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S. HRG. 108–432

NOMINATION OF ARNOLD I. HAVENS

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

ON THE

NOMINATION OF

ARNOLD I. HAVENS, TO BE GENERAL COUNSEL FOR THE

DEPARTMENT OF THE TREASURY

NOVEMBER 18, 2003

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

DON NICKLES, Oklahoma

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

TOM DASCHLE, South Dakota

JOHN BREAUX, Louisiana

KENT CONRAD, North Dakota

BOB GRAHAM, Florida

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

KOLAN DAVIS, Staff Director and Chief Counsel

JEFF FORBES, Democratic Staff Director

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Thomas, Hon. Craig, a U.S. Senator from Wyoming ............................................ 1

Smith, Hon. Gordon, a U.S. Senator from Orgeon ................................................ 1

ADMINISTRATION NOMINEE

Havens, Arnold I., nominee to be General Counsel for the Department of

the Treasury ......................................................................................................... 2

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Prepared statement .......................................................................................... 7

Havens, Arnold I.:

Testimony .......................................................................................................... 2

Prepared statement .......................................................................................... 8

Responses to questions from Senator Grassley .............................................. 9

Biographical ...................................................................................................... 12

Smith, Hon. Gordon:

Opening statement ........................................................................................... 1

Thomas, Hon. Craig:

Opening statement ........................................................................................... 1

(III)

(1)

NOMINATION OF ARNOLD I. HAVENS, TO BE

GENERAL COUNSEL FOR THE DEPARTMENT

OF THE TREASURY

TUESDAY, NOVEMBER 18, 2003

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 1:00 p.m., in

room 215, Dirksen Senate Office Building, Hon. Craig Thomas presiding.

Also present: Senators Smith and Bingaman.

OPENING STATEMENT OF HON. CRAIG THOMAS, A U.S.

SENATOR FROM WYOMING

Senator THOMAS. Welcome. I think we will get started here.

There are lots of things going on today, but we are happy to be able

to go ahead and hold this session.

I would like to welcome Arnold Havens to the Finance Committee this morning. Mr. Havens has been nominated for the important position of General Counsel for the Department of Treasury, a position for which I believe he is well qualified.

Mr. Havens has most recently served as senior vice president of

Governmental Affairs for SCX Corporation. Mr. Havens has also

held a number of other posts in local and Federal Government, including service as Assistant Legislative Counsel for the House Energy and Resource Committee.

As General Counsel for the Department of Treasury, Mr. Havens

will be called upon to serve as a senior legal and political advisor

to the Secretary, to the Deputy Secretary, and other senior departmental officials. The General Counsel also serves as head of the

Treasury Legal Division and works with responsibility for all legal

work of the department.

Would you like to make a statement, Senator?

OPENING STATEMENT OF HON. GORDON SMITH, A U.S.

SENATOR FROM OREGON

Senator SMITH. Thank you, Mr. Chairman, colleagues. I am very

pleased to be here to support Arnie Havens, whom the President

has nominated to be the General Counsel of the Department of

Treasury. I have known Arnie for many years and have admired

his work with John Snow at CSX Corporation. He has been responsible for providing advice and counsel on Federal and State affairs

to that company.

2

I think, given his experience as Minority Counsel and Staff Director to the House Energy and Commerce Committee, he is very,

very well qualified to serve in this, and I know he enjoys the support of the Secretary of the Treasury, who has confidence in his

counsel.

So, it is my real pleasure to welcome you, Arnie, to this committee and tell you how anxious I am to see you confirmed and to

get on with your duties of public service once again.

Thank you, Mr. Chairman.

Senator THOMAS. Senator Bingaman, did you want to speak now?

Senator BINGAMAN. Mr. Chairman, I just wanted to ask a question after the nominee makes his statement, if I could.

Senator THOMAS. All right. Very well.

Senator Baucus has a statement he would like to have submitted

to the record, and we will do that.

[The prepared statement of Senator Baucus appears in the appendix.]

Senator THOMAS. I just left a meeting with family practice consultants and your wife was to have been there, but needed to be

here, I understand. So that’s great.

So, Mr. Havens, if you would go right ahead, sir. We appreciate

having you here and look forward to your comments.

