United States. Congress. House. Committee on Banki.

Organized crime and banking : hearing before the Committee on Banking and Financial Services, House of Representatives, One Hundred Fourth Congress, second session, February 28, 1996 online

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ft^ ORGANIZED CRIME AND BANKING



'- o



10^



HEARING

BEFORE THE

COMMITTEE ON BANKING AND
FINANCIAL SERVICES

HOUSE OP REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS

SECOND SESSION



FEBRUARY 28, 1996



Printed for the use of the Committee on Banking and Financial Services



Serial No. 104-47



RECEIVED



SEP 1 1 ZCd



BOSfOW PUBLIC LIB

GOVERNMENT DOCUMENTS DEPA




jfl.M 2 3 1997



ORGANIZED CRIME AND BANKING



HEARING

BEFORE THE

COMMITTEE ON BANKING AND
FINANCIAL SERVICES

HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS

SECOND SESSION



FEBRUARY 28, 1996



Printed for the use of the Committee on Banking and Financial Services

Serial No. 104-47




U.S. GOVERNMENT PRINTING OFFICE
22-802 CC WASHINGTON : 1996

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-053608-1



HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES

JAMES A. LEACH, Iowa, Chairman
BILL MCCOLLUM, Florida, Vice Chairman



MARGE ROUKEMA, New Jereey

DOUG BEREUTER, Nebraska

TOBY ROTH, Wisconsin

RICHARD H. BAKER, Louisiana

RICK LAZIO, New York

SPENCER BACHUS, Alabama

MICHAEL CASTLE, Delaware

PETER KING, New York

TOM CAMPBELL, California

EDWARD ROYCE, California

FRANK D. LUCAS, Oklahoma

JERRY WELLER, Illinois

J.D. HAYWORTH, Arizona

JACK METCALF, Washington

SONNY BONO, California

ROBERT NEY, Ohio

ROBERT L. EHRLICH, Maryland

BOB BARR, Georgia

DICK CHRYSLER. Michigan

FRANK CREMEANS, Ohio

JON FOX, Pennsylvania

FREDERICK HEINEMAN, North Carolina

STEVE STOCKMAN, Texas

FRANK LoBIONDO, New Jereey

J.C. WATTS. Oklahoma

SUE W. KELLY. New York



HENRY B. GONZALEZ, Texas
JOHN J. LaFALCE, New York
BRUCE F. VENTO, Minnesota
CHARLES E. SCHUMER, New York
BARNEY FRANK, Massachusetts
PAUL E. KANJORSKI, Pennsylvania
JOSEPH P. KENNEDY II, Massachusetts
FLOYD H. FLAKE, New York
MAXINE WATERS. California
BILL ORTON. Utah
CAROLYN B. MALONEY. New York
LUIS V. GUTIERREZ. Illinois
LUCILLE ROYBAL-ALLARD. California
THOMAS M. BARRETT. Wisconsin
NYDIA M. VELAZQUEZ. New York
ALBERT R. WYNN, Maryland
CLEO FIELDS, Louisiana
MELVIN WATT, North Carolina
MAURICE HINCHEY, New York
GARY ACKERMAN, New York
KEN BENTSEN, Texas
JESSE JACKSON, JR., Illinois
CYNTHIA McKINNEY, Georgia

BERNARD SANDERS, Vermont



(II)



CONTENTS



Page
Hearing held on:

February 28, 1996 1

Appendix:

February 28, 1996 83

WITNESSES
Wednesday, February 28, 1996

de Borchgrave, Amaud, Director, Global Organized Crime Project, Center

for Strategic and International Studies [CSIS] 69

Brody, Clifford L., President, Clifford L. Brody Associates, Inc 72

Brown, Richard A., District Attorney, Queens County, New York 50

Hecker, JavEtta Z., Associate Director for International Relations and Trade

Issues, General Accounting Office 7

Kelley, Hon. Edward W. Jr., Member, Board of Governors, Federal Reserve

System , 10

Memikoff, Boris F., Senior Vice F^resident, Wachovia Corp., on behalf of

the American Bankers Association 65

Morris, Stanley E., Director, Financial Crimes Enforcement Network 13

Owens, Charles L., Section Chief, Criminal Investigative Division, Federal

Bureau of Investigation 48

Rasor, Robert H., Deputy Assistant Director, U.S. Secret Service 43

Richard, Mark M., Deputy Assistant Attorney General, Criminal Division,

Department of Justice 54

Sims, Robert E., Senior Advisor, International Narcotics and Law Enforce-
ment Affairs, U.S. Department of State 16

