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For release on delivery
10:00 a.m. E.D.T.
May 26, 1993

Statement by
The Honorable John P. LaWare
Governor
Board of Governors of the Federal Reserve System
before the
Committee on Banking, Finance and Urban Affairs
United States House of Representatives
May 26, 1993

Mr. Chairman, I am pleased to appear before the
Committee on Banking, Finance and Urban Affairs to discuss the
Federal Reserve's role in the government's anti-money laundering
efforts.

The Federal Reserve places a very high priority on

supporting efforts to attack the laundering of proceeds from
illegal activities through our nation's financial institutions
and, over the past several years, has engaged extensively in
anti-money laundering endeavors.
We believe that the Fed has an important role to
perform in the federal government's efforts to detect and deter
money laundering activities within banking organizations, as well
as to provide assistance to law enforcement agencies in their
efforts to suppress these criminal activities and seize proceeds
gained from them.

As I will describe in more detail, the Federal

Reserve has participated in, and provided assistance to, the
federal government's efforts in attempting to eliminate money
laundering activities.
Currently, the Board, through the varied functions that
it performs on a routine basis, such as examinations of state
member banks and the U.S. branches and agencies of foreign banks,
as well as through special projects and various other programs,
monitors financial institutions in an attempt to stop money
laundering activities.

We have also devoted significant

resources to providing technical assistance and training both to
domestic and foreign law enforcement and banking supervisory
agencies.

- 2 An example of the Federal Reserve's commitment in this
area was the creation, in January 1990, of the Federal Reserve
System Working Group on Money Laundering Activities.

Chairman

Greenspan created this senior level Working Group to review the
Board's initiatives on money laundering and identify new ways to
contribute to the federal government's anti-money laundering
efforts.

The Working Group placed special emphasis on providing

assistance to domestic and international law enforcement
organizations.

It also developed internal programs and

procedures for Board and Reserve Bank staffs to implement in
their normal supervision and regulation of financial institutions
and provision of services to banking organizations.

The Working

Group formed three task forces, in the areas of cash, funds
transfer and supervision.

The three task forces focused on

identifying areas within the Fed in which better procedures would
detect and deter money laundering activities.

Many of the

activities that I will address today are the result of the
efforts of the Working Group and its task forces.

Federal Reserv« Pra<|ra»ia fnr controlling Money Laundering
During the course of each Federal Reserve examination
of a state member bank or U.S. branch or agency of a foreign
bank, a Bank Secrecy Act compliance examination is conducted.
Such examinations are scheduled to occur every year.

When deemed

necessary, Fed examiners may conduct special targeted
examinations of financial institutions if there is reason to

- 3 -

believe that violations of the Bank Secrecy Act may be occurring
or other suspicious activities are identified.
In order to conduct effective examinations for
compliance with the Bank Secrecy Act, all Federal Reserve
examiners receive training in understanding the basics of money
laundering.

Examiners are also trained in the provisions of the

Bank Secrecy Act and Treasury's rules and regulations
implementing it and in identifying suspicious activity that may
be associated with money laundering.

This training is provided

during initial courses that our examiners attend upon entering
the Federal Reserve System.

Additional training regarding Bank

Secrecy Act compliance and related matters is also provided to
experienced examiners during the course of supplemental training
programs in which they are required to participate over their
careers, as well as training programs sponsored by the Federal
Financial Institutions Examination Council and various law
enforcement agencies.
I must emphasize, however, that even with the extensive
training provided to our examiners, it is difficult for even the
most experienced bank examiners to detect sophisticated money
laundering schemes during the course of an examination.

Well

trained examiners are able to determine if financial institutions
are in compliance with the various specific provisions of the
Bank Secrecy Act.

Bank examiners are also able to determine if

financial institutions have in place systems to identify and
report to the appropriate law enforcement and supervisory

- 4 agencies any suspicious activity occurring at or through those
institutions.

By identifying institutions not in compliance with

the various requirements of the Bank Secrecy Act or who do not
have systems in place to report suspicious activity, the Fed
provides critical data to government enforcement agencies.
In order to enhance the ability of bank examiners
conducting Bank Secrecy Act compliance examinations, the Board,
in late 1991, created a special committee of bank examiners with
the most experience in Bank Secrecy Act compliance-related
matters.

