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Policing Money Laundering Through Fund Transfers: A Critique of Regulation Under the Bank Secrecy Act

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Indiana Law Journal Volume 67 Issue 2 Article 4 Winter 1992 Policing Money Laundering Through Fund Transfers: A Critique of Regulation Under the Bank Secrecy Act Sarah Jane Hughes Indiana University School
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Indiana Law Journal Volume 67 Issue 2 Article 4 Winter 1992 Policing Money Laundering Through Fund Transfers: A Critique of Regulation Under the Bank Secrecy Act Sarah Jane Hughes Indiana University School of Law, Follow this and additional works at: Part of the Banking and Finance Law Commons, and the Criminal Law Commons Recommended Citation Hughes, Sarah Jane (1992) Policing Money Laundering Through Fund Transfers: A Critique of Regulation Under the Bank Secrecy Act, Indiana Law Journal: Vol. 67: Iss. 2, Article 4. Available at: This Symposium is brought to you for free and open access by the Law School Journals at Digital Maurer Law. It has been accepted for inclusion in Indiana Law Journal by an authorized administrator of Digital Maurer Law. For more information, please contact Policing Money Laundering Through Funds Transfers: A Critique of Regulation Under the Bank Secrecy Act SARAH JANE HutOEs* Wire transfers, which are essentially unregulated, have emerged as the primary method by which high volume launderers ply their trade. ' [M]oney launderers... always seem to be one step ahead of the cash 2 cops.' INTRODUCTION International funds transfers 3 have become drug dealers' favorite mechanism for money laundering. 4 The paucity of controls on wire transfers relative to other means of laundering monies is the primary reason for their popularity among drug dealers. For several years, Congress and drug enforcement officials have known of this state of affairs. Beginning with the Anti-Drug Abuse Act of 1988, 5 Congress authorized the Department of * Adjunct Associate Professor of Law, Indiana University School of Law at Bloomington. J.D., 1974, University of Washington; A.B., 1971, Mount Holyoke College. The author wishes to thank Chancellor Gerald L. Bepko of Indiana University-Purdue University at Indianapolis and Dean Ralph Rohner of The Columbus School of Law, Catholic University of America, for their encouragement of this work, and R. Kevin Belt, Indiana University School of Law, 1991, and Antje Petersen, Indiana University School of Law, 1992, for their assistance in researching and editing it. 1. AmERicAN BA,Rs AssOCiATiON MoNY LAuNDERING TASK FORCE, TOWARD A NEW NATIONAL DRUO Pouicy-THE BANKiNG INDusTRY STRAGY, reprinted in 135 CONG. Rnc. S5555, 5556 (daily ed. May 18, 1989) [hereinafter MONEY LAUNDER]N TAsK FORCE]. 2. Money Laundering in Florida: Banking Compliance, Federal Enforcement Measures, and the Efficacy of Current Law: Hearing Before the Subcomm. on Consumer and Regulatory Affairs of the Senate Comm. on Banking, Housing, and Urban Affairs, 101st Cong., 1st Sess. 119 (1989) [hereinafter Money Laundering in Florida] (statement of Charles A. Intriago, Esq., Publisher of Money Laundering Alert). 3. Funds transfers also are called wire transfers. 4. As a senior Internal Revenue Service official explained it, [m]oney laundering is the concealment of the existence, nature or illegal source of illicit funds in such a manner that the funds will appear legitimate if discovered. Thus, 'dirty' money is washed in order to appear 'clean. ' Business Community's Compliance with Federal Money Laundering Statutes: Hearing Before the Subcomm. on Oversight of the House Comm. on Ways and Means, 101st Cong., 2d Sess. 142 (1990) (statement of Michael J. Murphy, Senior Deputy Commissioner, Internal Revenue Service). 5. Pub. L. No , 102 Stat (1988) (codified as amended in scattered titles of U.S.C.). Section 4702 of the Act (codified as amended at 31 U.S.C (1988)) also instructed the Secretary of the Treasury to undertake negotiations with nations that have strict bank secrecy laws to increase access for United States enforcement authorities to bank records in aid of drug prosecutions. INDIANA LAW JOURNAL [Vol. 67:283 the Treasury (Treasury) to impose more stringent controls on wire transfers. Congress's purpose was to enable law enforcement officials to trace the proceeds of narcotics trafficking more effectively. 6 In October, 1989, the Treasury announced its intention, under that authority, to impose additional recordkeeping and reporting requirements on banks that originate or receive the proceeds of international wire transfers. By October, 1990, the Treasury issued a revised proposal (the 1990 Funds Transfer Proposal) and expanded its reach to domestic as well as international wire transfers. 8 Throughout the Treasury's deliberations on this proposal, Congress has considered even stricter statutory controls on domestic as well as international wire transfers. 