Wankel, Harold D., Chief of Operations, Drug Enforcement Administration,

Department of Justice 16

APPENDDC

Prepared statements:

Leach, Hon. James A 84

Flake, Hon. Floyd H 87

Maloney, Hon. Carolyn B 90

Royce, Hon. Edward R 92

Watts, Hon. J.C 93

de Borchgrave, Amaud 301

Brody, Clifford L 307

Brown, Richard A 198

Hecker, JayEtta Z 94

Kelley, Hon. Edward W 110

Melnikoff, Boris F 218

Morris, Stanley E 123

Owens, Charles L 179

Rasor, Robert H 163

Richard, Marie M 207

Sims, Robert E 153

Wankel, Harold D 137



(HI)



IV

Page

Additional Material SuBMnrED for the Record

Moloney, Hon. Carolyn B., copy of Indictment No.: 4355/95, The People of
the State of New York against Olushina Godwin Adekanbi et al 319

Vento, Hon. Bruce F., Pioneer Press, February 27, 1996, "Identity theft'
can be financial ruin" 317



ORGANIZED CRIME AND BANKING



WEDNESDAY, FEBRUARY 28, 1996

House of Representatives
Committee on Banking and Financial Services

Washington, DC.

The committee met, pursuant to notice, in room 2128, Rayburn
House Office Building, at 10:02 a.m., Hon. James A. Leach, [chair-
man of the committee] presiding.

Present: Chairman Leach, Representatives McCollum, Baker,
Lazio, Campbell, Royce, Metcalf, Chrysler, Cremeans, Heineman,
Watts, Kelly, Gonzalez, Vento, Flake, Waters, Orton, Maloney,
Roybal-Allard, Velazquez, Fields, Hinchey, Bentsen and Jackson.

Chairman Leach. The committee will proceed to the order of the
day, which relates to hearings on a very important subject. The
committee is meeting to review the threat organized criminal
groups pose to the international banking system.

Rapid changes in technology, globalization of finance, and politi-
cal problems m other countries nave all put stresses on the inter-
national financial system. While electronic and international bank-
ing have provided consumers with more choices and more efficient
markets, they have also made our financial institutions more vul-
nerable to fraudulent international schemes.

Organized crime groups, both in the United States and abroad,
are engaged in money laundering, counterfeiting of U.S. currency,
counterfeiting of fake financial documents, access device fraud, and
financial extortion on a massive scale.

Yesterday, the General Oversight and Investigation Subcommit-
tee, under the able leadership of Chairman Bachus, reviewed the
threat international coimterfeiting poses to the integrity of the U.S.
currency. Today, we will focus on other financial crimes.

As the use of paper currency decreases and gives way to credit
cards and electronic transfers, fraud associated with access devices
become more troublesome. This includes the fraudulent use of cred-
it cards or the fraudulent misuse of electronic banking systems.
Last year, this concern was made real when the Nation's largest
commercial bank, Citicorp, was electronically held up by inter-
national saboteurs. Jesse James may well have met his match. Ap-
proximately $12 million was transferred, with $400,000 withdrawn
via Citicorp cash management systems, and the unauthorized
transfers took place all over the globe, from Buenos Aires to the old
Russian capital of St. Petersburg to Israel.

Given that Citicorp alone moves about $500 billion per day, the
potential risk to the banking system is clearly staggering. Cur-
rently, access device fraud costs financial institutions an estimated

(1)



$4 billion annually. Nigerian criminal gp^oups, for instance, report-
edly account for more than $2.5 million in credit card fraud a
month in Dallas alone.

Another fraud being perpetrated by organized crime includes so-
called "desktop publishing" of fake financial documents, sometimes
referred to as "prime bank notes." Counterfeiting of corporate
checks, bonds, securities, and other real or fictitious negotiable in-
struments are being produced to defraud individuals, pension com-
panies, charities, and financial institutions.

Two years ago. Federal banking regulators issued a warning to
the banking industry on the rise in phony prime bank note activity.
Earlier this month, State banking regulators in the northeast is-
sued another warning to their State banks, indicating that the
threat continues.

Today, I will introduce legislation that will help law enforcement
agencies combat the financial crimes of counterfeiting, access de-
vice fraud, and producing bank notes. The legislation will make it
a Federal crime to pass off fake documents, such as prime bank
notes. It will allow Federal law enforcement agencies to seize the
equipment used in committing access device fraud, such as credit
card embossers. And the bill will increase the penalty for counter-
feiting to a maximum of 25 years imprisonment.

