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90–722 PDF 2003

S. HRG. 107–1018

THE ADMINISTRATION’S NATIONAL

MONEY LAUNDERING STRATEGY FOR 2002

HEARING

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

ON

THE COORDINATION AND THE FOCUS OF FEDERAL ANTI-MONEY

LAUNDERING PROGRAMS, ONE YEAR AFTER THE PASSAGE OF THE

INTERNATIONAL MONEY LAUNDERING ABATEMENT AND FINANCIAL

ANTI-TERRORISM ACT OF 2001, TITLE III OF THE USA PATRIOT ACT.

OCTOBER 3, 2002

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

ZELL MILLER, Georgia

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JON S. CORZINE, New Jersey

DANIEL K. AKAKA, Hawaii

PHIL GRAMM, Texas

RICHARD C. SHELBY, Alabama

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

JOHN ENSIGN, Nevada

STEVEN B. HARRIS, Staff Director and Chief Counsel

LINDA L. LORD, Republican Staff Director

STEVE KROLL, Senior Counsel

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

(II)

CONTENTS

THURSDAY, OCTOBER 3, 2002

Page

Opening statement of Chairman Sarbanes ........................................................... 1

Opening statements, comments, or prepared statements of:

Senator Enzi ..................................................................................................... 3

Senator Stabenow ............................................................................................. 6

Prepared statement ................................................................................... 36

Senator Carper ................................................................................................. 32

WITNESSES

Charles E. Grassley, a U.S. Senator from the State of Iowa ............................... 4

John F. Kerry, a U.S. Senator from the State of Massachusetts ........................ 36

Kenneth W. Dam, Deputy Secretary, U.S. Department of the Treasury ............ 7

Prepared statement .......................................................................................... 38

Larry D. Thompson, Deputy Attorney General, U.S. Department of Justice ..... 10

Prepared statement .......................................................................................... 61

Stuart E. Eizenstat, former Deputy Secretary, U.S. Department of the

Treasury ................................................................................................................ 24

Prepared statement .......................................................................................... 65

Elisse B. Walter, Executive Vice President, Regulatory Policy and Programs,

National Association of Securities Dealers ........................................................ 27

Prepared statement .......................................................................................... 69

Alvin C. James, Jr., former Senior Money Laundering Policy Advisor, U.S.

Department of the Treasury ................................................................................ 28

Prepared statement .......................................................................................... 73

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

The 2002 National Money Laundering Strategy, dated July 2002 ..................... 79

(III)

(1)

THE ADMINISTRATION’S NATIONAL

MONEY LAUNDERING STRATEGY FOR 2002

THURSDAY, OCTOBER 3, 2002

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC.

The Committee met at 9:40 a.m., in room SD–538 of the Dirksen

Senate Office Building, Senator Paul S. Sarbanes (Chairman of the

Committee) presiding.

OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

Chairman SARBANES. Let me call the hearing to order.

We are holding this hearing today to review the Administration’s

2002 National Money Laundering Strategy. This Committee has

devoted a great deal of time to the anti-money laundering measures over the past year. In fact, a year ago tomorrow, the Committee unanimously passed path-breaking legislation that became

Title III of the USA PATRIOT Act. We held an oversight hearing

on that legislation, January 29, and we are holding a second oversight hearing today.

I am especially pleased that Senator Grassley is able to be with

us this morning. He has taken a strong role on this issue, along

with Senators John Kerry and Carl Levin. I have Senator Kerry’s

statement which will be included in the record, and Senator Levin

has indicated that he intends to submit a statement for the record.

Before I turn to Senator Grassley, I just want to say a couple of

words about the issue. During the last year, the anti-money laundering agenda has been dominated by the financial war on terrorism. The Federal Government has taken unprecedented steps to

lead international efforts to disrupt and disarm international terrorist financing networks.

According to Deputy Secretary Dam, the United States and other countries have frozen more than $112 million in assets related to

terrorist organizations. Treasury has also worked to implement the

various provisions of Title III of the USA PATRIOT Act, a job that

is not yet fully complete. It has produced the necessary rules in a

steady and timely sequence, and while one may differ on occasion

with some of the substantive choices made, I do think that there

has been a committed effort to meet the statutory deadlines.

The short-term focus on clandestine financial movements designed to fund terrorism is understandable in the circumstances.

But it should not detract attention from two issues affecting the

broader range of Government anti-money laundering efforts.

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The first issue is that we have not yet assigned responsibility for

the success or the failure of these efforts. Working against money

laundering means more than prosecuting particular individuals. It

means combining civil regulatory criminal enforcement and diplomatic initiatives. And the question is who is the responsible person

if the necessary combination does not occur?

The question is especially relevant to last year’s legislation,

which dealt in large part with cross-border transactions, especially

international banking and money movement.

Implementing regulations are written by the Department of the

Treasury. But the bank supervisory agencies, the SEC, and now

the CFTC, examine various classes of financial institutions for compliance with the rules.

Although the IRS is supposed to examine a vast range of

nonbank institutions, including hawala money transmitters for

compliance, a reorganization of the revenue service has made it difficult for it to find staff resources for such audits.

The Treasury retains ultimate authority to impose penalties for

noncompliance with the new rules. But the experience has been

that that job is usually left to the bank supervisors under different

authority.

The second issue is the Government’s difficulty in developing a

fully coordinated approach to combat money laundering as a separate crime, again, in part because no one is responsible for doing

so, or authorized to overcome organizational resistance.

Now, central coordination I think has been in place to a significant extent to deal with terrorist funding. But that organization

has not been duplicated to deal with narcotics-based money laundering, or with problems associated with correspondent banking

and off-shore shell companies.

Some of the proposed transfers in the Homeland Security legislation heighten these questions, particularly the transfer of the Customs Service and the Secret Service. The Customs Service has been

a leader in money laundering investigations and the Secret Service’s expertise in dealing with credit card crimes is increasingly relevant to money laundering cases.

There are also reports that indicate that the enforcement arm of

the Bureau of Alcohol, Tobacco, and Firearms, and perhaps all or

part of FinCEN, could also be moved, either to the Department of

Justice or the new Department of Homeland Security, so that

Treasury would have little or no law enforcement capacity remaining outside of the Internal Revenue Service.

The possibility of shifting these investigative resources make it

all the more important to examine how to centralize the formation

and coordination of all Federal anti-money laundering efforts.

By bringing attention to these issues, I do not mean to minimize

the difficulties involved in carrying out a unified anti-money laundering program. Money-laundering involves a complex set of problems that cut across jurisdictional and subject matter boundaries.

But, we must face this challenge and it is one of the things that

we need to explore in this hearing.

With that, I yield to Senator Enzi.

3

STATEMENT OF SENATOR MICHAEL B. ENZI

Senator ENZI. Thank you, Chairman Sarbanes. I appreciate your

willingness and diligence with this issue. I also want to thank the

witnesses who will be testifying today. This issue is of the utmost

importance and the timing of the hearing is extremely important.

Since September 11, the Congress and the Administration have

worked in conjunction in an attempt to decide how to defeat an

evasive and deadly enemy. Terrorists and terrorist organizations

offer new threats to the security of the American people and we

have to do everything possible to defeat them.

I am proud to say that this Committee acted almost immediately

after the September 11 tragedy to explore avenues to stop the financing of terrorism. Through bipartisan efforts led by Chairman

Sarbanes and Senator Gramm, and the efforts of Senators Levin

and Grassley, this Committee passed the International Money

Laundering Abatement and Financial Anti-Terrorist Act of 2001.

This legislation developed far-reaching laws which will assist our

local law enforcement community in stopping funds from going to

the enemy.

Many of the provisions included in the bill required regulatory

action by the Department of the Treasury and the Department of

Justice. Now, as these regs are written, it is critically important

that Congress remain aware of the implementation and areas that

we may need to readdress to assist in the efforts to stop the flow

of funds to these organizations.

However, this is not just a domestic issue. Combatting terrorist

financing is a global issue which requires the assistance of all our

allies and, quite frankly, our allies are happy to finally have us

joining the battle.

Chairman Sarbanes and I have the privilege of being the Congressional delegates to the United Nations. Chairman Sarbanes

has always conducted himself as a diplomat, and now he actually

has diplomatic status and rank.

[Laughter.]

In that capacity, he and I are able to witness the coalition-building taking place on the international front. An example of good

work being done is the United Nations Security Council Counterterrorism Committee, or CTC. The CTC was created by the Security Council Resolution 1373 after the attacks of last September

and with full support from the United States.

With the exemplary leadership of Sir Jeremy Greenstock, British

Ambassador to the United Nations, the CTC has gathered reports

from over 170 individual nations. The Committee has made suggestions on how these nations can continue to improve their financial

monitoring systems in the fight against terrorism.

Although not all reports to the CTC have shown effective action

being made by nations, the knowledge garnered from the international community can be used to find links between charities,

NGO’s, and terrorist organizations.

I have had the opportunity to work with Ambassador Greenstock

and am very pleased with his leadership on the CTC. I am also

pleased to hear of his support for regional organizations taking a

larger role in the fight against terrorism.

4

I am concerned, however, about the future of this work. The information gathered has been remarkable. But now we are faced

with the question of what to do with it.

The CTC was not designed to take action, just to gather information. It is up to the international community to cooperate and use

this information. When cooperation on money laundering is not a

high priority, the entire world is at risk. It only takes one nation

with lax laws to provide terrorists and money launderers a safe

place to hide.

Again, Mr. Chairman, I appreciate your holding this hearing. I

look forward to working with you and the other Members and I

look forward to the testimony of Senator Grassley. He is always

one of the best-prepared people, particularly on issues that require

a lot of detail. And that is an unusual combination around here.

Thank you, Mr. Chairman.

Chairman SARBANES. Thank you, Senator Enzi.

Senator Grassley, we would be happy to hear from you.

STATEMENT OF CHARLES E. GRASSLEY

A U.S. SENATOR FROM THE STATE OF IOWA

Senator GRASSLEY. Thank you, Mr. Chairman, and Senator Enzi,

most importantly for the invite at a time when Congress winds

down. I think it shows on the part of you and your Committee that

this is a very important issue and that you cannot let this issue

drag or be unattended, or we are not really going to get things

done that need to be done.

In 1997, when I first started thinking about what would eventually become the Money Laundering and Financial Crimes Strategy

Act, there were a couple of facts that I highlighted. First, I believed

then, and still do, that money laundering poses a significant threat

to our country. It undermines legitimate financial transactions,

promotes corruption, and funds terrorism. It also allows profits

from a plethora of illicit transactions, from drugs to prostitution to

gambling.

Second, it seemed to me at that time that to best respond to this

threat, we needed a comprehensive and coordinated response. Coordinated not only between Federal law enforcement agencies, but

between regulators, industry experts, and policymakers. And to accomplish this coordination, we would need a plan.

Working with Representatives Vela ́zquez and Leach, as well as

the former Chairman of this Committee, Senator D’Amato, we

agreed that the best way to encourage a comprehensive, coordinated response to money laundering was to require the development of a national strategy on money laundering. As a model, we

used Operation El Dorado, a joint venture between Federal, State,

and local law enforcement in New York City. Operation El Dorado

was able to identify and shut down money laundering in a segment

of the money transmitter industry. We hoped that that strategy

would take the lessons learned from Operation El Dorado and

apply them on the national level. But it does not seem to have been

duplicated elsewhere.

These elements of cooperation and coordination which made the

Strategy an important concept in 1998, make it essential today. We

know that money laundering is the functional equivalent of a war

5

industry for terrorist groups. More than ever, I am convinced that

we need a coherent, comprehensive response on the issue. If we are

going to ensure the legitimacy and security of our financial system,

while protecting the privacy of investors, then everyone, from law

enforcement to bank regulators, need to understand the threat and

what their particular role is in addressing that threat. Difficult topics or turf disagreements cannot be swept under the rug. And those

do exist.

Unfortunately, this latest strategy falls short of the goal. I am

disappointed to have come to this conclusion. But we must think

clearer about what can be done, and we must exercise leadership

and establish responsibility to ensure that it happens.

This is not a criticism of current efforts. Most of the efforts we

are making, such as Treasury’s Operation Green Quest or the Terrorism Financing Review Group at Justice, are doing a great job.

I am confident Deputy Dam and Deputy Thompson will give you

a full report. But there are weaknesses that these groups and others have identified in our financial system that we need to address

if we are going to make an effective difference. And unfortunately,

these weaknesses are not discussed in this latest Money Laundering Strategy.

For example, Mr. Chairman, I am concerned that not enough attention is being paid to the correspondent accounts U.S. banks

have established. While the USA PATRIOT Act moved the ball significantly forward, it appears that greater steps should be taken

that may not be best accomplished with additional legislation.

We know that even today, a satchel of thousands of U.S. dollars

can be taken to a foreign bank that is willing to accept the deposit

with no questions asked. The foreign bank, through its correspondent relationship with a U.S. bank, will provide either readily negotiable U.S. dollar checks drawn on a U.S. bank or wire transfers

initiated by the U.S. bank in exchange for the cash. These checks

and wire transfers are drawn on the account of the foreign bank

with the U.S. bank, effectively hiding the source of the funds.

And since no banker wants to hold excess currency, the foreign

banker, who does not have the option of sending his excess dollars

to the Federal Reserve Bank, deposits the dollars in his U.S. correspondent account. This is a gaping hole in our money laundering

net. It circumvents all the safety measures that the legislation put

in place—yet it is not discussed at all in this Money Laundering

Strategy. What we have instead is a report on current activities.

Only actions currently underway are addressed, and potential new

components which have been discussed in the past—such as the report required in the 2001 Strategy on the roles lawyers and accountants play in money laundering—are ignored.

I believe a strategy should not be a report card on what has been

done, but, instead, should provide a roadmap to where we want to

be tomorrow. It should identify threats and the tools needed to address these threats. And it should provide direction for the steps

necessary to reach objectives. If we are going to avoid duplication

or inconsistent, ad hoc responses to these new threats, then we

need to develop a clear, systematic approach to money laundering.

We have had such a document in the past. The 2000 Strategy

was a strategic document. The 1999 Strategy was as well, although

6

it wasn’t released until the end of the year. But both documents

identified problems, and then listed specific steps that would or

should be taken to address these challenges. They charged specific,

individual offices with action items. And each of us may have had

some difficulties with where the Strategy was taking us—but any

good strategy will be controversial. It laid out a coherent, comprehensive plan to deal with money laundering, nevertheless.

If we were going to address money laundering in a coordinated

and effective manner in the future, then we must have a coherent

plan of action. An effective strategy should be released at the beginning of the year, before funding decisions are made. By law, the

2003 Strategy is due February 1. It should talk less of targeting

the individuals who manipulate the system, and more about how

to make the methods that they use no longer workable. And it

should outline the steps necessary to get from where we are today

to where we want to be.

I know that we can do better. I know that we have to do better.

And I hope that when the 2003 Strategy is released early next

year, it is. Thank you again for the invite. I look forward to continuing to work with the Members of the Committee, and particularly the Administration, on this important issue.

Chairman SARBANES. Thank you very much, Senator Grassley,

and thank you again for your constant efforts on this issue.

I do just want to underscore one point you made.

Of course, this Strategy came late. But the next report is due in

February of next year. I think the Committee should obviously

have a review of that report, which I hope will be on time, or close

to it, shortly after it is released, and we look forward to again

interacting with you in that regard.

I think your suggestion that in addition to reviewing what has

been done, which is always helpful, of course, as you look to moving

ahead, but I think you are right, we need to have a strategic plan

that focuses on other concerns as well.

So, as we move ahead, we are really getting a comprehensive

framework into place to deal with this issue. I think it is extremely

important. And I look forward to continue to work with you in that

regard.

Senator GRASSLEY. If that Strategy is delivered timely, it is going

to come at the time that we develop the budget and then for the

hearings of the Subcommittees of Appropriations. And if there is

more money needed, it is going to be much more easy if we have

that Strategy plan with us at that time.

Chairman SARBANES. I think that is an excellent point.

Senator Enzi.

Senator ENZI. I just want to thank Senator Grassley for the excellent testimony and the ideas that he has here.

Chairman SARBANES. Senator Stabenow, do you have any questions of Senator Grassley?

COMMENTS OF SENATOR DEBBIE STABENOW

Senator STABENOW. Thank you, Mr. Chairman. Not a question,

but just to thank Senator Grassley for all of his work on this issue.

Another issue Senator Grassley has raised and I have raised on

the Committee is the issue of concentration accounts. I know that

7

we have been jointly urging the Department to move forward on

rules related to concentration accounts, and I am interested in

what the Department has to say in terms of being updated today.

But I appreciate your comments and share your concerns.

Senator GRASSLEY. And maybe we should review our coordinated

effort on that to see if we need to take any additional steps at this

point.

Senator STABENOW. I agree. Thank you.

Chairman SARBANES. Senator Grassley, we thank you very much.

Senator GRASSLEY. Thank you.

Chairman SARBANES. We look forward to continuing to work with

you.

Senator GRASSLEY. Thank you.

Chairman SARBANES. If our next panel could come forward, Deputy Secretary Dam and Deputy Attorney General Thompson.

Senator Stabenow, you have joined us since we made opening

statements. I would yield to you now if you have a statement you

might wish to make.

Senator STABENOW. I would just submit one for the record, Mr.

Chairman, and thank you again for this hearing. I am proud of the

work that we did last year and I know that this was the focal point

for really moving forward. I am anxious to hear what the Department has to say as they have taken the legislation that we worked

on and passed last year.

Chairman SARBANES. Yes. Well, I want to thank the Committee

Members for their commitment last fall when we took up this

issue. We had actually scheduled a hearing on money laundering

before September 11 happened. It was to occur about a week later.

So, we were turning our attention to that issue and then, of course,

September 11 occurred, which raised this to a crisis matter. And

we were able, by working very diligently over a number of weeks

last fall, to put together a good piece of legislation that became one

of the titles of the USA PATRIOT Act.

Secretary Dam, I think we will go to you, and then to Attorney

General Thompson, unless you have worked out some contrary arrangement amongst yourselves.

Mr. DAM. No, that would be fine.

Chairman SARBANES. All right.

STATEMENT OF KENNETH W. DAM

DEPUTY SECRETARY, U.S. DEPARTMENT OF THE TREASURY

Mr. DAM. Mr. Chairman and distinguished Members of this Committee, I appreciate this invitation to testify. I have a fairly lengthy

prepared statement which I think will be helpful, but I would just

like to summarize it briefly and ask that the full statement appear

in the record.

Chairman SARBANES. The full statement will be included in the

record and we appreciate the effort and care that went into the

preparation of the full statement.

Mr. DAM. Thank you, Chairman Sarbanes.

I will focus on three principle areas—our progress on the financial front of the war on terrorism, the 2002 National Money Laundering Strategy, and the implementation of the USA PATRIOT Act.

8

Now with regard to the first principal area, the financial front

of the war on terror is critically important to America’s success in

fighting terrorism. Our strategy is set forth in the National Money

Laundering Strategy as Goal 2. There, we make it clear that we

need a multifaceted strategy, which includes intelligence gathering,

freezing of suspect assets, law enforcement actions, diplomatic efforts and outreach, smarter regulatory scrutiny, outreach to the financial sector, and capacity building for other governments and the

financial sector generally.

These efforts are having an impact. As you, Mr. Chairman just

pointed out in your opening statement, the United States and other

countries have frozen more than $112 million in terrorist-related

assets. But to see the full effect of the action, you cannot just count

the money that has been seized. You also have to look at the flow

of funds that has been disrupted. And just to illustrate that, I want

to take one example. The al Barakat network, which is a worldwide

network which was, according to some estimates, channeling $15 to

$20 million a year to al Qaeda. We have not only frozen the assets,

but we have also cut that flow, and it is the flow that is critically

important.

I wish to underscore the importance of the international cooperation we have received. After all, you cannot bomb a foreign bank

account. So, we need the cooperation of other governments in order

to achieve our objectives. And since September 11 of last year, we

have obtained strong international cooperation. All but a small

handful of countries have pledged support and over 160 countries

actually have blocking orders in force. Hundreds of accounts worth

more than $70 million have been blocked abroad, and foreign law

enforcement agencies have acted swiftly to shut down terrorist financing networks. I have given you several examples in my written

testimony, but let me just refer as one example to last month’s

joint action by the United States and Saudi Arabia to refer to the

U.N. Sanctions Committee a man named Wa’el Hamza Julaidan,

who was an associate of Osama bin Laden and a supporter of al

Qaeda terror. And of course, we also have blocked any accounts.

Now, let me turn to the National Money Laundering Strategy as

a whole. It is a strategic document, not a report card. But I can

go into that at greater length. I would like to point out now that

this Strategy involves 26 different U.S. Federal agencies, and they

have all concurred in this Strategy. The Strategy lays out six specific goals. And I would like to refer to some specific aspects.

As I mentioned, of course, disrupting terrorist financing is one of

the major goals. But one of the things we have done that is new

here is to show our determination to measure results. This is part

of a general philosophy that is contained in the President’s Management Reform Agenda. But I do not think I have to tell you that

Secretary O’Neill, with his background and his experience, is very

much focused on the results. Inputs are one thing, but results are

another. And this strategy is focused on measuring the effectiveness of our program.

The last two Strategies have been focused more, and particularly

2002, on attacking large transnational, professional money laundering organizations. And we highlight this in our Goal 3. Now

these kinds of cases, as opposed to just picking up somebody on the

9

street take time to develop. But, nevertheless, we are having some

early successes. And let me just point out one illustration.

Earlier this year, the Customs agents in New Jersey arrested an

Assistant Vice President of a bank who was operating an illegal

money transmitting business that moved approximately a half-billion dollars in 8 months. This Assistant Vice President maintained

over 250 accounts at the bank, 44 of which were in the names of

nonexistent companies and people that were fronts for currency exchanges, or actually firms, in Brazil. So this is an example of what

you can accomplish if you focus on a large organization.

Let me turn now to the USA PATRIOT Act.

Chairman SARBANES. What happened to that fellow?

Mr. DAM. This has been dismantled and I will get you an answer

on exactly where the status of the case stands. Perhaps Deputy Attorney General Thompson can provide that.

Chairman SARBANES. All right. Well, I will defer and I wait until

the question period.

Mr. DAM. Thank you very much.

Turning to the implementation of the USA PATRIOT Act itself,

our major accomplishments over the past 11 months include the

following: Together with the Federal functional regulators, we

issued customer identification and verification regulations. We

have developed a proposed rule that seeks to minimize the risks

presented by correspondent banking and private banking accounts.

We expanded our basic anti-money laundering program requirement to the major financial service sectors, including insurance and

unregistered investment companies such as hedge funds.

Now all of this is spelled out in my written testimony, but I

grant you, we do have work to do. For example, I am not satisfied

with the pace of our deliberations over the first use of the powers

that you gave us in that Act under Section 311. We can go into that

later if you would like, but it does raise some difficult legal and

policy questions which our lawyers and our administrators have

been wrestling with. But I can assure you that Treasury is working

hard to invoke those powers and I expect to do so quite soon.

Let me come to the conclusion.

These three aspects of our program which I have just highlighted, the financial war, the Money Laundering Strategy, and the

USA PATRIOT Act, are all interrelated. As we move forward on

them together, I think we are making a difference.

Our combined efforts are making it increasingly more difficult for

terrorists to use the U.S. financial system. We are disrupting the

ability of terrorists to plan, operate, and execute attacks. And we

are forcing terrorists to use methods such as bulk cash smuggling

that hadn’t been necessary before to finance their operations. Now

forcing terrorists to resort to bulk cash smuggling has some benefits. Principally, I would point to the fact that smuggling exposes

both the courier and the cash or other financial instruments to a

greater risk of detection and seizure by the authorities, and I want

to give you an illustration and some figures.

Since last September 11, Customs has seized over $9 million in

cash being smuggled out of the United States to Middle Eastern

destinations or with some other Middle Eastern connection.

10

As an example of what has been accomplished beyond that, this

summer, Customs, Secret Service, and FBI agents apprehended,

and there was a subsequent indictment of Jordanian-born Omar

Shishani. This was in Detroit, where Shishani came in on a flight,

and because of the work that had been done to get information systems to work together, we were able to search and find that, contrary to his declaration, he was actually smuggling in $12 million

in forged cashier’s checks. So, he was vulnerable because he had

to use this device.

Now, I want to mention one other development. Just last month,

I announced that we were forming a USA PATRIOT Act Task

Force. And the purpose of that task force is to take a second look

at the regulations we promulgated over the last 11 months and to

ensure that they are doing a good job of disrupting terrorist financing, and I might say also, doing a good job in the money laundering

aspects of terrorist financing and other financing, and to do so in

a way that imposes the least burden necessary on the privacy interests of our citizens and our financial sector.

It will be a group to address some of the kinds of questions that

have been raised, including the question that Senator Grassley was

raising about correspondent banking relations—of U.S. financial institutions.

We look forward to working with you and your staffs on this

project and I would be pleased to take any questions you may have.

Thank you very much.

Chairman SARBANES. Thank you very much, Secretary Dam.

General Thompson, we would be happy to hear from you.

STATEMENT OF LARRY D. THOMPSON

DEPUTY ATTORNEY GENERAL, U.S. DEPARTMENT OF JUSTICE

Mr. THOMPSON. Thank you, Mr. Chairman.

Mr. Chairman and Members of the Committee, I am pleased to

appear before the Committee this morning to discuss with you

issues related to money laundering, including the 2002 National

Money Laundering Strategy and our progress on the financial front

of our ongoing war on terrorism.

And I, too, like Deputy Secretary Dam, have a detailed prepared

statement, but would like to discuss with you this morning in summary form with respect to issues in the prepared statement, and

some additional issues.

Chairman SARBANES. The full statement will be included in the

record.

Mr. THOMPSON. Mr. Chairman, I appreciate your attention to

this important issue and your interest in the Administration’s ongoing efforts to refine our battle plan against domestic and international money laundering.

