[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
PROMOTING CORPORATE TRANSPARENCY:
EXAMINING LEGISLATIVE PROPOSALS
TO DETECT AND DETER FINANCIAL CRIME
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON NATIONAL SECURITY,
INTERNATIONAL DEVELOPMENT AND
MONETARY POLICY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
MARCH 13, 2019
__________
Printed for the use of the Committee on Financial Services
Serial No. 116-9
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California PETER T. KING, New York
GREGORY W. MEEKS, New York FRANK D. LUCAS, Oklahoma
WM. LACY CLAY, Missouri BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri SEAN P. DUFFY, Wisconsin
ED PERLMUTTER, Colorado STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut ANN WAGNER, Missouri
BILL FOSTER, Illinois ANDY BARR, Kentucky
JOYCE BEATTY, Ohio SCOTT TIPTON, Colorado
DENNY HECK, Washington ROGER WILLIAMS, Texas
JUAN VARGAS, California FRENCH HILL, Arkansas
JOSH GOTTHEIMER, New Jersey TOM EMMER, Minnesota
VICENTE GONZALEZ, Texas LEE M. ZELDIN, New York
AL LAWSON, Florida BARRY LOUDERMILK, Georgia
MICHAEL SAN NICOLAS, Guam ALEXANDER X. MOONEY, West Virginia
RASHIDA TLAIB, Michigan WARREN DAVIDSON, Ohio
KATIE PORTER, California TED BUDD, North Carolina
CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio
BEN McADAMS, Utah JOHN ROSE, Tennessee
ALEXANDRIA OCASIO-CORTEZ, New York BRYAN STEIL, Wisconsin
JENNIFER WEXTON, Virginia LANCE GOODEN, Texas
STEPHEN F. LYNCH, Massachusetts DENVER RIGGLEMAN, Virginia
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota
Charla Ouertatani, Staff Director
Subcommittee on National Security, International
Development and Monetary Policy
EMANUEL CLEAVER, Missouri, Chairman
ED PERLMUTTER, Colorado STEVE STIVERS, Ohio, Ranking
JIM A. HIMES, Connecticut Member
DENNY HECK, Washington PETER T. KING, New York
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
JUAN VARGAS, California ROGER WILLIAMS, Texas
JOSH GOTTHEIMER, New Jersey FRENCH HILL, Arkansas
MICHAEL SAN NICOLAS, Guam TOM EMMER, Minnesota
BEN McADAMS, Utah ANTHONY GONZALEZ, Ohio
JENNIFER WEXTON, Virginia JOHN ROSE, Tennessee
STEPHEN F. LYNCH, Massachusetts DENVER RIGGLEMAN, Virginia, Vice
TULSI GABBARD, Hawaii Ranking Member
JESUS ``CHUY'' GARCIA, Illinois
C O N T E N T S
----------
Page
Hearing held on:
March 13, 2019............................................... 1
Appendix:
March 13, 2019............................................... 35
WITNESSES
Wednesday, March 13, 2019
Cohen, Jacob, former Director, Office of Stakeholder Engagement,
Financial Crime Enforcement Network (FinCEN)................... 5
Lormel, Dennis M., President & CEO, DML Associates, LLC.......... 8
Sharma, Amit, Founder and CEO, FinClusive........................ 9
Shiffman, Gary M., CEO, Giant Oak, Inc........................... 11
APPENDIX
Prepared statements:
Cohen, Jacob................................................. 36
Lormel, Dennis M............................................. 42
Sharma, Amit................................................. 52
Shiffman, Gary............................................... 61
Additional Material Submitted for the Record
Cleaver, Hon. Emanuel:
Written statement of the American Gaming Association......... 64
Written statement of the Credit Union National Association... 66
Written statement of the FACT Coalition...................... 67
Written statement of the Jubilee USA Network................. 68
Written statement of the National Fraternal Order of Police.. 69
Written statement of various undersigned trade associations.. 71
Written statement of the National Association of Federally-
Insured Credit Unions...................................... 75
New York Times article entitled, ``2 Former Goldman
Executives Barred From Banking Indusry After Malaysia Fraud
Scandal,'' dated March 12, 2019............................ 77
Garcia, Hon. Jesus ``Chuy'':
Fair Share Education Fund report entitled, ``Anonymity
Overdose; Ten cases that connect opioid trafficking and
related money laundering to anonymous shell companies,''
dated August 2016.......................................... 80
Lynch, Hon. Stephen:
Written statement of the FACT Coalition...................... 100
Washington Post editorial entitled, ``Putin and other
authoritarians' corruption is a weapon--and a weakness,''
dated March 8, 2019........................................ 101
Perlmutter, Hon. Ed:
Letter to Bob Carlson, President, American Bar Association,
from various lawyers with expertise in the field of
business and human rights, dated March 11, 2019............ 103
PROMOTING CORPORATE TRANSPARENCY:
EXAMINING LEGISLATIVE PROPOSALS
TO DETECT AND DETER FINANCIAL CRIME
----------
Wednesday, March 13, 2019
U.S. House of Representatives,
Subcommittee on National Security,
International Development
and Monetary Policy,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:09 p.m., in
room 2128, Rayburn House Office Building, Hon. Emanuel Cleaver
[chairman of the subcommittee] presiding.
Members present: Representatives Cleaver, Perlmutter, Heck,
Sherman, Vargas, Gottheimer, Wexton, Lynch, Garcia; Stivers,
Williams, Hill, Gonzalez, Rose, and Riggleman.
Ex officio present: Representatives Waters and McHenry.
Also present: Representatives Maloney and Luetkemeyer.
Chairman Cleaver. The Subcommittee on National Security,
International Development and Monetary Policy will come to
order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time. Also, without
objection, members of the full Financial Services Committee who
are not members of this subcommittee are authorized to
participate in today's hearing.
Today's hearing is entitled, ``Promoting Corporate
Transparency: Examining Legislative Proposals to Detect and
Deter Financial Crime.''
I now recognize myself for 3 minutes to give an opening
statement.
I would like to thank Chairwoman Waters for creating this
new Subcommittee on National Security, International
Development and Monetary Policy. These are some of the most
pressing issues facing our country and the world, and I am
excited for the opportunity this Congress presents to confront
them head on. Many of the matters that are likely to come
before this subcommittee have historically enjoyed bipartisan
support. They go to the very heart of our most profound
responsibilities as Members of Congress: preserving America's
national security, and the United States' global position as an
international leader in free and fair markets.
I am convinced that there is no better issue to start our
subcommittee's work than a discussion of policies to detect and
deter these financial crimes.
Since the last major anti-money laundering reforms in 2001,
the national security threats that face our country have
evolved profoundly. Cyber and technological attacks have risen
to the very top of our most recent worldwide threat assessment
as a paramount national security risk. Underground online
trafficking now allows for simplified avenues to transport
illicit materials across the nation and around the globe.
While the bill that we are dealing with today will close a
number of loopholes that have allowed for financial crimes to
be committed, it will also pull us into the 21st Century by
positioning the U.S. to face tomorrow's challenges. An
innovation council will be created from this bill, represented
by directors from each innovation lab, who will coordinate on
active Bank Secrecy Act compliance. It is imperative that we
modernize our efforts to combat financial crimes because our
adversaries will continue to modernize theirs. And this
proposal is an important step, even though it is our first
step.
With that, I will also be sending a letter to the
Treasury's Financial Crimes Enforcement Network (FinCEN) this
week to discuss how Fintech is being deployed to confront
illicit finance. I am also happy to see that the committee will
be considering Congresswoman Maloney's bill, which I know she
and her team have worked very long and hard on. The
straightforward bill provides needed transparency by requiring
companies in the United States to disclose the financial
beneficiary in order to prevent criminals and wrongdoers from
exploiting their status as a company for criminal gain.
I am also pleased that we will be considering Congressman
Lynch's Kleptocracy Asset Recovery Rewards Act. This bill
establishes in the Treasury Department, a Kleptocracy Asset
Recovery Rewards Program, which may provide rewards to
individuals providing information leading to the restraining,
seizure, forfeiture, and reparations of stolen assets linked to
foreign government corruption.
These are all very important proposals, and I am eager to
hear from our witnesses on their perspectives and insight.
I will now recognize the ranking member of the
subcommittee, Mr. Stivers, for such time as he may consume.
Mr. Stivers. Thank you, Mr. Chairman. It is an honor to
serve with you as the lead Republican on the National Security,
International Development and Monetary Policy Subcommittee. And
I want to commend you for your work on anti-money laundering.
The draft we have today, I think, is important, and an
important conversation to have.
Some of the provisions that you have included originate
from bipartisan bills from the last Congress, and I appreciate
that bipartisan approach. I also agree that we must modernize
our approach to anti-money laundering and the Bank Secrecy Act.
I also want to applaud Congresswoman Maloney for her
dedication over the years in combating the use of shell
companies by criminals, terrorists, and rogue nations, and
commend my colleagues, Steve Lynch and Ted Budd for their work
on the Kleptocracy Asset Recovery Rewards Act.
We are fortunate to serve on this subcommittee, because the
jurisdiction that we cover is frequently very bipartisan, which
I think will make our work easier. But there are a lot of hard
things that we have to do. And I know that everyone on this
subcommittee is dedicated to preventing criminals and
terrorists from accessing our financial network and financial
system. While we may disagree about the best way to accomplish
these things, we all want to keep money out of the hands of
those who would cause us harm.
The two benchmarks I will use when I evaluate bills before
today's committee are: number one, will the legislation be
effective at accomplishing its stated goals; and number two,
will these bills be the most efficient means to accomplish
their objective? Or do some of the provisions impose
unnecessary burdens that can be improved?
As we try to answer those questions, we should also be
careful to ensure our actions don't result in unintended
consequences. The provision of the anti-money laundering draft
speaks to this point. The provision which I support directs
Treasury to conduct a study on de-risking. This is a practice
of financial institutions closing accounts they deem high risk.
Some of these accounts are genuinely suspicious and are
rightfully terminated. Others belong to people who arguably are
at the greatest need for access to our financial system such as
legitimate international charities responding to humanitarian
crises.
Here, timely financial access to payment for medical
equipment or supplies can have lifesaving consequences. So I
think it is important that we look at this practice. This de-
risking is undeniably a result of our well-intended but
sometimes current laws and policies. As we examine our bills
under consideration today, I want to be mindful to avoid these
mistakes in the future.
Thank you to the witnesses for being here today. I am
looking forward to hearing your testimony today. And I want to
thank the chairman for having this hearing.
And I would like to yield 1 minute to the vice ranking
member of the subcommittee, Mr. Riggleman.
Mr. Riggleman. Thank you, Chairman Cleaver, for calling
this important hearing today.
BSA/AML laws and regulations serve as the legal framework
to help our financial institutions safeguard the financial
system. From its origins in the 1970 Bank Secrecy Act, BSA/AML
has attempted to adapt to continued threats of financial crime.
