WASHINGTON. Today, Senator Carl Levin, D-Mich., Chairman of the U.S. Senate Permanent Subcommittee on Investigations, released a 104-page report by the Government Accountability Office (GAO) providing an overview of the state of federal anti-money laundering (AML) programs.

“GAO’s report provides a snapshot of our existing anti-money laundering programs to protect the U.S. financial system from misuse by terrorists, criminals, and other wrongdoers,” said Levin. “It shows that while AML programs in banking are far along, programs for securities firms, commodity traders, and money service businesses are only partially in place, while hedge funds haven’t even begun. It also shows that, in recent years, fewer AML exams have been completed and, as a result, AML enforcement is down. As we restructure our financial system, we need to include more effective AML protections and oversight to safeguard our financial markets.”

The Subcommittee has held a number of hearings on AML issues over the past ten years and, after the 9/11 attack, helped strengthen U.S. AML laws in the Patriot Act of 2001. In 2004, the Subcommittee released a report and held a hearing critical of oversight efforts by federal banking regulators to ensure bank compliance with the new AML requirements. Using Riggs Bank as a case history, the Subcommittee showed that federal banking regulators had repeatedly identified AML deficiencies at the bank but failed to correct them. In response, federal banking regulators strengthened their AML oversight efforts including by issuing a joint AML examination manual, requiring prompt correction of AML deficiencies, and improving tracking systems to determine whether AML deficiencies had been corrected.

The GAO report, which was prepared at the Subcommittee’s request, provides an overview of federal AML oversight as of 2008. It examines not only oversight of the banking sector, but other financial sectors which, as a result of the Patriot Act, were required for the first time to implement AML safeguards. These financial sectors include businesses that handle substantial funds, including securities and commodity firms, money service businesses such as money transmitters and cash checking companies, insurance firms, casinos, and others.

The GAO report explains that the Financial Crimes Enforcement Network (FinCEN), a bureau within the Department of the Treasury, provides general oversight of U.S. AML programs. GAO states that FinCEN has a staff of about 300 persons, up from 175 in 2001, and an annual budget of $73 million, up from $38 million in 2001. FinCEN is charged by Treasury with issuing regulations under the key AML laws and enforcing compliance with those laws.

The report also explains that FinCEN has delegated primary AML regulatory and examination authority to other federal agencies. For example, FinCEN has delegated AML oversight of the banking sector to the five federal banking agencies, the Federal Reserve, Office of the Comptroller General (OCC), Federal Deposit Insurance Corporation (FDIC), Office of Thrift Supervision (OTS), and National Association of Credit Unions (NCUA). GAO states they oversee about 16,600 banks, thrifts, and credit unions.

FinCEN has delegated AML oversight of securities firms to the Securities and Exchange Commission (SEC) which has, in turn, delegated day-to-day oversight of firms to the Financial Industry Regulatory Agency (FINRA), a private industry organization charged by the SEC with overseeing the securities markets. GAO states they oversee over 5,500 broker-dealers and 680 mutual funds.

FinCEN has delegated AML oversight of commodity firms to the Commodity Futures Trading Commission (CFTC) which has, in turn, delegated it to several private industry organizations charged with overseeing the commodity markets, such as the National Futures Association and Chicago Mercantile Exchange. GAO states they oversee about 150 futures commission merchants and 1,600 introducing brokers.

FinCEN has delegated AML oversight of all other types of covered financial institutions, including money service businesses, insurance companies, and casinos, to the Internal Revenue Service (IRS). GAO states that the IRS oversees about 200,000 money service businesses, the largest group of financial institutions assigned to the agency. GAO does not provide figures for the other types of financial institutions overseen by the IRS.

The GAO report explains that FinCEN works with each of these agencies to develop appropriate regulations, examination standards, and enforcement actions to ensure U.S. financial institutions comply with their AML obligations. Those obligations include implementing written AML policies and procedures, appointing an official to head the institution’s AML efforts, providing AML training to personnel, and auditing AML compliance. Most financial institutions are also required to file suspicious activity reports with FinCEN.

Examination data provided in the GAO report shows that banking institutions undergo a higher rate of AML examinations, compared to other financial sectors. Data contained in GAO Report Tables 2-6 and 10 shows, for example, that, of the 16,600 banking institutions, about 10,000 received AML examinations in 2005, and 9,400 received examinations in 2008, which means that more than half underwent an AML examination. In contrast, of 5,500 broker-dealers, about 2,800 received AML examinations in 2007, and about 2,600 received them in 2008. Of 680 mutual funds, about 100 received AML examinations in 2007, and another 100 in 2008. Of the 150 commodity trading firms and 1,600 introducing brokers, about 320 received AML examinations in 2005, and about 200 received them in 2008. Of the more than 200,000 financial institutions overseen by the IRS, about 8,500 received AML examinations in 2007, while about 9,200 received them in 2008.

