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56–103—PDF 2008

S. HRG. 110–1034

ANTI-TERRORISM FINANCING:

PROGRESS MADE AND CHALLENGES AHEAD

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

APRIL 1, 2008

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

JOHN E. SUNUNU, New Hampshire

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 3

WITNESS

Levey, Hon. Stuart A., Under Secretary, Office of Terrorism and Financial

Intelligence, Department of the Treasury, Washington, DC ............................ 5

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

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

Letter from Kevin M. Brown, Acting IRS Commissioner, dated July 3,

2007 ................................................................................................................ 31

Cassara, John A.:

Testimony .......................................................................................................... 39

Grassley, Hon. Chuck:

Opening statement ........................................................................................... 3

Levey, Hon. Stuart A.:

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 55

(III)

(1)

ANTI-TERRORISM FINANCING:

PROGRESS MADE AND CHALLENGES AHEAD

TUESDAY, APRIL 1, 2008

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:06 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Bingaman, Kerry, Wyden, Salazar, Grassley,

Hatch, Kyl, and Crapo.

Also present: Democratic staff: Bill Dauster, Deputy Staff Director and General Counsel; John Angell, Senior Advisor; Mary Baker,

Detailee; Cathy Koch, Senior Advisor, Tax and Economics; and

Chelsea Thomas, International Trade Analyst. Republican staff:

Emilia DiSanto, Chief Investigative Counsel; Jason Foster, Investigative Counsel; Lori Dillard, Detailee; Eben Roberts, Detailee;

and Janet Drew, Professional staff.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

The British terrorism expert Paul Wilkinson said, ‘‘Fighting terrorism is like being a goalkeeper. You can make 100 brilliant saves,

but the only shot that people remember is the one that gets past

you.’’

Today we will address the terrorism funding efforts of the Office

of Terrorism and Financial Intelligence, the TFI, within the Treasury Department.

It has been 4 years since the TFI was created. It has been 4

years since the Finance Committee confirmed Under Secretary

Levey as the administration’s top anti-terrorism financing official.

This is a good opportunity for the Finance Committee to reexamine

this critical office.

This hearing is also timely, considering the CIA’s latest warning.

On Sunday, CIA Director Michael Hayden warned that Al Qaeda

has been able to establish a safe haven along the Afghan/Pakistan

border. We have to ask our terrorism fighters if they are letting

some shots get past that goal, or get past them.

Mr. Levey, however, has been moving full speed ahead, and I

commend him for his continuing commitment to this essential effort. Of course, his dedication and hard work will not prevent us

from asking tough questions; a number of concerns remain.

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Is the administration effectively coordinating the 19 Federal offices that work on terrorism financing? How is Treasury coordinating with the Justice Department, the FBI, the CIA, and the

State Department? Has the National Safety Council been aggressive in bringing these agencies together?

Does the Treasury Department have the resources that it needs?

At one point there was a report that the administration turned

down a request for 80 IRS agents used exclusively for investigating

terrorism financing.

Is the anti-terrorism financing staff expert enough to move

through the increasingly complex international financial world?

Are there enough Arabic speakers?

Is the office setting its priorities correctly? In 2005, the committee learned that 2 employees were assigned to go after

Saddam’s missing funds, and 2 employees were assigned to go after

Osama bin Laden’s money, but 21 employees were assigned to go

after those who violate Cuba sanctions. That was in 2005.

The TFI has since increased the number of employees assigned

to Al Qaeda and Iraq, but I want to be reassured that resources

are wisely allocated. I want to hear that TFI’s priority targets continue to be those who seek to harm Americans.

The focus on Osama bin Laden’s network must be job one. I want

to know what assets have been seized from Al Qaeda in the past

2 years.

In the Los Angeles Times article last week, Michael Jacobson, a

senior advisor in the TFI until last year, said that ‘‘the international cooperation and focus is dropping the further we get from

9/11.’’ I hope that Mr. Levey will react to this charge in his testimony.

We have also seen prosecutions failing in some high-profile trials

involving charities suspected of having ties to terrorist organizations. What happened there? Were these prosecutions off-base?

Does the administration need to do a better job of monitoring these

organizations?

Also, on nonprofits, the report from the Treasury Inspector General for Tax Administration found that the IRS was using a limited

terrorism watch list for checking the tax returns of nonprofits. I followed up by writing Secretary Paulson. The reply from the Acting

Commissioner did not give me a lot of confidence that the administration is being aggressive enough in establishing links between

nonprofits and terrorism financing.

Another interest of the Finance Committee is offshore tax evasion. A news story in just the past few weeks told us about tax evasion in Lichtenstein. Another reported on the Kellogg, Brown, and

Root office in the Cayman Islands hiring Iraqi employees and not

paying payroll taxes. These are reminders that offshore financial

transactions threaten the revenue base of the Federal Government.

More importantly, it means that hardworking families are honestly paying their taxes while others send them offshore and do not

pay a dime. TFI has powerful tools to investigate and stop terrorism financing overseas. At some point, we have to ask ourselves

if they need to be used to combat offshore tax evasion as well.

3

I will also raise the issue of Stored Value Cards as a possible

new terrorism financing method. I am concerned about a classified

computer system that is behind schedule.

Money is the lifeblood of terrorism, and our government’s efforts

to locate and seize terrorist assets may mean the difference between life and death of American citizens. We appreciate Mr.

Levey’s continued commitment to the new TFI office. We commend

you on what may be 100 brilliant saves, and we encourage you to

continue to keep your teams focused on preventing that one shot

that might get past you.

Senator Grassley?

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. Thank you, Mr. Chairman, for calling this important hearing today to examine our efforts to understand and

combat terrorism financing.

After the 9/11 attacks, our government rededicated itself to follow the money. We were aggressively freezing and seizing terrorist

assets. We were naming and shaming terrorists by publicly designating their leaders and organizations as terrorists. This was, and

continues to be, a key element of our counterterrorism strategy. As

President Bush said, the goal was ‘‘a strike on the financial foundation of the global terror network.’’

We will hear today from the head of the Office of Terrorism and

Financial Intelligence, Stuart Levey, about the progress and successes that have been made in this effort, as well as finding out

about shortcomings. I look forward to hearing how Mr. Levey plans

to deal with some of the challenges faced by his office.

Many have expressed concern that we could, and should, be

doing a better job. According to an L.A. Times article just last

week, some experts argue that, among our many problems, the

U.S.-led coalition on this issue is deteriorating as countries like

Saudi Arabia and Pakistan drag their feet. Terrorists have adapted

their methods to get around the tools we use to stop them. The article also referred to our government agencies engaging in too much

squabbling to cooperate effectively and get the job done.

Example: One former State Department U.N. terrorism finance

official was quoted as saying, ‘‘Al Qaeda, the Taliban, and other

terrorist groups continue to have access to the funds they need for

active and expanded indoctrination, recruitment, maintenance, armament, and operations.’’ Meanwhile, our government is reportedly

distracted by infighting about who should be in charge. A recently

departed Treasury official was quoted as saying, ‘‘There is a lot of

elbowing and there isn’t any cooperation.’’

There are also indications of some basic management issues that

may need to be addressed within the office. For example, I have

heard that the employee turnover rate may be as high as 30 percent in some components. No program can develop dedicated, experienced, core professionals if turnover rates are that high.

Because of the complicated interagency process involved, it can

often take months to designate a terrorist individual or organization. The Treasury Department has even stopped reporting the

amount of assets it freezes and seizes from Al Qaeda and affiliates.

4

The bottom line is that terrorists constantly adapt and improve

their methods, and consequently so must our government.

The best way to stop terrorism is to get them where it hurts

most: the pocketbook. To do this, we must remain vigilant against

money laundering by ensuring that our laws keep pace with new

and emerging trends that terrorists and criminals exploit to fund

their activities. That is why I introduced the Combatting Money

Laundering and Terrorist Financing Act of 2007, and I did that

early last year. This bill seeks to close loopholes in the law and

provide necessary tools for law enforcement to catch those who

break the law.

As a sign of how fast these criminals and terrorists adapt, I have

had to rewrite my bill in just the last year to account for some new

and emerging trends. Example: Stored Value Instruments, such as

prepaid credit and debit cards, are now being used to smuggle

money in and out of the country. The amounts involved may be in

the billions of dollars. This is something that was not included in

the original bill.

I have added it in the new draft. I plan to introduce my updated

version of this vital legislation in the near future and would ask

my colleagues to take a look at it and support this effort to help

cut off funding for terrorism and criminals around the globe. The

Justice Department supported a previous version and is currently

reviewing my new draft. The Secret Service, as well as Immigration and Customs Enforcement have also expressed support.

The Department of Treasury has stated that it supports some

provisions of the new bill, but it has also raised some, in my estimation, vague concerns. The Department has agreed to sit down

with my staff and discuss the bill later this week. Given the importance of this legislation and my goal of closing any loopholes in our

law, I hope the Department will expedite its views on the bill so

that we can take immediate action.

