FROM THE OFFICE OF PUBLIC AFFAIRS

Chairman Leach, Mr. LaFalce, members of the Committee, it is a pleasure to be here today to speak about a top priority of President Clinton, Secretary Rubin, Attorney General Reno, and the Congress -- the federal government's efforts to combat money laundering.

Treasury Department enforcement bureaus and offices are responsible for significant elements of this fight. The U.S. Customs Service, the Criminal Investigation Division of the Internal Revenue Service (IRS-CI), the U.S. Secret Service and the Bureau of Alcohol, Tobacco and Firearms are charged with investigating money laundering in cases where the underlying criminal act lies within their core jurisdiction. The Financial Crimes Enforcement Network -- FinCEN -- is charged with administering the Bank Secrecy Act, which prescribes transaction reporting and record-keeping requirements for financial institutions designed to insulate those institutions from money laundering, and to provide a paper trail for investigators. FinCEN also serves as the central point for collection and analysis of Bank Secrecy Act data, providing case support to law enforcement investigations. The Office of Foreign Assets Control is responsible for implementing sanctions against nations determined to be a threat to the national security, economy or foreign policy of the United States, pursuant to the International Emergency Economic Powers Act (IEEPA), including sanctions aimed at the Colombian drug cartels. Treasury enforcement agencies work closely with one another, other law enforcement agencies, the Department of Justice, and with the Federal Reserve, the Office of the Comptroller of the Currency and other regulators as part of a comprehensive attack on money launderers and their underlying criminal activities.

Operation Casablanca

The impact these entities can have on money laundering is reflected in the Customs Service's recently concluded Operation Casablanca, the largest drug money laundering investigation in U.S. history. Although I cannot discuss the case in detail because the investigation and prosecutions are ongoing, I will provide a brief description of the operation based on information which has already been made public.

Prior to 1995, agents in Customs' Los Angeles Office had information that drug cartel members were laundering narcotics proceeds through branches of Mexican banks along the border. Operation Casablanca began in earnest in November 1995, after undercover agents participated in a money laundering transaction involving high level money launderers for the Cali and Juarez cartels. The investigation then expanded to include the financial infrastructure of the Juarez Cartel, including its money manager Victor Alcala Navarro, and a principal in the cartel, Jose Alvarez Tostado.

The investigation targeted both the financial infrastructure of the Juarez and Cali cartels and the financial systems used by these cartels to launder their U.S. drug proceeds. During the course of this investigation, undercover agents posed as money launderers for the cartels and met with Mexican and Venezuelan bankers who were willing to launder the cartels' illicit funds. These bankers established bogus accounts and would issue bank drafts to avoid anti-money laundering regulations. As a result of this investigation, indictments were brought against members of the Juarez and Cali Cartels and their financial brokers and bankers. One indictment charged 26 Mexican bank officials and three Mexican banks -- CONFIA, BANCOMER, and BANCA SERFIN with money laundering.

To date, Operation Casablanca has resulted in the arrest of 167 individuals and the seizure of approximately $100 million. We expect further arrests and seizures in this investigation.

We believe that Operation Casablanca represents a significant step forward to curb money laundering. However, it is only the most recent example of law enforcement's efforts to close off U.S. and foreign money laundering systems used by drug traffickers and other criminals. Today, I want to speak about all aspects of Treasury's fight against money laundering -- a three-pronged strategy aimed at preventing money laundering through regulation, detecting money laundering through investigation, and deterring money laundering through international efforts. Before I discuss our efforts, however, I want to briefly discuss the challenges we are confronting.

The Money Laundering Threat

Money laundering is the life support system of sophisticated international criminal enterprises. The ability to sanitize ill-gotten gains permits drug trafficking and other criminal groups to perpetuate, and live lavishly from, their illegal activity. But, as Casablanca demonstrates, money laundering provides a point of vulnerability for these organizations. Indeed, the steps which criminal groups must take to lend the appearance of legitimacy to their illicit profits, provide us with an invaluable opportunity to attack the criminal organizations themselves. The better we are at tracking dirty money, the better our ability to bring down the leaders of drug trafficking and other criminal groups. For while the drug kingpins can separate themselves from street-level sales, they cannot separate themselves from the profits those sales generate.