Probably the most pernicious crime affecting the banking system,
however, is money laundering, which, according to some inter-
national experts, now approaches half-a-trillion dollars a year.
Criminals have found that technological developments appear to
have made it easier to launder their illegal gains. For instance,
smugglers may no longer have to worry about getting cash-flow
valises from Customs when they can electronically put thousands
of dollars on stored-valued or Smart cards, no bigger than the aver-
age credit card.

With regard to money laundering, there is no shortage of domes-
tic laws. Since 1986, major anti-money laundering legislation has
been enacted in every Congress — ^from the Money Laundering Act
of 1986, which fully criminalized money laundering, to the Anti-
Drug Abuse Act of 1988, to the Depository Institution Money Laun-
dering Amendment Act in 1990, to the Annunzio-Wylie Anti-Money
Laundering Act of 1992, to the Money Laundering Suppression Act
of 1994.

But despite increased criminal penalties and reporting require-
ments, criminal syndicates still have found ways to legitimize the
proceeds from their illegal activities. Of special concern is the use
of offshore corporations and banks to skirt tougher U.S. laws. One
of the questions we'll be exploring today is what the U.S. Govern-
ment is doing to counter money laundering overseas.

Let me just end with that and ask unanimous consent to put the
rest of my statement in the record, and ask if any other members
would wish to speak at this time.

[The prepared statement of Mr. Leach can be found on page 84
in the appendix.]

Mr. Vento. Mr. Chairman, I commend you and subcommittee
chairman Bachus for your initiatives on these hearings this week.
The fact is that at the time that we're advocating and we see the
evolution of the electronic funds transfer and other types of innova-



tions in terms of the financial transactions that take place in our
society, it's a time when there is even greater risk to the consum-
ers.

Clearly, as is evidenced by votes in this committee earlier this
year, we intend to try to protect the consumers that are operating
and functioning in a responsible manner with regards to the elec-
tronic transactions, as has been advocated since the late 1970's in
terms of the Electronic Funds Transfer Act.

The fact is that the evolution of electronic funds transfer and
wire payments and so forth is moving in a direction that frequently
the banking and other laws have served us well and rules in the
past are being eclipsed by such actions. This, also, I think,
underlies the importance of sound regulation, not just with regards
to financial institutions, but to all financial intermediaries and the
need to have a seamless regulatory fashion in which there is co-
ordination, consistency and common sense that governs such
actions.

We have, of course, many aspects of our financial system, includ-
ing the insurance and the solvencv of institutions, and other factors
that obviously concern us. There nave recently been headlines that
are being made this week concerning the tremendous impact of
crime and drug use and financial transactions as a drain on our
total economy.

So I woula hope that we would pursue — and I understand from
the fact that you're introducing legislation that it is your intention
to continue to pursue a resolution and aggressive policy implemen-
tation with regards to some of these changes. But it's going to have
to be something that we continue to work on so it does not spin —
these policies and these reactions and actions do not spin out of
control in terms of our economy or the financial institutions which
we have relied on to, in fact, facilitate this process.

So I look forward to the hearing and to the continued work on
this enormously important aspect of our economy and our financial
future.

Thank you, Mr. Chairman.

Chairman Leach. Thank you, Mr. Vento. Yes, Mr. McCollum.

Mr. McCollum. Thank you very much, Mr. Chairman. As you
know, I wear two hats, vice chairman of this committee and also
chairman of the Crime Subcommittee over in Judiciary. Having
those two hats to wear, this is especially an important set of hear-
ings that we're embarking upon today. I think that the question of
what we do about crime in the world of finance is very much inter-
twined with the modem technology of today and the criminal mind
that has gone into every aspect of how he or she can manage to
take resources that belong to legitimate citizens and use them for
their benefit.

In many cases, this today is international in nature, not just na-
tional. I think that the threat of international crime probably is not
appreciated by most Americans to the degree that we should have
it appreciated.

The truth is that it's incredible, powerful in its reach. The secu-
rity of many countries is at stake, not to mention our own concern
over the integrity of our banking system. We have had testimony
before our subcommittee over in Judiciary on the issue of Russian



organized crime and understand from those hearings, from the FBI
and others, that today we have an incredible amount of extortion
that goes on in Russia that has spread to the United States, and
that affects directly the banks in Russia and, through that process,
also affects the international marketplace.

According to the National Strategy Information Center's 1993 re-
port on international organized crime, there are three distinctive
characteristics of these organizations in contrast with traditional
criminal enterprises. First, international criminal organizations are
designed to operate across international boundaries. The largest of
these groups, such as the Colombian cartels, are structured in a
fashion similar to any large multilayered global business.