I support FinCEN in its mission to enforce BSA/AML, because I
believe that preventing illicit finance on all fronts is
essential to national security. I personally witnessed the
benefits of cutting the head off the snake.
However, I am very worried that the current framework is,
at times, both onerous and outdated and, therefore, unable to
keep pace with emerging threats and evolved criminals that have
adapted to our security posture. Criminals are constantly
adapting their tactics, techniques, and procedures (TTPs) to
bypass our defenses.
As Congress considers reforms to the law, it is critical
that we provide the private sector with a flexible, suitable,
and effective regulatory regime that actually assists banks and
credit unions in preventing illicit finance. We should strive
to equip regulators and financial institutions with clear
directives and critical information, and create strong
partnerships with law enforcement. Collaborative data sharing
between law enforcement and financial institutions is essential
to supporting FinCEN's mission.
I very much look forward to hearing the testimony from our
witnesses. And thank you for being here today.
I yield back.
Chairman Cleaver. Thank you.
Chairman Cleaver. Thank you, Mr. Stivers.
The Chair now recognizes the gentlelady from California,
the Chair of the full Financial Services Committee, Ms. Waters,
for such time as she may consume.
Chairwoman Waters. Thank you very much, Mr. Chairman. And
congratulations on convening the first hearing of the
Subcommittee on National Security, International Development
and Monetary Policy. This hearing is on an important and timely
topic: promoting corporate transparency and safeguarding our
financial system from terrorists, traffickers, corrupt
officials, and other criminals.
Our nation's anti-money laundering framework needs an
overhaul. In the past few years, we have seen an increase in
human and narcotics trafficking through online marketplaces,
large-scale cyber attacks from maligned foreign actors, and the
proliferation of shell companies being used to hide illicit
funds. It is for this reason that the House debated a
resolution I introduced that advocates for the closure of
money-laundering loopholes. At the same time, we have
experienced tremendous technological advances that can both
help detect bad actors, and facilitate terrorism and crime.
The need for responsible innovation of new technologies is
especially important in this rapidly changing environment. In
addition, the Treasury Department and its partners need better
access to actionable financial intelligence. And financial
institutions large and small must better understand what is
required of them in the shifting landscape.
It is also painfully clear that some institutions
unrepentantly abuse our financial system and are willfully
blind to money laundering occurring within the banks instead of
being held criminally accountable. However, these institutions
often get away with penalties and fines that amount to a slap
on the wrist.
The legislation being discussed today would address these
concerns while also improving compliance and innovation, thus
strengthening the anti-money laundering framework.
I yield back the balance of my time.
Thank you.
Chairman Cleaver. Thank you.
Today, we welcome the testimony of our four witnesses. Our
first witness is Mr. Jacob Cohen. Mr. Cohen is a subject matter
expert, with over 8 years of policy, regulatory, and
operational experience working to combat money laundering and
terrorist financing domestically and internationally. From 2012
to 2018, Mr. Cohen held various roles in the U.S. Department of
the Treasury's Office of Terrorism and Financial Intelligence,
including as policy advisor in the Office of Terrorist
Financing and Financial Crimes. He also served for several
years as the Director of the Office of Stakeholder Engagement
at the Financial Crimes Enforcement Network (FinCEN). He
currently advises financial institutions and emerging Fintech
companies regarding Bank Secrecy Act requirements and potential
exposure to economic sanctions, money laundering, and terrorist
financial risk. Welcome, Mr. Cohen.
Our second witness is Mr. Dennis Lormel. Over the last 15
years, Mr. Lormel has served as the founder and president of
DML Associates, where he provides consulting services and
training related to terrorist financing, money laundering,
fraud, financial crimes, suspicious activity, and due
diligence. Prior to that, Mr. Lormel served as a Special Agent
at the Federal Bureau of Investigation for 28 years where, in
2000, he became Chief of the FBI's Financial Crimes Program.
Following the terrorist attacks of September 2001, Mr.
Lormel established and directed the FBI's comprehensive
terrorist financing initiative, which evolved into the
formation of the formal section within the counterterrorism
division of the FBI known as the Terrorist Financing Operation
Section. Welcome, Mr. Lormel.
Our third witness is Mr. Amit Sharma. Mr. Sharma is the
founder and CEO of FinClusive, a digital financial services
platform for financially underserved and excluded entities that
leverages blockchain technology and risk compliance tools to
drive financial inclusion, build economic resilience, and
protect financial system integrity. Mr. Sharma previously
served as Chief of Staff to Deputy Secretary Robert Kimmitt,
and as advisor to Treasury's senior team under Secretary Henry
Paulson.
Prior to that, he served at the Treasury's Office of
Terrorism and Financial Intelligence, where he developed tools
to combat transnational threats and financial crime and anti-
money laundering counterterrorist financing strategies.
Welcome, Mr. Sharma.
Our final witness is Dr. Gary Shiffman. Dr. Shiffman is an
expert in the economics of organized violence, and the CEO and
president of Giant Oak, Incorporated. His company supports
Federal law enforcement and compliance professionals in
regulated industries through software that brings the craft of
behavioral science together with computer science and subject
matter expertise to better understand patterns of illicit human
behavior, such as money laundering, human trafficking, drug
trafficking, insurgency, and terrorism.
Dr. Shiffman previously served as Chief of Staff at the
U.S. Customs and Border Protection. He also teaches at
Georgetown University in the School of Foreign Service.
I welcome all four of you.
Mr. Cohen, you are reminded that your oral testimony will
be limited to 5 minutes. And without objection, your written
statement will be made a part of the record.
You are now recognized for 5 minutes.
STATEMENT OF JACOB COHEN, FORMER DIRECTOR, OFFICE OF
STAKEHOLDER ENGAGEMENT, FINANCIAL CRIME ENFORCEMENT NETWORK
(FINCEN)
Mr. Cohen. Thank you.
Chairman Cleaver, Ranking Member Stivers, and distinguished
members of the Subcommittee on National Security, International
Development and Monetary Policy, I am honored by your
invitation to testify before you today.
Today, I want share my views on the importance of providing
FinCEN and the Department of the Treasury with the appropriate
resources to expand engagement in collaboration with domestic
and global stakeholders. I will focus my remarks on FinCEN
engagements efforts domestically, but I will also touch upon
Treasury engagements with foreign counterparts through its
attache and technical assistance program.
The current AML/CFT landscape in the United States and
around the world is complex, dynamic, and requires FinCEN and
its private sector partners to constantly adapt. The global
dominance of the U.S. economy places FinCEN and U.S. financial
institutions at the forefront of combating financial crimes.
To continuously adapt to the ever-evolving threats, FinCEN
must have the resources to regularly and systematically engage
with all its stakeholders. FinCEN plays an often understated,
but outsized role in protecting the integrity of our financial
system.
FinCEN serves two roles. First, it is a financial
intelligence unit, or FIU, for the United States. FinCEN is
responsible for the collection, analysis, and dissemination of
financial intelligence to law enforcement agencies and other
authorities.
Second, FinCEN is the lead AML/CFT regulator for the
Federal Government.
To effectively carry out these roles, FinCEN engages and
shares information with the private sector through a variety of
mechanisms, including Bank Secrecy Act advisory group (BSAAG)
meetings, sharing information through advisories with financial
institutions, and select speaking engagements. However, these
engagement efforts are not sufficient to keep up with the
current threats and the increasing cost from industry for more
information to better detect and deter financial crimes.
Held twice a year, BSAAG meetings allow FinCEN and other
regulators to have frank discussions with a cross-section of
industry representatives regarding the operations of the Bank
Secrecy Act. However, engagement with a small fraction of
financial institutions twice a year is not sufficient to
generate the level of collaboration, continuous change, and
learning that FinCEN and the private sector need to engage in
to stay abreast of emerging threats and identify innovative
approaches to continuously update and modernize our BSA/AML
regime.
FinCEN also communicates with industry by issuing public
and nonpublic advisories to alert industry of specific
financial crime threats. These advisories provide actionable
information to financial institutions that allows them to
enhance their AML monitoring systems and produce more valuable
reporting.
Due to limited resources dedicated to engage stakeholders,
not to mention limited analytical support, FinCEN publishes
advisories infrequently. This is evidenced by the low number of
threat-specific advisories issued by FinCEN over the past 3
years. Advisories on human trafficking, trade-based money
laundering, and virtual currency were notably missing.
Today, I would like to express my strong support for a few
provisions in the discussion draft that I believe will enable
FinCEN and Treasury to continue to meet the challenges facing
our financial system.
The scope of FinCEN's responsibilities require ongoing
engagement with stakeholders beyond the Beltway. Providing
FinCEN with the resources to deploy domestic liaisons in key
cities across the country would allow FinCEN to systematically
engage with financial institutions, Federal, State and local
partners, and other stakeholders. The benefits of such a
program would be substantial. Similar benefits include:
identifying region-specific illicit finance risks; issuing
region- or industry-specific advisories and geographic
targeting orders; communicating priorities and guidance more
directly, and with greater frequency to stakeholders; staying
abreast of opportunities and challenges of BSA/AML-related
innovation.
In December 2017, FinCEN launched a FinCEN exchange program
to enable greater information sharing between the public and
private sectors. Sharing information about specific threats
enables financial institutions to more effectively allocate the
limited resources, to identify and report illicit financial
activity. This important initiative should be supported with
dedicated resources for FinCEN to conduct the necessary
research and analysis, and to increase collaboration with the
private sector.
Treasury attaches play a key role in advancing U.S.
sanctions policy, advocating for implementation of financial
action tasks for recommendations, and combating financial crime
threats. However, limited resources and the small footprint of
the attache program forces Treasury to play a zero-sum game,
essentially closing programs in countries that might still
offer significant value when a new program elsewhere is
required.
Treasury, through its Office of Technical Assistance (OTA)
supports foreign regulatory law enforcement, FIUs, and judicial
authorities. OTA's approach entails strengthening and
integrating the work of the entire spectrum of AML/CFT
stakeholders, but with a specific focus on FIUs as a lynch pin
of an effective AML/CFT regime.
This enables FinCEN to engage in more productive
information-sharing relationships with FIU partners around the
world.
While these proposals will enhance FinCEN's ability to
increase engagement with industry, without the proper resources
to support these new requirements, you will be placing
additional burdens on an already resource-strained bureau.
In my experience, one of the greatest challenges for FinCEN
has been its ability to hire and retain mission-critical staff.
FinCEN is at a disadvantage because it competes for the same
experts with Federal banking agencies (FBAs), law enforcement,
and the intelligence community, which either have higher
salaries, special hiring authority, or both.
Allowing the Director of FinCEN to set salaries at the
level of the FBA's will position FinCEN to better compete for
quality candidates, and I would also urge this committee to
consider providing FinCEN special hiring authority to recruit
high-quality candidates for mission-critical, hard-to-fill
positions. This would go a long way toward ensuring FinCEN is
best positioned to achieve its mission, and to adapt to new and
emerging threats to our financial system.
Thank you for the opportunity to testify today.
I look forward to your questions.