Initially, I would like to thank the Members of this Committee,

as well as all the Members of Congress, for your efforts in developing and in passing two landmark pieces of legislation in prompt

response to the threats that our Nation has encountered over the

past year. The USA PATRIOT Act, passed in response to the horrible attacks of September 11, provided those of us whose mission

it is to protect the people of the United States with a wide array

of new measures that will serve to enhance our ability to carry out

11

this important work. The Sarbanes-Oxley Act of 2002, passed in response to the threat to our economic well-being posed by corporate

criminals, was a signal to those who seek to cheat hard-working

Americans that these kinds of actions will not be tolerated. You

should be proud of your accomplishments in passing these extraordinary bills, and on behalf of the dedicated men and women in law

enforcement, we thank you for your efforts in this behalf.

Chairman SARBANES. Thank you.

Mr. THOMPSON. The 2002 National Money Laundering Strategy

makes significant strides in advancing our battle plan against

money laundering and, in fact, addresses some formidable issues

head-on. In Goal 1, the Strategy confronts the issue of defining the

scope of the money laundering problem and the development of

measures of effectiveness, and Deputy Secretary Dam addressed

that in his opening statement. Goal 2 addresses the critical issue

of terrorist financing, and I will discuss the Department’s progress

on this front in more detail later in my summary testimony.

I would like to focus at this point on Goal 3, which constitutes

the core of the 2002 Strategy for purposes of law enforcement. This

Goal sets forth what the Department believes are the major challenges in attacking money laundering. The first objective of Goal

3 is to enhance our interagency coordination of money laundering

investigations. The first priority in this regard is to establish an

interagency targeting team to identify money laundering related

targets for our priority enforcement actions. This interagency targeting team has already been created and has met on several occasions. The purpose of this group is to identify those organizations

or systems that constitute significant money laundering threats

and to target them for coordinated law enforcement action.

The second priority in Goal 3 is to create a uniform set of undercover guidelines for Federal money laundering enforcement operations. And our well-intended agents in the field are sometimes

limited in conducting joint undercover operations, for example, because they must follow different agency guidelines. If we can find

ways to overcome these differences or develop uniform guidelines

that address the concerns and priorities of all of the agencies, our

efforts in conducting these operations I believe will be significantly

enhanced.

And the third priority of Goal 3 is to work with our 93 U.S. Attorneys’ Offices to develop the Suspicious Activity Reports (SAR)

Review Teams, as we call them, where they do not currently exist

but could add value. These SAR Review Teams are another vehicle

for promoting interagency coordination. When an interagency task

force is created to review the SAR’s in a coordinated manner, the

value of the SAR’s is enhanced and investigative priorities can be

identified and better coordinated. DOJ and Treasury are both promoting the value of these SAR Review Teams to the investigators

and prosecutors in the field. And I am proud to say that, according

to an Internal Revenue Service survey of their SAR Review Teams,

our U.S. Attorneys’ Offices participate in 37 of the 41 Teams that

have been established nationwide to date.

Objective 2 of Goal 3 focuses on the High-Risk Money Laundering and Related Financial Crime Area, HIFCA Task Forces. The

HIFCA concept was another attempt to coordinate the resources of

12

all of the law enforcement and regulatory agencies in a jurisdiction

on the most significant money laundering targets or threats in that

particular region. Now, Mr. Chairman, while a number of issues

have hampered the HIFCA’s from reaching their true potential, the

2002 Strategy will have DOJ and Treasury reviewing the HIFCA

program and refining the mission, composition and structure of the

Task Forces so that they can fulfill the mission that was intended

for them.

With regard to Goal 2 of the Strategy, we have no greater priority than the prevention of further terrorist attacks against our

citizens. We believe that the use of every tool in our arsenal is necessary to do that, including terrorist financing enforcement. And

this is one of the focuses of this Committee. If we can identify

would-be terrorists through financial techniques, or prosecute them

for traditional financial crimes, or target their supporters and

operatives with the crime of terrorist financing, we will be preventing violent attacks that may otherwise occur.

The Department’s terrorist financing enforcement efforts are centered around two components the Attorney General established in

the aftermath of the September 11 attacks.

Within the Criminal Division, Mr. Chairman, we created the

DOJ Terrorist Financing Task Force, a specialized unit consisting

of experienced white-collar prosecutors drawn from several U.S. Attorneys’ Offices, the Tax Division, and some litigating components

of the Criminal Division. These are Washington-based prosecutors

and they work with their colleagues around the country, using financial investigative tools in an aggressive manner to disrupt

groups and individuals who represent terrorist threats.

In the field, the Attorney General created 93 Antiterrorism Task

Forces to integrate and coordinate antiterrorism activities in each

of the Federal judicial districts.

The criminal laws relating to terrorist financing are powerful

tools in enhancing our ability to insert law enforcement into terrorist plots at the earliest possible stage of their conspiratorial

planning. For example, the statute that makes it a crime for anyone subject to a U.S. jurisdiction to provide anything of value, including their own efforts or expertise, to organizations designated

as ‘‘foreign terrorist organizations,’’ was used recently in the Charlotte, North Carolina Hezbollah case, the John Walker Lindh matter, the recent New York indictment of supporters of Sheik

Rahman, and the actions that we took over the past few months

in Seattle, Detroit, and Buffalo. It is a powerful preventive tool.

The financial investigative tools at our disposal, which have been

refined over the years for use in combatting money laundering, can

also be employed in terrorist financing enforcement. And to the extent that we succeed in raising the global standards for money

laundering prevention or enacting tools that help our own efforts

in this area, I believe we will be enhancing the world’s and our own

ability to stop terrorist financing. In this sense, terrorist prosecutors are using money laundering as an important tool in these

prosecutions. And terrorism prosecutors and money laundering

prosecutors are beginning to share that same expertise, which I

think is important.

13

Now no discussion about money laundering would be complete

without a discussion about what we are trying to do with respect

to drug money and our efforts to stop it. No one can tell us with

any kind of certainty how much drug money is laundered in our

country. But we do know that users in the United States spent at

least $63 billion on drugs last year, an astonishing sum. Now since

assuming the Office of Deputy Attorney General, I have made our

Organized Crime Drug Enforcement Task Forces the centerpiece of

the Department’s effort to attack the supply side of the drug problem. The Attorney General and I announced this past March a new

strategy to use OCDETF, as we call the Organized Crime Drug Enforcement Task Forces, to go after the entrenched and significant

drug trafficking and drug money laundering groups. Integral in

this Strategy is the use of money laundering charges, financial investigations, and forfeiture. In fact, Mr. Chairman, our new guidelines issues to the U.S. Attorneys now require that each OCDETF

investigation must contain a financial component, and that the results of those investigations must be documented. And I can assure

you that we will be closely reviewing the results of these investigations in order to use our scarce resources in the most effective way

possible. We are trying to take the money away from these organizations in order to completely dismantle their illegal structure and

prevent them from doing what they have been doing in the past.

In conclusion, I would like to express the appreciation of the Department of Justice for the continuing support that this Committee

has demonstrated for the Administration’s anti-money laundering

enforcement efforts.

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

this opportunity to appear before you this morning. I look forward

to working with you as we continue the war against terrorist financing and all forms of money laundering, and to refine our Strategy to address these serious threats. I would be happy to try to answer any questions that Members of the Committee may have.

Thank you.

Chairman SARBANES. Thank you very much.

Secretary Dam, I wanted to pick up on the reference to Section

311 and focus attention on that.

We provided in Section 311, authority to the Secretary of the

Treasury to impose five special measures against foreign jurisdictions, foreign financial institutions, or transactions involving such

jurisdictions or institutions that were determined to pose a primary

money laundering concern to the United States.

The special measures were pretty encompassing, I thought, requiring additional recordkeeping or reporting, requiring the identification of the foreign beneficial owners of certain accounts at U.S.

financial institutions, requiring the identification of customers of a

foreign bank who use an interbank payable through an account

opened by that foreign bank at a U.S. bank, requiring the identification of customers of a foreign bank who use an interbank correspondent account opened by that foreign bank at a U.S. bank,

and restricting or prohibiting the opening or maintaining of certain

interbank correspondent or payable through accounts.

Now these are pretty extensive authorities. But it is my understanding that you have yet to use this authority. Is that correct?

14

Mr. DAM. That is correct, Senator.

Chairman SARBANES. What is the problem?

Mr. DAM. I am going to answer that. But can I first answer your

earlier question about the New Jersey case, just because I think it

is very important?

Chairman SARBANES. Yes.

Mr. DAM. Criminal charges have been filed against the senior executive of the bank whom I mentioned, and there is a general investigation trying to develop all of the facets of the case before proceeding further. We have seized many of the accounts that were involved and we will be glad to give you a detailed written response

beyond these simple points that I have made.

I would also like to say that in the 2002 Strategy document,

there is an Appendix 7, that is at page A–14 of the Appendix,

which lists quite a number of major cases that had been developed

in 2001 and 2002 before we were able to publish it in July.

I think that illustrates what is possible if you focus on the big

networks because most of these are cases involving major firms or

major networks. So, that is one of the emphases, I guess I should

say, in this strategy. We want to push in that direction.

Chairman SARBANES. Let me just follow up.

What happened to the supervisors of that bank vice president?

Are they being punished in any way? Obviously, there must have

been some breakdown in supervision.

Mr. DAM. I agree with you. And I think that is what the broader

investigation is designed to get at. But I will include that in the

response and we will get that to you quite promptly.

Chairman SARBANES. Thank you.

Mr. DAM. With regard to your question about Section 311, now

I too have been wondering why we have not gone forward yet, and

I am a little impatient on that score, as I suspect that you are.

Actually, there are some factors to bear in mind. One of them is,

this is a terrific set of empowerments of measures that we can impose. But, because they are so far-reaching, they have some substantial due process and procedural concerns that have been raised.

And you know, we try to be very careful and not overreach, particularly when we get into areas such as due process. So that is one

factor that has been brought to my attention.

The second one is evidentiary. We believe that we have to develop a record that will stand up if there is a case brought to set

aside any measure that we impose. It is like terrorist financing in

that regard, although in terrorist financing, we do have certain

rights given to us in the USA PATRIOT Act to present the classified evidence in camera to the judge. And my impression is, and

I believe I am correct on this, that that power does not extend to

Section 311 measures. So, we are trying to be sure that we have

a good record before we use this.

There is one other factor to bear in mind when it goes to the

question of imposing Section 311 measures on a country. You can

do it against a foreign jurisdiction, against institutions, and so

forth. However, when you are thinking about countries, one of the

important points here is that we want to get compliance with

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ommendations, and imposing sanctions may be counterproductive

to achieve that goal.

In fact, we have a good record, I think, through the FATF in

making progress with foreign jurisdictions and in nearly every

case, countries have made progress and many of them are getting

off the FATF list, and more will be taken off the FATF list when

the plenary meeting occurs just next week. I would say that we are

making good progress in bringing foreign countries along.

I think that you need to think of the 311 measure there like the

club that we keep in the closet, rather than as the objective of the

measure being actually to use that power.

Those are some of the considerations. But I want to underscore

the fact that I, too, am very interested in why we have not been

able to use those powers yet.

Chairman SARBANES. Well, of course, if you keep the club in the

closet all the time, eventually, people come to think that you are

not going to use it. So you need to try to focus on its use, at least

in some instances, to send the message that in fact it can be used

and you get the deterrent effect of that.

Your point on foreign jurisdictions is one that needs to be carefully thought through. But you can act against a foreign financial

institution and you can also act against transactions involving certain accounts. And it would seem to me that, in looking over the

landscape, you can pick out a couple of instances that really would

lend themselves to the invocation of Section 311, so people know

that this club is not only there, but also on occasion, it will be used.

Otherwise, I think that they eventually reach the conclusion that

there is no backup here.

Mr. DAM. I agree with you, Mr. Chairman.

Chairman SARBANES. Yes. My time has expired. I yield to Senator Stabenow.

Senator STABENOW. Well, thank you, Mr. Chairman. I appreciate

the testimony of both of our distinguished witnesses.

I would like to refer to a letter and ask Mr. Dam if you can respond, and both of you are certainly welcomed to make responses

as it relates to the use of concentration accounts.

There was a letter that was sent back on January 11 of this year,

by Senator Grassley, Senator Carl Levin, and myself and I would

appreciate knowing what has happened since that time. I do not

believe we have had a written follow up to that.

But Section 325, which I advocated that we place into the bill

that we passed, explicitly authorizes the Treasury Secretary to prescribe regulations to close an existing loophole in the regulations

governing how U.S. financial institutions operate their internal administrative financial accounts, often called concentration omnibus,

or suspense accounts. We know that dollars that come into an account when that is used, as you know, they are pooled. The concern

is that it breaks the audit trail. It is difficult to track the dollars

coming out to specific accounts.

I know, in the past, probably the most notorious case was a

money laundering case regarding drugs with Raoul Salinas and

what happened back in the 1990’s.

But I am concerned at this point that we should be moving forward to focus on these accounts and draw upon the statement that

16

the Federal Reserve issued actually back in July 1997, in their

sound practices paper on private banking.

And again, I would just read this and then ask you to comment

and also what in fact, if anything at this point, has been done to

focus on concentration accounts.

However, the Federal Reserve back in 1997 issued a warning.

Unfortunately, it was only to U.S. private banks and not all institutions. It was a guideline, not a binding regulation.

They did say at the time that private banking operations should

have the policies and controls in place to confirm that a client’s

funds flow into and out of the client’s accounts and not through any

other accounts, such as an organization’s suspense, omnibus or concentration accounts.

Generally, it is inadvisable from a risk management and control

perspective for institutions to allow their clients to direct transactions through these other accounts. Such practices effectively prevent association of the client’s name and account numbers with

specific account activity, could easily mask unusual transactions

and flows, the monitoring of which is essential to the sound risk

management in private banking and could easily be abused.

In the context of the debate in the Committee a year ago, I had

raised this, as did Senator Grassley and Senator Levin. We did

place a requirement to move forward on regulations and we are

very anxious to know if the Department has begun moving in that

direction.

Mr. DAM. Thank you, Senator. Yes, I know about your interest

in this subject. And let me say that we are moving forward on Section 325. We have formed an interagency working group that has

been meeting and considering what types of controls should be imposed. One thing that has become clear is that many of the abuses

that we are talking about here are violations of existing rules and

are being dealt with under those rules.

But we, frankly, have been very concerned with meeting the

deadlines, which are quite good deadlines and have forced an enormous amount of work with regard to other provisions which have

specific near-term deadlines, and we have issued quite a long group

of very voluminous regulations, rules, and that takes time. And I

would just like to explain why it takes time to do that.

We have a very extensive process of consultation with the financial institutions involved. After all, these rules and regulations we

promulgate have to be workable. And they work best when the financial institutions feel that they are reasonable and do not impose

undue burdens on them.

That does not mean we are soft, but it does mean that we go

through this extensive consultation process. I know from personal

experience that we have gotten very favorable feedback from our

major financial institutions because of that. But in any event, we

are continuing to work on the subject of concentration accounts.

Now with regard to the letter you read, private banking is often

a term used to refer to two things. You could have a major commercial bank which had private account managers. These are large accounts and so forth. And there, the commercial banks are already

subject to important regulations.

17

The concentration account provisions of 325 will undoubtedly

bear on them, too. There are also private banks, like hedge funds

and so forth, and they are now subject to regulations we promulgated—I believe they are proposed at this point. But, nevertheless,

the hedge funds know what they have to do, which requires them

to put in place something that they never had to have before,

which was money laundering programs.

And not only that. Since they are private banks and they are not

subject to normal Federal regulation, they now have to register

with FinCEN, so that we know who they are and we will be able

to follow up. So, we are moving against that target as well.

Senator STABENOW. I appreciate that and I think it is obviously

important to work with the industry, so that whatever is done is

workable.

My question would be, though, do you believe that this, in fact,

is an issue, a loophole that concentration accounts are accounts

that can and have been abused and will be a focus of your efforts,

along with the other issues that you are addressing?

Mr. DAM. I will give you a personal opinion. If we could, I would

like to give you a written response in general to what we are finding in the working group. However I will say that the Congress and

you have identified this as a problem. You have given us the authority. We plan to use the authority. And we need to come out

with rules that implement Section 325.

Senator STABENOW. We would very much appreciate knowing an

update from you on what is happening and where it fits into your

priority list. And it looks like by not putting a deadline in there,

next time we will put a date in, with all the other dates that were

put in the bill. I realize that you have a lot to do and have been

working diligently. But this is an issue that has come to my attention a number of different ways.

I would be curious, Mr. Thompson, and I can see my time is up,

but I do not know if you have anything to add. If you had situations occur where the use of concentration accounts, pooling of

funds, and the loss of audit trails because funds are designated to

a specific account, whether that has been an issue?

Mr. THOMPSON. Well, in addition to the efforts that the Treasury

Department is making in terms of defining the nature of this problem, as I mentioned in my testimony, Senator, we are establishing

these targeting teams across interagency, in connection with the

interagency process.

I do not have any personal knowledge with respect to these concentration accounts and how they are being used, for example, in

illegal narcotics trafficking, but I would like to look at that and

also at how we are targeting systems, as well as just targeting organizations and leaders. We are targeting systems. This looks like

the kind of thing that we need to take a look at, especially as it

relates to drug enforcement. And I would be pleased to get back to

you on that.

Senator STABENOW. Thank you.

Mr. THOMPSON. Because as I was listening to your exchange with

the Deputy Secretary, I do see how it could be applicable to our

drug enforcement efforts.

18

Senator STABENOW. Absolutely. Thank you. I would appreciate it

if you could get back to us on what you are doing or how much you

think that this is an issue.

Thank you, Mr. Chairman.

Chairman SARBANES. I think that this is a very important line

of questioning that Senator Stabenow has been following.

Secretary Dam, we appreciate that the Treasury had a heavy

burden imposed upon them in terms of developing regulations to

carry out the anti-money laundering legislation. As Senator

Stabenow notes, we did not have a deadline on these regulations,

although we had them in many other areas. I think you are close

to completing that process, most of your rules and regulations. I

think there are only a couple of projects left.

So, I would anticipate that before the end of the year, you will

be there. And therefore, I think that the next hearing that we

would be thinking of holding would be fairly early in the new year,

after we get the strategic plan, which is due the first of February.

Then you would have an opportunity to have put all your rules and

regulations into place and we could take a good view of the landscape and where things are. We have to keep at this and we must

not lapse back.

I want to ask General Thompson, immediately after September

11, there were a number of press reports about alleged suspicious

trading activity in the European markets, which suggested that

people with advanced knowledge or associated with those attacks

had sought to profit by taking short positions in the airline and insurance markets in the weeks leading up to the attack. At the

time, the Justice Department indicated that they would investigate

that matter. What can you tell us about where that matter stands?

Mr. THOMPSON. Senator, I am aware of those instances that you

are talking about. But as I sit here this morning, I am really not

in a position to specifically respond to exactly where those investigations are. I will be happy to give you a written response.

Chairman SARBANES. But there are investigations underway. Is

that correct?

Mr. THOMPSON. I do not know.

Mr. DAM. Senator, may I respond to that question?

The only investigation that I am aware of was done by the Securities and Exchange Commission. And my understanding of their

finding is that they did not find specific credible evidence to support that newspaper story or those newspaper stories. But if we

have anything more on it, we will certainly provide it to you.

Chairman SARBANES. My understanding is that inquiries to the

SEC have resulted in the response that the Justice Department is

the lead agency on that matter.

Mr. DAM. Those may both be true, Senator. I just do not know.

We will have to get back to you on that.

Chairman SARBANES. All right.

General Thompson.

Mr. THOMPSON. I am aware of one investigation and prosecution

in the domestic area in which a person who was employed by the

Federal Bureau of Investigation was charged with using some improper information as it related to those events. But I just do not

know where we stand with respect to any other investigation.

19

Chairman SARBANES. How is this reorganization going to impact

our efforts in this arena, as it relates to the Department of Homeland Security? I have great difficulty in seeing how all this is going

to work.

The Treasury is going to continue to be the responsible agency

for promulgating these regulations, but you are not going to have

any enforcement backup. Is that correct?

Mr. DAM. Well, Senator, I heard what you said earlier about

that. I do not believe that it has to unfavorably impact efforts in

this area.

You mentioned that perhaps part of FinCEN would go to Homeland Security. Unless the Congress so determines, I do not believe

that would happen. It is certainly not anything that is proposed by

the Administration. It is the first that I have actually heard of it

and it strikes me as questionable to do that because the fact of the

matter is that the great strength of the Treasury in this respect,

and of FinCEN, is the contact with the financial community.

That is a set of relationships that have been built up by many

Administrations over a long period of time. We really need the cooperation of the financial community. It is not fundamentally a

prosecutorial activity or even a law-enforcement activity. It is a set

of arrangements whereby, to be sure, with the force of law, they

are required to file reports and do certain things more and more

now with the USA PATRIOT Act. But for this to work smoothly

and quickly, it is very important to get real buy-in from the financial community. And not just commercial banks, but the brokerdealers, insurance companies, and so on.

So it seems to me that that strength will remain in Treasury.

What is moving out of Treasury under the Homeland Security proposal is Customs and Secret Service. I do not want to get into a

debate about whether they are to remain integral or not, but they

will move as a body into Homeland Security and presumably, they

will continue to participate in the way they do now in all of these

activities. They will be part of the working groups and so forth. I

do not think that has to be the result.

Another very important point here is that the Internal Revenue

Service, Criminal Investigative Service, is extremely important in

money laundering activities, as perhaps Deputy Attorney General

Thompson can testify even more than I can, because he has had

actual experience of cases where they have been involved. And they

remain very much in Treasury. They are excellent forensic accountants who can really go into these complicated cases.

Chairman SARBANES. They are short-changed, though, on personnel, aren’t they, in a serious way to deal with this matter?

Mr. DAM. That is an interesting question. I do not want to express a personal opinion because I have not done the personnel investigation that would be necessary. There is a great demand for

their services, I will tell you that, because there is something called

the Webster Commission Report, with Bill Webster, who was head

of the FBI and head of the CIA. His report says that they should

all be devoted to tax matters. And there are other people who say,

well, we need more of them in the money laundering area.

I think we have worked out a good accommodation and I am sure

with more money, there could be more of these people hired and

20

make a contribution. But it is like everything else, it is a trade-off

of scarce resources with many tasks.

Chairman SARBANES. I always thought that the extra money that

was required to enhance the IRS’s capabilities in these two areas

you mentioned more than paid for itself in terms of the results they

produce. Isn’t that correct?

Mr. DAM. That is probably correct. But you know, that is probably like many things the IRS does. So that is always an argument

for giving the IRS more money, although their resources have been

not necessarily increased.

We do have an arrangement—just so I am not misunderstood—

a large number of IRS–CI employees are devoted right now to the

drug problem in OCDETF and so forth. And as I say, the whole responsibility and leadership there is Mr. Thompson. He knows more

about that than I do and perhaps he can shed light on it.

Mr. THOMPSON. Senator, as I mentioned earlier, the Department

is concerned about money laundering and using the really great

and powerful money laundering tools in a number of law enforcement actions, and not just in our antiterrorism work, but in other

kinds of law enforcement.

Chairman SARBANES. Now, do you have these task forces that

you talked about, that you said were antiterrorism, do they also

exist to deal with other forms of money laundering, or only in the

terrorism field?

Mr. THOMPSON. No, they also exist to deal with other forms of

money laundering, Senator.

For example, I mentioned our Organized Crime Drug Enforcement Task Forces, which is very important in order for us to get

at the supply side of the drug enforcement problem. And that is,

to identify the leaders of drug-trafficking organizations, identify the

significant organizational structures in those criminal activities,

and to dismantle them. The only way to do that, and the only way

to get at dismantling those organizations is through asset forfeitures, through money laundering charges.

The IRS has been a very important participant in the past in

that program. In 1990, we had, I believe, over 850 IRS agents assigned to our very important work in that program. They participated in 69 percent of our OCDETF investigations. This year, we

are down to 450 agents and only 38 percent of our OCDETF investigations. And what we have done in trying to retool this effort in

our OCDETF and drug enforcement efforts is to make certain that

we do not lose sight of how important and how essential it is to

have financial investigations along with all of these significant

drug enforcement investigations.

But getting to your question to the Deputy Secretary with respect to what is going to happen to our money laundering efforts

if the new Department of Homeland Security is created as we expect it to be, we believe that because of the Department of Justice’s

expertise in a number of these areas, and because of our resources,

we would be in a position to assume a greater leadership role in

these money laundering efforts, working with our colleagues at

Treasury.

I agree with Deputy Secretary Dam that Treasury will need to

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lationships with banks and financial institutions. But we do believe

from a law enforcement standpoint that the expertise and the resources of the Department of Justice would make the Department

uniquely suited to take a greater leadership role in what we are

doing in our money laundering law enforcement efforts.

Chairman SARBANES. Has the Department reviewed the legislation with an idea of coming to the Congress for any changes or any

additions that it may needed made in order to enhance its capabilities to deal with this problem?

Mr. THOMPSON. I know that with respect to the Department of

Homeland Security, Senator——

Chairman SARBANES. No, no. I mean with respect to the antimoney laundering title that we passed last year.

Mr. THOMPSON. Let me just address the resource issue.

I know that we are seeking to reprogram our OCDETF efforts to

provide additional monies or additional focus for training, joint

training of FBI and DEA agents. And we are seeking to reprogram

our efforts to provide the establishment of a special task force to

investigate money laundering havens.

As I see what we are trying to do, we need the resources to be

able to use the very powerful tools that you have given us so that

we can better do drug enforcement efforts and our law enforcement

efforts as it relates to corporate fraud.

I think that is an important part of our analysis of this legislation and our efforts in terms of how we can do our jobs better.

Chairman SARBANES. Yes, I think that is a valid point. But I still

want to come back to the question, which is whether, in reviewing

the statute that was put into place, you feel that there are changes

that should be made that would enhance your abilities to address

this problem?

Mr. THOMPSON. I am not aware of specifically what we have done

along those lines, Senator.

Chairman SARBANES. Well, maybe both the DOJ and Treasury

could undertake to do that. But at the time we hold our next hearing on this issue, which I would anticipate sometime in the early

part of the next year, we would have a chance to get the benefit

of any recommendation.

Did you want to speak to that, Secretary Dam?

Mr. DAM. Well, I just wanted to say, Mr. Chairman, that was one

of the motivations in creating this internal Treasury Task Force.

And it will work with other departments and agencies and with the

private sector to see if additional legislation is necessary.

