Law allows for the designation of business agents by the licensees upon State Banking approval. These separate business entities are not required to have a corporate structure. There have been in excess of 1,900 agents approved by State Banking, the great majority being agents of american Express and Western Union. On a periodic basis, licensees are required to send summary financial records to State Banking. State Banking is authorized to make on-site compliance audits of licensees and their agents. With over 2,500 business locations (licensees, agents, and their 6 PAGENO="0117" 113 branches) to monitor, State Banking examiners are not able to make as many on site audits as they would prefer. State Banking has only eight examiners assigned to monitor money transmitter businesses. They do not have the training nor the resources to identify the multitude of noncomplying casas de cambio. When noncomplying casas de cambio are located, the examiners do not have the training nor the resources to conduct the undercover sting operations necessary to bring criminal charges for noncompliance. Instead, when an unlicensed money transmitter is located, State Banking normally sends out a cease and desist letter. About one-half of the noncomplying businesses close their doors on receipt of the letter; the other half continue to operate. There have been no criminal prosecutions for noncompliance, under the Money Transmitter Law. Often a money transmitter business shares offices with other businesses. In this situation it is sometimes difficult for the public to ascertain which business is licensed by the State to transmit moneys. It is also difficult for State Banking to insure that only the licensed business is transmitting moneys abroad, and not one or more of the similar businesses with which it sharesoffice space. For example, Jet Peru is a State Banking-approved money transmitting agent of Associated Foreign Exchange, Inc. Jet Peru shares offices located at 440 5. Broadway, Los Angeles, with two similar businesses, Amir Travel and Central Travel .& Tour Service. The only State Banking-licensed business of. the three is Jet. Peru. However, Jet 7 PAGENO="0118" 114 Peru is the only business of the three that does not advertise on the outside of the business location that it transmits money abroad. The unlicensed Central Travel & Tour Service advertises that it is licensed by the State of California to transmit money to Mexico. It also falsely advertises that a customer's money is insured up to the sum of $250,000 (when in reality Jet Peru's licensee posted a $250,000 bond to obtain the State Banking license). A preliminary telephone inquiry was made to Central Travel & Tour Service concerning its claim that it is licensed by the State of California. ~n employee of Central Travel & Tour Service indicated that an owner of the business, whose name was unknown to the employee, was licensed by State Banking. The employee gave a telephone number where more information about the license could be obtained. The telephone number turned out to be out of order. C. Municipal Regulations and Enforcement The San Diego City Council enacted an ordinance on January 25, 1988, for the purpose of preventing false or misleading advertisement and consumer fraud perpetuated by money exchange houses. A copy of the pertinent sections of the San Diego Municipal Code is attached as Exhibit C. Although primarily a consumer protection ordinance, the San Diego money exchange ordinance has certain features that further law enforcement objectives in the money laundering area. The ordinance requires that casas de cambio obtain a permit before 8 PAGENO="0119" 115 engaging in the business of currency exchange. The permit application requires identifying information, employment history, criminal convictions, and fingerprinting of all owners, partners or corporate officers. The ordinance mandates that all casas de cambio be open to police inspection during business hours and that all currency transactions be recorded on a San Diego Police Department form. A copy of the forms (receipts of currency transactions) must be mailed each week to the police department. The San Diego Money Exchange Ordinance gives the San Diego Police Department Licensing Unit an opportunity to keep close tabs on the 50 casas operating within the city limits of San Diego. A compliance officer makes a least a cursory inspection of `the business records of each casa on a monthly basis. Through these inspections and its high-profile presence at the locations of the casas de cambio, the San Diego Police Department Licensing Unit keeps abreast of the openings and closings of casas and learns about the modus operandi of these currency exchange businesses. The weekly receipts and financial records on hand of the vast majority of the casas do not reflect sufficient money exchange transactions to pay the minimum salaries of the casas de cambio's tellers. The receipts and financial records shown to the Licensing Unit are estimated by law enforcement to reflect the "front door" business. "Front door" business consists of "walk up" customers conducting legitimate currency exchanges of relatively small amounts. Law enforcement estimates that 9 PAGENO="0120" 116 substantial income is generated by casas from unrecorded, or falsely recorded, "back door" currency exchanges/money transmittals. Besides the federal convictions involving the laundering of millions of dollars through casas in California and the economic realities that most casas could not afford to stay open on "front door" business, there are other, more subtle signs of the ongoing "back door" business. Last fall, the San Diego Police Department investigated a mugging and robbery of an owner of a casa where $30,000 in American and Mexican currency was stolen. The money was stolen from the owner as he was going to work at his casa at 9:00 a.m. According to the San Diego Police Department Licensing Unit, the victim's casa was reporting gross receipts of approximately $1,000 per day during the time period before the robbery. Why does a business which only generates $1,000 a day in gross receipts need $30,000 in cash at the business location? Hidden ownership of casas is a big problem for the Licensing Unit. The ostensible owner of the casa--the one who has a clean record, the one who places his fingerprints on file with the police department--is often not the one who operates the casa or reaps the benefits from its operation. Even when law enforcement is able to close down a casa that has been laundering money, it can be reopened with a different family member designated as owner. Charles Jung and his wife, Yee Soon Shin, were sentenced to prison on October 11, 1990, for 10 PAGENO="0121" 117 money laundering, structuring currency transactions to avoid the $10,000 CTh filing requirement, and failing to file CTRs. These convictions arose from currency transactions conducted at two of the couple's casas in San Diego. Defendant Shin's brother, Thomas Shin, emerged as the new owner. A positive development in law enforcement's efforts to curb the laundering of money through casas in the San Diego area is the cooperation and lines of communication established between local and federal law enforcement. The sharing of information between the San Diego Police Department Licensing Unit, the IRS, and U.S. Customs has benefited all the agencies involved. D. Common Problems Confronting Local, State, and Federal Law Enforcement Casas are not fully complying with applicable local, state and federal record keeping and reporting requirements. Certain casas will go to great lengths to avoid record-keeping requirements. For example, a federal regulation (31 CFR section 103.37 (b) (3)) requires that money exchange houses keep a record of each transaction in excess of $1,000. The recorded information is supposed to include detailed identifying information about the customer who conducted the transaction. The IRS informed a noncomplying casa with the $1,000 record- keeping requirement. Following such advisement, the IRS again inspected the casa's financial records, which indicated that $150,000 in cash transactions were conducted by the casa in a 11 PAGENO="0122" 118 three-day period; all transactions were under $1,000 and were conducted at fifteen-minute intervals. In many cases the identification provided to casas by customers purported to be Mexican nationals is not verifiable by law enforcement officials. Money launderers are increasing the use of couriers with fraudulent identification to launder their illegal proceeds through casas. Law enforcement surveillance of casas is often very difficult, especially along border areas where the casas are normally clumped together. For example, almost all of the casas in San Diego are located on, or just off, San Ysidro Boulevard, the closest street to the border. On one particular block of San Ysidro Boulevard, there are more than a dozen casas. The operators of these casas and the neighboring businesses form a close knit community where it is next to impossible for undercover surveilling officers to remain unnoticed. Cultivating informers within the casa de cambio trade is also difficult, even if the potential informer is not involved in illegal activities. Even a legitimate casa de cainbio operator does not want to be branded an informer in his community. Establishing the requisite knowledge and/or intent elements of the applicable money laundering or reporting statutes in the casa de cambio context can present a problem for law enforcement. Due to the widespread use of nominee owners by casas, rapidly changing ownership, difficulties in cultivating informers, and surveillance obstacles, it often calls for a herculean task to 12 PAGENO="0123" 119 prove beyond a reasonable doubt that the true, behind-the-scenes owner had the requisite intent or knowledge to enable- the prosecutor to convict him for money laundering. E. Money Laundering Schemes and Trends Money laundering schemes can be analyzed by the manner in which the cash received by the casa is, or is not, reported, and by the way in which the cash is transmitted across the border to a foreign country. Over five years ago, most casas did not know of the CTR filing requirements, or chose not to file CTRs. In response to law enforcement's efforts to "inform" casas of the reporting requirements, many casas began to structure dash transactions in amounts less than $10,000 to avoid the filing of CTR5. Law enforcement countered with prosecutions based on an amendment to the Bank Secrecy Act (31 USC section 5324(3)) that made it a felony for a casa to structure cash transactions with the intent to avoid CTR reporting requirements. The current trend is for casas to file CTRs on cash transactions involving illegal drug proceeds. Under these circumstances the drug traffickers are using nominee depositors with fraudulent identification. The prevailing attitude among money launderers seems to be that a CTR based on fraudulent customer identification will conceal the identity of the transactor from law enforcement inquiries and will insulate the casa from any criminal exposure that could occur as a result of a failure to file a CTh. 13 PAGENO="0124" 120 Once the casa has received the cash, there are three main ways that the casa can make it available to a customer in a foreign country. One way is for the casa to deposit the cash in its own bank account and then instruct the bank to wire the money to a customer-designated foreign account. The cash deposit by the casa into its own account will not identify the customer on any CTR that is required to be filed by the bank. Furthermore, CTRs and CMIRs (Currency and Monetary Instrument Reports on the transportation of currency and certain monetary instruments in excess of $10,000 between the United States and foreign countries) are not required to be filed on wire transfers of funds to a foreign country. Although the above set forth method of transmitting money to a foreign country is not reportable,~ it is coming into disfavor with money launderers because this method leaves a paper trail with the American bank that is traceable back to the casa. The preferred method is for the casa to arrange for the physical transportation of the drug proceeds across the border into Mexico. This is usually accomplished by secreting the cash in a car or truck and driving it across the border. There are few random searches by United States border officials of outgoing vehicles. Upon arrival in Mexico, the cash is driven to a Mexican bank and deposited. Once deposited in the Mexican bank, the money can be wired anywhere in the world. 14 PAGENO="0125" 121 In the spring of 1991, I obtained a conviction in the Central District of California against the head of a narcotic trafficking organization that distributed in excess of 80,000 pounds of marijuana from Mexico throughout the United States and parts of Canada. There was testimony at the trial about members of the organization driving El Cainino pickup trucks on several occasions from Orange County to Tijuana with duff le bags filled with millions of dollars of cash. The money was driven directly to a Mexican bank located in Tijuana, where it was transmitted by wire to the marijuana supplier's account in Guadalajara, Mexico. As part of an investigation that resulted in the conviction of operators of two San Diego casas de cambio, agents watched a courier walk across the border carrying $500,000 in cash in shopping bags. A third, lesser used method, is for no funds to be wired or physically transported between the United States and Mexico. In this scenario, an amount of money equal to the sum received by the casa in the United States, less commission, is credited to the~balance of the drug trafficker's account in Mexico. No matter how the money is deposited with, or credited to, a Mexican bank account, the money can be wired back to an account in the United States as previously mentioned. A more sophisticated scheme entails the funds being wired to a safe haven country (no financial disclosure laws), where it is laundered through accounts of shell corporations before the money 15 PAGENO="0126" 122 makes it way back to the United States in the form of purported loans or fraudulent corporate purchases. ~n easier method to get the money back to the United States is for the Mexican bank to write a draft on the paper of its United States correspondence bank. For example, the Mexican bank would be instructed to issue a bank draft to an escrow company in the United States as payee. This bank draft can be used in the United States to purchase real property for a nominee of the drug dealer. In this transaction there would be no United States based records or reporting directly traceable to the drug organization. San Diego law enforcement officials believe that the large trafficking organizations in Los angeles and Tijuana are utilizing San Diego based casas less frequently than before to launder their drug money. These organizations have established their own contacts with Mexican financial institutions and arrange for their own transportation of drug proceeds across the border. The success of Operation Greenline has also contributed to the lessening of the flow of drug money through San Diego casas. Operation Greenline was a two and one-half year investigation conducted in the late eighties. Law enforcement officials estimated that during the time period of their investigation $2 billion a year in narcotic proceeds from Los Angeles and Tijuana organizations flowed through a San Diego laundering network that included casas de cambio. Operation Greenhine resulted in the 16 PAGENO="0127" 123 indictment of 22 defendants and the conviction of multiple owners/operators/employees of casas de cambio. F. Reconmiendations 1. Passage of comprehensive federal legislation to effectively reoulate and curb the flow of drug proceeds and unreported currency transactions through casas de cambio. The legislation would have to address the hidden ownership of casas by requiring identifying information as to each casa owner, employee, operator, director, or person who receives any income from the operation of the business. The legislation should require that a casa have a sound and identifiable economic base in order to obtain a license to operate. The legislation should provide for unannounced on site inspections of business operations by law enforcement and regulators during business hours. Casas should be required to send copies of their weekly receipts to the monitoring agency. Casas should not be allowed to conduct financial transactions unless proper customer identification, that is verifiable by law enforcement, is shown and recorded. A synopsis of the currency transaction reporting laws should be posted prominently outside and inside the casa. Finally, the legislation should impose stiff civil and criminal penalties for the violation of licensing and other regulatory requirements. 17 PAGENO="0128" 124 Recently enacted Arizona money transmitter legislation can be used as a model for comprehensive federal legislation. (H.B. 2329, effective September 20, 1991, amends A.R.S. section 13-2317.) 2. Encourage the formation of federal, state and local law forces to monitor casa and enforce violations of criminal law. Local law enforcement is best suited to establish a high profile presence at the casas' places of business. Federal law enforcement has the resources and expertise to conduct or direct investigations into large scale money laundering networks that utilize casas de cambio. 3. Allocate sufficient resources to the federal monitoring agency (presently IRS) so that the agency can conduct freguent~ systematic compliance audits of casas de caznbio. The current IRS goal of performing only one audit every three years of each casa is patently inadequate for law enforcement and compliance purposes. The auditors should be trained in forensic auditing techniques to better ferret out illegal activities. 4. Encourage Mexico to adapt and enforce currency transaction reporting laws that complement United States~ reporting laws, and, throu~h executive, legislative, and law enforcement efforts, establish a protocol for comprehensive and rapid access by law enforcement agencies to currency transaction records kept by financial institutions situated on both sides of jthe border. This would allow United States law enforcement 18 PAGENO="0129" 125 agencies to rapidly access currency transaction reports kept by Mexican financial institutions, and vice versa. 5(a). Expand the assistance that federal law enforcement agencies provide state and local law enforcement. State and local law enforcement agencies need rapid access to nationwide commercial, financial, and law enforcement data bases. The Financial Crimes Enforcement Network (FinCEN), an office of the Department of Treasury, is helping to fulfill this need by providing intelligence and financial data to state coordinators for local law enforcement use. Local law enforcement needs to become better educated about the services provided by FinCEN and other federal offices and agencies. More data bases should be brought on line and made accessible to state and local law enforcement. (b). Expand the expert and technical assistance programs provided by federal agencies to state and local law enforcement. The FBI, IRS-CID, and U.S. Customs already have some excellent assistance programs. IRS-CID will provide experts to testify about money laundering schemes in state prosecutions. FBI will provide personnel to decipher and testify about pay and owe sheets and coded messages in state narcotic prosecutions. U.S. Customs analysts will examine and correlate CTR, CMIR and other financial data for use by local law enforcement in their financial investigations and prosecutions. These programs are essential to the effective prosecution of narcotic/money laundering cases and should be expanded. 19 54-650 0 - 92 - 5 PAGENO="0130" 126 6. Set up more random border inspections of southbound traffic to Mexico. These inspections can curb the physical transportation of drug proceeds across the border and familiarize couriers with CMIR reporting requirements. III. REPORTING OF CURRENCY TRANSACTIONS BY TRADES AND BUSINESSES An analysis of money laundering through nontraditional financial institutions is not complete without examining the compliance by trades and businesses with IRS Form 8300 reporting requirements. Section 60501 of the Internal Revenue Code and regulations thereunder require businesses to report (on IRS Form 8300) cash receipts and certain monetary instruments that total in excess of $10,000 in a transaction or related transactions. Financial institutions that are required to file CTRs are exempted from 8300 filing requirements. Certain trades and businesses are more likely than others to be used by money launderers to launder illegal proceeds. These businesses include auto and boat dealerships, travel agencies, real estate/escrow companies, precious metal and coin dealers, antique/art dealers, furriers, jewelers, and oriental rug V dealers. These businesses all sell high-ticket, often luxury, items that drug traffickers can invest in and enjoy using, collecting, or just observing. 20 PAGENO="0131" 127 A. Compliance The compliance by businesses with the 8300 filing requirements is improving, but is still dismal. The 8300 filings for fiscal years 1988 through 1991 are as follows: FY 1988 17,000 filed FY 1989 22,000 filed FY 1990 29,000 filed FY 1991 56,000 filed The paucity of 8300 filings is accentuated when the CTR filings for the same fiscal years are compared: FY 1988 Over 5.6 million filed FY 1989 Over 6.3 million filed FY 1990 Over 7 million filed FY 1991 Over 7 million filed The over 7 million CTR5 filed in fiscal year 1991 represented approximately $495 billion in cash transactions. The Internal Revenue Service is the agency which is responsible for monitoring the compliance by trades and businesses with the 8300 filing requirements. Considering the number of trades and businesses in the United States, this is a daunting task. The IRS has responded to this challenge by targeting certain types of businesses in specific geographic areas which are not complying with the filing requirements and are the types of businesses known to be used by money launderers. Pursuant to this targeting, IRS has made announced and unannounced audits (8300 sweeps) of car dealerships in Michigan, 21 PAGENO="0132" 128 Washington, D.C., and Massachusetts. These sweeps have positively impacted upon the level of compliance with 8300 filing requirements in the targeted geographical areas. There have also been 8300 sweeps of boat and aircraft dealers, jewelers, construction companies, and export businesses. IRS is currently conducting announced audits of San Diego businesses, primarily jewelers, furriers, and auto and boat dealers. B. Money Laundering Schemes Money launderers continue to change their modus of operandi for their laundering of money in response to law enforcement's successful efforts in curbing their pre-existing schemes. Initially the launderers just used banks to launder their money. Once law enforcement and regulators "encouraged" bank compliance with the reporting requirements of the Bank Secrecy Act, money launderers began to structure their cash deposits with banks to avoid the $10,000 reporting threshold. Law enforcement responded by enforcing new laws containing anti-structuring provisions. Money launderers then changed their focus of operations from banks to nontraditional financial institutions, such as casas de cainbio and telegraph companies. With enforcement being stepped up in the nontraditional financial institution area, launderers are increasing their use of certain businesses, such as real estate/escrow companies, travel agencies, and auto and boat dealers, to launder their illicit moneys. 22 PAGENO="0133" 129 A narcotic organization does not launder its proceeds by just one method. It simultaneously uses many different methods, which include the use of traditional and nontraditional financial institutions, the use of certain businesses, and just physically transporting the cash across the border. Casas de caxnbio have been known to facilitate the laundering of drug proceeds through trades and businesses and to arrange for the transportation of cash across the border. Casas have arranged for the purchase of real property with drug proceeds and have disguised drug proceeds as purported cash purchases of airplane tickets and concert tickets. This is why any analysis of casas de carnbio and money launderers has to consider their interplay with trades and businesses and 8300 compliance. C. State Access to 8300 Information IRS 8300 forms are classified as tax returns. Therefore, they are cloaked with the confidential safeguards associated with more traditional tax forms, such as personal income tax returns. Section 6 103(i) (8) of the Internal Revenue Code does allow for the disclosure of 8300 information to employees of federal agencies whose official duties require such disclosure for the administration of federal criminal statutes not related to tax administration. It is very difficult, and often impossible, for state and local law enforcement to access 8300 information. California law enforcement agencies can only access 8300 returns filed by 23 PAGENO="0134" 130 California businesses upon obtaining an ex parte order from a magistrate, based upon a showing of an articulable suspicion that an individual has committed a felony offense to which the 8300 return is related. Upon such showing, the magistrate orders the State Franchise Tax Board to provide a copy of the return to the Attorney General. The Attorney General can then disseminate the return to a local law enforcement agency upon request by the district attorney. This restricted state access to 8300 information means that local law enforcement cannot use such information to initiate an investigation. Instead, the investigation has to have progressed to the stage where law enforcement can satisfy the articulable suspicion standard of proof. Furthermore, even through this method, only 8300 returns filed since January 1, 1991, are available. D. Recommendations 1. Establish a systematic program for the education of trades and businesses concerning the 8300 filing reguirements. Posting of a synopsis of 8300 requirements inside all trades and businesses should be required. 2. Dramatically step up the level of 8300 compliance audits. 3. Change the designation of 8300 forms from tax returns to a classification that will allow easy access by local and state law enforcement to 8300 information. This would make 8300 form 24 PAGENO="0135" 131 access similar to CTR and CMIR access. 4. Encourage the establishment of local, state, and federal law enforcement task forces to curb the launderinQ~ drug proceeds through trades and businesses. IV. CONCLUSION Due to the interrelationship of money laundering schemes with traditional and nontraditional financial institutions, as well as with trades and businesses, any contemplated legislation aimed at nontraditional financial institutions, e.g., casas de cambio, must also address businesses and 8300 compliance. There must be an integrated and comprehensive approach by legislators and law enforcement to combat money laundering. If only one side of a ripe tomato is squeezed by law enforcement, the meat of the tomato will burst uncontrollably free on the other side. Where all sides of a ripe tomato are squeezed simultaneously, you get tomato juice. This statement expresses the views of James D. Dutton and not necessarily those of the office of the California Attorney General. 25 PAGENO="0136" 132 EXHIBIT A PAGENO="0137" 133 § 1564 FINANCIAL CODE funds which it lawfully holds for investment in interests in * ~ common trust funds administered by itself or by any affiliated trust company including, without limitation, any foreign (other state) affiliated trust company, if such investment is not prohibited by the instrument, judgment, decree, order, or statute creating or governing such fiduciary relationship, and if, in the case of cofiduciaries, the trust company procures the consent of its cofiduciafies to such investment. (c) Each common trust fund established hereunder shall be treated as an entity separate and distinct from the fiduciary relationships participating therein~ No fiduciary in administering a participating fiduciary relationship shall be required to make any apportionment or allocation between the principal and income of this relationship different from that made for the common trUst fund. No * * * participating fiduciary relationship, nor any person having an interest in that relationship, shall have or be deemed to have any ownership in any particular property of the èommon trust fund,' but each * * * partici- pating fiduciary relationship shall have a proportionate undivided int&est in the fund and its income; and the ownership of all property of the common trust fund shall be in the trustee of the fund. (d) This section shall apply to fiduciary relationships now* in existence or hereafter established, whether the same be revocable or irrevocable. The superintendent, at his direction, may make an examination' of any common trust fund established hereunder at the times and to the extent a~ he may deem advisable. The provisions of the Corporate Securities Law shall nOt apply to the creation, administration, or termination of common trust funds, nor to participation therein. Amended Stats 1991 ch 419 § 1 (AD 1693). Collateral Referencea: Cal Jur 3d (Rev) Guardianship and Conservatorship § 192. 194. ARTICLE I General Provisions [Chapter 13.5] Collateral References: Cal Jur 3d (Rev) F.stoppel and Waiver § 41. CHAPTER 14 Transmission of Money Abroad Collateral References: Cal Jur 3d (Rev) Consumer and Borrower Protection Laws § 147. § 1800. Legislative intent; Legislative findings and declarations (a) It is the intent of the Legislature in enacting this chapter to ~*otect the people of this state, from being victimized by unscrupulous practices by persons receiving money for transmission to foreign countries and to establish a minimum level of fiscal responsibility, and corporate integrity for all entities engaging in the business of receiving money for transmission to foreign countries without regard to the method of transmission. (b) The Legislature finds and declares that California has a large and diverse po~uiation many of whom are concerned with the financial plight of people remaining in the countries which they left. Many of these people are not familar with the varied and intricate financial systems of this state and due to Recinning in 1992. 26 iia1k~ indicate changes or additions. indicate omissions. 11 Rn Cl PAGENO="0138" 134 ~`FINANC1AL CODE § 1800.4 .~ language barriers and other obstacles do not have access to entities offering legitimate money transmission services. In an effort to transmit money to their. 2friends and relatives, these persons give their money to persons under the precept that the money or its equivalent will be immediately transmitted to the designated foreign country. .The money is frequently misappropnated or~ never transmitted. The victims of these practices are generally not Aware of the law enforcement services available to help them, thus this unlawful conduct goes unreported. . . .. * Added Stats 1989 ch 1196 sec 2. . **` Former Sections: Former * 1800 was renumbered § 1800.3 Stats 1989 ch 1196 sec I. Cross References: Failure to perform specified acts on receipt of money for transmission to foreign countries: Pen C 1 500. Collateral References: Review of 1989 Legislation. 21 Pacific LI 364. § 1800.3. License requirement; ApplicAtion of chapter `: . (a) No person shall engage in the business of receiving money for the pUrpose of transmitting the same or its equivalent to foreign countries without first obtaining a license from the superintendent. . . (b) This chapter shall not apply to any of the following: (1) A bank, the deposits of which are insured by th~ Federal Tieposit Insurance Corporation or its sUccessor, or any foreign (other nation) bank which is licensed under Article 3 (commencing with Section 1750) Ot Chapter 13.5 or which is authorized under federal law to maintain a federal agency or federal branch office in this state. (2) A trust company licensed pursuant to Section 401 or a national association authorized under federal law to engage in a trust banking business. (3) An association or federal association, as defined in Section 5102 the deposits of which are insured by the Federal Savings and Loan Insurance Corporation or its successor. . - (4) Any federally or state chartered credit union the member accounts of which are insured or guaranteed as provided in Section 14858.!. (5) An industrial loan company or thrift and loan company, as defined in Section 18003, the investment certificates of which are insured by the Federal Deposit Insurance Corporation or its successor~ . § 1800 renumbered and amended Stats 1989 ch 1196 § 1. . . `,* Amendments: 1989 Amendment: Substituted the section for the former section., § 1800.4. ConditIons for exemption from licensure of receipt of money by' telegraph, company * * (a) The receipt of money by an incorporated telegraph company, or its agents, for immediate transmission by telegraph to foreign countries shall be. exempt from licensure under this chapter. until July 1, 1990, provided each of the following conditions is satisfied. (1) The company has applied before February 1, 1990, to the superintendent for licensure under this chapter. * (2) The company, and its agents, shall comply with and be subject to all applicable provisions of this chapter. . * * Beginning in 1992. (1 Rn C) Italici Indicate changes or additions. ~ indicate omlstlons. It 21 PAGENO="0139" 135 * §1800.4 PINANCIAL CODE (3) The company directly, or through agents, on or before February .1, 1989, * received money for immediate transmission by telegraph to foreign countrks. * (b)The superintendent may extend the licenSure exemption period provided in subdivision (a) once for up to 60 days for an applicant Incorporated telegraph compatly in the event that the supèrintehdent is unable to àpptoi'e or deny the application before July 1, 1990, provided that the applicant incorporated telegraph company shall continue to comply with paragraphs (1) to (3), inclusive, of subdivision (a) during the extension petiod. Added Stats 1989 cli 1196 sec 3. Collateral References: Review of 1989 Legislation. 21 Pacific Ii 364. § 1800.5. Definitions 0 For the purposes of this chapter: (a) (1) "Receiving money for transmission" means receiving money for the purpose of transmitting the same or its equivalent to foreign countries~ * * (2) Except as otherwise provided in paragraph (3), "receiving money for * transmission" does not include selling any check, draft, money order, travelers check, or other instrument (whether or not negotiable) for the transmission or payment of money. (3) "Receiving money for transmission" includes the sale by a person, either directly or indirectly through an agent, of any check or draft which: (A) Is drawn by the person; * (B) Is drawn on, or is payable through or at, an office of a bank located in a foreign country; (C) Is denominated in a foreign currency; and (D) Is not designated on its face by the tetm "money order" or "traveleti check" or by any substantially similar term. (b) "Transmission money" means money received in this state b~r a lIcensee for transmission to a foreign country, or any equivalent Into which the monCy is converted, from the time the money is received for transmission to a foreign country until the time the transmission of the money in accordance with the agreement of the licensee with the customer is completed, or, if the transmis- sion is not completed, until such time as the money is repaid to the customer. (c) "Agent" means any person whom a licensee has appointed a~ its agent with authority to receive transmission monCy on behalf of the licensee, provided that the licensee becomes liable for the transmission of the transmis- sion money at the time when the transmission money is received by the person. However, "agent" does not include any officer or employee of the licensee when acting as such at an office of a licensee. (d) "Licensee" means any corporation licensed pursuant tø this chapter. (e) For the purposes of Section 1802.2, 1803.5, and 1804 the following terms shall have the following meanings: * :(1) "Control" has the meaning set forth in ~Cction 700. (2) Officer has the meaning set forth in Section 33057 Amended Stats 1989 cli 1196 sec : Amendments: 1989 Amendment: (1) Added subdivision desgnation (aXi); (2) redesignated former ~ubd (a) to be subd (aX2); (3) substituted "paragraph (3)" for "subdivision (b)' in subd (aX2); (4) redesignated former ~ttbd tieginning in 1992, 28 Italics indicate changes or additions ``S Indieste ominsinn,. (1 rin C) PAGENO="0140" 136 ~FINANCIAL CODE `~ 1~01 (b) to be subd (a~3) and subds (bXl)-(bX4) to be subds (aX3XA)-(aX~XD); (5) substituted "person" for license" both times it appears in subd (a~3); (6) deleted former subd (c); (7) redesignated fonnersubda (d) and (e) to be subds (b) and (c); and (5) added subda (d) and (c) § 1800.7. Findings on characters of designated persons " (a) As used in this section, "designated person" means any agent, any applicant, the officers, directors, and controlling persons of any applicant or agent, and the directors and officers of the controlling persons of any applicant or agent. ` (b) For the purposes of Sections 1802.2, 1803.5, and .1804, each Iii' the following applies: . (1) The superintendent may, in the absence of the credible evidence to the contrary, presume that designated persons are each of good character and sound financial standing. (2) The superintendent may find that a designated person is not of good character if that person has done any of the following: I (A) Been convicted of, or has pleaded nob contendere to, any crime involving an act of fraud or dishonesty; (B) Consented to or suffered a judgment in any civil action based on cohduct involving an act of fraud or dishonesty. (C) Consented to or suffered the suspension or revocation of any professional, occupational, or vocational license based upon conduct involving an act of fraud or dishonesty. (D) Willfully made or caused to be made in any application or report filed with the superintendent or in any proceeding before the superintendent, any statement which was at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact, an has willfully omitted to state in any application or report any material fact which was required to be stated thcrein~ (E) Willfully committed any violation of, or has willfully aided, abetted, counseled, commanded, `induced, or procured the violation by any other person of, any provision of this division or of any regulation or order issued under this division. (3) Paragraph (2) shall not be deemed to be an exclusive list of grounds upon which the superintendent may find that a designated person is not of good character. Added Stats 1989 ch 1196 sec 5. Collateral References: . Review of 1989 Legislation. 21 Pacific LI 364. § 1800.9. Conditions that may be imposed on authorization, approval, lken~e or order The superintendent may impose on any authorization, approval, license, ~r order issued pursuant to this chapter any conditions that he or she deems * reasonable or necessary to the public ihterest. * Added Stats 1989ch 1196 sec 6. * Collateral References: Review of 1989 Legislation. 21 Pacific LI 364. ` §1801. Fees (a) Fees shall be paid to, and collected by, the superintendent, as follows: Beginning in 1992. 11 Rn Cl italics indicate changes or additions. ``` indicate omissions. PAGENO="0141" 137 ~ 1801 FINANCIAL CODE (I) The fee for filing with the superintendent an application for a liôense is fii'C thousand dollars ($5,000). (2) The fee for filing with the superintendent an application for authorization to appoint an agent is seventy-five dollars ($75). This paragraph shall become inoperative as of July 1, 1991. (3) The fee for filing with the superintendent an application for approval to acquire control of a licensee is three thousand five hundred dollars ($3,500). (4) The fee for filing with the superintendent an application for approval .to establish a branch office of a licensee is.two hundred fifty dollars ($250). (5) The fee for filing with the superintendent an application for approval to establish a branch office of an agent is fifty dollars ($50). S (6) The fee for filing with the superintendent an application for extension of an approval to establish a branch office is one hundred dollars ($100). (7) A licensee shall pay to the superintendent annually on or before July 1, a licensee fee of two thousand five hundred dollars ($2,500). (8) A licensee shall pay to the superintendent annually on or before July .1, one hundred twenty-five dollars ($125) for each licensee branch office. (9) A licensee shall pay to the superintendent annually on or before July 1, twenty-five dollars ($25) for each agent headquarter office and each agent branch office. (10) Whenever the superintendent examines a licensee or any agent of a licensee, the licensee shall pay, within 10 days after receipt of a statement from the superintendent, a fee of four hundred dollars ($400) per day for each examiner engaged in the examination plus, if it is necessary for any examiner engaged in the examination to travel outside this state; the travel expenses of the examiner. . . S S (b) (1) Each fee for filing an application with the superintendent shall be paid at the time the application is filed with the superintendent. * S. (2) No fee for filing an application with the superintendent shall be refundable, regardless of whether the application is approved, dehiCd, or withdratvii:- (c) The superintendent shall, not later than Jánuaiy 1, 1991, submit recóm- mendations to the Legislature for the collection after July 1, 1991, of mt~t1eys in an amount that may be necessary to replace fees authorized by paragraph (2) of subdivision (a). S S 55 Added Stats 1989 ch 1196 sec 8. Former SectIons: Former § 1801, similar to the present section, was repealed Stats 1989 ch 1196 sec 7. Collateral References: . S Review of 1989 Legislation. 21 Pacific Li 364. . *. 5 5 . S § 18O1.1~ Assessment levy on licensees . . . .. Each fiscal year the superintendent shall levy an assessment on a pro rata basis on those licensees which at any time during the preceeding calendar year received transmission money. The total assessment levied on all of those licensees shall be in an amount which, when added to the fees that..the superintendent collects during the fiscal year the assessment is levied, is sufficient to meet the expenses of the superintendent in administering this chapter and to provide a reasonable reserve for contingencies. The basis of the apportionment of the assessment among the licensees assessed shall be the leglnning in 1992. 30 iMlks indicate changes or additions. `` indicate omIssions. II Pbs C) PAGENO="0142" 138 FINANCIAL CODE § 1802.2 proportion that the amount of transmission money received by the lictnsee bears to the total amount of transmission money received by all licensees as shown by the reports of licensees to the superintendent for the preceding calendar year, as required by Section 1807. The assessment rate shall be fixed from time to time by the superintendent but shall not exceed one dollar ($1) per one thousand dollars ($1,000) of transmission money received by the licensee. The superintendent shall notify each licensee by mail of the amount levied against it. The licensee shall pay the amount levied within 20 days. If payment is not made to the superintendent within that time, the superintendent shall assess and collect, in addition to the annual assessment, a penalty of 5 percent of the assessment for each month or part thereof that the payment is delinquent. This section shall not become operative until July 1, 1990. Added Stats 1989 ch 1196 sec 9. operative July 1, 1990. Collateral References: Review of 1989 Legislation. 21 Pacific Li 364. § 1802. Application for license (a) An application for a license shall be in writing, under oath, and in a form prescribed by the Superintendent of Banks. It shall contain the name and address of the applicant, and of every officer and director thereof'., The application shall also contain any other information the superintendent may require. (b) No person other than a corporation may apply for or be issued a license. (c) Notwithstanding Section 1819, all licenses issued prior to January 1, 1985, to noncorporate persons shall be automatically revoked on June 30, `1985. Until June 30, .1985, the fee for filing an application for a license shall be waived if a person which controls the applicant is a noncorporate person which held a license on December 31, 1984. . Amended Stats 1989 ch 1196 sec 10. . Amendments: 1989 Amendment: (1) Amended the third sentence of subd (a) by (a) substituting any" for "auch:'; and (b) deleting as after information and (2) deleted the former fourth sentence of subd (a) § 1802.2. Grounds for approval of license If the superintendent finds, with respect to an application for a license: (a) That the applicant has adequate capital as specified in Section 1814 to engageS in the business of receiving money for transmission and, that the financial condition of the applicant is otherwise such that it will be saf~ and sound for the applicant to engage in the business of receiving money. (b) That the applicant, the directors, and officers of, and any person which controls the applicant, and the directors and officers of any person which controls the applicant, are of good character and sound financial standing. (c) That the applicant is competent, to engage in the business of receiving money for transmission. (d) That the applicant's plan for engaging in the business of receiving money for transmission affords reasonable promise of successful operation. (e) That it is reasonable to believe that the applicant, if licensed, will engage in the business of receiving money for transmission and will comply with all Reginning in l992. 11 FIn CJ Italics indicate changes or additions. `~ Indicate omissions. ~3i PAGENO="0143" 139 § 1802.2 PINANCIAL CODE appliôable provisions of this chapter and of any regulation ~ order issued under this chapter, the superintendent shall approve the appllcatioh. If,' after notice and a hearing, the sUperintendent finds otherwise, the superintendent shall deny the application. ` § 1803 renumbered and amended Stats 1989 ch 1196 ~ II. Amendment.s: 1989 Amendment: (1) Deleted subdivision designation (a) at the beginning; (2) redesignated former tuixis (aXl)-(aX5) to be subds (a).(e); (3) added "as specifled in Section 1814" in aubd (a); (4) aubetituted "of~oOd character and" for "not lacking in integrity and are or' in aubd (b); and (5) deleted fornstr subd (b). Collateral References: . See suggested form following former § 1803. § 1802.6. TransferabHity; Assignability The license is not transferable or assignable. § 1805 renumbered Stats 1989 ch 1196 sec 18. § 1802.7. Issuance of license If the application is approved by the superintendent he or she shall, upon the payment of the license fees, issue and deliver to the applicafit .a license to engage in business in accordance with this chapter. § 1804 renumbered and amended Stats 1989 ch 1196 § 16. Amendments: 19R9 Amendment: Added "or she". § 1802.8. Consent appointing superintendent to receive service of process (a) Before any applicant is issued a license the applicant shall file With the superintendent, in the form required by the superintehdent, an irrevotable consent appointing the superintendent to receive Service of any lawful process in any noncriminal judicial or administrative proceeding agahist the person, that person's successor, executor, or administrator, which arises tthder this chapter or any regulation or order issued under this chapter after the consent has been filed. (b) Service of process after consents have been filed pursuant to this section shall have the same force and validity as if personally served on the person. (c) Service may be made by leaving a copy of' the process at any office of the superintendent, but the service is not effective unless (I) the party making the service, who may be the superintendent, immediately sends notice of the service and a copy of the process by registered or certified mail to the party served at his or her last address on file with the superintendent, and (2) an affidavit of compliance with this sectiofl by the party making service is filed in the case on or before the return date, If any, oi any furthei' time that the court, in the case of a judicial proceeding, or the administrative agency, In the case of an administrative proceeding, allows. (d) Any consent filed pursuant to this section shall be* deemed to have appointed the superintendent and any Suôcessor from time~tó-time in officC. Added Stats 1988 ch 431 § I, as § 1803.5. Renumbered and renumbered Stats 1989 ch 1196 § 14. Amendments: . 1989 Amendment: (1) Substituted "chapter" for "article" ~ftér "under this" both times it appears In as~bd fleginninl In 1992, italics indicate changes or additions. ~ indicate omissions. 32 11 Fin C) PAGENO="0144" 140 FINANCIAL CODE 4 1A03.S (1); (2) substituted "any further time that" for "such further time as" after "date, If any,. or'! Is~ ~ubd (~ and (3) deleted the provisions or after pursuant to in subd (d) I its § !803;'Contract `téquired for appointment or continuation as agent No licensee shall appoint or continue any person as an àgeñt, unless the licensee and the person have madea written contract *hich ~ontaifls t~cth `Of the following provisions~ . ` . ` ` `. `` (a) That the licensee appoints the person as its agent with authority torecCive transmission money on behalf' of the licensee (b) That the person make and keep accounts correspondence memôrandum~, papers, books, and other records as the superintendent by regulation or Ordei requires and preserve the records for the time specified by the regiiIatiOrt.oi~ order. * .. I * (c) That all funds, less fees due agents provided for and expressly set forth, received by the person from the receipt of transmission money on behalf of the licensee shall be trust funds owned by and belonging to the person from whom they were received until the time that directions have been given by the licensee or its agents for payment abroad of the remittance and funds provided. for the payment. (d) Any other provisions that the superintendent may find to be necessary to. carry out the provisions and purposes of this chapter. (e) This section shall not apply to any writteil contract between alicenseé and an agent appointed by the licensee prior to February 1, 1989, unless'the superintendent, in his or her sole discretion, determines that compliance with this section is necessary and appropriate. For purpose of this subdivision only, "licensee" means an incorporated telegraph company which existed on February 1, 1989 or any wholly owned incorporated subsidiary. of~ that' telegraph company. ,. . . . . Added Stats 1989 ch 1196 sec 12. . .. ` Former Sections: ,. . . . Former § 1803 was added by Stats 1984 ch 917 § 3.5; and renumbered § 1802.2 Stats 19R9 ch 1196 sec 11,. Collateral References: . . - Review of 1989 Legislation. 21 Pacific Li 364.. . § 1803.5. Appointment of agent. (a) Except as provided in subdivision (b), no person shall act as an agent of a licensee, or act in any other similar capacity,.and no licensee shall appoint another person to act as an .agent, or to act in any other similar capacity, for. the receipt of . transmission money on behalf of, that licensee without, first obtaining the authorization of. the superintendent. .. . (b) (1) Any person appointed as an agent by a licensee before February 1, 1989, may continue to act as an agent for that licensee, without the original appointment having been authorized by the superintendent as provided in this section. However, the licensee shall .notify the superintendent by March 31,. 1990, of all agents appointed by'the licensCe prior to February 1, 19~9.. The superintendent may thereafter issue an' order revoking Or suspending any agent appointed prior to February 1, 1989, as provided by this section. With respect to any person appointed as an agent by a licenseC oil or after February 1, 1989, and before January 1, 1990, the licensee shall comply with the requirements for approval set' forth in this section onor before March 31,' fleginning in 1992, ft Fin Cl italics indicate chan~e~ or additlônt. `` Indicate otnttlons. PAGENO="0145" 141 § 1803.5 FINANCIAL CODE 1990. However, the application fee othehvise required for the application shall be waived. This limited category of agents may contihue to serve a~ an agent of the licensee for 45 days after filing the application with the superintendent but in no event beyond May 15, 1990, without approval of the application by the superintendent under subdivision (d) (2) Any incorporated telegraph company which had more than 1,000 agents on February 1, 1989, or awholly owned subsidiary of that telegraph company, either of which applies for licensure under this chapter, shall notify the superintendent at the time of application, ot, if the application was filed prior. to January 1, 1990, shall notify the superintendent not later than February 1, 1990, of any agent who has been an agent with that company continuously for at least five years prior to February 1, 1989. Any agent that has been with that telegraph company continuously for at least five years prior ~o Feblitary 1, 1989, may, from the time the license is issued by the superintendent, continue to act as an agent (or that cómpány without the original appointment having been authorized by the superintendent as provided in this section. The superintendent may thereafter' issue an order revoking or suspending any agent appointed by that company who has been an agent with the company continuously for at least five years prior to February 1, 1989, as provided by this section. (c) An application for the appointment of an agent shall be submitted by a' licensee for each proposed agent, shall be in writing, under oath, and in a' form prescribed by `the superintendent. The application shall contain that information which the superintendent may require. (d) If the applicatiOn for the appointment of an agent is hot' apprOved or denied within 45 days after the, application is filed with the superintendent, the application shall be deemed to be approved by the superintendent as of the first day after the 45-day period. For purposes of this subdivision, an application for the appointment of an agent is deemed to be filed with the superintendent at the time when the complete application, including any amendments or supplements, containing all the information in the form required by the superintendent, is received by the superintendent. The superintendent may disapprove the application for the appointment of an agent by a licensee if the superintendent finds any of the following: (1) That the operations and financial condition of the licensee indicate that the licensee is not competent to appoint the proposed agent to recCive transmission money and to supervise the proposed agent. (2) That the proposed agent, any person who controls the proposed agent, and any director or officer of the proposed agent or of any person who controls the proposed agent, if any, are not of good character or of sound financial standing. ` ` (3) That the proposed agent is not competent to engage in the business of receiving money for transmission. 0 , (4) That it is reasonable to believe that `the proposed agent, if it becomes an agent o1 a licensee, will not comply with all applicable provisions of this chapter and of any regulation or order issued under this chapter. (e) An agent of a licensee shall not appoint a subagent to receive transmission money. ,*. ` (1) Each licensee shall be liable as a principal for the transmission of the fleginning in 1992. 34 italics indicate changes or additions * indicate omissions. (1 FIn C) PAGENO="0146" 142 FINANCIAL CODE ~ 1R04 transmission monCy at the time when the transmission money is receiv&1 b~ -the agent. . . .. (g) The superintendent may Issue an order revoking or suspending ~any authorization issued pursuant to this section or revoking authority to continue any agent appointed prior to February 1,' 1989, if, after a hearing, ,the superintendent finds any, of the following: ` (1) The agent has violated this chapter or any regulation adopted by the superintendent under this chapter. / . . .. (2) Any fact or condition exists which would be grounds for denying an application for authorization under subdivision (d).' ` (3) The agent is conducting its business in an unsafe manner. (h) (1) If the superintendeht finds that `an~r of the factors ~et forth In subdivision (g) is true with r~pec~'to any `agent and that it is necessary for the protection of the public interest that the superintendetit immediately' suspend or revoke the authori~ation issued pursuant to this section, the superintendent may issue an order `suspending or revoking the authorization issued pursuant to this section. " . (2) Within 30 days after an order is iSsued pu1~uant to paragraph (I), any licensee to whom the order i~ issued or any agent or former agent with respect to whom the order was issued may file with the superintendent an application for a hearing on the order. If the superintendent fails to comméncC `a heating within 15 business days after the application is filed with the superintendent, (or within a longer period of time agreed to by a licensee, agent, or formCr' agent) theorder shall be deemed r~scihded. Within 30 days' after the heating the superintendent shall affirm, modify, or' rescind the order. Otherwise the order shall be deemed rescinded. The right of any licenste to which ~.n orde1~ has been issued under paragraph (1) or of the agent or fotmer agent With' respect to whom the order Was issued to petition for jUdicial review of the' order shall not be affected by the failure of the licensee, or the agent or former agent to apply to the superinttndent for a hearing on' the order puiSu~flt to this paragraph. . . ` `r ` .1.: (i) Section 1805 shall apply to the establishment of a branch office in thiS §tate by an agent of a licensee and Section 1805.5 shall apply to the relocation of a branch office in this state by an agent of a licensee. " ` ` Added Stats 1989 ch 1196 sec 15. ` ` `` ` Former SectIons: Former § 1803:5, relating to applicants convicted of crimes in~'oIvrsg fraud or dishonesty, s)M added Statt 1982 ch 1570 § 3 and repealed Stats 1989 ch 1196 sec 13. ` . Former § 1803.5 was added Stats 1988 ch 431 sec I and renumbered § 18t12.8 Stats 1989 ch 1196 *ec 14. Collateral Reference,: Review ol 1989 Legislation. 21 Pacific Li 364. ` ` - § 1804. Acquiring control of licensee (a) No person shall, directly or indirectly, acquire control of a licensee unleSs the superintendent has first approved in writing of the acquisition of control. An application to acquire control of a licensee shall be in writing, under oath, and in a form prescribed by the superintendent. The application shall contain that information which the superintendent may require. (b) The superintendent shall not approve the application unless the superin- tendent finds, all of the following: ` -` Beginning in 1992,' 11 Fin Cl Italics Indicate changes or idditions. ``a Indicate ómlnslont. PAGENO="0147" 143 §1804 FINANCiAL CODE (1) The applicant and the officers and directors of the applicant are of good character and sound financial standing. (2) The applicant is competent to engage in the business of receiving money. for transmission. (3) It is reasonable to believe that, if the applicant acquireS control of the licensee, the applicant will comply with all applicable provisions of this chapter and any regulation or order issued under this chapter. (4) The applicant's plans, if any, to make any major change in the business, corporate structute, or management of the licensee are not detrimental to the safety and soundness of the licensee. (c) For the purposes of subdivision (b), the superintendent may find an applicant's plan to make major changes in the management of a licensee is detrimental to the licensee if the plan provides for a person who is not of good character to become a director or officer of the licensee. The grounds specified in this subdivision shall not be deemed to be the only grounds upon which the superintendent may find, for the purposes of subdivision (b), that an applicant's plan to make a major change in the management of a licensee is detrimental to the licensee. (d) If it appears to the superintendent that any person is violating or failing to comply with this section, the superintendent may direct the person to comply with this section by an order issued over the superintendent's official. seal. (e) Whenever it appears to the superintendent that any person has committed or is about to commit a violation of any provision of this section or of any regulation or orderof the superintendent issued pursuant to this section, the superintendent may apply to the superior court for an order enjoining the person from violating or continuing to violate this section or that regulation or order, and for other equitable relief as the nature of the case or interests of; the licensee, the controlling person, the creditors or shareholders of the licensee or controlling person or the public may require. (f) The superintendent, may, for good cause, amend, alter, suspend, or revoke any approval of a proposal to acquire control of a licensee issued pursuant to this section. (g) There shall be exempted from the provisions of this section any transaction which the superintendent by regulation or order exempts as not being comprehended within the purposes of this section and the regulation of which he or she finds is not necessary or appropriate in the public interest or for the protection of a licensee or the customers of a licensee. * Added Stats 1989 ch 1196 sec 17. Former Sections: Former § 1804 was renumbered § 1802.7 Stats 1989 ch 1196 sec 16. - Collateral References: Review of 1989 Legislation. 21 Pacific LI 364. § 1805. Establishment of branch office (a) For the purposes of this section "branch office" means any office in this state, other than the headquarters office of a licensee or agent, at which the licensee receives money for transmission to a foreign country, either directly or through an agent. . (b) A licensee shall not establish a branch office without first obtaining the approval of the superintendent. . . Reginning in 1992. 36 ilelies indicate changes or additions. `` indicate omissions. it Fin CI PAGENO="0148" 144 FINANCIAL CODE § 1807 (c) An application to establish and operate a branth office shall be in writing and in a form prescribed by the superintendent. The application shall contain that information which the superintendent may require. (d). The superintendent ~haII deny an a~plicatIoh to estáb1i~h z~nd opCratC A branch office *hCre the Opetatibns or financial conditioft of the licetisét frbf the agent. are not satisfactory. (e) In case all application to establish and operatt a branch office i~ not th~nkd Or approved by the superintendent within 60 days after the appllcatldh i~ fild with the superintendent, or, if the superintendent extends the period ~i1h1tl which the superintendent may act,within the extended period, the A1,pllcatitti shall be deemed to be approved by the superintendent as of the first day hfter the 60-day period or the extended period, as the case may be; i~ For purposes of this subdivision, an app'ication to establish and operate a branch office shall be deemed to be filed with the superintendent at the tiniC when the complete application, including any amendments or supplemeiitsi containing all the information in the form required by the superintendent, is received by the superintendent. . .. ~. . (I) The approval of an application for authority to establith and operate a branch office shall be revoked by operation of law with respect to any branch office which the applicant does not establish and operate, as the case may be, within one year after the date of approval by the superintendent. However, for good cause on written application, made before the approval is revoked, the superintendent may extend the approval for additional periods not in excess of one year. .. . (g) Not less than 60 days prior to discontinuing the operation of a branch office, a licensee shall provide the superintendent and the public with written notice of the discontinuance in the manner the superintendent directs; This subdivision does not apply to the discontinuance of a branch office of an agent if the discontinuance of the branch office results from termination of the agency relationship. Added Stats 1989 ch 1196 sec 19. Former Sections: , . Former § 1805 was Added by Stats 1963 ch 2052 6, effective July 25, 1963. Amended Stats 1981 ch 61 § 12, effective June 16, 1981; Stats 1984 ch 917 § 4, and renumbered § 1802.6 Stats 1989 ch 1 l?6 s~c 18. Collateral References: ` . Review of 1989 Legislation. 21 PacifIc ii 364. § 1805.5. ChangIng location of branch office A licensee shall not change the location of a branch office without notifying the superintendent and the public in the manner as the superintendent dirt~t~ at least 60 days before the date of the proposed relocation. For purposesof' this section, "branch omce" has the meaning specified in subd~vision(a),of' Section 1805. Added Stats 1989 ch 1196 sec 0. Coliateril References:' Review of 1989 Legislation. 21 Pa~iflc Li 364. § 1807. Reports.: (a) Each licensee shall, not more than 90 days after the close of each of its fiscal years or within such longer period as the superintendent may, by regulation or order specify, file with the superintendent a report containing all of the following: - fle~inning in 1992, 11 FIn Cl . ifalk, indicate ~hanges or additions. ```indláte o,dláion,. .7 PAGENO="0149" 145 § 1807 rir'uiis~..siti# `~~~J*J,-# (1) Financial statements `(including balance sheet, income statement, state' ment of changes in shareholders' equity, and statement of changes in financial position) for, or as of the end of, that fiscal yeart verified by two of the licensee's principal officers. The verification shall state that each of the officers making it has a personal knowledge of the matters in the report and that each of them believes that each statement on the report is true. (2) The current address of the headquarters office and each branch office of the licensee and each agent at which the licensee receives transmission money in this state. For the purposes Of this paragraph, a branch office has the meaning set forth in subdivision (a) of Section 1805. (3) The name and business address of each person which acted as an agent of the licensee during the last quarter of that fiscal year in this state, and if the person is no longer an agent of the licensee, the date on which the relationship terminated. (4) Such other information as the superintendent may, by regulation or order, require. (b) Each licensee shall, not more than 45 days after the end of each quarter (except the fourth quarter of its fiscal year), or within such longer period as the superintendent may by regulation or order specify, file with the superin- tendent a report containing all of the following: (I) Financial statements (including balance sheet, income statement, state- ment of changes in shareholders' equity, and statement of changes in financial position) for, or as of the end of, that fiscal quarter, verified by two of the licensee's principal officers, in the manner described in paragraph (1) of subdivision (a) of this section. (2) The current address of the headquarters office and each branch office of the licensee and each agent at which the licensee receives transmission money in this state. (3) The tiame and business address of each person which acted as an agent of the licensee during the quarter in this state, and if such person is no longer an agent of the licensee, the date on which such relationship terminated. (4) Such other information as the superintendent may by regulation or order require. (c) Each licensee shall file with the superintendent such other reports as and when the superintendent may by regulation or order require. Amended Stats 1989 ch 1196 sec 21. Amendments: . . - 1989 Amendment: Substituted (I) subd (a)(2) for former subd (aX2); and (2) subd (bX2) for former *ubd (b)(2). . § 1808. Examination of business of licensee or agent (a) The superintendent may at any time and from time to time examine the business of any licensee or any agent of a licensee in order to ascertain whether that business is being conducted in a lawful manner and whether all moneys received for transmission are properly accounted for. (b) The directors, officers, and employees of a licensçe or agent of a licensee being examined by the superintendent shall exhibit to the superintendent, oh request, any or all . of the licensee's accounts, books, correspondenàe, mCmo- randa, papers, and other records and shall otherwise facilitate the examinatiofl so far as it may be in their power to do so; Amended Stats 1989 ch 1196 sec 22. fleginning in 1992. 38 italics indicate chanrs or additions. `` indicate omissions. . ft Fin Cf `5 PAGENO="0150" 146 FINANCIAL CODE ~ 1810.5 Amendments: 19*9 Amendment: (1) Substituted "that", for "such" after "ascertain whether" in aubd (a); and (2) deleted former subd (c). ` § 1809. ReceIpt forms; Filing with superintendent; Violation of QCtiOn Penalty; Liability for acts of agents (a) Each licenseC shall file with the superintendent a certified copy of every receipt form used by it or by its agents for money received for tranSmission. No licensee or its agents shall uSe any receipt, a certified copy of which has not first been filed with and approved by the superintendent. (b) If a receipt is required by this chapter to be in English and another language, the English version of the receipt shall govern any dispute concern- ing the terms of the receipt. However,' any discrepancies between the English version and any other version due to the translation! of' the receipt from English to another language including errors or ambiguities shall be construed against the licensee or its agent and the licensee or its agent shall be liable for any damages caused by these discrepancies. (c) Any licensee violating the requirements of this section shall be subject to a fine of fifty dollars ($50) for each violation. (d) if any licensee or its agent uses a receipt form, a certified copy of which has not first been filed with and approved by the superintendent, the licensee shall be liable for the acts of its agents whether or not the licetisee authorized the agent to use that forth. Amended Stats 1989 ch 1196 sec 23. Amendments: . ` 1989 Amendment: In addition to making technkal chanles, (1) added subd (b); and (~) redesignated former subds (b) and (c) to be subds (c) *nd (d). § 18105. Refunds ,, (a) Every licenseeor its agent shall refund to the customer within IO days of receipt of the customer's writtcn request for a refund any and all moneyS received for transmission to a. foreign country unless any, of the fol1ow~ng occurs: . , (I) The funds have been forwarded within 10 days of the date of' receipt. (2) Instructions have been given committing an equivalent amount of money to the person designated by the customer within 10 days of the date of the receipt of the funds from the customer. (3) The customer instructs the `licenSee tO transtnit tbe' `filoneyS `ht a time beyond 10 days. If the customer gives instructions as to when the nioneyS shall be forwarded or transmitted and the moneys have not `yet beeui forwarded or transmitted, the lic~ensee or its agent shall refund the custothCr's money within 10 days of receipt of the customer's written request for a refund. (b) A receipt shall be provided by a licensee Or its agent to a t~ustoti1ei'whIc~h shall be made' available to `the customef ih English and in `the la~tguage principally Used by that licenset or that hgent to advertise, solicit; of negotiate, `either ofally or in writing, at that office if othef than English. The re~eij3t .shall either include or have attached a cOnspk~Uoti5 statement in Etiglish and in the language principally `used by the licCnsee of that agent to advertise, solicit, or negotiate, either orally or in writing at that office if other than English in a size equal to at least 10-point bold type, as follows: II Fin C) Peginning in 1992, Ita~lct indicate changes or additions `` indieste omlationt, PAGENO="0151" 147 §1810.5 FINANCIAL CODE RIGHT TO REFUND "You, the customer, are entitled to a refund of the money to be tt~nsihitted as the result of this agreement if (name of licensee ot' its agent) does not forward the money received from you within 10 days of the date of its receipt, or dots not give instructions committing an equivalent amount of money to the person designated by you within 10 days of the date of the receipt of the funds from you unless otherwise instructed by you. If your instructions as to when the thoneys shall be fot'warded or transmitted are not complied with and the money has not yet been forwarded Or transmitted you have a right to a refund of your money. If you want a refund, you must mail or deliver your written requeSt to (name of licensee or its agent) at - ~mai1in~ address of licensee or its agent). If you do not receive your refund1 you may be entitled to your money back plus a penalty of up to $1,000 and attorney's fees pursuant to Stction 1810.5 of the California t~inancial Code." (c) A cause of action under this section may be brought in small claims court if it does not exceed the jurisdiction of that court, or in any other appropriate court. The customer shall be entitled to recover each of the following: (1) Any and all moneys received for transmission to a foreign county, plus any fees and charges paid by the customer. (2) A penalty in an amount not to exceed one thousand dollars ($1,000). The court shall award the prevailing party costs and attorney's fees. Added Stats 1989 ch 1196 sec 24. § 1814. Maintenance of tangible shareholders' equity (a) Except as provided by subdivision (c), each licensee shall at all times maintain tangible shareholders' equity determined to be adequate by the superintendent of at least two hundred fifty thousand dollars ($250,000). (b) "Tangible shareholders' equity" means shareholders' equity minus intan- gible assets as determined in accordance with generally accepted accounting principles. (c) All licensees licensed pursuant to this chapter before January 1, 1990, are not subject to this section until January 1, 1991. Added Stat, 1989 ch 1196 sec 23. Collateral References~ Review of 1989 Legislation. 21 Pacific LI 364. § 1815. Requirements for receipts for refunds; Display requirements for rates of exchange (a) The receipt presented to each customer for each transaction pursuaht to subdivision (b) of Sectiofi 1810.5 shall clearly state the rate of exchange fót the particular transaction, the amount Of commission or fees, and the net exchange after all fees and commissions have been deducted. The receipt shall also state the total amount of currency presented by the customer and the total amount to be delivered to the beneficiary designated by the customer. These disclosures shall be in English and in the same language as that principally used by the licensee or any agent of the licensee to advertise, solicit, ór negotiate, either orally or in writing, at that office if other than English. . . - (b) All window and exterior signs concerning the rates of exchange shál Reginnln~ in 1992. 40 isolics indicate changen or additions. `` Indicate nmlsslonn. fl Fin Cl PAGENO="0152" 148 FINANCIAL CODE § 1823 clearly state in English and in the saihé language principally used by the licensee or any agent of the licensee to advertise,' solicit, or negotiat~, either orally or in writing, at that office if other than English, the rate of exchange for exchanging the currency of the United States for foreign currency. All interior signs and all advertising, if rates are quoted, shall clearly state the rates of exchange for exchanging the currency of the United States for foreign currency and shall state all commissions and fees charged on all transactions. (c) At each office of each licensee and each agent, there shall b~ disdosed in those offices in this state the information specified in subdivision (b) in English and in the same language principally used by the licensee or any agent of the licensee to advertise, solicit, or negotiate, either orally or in writing, with respect to receiving money or its equivalent for transmission to a foreign country at that office. ~. .. (d) If thecustomer does not specify at the time the currency1 is presented to the licensee or its agent the country to which the ctlrrency is to be transmitted, the rate of exchange for the transaction iS not required to be set forth ~n the receipt., Added Stats 1989 ch 1196 sec 26. Collateral References: Review of 1989 Legislation. 21 Pacific LI 364. § 1819. Re'ocation or suspension of license The superintendent may revoke or suspend any license issued pursuant to this article, if, after a hearing, he or she finds any of the following: (a) The licensee has violated any provision of this chapter of' any mit of regulation adopted by the superintendent. (b) Any fact or condition exists which, if it had existed at the time of the original application for the license, would be grounds for denying an appIica~ tion for a license under Section 1802.2. (c) The licensee is conducting its business in an unsafe manner.. (d) The licensee has failed to obey a final order issued by the superintendent. Amended Stats 1989 ch 1196 sec 27. Amendmenta: 1989 Amendment: (I) Substituted "or she finds any of the following" for "finds that" in the Introductory clause; (2) substituted periods for "; or" at the ~nd of subds (a)-(c); and (~4) amended subd (b) by aubstltuting (a) "the" for "auch" before "license,"; md (b) "Section 1802.2" for "gection I80~". § 1823, Effect of violAtion Of chapter Every person who violates or fails to comply with this chapter, or `who, without complying with this chapter, represents that he or she is authorized to receive, or who solicits or receives, money or the equivalent for transmis- sion to a foreign country, shall upon. conviction be filled not thore that) fifty thousand dollars ($50,000) or shall be imprisoned in the state prison, or in a county jail for not more than one year, or be punished by both the fine and imprisonment. Amended Stats 1989 ch 1196 *ec ~8. Amendment, , , 1989 Amendnient: In addition to making technical changes, substituted "shall upon costviction be fined not Re~inning In 1992, II Rn C3 Italics Indicate Changes or additIons. ~ Indicate omiMlons. PAGENO="0153" 149 § 1823 FINANCIAL COD1~. more than fifty thousand dollars ($50,000) ot shall be imprisoned in the state prison, or In a county Jail for not more than one year, or be punished by both the fine and imprisonment" for"Is guilty of afeIony~. § 1826. Fine for violation of chapter * Any person who violates this chapter shall be liable to the people of t~é State of California in an nctiofl brought by the superintendent for a civil penalty not to exc~eed one thousand dollars ($1,000) for each violation or, in the case of a continuing violation, one thousand dollars ($1,000) for tach day or part thereof during which the violation continues. Amended Stats 1989 ch 1196 sec 29.. Amendments: 1989 AmendmEnts Substituted the section for the former section. § 1827. Receipt by agent aftet notice of suspension or revocation of licensee's license or order taking possession (a) No agent of a licensee who has actual notice that the superintendent has suspended or revoked the license of a licensee or that the superintendent has issued ~an order taking possession of the property and busineSs of the licensee, shall receive any transmission money on behalf of the licensee. (b) If any agent of a licensee, after first having actual notice that the superintendent has suspended or revoked the license of a licenset or that the superintendent has issued an order taking possession of the property and business of the licensee, receives any transmission money on behalf of the licensee, the agent shall be jointly and severally liable with the licensee for the timely and proper delivery of transmission money received by the agent of the licensee. Added Stats 1989 ch 1196 sec 30. Collateral References' - Review of 1989 Legislation. 21 Pacific LI 364. AP~TICLE I Geheral Provisions [Chapter 14A] Collateral Referencet: Cal Jur 3d (Rev) Consumer and Borrower Protection Laws ~ 90. § 1901. Extra examination and attention; Charge EAtra examination and attention; Charge Whenevtr, in the judgment of the superintendent, the condition of any bank, trust company, or foreign banking corporation renders it necessary or expedient to make an extra examination or to devOte any extraordinary atteñtioh to Its afl'air~, he or ~he has the authority to make any necessary extra examinations and to devote any necessary extra attention to the conduct of its affairs and to charge for such extra services an amount not exceeding two hundred dollars ($200) a day for each examiner engaged in the examination of such bank:: .0 Amended Stats 1991 ch 1091 § 29 (AB 1487). . . . § 2051. Agreement of purchase and sale; Provisions (a) The selling and purchasing banks shall entet into an agreement of purcllaSe and sale which shall contain all the terms and conditions of the sale and contain * * * proper provision for the payment of all liabilities of the selling bank, or of the business, branch, or branch business sold, and proper / provision for the assumption by the purchasing bank of all fiduciary and trust obligations of the selling bank, or business, branch, or branch business sold. fle8lnnlng in 1992. 42 billet indicate changes or additions. ~* indicate omissIons. 11 Flu C) PAGENO="0154" 150 EXHIBIT B PAGENO="0155" 1585 Continental Currency Transfer, Inc 1108 East 17th Street Santa Ana, CA 92701 1494 Dollar America Exchange Inc. 2000 Wyatt Drive, Suite 16 Santa Clara, CA 95054 1377 Esteva & Co~any, Inc. 833 Market Street, Suite 705 San Francisco, CA 94103 Far East Forms Co.