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[inaudible conversations] a trillion dollars reduced rate we

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[inaudible conversations] what we're trying to do is help the next president to be able to

govern well. the next president is going to have no question -- [inaudible] [inaudible conversations] you're not going to get through the next four years without a massive tax on the dollar and a dramatic increase on the cost of financially. our debt unless we take some action. that's going to be -- if you're the president coming in -- incoming president, if you want to predict the crisis, that's predictable, you're going have to deal with it. it's going to be huge. we're going to try to help them. [inaudible conversations] thank you. [inaudible conversations]

tonight on c-span2 a senate agricultural hearing on fraud and commodities financial. following by a senate homeland security information of money laundering at the british bank hsbc. and former secretary of state madeline albright and colon powell talk about u.s. foreign policy. u.s. future regular layers acknowledged that the system failed to protect customers of financial group. which collapse last week, with the founder admits to $100 million in fraud. mr. again leer who heads the commodity future testified tuesday at senate hearing looking into the impact of new financial regulations. the committee also heard from a security and exchange commission regulator.

good morning we call the committee together. we welcome everyone. let me say at beginning for the first panel, we have agreed because of importance of number of issues that we'll talking about today to two rounds. we'll give b giving each member seven minutes. we'll have additional time to have a full discussion. it's, two years since they passed the dodd-frank. there's been an open ruling making. as i said before, it's extremely important that we get the rules done right. repeatedly -- it was made final along with the entity start the clock on compliance. this is a significant step toward greater transparency and final implementation key

provision of the law. i also appreciate the commissions' work to finalize the end user rules. we are still waiting a on a number of significant rules to be made final or go into effect. including those on capital an margin, clearing and trading, block trading, conflicts of interest and swap execution facilities. there's no question it's important to coordinate the rules between agencies, and harmonize them internationally. but it's also critical to get them done. how many -- while some rules are still unwritten, many derivatives are still trading in the dark. some financial constitutions are still taking risks to threaten the economy. if anyone is wondering with need these rules automatic you have to do today is turn on the news. there is the rate setting scandal, the eurozone crisis, the economize of the financial

group. significant trading losses at jp more gab began and the mf global bankruptcy. you can't blame people for thinking what's next. we need these markets to have integrity. and market participates need certainty so they can plan for compliance and make business decisions for the coming months and years. job creating companies and farmers and ranchers need to know these markets are safe for trading and hedging their risk. again, american families need know their jobs aren't going disappear again because of excessive risk taking by a reckless few. i understand in have been significant hurdles. we have seen proposes to defund the agency charged with protecting the markets. even as events around home and the globe don't highlight the need for effective oversight.

we can't forget when the law was passed, we were on a brink of a global economic crisis. a crisis that left 8 million americans out of work, home mortgages under water, and small business closed forever. despite the challenges i know the individuals charged with writing these rules have been working very hard in the face of greater challenges and difficult if i. i'd like to commend everyone involved in the staff for what i know has been a tremendous amount of hard work. i'm eager to hear from the witnesses today about where we are in the rule make progress excess, what challenges they are facing, if they try to complete these rules, and what this committee can do to support those efforts. so again, i would welcome both of our first witnesses. we appreciate your efforts and leadership. i would now turn now to senator.

thank you miami chairwoman. i thank you for calling the hearing this morning to discuss the dodd-frank bill two years after it has become law. you brought it up very appropriately. we have learned they knew about it back in 2008, i have serious concerns why it has taken to the end of the term for them to act. this is 2012. four years after the economies was commission was made aware of the potential underreporting. this committee and the american taxpayer deserve an explanation. typical two years after the major piece of legislation like dodd-frank has passed we would hear an update from stakeholders how the slaw effecting the real world. we would hear from the agencies in charge about implementing the things congress did well and the

things we might need to consider changing. when it comes to dodd-frank stakeholders are confused and begging to be told what is expected of them. the courts have throne out a major rule for inadequate cost-benefit analysis and other rules are being challenged on the sail basis. thethe agencies are here today to cooperate. here we are two years later and we still have no plan. the cftc has told anyone how it plans to coordinate the implementation of over thirty rules and thousand and thousand of pages of new regulations it has created. no one knows how the rules will fit together or how much if any coordination there has been between the agencies in charge of implementing dodd-frank domestically or internationally. i want to to be clear on this point, stake holders are certainly not opposed to the certainty that goes along with

dodd-frank mandate that it be clear. in fact many have firms have spent million of dollar in an effort to be ready to implement the dodd-frank rules. what the folks want and what they have been asking for the past two years is certainty and direction from the cftc as to what they need to do toward implementing what commissioner somers has properly labeled the commerce clause of regulation. the problem is that no one knows what the plan is. chairman glens leer's plan two years later is disjointed, incomplete, and now we find out it's just interpreted and therefore not inforcible by law. regardless, the cftc is about to niche at auate the 60 day count down. in doing so sets in motion a series of events will further shock waives. what happens at end of the 60

days which should be october 1 when the domestic user international regulators or international user of derivatives are not ready? will the commission offer wavers or will participants face fines. is the cftc about to create the own system of dismemmic risk. it is not doing a job in my opinion of what was created to do and that is to police the financial streets. it appears as though chairman against leer is working on the plan have a conversation can anyone including fellow commissioner or the security and exchange commission about implementing recommendation in the aftermath of the mf global bankruptcy. the chairman set a unique precedent by taking nonparticipating role and wanted to step aside from the relationship with john in the investigation of mf global.

i understand that. he made it clear to over commissioners staff and outside parties that he wanted to keep control of the recommendations that came out of that investigation. my question especially light of failure of pfg best the second major failure of this nature on his watch where are the recommendation? investor, stakeholders and others need confidence in the system. he said it well -- laid out in the commodity exchange act. chairman again leer should be focused on doing that and overseeing the rules on the books rather than requesting new multitudes of staff and looking informer justification to regulate the world. any entity doing business with the u.s. person. therefore the world with regulations we have seen labeled not enforceable by law.

i look forward to hearing from the chairman how we land the spaceship and how he works to fcc to implement what dodd-frank intended. thank you. >> thank thank you very much senator roberts we have a lot of thicks to discuss today. we welcome both of you here being here. let me introdust the first panel list. most importantly titled offed dodd-frank too the helped to position with the treasury under the clinton administration, he served as understeek tear of the treasury for domestic finance and assistant secretary for full-time markets. we welcome him. let me introduction the second. mr. cook is the director of division of trading and markets at securities and exchange

mission. he mr. cook as oversight for the standards of fair, orderly and efficient mark. he is a leading practitioner. we welcome you this morning as well. and we'll start with chairman gensler. >> good morning. thank you for inviting me here to talk about the market reforms, i also want to comment on my recent events related to. the commission made significant progress on implementing congress' -- bringing transparently. four years after the fact in two years after the passage of the dodd-frank act americans are still struggling from the worst economic crisis experience since the great depression. 8 million americans of lost their jobs. millions of family lost their house and thousands of business shut down.

we're moving from the rule writing process to the the im-- light will begin now to shine out swap market this fall when around october, swaps price and volume information will be publicly reported for the first time in real time. regulators will get the first full window into the markets. swap. dealers will begin to register provisionally at first to come under comprehensive regulation anding a will apply to both future and swap. we look forward to completing other swaps market reforms this year including those relating to determining swaps must be cleared, pretrade transparency to promote it. as we final liz it, we will recall the lessons of past crisis. financial transactions executed offshore by u.s. financial will

send risk here to the back shows. which is true in the affiliate of aig g, city group, and decade earlier long-term capital. the recent event of jp morgan chase, again, where do they call it the london whale. it's the stark reminder. transactions here in aproud are based open this. taking out small business loans, credit cards with mortgages often in the fine print there's a reference to the rate called -- as well as big companies doing complex transactions. what do they rely on? the honesty of this benchmark. banks must not attempt to influence of the sister range

and can't do it if they're concerned about the reputation and they can't do it if they're concerned about the profitability. it's wrong and against the law. so if these key benchmarks are based on observable derivative users. if they are not based on honest submission, we all lose. before i close, i'd like to review the recent events. they fought a federal action $200 million fraud and customer funds. the firm's owner was arrested and charged criminally. simply put wlg the evidence alleged in the case is that mr. wasessen door of embezzled forged signature and created fakeback addresses. the charges against him he took customer funds right out the bank and lowed about it for years.

is required to conduct periodic audits. in addition, there's got to be an annual review. just like the police cannot prevent all bank robberies. they can't prevent all financial fraud. having said that, they failed to protect the chers and we all must do better. the commission has been working to improve protection of customer funds. we finalize four separate critical rules in regard. we worked with national future association and future industry over the last seventhover eighth months and finalize the rules that are new common sense rules to protect customers. the cftc has been implementing new leadership for the division and to do up the examination group nine months ago. looking toward, i believe it's

critical we can further update our rules giving regulators direct electronic access to all accounts. now we don't question know the full facts of the circumstances, but we are committeed at the cftc to conduct a full review of the self-regulatory function of the commission merge looking openly for further improvements. we must do that. we must do everything within our authority and resource to strengthen the oversight programs and protection of customer funds. i look forward to taking your questions. mr. cook, thank you. >> thank you. good morning my name is robert cook and i'm the director of the security and exchange commission. thank you for the opportunity to testify regarding title 769 dodd-frank act. as you though it creates a entirely new regulatory regime

over the counter derivatives to bring a number of rules to implement the regime. the fcc has author over security base swapped while the cftc has author over all over which comprise the overwhelming majority. my testimony today will provide an overview of the fcc effort to implement title 7 focusing on development since the testimony before the committee in december. since enactment of the dodd-frank act two years ago fcc imsupposed most of the rules. we continue to work with the foreign regulators to implement all titles and provision. in june the fcc issued a policy statement describing the order in which it expects to require compliance with the fission final rules under title 7 and request public comment. the policy statement is divided into five broad category of

rules and explains how they could be sequenced by describing the. ..

statutory exception for dealers in a way that recognizes different types of security based swaps and that includes a phase and designed to promote the orderly rollout of the regulation of the dealers. the rulemakings have a significant milestone in the journey towards a complete implementation of title seven. beyond the definitional rules the sec adopted rules that estoppel procedures for their review of certain actions undertaken by the clearing agencies including their submission of information to the sec about the security based swaps they plan to accept for clearing. they're designated as systemically important under the act to submit advanced notice of changes to the rules, procedures or operations that could affect the nature of the rest of the agency's.

