[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
RISK MANAGEMENT AND REGULATORY
FAILURES AT RIGGS BANK AND UBS:
LESSONS LEARNED
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
JUNE 2, 2004
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-91
U.S. GOVERNMENT PRINTING OFFICE
95-062 WASHINGTON : DC
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
MARK GREEN, Wisconsin JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona MIKE ROSS, Arkansas
VITO FOSSELLA, New York CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MELISSA A. HART, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
TOM FEENEY, Florida DAVID SCOTT, Georgia
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey CHRIS BELL, Texas
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Oversight and Investigations
SUE W. KELLY, New York, Chair
RON PAUL, Texas, Vice Chairman LUIS V. GUTIERREZ, Illinois
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
MARK GREEN, Wisconsin DENNIS MOORE, Kansas
JOHN B. SHADEGG, Arizona JOSEPH CROWLEY, New York
VITO FOSSELLA, New York CAROLYN B. MALONEY, New York
JEB HENSARLING, Texas JIM MATHESON, Utah
SCOTT GARRETT, New Jersey STEPHEN F. LYNCH, Massachusetts
TIM MURPHY, Pennsylvania ARTUR DAVIS, Alabama
GINNY BROWN-WAITE, Florida CHRIS BELL, Texas
J. GRESHAM BARRETT, South Carolina
C O N T E N T S
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Page
Hearing held on:
June 2, 2004................................................. 1
Appendix:
June 2, 2004................................................. 31
WITNESSES
Wednesday, June 2, 2004
Baxter, Thomas Jr., General Counsel and Executive Vice President
of the Federal Reserve Bank of New York, accompanied by
Katherine Wheatley, Assistant General Counsel, Federal Reserve
Board and Michael Lambert, Financial Services Cash Manager,
Federal Reserve Board.......................................... 6
Stipano, Daniel, Deputy Chief Counsel, Office of the Comptroller
of the Currency................................................ 5
APPENDIX
Prepared statements:
Kelly, Hon. Sue W............................................ 32
Oxley, Hon. Michael G........................................ 34
Baxter, Thomas Jr............................................ 36
Stipano, Daniel.............................................. 54
Additional Material Submitted for the Record
Kelly, Hon. Sue W.:
Bank Secrecy Act: OCC Examination Coverage of Trust and
Private Banking Services, U.S. Department of the Treasury.. 74
RISK MANAGEMENT AND REGULATORY
FAILURES AT RIGGS BANK AND UBS:
LESSONS LEARNED
----------
Wednesday, June 2, 2004
U.S. House of Representatives,
Subcommittee on Oversight and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 2:13 p.m., in
Room 2128, Rayburn House Office Building, Hon. Sue W. Kelly
[chairwoman of the subcommittee] Presiding.
Present: Representatives Kelly, Gutierrez, Moore, Maloney,
and Matheson.
Chairwoman Kelly. The subcommittee on Oversight and
Investigations will examine risk management and regulatory
failures at Riggs Bank and UBS, lessons learned this afternoon.
Two weeks ago, this subcommittee explored proposals to
streamline and federalize our current system to prevent money-
laundering and terror financing. The recent cases involving
Riggs Bank and UBS reveal regulatory and risk-management
breakdowns that also must be examined in order to strengthen
our Government's ability to enforce our anti-money laundering
laws.
This afternoon, the subcommittee will investigate the
noncompliant and inexcusable behavior of these two banks, along
with the inadequate response of our regulators. In the OCC's
oversight of the Riggs Bank's case, we find no better
illustration of the inherent weaknesses of a fragmented
regulatory regime.
We find a regulator that was reportedly aware of
noncompliance by Riggs with high-risk foreign clientele as far
back as 1997, perhaps even earlier, and does nothing about it.
We find a regulator that was slow to act even after the
September 11 terrorist attacks inside our borders made the
threat posed by terror-funding networks all too clear. We find
a regulator with credibility so diminished that Riggs
shamelessly continued to violate the Bank Secrecy Act even
after a full-time OCC examiner was placed on the bank's
premises following last summer's consent order.
I am very interested in hearing directly from the OCC about
how this happened. I am also deeply concerned that we are
combating illicit funding networks inside our country with the
regulatory structure that was not designed to be part of our
arsenal in a war on terror.
Though a lot of great strides forward have been taken,
particularly with the creation of the Office of Terrorism and
Financial Intelligence, the TFI, and with an elevated focus on
improving FinCEN's capability, it is evident that this is still
a work in progress. The time has come to replace slow-footed
regulatory systems with one that is centralized, multi-
dimensional and focused intentionally on preventing our
financial institutions from being exploited by criminals and
terrorists.
Therefore, this subcommittee will continue to pursue
proposals that centralize our examination and compliance
assets, that establish a criminal enforcement authority, that
will restore the credibility of our regulators. Such reforms
should establish clear lines of oversight, improve our ability
to quickly detect and respond to suspicious activity and will
make clear to financial institutions that, from now on, brazen
violators are going to be going to jail instead of just paying
a civil fine.
Our hearing today also focuses on UBS's contract with the
Federal Reserve Bank of New York to serve as an extended
custodial inventory which facilitates the international
distribution of U.S. Currency. Beginning with its contract in
1996, UBS was in violation of its agreement to repatriate old
U.S. banknotes and distribute--re-distribute new banknotes on
behalf of the Federal Reserve. The bank knowingly traded U.S.
currency through the ECI with countries subject to restrictions
from the Office of Foreign Asset Control, including Cuba, Iran,
Libya, and Yugoslavia. The most serious and disturbing
violation has been the discovery that officers and employees at
UBS intentionally falsified documents to side-step detection by
U.S. authorities.
Though these actions and the company's failure to implement
internal controls made it exponentially more difficult to
detect suspicious activity, it is also important to examine how
and why routine oversight by the Federal Reserve and the OCC
didn't raise any concerns. In fact, this subcommittee is deeply
concerned that contract violations would likely still be
occurring today had our military not been in a position to find
U.S. dollars from the Federal Reserve Bank of New York on the
ground in Iraq. As such, I believe that we must investigate all
ECI contracts to ensure that foreign governments and financial
institutions are cooperating with our Government.
While Riggs Bank and UBS illustrate two distinct regulatory
meltdowns, they both speak clearly to the need for improving
our efforts to stop terrorist financing. It may create new and
unfamiliar responsibilities for financial institutions, but it
is a moral and ethical responsibility and a license required to
do business in this country.
We thank our witnesses for their testimony and hope that
they can shed some light on these issues. I look forward to
continuing this discussion in the subcommittee's hearing next
week regarding the oversight of the Department of Treasury and
the agency's anti-money laundering efforts.
I turn now to Mr. Gutierrez.
[The prepared statement of Hon. Sue W. Kelly can be found
on page 32 in the appendix.]
Mr. Gutierrez. Thank you Madam Chairwoman. Thank you for
calling this hearing today. It is important, especially given
recent events, as we closely examine our anti-money laundering
efforts and whether they are sufficient. I am pleased we will
be looking--we will hear from the regulators about how these
problems occur and what steps have been taken to prevent their
re-occurrence.
The last time Congress was this concerned with the actions
of UBS was when the Senate Banking Committee was investigating
the sources of Holocaust financing and UBS attempted to shred
documents which showed the extent of its involvement. I would
have hoped that UBS would have learned from the experience to
take U.S. law and the U.S. Congress much more seriously. I also
recall the reluctance of Swiss banking authorities to cooperate
at that time. While I understand that the Swiss Federal banking
economist was much more helpful in this effort, most foreign
bank supervisors simply lack the supervisory tools and
authority of our regulators here in the U.S.
I think, perhaps, this extended custodial inventory, ECI,
business should be restricted to U.S. Institutions so that we
can ensure no dealings with OFAC nations, and nations'
activities can be closely supervised by U.S. Regulators who
need to take an active role in monitoring these activities.
While this fine of a $100 million seems very large, it is
merely, I believe, a drop in a bucket of a $1 trillion
institution. It is a one-time penalty that may not have the
deterrent effect against misconduct that we may have hoped for.
In this case, the ECI business wasn't particularly profitable
for the bank--or they say--so the termination of the contract
and the exclusion from the part of their business isn't likely
to hurt their financial bottom line very much. It might make
more sense to punish an institution of the size of UBS by
restricting their conduct in a more profitable area, such as
their ability to operate in the United States or making them
sell off certain aspects of their business which we know to be
profitable.
I am also deeply troubled by the Riggs situation. It
represents not merely a failure of one institution's internal
controls, but a fundamental flaw in its regulation. It is my
understanding that the flaws in Riggs systems were long
outstanding and systematic, dating well before the Patriot Act.
The recent consent order is something that should have happened
2 years ago, if not earlier. I don't understand why the OCC was
not more vigilant on this front and why it took them so long to
take these actions.
I also understand that Rigg's problems were initially
discovered by the FBI, rather than the OCC, and that the
irregularities in New Guinea were discovered by the bank itself
and not the OCC. I don't understand, in a risk-based
supervisory system, why the OCC was not more closely monitoring
Riggs and why these actions were not brought to light much
sooner and appropriate action taken. 9/11 was a wake up call
for the industry and should have been for all regulators as
well. Our safety depends on banks and bank regulators to be on
the front lines to prevent terrorists from using international
financial systems to fund their activities.
I am gravely concerned that the regulator has not made this
responsibility a higher priority, and their resources may be
spread too thin to fulfill their obligations. I have previously
expressed this concern about the OCC's attempt to broaden their
portfolio into areas the Congress has not authorized. And I
think, in fact, the financial services committee is on the
record in agreeing with me on this point.