The money laundering problem we face today is increasingly international in character. The greater integration of the world economy, and the removal of barriers to the free movement of capital, have combined to create new commercial opportunities. Unfortunately, the efficiency and convenience that the global economy affords to legitimate commerce, make the job of disposing of criminal proceeds easier.

Late last year, this Committee held hearings on a money laundering system that serves as an excellent example of the scope and complexity of money laundering today -- the Colombian Black Market Peso Exchange. This system works as follows: Cocaine is shipped from Colombia to the United States where it is sold. The narcotics proceeds are then deposited by the Colombian drug cartels into U.S. bank accounts belonging to a black market peso broker in Colombia. The peso broker then sells these dollars to Colombian businessmen for pesos which are paid to the drug trafficker in exchange for the dollars. The Colombian businessmen use the dollars to purchase goods in the U.S. which are shipped to Colombia. This method permits the drug trafficker to convert dirty money -- the drug proceeds -- into clean money -- the Colombian pesos -- which can be spent legitimately.

Treasury's Response: Regulatory and Enforcement Efforts

To address this increasingly complex money laundering threat we must continue to focus our anti-money laundering efforts on both prevention and enforcement. In so doing, we cannot stop at our borders, but must promote an aggressive international campaign to ensure that all nations are vigilantly pursuing the money laundering problem.

Domestic Efforts -- Regulatory and Enforcement

Domestically, our goal is to combine effective prevention of money laundering with proactive aggressive enforcement. Leveraging Treasury's unique regulatory authority in concert with its enforcement capabilities (and those of other agencies), we seek a comprehensive approach to the money laundering problem -- one that both insulates financial institutions from criminal proceeds, and enhances the prospects for identifying launderers and disrupting their illegal schemes.

Domestic Regulatory Efforts

We are accomplishing this objective in several ways. To enhance our ability to prevent money laundering, for example, we are developing more intelligent, targeted regulations for banks and other financial institutions. In the last several years, FinCEN has been engaged in an effort to streamline regulations while actually increasing the utility of the information provided to law enforcement.

As part of the continuing process of reforming the BSA, we have introduced an invigorated system of suspicious transaction reporting. Our objective is to permit the financial sector to redirect its resources from mechanical compliance to more proactive detection methods. We are building our alliance with the U.S. financial services community, utilizing its expertise to identify potential criminal conduct within its midst.

We are also working to revitalize anti-money laundering controls for institutions other than banks. To that end, FinCEN recently issued proposed regulations expanding suspicious activity reporting to casinos and will soon add securities firms. FinCEN also is in the process of finalizing regulations requiring the registration of issuers and sellers of traveler's checks and money orders, money transmitters and other "money services" businesses. These regulations will also require certain of these institutions to report suspicious activity. Finally, FinCEN has proposed regulations that would impose a special currency reporting rule on certain outbound currency transfers stemming from Treasury's use of Geographic Targeting Orders, which I will talk about below.

Domestic Enforcement Efforts

In addition to our regulatory efforts, which are geared toward preventing the placement of illicit proceeds in our nation's financial institutions, Treasury's investigative bureaus have been working to enhance the detection and investigation of money laundering. Customs and IRS-CI in particular are aggressively pursuing investigations in which the disruption of a money laundering operation, and the arrest and prosecution of the launderers, are the primary objectives. Together, these agencies have approximately 1,100 expert financial investigators and staff dedicated to "pure" money laundering investigations. Last year alone, Customs conducted nearly 4,500 money laundering investigations. IRS-CI conducted almost 2,500.