moving forward, the sec expect soon to complete the last of the core elements of the proposal phase of rules related to the financial responsibility of the dealers and major securities participants. further, we intend to propose any single holistically rulemakings roles and interpretive guidance suggesting the international implications of title seven. our cross border approach will be informed by discussions with the cftc and regulators in other jurisdictions. i expect the commission's proposal will address the international implications of title seven with respect to each of the major registration categories covered by title seven relating to market intermediaries and infrastructures for the security based swaps. as well as with respect to the transaction related requirements under title seven in connection with the according, clearing trade institution security based swaps. the publication is intended in part to give investors market participants, foreign regulators and other interested parties an opportunity to consider as an

integrated hold our approach to the registration and regulation of foreign entities engaged in the cross border transactions involving u.s. persons. the commission anticipates that this release will be published before the underlying rules address dennett are finalized so that the entry can be taken into account in drafting the final rules. in conclusion as we continue to implement title vii, we look forward to continuing to work closely with congress, from the regulators ed members of the public. thank you for the opportunity to share progress and thinking on the implementation of title seven. i will be happy to answer any questions. >> thank you very much to both of german ginsburg, there's a lot of things you want to talk about in this hearing that are very important both in terms of the dodd-frank implementation on title vii as well as what has happened since then. let me start by asking something related to ms global and to the

financial group because there is no question that these efforts are devastating to the futures markets and point to regulatory gaps use book about in the earlier statements and that some things were being done earlier this year after the hammes global i have asked that those involved as market participants give us recommendations and what should be doing and what they should be doing, what you should be doing we will be giving a hearing on august specifically on that as we are making changes what are we doing to protect consumers and to instill confidence and the integrity of the futures markets. migraine elevator operators should i use the futures market any more because of their concern about what's happened and the lack of confidence as a

broken regulatory system at this point we pulled together market participants in a the feb into full days of round tables good regulations can forward the national futures association. one was have they put into the customer funded the excess funds that you remember so well from the end of events of last fall that death can only be removed if it's more than 25% with the chief financial officer and senior management and reported directly to the regulators. they close a significant gap that existed for over 20 years and the rules about the foreign futures accounts. there were two methodologies. i'm not in entirely sure, but we have closed that gap as well.

those are very important changes but also we have in front of the commissioners now a series of recommendations to go further than that. one of them that i highlighted in my opening statement on a really believe that the regulators, the chicago exchange, the national futures association should have direct and daily electronic access to see what is in the bank accounts to see what is in the custodial accounts not relying somewhere on -- of course the defense were about falsifying bank statements and forging signatures and so forth and we are not going to be doubled stop every fraud, but to have the regulators have direct access on a daily basis i think is a critical reform so we need to go further. estimate on that point is that one of the changes you will be meeting because the technology available today i don't know why we are not requiring real time oversight of the futures

commissions at this point. >> it is, and i think it is a critical reform. it's one that we've talked to the mfa about and i'm hoping it will of broad support. we need to put it out for public comment but yes. >> that's great. talk a little about -- there's obviously criticism about the regulators for failing to do your job and reacting to the crises rather than preventive efforts that you speak broadly to that. >> we are an agency that ultimately has responsibility for the future and now the swaps oversight. through statute we have to work with self-regulatory function agencies. and that's been appropriate for decades. it's a multi decade approach and i think that they have it similarly. they are the front-line regulators and we oversee them as well. but i do think that we need to do more. we need to do more and review

that relationship and make sure that we are doing the right things at the cftc when we examine the examiners so to speak. as the second line of defense to ensure that their audits are full and don't mess things for instance. >> when we look at the sec, and i very much appreciate them working together on definitions saddam rules and so on, but at this point the sec has frankly been behind the cftc in terms of title seven moving forward and finalizing that one-third of the rules you indicated there's a lot coming up in the near future, but i wonder if you know in the sec is going to put forward the proposed rule on the extraterritoriality coming and why the sec chose to propose a rule rather than interpretive guidance.

>> thank you, chairman. it's difficult to predict when the rule will come out but i can tell you it's right in the sweet spot of the focus of the stuff right now together with the final proposing rule we need to implement which is the rule relating to the financial requirement securities swap dealers, the capitol margin rules, so we are hoping in the next several months we will have those rules and try to act upon. we are intending to sequins than with the capitol margin coming forward first and then the cross border release coming second because under our approach, we've on the cross border capstone to all of our regulatory proposals to all of them and ask the question. why we have all of our proposals done and then do the cross border release that is an answer to the second question which is why we would do the rules. we are in some cases amending some of the rules that we have

already proposed in providing fairly significant guidance about how the rules would apply in a cross border context where we feel that it is beyond the scope of what we can do by your interpretation. the question whether you do something interpretation by the rule is each agency has to make. we've different statutes since we have different rules we try to interpret in some cases but our approach so far as the staff level of the commission hasn't yet addressed this issue that we will need to do that through a rule making as to what is in a statute within the scope of our authority and also that will incorporate the economic analysis and cost benefit analysis that normally would accompany the rule making. >> when would you anticipate having that done? we look going for what we have about 30 ralston now. the next couple of months we finalize the next couple of

months the cross border release of comer after that but we are actively working on it now so that we can sequence it after the capitol margins. >> senator roberts. >> for the cftc the commission's investment and technology should be its highest priority and the funds for technology shouldn't be redirected for other purposes. my question mr. chairman if you reject the need to redirect the technology and high stress was it not a technology update that allows the self-regulatory administration and the national features association pardon me to ultimately catch?

this move from a paper process to an electronic process. we learn more facts they're moving to an electronic confirmation platform rather than a paper confirmation platform. islamic but if you redirect the funds and to be used for technology that is my basic question. >> to the basic question naturally we have gone the other way. we are an agency is about 10% and headcount more than we were 20 years ago about 690 people right now. this year we will spend just approximately 50 million on technology which is significantly up from last year. working with congress there was a laid out that we must spend a least 45 million command what we've been able to do over the last several months his redirect more into technology. we need to do both. we need people and machines but in fact it is --

>> have you redirected funds that were designated for technology for other purposes? >> our appropriation said we had to spend at least 45 this year and i think we will be close to 50 million on technology. >> let me see if i am the stand this correctly. the cftc needs a large budget to regulate the swap in singapore because it has a direct and significant connection to u.s. commerce to do this requires the cftc enforcement action on the foreign bank that you are calling a u.s. person based on substituted compliance an interpretive guidance a document that has no force of law. where is all of this found in dodd-frank? >> in section 722, the congress laid out specifically the jurisdiction of the agency they did that for the cftc. there's not a similar provision on the side.

we had many comments say can you help interpret the word. what does it mean to have a direct significant effect on the commerce and activity in the united states? i am roughly pair of freezing the that is what 722d is. that's what we are trying to interpret. >> what if this person disagrees and it is a u.s. person based on this interpretive guidance that has no force of law. what happens then? >> of the statute is very and we are hoping to give guidance and we factly put it out to the notice and comment and i think benefit from the consultation with the public before we finalize such guidance. >> if we have letters from five international obligatory agencies saying thanks but no things we are not in u.s. person does this stomach the u.s. portable to bertolt to

reregulation or regulatory arbitrage? >> if somebody is not a u.s. person under the guidance of the law than it is not under our jurisdiction. but what we do have is jpmorgan chase just lost several billion, $5 billion in london coming and that became a u.s. issue, and ai eg if i can say is a u.s. issue even though they ran their derivatives portfolio out of london and $180 billion of u.s. taxpayers' money went in. >> i understand that problem and it's a very serious problem but what happens when the foreign regulations are not similar to the u.s. regulations? which regulation supersedes the others? who will decide if there is a disagreement? >> if they are comfortable and comprehensive which are words that would defer more than a decade probably then we would defer and under something called substituted compliance the u.s.

bank is operating in london dodd-frank would still be applicable. if a worker assigned to the swap dealer a year later we now have five different definitions for a bonafide hedge. why can't we just have one definition? >> the good news is that the sumner county elevator well not have to be under the deal and that is very important. why we have different definitions is in the circumstance of the end users and the trace not to clear i think the congress was very direct with us. make it easy to read make sure that all of these financial in the users don't have to clear and that is what we did last week when we finalize the that. but then, and another circumstance, for instance, the felker rule there is different language about hedging and i

think they didn't want the exception to swallow the limitation on the proprietary trading. so, different circumstances by the congressional intent. >> what are the recommendations regarding the global fiasco that we had in the second major failure we just talked about this week? do you have those recommendations? >> recommendations are in front of the commissioners now. some of the recommendations were embodied in the good work in the future industry. that which is finalized last week. >> the cftc has imposed an interpretive guidance. your testimony indicates the intent to propose and at best referral. you are also doing a cost-benefit analysis of the cftc is not. it is my understanding the agencies will merge these into a single proposal coming leader; is this correct? >> it is correct that we would intend to do a series of rules. >> you are a lawyer. how does this work? how long will this take?

mccuish not going to merge our rules into a single rule. we will propose taking into account of the cftc has done and obviously one of the things we have to do a cost-benefit analysis is considered whether it would be different than another regulator whether the markets overlap with our costs and the benefits for doing that? stood are you saying they see it on the end of the sec sees it another and when they have a chance to comment? >> no, sir. i didn't mean to suggest that. we haven't come out with our proposals yet it would be informed with the sec has done and it may look like it and it may be different in some respects all of which we would comment on. >> you believe they are doing this correctly? >> we are doing our best to implement the statute with our organic document still would require us to follow the certain procedures. >> do you also believe the cftc is doing this correctly?

>> i do, sir. may i just clarify something? because it was on this transfer of technology that we spend a little over 37 million last year and this year i think i will be close to 50. otherwise discussions with congress as to how much we should spend this year. the appropriations bill ultimately ended up at 55 million but then said it could be brought down to 45 by something technically called transfer authority. so we did that but we are spending approximately 50. >> thank you. senator harkin? >> thank you madam share. >> ebal recovered a little bit about the financial going under the in iowa over 200 million-dollar shortfall in the customer segregated accounts. a couple three observations. first of all, i find it hard to believe that one person with hundreds of employees dealing with all of these accounts could

be the sole person responsible. i just find that hard to believe, and i hope the investigation will continue on to find out if there were others involved. second, the controlling agency that was the natural futures association, not you, not the cftc. the national futures association. i am astounded that this could go on for nearly two decades. and yet nobody checked to see where the bank statements for dillinger, who they were going to come if they were real or not. i just find that mind-boggling that no one at the nsa put the service which raises again the question in my mind that this issue of the self regulation. self regulation works only if you have a tight controls from the regulatory body over them which would be the cftc. so, i guess picking up on this debacle, if the cftc has direct

access to bank records of customer funds, if you do that, do you have the resources to actually come and the personnel to do an adequate job of oversight? >> we don't, frankly. we are only about 10% greater than we were 20 years ago and the futures market alone are bigger and then we have the swaps market. eight sold more than a fivefold. but i do think that the direct electronic access for the self regulatory function is critical that it will still be the first line of defense the will be the self-regulatory organization. >> i said i'm losing faith in the self regulation. unless there is adequate tight oversight by the agency that we find it to the federal government and through the regulatory process would you can do to make sure that they are doing their job. do you see self regulation fail

since glass-stegall was overturned since 1999. i have the federal reserve chairman here telling me that they are going to solve regulate themselves. we found that didn't work either. so you have to have the personnel and the resources to be able to adequately oversee the association. >> we do and we do need those resources president put forward at 308 million-dollar budget but we do need those resources. >> the house appropriations committee just cut the funding by $25 million. how is that going to help you? how is that going to help reassure the public that the cftc is going to have oversight and adequate regulatory oversight over the nsa and other entities? >> there will be more measuring in the markets. >> that is what is happening. they're trying to say they will take care of themselves. we have seen what has happened on that in the past.