One final point which I mentioned at our May 18 hearing,
the OCC issued, its fine, late on a Thursday. On that Friday, a
Maryland woman called her Congressman. She was very concerned
about her bank account at Riggs Bank. She was referred to the
Banking Committee staff. And she said that she wanted to talk
to the regulator. My staff supplied the phone number for the
OCC's Customer Assistance Group. But unfortunately, they don't
operate on Fridays. They only talk to consumers 4 days a week
and then only from 9 to 4, so that woman had to wait from
Thursday night till Monday before she could possibly reach
someone at the OCC.
I would like to know what consumers are supposed to do when
the OCC is not operating its call center. I think this agency
is not concerned about consumers, and I have to doubt its
commitment to an anti-money laundering effort.
Thank you again, Chairwoman Kelly, for calling this
hearing, on this hearing, on this issue.
Chairwoman Kelly. Thank you, Mr. Gutierrez.
Ms. Maloney? Whoops. Mr. Moore?
Mr. Moore. Madam Chairperson, I will simply welcome the
witnesses here today.
I want to listen and learn, and I appreciate your convening
this hearing.
Chairwoman Kelly. Thank you.
Mr. Matheson?
Mr. Matheson. I will just reiterate what Mr. Moore said. I
am looking forward to the hearing. Thank you, Madam Chairwoman,
for calling it.
Chairwoman Kelly. Thank you.
I am going to just simply say that, without all objection,
all Members' opening statements will be made part of the
record. One of the reasons for this is that we have a very busy
schedule right now, and we were going to, with unanimous
consent, we will just make them all part of the record.
Chairwoman Kelly. Now, I would like to introduce our panel.
With us today are the representatives from the Office of the
Comptroller of Currency and the Federal Reserve Bank of New
York.
Our first witness, Mr. Daniel Stipano, was appointed deputy
chief counsel of the OCC in December of 2000. He is also a
member of the Treasury Department's Bank Secrecy Act Advisory
Group and the National Interagency Bank Fraud Working Group.
Prior to this appointment, Mr. Stipano served as director of
the OCC's Enforcement and Compliance Division since 1995.
Our second witness is Mr. Thomas C. Baxter, Jr., general
counsel and executive vice president of the legal group at the
Federal Reserve Bank of New York. Mr. Baxter has assumed this
role since 1995 and also serves as its deputy general counsel
of the Federal Open Market Committee. His principal
responsibility is to supervise the day-to-day operation of the
New York Fed's legal group. That is a big job. We thank you.
And we thank you for being here. We thank you for your
testimony today. And without objection, your written statements
will be made part of the record.
If you have not testified before a committee before, you
will be recognized for a 5-minute summary of your testimony.
There are lights there that will come on the boxes. The green
light means you have 5 minutes. The yellow light means, please
sum up in 1 minute, and the red light means, if you haven't
already summed up, please try to do that as quickly as
possible. Thank you very much.
And we will begin with you, Mr. Stipano.
STATEMENT OF DANIEL P. STIPANO, DEPUTY CHIEF COUNSEL, OFFICE OF
THE COMPTROLLER OF THE CURRENCY
Mr. Stipano. Chairwoman Kelly, Ranking Member Gutierrez and
members of the Subcommittee, I appreciate this opportunity to
discuss the OCC's supervision of Riggs Bank N.A. and
particularly our efforts to bring Riggs into compliance with
the Bank Secrecy Act. The OCC and FinCEN recently assessed a
$25 million civil money penalty against Riggs for violations of
the BSA. The OCC also took a separate cease and desist action
to supplement the Order issued against the bank in July 2003.
The OCC first identified deficiencies in Riggs procedures
several years ago. Beginning in the late 1990s, we recognized
the need for improved processes at Riggs and for improvements
in the training in, and awareness of, the BSA's requirements
and in the controls over their BSA processes. Prior to 9/11,
the OCC visited the bank at least once a year and sometimes
more often to either examine or review the bank's BSA
compliance program.
Over this time frame, OCC examiners consistently found that
Riggs' program was either satisfactory or generally adequate,
meaning it met the minimum requirements of the BSA, but we
nonetheless continued to find weaknesses and areas of its
program that needed improvement. We addressed those weaknesses
using various informal supervisory actions.
After 9/11, the OCC escalated its supervisory efforts to
bring Riggs' compliance program to a level commensurate with
the risks that were undertaken by the bank. In 2002, the OCC
conducted a series of anti-terrorist financing reviews at our
large or high-risk banks, including Riggs. As a result of these
reviews and other internal assessments, plus published reports
of suspicious money transfers involving the Saudi Embassy
accounts, our concerns regarding Riggs' anti-money laundering
program were heightened. Thus we conducted another examination
of Riggs in January 2003.
The focus of that examination was on Riggs' embassy banking
business and, in particular, the Saudi Embassy accounts. The
examination lasted for approximately 5 months and involved
agency experts in the BSA and anti-money laundering area. It
disclosed serious BSA compliance program deficiencies that
resulted in the bank's failure to identify and report
suspicious transactions occurring in the Saudi Embassy
accounts.
The finding from the January 2003 examination formed the
basis for the July 2003 cease and desist order.
Throughout this examination, there was regular contact with
the FBI investigators. We provided the FBI with voluminous
amounts of documents and information on the suspicious
transactions, and we hosted a meeting with the FBI to discuss
these documents and findings. Throughout this process, we
provided the FBI with expertise on both general banking matters
and on some of the complex financial transactions that were
identified.
The OCC began its next examination of the bank's BSA
compliance in October 2003. The purpose of this examination was
to assess compliance with the Order and the USA PATRIOT Act and
to review accounts related to the Embassy of Equatorial Guinea.
The examiners found that, as with the Saudi Embassy accounts,
the bank lacked sufficient policies, procedures, systems and
controls to identify suspicious transactions concerning the
bank's relationship with Equatorial Guinea. The findings from
this examination as well as from previous examinations formed
the basis for the OCC's recent civil money penalty and cease
and desist actions.
In retrospect, as we review our BSA-compliance supervision
of Riggs during this period, we should have been more
aggressive in our insistence on remedial steps at an earlier
time. We also should have done more extensive probing and
transaction testing of the Embassy accounts. As described more
fully in my written testimony, we have reevaluated our BSA
supervision processes in light of this experience, and we will
be implementing changes to improve how we conduct supervision
in this area.
While not to be minimized, the Riggs situation must be put
in broader context. Unlike other financial institutions which
have only recently become subject to compliance program and
suspicious activity reporting requirements, banks have been
under such requirements for years. Not surprisingly, banks are
widely recognized as the leaders among the financial services
industry in the anti-money laundering area. The role of the OCC
and the other Federal banking agencies is not that of criminal
investigators, but rather to ensure that the institutions we
supervise have strong anti-money laundering programs in place.
As a consequence of our supervision, most banks today have
strong anti-money laundering programs, and many of the largest
national banks have programs that are among the best in the
world.
In conclusion, the OCC is committed to preventing national
banks from being used wittingly or unwittingly to engage in
money laundering, terrorist financing or other illicit
activities. We are ready to work with Congress, the other
financial institutions regulatory agencies, law enforcement and
the banking industry to continue to develop and implement a
coordinated and comprehensive response to the threat posed to
the Nation's financial system by money laundering and terrorist
financing.
[The prepared statement of Daniel P. Stipano can be found
on page 54 in the appendix.]
Chairwoman Kelly. Thank you very much.
Mr. Baxter.
STATEMENT OF THOMAS BAXTER, JR., GENERAL COUNSEL AND EXECUTIVE
VICE PRESIDENT, FEDERAL RESERVE BANK OF NEW YORK, ACCOMPANIED
BY KATHERINE WHEATLEY, ASSISTANT GENERAL COUNSEL, AND MICHAEL
LAMBERT, FINANCIAL SERVICES CASH MANAGER
Mr. Baxter. Chairwoman Kelly, Representative Gutierrez and
Members of the subcommittee, my name is Thomas Baxter, and I am
the general counsel and executive vice president of the Federal
Reserve Bank of New York.
At the New York Fed, I have responsibility for the Legal
Department, Security and the Court Secretary's Office. With me
today are two representatives of the Federal Reserve Board,
Katherine Wheatley, assistant general counsel, and Michael
Lambert, financial services cash manager.
Chairwoman Kelly. We welcome their presence. Thank you very
much, Mr. Baxter.
Mr. Baxter. We appreciate your invitation and are
privileged to appear before you to discuss the Federal
Reserve's operation of the extended custodial inventory, or ECI
program, and our responses to UBS's misconduct in operating one
of our ECI facilities.
The U.S. dollar is the most desired form of money in the
world. In many ways, our dollar represents the strength of the
American economy. The dollar is so desired around the world
because it is a stable, always-reliable medium of exchange and
store of value. Today, I will be speaking about the Federal
Reserve's operation of the ECI program, and I should start by
describing that program.
In operation since 1996, when the Treasury, Secret Service
and Federal Reserve collectively decided to launch it, the ECI
program has been a great success. The program sustains the
quality of the U.S. dollar banknote, helps to deter
counterfeiting and provides an efficient and effective
mechanism for the distribution of those notes in our largest
market, the market outside of the United States. We estimate
that up to two-thirds of our currency, or over $400 billion,
circulates outside of the United States.
