Bank Secrecy Act
FinCEN and IRS Need to Improve and Better Coordinate Compliance and Data Management Efforts Gao ID: GAO-07-212 December 15, 2006In 2005, over 16 million Bank Secrecy Act (BSA) reports were filed by more than 200,000 U.S. financial institutions. Enacted in 1970, BSA is the centerpiece of the nation's efforts to detect and deter criminal financial activities. Treasury's Financial Crimes Enforcement Network (FinCEN) and the Internal Revenue Service (IRS) play key roles in BSA compliance, enforcement, and data management. GAO was asked to describe FinCEN's and IRS's roles and assess their effectiveness at ensuring BSA compliance and efforts to reengineer BSA data management.
FinCEN and IRS have distinct roles, but share some responsibilities in implementing BSA. FinCEN's role is to oversee the administration of BSA by numerous agencies including IRS. IRS's role is to (1) examine nonbank financial institutions (NBFI), such as money transmitters and check cashers, for compliance with BSA; (2) investigate potential criminal BSA violations; and (3) collect and store BSA reported data by all financial institutions. IRS continues to face challenges in identifying NBFIs subject to BSA and then using its limited resources to ensure compliance. First, IRS has identified approximately 107,000 potential NBFIs, yet FinCEN, IRS, and others agree there is a portion of the NBFI population IRS has not identified. Identifying NBFIs is inherently challenging and made even more difficult because FinCEN regulations about who is covered are confusing, especially for smaller businesses. Second, IRS currently lacks, but is working to develop, a statistically valid risk-based approach for selecting NBFIs for compliance examinations. IRS only examines a small fraction of NBFIs, less than 3.5 percent in 2005, highlighting the need for building risk into the selection process. IRS is statistically validating a risk-based approach for targeting compliance examinations on certain NBFIs suspected of noncompliance. IRS's validation study is a step in the right direction, but IRS's approach will continue to have limitations because the study was not designed to be representative of all potential NBFIs. And lastly, IRS established a new office accountable for BSA compliance, and is working to improve examination guidance. However, IRS's management of BSA compliance has limitations, such as a lack of a compliance rate measure and a comprehensive manual that NBFIs can use to develop anti-money laundering programs compliant with BSA. Addressing program challenges, such as identifying NBFIs and examining those of greatest risk of noncompliance will take time and require prioritizing actions and identifying resource needs. However, FinCEN and IRS lack a documented and coordinated strategy with time frames, priorities, and resource needs for improving NBFI compliance with BSA requirements. FinCEN has undertaken a broad and long-term effort to reengineer, and transition from the IRS, all BSA data management activities. FinCEN, however, missed opportunities to effectively plan this effort and to coordinate its implementation with IRS. For example, FinCEN began making significant investments in information technology projects before a comprehensive plan to guide the reengineering effort was in place. When a key project--BSA Direct Retrieval and Sharing--failed, it jeopardized the future of the broader reengineering effort. After investing over $14 million (nearly $6 million over the original budget) in a failed project, FinCEN is now reassessing BSA Direct but does not yet have a plan for moving forward with the broader effort to reengineer BSA data management activities.
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
December 2006:
Bank Secrecy Act:
FinCEN and IRS Need to Improve and Better Coordinate Compliance and
Data Management Efforts:
GAO-07-212:
GAO Highlights:
Highlights of GAO-07-212, a report to congressional committees.
Why GAO Did This Study:
In 2005, over 16 million Bank Secrecy Act (BSA) reports were filed by
more than 200,000 U.S. financial institutions. Enacted in 1970, BSA is
the centerpiece of the nation‘s efforts to detect and deter criminal
financial activities. Treasury‘s Financial Crimes Enforcement Network
(FinCEN) and the Internal Revenue Service (IRS) play key roles in BSA
compliance, enforcement, and data management. GAO was asked to describe
FinCEN‘s and IRS‘s roles and assess their effectiveness at ensuring BSA
compliance and efforts to reengineer BSA data management.
What GAO Found:
FinCEN and IRS have distinct roles, but share some responsibilities in
implementing BSA. FinCEN‘s role is to oversee the administration of BSA
by numerous agencies including IRS. IRS‘s role is to (1) examine
nonbank financial institutions (NBFI), such as money transmitters and
check cashers, for compliance with BSA; (2) investigate potential
criminal BSA violations; and (3) collect and store BSA reported data by
all financial institutions.
IRS continues to face challenges in identifying NBFIs subject to BSA
and then using its limited resources to ensure compliance.
* IRS has identified approximately 107,000 potential NBFIs, yet FinCEN,
IRS, and others agree there is a portion of the NBFI population IRS has
not identified. Identifying NBFIs is inherently challenging and made
even more difficult because FinCEN regulations about who is covered are
confusing, especially for smaller businesses.
* IRS currently lacks, but is working to develop, a statistically valid
risk-based approach for selecting NBFIs for compliance examinations.
IRS only examines a small fraction of NBFIs, less than 3.5 percent in
2005, highlighting the need for building risk into the selection
process. IRS is statistically validating a risk-based approach for
targeting compliance examinations on certain NBFIs suspected of
noncompliance. IRS‘s validation study is a step in the right direction,
but IRS‘s approach will continue to have limitations because the study
was not designed to be representative of all potential NBFIs.
* IRS established a new office accountable for BSA compliance, and is
working to improve examination guidance. However, IRS‘s management of
BSA compliance has limitations, such as a lack of a compliance rate
measure and a comprehensive manual that NBFIs can use to develop anti-
money laundering programs compliant with BSA.
Addressing program challenges, such as identifying NBFIs and examining
those of greatest risk of noncompliance will take time and require
prioritizing actions and identifying resource needs. However, FinCEN
and IRS lack a documented and coordinated strategy with time frames,
priorities, and resource needs for improving NBFI compliance with BSA
requirements.
FinCEN has undertaken a broad and long-term effort to reengineer, and
transition from the IRS, all BSA data management activities. FinCEN,
however, missed opportunities to effectively plan this effort and to
coordinate its implementation with IRS. For example, FinCEN began
making significant investments in information technology projects
before a comprehensive plan to guide the reengineering effort was in
place. When a key project”BSA Direct Retrieval and Sharing”failed, it
jeopardized the future of the broader reengineering effort. After
investing over $14 million (nearly $6 million over the original budget)
in a failed project, FinCEN is now reassessing BSA Direct but does not
yet have a plan for moving forward with the broader effort to
reengineer BSA data management activities.
What GAO Recommends:
To strengthen BSA compliance, GAO recommends the Secretary of Treasury
direct FinCEN and IRS to develop a documented and coordinated strategy
that includes priorities, time frames, and resource needs. The strategy
should cover implementing specific GAO recommendations, such as
clarifying regulations and measuring the compliance rate. To strengthen
BSA data management reengineering, GAO is recommending FinCEN develop a
long-term plan that includes coordination with IRS.
In commenting on a report draft, the Director of FinCEN and the
Commissioner of Internal Revenue agreed with our recommendations.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-212].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact James R. White at (202)
512-5594 or whitej@gao.gov.
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
FinCEN and IRS Have Distinct Roles in Implementing BSA, but Share Some
Responsibilities:
IRS Lacks an Effective BSA Compliance Program, Despite Several
Improvements:
CI Investigates BSA Criminal Violations and Uses BSA Information
Extensively:
Missed Opportunities for Effective Planning and Poor Project Management
and Oversight Have Hampered FinCEN's Efforts to Reengineer BSA Data
Management Activities:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Reports Required by BSA Regulations:
Appendix III: Responsibilities of MSBs under BSA:
Appendix IV: Access to Taxpayer Information for BSA Examinations:
Appendix V: MOUs on BSA Compliance:
Appendix VI: Comments from the Financial Crimes Enforcement Network and
Internal Revenue Service:
Appendix VII: GAO Contact and Acknowledgments:
Tables:
Table 1: Types of Entities Qualifying as NBFIs Not Otherwise Regulated
by a Federal Functional Regulator:
Table 2: Summary of BSA Compliance Program Improvements and
Limitations:
Table 3: BSA Performance Measures Established to Track Program
Activities in Fiscal Years 2005 and 2006 and Compared to Performance
Information Available for Fiscal Year 2004:
Table 4: CI's BSA Investigative Time, FTEs, and Costs for Fiscal Years
2002 through 2006:
Table 5: BSA Investigations Initiated, Investigations Completed,
Recommendations for Prosecutions, and Convictions for Fiscal Years 2002
through 2006:
Table 6: Criteria Applied by Treasury and IRS When Evaluating Specific
Proposals for Governmental Disclosures:
Figures:
Figure 1: BSA Framework:
Figure 2: Key Moments in the Development of New BSA Data Management
Systems:
Abbreviations:
BSA: Bank Secrecy Act:
BSA Direct R&S: BSA Direct Retrieval and Sharing:
CBRS: Currency and Banking Retrieval System:
CFTC: Commodity Futures Trading Commission:
CIMIS: Criminal Investigation Management Information System:
CI: IRS Criminal Investigations Division:
CIO: chief information officer:
CTR: currency transaction report:
DEA: Drug Enforcement Administration:
DHS: Department of Homeland Security:
ECC-DET: Enterprise Computing Center at Detroit:
FBI: Federal Bureau of Investigation:
FDIC: Federal Deposit Insurance Corporation:
FFIEC: Federal Financial Institutions Examination Council:
FinCEN: Financial Crimes Enforcement Network:
FRB: Federal Reserve Bank:
FTE: full-time equivalent:
ICE: Immigration and Customs Enforcement:
IRS: Internal Revenue Service:
MITSIRS: Modernization and Information Technology Services:
MOU: memorandum of understanding:
MSB: money service business:
NBFI: nonbank financial institution:
NCUA: National Credit Union Administration:
NRP: National Research Program:
OCC: Office of the Comptroller of the Currency:
OIG: Office of Inspector General:
OMB: Office of Management and Budget:
OTS: Office of Thrift Supervision:
SAR: suspicious activity report:
SB/SE: Small Business Self-Employed Division:
SEC: Securities and Exchange Commission:
TIGTA: Treasury Inspector General for Tax Administration:
WebCBRS: Web-based Currency and Banking Retrieval System:
United States Government Accountability Office:
Washington, DC 20548:
December 15, 2006:
The Honorable Christopher Bond:
Chairman:
The Honorable Patty Murray:
Ranking Minority Member:
Subcommittee on Transportation, Treasury, the Judiciary, Housing and
Urban Development and Related Agencies:
Committee on Appropriations:
United States Senate:
The Honorable Joe Knollenberg:
Chairman:
The Honorable John W. Olver:
Ranking Minority Member:
Subcommittee on Transportation, Treasury, Housing and Urban
Development, the Judiciary, District of Columbia, and Independent
Agencies:
Committee on Appropriations:
House of Representatives:
Criminals frequently use the financial system in attempts to conceal
illegal or untaxed proceeds from a variety of activities, including
narcotics trafficking, arms trafficking, extortion, and public
corruption. Laundering money, evading taxes, and financing a terrorist
plot can involve many of the same methods. For example, they may use
third-party nominees, currency, wire transfers, multiple bank accounts,
or international "tax havens" to avoid detection. Attempts to convert
criminal income into legitimate assets or conceal the use of legitimate
assets in criminal activity jeopardize not only the security of our
financial system but also our national security.
The Bank Secrecy Act (BSA) establishes the framework used to combat
these activities and prevent the exploitation of our financial
system.[Footnote 1] BSA requires financial institutions to report
certain financial transactions made by their customers. For example, in
2005, U.S. financial institutions filed over 16 million BSA reports.
These reports provide information used by law enforcement to detect and
prevent a wide range of financial crimes.
At the federal level, many agencies have some responsibility for
protecting our financial system, but a key role is played by the
Department of the Treasury (Treasury). Within Treasury, the Financial
Crimes Enforcement Network (FinCEN) oversees the administration of BSA
and the Internal Revenue Service (IRS) has responsibility for ensuring
non bank financial institutions (NBFI), not otherwise subject to
examination by another federal functional regulator, comply with BSA
requirements. NBFIs include, in part, casinos and state-chartered
privately insured credit unions and money service businesses (MSB),
such as money transmitters and check cashers. In addition, IRS's
Criminal Investigation Division (CI) is responsible for the
investigation of criminal BSA violations and money laundering crimes,
including those related to taxes.
In the Senate Appropriations Committee Report, the Committee expressed
considerable concern over FinCEN's and IRS's management of BSA
compliance efforts.[Footnote 2] As proposed by the Senate, the
conference agreement mandated that we review the effectiveness of the
roles played by FinCEN and IRS in those areas for which they share
responsibility for carrying out the BSA legislation.[Footnote 3] As
agreed with your Subcommittees this report:
* describes IRS's and FinCEN's roles and responsibilities for BSA
compliance, criminal investigations, and data management;
* assesses IRS's effectiveness in managing its BSA compliance program
and coordinating with FinCEN;
* describes the BSA enforcement efforts of CI; and:
* assesses the effectiveness of FinCEN's efforts to reengineer BSA data
management activities.