Second, these organizations have established transnational links
to other criminal groups, such as terrorists and drug trafficking or-
ganizations, allowing them to cooperate in specialized activities,
such as money laundering and terrorist activities.

And, third, international criminal organizations are a significant
threat to the authority of civil government and the stability of
democratic financial, economic and legal institutions. Whereas tra-
ditional organized criminals, such as La Cosa Nostra, engaged in
a wide range of criminal activities, they have not normally pre-
sented a challenge to political order.

So I think that these hearings today are exceedingly important
and not just from the domestic standpoint, because having been an
author of much of the money laundering legislation or a co-author
of it that we are now dealing with, I'm interested in how that is
working and how many of our other domestic side issues are going
with respect to crimes in the financial services community. I'm very
gravely concerned about the international implications and how
that affects our banking system.

Thank you, Mr. Chairman.

Chairman Leach. Thank you, Mr. McCollum.

Mr. Vento. Mr. Chairman, I would ask unanimous consent to
place in the record an article on a report on "60 Minutes" this past
Sunday, in which a simple change of postal address resulted in a
rip-off in Rochester, Minnesota. A woman's address was changed
involuntarily to Brooklyn, New York. It just shows, I think, how
simple and how profound the changes can occur in terms of the na-
ture of our society. I would ask to put that article in the record.

Chairman Leach. Without objection, so ordered.

Mr. Vento. Thank you, Mr. Chairman.

[The information referred to can be found on page 317 in the
appendix.]

Chairman Leach. Yes, Mrs. Maloney.

Mrs. Maloney. Thank you, Mr. Chairman. First of all, I would
like to commend you on your legislative initiative and for holding
this hearing. The kinds of financial fraud we're going to discuss
today unfortunately affect every American. At the very least, each
one of us pays an increased price on everything from credit cards
to bank fees to make up for the dishonesty of those who don't play
by the rules, and some citizens pay a much higher price.

New York City's own Queens District Attorney, Richard Brown,
who will be testifying here later, has done a great deal in this area.
His hard work resulted in the indictment of eight Nigerian nation-



als charged with running a multi-milHon dollar nationwide coun-
terfeit credit card operation. The victims of this scheme had their
identities stolen, their accounts plundered, and their credit ratings
ruined. The scary thing is that this could happen to any of us, as
Mr. Vento just pointed out. By some law enforcement estimates,
this type of financial fraud alone is a $1.5 billion underground
business.

This is one of the reasons why my colleagues, Mr, Schumer and
Mr. Vento, and I oflTered an amendment to strike language from the
banking regulatory bill which would have both increased the maxi-
mum consumer liability from $50 to $100 on unauthorized ATM
transfers, which are very easy to take place, as well as transferred
the burden of proof to the customer on the issue of providing all
relevant information relating to an unauthorized use.

With some of the examples of illegal access to financial informa-
tion and even PIN numbers before us today, which we will be hear-
ing, I'm pleased for the American consumer that our amendment
passed this committee.

In the area of money laundering, I strongly supported the reduc-
tion in the number of currency transaction reports that banks must
file. It's the quality, not the quantity of information we gather that
is important. By blanketing every transaction over $10,000 with a
reporting requirement, resources were wasted by banks and the
government alike. It makes no sense to make banks file new paper-
work on every $10,000 transaction of, say, a nationally reputable
department store. Instead, know your customers' procedures, target
limited resources at the problem by spending the time to verify a
new account holder's business. A bank then has a standard of judg-
ment to identify what would be a suspiciously high transaction for
each particular customer.

In the near future, we are going to have a hearing on electronic
benefits transfer technology, which could move government bene-
fits, like social security and food stamps, from checks and coupons
to electronic benefit and debit accounts. Next week, we have yet
another in the series of hearings on the future of money. All these
emerging possibilities of government and business will be asking
consumers to place their trust in these new forms of currency. So
as we move into this new era, we need to maintain, not weaken
our consumer protections, find ways to make our new technology
both protect privacy and increase access to new services, and work
with business, regulatory and law enforcement to crack down hard
on those who seek to defraud American consumers and business.

Finally, it's important to remember that these financial crimes
are often vehicles for other criminal activities, whether tax evasion,
illegal drugs, or even terrorism. As the President said last year,
and I quote, "Criminal enterprises are moving vast sums of ill-
gotten gains through the international financial system with abso-
lute impunity. We must not allow them to wash the blood off
profits from the sale of drugs, from terror, or organized crime."