Now it might in some cases be to reduce authorities if they are

creating a problem. But more likely, it will be to fill in gaps.

We certainly will have in mind the timetable that you mentioned

and be able to express an opinion at that time as to whether additional authority or some other kind of change is required in the legislation, and we will work with Justice.

Chairman SARBANES. When we have passed the point where people can say, well, we are still baking the cake because we do not

have all the rules and regulations in place yet, or we are still baking the cake because we haven’t figured out how we are going to

do all the allocation of resources and so forth.

22

We are beyond that point and we are now, in a sense, moving

ahead. Then we need to look to see what else needs to be done to

bolster this effort. And then, of course, carefully examine what the

results of the effort are.

As I indicated in my opening statement, I do think we face some

difficult questions on coordination. Of course, Senator Grassley was

very strong on the point of great strategic thinking as we go into

the future.

So, I think I just should leave that charge with you as we think

of the early part of next year. As we get the next Money Laundering Strategy report, as Senator Grassley pointed out, we will be

in the budget process, so there may be efforts to bring about important change, although you can do that now as the budget is being

put together, rather than us trying to do it later when the budget

comes to us. And I encourage you in that regard.

Mr. DAM. Could I respond to one aspect of what you just said?

I thought that, in general, Senator Grassley made a very fine

statement. But I do find the last three or four paragraphs a little

misleading, perhaps, because in talking about the need for strategy

and knowing who does what and when, I think that is exactly what

is different about the new Money Laundering Strategy from the

past. The past was very much focused on how can we spend more

money on this problem, rather than what specifically do we have

to do. And you will notice if you look through the actual document,

that for each and every priority, and there are many, there is a

specific statement of who is responsible and a specific statement of

what was accomplished in 2001 and what was accomplished in

2002.

If you have a copy, for example, I could point to page 11, Priority

3, which has to do with going out and seizing the money. Who has

the lead?

Well, the lead is shared between Justice and Treasury and there

is a very specific person in the Treasury, the Director of the Executive Office of Asset Forfeiture, and in Justice, the Chief of the

Asset Forfeiture and Money Laundering section who is responsible.

In 2001, for the very first time, the two Departments actually established a definition of what is money laundering, so that they

could actually figure out what they had done in seizures because

there are other kinds of seizures that are not money laundering

seizures. For 2002, we are establishing a reporting system, so we

actually know what we are accomplishing in taking the money

away from the money launderers.

So it seems to me that that is exactly the kind of thing Senator

Grassley is calling for and I think it is here. I agree that it was

not present in the past to nearly the same extent. I think you will

find that for each and every priority, we have indicated who is in

the lead and what they are going to do in 2002.

Now will they accomplish it all? I do not know. But it is not because they do not know what they are supposed to do to carry out

the Strategy.

Chairman SARBANES. How often do you and General Thompson

meet on this question of the Money Laundering Strategy?

Mr. DAM. Well, in principle, we meet every month. I have to say

that is not always true. We also talk to each other a great deal.

23

Chairman SARBANES. You meet every month on this issue?

Mr. DAM. Or whatever issues are open. And often it is money

laundering questions we have had quite a number of conversations

about the allocation of the IRS agents, for example, of how we can

fund more agents because Justice finds them extremely useful.

Chairman SARBANES. Can one say that the Deputy Secretary of

the Treasury and the Deputy Attorney General meet monthly to coordinate and examine the Money Laundering Strategy?

Mr. DAM. I wouldn’t go quite that far, not that maybe that is not

a good idea and maybe we should do that, but we do in principle

try to meet every month to go over all of the open items between

Treasury and Justice.

Chairman SARBANES. Now do the Secretary and the Attorney

General ever meet on this question?

Mr. DAM. I cannot answer that question. I know they meet. But

I cannot answer that question.

One of the things that I hope this new Treasury Task Force will

do is reach out specifically to Justice, but also all the other nonTreasury agencies, bureaus, and departments in order to be sure

that we are on track.

I know that there are a lot of working groups working every

week on these tasks that are laid out, one of which I just referred

to, like the reporting system on seizures. And at that level, we

meet constantly.

Chairman SARBANES. Gentlemen, thank you very much.

It has been a very helpful panel and presumably, we will see you

not too far into the new year to review once again where we are.

And hopefully, at that point, to have gotten under our belt a lot of

the start-up aspects of this effort, which we are still engaged in.

Thank you for coming and being with us.

Mr. DAM. Thank you, Mr. Chairman.

Mr. THOMPSON. Thank you, sir.

Chairman SARBANES. We will now call the next panel. We are very pleased to have this

panel with us.

Stuart Eizenstat, now a partner at Covington & Burling, but

with a very long and distinguished career in public service and a

great familiarity with the issues we are dealing with. He, in fact,

served as Deputy Secretary of the Treasury in the previous Administration and was the lead official on anti-money laundering initiatives and was also our Ambassador to the European Union in 1993

to 1996.

Elisse Walter is the Executive Vice President for Regulatory Policy and Programs at the National Association of Securities Dealers.

She has held senior positions at both the SEC and the CFTC. In

her current position at the NASD, she oversees the operating legal

and policy activities for the securities industry and is responsible,

as I understand it, for monitoring the steps the securities industry

is taking to create anti-money laundering and reporting programs

pursuant to the legislation.

Alvin James, a Principal at Ernst & Young, has much expertise

in investigating money laundering schemes, particularly the Colombian Black Market Peso Exchange. He has been a Senior Money

Laundering Policy Advisor to the Financial Crimes Enforcement

24

Network and a Special Agent in the IRS Criminal Investigation Division.

We are very pleased to have this panel here.

Secretary Eizenstat, why don’t we start with you? Then we will

go to Ms. Walter and we will close out the panel with Mr. James.

STATEMENT OF STUART E. EIZENSTAT

FORMER DEPUTY SECRETARY

U.S. DEPARTMENT OF THE TREASURY

Mr. EIZENSTAT. Thank you, Mr. Chairman. I appreciate your continued leadership on this issue because effectively dealing with

money laundering is not only essential to dealing with narcotics

trafficking, organized crime, and corruption abroad, but also with

terrorism financing and therefore, national security directly as

well.

The Bush Administration has made important advances in dealing with money laundering and antiterrorism funding. Some terrorist funds have been frozen. Organizations and individuals have

been designated under IEEPA, and our allies have helped block

their accounts. But the Bush Administration has barely scraped

the surface of what needs to be done. There is no genuine strategy

to attack money laundering and money launderers. IEEPA designations have become less frequent.

Our Government is still not properly structured internally to

focus priority attention on terrorist financing. There is no existing

international entity to work exclusively on locating and blocking

terrorist money. And we have not put the kind of pressure we have

to convince nations in the Middle East and Persian Gulf, who are

the principal locations and transit points for terrorist financing, to

bring their laws and practices on money laundering and the tracking of terrorist money up to international standards. Until these

steps are taken to shut down the financial sources of terrorism, our

Nation will remain vulnerable.

We have disrupted, but we are a long way from dismantling, al

Qaeda’s financial network. During the Clinton Administration we

established that the bulk of al Qaeda’s wealth did not come from

Osama bin Laden’s inherited personal fortune, but rather from

multiple sources and was distributed through multiple sources.

This money comes from both businesses cloaked with the mantle

of legitimacy and from criminal activities, from petty crimes to the

heroin trade in Afghanistan. But its principal source of money, Mr.

Chairman, comes from its fundraising activities through ‘‘charities,’’ mosques, financial intermediaries, and financial institutions.

Charities and individuals in Saudi Arabia have been the most important source of funding. In our Clinton Administration, two missions were sent to the Gulf and Saudi Arabia to enlist their support

in shutting down these charities and dealing with these individuals, but we received virtually no cooperation.

Let me suggest the outlines of a strategy. First, on the U.S. Government side, we have to more effectively coordinate the several

branches of our Government working on this issue. The Interagency Policy Coordination Committee on Terrorist Financing,

chaired by the General Counsel of Treasury has made strides in

this direction, but it is neither institutionalized nor possesses clear

25

lines of authority. We must have a high level coordinator within

the U.S. Government that has the President’s ear to coordinate the

diplomatic law enforcement and regulatory activities of our Government and focus our Government’s attention on terrorist financing

on a continuous and sustained basis.

Second, we must ensure greater attention at the international

level to the problem of money laundering in general, and terrorist

funding in particular.

The Financial Action Task Force, FATF, has done a good job of

placing an international spotlight on those countries which do not

meet international standards in dealing with money laundering,

and thus, can be misused by terrorist groups to launder their

money. During the Clinton Administration, we began important

elements of a dual track policy of both tracking terrorist funds and

working to upgrade international money laundering strategies and

standards. Fifteen nations were cited as being noncooperative in

the international fight against money laundering in 2000, and we

followed up those FATF actions, Mr. Chairman, with our own hardhitting advisories to U.S. financial institutions, recommending enhanced scrutiny against potential money laundering transactions

involving those countries. The reaction was positive. Bahrain, UAE,

and Egypt passed anti-money laundering laws. Panama, Israel, and

Liechtenstein took important steps to bring their laws up to international standards and were removed from the list.

But, frankly, this important initiative seems to have hit a snag.

I am very concerned that the Bush Administration may be retreating from the strong effort to identify noncooperating countries.

Only last week, it was reported that FATF was planning to agree

to suspend for at least 1 year its practice of identifying noncooperating countries. This, Mr. Chairman, would be a serious mistake.

The plan to abandon the blacklisting practice somehow contemplates in its place an increased role by the IMF and the World

Bank. But these are not contrary to each other. Indeed, hopefully,

the Administration will continue to publicize noncomplying nations

through the FATF process, while also encouraging a greater role

for the IMF and World Bank.

FATF is only part of the solution. There is no international organization dedicated solely to tracking terrorist funds. We should

work with our G7 and G8 partners to create such an organization,

working in parallel to FATF. The Greenberg Task Force on the

Council on Foreign Relations dealing with terrorist financing, of

which I am a member, will have detailed recommendations here

and in terms of our international organization, by the end of the

month.

It is critical to establish international standards through this

new organization to regulate charitable organizations, put money

laundering on the agenda of major international fora, and set international standards to regulate hawalas.

The Administration needs to place the issue of terrorist funding

on the regular agenda of every major international event—APEC,

ASEAN, and the twice annual EU–U.S. Summits. With regard to

the EU, unless our EU allies and their banking systems employ the

same approach as we have, and maintain the degree of political

commitment necessary to achieve financial transparency, then the

26

value of our Government’s work with our own financial institutions

will be greatly reduced.

The EU countries have taken some positive steps to cooperate in

tracking down terrorist funds. But, frankly, the robustness of their

regulatory approach does not match the strength of their antimoney laundering laws. For example, the EU only bars funding by

the military wing of Hamas, not its civilian wing, when, in fact,

they are all one organization, dedicated to terror. Likewise, EU nations do not forbid Hezbollah funding at all. Their evidentiary

standards also make it difficult to block assets. Their financial institutions submit a very low number of SAR’s and their porous borders invite the transit of terrorist funds.

It must be—as it appears not to be now—a major talking point

of the President to raise in meetings with foreign leaders. If more

effort is needed with the EU, then certainly, special efforts must

be made with countries like Saudi Arabia, Pakistan, and the Gulf

States, which are the principal sources and transit points for terrorist money. Their anti-money laundering laws are weak and their

follow-up no better. They do not deserve the diplomatic pass the

Administration seems to have given them. If we really want to put

sand in the gears of al Qaeda, we must press them to cooperate in

dealing with the phony charities and individuals who support al

Qaeda, and to come up to international standards on money laundering. We have to speak plainly and bluntly, even if privately, in

the face of such noncooperation.

Third, we cannot skimp on technical and development assistance

to help other nations build the technical capacity to supervise their

financial systems adequately. The President’s fiscal year 2003

budget allocates only a few million dollars to assistance. Far more

is necessary.

Fourth, we need to bring the underground hawala system into

the Federal regulatory system and simultaneously urge other countries to regulate and control them. FinCEN has not been as effective as it needs to be to register hawalas. There is no coordinated

law enforcement plan at the Federal, State, and local levels to register and prosecute unregistered hawalas.

And fifth, we cannot leave the job to others, even to our allies.

We must not hesitate to employ stronger measures than diplomacy

when necessary. As you pointed out, Mr. Chairman, the Administration has made no use of the authority granted to the Treasury

by Section 311 of the USA PATRIOT Act to identify certain aspects

of terrorist financing as ‘‘primary money laundering concerns’’ requiring special reporting, regulatory, or other measures. This

would allow sanctions short of a Presidential designation under

IEEPA, and I urge the Administration, as Ken Dam indicated he

would like to do, to move forward on this.

These observations reflect a basic premise with which I would

like to conclude. And that is, dealing with terrorist financing requires ‘‘structure, integration, and focus’’ both within our Government and between our Government and its allies. This is true not

only with money laundering, but with antiterrorism financing as

well.

There has to be a common thread and that thread is working

against money laundering systems and high-risk problems everyVerDate 11-MAY-2000 14:39 Dec 04, 2003 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 90722.TXT SBANK4 PsN: SBANK4
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where they occur, coordinated enforcement and regulatory activity,

leveling the playing field among financial institutions so money

launderers cannot go to those most weakly regulated, and making

and keeping money laundering on the international agenda.

Thank you very much.

Chairman SARBANES. Thank you for a very helpful statement.

Ms. Walter.

STATEMENT OF ELISSE B. WALTER

EXECUTIVE VICE PRESIDENT

REGULATORY POLICY AND PROGRAMS

NATIONAL ASSOCIATION OF SECURITIES DEALERS

Ms. WALTER. Thank you, Mr. Chairman, for the opportunity to

testify before you today.

I am here today to tell you about the steps that NASD has taken

in cooperation with the Securities and Exchange Commission, the

Treasury Department, and the securities industry to begin the implementation of those aspects of the USA PATRIOT Act that apply

to broker-dealers.

NASD, as you know, is the self-regulatory organization for every

one of the roughly 670,000 registered representatives in the United

States securities industry, and all 5,500 brokerage firms that connect investors to the markets.

Even before the USA PATRIOT Act, we had some experience

overseeing the securities industry’s compliance with anti-money

laundering regulations. For example, in July 2001, before Congress

passed the USA PATRIOT Act, NASD Enforcement filed a case in

which NASD ultimately barred a registered representative from

the industry for evading Bank Secrecy Act reporting requirements.

In that case, we enforced the Bank Secrecy Act regulations under

an NASD rule of conduct, which obliges firms and their employees

‘‘to observe high standards of commercial honor and just and equitable principles of trade.’’

Today, with the advent of the USA PATRIOT Act, a number of

new anti-money laundering requirements apply directly to the securities industry. We have worked very hard over the last year to

educate broker-dealers and to bring about and monitor their compliance with these new requirements.

For example, NASD has adopted a rule that mirrors the USA

PATRIOT Act’s mandate that all broker-dealers develop and implement an anti-money laundering compliance program. We are now

examining our members to determine whether they are meeting

that obligation. We have issued four notices to our membership to

provide guidance and we have conducted educational workshops to

help firms build their compliance programs.

Congress wisely made anti-money laundering program requirements flexible enough so that each firm can tailor their own programs to the firm’s size, business activities, and customer base.

Many smaller securities firms, and they are the majority in the industry, did not have the extensive experience with anti-money

laundering regulations that large, bank-affiliated firms have had

and were uncertain about how aspects of the USA PATRIOT Act

apply to them.

28

To aid these firms, we developed a template to assist them in

setting up their compliance programs. In addition to giving detailed

explanations for the rules and how they apply to various business

relationships and financial products, the template contains instructions and links to other useful resources. Since being posted on our

website in July, this template has been consulted by our membership almost 8,000 times.

We have also created a search tool that enables securities firms

to electronically search OFAC’s list. Since its launch in June, there

have been over 17,000 visits to our OFAC search tool, which is accessible through our anti-money laundering website.

We have also developed an online training course, which can be

used to help firms meet their USA PATRIOT Act training obligations. As of the end of August, over 6,000 people had registered for

that course.

As soon as the statute and rule went into effect, NASD began examining and enforcing compliance with the anti-money laundering

program requirements. Through our examinations, we determine

whether firms have the required compliance programs and assess

any deficiencies we find.

Critical in this effort has been the effective coordination among

Treasury, the SEC, and the securities SRO’s. Throughout, Treasury

and the SEC have provided us with timely and helpful information

and critical feedback on our template and the other initiatives we

have undertaken.

This continued coordination will remain critical because we must

continue to provide regulatory consistency and certainty in guiding

the securities industry because, for this industry, this is a time of

great change in this aspect among others. There are significant

issues that still remain concerning how this regulatory regime,

which traditionally has applied to depository institutions, will affect and apply to the securities industry, and we look forward to

continuing that dialogue and that productive relationship.

I am pleased to have shared with the Committee our part in the

extensive efforts that have been made to date to ensure compliance

with the USA PATRIOT Act and, in particular, its anti-money

laundering provisions.

NASD is committed to continuing its work with Congress, with

the Treasury Department, with the SEC, and with other regulators

on this important initiative, which makes our markets stronger

and our Nation safer.

Thank you.

Chairman SARBANES. Thank you very much for your statement.

Mr. James.

STATEMENT OF ALVIN C. JAMES, JR.

FORMER SENIOR MONEY LAUNDERING POLICY ADVISOR

U.S. DEPARTMENT OF THE TREASURY

Mr. JAMES. Thank you, Mr. Chairman. I am very pleased to be

given this opportunity to return to your Committee to speak to you

today about our Government’s anti-money laundering programs

and strategy. I serve as the leader of the Anti-Money Laundering

Solutions Group at Ernst & Young, LLP. However, the views I am

29

expressing here today are my own and do not necessarily reflect

the views of Ernst & Young.

Mr. Chairman, I have submitted a statement for the record and

I would like to summarize and briefly add to those remarks today.

Chairman SARBANES. The full statements of all of the panelists

will be included in the record.

Mr. JAMES. Thank you, Mr. Chairman.

Chairman SARBANES. We would appreciate your summarizing.

Mr. JAMES. Mr. Chairman, our current National Money Laundering Strategy is replete with all the right buzzwords—

money laundering systems, interagency cooperation, coordination of

effort and information sharing. Unfortunately, this strategy has

failed to enhance our ability to deter systemic money laundering.

It has failed because at the root of our efforts, we cling to prosecution and indictment as our primary tool and our primary measure

of success in dealing with systemic financial crime. We must use

all the tools in our tool chest if we are to build a solution to this

systemic money laundering problem.

The source of this failure to successfully address systemic crime

lies at a fundamental level. Major money laundering is a systemic

crime. Systemic crime is brought about by an illicit demand within

society that is not dependent upon the action of any particular individual or group of individuals. Therefore, the criminal conduct cannot be effectively deterred by the threat of indictment and prosecution, fines, or imprisonment. Systemic financial crime is crime that

for various reasons will always have a new criminal ready to step

up when his predecessor falls to criminal sanctions. When we fail

to acknowledge the shortcoming of prosecution as the sole deterrent

in critical areas, then we also failure to strategize toward a more

effective means of disruption and elimination of the criminal systems that plague our Nation.

As I continue in my testimony, I will set out several areas of systemic abuse of our Nation’s financial structure. I will also suggest

at the end an approach that I believe might effectively design and

implement a strategy to combat systemic crime within our enforcement and regulatory communities.

The first area of systemic abuse I would like to mention centers

on correspondent banking. I agree with Senator Grassley that this

is a very serious area of concern. The USA PATRIOT Act began to

bring attention to these correspondent relationships.

However, in spite of the actions of the USA PATRIOT Act, this

network is currently being abused as the primary narcotics-currency placement vehicle for the Colombian Black Market Peso Exchange.

Money remitters make up another large category. Numerous

money remitter systems exist throughout the world. They all offer

similar services of foreign exchange and small dollar money remittance through informal networks based on ethnicity and trust.

They exist in Asia, Africa, and South America. They all have

branches in other lands based on the Diasporas of their people. Although they serve many useful purposes, by their very nature, they

are also vulnerable to money launderers.

Yet another system involved the gold broker networks. The U.S.

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works within our country or the world. Nonetheless, it is possible

to transfer millions of dollars of value internationally within these

amorphous networks with no paper trail. The transfers can go from

the souks of Dubai, India, and the Far East to the brokers of Switzerland and Italy to the coin shops of the United States. It is very

likely that recent transactions of terrorist funds were moved

through this network. There is a similar international network involving diamonds, especially the blood diamonds that have been described recently in the press.

False invoicing is another means of covertly moving funds from

one country to another that has existed for centuries and is well

known and well documented. Yet, as with many of the others mentioned, it remains almost untouched by U.S. law enforcement as a

systemic means to launder money.

In addition, there are remittance companies. These firms should

be distinguished from money remitters in that they offer discreet

international transfers of funds for wealthy individuals and firms

along the lines of the services provided for private banking clients

within the legitimate financial industry. They do so by moving

these funds through their personal accounts without notice to anyone of the true ownership of the funds.

Finally, hawala and Colombia Black Market Peso are also areas

of systemic abuse which have been dealt with extensively by this

Committee. I describe these systems more fully in my written testimony. But I will note here that although these systems are well

known, they continue to be major areas of systemic money laundering abuse.

I offer the following proposal as one means to address these problems. A coordinated effort using all of the tools available to the

Government is the key to disrupting and dismantling systemic financial crime. The home agency solely responsible for systemic

criminal law enforcement and Bank Secrecy Act regulatory policy

and enforcement is the best means to achieve this coordination. I

strongly suggest the new agency be given the power via a Presidential directive to coordinate all investigations impacting systems

of financial crime that are a threat to our national security. This

would be investigations outside this agency as well as in. I also believe it is essential to see that the new agency has the security

clearances necessary to coordinate its strategies with the intelligence community. Finally, it is vital that this new agency include

this Nation’s private financial sector as a partner in designing and

implementing overarching strategies designed to impact systemic

financial crime.

The problem of overlapping jurisdiction has always been an impediment to cooperation and to coordination of the investigations

related to systemic financial crime. Anti-money laundering is necessarily a fragmented jurisdiction due to the numerous substantive

crimes that generate illicit funds. But the recognition of systemic

crime gives rise to a logical division of effort along the lines of systemic enforcement versus individual indictment and prosecution.

The agency I proposed would be charged with systemic financial

enforcement and could pass off individual cases to the appropriate

investigating agency, thus providing an incentive for cooperation

rather than competition. In addition, the performance of the sysVerDate 11-MAY-2000 14:39 Dec 04, 2003 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 90722.TXT SBANK4 PsN: SBANK4
31

temic crime agency could be measured along the lines of its strategy, which would not directly include individual prosecution.

As an example of the type of coordinated strategy that might

arise from this agency I propose, let me turn to the area I know

best—Black Market Peso Exchange. The goal of the following strategy would be to force the BMPE money launderer and the Colombian drug lord to use processes to launder drug money that are less

suited to their purpose and thus, easier to detect and attack, both

by systemic and traditional criminal enforcement. First, I propose

a coordinated series of disruption-oriented undercover operations

that could be added to the strategic plan. These operations can infiltrate the BMPE money laundering organizations and then use

their insider status just at the right moment to seize or otherwise

divert the funds that they have been trusted to launder. Then a

BSA Geographic Targeting Order directed at correspondent banking accounts that are funded with substantial currency deposits,

those mentioned by Senator Grassley earlier this morning, could be

added to the mix. An international arm could be included that

would coordinate the impact of intelligence to be shared with, say,

Colombian or other foreign law enforcement agencies. In addition,

related individual investigations could be coordinated in such a

way as to maximize their effect on the overall system. And finally,

the private sector could be included by advising them at the most

appropriate moment of the overall scheme that we are trying to

combat, as well as specific countries, foreign banks or particular accounts that are known to be involved in the system.

The overall strategy could be designed to shake the confidence of

the illicit users of the system. On the one hand, they would lose

confidence that the money that they launder is safe and will be returned to them. On the other hand, the appropriate individuals involved could be passed on for individual prosecution or investigation, not only to our country, but also by their own law enforcement

as well if they lie outside this country. Those who maintain legitimate businesses could find their ability to use the financial institutions throughout the world hampered by their link to narcotics

crime, if they are linked to this process. Providing the identity of

the known users of the money laundering system to the international press could further shame and deter future use of the system. The final effect is to eliminate the market for Black Market

Peso Exchange dollars in foreign exchange. Such a coordinated effort as part of an overall strategy to attack a system of financial

crime could begin to impact the system itself, rather than just chip

away at the individuals involved.

Mr. Chairman, thank you for allowing me this opportunity to express my views. At the least, I hope that my comments will foster

a continuing debate directed at more effective enforcement of systemic financial crime and more efficient use of the tools available

to our enforcement community.

Thank you.

Chairman SARBANES. Thank you very much, Mr. James.

We thank all the panelists. You have made some very helpful

suggestions and very positive contributions.

We have been joined by Senator Carper. Senator, I will yield to

you at this point.

32

COMMENT OF SENATOR THOMAS R. CARPER

Senator CARPER. I have no questions. I am delighted to see our

witnesses, and especially welcome Mr. Eizenstat.

Chairman SARBANES. Let me try to segment this thing in time

terms.

As you heard, as I was talking with Secretary Dam and the Deputy Attorney General, it would be our intention to get their next

strategic plan on time, or close to on time, which is February 1.

We have also pushed them to get the system into place, as provided for in the USA PATRIOT Act. The Treasury Department still

has some rules and regulations to do and so forth. And then we

would have an opportunity for a thorough examination of this early

in the new Congress, before a heavy legislative agenda intervenes.

What in the interim, as we approach that thorough and comprehensive examination, can the Congress be doing? Or what can

we do over the next few months to move this effort forward before

we undertake that review, recognizing that the number of legislative days left are extremely limited, so there is not a legislative

agenda I think that we can pursue over the next few months?

Does anyone have any suggestions in that regard?

Stu.

Mr. EIZENSTAT. Well, quite frankly, I would hope that you and

Members of the Committee, Senator Carper and others, might incorporate some of the recommendations and suggestions that you

have heard this morning into a letter to Secretary Dam and Deputy

Attorney General Thompson so that there is a direct input from the

Committee into their Strategy.

Having a hearing is very important in terms of accountability.

