16 June 1998
Source:
http://www.usia.gov/current/news/topic/global/98061208.lgi.html?/products/washfile/newsitem.shtml
United States Information Service Washington File
12 June 1998
(Says banks should know their customers) (3620)
WASHINGTON -- "Banking organizations and their employees are the first
and strongest line of defense against financial crimes and, in
particular, money laundering," says Federal Reserve official Herbert
Biern.
Testifying June 11 before the House Committee on Banking and Financial
Services, Biern described the measures undertaken by Federal Reserve
examiners to assist bankers in detecting and reporting suspicious
transactions. "A banking organization's best protection against
criminal activities is its own policies and procedures designed to
identify and then reject potentially illegal or damaging
transactions," he explained.
The Federal Reserve has a responsibility to "evaluate the
effectiveness of a banking organization's controls and procedures,"
Biern said, and provides training to its staffers "on the latest
trends in money laundering, as well as techniques for identifying
suspicious or unusual transactions." In this way, he added, bankers
are alerted to the potential for misuse of "cash transactions,
exemptions, the sale of monetary instruments and fund transfers."
Nevertheless, Biern pointed out that the Federal Reserve necessarily
plays a limited role in preventing or suspending money laundering.
"Even with appropriate training, it is still difficult for even the
most experienced examiners to detect sophisticated money laundering
schemes during the course of an examination," he conceded. "In this
regard, I must emphasize that we do not expect our examiners to act as
criminal investigators. As a federal bank supervisory agency, we view
the Federal Reserve's role as auxiliary to the legitimate law
enforcement duties of criminal justice agencies."
Yet at times, Biern said, the Federal Reserve will take additional
action if circumstances warrant it. "In recent years the Federal
Reserve has determined that in some instances it is necessary to go
beyond the scope of an ordinary bank examination to determine if
violations of law have occurred," he told Congress. Such
circumstances, he remarked, led to the Federal Reserve's involvement
in Operation Casablanca, the three-year undercover investigation that
recently revealed the complicity of several Mexican banks in money
laundering activities.
"The Federal Reserve has a vital interest in protecting the banking
system from criminal elements," Biern concluded. "Consequently, we
will continue our cooperative efforts with other bank supervisors and
the law enforcement community to develop and implement effective
anti-money laundering programs addressing the ever-changing strategies
of criminals who attempt to launder their illicit funds through
banking organizations here and abroad."
Following is the text of his statement, as prepared for delivery:
(begin text)
Statement of
Herbert A. Biern
Associate Director
Division of Banking Supervision and Regulation
Board of Governors of the Federal Reserve System
before the
Committee on Banking and Financial Services
U.S. House of Representatives
June 11, 1998
Mr. Chairman, I am pleased to appear before the Committee on Banking
and Financial Services to discuss the Federal Reserve's role in the
government's anti-money laundering efforts and our interagency efforts
to develop and issue effective "Know Your Customer" rules for the
banking industry. As you requested, I will also describe in general
terms the Federal Reserve's participation in Operation Casablanca and
the issuance of enforcement orders against the foreign banking
organizations with U.S. offices identified in the operation. Finally,
I will provide some comments on proposed anti-money laundering
legislation that you and the members of the Committee are considering.
First, I want to emphasize that the Federal Reserve places a high
priority on participating in the government's programs designed to
attack the laundering of proceeds of illegal activities through our
nation's financial institutions. As a result, over the past several
years Federal Reserve staff has engaged extensively in anti-money
laundering endeavors on its own and in coordination with U.S. and
international bank supervisory agencies and law enforcement
authorities.
As bank supervisors, the Federal Reserve believes that it is necessary
to take reasonable and prudent steps to assure that banking
organizations do not knowingly engage in money laundering. For this
reason, and to support our law enforcement agencies in their efforts
to combat money laundering, the Federal Reserve's efforts to attack
the money laundering problem continue to be one of our highest bank
supervisory priorities. As I will describe in more detail, the Federal
Reserve has played, and will continue to play, a prominent role in the
federal government's program to reduce and hopefully eliminate money
laundering activities through U.S. financial institutions.
Federal Reserve Role
Banking organizations and their employees are the first and strongest
line of defense against financial crimes and, in particular, money
laundering. It is for this reason that the Federal Reserve emphasizes
the importance of financial institutions putting in place controls to
protect themselves and their customers from illicit activities. A
banking organization's best protection against criminal activities is
its own policies and procedures designed to identify and understand
with whom it is conducting business and having the capability to
identify and then reject potentially illegal or damaging transactions.
For this reason, the Federal Reserve and the other regulators have
implemented various directives for banking organizations to establish
internal controls and procedures designed to detect unusual or
suspicious transactions that, if unchecked, could lead to criminal
misconduct, including money laundering.