The ECI program involves the use of financial institutions,
mainly commercial banks, that are highly active in the
international currency distribution business as Federal Reserve
contractors. These institutions agreed to extend the Federal
Reserve's reach into major financial centers of other countries
and hold inventory of our most popular product, that is the
Federal Reserve note. They do this by holding in custody for us
in their vaults U.S. dollar notes that we expect to distribute
abroad or old and unfit notes that we wish to repatriate. The,
quote, ``extended custodial inventory,'' unquote, facility,
helps to assure the quality of our product and its efficient
distribution.
With respect to quality, the ECI facility performs two
important functions. First, it positions us to better monitor
and control the quality of our product by identifying
counterfeit notes. The ECIs are well situated to detect such
notes, to remove them from circulation, to provide intelligence
to law enforcement authorities, both here and abroad, and to
distribute new authentic notes. They perform similar functions
with respect to what we at the Federal Reserve call unfit
notes, which is a cash-processing codeword for worn and dirty.
As for the efficiency of our distribution network, through
our ECI contract partners, we are positioned in high-volume,
wholesale banknote markets. Currently, these markets are
located in London, Frankfurt, Zurich, Hong Kong and Singapore.
At the present time, we have ECI contracts with American
Express Bank, Bank of America, HSBC Bank USA, the Royal Bank of
Scotland and United Overseas Bank. Our ECI contractors bring
into the markets they serve new fit notes quickly, and with
similar expedition, they repatriate unfit or old-design notes
to the United States for destruction.
They have ready a substantial inventory of notes to satisfy
the periodic spikes in supply and demand encountered in a world
full of uncertainties. Because these notes are Federal Reserve
property, the ECI contractors do not have to finance the
inventory when it is not needed. This leads me to my first
point.
The experience that we have had with UBS does not change
the fact that the ECI program is a success, nor should it
detract from the importance of the program to the Federal
Reserve, the Treasury, and the Secret Service. I hasten to add
that I am in no way trying to minimize what UBS did. The breach
by UBS of our contract was wrongful, and the concerted acts of
deception by UBS carried out over a long period of time,
violated our laws.
The Federal Reserve terminated the contract with UBS in
October of 2003. And we assessed a $100 million civil money
penalty against UBS on May 10, thereby remedying the breach and
punishing UBS's deception. This leads to my second point, which
looks at how we respond when someone doing our business
performs badly.
The prompt corrective action taken to terminate the Federal
Reserve's contractual relationship with UBS and to punish
deception by UBS with a large monetary penalty demonstrates a
resolve that Federal Reserve operations will be conducted to
the highest standards and in full compliance with U.S. legal
requirements. In this regard, it is noteworthy that our ECI
contracts in essence export U.S. legal requirements, including
OFAC restrictions, to offshore facilities. The U.S. sanctions
regime generally cannot be applied extra-territorially.
When the Federal Reserve learned that UBS breached its
contractual obligations to abide by the restrictions of the
U.S. sanctions program and engaged in U.S. dollar transactions
with impermissible jurisdictions, we acted swiftly and surely.
We terminated our contract with UBS and debited UBS's account
with us for the entire inventory maintained in the Zurich
vault.
In a day, UBS lost an entire business line that had been
profitable throughout the 8 years that UBS served as an ECI
contractor. The forfeiture of profitable business is a
financial consequence. UBS also suffered a reputational injury.
Through the related action of our colleagues at the Swiss
Federal Banking Commission, UBS is forbidden from reentering
the wholesale external banknote business without the permission
of the commission. This leads to my third point.
The Federal Reserve will not tolerate deception. We will
not tolerate deception from those banking organizations that we
supervise, and we will not tolerate deception from those with
whom we contract to execute important Federal programs. The ECI
program is one such program. To transact business out of the
Zurich facility with Iran, Cuba, Libya, and Yugoslavia, as UBS
did, UBS personnel needed to act covertly and to hide their
activity from the Federal Reserve. The people who engaged in
such conduct in Switzerland have lost their jobs. The business
franchise is no more. In the civil money penalty that we
announced on May 10, UBS paid a heavy price for the deceit of
the banknote personnel which it formally employed.
Turning for just a moment back to the ECI program, the
imposed penalty gave our remaining ECI operators 100 million
reasons to be truthful. And on top of all of that, the Swiss
Federal Banking Commission issued a formal, public, quote,
``reprimand,'' unquote to the largest bank in Switzerland. The
banknote personnel of UBS deceived people at the Banking
Commission just as they deceived us. Our colleagues at the
Banking Commission joined with us in finding such deception
inexcusable and warranting that reprimand. This brings me to my
fourth and my final point.
At the Federal Reserve, we are dedicated to continuous
improvement, and we know that all internal controls can be
bolstered through the lessons of experience, including our own
unfortunate experience in the UBS matter. That experience has
shown that our primary control for compliance with the country
restrictions in the contract, namely, truthful monthly
reporting of currency transactions by country, was just not
sufficient. With the country reports that we received from UBS,
we did not follow the old audit admonition, quote, ``trust but
verify,'' unquote. Since February of this year, our ECI
contracts have a number of new features that enhance the
control environment and provide for the necessary verification.
One is the requirement that management of our ECI contractors
attest yearly on contract compliance and accurate reporting and
that an independent public accounting firm certify to the
Federal Reserve that the management attestation is fairly
stated. This Sarbanes-Oxley inspired change shows our
commitment to continuous improvement.
Another new feature is a 17-point procedural program that
spells out the ECI contractor's responsibilities for OFAC and
anti-money laundering compliance. This program provides for
OFAC risk-assessments, requires the implementation of ECI
program internal controls, establishes operational
responsibility for compliance and specifies internal and
external audit requirements. Moreover, each ECI operators
policies and procedures directed at OFAC's compliance will be
reviewed by a team of experts from both the New York Feds and
OFAC.
Let me conclude by summarizing my four points. The ECI
program is important and successful because it fosters the
excellent quality of U.S. currency, and it has efficient
distribution outside the United States. When someone performs
poorly in the ECI program, you can be assured that the Federal
Reserve will respond with prompt force, full corrective action.
If there is deception in addition to poor performance, as was
the case with UBS, the consequences will be severe. Finally, we
will strive to continuously improve our internal controls and
the ECI program by borrowing the best ideas and by learning
lessons from our experiences. Thank you for your attention. And
I look forward to answering any questions you may have.
[The prepared statement of Thomas Baxter Jr. can be found
on page 36 in the appendix.]
Chairwoman Kelly. Thank you Mr. Baxter. I am sure there
will be questions.
I am going to turn to you, Mr. Stipano. I have seen news
reports that indicate that your agency was aware of compliance
problems at Riggs as far back as 1998, 1997 or 1999 and I see
your testimony says late 1990s. When exactly, what month and
year, did the OCC recognize problems and violations were
occurring at Riggs?
Mr. Stipano. Well, I can't give you the month, but I can
give you the year. As far back as 1997, we cited the bank for
deficiencies in its Bank Secrecy Act compliance program. The
types of deficiencies that were flagged at the time tended to
have to do with the individual elements of a compliance
program, in other words, with training, internal controls,
testing, et cetera. Those deficiencies were somewhat technical
in nature and were not really at a level that would normally
require use of formal enforcement action to correct.
Chairwoman Kelly. Is there--Mr. Stipano, I am going to ask
you this again.
Mr. Stipano. Okay.
Chairwoman Kelly. I would like to know a month. If it was
1997, what month?
Mr. Stipano. I don't have that information at my
fingertips. We would be happy to provide it to you though.
Chairwoman Kelly. I would appreciate if you will do that.
[Subsequently Mr. Stipano advised Mrs. Kelly that the month was
August of 1997.]
Mr. Stipano. We will do that.
Chairwoman Kelly. I think that is important for us to know.
Mr. Stipano. Understood.
Chairwoman Kelly. The problems you just outlined, training,
testing, internal controls, why did it take 6 years for the SAR
reports, that problem not to come to light? Your agency knew
that there were violations at Riggs. It took an unusual step in
2003 to put a full-time examiner on-site, but it wasn't until
2004 that you took some action by assessing a fine.
I think you would agree that eradicating terror financing
is one of the most time-sensitive issues that has ever faced
our financial regulatory system. I want to know why the agency
dawdled before taking any real action if you knew about these
problems. You knew about them 3 years before 9/11. But even
after that wake-up call, it took another 2 years before you got
a full-time examiner on site, and the violations were still
continuing with your full-time examiner.
I just--you know, I just--it boggles my mind. I am sure it
probably boggles yours. But I would like to know why the agency
dawdled in not taking any real action here.
Mr. Stipano. I don't know that I would characterize us as
having dawdled.
But I would agree that, with hindsight, there certainly
were judgments that we made that turned out not to be the
correct ones. Let me go back a little bit in time because I
think it is useful to look at our supervision of Riggs, both
pre-9/11 and post 9/11. Pre-9/11, we did many examinations of
the bank focusing on the adequacy of their BSA compliance
program, which is our charge. The bank had a program and was in
compliance with the regulation. In other words, the regulation
requires that all banks have a program in place and that it
cover four areas. The bank had that. But it didn't perform on
each of those elements as well as it needed to. There were
deficiencies. The training needed to be better. The controls
needed to be beefed up. What we did not know at that time were
the types of substantive violations of the BSA that were
discovered as a result of our examination in 2003.
I think there are a couple of reasons for that. And I will
be very up front with you. The first is that we trusted
management too much to get the problems fixed. In the vast
majority of cases where you have these types of violations, the
examiners bring them to the attention of management and the
board, and the problems get fixed. And that is usually the end
of it. That didn't happen at Riggs. There was an effort made to
fix the problems, but the effort took a long time. It took
longer than it should have, and we were willing to give
management too much slack.