[The prepared statement of Mr. Cohen can be found on page
36 of the appendix.]
Chairman Cleaver. Thank you.
Mr. Lormel?
STATEMENT OF DENNIS M. LORMEL, PRESIDENT & CEO, DML ASSOCIATES,
LLC
Mr. Lormel. Thank you, sir. And thank you for inviting me.
I appreciate it, and I want to congratulate the committee for
the work you are doing. I think it is really important.
In your opening remarks, I agreed with everything you just
said. And, Mr. Stivers, the comment you made about the
inclusion and about the unintended consequences is really
important. And that is one of the things I want to focus on
later.
Thank you for accepting my written statement. And I would
like to highlight some things around that.
I have been involved in this space--fighting fraud,
corruption, money laundering, and terrorist financing--for over
45 years now. And these are very serious problems, as you
pointed out.
Mrs. Maloney, I want to congratulate you and thank you for
your perseverance in continually bringing up the beneficial
ownership issue. I think that is an incredibly important issue.
So, thank you for that.
I know firsthand, having been in law enforcement, and the
first shell company I ever dealt was in 1975. So that goes back
a long way. I want to strongly encourage the committee to pass
this legislation, the beneficial ownership legislation. I have
been an advocate for this since 2012, and I think it is really
important. I think all of the legislation that you are
considering is extremely important.
It's interesting that you bring up the kleptocracy issue
with--and Mr. Lynch, thank you for that--the beneficial
ownership issue, because kleptocracy, if you want case studies,
go to every kleptocracy case out there. One MDB right now is
one of your most significant cases. And that has shell
companies all over it, and it is so difficult to follow those
cases, so thank you for that.
Looking at the beneficial ownership legislation, I think
the best-case scenario would be if we had the incorporation
information captured and reported at the point with the States'
Secretaries of State. That is not a realistic opportunity, so I
think the opportunity that Mrs. Maloney is advancing by using
FinCEN as the conduit and repository for information is our
good-case scenario. And it is our best alternative going
forward. I think it helps law enforcement. It certainly gives
law enforcement a lot of good access, and I am sure we will
discuss that later.
I like what is not included in the other bill, which is the
thresholds, the reporting thresholds for SARS and CTRs.
In my written statement, I spent a lot of time on the Bank
Secrecy Act. Law enforcement is your number one beneficiary of
Bank Secrecy and the reporting. And having been an FBI agent, I
was the firsthand beneficiary of suspicious activity reports
and CTRs. I think anything to diminish the reporting levels
would be very detrimental for law enforcement, and I would
encourage you, and encourage every committee, to really consult
with law enforcement on that issue, because it is so important.
In terms of the other things here, I like the theme in your
bill about information sharing and building partnerships. Those
are critically important. And the innovation. I am not an IT
expert. These two gentlemen are. And I certainly defer to them
on that. But innovation is critically important. When you can
combine partnerships with innovation, that is a win-win
situation for us going forward. And I think that is critically
important.
I think the information sharing--if you can expand 314,
that is one of the biggest things I hear, one of the
detriments, is that we didn't have a consistent feedback
mechanism to financial institutions. And I was partly
responsible when I was running the financial crimes program. I
met with the Director of FinCEN on a regular basis, and we beat
that to death trying to figure out how do you do it.
Well, that 314(a), how you recommended it here of providing
scenarios and kind of working concepts I think is fantastic. I
think that is the type of thing, and I think my old
organization, TFOS, in the FBI, they have a tremendous working
model just where they do that, where they have a working group
of financial institutions, and they share that information.
And on that, I am going to run out of time, so I will stop,
and I will look forward to questions.
[The prepared statement of Mr. Lormel can be found on page
42 of the appendix.]
Chairman Cleaver. Thank you, Mr. Lormel.
You are now recognized for 5 minutes, Mr. Sharma.
STATEMENT OF AMIT SHARMA, FOUNDER AND CEO, FINCLUSIVE
Mr. Sharma. Ranking and distinguished members of the
subcommittee, thank you very much for the opportunity to
testify before you today.
In particular, I am grateful for the opportunity to discuss
several initiatives that this committee and others in Congress
broadly are pursuing to modernize our anti-money laundering and
counterterrorist financing regime of the United States, and the
attendant issues that emanate from the U.S. Bank Secrecy Act
amidst an ongoing and evolving financial crimes threat, not
only in terms of the evolution of how criminals move money, but
also the attendent consequences or, albeit unintended, of de-
risking and the issues related to financial exclusion, which I
believe are paramount, and certainly related to our broader
national security objective.
I am happy to discuss during the Q&A session additional
issues associated with this hearing, including corporate
transparency, beneficial ownership, and other parts of Titles
I, II, and III. But I am going to focus my short remarks on the
issues related to strengthening the coordination between public
and private agencies, in particular, in recognition of the
evolution of technology to advance some of these issues, not
only for inclusion, but also to enhance, modernize, and make
much more efficient the anti-money laundering and
counterterrorist financing regime for banks and nonbanks alike.
To start, I would say that there are several important
trends that are very, very important to recognize, as we think
about both the evolution of illicit finance threats, and the
evolution in financial services themselves.
The first is the recognition that there has been, and
continues to be, an exponential increase in financial
intermediation taking place outside of traditionally regulated
channels. The direct extension of credit and lending by
institutions, and individuals to one another, peer-to-peer
transactions, web- and mobile-based banking, the increased
digitization and tokenization of financial instruments and
assets, and these are just some examples.
Under any rubric, we are seeing financial innovation
blossom to assist traditional financial market participants and
increasingly nontraditional entrants are driving that
innovation. And we have to take notice of the same when we
think about modernizing and strengthening the broader BSA
requirements that impact them.
Secondly, this growth in financial activities outside
traditional channels provides a hugely tremendous opportunity
to increase access for the globally underserved, the
underbanked, the unbanked, and those otherwise financially
excluded. Such efforts have understandably given financial
regulators pause as nonbank entities and other nontraditional
market participates have come in. Technology and social media
companies, online and e-commerce retailers, corporate entities
with large recurrent user and consumer populations, and others
with large and growing affinity groups are increasingly
realizing the commercial benefits and the potential of
providing financial intermediation within their infrastructure
and their networks.
And while some of these provide tremendous opportunities,
the attendant issues that have otherwise impacted and really
been relegated specifically to traditional financial
institutions, must now necessarily apply to that growing
nontraditional space.
Finally, since the tragic events of September 2001, and
exacerbated by the credit and financial crisis in 2008, there
is a growing body of regulation. Financial oversight rules have
understandably caused consternation, not only to traditional
market players, but increasingly in the nontraditional, nonbank
sector.
With an average governance risk and compliance, GRC spend
for most major banks of 25 percent or more, many organizations
are presented with this unfortunate economic decision of
whether or not to do business with certain sectors, with
certain constituents, and has led importantly to financial
exclusion and exacerbated de-risking.
I think the comment and the joint statement in December
2018 by the financial regulators to talk about innovation and
the AML/CFT space is a very, very good start. But I think some
practical steps can emphasize taking that forward in a
meaningful way with industry.
One, coordination with examiners. Having senior leadership
and director level at individual regulators drive finance,
technology, and innovation centers with examiners in the field
is paramount. Too often, bank and nonbank entities have to
navigate this myriad examination space that is largely
uncoordinated between the State and Federal level, and doing so
with examiners not only helps with respect to the assessment
and application of technology, but with the examination and
audit process itself.
State-based coordination is paramount to enhance that
coordination, but also to ensure that bank and nonbank
applications of this technology are kept in check, and are done
so in a way that financial industry participants, when facing
exams with and by State and Federal authorities, where
sometimes there may be conflict, can do so and reconcile.
In sum, we have to look at some of these financial
inclusion tools as part of the national security tool kit and
the AML/CFT process versus looking at it as a binary and false
choice between inclusion and AML/CFT implementation.
And I think with that in mind, I certainly commend this
subcommittee's and other efforts to modernize the system to do
the same.
[The prepared statement of Mr. Sharma can be found on page
52 of the appendix.]
Chairman Cleaver. Thank you.
Mr. Shiffman?
STATEMENT OF GARY M. SHIFFMAN, CEO, GIANT OAK, INC.
Mr. Shiffman. Distinguished members of the subcommittee,
thank you for the opportunity to appear before you today to
discuss the important topic of countering financial crime.
I am an economist who focuses on technology, behavioral
science, and people who do bad things such as money laundering,
human trafficking, drug trafficking, terrorism, fraud, and
corruption.
I am the CEO of Giant Oak, a software company focusing on
making screening easy. I teach courses at Georgetown University
on organized violence. And I am also a Navy Gulf War veteran,
and I have served in Federal law enforcement.
I have no interest in reforming AML compliance for
compliance's sake. I tell you about my background to emphasize
this point. I come to the subcommittee today as a technologist
to argue that we can and must do better to combat money
laundering, trafficking, terrorism, and other illicit acts.
Our current AML regime requires radical reform. We are
inefficient. According to the United Nations, the estimated
amount of money laundering globally in 1 year is 2 to 5 percent
of global GDP. At the same time, spending to combat money
laundering and the financing of terrorism exceeds $7 billion in
the United States, and $25 billion globally. However, of the
approximately 2 million suspicious activity reports generated
by today's AML systems for FinCEN, less than 5 percent of those
provide value.
In short, it appears we have an AML regime which compels
the industry to spend billions of dollars, generates mostly
useless data, and counters less than 1 percent of the problem.
We must do better.
We can begin by harnessing available technologies and
focusing them on supporting our law enforcement and national
security professionals.
When I say, ``technology,'' I refer primarily to machine
learning, artificial intelligence, and the application of
behavioral science to patterns in data analytics. I define
machine learning as the training of computers to identify
patterns in data.
If you imagine a spreadsheet with millions of rows and
columns, it is not hard to believe that patterns exist
somewhere in the data. But because our human eyes and brains
cannot find those patterns, none of us will ever again live in
a world without machine learning.
By utilizing machine learning, we can teach computers to
find and reveal patterns for us. Any future AML regime must
include machine learning, and a future BSA/AML regime without
machine learning seems unbelievable.
So what can we do? To build the best machine to detect and
deter financial crime, one needs good training data. Machines
are literal. If you teach a machine to play chess, it will not
learn to play checkers. The best machine on the planet for AML
will be built by training it on AML data.
If we apply this to financial crimes, the vulnerabilities
and opportunities are obvious. Government agencies know which
SARs provided the best quality information, but the banks do
not, so they cannot train their tools properly. The few banks
using machine learning for AML today train their machines on
previous years' SARs data. But if more than 95 percent of past
SARs were wrong, then the banks simply perpetuate the
inaccuracies, just more efficiently.
However, with feedback from law enforcement, systems can
learn and improve. This is where we need to bring the AML
regime: information sharing, and priorities.
I do not want to end without raising a word of caution.