To understand and properly evaluate the effectiveness of a banking
organization's controls and procedures, Federal Reserve staff has
developed comprehensive examination procedures and manuals. In
November 1997, the Federal Reserve issued its newly revised
risk-focused Bank Secrecy Act examination procedures. These enhanced
examination procedures specifically address anti-money laundering
compliance. For example, the examination procedures direct examiners
to review written policies of an institution to assess whether senior
management has included anti-money laundering procedures in all of the
institution's operational areas, including retail operations, credit,
private banking, and trust. Examiners are also directed to review
existing "Know Your Customer" policies as a preventive measure and as
a means to detect and report suspicious money laundering-related
activities. In addition, specific examination procedures direct the
examiner to determine the effectiveness of systems used by the
institution to identify unusual or suspicious activities with regard
to cash transactions, exemptions, the sale of monetary instruments and
funds transfers. Examiners are also directed to review audit testing
procedures to determine if audits are being used to detect, deter and
report money laundering activities. Training programs for relevant
bank staff in the areas of Bank Secrecy Act compliance and anti-money
laundering controls are also evaluated.
Federal Reserve examiners are provided with comprehensive training to
assist them in identifying appropriate bank policies and procedures.
We also provide training to our examiners on the latest trends in
money laundering, as well as techniques for identifying suspicious or
unusual transactions. Examiners evaluate the viability of a bank's
anti-money laundering policies and procedures designed to enable the
bank to, among other things, detect and report unusual or suspicious
transactions. However, even with appropriate training, it is still
difficult for even the most experienced examiners to detect
sophisticated money laundering schemes during the course of an
examination. In this regard, I must emphasize that we do not expect
our examiners to act as criminal investigators. As a federal bank
supervisory agency, we view the Federal Reserve's role as auxiliary to
the legitimate law enforcement duties of criminal justice agencies.
Our examiners do not, nor should they, possess the necessary tools
required to fully investigate and prosecute criminal conduct. If money
laundering transactions are identified or strongly suspected during
the course of an examination, we immediately notify our law
enforcement colleagues.
Having said this, however, in recent years the Federal Reserve has
determined that in some instances it is necessary to go beyond the
scope of an ordinary bank examination to determine if violations of
law have occurred. For this reason, in 1993 the Special Investigations
Section was created in the Board's bank supervision division. This
unit's function, in part, continues to be that of reviewing
information developed during the course of an examination and
conducting a specialized inquiry to determine what, if any, laws have
been violated through activity conducted at a banking organization.
Section staff notifies the appropriate law enforcement agency when
apparent criminal violations are detected, and provides support and
technical assistance whenever requested. Recent undertakings of this
section include uncovering information that led to the conviction for
criminal activity related to money laundering and fraud of the Bangkok
Metropolitan Bank, a foreign banking organization that subsequently
was ordered by the Federal Reserve to cease all operations in the
United States, and coordinating the Federal Reserve's recent
involvement in Operation Casablanca.
Coordinated Anti-Money Laundering Efforts
In addition to the Federal Reserve's efforts to develop appropriate
anti-money laundering-related policies and procedures for the domestic
and foreign financial institutions that we supervise and our
examination for compliance with those policies and procedures, staff
of the Federal Reserve has taken an active role among federal bank
supervisors in the law enforcement community's battle to deter money
laundering by providing expertise for law enforcement initiatives and
training to various government agencies.
The Federal Reserve routinely coordinates with federal law enforcement
agencies with regard to potential criminal matters, including
anti-money laundering activities. The scope of this coordination
ranges from our significant work on the development and implementation
of the new interagency Suspicious Activity Reporting system to the
referral of illicit activities on a case-by-case basis to law
enforcement agencies resulting from examinations of banking
organizations.
Training provided by Federal Reserve staff to law enforcement agencies
continues to include programs at the U.S. Department of the Treasury's
Federal Law Enforcement Training Center and at the FBI Academy, as
well as training for the U.S. Secret Service and the U.S. Customs
Service. Additionally, Federal Reserve staff has provided training in
anti-money laundering procedures to foreign law enforcement officials
and central bank supervisory personnel in such countries as Russia,
Poland, Hungary, the Czech Republic, and a number of the emerging
Baltic states, as well as Brazil, Ecuador, Argentina, China and
several other countries in the Middle and Far East.
The Federal Reserve's foreign initiatives also include our staff's
active participation in the Financial Action Task Force (FATF), which
was established by the G-7 group of countries. Board staff has
contributed significantly to the FATF's mission of educating countries
around the world in anti-money laundering and fraud prevention
efforts. The Federal Reserve also participated in the development of
guidance related to serious financial crimes, including money
laundering, that was adopted at the recently concluded G-7 ministerial
meeting at Birmingham, England.