i wanted to get in just briefly on the swaps issue that my friend from kansas raised in terms of overseas. dodd-frank does say come and i quote, u.s. regulators and overseas what activities have a direct and significant connection with activities and the effect on the commerce of the united states. you mentioned that to the well, and i am concerned that without the proper regulatory framework to read again, the proper regulatory framework the large u.s. swap dealers will move their business to a subsidiary overseas, he stayed the cftc oversight while retaining the financial risk and the parent of u.s.-based companies in other words the taxpayers will still there the rest. sali st, chairman, did the trade conducted by jpmorgan chief investment officer in london about $7 million as you mentioned did it have a direct

and significant effect on commerce in the united states? yes. absolutely yes. >> going forward how will the ensure that the taxpayers are protected for the swaps conduct overseas but which financial risk is held in the united states? >> what we have laid out in the legal interpretation of that statute the congress wrote is that it is the branch ave u.s. person overseas that is covered by dodd-frank. if it is guaranteed by the mother ship so the risk can come back here that comes after dodd-frank but we could substitute a compliance and so forth but the risks come crashing back. i look at the financial institutions and set up hundreds of legal entities. today i'm understand there are thousands of legal entities around the globe but in a crisis the risk comes crashing back here. >> i am worried about the integrity of the financial markets especially in the areas of the swaps and futures.

here are some troubling events. goldman sachs sold a derivative to a point and even the internal e-mails for the bank label that one blank deal. a bad deal. jpmorgan's chief investment office did the $7 billion in london. a large financial and institutions across the globe are being investigated for fixing the london interbank key benchmark interest rate in the trillions of dollars worth of financial transactions. the two futures brokers and of global have recently been found to have significant shortfalls of the segregated customer funds. so, when i hear people say that we need to get rid of the reforms of dodd-frank most of which are not even in effect yet, it makes me wonder whether or not people were paying attention to the same things that we've read about in the paper. so, again, it is high time that we get the regulations out in the reform of dodd-frank finalized so both of you -- when will your commissions get the work done?

>> there is a whole series of regulatory requirements under dodd-frank to address a range of those issues and putting things beyond title vii and against of the volcker will for the offerings so we are trying to tell all of these parallels as quickly as possible. it is going to be -- still we have a lot of work of with us but we understand the importance of getting it done as quickly as possible trying to coordinate effectively. >> you can't give me a time frame. german, how about you? >> we are well over half way to be to give about 55 things to do. we have just under 20 to go i think that we will complete most if not all by december 31st of this year but there may be two or three in its slide into the first quarter of next year. >> good luck getting it done but i hope we don't do that. >> thank you madam chair. >> thank you very much senator harkin.

senator grassley. specs before madame chairman giving it a very important hearing. glad you are hearing it. i follow the law, senator harkin said about. i have some of the same questions. i have a little bit more specific but before i go to those questions, let me say a few things. it's important that we do flesh out the issues with the implementation of dodd-frank. for instance, i continue to be concerned about what sort of reach the regulations will have on the agricultural cooperatives especially given that agriculture cooperatives were by no means responsible for the events that led to the financial crisis in the first place. our commodity markets are vital for the farmers' businesses economy had rest of confidence in our system and if farmers have utilized the trading system for decades to help manage risk. the confidence of the farmers, investors and other market participants have shaken first and f global and now while we are here today to discuss the

development of the regulations, we have to also make sure that the regulations that we already have in place are being enforced. i know some people will always try to get around regulations for both msm global and the situations cause me concern is perhaps not everything is being done to ensure proper oversight of the brokerage firms. leading in from my first question and has been widely reported the owner of the pfg was able to defraud regulators by forging the banks. my first question as to parts but i will give you both parts of it. isn't it a cornerstone of independent auditing for them to check with banking institutions as to what account balances are? yp4 the auditors that were auditing not checking during the 20 years as the fraud was apparently occurring?

>> on a happier here as the head of the trading commission not as an altar, but i do understand those are the cornerstones of the confirmation. independent cpa and the national futures association to do that. it appears here and what we have alleged is there is this will delete could deliberately forged bank statements and also faint bank addresses on the statement. that is what we have alleged and it has been admitted in a note that was left when mr. lawson rafah tended to take his own life. we need to go back and look at that, and i do think that this field of the investors. both the independent cpa and the nsa as we understand our well aware of the cornerstones that you mentioned in the world.

we have to go to the direct electronic but the regulator and the cpa can get these confirmations and acknowledgment letters. >> what is the cftc doing to ensure the segregated customer money is properly safeguarded him as the crt going to respond to the farmers and investors worried about properly accounted for at but never firm that has held. we have reorganized and stood up the division and leadership not only of the top of the intermediary oversight pulse of the examination function. we have dealt with the nsa and others put in place four or five

new comments particularly those not as you know i'm not participating directly in the imf global situation, and we have had some good public comments about that between you and me. we work through the round tables. we got public input and the commissioners can together and put some new rules in place. our commissioners now have in front of them a whole set of new rules as well they will put out to the public, and hopefully in the near term. i do also think we need to do a complete review and get people looking at how we examine the examiners. we at the cftc oversees the functions as senator harkin and senator roberts also referenced. we have to be reflective and we might findings over the years that we have done better, but we shouldn't shy away from that. we have to look to see what can we do better as well. >> my last question, do you have any initial impressions of opinions on how the national

futures association and or the cftc missed this fraud over the last 20 years. >> we are going to learn a lot more fact and look at the auditor files and see specifically what were they looking at and it is always going to be a part of this investigation and also we are going to be reviewing ourselves for looking to see the examiners, how we look at that. so, i look forward to sharing that as we learn more of the fact because the investors here got let down. >> i will yield back my time, madam chair. >> thank you. senator klobuchar. >> thank you madam chairman for holding today's oversight hearing. i think we all know that in the last two years since dodd-frank was sent into law there's been far too many stark reminders of the financial crisis and the necessary reason to put forth

some reforms of the regulatory systems. we've seen the collapse of an affable which left the system was supposed to protect holding many in my states were still working to collect the money and have a devastating impact on the livelihood savings of seven people on august 1st with what is happening with that at that time and more recently as we have discussed jpmorgan trading bloc come barclay said mission to bennati leading the rival rate and now financial group filed for bankruptcy after the founder blatantly defraud the customers out of hundreds of millions of dollars. it seems there is more work to be done and that is what i wanted to focus on. you've discussed with some of my colleagues, trenton slur, the emergency industry meeting set for next week to explore how to better protect the money in light of what has happened at the pfg.

and it just seems so unbelievable that it is just nine months after ineffable will especially when you look at the timeline and owls my colleagues from all i ll pointed out the complicity of of what is perpetrated. what assurance do you have that we can address this going forward? and my specific question as i know that you are pushing them to do electronic filings. do you have that power now? and it's just that it hasn't been ruled out? can you require all of the firms to do electronic filings and what other ideas you have? >> we do think we have the authority but we have to do it through the notice and comment in the administrative procedures so to put a rule out we do think that we have that authority. we look forward to doing that. in terms of beyond that, i also believe that investors should get the same transparency into their account in the futures world that they come to expect in the securities world and the mutual fund area that if i have a future account somewhere that if i choose to know how was it

invested and so forth. we raise that with the industry if we have the support to put that in the public, and we will do that. third i think their needs to be the strengthening of the internal controls if the futures commission merchants and will be the cost and benefits of course, but higher internal controls of the futures commission merchants particularly the separation of duties, submissions of duties the people that can move money from those that can count the money. classic separation of duties issue as well. >> just to give you a sense of one that we have already heard from and he copied me on a letter that he sent to the faa and he had his money with an edible oil and he lost money on that and then he went over which i think we are going to find many midwestern farmers to try to protect themselves. and this is what he said to the

mfa. the problem with your statement is the implication the problem of your statement is the implication the failure to detect the two entered million dollar fraud earlier shouldn't count against you. it just matters that you catch it. i couldn't disagree more. your job is to prevent fraud by putting in place the tools and people to ensure the funds are reported to segregate it bounces are protected and that the people making investments decisions can rely on the audits that you perform. why have there been so many recent cases where the system has failed to detect the risk, and again, can you commit that we are going to be able to fix this? >> i find myself with your constituent the nsa and self regulatory functions but also how we examine the examiners as we say there are certainly funding issues as well but i

think it is really about how the audits and the examination function occurs on the street. estimate i know i heard you talking to some of the other senators about reaching out to the banks where the future firms held cash to seek to obtain independent and verifications of the statements made by the firms which would have helped catch the problem earlier. obviously you were not tremendous started in this particular fraud. but i just wonder why this position wasn't made back in january to rely on information maintained by the sec and instead of the confirming balances with the holding customers. islamic again we will learn a lot more facts as the understanding eight. there are photo shops or forged documents and even if eight p.o. box for the bank. what we understand is the nsa wasden their audit in may of

2011 february 2010 the independent cpa lasted for december 31st, 2011. all of them were in essence the fraud and lied to. and as i say, we are going to take a look very close look at each of those and to go back as many years as the documents exist and also look at the cftc did and what we need to change. >> you think that they are not to the task of serving as a first mind regulator year? obviously they are not ready for this. >> you raise an excellent question, and in fact i would say to this committee we are broadening it with the swap reform of dodd-frank because under dodd-frank, the nfa will be the front line regulator ranging from jpmorgan of the world across any swap dealer.

no agriculture will be swap dealers. we did address of that i ought to make sure we understand. but we are adding to this a self-regulatory function. it's in our statute the way the congress has laid out we rely on them and then we are supposed to oversee that. so you raise an excellent question. i think that all of us have to do better and we are going to review the self-regulatory responsibilities. >> one last question you mentioned the end users and i think you've for your work on that issue. many of the end users in my state and you mentioned in your testimony that the cftc has been working with the federal reserve and the other u.s. banking regulators and international regulators and policy makers to align the requirements for the undeclared swaps. as i know you are aware, the rule proposed by a credential regulators have caused a great deal of concern among the end users as they would explicitly

require the swap dealers and major swap participants to collect initial margins for the non-financial and users under certain circumstances. could you talk about your efforts to align these requirements both here and abroad and where things stand with the regulators? and i would ask you to do that quickly. >> it was such an easy question to the estimate we have made great progress and we have put out internationally can approach to margin which actually i believe is consistent with the cftc had done to date and this document went out about a week and a half ago in the two months of further comment. as we think that the provincial regulators understand. >> we will simply ask a question in writing to the chairman about this matter. thank you. >> thank you very much. senator thune. stomachs before madame chair and distinguished ranking member for holding this hearing. it is important and it is timely coming and i want to kind of follow-up little bit putative i'm sorry i walked in a little

bit as the senator from minnesota was asking questions, but i am just curious to know from the standpoint of the average investor out there when the meltdown occurred in 2008 we enacted these reforms dodd-frank was supposed to make sure that the investors were protected, that these types of things that had been done in the past would be prevented from happening again. if you are an average investor. end user this is a sort of a global question for 30,000. how would you reassure that person after you've had enough global and of course what was happening with jpmorgan those like sort of major big significant events that i think cause people to question dhaka and impact the confidence that

the american people have that there are safeguards in place that will protect them. how do you respond to them in light of the fact that dodd-frank was supposed to address this issue of systemic risk and get us away from the concerns and adults and the questions and the lack of confidence the american people have that it's a financial system working and working with integrity. >> senator, i would certainly add to that this recent matter would go to the kallur playoffs. they are not enormous reporting integrity. i would say that this is midstream. this is a work in progress. dodd-frank is historic. i think it is critical we get it in place. we haven't been trying to rush against the clock that we've been trying to get a balanced cost-benefit analysis and so forth. but it is time to get it done. i think that we still have much work to do at the cftc both in

the futures and the swap area. there is going to be greater transparency starting this fall the public will see these in the swaps markets. we have greater customer protections but just as this circumstance showed when somebody attempted to rob the bank basically this is like a bank robber with falsifying statements taking $200 million approximately. we have to do everything we can to ensure that is harder to do. it's harder to do fraud. it's human nature. there's always going to be somebody out there that is looking for fraud. you have to make it harder and have enough cops on the beach to go after them. >> do you think that they have the type of safeguards in place? >> i think we are getting there. i think that in terms of the swaps market reforms they are not fully there. we have close to 20.