Another new concern is what is known as trade-based money

laundering. International trade is increasingly being used to disguise money laundering and terrorism financing activities. Criminal organizations are using basic trade fraud, such as under- and

over-invoicing, and multiple invoicing of goods and services to hide

the proceeds of their illegal activities. Terrorist organizations also

trade in drugs, gems, and precious metals to store and move their

money undetected around the globe.

For instance, Afghan officials have stated that drug traffickers

smuggle heroin out of the country, only to return with weapons and

bombs. Money service systems such as hawalas can also be used

to finance terrorism. These systems trade debt and payment

through an informal network of brokers without the need to access

traditional banking systems.

Now, it seems like the Treasury Department has done some

things well in keeping known terrorists out of our financial system

and encouraging other countries to adopt more stringent regulations to help achieve our goal worldwide. It should receive our

praise for these important accomplishments.

However, this is a beginning. I am concerned that we are not

doing enough to understand and address these alternative means

of funding terrorist operations. Some say we should be satisfied to

5

just play defense. That is not good enough. It is not enough to declare a victory just because we think we have forced most terrorist

funding outside the traditional banking system.

Instead, we need to stay on offense. We have terrorist organizations using a variety of methods to obtain their funding. They are

experts at switching from one method to another whenever needed.

But we are simply not prepared right now to keep up with them

and put them out of business once and for all. We need to take the

battle over terrorist funding to wherever the money flees. We need

to understand how terrorism adapts and go after their new methods with the same urgency and purpose that we had in the weeks

and months after 9/11. The Treasury Department ought to be at

the forefront of analyzing, evaluating, and countering these new

trends. I certainly hope that we hear today what is being done to

accomplish that. Thank you.

The CHAIRMAN. Thank you, Senator.

We now turn to our witness, our one witness today, the Under

Secretary for Terrorism and Financial Intelligence, Stuart Levey.

Mr. Levey, your complete statement will be in the record, but,

since you are the only witness, we will give you more than 5 minutes. You can take at least 10, and we will take it from there.

Thank you very much. Welcome to the committee. As I mentioned

in my statement, I think you have been doing a pretty good job.

So the goal of this oversight hearing is essentially to compare

notes on basically how we can do a better job in tracking down terrorism financing. We will have some tough questions to ask, but

the mutual objective here is to get the job done. Thank you.

STATEMENT OF HON. STUART A. LEVEY, UNDER SECRETARY,

OFFICE OF TERRORISM AND FINANCIAL INTELLIGENCE, DEPARTMENT OF THE TREASURY, WASHINGTON, DC

Mr. LEVEY. Well, I very much appreciate that. Mr. Chairman,

Ranking Member Grassley, distinguished members of the committee, I thank you for the opportunity to talk to you today about

the work of our Office of Terrorism and Financial Intelligence, and

for the support that we have received from this committee and the

other committees that oversee us.

It has been nearly 4 years since I first testified here as a nominee for my current position, and I think it is fair to say that at that

time there was a real question about what the Treasury Department’s role would be, if any, in our national security architecture

after our law enforcement functions were moved out of the Department.

Fast forward to today and I think the Treasury Department is

playing a greater role in national security issues than it ever has

before. The reason is that many of the threats that we face, as you

indicated, from terrorism to proliferation of weapons of mass destruction, rely on financial support networks. We are wellpositioned to address that aspect of the threats because of the authorities we have been given by the Congress, our relationships

with governments and private sector actors around the world, and

the information we can draw upon, especially now that we do have

an Office of Intelligence and Analysis, the first such intelligence office in any finance ministry anywhere in the world.

6

As we approach these threats, we are increasingly employing

conduct-based financial measures targeted at particular actors.

When we use these targeted financial measures rather than impose

sanctions on an entire country, it is easier to achieve a multilateral

alignment of interests. Whatever the political views of a country,

they all have a shared interest with us in keeping their financial

sectors free from illicit conduct.

Even more significant is the reaction from the private sector.

When we use targeted financial measures, the private sector becomes our ally. Banks do not want to jeopardize their reputations,

and beyond that they really have no interest in dealing with terrorists, proliferators, and others of their ilk.

As a result, we have seen banks around the world voluntarily go

beyond their legal requirements to cut off business with those that

we identify as posing a risk. Such voluntary implementation, in

turn, makes it more palatable for foreign governments to act with

us because their financial institutions have already given up the

business, and thus we can create a mutually reinforcing cycle of

public and private action.

The written testimony that I submitted discusses how we have

been using these targeted financial measures in a number of areas.

I want to just talk about two this morning: terrorist financing, of

course, and our work on Iran.

As the chairman and ranking member noted, tracking and combatting terrorist financing are critical pillars of our overall

counterterrorism strategy. In December of 2005, the 9/11 Commission’s Public Discourse Project gave its highest assessment to our

overall efforts to combat terrorist financing, and we have continued

to improve our efforts today.

To start, we have come a long way in our ability to map terrorist

networks using financial intelligence and other information. Often,

it is most useful for us not to take a public action, but to continue

our intelligence work, to trace the terrorist network both upstream

to find the ultimate donors, and downstream to find the operational

cells. Often, we can then empower others around the world to act.

On some occasions, as Senator Grassley mentioned, we do publicly designate terrorist supporters, freezing their assets in the

United States. With Al Qaeda and the Taliban, we seek parallel

designations at the United Nations.

In the right case, the disruptive impact of these actions is very

significant. Beyond the direct effect on the designated party, these

designations can deter other donors. The operative who is willing

to strap on a suicide belt may not be susceptible to deterrence, but

the wealthy donor may well be.

These efforts do put pressure on terrorist networks. These networks require significant financing to survive, far beyond the cost

of an individual attack. They need money to pay operatives, indoctrinate and train new recruits, travel, bribe public officials, and the

like.

The key measure is what we have seen with respect to Al Qaeda,

which is that we have made real progress in pressuring its financial network. That is the goal. We have disrupted and deterred

many of its donors on which it used to rely. We have shut down,

7

by our designations, many of the charities that Al Qaeda previously

depended upon.

Al Qaeda has had no choice but to turn to less reliable methods

of raising, storing, and moving money, giving rise to opportunities

for fraud and distrust within its ranks. It is difficult to operate an

organization with just cash couriers. Some of them get caught and

some of them get greedy.

Consider this relatively recent quote from a high-ranking official

of Al Qaeda, Shaykh Sa’id. He said, ‘‘As for the needs of the Jihad

in Afghanistan, the first of them is financial. There are hundreds

wishing to carry out martyrdom-seeking operations, but they can’t

find the funds to equip themselves. So, funding is the mainstay of

Jihad. Those who perform Jihad with their wealth should be certain to only send the funds to those responsible for finances and

no other party, as to do otherwise leads to disunity and differences

in the ranks of the Mujahideen.’’

DNI McConnell recently summarized the impact of all of these

terrorism financing efforts, noting that over the last year to 18

months the core leadership of Al Qaeda has had difficulty raising

funds and sustaining itself. I agree with you, that does not mean

we can relax. There are many critical challenges facing us, some

of which you alluded to and I am sure we will have a chance to

discuss.

In my view, one of the toughest that we face is that it has proven

difficult to persuade officials in some countries to identify and hold

terrorist financiers publicly accountable for their actions. That lack

of public accountability undermines our ability to create this deterrent effect. So long as that is the case, even when we are successful

in disrupting terrorist facilitators and their financial conduit, our

successes may be short-lived.

I want to spend a few minutes also briefing you on the steps we

have taken with respect to Iran, which is not only pursuing a nuclear program in defiance of U.N. Security Council resolutions, but

it also the world’s foremost state sponsor of terrorism, and indeed

the central banker of terrorism.

Iran uses its global financial ties and its state-owned banks to

pursue its nuclear and ballistic missile programs, and to fund terrorism. In order to do so, it engages in an array of deceptive financial conduct. It uses front companies and cut-outs to engage in ostensibly innocent transactions that are actually related to its nuclear missile programs. We have seen Iran’s banks request other financial institutions take their names off of transactions when processing them in the international financial system.

This practice, which is even used by the Central Bank of Iran,

is intended to evade the controls put in place by responsible financial institutions and has the effect of threatening to involve those

financial institutions in transactions that they would never engage

in if they knew who or what was really involved.

Over the past year and a half, I, and many other senior Treasury

officials, have met with government counterparts and with scores

of private banks around the world to share this information and to

discuss the risks of doing business with Iran. We have taken very

aggressive targeted financial actions under our terrorist executive

8

order and our proliferation executive order against key Iranian

banks, entities, and individuals facilitating the regime’s conduct.

These efforts have been accompanied by simultaneous international action. For example, one of the major Iranian banks that

we designated, Bank Seppa, has also been designated by the

United Nations for its activity. In the most recent Security Council

resolution, the Security Council called on all states to exercise vigilance over their financial institutions dealing with all Iranian

banks.