But this is a place where specific recommendations should be

made. For example, as I have suggested here, I think that the real

key is political will and that has to be expressed in a number of

ways. First, organizationally, that there is no one person in the

U.S. Government with sufficient clout who can be designated by

the President to coordinate all the diplomatic law enforcement, political, and other activities that are necessary, nor is there an international organization to do that.

FATF does a good job on the money laundering. But there is

nothing on the terrorist financing side.

Chairman SARBANES. Who should that person be? Do you have

a suggestion in that regard?

Mr. EIZENSTAT. I think that this is something that the Council

on Foreign Relations Task Force will designate. But it needs to be

somebody that is in the White House and that has the ear of the

President and can coordinate across departmental lines.

Chairman SARBANES. When is that Task Force Report coming in

from the Council?

Mr. EIZENSTAT. It will be at the end of October and again, I do

not want to step on any headlines. They have their own recommendations. I am part of that Task Force.

Chairman SARBANES. All right.

Mr. EIZENSTAT. But I think it will be very concrete. And the

same with respect to the international institution.

Second, the Congress can urge that in their Money Laundering

Strategy, that the Administration commit itself to put the issue of

33

money laundering and terrorist financing on every major international fora that we participate in—APEC, ASEAN, the EU–U.S.

summits, and that we press both our close allies in the EU and

those in the Gulf and the Middle East to take this issue more seriously and we have to break some diplomatic crockery.

We simply cannot sit back and say that the Saudis have done

everything that we have asked them to do, when that simply is not

the case.

And third, as you have suggested here, but, again, I think concretely, it should be something that Congress and this Committee

could ask them to include. And that is, not to back off FATF designations, to continue to highlight those countries which do not

come up to international standards in their money laundering laws

and implementation, and to get on with the business, as you suggested, of making these Section 311 designations.

So, I think that perhaps a letter from yourself and Members of

the Committee incorporating some of the thoughts that you have

heard from Mr. James, myself, and Ms. Walter, might mean that

the actual Strategy when it comes out is more concrete.

Chairman SARBANES. That is very helpful. Does anyone want to

add to that?

Mr. JAMES. I would certainly agree with Mr. Eizenstat. I think

that there is a tendency in the current Strategy and current efforts

to not see the forest for the trees. And this Committee, by letter

and comment, can continue to focus attention on the overall effect,

the impact of this Strategy, and what it is doing to prevent terrorist financing, to prevent money laundering, to actually move

these systems toward deterrence.

Counting the number of prosecutions, and the number of cases

we have open, all of that is well and good. But if there is not some

overarching plan to eventually diminish the opportunity to have

those cases, then I submit we are not getting where we need to be.

And I think your leadership in that regard, Mr. Chairman would

be very helpful.

Chairman SARBANES. Ms. Walter, are you encountering any resistance within the industry to your efforts to bring them up to

speed on these requirements and so forth? How cooperative are

people being? Or do they regard it as an imposition that has been

thrust upon them, which they are reluctantly trying to comply

with?

Ms. WALTER. I would not say that we are encountering any resistance. This has been a period of great change and turmoil, not

an easy period for the securities industry.

Given those difficulties, it is to me a tribute to the industry that

they have stepped up to the plate as well as they have, and our

initial results of our initial exams are really quite encouraging.

We have found that well over 90 percent of the firms that we

have examined thus far, and it is about 500, do have their compliance programs in place. They have some more work to do. We obviously want that figure to be 100 percent and we want all aspects

of those exams to be up to snuff.

Chairman SARBANES. Now are you examining just whether they

have established a program, or are you also examining how thoroughly the program is being implemented?

34

Ms. WALTER. We are examining both. Obviously, the requirement

to have the program has only been in place since April.

Chairman SARBANES. Right.

Ms. WALTER. And the SAR’s reporting requirement for most

broker-dealers has not yet gone into effect. So this will be an evolving process.

But we have also found in our exams that people are starting to

get better attuned, and this is a new mode of analysis particularly

for many of our smaller firms, to the issues that arise, and we use

our examinations as well to point out to them areas in which a report would be appropriate, where a report has not up till now been

required, but will shortly be required.

Chairman SARBANES. Right.

Ms. WALTER. So both issues are really covered.

Chairman SARBANES. Mr. James.

Mr. JAMES. Mr. Chairman, thank you. I would add that, from my

perspective, it brought my thought back to your reference earlier,

I think when you were talking to Mr. Dam about the club in the

closet.

Chairman SARBANES. Right.

Mr. JAMES. I think that club could be a little bit more effective

of an incentive if it had—pardon my reference here—but a little

blood on it.

CEO’s have a myriad of compliance issues that they have to face

and they have just so many dollars to fund them. And getting a

particular issue past their concern and up to the level where they

are actually going to spend some money on it sometimes takes

some incentive.

Certainly, in my perspective, most companies that I have dealt

with are very concerned about this issue and very willing to deal

with it. But they would probably have a little more impetus to do

so if some of the worst offenders out there were brought to heel a

little more effectively.

Chairman SARBANES. Yes, it really defies common sense to think

that there aren’t transactions or enterprises that could not be

found to be a primary money laundering concern and then bring

those sanctions to bear.

Mr. JAMES. I think a few good examples along those lines would

help immeasurably.

Mr. EIZENSTAT. One of the reasons that we wanted to have something like the USA PATRIOT Act was that, prior to that, we really

were between two extremes. That is, having an IEEPA designation,

which requires a major Presidential designation. It is blocking

funds of a foreign government. It is a major diplomatic action and

problem. Or virtually doing nothing except advisories.

Chairman SARBANES. Yes.

Mr. EIZENSTAT. And the purpose of this was to try to give a more

flexible set of sanctions short of a Presidential designation that can

be taken, as you pointed out in your own questioning, not just

against a government, but against a type of transaction or against

a particular financial institution as well, rather than the government itself. That flexibility should be employed. That is the whole

purpose of it so, again, we were not forced to either do virtually

35

nothing except advisories or the nuclear bomb of an IEEPA designation.

Chairman SARBANES. Yes, I think that is a very apt observation.

And it is obviously why we structured it that way and it does offer

an opportunity, it seems to me, as Mr. James said, to send some

very important messages. And I think if you send out a few of

those messages, they are going to have a real impact.

There is a vote underway and so I have to draw this to a close.

But we very much appreciate your testimony. We probably will

seek to call on you again in the future and we are most grateful

to you for your responsiveness and your assistance as we examine

this problem.

The hearing is adjourned.

[Whereupon, at 11:40 a.m., the hearing was adjourned.]

[Prepared statements and additional materials supplied for the

record follow:]

36

PREPARED STATEMENT OF SENATOR DEBBIE STABENOW

Thank you, Chairman Sarbanes. I am glad you have called this hearing.

I would also like to welcome our colleague, Senator Grassley, to today’s hearing.

He has been a real leader on the subject of money laundering.

He and I have worked together in encouraging the Administration to move

promptly in issuing a regulation regarding concentration accounts and their potential use as a vehicle for terrorist financing—a subject that I hope the Treasury

Department will update us on today. I look forward to hearing Senator Grassley’s

comments today.

Combating money laundering in the aftermath of September 11 has proven to be

particularly critical. We have long seen money laundering associated with terrible

illegal activities such as drug trafficking. These activities pose ongoing serious challenges to our country, but now we must also look at the fight against money laundering as one to ensure our basic national security.

Our task since the horrible attacks has not been a simple one. However, this Committee acted swiftly and aggressively after the attacks to address terrorist financing.

I was proud to have been an active participant in that debate.

We now have an opportunity to examine the implementation of the International

Money Laundering Abatement and Financial Anti-Terrorist Act. I am anxious to

hear the testimony of our witnesses about the promulgation of regulations related

to the Act and to hear their assessment of how the law is working. I also welcome

their insight on what Congress can further do to help combat terrorist financing.

The free movement of money across borders, unnoticed and untracked is so critical to the work of terrorists. By acting quickly to cut off the supply of money, we

limit their ability to act. This is key. As I have said in this Committee before, in

this new era, economic warfare will be one of our strongest weapons against terrorism. Terrorists who would destroy our way of life, in an ironic way need our institutions to thrive and we will not allow that to happen.

Thank you again, Mr. Chairman, for calling this hearing today. I appreciate your

vigilant attention to this matter.

—————

PREPARED STATEMENT OF JOHN F. KERRY

A U.S. SENATOR FROM THE STATE OF MASSACHUSETTS

OCTOBER 3, 2002

Mr. Chairman, I would like to thank you for the opportunity to testify again on

the implementation of the anti-money laundering provisions included in the USA

PATRIOT Act. I know that these anti-money laundering provisions would not have

been included in the law, and their implementation would not be as effective, without your hard work and dedication.

The USA PATRIOT Act provides a clear warning to those who have assisted or

unwittingly assisted those involved in the al Qaeda network or other terrorist organizations in laundering money that the United States will take whatever actions are

necessary to stop those funds from entering into the United States. These actions

include denying foreign banks and jurisdictions access to the U.S. economy, to stop

terrorists and international criminal networks from laundering money into the

United States through the international financial system.

Over the past year, the United States and our allies have made important

progress to limit the ability of terrorist organizations to move money through the

international financial system. But we must do far more to coordinate and marshal

the resources of the Federal Government and international organizations to fully

implement an effective strategy that will end the scourge of money laundering.

In September, a United Nations report said that despite initial successes in locating and freezing $112 million in assets belonging to al Qaeda and its associates, al

Qaeda continues to have access to considerable financial resources. The frozen funds

represent only a small fraction of the economic resources that many experts believe

are still available to al Qaeda. The United Nations also reports that funds to assist

al Qaeda continue to be available from bin Laden’s own personal inheritances and

investments; from funding provided by members and supporters of al Qaeda and

from contributions from some Islamic charitable organizations. The report also

states that a large number of ostensibly legitimate businesses continue to be maintained and managed on behalf of bin Laden in northern Africa, Europe, the Middle

East, and Asia.

37

This report highlights the need for additional steps to increase intelligence and

information sharing to stop al Qaeda from moving funds within the international

financial system.

The USA PATRIOT Act includes legislation, which I sponsored, that provides the

tools the United States needs to crack down on international money laundering havens and protect the integrity of the U.S. financial system from the influx of tainted

money. The United States has the largest and most accessible economic marketplace

in the world. Foreign financial institutions and jurisdictions must have unfettered

access to markets to effectively work within the international economic systern The

Secretary of the Treasury now has the authority to leverage the power of our

markets to force countries or financial institutions to stop interacting with known

terrorists and those involved with money laundering. I am surprised and deeply dismayed that the Bush Administration has taken no steps to exercise its authority

under this law. I believe that the Bush Administration’s inaction is especially troubling given the current threats the United States faces.

The USA PATRIOT Act also includes a number of important provisions that have

begun to seal the cracks in existing law and that provide new tools to law enforcement to stop money laundering. First, the law requires U.S. financial institutions

to use appropriate caution and diligence when opening and managing accounts for

foreign financial institutions. Second, it prohibits foreign shell banks, that have no

physical location in any country from opening accounts in the United States and

requires our financial institutions to take reasonable steps to ensure that foreign

banks are not allowing shell banks to use their U.S. accounts to gain access to the

U.S. financial system. Third, it expands the list of money laundering crimes and it

assists our law enforcement efforts by making it easier to prosecute those crimes.

Fourth, it requires financial institutions to develop appropriate anti-money laundering programs. Finally, it prohibits the use of concentration accounts that allow

foreign banks to transfer large amounts of cash into the United States without including appropriate information on the beneficial owner of the funds. As the final

regulations for the USA PATRIOT Act are developed, it is my hope that the U.S.

Department of the Treasury will work with the online commerce industry to develop

appropriate standards for identifying suspicious behavior and to combat money

laundering which do not unnecessarily invade the privacy of American consumers.

With this new law in place, we must now continue to develop a broad strategy

both within the Federal Government and in coordination with our allies to stop

international terrorists from laundering money into the United States. As the international financial system becomes more adept at stopping money laundering, terrorists will become more adept at developing new and more sophisticated ways of

moving funds internationally. The Federal Government must do a better job of integrating and coordinating among its investigative, prosecutorial, and regulatory

resources to combat money laundering. Better information sharing and a central coordination point among Federal agencies fighting money laundering, as has taken

place in efforts to deal with terrorist financing, is overdue and will assist in a broad

range of efforts.

Additional funding is needed for many agencies and programs that fight money

laundering. The Financial Crimes Enforcement Network (FinCEN) within the U.S.

Department of the Treasury supports the investigative efforts of both law enforcement and financial institutions to stop domestic and international financial crimes.

FinCEN deserves additional funding to expand its ability to work with financial institutions in the United States to review Suspicious Activity Reports (SAR’s) that

help discover illegitimate banking activities. The Electronic Crimes Task Force developed by the U.S. Secret Service has been effective in stopping attacks on our critical financial infrastructure and has stopped financial fraud. These efforts must be

continued and expanded with adequate resources. They must also be coordinated

with the work already being done by the Department of Justice, the Federal Bureau

of Investigation, and others, to combat money laundering.

I am deeply concerned that terrorists and international criminal organizations are

hiding money derived from the sale of drugs, weapons, and other criminal enterprises, in countries with inadequate tax laws, called ‘‘tax havens.’’ In many cases,

the funds that criminals hide in these tax havens have already been laundered in

the international financial system. To stop criminals from hiding the proceeds of

crime, I have introduced the Tax Haven and Abusive Tax Shelter Reform Act of

2002. First, the bill would impose strict measures against nations identified as uncooperative tax havens. Second, it would impose strict measures against those which

use confidentiality rules and practices to undermine tax enforcement and administration or refuse to participate in effective information exchange agreements. Third,

it would limit foreign tax credits claimed by taxpayers operating in uncooperative

tax havens. Finally, it would require a strict reporting of outbound transfers by U.S.

38

taxpayers and impose a new civil penalty on U.S. taxpayers who fail to report an

interest in an offshore account.

The events of September 11 and the recent United Nations report show the need

for additional efforts by the United States and its allies to limit the ability of international terrorists and others to use tax havens to hide the proceeds of their crimes.

I remain extremely concerned about the Bush Administration’s policy to take a unilateral approach to the issue of tax havens and to step away from the bilateral

efforts of the European Union and the Organization of Economic Cooperation and

Development (OECD) to place appropriate limits on tax havens. Contrary to what

some claim, the OECD approach does not punish countries just for having low tax

rates or seek a harmonization of tax policy. Instead, the OECD attempts to reduce

the number of countries whose tax systems have a lack of transparency, a lack of

effective exchange of information and those that have different tax rules for foreign

customers than for its own citizens. I believe the Bush Administration approach will

make it more difficult for the international community to track and freeze the assets

international terrorists like bin Laden and expand upon our recent progress in fighting financial crimes.

Working together, we have achieved a great deal to crack down on international

money laundering havens and to protect the integrity of the U.S. financial system

from the influx of tainted money. I look forward to working with Chairman Paul

Sarbanes and others to ensure that the new law is properly implemented to stop

international criminal and terrorist networks from laundering the financial proceeds

of their crimes and to stop the use the international financial system to develop terrorist networks and fund terrorist actions.

—————

PREPARED STATEMENT OF KENNETH W. DAM

DEPUTY SECRETARY, U.S. DEPARTMENT OF THE TREASURY

OCTOBER 3, 2002

Chairman Sarbanes, Ranking Member Gramm, and distinguished Members of the

Committee, thank you for inviting me to testify about the implementation of the

USA PATRIOT Act and the National Money Laundering Strategy. In many ways,

the National Money Laundering Strategy and the USA PATRIOT Act regulations

are central to the war on terrorism. I applaud the Committee for its work in passing

the USA PATRIOT Act and its continued interest in the success of the National

Money Laundering Strategy. I look forward to continuing to work with the Committee as we further implement the Act.

Before reviewing the work we have done to implement the Act and discuss the

status of the 2002 National Money Laundering Strategy, I wish to update the Committee on the progress we are making on the financial front of the war on terrorism.

Along with my testimony, I am submitting a document entitled, ‘‘Contributions by

the Department of the Treasury to the Financial War on Terrorism.’’ This document

is available on our website at http://www.treas.gov/press/releases/reports/2002910

184556291211.pdf.

The President has emphasized that the financial front of the war on terror is critically important to America’s success in fighting terrorism. The President has directed the Secretary of the Treasury and the Department, in coordination with other

departments of the Federal Government and with other nations, fight this front on

the war on terrorism. As set forth in Goal 2 of the National Money Laundering

Strategy, the long-term battle against terrorist financing requires a multifaceted approach: (1) intelligence gathering; (2) freezing of suspect assets; (3) law enforcement

actions; (4) diplomatic efforts and outreach; (5) smarter regulatory scrutiny; (6) outreach to the financial sector; and (7) capacity building for other governments and

the financial sector. This is an integrated interagency strategy because these efforts

draw on the expertise and resources of the Treasury Department and our sister

departments and agencies, as well as our foreign partners and the private sector.

As Deputy Secretary of the Treasury, I ensure that this Strategy and the Secretary’s initiatives draw on the relevant expertise within the Department and are

implemented across all the components of the Department. I also help lead National

Security Council deputies committee meetings in setting strategic priorities for the

financial front. Our Under Secretary for Enforcement, Jimmy Gurule ́, leads our enforcement bureaus including the United States Customs Service, the United States

Secret Service, the Financial Crimes Enforcement Network (FinCEN), and the Office of Foreign Assets Control (OFAC) in fighting terrorist financing. In addition,

Under Secretary Gurule ́ oversees a particularly important Treasury initiative, OperVerDate 11-MAY-2000 14:39 Dec 04, 2003 Jkt 000000 PO 00000 Frm 00042 Fmt 6621 Sfmt 6621 90722.TXT SBANK4 PsN: SBANK4
39

ation Green Quest—an interagency task force that draws upon expertise in the Customs Service, the United States Secret Service, the IRS Criminal Investigations

Division (IRS–CI), the Department of Justice, the FBI, and the other agencies to investigate terrorist financing. Our Under Secretary for International Affairs, John

Taylor, works, along with the State Department and the Department of Justice, to

build and maintain the international coalition against terrorist financing. Our

Under Secretary for Domestic Finance, Peter Fisher, works to help implement the

USA PATRIOT Act, and to help protect our Nation’s critical financial infrastructure.

And, of course, we have many, many employees who are working hard and, in some

cases, putting their lives at risk to fight the financing of terror. In all of these efforts, we work closely with the State Department, the Department of Justice, and

other departments. This is a team effort and our success depends on it.

Achievements in Financial Aspects of U.S. Anti-Terrorism Initiatives

Our goal is straightforward. We seek to prevent terrorist attacks by: (1) disrupting terrorist finances in the short and the long term; and (2) following financial

trails to disrupt terrorists themselves. Our challenge is to accomplish this without

unduly compromising or burdening legitimate businesses or our citizens privacy. We

expect our ability to do this to grow as we learn more about the threat and our enforcement and penalty strategies in accordance with this.

Our first actions after the tragedy of September 11 were to identify known terrorists and terrorist entities, freeze their assets in the United States, and work with

our allies to extend those freezes worldwide. Since September 11, the United States

and other countries have frozen more than $112 million in terrorist-related assets.

The actual amount of money blocked understates the full effect of the blocking action in that our efforts to freeze accounts and fund transfers have effectively cut the

flow of terrorist money through funding pipelines and permanently excluded designees from using the formal financial system. For example, we—through OFAC

blocking actions, law enforcement actions performed by Operation Green Quest and

the FBI and subsequent prosecutions—we disrupted al Barakat’s worldwide network

that, by some estimates, was channeling $15 to $20 million dollars a year to al

Qaeda. As another example, we froze the assets of the Holy Land Foundation for

Relief and Development, which, as the principal U.S. fundraiser for Hamas, raised

over $13 million in 2000.

Where warranted, we have also unblocked funds. Three hundred fifty million dollars in Afghan government assets that were frozen in connection with the Taliban

sanctions, mostly before September 11, have now been unfrozen for use by the legitimate Afghanistan government.

We have obtained strong international cooperation in this effort. All but a small

handful of countries have pledged support for our efforts, over 160 countries have

blocking orders in force, hundreds of accounts worth more than $70 million have

been blocked abroad, and foreign law enforcement agencies have acted swiftly to

shut down terrorist financing networks and to seize terrorists’ assets. The United

States has often led these efforts, but there have also been important independent

and shared initiatives. To cite just four examples: On March 11, 2002, the United

States and Saudi Arabia jointly referred to the U.N. Sanctions Committee two

branches of a Saudi-based charity; on April 19, 2002, the G7 jointly designated nine

individuals and one entity; on August 29, 2002, the United States and Italy jointly

designated twenty-five individuals and entities; and, on September 6, 2002, the

United States and Saudi Arabia jointly referred to the U.N. Sanctions Committee

Wa’el Hamza Julaidan, an associate of Osama bin Laden and a supporter of al

Qaeda terror. These efforts have been bolstered by actions from the European

Union, which has issued three lists of designated terrorists and terrorist groups for

blocking and by Germany, which recently submitted the names of four al Qaeda terrorists connected to the September 11 hijackers to the United Nations Sanctions

Committee. Also, other countries have been taking proactive freezing actions and

enforcement measures.

In addition to these efforts, we work with countries daily to get more information

about their efforts and to ensure their cooperation is as deep as it is broad. In many

cases, we provide technical assistance to countries to help them develop the legal

and enforcement infrastructure they need to find and freeze terrorist assets.

We have also had success pursuing international cooperation through multilateral

forums including the U.N., the G7, APEC, the G20, the Financial Action Task Force

(FATF), the Egmont Group, and the international financial institutions. In particular, Treasury continues to play a strong leadership role in FATF, a 31-member

organization dedicated to the international fight against money laundering. In late

October 2001, the United States hosted an Extraordinary FATF Plenary session, at

which FATF adopted eight Special Recommendations on Terrorist Financing. These

40

recommendations quickly became the international standard on how countries can

take steps to avoid having their financial systems abused by terrorist financiers.

Many non-FATF members have committed to implement these recommendations, as

well. Over 80 non-FATF members have already submitted reports to FATF assessing their compliance with these recommendations. We are continuing our work within FATF to ensure that member countries fully implement the recommendations.

We are cleaning up the financial environment generally. Hardly a week passes

without news that a foreign government or bank has taken an important new step

to crack down on money laundering or terrorist financing. For example, according

to foreign press accounts, Thailand recently announced plans ‘‘to reduce the minimum value of transactions subject to scrutiny’’ by its anti-money laundering office.

As another example, the foreign press recently reported that Qatar National Bank

provided its entire staff with a 4-day course on fighting money laundering and terrorist financing. There are scores of similar examples involving countries around the

globe.

Governments are also taking steps to prevent charities from being abused by terrorists. In the United States, we have designated or blocked the assets of several

U.S. and foreign charities including the Holy Land Foundation, the Afghan Support

Committee, and the Pakistan and Afghan offices of the Revival of Islamic Heritage

Society. We have also blocked the financial accounts of the Benevolence International Foundation and the Global Relief Foundation pending ongoing investigations of these organizations. The international community, including FATF, is also

focused on this issue because of the threat it poses not only to our collective security

but also to the sanctity of charitable giving. Kuwait and Saudi Arabia have each

reportedly established new supervisory authorities to better regulate charities. This

work is very important. Charity is an important component of many religions, including Islam, and few acts are as reprehensible as misusing charities for terrorist

purposes. We seek to ensure a regulatory climate in which donors can give to charities without fear that their donations will be misused to support terrorism.

In addition to preventing terrorists from abusing our formal financial systems,

governments are taking important steps to prevent terrorists from abusing informal

financial systems, including hawala (a centuries-old, trust-based method of moving

money that generates little paper trail). FATF’s Eight Special Recommendations require member countries to impose anti-money laundering rules on informal financial

systems, including hawala dealers. As of December 31, 2001, the United States required money service businesses to register, maintain certain records, and report

suspicious activity. In May 2002, the United Arab Emirates hosted an international

conference where several countries agreed to improve the regulation of hawalas by,

among other things, implementing the FATF Recommendations against hawalas

and designating a supervising authority to enforce the rules.

We have concentrated the world’s attention on this problem, and these efforts are

paying off. We know that al Qaeda and other terrorist organizations are suffering

financially as a result of our actions. We also know that potential donors are being

deterred from giving money to organizations where they suspect that the money

might wind up in the hands of terrorists.

Under leadership from the President, the Congress, and this Committee, we are

making it increasingly difficult for terrorists to use the mainstream financial system. As a result, we believe that terrorists increasingly will attempt to finance their

operations by smuggling bulk cash or other instruments. But smuggling is costly.

It takes time. It is uncertain. Smuggling exposes the cash or other instruments to

possible detection and seizure by the authorities. Indeed, since September 11, our

Customs Service has seized over $11 million in cash being smuggled out of the

United States to Middle Eastern destinations or with some other Middle Eastern

connection. By making bulk cash smuggling a crime, the USA PATRIOT Act helped

make these increased seizures possible.

Smuggling also exposes couriers to possible capture. This summer, Customs,

United States Secret Service, and FBI agents apprehended and subsequently indicted Jordanian-born Omar Shishani in Detroit for smuggling $12 million in forged

cashier’s checks into the United States. The detention and arrest of Shishani are

highly significant as they resulted from the Customs Service’s cross-indexing of various databases, including information obtained by the U.S. military in Afghanistan.

That information was entered into Customs’ ‘‘watch list,’’ which, when cross-checked

against inbound flight manifests, identified Shishani.

While we have had important successes, I must tell you that we have much to

do. Although we believe we have had a considerable impact on al Qaeda’s finances,

we also believe that al Qaeda’s financial needs are greatly reduced. They no longer

bear the expenses of supporting the Taliban government or of running training

41

camps, for example. As I have cautioned before, we have no reason to believe that

al Qaeda does not have the financing it needs to conduct additional attacks.

2002 National Money Laundering Strategy

Although terrorist financing is a key component of our Anti-Money Laundering

Strategy, our fight against money laundering goes well beyond terrorist financing

issues. And just as we have made great strides in the war against terrorist financing, the Administration’s more general fight against money laundering—domestically and internationally—has achieved tremendous progress.