~any Approved, not licensed 401 West A Street San Diego, CA 92120 1536 Fiesta X-Change, Inc. 631 South Main Street Santa Ana, CA 92703 President: Julio Greene Vice Pres: Pedro Kroeschroder Asst. VP-Manager: Gregg Hendrell licensed) President/CFO: Aebrosio B. Mangilit, Jr. Director: Richard V. Wheeler Director: Marlene S. Alindogan President: Benjamin P. Palea Gil Director/CFO: Diosdado 0. Lagman Secretary: Roeeeel R. Garcia Chairman: Irving Barr President: Fred Kanik Exec. VP: Allan Morinose President: Ben Javellana Secy/Treas: Julie Hernandez Chairman: Jess 1. Esteva President: Maria Stark Exec. VP: Corazan Esteva Doyle President: Jose S. Montana, Jr. Corporate Secy.: Lorenzo M. Miranda, Jr. President: Carlos Alfonso Mendoxa Secretary: Marco Antonio Mendoza Treasurer: Maria 0. P. Mendoza TELEPHONE (212) 640-5100 (212) 640-5094 FAX (212) 640-1273 DIRECTORY OF TRANSMITTERS OF MONEY ABROAD Septenter 26, 1991 OFFICER CONTACTS NO. LICENSEE/ADDRESS 15201MA American Express Travel Related Services Co., Inc. Manager License: Ann Schepp World Financial Center Asst. Secretary: Bernadette Ocanpo 200 Vesey Street New York, NY 10285-4775 American Express Travel Related Services Co., Inc. 6200 South Quebec, Suite 440 Greenwood Village, CO 80111 1374 A~aro's Foreign Exchange 233 Sansome Street, Suite 502 San Francisco, CA 94104 1375 Associated Foreign Exchange, Inc. (AFEX) 201 Sansome Street San Francisco, CA 94104 BPI Express Remittance Corporation (app. not 805 Third Avenue, 28th Floor New York, NY 10022 1642 Century Finance and Remittance Centers, Inc. 6420 Wilshire Boulevard Los Angeles, CA 90048 Director MoneyGram: Floyd Pierce (303) 799-2202 Sr. VP, Gen. Manager: Mr. G. .0. McNary FAX (303) 799-2333 VP/Cust. Service 6 Agent Querations: Dan Carrlngton President: Alaine M. GallanoS (415) 362-0426 Treasarer: Alexander 0. Martin (415) 781-7683 (212) 644-6700 FAX (212) 7525969 C;' (213) 651-4207 FAX (213) 651-1554 or 655-4653 (714) 569-0300 (408) 748-9711 (415) 392-1261 (818) 982-2382 (714) 542-8768 PAGENO="0156" NO. LICENSEE/ADDRESS 1631 Foreign Exchange Limited (FOREX) 415 Stockton Street San Francisco. CA 94108 1646 Giromex, Inc. 426 West Second Avenue, Suite A Escondido, CA 92025 1622 Global Telegraph Corporation 1068 Sixth Avenue San Diego, CA 92101 1447 Golden Asian Express Co. * Inc. 108 North Ynez Avenue, Suite 128 Monterey Park, CA 91754 1378 Grace Foreign Exchange Corporation 870 Market Street, Room 317 San Francisco, CA 94102 1552 LBC Mabuhay USA Corporation 362 East Grand Avenue South San Francisco, CA 94080 1430 Maniflo Money Exchange, Inc. 1442 Highland Avenue National City, CA 92050 1540 Odena Foreign Exchange Corporation 870 Market Street Suite 501 Mailing Address: 1755 Landess Avenue Milpitas 95035 1619 Orlandi valuta (formerly Telegrafos) 560 South Spring Street Los Angeles. CA 90013 1627 PCI Express Padala, Inc. 215 South Vermont Los Angeles, CA 90004 DIRECTORY OF TRANSMITTERS OF MONEY ABROAD Septenter 26, 1991 OFFICER CONTACTS Director/Pres/CEO: Ralph Rino Director/Ex. vP: Michael Eteinads President: Juan Carlos Lebrija President: Rruce Reid Secretary: Orlando L. San Juan President: Sy un PresICEO: Cyrus T. Santa Maria VP/Treasurer: Luisa J. Santa Maria President: Isidro Protasio Pres/Gen. Mgr: Florino Agpaoa President: Jaiee Odena Treasurer: Anita Odena Cruz President: Paolo Orlandi Secretary: Cynthia Genera Vice President: Harm Meijer, Jr. President: Jose Colayco, Jr. TELEPHONE (415) 397-4700 (415) 398-4610 (619) 739-9497 (619) 696-9797 (213) 572-6580 (415) 956-2860 (415) 873-0750 (619) 474-1547 (408) 263-1934 (213) 623-7376 FAx (213) 612-9552 C;' PAGENO="0157" DIRECTORY OF TRANSMITTERS OF MONEY ABROAD Septendser 26 1991 0. LICENSEE/ADDRESS .446 Pan Asian Currency Exchange Corporation 1939 Alue Rock Avenue San Jose CA 95116 1379 Pekao Trading Corporation 2 Park Avenue New York, NY 10016 639 RIA Telecoennunications, Inc. 488 Madison Avenue New York. NY 10022 1453 Regent Forex, Inc. 628 North Vereont, Suite 10 Los Angeles. CA 90004 South Aeerican Express, Ltd. approved not licensed 84-09 Roosevelt Avenue Jackson Heights, NY 11372 Thoeas Cook Currency Services, Inc. (foreerly Deak) 156 West 56th Street, 5th Floor New York, NY 10019 t373TMA Tho.as Cook, Inc. 3 Independence Way Princeton, NJ 08540 Urban Forex Approved, not licensed 1040 Collusa Vallejo, CA 94590 1616TMA Western Union Financial Services, Inc. One Lake Street I~per Saddle River, NJ 07458 President: Jesus 0. Mercado Secretary: Mary Jane Menses Treasurer: Marilyn Mercado President: Marcos H. Melo Vice President: Gloria I. Halo Secretary: Gladys H. Ruiz General Counsel, Aeericas: Susan Sweeney President: Arkadi Kuhleann Sr. VP: Steven Kirson Pres/CEO: Charles J. Bench VP/Secy/Controll: Anthony J. Home OFFICER CONTACTS President: Anita L. Papa Vice Pres: Ernesto Pacifico President: Leszek Kropiwnicki VP/Secy: Jan Szewczyk TELEPHONE (408) 251-1250 (212) 684-5320 FAX (212) 779-8348 Direct., Chair/Board: Jorge F. Piano (212) 754-1750 CEO/President: Jesus Perez Santalla Treas./Exec. VP: Carlos Rivera send corres. to-Gen. Mgr.: Osualdo F. Valencuela (213) 662-5155 (718) 507-2333 (718) 507-8760 (212) 969-7726 or (212) 969-7731 FAX (212) 969-7725 (609) 987-7313 (609) 987-7200 Exec. VP: Redenter R. Visaya N Asst. Gen. Counsel: Gerald L. Popovsky N. (201) 818-5284 Mgr. Agent Program: Fred 0. Palsnd,o ~ PAGENO="0158" 154 EXHIBIT C PAGENO="0159" § 33.4300 Purpose and Intent It is the purpose and intent of the Council that the operation of Money Exchange Ilouses, as defined by this Code, should beregulated to protect the general safety and welfare of the public and to prevent false or misleading advertising and consumer fraud. (Added 1-25-88 byO-17018N.S.) § 33.4301 Definitions For the purpose of this Division, the following words and phrases shall mean: (a) Money Exchange house. ~Money Exchange hlouse, also called Ca.sa tIe Cambio,~ means any space, room, enclosure or structure used or intended to be used for conducting the business of exchanging or dealing in currency of the United States ofAmerica, Mexico or other foreign countries, and the use of which is available to the public,or any portion of the public; provided, however, that this section shall not apply to anybank, savings and loan association or credit union chartered under the ~ of the State of California or the United States or to any business regulated by the Financial Code of the State of California. (b) Currency. Currency' means any coined money, banknotes or other paper money as are au- thorized bylaw and do in fact circulate from hand to hand as the medium of exchange. (Added 1-25-88 i~yO-J7018N.S.) § 33.4302 Permit Required It shall be unlawful for any person, association, partnership, or corporation to engage In, conduct, carry on, or permit to be engaged in, conducted, or carried on, in or upon any premises within The City of San Diego, the operation of a Money Exchange House without first having filed an application and received a permit for such operation from the Chief of Police. The permit required hereby shall be in addition to any other police permit or business tax certificate required under this Code. (Added 1-25-88 by 0-17018 N.S.) § 33.4303 Application An application for a Money Exchange house per- mit accompanied by an investigation lee ahall be made to the Chief of Police on forms provided. The forms shall contain the exact address of the pro- posed business and the following information for all owners, partners, or corporation olTicers. (a) The full true name and any other names used by the applicant; (IRS) §33.4306 (b)The present address and telephone numberof the applicant; (C) Each residence and business address of the applicant for the three (3) years immediately preceding the date of the application, and the inclu- awe dates of each such address; (d) Applicant's age, date of birth, weight, height, color of eyes and hair; (e) Driver's license and social security number; (I) Applicant's business, occupation and employ- ment history for the three (3) years Immediately preceding the date of application, and the inclusive dates of each such address; (g) All criminal convictions, except traffic viola- tions, and a staCement of the dates and places of such convictions; (h) The Chief of Police shall require the applicant to furnish fingerprints for the purpose of establish- ing identification. (Added 1-25-88 by 0-1 7018N.S) § 33.4304 lasuance or Denial of Permit Except as otherwise provided in this Code, upon completion of the background investigation of the applicant, the Chief of Police or designated repre- sentative shall issue the permit unless: (a) The applicant has knowingly made false or misleadingstatements of a material factor omission of a material fact in the application; or (b) The operation of the business as proposed pursuant to the issuance or renewal of a permit will not be in compliance with the building, fire, health, and zoning or sign requirements as set forth in this Code; or (c) The applicant has had a similar permit or license previously revoked or denied for good cause within one (1) year Immediately preceding the date of the filing of the application; or (d) The applicant has, within five (5) years imme- diately preceding the date of filingof the application, been convicted in a court of competent jurisdiction of any of the following offenses: (I) Any offense involving the use of force or vio- lence upon the person of another; or (2)Anyoffense of theft, embezzlement, or receiv- ing stolen property. (Added 1-25-88 by 0-1 7018N.S.) § 33.4305 Permit Not Transferable Each permit issued hereunder shall be issued to a specific person, partnership, or corporation to con- duct business as a Money Exchange Ilouse at a spe- cific location. In no event shall the permIt be trans- ferred from one owner to another or from one location to another without prior approval of the Chief of Police. (Added 1-25-88 byo-17018NS.) § 33.4306 Regulatory Fee In accordance with the policy of The City of San Diego, set forth itt SectIon 33.0104, the coats of the MC 3.115 155 SAN DIEGO MUNiCIPAL CODE DIVISION 43 Money Exchange houses (Added 1-25-88 by0-1 7018 N.S.) PAGENO="0160" required enforcement of laws regulating Money Exchange houses which are police regulated busi- nesses shall be borne by the applicant, licensee or mittee and current rosts shall be reflected in the required for such license or permit. ~ Where a fee or a sum of money is referred to in this Division, the exact amount of such fee or sum of money shall be found in the City Clerk's Composite Rate Book. (Added 1-25-88 by0.17018NS.) § 33.4307 Permit Renewal A valid permit issued pursuant to the trosistotis of this Code must be renesved annually upoti the following terms and conditions: (a) An application for renesval accompattieil by the regulatory fee shall he completed anti subntittcil to the Chief of Police of The City of San Diego thirty (30) days prior to the expiration of the existing permit. (ii) fan application for renewal is not fileil wit liin the time sperifleit by subsection (a) liereiti, the tier mit shall exl)ire one (1) year after the (late of its issuance or la.st renewal. (Added 1-25-88 1)1-0.17018 N.S.) § 33.4308 Regulations (a) All Money Exchange houses shall be open to police inspection during all hours of operations. (b) The business shall be carried on only in the building dhsignated in the permit. (c) The permit or a copy thereof, certified by the issuing authority, shall be displayed on the premises where it can be easily read. (d) All advertising arid signs concerning the rate of exchange must include any and all commissions or fees charged by the business establishmemtt. All interior signs concerning rates and commission mtist be posted at a height of five feet (5') with print size no less than two-thirds (2/3) as large as the largest number or letter modified. All interior and exterior sigits shall reflect the true net rate of exchange and both the buy and sell rate of exchange. There can be no hitlden charges to any customer. (e) All exterior signs must comply with existing City of San Diego sign trdinances and must be prop- erly permitted. (f) All transactions or exchanges must be recorded on forms approved by the Chief of Police. The form will be pre-printed and consist of an origi- nal and two copies.The original mustbe given to the customer, one (1) copy retained by the Money Exchange house for three (3) months and a copy mailed to the Chief of Pollee on a weekly basis. The form must contain the following information: (1) Name, address, and phtne number of busi- ness; (2) Date and time of transactit'n; 1) Total amount of money excnanged; ~1) A complete summary of the exchange by denomination received and paid out; (5) Rate of excliatige at the time of transaction. (Antended 5-22-89 by 0-17302 N.S.) § 33.4309 Revocation of Permit In addition to the grounds enumerated m Section 33.0401. the Chief of Police may revoke a Money Exchange llouse permit based on a finding that the permittee or atiy agent or representative thereof is not operating in full compliance with all provisions of this Divisioti; or in lie event the person holding a permit is convicted of anyof those offenses ettumer- ated in Section 33.4304. ~Added 1-25-88 liyo.17018N.S.) § 33.4310 Penalties Any persoti violating any of the provisions or fail- ing to comply svithi any of the requirements of this Division shall be guilty of a misdemeanor anti iipoii conviction thereof. shall be punishable by a fine 01)1 to exceed five hiuiidrc'ih dollars ($500) or by impri- sottmeot in the county jail for a period of not nor thiatu six (6) months or by both such Bite and impri- sonmetit. (Added 1-25-88 li,t'0-17018N.S.) § 33.4311 SeverabIlity If any provi.siouu, clause, sentence, or paragraph of this Division or the application thereof to any person or circumstances shall be hehil ituvahid, such invalid- ity shall not affect the other provisions or applica- tions of the provisions of this Division which can be given effect without thte invahiul provision or applica- tion, and to this end the provisions of thu_s Division are hereby declared to be severable. (Added 1-25-88 hyo-17018NS) §33,4306 156 SAN DIEGO MUNICIPAL COl)E .. MC 3-116 PAGENO="0161" 157 Statement of Ronald J. Eatinger Chief, Criminal Investigation Division Houston District Internal Revenue Service Before the Permanent Subcommittee on Investigations Senate Committee on Governmental Affairs Current Trends in Money Laundering * February 27, 1992 I I 54-650 0 - 92 - 6 PAGENO="0162" 158 STATEMENT OF RONALD 3. EATINGER CHIEF, CRIMINAL INVESTIGATION DIVISION HOUSTON DISTRICT INTERNAL REVENUE SERVICE BEFORE THE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS FEBRUARY 27, 1992 Mr. Chairman, I am Ron Eatinger, the Chief of the Internal Revenue Service's Criminal Investigation Division in Houston, Texas. I would like to thank you and the Subcommittee for the opportunity to testify today concerning money laundering activities. I. OVERVIEW `1 For a number of years, the IRS Criminal Investigation Division in the Houston District has been in the forefront of government law enforcement efforts to combat money laundering. Drug dealers and money launderers who participate in this underground economy also invariably fail to report this cash flow on their income tax returns, or fail to file tax returns at all. We believe that these and other IRS criminal enforcement activities in the illegal source income area contribute both directly and indirectly towards the Service's goal to encourage voluntary compliance with the Internal Revenue laws. PAGENO="0163" 159 2 II. "GIROS" OPERATIQN~ During the past several years, the Criminal Investigation Division has identified and tracked the emergence of an industry in Houston which is in large part a front for Colombian money launderers. The businesses which comprise this industry are known within the Houston community as "giros" houses, meaning a business that wire transfers money. These "giros" businesses are usually two or three person operations, occupying only a couple hundred square feet of office space. Often these "giros" operate under a name that identifies the business as a telecommunication company, paper company, insurance company or travel agency. Because of the use of such common industry names, the mere identification of a "giros" business is the first problem encountered by law enforcement. We estimate that there are approximately 80 "giros" businesses in Houston, Texas. Further, it is known that "giros" businesses exist and operate in other major metropolitan areas throughout the United States. In early 1991, due to our growing concern that large sums of dollars were being laundered through the "giros" industry in Houston, Texas, and the fact that ~ Currency Transaction Reports were being filed by ~ "giros" business for transactions involving U.S * currency of more than $10, 000, the Criminal Investigation Division requested the Secretary of Treasury to issue a Geographical Targeting Order. The authority to issue PAGENO="0164" 160 3 Geographical Targeting Orders was granted to the Secretary in 1988 which authorizes Treasury to establish additional record keeping and reporting requirements in designated geographical areas. Under this authority, a Geographical Targeting Order was issued for a sixty-day period during mid-1991, and required "giros~ businesses to file Currency Transaction Reports for all wire transfers involving U.S. currency of $100.00 or more. The Criminal Investigation Division implemented, monitored and enforced this Geographical Targeting Order. As a result of this Geographical Targeting Order, evidence was gathered that large sums were,- in fact, being laundered through the "giros" industry in Houston, Texas. Specifically, based upon the intelligence available to the Criminal InvestigatiOn Division, it is estimated that in 1991, in excess of $100,000,000. in U.S. currency moved through the "giros" industry in Houston, Texas. Of this $100, 000,000, there is evidence that strongly suggests that in excess of $75,000,000 emanated from narcotic trafficking. This $75,000,000 is of grave concern to law enforcement authorities in Houston, Texas. However, even more alarming to us is the intelligence which discloses a 300% increase in the amount of U.S. currency being moved through the "giros" industry from 1989 to 1991. This dramatic increase suggests how easy it is to use this relatively new method for laundering dollars. - PAGENO="0165" 161 4 It is our belief that the money laundering activity currently proliferating within the "giros" industry in Houston is a direct result of a high level of compliance with federal currency reporting statutes within the traditional banking community. Simply put, this high level of compliance within the traditional banking community has forced the money launderers to establish new routes to move their illicitly derived proceeds: the emergence of the "giros" industry. The schemes utilized by certain "giros" within the industry in Houston to launder dollars and evade federal currency transaction reporting requirements are simple, yet effective. Typically, two schemes are used to launder money through "giros" businesses. These schemes are used to wire transfer dollars to Colombia, conceal from law enforcement the identity of the money launderer, and to disguise the transaction so as to preclude prosecution for violating a federal currency statute. Descriptions of the two money laundering schemes being utilized now follow: III. ThE AIDING AND ASSISTING IN "SMURFING" ACTIVITIES. The "giros" knowingly allow narcotic traffickers to structure, or "smurf", several currency transactions in amounts of $10,000 or less. No Currency Transaction Report is filed. Further, the "giros" do not request proof of identity from the PAGENO="0166" 162 5 individuals making these U.S. currency transactions. As a result internal records at the "giros" business show fictitious names as the remitters of the U.S. currency. These false internal records not only conceal the money launderer's identity, they also conceal the criminal-structuring violation. This conduct of willful blindness or deliberate ignorance on the part of the "giros," if proven beyond a reasonable doubt, is a criminal violation of 31 Usc 5324. Given the close physical proximity of these "giros" businesses to. one another in Houston, two money launderers - operating fron one vehicle - can easily "smurf" $250,000 in U.S. currency in less than one hour's time. Money launderers involved in "smurfing" activities such as this earn from 2 percent to 4 percent of the gross amount wire* transferred to Colombia. Thus, if they "smurf" $250,000, they could earn between $5,000 to $10,000. IV. TuE FABRICATION OF INTERNAL RECORDS BY THE "GIROS" BU~SINESS~ This scheme involves the receipt by the "giros" business of large sums of U.S. currency, for example $500,000, from a narcotics, trafficker. The' "giros" then prepares, for `example,: sixty invoices all in. amounts of less' than $10, 000 using fictitous names to cover the receipt of the $500,000. This PAGENO="0167" 163 6 conduct, if proven beyond a reasonable doubt, is a criminal violation of 31 Usc 5313 and 5322. After the receipt of the dollars, the "giros" business deposits the U.S. currency, less its commission of usually 7 percent to 8 percent, to an account maintained at a traditional banking institution. The "giros" business then instructs the traditional banking institution to wire transfer the dollars to Colombia. The traditional banking institution will file a Currency Transaction Report, as required by 31 USC 5313, with the Internal Revenue Service. This Currency Transaction Report will disclose the receipt of U.S. currency from the "giros" business. The paper trail envisioned by Congress when enacting the federal currency reporting laws ends here, however, because the "giros" business will not file a Currency Transaction Report. Moreover, if the "giros" business is questioned by law enforcement authorities as to its receipts of the U.S. currency, false internal records reflect U.S. currency transactions -- all in amounts of $10,000 or less -- from fictitious individuals. Therefore, ostensibly the business has no legal requirement to file a Currency Transaction Report. These internal "giros" business records, in most cases, cannot be proven false beyond a reasonable doubt, and therefore no criminal charges can be brought. PAGENO="0168" 164 7 V. SUMMARY In summary, the money laundering currently occurring through the "giros" industry in Houston is significant. Further, this money laundering activity is proliferating at an alarming rate. This rate of increase is attributable to the effectiveness of the money laundering schemes used by "giros" businesses to evade current federal reporting laws. Mr. Chairman, this concludes my prepared statement. At this time, I would be glad to answer any questions that you or other members of the Subcommittee might have. PAGENO="0169" 165 Statement of Dennis E. Crawford Chief, Criminal Investigation Division Los Angeles District Internal Revenue Service Before the Permanent Subcommittee on Investigations Senate Committee on Governmental Affairs Current Trends in Money Laundering February 27, 1992 PAGENO="0170" 166 STATEMENT OF DENNIS B * CRAWFORD CHIEF, CRIMINAL INVESTIGATION DIVISION LOS ANGELES DISTRICT INTERNAL REVENUE SERVICE BEFORE THE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS FEBRUARY 27, 1992 Mr. Chairman, I am Dennis Crawford, the Chief of the Internal Revenue Service's Criminal Investigation Division in Los Angeles, California. I would like to thank you and the Subcommittee for the opportunity to testify here today concerning non-bank financial institutions such as check cashing establishments and currency exchange houses, many of which law enforcement agencies believe are used by the multi-billion dollar drug trade to launder and repatriate illicit drug funds. I. OVERVIEW The Internal Revenue Service has committed resources and expertise to law enforcement's collective efforts directed against the proliferation of drugs and the corrupting effects of drug money in this country. Our most significant contribution to these efforts has been to uncover and trace the financial transactions which are the lifeblood of drug organizations. These financial transactions involve both the costs of conducting a drug business and the distribution of the lucrative profits. We believe that IRS criminal enforcement PAGENO="0171" 167 2 activities in the illegal sector have both directly and indirectly encouraged voluntary compliance with Internal Revenue laws. From our long investigative experience we know that one important `ingredient for the financial viability of these drug organizations, whether they are repatriating the "costs of goods sold" to buy more product or siphoning off the profits, is the capability of disguising the nature and flow of their voluminous currency transactions on a regular basis. These disguises must appear legitimate or must hide completely the movement of the money. Plain and simple, this is the nature of "money laundering". Over the past decades, laws and regulations have been enacted and implemented which have made it more difficult for drug organizations to disguise or keep secret their financial transactions. For instance, the Bank Secrecy Act and other laws have been amended to ensure significant jail time, increase monetary penalties, and provide for the forfeiture of drug assets and profits. These laws are now having the intended effect on those who previously used this Country's financial institutions to move billions of drug dollars throughout the Country and offshore. However, experience tells us that when law enforcement begins to gain the upper hand in certain areas, the drug trade finds new and different PAGENO="0172" 168 3 ways to circumvent our laws. II. DEFINITION OF A "NON-BANK FINANCIAL INSTITUTION" One of those ways, growing in popularity now that established financial institutions are tightening controls, is the use of "non-bank financial institutions" for similar services that financial institutions once provided. These "non-bank financial institutions" include check cashing businesses, currency exchange houses (also known as "cambios"), electronic money transmitters, and domestic and international courier services. Even established local businesses, such as liquor stores and travel agencies who perform financial services such as those described above, operate as "Non-bank financial institutions." "Non-bank financial institutions" offer an array of financial services for a price, i.e., the physical transportation of cash, the conversion of currency to monetary instruments, the electronic transmission of funds, the cashing of checks for the public, the converting of dollars to foreign currencies, and the exchanging of dollars for marketable commodities, like precious metals, airline tickets, or food stamps. IRS's Los Angeles Criminal Investigation Division has been able to successfully investigate and prosecute money launderers who used~ "non-bank financial institutions", in whole or in part, in their illegal~ activities. I will summarize PAGENO="0173" 169 4 below a few of the more recent cases. I think it's important for me to comment on them and the investigative issues they represented. III. CASE INVESTIGATION~#1 Investigation #1 was a domestic money laundering organization comprised of at least thirteen identified participants. At the top of the organization was a Colombian national, based in Miami, Florida. He used a Los Angeles-based money laundering network to move some of his drug proceeds into East Coast bank accounts controlled by foreign currency exchange houses. The money ended up offshore in Central and South America. In just over a year, the Los Angeles network laundered approximately $7 million, using various methods to place funds into the banking system and move them to the East Coast and offshore as quickly as possible. The organization in California was controlled by a man who did not fit the typical profile of a drug money launderer. He was a 71 year old attorney and a law school graduate. He was known and respected, both in his profession as an international lawyer, and in his private life as a good neighbor and president of his church parish. On the day we executed search and arrest warrants, this venerable and respected member of the community PAGENO="0174" 170 5 stood at his bedroom door as entry was made, and fired a 9mm handgun at the entry team, injuring two Los Angeles Police Department SWAT Team officers who accompanied us on the raids. He was mortally wounded by return fire. Among other items of documentary and physical evidence, the raids netted $450,000 in seized money and 61 shoulder weapons and handguns from the deceased attorney's residence. The money laundering scheme used front businesses into whose business bank accounts were deposited millions of dollars of drug currency. These businesses included an escrow company, a constructionfirm and a liquor store. As part of the multi- faceted laundering scheme, the "non-bank financial institution" liquor store changed the character of the money generated from the street sales of drugs by cashing checks for ordinary customers, using the drug money. The cashed checks were deposited to the liquor store business accounts, where the funds were then wire transferred to East Coast money exchange accounts. The funds were ultimately exchanged for Colombian pesos. The liquor store alone laundered $1,850,000 in drug money during the short period of time covered by the investigation. The scheme came to our attention when a bank notified the IRS of the suspicious transactions involving these accounts. We identified the network of players and gained insight into PAGENO="0175" 171 6 the inner workings only after we gained the liquor store owner's confidence using an IRS undercover agent, posing as a "crooked" bank vice president. We spent hundreds of hours doing intensive surveillance, street work, canine "alerts" on the deposited currency, and extensive analysis of the financial paper trails. As an interesting aside, the Los Angeles Daily News reported that in addition to installing heavy security around his hone, the deceased attorney kept files on money launderers and narcotics dealers, and closely followed the trial of a Los Angeles resident who had been charged with money laundering. It was believed that this was done so the attorney could keep up to date on the government's efforts to combat money laundering. IV. CASE INVESTIGATION #2 After closure of this investigation, ~jj~~g Magazine reported that by 1988 the principals in our Case Investigation #2 were moving one ton of cocaine per week, from which they grossed $4 million in income per month. ~j~g also said this was the first direct connection between Colombia's Cali Cartel and Los Angeles street gangs in the United States. "Non-bank financial institutions" were an integral part of this drug organization' s burgeoning success. PAGENO="0176" 172 7 In the late 1980's, a combined federal and local investigation focused in on two well-matched drug confederates: one, a 29 year old South American with direct links to Colombian drug traffickers, and the other, a 25 year old South Central Los Angeles man with a natural talent for business. This organization's main method for laundering money from their enormous sales of crack cocaine was to use check cashing businesses. They had already established three and were in the process of purchasing more check cashing businesses when law enforcement shut them down. During the investigation, monitored telephone conversations revealed detailed instructions being given to co- conspirators on how the check cashing businesses were to be established. These conversations, and other evidence, confirmed the belief that this organization used check cashing businesses to achieve a number of goals. One goal was to have a good cover story in case any of the participants were caught with large amounts of cash. This actually occurred when one of the organization's money runners was stopped by police who discovered thousands of dollars in his possession. He tried to explain the presence of the money by stating that it was money belonging to one of the organization's check cashing businesses for whom he worked. PAGENO="0177" 173 8 Another goal, the most obvious one, is that the organization's check cashing businesses had cash as inventory. This provided a clean and direct way to exchange drug cash for third party checks. It even generated a small profit as well. The check cashing businesses also gave these criminals a safe place to count and store their drug cash, and permitted an entre to banks where they could deal in cash without raising suspicion. The two young confederates who headed this organization were each sentenced to prison terms of life plus twenty-four years, while their five co-defendants received terms ranging from eleven to twenty years. V. CASE INVESTIGATION #3 During the mid-l980's, the principal in Case Investigation #3 was a shareholder, employee and signatory on bank accounts for a San Diego based "casa de cambio"~ "Casa de caxnbios" ostensibly exist to provide services such as exchanging U.S. dollars for Mexican pesos to aid commerce-and travel, transmitting funds domestically and abroad, selling monetary instruments, and other types of miscellaneous financial services, for a segment of the population who otherwise do not have established banks PAGENO="0178" 174 9 available to them. During a two-year period, this San Diego exchange house had deposited over $46 million into its business bank accounts. Yet, it had not filed even one Currency Transaction Report in the ordinary course of its exchange business thus implying that the entire $46 million had been taken in from customers in less than $10,000 increments. Three years later, the principal had moved Northward and opened three exchange houses in the Los Angeles area. This was when the IRS was able to penetrate his legitimate business exterior using an undercover operative with the Los Angeles Police Department, posing as a drug dealer needing a quick way to launder drug money which he wanted to use here in the United States. The principal spoke to the undercover agent of the difficulties he was having in laundering all the money the Mexican drug lords were sending his way. He also showed the agent some of his secret business records which backed up parts of his "sales pitch". While discussing with the undercover agent the types of money laundering services available, the principal made it clear that those services would not include currency deposits to domestic banks. He said he knew that law enforcement used dogs to detect the scent of narcotics on the deposited money. PAGENO="0179" 175 10 If we wished, he'd use our currency to cash checks for customers, but he said it would take several days longer to use up the cash before we could be repaid. We finally settled on a service he offered whereby our cash would be physically transported across the border and deposited into Mexican banks. In turn, we would receive checks drawn on U.S. banks from accounts controlled by the Mexican banks. Prior to taking down* the operation, the principal laundered $300,000 of our purported "drug money" in this fashion. We ultimately documented the principal's laundering business volume at about $4 million per month. VI. CASE INVESTIGATION~J4 Mr. Chairman, the final case I'll summarize today will present an industrious individual who coupled the "right contacts" with his business acumen to become one of the most successful money launderers in Southern California for a period of time. This man entered the United States in the 1980's, having left his native Peru a wanted man. After arriving in South Florida .he set up a money exchange business. He even established himself as the supposed Peruvian Chamber of Commerce. Before long he was forced to leave Florida because of mounting law enforcement scrutiny with respect to his PAGENO="0180" 176 11 banking activities. There were even indications that he had attempted to double deal Colombian drug traffickers on some financial transactions. After changing his name, he came to Southern California where he operated an investment firm, a check cashing service, a money exchange house, and an advertising company. He also created several shell corporations and opened an offshore bank account in a tax haven country. This individual provided a wide array of financial services from which he generated handsome profits. Virtually none of his activities were legal. His lifestyle and spending habits changed, and he began displaying his affluence and success. We first took notice of this individual's activities after being alerted by a bank that he appeared to be structuring currency deposits to avoid the Currency Transaction Reporting requirements. His employees visited many different bank branches on a daily basis and made interbranch currency deposits under $10,000 to his various accounts. This activity is commonly referred to as "smurfing". The IRS monitored his financial activities over a period of months, and finally an opportunity arose for us to move closer. Because of his suspicious currency transactions, a particular bank closed his accounts and stopped doing business PAGENO="0181" 177 12 with him. In searching for another bank to handle his financial activities, he approached a bank which allowed us to pose as one of its employees. Our undercover agent would pretend to service the principal's banking needs as his "private banker." It took eight months to get close enough where he finally entertained the idea of laundering illegal money for our "associates". The principal started laundering our money, and it became apparent that he was using all of his financial enterprises in one way or another. In addition to "smurfing" deposits, he also structured the purchases of cashiers checks, using false names. He gave us checks written on his various business accounts in exchange for our currency, which he noted as business expenses, like advertising and marketing research. We even discovered that his check cashing businesses opened or closed for business, day by day, based on the availability of drug currency to launder. In .f act, in setting the principal up for the final execution of arrest and search warrants, we told him we'd be coming in with a load of $500,000 in currency to launder. We later found out that after hearing this, he alerted his check cashing businesses, which were just about to close down to the public due to lack of currency, to remain open because our expected load of money was on the way. Among the items seized pursuant to our search warrants PAGENO="0182" 178 13 were numerous sets of false identifications and passports for the principal, a notebook with the full names and telephone numbers of narcotics traffickers in the United States and Colombia, lists of cashiers checks purchased, gold, precious stones, money counting machines, and cellular telephones. We also found a 1987 letter from an attorney, which was written as a response to questions raised by the principal, in which the attorney explains the provisions of the money laundering statutes, such as Title 18, Sec 1956. Once the principal finishes serving his Federal prison term he will be turned over to the Peruvian authorities to face charges from which he originally fled. VII. SUMMARY Mr. Chairman, this concludes my prepared statement. At this time I would be happy to answer any questions that you or the other members of the Subcommittee might have. PAGENO="0183" 179 PAGENO="0184" 180 S~n~i~ p ~ Suht~Q~~ ~ PAGENO="0185" 181 P~rm~n~t S~O~omm~tte~ PAGENO="0186" 182 Senate Permanent Subcommittee on Investigations EXHIBIT # ~ STATEMENT SUBMITTED BY BRIAN M. BRUH DIRECTOR, FINANCIAL CRIMES ENFORCEMENT NETWORK U.S. DEPARTMENT OF THE TREASURY TO THE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS SENATE COMMITTEE ON GOVERNNENTAL AFFAIRS February 27, 1992 Mr. Chairman and Members of the Subcommittee, I am pleased to submit this statement for the record of your hearings on trends in money laundering. The Financial Crimes Enforcement Network (FinCEN) was created on April 25, 1990, by Order of the Secretary of the Treasury, to combat national and international money laundering operations, primarily those involving the proceeds of narcotics trafficking. FinCEN provides analytical intelligence support to law enforcement and bank regulatory agencies and monitors the trends and patterns of money laundering that its analyses reveal. It supports ongoing criminal investigations and assists in the coordination of law enforcement anti-money laundering efforts. Money laundering operates to disguise the nature, origin, and beneficial ownership of the proceeds of illicit activity. It involves a series of transactions that ultimately provide the funds with a false provenance and the appearance of legitimacy. The explosion of narcotics trafficking in the 1980's has made money laundering a top law enforcement priority. PAGENO="0187" 183 The illicit drug trade in the United States annually generates many billions of dollars of criminal revenue and profits, much of it in cash. These profits are both a motivating force and a point of vulnerability for drug trafficking organizations. To use illicit profits without detection, the funds must be "laundered." All successful laundering requires integration of illicit funds into the legitimate financial system whether in this country or some other nation, and it is at that point--the placement of cash into the system--that criminally derived proceeds are most vulnerable to detection and seizure. Banks and other depository institutions have historically been a primary avenue used to launder funds and remain an area of concern; however, more recently, criminals have turned attention to alternate initial means of integrating funds into the financial system. We believe the change in attention is due in part to the increasingly high level of compliance by banks with Bank Secrecy Act reporting and record-keeping requirements, as a result of growing levels of awareness within the financial community and past enforcement efforts by the Departments of the Treasury and Justice. The level of Criminal Referral and Suspicious Transaction Reports filed on suspected attempts to launder funds and/or evade reporting requirements is increasing. Because of the increased level of scrutiny and risk of detection associated with traditional depository institutions, money launderers have shifted much of their illicit business to 2 PAGENO="0188" 184 non-traditional providers of financial services where they experience less risk of detection. These non-bank financial institutions generally fall outside the spheres of federal regulation. Non-bank financial institutions do not receive and hold checking or savings deposits. They do, however, offer many services that are substitutes for traditional "banking" relationships, such as funds transfers, check cashing, currency exchange, or sale of certain consumer-oriented monetary instruments. In addition to providing many traditional financial services, some non-bank financial institutions also offer to transport cash into or out of the U.S., use facsimile and book entry systems to transfer funds anonymously, and conduct payment transactions for customers out of the non-bank financial institution's own account. Types of non-bank financial institutions include check cashers and wire and other money transmitters that can be found in any American community, sellers of monetary instruments such as money orders and traveler's checks, and currency exchange houses, including casas de caxnbio which operate primarily along the southwest United States border. While many such organizations provide valuable financial services and may be free of any taint of illegal activity, we must recognize that any of these non-traditional entities may prove to be a fruitful avenue for sophisticated money laundering schemes - and some are used just this way. 3 PAGENO="0189" 185 These types of non-bank financial institutions are appealing to criminal customers for several reasons. Historically, they have been subject to little regulation or oversight. Many of the organizations operate without licenses; some are not even required to apply for licensing. Further, non-banks are not required to report suspicious transactions to the Treasury. Finally, and regrettably, investigators have found that the operators of some non-bank financial institutions have been willing to circumvent federal currency reporting requirements and knowingly aid criminal enterprise; this is not true of the whole industry, and estimates are difficult to make, but a serious problem does exist. consequently, non-bank financial institutions can, and frequently do, provide excellent conditions for placing illicit funds into the financial system while disguising the existence, ownership and origin of these funds. By using a non-bank financial institution, criminals are afforded a vast array of bank-like services, but avoid the risk of identification or law enforcement action which could result if they brought large amounts of cash to a bank or regulated broker-dealer for deposit or use. Southwest Border Casas de Cambio We believe that casas de cambio are the primary non-bank financial institutions used for money laundering purposes along the southwest border of the United States. Casasde cambio are PAGENO="0190" 186 currency exchange houses; they change U.S. dollars to Mexican pesos (or the reverse) for tourists and for legitimate businesses with cross-border operations. Some casas also sell money orders and cashier's checks, wire transfer customer funds, and make payments for customers from casa accounts. Some of the services provided appear to cater directly to criminal clientele seeking to launder funds. An estimated 1,000 casas operate along the southwest border of the United States. Typical casas operate out of small, one- or two-room structures adorned with hand-painted signs. Some combine their operations with other operations, such as travel agencies, limousine services, insurance brokerage firms, and gas stations. Casas have been operated out of pick-up trucks, travel trailers, storage sheds, and, at times, phone booths; others may operate like any other small business. Their localized, portable nature enables them to close down at a moment's notice, further hampering law enforcement efforts. Investigators report that a typical casa de cambio can easily launder $5 million or more per month. Some casas have reportedly laundered much larger amounts in shorter periods. We estimate that U.S. -based casas de cambio alone launder billions of dollars annually, and some casas are suspected of being operated solely for the purpose of laundering funds for large criminal organizations. Although the environment and manner in which casas operate make their methods difficult~ to investigate, some of the methods, 5 PAGENO="0191" 187 identified by law enforcement sources, that casas use to launder funds include the following: o Currency received by a casa may be wire transferred directly to another location within or outside the United States. o Cash may be deposited into the casa's U.S. or Mexican bank account and from there wire transferred through a series of accounts to a destination controlled by the customer. o South American "remittance corporations' may be used as intermediary funds transfer points prior to transferring the funds to offshore accounts or brokerages. o Casas may serve as money "brokers" to their criminal customers by accepting and depositing cash into casa- owned bank accounts, then making payments for assets, goods, or services from the casa account at the direction of the customer. Real estate or other property may be purchased in this way using nominees in order to further conceal the true owner and origin of funds. o Currency received by a casa may be transported or smuggled into Mexico for deposit into a Mexican bank. Transactions may them be conducted at the Mexican bank to convert the funds to another type of monetary instrument or to electronically transfer the funds to a 6 PAGENO="0192" 188 foreign location or back into the United States. Mexican casas may be used as intermediaries to conduct the transactions and to maintain accounts at Mexican banks. o Currency obtained from illegal activity in the U.S. nay be snuggled into Mexico to a Mexican casa which maintains accounts throughout the United States. The criminal customer may instruct the casa to settle a debt or pay for assets out of a U.S. account as needed. For example, a luxury home in Phoenix may be purchased out of a Phoenix account resulting from instructions provided to a Mexican casa. o Casas may issue cashier's checks, personal checks, money orders, or other monetary instruments in exchange for currency. These instruments may be made payable to any payee or to "bearer" as desired by the customer. o U.S. casas frequently maintain business relationships with Mexican casas and banks. Complex financial networks may be utilized to move criminally derived funds through several Mexican casas and/or banks prior to wire transferring the funds into U.S. or European accounts owned or controlled by the criminal customer. In addition, book entry systems shared by "sister" casas on both sides of the border may be used to eliminate the need for physical movement of the currency. 7 PAGENO="0193" 189 In the above cases, Currency Transaction Reports (CTR5), required to be filed by financial institutions on cash transactions over $10,000, may be either falsified or not filed by the casa; CTR5 filed by the banks identify the casa as owner of the currency. (Of course, a casa would be expected to have significant currency requirements.) Additionally, casas are required to verify and record identifying information on the purchasers of certain monetary instruments in amounts of $3,000 to $10,000 in cash. The significance of CTR filings in cases like this should not be underestimated; I discuss later in my statement the manner in which FinCEN uses CTR filings proactively. Until several months ago, most U.S. casas were not regulated or licensed, although they are subject to Federal currency reporting and record-keeping requirements. However, two southwest border states -- Arizona and Texas -- recently passed legislation requiring licensing and regulation of casas de cambio and certain types of money transmitters operating in their states. These statutes provide for a regulatory regime intended to protect legitimate consumers, as well as to provide additional tools for targeting non-banks engaging in illicit financial activity. Both statutes became effective in September 1991, and Arizona and Texas are currently in the process of implementing the statutory requirements. 8 54-650 0 - 92 - 7 PAGENO="0194" 190 Other Problem Areas This type of money laundering problem is not limited to the southwest border or to casas de cambio. Currency exchange houses along the U.S. -Canada border may offer other avenues for money laundering. Additionally, other non-bank financial service organizations, such as check cashers, money transmitters, or travel agencies that offer to wire transfer funds for customers, are also extremely vulnerable to misuse by narcotics traffickers and other criminal organizations. These organizations can all offer anonymity, avenues into the wire transfer or banking systems, little (if any) scrutiny of suspect transactions, and, among some less scrupulous operators, a willingness to circumvent currency reporting and record-keeping requirements. For example, a common laundering method using check cashers occurs when a criminal organization supplies currency to the check casher in exchange for checks received from the public. The endorsed checks are subsequently deposited into the organization's bank account. The funds can then be wire transferred to any destination without detection. This method eliminates the CTR filing by the bank in which the checks are deposited, and it effectively disposes of the bulk cash proceeds. It also aids~ the check casher by providing a convenient source of cash to use in his business and allows the operator to obtain the currency with a profit. Techniques used by telegraphic transmitters include the use of wire transfers, couriers, international bank accounts, and 9 PAGENO="0195" 191 structuring funds to avoid currency reporting requirements. In the southwest, investigators have reported that store-front "giros" (wire transfer houses) are used as a means for laundering money. These entities sometimes provide other services, such as telephone message and answering services, beepers, cellular phones, pagers, automobiles, auto insurance, property management, and property sales. According to investigators, giros primarily service Colombian money launderers. Check cashers and money transmitters do provide needed financial services to legitimate customers, especially those in low-income neighborhoods where few banks operate, and their industry organizations have begun to recognize that they are vulnerable to misuse. But, more needs to be done to halt the potential for misuse. F1nCEN Efforts FinCEN initiated a study on casas de cambio, as one of its first projects, in 1990 to assess the extent of their use in money laundering and to aid in developing strategies to combat this law enforcement challenge. As follow-up to this study, FinCEN held a conference to discuss the casas de cambio issue in June 1990. participants in FinCEN'S casas de cambio conference included experts from Federal and State law enforcement, prosecutorial, and regulatory agencies. The conference ended with a forum organized to discuss "recommendations" and "next steps" in an attempt to summarize the points raised during the 10 PAGENO="0196" 192 conference. FinCEN subsequently prepared and distributed "Issue Statements" describing the major issues identified by the group. In January 1991, FinCEN sponsored a conference on Money Transmitters. This seminar assembled investigative, prosecutorial, legislative, and regulatory personnel from throughout the nation to explore the role of money transmitters in money laundering activity. The conference followed the same approach as the earlier casa de cambio conference and produced similarly useful insights. In June 1991, FinCEN and the Arizona State Attorney General's Office co-sponsored a Southwest Border Money Laundering Conference. Conference participants included approximately 60 field level experts from Federal, State, and local law enforcement and prosecutorial agencies, as well as officials from southwest border state banking departments, the Department of the Treasury's Office of Financial Enforcement, and the Office of National Drug Control Policy (ONDCP). A summary paper, entitled Casas de Cambio and Southwest Border Money Laundering: Issues and Recommendations (December 1991), was compiled by FinCEN from this and previous conference discussions. FinCEN has been asked to conduct more of these conferences, and we agree that .they are extremely valuable and productive in coordinating~ideas, plans, and resources against the problem. Currently, we are working with the Arizona State Attorney General's Office in planning another Southwest Border Money Laundering Conference to be held during May 1992. 11 PAGENO="0197" 193 Money Laundering Conference Ideas Participants in the 1990 and 1991 conferences produced a number of ideas about ways to combat the problem of the use of non-bank financial institutions to launder money. These ideas are not all uniform or easy to implement; some raise problems of their own. But they do give a sense of the breadth of the problem and the attempts law enforcement is making to deal with it. Many conference participants believe that effective enforcement of currency reporting and anti-money laundering rules cannot proceed until non-bank financial institutions are subject to a system of uniform or similar state regulation. The regulatory framework should include a licensing program, require full disclosure of background information, and mandate record- keeping with access to records by law enforcement and regulatory officials. The record-keeping, reporting, and access provisions might well be modeled on existing Federal requirements for other kinds of financial institutions. Model state legislation has been drafted by the Arizona State Attorney General's Office, in a format to allow for easy adaption by other states. In addition, the Money Transmitter Regulators Association (MTRA) has developed a Model Legislation Outline which can be used by the states in developing uniform money transmitter statutes. Other conference participants suggested that changes to the Bank Secrecy Act might be useful, for example, to deal with mailing of currency from abroad to banks in the United States. 12 PAGENO="0198" 194 At present, lack of effective regulation allows those in the industry who want to share in the illicit monies to launder funds for criminal organizations with reduced risk. The Department of the Treasury's Office of Financial Enforcement (OFE) is becoming increasingly aggressive in enforcing Bank Secrecy Act compliance by non-bank financial institutions. Recently, a large penalty was assessed by OFE against a currency exchange house. FinCEN's Proactive Use of CTR Data FinCEN uses the CTR database, as well as other Bank Secrecy Act and currency reporting databases, to identify individuals and organizations whose reported activities suggest the possibility of illicit financial activity. Many targets identified from CTR data have been associated with various large criminal enterprises. Possible suspicious transaction patterns may be based on analyses of geographical areas, those with unnaturally heavy cash flows, types of industries or occupations (e.g., those not usually generating high levels of cash but appearing on CTR5), transaction types, or any combination of factors. From the data extracted, suspicious levels and unusual financial transaction patterns relating to specific entities are discerned and further evaluated. In some cases, data extracted from the CTR database is compared to other data sources to identify specific targets. For example, CTR5 filed by financial institutions on automobile 13 PAGENO="0199" 195 dealerships niay be compared to Form 8300 (Report of Cash Payments Over $10,000 Received in a Trade or Business) filings by those sane dealerships to identify dealers who nay be evading Form 8300 filing requirements. FinCEN also receives data from the Federal Reserve on currency receipts from and shipments to its member depository financial institutions. This data is used to identify geographical areas exhibiting cash surpluses and, ultimately, financial institutions within those areas with unusual levels of currency activity. CTR data is used in the analysis of specific financial institutions to identify possible sources of anomalous currency activity. Recently, FinCEN completed a targeting project in support of an ongoing multi-agency investigative task force focusing on drug related money laundering in a certain geographical area. Using CTR data combined with other data, FinCEN identified numerous potential investigative targets, including many suspect non-bank financial institutions. Additionally, CTR data provided valuable information on each suspect's financial activity patterns, seizable bank accounts, and associated entities. FinCEN is currently developing an artificial intelligence (Al) system to exploit fully the CTR data potential for proactively targeting criminal activity. The Al system will automatically monitor the CTR database, constantly identifying suspect activity in super-computer rapid response time. This system will also allow FinCEN analysts to link CTR data with 14 PAGENO="0200" 196 other data sources for exhaustive analysis through use of Massively Parallel Processing (MPP) technology. MPP focuses on searching and sorting large databases according to multiple, ambiguous criteria in order to identify and analyze anomalies. This technology will allow FinCEN to conduct a record-by-record search of the more than 32 million records in the Bank Secrecy Act database in a minimal amount of time. Conclusion The use of non-bank financial service providers to launder illicit money can be made more vulnerable to law enforcement against those who operate such enterprises, and against those who use them for illegal purposes. At FinCEN we have tried to act as a catalyst for initiating and coordinating efforts in helping to eliminate this trend. We will continue to monitor and study the movement of currency through non-traditional media and to help develop strategies to aid in counteracting money laundering schemes within the currency exchange and money transmitter industries. Additionally, we will continue to aid law enforcement in targeting such enterprises that are operating illegally and to support them in their ongoing criminal investigations. 15 PAGENO="0201" 197 Senate Permanent Subcommittee on Investigations EXHIBIT#_ 6 STATEMENT OF PETER G. DJINIS DIRECTOR, OFFICE OF FINANCIAL ENFORCEMENT U.S. DEPARTMENT OF THE TREASURY TO THE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS MARCH 20, 1992 Mr. Chairman and Members of the Subcommittee, the Department of the Treasury's Office of Financial Enforcement (OFE) appre- ciates the opportunity to submit this statement for the record concerning current trends in money laundering. BACKGROUND AND HISTORY Beginning in 1970, Congress, at the urging and with the support of the Department of the Treasury and other law enforce- ment agencies, enacted a succession of laws to enable law enforcement officials to detect and prosecute drug trafficking and other criminal activities which generate large amounts of illegal proceeds, and the laundering of those proceeds. The Currency and Foreign Transactions Reporting Act, commonly referred to as the Bank Secrecy Act (BSA), gives the Department of the Treasury broad authority to require financial institutions to file reports and maintain certain records that have been determined to have a high degree of usefulness in criminal, tax or regulatory investigations or proceedings. In exercising this authority, the Department of the Treasury has been acutely concerned with striking an appropriate balance between the needs of the law enforcement community and the costs and practical ability of the financial services industry to comply with these regulations. Under the supervision of the Assistant Secretary (Enforce- ment) and the Deputy Assistant Secretary (Law Enforcement), coordination of BSA compliance, enforcement, and policy making rests with OFE. OFE has the responsibility to ensure compliance with the currency reporting and recordkeeping requirements imposed on financial institutions by the Bank Secrecy Act and its implementing regulations. Successful accomplishment of this task goes beyond statutory compliance because it provides a compre- hensive data base of financial information with respect to large currency transactions and serves as the beginning point and foundation for the U.S. Government's anti-money laundering effort. OFE was created in July of 1985 and first included three (3) full-time employees. In the past, OFE supplemented its permanent staff with employees temporarily detailed from Treasury's bureaus and the bank regulatory agencies. In mid-November of 1990, as a PAGENO="0202" 198 2 result of significant increases in initiatives and responsi- bilities, Congress approved sufficient funds for six (6) additional positions which are now filled. During the last quarter of 1990, OFE suffered the departure of its entire senior management staff -- the Director, Deputy Director and Chief, Compliance Section. These three positions were also filled. As of March 1992, with seventeen (17) full-tine employees, OFE is at full complement and is in the process of expanding its International Section as well as obtaining additional details to replace those who accepted permanent positions. Throughout this tremendous turnover and growth in responsibilities, OFE continued its aggressive administration and enforcement of the BSA. Enforcement of the BSA is further facilitated through delegations from the Assistant Secretary (Enforcement) to the Internal Revenue Service (IRS), U.S. Customs Service (Customs), Financial Crimes Enforcement Network (FinCEN), the Securities Exchange Commission (SEC), and the federal bank regulatory agencies. OFE provides oversight of the IRS and Customs BSA data collection activities; provides guidance on the recordkeeping and reporting requirements of the BSA; monitors compliance with the BSA by financial institutions; and, receives referrals of alleged BSA violations from the IRS and the financial institution regulatory agencies. Further, OFE assesses civil penalties against violators when appropriate; provides training (over 50 speaking engagements each year) to law enforcement, regulatory compliance examiners, foreign law enforcement, government officials and the financial community; issues Administrative Rulings, and responds to over 1,000 requests received each year for private interpretive advice. GNRZRAL BSA COMPLIANCE BSA compliance by banks has improved each year. In 1991, almost eight (8) million Currency Transaction Reports (CTR5), IRS Forms 4789, were filed. Many (65,000) were filed on transactions which financial institutions felt were unusual enough to report as suspicious. These figures reflect the increased sensitivity of the financial community to the BSA's recordkeeping and reporting requirements. Treasury is gratified that, in the vast majority of cases, the banking industry now treats BSA compliance as standard operating procedure. Banks regularly seek guidance on complying with the BSA from OFE and the Detroit Computing Center's Compliance Review Group. Banks understand that their financial institutions will be examined by regulators; are aware of the severe potential penalties for noncompliance; and, are prepared for this scrutiny. PAGENO="0203" 199 3 In the past, traditional banks were the primary vehicles used by money launderers. However, as discussed in the testinony submitted by FinCEN, increased law enforcement efforts and the cooperation of the banks have significantly improved BSA compliance and has forced criminals to seek alterative money laundering methods to integrate illicit funds into the financial system. As Assistant Secretary for Enforcement, Peter K. Nunez, has testified before Congress in the past, and OFE represen- tatives have discussed with members of the Subcommittee's staff, money launderers have now shifted much of their illicit business to less traditional providers of financial services. These financial institutions, referred to as "nonbank" financial institutions, are designated as financial institutions under the BSA. They include currency exchanges, check cashers, issuers, sellers and redeemers of money orders and travelers checks, telegraph companies, licensed transmitters of funds and unlicensed funds transmitters such as "giros". OFE does not mean to suggest that all nonbank financial institutions are involved in illegal activity. On the contrary, many nonbank financial institutions provide a necessary and legitimate service for individuals who do not have access to, or account relationships with traditional banks. Nonbank financial institutions are required to file IRS Forms 4789, Currency Transaction Reports, on all currency transactions in excess of $10,000; Customs Form 4790, Report of the International Trans- portation of Currency or Monetary Instruments; maintain logs of purchases in currency of monetary instruments totalling $3,000 or more; and, are subject to general recordkeeping provisions. Responsibility for BSA compliance review of nonbank financial institutions has been delegated to the IRS. State licensing and regulation, if any, varies from state to state, and the sheer number of these institutions makes this responsibility very difficult for the IRS. OFE has taken significant action with respect to improving and enforcing BSA compliance by nonbank financial institutions. There are several existing mechanisms in place, several proposed regulations which are expected to be implemented in the future and legislative proposals which if enacted, will provide the necessary elements to detect and deter money laundering by or through nonbank financial institutions. In addition, OFE has held several ~ ~j~q meetings with industry representatives and participated at numerous conferences attended by nonbank financial institutions. PAGENO="0204" 200 4 AMENDMENTS MADE BY ANTI-DRUG ABUSE ACT OF 1988 Two amendments to the BSA, sections 5325 and 5326, were made by the Anti-Drug Abuse Act of 1988. Both amendments were aimed at combatting money laundering schemes designed to evade the reporting requirements. The purpose of these amendments was to deter smurfing, which is the practice of breaking up large sums of currency into amounts of less than $10,000 and engaging in currency transactions at one or more banks or nonbank financial institutions or on one or more days in an effort to prevent the bank or nonbank financial institution from filing CTR5. GEOGRAPHICAL TARGETING AMENDMENT One amendment was the geographic targeting amendment (31 U.S.C. section 5326). This amendmentallows the Secretary of the Treasury to issue an order requiring additional recordkeeping and reporting requirements by financial institutions through reduced reporting thresholds for a limited period of time in a particular geographic area. The regulations are at 31 C.F.R. 103 .26 and became effective on September 19, 1989. Treasury may issue a Geographical Targeting Order (GTO) on its own initiative or at the request of any Federal or state law enforcement agency. Any requests for geographic targeting from state and local authorities will have to be channeled through Federal law enforcement agencies in their areas to ensure that the required resources can be made available. Treasury has developed and disseminated guidelines to the IRS, Customs and several U.S. Attorney's offices which explain how requests for geographical targeting should be submitted to Treasury. These guidelines can be modified easily to accommodate requests from state or local authorities. The location of a GTO is selected based upon a determination that additional reporting, at a lower reporting threshold, is required to prevent noncompliance with the BSA. Although a GTO may include banks, the two times that Treasury has used this authority involved nonbank financial institutions. In the first GTO, Treasury required domestic wire transmitters (telegraph company agencies in a certain city) to report all transfers exceeding a designated amount or more in currency. The second GTO was issued on March 20, 1991 and targeted "giros" in Houston, Texas. These "giros" provide funds transfer services to Colombia and other South American locations. The GTO lasted from March 27 to May 25, 1991. One of the reasons the "giros" were targeted was the gross disparity between the number of CTR5 filed on the "giros" by banks and the number of CTR5 filed by "giros" on transactions reported as occurring at their PAGENO="0205" 201 5 premises. The IRS initiated and conducted several investigations as a result of information and intelligence gathered from the GTO process. The specifics of targeting orders are not considered public information, however, the Houston targeting order was disclosed following a federal lawsuit challenging Treasury's authority. The judge denied all constitutional claims of the "giro" operators and held that the statute provided Treasury with sufficient authority to conduct GTOs. A GPO requires Treasury and other Federal agencies to devote significant resources to the targeted area to train financial institutions, to enforce the orders and to analyze the data. It also may impose significant, albeit temporary, burdens upon the targeted class of financial institutions. It is Treasury's policy to ensure that a GTO is issued effectively, that is, in an area where there is evidence of money laundering or other illegal activity or where there is strong evidence that the otherwise applicable currency reporting requirements are being evaded. All GPO requests are closely scrutinized by Treasury to ensure that they provide sufficient justification for the collection of the data and will result in a comprehensive analysis of information based upon the lowered reporting threshold. KONE'I'ARY INSTRUMENT LOG - $3. 000 IDENTIFICATION RULE The second amendment is conmonly referred to as the "$3,000 Identification Rule" (31 U.S.C. section 5325) implemented by regulations set forth at 31 c.F.R. 103.29. This regulation deters and detects smurfing by individuals with large quantities of currency who attempt to purchase multiple monetary instru- ments, namely, bank checks and drafts, cashier's checks, money orders and travelers checks, in amounts less than $10,000 to evade the BSA CTR reporting requirement. congress felt that there was a need for heightened scrutiny over the sale of these monetary instruments as individuals could otherwise conduct multiple currency transactions, each in amounts under $10,000, without having to identify themselves. The regulation requires that financial institutions may not issue or sell monetary instruments for $3,000 or more in currency to an individual unless it verifies and records the identity of the individual and records and maintains certain additional information, for example, address, social security number, account number, if applicable, amount of the instrument etc. on a chronological log that must be retained by the bank for five years. These logs are available to Treasury upon request. PAGENO="0206" 202 6 CIVIL PENALTY PROCESSING To monitor and enforce financial institutions' compliance with the BSA, OFE conducts civil penalty reviews of apparent or alleged BSA violations, including currency transaction reporting and the reporting on international transportation of monetary instruments. OFE coordinates these reviews and the assessment of any civil penalties with any criminal prosecution of these violations. All referrals received by OFE are forwarded to the Internal Revenue Service's Criminal Investigations Division (IRS/CID) to determine if there is an ongoing criminal investi- gation or if upon review of the information, IRS/CID intends to initiate one. OFE does not proceed with its civil investigation until it has received notification from IRS/CID or a prosecuting attorney that there is no objection. Reports of BSA violations on nonbank financial institutions are referred to OFE from a number of sources. The majority come from IRS/Examination Division, who in the course of compliance examinations, discover BSA violations. In November of 1990, OFE distributed Bank Secrecy Act Referral Guidelines for Financial Institutions. These guidelines were designed to assist the bank regulatory agencies and IRS/Exam in determining which BSA violations warrant referral to OFE for review and consideration of civil/criminal penalties. They were also intended to assist the bank regulatory agencies and IRS/Exam in submitting adequately documented penalty referrals in order to facilitate their ultimate disposition. As a result of these guidelines and training and guidance provided by OFE, the comprehensiveness and supporting documentation of these referrals has improved. In determining whether civil penalties are appropriate, OFE has formal Civil Penalty Processing Guidelines as well as Internal BSA Civil Penalty Determination Guidelines. The processing guidelines ensure that all of the relevant information is secured and analyzed prior to making a final recommendation as to whether civil penalties should be pursued. The internal penalty guidelines are used to determine whether the assessment of a civil penalty is appropriate. It must be emphasized that these are guidelines only and the actual determination of whether to assess a penalty and if so, for what amount, depends upon the factors and circumstances of each particular case. As set forth below, it is OFE's procedure to establish a preliminary case file on every referral to ensure that each case is tracked and processed consistently. This procedure may unintentionally generate a misleading ratio of referrals to penalties. PAGENO="0207" 203 7 It should be noted that OFE's responsibility is to encourage and ensure maximum compliance by financial institutions with the BSA. Therefore, Treasury does not consider the imposition of civil penalties in a vacuum. In many cases, OFE may elect not to assess a penalty but may, for example, direct a financial institution to backfile CTR5 or take corrective action to strengthen BSA compliance. Treasury's enforcement actions, educational efforts, correspon- dence, and actions taken on referred cases, are directed toward increasing BSA compliance, heightening sensitivity to money laundering and facilitating cooperation and communication among federal, state and local law enforcement agencies. OFE seeks to provide clear, understandable instructions to assist financial institutions in applying BSA requirements to various transactions so as to guard against potential exploitation by money launderers. While OFE's previous civil penalty actions have been directed primarily against banks, OFE has, in the past and recently, assessed civil penalties against nonbank financial institutions. Currently, OFE has a number of potential civil penalty cases involving nonbank financial institutions which are either in the final stages of the review process or in settlement negotiations. From December of 1991 through February of 1992, OFE met several times~with Subcommittee staff members to discuss recent money laundering trends and BSA compliance issues. The Subcommittee staff members requested information concerning several BSA compliance issues as well as statistics on the number of civil penalty referrals OFE had received involving nonbank financial institutions. This information, which will be summarized below, was provided to the Subcommittee staff on December 11, 1991, and is attached to this statement for reference. NONBANK FINANCIAL' INSTITUTION STATISTIC$ The Internal Revenue Service's Examination Division (IRS/Exam) has responsibility for examining nonbank financial institutions subject to the BSA. Approximately 2,200 compliance examinations were conducted by IRS/Exam in 1990; 36 of which were referred to OFE. Three (3) nonbank financial institutions were referred to OFE in 1985, two (2) in 1986, twenty-five (25) in 1987, fifteen (15) in 1988, thirty-eight (38) in 1989, and seven (7) in 1991. The total of 128 represents not only referrals made by IRS/Exam but also includes referrals made by other sources (i.e., IRS/CID or voluntary disclosures). No civil penalty cases PAGENO="0208" 204 8 involving nonbank financial institutions were closed in 1985, two (2) in 1986, four (4) in 1987, three (3) in 1988; twenty-six (26) in 1989, thirteen (13) in 1990, and eighteen (18) in 1991. In 1988, OFE assessed a civil penalty in the amount of $3,010,000 against Oscar's Money Exchange, Hildago, Texas and on January 27, 1992, OFE assessed a $18,000 civil penalty against Randolph and Clark Currency Exchange, Inc., Chicago, Illinois. As stated previously, nonbank financial institutions often operate beyond regulatory scrutiny. Often it is difficult to pursue civil penalties on referrals of nonbank financial institutions. For example, in August of 1989, IRS Examiners in the Indianapolis District as well as others submitted multiple referrals on nonbank financial institutions recommending that~ civil or criminal penalties be assessed against agents of these nonbanks for alleged violations of the anti-structuring provi- sions of 31 CFR 103.53. IRS/CID declined to pursue most of these cases because they generally appeared to reflect cash payments in small or nominally significant amounts that were consistent with criminal struc- turing activity but did not present evidence sufficient to show that the transactions themselves were conducted in such manner as to avoid the filing of a CTR. In some instances, there were existing criminal investigations and further civil action was precluded. In all of the other cases, OFE could not pursue civil penalties because there were either no failures to file, or amounts were under $10,000 and the transactions were conducted on different days and/or sometimes at different locations. There was no evidence to show criminal activity or that the funds were derived from illicit activity. Most importantly, there was no evidence that indicated that the financial institution had knowledge of, or assisted in the structuring of, the multiple transactions. As each transaction was under $10,000, there is no BSA requirement to verify the identity of the transactor. These referrals were then returned to the IRS for potential income tax leads. Partly in response to OFE's concern in obtaining additional substantiation for potential structuring cases, OFE participated in several training seminars with the IRS examiners to assist then in developing future referrals. It was also decided that nonbanks required particular referral guidelines and OFE and IRS are currently drafting revised guidelines. P~17LATORY AND ENFORCEMENT INITIATiVES Money laundering schemes have become increasingly sophisti- cated and the techniques employed by launderers continually change. As a result, the BSA enforcement effort must be constantly strengthened and revised to adapt. To respond to the shift in money laundering activity from banks to nonbanks and the PAGENO="0209" 205 9 increasing use of the funds transfer system to move proceeds derived from illegal activity, Treasury issued three proposed regulations. These regulations which apply to banks and nonbanks will significantly strengthen the BSA compliance of all financial institutions. In addition, the Treasury has supported several legislative proposals directed at BSA compliance by nonbank financial institutions. PROPOSED REGULATIONS On September 6, 1990, Treasury issued a Notice of Proposed Rulemaking on Mandatory Aggregation of Currency Transactions for Certain Financial Institutions and Mandatory Magnetic Media Reporting of Currency Transaction Reports. The aggregation proposal would require that banks with assets of over $100 million, implement systems which would capture, at a minimum, multiple cash in or cash out currency transactions which when aggregated exceed $10,000 in currency that affected an account on one business day. Nonbank financial institutions, regardless of asset size, would be required to implement systems that would capture multiple cash in or cash out currency transactions which when aggregated exceed $10,000 in currency conducted by or on behalf of one person on one day. The magnetic reporting proposal would require that financial institutions who file more that 1,000 Currency Transaction Reports a year file by the use of magnetic media. Treasury received over 350 comments concerning these proposals and expects to issue a final regulation in the near future. On October 15, 1990, Treasury issued a Proposed Amendment to the Bank Secrecy Act Regulations Relating to Recordkeeping for Funds Transfers by Banks and Transmittals of Funds by Other Financial Institutions to standardize the information obtained by financial institutions in the funds transfer process and to facilitate its retrieval in money laundering and related matters. This proposal would require that banks and nonbank financial institutions verify the identities of persons who initiate and/or receive funds transfers. The proposal would also require that certain other information relating to funds transfers be recorded and retrievable by name and account number, if applicable. Treasury received over 330 comments on this proposal. Treasury has worked with the Federal Reserve and other agencies affected by this regulation and is close to issuing a final regulation. LEGISLATiVE PROPOSALS Listed below is a summary of some of the pending legislative proposals contained in H.R. 26 and/or in legislation that was considered by the Senate Banking Committee but not passed during the last session of Congress and directed toward enhancing the PAGENO="0210" 206 10 BSA and improving BSA compliance by nonbank financial institu- tions. We hope that the Banking Committee will introduce these measures in the near future. o State Regulation of "Nonbanks" - Encourages states to adopt uniform laws to license and regulate check cashers, money transmitters and issuers and redeemers of money orders and traveler's checks and similar instruments. After three years, Treasury would report to Congress on the states' progress. o Illegal Money Transmitters - Makes it a five-year felony to conduct, control or own a money transmitting business without the appropriate state license where the illegal operation of the business is a crime under state law. o Confidentiality of Targeting Orders - Prohibit financial institutions served with geographic targeting orders from disclosing the existence of the order to their customers. o Authority to Order Depository Institutions to Obtain Copies of CTR5 From Nonbank Financial Institutions - Would provide Treasury with authority to require targeted depository institutions to have their "nonbank" financial institution customers furnish the depository institution with copies of CTR5 that the nonbank financial institution filed when it took in the funds it is depositing in the bank. - If the unregulated business refused to provide said CTR5 a written report would be required to be sent to Treasury. o Identification of Nonbank Financial Institutions - Would require depository institutions to identify their "nonbank" financial institution customers and report their names to Treasury. - This section was intended to identify these businesses as they are largely unregulated. PAGENO="0211" 207 11 WITH STATES FOR SHARING BSA DATA Treasury supports and encourages an enforcement partnership with the States. Toward that end, Treasury (OFE) has formal agreements with the States of Arizona, California, Florida, Maryland and New York to provide these states with magnetic tapes containing BSA report information. These states receive, on a regular basis, report information on all CTR5 filed by financial institutions located within their jurisdiction. In addition, Arizona, Florida and New York receive tapes of report information on CMIR5 relating to the movement of currency and certain monetary Instruments into and out of the United States by their residents or by individuals arriving and/or departing into/out of their respective states. These five states all have statutes that mirror the BSA. Four of the five states also have statutes that criminalize money laundering. Treasury has also received inquiries from a number of other states. INTERNATIONAL - BILATERAL AGREEMENTS In order to have a comprehensive anti-money laundering program, an international alliance must exist between the bank regulatory and law enforcement agencies of each nation and their foreign counterparts. Over the last few years, Treasury has successfully signed agreements with foreign government authorities. On January 11 and October 14, 1991, respectively, the United States signed agreements with the Governments of Venezuela and Peru for the exchange of currency transaction information upon request for use in criminal, civil and adminis- trative investigations and proceedings related to narcotics trafficking and related money laundering. The U.S. and the Republic of Colombia signed an agreement on February 28, 1992, to share records of large currency transactions in connection with investigations and proceedings concerning all illicit funds. A mutual legal assistance treaty, which also provides for the exchange of similar information, has been negotiated by the Departments of State, Justice and Treasury with the Government of Panama. This treaty is currently awaiting the advice and consent of the U.S. Senate. SEEKING AN INTERNATIONAL CONSENSUS/MULTILATERAL INITIATIVES In addition to pursuing bilateral agreements, Treasury has simultaneously worked with great success in multilateral fora and has made progress in establishing an international consensus as to what constitutes a comprehensive program to combat money laundering. This includes the concept that comprehensive programs must include legal and regulatory measures to prevent, detect and prosecute money launderers. Money laundering must be criminalized, and local statutes should provide for the seizure PAGENO="0212" 208 12 and forfeiture of illicit drug proceeds. While respecting the legitimate privacy of financial transactions and information, bank secrecy and other laws should not erect impenetrable barriers to anti-money laundering law enforcement. Laws, regulations and other measures should ensure that financial institutions maintain adequate records and that this information, under appropriate safeguards, be provided to domestic and foreign law enforcement. These records should, in all cases, enable the reconstruction of financial transactions, including large currency transactions and exchanges. Financial institutions should be alert to suspicious transactions and be authorized and encouraged to report these transactions to law enforcement without having to notify the customer or without being exposed to liability under secrecy laws. These same institutions should develop internal proce- dures, complete with employee training and audit procedures, to guard against money laundering. Regulators of financial institutions must actively oversee their supervised institutions to ensure full compliance with all applicable laws and to ensure that these institutions have adequate anti-money laundering programs. Finally, governments should provide international assistance and cooperation in money laundering cases. These elements of a comprehensive anti-money laundering program comprise some of the 40 action recommendations' developed by the Financial Action Task Force (FATF), which consists of Among other things, the FATF recommended: that money laundering be made a criminal offense; that asset seizure and forfeiture laws be enhanced; that financial institutions identify their clients and maintain complete records for five years, including information on currency transactions; that countries consider the feasibility and utility of currency transaction reporting; and that governments take measures to exchange information and mutual legal assistance in narcotics trafficking and money laundering cases. PAGENO="0213" 209 13 experts from 26 countries.2 These principles have been embraced not only by FATF countries, but are being considered by certain Latin American and Caribbean countries. A little over a year ago, a group of bank regulatory and law enforcement experts was convened by the Organization of American States (OAS) to draft a comprehensive set of model regulations and legislation in order to address all sides of the drug money laundering problem, from the criminalization of narcotic-related money laundering to the establishment of detailed recordkeeping, "know your customer" guidelines, and suspicious transaction reporting procedures. During the first week of March, the group completed its work and voted unanimously in favor of nineteen (19) articles that make up the draft Model Regulations on Crimes Related to Laundering of Property and Proceeds Related to Drug Trafficking. The regulations represents a significant constructive step forward for those countries in North, Central, and South America wishing to institute broad-based money laundering programs within their law enforcement and financial institution regulatory agencies. The regulations are consistent with many of the Bank Secrecy Act programs already in effect in the U.S. SPECIFIC ELEMENTS OF AN ANTI-MONEY LAUNDERING PROGRAM In discussing the FATF initiatives, and the provisions of the U.N. Convention, one recurrent theme has been the need for adequate recordkeeping and the equally imperative need for enhanced mutual assistance unimpeded by stringent bank secrecy laws. With regard to adequate recordkeeping, each of the countries participating in the FATF have agreed that, at a minimum, countries must consider the feasibility and utility of large currency transaction reporting. CONCLUSIONS The Office of Financial Enforcement continues its dedication to administering, enforcing and improving BSA compliance to deter and detect money laundering by and through financial institu- tions. Treasury is, and has been concerned with the increasing trend of money laundering through nonbank financial institutions. 