As a result, we are seeing just the type of mutually reinforcing

public and private action that I previously mentioned. The world’s

leading financial institutions have largely stopped dealing with

Iran, and especially its banks, in any currency. The Iranian regime

is fast turning its country’s banking system into a financial pariah.

This represents a substantial success in protecting the integrity of

the financial system from Iranian illicit conduct, while also putting

pressure on the regime.

Mr. Chairman, I believe that, with your support and the support

of this committee, we have transformed the Treasury Department

into an important part of our national security architecture. We

have greatly improved our ability to analyze and use financial intelligence. We have developed and implemented strategies for combatting terrorist financing and other pressing threats to our national security, including those posed by North Korea and Iran.

We have made important strides in strengthening the systemic

safeguards in the United States and the international financial system, trying to learn about those new methods that I hope I have

a chance to discuss with you during the questions and answers.

But our work is not nearly complete, and I look forward to working

with this committee as we go forward to tackle these important

challenges in the spirit that you have indicated, Mr. Chairman.

Thank you very much.

The CHAIRMAN. Thank you very much, Mr. Levey.

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

The CHAIRMAN. I have a lot of questions, and not enough time

to ask them all.

I am going to start off with a somewhat narrow question. The

TFI used to publish an accounting of how much had been seized

from Al Qaeda, but in the past year the numbers have not been

published, leading some to suspect that the seizures have trailed

off. So, a couple of questions. Why are you no longer publishing the

amount of assets seized? Second, has there been a trailing off or

has it increased?

Mr. LEVEY. Mr. Chairman, I do not know the exact answer as to

why we do not publish it. I will give you my opinion, which is, I

do not think it is a useful metric. One thing I promised this committee when I was going through the confirmation process was that

the way we would judge what actions to take and how we would

try to conduct our terrorist financing activities was to try to put

pressure on the ultimate target, to put pressure on the terrorist organization.

As I indicated in my testimony, sometimes the best way to do

that is by simply following the money, trying to empower others to

act in ways that you could imagine, given our public setting. That

9

is the most important message for fighting terrorism and using terrorist financing as part of an overall terrorism strategy. I think

that, in the end, our efforts have been effective, as the Director of

National Intelligence suggested, in the sense that we have put a

lot of pressure on their financial network and they are having trouble raising funds.

The CHAIRMAN. I guess the question is, how is this committee or

the public going to know that TFI has been accountable, that they

are doing their job? It seems to me that there has to be some quantification, some measurement, some benchmark of some kind, certainly for this committee, and second, for the public.

Mr. LEVEY. Well, for this committee I have one answer. The public may be a little more difficult.

The CHAIRMAN. Or we can go in maybe a different setting to answer these questions. But it just seems to me there has to be some

way for, at least this committee, and also for the public, to have

some quantifiable information to know the degree to which your

agency has been doing its job.

Mr. LEVEY. I completely agree. I am perfectly happy to brief any

member of the committee in that context, because I do think that

is the best way to judge it. What I do worry about, and what I told

the committee during my confirmation hearing I worry about, is

creating metrics that skew incentives. I do not want——

The CHAIRMAN. Well, what is the proper metric? What are some

of the two or three proper metrics?

Mr. LEVEY. A proper metric is, what is the best way to put pressure on the target?

The CHAIRMAN. And the best way would be?

Mr. LEVEY. Well, it depends. I have these meetings twice a week,

at least, where we sit down, we discuss a target. We have our Intelligence Office, which was created at the same time my office was

created, present the intelligence as to what we know about that

target, and then we discuss what our tools are. Sometimes are tools

are simply, we should share this information with an ally. They are

better positioned to act. They have authorities that are better. They

can question this person. They could help us learn more. Sometimes we put out a confidential notice to our financial institutions,

an authority that they have used over 750 times since the

PATRIOT Act was passed, another authority given to us by the

PATRIOT Act.

What I do not want to have happen is to have the person who

is in charge of that meeting—in this case, me—worry about, gosh,

I am going to favor the public designation because that will look

better to the public.

The CHAIRMAN. You sit down in these meetings twice a week. Do

you have a sense that you know all the targets? Do you know all

the targets or not?

Mr. LEVEY. No, I am sure I do not. We certainly try hard.

The CHAIRMAN. By what percentage? What is your best guess?

What percent of the targets out there that are meaningful in some

way do you think you know?

Mr. LEVEY. That is an inherently difficult question to answer. I

do think we know the important targets, and we try to make sure

that we are focusing in terms of those that matter most. To get one

10

of the concerns in your statement, we do focus on Al Qaeda primarily because that is job one.

The CHAIRMAN. Yes. But do not forget, you are a goalie, too. You

cannot let a shot get passed.

Mr. LEVEY. And I am very sensitive to that. I think I have a lot

more gray hair than I did 4 years ago because of that.

The CHAIRMAN. So that is sort of unsettling. It leaves me really

unsettled. That is, I do not get the sense that you have a good

grasp of all the targets.

Mr. LEVEY. Well, we are talking about a global problem of terrorism.

The CHAIRMAN. It is.

Mr. LEVEY. There are a lot of terrorist organizations. Al Qaeda,

as I mentioned in my written testimony, is affiliating itself with regional terrorist groups. There may well be things that we are still

trying to learn, but this is, as you know, the highest priority for

our intelligence community. We have access to all the intelligence

that they collect and publish for us. What we try to do is focus on

the targets that matter the most, the ones that are the highest priority, Al Qaeda being first among those, but not the only one. Certainly, as another example, we are focused on Iran’s support to terrorism, which is also important.

The CHAIRMAN. I will have many more questions, but my time

has expired.

Senator Grassley?

Senator GRASSLEY. I have drafted an updated version of S. 473,

which I have shared with the Department. It would help target

some of the new nontraditional ways that terrorists and criminals

are moving money around the globe. Could you describe for me any

concerns or suggestions you have for improving the legislation?

Mr. LEVEY. Senator Grassley, I am only familiar in general with

the provisions of the bill. I know we are going to get together with

your staff later this week and have detailed suggestions. There is

much in that bill that I think we find possible. We certainly agree

with the intent of the bill. I think we will be able to provide constructive comments to you later this week.

Just as an example, I know that the Treasury Department has

previously supported—and I have no reason to doubt that we would

continue to support—the addition of tax evasion as a money laundering predicate, which I think is an important thing. But I would

rather let our detailed comments come through your staff; I can assure you, they are going to be constructive.

Senator GRASSLEY. All right.

I brought up infighting in my opening statement. My understanding is that it often takes months to designate a terrorist individual or entity, even when evidence is very clear. The interagency

process requires unanimous agreement among many departments

and agencies. It sounds like it may be too cumbersome.

The Financial Action Task Force, the Defense Department, and

the Council of Foreign Relations have all suggested that we need

to reexamine our efforts on this issue, and perhaps even create an

anti-terrorism financial czar. This official could report directly to

the White House and be final authority on interagency disputes.

Would you please provide the committee with the detailed statistics

11

on the average time a designation package takes to completely go

through the process? What do you think of the idea that there

should be a terrorism financing czar?

Mr. LEVEY. Well, Senator Grassley, I think I certainly sometimes

feel some of the frustrations of the interagency process, as I think

any executive branch official does. But I do have to say that I

would not necessarily equate debate and argument about what is

the proper way to treat a problem with just bickering. I mean, I

think there is something to be gained from different agencies having different views on how to treat a problem. So, while I probably

experience just as much frustration as anyone else, I do not think

that we should avoid having the input of all of the agencies that

have an interest in these things.

I do think that having a counterterrorism financing czar would

be counterproductive. I think the key thing, and what we have

achieved over the last 4 years, is to make terrorist financing an integral part of the counterterrorism effort, and there is a counterterrorism czar, and we have a National Counterterrorism Center.

What we should be trying to do is making terrorist financing an

integral pillar of a counterterrorism strategy rather than its own

strategy. So I think that I’ve seen that recommendation. That was

a recommendation that had been made back in 2003–2004. I do not

think it would make our efforts more effective.

Senator GRASSLEY. I presume that you are going to provide the

statistics in writing that I asked for?

Mr. LEVEY. I am going to attempt to provide those statistics in

writing. I am not so sure that that is going to be readily available.

We will do our best to get you information on that.

Senator GRASSLEY. Would you please provide detailed statistics

on the employee turnover, the various components and subcomponents of your office? Do you have any subcomponents under your

supervision where the turnover rate is approaching 30 percent? If

so, is that not something that needs to be dealt with? I have also

heard reports that analysts with Arabic language skills and Middle

Eastern terrorism expertise have been assigned to work on Cuba

issues. What are you doing to ensure that analysts are matched to

tasks appropriate to their skills?

Mr. LEVEY. Senator Grassley, I got indication of that question

this morning. In my quick check, I do not think that any of our

components have a turnover rate that is as high as you mentioned.

But, certainly turnover is a problem. One insight I have into why

we have turnover is, we just had our analysts do a confidential survey for the intelligence community where it was anonymous.