Computers are powerful tools that can do both good and bad. As
far back as the 1968 Stanley Kubrick and Arthur C. Clarke film,
``2001, a Space Odyssey,'' we humans have understood the need
to harness the computer. To ensure we maintain the balance
between risks and rewards of advancing technologies, I suggest
three core principles for the subcommittee to consider as part
of any reform or legislative proposal.
First, encourage information sharing between law
enforcement, financial institutions, and regulators. This will
enable the sharing of priorities and the training data for
machine learning.
Second, avoid opaque solutions where humans cannot
understand and interpret the internal processes and outcomes of
the machines.
And, third, keep humans in the loop. Let machines sort and
filter data, but let humans adjudicate good and bad, right and
wrong.
To close, machine learning already pervades our lives.
Technology will increasingly enable regulated financial
institutions to identify threats with increasingly precise
measurements that will enable enhanced security, protection of
privacy, and promotion of financial inclusion.
We spend billions today to generate mostly useless data,
and miss 99 percent of global financial crime. Law enforcement
knows that better systems, based upon existing technologies,
are available to generate good data and keep us all more safe
and secure.
Thank you for your time. I look forward to your questions.
[The prepared statement of Dr. Shiffman can be found on
page 61 of the appendix.]
Chairman Cleaver. Thank you very much.
I now recognize myself for 5 minutes for questions, and
begin by making reference to this New York Times article, which
is very disturbing. It talks about one of the executives from
Goldman who runs their Asian office, and he has pleaded guilty
in a Federal criminal investigation of fraud, and has been
ordered--this is the part that troubles me; it is not the main
part--to forfeit $44 million. That is not insignificant. But
that is the extent of his penalty, forfeiting $44 million. This
is just one more example of what happens if you wear a tie and
are considered to be in a proper job. I know people in jail who
stole $44.
That has nothing to do with the hearing, but I had to get
it off my chest.
But this particular fraud emanated in Malaysia. And I
understand Treasury's Financial Crimes Enforcement Network,
FinCEN, is one of 159 financial intelligence units in the
world. Through international cooperation, these units are
better able to detect and counter transnational crime,
including terrorism.
In my home State of Missouri, we have six foreign banking
organizations engaged in a range of financial transactions. And
so, I am hopeful they are not engaged in any such illicit
activities and are not doing any damage to my constituents. But
what makes me feel assured is Treasury's work with the
international counterparts.
So Mr. Cohen, can you discuss, ever so briefly, FinCEN's
efforts with the international counterparts and the value of
Treasury's technical assistance international attache's
program?
Mr. Cohen. Absolutely.
I will start with FinCEN. FinCEN is part of the Egmont
Group of financial intelligence units (FIUs). In fact, it is
one of the founding members of that international body. It is a
group of, as you said, 159 FIUs that meets on a regular basis
to discuss what the operational standards are for information
sharing. Between these bodies, these financial intelligence
units, every country has more or less an equivalent of FinCEN.
FinCEN has both financial intelligence units and regulatory
responsibilities. Other FIUs just have one or the other, or
maybe both. And so that engagement is tremendously important
for the United States as we are one of the predominant players
in that space in sharing information with our partners. And the
information that we receive is tremendously helpful for our law
enforcement agencies and others.
In regards to the Treasury attache program, that is a
program where we have, in select strategic countries around the
world, just like you have CBP attaches, FBI attaches around
the--I mean, embassies around the world. You have Treasury
attaches, but to a much lesser extent. And they advocate for
U.S. sanctions policy. They advocate for combating financial
crimes, and implementation of international AML standards.
So in that sense, it is tremendously important.
Chairman Cleaver. Thank you.
I want to get to the FBI. I could hardly wait to ask you
this question. What can Congress do? Where can this committee
begin in terms of creating international support and
cooperation in fighting money laundering? You have places where
people traditionally go to launder money, but what can we do as
a body?
Mr. Lormel. Thank you, sir, for that.
I think there is an awful lot that you can do. And it
starts with understanding what the issues and problems are.
And to the point that Mr. Stivers made earlier about what
not to overreact to, the first thing for law enforcement is--or
the FBI law enforcement in general, is the reporting
thresholds. We need to be able to have--and law enforcement
needs the ability to access and to use that information. And
they do that to a very good degree.
I think part of the answer to the question you are asking
is the difference between regulatory requirements and
regulatory expectations involving the regulators. And I think
there is kind of--if you look at it--the financial institutions
and the regulators and law enforcement, there is a triangle
here. And there are hard lines between the financial
institutions and law enforcement, and financial institutions
and the regulators. But there is a broken line between law
enforcement and the regulators.
Chairman Cleaver. Keep that line right there. I will get
back to you with that line.
My time is up.
I recognize the distinguished ranking member for 5 minutes.
Mr. Stivers. Thank you, Mr. Chairman. I really appreciate
you calling this hearing. Again, I want to thank all the
witnesses for your great testimony. And Mr. Lormel, I want to
ask you first, there were 900,000 suspicious activity reports
last year, give or take. That is an approximate number. I have
to deal in round numbers because it is all I can handle.
But of those, some were very useful, and some were less
useful. And to the point you just made, I don't want to reduce
the number of suspicious activity reports, but I want us to be
able to efficiently process them, which speaks to Mr.
Shiffman's point about machine learning.
Are we using machine learning enough, and are we
communicating back? I have looked at the draft in Sections 109,
201, 202, and 203. Nothing really refers back to the kind of
machine learning and computers that have to happen to go
through 900,000 reports. Are we helping create a more efficient
system, to my opening statement again? And what can we do in
this draft to empower that?
I will go to Mr. Shiffman next. But have we mentioned the
right things in here? I like the fact that it requires a
feedback loop, but are we doing what we need to do?
Mr. Lormel. I think this is a very good start. I think this
is a great foundation to build on.
The question you are asking, though, sir, it is such a much
more complex issue, because if you look at suspicious activity
reports from a law enforcement standpoint, the first part of
your question was the analytics. And when I was at headquarters
and on a program level, we would use those types of analytics.
And we need more and better of those analytics, so I will defer
to these--
Mr. Stivers. And I want to go to Mr. Shiffman now, because
you brought up a really good point. Machines only learn what we
tell them. So if we are not giving them good feedback, machines
aren't getting better. We could be a lot more efficient.
Is there anything in this draft we need to do to
acknowledge what is going on, or be more specific about the
machine learning that is going on to make it better?
And I want to acknowledge, again, Mr. Chairman, this draft
is great. It is a really good start. But I am asking, Mr.
Shiffman, can we improve it?
Mr. Shiffman. Thank you, Mr. Stivers.
I agree. I think this draft is very good. I really like the
bill and where it is going and take very little exception to
anything in the bill.
I would emphasize that--so picture a triangle. You have law
enforcement, you have the regulators, and you have the banks. I
would argue that communication across all those channels is not
good, or is just one way sometimes.
In order to take advantage of technology, the banks need
the feedback from law enforcement so they can train their
algorithms. The banks are already investing billions of dollars
in this. So this isn't a matter of appropriating dollars. This
is a matter of giving the banks the data they need to train
algorithms and to set priorities. That concept is already in
this bill. I would just emphasize it for the members of the
committee.
Mr. Stivers. I guess that goes to the heart of my question.
When I read the draft, it does talk about sharing compliance
resources in Section 202. It talks about sharing suspicious
activity reports within a financial group and the FinCEN
exchange with their financial institution counterparts.
Do we need to more expressly define that triangle and that
sharing that needs to happen between the three and between the
machines at the three places for the computer analysis that
needs to happen here? It seems to me we might do a better job
of explaining the legislative intent of what we want to help
them actually comply with law enforcement and FinCEN and the
financial institutions.
Mr. Shiffman. I think that would strengthen the bill. I
think the bill is already pointed in the right direction, but
that would strengthen it.
Mr. Stivers. And I believe that, too.
Thank you.
I am going to yield some time to the gentleman from
Arkansas, Mr. Hill.
Chairman Cleaver. The gentleman is recognized.
Mr. Hill. Thank you, Mr. Stivers. And I appreciate you
calling this hearing, Mr. Chairman.
Just following up on that question, Mr. Shiffman, how do we
protect the privacy of Americans in this triangle you
described? What is in this bill that thoroughly protects
people's Fourth Amendment right to privacy?
Mr. Shiffman. I can't speak as an expert on this bill
itself. But I think that there are ways in which we can move
forward, improve a system, take advantage of the vast resources
spent in this AML regime and get better results and protect
privacy. And I think we need to do that.
I know privacy is addressed in the bill. I am not an expert
on what the committee had in mind as they drafted it. But I
think we do need to be acutely aware of the tradeoff between
law enforcement and privacy, and it is something that we have
all been dealing with throughout our careers.
Mr. Hill. I yield back. Thank you.
Mr. Stivers. I yield back the balance of my time.
Chairman Cleaver. Thank you.
I would like to ask unanimous consent to allow Mrs.
Maloney, who has done enormous amounts of work in this area, to
claim 5 minutes for questions.
Mrs. Maloney. Thank you so much.
Chairman Cleaver. Without objection.
Mrs. Maloney. Thank you so much, Mr. Chairman, and Mr.
Ranking Member, for holding the hearing. I thank you for
allowing me to participate. And I thank all of my colleagues,
and I thank all the panelists for your testimony today.
This hearing is examining a bill that I have been working
on for 10 years, along with my good friend, Peter King, the
Corporate Transparency Act, which requires companies to
disclose their beneficial owners to law enforcement and
financial institutions.
The problem that we are trying to solve here is very
simple: Criminals and terrorists have always used anonymous
shell companies to finance their operations. And because they
never have to disclose who actually owns the shell companies,
there is no way for law enforcement to figure out who is
involved in a transaction conducted by a shell company.
Law enforcement tells me that whenever they are following
the money in an investigation, they always hit a dead end at an
anonymous shell company. They can't figure out who is behind
it, so they can't follow the money any further.
This is a very serious problem in the City of New York.
This challenge was brought to me by law enforcement who are
very concerned about, first and foremost, terrorism financing.
We are a terrorist target. Since 9/11, numerous other people
have tried to strike us. Where did they get the money? Where
did it come from? Where did the technology come from? Where did
the bomb-making skill come from? All of this information they
would like to know. And when they say they hit this LLC, they
can't figure out who owns it.
You can just ride through my district at night, the East
side of Manhattan, and you will pass buildings, complete
buildings, where there are no lights on. They are bank
accounts. And they simply want to know who owns that bank
account, for national security.
President Obama was so concerned about this issue that he
even formed a task force the last year he was in office with
Jim Clapper, head of National Security, and others trying to
figure out how to pass this bill that would allow law
enforcement to get the tools that they feel they need to
protect us.
To help address this problem, FinCEN passed a rule in 2016
that requires financial institutions to identify the beneficial
owners of the companies that open accounts with them. My bill
would take this burden off of financial institutions, and would
require companies to disclose their beneficial owners at the
time the company is formed. FinCEN would collect this
information. And the only people who would have access to it
would be law enforcement and financial institutions. And in the
case of the financial institutions, the person with the
information would have to allow that to be disclosed.