2 France, Austria, Australia, Belgium, Canada, Italy, Germany, Japan, Luxembourg, Netherlands, Spain, Sweden, Switzerland, United Kingdom and United States; as well as the European Community. (Australia, Denmark, Finland, Greece, Hong Kong, Iceland, Ireland, New Zealand, Norway, Portugal, Singapore, Turkey) and the Gulf Cooperation Council. PAGENO="0214" 210 14 Treasury intends to continue to strengthen its efforts in increasing and improving BSA compliance by these financial institutions through educational efforts as well as the assessment of civil penalties where appropriate. Toward that end, OFE will continue its cooperative relationship with IRS to assist in determining which BSA violations ~rrant referral for consideration of penalties. In addition, Treasury will continue to work with the States to encourage increased oversight and regulation. At the federal level, Treasury, in cooperation with its enforcement bureaus, will seek to expand and refine the use of the information resulting from GTO5 for intelligence, investigative and analytical purposes. As in the past, OFE is willing to provide any additional information or materials to assist the subcommittee in its efforts. PAGENO="0215" 211 Senate Permanent Subcommittee On Investigations EXH1BIT#_~ 7 STATEMENT FOR THE RECORD OF U. S. CUSTOMS SERVICE HEARINGS OF SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS ON CURRENT TRENDS IN MONEY LAUNDERING February 27, 1992 MR. CHAIRMAN AND MEMBERS OF THE SUBCOMMITTEE: THE U.S. CUSTOMS SERVICE HAS A LONG, DISTINGUISHED RECORD AND VAST EXPERIENCE IN INVESTIGATIONS OF FINANCIAL CRIMES, PARTICULARLY CRIMES SUCH AS MONEY LAUNDERING WHICH TRADITIONALLY INVOLVED THE MOVEMENT OF LARGE SUMS OF MONEY ABROAD, AS WELL AS THE USE AND ABUSE OF OUR FINANCIAL INSTITUTIONS TO FACILITATE THOSE MOVEMENTS OF ILLICIT PROCEEDS. AS YOU KNOW MR. CHAIRMAN, THE PHENOMENON OF MONEY LAUNDERING AS AN EMERGING INDUSTRY IN THIS COUNTRY IS SIMILAR TO ALL INDUSTRIES INASMUCH AS THERE IS A CONSTANT EVOLUTION AND REFINEMENT OF THE SCHEMES AND METHODS UTILIZED BY THE MONEY LAUNDERER. OLD MONEY LAUNDERING METHODS ARE STILL BEING USED. MONEY IS STILL SMUGGLED ACROSS OUR BORDERS, AND OUR FINANCIAL INSTITUTIONS ARE STILL USED TO LAUNDER ILLICIT PROCEEDS. NO MATTER THE TYPE OF MONEY LAUNDERING OPERATION, MOST ARE INITIATED THROUGH WHAT IS KNOWN AS THE "PLACEMENT" STAGE, WHEREIN ILLICIT PROCEEDS ARE INITIALLY INTRODUCED INTO THE FINANCIAL SYSTEM. IT IS AT THIS POINT WHERE THE BULK CASH ILLICIT PROCEEDS ARE COALESCED IN PREPARATION FOR THEIR "PLACEMENT" INTO THE 1 PAGENO="0216" 212 FINANCIAL SYSTEMS THAT THE MONEY LAUNDERING PROCESS IS MOST READILY DETECTABLE. THE "PLACEMENT" STAGE IS THE POINT THAT CUSTOMS TARGETS AND AGGRESSIVELY PURSUES IN AN EFFORT TO STOP THE MOVEMENT OF CASH ACROSS OUR BORDERS AND INTO INTERNATIONAL FINANCIAL CHANNELS. BANKS AND NONBANK FINANCIAL INSTITUTIONS WHICH OFFER BANK-LIKE SERVICES, HAVE ALWAYS BEEN MAJOR TARGETS OF MONEY LAUNDERING OPERATIONS BECAUSE THEY PROVIDE A VARIETY OF SERVICES WHICH ENABLE ILLICIT PROCEEDS TO BE PLACED INTO THE FINANCIAL SYSTEM WITH EASE. MONEY LAUNDERERS REALIZE THAT ONCE THE PROCESS OF MONEY LAUNDERING MOVES ON FROM THE "PLACEMENT" STAGE, IT BECOMES INCREASINGLY MORE DIFFICULT FOR LAW ENFORCEMENT TO DETECT AND TRACE. THE CRIME OF MONEY LAUNDERING, DOMESTICALLY AND INTERNATIONALLY REMAINS A MULTI-BILLION DOLLAR INDUSTRY. THE EXTENT OF THE MONEY LAUNDERING PROBLEM HAS BEEN ESTIMATED BY THE G-7 NATIONS FINANCIAL ACTION TASK FORCE ON MONEY LAUNDERING. IN THEIR 1990 REPORT, IT WAS ESTIMATED THAT SALES OF COCAINE, HEROIN AND CANNABIS ALONE, AMOUNTED TO APPROXIMATELY $122 BILLION PER YEAR IN THE UNITED STATES AND EUROPE. OF THIS FIGURE, AN ESTIMATED $85 BILLION A YEAR IS CONCEIVABLY AVAILABLE FOR LAUNDERING AND INVESTMENT. THIS IS ALMOST INCONCEIVABLE CONSIDERING THAT $85 BILLION IN $20 DOLLAR BILLS WOULD WEIGH APPROXIMATELY 9,216,000 POUNDS OR 4,608 TONS, AND IN MASS, WOULD DO A COMMENDABLE JOB OF FILLING THE ROTUNDA OF THE CAPITAL. AS YOU ARE AWARE, MR. CHAIRMAN, LAW ENFORCEMENT IS SEEING THE 2 PAGENO="0217" 213 CONTINUOUS EMERGENCE OF THESE NONBANK FINANCIAL INSTITUTIONS, WHICH PROVIDE BANK-LIKE SERVICES, BEING UTILIZED IN VARIOUS MONEY LAUNDERING SCHEMES. THIS EMERGENCE OF THE NONBANK FINANCIAL INSTITUTIONS IS OF MONUMENTAL CONCERN TO U.S. CUSTOMS BECAUSE THESE BUSINESSES ARE NOW A DIRECT CONDUIT FOR THE "PLACEMENT" OF MONEY INTO THE FINANCIAL SYSTEMS, AND ENABLING ITS EASY TRANSFER OUT OF THE U.S. WE, IN THE LAW ENFORCEMENT COMMUNITY, ATTRIBUTE THIS MOVE TO THE NONBANK FINANCIAL INSTITUTIONS TO THE NEW AND STRINGENT ANTI-MONEY LAUNDERING LAWS AND REGULATIONS FOR THE TRADITIONAL FINANCIAL INSTITUTIONS WHICH HAVE BEEN PASSED IN THE UNITED STATES IN RECENT YEARS. THESE LAWS, AND THEIR SUBSEQUENT STRINGENT ENFORCEMENT IN THE FORM OF CRIMINAL CHARGES AND LARGE FINES BEING LEVIED AGAINST FINANCIAL INSTITUTIONS WHO ASSIST THE MONEY LAUNDERER, HAVE CAUSED THE TRADITIONAL FINANCIAL INSTITUTIONS TO BECOME MORE DILIGENT IN REGARD TO COMBATTING MONEY LAUNDERING, SUBSTANTIALLY SHUTTING OFF THIS AVENUE TO THE MONEY LAUNDERER. MANY BANKS HAVE ESTABLISHED THEIR OWN COMPUTER-BASED SECURITY PROGRAMS TO ALERT THEM TO POTENTIAL MONEY LAUNDERING SCHEMES SO THAT THEY MAY NOTIFY THE APPROPRIATE LAW ENFORCEMENT AGENCY. THE DAYS OF INDIVIDUALS ARRIVING AT A TELLER WINDOW WITH SHOPPING BAGS FULL OF MONEY ARE OVER. THE LAW NOW PERMITS FOR THE BANKS TO REPORT POSSIBLE CRIMINAL ACTIVITY ON CRIMINAL REFERRAL FORMS TO THE APPROPRIATE LAW ENFORCEMENT OFFICIALS WITHOUT FEAR OF REPRISAL. TODAY, THE AMERICAN BANKING ASSOCIATION RUNS FULL PAGE 3 PAGENO="0218" 214 ADVERTISEMENTS IN NEWSPAPERS AND MAGAZINES WHICH ASK THEIR CUSTOMERS TO BE PATIENT WITH THEM - THAT THERE MAY BE DELAYS IN ASKING FOR ADDITIONAL INFORMATION OR IDENTIFICATION.. . BUT IT IS BECAUSE THEY WANT TO FIGHT DRUG TRAFFICKING AND MONEY LAUNDERING. THIS IS ALSO A RESULT OF THEIR BEING REGULATED FINANCIAL INSTITUTIONS WHO ARE ACCOUNTABLE FOR THEIR ACTIONS THROUGH THOSE REGULATIONS. NONBANK FINANCIAL INSTITUTIONS ARE AN ENTIRELY DIFFERENT STORY. NONBANK FINANCIAL INSTITUTIONS ARE BEING EXPLOITED BY MONEY LAUNDERERS IN MUCH THE SANE WAY THAT TRADITIONAL FINANCIAL INSTITUTIONS HAVE HISTORICALLY BEEN ABUSED. THESE ABUSES OCCUR MOST NOTABLY THROUGH STRUCTURING/SMtJRFING, COMPLICITY, AND COMMINGLING. AT THIS POINT, I WOULD LIKE TO PROVIDE THE COMMITTEE WITH A FEW DEFINITIONS OF THE TERMS REGULARLY USED WHEN DISCUSSING THE ACT OF MONEY LAUNDERING. MONEY LAUNDERING - THE PROCESS WHEREBY PROCEEDS, REASONABLY BELIEVED TO HAVE BEEN DERIVED FROM CRIMINAL ACTIVITY, ARE TRANSPORTED, TRANSFERRED, TRANSFORMED, CONVERTED, OR INTERMINGLED WITH LEGITIMATE FUNDS, FOR THE PURPOSE OF CONCEALING OR DISGUISING THE TRUE NATURE, SOURCE, DISPOSITION, LOCATION, MOVEMENT OR OWNERSHIP OF THOSE PROCEEDS. THE GOAL OF THE MONEY LAUNDERING PROCESS IS TO 4 PAGENO="0219" 215 MAKE FUNDS DERIVED FROM, OR ASSOCIATED WITH, ILLICIT ACTIVITIES APPEAR LEGITIMATE. THIS PROCESS OCCURS IN THREE BASIC STEPS: PLACEMENT, LAYERING AND INTEGRATION. PLACEMENT - THE PHYSICAL DISPOSAL OF BULK CASH PROCEEDS. LAYERING - SEPARATING ILLICIT PROCEEDS FROM THEIR SOURCE BY CREATING COMPLEX LAYERS OF FINANCIAL TRANSACTIONS DESIGNED TO DISGUISE THE AUDIT TRAIL OF THE ILLICIT PROCEEDS. INTEGRATION - THE PROVISION OF APPARENT LEGITIMACY TO CRIMINALLY DERIVED WEALTH. NONBANK FINANCIAL INSTITUTION - AN INSTITUTION WHICH PROVIDES SOME FORM OF FINANCIAL SERVICE, (E.G., MONEY ORDER/CASHIER'S CHECK/TRAVELER'S CHECK SALES, CHECK CASHING SERVICE, MONEY EXCHANGE, TRANSPORTATION OR TRANSMITTING OF FUNDS) YET USUALLY FALL OUTSIDE OF THE REGULATED FINANCIAL SECTOR. THESE INSTITUTIONS ENCOMPASS A WIDE RANGE OF ENTITIES, TO INCLUDE: CHECK CASHERS, MONEY TRANSMITTERS, AND CURRENCY EXCHANGE HOUSES; PROFESSIONS WHOSE PRIMARY PURPOSE IS TO OFFER SOME FORM OF GAMBLING ACTIVITY; PROFESSIONS WHOSE PRIMARY ACTIVITY IS TO DEAL IN HIGH VALUE ITEMS (E.G., PRECIOUS METAL AND GEM DEALERS, AUCTION HOUSES, REAL ESTATE AGENTS, CAR, AIRPLANE AND BOAT DEALERS); AND PROFESSIONALS WHO, IN THE COURSE OF PROVIDING THEIR 5 PAGENO="0220" 216 PROFESSIONAL SERVICES, OFFER CLIENT ACCOUNT FACILITIES. STRUCTURING/SMURFING - THE STRUCTURING OF CASH TRANSACTIONS (DEPOSITS, MONETARY INSTRUMENT PURCHASES, EXCHANGES OF SMALL DENOMINATION BILLS FOR LARGER BILLS) TO EVADE THE CURRENCY REPORTING REQUIREMENTS BY DIVIDING SINGLE LARGE LOTS OF CASH INTO SMALLER LOTS, IN AMOUNTS OF $10,000 OR LESS. THE TERM SMURFING RELATES TO WHEN THESE TRANSACTIONS ARE CONDUCTED, UTILIZING NUMEROUS INDIVIDUALS, THROUGH VARIOUS ACCOUNTS AND DIFFERENT BANKS. INSIDER COMPLICITY - MONEY LAUNDERING IS FACILITATED WHEN EMPLOYEES ARE COMPRISED OR WHEN THE INSTITUTION ITSELF IS ACTUALLY CONTROLLED OR HEAVILY INFLUENCED BY CRIMINALS. COMMINGLING - COMMINGLING OF FUNDS AND ESTABLISHING FRONT COMPANIES TO TAKE ADVANTAGE OF CASH INTENSIVE BUSINESSES, EITHER BY OBSCURING ILLICIT PROCEEDS IN A FOREST OF LICIT TRANSACTIONS (COMMINGLING) OR BY DOING LITTLE OR NO BUSINESS AND PROVIDING MOSTLY THE APPEARANCE OF LEGITIMATE BUSINESS ACTIVITY THAT ACCOUNTS FOR THE PROCEEDS (FRONT COMPANIES). AT THIS TIME, I WOULD LIKE TO PRESENT SOME CASE EXAMPLES TO THE SUBCOMMITTEE. THESE INVESTIGATIONS SERVE TO DEMONSTRATE THE TYPES OF SERVICES NONBANK FINANCIAL INSTITUTIONS CAN PROVIDE A MONEY LAUNDERER. 6 PAGENO="0221" 217 AN INVESTIGATION OF A CURRENCY EXCHANGE HOUSE (CASA DE CAMBIO) RESULTED IN A LANDMARK ACTION BY TREASURY. THE $3.1 MILLION CIVIL ACTION REPRESENTED THE FIRST TIME A CIVIL PENALTY HAD BEEN IMPOSED AGAINST A CURRENCY EXCHANGE HOUSE. THE INVESTIGATION REVEALED THAT DURING A 4-MONTH PERIOD, A MAJOR DRUG TRAFFICKING ORGANIZATION DEPOSITED APPROXIMATELY $5.5 MILLION AT THE CURRENCY EXCHANGE. THE CURRENCY EXCHANGE TRANSPORTED THE FUNDS TO MEXICO, EITHER AS U.S. CURRENCY, MEXICAN PESOS OR BEARER NEGOTIABLE MEXICAN PESOS CHECKS, WITHOUT FILING THE REQUIRED CURRENCY REPORTING FORMS. IN AN INVESTIGATION WHICH TARGETED THE OWNER OF 15 MONEY. TRANSMITTING BUSINESSES, CASH FROM DRUG SALES WAS RECEIVED THROUGH THE VARIOUS INTER-CONNECTED BUSINESSES, E . G., TRAVEL AGENCIES, CASA DE CAMBIOS, AND A REAL ESTATE OFFICE. IN RETURN FOR AN 8% FEE, DRUG PROCEEDS WERE STRUCTURED INTO CHECKS IN AMOUNTS LESS THAN $10,000. THE CHECKS WERE DEPOSITED/WIRE TRANSFERRED INTO 48 DIFFERENT BUSINESS ACCOUNTS AT 26. VARIOUS DOMESTIC AND FOREIGN BANKS. THE BUSINESS ORGANIZATION UTILIZED FACSIMILE MACHINES TO TRANSMIT PAYMENT INSTRUCTIONS TO CORRESPONDENT CANBIOS IN CENTRAL AND SOUTH AMERICA. ANOTHER INVESTIGATION UNCOVERED A COLOMBIAN MONEY LAUNDERING ORGANIZATION OPERATING UNDER THE GUISE OF A TRAVEL AGENCY. THE OPERATION UTILIZED THREE DIFFERENT SCHEMES, WHICH AT THE HEIGHT 7 PAGENO="0222" 218 OF THEIR OPERATION, ALLOWED THEM TO LAUNDER APPROXIMATELY ONE MILLION DOLLARS A WEEK. ONE SCHEME INVOLVED SMUGGLING U.S. CURRENCY OUT OF SOUTHERN CALIFORNIA TO COLOMBIA VIA GUATEMALA ON A COMMERCIAL AIR FLIGHT. A COURIER WOULD DEPAR~P THE U.S. WITH A ROUNDTRIP TICKET TO GUATEMALA, NEVER USING THE RETURN PORTION OF THE TICKET. A SECOND TICKET, WOULD BE HIDDEN IN THE COURIER'S LUGGAGE, WHICH ENABLED THE COURIER TO TRAVEL FROM GUATEMALA TO BOGOTA. A PREPAID TICKET WOULD THEN BE PICKED UP AT THE AIRPORT IN BOGOTA ALLOWING THE COURIER A RAPID RETURN TO THE U.S. THE INITIAL MOVEMENT OF THE MONEY OUT OF THE U.S. WAS ACCOMPLISHED WITH THE ASSISTANCE OF A SUBORNED AIRLINE EMPLOYEE, WHO WOULD ADVISE THE COURIER IF U.S. CUSTOMS WAS INSPECTING THE FLIGHT. IF THERE WAS NO INSPECTION, THE AIRLINE EMPLOYEE WOULD ASSIST THE COURIER IN BYPASSING SECURITY AND PROCEEDING DIRECTLY TO THE DEPARTING AIRPLANE. THE SECOND SCHEME UTILIZED BY THE ORGANIZATION, WAS TO WIRE TRANSFER FUNDS TO "CASAS DE CAMBIO" IN CALl AND MEDELLIN, COLOMBIA. THE ORGANIZATION HAD ALSO SET UP A WIRE TRANSFER BUSINESS IN THE U.S. IN CONJUNCTION WITH THEIR TRAVEL AGENCY SPECIFICALLY TO FACILITATE THE LAUNDERING OF FUNDS. A CONSPIRATOR IN CALl WOULD SEND FACSIMILES TO THE ORGANIZATION IN THE U.S. WHICH CONTAINED LISTS OF NAMES AND PHONE NUMBERS OF "SENDERS" AND "RECEIVERS" OF FUNDS TO CALl AND MEDELLIN. THE NAMES OF THE SENDERS WERE FICTITIOUS, HOWEVER, THE NAMES OF THE RECEIVERS WERE LEGITIMATE. IN ORDER TO PRECLUDE THE FILING OF 8 PAGENO="0223" 219 THE IRS CURRENCY TRANSACTION REPORTS (CTh), EMPLOYEES OF THE ORGANIZATION STRUCTURED THE FUNDS RECEIVED FROM DRUG TRAFFICKERS INTO INDIVIDUAL WIRE TRANSFERS USING THE FICTITIOUS SENDERS NAMES FOR THE FACSIMILES, THEREBY, CONCEALING THE ILLEGAL SOURCE OF THE FUNDS * ONCE THE FUNDS REACHED COLOMBIA, THE RECEIVERS WOULD BE BROUGHT TO THE EXCHANGE HOUSE TO COLLECT THE FUNDS. THE RECEIVERS WOULD THEN TURN THE FUNDS OVER TO THE ORGANIZATION'S REPRESENTATIVE WHO WOULD, IN TURN, PAY THEM 10 THOUSAND COLOMBIAN PESOS FOR THEIR WORK. THE THIRD METHOD EMPLOYED BY THE ORGANIZATION WAS TO INTEGRATE THEIR ILLICIT FUNDS THROUGH THE VARIOUS ACCOUNTS ESTABLISHED IN THE NAME OF THE TRAVEL AGENCY. THE TRAVEL AGENCY WOULD MAKE DAILY CASH DEPOSITS OVER $10,000 INTO THREE ACCOUNTS, UNDER THREE DIFFERENT BUSINESS NAMES, AT THREE DIFFERENT BANKS. UNLIKE TYPICAL TRAVEL AGENCIES, THIS ONE DID NOT ROUTINELY DEPOSIT CHECKS OR CREDIT CARD DRAFTS. THE ORGANIZATION'S MEMBERS BROUGHT CASH DEPOSITS TO THE BANKS IN BROWN PAPER BAGS. THE MONEY WAS USUALLY FOUL SMELLING, MOLDY AND WET, AND WAS IN SMALL DENOMINATIONS SEPARATED WITH RUBBER BANDS. ONCE THE MONIES WERE DEPOSITED INTO THESE ACCOUNTS, THE ORGANIZATION WOULD WIRE TRANSFER THE FUNDS INTO OTHER ACCOUNTS OR CHECKS WOULD BE WRITTEN AGAINST THE ACCOUNTS TO AN UNKNOWN INDIVIDUAL FOR AMOUNTS BETWEEN $20,000 AND $40,000. MEMBERS OF THE ORGANIZATION WERE INDICTED BY A FEDERAL GRAND JURY 9 PAGENO="0224" 220 ON 22 COUNTS OF MONEY LAUNDERING AND DRUG TRAFFICKING. GUILTY PLEAS HAVE BEEN ENTERED ON THE MONEY LAUNDERING CHARGES. TRIAL IS SCHEDULED FOR EARLY 1992 FOR THE DRUG TRAFFICKING CHARGES. FINALLY, AN ONGOING INVESTIGATION HAS TARGETED THREE SMALL CHECK CASHING BUSINESSES LOCATED WITHIN A SMALL GEOGRAPHIC AREA. THESE BUSINESSES WERE TARGETED BASED ON A REVIEW OF THEIR CTRs, WHICH REVEALED THAT BEGINNING IN 1985, MILLIONS OF DOLLARS HAVE BEEN FLOWING THROUGH THEIR ACCOUNTS ON A MONTHLY BASIS. THE SOURCE OF THE FUNDS HAS YET TO BE IDENTIFIED. SURVEILLANCE OF THE LOCATIONS HAS INDICATED THAT THERE IS NO POSSIBILITY THAT THEIR PATRONAGE WOULD GENERATE THE NEED FOR THESE LARGE AMOUNTS OF CURRENCY. ONE CHECK CASHING BUSINESS IS HOUSED IN WHAT APPEARS TO HAVE ONCE BEEN A GUARD SHACK. THE BUILDING IS APPROXIMATELY 15 FEET SQUARE. THE OTHER TWO BUSINESSES ARE LOCATED IN VERY SHALL "MOM AND POP" NEIGHBORHOOD MARKETS. BOTH THESE BUSINESSES RECEIVE DELIVERIES OF CURRENCY, VIA AN ARMORED CAR SERVICE, 6 DAYS A WEEK FROM THE CENTRAL CASH REPOSITORY OF A MAJOR BANK. FOR A SINGLE WINDOW CHECK CASHING BUSINESS, MONTHLY TOTALS CALCULATED FROM CTR FILINGS, GENERALLY EXCEED ONE MILLION DOLLARS. THE TOTAL DOLLAR AMOUNT FOR CTR FILINGS SINCE NOVEMBER 1985, IS OVER $99,000,000 FOR ONE CHECK CASHING BUSINESS LOCATED IN THE GUARD SHACK. AN ASSOCIATED INCORPORATED BUSINESS 10 PAGENO="0225" 221 AT THE SANE LOCATION REFLECTS A TOTAL DOLLAR AMOUNT FOR CTR FILINGS FROM SEPTEMBER OF 1985 TO DECEMBER 1989, OF OVER $56,000,000. THE ONE REGISTER NEIGHBORHOOD MARKET REFLECTS A LIKE AMOUNT OF OVER s56;000,000 FOR THE SANE APPROXIMATE TIME PERIOD. AS A RESULT OF THIS INVESTIGATION, OTHER ASSOCIATED CHECK CASHING BUSINESSES HAVE NOW COME UNDER INVESTIGATION. AS OF FEBRUARY OF 1991, REVIEW OF THE TREASURY FINANCIAL DATA BASE FOR SEVEN ADDITIONAL NONBANK BUSINESSES SHED THAT THEY WERE RESPONSIBLE FOR FILING CTRs IN EXCESS OF $300,000,000. THESE CASE EXAMPLES ARE JUST A SMALL REPRESENTATIVE SAMPLE OF THE TYPES OF NONBANK FINANCIAL INSTITUTION INVESTIGATIONS BEING CONDUCTED TODAY WE HAVE SEEN THE POSITIVE RESULTS OF WHAT REGULATION OF OUR TRADITIONAL FINANCIAL INSTITUTIONS HAS ACCOMPLISHED. HOWEVER, INVESTIGATORS CONTINUE TO FIND THAT NONBANK FINANCIAL INSTITUTIONS, WHICH ENGAGE IN BANK-LIKE SERVICES, ESPECIALLY THE BUSINESS OF TRANSFERRING FUNDS EITHER DOMESTICALLY OR INTERNATIONALLY BY WIRE, CHECK, DRAFT, COURIER, FACSIMILE, COMPUTER NETWORK OR OTHER MEANS, ARE BEING EXTENSIVELY USED BY THE CRIMINAL ELEMENT TO AVOID THE SCRUTINY ENCOUNTERED AT TRADITIONAL FINANCIAL INSTITUTIONS. THESE NONBANK FINANCIAL * INSTITUTIONS ARE ACCEPTING CASH AND CONDUCTING DEPOSITS AND OTHER TYPES OF TRANSACTIONS, PLACING ILLICIT PROCEEDS INTO THE FINANCIAL SYSTEM, AND ARE VEHICLES FOR PROVIDING A DISGUISE FOR 11 54-650 0 - 92 - 8 PAGENO="0226" 222 THE TRUE OWNER OF THE MONIES AND THEIR ILLICIT ORIGINS. THESE NONBANK FINANCIAL INSTITUTIONS ARE READILY ABLE TO PROVIDE A DISGUISE FOR THE TRUE OWNER OF THE FUNDS BECAUSE THE TRANSACTIONS WHICH THEY CONDUCT ON BEHALF OF THE TRUE OWNER ARE CONDUCTED IN THE NAME OF THE NONBANK FINANCIAL INSTITUTION. THE NEED TO ESTABLISH A MORE EFFECTIVE REGULATORY REGIME FOR THE NONBANK FINANCIAL INSTITUTIONS IS CRITICAL TO SHUTTING OFF THIS PIPE-LINE, WHICH MONEY LAUNDERERS ARE CURRENTLY UTILIZING WITH IMPUNITY BECAUSE OF THEIR MINIMALLY REGULATED STATUS. SIMILAR TO REGULATED BANKS, THE U. S. MUST ESTABLISH COMPLIANCE STANDARDS FOR THE NONBANK FINANCIAL SECTOR. THESE COMPLIANCE STANDARDS CAN BE IMPOSED THROUGH THE ENACTMENT OF STATE OR FEDERAL LEGISLATION TO REQUIRE ACCOUNTABILITY/COMPLIANCE IN THE AREA OF NONBANK FINANCIAL INSTITUTIONS, IN ORDER TO CLOSE THIS AVENUE OFF TO MONEY LAUNDERERS. AS DEMO~jSTRATED IN THE CASE EXAMPLES, THERE IS AN IMMEDIATE NEED TO VIEW THESE BUSINESSES/INSTITUTIONS IN THE SAME LEGISLATIVE PERSPECTIVE AS OUR BANKS AND OTHER REGULATED FINANCIAL INSTITUTIONS. AS STATED EARLIER, MONEY LAUNDERING OPERATIONS UTILIZE A VARIETY OF AVENUES TO LAUNDER MONEY. THE NONBANK FINANCIAL INSTITUTIONS ARE BUT ONE OF THESE AVENUES. ANOTHER AREA OF CRITICAL CONCERN IS THE UTILIZATION OF THE U.S. MAIL SYSTEM TO MOVE MONIES OUT OF THE U.S. 12 PAGENO="0227" 223 MR CHAIRMAN I CANNOT OVER-EMPHASIZE THE IMPORTANCE OF CLOSING THESE LOOPHOLES TO COMBAT MONEY LAUNDERING. IN CLOSING, I WOULD LIKE TO REITERATE A POINT EXPRESSED FROM THE ORIGINAL G-7 FINANCIAL ACTION TASK FORCE REPORT ON MONEY LAUNDERING, "ANY DISCREPANCY BETWEEN NATIONAL MEASURES TO FIGHT MONEY LAUNDERING CAN BE USED POTENTIALLY BY TRAFFICKERS, WHO WOULD MOVE THEIR LAUNDERING CHANNELS TO THE COUNTRIES AND FINANCIAL SYSTEMS WHERE EITHER WEAK OR NO REGULATIONS EXIST ON THE MATTER, MAKING THE DETECTION OF FUNDS OF CRIMINAL ORIGIN MORE DIFFICULT." MR. CHAIRMAN, CUSTOMS HAS BEEN WORKING WITH YOUR STAFF ON THESE MATTERS, AND WILL BE AVAILABLE TO ANSWER ANY QUESTIONS WHICH YOU OR THE OTHER MEMBERS OF THE COMMITTEE MAY HAVE IN REGARD TO THESE ISSUES. ~ 13 PAGENO="0228" 224 Senate Permanent Subcommittee on Investigations EXHIBIT # ____~~~~ STATEMENT FOR THE RECORD OF CAMERON H. HOLMES Unit Chief Financial Remedies Unit Criminal Division Arizona Attorney General's Office Before the Permanent Subcommittee on Investigations Senate Committee on Governmental Affairs February 27, 1992 PAGENO="0229" 225 Mr. Chairman and members of the Permanent Subcommittee on Investigations, it is my pleasure to have been invited to submit a statement for your consideration on the current impact of money laundering in Arizona and the law enforcement response. As you are aware, illegal drug imr'ortatiofl and the money laundering that necessarily accompanies it have been increasing dramatically along the Southwest border throughout the 1980's and continue to do so up to the present time. Arizona was the first state to enact a money laundering prohibition, effective in 1985, prior to its federal analog. Law enforcement efforts in Arizona have continued to focus on money laundering at the state and federal levels. In 1991, Arizona enacted a comprehensive money transmitter regulation and financial transaction reporting statute. Arizona's money laundering and transaction reporting provisions are both coordinated with Arizona's racketeering ("state RICO") statutes and forfeiture provisions for maximum civil enforcement impact on the drug industry. Money laundering legislation at the state and federal levels and related federal agency deployment are of vital importance to the people of Arizona. I deeply appreciate this opportunity to express my thoughts to this Subcommittee about federal contributions in this field. I have attached to this statement a draft copy of a recent update of a money laundering strategy for your reference. I will amplify a few of the points made in that strategy for this Subcommittee, r'oiicentrating on observations that support specific ~;onuress~onal action. PAGENO="0230" 226 BACKGROUND Money laundering, broadly speaking, is knowing participation in the finances of crime. It may take the form of moving funds and assets in hidden, disguised or ostensibly legitimate channels in order to continuously supply onqoinq criminal activities with needed capital and equipment. It may take the form of providing an apparently legitimate source for illegitimate profits in order to allow a participant in illegitimate conduct to enjoy the fruits of his crimes unmolested by law enforcement. Illegitimate funds are the life blood of ongoing crimes as well as the blood money that results from the offense. When law enforcement attacks the money~ laundering mechanism it attacks both the criminal enterprise's means of continuing its activity and the individual criminal's incentive to do so. Law enforcement efforts have attempted to reduce opportunities for laundering money, to raise toe risk of financial loss and punishment fcr those ~ho do launde': amey, and to strip the assets away from the enterprises ant :ay from the personal enjoyment of the enterprise leaders. As ow enforcement has evolved its methods, the practices of launderers, great and small, have changed as well. TRENDS Trends observed by Arizona law enforcement include: 1) Increased flight from banks in favor of non--bank 1iiiancial institutions. CTP filings are sharply on the rise. Tilir is due in part to better compliance and regulation changes PAGENO="0231" 227 requiring aggregation. Also some banks are discouraging or discontinuing ~ ~ cambio accounts. More laundering activity is therefore being driven Out of banks and into non-bank businesses. 2) Rise of facilitator specialists. The CTR and other reporting pressure is giving rise to a small hard core group of businesses and individuals willing to accept the, risk of loss or prison in exchange for high profits. Casas ~ cambio, business advisors, and free-lance launderers are absorbing the business. 3) Cash exports are increasing. One way to avoid CTR and related reports is to export drug proceeds as cash by smuggling it into Mexico or elsewhere. CMIR data aid other sources indicate that most amounts are being handled this way, perhaps $3 billion per year from Arizona alone. 4) Re~:ision of method: to avoid CMIR filinc. Cnsas cle cambjp have reduced the funds they hold for thc h'~netit of cuntomero in U.S. banks. Instead, they accept cash aid deposit it ~ Mexican banks or obtain Mexican bank drafts (the functional equivalent of a cashiers check) for the customer fcL S hand]inci fOe. The deposit may be wired anywhere in the ccrIId. The draft may be made out to any person, and may be presented at any bank with a relationship with the Nexican bank. Wire transfers are then used to move the funds once they Sic on deposit. 5) Increased exposure to regulatory measures. ~~~cno~nu and transaction reporting requirements hdve created PAGENO="0232" 228 new enforcement opportunities for prosecution of licensing and reporting offenders, gathering evidence on launderers and drug dealers/smugglers, and guiding overall resource allocation. These opportunities have arisen from state legislation requiring money transmitters to obtain licenses and to make financial reports. Compliance with licensing and reporting requirements is incompatible with successful illegal conduct. Non-compliance now creates opportunities to eliminate illegal businesses. FEDERAL CONTRIBUTIONS A number of federal agencies are involved in money launc3erinq efforts. Their work has profound effects on state and. local efforts. Money laundering enforcement cuts across many traditional organizational boundaries, such as type of crime (DEA/IRS), geographical (in U.S./foreign) and de~artrnental DOJ Truasury) . Coordination and mutual assistance among all law enforcement agencies are therefore e~;pecial!v necessary elements of the use of money laundering as a ~:trategy, as a theory of investigation and as a theory of rc~ecn~:i:n. 1 will limit my suggestions to a few concrete `xainrles Transaction Reporting The Department of Treasury has taken the lead in money laundering investigations along the Southwest border. Its rrcv~ ~;ion 0: CTR and CMIR data through the Office of Financial oement o states through Memoranda of Understandinci (MOUs) no state enfcrcement to bear effectively while PAGENO="0233" 229 minimizing costs to industry and to the states. This program should be expanded in three ways. First, the number of states should become larger, a measure that is now in progress. Second, the IRS form 8300 is a transaction reporting requirement that has far greater potential than has been utilized. its greatest failing is that it is not accessible to general law enforcement because of its designation as a tax report. Re-designation has been continuously advocated for a number of years. IRS officials have stated that they favor re-designation. This should be done. At the same time, the expansion of the scope of the 8300 report beyond cash transactions should be hastened into effect and the IRS should redouble its efforts to improve compliance. State resources may be relied upon to help spread notice of the requirement, educate the public and, in states with transaction reporting ~totuteo, prosecute offenders. Third, efforts to improve computerized analysis of all of the BSA data, now in progress at finCEN, should be fully funded and accelerated. I believe that the relevant data available for ac:Iysis could be vastly expanded. States have numerous automated databases containing useful data. For example, motor vehicle, real property, licensing and criminal history information is often readily available. FinCEN is currently in the process of entering into MOUs with states regarding state access to FInCEN data. These agreements should be expanded to include FInCEN access to state data. The states are each in a r)oslt ion to shepherd their own diverse databases on a PAGENO="0234" 230 continuing basis. They can do the job of delivering vast stores of useful data to users nationally through FinCEN, and would be happy to do so considering their reciprocal access through FinCEN to federal transaction reports and the public information data contributed by other states. Money Laundering Enforcement Clearinghouse Money laundering legislation is being enacted at an accelerating rate in state, federal and international forums. Statutes include regulating, reporting, civil and criminal approaches, which means that more diverse agencies are becoming involved. There is a great need for a clearinghouse for general information, research, comparative statutory references, investigative and prosecutive forms, examples and aids, training materials and live advice. For example, my office now serves as a clearinghouse for a network of state officials involved in implementing state transaction reporting requirements. Any network participant who wishes to contribute material to the group sends it to my office. We duplicate it and send it to all other participants at no cost. In a related example, the National Association of Attorneys General, operating under a Department of Justice Bureau of Justice Assistance grant, performs a similar function for state prosecutors in the money laundering field. These kinds of efforts should be fully funded through BJA or otherwise and coordinated with federal contact points such as FinCEN, the [epartment of Justice Money Laundering Office and the U.S. Trc~~iiiy Office of Financial Enforcement. It should have a -6- PAGENO="0235" 231 complete set of regulatory and enforcement contacts in each state. In the Southwest and Florida, where money laundering enforcement is a critical element of drug enforcement, special new funding~ allocations, perhaps through the High Intensity Drug Trafficking Area (HIDTA) program, should be made available for clearinghouse activities. One activity that the clearinghouse should immediately support is the consideration of initiatives relating tO casas cie cajnbjo and money laundering along the Mexican border collected by FinCEN. These recommendations represent the work of several multi-agency federal, state, and regulatory conferences over a twenty-month period. One example of this set of recommendations is the institution of southbound border searches for currency along the Mexican border. Joint state, federal and National Guard operations are long overdue. These operations have enormous promise as a means of choking the money flow of the powerful smuggling groups that operote on the hordes. The clearinghouse should provide support fri all money laundering investigators and prosecutors at all levels of qoverniment. It should be staffed by people drawn from all of the groups it will serve to assure an understanding of the problems and methods of each group. Its services should be free to the users, paid for through grant funding or through the federal forfeiture funds. If paid for through the forfeiture funds, the employees could be considered outside `cn~rnrt employees in the same manner that analysts, -7- PAGENO="0236" 232 secretaries and paralegals employed by DEA and U.S. Attorneys are now being regarded as contract employees so that they may be paid from forfeiture funds. Resource Management Federal employees engaged in money laundering efforts are presently confronted with artificial obstacles to overall success that are the result of nothing more permanent than agency resource management decisions. I will not presume to suggest solutions for the already well-known fragmentation of federal resources relating to money laundering policy, research, regulation and enforcement. The observation that federal fragmentation presents state agencies with a confusing and ever-changing welter of contacts does not need restatement. Federal resource management policies that drive federal agencies and state agencies apart even after they have found each other, however, are pressing state concerns. In my view, based on over 21 years of city, county, and s. atw law enforcement: experience, one of the most troublesome obstacles to Lociai~:i cooperatson with non-federal agencies is also the sas~est t: correct. It is the policy of some agencies of i ecouniziiici a work product only to the extent that its effect is qnantifiable within the federal government. Two sets of contrasting examples illustrate the problem. IRS policy requires that a federal IRS-jurisdiction (tax) charge be brought in order for the IRS agent involved in investigation to receive recognition for the work done on one. Therefore, IRS assistance is not available to cases PAGENO="0237" 233 in which state prosecution is contemplated, even in cases in which the state will prosecute the very conduct that the IRS statutes are designed to control. Inthe money laundering field, this means that the IRS agent is forced by policy to insist on federal prosecution of a form 8300 compliance violation even in states that have identical state statutes, or to elevate a trivial tax charge above a more fundamental charge that could disable the subject drug enterprise. Task forces and cooperative cases are divided because of an artificial statistical counting policy. In contrast, when the agency policy attempts to quantify the achievement of the ultimate agency goal the result io that cooperation is encouraged. Both FinCEN and the Treasury's Office of Financial Enforcement exemplify this çial-oriented approach and have made excellent contributions to cooperative money laundering efforts. The effective energy of their own internal resources has been multiplied by working with non-federal resources and making use of those external reoourcer; in constructive partnerships. MOU5 on joint infirmation use, jointly sponsored conferences, joint training and open information exchanae have been the hallmarks of both F1nCEN and the Office of Financial Enforcement. While the osults may not be as readily visible on statistical summaries of work product, the results are deep and long-lasting benefits in tie development of solutions to money laundering. The second set of contrasting examples involves the application of the federal-only counting method to financial PAGENO="0238" 234 enforcement. Financial enfd"rcement is critical to the reduction of money laundering because it provides economic disincentive for an economic crime and because it removes the key instrumentality involved, dirty money. The Department of Justice maintains an asset forfeiture fund into which monies ar~ placed from money laundering cases, among other sources. U.S. Attorneys offices, by policy, tend to quantify their success in their pursuit of financial remedies according to their deposits into this fund. Therefore, they are encouraged to accept prosecutions based on dollar amounts rather than on an overall regional or statewide arrangement among federal, state and local prosecutors designed to maximize the effectiveness of the region's prosecutors as a whole. The U.S. Customs Service, in contrast, operates a separate sharing fund, but with dramatically different effect. Unless overborne by the U.S. Attorney's Office, Customs considers only the achievement of the ultimate goal of money laundering reduction, without regard to federal sharing or who makes the arrest or prosecutes the case. As a result, Customs has attracted substantial state and local resources with which it enhances its total impact. The methods by which federal agencies quantify work product are extremely significant to their relationships with ion-federal agencies. Federal careers depend on these quantifications of work product more than they depend on an employee's actual contribution to the success of the mission of - 10 - PAGENO="0239" 235 their agency. Congress has a key role in the formulation of an agency's methods of quantifying work product. In general, Congress should examine the effects that resource management policies in money laundering have on each agency's ability to participate constructively in the overall mission. In particular, Congress should discourage IRS and DOJ/U.S. Attorney policies that create barriers to cooperative money laundering enforcement. Individual employees almost always want what is best for the ultimate result. They deserve agency policies that make that solution best for their careers as well. I understand that balancing the need for quantifiable results and the need to encourage overall mission success is complex and difficult, and draw these matters to your attention with that in mind. In closing, I commend you and Congress generally for your leadership in the money laundering field. Law enforcement is often slow to grasp and respond to new approaches. Money launderino enforcement is an example of positive legi~:]~tive leadership on many simultaneous fronts. The state, n::ional and worldwide response to money laundering is a tribute to Congredsional leadership in this field. I am confident that Congress, having recognized the problem of dirty money and having designed multiple inter-related measures to control the problem, will continue to make the organizational adjustments ~ncJ resource allocations necessary to make the Congressional money laundering initiatives successful. In closing, I want to repeat my thanks for this - 11 - PAGENO="0240" 236 opportunity to express my views on this subject to you. This Subcommittee's well-deserved reputation for objectivity and thoughtful consideration of all viewpoints by its members and its highly professional staff make it an ideal forum for the collection of candid information, as well as an ideal contributor to Congressional leadership of the coordination of federal money laundering efforts. I hope that my rematks will be useful to you, and would be honored to respond to any questions you may have. J. 564 E PAGENO="0241" 237 COMBATING MONE( LAUNDERING: STRATEGIC DEVELOPMENTS CAMERON H. HOLMES Assistant Attorney General Unit Chief Financial Remedies Unit Drug Enforcement Section Arizona Attorney Generals Office February 1992 All Rights Reserved PAGENO="0242" 238 Combating Money Laundering: Strategic Developments Arizona became the first state in the nation to criminalize money laundering in 1985, a year nefore similar federal legislation, 18 U.S.C. § § 1956 and 1957. The timing was significant. At that time, Arizona and the rest of the Southwest border states were experiencing increasing pressure because growth in drug importation was being displaced to Arizona from the Southeastern states and the Caribbean. In 1985, Arizona's legislature made substantial improvements to its state RICO statute, and included a new and separate money laundering offense as a part of the same legislation. Illegal drug importation has continued to increase in Arizona through the `80s and to the present. Drug smuggling and its inevitable violent and property crime side effects remain the dominant law enforcement problem in the region. Particularly, large scale smuggling is the source of corrosive drug money that has spawned deep and long-lasting damage to law enforcement and financial institu- tions. As one example, in the years between 1985 and 1988 the cash surplus re- ported in the Federal Reserve Bank in Los Angeles, the regional Federal Reserve Bank to which cash from Arizona is thipped, rose by 2, 192%, while the cash surplus in the Miami regional bank fell by 24.5%. Money laundering is a central concern of Arizona law enforcement. In 19S8 the Bureau of Justice Assistance of the U.S. Department of Justice ftxnde~ a money laundering study by the Arizona Attorney General's Office, through the Police Executive Research Forum. Combating Money Laundering: An Arizona- Basec Apomach, was a product of that study. Strategic developments since that s~cc are tne reason :cr this update. Eac~ground Drug trafficking and other rackets are business activities. The participants engage in them for profit on a continuous basis, The illegal drug industry is the ~argesr.. most profitable and most destructive American racket, so its suppression tends to drive money laundering strategy. While the illegal drug industry is the most significant example, however, and tnerefore dominates this update, the approaches suggested by efforts to combat drug trafficking are applicable to other rackets as well. The illegal drug industry is composed of various activities, which, taken to- gether, form a network of interdependent activities. The delivery of drugs tc con- sumers requires a number of acts in furtherance of the overall objective. The drug must be produced, processed, transported, and distributed; profits must be laun- dered for network expenses and personal uses; and the entire delivery process from production to consumption must be concealed and insulated from competitors and law enforcemen:. The activities include, generically speaking, production, process- inc. trans~ortaticn. sales and money laundering, together with support seivices such PAGENO="0243" 239 as corruption, violence against competitors, and obstruction of justice, and re1ated interdependent activities such as property crimes and fencing. Each of these roles is a component of the network as a whole. If a particular component activity is necessary to the ultimate delivery of a particula drug, its suc- cessful elimination stops the flow of drugs through the network, even if other com- ponents are still capable of functioning well. The idea of attacking vulnerable com- ponents of the drug industry is, of course, as old as drug enforcement. Interdiction, which attacks the transportation component, is an obvious example of the applica- tion of this observation. The money laundering component of the drug industry is particularly essen- tial. If the money derived from illegal drug sales cannot be safely enjoyed to en- hance traffickers' lifestyles, the risks and effort in obtaining such income would be better invested in other endeavors. If the capital generated or otherwise available cannot be put to use to keep the drug enterprises operating, the process would grind rapidly to a halt. The objective of money laundering is to make illegally obtained money safe to use by making it appear to have been derived from legitimate sources. To the extent that law enforcement agencies and prosecutors offices can sufficiently disrupt drug-related money laundering activity, they will have struck at the motivational heart of the dominant traffickers and will have deprived trafficking networks of an asset traffickers must possess to effectively continue their drug oper- ations -- an adequate supply of money that can be spent in relative anonyniinity and safety. Fortunately, the money laundering component is as vulnerable as it is neces- sary. The combination of necessity and vulnerability makes money laundering a prime target for enforcement personnel and prosecutors. As a separate business activity or specialty of drug organization., money laundering is vulnerable for a number of reasons. First, it is generally dominated by professional people -- financial advisors, attorneys, bankers, accountanr.s, etc. -- who are responsive to deterrence. A street dealer, in contrast, is motivated generally by desire for drugs in addition to money and by other societal factors. He perceives lit- tle alternative to participation in drug dealing and is not terrified of criminal sanc- tions, much less of civil sanctions. An accountant, banker, or attorne\ who is tempted to engage in money laundering is motivated by profit, has many apparer~ alternatives to involvement with dirty money, and has great fear of both criminal and civil sanctions. They may be counted upon to act as the economists hypothetical "rational man," weigh the risk against the potential gain, and elect to avoid the risk when it is unacceptably high. Second money launderers who become witnesses for the state are likely to be valuable and effective. On the witness stand, they tend to be a distinct contrast to the usual drug trafficking defendant or co-conspirator. They are likely to be educated, articulate, and sophisticated. They generally have no criminal records. stable personal lives, and other indicia of credibility. Their testimony is also likely tO be corroborated by plentiful records and doc'~ments, such as financial records, phone toll records. calendars, phone books, and the like. Pace 2 PAGENO="0244" 240 ment in the finances of crime and complementing Arizona's 1991 financial reporting and money transmitter regulation provisions. The amended A.R.S. § 13-2317 is re- produced in Appendix 1 which also includes diagrams of the elements of each sub- section of the money laundering provisions. Investigatively, Arizona has turned increasingly tc financially oriented inves- tigators. One useful illustration of this focus is the conscious concentration on fi- nances when debriefing and directing witnesses and information sources. A de- briefing outline is supplied in Appendix 2. Financial training for investigators and recruitment of financial analysts are essential to money laundering r'rosecutions. The financial analysts available to law enforcement have been greatly increased by the deployment of National Guard analysts in law enforcement asset location and seizure units. Federally, the Drug Enforcement Administration and U.S. Attorney's offices have hired numerous clerical and analytical employees paid through the as- set forfeiture fund. Money laundering prevention at its general level is aimed at drug smugglers, producers, and dealers that launder money to conduct their illegal enterprises and to legitimize their own personal profit from their operations. Tactics used against low-level money laundering include general investigation as well as such special tac- tics as identification of conspicuous consumption and development of financial in- telligence. Financial reporting under the 1991 Arizona reporting statute. A.R.S. § 6- 1241-42, discussed below, will be very useful. Money laundering is also carried out by specialists. This type of launderer includes casa de camhio operators, financial advisL s, attorneys, accountants, real estate brokers, bankers, and business insiders who intentionally create and execute money laundering schemes for the benefit of themselves aod others. Aga~ the most effective investigative tactics are drawn from genera~ lay er.~ :cerrier~r, al- though often through a somewhat differrn: a~proach than standard crug enforce- ment. Specialized trctics include the us~ of phr'sica~ surveilianc~ electronic surveillance. undercover officers posing as drug dealers, money launderers or srn~giers. and tracing the paths of the various money laundering transaction methods. An analysis of various types of mone' iaunder~ng transac:ior~. is attached as Appendix 3. Wnen specialists like casa de carr.bio operators become sources of informa- tion for the government, they are particularly disruptive to the illegal drug t::dusuy because the fear Or oeing identified by a .c..~.a operator who has been recruited by the government tends to drive dealers and smugglers away from all ~ just as ef- fectively as would a massive subpoena or search warrant project directed at ~ Money laundering specialists are specifically treated under Arizona's money laun- dering statute. A.R.S. § 13-2317(B) enhances the degree of the money laundering offense if a person "knowingly initiates, organizes, plans, finances, directs, manages, supervises or is in the business of money laundering." Observers of racket activity recognize that the core participants in the crimi- nal acdvi of the racket rely heavily on the self-interested assistance of less directly invok'ed facilitators, those who knowingly assist criminal conduct but do n'~ them- Pagr PAGENO="0245" 241 Third, the same records that make money launderers solid witnesses make them and their clients vulnerable to investigation generally. Unlike the scar4~e, closely guarded and heavily coded records of drug sellers, some recors.:s of money launderers must "surface" and interface with those of legitimate business, thereby creating a paper trail that is vulnerable to investigation. The money launderer's specific knowledge of the most critical information about the trafficking network -- how its money is spent -- will lead law enforcement to the most dominant partici- pants and to the key physical assets of a target enterprise. Even more significant, the records will often lead to each of the other enterprises that an individual money launderer has dealt with as well. Drug dealers and smugglers tend to rely on profes- sionals recommended to them by people in their drug business, so one individual launderer may have dealt with many separate drug enterprises. Money launderers are, therefore, a rich source of investigative leads. These spin-off leads may be es- pecially useful because the other clients of the target launderer will have no warmng that their launderer has become a government witness. A devastating case may be developed before the client has any opportunity to take evasive measures. Finally, a professional money launderer is a relatively scarce resource. Unlike the mid-to-street-level dealer, for example, whose place is so easily and rapidly filled that his removal is not even noticed, the money launderer is harder to replace. Concentration on the removal of money launderers will, in effect. create a bottleneck in the flow of illicit funds. U. Developing a Money Laundering Enforcement Strategy Development of a money laundering strategy involves inquiry into (1) the vulnerabilities of a drug network's money laundering component; (2) the links be- tween the money laundering component and the other component actvities with which it must operate; and (3) the identification of key physical and persorine~ as~e:~ associated with money laundering, including evasive techniques as key assets. Eac~. of these three areas are addressed below. A. Focusing on the Money Laundering Comporarit The investigation and prosecution of the money laundering component itself is. of course, a prime enforcement strategy, entailing reactive and proactive investi- gations and criminal, civil, and administrative remedies. ~nzona has soph sticated ~cketeenrg fo'ieiture and drug s atute arc b~s used its legislative tools aggressively to r-osecute money liundering civiliy and criminally. Money laundering is a "predicate offense" under Arizona's Racketeering Act, A.R.S. ~ 13-2301 ~ seq. Therefore, substantial criminal and civil remedies are available for money laundering, including a personal civil judgment for an amount equal to the illegal gain, forfeiture of the proceeds of money laundering and of the proceeds of the underlying criminal acts, and forfeiture of the defendant's interest in any property dr enterprise used for or conducted through money laundering. A.K.S. § § 13-2301(D)(4). 13-2314. In 1991 Arizona amended its money laundering statute. ~.F S 23~ i-' several v~a'~s making ciear ma it reacnes a~ kno~ng i"~ nive PAGENO="0246" 242 selves share the goals or the direct benefits of the conspiracy or criminal enterprise. Over the past 20 years, law enforcement k-as realized the critical importance of de- terring racket facilitators. Investigators and prosecutors have developed some fa- miliarity with civil and administrative rem dies partly because those noncriminal remedies can be applied to facilitators. The strategy is to drive up the financial risk of facilitation to offsetthe financial advantages of cozy involvement with racketeers. Upon considering ti. risk of loss against the possibility of extra gain, facilitators will be driven away from the racket, leaving the core participants unassisted and unable to conduct rackets that are efficient and secure from investigation. In addition to tactics founc~ useful in investigations of core participants, less drastic measures can often deter facilitators. Educational initiatives designed to pierce willful blindness by laying out the money laundering methods employed and the social harms that result from facilitating those methods may be effective For example, willful failure by car dealerships to file IRS Form 8300 (Arizona Attorney General report 6-1241(C)) (reports on receipts of cash in a trade or business in amounts over $10,000) may be regarded as innocent avoidance of paperwork until the requirements and their underlying utility to detect and prevent racket offenses are made clear to car dealers. Real estate professionals, bankers, financial advisors, and other similarly situated potential facilitators may respond to appeals by their own professional associations or by community leaders. Those groups may also be relied on to spread knowledge of enforcement action taken against one of their members. Although the industry's coverage of the case may tend to emphasize the burdens of the government's action on legitimate commerce, this coverage certainly :.~ultiplies the deterrent impact of widely scattei ed enforcement actions. Arizona can benefit from each of the above strategies, particularly appeals to unwitting or willf&~v blind facilitators. The great majority of businessmen and women who facihrt. money laundering are unaware of the full consequences. They may not kn~ t~t conduct i~ connected to money laundering, or they may not ~ -r:and the c:~ natuT ~. service they p: rvide. Therefore, they see nei- ther toe extent of harm nor the importance of their opportunity to contrioute to the socia rejection the inderlying criminal conduct. On a statewide basis, real estate brokers and tr. suppliers of vehicles, planes, communication services, and fi- nancia services are ley to Arizona's drug importation cartels. Specialized supplies are also needed for drug productior. in Arizona. Certain consumer items such as packaging and cuttin materials are goom~ leads to local drug dealers. All are sup- plied by Arizona bustnesses. Law enforcement must concentrate its efforts on busi- ness groups through education, persuasion, and judicial civil remedies and, ulti- mately. criminal sanctions when necessary. Arizona and other border states also carry a special responsibility to prevent facilitation that occurs on the border itself. Facilitation of smuggling activity on the border is destructive to the nation because of its far reaching consequences. It also presents an especially promising opportunity for intervention. There are a limited number of border towns on the Southwest border. Many are so small that the finan- cial elite there tencf to know of important financial developmen'~ ~n the communit. These neonle are in a position to know who is making transactions inconsistent with Page PAGENO="0247" 243 legitimate needs or purposes or through irregular means, to know who is purchasing or controlling assets useful in smuggling activities, and to know who is living or in- vesting beyond their legitimate means. Each resident of a border town has a very disproportionate ability to do something about the nation's drug problem. If those few citizens acted with law enforcement leadership and support to reject smuggling in their conununities, they could force smugglers out. The effect of denying smuggling operations a base of operations on the Mexican border would be devastating to established smuggling enterprises. Those operations tend to depend on intimate knowledge of law enforcement methods, per- sonnel, work schedules, and technical capabilities. These close ties require actual presence on the border. Storage, staging, infiltration, the all-important family ties, and corruption all require a border base. An interior Mexican base would be far less efficient. Also, success as a smuggler generally leads to investment of profits in the United States and to benefits related to the smuggler's proximity to the United States, such as schools, hospitals, and U.S. births for alien children. Denial of those benefits would be additional disincentives for involvement in smuggling. The critical importance of the financial communities in border areas is illus- trated by the Arizona-related CTR (Currency Transaction Report) and CMIR (Currency and Monetary Instrument Report) data provided to the Arizona Attorney General's Office by the U.S. Department of Treasury. Treasury's concern for the continuing usefulness of the data prevents precise disclosure, but general discussion does not present such considerations. In 1987, 1988, and 1989 a staggering amount was reported in CMIRs as imported into Arizona from foreign countries in cash or cash equivalents in amounts over $10,000. The importation amount represents a significant figure when compared to all deposits made into all Arizona banks. CTRs filed in Arizona relating to deposits only, without withdrawal transactions, totaled about half the in-bound CMIR total. The three border counties, Yuma, Santa Cruz, and Cochise (but not Pima, which, although it includes some of the border, has no border town) account for 19 percent of the deposit CTRs in the state but contain on~ 6 percent of the state s population Tiny Santa Cruz County accounted for 10 percent of the total deposit CTRS but contains less than 1 percent of the state's population. The ratio of CTR-eligible deposits (over $10,000 in cash) to all bank deposits in the county of Santa Cruz is almost four times higher than that for the state as a whole. The reason is not that Santa Cruz is a particularly prosperous area. It has belc~ average wages, above average unemployment, and well below average per capita income, as do the border counties as a group. In Santa Cruz County, a county in which the unemployment rate is 14.7 percent and per capita income is un- der $12,000 per year, 43 cash transactions of over $10,000 were reported for every person in the county in 1989. The amount deposited and withdrawn in CTR-eigible transactions in Santa Cruz County is a significant portion of the aggregate personal income for the county, whereas the amount deposited and withdrawn in CTR trans- actions statewide expressed as a percentage of statewide personal income was less than one-sixteenth as large as the comparable figure for Santa Cruz County. The rededication of the Nogales Police Department under a new city admin- istration has resulted in a renewed emphasis on money laundering cases. Two PAGENO="0248" 244 Nogales Police Department officers are working with a Special Agent of the Attorney General in Nogales on money laundering there. They are concentrating on facilitators who are not directly engaged in drug importation but who are know- ingly facilitating such conduct by participation in some financial aspect of the con- duct. Substantial changes have occurred in the methods of money laundering since 1988, especially through casas de cambip. The use of "omnibus" accounts held in the name of theç~ or aç~ employee in U.S. banks on behalf of clients has declined. In its place, c~ are accepting U.S. cash, depositing it in Mexican banks and re- ceiving Mexican bank drafts in exchange. These drafts may be imported into the U.S. without filing a CMIR, and may be made payable to any person or entity of the client's choice. Counter-measures that may be effective against casas de cambio are a major law enforcement concern. Suggestions include substantial state or federal regula- tion of c~ ~ cambip (discussed below), establishment of a centralized database by which to track suspect ~ and their principals/employees, expansion of crirni- nal referral form requirements beyond banks to include ças~, and amendments to the CMIR requirements to conform more closely to ~çg~g methods and pick up and track ç~-controlled imports and exports of currency and monetary instruments. B. Unks Between Money Laundering and Other Network Componerts Money laundering activity provides money for individual consumption and to support the activities of the illegal enterprise. Laundered money for individual con- sumption flows to individuals in all other industry components, so blocking its flow should be an enforcement strategy regardless of the compon~nz rddrossed. Similarly, laundered money destined for expenditure on illegal activities will also flow to the various drug n~ork components. In the drug importation componen:. for example, the largest share of cash is spent for "cost of goods sold" -- that is, for drugs -- and~ large shares are also spent for smuggling services. Some of those money shipments are large and vulnerable. That has been particularly true since 1985 because compliance with the Bank Secrecy Act has driven drug cash out of fi- nancial institutions and into the open. State enforcement of reporting similar to the Bank Secrecy Act and other related reporting requirements and state regulation of non-bank financial institutions can safely be counted upon to increase the effective- ness and breadth of this pressure. Physical interdiction of drug money is, therefore. a useful strategy. Interdiction of money flowing back from the street to the suppliers is possible throughout the supply network, from the coca, poppy, or marijuana farmer or drug producer to the street user. Concentration on airports, bus and train depots, and highway couriers has proven effective. Large drug organizations have developed specialized money transport systems using money collection houses, secondary counting houses, and freight handling mechanisms to gather the cash and move it to Colombia, Mexico, or financial centers such as Panama. Surveillance, informants. PAGENO="0249" 245 electronic surveillance, and undercover penetration of those money transportation mechanisms have all proven useful. Interdiction of large money movements is especially warranted at the n~ tional borders. Shipments of money for drug supplies, for smuggling particioants, and for support of smuggling activities are heavily concentrated at the border. These three money flows may move quite separately. For example, establishments for the collection of cash for wiring to Colombia do not pay drug dealers in the United States and do not pay smLgglers. The three flows may overlap signiicantly, however, as is often the case in Mexican marijuana enterprises that engage in growing, smuggling, and brokering. Arizona-related CMIRs indicate that large quantities of unreported money are exported to Mexico. In-bound CMIRs totaled many times the reported out- bound cash. For each dollar reported leaving the state to a foreign country in 1988, over $50 was reported coming in. At one port of entry in 1988, for each dollar re- ported leaving, almost $2,000 was reported entering. One explanation of this differ- ence is that cash importers face the possibility of a search and the forfeiture of the funds if they are not reported. Exporters who do not report the cash also face for- feiture. But they are very rarely searched, and, therefore, do not report. If the true cash exports even approach the reported imports (not to mention ~c~tt~i im~ ..rts), the government is foregoing hundreds of millions of dollars per year in forfeitures in Arizona alone by failing to enforce, through exit searches, the CMIR statutes as they relate to cash exports. Federal response to the recognition of the need for a more effective southbound search mechanism has been painfuL1~ slow. Manpower has not been made available, and physical design problems in the ports that allow smugglers to thwart search efforts have not been systematically corrected. The us~. of National Guard personnel has aided somewha:, but southbound mo.~:' sei.ure are still a major opportunity that should be far more fully exploited. Personnel from federal/state/local task forces should be cross-deputi.ed federal agents to give them authority to do border searches. They should be tri~~ne~ and organized to function in brief visits to their area's port of entry, apDearing a: un- scheduled times in no predictable pattern. Tney could select a few vehicles i:om the southbound flow, screen or search them, and returi~ to their other ou1~'~s before smugglers could respond to their presence by pulling out of line. The div~:se agen- cies involved, non-scheduling of actions and brief stays would make counter-n~ea- sures difficult for cash smugglers. Border ports of enry should be redesigned to facilitate southbound searches. In places where vehicles are able to pull out of line and turn back away from the border when the driver or a spotter becomes aware of a potential search, physical barricades should be created to force each vehicle to commit to remaining in line once it passes a particular point of no return. In this way, a search team could arrive to find a sample of vehicles that have had no opportunity to abort their border crossing. pressure c'- barn and ion bank financia in ututions and othe' busr ~ as a amaticall -`creased in Arizona by lecisia ior effectiv'~ in S ntemo~' ~ PAGENO="0250" 246 Arizona's money transmitters are now regulated for the first time. Moreover, finan- cial institutions and people engaged in any trade or business are now required to make state financial reports similar to federal CTR, CMTR, FBAR, CRF and 8300 reports. The regulatory aspects of the new statute were drafted in close cooperation with representatives of legitimate indt ~try, and in consultation with the newly- formed Money Transmitter T~egulators Association (MT.RA). Increased business cooperation with law enforcement, voluntary or legis- lated, has given a large boost to so~called "asset protection," especially attorneys ad- vising clients on the formation of off-shore corporations and trusts through which to defeat creditors, including government creditors. These services take the form of at- tempts to disguise money flow channels and to create the ifiusion of legitimacy for drug-derived money. Financial reporting requirements followed by undercover work may control the growth of this parasitic sub-industry. In addition to the money laundering component's linkage to production, transportation, and sales through money flow the money laundering component must also be closely linked to other network components by communicationsystems. Despite efforts to keep communication secure, the) must operate over great dis- tances and must achieve high speed and accuracy, often despite poor foreign public communications facilities. They become vulnerable to electronic surveillance and to informants. C. Identification of Key Physical and Personnel Assets Money laundering enforcement offers significant exposure of physical assets to civil remedies. such as civil RICO and forfeiture. In addition to the vehicles, planes, houses, and other property used in money t:ansporza~ion, money laundering gives rise to forfeiture of a business used as a inundering device by laundering tainted money into it. Also, money laundering may give rise to the forfe~tttre o~ a business conducted through money laundering~ T::~s rray occur if the husiners is conducted through the provisior. of property with inov.iedge that the propcrty is in- tended for use ir drug dealing (real estate, vehicies. eLc.), i~ me business is used to create an artificial appearance of legitimacy for monies mat gc. through its own books (bar, restaurant, other cash business), if it is conducted through providing ad- vice or other assistance to clients in the laundering of the client's funds, or if it is used in any combination of these wavs~ A.F..S. ~ 13-2317, A.R.S. g 13-2312 and A.R.S. § 13-2314(D)(6). New A.R.S. § 6-1.41 provides an additional dimer~sion to these remedies in two ways. First, failures to file required reports may result in civil regulato"~ re-nedies mciudmg 1 .en~. r x.~'uo~ and monetar~ pen it e as well as criminal prosecution. Second, evasion of a reporting requirement in connection with funds that are known to be the proceeds of some offense is money laundering under new A~R.S. § 1S-2317(A)(3). This, in turn, is an act of racketeering and there- fore gives rise to all of the civil remedies described above, including civil forfeitures. Finally, all types of money laundering gives rise to personal liability for the gross amount of the money laundered. See A.R.S. § § 13-23 17, 13-2314(D)(7). PAGENO="0251" 247 The money laundering component itself is personnel intensive. The key per- sonnel assets within the component are the more experienced and technically profi- c~ent money laundering `~pecialists, followed by the major drug smugglers, produc- ers, and dealers who have money laundering expertise. Removal or neutralization of those key people is accomplished through criminal and civil prosecution, through administrative remedies such as license requirement and revocation, and through court orders or legal coercion to testify against accomplices. The linkage between money laundering and other components also presents important asset and personnel targets. Asset targets include those involved in money transportation and communications. Personnel targets are the dealers and smugglers who are successful enough to need money laundered. A money launderer's testimony, information, assistance, and records can pro- vide a wealth of information about key people and assets on which law enforcement strategy can focus. A final asset of the money launderer is the set of techniques that are avail- able for use in laundering money. Their exis:ence and continued viability depend on a number of factorc, including legislation, law enforcement cooperation, financial community support and, in the Southwest, cooperation across the Mexican border. D. Measures to Counter Evasive Techniques Evasive techniques are used to make money laundering transactions more difficult for investigators and prosecutors to prevent, detect, or prove. Some tech- niaues might re weakened through changes in state statutes or changes that are within the power of the law enforcement or commercial communities to effect. Each evasive technique should be examined and possible countermeasures evalu- atec. The essential objective of each of the various evasive techniques is to scatter or disper~ law enforcement knowledge, t'nderstanding, and resource: that other- vise might have contribtn~d to prevention, discovery, and proof of money launder- activity. The essn~:iai objective of each counter-technique, then, is to unite, syn- thesize, and coordir~nt investigative and prosecutive efforts. Countermeasures in- clude iegisi: zion, law enui~rcement cooperation, financial community support and in- formation source development, and cross-border cooperation, amongothers. 1. Legis~attzrn The executive branch's authority and resources, and therefore its ability to coordinate duties and resources, rests on legislative mandates and appropriations. The legal remedies are the tools with which executive officials work. Many of the evasive techniques play on factors that may be effectively addressed by legislation. An effective and continuous legislative agenda is essential to combating money laundering. The agenda should include criminal remedies, broader civil remedies that enforce financial responsibility for facilitators as well as primary actors and ac- ?age it PAGENO="0252" 248 complices, and regulatory provisions to create structural barriers to prevent money laundering. Effective November 1, 1991, money transmitters must be licensed to do busi- ness in Arizona. Appendix 4 is a copy of A.R.S. § 6-1201 ~ .s~q., Arizona's 1991 money transmitter regulation and financial transaction reporting legislation. After Arizona's statute was drafted, the Money Transmitter Regulators Association (MTRA) promulgated an outline for such statutes. Appendix 5 is the MTRA model regulatory legislation outline. Using Arizona's enacted statute as a base, with spe- cific Arizona referenons eliminated in favor of generic provisions, I have modified to more closely reflect the MTRA outline of suggested provisions. The resulting Model Money Transmitter and Transaction Reporting Act of 1992 is attached as Appendix 6. Effective September 20, 1991, financial reports substantially similar to ~d- eral CTR, CMIR, FBAR, CRF and 8300 forms are required on a state level. The CMIR and FBAR reports are required only of money transmitters, not of citizens generally. Both regulation of money transmitters and transaction reporting legisla- tion are discussed below. Money laundering statutes, including criminal provisions and transaction re- porting requirements, have been adopted in a growing number of states. Appendix 7 catalogs state money laundering statutes effective at the end of 1991. Money transmitter regulation has been more widespread, but has also undergone significant change in recent years, prompted by consumer losses in the late 1980's. In 1991 Arizo:~a an Washington enacted new laws, and Connecticut, florida, Louisiana, North Carolina, Puerto Rico and Texas amended their statutes. Appendix 8 lists the stz.~.e money transmitter statutes effective at year end, 1991. The legislative strategy of extending liability, both criminal and RICO, to ~now1rig facilitators of key offenses has been seen in both Mnney L2undering, A.R.S i?-2~. and in Participation in or Assisting a Criminal Syndicate, A.R.S. § 13- 23. The 1991 changes in the money laundering statute have been discussed. The e~ementt are diagrammed ~n Atpendix. Changes in 1990 and 1991 to I~.R.S. c 13- 2308 created an offense of assisting a criminal syndicate. A.R.S. § 13-2308(C) pro- vides: C. A person commits assisting a criminal syndicate by committing any felony offense, whether completed or preparatory, with the intent to promote or further the criminal objectives of a criminal syndicate. The facilitator who knowingly promotes an offense is explicitly included in criminal liability. Because participating in a criminal syndicate is a RICO predicate offense, a violator of A.R.S. § 13-2308 is included in civil liability as well. A.R.S. § 13-2308 and its definitional provisions are Appendix 9. 2; Law Entorcement Cooperation Law enforcement fragmentation is nowhere more apparent than in the -nonev laundering area. As federal agencies scra~nble for jurisdiction ove: portions Pane 1 PAGENO="0253" 249 of federal statutes relating to money laundering enforcement, responsibility for overall strategy becomes more fragmented. Four developments may mitigate this unfortunate situation. First, the Department of Treasury, parent of U.S. Customs Service, the Internal Revenue Service and the Secret Service, has created a Financial Crime Enforcement Network (FinCEN) designed to serve as a clearinghouse for financial money laundering-related data and services. It has enormous potential as a coordi- nating body. In early 1992 FinCEN will be entering into memoranda of under- standing with the states on information and data exchange. States should contribute to the overall effectiveness of FinCEN by coordinating the collection of state agency data that would be useful to FinCEN, such as vehicle, real estate, corporate, licen- sure and regulatory information1 and by contributing legally appropriate databases containing such data to FinCEN Second, state-federal task force operations tend to break down institutional barriers and pool resources constructively at the operational level. Those opera- tions take many forms. Most of the specialized money laundering enforcement in Arizona is now done through multiagency units, particularly those involving the U.S. Customs Service. Federal and state funding in the money laundering and racke- teering fields, including drug crimes, should~encourage or require joint participation by federal and state agents. Joint efforts should receive more funds at the expense of individual agency budgets. In 1991 the Bureau of Justice Assistance funded a multi-agency effort to combat Arizona narcotics facilitators, especially money launderers. The project in- cludes two federal agencies and three state agencies, and is now supporting signifi- cant efforts to investigate money laundering in Arizona. Third, state and local attention to money laundering as a preventive, inves- tigative. and prosecutive tool promises to bring an additional dimension to enforce- ment in the area. State agencies are more closely tied to state banking an~ financial regulation than federal agencies involved in drug enforcement. They are also com- posed of people who are not subject to out-of-state transfer and who, there.ore. identify with the long-range health ofthe state's lifestyle and econ'nny. Resources needed to unearth facts about money laundering within a state should be drawn from all available police agency and regulatory sources, and coun- termeasures should be selected from the entire range of criminal, civil, and regula- tory remedies, including any combination thereof. The statewide prosecutive or en- forcement agency whether it is the Attorney General or another agency shouid as sume responsibility for acting as a clearinghouse for information on money laun dering cases, techniques, and countermeasures. Nonfederal drug enforcement ef- forts at the statewide level should concentrate heavily on the financial aspects of the drug industry and on providing a vehicle by which to bring state regulatory agencies and the state's financial community into the enforcement effort. The Arizona Banking Department took a very active role in the passage of money transmitter egulation ana ransaction reporting legislation in 1991 As 1ie rerula ~` agerc~ ~esponsihie for enforcement of its provisions, it has joine.' with ire Attorney PAGENO="0254" 250 General's Office and the Arizona Department of Public Safety to assure coordi- nated enforcement. Fourth, the U.S. Department of Justice has organized an Office of Money Laundering. This office has an excellent opportunity to provide leadership and fed- eral-state coordination, and is moving to perform that role. It should be fully funded, and should support efforts to assist state and local money laundering en- forcement by supporting a state contact agency in each state that is active in such enforcement. 3. Financial Community Support and Information Source Development A third major strategy to counter evasive techniques of money launderers is the development of financial community support and information sources, partict- larly by building and relying on the goodwill of the legitimate commercial commu- nity. The financial community is in a unique and indispensable position to defeat the evasive techniques of money launderers. Its business often involves gathering, collating, and transmitting the kind of information that discloses and proves the links among people (including fictitious or falsely identified people), transactions, and countries. Often this information exposes money laundering as well as fraud. Under new A.R.S. § 6-1241 a great deal of that information must now be collected and sent to Arizona law enforcement. Reports required of all financial institutions include: Currency Transaction Reports, Form 8300 reports, and state Suspicious Transaction Reports. In addition, money transmitters must fl~:: Foreign Bank Account Reports and Currency and Monetary Instrument Reports, and must make logs of certain cash transactions over $3,000. Regulatory Enforcement. Regulation of money transmitters as such is new to Arizona. The major effects of this statute will be in three related areas. First, regulation will prevent entry into the business by unsuitable corpora- tions. Applicants who do not demonstrate suitable "financial conditioa and respon- sibility, financial and business experience, character and general fitness" will not be accepted. Second, licenses may be suspended or revoked for shortcomings of general competence, experience and integrity, or for insolvency. The superintendent has broad discretion to apply A.R.S. § 6-1210 to remove licenses for sucn reasons for the protection of the public. Third, licenses may be revoked for failure to comply with the various anti- money laundering provisions or reporting requirements. Even the conduct of an au- thorized delegate may result in the loss of a license if the authorized delegate vio- lates title 13, chapter 23 (covering organized crime and racketeering, including money laundering) title 6, chapter 12 or rules adopted under title 6, chapter 12 (the money transmitter regulation and transaction reporting statutes), if the delegate's conduct was the "result of a course of negligent failure to supervise or.. . of the will- ful misconduct of the licensee." These provisions are of great practical significance. because major money transmitters (American Express, Travelers Express, Western Page 13 PAGENO="0255" 251 Union, etc.) have enormous economic incentive to police their own delegates and thereby avoid revocation proceedings. Loss of a license in one state may automati- cally trigger proceedings in other states against the same licensee, with huge eco- nomic risks to the major operator. Law enforcement may therefore . ely on the li- censee to cooperate in the investigation of their own delegates and, more impor- tantly, in their maintenance of internal compliance programs designed to assure strict compliance with required reporting and recordkeeping provisions. Transaction Reporting Requirements. The transaction reporting require- ments of new A.R.S. ~ 6-1241 generally parallel current federal transaction reporting requirements on the substance of who must make reports, the contents of the re- ports and the circumstances that trigger the obligation to report. The reports are designed to provide law enforcement with data from which law enforcement may make general resource allocations, improve geographic and business sector target- ing, focus on specific individuals and businesses, and assist in the proof of cases un- der investigation. The reports are: § 6-1241(A) Suspicious Transaction Reports The suspicious transaction report is a successor to the previous voluntary sys- tem of reporting suspicious financial transactions on so-called Money Laundering Reports. The obligation is on all money transmitters, a term that is defined in A.R.S. § 6-1201(10) to include all financial institutions as defined by federal law and several additional categories of businesses. The form of the report, called an "STR," is within the discretion of the Attorney General. The reports required under Section 6-1241 are attached as Appendix 9. § 6-1241(B) - Currency and Foreign Transac;ons Reporting Act Reports This subsection also applies to all money transmitters, but, unlike § 6- 1241(A) onl~ imposes a duty to report if the transmitter is requi'~ed to fi~ ~ri.