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Committee on Financial Services

United States House of Representatives

Archive Press Releases

Text as Prepared for Delivery
March 11, 1997

Treasury Under Secretary for Enforcement Raymond W. Kelly

The New York Money Transmitter Geographic Targeting Order

Statement before the
U.S. House of Representatives Banking Committee
Subcommittee of General Oversight and Investigations

Introduction. Good morning Mr. Chairman and members of the Subcommittee. I am pleased to appear before the Committee to discuss Treasury enforcement's successful use of a geographic targeting order (GTO) or "The Order" to fight narcotics money laundering through a segment of the money transmitter industry in the New York Metropolitan Area. The New York GTO has been in place now for over seven months, and it has caused a dramatic reduction in the amount of illicit funds moving through New York money transmitters.

The circumstances surrounding the Treasury's issuance of the New York GTO, and the lessons we are learning from it, are significant for Treasury enforcement, and we appreciate your interest. The El Dorado Task Force investigations that led to the issuance of the GTO demonstrate the value of Treasury's coordinated, systematic attack on money laundering problems affecting a particular segment of an industry. The implementation of the GTO is an example of enforcement and regulatory cooperation at its best. Perhaps most important, the GTO has demonstrated graphically that drug money launderers have been extensively abusing a segment of the relatively unsupervised money transmitter industry, and that this underground market does respond to regulatory and enforcement pressures. The GTO therefore confirms the need for all of us to work together to bring appropriate resources to bear more broadly on the problem.

The GTO. If you would, allow me to provide you with a brief overview of the GTO. The GTO has been in place since August 7, 1996, and is currently scheduled to expire on April 3, 1997. It currently requires 22 licensed money transmitters and their approximately 3,500 agents to report information about the senders and recipients of all cash purchased transmissions to Colombia of $750 or more. The GTO was issued under a provision of the Bank Secrecy Act which allows the Treasury, either on its own initiative or upon a request from an appropriate law enforcement authority, to require a financial institution or a group of financial institutions in a geographic area to comply with special reporting or record keeping obligations. The special requirements may be put in place upon finding that there is reason to believe that such reporting or record keeping is necessary to ensure compliance with, or prevent evasions of, the Bank Secrecy Act. GTOs may be authorized for no more than 60 days at a time.

The statute and regulations under which the GTO was issued constitute a very flexible and powerful tool. Prior to the New York GTO, Treasury had issued two other GTOs: in Phoenix in 1989; and in Houston in 1991. Like the New York GTO, both of the earlier orders required special reporting of cash purchased money transfers through non-bank money transmitters. But the past two GTOs were not as successful as the New York GTO. This was so because they were not issued in the context of a sustained, multi-agency law enforcement and regulatory task force investigation into abuses across a broad segment of an industry.

Extension and Expansion. The GTO was extended and expanded in October to include a total of 22 licensed transmitters and approximately 3,200 agents. The order was extended again in December, and a third time at the beginning of February.

The Money Transmitter Industry. In addition to a review of the GTO itself, an examination of the money transmitter industry is essential to understanding Treasury's initiative. Due to the global trend of rapidly increasing electronic commerce and the continuing influx of immigrants who use international transfer services to send money home to family and friends, the U.S. market for money transmission services has grown steadily over the last ten years. U.S. money transmitters remit upwards of $10.8 billion, exclusive of fees, each year, through approximately 43,000 locations nationwide. The industry is highly concentrated: the vast majority of the funds transfers and locations are handled by two companies, Western Union and MoneyGram. And most of the money transmission outlets are concentrated in six major states: California, New York, Texas, New Jersey, Florida, and Illinois.

Most of the smaller money transmitters in competition with the major national companies are oriented toward particular ethnic markets and rely on their own service infrastructures for transferring funds, and for communications and settlement among outlets. The niche customers served by these smaller providers are willing to pay a premium for value- added services, such as receiving informal news from other countries. These niche transmitters often are bilingual, and located in urban ethnic communities.

State regulators are monitoring the growing money transmission market with great interest. Twenty-three states now have licensing requirements for money transmitters, but those regulations vary a great deal, and are primarily focused on consumer protection issues. Some states, including New York, also require each licensed money transmitter to register the names and locations of each of its legal agents or vendors. There are 52 licensed money transmitters in New York, which operate through thousands of agents.

Despite these licensing procedures, it has become clear that the money transmitter industry is vulnerable to abuse by organized money launderers. This fact has been made plain as day by the work of the Treasury-led El Dorado Task Force.