9 These proposals have encountered substantial opposition on several fronts from financial institutions and financial regulatory agencies. In particular, opponents have pointed to the array of methods and the nonstandard formats used by financial institutions and communications systems in international and domestic wire transfers.' 0 They also have argued that the difficulty and costs associated with standardizing the communications formats to capture data sufficient for policing purposes would eliminate the 6. The Act authorized the Treasury to adopt specific recordkeeping and reporting requirements for wire transfers in addition to the long-standing general reporting requirements in 31 C.F.R (1990). In addition, it enabled the Treasury to require financial institutions to report transactions, including international wire transfers of funds, with foreign financial institutions in a designated location for a limited period of time. 54 Fed. Reg. 45,770 (1989) (discussing 31 C.F.R (1990), which authorizes the Treasury to require reports of financial institutions). Title 31 of the U.S.C. and the C.F.R., however, require the Secretary of the Treasury to balance law enforcement priorities against the effect of new recordkeeping on the cost and efficiency of the payments system. 31 U.S.C (1988); 31 C.F.R (1990). The targeting for geographic areas permitted by 31 U.S.C (1988) and 31 C.F.R (1990) is limited by the paucity of information about the parties to the wire transfer, known as the originator and beneficiary, respectively. 54 Fed. Reg. 45,770 (1989) Fed. Reg. 45,769 (1989) (proposed Oct. 31, 1989) [hereinafter 1989 Funds Transfer Proposal]. The Treasury requested comment on several alternatives for the retention and maintainance of data on international wire transfers. 8. Proposed Amendment to the Bank Secrecy Act Regulations Relating to Recordkeeping for Funds Transfers by Banks and Transmittals of Funds by Other Financial Institutions, 55 Fed. Reg. 41,696 (1990) (proposed Oct. 15, 1990) [hereinafter 1990 Funds Transfer Proposal]. This notice of proposed rulemaking covers non-bank funds transmittals such as those processed by currency exchanges, telegraph companies, and registered securities broker-dealers. Id. at 41,704 (proposed amendments of 31 C.F.R , to be codified at 31 C.F.R (0). 9. E.g., 136 CoNo. Rac. at H (daily ed. Apr. 25, 1990) (amendment to H.R proposed by Sen. Torres). The House of Representatives passed H.R without this provision. S. REP. No. 460, 101st Cong., 2d Sess (1990); House Passes Bank Bill on Money Laundering, N.Y. Times, Apr. 26, 1990, at D2, col E.g., Money Laundering Legislation: Hearing Before the Subcomm. on Financial Institutions Supervision, Regulation and Insurance of the House Comm. on Banking, Finance and Urban Affairs, 101st Cong., 2d Sess (1990) [hereinafter Money Laundering Legislation] (statement of Clyde H. Farnsworth, Jr., Director, Division of Federal Reserve Bank Operations, Board of Governors of the Federal Reserve System). For more information about funds transfer systems, see J. DoIAN, UNrFoEm CoMMERCAt CODE TEMss AND TRANSACTONS IN CoimmatcrL LAW 25 (1991). 1992] POLICING MONEY LAUNDERING chief attractions of wire transfers as inexpensive, speedy, efficient payment mechanisms. In addition, bank regulators have pointed to other difficulties of policing international as well as domestic transfers due to the number of daily transactions 2 and to the problems of capturing data about the parties to the transfer who are not present in the United States.' 3 Finally, bankers have expressed their dissatisfaction with their increasing responsibilities in the current war against drug trafficking, 4 particularly the proportion of the investigatory burden they must bear, and questioned the likelihood that records kept under the proposal would be useful in law enforcement proceedings. 15 During the early debate about the need for stricter controls on funds transfers and on the scope of those controls, the National Conference of Commissioners on Uniform State Laws and the American Law Institute 11. See Money Laundering Legislation, supra note 10, at (statement of Clyde H. Farnsworth, Jr., Director, Division of Federal Reserve Bank Operations, Board of Governors of the Federal Reserve System); 136 CONG. REc. H1727, H1729 (daily ed. Apr. 25, 1990) (statements of Reps. McCollum and Hiler) (debate on Torres amendment to H.R. 3848). 12. The Board of Governors of the Federal Reserve System (Federal Reserve Board) reported that Fedwire and the Clearing House Interbank Payments System (CHIPS) process approximately 350,000 funds transfers each day with an aggregate worth of approximately $1 trillion. 55 Fed. Reg. 40,791 (1990) (final rule amending 12 C.F.R. 210, adopting U.C.C. Article 4A for funds transfers through Fedwire). 