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TERRORIST RESPONSES TO IMPROVED

U.S. FINANCIAL DEFENSES

HEARING

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

FEBRUARY 16, 2005

Printed for the use of the Committee on Financial Services

Serial No. 109–3

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

SUE W. KELLY, New York, Chair

RON PAUL, Texas, Vice Chairman 

EDWARD R. ROYCE, California 

STEVEN C. LATOURETTE, Ohio 

MARK R. KENNEDY, Minnesota 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

MICHAEL G. OXLEY, Ohio 

LUIS V. GUTIERREZ, Illinois 

DENNIS MOORE, Kansas 

CAROLYN B. MALONEY, New York 

STEPHEN F. LYNCH, Massachusetts 

ARTUR DAVIS, Alabama 

EMANUEL CLEAVER, Missouri 

DAVID SCOTT, Georgia 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

February 16, 2005 ............................................................................................ 1

Appendix: 

February 16, 2005 ............................................................................................ 35

WITNESSES 

WEDNESDAY, FEBRUARY 16, 2005

Factor, Mallory, President, Mallory Factor Inc. .................................................... 21

Farah, Douglas, Author ........................................................................................... 23

Zarate, Hon. Juan C., Assistant Secretary for Terrorist Financing, Department of the Treasury ........................................................................................... 7

APPENDIX 

Prepared statements: 

Factor, Mallory ................................................................................................. 36

Farah, Douglas ................................................................................................. 41

Zarate, Hon. Juan C. ........................................................................................ 59

ADDTIONAL MATERIAL SUBMITTED FOR THE RECORD

Written letter to Hon. Juan C. Zarate from Hon. Luis V. Gutierrez .................. 68

Written response to Hon. Luis V. Gutierrez from Hon. Juan C. Zarate ............. 72

‘‘Economic Posts Unfilled Despite Big Pushes Ahead,’’article, The New York 

Times, February 24, 2005 .................................................................................... 88

(1)

TERRORIST RESPONSES TO IMPROVED 

U.S. FINANCIAL DEFENSES 

Wednesday, February 16, 2005

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to call, at 10:04 a.m., in Room 

2128, Rayburn House Office Building, Hon. Sue Kelly [chairwoman 

of the subcommittee] presiding. 

Present: Representatives Kelly, Kennedy, Price, Fitzpatrick, 

Gutierrez, Moore of Kansas, Maloney, Cleaver, Scott, Wasserman 

Schultz, and Moore of Wisconsin. 

Also present: Representatives Royce and Feeney. 

Chairman KELLY. [Presiding.] This hearing of the Subcommittee 

on Oversight and Investigations will come to order. 

Since September 11, 2001, the Subcommittee on Oversight and 

Investigations has conducted a series of hearings on terrorist finance. This subcommittee has led efforts to improve our financial 

defenses and shut off the flow of terrorist money into this country. 

Working with the Treasury Department, we have created the Office 

of Terrorism and Financial Intelligence and increased the resources 

available to FinCEN, OFAC, and the Office of Intelligence Analysis. Since the attacks on our country, our financial defenses have 

improved dramatically. We are constantly making strides forward 

and discouraging terrorists and international criminals from using 

our financial systems against us. 

The global war on terror is a dynamic process, however, and our 

foe is ruthless and cunning. The improved state of our financial defenses requires Al Qaida and its allies to find new means to carry 

out their ends. In turn, our own nation must ensure that new financial routes do not become safe havens for terrorist finance. 

Finally, we must make sure that our efforts to detect and prevent money laundering and terrorist finance do not drive out legitimate cash-handling institutions, drive them out of business. I appreciate Secretary Snow and Under Secretary Levey’s recent public 

comments on this issue. The U.S. does not have the resources to 

police all monetary transactions for money laundering and terrorist 

connections. In West Africa, South Asia, and the Middle East, cooperation with local regulators and financial institutions is essential for achieving our policy goals. Multilateral associations such as 

the Financial Action Task Force and the Egmont Group can help 

facilitate this cooperation. 

2

FATF is a group of 33 nations, including the United States, that 

develop anti-money laundering policy and best practices. The 

Egmont Group consists of 94 financial intelligence units from 

around the world who share information on terrorist financing and 

money laundering. Encouraging the creation of the FIUs and 

strengthening their information-gathering capacities is essential to 

tracking changes in the terrorist financial activities. 

Unfortunately, not all nations that are committed to establishing 

an FIU have done so, leaving a gap in our ability to fight terrorism 

and threatening relations with nations that do not match their 

words with actions against our mutual enemies. An example of the 

important role an FIU might play arose earlier this month. New 

reports emerged that Arab Bank in New York was being used to 

transmit funds form Saudi Arabia, convert them to dollars or shekels, and then transmit them as rewards to the families of terrorist 

bombers. This reported that families would simply present martyrdom certificates at Arab Bank branches and receive compensation. From what I have seen, when they present these martyrdom 

certificates, the Arab Bank would then list that they had given 

$7,000 to the family or 20,000 shekels to a family that had in fact 

had a child or a family member who had blown themselves up, and 

in the process blown up other people. 

There is a priced that has been paid to people to kill others 

through the Arab Bank branches, as far as we can see. If that is 

true, perhaps a Saudi FIU could have accelerated the flow of information to the U.S. so our Treasury Department and financial regulators could have responded and responded quickly. Perhaps there 

are other instances where the absence of a Saudi FIU slowed or entirely prevented action against terrorist activity. Saudi Arabia announced that it established an FIU in 2002. However, it appears 

that there was no corresponding action with this announcement. In 

August of 2004, Treasury Under Secretary Levey informed the financial services committee that the Saudi FIU had still not been 

established, despite their announcement in 2002. Today, more than 

2 years after that announcement, it is quite reasonable to doubt 

that an operational Saudi FIU exists. There is a news report this 

morning where a Saudi spokesman states that an FIU has been established, and that to say otherwise disregards the facts. 

This subcommittee recognizes Saudi Arabia as a critical ally in 

fighting terrorism, and welcomes any additional information that 

the Saudi Arabian government is willing to provide on the FIU 

issue and other matters which Mr. Royce and I have recently 

raised regarding terror finance initiatives. We share their deep interest in continuing strengthening the U.S.-Saudi partnership and 

fighting mutual enemies, but we will not be placated by press releases and glossy generalities. We will welcome future discussions 

on this matter. 

The necessity of cooperation in fighting terror financing and encouraging governments to enforce the laws on their books cannot 

be denied. Our witnesses have first-hand experience in the difficulty of identifying nontraditional financial networks, of creating 

a climate of compliance that foreign regulators feel comfortable in, 

and of ensuring that communities are backed by action. One way 

to provide measurable evidence of a nation’s cooperation with the 

3

United States in stopping terror financing is to create a certification regime on terror finance. Such a measure would give our 

Treasury officials another tool in convincing their colleagues overseas of the necessity of fighting terror finance on their own and to 

reassure investors in compliant nations that their financial sectors 

are clean. I introduced legislation to create a certification regime 

in the last Congress and I will reintroduce this legislation for the 

committee’s consideration again. 

This morning, the committee will take testimony from three individuals with expertise on the current state of our financial defenses, those of our allies, and the areas in which terrorist financing may be moving in response to our new laws. Without objection, 

all members’s opening statements are going to be made part of the 

record. 

With that, I will turn to Mr. Gutierrez. 

Mr. GUTIERREZ. Good morning. I want to thank Chairwoman 

Kelly for having this hearing, the first one for the Oversight Subcommittee in the 109th Congress. I want to extend a warm welcome to all the members of the subcommittee, some of whom are 

returning and others who are new to the subcommittee or new to 

the Congress. 

It is particularly appropriate that the subcommittee’s first hearing of this new Congress is focused on the issue of terrorist financing. Chairwoman Kelly and I have frequently worked together on 

this issue, both within the subcommittee and as founding members 

of the Terrorist Finance Task Force. Ensuring that Treasury has 

the necessary resources to perform its mandated functions is a high 

priority for us. We worked hard together last year to secure an additional $25 million in funding for FinCEN. Given our history on 

this matter, I expect that we will continue our efforts on this issue, 

especially as we review the budget. I look forward to working with 

you, Chairwoman Kelly. 

Today, I am pleased that we will be hearing from Assistant Secretary Juan Zarate, who is with us today only because his wife has 

not yet made him a father, which we understand could happen any 

second. I congratulate you, Mr. Zarate, and I have to say that being 

a father is the best job I have ever had. I wish you much luck and 

happiness. 

I look forward to asking Mr. Zarate about the evolution of the 

current structure of the terrorist finance operations at Treasury. I 

also have some questions about the budget relating to his department, specifically regarding their computer system. In addition, we 

have been informed that a number of employees will be transferred 

from OFAC to the office of intelligence, and I would like to hear 

how this will affect the day-to-day operations. 

I look forward to the testimony of the other witnesses. Mr. Mallory Factor points out in his testimony that the U.S. government 

should increase its information sharing with the financial services 

industry under the PATRIOT Act so that that industry may better 

understand how the data they provide are used. Coming from Chicago where I hear the word ‘‘commodities,’’ I tend to think of corn 

and pork bellies as futures on the finest exchanges in the world, 

the Chicago Board of Trade and the Chicago Mercantile Exchange. 

Mr. Douglas Farah will talk about the use of commodities that do 

4

not grow in the Midwest, particularly diamonds and their use in 

financing terrorism. I look forward to hearing from him about his 

research. 

All of these witnesses have valuable experiences to share with 

the subcommittee. I am eager to hear their testimony, and I yield 

back to the gentlelady the balance of my time. 

Chairman KELLY. Thank you very much, Mr. Gutierrez. 

Mr. Royce? 

Mr. ROYCE. Thank you, Chairwoman, for calling this important 

hearing. 

I also want to welcome Juan Zarate. I think he brings considerable skill and a tremendous amount of institutional knowledge to 

cracking this problem. It is good to see somebody from Orange 

County leading this fight. The Chairwoman and I have developed 

I think a very good working relationship on terror finance issues. 

I know that we are both looking forward in serving on this subcommittee to continue building on that. I have been named the 

international relations chair for the subcommittee on terrorism and 

nonproliferation. I think there is a chance for us to hone in together, Chairwoman Kelly, on this important and critical issue. 

Chairman KELLY. I look forward to that, Mr. Royce. 

Mr. ROYCE. Thank you. Thank you. I think the United States has 

improved our financial defenses against terrorist operations. I 

think the Office of Terrorism and Financial Intelligence has been 

effectively formed within the Treasury Department. I think 

changes in money laundering law through the PATRIOT Act have 

proven vital. I think we in the Congress have also stepped up efforts on a bipartisan basis through the Congressional Anti-terrorist 

Financing Task Force. I commend Chairwoman Kelly, again, for 

her leadership on that. 

However, money is the lifeblood of terrorists, and we should fully 

expect that as soon as we act to tighten our defenses in one area, 

that the terrorists will change their tactics and move in a different 

direction. We have to challenge ourselves at every step to think 

and act creatively. It is a chess match, and these are urgent issues. 