What we found is that we scored very, very high on most of the

variables in terms of the quality of the work, the importance of the

work, but that we scored low on work/life balance. I think that is

an inevitable fact of the life for an organization that does the work

that we do.

I remember the chairman mentioned the issue about language

skills back in 2004. We have made a concerted effort to improve

the number of Arabic speakers and other relevant languages that

we have. I think we have 16 Arabic speakers, and we do assign

them to appropriate tasks. I would be surprised—I will go back and

check, but I would be surprised—if we have people who are fluent

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Arabic speakers working on Cuba issues. But rather than say that

definitively, I will check for you, Senator Grassley.

Senator GRASSLEY. Thank you, Mr. Chairman.

The CHAIRMAN. Senator Salazar, you are next.

Senator SALAZAR. Thank you very much, Chairman Baucus and

Senator Grassley, for holding this important hearing.

To you, Mr. Levey, thank you for your leadership. Congratulations also on the high rating that you did receive from the 9/11

Commission, which I think did great work for this country.

I have a couple of questions for you. First, with respect to the

money that is coming in that is helping kill our solders in Iraq. My

two questions are: where is that money coming from, killing our

soldiers on the streets of Baghdad and other places in Iraq, that

is financing the IEDs? Second of all, what is the role of the Iranian

Central Bank in terms of contributing to financing the violence

against American troops in Iraq? During our break, we reached the

4,000th soldier killed in Iraq. I think these are important questions

to know. Where is the money coming from that is financing the war

against us there?

Mr. LEVEY. Well, thank you, Senator Salazar. The problem that

we face in Iraq is, of course, a difficult one. There are many factors

to fomenting violence in Iraq. It is not just one source. There are

different sources funding different aspects of the insurgency and

others engaging in violence.

We have, in order to try to understand this better, worked with

the Department of Defense. We have actually deployed analysts

into Iraq, and we set up an Iraq Threat Finance Cell that we

formed in 2005. We put people in Iraq to work with the military

to make sure that they are getting all of the information and analysis that they can use to understand the financial networks and

the various threats that they face, whether it be Shiite or Sunni

violence.

What we found, as I am hinting at, is there are a number of different sources. Some of the violence is self-funded from within Iraq

from——

Senator SALAZAR. Let me ask you more precisely, Mr. Levey. A

week or so ago, the IED that killed four soldiers took us to 4,000

Americans killed in action in Iraq. Do you, through your financial

capabilities, have the capability to trace where the money came

from that financed that particular IED?

Mr. LEVEY. I do not think that we have that kind of particularity. We do know that these IEDs are coming from Iran. Tracing

the money may be a slightly separate question. We have, as I think

you know, designated, for example, the KUDS force for its support

to terrorism, including not only what is going on in Iraq, but also

their support to the Taliban and other terrorist organizations.

Senator SALAZAR. How does the money come from Iran, and what

is the role of the Iranian Central Bank in terms of financing some

of these IED operations?

Mr. LEVEY. The role of the Iranian Central Bank is one that we

are studying. I think where I am on that is the following. We have

seen the Iranian Central Bank engaged in deceptive conduct. We

have seen the Iranian Central Bank be the source of money that

13

was sent through Bank Saderat to Hezbollah fronts in Lebanon,

and we designated Bank Saderat for its role in that activity.

We have seen the Central Bank of Iran acting in ways that give

us concern that they are trying to help other entities already designated at the United Nations for proliferation evade their sanctions, but I do not have the last sentence of that, which is what

I think you are asking.

Senator SALAZAR. All right. Do we have a sense of the quantum,

how much money is coming through the Iranian Central Bank,

whether it is to foment violence in Lebanon or Iraq?

Mr. LEVEY. With respect to Lebanon, we did make public the

amount of money in that case, which was, from 2001 to 2006, over

$50 million. We have an estimate that Iran provides between $100

million and $200 million a year to Hezbollah alone. When I say the

Central Bank, that is what I am referring to. That far exceeds the

amount of money that we think——

Senator SALAZAR. And do we know where that money is coming

from through the Iranian Central Bank, what is the source of that

money?

Mr. LEVEY. I do not have that.

Senator SALAZAR. Is it oil money?

Mr. LEVEY. Well, I do not think that there is more that I can say,

Senator Salazar.

Senator SALAZAR. All right.

Now, with respect to Osama bin Laden, the attacks of 9/11/2001

happened 7 years ago. Senator Baucus asked the question about

how many agents were assigned to actually tracking the financial

activities there, and I think the answer was that there were two.

So what are we doing now to try to track his financial activities

around the country and around the world?

Mr. LEVEY. It is not just the Treasury Department. The numbers

of intelligence analysts in our government that are working on Al

Qaeda are very, very high. I am sure the number is classified, but

it is orders of magnitude higher. Certainly our effort on it is also

orders of magnitude higher than it was on 9/11.

Senator SALAZAR. My time has expired.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

Next is Senator Hatch.

Senator HATCH. Thank you, Mr. Chairman. I appreciate you and

Senator Grassley and your leadership of this committee, and especially having this subject, which is a very, very important subject.

I personally appreciate Mr. Levey for the great work he is doing

and the intelligence that he brings to this job. I think we all owe

you a debt of gratitude and thanks.

But I am very concerned about a new form of terrorism. I would

call it cyber-terrorism. Examples of this phenomenon can be seen

in the recent coordinated attack on Estonia’s government and financial computer systems. There have been multiple reports that

these attacks have originated in Russia. Now, unfortunately this

assault on a NATO ally seems to be only a harbinger of things to

come.

So serious is the threat of cyber-terrorism that our own military

has appointed an Air Force general, it has actually created a new

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command headed by a four-star general, that will be tasked with

protecting our military’s computer and communications systems.

Now, our Nation’s financial institutions’ computer systems have

also been attacked by organized criminal groups in Russia. These

same groups are so organized that they have websites where cyber

criminals and terrorists can buy, sell, and trade militia software,

spamming services, packing services, and, of course, financial information.

Now, I realize this is a public forum and that some of this you

may not be able to discuss. However, in general terms, what is the

Treasury Department doing to stem these assaults on our financial

system?

Mr. LEVEY. Well, Senator Hatch, I think you have identified a

very, very important problem. In some ways, when I think of the

financial networks, they are global. They do not follow geographic

boundaries. The same thing is true with our cyber systems. So, it

is an asymmetrical attack that we can face from a cyber attack and

it is very, very important. Our financial system is part of our critical infrastructure, as I think this committee is well aware and

takes very seriously.

In the Treasury Department we have an official devoted to this,

the Deputy Assistant Secretary for Critical Infrastructure Protection, whom I think the committee knows, Valerie Abend, who is

very, very high quality, doing an excellent job. This is an issue in

which we do have a vulnerability that we need to fix. Our adversaries are targeting this vulnerability, so we need to really step up

our efforts. I think, as you indicated, that is something that our

whole government has realized and made a much higher priority,

the Treasury Department included.

Senator HATCH. Thank you.

Now, despite the popular perception to the contrary, the Treasury Department’s new strategy of directing ‘‘financial measures’’

against specific individuals and entities has, as you have mentioned, met with a certain level of success. As you discussed in your

testimony, the effectiveness of this strategy is a result of two major

factors: first, foreign governments are more prone to support actions when presented with ‘‘conduct-based cases;’’ and second, foreign governments do not wish their respective financial systems’

reputations to be harmed by associations with illicit activity.

Now, it would appear that the Treasury Department strategy

leverages globalization and mass global communications to our Nation’s advantage in preventing terrorist financing. Therefore, I am

curious if the prospect of entering into free trade agreements, especially in the Middle East, has had a positive effect on the level of

cooperation between nations under consideration for FTA and the

Office of Terrorism and Financial Intelligence. You might even

mention the effect of having it in Colombia, should we pass that

free trade agreement.

Mr. LEVEY. My instinct, of course, is to say, yes, that is true. We

have seen, as we develop trade relationships with other countries,

that cooperation builds into other areas, including this one. So the

more commercial connection that we have with the governments of

another country and with businesses of another country, the better

we are able to get cooperation on these issues.

15

I would add that one of the main reasons for that, Senator

Hatch, is that the private sector is part of this fight. This is not

just a government-to-government thing. That is one of the things

that I think I have learned over the course of my time here, that

the private sector, in many ways, is much more powerful than the

government in helping us solve these problems. The more we can

have that kind of relationship develop, the better off we are.

Senator HATCH. Well, thank you so much. I just want to compliment you again for your service. I have been very impressed

with it. I think it has been totally bipartisan, and in every way

helpful to our country. As a senior member of the Senate Select

Committee on Intelligence, we have watched what you are doing

and we know that it is important, and we know that we want you

to keep it up.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator.

Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman.

Without making this a bouquet-tossing contest, Mr. Levey, let me

also join my colleagues in the commendations for you. I sit on the

Intelligence Committee, as you know, and we get to see what you

do that is classified. It is very professional work.