~e 31 L S C § 5~ 26 ano the relevant federal regula.~.ons It there ore do~ i impose a renorting duty on non transmitter or on an~ pe'~son who is not presen obliged to file under federai law. These criteria have different effects on different reports. Tne reports are 1) Cash Trar~action Reports ( CFRs) A money transmitter must file a report o each deposit, wittidrav~ai exchange of currency or other payment or transfer, by, through, or to the transmitter if the transaction involves more than $10,000 in currency. Under various circumstances, multiple transactions are to be totalled and treated as a single transaction (`aggregated") for the purpose of reporting. 2) Casino Repérts ("CIRC) Casinos are separately required to ifie forms similar to the CT'R by federal law, and therefore by A.R.S. § 6-1241(B). Since casinos are not legal in Arizona, this will have limited application. ?ag~ 14 PAGENO="0256" 252 3) Reports of Transportation of Currency or Monetary Instruments (called "Currency or Monetary Instrument Reports" or "CMIRs") Federal law requires that each person who physically transports (including mails or ships) or causes to be transported or attempts to transport currency or other monetary instruments in an aggregate amount of over $10,000 at one time in or out of the United States, or receives such currency or monetary instruments from abroad, must mak a report of that event. The report is generally called a "Currency or Monetary Instrument Report" or "CMIR." A monetary instrument includes cur- rency, traveler's checks, and negotiable instruments or securities in bearer form or made to a fictitious payee or in such a form that title passes on delivery. The federal requirements contain numerous exemptions for legitimate commercial entities. The state statute automatically incorporates all of the federal exemptions. It further re- duces its impact by requiring reports only of "money transmitters," iic~ of all "persons." Therefore, individuals and businesses who are not money transmitters as the term is defined in AR.S. § 6-1201(10) are not required to make a state CMIR report. All federally filed CMIRs that relate to Arizona are made available to Arizona state officials through its Memorandum of Understanding with the U.S. Department of Treasury 4) Reports of Foreign Financial Accounts (called "Foreign Bank Account Reports" or "FBARs") Under federal law, each person subject to the jurisdiction of the United States (except a foreign subsidiary of a U.S. person) that has an interest in or au- thority over a bank, securities or other financial account in a foreign country must report that relationship each year. These are sometimes called "Foreign Bank Account Reports" or "FBARs." As with CMIRs, the Arizona requirement applies only to money transmitters, and not to all persons. These reports may have great significance despite their limited application, since nor-bank money transmitters suct- as casa a~ cambios must disciose Mexican accounts t 6-1241(C) - Reports of Receipt of More Than $10,000 in a Trade or Business (Form 8300) All persons engaged in a trade or business, whether or not they are money transmitters, who receive more than $10,000 in cash or a cash equivalent in one transaction (or in twc or more related transactions) must file a report of the transac- tion. The report is contain the information contained in the federal IRS Form 8300 § 6-1241(D) $3,000 Logs All money transmitters who are required by federal~ law to keep so-called "$3,000 logs" must keep them for the Attorney General as well. These logs are re- cuired whenever a financial institution sells a bank check or draft, cashier's check, money order or traveler's check for $3,000 or more in currency (including contem- poraneous purchases totalling $3,000). If the purchaser has a deposit account with the financial institution their identity must be verified and the basic information about the transaction noted: name. account number, date, branch, type of instru- Page 15 PAGENO="0257" 253 ment, serial number, and dollar amount. If the purchaser does not have a deposit account, their identity must be verified by identification provided, including the identity of any person for whom they are dealing, and the same data collected and logged. The logs must be available for inspection at any time. § 6-1241(E) - Targeting Projects The banking superintendent may require additional recordkeeping in a speci- fled geographic area for a sixty day period. This provision is modeled 01131 U.S.C. § 5326. It is intended to allow the superintendent to gather financial report data on a more comprehensive basis than allowed by the other financial reporting require- ments, and to address specific localized money laundering problems. Non-Duplication of Reports. New A.R.S. § 6-1241(G) recognizes the present MOU between Arizona and the U.S. Department of Treasury and the possibility that access arrangements may change in the future It provides that the filing of a report with the appropriate federal agency is deemed to be compliance with the parallel state requirement "unless the attorney general has notified the superinten- dent that reports of that type are not regularly and comprehensively transmitted by that federal agency to the attorney general." Therefore, no business now filing CTRs or CMIRs in compliance with federal law need file any different or additional report with the state, because the current MOU results in the regular and compre- hensive transmittal of those reports to the attorney general. The same is not true of FBARs or 8300s, however. These are tax forms and cannot be distributed by MOU. These will have to be separately made to the attorney general. Immunity from Liability. A.R.S. § 6-1241(H) and (I) are companion provi- sions to A.R.S. § 13-2315(D), which provides protection from civil liability for finan- cial institutions that notify law enforcement of possible racketeering violations. These new provisions broaden that protection to cover the broader range of persons involved and to cover keeping and filing reports as well as divulgence of informa- tior~. Computerizing Arizona-related financial report data. The Arizona Attorney General's Office, through agrant project, obtained computer hardware and software to store and manipulate data received from the U.S. Department of Treasury. The data tapes obtained under the Memorandum of Understanding described above contain all Arizona-related CIR and CMIR information from January, 1987 to the present. The additional data required under the 1991 statute has been added as it is submitted. The data is collected and analyzed in the Financial Remedies Unit of the Attorney Generals Office by the Transaction Record Analysis Center (TRAC) The Arizona Attorney General s Office through TRAC, continues to de velop a microcomputer system capable of manipulating the massive database and producing useful analysis. The system is being designed so that it can be tailored for use by any state The Arizona Attorney General s Office intends to distribute the hardware and software specifications of its system, along with its own software en- hancements, to other states interested in putting the database to work. States that obtain data relevant to that state from the Department of Treasury will then be in a Page 16 54-6500 - 92 - 9 PAGENO="0258" 254 position to use all of Arizona's development products and move immediately to a working system. The concept of computerized state financial data analysis includes four capa- bilities. First, the data should be readily retrievable in response to specific queries on, for example, a name, a social security number or an address. Second, the data search should be enhanced, so that a name inquiry, for ex- ample, would trigger responses including CTRs, CMIRs or other reports that did not contain the specified name but did contain some data linked to the name. The nature of the link would be defined by "expert rules," criteria that mimic the analysis that an expert would do of the entire database. For example, the computer could respond to a name queiy with financial re- port data containing an address that the subject used, even though a particular CTR/CMIR did not contain the subject's name. It could also link aliases, switched names, or sound-alikes. It could identify networks of names, addresses, social secu- rity numbers and other identifiers, and describe the activity of the group. The group's activity may be significant in ways beyond that of a single member, such as the activity of a group of "smurfs" or "mules." Third, the computer would be fed expert rules for the identification of poten- tial money laundering suspects. Criteria can be posed to the computer so that it can generate lists in response to the criteria. Experimentation with such criteria has ad- vanced for a number of years in the Department of Treasury, most recently under FinCEN. The Arizona Attorney General proposes to build on that foundation and adjust those nationwide expert rules to the peculiarities of Arizona. Fourth, the project proposes to pose general statistical questions to the com- puter for the purpose of generating strategic guidance. The database could then be useful as an empirical check on other trend analyses, intelligence, and economic ob- servations. The first goal, responding to inquiries, is straightforward and needed only the technical work of defining, transferring, and digesting the data. That has beer ac- complished, and the information is on line for queries through TRAC. Computer responses have proven useful in numerous cases and promise to become ever more valuable as agencies become more familiar with the usefulness of CTR, CMIR, 8~O3 and other data. The system for recognizing related information in the database is presently being designed. The analytical capacity needed to perform the component tasks pushes a PC based system to the limits of present technology. The first task is to take a given inquiry "hit" and locate any additional records associated with the "hit" that are in the database. This is done by checking selected portions of the "hit" record against all other records in the system. The selected portions include ad- dress, social security number, organization name, organization address and account numbers. The result of secondary "hits" is a web or network that is a subset of the total database, containing records with common identifiers. For example, the net- work may begin with a CMIR on a "mule," connect it with a relative of the mule ~ Page 17 PAGENO="0259" 255 used the same address as the mule when depo~iting funds on which a CTR was filed, a business of a relative, and a series of other mules that used the same business name when reporting other cash importations. By supplying known associates in the initial inquiry, a more detailed picture of an enterprise may emerge. The goal of developing a system that uses only resources that are within the reach of state law enforcement requires limitation to the PC. The PC solution, however, will be a compromise, trading off processing time and system resources in order to keep the resources required at a realistic leveL The project is now in the process of improving software to enhance the efficiency of available hardware. The TRAC is also acquiring new hardware designed specifically to recognize and plot networks based on and capable of handling large amounts of data. The development of an expert system capable of assisting strategic decisions is proceeding. First, at a broad strategy level, the transaction report data is being compared over time, geographically, and with external social and economic data. These corn- parisoris will attempt to identify anomalies, data errors, and data collection deficien- cies. As part of the anomaly-identification process, results are being tested and ex- plored for validity and significance. For example, a comparison of CTR totals by county expressed as a percentage of total personal income in that county revealed consistently higher percentages in the border counties. The project will be working with U.S. Customs Service agents and others with experience in drug finance inves- tigations to develop useful results. The broad analysis will be useful in allocating resources and identifying the systemic vulnerabiiti.is of the money laundering component of the drug industry. For example, the amount of inbound cash reported on CMIRs and the relative amount of outbound CMIR reports -- about one-fiftieth of the inbound amount -- indicates that spot searches of outbound traffic at border crossings would probably yield large amounts of unreported cash, especially at certain ports. Greater e~peri- ence with the database and deeper understanding of the figures that g inrc' it and their social and economic context will allow thc development of formumas and c~mn- parisons that disclose which cash is drug cash and provide insight into how and where it flows. The second level of analysis will be aimed at the identification of individual targets. It will build on the other two processes - network identification and broad analysis. As with the development of expert rules, the targeting of individuals and groups will require isolation of each of a multitude of variables and inquiry into their workings and their effects on the analysis. This process depends only partly on deductive reasoning and statistical review. It will turn primarily on interviews with people who have experience with the variable under study. These interviews will concentrate on law enforcement experts, bankers, economists, and demographers. The expert rule development process will build on the existing experience of the U.S. Department of Treasury by focusing on the Arizona data and tailoring the nationwide conclusions tc ñt Arizona's particular circumstances. An important ad- Pam 1E PAGENO="0260" 256 vantage of focusing on one small part of the national picture should be that greater attention can be given to local anomalies. Equally important, the greater depth of understanding of the component variables should permit more sensitive and there- fore more accurate changes in the rules over time to adjust to changing circum- stances. Statistical analysis has proven to be possible only on a limited basis pending receipt of more powerful. computer hardware. The size of the database has over- whelmed available minicomputer technology. It was determined that only a main- frame computer could do complete statistical analysis, due to memory needs. Limited memory, however, does not prevent meaningful strategic results, some of which have been rather startling even for experienced Arizona drug investigators. Concern for investigative integrity, as expressed in the MOU with the Department of Treasury, prevents the widespread disclosure of the computer-gen- erated results. They will be made available on a need-to-know, right-to-know basis as they are refined. State Suspicious Transaction Reports. In a report on money laundering by the American Bankers Association, Toward a New National Drug Policy - The Banking Industry Strategy; American Bankers Association Money LauiYering Task Force, April 27, 1989, the financial industry adopted a philosophy regarding law en- forcement, the financial industry and money laundering. The introduction to that report reads: It is as imperative for the banking industry as it is for the L,w enforcement community to deter drur dealers from using our nation's finande ~istitutions to laun- der monies derived from illegal activity. To be successful, however, there must be partnership in this effort... Our members stronelv believe that the government and the banking industry need to won: together as a team, not as adversai:s, in pursuing the goal of a drug- free America. Tne Arizona Attorney General's Office has enioyed a mutually beneficial relationship with Arizona's financial community for many years. In 1985, when Arizona enacted its Money Laundering statute with criminal and civil enforcement mechanisms. the Arizona Attorney General's Office met with financial lea~.ers to discuss the effects of the new legislation. One result of those discussions was the development of a voluntary, informal reporting system relating to possible money laundering activits through the use of bank services. The Money Laundering Report (MLR) was born of mutual desire to prevent Arizona's financial institutions from being used for money laundering. MLRs were simple, one-sheet forms on which financial institution personnel provided information about suspected money launderers or suspicious transactions. As of September 20, 19' , each "money transmitter" doing business in Arizona. a classification that mclucies all banks financial agencies and financial in stitutionsas defined by 31 U.S.C. § 5312 or 31 C.F.R. 103.11, must file: p~. PAGENO="0261" 257 in a form prescribed by the attorney general a report of any suspicious activity or business conducted by a customer that the . . . money transmitter believes may con- stitute a possible money laundering. . . [or other "racketeering" offense under the state's RICO lawsi violation... The Arizona STR requirement goes beyond the analogous federal Criminal Referral Forms. It applies to all money transmitters, including various walk-in fi- nancial services such as check cashers, money exchangers and telegraph services. The Arizona Attorney General designed the form to be brief. A three-part list of possibly suspicious circumstances is provided on the back of the STR form. The first part, titled `Transaction Suspicious," lists circumstances that m~y signal money laundering. They include repeated large cash transactions associated with wire transfers to, from or through listed narcotics source or transfer countries or bank secrecy countries and other factors, even including the odor of the bills (odors that are used to defeat drug dogs or that are associated with illegal drugs - nail polish remover is listed, for example, because it smells like the acetone that permeates bills present when methamphetamine is "cooked"). The second part, "Person Suspicious," includes characteristics that would be relevant to a non-bank money transmitter with no prior relationship to the customer and whose employee has never seen the customer before. Ignorance of basic facts related to the transaction, refusal to provide identification or production of false identification and a customer's request for payment addressed to a post office box are among the circumstances described. The third and final portion of the list, "Circumstances Create Suspicion," is composed of situations in which the circumstances surrounding the transaction may trigger well-founded suspicion. It is aimed primarily at banks and othe' money transmitters with ongoing relationships with the customer. Here the context of the :ransaction is the focal point. Toe Arizona STR is intended to tan a different dimension of financial infor- mation than the CTR/8300 reports. Those forms are part of a set of statutory barri- ers erected to channel the cash economy, especially at the point that cash enters the financial system. Because these barriers must be rigid, the form must be completed even though the banker may have known the customer for years and may know ex- actly the innocent source or purpose of the cash being reported. The STR is de- signed to elicit the informed judgment of the people who often know the most about the customer and the transaction. The list of possibly suspicious circumstances is provided to help remind involved personnel of some of the circumstances commonly associated with money laundering. The instructions caution, however, that even the presence of several of the listed circumstances in the same transaction may be ade- quately explained by other facts or circumstances. The information requested includes: reporting person's identification; cus- tomer identification, including date of birth, social security number or employer identification number and occupation; description of transaction; and additional in- formation. Page 20 PAGENO="0262" 258 A portion of the form was left blank for comments. The comment section has proven to be the most useful in detecting criminal activity. In contrast with the federal reports, which require only objective information, STRs give the person fill- ing out the report an opportunity to state subjective impressions and observations. Often bank personnel will include information in the comment section that they omit from the federal Criminal Referral Forms and CTRs. Since the comment por- tion is narrative, it is relatively difficult to enter into a computer. We have found, however, that the comments are worth the added effort. The Arizona SIR is an open invitation to the flhancial industzy to provide selective information. Reporting is also encouraged by statutoiy immunity from suit and by restrictions on dissemination of the reported information to prevent dissemi- nation for anything other than bona fide law enforcement purposes. The Arizona SIR is unique among similar forms in that it was largely cre~ ated by representatives of the industry that must complete the form; On the day the statute was finally approved, the Attorney General began to assemble a working group of representatives of the various sectors of the money-transmitter industry. The Arizona Bankers Association, Arizona's check-cashers association, a major money order business and a representative of the "mom and pop" non-bank financial businesses all joined with the Banking Department and the Attorney General's Office to form the working group. Representatives of a major telegraph company, an international money exchanger and others were also consulted freely. The SIR went through numerous drafts, a complete reorganization and a great deal of commentary. The attorney general's office determined that the form would not exceed, one page (with the suspicious circumstances listed on the back); that it would be compatible with the present federal Criminal Referral. Forms and with the future FinCEN unified federal regulatory form; and that its language would be plain enough to be understood by those who would fill it out. The rest was open. for discussion. A state SIR system is a useful supplement to the federal system. Experience with the SIR and its voluntary predecessor has shown that it is a fairly reliable pre- dictorof criminal activity when used in conjunction with other data. The systeir of federal reports relating to money laundering is comprehensive and a proven deter- rent. State ~:atutes should either designate as a state crime the failure to comply with or the avoidance of federal requirements or should mirror federal require- ments at the state level. Other sources. Financial information may also be developed through im- plementation of a money lawzdering hotline, along the general model of a "silent wit- ness" program. The concept would ~center on a publicly announced and advertised telephone number, with the phone(s) staffed by volunteers composed of experi- enced financial community and financial law enforcement retirees. The activities would be publicized and overseen by a blue ribbon board of directors, drawn from business and law enforcement leaders. The program would solicit financial support and offer rewards for information, which would be held in strictest confidence. Initial efforts to establish such a program in Arizona are under way. Pace 21 PAGENO="0263" 259 The financial community is critical to money laundering prevention beyond its role as a source of information. Without support services from the financial community, money laundering could not flourish. Therefore, education of key finan- cial personnel is essential as a prevention measure. Law enforcement must assume primaty responsibility for efforts to provide financial service providers with the knowledge and will to resist money laundering. In areas in which substantial money laundering activity is occurring, law enforcement should reach out to the financial community. Law enforcement must include the financial community in its associa- tions, planning groups, and legislative proposal drafting and must consider and re- spect its points of view and agendas. In the context of money laundering, the special significance of border towns generally, and particularly of the financial and business community there, should be recognized. Even a few reliable sources of financial information in a border town provide a foothold for the commumty s effort to reject drug trafficking and the shadowy money that it generates and operates on. The highest strategic priority of law enforcement in border states should.be the denial of financial facilitation to the smuggling groups on the border. Methods by which this str4~:egy could be imple- mented include designing or encouraging professional and business education pro- jects, fostering strong cooperation between law enforcement and commercial inter- ests, concentrating prosecution efforts on the more overt facilitators of money laun- dering, and developing reliable sources within the financial community, particularly in the businesses that supply key assets to smugglers, such as real estate, vehicle sales, and specialized services such as mobile phones, modified vehicles, and special electronic gear. Law enforcement should also concentrate on border businesses that provide special opportunities for laundering money. Import-export firms; çg~~ oe cambin; traders in border products, such as produce, cattle, or manufactured goods; and in- vestment concerns all provide inordinate temptation as targets for illicit control by money launderers. Financial community awareness of money laundering is essential to an attack on all drug industry activities including local production and lower level sales. Programs emphasizing knowledge of the customer, inquiries designed to pierce false identification and locate foreign connections, and similar methods of spotting poten- tial launderers should be reinforced by legislation providing immunity from civil lia- bility for divulging customer information to law enforcement. 4. InternatIonal Boundary Countermeasures International legal and diplomatic developments related to money launder- ing enforcement over the past few years are truly revolutionary. They promise to reduce greatly the effectiveness of multicountry schemes, thanks to excellent work by federal officials to dissolve international barriers to the investigation and prose- cution of money laundering. For example, a Mutual Legal Assistance Treaty ("MLAT') is now in effect between the United States and the Republic of Mexico. Much international cooperation can alsobe fostered at the state level. For example, ?age2 PAGENO="0264" 260 the Conference of Border States Attorneys General is an excellent vehicle for direct cooperation on matters of mutual concern on the Mexican border. This conference~ has met twice yearly for many years. Since 1988 it has reflected growing concern over drugs and money laundering on both sides of the border. It provides a forum for issue resolution that is more flexible and practical than federal treaties. It also provides a clearinghouse for law enforcement training. Financial investigation training is current'y being designed for local officers on both sides of the Mexican border with the assistance of the Federal Law Enforcement Training Center (FLETC). FLETC has facilities in Marana, Arizona and Artesia, New Mexico, at which it will be able to host training. Various trade-related commissions and boards provide similar border oppor- tunities. Also, local law enforcement has long cooperated informally across the border on a wide range of topics from stolen vehicles to missing persons The list of topics has been recently expanded to include money laundering, a matter of vital concernto Mexican as well as United States officials. Direct local government con- tacts with Mexican prosecutors, investigators, and regulators are a key part of a Southwest money laundering strategy. Pae 23 PAGENO="0265" 261 Conclusion The evolution of law enforcement over the past twenty years has been toward recognition of the importance of the finances of crime. Money laundering strategy is the process of discovering, selecting, developing and perfecting techniques to re- duce and remedy crime by focusing on its finances. This update report proposes a general framework for the identification of goals for financial enforcement, and builds a strategy to address Arizona's three main sour ~s of drug money, a strategy that is relevant to all states. Application of the strategy in Ar;zona will test it, guide it and continue to refineit as time goes on. PAGENO="0266" 262 Sesate Pennanept Subcommittee * Ilmestigatiopis FACT SHEET ~ #._______1 0 From Los An~eles Police Department Regarding Casas de Cambios and Check Cashing Businesses Growing with the burgeoning drug trade, "casas de cambios" and check cashing businesses have sprung up state wide, and are believed to be lucrative sources for laundering millions of dollars of illegally obtained funds. This report will explain how casas de cambios and check cashing businesses function, review a casas de cambios case, how money can be laundered through check cashing businesses and recommend regulations to be imposed to regulate these unscrupulous businesses. Casas de Cambios Casas de cambios are public money exchange businesses used almost exclusively by the Latin American population. According to the Internal Revenue Service (IRS), over 1,200 casas de cambios are in operation in California. Their purported legitimate purposes are to exchange United States currency into Mexican pesos and vice versa, wire transfer and receive transmittals of currency domestically and abroad, cash Checks, and provide miscellaneous financial services to customers who do not have bank accounts or credit. These financial services include an endless variety of consumer services. Casa de cambios send currency to relatives in Mexico, Central America and South America. They also create savings accounts, make loans, pay bills, purchase money orders, sell postage stamps, provide notary services and arrange for airline tickets. PAGENO="0267" 263 FACT SHEET Casas de Cambios Check Cashing Businesses Casas de cambios originated in Mexico during the 1980s reportedly to circumvent the government's strict currency and financial controls. They proliferated in those areas which were politically or economically unstable. They met the demands of persons involved in illegal activities for secrecy and avoidance of the Mexican government's supervision. Today, casas de cambios are usually found in heavily populated Hispanic neighborhoods near the Mexican border, the greater Southern California area, the San Joaquin Valley and the East Bay area in Northern California. The majority of these casas de cambios perform exactly as they do in Mexico. The only regulation imposed on them is to register for licensing with the state. According to the IRS, less than one (1) percent of over 1,200 casas de cambios are licensed. No California regulatory agency has the regulations or manpower to enforce licensing. Federally, casas de cambios are classified as nontraditional financial, institutions. All of the financial services they provide to the public are outside of the regulated financial industry. In 1991, the Los Angeles Police Department and the IRS, concluded a two-year investigation into Central de Cambios y Servicias, Mexico, Inc. (Central), a casas de cambios, operating in San Diego. Between April 1985 and June 1987, employees of Central 2 PAGENO="0268" 264 FACT SHEET Casas de Cambios Check Cashing Businesses deposited over $46.5 m~l1ion in U.S. currency into business accounts. No Currency Transaction Reports (Cm), IRS Form 4789, were filed by Central on any portion of this currency. A CTR must be filed whenever a financial institution receives more than $10,000 in cash, in one or more related transactions. It was established during the investigation that the owner of Central, Antonio Gonzalez, had extensive ties with narcotics traffickers and money launderers, and had participated in the purchase of a home which was later found to contain 263 kilograms of cocaine~ The investigation also uncovered another casas de cambios, TJNIMEX, Inc., a California Corporation, a subsidiary of Central. The owner of UNIMEX, Raul Velasquez, laundered approximately $300,000 in cash from government funds that he believed had been generated through narcotics sales. No CTRs were filed on any portion of this currency. Velasquez told undercover agents that their money was being driven across the border to Mexico and deposited into bank accounts in Tijuana, which Velasquez controlled. The undercover agents were then provided with "bank checks," drawn on domestic Mexican bank accounts, in return for the cash they gave to Velasquez. The purpose of this exchange was to launder money. The undercover agents received a bank check from a purportedly legitimate source, for a purportedly legitimate reason, which could be openly deposited. Velasquez disposed of the cash in a manner designed to conceal its source and existence from law enforcement and regulatory agencies. 3 PAGENO="0269" 265 FACT SHEET Casas de Cambios Check Cashing Businesses Initially, Velasquez offered to launder the undercover agent's drug money by using it (the money) to cash checks in his casas de cambios. Velasquez further explained, that when the money was all used up, he would send the undercover agents either a wire transfer or a check.. Velasquez was opposed to depositing the money in a bank because he was aware that law enforcement used canines to detect the scent of. narcotics on money. Velasquez was also aware of the enforcement of Bank Secrecy Act (BSA) statutes regarding money transfers and thus he had to be more careful. Check Cashing Businesses Check cashing businesses function just as their title implies. They may also conduct many of the same functions as casas de cambios. Check cashing businesses can be found in almost any neighborhood, but are most prevalent in lower economic communities and in the vicinity of large industrial complexes.. According to the California Secretary of State, Department of Corporations, and Department of Banking, there are no statistics available for the number of check cashing businesses operating in California. It is extremely easy for a check cashing business to launder illicit money. The following scenarios are examples of how drug proceeds can be laundered by check cashing businesses. These examples have been structured from firsthand information obtained 4 PAGENO="0270" 266 FACT SHEET Casas de Cambios Check Cashing Businesses from undercover detectives and interviews with Confidential Reliable Informants in recent money laundering investigations. 1) Check Cashi~q - A drug trafficker provides the check cashing business with $100,000 in cash from drug sales. The money is then placed in the check cashing business' safe and is used as a bank to cash checks from customers. Many of the checks are typically less than $1,000 amounts. The check cashing business typically charges the person cashing his or her check a two (2) percent service charge. The checks are then openly deposited in the check cashing business account at a local regulated banking institution. The check cashing businesses continually cash checks and make deposits until the $100,000 amount has been reached. These funds are then either held in the account, issued as.cashier's checks, or wire transferred to another financial institution or off- shore account. The laundering cycle is then completed. Typically, the check cashing business will charge a known drug dealer a five (5) to seven (7) percent charge for their service, and eight (8) to nine (9) percent or more to someone they do not know that well. 2) Smurfing - Drug proceeds can be laundered through the issuance of cashier's checks or money orders issued by the check cashing business. For example, a drug trafficker provides the check cashing business with $100,000 in cash 5 PAGENO="0271" 267 FACT SHEET Casas de Cambios Check Cashing Businesses from drug proceeds. The operator of the check cashing business will then employ several persons (smurf s), to obtain cashier's checks or money orders from regulated financial institutions. These cashier's checks or money orders are typically in increments of $5,000 or less. For their services, the smurfs are paid from $30 to $50 per instrument that is obtained. The monetary instruments are then deposited in a drug dealer's or nominee's account or sent across the border for deposit into a bank account in Mexico. The funds can then be wired back to the United States or abroad and the money laundering cycle is completed.. The charges for these services by the check cashing enterprise are similar to the fees in the aforementioned check cashing scenario. The combination of Bank Secrecy Act guidelines and federal and state enforcement efforts have been very effective in detecting abuses by regulated financial institutions and identifying money launderers. Criminal organizations are now being forced to deal with nontraditional financial institutions, such as casas de cambios and check cashing businesses. As stated earlier, casas de cambios ~must be licensed to operate in the State of California. However, there are no regulations to govern or audit these enterprises. In addition, there are no federal provisions under the Bank Secrecy Act for licensing, 6 PAGENO="0272" 268 FACT SHEET Casas de Cambios Check Cashing Businesses enforcing, or auditing casas de cambios. There are two potential consequences casas de cainbios and check cashing businesses can have upon the U.S. economy. First, these illegal enterprises are unfair competition to the legitimate financial sector. They draw potential customers away from regulated financial institutions and other connected consumer services and businesses. Second, because they are unregulated, these businesses avoid paying local, state and federaltaxes. Recommendations It is recommended that the following Bank Secrecy Act guidelines and federal laws be enacted to regulate casas de cambios and check cashing businesses: 1) Require licensing of businesses engaged in money transmittal, currency exchange, check cashing, issuing of payment instruments, and receiving money from an obligor for the purpose .of paying the obligor's bills; 2) Require the filing of Suspicious Transaction Reports (STR5) regarding possible money laundering or structuring violations; 3) Require a corporate structure for each licensee and designated agent of the licensee; 7 PAGENO="0273" 269 FACT SHEET Casas de Cambios Check Cashing Businesses 4) Require fingerprinting and extensive background information on all key personnel associated with the nontraditional financial institution, including businesses with less than five full-tine employees; 5) Require the posting of at least a $250,000 bond by each licensee; 6) Conduct periodic, unannounced, on-site inspections of business records by the regulatory agency. Allow local and state agencies to inspect the records in conjunction with the federal regulatory agency; 7) Allow for the inspection of business records during normal business hours by law enforcement as part of an investigation into money laundering or compliance with CTR and STR reporting requirements; 8) Make it mandatory that all records of transmittals, currency exchanges, check cashing, issuance of payment instruments and other financial records are maintained for five years; and, 9) Make it a five-year felony for the willful violation of any of the licensing provisions. 8 PAGENO="0274" 270 FACT SHEET Casas de Cambios Check Cashing Businesses Drug traffickers and money launderers will employ any method their imagination can devise to conceal and legitimize the proceeds of illegal drugs. Aggressive government, regulations, licensing, compliance and penalties are urgently needed to detect the illegal practices of the casas de cambios and check cashing industry. Prepared By: Los Angeles Police Department March 20, 1992 9 PAGENO="0275" 271 THOMAS M. MENINO Senete Permanent Subcommittee BOSTON CITY COUNCIL On InveStigatiOnS EXHIBIT# 11 C~,~itt*~ Ch.i,,~., ~ ~ March 20, 1992 ~ An. andHu~ib.. STATEMENT OF BOSTON CITY COUNCII,LOR THOMAS M. MENINO AS SUBMITTED TO THE SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS In the fall of 1989, a check cashing company began negotiations to secure a store front property in our neighborhood business district. Merchants and residents alike became concerned because accounts of illegal money laundering by the very same company had juSt appeared in the newspapers. On September 21, 1989, the Boston Globe reported that `Special agents from the Internal Revenue Service along with federal marshals ... raided eight ... check cashing businesses and charged their owners with illegally laundering more than $2 million dollars ... they believe came from the sale of cocaine." Not only was there the cloud of illicit activity associated with these operations, there was also the issue of extremely high fees being charged for services. As reported in a Chicago business publication, Cram's Chicago Business, (Oct.30, 1989), "Critics contend that despite regulation, the currency exchanges' charges are abusive - especially the fees for cashing government checks."This was of very grave concern because my City Council District is home to a significant elderly population, as well as home to several public housing developments. - The community protested the opening of a store front operation to the city, but residents were told that there were no legal provisions which barred the activity. Residents were not deterred. First, we met with every community bank in our business district to draft agreements and procedures which assured that every resident receiving a government check could cash that check at the nearest bank. Second, we petitioned the City's Zoning Board to amend the zoning code so that check cashing operations would be included in the "conditional use" clauses, thereby requiring community approval. Third, we lobbied State government to create legislation regulating check cashing operations in the Commonwealth of Massachusetts. The local press kept the community's efforts before the public, and residents and merchants turned out in force before the zoning board and the state legislature to protest the lack of regulation on such an important business activity as currency exchange. By the time we had finished, the check cashing company's interest in our community had vanished. One City Hall Square, Bonton, MA 02201 617.726.3510 O'~ Rn~y~I~ PAGENO="0276" 272 We won the battle but hardly the war. State legislation to regulate this industry is still pending; meanwhile, store front operations continue to spring up all over the City. It is unbelievable that government, on the one hand, places regulatory constraints on financial institutions which are designed to prevent money laundering activity, while on the other hand, the government allows store front operations to deal in limitless curçency xchan~~ithout any regulatory procedures whatsoever. Without specific regulations which prevent consumer exploitation and which prevent the potential for illicit activity, the door is left open for both to take place. PAGENO="0277" 273 Senate Permanent Subcommittee on Investigations STATEMENT TO THE UNITED STATES SENATE EXHIBIT # 12 SUBCOMMITTEE ON INVESTIGATION BY JAMES R. ZAZZALI, CHAIRMAN STATE OF NEW JERSEY COMMISSION OF INVESTIGATION February 27, 1992 In 1986 the New Jersey State Commission of Investigation [SCI) began an inquiry into New Jersey's check cashing industry, responding to information from law enforcement authorities that certain check cashers, both licensed and unlicensed, were being used for various illegal activities. Preliminary findings showed that the check cashing industry had been subverted by unscrupulous entrepreneurs, as well as members or associates of organized crime factions operating in northern New Jersey and New York, for activities such as evasion of federal and state income, sales and other taxes, bankrupting of companies, defrauding of corporate stockholders and creditors, and laundering of cash obtained from gambling, narcotics, embezzlement and extortion, loansharking. New Jersey requires check cashers who charge a fee to be licensed by its Department of Banking. The number of licensed check cashers has remained relatively constant, fluctuating between 75 and 88 since 1984. The volume of check cashing activity, however, has grown significantly. In 1986, more than 80 licensed check cashers reported cashing more than four million checks worth more than $1 billion and collecting fees in excess of $10 million. The most recent figures available from the New Jersey Department of Banking reveal that in 1990, 79 licensed check cashers reported PAGENO="0278" 274 fees of over $17 million for cashing nearly 5 1/2 million checks worth over $1.6 billion. Of course, these figures provide no information about the untold number of unlicensed check cashers who operate in New Jersey. The Commission's investigation culminated in a three-day public hearing in April, 1988. Then-Chairman Henry Patterson opened the hearing by saying of check cashers, "The operators may be few in number, but they constitute a business with ... a huge dollar volume and . . . a constant flow of cash that ... presents potent temptation for fraud, loansharking and other criminal activities." * * * The limited historical data available, obtained primarily from the State of New York, indicates that check cashing for a fee originated in its modern form in the late 19th century as a means for small businesses such as garmer~t manufacturers to cuickly convert the checks they received into cash to pay their yorkers. As criecks began to be used Sin business, small subcontractors received weekly checks in payment fcr their production. Since they required immediate cash to meet their weekly payroll and their limited capital prevented them from drawing against uncollected funds, the need for immediate cash was first met by the local saloon keeper who cashed checks in exchange for purchases of a few drinks or for a fee. In time, check cashing for a fee spread from the saloon keeper to other retailers who had cash available. As the use of checks in the marketplace expanded, check cashing PAGENO="0279" 275 activity also increased. New York and Illinois adopted the first laws regulating such activities in the 1940's, followed by New Jersey in 1951. The Commission found a heavy concentration of check cashers in the populous northeastern corner of New Jersey near New York City. In addition to identifying socioeconomic factors which would attribute this concentration of check cashers to high population density, the Commission learned that the major depository bank for check cashers in New York does not permit then to deposit corporate checks, and that New York's check cashing law has a $2,500-per- check limit. Therefore, as a practical consequence, checks payable to corporate or business entities or checks in amounts over $2,500 cannot be negotiated at a New York City check casher. In the southern part of New Jersey, which borders unregulated states, there is no similar heavy concentration of check cashers. The Commission recOgnizes that privately operated check cashing businesses serve a vital social and economic function for a significant segment of the population who do not or cannot rna~ntain contact with regular banking institutions. Check cashers are the only alternative for many people who need to cash social security and other government benefit checks as well as payroll checks. This alternative banking service is the only way some people can obtain cash with which to purchase food, clothing, shelter and other necessities. The Commission's investigation endeavored to ascertain what other types of customers used New Jersey's check cashers and why. 3 PAGENO="0280" 276 It was determined that many customers were corporations who, despite having bank accounts, were cashing receivables (checks payable to their businesses) at check cashers. The numbers were startling. At a single check casher in a 15-month period, the Commission identified $26 million in checks payable to businesses. More than. 500 companies used that one check casher during that period. Seventy of.them each cashed a.t least $30,000 worth of checks, 35 other companies each cashed checks worth over $100,000, eight companies cashed over $1 million each in checks and one individual customer cashed almost $5.5 million in checks payable to three companies. What can be said about some of these unusual customers which were found using New Jersey's check cashers? - We foundto be a myth the commonly accepted view that check cashers exist only to process small transactions for people who need to cash government benefit checks and payroll checks but who do not or cannot use banks or other financial institutions. Instead, we found widespread use of check cashers by corporations and individuals seeking to avoid the more stringent and more tightly enforced laws and regulations dealing with traditional financial institutions. We found the largest dollar amount of checks cashed at a New Jersey check casher was payable to a New York company PAGENO="0281" 277 involved in an extortion conspiracy to assure labor peace at John F. Kennedy Airport. A significant associate of the Gambino/Gotti crime family was involved inthat case. Curiously, one month after the company stopped negotiating its checks at the New Jersey check casher, the company petitioned for involuntary bankruptcy. - We found that a small trucking company cashed over $1,765,000 in checks in 15 months and more than half of that amount was not recorded in the company's books and records. The money disappeared without a paper trail. - We found the structuring of checks to avoid Currency Transaction Report requirements. That is, we found consecutively numbered checks by the same maker to the same payee cashed at check cashers. Each check was under the $10,000 CTR limit but collectively they exceeded the limit. We found companies cashing checks after filing ~for voluntary bankruptcy. - We found evidence of check cashers loaning money through the mechanisms of 1), accepting checks knowing they would bounce when presented and 2), by accepting post-dated checks. 5 PAGENO="0282" 278 We found a check casher kiting $5.7 million over a 10- month period between a New Jersey check cashing facility and one out of state. - we learned that check cashers are mainly concerned with whether they will be paid on a check. Therefore, the cashing of fictitious payroll checks and checks payable to fictitious business names is common. We found that check cashers even supply endorsements. - We found that the then-principal owner of New Jersey's largest check cashing conglomerate, himself president of the New Jersey Check Cashers Association, pled guilty to violating the CTR law and was sentenced to a term in federal prison. We found that increased CTR filings by banking and other traditional financial institutions have apparently been a factor in the huge increase in activity at check cashers. It is believed that money launderers have had to look elsewhere for the accommodation they need to get or move cash needed for payoffs, bribes, tax evasion or funding of illegal operations such as gambling or narcotics. 6 PAGENO="0283" 279 - We found that cash generation can be accomplished through the diversion of income checks and the cashing of checks payable to fictitious payees or the laundering of small denomination bills. - We found that organized crime overtly or through fronts has sought Ownership of check cashing facilities in New Jersey, and many of the customers we looked at had organized crime connections. * * * The New Jersey State Commission of Investigation issued a report in August, 1988 which summarized its findings concerning this probe and made recommendations with three goals in mind: (1) to protect the traditional non-banking clientele of check cashers, (2) to improve the state's regulatory powers and (3) to criminalize certain activities to stop organized crime incursion into the industry. in addition requesting that the Ne~ Jersey Department of Banking be given sufficient funding to thoroughly and effectively regulate check cashers, the Commission recommended that the following activities be made criminal offenses: Cashing of checks for a fee or gratuity by an unlicensed check casher. PAGENO="0284" 280 * Cashing of any check made payable to a payee other than a natural person, thereby eliminating any checks made payable to a business, trade name or logo, etc. * Operating or utilizing a licensed check casher to further any unlawful activity, including check kiting or other abuses of the float period required by traditional financial institutions for the clearance of checks in transit. * Any activity by a person or entity, including banks, which facilitates the commission of a criminal act by a licensed or unlicensed check casher. To further strengthen anti-crime controls over the industry, the Commission also recommended enactment of a state criminal money laundering statute which would also prohibit check cashing transactions which facilitate criminal activity. The Commission also urged the Legislature to authorize the Department of Banking to adopt additional regulations to: * Prohibit the cashing of any check in a dollar amount exceeding a specified limit, subject to exceptions for government, certified and insurance checks. 8 PAGENO="0285" 281 * Increase penalties for "fee gouging" and strengthen their enforcement. Lastly, the following corrective actions of an administrative nature were suggested: * Increase the Departnent of Banking's fees for investigations depending upon the complexity of an inquiry and the size of the entity under scrutiny. * Require that all transactions be either photographed (regiscoped) or microfilmed. * Require that the check cashing privileges of any customer who presents checks that bounce more than three times within a year, or who presents bad checks totaling more than $3,000 during the same period, be suspended and that such incidents be reported in writing to the Department of Banking. * Require that licensed check cashers keep books and records, including Currency Transaction Reports (CTR5), for a minimum of five years and that copies of CTR5 be filed with the New Jersey Division of Taxation. 9 PAGENO="0286" 282 * Require that receipts be given to customers showing the check cashing fee paid and amount of the transaction. * Simplify the licensing procedure, primarily to increase the number of check casher licensees. * * * Following the Commission's public hearings on check cashing in 1988, legislation was introduced that would have substantially reformed the industry. In 1989, the Department of Banking drafted its own bill to comprehensively reform the 1951 check cashing law N.J.S.A. 17:15-1 et. ~g. The bill would have criminalized the activities the Commission recommended with the notable exception of money laundering, which the Department of Banking felt deserved separate consideration by the State Attorney General. The draft bill also addressed others of the Commission's concerns. The Department reviewed and substantially rewrote its bill in early 1991 but the measure, which embodied recommendations made by the Commission, was never introduced. A trade organization representing the interests of licensed check cashers has opposed all such legislation. The check cashing investigation generated literally hundreds of criminal and civil referrals. It has resulted in countless requests for assistance from state, federal and local law enforcement offices. It seems that not a week goes by that we do 10 PAGENO="0287" 283 not encounter another scenario related to nefarious activities involving check cashing. All of the abuses we highlighted in our hearings and reports continue to occur. The Commission is also including a copy of its complete report for the record. 11 PAGENO="0288" 284 Senate Permanent Subcommittee on Investigations EXHIBIT# 13 UNITED STATES SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS Hearing on February 27, 1992 Statement By. Jose H. Garza, Jr. Sergeant Criminal Investigator TEXAS DEPARTHEN~ OF PUBLIC SAFETY NARCOTICS SERVICE Austin, Texas PAGENO="0289" 285 S -1- Mr. Chairman and members of the Subcommittee Thank you for the opportunity to portray for the Subcommittee the methods of operation and problems associated with~ the "Casa de Cambio" (Money Exchange Houses). I would also like to present to the Subcommittee my actual experiences in dealing with "non-bank banks" along the south Texas border area and the millions of dollars being laundered by these businesses. The first topic I would like to discuss is: What is a "Casa de Cambio"? S "Casas de Cambio" have been operating in Mexico since the 1980's, due to Mexico's tightening of the tax laws enforcement. The Mexican Nationals sought ways to transport "flight capital" out of Mexico to a more stable currency of the United States. The "Case de Cambio" helped in this regard because they would provide secrecy and avcid the Mexican government's, supervision. The "Casa de Cambio" businesses have been operating and growing in large numbers primarily along the U.S./Mexico border and the interior of Mexico for several years. The "Casas" have been operating as unregulated banking institutions. These institutions have been making wire transfers, loans, as well as providing check cashing capabilities and savings accounts with paid interest, on monies held for clients. Many of the individuals owning or operating the "Casas" have been, for a greater part, working for or associated with banks in a foreign country (Mexico). These individuals have held numerous positions from high ranking executives to tellers. 54-650 0 - 92 - 10 PAGENO="0290" 286 -2- A large scale marijuana and cocaine investigation was conducted in `ate 1987 involving Federal and State officers in Rockford, Illinois, and South Texas. This investigation brought to light the involvement of "Casas de Cambio" and their role in laundering large amounts of U.S. currency. Through this investigation, it was learned that Antonio "Tony" Franco had laundered several nillion dollars through Oscar's Money Exchange, a "Casa de Cainbio", in Hidalgo, Texas. Within days of the execution of the initial search and arrest warrants on members of the Antonio Franco/Richard Garza organization, search and seizure warrants were executed at "Oscar's Money Exchange." Seized at the business were drug ledgers, ledgers involving the use of several U.S. Banks withixi Hidalgo County and other "Casas de Cambio" in the U.S. and Mexico. Also seized was a large amount of U.S. currency. As the investigation proceeded, several employees from Oscar's Money Exchange were :interviewed. As a result ofthese interviews, officers discovered over twenty-six accounts in which illicit drug proceeds were being laundered. The officers also learned the methods by which wire transferring concealed the true origin of the currency and the true identity of the members of the drug organization. The investigation indicated that the business had laundered over five million dollars of U.S. currency within a few months for Antonio Franco, and the business had also laundered millions of dollars within a six-month period servicing all of its accounts. PAGENO="0291" 287 -3- The owner of "Oscar's Money Exchange" was subsequently indicted and arrested and pled guilty for failure to file a Currency Transaction Report (CTR). The principal client for "Oscar's Money Exchange", Antonio "Tony" Franco, was sentenced in Rockford, Illinois, and Brownsville, Texas, to serve 45 years in a Federal penitentiary. Richard Garza, head of the main drug operation in the organization, was sentenced to life without parole. As the investigation continued, it was discovered that a second "Casa de Carnbio", the "Casa de Carnbio America", was also involved with members of the Franco organization in laundering drug money. A search warrant was executed at the business, and it uncovered a multitude of CTR's (Currency Transaction Report) indicating large deposits of currency into a second "Casa de Ca~bio". The owner of "Casa de Canbio Arerica", after an interview with State and Federal officers, disclosed that he had an understanding with a third `Casa de Cainbio" that no CTR's would be filsd. As a result of this investigation, the owner of "Casa de Cambio America" was indicted, arrested, and pled guilty for failure to file CTR's. After a lengthy undercover investigation conducted by U.S. Customs and IRS, it was discovered that another "Casa De Cambio" had been laundering several hundred thousand dollars. Search and arrests warrants at this "Casa de Cambio" resulted in the arrests of its owners and several individuals. Seized at this location was over 4.5 million dollars in of U.S. Currency, precious stones, PAGENO="0292" 288 -4- jewelry, gold and silver coins, silver bars, and expensive paintings from Mexico. As the investigations continued into the now apparent problem with the "Casas de Cambio", a lengthy money laundering undercover investigation code named Operation Vagabond" was begun by U.S. Customs, IRS, Texas DPS, and FBI. This investigation resulted in the execution of simultaneous search and seizure warrants on numerous "Casas de Cambio" along the south Texas border from Roma, Texas, to El Paso, Texas. Over twenty-eight persons were indicted, and over three hundred thousand dollars in U.S. currency was seized in this investigation. One of the individuals arrested was a government employee involved in the money laundering business. In 1987, Texas DPS assisted the FBI in an investigation of a kidnapping of a local businessman in McAllen, Texas. The victim was the owner of a local clothing/jewelry business in NcAllen and also had a "Casa de Cainbio" within the business. After the arrest of the kidnapping suspects, the suspects confessed that they had knowledge that the business was accepting large amounts of currency from drug transactions. The kidnappers had hoped to obtain this currency as a ransom. In Houston, Texas, there are wire transfer businesses, or currency transmitters, known as "Giros". "Giros" are store front operations for laundering via wire transfers. "Giros" are also known for "One Stop Shopping": for obtaining beepers, cellular telephone rentals, providing long distance phone booths or facsimiles to clients that can aid in concealing the origin of PAGENO="0293" 289 -5- currency from law enforcement. A great percentage of the "Giros" are being operated by Colombian nationals. I. Common Methods Used for Money Laundering A. Ill-gained currer~y from drug proceeds reaches the business and laundering operation by business owner, nominee, and/or employee begins: 1. Cash is deposited into "Casa", usually through the "back door' and no CTR is filed. This is the first violation committed through the use of the "Casa". 2. A portion or all of .the cash is then transferred to a second "Casa" and/or banks(s), and again no CTR is filed. 3. Cash is accepted under the name of the "Casa" owner to avoid true ownership of the currency or negotiable instrui~ent. 4. Currency or negotiable instrument is then converted or deposited in a Mexican bank account(s). (Either in pesos or U.S. currency). 5. Currency (pesos or dollars) is then wire transferred to other banks and/or accounts destined for drug traffickers. 6. Upon reaching its final destination, the currency will: a. Remain in the foreign country b. Be rerouted into the United States - either by bearer or check drawn on Mexican banks. PAGENO="0294" 290 -6- c. Currency is then declared upon entering the U.S. as `clean" money from a foreign business. B. Another method of money laundering through the use of the "Casa de Cambio" is the hand-carrying of the currency into Mexico by the "Casa" owner, nominee and/or employee. Due to the high volume of vehicular and pedestrian traffic crossing from the U.S. into Mexico there is no real way of knowing how much currency is illegally leaving the U.S. II. Partial Compliance with Law by "Casas de Cambio" A. Investigations have indicated that partial compliance of Federal law is being done by some of the "Casas de Cambio"; however, non-compliance in the filing of the CTR and Report of International Transportation of Currency or Monetary Instruments (CMIR) is still occurring. 1. The drug trafficking is promoted through "Casas" by: a. Money laundering for a fee of 2% or more per transaction depending on the client. b. When a CTR or CMIR is filed, the paper work indicates the name of the "Casa de Cainbio" owner, employee and/or nominee, thus hiding the true ownership of the currency or original bearer. c. "Casa" owner, employee and/or nominee takes illicit business proceeds to a second or third PAGENO="0295" 291 -7- "Casa" and deposits the currency without filing or filling out any CTR's or CMIR's thus further concealing the drug money. III. Texas Currency Exchange Act A. Vernon's Texas Civil Statutes (Article 350) 1. Effective date: September 1, 1991. Effective enforcement date: January 1, 1992. B. Problems prior to Texas Currency Exchange Act 1. Exchange Houses were unregulated, with no control, and acting as banking institutions. 2. There was no compliance with Federal laws and regulations. 3. Exchange houses move to different locations within the community, county, or state when law erforcement officials begin to investigate or ;~hen it becomes known that the business(s) and/or employee(s) are under investigation. 4. There is difficulty in ascertaining who is the ovner(s) or individual(s) in charge of the location. 5. It is difficult to check on employees, owners, or nominees of Exchange Houses, since most of the individuals at the locations are foreign nationals with resident alien status. Employees move or work at two or three different Exchange Houses owned or controlled by the same person. PAGENO="0296" 292 -8- IV. Problems Experienced by Investigators A. The Drug Organization: 1. The investigation of a drug organization first requires a team of investigators dedicated to work many hours. The work load becomes even more intensive as the investigation proceeds and new leads come forth and a particular target is prioritized. 2. It is very difficult to investigate a large scale drug smuggling organization. However, once an informant and/or undercover agent has been implanted within the organization, the investigation becomes even more intense and a focus of the designated target must be maintained even though other targets may seem more lucrative. 3. Problems arise when information is received on a money laundering operation with a Money Exchange House. a. What is the true identification of the business? b. Who are the agent/owner(s) in charge of the location and employee? c. Can an undercover agent or informant infiltrate to provide more information about the location? PAGENO="0297" 293 -9- V. Drug Enforcement Report (News Letter - June 24, 1991 - Volume VII, #18) Joint Federal-State-Local Task Force seized $450.5 million in cash from major drug trafficking organizations in Fiscal Years 1989 and 1990 alone, compared to $338.5 million in the previous five years. Property seizures amounted to $555 million in Fiscal Year 1989 and 1990, nearly as high as the $577.6 million seized from 1983 through 1988. Money laundering was involved in a full 75% of task force investigations initiated in the last two years. VI. Recommendations for Further Action A. The success of the New Texas Currency Exchange Act in helping control the "Casas de Cambio', "Giros", and money transmitters, their owners, agents, and employees, will * depend on the availability of the resources in enforcement of the Currency Exchange Act. B. More uniformity in enforcement and exchange of information by law enforcement agencies which have laws concerning money exchange institutions is needed. PAGENO="0298" 294 Senate Permanent Subcommittee On Investigations EXHIBIT ~ 14 STATEMENT OF THE AMERICAN BANKERS ASSOCIATION ON CURRENT TRENDS IN MONEY LAUNDERING FOR THE UNITED STATES SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS PERMANENT SUBCOMMITTEE ON INVESTIGATIONS FEBRUARY 27, 1992 PAGENO="0299" 295 Mr. Chairman and members of the Committee, the American Bankers Association appreciates the opportunity to present our views on the critical issue of money laundering deterrence. The ABA is the national trade and professional organization for America's commercial banks. The members of the American Bankers Associition range in size from the smallest to the largest banks, with 85 percent of our members having assets of less than $100 million. Assets of our members comprise over 90 percent of the total assets of the commercial banking industry. The members of the American Bankers Association have long been in the forefront of efforts to stop money laundering. We welcome the opportunity to discuss the issue of check cashers, money transmitters and money laundering, proposed legislation, and the government's efforts to thwart this problem. The U.S. banking industry applauds all efforts to prevent our financial system from being used as havens for drug dealers. However, there is a need to carefully consider all proposals (whether legislative or regulatory) in order to insure that we are not unduly hindering the U.S. financial system, while adding little to our country's law enforcement efforts. It is in this spirit that we offer our comments. The American Bankers Association has been involved in money laundering deterrence since the mid- 1980's. Whether it has been testifying before the Congress or state legislatures, submitting written comments on regulatory proposals, or training bank employees, our association is committed to active cooperation in this war to stop the laundering of monies of drug dealers through financial institutions. The ABA and the industry as a whole understands the challenge facing law enforcement officials in attempting to combat drug trafficking and organized crime. The use of banks as havens for drug money is as abhorrent to us as bankers, as it is to the public in general. Therefore, we are pleased to report that our industry's response has been extensive, effective and ongoing. Since 1985, ABA has trained over 50,000 financial institution employees on the Bank Secrecy Act, the Money Laundering Control Act and all the applicable law and regulations designed to solve this problem. The banking industry has achieved a high level of awareness of the laws and regulations regarding money laundering and our association has contributed significantly to that effort. During the debate on expanding the Bank Secrecy Act, our association worked closely with the Congress, various regulatory agencies, including the Treasury department and others, in devising workable methods to deter money laundering. While we have opposed proposals that were seen as ineffective, the industry ~J4 support the creation of several statutes making money laundering a crime. In February of 1989, the American Bankers Association was the first trade association to create a task force on money laundering. Mr. Chairman, the ABA would like to reiterate our Statement of Principles (attached), announced in September, 1989, for the elimination of money laundering. We have contacted other financial institUtion trade associations to enlist their support in our efforts to completely shut down the use of our financial institutions by drug dealers. In addition to the estimated 7.2 million Cash Transaction Reports (C'FRs) filed with the Internal Revenue Service on routine cash transactions in 1991 (current transactions over $10,000), the banking industry is responding to the need for active cooperation with the government with the voluntary reporting of suspicious transactions. The number of bank CTRs, however, is in stark contrast to the reports filed by trades or businesses (other than financial institutions) for currency transactions over $10,000 (Form 8300's). In 1991, only 56,000 such reports were filed. These private sector citizens PAGENO="0300" 296 need to increase their role in money laundering deterrence or all of our industry's efforts will be for naught. It is encouraging that the Internal Revenue Service is now emphasizing reporting by those entities and has publicly advocated that compliance with Form 8300 regulations `must be improved." The commercial banking industry remains concerned about the lack of adequate oversigh~over those entities that act like financial institutions. Since our nation's bankers are valued participants in governmental efforts to slow money laundering, we are frustrated at the lack of assistance from other parts of the private sector. Trade or businesses not subject to the Bank Secrecy Act (Form 8300 filers), the casas de cambios, currency exchange operations and check cashing operations must be reigned in. PROBLEMS WITH CHECK CASHING OPERATIONS The ABA Task Force members and other banks were quick to report back to us their concerns about certain check cashing operations. Samples of their responses follow. 1. One large institution told us that, as a general rule, they discourage branches from opening accounts for check cashers and money transmitters. They have adopted this position because of the extremely bad experiences they have had with those entities. However, when opening an account for those entities, th~ bank will request a copy of a state license for the check casher and contact the state banking regulator to find out any negative information about the company. The institution goes on to add, "for check cashers and money transmitters, `knowing your customer' is almost impossible. There is no practical way to determine if the volume of cash going through one of these accounts is reasonable with respect to the company's normal lawful business." The bank recommends that it should be the state's responsibility, when granting a license, to determine the character of the individual operating the business, their agents and sub-agents as well as the amount of cash which constitutes the company's normal lawful business. If a bank maintains an account for a licensed company and that company operates within the amounts authorized by the state, the bank should have no further reporting responsibilities or obligations. 2. Another respondent from a west coast institution told the ABA that if the state does not license check cashers, the institution can obviously not "exempt" check cashers from the Bank Secrecy Act reporting requirements. So, those entities are treated like any other customer for reporting purposes. 3. The final response was the most interesting and revealing. The following is an excerpt from the bank's response. 2 PAGENO="0301" 297 "One of the great concerns I have about the check cashing businesses that are popping up all over is the ability to launder money and sell illegal narcotics if a less than scrupulous business owner should decide to do so. An example best serves to explain. Joe Smith is,in reality, a drug dealer. Joe is having problems unloading all his cash that he collects in his daily drug sales. The banks do not want to sell him large dollar cashiers checks anymore and they insist on doing a Currency Transaction Report when he deposits over $10,000 in cash. So Joe devises a new plan to dispose of his "crush of cash." Joe goes into the check cashing business. After all, he has plenty of start-up cash! Joe rents a store front and advises all his "customers" of his new endeavor and tells them to bring their paychecks to his store. On payday, some of his customers show up and cash their checks. But instead of getting their paychecks cashed, outright, Joe transacts a drug deal simultaneous to the cashing of the check. Let's say the paycheck is for $500.00 and Joe Smith keeps 4% for his check cashing service. Therefore, Joe would keep $20.00 and give cash back in the amount of $480.00. But, the customer has indicated that he wants to buy $100.00 worth of cocaine. So Joe gives him only $380.00 back in cash and $100.00 worth of cocaine. Done deal. Joe has finally succeeded in eliminating the cash nightmare he's always had. He looks "clean" at his bank too because he only every deposits well-known payroll checks. The only cash side to his business is the cash he withdraws for check-cashing purposes. He looks like every other check casher. And, the beauty of it is, if it's not a well known and reputable payroll check, he doesn't risk anything -- he just doesn't cash it. Joe can almost by assured 100 % of the time that these payroll checks are not going to be charged back to him so his risk is infinitesimal." Mr. Chairman, all of these respondents emphasized the need for states to regulate check cashing operations and examine those entities as they would for commercial banks. We support state licensing and regulation as set forth in last year's House bill (H.R. 26). Another area of concern, outlined by our bankers, is the fact that so many check cashers are selling money orders. While the money order companies' records are probably completed accurately, bear in mind that, when issued, they have no payee or purchaser information. Payee information and purchaser information is completed by the purchaser subsequent to the sale. Not only does this potentially afford another method to drug dealers to launder money, it also puts more cash into the check cashers coffers which allows him to continue to conduct his check cashing/drug sale business. 3 PAGENO="0302" 298 Mr. Chairman, we urge this committee to recommend strongly that all the states pass laws to regulate money transmitters and check cashing operations. In addition, given the examples presented above, the role of investigating sources of revenue for these entities should be p1 ced on those best equipped to determine unusual or suspicious behavior. That is clearly the regulator and not the commercial banks. While we continue to train our employees to discover illegal activity, there will always be difficultly in determining the source of a transaction through a check cashing or money transmitter operation. MONEY LAUNDERING LEGISLATIVE PROPOSALS Mr. Chairman, we would like to take this opportunity to comment on Title IX of the Bank Reform Act (S. 543) (Financial Institutions Enforcement Improvement Act) and HR. 26 (the Money Laundering Enforcement Amendments of 1991). While Title IX was dropped in conference last year, the provisions are still contained in two separate Senate bills. As indicated upon introduction, the intent of these bills is to give the appropriate Federal depository institution regulatory agencies the power to revoke charters, terminate deposit insurance, and remove or suspend officers and directors of depository institutions involved in money laundering or currency transaction offenses. The banking industry generally supports these bills because the proposed solutions do not fail to give the regulators the necessary flexibility to consider several important factors prior to closing the institution. We do have comments to offer on several specific provisions. o Section 9 (H.R. 26); Section 921 (S. 543) Identifications of Financial Institutions This section will require depository institutions to provide the name and other information about nonbank financial institution customers to the Treasury Department. While we understand the intent behind this section, it is distressing that once again the banking industry is being asked to provide information to law enforcement which could be and should be derived from other sources. It is troubling that because of the inability of the Treasury Department to get a handle on certain entities that are not providing sufficient information, Congress is recommending that depository institutions provide the information. With the creation of FINCEN (Financial Crimes Enforcement Network), there must be information available outside of our industry to create a database to determine which nonbank financial institutions are evading reporting requirements. o Prohibition of Illegal Money Transmitting Businesses (House/Senate Bills) The ABA strongly supports the provisions that would establish criminal penalties for illegal money transmitters. This is the only real deterrent to those entities that can continue to easily launder illegal monies. 