I think my bill would help protect our national security,
and law enforcement believes the same, and would provide
regulatory relief for financial institutions.
I want to submit for the record a statement from the Bank
Policy Institute on the importance of beneficial ownership
legislation, and a letter from 9 different financial services
trade groups supporting beneficial ownership legislation, and
also statements from law enforcement in support of the bill.
Chairman Cleaver. Without objection, it is so ordered.
Mrs. Maloney. I want to thank the chairman for yielding to
me, and Mr. Lormel, I want to ask you about beneficial
ownership. I know you have seen my bill, and I want to thank
you for your support for this effort.
Now, my colleague, Mr. Hill, has also circulated a bill on
beneficial ownership, which I personally think is far, far too
weak.
Have you seen Mr. Hill's bill?
Mr. Lormel?
Mr. Lormel. Yes, ma'am. I have.
Mrs. Maloney. Do you think Mr. Hill's bill is workable, or
do you think Congress would be better off, and the safety of
the American people better off passing my Corporate
Transparency Act?
Mr. Lormel. I think your Act is much more comprehensive.
Mr. Hill, I thank you for your effort in this, but I think
that--you recommended that the IRS be the collection point, and
that is not workable, sir, from my experience. And I think that
Mrs. Maloney's bill is much more comprehensive. You also, Mrs.
Maloney, you don't have any thresholds. You are asking for all
beneficial ownership. I didn't believe that to be the case in
the other bill.
Mrs. Maloney. Are you concerned that--and I congratulate
Mr. Hill's interest and hard-working efforts, but are you
concerned that Mr. Hill's bill doesn't even have a provision
that would give law enforcement access to the beneficial
ownership information?
Mr. Lormel. Yes, ma'am. I think that is a serious problem
because as a law enforcement--
Chairman Cleaver. Go ahead and finish.
Mr. Lormel. Okay. Just to the point about access, as an FBI
agent, I wouldn't have access to that information because I
would have to have a court order to get IRS information,
especially tax information.
Mrs. Maloney. You can't collect information if you can't
see it, right? Has my time expired?
Chairman Cleaver. Yes.
Mrs. Maloney. Thank you.
Chairman Cleaver. The Chair recognizes the gentleman from
the great State of Texas, Mr. Williams.
Mr. Williams. Thank you, Mr. Chairman. Thank you all for
being here today.
And Mr. Lormel, since you have had firsthand experience in
the law enforcement perspective, can you walk us through an
example where having the beneficial ownership information was
crucial for you?
Mr. Lormel. Yes, sir. I served 10 years in New York. I was
a supervisor in New York. Back in 1983, there was a case that
we had with a broker-dealer, and it was an internal
embezzlement of about, at that time, $18 million, so you can
imagine that $18 million today would be a lot more. The subject
who embezzled that money set up, at first, four shell
companies, and then he expanded to eight shell companies. And
working through those shells to get to--and back then, it was a
lot more difficult because we didn't have the internet; we had
a paper trail. And so, working through those shell companies
was very, very difficult. There were so many impediments to get
around them, and to develop the evidence that we needed. It was
very challenging, sir.
Mr. Williams. Okay. Thank you. Dr. Shiffman, you mentioned
in your testimony that technology and machine learning will be
the cornerstone of any future BSA/AML regime. FinCEN has an
entire technology division within the department. My question
to you is, what is the biggest hurdle in getting this
technology into use for BSA/AML purposes?
Mr. Shiffman. Sir, I think FinCEN has great data, because
they have all the data sent to them by the financial
institutions, but I am not sure it is the right data, but they
have a lot of data. The banks also have a lot of data. I think
it is about training tools to identify the right data. As I
said in my testimony, at least 95 percent of the suspicious
activity reports sent to FinCEN never provide any value, so
that is a massive investment on behalf of the banks, and it is
a massive amount of data at FinCEN that never provides value.
So my concept here is that, let's get the ground truth
data, the actual cases of known money laundering, terrorism,
drug trafficking, things like that, and train algorithms, both
at FinCEN and in the financial institutions, and we will have a
much more efficient system.
Mr. Williams. Mr. Cohen, I would like to hear what you have
to say, if you have anything to add to that answer.
Mr. Cohen. Absolutely. I think it is critical for the
machinery to work, if I understand it correctly, and I am
certainly no expert, but communication and information sharing
with the private sector is fundamental.
FinCEN as the FIU aggregates all this information, all the
SARs that are submitted by financial institutions, and then
they can provide critical insight to financial institutions
around the country to be able to better identify the type of
activity.
So I think that FinCEN Exchange programs, like the FinCEN
liaison program, the domestic liaison program where you have
folks engaging with industry, understanding the threats
locally, regionally, that will greatly enhance, in my opinion,
financial institutions' ability to detect suspicious activity
and make the algorithms and machine learning even more powerful
when that information then comes out and is looked at by an
analyst.
Mr. Williams. In 2016 alone, there were over 900,000
suspicious activity reports filed with FinCEN along with 3\1/2\
million currency transaction reports. With so much information
coming in, it seems that bad actors will easily be able to slip
through the cracks, since millions of other legitimate
transactions are being reported. So my question to you, Mr.
Lormel is, I see from your testimony that you are not in favor
of raising the thresholds for SAR and CTR. What recommendations
do you have, then, in order to make the information within
these reports more useful?
Mr. Lormel. There are a few things, sir. You have to look
at different perspectives. Now, from where I have sat at
headquarters, we did data mining, and we did analytics, and I
think that is one of the ways forward in terms of using that.
But if you go down to the grassroots, to the SAR review team
level out in the field, they are going through it by hand. So
you have two different perspectives that you are dealing with.
But part of the issue, again, comes down to, from where I
sit, regulatory expectations versus regulatory requirements and
financial institutions kind of getting caught up. If you think
about the flow of information from a financial institution to
law enforcement, that flow gets impeded by the regulatory
requirements to a degree and then the regulatory expectations,
so part of the answer also is the feedback. We have to have a
better feedback mechanism, like Gary said, from law
enforcement, where the banks understand it, and they get those
scenarios. I think with the bill that you guys have introduced,
you are setting the stage for that with 314.
Mr. Williams. Thank you for your testimony.
I yield back.
Chairman Cleaver. Thank you.
The Chair now recognizes the gentleman from Colorado, Mr.
Perlmutter.
Mr. Perlmutter. Thank you, Mr. Chairman, and gentlemen,
thank you for your testimony.
I want to focus, first, on sort of the technology piece of
this thing. We have two detectives, one in financial and the
Treasury, and one police detective and sort of two
technologists who want to provide--help them have the best
information they can have. So Mr. Sharma, you said something,
and that I was kind of scratching my head. You said that
growing regulation IT costs and compliance has led to financial
exclusion. Am I quoting that right? What did you mean? I didn't
know what you meant.
Mr. Sharma. Right. Thank you for your question. What we
have seen, especially with global financial institutions,
certainly western financial institutions, and the U.S. in
particular, is that the combination of growing financial sector
requirements, vis-a-vis AML compliance, and the ongoing fines
that have increased over time, many of which are fully
warranted for negligence or willful blindness, et cetera. Many
institutions start looking at particular types of transactions,
particular types of entities and constituents as just high
perceived compliance risk. An example would be global
remittance flows. And if I as a bank am spending an increased
amount of time, energy, manhours, and money on understanding
money services businesses Fintech companies and other non-bank
FI activity that are sending money to the tune of hundreds of
billions over the course of a year, but that is costing my
business a lot from a compliance perspective, many institutions
have just said I am not going to do business at all.
Mr. Perlmutter. And so, quickly, how would you remedy that?
And I have some questions for Mr. Shiffman.
Mr. Sharma. This is where I think technology plays a vital
role both in terms of the use of applied and advanced analytics
like AI and machine learning. Distributed ledger technologies
that can bring real-time transaction tracking and client
monitoring while preserving the essential personal identifying
information in the back end offer great promise to do these
things in an environment that has been a very high
traditionally man-hour-centric environment or process. So these
two technologies have tremendous promise to drive inclusion and
keep folks in the system, while, at the same time, following
the anti-money laundering, know-your-customer, customer due
diligence, monitoring and transaction tracking that are
essential to the compliance tool kit.
Mr. Perlmutter. All right. Thank you. And so Mr. Shiffman
and Mr. Hill brought up the fact that we want to have as much
information, make it as effective as possible for our law
enforcement, but we are all subjected to the Constitution and
our rights to privacy and things like that. So the three of
us--Mr. Gonzalez, Ms. Wexton, and I--are all on the Science
Committee, and you talked about Hal from ``2001, A Space
Odyssey.'' I talked about Skynet from ``The Terminator.'' Why
did you bring up Hal? What is it that you are worried about
with artificial intelligence in this arena?
Mr. Shiffman. If you recall, Hal wouldn't let Dave back
into the spacecraft.
Mr. Perlmutter. Right. I know. I mean, in ``The
Terminator,'' Skynet became aware.
Mr. Shiffman. Right. Absolutely.
Mr. Perlmutter. And singularity is when the computers
become aware. I am not trying to minimize it.
Mr. Shiffman. Right.
Mr. Perlmutter. I think the concern is that--I am over on
the fiction section, not the non-fiction section. The concern,
though, is coming back to the Constitution, coming back to the
right of privacy, you said we need to focus on three core
things: information sharing; avoiding opaque solutions; and
keeping humans in the loop. Can you expand on that a little
bit?
Mr. Shiffman. Sure. Machines are literal. They will do what
they are taught, and they don't know right from wrong. They
don't have judgment. So you could intentionally, or
inadvertently, program a machine that does the wrong thing, and
that is why we always need to have, in my opinion, a human in
the loop. Humans do know right from wrong. Machines don't.
Machines do what we tell them to do. That is why I want to live
in a world--my point is we are not going to stop machine
learning, artificial intelligence. It is here. It is here to
stay. It is pervading every aspect of our life. Therefore, it
will make it into AML, so let's deal with it, and let's keep in
mind that we want humans in the loop so that way, we can
address things like financial inclusion and things like
privacy. And if we don't think a lot about that now, we are
going to be in trouble later.
Mr. Perlmutter. Okay. Thank you, Mr. Chairman, and it was
fun talking about that. I yield back.
Chairman Cleaver. You and Dr. Shiffman need to go into the
corner.
The Chair now recognizes the gentleman from Arkansas, Mr.
Hill.
Mr. Hill. Thank you, Mr. Cleaver. I appreciate that. I
appreciate Mrs. Maloney's long years of work on the Corporate
Transparency Act and her various iterations of it over the past
couple of Congresses. And, of course, all of us support the
adequate disclosure that we need for law enforcement to do
their job. That is really not in question here. And since the
know-your-customer rules were promulgated as a part of Gramm-
Leach-Bliley, banks have been collecting this information and
had obviously a responsibility for 40 years to follow
suspicious activity reports.
Mr. Lormel, I was reading your testimony. On page 7 of your
testimony, you say your long-time preference is that the States
collect this information, and you said they resist doing that.