I think for those of us who have served in government for a while. 

We know that the U.S. governmental agencies typically have not 

proven as flexible as the ruthless terrorist groups targeting our nation. So I think a lot more energy on our part needs to go into 

thinking this through, hearing what additional tools individuals 

like Juan Zarate need in order to effectively outsmart our enemies, 

and we need to be prepared to give them those tools. 

I look forward to your testimony. Thank you. 

Chairman KELLY. Thank you very much, Mr. Royce. 

Mr. Scott? 

Mr. SCOTT. Thank you very much, Chairwoman Kelly. I certainly 

appreciate this hearing. It is a most important and timely hearing 

on a very, very vital issue. 

This hearing today is an important review of efforts by the government and the financial industry to identify and eliminate terrorist financing. Since 9/11, several sectors of the financial industry, new cabinet offices, and task forces have been created to track 

and disrupt terrorist financing. While there has been some early 

success in closing down identified financing schemes, new methods 

5

of transferring funds between terrorists and rogue nations or crime 

syndicates continue. 

The United States must continue to improve financial intelligence in order to identify and track down terrorist cells and eliminate them once and for all. We must understand that closing one 

network provides incentives for another opportunity to transfer resources between cells. It is also imperative that our enforcement 

agencies continue to collaborate and not become entangled in bureaucratic differences. 

Finally, I am concerned that several despotic nations have allowed lawless segments of their countries to become safe havens for 

terrorist operatives. We know who these countries are and we need 

to move forcefully to deal with these countries if the world is going 

to be safe from terrorism. We must not ignore the threats that 

have been brewing in some of the world’s poorest countries. This 

is where the action is. 

I look forward, Chairlady Kelly, to this hearing from this distinguished panel of witnesses, who will provide us with an update on 

current efforts to track terrorist financing. 

Thank you. 

Chairman KELLY. Thank you, Mr. Scott. 

Ms. Moore? 

Ms. MOORE OF WISCONSIN. Thank you, Madam Chair, for recognizing me. I am a very new member to this committee and subcommittee, so I am very eager to hear from our witnesses today. 

I am hoping that throughout the testimony, particularly of our first 

witness, the Honorable Juan Zarate, that I will learn more about 

the structure and command of his division, and how you plan to 

use the increased funding for your department to explore the strategies for anti-terrorist financing. 

You also have some vacancies in your department, and there is 

going to be some reorganization. I would be very interested in your 

focusing on that. 

Thank you. 

Chairman KELLY. Thank you, Ms. Moore. 

Mr. Fitzpatrick? 

Mr. FITZPATRICK. Thank you, Chairwoman Kelly. 

To our distinguished panelists, thanks for taking the time to 

meet with us here today. Even though I am new to this committee, 

it is apparent that our government has made great strides to identify and prevent terrorists from using America’s financial systems 

to support their activities. With the freezing of terrorist assets 

worth millions and millions of dollars, Americans are safer today 

than they were on September 11, 2001. 

Despite the wide-ranging viewpoints in Congress, we can always 

stand together on one thing. We must continue to do everything in 

our power to prevent another terrorist attack. I commend the 

Treasury Department for its continued efforts to block the flow of 

terrorist funds to terrorist organizations. However, terrorist financiers are constantly adjusting to our domestic and our international efforts. They are finding inventive ways to finance terror 

with commodities that are difficult to track, like gold and diamonds. Despite extraordinary global efforts, in particular the Financial Action Task Force and the Egmont Group, I am concerned 

6

that our efforts abroad are not sufficient. There are significant hurdles that remain before information flows seamlessly across nations. 

I represent a district that was affected directly by the September 

11 attack. Seventeen residents from Pennsylvania’s eighth district 

were killed in the attack on the World Trade Center. The families 

of those 17 people that tragically died that day want these cowards 

brought to justice. It is critical that we never forget that our efforts 

to cut off terrorist organizations’s funding will save lives of our constituents. 

I yield back the balance of my time. 

Chairman KELLY. Thank you. 

Mr. Cleaver? 

Mr. CLEAVER. Madam Chairperson, I am honored to have the opportunity to serve on this subcommittee. I believe the agenda is 

significant to the preservation of our way of life and I think it is 

one of the great responsibilities we have if we are successful in 

tracking down the source of dollars that go into the pockets of terrorists. 

I look forward to working with you and the other committee 

members. Being new is sometimes a new experience. 

Chairman KELLY. Thanks, Mr. Cleaver. 

Mr. Moore? 

Mr. MOORE OF KANSAS. Thank you, Madam Chair, and I thank 

the witnesses for being present. I just want to say that I learned 

a long time ago that I learn more when I listen than when I speak. 

So today, I am here to learn and not to speak. 

Thank you. 

Chairman KELLY. Thank you, Mr. Moore. 

Ms. Wasserman Schultz? 

Ms. WASSERMAN SCHULTZ. Thank you, Madam Chair. 

I am looking forward to hearing from the panelists that are going 

to be testifying today. Although we have made some progress since 

the attacks of September 11, obviously the fight is not over. Al 

Qaida continues to pose a great threat to this country’s national security and Congress has a responsibility to take action and protect 

our citizens from the threat of terrorism. 

It is the job of this subcommittee, under your leadership, Madam 

Chair and Ranking Member Gutierrez, and the responsibility of all 

members of Congress, regardless of which side of the aisle that we 

sit on, to destroy the mechanisms of terrorist financing. We must 

take every necessary step to uproot the sources of funding for terrorist activity, while at the same time making sure that we protect 

the free flow of capital for legitimate commercial purposes. I think 

that is the balance that is going to be important for this committee 

to eventually strike. 

I look forward to hearing from today’s panelists and will work 

with my colleagues on the subcommittee to address this grave 

problem. Thank you. 

I yield back the balance of my time. 

Chairman KELLY. Thank you. 

Mr. Price, I understand you do not have an opening statement. 

Is that correct? 

7

Mr. PRICE. I appreciate the opportunity and look forward to the 

testimony. 

Chairman KELLY. Thank you. 

With that, with us today here on the first panel is Assistant Secretary of the Treasury for Terrorist Finance Juan Zarate. Prior to 

working at the Department of Treasury, Mr. Zarate served as a 

prosecutor in the Department of Justice’s Terrorism and Violent 

Crime Section. In that role, he helped to investigate and prosecute 

several terrorism-related cases, including the USS Cole investigation. While at the Department of Justice, he also specialized in 

cases relating to weapons of mass destruction and prosecuted firearms-related cases in the District of Maryland, as well as serving 

a short term as an attorney in the Appellate Section of the Criminal Division. 

Mr. Zarate, you come to this job with a tremendously strong 

background. We welcome you and we welcome you here on our 

panel. You may proceed. 

STATEMENT OF HON. JUAN C. ZARATE, ASSISTANT SECRETARY FOR TERRORIST FINANCING, DEPARTMENT OF THE 

TREASURY 

Mr. ZARATE. Chairman Kelly, thank you very much for the very 

warm introduction. Ranking Member Gutierrez, I want to thank 

you very much for your warm thoughts in the conversation we had 

before. I will be looking to your example and others on this committee as to how to be a good parent, so I really appreciate the 

thought. 

Chairman Kelly, Ranking Member Gutierrez and distinguished 

members of the subcommittee, thank you very much for this opportunity to talk to you today about the abuse by terrorists of informal 

means of financing and the U.S. government’s efforts to combat 

those efforts. This is an important and complex issue, and I again 

applaud the subcommittee for its continued focus on the changing 

face of terrorist financing. 

The Treasury Department particularly appreciates the leadership 

of you, Madam Chair, as well as the subcommittee, and your support in terms of the Office of Terrorism and Financial Intelligence. 

We thank you very much. 

The axiom now accepted around the world is that we must concentrate our national and collective power on breaking the financial 

ties that bind terrorist networks. Since September 11, we have focused on financially isolating those who support terrorism, while at 

the same time building systems and capacities in the international 

financial system to heighten the risks and costs associated with 

moving tainted capital. Throughout this period, U.S. leadership has 

helped foster a growing realization internationally that securing 

the financial systems and all vulnerable sectors, in addition to targeting the sources of terrorist support, is an essential element of 

our fight against terrorism and financial crimes. 

Through an unprecedented global effort to attack terrorist financing, it is now harder, costlier and riskier for terrorists to raise and 

move money around the world. Terrorist assets and conduits of 

funding have been frozen, shut down or otherwise neutralized. Key 

facilitators have been captured or killed. Otherwise sympathetic 

8

donors have been deterred or isolated, and through training and 

technical assistance, we have increased the capacity of our global 

partners to combat terrorist financing. 

In addition to concentrating on the formal mechanisms used by 

terrorists and criminals to hide sources and eventual uses of 

money, we have addressed the various informal ways that are vulnerable to terrorist abuse. In this realm, we know that terrorist 

groups of all stripes use a variety of mechanisms to raise and move 

money. Al Qaida has relied on the corruption of charities and deeppocket donors for financial support. Hamas holds fundraising 

events. 

The terrorist cell that launched the devastating attacks on Madrid’s train system raised money through drug dealing. Colombia’s 

notorious FARC, ELN and AUC narco-terrorists maintained drug 

cartels and kidnapping operations in order to support their terrorist operations. Still others like Hezbollah, ETA and Jemaah 

Islamiyah employ front companies and phony businesses to funnel 

cash or extortion taxes meant to subsidize their networks. In addition, as Al Qaida balkanizes, the organizations and those localized 

cells that are aligned with it are relying on additional sources of 

financing to survive and proliferate. 

We have applied a consistent approach to these evolving challenges. This has involved confronting the relevant systemic risks 

attendant to different sectors of the international financial system, 

both formal and informal. This is done in order to bring greater 

transparency and accountability to financial transactions globally. 

To this end, we have supported and encouraged the worldwide expansion of regulatory oversight to previously unregulated sectors, 

garnered more information from the newly regulated communities, 

and applied enforcement pressure when and where needed to help 

ensure compliance. In many respects, these efforts have shown the 

light of day on previously unseen or untended corners of the financial world. 

In my written testimony, I lay out for the subcommittee in some 

detail the various informal or non-bank mechanisms that we think 

are vulnerable to terrorist abuse, as well as steps that we have 

taken to address the attendant risks. It bears mentioning that we 

have applied our resources in a manner that is consistent with the 

level of risk we ascribe to the vulnerable systems. With respect to 

charities, our strategy has combined designations and concentrated 

enforcement actions with greater oversight efforts, heightened 

international standards, and private sector awareness. With respect to previously unregulated sectors like hawalas, we have started the process of building awareness in the financial community, 

as well as in a new regulatory system both domestically and internationally, that has catered to these less formal sectors. Combined 

with targeted enforcement actions, these efforts are taking effect, 

but there is much more to do to ensure that this sector is fully 

identified and is operating legitimately and with full transparency. 

Given increasing reliance on cash couriers by Al Qaida, we have 

launched an international response starting with the adoption of a 

new special recommendation by the Financial Action Task Force 

last year, which has resulted in jurisdictions like Hong Kong passing new laws and instituting new reporting and search practices at 

9

their borders. In addition, we are looking at innovative strategies 

of melding certain types of financial data available to us to try to 

pinpoint couriers moving in and out of the United States. 