we need to continue to work with the industry to make sure that it is more fully implemented it is not as the senator was concerned, and i agree it isn't like a gotcha moment on october 1st. but it is smoothly put in place. so i think there's a lot more to do here and in the customer protection area i think it's critical that the regulators have direct access to see these accounts bhatia. >> let me ask a question because a lot of this comes back to the use of segregated customer accounts, and where the rule would apply. i would like to ask you how you would distinguish between the proprietary trading and hedging which is the crux of the rule and whether or not you believe that you can draw a clear distinction between the proprietary trading and what constitutes a proper hedge.

and if so, how would you make that distinction? >> senator, it is one of the most challenging rules that you gave the federal regulators. prohibit proprietary trading so the taxpayers don't stand behind betting on the markets. but permit as you say hedging and market making as well which are critical. it's critical that the banks hedge themselves. we are making very good progress but it is very challenging because it is overlapped. they do overlap. >> what about the portfolio hedging? >> the contras actually spoke to it and said that it hedges for specific risks or aggregate positions. i think that should be allowed. connors answered that question. this word portfolio hedging can sometimes mean almost anything to anybody in the specific positions even if there is a hundred of them and it is tied to the specific positions the

congress vote to that and should be allowed but, if it is just something that has a label like betting on markets. >> let me ask the whole question how the cftc interacts with regard to the capitol and margin requirements. the commission initially said it was recognizing the requirements and the cftc now indicated that it will not. we're in the dodd-frank act is the distinction made? >> welcome for the futures commissions they are also registered as though broker-dealers and so when they are joined broker-dealers in the future commissions we have to trade rules on the capitol that have been in place for numerous years, and we continue to share our work with them for them on the joint registers.

but i think that we would set the margin for somebody that is not a broker-dealer and is just under our jurisdiction and obviously maybe mr. cook has something. >> riding that is right and one of the proposals was to recognize the certain capital purpose as the use of the models or the valuation risk regime and i think that in the cftc proposal the chairman can correct me if there was recognition if they have improved the model but the cftc would accept that and i think that is part of an overall regime to recognize where other regulators have always addressed the particular framework for capital risk management, something worth considering on our endows well. >> particularly since we recognize model that they approve. >> i see my time is expired. >> thank you very much.

senator lugar. >> thank you, madam chairman. i remember vividly at a hearing that senator harkin conducted four years ago at the time of the mortgage crisis and this oversimplifies the explanation that we were given, but the gentleman from the federal government said you must understand this way the bankers come young bankers out in the neighborhoods are attempting to get as many mortgages as possible to even get bonuses regardless of whether the borrower can pay it back because the bank then packages all of these mortgages, send onto a larger bank, has no risk left, the park to believe the package is far more and locations for the financial institutions realize they have quite a bag full now and the risks are such.

chongging to divide formulas may be from one to ten. some are very risky and some are less. and they then produce securities which have lots of risks attached and they try to market those often successfully and those are the riskiest funds on insurance. they go to a firm such as aig. ag then has a whole raft of these situations, and they offer insurance, but the testify years the offer also debt or (. what's this all about? for example, somebody might decide that a security and pakistan was the one that they wanted to have a trade-off swap or what have you. i mention of this because it is a reasonable way to explain to my constituents why the disaster

had occurred along the way. why aig finally had to be rescued from all of these imaginations, and we have then descriptions of the very able guy is back in the backroom chongging to make money for the banks or the institutions with all sorts of its strawberry trades and people said this is the american enterprise system. this is the freedom of choice to use your money however you want to. the dilemma was that the american public was left with the recession and all the tragedies that have come from this. so this led to dodd-frank and other things prior to that point. even as you testified mr. ginsberg over the years we always keep raising the question coming in you phrased it today calmar all of these regulations ever going to be written with the staff that you have for help

in the world can the cftc or other for the poor economy the sec, too that we have been dealing with them and the answer never really comes through because they're seems to be a tension between some who are risk takers in the system and we admire, and people who do not really want regulation and the attention finally comes down to the fact if we don't have many rule makers there probably is going to be less regulation. so they pass dodd-frank two years later we are not asking you where are all of the rules and you were saying you have to go through this public notice and all the rest of it. even then i would be curious how you run the agency. why don't you get people sitting around the table and say we are going to make a decision we will have a vote to move this along but leaving that aside, this seems to me to keep talking about the issue on the one hand we know is the risk occurred and the tragedies we discussed

today. on the other hand, we have seen very resonance to use the rulemakings or to have transparency with swaps for example but a lot of things this is an invasion of privacy be a curtailment of american free enterprise. i leave this out because i am wondering how far the rules are, or 25 or so forth how there is any assurance to the american public that in the meanwhile more tragedies are not going to occur that jeopardize the banks and then get back to the argument of too big to fail. in other words, if an agency is mistakes they fail and to get with them or public insurance they're going to be rescued. when you advocate for the congressional committees more staff why aren't you successful? what do you see as the barrier right now? why don't you make the rules and

get along with it much more rapidly? >> these are excellent questions and, you know, i have three daughters and when they asked for the car keys i'm glad they are actually common sense rules on the road and traffic lights and cops on the road to protect my daughter's from drunk driving. and i think that is what the american public wants in the financial market as well. common sense rules but still let you get to where you need to go and innovate and frisked, and it's for the great backbone of the american success that people can innovate. in terms of the headwind we have, they're very significant. converse has nearly 60 rules. we've gotten 33,000, the letters. we've got 1700 meetings, 18 full round tables in my written testimony we are going to have another round table on the customer protection. we have the two lawsuits already in the american way and we are going to defend them and if we got them on in the course as we got them all we have to go back and do them again.

but i think that the american public needs to finish these rules, i believe it is a good investment to have more cops on the beat in essence like my daughter's so that we protect the roads from the drunk drivers. >> can we protect the rule and have a few seconds left paul volcker was recently talking about in my local bank i don't really want the bankers speculating with my money to make more money on it as we try to separate these functions. is this going to work in real life or are people going to continue to protest that depositor money or whatever you want to call it is really up for grabs? you have that part of it. >> i think it is a challenge, senator. i think there will still be risks and banks.

nobody's going to repeal the there is risk in banks. i think the banks need to have the freedom to fail and when they do the taxpayers don't bail them out. >> thank you very much. senator lugar. >> thank you madam share. i agree with senator harkin in the sense that we certainly need to provide you with the adequate resources that you need to carry forth with the agency and provide oversight. i guess the question is perhaps a lot of people are concerned that u.s. mission creed and has creeped over into a lot of areas with duplicative entities. sometimes not really having the authority dodd-frank gave you i think you use the term and the spirit of dodd-frank. but i think an example of that might be that cftc has in their

definition of swaps the registration of things essential you have an additional 18,000 to 28,000 registrations to go by the cftc despite having their regulated many of those regulated by other agencies. one of the problems we have had in the situations where people have lost vast amounts of money and the regulation hasn't been there wouldn't you be better off concentrating on the core role of the agency right now and getting that under control? >> center, we are very much focused on the core role of the nation to oversee the derivatives markets. congress added this market slot that is eight times the size but i used this situation cftc opens the investigation in 2008 and april to look at a key benchmark

where the market regulator there were bank regulators of course around the globe. we as a market regulator knew that was critical over 70% of the futures market's priced at the dollars by the way off of this rate. and it did take us years in a complex case, but we are very much focused on the core mission. that's very core to the futures markets place even before dodd-frank. and of course we are also focused on what the congress asked us to do to protect the public for the unregulated swaps market place that exists in 2008. >> let me ask both of you are you giving a better job of working together and trying to come up with regulations that are in harmony with each other and not regulations that make it difficult as those that follow the regulations for them to really feel like one is going one way and the other agencies

bring another. mr. cook? >> thank you. i think that we are working hard to do that. but in the spirit of the need for regulators to be critical i think the jury is still out because we haven't really finalized our rules yet and so while i think if you look over the rules, there are vast swaths of similarities were identical aspects of what we propose there are some important distinctions and we need to keep those in mind as we move to the adoption, and if it is different we need to be able to justify it based on some rationale like a different market. there are differences between the markets we regulate and some differences on the statutes and i think we need to take a very careful look at that as we move forward. >> you're rolvaag is different than. can you tell us why you chose to live out in the way that you did as opposed to peace dillinger?