In addition, the Federal Reserve is a founding member and an active
participant in the well regarded interagency Bank Fraud Working Group,
which consists of representatives of 13 federal law enforcement and
bank and securities supervisory agencies. Among other things, this
group, which has been meeting on a monthly basis since the mid-1980s,
has coordinated the dissemination of relevant and timely information
concerning criminal misconduct involving various banking organizations
and their officials.
Know Your Customer
The Federal Reserve believes that the most prudent and effective means
by which banking organizations can protect themselves from allowing
criminal transactions to be conducted at, or through, their
institutions are for the institutions to adopt what has become known
as "Know Your Customer" policies and procedures. Illicit activities,
such as money laundering, fraud, and other transactions designed to
assist criminals in their illegal ventures, pose a serious threat to
the integrity and reputation of financial institutions. When
transactions at financial institutions involving illicit funds, such
as money laundering activities, are revealed, such transactions
invariably damage the reputation of the institution involved. While it
is practically impossible to identify every transaction at a financial
institution that is potentially illegal or is being conducted to
assist criminals in the movement of illegally derived funds, it is
fundamental for safe and sound operations that financial institutions
take reasonable measures to identify adequately who they conduct
business with, understand the legitimate transactions to be conducted
by those customers and, consequently, identify those transactions
conducted by their customers that are unusual or suspicious in nature.
In February 1996, Governor Kelley directed Federal Reserve staff to
begin the development of a "Know Your Customer" regulation. The first
step in this process was an extensive Federal Reserve effort in 1996
and 1997 to gain a comprehensive understanding of the current "Know
Your Customer" policies and procedures of banking organizations
operating in the United States and abroad, including the private
banking activities of large domestic and foreign banking
organizations. Among the actions taken by Federal Reserve staff during
this time period were the examinations of several private banking
operations in order to determine, among other things, how they have
implemented their own "Know Your Customer" policies and procedures. As
a result of the year-long private banking review, the Federal Reserve
developed and issued a "sound practices" paper on private banking in
July 1997. Information gathered from the private banking examinations
provided staff with some basic information that was necessary before
draft regulations covering banking organizations' relationships with
their customers could be prepared.
In the late summer of 1997, the staff of the Federal Reserve prepared
a preliminary draft regulation, and then began discussions with the
other federal bank regulators in an effort to design a coordinated
regulation that would address the "Know Your Customer" activities of
all federally supervised banks, thrifts, and credit unions.
Representatives of the five federal bank supervisory agencies, along
with a representative from Treasury's Financial Crimes Enforcement
Network (FinCEN), have been meeting over the past year. Hopefully, we
are nearing the end of what has been a complex process. Barring any
unforseen complications, we expect that the regulators should be able
to issue coordinated notices of proposed rulemaking for "Know Your
Customer" regulations that would be applicable to bank as well as
non-bank financial institutions within the next few months.
The objective of the "Know Your Customer" regulation will be quite
simple. The regulation is designed to protect the reputation of the
bank, facilitate the bank's compliance with all applicable statutes
and regulations and with safe and sound banking practices, and protect
the bank from becoming a vehicle for, or a victim of, illegal
activities perpetrated by its customers. One of the benefits of
developing and implementing a "Know Your Customer" program is that
having an effective program should enhance the relationship between
the bank and its legitimate customers.
As the regulators' staff now envision the requirements of the
regulation, banking organizations would be required to develop a "Know
Your Customer" program that would allow them to identify their
customers at the inception of the customer relationship, and
understand the source of funds and the normal and expected
transactions of their customers. The program should also be designed
to allow banking organizations to monitor the transactions of their
customers to ensure that they are consistent with their expected
transactions, and identify and report, as necessary, those
transactions that are unusual or suspicious.
The requirements of the "Know Your Customer" program are expected to
be set out in general terms, reflecting the view that a "Know Your
Customer" program that is appropriate for one institution may not be
appropriate for another. Under the proposed regulation, we would
expect each banking organization to design a program that is
appropriate to that organization, given its size and complexity, the
nature and extent of its activities, its customer base and the levels
of risk associated with its various customers and their transactions.
The Federal Reserve has long advocated this approach as opposed to a
detailed regulation that imposes the same list of requirements on
every organization regardless of its specific circumstances and the
scope of its business activities.
Operation Casablanca
As the members of the committee are aware, Operation Casablanca was
recently made public with the announcement of criminal indictments
that included charges of money laundering being brought against
numerous bankers, as well as three Mexican banks --two of which
operate offices in the United States. As I am sure the committee will
understand, I cannot provide specific operational information about
Operation Casablanca because the law enforcement agencies responsible
for the operation are still working on various aspects of the case.