In the case of vulnerabilities attendant to the trade in precious 

commodities, we have applied a similar approach, but have also 

used the international outrage and response to the conflict diamond issue as a means of bringing some degree of transparency 

and accountability to the sector. Through the Kimberley process, as 

well as the application of targeted sanctions on Charles Taylor and 

the former elements of his regime in Liberia, we are applying other 

tools to bring accountability to the use of precious stones from conflict regions. 

We must continue to build upon this broader strategy to reduce 

the risks associated with the movement of money in the less formal 

sectors of the international financial system. With this in mind, we 

are looking to other financial sectors around the world that could 

be used not only to skirt financial regulations, but also to facilitate 

criminal activity and possibly terrorism. In this regard, we are 

working with our partners in the interagency to take a closer look 

at the vulnerabilities attendant to trade-based systems around the 

world. 

Madam Chair, there is no doubt that Al Qaida and like-minded 

terrorist groups and their supporters will constantly search for the 

weak link in the preventive systems that we have put in place in 

the U.S. and around the world. It was bin Laden himself who indicated that Al Qaida well understood the cracks in our financial system that could be exploited. Thus, we are challenged to innovate 

ways of securing international financial systems and disrupting 

terrorist financing, without doing damage to the workings of the 

free market. This is part of our challenge, but we also see this as 

an opportunity to disrupt the financing that fuels terror, while securing the international financial system against the corruption of 

tainted capital. 

Madam Chair, we appreciate the subcommittee’s continued support and concentration on these issues. We look forward to continuing to work with you on all of these evolving issues. 

Thank you. 

[The prepared statement of Hon. Juan Zarate can be found on 

page 59 in the appendix.] 

Chairman KELLY. Thank you, Mr. Zarate. 

Other witnesses are going to testify about the unique monetary 

and cultural role that gold plays in Saudi Arabia. Without an FIU 

in place, it seems that our efforts to effectively track and understand the flow of gold and other commodities there are lacking a 

critically important tool. Of course, there are other obvious benefits 

to having an operational FIU in Saudi Arabia. When I asked about 

the status of the Saudi FIU in August of 2004, Assistant Secretary 

Levey said, ‘‘It has not happened yet.’’ As you know, he said this 

almost 2 years after the Saudi government had declared that they 

had established an FIU. He went on to talk about the Saudis, and 

I am quoting again from the record, ‘‘There are lots of areas in 

which they have made significant progress, progress that is very 

valuable to us, but there are also situations where they need to 

move further and we need to continue to push them.’’

10

The FIU situation is one of them. Another is that while they announced the regime to monitor charities in the kingdom, it does not 

cover certain organizations that we have long thought have terrorist financing concerns. You and I have had subsequent conversations about this in the September hearing, and I know that together we share a strong desire to continually improve the value 

of the important alliance that we have with Saudi Arabia in this 

horrible fight against terrorism, but Under Secretary Levey’s comments resonated with many of us who really want to strengthen 

that U.S.-Saudi partnership. 

My question is whether or not you are optimistic that we can 

continue to make substantive progress in making sure that Saudi 

Arabia is an effective partner in combating the terror financing 

that unfortunately flows from their country. 

Mr. ZARATE. Madam Chair, I am optimistic. I think the relationship with Saudi Arabia in the context of terror financing is essential. As you have mentioned, sources within Saudi Arabia as well 

as other sources in the Gulf have proven to be sources for Al Qaida 

and other like-minded terrorist groups. So it is essential, and this 

is why we have devoted so much attention to this issue. It is essential that we have in place mechanisms with the Saudis to not only 

share information, but to ensure that the Saudis themselves can 

take control over these issues. 

I think what is most encouraging, Madam Chair, is that in particular after the bombings in Riyadh, the Saudis have taken very 

seriously the threats attendant to their own regime, based on the 

threats of Al Qaida and other groups. They recently hosted the 

worldwide counterterrorism conference attended by Homeland Security Adviser Fran Townsend and a member of my office, and a 

high-level delegations from the U.S. government. The Saudis are 

taking this issue very seriously, but I will reiterate what Under 

Secretary Levey has said, which is there are a range of issues that 

we continue to push the Saudis on, some of which you have identified. It is essential that we continue to do so, and continue to work 

with them. 

Chairman KELLY. Do you think we are going to be able to ensure 

that there is a more rigorous approach to the designated individuals in Saudi Arabia? 

Mr. ZARATE. Madam Chair, I believe so. I think one of the highlights of our engagement with the Saudis has been a more progressive willingness on the Saudis’ part to take preventive administrative actions to freeze assets. That has been part of the cornerstone 

of our international efforts to staunch the flow of funds to terrorist 

groups. It has been a number of joint designations with the Saudis 

that has proven in large respects their willingness and their seriousness with respect to applying those types of measures. 

But I think what we need to continue to do is to work with them 

on identifying known conduits, known sources of funding, and 

working with them to isolate those individuals. We did so in December with an individual by the name of Adil Batterjee. We have 

done so previously with individuals like Yasin al Qadi and Mr. 

Julaiden. We have certainly done so with the case of Al Haramain 

and the threat that that charity posed worldwide. I am hopeful 

that those actions will continue not only because they are imporVerDate 0ct 09 2002 10:01 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 G:\DOCS\22159.TXT FIN1 PsN: MICAH
11

tant to us, but I think the Saudis now realize they are important 

for their own safety. 

Chairman KELLY. And you feel that the Saudis are actually following up once we do this designation and discussion with them, 

they are actually going to do something about these things. The list 

you just gave, for instance, have they done anything to freeze assets or stop the individuals, especially Al Haramain? What have 

they done? Do you know anything about these? 

Mr. ZARATE. Madam Chair, based on the information I have, and 

I was last in Riyadh in November talking about a number of these 

issues, some of the issues that you raised earlier. Based on the information I have, they have certainly taken actions to freeze the 

assets of those individuals, in particular the Al Haramain charity 

which presented numerous legal complications for them, given the 

extent of the reach of that organization within the kingdom, as well 

as internationally. 

So I am confident that they are taking actions, but I have to be 

honest with you, Madam Chair, we are constantly working with the 

Saudis to ensure that that is the case. One of the issues that we 

have talked to them about is ensuring that we have a complete 

record of the assets that have been frozen since September 11. 

Chairman KELLY. And they are cooperating, I hope. 

I am out of time here. 

Mr. Gutierrez? 

Mr. GUTIERREZ. Thank you, Madam Chair. 

I would like to start by asking you about your Under Secretary 

is proposing to transfer in 2006 the 23 people from the terrorist assets division of OFAC to the departmental offices. What is your 

view on this change? Weren’t there a minimum number of employees statutorily established for OFAC of employees and people, and 

wouldn’t this violate that floor of employees? 

Mr. ZARATE. Congressman, with respect to the OFAC floor, which 

I believe you are referring to, I think the floor is 120 FTEs, if I am 

not mistaken, but we can verify that for you. I think this transfer, 

with the infusion of additional FTEs for other functions under 

OFAC keeps us above the OFAC floor. So we have been working 

very closely with members of Congress as well as the budget and 

management folks to ensure that we are in complete compliance 

with those strictures. 

On the broader issue with respect to the transfer of the 23 employees who were part of the Foreign Terrorist Division within 

OFAC, this is, in my opinion, a necessary and natural evolution of 

how the Treasury is going to be working on these issues. One of 

the key and important elements of the new Office of Terrorism and 

Financial Intelligence was the establishment of a robust and very 

real office of intelligence and analysis. At the heart of what that 

office will do will in essence be a good bit of the analytical work 

with respect to terrorist financing, with respect to the movement 

of illicit flows of funds, with respect to money laundering, which 

has been done in large part within the structure within OFAC. 

So what this is, is a rationalization of the process and a bringing 

into Treasury proper resources and the know-how and the human 

capital to be able to deal in the long term with the broader issues 

12

that we are talking about. That is in addition to new hires that we 

are bringing on in terms of our analytical capabilities. 

Mr. GUTIERREZ. So we are going to move them to the intelligence 

part of Treasury. I know you are not the Under Secretary, but as 

we move 23 people, don’t you think we should have the Assistant 

Secretary for Intelligence in place, instead of having a career professional who is probably doing a great, job but it is a career professional in a vacant position. We do not have an Assistant Secretary for Intelligence, but we are moving people into a division 

where we have it. Can you tell us where we are at on that issue, 

if you know? 

Mr. ZARATE. Congressman, first of all, I think that the movement 

of personnel is very important in terms of the holistic functioning 

of this office. I think, even though there is not an Assistant Secretary in place, it is important to make this move now and to make 

it quickly, to do it quickly and efficiently. I will tell you that the 

Deputy Assistant Secretary Janice Gardner, who is operating the 

Office of Intelligence Analysis, is not only a committed career employee, but she is a true professional through and through and 

doing an enormous job for the U.S. government and for the Treasury. With Under Secretary Levey’s leadership, I do not see there 

being a problem. 

With respect to getting a person in place, I know that the White 

House continues to work on that and it is a top priority. 

Mr. GUTIERREZ. In my humble opinion, I am thankful for professionals and I am sure she is doing a great job, but it just seems 

to me that somebody who is, I mean, I look at you and your role 

and the development that you have had as Assistant Secretary. I 

say to myself, we need a person who sees this as their focus, their 

job, much as you have seen this as your focus, your job, in terms 

of developing leadership. You know how it works. The person is not 

going to be there maybe next month. Who knows what happens in 

the chain of command with people, and how you have priorities and 

a vision and you take that to the Under Secretary and then to the 

Secretary of Treasury to make sure that those patterns get carried 

out. 

I am going to have, because of the constraints of time, I am going 

to have a few questions that I am going to hand to you in writing. 

I am just going to ask you two more. Given the fact, you know, this 

lack of a Secretary here, and your involvement, does OFAC report 

to you now? 

Mr. ZARATE. Based on the legislation coming out of the intelligence bill, OFAC reports to the Under Secretary. That authority 

can be delegated to me. The way this has operated, after the Homeland Security transition, OFAC did in fact report to me in my previous capacity as Deputy Assistant Secretary for Terrorist Financing and Financial Crimes. We have been operating for the last 

year-and-a-half with that construct, where OFAC reports up to me. 

Mr. GUTIERREZ. Okay. And it continues to report to you to this 

day under the authority of the Under Secretary to be able to delegate it to you? 

Mr. ZARATE. That authority has not been technically delegated, 

to my knowledge, but the organization within TFI is fairly fluid, so 

we all work together very closely. 

13

Mr. GUTIERREZ. Because when I read section C, it says the Office 

of Foreign Assets Control, in this section referred to as OFAC, 

which shall report directly to the Under Secretary for Terrorism 

and Financial Crimes. I am just wondering if they are reporting to 

you, how that delegation of reporting to you, how would I say, 

blends with the statute as I read it. Do you see any contradiction 

between the statute and the fact that OFAC reports to you? 