Just last week, Customs seized more than $15 million in cash believed to be illegal drug proceeds in four separate incidents in Houston, San Diego, Newark, and Chicago. The money was destined for Colombia, Venezuela and Mexico.

Domestic Efforts -- The Comprehensive Approach

As I stated earlier, we believe our efforts are most successful when we combine prevention with enforcement to shut down entire money laundering systems. This comprehensive approach can be seen in Operation Casablanca and in Treasury's use of Geographic Targeting Orders, or GTOs.

The Comprehensive Approach -- Casablanca

On its face, Casablanca may appear to be strictly an enforcement action. In light of its own regulatory authority, Treasury understands how law enforcement can benefit by working with regulators. In the case of Casablanca, the involvement of the Federal Reserve Board made it possible for it to immediately issue temporary cease and desist orders to six banks (Banamex, Banca Serfin, Bital, Bancomer and Banco Santander, Banco Industrial de Venezuela). The orders require these banks to describe their current anti-money laundering programs, to tell the Federal Reserve their understanding of what broke and to submit an acceptable plan to fix what was broken.

More broadly, Treasury is reviewing its regulations to see what, if any, changes are needed to better prevent and detect money laundering schemes such as those utilized in Casablanca.

The Comprehensive Approach -- GTOs

Another example of Treasury's comprehensive approach is its use of Geographic Targeting Orders -- GTOs. In 1996 and 1997, Treasury, working with the Department of Justice, issued a number of GTOs mandating additional record-keeping and reporting requirements for certain money transmitters sending money to Colombia and the Dominican Republic. As with Casablanca, in the case of the GTOs, investigative work led to regulatory action. With the GTOs, however, the regulatory action also spawned enforcement activity.

Through the work of a Treasury-led task force, Operation El Dorado, it became apparent that Colombian drug traffickers were using certain money remitters in the New York City area to launder drug cash. The evidence demonstrated that 12 remitters had funneled approximately $800 million a year to Colombia. To account for this money legitimately, each Colombian household in the area would have had to wire $30,000 to Colombia each year -- an amount which exceeds the $27,000 average annual income for this community.

To address this problem, Treasury invoked a previously little-used statutory provision which grants the Secretary of the Treasury authority to require special reporting and record keeping by financial institutions in specific geographic areas where necessary to fulfill the purposes of the Bank Secrecy Act.

In August 1996, Treasury issued a GTO aimed at remittances from the New York City area to Colombia. It required 12 New York area money remitters and their approximately 1,600 agents to obtain and report identifying information on all cash remittances of $750 or more to Colombia. A second GTO was signed in October 1996, extending the heightened reporting requirements to 10 additional remitters and their agents. The GTOs were extended by Treasury several more times before expiring in October, 1997. Following the Colombian GTOs, Treasury issued a series of similar GTOs covering money remittances sent to the Dominican Republic by certain remitters in New York, New Jersey and Puerto Rico.

While we are still reviewing the effect of the Dominican Republic GTOs, it is clear that the Colombian GTOs had a significant impact on the flow of drug proceeds through the targeted remitters. Several of the remitters targeted under the GTOs stopped sending funds to Colombia altogether, while many others sent significantly lower amounts. Thirteen individuals and two corporations have been indicted or have pled guilty to structuring transactions to avoid the GTOs. Several others are under investigation.

The GTOs also forced the traffickers to resort to other, more difficult tactics to move their profits back to Colombia. In the first six months after the Colombian GTOs went into effect, Customs' currency seizures at East Coast ports of entry increased approximately four hundred percent as traffickers were forced to move money in bulk.