As a result, procedures for Bank Secrecy Act compliance

examinations that are better suited to today's changing
environment were developed.

These procedures have been

successful during field tests throughout the Federal Reserve
System over the past year.

Our staff is also developing better

procedures to review the operations of U.S. banks in foreign
jurisdictions which do not have laws and regulations comparable
to the Bank Secrecy Act.

We have identified several specific

areas of foreign operations that should be reviewed to determine
if the U.S. bank is susceptible to money laundering activities.
To strengthen banks' anti-money laundering efforts, we
have been encouraging financial institutions to adopt more
comprehensive "know your customer" policies to protect them from
illegal penetration of their facilities by money launderers.

The

Board believes that the best protection is for banks to possess
sufficient knowledge to clearly identify each customer and to

- 5 have a full understanding of the type of business engaged in by
the customer.
It is certainly not sufficient to simply identify those
institutions that are not in compliance with anti-money
laundering statutes, without taking action to ensure future
compliance.

To this end, the Board initiates appropriate

enforcement actions against the domestic and foreign banking
organizations which it supervises to address instances of
noncompliance.

While the Office of Financial Enforcement of the

Department of the Treasury initiates civil money penalties
against banking organizations for specific violations of the Bank
Secrecy Act, the Board addresses such matters as the lack of
internal controls and procedures.

For this purpose, the Board

may use its cease and desist and civil money penalty assessment
authority.

Recent actions to address noncompliance in this area

include the assessment of fines of $200,000 each against two
foreign banking organizations that were found to have inadequate
internal controls and systems to assure compliance with the Bank
Secrecy Act.

Tracking of Currency bv the Federal Reserve
One of the initiatives proposed by the Cash Task Force
of the Board's Working Group on Money Laundering Activities was
the development of a system whereby currency flows to and from
Reserve Banks would be monitored on a regular basis and
abnormalities in the normal flows, either surpluses or

- 6 -

deficiencies, would be identified and further investigated.
During the development of this project, the Federal Reserve Bank
of Dallas initiated a cash flow study to establish the normal
range of cash activities for each of the financial institutions
that used that Reserve Bank's cash services.

Once these norms

had been established, the Bank was able to identify and
investigate deviations in the normal pattern of cash transactions
by their customers.
The results of the study by the Dallas Reserve Bank
were discussed with various law enforcement agencies.

It was

determined that the most efficient means of gathering, analyzing
and disseminating currency flow data from around the United
States was to have each of the Reserve Banks report all of their
cash flow data to a single federal government agency more suited
to the task of providing financial investigative assistance to
the law enforcement community.

This resulted in the

establishment of an agreement between the Federal Reserve and the
Financial Crimes Enforcement Network of the Department of the
Treasury (FinCEN) for each Reserve Bank to provide FinCEN, on a
monthly basis, specific information on cash shipments, by
denomination, to and from the Reserve Banks by their financial
institutions.

Once FinCEN obtains this information, it initiates

an analysis of the information and identifies abnormalities by
geographic locale or financial institution.

This information is

then passed on to law enforcement officials, as well as to the
responsible supervisory agency for further investigation.

- 7 -

In addition to the provision of currency flow data to
FinCEN, each of the Reserve Banks has adopted a ’’know your
customer" policy similar to that which the Federal Reserve
encourages private sector financial institutions to adopt.

These

policies are designed to ensure that each Reserve Bank has an
understanding of the normal business practices of its cash
customers and, therefore, can identify and review
inconsistencies, should they arise.

Money Laundering and Fedvire
Several initiatives are now underway to provide
assistance in tracking funds through the Fedwire system.
One initiative is known as the "scanning program."

Using

information relating to suspected money launderers supplied by
agencies such as the FBI and the U.S. Customs Service, the
program enhances law enforcement's ability to track funds
transfers through the Fedwire.
Fed staff is now meeting with law enforcement agency
representatives in Washington, D.C. and throughout the United
States to acquaint them with the potential uses of the scanning
program.