Mr. ZARATE. Well, again, as I said, technically OFAC reports to 

the Under Secretary. In past form and function, they have reported 

to me, given the Treasury orders and organization charts. There is 

not really a problem in the sense that we read and our lawyers 

read the legislation, to allow for the delegation of that authority 

down to me. As I indicated, I would have to check with our Treasury lawyers, I do not think that that authority has yet been delegated officially to me. 

Mr. GUTIERREZ. Does FinCEN report to you? 

Mr. ZARATE. FinCEN, based on the bill, now reports to the Under 

Secretary. The way that we read the language, that authority cannot be delegated based on what the legislation says. 

Mr. GUTIERREZ. So when it comes, and I will finish now, Madam 

Chairwoman, so as Treasury see it, OFAC, as your lawyers and 

your people read it, the Under Secretary can delegate that to someone else, but not FinCEN, so FinCEN does not report to you. 

I will hand over the rest of the questions in writing. Thank you 

very much. 

Mr. ZARATE. Thank you, Congressman. 

Chairman KELLY. Thank you. 

Mr. Fitzpatrick? 

Mr. FITZPATRICK. I want to say thank you for your testimony 

today and also for your service to our nation as a prosecutor and 

now at the Department of Treasury. I appreciate that. 

I was wondering if you could talk to us about whether you have 

seen or are aware of any credible evidence that Al Qaida is operating the conflict diamond sector in Africa. 

Mr. ZARATE. Congressman, that is a very good question. Let me 

take this opportunity to compliment one of the next panelists, Doug 

Farah, who has done incredibly important reporting on these issues 

and has been intrepid in the work that he has done. I admire him 

greatly. I wanted just to mention that because he has in large part 

been a driver in the public sphere on this issue. 

With respect to the connection, I leave that specific question to 

my FBI and intelligence colleagues. The FBI has sent a couple of 

teams out to West Africa to investigate ties. I will tell you, from 

my experience we have not seen direct links. We looked at this 

issue early on, even as the first article from Mr. Farah was coming 

out in November, 2001. I have met with Belgian authorities. We 

have had Treasury officials meet with the Diamond Council around 

the world. There is no direct evidence that we see that ties Al 

Qaida. 

That being said, the trade in precious commodities, in particular 

conflict diamonds, is an area rife with potential corruption. As Congressman Scott, I believe, indicated, it is these untended corners of 

the world where there is opportunity for great mischief. We have 

seen that with Charles Taylor and what he did in Liberia. We have 

14

seen what that produced in terms of not just fomenting of rebellion 

in Sierra Leone with the RUF, but also with arms trafficking and 

other nefarious behavior. 

So even if there is not a direct link to Al Qaida, it is an issue 

of concern to us because it presents a gap or an opening for criminals and rogue leaders to take advantage. 

Mr. FITZPATRICK. Does your department have the ability to control directly or indirectly through regulation or otherwise that kind 

of trade? 

Mr. ZARATE. We are certainly part of it. By ‘‘we,’’ I mean the 

greater U.S. government, part of the Kimberley Process, which is 

the first attempt to apply a certification regime to the diamond 

trade, which I think is a good first step. It certainly is not the silver bullet for this issue, but it is a good first step. We domestically, 

the Treasury Department that is, have the ability to regulate dealers in precious stones and commodities. We have put out an interim rule, a proposed rule about 3 years ago now. We are in the 

final stages of coming out with a final rule, so we do have the ability internally to control to a certain extent the trade and dealing 

in precious stones. 

The other element of this, and I think you alluded to this, Congressman, very aptly in your opening remarks, part of this is creating mechanisms where we can share information more fluidly. 

Part of that is doing so in the Egmont Group, making that a more 

strategic information-sharing body. That is one of my priorities. 

That is one of Bill Fox’s priorities as director of FinCEN. Another 

issues, as I referred to in my testimony, is looking at sharing data 

with respect to trade anomalies and trade transactions in a much 

more robust way. 

So there are different ways of getting at this, even if we do not 

have jurisdiction to reach into West Africa or reach into Southwest 

Africa or reach into different parts of the world that are proving 

problematic. 

Mr. FITZPATRICK. I yield back my time. Thank you. 

Chairman KELLY. Thank you. 

Mr. Scott? 

Mr. SCOTT. Thank you very much, Madam Chairman. 

Assistant Secretary Zarate, it seems to me that while seizing the 

asset is very important, it seems to me that much more important 

is maybe backing off of that and being able to watch and follow the 

flow of that money trail as a really more effective way of that. And 

that requires, of course, using intelligence. It concerns me that in 

the department the position of Assistant Secretary for Intelligence 

is not filled and has not been filled. 

So that is a gaping hole in dealing with perhaps the most fundamental area and really putting a dent in terrorist financing if we 

do not even have the position filled in the Treasury Department of 

the very person who is charge of gathering intelligence. This is devastating not only in terms of our not being able to follow the money 

trail, but really in getting to the issue of understanding the depth 

of these nations and these countries who are providing safe havens. 

How could the Treasury Department allow this most crucial position of Assistant Secretary of the Treasury for Intelligence to go 

unfilled? What is it doing to hamper our progress? 

15

Mr. ZARATE. Congressman, you raise a serious issue. Again, I reiterate the fact that the White House has it as a priority. Certainly, 

Secretary Snow understands the seriousness of this and we are 

moving as quickly as possible to fill that position. That being said, 

Congressman, I will tell you that the lack of having someone in 

that position is not hampering our effectiveness with the intelligence community at large and our ability to balance the tradeoffs 

that you are talking about, the tradeoffs between taking action now 

based on information and intelligence we have, versus waiting and 

watching and allowing for a longer-term approach in terms of following the money trail. 

That is something, frankly, that we have been doing since September 11 very closely with the intelligence community. That is 

part of the reason we have had a very effective policy coordinating 

committee that has done precisely what you indicate, which is a 

balancing of that tradeoff. In a post-9/11 world where you have terrorist groups not only intent on killing us, but perhaps doing so 

with apocalyptic force, it becomes a very important debate as to 

whether or not we take actions to prevent certain elements of support and activity, versus waiting and watching. That goes to the 

heart of how we function. 

Mr. SCOTT. It has been 2 years. I mean, I am trying to figure, 

is there any reason why this has not been done? 

Chairman KELLY. If the gentleman will yield, the Chair would 

remind members that nominations and confirmations are not within the constitutional authority of the House. The questions are appropriate, but this is not a constitutional authority that we have 

in the House of Representatives. 

Mr. SCOTT. I realize that, Madam Chairlady, and I certainly respect that, but I do think that the American people are certainly 

owed an understanding as to why this very vital position of intelligence continues to go unmanned. 

Let me go to another point. We have dealers in precious metals, 

in stones and jewels, that are included among the many types of 

financial institutions defined under the Bank Secrecy Act. Yet the 

Treasury Department has not issued a regulation pursuant to section 352 of the PATRIOT Act requiring diamond dealers to establish anti-money laundering programs. Let me ask you this question, if I can get an answer to this one: When will Treasury propose 

a rule to address this provision of the PATRIOT Act? 

Mr. ZARATE. Congressman, as I indicated earlier, it was 2 years 

ago that we laid out the proposed rule, which does in fact create 

obligations on dealers in precious stones. What we have is an ongoing process which I think and hope will be finalized very soon when 

we put out the final rule with respect to this important sector. 

What I will mention is that this is part of the grand expansion of 

the Bank Secrecy Act, post-9/11. Heretofore, there has not been federal regulation of this sector, which I will remind this committee, 

leads very easily into the retail sector and the complications attendant to that and the potential economic outflow from the regulations we come out with are serious and severe. 

So we have been working at this diligently, trying to get as much 

information as possible. As I indicated, this was not a sector that 

we had previously regulated, so a lot of this was writing on a blank 

16

slate, but I am hopeful that we will very shortly have a final rule 

that helps explicate what the obligations finally are. 

Mr. SCOTT. Finally, let me just ask you this question. 

Chairman KELLY. I am sorry, but you are out of time. 

Mr. SCOTT. That is fine. Thank you. 

Chairman KELLY. We come now to Ms. Moore. 

Ms. MOORE OF WISCONSIN. Thank you, Madam Chair, for this opportunity. 

I also was interested in sort of the administrative work that is 

needed to be done to combat terrorism. My question really relates 

to what the timing is in issuing guidelines for handling MSBs. You 

stated in your opening comments that the hawalas are a primary 

source of criminal movement of money. 

At the same time, this is a primary resource for many folks in 

urban areas who have no checking accounts, and many other poor 

people. I recall in my own lifetime that money orders were primarily the ways and means that my family could best do business. 

And there are many financial institutions that are deciding to pull 

out of these instruments because of the perceived regulatory problems and no guidelines really being issued. 

So I am concerned about the timetable for putting that in place, 

so that we can effectively track terrorist activity, but not hamper 

the ability of poor people to conduct business. 

Mr. ZARATE. Congresswoman, you raise an incredibly important 

issue, and it goes to the heart of our function, which is to balance 

the regulatory burden placed on the financial community with the 

benefits associated with those regulatory burdens. 

What we have done, and what I said in my written testimony, 

and I hope this is reflected well, is that hawalas certainly, and 

money service businesses writ large, are essential elements in 

many cases to the economy. MSBs, as they are referred to, form an 

essential part of remittances to the developing world, and it has 

been a consistent U.S. government and Treasury policy to ensure 

that we are encouraging those types of flows of money. That, I 

think, is an essential point. 

With respect to guidance on this issue, I think this is very important. This is something that Secretary Snow addressed publicly before the Florida Bankers Association. I did as well. What we are 

planning on doing is having an MSB conference in the context of 

the Bank Secrecy Act Advisory Group, to in part talk about not just 

the regulatory and enforcement challenges which we have, which 

are real and which I indicated in my testimony, but also to deal 

with the economic impact and the regulatory response that we are 

seeing from the private sector. 

Part of the outflow from that I hope will be joint guidance from 

the Treasury and the regulatory body with respect to what is expected and anticipated of the financial community when dealing 

with money service businesses. 

We did something similar in the context of embassy banking 

after the Riggs enforcement actions led to some confusion with respect to how to deal with embassy bank accounts. I see something 

similar here in this case. 

Ms. MOORE OF WISCONSIN. Thank you. 

Chairman KELLY. Mr. Cleaver? 

17

Mr. CLEAVER. Thank you, Madam Chairperson. 

Mr. Secretary, is there a delegation in Saudi Arabia at this time 

from Treasury? 

Mr. ZARATE. We had a delegation as part of the Fran Townsend 

delegation that was attending the Saudi counterterrorism conference. We do have on a permanent basis a working relationship. 

This is an important point and we have made this point before, an 

important working relationship with Saudi security forces internally in a Joint Terrorist Financing Task Force, which has been an 

important element of our information sharing and an evolution of 

how it is that the Saudis work at these issues. 

Three years ago, the Saudis, and this goes, Madam Chair, to 

some of your questions, 3 years ago the Saudis did not necessarily 

look at financing the way that we do. They did not, when conducting searches, pick up receipts and look for financial records. 

