WASHINGTON The General Accounting Office on Thursday revealed a giant unintended consequence of the Gramm-Leach-Bliley Act: a gap in money-laundering enforcement authority that has kept regulators from examining bank securities affiliates for more than a year.
The agencys report, prepared at the request of Sen. Carl Levin, D-Mich., found that when Gramm-Leach-Bliley transferred regulatory authority over bank-affiliated securities firms from federal bank regulators to the Securities and Exchange Commission, it left the SEC without an anti-laundering rule to enforce.
The securities affiliates are still technically subject to a 1996 rule issued by bank regulators that requires suspicious-activity reports on customers who may be engaged in money laundering. However, Gramm-Leach-Bliley ceded most of the authority to regulate such affiliates to the SEC, which claims it has no statutory authority to enforce another regulators rules.
Before the bill became law, the Federal Reserve Board oversaw the anti-money-laundering practices at 52 broker-dealers, by far the largest connected to banks. The Office of the Comptroller of the Currency and the Office of Thrift Supervision were unable to tell the General Accounting Office how many securities affiliates they examined for SAR compliance, but the Comptrollers Office estimated that hundreds of national bank affiliates engage in securities activities.
Currently, securities firms that have no affiliation with a bank are not required to file suspicious-activity reports.
The GAO report laid the blame for the gap in enforcement authority at the door of the Treasury Department, specifically its Financial Crimes Enforcement Network, which has been working on suspicious-activity reporting rules for the securities industry for the last five years.
FinCEN was expected to complete a proposed rule by the end of 2000, according to the Clinton administrations National Money Laundering Strategy for 2000, but the deadline passed with no word on when a rule might be proposed.
Regulatory oversight of SAR requirements applicable to broker-dealers, including subsidiaries of depository institutions and their holding companies, is not expected to resume until Treasury adopts an SAR rule tailored and applicable to the securities industry as a whole, wrote Davi M. DAgostino, the GAOs director of financial markets and community investment.
Issuing such a rule is also important to ensure consistent regulation and oversight of the area, she continued. However, when a securities SAR rule will be proposed and become final is not clear.
In a statement Thursday, Sen. Levin described the delay as an unfortunate step backwards in the fight against money laundering and called on the Treasury to act. This issue has dragged on without resolution for too long, he said. A regulation should be issued before we lose more ground in the fight against money laundering.
FinCEN officials would not comment on the report. However, in a letter to the General Accounting Office commenting on a draft version of the report, FinCEN Deputy Director William F. Baity agreed that a regulation is needed to address the problem and said that his agency is working with all interested parties.
However, the Treasury is unlikely to issue any major enforcement-related rules until an undersecretary for enforcement has been nominated by President Bush and confirmed by the Senate.
Some observers have questioned the urgency of implementing such a rule for securities firms. Critics contend that stock purchases rarely involve cash, and hence are unlikely vehicles for dirty money, because most money laundering involves the conversion of illegally obtained cash into deposits that appear legitimate.
And in its report, the GAO notes that the Fed did not identify significant problems related to money-laundering compliance at broker-dealer subsidiaries of bank holding companies.
Supporters of the rule are nevertheless convinced that it is necessary.
It is incorrect to suggest that money laundering cannot occur in a cashless system, said John J. Byrne, senior counsel for the American Bankers Association. Historically you have heard people say that if an entity doesnt take cash there can be no money laundering. That obviously doesnt make sense. Money can be laundered through a financial institution without the use of cash.
As a result, he said, bankers have long been bothered that SAR rules apply only to depository institutions and their affiliates.
It just didnt make any sense to those who were creating SAR compliance programs that similar activities were not occurring in freestanding broker-dealers, he said. It is pretty clear that the large broker-dealers have voluntary SAR reporting that is pretty good. But there needs to be some decision reached regarding how the financial services industry is going to handle this going forward.