Let me start with your comments with respect to Iran. I share

your view that getting the U.N. Security Council to adopt this resolution with respect to Iran is unquestionably a positive step, but

getting individual nations to enforce the resolution will be critical.

Have the Chinese, the Russians, and the Europeans all indicated

that they are going to start changing their interactions with Iran

based on this resolution?

Mr. LEVEY. Well, Senator Wyden, I think you are exactly right,

particularly the provision that I refer to in my testimony. A lot

hangs on how people interpret it and how aggressively it is implemented.

One thing that we found that is interesting, I think, with respect

to China, the private sector—to the extent it has a real private sector—is the banks in China have taken these issues quite seriously,

for the reasons I indicated, which is that they want to protect their

reputations and they want to make sure that they can expand to

the international marketplace. So, we have seen some good cooperation there.

But a key point will be whether countries follow through. The

resolution calls for vigilance on all of Iran’s banks. We are looking

to see how other countries follow through.

Senator WYDEN. To date, Mr. Levey, have the Russians and the

Europeans done anything differently based on the resolution?

Mr. LEVEY. I do not think that the resolution has been implemented yet in other countries, but I know it is under discussion.

So, I do not take that yet to be a sign of discouragement. I know

that they are debating how to implement.

Senator WYDEN. So, so far China has moved with respect to their

financial institutions, and it is too early to tell with the Russians

and Europeans?

Mr. LEVEY. Well, the point, I think, about China, is general,

about their reaction to the entire issue of the Iranian illicit activity

16

in the financial system and the reaction to that generally, not specifically with respect to this resolution. I just want to be clear.

Senator WYDEN. Yes. Because it seems to me that, if the big

countries do not change the way they are doing business with Iran,

we are still faced with very tough prospects in terms of turning

around the dangerous situation with Iran. I just hope you will keep

blowing the whistle on this because it is extraordinarily important.

One question, to follow up on Senator Salazar’s, if I might. What

is the likelihood that Treasury is going to designate the Iranian

Central Bank as a financial institution involved in terrorism financing? I know you all are having a debate about it, pro or con.

I would just like to get your sense on, what is the likelihood that

that will happen?

Mr. LEVEY. Well, I think you would understand, that is not a

question I would ever give you a very straight answer on. We do

not say what we are going to do in the future.

What I will say is, I think we have been very, very aggressive

and very, very vigilant about pointing out Iranian illicit conduct,

particularly financial illicit conduct, and we are going to continue

to do that and take whatever action we think is necessary to protect the integrity of our financial system and the international financial system.

Senator WYDEN. Let me turn if I can to Mexico, and then Saudi

Arabia. You referred in your initial statement to the Merida Initiative, strengthening the Mexican government’s efforts. I was just in

Latin America and I am convinced that, dollar for dollar, these

kinds of approaches make a lot of sense. Somehow we can go

through $10 to $12 billion a month on the war in Iraq, and very

often these kinds of investments in fighting terrorism can make a

lot of sense.

How is your office you envision going to be involved in this kind

of new initiative?

Mr. LEVEY. Well, I agree that it is an important initiative, and

it can be quite valuable. We are already involved through outreach.

There is a financial intelligence unit in the United States, FinCEN.

It is sort of the major organization in my office. They have a counterpart office in Mexico, where we have already established that

kind of interaction in the context of the Merida Initiative, and we

are going to continue doing that. Our FinCEN director was just

down in Mexico a few weeks ago.

We have seen, with the new Government of Mexico, a real commitment to working with us constructively on money laundering

and drug trafficking and the like, so we hope to capitalize on that

to the benefit of both countries.

Senator WYDEN. Mr. Chairman, my time is up. I have some additional questions, but why don’t I wait until after you have your

next round?

The CHAIRMAN. Senator, why don’t you proceed? Go ahead.

Senator WYDEN. All right. Thank you very much, Mr. Chairman.

And let me thank you for holding this hearing. You and I had

talked a lot about this topic, and I really appreciate your leadership in this whole effort.

Let me turn to Saudi Arabia, just briefly, Mr. Levey. I know you

have strong views on this, and I do as well. The 9/11 Commission

17

is quite critical of the role of the Saudis in terms of fighting terrorism. My own view is, the Saudis generally are much tougher

about catching terrorists who are physically present in Saudi Arabia, but they are not so serious about stopping money from flowing

to terrorists who are outside the country.

Now, in 2006 the Treasury Department officials reported that

what the Saudis consider their financial intelligence unit was not

fully functional. My sense is that maybe there have been some improvements there, and I think it would be helpful to get your sense

of what is happening.

What I do not understand, frankly, is how the Saudis can continue to drag their feet on these issues when, certainly with oil selling for over $100 a barrel, if they were serious about fighting terrorism they would put the resources into making these intelligence

units ‘‘fully functional’’ and really an effective tool in the fight

against terrorism. So, give us a sense of what is going on with the

Saudis. I appreciate the good work you have been doing on it.

Mr. LEVEY. Thank you, Senator. I do think this is the kind of answer that is going to be on the one hand, and on the other hand.

Senator WYDEN. Right.

Mr. LEVEY. They are serious about fighting Al Qaeda in their

kingdom, and they do. They go after the terrorists in the kingdom

very aggressively. They capture them, they kill them, they wrap

them up. They have had their security forces take casualties. This

is a serious fight for them. We have good cooperation with them on

the operational level. That does have—and I want to make sure

that people understand this—a real impact on the financial networks of these terrorist organizations because they are disrupted

by the actions that I have referred to.

But you are right. The seriousness of purpose with respect to the

money going out of the kingdom is not as high. Saudi Arabia,

today, remains the location from which more money is going to

Sunni terror groups and the Taliban than from any other place in

the world. I think part of this is an unwillingness to move forward

on public accountability, as I mentioned in my testimony. Part of

it is not being willing to invest the resources into a financial investigative capacity. What I said in 2006 about the status of their financial intelligence unit remains largely true.

I think there may have been improvements, but still, Saudi Arabia has a financial intelligence unit that has not met the criteria

for admission to the Egmont Group, which is the international organization for financial Intelligence units, which has over 100

members. When we think about the threat in Saudi Arabia, that

is a real problem.

But I do think that the more important one is public accountability because, in the end, as I said, we can keep disrupting these

networks, but, if we are going to get at it long-term, we need to

stop the donors. The donor is the best way to get at them, to deter

them or dissuade them in some way. The Saudis are trying to work

on dissuading through statements about undermining extremist

ideology, but in terms of public accountability, that remains something that they have not been willing to do.

Senator WYDEN. Well, you continue in your good work, Mr.

Levey. I think, on this public accountability point, I hope that we

18

can continue to blow the whistle on the fact that the Saudis are

foot-dragging on this question of the Charities Commission, because the point of the Charities Commission was to oversee the

charitable donations and to keep them from being used to fund terrorism. Now, as far as I can tell, this commission still has not been

established, and it has been years they have been dragging their

feet on it. So, I hope that you will continue to hammer away at

this.

I am going to assist Chairman Baucus in this area, and we will

also work with you, I guess, offline on the Intelligence Committee.

But I really appreciate the work that you are doing, and you have

been very responsive. I may ask you some additional questions in

writing as well.

Thank you very much, Mr. Chairman, for the extra time.

The CHAIRMAN. You bet. Thank you, Senator, very much.

I would like to, Mr. Levey, talk to you a little bit about the Suspicious Activity Reports, which I understand are a tool that is

available to you whereinunder various financial entities report

large cash flows and it helps you in your efforts.

Could you describe what these are, the SARs, and also the degree to which they might be a tool that is available to this committee in some other way to get to accounts that are offshore? They

are a tool that the IRS does not have available to it right now, as

I understand it.

Mr. LEVEY. The IRS does have access to Suspicious Activity Reports. Every financial institution, and many others, have the obligation to report suspicious activity to FinCEN, confidential in the

sense that they cannot tell their client or the underlying customer

that they are making the report. Those Suspicious Activity Reports

are collected by FinCEN. They are made available to law enforcement agencies, including IRS CI, and certainly many others.

The CHAIRMAN. But is it your understanding that those reports

are available not only to your organization, that is, those fighting

terrorism financing, but also the IRS generally?

Mr. LEVEY. I know, certainly, IRS CI.

The CHAIRMAN. Sorry?

Mr. LEVEY. I know, certainly to the Criminal Investigative section of the IRS, they are certainly available to them.

The CHAIRMAN. But what about tax evasion?

Mr. LEVEY. I think I will have to check for you in terms of

whether civil tax investigators have access to Suspicious Activity

Reports. I am not sure. I will have to check.

The CHAIRMAN. My understanding is that they do not, but that

is irrelevant.

Mr. LEVEY. You may be right.

The CHAIRMAN. That is irrelevant. For the purposes of discussion, let us assume they do not.

Mr. LEVEY. All right.

The CHAIRMAN. How valuable do you think that tool would be?