>> we made a choice early on to the leyba effectiveness of the substantive requirements. some of the rules were triggered by the recent adoption of the product definitions because we were not sure when that was going to happen or where we would be in the process. some at that time, we decided that we were going to each time we adopt a rule consider when it should go by, and then wanting to kind of look back at the whole mosaic of the rules to see how they fit together and give people an opportunity to see how we think of sequencing of them and then to consider how to comment on them and that is the policy statement that i mentioned in my opening remarks that we put out as a way to help inform that debate. >> chairman, you have taken a little different view of that in your rollout. please comment on that and again, comment on how things are going in working with the sec

and chongging to get these things accomplished. one of the problems we've got coming in you know this so well better than anybody. but, when there is uncertainty and there is uncertainty in this area there is uncertainty for the entire economy and it is such a drag on the economy, and so, if you would comment, that would be great. >> i think it is working very well with chairman shapiro and myself forming a partnership but it's not a tremendous the staff really and it may have been a low are but there are some rules this congress asked. we completed the foundational rules jointly with the sec. in terms of moving forward, the congress gave us oversight to what is approximately 95% of the

overall swaps market as measured in notional site. the credit default swaths that this kind of thing we got paid a got a lot of other things to do and congress gave them to do. so in fairness to the sec, they have such a full plate on other things to be a we are just swimming in one very deep land future swap curious that is why we have taken another approach. we've gotten so much completed. they have many things completed and other lanes not derivatives. sinecure approach is being -- >> our approach -- >> our approach is that we finished the proposal base of about 55 proposals by about a year ago than we opened them all up to public comment and then we turned the corner and started

finalizing rules about a year ago. we finalized 35 of them. many of them now will be implemented. we are living with and also the president's commitment to the g 20 national leaders that said we would complete this by december 31st, 2010. conagra said to get the job done within one year of dodd-frank and now it is two years we are in one deplane and they are in many others but we need a luxury to get the job done on this. >> thank you, madame chair. >> thank you very much. >> chairman vince fuller, i would talk to talk more about life or, and appreciate the reason for some actions against for cleaves and if there is no question this manipulation scandal was very significant implications of hundreds of trillions of dollars in transactions and casts another

cloud over the financial industry are you working on similar cases related to weigel? >> i wouldn't want to compromise other enforcement matters, but i would say that numerous other financial the institutions have publicly reported that the cftc has asking them questions. >> can you again speak to the length of time that it's taken because i think it is hard from the public standpoint for people to understand to begin this in 2008 what took so long. >> they are very complex cases. we started in april of 2008 and started actually just reviewing the market's and reaching out. odierno arrived in the spring of 2009, so i remember this one pretty well. evidence starts to populate by fleet 09 and early 2010 we get

the justice department and the financial services authority i think open formally their case in new england and in the spring of 2010. so that is already almost two years. what happens in a case like this there are millions of documents and information requests have to be handled the jurisdictional the overseas, and so even sometimes the schedule which caught interviews over their sometimes we call them the positions here takes a considerable amount of time. this case was pervasive. it involved trading in three continents and involved the two rates. it was involved at least in four other banks that mean and does the bank adc nd in the border. aiding and abetting wherever people might call the illusion but under our statutes aiding and abetting and the management directive where they were saying stayed below. let's get in the pact over 14 or 15 month pogo.

so it is a very important case. and refocus resources. and i've also say that it started with -- we have far fewer people on our bar place team than are sitting at this table right now. so, you know, it starts we have 400 different investigations going on in a particular time in the cftc. >> you laid out the parameters setting the scene to dictate standards that bring integrity back into the process of the fire walls transition based submissions. i am wondering when you talk to the broad global lending implication certainly which there are many did you work with the fed, did you work with international banking authorities prescribing standards? how did you approach this? >> we work together with other law enforcement agencies when we pursue the law enforcement action like this we work with

law enforcement authorities and really try to keep the parameters within that community because it protects the enforcement and doesn't compromise that enforcement but i think you for raising the undertaking. we thought more cleaves really needed to do this better. this has to be an honest rate. our cleaves is committed to make it transaction focused based on the real transactions of four -- barclaves from the markets if they are not secure. firewalls and other provisions that are critical because what they were doing is so pervasive and it was wrong. >> let's talk a little bit more about international harmonization and global coordination in the financial market regulation that is a balance on the one hand we want to make sure that we keep this very important industry in the united states and the same time the broader global marketplace with broad implications.

so i know that there is some very important things to look at on both sides here. i am glad that you've proposed guidance on a matter that i have some questions and first i guess for both of you what sort of coordination are you doing and by the desk and vice versa the whole question of the global marketplace and international harmonization. >> we shared with the sec the treasury and the other regulators not only our draft documents before but we started about a year ago in consultation with the sec and by about six or eight months ago with the treasury department particularly the group of international folks at the treasury got a lot of feedback on our guidance. semidey want to respond to that coordination issue? >> we have consulted extensively

with the cftc staff and i think as we move forward with our proposal and as they consider comments i fully anticipate we will continue to do so. we have also been partnering in the international by all through some of the international organizations working groups in that area. but also, some other multilateral conversations including at least two meetings of regulators and key jurisdictions have been attended by the senior leadership of the agencies and agencies around the world to talk about the timing, but the substantive regulations are to harmonize. spanish jarman eve ensler as you look at regulating branches of the u.s. institutions abroad, that is a transactional level. could you speak to the concerns i know that there's significant competitive disadvantage with u.s. entities versus the foreign competitors and so how do we balance that with protecting

american consumers and american investors? >> if we were to adopt what some in the industry had asked for of the jobs will move off shore and the rest could still be back here let me say that again. if we don't cover the branches of jpmorgan chase and citibank and bank of america that do about of the branches with a guaranteed affiliate's of goldman sachs and morgan stanley we don't cover that in dodd-frank, the rest is still the american taxpayers. the jobs and the markets will move to london and elsewhere because they will go to where they can have less regulation. i used to do a bit of this when i was at one of those firms. it's natural. it's basically just planning. and they have thousands of legal entities now to pick from. we are taking in consideration how to best protect the american public for most and to comply with dodd-frank.

64. senator roberts. >> one of the things i think is obvious is that as the senator pointed out, the need for transparency and cooperation just as a question to the chairman, when do the commissioners or have the commissioners received recommendations on a mnf global? >> about the customer protection starting with the round table that we had in february under the division of slot to become swap. >> i mean your plans for mf global and fpi all the other folks investigated but you indicated that you were and then you wanted to be in control, and i am assuming that you have a

plan for mf global at least a plan to go forward. have you shared that with the commissioners? >> again i'm not participating directly. in terms of customer protection initiatives, those have been shared throughout the process from january through now even leading to what was approved from the national futures association. >> here is what i'm getting out. you said before that the commissioners have received or were working on recommendations sharing things on recommendations. when did they get a copy for the final product in regards to the recommendations? >> the product is actually not yet finalized. but it started in january and february what staff briefings and lists of possible alternatives. a lot of that led to -- >> you didn't give the commissioners a copy of your

recommendations? >> through they received yesterday is still a draft of rule. >> so they did receive a draft? a draft of the recommendations? >> it is a draft of the rule of text. we moved from the list of the recommendations. >> i don't know what kind of the draft of the rule. >> we are dancing around in terms of cooperation letting the commissioners know what the heck is going on. why did the cftc choose to address the cross border issue in the guidance rather than through the four of rulemaking process? and the obvious follow-up is was that so you could avoid a cost-benefit analysis the sec is doing and i think that you sort of indicated you're trying to direct to push this from the standpoint the sec would follow when it comes to the reach of the u.s. tour of this regulation there was a speech you could

respond to faugh. >> 22b is also not over in the sec. i don't know the history which is why we have it. we got a lot of questions. i'm sorry, senator? >> i am just concerned what has been described is your intergalactic plan that nobody other than you knows what it actually is and they could be taking our derivatives markets over a cliff. we know what the sec is doing. they have a plan. my question is what is your plan? for example, how many execution facilities do we have operational those at the entities up and running today that can do the job? >> swap execution facilities have yet to register. we estimate there may be somewhere close to 20 but we

don't know yet how many and we haven't yet finalized. >> it's my and standing there is only one in operation. is that correct? >> swap execution facilities there are not in yet we haven't finalized the rules but if you are referencing the swap data repositories there are four others that have various stages of application that becomes what data repositories. >> can you confirm, you have already indicated that the sec will be issuing its own cross border proposal. is that true? >> yes, sir. >> are we going to end up with two distinct cross border regulations that in the sec and the cftc when we are through? >> i think that we will have to take into account very closely with the cftc has done and consider whether there are differences in the market the make in the proposal one of the

things we found in the world making has been proposing alternatives is helpful to get good public comment back and inform where we ultimately land. why is the cftc doing it directly why don't you have a 60-day walkover at the sec? why don't you have a 60-day? >> i believe it is triggered by the adoption of the product is released, which on the cftc side as the chairman can address if i'm wrong but trigger the application -- >> one is an interpretive guidance coming and the other one basically is rulemaking that involves a cost benefit study which the cftc hasn't done that seems to me you have got to different frameworks. is the sec required any registration to be automatically triggered before all of its

rules, and to effect the sec? >> we are not requiring the registration at this point. we have finalized the registration rule. >> i yield back madame chair. >> thank you very much. >> what's this year. where are we? senator lugar? >> all right. we will -- at this point we will thank both of you. we will continue to work with you and appreciate the opportunity both formally and informally as we have been certainly in constant communication with you both directly but through staff and there's a lot of work to be done. we look forward to working with you on it. thank you very much. >> thank you again.

>> this weekend forty years of the administration of ronald reagan and clinton and bush and obama have done more to confirm the projection of the rich getting richer and everyone else falling behind them 75 years of the soviet union perhaps to a discount from lectures in history socialism in america, colombia history professor eric

boehner on the rise of socialism and 20th century america. saturday night at eight eastern. sunday more from the contenders. our series on the key political figures who ran for president and lost but changed political history. this week thomas dewey the new york republican with louis in 1944, and harry truman and 48. 7:30 eastern and pacific. american history tv this weekend on c-span3. there has been a hostility in poverty. since the war on poverty lyndon johnson was the best president and looked at poverty issues and spend money on it and talk about the social service programs. lyndon johnson. let's follow that by i hate to say this but richard nixon is actually the father of the minority business development. and inside his minority business established the small business

administration minority business agency coming and use the term economic justice, richard nixon, economic justice. global financial from hsbc head of compliance david bagley told a senate homeland security subcommittee today that he will step down the charges the british bank if terrorists, drug cartels and criminals access to the u.s. financial system by failing to guard against money laundering. the settlement security subcommittee released a report documented a and decade of

compliance failures at hsbc, europe's largest banks. >> i will now call the second panel of witnesses for this morning's hearing david bagley the head of group compliance hsbc holdings and london. paul, chief exhibit for the retail banking and wealth management at hsbc holdings in hong kong. michael gallagher, the former executive vice president and head of the gcm north america for hsbc bank u.s. and new york, and finally, christopher locke, the former head of global bank notes at hsbc in new york. we appreciate all of you being here this morning and look forward to your testimony. as you heard, we have a role six which requires witnesses who

testified before the subcommittee are required to be sworn in. so we but ask each of you to please stand and raise your right hand. >> do you swear the testimony you're about to give will be the truth, the whole truth and nothing but the truth so help you god? >> the timing system that we are using today will get you a warning one minute before the red light comes on and then there will be the shift from green to yellow. we will give you the opportunity to conclude the remarks and the opportunity will be printed in the record in its entirety. please try to limit or oral testimony to know more than five minutes each. before you want to go i want to thank hsbc for the cooperation as i said in my opening statement, hsbc was totally cooperative with this investigation. we appreciate that.