To address these objectives, we reviewed relevant legislative and
regulatory authorities. We analyzed data on program performance and
compared estimates of the NBFI population. We compared IRS's approach
for selecting NBFIs for compliance examinations to the approach it uses
for examining individual tax returns, as well as to guidance from the
Office of Management and Budget (OMB), GAO, and others. We applied our
criteria for internal controls to the Title 31 database IRS used to
house and store data for BSA examination cases. We analyzed BSA Direct
planning and implementation documents and compared cost, schedule, and
performance plans against actual progress. We also compared FinCEN's
approach to GAO's investment management framework. We examined the
memorandums of understanding (MOU) established between FinCEN and IRS,
FinCEN and the states, and IRS and the states. We interviewed FinCEN
officials in Washington, D.C., and Vienna, Virginia, and IRS Small
Business Self-employed Division (SB/SE) officials in Washington, D.C;
New Carrollton, Maryland; and Detroit, Michigan. We also interviewed
officials from the Treasury Office of Inspector General (OIG) and the
Treasury Inspector General for Tax Administration (TIGTA), and
officials from the Conference of State Banking Supervisors. Appendix I
provides a more detailed scope and methodology for this review. We
conducted our review from July 2005 through November 2006 in accordance
with generally accepted government auditing standards.
Earlier this year, we provided detailed briefings on the interim
results of our work to the Subcommittee on Transportation, Treasury,
the Judiciary, Housing and Urban Development, and related agencies,
Senate Committee on Appropriations. Further, because FinCEN experienced
problems with development and implementation of the retrieval and
sharing component of BSA Direct, we provided our observations on this
project in July of this year.[Footnote 4]
Results in Brief:
FinCEN and IRS have distinct roles in implementing BSA, but share some
responsibilities. FinCEN's role is to oversee the administration of BSA
by numerous agencies, including IRS. In this role, FinCEN develops
policy and provides guidance to both federal financial regulators and
financial institutions and also controls access to BSA data by law
enforcement agencies. IRS has three roles. First, IRS is one of eight
federal financial regulatory agencies that conduct BSA compliance
examinations--in IRS's case, examinations of NBFIs. Second, CI
investigates potential criminal BSA violations. Third, IRS collects and
stores the reports of financial transactions required by BSA and filed
by financial institutions.
IRS lacks an effective BSA compliance program, despite several recent
improvements. IRS faces challenges in identifying NBFIs subject to BSA
and then using its limited resources to ensure compliance.
* IRS is aware of approximately 107,000 potential NBFIs, yet one study
commissioned by FinCEN estimates there are up to 200,000 of these
businesses in the United States. Identifying NBFIs, and particularly
MSBs, is difficult especially for businesses, such as grocery stores,
where financial transactions are not the primary business activity.
FinCEN and IRS could take additional steps to identify NBFIs, but some
steps are of unproven benefit and would require adjusting priorities.
Some IRS BSA officials told us that tax return information might help
identify potential NBFIs, but IRS is prohibited by law from disclosing
tax information for nontax purposes, with some exceptions. The
disclosure provisions in the Internal Revenue Code do not currently
include an exception for BSA compliance examinations. IRS does not have
evidence about the value of tax return information for identifying
NBFIs and has not made a decision about whether it would be worth
pursuing a legislative change. Treasury's OIG found that FinCEN's
regulations and guidance for MSBs can be confusing and easily
misinterpreted. FinCEN agreed, but officials said verifying MSB
registrations is a higher priority than revising these instructions.
* IRS lacks a statistically valid risk-based approach for selecting
NBFIs for compliance examinations but is working to make improvements.
A risk-based approach is important because IRS has limited examination
resources, highlighting the need for building risk into the audit
selection process. In 2005, IRS completed 3,712 examinations--3.5
percent of the approximately 107,000 potential NBFIs currently in its
database. IRS is conducting a study to validate the risk factors it is
using to select MSBs for examination by randomly sampling from a group
of MSBs that have filed, are required to file, or are the subject of
filed BSA reports. This study is a step in the right direction, but
IRS's approach will continue to have limitations, in part, because the
study only addresses a segment of NBFIs identified by IRS. In the
future, IRS can improve its risk-based approach for targeting
examinations of NBFIs by studying the compliance risks posed by the
broader population of known NBFIs.
* IRS has established a new Office of Fraud/BSA accountable for BSA
enforcement, improved examination guidance, and tracking referrals to
law enforcement agencies; however, management limitations remain. For
example, IRS lacks a measure of NBFIs' rates of compliance with BSA and
thus cannot track program effectiveness over time. IRS also lacks a
comprehensive examination manual that NBFIs can use to develop anti-
money laundering programs that satisfy BSA requirements. In addition,
FinCEN and IRS lack a documented and coordinated strategy that lists
priorities, time frames, and resource needs for addressing BSA
compliance program limitations.
As IRS's law enforcement arm, CI dedicates a portion of its resources
to investigating criminal BSA and money laundering violations. CI's
direct investigative time for BSA investigations has remained
relatively constant for the past 5 years at about 12 percent of total
investigative resources. BSA convictions have increased during the same
period, from 240 in fiscal year 2002 to 296 in fiscal year 2006.
FinCEN missed opportunities to effectively plan and coordinate early
efforts to reengineer BSA data management activities and experienced
poor project management and oversight of the BSA Direct Retrieval and
Sharing (BSA Direct R&S) project. Specifically, FinCEN did not develop
a comprehensive long-term plan for reengineering BSA data management
responsibilities before investing in new information systems. Instead,
FinCEN began development on BSA Direct R&S before a plan was in place.
This project--on which work was eventually stopped, in part, because of
poor project management and oversight--was expected to be the
cornerstone of the broader reengineering effort. In addition, FinCEN
did not do an adequate job of communicating and coordinating the
reengineering effort with IRS, which resulted in the development of new
systems with some duplicative capabilities. With the failure of BSA
Direct R&S, FinCEN is now reassessing the future of BSA Direct, but
does not yet have a plan for moving forward with the broader effort to
reengineer BSA data management activities.
We are recommending that FinCEN and IRS develop a documented and
coordinated strategy for improving NBFI compliance with BSA. We are
making a number of specific recommendations to be incorporated into
this strategy, such as making a decision about whether to pursue
accessing taxpayer data to identify NBFIs and developing a NBFI
compliance manual. We are also recommending FinCEN develop a
comprehensive plan to guide the effort to reengineer BSA data
management activities. On December 11, 2006, the Director of FinCEN and
the Commissioner of Internal Revenue agreed with all our
recommendations. The Director and Commissioner also stated their
appreciation that our report notes the steps that FinCEN and IRS have
already taken to improve BSA compliance.
Background:
BSA, enacted by Congress in 1970, authorizes the Secretary of the
Treasury to issue regulations requiring financial institutions to
retain records and file reports useful in criminal, tax, and regulatory
investigations. Following the September 11, 2001 terrorist attacks,
Congress passed the USA PATRIOT Act, which, among other things, amended
BSA and expanded the number of industries subject to BSA
regulation.[Footnote 5] Title III of the act expanded BSA powers to
combat terrorist financing and required financial institutions to
establish proactive anti-money laundering programs. In addition, the
act expanded reporting requirements and allowed the records and reports
collected under BSA to be used in the conduct of intelligence or
counterintelligence activities and to protect against international
terrorism.
The BSA framework focuses on financial institutions' record keeping and
reporting requirements to create a paper trail of financial
transactions that federal agencies can trace to deter illegal activity
and apprehend criminals. Under the BSA framework, primary
responsibility rests with the financial institutions themselves in
gathering information and passing it to federal officials. "Financial
institutions" include both banking institutions and NBFIs. Banking
institutions include commercial banks and trusts, savings and thrifts,
branches of foreign chartered banks doing business in the United
States, and credit unions. NBFIs include MSBs, casinos, and some credit
unions. MSBs include businesses that transmit money, cash checks, and
engage in certain financial transactions. MSBs are the largest and most
diverse group of entities that qualify as NBFIs. Table 1 describes the
different types of entities that qualify as NBFIs not otherwise
regulated by a federal functional regulator.
Table 1: Types of Entities Qualifying as NBFIs Not Otherwise Regulated
by a Federal Functional Regulator:
NBFIs: Casinos;
Description of institution: Nevada casinos, state/ territory licensed
casinos; and gaming operations; tribal casinos; and other gaming
organizations, such as card clubs.
NBFIs: State chartered non-federally insured credit unions;
Description of institution: Member-owned, member-controlled, not-for
profit cooperative financial institutions formed to permit groups of
people who share a "common bond" to save, borrow, and obtain related
financial services and to participate in their management that are
privately insured and state chartered and regulated.
NBFIs: Credit card operators;
Description of institution: Business in the United States that operates
a system for clearing and settling transactions in which the operator's
credit or debit card is used to purchase goods or services or to obtain
cash advances.
NBFIs: MSBs;
Description of institution: Businesses that;
* transmit money;
* cash checks;
* issue, sell, or redeem traveler's checks, money orders, or stored
value;
* deal or exchange currency; and;
* conduct more than $1,000 in the activities mentioned with the same
person on the same day, and provide money transfer services in any
dollar amount; The U.S. Postal Service (transactions excluding the sale
of postage and philatelic products).
NBFIs: The USA PATROIT ACT Expanded The Types of Entities That Qualify
As NBFIs.
NBFIs: Dealers in precious metals and jewels;
Description of institution: Manufacturers, refiners, wholesalers,
certain retailers considered dealers, and any other entities engaged in
the business of purchasing and selling jewels, precious metals,
precious stones, or jewelry. Ranges from single artisan goldsmiths
selling unique and rare gemstones on an individual basis to publicly
traded commercial manufacturers producing millions of pieces each year.
NBFIs: Insurance companies;
Description of institution: Insurance companies that issue permanent
life insurance policies, annuity contracts, and any other insurance
products with features of cash value or investment. The companies are
to integrate agents and brokers who sell these products under the
insurance companies into their program requirements and ensure policies
and procedures are followed.
NBFIs: Loan/finance companies;
Description of institution: FinCEN has not adopted any rules defining
which businesses are to be included in these sectors.
NBFIs: Travel agencies.
NBFIs: Real-estate closing professionals.
NBFIs: Sellers of vehicles.
NBFIs: Unregistered investment companies.
Sources: FinCEN and the Financial Action Task Force.
[End of table]
All financial institutions subject to BSA requirements must implement
internal controls, policies, and procedures; maintain records of
transactions; and file reports of cash transactions over the $10,000
dollar threshold and suspicious activities. The USA PATRIOT Act
required all financial institutions to develop written anti-money
laundering compliance programs that detail internal policies,
procedures and internal controls. Each program must designate a
compliance officer, provide ongoing employee training of pertinent
personnel, and provide for independent reviews whose scope and
frequency is commensurate with the risk of the financial services
provided.
Registration, record keeping, and reporting are the core elements of
anti-money laundering requirements for MSBs. Certain MSBs are required
to register with the Secretary of the Treasury and renew those
registrations every 2 years. In addition, MSBs that sell money orders,
travelers' checks, or other instruments for cash must verify the
identity of each customer and create and maintain a record of each
purchase when the purchase is cash from $3,000 to $10,000.[Footnote 6]
Also, financial institutions and certain types of businesses are
required to submit reports on cash transactions over the $10,000
threshold and transactions of a suspicious nature. Millions of these
reports are filed each year. For example, in 2005 over 16 million BSA
reports were filed by financial institutions. Certain civil and
criminal penalties can be levied against financial institutions for
violating BSA reporting requirements, with fines ranging from $500 for
negligence to $500,000, 10 years in jail, or both for certain willful
violations. [Footnote 7],[Footnote 8] Appendix III discusses the
compliance reporting responsibilities in more detail.
FinCEN and IRS Have Distinct Roles in Implementing BSA, but Share Some
Responsibilities:
FinCEN's role is to oversee administration of BSA government wide. In
this role, FinCEN develops policy and provides guidance to other
agencies, as shown in figure 1. However, FinCEN also relies on other
agencies in implementing the BSA framework, including (1) ensuring
compliance with BSA requirements to report certain financial
transactions, (2) conducting investigations of criminal financial
activity, and (3) collecting and storing the reported information IRS
is involved in all three of these areas.
Figure 1: BSA Framework:
[See PDF for image]
Source: GAO.
[A] Agency names are listed in the list of acronyms located at the
front of this report.
[B] FinCEN collects some BSA information directly through its E-filing
system; however, this information is then provided to IRS and stored
with all other BSA information in IRS's WebCBRS system.
[C] CTRs and SARs are only examples of the types of BSA reports stored
on IRS's Web-based Currency and Banking Retrieval System (WebCBRS). See
App. II for the complete list.
[D] There are 215 agencies with access to IRS WebCBRS. This is only a
partial list of these agencies. Additionally, some agencies have
duplicate copies of the information that are incorporated into other
data systems; therefore some agencies do not always have to access
WebCBRS to review BSA data.
[End of figure]
FinCEN Oversees the Government wide BSA Compliance Program, While IRS
Conducts Compliance Examinations of NBFIs:
As administrator of BSA, FinCEN's compliance role is to develop
regulatory policies for agencies that examine financial institutions
and businesses for compliance with BSA laws, and when appropriate,
assess civil penalties against noncompliant institutions. FinCEN
develops and issues BSA regulatory requirements and provides guidance
to financial institutions that are subject to those requirements.