4 PAGENO="0303" 299 OTHER ISSUES We believe that there is a need for consistency in supervision and regulation of the financial industry. This can only occur if the government and the banking industry understand their respective roles. One way to do this is by educating the industry on the latest tactics and techniques utilized by money lajnde~ers. We do realize that this problem is more a result of diminishing resources and an increased workload than any intentional disregard for supplying financial institutions with immediate information. However, it would be helpful if various banking and law enforcement agencies could immediately advise the banking community as to the latest money laundering trends, suspicious types of customers, and current illegal transactions so that the industry could put into effect the necessary safeguards to preclude such activities. There is now hope in this area as we have seen guides created by the Office of the Comptroller of the Currency (0CC) and the excellent FINCEN newsletter (It~ji~s) that is the first real attempt by the government to furnish banks with needed information on how to deter money laundering. ABA is working to do its part by providing copies of these government publications to our membership. PROTECTION FROM CIVIL LIABILITY Financial institutions are constantly providing the government with information as to what may constitute a suspicious transaction. One outstanding concern of the banking industry is the level of adequate protection from criminal and civil liability for reporting such transactions to the proper law enforcement activity. The ABA believes that institutions should have the ability to refuse to do business with individuals or corporations who may reasonably be suspected of engaging in illegal activity, but current law makes that difficult or impossible. Banks now find themselves in a position of having to monitor customer transactions, prepare and file currency transaction reports, report suspicious criminal activities, avoid participation (directly or indirectly) in structuring money laundering or receiving the proceeds of criminal activities. By following the letter and spirit of these new laws and regulations, banks are in the untenable position of complying as "good corporate citizens" while being subjected to potential lawsuits for privacy violations, defamation, breach of contract and lender liability. For example: a bank reports a customer for possible money laundering; (1) if the bank continues to do business with the customer, it faces the possibility of violating the Money Laundering Control Act for doing business with a suspected money launderer; OR (2) if the bank refuses to do business with the customer financially, it faces a lender liability suit with the information it reported being used against it. In those instances where banks are cooperating in government law enforcement efforts, it is incumbent upon the government to protect the banks from such liability. There is now a distinct possibility that well-run financial institutions will face criminal and civil liability because of the lack of adequate protection under the law. Our members face criminal liability if they fail to uncover money laundering or if they uncover suspected money laundering and actually report it. Public policy plainly requires that financial institutions take an aggressive attitude toward potential 5 PAGENO="0304" 300 money laundering and the American Bankers Association completely supports this policy. However, we believe that now is the time for Congress to review possible avenues that may be expanded to give good corporate citizens the needed protection for the support they are giving law enforcement. There is a history of "safe harbor" protections long supported by Certain federal agencies. The policy is simple: as long as the regulated entity maintains a diligent and serious compliance effort and fully reports all legal violations, the entity should not face prosecution or civil liability. The Securities and Exchange Commission (SEC) adopted a safe harbor program for dealing with the misuse of corporate funds, such as illegal political contributions, kickbacks, and payments to individuals and officials overseas. The SEC implemented a voluntary compliance program to the effect that, if a corporation conducted its own investigations and then remedied its problems. the SEC would give credit to the corporation when it was deciding whether to pursue an enforcement action. More recently, the SEC advocated the use of a safe harbor in the context of the Bank Secrecy Act. In a comment letter to the Department of Treasury, the SEC recommended a "safe harbor be provided in your [Treasury's] regulations for firms that have developed and effectively implemented procedures reasonably designed, in light of the size, sophistication and structure of the firm, to uncover multiple, same day transactions." The SEC went on to point out that "this approach will encourage more effective surveillance of currency transactions by financial institutions while providing those firms protection against liability where they have implemented good faith. procedures."2 In addition, the American Bar Association's Criminal Justice Section recommended to the ABA's House of Delegates that the United States "adopt prosecution policies to encourage compliance with the Bank Secrecy Act and the Money Laundering Control Act by establishing guidelines and standards governing prosecution of financial institutions." Finally, the publication of the G-7 Financial Action Task Force Report on Money Laundering confirms the need for a safe harbor on an international level. Recommendation 16 of the report states: If financial institutions suspect that funds stem from criminal activity, they should be permitted or required to report promptly their suspicions to the competent authorities. Accordingly, there should be legal provisions to protect financial institutions and their employees from criminal or civil liability for breach of any restriction on disclosure of information imposed by contract or by any legislative, regulatory, or administrative provision, if they report in good faith, in disclosing suspect criminal activity to the competent authorities, even if they did not know precisely what the underlying criminal `For example, Stone Oak National Bank in San Antonio, Texas has been involved in a protracted case dealing with liability to an institution that had reported suspicious transactions. Attached is a copy of correspondence to several Members of the House that further describes this problem.. ~ SEC letter to Jonathan Rusch (March 20, 1987). PAGENO="0305" 301 activity was, and regardless of whether illegal activity actually occurred.3 These are just some of the examples of the support for the `safe harbor" concept. The House bill already includes such a provision. According to the House Banking Committee: The Committee is concerned that financial institutions have been reluctant to report suspicious transactions to law enforcement authorities because of concern for potential civil liability resulting from the filing of the report. Financial institutions are also reluctant to cease doing business with customers whom they suspect are engaged in illegal activities out of concern for liability to those customers. In one case, a court held the bank civilly liable for terminating a business relationship with a customer, even though the bank had been told (erroneously) by Federal law enforcement authorities that the customer was engaged in illegal activity. In order to encourage financial institutions to report suspicious transactions and to encourage financial institutions to terminate relationships with customers who may be engaged in illegal transactions by who have not yet been charged with any offense, the Committee amends the Right to Financial Privacy Act to provide an exemption from civil liability for any institution which, in good faith, files a suspicious transaction report or who refuses to do business with a customer that the institution has in good faith reported. The Committee emphasizes that this exemption from liability applies only when the referral has been made in good faith. It does not apply to the filing of a referral simply as an attempt to evade liability from an otherwise impermissible purpose or motive. The Committee intends `good faith" to mean that the report has been filed with an honesty of intention, observing the reasonable standards of fair dealing in filing the report.4 The American Bankers Association continues to urge passage of these types of provisions as well as an expansion of this necessary proposal in several ways. Eft~t, it should be noted that the Justice Department, which had opposed mandatory adoption of a prosecution policy in the past, has developed draft prosecution guidelines which should be completed this year. This is a tremendous opportunity for banks to receive clarity and guidance and we welcome its completion. ~ ABA recommends that the Right to Financial Privacy Act be expanded to provide protection from civil suits from corporations, individuals and potential customers. The time has come to protect an industry that is willing to be part of the frontline on the war on drugs. 3See, "Synopsis of the Forty Recommendations of the Report," Financial Action Task Force. 4House Report 101-446, pgs. 33-34. 7 PAGENO="0306" 302 CTR EXEMPTIONS As the Committee knows, Bank Secrecy Act reporting requirements permit "exemptions" from CTR reporting under certain circumstances. The banking industry has long been frustrated over the inappropriate application of the Treasury exemption authority for certain businesses. Specifically, there are categories of businesses for which financial institutions can exempt from the cash reporting requirements which seem to fly in the face of law enforcement needs (i.e., race tracks). In addition, various law enforcement agencies such as Drug Enforcement Agency (DEA) and the Customs Service have frequently told bankers to narrow or extremely limit the amount of companies that are placed on their exemption lists. The Treasury Department, according to our members, in the past, has been very slow in responding to questions on various interpretations under the law regarding exemptions. I am attaching for your information a statement by the ABA on the issuance of exemptions as well as an article on the lack of cost-savings for institutions that establish exemptions. Many institutions have eliminated their exemptions. The Committee may wish to recommend elimination of the institution's authority to establish exemptions. Once banks begin filing cash reports electronically, the use of exemptions will simply not be cost- effective. More importantly, elimination of exemptions would add uniformity to our compliance procedures. INTERNATIONAL FUNDS TRANSFERS Once again, the banking industry is facing yet still more regulations designed to stop money laundering. The imminent Treasury Department's funds transfer proposal is expected out in the next few months. The banking industry is extremely concerned about the potential of these regulations to harm our nation's banks without any real effect on law enforcement. For law enforcement, it is unclear how new recordkeeping requirements will enhance government efforts. In a recent law review article5 by Professor Sarah Jane Hughes of Indiana University School of Law on the funds transfer proposal, the author points out that the "sheer volume of funds transfers will undermine the proposal's utility to law enforcement agencies." Professor Hughes includes that,"the funds transfer proposal reflects weaknesses in the Treasury's current approach to regulations under the Bank Secrecy Act. It demonstrates a willingness to impose substantial new obligations on the banking system without careful evaluation of their potential efficacy, without measuring the utility of prior regulations before adopting additional regulations, and without regard to costs imposed on the banking community."6 5Hughes, Policing Money Laundering Through Funds Transfers: A Critique of Regulation Under the Bank Secrecy Act, 67 Indiana Law Journal 283 (1992). 6Hughes at 330. 8 PAGENO="0307" 303 ADDITIONAL BANKER ACTIVITY Our association completed a survey in 1990 on banker compliance with the Bank Secrecy Act and general money laundering deterrence. Whereas many banks could ~ easily or precisely quantify their cost of complying with the Bank Secrecy Act, it appears to us that the industry spent over $129 million dollars in compliance in 1989. Our survey experts feel that this number is probably an underestimate, but it does give an indication of the resources being dedicated to the slowing down of drug money laundering. Regardless of cost projections, it is disappointing that the Treasury, while promulgating various BSA proposals, has never completed a cost/benefit analysis of a possible regulation. We have attached a copy of correspondence with Treasury on this issue during the consideration of a regulation on mandatory aggregation of currency transactions. - Our survey did confirm banker commitment to compliance policies on "knowing your customer." This result emphasizes a dedication to monitoring activity far beyond those required on reporting cash transactions. We have included an article written by a Task Force member on how to establish a strong "Know Your Customer" policy. ABA is filling training needs in this area and many others. We are happy to report that frequently, government officials are extremely helpful in participating in our training efforts. Specifically, the 0CC, the IRS CID, the Federal Reserve Board and many others have assisted our education efforts. This cooperation must be maintained. Mr. Chairman, deterrence works if risks are raised sufficiently. We believe that the risks involved in attempting to launder money through financial institutions are great and the reporting of suspicious activity is on the rise. Congress can close out the possibility of laundering by aggressively addressing the problem of nonbanks and establishing controls similar to those placed on commercial banks. We ask this Committee to consider our comments as constructive criticism to a system that can work if all affected parties are involved. We thank you for the opportunity to present our views. 9 PAGENO="0308" 304 AMERICAN 1120 Co~'..c~.cw A.e.we ~ BANKERS walh..!.o. DC ASSOCIATION 2003t MEMORANDUM The American Bankers Association Statement of Principles for Conbatino Money Launderinq~y U.S. J'inancial Institutions o U.S. financial institutions should continue to be at the forefront of efforts to combat the laundering of profits f roe illegal drug trafficking. o U.S. financial institutions should comply fully with all laws and regulations relating to money laundering. Employees of these financial institutions should be trained in the rules applicable to reporting of transactions and to identifying possible money laundering schemes. The management of all financial institutions should indicate strong support for employee efforts to combat money laundering. o The employees of financial institutions should report suspicious transactions or other activities to authorities when there is sufficient reason to believe that illegal activities may be taking place, consistent with basic principles of customer privacy. o Financial institutions, and their employees should work actively with law enforcement authorities when those authorities request their assistance in investigations of money laundering. o Financial institutions should work with government institutions to develop new methods to effectively combat money laundering. 0 U.S. financial institutions should work through their trade associations to encourage international cooperation and agreement on cross-border efforts to combat money laundering. PAGENO="0309" 305 ~1S' *`~ \\ c:-it- £_C:.., - D.~er. C~iorz~ !O~-~.:.os anuarv 10, 1991 The Honorable flicholas Brady Secretary of the Treasury De:arzment of the Treasury 1500 Pennsylvania Avenue, N.W. Washington, DC 20220 Dear Mr. Secretary: I an writing.to express the grave concernof the American Bankers Association ("ABA) about the potential effect of two procosed regulations put out for comment by Treasury on September 6, 1990, ccr.cerning money laundering. These proposed regulations, if adopted, would impose mandatory aggregation of currency transactions and mandatory magnetic media reporting of currency transacticn recorts ("CTRs') bY some financial institutions. (Cur official comment letter on these proposed regulations is attached for your info~ation.) - Our members believe that the proposed regulations will, if adocted, have a very negative impact on the banking industry at a time when there is scant evidence that any of these proposed changes will incrove our cacability to prevent the laundering of d~g-related funds. Congres~icnal testimony confi~s that law enforcement is now saturated with .info~ation that cannot be processed e~editiou~ly~ The Treasury estimates that after these ~les are finalized, c*ne million additional cTP~s will be added to the already voluminous seven million forms filed annually. There has not even been a detailed assessment by the Treasury of the value of these current repcrts in the d~g effort. Therefore, we urge the Treasury to reexamine these proposals from a cost/benefit perspective. We believe that such a reexanination will result in the conclusion that these proposed regulations are unnecessary. The Treasury has proposed two related regulations. The first would re~ire banks with deposits over $100 million to maintain systems to aggregate, at a minimum, currency transacZ~ons that are conducted by or on behalf of accountholders at the baniC anc that affect an account during a "business' day. The seconc woulc rec-uire financial institutions that file more than 1,000 CRS a PAGENO="0310" 306 ~ - year to file by use cf macnetic media. ABA su~~orts the coal of ~rovidinc government officials all of the necessary info~ation to further efforts to combat money launderinc. However, these proposed regulations do not appear to further these efforts in a meaningf~l way, and their implementation would moose major costs on a banking industry struggling with a declining economic climate. Furthe~ore, the Treasurw states that the ~ro~osed reculations, taken together, are `not a major rule for puroses of Execuzive Order: l22Sl~ [and], it is not anticipated to have an annual effect on the economy of $100 million or more." However, ABA's research indicates otherwise. The banks affected by the proposal will have a "hard cost" of over $285 million. The `hard cost' includes: the cost for supporting the accregating of cash transactions, the cost of magnetic media :~~ing ann the cost of ma~nta~n~nc toe magnet~c.menia f~~ng * system. It should be noted that the above costs would at least double if "soft" costs are included (i.e., training), and the costs will rise over time for the industry. In our opinion, the Treasury Department has grossly underesticated the probable costs. * Treasury also states that only 1000 banks would be affected by the proposal on mandato~ aggregation. ABA's research concludes that there. are over. 2600 FDIC-insured conmercial banks with deposits greater than $100 million that would be affected by the * . accrecation proposal. ABA would be pleased to share cur research with the Treasury.. Mr.. Secretary, the members of the ~eric~ Bankers Association fully accept their role as partners in the war on drugs. The banking industry has received munerous commendations from various * government agencies for its close cooperation with law emf~rcsment officials in ridding our nation's financial institutions of money laundering. In addition, the ABA ~.tsel: * has been sincled out for its history of alliance w~th law * enforcement officials in efforts to educate the industry on bow to stop money laundering. - The banking industry remains committed to the Treasury's, work in this area. But as you know, ~tr. Secretary, the bank.ng innustry PAGENO="0311" 307 SH~T NO. is now struggling with a declining economy, a regulatory burden, and sharply increased deposit insurance premiums. Before issuing new regulations with specific mandates, the Department should undertake a thorough cost/benefit analysis. The ABA will be pleased to provide any additional information that the Treasury requests on either the current situation or these proposed regulations. Sincerely, Richard A. Kirk Enclosure PAGENO="0312" 308 DEPART~MENT0FTHETP.EASURY ~ 2~ ~ WASHINGTON * 24~PR 1~2:; Mr. Richard A. Kirk - President ner~can Bankers Association 1120 ConnecticUt Avenue, N.W. Washington, D.C. 20036 Dear Mr. Kirk: Your letter of January 10, 1991, addressed to Secretary Brady, has been forwarded to this office for response. Your -letter snakes reference to the American Bankers Association's comments regarding two Treasury proposals that were published in the Federal Reaister on September 6, 1990. First, let me state that your organization's participation in the regulatory process is both recognized and appreciated. The first proposal would require that banks with deposits of over $100 million maintain systems to aggregate currency transactions that, at a minimum, are conducted by or on behalf of accountholders at the bank and that affect an account durihg a business day. The second proposal would require financial institutions that file more than 1,000 Currency Transaction Reports a year to file by usa of magnetic media. - Currently, financial institutions -are not required to purchase new hardware or software in order to aggregate currency transactions. However, many financial insti~utions are voluntarily aggregating currency transactions under $10,000 and today there are a number of automated software packages available which track these multiple transactions. If there is- no -aggregation system, a financial institution must rely on the knowledge of its employees to determine if multiple transactions have taken place. Treasury is of the view that large and multi- branch banks should be required to take sufficient steps to detect multiple transactions and prevent possible structuring. The $100 million figure was set by reviewing the present top filers of CTR5 and by considering that many $100 million banks have multiple branches. However, as stated in the proposed rule, upon review of the comments, the $100 million figure may be adjusted. In addition, it is believed that mandatory magnetic filing would be beneficial to both the Treasury and financial institutions. Treasury would receive snore accurate and complete CTh information that would be available for analysis in a -speedier manner. The IRS has noted a 90 percent reduction in original errors on CTR5 filed magnetically. Financial institutions would receive immediate acknowledgement that thelr -- tate had been received. The 1,000 threshold was determined by -analysis of the present top filers. Again, after cons~derat1cn of the comments, this number may be adjusted. PAGENO="0313" 309 In pro~osing Bank Secrecy Act regulations, ~.reasury attempts to strike an appropriate balance between the legitimate needs of law enforcement and the practical and financ~l ability of financial institutions to comply. In accordance with these parameters, Treasury estimates the potential commercial burden and solicits comments from affected financial institutions to provide detailed info~nation regarding the cost and. implications of these proposals. Be assured that each comment received is carefully reviewed and considered before a Final Rule is issued. There is no easy solution to the money laundering problem;'however, we are optimistic that the strides made in the past few years have been significant. President Bush has designated money laundering as a top priority in the Administrations Drug Control Strategy. With the cooperation of the banking community, Treasury intends to see this priority executed. In drafting a Final Rule, Treasury will make every effort tc accommodate commercial concerns whila preserving the needs of law enforcement to adopt workable and mutually beneficial regulations. Should you have additional guestions concerning this matter, please contact Peter G. Djinis, Acting Director, Office ofFinancial Enforcement at (202) 566-8022. S in5srely, / /-~ `~1 Peter/K. Nunez /7 / Assistant Secra~ary (En~orcememt) PAGENO="0314" 310 The American Bankers Association's Money Laundering Task Force STATEMENT ON THE USE OF EXEMPTIONS UNDER THE BANK SECRECY ACT o U.S. finandial institutions continue to be at the forc~front of efforts to combat the laundering of profits from illegal drug trafficking. o The Bank Secrecy Act (BSA), the main recordkeeping and reporting statute that assists law enforcement in pursuing money laundering, permits but does not require financial institutions to "exempt" certain transactions and the accounts of certain customers from the BSA's reporting requirements. o "Exemptions" are not a "safe harbor" from civil or criminal liability even for institutions that have compli~ed with the Treasury Department's regulations and Exemption Handbook. o The Congress and federal law enforcement agencies have expressed concern that "exemptions" may be concealing the activities of money launderers and other white collar criminals who prey on financial institutions. o Therefore, the Task Force recommends that banks do not create BSA "exemptions unless "exemption" clearly: 1. poses no risk of inadvertently concealing a customer engaged in criminal activity, 2. offers a significant net cost reduction (cost of producing "exemptible" Currency Transaction Reports less the cost of administration of the "exemption"), and 3. improves the quality of service to the depositor. PAGENO="0315" 311 CTR Exemptions friend oRJbe? E tempt. No English word is dearer to the heart cia regula- tory manager. Look it up and you'll see why. As an adjective, `exempt' is normally defined as "excused" or freed from an obligation or duty required of others." Our industry has a firm grasp of the concept. We do not, for example, quote APRs to corporate borrowers or require flood insurance for unsecured loans because the regulations excuse us from these chores. By the time a student of banking reguiations has waded through Regula- tions A to CC and finally gets to the U.S. Treasury Department's regula- tions (31 CFR Part 103) that implement the Bank Secrecy Act (BSA), he or she knows that you can't manage a regula- tion unless you understand its "cover- age:' LI a business activity is "covered:' you comply; and if it's "exempt:' you don't, - The general rules of coverage oi Part 103 are atraigh~orward: If it's cash, you file a Currency Transaction Report (CTR). The exemption process, unfortunately, is not as simple. While the general rules of coverage fit into one section of the regulation (Part 10322(a)), sirsections are required to expialn the rules governing exemp- tions (103.22(b)-(g)). BSA exemptions are "self-service:' entailing three steps: determine whether the customer is eligible for an exemption; set an appropriate upper limit: and record a few pieces of basic customer information on the bank's "exemption list:' So far. BSA exemp- tions iook like a free lunchl Being the suspicious type (regula- tory specialists are paid ext-a to under- stand TINSTAAFL). you are asking, "-There's the catch?" Read on, .`~Tt~.tN 990 2. "`EXEMPT" option: a. Number of hours spent (annually) gathering and evaluating account history and customer data b. Hourly compensation rate of exemption adminisrrator(S.67/SL000 annual salary) c. Total compensation coat of evaluation [2,a.x2.b.] d. Days when CTs exceed exemption limit (May not exceed Item Lb) e. Total number of "over limit" CTRs peryear [(2.d./La.)X 250) f. Total annual cost of filing "overlimit" CTRs [2.e.XLc.] g. Miscellaneous annual coats related to one exemption (training, audit, etc,) h. Total annual coat of "EXEMPT" option (2,c,+2,f.~'2.g.] by Richard G. In.sley Everyone who's involved in the exemptions reduce hassle. Your boss exemption process has a different point probably sides with this grouo because of view, Let's lookat theirs before you she went to a seminars few years ago develop yotir own. Customers and where a government speaker encour~ employees love exemptions because aged banks to make good use of the Exhibiti Exemption Desirability Analysis Worksheet Proposed exemption limit: Exemption will be: Monday only / Every day / Other___________ 1. "FILE" option: a, Business days reviewed (EXEMPTION HANDBOOK requires a minimum of 42 business days) b. Days when CTs are > S10,000 (May not exceed Item la,) c. Cost per additional CTR S_________ d, Total number of CTRa per year [(Lb. / l.a.) X 250] e. Total annual cost of "FILE" option $_________ [2.c.x2.d.] S -_< S__________ $__________ S__~ < 5- PAGENO="0316" F_athibic 2 312 CUSTOMER i-FAST FOOD RESTAURANT Aggregate daily Number of occurrences cash deposits ----during review period (in thousands) Mon. Tue. Wed, Thu. Fri. $ 0.O'SiO.O 2 12 13 12 12 10.0' 19.4 3 0 0 0 0 19.4- 20.3 2 0 0 0 0 20.5. 21.6 3 0 0 0 0 21.6. 22.8 1 1 0 0 0 22.3. 23.8 1 0 0 0 0 Total number of days over $10,000: 11 Proposed exemption limit: 321.600, Mondays only Number of days proposed limit would have been exceeded: 3 ~Review period was 62 business da,vs CUSTOMER 2-HOTEL. Aggregate daily Number of occurrences cash deposits during review period (in thousands) Mon. Tue. Wed. Thu. Fri. $ 0.0.3 10.0 1 2 1 2 1 10.0. 107.4 0 3 4 5 4 107.4. 199.2 1 0 1 3 1 199.2. 290.9 4 2 1 1 5 290.9. 382.7 4 3 3 0 2 382.7. 423.5 1 3 1 0 0 423.5. 474.4 0 0 2 1 0 Total number of days over $10,000: 55 Proposed exemption limit: $428,500. Daily Number of days proposed limit would have been exceeded: 3 *Review period was 62 business days exemption au:!'.oricy, He said some~ thing about a masochistic i:rm of behavior called `malicious compliance' filing too many CTRa) and said that exemptions are good because they save money ior both your bank and the government. Maybe there is a Santa Claus! If exemptions save money and make your customers, boss. and regulator happy, who are you to throw a wet blanket on such a cozy arrangement? Go for it-exemptions for everyone! But wait.. .what about law enforce' meat agencies? Congress intended for the information contained in CTRs to have a significant value for law enforcs- meat purposes. If banks exempt all of their cash'handling customers, there will be no information "determined to have a high degree of usefulness in criminal, tax, or regulatory investiga' tions or proceedings:' Federal (and a growing number of state) law enforcsrnent agencies do not beat the drum for exemptions. Instead. they may point out the danger of inadvertently adding a criminal to the exemption list. Such an error would be like placing the fox in charge of the henhouse. By allowing liberal exernp tior.s with few questions. your bank or even YOU could be charged with money laundering felonies and face huge fines. (The check for lunch is here!) Well, you say, everyone here at the bank really likes exemptions, and we know all of our "good customers' who are exempt. How much do I really have to worry about penalties? Calculator handy? There are roughly 250 business days per year. Failure to ichard C: Inslevis Vice President motion Section of the Examination banking of South Carolina and West nd Compliance OfficerforSignet Department. He participated in the task Virginia, and numerous examiner aninng Corporation, Richmond. force that developed the compliance training schools conducted by the zrginza. In addition to his position examination program forthe Federal Federal Reseive System and the Federal ;th Signet. .VIr. insley owns and oper. Resen.'e System. Financial Insti rations Examination :esAPR S,vstems. Inc~, Richmond~ CounciL He has also delivered regula' zrgz;sza. a/inn that develops and dis' Mr. Insley has spoken and lectured toly presentations for numerous trade `tonics Truth in Lending risk manage. extensively on regulatoiysubjecfs. groups and the Bankerz.TVNetworR~ rent software and computerproducts. He has saved on the faculty of the In September1989. Mr. Insley was ABA'S National Compliance School and appointed to the American BanRers .~1r, Insley's prior cx erience includes National Graduate Compliance School, .Association's Task Force on Money :rt':ce with the Federal Rese,ve Bank the Charleston National Bank School Launderingand Bank Secrecy In May R:cnn,ond, beginning as a bank exam~ o(c'ompliance in Cisarieston. West 1990. he was appointed to the Ofltce zerand et'enrnally establishingand Virginia. the Virginia Bankers Associ of National Drug Control Policy :anaging the ~oiisrimerAffajrs Exam' anon's Compliance SchooL the schools of "Roundtable of Experts." PAGENO="0317" ~Ee one CTR carries a potential penalty between 325.000 and 5100.000. bepending on the size of the currency ransacuon that went unreported for mOre than 15 days. Yes, that's a poten' ::al penaL:' ranging from 36.25 million :~ 325 irtlion per year. Lf you heve more than one exernptidn. multiply on. When you are finished. run down to the customer reception area and get a copy of yourlatest Report of Condition. Compare the result of the above calculation with your total capital accounts. Oh dear! For many banks, penalties that can result from improper exemptions would more than wipe out the stockholders' equity. These penalties are clearly unacceptable and must be avoided at substantial cost. "Well, at least we~re saving money with exemptions:' you may be thinking. "if we don't have to file CTRs, there's to cost," Sorry. Except for otherfinancial bistitutions, no customercan be granted an exemption that is unlimited in amount. There must be an upper limit that is "commensurate with the cns~ :omarv conduct of the lawful domestic business of the customer," How do you know what is customary ~or each exempt customer? The US. Treasury's Exemption Handbook speci' fes that you mustreview the customer's uansaction history for a period of at east 60 days prior to setting an exemp' ion. It also states (in general terms) that you should know your customer's business pattern and potential ~vell enough to conclude that the exempted amounts of cash are legitimate. The transaction history reviewis easy, but gathering the necessary daily deposit and withdrawal information may take some time. Judging the mis- :omers business potential with any degree of science is n-icky at best, You are left to your own devices to determine how much cash per day is believable. This determination may not be too difficult if the customer has one store, and it is across the sweet from the bank, and the bank has detailed fnancial information because the cus- :omner borrows from the bank. But then, there are customers like Sears: Southland Corooration. Exxon, and many others whose business pattern and potential will be infinitely harder to document and analyze. .`LT'LMN 1990 313 E'thibitS Exemption Desirability Analysis Customer: r~Si~oP R~crA 4vT" Proposed exemption limit: ~ `~ `i ~0 Exemption will ~~onday only/Every day / Other__________ 1. "FILE" option: a. w Business days reviewed ________ (EXEMPTION HANDBOOK requires a minimum of 42 business days) b. Days when CTs are > $10,000 ________ (May not exceed Item l.a.) c. Cost peradditional CTR s~20 < d. Total number of CTRs per year [(lb. / l.a.) x 250 1 e. Total annual cost of "FILE" option S / 32'. 00 [2.c.x2.d.1 2. `"EXE.MPT" option: a. Number of hours spent (annually) gathering and evaluating account history and customer data _________ b. Hourly compensation rate of exemption admninistrator(S.67/Sl,000 annual salary) S .00 c. Total compensation cost of evaluation $ ~~`0' 00 [2.a.x2.b.] d. Days when CTs exceed exemption limit ________ (May not exceed Item Lb.) e. Total number of "over limit" CTRs per year i'2,, [(2.d./La.)X 250] f. Total annualcost of filing "over-limit"-CTRs S ~" 00 [2.e.x1.c.] g. Miscellaneous annual costs related to one ~5 00 exemption (training, audit. etc.) $_________ h. Total annual cost of "EXEMPT" option 5 106.00 Knowing yourcustomer well enough to say (possibly on the wimess stand at some future date), "rm sure this cus- tomer can legally generate or consume daily amounts of cash in this range.' takes time and e~orr, The process is very similar to a creditreview per' formed for problem loans. So what do you do? Sure there are potential penaltiei, but they aren't always imposed when the bank has made a "good faith" error. There are costs of filing, but also costs related to exemptions. What shouid a cautious but cost-conscious regulatory manager do~ Peiforming a "Risk/Reward" Assessment Evaluate your options. Calculate and compare the costs of your alternatives, You can use the worksheet in Exhibit 2 to estimate. on a per-account basis, the costs associated with having no exemp- tion and compare them with the cost of maintaining an exemption properly. By estimating the annual number of CTR filings for one customer who may be eligible for an exemption and the cost per item, you can approximate the annual cost of the -`FILE' option. The 19 PAGENO="0318" 314 E~hibir4 Exemption Desirability Analysis Cuszorner: Hcr~ L.- Exemption will be: Monday only(~~~ay Other "FILE" option: a. Business days reviewed _________< (EXEMPTION RANDBOOK requires a minimum of 42 business days) b. Days when CTs are > S10,000 (May not exceed Item La.) c. Cost per additional CTR d. Total number of CTRs per year ((1.b. / La.) X 250) e. Total annual cost of `FILE" option [2.c.x2.d.] "`EXEMPT" option: a. Number of hours spent (annually) gathering and evaluating account history and customer data b. Hourly compensation rate of exemption administrator (5.67/51.000 annual salary) c. Total compensation cost of evaluation _________ (2.a.X 2.5.] d. Days when CTs exceed exemption limit ________ (May not exceed Item Lb.) e. Total number oi "over limit" CTRs per year ((2.d. / La.) x 250] f. Total annual coat of filing "over limit" CTRs _________ [2.e.X1.c.] g. Miscellaneous annual costa related to one exemption (training, audit. etc.) h. Total annual cost of "EXEMPT" option ________ {2.c.±2.f.+2.g.) per month for customers who are other. svise exempt). The final cost of the EXEMPT" option will be miscella. neous iten'.s such as training, audit, and any other expenses that would be avoided if the exemption did not exist. Evaluations of two sample accounts are shown inEzhibits2, 3, and4 for reference. The fast food restaurant in the first example would be a "Monday only" exemption because the customer rarely hastransactions in excess of $10,000 on any other day of the week. Relatively few CTRs would be saved by this exemption. If additional CTRs cost 53,8 hours of exemption adminisnation are required during the year, the compen. sation rate is S20 per hour (fully loaded), and a miscellaneous cost of $10 is incurred, you would lose money with an exemption. It would be cheaper by $74 per year to file CTRs (44 filings per year are estimated) whenever cur- rency transactions exceed $10,000. On the other hand, the hotel in the second example has more transactions that exceed 510,000, so there is more CTR preparation coat to be saved. An annual saving of $464 is projected. The assumptions used in these examples are estimates. You should review your own costs to arrive at esti- mates that are valid for your bank. The computer program used to eval- uate these options is available from the author. 11 you would like a copy, send $5 (enough to cover costs) to Richard C. Insley, P.O. Box 37176, Richmond, VA 23234.7176. The program requires IBM orcompatible PC, XT, or AT with DOS 2.1 or later, one floppy-disk drive, and 320K RAM. Indicate whether you need the 3½" or 5½" disk format. if preparing one CTR for a tnown customercould range from w as $1 to SlO or more. Every :`s cost will vary. ic way to estimate your cost of pre' :g and filing each CTR is to deter- how many minutes are requfred a teller line, at the review desk, aisewhere. Multiply these times by ital compensation rate (including a. benefits, and soon) of the staff red. If they are increased by .nonal filing volume, you may wish .osv in a proportionate share of annual costs of BSA management, ~ing, data processing, audit, control, and overhead. Notice that the number of CTR filings is annualized on the basis of 250 business days per year. The "EXEMPT" option has three categories of cost By estimating the amount of annual review time to prop- erly administer one exemption and the hourly compensation rate of the officer who will conduct the review, you tan approximate the cost of exemp- tion administration. To this you must add the cost of filing "over limit" CTRs on those days when the customer exceeds your exemption limit(the author recommends one or two filings C'onclu,rions? TII'IST.AAFL (There Is No Such Thing ass Free Lunch)! Exemptions are no exception. You must perform your own "risk/reward" assessment to be sure your exemptions save enough money to justify the increased risk of violations and related penalties. "Exempt" does not mean excused. It does mean increased responsibility for effective controls and periodic reviews of exempt customers' businesses and transaction habits- Exemptions can save money, but not always- Know your costs. S A5A BANK COMrLI."~.~C5 ~t ~g, s~o~ < $ 3.00 < $ 6~~.O0 S $ 2.0.00 < S !6o.Oo 3< I2~ $ 36.00 $_____ $ 2.06.0o PAGENO="0319" 315 !.~{ L*NTONJ DEVELOPMEN1 `.~M)'ANIES February 20, 1992 The Honorable Lamar Smith 21st District 422 Cannon NOB Washington, D.C. 20515 RE: Stone Oak National Bank Dear Lamar; About eighteen months ago I sent you a letter regarding the Bank and its legal problems with the United States government. As a member of the Board of Directors, I was concerned that the government through the Justice Department was carrying on an unsubstantiated campaign to destroy the Bank through prosecution and/or implication of supposed money laundering claims against the institution which resulted in the seizure of more than $l,000,000,00 in loan collateral. At the time of the prior correspondence I vehemently protested to you this unsupported persecution of the Bank which was (is) seriously damaging the institutions viability. I requested of you whatever intervention which might be appropriate. During the intervening period, this judicial travesty has continued unabated. The Bank is on the brink of being forced into failure by the FDIC. Persistent efforts to settle with the Justice Department have finally resulted in an agreement which would return substantial funds to the Bank wnich were seized by the government. However, the settlement has not been put in place due to the Justice Departments agenda and the PDIC continues to churn toward the closing of the Bank, The gist of the situation is that the overzealous and unwarranted persecution of the Bank by the government will force the failure of the Bank, and the resultant loss of employment of twelve people and the total loss of all the stockholders investment and effort. Attached is a Memorandum Of Supplemental Evidence which was recently extracted from the Justice Department proescutors under extreme duress. If you would take just a moment to flip through this document, 1 believe you will find that the government possessed and withheld the evidence.exonerating the Bank. The overt actions of the government over the past two years while in possession of this information is unconscionable. I have never been thrust into a position where I have developed a complete disgust, distrust, and hosti1it~' in regard to the Justice Department and their insidious ~ngenues and perpetrators of these 3~O OAK~IL~1 cO~.in . ~A: ,,,,o:.:t., II XA' !~r)~8 . (~1~7c .~ PAGENO="0320" 316 ~age2 The Honorable Lamar Smith February 20, 2992 legal fallacies. The tact that the actions of the Justice Department are forcing an otherwise probably solvent Bank into failure are reprehensible to those of US directly affected. It is inexplicable. The overall situation and background is certainly more complicated than I have outlined above and 2 apologize for being reactionary. liowever, the receipt of the supplemental evidence created some significant emotion and thus the letter to you as our Representative. The Chairman of the Board, ITarold McDonald, and the President of the Bank, ~obert Schumann, and I would be happy to discuss this matter with you at any time either in San Antonio or Washington. I would appreciate any consideration you could give to this matter and I am at your disposal in this regard. Thank you. Most Sincerely, Lloyd A. Denton, Jr. cc:.The Honorable Henry B. Gonzalez with attachment Mr. Harold McDonald Mr. Robert Schumann ~ PAGENO="0321" 317 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF TEXAS SAN ANTONIO DIVISION UNITED STATES OF AMERICA Vs. 4 CRIMINAL NO. SA 91 CR 412 MARIO ALSERTOSALINASTREV'~, 4 a/k/a "PRIETO," § JORGE ANTONIO CANO AHUGABER, § HERBERT E. POUNDS, JR., AND 9 HARLAN 0. VANDER ZEE 4 MENGR~LR1 9T SUPPLvj~M~ID~E~ -~ $(~P~Q~T QP ~ ~O DI$t1155 TO THE HONORABLE JUDGE OF SAID COURT: 1. On February 7, 1992, the Government first produced for inspection by the Defendant Harlan Vender Zee's attorney, certain evidence which supports Harlem Vender see's Motion to Dismiss the Indictment. 2. The memoranda on file in this case reflect that on March 31, 1987, at the time Of the first transaction between Mario and Ba1d~mar Salinas in the Stone Oak~ National Bank, the bank offIcers made numerous cells to government ofticia1~ in which they sought guidance with respect to the transaction. Included within the calls were cells to the local Internal Revenue Service, the Office of Customs Secret Servica end to tt~e Off ice of the Deputy Assistant Secretary for the Treasury, for Law Enforcement. The calls on March 31, 1987 were made by Charles Curry and Jack Turbo. Mr. Curry and Mr. Turbo were advised by e Treasury of ficial that the bank was not a "policemen" end that its only duty was to report ~u~picioue trans8ctiona. 54-650 0 - 92 - 11 PAGENO="0322" 318 3. on April 4. 1987, prior to disbursing any of the funds, the president of the Bank, Herbert Pounds, called the Department of Treasury for the third time and spoke with a Treasury official, Pete Caputo. Mr. Caputo is presently employed by the Internal Revenue Service, Criminal Investigations Division, in Washington, fl.C. At the time of tho telephone call on April 4, 1987, he was an employee of the Deputy Assistant Secretary of the Treasury for Law Enforcement. Mr. Pounds told Mr. Caputo that some Mexican nationals had brought $300,000 Sn cash and deposited it with the bank and that they had come back and wanted to borrow back some of the money. Mr. Pounds expressed concern over the transaction end stated that he "had never had a transection" like the one before him. lIe said that "I talked to several of my banking friends. They've never had anybody bring in that much cash and the guys say they've got a lot more where that came from. Mr. Caputo responded, "Well, that's fine, as long as it'~-..as long as you sand the CTR ... That's all you're resporAso~-that's all you're responsible for." Mr. Caputo asked whether the 8ank had filed CTRe Dn the trensaeti~n and Mr. Pounds said that it had. Mr. Caputo ~eked Mr. P~unda to forward edditional Copieø of the CTRe directly :o him, addressed to the "Office of Financja]. Enforcement, 1500 `enneylvanje Avenue, N.W., Washimgton, D.C. 20220." 4. Today, the Government produced the following documents: A. A correspondence log for the Office of Enforcement eflecting that on April 6, 1987, that office received Currency :ansactjon Reports ("CTRn"), Form~a 4789, from the Stone Oak 2 PAGENO="0323" 319 National Bank. That document notes that it was to be followed up on April 13, 1987 (A copy of that document is attached as Exhibit A). 2. A memorandum dated April 13, 1987, from Gerald L. Rusher, Deputy Assistant Secretary of the Treasury (Law Enforcement). tran~mittifl9 the CTR forma~ to Anthony V. Langons, Assistant Commissioner (Criminal Investigation) Internal Revenue Service. The memorandum is sntitled "Possible Criminal Investigation." Under that memorandum, Mr. Hilaher transmitted copies of the Forms 4789 received from the Stone Oak National Bank with the specific explanation that "Apparently, the bank is alerting us to what they consider unusual currency transactions." Accompanying the Forms 4789 ware xerox copies of Mexican driver's l~cense~ for the individuals conducting the. transaction inducing their photographs. Mr. Rusher requested Mr. Lengone to have hi~ staff determine whether any possible criminal investigation action was appropriate (Exhibit B). C. An Internal Revenue Service memorandum dated April 28, 1987, from the Acting Director of the Office of Investigations transmitting the same CTR forms end photo IDe to the Chief of the C~'iminal Investigation Division in the Austin District. The memorandum is entitled Suapicioue Currency Transactions," and roflects that his office received thie transmittal on Apr11 30, 1987 and that the transmittal indicated that the "Information is being forwarded to you for whatever action you deem appropriate. The document reflects that the Asaistant Chief CID assigned the 3 PAGENO="0324" 320 "suspicious currency transactions" isattar to Group 912 and transmittCd copies to San Ant~~nio, ~a~ai, where it wee received on May 1, 1987. A yellow tab etrached to that document reflects that it was received oy tne ~~roup Manager for Group 912, Mr. Mark Venuto. It was then assigned to Speciel Agent Dorma.n Batrowe. According to the statement made to the undersigned attorney by the Assistant United States Attornsy~ Mr. Jack Frele, Mr. Barrowa reviewed the currency reports and determined that no further investigative activity was required. Apparently, the matter Was closed without any contact at the Stone Oak National Bank. 5. In summery, the evidence now before the Court confirms that, prior to disbursing the funds, the bank officers advised government officials that they considered the transactions to be suspicious and sought guidance from those govermment officials as to whattheirreeporieibilitiea and obligations were. The evidence also confirms that the bank officials were advised they may complete the financial transactions end were requested to supply additional copies of the Currency Transaction Reports directly to the Treacury officials in Washington. The evidence further confirms that the bank off icials did directly supply copies of those Currency Transaction Reports to the Department of Treasury offici~l~ and also included (although this was not required of them) xerox copies of the photo lbs of the persons cQndu~t1~g the transactions, The evidence further cOnfirms that the Department of ~reesury expressly. understood that th~ Bank wa~ advising it that it felt thO5O transactions to be auspicious, The evidence further 4 PAGENO="0325" 321 confirms that thO Department of Treasury understood that this matter presented a "posaib~ criminal investigation." The evidence reflects that the matter wee then referred to the local office of the internal Revenue Service, where no further contacts wore made with the Bank end the~ bankers wore given no further guidance or 6seisteflce with respect to their concerns about the transactions. In the Government's Supplemental Reply, it asserts the followiflg Subsequent tO the early April 1987 telephOne conversation between companion Defendant Pounds and a government official, Stone Oak National Bank made ~ (suspicious :ranseCtiofl) reports to IRS of ficials until dune 6, 1988. Gov't Supp. Reply at 7, emphavi8 supplied. In fact, the evidence produced today by the Government confirms that, - immediately following the April of 1987 telephone conversation, the Bonk made a~ report to the Government of transactions which it believed to be suspicious currency transactions, and that the Government in fact recognized that those transactions presented a possible criminal violation. The Government's statement in its Supplemental Reply thus 18 directly contrary to the evidence it has now produced. Respectfully submitted, MATTSEWS & BRANSCOMB A Professional Corporation 106 S. St. Mary's, Suite 800 San M~~c1S'~'o, Texas 70205 (S~2~ç.flll State~Bar No. 14699000 kCtor~eya for befendent, Harla b. Vender See 5 PAGENO="0326" 322 CORR~SPOND~NCE LOG OFFICE OF ENFORCEMENT * r:c~r.~ DATE: ~O~JTE TMROtJGH: ~OTE 2: JOTE 3: ;OT~ 4: OUR REF. I: 001317 EXEC. SEC. *; EXEC. SEC. DDE DATE: LEG. AFFAIRS $: LEG. AFFAIRS DUE DATE: D~E RECEIVED: ~ DATE COMPLETED: ~~.ENT DATE: NOT DATED ~TE1 OESCRIPTION FORMS 4789 2: 3: SOuRCE AGENCY/ORGANIZATION: STONE OAF NATIONAL DANE S~)URCE RXF. 4: ~FE rROM: VANDER ZEE fAJ~~~- .`~5 ACTION FOR: ~ DUE DATE: 04f13/87 ACTION TO BE TAKEN: APPROPRIATE ACTION ACTiON (Line 2) ACTION (Line 3) INFO COPIES; INFO COPY 2: INFO COPY 3: INFO COP~' 4: --U---' : £XHI$1T LA~ PAGENO="0327" 323 M~RA$~' FOR; ?~x~thOny v~ Langone Assigtar~t Cemm~,seionsr (CrL~inal investigation) Internal Revenue Service F~C:1: Gerald L. ~i1sher Deputy A55iltant Se~retary (~aw Eorcenent) ~1'4~7ZCT: Poesthis Crimthal Investigation he attached copia~ of ?orms 4789 were r*ceived from the ~tor.o Oak flational sank. )4pparently, tho~bank ti a~rting ~s to what they coneider unusual currency transactions. ~ p~:ecLate* ~.t if you would have your staff review this n~ornat1~n to dotermin. whether arty poaathla criainai ~re~tigation action is appropriate. PAGENO="0328" ntsmal Revnus Srvlce memorandum MAY 0 11987 I~. tdml Dt~1~ its: APR 28~ to: Chief, Criminal Investigation Division Austin District ) m:,~c~T4'~irih~r, 0 Ice of Investigations (criminal Inv.stigation) OP:Ct..rN~i:5fA.fl( ;t: Suspicious Currency Transactions Attached is a memorandum from ~srald L. Hilsher, Deputy Aasistant Secretary (Law Enforcement), Department of the Treasury, transmitting copies of Form 4789 (CTRa) received from the Stone Oak National Bank. Thjs information is being forwarded to you for whatever action you deem appropriate. If you have any further questiong on thi. matter, please contact me, or ~ at S66-3o9~. Attachment CC: A$BiEt~~t Regional Commissioner (Criminsi InVestig$tiOfl) SOuthw~~t Region 324 APR ~Q 1387 PAGENO="0329" 325 Complying with the Spirit LofBSA~ "KnowYour Customer" Policies and if! Cook is Vice President and . -- `npliance Manager of the PugetSound- Oy Cli,rj E. Gooe :nh in Tacoma. Washington. Mr. Cook reioped and implemented the banks FUICWO~-d mat compliance program in 1979 and :u oversees compliance for the $4.6 Gon Puget Sound Bancorp. Mr. Cook wrote the ABA's Currency ansaczion Peporting: A Tutorial for rnpliance and co.authored the ABA's Guide to the Bank Secrecy Act. He :s written other books and articles on * ek compliance and has addressed a .mberof local and national seminars bank compliance issues. In addition, * was Chairman of the Washington ;nkers Association's Compliance Corn' f:s-ee and editor of the association's :zripliance Bulletin. His other posts include mere ber of o ABA's Compliance Executive Corn' :s-ee, member of the committees mey Laundering Task Force, and ~`mberof the Federal Reserve Board's r,sumerAduisoi Council, He is also :966 honors graduate of the Pacific rsr Banking School at the University Washington. :MMER 1991 was also intended to provide the gov. ernrnent with information about the - use of secret foreign bank accounts: hence, the use of the term "bank secrecy.' However, over the last two decades. theBSA's recordkeeping soc reporting requirements have evolved into a law enforcement tool designed to curb drugrelated money laundering throwing banks right into the middle of the nation's war on drugs. Bank compliance with the BSA according to the letter of the law can be, by itself, an effective deterrent to money laundering. But to be further insulated from illicit transactions, banks should expand their compliance programs to include two important e~e~ menta designed to comply with the spirit of the law. First, establish a firm "know your customer" policy. Anti second. identify and report suspicious currency transactions. This article explores both of these additional compliance steps. The ABA Money Laundering Tasc Force is developing a policy along the lines outlined here by Mr. CooK. Suspicious Transactions Reporting Bank Secrecy is a textbook designed to help bankers under- stand the Bank Secrecy Act (BSA). comply withits highly tech. sisal reporting requirements. and cope with the intensified government enforcement of these rules. Toe text~ book and accompanying instructor's manual provide the basis for a training course or seminar for tellers. branch managers. and other customer~contact personnel; compliance and operations personnel: mid.level managers: bank auditors; and others in the bank who must be trained to deal with the report' ing and recordkeeping requirements of the BSA. When the BSA was enacted in 1970. its primary purposes was to help deter white-collar crime such as income tax evasion) by furnishing law eniorce~ s-tent agencies with greater evidence of Illegal financtal transacnons. The BSA PAGENO="0330" 326 I. ~"Kncw i~.nt,' CUStOmCI~?~ court or durir.g a reg~ziator. e~.force. :ndividual or a si~eva. How tho-o" Standai tfr and Polio es `ne t C ion no ne n~e igat on ce e c on Money launderers enter the bank og )-,a decline ri public confIdence type and size of the account being system for the purpose of concealing resui::r.g rrom negative publicIty stir openea. as well as the extent of the the true source and use of funds derived rouncing the uncovering of money banks prior knowledge of the custom from their criminal activity. Most mnc~'~~ activities. money laundering schemes utilize one A sound "know your customer" or more oi the many financial services policy has three basic elements. First. Opening Accounts for Ind.ividuo or-c eo ov banics ~aoocing a a tic a baro noulo maI~e a re onaole ~ When ooenrig a new acco~nc or r "know yourcustomer" policy is an effec. to knoW who its deposit and loan ~oiv~,ua1 a oa~i~ should first obtam tive way for a bank to avoid being unwit- customers are. Second. a bank should ioentirication or the prospective cus tingly :nvoived in money laundering. make a reasonable effort to know who tomer~.na then~ce a~propnace 5cc: Besides aiding the U.S. government is using its other services (for example. ~9 ve.nr3r the vaiiait; or both the ider in its var on arugs a pruaent now wire tran rers casniers cneci~s money `icacion and the c~ omer ~`imol~ DL your customer" standard helos a bank orders, and soon). Finally, a bank insceao 01 just making sure the rtarns avoid risks and liabilities associated should decline to do business with an aria picture macon the person atcem: with money laundering schemes. individual who refuses to provide ing to open a new account, bank Among these risks and liabilities are proper identification or a business that employees snouid concentrate on do the following: refuses to provide sufficient back. tirying the potencias new customer 5 ~ `cegligence penalties" for viola, ground information or credentials. compa~'ingtn,e pieces or identificacic. tions that occur when a bank falls to For BSA compliance and money Wi~ otn!r i~o~orma9on an4~'ed~tia. establish proper BSA compliance proW launaering deterrence purposes. a ~ oat nic~itious pieces or ioentu:ca- cedures. which include a "know your banK a ,mow your customer" standard n ave a pic~ure that rnaccnes ire customer" policy' ` snould have three tiers. One tier estab. person trying to open an account tar ` lishes standards forooeningnew deposit uuicit purpose. However, a thorough iaouity tar willful blinonees, a accounts. The second tier aoolies to investigation or that person might errn atae..crioes a bank that ooes loan customers. And the third tier uncover an inivaiia social security ;.Ot 101 ow up on suspicions that a cus~ establishes exemDtions from the act's !iu,mber, ~ raise home address, or otS may be aundenng money arm, currency reoortin'g requirements. The inxormacioncnac would cause the bat ~.us.ms.'res a conscious decision to following are recommended proce. to be suspicious a'oour that person. oto c_ricing the t, urn: dures for a bank to include in each of . A bank snould oocain the rollowir. a toss resulting from civil or the three tiers of its "know your cusS inxormation wnen opening neov accou: crtmir.al asset torteiture actions by the tomer".policy. The depth and scooe of for inoivrouals: goveminent: the procedures adopted by a pardcular ~ name and address (do not allow ~ a delay or cancellation of a bank's bank depend on its size and corporate the use of a post office box or mali dr merger or acquisition activity; culture and the community it serves, service to be the only address on ~ substantial legal fees incurred record): wnen a bank must defend itself in Tier One: Opening New Deposit ~` previous address: Accounts ~` social security number (require for all deoos:t accounts: refer to A thorough investigation of new chaoter 7); accounts is the first, and perhaps most ~.. important, step a bank can take to aate or oirt,~, avoid dealing with money launderers. , ~` picture identification (for exam; Editor's Note Investigating new account customers is o.nvers license, passport, state chet not an unfamiliar procedure to banks. castling cara, government identifica trios article IS excerpted from Screening new account customers has tion card. military identification, ant an uccoming textbook entitled been a very common and orudent so forth); Bane Sec,'ecot to be pubhsned banking practice forman~ years. For ~`other types of identification us~ at~ in 1.91 by the Amencan money laundering deterrence purposes, in conjunction with oiccure identific. amucers, ....ociaoon. Here, we however, banks may need to exoand tion (for examole. credit card `oca present an aosptaoon or Cnapter the scope and depth of this zyp~of security card, voter registration car: ow our Customer and investigation. Frequently, a thorough birth certificate. ernolover ID card. ..uspicious ransacoons. For investigation of a prospective new cus. union card, and so forth)' more rnormaoon on the avsisaoii. corner immediately deters a criminal ~ home `od w "t * L~ or the text, please contact from attempting to use the bank for `lu b or,. eiepnone * niern Panno in the Education and illicit purooses. e. ~:ucy Development Division of The ei~menta of propernew account ~cucrent and previous employer B 1120 Connecticut k~e n~esaganon tecnmaue cluoe ootain ano S ~Sasnington J C 0O.~6 or ing ~.na e'-rvsng ioe'itu' non aria ~ orevious oano~ e e `ice I C t ( 0~) 6o~ ou o ae rai "nis is trt.e iether ~ne Obtair " `i uor-_tion is oni potential new' account customer is an half of the r.ew actount :nvesttgatic ?5A 3."~NK CO.%IPLIA.' PAGENO="0331" 327 ::cees. The other and most important of the process is to verify the infor- :a:cn received. This verification proc so couid include the following steps. o ac~ropriate to the bank and the pro- :ecm'e customer: ~ A customers home address can be *st-thed by using a `reverse directory' :r'c:rvdirectorv," ~- Verify the validity of the social ocuriry number by utilizing one of the xial security number verification servO .:as available to the banking thdusny~ ~ W'nen examining pieces oi identi. ficanon, bank employees should make o~re toe age. physical description, and ::czure march the person opening the taw account. ~- Home telephone numbers cars be :sr',fied by using the telephone direc- cry or teiephone company information osroice. as well as ny simpiy calling `~`.v customers at borne to tnank them ar .`ietr bustness. )~`~"LM.ER :9s; ~` A bank should not hesitate to con- tact both current and past employers to verify employment. )`- Contact prior bank references. This sot only verifies new account informa- tion but also provides valuable insight into a customers banking practices. To take this investigation a step farther, a bank chuld also subscribe to a third-parry data base verification system, These types of services range from the very basic to the complex. from simply verifying the existence of a person to verifying social security number and other information. Some services even provide information about a customer's previous financial relationships. Another effective verification tool banks should considerusing is credit reports. Besides providing valuable insight into a potential customers "financial character." credit reports also verify social security numbers and other identifying iniorrnanon on the customer.- Openinit Business Accounts. `.Vi:b a iew eccep:;oro, ;~e ns'esz;vauop, techniques used whets opeosog a new account for a :usir,ess customer onouju be similar to those for ;cdiv~duais. A banic should still obtain arid vem'.fy background in.formstion and creden. mis that identify the prospective busi ness customer. Obviously, a business customer will not have picture identifi- cation. but a legitimate business will have other documentation that could serve the same purpose for a bank. A bank should obtain and verify the following information when opening a business account: ~ business name and address (do not allow the use of a post office box or mall drop service to be the only address on record); ~ previous business name and address if any); P~ taxpayer identification number (required for all business accounts); )` date of incorporation or when a business began operating; ~ articles of incorporation, corporato by-laws, a business license, signature authority documents, partnership agreements. sole proprietorship ago-er rnents. ann similar documents; a descmption of the customers primary line or nature of business: ~` business financtal statements. including an esnmation of cash sales and related deposits; ~- banot arid other financial ref erences. ouch as suppliers or major customers; and ~- name, address, date of birth. soctal security number, and picture identification of each authorized sums on signature cards or other deposit agreements. Normally, a business account will generate larger deposit balances thar an individuals account. With these larger balances comes a higher degre of risk, both from a money launderin standpoint and because of the dange. of deposit account fraud. Consequent a bank should not only utilize the vsr fication techniques just outlined for individuals, it should also consider expanding the scope and depth of investigation when a business custoc is invoived. This is especially true if any `dane oignaio are present when opening:. account. For examnie. svners cneck;: Exliibi;A Examples oft sspicious Deposit Accoi.uit Activities bank should be SitSflCinii,S when a cots romer- $` opens a nur.ber `i accounts under one (or more) names and subsequently makes numerous cash deposits in amounts less than iiO,000; ~` opens art account without references, a local address, or proper identification, or refuses to provide information the bank feels is necessary to open the account; ~` when ooening a new account, provides identification informa. :ion that is minimal or possibly false, or information the bank cannot :eadüy verify; ~- opens savings accounts or buys certificates of deposit for the apparent sole purpose of being used as collateral for loans; )` makes numerous large cash deposits for a type ofbusiness that is not known to generate such substantial amounts of cash, or when there is no apparent business reason for generatinglarge amotints of currency (such as an individual frequently making large cash deposits into a personal account); ~- makes a cash deposit without first having counted the cash; ~`- opens corporate accounts for which deposits and withdrawals are predominantly cash rather than checks (which are more common in legitimate commercial transactions); ~` provides little or no business-reiated banking activity or history -.vheri opening a new account; and ~ makes a deposit using numerous $50 and $100 bills. PAGENO="0332" 328 other banking references, a bank should do more than verify the exist. ence of a previous or existing account. it should ny to determine how the cus~ :omer handled the banking relation' ship, as well as nv to determine the customers business reputation. The account officer should drive by the business address or even pay a per. sonal visit to the customer during busi. ness hours. Legitimate customers perceive such a visit as evidence of the bank's goodwill and high level of cus :orner service. At the.ss.me time, this type of verification procedure helps scare away a business intending to aunder money or use the bank for come other illegal purpose. Obtaining a report on the business from a credit reporting service provides `aluable credit and financial informa. non on the customer. In addition, tele. phone calls to the local chamber of commerce. Better Business Bureau, or other business associations are prudent investigation techniques. In most cases. a bank should perform `background checks" on the principals of the busi' ness (the owners, corporate officers, partners, and so forth). Ongoing Monitoring. A bank may not actually "know" a customer until after an account has been opened for a few months. Therefore, another impor. tantorocedure in a "know your cus~ tomer" policy is a periodic review or monitoring of transactions to determine if the activity is consistent with the normal and expected deposit account activity of the customer. This monitor. ing would be especially important if a bank spots one of the danger signals when an account is opened. Basically, ongoing monitoring con~ sists of a periodic review of account activity to determine any unusual transactions that may indicate possible money laundering activity or deposit account fraud. Most banks currently produce one or more of the following types of reports thatcould be used to monitor customers' deposit account activity: ~` cash management reports; ~`account analysis reports; ~- demand deposit accounts activity reports; ~` large currency transactions or coan-incash-out reports used for liSA compliance monitoring; and ~` chec:-: kiting sus~ec: reoor.s. Only after reviewing these or other similar types of reports can a bank establish a data base of information to determine what account activity is conS sistent with a customer's legitimate activities and what activities are unu~ sual or suspicious. Tier Two: "Knowing" Loan Customers Bankers must realize and be aware that any financial transaction, even a loan transaction, can be used as a part of a scheme to launder money. As a result, a bank must make sure its `know your customer" policies and pro. cedures also apply to loan customers. Recently, a number of financial instiru. tons have suffered losses after taking property for collateral that their bor. rowers originally obtained with illicit funds. The losses occurred because the properties were seized by and forfeited to the government as a result of the illegal activities. tinder federal law, both real and personal property beiongir.g to a per son invoived in illegal crnig sales or purchased with laundered money s-~ subject to government setaure and forfeiture.2 Occasionally, the seized ~roperty may be collateral for bank loans. WIser, the property is seized b the government, a bank may petidor the court to "pardon' the property the forfeiture. To be successfui in thi petition, a bank must prove that it hr no knowledge of the illegal activity that led to the forfeiture. That is, a bank must be able to prove it was "innocent" owner or lien holder.3 The following are examples of acr cases where the (iS. Justice Depart rnent has seized property used as collateral for bank loans. Examples A customer developed a aignific: relationship consiadngof nine dep accounts and ten outstanding (oar with a small bank. Two years late the customer was arrested by FBI for alleged drug rmathcking money laundering. The FBI sei borne ann three vehicles and tro: 5353.000 in bank ceposits. bce `n. i~'.y cnipL1': lxhihi;B Examples of Suspicious Funds Transfer Ac dvities A bank should be suspicious when- ~` a customer makes numerous cash deposits and subsequently requests wire transfers of all but a small amount to another city or country, especially when these transactions are inconsistent with the customer's business or banking history; ~ a customer deposits funds into several accounts, usually in amounts below $10,000, and the funds are then consolidated into one master account and wired outside of the United States; ~ a person uses wire transfers to move large amounts of money to a flnancial haven country such as the Cayman Islands, Columbia, Hong Kong, Liechtenstein. Luxembourg, Panama, or Switzerland; ~` a person receives numerous small wire transfers of fi.uids or deposits of checks and money orders, and then conducts large outS going wire transfers to another city or country; ~- a person sends or receives wire transfers, particularly if there is no apparent business reason for such transfers: ~ a person receives wire transfers and immediately purchases negotiable instruments payable to third parties; ~` a customer uses individual or corporate accounts primarily as a temporary repository for funds that are then transferred to a foreign bank account; PAGENO="0333" zssera were pledged as collateral igalnst 51.008.000 in loans by :ne bank. A bank listed a parcel of fore- nosed real estate with a broker. Eventually, the bank accepted an offer made through the broker and entered into a sales contract that railed for a down payment of $57500, with the $60000 balance financed by the bank. Later, the property was seized following a criminal indict- rnent against the purchaser, who pled guilty, admitted the property was purchased with drug proceeds, and consented to the forfeiture. In each of these cases, the Justice ~eparnnenc refused to release the rnperties to the banks, claiming that `te banks "had knowledge" or "should ave known" thattheir customers were ovolved in illegal activiry Civil judicial .:tions determine if the banks were, ostead, innocent owners and therefore :otitled to an interest in the forfeited :rnoerty. To be successful in their ::airns. banks must prove they accepted `te depostts or made the ioans in ;ood faito.' t'MMER 19°l Example Ir, another case, a bank lost over $800000 (not including attorney's fees and related costs) when a fed- eral court ruled in favor of the gov- ernment by staring that the bank could not prove it was an"innocent lien holder."5 This case involved a bank that made a 1-year term $800,000 firstmorrgsge loan to a Panamanian corporarion. The loan was fully collateralized by a $1.). mil- lion home owned by the corporation, After the loan was made, the govern- ment discovered that the corporation was a Panamanian shell corporation owned by a drug trafficker The government subsequently seized the property in the last example, claiming ithad probable cause to believe the property had been purchased with the proceeds of drug transactions. The government also claimed that the bank president, who granted the loan, should have known, before the loan was granted, that the owner of the property was involved in drugs. :n reaching its conclusion, the court :`r;ed that the bank was ".viilfuily blind" :o a number ci obvious fac:s that should have indicated that me orcoert-.' may have been obtained `.viii illicit oro- ceeds, In `tiec:. the court stated th~; the bank iosed its c-es" to the follow' ing facts' )` born' icr was a Panamanian shell corporat.in: ~ corporation's sole asset `-vas the property; ~` property "as a vacant residence: ~- property was up for sale; )- bank did not ask about the pur' pose of the loan; ~` bank did not perform a title search or examine the history of the prooerty: ~` persons involved in the trans- action made inconsistent statements concerning ownership of the property: ~ borrower had no apparent source of funds to repay this sizable loan: ~ loan was approved outside oi normal banking channels: ~ bank's board did not approve the loan until long after the closing; ~ some loan proceeds were used to buy expensive gifts for the bank preoi' dent's family; ~ loan proceeds were immediately transferred to Switzerland: and ~- although the proPerty was up for sale, there was no understanding that the sale proceeds would be used to repay the loan, In the end, the court ruled that, because the bank jailed to know its customer. it was not entitled to the innocent owner defense. Screening Borrowers. To ensure that the innocent owner defense is available, a bank must follow strict "know your customer" procedures for its loan borrowers. These procedures includes "due diligence" screening of potential borrowers, The steps involve' in the screening process for loans to a: individual differ from the process for loans to a business, However, in both cases, the due diligence process con- sists of three basic steps: 1) obtaining reliable identifying and financial infor marion: 2) establishing the purposes; the loan (regardless of the collaterail: and 3) checking credit history and banking re:ationsnips. For loans to individuals, additional steos might induce cnec:'ung with a borrowers iawi-'er. :nsumnce agent.. 329 Exhibit B conrin:ed ~- a person (either a customer or not one) receives incoming wire :ransfers with insn-uctions to the bank to "Pay Upon Proper Ideritifi- ration:' or to convert the funds to cashier's checks, with the wire o'ansfer having the following characteristics: -amount is very large (for example. over $100,000); -amount is just under $10,000; -funds are wired from a foreign country; or -ti-ansactions occur repeatedly. ~- a business customer uses wire transfers to send and receive large amounts of money, both domestically and intemationally when such transfers are not consistent with the customer's business or banking history; ~- a person arranges for large wire transfers out of the country, which are paid for by multiple cashier's checks on U.s. banks, possi- bly in amounts under $10,000; - ~` a person directs a bank to wire funds to a foreign country and advises the bank to expect same-day return of funds from sources different from the original beneficiaries of the outgoing wires; ~` a customer's wire transfer activity significantly increases when there has been very little or no previous wire transfer of funds by or for that customer; and ~` people who are not customers of the bank send numerous wire transfers, using currency in amounts just below $10,000. PAGENO="0334" 330 finar.c:al advisor. For business bor' let the matter rest. to essence, a bank No Longer Business as Usual rowers, a bank should establish an scans cc monitor an exemptIon fl the No oingie piece of idencificznon n ceccn ~ro ec'~e or ne cu ome `ic a ccc loan olac a on ~ ion `iii crc ice e c' ous ne sanoinse gac hec tom cc talc cit cciii Tiscis .. e ureoraoro ccc ~ec ome SLc era reputation in the business cornmu- account trust be continually revieweo when that oiece of information is an riity or industry. In particular, banks at least annually) to make sure the lvzed along with all the other data should exercise caution wnen granting exemption amount is sriil commensu obtained during the new account ins `cash loans" that are fully collateralized race" with the cuscomar conduct of the cigacion or loan due diligence orocee by depostc accounts, securities, or business. if there is a substantial fluctu a bank will have enough infor~riatio' other cash epuivalents, and are nor~ scion in the deposit activity generated decide whether to do business with rally viewed as nisk'free. If the collac. from the business, the bank should particular customer. The res~onsibi: eral was later traced to illegal drug investigate the reasons ror this fluCtua. lies entirely ivith banks to obtain sales or purchased with laundered tion and reconsider the justification icr enough information to make a corre money; it may be subject to govern, the exemption. This investigation may judgment about the legitimacy of its ment seizure and forfeiture. As a result, also result in an aajustmenc in the customers' activities. Furthermore, the bank ivould effectively have an exemption limit, bank must now take a tough stance unsecured loan. al and refuse to open an account when Other loan safeguards to protect a Danger Sign S * * customer refuses to provide identify bank from a forfetture loss include During the new account invesciga. or background information, or `.vher obtaining written statements from bor. cion or loan due diligence process. cer the information is incomplete or riot rowena regarding the legality of their cain circumstances may yield danger verifiable. business activities. intended legal use signals that indicate that a potential At first glance. the procedures tr. of the loan proceeds, and the lack of customer may not be legitimace.A make uc a prooer "know your custer pending or threatened legal proceed. bank would need to investigate rurther policy tilay se~m onerous and not ings that could result in a forfeiture. it any or the rollowing signals are SpOt' effective. However, these procedur A bank could also consider including ted when opening a new account or can be easily justified when you cot covenants and default provisions in granting a loan: aider that: 1) money launderers nec loan documentation that stipulate that ~` a customer furnishing unusual or banks in order to be successful in ti a borrower wail not violate any law that suspicious identification documents: line of work: and 21 a bank coulo pa could result in ro"reicure ano wul pro ~` e'uccanc or a custoi-ie to reveal very high once ror cc g .inwitt n~ vice the bank with notice or any pend. cersonal background information: involved irs money launcering trar,~ ing or threacenec legal action, ` ticns. In anon, it is no onger ousin Tier Three: Establishing ~ as usual when opening new accoun "TExernptions" from Currency ~` references that cannot beverified or granting can,,, Reporting ~ cont-'cwd' To be placed on a bank's exemption ` .. ` . , , 11. Reporting Suspiciou.s list is ccssibiy the ultimate dream of a ~` cisconne,,te ome pncne. mone~ launderer. This is why laun. ~ no record of past or present B ~ollowin erooe~ "iow your derens create complex and elaborate employment: tcm~' eroced~e~' bank emo1ove~ schemes involving illegitimate "front" ~` customer's reluctance or refusal to will u'ndoubtedlv e'icouncer bank:- companies or collaborate with employ, disclose other banking reiatronsnips: transactions that will trigger thetr: aes ot legi imate businesses. `~nere~ ~` home address or business location olden. Establishing a orcgram to i(, tore, the eiements or a banks know far removed from the banking office: ~ifv and report suspicius transac:: urcustornerplicyshouJdjncl~ice ~` customer's background is inconsis. avi~l not only help a bank avoid the customer on the currencrepoi~ting tent with business activities; risks associated with mnoneylaunni excretion list. ~` customer's reluctance or rerusal ing operation., I C Whets establishing an exemption for to reveal details concerning business sole assistance to e governrnen~ a business customer, a bank is required activities; g by the BSA regulations to expand the ~-cuscomer's reluctance orrefusal to Examples scone of its investigation to: 1) deter' provide business flnancial statements: During the late 1.80s, there wer rtunef the customer's business acuvity ~- recent change in ownership of the nurTierous occasions when bane~ qualities ror an exem~tion;2)veriry business but the background ~f the ~ortig~isi~ous currenc at e money genera 9, new owners is Inconsistent or incom- transactions Pe~baos the most ro duct of a domestic patible with the nature of the business: braced case was du6bed "Opera: `cusine~s" of th"t cus'cme'- and 3) ~"business financial statements are Polar Cap:' Two multinational b vi w ~ con e .inve months or am~ ircon isce'st yin those or simuar ri-Des headquarte cc in Lalirornla nrc mg n'ansacticns to determine a srcper Ot ouslilesses: aria the critical "trussing units ~o excretion amount, * ~` for large bustnesses or corpora- enrorcemenr orric:ais. ne:puigtc On~e a custcmer is claced on the nons. ~nanc:al statements are rot :re uncover a soonisncateo mten~~ e'c riction u o~. `~ ca~ ct "sciv c~e ri cco~'it~nr rionev I ~nce'ire e"e 1. ~A B,~K CO,~~LL~ PAGENO="0335" 331 Exhibit C Ex. -uples of Suspicious Nondeposit Account Activities A ban?. should be saspiciores when eirherc c-.cstomeror someone who ~s not a -cstomer- ~`- co.~verts large amounts oi currency from small to large denomi- nation bills for example. exchanges Si. 53, Sb, and S20 bills for 550 and S100 bills); ~ buys a number oi cashiers checks. money orders, or traveler's checks in amounts just below the 510,000 CTR threshold, or in amounts just below the $3,000 threshold for completing a negotia- ble instrument log; ~- two ormore persons come to the bank together. but separately use cash to purchase cashiers checks, traveler's checks, or money orders that individually do not exceed SiO,000: ~` is reluctant to furnish identification when purchasing negotiable instruments in amounts between S3.000 and S10,000; )~ reduces the amount of a transaction to below $3,000 after being informed that a negotiable instrument log must be completed; ~` comes into a branch cr bank on consecutive (or near-consecutive) business days to purchase negotiable instruments in amounts less than $3,000; ~ uses numerous S50 and S100 bills to purchase cashier's checks, money orders, or traveler's checks that individually do not exceed 510.000; and ~` has unusual activity in the safe deposit box areas; for exampie. increased frequency of use by a customer, a customer carrying satch- els. bags. or other containers that could conceal large amounts of cash, multiple sarne'day visits, or a customer being accompanied by other individuals when accessing a box. :ranc:es of a bao.- isv r.csviduaio ;vero :` cong cash to purcnas~ canter a cnet:':s, all n amounts :00w $10,000 These branches noependeotly reported their suspicons to the bank's law enforcement liaison, woo ri turn reported the suspic:ous trans actions to the local IRS'CID office. The ensuing federal ovestiganon consisted oi 23 days of arouno-the' clock sun'eillance and the execution of 14 search warrants, The investigation resulted in the arrest and conviction sf20 ir.dividu- sis who were indicted on 136 separate federal drug and money laundeong offenses. In addition, the govern nent seized over 15 pounds of cocaine and heroin. 15 weapons. severas vehicles, and well over $100,000 in currency and other personal property. These are just three examples of how banks are proacriveiy reporting ouspicious currency transacoons to law enforcement officials. The common :hread among these and other docu' mented cases is that tellers and other front-line employees were properly trained to identify and report suopi' cious currency transactions. Defining Suspicious Transactions A suspicious transaction can best ho oefineo as a currency ransaczior. or other type of banking acnvity where the bank has reason to believe, knows ior a fact, or suspects: 1) the money or loan collateral was obtained frornan illegal activity (such as drug traffics:- ng); or 2) a person is structunng the transaction in such a way as to evace the CTR requirements. Every day, numerous situacons are encountered by ban.ic employees thst could be considered suspicious in nature- The most obvious example of suspicious u-~nsaction so when a cus- tomer begins to conduct a currency transaction exceeding $10000. but then reduces the amount of the noose hon to under $10,000 when told that: CTR must be completed~VsriaO0ns: this example are perhaps the most it: queor.ly cited examples of suspicious transactions occurring in banks. In deterrninmg whetner or not a cc rency ~nsaction is suspic:oua. a bar rust consider a number of facts anc c:rccotstanCes ourrounoirig toe their internal monitoring systems. the two banks independently detec:ec and reported suspicious activities of business customers who were apparently using front companies to launder drug money. As a result of the actions these banks took. "Polar Cap" broke up an operation that laundered over $1.2 billion over 2 years. Over 120 people were arrested, a Colombian bank was indicted, and more than a ton of cocaine was seized during the investigation. In another case, several banks in New York and New Jersey noured onusuas acovity in casts purchases of money orders ano casners cnec:-ta, The snetrurnents etner did not spec- ±1 payess or were race out to ic::' SUMMER 1991 tious psyees. Although the transac tons were all in amounts under 510.000 and did not require a cur~ rency transaction report(CTR). the suspicious bankers notified the local office of the IRS Criminal Investiga' tons Division )CID). The subsequent investigation found the instruments were being express mailed to Colombia between the pages of magazines and ttien forwarded to banks in Panamr.. The banks' suspicions resulted in the indicrnient of 16 people for launder' ing about $100 millions year from cocaine sales in New York. Another example that did not receive any rno)iciry involved a cook is toe Pacific Northwest- In :ois case. several tellers at oifferent PAGENO="0336" iCtlOri. For example. if the transaction .nvoives a business customen the bank must determine if the transaction is ~onsistenc with the customers legiti- mare business activities. Of course, the ~:ey to this determination is to know enough about the customers business :o recognize an unusual or suspicious :ransaction. Structuring Currency Transactions Congress included an "anti- structuring" provision in the Money Laundering Control Act. This provi- sion was intended to make it clear that all currency transaction structuring schemes designed to evade the BSA reporting requirements are unlawful, even if the 310,000 threshold is never exceeded at any tine bank during a sin.