The other error in judgment that was made during that time
frame was that we under-estimated the risk in the Embassy
accounts. Pre-9/11, embassy accounts were not viewed by the OCC
or anyone else that I know of as high-risk accounts. The types
of things that we were focusing on for in-depth examinations
were foreign private banking, foreign correspondent, accounts,
accounts with Russian entities, accounts with countries that
are on the Financial Action Task Force list, but not embassy
accounts. As it turned out, there was a lot of risk in those
embassy accounts, but it did not come to light until after 9/
11.
Chairwoman Kelly. I am looking now at an OCC examination.
It is entitled Bank Secrecy Act, the OCC Examination Coverage
of Trust and Private Banking Services issued by the Office of
Inspector General, November 29, 2001. In there, there is a
chart that lists your rate of coverage and testing high-risk
transactions for foreign correspondent banking at 0 percent. In
other words, in November of 2001, the IG's report says you
weren't even looking at this stuff. And that's November of
2001. You still weren't looking at this. With unanimous
consent, I am going to insert this into the record.
[The following information can be found on page 74 in the
appendix.]
Chairwoman Kelly. But that, sir, begs the question about
what those people were doing between 2001, November, and 2003,
when you finally put somebody in the bank. I am not asking you
a question. I am simply making a statement here that there had
to be some knowledge somewhere, institutionally within the OCC
I suspect, that would have brought to bear some more
information gathering and better oversight on foreign
transactions.
What kind of an interaction did you have with bureaus like
FinCEN and the Fed after the OCC became aware of the Riggs
problems? When did the law enforcement get involved? And I
would like to know what--it was a result of the investigation
into the report of the financial link between the Saudi
ambassador's wife and the 9/11 hijackers. Was that what
triggered this? What triggered this?
Mr. Stipano. Maybe it would be useful for me to walk you
through the chronology, post 9/11. You are absolutely correct;
9/11 turned the world on its head, including our world in the
regulatory agencies. Our immediate response in the aftermath of
9/11 was to work with law enforcement to identify where the
accounts of the 9/11 hijackers were, as well as where the
accounts of other individuals and entities that were linked
with the hijackers were.
A process was put into place 5 weeks after 9/11 whereby the
FBI could provide us with the names of suspected terrorists and
people who were linked to terrorism, and we would blast it out
by e-mail to every one of our financial institutions, who would
then be obligated to report back and identify the account. So
that was something we did immediately after 9/11.
Another major initiative at that point was to implement the
PATRIOT Act, which was passed a few weeks after 9/11. It put
some requirements in place very quickly. But very little of
that statute was self-effectuating. It required that
regulations be written. So we worked on various work teams with
the Treasury Department and the other Federal financial
institutions regulators to write regs to implement the PATRIOT
Act.
Another step that had to be taken was to write new exam
procedures. Pre-9/11, our focus in this area was on money
laundering. Post-9/11, now we are looking at something
relatively new, terrorist financing. So we needed new exam
procedures. These were all things that were done in the
immediate month after 9/11.
In the summer of 2002, we embarked on a series of anti-
terrorist financing reviews at most of our large banks and our
other high-risk banks, including Riggs. The purpose of those
reviews was to, determine the extent of compliance with the
PATRIOT Act requirements that were in place as of that time,
and to see what the banks were doing to deter and prevent
terrorist financing. And to the extent that we discerned
weaknesses, we would then follow up with a more full-scope
exam.
Riggs was, as I said, part of that group that was examined
with these anti-terrorist-finance exams. And it disclosed
weaknesses. So that was part of our impetus for doing the
January of 2003 exam.
Now, in the meantime, that fall, there were published
accounts of Riggs accounts related to the Saudi Embassy that
may have been used to funnel information to people associated
with the hijackers. Obviously, became aware of that and that
caused us to focus with particularity on the Saudi Embassy
accounts. Up to that point, other than the normal types of
supervisory interactions that we would have with the Fed on any
bank that has a holding company, there was not extensive
contact with other agencies. There was not with FinCEN, and to
my knowledge, there was not with the FBI.
Once that examination began, that all changed. The exam we
did in January of 2003 involved some of our best agency
experts. It went on for 5 months. It was an intensive drill-
down type of look at the Saudi accounts, and it discovered all
kinds of problems, mainly a lack of sufficient know-your-
customer documentation and a failure to file suspicious
activity reports in noncompliance with the BSA.
This information was provided to the FBI. We had many
meetings with the FBI. I shared a lot of information with them,
and at the conclusion of the examination, we made a referral to
FinCEN for the assessment of civil money penalties under the
Bank Secrecy Act.
Chairwoman Kelly. Okay. I think that we can talk about that
further because it brings questions in my mind about when you
say that there was no contact between your agency, FinCEN, FBI
and the Treasury prior to this. It just--I hope that that has
changed.
Mr. Stipano. But at that point, there really wouldn't have
been a reason to. I mean, we would normally make a referral to
FinCEN under guidelines that FinCEN and the banking agencies
agreed to many years ago. Prior to that January 2003 exam,
systemic BSA violations had not been discovered, so there would
not have been a basis for a referral to FinCEN. And we were
unaware of any criminal violations that would have necessitated
a contact with the FBI.
Chairwoman Kelly. Well, in 1997, there were some areas of
concern. And it didn't improve, and it continued to not
improve. I think we should--I think we should maybe get into
another dialogue about this, and I will have some further
follow-up questions on it as I think.
But the report that was--a report that was issued by the
Treasury Inspector General found that you really lacked, as I
pointed out, sufficient testing of the high risk transactions
that were commonly associated with money laundering or lacked
review and evaluation of critical BSA reports that banks are
required to file. Now, that is--I am quoting from the inspector
general's report that I put into the record. Specifically,
examiners did not test wire transfers, transactions with
foreign correspondent banks, currency transaction reports or
suspicious activity reports. In fact, when they looked at that,
you had a 0 percent score.
The report concluded that the OCC should ensure that
examiners complete transactional testing of high-risk BSA
areas, and this was November 2001. And it notes that the OCC
management concurred with that recommendation. So the
management, the OCC knew in 2001 that there were shortcomings
there. And, you know, if you--the OCC scored 0 percent in high-
risk areas. You wonder then, there are some other things on
that chart. You wonder about some of these other areas. And if
you thought you were performing at a certain standard, you
think that you maybe now might be overstating your ability to
handle the issues? I was adding up this--your testimony, the
number of people who worked for the OCC. You have taken on a
lot. And I am wondering if you are overstating your ability to
handle the issues.
In the Riggs case, that bank is located just a couple miles
from its own regulator, the OCC, in a high-threat area with the
largest embassy banking clientele. You begin to wonder how many
warning signs it takes, how many IG reports it takes. And you
begin to wonder that--how can the American people have any
confidence to handle this financial oversight? You know,
banking regulators have had every warning and every
opportunity, and I am not so sure we can win any longer.
On a scale of 1 to 10, how would you rate banking
regulators' ability to oversee the BSA compliance right now?
Mr. Stipano. 9. This is not a new area for us, Chairwoman
Kelly. This is something that we have been doing for decades.
And I am not saying that we are perfect and that--I am not
saying that the supervision that we did in Riggs was perfect.
But our job is to ensure that banks have strong anti-money
laundering programs, and banks have been under that requirement
for 17 years.
The OCC has been very aggressive and vigorous in this area.
For example, since 1998, we have taken 78 formal enforcement
actions against banks and their institution-affiliated parties
that were based in whole or in part on violations of the Bank
Secrecy Act. Some of those cases are among the most significant
money-laundering cases that the United States Government has
ever brought, and the OCC played a key role in those cases.
As a consequence of our vigilance in this area, most banks
have excellent BSA compliance programs, and some of the largest
national banks have programs that are among the best in the
world. They are the model that nonbanking financial
institutions are trying to achieve.
And, frankly, I think the real area of concern and one of
the best things that the PATRIOT Act did was it extended the
types of requirements that banks are under, like the compliance
program requirement and the SAR filing requirement, to a whole
host of industries that previously had not been subject to
those requirements: money transmitters, pawn brokers, broker-
dealers, et cetera. And the task now is to get those industries
up to the level where the banks are.
Chairwoman Kelly. Finally, I look inside here, and you say
you have nearly 17,000 examiners in the field. It seems to me
that what happened with Riggs may not be an isolated case. I
think that there may be difficulty in communications with other
agencies. I think that maybe it might be time, for the sake of
the American people's trust in our financial system, to let the
agency egos be put aside and start recommitting to working
together so that you can share information.
I am very concerned that information has not and may still
not be shared between agencies. The problem is, one, when a
regulator goes in and begins to look at the things they are
charged to look at, they get very involved in the paper work,
the appropriate forms filled out, the appropriate forms filed
and the appropriate filing cabinets. It does us no good, in
terms of bank regulation and enforcement, to have everything go
into a filing cabinet and not be enforced. And I am very
concerned that we maybe think about not only civil but criminal
enforcement and possibly think about ensuring that compliance
is assisted by a criminal enforcement program within the
Treasury.
Do you think it would have made a difference last year, if
Riggs--when Riggs was kind of shamelessly flaunting all your
regulations in your face---if someone had been able to pick up
in Treasury, at that moment, and had criminal enforcement
powers for the BSA? I mean, right now, the IRS is the only one
that has that power. Wouldn't it be helpful that maybe we have
criminal enforcement capability with people who are familiar
with the controls and the systems of the financial institutions
to put it all together?
When your reports come in and say, wait a minute, this is a
red flag, something needs to happen. What do you think about
that?