FinCEN is also responsible for overseeing agency compliance examination
activities and provides these agencies with assistance in educating
institutions on their BSA responsibilities.
As highlighted in the compliance examiners section of figure 1, IRS is
one of eight agencies that actually conduct the compliance examinations
that FinCEN oversees. The Office of Fraud/BSA, within SB/SE, conducts
examinations of NBFIs, including MSBs, which are not regulated by
another federal agency. Appendix III discusses the compliance
responsibilities of MSBs in more detail.
FinCEN Is Responsible for Supporting and Networking the Law Enforcement
Community, Including CI:
FinCEN is responsible for supporting and networking law enforcement at
the federal, state, and local levels. FinCEN's network exceeds 180 law
enforcement agencies, and includes CI, the Federal Bureau of
Investigation, the Drug Enforcement Administration, Immigration and
Customs Enforcement, state and local police departments and
investigative bureaus, attorney general and district attorney offices,
and foreign authorities. FinCEN provides investigative leads to support
financial criminal investigations and offers a variety of analytical
products on trends and patterns that can be used by law enforcement to
more effectively target their investigations.
As the enforcement arm of IRS, CI has the authority to investigate
criminal violations of BSA laws. Like other law enforcement agencies,
CI uses financial intelligence, including data provided on BSA reports,
to build investigations and prepare cases for prosecution. The law
enforcement section of figure 1 highlights how FinCEN, IRS CI, and the
broader law enforcement community fit into the BSA framework.
FinCEN Relies Heavily on IRS for the Collection, Storage, and
Maintenance of BSA Data:
FinCEN has responsibility for overseeing the management of BSA data,
but from an operational standpoint does not collect, store, or maintain
the official data that are reported by financial institutions. IRS's
Enterprise Computing Center at Detroit (ECC-DET), under a long-standing
cooperative arrangement with FinCEN, has been the central point of
collection and storage of these data. ECC-DET maintains the
infrastructure needed to collect the reports, convert paper and
magnetic tape submissions to electronic media, and correct errors in
submitted forms through correspondence with filers. As illustrated in
the data management section of figure 1, BSA data are processed and
warehoused in IRS's Currency Banking and Retrieval System are accessed
through a Web-based interface. The system is called WebCBRS. IRS
examiners and investigations officials access WebCBRS directly through
IRS's intranet. Non-IRS law enforcement users access BSA data through
FinCEN's Gateway computer system. Secure Outreach functions as a portal
through FinCEN's information technology infrastructure to BSA data
housed at ECC-DET.
IRS Lacks an Effective BSA Compliance Program, Despite Several
Improvements:
Despite many improvements, IRS does not yet have an effective BSA
compliance program. An effective IRS compliance program would require
identifying the population of NBFIs and then periodically testing
whether these NBFIs are complying with their reporting and other BSA
requirements.
FinCEN and IRS Continue to Face Challenges in Identifying the
Population of NBFIs Subject to BSA Requirements:
Several efforts have been made to estimate the NBFI population, but all
of these estimates have weaknesses. However, IRS and other
knowledgeable observers agree that IRS has only identified a portion of
the population. No recent studies have been conducted that estimate the
total population of NBFIs; however, a number of efforts have been made
to estimate the number of MSBs, the largest group of NBFIs subject to
BSA requirements. A 1997 study conducted by a FinCEN consultant
estimated the existence of approximately 158,000 MSBs.[Footnote 9] One
IRS official within the Office of Fraud/BSA estimates there may be
approximately 160,000 MSBs. In 2005, another FinCEN study estimated the
population to be as high as 200,000.[Footnote 10] Officials from
FinCEN, IRS, Treasury, TIGTA, and Treasury's OIG agree that IRS has
only identified part of the NBFI population.
Several factors contribute to IRS's difficulty in identifying NBFIs.
NBFIs, especially MSBs, are inherently difficult to identify because of
the wide range of sizes, structures, and financial activities they
conduct. Unlike traditional financial institutions, such as federally
insured banks, many MSBs are small, independently owned businesses in
which financial services are offered as a secondary business activity.
For example, many grocery stores, convenience stores, gas stations, and
liquor stores would be considered MSBs because they offer check
cashing, money order, or wire transfer services, even though the
primary activity of these businesses is the sale of consumer goods. In
a 2005 report, the OIG cited language barriers and the limited
financial proficiency of some business owners as reasons many MSBs are
not registered, [Footnote 11] and therefore have not been
identified.[Footnote 12]
The OIG also found that regulations and guidance for MSBs can be
confusing and easily misinterpreted, thus contributing to the challenge
of identifying MSBs. The report states that the distinction FinCEN
makes between a MSB principal and an agent of that principal is not
always understood by the MSB population and is difficult to verify
other than through an on-site examination. Some BSA rules, such as the
registration requirement, are applicable to principals--the entities
issuing financial instruments--and some are applicable to agents--
businesses authorized to sell the issuers' financial instruments.
Another confusing aspect of the MSB requirements is that businesses
whose daily money services transactions are less than $1,000 per day
per person are generally not considered MSBs. As with the agent
exemption, the dollar threshold is difficult to verify other than
through an on-site examination. The OIG found that FinCEN had plans to
assess whether agents of MSBs should be required to register; however,
FinCEN has not taken action to implement these plans. IRS officials in
the Office of Fraud/BSA support a change that requires all MSBs to
register, regardless of whether they are principals or agents, because
it would make identification easier. FinCEN officials, however, said
that their first priority is to ensure that the current list of MSB
registrations is accurate. Therefore, FinCEN does not have a time-frame
for revising MSB regulations and guidance, including registration
requirements.
Identifying NBFIs, and particularly MSBs, is challenging and resource
intensive--both FinCEN and IRS have responsibility in this area. IRS
uses CBRS, public and commercial databases, Internet searches, and the
yellow pages to identify potential MSBs. FinCEN searches past BSA
reports and gets referrals from other law enforcement officials about
potential NBFIs and MSBs. However, not all businesses identified from
these sources as potential NBFIs are actually subject to BSA
requirements. IRS has identified 107,000 potential NBFIs, but has not
been able to determine how many of these businesses are subject to BSA.
Whenever IRS identifies a new business it believes may be an NBFI, it
sends the business a letter. This letter explains that IRS believes the
business is engaged in an activity that qualifies it as an NBFI subject
to BSA requirements. IRS officials said they are uncertain about the
effectiveness of this letter and that some businesses do not reply.
Further, these officials said often the only way to confirm whether a
business is subject to BSA requirements is to conduct an on-site
examination, a labor-intensive and time-consuming process.
IRS officials in the Office of Fraud/BSA told us that accessing IRS's
tax return databases might help identify additional potential NBFIs.
The Office of Fraud/BSA is currently unable to use tax return
information to identify businesses that may be subject to BSA
requirements because IRS is prohibited by law from using tax return
information for nontax purposes, with only a few exceptions.[Footnote
13] The confidentiality of tax information is considered crucial for
promoting voluntary compliance by taxpayers, and legislative proposals
for exceptions have been strictly scrutinized by Treasury before
submission to Congress. IRS currently lacks empirical evidence that
would support making a case to grant an exception (for example,
evidence on the number of potential NBFIs that could be identified from
tax data but not from other sources), and IRS has not decided whether
it should pursue obtaining access in an effort to develop this
evidence. Appendix IV provides more detail on taxpayer disclosures and
the criteria the executive branch considers before submitting a
proposal to Congress for granting exceptions.
In another effort to identify potential NBFIs, FinCEN and IRS have
recently agreed to a number of MOUs with state financial regulators to
improve coordination and information sharing.[Footnote 14] Almost all
MOUs are less than 2 years old, and according to IRS, FinCEN, and
officials representing the states that have signed MOUs, it is still
too early to tell how effectively they will be carried out.
Successfully implementing these MOUs and sustaining the partnerships
they establish will be an ongoing challenge for IRS, FinCEN, and the
states involved. For example, states have differing definitions and
licensing requirements for MSBs, which can make it difficult to ensure
consistency in the reporting of information. Additionally, IRS
officials said that meeting the information-sharing requirements in the
MOUs is time intensive because it requires manually gathering large
amounts of information from different parts of the organization. The
benefits to IRS and the states, thus far, have not been determined.
IRS, FinCEN, and the states have only recently begun to implement the
agreements in the MOUs. Therefore, little has been done to evaluate the
usefulness of the information that is being shared. Appendix V provides
additional information on the MOUs.
IRS Is Developing a Statistically Valid Risk-Based Approach to
Selecting Businesses for Compliance Examinations, but Limitations Will
Continue to Exist:
IRS does not have a statistically valid risk-based approach for
targeting NBFIs for BSA compliance examinations, but it is working on
developing such an approach for a segment of MSBs. A risk-based
approach is important for selecting NBFIs for compliance examinations
because IRS only has resources to examine a small fraction of NBFIs
each year. For example, in 2005, IRS completed 3,712 examinations--3.5
percent of the 107,246 potential NBFIs in its database.
A risk-based approach uses statistically valid risk factors to select
NBFIs for compliance examinations. Statistically valid risk factors can
be used to better target examinations on those businesses that pose the
greatest risk for noncompliance with BSA requirements. As a result, IRS
would devote fewer of its scarce resources to examining compliant
NBFIs. One approach to statistically validating the risk factors
involves testing them on a sample of NBFIs representative of the
population and determining the extent to which the results correlate
with businesses' actual noncompliance with BSA requirements.[Footnote
15] IRS already uses a risk-based approach when selecting individual
tax returns for audit. Its approach involved statistically validating a
set of risk factors using a relatively small but representative sample
of individual tax returns.[Footnote 16] IRS now uses those risk factors
to select individual tax returns for audit from the entire population.
We, as well as OMB and TIGTA, have recognized the value of risk-based
approaches. Earlier this year, we reported that risk management,
including risk assessment, is a widely endorsed strategy for helping
managers and policymakers make decisions about allocating finite
resources and taking actions under conditions of uncertainty.[Footnote
17] OMB also recommends making decisions based on risk assessments. As
far back as 1986, we concluded that BSA regulators would use their
resources better by targeting examinations on entities with a high
potential for problems.[Footnote 18] In 2004, TIGTA reported that a
risk-based, data-driven process to select the potentially most
noncompliant MSBs for compliance checks could be a more effective
selection method than IRS's existing process.[Footnote 19]
IRS's approach for selecting NBFIs for examination is based mainly on
the judgment and experience of IRS managers and examiners. Based on
that judgment and experience, IRS's Office of Fraud/BSA has developed a
set of risk factors that assist in prioritizing and selecting NBFIs for
examination. However, the judgment and experience of managers and
examiners is based on past compliance cases that are not a
representative sample of NBFIs. Further, IRS studied the risk factors
to help develop rules for case selection and used experienced examiners
to score these factors based on their potential for producing cases
involving noncompliant businesses. IRS has not conducted a test to
statistically validate these risk factors.
IRS recognizes that its risk factors have not been tested and
validated. It has a research project under way to test whether the
current risk factors are more effective than chance at identifying
noncompliant MSBs. IRS selected a random sample of potential MSBs from
CBRS. Then each MSB in the sample was scored for risk of noncompliance
using the risk factors. Beginning in January 2007, IRS will examine
each MSB in the sample to determine whether actual noncompliance
exists. The examination results will be compared to the risk scores to
determine the effectiveness of the risk factors at predicting
noncompliance. The results could also be used to make improvements to
the factors. The research project is slated for completion in December
2007. If the project is completed on time, IRS officials expect any
changes made to the risk factors would go into effect in time to guide
the selection of cases for examination in calendar year 2008.
IRS's research project is a step in the right direction. For MSBs in
CBRS, it will provide empirical validation for IRS's current risk
factors or a basis for improving them. However, this risk-based
approach will continue to have limitations, including the following.
IRS's research study was not designed to be representative of all the
potential MSBs identified by IRS. IRS is testing the validity of the
risk-based selection process by sampling from a subpopulation of
potential MSBs, not the entire population. The study samples from a
list of 59,701 potential MSBs entered into CBRS in 2004 or 2005 because
they either filed BSA-required reports, such as MSB registrations,
CTRs, and SARs, or were named in such reports by third parties.
However, the population of potential MSBs that IRS has identified is
larger. IRS has approximately 105,710 potential MSBs in the Title 31
database and is responsible for determining whether all of them are
complying with BSA.[Footnote 20] According to IRS officials, IRS did
not draw from the Title 31 database to conduct this study because
inconsistency in the quality and completeness of the information it
contains on NBFIs limited its usefulness as a reliable source. IRS's
decision to use CBRS as the source of the study is a valid one.
However, because the research study does not address the entire known
population, IRS will not know how useful the risk factors are for
producing cases within the segment of the population it did not study.
IRS does not have plans for validating the risk factors for the entire
known population of MSBs.
IRS's risk-based approach to selecting MSBs for compliance examinations
necessarily ignores the unknown part of the population. As discussed
previously, there is widespread agreement that despite its efforts to
date, IRS has not identified all MSBs. As IRS uses new information
sources and methods to identify additional MSBs, the risk factors may
not take into account the characteristics of these previously
unidentified MSBs. The only way to ensure IRS is adapting its risk-
based selection process to reflect changes in the identified population
of MSBs is to continue updating its risk assessments. IRS does not have
plans for reassessing the validity of the risk factors as additional
MSBs are identified.