13. Witnesses expressed doubts that regulation of the domestic side of an international funds transfer would provide much useful data because of bank secrecy laws enforced by many nations. E.g., Money Laundering Legislation, supra note 10, at 16 (statement of Clyde H. Farnsworth, Jr., Director, Division of Federal Reserve Bank Operations, Board of Governors of the Federal Reserve System). Some predicted that without significant changes in the laws of other countries legislation such as H.R and the funds transfer proposal would be less meaningful. E.g., H. RaP. No. 446, 101st Cong., 2d Sess. 21 (1990) (Depository Institution Money Laundering Amendments of 1990); see also Other Agencies Say No Soap to Treasury's Push for High-Tech Tracking of Money Laundering, Wall St. J., Dec. 14, 1989, at A22, col See, e.g., Money Laundering in Florida, supra note 2, at 109, 111 (prepared statement of Peter R. Fowler, Vice President and Department Head, International Private Banking, Barclays Bank, Miami, Fla.); see also Comment Letter from U.S. League of Savings and Loan Institutions to the Department of the Treasury 2 (Dec. 6, 1990) [hereinafter U.S. League Comment] (comment on proposed amendment to the Bank Secrecy Act Regulations relating to recordkeeping for funds transfers by banks; describing burden imposed on the industry by the extra strain on staffs to meet responsibilities of new requirements). All citations to comments in this Article are to comments to the 1990 Funds Transfer Proposal, supra note 8, unless otherwise specified. Copies of comments cited in this article are on file with the Indiana Law Journal; comments not cited are available from the Office of the Assistant Secretary (Enforcement), Department of the Treasury, Rm. 4320, 1500 Pennsylvania Ave., N.W., Washington, D.C., See also Banks Question Marching Orders in Drug Battle, Am. Banker, Jan. 23, 1990, at 1; Tellers Take Crime Detection 101: Banks Bear the Burden of Training Frontline Workers to Spot Suspicious Transactions, Am. Banker, July 24, 1989, at 19; Comment Letter from American Express Co. to the Department of the Treasury 2 (Jan. 15, 1991) [hereinafter American Express Comment] CoNG. Rac. H1729 (statement of Rep. Hiler); see Comment Letter from the Board of Governors of the Federal Reserve System to the Department of the Treasury 3 (Jan. 25, 1991) [hereinafter Federal Reserve Comment]; U.S. League Comment, supra note 14, at 2. INDIANA LAW JOURNAL [Vol. 67:283 approved Uniform Commercial Code Article 4A. 6 Article 4A represents the first attempt to standardize the relationships between banks and customers that use wholesale wire transfers as payment mechanisms both in the United States and abroad. 17 Twenty-eight states have adopted Article 4A in the two years since its approval. 8 In addition, Article 4A is being used by the United Nations Commission on International Trade Law as a basis for discussion of an international convention for wire transfers. 9 Despite its emergence as the standard reference point for funds transfers, neither Treasury nor Congressional proposals have used Article 4A as a means of avoiding new regulations on the funds transfer industry. This Article seeks to stimulate discussion of the United States strategy in policing money laundering through funds transfers. In particular, this Article criticizes the government's intent to impose substantial additional recordkeeping and reporting burdens on the banking industry as opposed to combating money laundering by more traditional law enforcement techniques. Although this Article discusses only one of several proposed amendments to the Bank Secrecy Act regulations, by analyzing key issues concerning the 1990 Funds Transfer Proposal, this Article will illuminate the United States' general approach to Bank Secrecy Act regulation and the rationales and policy choices it presents. Part I of this Article explains the special regulatory and investigatory problems presented by funds transfers. These include the enormous volume of daily transfers, the array of methods of effecting wire transfers, the lack of standard formats used by the financial institutions and the various communications systems involved in the transfers, and the effect of foreign bank secrecy laws on collection of information about the account and the originator or beneficiary that is outside the United States. Part II reviews existing Bank Secrecy Act requirements that pertain to international funds transfers and evaluates the Treasury's funds transfer proposal in light of 16. U.C.C. Article 4A (1991) (Article 4A was adopted in July 1989.). 17. No other country currently regulates funds transfers by statute. To the extent that wire transfers have been regulated, the regulation has consisted of rules of the major funds transfer systems, of the local banking associations that operate clearing houses for funds transfers, of Federal Reserve Board Regulation J, 55 Fed. Reg. 40,801 (1990) (as amended Oct. 5, 1990) (to be codified at 12 C.F.R. 210 (Subpart B)), and of Federal Reserve Board Operating Circulars, 55 Fed. Reg. 40,801 (1990) (to be codified at 12 C.F.R (c)). 18. Table of State Enactments of 1989 Amendments (Article 4A), U.C.C. Rep. Serv. State Correlation Tables (Callaghan) xvii (Supp. Sept. 1991). 19. Lanza, Operational Aspects of Article 4A, in U.C.C. ARTICLE 4A[:] A PRACTICAL GUIDE FOR BANEas AND BANK CoUNsEL 64 (Am. Bankers Ass'n, Greco ed. 1991). The United Nations Commission on International Trade Law is commonly known as UNCITRAL. 