- gle day. Basically, the structuring pro- vision was enacted to prohibit a person from structuring or assisting in struc- turing, or attempting to structure or assist in structuring, any transaction with one or more domestic financial institutions for the purpose of evading the reporting requirements. After structuring became a federal crime, confusion was widespread among bankers regarding what types of activities would constitute struc- turing or attempting to structure. in response to this confusion. the Treasury Department amended the BSA regulation in January 1989 to include the following formal definition~ - .a person structures a transaction if that person, acting alone, or in con- junction with, or on behalf of, other persons, conducts or attempts to con- duct one ormore transactions in cur- rency,in any amount, at one or more financial institutions, on one or more days, in any manner, for the purpose of evading the reporting require- ments under section 103,22 of this Part. "In any manner" includes, but is not limited to, the breaking down of a single sum of currency exceed- ing $10,000 into smalleh sums, including sums ator below $10,000, or the conduct of a transaction, or oeries of currency transactions, including transactions at or below 310,000. The transaction or transac- nons need not exceed the $10,000 reporong threshold at any single financiai inenranon on any single day ri orcer to conoorute structuring within me meaning of mis definition. Assisting in Structuring Although not specifically included in the structuring definition. :he terra `assisting in structuring" included in the law still poses some potential liabil- ity for banks that, with the intention of providing a customer service, tell a customer how to present currency transactions to evade reporting. The term "assist in structuring" encom- passes a wide range of actions that no single definition can fully address. However, a distinction can be made bere-een merely explaining the require- ments of this provision, and advising the customer how to evade those require- ments. It is legal for a bank to simply explain the structuring prohibition to its customers if the appropriate situa- tion arises. In contrast, it is a federal crime, not a customer service, to advise a customer on how to evade those requirements, no matter what the bank's intentions were. For example, in response to a cus- tomer's questions, a bank employee may explain that: 1) all same-business- day cash transactions in excess of S10,000 must be reported to the govem- ment; 2) any transaction of less than 310,000 need not be reported; and 3) structuring transactions to evade the reporting requirements is illegal, By merely explaining the law to the cus- tomer, the bank has not assisted the customer in structuring the transaction, However, a bank employee would indeed violate federal law by helping a customer to present the transaction in such a way that would not techni- cally trigger the currency reporting requirements, Li a customer asks questions about the CTR rules, the bank employee must respond clearly and in such a way that the bank could not be accused of attempting to assist in structuring a transaction. Perhaps the safest course oi action in response to a customer's inquiry isto simply expiain that cur- rency transaction reporting is a require- meat under federal law, and then to furnish the customerwith a copy of the CTR form together with completion instructions. As an altemative, a bank should consider either purchasing or developing customer information bro- chures to explain the government's BSA reporting requirements. This will heip assure that bank employees are providing proper informanon to c'us :omers aria wouic also neip nsu.iame a bank and itp employees from being pros- ecuted for "assisting Er, structuring:' Before a bank may be held liable, eithercniinally or ci~iily, for assisting a custommr in structuring transactions, the ban~ must have knowledge that its customer s attempting to circumvent the BSs~ reporting requirements, and the bank must aid or help the customer in that attempt, If a c-,iatorner disguises multiple cash transactions without the complicity of any officeror employee of the bank, and the bank has no "knowledge" (as defined in chapter 1) of the multiple currency transactions, the bank has not knowingly or willfully violated the "assisting in structuring" provision of the law, Examples ofSu.spicious Transactions Defining the terms "suspicious trans actions" and "structuring" helps bank employees understand what types of activity may, in reality, be money laun- dering, However, examples of actual money laundering techniques provide the best educational tool for bankers, ii this end, the Department of Treasury, law enforcement officials, banking reg ulators, and some banking associadono have separately identified the charac- teristics of transactions that may be co: sidered suspicious. Exhibits A through E enumerate and deairribe transaction. in five areas that could be warning signals to alert personnel that an attemp may be underway to use the bank for the purpose of money laundering. The lists of suspicious activities an transactions in Exhibits A through E are not intended to be all-inclusive, bi they should help illustrate the types a: activities to be on the lookout for. Hor ever, the occurrence oi these situatior alone may not necessarily mean some one is trying to use the bank for an illicit purpose, Bank employees, there fore, should carefully consider these and other circumstances before repor ing such activities to law enforcemen officials, An Approach to Handiitig Suspicious Transactions The pressure on banks to voluntari report suspicious transactions is conn ually increasing. This pressure come in the form of law enforcement expe~ rations, unfavorable legal actions, encouragement by the regu.iatoryag- cies. and congressional threats at an .~BA BANK COM,PLIAN' 332 PAGENO="0337" Exhibit D 333 Examples of Genera.Uy Suspicious Activities bank should be surpicious when- ~` someone is reluctant to proceed with a transaction after being iforrned that a CTR would be filed with the IRS; ~` someone is reluctant or refuses to provide the necessary infor- ration to complete a CTR or a negotiable instrument log; ~` a person expresses a concern or is overly curious about the ank's intention to file a CTR on a transaction or complete a nego~ able instrument log; ~` someone reduces the amount of the transaction to below the 310,000 reporting threshold when informed that a CTR must be iled; ~ a person discusses the CTR filing requirements with bank ersonnel, with the apparent intent to determine how to structure :ransacrions to avoid reporting; and ~` a customers business changes ownership and the background Df the new owners is inconsistent with the customers nature of busi. -tess. or the new owners are reluctant to provide personal and finan- :iaI background information. ai legislation. As a result, banks are not required by either federal or state ed in the unenviable position of law to report suspicious transactions to ~g both judge and jury." Because law enforcement authorities, unless the -.is pressure and the potential sen. transaction exceeds £10,000. However. ramifications to banks and bank there are a few issues a bank should cioyees for processing a currency consider that make it clear the best ~oaction or other financial transac~ course of action is to voluntarily report nat they either know or suspect suspicious transactions. irraced from an illegal source, an :orcsnr question is: How does a Assisting Law Enforcàment. :k handle suspicious transactions? Reporting suspicious transactions can The most cautious approach would be a valuable assistance to law enforce' :o refuse to process a currency cans- ment in detecting and apprehending ::on altogether, reject a loan request, money launderers. Although the CTR refuse to wire funds for a customer. process provides law enforcement off- :wever, this approach may prove cials with investigative information. to the bank employee if an iUegit- there sometimes is a significant time ate customer retaliates, or to the lag in this reporting structure. The ,rik~s business and public image if the sooner law enforcement authorities ursaction is later found to be legiti- receive information concerning a possi- ace. A more prudent or reasonable ble money laundering transaction, the :ernadve would be to conduct "busi' better the chances are that they will so as usual" and thenreport the cans~ apprehend a money laundereror break ton to the government. This approach up a significant money laundering culd be less risky and help to insu' operation. :~ the bank from either civil or cnimi. lability if the transaction is actually `Willf~.i.l Blindness!' The legal of a money laundering scheme. concept of "willful blindness" is another Althoug'n banks are required to reason a bank should consider volun. ::ort suspicious transactions to their zanily re~or r.g suspicious transactions, :erai regulatory agenc:es, the'; are As previously noted, willful blindness t.~M.M.ER 1991 describes a bank that "closes its eyes to oovious zacra that tray indicate ille- gal actrviry~ For example. if a bank off ceror employee suspects a customer :s laundenng money. but then fails to investigate further or fails to report the suspicions to law enforcement authori. ties, the bank could later be deemed to have knowledge of the money laun- dering transaction by virtue of its willful blindness. If such activity is later proved to be money laundering, the bank may be held liable for a willful intent to violate the BSA. This concept is clearly attic- ulated by the Deparcnenc oi Treasury in its 1989 amendments to the BSA regulation: ...as Treasury has consistently stated in the past, "knowledge" clearly also includes the concept of "w'iilful.blindness" articulated in the case of United Stares n Jeweil. 532 F. 2d 697(9th CIt.) cert. denied 426 U.s. 951(1976). This concept applies to a person who has deliberately avoided positive knowledge.As the court stated in the Jewell case. ``if a person has his suspicions aroused but then deliberately omits to make further inquiries because he wishes to remain in ignorance. he is deemed to have knowledge:' Thus, if a financialinstitution suspects that someone may be either conducting currency transactions or having them conducted on his behalf, in amounts totalling more than 510,000, but deliberately refuses to ask ques- tions because he wants to remain ignorant, and therefore. `innocent:' the financial institution will be deemed to have knowledge for pur. poses of assessing liability under the Bank Secrecy Act. Encouragement by Treasury and the Regulators. The Department of Treasury and the federal regulators have issued rulings or advisories that "encourage" banks to report suspicious transactions to law enforcement author' ities. Treasury, for example, issued an adminismrative ruling in 1988 that clarified how a bank should report sus~ picious transactiona~ The ruling encourages banks to be aware of the possibility that their institutions may be misused by persons intentionally structuring transactions to evace toe reporting requirements or engaging in transactions that may involve illegal PAGENO="0338" 334 -ny sucn as drug :r3liicksng. tax sion. ar money laundering. The nil- aiso extains what action a bank rid taste men it suspects this type .iegai activity. (Note that Treasury's mrnendstions for handling suspi. ~s transactions are incorporated aughout this article.) ~foney Laundering: .4 Banker's ide to .-IvoidingPmblems is a prime ample of how the regulators are :ourag'ing banks to report suspicious tisactiona. Published by the Office of Comptroller of the Currency sOCC), guide provides numerous examples suspicious transactions and explains v to report such activity to the ~ropriate law enforcement officials. ic guide also encourages banks to :iude this type of reporting activity their BSA policies and procedures. Good Corporate Citizen. Voluntar reporting suspicious transactions tovides tangible evidence of a banks ::orts to be a good corporate citizen a willing participant in the war on tugs. This reputation or standing can especially helpful in a BSA enforce- tent ac:ton. ivnen Treasury decides nether to impose a civil penalty rs:rist a bank for willful violations of CTR requirements. It also can be uipful during a criminal prosecution ase. curing which a court must decide a bank was willfully involved in a roney iaundering operation. i~ow To Report Suspicious ranaactions This section explains the technical -squirementa and procedures jot :spor'.ing suspicious transactions. Federal Investigative Agencies. The IRS Criminal Investigations Divi. sion (Cm) is charged with investigating alleged money laundering activities. Therefore, if a bank has reason to tei.ieve. knows for a fact, or suspects someone is intentionally structuring :tarrencv transaccons to evade the :TR requirements, or is engaging in a transaction that may involve other ille' gal activity, the bank should report the transaction to the local IRS.CID office. Suspicious transactions can also cc re:orang to the iRS-Cm by calling national toll-free "hotline": L-d00-BSA-CTRS (1-800.272-2877). cone ex~ecinous1y, this method of :s:crtmg ousctc:cus transactions can an sffect:ve ttieans of assisting ~ ::r:erttern autnor.ties in thetr efforts to fight money laundering and drug trafficking. In fact, most law enforce. ment officials and banking industry BSA experts believe that using the hotline is the most effective way a bank can report suspicious transactions. Although the IRS-CID has jurisdic. tion over most criminal investigations involving CTR filings, money launder- ing activities, and tax evasion, the U.S. Customs Service is responsible for CMIR (Currency or Monetary Insticu' ments Reports) and smuggiing investi- gations. Therefore, la bank suspects activity relating to a smuggling opera- tion or a CMIR violation, it should call the local office of the U.S. Customs Service, or call i-800.BE-ALERT. ha bank suspects activity involving bribery of a bank official, then the Fed- eral Bureau 0f Invasrigations (FBI) would have jurisdiction over a criminal investigation. So if a bank suspects someone is trying to bribes bank o~cial to launder money or otherwise violate the BSA. it should contact both the local office of the ~S.CID and the FBI. CTB. Filings for Suspicious Currencylransactiona. A CTR filing is another way to notify the govern- ment of suspicious transactions. The CTR form provides a box the bank can check if a transaction is conordered sus- picious. Furthermore. the box may be cneckec and a CTR filed even if the transactIon amounts to 810.000 or unoer. What To Report When reporting suspicious trans- sctions to the IRS-Cm or any other federal government agency, a bank must be careful not to provide any information other than: ~- the suspect's name and other identifying information: ~` information regarding the effected deposit accountsss: and ~` the nature oj the suspected illegal activity for example. money laundering). By no means should a bank provide any account or loan documentation without first receiving a subpoena or through another appropriate legal proc- ess. Before the 1986 amendments to the Right to Financial Privacy Act. there were some general uncertainties in the banking industry as to what information a bank could furnish to the government regarding suspictous transactions. However, the 1986 amendments made it clear that banks could report the above information to the federal government without fear or civil liability for improper disclosure under the Privacy Act. Section 1103(c: of the act now reads: Nothing in this title shall preclude any financial institution, or any offi- cer, employee, or agent of a firia.ncta. institution from nonlymg a Govern- ment autnonty tnat uucn .nsntut:Or. or ai~cer. ertp:oyee. or agent has ABA sANK coMpLeANC: : ExJ.iibitE Examples of Suspicious Loan Activities .`l bank i lending personnel should be suspicious ic/zen - a borrower's stated purpose does not make economic sense or is inconsistent with the borrower's background or nature of business: ~` a borrower uses cash or certificates of deposit as collateral for a loan, while refusing to disclose the purpose of the loan: ~` a borrower suddenly pays down a large loan without a readily identifiable source for repayment (especially if this was a problem loan); ~` the proceeds of a loan are wired or mailed to a bank or third party who is "offshore"; ~- a loan request is for an offshore company or secured by obliga- tions of offshore banks; and ~ a potential borrower is reluctant or refuses to state a purpose for the loan or the source of repayment. PAGENO="0339" 335 scion which may be relevant Criminal Referral Process Some banks have deveiooed their ssiole violation of any statute Another goVernmental reporting Own susPiC:OUS transacuon form for ..:acion. Such inicrmanon may process triggered by suspicIous s- internal reporting. Such a form couid only the siame crotheriden. actions is the filing of a Criminal Refer- also be furnished to the government - reformation concerning any ral Form CRF) with a bank's federal agency :nvoived if the completed forms :ual. corporation. or account regulatory enforcement agency. The contained only information allowed to `d and nature a/any suspected criminal referral reporting system was be disclosed under the Right to Firian. * acrwtt,v.. any financial develooed in 1984 to help banks report cia.l Privacy. ~cion. or officer, employee, or a varie~y of known or suspected crimes Review oflnforniatiors Regarding thereof, making a disclosure of and/or losses involving transactions at Suspicious Activity To Determine ~acion pursuant to this subsec. a bank. The criminal referral process if the Government Should Be nail not be liable to customer was also intended to provide a stand- Nod-fled. Routing information on sus- any law or regulation of the ard format for banks to report sus- picious activity through a central loca. ti States or any constitution. pected or actual criminal activity to the tion allows the bank to conduct an regulation of any State or regulatory agencies. as well as to the objective review of the transactions mi subdivision thereof, for such 13.5. Attorneys, the FBI. and other fed' before the government is notified. In raure or for any failure to notify ersi investigative agencies. some cases, further review of a custom- stomer of such disclosure, In 1987, the federal enforcement er's activity may reveal a legitimate :riasis added] agencies revised their CRF rules to purpose for the transactions. In other egisiative history supporting include the reporting pf suspicious cases, the central location may receive sage of the 1986 amendments transactions. The following reporting separate suspicious reports on a cus- :ed clarifying background infor- inscr.icrions contained in the 0CC tomer from more than one branch or regarding the three types of Criminal Referral Form makes ic clear banking office, Individually, these ation that may be reported to the that suspicious transactions are reports may not have been overly sus- * government:9 included in this reporting process: picious, but when reviewed as a group tie and Identifying In.forma- "Required reporting:.. .any known they may indicate a money laundering The names allowed to be disclosed or suspected criminal activity involv. operation. the names of any individuals, ing a financial transaction which Principal Liaison Between Bank -ate entities, partnerships, or uses the bank as a conduic forsuch and Law Enforcement/Prosecution :rganizations involved in the sus- criminal activity (such as structuring Officials. A central location through activity. A bank also may die- transactions to evade Bank Secrecy which to funnel suspicious rransacnons he appropriate address for both Act reporting requirements or (sun- helps assure the information reported duals and businesses, as well as dering monetary instruments):' to the government complies with the security numbers or taxpayer Right to Financial Privacy Act. Also. .dication numbers. this principal contact assures that law Internal Procedures enforcement and prosecution officials i'ected Accountla). Information are working with properly trained bank ding the account(s) involved in No matter what method a bankuses employees who are knowledgeable of :s~icious activity includes the to report suspicious transactions, it ~ the issues involved in reporting, inves- ~rrt number, the type of account, crucial that proper internal procedures oat race on the account, and the exist to control the flow of information tigating, and prosecuting individuals susoected of money laundering. :on of the branch or banking office. to the government. The key element in - these procedures is to designate a cen- Decision Whether To Continue irate of fliegal Activity. ~ a tralized employee, othcer, or depart. To Do Business with a Customer does not know the specific type merit to serve ass `clearinghouse" for Whose Suspicious Activity Has agal activity suspected in a trans- branch or line personnel to report sus~ Been Rcported~ Deciding whether to :n. it may discloses description of picious activity. Other internal proce- continue doing business with a cusS activity causing suspicion. For dures regarding suspicious transaction tomer after a report has been filed with rnple. every Monday, Wednesday, should include, but not necessarily be the government is often di~cult and Friday a bank customer buys a limited to, the elements that follow, should only be made after consultation .iers check with 15.000 in small with senior management, legal cotin- :minadori bills. If the bank sus- sd, and the law enforcement agency :s this is an illegal activity, but does Internal Channels for Branch or involved. For some customers, the ~mow precisely what law may have Line Personnel To ReportSuspicious decision is an easy one. For example, a violated, it rosy describe the pat- Transactions. Maintaining clearand customer frequently uses cash to pur- of activity that led to the suspi. articulated procedures for intemal chase cashier's checks in amounts just Provided a bank does not disclose reporting of suspicious transactions under S10,000, but refuses to provide * ocher information or provide docu- helps assure timely and properreport. the necessary information for the bank relating to a customers transac- log to the government. These proce- to comply with the "S3,000 rule' or to ~s. it should be free to make good dures may consist of a phone call or complete aCTR when required. A reports of suspicious transactions memo to the central location, orfor- bank would be well advised to discon- government without fear of civil warding a partial or completed CTR tinue doing bustness with this cus- ::iiry to the customer nvolved. cieariy marked as "SUSPICIOIJS' tomer unless a law enforcement agency M.t.LZB, 1991 17 PAGENO="0340" 336 spectficaily requests that the relation. ship be preserved to assist in its ongo- rig tnveatigation. in anotner example. a business customer begins receiving numerous domestic wires for deposit into a busi' ness account. After a few daya. the cts- tomer buys cashiers checks payable to an unfamiliar business in another pam of the count~ The customer contends that the third parry is a supplier for his business. Although this type of activity is an unusual way to conduct business. it may ultimateljr prove to be legitimate. Without additional facts or information to support the suspicions. a bank may not be able to justify terminating the relationship. In some cases, law enforcement officials ivill ask a bank to maintain a deposit relationship with a customer whose transactions have been reported as suspicious. This request is normally made when law enforcement wants to monitor a customers transactions as part of an investigation. Before decid. ing to agree with this request. a bank should ask for and receive a letter from a government official (normally a local (5.5. Attorney), indemnifying the bank and holding it harmless from any civil or criminal liability or losses that may result from continuing to do business with a suspected money launderer or other person believed to be involved in a criminal activity. Among other things. this type of letter should specifically address the various civil and criminal penalties under the BSA and related federal statutes, the federal govern. ment seizure and asset forfeiture pro- ceedings, as well as any applicable state law. Proper Documentation `of Investigations and/or Reports of Suspiciou.s Transactions. Document. ing the actions bank takes upon encountering suspicious activity is important in helping it avoid civil or criminal liability if the activity later proves to be an act of money laundering. Documentation is especially important ~f. after investigating a customers transactions, the bank decides not to report the transactions to the govern- ment or continues to do business with the customer. In these instances, proper documentation of the facts and the sub- sequent investigation can show that me oank was acting in gooo farth and was not willfully involved in me cus :cmer 5 activity. When transacz:ons are reported to law enforcement. :he documentatson should reflect the following: ~ details of the acu'.'itv causing ouspic:on: ~ name of the law enforcemer.: agency notified incfuding date, time, and person contacted): ~` description of the information provided to the government: ~` copies of internal memos, letters, or pertinent documents: and ~ a copy of the CRF filed with the bank's regulatory agency. Proper documentation also provides evidence of the bank's compliance with allowable disclosure provisions of the Right to Financial Privacy Act. Notes L Obtaining a credit report for a legitimate business need is considered a `permissible purpose'.and therefore ailowabie under the FairCredit Reporting Act(Sectiin 604(31(E)). 2. Included in provisions of the Controller Subotances Act of 1978. Money Launder- ing Control Ac: of 1986. and Anti.Drug Abuse Act of 1968. 3. The Money Laundering Control Ac: of 1966 contained a provision, commonly referred to as the innocent owner defense. that states: `no procerry shall be forfeited under this section to the extent of the inter- est oisn owner or lien holder by reason oi any act or omission established by the owner or lien holder to have been commit- ted without the kriowiedge of that owner or lien (wider.' 4. The examples were contained in an 0CC Advisory (AL9-5), `Government Seizures and Asset Forfeitures.' dated March 29. 1990. At the time of publication, the cases had not yet bees full adjudicated. 5. United Stares u. One Single Famiiv Residence Located a: 6960 Mirarlores .4cc. sue. Oo'at Gables. Florida (No. 88.0349- CIV.SCOTT, S.D. FLA). 6. Federal Ragisrec Vol. 54, No. 13, Monday, January 23. 1989. Rules and Reg- uladons, pages 3023-3027. 7. See noteS. 5. DepsrrnentoiTreaaury. 35.5,j :988. 9. Conference Retort. 99-433. 99th Conzreoa. .no Seoa:on. 986.~ ABABankComplianc~ The editorial staff ofABA Bank CompLiance woujd welcome error: notes. and comments from readers Please let us hear from you. Use the form below to send us sour comments and ideas for future articles. TELL IT To THE EDITOR (Aracn ~ui:r.osu~ thees~:fst:ata.) ss ABA SANK COM.PLL°~NC PAGENO="0341" 337 Senate Permanent Subcomm~dt.e an Investigations !XIIIBIT# 15 UNITED STATES SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS COMMITTEE ON GOVERNMENTAL AFFAIRS Statement of American Express Travel Related Services Company, Inc. Mr. Chairman and Honorable Members of the Committee: American Express Travel Related Services Company, Inc. ("TRS") is pleased to provide the following comments to the Permanent Subcommittee on Investigations~ hearing on "Current Trends in Money Laundering." Background Information TRS is a wholly-owned subsidiary of American Express Company ("Amex") and is the issuer of American Express® Money Order, American Express® Official Check, American Express® MoneyGram (collectively, the Amex Payment Instruments), American Express® Travelers Cheque and American Express® Gift Cheque. TRS is both licensed and regulated by the states in which it conducts, its operations. Pursuant to an agreement with TRS, American Express Integrated Payment Systems Inc. ("IPS"), which is a wholly owned subsidiary of First Data Corporation ("FDC"), (formerly known as American Express Information Services Corporation) manages the Amex Payment Instruments Business for TRS. This Statement relates to issues and operations associated with the Amex Payment Instruments. PAGENO="0342" 338 Official Check American Express Official Checks, introduced in 1983, are sold at approximately 400 selling locations. The Selling Agents for Official Checks are primarily banks and savings and loan associations. The average face amount of the Official Check sold in 1991 was approximately $3,200.00. The Official Check serves as an alternative to a financial institution's own teller's check or cashiers check. Money Order The American Express Money Order was introduced in 1882. This product, together with American Express MoneyGram, is offered through a network of selling agents with approximately 40,000 selling locations, including depository institutions, check cashing bureaus, selected supermarkets, convenience stores, packaging and postal outlets, airport facilities and American Express Travel Service Offices (~TSO's"), (collectively, the "Selling Agents"). Money Orders serve as a safe, convenient and relatively inexpensive alternative to a personal check. Many Selling Agents operate in areas that are not sufficiently served by banks, such as inner city and low income neighborhoods, Customers without traditional banking relationships often utilize this product to pay monthly bills such as rent or to pay for significant purchases such as appliances. The average face amount of the American Express Money Order sold in 1991 was approximately $112.00. Most Money Orders sold at retail locations have a maximum face limit of $300.00. A higher dollar limit, generally not in excess of $500.00, may be made available at the request of the Selling Agent. PAGENO="0343" 339 -- MoneyGram The American Express MoneyGràm, introduced in 1988, allows a customer to send money in a matter of minutes to more than 11,000 locations worldwide. Common uses of the MoneyGram service include sending wages home, sending emergency money to a family member or friend and sending money to students away from home. The average face amount of a MoneyGram transmission in 1991 was approximately $414.00. MoneyGram is offered through the network of Selling Agents referred to under the heading "Money Order" above. Selling Aaent~ With the exception of TSO's which are wholly owned by TRS, TRS enters into an agency agreement with all Selling Agents which sets forth the responsibilities and obligations of the parties. All agents are required by contract to comply with all applicable federal, state or local laws. The type of Selling Agent varies from small, family owned businesses to large corporations. It is important to remember that these Selling Agents are in fact independent of TRS. It is also important to note that selling Amex Payment Instruments is a small part of the business for virtually all our Selling Agents. A typical example of a Selling Agent would be a convenience store whose principal revenues come from groceries, gas, beverages, and magazines. TRS considers its retail agent network to be one of the cornerstones of its day-to-day operations. TRS limits its risks with respect to defalcations and improper activities on the part of any retail agent by examining the background of potential agents before entering into a contractual relationship. With respect to PAGENO="0344" 340 MoneyGram Selling Agents and non-bank Money Order Selling Agents, TRS enters into a retail agency relationship only after the applicant provides a description of the applicants business structure and certain financial information relating to any party guaranteeing performance of the applicant under the agency agreement. Such information is cross-checked with available outside services such as Dunn & Bradstreet and TRW. When TRS becomes aware of a Selling Agent~s activity which suggests money laundering or dishonesty on the part of the Selling Agent, the Selling Agent is terminated. TRS has a long history of cooperation with federal and state regulatory and law enforcement agencies in the operation of these businesses. Education of Selling Agents TRS has distributed Bank Secrecy Act compliance policies, procedures and guidelines to all TSO~s which sell either the Amex Payment Instruments or Travelers or Gift Cheques. To ensure that the independent Selling Agents understand their obligations under the Bank Secrecy Act, TRS management has directed the implementation of an educational program consisting of written materials to be distributed to the Selling Agents.. Upon completion of these materials, TRS will gladly forward a copy of the same to the Subcommittee. PAGENO="0345" 341 Additional Precautions Against Money Laundering As mentioned above (see the caption entitled "MoneyGram"), the MoneyGram product was designed primarily to service consumers who need to send emergency money to friends and relatives or who transmit money on a regular basis to loved ones at home and abroad. We have reviewed the actual needs of the consumers we are attempting to serve and have concluded that these consumers do not require a service which will transmit sums from, to, or within the United States in excess of $10,000. Accordingly, we have determined that effective approximately April 15, 1992, American Express® MoneyGram will no longer offer such money transmission services for sums exceeding $10,000. Conclusion TRS is fully aware of its own reporting and recordkeeping obligations with respect to money laundering statutes It has implemented an effective compliance program with its TSO s and is taking the additional steps described above relating to agent education and the imposition of the dollar limit of its MoneyGram services to help improve compliance by Selling Agents TRS joins with those who have suggested that a continuing dialogue between the industry and federal regulators and law enforcement officials is very important This dialogue can result in efforts that are tailored to material abuses common to this industry, while lessening the risk of overly broad regulations which increase costs but have a relatively small impact upon the abuses. We also join with those that have suggested the creation of a non-bank financial institution panel to discuss money laundering issues and to provide the federal government with recommendations. PAGENO="0346" 342 We caution, however, that care must be taken when addressing these abuses. A single solution based on models relating to complex organizations such as banks simply will not work for the non-bank financial products industry. We believe that the government must work with the non-bank industry to develop solutions that will address the recognized abuses in a fashion which will permit the industry to provide valuable money transmission services to the public at affordable prices. TRS appreciates the opportunity to provide this statement to the Subcommittee. We look forward to continuing to work with regulators and law enforcement officials to identify and deal with any illegal operations. PAGENO="0347" 343 Seiiate Permanent Subcommittee on Investigations 16 STATEMENT TO THE PERMANENT SUBCOMMI11EE ON INVES11GA11ONS COMMI1TEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE FEBRUARY 27,1992 BY CHARLES A. INTRIAGO PUBUSHER AND EDITOR OF MONEY LAUNDERING ALERT MIAMI, FLORIDA We, at Money Laundering Alert, appreciate this opportunity to present information to this Subcommittee that may assist in the discharge of its legislative duties. We have a unique perspective on the money laundering problem and on the governmental effort to control it. We speak neither for the government nor for any segment of the private sector. We merely report developments in the field as we have been doing for nearly three years. I am an alumnus of Capitol Hill having worked 20 years ago as chief counsel to an oversight subcommittee of your counterpart in the House, the Government Operations Committee. I know the illustrious history of this Subcommittee and its contributions to law enforcement and the control of crime. Subsequently, I served as an Assistant United States Attorney in the Southern District of Florida specializing in the prosecution of corrupt politicians. PAGENO="0348" 344 If one discounts crimes of passion, virtually all other crimes on the books of all jurisdictions have one common element - the pursuit of money or economic advantage. It is for that reason that the money laundering laws are so important. Take the motive away, penalize and prosecute those who assist in hiding and moving criminal proceeds and you will impact the crime rate dramatically and send a powerful message to the successors in crime. The pursuit of money laundering, as you know, is of recent vintage. It was only in October 1986 that the United States became the first country in the world to make money laundering a crime. Preceding that were laws dating back to the 1970 Bank Secrecy Act which required the financial and business communities to assist the government in the hunt of money laundering. Those requirements include the filing of four government forms to report cash transactions of more than $10,000: * IRS Form 4789 - filed by financial institutions * IRS Form 8300 - filed by trades and businesses * Customs Service Form 4790 - filed by anyone who enters or leaves the country with more than $10,000 in cash or its equivalent * IRS Form 8362 - filed by casinos. From the time those requirements were put into place, the government has received more than 30 million of those forms, each taking an average of about 20 minutes to fill out, according to the government's own estimates, The entire regulatory scheme to track dirty money created by Congress, Treasury and the IRS, of which the cash reports 2 PAGENO="0349" 345 are the centerpiece, has given rise to compliance programs that cost the private sector hundreds of millions of dollars annually. In view of the goals of the laws and regulations, no one would question the utility or necessity of that large private investment if the government agencies receiving the forms and enforcing the laws are achieving the results that Congress envisioned. Unfortunately, that is not always the case. Neither Money Laundering Alert nor I are here as advocates of dismantling the cash reporting system. What we advocate, primarily as taxpayers, is an effective, efficient and economical application of the laws and regulations. Two months ago, in response to the first mandate of the Crime Control Act of 1990, the Treasury Department submitted a report to Congress which was supposed to respond to a number of concerns about the utility of the cash reports and the application of penalties for noncompliance. Treasury's report to Congress, which was filed seven months late, paints a picture of the federal money laundering effort that is airbrushed, incomplete and unreliable. The Treasury report does a disservice to you, the collective authors of the laws that it regulates, and to tens of thousands of law-abiding bankers, tradesmen and others who try, at high cost and consternation, to stay out of harm's way from money launderers and the government. The Crime Control Act of 1990 (Public Law 101-647, November 29, 1990) required that the report respond to these questions: * the "number of each type of report filed" the previous year under the Bank 3 PAGENO="0350" 346 Secrecy Act of 1970 and the tax code provision which requires cash reports by trades and businesses * an estimate of the "rate of compliance" with the cash reporting laws, including IRS Forms 4789, 8300, 8362 and Customs Service Form 4790 * the way Treasury "and other agencies of the U.S. collect, organize, analyze and use" the data from those forms to enforce U.S. and foreign laws * a "summary of sanctions" imposed the previous year against violators of the cash reporting laws * a summary of indictments resulting from investigations "initiated by analysis" of the cash reporting forms * a summary of indictments in the previous year "initiated by information" from reports of suspicious transactions by financial institutions. Congress will not find answers to those questions in Treasury's report. One has to have more knowledge of the federal money laundering effort than generally exists to detect the inefficiencies Treasury does not air, the flaws it obscures, and the exaggerations it trumpets. The report strains to depict a smooth, successful federal effort, led by Treasury, and a compliant private sector that is gradually accepting its growing and expensive compliance duties. That is not a true picture. The effort is anything but smooth and the legitimate, regulated private sector continues to raise perfectly valid questions. They wonder about the public's benefits from a maze of regulations that have yet to show their promise, primarily because the same 4 PAGENO="0351" / 347 government that issues them gives little guidance and enforces the laws inadequately and sometimes unfairly. They wonder about the disparities in the laws and their application. They wonder why regulations are announced but never finalized, such as those Treasury announced in October 1989 to regulate wire transfers, which it said are a principal vehicle for money laundering. Two illustrations, extracted from the report itself, highlight some of the problems to which I allude. In the "introduction" to its report Treasury cites as a footnote a booklet that it issued in 1988 on its so-called exemption process. That permits a bank, through a complicated, months-long procedure, to obtain exemption from filing CTRs for very select customers. Are bankers to be blamed for their frustration when they learn that the touted booklet, which Treasury says is "invaluable," is the only written guide ever issued by Treasury in the 22 years the Bank Secrecy Act has been the law? Not even that booklet has been updated in the four eventful years since it was issued. Compare that to the treatment British, Australian and French bankers get from their regulators British bankers and other regulated institutions get a series of "guidance notes" and "feedback reports" that lead and inform them. The feedback reports given to British financial institutions by the New Scotland Yard provide the information about the general status of cases involving suspicious transactions that have been referred to the British authorities. There is no similar procedure in existence in the U.S., leading to the 5 PAGENO="0352" 348 conclusion by many bankers that their referrals go into a bottomless pit and get no attention from government agents In Australia, the only other country with a similar cash reporting regimen as the U.S., cash dealers, as they are called, receive a regular dose of widely-distributed written guides that even name the countries known for money laundering or drug trafficking proclivities. In France, the authorities are producing a videotape for distribution to banks and businesses vulnerable to laundering. Should the regulated U.S. public, institution or individual, expect anything l~ss for all the resources they devote to regulatory compliance? Why doesn't Treasury address those needs? Should not the goal of regulators be not only the detection of those who don't comply but also assistance to those who have every intention of complying? Another illustration from the report: In its listing of criminal cases supposedly activated by data from filed cash reports, Treasury cites as its first example the case of Luis Roges, a New York City jeweler indicted last July for laundering $30 million in drug proceeds and for filing fraudulent Forms 8300. The full story that Treasury doesn't tell is that Roges blithely flooded the government's form collection system with 1,685 phony forms during 39 months before the government accidentally stumbled onto him through a zip code analysis of area banks by the Customs Service. Roges filed his phony forms at the rate of more than 43 per month during the 39 months. They Were logged in at the IRS Computing Center in Detroit from January 1987 through March 1990. 6 PAGENO="0353" 349 The IRS Computing Center performs no examination of the forms other than to see if they are missing certain information. Once received by the Center, the data from the forms is transmitted to the Financial Crimes Enforcement Network. Neither agency knows how many false cash reporting forms are filed, including Form 4789 which is filed by banks. There were 7.6 million Forms 4789 and 66,573 Forms 8300 filed in 1991, according to the IRS Detroit Center. But for the coincidence of. the location of Roges's shop he might still be bombarding the government with phony forms. Of that fact the government was unaware until Money Launderinc Pd~rt disclosed it. Can the regulated public be blamed if they are skeptical about the use to which the government puts the data from the forms they file if a large money launderer can beat the system for so long by flouting it? How is the government addressing those problems? Treasury doesn't say, and that is the problem with its report. That is also symptomatic of the whole effort. Congress and the public need to have better answers than Treasury provides. The Subcommittee focus today is on the subject of money laundering by non-bank financial institutions which include money exchangers, "giro" houses which wire transfer funds, money transmitters and check cashers. There are solid indications of widespread non-compliance by those businesses with the cash reporting laws. "Sweeps" conducted by the IRS Examination Division around the country have found high rates of non-compliance among those businesses and others subject to the laws. 7. 54-6500-92-12 PAGENO="0354" 350 The problem with `non-banks and their compliance is that they are subject to no regular supervision by any Federal agency, unlike banks and other traditional financial institutions. The Examination Division, which has many other duties in the administration of the tax laws, audits those businesses irregularly as part of its other duties. If it finds violations subject to penalties it must refer them to Treasury for final penalty action. And that is another major problem with enforcement of the cash reporting laws - the backlog of cMl penalty cases awaiting action by Treasury. It is persistent and is causing erosion of the credibility of the Federal money laundering effort. In about a dozen instances Treasury has obtained "statute of limitations waivers" from possible penalty subjects because pending penalty casesweré so old that sanctions were in danger of being foreclosed by the running of the clock. Treasury decides civil penalty cases that originate from three sources: * federal regulatory agencies which routinely examine traditional financial institutions, such as the Office of the Comptroller of the Currency, Securities and Exchange Commission, Federal Reserve Board, Office of Thrift Supervision, and the Federal Deposit Insurance Corporation * the IRS Examination Division which reviews "non-bank financial institutions," such as money transmitters and money order companies for compliance with the BSA and the proper filing of IRS Form 4789, which reports cash transactions of more than $10,000 * financial institutions themselves which voluntarily come forward admitting to possible violations of the BSA. In a January1990 report by Treasury's Office of Inspector General, the Department 8 PAGENO="0355" 351 Was criticized for its management of the civil penalty process and the backlog of unresolved penalty cases. Federal bank regulators and IRS officials express concern about the loss of credibility of the effort to increase compliance with the BSA and of the growing reluctance of their agents to submit civil penalty referrals because of Treasury's lack of action. They cite the salutary effect which the famous 1985 Bank of Boston case had on BSA compliance. In that instance, revelations of widespread noncompliance with the cash reporting requirements led to the quick imposition of 15 civil penalties of more than $200,000 each, including one against the Bank of Boston for $500,000 in February 1985. The largest was against the Bank of America in San Francisco for $4.75 million in January 1986. The following is a listing of all CMI penatties imposed by the Treasury Department since 1988 for violations of the Bank Secrecy Act. One fact stands out -- the conspicuous virtual absence of non-bank financial institutions from the list. Bank secrecy Act civil penalties imposed by the Treasury Department, January 1988 - February 25, 1992 Date Institution Penalty amount 1988 February 25 North Valley Bank $100,000 Redding, CA March 23 american National Bank 22,000 Handen, CT March 25 Rainier National Bank 95,000 Seattle, WA June 2 San Antonio Savings Assn. 60,000 San Antonio, TX 9 PAGENO="0356" 352 July 29 Oscar's Money Exchange 3,010,000 Hidalgo, TX 1989 January 6 United Orient Bank $250,000 New York, NY January 17 First Women's Bank 80,000 New York, NY February 9 Ponce Federal Bank, FSB 500,000 Ponce, PR December 4 Bank Leumi Trust Co. of 291,000 New York New York, NY 1990 August 10 National Bank of Washington 368,000 Washington, DC October 29 Robert Lee State Bank 10,000 Robert Lee, TX. 1991 September 24 Bank of Mingo 54,600 Naugatuck, WV 1992 None through February 25, 1992 Source: Office of Financial Enforcement, U.S. Treasury Department and Money Laundering Alert, September and October 1991) 10 PAGENO="0357" 353 OPINiON ____________________ Treasury report is a disservice to Congress, publicS If Congress thought it was going to The 102.pagereportwasrequiredhYthe whichTreasury cites as"invaluahie," is the resolve doubts about the utility of cash Crime Control Act of 1990. It was sup- only written, broadly disseminated guide reports filed by banks and businesses when posed to respond to these questions: ever issued by Treasury in the 22 years the itordered theTreasury Department tosub- ~ the"numberofeachtypeofrePortfiled" Bank Secrecy Act has been law? Not even mit a full account, disappointment will the previous year under the Bank Secrecy that bcxiklet has been updated in the four reign now that Treasury has spoken. Act and the law which requires cash re- eventful years since it was issued. Treasury's report to Congress, which portsbytradesandhusinesses(Title3lUSC f~omparethattothetreatmentbaflkets0f was filed seven months late in December Sec. 53l1.5326,Title26,USCSec.6050l). othercountriesgetfromtheirregtilatomThe paints a picture of the federal money laun- ~` an estimate of the "rate of compliance" BritishregulatedprivatesectOrget5aseriesof deringeffort that has been airbrushed. It is withthecashreportinglaws, includinglRS "guidancenotes"and"feedbackrepoits"that incomplete and unreliable Forms 4789,8300, and 8362 and Customs inform and guide them. The reportdoesadisservice toCongress Service Form 4790. In Australia, the only other country and to tens of thousands of law-abiding ~ the wayTreasury"and otheragencies of with cash reporting laws, cash dealers re- bankers, tradesmen and others who try, at the U.S. collect, organize, analyze and use" ceive a regular dose of written guides that high cost, to stay out of harm's way from the data from those forms to enforce U.S. even name countries known for launder- money launderers and the government, and foreign laws ing proclivities. a "summary of sanctions" imposed the In France, the authorities areproducing MONEY LAUNDERING ALERTc previous year against violators a videotape for banks and businesses. Pubtishe'/Ediior a summary of indictments and investi- Should the regulatedU.S.publicexpect /alhsgtu,i~uuChief gations "initiated" by cash reporting forms anything less for all the resources they Anth:'isy L. Kinsery a summary of indictments in the previ- devote to regulatory compliance? E,litoriul Board of Mviaors ous year "initiated by information" from In itslistingofcriminalcasessupposedly Jo Ann S. Barefoot, 0. Robert Bhshey, Riq., . Breni F,sne, Philip R Mid, reports of suspicious transactions by finan- activated by data from filed cash reports, lame. E. McDonald, Esq Robin E Posh. Eq.. cial institutions (Public Law 101-647, No- Treasury prominently cites the case of Luis Neal R. Senneii, Esq., Vicious T:'ensing, Esq., vember 29, 1990). .. Roges, a New York City leweler indicted Sor.,h N. Welling, E.xy. Congress will not find answers to those forlaundering$3omillionindrugproceeds Art Direcine questions in Treasury's report. One has to and for filing fraudulent Forms 8300. Patricia Intrioga have moreknowiedge of the federal money What Treasury doesn't say is that Roges Kb K Ia nde ng effo t than gene ali~ cx sts to hi thely flooded the go emment s form col Aniiai,mt tu the Publisher detect the inefficiencies Treasury does not* lection system with 1,695 phony forms dur- ~allinJ. Hire air, the flaws it sbscures, and the exaggera- ing 39 months before the government acci- D t:),.b,hA ~ S~rsi t ons it trumpets dentally t mbled onto h mh gh a C The report strains to depict a smooth, tonis Service zip cede analysis. 1h i'hbl d ~ J p 1 c e f if deral if t led b3 T e s r~ Butf theco nc denc ofh sshopsloca taanderi,sg cos,,'l' .osd united .uhjecis. In psb~. and a compliant private sector that is at- tion, the man might stilihe bombarding the lishingihis scorE neither ilseo,:rls,insno' the p::b. cepting its growing and expensive compli- government with phony forms and possibly II I ~ I ,,, n d t es That n t tru p t be dd ngtol s a t nd ng 32 pe centofall peies,pnofeoiissolpees~sihaolJbe5~~eiZlst if:uch The effort is anything hut smooth, and Forms 8300 filed in the Manhattan IRS Cap h 1~) by 53 nit m U ~ theleg t mat gui tedp ate ectorc n D stnct thesecondla gest nthe o ntry Of ,ighi: ,ex'reed. Reproduction or transmission tinues to raise perfectly valid questions, that fact the government was unaware until without the express written consent of Alert They svonder about the public's benefits the press disclosed it. Al I ,~ It ~BI.A trmama e fre lati nsthatha eyetto Can th pubic be blamed if they are Suite 304. Miami. Florida 33131. show their promise. That is because the skeptical about the use of the data from the government gives little guidance and en- forms ifalargemoneylaunderercanbeat the Telephsse 305.530.1652. Fox: 305.530-9434. forces the laws inadequately, system by flouting it? How is Treasury ad- F,,rns,bncnirii,,fljnC,nti:iii,inPte501~e0niP. Twit illustratftsns, extracted from the dressing those problems? ISSN No 046-3070 - - report itself, make the point. In the "intro- What about the"summary of sanctions" M:m,Lonn&ni,,gAlenii.,15,,iI.lhlnosliisetip0 Juction" to its report Treasury cites as a Congress requested? Who is and is not get- ,,ftheLEXIS®INEXIS®s'nsieos F,,ninf,'rnsati,'n footnote a bcioklet it issued in 1988 on its ting penalized? What agencies are dmgging ~ o.called exemption process. their feet? Where is the leadership? I$J).3415.9759 * That permitsa bank, through a compli- Treasurydoesn'tsay,andthatisthePmb in ~ cated, months-king procedure to obtain lees with its report. It is symptomatic of the - - exemption from filing ~Rs for certain wholeeifon.CongressandthePubltc~edt0 Printed ,~nRecyc1ed Poper select customers. know. I Are hankers tobe blamed fortheirfrus- (Responsible replies will be conrseiered for lN'lERNA'll(3N:~l i~*. tration when they learn that the booklet, publication.) 2 / MONEY LAUNDERING ALERT! FEBRUARY 1992 PAGENO="0358" 354 ~NaCCA National Check Cashers Association, Inc. 1023 15th Street, NW., Seventh floor, Washington, D.C. ADMINISTRATIVE OFFICES: One Mack Centre Drive, Mack Centre II Pararnus, NewJersev 07652 201.777-9870 FAX: (201) 773-6981 Seuate Permanent Sebcommittee ou Investigations 17 -~ STATEMENT OF THE NATIONAL CHECK CASHERS ASSOCIATION on "New Trends in Money Laundering" before the Senate Subcommittee on Inv~estigations February 27, 1992 PAGENO="0359" 355 1023)5th Street, NW.. Seventh floor, WashingtoF. DC ,~ Na ADMINISTRATIVE OFFICES: One MackCentre Drive, MackCentre II Paramus, NewJersevO76SZ 201-777-9870 FAX: (2.01) 7736983 Nalional Check Cashers Association, Inc. The National Check Cashers Association (NaCCA) appreciates this opportunity to~ provide background information regarding our industry and our members' efforts to help prevent money laundering. We have endeavored to cooperate with this Subcommittee's investigation of new trends in money laundering and will continue to do so. As we have indicated to your staff, we intend to provide additional information to the Subcommittee subsequent to the public hearing when we will have a clearer idea of the issues under investigation. Our association is relatively new, and has grown to more than 800 businesses which have more than 1800 locations. We estimate that there are approximately 4,500 companies in the United States engaged in the business of check cashing. This estimate does not include those firms which may charge for cashing checks as a sideline to another retail enterprise. The Check Cashing Business Today The origins of the professional check casher date to the great depression. Throughout the period, traditional financial institutions were closing their doors and the public was left with few outlets where they could conduct their banking business. Small businesses saw the need to serve these banking needs, and started cashing checks for a fee as an adjunct to their primary businesses. Even today, the majority of checks cashed outside of banking channels is done at businesses such as groceries or liquor stores, some of whom charge for this privilege or require the customer to purchase a product in order to cash a check. A few businesses began to cash checks as their primary business at that time, and the number of check cashers grew as employers began to pay employees by check, instead of cash. The most rapid growth of the industry, however, has occurred since enactment of the Depository Institutions Deregulation and Monetary Control Act. As pointed out by Associate Professor John P. Caskey of Swarthxnore College in his 1991 report "Check Cashing Outlets in the United States," the deregulation led banks to raise fees and to close branches in unprofitable or marginal areas. As Professor Caskey explained, the result was to make banks more expensive and less convenient for many low and moderate income consumers. PAGENO="0360" 356 The most recent trend in check cashing is, however, to extendinto areas other than the core city locations which previously had dominated the industry. As will be described below, the range of services and convenience of check cashers has enabled them to penetrate new markets. In fact, a 1989 survey conducted .f or the Consumer Bankers Association by the Roper Organization revealed that 67 percent of check casher customers surveyed held accounts at a depository institution. These surveyed customers had used check cashers for various reasons, including convenience, location, and speed of service. It is this customer view of service that has led - to the recent growth of the industry. The motivations of these customers are similar to those of convenience store customers. Cashing Checks--A Risky Business Unlike a bank, when a check casher accepts a customer's check in exchange for cash, the check casher is risking personal funds. If the check later is returned for insufficient funds, or turns out to be a forgery, the check casher takes the full loss. As all of us know through our personal experience, conventional financial institutions will not subject themselves to this risk; they do not cash checks unless sufficient funds are in the account. And, despite conventional wisdom, cashing government checks is not free of substantial risk. In many cases, customers have claimed their checks were stolen in order to obtain replacement payments. During the investigation of the claim, the check casher must repay the government for the loss--and many such claims are never fully resolved, leaving the check casher holding the bad paper. The Banking Relationship -A check casher cannot operate without a relationship with a commercial bank. The check casher requires a bank to clear the large number of checks cashed and then deposited on a daily basis and in most instances requires a line of credit to fund the daily operation. Because of the risks which are borne by the banks (which are liable for checks in process if the check casher goes out of business), they routinely conduct thorough background reviews of check cashers prior to accepting their business. Check Casher Product/Service Mix In addition to check cashing, our members typically provide a range of customized services for customers in each locale. The sale of money orders is the most common ancillary service sold by check cashers f or customers who often need a money order to pay rent or utilities. Further, the money order purchaser does not need to keep records or take the risk of incurring an overdraft charge. The average face amount of money orders sold is $90. The Page2 PAGENO="0361" 357 Most often, check cashers who sell money orders are acting as agents of major, national money order companies such as Travelers Express or American Express. These national companies also have agents such as the local grocery or drug store. The large money order companies are careful about whom they give blank money orders due to their high level of exposure--a blank money order is tantamount to a blank check. They require detailed financial statements, letters of credit, references, insurance and bonding. The modern check casher also usually acts as an agent for a licensed wire transfer company such as Western Union or American Express because the check casher does not have the capability to wire funds directly. Wire transfers average approximately $180. These companies also require detailed financial information from their agents. Other services often provided by check cashers include: 1. Distribution of state and local government benefits 2. Distribution of public transit tokens 3. Automobile licensing 4. Collection of rent for public housing 5. Utility bill collection 6. Income tax preparation 7. Postage sales 8. Fax service It must be emphasized that not every check casher provides all these listed services. As neighborhood financial centers, the provision of these services will depend on local conditions and state statutes. A check casher in a large metropolitan area with a lot of traffic will be able to charge different rates than a check casher in a rural community with lower volume. And, the financial needs of urban and rural communities will differ. When states and localities use check cashers for distributing government benefits, they set rates based on local conditions. Federal Regulation As financial institutions, check cashers are regulated under the Bank Secrecy Act in much the same manner as banks,~ credit unions, and thrift institutions. The primary requirement of the Act mandates that we report to IRS all cash transactions which are in amounts of more than $10,000. Treasury Department regulations under the Act have added a requirement that we keep records, but not report, certain transactions of more than $3,000. We have a further legal obligation to deter money launderers who attempt to evade the reporting requirements when they "structure" transactions so as to stay below these thresholds.. We are required to report this information on Currency Transaction Reports (CTR's). Page 3 PAGENO="0362" 358 Most of our transactions are far below threshold levels and so we don't generate large numbers of CTR's. But our members do submit them when they cross the legal threshold. Many check cashers have undergone extensive and lengthy IRS compliance audits conducted on their premises. The desire on the part of Congress and law enforcement officials to combat the laundering of drug money has been the impetus behind the new emphasis on money laundering. Because of the difficulty of stopping the sale of drugs, or their importation, authorities have decided to `follow the money" and crack down on laundering. The act of cashing a check, however, is not used for laundering drug money. When we cash checks, we pay money out--just the opposite of what the launderer would want. The only way cashing a check could be used for laundering drug money is in the case where the operating funds for the business are provided by the launderer. And, given the banking relationship necessary to operate a check cashing business, this could not go undetected for long. A bank would quickly realize that the check casher was not borrowing sufficient funds to cover the checks the bank receives in deposits. Banks are generally not interested in processing checks unless they get the loan business from the check casher. A check casher is no more likely to be funded by illegal cash than any other business.. Other retail businesses dealing in cash are better choices for the launderer because the bank does not have the same relationship with them. The bank would not have any way to match up the operating funds with deposits of other retail establishments. The sale of money orders could be used to take cash out of circulation, and therefore could be used to launder money. As indicated above, most check cashers do act as agents for the sale of money orders. When we sell money orders we are subject to reporting requirements today under the Bank Secrecy Act. We are no more or less susceptible to being used by mcmney launderers than other businesses selling money orders, such as drug stores~ groceries, or liguor stores. NaCCA's Principles Regarding Money Laundering NaCCA takes a very tough stand against money laundering. One of the first actions taken by our Board of Directors was to adopt a Statement of Principles Regarding Money Laundering (attached to this statement). This statement requires that NaCCA members comply fully with all laws and regulations regarding money laundering, report suspicious transactions, and train employees on appropriate reporting procedures. Our bylaws empower the Board of Directors to expel members who violate these principles. Page 4 PAGENO="0363" 359 We have also made education of our members one of the major activities of the association. A large part of the last two annual conventions has been devoted to discussing money laundering among ourselves, and we have had top officials from both the Internal Revenue Service and Department of the Treasury participate in workshops. In addition, our Chairman has been active in working with the Federal Financial Crimes Enforcement Network (FINCEN) and other organizations to do our part in the battle against the launderers. Check cashers are concerned about being unfairly tarnished by the actions of some businesses which may ~ to be check cashers but are not. Some negative publicity about check cashers was generated not long ago when a number of storefront businesses were accused of money laundering in New York City. In fact, these were not check cashers, but wire houses which were operating in violation of state law. The issue was put in perspective by the testimony before the Senate Subcommittee on Consumer and Regulatory Affairs on November 1, 1989 by Tim Mahoney, Director of the Special Investigations Division of the New York State Banking Department. At that time Mr. Mahoney was asked by Senator Alan Dixon: Senator Dixon. Do I understand your testimony to be that they (check cashers) are not the problem? Mr. Mahoney. Check Cashers are not the problem. Mahoney went on to say "it is primarily the unlicensed money transmitter who provides the best means of laundering money and is most often used to structure illegal transactions." Recent Federal Legislation Our association has been supportive of legislative efforts to crack down on money laundering. We have testified in favor of provisions of last year's major banking legislation, 5 543, which included some tough provisions making it a Federal crime to operate an illegal money transmitting business, and requiring financial institutions to keep records of their check casher and money transmitter customers. We believe that if banks "know their customers, they will be in a strong position to aid law enforcement officials to enforce the Bank Secrecy Act, affecting both check cashers and money transmitters. Page 5 PAGENO="0364" 360 NaCCA proposed even tougher legislation. We would support a registration requirement if it were to apply to all money transmitters. This requirement would include our members because most of our members sell money orders. The value of such a program is that it would assist law enforcement in determining which businesses must be monitored for compliance with the Bank Secrecy Act. We have opposed efforts to establish uniform regulations over the check cashing industry because these regulations could not differentiate among the various types of check cashers. We also do not believe a full blown call for licensing and regulation is needed in the fight against money laundering. It would, however, impose new costs and red tape on our members while providing no additional safeguards to those available from a comprehensive registration program. Although NaCCA has supported responsible Congressional proposals to combat money laundering, we have virgorously opposed one effort to regulate our industry on a national basis. Section 9 of HR 26 would coerce states (by threatening an unspecified future sanction) into enacting a "model" bill to regulate check cashers. And, although the provision is attached to a money laundering bill, it calls for states to consider capping the rates we can charge for check cashing. The lack of any real relationship between rate caps and money laundering was best demonstrated when the sponsor of the provision said rate caps would aid in the fight against money laundering by putting some check cashers out of business! As indicated earlier, check cashers do not object to regulations which would effectively combat money laundering and affect check cashers on the same basis as everyone else. We don't like being singled out for regulation, however, based on inaccurate preconceptions of our industry. We have a particular objection to regulations which would require our members to expend substantial money, time, and effort to comply with regulations while our competitors remain unaffected by the regulations. As explained above, unlike check cashing, the sale of money orders could be used to launder illicit funds. For purposes of combating money laundering, there is no reason to single out check cashers from any other retail business. If Congress intends to enact legislation with the expectation that it will have a significant impact-on money laundering, then it must be applied to all relevant businesses. That would include all sellers of money orders and companies wiring money. Page 6 PAGENO="0365" 361 Our experience has been that when regulations are issued, they often exempt other sellers of money orders and money transmitters. Because few elected officials or regulators want to impose extensive regulations on small businesses, we suggest that new requirements be limited to registration for all check cashers and money transmitters, including sellers of money orders. This would enable IRS to find all potential filers of currency transaction reports. This would enable IRS to find all potential filers of CTR's and therefore pinpoint those who do not comply with the law. Conclusion The professional check cashing industry through NaCAA is doing its part to fight money laundering through educational efforts and advocacy of a registration program for money transmitters. We applaud the committee's efforts to investigate money laundering and stand ready to assist your efforts. We simply urge that before the subcommittee issues any findings, it thoroughly review the operation of check cashers to assure that any requirements imposed be appropriate and effective, as well as equitably applied. In addition, as we did not have the opportunity to review the identity or statements of witnesses in advance we may need to submit additional comments subsequent to the public hearing scheduled for February 27th. Page 7 PAGENO="0366" 362 Senate Permanent Subcommittee on Investigations EXHIBIT # 18 Additional Testimony on `New Trends in Money Laundering" Submitted by The National Check Cashers Association to the Subcommittee on Permanent Investigations United States Senate Math 31, 1~ PAGENO="0367" 363 The National Check Cashers Association is submitting this additional statement regarding the February 27th hearing of the Subcommittee on Permanent Investigations regarding New Trends in Money Laundering'. NaCCA is providing this response in order to assist the Subcommittee in obtaining more complete background regarding the professional check cashing industry in the United States. As no representative of the professional check cashing industry appeared before the Subcommittee, this is our first opportunity to officially respond to the testimony presented at the hearing. Recently the Executive Board of the association reaffirmed NaCCA's support of a requirement for ~jJ~ money transmitters to register with their states. NaCCA's Board of Directors is also reviewing ways in which to encourage states to adopt such a program and to strengthen enforcement of the Bank Secrecy Act. We will share our findings and conclusions with the Subcommittee when our review is completed.* NaCCA would, however, like to take this opportunity to respond to the comments of several witnesses at the hearing regarding our industry. It is difficult to answer the very sweeping charges made about the check cashing industry at the hearing because they are so general, and in many instances merely repeat the unsupported allegations of anonymous sources describing purportedly illegal activities. In those instances where specifics were provided at the hearing, the criminal activities were largely conducted at businesses other than the professional check cashers. The bulk of the February 27th hearing concerned the casas de cambio (international currency exchanges/wire houses). As described at the hearing, these casas de cambio often wire funds directly to a bank outside the United States. Professional check cashers do not wire funds directly to foreign banks. Instead, we serve as agents of well-known, reputable companies such as Western Union and ~merican Express. Thus, check cashers are not in a position to launder money in the manner described by Mr. Gomez, the admitted money launderer who testified in person at the hearing. The Check Cashing Industry Comments by the staff and other witnesses did not accurately describe the way a check cashing business operates. For example, the statement submitted by staff asserted: Under normal circumstances, a check cashing business will withdraw cash from its bank account in an amount PAGENO="0368" 3S4 approximate to the dollar volume of the checks it expects to cash over a period that typically ranges from several days to a week. In fact, check cashers usually withdraw necessary funds on a daily basis in order to have sufficient cash on hand for customers who cash checks. And, the check casher is anxious to deposit checks in a timely manner in order to gain access to good funds as quickly as possible to minimize any necessary borrowing. Cash for the daily operation of a check casher come from the business account and bank borrowings with smaller amounts coning from money order sales. Understanding the source of a check cashers funds is important in order to understand the statement we submitted to the Subcommittee earlier: The act of cashing a check, however, is not used for laundering money. When we cash checks, we pay money out--just the opposite of what a launderer would want. The only way cashing a check could be used for laundering drug money is in the case where the operating funds for the business are provided by the launderer. . . .A check casher is no more likely to be funded by illegal cash than any other business. Other retail businesses dealing in cash are better choices for the launderer because the bank does not have the same relationship with them. The bank would not have any way to match up the operating funds with deposits of other retail establishments. During the hearing Chairman Nunn asked the staff and other witnesses whether the above statement was accurate. They disagreed with NaCCA's statement but did not address the specific issues we raised. Let me cite the testimony of Dennis Crawford, Chief of IRS Criminal Investigation Division in Los Angeles to elaborate. Mr. Crawford cited three specific cases to describe money laundering by non-bank entities. In the first case, money was laundered in a liquor store which cashed checks with drug funds and then deposited the checks in the liquor store account. Eventually the scheme was detected when the bank became aware of suspicious transactions in the account. As this case involves a liquor store which cashed some checks on the side, it cannot be used to demonstrate that the check cashing business is used for laundering funds. Even so, the check cashing function led to detection, which is why we maintain check cashing is not an efficient way to launder money. In this case, the laundering was done by an attorney, a "pillar of the community". Presumably, the California Bar had reviewed his qualifications, so a strict licensing procedure is no guarantee for preventing money laundering. 2 PAGENO="0369" 365 In the second case cited by Mr. Crawford, drug money was said to have provided the cash to pay out in exchange for cashed checks. We argue that the check cashing business is no more likely to be used for laundering funds than any other. A jewelry, clothing, or liquor store could easily be a conduit to launder illegally obtained cash. NaCCA believes that a bank, which is needed by a check casher in order to deposit cashed checks, eventually would get suspicious about a check casher who did not need to borrow funds, making this a foolhardy and easily detected money-laundering technique for drug dealers. A bank would not raise similar questions about a clothing store, whose inventory is in merchandise, not money. In the third case involving check cashing, an individual ran several businesses, including check cashing, advertising, and investment companies. In this case, a bank also turned him in because of suspicious transactions. The case has not been made that check cashing is a business which is any more susceptible to money laundering than other cash businesses. It is, therefore, a mistake to single out this industry. We do believe, however, that law enforcement authorities should be aware of all those businesses which are required to file Currency Transaction Reports. ~ of the susceptible businesses should be forced to register, and as we stated above, we support a strong registration program which would make it illegal to sell money orders or wire funds without registering with a state. NaCCA and its members stand ready to work with the Subcommittee to assist in the effort to combat money laundering. 3 PAGENO="0370" 366 Senate Permanent Subcommittee on Investigations EXHIBIT# 19 Statement for the Record by Travelers Express Company, Inc., for the Permanent Subcommittee on Investigations' hearing on "Current Trends in Money Laundering" February 27, 1992 Mr. Chairman and Members of the Subcommittee, Travelers Express Company, Inc., appreciates the opportunity to provide written testimony for this hearing on "Current Trends in Money Laundering." Travelers Express, headquartered in Minneapolis, Minnesota, is the nation's largest issuer of money orders. Travelers Express has been in the money order business since 1940, and has been a Dial Corp company since 1965. Travelers Express also has a division, Republic Money Order Company, based in Dallas, Texas. Background Information Travelers Express is licensed and regulated by the banking departments of the states in which it operates. Travelers Express submits detailed reports of its operations to the regulatory agencies, including audited financial statements and information about the background of its management. A number of states conduct on-site examinations of its operations. Travelers Express is also considered a financial institution under the Bank Secrecy Act, and as such, is required to comply with federal reporting and recordkeeping regulations. Travelers Express issues over 250 million money orders a year through a network of independent sales agents. These independent agents are located throughout all 50 states and Puerto Rico and include over 55,000 sales locations. Travelers Express' agents include banks, credit unions, and other financial institutions, convenience stores, supermarkets, pharmacies, other retail locations, and check cashing outlets. In Washington, D.C., these agents include, among others, Giant Food and the Department of Labor Federal Credit Union. In your home State of Georgia, Mr. Chairman, Travelers Express has approximately 2,000 agents, issuing over 8,000,000 money orders a year. Although there has been much discussion of the "unlicensed money transmitters," there are a number of responsible, licensed companies, like Travelers Express, in this industry. The existence of some illegal, unlicensed money transfer operations should not be permitted to overshadow the valuable services provided by the legitimate nonbank businesses. 1 PAGENO="0371" 367 Money orders are a convenient and inexpensive payment alternative to checking accounts and other forms of payment. Most people who use money orders do so on a regular basis, buying two to three money orders a month to pay their rent, utility bills, car loans or other types of bills or payments. Money orders are an important financial service for low- and moderate-income consumers. Generally, fees charged to purchase a money order are low, usually between 75Q and $1. These low fees and widespread availability are possible because issuing money orders is a highly automated, efficient, and simple process. Money orders were created by the U.S. government during the American Civil War. The Post Office began issuing money orders because soldiers in the field needed a safe way to send money home. Commercial money orders serve a similar function today. Most small businesses which sell money orders, such as the neighborhood grocery store, the convenience store, or the drug store, do so as a service to their customers, not as a major portion of their business. Money orders are an incidental part of their businesses; in most cases the sale of money orders generates -* additional customer traffic, thereby increasing sales of other goods, such as bread and milk. The average dollar amount of a Travelers Express money order -is - about $100. All of Travelers Express' money orders have a maximum - dollar limit. Most money orders sold in retail locations have a $300 limit, with a $1,000 limit on money orders sold in financial institutions. A $500 limit is available in a few areas where rents and other payments tend to be higher than $300. When establishing a relationship with an agent, -Travelers Express thoroughly reviews the business' financial records and its management. An applicant to be a money order agent completes an application comprised of detailed information including the business structure and history, banking and credit references, personal history, and financial statements. The approval process- utilizes this information, as well as outside services such as Dun & Bradstreet and TRW. -. Upon approval of an applicant, an installation of the money order service is completed at the agent's place of business. The agent - receives instruction and written information covering the practical aspects of issuing money orders, the agent's contractual obligations, and federal and state regulations pertaining to money laundering. Keep in mind that the money order agents the company~: selects are temporarily holding the proceeds of money order sales for Travelers Express pending remittance. As a result, Travelers Express has a substantial interest in doing business only with businesses that can be trusted. 