The Colombian GTOs represent the model for intelligent money laundering control. Beyond using traditional law enforcement techniques to address discrete instances of criminal activity, the GTOs marshaled Treasury's regulatory authority to identify and correct a weakness that had penetrated a small but important part of the money transmitter industry. This preventative effort, in turn, triggered a wave of enforcement activity, as money launderers were forced to resort to riskier means of moving their funds once the vulnerabilities in the transmitter industry had been remedied. Finally, the evidence gleaned through the GTO experience prompted Treasury to propose a more permanent solution to the problems it sought to address. FinCEN is in the process of finalizing the three regulations it proposed last May to deal with money services businesses. The regulatory process has emphasized frank and full discussions with industry in five open meetings and the review of more than 80 comments. The final rules will build on the GTO experience by dealing with abuse in sectors of the money remitter industry and giving us the tools to carry on the work begun by the El Dorado Task Force.

International Efforts

Through innovation in regulation and enforcement, then, we are working to make U.S. financial channels less user friendly to criminal enterprises. Indeed, as our experiences in Casablanca and with the GTOs demonstrate, we have been successful at forcing drug traffickers to alter their money laundering schemes. But these are only two fronts in the battle.

Drug traffickers and other criminal organizations will continue to search for the path of least resistance to launder their money. Thus, no country's individual efforts -- whether in the legal, regulatory, or law enforcement arena -- will be sufficient given the relative ease with which money flows across borders.

In this regard, important strides have been made through multilateral initiatives. Chief among those have been the Financial Action Task Force, or "FATF." The FATF is an independent, international group formed in 1989 by the G-7 nations to cultivate the development of effective anti-money laundering controls and enhance cooperation in investigations among its membership and around the globe. In the nine years since its inception, the FATF has made significant progress. The FATF 40 Recommendations, issued originally in 1990 and updated in 1996, serve as the principal benchmark for governments addressing the legal, financial and regulatory aspects of money laundering. Moreover, prior to the establishment of the FATF, money laundering was a criminal offense only in the U.S. and a couple of other nations. Today, all 26 FATF member nations have such laws in place.

Over the next several years, the FATF will expand its membership to include strategically important countries from under-represented parts of the world, and foster the development of FATF-style regional bodies, such as the Caribbean Financial Action Task Force and the Asia Pacific Group.

A related initiative designed to build upon the FATF's success in the Western Hemisphere has begun under the auspices of the Summit of the Americas. As a follow up to the 1994 Summit in Miami, Secretary Rubin convened a conference of Finance and Justice Ministers representing 29 of the 34 democracies of the region in Buenos Aires in December 1995. The purpose of the Buenos Aires conference was to develop a coordinated, hemispheric strategy to combat money laundering. The conference produced an agreement on the basic elements of such a strategy, including the need to: criminalize the laundering of the proceeds of drug trafficking and other serious crimes; adopt reporting and record keeping regulations to protect financial institutions; take steps to enhance international cooperation in money laundering investigations; and create financial intelligence units that specialize in the collection and analysis of pertinent financial records in order to help track criminals' financial activities.

The Summit process has yielded promising results. Over one third of the Summit nations have passed legislation criminalizing money laundering, or have issued anti-money laundering regulations. Many others are considering doing so. Four Summit countries have established financial intelligence units and a fifth, Paraguay, is expected to have a financial intelligence unit in place by July 1, 1998.

In addition to multilateral efforts, Treasury -- in conjunction with our partners at the Departments of Justice and State -- works bilaterally with a number of countries to strengthen the global fight against money laundering. In so doing, we provide assistance in a wide-range of areas. Treasury and Justice have assisted Mexico, Panama, El Salvador and others in drafting anti-money laundering legislation and regulations. FinCEN has provided technical assistance to Canada, Venezuela, Argentina, and other countries regarding the establishment of financial intelligence units and has trained analysts staffing such units. In the last year, IRS-CI has trained foreign investigators and prosecutors from, among other places, Russia, El Salvador, Trinidad and Tobago, and Brazil. In fact, just last week, IRS-CI and Customs participated in a training session for Colombian prosecutors and investigators sponsored by the Department of Justice. Through these multilateral and bilateral efforts we will continue to make it more difficult for criminals to launder their illicit funds in all countries.