El Dorado. The third piece of the picture requires further description. The El Dorado Task Force can serve as a model of interagency cooperation and innovation in combating a broad base of money laundering and financial crime. The task force is a joint federal, state and local effort that includes some 140 agents, police officers and support personnel from 13 agencies, including the Customs Service, IRS Criminal and Examination Divisions, the Secret Service, the NYPD and New York State Banking Department. The task force targets systems or industries that facilitate money laundering. Its resources are aimed at abuses in non-bank financial institutions, banks, brokerage houses and private banking, and the bulk transportation and smuggling of cash. Since its inception in 1992, El Dorado has enjoyed a legacy of success unmatched in federal law enforcement. The task force has seized in excess of $150 million in currency, made 700 arrests, and captured more than 2 tons of cocaine and 120 pounds of heroin.

El Dorado's Operation Wire Drill helped lay the groundwork for our GTO. Wire Drill is an ongoing investigative effort focused on systemic abuses in the money transmitter industry. Over the past several years preceding the GTO, Operation Wire Drill investigations have led to the conviction of hundreds of persons and the seizure and forfeiture of over $10 million dollars associated with money laundering through the agents of licensed money transmitters. These investigations focused primarily on transfers of funds to Colombia and the Dominican Republic. El Dorado has been able to demonstrate the complicity of money remitter agents in the simple scheme of structuring large cash transactions to avoid the reporting and record keeping obligations of the Bank Secrecy Act, using false invoices and fabricated identities of senders and recipients.

In July 1996, based on an investigation conducted by the El Dorado Task Force, the government secured the first-ever guilty plea of a licensed money transmitter, Vigo Remittance Corp., to money laundering charges.

Armed with information generated by El Dorado's Wire Drill investigations, the U.S. Attorneys from the Southern District of New York, the Eastern District of New York, and the District of New Jersey, along with senior officials of Customs, IRS, and FinCEN presented me with a compelling case that a GTO would be an appropriate measure to take with respect to a broad segment of the money transmitter industry in the New York area.

Tailoring the GTO. As I already have indicated, the GTO is a very flexible tool. FinCEN worked closely with the primary Assistant U.S. Attorney, and representatives of Customs, IRS and the Department of Justice, to review the application and craft an appropriate order. Twelve licensed transmitters and their 1,600 agents were identified as particularly vulnerable to abuse. A number of factors were considered in addition to the evidence generated by the Wire Drill investigations in the identification of their subjects. Perhaps most strikingly, the business volume of the 12 money transmitters simply did not accord with the size of the Colombian community in the New York area. New York State Banking Department figures indicated that the 12 originally targeted transmitters, serving a community of approximately 25,000 households, have been sending approximately $1.2 billion annually to South America. About two thirds of this amount, or $800 million, goes to Colombia. To account for this figure, each Colombian household would have to send approximately $30,000 per year through money transmitters to Colombia. Given that the median household income of this same community is roughly $27,000 per year, there was cause for concern.

The terms of the GTO. The terms of the order were designed to avoid interfering with legitimate commerce as much as possible.

--The order was directed against transactions to Colombia because of its peculiar status as perhaps the predominant narcotics source country in this Hemisphere.

--The reporting threshold of $750 was estimated to be well above the average legitimate transmission of $200 - $500.

--Money transmitter agents were required daily to report identifying information about the sender and recipients of each covered transaction on a special form, and to collect and file a copy of one of three standard forms of photo ID of the sender.

--At the same time, the licensed money transmitters were required to file, electronically on a weekly basis, the same information filed by the agents. This feature of the order was intended to enable investigators to check the accuracy and completeness of filings, by comparing the filings of the agents with the filings of the licensed money transmitters.

Finally, the GTO was made confidential, so that it would be a breach of the order to notify any person (other than an attorney or accountant in the context of seeking professional advice) about its terms or even its existence.

All of the information reported under the GTO is collected at the New York High Intensity Drug Trafficking Area (HIDTA) office and entered into a database designed by FinCEN to facilitate entry and analysis of the information collected.

Effects of the GTO . At this point, I would like to highlight directly the results the GTO has produced. The GTO caused an immediate and dramatic reduction in the flow of narcotics proceeds to Colombia through New York City money transmitters. Curiously, business to Columbia dropped off even at the money remitters not subject to the GTO. This suggests that much of the money remitted to Colombia has been controlled centrally by high level cartel money brokers.

Our analysis of data generated by the GTO is ongoing, but the targeted money transmitters' overall business volume to Colombia appears to have dropped by approximately 30%. We believe that most of this money has been physically removed from the New York Metropolitan area, either for transfer through money transmitters operating in other cities along the East Coast, or for bulk smuggling out of the U.S. On this latter point, we have observed a dramatic increase in Customs interdiction and seizure activity at the airports, seaports, common carriers and highways along the east coast -- over $50 million since the GTO went into effect. This figure is approximately four times higher than it has been in prior years. We have also gleaned a substantial amount of intelligence out of Customs undercover operations.