We have engaged in intense training with them, intense collaboration. What we have on the ground now, led by the FBI, is a Joint 

Terrorist Financing Task Force which is proving valuable. 

Mr. CLEAVER. Is it possible that you could provide the committee 

with a list of the individuals in that delegation from Treasury and 

their titles, and the roles that they are playing while there? 

Mr. ZARATE. Certainly, Congressman, we can provide both the 

names of the delegation that attended the conference with Ms. 

Townsend. We could also in consultation with the NSC, obviously, 

and then we can certainly provide names as appropriate as to who 

is on the ground. There may be some sensitivity to that, given the 

security relationship, and to a certain extent we will have to go 

back and talk to the FBI about that, but I will try my best and 

we will take that back. 

Mr. CLEAVER. Thank you. 

Thank you, Madam Chair. 

Chairman KELLY. Thank you, Mr. Cleaver. 

Mr. Moore? 

Mr. MOORE OF KANSAS. Thank you, Madam Chair. 

Again, Mr. Zarate, I appreciate your being here. I want to follow 

up on a question that Ms. Moore asked you and that you answered, 

and this may partially already answer my question, but I just want 

to refine it a little bit. 

As you know, MSBs play an important role in many urban communities. These small community-based businesses, in partnership 

with the banks or other financial institutions, provide necessary 

money transfers to many neighborhoods with significant immigrant 

populations. Often, at times community members will feel more 

comfortable with the local MSB than they might with a large national bank that does not have a presence in their community. 

Certain regulatory requirements contained in the PATRIOT Act 

are causing some banks to sever their relationships with MSBs, is 

my understanding, because these banks have a business relationship that unless conducted separately require a review of MSB 

policies. In fact, this is including their anti-money laundering policies, their financial information third party references, information 

on owners and other business information. These relatively new reporting requirements have apparently caused some banks to believe they should not carry on these relationships with MSBs beVerDate 0ct 09 2002 10:01 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 G:\DOCS\22159.TXT FIN1 PsN: MICAH
18

cause of the increased regulatory burden associated with doing 

that. 

I think we all, I think everybody on this committee and probably 

every member of Congress feels we must do all we can to protect 

our country and our people from money laundering that is associated with financing terrorist organizations in this post-9/11 world. 

I think we all agree that is a reasonable thing that must be done 

in a reasonable manner. 

You have already kind of answered this question, but do you 

agree that MSBs can play a useful role in our cities? And what 

steps can Treasury Department take to alleviate the problems they 

are facing? You indicated that there might be an MSB conference 

coming up. Is there a timeframe for that and where and when 

might that be? If you can tell me if you have that information, we 

would like to get information from that to see if this issue, if it is 

an issue and a problem, can be addressed in an administrative 

fashion, or does it need to be addressed by Congress for further action? 

Thank you. 

Mr. ZARATE. Thank you, Congressman. 

Again, you and Congresswoman Moore raise very good and important issues. These are issues that we hear as well, and I know 

you hear it from various banking associations and proprietors. This 

is a serious issue because money service businesses form part of 

the financial sector that is important. It is important to rural communities, to ethnic communities, to less-serviced communities. Access to the financial system by individuals is incredibly important 

and it is a part of Treasury’s mission, frankly. So that is important. 

What I think we are seeing, sir, is part of the growing pains of 

the post-9/11 expansion and deepening of the anti-money laundering system. You have sectors, as I mentioned in my testimony, 

that have previously been unregulated, at least federally, and an 

attempt to try to mesh the federal system with ongoing practices, 

as well as with the more formal sectors that are well regulated and 

know how the system works. 

Part of our challenge, and again I think this is what the MSB 

conference will in part focus on, will be finding the right balance 

of expectations. What is expected of the formal financial sector? 

What is expected of the MSB sector? I think the conference will go 

a long way. Our intent is to have that fairly soon, sir. I would hope 

sometime in the next three to four weeks, as soon as we can schedule it with the appropriate parties. 

Chairman KELLY. Thank you, Mr. Moore. 

Ms. Wasserman Schultz? 

Ms. WASSERMAN SCHULTZ. Thank you, Madam Chair. 

Mr. Zarate, I am from the state of Florida. You might be familiar 

with the case of Sami Al-Arian in Florida and the fact that it took 

approximately 7 years, if not longer, to bring indictments against 

Mr. Al-Arian. He was a full tenured professor at the University of 

South Florida, operating an Islamic academic institute on the campus, was here legally in the country, and ultimately was accused 

of and is now in jail for operating a terrorist financing network. In 

fact, one of his lieutenants actually went back to the Middle East 

to head Islamic Jihad. So obviously not a very good guy. 

19

One of the concerns that I have, and I would just like you to respond to it, is that there is a balance that I referred to in my opening statement about balancing how we interact with commercial financial institutions and suspicious activity reports, needs to be 

struck carefully. On the one hand, it took almost 7 years to bring 

indictments against Mr. Al-Arian, but you can actually potentially 

drive this activity underground if you are overly aggressive in pursuing this, because they will just find another way to interact and 

pursue their financial transactions. 

So as it relates to that kind of activity, how are you striking that 

balance? 

Mr. ZARATE. Congresswoman, again, you hit a very good point. 

It is a consistent message that we have stated both domestically 

and internationally. Frankly, we have done so very forcefully internationally. The idea that bringing, and this is reflected in my testimony, the strategy is bringing these previously unregulated sectors 

into the light of the regulated community so that there is greater 

transparency, there is greater accountability, so that we have access to information that we did not have access to before, and to 

deal with it in as open and transparent a way as possible. 

So part of it is developing international standards, which we 

have done which reiterate that very point. The United Arab Emirates has hosted a number of hawala conferences. They are going 

to have their third conference here in April where that theme is reiterated over and over again, because the last thing we want is for 

providers of financial services to be driven underground. 

You are right. There is a potential here in the MSB context for 

certain money service businesses, hawalas or otherwise, to be driven underground either because of regulatory burdens or because 

they are not being serviced by the formal financial sector. 

So that is precisely what we are trying to avoid, and it is a common message that we have with banking associations, with the 

general public, and will be a major theme of this conference which 

I think will be an important step in setting forth expectations. 

Ms. WASSERMAN SCHULTZ. How are you trying to, if you could be 

more specific, how in the future are we going to ensure that it does 

not take almost a decade to prosecute and discover the activities 

of someone like Sami Al-Arian? 

Mr. ZARATE. Congresswoman, I cannot speak, although I was formerly part of DOJ, I cannot speak for DOJ and that prosecution 

in particular. I will tell you that those types of cases and terrorist 

financing and support and material support cases are very difficult 

to make. We have prosecutors on the frontlines of this every day 

who are doing yeoman’s work and phenomenal work to make these 

cases, but I think it bears mentioning that prosecutions are, as we 

say often with designations, one tool in our tool shed to bring to 

this issue. 

And quite frankly, we have been preaching since 9/11 the importance of the preventive aspects of the designation. Designations 

and the freezing of assets are a way of using our administrative authorities and the President’s executive powers to preventively arrest assets, not individuals, but arresting assets in a preventive 

way and in a way that does not tie us into the criminal legal process. 

20

So I think there is a larger point in what you are indicating in 

that it is very difficult to often draw the clear ties between someone who is engaging in support activities generally to terrorism 

more specifically. Our prosecutors are doing great work around the 

country to do just that, but it is difficult work. 

Ms. WASSERMAN SCHULTZ. In light of your comments, then, the 

ones you are just making now, what relevant portions of the PATRIOT Act, since this administration has continued to point to the 

PATRIOT Act as being evidence of the positive steps we have taken 

to prevent cases like Sami Al-Arian, what relevant portions of the 

PATRIOT Act are going to help ensure that that type of activity 

is discovered more quickly and caught? 

Mr. ZARATE. Congresswoman, again I cannot speak to all the various titles of the PATRIOT Act. I am more expert on Title III, 

which is relevant to the subject that we are talking about here. I 

will tell you that given my past experience at DOJ and given the 

changes provided and tools provided in the PATRIOT Act in terms 

of allowing the flow of information to flow between government 

agencies in a much more robust way, allows for these types of cases 

to theoretically be brought to fruition much sooner. 

In the Title III context, we have the ability now, and this was 

an innovation from Congress and a very good one, the ability to 

share more information with the financial community and frankly 

to provide safe harbors to the financial community to share information with each other. That is very important because as we see 

trends, we see customers trying to move from one financial sector 

to another or one institution to another, it is important for these 

financial institutions to speak to each other. 

Just 2 weeks ago, FinCEN announced the establishment of the 

314(a) secure network, which allows for the passing of more secure 

information to the financial community, which is something that 

they have been hungry for, something that we have wanted to do, 

and build on the 314 process which is in the PATRIOT Act, which 

has allowed us to get leads and information out to the financial 

community and to get information back. 

So all of that, the theme of greater information sharing, greater 

flows of information both vertically and horizontally I think is the 

key element of the PATRIOT Act and why it is so important. 

Let me just say, one other element of the PATRIOT Act that we 

have found incredibly important from a diplomatic and strategic 

standpoint. Madam Chair, you talked about the certification process. One of the tools you all provided us was Section 311 of the PATRIOT Act, which gives the Secretary of the Treasury the power 

to identify foreign jurisdictions, foreign entities or classes of transactions as a primary money laundering concern. We have used that 

now eight times. We are using it strategically. It is part of the national security thinking now, and that is incredibly important. 

Chairman KELLY. Thank you very much, Ms. Wasserman 

Schultz. 

Ms. WASSERMAN SCHULTZ. Has my time expired? 

Chairman KELLY. Yes. The red light up there indicates it. When 

the green light is on, you have 5 minutes. When the yellow light 

is on, you have 1 minute to sum up. And when the red light goes, 

you are out of time. 

21

Ms. WASSERMAN SCHULTZ. Thank you. 

Chairman KELLY. Thank you. 

Mr. Zarate, during your testimony you spoke about goods. Beyond precious gems, a lot of physical goods are moved through 

international trading systems legitimately every day. The system 

can also be abused by terrorists and I am concerned about whether 

or not the Treasury is worried about this, or focused on this. I 

would like to know your thoughts about what the vulnerabilities 

are there. 

Mr. ZARATE. Madam Chair, I think the trade-based 

vulnerabilities are real, and we are very concerned about it. I 

present in the written testimony a discussion of the black market 

peso exchange process, which is in essence a trade-based value 

transfer system that has been used over the past couple of decades 

in South America to help launder money. It has been a primary 

way for the Colombian cartels, for example, to launder their funds 

by the use of trade transactions with the Caribbean and with the 

United States. 

So we are very concerned about it. We have addressed it in concrete ways in the black market peso exchange context, but we are 

also concerned as to how it relates to evolving free trade zones 

around the world, as well as with respect to trade anomalies, in 

particular with rogue regimes. So that is an important element of 

what we are starting to look at. 

Chairman KELLY. Thank you very much. 

The Chair notes that some members may have additional questions for this panel that they may wish to submit in writing. So 

without objection, the hearing record is going to remain open for 

30 days for members to submit written questions to the witness 

and to place the responses in the record. 