OPENING STATEMENT OF ARNOLD L. HAVENS, TO BE GENERAL COUNSEL FOR THE U.S. DEPARTMENT OF TREASURY,

WASHINGTON, DC

Mr. HAVENS. Well, thank you, Mr. Chairman. Thank you, Senator Smith and Senator Bingaman, for the opportunity to appear

before you today, and especially for the prompt scheduling of this

hearing.

I am honored to be President Bush’s nominee to serve as the

General Counsel for the Department of Treasury and I am grateful

to Secretary Snow for his confidence in me.

I know the time is brief. If you would permit, Mr. Chairman, I

would like to introduce—although you have already started that

process—the members of my family that are here.

Senator THOMAS. Absolutely, if you will, please.

Mr. HAVENS. My wife, Deb Hardy Havens, who is an inspiration

to all of us the family, and my best friend. My daughter Brittany,

who is currently in eighth grade at Cooper Middle School in

McLean, and who is quite a student, but whose real passions are

horses, music, and basketball.

And my son Jonathan, who is in his third year at the University

of Virginia in Charlottesville, and who aspires to be a lawyer, and

also 1 day hopefully run for elected office.

Senator THOMAS. Wonderful. Welcome. Good to have you here.

Mr. HAVENS. And I would mention just briefly, although she

could not be here, my daughter Alyssa, who is an on-air reporter

for an NBC affiliate in Michigan.

Mr. Chairman, as you may know, I grew up in Evanston, Illinois.

My parents were passionate about a number of things, but chief

among them was assuring that my sister and I received a quality

education. They sacrificed much to give us that opportunity.

3

They also taught us, by example, the importance of giving back

to our community in recognition of the obligation we have as citizens living in a democracy. Volunteering and assuming positions of

responsibility in community organizations, albeit at times challenging, is simply a given in our family.

These important lessons, and others, help explain why, for me,

public service is both a privilege and an obligation. The opportunity

to return to public service at this time seems especially important

in this post-9/11 environment. Today our Nation faces many challenges that we can, and must, meet so that our children and their

children’s futures and freedoms remain bright.

I welcome the opportunity, if confirmed, to contribute what I can

towards meeting these challenges. I understand the responsibilities

of the General Counsel of the Department of Treasury are great.

The legal issues confronting the Department are both important

and wide-ranging, among the most sweeping in government, ranging from the financial war on terrorism to interpretation of the Tax

Code. Decisions of the Department directly impact individual citizens in businesses in very profound and personal ways.

It is clear to me that assuming leadership of the Treasury’s Legal

Division and providing candid advice to the Secretary and Treasury

clients will be both challenging and immensely rewarding, if I am

confirmed.

I welcome this challenge and pledge to you that I will work hard

every day to carry out my responsibilities should the Senate choose

to confirm me. I thank you again, Mr. Chairman, for allowing me

to appear before you today, and I am happy to respond to your

questions.

[The prepared statement of Mr. Havens appears in the appendix.]

Senator THOMAS. Thank you very much.

There are several questions that are asked of all nominees, if I

may do that now, please.

First, is there anything you are aware of in your background that

might present a conflict of interest with the duties of the office to

which you have been nominated?

Mr. HAVENS. No, Senator.

Senator THOMAS. Second, do you know of any reason, personal or

otherwise, that would in any way prevent you from fully and honorably discharging the responsibilities of the office to which you

have been nominated?

Mr. HAVENS. I do not.

Senator THOMAS. Finally, do you agree without reservation to respond to any reasonable summons to appear and testify before any

duly-constituted committee of Congress, if you are confirmed?

Mr. HAVENS. I do.

Senator THOMAS. All right. Thank you.

Senator Bingaman?

Senator BINGAMAN. Thank you very much. Congratulations to

you on your nomination. I have every reason to believe you will

serve with distinction.

I wanted to raise one issue, and really ask you to look into it,

if you would, then report back to the committee, or to the Chairman, Ranking Member, and myself.

4

I have recently been reading something about an Office of Independent Review at the Internal Revenue Service. This office, several months ago, reversed the position of the Internal Revenue

Service in a Tax Court ruling on a case involving charitable organizations affiliated with former Speaker Gingrich.