so, we are going to have you go first followed by mr. thurston and mr. gallagher then mr. login then we will turn to questions. mr. bagley, please proceed. >> thank you pittard could morning german 11, dr. colburn and members of the subcommittee. my name is david bagley. thank you for the opportunity to be here today. i have submitted written testimony but in the interest of time, i have can't find my remarks to a few points. since 2002 i've been the head of the group compliance said that global parent of hsbc. having been for 30 years in the banking that operates approximately 80 to the sections worldwide, i have dedicated my career not only within each spc but through by broad industry work as well to meeting the significant challenges that confront the global banking institutions in the world that we live. i followed the work of the

subcommittee and have seen how your work has advanced important dialogues and how the international banking community including hsbc identifies and addresses the potential vulnerabilities. my chief focus is the head of the group compliance at hsbc has been promoting the values that we as the bank of set for ourselves and the values that you and other regulators both in the united states and around the world like we expect from a global bank like hsbc. and while there have been successes on many compliance issues, i recognize that there have been some significant areas of failure. i said before, and i will say it again, despite the best efforts and intentions of many dedicated professionals, hsbc has fallen short of our own expectations and the expectations of the regulators. this is something that a bank seeking to conduct business in the united states and globally must acknowledge and most importantly take steps to avoid the future. the group has always had the

relevant compliance policies, its focus on both of the letter and the spirit of the law and the regulation. not just what is permissible, but what is prudent and responsible. in hindsight as i reflect on the dialogue from 2002 to 2007 and specifically the lessons learned out of the mexico issues i think we all sometimes allowing focus on land was all full and incompliant to obscure what should be best practices for the global bank. transparency is a principal at hsbc and everything should make it a top priority even when it isn't legally required. i think that with our revised structure approach, this is where we are today. indeed, we have learned a number of dalia will listen to and the bank is on the way to converting those into solutions. as i expect my colleagues to describe in some detail, hsbc is in the process of sharing de historical compliance model but

the bank. this departure from the old model is very significant. our formal compliance structure was a product of historical growth by acquisition, and it was a major factor behind some of the issues that i expect we will be discussing today. under the formal model, the former model, my mandate was limited to advising, recommending and reporting. my job was not to ensure that all of our global limits followed the group's compliance standards and i did not have the authority resources to support or infrastructure to do so. rather, the final authority and decision making in each of the bank's affiliate's. now a major overhaul was under way. the new compliance model is a product of deep recession and tailored to address today's challenges as well as the inevitable challenges of tomorrow. significantly the group function now for the first time has authority over the compliance department at every one of the bank affiliate's. this is a break from the past.

krepp compliance with the mandate and the resources to ensure the affiliate's have complied. in other words for the first time the group compliance is an advisory and control function. in addition, personal of the landreneau intangible to the group's compliance for their conduct. a second come under the new model, but compliance oversees the bank's nearly 3,500 compliance officers world wide and takes the lead on the decisions on the resource of occasions, compensation objectives strategy and accountability. last, while i do not have the time to describe all of the recent enhancements, i would like to emphasize the creation of our assurance function. in short, the authority of the hedge group compliance and there for the function as a whole is greatly increased. as i have thought about the structural transformation of the bank's compliance function, i recommend to the group that now is the appropriate time for me and for the bank to summon the head of compliance.

i have agreed to work with the bank's senior management to was an orderly transition at this important role. thank you for your time. i welcome this opportunity to answer any questions. >> thank you. thank you very much mr. bagley. >> thank you and good morning chairman 11, ranking member, dr. colburn and members of the subcommittee. i am the chief executive of the retail banking will management at the hsbc group and i have submitted a written testimony but in the interest of time today i will confine my comments to a few points as well. i have worked in the banking industry for 37 years. and i have served at various roles and hsbc around the world. i was the chief executive of hsbc for the challenging and stressful months beginning inventory of 2007. when i arrived in mexico, i set out to find out the most

important business issues and risks that there were in the business. i met with business heads, with management, all of it and also the regulators, and it became clear that a number of groups systems and policies had been put in place at that time, but that this was not hscc as i knew. there were significant weaknesses and the control infrastructure, and these weaknesses existed in asl management and in other areas of the bank as well including the credit risk management, prevention technology and management information. as i investigated these issues and tried to ss with the problems persisted, i came to learn that they were exacerbated by the business model and the performance management system that we have inherited from the form of the bank that was heavily focused on the business growth rather than the control. and i should add that we were operating in the externals

environment in mexico that was an incredibly challenging. bank employees faced very real risks being targeted for bribery, extortion and kidnapping and indeed there were many kidnappings during my tenure and high level of security were required. in addition, unlike the united states, mexico was a data poor environment making it difficult to verify the identity of the customers. some of the things i from frankly took my breath away. but every time i found a weakness, i tried to ensure that we took action not just dealing with the immediate issues the programs to improve the infrastructure process and business model for the future. i frequently requested the compliance reduced be scheduled so that i would have an independent review of the

progress and get the regional audit committee and group management informed of everything that i saw and did and i also ensure that we cooperated fully with the regulators as indeed the group in this investigation. >> effective antimoney-laundering depends on what customers and this is a major area of concern to me with some standard files and kc-y c. documentation house across the network of 1400 branches in the technology and centralize the review of all files for all new and existing accounts and to keep the central records that could be used for on going alert management. i recognize that this would take time to develop and install. ..

we will be a target. we have to be sure that we have the strongest events in place in every business and every marketing thing we operate regardless of the local challenges and committed to doing this. we know we should have done this better sooner. there are many learnings in our experience in mexico for us and others, and i'll be pleased to answer any questions you may have. >> thank you very much. mr. thurston and mr. gala gear. >> good morning. members of the committee, my name is michael and i reside in new jersey from 2000 to last year i was executive vice president at h buzz i was responsible for the payments and cash management business in north america. on november 2nd -- 21st i was subject to the and have not been a member of theback for the past

eight months. during my time there they developmented services to corporate middle market clients as well as financial institutions including hsbc affiliated banks. while pcm general did not manage the various operational unites with the pcm products we work closely with the operation colleagues to manage and maintain the expected stander of quality and control. i understand the subcommittee is interested in money-laundering efforts. during men your there we took the compliance matters very seriously. we were abilityive participates in the efforts of the compliance department to ensure safety and soundness. pcm assisted the department as well as relationship managers in this regard. in instances where pcm became aware of negative information regarding a client they worked close with and the relationship

managers to ensure they received the information they needed. pcm also made resources available for relationship managers and the compliance democrat to assist in my way we could. at various times they made staff available to different departments to assist in various projects and problem resolution. in summery i'd like to thank you you for allowing me to speak on the critical matters. any money-laundering, terrorism financing with and global access u.s. financial systems are issues of critical importance to the banking industry, national security and to me. hsbc and the banking industry as ang a whole have learned many important lessons. it can add real value to understanding more broadly the risks and opportunities for enhancing safety in the

industry. during my time at hsbc there were steps taken to antimoney-laundering controls. i understand the significant progress has been made in this regard since my departure. with hindsight, it is clear we do not always fully understand the rest of our businesses, or the challenges of global cross border nature of the business. it's clear that we could have done much more and done it more quickly. i appreciate the opportunity for providing this information to subcommittee. i'm prepared to answer any additional e questions the subcommittee may have at this hearing. >> thank you very much. mr. gala gallagher. >> ranking member coburn and members of the committee. i appreciate the opportunity to be here today. my name is christopher lok and from 2001 until 2010, i served as global head of the bank business hsbc.

in my statement today, i will cover three topics. first, i will provide my background. second, i will provide an overview of the business hsbc. and third, i will address some of the specific problems and issues that believed are of interest today. for me, it is painful and embarrassing to talk about areas where in hind sight we fell short. at the same time, it is valuable to do so in order decline the structured solution and others don't make the same mistakes going forward. i was born and raised in hong kong. in 1971, i started working in a business and that is what i did for 29 years. during the entire time from 81 through 2010 i worked for hsbc institution. for most of my career, i was

based in asia. but i was privileged to have lived and worked in new york for a brief period in the 1990 z and again, from 2001 until 2010. even though i'm not a u.s. citizens, i had a wonderful experience living and working in this country. and i have a great admiration and affection for the united states. i would like to provide a brief overview of the business. in essence, the business is about fiscal currency as the wholesale. our clients were banks and other financial institutions around the world. we employed about 275 people including traders, staff and people who focused on operations and logistics. we dealt with a approximately 800 customers in over 100 countries, and we transacted in

about 75 different current seis. driven by various economic activities. to them, hsbc was a safe and reliable counter party. and i believe that we provided them with a valuable service. i understand that is a -- [inaudible] focused on the some of the compliance challenges that we faced in the business. let he start by emphasizing that compliance was a critical part of the hsbc business. over a period of years, there was some occasions in our communicate i with my colleagues in a manner that was unnecessarily adepressive and harsh. if communications were unprofessionally and i deeply regret them. in reality, the business line and compliance shared the same

objective to award the bank being used by inappropriate people for inproper transsanctions. despite my critical e-mails, i believe the business and compliance people actually had a good working partnership. what i didn't always communicate this, i had great respect for my colleagues and compliance and i valued their work. there are sections with customers in mexico up until december 2008, i was under the impression that hsbc america can affiliates was upgrade hsbc standards. in december 2008, they announced that would no loor be accepting u.s. currency in mexico. i was surprised by the announcement, and i tried to find out what was the reason behind it. it was not until ear9

that i learned as a result of my own inquiry hsbc gotten into problems antimoney-laundering controls that was seriously come promazed. i was surprised and concerned about the news. i was not previously aware of the problems at hsbc. if we known of the problems and certain that we in the business would have done things differently. as time went by, sop questions were raised about the business in mexico. in retrospect would not adequately appreciate the concerns being raised about the business environment in mexico. question our best to deal with the inquiry witness i'm sorry to understand what later became a problem. in hindsight, it is not clear that we did not receive the extent of the antimoney-laundering efficiency and the risk present in mexico. thank you very much. >> thank you very much, mr. locke. let's have a -- [inaudible]

a bank that had a long standing severe money lauren problem. we describe it at eleventh in the report. the bank was purchased in 2002, you didn't arrive until 2007. take a look, if you will, at the exhibit book, in front of you there, exhibit 1b. what we have done here is put together a chart smiersing -- smiersing some of the exhibits some of the highlights from the exhibits, which are really a lit any of money-laundering deficiencies at hbm x from 2002

to 2009. so first, first reference to 2002 in the exhibit. here's what the audit found, quote, there is no recognizable compliance or money-laundering function. at the bank that you bought. there's 2002 then from 2005, three years later now, senior persons within the compliance function fabricated records of certain mandatory antimoney-laundering leadings. this quote taken from exhibit 12. we put together these quotes on the exhibit 1b. now, the fabrications were ordered by the head of the

antimoney-laundering compliance program, who was asked to leave the bank. this e-mail was sent by mr. bagley to steven greene who was then head of the hsbc ceo. next 2007, this is a quote from the july 7th 2007, e-mail from a senior compliance person at hsbc group john. taken from exhibit 19. it's a e-mail to the head of hbm x compliance after finding out that the antimoney-laundering committee allows three different high-risk accounts with suspected illegal drug proceeds to stay. what is this the school of low expectations banking?

2008 in 2008, this is a statement from h.b. m x own antimoney-laundering direct who was leaving the mexican affiliate. he was prarping man exhibit interswriew mr. baggily. he said the following, there was allegations of 60 percent to 70% of laundered proceeds in mexico going through hbm x. he also stated that hbm x exec executives didn't care about antimoney-laundering controls. -- it comes from exhibit 30. this is 2008. and then another quote from mr. bagle in 2008, what i find most frustrating is the way in which new issues con standly emerged however much time is spent with hbm x.