The President underlines the need for more international co-
operation of a type the Administration's financial crimes enforce-
ment network is pursuing in cooperation with private industry and
international regulators.



I hope this hearing today can provide us with some new insight
and ideas to combat criminal activity aimed at our financial insti-
tutions.

Thank you, again, Mr. Chairman, for your legislative initiative.

Chairman Leach. Thank you, Mrs. Maloney. Does anyone else
wish to make a statement on our side?

Mr. ROYCE. Yes, Mr. Chairman, if I could.

Chairman Leach. Mr. Royce.

Mr. Royce. Thank you, Mr. Chairman. In previous Congressional
hearings, we've heard that in Russia alone, organized crime encom-
passes some 1,500 state enterprises, some 500 joint ventures, and
550 banks. From news reports and research done by various orga-
nizations, such as the American Foreign Policy Council, we know
that the most rapid growth of organized crime in Russia is now
within the financial and banking structure and it is being coordi-
nated by former Soviet KGB operatives.

Indeed, according to party documents, in a 1992 Russian par-
liamentary investigation, the former Soviet First Chief Directorate,
the KGB's foreign intelligence arm, was instrumental in setting up
many banking institutions, which are now integrating themselves
into the western banking system. A parliamentary investigative
commission concluded that "The Politburo of the Communist Party
of the Soviet Union Central Committee made several secret resolu-
tions toward direct concealment in commercial structures of prop-
erty and monetary resources actually accumulated at the expense
of the nation. Based on this, at all levels of the Party hierarchy,
there was a mass founding of party banks, joint enterprises, and
joint stock companies in 1990 and 1991."

In fact, published reports in the Russian and western media say
that 75 to 80 percent of all joint ventures with western companies
founded between 1989 and 1991 involve officers of the KGB. With
this type of KGB involvement, the Russian Mafiya has been pro-
vided with organizational expertise, professional intelligence tech-
niques, and the manpower to carry out their illegal activities.

The professionalization of the Russian Mafiya poses new threats
to U.S. and world financial markets. White collar crimes, counter-
feiting, fraud, money laundering are the weapons of choice, with
the money then being used to expand operations into violent
crimes, such as drug smuggling, murder, extortion, and, most
alarmingly, trafficking in arms and nuclear weapons-grade pluto-
nium.

With ever-expanding increased computer access, with the new
encryption decoding techniques that new technologies bring, it is
hardly surprising to find that much organized crime today is being
carried out through the computer. Offshore operations are being in-
creasingly used to facilitate illegal activities of organizations not
only in Russia, but in Africa, the Middle East and South America.

Information and testimony from previous hearings has shown
that U.S. institutions, commercial accounts, municipalities, and
even our country's defense and civil systems are vulnerable.

Now, the overriding question, that I hope will be addressed by
each of our witnesses, remains what can we, as legislators, do to
help? What can we do to provide our institutions and citizens with
the capability to defend themselves against escalating cyber at-



tacks and punish those who would seek to conduct their criminal
activities through financial systems?

Thank you, Mr. Chairman.

Chairman Leach. Thank you, Mr. Royce. Mr. Fields, do you want
to be recognized?

Mr. Fields. Mr. Chairman, I would simply request unanimous
consent to have my statement entered into the record, as well as
any other Member who wishes to have his or her statement en-
tered into the record. I would like to commend you on this hearing
today and commend your fine group of panelists, because I feel that
this issue is certainly an issue that pours over into the illegal drug
activity that we have in our country. So I thank the gentleman.

Chairman Leach. Thank you, Mr. Fields. Without objection, so
ordered.

Mr. Chrysler or Mr. Heineman. No statements. Thank you. Mr.
Cremeans. No, fine.

Then we will turn to our panel. Let me introduce our panel, first.
Our first witness will be Ms. JayEtta Hecker, Associate Director for
International Trade, Finance and Competitiveness of the GAO; the
Honorable Edward W. Kelley, Jr., Governor of the Federal Reserve
Board; Mr. Stanley E. Morris, Director of the Financial Crimes En-
forcement Network; Mr. Harold D. Wankel, Chief of Operations of
the Drug Enforcement Administration; Robert Sims, Special Advi-
sor on International Criminal Justice to the Assistant Secretary on
International Narcotics and Law Enforcement Affairs of the De-
partment of State.

We welcome vou all. Before turning to Ms. Hecker, who is going



Online LibraryUnited States. Congress. House. Committee on BankiOrganized crime and banking : hearing before the Committee on Banking and Financial Services, House of Representatives, One Hundred Fourth Congress, second session, February 28, 1996 → online text (page 1 of 41)