We are making solid progress on our more traditional money laundering case investigations. For the first time, the 2002 Strategy reports on some of the significant

money laundering cases that the Federal Government has investigated and prosecuted in the last year. For example, earlier this year, Customs agents in New Jersey arrested an Assistant Vice President of a bank who was operating an illegal

money transmitting business that moved approximately a half billion dollars in 8

months. The Assistant Vice President maintained over 250 accounts at the bank,

44 of which were in the names of nonexistent companies and people that were fronts

for currency exchange firms in Brazil. Customs received substantial assistance from

IRS–CI and DEA in the case, which is now being prosecuted by the U.S. Attorney’s

Office in Newark.

In 2001, law enforcement agents of the Departments of Treasury and Justice

seized over $1 billion in criminal funds—about 38 percent of which was related to

money laundering investigations. The Departments forfeited over $241 million in

criminal assets in fiscal year 2001 relating to money laundering.

But much remains to be done. The vision for how we, as a Government, will accomplish this mission and what we, as a Government, hope to accomplish is laid

out in the annual National Money Laundering Strategy.

Congress directed the President, acting through the Secretary of the Treasury, in

consultation with the Department of Justice and a number of other agencies, to develop a national strategy for combating money laundering and related financial

crimes in the Money Laundering and Financial Crimes Strategy Act of 1998. On behalf of the President and his Administration, this Department was proud to release

the 2002 National Money Laundering Strategy, which reflects the views, contributions, and consensus of 26 different Federal agencies, in July of this year. I am delighted to appear before you today to discuss the 2002 Strategy. The 2002 Strategy

describes our multiyear effort to safeguard the integrity of the world’s financial system and to reduce the vulnerability of the U.S. financial institutions to criminal activities. I am especially proud of our efforts to implement the anti-money laundering

provisions of the USA PATRIOT Act, which has become a cornerstone of U.S. antimoney laundering efforts, and I will expand upon those efforts in a moment.

The 2002 Strategy is precedent setting. It lays out, for the first time, the comprehensive national strategy to attack the financing of terrorist groups, which I

have described above. It sets another important precedent too, a precedent about

accountability, and we have the leadership of Secretary O’Neill to thank for this.

The 2002 Strategy also reflects two themes that have driven this Administration’s

approach to money laundering enforcement since its first day in office: (1) the need

for interagency coordination and cooperation in conducting anti-money laundering

policy; and (2) the need to ensure that the information that the financial institutions

are required to report is useful, and can be used effectively by the Government.

Effective Interagency Coordination

First, coordination. As I have already noted, 26 distinct agencies participated in

the drafting of the Strategy and all 26 are necessary to the successful execution of

the Strategy. We rely on many of these same agencies to lend their experience and

expertise in drafting regulations to implement the USA PATRIOT Act.

We have learned through experience that it is only by working cooperatively that

we will be able to cut off the lifeblood that criminals and terrorists rely on to finance

their illegal acts. It is vitally important to cooperate and coordinate on an interagency basis to investigate priority targets whenever it is possible to do so.

The notion of interagency cooperation is not new. And it is not new in the specific

area of anti-money laundering investigations. In the Money Laundering and Financial Crimes Strategy Act of 1998, Congress directed the Secretary, in consultation

with the Attorney General, to designate High-Risk Money Laundering and Related

Financial Crime Areas or HIFCA’s. HIFCA’s can be established to focus on money

laundering in an industry, sector, or group of financial institutions.

These HIFCA Task Forces are intended to improve the quality of Federal money

laundering investigations by concentrating the money laundering investigative

expertise of the participating Federal and State agencies in a unified task force.

42

HIFCA’s are supposed to leverage the resources of the participants and create investigative synergies. Thus, interagency coordination on money laundering investigations takes place every single day in HIFCA areas, and the six existing HIFCA Task

Forces initiated over 100 investigations during 2001.

Perhaps the most important of these HIFCA cases was Operation Wire Cutter.

Wire Cutter was a multiyear investigation where the U.S. Customs Service and the

Drug Enforcement Administration (DEA) teamed with Colombia’s Departamento

Administrativo de Seguridad to arrest 37 individuals as part of an undercover investigation of Colombian peso brokers and their money laundering organizations. Investigators seized over $8 million in cash, 400 kilos of cocaine, 100 kilos of marijuana,

6.5 kilos of heroin, nine firearms, and six vehicles.

I should also note the long-standing ‘‘El Dorado’’ Task Force, which is led by U.S.

Customs and IRS in New York and is also a High Intensity Drug Trafficking Area

(HIDTA) initiative. Comprised of 185 individuals from 29 Federal, State, and local

agencies, the ‘‘El Dorado’’ Task Force is one of the Nation’s largest and most successful financial crimes task forces, having seized $425 million and arrested 1,500

individuals since its inception in 1992.

However, we recognize that it is not enough simply to create HIFCA’s or celebrate

the success of isolated cases. A number of obstacles still remain before the mission

of all the HIFCA’s can be fully realized. For example, the Federal law enforcement

agencies have provided different levels of commitment and staffing to the Task

Forces. Few of the HIFCA’s have succeeded in integrating non-law enforcement personnel into their work.

We have been candid about the difficulties some of the HIFCA’s have experienced,

and we discussed them in Goal 3 of the 2002 Strategy along with our plan to determine how to improve the functioning of the HIFCA’s. During this year, the Departments of Treasury and Justice are reviewing what has worked and what has not

since the initial designation of the HIFCA’s, and will seek to implement appropriate

changes through the work of an interagency HIFCA review team.

The 2002 Strategy presents a concrete plan and a vision for further improving

interagency coordination on law enforcement investigations. The Strategy calls on

the Treasury and Justice to co-lead an interagency effort to identify potential money

laundering-related targets, and then deploy the necessary assets to attack those

agreed upon targets. Those efforts are well under way and I am very pleased with

the progress the interagency group has made in a short period of time.

Effective Use of Reported Information

Next, the Strategy focuses on ensuring that we are making effective use of information that financial institutions are required to report to the Government. Both

inside and outside of Congress some have wondered whether the information reported by financial institutions, especially the Suspicious Activity Reports (SAR’s),

makes any difference and whether any one in law enforcement reviews them. The

answer to both questions is an unequivocal YES.

Federal law enforcement agents, often together with their Federal and State financial regulatory colleagues and State law enforcement colleagues, currently

download and review over 15,000 SAR’s every month. Each SAR filed is reviewed

in the field, often by more than one agency. Obviously, given restraints on resources

and the number of hours in the day, we have to make educated decisions about

which SAR’s merit further investigation, and then proceed accordingly.

The 2002 Strategy strongly supports the creation and development of interagency

SAR Review Teams. Goal 3, Objective 1, Priority 3 specifically addresses the creation of five additional SAR Review Teams in the U.S. Attorney Offices that do not

currently have or support a SAR Review Team, but would benefit from having one.

Several HIFCA Task Forces, such as San Juan, Los Angeles, New York, and Chicago, have also successfully integrated their SAR Review efforts into the work of

their HIFCA Task Forces.

Let me give you a few examples of how SAR’s have been used in some high-profile

cases and in recent criminal investigations.

• A SAR filed in August 1998, by Republic National Bank reported a series of suspicious transfers of large sums of money from a Russian bank correspondent

account to accounts in the Bank of New York. Federal authorities began an investigation of Peter Berlin and his wife, Ludmila Edwards, a BONY Account Executive. Seizure warrants were executed against the BONY accounts and several

other Berlin entities, as well as the correspondent account for a Russian bank at

the Bank of New York, and resulted in seizures totaling $21,631,714 from 11 different accounts. Berlin and his wife pled guilty to conspiracy, money laundering,

and conducting an illegal money transmittal business, and agreed to criminal forfeitures totaling approximately $8.1 million.

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• In January 2001, Citibank Miami filed a Suspicious Activity Report (SAR) concerning the deposit of approximately $15 million from an individual whom law enforcement determined to be the ‘‘bagman’’ for Vladimiro Lenin Montesinos-Torres,

the former Chief of the Peruvian National Intelligence Service (SIN). Montesinos

was under investigation in Peru for fleeing with government funds, trafficking in

narcotics, and violating human rights. Intelligence information revealed that

Montesinos had maintained a global network of bank accounts and front companies to move and to hide hundreds of millions of dollars received from drug traffickers, defense contract kickbacks, embezzlement of public funds, and gun-running since the mid-1990’s. This money was deposited into banks located in Peru,

Switzerland, the Cayman Islands, Panama, and the United States. Following the

bagman’s arrest, Montesinos attempted to extort U.S. bank officials to release

about $38 million seized in connection with the investigation. This effort backfired

when Montesinos associate was arrested in Miami and cooperated with the FBI,

providing them with the location of Montesinos hiding place. Over $22 million has

been seized in the United States for forfeiture related to this investigation.

• In May of this year, as a result of several SAR’s filed by different financial institutions, three principals and the former treasurer of a group of metal trading companies were charged with conspiracy to commit bank fraud, mail fraud, and wire

fraud in connection with a sophisticated international scheme to defraud banks

worldwide of more than $600 million.

• In April of this year, information learned from an interagency investigation generated by SAR’s led to the successful prosecution of a man for operating an illegal

money transmitting system. From September 5, 2000 through November 2001, the

defendant operated the money transmitter without the license required by the

State, despite notice from the State supervisory agency that this was criminal

conduct. During this period, the defendant transmitted $2.8 million to the UAE.

The money transmitter in this case is one of a number of outlets of a money transmitter system that had its assets frozen by OFAC.

• Another SAR filing led to the investigation, arrest, and guilty plea in February

of this year of three brothers who pled guilty to fraudulently selling food stamps

out of their convenience store. The scam netted nearly $2 million. The brothers

wire transferred several hundred thousand dollars to foreign nationals in the Middle East, and these transactions are still under investigation by Federal agents.

SAR’s have also been used to aid investigations of terrorist financing. In the 6

month period following the September 11 attack, 255 financial institutions filed over

1,600 SAR’s concerning potential terrorist financing activity, with violation amounts

ranging up to $300 million. FinCEN continues to support law enforcement efforts

in tracking terrorist financing.

Implementation of the USA PATRIOT Act

As I have just stated, the importance of the SAR’s is, of course, interrelated with

our work in implementing the many provisions of the USA PATRIOT Act. Goal 4

of the Strategy focuses on our work on the USA PATRIOT Act and our related goal

to ensure that these regulations are meaningful and useful to law enforcement. In

that vein, I wish to turn now to an update on Treasury’s implementation of the

money laundering and antiterrorism provisions of Title III of the USA PATRIOT

Act. We have devoted ourselves at the highest levels of Treasury to carrying out the

tasks that this Committee and Congress have placed on our shoulders to improve

and to fortify our anti-money laundering and antiterrorist financing regime. The

provisions of the Act, and now our regulations, take aim at areas in which our financial services sector may be vulnerable to abuse. As the principal architect of

these new regulations, Treasury is mindful of the need to craft rules that achieve

the goals of the Act without unduly burdening legitimate business activities or our

citizens’ privacy.

Any discussion of Treasury’s implementation of the USA PATRIOT Act would be

incomplete without recognition of the assistance provided by the Federal banking

agencies, the Securities and Exchange Commission, the Commodity Futures Trading

Commission, and the Department of Justice. These agencies have lent their time

and expertise for the common goal of protecting our financial system through intelligent regulations. Active participation by the financial services industry that will

operate under our regulations, has also been essential.

Our major accomplishments over the past 11 months include:

• Together with the Federal functional regulators, issuing proposed customer identification and verification regulations.

• Developing a proposed rule to that seeks to minimize risks presented by the correspondent banking and private banking accounts.

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• Expanding our basic anti-money laundering program requirement to the major

financial services sectors, including insurance and unregistered investment companies, such as hedge funds. • Developing rules to permit and facilitate the sharing of information between law

enforcement and financial institutions, as well as among financial institutions

themselves.

Of course, each of these accomplishments emanated from the very legislation that

this Committee was instrumental in drafting.

Ensuring Appropriate Customer Identification and Verification of Identification

In July, Treasury and the Federal functional regulators, jointly issued proposed

rules requiring certain financial institutions to develop identification and verification procedures that enable them to form a reasonable belief as to the identity

of the customer. The proposed rules apply to banking institutions, securities brokers

and dealers, mutual funds, futures commission merchants, and futures introducing

brokers. Just as this Committee envisioned, the proposed rules seek to make mandatory what many financial institutions are already doing—obtaining basic identifying information from customers at the time of account opening. However, the rules

also maintain sufficient flexibility so as to accommodate advancing technology and

the wide range of channels through which financial services are offered by these institutions, including opening accounts via the Internet. Obtaining certain information is mandatory, but the manner in which that information is obtained and

verified is appropriately left to the discretion and judgment of each particular financial institution. We are continuing our work on drafting similar regulations for the

remaining types of financial institutions that maintain accounts for customers.

From the outset, we recognized the potential benefits to a financial institution’s

identification program if it were able to reliably confirm that the customer’s name

matched the Social Security number provided at the time of account opening. The

most reliable source for this information is, of course, the Social Security

Administration. This spring, we reached an agreement in principle with the Social

Security Administration to permit financial institutions to verify with the Social Security Administration the authenticity of the Social Security numbers provided by

accountholders. We are continuing to work out the logistical details and hope to

have this service available in the near future. However, I caution that verifying the

authenticity of a Social Security number does not ensure that the person who provided the information is, in fact, that person.

Eliminating Risks Associated with Correspondent Banking Activities of

Foreign Banks and Other Foreign Financial Institutions

Several important provisions of the USA PATRIOT Act take aim at systematically

eliminating the risks that can exist when U.S. financial institutions offer correspondent accounts to foreign banks and other foreign financial institutions. Given their

breadth and international focus, these provisions are some of the more significant

ones in the Act.

One month after the Act became law, we issued interim guidance to financial

institutions describing how they were to comply with two key provisions—the prohibition on maintaining correspondent accounts for foreign shell banks (Section 313),

as well as the recordkeeping provisions for foreign banks having correspondent accounts (Section 319(b)). A proposed rule followed shortly thereafter. Having thoroughly reviewed public comments received and analyzed the issues presented, we

issued on September 18 a final rule implementing both provisions.

In the final rule, we have defined ‘‘correspondent account’’ to reflect the objectives

of different provisions of the Act, as well as comments received from the private sector. With respect to the shell bank prohibition, for example, we have construed the

term ‘‘correspondent account’’ broadly to reflect the intent of Congress to cut off

unregulated ‘‘brass plate banks’’ from the U.S. financial system. Similarly, we determined that a broad definition of ‘‘correspondent account’’ was appropriate for the

recordkeeping provisions of Section 319(b). These recordkeeping provisions apply to

correspondent accounts maintained by any foreign bank, regardless of the jurisdiction in which the foreign bank is licensed. Obtaining the basic information required

by this Section from all foreign banks, namely, the names of the owners of the foreign bank and the name of a U.S. agent for service of process, serves a valuable

law enforcement purpose and will assist U.S. banks and securities brokers with

their anti-money laundering efforts. Further, Section 319(b) also contains an important provision authorizing both the Secretary of the Treasury and the Attorney

General to serve administrative subpoenas on any foreign banks with correspondent

accounts in the United States. Any limitation on the definition of a correspondent

account in this Section would unduly limit this subpoena power.

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Treasury has also issued a proposed rule that aggressively implements Section

312 of the Act, a provision that takes aim at a wide array of money laundering risks

associated with correspondent accounts maintained for foreign financial institutions

in the United States. Additionally, both the statute and Treasury’s proposed rule

seek to curb potential abuses in connection with private banking accounts for foreign persons by requiring due diligence, including obtaining information on the true

ownership and source of funds placed in such accounts. Recent events have demonstrated the risks posed by well-intentioned financial service professionals seeking

to court and maintain wealthy foreign clients. This rule is designed to minimize

those risks. Treasury’s rule also includes important safeguards to prevent the proceeds of foreign official corruption from finding a home in the U.S. financial system.

After issuing this proposed rule, Treasury received extensive comments from the

affected industries. While many of the issues raised will take time to analyze, Section 312 became effective on July 23. Accordingly, on that date we issued an interim

rule that effectively tolled the application of this provision pending our issuance of

a final rule for most financial institutions. However, because of the importance of

this provision in protecting the financial system, we required certain financial institutions, such as banks and securities and futures brokers, to begin conducting the

type of due diligence that will eventually be incorporated into the final rule.

Expanding the Anti-Money Laundering Regime to All Facets of the

U.S. Financial System

A basic tenet of our anti-money laundering regime is that tainted funds will follow

the path of least resistance to enter the legitimate financial system. Therefore, a

comprehensive approach to minimizing money laundering and terrorist financing

risks within the Nation necessarily involves extending controls to the full range of

financial services industries that may be susceptible to abuse. Section 352 of the Act

embodies this approach by directing Treasury to expand the basic anti-money laundering program requirement to all financial institutions presenting risks of money

laundering by virtue of the products or services offered. The challenge is to take the

broad statutory mandate and translate that into rules applicable to each of the

diverse industries defined as financial institutions under the Bank Secrecy Act.

In April, Treasury, with the assistance of the SEC, the CFTC, their respective

self-regulatory organizations, and the banking regulators, issued regulations requiring firms in the major financial sectors to establish an anti-money laundering program. In addition to the banks, which already had an anti-money laundering program requirement, we covered securities brokers and dealers, futures commission

merchants and introducing brokers, mutual funds, money services businesses, and

operators of credit card systems. Separate rules applicable to each financial industry

were drafted to ensure that the programs would be appropriately tailored to the

risks posed by their operations. With the pledge that we would work diligently to

complete our task, the Secretary exercised his discretion and allocated additional

time for us to study the remaining industry sectors and craft regulations.

Since that time, we have studied the business operations of the remaining financial industries in order to take banking oriented regulations and modify them to

apply to these other industries. Members of the remaining financial industries have

never been subject to comprehensive Federal regulation of their relationships with

customers, let alone anti-money laundering regulation. Additionally, the remaining

categories of financial industries encompass a broad range of businesses, from sole

proprietorships to large corporations, further complicating the process of drafting a

regulation that does not impose an unreasonable regulatory burden. Following

months of meetings with industry groups and representatives, we have virtually

completed our research and are working now on the task of drafting the regulations.

We recently issued proposed rules that would require firms in certain segments

of the insurance industry and certain investment companies (namely, those not registered with the Securities and Exchange Commission) to establish anti-money laundering programs. These two rules reflect the complexities of our task. For the insurance industry, after tapping the expertise of the State insurance regulators and both

domestic and international law enforcement officials, we tailored the rule to those

areas of the industry where the products offered are particularly susceptible to

money laundering abuse and instances of money laundering have been documented.

This is primarily the life and annuity products. Also while the insurance agent must

play a vital role in any comprehensive anti-money laundering program, we

expressly left the obligation on the insurance company to set up and assure implementation of the program. Upon the establishment of an effective program, the insurance company can delegate responsibilities to the agents as appropriate. With respect to investment companies, such as hedge funds, that are not registered with

the SEC, with the expert guidance and assistance of the SEC and the CFTC, we

46

specifically targeted collective investment vehicles with characteristics that make

them susceptible to money laundering. Those vehicles investing in securities, commodity futures, or real estate fall within the rule. Furthermore, to facilitate effective

regulation, we are proposing to require investment companies covered by the rule

to file a notice with FinCEN identifying themselves, their principal investments,

and contact information. Such a notice is crucial given that many such vehicles

often have offshore operations despite their marketing to U.S. investors.

Another important component of an effective anti-money laundering regime is ensuring that financial institutions report suspicious activity to FinCEN promptly.

With the able assistance of the SEC and the Federal Reserve, we have successfully

completed a final suspicious activity reporting rule for securities brokers and dealers, ensuring that firms in this critical financial sector have a mechanism in place

for reporting suspicious activities. Similarly, we are working with the CFTC to complete a proposed rule that would require the futures industry to file suspicious activity reports, and we are working with the SEC on a rule requiring mutual funds to

file suspicious activity reports. And, although not required by the Act, we recently

issued a final rule requiring casinos to file suspicious activity reports. Beyond these

financial institutions, we are considering whether reporting obligations should be

imposed on additional financial sectors such as the insurance industry. As we gain

more experience with the various financial sectors, we will be able to make an

informed judgment as to the efficacy of imposing reporting requirements.

Facilitating the Sharing of Critical Information Relating to Money Laundering

and Terrorist Financing

Early in the implementation process, I emphasized that one of the principles that

guides Treasury’s implementation of Title III is honoring a central purpose of the

Act to enhance coordination and information flow. To that end, we have issued a

final rule pursuant to Section 314(a) seeking to establish FinCEN as an information

conduit between law enforcement and financial institutions to facilitate the sharing

and the dissemination of information relating to suspected terrorists and money

launderers. The system builds upon FinCEN’s ongoing relationships with law enforcement, the regulators, and the financial community. We have also pledged to

work going forward to provide the financial sector with additional information, such

as typologies of money laundering or terrorist financing schemes and updates on the

latest criminal trends.

Since March of this year, Treasury has authorized certain financial institutions

to share information among themselves concerning those suspected of terrorism or

money laundering pursuant to Section 314(b) of the Act. Our final rule retains the

central features of the prior rule, but we have expanded the scope of financial institutions eligible to share information under this provision. Also, as required by the

statute, financial institutions must provide FinCEN with a yearly notice that they

will be taking advantage of this provision to share information.

Further facilitating the sharing of information is FinCEN’s establishment of the

USA PATRIOT Act Communication System (PACS). PACS is designed to allow participating financial institutions to quickly and securely file BSA reports over the

Internet. This e-filing will expedite reporting the process, make the information

available to law enforcement more rapidly, and reduce the costs for financial institutions in complying with the filing of BSA reports. FinCEN has completed a successful beta test in which twenty-six major financial institutions volunteered to file their

BSA reports using this system. They have also begun offering this optional filing

method to financial institutions generally.

Conclusion

In summary, we have made substantial progress in the global fight against money

laundering, through our coordinated efforts, including our work in terrorist financing and the National Money Laundering Strategy and our implementation of the

USA PATRIOT Act. The Act is making a difference. Recently, USA Today reported

the results of a survey of over 2,000 financial professionals. Sixty-nine percent of

them agreed that the USA PATRIOT Act will prevent terrorist access to the U.S.

financial system. They are right. We believe that the Act is making it increasingly

difficult for terrorists to use the U.S. financial system. We are disrupting their

ability to plan, operate, and execute attacks. And we are forcing them to resort to

methods, such as bulk cash smuggling, that expose them to a greater risk of detection and capture.

Of course, we still have much more work to do, and this important work must

continue once the new Department of Homeland Security has been created. Regardless of the final structure of the new Department, Treasury will continue playing

a pivotal role.

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For example, our regulatory and oversight responsibilities for the USA PATRIOT

Act and Bank Secrecy Act will continue. We are hard at work on developing additional implementing regulations, and I have testified repeatedly that the work does

not stop once the regulations have been released. Time and experience will allow

reasoned reflection on the decisions we have made, and it is incumbent upon the

Treasury to make adjustments to these rules when it is necessary to ensure that

they continue to achieve our goals.

To that end, I announced the creation of a new task force within the Treasury,

the Treasury/USA PATRIOT Act Task Force. This task force will work with other

financial regulators, the regulated community, law enforcement, and consumers to

improve the regulations that we have issued in light of the experience we gain

through implementation.

Even after the creation of the new Department, Treasury will continue to participate in analyzing and investigating the information reported by financial institutions. IRS-Criminal Investigation will maintain its leadership of the interagency

SAR Review Teams that I discussed earlier in my testimony. Again, these SAR Review Teams currently review over 15,000 SAR’s each month. IRS–CI has established

41 SAR Review Teams across the country and will continue to devote substantial

resources to this effort.

OFAC, of course, will continue its role in administering targeted financial sanctions. FinCEN will also remain at work in developing new analytical tools to find

patterns in the data provided by the financial institutions. In addition to its traditional role of supporting law enforcement agencies on specific investigations,

FinCEN has begun to develop proactive leads to send to the field for investigation.

FinCEN will continue these efforts and continue to send the necessary information

to the appropriate law enforcement agencies, wherever they hang their hats at the

end of the day.

We look forward to working with the new Department and the Committee on our

continued work toward our common goal.

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CONTRIBUTIONS BY THE U.S. DEPARTMENT OF THE TREASURY

TO THE FINANCIAL WAR ON TERRORISM

FACT SHEET

U.S. DEPARTMENT OF THE TREASURY

SEPTEMBER 2002

‘‘This morning, a major thrust of our war on terrorism began with the stroke of

a pen. Today, we have launched a strike on the financial foundation of the global

terror network . . . we will direct every resource at our command to win the war

against terrorists: every means of diplomacy, every tool of intelligence, every instrument of law enforcement, every financial influence. We will starve the terrorists of

funding, turn them against each other, rout them out of their safe hiding places and

bring them to justice.’’

President George W. Bush

September 24, 2001

Announcing Executive Order 13224

‘‘If you have any involvement in the financing of the al Qaeda organization, you

have two choices: cooperate in this fight, or we will freeze your U.S. assets; we will

punish you for providing the resources that make these evil acts possible. We will succeed in starving the terrorists of funding and shutting down the institutions that support or facilitate terrorism.’’

Treasury Secretary Paul O’Neill

September 24, 2001

Table of Contents

1. Executive Summary

The challenge, objective, approach and actions the United States has taken, and

the results of those actions.

2. Executive Order 13224

The Order expands the United States’ power to target the support structure of

terrorist organizations, freeze the U.S. assets and block the U.S. transactions of terrorists and those that support them, and increases our ability to block U.S. assets

of, and deny access to U.S. markets to, foreign banks who refuse to cooperate with

U.S. authorities to identify and freeze terrorist assets abroad.

3. USA PATRIOT Act

This legislation, signed into law by President Bush on October 26, 2001 contained

new tools to enhance our ability to combat the financing of terrorism and money

laundering.

4. Charities

Charities across the Nation do important work, making a difference in the lives

of millions of people. Americans and others around the world donate hundreds of

billions to charity, with humanitarian intent. They deserve to know that protections

are in place to assure that their contributions do good work. Unfortunately, some

charities have been abused by those who finance terror, through schemes to siphon

money away from humanitarian purposes and funnel it to terrorism.