Mr. LEVEY. That tool is quite valuable. I think what we found,

from suspicious activity reporting as well as from the cash reporting that is done to FinCEN, these have been enormously valuable

for law enforcement in all sorts of contexts, from mortgage fraud,

which I know is on everyone’s mind right now, to drug trafficking

19

and other financial crimes. This is a very, very rich tool that law

enforcement can use as leads and to otherwise develop their cases,

and certainly in terrorism cases it has been quite valuable. The

FBI reports that, I think in 40 percent of their terrorism investigations, they have used either Suspicious Transaction Reporting or

Cash Transaction Reporting in terms of developing those——

The CHAIRMAN. So what are the most effective tools to understand the movement of funds, transfer of funds domestically as well

as internationally? This is one.

Mr. LEVEY. Well, I think the combination of this kind of reporting. All the efforts that we are making on transparency, again, in

our system to make sure that—as I think you indicated earlier, we

have rules for getting transparency in various parts of our financial

sector.

Two things happen at the same time. First of all, bad guys figure

out ways to work around it, and there is innovation for consumers,

so Stored Value Cards would be a good example, that that is both

useful for bad guys and useful for good guys. So what we need to

do is figure out, as there are innovations, how do we make sure we

get the benefit of the innovations without just giving in to the vulnerability of the innovations?

The CHAIRMAN. Let us stick with this question: what tools are

best that you find most effective for you? You talked about the Suspicious Activity Reports. What else?

Mr. LEVEY. I think the Suspicious Activity Reports and the Cash

Transaction Reports.

The CHAIRMAN. And what are they?

Mr. LEVEY. That is what people typically think of when you have a cash transaction of $10,000 more, it is reported.

The CHAIRMAN. So what about these cards we are talking about,

the Stored Value Cards?

Mr. LEVEY. Stored Value Cards. It is interesting. Senator, I am

going to pause for a second. What we did at the end of 2005 is conduct a threat assessment on money laundering, just money laundering, and we tried to figure out, what are the different ways that

all of our law enforcement agencies and regulators were seeing

about how bad guys moved money. We did a comprehensive threat

assessment, getting everyone’s information, and we then built a

money laundering strategy on top of that. So that was, I think, the

first time that has ever been done.

One of the threats that we saw was Stored Value Cards; one was

the trade-based money laundering that Senator Grassley talked

about. With Stored Value Cards, you have—and people are familiar

with it—it ranges from everything from your $25 mall card or

bookstore card to an open-ended, what we call open system cards,

where they are sort of reloadable. You can keep adding value to

them and you can use them in the ATM network.

So there is a range of products out there, and some of them could

pose a real vulnerability on money laundering. The ones I just

mentioned and what I call open-ended, I think, do pose a real vulnerability for money laundering because it is a way that the bad

guys can move value without having to move cash or otherwise get

access to the banking system, which is pretty tough to get access

to.

20

So we recognize the vulnerability. The problem is, it is also incredibly convenient and useful to innocent people and we do not

want to get——

The CHAIRMAN. So what are you doing about it?

Mr. LEVEY. We are trying to figure out how to regulate it.

The CHAIRMAN. What are your thoughts right now?

Mr. LEVEY. That it is going to be a difficult thing to regulate because there is no point of regulation. There are several different

possibilities, ranging from the issuer to the marketer, and it is very

hard and it is going to be difficult to regulate. Thus far, we have

not successfully regulated.

The CHAIRMAN. So how much do you think is being transferred

under the Stored Value Cards, or something similar to it on some

monthly or annual basis?

Mr. LEVEY. I do not have any credible estimate for that. What

I can say, and the way we have information on this, is when law

enforcement catches someone and then they——

The CHAIRMAN. This is just a very convenient way to transfer

cash.

Mr. LEVEY. It is.

The CHAIRMAN. That is exactly what it is.

Mr. LEVEY. It is. It is a very convenient way. It is a very convenient way. It is a way which both bad guys and a lot of good guys

are using, too—frankly, probably many, many more good guys than

bad guys—and we have to make sure we do not throw the baby out

with the bath water, as it were.

The CHAIRMAN. Could you briefly just tell us a little bit about the

role of non-bank financial institutions? For example, just last week

the Federal Reserve opened a discount window to non-banks to get

favorable loans. That was a whole big change in our system, which

leads me to wonder the degree to which there are lots of other institutions worldwide, financial institutions worldwide, that might

be involved in transferring monies that are ‘‘unregulated,’’ at least

not as much as banks, generally. Take hedge funds, for example.

There must be 1,000 different varieties and forms of financial institutions that are not banks, that are probably somehow involved

that could be used in terrorism networks.

Mr. LEVEY. The general answer to that, Mr. Chairman, is that

our regulations stretch well beyond banks. The requirement to

have real money laundering compliance officers and file Suspicious

Activity Reports and the like goes well beyond just banks to money

services, businesses, et cetera, that have that obligation.

What I do not want to suggest is that it works perfectly. It does

not. We have a lot of progress that we still need to make, but we

are not limited to just banks in terms of our regulatory reach. The

PATRIOT Act, frankly, required us to write regulations and impose

these controls on a number of different industries beyond traditional financial——

The CHAIRMAN. What is your level of confidence in the degree to

which you have gotten a handle on this? I mean, to be candid, just

listening to you, I am not being personally critical of you. This is

an incredibly complex problem. But to be candid, I get the sense

that, man, we have a long ways to go yet. We are nowhere close

to stopping all those flying pucks at the goalie.

21

Mr. LEVEY. I do not want to be flip, but I will say this. If you

ever have someone sitting here saying that they know that they

have it under control, then you have a problem.

The CHAIRMAN. That is right. And I did not expect to hear that

from you. But what I am expecting to hear from you is some guidance as to what we can do to help make sure we have more under

control.

Mr. LEVEY. Well, I think we have gotten incredible support from

Congress. This started off as a real start-up with a very, very small

group, and we have gotten great support. I want to say, this has

been a completely bipartisan effort. We have had great support

from both sides, from the House and Senate on this and we have

gotten resources and we are much better off for it. But I just am

not the type that would ever say that——

The CHAIRMAN. Well, I understand that. I am looking for guidance of what we have to do. Like, what about your international

cooperation? Is Saudi Arabia a weak link?

Mr. LEVEY. Well, it is not just about Saudi Arabia.

The CHAIRMAN. I know that. Right.

Mr. LEVEY. I do not want to focus on that.

The CHAIRMAN. I am asking the degree to which there are other

Saudi Arabias.

Mr. LEVEY. I have to say, the quote that you had, I think it was

in your opening statement, that as we get further from 9/11 it is

harder to keep people feeling urgent about this. Michael Jacobson,

who made that quote, is someone whom I have a great deal of respect for. It is harder to keep people focused on this. It is just

human nature. But I intend to stay urgent on it. The United States

certainly is very urgent about this. This is a very, very high priority for us and, quite frankly, I think it means a lot. When Secretary Paulson meets with his counterparts, he always raises these

issues. I think that has not always been the case for Treasury secretaries in the past. I think by doing that, he does send a very

strong message.

The CHAIRMAN. Well, I know that is true because he has mentioned that to me several times. I know that. I think that is clearly

very helpful.

Before I turn to Senator Kerry, though, I want you to know that,

clearly, we want to do all we can to join with you and others to

combat terrorism financing, so I am depending to a large degree on

you to tell us, not at this hearing but at future dates, formally or

informally, what you need to get the job done.

Mr. LEVEY. Thank you, Mr. Chairman.

The CHAIRMAN. Senator Kerry?

Senator KERRY. Thank you, Mr. Chairman. Thank you very

much. I appreciate it.

Thank you, Secretary Levey. It is a pleasure to have you here

today. I want to commend you, as others have. I think there have

been public commendations of TFI’s efforts to prevent the misuse

of our financial system by terrorist financiers, so we appreciate

that work.

This is something actually that I stumbled into a number of

years ago on the Foreign Relations Committee when I was looking

at the issue of the Contras and the illegal activities in Central

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America. In the course of that, we found a rather remarkable network internationally of finance linked to drugs, arms, as well as

ideology. It was quite an insight. I launched an investigation 20

years ago now that shut down the DCCI Bank, which, interestingly

enough, not only funneled illegal funds to a lot of interesting actors

who played a role in large ways, but also included Osama bin

Laden back then. That was the first time that I became aware of

his name.

Then in 2000, I introduced the International Counter-Money

Laundering and Foreign Anti-Corruption Act, which provided the

tools that you are now working with, some of them, anyway. After

9/11, I worked closely with Senator Sarbanes and Senator Levin to

develop a package of anti-money laundering provisions that were

included in the PATRIOT Act. So, this is an area of considerable

concern.

I appreciate that your efforts are not all that well-known to everybody and not always that glamorous, but boy are they important

and very, very significant in their ability to be able to reduce the

easy ability of terrorists to be able to carry out their plans.