I understand the Internal Revenue Service has recently announced that they would no longer be using this process. Although

they have not made any formal announcement of that, as I am

aware, and there has been no change in the Internal Revenue Manual, the information I have is that a decision was made to eliminate the process, effective in August.

As far as I can tell, and this is sort of quoting from newspaper

accounts which could be inaccurate here. This is in a Roll Call article a couple of weeks ago, or a week ago. It says, ‘‘The independent

review process established in 2002 was created to provide another

avenue of appeal for taxpayers involved with complex cases, according to IRS officials.

‘‘Critics have said that it was an extraordinary process with no

accountability. The decisions involving the Gingrich groups are the

only matters publicly known to have been handled under the review process.’’ Then, as I say, the latest word is that the review

process has now been disbanded.

Obviously, this raises real questions about whether there we

have a circumstance that is less than an even-handed enforcement

of our tax laws. I guess what I would like you to try to find for us

and report to the committee on, is explanation about how this Office of Independent Review was established, what was the impetus

for it, what decisions it did make, why was it disbanded, if it was,

as this account indicates.

I am informed that some earlier inquiries to the IRS have been

responded to by a claim of privilege under IRC Section 6103. If you

think that that kind of a privilege applies to this kind of information and that the committee cannot have access to it on that basis,

I wish you would give us a full explanation of your grounds for concluding that.

Mr. HAVENS. Senator, if I am confirmed, I would be pleased to

look into that matter and report back to the committee.

Senator BINGAMAN. Thank you very much. That was the only

issue that I wanted to raise. I think it is important that the average taxpayer have confidence that the tax laws are being fairly applied and fairly administered by the IRS. I think they have a great

tradition of doing that over many, many years, and I would hate

to see that lost here because of this kind of incident. Thank you.

Thank you, Mr. Chairman.

Senator THOMAS. Thank you.

One quick question, then we will go to Senator Smith. Will you

have a role in efforts to police corporate fraud, and what is your

general view and thought about that matter?

Mr. HAVENS. Senator, I have had an opportunity to briefly discuss that with Secretary Snow. If confirmed, it is my understanding that he would ask me to continue some of the fine work

that former General Counsel David Aufhauser was engaged in in

serving on the Corporate Fraud Task Force headed by the DepartVerDate 11-MAY-2000 11:22 May 06, 2004 Jkt 092535 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 93363.000 SFINANC2 PsN: SFINANC2
5

ment of Justice. I would look forward to doing that, given the opportunity.

Senator THOMAS. So it is your feeling that is a legitimate role for

the Department?

Mr. HAVENS. Yes, I believe it is.

Senator THOMAS. Senator Smith?

Senator SMITH. I have no questions for the witness. Just, again,

to welcome him and thank him for his service.

Senator THOMAS. What would—and I know this could be long,

but you do not need to do that—you see as your priorities as you

enter into this challenge?

Mr. HAVENS. Senator, in the first instance, if confirmed, my principle responsibility would be to serve, as you indicated in your

opening remarks, as the chief legal officer for the Department and

provide advice to the Secretary and other Treasury clients.

Beyond that, it seems to me that some of the work that, again,

David Aufhauser has been involved with in helping the Secretary

manage, particularly in the era of terrorist financing, is one that

I would anticipate, certainly preliminarily, helping the Secretary

continue to be involved with.

There are a range of other issues that the Department, as I indicated in my opening statement, touches, the pension area and the

tax area. My sense is that I will be there and be involved in those

things as directed by the Secretary and as needed by the other clients of the Treasury Department, should I be confirmed.

Senator THOMAS. Thank you. Well, it is interesting that, more

and more, there are aspects of financial Treasury business expanding into all different kinds of things in the private sector. I presume that’s one of the things that you will be concerned with.

So, I think we are delighted to have you here. I think everyone

is looking forward to your confirmation and to get into the task before you. Even though this has been very short, it is an important

aspect of it and we appreciate your being here. We welcome your

family. We look forward to working with you in the Department.

Mr. HAVENS. Thank you, Mr. Chairman, very much.

Senator THOMAS. Thank you very much.

The committee is adjourned.

