Statement by Edward W. Kelley, Jr., Member, Board of Governors of the Federal Reserve System

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Statement by Edward W. Kelley, Jr., Member, Board of Governors of the Federal Reserve System, before the Committee on Banking and Financial Services, U.S. House of Representatives, February 28, 1996

I am pleased to appear before the banking committee on behalf of the Federal Reserve to discuss the impact of crime on the stability of the banking system and the Federal Reserve's efforts to assist banks and law enforcement officials in countering criminal activity. As a bank supervisory agency, the Federal Reserve Board places a high priority on providing assistance in deterring, detecting, and reporting criminal activities directed at banking organizations, and we appreciate the committee's interest in this important area.

Your letter of invitation asked me to address the threat that criminal activity poses to the banking system, and I would like to turn initially to that issue. Although all bank losses that result from criminal activity are unacceptable, it is important to put the risks associated with criminal activities affecting banks in the appropriate context. As of September 30, 1995, the more than 10,000 insured commercial banks in the United States had total aggregate assets of about $4.2 trillion, combined capital of approximately $350 billion, and earnings of $37 billion for the first three quarters of 1995.

In view of the current financial strength of the U.S. banking system and estimates of the extent of banks' losses resulting from criminal misconduct, which include the banking industry's 1994 estimates of approximately $800 million in losses associated with check fraud and $700 million from credit card fraud, we believe that losses from criminal activities do not pose a systemic risk to the banking system. Also, we have no information that suggests that any individual US. banking organization has been overtaken or substantially threatened by criminal organizations or activities.

Although we see no systemic threat to the banking system, we obviously are concerned about the risks to the reputation and integrity of our nation's banks arising from criminal elements using the banking system for illicit purposes. These risks are best illustrated by money laundering, estimates of which range between $300 billion and $500 billion annually. Although no amount of money laundering is acceptable, there is no evidence that the flow of these funds through U.S. banks on its own poses a systemic risk. However, if left unchecked, the use of our banking system by criminal elements could undermine the reputation of banks or weaken the public's confidence in banks as safekeepers of their funds. For this reason, and to support our law enforcement agencies in their efforts to combat crime, the Federal Reserve's efforts to attack the money laundering problem continue to be one of our highest bank supervisory priorities.

Federal Reserve Role

As a banking supervisor, the Federal Reserve has an important role in ensuring that criminal activity does not pose a systemic threat and, as important, in improving the ability of individual banking organizations in the United States and abroad to protect themselves from illicit activities. Because bank systems and bank employees are the first and strongest line of defense against financial crimes, the Federal Reserve places a high priority on ensuring that banking organizations have appropriate controls in place to protect themselves and their customers from criminal activities. The Federal Reserve places an equally high priority on supporting efforts by U.S. law enforcement agencies to apprehend criminal enterprises before they can cause harm to consumers and banking organizations.

A banking organizations best protection against illicit activities is its own policies and procedures designed to identify and then reject potentially illegal or damaging transactions. For this reason, the Federal Reserve and other regulators have implemented various directives for banks to establish internal controls and procedures designed to detect unusual or suspicious transactions that, if unchecked, could lead to fraud, money laundering, or other types of criminal misconduct. …