Are you aware of Congress having hearings on the States
collecting this information?
Mr. Lormel. Yes, sir. Back in 2012, I was actually invited
to the annual conference of the National Association of
Secretaries of State (NASS) where we discussed this issue, and
I--
Mr. Hill. They resisted, of course, and, you know, that is
their prerogative.
Mr. Lormel. Yes.
Mr. Hill. We have 50 States. We have a Federal Government,
federalism, and we incorporate entities at the State level.
Hasn't this been a problem for years? As an FBI agent, you
would say that your biggest concern are all the Californians
who claim they are Nevadans, right, for tax evasion purposes.
Isn't that a big problem in this country, tax evasion, using
the laws of Nevada if you are either a California or an Alaska
trust?
Mr. Lormel. Yes, sir.
Mr. Hill. So we have this challenge with the States, but if
we had a set of best standards and beneficial ownership
requirements that the States could collect, and should collect
in your view, I think, based on reading your testimony, you
would support the States doing a better job of being
transparent, then, wouldn't you?
Mr. Lormel. In most circumstances, I probably would.
Mr. Hill. Yes. That is the way I took your testimony, so
thank you for that. I think we all agree that it would be great
if there was consistent information collected by the States in
a machine-readable format. We don't have it. I will argue that
that has never really been requested by the Federal Government
on behalf of national security for tax evasion purposes, not
that I can read in the record. So I will leave it at that for
the moment. I know Secretary Mnuchin prefers that. I know the
members of this committee prefer if the States would do that.
One of the issues, though, you also bring up in your
testimony, on page 8, you raise serious concerns about FinCEN's
capacity to collect and disseminate beneficial ownership
information. Is that in your testimony?
Mr. Lormel. Yes, it is.
Mr. Hill. Yes. So that is why I focused on this issue of
perhaps the normal tax collection process. Like we have changed
Schedule B on the Form 1065 many times to collect additional
information about foreign bank accounts and foreign activity
that we change, that collect beneficial ownership in the same
place where we collect all the ownership information of a pass-
through entity in the case of an LLC or a partnership and then
on the C corp forms or S corp forms for a corporation, and we
change the question there. We had that material. In contrary to
the testimony you all exchanged in your colloquy, it would be
shared with FinCEN from the IRS, so that is the way my bill
reads. And I think that is where most small businesses do this
kind of work. Instead of having another form with another
criminal penalty, Heritage estimates there could be a million
unintended felons under the draft bill that we are considering
because of the way it is written. I don't know if I agree with
that. It could be an exaggeration. But the point is, we are
asking charities, every business entity in America, to file
directly with FinCEN beneficial ownership information, and yet,
we collect all the ownership information, the contact
information, the foreign bank account information, everything
as a normal part of the income tax preparation. Isn't that
right?
Mr. Lormel. To a degree, yes, but I don't know that we
collect all of the beneficial ownership information.
Mr. Hill. We don't do it now. We collect the ownership
information undeniably unless you want to be penalty of an
IRS--commit IRS fraud. I don't think most people want to do
that.
Mr. Lormel. No. No, not at all, but the other issue you
have, Congressman, is the fact that I would need a court order
as an FBI agent or another law enforcement officer.
Mr. Hill. So are you suggesting if we use Mrs. Maloney's
FinCEN form, you won't have a court order? You can just go look
at it? Is that what you are suggesting?
Mr. Lormel. Yes.
Mr. Hill. You think that protects people's privacy, or
should they have a reasonable reason supported by law
enforcement to go look at people's information?
Mr. Lormel. I think that is very reasonable.
Mr. Hill. So if in my paper records--I will yield back.
Thank you, Mr. Chairman.
Chairman Cleaver. Thank you.
The Chair now recognizes the gentlelady from Virginia, Ms.
Wexton, for 5 minutes.
Ms. Wexton. Mr. Chairman, I have no questions for these
witnesses.
Chairman Cleaver. The Chair now recognizes the gentleman
from Ohio, Mr. Gonzalez, for 5 minutes.
Mr. Gonzalez. Thank you, Mr. Chairman. Thank you,
everybody, for being here, and for your testimonies today.
When I think of the challenge before us, I think of my home
State, and I think of Fentanyl. I think of Fentanyl coming from
China, going into Mexico, or going through our mail and coming
into my community. In Ohio, over the past few years we have
lost, in each individual year, more people due to the opioid
crisis than we lost in the entirety of the Vietnam War. More
people in a year than the entirety of the Vietnam War. It has
absolutely devastated my community, and so I thank you all for
the work. I thank this whole committee for the work and the
commitment to stopping money laundering, and making sure that
we take care of the people of Ohio.
When I think of machine learning, and Dr. Shiffman, you
will correct me if I am incorrect, I think you need good data,
and you need it at scale, right? You need a lot of good data,
essentially, and the more good data you have, the quicker your
machines will be able to train themselves and be able to spot
nefarious actors. In your testimony, you talked about 2 million
suspicious activity reports, but less than 5 percent provide
value. Mr. Cohen, if I could quickly, does that sound accurate?
That is a bold claim. I have not heard that before, but is most
of the data just not useful?
Mr. Cohen. Again, I can't speak to the numbers. I do know
that the data is tremendously useful to law enforcement
agencies and our international partners. Again, if you are
talking about percentages, I don't know those numbers.
Mr. Gonzalez. Okay. Dr. Shiffman, can you talk about that a
little bit? How are you kind of making that claim?
Mr. Shiffman. Sir, there is a footnote in my testimony for
that claim, and it is the clearinghouse article called, ``By
the Numbers on AML.''
Mr. Gonzalez. Okay. Thank you. My next question, then,
would be, again, to Dr. Shiffman. So it sounds like we have a
bad data problem, essentially, among others, but what data do
we need that we are not collecting, or how can we improve the
SAR process generally?
Mr. Shiffman. Sir, thank you for the question. The idea
here is that in the world we live in today, where we are
talking about this new generation of technology, we have to get
data and algorithm into the same place at the same time. So how
do we do that? We can compel banks to send data in to FinCEN,
and that is what they do. But we don't do a good job of letting
the banks know this data was good, this data wasn't, because if
we did that, then they could refine their algorithms and send
better high quality data more efficiently, right.
So it is just a matter of thinking about data and algorithm
in the same place at the same time to do the training, because
your understanding of machine learning is exactly right. It is
about having good data and quantities of it.
Mr. Gonzalez. Okay. And then quickly, Mr. Lormel, I talked
about the Fentanyl crisis in Ohio. Could you describe, sort of,
how that works from a shell corporation standpoint, and how
they bury, essentially, what they are doing inside of these
shell corporations?
Mr. Lormel. You could liken that with the Fentanyl to any
number of crime problems, but using your example there, if I
have an operation, and I have people out there pushing Fentanyl
for me, at some point, that money needs to get into the system.
And so, one of the ways I am going to get that into the system
is through shell companies, and the more opaque I can make
that, and the more layers I can put in there, the more I am
going to be able to comfortably move my money through and start
to legitimize it again. You raise, you move, you store, you
spend. And the more that you store and you move, the more
opaque it gets. And that is exactly what I would be doing if I
was involved in one of those operations.
Mr. Gonzalez. Thank you. And with that, I will yield back
the balance of my time. Thank you.
Chairman Cleaver. The gentleman yields back.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Lynch.
Mr. Lynch. Thank you very much, Mr. Chairman, and Ranking
Member Stivers. And thank you to the witnesses. We really
appreciate it. I am familiar with all of your work. Thank you
so much.
Mr. Lormel, I did not realize you had been doing this for
46 years. You must have been violating the child labor laws
when you started out. Just like me. You can take the Fifth on
that.
So I have been on this committee a while, and for a while,
I was the chairman of the Task Force on Terrorist Financing
before they made it a subcommittee. We are involved in Kabul
Bank. We had a situation with the ATMs in Gaza that were
operated by Arab Bank. Nigeria. We had a terrible diversion of
natural resources. In all those jurisdictions, we had very weak
rule of law. And so, one of the ways that we were able to get
at that was that FinCEN--thank you, Mr. Cohen--was able to work
with people on the ground in those countries that actually
provided firsthand information, so we were able to get at this.
So that is what led to the kleptocracy bill, because in
many of these countries, especially developing countries,
because of the lack of rule of law, and the lack of a strong
independent judiciary, it is the only way we can get at this
stuff, and FinCEN has been doing a lot of this stuff already.
They just haven't been formalized, but that is what I hope to
do in my bill.
I am just wondering, Mr. Lormel, if there is--let me shift.
Mr. Sharma, you are dealing with a new area, and I am aware of
your work with CGS before on doing a lot of this work. Mr.
French Hill and myself have been asked to head up this Fintech
task force now. We just started it. Ms. Waters created it. What
are the dangers? What are the new and different dangers that we
see moving from this sort of brick-and-mortar system to online
banking, and the digital dimension of this?
Are there new and different things that we need to upgrade
our regulatory framework to address that type of threat? I know
you have been doing a lot of that work, and also, you have been
doing great work on underbanked areas and things like that, but
just the technology change. How would we best respond to that
threat?
Mr. Sharma. A couple of things. I really appreciate the
question. So in my opening statement, I talked about a couple
of trends that I think that we need to layer in as we look at
oversight. One is that increased financial remediation is
happening outside the banking network.
Mr. Lynch. Yes. It is shadow banking, you mean.
Mr. Sharma. Shadow banking. I often tongue-in-cheek ask the
regulators, when was the last time you visited Walmart? When
was the last time you visited Target? When was the last time
you visited Amazon? These are banks. At the end of the day,
these are institutions that have certainly a nationwide, if not
a global network and engage in credit, lending, stores of
value, et cetera. And so now you add that to the growing and
emerging non-bank and Fintech space, and there is just
increased financial intermediation there. And so from a
regulatory perspective, we need to start looking in areas
outside of what has been traditional covered institutions.
The second is in the context of how some of these new
technologies, in particular for the advanced analytics side and
in distributed ledger actually provide tremendous opportunity
to the unbanked, and some of these are macro challenges that we
treat as compliance challenges.
Mr. Lynch. Let me ask you to pause there, because we have
had some major hacks of our blockchain technologies, Bitcoin in
particular.
Mr. Sharma. Yes.
Mr. Lynch. With Mount Gox and some others, $350 million
went in one whack, so have we--and those were fairly recent. I
think the last one was in 2014. But have we got to a point
where we trust the system? And believe me, I know, in theory,
that blockchain will work, and it is probably our best hope,
but are we there yet to a point where we can actually, as a
Congress, sort of endorse this going forward without having
some level of fear for the risk that it creates?
Mr. Sharma. I believe blockchain and some of these
technologies aren't panaceas. They aren't going to be the be-
all-end-all. We do need to understand the difference between
the applications of these technologies in the areas that are
hackable or corruptible, as we have seen in the Mount Gox and
other crypto areas. The underlying technology of distributed
ledger does hold promise insofar as the encryption,
distribution, and immutability of that ledger. It is harnessing
that technology in the context of AML/CFT for transaction
tracking and the protection of the underlying information,
whether it is your personal data or otherwise.