IRS's study and the risk factors applied are only applicable to MSBs
and do not take into account the risks of other NBFIs. IRS does not
have a statistically validated risk-based approach for selecting
casinos, wholesale jewelers, or insurance agents for examination. In
addition, as more types of NBFIs are required to comply with BSA
requirements, IRS will be required to incorporate those businesses into
its compliance examination efforts. From a long-term perspective, a
risk-based approach that looks across the different segments of the
NBFI population could result in a more effective use of resources for
compliance examination. IRS does not have plans for a risk assessment
of the full range of NBFIs.
Addressing the limitations in IRS's current risk-based approach for
targeting NBFIs for examination will require time and resources.
Identifying unknown NBFIs is inherently challenging and gradual--no
easy solution exists for addressing this problem. Compliance research
is costly; IRS estimates the research that is currently under way will
cost approximately $1.7 million. Furthermore, IRS's ability to mount
separate efforts to deal with the range of limitations will be
constrained by management capacity and research capacity.
The benefits of a statistically valid risk-based approach to ensuring
compliance are potentially very great. The nation would have data-based
assurance that the NBFI compliance examination program is targeting its
resources where the risks of NBFI noncompliance, and the resulting lack
of reporting about suspicious financial transactions, are known to be
greatest.
Although Compliance Challenges Continue to Exist, the Establishment of
an Office of Fraud/BSA Has Resulted in Some Improvements:
In October 2004, IRS established the Office of Fraud/BSA within SB/SE.
This office is responsible for ensuring NBFIs comply with BSA
requirements. IRS appointed an executive to oversee the office. This
executive reports directly to the SB/SE Commissioner. The establishment
of this office came, in part, in response to TIGTA findings that IRS
needed to strengthen oversight of the BSA compliance program.[Footnote
21] For example, prior to reorganizing, IRS did not have examiners
dedicated specifically to conducting BSA compliance examinations.
Instead, according to IRS officials, examinations were conducted by tax
examiners who split their time among tax examinations, BSA
examinations, and collections activities.
With the establishment of the Office of Fraud/BSA, IRS dedicated over
300 staff in 33 field offices specifically to conducting BSA compliance
examinations. The dedication of these staff reflects IRS's decision to
place a greater priority on meeting its BSA examination
responsibilities. Since establishing the Office of Fraud/BSA and
dedicating staff specifically to BSA issues, IRS has centralized and
increased uniformity of BSA compliance examinations. However, the
program still has management limitations and the improvements do not
address the significant problems that IRS has in identifying NBFIs and
targeting compliance examinations. Table 2 shows the improvements IRS
management has made and some remaining management limitations.
Table 2: Summary of BSA Compliance Program Improvements and
Limitations:
Program area: Compliance examination policies and procedures;
Improvements: IRS has centralized, more fully documented, and better
implemented policies and procedures for conducting examinations of
NBFIs for compliance;
Limitations: IRS's Internal Revenue Manual, the resource for IRS's
official policies and procedures, has not been amended since January
2003.
Program area: Education and outreach to NBFIs;
Improvements: FinCEN and IRS have expanded and better coordinated
education and outreach efforts directed to the NBFI community;
Limitations: Unlike the agencies that examine banks for BSA compliance,
IRS lacks a comprehensive manual that NBFIs can use to develop anti-
money laundering programs that are compliant with BSA requirements.
Program area: Information management;
Improvements: IRS has centralized and taken steps to improve the
accuracy and reliability of all data on NBFIs and information used to
manage examination resources;
Limitations: IRS's Title 31 database, which contains IRS's information
on NBFIs, is labor intensive to maintain and has limited functionality
and security and stability concerns.
Program area: Performance measurement;
Improvements: IRS has established and benchmarked a number of
performance measures of program activities;
Limitations: IRS lacks a way of measuring the extent to which known
NBFIs comply with BSA requirements.
Source: GAO.
[End of table]
Compliance Examination Policies and Procedures:
Before establishing the Office of Fraud/BSA, IRS did not have centrally
managed, or consistently implemented, BSA examination policies and
procedures. IRS lacked formal guidance for documenting BSA compliance
examinations and determining whether a case warranted referral for
civil or criminal enforcement by FinCEN or CI, respectively. Since
establishing the Office of Fraud/BSA, IRS has established uniform
instructions that compliance examiners use for requesting records and
examining institutions for compliance with BSA requirements.
Additionally, IRS has developed better procedures for determining
whether a case has enough support to warrant a referral for civil
enforcement by FinCEN or criminal enforcement by CI. According to
FinCEN officials, the documentation for cases referred for civil
penalty assessment has improved significantly as a result of these
changes. CI officials have also noticed improvements in case
documentation and referrals that they attribute to the establishment of
the new organization.
However, many of the changes to the processes and guidance have not
been incorporated into the Internal Revenue Manual--IRS's official
internal policies and procedures document resource. Instead, many of
IRS's new or revised policies and procedures are distributed to
compliance examiners via memorandums and electronic mail. Distributing
guidance in this manner makes it difficult to keep track of the changes
and ensure consistent understanding and implementation over the long
term. IRS recognizes these challenges and has slowly made progress in
generating an update, but this process began in 2004 and was not
complete as of November 2006. IRS could not provide a definitive
deadline for when the updated Internal Revenue Manual would be
published.
Education and Outreach to NBFIs:
IRS's outreach is conducted by the SB/SE Stakeholder Liaison Office.
The liaison office works with FinCEN in coordinating the development
and distribution of standardized and consistent information through
brochures, newsletters, presentations, and other materials.
However, IRS has not provided the NBFI community with a comprehensive
source of information that can be used to guide efforts to develop a
program that meets BSA requirements. In June 2005, the Federal
Financial Institutions Examination Council (FFIEC) addressed this issue
for the agencies responsible for conducting BSA examinations of banks
and similar financial institutions.[Footnote 22] FFIEC, with support
from FinCEN, developed the Bank Secrecy Act/Anti-Money Laundering
Examination Manual.[Footnote 23] Although this manual is intended to
guide examiners when examining financial institutions for compliance
with BSA requirements, the banking industry has applauded its
development and publication because it makes examination procedures
transparent and provides excellent guidance on what is expected of
banks.
Despite agreement by FinCEN and IRS that a similar manual is needed for
the NBFI community, such a manual has not been developed. According to
IRS officials, they have recently hired a training coordinator who will
be responsible for developing this manual. However, no timeline has
been established for when the process for developing this manual will
begin.
Information Management:
Prior to the establishment of the Office of Fraud/BSA, the management
of BSA compliance program information was decentralized. Each of the 16
field offices maintained its own, separate lists of potential NBFIs and
information on the examinations it was conducting. Once the new office
was established, IRS took steps to combine all of this information into
one centralized database, the Title 31 database.
The Title 31 database, however, was not built using a disciplined
systems development process and is not supported by IRS Modernization
and Information Technology Services (MITS). As a result, the database
potentially contains duplicate, outdated, and sometimes inaccurate
information from the 16 merged systems. IRS officials believe it has
addressed many of these issues but could not validate that all have
been addressed. Further, IRS officials stated that the database has
other limitations, including (1) limited capacity to handle the number
of fields required to maintain and close cases, (2) issues with
connectivity across field locations, (3) limited controls to prevent
the entry of invalid information, and (4) system instability. IRS has
obtained MITS support in creating a new system to maintain the
information in the Title 31 database. However, IRS will continue
operating within existing system constraints until the new system is
fully operational.
Performance Measurement:
IRS has made progress in tracking and measuring program activities, but
lacks a measure of the extent to which NBFIs comply with BSA
requirements. Prior to the new organization, IRS had only one
consistently measured performance goal for the BSA compliance program-
-delivery of direct examination staff years. In a 2004 review, TIGTA
found that IRS needed to establish performance indicators that measure
case results and their cumulative impact on compliance. For fiscal year
2005, IRS established a suite of measures that it is using to track and
assess program performance. Table 3 lists these measures and the fiscal
year 2005 results and fiscal year 2006 goals and results.
Table 3: BSA Performance Measures Established to Track Program
Activities in Fiscal Years 2005 and 2006 and Compared to Performance
Information Available for Fiscal Year 2004:
BSA performance measure: Number of closures;
Fiscal year 2004: 3,481;
Fiscal year 2005: 3,712;
Fiscal year 2006 through May: 3,681;
Fiscal year 2006 target/goal: 6,427.
BSA performance measure: Hours per case;
Fiscal year 2004: [A];
Fiscal year 2005: 49;
Fiscal year 2006 through May: 44;
Fiscal year 2006 target/goal: 50.
BSA performance measure: Cycle time;
Fiscal year 2004: [A];
Fiscal year 2005: 218;
Fiscal year 2006 through May: 219;
Fiscal year 2006 target/ goal: [B].
Cases in inventory.
BSA performance measure: Assigned to examiner--examination not started;
Fiscal year 2004: [C];
Fiscal year 2005: [C];
Fiscal year 2006 through May: 2,593;
Fiscal year 2006 target/goal: [B].
BSA performance measure: Assigned to examiner--examination started;
Fiscal year 2004: [C];
Fiscal year 2005: [C];
Fiscal year 2006 through May: 2,754;
Fiscal year 2006 target/goal: [B].
BSA performance measure: Net number of new starts;
Fiscal year 2004: [C];
Fiscal year 2005: [C];
Fiscal year 2006 through May: 4,837;
Fiscal year 2006 target/goal: [B].
BSA performance measure: Referrals to CI;
Fiscal year 2004: 9;
Fiscal year 2005: 21;
Fiscal year 2006 through May: 10;
Fiscal year 2006 target/goal: [B].
BSA performance measure: Referrals to FinCEN;
Fiscal year 2004: 8;
Fiscal year 2005: 10;
Fiscal year 2006 through May: 4;
Fiscal year 2006 target/goal: [B].
BSA performance measure: Referrals to tax examiners;
Fiscal year 2004: 1,663;
Fiscal year 2005: 1,572;
Fiscal year 2006 through May: 471;
Fiscal year 2006 target/goal: [B].
Source: IRS Office of Fraud/BSA.
[A] Information on hours per case and cycle time was not captured until
January 2005.
[B] No targets and goals have been identified.
[C] Information not provided for fiscal years 2004 and 2005.
[End of table]
IRS performance measures in table 3 do not provide information on the
rate of NBFI compliance. Although measuring compliance rates can be
challenging, IRS has done so for taxpayer compliance of individuals
under Title 26. IRS's research to validate the risk factors it uses to
target MSB examinations could also be used to estimate a compliance
rate for MSBs in CBRS. This compliance rate would not be generalizable
to the entire MSB or NBFI population; however, it would allow IRS to
get a better understanding of the extent to which the MSB population
captured within CBRS complies. Without a measure of the compliance
rate, IRS and external parties such as Congress will not know the
effect, over time, of IRS's efforts to ensure compliance. IRS has no
plans to measure the NBFI compliance rate.
FinCEN and IRS Lack a Documented and Coordinated Strategy for Improving
NBFI Compliance with BSA Requirements:
FinCEN and IRS have taken a number of steps to improve efforts to
ensure that NBFIs comply with BSA, but they lack a documented and
coordinated strategy for moving forward. Our previous discussion shows
that many additional steps could be taken to identify the population of
NBFIs, ensure compliance of those NBFIs that have been identified, and
strengthen management of IRS's BSA compliance program. Addressing these
limitations will be challenging and will take time. The challenges are
compounded by the fact that the types of NBFIs that are IRS's
responsibility under the law are growing. Some actions to address these
challenges could be taken by the agencies individually, but others will
require a coordinated approach to be effective. Further, limited
resources and time constraints mean that additional actions will have
to be prioritized, alternatives will need to be considered, and trade-
offs may need to be made. FinCEN and IRS do have some elements of a
strategy to guide future efforts.[Footnote 24] However, FinCEN and IRS
do not have a documented and coordinated strategy that prioritizes
actions, lists time frames, and explains resource needs over multiple
years.
Without a strategy that prioritizes and guides IRS and FinCEN's
collective efforts to improve NBFI compliance, the risk is greater that
noncompliance will go undetected and uncorrected. Noncompliance by
NBFIs means that suspicious financial transactions, such as money
laundering and terrorist financing that occur at these institutions,
might go undetected.
CI Investigates BSA Criminal Violations and Uses BSA Information
Extensively:
CI investigates individuals and businesses, including financial
institutions, for BSA and money laundering violations, usually in
conjunction with other tax law violations.
CI Dedicates a Portion of Its Resources to Investigate Criminal BSA
Violations:
BSA investigations constituted roughly 12 percent of CI's direct
investigative time in fiscal year 2006. Full-time equivalents (FTE)
dedicated to BSA enforcement from 2002 to 2006 remained relatively
unchanged, as shown in table 4.
Table 4: CI's BSA Investigative Time, FTEs, and Costs for Fiscal Years
2002 through 2006:
Direct investigative time;
Fiscal year 2002: 11.1%;
Fiscal year 2003: 12.3%;
Fiscal year 2004: 12.4%;
Fiscal year 2005: 12.0%;
Fiscal year 2006: 11.8%.