Similarly, confidentiality requirements preclude me from discussing
supervisory information about the banking organizations that allegedly
may have been involved in improper activities identified during
Operation Casablanca. Within these parameters, I would like to
describe briefly the Federal Reserve's involvement in the operation.
The Federal Reserve was first made aware of Operation Casablanca in
late 1995 when staff was approached by Special Agents of the U.S.
Customs Service, the lead agency for Operation Casablanca. The agents
requested technical assistance with regard to certain banking aspects
of an undercover money laundering sting operation. From that time on,
Federal Reserve staff has provided, and continues to provide,
assistance to the U.S. Customs Service and the Department of Justice
as they complete the investigation and as they now prepare for the
various prosecutions resulting from the recently announced
indictments. Some of the assistance that we provided included
verification as to the existence of banking organizations and the
geographic location of their operations, explanations of procedures
for the movement of currency between banking organizations and within
the Federal Reserve System, training on check clearing and funds
transfer procedures, describing the various procedures banks follow in
complying with regulatory reporting requirements such as the filing of
Suspicious Activity Reports and Currency Transaction Reports, and
providing assistance in the post arrest interviews of the bankers who
were arrested in the United States.
On May 18th -- when the Departments of Justice and Treasury jointly
announced the indictments of several banks and bankers resulting from
Operation Casablanca -- the Board issued enforcement actions, in this
case temporary cease and desist orders, against four Mexican banks and
one Spanish bank with a Mexican bank subsidiary. Two days later, when
several Venezuelan bankers and alleged money launderers were arrested,
the Board took a similar enforcement action against a Venezuelan bank
with U.S. operations. In total, the Board issued six temporary cease
and desist orders resulting from Operation Casablanca.
Specifically, the Board ordered each of the financial institutions to
provide a detailed description of the anti-money laundering policies
and procedures that it had in place, as well as a detailed description
of its understandings regarding the deficiencies in such policies and
procedures that could have given rise to the apparent illegal actions
taken by its employees. Additionally, the Board ordered each
institution to submit an acceptable plan detailing the steps that have
been and will be implemented to ensure that conduct, such as that
which has already occurred, is not occurring and will not occur in the
future. In conjunction with the responses expected from the six
banking organizations, the Federal Reserve has begun in-depth targeted
reviews of their anti-money laundering policies and procedures, and
staff continues to monitor each of the implicated banks with U.S.
operations.
Proposed Legislation
Finally, you have asked us to comment on legislation you proposed,
entitled the "Money Laundering Deterrence Act of 1998," as well as
legislation proposed by Congresswoman Velazquez, entitled the "Money
Laundering and Financial Crimes Strategy Act of 1998." While the Board
has not had an opportunity to review either proposal, as a general
proposition the Federal Reserve has always supported constructive
efforts to better and more efficiently attack money laundering
activities. From staff's review of the proposals, it appears that the
legislation, among other things, would increase the tools available to
law enforcement authorities to combat money laundering on the one
hand, and establish a coordinated government-wide effort against money
laundering on the other.
With specific regard to the "Money Laundering Deterrence Act of 1998,"
staff is particularly pleased with the clarification of some issues
related to the disclosure of Suspicious Activity Reports. The filing
of Suspicious Activity Reports by banking organizations is a vital
tool for the government's anti-money laundering efforts, and your
legislative proposal enhances the organizations' ability to
communicate with law enforcement and bank supervisors in a timely and
effective manner without the threat of inappropriate legal challenges.
We also appreciate the importance that the proposed legislation places
on "Know Your Customer" regulations as an integral component of an
effective government anti-money laundering program.
With respect to the "Money Laundering and Financial Crimes Strategy
Act of 1998," we believe that coordination already exists among and
between the various governmental bodies that participate in anti-money
laundering efforts. If the Congress were to determine that the
development of a national strategy in this area is appropriate, then
we would welcome the opportunity to participate in such an initiative.
Conclusion
Over the last several years, the Federal Reserve has undertaken
extensive efforts to develop programs, procedures and systems to
better detect and deter illegal money laundering activities at
individual banking organizations as well as address systemic issues
related to financial institutions' compliance with applicable
anti-money laundering laws and regulations, including the Bank Secrecy
Act. The Federal Reserve has also provided training and technical
assistance to law enforcement agencies participating in the
government's anti-money laundering efforts and to international
banking and law enforcement authorities.
These actions underscore the Federal Reserve's significant commitment
to the bank regulatory community's anti-money laundering mission. The
Federal Reserve has a vital interest in protecting the banking system
from criminal elements. Consequently, we will continue our cooperative
efforts with other bank supervisors and the law enforcement community
to develop and implement effective anti-money laundering programs
addressing the ever-changing strategies of criminals who attempt to
launder their illicit funds through banking organizations here and
abroad.
(end text)