IEEPA

The final component of Treasury's international strategy is the IEEPA Specially Designated Narcotics Traffickers program directed against the Colombian drug cartels. This economic sanctions program against the Colombian narcotics traffickers was imposed by President Clinton through Executive Order 12978 issued under authority of the International Emergency Economic Powers Act. The principal tool for implementing the IEEPA narcotics trafficking sanctions is the list of Specially Designated Narcotics Traffickers ("SDNTs") developed by Treasury's Office of Foreign Assets Control ("OFAC") in close consultation with the Justice and State Departments.

The objectives of the SDNT program are to identify, expose, isolate and incapacitate the businesses and agents of the Colombian cartels and to deny them access to the U.S. financial system and to the benefits of trade and transactions involving United States businesses and individuals. For example, SDNTs are denied access to banking services in the U.S. and Colombia, and existing SDNT accounts have been terminated. To date, OFAC has identified nearly 400 closed Colombian bank accounts affecting over 200 SDNTs. OFAC has issued seven lists identifying SDNTs since the inception of the IEEPA sanctions in October 1995. As of today, OFAC has listed 451 companies and individuals as SDNTs against which the prohibitions and blocking authorities of Executive Order 12978 apply. The SDNT list includes the four kingpins of the Cali cartel named by President Clinton as significant narcotics traffickers, the newly-designated significant North Coast trafficker, Julio Caesar Nasser David, 154 companies, and 292 additional individuals involved in the ownership or management of the Colombian drug cartels' "legitimate" business empire. Work is underway on naming more SDNTs.

Next Steps

The drug traffickers and other criminals never rest in their attempts to find new, easier methods of laundering their dirty money. We must be ever vigilant in our efforts to stop them. Just as we continue to hurt the criminal groups through enforcement activity, we also continue to revise our regulations to respond to new threats. To ensure that prosecutors and investigators in the field are informed about regulatory and other tools as they are developed, Treasury and Justice co-sponsor a series of money laundering conferences. To date, conference attendees, which include nearly 200 federal investigators and prosecutors from across the country, have discussed Geographic Targeting Orders, FinCEN's Suspicious Activity Reporting System, and money laundering trends including the use money orders and bulk cash shipments.

Additionally, our efforts to continually improve our anti-money laundering regime include reviewing relevant law to see if changes need to be made. In this regard, I would like to encourage the Committee to support President Clinton's International Crime Control Act. The new authorities contained in the Act would give Treasury more weapons to fight a wide-range of international crimes, including money laundering. I particularly want to highlight the provision permitting Customs to search outbound mail.

Currently, the Customs Service conducts legal, warrantless border searches in virtually every situation in which merchandise crosses the border. The one exception is outbound international mail sent through the U.S. Postal Service. We are certain that this fact has not gone unnoticed by international criminals and terrorists, who are only too happy to take advantage of this relatively safe and inexpensive means of transporting contraband and cash out of the United States. Express mail parcels can accommodate up to $90,000 in $100 bills, making it one of the most efficient and cost-effective means of smuggling currency out of the country. Similarly, a single international letter class parcel can hold as much as $180,000 in $100 bills. The outbound mail provision of the President's International Crime Control Act would make it easier for Customs to interdict such shipments.

In addition to the President's International Crime Control Act, I also want to take a moment to comment on your bill, Mr. Chairman, as well as the bill introduced by Representative Velazquez. In doing so, however, I would only note that I must limit my comments to technical matters pending a more detailed analysis and formal position by the Administration on each of the bills.

The money laundering problem is complex and extends across the country and beyond our borders, and potentially involves different sectors of the financial services industry. The Department of the Treasury appreciates the efforts made by this committee and its members to help us in the fight against money laundering, including the development of legislation to enhance anti-money laundering measures.

"Money Laundering Deterrence Act of 1998" (Leach Bill)

The Money Laundering Deterrence Act contains a number of provisions with objectives that could further our fight against money laundering.