These figures show that the number of AML examinations performed by federal agencies other than the IRS has declined in recent years, with a corresponding decrease in the number of AML violations identified and enforcement actions taken. For example, banking regulators took 49 formal and 6,500 informal AML enforcement actions in 2006, but only 37 formal and 3,400 informal enforcement actions in 2008. Securities regulators took 34 formal AML enforcement actions in 2007, but only 25 in 2008. Commodity regulators took 21 formal AML enforcement actions in 2006, but only 8 as in 2008 as of August 2008.

With respect to the IRS, the report explains that the IRS has no independent AML enforcement authority and must refer cases to FinCEN for enforcement. The report states that, from 2006 to 2008, the IRS referred about 50 cases to FinCEN for enforcement action, without breaking down the referrals by year. In addition, GAO states that, in 2008, FinCEN reported taking an average of 485 days, more than one year, to review referrals sent to its Office of Enforcement. GAO does not specify how many enforcement actions actually resulted from the IRS referrals. GAO reports that FinCEN and the IRS have now accepted a GAO recommendation to strengthen FinCEN procedures for handling enforcement referrals.

The GAO report also identifies significant discrepancies among the agencies in the number of examiners with AML expertise and the frequency of AML examinations. Although all examiners receive AML training, available data shows that, in 2008, over 450 banking examiners with specific AML expertise helped conduct about 9,400 AML exams; about 30 SEC and FINRA examiners with specific AML expertise helped conduct about 2,600 AML exams; and about 385 IRS examiners conducted about 9,200 AML exams. For commodities firms, the report states that no examiners are dedicated solely to AML examinations, but about 200 examiners have received AML training during the course of their duties. The report also discloses that while bank and commodity examinations are scheduled for every 9-18 months, examinations of securities firms are required at least once every 4 years.

GAO reports further that, while banking and IRS examiners use AML examination manuals which are available to the public, securities and commodity examiners use examination manuals which are not publicly available and cannot be discussed in a public setting. The report does not provide any rationale for keeping the manuals secret and points out the benefits of federal regulators developing and applying consistent AML examination standards across the financial sector.

“The deficiencies in our anti-money laundering programs do not end with the problems identified in the GAO report,” said Levin. “Two additional big problems are FinCEN’s failure to close the hedge fund loophole that allows millions of unscreened offshore dollars into the U.S. financial system, and FinCEN’s failure to meet a 2008 deadline to bolster U.S. incorporation practices. Both are problems that we can and should fix as part of our efforts to strengthen U.S. financial regulation.”

Despite a 2001 Patriot Act requirement that all U.S. financial institutions, including hedge funds and other securities and commodity broker-dealers, adopt procedures to prevent terrorist financing and money laundering, FinCEN has not taken the steps needed to require those companies to set up AML programs. In 2006, as part of an investigation into offshore jurisdictions, the Subcommittee showed how two U.S. citizens were injecting millions of offshore dollars into the U.S. financial system through two hedge funds they operated. A bipartisan Subcommittee staff report recommended that FinCEN finalize a regulation, which FinCEN had proposed four years earlier in 2002, to require those companies to establish AML programs. Instead of finalizing the regulation, however, FinCEN inexplicably withdrew it in 2008. In the absence of that regulation, Levin has introduced legislation, S. 506, to require hedge funds and other unregistered securities and commodity dealers to set up AML programs.

A second problem not addressed in the GAO report involves U.S. incorporation practices. Right now, states form about 2 million U.S. corporations each year without knowing who is behind them, in violation of an international AML standard requiring countries to identify the beneficial owners of the corporations they form. In 2006, at a Subcommittee hearing on this issue, FinCEN testified that it was considering proposing a regulation to require states to identify the beneficial owners of the corporations formed under their laws. At the time of the hearing, the United States was facing a July 2008 deadline set by the leading AML international body, the Financial Action Task Force on Money Laundering, to strengthen its incorporation practices. FinCEN, however, never proposed the regulation, the United States missed the deadline, and it is now out of compliance with the international AML standard. In the absence of any regulation issued by FinCEN on this matter, Levin has introduced legislation, S. 569, to require states to obtain beneficial ownership information for the corporations they form.

Other portions of the GAO report show that FinCEN has taken years to implement the stronger AML protections required by the 2001 Patriot Act. GAO points out, for example, that FinCEN took years to conclude AML memorandums of understanding (MOUs) with the key agencies. It signed an MOU with the banking agencies in 2004, with the SEC and IRS in 2006, and with the CFTC just two months ago in January 2009. GAO points out that FinCEN took until 2006 to replace a paper-based system for tracking case referrals with an electronic case management system. GAO also highlights an ongoing problem with a FinCEN policy that denies direct access to its database of suspicious activity and currency reports for SEC and CFTC regulatory organizations that employ private sector rather than government personnel. GAO indicates that, by requiring these organizations to go through the SEC and CFTC to obtain its data, FinCEN not only creates delays, but places a strain on the two agencies that have to forward the data. GAO recommends that FinCEN permit direct access to its data.

GAO also recommends that all of the government agencies involved with AML oversight create a nonpublic forum in which they can discuss examination and enforcement issues.

The GAO report [GAO-09-227] can be found at: .