TFI has now designated some 500 individuals and entities that

had been tied to terrorist activity, so that designation and the

heavy premium that you have placed on financial intelligence gathering has strained their networks. On the other hand, what we

have all learned through the years of working in this, like any

criminal activity, the minute you begin to shut down in one place

or another they begin to move to another place and develop new

methods. That is what concerns me a little bit right now, is that

terrorists change their methods. The question is, have we changed,

and do we have the resources, and are we moving rapidly enough

to stay up with them and ahead of them? That is sort of question

number one, if you will.

Two, I want to know what you think we can do to adapt our tactics in response to the new ways that they raise, store, and move

funds like the hawalas, for instance, and the trade-based money

laundering that is taking place.

I also want to pursue just very quickly what the chairman started to ask about, which was this issue of international cooperation.

After 9/11, people came to us in significant numbers and said, wow,

we have to work at this, what are we going to do? There was a

burst of energy. But I am concerned that that is now lagging in

ways that are very dangerous to us all. There is a lack of will or

there is a lack of capacity, or both, and sometimes they are intertwined.

This January, the Financial Action Task Force said that international efforts had only limited success in detecting terrorism financing activities. So, I would like to hear what you think. That

is the third part of the question.

Finally, we really do know that you have scarce resources, and

we are struggling with resources here in every sector of our governance now. I am pleased that there has been a shift from broadbased country sanctions to more targeted financial measures, but

I get concerned when I hear that, out of the over 20 sanctioned programs administered by OFAC, more than 60 percent of investigated cases involved contraband entering from Cuba. The quesVerDate 11-MAY-2000 14:49 May 17, 2010 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 56103.000 TIMD PsN: TIMD
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tion looms large whether or not OFAC and FinCEN are properly

prioritizing the threats that we face and using the limited resources as effectively as possible.

So, why do we not start with those several questions on the

table, and we can go from there?

Mr. LEVEY. All right. There is a lot there. Let me see if I can

answer as much of it as I can, and cover as much of it as I can.

I think, let me start with international cooperation, because

maybe it is the most important. As I said to the chairman, I think

there is a challenge in terms of keeping people focused on this.

After 9/11, this was the issue for everybody in the whole world. We

are now in 2008.

Having said that, I think that the people who work on terrorist

financing and money laundering issues, and particularly the Financial Action Task Force that you mentioned, Senator Kerry, they

have made a huge difference. That work, I think, does continue

very, very powerfully and is even adapting—to maybe pull two answers into one—to new methods. So one of the things that we have

seen is that, as terrorists get pushed out of the financial system,

they move to cash couriers, for example.

So what the Financial Action Task Force did is they started with

recommendations about terrorist financing. We saw that that was

one of the adaptations that were being made by the terrorist

groups. We now have a new recommendation from the FATF about

cash couriers and the kinds of controls that need to be put in place.

Senator KERRY. How long does it take you to implement when

you get that kind of recommendation? How fast can you respond?

Mr. LEVEY. There are 175 countries that have pledged to implement status standards and they subject themselves to mutual evaluations. No one gets them all perfectly, including us. We had our

own mutual evaluation, and we have improvements that we need

to make. But what we try to do is, as you said, if there is a will,

if there is political will and people want help, we try to identify

training and technical assistance, including through the Treasury

Department’s Office of International Affairs, which provides a lot

of technical assistance, as does the State Department, but also

other countries.

Senator KERRY. Who is the point person on that? Who is the lead

in that effort to motivate and guide those 175 countries? Is that

State or is that you?

Mr. LEVEY. The FATF would be us. The FATF is a Treasuryled——

Senator KERRY. Do you feel, though, that extraneous State or

DoD or White House priorities often get in the way of that, that

you are not sufficiently leveraged?

Mr. LEVEY. No. I think we have gotten incredible support on our

FATF work, and people are recognizing the power of it, especially

as the FATF has taken up the issue of Iran and put out statements

about the vulnerability that Iran poses to international financial

systems. I think everyone around the world is realizing that this

is something that the private sector around the world listens to,

and that makes it powerful because, as I said before, they have

much more of a chance of having a substantial impact than governments can.

24

Senator KERRY. Who have been our greatest allies in this effort?

Who are the fastest to respond and the greatest help?

Mr. LEVEY. That is a difficult question.

Senator KERRY. That is why I am asking. I want to know.

Mr. LEVEY. For the most part, our cooperation on these issues is

very good.

Senator KERRY. Is it as good in every country? No, obviously not.

Mr. LEVEY. Of course not. What I would have to do to answer

that comprehensively is, we do a report each year about what

vulnerabilities exist in countries’ money laundering and terrorist financing regimes, and there are also these mutual evaluations that

I referred to.

Senator KERRY. Well, are there some countries that just get it

and are really rabid supporters of this effort?

Mr. LEVEY. There are and there——

Senator KERRY. Such as?

Mr. LEVEY. Our Western European allies are quite strong on

these issues. They have very good controls.

Senator KERRY. I will wait until the next round.

The CHAIRMAN. Senator Wyden? Thank you, Senator.

Senator WYDEN. Thank you, Mr. Chairman.

Just very briefly, I want to follow up on Saudi Arabia, Mr. Levey.

You have a talented squad of financial analysts. When you come

across leads about possible terrorist financiers in Saudi Arabia, is

that information passed on to the Saudi government?

Mr. LEVEY. Senator, could I take that up with you in another setting? I would be happy to, and I will do it as soon as you want,

but I would rather not have that discussion in this session.

Senator WYDEN. All right. I will do that as part of my classified

information handling as a member of the Intelligence Committee,

because I really do want to know what happens with that information.

Mr. LEVEY. I would be happy to.

Senator WYDEN. Then the last question, very briefly. We have

been outlining this morning all of the ways in which Saudi Arabia

has been foot-dragging on these kinds of questions of terrorist financing. I mentioned the Charities Commission. I mentioned the

fact they have been slow to put in place, as you call it, a fully functional financial intelligence unit.

In your judgment, because of the nature of the Saudi government, tackling these questions, like establishing a Charities Commission, does it really not come down to the royal family’s political

will? If the royal family has the political will to deal with these

issues, it happens. Do you agree?

Mr. LEVEY. I agree to the extent that the things that we have

asked them to do are things that they are capable of doing, but I

also think that they have shown political will on other issues that

are important to us, including fighting terrorism within the kingdom. So, yes, I agree that these are issues that they could tackle

and have the resources to.

Senator WYDEN. It just comes down, on issue after issue—I

mean, you have cited appropriately, in my view, the importance of

overseeing these charitable donations. I mean, there is no question

that what happens today is, when somebody goes to a gas pump

25

in Medford, OR, eventually a part of the price you pay for gasoline

in Medford, OR makes its way to Saudi Arabia and they back-door

it then through these various terrorist organizations. I would just

appreciate your keeping the heat on.

Mr. LEVEY. I feel obliged to make the comment that I do not

want to imply that I am saying that this is state funding of terrorism.

Senator WYDEN. Oh, no question.

Mr. LEVEY. Okay. That is Iran.

Senator WYDEN. What happened is, and this has been clear all

the way from the 9/11 Commission, is that we are seeing donations

from private parties make their way through these charitable endeavors, and the Charities Commission, which was supposed to be

set up to oversee the donations and keep them from being used to

fund terrorism, is now 3 or 4 years into the debating stages, still

has not taken place.

I think what you have made clear is something I feel very strongly about, which is, while the Saudis have been willing to work in

other areas, as you have just indicated, they have not had the political will to really put in place these organizations that deal with

the financing of terrorism as it relates to stopping money from

flowing to terrorists who are outside the country. Again, I appreciate your work, and we will talk offline about the first question

I asked.

Thank you for the time, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator.

Mr. Levey, the Treasury IG’s office has briefed us on what is potentially quite a serious example of mismanagement at TFI, and

that is the failure to get up and running a computer system that

connects the Treasury to other intelligence agencies. Funding has

been received for this system, and the operating project was scheduled to be completed last September 30. That is my understanding,

but it has still not happened. It seems to me it would be a good

idea to get a pretty good computer system operating between the

intelligence communities. What is the deal?

Mr. LEVEY. The deal is—and thank you for the question, this is

important—we expect, in the middle of this—we are in April now,

right?—in the middle of this month, to have the next stage rolled

out.

The CHAIRMAN. Well, this is April Fool’s Day. We are not quite

there yet.

Mr. LEVEY. By mid-April.

The CHAIRMAN. All right.

Mr. LEVEY. From wherever we are now, in mid-April we expect

the next phase to be deployed. It is a few months behind, no question about it, but it is still on budget and, in a broader sense, on

track. This is a critical project for our success.

The CHAIRMAN. So you expect to be up and running when?

Mr. LEVEY. Middle of April.

The CHAIRMAN. In a couple weeks?

Mr. LEVEY. In a couple of weeks. Give me until the end of April

to give me a little play in the joints there.

The CHAIRMAN. Good.