The program has been used successfully by various law

enforcement agencies to date? and, in recent weeks, several
Reserve Banks have reported an increased number of inquiries from
law enforcement agencies about how to use the program.
In an effort to further augment the ability of the wire
payment systems to track funds transfers, in late 1992 the Fed

- 8 -

recommended that the Federal Financial Institutions Examination
Council adopt a policy statement encouraging financial
institutions to include complete identifying information about
the originator and beneficiary of a wire transfer in the payment
message.

We took this step because enforcement agencies

indicated that this information would be useful in conducting
investigations.

The Council's five regulatory agencies have now

adopted such a policy statement and distributed it to banking
organizations in December 1992.
As you are aware, the Federal Reserve and the
Department of the Treasury are also engaged in developing
recordkeeping requirements for funds transfer as a result of
provisions of the Annunzio-Wylie Anti-Money Laundering Act.

Even

prior to this legislation, the Federal Reserve was actively
assisting in the development of funds transfer recordkeeping
requirements.
The design of funds transfer recordkeeping requirements
is a very complex and technical undertaking.

While the Board

agrees that it may be beneficial to use information from funds
transfers for investigations of money laundering activity, or to
trace the proceeds of such activity, we also have a continuing
interest in ensuring the efficiency and integrity of the payments
system.

It is important that the impact of any funds transfer

recordkeeping requirements be carefully weighed to ensure that
they do not result in a degradation in the efficiency and
attractiveness of the large-dollar payments system.

More

- 9 -

importantly, recordkeeping requirements that are too onerous
could have serious adverse consequences for the competitive
position of U.S. financial institutions.

We believe that

recordkeeping requirements are being developed that will meet the
needs of the government's anti-money laundering efforts and, at
the same time, protect the efficiency and the integrity of the
payments system.

Coordination with Federal Law Enforcement Agencies
The Fed routinely coordinates with federal law
enforcement agencies with regard to anti-money laundering
activities.

The scope of this coordination varies from the

development and implementation of a criminal referral form that
specifically addresses money laundering offenses to specific,
case-by-case assistance to law enforcement agencies resulting
from examinations of financial institutions that appear to be
engaged in violations of the Bank Secrecy Act or related
offenses.
The Board also continues to maintain a close working
relationship with Treasury's Office of Financial Enforcement with
regard to the enforcement of the Bank Secrecy Act.

As you are

aware, the Office of Financial Enforcement promulgates all
regulations with regard to the Bank Secrecy Act that affect
financial institutions; and it is the joint responsibility of the
Federal Reserve, the other federal financial institutions
supervisory agencies, and the Office of Financial Enforcement to

ensure that financial institutions comply with these rules and
regulations.

To this end, the Fed routinely provides the Office

of Financial Enforcement, on a quarterly basis, with information
related to noncompliance with the Bank Secrecy Act by the
domestic and foreign financial institutions that are examined by
us during the quarter.
Over the past year, Board staff also began a dialogue
with the Money Laundering Section of the Department of Justice's
Criminal Division to coordinate better the review of pertinent
intelligence information.

We now work closer with Justice staff

to identify potential money laundering at or through domestic
banking organizations or foreign financial institutions doing
business in the United States.
On the international front, the Federal Reserve is an
active participant in the Financial Action Task Force, which was
established by the G-7 group of countries.

Board staff has a

significant role in the U.S. delegation to the Financial Action
Task Force, and has provided resources to the Financial Action
Task Force's efforts to provide educational assistance to
countries that are attempting to understand the money laundering
problem and develop programs to combat such activity.

The staff

has travelled to such places as Hungary, Poland, Austria,
Singapore, the United Arab Emirates and Saudi Arabia to provide
training and technical assistance under the auspices of the Task
Force.

- 11 -

Resources the Federal Reserve Has Committed to Anti-Money
Laundering Initiatives_________________________________
As I have described, extensive resources have been
dedicated to the Federal Reserve's anti-money laundering efforts.
At a minimum, each banking organization supervised by the Fed
receives a regular examination for Bank Secrecy Act compliance,
which is an effort that requires significant human resources and
expense.