5. Hawalas

The word ‘‘hawala,’’ meaning ‘‘trust’’ refers to informal money or value transfer

systems or networks outside the formal financial sector. Hawala provides a fast and

cost-effective method for worldwide remittance of money or value, particularly for

persons who may not have access to the financial sector. Due to the lack of transparency in hawala and other alternative remittance systems, there is substantial potential for abuse.

6. International Efforts

Numerous multilateral groups, such as the G7, the FATF, and the Egmont group,

have marshaled their resources to join the United States to combat terrorist financing.

7. Domestic Law Enforcement Efforts

Domestic law enforcement agencies—many within the U.S. Treasury—have mobilized to identify terrorists networks and starve terrorists of money.

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1This fact sheet highlights the Treasury Department’s efforts against terrorist financing over

the past 12 months since September 11, 2001. This is not intended to document all United

States Government activity on the financial front on the war on terrorism. The activities of

other areas within the U.S. Government—specifically the intelligence community, the military

community, the diplomatic community, and the non-Treasury law enforcement community—are

not detailed here.

Executive Summary

One year ago, terrorists struck our Nation with unforeseen guile and unprecedented consequences—unprecedented consequence for Americans and our way of

life. In turn we have taken unprecedented actions to dismantle terrorist networks.

Under the leadership of President Bush, Americans have rallied to the war on terror, and we have struck back on every front: military, political, and financial, even

as we have strengthened our homeland defenses against future attacks.

The Department of the Treasury—in coordination with the Departments of Justice

and State—leads an interagency effort to disrupt and dismantle terrorist financing.1

No less than the military campaign, the financial war has required careful planning,

domestic and international coalition-building, and decisive execution. And as with

the military campaign, we have achieved results.

As a necessary first step in leading the financial war against terrorism, we have

developed and published a comprehensive strategy to identify, disrupt, and dismantle terrorist financing networks. This strategy is three-fold. First, we are applying technology, intelligence, investigation, and regulations to locate and freeze the

assets of terrorists, wherever they may hide. New powers granted by the President

and Congress have enabled us to scour the world financial system for suspicious

activities with greater precision than ever before.

Second, we are attacking terrorist financial infrastructures—their formal and underground methods for transferring funds across borders and between cells, whether

through banks, businesses, hawalas, subverted charities, or innumerable other

means. Our approach is to deny terrorists access to the world’s formal financial infrastructure and use the money trail to locate and apprehend terrorists.

Third, we are using diplomatic resources and regional and multilateral engagements to ensure international cooperation, collaboration, and capability in dismantling terrorist financing networks.

The war on terrorist financing is an immense undertaking. The openness of our

modern financial system, which allows savers and investors to fuel economic growth,

also creates opportunities for terrorist parasites to hide in the shadows. Our challenge in this front of the war is to protect the freedom and flexibility the world’s

financial systems while driving our enemies into the sunlight, where we and our

allies can sweep them up. We have enjoyed success, but much more remains to be

done.

The United States took six principal steps in the fall of 2001 to pursue financial

underwriters of terrorism:

1. President Bush signed Executive Order 13224 giving the United States greater

power to freeze terrorist-related assets;

2. The United States won the adoption of UN Security Council Resolutions 1373

and 1390, which require member nations to join in the effort to disrupt terrorist financing;

3. We are implementing the USA PATRIOT Act to broaden and deepen information sharing and the regulatory net for our financial system;

4. We are engaging multilateral institutions such as the Financial Action Task

Force and the international financial institutions (IFI’s) to focus on terrorist financing;

5. We established Operation Green Quest—an interagency task force which has

augmented existing counter-terrorist efforts by bringing the full scope of the Government’s financial expertise to bear against systems, individuals, and organizations

that serve as sources of terrorist funding; and

6. We are sharing information across the Federal Government, with the private

sector, and among our allies to crack down on terrorist financiers.

The President’s Executive Order 13224 explicitly targets terrorist financing and

casts a global net over the fundraisers, donors, transfer agents, and bankers of terror. It subjects managers and fiduciaries of nongovernmental organizations, foreign

financial institutions and donors to economic sanctions if they support terrorism.

The UN Security Council Resolutions amplify the effect of the President’s Executive Order. The resolutions—1373 and 1390—direct member states to criminalize

terrorist financing and to adopt regulatory regimes intended to detect, deter, and

freeze terrorist funds. The UN actions have been critical to winning support for our

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campaign, and they have been essential tools for building the international coalition

against terrorist financing.

International alliances against terrorism are crucial, because the overwhelming

bulk of terrorist assets, cashflows, and evidence lie outside our borders. We are

working strategically with allies around the world to address regional threats: we

have recently submitted names to the UN jointly with Italy, Saudi Arabia, China,

and central Asian states. To augment our allies’ good intentions and capabilities,

we are providing technical assistance to many Persian Gulf, African, South American, and Southeast Asian countries. Our assistance allows them to accomplish their

goals for neutralizing those who support terror.

We are reaching out to other international organizations, such as the Financial

Action Task Force (FATF), an international body created to fight money laundering,

to impact terrorist financing. FATF adopted eight principles of conduct specifically

directed at terrorist financing—Eight Special Recommendations that all member nations have endorsed and moved to implement. The U.S. Treasury Department has

also prompted the G7, the G20, the IMF, and the World Bank to take actions, enlisting their member nations in the comprehensive program against terror.

Domestically, the enactment of the USA PATRIOT Act has provided several tools

for the financial front of the war. The USA PATRIOT Act imposes responsibilities

for opening and monitoring bank accounts, permits information sharing within the

Government and among financial institutions, bars transactions with shell banks,

requires information from foreign financial institutions, protects sensitive evidence

from disclosure, and expands the industry sectors subject to rigorous anti-money

laundering and terrorist financing compliance programs. The USA PATRIOT Act

also encourages partnerships between the Government and the private sector.

Treasury and the FBI have reached out to the financial services sector in order to

develop effective screening mechanisms for suspect transactions.

Over the past year, we have seen successes in the financial war on terrorism.

For example, we exposed and dismantled the al Barakat financial network. Al

Barakat’s worldwide network and its owners were channeling several million dollars

a year to and from al Qaeda. Last November, Treasury agents shut down eight al

Barakat offices in the United States, and took possession of evidence that will be

investigated for further leads in the terrorist money trail. Millions of dollars have

moved through these U.S. offices of al Barakat. At its core, it was a conglomerate

operating in 40 countries around the world with business ventures in telecommunications, construction, and currency exchange. They were a source of funding and

money transfers for bin Laden. Our allies around the world are joining us in cutting

al Barakat out of the world financial system. Dubai, UAE is the home base of al

Barakat. The UAE blocked the accounts of al Barakat, paralyzing the nerve center

of the operation.

Another success is our action against the Holy Land Foundation for Relief and

Development. Holy Land headquartered in Richardson, Texas, raises millions of dollars annually that is used by Hamas. In 2000, Holy Land raised over $13 million.

Holy Land supports Hamas activities hrough direct fund transfers to its offices in

the West Bank and Gaza. Holy Land funds are used by Hamas to support schools

that serve Hamas ends by encouraging children to become suicide bombers and to

recruit suicide bombers by offering support to their families. Our action blocked

their current accounts and prohibits U.S. persons from doing business with Holy

Land in the future, thereby stopping the flow of millions of dollars every year from

the United States to Hamas.

Our war on terror is working—both here in the United States and overseas. We

are harvesting information, and we are putting it to good use. We are seeing

progress. We have frozen dollars and the assets of organizations, stopping acts of

terror before they can occur, and forcing terrorist backers to riskier, more vulnerable positions.

Our efforts are having real-world effects. al Qaeda and other terrorist organizations are suffering financially as a result of our actions. Potential donors are being

more cautious about giving money to organizations where they fear that the money

might wind up in the hands of terrorists. In addition, greater regulatory scrutiny

in financial systems around the world is further marginalizing those who would support terrorist groups and activities.

The war on terrorism is only beginning, and it is certain to demand constant vigilance. In the year since that terrible day, we have hit them hard. Our goal is to

bankrupt their institutions and beggar their bombers. This war—the financial war

against terrorism—won’t be easy and much more remains to be done. We are off

to a good start but it is a long obstacle filled road ahead. We will not relent.

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Executive Order 13224

‘‘We will starve terrorists of funding, turn them against each other, rout them out

of their safe hiding places, and bring them to justice.’’

President George W. Bush

September 24, 2001

On September 24, President Bush issued Executive Order 13224, authorizing the

blocking of the assets of terrorists and those who assist them.

The Order expands the Treasury Department’s power to target the support structure of terrorist organizations, freeze the assets subject to U.S. jurisdiction and

block the transactions of terrorists and those that support them, and deny them

access to U.S. markets.

Disrupting the Financial Infrastructure of Terrorism

The Executive Order—

• Targets all individuals and institutions linked to global terrorism. • Allows the United States to freeze assets subject to U.S. jurisdiction and prohibit

transactions by U.S. persons with any person or institution designated pursuant

to the Executive Order based on their association with terrorists or terrorist organizations. • Names specific individuals and organizations whose assets and transactions are

to be blocked. • Punishes financial institutions at home and abroad that continue to provide resources and/or services to terrorist organizations.

Authorities Broadened

New Executive Order actions and authorities:

The Executive Order blocks the U.S. assets and transactions of specified terrorists, terrorist organizations, and terrorist supporters and authorizes the imposition

of blocking orders on additional domestic or foreign institutions that support terrorism. It also directs Federal agencies to work with other nations to cut off funding

and shut down the institutions that support or facilitate terrorism.

The new Executive Order broadens existing authority in three principal ways:

• It expands the coverage of existing Executive Orders from terrorism in the Middle

East to global terrorism. • The Order expands the class of targeted groups to include all those who provide

financial or material support to, or who are ‘‘associated with,’’ designated terrorist

groups. • Establishes our ability to block the U.S. assets of, and deny access to U.S. markets to, those foreign banks that refuse to freeze terrorist assets.

Blocking Terrorist Assets

• The Order prohibits U.S. transactions with designated terrorist organizations,

leaders, support networks, donors, and corporate and charitable fronts. • Terrorist groups from around the world are designated under the Order, including

organizations that are related to the al Qaeda network.

• Terrorist leaders and operatives are listed; including Osama bin Laden and his

chief lieutenants along with many of the entities that act as a support network

for al Qaeda, including charities and front organizations.

• The Order authorizes the Secretary of State and the Secretary of the Treasury

to make additional terrorist designations.

—The Treasury’s Office of Foreign Assets Control (OFAC) plays a key role in implementing and administering the Order, including by working with financial

institutions to ensure that they implement blocking orders and maintaining a

current list of designated entities on its website: http://www.ustreas.gov/offices/enforcement/ofac

Results

Two hundred thirty-six individuals, entities, and organizations are currently designated under the Executive Order as supporters of terrorism. This includes 112 individuals ranging from organizational leaders such as Osama bin Laden and his key

lieutenants to terrorist operatives, financiers, and intermediaries around the globe.

All 34 U.S.-designated Foreign Terrorist Organizations are listed under the order

as are 15 other terrorist organizations such as the Continuity IRA and the East

Turkistan Islamic Movement. Seventy-four other companies, charitable organizations, or entities who support and/or finance terrorism are also listed under the

Order. Working bilaterally and through the United Nations and other multilateral

institutions, we have spread the effort to freeze terrorist assets across the globe.

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Over 165 countries and jurisdictions have issued blocking orders against the assets

of terrorists. Since September 11, 2001, $112 million in terrorist assets have been

frozen worldwide in over 500 accounts. Thirty-four million dollars of those assets are

frozen in the United States, $78 million overseas.

While the money frozen in bank accounts is one measure of the impact of the

blocking orders, it is not the most important one. Each of the accounts frozen has

the potential to be a pipeline for far more money than what was in the account on

the day it was frozen. In addition to closing off these identified pipelines, blocking

actions have a deterrent effect leading those who would assist the financing of terrorism to avoid use of the traditional financial system. Finally, following the money

assists worldwide law enforcement, intelligence, and military communities to identify, capture, arrest, and neutralize terrorists.

The Executive Order applies to all global terrorists. The list of designees includes

74 terrorists or supporters of terrorism not part of the al Qaeda network such as

Shining Path, the REAL IRA, the Tamil Tigers, Hamas, ETA, and Hezbollah, among

others.

Just as the United States needed new Government powers to enable the financial

war on terrorism to begin, other nations around the globe examined their laws and

sought new legislation to enable them to engage in the financial front of the war

on terrorism. Since September 11, over 180 countries and jurisdictions have implemented, passed, or drafted legislation strengthening their abilities to combat the

financing of terrorism.

USA PATRIOT Act

On October 26, 2001, the President signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct

Terrorism (USA PATRIOT) Act of 2001. Contained within this comprehensive package is a wide array of provisions designed to enhance our ability to combat terrorism, the financing of terrorism, and money laundering.

I. PROVISIONS BOLSTERING OUR ANTI-MONEY LAUNDERING/ANTI-TERRORIST

FINANCING REGULATORY REGIME

• The USA PATRIOT Act contains sweeping revisions to our anti-money laundering

and antiterrorist financing regime that dramatically enhanced Treasury’s ability

to combat the financing of terrorism and money laundering. These provisions reflect the important principles of: (1) enhancing transparency in financial transactions; (2) protecting the international gateways to the U.S. financial system; and

(3) increasing the vigilance of all our financial institutions that are themselves the

gatekeepers of the financial system.

• Over the past year we have:

—Issued a series of proposed and interim regulations targeting money laundering

and terrorist financing risks associated with correspondent accounts maintained

by foreign financial institutions.

—Issued jointly with the Federal financial regulators proposed rules requiring

banks, securities brokers, futures commission merchants, and mutual funds to

establish basic customer identification and verification procedures.

—Issued regulations requiring key financial sector industries to implement antimoney laundering programs designed to prevent the services they offer from

being used to facilitate money laundering or the financing of terrorism.

II. PROVISIONS ENHANCING THE ABILITY TO SHARE CRITICAL INFORMATION

• The USA PATRIOT Act permits and facilitates greater information sharing

among law enforcement and the intelligence community.

• Treasury has issued regulations implementing another provision of the Act designed to improve two other key channels of communication regarding terrorism

and money laundering between the Government and financial institutions; and

among the financial institutions themselves.

• Treasury’s FinCEN has developed a new, highly secure website through which financial institutions will be able to file Bank Secrecy Act information electronically. The same system will also permit FinCEN, as well as financial regulators

and law enforcement, to send alerts or other communications directly to financial

institutions in a secure environment. The USA PATRIOT Act Communication System (PACS) has the capability of providing an instantaneous communication link

between FinCEN and all financial institutions and will better enable us to fight

terrorism and financial crime.

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III. PROVISIONS PROVIDING THE ADDITIONAL TOOLS NECESSARY TO BLOCK

AND FREEZE TERRORIST ASSETS

• The USA PATRIOT Act also makes several amendments to International Emergency Economic Powers Act (IEEPA), which enhances our ability to freeze terrorist assets. In the financial war on terrorism, this blocking and freezing power

has been an essential weapon in our arsenal. Among others things, the amendments clarify the authority (1) to freeze assets during an investigation, and (2)

to use classified information to support a blocking order without having to reveal

that information to anyone other than a reviewing court.

Results

The USA PATRIOT Act was enacted with the assistance of the Federal banking

regulators, the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Department of Justice. Since the USA PATRIOT Act was

enacted, the Treasury Department has worked with these agencies to issue over

dozen regulations covering a wide array of financial institutions and transactions.

Charities

Unfortunately, some charities have been abused by those who finance terror,

through schemes to siphon money away from humanitarian purposes and to funnel

it to terrorism. Charities across the world do important work, making a difference

in the lives of millions of people, and the sanctity of charitable giving is a critical

component of many cultures. In 2000, for example, Americans donated $133 billion

dollars to charity with humanitarian intent. Donors around the world deserve to

know that protections are in place to assure that their contributions are being channeled to the good purposes intended.

The President’s Executive Order

Under the authority of E.O. 13224, the United States has designated 10 foreign

charitable organizations as having ties to al Qaeda or other terrorist groups and has

shut down two prominent U.S.-based charities with alleged ties to Osama bin Laden

and the Taliban. In addition, the U.S. Government has frozen the assets of the largest U.S.-based Islamic charity which acted as a funding vehicle for HAMAS. Six million three hundred thousand dollars in U.S. charitable funds have been frozen to

date and an additional $5.2 million have been frozen or seized in other countries.

Outreach to Safeguard Charitable Organizations from Abuse by Terrorists

U.S. Treasury officials have met with charitable sector watchdog and accreditation organizations to raise their awareness of the threat posed by terrorist financing

including the Better Business Bureau Wise Giving Alliance and the International

Committee on Fundraising Organizations.

Our goal is to guard charities against abuse without chilling legitimate charitable

works. Our strategic approach, as set forth in the recently published 2002 National

Money Laundering Strategy, involves domestic and international efforts to ensure

that there is proper oversight of charitable activities as well as transparency in the

administration and functioning of the charities. It also involves greater coordination

with the private sector to develop partnerships that include mechanisms for self-policing by the charitable and nongovernmental organization sectors.

International Coalition-building

We are seeking to increase the transparency and oversight of charities through

multilateral efforts. The Financial Action Task Force (FATF) adopted a recommendation committing all member nations to ensure that nonprofit organizations cannot

be misused by financiers of terrorism. The United States submitted a paper to the

FATF in June 2002 discussing our approach to combating such abuse. Going forward, we will work with FATF to promote international best practices on how to

protect charities from abuse or infiltration by terrorists and their supporters.

We are working bilaterally and regionally with countries in the Persian Gulf to

develop best practices for ensuring the accountability of charitable organizations,

and we have urged international watchdog groups to expand their work to ensure

transparency in charitable operations. The vast majority of donors give to charity

for humanitarian, altruistic reasons. It is an egregious abuse of their altruism to

allow any of these funds to be diverted to terrorism.

Results

The United States has secured commitments from international financial

groups—such as FATF—to develop best practices to increase oversight of charities.

The United States has designated 10 foreign charitable organizations as having

ties to al Qaeda and other terrorist groups and has shut down two prominent U.S.-

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based charities with alleged ties to Osama bin Laden and the Taliban. In addition,

the U.S. Government has frozen the assets of the largest U.S.-based Islamic charity

which acted as a funding vehicle for Hamas. Six million three hundred thousand

dollars in U.S. charitable funds have been frozen to date and an additional $5.2 million have been frozen or seized in other countries.

Charities Abused by Terrorist Groups Shut Down by the United States

On January 9, 2002, the United States designated the Afghan Support Committee

(ASC), a purported charity, as an al Qaeda supporting entity. The ASC operated by

soliciting donations from local charities in Arab countries, in addition to fundraising

efforts conducted at its headquarters in Jalalabad, Afghanistan, and subsequently

in Pakistan. The ASC falsely asserted that the funds collected were destined for

widows and orphans. In fact, the financial chief of the ASC served as a key leader

of organized fundraising for Osama bin Laden. Rather than providing support for

widows and orphans, funds collected by the ASC were turned over to al Qaeda

operatives. With our blocking action on January 9, 2002, we publicly identified the

scheme being used by ASC and disrupted this flow of funds to al Qaeda.

Also on January 9, 2002, we designated the Pakistani and Afghan offices of the

Revival of Islamic Heritage Society (RIHS). The RIHS is an example of an entity

whose charitable intentions were subverted by terrorist financiers. The RIHS was

a Kuwaiti-based charity with offices in Pakistan and Afghanistan. The Peshawar,

Pakistan, office director for RIHS also served as the ASC manager in Peshawar. The

RIHS Peshawar office defrauded donors to fund terrorism. In order to obtain additional funds from the Kuwait RIHS headquarters, the RIHS Peshawar office padded

the number of orphans it claimed to care for by providing names of orphans that

did not exist or who had died. Funds sent for the purpose of caring for the nonexistent or dead orphans were instead diverted to al Qaeda terrorists. In this instance, we have no evidence that this financing was done with the knowledge of

RIHS headquarters in Kuwait.

On March 11, 2002, the United States and Saudi Arabia jointly designated the

Somali and Bosnian offices of the Saudi-based al Haramain organization. Al

Haramain is a Saudi Arabian-based charity with offices in many countries. Prior to

designation, we compiled evidence showing clear links demonstrating that the Somali and Bosnian branch offices were supporting al Qaeda. For example, we uncovered a history of ties between al Haramain Somalia and al Qaeda, the designated

organization al Itihaad al Islamiya (AIAI), and other associated entities and individuals. Over the past few years, al Haramain Somalia has provided a means of funneling money to AIAI by disguising funds allegedly intended to be used for orphanage projects or the construction of Islamic schools and mosques. The organization

has also employed AIAI members. Al Haramain Somalia has continued to provide

financial support to AIAI even after AIAI was designated as a terrorist organization

by the United States and the United Nations. In late-December 2001, al Haramain

Somalia was facilitating the travel of AIAI members in Somalia to Saudi Arabia.

The joint action by the United States and Saudi Arabia exposed these operations.

On December 4, 2001, we blocked the assets of the Holy Land Foundation for

Relief and Development, which describes itself as the largest Islamic charity in the

United States. It operates as a U.S. fundraising arm of the Palestinian terrorist organization Hamas. The Holy Land Foundation for Relief and Development, headquartered in Richardson, Texas, raises millions of dollars annually that is used by

Hamas. In 2000, Holy Land raised over $13 million. Holy Land supports Hamas activities through direct fund transfers to its offices in the West Bank and Gaza. Holy

Land Foundation funds are used by Hamas to support schools that serve Hamas

ends by encouraging children to become suicide bombers and to recruit suicide

bombers by offering support to their families.

On December 14, 2001, OFAC utilized this authority to block suspect assets and

records during the pendency of an investigation in the case of Global Relief Foundation and Benevolence International Foundation, two charities with locations in the

United States.

We have also designated as terrorist supporters the al Rashid Trust and the Wafa

Humanitarian Organization both Pakistan based al Qaeda financier organizations.

Wafa was a militant supporter of the Taliban. Documents found in Wafa’s offices

in Afghanistan revealed that the charity was intimately involved in assassination

plots against U.S. citizens, as well as the distribution of ‘‘how to’’ manuals on chemical and biological warfare.

Hawalas

The word ‘‘hawala,’’ meaning ‘‘trust’’ refers to a fast and cost-effective method for

worldwide remittance of money or value, particularly for persons who may be outVerDate 11-MAY-2000 14:39 Dec 04, 2003 Jkt 000000 PO 00000 Frm 00058 Fmt 6621 Sfmt 6621 90722.TXT SBANK4 PsN: SBANK4
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side the reach of the traditional financial sector. In some nations hawala is illegal;

in others the activity is considered a part of the ‘‘gray’’ economy. It is therefore difficult to measure accurately the total volume of financial activity associated with the

system; however, it is estimated that the figures are in the tens of billions of dollars,

at a minimum. Officials in Pakistan, for example, estimate that more than $7 billion

flow into the nation through hawala channels each year.

The very features which make hawala attractive to legitimate customers—efficiency, anonymity, and lack of a paper trail—also make the system attractive for

the transfer of illicit funds. As noted in a recent report of the Asia Pacific Group

(APG) on Money Laundering, the terrorist events of September 2001 have brought

into focus the ease with which alternative remittance and underground banking systems may be utilized to conceal and transfer illicit funds. Not surprisingly, concerns

in this area have led many nations to reexamine their regulatory policies and practices in regard to hawala and other alternative remittance systems.

Actions

The USA PATRIOT Act requires hawalas to register as ‘‘money services business’’

or ‘‘MSB’s’’ which subjects them to money laundering regulations including the requirement that they file Suspicious Activity Reports (SAR’s).

The USA PATRIOT Act makes it a crime for the money transfer business owner

to move funds he knows are the proceeds of a crime or are intended to be used in

unlawful activity.

The new U.S. regulatory requirements are echoed in the principals set forth in

the Special Recommendations on Terrorist Financing, issued in October 2001, by the

Financial Action Task Force (FATF) on Money Laundering. The FATF has called

upon all countries to:

‘‘take measures to ensure that persons or legal entities, including agents, that

provide a service for the transmission of money or value, including transmission

through an informal money or value transfer system or network, should be licensed or registered and subject to all the FATF Recommendations that apply

to banks and nonbank financial institutions. Each country should ensure that

persons or legal entities that carry out this service illegally are subject to administrative, civil or criminal sanctions.’’

Results

The operations of several hawalas implicated in terrorist financing have been disrupted. U.S. experts have worked with officials in other nations on proposed licensing and/or registration regimes for hawaladars, to ensure greater transparency and

recordkeeping in their transactions.

Using criminal authorities stemming in part from the USA PATRIOT Act, U.S.

law enforcement has charged individuals who are illegally operating money remitting businesses.

Under the provisions of the USA PATRIOT Act, well over 10,000 money service

businesses have registered with the Federal Government and are now required to

report suspicious activities. This provides law enforcement with an additional window into financial transactions previously unregulated by the Federal Government.

FATF adopted eight special recommendations to impose anti-money laundering

rules on all alternative systems used for transferring value, including hawala. Members, as well as many nonmember nations are currently working to implement new

legal and regulatory measures in accordance with the FATF recommendation.

At a conference on hawala in the UAE in May 2002, a number of governments

agreed to adopt the FATF recommendation and shortly thereafter the UAE government announced it would soon impose a licensing requirement on hawalas. Participants at the UAE meeting drafted and agreed upon the Abu Dhabi Declaration on

Hawala which set forth the following principles:

• Countries should adopt the 40 Recommendations of the Financial Action Task

Force (FATF) on Money Laundering and the 8 Special Recommendations on Terrorist Financing in relation to remitters, including Hawalas and other alternative

remittance providers.

• Countries should designate competent supervisory authorities to monitor and enforce the application of these recommendations to Hawalas and other alternative

remittance providers.

• Regulations should be effective but not overly restrictive.

• The continued success in strengthening the international financial system and

combating money laundering and terrorist financing requires the close support

and unwavering commitment of the international community.

56

• The international community should work individually and collectively to regulate

the Hawala System for legitimate commerce and to prevent its exploitation or

misuse by criminals and others.

International Efforts

UN

On September 28, 2001, the UN adopted UNSCR 1373, requiring all member

states to prevent and suppress the financing of terrorist acts.