26

Mr. LEVEY. But if we are not there by the end of April, we will

be up to tell you about it.

The CHAIRMAN. All right.

Senator Kerry, any questions?

Senator KERRY. Yes, I do. I appreciate that. Let me follow up.

Let me come back to what I was asking. You said the Western

European countries. What about the biggest problems right now?

Who are the slowest to respond?

Mr. LEVEY. I am not trying to be difficult, Senator Kerry. There

are a number of countries that do not have adequate terrorist financing and money laundering laws, and some of them are more

important to us than others. So, for example, it is a problem that

Kuwait does not have an adequate terrorist financing law. It is not

the only country that does not have a terrorist financing law, but

it is important that they——

The CHAIRMAN. I do not mean to interrupt, but that is surprising

to me because Kuwait is a friend.

Mr. LEVEY. It does not track in terms of friends or not friends.

It is just, these are issues that it takes effort, it takes people with

expertise, and it takes, oftentimes, political will. It took a long time

to get a money laundering law passed in Jordan, and there is no

better friend in this effort.

But we have, in Turkey, for example, where there is a big financial system, an important ally, generally trying hard on these

issues, but they have a definition of terrorism in their terrorist financial money laundering laws that is limited to acts of terrorism

against Turkish nationals. That is a problem because that is out

of step with the international camp.

Senator KERRY. What I have found, at least, in my experience

with this is, it is usually a question of interest, country interest,

business interest, sometimes political and business combined. But

it is always money that is at the bottom of this, as some of you

know. The point I am making is, you have to make the connection

between this money and the ultimate danger to these people, and

a lot of them do not accept it.

I was just recently in Pakistan, and both the new leadership and

others just view the insurgency differently than we do. For them,

the threat is the Massoud and the indigenous insurgency, not Al

Qaeda. That drives them to a different set of balances.

Mr. LEVEY. You are right, Senator. I think the point you just

made, which is why I started to intervene, you are exactly right.

We have to convince them that it is in their interests to do this.

I think there is a good argument that it is in their interests to do

this, which is that, by bringing their financial system up to international standards, they are more likely to attract investment and

attract business from outside. When they are not living up to international standards, people do not want to do business with them.

That is the argument that we try to make, and it is oftentimes successful, but we have to keep pushing on that issue.

Senator KERRY. Well, in Iraq, in Anbar Province, until recently—

I am not sure what the status is exactly today—I know there were

some 70 different export-import banks in Anbar Province that were

engaged in the funding of illicit activities. They were fronts for

those illicit activities. In the Shiite part of Iraq it is more dependVerDate 11-MAY-2000 14:49 May 17, 2010 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 56103.000 TIMD PsN: TIMD
27

ent on the hawalas as their means of movement of money. But

what steps have been taken by the Government of Iraq, where we

are pouring life and money at extraordinary levels to support them,

to be supportive of us?

Mr. LEVEY. Well, we are working very closely with the Government of Iraq. We have people on the ground there.

Senator KERRY. Well, we know we are working closely with

them. What are they doing? This is 6 or 7 years now. We are moving down the road here, and they are still a part of the problem.

Mr. LEVEY. Well, we are trying to set up a banking—this is a significant problem, Senator. I am not trying to minimize it. The problem is, we need a banking system in Iraq so that it is not so much

of a cash society. A cash society has all the vulnerabilities that you

are very well aware of in terms of illicit conduct.

We need to have a secure banking system so that people can

move money electronically for legitimate purposes so that we do

not have innocent people traveling around with lots of cash, because then it is hard to separate out the good from the bad. We

are working with them on that and we are seeing some progress,

but we have a ways to go.

Senator KERRY. To what degree, similarly in Afghanistan, is the

narcotics trafficking, the poppy, undermining our own efforts and

providing a source of funding for Al Qaeda and the Taliban and for

counter-government efforts?

Mr. LEVEY. I am a little nervous about what I am allowed to say

publicly. Of course, you could get a full briefing. It certainly is one

of the sources of funding and control from the Taliban. It is not the

only source of funding. They are also getting funds from outside,

as I indicated in my answer to Senator Wyden. There are other

sources of funding going into the Taliban. Frankly, the quote from

Shaykh Sa’id that I had in my opening statement is him trying to

raise money for the Taliban. But there is no doubt that the drug

trafficking in Afghanistan contributes to it. I think it is different

in different parts of Afghanistan.

Senator KERRY. Well, what about the resourcing to you? What

you are describing is a major connection. This is the great

facilitator of terrorism: money and its movement. To the degree

that we have transparency and accountability, obviously everybody

is better off, not to mention just in governance in terms of who is

making what money where, and the flow of capital.

So this has always struck me as an area that just gets overlooked. Somehow we are willing to send people in uniform to put

their lives on the line, we put billions of dollars into the jets and

the bombs and this and that, but if you cannot deal with these

kinds of issues you are not putting your priority where it ought to

be.

What do you need to augment this effort and to give it the full

measure of light that it deserves?

Mr. LEVEY. Well, I like the question, Senator Kerry. I appreciate

it. I think we have gotten a lot of support. We have had our budget

fully funded each year, and it has increased each year. I do not

think it is necessarily the case that every government official sitting here would always say, I need more resources. You could make

28

the argument for more resources, but the truth is, it is more about

using our resources wisely.

I think we have adjusted in response to some of the chairman’s

concerns, and making sure that we continue to raise this at a high

level politically, because it is not so much needing more people, it

is making sure that we make this a priority in our relationships

with other governments and making it a priority when we deal

with the private sector leaders in other countries.

To get to your point, I think one of the best sources of getting

political will generated in some of these countries to improve their

systems of controls on these issues is the private sector, because

they are trying to live up to the international standards themselves

because they want to do business internationally. They sometimes

go to their own governments and say, hey, let us improve our law.

So it is more a question of using our resources wisely, making sure

we are talking to the right people, and continuing to keep it high

on our political agenda.

Senator KERRY. Well, with all due respect, I have to say to you,

I mean, I realize the position that any leader of an agency is in

with respect to defending the budget up here. After the years I

have been here, I am sort of impatient with the automatic defense

that you get and lack of reality sometimes.

I have to tell you, having just been in both Pakistan and Afghanistan, it is shocking to me the disparity between the amount of

money going in there. I think it is a half a billion that was going

into Pakistan, compared to $10 billion, $12 billion a month—half

a billion a year, compared to $10 or $12 billion. That is the center

of the front on terror. That is where Al Qaeda is. That is where

they have reconstituted in some 60 countries today.

I have had that intelligence briefing, and I really am not satisfied that we are doing what is necessary to build the infrastructure. The Karzai government is locked into Kabbul fundamentally.

They have huge problems getting out to the rest of the country,

where 70 percent of the population is. Unless we resource that adequately, both militarily and otherwise, we are going to fail there.

That is what most experts who have been there, from General Jim

Jones and others to the current folks who are there, tell us. So, I

do not think it is adequately resourced.

I think you deserve to have more ability to be able to leverage

these countries and to put people in them to provide the technical

expertise and to help provide even some of the technology and the

hardware and the training, and that is labor-intensive. So, I thank

you for the work you are doing, and I understand you are doing

well with the limits you have. But this has to get actually a much

higher priority, in my judgment.

Mr. Chairman, thank you for having this hearing. I think it is

very important. I appreciate the time.

The CHAIRMAN. Thank you very much, Senator.

A couple of matters here. On behalf of Senator Grassley, I would

like to put in the record a testimony of former CIA Customs Agent

John Cassara. That will be in the record.

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

29

The CHAIRMAN. Second, I would like to place in the record a July

3, 2007 letter from Acting IRS Commissioner Kevin Brown. It is a

letter to the chairman on the issue of how the IRS checks names

on nonprofit tax filings against terrorist watch lists.

[The letter appears in the appendix on p. 31.]

The CHAIRMAN. Finally, Senator Grassley and I also have

learned that we should ask the Government Accountability Office

to conduct a comprehensive review of the Office of Terrorism and

Financial Intelligence, and we are sending a letter with that request today. I think we agree that, after 4 years and to prepare a

new administration for its anti-terrorism financing duties, that this

sort of study could be very timely.

I want to thank you again, Mr. Levey, for your testimony today.

I generally believe and feel, as others have stated, that you are

doing a pretty good job, given the resources that you have and

given the degree to which this is or is not a priority for the entire

administration. I frankly believe it should be a higher priority, a

much higher priority. I hope that you are able to be very effective

in convincing the administration to put this up several notches.

There are lots of, I know, different offsetting interests that the

administration has with all these different countries, but frankly,

the bottom line to me is terrorism and making sure that we do

snuff out the financing of terrorism. It comes down to money, as

you have often said, and I just hope very much that we get this

to a much higher priority. It is a higher priority now, but in my

view it must be a still higher priority. I hope we can accomplish

that objective quickly.

Thank you very much. The hearing is adjourned.

[Whereupon, at 11:40 a.m., the hearing was concluded.]

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