Mr. Stipano. I think it would be very, very difficult for
another agency or group of agencies to duplicate or improve on
the job that the banking agencies do when it comes to assessing
the adequacy of a BSA compliance program for a couple of
reasons. One is that we have at our disposal thousands of bank
examiners who are skilled experts at doing this, and that would
not be true with another agency. And the type of work that is
involved, assessing controls, assessing training, testing, is
within the particularized skill sets of most bank examiners. So
handing that function to another agency, in my view, would be a
step backward and would not improve compliance in the anti-
money laundering area.
That said, I agree with you that there is room for
improvement when it comes to coordination among Government
agencies and information-sharing. One area where I think that
the Government is lacking is that information-sharing often is
a one-way street from the banks and from the banking agencies
to criminal law enforcement. There has been improvement since
the PATRIOT Act. The process that I described to you
previously, of sending out the control list, has now been
codified under Section 314 of the PATRIOT Act. That is a
significant development that has made it much easier for law
enforcement to target accounts of potential terrorists. But
that is relatively new.
What I think would help the banking agencies probably more
than anything would be for the Treasury Department and FinCEN
in particular to better utilize the data that they have to
provide us with analytical reports that would allow us to be
better at identifying the risks and concentrating our resources
on the high-risk banks and the areas within the banks that pose
the greatest degree of risk. That is something that I
understand is a very high priority with FinCEN presently and
something that they hope to accomplish.
Chairwoman Kelly. Well, right now, FinCEN doesn't have the
ability to enforce anything. They are collecting. And they are
collecting information. Streamlining and centralizing.
I heard you talk about streamlining, but I think also maybe
we need to think about centralizing information so that it can
be appropriately examined with one oversight and be responded
to, so we don't have another instance where it has taken since
1997 before people throw up their hands and said, ``Oh my
goodness, there is something happening here.'' that is--
streamlining and centralizing might be good. It is not
necessarily always one of the things that we do with the
Federal Government, but in this instance, it might be a good
thing. So maybe we can talk about that also.
Mr. Stipano. I just want to be clear on this point though
because our view is that, while errors in judgment were made on
Riggs, Riggs was an anomaly and the system as a whole presently
functions very well. It can be improved, and we hope to improve
it. And the way to improve it is through better coordination
among agencies and increased information-sharing. The solution,
in our view, is not to junk the present system and replace it
with something else, because I don't believe that you will
replace it with a system that is better than the one you have
right now.
Chairwoman Kelly. Well, Mr. Stipano, I am not interested in
junking the present system, but I am interested in making sure
that we don't walk out of here this afternoon and find that, on
the front pages of the newspapers tomorrow morning, there is
another Riggs situation.
I think it is very important that we look at how the
examinations are being done, how information is being
collected, how it can be better collected in a place so that it
can be reacted to by the people who have the enforcement
capability. And if there is not an appropriate enforcement
capability at the agency in charge, which in this case is the
Treasury, then the Treasury probably should have that
enforcement capability. And it may be something that we want to
think about.
It is just--I am just throwing this out here, because I
think it is clear there was a break down in the system. And
when that happens, we need--it is right and appropriate for us
to take a look at how to better that system so that doesn't
happen again.
Mr. Baxter, I would like to ask you a couple of questions.
There are indications that the Fed saw hints of OFAC related
problems at UBS early in the ECI program and had some
conversations with the bank. Please tell us if those concerns
were ever communicated to OFAC. Also, please tell us why there
was not much more stringent attention to the problem if there
was even a hint of OFAC-related problems.
Mr. Baxter. Chairwoman Kelly, first, with respect to
whether we had an early warning of a problem at UBS involving
OFAC, the answer is no.
In 1998, following the merger between UBS and Swiss Bank
Corporation, Federal Reserve officers felt it was appropriate
to remind the UBS management that came in at the time of the
responsibilities for OFAC compliance under the contract. But
that was triggered not by concern that there was a compliance
failure. It was a concern about management change that attended
the merger of Swiss Bank Corp and UBS.
With respect to notification to the office of foreign
assets control, we first learned of an OFAC problem on June 25
of 2003 when an officer who was visiting the Zurich facility
learned that there had been transactions of cash with Iran,
which of course was not permitted under the contract in early
July. All of that information was communicated to our
colleagues at OFAC, and I should emphasize that we communicated
the information that we had at the time, information that was
not correct in several different respects, but the information
was timely communicated by the Federal Reserve to OFAC as soon
as we learned that we had a problem.
Chairwoman Kelly. Did the Fed send correspondence after the
UBS merger to warn them of interaction with OFAC-listed
countries?
Mr. Baxter. I wouldn't characterize it as a warning. I
would characterize it as a reminder, and the concern was
specifically generated by the fact that anytime there is a
merger, particularly a merger of the dimension of the UBS-Swiss
Bancorp that with management change come new people, and the
new people might not be mindful of the special contractual
requirements that we exported through our contract to
Switzerland. And in Switzerland there were no prohibitions on
transactions by Swiss banks with Cuba, with Iran; there were
restrictions with Libya and Yugoslavia. So it was appropriate
for us to remind periodically not only UBS, but other ECI
operators that there were special restrictions exported from
the United States by contract.
Chairwoman Kelly. I just turned to Mr. Gutierrez, because
earlier in his opening statement he talked about whether or not
the ECI should be with American-owned banks only.
Why wouldn't some aggressive steps, having been taken in
1996, make certain that ECIs around the world were operated by
U.S. banks? Why wouldn't they, by definition, have to observe
the OFAC sanctions? Is there some reason why that didn't
happen?
Mr. Baxter. First, with respect to the point about U.S.
institutions--and it is a very good point because, as U.S.
persons, branches abroad of U.S. banking organizations are
subject to OFAC requirements, so they would not need to be
reminded or they would not need to be required in a contract.
But there are also specific reasons why the Federal Reserve
looks to foreign institutions in certain locations. And let me
give you a case in point, and the case in point happens to be
UBS.
At the time we started our ECI program, we were
particularly concerned about replacing a $100 note with a new
note, and one of the places that the old $100 note was very,
very popular was in the former Soviet Union. At that point in
time, there was an American bank called Republic National Bank
that was serving the former Soviet Union. That American bank
decided that it was no longer interested in the Russian
business. And so we were in the position of wanting to reach
into Russia to deal with the replacement of the $100 note, and
we needed to find an ECI contractor who could do that.
UBS was the contractor who stepped forward. So in that
particular case, we looked to a foreign institution to fill in
for a U.S. institution that no longer exists, but at the time
it was withdrawing voluntarily from that particular business,
business that the Federal Reserve, the Treasury, and the Secret
Service and the American ambassador at the time felt was very
important to pay attention to with respect to the replacement
of that $100 note.
So there are reasons that we look to particular foreign
institutions to extend our reach into certain jurisdictions,
like Zurich back in 1996, like Singapore with respect to United
Overseas Bank; and those are reasons to look to foreign
institutions to service us. And what we do with the foreign
institutions is, we basically apply through the contract the
OFAC restrictions.
Chairwoman Kelly. Thank you.
Mr. Gutierrez.
Mr. Gutierrez. Thank you very much. Welcome to you all and
thank you for your testimony. I want to go back to Mr. Stipano.
The chairwoman and you, through her questions, spoke a
little bit about the Riggs situation in 1998 and 1999. Now, I
will put words in your mouth, so you can correct anything that
you said, that one of the reasons was that your auditors
believed what was being said by the answers that were given by
Riggs employees back to your regulators and auditors; is that
what you said?
Mr. Stipano. I don't know if I would characterize it
exactly that way.
Mr. Gutierrez. Why don't you recharacterize it, because I
want to know exactly what happened.
Chairwoman Kelly said, well, what happened, you were there
for 1 year, 2 years, 3 years; and you said, well, one of the
reasons was--I understood that they lied to you. And you kind
of phrased it a little nicer and said, they didn't quite--we
kind of believed them.
Mr. Stipano. I wouldn't say that they lied to us, but I
think that what was going on in that pre-9/11 period was that
our examiners were finding deficiencies with the bank's BSA
compliance program at every exam. They weren't the kinds of
deficiencies that were flagged in the 2003 exam where we looked
in depth at the Saudi Embassy accounts, but there were
problems, and we brought these problems to the attention of
bank management and the board. They were discussed during the
exams. They were written up in the exam reports, and we secured
what we believed was a commitment from bank management to fix
them.
What would happen is really what I would term more
accurately as ``foot dragging.'' The changes that we wanted to
have made were made, but they were made slowly. There was not a
real responsiveness. And looking back at this with hindsight, I
think that----
Mr. Gutierrez. You trusted them.
Mr. Stipano. We trusted them. And in hindsight, we
shouldn't have done it.
Mr. Gutierrez. I guess we finally found a word to describe
why it might have taken the OCC as long, because you trusted
them. But it seemed to me that an organization such as yours,
which is safety and soundness and is the regulator, there
shouldn't be issues of trust. I mean, you know, was it trust
but verify? And I don't think you were verifying, because
similar things popped up later on.
It should have been caught earlier. And just so that we
don't think it is the chairwoman and I who have decided,
because they sent you down here--they usually send one of the
counsels down here. Mr. Hawke is good at doing that, but he
acknowledged, and these are his words in the New York Times, he
says ``We should have gotten tougher earlier, and I don't make
any excuses for it. It's a fair criticism of our supervision of
Riggs that we let things go on too long.''