In particular, we appreciate the attempt the bill makes to address the use of form 8300 to assist law enforcement investigations of money laundering and financial crimes. This form is essentially the equivalent of a Currency Transaction Report (CTR) for non-financial businesses such as car dealerships. Changing the status of this form so that it is required by the Bank Secrecy Act rather than the Internal Revenue Code could provide valuable information to federal, state, and local law enforcement organizations conducting financial crime investigations and tracking down the laundering of drug profits and other criminal proceeds. We also appreciate the effort made in this bill to extend a "safe harbor" from liability for reporting suspicious financial activity. As we view it, the provisions in the bill would grant immunity to accountants who report suspicious activities and would make clear that a "safe harbor" for suspicious activity reporting applies to arbitration.

This legislation also expands BSA summons authority, which could be used by FinCEN to develop a modern civil enforcement program with easier access to important information. This provision would clarify the scope of laws covering BSA administrative summons to cover compliance audits and investigations related to the filing of BSA reports for any person.

In one of its sections, the bill also attempts to clarify penalties for violations of GTO's and funds transfer rules. The bill would make plain that violations of GTO's and of wire transfer rules constitute violations of law, and that structuring violations extend to transactions that are broken up to avoid the $3,000 floor for wire transfer record-keeping requirements. These changes solve important technical problems.

"Money Laundering and Related Financial Crimes Strategy Act of 1998" (Velazquez Bill)

We appreciate that Congresswoman Velazquez's Money Laundering Strategy Act recognizes the scope of the money laundering problem and attempts to develop a mechanism to address these challenges.

An anti-money laundering strategy could prove to be useful in setting priorities and communicating them to Congress and the public. Money laundering enforcement is complex and resource-intensive. Enforcement of money laundering laws could benefits from proper coordination among federal, state, and local law enforcement.

We also appreciate the bill's effort to make additional resources for anti-money laundering activities available to the men and women fighting money laundering in State and local law enforcement. Financial crime investigations are complex and require specialized expertise, as well as resource commitments to follow leads that take time to develop. Like our some of recent investigations indicate, cases themselves may span years and are information-intensive. Because of this, State and local law enforcement can benefit from additional resources and expertise to fully join the fight against money laundering.

"Money Laundering Act of 1998" (McCollum Bill)

The Money Laundering Act of 1998 introduced by Congressman McCollum includes provisions that were in a money laundering bill the Administration supports. This bill could also help us in our continuing fight against money laundering, both in the United States and abroad.

The Administration has previously supported a bill containing most, though not all, of the provisions in this proposal. This bill was primarily designed to address international laundering of criminal proceeds, either by criminals committing offenses in the U.S. and attempting to conceal their gains abroad, or by criminals who commit offenses in other nations and attempt to use our financial system to launder their profits. For example, Section 8 of this legislation would expand the predicate offenses for money laundering to include a number of foreign crimes, such as terrorism, fraud and corruption, and crimes of violence. Section 16 also raises the standard necessary for successfully asserting the "innocent owner" defense if individuals buy tainted profits on the so-called "Black Market Peso Exchange." Under this legislation, such a claim would be subject to the legal standard applicable in drug cases, which requires a person to establish that he or she was a bona fide purchaser who took all reasonable affirmative steps to make sure that the money was not derived from a criminal offense.

The Justice Department took the lead in drafting the original legislation from which this bill draws, and will likely have further comments about other significant provisions contained in this bill.

Further collaboration

As you consider all of this legislation, we want to be of the greatest possible assistance in giving you the best considered view regarding technical aspects of the bills. These anti-money laundering bills highlight the Committee's determined support to assist federal law enforcement and regulators in the fight against laundering of dirty money. We would like to continue to work with each of you as you move forward with your respective bills.

Once again, I would like to thank the Committee for allowing me to speak today on this very important issue. I look forward to continuing our work to combat money laundering in the U.S. and abroad. Thank you.