2 PAGENO="0372" 368 Most of Travelers Express' agents are small "mom and pop" type businesses. Some of them qualify as financial institutions under the Bank Secrecy Act, which is defined as having sold over $150,000 or more of money orders in a month. Money Laundering Reauirements Under the Bank Secrecy Act, money order agents are required to file Currency Transaction Reports with the Internal Revenue Service when receiving cash in excess of $10,000 (either Form 4789 or 8300, depending on money order volume). In addition, money order agents are subject to the requirement to keep detailed records of cash transactions totaling $3,000 or more per day to one individual that involve cashier's checks, bank checks or drafts, traveler's checks, ormoney orders. These records are to be maintained for five years and be made available to the Secretary of Treasury upon request. Both the $10,000 and $3,000 transactions for money order purchases would be highly unusual for Travelers Express' agents. As previously mentioned, the average dollar amount of a Travelers Express money order is about $100. In addition, Travelers Express limits the dollar amount of a money order to either $300 or $500 in a retail operation, versus $1,000 in a financial institution. This is not to say that money orders, like other financial transactions, cannot be used to launder money. We have seen a few "bad apples" out of our 55,000 agent locations and have cooperated with the authorities to deal with those situations. Travelers Express has systems to review the sales of its agents to monitor compliance with contract remittance schedules. Agents with sales that appear suspicious are contacted to discern the nature of the transaction and instructed to discontinue the practice. If a transaction exceeding $10,000 or $3,000 is identified, the agent is reminded of the currency transaction reporting and/or logging requirement. If the agent continues the practice, the money order service is cancelled. These problems are rare. Because of the very high volume of money order transactions, we need to be able to focus our efforts to find that "needle in a haystack" that may indicate a problem. Travelers Express has only about 500 employees involved in the money order business. With over 55,000 locations nationwide, it would be almost impossible and extremely costly for Travelers Express to ensure that each and every independent sales agent complies with federal regulations. If any additional regulation is contemplated, care must be taken that the regulations are workable and not constantly changing. If * these small businesses are overburdened with regulatory requirements, many would terminate their money order sales determining that it would cost them too much to stay current and 3 PAGENO="0373" 369 comply with requirements. This would negatively impact the money - order consumer as well. Money orders have remained an affordable and convenient payment instrument because of their widespread availability in retail stores, many of which are located in inner- city and low-income neighborhoods with few bank locations. The Need for Education In an effort to ensure that Travelers Express' agents are aware of and comply with these reporting and recordkeeping requirements, Travelers Express sends out communications alerting the agents to the requirements. Attached is the notice that was sent to all of its agents detailing the $3,000 recordkeeping requirements. Travelers Express worked with the Treasury Department to clarify certain issues with the $3,000 recordkeeping requirement to ensure that the agents were fully informed of the regulations. Travelers Express also issues a quarterly newsletter to its agents. - Periodically Travelers Express highlights federal requirements, reminding agents that they must abide by federal and state laws,~ when applicable. Attached are copies of newsletters dealing with money laundering issues.. Given that the majority of Travelers Express' agents are small retail operations whose principle business is non-financial services-related, Travelers Express seeks to provide them with simple, straight-forward information to assist them in complying with federal and state requirements. During the past few years, Travelers Express has initiated contact with a number of federal agencies and offices, such as the Treasury Department's Office of Financial Enforcement, the White House's Office of National Drug Control Policy, and the IRS' Criminal Investigation Division. Travelers Express' purpose in contacting these agencies has been to express a willingness to cooperate with federal authorities and to learn more about how money laundere-rs are using nonbank institutions to launder their drug proceeds. Travelers Express believes that the more it knows about how nonbank financial institutions, including its agents, are being used, the better able it is to educate its agents on what to look for as well as how to manage its own operations to prevent it from occurring. The company has worked closely with its local IRS CID office since 1987 on money laundering issues. In fact, in 1990 Travelers Express received a letter of commendation from the IRS for information that led to the seizure of over $700,000 from a money launderer. In discussing these issues with federal officials, Travelers Express has learned that most federal agencies need a better understanding of nonbank financial institutions, including the PAGENO="0374" 370 diversity among nonbank financial institutions' operations, such as money order companies, check cashers, money transmitters, and currency exchanges. Travelers Express has found these agencies and officials willing to take the tine to listen and to discuss nonbank money laundering issues. Recognizing that other money order companies, many of whom are small regional operations, do not have the resources to follow money laundering issues as closely, Travelers Express expressed an interest in arranging a.roundtable between federal regulators and law enforcement and money order companies. It was agreed that the Financial Crimes Enforcement Network (FinCEN) and the IRS would sponsor the conference, which was to be held in Minneapolis in June 1991. The purpose of the conference was to discuss how money orders were being used for money laundering and how the industry and the federal government could work together in identifying potential money launderers. Letters of invitation were sent by FinCEN to money order companies from around the country. In addition, Travelers Express sent personal letters to each of the companies encouraging their active participation in the conference. FinCEN later cancelled the conference citing concern about convening the conference while the Treasury Department was undergoing rulemaking on its mandatory aggregation proposal. The conference has not been rescheduled, and the Treasury Department has yet to issue its rulemaking. Travelers Express feels the conference would have been an excellent opportunity to initiate a formal dialogue with appropriate federal officials and the money order industry on money laundering issues. It would have provided the industry with a good opportunity to learn from the federal government how individuals are using money orders to launder money. It would have also given the federal officials a better understanding of how the industry operates and what is and is not feasible for the industry to do in order to prevent money laundering. Since the conference has not been rescheduled, other efforts should be considered to achieve these goals. Conclusion Travelers Express stands ready to work with the federal government to develop reasonable steps to prevent money laundering through nonbank financial institutions, including its agents. We believe a continuing dialogue between the industry and federal regulators and law enforcement is very important. This dialogue can permit efforts that are more focused and do riot increase costs and burdens across the board. One way to accomplish this goal would be the creation of a nonbank financial institution panel to discuss money laundering issues and 5 PAGENO="0375" 371 to provide the federal government with recommendations. A comparable panel has been formed for banks under the Office of Drug Control Policy. Nonbanks need to have a voice in federal policymaking comparable to that of banks, especially since their operations vary considerably from banks. The federal government could greatly assist the educational process by preparing educational materials targeted to nonbanks. Such materials would include information about compliance requirements, how money laundering is accomplished, and the types of things to look for. Care must be taken when addressing any possible problems. A single solution based on bank models targeted to all nonbank financial institutions will not work, given the wide diversity of the industry. The government must work with various nonbank industries to develop ideas which will address any problems without over- regulating these industries. Certainly, the first steps toward curtailing money laundering should be through increased resources to identify unlicensed, illegal money transfer operations. It is of little help to increase requirements on legitimate businesses if illegal money transfer operations continue to operate. We appreciate the opportunity to provide a statement to assist the Subcommittee. We look forward to continuing to work with regulators and law enforcement to identify and deal with any "bad apples," while at the same time avoiding undue burdens on the vast majority of necessary and routine money order transactions. 02-25-92 JM\MLHEAR. I 6 PAGENO="0376" 372 HEED FEDERAL REQUIREMENTS FOR MONEY ORDER SELLERS Certain federal requirements apply to all Travelers Express money order agents. You must file a currency transaction report with the IRS ~ you have a transaction invoMng more than $10,000 in currency. Forms are available from the IRS. If you've sold Si 50,000 or more in money orders in any 30.day period, you must keep a log of any sales of checks, drafts, money orders and traveler's checks for $3,000 or more in currency per day to one person. These records have to be kept for five years. You may handle this requirement by limiting transactions to less than $3,000. Travelers Express can help by providing you with a sample log form or a sign to tell your customers and employees that you choose to limit transactions to less than S3,000. Call your account coordinator for the forms and signs. A new Arizona law requires at money order seters to report `suspicious business or activity' to the Arizona attorney general on a form that he presc~bes. Travelers Express has provided an information package to all Arizona agents to help them comply with this new law. RT-60 MONEY ORDER DISPENSER FILLS BILL FOR BUSY RETAILERS As a Travelers Express money order agent, how do you know that the new RT-60 automated money order disperser is right for you? That's easy. If paperwork isn't your bag and your security needs loom large, the RT-60 may be your smartest choice. The dispenser, complete with automatic reporting and a patented security system, has been a first-rate a~ernative for Sulft,'an's NewMarket, a busy food store that operates in the heart of Minneapolis. Manager Mark Happ~ey prcnounces the RT-60 an excellent system for han~-: mcney orders. `We don't have time for cur Please Pass Along To The Stafl. Thanks I FALL 1991 PAGENO="0377" 373 people to use most other money order dispensers on the market,' he says. `And the paperwork that comes with money orders was cost-prohibitive for us. Now everything is so simple under the RT-60 format.' Happley says he's sold on the RT-60s security system, which features software that operates by muiti-level security codes, limits access to inventory, and facilitates the monitoring of money order sales. `Security is very important for us,' he notes. `We're a 24-hour operation and we have a total of eight people who must be able to sell money orders. They all have their own codes to operate the machines. This is definitely a safe system for us.' Available for rent or purchase, the RT-60 is part of a total program that includes 24-hour customer service for assistance and repairs. For further information, call your Travelers Express sales representative or (800)328-5678, ext. 3300. CHECK OUT THE POSTAGE WHEN YOU MAIL IN YOUR REPORTS To ensure that your reports reach Travelers Express' headquarters without delay, please take time to assess the amount of postage on your envelope. Use a postage guide to help estimate the proper postage, weigh your envelope on a postal-weight scale, or take it to a post office for weighing in. By using the correct postage, you'll avoid bills for `postage due. And because your reports arrive on time, you'll receive requested money order forms and supplies when you need them. BE ON THE ALERT FOR MONEY LAUNDERING INFORMATION yo~'re interested in keeping up-to-date on the rapidly evor~ing world of money laundering and asset forfeiture. check out a monthly newsletter called f~fonev Laundering Aierr. Travelers Express agents get a reduced subscription cost for this publication that focuses on money laundering and carries stories on fezeral and state regulations, enforcement actions, proposed legislation and n:ernational developments in the field. Launched two years ago, the ne~vsiet1er coasts a wice spectrum ci subscribers. inc!~ding financial institutions, covernmenr agencies, check cashers and money transmitters of all kinds. The ;C~C5t single ins~tutbnal subscriber is the IRS. For a free sample and subscription information, write: Money Laundering Alert, 1460 Brickell Ave., Suite 304, P.O. Box 011390, Miami, FL 33101 or call (800)222-3652. Be sure to dent~I yourse~ as a Travelers Express agent. ORDER POSTERS TO PROMOTE HOLIDAY MONEY ORDERS ~ra.e:ers Exoress has a limited inventory of posters that prcmote money orders as ho cay g~.s. Avai:aole in English or Spanish, they're free for the cating: 22E-E6~E ext. 3300. ~F/~' :s produced quarrerl.' for customers of 7~-a~ olers Exoress PAGENO="0378" 374 Please Pass Along To The Staff. Thanks! SPRING 1992. TRAVELERS EXPRESS HELPS REDUCE HONEY LAUNDERING In an effort to prevent money launderinq, Travelers Express has developed a program to inform money order agents about laws and regulations designed to deter that activity. Last~' August. the company mailed agents information regarding law changes and explained how it can help them meet their obligations. New agents will receive an information package on money laundering. A new-agent handbook will address the issue. In June Travelers Express will participate in a meeting with federal government officials and money order industry representatives to exchange information on money laundering prevention. The company is educating its account coordinators and sales reps about compliance with regulaticris. If you have questions regarding these requirements, call your account coordinator. Traffic will regularly print updated information on laws and regulations. STAMP THOSE REFUNDS Please stamp your refunds "not used for purposes intended" and deposit the items in your bank account rather than mailing them in to Travelers Express with your reports. Thanks fcr your help! VISIT TRAVELERS EXPRESS' BOOTH AT THE PHI MEETING If you're attending the Food Market:ng Institute's Sernar.zez Industry Convention Hducazion PAGENO="0379" 375 Exposition in Chicago, visit Travelers Express' booth (~583l). The conpariy is a first-time exhibitor at this convention May 5-8 at McCormick Place. Sales reps will be on hand to chat about your money order program and other company services, including the new WINGS money-transfer service. Enter the exhibit floor viathe lobby- level entrance. The booth is located midway down the far-left aisle. STORE MOVES MONEY ORDERS BY CATERING TO CUSTOMERS.. In a section of Detroit where competition for money order sales is keen, Gratiot Super Food Center emerges as a top-notch agent. This supermarket that is owned and operated by four brothers who emigrated from Iraq 13 years ago moves approximately 6,000 money orders a month. That's close to 75,000 a year. The secret? Simple, says brother Safa (Joe) Jaddou, who is a store manager. "Our first priority is our customers--you always have to take care of them," he says. "That's the key of doing business." The Jaddou brothers bend over backwards to satisfy their customers, says Travelers Express Sales Rep Lou Murphy. Money order success follows. The store, which offers check-cashing services, promotes money orders through exterior signage and regular advertising in neighborhood newspapers. "Our money order custoners like the larger size of o~r store and its security," Jaddou notes. He says he expects even more money order activity when the store moves to new, larger quarters soon. PARENT COMPANY CHANGES NAME Travelers Express' parent coir~pany has been renamed The Dial Corp to more accurately reflect its direction. Previously called Greyhound Dial, the cc~pany focuses on consumer goods ar~ services. Buses are not part of those services. The Greyhou~ Lines--the bus line--was s:~ in ~87. TR~FIC is produced quarterly for customers of Travelers Express. PAGENO="0380" 376 January 1990 AGENT LAUDS AUTOMATED RT-5O'~SYSTEM Take It from Sanford (Sand\?) Herman, Travelers Express' RI-SO system complete with the most advanced money order dispenser on todays market is manna from heaven. Herman. who operates Van Wyck Check Cashing in Hempstead. N.Y., and Westbuxy Check Cashing Corp. In Westbury, N.Y., says he is delighted with the entire money order system and particularly the fully automated dispenser. "It's very fast, very accurate and excellent when involved with multiple transactions," he says. "It's excellent `when the customer is purchasing more than one money order." A Travelers Express agent for the past six years, Herman has used the RT-50 system since August. `The machine allows you to complete other ancillary transactions while the money orders are being printed up." he notes. adding that the system's reporting process is simple and fast. `The machine gives the daily totals immediately." The RT-50 dispenser, which Travelers Express acquired when It pur- chased Republic Money Orders in early 1989, Is approximately half the size of other automated dispensers and sports a secure design, with money orders stored in a locked compartment accessed by a series of security codes. The dispenser transmits reporting information directly to Travelers Express' computers via telephone hookup. Ideal for agents with high volume or multiple locations, the dispenser will be ready for controlled distribution nationwide after February. Ask your agency supervisor for further information about the RT-50 and the automated system. BEWARE OF MONEY LAUNDERERS With banks clamping down on money launderers, drug enforcement au- thorities fear that these illegal operators will try to launder money through cther means. including retail outlets. The authorities have asked Traveiers Express to remind its agents that ~arze cash trartsac- PAGENO="0381" 377 tions must be reported to the IRS. These reports are required when one customer purchases money orders totaling $10,000 or more. Financial Institutions, check cashers or money order agents with money order sales exceeding $150,000 in a 30-day period should use Form 4789. Other agents should use Form 8300. PIck up the forms from your local IRS office or call (800) 424-FORM. To Inform the IRS about potential money-laundering transactions, call the IRS hothne number, (800)BSA- CTRS. Its not too early to display Travelers Express free tax banners whch remind customers to-paytaxes with money orders. Order these posters from your agency supervisor MONEY ORDERS REV UP BUSINESS AT 01110 STORE Mary Visco, operator of Holland Carryout In Holland, Ohio, Is a walking testimonial for Travelers Express. `We're just one little convenience store and yet we grossed $1 million In 1989." she says, noting that her business boasts a monthly money order volume of 2,300. "It's the sale of Travelers Express' money orders that put us over the top." Visco and her husband, Vernon Salyer, who own the suburban Toledo store, are delighted that CaSh Here, their operation's trade-marked check-cashing service, has taken off so well. In business for 15 years, the couple decided to open a check-cashing division in August 1988 after years of cashing payroli checks for regularcustomers. Their requests for check cashing increased with the money orders we sold, and we finally realized that we could provide a service and make a profit at the same time," Visco says. `Because of the sale of money or- ders, CaSh Here has exceeded our 12-month projection in six months. When people found out that they could come in and cash checks and buy money orders inexpensively and quickly. It was just gangbusters. We are thrilled, and Travelers Express Is a critical part of the package." Serviced by Agency Supervisor Jim Coulson, Holland Carryout has been a Travelers Express agent for four years. `We keep our money orders at 39 cents," Visco says, adding that discounting Is unnecessary. `We promote them in the local newspaper and do in-store advertising through the posters Jim supplies us with." Visco and Salyer, who hope to open a second unit, emphasize service to their six employees. `We teU them that the customer Is king." Visco says. "We also believe that inexpensive money orders and quick service go hand in hand. At our store, customers don't have to stand in line for one thing and another. We keep them moving." TRAFFIC is produced quarterly for customers of Travelers Express. PAGENO="0382" 378 Spring -1-987 Newspaper Column Will Promote Money Orders To Consumers Travelers Express has launched a public information campaign promote money orders through a series of consumer-oriented newspaper columns that will appear nationwide. The advice-type columns, focusing on the convenience, safety and low cost of money orders, will be released to many suburban, com- munity and weekly newspapers. The first column, which talks about money orders as gifts, was mailed April 1. Additional columns will be released in two-month intervals. Be sure to clip the money order columns when they appear in your local newspa- pers, then post them near your money order sales counter. Or, write TRAFFIC and well send you a copy of the first available column. New Money Order Machines Test Positive `We love it." That's the way Connie Gornian of One-Stop-Pharmacy located in Rockford, Ill., described the new money order machine (M3M) they've been using for the past 14 months. One-Stop, was a participant in a MOM test market program, which recently concluded. They, along with other money order agents, found using Standard Register's T4300 t'iJM made money order transactions easier and error free. "Since we got the new machine," said Gorman, "we haven't had any shortages or made one mistake." The machine has also proven to be a time saver, enabling One-Stop clerks to make quicker transactions. "We now can make transac- tions twice as fast as before and that's important when you sell as large a volume (money order) as we do," said Gorman. One-Stop averages 2,500 money order sales a day, and at peak times of the mon:h, sells up to 7,500. And does One-Stoc plan to keep their MOM? `You bet," said Gorman. "We're also planning to put MOMs in our other stores soon." MOM continued on page 2. D T~i~r~xpress to PAGENO="0383" 379 MOM continued from page 1. Travelers Express is currently supporting the sale and leasing of Standard's T4300 MOM and will soon support a comparable machine from Entronics Inc. These machines may be purchased directly from the manufacturer for roughly 51,500 with lease options available. If you're interested in a MOM and its services, contact your agency supervisor for more information. Traffic Readers Say "Yes" When Travelers Express asked if you liked Traffic, you said, "Yes", according to a recent survey in the quarterly publication. Of the 181 readers who responded, 1QO percent said they enjoy Traffic, while the same percent wish to continue receiving the newsletter. When asked what they liked best about Traffic, 75 percent said everything. Individually, 24 percent preferred retail industry information, 18 percent liked money order infor- mation and 6 percent enjoyed agent profiles. The survey also indicated that store owners make-up 78 percent of Traffic's readership, 36 percent are managers and 30 percent are empl oyees. - New Packaging Indicates Product Tampering A new revolutionary material could make product tampering a lot tougher in the future. A Princetcn consulting company, working with Optical Coating Laboratory Inc., in Santa Rosa, Calif.. has developed en iridescent strip of blue-green plastic with exotic properties. According to an article-in the February 16 issue of Newsweek, if the plastic is twisted, bent or cracked, it loses its tolor and turns transparent. The strip can be appliec around the caps of bottles or over tuck-in flaps of cartons. IRS Reports Required For Cash Transactions Over $10,000 It probabiy doesn't happen too often, but if you have a customer purchase money orders amounting to 510,000 or more in one day, you need to report it to the IRS using Form 8300. Copies of Form 8300 can be obtained from your local IRS office, along with completion instructions. PAGENO="0384" 380 DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON D.C.20224 JU?~ 22 1923 U: Travelers Express Company 1 Atto: James K. El!?, President dL~ ~ 1550 Utica Avenue South Mtnnea?clis, Mn 55415 ~ ~$11. Recently, your company provided information to the Internal Revenue Service, that resulted in the seizure of over $700,000 from a money launderer, who is believed to have been wcrk~ng for the Kedellin drug Carte! in Colomhia. As you know, money launderers use many different methods to hide illegal income. The purchase of a large number of so~all denomination money orders with currency, is one method commonly used. Your company has wcrked diligently with agents in our St. Paul District field office to help identify troseoute tnese inv.cua~s. you have taken creat care to inform company 000:ota_5 ant arents. tne currency transactton reporttng raruireoents under it?es 25 and 3. of the United States You and your ccmcanv are e::cellent examoles of the oco=unity involvement needed to assist our law enforcement war aratnst crucs. On behalf cf the internal Revenue Service, Criminal n--estiration Dtvisicn, would li~e to tersonaLly tnan~ ~-ou, for assisting cur agents in identifying money laundering through your company by unscrupulous individuals. We look forward to your continued cooperation in the fight against illegal drugs and other related PAGENO="0385" 381 raveIePSEXiiPeSS A Greyhound Company ~ Tra.'e!ers Expess Comnany. Inc. 1550 Unca Avence Scum Mrtneucols. MN 55.ii6 612!50i3000 URGENT! ATTENTION REQUIRED! NEW MONEY L~.UNDERING REGULA.IIQ~S Dear Travelers Express Money Order Customer: New regulations from the United Stares Treasury Department soon will affect you if your company sells $150,000 Cr more of money orders in a month. The rew regulations go into effect August 13, 1990 and are designed to prevent drug dealers from using items such as cashiers checks or money orders to launder money. The regulations require that a detailed log be kept of any ~.gga transactions totaling $3,000 or more per day to one individual that involve cashiers checks, bank checks or drafts, travelers checks, or money orders. If someone uses cash to purchase money orders from you totalling $3,000 or more in either one transaction or a series of transactions, you would need to keep detailed records about the purchase(s) and verify the identification of the purchaser. These records would have to be maintained for 5 years and be available to the Secretary of the Treasury upon request. Most money Orders are used to pay day-to-day bills, such as rent or utilities. purchase of money orders involving $3,000 in cash should be very unusual. Because of this, you may find it makes sense for your business to simply refuse any sales that reach the $3,000 level. You can comply with the new regulations by adopting and enforcing a policy not to accept any sales of money orders totaling $3,000 or more. If you take this approach, be sure to read Question 2 concerning multiple transactions. Drugs are a major problem in our society. . The federal authorities believe money laundering is key to the ability of drug dealers to continue to operate. These regulations will help us keep money launderers out of legitimate businesses. Travelers Express wants to do everything we can to assist you with these new requirements. If you decide to limit the amount of your sales, we have signs available that you can use to explain this policy to your customers and remind your employees. If you decide to keep a log, we also have a sample log form available. Simply fill out the enclosed order sheet indicating what materials you need and return it to your region office. We value ycur contir.ued business. If we can be of any further assistance, please cor~tact your sales representative. TRAVELE?.S EXPRESS COM.PA~Y, INC. 54-650 0 - 92 - 13 PAGENO="0386" 382 July 27, 1990 NEW MONEY LAUNDERING P.EGIJLA QUESTIONS AND ANSWERS uestion 1: Who ~s covered by the regulations? ager.: whose locations together have sold $150000 or core of money orders in any conch covered. In addition, all check cashers, money order companies, currency exchanges, money ransfer services, and agents of a money transfer service are covered. Eanks, credit unions, swings and loans, and other types of depository institutions are also covered. All of these :.~es of businesses are considered `financial institutions" for purooses of these e:uirerencs, under Treasury Department regulations adopted in July, 1987. The Treasu~, erartrer.t considers any agent who has sold $150,000 or core in any month since July of 1987 be covered, if you were in this category only temporarily, you can apply to Treasury for exer~tjor. on that basis. uestion 2: Do these requirements apply only to a transaction done at one time? The regulation covers one cash sale of $3,000 or core ~ several sales in one day by the are customer totaling $3,000 or more. For example, if one your erolovees is aware that the are individual came back two or three times and purchased a total of $3,000 during one day, transaction would be covered and, therefore, would need cc be logged (or refused if that your ~olicw). snat ~s tre oac~grcuna or me regu~atrons - ese new rerulations are the latest effort cc ~revent money laundering. Vnder the Act reated legislation, banks and retail businesses are alreacy reçu:rec to .arge currency transactions ($10,000 or more) on specia:. fo~s which contain detailed about these transactions. Sore cf you ray be familiar with these requirements a result of depositing cash in your bank. The authorities found, however, that money :underers were avoiding these recuirecents by breaking up transactions in smaller amounts, is called structuring cr snurfin;. Thus, Congress passed an amendment to the lank Art ir. 1938. refuiring Treasury to adopt regulations tc:eouire recordkeepinz of any a: ticr.s involving cashiers checks, bank checks or drafts, travelers checks, or :r.ey crd~rs of $3,000 or more. Violations of money laundering regulations are treated aricuslv. Violators are subject to criminal prosecution. ~Csticn 4: Why does this affect me? I thought mcney laundering requirements only arclrec to oan~:s. focus cf most enforcement efforts have been on banks, but money laundering reçuirerents business that deals in cash. :n fact, the authorities are concerned that up their ccr.trcls to prevent money laundering, launderers will move to PAGENO="0387" 383 ~~STIONS AND ANSWERS CONTINUED nestion 5: What exactly does the rule cover? he new regulation covers sales of $3,000 or more of cashiers checks, bank checks or drafts, rave.ers checks, or money orders in cash to one person in one business day. If one of your trloyees is aware that the same individual came back two or three times and purchased a :tal of $3,000 during one day, that transaction would be covered. zr those transactions, the log needs to include such inforuation as (1) the name and address f the purchaser; (2) the social security number or alien identification number; (3) the date f birth of the purchaser; (4) if the purchaser is buying the instruments on behalf of nrrher person, the same information in 1 - 4 for that person; (5) date of purchase; (6) the ::aticn of purchase; (7) the type of instrument and the serial numbers; (8) the dollar purchased and the amount of currency involved. The seller also needs to verify the .zrrhaser's name and address and record the method of identification. £ :.`ou decide to handle transactions of $3,000 or more, you should review the recordkeeping quiranents in the regulation carefully. ~esrion 6: What if I have not sold $150,000 in money orders in any month? ntil you reach that sales level, you are not covered by the new log requirement. However, businesses are required to report any cash transactions of $10,000 or more to the IRS. wculd use Forn 8300 for this report. ~eztitn 7: When is the regulation effective? -~ new re;u.atior takes effect August 13, 1990. C: ;hat if I a authorized to make paynesLtz to vendnrs wIth money orders, vhith ray exceed $3,000? :n:e vendor pa1.~ents are made in exchange for the purchase cf products, they do not involve Cr current:. and are r.ot covered by the regulation. ueztirn 9: Eut I know my customers and none of them are involved in any drug dealing. So why should I have to worry about their cash transactions? la ratordkeeping and re:orting requiremer.tS apply to all cash transactions and are to known drug dealers or transactions that appear suspicious. Even the cash :ransattions of customers you know are honest are required by Treasury to be logged or :e:cr:ed, as ampropriate. uestizn 1O~ Are there any other requirements I should be aware of? mentioned above, there are also requirements to report any cash transactions cf ~:.o,oco -r m:re. Thus, cash. transactions between $3,000 and $10,000 are subject to the e:crdkeepin;'log recuirerents. Transactions of $10,000 or over are subject to the reporting are covered by the lcg requirements use Fcrr 479? to report; cthers ?:rm 8300. f vcu need further infrmmaticn about these reporting requirements, pleare ccntact ::rmr C ~` o~ oe~s m - o a - - - the re~crt~ng Cr ~C'5 requirements. the 112 encourages the ir.redio:a e~orting ci tnt: information cn its hot.ine. ..800-ESA-CTRS. PAGENO="0388" 384 TRAVELERS EXPRESS COMPANY, INC. ORDER FORM To avoid the additional administrative task of completing money order trans- action logs, you can limit money order sales to any one individual to $2,999 per day: Travelers Express can provide you with~a sign stating this to post near your money order sales area. There is no cost for the sign. Also, available at no charge are copies of the recent amended regulation and samples of the log forms if you decide to sel! and record-daily money order transactions to individuals, of $3,000 or more. To order any of these items, simply complete this order form and include it in your next money order report envelope. Please send me the items checked below: ~O~EY O~D!RZ~E~ ~i;'2"Xii"l~iofleyOrderSign(ShoWflatright) I many? ____________ ~! Co~v of New Rcauiation fl Cc: oa~saco~Log H Copy of IRS Currency Transaction Form 4789 Acen: Number _______________ Customer Name C~ S~ PAGENO="0389" 385 MONEY ORDER TRANSACTJON LOG Use so log to re~rd ass,r money oroer sales of $3,000 or more to one individual in one business cay. This forts mus: be retained for live years from dale of sale, according to the U.S. Treasury Department regulations. Purchasers Nurse Street Address Cay, State, Zip ~eotPt.rrthate DO -E]D-DD Monith Day Year Purchasers Date of Birth 00-DO-DO Month Day Year Purniuser's Drivers License Number _________________________________ State ____________ Other Identification___________________________________________________________________ ID. Positively Verified By ____________________________________________________________ (Name of Store Employee) It ~v above information is rot provided, the transaction must be refused. TF,~.SACTiON)S): SERIAL NUMBER____________________ (ElSERIAL NUMBER____________________ )fS)SEPIAL NUMBER____________________ :OLLAR AMOUf~T_________________ DOLLAR AMOUNT_________________ DOLLAR AMOUNT________________ 2) SERIAL NUMBER____________________ (9)SERIAL NUMBER____________________ (16)SERIAL NUMBER___________________ OOLLAR AMOUNT________________ DOLLAR AMOUNT________________ DOLLAR AMOUNT________________ 3) SERtAI. NUffEEP____________________ )tO)SER1AL NUMBER____________________ )17)SER1AL NUMBER___________________ OLLAR AMOUNT________________ DO.LAR AMOUNT________________ DOLLAR AMOUNT_______________ SERIAL NUMBER___________________ (1l)SERIAL NUMBER__________________ )iS)SERIAL NUMBER__________________ :OLLO.R AMOUNT________________ DOLLAR AMOUNT________________ DOLLAR AMOUNT_______________ (5) SERIAL NUMBER___________________ (12)SERLAL NUMBER__________________ (l$)SERIAL NUMBER__________________ ~DLLAR AMOUNT. DOLLAR AMOUNT_______________ DOLLAR AMOUNT______________ (B) SERIAL NUMEER___________________ (53)SERtAL NUMBER__________________ t23)SERIAL NUMBER__________________ :OLLAR AMOUNT________________ DOLLAR AMOUNT________________ DOLLAR AMOUNT________________ SERIAL NUMBER___________________ (14)SERIAL NUMBER__________________ )21)SERIAL NUMBER__________________ :::.LAR AMOUNT________________ DOLLAR AMOUNT________________ DOLLAR AMOUNT_______________ 70A. CURRENCY ~EEO B_______________________________ Store Name Street Adoress Coy, State, Zip Money Orders are purchased: o For Purchasers Use o On behalf of arrother person (Ust otherperson's name, address, social security number or alien ID. number, and taxpayers ID. number on the buck of this form) DOD -DO-DODD Purchasers Soclaf Security Number (or Alien t.D. Number) PAGENO="0390" 386 NOTICE TO MONEY. ORDER CUSTOMERS New Federal and State Regulations are in effect to make it tougher for drug traffickers to dispose of large amounts of cash. As a result, we have set a limit of $2,999 on the total face value of money orders sold to any one individual per day. Please accept our apologies for any inconvenience caused by these measures. With your cooperation we can help fIght the drug problem more effectively in our communIty. PAGENO="0391" 387 Senate Permanent Subcommittee on Investigations EXHIBIT # - 20 UNITED STATES SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS PERMANENT SUBCOMMITTEE ON INVESTIGATIONS STATEMENT OF WESTERN UNION FINANCIAL SERVICES INC. Mr. Chairman and Honorable Members of the Committee: Western Union Financial Services, Inc. (hereinafter "Western Union") is pleased to respond to the Subcommittee's request for information about its efforts to combat the potential for money laundering through its system. Western Union is the oldest continuously operating non-bank money transfer company in the United States. Western Union has provided money transfer services to the general public for more than 140 years. As a licensed money transmitter, Western Union offers its services through a network of more than 19,000 agents and makes noney available virtually instantly within the United States and to and from more than 25 countries. The foundation of Western Union's operation is its high quality agent network. Beginning in the later 1970's and early 1980's, Western Union switched from company-owned and operated locations to a vastly expanded network of independently operated agents. Each of these agents operates another business as its primary source of income; Western Union commissions provide oT4y a small portion of the agent's total revenue. PAGENO="0392" 388 Statement of Western Union Financial Services, Inc. The following criteria are applied to determine suitability as a Western Union agent: -Operating the business in good standing at the location for at least 3 years -Easy physical accessibility to the public -High availability of cash -Sufficient personnel to handle Western Union money transfer and message services -Financial viability of agent's primary (non-Western Union) business (agents must have a minimum net worth or be willing to provide a surety bond or a certificate of deposit, and must have a good credit rating) -Convenient days and hours of operation -Commitment to offering Western Union services -Courteous and timely service presentation Given these attributes, Western Union has recruited agents in the following types of business, among others: Supermarkets Convenience stores Pharmacies Check Cashers Florists Mailbox stores Travel agencies Western Union has a comprehensive, thorough and strictly enforced program to comply with and exceed the requirements of federal and state law regarding the reporting of currency transactions. In 1990, Western Union filed more than 1800 reports of transactions of $10,000. or more, inclusive of Western Union's fees, which passed PAGENO="0393" 389 Statement of Western Union Financial Services, Inc. through Western Union's money transfer system. In addition, Western Union filed more than 5100 reports on transactions because it believed that the particular transaction was part of a group of transactions processed in one business day exceeding $10,000 in the aggregate (but where none of the individual transactions exceeded $10,000) or where, for good cause, the transaction was determined to be "suspicious". In 1991, more than 1700 reports of $10,000 transactions were filed, along with more than 7800 reports of "suspicious" transactions. Western Union also has refused to process approximately 200 transactions each in 1990 and 1991 because customers refused to present identification or refused to provide required information necessary to complete a Currency Transaction Report (form 4789). In addition to filing Forms 4789, Western Union personnel will continue to cooperate (consistent with all legal requirements) with law enforcement in providing records and information requested, both on a voluntary basis and in response to administrative and court-issued subpoenae, as well as information brought to their attention because of its suspicious nature. Last year, consistent with its obligations under the law, Western Union voluntarily provided information to law enforcement organizations, including the FBI, the DEA and FinCEN, on more than 400 investigations which were ongoing. Western Union also responded to more than 1200 subpoenae from federal and state entities, expending more than PAGENO="0394" 390 Statement of Western Union Financial Services, Inc. 10,000 hours of clerical time alone to research, review, copy and ship records at a total cost in 1991 exceeding $600,000. Unlike a bank, which receives reimbursement under the Right to Financial Privacy Act for responding to these same type of subpoenae, Western Union receives virtually no reimbursement for these efforts. Western Union has undertaken an extensive program to make agents aware of their obligations under the law, Western Union has produced a manual which is given to every agent and which describes in detail the reporting requirements under federal law and the agent's obligations (a copy of the manual currently in use is attached to this testimony for the Committee's review). This manual has been provided to representatives of the IRS and of the Office of Financial Enforcement, Treasury Department. The manual and the overall compliance program are reviewed with each agent at least once annually. Western Union also publishes a newsletter which is distributed to each and every agent periodically ("Accent on Agents") In that publication Western Union advises agents o~ changes to reporting requirements as well as of situations which may arise and require reporting. PAGENO="0395" 391 Statement of Western Union Financial Services, Inc. Western Union has also met, and continues to meet with representatives of the law enforcement community to educate them on Western Union's system and to answer questions about the system and the industry. Western Union believes that it has been in the forefront of non- bank financial institution compliance efforts in both designing and implementing an effective compliance program and working closely with government agencies in connection with this program. Western Union will continue to pursue these objectives and more than meet its obligations under existing law and regulations. Respectfully submitted, WESTERN UNION F Presi~nt PAGENO="0396" 392 WESTERN UNION BANK SECRECYACT COMPLIANCE MANUAL COPYRIGHT WESTERN UNION FINANCIAL SERVICES INC. PAGENO="0397" 393 I. POLICY STATEMENT For more than 100 years, Westem Union has engaged in the business of providing people with the ability to send and receive money throughout the United States and internationally quickly, efficiently, and with confidence that the money would reach its intended recipient. This service has always been available to anyone, irrespective of wealth, power or position. Westem Union's Money Transfer services are opportunities available to all. "All", however, does not now and has never included those who would use the system in violation of law. The scourge of illegal drug use is a problem which impacts all facets of society, both personal and business. Criminal justice authorities tell us that illegal drug activities are in part financed by monies passed through legitimate financial institutions. Westem Union recognizes that, as a major financial institution with over 15,000 locations throughout the United States and affiliates in other countries, we have an obligation to do all that we can to prevent those who would use our services for illegal purposes. It is the policy of Western Union Corporation and its subsidiaries to strictly adhere to the requirements of law regarding monetary transactions, in particular the requirements of the federal Currency Transaction Reporting Act (31 U.S.C. 5311 et seq.). Specifically, it is the policy of Western Union that: - All Money Transfer transactions exceeding $10,000 (inclusive of charges on the input side) will be reported to the IRS, and all information necessary to complete the required Currency Transaction Report (CTR) will be obtained. This applies to both sending and payout transactions. - Where an individual sends or receives Money Transfers in multiple transactions, each less than $10,000 but which exceed $10,000 in a single day, those transactions will be reported to the IRS. - Western Union customers will not be counselled or instructed on "grouping" and/or "structuring" transactions to avoid having to report the transactions. - With the exercise of due diligence, suspicious transactions will be promptly identified and reported to the IRS. Any employee or Agent of Western Union who assists or instructs a Western Union customer on how to avoid Currency Transaction Reporting requirements is not only violating civil and criminal laws, which may subject them to civil fines of up to $25,000 and criminal penalties of up to $500,000 (and possible incarceration), but is injuring the goodwill and reputation of Western Union. Such actions will not be tolerated. Any employee found to be violating this policy will be subject to dismissal; any Agent found to be violating this policy will be subject to termination. II. THE LAW The following is a summary of the relevant sections of federal law and regulations relating to reporting of monetary transactions: I. Every financial institution (including Western Union and Western Union Agents) must file a report on Form 4789 regarding each exchange or transfer of currency in excess of $10,000. Multiple currency transactions conducted on the same day by, or on behalf of the same person are considered one transaction for the purpose of determining whether a report must be filed. 31 Code of Federal Regulations Section 103.22 Page 2 PAGENO="0398" 394 2. Prior to concluding a transaction for which a report must be filed (either a sending transaction or a payout) the financial institution (Western Union, through its Agent) MUST obtain and verify the identity of the person conducting the transaction, and record the identification information. The necessary identification is of the type that would be acceptable if the customer were cashing a check (driver's license, credit card, passport, alien identification card, student ID with picture, etc.). 31 C.F.R. 103.27 NOTE: An Agent ~ process a transaction (sending or payout) for which a report must be filed without obtaining the necessary identification. 3. A civil penalty equal to the greater of the amount of the transaction (up to $100,000) or $25,000 may be imposed for each transaction for which a report was not filed, and may be levied against the financial institution (i.e. Western Union and any incorporated Agent involved in the transaction) and ~g~jnst a partner, director, officer or çrpp~pyee of the financial institution. 31 U.S.C 5321 4. A person may not structure (split) a transaction for the purpose of evading reporting requirements; nor may a financial institution assist someone in structuring a transaction. 31 U.S.C. 5324 5. A person who structures a transaction is liable for civil penalties equal to the amount of the transaction. 31 U.S.C. 5323 6. kperson who willfully fails to file a report on a reportable transaction or structures a transaction or assists in structuring or avoiding the filing of a report, is liable for criminal fines of up to $250,000, imprisonment ~)~pp~o S years, or both. If the violation is determined to be part of a pattern of violations involving more than $100,000 in a 12-month period, criminal fines of up to $500,000, imprisonment for up to 10 years, both, may be imposed. 31 U.S.C. 5322 III. PREPARATION OF CURRENCY TRANSACTION REPORTS (IRS Form 4789) When shall a Form 4789 be prepared? 1. When a customer conducts a single transaction in which he/she sends an amount which, inclusive of the Western Union fee, exceeds $10,000; or 2. When a customer receives a single Money Transfer exceeding $10,000 ; or 3. When a customer sends several Money Transfers at one time, which totalled exceed $10,000 (WHETHER OR NOT SENT TO ONE PERSON); or 4. When a customer receives several Money Transfers which, taken together, exceed $10,000; or 5. When a customer sends several Money Transfers in the course of one calendar day, at different times, which total (inclusive of the Western Union fee) more than $10,000; or 6. When a customer receives several Money Transfers in the course of one calendar day which total more than $10,000; or 7. Where the sending or receiving Agent suspects that a given transaction is part of a scheme to avoid filing a Form 4789 or is otherwise part of some illegal activity (discussed in greater detail later). Page 3 PAGENO="0399" 395 Who will prepare the Form 4789? The Form 4789 will be prepared by designated Western Union employees at Bridgeton, MO based upon information obtained from the Western Union Agent who handled the transaction. How will the Agent provide the necessary information to the CTB? When a situation occurs requiring the preparation of a Form 4789 (see above) the Agent will gather the information required to complete the Form 4789 pejp~o inputting the transaction (or, in the case of a payout, prior to~!I!~icpg p~yp~p9. The Agent will contact the Compliance Section at Bridgeton (Tel. 800-634-1311) and provide the necessary information to the operator at Bridgeton. Once this has been completed, the Agent may complete the transaction (inputting a "sending" transaction or paying a "receiving" transaction). What information must the Agent obtain for the Form 4789? A. IN A SENDING TRANSACTION: I. Date of birth of the sender 2. Name and address of the sender, verified by identification. ID may include: a. Driver's license b. Passport c. Alien work permit d. Residency permit e. Student identification card if it has cardholder's signature and address f. Employer's identification if it has employee's signature and address g. Other identification card if of a type generally accepted for conducting financial transactions. The Agent must record the type of IDpresented, the ID number (if one appears on the ID) and the date of p~pefation~Lg03. 3. Social Security Number - if none, note that there was none. 4. Occupation of the sender. 5. If the Agent reports transactions conducted by two or more people simultaneously which the Agent believes to be part of a scheme to avoid reporting requirements, this information must be given to the Compliance Section (which will make a notation on Item 2 of the Form 4789). Example: Mr Smith and Mr. Jones together enter Ed's Supermarket in Greenville, WI, a Western Union Agency. The Agent notices Smith and Jones conversing; then Smith and Jones begin to fill out sending forms. Smith and Jones proceed to present several transactions to besent. None of the transactions is larger than $10,000. Thetotal of Smith's transactions is less than $10,000, as is the totalof Jones': however, the total of Smith's and Jones' transactions together is more than $10,000. The Agent must obtain identification information from Smith and Jones, and report this fact to the Compliance Section at Bridgeton before inputting transactions. 6. In any transaction for which a Form 4789 must be filed, the Agent must ask the sender if he/she is sending on behalf of someone else. This does not refer to sending to someone else. The issue is whether the sender is sending at someone else's request. Page 4 PAGENO="0400" 396 Example: Jane James goes to Ed's Supermarket in Greenville, WI. She fills out a sending blank to send $11,000 to Mark Marcus. The Agent must ask whether she is sending on her own behalf. Jane says that she is sending on behalf of her boss, to his son. The Agent must get the information listed in A(I-4) above as to both Jane James and Michael Marcus, her boss. 7. Form of funds used to send a transaction: a. Currency b. Cashier's Check (verified with the issuing bank) c. Other (i.e., Travelers Check) If the funds involve in part a check issued by a bank, trust company, savings and loan association, credit union, etc., the Agent must list the name and address of the financial institution, account number (if any) appearing on check, and ascertain whether the name on the check is the same as that of the sender. If it is not, information must be obtained about the person named on the check. If currency is given, the Agent must advise Bridgeton of the exact amount of currency paid (including the Western Union fee). The Agent must also advise as to the number of bills of $100 or more given by the customer. If more than one check is given to the Agent, the Agent must advise Bridgeton of the total number of checks used. 8. If multiple transactions are involved, the Agent must advise the Compliance Section. Example: Robert Johns sends $3,000 at 10 AM., $4,000 at 2 P.M. and $4,000 at 11 P.M. At the time of the last transaction, the Agent must get the necessary information from Mr. Johns before inputting the transaction and must contact the Compliance Section. The Compliance Section will fill out Form 4789 and fill out Item 48. B. IN A PAYOUT TRANSACTION: I. The same information is required as in items A(l-4) above, except that the Agent shall get this information from the payee and the information shall be with regard to the payee, not the sender. 2. If the payee receives multiple transactions in one day which total more than $10,000, the Agent shall obtain the necessary information from payee. 3. The Agent must record the numbers of the checks issued to the pg~g~~ even if the Agent subsequently cashes them. 4. If the Agent cashes the checks, the Agent must indicate the amount paid to the payee in denominations of $100 or higher. When shall an Agent obtain the information? The Agent shall obtain the information required on all transactions exceeding $10,000 whether single transactions or multiple transactions. Pages PAGENO="0401" - 397 IV. IRS COMPLIANCE CHECKS The IRS is empowered by Federal Law to conduct spot checks to determine whether financial institutions are complying with the Bank Secrecy Act, and, in particular, with that section known as the Currency Transaction Reporting Act. In fulfilling this requirement, IRS agents may, at any time, come to a Western Union Agency and ask to see documents, including but not limited to application forms (WU 72), and payment request forms (WU 5391). THE IRS AGENT IS ENTITLED TO SEE ALL OF THESE DOCUMENTS, AND WESTERN UNION AGENTS ARE EXPECTED TO COMPLY. The Western Union Agent should ask the IRS agent for identification. If the IRS agent cannot produce identification, the Western Union Agent should not permit~çffl to look at any documents. If an IRS agent appears at a Western Union Agency accompanied by someone who is not an IRS agent, only the IRS agent is empowered to review documents without a subpoena. No other agency is empowered to look at Western Union records without a subpoena, etc. The Western Union Agent should contact Bridgeton for further instruc- tions ifs question arises. If unable to contact Bridgeton, the Agent should call the Western Union Corporate Security or Law Departments at Upper Saddle River. The IRS agent may make notes regarding any documents and if the Western Union Agent has a copying machine on the premises the IRS agent may make copies of any documents HOWEVER: ~~~inal documents may be removed from the Agency premises without a subpoena, summons or search warrant, unless permission is secured from the Western Union Corporate Security or Law Departments. If in the course of a compliance check the IRS agent asks to see a document which is not at the Western Union Agency (e g a specific Money Transfer check etc) the IRS agent should be referred to the Western Union Compliance Officer or if unavailable to the Western Union Corporate Security or Law Departments V. COMPLIANCE REVIEW AND TRAINING On an annual basis, Financial Services field representatives shall meet with each Western Union Agent and review the Agent's awareness of the Compliance Program, Federal Law (including the applicable civil and criminal penalties) and Western Union policies and procedures. The representative shall make certain that each Agent has a copy of the relevant sections of the Compliance requirements in its updated form. The representative shall answer any questions regarding the Compliance Program and Western Union procedures, or refer them to appropriate Western Union personnel. As part of the training given to new Agents, Western Union field personnel shall instruct them in the following areas: - Western Union Policies -FederalLaw * Obligations to report transactions * Penalties for failure to report * Structuring Page 6 PAGENO="0402" 398 - Currency Transacting Reporting * How to11determine whether a transaction is reportable * What types of transactions must be reported * Suspiç~ous transactions * How to obtain and record information necessary to report transactions * What identification is acceptable - Western Union record retention policies and legal requirements - The role of the Compliance Section at Bridgeton - The role of the Corporate Security and Law Departments Western Union will maintain records of which Agents have received training, the subjects covered with each Agent, the name of the trainer and the date(s) of training. Western Union will create a Compliance reference for Agents, which will be distributed to all Agents. The Compliance reference shall be reviewed annually by the Western Union Law, Corporate Security and Financial Services Departments, and shall be updated to comply with the changes in the law and regulations, as well as to address matters occurring after the publication of the manual. The updated information will be distributed in its entirety to all appropriate Western Union personnel and to all Agents. The repeated failure of an Agent to report transactions requiring the filing of a CTR to Bridgeton will be considered grounds for termination. Page 7 PAGENO="0403" 399 ~ Pwm~ Sub~m~ftN is lisestigitioss 3,3, ~. F~ ~T~.Ph33.PO~51~Os91 21 TRENT)$ IN MONEY LAUNDERING Pron the Financial Crimes Enforcement Network December 1990 Trends in Money Laundering is published periodically as a means of sharing the emerging trends,. patterns and schemes within the realm of money laundering. The newsletter is prepared and disseminated to enhance the ability of the banking community to combat the proliferation of money laundering in our economy. The primary purpose of this publication is to alert the Financial Community as to some types of activities which should be construed as being suspect. INTRODUCTION: Money laundering can be described simply as the process by which illicit source monies are introduced into an economy and used for legitimate purposes. The process of money laundering is better understood when divided into the following three stages: - PLACEMENT - the physical disposal of the bulk cash profits that are the result of criminal activity; - LAYERING - the piling on of layers of complex financial transactions (e.g. wire transfers) to separate the proceeds from their illicit source; - INTEGRATION - the provision of a legitimate looking explanation for the appearance of wealth. The findings presented in this publication are categorized into one, or a combination, of the Placement, Layering, or Integration stages of money laundering. PAGENO="0404" 400 2 This publication has been prepared as a public service by the Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury. The publication is intended to assist, but in no way to limit, the compliance activities of financial institutions; the description in its pages of certain recognized patterns of activity is intended to be illustrative only. No conclusions should be drawn from the fact that the publication discusses certain activities but fails to discuss other activities. The contents of this publication do not constitute legal advice or formal policy statements of the Department of the Treasury. PAGENO="0405" 401 3 PLACEMENT Criminals engaged in the practice of money laundering are most vulnerable to detection during the bulk cash Placement stage. The Bank Secrecy Act (BSA) and other related statutes provide a powerful leverage against the practice of money laundering, especially during the bulk cash Placement stage. The BSA forôes the criminals engaged in money laundering to create an audit trail on the flow of their illicit monies or violate the law by attempting to evade the BSA reporting requirements. Accordingly, law enforcement officials, with the cooperation of the financial community, are in a unique position to combat money laundering during this stage. Appearing below are emerging trends which have been identified during the Placement stage of money laundering: $ Money transmittal houses in the New York city area The last five or six years have realized a proliferation of illicit money transmittal houses in the Hispanic neighborhoods of~ New York City. The money transmittal houses normally consist of a cluster of local businesses using wire transfers, couriers, international bank accounts, and other structuring techniques to launder criminal source monies. [PinCEN will be sponsoring a conference on money transmitters in January 1991]. r~ri~ L~') Plies Mon.y A ~ Exchonges JOE~S EATS Security Brokers S.. ~ ~ ~ PAGENO="0406" 402 4 $ Casas de Caabios: Do They Exist for Tourists or Traffickers? Casas de cainbios have been sprouting up like weeds practically everywhere along the U.S.-Mexican border. These small currency exchange houses provide a whole range of financial services which make them highly attractive to money launderers. Drug proceeds are often introduced into the banking system through deposits made by the Casa de Cambio. Currency Transaction Reports (CTR forms) filed by the bank identify the Casa de Cambio instead of the drug trafficker as the owner of the currency. Lack of regulation for the Casa de Cambio industry is a major contributing factor to~the~ease with which these operations launder large amounts of drug proceeds annually. Federal and State legislative and resource initiatives are needed to disrupt the illicit Casa de Cambio money laundering operations. (FinCEN sponsored a symposium on Southwest border casas de cambios' in July 1990. The symposium was attended by federal and state law enforcement and bank regulatory officials.] $ "GIROS" - Mini Casas Another emerging method of money laundering that has evolved to avoid the reporting requirements of the BSA involves the use of "GIROS", commonly known as "transmitters" or "wire transfer houses". GIROS are store-front operations that facilitate the laundering of money via wire transfers. The GIROS operate by making currency deposits below the $10,000.00 CTR reporting threshold and wiring these funds into other, seemingly legitimate, accounts. - $ Might Money Launderers Use Auction Houses? Based on a project study conducted by FinCEN, the price of art objects, together with the confidential cash purchase nature of art business and the transportability and marketability of these objects, makes auction houses a viable target for usage by criminals to launder illegally gained profits or evade taxes. $ Illegal lotteries in Puerto Rico used to launder money as well as rip off small timers Illegal private lotteries `in Puerto Rico, commonly known as the "shadow lottery" or "bolita" have been the target of complicated money laundering schemes. The considerable cash profits available to the retailers and purchasers of private lottery tickets provides an open window to criminal conspiracies and abuses. $ How to Avoid U.S. Currency Reporting Requirements: Use Canadian Currency Exchange Houses Canadian `currency exchange houses are being increasingly used by narcotics traffickers and other criminals to launder PAGENO="0407" 403 5 illicit source monies. Canadian exchange houses offer an extensive array of financial services in addition to exchanging currencies. Consequently, exchange houses provide excellent conditions for concealing the conversion of criminally derived currency and disguising the existence, ownership and origin of illicit funds. $ What Good Are Currency. Transaction. Reports? The filing of CTR forms by financial institutions is the "cornerstone" element of Government efforts against money laundering and other financial crimes. The Internal Revenue Service and the U.S. Customs Service make regular use of the information in the CTR forms. The IRS makes it a standard pradtice to query the Detroit Data Base on ~TR forms in regard to evaluating potential criminal cases. IRS files reflect that over 400 criminal cases have been initiated as a result of information contained in the CTR forms. The IRS Examination and Collection Divisions also routinely query the CTR information data base on open cases. Recent figures show that the IRS logs more than a million queries a year from the "on line" access of CTR information from the Detroit Data Base and Treasury~ Enforcement Communication System. Additionally, the U.S. Customs Service has stated with certainty that Bank Secrecy Act (BSA.) reports are quite beneficial in their investigations. As of February 1990, 9% of all individuals under investigation for any Customs offense had BSA documents linked to them. Furthermore, all Treasury agencies (including IRS) made 1,572,102 queries for BSA information via Customs administered data bases over the ten month period which ended August 31, 1990. This publication has been prepared as a public service by the Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury. The publication is intended to £ssist, but in no way limit, the compliance activities~of~~ financial institutions the description in its pages of certain recognized patterns of activity is intended to be illustrative only. No conclusions should be drawn from the fact that the publication discusses certain activities but fails to discuss other activities. The contents of this publication do not constitute legal advice or formal policy statements of the Department of the Treasury. - PAGENO="0408" 6 a T.nVPPTWa nwn 404 Once criminals have successfully placed illicit bulk cash in an economy, it becomes increasingly difficult to uncover their money laundering operation. The criminals are now able to change the cash into easily transportable monetary instruments and wire transfers. Further, the criminals are able to circumvent the BSA reporting requirements and conceal the illicit sources of their monies by creating the appearance of legitimate wealth. The following emerging trends and patterns have been identified to facilitate authorities in the detection of criminal activity,. during the Layering and Integration stages of money laundering: $ Travel Agencies are Upgrading Their Services Several travel agencies have long been used to launder money through their ticket sales operations. Now it seems that certain travel agencies are offering additional services including wiring funds offshore for their customers. This activity has been observed by Government authOrities, especially when funds were wired to Panamanian and other Latin American accounts. The activity appears to be highly conducive to money laundering. $ Currency Brokers - A Simple Scenario Domestic and foreign currency brokers are using a simple scheme of identifying clients in their respective countries who are willing to use brokerage accounts as a means of money LAYERING: INTEGRATION: PAGENO="0409" 405 7 laundering. This means of Layering provides a way for individuals in the U.S. to place funds in foreign countries without physically transporting the currency or the availability of wire transfer records that could possibly be traced in an investigation. $ Cash Management Accounts - Another Device For Money Laundering? The Government effort to halt drug trafficking by eliminating the profit motive encouraging such activity has forced criminals to continuously seek new avenues for laundering their money. The cash management accounts available at many investment firms may provide a potential money laundering device for the sophisticated criminal. These cash management accounts offer a variety of financial services including security and checking accounts, credit and debit card accounts, cash advances, travelers checks, automated teller machines, bank checks, and domestic and international wire transfers. The cash mobility, convenience, and legitimate appearance added to criminal source monies make these accounts an attractive target, to the cash-flush money launderer. $ operating losses at a foreign "subsidiary" legitimize overseas funds transfer A recent case included the following scheme to launder money out of the United States. A foreign money launderer would solicit clients for the expressed purpose of setting up seemingly. legitimate U.S. businesses with Latin American subsidiaries. The Latin American subsidiaries were often nothing more than post office boxes or store fronts and otherwise seemingly legitimate companies. The foreign subsidiary companies would then "experience" operating losses and the domestic parent company would transfer funds down to cover the losses. This scheme, provided the double benefit of transferring illicit funds overseas for seemingly legitimate purposes while at the same time generating tax deductions for the parent company. $ Current Trends And Methods Been in Criminal Referral Reports (CRR5) Filed by Financial Institutions In the current review certain trends were noted the primary trend, as shown in the' following examples, is the structuring of deposits or withdrawals to prevent the issuance of CTR's: PAGENO="0410" 406 8 o Buying Down of Cashiers Checks One structuring method, which appeared a number of times, is the "buying down" of cashiers checks. Under this method, the subject possessed (method of possession unknown at present time) a large cashiers check (far in excess of $10,000.00). The subject would exchange this check at a bank for cash (under $10,000.00) and a new cashiers check for the balance. The subject would repeat this process until the check was reduced to an amount under $10,000.00, at which time he/she would "cash out" the check. This type of activity would indicate the need for generation of. a CRR (Criminal ReferralReport). This is a problem in the Northwest where many local lumbermen have been using the method for years to conceal their income from the IRS. o Credit Card Credit Balances A second method utilized was making advance payments to credit card. accounts. The subject would make multiple advance credit payments of a few hundred to a few thousand dollars to his/her credit card account and generate an aggregate credit balance of $10,000.00 to $15,000.00. The subjects would then either charge purchases, leave the country and "cash out" the card,. or request a refund from the issuing bank. With these methods, the unreported income was spent or deposited to a foreign account and the money appears to be from a nontaxable source. With the increased use of credit cards this method may gain in popularity. . - $ Para Xe Familia: Bancomer International and the Bank of America ease funds transfers from the United States to Mexico. An agreement was announced in Mexico, as part of a public education campaign, to teach the "poorest sectors of the Mexican economy" about services available, to improve their quality of life. A concern among Mexican illegal aliens working in the United States is how to send portions of their wages back to their families without being discovered by U.S. Immigration officials. A correspondent agreement between a major U.S. bank and a major Mexico-based correspondent bank, using SWIFT (book transfers through the Society for Worldwide Interbank Financial Telecommunication) and PUPID's (Payment Upon Proper Identification), seeks to provide these services to the Mexican community in the United States. No U.S. financial reporting requirements have been circumvented by this agreement. In fact, an official at the Federal Reserve estimates that the amount of currency going unreported into Mexico will be reduced as a result of this agreement. PAGENO="0411" 407 9 $ Current Cases, Trends, and Unusual Findings The following items were compiled through interviews with investigators from across the nation. While not all- encompassing, they provide a brief overview of recent money laundering operations for the purpose of alerting the financial industry to suspicious transactions. Cases under active investigation have been presented in vignette form and specific monetary figures, locations, and agencies have been deleted: o Pennies to Haven An alert bank employee generated a suspicious transaction report on possible smurfing using an "IPO" Account (Initial Public Offering) normally associated with "Penny Stock Offerings". These accounts are used when a stock offer is being formulated and act as ,a type of "escrow account" while initial funding is being raised and the stock is in the process of being registered. The investigation disclosed that the initial deposits to the account were bank checks and money orders which were purchased in fictitious names. Further investigation disclosed that the "scam" was to create the appearance of a promising low cost over-the-óounter stock commonly referred to as "penny stocks." The inasterminds of this operation managed to create~a..falsé.value for worthless paper on a number of stock offerings. The "profits" were eventually siphoned off and transferred to bank "haven" countries in Europe where they were again laundered through false escrow accounts to further conceal the paper trail. The funds were subsequently transported back to the U.S. as legitimately earned investment capital. o More help from your friends A Title Company "escrow" account can be used to launder funds. In this method, deposits are made to a title company allegedly for the purchase of a specific piece of property. After sufficient currency has been deposited for the purchase, the deal is called off and the title company issues a refund check in the amount of the deposit without reporting those transactions in excess of $10,000. o Smurfs With an Accent One trend which seems to be on the rise is the opening of bank accounts by foreign nationals. These individuals act as smurf a depositing small amounts of currency ($2-6, 000 at a time). After accumulating around $15,000.00, smurfs issue a personal check to whomever they are directed. These personal checks are PAGENO="0412" 408 10 collected and shipped to an offshore bank account where they are cleared in the normal manner. Since very few banks review return checks drawn on personal accounts, there is little chance of discovery. Note that sometimes these checks are taped inside magazines and mailed to an offshore accomplice. A second trend is the use of negotiable instruments to pay for drugs. The negotiable instruments offer the criminal a portable, easily concealable alternative to bulk-cash. These negotiable instruments are actually the preferred method of payment in certain drug transactions. Suggested Role of the Pinancial Industry in Cosbatting Money Laundering The financial industry plays a key role in the effort against money laundering. The filing, by financial institutions, of Currency Transaction Reports and Criminal Referral Report's (CRR), based upon suspicious transactions, are of the utmost importance in identifying money laundering operations. This will become increasingly true in 1991 with the implementation of the * FinCEN data base which will incorporate the CRR information; * - FinCEN will perform analyses on that system and use it to "target" individuals for investigation. A review of the emerging money laundering trends highlighted by. this newsletter should help sharpen the level of awareness of financial institution employees and provide examples of suspicious transactions which might require further investigation. Financial institutions should also apply special scrutiny to any banking transactions involving such highly suspect entities as Casas de Cambios and GIROS as well as any people associated with these entities. Interested people within the financial community may contact the Financial Crimes Enforcement Network (FinCEN) for further information on any particular aspects or emerging trends in money laundering operations as well as about the schedule for any future money laundering conferences. PAGENO="0413" 409 11 This publication has been prepared as a public service by the Financial Crimes Enforcement Network (FinCEN) of the Department of Treasury. The publication is intended to assist, but in no way to limit, the compliance activities of financial institutions; the description in its pages of certain recognized patterns of activity is intended to be illustrative only. No conclusions should be, drawn from the fact that the publication discusses certain activities but fails to discuss other activities. The contents of this publication do not constitute legal advice or formal policy statements of the Department of Treasury. * ** * ****** ****** *** *** **** *** ***** ** * ***** ** Trends in Money Laundering is produced and disseminated by the Financial Crimes Enforcement Network, U.S. Department of the Treasury, 3833 Fairfax Drive, Arlington, VA 22203, Telephone No. (703) 516-0591. This publication is not intended as a legal guideline or substitute for the rules and regulations appearing in the Bank Secrecy Act. A separate periodic publication dealing with the geographic threat involving international money laundering activities is currently in development. Any questions or comments regarding the contents of, or submissions to, Trends in Money Laundering should be addressed to the attention of the Director, FinCEN. ~U.S. GOVERNMENT PWNTING OFFICE: 1991-O-521509 ***** * CCC CCC CC CC CC* CCCCCC CCC* CC CC CCCCCC CCC C*C*C CCC CCC PAGENO="0414" 410 Senate Permanent Subcommittee on Investigations EXHIBIT #__~22 FI!ThNCIAL CRIMES ENFORCEMENT NETWORK BRIEFING REPORT ON CASkS DE CAMBIO February 11, 1991 During the past decade, casas de caznbio have proliferated along the United States-Mexican border. What are these strange little businesses? Often operating out of small wooden shacks adorned with garish hand-painted signs, casas de cambio are money exchange houses, similar to bureaux de change in Europe. Although their primary legitimate function is to change U.S. dollars to Mexican pesos (or the reverse) for tourists, they generally provide numerous other financial services as well, such as selling money orders and cashier's checks, wire transferring funds, exchanging currency for checks, and making payments for customers from casa accounts. And much of their clientele allegedly includes drug traffickers and other criminals seeking to launder illicit proceeds. The proliferation of casas de cambio along the border has. become a significant factor in money laundering. Although any legitimate need for casas is minimal, it has been estimated that over 1,000 of these operations flourish in the~ U. S. along the Mexican border -- some reportedly dealing in millions of dollars each month. Casas de cainbio appear to be one of the most effective and pervasive laundering mechanisms used in the southwest United States. Investigators report that a typical casa de cambio can easily launder $5 million per month in ways that are extremely difficult for law enforcement to track. Although casas de cambio are largely unregulated in the U.S., they are subject to U.S. Bank Secrecy Act currency reporting and recordkeeping requirements, as well as U.S. money laundering statutes. Under the Bank Secrecy Act, financial institutions, including casas de cambio, are required to file a currency Transaction Report (CTR) for each cash transaction conducted exceeding $10,000. The CTR identifies the customer conducting the transaction, the individual/entity for whom transaction was conducted, the financial institution, and the date, type and amount of the transaction. Effective August 13, 1990, regulations promulgated by the U.S. Treasury Department require financial institutions to verify, record and maintain records of identifying information on all customers purchasing cashier's checks, traveler's checks, money orders or bank checks in amounts of $3,000 to $10,000 in currency. These records must be provided to the U.S. Treasury Department upon request. The purpose of the above Bank Secrecy Act requirements is to aid law enforcement in identifying, tracking and tracing illicit cash proceeds. Many casa opej~ators allegedly criminally circumvent these statutes for profit. Investigators report that drug traffickers PAGENO="0415" 411 can easily find casas that will wire transfer currency to any destination desired without filing CTRs. This is a frequently used method of concealing, converting, and moving criminally derived cash. Additionally, casa de cambio owners have instructed their customers in methods of structuring transactions to evade the CTR filing requirements -~ for example, dividing large amounts of currency into amounts below the $10,000 threshold and conducting several transactions at different times or using several individuals, referred to as "smurfs," to exchange the cash for other monetary instruments or to wire transfer the smaller amounts of currency from various locations into one account. Casa operators have also allegedly referred criminal customers to attorneys or other professionals experienced in setting up complex offshore financial networks for laundering purposes. Cash drug proceeds received by a casa operator are introduced into the U.S. banking system through bank deposits made by the casa de cambio. CTRs then filed by the U.S. banks identify the casa de cainbio as the owner of the currency rather than the drug trafficker, effectively initiating the laundering process and disguising the trafficker's identity and his/her connection to the funds. Casas de cainbio offer a wide variety of methods for laundering illicit currency. In addition to using wire transfers, other alleged schemes include the following: o Casas may serve as money "brokers" to their criminal customers by accepting and depositing cash into casa- owned bank accounts, then making payments for assets, goods, or services from the casa account at the direction of the customer. Often, real estate and other assets may be purchased in this way using nominees in order to further conceal the true ownership and origin of the funds. o Currency received by a shady casa de cambio may. be transported, smuggled or structured into Mexico for deposit into a Mexican bank prior to its transfer to another offshore location or repatriation to the U.S. without detection. Reports of International Transportation of Currency or Monetary Instruments (~MIRs) are allegedly not filed or are falsified to conceal the true owner of the currency. o Casas may issue cashier's checks personal checks money orders, and other monetary instruments in . exchange for currency. These instruments may be made payable to any payee name or "bearer" as instructed by the customer. Reportedly, CTR5 are rarely filed; those that are filed are often falsified. PAGENO="0416" 412 o U.S. currency obtained from drug sales in the U.S. may be snuggled into Mexico to a Mexican casa which maintains accounts throughout the U.S. The drug dealer nay instruct the casa to settle a debt or pay for assets out of a U.S. account as needed. For example, a luxury hone in Phoenix nay be purchased out of a Phoenix account resulting from instructions provided to a Mexican casa. o U.S. casas frequently maintain business relationships with Mexican casas and Mexican banks. Complex financial networks may be utilized to move criminally derived funds through several Mexican casas and/or banks prior to transfer of the funds into U.S. or European accounts owned or controlled by the criminal customer. In addition, book entry systems shared by "sister" casas on both sides of the border may be used to eliminate the need for physical movement of currency. PAGENO="0417" 413 Ssrsate permanest Subcof$fluttee 3~33 N. TREND$ IN MONEY LAUNDERING - Trends in Money Laundering is published periodically as a means of. sharing the emerging trends, patterns and schemes within the realm of money laundering. The newsletter is prepared and disseminated to enhance the ability of the banking community to combat the proliferation of money laundering in our economy. The primary purpose of this publication is to alert the Financial Community as to some types of activities which should be construed as being suspect. IN THIS ISSUE: Placement 3 $ Fishing for Dollars 3 $ Quarterly Overview - Outbound Currency Seizures 4 $ Hot Cash/Cool Cash 6 $ Money Transmitters - Whose Money are They Moving? 