[Whereupon, at 10:19 a.m., the hearing was concluded.]

(7)

A P P E N D I X

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

PREPARED STATEMENT OF HON. MAX BAUCUS

Mr. Chairman, today this Committee meets to consider the nomination of Mr.

Arnie Havens to become the chief legal and policy advisor to the Treasury Secretary.

Mr. Havens, I’d like to welcome you and your family. Public service is a noble undertaking. While serving requires sacrifices by you—your family will also share this

burden. We appreciate your willingness to accept this important position.

The Treasury General Counsel is responsible for the supervision of more than

1,400 Treasury Department lawyers. These attorneys are actively engaged in tax,

banking, finance, and international affairs. Their legal analyses and decisions affect

us all.

But the position of General Counsel is not just the managing partner of one of

the government’s largest law firms. The General Counsel carries a heavy, substantive load.

The General Counsel serves as they Chairman of the National Security Council

policy coordinating committee on terrorist financing. He is the Secretary’s representative on the Department of Justice Corporate Fraud Task Force and counsel to the

Committee on Foreign Investment in the U.S.

In addition, the General Counsel is responsible for overseeing the Treasury Department and IRS’s vast rulemaking authority. Rule-making is one of the most important tasks that Treasury performs. The General Counsel has a special responsibility to ensure that Treasury facilitates rulemaking procedures in a manner consistent with Congressional intent.

As the top lawyer at Treasury, the General Counsel has direct oversight over

Treasury’s economic sanctions program, financial crime, investigations and USA Patriot Act regulatory responsibilities.

Mr. Havens, you will have plenty on your plate, but for the time being, you will

not have much help. There are many empty seats at Treasury. This is a troubling

fact, particularly when considering the important role Treasury is playing in the

war on terrorism.

These vacancies include the Deputy Secretary, the Under Secretary for Domestic

Finance, the Assistant Secretary for Economic Policy, the Under Secretary for Enforcement, the Assistant Secretary for Enforcement, the Inspector General for Tax

Administration, and the IRS Chief Counsel. It is important that these positions be

filled.

Today’s hearing provides an opportunity to hear your plans for the Office of General Counsel. I am particularly interested in the role you personally expect to play

in the war on terrorism.

As you know, the Treasury Department is the principal policymaker in five areas

of enforcement that concern national security: (1) terrorist financing, (2) money

laundering, (3) economic sanctions, (4) counterfeiting, and (5) the development of resilient financial infrastructure.

Your predecessor, David Aufhasuer, recently testified before Congress about the

war on terrorism.

He said ‘‘nothing in this shadow war is more achievable and more sustainable—

nothing has more immediate real world consequence—than to deny terror of its currency. There may be an infinite number of ways that a terrorist cell can divine how

best to apply one hundred thousand dollars in funds to jihad. But all such violent

invention is forfeit if the money never materializes.’’

8

However, Mr. Aufhauser recently acknowledged that what is frequently lacking

at Treasury is direct authority and resources to ensure that policy initiatives for

which Treasury is held accountable are put into practice.

He said ‘‘Treasury no longer has a police force to investigate counterfeiting. It

does not have auditors to ensure compliance with the Patriot Act. It does not have

investigators to pursue the priorities of the National Money Laundering Strategy.

And Treasury does not have an intelligence office that is fully integrated into the

national intelligence community.’’

Last year, the Department of Homeland Security was created to concentrate resources for the protection of our borders against terrorism. In doing so, however, it

broke apart much of the system for pursuing financial crimes, which was once

housed in the Treasury Department.

I concur with the comments by Mr. Aufhauser: ‘‘while it is plain that there must

be shared responsibilities between Justice, Treasury and Homeland Security in the

borderless war on terror, someone’s hand has to be at the helm to protect the integrity of the U.S. financial system.’’

Today, there is no longer a central venue within the Federal Government vent for

developing, coordinating and implementing an effective strategy for combating financial crimes. I think there should be one. And I think it should be part of Treasury.

Treasury is undergoing significant structural, resource and management changes.

I would like to get your thoughts on how the government can better combat financial crimes.

Thank you Mr. Chairman.