Total FTEs;
Fiscal year 2002: 450;
Fiscal year 2003: 478;
Fiscal year 2004: 474;
Fiscal year 2005: 453;
Fiscal year 2006: 451.
BSA costs;
Fiscal year 2002: $56,684,148;
Fiscal year 2003: $63,760,525;
Fiscal year 2004: $69,183,775;
Fiscal year 2005: $66,516,938;
Fiscal year 2006: $68,286,292.
Source: IRS's Criminal Investigation Management Information System.
[End of table]
CI highlighted enhancing BSA compliance in its strategy and program
plan for fiscal years 2005 through 2006. In the plan, CI outlines its
strategies to support IRS's strategic plan goal to enhance enforcement
of tax laws. One of CI's major compliance strategies involves
effectively working with Treasury, the Department of Justice and other
law enforcement partners among other things, to enhance BSA compliance
efforts.[Footnote 25] CI recently introduced new performance measures
based, in part, on a previous TIGTA report and an OMB review. During
the OMB review, Treasury, CI, and OMB jointly determined that the old
measure of completed investigations was insufficient to measure program
effectiveness. As a result, CI introduced three new annual performance
measures: the number of convictions (a measure of impact on
compliance), the conviction rate (a measure of quality of
investigations), and conviction efficiency (a measure of cost
efficiency). CI reported 296 convictions for BSA violations during
fiscal year 2006. From fiscal years 2002 through 2006, convictions
increased about 23 percent.
CI investigates individuals and businesses for BSA or money laundering
violations, but according to CI officials, agents do not typically
investigate many financial institutions for Title 31 violations.
Generally, if an institution is the subject of an investigation, it is
for failure to have an anti-money laundering program in place or
because an individual within the institution is causing the institution
to not file required forms. According to CI officials, structuring is
the most common type of BSA violation CI investigates among
individuals. Structuring occurs when a person conducts or attempts to
conduct currency transactions at financial institutions for the
purposes of evading the reporting requirements of BSA. Many BSA
investigations involve structuring, failure to file reports on
transactions or bulk cash, and smuggling activities, according to CI
officials.
BSA criminal violations are usually investigated in conjunction with
other tax violations, according to CI officials. In one recent case, a
sales executive for an international telecommunications company was
sentenced to 24 months in prison and fined $20,000 in a money
laundering case involving cash deposits. The sales executive structured
bank deposits and made 31 cash deposits totaling over $250,000 to
accounts in two different banks to avoid currency transaction reports
being filed to IRS. The sales executive forfeited $59,400 and filed
amended income tax returns to report an additional $250,000 in income
that he was attempting to hide with his structuring activity. The case
was developed from information reported in SARs.
CI Statistics Show Increases in Enforcement Activity for BSA
Violations:
BSA convictions increased from fiscal years 2002 through 2006.
Likewise, investigations completed and prosecutions recommended
increased during the same period. Table 5 shows CI's BSA investigations
initiated, investigations completed, prosecutions recommended, and
convictions.
Table 5: BSA Investigations Initiated, Investigations Completed,
Recommendations for Prosecutions, and Convictions for Fiscal Years 2002
through 2006:
Investigations initiated;
Fiscal year 2002: 563;
Fiscal year 2003: 525;
Fiscal year 2004: 523;
Fiscal year 2005: 546;
Fiscal year 2006: 554.
Investigations completed;
Fiscal year 2002: 418;
Fiscal year 2003: 513;
Fiscal year 2004: 700;
Fiscal year 2005: 546;
Fiscal year 2006: 628.
Prosecutions recommended;
Fiscal year 2002: 292;
Fiscal year 2003: 322;
Fiscal year 2004: 501;
Fiscal year 2005: 379;
Fiscal year 2006: 437.
Convictions;
Fiscal year 2002: 240;
Fiscal year 2003: 239;
Fiscal year 2004: 310;
Fiscal year 2005: 343;
Fiscal year 2006: 296.
Source: IRS's Criminal Investigation Management Information System.
[End of table]
CI Is a Large Consumer of BSA Data:
CI is a big user of BSA data and IRS's database that stores the data--
CBRS. CI's enforcement mission coupled with being organizationally
located within IRS places it in a unique position for utilizing BSA
data. CI queries CBRS more than any other federal, state, or local
agency. During fiscal year 2005, CI made about 57 percent of the over
1.5 million queries made of the system. Additionally, CI was
responsible for more than 66 percent of the document viewing activity
in CBRS.
During 2006, CI transitioned to a new Web-based version of CBRS. CI
officials reported the system has advantages for improving CI's ability
to develop investigative leads. One advantage is the ability to conduct
searches within narratives on BSA reports. Analysts and investigators
can now search narratives on SARs, for instance, for specific words and
were unable to do so under the old CBRS system. Another advantage cited
is the ability to better use downloads of SAR data. With the Web-based
system, an analyst or investigator can put downloads in Access or
Excel. Once the data are in a spreadsheet or database management
applications program, analysts or investigators can easily look for
trends in certain addresses or occupations. With the old CBRS system,
the analyst had to print out downloads and manually look at the
different fields of information from SARs.
Missed Opportunities for Effective Planning and Poor Project Management
and Oversight Have Hampered FinCEN's Efforts to Reengineer BSA Data
Management Activities:
In 2003 FinCEN began an effort to reengineer BSA data management
activities However, the cornerstone of FinCEN's reengineering effort,
BSA Direct R&S, was permanently halted because of a multitude of
problems.
FinCEN Missed Opportunities to Effectively Plan, and Coordinate with
IRS, Early Efforts to Reengineer BSA Data Management:
FinCEN made two mistakes in the early stages of its effort to
reengineer BSA data management activities: it began reengineering
without a comprehensive implementation plan and did not adequately
communicate and coordinate with IRS.
FinCEN Began Reengineering BSA Data Management Activities without a
Comprehensive Implementation Plan:
According to our Business Process Reengineering Assessment Guide,
before an agency initiates business process reengineering, a
comprehensive implementation plan should be developed that spells out
the work that needs to be done.[Footnote 26] This plan should include
time frames, milestones, decision points, and resource allocations.
Although FinCEN commissioned a series of studies to examine and
recommend an approach to reengineering BSA data management activities,
these studies were only recommendations and did not constitute a
comprehensive plan for conducting the reengineering effort. Instead,
FinCEN made the decision to move forward with one aspect of the broader
reengineering effort, BSA Direct R&S, before establishing a
comprehensive plan. FinCEN commissioned the MITRE Corporation to
develop a comprehensive reengineering plan that would serve as a road
map for the reengineering effort after the BSA Direct R&S project was
well under way. Further, this plan was developed under the assumption
that BSA Direct R&S would be completed successfully. FinCEN expected
BSA Direct R&S to be the center of FinCEN's broader reengineering
effort and serve as the catalyst for its execution.
FinCEN intended to establish the technology for implementing the
reengineering effort before establishing the reengineering plan itself.
We have found in examining reengineering and technology acquisition
efforts that technology is an enabler of process reengineering, not a
substitute for it. We have also found that acquiring technology in the
belief that its mere presence will somehow lead to process innovation
is a root cause of bad investments in information systems. FinCEN's
decision to implement one aspect of the reengineering effort, BSA
Direct R&S, before developing a comprehensive plan for conducting the
broader effort exemplifies this problem. FinCEN viewed BSA Direct R&S
as a strategic initiative, as it was intended to eventually interface
with other systems in order to facilitate all BSA reporting and data
related processes from IRS to FinCEN over time.
FinCEN Did Not Adequately Communicate and Coordinate Reengineering
Efforts with IRS:
FinCEN did not adequately communicate and coordinate its BSA data
management reengineering efforts with IRS, namely efforts to develop
new information systems used to house and disseminate BSA data. Had
better communication and coordination occurred, a more effective
technology and business solution might have been achieved. The
cornerstone of FinCEN's effort to take control of all BSA data
management responsibilities was the development of BSA Direct R&S, a
new information system that was to store and disseminate all BSA data.
At the same time, IRS developed its own system, WebCBRS, with many of
the same capabilities. FinCEN did not actively engage in discussions
with IRS about WebCBRS as it was being developed. FinCEN, IRS, and
Treasury all have a role in the reengineering effort. However, FinCEN's
goal is to take over all BSA data management responsibilities currently
conducted by IRS. Therefore, FinCEN is driving the reengineering effort
and has responsibility for communicating and coordinating its
activities to the other agencies. Key moments in the development of
these two systems are documented in figure 2.
This page is left intentionally blank.
Figure 2: Key Moments in the Development of New BSA Data Management
Systems:
[See PDF for image]
Source: GAO.
[End of figure]
In examining the above timeline, we identified at least three missed
opportunities early in the implementation of the two projects where
better planning and coordination might have resulted in more effective
and efficient systems development efforts:
* In April 2002, Treasury, with FinCEN's input, recommended IRS
maintain its role in BSA data management; yet over the next 2 years
FinCEN decided to pursue alternative approaches while IRS initiated the
transfer of BSA data to WebCBRS, a new system.
* In the fall of 2003, FinCEN decided to launch the BSA Direct project
just a month before ECC-DET at IRS secured additional funding and
accelerated the development of WebCBRS with an anticipated completion
of 2006 instead of 2009. FinCEN, however, justified the need for BSA
Direct without fully accounting for (1) the expected capabilities that
IRS's WebCBRS system would provide and (2) IRS's revised and more
aggressive conversion schedule. For example, part of FinCEN's
justification to OMB for BSA Direct was that it would allow IRS to
discontinue the development of WebCBRS, potentially resulting in
financial savings for the agency. However, officials at both FinCEN and
IRS said no discussion on discontinuing IRS's effort ever took place
before this justification was presented.
* In December 2004, the Chief Information Officer (CIO) of Treasury
issued a memorandum documenting key agreements between the department,
IRS, and FinCEN on the future of BSA data management, but it is unclear
how some of these agreements were actually implemented. For example, an
agreement stated that IRS would be a preferred user of FinCEN's system,
yet IRS officials stated that they remained uninformed throughout the
process about their current and future access to BSA data.
Additionally, an agreement stated that the Treasury CIO would lead a
joint effort to identify, eliminate, and prevent any potential
duplication of efforts. However, no information was provided to
demonstrate how this agreement was to be carried out.
Poor Project Management and Oversight Contributed to the Failures of
BSA Direct R&S:
BSA Direct R & S failed, in part, because project management issues
continued throughout the project's life and were not adequately
addressed by agency executives. On March 15, 2006, the Director of
FinCEN placed the BSA Direct R & S project under a temporary "stop
work" order because of significant cost, schedule, and performance
issues. Over the following 4 months, FinCEN reassessed the project with
the assistance of two outside consultants. Then, on July 12, 2006, the
Director decided to permanently halt the project because of a multitude
of problems. Among these were inadequate project governance and a lack
of demonstrated project management expertise by the project contractor
and FinCEN.
In a previous review we found that FinCEN did not always apply
effective investment management processes to oversee the BSA Direct R&S
project.[Footnote 27] This, in part, contributed to the problems
experienced by the project, because issues that occurred at the project
management level continued and were compounded, yet were not addressed
at the executive level. For example, the MITRE Corporation--the
organization assisting FinCEN with project monitoring--identified
multiple occasions where FinCEN did not take action to mitigate project
risks or address significant descoping of project functionality.
BSA Direct R&S repeatedly missed program milestones and performance
objectives and exceeded the project budget. The original cost estimate
of $8.9 million for the prime contract increased to $15.1 million. Of
that amount, $14.4 million was spent. FinCEN estimates that an
additional $8 million would be required for operations and maintenance.
Also FinCEN could not ensure that any additional investment would
achieve the desired product. Therefore, FinCEN terminated the project
and is currently:
* formalizing a replanning effort for BSA Direct R&S, to include
strategic, technical, and resource planning issues, as well as
stakeholder analysis;
* evaluating the discrete elements of BSA Direct R&S for
salvageability; and:
* developing a road map to achieve BSA Direct R&S in steps, as a
program with multiple projects, both business and technology oriented.
In our previous review we noted that the problems with BSA Direct R&S
indicate systemic problems with FinCEN's management and oversight of
information technology projects. As a result, the Subcommittee on
Transportation, Treasury, Housing and Urban Development, the Judiciary,
and Related Agencies, Senate Committee on Appropriations, directed
FinCEN to ensure it has an executive-level review process for
information technology projects.[Footnote 28] We also recommended that
FinCEN develop a plan for managing BSA Direct that focuses on
establishing policies and procedures for executives to regularly review
investments progress against commitments and take corrective actions
when these commitments are not met. In October 2006, FinCEN developed
an interim information technology management improvement plan that
acknowledges that these and other actions are needed to build its
information technology management capabilities. However, the plan
focuses on improving FinCEN's information technology management
capabilities but does not address FinCEN's broader efforts to
reengineer BSA data management activities.