6 Prom the Pinancial Crimes Enforcement Network Issue #2 May 1991 Layering and Integration: 7 $ Drug Stamps? 8 Other Trends and Information: 9 $ Changes to CMIR Form on Hold 10 $ Trends Observed from Criminal Referral Reports 10 54-650 0 - 92 - 14 PAGENO="0418" 414 2 The findings presented in this publication are categorized into one, or a combination, of the Placement, Layering, or Integration stages of money laundering. This publication has been prepared as a public service by the Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury.. The publication is intended to assist, but in no way to limit, the compliance activities of financial institutions; the description in its pages of certain recognized patterns of activity is intended to be illustrative only. No conclusions should be drawn from the fact that the publication discusses certain activities but fails to discuss other activities. The contents of.. this publication do not constitute legal advice or formal policy statements of the Department of the Treasury. PAGENO="0419" PLACEMENT~ 415 3 Criminals engaged in the practice of money laundering are most vulnerable to detection during the bulk cash Placement Stage. The Bank Secrecy Act (BSA) and other related statutes provide powerful leverage against the practice of money laundering, especially during the bulk cash Placement Stage. The BSA forces the criminals engaged in money laundering to create an audit trail on the flow of their illicit monies or violate the law by attempting to evade the BSA or other related reporting requirements. Accordingly, law enforcement officials, with the cooperation of the financial community, are in a unique p~sition to combat money laundering during this stage. Appearing below are emerging trends which have been identified during the Placement Stage of money laundering: One industry that is increasingly more susceptible to money laundering is the fishing industry. The fishing industry is a multi-million dollar business and is conducted almost exclusively in cash. $ Fishing for Dollars PAGENO="0420" 416 4 A money launderer could use this industry to launder cash by providing financial backing to a fish buyer in the form of illicit bulk cash. At the same time, the launderer could set up a side business related to the fishing industry (i.e., seafood market, equipment, etc.). The buyer then purchases fish from a fishing boat with the illicit cash which is used to pay fishermen and expenses which now is circulated and absorbed into the local economy. The buyer then delivers the fish to a processor for cleaning and freezing. The processor, on behalf of the buyer, prepares the fish and ships it to a wholesaler who has contracted to purchase the fish. The wholesaler then makes payment per the buyer's instructions. These instructions, dictated by the launderer, could specify any non-cash, non-reportable form of payment (bank check, company check, credit, letter of credit) and virtually any destination (the launderer's side business, a foreign bank account, back to the buyer, or anywhere else). The important thing is that the launderer has converted an enormous amount of cash into a non-reportable form and can now account for the funds and state their legitimate source as being the wholesaler for merchandise or services provided. Since the fishing business is very cash intensive, little attention is paid to where the cash came from. Fishing boats are interested only in getting paid for the fish--in cash. Only the very long-term, well established commercial operations pay their employees by check. This is a very competitive, intense industry and one season can make or break a person. Thus, someone with ready cash is always welcome and can very easily convert large sums of cash into a non-cash form and integrate (licit and illicit) funds into the mainstream economy making it very difficult to identify and trace illegally obtained assets. $ Quarterly Overview - Outbound Currency Seizures The physical movement or smuggling of currency out of the U.S. is often detected and the funds seized by the U.S. Customs Service. Seizure statistics of illegal exportations (Title 31- CMIR violations) for the first quarters of FY 89-91 are reflected in Figure 1. During the first quarter of FY 91, Customs seized approximately $16 million in currency and monetary instruments which is an increase to the $12.8 million seized during the same time period in FY 90 (Oct-Dec.'89). These statistics do not include outbound mail seizures. PAGENO="0421" 417 15 10 0 FIGURE! U.S. CUSTOMS SERVICE FIRST OUARTER OUTBOUND SEIZURES OF CURRENCY AND MONETARY INSTRUMENTS FISCAL YEARS 1989 - 1991 5 significant annual increases during FY 88-90 have also occurred in outbound currency/monetary instruments seizures. Seizure statistics reflect that over $53.3 million was detected in FT 90, with trailing figures of $33 nillion and. $21.3 million, in FT 89 and FT 88 respectively. [See Figure 2) It is believed that these increases are, in large part, the result of increased law enforcement efforts. DOLLARS (IN MILLIONS) 20 FIGURE 2 U.S. CUSTOMS SERVICE TOTAL OUTBOUND SEIZU CURRENCY AND MONETARY Th **flAfl5l~5 DO NOT INClUDE OUTBOUND MAIL SEIZURES FT 1988 FT 1989 FT 1990 PAGENO="0422" 418 6 $ Hot Cash/Cool Cash The smuggling of currency to Colombia and other Latin American countries is not a new phenomena but some recently discovered methods are more creative. In the last year, two seizures of cash hidden in microwave ovens being exported totalled over $350,000. Another $2.2 million was discovered in a shipment of air conditioners and an additional $1.6 million was found inside water coolers. These frequently exported items are ideal for smuggling cash because the weight of the equipment is so great that a few extra pounds of cash is not very noticeable. They also commonly have many void areas inside compartments and around mechanical components. The size and nature of the materials used in the construction of these appliances frequently prevent x-ray examination leaving Customs Inspectors little choice but to dismantle and search each item by hand. $ Money Transmitters -- Whose Money are They Moving? Money Transmitters are non-bank financial institutions which engage in the business of transmitting funds either domestically or internationally by wire, courier, computer network, or other means. In addition, check cashers, check sellers, currency exchange houses, and sellers of money orders and travelers checks are considered to be money transmitters. Due to well publicized initiatives by regulators and increased compliance by traditional financial institutions in reporting large cash transactions and other suspicious transactions, criminals appear to be gravitating to non-bank financial institutions for converting and moving their illicit cash proceeds. While the vast majority of Money Transmitters are believed to be legitimate, investigators have found that these businesses are utilized by money launderers. Narcotics traffickers and money launderers are attracted by the anonymous, low risk financial services offered by certain Money Transmitters. Narcotics proceeds or other illegally obtained funds can be easily transferred anywhere in the world through a Money Transmitter without any disclosure of the origin or ownership of the funds. PAGENO="0423" 419 7 Money Transmitter businesses may be operated independently in storefronts or within other businesses, such as local grocery or liquor stores. The number of both legal and illegal Money Transmitters has significantly increased in recent years, particularly in cities with large newly-arrived immigrant populations. Among the steps being taken, the increased implementation of the "Xnow Your Customer" policies by traditional banking facilities appears to be forcing launderers to seek other available mechanisms for moving their illegally obtained funds. LAYERING AND INTEGRATION: Once criminals have successfully placed illicit bulk cash in an economy, it becomes increasingly more difficult to uncover their money laundering operation. The criminals are now able to change the cash into easily transportable monetary instruments and wire transfers. Further, the criminals are able to circumvent the ESA reporting requirements and conceal the illicit sources of their monies by creating the appearance of legitimate wealth. The following emerging trends and patterns have been identified to facilitate authorities in the detection of criminal activity during the Layering and Integration Stages of money laundering: LAYERING: INTEGRATION: PAGENO="0424" 420 8 $ Drug Stamps? The illegal use of food stamps has become part of the drug trafficking trade. Federal authorities have reported that over the past several years, food stamps have frequently been used as currency in exchange for narcotics. The typical trafficking scheme involves the following scenario: Instead of buying groceries, some food stamp recipients have been exchanging their coupons on the street to dealers for drugs. The food stamp recipients usually will receive drugs that are worth only about half the value of the stamps in such transactions often trading $100 worth of stamps for $50 worth of drugs. The drug dealer takes the stamps to a clerk or owner of a local grocery store who is willing to buy the stamps for an amount of money that is less than their full value. For example, the dealer will sell the $100 worth of stamps to the grocer for $75 in cash thereby making a quick profit of $25. The grocery store owner then sends the food stamps to the bank which will reimburse him for their full value ($100), giving the grocer a $25 profit. The bank sends the stamps to the Federal Reserve for full redemption. Essentially, the food stamp recipients obtain drugs and the drug dealer and grocery store owners or clerks profit while food never becomes involved. Federal officials have reported that this food stamp fraud trafficking scheme is popular and simple to achieve for several reasons: - Food stamps which are used as street currency are very difficult to trace. The coupons can only be used once before being burned after redemption. Since the Government produces more than 2 billion Food Stamp coupons each year, the serial numbers on them are essentially useless. - Drug dealers, store owners, and black market operators are anxious to deal in these non-traceable food stamps. Furthermore, it is usually not difficult for drug dealers to find store owners willing to cooperate. - Some of the 220,000 grocery stores authorized to accept food stamps are quite willing to pay the drug dealers a fraction of the face value for the stamps, which they can turn into banks at full value, often making profits of 50% or greater. In fact, some grocery stores in depressed areas are reported to rely upon this scheme for keeping.their heads above water. PAGENO="0425" 421 9 Several efforts are currently being undertaken to combat the extensive food stamp trafficking problem. Federal agencies are experimenting with the use of electronic cards. Participants are issued an "Independence Card" with a personal identification number. These cards are passed through a mini-computer device at the grocery check-out `line which verifies the card and electronically subtracts the purchase from the account. Thus far, Federal authorities have reported that incidents of fraud involving Independence Cards have been minimal and that, overall, everyone involved is becoming more responsible and accountable. In addition, Congressional legislation has recently been passed which will provide a penalty ofa $250,000 fine and/or a 20 year prison sentence for the unlawful trafficking of food stamps in the aggregate amount of $5,000 or more. OTHER TRENDS AND INFORMATION: The emerging trends and patterns of money laundering occasionally involve a combination of the Placement, Layering and Integration Stages of money laundering. The trends and patterns that are not distinguishable within one of the previously identified stages of money laundering are discussed in this section of the report. Also presented in this section are informational items about law enforcement and regulatory efforts to combat money laundering. PAGENO="0426" 422 10 $ Changes to CMIR Porn On Hold Customs Form 4790, the Report of International Transportation of Currency or Monetary Instruments (CHIR), was scheduled to expire on December 31, 1990 and changes within the form to be released on January 1, 1991 were under discussion. However, due to a one-year extension of the current form, the new form and anticipated changes will not be in effect before January 1, 1992. $ Trends Observed From Criminal Referral Reports FinCEN.has been reviewing suspicious transactions reported on Criminal Referral Reports (CRRs) from regulatory agencies to determine if any emerging trends may be identified. A review of *the CRR5 filed over the past six months has revealed that structuring transactions, aimed at avoiding the Currency Transaction Report (CTR) filing requirements, are still the primary trend. Several unusual structuring patterns have been detected. o The use of Automatic Teller Machines (ATM's) appears to be a quick and easily accessible way to structure frequent bank deposits below the amount of $10,000 for purposes of avoiding CTR filing requirements. o The use of foreign currency in suspected structuring schemes has also been quite evident. One recently-suspected structuring scheme, for example, has involved weekly purchases of cashiers checks under $10,000 with Canadian funds. Another typical example has involved the frequent exchange of U.S. currency in amounts of slightly less than $10,000 for an equivalent amount in Swiss or French Francs. o Large structured deposits of food stamps into bank accounts held by neighborhood grocery stores is a recent development. (This narcotics-related scheme is the subject of another article in thisissue). o : Structuring schemes involving the use of employee payroll checks have also emerged. Usually, a bank customer will deposit numerous payroll checks into an account and withdraw cash. These payroll checks, which may be bogus, are made-out to the customer's employees and exceed $10,000 in the aggregate. The usual justification offered for these suspect transactions has been the customer's alleged need to finance check cashing operations for employees. PAGENO="0427" 423 11 o The use of U.S. bank accounts opened-up in the name of a Casa de Cambio (money exchange house) was discussed in the previous issue of TRENDS IN MONEY LAUNDERING. One representative transaction involved inter-bank wire transfers amounting to $12 million within two days into a U.S. bank account held by a Casa de Cambio. - o Traveler's checks have been used in several recently observed suspicious transactions. In one typical transaction, a customer deposited into his bank account $40,000 worth of traveler's checks. They were all in $1,000 denominations and were in complete sequence - essentially, it appeared that they had never been used and had just been purchased for the sole purpose of making bank deposits. PAGENO="0428" 424 12 ***************************************************** This publication has been prepared as a public service by the Financial Crimes Enforcement Network (FinCEN) of the Department of Treasury. The publication is intended to assist, but in no way to limit, the compliance activities of financial institutions; the description in its pages of certain recognized patterns of activity is intended to be illustrative only. No conclusions should be drawn from the fact that the publication discusses certain activities but fails to discuss other activities. The contents of this publication do not constitute legal advice or formal policy statements of the Department of Treasury. Trends in Money Laundering is produced and disseminated by the Financial Crimes Enforcement Network, U.S. Department of the Treasury, 3833 N. Fairfax Drive, Arlington, VA 22203, Telephone No. (703) 516-0591. This publication is not intended as a legal guideline or substitute for the rules and regulations appearing in the Bank Secrecy Act. A separate periodic publication dealing with the geographic threat involving international money laundering activities is currently in development. Any questions or comments regarding the contents of, or submissions to, Trends in Money Laundering should be addressed to the attention of the Director, FinCEN. ***************************************************** ISSN # 1056-4160 PAGENO="0429" 425 Senate Permanent Subcommitte~ on Investigations DEPARTMENT OF THE TREASURY `~ UNITED STATES CUSTOMS SERVICE u0 ~ EXHIBiT ~ 24 TYPCLOOY C'F MONEY LAUNDERING NON - TRADITiONAL FINANCIAL INSTITUTIONS FINANCIAL ACTION TASK FORCE II MARCH 14- 19, 1991 PARIS, FRANCE PAGENO="0430" 426 TYPOLOGY OF MONEY L~UND~IN~ ANON-TRADITIONAL FINANCIAL INSTITUTIONS" Prepared by U.S. Customs for the Financial Action Task Force March 14-19, 1991 Paris, France o In last year's presentation, U.S. Customs provided an overall study of money laundering in a paper entitled `The Typology of Money Laundering". o In this year's presentation, I will specifically address the aspects of money laundering utilizing what the USA calls "non-traditional financial institutions," or informal financial institutions. o The term "non-traditional financialJ~stitution" represents those businesses which provide bank-like services (i.e., currency exchanges, securities brokers, precious metals dealers/brokers, commodities brokers, casinos, telegraphic services, postal services, quick stop markets, and check cashing services). o In general, non-bank financial institutions can be exploited by money launderers in ways similar to a traditional financial institution, most notably through structuring/ 1 PAGENO="0431" 427 smurfing, employee complicity, and commingling illegal proceeds with legitimate proceeds. o The utilization of these non-traditional financial institutions occurs at the proven weak link in the laundering process, the "Placement" stage (the physical disposal of bulk cash proceeds), as discussed in the Typology paper presented in 1990. o In recent years a number of significant events have occurred that have had a positive impact on money laundering enforcement in the USA. New and stringent anti-money laundering laws and regulations have been passed in the USA, and there has been a heightened awareness in our traditional financial institutions in regard to money laundering. o With this heightened awareness, there has been an improved alliance between the nation's traditional banking industry and the U.S. Government. With these new initiatives in place, the USA is seeing structuring and other money laundering practices being driven to non-traditional types of financial institutions. 2 PAGENO="0432" PLACEMENT OF CASH IN SYSTEM THRU NON-TRADITIONAL FINANCIAL INSTITUTIONS a PAGENO="0433" * ~ ~ ~jj~ _________ , ~Who in on;or Several Separate Transactions Transact Less Than $10000 (in Deposits. Monetary Instrument Purchases. Exchanges of Small Bills for $100 Bills. etc.). At Several Different Banks or Branches of the Same Bank One Individual Subdivides Amount and ________ Transacts Amounts Less Than $10000 (Sometimes Over Several Days) Full Amount Provided to Bank Official who Makes Multiple Separate Transactions of Less Than $10000 on Behalf of Client MONEY LAUNDERING STRUCTURING (PLACEMENT) VIA /SMURFING Amount In Excess of $10,000 Several Layering Options PAGENO="0434" CASH CONVERTED TO MONETARY INSTRUMENTS Funds Withdrawn. as Monetary Instruments Co Cash Placed in Institution Financial ~ ~ Transportation Transported Internationally Without Filing CMIR's PAGENO="0435" 431 C > CD cci- wLJ~ >-~ -J cc Ow ZLL. -Cl) cc2 w cc -I- >.~ w 2 0 C a C C C C V fl japiog C *~ 2 3 C CU) % i~ I ~ !OC C flC3C 50 CO C C~ U) C E 0 0 C 3 E 3 `U) CC u.C.) PAGENO="0436" 432 Money Laundering via Check Cashers Bank PAGENO="0437" 434 TYPOLOGY OF MONEY LAUNDERING MONEY LMJNDERING: The process whereby proceeds, reasonably believed to have been derived from criminal activity, are transported, transferred, transformed, converted, or intermingled with legitimate funds, for the purpose of concealing or disguising the true nature, source, disposition, movement or ownership of those proceeds. The goal of the money laundering process is to make funds derived from, or associated with, illicit activity appear legitimate. The requirement to launder money stems from the desire to conceal criminal activity. Although the term "money laundering" is generally associated with narcotics; criminal activities such as gambling, prostitution, extortion, international arms sales, and fraud schemes, also generate illicit proceeds needing to be concealed. Cash is the medium of exchange in all manner of criminal activity. The ultimate goal of the criminal organization is to manipulate its illicit proceeds in a manner which makes them appear to have come from a legitimate source. It is imperative to understand that money laundering is a vital component of all criminal activity, and more particularly, of drug trafficking operations. The laundering of drug proceeds usually involves the international movement of funds at some point in the process. Payments must be made -to the source country growers, to the processors, to those responsible for the smuggling as well as to those who collect and launder the proceeds. Accumulated proceeds must somehow be "legitimized" in order that the traffickers may make use of their adquired wealth. It is the interception of those proceeds wherein law enforcement can inflict the most harm directly upon the drug trafficker. The trafficker can replace seized drugs from continued cultivation, but cannot easily replace seized proceeds. Comparable efforts should be exerted in both stemming the flow of drugs into the U.S. as well as curbing the domestic and international laundering of drug related proceeds. Money laundering schemes do not merely provide the conduits for financing drug trafficking ventures; they also conceal the true nature and source of drug related proceeds and disguise those funds to make them appear legitimate. 1 PAGENO="0438" 433 DEPARTMENT OF THE TREASURY ~ UNITED STATES CUSTOMS SERVICE TYPOLOGY OF MONEY LAUNDERING PAGENO="0439" 435 Drug related proceeds are not only used to sustain the trafficking networks; the larger shares are used for various licit and illicit investments and indulgent luxurious life- styles which contribute to the creation of false economies. Illicit proceeds sometimes support political insurgencies and terrorism or finance other kinds of criminal activity. Thus, tracing, seizing and otherwise interrupting the flow of the billions in drug related proceeds are essential in the overall effort to disrupt drug production and trafficking. In 1970, the Bank Records and Foreign Transaction Reporting Act, together with certain other provisions of law, commonly known as the Bank Secrecy Act (BSA), was signed into law. The BSA provides requirements for recordkeeping and reporting by private individuals, banks and other financial institutions. An essential factor leading to the passage of the reporting requirements was the desire to aid law enforcement in dealing with the problems being caused by the various bank secrecy laws enacted in bank secrecy countries. The Act was created to help identify the source, volume and movement of U.S. currency and monetary instruments being transported into or out of the country or being deposited in financial institutions, and to use that information in investigations of criminal, tax, and regulatory violations. There are two parts to the Bank Secrecy Act. The first part, codified in Title 12 of the United Stated Code (USC), requires that banks and other financial institutions maintain certain basic records for a period of five years. The second part, codified in Title 31 of the USC, requires individuals, banks, and financial institutions to report certain domestic and foreign transactions (exceeding $10,000). The flow of monetary instruments into and out of the U.S., and that which is deposited or withdrawn from domestic banks and financial institutions, is not controlled nor is it illegal; however, the transportation of more than $10,000 in cash or negotiable monetary instruments into or out of the U.S., must be reported to Customs on a Report of International Transportation of Currency or Monetary Instruments (CNIR). The exchange, withdrawal, deposit, or transfer of more than $10,000 in cash at a domestic bank or other financial institution, must be reported to the IRS on a Currency Transaction Report (CTR). The failure to file either of these reports as required would subject the funds to seizure and the individual or organization to criminal and civil penalties. Any one with signatory authority or other 2 PAGENO="0440" 436 authority over a bank, securities or other financial accounts in a foreign country, which exceed $10,000 in aggregate value at any one time during a calendar year, must file a Report of Foreign Bank and Financial Account (FBAR). The FBAR must be submitted to Treasury on or before June 30 of the year. Finally, in 1986, although not a part of the BSA, retail businesses and individuals were mandated to file Reports of Cash Payments Over $10,000 Received in a Trade or Business (IRS Form 8300) with the IRS. This reporting requirement was established in an effort to allow the government to trace assets and identify drug money being laundered through commercial trade and/or businesses. These reporting requirements either create an audit trail on the movement of illegal cash and monetary instruments (a source of vulnerability which can be exploited by law enforcement) or cause the criminals to avoid the same requirements (also creating a vulnerability by forcing the criminals to further break the law). Cash is the medium of exchange in the world of drug trafficking. Thus, the most basic problem to the money launderer is to convert the large amounts of cash received from the drug transactions into more manageable monetary instruments or other assets which conceal its illicit origins. The difficult reality of the problem can be recognized when one considers that street transactions are completed in small bill denominations, i.e., $5, $10, $20 and $50's. A U.S. currency note weighs approximately one gram and there are approximately 454 notes per pound. For example, one pound of U.S. twenty dollar notes equals $9,080 and 100 pounds of U.S. one hundred dollar notes equals $4,540,000. Criminal organizations need to convert the cash itself into a more easily transferable/manageable form. In order to complete the money laundering scheme of concealing the true source and ownership of the proceeds, the illicit proceeds must be laundered without leaving a recognizable audit trail. The laundering process, regardless of the degree of complexity, is accomplished in three basic steps, i.e., 1) Placement, 2) Layering and 3) Integration, and often involves the utilization of offshore laundering systems. The three basic steps may occur as separate and distinct phases; they may occur simultaneously; or more commonly, they may occur in an overlapping fashion. The utilization of these three basic steps depends upon the available laundering mechanisms and the requirements of the criminal organization. PAGENO="0441" 437 These three stages of money laundering are delineated to facilitate the readers understanding of the overall process of money laundering, and to provide a consistent framework for discussion: 1. PLACEMENT - the physical disposal of bulk cash proceeds. Recognizing that large volumes of cash may draw immediate attention to their illegal source, criminals often physically remove the bulk cash from the location of its acquisition. In a known narcotics traffic]cing section of a large city, let alone in a small town, disposing of bulk cash would likely draw law enforcement attention. Thus, criminal organizations are driven to coalesce these proceeds in areas where they are more easily disguised or misrepresented, and less easily recognized for what they actually are. Although physical separation from the location of the acquisition may have occurred, the placement of the bulk cash proceeds by any number of means into (a) traditional or (b) non-traditional financial institutions, (c) into the retail economy, or (d) out of the U.S. entirely, is the initial step to legitimize illegal proceeds What follows is an overview of the current known methods utilized in the initial placement of the bulk cash proceeds: (a) The term "traditional financial institution" represents those institutions normally thought of as conducting the nation's customary financial business. This definition covers those businesses (i.e., commercial banks, savings and loan associations, credit unions, mutual savings banks) supervised and regulated by the Federal and State bank regulatory agencies. Structuring/smurfing, bank complicity, exemption lists, correspondent banks/Federal Reserve, the creation of a BSA paper trail, and commingling are representative of the known methods utilized in manipulating the traditional financial institutions. These methods are outlined as follows: structuring/Smurf 1mg - the structuring of cash transactions (deposits, monetary instrument purchases, exchanges of- small denomination bills for larger bills, etc., to evade the CTR or CMIR filing requirements by dividing single large lots of cash into smaller lots, in amounts of $10,000 or less. This occurs through transactions in amounts of 4 54-650 0 - 92 - 15 PAGENO="0442" 438 $10,000 or less. Bank Complicity - money laundering is facilitated when bank personnel (from tellers to executives) are suborned or when financial institutions are actually controlled by criminals. This complicity makes bulk cash placement, layering, and integration of illicit proceeds much easier. Misuse of Exemption Lists - to eliminate the filing of CTRs on behalf of legitimate businesses regularly engaging in transactions over $10,000, Treasury included in the BSA regulations certain provisions that permit banks to unilaterally grant exemption from filing ems by certain customers. The ease with which unilateral CTR exemptions are granted by financial institutions offers money launderers a way in which to avoid an audit trail of their cash transactions. Abuse of the exemption lists may involve the creation of front companies by criminals or even the complicity of bank officials. Correspondent Banks/Federal Reserve Deposits - shipments of illicit proceeds to correspondent banks and/or the Federal Reserve can be misrepresented as bank-to-bank transfers. This method offers criminals the opportunity to move especially large amounts of money by creating an inaccurate audit trail. Creation of a False BSA Paper Trail - the intentional production of false documentary evidence, primarily to disguise the true source, ownership, location or control over the illegally generated funds. This is done for example, by the filing of false eMIRs to legitimize domestically generated cash and monetary instruments later deposited in U.S. banks or transported out of the U.S. With an improved alliance between the nation's traditional banking industry and the Federal Government, structuring and other money laundering practices may be driven to non-traditional financial institutions. (b) The term "non-traditional financial institution" represents those businesses which provide bank-like services (i . e., currency exchanges, securities brokers, precious metals dealers/brokers, commodities brokers, casinos, telegraphic services, postal services, quick stop markets, and check cashing services). In general, non-bank financial institutions can be exploited by money launderers in most of the same ways as a traditional financial 5 PAGENO="0443" 439 institution, most notably through structuring, smurfing, insider complicity, and commingling. Currency Exchanges - fall into three categories: currency transaction departments of major industrial banks; large currency houses which deal in a multitude of currencies; and smaller currency houses which predominate near international borders. Even complying with existing regulations, all three can provide an effective screen for illicit transactions once the currency is transported out of the country. Smuggled U.S. currency can be exchanged in a foreign country (sometimes at a more favorable rate) and the exchanged U.S. currency subsequently returned to the U * S. The CNIR filed for the returned currency will generally reflect the foreign currency house as the owner. Securities Brokers - this method usually requires the complicity of employees in order to structure large deposits of cash to brokers in a manner which disguises the original source of the funds. Precious Metals, Stones and Artwork Dealers and/or Brokers - are generally considered to be cash oriented businesses, in which cash is exchanged for precious metals, stones or artwork, which can act as a medium of exchange itself and may even be more easily transported. Currently, a broker is commonly listed in the BSA database as the owner of the funds deposited in a financial institution in lieu of the true owner. Commodities Brokers - like the precious metals dealers, commodities brokers can assist money launderers by providing an opportunity to place illicit proceeds into the legitimate financial system. (c) Commingling of Licit and Illicit Funds - there are numerous types of businesses for which the handling of considerable amounts of cash is both common and legitimate (i.e., restaurants, bars, hotels, pizza parlors, vending machine companies, etc.). commingling of funds and establishing front companies take advantage of these circumstances, either by obscuring illicit proceeds in a forest of licit transactions (commingling) or by doing little or no business and providing mostly the appearance of legitimate business activity accounts for the proceeds .(front companies). 6 PAGENO="0444" 440 (d) Asset Purchase With Bulk Cash - the purchase of hard assets (i.e., cars, boats, planes, stocks, luxury items, or real estate) with cash is a significant money laundering method. The purpose of large scale purchases is threefold: to support a luxurious life style; to change the form of the proceeds from conspicuous, bulk cash to some equally valuable but less conspicuous form; or to obtain major assets which will be used to further the criminal enterprise. (e) Currency Snuggling - the physical smuggling of currency and monetary instruments out of the U.S. by various methods of transport (i.e., international air express companies, commercial air passengers, private aircraft, cargo shipments, and vehicles bound for Mexico or Canada) does not leave a discernible audit trail. 2. LAYERING - separating illicit proceeds from their source by creating complex layers of financial transactions designed to disguise the audit trail of the illicit proceeds. If the placement of the bulk cash has been successful (i.e., undetected), the money launderers' activities become increasingly more difficult to uncover. The confusing and complicated ways in which layer after layer of activities and transactions are piled on one another are intended to make the traceability of the illegal, and thus seizable, proceeds, extremely difficult for law enforcement. What follows is an overview of the known methods utilized in the layering process: Cash Converted Into Monetary Instruments once the illicit proceeds have been successfully placed into either a traditional or a non-traditional financial institution, the proceeds can then be converted into monetary instruments such as traveler's checks, letters of credit, money orders, cashiers checks, bonds, and stocks. The conversion into, monetary instruments allows the illicit proceeds to. be more readily transported out of the U.S. without detection, or to be deposited into other domestic bank accounts without filing a CTR. Material Assets Purchased With Cash and Converted/Sold - when a launderer has placed proceeds by purchasing assets such as vehicles or gold, the asset can then be resold domestically or exported and 7 PAGENO="0445" 441 resold overseas, and the proceeds taken in a non-cash form. Two things then occur: the identity of the purchaser becomes less easy to discern, and the assets becone more difficult to locate and seize. Electronic Funds Transfer (EFT's) - or wire transfers are probably the most important layering method available to money launderers. EFT's offer. criminals many advantages as they seek to cover their trail. Speed, distance, minimal audit trail, and increased anonymity amid the enormous daily volume of EFT's are all major benefits. 3. INTEGRATION - the provision of apparent legitimacy to criminally derived wealth. Once the layering process has been accomplished, the money launderer needs to provide a legitimate looking explanation for his wealth. Integration schemes place the laundered proceeds back into the economy in such a way that it reenters the banking system appearing as normal business earnings. Unless the traceability of illicit proceeds has been established during the bulk cash placement or layering stages, it becomes extremely difficult to distinguish between legitimate and illegitimate wealth. Detection and identification of laundered funds at the Integration Phase is normally possible only through undercover infiltration or violator assistance. What follows are the various known methods utilized during the integration process: Real Estate Sales - there are a number of variations in real estate sales that can be utilized to integrate laundered money back into the economy. Property can be bought by a shell corporation using the illicit proceeds. The property is then sold and the proceeds are considered legitimate funds, obtained through the sale of property. Real estate may be purchased in the form of a failing business to create the illusion that proceeds derived from illicit sources are actually the proceeds of the business. Front companies and Sham Loans - through the use of front companies (usually incorporated in a country with corporate secrecy laws), a criminal enterprise can loan itself its own laundered proceeds in an apparently legitimate transaction. The enterprise can pay itself interest on the loan and at the same time declare the interest as a business expense on 8 PAGENO="0446" 442 their income tax return, thereby reducing their tax liability. This in effect increases the tax liability of law abiding citizens to compensate for the illegal deductions realized by the criminal enterprise. Foreign Bank Complicity - money laundering using complicit foreign banks represents a higher order of criminal sophistication and presents avery difficult target for law enforcement. The importance of using a complicit foreign bank lies in its ability to conceal much of the activity relating to the money. Secondly, through the participation of well placed bank employees in sham loan schemes, the money launderer can obtain an apparently legitimate loan, when in actuality the loan is secured by the illicit proceeds. Finally, the willing assistance of the foreign bank is frequently protected against law enforcement scrutiny not only by the duplicity of the criminals, the money launderer and the complicit foreign bank, but by the banking laws and regulations of other sovereign governments. False Import/Export Invoices - the use of false invoices by import/export companies, has proven to be a very effective way of integrating illicit proceeds back into the U.S. economy. This scheme involves the overvaluation of entry documents so as to justify funds later deposited in U.S. banks and/or the overvaluation of exports in order to justify funds received from abroad. The money launderer may utilize any combination of these three basic steps and various methodologies in order to complete the money laundering process. WHERE MONEY LAUNDERING IS VULNERABLE: The proven weak link in the laundering process is the bulk cash (Placement) stage. This is the stage in the laundering process at which the estimated billions in U.S. drug related proceeds are most easily detected. Intelligence places worldwide drug trafficking revenues in the hundreds of billions per year. Each year in the U.S. alone, it is estimated that in excess of $100 billion in illicit proceeds are generated from drugs and other illegal activities. Most illegal activity involves either U.S. or foreign currency. This medium of exchange may involve suitcases of cash used in payment for a major delivery of drugs, arms, or secrets. Small denomination 9 PAGENO="0447" 443 bills ($2 Os and less), "street money," is what is collected as a result of individual sales of drugs, pornography, gambling, or sex. Cash is what drives the criminal activity and it is cash that is both the power behind and ultimately one of the greatest vulnerabilities of the criminal. History and experience has shown that large, well organized money launderers must rely on the sophistication of both domestic and international financial channels to move proceeds while providing anonymity to themselves and their clients. It is the transfer of illegally generated proceeds through layers of front companies and financial institutions affording bank secrecy that breaks the audit trail necessary to prove the connection between the proceeds and the drug trafficker or other criminal. It is during the coalescing of these proceeds, the preparation for the "placement" into financial channels and/or the transfer of the proceeds out of the U.S., that the criminal is most susceptible to detection. From the time that the criminal amasses large quantities of cash, until the criminal successfully deposits the proceeds into a bank which affords anonymity, the criminal must rely on couriers and/or financial channels to move the proceeds thus providing a window of vulnerability. Every effort should be undertaken by law enforcement to exploit this vulnerability. Once the bulk cash has been successfully placed into a nation's legitimate financial channels, the job of combatting money laundering and tracing the proceeds becomes an increasingly difficult task for law enforcement. "NON-TRADITIONAL FINANCIAL INSTITUTIONS" The previous portion of this paper provided an overall study of money laundering in a paper entitled "The Typology of Money Laundering," which was part of the United States presentation at the Financial Action Task Force convened in Washington, D.C., on November 6-8, 1989. This portion of the paper specifically addresses the aspects of money laundering utilizing "non-traditional financial institutions," or informal financial institutions, and was presented at the Financial Action Task Force II in Paris, France, on March 14-18, 1991. The term "non-traditional financial institution" represents those businesses which provide bank-like services (i.e., currency exchanges, securities brokers, precious metals dealers/brokers, commodities brokers, casinos, telegraphic 10 PAGENO="0448" 444 services, postal services, quick stop markets, and check cashing services) . In general, non-bank financial institutions can be exploited by money launderers in ways similar to a traditional financial institution, most notably through structuring/smurfing, employee complicity, and commingling illegal proceeds with legitimate proceeds. The utilization of these non-traditional financial institutions occurs primarily at the proven weak link in the laundering process, the "Placement" stage (the physical disposal of bulk cash proceeds), as discussed in the Typology paper presented in 1989. In recent years a number of significant events have occurred that have had a positive impact on money laundering enforcement in the USA. New and stringent anti-money laundering laws and regulations have been passed in the USA, and there has been a heightened awareness in the US traditional financial institutions in regard to money laundering. With this heightened awareness, there has been an improved alliance between the nation's traditional banking industry and the U.S. Government. With these new initiatives in place, the USA is seeing structuring and other money laundering practices being driven to non-traditional types of financial institutions. OVERVIEW OF BUSINESSES/PROFESSIONS OUTSIDE THE REGULATED FINANCIAL SECTOR The purpose of this section of the paper is to provide an general overview of money laundering through various businesses and professions outside the regulated financial sector. Actual cases and further explanation regarding the utilization of these businesses and professions are provided later in this paper. The following representations are related to businesses and professions outside of the regulated financial sector. These businesses and professions are considered to have actual or potential significance as vehicles utilized in the cash placement stage of money laundering: Cheque Cashers, Bureaux de Change, Money Transmitters and Travel Agencies - The USA sees these services as combined entities. These businesses are very similar and may operate separately or in various combinations of services, often commingled under one roof or business franchise. These businesses provide a large variety of bank-like financial services to their customers who are either unable or unwilling to establish a relationship with a traditional financial institution. They are active, cash 11 PAGENO="0449" 445 intensive businesses; providing the opportunity for illegal proceeds to be easily commingled with legitimate business profits. Customers may conduct their business in complete anonymity and obscurity, with little or no questions asked. In the USA, the utilization of these businesses by money launderers is recognized as a significant emerging trend by law enforcement. The USA currently has numerous ongoing money laundering investigations involving these businesses. ThOse cases are further discussed in the examples and actual case section of this paper. currency Exchanges - fall into three categories: currency transaction departments of major industrial banks; large currency houses which deal in a multitude of currencies; and smaller currency houses which predominate near international borders. Although their primary legitimate function is to change one currency for another, they generally provide, numerous other financial services as well, such as selling money orders and cashier's checks, wire transferring funds, exchanging currency for checks, and making payments for customers from the exchange house accounts. Even complying with existing regulations, all three can provide an effective screen for illicit transactions once the currency is transported out of. the country. Money Transmitters - engage in the business of transferring funds either domestically or internationally by wire, check, draft, courier, facsimile, computer network, or other means. They also sell or issue payment instruments, i.e., drafts, traveller's checks, money orders, etc., whether negotiable on site or a distant location. The legitimate function of these businesses, when exercised, is to send money overseas for people who are unable to establish a relationship with a traditional financial institution. The illegitimate function is to move money overseas while maintaining a veil of anonymity Precious Metals, Stones and Artwork Dealers and/or Brokers - are generally considered to be cash oriented businesses, in which cash is exchanged for precious metals stones or artwork. Precious metal, stones and artwork, because of their inherent value, can act as a medium of exchange itself and may even be more easily transported. It should be noted that large wholesale purchases in these businesses are often made in cash without suspicion With particular regard to the sale and purchase of precious metals, sales are often accomplished through brokers and there is never an actual physical exchange, of the commOdity, yet there may be numerous financial~ 12 PAGENO="0450" 446 transactions. Currently, a broker in the US is commonly listed in the US Treasury Financial Data Base as the owner of the funds deposited in a financial institution in lieu of the true owner. In recent years, US law. enforcement has discovered that these businesses are being increasingly utilized by criminal organizations in furtherance of both drug trafficking and money laundering operations. Casinos/Gambling Establishments or Businesses (eg. racetracks, sports betting establishments) - present a significant threat as avenues for money launderers as gambling is a well established, widely accepted industry. Because gambling is an accepted practice, illegal activity can easily be disguised by commingling illegal and legitimate funds. Gambling is a very cash intensive business, offering anonymity and obscurity to the patrons. Specifically, casinos as a gambling ëstablishthent, also offer a full range of financial transactions, e.g., extension of credit, safe deposit boxes, sale of checks, and funds transmittal. Automobile/Airplane/Boat/Real Estate Dealers and/or Brokers - these, along with other dealers in luxury goods, are often recipients of illegal funds. The purchase of hard assets with cash is a significant money laundering method. The purpose of large scale purchases is threefold: to support a luxurious life style; to change the form of the proceeds from conspicuous, bulk cash to some equally valuable but less conspicuous asset; or to obtain major assets which will either be used to further the criminal enterprise or sold and converted back to cash. Professionals - it is not uncommon for attorneys and accountants to handle large sums of money for their clients for a variety of legitimate reasons. Specifically, attorneys may receive large amounts of cash derived from illegal drug sales, and in turn, deposit these funds into special bank accounts set up purportedly to hold funds on behalf of its clients, and fromwhich the attorney's fees can be withdrawn as they accrue. These accounts are maintained on behalf of the attorney and generally do not identify the names of any of the clients. As part of the money laundering scheme, the attorney returns the money to the client in a different form; either through a check or series of checks or other monetary instruments, through the purchase of real estate or other valuable property, or through other means. However, due to the inherent professional/client confidentiality privilege it becomes difficult if not 13 PAGENO="0451" 447 impossible to determine the legitimacy of both the funds and the prufessional's subsequent services. Money Order Issuers/Check Sellers (eg. Cashier's and Traveler's Checks) - while these businesses provide services which may mirror some of the functions of the cheque cashers, bureaux de change and money transmitters, the issuers/sellers usually do not provide a full range of bank-like services. The conversion of bulk cash into monetary instruments allows the illegal proceeds to be more readily transported out of the country without detection, or to be deposited into financial accounts without the filing of a currency transaction report. Insurance Companies - insurance is a billion dollar industry which handles a large volume of transactions in the normal course of business. The utilization of an insurance company to further a money laundering scheme usually requires the complicity of the employees to provide an opportunity to place illicit proceeds. into the legitimate financial system. Securities Brokers/Dealers - every business day this industry handles millions of transactions valued in the billions of dollars. This method usually requires the complicity of employees in order to structure large deposits of cash, to brokers, in a manner which disguises the original source of the funds. The utilization of securities brokers/dealers in the USA appears to have decreased in recent years. There has been some indication that members of this industry are employing the "know your customer" principle and are refusing to accept cash transactions. Commodities Brokers - like the precious metals dealers, commodities brokers can assist money launderers by providing an opportunity to place~ illicit proceeds into the legitimate financial system. REPRESENTATIVE EXAMPLES AND ACTUAL CASES To better illustrate the aspects of money laundering through the non-traditional financial institutions we offer the following examples: Currency Exchan~es or Casa de Cambiom - although largely unregulated in the U.S., they are subject to U.S. Bank Secrecy Act currency reporting and recordkeeping 14 PAGENO="0452" 448 requirements, as well as U.S. money laundering statutes. Smuggled U.S. currency can be exchanged in a foreign country (sometimes at a more favorable rate) and the exchanged U.S. currency subsequently returned to the U.S. The "Report of International Transportation of Currency or Monetary Instruments (CMIR)" filed for the returned currency will generally reflect the foreign currency house as the owner. Cash proceeds may also be received by the exchange house and introduced into the banking system through bañk deposits made in the name of the currency exchange house. The "Currency Transaction Reports (cTRs)" then filed by the U.S. banks identify the exchange house as the owner of the currency rather than the criminal customer. Currency may be exchanged fOr cashier's checks, personal checks, money orders, and other monetary instruments, without a CTR being filed or filing a CTR with false information. These instruments may be made payable to any payee name or "bearer" as instructed by the customer. Transactions may also be structured to evade the CTR filing requirements by dividing~ large amounts of currency into amounts below the US$ 10,000 threshold and conducting several transactions at different times, or using several individuals (smurfs) to exchange the cash for other monetary instruments. The exchange house may wire transfer currency to any destination desired without filing a CTR, or wire transfer smaller amounts of currency from various locations into one account to avoid the CTR. The exchange house may serve as a money "broker" to their customers by accepting and depositing cash into the exchange house-owned bank accounts, then make payments for assets, goods, or services from the exchange account at the direction of the customer. Real estate and other assets maybe purchased in this way using nominees in order to further conceal the true ownership and origin of the funds. U.S. currency exchange houses, or "casa de cambios", frequently maintain business relationships with Mexican cambios and banks. Complex financial networks may be utilized to move criminally derived funds through several Mexican cambios and/or banks prior to transfer of the funds into U.S. or European accounts owned or controlled by the criminal customer. In addition, book entry systems shared by "sister" cambios on both sides of the border may 15 PAGENO="0453" 449 be used to eliminate the need for the physical movement of currency across the border. - In a major USA investigation into currency exchange houses being utilized by drug' traffickers for the purpose of laundering drug proceeds, the US Treasury imposed a US$ 3,011,001 civil penalty against a currency exchange house for money laundering violations. This was a landmark action by the US Treasury, representing the first time a civil penalty had been imposed against a currency exchange house. The investigation revealed that during a four-month period a major drug trafficking organization had deposited US$ 5,566,470 with* the currency exchange house without the required reports being filed. The currency exchange house then transported those funds into Mexico, either as US currency, Mexican pesos or bearer negotiable Mexican peso checks, without filing the required USA transaction reports. The investi- gation culminated with the seizure of US$ 2.55 million at the money exchange, the arrest of both the drug trafficker and the owner of the money exchange, the closure of the exchange business, and the issuance of the USS 3.01 million civil penalty against the owner of `the casa de cambio for the funds which had been illegally transported into Mexico. - A US investigation into a casa de carnbio operating in California revealed that approximately US$ 40 million in drug proceeds were laundered by this casa for the "Cartel" over a ten-month period in 1990. The owner and employees of the casa de catnbio accepted cash known to be drug proceeds, and transported the cash by courier to a Mexican bank where it was converted to cashier's checks made payable to fictitious names. The cashier's checks were then transported by courier back to the US and delivered to the customer for a fee. .~n other instances, the Mexican bank transferred funds via wire, or through internal bank transactions, immediately to the principal's. The investigation culminated with the arrest of the cambio owner, the seizure of the business, and the seizure of approximately US$ 2 million in currency. The casa de cambio owner was convicted of money laundering and related offenses. Although sentencing is pending, the casa owner faces life imprisonment and a possible fine of US$ 4.25 million. Another USA investigation into the activities of two currency exchange houses was initially predicated upon the review of the CTR and CMIR reports maintained in the Treasury Financial Data Base 16 PAGENO="0454" 450 (TFDB). The review revealed that both currency exchange houses were conducting large deposit transactions and subsequently transporting large amounts of currency out of the US without filing the required reports. The undercover investigation disclosed that the currency exchange houses were accepting large cash deposits, represented as drug proceeds, without filing the required reports. The investigation culminated with the arrest of both currency exchange house owners, the seizure of US$ 114,000, and the closure of both exchange houses. Money Transmitters - these businesses maybe operated independently in storefronts, or within other businesses, such as local groceries, pharmacies, liquor stores, or travel agencies. The number of both legal and illegal money transmitters has significantly increased in recent years in the U.S., particularly in cities with large newly-arrived immigrant populations. Criminals may hire 50-100 people6 each of whom purchase money orders in amounts below US$ 3,000 (now in the U.S. records must be maintained on monetary instrument purchases of US$ 3,000 or more). The money orders are then transported to other states where they are deposited into various bank accounts. Narcotics organizations supply currency to check cashers in exchange for checks cashed by the general public. The endorsed checks are then deposited into the narcotics organization's bank account identified by a fictitious company name. The funds can then be wire transferred anywhere in the world without detection. Money transmitters and check sellers issue cashier's checks, traveller's checks, personal checks, money orders, drafts, and other monetary instruments in exchange for cash without filing a CTR. Structuring (dividing large amounts of cash into amounts below either US$ 10,000 or US$ 3,000, and conducting several separate transactions) can be accomplished using a telegraphic money transmitter., e.g., Western Union. Illegally obtained funds may be structured and telegraphically transferred to a single destination from various locations by one or more individuals. Western Union has offices, throughout the world and also uses correspondent u.s. financial institutions in foreign countries to receive/transfer funds internationally. - A U.S. money laundering investigation targeted the owner of 15 money transmitting businesses, whose 17 PAGENO="0455" 451 offices consisted of travel agencies, casa de cambios and a real estate office. In return for an 8% commission, the business owner and his employees, at the various offices, structured large suns of currency into checks in amounts less than US$ 10,000. The checks were then deposited or wire transferred into 48 different business accountsat 26 various domestic and foreign banks. The business organization utilized facsimile machines to transmit directions to correspondents in South and Central America regarding the payment of money to individuals. Approximately'US$ 250 million was laundered over a five-year period. - In an ongoing investigation, the US has discovered a money transmitting company which is operated as a franchise throughout various cities in the US. The subject company enters into contracts with its agents, who, operating as independent contractors, open storefronts to conduct the money transmitting business on a walk-in basis. The investigation to date has revealed approximately 100 different storefront businesses who have transacted a total of approximately US$ 18.1 million. These businesses are accepting currency in amounts exceeding US$ 10,000, and not filing the required reports, filing the reports using false names and identifiers, and/or structuring the deposit amounts to avoid the reporting requirement. The funds are then wire transferred to Colombia, Panama, Ecuador and Venezuela. Parallel Money Exchange Markets. or "Black" Markets - represent a new and sinister phase of the money laundering problem. Money exchangers in Peru, Colombia and Ecuador, (countries where it is legal and common-place to buy and sell U.S. dollars openly on the streets) are buying drug dollars from the traffickers and selling them to legitimate businessmen and others who desire to convert their profits and savings into U.S. dollars and deposit those dollars in the U.S. An illustration of the parallel market stems from persons in countries with strict currency controls, such as Colombia and Peru, desiring to do legitimate business in the U.S. Under Colombian law, for instance, anybody can deposit any amount of local currency (pesos) in a Colombian bank without reporting requirements, but no one can legally export money out of Colombia except by buying foreign currency at a fixed rate of exchange through the Colombian central bank. A legitimate Colombian 18 PAGENO="0456" 452 * businessman may require a more confidential and faster way of exchanging pesos for US dollars and moving these dollars to the U.S. in order to conduct his business. At the sane time, the Colombian drug trafficker has large amounts of US dollars in the United States that he needs to bring back to Colombia and convert to pesos to finance his drug business. The Colombian businessman and the drug trafficker meet through a money launderer and agree to do their own private exchange. The drug trafficker deposits his US dollars for the Colombian businessman in the United States, while in Colombia, the businessman deposits his pesos for the drug trafficker. The laundering occurs without any currency physically leaving either country and, perhaps, without the businessman knowing that he assisted in laundering drug money. A U.S. investigation revealed that the black market centered in Lima, Peru, is directly linked with the Upper Huallaga River Valley, where about 70% of Peru's coca farming is carried out. The coca farmers sell both coca leave and processed cocaine paste to Colombian narcotics traffickers. The Colombians fly airplanes into several villages in the valley, where they exchange U.S. dollars for the coca. The Peruvian growers/traffickers, in turn, sell the dollars to the Lirna-based exchange houses for the local currency (Intis), needed to sustain their narcotics operation. The Lima-based currency exchangers fly airplane-loads of Intis into the valley when news of a coca shipment is received in Lima, and return to Lima several hours later with the U.S. dollars. The U.S. dollars were then sold for Intis, at a profit, to Peruvian "capitalists and industrialists" (who wanted to convert local currency to dollars as a hedge against inflation) through the black market in Lima. The Lima-based black market exchangers delivered the U.S. dollars to the Peruvian "capitalists" by transferring the money by wire to their own "office" accounts in the U.S., and then, after receiving the Intis from the dollar sale transaction, transferred the funds a second time from their "office" accounts into the accounts the buyer "capitalists" held in New York and Miami. The organization would then return with the Peruvian currency to the jungle to buy more U.S. dollars and repeat the cycle. The organization utilized their U.S. "office" accounts to launder in excess of US$ 10 mil- lion. The four principal defendants in this investigation have been charged with criminal offenses in the U.S. One defendant, the, attorney 19 PAGENO="0457" 453 - representing members of the organization, plead guilty to charges of attempting to obstruct justice. Another defendant was charged and subsequently convicted of conspiring to import cocaine into the U.S., was sentenced to 27 years in prison and fined US$ 4 million. The remaining two defendants have been indicted on charges of conspiring to violate the money laundering laws of the U.S. Precious Metal. Stones and Artwork Dealers/Brokers and/or Auction Houses - are considered to be cash oriented businesses. The U.S. investigation entitled OPERATION POLAR CAP, revealed an elaborate scheme to disguise the origin of narcotics proceeds through the buying and selling of large quantities of gold. POLAR CAP uncovered in Los Angeles, California, wholesale jewelry businesses being used as the hub of an international narcotics conspiracy that laundered more than US$ 1 billion in two years. The targets of the investigation developed an extremely complex laundering system which involved the collection of drug sale proceeds in several major U.S. cities, including New York, Houston, Detroit, Miami, and the San Francisco Bay area. These illegal funds where delivered to store "fronts" purporting to be gold and jewelry businesses. The cash was then boxed and shipped cross-country via armored car companies to the jewelry stores in Los Angeles. The money was counted, bundled and then deposited into bank accounts in the Los Angeles area, represented as proceeds from the sale of the supposed gold and jewelry. The money from the Los Angeles accounts was transferredto the cartel's Manhattan, New York, bank accounts, then wired through Panama to South America to pay for coca and operating expenses. The remaining profits were wired to secret accounts in European banks or sold through the parallel money exchange market, or "black" market, in South America and returned to the U.S. where the monies are used to purchase luxury goods and services. - Another US investigation revealed coin dealers being utilized to launder money. The subject of the investigation followed the same scheme in dealing with two different coin and precious metal dealers. The scheme involved the subject ordering gold coins, purchasing the coins with illegal cash proceeds, and then cancelling the order and requesting a refund by way of a check (made out to a fictitious name) from the coin dealer. The subject conducted four 20 PAGENO="0458" 454 transactions in this nanner totalling approxinately US$ 5.1 million. Auction houses have become a dominant force in art transactions; and have adopted the financial methods of "big businesses." These methods include financial services that do not necessarily involve the traditional node of cash payment, but have similar banking practices such as advance credit, individual "accounts," wire transfers via brokerage services, etc. - In a U.S. investigation, a practicing attorney agreed to launder noney with his associate, a bank chairman. The bank chairman also owned an auction business, where alleged drug cash was made to appear like receipts of auction sales, and checks were issued to fictitious names. These checks were deposited into the chairman's bank into an account established by the attorney in the name of a fictitious car wash. The funds were then transferred to accounts at other banks throughout the U.S. The investigation revealed that a total of US$ 905,000 was laundered. Casinos/Gambling Businesses - handle enormous amounts of cash every day and patrons depositing large amounts of cash do not draw unusual attention from casino/gambling business personnel. In the USA in 1985, the Bank Secrecy Act was amended to include casinos (with gross annual gaming revenue over US$ 1 million) in the definition of financial institutions, requiring casinos to report cash transactions in excess of US$ 10,000. As non-traditional financial institutions, casinos are under less scrutiny from the Federal Government, with virtually all regulation and oversight left to the individual states in which the casino operates. Casinos are increasingly able to perform the same transactions as traditional financial institutions, including international wire transfers. Money laundered through casinos can easily be represented as legitimate gambling winnings. A money launderer could place an extremely large amount of cash on deposit with a casino, insisting that no report be filed or they would take their money elsewhere. Once deposited at the casino with no report, the money can be withdrawn as a casino check or wire transferred. Structuring may also occur in a casino by making multiple deposits under US$ 10,000 or less, or exchange similar amounts for gaming tokens on the gaming floor without the casino filing a report. 21 PAGENO="0459" 455 Many casinos have offices overseas where patrons can book reservations and deposit money which can be wired back to the U.S. This is a very effective means for people to move funds into the U.S. from overseas. Large amounts of U.S. currency or other U.S. negotiable instruments wagered or placed on deposit in foreign casinos may be an indication of large scale money laundering and smuggling. - In a U.S. investigation, the defendant was convicted on money laundering charges~ for exchanging narcotics proceeds in small denomination bills for large denomination bills in an Atlantic City casino. This exchange facilitated approximately US$ 2 million in currency to be smuggled out of the U.S. into Switzerland and Italy over a 6-month period. Automobile/Airplane/Boat/Real Estate Dealers or Brokers - the large scale purchases of hard assets with cash is recognized as a significant money laundering method in the USA. - In a US investigation, an exotic automobile dealership was used to launder US$. 650,000 in funds obtained as a result of a bank fraud scheme. The automobile dealer accepted and deposited bank~ cashier's checks into his business checking account. The dealer then directed the bank to distribute money to his co-conspirators in the form of cash and cashier's checks. The dealer represented all of the transactions as legitimate automobile sales. - Another US investigation revealed that five automobile dealerships and two insurance companies were aiding narcotics dealers by knowingly accepting* drug proceeds in cash for the purchase of automobiles and concealing the identity of both the purchasers and the cash. Expensive luxury automobiles were purchased with cash, using fictitious nominee names, and without the automobile dealer filing the required report. The automobile dealers would deposit these funds, in installments under the US$ 10,000 reporting requirement, into the dealership accounts. The two insurance companies were utilized to further disguise the true ownership of both the illegal funds and the new automobiles, by providing driver's licenses and vehicle registrations in fictitious names. The investigation culminated in the arrest of 15 * individuals, the seizure of 31 new automobiles valued at US$ 877,000, with the additional seizure of seven bank accounts belonging to the five automobile dealerships. 22 PAGENO="0460" 456 - In another US investigation, drug proceeds were laundered through the purchase of hard assets, of a type other than luxury goods. The investigation revealed drug proceeds being delivered to a front company in Florida. A Colombian drug trafficker would then send a false order to the front company in Florida for the purchase of tools from a legitimate company in Texas. The Texas company had a bank account in Florida into which the front company would deposit cash to facilitate the tool purchase. The Texas company would then deliver the tools to the front company in Florida. The tools were then shipped (smuggled) to the trafficker in Colombia as a contraband shipment. Colombian Customs personnel would then be paid off in order to allow the shipment of tools to enter the country for delivery to an unlicensed importer (the trafficker). The trafficker would then sell the tools to legitimate businessmen in Colombia in exchange for pesos. Professionals - in the USA, trades or businesses, and/or businesses which offer professional services are required to file a report with the Federal government reporting the receipt of currency in excess of US$ 10,000. This report requires detailed information concerning the identity of the individual purchasing the goods and/or services. Many attorneys in the USA have either refused to file these reports, or have refused to identify their clients, arguing that such transactions would unfairly incriminate their clients and thus violate the attorney/client privileges. This legal issue is currently being considered by the US judicial system. Notwithstanding, US law enforcement has investigated and successfully prosecuted attorneys for their involvement in money laundering schemes. - In a US investigation, an attorney was successfully prosecuted and convicted for money laundering and conspiracy to distribute and to possess with intent to distribute cocaine. The court found that although the attorney may not have known the exact extent and nature of the narcotics organization, the attorney knowingly assisted in the organization's cocaine distribution through specific legal work. The legal work included the laundering of drug cash proceeds through the structuring of drug cash proceeds, with subsequent purchases of real estate in the attorney's name on behalf of the narcotics organization. The investigation revealed an elaborate scheme involving a series of financial manipulations by the attorney. 23 PAGENO="0461" 457 The attorney would accept drug cash proceeds from the organization, deposit the cash into, his trust account and/or convert the cash in amounts of less than US$ 10,000 into bank cashier' s checks. The attorney would then purchase real estate in his name, making payment through combination of checks drawn on the attorney's trust account, cashier's checks in various amounts below US$ 10,000,. and cash. Approximately US$ 380,000 in drug proceeds were laundered through the purchase~ of three properties. - A US undercover investigation revealed another attorney willing to assist and conspire to launder money. The attorney acceptedI large amounts of US currency in excess of US$ 10,000, depositing the funds into his attorney trust account, providing false information to the financial institution, thereby causing false currency transaction reports to be filed. The attorney also established two corporations to act as a nominee on behalf of the true owner of the funds. The attorney would then issue checks frOm the trust account, made payable to the nominee corporations for deposit into the bank accounts of the nominee corporation. The attorney laundered approximately US$ 176,000 over a 12-month period. Insurance Companies - the utilization of insurance companies in money laundering schemes is a relatively new area for US law enforcement, and very little is known about the extent of involvement. An ongoing US investigation, has thus far revealed millions of dollars which were embezzled from an insurance company by the company owners, causing said company to go into bankruptcy and defraud thousands of its policyholders and claimants In furtherance of the overall scheme to defraud, the primary defendants (the company owners) conspired with the Insurance Commissioner of the state where the crimes were committed, to conceal their embezzlement and facilitate their continued operation of the company. In return, the Insurance Commissioner received US$ 2 million in insurance company funds disguised as campaign contributions from approximately 25 nominees. These contributions involved numerous financial transactions, ie.,. structuring the funds deposits to avoid the filing of a required currency transaction report. The Insurance Commissioner and the four primary defendants have been indicted for mail fraud, money laundering and conspiracy. Three 24 PAGENO="0462" 458 * of the primary defendants have plead guilty. The investigation continues into the international aspects, as the primary defendants had set up two separate companies in the Cayman Islands in the apparent furtherance of their embezzlement scheme. Securities Brokers - this method usually requires the complicity of the brokerage firm employees. - In a U.S. investigation, the Providence, Rhode Island office of E.F. HUTTON AND COMPANY, as well as a stock broker were convicted of laundering organ~ zed crime funds. Over US$. 500,000 in proceeds from the sale of pornography films were converted from cash to cashiers checks (in amounts less than US$ 10,000) by E. F. HUTTON employees at local banks, then deposited into HUTTON customer aôcounts bearing fictitious names and Social Security numbers. The funds in these accounts were used to purchase certificates of deposit and municipal securities in the form of bearer bonds. The stock broker then directed intermediaries to redeem the coupons attached to the bonds at local banks, again using false names and addresses. E.F. HUTTON AND COMPANY received a fine of US$ 1 million. Another trend emerging in the U.S. is the utilization of bearer bonds and bearer bond interest coupons to pay for narcotics. These bonds and coupons are being exchanged by some narcotics dealers just like cash. Again, much needs to be learned from this type of money laundering scheme. In conclusion, the significance of money laundering to law enforcement lies in our ability to disrupt organized international criminal enterprises through financial devastation, rather than only concentrating on the illegal activities. A narcotics trafficker can easily replace seized drugs by continued cultivation and processing, however, seized drug proceeds and subsequent assets are not so easily replaced. Criminal organizations do not respect national borders and have exploited the globalization of commerce. As the countries of the world tighten their regulations and enforcement procedures to prevent money launderers from using the traditional or formal financial systems, money launderers will turn increasingly to the non-traditional financial systems, transfer mechanisms, and foreign financial systems where either weak or no regulations exist, to disguise the source of their funds and convert them to legitimate use 25 PAGENO="0463" 459 The utility of the international payments system within money laundering networks has been successfully demonstrated through the Operation C-CHASE/BCCI and Operation POLAR CAP investigations. Both of these investigations have assisted in heightening the global awareness of the money laundering threat, and illustrating the necessity for foreign governments to modify bank secrecy laws and develop coordinated responses to combat the money laundering threat. To reiterate a point from the FATF report, "Any discrepancy between national measures to fight money laundering can be used potentially by traffickers, who would move their laundering channels to the countries and financial systems where either weak or no regulations exist on the matter, making the detection of funds of criminal origin more difficult." PAGENO="0464" 460 Senate Permanent Subcommittee on Investigations EXHIBIT# 26 THE SADLER GROUP Time Saver Minit Markets, Inc. - Mi$ter Money Check Ca$her LAGK Partners - Alan M. Sadler Mgmnt. Co. - Small Business Funding Corp. Estate of Barney L. Sadler - Ruth S. Sadler Real Estate Interests Offices: Suite E-l, Norwood Plaza, 7360 Skidaway Rd., Saiannah, GA 31406 P0 BOX 13648, SAVANNAH, GA 31416 (912) 351-6000 FAX (912) 351-6030 February 17, 1992 Honorable Sam Nunn Chairman, Subcommittee on Investigations US Senate WASHINGTON, DC 20510 Dear Senator Nunn: This concerns the upcoming hearing your Subcommittee has scheduled on "New Trends in Money Laundering." I would appreciate an opportunity to discuss this matter with you prior to the hearings, at your convenience either here or in Washington. One of cur affthated businesses is Mister Money Check Cashers. We operato 11 locations here in Georgia, and 10 others in SC, NC and VA. Our records have successfully undergone Internal Revenue Service compli- ance audits designed to coobat money laundering. We are members of the National Check Cashers Association which has adopted a code of conduct against money laundering. Both the State and National associations actively serve thei: members in fighting money laundering. In our view, existing law and regulations are more than adequate to prevent money laundering in the check cashing industry, only enforcement needs strengthening. The State of Georgia has regulated check cashers for 2 years, and since the inception of the law, our Georgia locations have been fully licensed and supervised by the Georgia Department of Banking and Finance. As are most in our industry, we are reputable, responsible, well-estab- lished legitimate business people operating modern financial facilities serving a large segrent of the public with essential services not other- wise available on a basis responsive to their needs. We share the goals of the Subcommittee's investigation: we want the bad apples in our industry out, and we support prosecution to fullest extent of the law; but we are concerned with the hearings potential for unfair and unnecessary damage to our image with our customers and to the repu- tation of the industry. The ~ apples ARE NOT TYPICAL and their ~ trayal as such in the hearinos would be ~ ~ disservi~ to a legiti ~ industry. You: assistance in assuring an even hand is needed. continued on Page 2 PAGENO="0465" 461 SENATOR SAM NUNN February 17, 1992 - PAGE 2 While we do not dogmatically oppose regulation of our industry, we must voice our concern lest the way testimony and data is presented in the hearings that it gives birth to advocacy of new regulations. Mister Money Check Casher stands ready to assist the Committee in any way we can, and I have also been assured that likewise all of the re- sources of our National Association have been offered the Committee Staff. Best reg~rds ~RIS~TIN Executive Officer HS:ad 0 PAGENO="0466"