At the same time, it is clear that a significant number of money transmitter agents have been willing to structure transactions beneath the GTO's $750 reporting threshold. The number of transactions in amounts below $750 have risen sharply, and the amount of funds transferred to Colombia in such increments appears to have almost doubled. The El Dorado Task Force has already arrested three defendants, and executed search warrants on 22 money transmitter agents suspected of intentionally structuring transactions in violation of the Order; additional people are currently under investigation. One of the three defendants has already pleaded guilty. Two suspects are considered fugitives. El Dorado is continuing to pursue investigations of this type. Treasury will consider imposing civil penalties against violators who are not pursued criminally.

GTO Filings. Ironically perhaps, the reports of transactions actually required by the GTO -- on cash purchased transfers of $750 or more to Colombia -- have proven to be of only limited use to investigators. Although we have no indications of widespread non-compliance with the order, only about 1,000 required filings have been received each month. These filings have for the most part amounted to a "good guy" database with information about people who have nothing to hide.

Industry Reaction.. Several aspects of the industry response to the GTO are notable. First, representatives of most of the licensed money transmitters have reported that they generally approve of the GTO. Some have praised the GTO's "bright line" rule, observing that it is is both easy to follow and easy to enforce upon their agents. They also welcome the GTO's elimination of any unfair competitive advantage one transmitter might have over the others. They believe the GTO assists them in maintaining their network of agents, and that it is it is particularly important to those transmitters which have imposed tight restrictions on their agents in response to pressure already brought to bear upon them by El Dorado investigators.

Also of interest, is the fact that since the GTO was put in place, several money transmitter agents have lowered their fee for transfers to Colombia from 7% to 5% of the value of the transfer. This appears to be a logical business response to a reduction in the demand for services. This is particularly important because it represents a benefit of the GTO to legitimate customers of money transmitters.

Next Steps. The final issue I would like to discuss today is next steps. The GTO's confidentiality provision was lifted in early December, in order to begin a public policy discussion about what has been learned, and what next steps are available and appropriate.

Naturally, we have begun to consider whether, and under what circumstances, the Department of the Treasury might wish to issue additional GTOs. The New York experience has taught us a couple of key lessons as we ponder this question. First -- and I can't stress this point enough -- the task force environment is key to the successful management of the additional administrative, analytic and investigative work involved in a GTO. Without the coordinated analytic and investigative effort involving all of the El Dorado task force participants, we would not even know what a success we have, let alone be in a position to capitalize on it. In addition, the New York GTO involved considerable administrative effort (and opportunity cost), much of which was born by FinCEN.

Second, the efforts of the U. S. Attorney's Office in the Eastern District of New York in pursuing a series of cases over a two- year period were critical to building an investigative foundation that justified the GTO. We applaud the Department of Justice for encouraging other districts, to take this kind of approach. This is a classic example of less in the short term leading to more in the long term.

Third, the GTO tool is intended to prevent and detect abuses, and cannot replace traditional enforcement techniques. The New York experience has demonstrated the powerful enforcement ramifications a GTO can have when the local authorities are prepared to make use of it and where the regional record justifies it. Those conditions may not prevail everywhere, at all times.

With this in mind, and in the context of our overall strategy to combat money laundering, we at Treasury intend to continue looking carefully, and working with the Department of Justice and other law enforcement and regulatory officials, to find appropriate situations that may lend themselves to application of additional, tailored GTOs in other locations.

Permanent Regulatory Solutions. We are also nearing completion of a number of notices of proposed rulemaking intended to address vulnerabilities in the money transmitter industry. First, we intend to implement the Congressional mandate to register money services businesses generally. A Federal registration requirement -- while relatively easy for businesses to comply with -- will consolidate information about the industry for investigators, and put real teeth into the law that already makes it a federal crime to operate an unlicensed or unregistered money transmitting business. In addition to the registration requirement, we hope to publish in the near future proposed rules to require special record-keeping and reporting by money transmitters. Finally, we are working with the Department of Justice to develop a series of meetings of U.S. Attorney's and Federal law enforcement agencies from other parts of the country where drug money laundering is a particular problem. We will be looking to explore ways to leverage Treasury's unique tools in partnership with Justice to develop additional innovative strategies.

Conclusion. In closing, I would like to emphasize how proud I am of the men and women in Treasury enforcement as well as the Department of Justice, the New York Police Department, and the New York State Banking Department, who have worked so hard to make the El Dorado Task Force and the New York GTO so successful. The dedication to service, team-work, and professionalism demonstrated by these individuals is deserving of the Committee's attention. Thank you for the opportunity to tell you their story.

I would be happy to answer any questions you may have.



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