2009, quote, statement from e-mail from mr. bagle to the ceo of hsbc latin america. the inherit antimoney-laundering risk in mexico is still very high closed quote. so it's been going on for seven years money-laundering problems, antimoney-laundering problems. at hbm x bank mexican affiliate. mr. thirst ton when you arrived in 2008, you began immediately making some changes, problems that you faced had been long standing, they weren't corrected before you got there and some of them plenty of them weren't corrected until you got there and them some remained. they corrected some of them after you left. why did you discover that these

had festered for so many years. what was there about that bank the culture that you discovered allowed these things to go on and on on. these aren't things that were discovered later. they were known at the times e-mail showed they were known at the time. a number of you talk about hindsight. these are contemporaneous e-mails. this isn't something discovered or learned in hindsight. it is something people knew was going on at theback. bank -- bank was it allowed to continue? what did you find when you got there? >> thank you, mr. chairman. my assessment was that starting from before the accusation this bank had been a fast-growth bank. that was the reason it got into trouble. what was the reason we were able to acquire -- that had no controls. and the business model was

completely decentralized and all the files, all the decisions were taken in a distributed branch networking. it was very difficult from the center to get control. it was a strong incentive scheme banks continuing falling growth rather than the quality control paps ?urm of number of steps were -- a number of steps were taken to install group process and group systems. [inaudible] for lying on 1300 branches to do the kyc, we would have all of those papers in a central site where we could check and see we had all the documents, that we had the papers, and if we didn't then we wouldn't go through.

but that kind of investment takes time. there was a significant remediation task to be put to put rights the files from the past. so multiple problems that existed in the bank as i saw it when i was there. >> these were problems which were known for years. there is not something which was, you know, looking back. this is something which year after year after year starting in 2002 was known by this bank. yet, these problems festered for years. here's another e-mail. exhibit 36; this was hsbc coop head of compliance in 2008 e-mail. now he'd been sent to mexico to try a get a handle on money-laundering problems

there. one of the problems discussed was a bag log of 3600 accounts that were supposed to be closed but weren't. including 675 which had been identified as potentially involving money-laundering that had been ordered closed by hbm x antilaunderring comeen known as ccc. here's what the e-mail noted. this is 36. the 675 accounts, 16 had been ordered closed in 2005. 130 in 2006. 172 in 2007. 309 in 2008. so it took three or four years to close the suspicious account. now, is there any way that should from have been allowed to happen. forget the business case.

is there any way that should where within allowed to happen at the time? >> [inaudible] another problem involving hbm x another committee mandated under mexican law is business and compliance personnel charged with antimoney-laundering issues such as what accounts should be closed. in july of 2008, after the ccc committee decided to allow several suspect accounts to remain open, senior compliance official hsbc group genre, this is now a group now. sent a letter to h.b. m x compliance head mr. garcia.

exhibit 19. and i read from the exhibit. a number of items jump out from your most recent weekly report. everything peals in comparison with the money-laundering items on page four he writes. it looks like the business is still retaining unacceptable risk. the al committee is going along after initial hemming and hawing. it's not functioning properly. i'm close to picking up the phone to your ceo. what on earth is this an assumption responsibility letter? how would it protect the bank if the client is a money-launderer? he writes you address up u.s. $10 million to be paid to the u.s. authorities an economic penalty, if you wish, but a fine is fine. and what this is a school of low expectations banking?

we didn't go to jail, we barely signed a settlement with the feds for $10 million. so he said, one problem was strike one, another strike two. let's look at strike three. he writes, i hope you like baseball. same person who was giving, this is his writing, sack sacrosanct is being asked why he obtained the relationship after 11 million u.s. dollars was seized by the authority in pueblo. in an account in miami. what? the business was okay with this? and then he says the antimoney-laundering committee can't keep rubber stamping unacceptable risks because someone on the business side writes a business letter. they need to take a business

stance. they need cojoans. we have seen the movie before, it ends badly. why is it the bank -- the bank that is the group bank sees these kind of problems, just doesn't flat out hold folks accountable and fire some folks? , i mean, they can write this kind of a letter, and they did. we dug it out of the e-mails, why if the folks running this bank are so bad, why isn't action taken against them by the parent bank? >> mr. chairman, the time i was in mexico, we held to a very -- discipline. we took strict disciplinary action against many members of staff even the senior management levels. including dismissals. so we were certainly taking responsibility in mexico. >> my time is up.

thank you. >> i want to go to mr. bagle for a moment if i might. i think your testimony was that you were in charge of compliance, but you had no essential line of authority to enforce that compliance. is that correct? >> that's right. the core responsibility of group compliance was to set policy to report to escalate issues when they were reported to us. we did not manage and control the individual compliance departments in each one of the -- [inaudible] >> those individual compliance departments in the subsidiaries reported to the head of whatever that subsidiary was, correct? >> there were two reporting lines. one, the group client sei for reporting and other reasons. another line to the local ceo of business head. >> and i think it was also your

testimony that has been changed and that there is a line function for compliance from corporate hsbc all the way down to every bank; that correct? >> it has fundamentally changed the hardest line of reporting is now through the function so i'm accountable, responsible and have authority over the whole function globally 3,500 people across the group. i control results, allocation, budget, remediation, and can ensure that theded adequate is a significant change. >> there's the answer to the question you ask. in other words there was no line -- you have a compliance all you want. if you had no line authority to

cause people to chack -- change in actions and the same people guiding have a line authority here's your profit. how well the affiliate or the subsidiary does. one of those is going to have more power than the other. thank you. mr. gala gallagher, you said in your testimony hindsight we did not fully understand the business. we could have done it more effectively. looking at whole thing of this, that to me is an unbelievable statement when you have things going on in mexico. things going on educational elsewhere, it's almost like you weren't aware these -- it is in fact you were ant aware of these things happening? >> it is in fact thing were happening that we didn't know

within certain entities. that's true. >> what were the efforts made to try to become aware of what was happening? >> you know, my natural inclination is to say, you weren't didn't fully understand the risk, or you ignored reality based on the testimony and the data we've collected from inside your own operations. would you just expand on that a little bit so i can gain a clear are understanding. >> yes, i appreciate the question. i share your concern on this matter. one of the lessons we have certainly learned is the sharing of information not only through the organization across variations and across geography. i'm going to believe it improved cigly after i left and when i was there there was improvement in the process. it was not easy to move

information across organizations down to the appropriate levels to get action. compliance and monetary was our first level of finding issues and look after them. whenever we found issues in my experience, i believe we inquired, we reacted, we pursued, so i think we did a lot of the time, but said by others this morning, we have learned a lot as we went along. >> okay. thank you. >> mr. thirst ton. in early 2007, when when you started one of the hbm x client was gone. a reported drug lord who got caught selling precur for meth and the cartels. whether you learned that he was a clientd of hbm x, what did you

do? i was horrified be the case and expose the the whole series of weaknesses within the bank. i personally conducted an information brought in the security team. i brought in the compliance team, we made a number of changes. this is where i found, for example, the business heads were overriding the people in the compliance department on the decisions on accounts. i put up an ease escalation process so they had a route to the chief operating officer and to me if they weren't comfortable with the decisions being made through that legal committee. i looked at the fact that we had here a business account that was being managed in the personal part of the bank. which was make it very hard for people to spot the underlying activity and compair it with normal activity. so we made a number of changes

about that. we started to dismisa number of people who false fied records. not been to visit the premises when they said they had. i realized that practice -- we looked to see if there was any sign whatsoever of any cocollusion, we invested all the staff accounts and as a result of that we found some incident of staff lending to each other. becreated policy on that. so there were a whole serious of actions that would stand out of finding that incident. >> there was, in fact, a significant attention from the compliance officer at that time; correct? prior to your knowledge that had been raised an an issue? >> that's correct. that's correct. >> okay. thank you. during your tenure, i understand law enforcement in mexico raised concern about high-risk

money-laundering at hsb x. what was it that the mexican legal authorities seeing now today your record was worse than any other bank in mexico? is it in fact or is it there some assumption there that the committee should know about? >> there were, i believe, they found that whenever they wanted information from the bank, hsbc was one the slowest to respond. they were conducting investigation hsbc took longer to produce documents, had more challenges producing documents than most of the other banks. when we investigated that we looked to see if it was coalition. it was people deliberately trying to hold information from the authority. we find no sign of that whatsoever. what we did find was a process

where the things would go out because all the files were held around the country, and the quality was so poor, it would take a longer time to get the information and get it back into the things that were missing, which is why the centralized program we had was so important. but we were also slumped with information request. we had on average 1,000 a week coming from the regulators. not distinguishing between different types. so we then set up a private line with the financial intelligence unit within mexico. so where they were conducting urgent investigation they could come through straight to the bank so that we could respond more quickly. >> thank you. i'll yield back for right now.

>> mr. kristin, you were at the bank there for a years you've testified while there you made improvements. the problems continue. the high-risk products and clients the bank had. i want to get to some of that issue by discussing with you the cayman accounts. when you bought the mexican bank and hsbc bought the mexican, it found hbm x kept all the so-called branching office in the cayman island. i say so called branching office because i understand in the end there was no actual building. no office, no employees, just a shell operation that offered u.s. dollar accounts. the branch so called was run by

hbm x itself using the own employees employees in mexico. any hbm x branch could open a u.s. dollar account for a client, and at one point, 50,000 clients had these cayman accounts holding $2.1 billion in assets. now we have spend a lot of time on the subcommittee raising questions about acaymans and others for the tax avoidens purposes. it's a little bit different and the subcommittee put a lot of interest in these issues involving the caymans because they are shell corporation. they possess and pose a significant money-laundering problems and they do it as soon as they're organized because nobody knows who is behind the

corporations. here's a few of the highlights real toift caymans. exhibit 9 is a 2009 -- 2002hbm x audit notes that 41% of the accounts in cayman islands had no client information. exhibit 31, is a 2008, e-mail saying that 15% of the customers? -- there didn't have a fail. the cayman accounts will be a huge strug struggle. he says how do you locate clients when there's no file. exhibit 32 is a july 2008 e-mail noting that hbm x discovered, quote, significant u.s. dollar remintenses being made by a number of hbm x cayman customers

to a u.s. customers to be supplied of aircraft drug cartels. that's exhibit 32. later e-mail november 2008, which is exhibit 34 describes cayman accounts as having, frozen, quote, due to massive misuse of them by organized crime. so first of all, did you though that cayman branch was a fictitious, just a shell? >> it's what called is cat b. license i believe. >> did you know it was a shell company? there was no employees there. no office. were you aware of that. >> i know that's, sir. >> did you know about the problems with the cayman account in this case read. >> mr. chairman, no i didn't during the time i was there. i'm reading your report, i was really angry to find there had been an audit report on these in