Mr. Zarate, we wish you very good luck with the birth of your 

child and we thank you so much for spending time with us here 

this morning. 

This panel is dismissed. 

Mr. ZARATE. Thank you, Madam Chair. 

Chairman KELLY. While the next panel is being seated, I would 

like to introduce our next panel. 

It consists of Mr. Mallory Factor, who is the President of Mallory 

Factor, Incorporated. He is a member of the Council of Foreign Relations Task Force on Terror Finance, and he is a New York State 

banking regulator. 

Our second witness is Mr. Douglas Farah, a former investigative 

reporter in West Africa. He is a frequent writer on terrorist finance 

and the author of a book, Blood for Stones. 

Gentlemen, any time you are ready, if you would give me that 

indication we will go forward. Is the panel indicating that they are 

ready? 

We begin with you, Mr. Factor. 

STATEMENT OF MALLORY FACTOR, PRESIDENT, MALLORY 

FACTOR INC. 

Mr. FACTOR. Chairwoman Kelly, Congressman Gutierrez and distinguished members of the Subcommittee on Oversight and Investigations, thank you for inviting me to testify today. 

22

Chairwoman Kelly, I would like to commend you in particular for 

addressing head-on the complex issue of terror financing through 

your introduction in the 108th Congress last September of a tariff 

financing certification regime, and your commitment which continues on this issue. Thank you very much for your leadership. 

My remarks are informed by two reports of an independent Task 

Force on Terrorist Financing on which I served as Vice-Chair and 

which was sponsored by the Council on Foreign Relations. I am testifying in my personal capacity, as is customary, and not on behalf 

of the task force or the Council on Foreign Relations. In my written 

testimony, I set forth seven forward-looking recommendations for 

Congress to improve U.S. efforts against terrorism financing, three 

of which I will discuss briefly today. I welcome your questions, 

however, on any of these recommendations. 

First, Congress should enact a Treasury-led certification regime 

specifically on terrorist financing. A certification regime should require the Treasury Department to provide a written certification on 

an annual basis, classified in whole or in part if necessary, detailing the steps each foreign nation has taken to cooperate in U.S. 

and international efforts to combat terror financing. To be truly 

meaningful, a certification regime must focus first on the nation’s 

laws and regulations against terror financing and second, on the 

extent to which the nation actually implements these laws and regulations to combat terror financing. 

The certification regime should provide for sanctions under Section 311 of the PATRIOT Act on nations that do not receive certification. These sanctions would include denial of U.S. foreign assistance monies and limitations on access to the U.S. financial system. 

Of course, sanctions would be subject to waiver by the President 

if required by vital U.S. national interests. 

A certification regime for terror financing would ensure that the 

special measures provided by Section 311 of the PATRIOT Act are 

used appropriately and thoughtfully against rogue jurisdictions. Although the PATRIOT Act gives the Administration powerful tools 

against terror financing, my understanding is that the Administration has used its Section 311 powers only once in the context of terror financing. A separate certification regime for terror financing 

ensures that stringent requirements are maintained and revisited 

annually with respect to each nation’s practices on terror financing. 

U.S. News and World Report reported that the State Department 

appears unenthused about a terror financing certification regime 

‘‘because it could end up citing allies like Indonesia, Nigeria and 

the Philippines.’’ This objection precisely highlights the need for a 

certification regime. The Executive Branch needs to formally review the progress of each nation on terror financing annually without regard to whether such a nation is a so-called ‘‘ally’’ of the 

United States. 

Second, the U.S. government should increase sharing of information with the financial services sector as permitted by Section 

314(a) of the PATRIOT Act so that the sector can cooperate more 

effectively with the U.S. government in identifying terror financiers. Helping private sector financial institutions become effective partners in identifying financiers of terror should be a top priority. The procedures of Section 314(a) of the PATRIOT Act which 

23

promote information sharing between the U.S. government and financial institutions to increase detection of terror financing are not 

working as well as they should. Banking industry officials tell me 

that the U.S. government is still not providing financial institutions with adequate information to enable the institutions to detect 

terror financing. 

Financial institutions are used primarily to assist in investigating known or suspected terror financiers, not in identifying unknown ones. Very little information is flowing from the government 

to financial institutions. I recognize that the information that 

would enable financial institutions to become effective partners 

may be highly protected intelligence information. In other industries such as defense and transportation, however, persons can be 

designated by the U.S. government to receive access to certain 

high-value information as necessary. A similar approach could be 

used to facilitate information sharing and cooperation between the 

U.S. government and private financial institutions. I strongly encourage this subcommittee to hold an oversight hearing on Section 

314 of the PATRIOT Act to determine how more effective procedures for information sharing with financial institutions can be developed and implemented. 

Third, the National Security Council (NSC) and the White House 

Office of Management and Budget (OMB) should conduct a crosscutting analysis of the budgets of all U.S. government agencies as 

they relate to terrorist financing. A terrorist financing cross-cut 

would allow policymakers to gain clarity about who is doing what, 

how well, and with what resources. With this information in hand, 

the Administration and Congress can begin to assess the efficiency 

of existing efforts and the adequacy of appropriations relative to 

the threat. 

I thank you and I look forward to your questions. 

[The prepared statement of Mallory Factor can be found on page 

36 in the appendix.] 

Chairman KELLY. Thank you, Mr. Factor. 

Mr. Farah? I want to say, Mr. Farah, I read your book. I am very 

interested in what you have to say here today. 

STATEMENT OF DOUGLAS FARAH, AUTHOR 

Mr. FARAH. Thank you very much, and thank you for the invitation to be here. And thank you, Chairman Kelly, especially for your 

leadership in the investigation of Arab Bank and the possible support for suicide bombers in the Middle East. I think that is an incredibly important part of the terrorist financial relationship. 

Commodities such as gold, diamonds and tanzanite have played 

a vital role in the global terrorist infrastructure. Gemstones have 

played a particularly important role in Al Qaida’s financial architecture and has been used to raise money, launder funds, and store 

value. Gold, for a variety of cultural and logistical reasons, has 

been used primarily as a way to hold and transfer value. These 

commodities are not tangential to the terrorist financial structure, 

but a central part of it. 

Diamonds have also been used extensively by Hezbollah and 

other terrorist groups in the Middle East that have a long tradition 

of access to diamonds in West Africa through the Lebanese DiasVerDate 0ct 09 2002 10:01 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 G:\DOCS\22159.TXT FIN1 PsN: MICAH
24

pora there. Gemstones are ideal for several reasons. They hold 

their value; they are easy to transport; they do not set off metal 

detectors in airports; and they can be converted back to cash when 

necessary. This is especially true of blood diamonds or diamonds 

armed by armed groups, mostly in sub-Saharan Africa in order to 

finance their wars. 

Al Qaida sought to exploit gemstones in West Africa, East Africa 

and Europe almost since its inception. There is strong evidence of 

Al Qaida’s ties to the African diamond trade, despite the reluctance 

of some in the U.S. intelligence community to acknowledge this 

link. The data comes from testimony of Al Qaida members convicted in the1998 U.S. embassy bombings in East Africa; my own 

investigations into the ties in West Africa, particularly to Charles 

Taylor in Liberia and his allies in the Revolutionary United Front 

in Sierra Leone; investigations by the London-based NGO Global 

Witness; Belgian police investigations; and most recently, a growing body of evidence accumulated by the U.N.-backed Special Court 

for Sierra Leone, charged with investigating crimes against humanity in that brutal conflict. 

In two reports presented to some members of Congress, the 

court’s chief prosecutor and chief investigator, each with 30 years 

experience in the Department of Defense, have summarized the 

large volume of evidence of these ties from sources that are different from and independent of other investigations. I would be 

happy to provide members of the subcommittee with any of these 

documents. 

Groups like Al Qaida and Hezbollah chose West Africa as a base 

because in states such as Liberia, Sierra Leone, and others in the 

region, governments are weak, corrupt and exercise little control 

over much of the national territory. Some states like Liberia under 

Charles Taylor were in essence functioning criminal enterprises. 

For the right price, Taylor let Al Qaida, Russian organized crime, 

Ukrainian organized crime, Balkan organized crime, Israeli organized crime and Hezbollah operate under his protection. 

The evidence points to two distinct phases in Al Qaida’s diamond 

activities. The first started sometime before 1996, when bin Laden 

lived in the Sudan and this was aimed at helping to finance the 

organization. The latter years of this activity also overlapped with 

the large-scale Al Qaida-dominated purchase of tanzanite in East 

Africa. 

Wadi el Hage, bin Laden’s personal secretary until he was arrested in September 1998, spent a great deal of time on gemstone 

deals. El Hage’s file of business cards, personal telephone directory 

and handwritten notebooks were introduced as evidence in his 

trial, where he was sentenced to life in prison. The notebooks contain extensive information on buying diamonds and appraising diamonds and tanzanite. There is a page on Liberia with telephone 

numbers and names. His address book and business card file were 

full of the names of diamond dealers and jewelers, many containing 

the purchaser’s home phone number. 

It is not clear how profitable Al Qaida’s gemstone ventures were. 

It is clear that the efforts to acquire gemstones, particularly diamonds, were frequent, widespread and a matter of priority for Al 

Qaida. In late 1998, following the Al Qaida attacks on the U.S. emVerDate 0ct 09 2002 10:01 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 G:\DOCS\22159.TXT FIN1 PsN: MICAH
25

bassies in Kenya and Tanzania, Al Qaida moved to the second 

phase of its diamond operations. The impetus was the Clinton administration’s successful freezing of $240 million in assets belonging to the Afghan Taliban government and bin Laden. The funds 

were mostly stored in gold reserves in the United States central 

banks. 

The picture of Al Qaida’s activities in West Africa changed dramatically in the latter half of 2000, when senior Al Qaida 

operatives arrived in Monrovia, Liberia. Having set up a monopoly 

arrangement for the purchase of diamonds through Taylor with the 

RUF, Al Qaida buyers went on a spree that lasted several months. 

But here the intention was not to make money, but rather to buy 

the stones as a way of transferring value from other assets. Telephone records from the middlemen handling the purchases show 

telephone calls to Afghanistan until September 10, 2001. The available evidence gathered by Belgian police and bank investigators 

points to Al Qaida purchasing some $20 million worth of RUF diamonds during the 14 months prior to 9/11. 

In the terrorist financial architecture, the use of gold is different 

from that of precious stones. Gold is used primarily to store value 

and facilitate the movement of money cross the world’s financial 

markets. Cultural and regional factors have made gold a favorite 

commodity of both the Taliban and Al Qaida. In the waning days 

of Taliban control in Afghanistan, Sheik Omar and bin Laden sent 

waves of couriers carrying gold bars and bundles of dollars, the 

treasury of the terrorist movement, across the porous border of Afghanistan into Pakistan. 

From the Afghan-Pakistan border area, the assets were consolidated and taken by couriers to Karachi, Pakistan. There, the 

Taliban consul general oversaw the movement of the wealth to 

Dubai in the UAE. The transfer to Dubai relied on couriers and the 

virtually untraceable informal money transfer system known as 

hawala. Taliban consul Kaka Zada personally acted as a courier at 

least once, carrying $600,000 in a diplomatic pouch to Dubai in late 

November, 2001. 