So when you describe a situation, which is a 9, in which
Mr. Hawke, who I would characterize as a very self-assured
person--I wouldn't say arrogant, but self-assured person,
doesn't take much from anybody, right, tough--says, we took too
long and which his deputy counsel, yourself, said, we trusted
them too much, I think you can start wondering.
I mean, if the FBI came and said, yeah, we talked to the
terrorists, but we trusted them and so the buildings came down,
I think people might think it wasn't a 9-out-of-ten system that
was working there. I mean, just understand that from our point
of view that--just we trusted them, they took too long, there
was foot dragging. You are the boss. I mean, when a regulator
sends down bank examiners, I want them to shake up that bank. I
want them to go all the way up the chain of command and say, we
have a problem and we have to clean it up or--I think you know
what the problem is, Mr. Stipano, it is always the ``or.''
Maybe they take the risk of getting caught and the fines and
the penalties, which was one of my earlier questions.
We have to think of new fines and new penalties. I mean,
this is like risk: What is my risk as a financial institution
if I foot drag? What is the most that the OCC--maybe we need
tougher penalties, and we have been doing some of that.
So it just seems to me that to say we trusted them,
especially in this new age after we passed the PATRIOT Act, you
can't trust anybody anymore. We can't trust the Riggs. We can't
trust UBS.
I am sure the folks at the Federal Reserve Bank trusted
them. They said, what a great company, they are really going to
come on and do this job. And we can't do that. We need to
monitor them, don't you think?
So 9 out of ten, I don't think in this particular case to
say that this is just one. Which are the other cases in which
you are trusting people today that tomorrow we are going to
find out that that trust was ill conceived?
Mr. Stipano. First of all, I always agree with Mr. Hawke.
So I'd like to get that on the record.
Mr. Gutierrez. I don't, and in that, we don't share a
common opinion.
Mr. Stipano. Secondly, while I would characterize our
overall efforts in this area as a 9, I certainly would not
characterize our efforts with respect to Riggs as a 9. We made
errors in judgment, and I think they are obvious and we have
discussed them. But I don't think that Riggs is emblematic of
our supervision broadly in any area and certainly not in the
BSA area.
Mr. Gutierrez. Let me ask you a question. Do you still
trust people? Do you still send your bank auditors out and say,
we trust them, and walk away?
Mr. Stipano. I believe you have to trust but verify.
Mr. Gutierrez. Okay. Well, I would like to know what kind
of things you are doing differently, given that Riggs started
in 1997, 1998, 1999, and finally, voila, this year we got a
fine. So that is a long time, as we sit here, to watch an
institution such as yours, that wants to expand.
Now you are sending out preemption notices to the States
saying, not only do we want to do all the great things we did
while Riggs was doing all of these nefarious things, we want to
expand our authority; but we don't want to actually charge any
more fees to our customers, the banks, in order to hire more
employees in order to expand that authority.
So I see an institution that walks up here and says, we are
doing everything fine, we are doing everything so great--this
is Mr. Hawke, of course, not yourself--doing everything so
great and now we want to preempt attorneys general and bank
regulators and other people at the State level from issues and
consumer complaints, that you want to now preempt stateside.
So I think you get my worry.
Let me just say that I read your testimony, and it was like
on page 19 on the top that says ``The examiners found that, as
with the Saudi Embassy accounts, the bank lacked sufficient
policies, procedures and controls to identify suspicious
transactions concerning the bank's relationship.''
You found out about those irregularities at the Equatorial
Bank, or did the Riggs people tell you about them or the FBI
tell you about them? Because as I read that, it kind of sounds
like, voila, our examiners found out about it. Did your
examiners find out about it as I was led to believe when I
first read that paragraph or did others bring it to your
attention?
Mr. Stipano. Let me give you an answer to that question.
First of all, I don't think the sentence says that we found
problems in the Equatorial Guinea accounts.
Mr. Gutierrez. It says ``The examiners found that, as with
the Saudi Embassy accounts, the bank lacked sufficient
policies, procedures and controls,'' ``the examiners found.''
Mr. Stipano. Right.
Mr. Gutierrez. Did the FBI or Riggs find it?
Mr. Stipano. No. The examiners found that, just like with
the Saudi accounts, the bank did not have policies and
procedures with respect to Equatorial Guinea. What happened
with Equatorial Guinea was that this was actually something
that was going to be looked at during the January 2003
examination. There were published accounts of problems----
Mr. Gutierrez. I just read it and I just want to see. So if
you can only find something once between the OCC, the FBI--what
agency, who brought it to public attention first? Did the bank
examiners show up and say, voila, we found this or did Riggs
say it?
Mr. Stipano. The examiners did not find the problems at
Equatorial Guinea.
Mr. Gutierrez. That's what I am trying to say. So then, in
other words, when I read your testimony and when I first read
it, I said, hey, look, the examiners did a great job. They
found this.
Actually, they didn't find it.
Mr. Stipano. Congressman, with all due respect, I don't
believe that is what that sentence says. The sentence says that
they didn't find adequate policies and procedures with respect
to those accounts, just as they didn't find adequate policies
and----
Mr. Gutierrez. But really Riggs is the one that brought
this to the attention of the OCC about the lack of procedures?
Mr. Stipano. Not exactly.
Mr. Gutierrez. Fine. It is all right. What is, is. It will
come up again----
Mr. Stipano. Can I just finish the answer?
At the conclusion of the 2003 examination, we told the bank
that the next time we are in there, this was going to be an
area that we were going to look at. So the bank was on notice
that this was priority and, frankly, that was one of the
problems. And the reason for such a big sum of money penalty
was that despite having been put on notice, they still did not
clean up those accounts.
Mr. Gutierrez. All right. Let me just say that when your
boss, Mr. Hawke, says nonsense about what banks are going to
do, and I hear you give yourself a 9 out of 10, and I think
that I with my staff kind of set the tone. So if I am out there
saying that Congress, even though there has been a vote of the
Banking Committee saying basically, the OCC is wrong, this
committee has voted--and we are kind of elected, the last time
I checked. At least with everybody else there was no dispute in
their election by the people.
When he says, nonsense, and this committee says to Mr.
Hawke, let's sit down, which we have done on a number of
occasions, and let's sit down with bank regulators and let's
sit down with attorneys general and let's sit down with this
committee and let's try to resolve our differences after this
committee has taken a vote--not the Congress, but this
committee has taken a vote--saying we think you have exceeded
your authority and he says, no, nonsense, everything is fine, I
guess that can, I believe, create a sense of arrogance within
the institution when the boss basically says to Congress, after
it has taken a vote in the committee, and uses those kinds of
words when we believe we have a concern--and not only we, but a
lot of other people think that there is concern.
Let me just ask you that when consumers now call you folks
up, have a consumer complaint, am I right that those phones
only operate Monday through Thursday from 9:00 to 4:00?
Mr. Stipano. Congressman Gutierrez, I have to confess here.
I am not the expert on our Customer Assistance Group.
Mr. Gutierrez. We called on a Friday, and it said it was
closed. So you won't dispute that?
Mr. Stipano. I don't know whether it is or not.
Mr. Gutierrez. Let me just tell you, we tried it, and it
said 9:00 to 4:00 Monday through Thursday.
I was a former city council member back in Chicago, and I
loved that job a lot, and one of the things that kept us very
close was that if your cable didn't come on because the city
council would authorize who got the cable license, people would
call me up and say, I called the cable company and they won't
fix it; and if I told them that I was allowing the cable
company, which I had voted, as the city council, to only open
up their offices from Monday through Thursday from 9:00 to
4:00, I don't know how long I would have stayed in the city
council.
I think if people call up the gas company in Chicago or
Commonwealth Edison that has the franchise to serve
electricity, and they were only going to open from 9:00 to
4:00, as a matter of fact, if I decided that my city council
office or my congressional office tomorrow was only going to
operate from 9:00 to 4:00 Monday through Thursday, I think you
would agree with me that I would have a problem in doing that.
And I think that you should understand that you have a
problem and that when people complain to us that their
complaint is well grounded, that government should work Monday
through Friday 9:00 to 4:00--maybe that is not an 8-hour day--
and that if you need more help, since you want to expand your
authority and preempt the States, that maybe you should say,
Congress, we don't agree with you, but we are going to open
Monday through Friday.
Does it sound legitimate to you as the deputy counsel that
you should operate Monday through Friday?
Mr. Stipano. I do not deal with the Customer Assistance
Group. I am open Monday through Friday, and I don't leave at
4:00. And I get calls from people all the time. In fact,
usually if there is a problem in the BSA area, the call
ultimately comes to me. I am not suggesting that I want to
function as a shadow Customer Assistance Group, but there are
other people in the agency that can take calls----
Mr. Gutierrez. But the rest of the agency functions Monday
through Friday, right?
Mr. Stipano. The agency functions Monday through Friday.
Mr. Gutierrez. I suggest that all parts of the agency
should function Monday through Friday, and I think we can
probably give a lot of different examples about what would be
wrong with not functioning Monday through Friday. It seems to
me that that is the work week and that the financial
institutions are open and people have problems; and it is wrong
for agencies such as yours to want to preempt States and then
say, we are only going to open our offices from Monday through
Thursday from 9:00 to 4:00. It should be a better operation so
that the public, which I have a concern about, is well served
so that we are not getting messages that say we don't have to
deal with you, Attorney General, the OCC says that has been
preempted; let's call their offices, only to find your offices
aren't open.