Based on past issues, FinCEN will continue to face challenges in
building information technology management capability, while at the
same time continuing efforts to reengineer and transition BSA data
management processes. The MITRE Corporation, prior to the failure of
the BSA Direct project, characterized reengineering of BSA data
management as a daunting effort, in part, because it involved highly
interdependent tasks that must be conducted under short implementation
time frames. The decision to discontinue the BSA Direct R&S project
provides FinCEN with an opportunity to take a more deliberate and
disciplined approach to implementing the effort to reengineer BSA data
management activities.
Conclusions:
FinCEN and IRS play important roles in the national effort to combat
money laundering and terrorist financing activity. Both have recently
taken significant steps to make their efforts more effective; however,
a great deal more could and should be done.
FinCEN and IRS have taken action to improve NBFI compliance with BSA
requirements, but making significant progress in identifying NBFIs and
ensuring that they comply with BSA requirements is a long-term effort
with no simple solutions. In some cases, IRS, FinCEN, or both have
actions under way but no timetable for finishing. In other cases,
action has yet to begin. Some of these actions include deciding whether
to pursue gaining access to taxpayer information, clarifying the
definition of an MSB, updating the Internal Revenue Manual, developing
an NBFI compliance examiner's manual, creating a more functional and
secure mechanism for storing NBFI data, and developing a NBFI BSA
compliance measure. These actions have not been completed, in part,
because of competing priorities. However, without a coordinated,
documented strategy that guides the agencies' approach over time, the
agencies do not have assurance they are moving in the right direction
and are limited in their ability to measure progress in achieving
improvements. Furthermore, Congress and the public will have difficulty
understanding the overall approach that IRS and FinCEN are taking to
ensure that NBFIs are complying with BSA.
To date, FinCEN's effort to reengineer and transition BSA data
management activities has not been successful. The failure of BSA
Direct R&S was a considerable setback in this effort. However, FinCEN
is now in a position to reassess the goals of the reengineering effort
and develop a comprehensive long-term strategy. FinCEN and IRS must
also find ways to improve communication and coordination as FinCEN
proceeds with its effort to reengineer BSA data management activities.
Moving forward, FinCEN will need to take a measured and disciplined
approach to strengthening its ability to oversee and manage information
technology projects. Significant changes, such as FinCEN's data
management reengineering effort, are complex and slow to implement,
requiring a long-term, but flexible, strategy and a strong and
consistent focus to be successful.
Recommendations for Executive Action:
To improve BSA compliance, we are making the following 8
recommendations.
The Secretary of the Treasury should direct the Director of FinCEN and
the Commissioner of Internal Revenue to develop a documented and
coordinated strategy that outlines priorities, time frames, and
resource needs for better identifying and selecting NBFIs for
examination. This strategy should include the full complement of
actions that FinCEN and IRS can take to build a more effective BSA
compliance program, including the specific compliance program
recommendations we make below.
The Director of FinCEN should establish a time frame for revising MSB
regulations and guidance, including registration requirements.
The Commissioner of Internal Revenue should decide whether to pursue
gaining access to taxpayer data for better identifying NBFIs.
The Commissioner of Internal Revenue should direct the Office of Fraud/
BSA to:
* build upon the study to validate compliance risk factors by
developing a plan to assess the noncompliance risks posed by all NBFIs;
* establish time frames for finalizing and publishing the Internal
Revenue Manual with updated BSA compliance program policies and
procedures;
* develop a NBFI compliance examiner's manual that examiners can use to
guide examinations and businesses can use to ensure they are in
compliance with BSA requirements, and establish time frames for its
publication;
* create a more functional and secure mechanism for storing and
accessing the information contained in the Title 31 database; and:
* use the results of the forthcoming risk factor validation study to
estimate the compliance rate for the population of MSBs from which the
study sample was drawn.
To improve BSA data management, we recommend the following:
The Director of FinCEN, in cooperation with the Commissioner of
Internal Revenue, should develop and implement a comprehensive and long-
term plan for reengineering BSA data management activities before
moving forward with the BSA Direct R&S project. This plan, at a
minimum, should:
* take a broad and crosscutting approach to the reengineering effort,
and not focus solely on one component, such as BSA Direct;
* include short-and intermediate-term goals for reengineering BSA data
management processes, including the transition of IRS's data management
responsibilities to FinCEN; and:
* incorporate collaboration strategies into the plan by clearly
defining the role of IRS's ECC-DET in the transition process and more
actively involving it as a key stakeholder in the reengineering effort.
Agency Comments and Our Evaluation:
The Director of FinCEN and the Commissioner of Internal Revenue jointly
provided written comments on a draft of this report in a letter dated
December 11, 2006 (which is reprinted with its enclosures in app. VI).
FinCEN and IRS agreed with all our recommendations. The Director and
Commissioner also stated their appreciation that our report notes the
steps that FinCEN and IRS have already taken to improve BSA compliance.
They highlighted staff attrition as another challenge faced by the
program. The Director and Commissioner also raised some issues about
the difficulty in drawing a correlation between IRS's process for
selecting tax returns for audit and selecting NBFIs for BSA compliance
examination, but we view IRS's tax audit case selection process as a
potentially useful model for selecting cases--even if the audits are
for other purposes.
While agreeing with our first recommendation, the Director and
Commissioner expressed concern that we did not recognize the efforts
that they have already taken to better identify and select NBFIs for
examination. However, IRS's Workload Identification Process, which they
cite, has not yet been funded. Further, our report recognizes the use
of BSA information in the CBRS system--which includes SARs.
Additionally, we acknowledge efforts to improve coordination of BSA
activities with the states through MOUs.
If you or your staff has any questions, please contact me at (202) 512-
5594 or whitej@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. Key contributors to this report are listed in appendix VII.
Signed by:
James R. White:
Director, Tax Issues Strategic Issues Team:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
To describe the Internal Revenue Service's (IRS) and the Financial
Crimes Enforcement Network's (FinCEN) Bank Secrecy Act (BSA) related
roles and responsibilities, we reviewed and summarized relevant
legislative and regulatory authorities. We also reviewed BSA rules and
guidance, agency reports, and strategic planning documents. Further, we
interviewed officials at FinCEN and IRS Small Business Self-Employed
Division (SB/SE) and IRS Criminal Investigations Division (CI), and the
IRS Enterprise Computing Center at Detroit (ECC-DET). We examined the
information obtained to determine the BSA roles and responsibilities at
FinCEN and IRS, changes to these roles over time, and the potential for
overlap and duplication of responsibilities.
To determine the extent to which IRS has been effective in managing its
BSA compliance program and coordinating with FinCEN, we reviewed
relevant legislative and regulatory authorities. We analyzed data on
program performance and compared estimates of the nonbank financial
institutions (NBFI) population. We compared IRS's approach for
selecting NBFIs for compliance examinations to the approach it uses for
examining individual tax returns, as well as to guidance from the
Office of Management and Budget, GAO, and others. We applied our
criteria for internal controls to the Title 31 database IRS used to
house and store data for BSA examination cases. We reviewed strategic
planning documents related to BSA compliance examination and program
management, including the Internal Revenue Manual, FinCEN and IRS
strategy and program plans, and expenditure documents. We reviewed
Treasury Inspector General for Tax Administration (TIGTA) and the
Department of the Treasury (Treasury) Office of Inspector General (OIG)
reports and Treasury's response and disposition on recommendations
made. We also reviewed the Federal Financial Institutions Examination
Council manual established for federal banking supervisors to ensure
that the banks have consistent application of BSA requirements. To
obtain information on the total population of NBFIs in the United
States for which IRS has BSA compliance examination responsibility, we
reviewed reports from Coopers & Lybrand, KPMG, and Treasury's OIG and
Federal Register notices of the interim and final reports that
contained information on the additional BSA industries IRS will be
responsible for regulating. We also reviewed documentation on IRS's
examination and referral processes and IRS's performance measures,
including the number of cases closed, number of referrals, cycle time,
hours per case, number of new cases initiated, and cases in inventory.
We examined IRS's BSA case selection criteria and the Title 31 database
used to house and store data for BSA examination cases. We examined the
memorandums of understanding (MOU) established between FinCEN and IRS,
FinCEN and the states, and IRS and the states. We used our report on
key collaboration practices as criteria for assessing IRS's and
FinCEN's efforts to collaborate with each other and the states. We
interviewed IRS SB/SE officials involved with BSA examinations; BSA
case selection; and the SB/SE Stakeholder Liaison office involved in
outreach and education for NBFIs, FinCEN regulatory policy officials,
officials from Treasury's OIG and TIGTA, and officials from the BSA
Advisory Group and the Conference of State Banking Supervisors.
To describe CI's BSA role, we reviewed legislative and regulatory
authorities, agency reports, strategic planning documents, internal
policies and processes for conducting investigations and making BSA
case referrals, and the 1999 Webster Commission Report. We also
reviewed CI's statistics for BSA-related staffing resources and
caseload, including full-time equivalents, closed cases, cases with
violations, and referrals to FinCEN. We interviewed officials from CI,
SB/SE, FinCEN, the Department of Justice Asset Forfeiture and Money
Laundering Section, and the Department of Homeland Security Immigration
and Customs Enforcement on use of BSA data and access to BSA data. We
assessed the reliability of IRS's Criminal Investigation Management
Information System--a database containing nationwide data on the status
of CI investigations: how CI agents use direct investigative time; the
number and type of staff on board; and the inventory of equipment. Our
assessment included reviewing existing information about the data and
the system that produced them and interviewing agency officials
knowledgeable about the data. We determined that the data were
sufficiently reliable for the purposes of this report.
To assess the effectiveness of FinCEN's efforts to reengineer BSA data
management activities, we reviewed and analyzed BSA Direct planning and
implementation documents and interviewed agency officials at IRS and
FinCEN and some users of BSA information, such as federal law
enforcement agencies. We also reviewed project documents such as the
Office of Management and Budget Exhibit 300, the original BSA Direct
contract and revisions, progress reports, interim briefings, and
project assessments conducted by the MITRE Corporation. We also
interviewed FinCEN officials responsible for investment management and
the BSA Direct project, the contractor conducting the BSA Direct
project, and MITRE Corporation officials involved in the project. In a
previous review, we also examined FinCEN's application of information
technology investment management processes to the retrieval and sharing
component of the BSA Direct project using our guide, Information
Technology Investment Management: A Framework for Assessing and
Improving Process Maturity. We did not conduct a comprehensive review
of FinCEN's investment management practices. We focused on critical
processes associated with stage 2 of the five-stage framework because
they represent the practices needed for basic project-level control.
We performed our review from July 2005 through November 2006 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: Reports Required by BSA Regulations:
Report: Money Service Business Registrations (RMSB);
Description: Form used by certain MSB to register with FinCEN;
Who is required to file: Businesses that offer money orders, traveler's
checks, check cashing, currency dealing or exchange, and stored value,
and such businesses that conduct more than $1,000 in MSB activity with
the same person on the same day, or money transfers in any amount.[A];
Reports filed in 2005: 16,329.
Report: Bank Suspicious Activity Reports (SAR-DI);
Description: Reports that describe insider abuse of financial
transactions of any amount and type that financial institutions suspect
may be unusual or irregular, violations of $5,000 or more where a
suspect can be identified or involve potential money laundering,
violations aggregating $25,000 or more regardless of a potential
suspect, and computer intrusion;
Who is required to file: Financial/depository institutions;
Reports filed in 2005: 525,750.
Report: MSB Suspicious Activity Reports (SAR-MSB);
Description: Reports that describe financial transactions that are
conducted or attempted by, at, or through an MSB, involve or aggregate
funds or other assets of at least $2,000, and the MSB knows, suspects,
or has reason to suspect that the transaction (or pattern of
transactions of which the transactions are a part) involves funds
derived from an illegal activity, is designed to evade reporting
requirements, has no reasonable purpose or explanation, or involves the
use of the MSB to facilitate criminal activity;
Who is required to file: Money transmitters; issuers, sellers, and
redeemers of traveler's checks and money orders; and the U.S. Postal
Service;
Reports filed in 2005: 381,304.
Report: Casino Suspicious Activity Reports (SAR-C);
Description: Reports that describe financial transactions conducted by,
at, or through a casino involving at least $5,000 if they are suspected
to derive from illegal activity, are conducted to hide or disguise
funds, are designed to evade reporting requirements, have no reasonable
purpose or explanation, or involve the use of the casino to facilitate
criminal activity;
Who is required to file: Casinos and card clubs;
Reports filed in 2005: 5,865.
Report: SAR Securities and Futures Industries; (SAR-SF);
Description: Reports that describe financial transactions conducted by,
at, or through a broker or dealer in securities involving at least
$5,000 if they are suspected to derive from illegal activity, are
designed to evade reporting requirements, have no reasonable purpose or
explanation, or involve the use of the broker or dealer in securities
to facilitate criminal activity;
Who is required to file: Brokers and dealers in securities, futures
commission merchants, and futures introducing brokers;
Reports filed in 2005: 6,897.
Report: Currency Transaction Report (CTR);
Description: Reports that describe each deposit, withdrawal, exchange
of currency, or other payment or transfer by, through, or to a
financial institution, which involves a transaction in currency of more
than $10,000. Transactions reported include those conducted by, or on
behalf of the same person, conducted on the same business day, and
either a single or multiple currency transaction;
Who is required to file: Financial and nonfinancial institutions;
Reports filed in 2005: 14,228,961.