the previous year. but it will ever had been closed off with no action. i when i got there, i went through what are the top risks in the big audit -- [inaudible] you were unaware of the cayman office at the time you were at that office. >> that's correct, sir. >> now, be bagle, you indicated during the subcommittee to the interview you were aware of the accounts in the 2002 the cayman accounteds, you focused on them only after july 2008 incident involving funds going to buy planes for drug cartels. i don't know, given the history here how you can possibly not now ther isty of the problems the caymans until that time, but in any event, after that incident, the new head of hbm x

decided in i think in 2008 now he decided to suspend opening new cayman island accounts. so under mr. -- eventually closed 9,000 of them as of the beginning of 2012, there was still about 20,000 accounts with $6 70 million in assets. so two-thirds of the money-laundering risk continues. so mr. bagle, the subcommittee has found out these kind of shell corporations in caymans and other places create all kinds of tax avoidens problem. this is a different kind of issue. this is a money-laundering issue. and we have now two-thirds of the accounts of those which were

in acaymans that manies a is ets apparently sitting there still. what are you going to do about it? >> thank you. the point being that when we became aware of those cay may account, the ones that remain, have been full remediatorred. when became and awared of the cayman accounts themselves what we did as group what hbm x was work through each and every accounts revise and refresh the kyc to satisfy themselves there was an exflay nation for the money and we were satisfied with the source of the funds. what is left, has been subject to revised due diligence and refreshment of the information we're holding. >> 20,000 accounts now we're going to keep there? >> actually, the group that has repeatedly arrived at the decision which i support, which

is to close all the cayman accounts. >> that's the short answer. a very welcome answer. and particularly, i think the subcommittee can really look at the work as contributing to kind of pressure on you to do the right thing. i should be clear we are in process of closing those accounts. they are not yet closed but they all will be closed. >> that's good news. now hbm x did not inform hbus about the cayman u.s. dollar accounts for many years, is that correct mr. gag gear. >> yes, sir, that's correct. these transactions run through

-- what they wanted to know about the high-risk accounts and would you have wanted to know that? >> absolutely. >> do you know why you weren't informed. >>s or no, sir i can't answer that question. >> maybe bagley, the hb us why would hb us been informed of the accounts. >> it's a very appropriate questions. i think there are two or three reasons. one is that at that stage, neither each us as you report reflects, was conducting

affiliate due diligence. second, we at that time did not do affiliate due diligence across the rest of the group. an as a consequence, the questions you would normally expect to be asked by one affiliate or other weren't asked. they are now. issue your new rules now, you're going to be notifying each of the affiliates of this a kind of action? >> what we are doing and are have introduced and are in the presence of rolling out is affiliate due diligence across the whole group. they will do it all on the own affiliate. it will be to be the same standard as we eye my to a entirely independent third party. in addition, we have put in place the process that ensures that if there is a material deficiency or issue or risk in one affiliate, that will be

reported on a mandatory basis across the group, and automatically go to the compliance of each region. what will mean, when the work is excellent, if each affiliate will treat the affiliates -- will ask all the appropriate questions will know everything it needs to do about the risk profile that one affiliate presents to another. >> when will it be put in place you side it is. when will it be accomplished? >> we are rolling u -- it will take awhile. most due diligence profiles, we will use the ones we have completed for the u.s. we will do it as fast as we can. we have already put in place the mandatory report of al deficiency and we have that in the first. >> when will it be completed? >> i don't know when it will be exactly complianted. we will do the highest first.

>> will you let us know. >> i'll be happy to. >> be gallagher if you turn to exhibit number 40. the iran -- [inaudible] which because of the home country would give more scrutiny in the u.s. hsbc and europe helped coach send payments through the u.s. without getting slowed down. what was hsbc interested in doing business with this bank? i can't specifically for all the reasons the business desire was coming out of the europe and the middle east and not coming out of the u.s. it was a memo that described opportunities they saw for growth and business, general but they were not driving that business decision. >> what was it that exactly made

you say in the e-mail, i wish to be on the record is not comfortable with the piece of business? >> yes, thank you. that is a very important question. i was very concerned about a lack of transparenty in the proposal that put forward to describe how the payments flow. in the particular case, there seemed to be inability for the bank, that is the same, to describe in advance what the primary ben beneficiaries would be that cause me to say we should not want to engage in business with the client who can't provide that level of transparency to the system. >> so there was no know your customer here? >> i can't speak to that. what was done on the european side. when i became aware there was seemingly a lack of transparency in one of my roles, i thought that was inappropriate and very

strongly suggested we should not spread. >> what was the response to that? >> the transaction never was approved. >> do you know why? >> the question went on for some time back and forth across the regions of the world. i don't recall the specific reason, but i was delighted to know that my recommendation was part of the solution. >> did you raise over concerns that we have documented under exhibit. >> not specifically. >> i don't recall. >> okay. if you turn to exhibit 57 iranian payments in november 2004, this e-mail suggests that some inside hsbc thought that all iranian payments to the u.s. should be fully disclosed. nonetheless, many payments still went through without full transparency. sometimes because information removed by hb e.u. this e-mail says hb e.u. would

be advised to not alter the payment details in this way. was well understand that hsbc they were being removed from payments before they arrived in u.s. >> i don't know how well understood active. and i don't recall specifically through the exchanges but if i had to speculate consistent with my earlier position which was unchanged regarding the importance of transparency and the messages i'm quite comfortable that the proper people were alerted, and it was in a proper hands for residence lotion. specific details on this, i don't recall. >> but the decision went really against your advice? >> yes. because in fact they were offered; correct? >> it would seem so, yes. >> okay. do you have any idea how hsbc intended to make sure all these payments complied with u.s.?

there was a view at the time that team in london or subsequently elsewhere was going to ensure that the payments were compliment before they got to the u.s. >> do you think they were? >>. >> i don't think specifically they were vent. some of the information is new to me. i don't know the specific answer to that question. >> who would know the answer to that question? i would suggest either operational staff doing the work on the other side, and/or possibly somebody in compliance. >> should we rely on poem in ish to do that? certainly not in retro spect to not rely on anybody but other for the payment.

>> we've left you alone for alisle while. in your testimony you said comploins was a critical part of the hsbc bank notes business. >> correct, sir. >> can you explain to me exactly what you mean by this and tell me what it looked like? we have a system we have a system in place where by customers misrated and they are rated according to different categories, and they are the high-risk customers, we need to make sure there's a process in place where -- [inaudible] information about client is laid out in the open. so that the people can come in including the managers, the business people, process compliance, so that we can evaluate a risk. and finally, compliance has to be the final signoff, so we can

do business with the people. in other words, we consider compliance a very important partner in our business. >> did you recognize certainly vulnerable necialts in your compliance strategy in the business? >> at that moment, no honestly no. we believe you in hindsight? >> yes. looking at all the documents, yes, the answer is definitely yes. >> just for the educational purpose. are there certain challenges related to specific currencies over other currency. are there specific challenges in the bank note business in terms of compliance related to one currency over another? not necessarily in terms of

geographic location, for example, is it easier to rather run a scam or flay a game with the u.s. dollar the british proud, the euro, the japanese. did you recognize -- in other words does the same compliance that you see now in hindsight apply different to different currencies and different geographic location. at that moment, it doesn't hit pee there is a. [inaudible] analyzing the risk we were not, you know, -- the answer is no. >> okay. i yield back.

let me ask questions a about the corporation which was a u.s. money service business that transmitted the funds from u.s. clients to mexico and latin america. the dea undertook a sting operation in 2007 in the agent told them operators they wanted to send drug proceeds to mexico in more than two dozen of those operators obliged. in january of 2008, they entered into a deferred prosecution agreement. but the u.s. department of justice admitting the fact the and prevailtology have adequate money-laundering programs, hb u.s. determined in 2007 alone,

that had processed 159 u.s. dollar wire transfers for say involving about a half billion dollars. they were sent through the hbm x swont account with h.b. u.s. then, if you would look at exhibit 18a, in gallagher, which was a memo that was prepared by hbus after 2008 "the wall street journal" article on the wachovia case, it talks about the sea gate case and the use of the hbm x account, it also notes that sea gate was not added to the h.b. u.s. filter. it could be subjected to enhanced antimoney-laundering to

identify suspicious activity. you were the head of pcm at that time, mr. gallagher, it handleds wire monitoring. it did you owe why htion welcome did not subject them to the monitoring after the 2008 deferred prosecution agreement. >> no, mr. chairman. looking at memo, i note i'm not addressed on the mom moe. i can't hon -- honestly recall the memo. the decision to add any name to enhance monitored or filter of the decision that could be taking compliance not pcm. >> you continue -- you don't know why? you're saying it's not your department. you don't know why it wasn't added. should are been added? seemingly absolutely should have been added. i don't know it wasn't. >> okay.

in 2007, this is exhibit 30. who was head of the hbm x antimoney-laundering program, was leaving the bank, he had an exit meeting with you mr. bagley, i believe according to a meeting summary you wrote he told you there were allegations that quote, 60 to 70 percent of laundered proceeds in mexico went through hbm x, he did not think that senior management to my robust antimoney-laundering controls. that memo, i believe, exhibit 30 was written to you mr. thirst ton, if i have that. >> that was correct, mr. chairman. >> what was your reaction that you got that memo?

>> mr. chairman, i was incredibly distress. i don't think anybody wants to the hear those sorts of things coming through. we made sure we investigated. we made sure we took the things that were there. we recently had discussion with mexico. we made sure we took account of the program. we had missed. it also caused us to question whether our head of compliance was sufficiently good for the role as well. >> all right. let me now turn to the iranian issue, which dr. coburn, i have some questions about as well. now iran had been subject to sanctions in the u.s. for a long time, as a rogue nation.

it was on the list as we heard about this morning as a prohibited country. laws consistently prohibited u.s. persons from doing directly with iran inspect until 2008 u.s. banks were allowed to process transaction that might involve iran which was sent to the united states by foreign banks located outside of iran. are those transactions were called u-turns because they went from iran to a noniranian bank, foreign bank, to then a u.s. bank and then back to a different non-iranian foreign bank and thoant final party. there was a u-turn that was made through the u.s. bank. the issue with hb u.s. is that the hsbc affiliates in europe and middle east wanted to sent the u turn transactions through

the accounts without triggering that filter or individual review to make sure they were permissive youtubes. they want to remove any reference to iran and go through the h.b. u.s. systems without any manual or more detailed reviewl. it was a battle over transparency. united states wanted full transparency so that it knew it was dealing with iranian u-turn and make sure it complieted with u.s. law. the affiliate department want to trigger the reviews or to take the time for those reviews. so h.b. u.s. and the affiliates fought over the issue for three years. from 2001 to 2004. while they're argue, the oversees hsbc affiliates were senting undisclosed iranian u

turns there out h.b. u.s. accounts anyway. to do that the hsbc affiliate in europe, hb e.u. stripped out the references to iran. senior employees at hb e.u. protest in 2003 and 2004, i believe one of these protest was read by dr. coburn, they didn't want to be altering wire transfer documents for iran, but even -- [inaudible] two deadlines in 2004 when they said they would stop doing it both deadlines were ignored. hsbc issued group wide policy statements on iran in 2005 and 2006 neither resolved u-turn issue. it was resolved only in 2007 to exhibit iran.