PREPARED STATEMENT OF ARNOLD I. HAVENS

Mr. Chairman, Senator Baucus, and Members of the Committee, thank you for

the opportunity to appear before you today, and especially for your prompt scheduling of this hearing. I am honored to be President Bush’s nominee to serve as General Counsel for the Department of the Treasury, and I am grateful to Secretary

Snow for his confidence in me. If you will permit me, I will take a moment to introduce the members of my family that are here today.

As you may know, I grew up in Evanston, Illinois. My parents were passionate

about a number of things, but chief among them was assuring that my sister and

I received a quality education, and they sacrificed much to give us that opportunity.

They also taught us by example the importance of giving back to our community

in recognition of the obligation we have as citizens living in a democracy. Volunteering and assuming positions of responsibility in community organizations, albeit

at times challenging, was simply a given in our family. These important lessons and

others help to explain why—for me—public service is both a privilege and an obligation. The opportunity to return to public service at this time seems especially important in this post 9/11 environment. Today, our Nation faces challenges that we must

and can meet so that our children’s and their children’s freedoms and futures remain bright. I welcome the opportunity, if confirmed, to contribute what I can toward meeting these challenges.

Mr. Chairman, I believe that the solid education my parents encouraged and

helped me achieve along with the professional experiences that followed have prepared me well for the responsibilities I will undertake as General Counsel, if I am

confirmed by the Senate. My legal training has prepared me throughout my career

to solve complex problems by identifying issues, assessing relevant statutory and

regulatory provisions, and crafting solutions to meet the goals of my clients.

My government service as an Assistant Legislative Counsel for the House of Representatives and the Minority Counsel and Staff Director of the House Energy and

Commerce Committee taught me to be precise, analytical and thorough in developing legal proposals, and gave me a detailed understanding of the legislative and

regulatory processes.

In the private sector, I have provided strategic advice to my clients, and have advocated their interests in a variety of forums. This has helped me to formulate clear

and cogent legal and policy arguments, and to present them in a persuasive and

effective manner.

I understand the responsibilities of the position to which I have been nominated

are great. The legal issues facing the Treasury Department today are among the

most important and sweeping in government, ranging from the financial war on terrorism to interpretation of the tax code. Decisions of the Department directly impact

individual citizens and businesses in very profound and personal ways. It is clear

to me that assuming leadership of the Treasury’s legal division and providing canVerDate 11-MAY-2000 11:22 May 06, 2004 Jkt 092535 PO 00000 Frm 00012 Fmt 6601 Sfmt 6621 93363.000 SFINANC2 PsN: SFINANC2
9

did advice to the Secretary and other Treasury clients will be both challenging and

immensely rewarding. If confirmed, I welcome this challenge, and pledge to you that

I will work hard every day to carry out my responsibilities.

I thank you again, Mr. Chairman, for allowing me to appear before you today, and

I am happy to answer any questions that you and other members of the Committee

may have.

RESPONSES TO QUESTIONS FROM SENATOR GRASSLEY

TERRORIST FINANCING

Question 1. The Treasury Department is responsible for fighting money laundering, and for administering the Patriot Act and the Bank Secrecy Act. However,

Treasury does not have compliance officers and investigators to fulfill these missions. What is your plan for dealing with this situation?

Answer. Treasury’s Financial Crimes Enforcement Network administers the Bank

Secrecy Act and has, pursuant to Title III of the USA PATRIOT Act, implemented

several rules that regulate a much broader range of the financial services sector.

It is my understanding there is concern that FinCEN will need additional dedicated

personnel to ensure proper administration of these new regulatory programs. If confirmed, I will commit to learning more about the resources that are dedicated to

these regulatory programs; to working with officials at Treasury and FinCEN to determine whether those resources are sufficient to competently discharge FinCEN’s

responsibilities for administering those programs; and, if I believe those resources

are insufficient, to assisting Treasury and FinCEN to work with the Administration

and the Congress to get FinCEN the resources necessary to properly administer the

programs.

Question 2. One of the most important efforts in the war against terrorism is cutting off terrorists’ funding sources. The departing General Counsel has suggested

structural changes to make Treasury more effective in choking off terrorist financing. What changes do you recommend?