Mr. Lynch. Data, yes.
Mr. Sharma. And that is the key.
Mr. Lynch. Yes.
Mr. Sharma. And so, no, I would not be here saying you must
endorse a particular technology as the be-all-end-all but this
is where the coordination and technology and innovation centers
with regulators can look at both the application tested both in
beta and in live-market situations of that technology to
address both the inclusion elements and AML/CFT in tandem.
Mr. Lynch. Thank you.
Mr. Chairman, I yield back. Thank you for your indulgence.
Chairman Cleaver. Thank you.
The Chair now recognizes the gentleman from Virginia, Mr.
Riggleman.
Mr. Riggleman. Thank you, Mr. Chairman, and thank you very
much to the witnesses. I want to thank my esteemed and
venerable colleagues for asking most of the questions I was
going to ask. First of all, thank you.
Second, I want to say--I want to go a little bit geeky
here. My background is a little bit different, I think, and so
I want to tell you guys what I have done before I ask some of
these questions, because I looked at your resumes. I looked at
your bios, and I am very impressed, and probably, it is going
to be all of you trying to ask some of this. But for about 26
years, I have been in counterterrorism. For the past 15 years,
I have been involved in trying to build data ecosystems to
automatically predict what would happen in the command and
control networks, right, and you guys know that is a complete
infrastructure from fiber to cyber.
So listening to this, I don't think this data problem is
unique based on what I have gone through, and I want to let you
guys know I have broken a lot of capabilities for machine
learning and AI in my life. I have completely broken them, and
it might have been operator error, but not most of the time.
I want to ask Mr. Lormel something. First of all, thank you
for your service for 46 years. I very much appreciate that, and
I want to ask you: When you are looking at SARs and CTRs for
your teams, are you noticing any attributes? Are you noticing
any consistencies in the data that allows you to hone in on
something rather than another based on the manual templates
that you have built and trying to see what SARs or CTRs are
effective?
Mr. Lormel. Thank you, sir. Yes. Again, if you are looking
at SARs from where I sat at a program level, I am looking at it
differently, so I am using the data mining capabilities. And so
it is easier for us, then, to sort and we are looking at
certain things. At the street level, it is going to come down
to what we are looking at in those specific locations, which
agencies are involved, what violations do we work because that
is going to help inform where I am going to look for--what I am
going to look for in SARs. So you have the SAR review team. You
have an IRS agent. You have an FBI agent. They are going to
look at the same SAR. They may see it differently.
Mr. Riggleman. I put in a couple bills, 1038 and 1039, to
be a little bit more clear on the requirements from the
Department of the Treasury and what you guys are looking for,
and I am wondering, this is for Dr. Shiffman and Mr. Sharma,
and I think, Mr. Lormel, I am going to assume something, that
some of your teams are very good at SARs and CTRs and tracking
down people.
When you look at requirements, and Dr. Shiffman and Mr.
Sharma, you are going to smile at this question. If you are
going to build an ML template, a machine learning template, we
could use Mr. Lormel and his teams to start that ML template to
look at what SARs and CTRs are actually effective in going
after these certain individuals. Anytime we are parsing data,
it is the ``gazintas'' and the ``gazoutas,'' right? So when you
are looking at the ``gazintas'' and the ``gazoutas,'' that is
my operational term for data. When you are looking at that
data, and we use Mr. Lormel's template, is it possible that we
could actually build within the bill, or whatever bill that we
pass, the ability to be more specific on requirements based on
the templates that are built, could you, Mr. Sharma and Dr.
Shiffman, look at the specific SARs and CTRs, based on machine
learning, where we could be more specific on what is to be
reported, so it is not everybody in the world trying to report
these specific items? And either one of you can start.
Mr. Shiffman. Absolutely, you can do that, sir. You don't
want to preclude the ability for the machine to tell you things
that the human couldn't identify on their own. The machine can
look at a million attributes where a human can't. So you want
to be open to that, but absolutely that is where you start.
Mr. Sharma. And I would just add where it is the big data,
a lot of the data and the associated algorithm to learn, and
this is where a human judgment, both on the input and the
output side, is critically important. You don't want the
machine to just simply reinforce underlying biases in the data,
and you don't want it to provide ``garbage out'' simply because
it would be fully learned, because that is effectively what
data you gave. This is where the 46-year esteemed career of
Dennis Lormel plays a huge part in informing machine learning.
And then secondly, technologies like distributed ledger
can, in fact, allow for permissioned access across a number of
different data stores that, by mandate, have to be protected.
Mr. Riggleman. I would say that I don't think we should
take a human out of the loop in any of these processes. I think
that is what we are going to, right, Mr. Sharma? No human out
of the loop. But I think my biggest fear--I have owned multiple
companies. I have filled out multiple forms, whether they are
OOIs, TTB types of information, all the background check you
have to do. I had to do Federal acquisition requirements. I
have had a lot of fun in my life, trying to go with regulation.
But when I look at what Mr. Hill is talking about, and we are
looking at bills across the committee, I think the Treasury is
more specific in those requirements, based on maybe machine
learning that you guys could do for us. Maybe we can dig down
and actually build out of those 1065s, OOIs, background checks
that we have and use data parsing to get the information that
we have from the templates that are built by Mr. Lormel's team
and then actually transition those to machine learning or AI or
algorithms that can dictate what we want for requirements,
rather than just going wholesale, sort of, beneficial ownership
like cataclysmic idea of data.
Mr. Shiffman. Just to build on that, I think you are right,
and one of the points that I would emphasize from my testimony
is this idea of priorities. What you are talking about is
establishing the priorities, and that is going to make the
system much, much better. We don't really do a good job of that
today.
Mr. Riggleman. Thank you, gentlemen. I am very impressed by
you all. Thank you.
Chairman Cleaver. Thank you.
The Chair now recognizes the gentleman from Illinois, Mr.
Garcia.
Mr. Garcia. Thank you, Mr. Chairman, and I too want to
thank all the witnesses who have provided such valuable
testimony here in our endeavor to make an impact on this great
challenge that we face.
I would like to ask Mr. Lormel a question. While there are
many factors that contributed to the opioid epidemic, a 2016
report from the organization Fair Share explains that a key
facilitator of opioid trafficking is the ease with which drug
cartels can open anonymous shell companies to launder their
illicit gains, and mask their identifies from law enforcement.
Has it been your experience that drug cartels hide behind
anonymous shell companies to impede law enforcement
investigators?
Mr. Lormel. Yes, sir. Again, you can use a lot of examples,
but yes, I mostly worked financial crimes in my career, but
where I did assist with drug investigations, that was always a
challenge that the people who are responsible for laundering
the money, the people involved on the facilitation side like
that, that is their job description is to go out and hide that
money. They want to disguise it. They want to make sure that it
avoids detection.
Mr. Garcia. Thank you. And do you believe that collecting
beneficial ownership information of those companies formed in
the U.S. as the draft Corporate Transparency Act proposes to do
would help law enforcement pursue criminal traffickers of
heroin, Fentanyl, and other illicit opioids?
Mr. Lormel. The simple answer is yes. I think that is very
much so, but I also believe that the bad guys are going to be
out there looking to see how they can exploit other avenues,
because they are going to look for other vulnerabilities. But
to the direct question, yes. It would be very helpful.
Mr. Garcia. Okay. Thank you.
Mr. Chairman, I would like to enter the Fair Share report
into the record, if it is possible.
Chairman Cleaver. Without objection, it is so ordered.
Mr. Garcia. And then one final question. Again, Mr. Lormel,
can you give us some examples of bad actors using anonymous
shell companies in the U.S. from your experience in law
enforcement?
Mr. Lormel. I will use a kleptocrat. Vladimir Montesinos
was the head of internal security in Peru. Montesinos, at one
point, set up shell companies to launder $400 million around
the world. I was running the financial crimes program in the
FBI when we tried to help Peru render him back to the United
States first. He had over $40 million through shell companies
in the United States.
Mr. Garcia. Any others that you would like--that you can
share at this juncture?
Mr. Lormel. There are just--there are so many. If you look
at right now the ongoing 1MDB case, you can see a lot of use of
shell companies there. There is just--I am sorry, sir. There
are just so many cases you can go through.
Mr. Garcia. I see some heads nodding, so it must be a known
fact. Thank you very much. I yield back, Mr. Chairman.
Chairman Cleaver. The gentleman from Tennessee, Mr. Rose,
is recognized for 5 minutes.
Mr. Rose. Thank you, Mr. Chairman. I yield my time to Mr.
Hill.
Chairman Cleaver. The gentleman is recognized.
Mr. Hill. I thank the chairman. And I thank Mr. Rose. I
appreciate his time and willingness to do that.
Mr. Cohen, I was interested in this issue of balance. We
were talking about the most important things, data from CTRs
and SARs and beneficial ownership. All of these things are
clues to put the puzzle together to catch bad actors, domestic,
and to my point, and international. What do you think the most
fundamental is from your time at FinCEN? Is it the SAR, the
suspicious activity report? Is it the best clue among that
group of many things, you think?
Mr. Cohen. I can't single out a single report that is most
effective. I think it just depends on the nature, and I think
Dennis will speak better to that. I think every law enforcement
agency, every single piece of the puzzle provided by that
particular report could sort of break a case. So I certainly
don't want to say what report is best or not. Certainly, the
suspicious activity report is very important when you talk
about the threats to the U.S. financial system, because a lot
of that obviously comes through our financial institutions.
Mr. Hill. Yes. I have done it for 35 years in both the
brokerage business and the banking business. The nice thing
about it from a law enforcement point of view is it isn't
quantitative, it is qualitative. There are some rules around
it, and there are categories in which you report. But if it is
a suspicious activity, you have a duty to report which is an
ideal source of clues.
Mr. Cohen. Yes. Absolutely. I would add the sophistication
of financial institutions varies around the country and around
the world. The resources you have to devote to having--some
banks have a dedicated financial intelligence unit internally,
but others maybe have a few people. And so, I think working
closely with the private sector, with financial institutions,
law enforcement, we share a lot of information with them.
Having FinCEN as the aggregator, right, because FinCEN has a
big picture of all the SARs. They are the ones that collect all
the SARs.
Mr. Hill. Right. I appreciate that response.
Mr. Lormel, on the issue of structuring, the big issue, no
matter--we had a CDD rule put in place at Treasury last May,
and, of course, it arbitrarily took 25 percent of the company
you are supposed to report the beneficial owners. And yet, when
we look at IRS data, it can be zero, or it can be 100 percent
ownership of a company, a shell company, in your example. When
we pick a number like 25 percent, like Treasury did in the CDD
rule, isn't easily structured around? I know there is no right
answer there, but what is your perspective on--and I would say
most law enforcement people. You can't give them enough
information, and you can't give it to them fast enough, and you
can't give it to them better without a warrant. But with that
caveat, how do you feel about that 25 percent, and having done
it for 4 decades? What is your view of that?
