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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
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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
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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)
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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.
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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)
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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
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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
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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
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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
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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.
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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
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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.
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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.
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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
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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
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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
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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.
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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"
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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
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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.
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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.
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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-
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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
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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)
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-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
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-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)).
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-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.
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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.
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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.
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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
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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
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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
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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
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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.
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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,"
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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
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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
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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
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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
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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
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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
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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.
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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
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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.
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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
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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.
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(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
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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.
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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
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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.
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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
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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.
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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
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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
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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
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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,
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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
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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
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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.
** *
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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
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-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
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-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
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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.
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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.
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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
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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
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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.
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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
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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.
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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.
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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,
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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.
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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
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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
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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.
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EXHIBIT A
PAGENO="0137"
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§ 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"
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~`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"
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* §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"
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~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"
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~ 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"
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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"
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§ 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"
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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"
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§ 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"
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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"
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§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 ~
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EXHIBIT C
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§ 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.)
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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
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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
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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.
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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
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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. -
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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
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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
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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.
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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.
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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
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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
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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
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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
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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
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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
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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.
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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.
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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
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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.
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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
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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
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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
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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.
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S~n~i~ p ~ Suht~Q~~
~
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P~rm~n~t S~O~omm~tte~
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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.
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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
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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
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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.
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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
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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.
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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.
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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
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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.
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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.
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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
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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
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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
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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.
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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
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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.
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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.
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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.
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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
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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
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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
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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
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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
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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
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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. ~
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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
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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
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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,
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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
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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
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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
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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-
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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
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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.
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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
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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
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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.
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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.
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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.
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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
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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
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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
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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
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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.
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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,
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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
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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.
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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
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"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.
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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?
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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.
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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
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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
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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
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"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
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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
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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
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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).
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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.
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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
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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
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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
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/ 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
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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
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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
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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
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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
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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"
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~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"
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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.
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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"
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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
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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
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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
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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.
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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
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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"
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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
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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
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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
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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
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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).
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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
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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
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- 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
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~ 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.
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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.
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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..
~ ~ ~
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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"
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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"
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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"
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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.
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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"
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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"
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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"
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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
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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"
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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
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$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
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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).
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(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
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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
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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
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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
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PAGENO="0448"
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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
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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~
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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
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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
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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
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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
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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
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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
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* 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
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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
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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.
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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.
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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.
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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
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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
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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."
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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
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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
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