During the war in Afghanistan, the Taliban promised to clear the 

roadblocks to petty warlords, and in exchange to receive from the 

transportation syndicates substantial backing, mostly in gold. Donations to the Taliban and Al Qaida from wealthy Saudi backers 

was also made in gold. When U.S.-led forces occupied Afghanistan, 

they found Al Qaida training manuals that included not only chapters on weapons and explosives, but sections on how to smuggle 

gold. Using specially-made vests, gold smugglers can carry up to 80 

pounds, worth $500,000, on their person. Cash is far bulkier. There 

have also been rewards offered for killing U.S. officials in Iraq, payable in gold. 

There are several lessons one can draw about this financing of 

Middle East terror in West Africa and the terrorist use of commodities. One is that terrorist groups are sophisticated in their exploitation of gray areas where states are weak, corruption is rampant, 

and the rule of law nonexistent. They correctly bet that Western 

intelligence services do not have the capacity, resources or interest 

to track their activities there. 

26

A second lesson is that terrorist groups learn from their own mistakes, as well as from each other. They are adaptable in ways that 

make them extremely hard to combat. Hezbollah has been using 

diamonds from West Africa to finance its activities for 20 years. Al 

Qaida operatives simply plugged into the same network. 

The third lesson is that small clues matter in trading terrorist 

funding and the use of commodities. There has been a limited understanding of the financial structure of Al Qaida and Hezbollah 

both before and after 9/11. The intelligence community carried out 

its first comprehensive assessment of Al Qaida’s financial structure 

in 1999, 11 years after the organization came into existence. Rather than understanding the web of commodities, charities and individual donors that filled Al Qaida’s coffers, the conventional wisdom was that bin Laden was using his personal wealth to finance 

his organization’s operations. 

A fourth lesson is that terrorist networks and criminal networks 

can overlap and function in failed states like Liberia. Commodities 

like diamonds are the coin of choice as the different groups provide 

different services to governments or rebel groups in exchange for 

cheap access to commodities. 

The fifth lessons is that the intelligence community reacts very 

poorly to information it does not initiate. Thus, much information 

generated by journalists, the Special Court for Sierra Leone, and 

others was dismissed out of hand. More than 2 years later, the tide 

is changing, but if the terrorists’s use of commodities is to be understood and effectively cut off, the intelligence community must 

begin to look beyond the traditional methods of raising and moving 

money, and begin to look at commodities much more seriously. 

Thank you, and I look forward to your questions. 

[The prepared statement of Douglas Farah can be found on page 

41 in the appendix.] 

Chairman KELLY. Thank you, Mr. Farah. 

Mr. Factor, certification regimes have enabled Congress and the 

public to clearly measure how well other countries perform on various issues. They also allow investors to measure how well a market meets the demand for safety and transparency. If a certification 

regime for terrorist finance were to be put in place, what kind of 

metric would be the most use to the financial markets? 

Mr. FACTOR. That is a very good question. I think that the 

metrics are fairly simplistic. FATF in the past has looked at rules 

and regulations against terror financing, but almost no one has 

looked thoroughly at implementation. I think the implementation 

metric is absolutely vital. A number of countries have some of the 

best rules and regulations on their books, but their implementation 

of those rules and regulations is poor, to say the least. 

I think that the implementation of rules, as well as the rules and 

regulations, would be the key metric. 

Chairman KELLY. Thank you very much. 

Mr. Farah, your reporting on some of the issues relating to the 

use of precious stones by Al Qaida in West Africa has been polarizing in some circles. As you well know, some of your assessments 

and those made by others were not accepted by the 9/11 Commission report on terror finance. I have discussed this with my staff, 

and apparently they had discussed this with you. You know that 

27

many of us in Congress are trying to approach the issue with an 

open mind. We simply want to learn more about how this issue 

might be affecting the financial infrastructure of the groups that 

are trying to attack us. 

Some people I know and deeply respect disagree with your assessments. Others seem ambivalent. They say that you are right; 

this happened several years ago; it is largely a moot issue so far 

as our current efforts are concerned. Of course, there are others 

who would say the same thing that you have. I recall, for instance, 

a news report from last August in which a senior U.S. intelligence 

official said, ‘‘Charles Taylor was in the back pocket of Al Qaida. 

He was helping them launder money through the diamond mines.’’

I noted this morning an article that is in the Detroit Free Press 

with a headline that says, ‘‘Al Qaida has bases in Africa.’’ The 

opening sentence reads, ‘‘Al Qaida has opened recruiting and training bases in Nigeria, Somalia, Tanzania, and Uganda, the United 

Nations said Tuesday in a report that warned that terror group attacks should be expected to increase.’’ With unanimous consent, I 

am going to make a copy of this article from the Detroit Free Press 

a part of this record. 

One thing I think that should be clear to everyone is that the 

issues surfaced by your investigations remind us that there is a 

very dense cloak of uncertainty that we are trying to pierce in this 

fight against terrorism. Many parts of this terrorist apparatus cannot be fully seen and they never will be. But some things that we 

believe to be true dangers may not be provable in a court of law, 

and I think we have learned that our inability to find fire in certain areas where there is smoke does not mean that we should ignore that thick smoke. We cannot afford to. 

I am interested in hearing your thoughts on why some of the 

central assessments of your book are so important to us right now. 

Can you give a perspective on why the issues raised by your book 

and the other writings should warrant continued attention in our 

fight against terrorist financing, and about why we should have a 

strong presence in such places such as Africa where we previously 

may not have had a very robust intelligence operation? 

Mr. FARAH. Thank you for the question. 

I think you are right. I think that there has been a lot of discussion about the use of commodities, especially diamonds, in the intelligence community. I think that one of the huge differences between the initial reports that were done by myself and others and 

what has come subsequently is that we actually spent considerable 

time on the ground, in some cases years, getting to know the structures. It is very hard to send a two-person team in for one week 

into a country and expect them to come back with an adequate assessment of what actually happened there. 

I think there is also a real loss of the sense of the history of what 

Al Qaida was doing, which you can only gain if you go back and 

read the trial transcripts and read bin Laden’s early writings. If 

you look at that extensively, you will find that gemstones, especially in the trial of Wadi el Hage and others, are a consistent in 

huge part with what they talk about. It is not an isolated incident. 

Finally, when they expelled a Senegalese man from Germany 

last year, the BBC asked him if he really knew bin Laden. He said 

28

yes, he had visited bin Laden three times while bin Laden was in 

the Sudan. They said, why were you doing that? And he said because bin Laden was financing my diamond deals between West Africa and Belgium. It was interesting. The weight of evidence and 

the things especially the Special Court has come up with, from 

being on the ground over a considerable period of time varies with 

the assessment of people who can come and go, or only read someone’s intelligence report, especially when your human intelligence 

in that region is essentially nonexistent. 

As to why it is relevant now, I think it points to an MO of terrorist structures. In my mind, it is tremendously significant that 

Hezbollah has developed this incredible financial apparatus using 

diamonds out of West Africa that Al Qaida was simply able to plug 

into across the Shi’a-Sunni divide and into a business thing. What 

is even more stunning, and I go into it a little bit in my written 

testimony, is that on the ground in Africa, especially in the DRC 

and in Sierra Leone, you can find Israelis who are doing business 

with Hezbollah knowing who each other are and they are perfectly 

happy to do it because it is business there. It is a way of moving 

money and generating wealth. It is an MO that is very easy to use 

and escape public notice of scrutiny. 

Finally, I would say that the presence of RUF in Guinea just before Christmas of two South Africans who had initially been arrested with Mr. Ghailani in Pakistan, Ghailani being one of the 

key people in my book and a key person in the Al Qaida financial 

infrastructure. When he was arrested in Pakistan in July of last 

year, these two gentlemen were arrested with him. They were sent 

back to South Africa. They were freed after 2 days in South Africa. 

They were arrested in December trying to get from Guinea into Sierra Leone into the diamond fields. 

To me, especially presence of Dr. Ganchi who was providing medical attention to Ghailani when he was arrested, and his attempt 

to get back to the diamond fields indicates that there is a clear 

threat that this is something that they continue to want to do. 

Finally, I would point to the work of the U.S. European Command in the military. They have been on the ground there for a 

significant period of time and have looked at my reporting and 

other reporting and their own reporting over the last 3 years. They 

have come out very strongly and publicly, General Wald and others, that this in fact is happening and is an ongoing threat to us. 

So I think it is an MO that these people use and will continue 

to use because it works. Until you cut it off, they will keep using 

it. 

Chairman KELLY. Thank you. 

Mr. Gutierrez? 

Mr. GUTIERREZ. Mr. Factor, in your testimony you indicate that 

the U.S. government should increase its information sharing with 

the financial services industry under Section 314(a) of the PATRIOT Act. I agree that the filers of CTRs and SARs would benefit 

from learning what data the government found most useful. I understand that the regulators are working currently on examiner 

guidance to provide some certainty and consistency between what 

is said by the policymakers and what is done by the examiners in 

the field. I urge them to issue this guidance as soon as possible. 

29

Mr. Factor, what information do you believe would be most helpful to the industry, and how do you recommend the information 

sharing be improved and accomplished? 

Mr. FACTOR. First of all, thank you for the question. You are 

right that there is a need for fair information. You really brought 

up two separate issues, and I would like to address them both, if 

I may. One is the CTR issue. In 2003, which is the last available 

statistic I have, there were over 12.7 million CTRs filed. I have 

been told by bank representatives that it takes about a half-hour 

to process each CTR, to put that number in some perspective. The 

largest floating vessel in the world ever built was the Queen Mary 

II a few years ago. It took about 6 million man-hours to build that 

vessel. We spend more than 6 million man-hours on CTRs each 

year. 

The problem I find is that when we ask Treasury specifically if 

CTRs led to any arrests, convictions or prosecutions, they could not 

point to a single one. I am not against collecting information. I am 

against collecting information that cannot be used. Likewise, with 

respect to the suspicious activity report, SARs, as you brought up, 

in 2003, again the last full statistic I have, there were over 288,000 

of them filled. I cannot imagine how we could follow up on 288,000 

SARs. 

I think one of the problems is that we are collecting information 

for the sake of collecting information. Just the sheer collecting this 

information puts undue burdens on businesses and the American 

people. I believe that information collection may sometimes be necessary, but it is not necessary if you are not going to do anything 

with the information. 

I am not intimately knowledgeable about FinCEN, but I look at 

FinCEN as some huge, huge library with stacks of books with no 

card catalog. It is all there, but if you cannot use, it is not as much 

value. I think the real key is using the information that we get and 

figuring out a way. I mean, look at what we are doing with all 

sorts of logic that is being programmed into things. We have our 

Silicon Valley, our high-tech industries. We could utilize businesses 

that have knowledge of how to take information like this and put 

it into some way that is usable, not just collect it for the sake of 

collecting it. 