• The UN also required all member states to submit reports on the steps they have

taken to implement this resolution. As of June 27, 2002, 164 states had completed

their reports. The UN is now reviewing those reports with the intent of identifying gaps that member nations need to fill in order to comply with UNSCR 1373.

The UN adopted UNSCR 1390 on January 16, 2002, which modifies and continues

the international sanctions against the Taliban, Osama bin Laden, and al Qaeda as

set forth by UNSCR 1267 (1999) and 1333 (2000). Together these resolutions obligate all UN member states to ‘‘Freeze without delay the funds and other financial

assets or economic resources’’ of those entities and individuals designated by the

UN. Currently, 288 individuals and entities are on this list (135 al Qaeda linked

and 153 Taliban linked).

G7

The G7 Finance Ministers and Central Bank Governors issued an Action Plan to

Combat the Financing of Terrorism on October 6, 2001. Under the plan, the G7

countries:

• Committed to ratifying the UN convention on the Suppression of Terrorism. • Called on the Financial Action Task Force (FATF) to hold an extraordinary session and play a vital role in fighting the financing of terrorism. • Encouraged all countries to develop financial intelligence units (FIU’s) and share

information more extensively.

Financial Action Task Force (FATF)

On October 31, 2001, at the United States’ initiative, the 31-member FATF issued

Eight Special Recommendations on Terrorist Financing, to be adopted by all member nations:

• Ratify the UN International Convention for the Suppression of the Financing of

Terrorism and implement relevant UN Resolutions against terrorist financing. • Require financial institutions to report suspicious transactions linked to terrorism. • Criminalize the financing of terrorism, terrorist acts, and terrorist organizations. • Freeze and confiscate terrorist assets. • Provide the widest possible assistance to other countries’ laws enforcement and

regulatory authorities for terrorist financing investigations. • Impose anti-money laundering requirements on alternative remittance systems. • Require financial institutions to include accurate and meaningful originator information in money transfers.

• Ensure that nonprofit organizations cannot be misused to finance terrorism.

Many non-FATF members have committed to complying with the 8 Recommendations and over 80 non-FATF members have already submitted reports to FATF assessing their compliance with these recommendations.

FATF will build on its successful record in persuading jurisdictions to adopt antimoney laundering rules to strengthen global protection against terrorist finance. As

part of this effort, FATF has established a terrorist financing working group devoted

specifically to developing and strengthening FATF’s efforts in this field. Among

other things, it has begun a process to identify nations that will need assistance to

come into compliance with the 8 Recommendations.

G20

The G20 Finance Ministers and Central Bank Governors issued an Action Plan

on Terrorist Financing on November 17, 2001. Under the plan, G20 countries agreed

to:

• Implement UN measures to combat terrorist financing, including blocking terrorist access to the financial system.

• Establish FIU’s and enhance information sharing.

Provide technical assistance to countries that need help in combating terrorist financing and called on the International Financial Institutions to provide technical

assistance in this area.

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International Financial Institutions

In response to calls by the International Monetary and Financial Committee and

the Development Committee, the IMF and World Bank each developed and are implementing action plans which call for intensified work on anti-money laundering

and the combat against the financing of terrorism (AML/CTF). The action plans call

for joint Fund and Bank action:

• Expand Fund/Bank involvement in anti-money laundering work to include efforts

aimed at countering terrorism financing. • Expands Fund/Bank anti-money laundering work to cover legal and institutional

framework issues in addition to financial supervisory issues. • Agreeing with the Financial Action Task Force on a converged global standard on

AML/CTF. • Increases technical assistance to enable members to strengthen their AML/CTF

regimes in accord with agreed international standards. • Conducting a joint Fund/Bank study of informal funds transfer systems.

Under its Action Plan, the World Bank is also integrating AML/CTF issues in the

Bank’s country assistance strategies.

Under its Action Plan, the Fund is accelerating its Offshore Financial Center assessment program, and has circulated a voluntary questionnaire on AML/CFT in

the context of the IMF’s Article IV consultations with its members. As part of its

Article IV consultation, the United States provided detailed responses to the AML/

CFT questionnaire.

In addition, the IMF early this year invited its member countries to submit reports on steps that they have taken to combat the financing of terrorism. As of the

final week in August 2002, over 150 countries out of a total IMF membership of 184

had submitted reports.

Egmont Group

The Egmont Group is an international organization of 69 financial intelligence

units (FIU’s) from various countries around the world. Each serves as an international financial network, fostering improved communication among FIU’s in sharing information and training.

The FIU’s in each nation received financial information from financial institutions

pursuant to each government’s particular anti-money laundering laws, analyzes and

processes these disclosures, and disseminates the information domestically to appropriate government authorities and internationally to other FIU’s in support of national and international law enforcement operations.

Since September 11, the Egmont Group has taken steps to use its unique intelligence gathering and sharing capabilities to support the United States in its global

war on terrorism. On October 31, 2001, FinCEN (the U.S. FIU) hosted a special

Egmont Group meeting that focused on the FIUs’ role in the fight against terrorism.

The FIU’s agreed to:

• Work to eliminate impediments to information exchange. • Make terrorist financing a form of suspicious activity to be reported by all financial sectors to their respective FIU’s. • Undertake joint studies of particular money laundering vulnerabilities, especially

when they may have some bearing on counterterrorism, such as hawala. • Create sanitized cases for training purposes.

After September 11, the Egmont Group reached out to nations across the globe

to increase the information sharing that is vital to pursuing a global war on terrorism. In June 2002, 11 new FIU’s were admitted to the Egmont Group, increasing

its size to 69 members.

Approximately 10 additional FIU’s are being considered for admission to the

Egmont Group. Egmont is planning several training sessions to continuously improve the analytical capabilities of FIU staff around the world.

Technical Assistance and Diplomatic Outreach

Nations wanting to safeguard their financial systems from abuse by terrorists

have sought the expertise of the U.S. Government. We have met with officials from

over 111 nations, reviewing systems and providing input to increase transparency

of financial transactions and better enable financial institutions and regulators to

identify suspicious activities. We have in cooperation with other Federal agencies

presented training programs to countries that are crucial to the war on terrorism

that focus on the creation of an effective legislative framework to combat terrorism.

These programs are ongoing. We have also conducted, in cooperation with other

Federal agencies, reviews of priority countries’ laws and enforcement mechanisms

against terrorism and made recommendations for changes and reform and proposed

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follow up technical assistance to facilitate recommended changes and reforms. These

reviews are also ongoing.

After September 11, Treasury created the Office of International Enforcement Affairs (OIEA) to coordinate and focus Treasury law enforcement bureau’s international training and technical assistance work to complement and support U.S.

Government priorities in international law enforcement and antiterrorist fundraising efforts. As part of this effort, Treasury is using the International Law Enforcement Academies around the world, including in the newly constituted Costa

Rica facility, to better train law enforcement in the field of terrorist financing.

Since September 11, 2001, Treasury’s Office of Technical Assistance has deployed

dozens of technical assistance missions around the world to combat financial crimes

and terrorist financing. In several instances, in addition to offering TA, these teams

have received vital tactical information on terrorist activities and terrorist finance

and have ensured that this information was placed in the hands of the appropriate

authorities. In addition, the Office of Foreign Assets Control, the Office of Comptroller of Currency, and FinCEN have traveled abroad to provide needed training

and assistance to members of the regulatory community in other countries to

strengthen their capacity to detect, monitor, and uncover terrorist financing.

Results

To date, $112 million in the assets of terrorists and their supporters has been

frozen worldwide and the international pipeline of terrorists funds has been constricted. Over 165 countries have issued blocking orders against the assets of terrorists and over 80 countries have implemented or are in the process of drafting new

laws to combat terrorist financing.

G7 Finance Ministers and Central Bank Governors announced the first joint G7

designation and blocking action on April 20, 2002.

G7 Finance Ministers and Central Bank Governors on June 15, 2002, urged the

IMF and the World Bank to begin conducting integrated and comprehensive assessments of standards to combat money laundering and financing of terrorism.

• IMF and World Bank Executive Boards on July 26 and August 6, respectively,

endorsed proposals to begin 12-month pilot programs to comprehensively assess

their members anti-money laundering and terrorist financing regimes and performance. Such assessments are expected to commence shortly.

• An August 8, 2002, IMF document titled, ‘‘IMF Advances Efforts to Combat

Money Laundering and Terrorist Finance’’ (available on the IMF website:

www.imf.org) provides details on the program endorsed by the Executive Board.

Since September 11, the international financial institutions have increased focus

on terrorist financing and anti-money laundering in their work. The IMF in its assessment of offshore financial centers evaluates financial supervision and regulation, and helps members identify gaps. In 2002, 8 such assessments are already

completed and another 15 or so are scheduled or underway.

IMF and World Bank reviews and assessments of their members’ performance

and strategy now generally incorporate focus on issues relating to terrorism financing and anti-money laundering. IMF Article IV consultations with members now encompass such reviews. In line with its action plan, the World Bank’s country assistance strategies increase focus on the member’s framework and regime to combat

money laundering and the financing of terrorism.

As of December 1999, the UN has called on all member states to sign its Convention for the Suppression of the Financing of Terrorism. Since September 11, 71

nations, including the United States, have done so, bringing the total number of signatories to 131. By so doing, the countries pledge to make the financing of terrorism

a criminal act in their jurisdictions and to cooperate with other signatories in combating it.

In addition to the important UN action, joint designations are becoming more

frequent:

• On March 11, 2002, the United States and Saudi Arabia jointly designated two

branches of a charity.

• On April 19, 2002, the G7 jointly designated nine individuals and one entity.

• The European Union has issued three lists of designated terrorists and terrorist

groups for blocking.

• On August 29, 2002, the United States and Italy blocked the assets of twentyfive individuals and entities because of their support for and connections to terrorism.

• On September 6, the United States and Saudi Arabia jointly designated Wa’el

Hamza Julaidan, an associate of Osama bin Laden and a supporter of al Qaeda

terror.

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• On September 9, the United Nations added to its list of terrorists and terrorist

supporters associated with Osama bin Laden and his al Qaeda network the Eastern Turkistan Islamic Movement (ETIM).

International Law Enforcement Cooperation

One of the chief benefits of the financial war on terrorism and following the

money is to identify and locate terrorists. There has been unprecedented law enforcement cooperation around the world as countries ferret out terrorist operatives

and support networks. As information sharing and cooperation continue to improve,

law enforcement will continue to encircle and unveil terrorist cells.

Results

• International law enforcement cooperation has resulted in over 2,400 arrests in

95 countries.

• Arrests have led to the prevention of terrorist attacks in places like Singapore,

Morocco, and Germany and have uncovered al Qaeda cells and support networks

in countries such as Italy, Germany, and Spain.

• A working arrangement between the United States and Switzerland signed on

September 4, 2002, will result in the assignment of Swiss and United States Federal agents to respective terrorism and terrorist financing task forces to accelerate

and amplify work together on cases of common concern.

• Soon after September 11, the Bahamas provided critical financial information

through its FIU to FinCEN that allowed the revelation of a financing network

that supported terrorist groups and stretched around the world.

• Interpol’s website serves as a clearinghouse for foreign law enforcement for the

lists of those subject to freezing actions.

Domestic Law Enforcement Efforts

Green Quest

Treasury’s Operation Green Quest augments existing counter-terrorist efforts by

bringing the full scope of the Government’s financial expertise to bear against systems, individuals, and organizations that serve as sources of terrorist funding. The

initiative is targeting current terrorist funding sources and identifying possible future funding sources. Underground financial systems, illicit charities, and corrupt

financial institutions are among the entities scrutinized as possible facilitators of

terrorist funds.

The initiative also targets cash smuggling, trademark violations, trade fraud,

credit card fraud, drug trafficking, cigarette smuggling, and other activities that

may fund terrorists. Operation Green Quest uses the full array of law enforcement

techniques to pursue its objectives, including undercover operations, electronic surveillance, outbound currency operations, and the exploitation of intelligence, financial data, trade data, and confidential source data. Green Quest draws on the resources and expertise of the Treasury and Justice Departments and many other

Federal agencies.

The investigators with the Customs Service, the IRS, the FBI, and the Secret

Service are globally recognized as among the best and brightest financial investigators in the world. They are second to none. The same talent pool and expertise that

brought down Al Capone is now being dedicated to investigating Osama bin Ladin

and his terrorist network.

Operation Green Quest (OGQ) was established on October 25, 2001.

Customs

After September 11, the U.S. Customs Service undertook an enhanced inbound/

outbound bulk currency initiative directed at countries with known terrorist financing links. Customs inspectors at the Nation’s 301 ports of entry have made 369 seizures of smuggled currency and monetary instruments.

The cash smuggling provisions of the USA PATRIOT Act increased penalties

against those who bring in more than $10,000 in cash or monetary instruments with

the intent of avoiding a reporting requirement.

Cadres of Customs dogs are specifically trained to alert to the scent of dyes and

inks in currency.

Results

OGQ’s investigations have resulted in over 40 arrests, 27 indictments, and the seizure of over $16 million in bulk cash, (over $9 million with Middle East connection)

and are pursuing several hundred leads into potential terrorist financing networks.

(For the year ending September 11, 2001, Operation Oasis seizures outbound to

Middle and Far East countries totaled $5.216 million. Post-September 11 seizures

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2The Treasury Department has not determined that these seizures are related to terrorism.

outbound to the same countries total $16.1 million. Thus, there has been a threefold

increase.)

The increased scrutiny on terrorist financing has proved fruitful to law enforcement. We are seeing an increase in seizures made by the U.S. Customs Service. The

following are a few of the seizures made to date:2

• Customs inspectors seized $624,691 in smuggled cash hidden in plastic bags that

were professionally sewn into the lining of a comforter. The money-laced comforter

was in a suitcase bound for the Middle East aboard a commercial flight.

• Customs inspectors seized smuggled negotiable checks totaling $1.06 million that

was hidden in a parcel bound for the Middle East.

• Customs inspectors seized a smuggled certificate of deposit worth $297,000 that

was concealed in a parcel bound for Central America and which had originated

in Asia.

• Recently Customs, U.S. Secret Service, and FBI agents apprehended and the Justice Department subsequently indicted—Jordanian-born Omar Shishani in Detroit

for smuggling $12 million in forged cashier’s checks into the United States. The

Justice Department’s detention and arrest of Shishani resulted directly from the

Customs Service’s cross-indexing of various databases, including information obtained by the U.S. military in Afghanistan. That information was entered into

Custom’s ‘‘watch list,’’ which, when cross-checked against inbound flight manifests, identified Shishani.

In addition to preventing the cash from reaching its desired destination, these seizures have provided leads for new investigations into money laundering, terrorist

finance and other criminal activity. The currency initiative has also resulted in the

arrests of several individuals, including the first to be successfully prosecuted under

the new bulk cash smuggling provisions of the USA PATRIOT Act.

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PREPARED STATEMENT OF LARRY D. THOMPSON

DEPUTY ATTORNEY GENERAL, U.S. DEPARTMENT OF JUSTICE

OCTOBER 3, 2002

Chairman Sarbanes, Ranking Minority Senator Gramm, Members of the Committee, I am pleased to appear before the Committee on Banking, Housing, and

Urban Affairs to discuss issues related to money laundering, including the 2002 National Money Laundering Strategy and our progress on the financial front of the ongoing war on terrorism. I appreciate your attention to this important issue and your

interest in the Administration’s ongoing efforts to refine our battle plan against domestic and international money laundering.

Initially, I would like to thank the Members of this Committee, as well as all of

the Members of Congress, for your efforts in developing and passing two landmark

pieces of legislation in prompt response to the threats that our Nation has encountered over the past year. The USA PATRIOT Act, passed in response to the reprehensible attacks of September 11, provided those of us whose mission it is to protect the people of the United States with a wide array of new measures that will

serve to enhance our ability to carry out this work. The Sarbanes-Oxley Act of 2002,

passed in response to the threat to our economic well-being posed by corporate

criminals, was a signal to those who seek to cheat hard-working Americans that

these kinds of actions will not be tolerated. You should be proud of your accomplishments in passing these extraordinary bills, just as we at the Department of Justice

are proud of our efforts to protect the physical and economic well-being of the people

in this country.

As the Members of this Committee are well aware, money laundering enforcement

is a critical component in the fight against all kinds of criminal activity, whether

it be international terrorism, drug trafficking, health care fraud, or white collar

crime. It makes no difference whether money is the motive of the crime, as it is in

the case of drug trafficking and fraud, or whether money is the fuel that powers

the engine, as it is in the case of terrorism. Money is the key, and money laundering

and other financial investigations allow us to unlock the doors to these criminal organizations and provide us a road map that ties together the links in the criminal

organization. In cases where profit is the motive, following the money forward leads

to those who seek to profit from their crimes. In terrorism cases, following the

money backward leads to those who developed or planned the terrorist attacks. A

graphic example of this principle was provided by our efforts following the attacks

of September 11, where the financial trail provided the first links in our efforts to

unravel the plot that led up to those attacks.

Our country faces a multitude of threats during these challenging times, threats

that law-abiding, hardworking Americans should not have to face, yet they do.

International terrorists seek to undermine our security. Drug traffickers seek to

poison the minds and the bodies of our children. Organized crime groups seek to

corrupt our businesses and institutions. Corporate criminals seek to undermine our

economic well-being. But we do not shrink from these challenges. In fact, they inspire us to work even harder, because the American people deserve to live their

lives in a safe and secure world, and it is our duty to provide that safety and security for them. Those challenges inspire us to strive for new and better ways to utilize our resources, and to use our limited resources in the most effective manner

that we can.

The first step in marshaling our forces to confront a challenge is to develop a

strategy. In the case of money laundering, the development of a strategy was mandated by Congress in 1998 with the passage of the Money Laundering and Financial

Crimes Strategy Act of 1998. This Act (codified at Title 31, United States Code,

§ 5340 et seq.) requires the President, acting through the Secretary of the Treasury

and in consultation with the U.S. Attorney General, to develop a national strategy

for combating money laundering and related financial crimes. The first National

Strategy was issued in September 1999. The 2001 Strategy was due to be presented

to the Congress on September 12, 2001. The horrific events of September 11 and

the legislative and law enforcement responses to it have obviously changed our approach to the Strategy. The 2002 Strategy reflects some of those changes. In addition to the five goals that comprised the 2001 Strategy, a sixth goal—addressing terrorist financing—was added. The 2002 National Money Laundering Strategy was

issued on July 25, 2002 and, as with all the previous Strategies, was signed by the

Secretary of the Treasury and the U.S. Attorney General.

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cumstances surrounding the source, movement, and destination of the money must

be ascertained to make such a determination and must be proven in court to convict

someone of a money laundering offense. Furthermore, because money laundering encompasses all different kinds of criminal activity, the methods of money laundering

will vary depending on the nature of the criminal activity that generated the illegal

proceeds or that the money laundering is furthering.

The 2002 National Money Laundering Strategy, building upon the previous Strategies, makes significant strides in advancing our battle plan against money laundering and, in fact, addresses some formidable issues head-on. In Goal One, the

Strategy confronts the issue of defining the scope of the money laundering problem

and the development of measures of effectiveness. Goal Two addresses the critical

issue of terrorist financing. I will discuss the Department’s progress on this front

in more detail later in my testimony.

Goal Three constitutes the core of the 2002 Strategy for purposes of law enforcement. This Goal sets forth what the Department believes are the major challenges

in attacking money laundering. The first Objective of Goal Three is to enhance

interagency coordination of money laundering investigations. Because money laundering encompasses all kinds of criminal activity, all of our major law enforcement

agencies, as well as State and local law enforcement agencies, are involved in money

laundering enforcement. The first priority in this regard is to establish an interagency targeting team to identify money laundering-related targets for priority enforcement actions. This interagency targeting team has already been created and

has met on several occasions. The purpose of this group is to identify those organizations or systems that constitute significant money laundering threats and to target them for coordinated enforcement action. This will ensure that all of our law

enforcement agencies are focusing their resources on the most significant targets in

a coordinated manner.

The second priority in Goal Three is to create a uniform set of undercover guidelines for Federal money laundering enforcement operations. Our well-intended

agents in the field are sometimes limited in conducting joint undercover operations

because they must follow different agency guidelines. These guidelines are not arbitrary or archaic; they are carefully drafted guidelines to address policy concerns of

the agencies, but sometimes they address these concerns in different ways. If we can

find ways to overcome these differences or develop uniform guidelines that address

the concerns and priorities of all of the agencies, our efforts in conducting these

operations will be significantly enhanced.

The third priority of Goal Three is to work with U.S. Attorneys’ Offices to participate in Suspicious Activity Report (SAR) Review Teams where they do not currently

exist but could add value. These SAR Review Teams are another vehicle for promoting interagency coordination. SAR’s have been proven useful for identifying

targets or trends in money laundering activity, and each law enforcement agency

utilizes the SAR’s. However, we have found that when an interagency task force is

created to review the SAR’s in a coordinated manner, the value of the SAR’s is enhanced even further and investigative priorities can be identified and coordinated.

DOJ and Treasury are both promoting the value of these SAR Review Teams to the

investigators and prosecutors in the field. I am proud to say that, according to an

Internal Revenue Service survey of its SAR Review Teams, U.S. Attorneys’ Offices

participate in 37 of the 41 Teams that have been established nationwide.

Objective Two of Goal Three focuses on the High-Risk Money Laundering and

Related Financial Crime Area (HIFCA) Task Forces. The first four HIFCA’s were

designated in the 2000 Strategy based on recommendations made by an interagency working group. The first four HIFCA’s were New York/New Jersey, San

Juan, Puerto Rico, Los Angeles, and a ‘‘systems’’ HIFCA based in Texas and Arizona

focusing on the issue of bulk movements of cash. In 2001, Chicago and San Francisco were designated as HIFCA’s. The HIFCA concept was another attempt to coordinate the resources of all of the law enforcement and regulatory agencies in a

jurisdiction on the most significant money laundering targets or threats in the region. While a number of issues have hampered the HIFCA’s from reaching their

true potential, the 2002 Strategy will have DOJ and Treasury reviewing the HIFCA

program and refining the mission, composition, and structure of the HIFCA Task

Forces, so that they can fulfill the mission that was intended for them.

With regard to Goal Two of the Strategy, we have no greater priority than the

prevention of further terrorist acts against our citizens. We believe that the use of

every tool in our arsenal is necessary to do that, and terrorist financing enforcement, one of the focuses of this Committee, is key. By ‘‘terrorist financing enforcement,’’ I mean the use of financial investigative tools to identify and prosecute persons involved in terrorist plots anywhere in the world. If we can identify would-be

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terrorists through financial techniques, or prosecute them for traditional financial

crimes, or target their supporters and operatives with the crime of terrorist financing, we will be preventing violent attacks that may otherwise occur. We may never

know exactly how many lives we saved, but we will certainly not be merely reacting

to terrorism that we and the other parts of the Government failed to thwart.

The Department of Justice’s terrorist financing enforcement efforts are centered

around two components the Attorney General established in the aftermath of September 11. Within the Criminal Division, we created the DOJ Terrorist Financing

Task Force, a specialized unit consisting of experienced white-collar prosecutors

drawn from several U.S. Attorneys’ Offices, the Tax Division, and some litigating

components of the Criminal Division, such as the Fraud Section, the Office of International Affairs and the Asset Forfeiture and Money Laundering Section. This

Washington-based team of prosecutors works with their colleagues around the country, using financial investigative tools aggressively to disrupt groups and individuals

who represent terrorist threats. These attorneys also work closely with the FBI’s Financial Review Group, the Foreign Terrorist Tracking Task Force, and the Treasury

Department’s ‘‘Operation Green Quest,’’ which are developing preventive and predictive models and using advanced algorithms to mine data and identify terrorist

suspects.

In the field, the Attorney General created 93 Anti-terrorism Task Forces (ATTF’s)

to integrate and coordinate antiterrorism activities in each of the judicial districts.

Each ATTF is headed by a veteran Assistant United States Attorney from each district, and includes Federal, State and local members of the district’s Joint Terrorism

Task Forces (JTTF’s), the successful FBI program which serves as the ATTFs’ operational arm. The ATTF program is managed by six National Regional Antiterrorism

Coordinators from Main Justice, who work closely and share office space with the

Terrorist Financing Task Force. How does this structure add to prevention? To appreciate this, one has to understand the terrorist financing laws, investigative tools,

and information-sharing protocols, some of which were—thanks to Congress—enhanced by the USA PATRIOT Act.

First, the criminal laws relating to terrorist financing are a powerful tool in enhancing our ability to insert law enforcement into terrorist plots at the earliest possible stage of terrorist planning. For example, it is now a crime for anyone subject

to U.S. jurisdiction to provide anything of value—including their own efforts or expertise—to organizations designated as ‘‘foreign terrorist organization.’’ It does not

matter whether the persons providing such support intend their donations to be

used for violent purposes, or whether actual terrorism results. If someone subject

to U.S. jurisdiction provides, or even attempts to provide, any material support or

resources to Hamas, Hezbollah, Al Qaeda, the Abu Sayyaf Group, or any of the

other 34 designated groups, that person can be prosecuted in the U.S. courts. Our

prosecutors need not prove that the support actually went to specific terrorist acts.

This statute was used in the Charlotte, North Carolina Hezbollah case, the John

Walker Lindh matter, the recent New York indictment of supporters of Sheik

Rahman, and the actions we took over the last few months in Seattle, Detroit, and

Buffalo. It is a powerful preventive tool. The Terrorist Financing Task Force is

aggressively promoting this enforcement strategy, and it is available to help U.S.

Attorneys’ Offices and ATTF’s where circumstances arise in the districts that may

justify these charges.

Second, the financial investigative tools at our disposal, which have been refined

over the years for use in combating money laundering, can be employed in terrorist

financing enforcement. Money laundering—the process by which dirty money is

transformed into seemingly legitimate proceeds—depends on financial transactions,

which can now be identified through various Bank Secrecy Act reports that are

required of the private financial community. The financing of terrorism, though it

involves the opposite process—otherwise legitimate money being applied to dirty

purposes—may be revealed by those same reports. To the extent we succeed in raising the global standards for money laundering prevention or enacting tools that help

our own efforts in this area, we will be enhancing the world’s and our own ability

to stop terrorist financing. In this sense, terrorism prosecutors are money laundering prosecutors. They share the same expertise.