Answer. I am aware that Mr. Aufhauser made recommendations to Secretary

Snow regarding how Treasury should structure its assets that relate to terrorist financing and financial crime after the reorganization resulting from the Homeland

Security Act. If confirmed, I will certainly study Mr. Aufhauser’s recommendations

and consider other ideas people may have about how best to organize Treasury’s assets and put those resources to the most productive use in this critical endeavor.

If, after study, I determine that changes need to be made, I will make those recommendations to Secretary Snow, consult with all appropriate parties—including

the Congress—and do all I can to see that the recommendations are implemented.

Question 3. The Secret Service and Customs were moved from Treasury to the

new Department of Homeland Security, decreasing the coordination of financial

crime and counterfeiting efforts. What do you think needs to happen to make sure

that all the financial intelligence is appropriately coordinated so nothing slips

through the cracks?

Answer. I understand that Treasury has a central role in coordinating U.S. policy

relating to financial crime—notwithstanding the transfer of these agencies to the

Department of Homeland Security. If confirmed, I commit to you that I will help

Secretary Snow ensure that these critically important programs are fully coordinated and successfully implemented for the security of the financial system and the

good of the country.

REGULATION MAKING AUTHORITY

Question 1. There has been a disturbing trend in recent years with the Treasury

Department issuing regulations and other guidance that exceed its authority. Obviously, Treasury has some degree of flexibility in drafting regulations to make the

law work. Nobody would challenge that. But that flexibility can be pushed too far.

And we can end up with regulations that are not based on anything that has come

out of Congress. The recently proposed regulations dealing with the deduction and

capitalization of certain expenses—the so-called INDOPCO regulations. It is widely

thought that the INDOPCO regulations do much more than interpret any law made

by Congress—they create new law.

What actions would you take to insure that Treasury properly executes its regulation-making function and does not continue to draft invalid regulations?

Answer. I can assure this Committee that if I am confirmed as General Counsel,

I will carefully monitor regulations issued by the Department to ensure that they

do not exceed the Department’s authority.

10

Question 2. In your opinion, what should the Treasury Department do if it perceives a need for there to be additional guidance in an area, but Congress has yet

to provide it?

Answer. If I perceive that a legislative solution is necessary, I will not hesitate

to work within the Administration and with the Congress to achieve such a change.

Question 3. In your opinion, what effect does the proliferation of invalid regulations have on the integrity and the clarity of our tax laws?

Answer. I am not aware that there has been a proliferation of regulations that

exceed the Treasury Department’s authority. Certainly, if there were such a proliferation, it would have a negative effect on the tax laws.

CHINA CURRENCY

Question 1. The Department of the Treasury issued a report a few weeks ago that

concluded that none of our major trading partners is manipulating its currency.

That conclusion came despite overwhelming evidence and statements by many in

the Administration to the contrary, specifically about China and Japan. I don’t think

the Administration is taking this issue seriously. China’s actions weakening its currency is wreaking havoc in international currency markets as other economies in

Asia, including Japan, also artificially depress the value of their currencies in an

attempt to compete with China and stimulate their economies. Yet, the Administration chose to duck the problem in the Treasury report.

What you would do as General Counsel to the Department of the Treasury to address the issue of currency manipulation by our trading partners?

Answer. If confirmed as Treasury General Counsel, I would make sure that Treasury officials understood the requirements of Sections 3004 and 3005 of that Act for

determining whether a country is engaging in currency manipulation for purposes

of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade, and that determinations made were consistent with those requirements.

Question 2. If you had been responsible for the currency report—as I imagine you

will be in the future if you are confirmed—would you have found there to be no currency manipulation by any of our trading partners?

Answer. I understand that extensive work on the part of Treasury policy and legal

officials went into the report that was sent several weeks ago. Given the complexity

of the manipulation issue, I am unable to say whether I would have advised that,

as a legal matter, there was no currency manipulation by any of our trading partners, according to the terms of Section 3004 and 3005. What I can say is that I recognize the importance of the manipulation issue and, if I am confirmed, will give

very considered advice to the Secretary of the Treasury and other Treasury officials

concerning it.

