The movement of illegally obtained funds through financial institutions to make the funds appear unrelated or untraceable to the illegal activities is commonly called money laundering. To aid in deterring, detecting, and investigating such illegal activities, the Congress enacted the Bank Secrecy Act (BSA). A section of the BSA, referred to as "Title 31," requires that certain financial institutions keep records of, and provide reports to the government about, large dollar and suspicious financial transactions.

Since 1970, the Treasury Department has delegated to the Commissioner of the Internal Revenue Service (IRS) the responsibility for assuring that businesses which routinely exchange or handle money, but are not banks (called "non-bank financial institutions," or "non-banks"), comply with the Title 31 reporting requirements. A 1997 study by Coopers & Lybrand LLP (now a part of PriceWaterhouseCoopers) estimated there were about 158,000 of these non-banks, such as money remitters and check cashers, annually handling financial transactions totaling over $200 billion (the estimates available do not count financial transactions from all covered businesses). The IRS’ Examination Division is responsible for assuring that these non-banks comply with the BSA financial transaction reporting and record keeping requirements, as part of the Examination Anti-Money Laundering (AML) program. The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) managers, who regulate the government’s anti-money laundering efforts, consider the IRS Examination Division’s non-bank program to be a key component in the government’s effort to combat money laundering.

The overall AML program objective is to deter and detect money laundering by individuals, trades or businesses, and financial institutions under the IRS’ jurisdiction. There are three aspects to the program in regard to the BSA: (1) identify non-banks subject to the law, (2) educate non-banks on their reporting and record keeping responsibilities, and (3) conduct examinations of the non-banks’ compliance with the BSA reporting responsibilities. To achieve this, the IRS devotes considerable field office resources. For 1999, direct labor costs for revenue agents and tax auditors for Title 31 were $15.6 million. As of October 1999, 471 employees worked part-time and 169 worked full-time in the AML program.

The objective of this audit was to determine whether the IRS’ controls over Examination’s AML program Title 31 activities provided reasonable assurance that program objectives would be achieved.

The IRS needs to improve its program for ensuring compliance with AML reporting requirements and improve controls over the program to reasonably ensure the achievement of program objectives. Without changes, we believe there is a significant risk of undetected noncompliance and increasingly inconsistent program delivery nationwide. Treasury Department's FinCEN managers advised us that they are already in the process of working with the IRS to strengthen the program.

Program improvements need to be made in identifying, educating, and ensuring compliance of non-banks subject to Title 31.

AML Program Accomplishments. In 1999, IRS employees identified 6,697 entities and added them to the inventory of non-banks covered by Title 31. Performance information was not available on the AML program’s second aspect, educating businesses covered by Title 31 on their information reporting and record keeping responsibilities, although indications are some education visits were conducted. In 1999, IRS employees conducted 6,745 AML program compliance examinations of non-banks. In addition, the IRS made 14 referrals to the Department of the Treasury's FinCEN of noncompliant Title 31 businesses for assessment of penalties for noncompliance with financial transaction reporting requirements.

Areas for AML Program Improvement. While the IRS activities do provide benefit to the government’s AML efforts, significant program improvements are needed.

• New Identification of Covered Businesses. Even with the 6,697 newly identified entities, the IRS’ efforts fell considerably short of identifying the non-banks covered by the BSA. The IRS should be more effective in identifying new businesses for inclusion in the program. A consultant hired by the Department of the Treasury in 1997 estimated that there were 158,000 non-bank financial institutions (money service businesses). As of September 30, 1999, the IRS had information on only 64,000 (less than 50 percent of the 158,000). Our discussions with IRS employees indicated that the new identification of covered businesses is not considered a priority by at least some of the IRS field offices.
• Education of Covered Businesses. The IRS does not have a process for educating or even informing more than one non-bank at a time about their AML responsibilities. If AML education work proceeds at the current pace, it is unlikely most non-banks will be informed about their AML responsibilities. In addition, the IRS did not know how many entities subject to the law had been educated as to their responsibilities. Beginning in January 2000, the IRS started to capture the number of educational visits. Our discussions with IRS employees indicated that the majority of businesses have not received the intended education.
• Examinations of Covered Businesses. In the last 3 years, approximately one-third of the 64,000 identified businesses have received compliance examinations. However, of the estimated 158,000 non-bank money handlers in the country, over 85 percent had no AML program coverage in the past 3 years. In addition, there were significant geographic gaps in examination coverage in three of four districts reviewed.
• Referrals to the Department of the Treasury's FinCEN. A fourth work product of the IRS’ AML program is referrals to the Department of the Treasury of noncompliant money handlers for possible assessment of penalties. While not a definitive measure of program effectiveness, a cause for concern would be that the number of IRS Title 31 AML program referrals to the Department of the Treasury's FinCEN have decreased in the past 3 years, from 44 in 1997 to 14 in 1999.

Management controls over the IRS’ AML program should be strengthened.

• Performance Indicators. The IRS has not established performance indicators for any portion of the AML program. Measuring program performance is required by the Government Performance and Results Act (GPRA).
• Management Information. The management information system for the AML program is weak. IRS management, Treasury, and other oversight organizations (such as the General Accounting Office [GAO]) would have difficulty measuring or evaluating the effectiveness of Title 31 activities. For example, until the Treasury Inspector General for Tax Administration (TIGTA) inquired, the IRS did not begin to maintain information on one of the three AML program aspects—the number of entities educated on BSA financial transaction reporting requirements. Information was available on the number of entities identified and the number of BSA compliance examinations conducted. However, the number of BSA compliance examinations reported was questionable, since field offices combined educational statistics with examination statistics. In general, there is no quality control over the data and no assurance the information is updated timely.
• Oversight of Field Operations. In the past 8 years, the IRS National Headquarters analysts had not reviewed field office AML program activities. With the current headquarters staffing (two full-time staff), the IRS cannot reasonably ensure that field activities are effectively conducted or that there is consistent application of Title 31 nationwide. Appropriate oversight is critical since the IRS is reorganizing and the traditional oversight role of regional analysts has been eliminated.
• Training. Our visits at the IRS offices around the country showed significant gaps in training for field employees. Out of 20 program examiners interviewed, only 5 stated that they had the Basic program training. For example, one compliance officer specifically stated that he/she is unsure of what he/she is supposed to be doing during a BSA compliance examination.

The need for improvement in program effectiveness and the overall weakness in controls increases the risk that the IRS will not achieve AML program objectives (there will be significant undetected noncompliance and there will be increasingly inconsistent application of the non-bank AML program nationwide). It also increases the risk of not being able to evaluate the success of the program as provided by the GPRA. In addition, the absence of effective controls makes it difficult for the IRS to identify and correct program weaknesses or deficiencies.

Making the situation more critical and complex is the current IRS reorganization and the transition to new business units which has eliminated the oversight role of regional analysts.

We recommend that the IRS establish oversight responsibility for the AML program in the new IRS business units and strengthen that oversight capability, develop and deliver an educational/information package to a much larger number of covered businesses, improve field manager accountability for AML program objectives, establish measurable performance indicators as suggested by GPRA, improve the tracking of results, ensure more full-time employees are assigned in local offices, and ensure AML program examiners nationwide receive sufficient training.

Management's Response: Management's response was due on November 24, 2000. As of December 19, 2000, management had not responded to the draft report.