Because you want to know something. My State bank
regulators in Illinois are open Monday through Friday. The
attorney general of the State of Illinois is open Monday
through Friday. And across this country I have yet to find a
State bank regulator or attorney general, which your agency
wishes to preempt, that is not open Monday through Friday. So I
would expect that if you want to take over the responsibilities
of those State agencies that at least you afford the public the
same customer service that is currently being afforded them by
attorneys general and State bank examiners, that we don't
reduce the quality of service to the American people which you
and I have made a vocation to carry out. I guess that is our
point.
I have other questions, and we will submit them for the
record. Thank you very much, Madam Chairman.
Chairwoman Kelly. Okay. Thank you.
Mrs. Maloney.
Mrs. Maloney. Thank you, Madam Chair, for your hard work on
this, and Ranking Member Gutierrez.
Welcome, Chief Counsel Stipano and General Counsel Baxter.
I request that my opening statement be put in the record. I
really would like to ask Mr. Stipano what aspects of the
PATRIOT Act could help avert a repeat of the Riggs problem.
Mr. Stipano. I think that there are provisions in the
PATRIOT Act that are helpful and will be helpful going forward.
But I think that the problems----
Mrs. Maloney. Specifically, which ones would be helpful
going forward?
Mr. Stipano. I think that, first of all, section 312, which
is the provision that requires due diligence and enhanced due
diligence procedures for foreign private banking and
correspondent accounts, that would be something that would be
helpful because even though the Saudi Embassy accounts were not
technically private banking accounts, in some ways they were
operated like they were private banking accounts.
There is an interim final rule in place implementing
section 312. My understanding is that the Treasury Department
will soon be issuing a final regulation which will codify this
requirement, and I think----
Mrs. Maloney. Why is it taking so long? We passed the
PATRIOT Act and the anti-money laundering provisions almost 3
years ago. And we still haven't put the rule in place? I mean
this is really outrageous.
Mr. Stipano. We have all the other ones in place. I am not
a spokesman for the Treasury Department, though. The Treasury
Department has the pen on this particular regulation, and it is
the Treasury Department that has to issue the rule. So maybe
this is a question for your hearing next week. I don't really
know the answer to that.
Mrs. Maloney. Well, then when you were looking at Riggs,
under what standard did you examine Riggs regarding the due
diligence and the opening of accounts with the diplomatic
community? Were you using the standard before 312 or the intent
of 312, section 312?
Mr. Stipano. We have a requirement that all banks have a
compliance program, and among the things that are required as
part of a compliance program are satisfactory internal
controls. That would include due diligence procedures for all
accounts and enhanced due diligence procedures for high-risk
accounts.
The embassy accounts--at least the Saudi Embassy account is
a high-risk account; and what the bank should have done was,
first of all, they should have had better systems in place so
that they knew the number of accounts that they had. Secondly,
they needed to have better information on how those accounts
would be used, what the sources of funds would be, where the
funds would go.
Mrs. Maloney. But when you knew about this in 1998 and
1999--it was well known to the OCC that they were not in
compliance with the Bank Secrecy Act at Riggs--did you go to
them and suggest that they have standards and procedures and
due diligence, and then go back and just make sure they got the
job done? I mean, this is serious stuff right now.
Every time I pick up the paper, New York, where I live, is
Code Red, at least Code Orange. They are announcing terrorist
attacks any day now, and we all know you can't attack without
money. So if you crack down on the shipment of money, we can
crack down on the ability of terrorists to act.
I mean, this is extremely serious and not to put the regs
in place or even to have followed them or to have gone back--
you talk about all the people you have in the field. What about
who you have in Washington? You don't even have to leave the
office. You are right here in Washington with Riggs. You can
walk across the street and see them, practically.
And we knew, since 1998, they had problems with these high-
risk accounts, and yet we didn't come in and crack down on it
more. I mean, I find it quite frankly scandalous.
Mr. Stipano. I couldn't agree with you more as to the
seriousness of this matter, but what we knew in 1998 was very
different from what we knew in 2003; and in 1998 what our
examinations revealed were deficiencies in the compliance
program, not wholesale violations of the Bank Secrecy Act. It
was a much less grave type of violation.
They were brought to the attention of management. They were
written up in the exam report. Commitments to fix the problems
were obtained. But as I testified earlier, bank management did
not follow through on these changes as quickly as they needed
to, and hence, there were repeat violations.
There is no question, looking back at it with hindsight, we
should have been more forceful with that bank at that point and
not waited until 2003 to take a formal enforcement action.
Mrs. Maloney. What does your enforcement action mean? Will
they be fined? What is going to happen?
Mr. Stipano. There actually are three actions that the OCC
has taken. The first one was in July of last year, and that was
a cease and desist order. It is a public enforcement document.
It is about 20 pages long. It requires the bank basically to
take steps to improve its anti-money laundering program.
That cease and desist order was supplemented by a second
cease and desist order that was issued a few weeks ago and----
Mrs. Maloney. What I don't understand is, why didn't you
issue a cease and desist order the minute that the FBI alerted
you to the problems at Riggs? It almost makes it sound as if
the OCC doesn't take the Banking Secrecy Act issue seriously.
Is it a priority at the OCC, the BSA?
Mr. Stipano. It absolutely is a priority. We were not
alerted by the FBI. We found escalating problems with the
bank's program through our exam process and because of
published reports about connections between the Saudi accounts
and the hijackers. That triggered this very extensive
examination that we did last year which formed the basis for
our subsequent enforcement actions.
Mrs. Maloney. But you say that the BSA issues are a high
priority of the OCC, but I am told that they are not even part
of the National Bank Examiners Handbook, that most of the
regulations that were issued in 2002 aren't even part of the
examiners handbook. Now is that true----
Mr. Stipano. No, that is not true. The----
Mrs. Maloney.--that it is not fully updated? That the
handbook is not fully updated?
Mr. Stipano. We are in the process of updating it, and
there should be a revised version out shortly, but----
Mrs. Maloney. Why didn't you update it the minute that we
passed the PATRIOT Act? This is serious business.
I can't tell you how quickly New York reacted in a thousand
ways. We totally rebuilt the command center that was destroyed,
within 19 hours, completely rebuilt it, and I can't believe you
can't get the handbook updated with the information that we
passed to combat money laundering and terrorist dollars flowing
through our country. I mean, really it is beyond--it is a
disgrace, I think, an absolute disgrace.
Mr. Stipano. The PATRIOT Act required us to make lots of
changes in our examination procedures and to write regulations,
and that took time. We could have come out with a revised
handbook earlier, but if the procedures weren't done and the
regulations weren't written, it probably would not have been of
great value to the examiners.
Mrs. Maloney. It would not have been. Well, what more
should we be doing to make sure that the type of actions at
Riggs don't happen again?
Mr. Stipano. I think there are a number of steps that the
OCC is prepared to take.
Mrs. Maloney. Such as?
Mr. Stipano. Comptroller Hawke has directed our Quality
Management Division to do a stem-to-stern review of the Riggs
matter to find out what happened and to see what lessons we can
learn from it. But even before that review is done, there are
several steps that we can take right now, and we are taking
them.
Mrs. Maloney. When is your report on lessons learned from
Riggs going to be due? In another 3 years?
Mr. Stipano. No, it will not be. It will be a matter of
months. In fact, the review has already begun.
Mrs. Maloney. I would respectfully request that when it is
done, it would be handed in to the chairwoman so she can give
it to all of us, so we can all read it.
Chairwoman Kelly. Mr. Stipano, I would concur with that. We
would like that report delivered as soon as possible.
Mr. Stipano. As soon as it is completed, we will deliver
it.
Chairwoman Kelly. I thought you said it was completed, sir.
Mr. Stipano. No, no. I said the review has begun.
Chairwoman Kelly. The review has been done?
Mr. Stipano. The review has begun.
Chairwoman Kelly. Has begun. And I am sorry, if the
gentlewoman would yield, her question was how long do you
expect that to take?
Mr. Stipano. I don't know exactly how long it will take. My
guess is it will probably be several months.
Chairwoman Kelly. Would you please inform us of the
progress of that report on a regular basis?
Mr. Stipano. Yes, we will.
The due date, by the way, is September 1.
Mrs. Maloney. Reclaiming my time, what other steps can we
take that are concrete to crack down on the terrorist money
business?
Mr. Stipano. We need to become better at identifying risk.
One of the big problems with Riggs was that neither our
examiners nor law enforcement nor anyone else recognized the
risks in these embassy accounts.
There are a number of steps that we are taking to do that.
One of them is the nationwide implementation of a risk
identification system that has been developed by one of our
district offices. It involves gathering information on products
and services and various types of activities that banks are
involved in and putting it in spreadsheet form and developing a
methodology to quantify risks and identify banks that may be
outliers.
We are also working on a new database that would use
national bank-filed SARS to pinpoint operational risks
generally, but also risks in the BSA area.
Third, we are working with FinCEN and the other banking
agencies on ways to better use BSA data. FinCEN is sitting on a
gold mine of information with the SARS data and the CTR data
and other data that they have. The ability of the government to
connect the dots and provide that information to the banking
agencies is absolutely essential because once we have that kind
of information, we can target our resources to the areas of
banks that are truly high risk.
As I mentioned earlier, we have also completed our
examination procedures on three sections of the PATRIOT Act and
we are about to come out with new procedures on a fourth
section.
Mrs. Maloney. Quite frankly, you don't need a database or a
spreadsheet to know that Riggs, the international bank for most
of the foreign governments in the country and the foreigners in
the country, is a high-risk bank. I mean, it is common sense,
and yet it was not looked at. So I hope that you improve. This
should be a priority.