Your second part about information sharing, and I think that is 

one of the key things. Again, I ask you all to please hold a hearing 

on Section 314 because I think it would be extremely useful, and 

how to share information for the benefit of the American people. In 

other industries like the transportation industry and industries 

like, oh, a number of other industries, we share information that 

is classified, high-value information. We designate people. I think 

you are going to have to designate some people. I think the outcome is going to be much more sharing. 

I think coming from the Treasury Department, people have to be 

taught and informed how to use that information and the sharing 

of information, not just how to follow up on suspects. I do not think 

the procedures and policies necessary are in place yet, and I think 

we need to put them in place. I think it is Treasury’s obligation to 

do that, and I believe they eventually will, but I would rather see 

them do it sooner than later. 

30

Mr. GUTIERREZ. I think we would be well served to look at the 

section and to have hearings, particularly on this section, because 

you have over 200,000 SARs filed and maybe trying to find a mechanism so that we can pick what is relevant information. I think 

bankers are just being very, very careful in following the law, and 

being careful and if something looks suspicions, let’s send it in, 

when we may not need that information. 

Go ahead. 

Mr. FACTOR. I am sorry. I do not mean to interrupt you. 

First of all, it is almost 300,000 2 years ago. Second of all, some 

bankers are filing everything but the kitchen sink and others are 

filing almost nothing. There are no real set policies and procedures. 

As a member of the New York State Bank Board, I talk to bankers 

frequently. I think we need leadership and guidance on this issue 

to a greater degree than we have now. I understand that Treasury 

is doing a good job and they are moving forward. I think we have 

to move forward faster and we have to move forward in a more methodical way. I agree with you completely, and I thank you for your 

interest in this because I think it is vital to stopping the financing 

of terror. 

But remember, if I may have just 1 more second, the only true 

intelligence in this whole area of terrorism is with respect to money 

and money equivalents. If we can really begin to use finance intelligence effectively and zero-in on it, we have ways of stopping terrorism. The actual cost of an act of terror is not really the true cost. 

The true cost is the infrastructure needed for those organizations, 

and those organizations’s resources determine their ambitions. The 

greater their ambitions, the more resources they develop. We can 

find them if we follow the money. 

Mr. GUTIERREZ. Thank you. My time is up. Thank you very 

much. 

Mr. FACTOR. I apologize. 

Mr. GUTIERREZ. No, it is okay. Thank you so much for coming. 

My time is up. 

Maybe we could figure out a way where I get an e-ticket now, 

it is always good because I used to always lose my ticket. Now I 

just show my ID. Maybe all these hundreds of thousands of pieces 

of paper, they do not have to be on paper. Maybe we can figure out 

a way to electronic them. That is just one instance, because until 

we do this stuff electronically, we are never going to be able to garner the information and be able to siphon what is really necessary. 

Thank you so much for coming, Mr. Factor, and thank you so 

much for being here this morning. 

Chairman KELLY. Thank you, Mr. Gutierrez. I think there are a 

lot of us who would like to see the paper chase end and go electronic. The problem is the cost of going electronic at this point, I 

think. We are looking at it, but we have been looking at it. As you 

know, this committee has been very instrumental in trying to make 

sure that FinCEN especially has the money it needs to be an electronic agency. 

We go now to Ms. Moore. 

Ms. MOORE OF WISCONSIN. Thank you, Madam Chair. 

I really appreciate this panel for coming forward. Mr. Factor, I 

was particularly drawn to comments that you made on page two 

31

of your testimony, the fourth paragraph, where it says, ‘‘the certification regime should provide for sanctions under Section 311 of the 

PATRIOT Act, including denial of U.S. foreign assistance monies 

and limitations on access to U.S. financial systems on nations that 

do not receive certification. Of course, sanctions would be subject 

to waiver by the President if required by vital U.S. national interests.’’

I guess that leads me into the real contradiction that I think Mr. 

Farah raised in his testimony. This certification regime, how does 

it deal with, and I am just going to throw out some examples, we 

talked about Liberia. I mean, they were our buddies, our friends, 

as long as there were hostilities against the Soviets; Saudi Arabia; 

we are a debtor nation to China. We need the oil in Nigeria and 

so on and so forth. The South African diamond industry, in Mr. 

Farah’s testimony he talked about how we did not want to acknowledge that because it would be a blemish on the CIA and we 

had a relationship with them. 

How, in fact, will this certification regime process enable us to 

certify nations, be they friend or foe, particularly when our vital interests can trump anything else? 

Mr. FACTOR. You raise a very good point. In the drug area, Presidential waivers have been used. I think that when you are talking 

about terror financing, the public will react a little differently, but 

as important as that is, the fact is that we do not even name and 

shame those people who are helping finance terror which is killing 

U.S. citizens. I cannot even imagine not enacting a certification regime for terrorist financing because we want to keep certain issues 

off the table. I do not think we can any longer keep those issues 

off the table when our domestic security is involved. 

You may want to grant security waivers, but I think the naming 

and shaming process is the barest minimum step we have to take. 

Ms. MOORE OF WISCONSIN. Madam Chair, a follow-up? 

Chairman KELLY. Yes, of course. Anytime the green light is on, 

ma’am, you have that time as yours. 

Ms. MOORE OF WISCONSIN. Okay. 

Chairman KELLY. But at red, I am going to cut you off. 

Ms. MOORE OF WISCONSIN. Yes, ma’am. 

I guess I am wondering what sanctions we have against people 

where we are in their pocket. We owe them; we need their resources; we need their oil. Your testimony seems to suggest that 

this certification regime process would somehow hold people to task 

because we would have some sanctions. It is not clear to me what 

we could do to the examples that I gave. Maybe Mr. Farah might 

want to jump in, because I am very, very interested in this as a 

process question. 

Mr. FACTOR. Section 311 provides specific sanctions. It provides 

limitations on access to U.S. financial systems, which is deadly to 

the financial systems of another country. It would hurt their ability 

to have a financial system. That is for openers. Sanctions also include denial of U.S. foreign assistance monies. There are a whole 

host of things that can be done. 

What has happened is, we are not in the pocket of a lot of these 

countries. We have just taken certain issues off the table, which 

has been going on for multiple administrations. Saudi Arabia is an 

32

example, and there are other countries besides Saudi Arabia. We 

have to treat them in the way we treated the Soviet Union and 

later Russia, the way we treat China, where no domestic issues are 

off the table. In the past, as an example, our relationship with 

Saudi Arabia was such that we would help with their security; they 

would help with regional security and oil, and the Palestinian 

issue. Domestic issues were off the table. Again, this goes back 

multiple administrations. 

The times have changed. Our domestic security is involved. 

There can be no longer domestic issues which affect us that are off 

the table. I do not believe we are in anyone’s pocket. 

Chairman KELLY. Thank you, ma’am. 

The Chair would point out that there are certain problems with 

a public listing of noncompliant countries, not the least of which 

would be investment by outside companies and some of the ways 

to pull some of these countries back into cooperation is to make 

sure that they have a vital stake in a safe world. We can explore 

that further. 

I would like to ask a question of both Mr. Factor and Mr. Farah. 

The cultural differences in financial institutions can have a powerful affect on intelligence analysis, as I believe the testimony of both 

of you made clear. I want to know if you have an idea about what 

steps Congress should be taking to try to foster an understanding 

of these differences. I am just throwing that out to both of you for 

an answer. Whoever wants to can go first. 

Mr. FARAH. I would say that the first thing that comes to my 

mind is that, and it is one of the areas that this administration is 

seeking to remedy quickly, but I think in some areas not in the 

right geographic areas, and that is I do not think you can do this 

without good human intelligence. I do not think you can understand the cultural factors and understand, for example, in West Africa, how the Lebanese diaspora community controls through intermarriage and different groups that work together and families that 

work together, a lot of the commodity trade, not only diamonds, but 

frozen chickens, wines, and everything. 

Until you understand how those relationships work and what the 

clan structure is that imposes order on certain types of commodity 

trades, you cannot begin to understand how the actual system 

works. That is one of the big black holes in the intelligence community’s understanding of what goes on in West Africa, because they 

have never done this type of analysis of how things moves. 

I think for Congress, I am not sure what the role would be except 

to be pushing the community in that direction. I think we also have 

to be, as several members mentioned earlier, incredibly sensitive to 

the impact of going after, for example, the hawala system. As people mentioned, millions and billions of dollars flow into Pakistan 

and India through that system. The people have no other way to 

receive that, and you could cut that off and bring those economies 

to a halt, an unintended consequence for a very small trickle of 

dirty money. 

I would also say that in diamonds, you are talking probably in 

the blood diamond trade that is probably never more than 7 or 8 

percent of the diamond trade, of which the terrorists probably took 

10 percent of that. You are talking about a minuscule flow of dirty 

33

stuff through largely clean operations. If you take a sledge hammer 

approach to regulation, you end up ruining a lot more than you end 

up fixing. 

So I would be wary of regulation, and I would say that what 

Congress’s main role perhaps could be is in pushing Treasury and 

FinCEN and the intelligence community to look at these interculturally appropriate ways to regulate, and then coming back with 

the information they gather. 

Chairman KELLY. Thank you. 

Mr. Factor, the cultural differences within the financial institutions themselves sometimes have an effect on the intelligence analysis. What would you say to that question about what Congress 

should be doing to try to take into consideration the understanding 

and development of the differences? 

Mr. FACTOR. There are cultural differences, no question about it, 

but I think major cultural difference, and this has to be explored 

and worked on through bodies like the United Nations, is that the 

notion that any act of terror be legitimized by a charitable activity 

or some political motivations of the perpetrator has to be completely, totally, not be allowed to be bought into. No cause, however 

legitimate, justifies the use of terror. 

Indeed, the use of terror must delegitimize even the most worthy 

cause. We should not allow, and our true allies should not allow 

people to be part of it, countries and jurisdictions to be part of the 

world community that does not accept that principle. 

For us to allow people to be our allies and get away from that 

principle makes no sense to me. I think that is a foreign policy 

issue that Congress should be taking up, specifically those differences that you ask about and talk about in many cases have to 

do with, a lot of these societies are opaque. Things happen in the 

shadows. As long as things happen in the shadows, then these societies allow this opaqueness to exist with regard to enforcement of 

rules and regulations, we will never change that culture. 

And if we do not change that culture, we will allow breeding 

grounds for terrorism, and the mother’s milk of terrorism, which is 

money and the financing of terrorism to exist. It is our fault for not 

pursuing that. 

Chairman KELLY. I appreciate the comments from all of you. 

This is a very busy day, as you probably noticed people coming 

in and out from this panel. So the Chair notes that members may 

have additional questions for this panel. Personally, I have a couple 

that I am going to submit in writing, and others may wish to submit in writing. 

So without objection, the hearing record will remain open for 30 

days for members to submit written questions to these witnesses 

and to place their responses in the record. 

I thank both of you for your time this morning. It has been very 

informative and I hope will be very helpful to us in the long run, 

both with our dealings with agencies and in drafting legislation. 

With that, this hearing is adjourned. 

[Whereupon, at 11:56 a.m., the subcommittee was adjourned.] 

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A P P E N D I X

February 16, 2005

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