In addition to the use of our examination force to

conduct Bank Secrecy Act examinations and special targeted
reviews, the Board, in late 1989, augmented the resources
dedicated to this area when it created a new senior level staff
position within the Division of Banking Supervision and
Regulation to coordinate and enhance money laundering-related
matters.

Since December 1989, the Special Counsel appointed to

this position has assumed responsibility for coordination of
matters related to money laundering and Bank Secrecy Act
compliance, including investigation, enforcement and training.
Over the past three years, the Special Counsel, who is a
recognized expert with respect to the Bank Secrecy Act and money
laundering offenses, has travelled widely abroad and throughout
the United States representing the Board on Bank Secrecy Actrelated training programs and other international matters
pertaining to the federal government's anti-money laundering
efforts.

He has provided assistance to the Departments of State

and Treasury, and each of the many other federal administrative
and law enforcement agencies responsible for Bank Secrecy Actrelated matters.

Last month, the Board added to the staff of the

- 12 -

Special Counsel's office by hiring a Senior Special Examiner with
extensive Bank Secrecy Act experience to assist the Special
Counsel's anti-money laundering efforts.

Estimates on Money Laundering and the Effectiveness of
Currency Transaction Reports_________________________
You have requested that we estimate the amount of funds
laundered in the United States annually.

While the Fed does not

develop or maintain such statistics, it does rely on information
provided by other government agencies in this area.

The

Financial Action Task Force estimated that, in 1990, the United
States share of drug proceeds was $100 billion.

More recently,

the FBI has estimated that the amount of money laundered through
the United States on a yearly basis from narcotics trafficking,
as well as other major crimes, is $300 billion.
You also requested our views on the effectiveness of
the Currency Transaction Reports required to be filed by
financial institutions for most cash transactions in excess of
$10,000.

As I stated previously, the Federal Reserve is required

to monitor compliance by financial institutions with regulations
promulgated by the Department of the Treasury.

While the Fed

continues to examine for compliance with the currency reporting
requirements, it does not use the data contained in the Currency
Transaction Reports for investigative purposes and, therefore,
has no means by which to assess their effectiveness to the law
enforcement community.

- 13 -

Evaluation of the Effectiveness of the Federal Reserve*s
Anti-Money Laundering Efforts__________________________
Our anti-money laundering efforts have been extensive
over the past several years.

We conduct regular Bank Secrecy Act

examinations of all the domestic and foreign banking
organizations that we supervise, and the Board is the only
banking agency that has created and staffed senior staff
positions dedicated to developing, coordinating and overseeing an
anti-money laundering program.

While it is difficult to quantify

results in this area, it is important to note that the federal
law enforcement community looks toward, and relies on, the
Federal Reserve for assistance and guidance with respect to money
laundering matters.

Further, the international banking

supervisory community relies on our extensive expertise to
develop and coordinate international anti-money laundering
programs.
We expect that the Fed's Bank Secrecy Act examination
program and the notable formal enforcement actions addressing
Bank Secrecy Act-related deficiencies that have been taken by
this agency have had some deterrent effects.

Our staff has been

advised that many U.S. branches and agencies of foreign banks
have retained legal counsel and accounting firm consultants to
develop enhanced internal Bank Secrecy Act compliance procedures
for their institutions after the Board's announcements regarding
its recent enforcement actions.

Similarly, there has been

increased attention given to Bank Secrecy Act compliance matters
by the legal profession and by bankers during the course of

- 14 -

recent symposiums and training sessions.

This increased

attention is another indication that banking organizations and
their outside professionals are responding to the anti-money
laundering efforts of the federal departments and agencies
responsible for this area.

Conclusion
As I have described, over the last several years the
Federal Reserve has taken significant steps in all of its
relevant areas of responsibility to develop programs, procedures
and systems to assist in the government's anti-money laundering
efforts.

These efforts have made the Fed a leader in the bank

regulatory community's anti-money laundering mission.

The

Chairman, members of the Board and the staff have worked to
develop and implement programs and procedures in the bank
supervision, currency and payments system areas that enhance the
government's ability to detect and deter money laundering
activities in financial institutions.

The continued tuning and

improvement of this effort is an established Board policy.