Report: Casino Currency Transaction Report (CTR-C) and Nevada Casino
(CTRC-N);
Description: Reports that describe transactions greater than $10,000 in
currency as well as suspicious transactions. In addition, casinos must
report suspicious transactions and activities on FinCEN SAR-C. Nevada
casinos must file Form 103N, Currency Transaction Report by Casinos -
Nevada (CTRC-N)--reports that describe transactions involving more than
$10,000 in cash. Also, smaller transactions occurring within a
designated 24-hour period that; aggregate to more than $10,000 in cash;
are reportable if the transactions are the same types of transactions
within the same monitoring area or if different types of transactions
occur within the same visit at one location;
Who is required to file: Casinos and card clubs; and Nevada casinos
with greater than $10,000,000 in annual gross gaming revenue and with
over $2,000,000 of; table games statistical winnings;
Reports filed in 2005: 634,912.
Report: Form 8300;
Description: Reports of cash payments over $10,000 received in a trade
or business;
Who is required to file: Individuals involved in trades or businesses
that are not financial institutions;
Reports filed in 2005: 157,920.
Report: Foreign Bank and Financial Account Report (FBAR);
Description: Annual reports of financial interest in foreign accounts
if the aggregated value of a foreign financial account exceeds $10,000
at any time during the calendar year;
Who is required to file: Individuals or depository institutions having
an interest in, and signature or other authority over, one or more
bank, securities, or other financial accounts in a foreign country;
Reports filed in 2005: 281,762.
Report: Designation of Exempt Person (DOEP);
Description: Reports banks file to exempt eligible customers from
currency transaction report reporting requirements. Exempt customers
include banks, government agencies/authorities, listed companies and
subsidiaries, eligible nonlisted businesses with a history of frequent
currency transactions, and payroll customers;
Who is required to file: Depository institutions;
Reports filed in 2005: 105,775.
Report: Report of International Transportation of Currency or Monetary
Instrument (CMIR);
Description: Reports the transportation (physically, or mailing and
shipping or receipt) of currency into or out of the United States and
certain other monetary instruments on any one occasion in excess of
$10,000;
Who is required to file: Individuals, corporations, partnerships,
trusts or estates, and associations;
Reports filed in 2005: NA[B].
Source: GAO analysis.
[A] Exceptions include (1) businesses serving as agents of another MSB;
(2) businesses whose only MSB activity is the issuance, sale, or
redemption of stored value; (3) the U.S. Postal Service or agencies of
the United States, a state, or a political subdivision of any state;
and (4) MSB branch offices.
[B] Information is processed and kept by Immigration and Customs
Enforcement.
[End of table]
[End of section]
Appendix III: Responsibilities of MSBs under BSA:
Included within the BSA reporting and record-keeping requirements are
MSBs. A business is generally considered to be an MSB if (1) it offers
one or more of the following services: money orders, traveler's checks,
check cashing, currency dealing or exchange, and stored value and (2)
the business either conducts more than $1,000 in these activities with
the same person in one day or provides money transfer services in any
amount.
Each business (not including branches) that fits within the definition
of an MSB is required to register with FinCEN, except for the U.S.
Postal Service and other agents of the federal, state, or local
governments, and those businesses that are considered MSBs only because
they (1) act as agents for other MSBs or (2) act as issuers, sellers,
or redeemers of stored value. Certain MSBs are required to file
suspicious activity reports for transactions involving at least $2,000
in which the MSB believes or has reason to believe that the transaction
(1) involves funds derived from illegal activity or is intended to hide
such activity; (2) is otherwise designed to evade the reporting
requirements under BSA; (3) has no business or apparent lawful purpose
or is not the type of transaction in which the customer would normally
be expected to engage; or (4) involves the use of an MSB to facilitate
criminal activity.
All MSBs are required to develop and implement risk-based BSA
compliance programs. MSBs are also required to file currency
transaction reports for cash transactions of over $10,000, and must
maintain information pertaining to the sale of and verify the identity
of those purchasing certain monetary instruments (e.g., money orders
and traveler's checks) valued from $3,000 to $10,000. MSBs must also
maintain information on funds transfers of $3,000 or more.
[End of section]
Appendix IV: Access to Taxpayer Information for BSA Examinations:
One way to improve the IRS's knowledge of the NBFI population subject
to BSA requirements would be to access specific identifying information
reported on income tax returns. However, the IRS Office of Fraud/BSA is
unable to use taxpayer information to identify businesses that may be
subject to BSA requirements. Section 6103 of the Internal Revenue Code,
which prohibits IRS from disclosing returns or return information
unless a statutory exception applies, does not currently specifically
allow disclosure for Title 31 examinations. Over the years, however,
Congress has amended section 6103 to allow access to taxpayer
information for specific purposes, including disclosure to federal
officials for the administration of certain federal laws not relating
to tax administration. According to Treasury, the burden of supporting
an exception to the section 6103 prohibition should be on the
requesting agency, in this case IRS, to make the case for disclosure
and provide assurances that the information will be safeguarded
appropriately. To date, IRS has not done so. Table 6 lists the criteria
Treasury and IRS have applied when evaluating specific legislative
proposals.
Table 7: Criteria Applied by Treasury and IRS When Evaluating Specific
Proposals for Governmental Disclosures:
Criteria to be addressed by the requesting agency;
Is the requesting information highly relevant to the program for which
it is to be disclosed?;
Are there substantial program benefits to be derived from the requested
information?;
Is the request narrowly tailored to the information actually necessary
for the program?;
Is the same information reasonably available from another source?.
Criteria to be addressed by the requesting agency and Treasury/IRS;
Will the disclosure involve significant resource demands on IRS?;
Will the information continue to be treated confidentially within the
agency to which it is disclosed, pursuant to standards prescribed by
IRS?;
Other than I.R.C. § 6103, are there any statutory impediments to
implementation of the proposal?.
Criteria to be addressed by Treasury/IRS;
Will the disclosure have an adverse impact on tax compliance or tax
administration?;
Will the disclosure implicate other sensitive privacy concerns?.
Source: Office of Tax Policy, Department of the Treasury.
[End of table]
[End of section]
Appendix V: MOUs on BSA Compliance:
FinCEN and IRS are forging a more collaborative approach to
implementing BSA compliance efforts. FinCEN and IRS recognize that a
more collaborative approach to BSA compliance will allow them to better
leverage interagency and intergovernmental resources. Since 2005,
FinCEN and IRS have begun to formalize more collaborative relationships
with each other and a number of state regulatory/banking agencies that
examine NBFIs for BSA compliance. The principle vehicle for developing
these relationships has been the MOUs. These MOUs provide formalized
procedures for coordinating BSA activities and sharing information.
Separate MOUs between FinCEN and IRS, FinCEN and 42 state regulatory/
banking agencies and Puerto Rico, and IRS and 34 state regulatory/
banking agencies and Puerto Rico have been signed.
* The MOU between FinCEN and IRS establishes procedures for the
exchange of information between the two agencies with the goal of
enforcing BSA compliance. The MOU dictates that IRS provide a wide
range of information to FinCEN through quarterly and annual reports,
including new or revised examination policies, procedures, or guidance
and quantitative data on examinations conducted, violations discovered,
and referrals made. The MOU dictates that FinCEN will provide IRS with
information on enforcement actions and analytical products on patterns
and trends as well as provide technical and analytical assistance in
overseeing industry compliance.
* MOUs between FinCEN and 42 states and Puerto Rico have been signed in
an attempt to advance the sharing of information and enhance uniform
application of BSA. FinCEN expects to receive information on businesses
examined and enforcement actions taken. In exchange, the states expect
to receive analytical tools from FinCEN that will maximize resources
and highlight areas and businesses with higher risk for money
laundering. Both FinCEN and the states expect the agreements to help
them improve the coordination of collective actions and concerns by
providing a clearer picture of the various financial industries
regulated.
IRS has signed MOUs with 34 states and Puerto Rico to establish
information sharing to assist in the examination of MSBs and other
NBFIs. The IRS/State MOUs involve the coordination of examination
activities and the sharing of examination procedures, schedules, and
lists of MSBs. These MOUs are different from the MOUs between FinCEN
and the states because FinCEN's agreement involves FinCEN sharing
analytical information gathered from various regulators. By
collaborating with the states, IRS hopes to improve the quality and
coverage of compliance examinations and make better use of examination
resources. The agreements established in the MOUs are intended to
eliminate duplicative examination efforts and regulatory requirements,
and build greater quality and consistency through training. IRS,
FinCEN, and the states have only recently begun to implement the
agreements in the MOUs.
[End of section]
Appendix VI: Comments from the Financial Crimes Enforcement Network and
Internal Revenue Service:
Department Of The Treasury:
Washington, D.C. 20220:
December 11, 2006:
Mr. James R. White:
Director, Tax Issues Strategic Issues Team:
United States Government Accountability Office:
Washington, DC 20548:
Dear Mr. White:
Thank you for the opportunity to respond to your draft report entitled
"Bank Secrecy Act: FinCEN and IRS Need to Improve and Better Coordinate
Compliance and Data Management Efforts" (GAO-07-212).
Your report offers two primary recommendations: 1) that the Financial
Crimes Enforcement Network (FinCEN) and IRS develop a documented and
coordinated strategy for improving Non-Bank Financial Institutions'
(NBFIs') compliance with Bank Secrecy Act (BSA) requirements; and 2)
that FinCEN strengthen its BSA data management reengineering by
developing a long-term plan that includes coordination with the IRS. As
your report notes, most of these efforts are already underway.
The IRS BSA Program, established in 2005, has built a business process
for assessing Title 31 noncompliance. The IRS is dedicated to seeking
enhancements to this new program and welcomes the recommendations
outlined in this report for improvements in training, procedural
guidance, case identification and selection capabilities, as well as
database capacity and program measures.
One of the challenges facing the IRS BSA Program that was not
identified in the draft report is staffing attrition. As of October 1,
2005, the IRS employed 305 BSA field examiners with a goal of employing
385 examiners by September 30, 2006. The IRS hired an additional 101
BSA field examiners during FY 2006, but due to attrition retained only
349 examiners as of October 1, 2006. In order to address the staffing
challenge, the IRS has increased its staff recruitment efforts for FY
2007 by collaborating closely with recruiters, participating in an
internship program, and offering recruitment bonuses in certain hard to
fill locations.
Similar to your July 2006 report, "Observations on the Financial Crimes
Enforcement Network's (FinCEN's) BSA Direct Retrieval and Sharing
Project" (GAO-06-947R), this report concludes that FinCEN's failed
attempt at reengineering BSA data management was due to poor project
management and oversight. FinCEN acknowledges these project management
deficiencies and, as a result, has developed a comprehensive
Information Technology (IT) Management Improvement Plan that emphasizes
continued maturation of the bureau's IT governance processes and
project management capabilities. In addition, FinCEN and the IRS also
agree with the report's recommendation to develop a long-term plan that
includes coordination between FinCEN and the IRS while the future of
BSA Direct is reevaluated.
We appreciate that your report notes the significant steps that FinCEN
and the IRS have taken to improve Bank Secrecy Act compliance by NBFIs.
As your report correctly states, the actions needed to improve
compliance will require a long-term effort. Accordingly, we concur with
your recommendation that FinCEN and the IRS work jointly to develop and
document a coordinated strategy to improve BSA compliance by NBFIs.
While we share your concern with the current approach to selecting
individual NBFIs for compliance examinations, we believe that it is
difficult to draw a correlation to the IRS process for selecting
individual income tax cases for examination, due to the differing
missions of the individual taxpayer examination program and that of the
BSA compliance program. The IRS BSA program does not enforce tax filing
or payment compliance and does not usually generate federal revenue;
instead, its purpose is to safeguard the financial system from the
abuses of financial crime, including terrorist financing, money
laundering, and other illicit activity. As we move forward, the IRS
will continue to work on a better selection process for BSA compliance
examinations while FinCEN continues to evaluate the appropriateness of
current regulations for the money services business industry and
considers potential changes to the regulatory framework.
Responses to specific recommendations are enclosed. If you have any
questions, please call us or a member of your staff may contact Eileen
Mayer, Director for BSA/Fraud, Small Business/Self-Employed Division,
Internal Revenue Service, at (202) 283-2426 or Jamal EI-Hindi,
Associate Director for Regulatory Policy and Programs, Financial Crimes
Enforcement Network, at (703) 905-6414.
Sincerely,
Signed by:
Mark W. Everson:
Commissioner of Internal Revenue:
Signed by:
Robert W. Werner:
Director, Financial Crimes Enforcement Network:
Enclosure:
Enclosure:
To improve BSA compliance, GAO recommends:
Recommendation:
The Secretary of Treasury direct the Director of Financial Crimes
Enforcement Network (FinCEN) and the Commissioner of the Internal
Revenue Service (IRS) to develop a documented and coordinated strategy
outlining priorities, timeframes, and resource needs for better
identifying and selecting NBFIs for examination. This strategy should
include the full complement of actions that FinCEN and IRS can take to
build a more effective BSA compliance program, including the specific
compliance program recommendations we make below.