And I know you have a lot of smart people working in the
OCC, and I have great respect for Comptroller Hawke. But it
doesn't sound like the BSA issues are at the top of your
concerns, and I think it should jump ahead of any concerns that
you have to change your charter and everything else you have
been trying to do, because this is critically national security
and, really, the security of our people is at stake.
But I would like to go to Mr. Baxter and I would like to
ask you about the Basle Capital Accords that are coming out
that the Fed has been working on with the international
community. When we finally solidify and come forward with these
decisions on various capital requirements and so forth, do you
think having an international standard is going to help us
spotlight and see the type of problems that were at UBS? Do you
think that would be helpful, or is that really not an issue?
What is your feeling on that?
Mr. Baxter. One of the things we see in the UBS matter is
an example of operational risk, a failure of people, a failure
of controls. These failures were observed not here in the
United States, but in the operation that was being conducted in
Zurich. It is a good illustration of operational risk as a type
of risk being addressed in Basle II, and here is one vivid
demonstration of operational risk.
It also, I think, Congresswoman, has relevance to what is
being done at the Basle Committee because this occurred in a
multinational banking organization.
UBS is an organization that conducts its operations in many
countries. It has 65,000 employees around the world; 22,000 of
them are in the United States. So you can see an operational
risk problem and an institution that conducts its operation
cross-border. So it is a good illustration of why operational
risk is an important part of the risk quotient that is
addressed in Basle II. It is also a good illustration of why
the effort needs to be multinational and because this Basle II
is being imposed on institutions that conduct their operation
cross-border.
Mrs. Maloney. Well, I was encouraged somewhat that the U.S.
And Swiss authorities worked in cooperation with the U.S.
management of UBS to investigate and correct the UBS systemic
risk management lapses in Zurich.
But one of your statements earlier was alarming to me when
you said one of the problems is that the personnel at the bank
were not informed of the laws of the United States of America,
of how we treat these accounts, and that we certainly shouldn't
be transferring money and so forth to Libya, et cetera, and
these other countries. And it seems to me that that would have
to be part of the protocol, to let people know what the laws
are.
I mean, I find that an incredible--I can't believe that
someone is that stupid that they don't inform everyone that
this is the standard, because it is a U.S. bank, too, even
though it is dealing with many different countries and just
merged with the Swiss bank and so forth.
What is your comment on that? It is the stupidity defense,
``I just didn't know.'' I think if you read the paper, you
would have known that--any intelligent person reading the paper
would have known that we had these certain guidelines and rules
about transferring accounts and moneys and so forth to various
countries.
Mr. Baxter. Congresswoman, you are absolutely right that
the people in the bank note trading area of the UBS in Zurich,
they knew about the restrictions that were exported in our
contract to them. They knew that they had to conceal what they
were doing. They had to conceal what they were doing not only
from the Federal Reserve, but also from the Swiss Federal
Banking Commission, from the more senior management at UBS and
from UBS's external and internal auditors.
They did it because they were willing to lie. They did it
because they were willing to violate the law, and they paid a
price for that. But there is no question that they knew of the
limitations in that bank note trading area, and they knew they
had to hide. And hide they did.
Mrs. Maloney. Well, I misunderstood you in your earlier
comments. I thought you stated that they did not know, that
there were people with the Swiss bank, and they just merged
with another bank and they weren't familiar.
But you say it is just a matter of just crime, and I am
glad that we have cracked down on it, but what could we do in
the future to make sure that doesn't happen again? How could we
improve our oversight and our monitoring?
Mr. Baxter. Well, it won't happen again with UBS because
they are no longer in the----
Mrs. Maloney. No longer in business, right. But other
banks?
Mr. Baxter. With the other five contractors, what we have
done is implement this 17-point program through contract
changes that were effective in February of this year.
In addition, we are planning visitations to each of our
five contractors to review policies and procedures dealing with
anti-money laundering and OFAC compliance in our offshore
facilities.
Now, it will come as no surprise that we have heightened
attention in those five contractors now, who have watched the
$100 million penalty being assessed against UBS and have taken
careful notice. So while this iron is hot, we going to make
those visitations, we are going to review with our colleagues
at OFAC the policies and procedures that are in place, and we
are going to make suggestions to our ECI contractors as to how
they can be improved.
So those are the things that we have got in train. We are
also expecting in the late summer/early fall to start to
receive the public accounting firm certifications, and those
certifications will be attesting to the management
representations we will receive both with respect to contract
compliance and with respect to accurate reporting. And the
check of those independent public accounting firms, in our
view, is significant. It is significant in a Sarbanes-Oxley
context and it is significant because we know those public
accounting firms are very mindful of their own liability; and
they will be making certifications directly to the Federal
Reserve, and we will have a say in our contracts as to who
those public accounting firms are and then the policies and
procedures that they will follow with respect to their
certifications.
So all of those things are in train, and all of those
things, we expect, will give us much greater assurance that we
will not see a repetition of the conduct we found with UBS in
any of our other contractors.
Mrs. Maloney. Did the Fed ever consider using only U.S.
banks operating abroad for these functions? Wouldn't that have
made things simpler since U.S. Banks are not allowed to deal
with countries on the OFAC list?
Mr. Baxter. You're right, Congresswoman. It does make
things simpler, but that, in itself, is no guarantee of perfect
compliance. Again, we get to that old audit admonition about
trust but verify. So we feel that even with respect to our U.S.
ECI contractors--and most of them are U.S. Institutions--that
we can't only trust them, we have to trust and verify.
So the procedures that I mentioned with respect to the new
contracts and the external certified public accounting firm
attestations, those we are going to implement across the board
regardless of nationality. They will apply to the U.S.
institutions and the non-U.S. institutions.
With respect to the specific question, have we considered
using only U.S. flag institutions, yes, we have considered
that. The difficulty is to penetrate certain markets around the
world, we feel we need to turn to some of our foreign
commercial institutions for the reasons that led us to the UBS
in 1996. And that is why, in Singapore, we are doing business
with the United Overseas Bank.
So we are certainly mindful that the U.S. flag institution
might be simpler and has some legal difficulties that are less
than we find with the foreign flag carriers or institutions,
but we haven't made the decision to use only American
institutions at this point.
Mrs. Maloney. Thank you very much. And I yield back the
balance of my time, although I think I used it all up.
Chairwoman Kelly. That is quite all right. I thank you
both.
But I have one follow-up question for you, Mr. Stipano.
What happened to the auditors that failed to find the problems
at Riggs? Are they still at OCC?
Mr. Stipano. It is hard to answer that because we are
talking about----
Chairwoman Kelly. I thought it was a fairly straight
question. Are they still at OCC?
Mr. Stipano. There are a lot of examiners who have examined
Riggs during this time period. Some of them are still at OCC
and some of them are not.
Chairwoman Kelly. What mechanism do you have in place to
assess the performance of the bank examiners regarding the BSA
compliance?
Mr. Stipano. We have a couple of mechanisms. One is the
performance appraisal process that the OCC uses for examiners
and for other types of employees and another is the Quality
Management Division. That is the division that Comptroller
Hawke has directed to do a review of the Riggs matter and to
report back on what went wrong.
Chairwoman Kelly. How long was that Quality Control
Division in place?
Mr. Stipano. I don't know offhand. It is not something
recent.
Chairwoman Kelly. Years? Months?
Mr. Stipano. In some form, I would say years.
Chairwoman Kelly. I think that this has been a very
interesting hearing. I am interested that you were talking
about the great amount of information that FinCEN has and talk
about the ability to connect the dots. If we streamline what is
going on with regard to regulatory agencies and perhaps
centralize them, then they perhaps can have access to each
other's information in a much more direct way that will result
in better oversight, more rapid response. And certainly we
don't want to see this kind of thing happen again for such an
extended period of time.
We don't live in the world that we lived in prior to 9/11/
2001. We live in a very different world. And part of that world
is that we now--those of us who are charged with the
responsibility of making sure that our country is safe and that
our banking system is safe, we must think outside of the box,
look outside of the box for solutions; that we will never let
this kind of thing happen that happened with the Riggs Bank
again.
I am concerned with not only what happened with OCC, but I
also am concerned with the Fed in one aspect. The fine of $100
million sounds like a lot of money, but when you have a bank
with more than $1 trillion in assets, that fine seems a mere
slap on the wrist. I would hope that when an institution is
fined, especially an institution that had in place people who
were supposed to find this kind of malfeasance, I would hope
that that institution would pay a much steeper price for not
regulating and controlling their own employees' behavior.
Here in the United States we put people like that in jail
when there is a fraud in a bank. We have bank fraud laws; those
people go to jail. $100 million, it seems they got by on the
cheap, and I am quoting a lot of other people who have also
mentioned that to me.
I would hope that when you are considering fines of this
nature again that the Fed would consider a healthier fine for
any kind of malfeasance that is occurring.
This is a blow to our financial system in a way--both of
these are blows to our financial system in a way that American
people have a right to expect should not happen when we have
institutions in place whose charge it is to make sure that it
doesn't happen.
I appreciate the fact that you came here today. I
appreciate the fact that you spent so much time with us,
helping us understand what did happen, what went wrong, and
helping us understand how it is possible that we might be able
to get through this and come out on the other end with a much
better regulatory environment that will help protect America
and America's financial institutions in a better way.
The Chair notes that some members may have additional
questions for this panel which they may wish to submit in
writing. So, without objection, the hearing record will remain
open for 30 days for members to submit written questions to
these witnesses and place their responses in the record.
I thank the witnesses for their appearances here today.
This hearing is adjourned.
[Whereupon, at 3:57 p.m., the subcommittee was adjourned.]
A P P E N D I X
June 2, 2004
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