Testimony of the 108th Congress
The 9/11 Commission Report: Identifying and Preventing Terrorist Financing
HOUSE FINANCIAL SERVICES COMMITTEE
AUGUST 23, 2004
The Independent Community Bankers of America (ICBA)1 is pleased to submit this written statement on behalf of our nearly 5,000 community bank members, and to share with you their views on the fight against terrorist financing. As President Bush and others have stated, the war on terror will take place on many fronts, and the financial system plays a vital role. For us, compliance is not optional.
Community bankers are committed to support effective measures that will stop and deter terrorists from using the financial system to transfer money to fund their operations. At the same time, the ICBA strongly urges the federal government to recognize the costs and burdens that these requirements place on financial institutions, especially community banks. ICBA members want to work with Treasury, law enforcement and others in the public and private sectors to find ways to enhance communication and streamline regulatory requirements that will allow us to effectively assist law enforcement. For example, the rules under section 314(a) of the USA PATRIOT Act require banks to undertake extensive and frequent record reviews to search for matches with possible suspects while new Customer Identification Program rules require extensive tracking of data on the information used to verify a customer's identity. Simplifying this process and focusing the requests will increase the resources community banks can devote to meaningful efforts to ferret out terrorist financing schemes. The Treasury Department has made great strides in this effort, and we look forward to continuing to work with Treasury and law enforcement to produce results in a cost-effective manner.
Community bankers can serve as a valuable resource for the government in the war on terrorist financing, and we understand in this post 9/11 environment that everyone has a responsibility and a role, from the individual man on the street, to the community bank to law enforcement and the intelligence agencies. Enhanced communication on suspicious activity is a major part of the recommendations in the 9/11 Commission Report, and will require a cooperative effort on all levels, including community bankers. However, it is critical that community bankers are given appropriate information by law enforcement and the federal government that allows them to recognize the elements that create suspicion. In the same regard, once bankers file Suspicious Activity Reports (SARs) it is imperative that they receive feedback from law enforcement and intelligence agencies as to whether the information provided is consistent with the information needed. We fully recognize that information about ongoing investigations must remain confidential, but we believe that there is room for improvement in the amount of communication provided to the financial sector. For example, the ICBA has been working closely with Treasury and FinCEN on the regular production of the SAR Activity Review, to provide information to our members on suspicious activities, but more can be done. Small amounts of guidance and communication can make large strides in this joint effort. As in combat, the soldiers on the front lines need feedback and communication to ensure they are as effective as possible. Without effective and meaningful communication and data sharing between regulators, banks, law enforcement and intelligence agencies, terrorist financing cannot be targeted in the most effective and efficient manner. And, as has been recognized, that communication must go both ways.
Community bankers pride themselves on the personal nature of the service they provide their customers. Knowing their customers is one of the key elements that sets community banks apart from the growing mega banks. Our members have the unique and valuable advantage of knowing their customers on a personal level and forming real relationships with them on a daily basis. Many of this country's community banks are located in smaller communities across the country, where any newcomers are welcomed and duly noted by those who live there. As a result of this close contact and customer knowledge, community bankers are in the position to immediately recognize any abnormal or suspicious activity.
However, even with the personal nature of community banking, identifying terrorist financing schemes can be difficult, a notion that even the Treasury Department and law enforcement recognize. Since September 11, 2001, bankers' roles have evolved and expanded to include intelligence gathering to support the war against terrorist financing and to help prevent the United States financial system from being abused for terrorist ends. Banks need to be informed of and educated about methods and means to identify "red flags" that signify terrorist schemes. Because of the wide and varied financing mechanisms employed by terrorists to earn, move and store their assets, it can be very difficult to detect their activity. Thus, even the savvy bank employee who is very familiar with his or her customers and their routine transactions may not be able to recognize the subtle ways finances are used and moved by terrorists.
According to a November, 2003, GAO report on terrorist financing, terrorist organizations most often use informal banking systems like non-bank money services businesses rather than conventional bank systems to transfer assets due to the lack of transparency and liquid nature of the informal systems. Terrorists often store their assets in cash or commodities that are easy to buy and sell outside of our formal banking system. Therefore, efforts to disrupt terrorist financing must also naturally focus outside of mainstream financial institutions and the formal banking system, as provisions of Title III of the USA PATRIOT Act, which greatly expanded the requirements of the Bank Secrecy Act beyond the banking sector, recognized.
It is equally important that Congress and regulators not take steps that drive individuals away from using community banks and the banking system. Banks in the United States have a long history of tracking and documenting transactions. Steps that make it difficult for individuals to open bank accounts only encourage the growth of underground financing systems. For example, banning certain forms of identification may actually foster the growth of these systems by making it difficult to open bank accounts, thereby driving individuals away from established banks and encouraging the growth of underground systems to serve their financial needs.
As a result of the war on terrorist finance, banks are forced to walk a very thin line between data collection and retention while remaining within Congressionally mandated requirements to protect each customers' financial privacy. Bankers are rightly concerned with potential conflicts between protecting customer privacy and ensuring the security of their information, such as those demanded by Title V of the Gramm-Leach-Bliley Act, and customer identification requirements under section 326 of the USA PATRIOT Act. And, although guidance has begun to appear, bankers are concerned about the overall lack of regulatory guidance, especially on practical issues such as retention of copies of a customer's driver's license. This task is not insurmountable, but certainly imposes a burden on community banks and their customers. Numerous regulations have been adopted to carry out the provisions of the USA-PATRIOT Act. While these rules generally are flexible and allow banks latitude in developing their own risk-based compliance programs, the ICBA encourages the federal government to continue to work with the banking industry to provide additional guidance - such as best practices, questions and answers, or commentary - that is understandable, workable and easily applied by community banks. The ICBA applauds the announcement by FinCEN that it will offer additional guidance in this area in the near future, and we look forward to continuing to work with them in these efforts. The ICBA strongly urges Treasury to continue to refine the process for record reviews under section 314(a) and encourages the Office of Foreign Asset Control to streamline and simplify its lists for ease of reference and application by bankers.
As the effort continues to combat money laundering and terrorist financing, it is important to focus on quality over quantity for all Bank Secrecy Act reporting. The threshold triggering a Currency Transaction Report (CTR) filing has remained at $10,000 for many years. Congress has given Treasury a goal to reduce the level of CTR filings, and we strongly endorse Treasury's efforts to reduce the number of CTRs and to eliminate unnecessary filings on routine transactions that provide no meaningful information for law enforcement but that impose needless burdens and costs on the industry. Along with representatives from the federal government, law enforcement and the private sector, the ICBA is working with a Treasury task force to help achieve this goal, and we look forward to continuing working with Treasury to make the exemption system workable and to eliminate unnecessary reporting. We encourage the government to require reporting of only truly suspect transactions, and to strive to balance those requirements against the need to respect customer privacy.
The Independent Community Bankers of America strongly supports and is committed to the war against terrorist financing and eliminating money laundering. Terrorist financing will be defeated if we all communicate and work cooperatively to recognize and investigate suspicious transactions. We understand there will inevitably be changes in rules and practice standards as a result of our ever changing world and assure you that we are committed to this effort. However, we ask that all new rules be made clear, understandable, and workable, not just for the most sophisticated international bank, but for community banks in towns and neighborhoods across the country.