Mr. Lormel. There is always going to be wiggle room, so you
have that 25 percent, I always make the misstatement if it is a
``good bad guy.'' a proficient bad guy who really understands
how to move money is certainly going to be able to circumvent
that.
Mr. Hill. Yes. And that is an area where if you had
aggregated information that you blended with SAR data in a
legal way, you have a much better shot at moving that success
ratio up.
Mr. Cohen, in your experience at FinCEN, does FinCEN
aggregate open source data with that SAR trail as you are
building a case, and to kind of respond to Dr. Shiffman and Mr.
Sharma's analysis?
Mr. Cohen. I will caveat that by saying it's not analysis
at FinCEN they do from my understanding in working closely with
them. Yes, they do aggregate open source information with the
BSA reporting that we receive, yes.
Mr. Hill. Right. So there are many good things, Mr.
Cleaver, in this bill that are really improvements over the
work, and I thank Mr. Perlmutter and Mr. Lynch, and Mr. Pearce
in the last Congress. We have listened to a lot of this. A lot
of what we have heard is captured here like trade-based money
laundering, and expanding the target on real estate, something
of concern to the Chair and to Mrs. Maloney. So there are many
improvements here, but I think we really tried to find some
bipartisan consensus on this definition on beneficial
ownership. I thank Mr. Rose. I yield the time back to Mr. Rose.
Chairman Cleaver. The Chair now recognizes Mr. Sherman from
California for 5 minutes.
Mr. Sherman. I want to focus a little bit on
cryptocurrencies. I think, ultimately, they will be swept into
the dustbin of history, but for purposes of these questions,
let's assume that they will continue to be around for a while.
They undercut the power of the United States Government.
First, the U.S. Government makes a lot of profit off of
seigniorage, and I may be mispronouncing that term, the profit
we make by minting money. We get to spend it first. Our banking
sanctions have been incredibly effective, in large part because
of the importance of the U.S. dollar, and cryptocurrencies seek
to deprive the United States of this money and this power.
Now, among those rejoicing in the hope that
cryptocurrencies will be successful are our foreign enemies,
and also a strange group of people who view themselves as
patriotic Americans. They just want to disempower the U.S.
Federal Government, a certain Libertarian stream that wants us
to stop terrorism so long as there is no power in the U.S.
Government. We want a currency to be a medium of exchange and a
store of value. The U.S. dollar is clearly superior to any
cryptocurrency in those two things.
So it appears as if from the user's standpoint, the
advantage of cryptocurrency is that it is a system for design
and transmission designed to evade the U.S. Government. That is
not only useful for terrorists, it is useful to ordinary
criminals, and it is useful to people who view themselves as
law-abiding Americans. They just want to cheat on their taxes.
Does cryptocurrency offer the user an advantage over U.S.
currency or other euros or whatever, if they are not intent on
evading Federal law? Mr. Sharma?
Mr. Sharma. Sir, thank you for the question. I think that
the first thing that we need to be taking great care of is that
not all cryptocurrencies are the same. Not all cryptocurrencies
are treated equal. Not all cryptocurrencies are created for
purposes of full evasion or anonymity. In fact, there are
tremendous benefits with respect to digital assets.
Mr. Sherman. The dollar can be a digital asset, too.
Mr. Sharma. Correct. Exactly.
Mr. Sherman. I am saying cryptocurrency as compared to a
dollar. Obviously, you wire money. You have been doing that for
100 years.
Mr. Sharma. Correct.
Mr. Sherman. And you can say cryptocurrency is better
because you can wire it.
I do want to move on to another question. Mr. Cohen, since
2016, FinCEN has had in place a continuous series of 6-month
geographic targeting orders or GTOs. Do these GTOs, title
insurance companies and a number of areas around the country
have worked with FinCEN to collect and report beneficial
ownership information of LLCs and other legal entities in
certain all-cash real estate purchase transactions?
It is my understanding that currently title companies are
the only segment of the real estate industry taking part in
Federal law enforcement programs to prevent money laundering.
How did FinCEN come up with the decision to rely primarily on
title companies for the collection of beneficial ownership
information to combat money laundering in real estate? And to
your knowledge, has beneficial ownership information collected
and reported to FinCEN by title companies benefited law
enforcement efforts?
Mr. Cohen. I have a quick reply to that because while I am
aware of the issue, I was not involved in the specifics of the
matter, but I do know that FinCEN worked very closely with law
enforcement agencies in industry in order to develop the GTO in
question. And I do know that information that has been provided
must be--I think it has been reported publicly and has been
useful to FinCEN.
Mr. Sherman. And have the title companies paid for their
efforts in this area?
Mr. Cohen. I am not sure. I am sorry about that.
Mr. Sherman. Does any other witness have a response to that
question about title insurance and GTOs? Hearing no answer on
that, I can go back and ask for another witness to identify
some advantage that cryptocurrencies have for the law abiding
user over the U.S. dollar. Dr. Shiffman?
Mr. Shiffman. As you said, sir, cryptocurrencies have
gained appeal in kind of the Libertarian sort of movements. The
advantage to criminals is that it has anonymity or actually
pseudonymity, and so therefore, it is like cash, but it is much
easier to move around than cash.
Mr. Sherman. It is the only currency designed chiefly for
law evaders. I yield back.
Chairman Cleaver. The Chair now recognizes the gentleman
from Missouri, Mr. Luetkemeyer.
Mr. Luetkemeyer. Thank you, Mr. Chairman, and I thank all
of the witnesses for being here today.
Mr. Lormel, I just want to first thank you for your
service, and then I would like to ask you about--you talked a
little bit today about the levels on SARs and CTRs, and I have
a concern about that from the standpoint of it hasn't been
raised since it was instituted 30, 40 years ago. I think Dr.
Shiffman made a comment that most of it was wasted. Can you
give me a justification for not raising the SARs and CTRs
whenever you have thousands and thousands and thousands of
these things, millions of them, quite frankly, and it takes
hundreds of thousands of people? How many people at FinCEN does
it take to overlook these things when it takes hundreds of
thousands of people to put them together?
Mr. Lormel. You certainly bring up a good point, but in
today's environment in particular, I think one of the biggest
problems that we are looking at now is micro structuring in
smaller amounts. The biggest threat we have is the homegrown
violent extremist. I can't give you accurate statistics,
because I am not in the FBI right now, but I believe that the
FBI has some statistics that they used last year in 2018 that
talked about the percentage of cases that CTRs, in particular,
were used in, and it was a pretty high level.
Mr. Luetkemeyer. I would love to have that information. If
you can get ahold of it for me, that would be great. My concern
is that we are weaponizing the banks. We are making law
enforcement officers out of them. I understand your position.
The more information you have, the better chance you have to
catch somebody, but let me ask you this question: Would you
support putting a policeman on every single corner to prevent
crime?
Mr. Lormel. I'm sorry?
Mr. Luetkemeyer. Would you like to see a policeman on every
single corner to prevent crime?
Mr. Lormel. In a perfect world, yes.
Mr. Luetkemeyer. Okay. That is my point. In a perfect
world, we had a single SAR for every single transaction, so
where do you draw the line? Do you draw the line on having an
office to put patrolmen every so many blocks, every so many
miles? It is just like the SARs and CTRs. There is a cost
benefit here. At some point--right now you have deputized the
banks to be law enforcement officers.
Mr. Lormel. On that point, that is dangerous in the sense
that I would never call the bankers, and want to deputize or
give them any--
Mr. Luetkemeyer. They are not enforcing law, but they are
gathering data for you, just like a detective would.
Mr. Lormel. Right.
Mr. Luetkemeyer. They are gathering data to help you make a
case.
Mr. Lormel. Their responsibility is to identify suspicious
activity and report it, and that is really important.
Mr. Luetkemeyer. I am not trying to say that this shouldn't
be done, but I am trying to say, look, we have to find a cost
benefit spot, or sweet spot, and I would like to work with you
to find a sweet spot where we can raise the threshold to allow
the hundreds or thousands or millions--some of these banks are
paying millions of dollars to do these SARs, and according to
Dr. Shiffman, most of it is wasted.
So Dr. Shiffman, I want to ask you to go back over your
numbers for me. Can you give me those numbers again? I think I
saw that 5 percent of SARs and CTRs actually provide value. Is
that what you said?
Mr. Shiffman. Yes, sir. Nobody knows for certain, but the
estimates based upon polling done of the banks and others in
the clearinghouse report, it is 5 percent at most.
Mr. Luetkemeyer. It looks to me like most of the money
laundering in today's world, isn't that being done with
cryptocurrencies anyway?
Mr. Shiffman. I don't know whether that is true.
Mr. Luetkemeyer. If you look at the size, the amounts.
Mr. Sharma. I think what you would find, sir, is that most
of the money laundered in the world is in cash, and we are not
going to outlaw cash.
Mr. Luetkemeyer. It is laundered through cryptocurrencies,
right?
Mr. Sharma. In some instances, but no, I would not argue,
nor have I seen any data to support that the most laundered
instrument in the world is crypto. I don't believe that is
true.
Mr. Luetkemeyer. Really. That is information I have been
given by multiple people, so that is interesting. Okay.
Dr. Shiffman, continue.
Mr. Shiffman. I would say just to bring the law enforcement
and Mr. Lormel's perspectives and mine together; law
enforcement loves the FinCEN database right now, because it is
massive, and 5 percent of a lot of data is a lot of data,
right? So they have a lot of data that they like, and I
wouldn't want to take that away. As Mr. Hill was saying, I
don't want to take data away from them.
Mr. Luetkemeyer. I am not advocating to take it away. I am
trying to find a way for everybody to live here--
Mr. Shiffman. Right.
Mr. Luetkemeyer. --to be able to do your job to find the
bad guys, but yet, don't push the cost on the financial
institutions and say, if you don't do this, then you are part
of the problem.
Mr. Shiffman. Right. I think we love the current system
because it is the system we have, but I think across law
enforcement, there is this understanding--
Mr. Luetkemeyer. Part of the bill, the BSA bill we put
together last year, Congressman Pearce and I had in there a
pilot program that had, I think, using some of your technology,
Dr. Shiffman, to have an algorithm sit there and figure out by
the transactions that go through a bank in a day's time, you
can figure out when you come in the next morning, there will be
a program, or a printout sitting there saying, we have three
people you need to take a look at for the transactions for the
day versus SARs and CTRs. That may be an indication, but there
are a whole lot of other transactions, I think, if you use the
right algorithm, it can actually do a better job. So that is my
point. There is a better way to do this than SARs and CTRs.
Thank you very much for your testimony.
Chairman Cleaver. Thank you, Mr. Luetkemeyer.
I would like to thank all of the witnesses for your
testimony today. You have been very helpful to us as we have
dealt with an issue, and one of the beauties about this
particular hearing is that there is no partisan component to
it.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
[Whereupon, at 3:53 p.m., the hearing was adjourned.]
A P P E N D I X
March 13, 2019
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