S. HRG. 108–902 POLICIES TO ENFORCE THE BANK SECRECY ACT AND PREVENT MONEY LAUNDERING IN MONEY SERVICES BUSINESSES AND THE GAMING INDUSTRY HEARING BEFORE THE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS UNITED STATES SENATE ONE HUNDRED EIGHTH CONGRESS SECOND SESSION ON EXAMINATION OF THE EFFECTIVENESS OF U.S. POLICIES TO ENFORCE THE BANK SECRECY ACT AND TO PREVENT MONEY LAUNDERING IN MONEY SERVICES BUSINESSES AND THE GAMING INDUSTRY SEPTEMBER 28, 2004 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html U.S. GOVERNMENT PRINTING OFFICE 27–328 PDF WASHINGTON : 2006 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate 11-MAY-2000 16:52 May 11, 2006 Jkt 025856 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 27328.TXT SBANK4 PsN: SBANK4 COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS RICHARD C. SHELBY, Alabama, Chairman ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota CHUCK HAGEL, Nebraska JACK REED, Rhode Island RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky EVAN BAYH, Indiana MIKE CRAPO, Idaho ZELL MILLER, Georgia JOHN E. SUNUNU, New Hampshire THOMAS R. CARPER, Delaware ELIZABETH DOLE, North Carolina DEBBIE STABENOW, Michigan LINCOLN D. CHAFEE, Rhode Island JON S. CORZINE, New Jersey KATHLEEN L. CASEY, Staff Director and Counsel STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel SKIP FISCHER, Senior Professional Staff JOHN O’HARA, Senior Investigative Counsel STEPHEN R. KROLL, Democratic Special Counsel JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator GEORGE E. WHITTLE, Editor (II) VerDate 11-MAY-2000 16:52 May 11, 2006 Jkt 025856 PO 00000 Frm 00002 Fmt 0486 Sfmt 0486 27328.TXT SBANK4 PsN: SBANK4 CONTENTS TUESDAY, SEPTEMBER 28, 2004 Page Opening statement of Chairman Shelby ................................................................ 1 Opening statements, comments, or prepared statements of: Senator Dole ...................................................................................................... 2 Senator Sarbanes .............................................................................................. 3 Senator Bunning ............................................................................................... 5 Senator Carper ................................................................................................. 18 Senator Allard ................................................................................................... 22 WITNESSES William J. Fox, Director, Financial Crimes Enforcement Network, U.S. De- partment of the Treasury .................................................................................... 5 Prepared statement .......................................................................................... 40 Response to written questions of Senator Shelby .......................................... 61 Kevin Brown, Commissioner, Small Business/Self-Employed Division, Internal Revenue Service ................................................................................................... 8 Prepared statement .......................................................................................... 46 Response to written questions of: Senator Sarbanes ...................................................................................... 68 Senator Carper .......................................................................................... 68 Diana L. Taylor, Superintendent of Banks, State of New York .......................... 10 Prepared statement .......................................................................................... 50 Frank J. Fahrenkopf, Jr., President and CEO, American Gaming Association . 25 Prepared statement .......................................................................................... 54 Joseph Cachey, III, Deputy Chief Compliance Officer and Counsel, AML Global Compliance, Western Union Financial Services, Inc. ........................... 28 Prepared statement .......................................................................................... 55 Ezra C. Levine, Counsel, the Non-Bank Funds Transmitters Group and Part- ner, Howery, Simon, Arnold & White, LLP ....................................................... 30 Prepared statement .......................................................................................... 58 Response to written questions of Senator Shelby .......................................... 69 ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD Letter to Senator Richard C. Shelby from Frank J. Fahrenkopf, Jr., President and CEO, American Gaming Association, dated October 20, 2004 ................. 72 (III) VerDate 11-MAY-2000 16:52 May 11, 2006 Jkt 025856 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 27328.TXT SBANK4 PsN: SBANK4 VerDate 11-MAY-2000 16:52 May 11, 2006 Jkt 025856 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 27328.TXT SBANK4 PsN: SBANK4 POLICIES TO ENFORCE THE BANK SECRECY ACT AND PREVENT MONEY LAUNDERING IN MONEY SERVICES BUSINESSES AND THE GAMING INDUSTRY TUESDAY, SEPTEMBER 28, 2004 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The Committee met at 10:02 a.m., in room SD–538, Dirksen Sen- ate Office Building, Senator Richard C. Shelby (Chairman of the Committee) presiding. OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY Chairman SHELBY. This hearing will come to order. This morning, the Senate Banking Committee continues its ex- amination of the use of banks and other financial institutions for the laundering of money derived from criminal activity and for the possible financing of terrorist operations. In fact, the subject of this hearing is not banks at all, except to the degree that they transi- tion into the financial services sector, previously the domain of other institutions. Previous hearings in the Committee’s series on terrorist financ- ing have logically focused on the banking industry. With primary jurisdiction over the banks and the Bank Secrecy Act, one of the principal legal mechanisms for combating money laundering, the Banking Committee has sought to draw as complete an under- standing as possible of those institutions’ continuing vulnerability to abuse by those who seek to harm this Nation. The easy work, however, has been done. Today, comes the hard part. Relatively speaking, banks are easy. We can, to a large de- gree, get our arms around the problems they pose for preventing money laundering. Today’s hearing, however, begins our examina- tion into an entire other realm of financial institutions. If banks represent a fairly well-defined institution into which we can peer for insights and over which we can ensure some reasonable degree of oversight, money services businesses and casinos present prob- lems on a scale that dwarf anything else. There are an estimated 15,000 licensed money services businesses and another 160,000 un- licensed ones. That excludes 40,000 post offices, each of which func- tion as a money services business by issuing money orders. If our regulatory agencies are overextended trying to maintain adequate oversight of banks—and history indicates there is vast room for im- (1) VerDate 11-MAY-2000 16:52 May 11, 2006 Jkt 025856 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 27328.TXT SBANK4 PsN: SBANK4 2 provement—then the challenge of preventing abuse of nonbank money services businesses is of several magnitudes greater. Similarly, casinos exist for the sole purpose of transferring cash, generally from your pockets to the casinos’ vaults. The amount of money that filters through the hands of casinos has always been immense, and that was when Las Vegas and Atlantic City rep- resented the sum total of legalized gambling in the United States. Today, we have legalized gambling in 800 casinos in 30 States and territories. Riverboats ply the Mississippi with the same goal as those of Las Vegas casinos. Internet gambling presents literally a virtual challenge heretofore unimaginable to those with responsi- bility for regulating gambling. How we ensure that the explosion in legalized gambling is not abused by those seeking to launder the proceeds of crime or to finance criminal of terrorist activity is the challenge before us. Helping us to understand the challenge are two panels of ex- perts. Our first witnesses are responsible for monitoring money services businesses and casinos and helping ensure their integrity against criminal activity is maintained. First up, is a regular here: William Fox, Director of the Financial Crimes Enforcement Net- work, or FinCEN. Following Mr. Fox will be Kevin Brown, Com- missioner of the Small Business/Self-Employed Division of the Internal Revenue Service; and last, but not least, we hear from Diana Taylor, Superintendent of Banks for the State of New York. Ms. Taylor will provide valuable insights into the difficulties of reg- ulating money services businesses, drawing in part from her State’s experience with both major and small businesses. Our second panel will be comprised of Mr. Frank Fahrenkopf, President and CEO of the American Gaming Association; Mr. Jo- seph Cachey, Vice President of Global Compliance for Western Union; and Mr. Ezra Levine, Counsel to the Non-Bank