TAX SHELTER SETTLEMENT INITIATIVES

Question. One of the many problems with tax shelters is that they threaten to clog

the system and take IRS resources away from where they are needed. To minimize

lengthy and costly litigation, the IRS and Treasury have recently issued several settlement initiatives aimed at quickly dealing with particular tax shelters. I agree

that something has to be done to keep the system from being overwhelmed, but the

settlement process raises some concerns. I’m concerned that some IRS settlements

may be letting tax shelter participants off the hook too easily. Some taxpayers are

confident that they can come out of a settlement and still be way ahead—especially

in the case of the most complicated tax shelters.

What role do you see for settlement initiatives in the future in resolving the tax

shelter problem?

Answer. Although I am not aware of the specific initiatives you describe, I can

envision their use in certain cases. Unfortunately, the tax code is not always a

model of clarity. As a result, the IRS cannot always take cases to court with the

assurance that the Government will prevail. In such cases, it may be better to bring

taxpayers into compliance through settlement. While such initiatives should never

completely take the place of litigation, they may be a useful tool for the Government

in appropriate circumstances.

LACK OF RESOURCES FOR THE TREASURY INSPECTOR GENERAL

Question. Last year, the Treasury Department transferred to the Department of

Homeland Security about 35 percent of the Treasury Inspector General’s workload.

However, Treasury took away 70 percent of the Treasury IG’s budget and staff.

Last month, I received a copy of Treasury’s Federal Information Security Management Act report on its compliance with technology security measures. The report

11

was supposed to include an independent evaluation by the Treasury IG. But it was

not included. It is my understanding that Treasury and OMB told the IG that they

did not have to finish that report by its due date since the IG did not have the resources to do both the information security report and the Treasury’s financial

audit.

How can you ensure that Treasury employees are complying with the laws, regulations, and policies if its investigative arm has been cut off?

Answer. Senator, I know how important inspectors general are to the Executive

Branch’s departments and agencies. In fact, as Chief Minority Counsel for the

House Energy and Commerce Committee, I worked on amendments that created an

office of inspector general for the Railroad Retirement Board. If I am confirmed as

Treasury General Counsel, to ensure that Treasury employees are complying with

all the laws and regulations, I will work closely with Inspector General’s office on

any sensitive issues that require cooperation.

OFAC REGULATION OF CUBA TRAVEL RESTRICTIONS

Question. Last March OFAC tightened the restrictions against travel by Americans to Cuba. Notably, OFAC effectively eliminated ‘‘people-to-people’’ travel. The

revised rules also effectively expanded the amount of remittances available to

Cuban citizens. I was very disturbed by these new rules, because I think the travel

restrictions are counter productive, since they only shelter the Castro regime from

American influence. I was also disturbed because the Administration justifies the

travel ban by arguing that travel by Americans to Cuba would be a primary source

of hard dollars, and therefore financial support, to the Castro regime. Yet, remittances are one of the largest sources of hard currency to the Cuban government.

Finally, tightening the restrictions only means that more and more of OFAC’s resources are wasted on enforcing the travel ban. It is my understanding that OFAC

spends as much 10% of its operating budget, and dedicates 21 full-time employees

not counting supervisory resources, to enforce the Cuba travel ban. This is particularly alarming given that OFAC could otherwise use these resources to carry out

far more important work in monitoring international financing of terrorism.

With all the dangers that we face in the Middle East, with ongoing operations

in Iraq and Afghanistan, and with the very serious threats that our troops, our embassies, and our citizens face abroad, do you think that the use of 10% of OFAC’s

budget and 21 full-time employees to enforce the travel ban is a wise use of OFAC’s

resources?

Answer. It is my understanding that OFAC’s recent amendment of the Cuban Assets Control Regulations eliminated only the licensing provision related to non-academic educational tours of Cuba and that many other licensing provisions that promote people-to-people contact with Cubans remain available. I also understand that

the 21 full-time employees working on the Cuba program include supervisory resources and administration as well as enforcement of the entire Cuba embargo, not

just its travel-related aspects.

On October 10, President Bush announced new initiatives intended to hasten the

arrival of a free and democratic Cuba. As General Counsel of the Treasury Department, I would work to assist OFAC in enforcing these and other U.S. sanctions initiatives in a full and fair manner.

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