20. The October 15, 1990 revised funds transfer proposal adopts key Article 4A definitions but did not adopt them uniformly, causing considerable controversy about the scope of several provisions in the proposal. See infra notes and accompanying text. The proposal completely ignored the incentives for record retention that Article 4A provides and that are described in Part III of this Article. 19921 POLICING MONEY LAUNDERING the likely costs involved and the law enforcement benefits it could generate. Part III describes alternative sources of highly useful information, including the requirements of Article 4A, Regulation J, and other developments in the funds transfer industry, with emphasis on the provisions of Article 4A that are likely to generate additional records relating to funds transfers. Against this background, Part IV discourages adopting new regulations for funds transfers and recommends relying on the transfer contracts and records already maintained or likely to exist under Article 4A. It also argues for increased reliance on existing methods of detecting money laundering and on international cooperation in combatting drug trafficking and money laundering. I. STRucTuRE OF FUNDS TRANSFERS Funds transfers present special problems for regulators and drug enforcement personnel. Some of these problems stem from the large number of transfers made each day by United States banks and funds transfers systems. 2 ' Other problems result from the lack of a uniform format in the principal funds transfer systems and from restrictions on the characters and information fields that can be transmitted. Still other problems relate to the ease with which beneficial ownership of funds and other details of transfers can be shielded through repetitive transfers outside the United States or through foreign banks in countries with strict bank secrecy laws.? This portion of the Article first describes funds transfers as payment mechanisms and then discusses each of these issues in funds transfer regulation. A. Fund Transfers as Payment Mechanisms Fund transfers 3 involve the movement of credits from one bank to 21. See supra note Money Laundering in Florida, supra note 2, at 130 (statement of Larry Fuchs, Deputy Comptroller, Office of the Florida Comptroller) (discussing laundering trail from Florida to Switzerland); see Cox, New Path for Money Laundering: Complexity of Wire Transfers Makes It Harder to Trace the Origins of Dirty Money, Am. Banker, July 24, 1989, at 9; Federal Reserve Comment, supra note 15, at Article 4A uses the term funds transfer rather than wire transfer because transfers may be made in writing, or by telephone, telex, or computer link. U.C.C. Article 4A Prefatory Note (1991). Article 4A defines funds transfer in the industry's terms as the series of transactions, beginning with the originator's payment order, made for the purpose of making payment to the beneficiary of the order. The term includes any payment order issued by the originator's bank or an intermediary bank intended to carry out the originator's payment order. A funds transfer is INDIANA LAW JOURNAL [Vol. 67:283 another, two features that distinguish funds transfers from other payment mechanisms. Funds transfers may be made between domestic banks by means of clearing houses established by banks within one locale, 2 by Fedwire,2 or by transfers among correspondent banks by Fedwire or other means. The term also includes funds transfers involving a bank in the United States and a foreign bank that are communicated through SWIFT2 completed by acceptance by the beneficiary's bank of a payment order for the benefit of the beneficiary of the originator's payment order. U.C.C. 4A-104(a). The class of transfers subject to Article 4A is commonly known as wholesale wire transfers. U.C.C. Article 4A Prefatory Note. The terms funds transfers and wire transfers exclude two classes of transactions that are functionally similar to funds transfers. The first of these are consumer fund transfers under the federal Electronic Fund Transfer Act (EFTA), 15 U.S.C r (1988), Title IX of the Consumer Credit Protection Act. Article 4A excludes transactions subject to EFTA. U.C.C. 4A-108; U.C.C. Article 4A Prefatory Note. In common EFTA transactions, a nonbank entity such as an insurance or mortgage company initiates the transfer, which pulls from or debits the consumer's account. The consumer has separate contracts with the non-bank creditor and with its bank that authorize recurring debits from the consumer's account, such as monthly mortgage payments. See 15 U.S.C. 1693(a)(8)-(9), 1693(e). Article 4A's funds transfer definition also excludes transactions through funds delivery or transmittal systems, such as those operated by Western Union and currency exchanges. U.C.C. 4A-104 official comment 2. The funds transfer proposal recognizes the distinction with its separate requirements for funds transmittals Funds Transfer Proposal, supra note 7, at 41,704. The originator of a funds transmitta
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