Response:
While we agree that development and coordination of plans between
FinCEN and IRS would be beneficial in maximizing compliance with the
BSA and USA PATRIOT Act, the report fails to recognize significant
efforts IRS and FinCEN have taken to better identify and select Non-
Bank Financial Institutions (NBFIs) for examination. The IRS's
initiative to secure funding for the BSA Workload Identification
Process (WIP), as explained below, is representative of IRS efforts. In
addition, FinCEN and IRS are using Suspicious Activity Report (SAR)
information to assist in identifying unregistered Money Services
Businesses (MSBs). FinCEN and IRS are also coordinating with various
law enforcement and state regulatory agencies to identify these
unregistered entities through a variety of means. Once identified, IRS
is providing outreach activities which include educating these
unregistered MSBs on their potential obligations under the BSA.
In October 2005, the IRS BSA Program participated in the IRS's
Modernization Vision and Strategy (MV&S) process to identify and fund
critical business automation needs. The BSA WIP Project request was
submitted for FY 2008 funding. This project has two components -
workload identification and an electronic case file. WIP would provide
automated risk-based classification of IRS BSA Title 31 and Title 26
inventory and use third party data from federal, state, and commercial
sources to identify entities operating outside of federal regulatory
programs. Electronic case files would automate the reengineered BSA
examination process and reduce case building and cycle time.
Since the WIP request for $2.65 million from the FY 2008 IRS
Modernization account was not among the 24 funded projects, a revised
WIP proposal was submitted in October 2006, requesting funding for FY
2009 and FY 2010. The needs are estimated at $2.937 million for FY 2009
and $1.743 million for FY 2010. WIP Release #1 would include workload
identification features and Release #2 would include an electronic case
file process. Later releases might also provide the ability to attach
scanned documents to an electronic case file. If this project is funded
as a Modernization initiative in FY 2009 and FY 2010, a request will be
submitted for additional IRS BSA funds to support a full-time project
manager, refine requirements, plan security needs, and begin Enterprise
Life Cycle documentation before modernization money becomes available
in FY 2009. A decision is expected on modernization funding in February
2007.
Recommendation:
The Director of FinCEN establish a timeframe for revising MSB
regulations and guidance, including registration requirements.
Response:
As stated in your report, FinCEN's first priority is to make
improvements in ensuring the current list of MSB registrants is
accurate. IRS and FinCEN are, however, in the process of evaluating the
current regulatory regime as it applies to the MSB industry taking into
consideration the impact of any proposed rule change on all relevant
entities. For example, the IRS supports a regulatory change that will
increase information available to them for the purpose of identifying
and examining NBFIs. One alternative might be requiring the
registration of MSB agents who are not presently required to register.
Although this is one of many regulatory options currently being
explored, FinCEN continues to receive feedback on other alternatives
that require careful consideration before a definitive timeframe is
established as to how we will proceed.
Recommendation:
The Commissioner of the IRS decide whether to pursue gaining access to
taxpayer data for better identifying NBFIs.
Response:
We agree that access to some taxpayer data may be beneficial in
assisting IRS to more effectively and efficiently identify NBFIs.
Because the confidentiality of tax data is critical to voluntary
compliance, Treasury policy requires a business case to support
exceptions to disclosure. IRS will take actions in order to determine
whether a business case exists for pursuing legislative change to allow
Title 26 information to be used for Title 31 purposes. IRS will
establish a working group to determine the merit of the initiative. IRS
Office of Disclosure will provide oversight and guidance in this
effort.
Recommendation:
The Commissioner of the IRS directs the Office of BSA/Fraud to build
upon the study to validate compliance risk factors by developing a plan
to assess the noncompliance risks posed by NBFIs.
Response:
We agree that this recommendation would benefit the IRS BSA Program.
After evaluating the results of the current study, IRS will consider
the feasibility of preparing the recommended plan.
Recommendation:
The Commissioner of the IRS directs the Office of BSA/Fraud to
establish timeframes for finalizing and publishing the Internal Revenue
Manual with updated BSA compliance program policies and procedures.
Response:
IRS is finalizing an update of the Internal Revenue Manual (IRM). IRM
4.26 Sections 1, 2, 4, 6, 7, 13, 14 and 15 were published on November
17, 2006. IRM 4.26 Sections 8 through 12 have been update and forwarded
for publishing. The IRM 4.26 Sections 3, 5 and 17 are undergoing final
internal review and will be forwarded for publishing within the next 30
days. Section 4.26.16, FBAR Law, is currently being revised and will be
forwarded for publishing within the next 90 days.
Recommendation:
The Commissioner of the IRS directs the Office of BSA/Fraud to develop
a NBFI compliance examiner's manual that examiners can use to guide
examinations, and businesses can use to ensure they are in compliance
with BSA requirements, and establish timeframes for its publication.
Response:
We agree with this recommendation. This task has been assigned to an
IRS BSA Senior Manager. By December 31, 2006, IRS BSA management will
issue a plan to develop and deliver a compliance examiner's manual.
Recommendation:
The Commissioner of the IRS directs the Office of BSA/Fraud to create a
more functional and secure mechanism for storing and accessing the
information contained in the Title 31 database.
Response:
We agree with this recommendation and have taken significant steps to
implement a functional and secure mechanism for information contained
in the Title 31 database. IRS's Modernization and Information
Technology Services (MITS) began developing a new Title 31 database in
September 2006 and will enter the test production stage in December
2006. The new database will continue to be fully supported by MITS. The
server on which the new database will reside has been in operation for
the past two years, handling various other IRS applications which are
considerably larger than the new Title 31 database. The server capacity
is three terabytes. Current users of the server have not experienced
any connectivity problems to date.
Recommendation:
The Commissioner of the IRS directs the Office of BSA/Fraud to use the
results of the forthcoming risk factor validation study to estimate the
compliance rate for the population of MSBs from which the study sample
was drawn.
Response:
We concur with this recommendation. After concluding the current risk
factor validation study, the IRS BSA management and Research functions
will work to estimate a compliance rate for the MSB population.
Recommendation:
To improve BSA data management, GAO recommended that the Director of
FinCEN, in cooperation with the Commissioner of IRS, develop and
implement a comprehensive, long-term plan for reengineering BSA data
management activities before moving forward with the BSA Direct R&S
project. This plan, at a minimum should:
* Take a broad and cross-cutting approach to the reengineering effort,
and not focus solely on one component, such as BSA Direct;
* Include short-and-intermediate-term goals for reengineering BSA data
management processes, including the transition of IRS's data management
responsibilities to FinCEN; and:
* Incorporate collaboration strategies into the plan by clearly
defining the role of IRS's Enterprise Computing Center at Detroit in
the transition process and more actively involving them as key
stakeholders in the reengineering effort.
Response:
We concur with the report's recommendation to develop a long-term plan
that includes coordination between IRS and FinCEN as they reevaluate
the future of BSA Direct. In fact, preliminary planning is already
underway and IRS and FinCEN anticipate meeting within the next 60 days
to begin developing a comprehensive strategy for BSA data management
that takes into consideration the new capabilities of the web-based
Currency and Banking Retrieval System (WebCBRS).
[End of section]
Appendix VII: GAO Contact and Acknowledgments:
GAO Contact:
James R. White (202) 512-5594 or whitej@gao.gov:
Acknowledgments:
In addition to the above contacts Signora May, Assistant Director; Sean
Bell; Brian James; Katrina Taylor; and Shamiah Woods made significant
contributions to this report. Danny Burton, Evan Gilman, Timothy
Hopkins, Shirley Jones, Barbara Keller, Jeffrey Knott, Donna Miller,
and Sabine Paul also made key contributions.
FOOTNOTES
[1] Bank Secrecy Act, titles I and II of Pub. L. No. 91-508, 84 Stat.
1114 (1970), as amended, codified at 12 U.S.C. §§ 1829b, 1951-1959, and
31 U.S.C. §§ 5311-5322.
[2] S. Rep. No. 108-342 (2004) and Consolidated Appropriations Act,
2005. Pub. L. No. 108-447.
[3] H.R. Rep. 108-792 (2004).
[4] See GAO, Information Technology Management: Observations on the
Financial Crimes Enforcement Network's (FinCEN's) BSA Direct Retrieval
and Sharing (BSA Direct R&S) Project, GAO-06-947R (Washington, D.C.:
July 14, 2006).
[5] USA PATRIOT ACT, Pub. L. No. 107-56, 15 Stat. 272 (2001).
[6] 31 C.F.R. § 103.29.
[7] 31 C.F.R. § 103.57(h).
[8] 31 U.S.C. § 5322(b).
[9] The study reported the total number of NBFIs is estimated at
158,000. The study conducted a discovery process to identify businesses
that provided services involving (1) check cashing, (2) money orders,
(3) money transmission, (4) retail foreign currency exchange, and (5)
travelers checks.
[10] The study reported the total number of MSBs nation wide is
estimated to be 203,207 with a 95% confidence interval. The study
conducted a survey of a representative sample of 24,000 potential MSBs
and got a 10 percent response rate. The MSBs provided services
involving (1) check cashing, (2) money orders, (3) money transmission
(domestic and international), (4) foreign currency exchange, (5) stored
value, and (6) traveler's checks.
[11] Each business (not including branches) that fits within the
definition of an MSB is required to register with FinCEN, except for
the U.S. Postal Service and other agents of the federal, state, or
local government and those businesses that are considered MSBs only
because they (1) act as agents for other MSBs or (2) act as issuers,
sellers, or redeemers of stored value.
[12] Department of the Treasury, Office of the Inspector General, Bank
Secrecy Act: Major Challenges Faced by FinCEN in Its Program to
Register Money Service Businesses, OIG-05-050 (Washington, D.C.: Sept.
27, 2005).
[13] I.R.C. § 6103 provides that tax returns and return information are
confidential and may not be disclosed by IRS, other federal employees,
state employees, and certain others having access to the information
except as provided in I.R.C. § 6103. I.R.C. § 6103 allows IRS to
disclose taxpayer information to federal agencies and authorized
employees of those agencies for certain specified purposes.
[14] Some states incorporate BSA compliance reviews as part of safety
and soundness examinations they conduct on certain MSBs.
[15] Successfully completing a validation study offers assurance that
the final results are sufficiently robust and that the method can be
relied on for reproducible results. For an example, see GAO, Anthrax
Detection: Agencies Need to Validate Sampling Activities in Order to
Increase Confidence in Negative Results, GAO-05-251 (Washington. D.C.:
Mar. 31, 2005).
[16] The most recent such assessment was called the National Research
Program. See GAO, Tax Administration: IRS Is Implementing the National
Research Program as Planned, GAO-03-614 (Washington, D.C.: June 16,
2003).
[17] GAO, Risk Management: Further Refinements Needed to Assess Risks
and Prioritize Protective Measures at Ports and Other Critical
Infrastructure, GAO-06-91 (Washington, D.C.: Dec. 15, 2005).
[18] GAO, Bank Secrecy Act: Financial Institution Regulators'
Compliance Examinations, GAO/GGD-86-94 (Washington, D.C.: Aug. 1,
1986).
[19] See Treasury Inspector General for Tax Administration, Additional
Efforts Are Needed to Improve the Bank Secrecy Act Compliance Program,
2004-30-068 (Washington, D.C.: Mar. 12, 2004).
[20] The Title 31 database is the primary source of data for building
cases for BSA examination because it contains all the information IRS
has on NBFIs and potential NBFIs. The database includes business names,
owners, employees, addresses, and types of financial services offered.
It is also where IRS documents the status of compliance examination
activity, such as case summaries and results of past examinations.
Therefore, there is the potential for the same NBFIs to be identified
in both the Title 31 database and CBRS.
[21] Treasury Inspector General for Tax Administration.
[22] FFIEC's five member agencies are the Board of Governors of the
Federal Reserve System, Federal Deposit Insurance Corporation, National
Credit Union Administration, Office of the Comptroller of the Currency,
and Office of Thrift Supervision.
[23] This FFIEC Bank Secrecy Act/Anti-Money Laundering Examination
Manual was published on June 30, 2005. It provides guidance to
examiners for carrying out compliance and Office of Foreign Assets
Control examinations. An effective compliance program requires sound
risk management; therefore, the manual also provides guidance on
identifying and controlling risks associated with money laundering and
terrorist financing. The manual contains an overview of compliance
program requirements, risks and risk management expectations, industry
sound practices, and examination procedures.
[24] Both FinCEN and IRS have developed some elements of a strategy.
IRS has a Concept of Operations for the Office Fraud/BSA that describes
the strategic objectives, goals, and outcomes of the program, as well
as an annual program letter that describes the program priorities for
the fiscal year. FinCEN has a strategy to improve MSB compliance.
[25] In GAO, Bank Secrecy Act: Opportunities Exist for FinCEN and the
Banking Regulators to Further Strengthen the Framework for Consistent
BSA Oversight, GAO-06-386 (Washington, D.C.: Apr. 28, 2006), we
reported on some of the BSA criminal cases pursued by the Justice
Department.
[26] GAO, Business Process Reengineering Assessment Guide, GAO/AIMD-
10.1.15 (Washington, D.C.: May 1997), provides a general framework for
assessing a reengineering project, from initial strategic planning and
goal setting to post-implementation assessments.
[27] GAO-06-947R.
[28] S. Rep. No. 109-293 (2006).
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