Another criminal statute that was enhanced by the USA PATRIOT Act was Section 1960 of Title 18, prohibiting unlicenced or unregistered money remitters. This

revised statute was used successfully in the District of Massachusetts. On November

14, 2001, a Federal grand jury in Boston returned an indictment charging Liban

Hussein, the local President of an al Barakat money remitting house, and his brother, Mohamed Hussein, with a violation of § 1960. This prosecution was part of a national, and indeed international, enforcement action against the al Barakat network.

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On April 20, 2002, Mohamed Hussein was convicted of this offense and he was recently sentenced to 18 months’ incarceration for operating an unlicenced money remitting business.

Finally, we are now enjoying an unprecedented level of cooperation and information sharing between and among U.S. Government agencies involved in counterterrorism, due in part to important changes made by the USA PATRIOT Act. As

the Committee knows, prior to last October, there was no mechanism for sharing

certain types of criminal investigative material with the intelligence community,

and the intelligence community could not open their files to law enforcement. Such

sharing was possible, but only in clearly-delineated situations and following very

exacting procedures. For terrorist financing enforcement, the loosening of these

rules—particularly when it involves information about terrorist financial supporters

living in the United States—will be invaluable. Although this is only a small subset

of information relevant to terrorist financing, it will assure that we are using the

full spectrum of information from all sources to prevent future attacks before they

occur, from open source to highly sensitive classified information.

The structure we have in place both in Washington and the field to focus on terrorist financing enforcement will maximize the effectiveness of these tools. Where

law enforcement and intelligence intersect, information-sharing with field office

components necessarily involves their interaction with Washington. The Terrorist

Financing Task Force can access and provide information to the ATTF’s that they

might not otherwise have, while providing a wider perspective on developing trends

and joining disparate districts that may have pieces of the same puzzle without

knowing it. This role is in addition to the legal expertise and litigation support we

have gathered here at Main Justice for the specific purposes of ensuring that the

terrorist financing enforcement option is a robust one that can be used by those senior government officials in charge of our war on terrorism.

No discussion about money laundering would be complete without a discussion

about drug money and our efforts to stop it. In the words of then-Associate Attorney

General Stephen Trott in 1987, and who now sits on the U.S. Court of Appeals for

the Ninth Circuit, ‘‘[i]t is not enough to follow drug trails; it is also necessary to

follow the money in order to reach high levels in drug organizations.’’ No one can

tell us definitely how much drug money is laundered in the United States—but we

do know that users in the United States spent at least $63 billion dollars on drugs

last year. Since assuming the office of Deputy Attorney General, I have made the

Organized Crime Drug Enforcement Task Forces (OCDETF) the centerpiece of the

Department’s efforts to attack the supply side of the drug problem. The Attorney

General and I announced this last March a new strategy to use OCDETF to go after

the entrenched and significant drug trafficking and drug money laundering groups.

Integral in this strategy is the use of money laundering charges, financial investigations, and forfeiture. In fact, new guidelines issued to the U.S. Attorneys’ Offices

now require that each OCDETF investigation must contain a financial component,

and that the results of those investigations must be documented. I can assure you

that we will be closely reviewing the results of these investigations in order to use

our scarce resources in the most efficient way possible. Likewise, the Special Operations Division, a multi-agency operation consisting of DEA, the FBI, Customs, the

IRS, and prosecutors from the Criminal Division, has a special money laundering

unit dedicated to a strategy of targeting the command and the control elements of

major drug money laundering groups. It is the best strategy we have to deal with

organized money laundering groups, and its success has been demonstrated time

and again.

Conclusion

I would like to just conclude by expressing the appreciation of the Department

of Justice for the continuing support that this Committee has demonstrated for the

Administration’s anti-money laundering enforcement efforts.

Mr. Chairman and Members of the Committee, thank you for this opportunity to

appear before you today. I look forward to working with you as we continue the war

against terrorist financing and all forms of money laundering, and to refine our

Strategy to address these serious threats. I would welcome any questions you may

have at this time.

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PREPARED STATEMENT OF STUART E. EIZENSTAT

FORMER DEPUTY SECRETARY, U.S. DEPARTMENT OF THE TREASURY

OCTOBER 3, 2002

Chairman Sarbanes, Senator Gramm, and Members of the Committee, good morning. It is a pleasure for me to appear before this Committee once again. I am glad

to see you Mr. Chairman, and to have one more opportunity, Senator Gramm, to

testify before you as you end your long service.

As this Committee has recognized, dealing effectively with money laundering is

not only essential to the fight against narcotics trafficking, organized crime, and foreign corruption, but also it is critical to our national security and demands our ongoing attention. So, I am very pleased that the Committee is embarking on a continuing oversight role in this area.

In the last year, we have watched our Government and its allies conduct a financial war on terrorism, as part of its broader war on terrorism. Words such as

‘‘hawala’’ or ‘‘al Barakat’’ have become staples of the nightly newscasts.

In acting against financial aspects of terrorism, the Departments of the Treasury,

State, and Justice have made use of an enforcement and policy infrastructure built

up over several decades. It is well to review the history again. The Bank Secrecy

Act was a product of the Nixon Administration, and the statute making money laundering a distinct and very serious felony in the United States was the product of

the Reagan Administration. The first Bush Administration led the way in creating

the Financial Action Task Force (FATF), at the G7 Summit in 1989, and establishing the Financial Crimes Enforcement Network (FinCEN) at the Treasury a year

later, and President Bush signed the Annuizio-Wylie Anti-Money Laundering Act in

1992; that landmark legislation authorized suspicious transaction reporting and uniform funds transfer recordkeeping rules, among other pillars of today’s countermoney laundering programs in the United States and around the world. President

Clinton used the occasion of his nationally televised address on the occasion of the

United Nations 50th anniversary to call for an all-out effort against international

organized crime and money laundering, kicking off a coordinated 5-year effort to

bring the world’s mafias and cartels to heel and finally to close the gaps in our laws

and regulatory systems that had permitted these criminal groups to thrive.

My testimony draws on my collective experience serving during the 1990’s in the

Departments of Commerce, State, and Treasury. I want to also note that I am currently a member of a Council on Foreign Relations Independent Task Force on Terrorist Financing, chaired by Maurice Greenberg, Chairman & CEO of American

International Group, and my participation in the work of that Task Force has informed and reinforced my views; I wish to make clear, however, that I am testifying

here today in a personal capacity, and not on behalf of the Task Force. The Task

Force is expected to issue its report later this month.

The Bush Administration has made important advances in dealing with money

laundering and antiterrorism funding. Some terrorist funds have been frozen. Organizations and individuals who support terrorism have been designated and our allies have helped block their accounts. But the Bush Administration has barely

scraped the surface of what needs to be done. There is still no genuine strategy to

attack money laundering and money launders. Our Government is still not properly

structured internally to focus priority attention on terrorist financing. There is no

existing international entity to work exclusively on locating and blocking terrorist

money. And we have not applied the kind of pressure we must to convince nations

in the Middle East and Persian Gulf, who are the principal locations and transit

points for terrorist financings, to bring their laws and practices on money laundering up to international standards and to cooperate fully with our law enforcement authorities. Until these steps are taken to shut down the financial sources of

terrorism, the Nation will remain vulnerable. Let me explain.

Money laundering is simply the hidden movement of funds derived from crime,

funds intended for illegal purposes, or—most likely—both. There are as many ways

to hide the movement as there are ways to conduct other transactions. They range

from simple smuggling, through trust-based remitters of cash, to sophisticated banking transactions using correspondent accounts, chains of corporate and trust ownership, and shell nominees, all to obscure where money comes from and where it goes.

There are particular means that can be associated with particular groups—in the

case of the al Qaeda and other Islamic terrorists, for example, reliance has been

placed on the movement of funds in part through purported charities—some of

which may actually be charities in whole or part—and the use of Islamic banking

networks. Narcotics traffickers make significant use of the Black Market Peso Exchange, to convert large amounts of currency in the United States to export goods.

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There are also particular mechanisms or systems that all money launderers use

and that are susceptible to abuse by them. Some of these—for example shell banks

and unpoliced correspondent banking relationships—are addressed in the landmark

legislation the Committee shepherded through the Congress last year. Others, offshore banking systems, differing degrees of regulatory infrastructure among states,

and the very fact of the emergence of a global financial system, are, at the moment

at least, facts of international financial life.

Our law enforcement and intelligence systems are historically designed to track

money through the financial system, so that we can identify, interdict, or prosecute

particular criminals, including terrorists. But fighting money laundering means

more than that. It requires Government at all levels to seek to throw sand in the

gears of criminal money movement systems, wherever and whenever it can.

Our efforts against terrorist funding provide a good example, and I want to discuss them in detail for that reason. According to the Treasury Department, since

the September 11 attacks, $112 million in assets of terrorists and their supporters

worldwide have been frozen, $34 million of which are in the United States, and $78

million overseas. Over 165 countries have issued blocking orders, and over 80 countries have or are beginning to implement new laws to curb terrorist financing. The

Government has disrupted several hawalas, and established a new registration system for such ‘‘money service businesses,’’ and has frozen the assets of key charitable

organizations tied to al Qaeda.

We have disrupted but not dismantled al Qaeda’s financial network. During the

Clinton Administration we established that the bulk of al Qaeda’s wealth did not

come from Osama bin Laden’s inherited personal fortune, but rather from multiple

sources and was distributed through multiple sources. Its money comes from both

businesses cloaked with the mantle of legitimacy and from criminal activities, from

petty crimes to the heroin trade in Afghanistan. But its principal source of money

comes from its fundraising activities through ‘‘charities,’’ mosques, financial institutions, and intermediaries. Charities and individuals in Saudi Arabia have been the

most important source of its funding. The Clinton Administration sent two missions

to Saudi Arabia and the Gulf to enlist their support in shutting down these charities. We received virtually no cooperation.

Just as al Qaeda uses multiple sources to raise money, it distributes it through

multiple channels, from the global financial system to a network of underground,

unregulated hawalas and Islamic banks. The organization’s decentralized nature

means there is no one single source which can be frozen.

Thus, at what might be called the ‘‘theatre’’ level—somewhere between particular

investigations, on the one hand, and true Strategy on the other—significant successes have been achieved. But I am less optimistic that we have a long-term strategy for sustaining the progress that has been made. Formulating and implementing

that Strategy will be the challenge for the Administration in the coming months.

This Strategy must involve both organizational changes and diplomatic initiatives.

First, on the organizational side, dealing with terrorist funding involves regulatory and diplomatic as well as investigative approaches. That means effective

coordination over time across several branches of our Government, to ‘‘working’’ the

issue in all its guises, and to convincing others to do so. The Interagency Policy Coordination Committee on Terrorist Financing, chaired by Treasury’s General Counsel has made strides in this direction, but it is not institutionalized and does not

appear to possess clear lines of authority. We must have a high-level coordinator

within the U.S. Government, with the President’s ear, to focus the U.S. Government’s attention on terrorist financing. The Council on Foreign Relations Task Force

will have more to say on this shortly. Within our own Government we need to assure that all of our regulatory information, especially the new information about

money services businesses, is available in a coordinated fashion to all of the relevant

agencies, and that those businesses are examined for compliance with the new regulatory controls.

Second, we must ensure much greater attention at the international level to the

problem of money laundering in general and terrorist funding in particular.

The Financial Action Task Force (FATF) has done a good job of placing an international spotlight on those countries which do not meet international standards in

dealing with money laundering—and can thus be misused by terrorist groups to

launder their money. During the Clinton Administration, we began important elements of the dual track policy of tracking terrorist funds and working to upgrade

international counter-money laundering standards that the second Bush Administration is carrying forward. We placed designated foreign terrorist organizations on

the economic sanctions list in 1995 and on an expanded basis, to include al Qaeda

and other bin Laden-linked groups, in 1998. As a result, the Treasury froze about

$250 million in Taliban assets that year. We sent senior officials to the UAE, KuVerDate 11-MAY-2000 14:39 Dec 04, 2003 Jkt 000000 PO 00000 Frm 00070 Fmt 6621 Sfmt 6621 90722.TXT SBANK4 PsN: SBANK4
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1The list of noncooperating countries and territories in 2000 was: the Bahamas, the Cayman

Islands, the Cook Islands, Dominica, Israel, Lebanon, Liechtenstein, Marshall Islands, Nauru,

Niue, Panama, the Philippines, Russia, St. Kitts and Nevis, and St. Vincent and the Grenadines. The Bahamas, the Cayman Islands, Liechtenstein, and Panama were removed from the

list in June 2001, after curing most of all of the deficiencies FATF cited, and eight new countries—Egypt, Grenada, Guatemala, Hungary, Indonesia, Myanmar, Nigeria, and Ukraine—were

added to the list in June and September 2001. In June 2002, Hungary, Israel, Lebanon and St.

Kitts and Nevis were removed from the list, leaving the following 15 countries: Cook Islands,

Dominica, Egypt, Grenada, Guatemala, Indonesia, Marshall Islands, Myanmar, Nauru, Nigeria,

Niue, Philippines, Russia, St. Vincent and the Grenadines, and Ukraine. 2 Edward Allen and Alan Beattie, ‘‘Blacklist of ‘dirty money’ havens put on temporary hold,’’

Financial Times, September 26, 2002.

wait, Bahrain, and Saudi Arabia in July 1999 and again in August 2000 to look at

questions of bank and charitable organization involvement in terrorist funding.

Even more important, we pushed forward the FATF’s noncooperative countries and

territories project in the Clinton Administration’s last 2 years. Fifteen nations were

cited as being noncooperative in the international fight against money laundering

in 2000,1 and the Treasury followed up the FATF’s action and its own analysis by

issuing hard-hitting advisories to our financial institutions recommending enhanced

scrutiny against potential money laundering transactions involving those nations.

The reaction was very positive. FATF’s efforts can be credited for the fact that in

the last few years anti-money laundering laws have been passed in Bahrain (January 2001), Lebanon (April 2001), the United Arab Emirates (January 2002), and

Egypt (May 2002). Panama, Israel, and Liechtenstein took important steps in bringing their laws up to international standards and were removed from the list.

But this important multilateral initiative seems to have hit a snag. I am concerned that the Bush Administration may be retreating from the strong effort to

identify noncooperative countries, those with seriously substandard money laundering controls and seemingly little political will to change them. It was reported

last week that FATF is planning to agree this month to suspend for at least 1 year

its practice of identifying noncooperating countries.2 This would be a serious mistake. The plan to abandon the blacklisting practice contemplates an increased role

by the IMF and the World Bank in persuading countries to adopt or enhance their

money laundering laws and regulations. Hopefully the Bush Administration will

continue to identify and publicize noncomplying nations through the FATF process

while also encouraging a greater role for the IMF and the World Bank.

FATF is only part of the solution. There is no international organization dedicated

solely to tracking terrorist funds. We should work with our G7/G8 partners to create

such an organization, working parallel to FATF. Again, the Greenberg Task Force

of the Council on Foreign Relations will have detailed recommendations here which

are still being finalized.

The Administration needs to place the issue of terrorist funding on the regular

agenda of every major international event, like APEC and ASEAN, and the twice

annual EU–U.S. Summits. The Senior Level Group which plans these Summits can

serve as a regular ‘‘scorecard’’ to monitor our success. Unless our EU allies and their

banking systems employ the same approach we have, and maintain the degree of

political commitment necessary to achieve financial transparency in these areas, the

value of the U.S. Government’s work with U.S. financial institutions will be greatly

reduced.

The EU countries have taken positive steps to cooperate in tracking down terrorist funds. But the robustness of European regulators may not match the strength

of their anti-money laundering laws. The EU, for example, only bars funding by the

military wing of Hamas, not its civilian wing, when, in fact, they are all one organization, dedicated to terror. Likewise, EU nations do not forbid Hezbollah funding

at all. Their high evidentiary standards make it difficult to block assets. And their

porous borders invite the transit of terrorist funds.

We must continue to place financial transparency and the building of strong supervisory institutions conforming to international standards on the agenda of our

bilateral and multilateral discussions with nations all over the world. It must be—

as it appears not to be now—a major talking point for the President in his meetings

with foreign leaders.

If more effort is needed with the EU, special efforts must be made with countries

like Saudi Arabia, Pakistan, and the Gulf States, which are the principal sources

and transit points for terrorist money. Their anti-money laundering laws are weak

and their follow-up no better. They do not deserve the diplomatic pass the Administration appears to give them. If we really want to put sand in the gears of al Qaeda

we must press them to cooperate in dealing with the phony charities and individuals who support al Qaeda, and to come up to international standards on money

68

laundering. We must speak plainly and bluntly in the face of noncooperation. In

nations for which modern financial supervision and financial transparency are relatively new concepts, a paper commitment, or even a one-time series of arrests, is

not the same as sustained enforcement and regulatory change.

Third, we cannot stint on technical and development assistance to help nations

build the technical capacity to supervise their financial systems adequately. The

President’s fiscal year 2003 budget allocates only a few million dollars to assistance

in these areas; far less than is necessary if we expect countries to gain control over

the misuse of their financial institutions and rogue charities.

Fourth, we need to bring the underground hawala system into the Federal regulatory system and we need to simultaneously urge other countries to regulate and

to control them.

Fifth, we cannot leave the job to others, even to our allies. Without strong continuing U.S. leadership our progress will be marginal.

We cannot hesitate to employ stronger measures than diplomacy when necessary.

Last week, several House Members expressed disappointment that the Administration had made no use of the authority granted to the Treasury by Section 311 of

the USA PATRIOT Act to identify certain aspects of terrorist financing as items of

‘‘primary money laundering concern’’ requiring special reporting, regulatory, or

other measures, and I share the question they raised. This will allow sanctions

short of a Presidential declaration under IEEPA blocking orders. In the same way,

we will need to continue to use our economic sanctions authority where appropriate

to freeze potential terrorist funds.

These observations reflect a basic premise—that dealing with terrorist financing

requires ‘‘structure, integration, and focus’’ both within our Government and between our Government and its allies. The same is true of dealing with money laundering generally.

As I indicated, many of the same issues can be raised about other money laundering problems. When I spoke for the Treasury at the public issuance of the first

National Money Laundering Strategy in 1999, I emphasized that:

‘‘This Strategy reflects a national commitment to a coordinated, effective fight

against money laundering. The action items it sets forth obviously cannot be

accomplished all at once. Rather, they are meant to lay out a framework for

prompt, aggressive action.’’

What I see potentially lacking in our approach now is that ‘‘framework.’’ As the

Chairman noted, 26 agencies contributed to the current National Money Laundering

Strategy. And each no doubt had something valuable to add. But it is not easy to

detect a guiding direction underneath the particular actions listed. I do not see

‘‘structure, integration, and focus.’’

Some of the same criticism could have been directed to our first Strategy, which

was written at a less difficult time. But I think we could have met the criticism then

by pointing to a consistent strategic thread that continues to be the necessary

thread today:

• Working against money laundering systems and high-risk problem areas, at the

particular ways criminals and terrorists move funds;

• Coordinated enforcement and regulatory activity;

• Leveling the playing field among financial institutions, so that money launders

are not free to abuse some more than others; and

• Making, and keeping, money laundering on the international agenda.

A final element of our Strategy was ‘‘persistence’’ and follow-through—the recognition of the fact that it was far easier to state these goals than to achieve them. In

drafting the first strategy we recognized—and intended—that institutional arrangements—a framework—would follow and be knit together by particular initiatives.

That our work would, as I said before, be characterized by the need to learn to operate in a strategic way.

That has not happened and it will not happen quickly. As the public record of

our efforts to deal with terrorist financing shows, coordination is possible and can

be effective—if it is institutionalized and pressed forward. I am less certain that the

terrorism experience has been replicated in dealing with other money laundering

issues—because other issues intervene, or simply because no one is responsible for

making things happen. I think we are still where we were 4 years ago—with an

idea of what we would like to have happen but without any clear plans or institutional arrangements to make it happen.

I am especially pleased that this Committee intends to continue to follow this

issue closely, as it is demands our utmost attention. I would be happy to answer

any questions.

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PREPARED STATEMENT OF ELISSE B. WALTER

EXECUTIVE VICE PRESIDENT, REGULATORY POLICY AND PROGRAMS

NATIONAL ASSOCIATION OF SECURITIES DEALERS

OCTOBER 3, 2002

Introduction

On behalf of NASD, I would like to thank Chairman Sarbanes, Ranking Member

Gramm, and the Members of the Senate Banking Committee for this opportunity

to testify.

I am here today to tell you about measures the NASD has taken to assist in the

implementation of the International Money Laundering Abatement and Financial

Anti-Terrorist Act of 2001, which is Title III of the USA PATRIOT Act.

My appearance comes almost a year after the enactment of the USA PATRIOT

Act—a year during which the NASD has worked closely with the Securities and Exchange Commission, the Treasury Department, other regulators, and members of

the securities industry to begin implementation of those aspects of the USA PATRIOT Act that apply to broker-dealers.

Overview

Let me begin with a brief overview of NASD—because knowing our mission and

how we operate will help you understand NASD’s role under the USA PATRIOT

Act. As the world’s largest self-regulatory organization (SRO), NASD has been helping to bring integrity to the markets for more than 60 years. Investor protection and

market integrity are at the core of NASD’s mission and are the foundation of the

success of U.S. financial markets.

Under Federal law, every securities firm doing business with the American public

is required to be a member of NASD. Currently, roughly 5,500 brokerage firms,

90,000 branch offices, and over 670,000 registered securities representatives come

under NASD’s jurisdiction.

NASD writes rules that govern the behavior of securities firms. These rules become final upon approval by the SEC. The NASD examines firms for compliance

with these rules (as well as for compliance with SEC rules and the Federal securities laws), investigates possible violations of securities laws and regulations, and

disciplines members and their employees when violations occur. NASD also is responsible for professional training, licensing and registration, dispute resolution and

investor education.

While our regulatory jurisdiction is limited to our broker-dealer member firms and

their associated persons, our examinations, surveillance, and regulatory intelligence

alert us to illegal conduct outside of our jurisdiction. We routinely refer such findings to the SEC, the States, and criminal prosecutors for their action. We provide

technical assistance to Federal, State, and local prosecutors and agents throughout

the country on matters within our regulatory expertise. More than 200 defendants

have been convicted of felonies in cases where we assisted criminal authorities.

These matters have included not just ‘‘traditional’’ securities fraud, but also cases

involving organized crime, money laundering, and most recently terrorist financing.

Money Laundering and the Securities Industry

Prior to the passage of the USA PATRIOT Act, NASD had some experience overseeing the securities industry’s compliance with anti-money laundering regulations.

Broker-dealers have long been subject to the reporting requirements of the Bank Secrecy Act. For example, in July 2001, NASD Enforcement filed a complaint against

a registered representative who worked with a securities firm affiliated with a large

U.S. banking company, alleging that she, among other things, had structured currency transactions to evade Federal reporting requirements and had caused her

employer (an NASD member firm) to fail to file a currency transaction report, as

required by the Bank Secrecy Act.

In that case, the firm had a policy of prohibiting representatives from accepting

cash from customers. The firm, however, also had anti-money laundering policies

and procedures in place to ensure compliance with the Bank Secrecy Act, including

the filing of currency transaction reports, in the event that a cash transaction occurred. Despite the firm’s prohibition, the registered representative agreed to accept

$50,000 in cash from a customer. When the customer insisted that the representative not report the transaction, the representative agreed to structure the deposits

into an account in the name of the customer’s mother through cashier’s checks in

increments below the threshold for reporting.

In August of this year, NASD’s Office of Hearing Officers issued a decision in the

case, finding the registered representative liable for structuring and for causing her

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firm to fail to file a currency transaction report. NASD barred this representative

from being associated with any NASD member firm in any capacity. (See Press Release at http://www.nasdr.com/news/pr2002/releasel02l048.html.) NASD was

able to enforce the Bank Secrecy Act regulations under NASD Rule 2110, which

obliges firms and associated persons to ‘‘observe high standards of commercial honor

and just and equitable principles of trade.’’

Nonetheless, prior to passage of the USA PATRIOT Act, the securities industry

had limited experience with anti-money laundering regulations. While subject to the

Bank Secrecy Act reporting requirements, most securities firms, as a matter of policy, prohibit cash transactions. Many broker-dealers, therefore, do not have the experience of filing currency transaction reports. And although NASD, since as early

as 1989, has recommended that all broker-dealers file suspicious activity reports

(SAR’s) with the Treasury Department’s Financial Crimes Enforcement Network

(FinCEN), only broker-dealers that were subsidiaries of banks or bank holding companies were required to do so by Federal law.

Before the tragedy of September 11, NASD participated in a significant collaborative effort with the New York Stock Exchange (NYSE) and the SEC to conduct

joint examinations of a group of broker-dealers to determine the scope and the effectiveness of their anti-money laundering compliance programs. We learned that, although many of the larger broker-dealers had implemented comprehensive antimoney laundering procedures voluntarily, most broker-dealers had not implemented

programs that went beyond the reporting requirements of the Bank Secrecy Act.

NASD Rulemaking Under the USA PATRIOT Act

The USA PATRIOT Act imposes a number of new anti-money laundering requirements on the securities industry. This is uncharted territory for many broker-dealers. NASD has worked over the last year to use our regulatory tools and resources

to educate broker-dealers about and monitor compliance with these new requirements under the USA PATRIOT Act.

To that end, NASD proposed a new rule, Rule 3011, to establish the minimum

standards for broker-dealers’ anti-money laundering compliance programs, which

Section 352 of the USA PATRIOT Act required all broker-dealers to develop and implement by April 24, 2002. On April 22, 2002, the SEC approved NASD Rule 3011

and the NYSE’s substantially similar rule, Rule 445.

NASD Rule 3011 requires firms to develop and implement a written anti-money

laundering compliance program that is approved in writing by a member of senior

management and, at a minimum:

(1) establishes and implements policies and procedures that can be reasonably expected to detect and cause the reporting of transactions required under 31 U.S.C.

§ 5318(g) (which governs SAR’s) and the implementing regulations thereunder;

(2) establishes and implements policies, procedures, and internal controls reasonably designed to achieve compliance with the Bank Secrecy Act and implementing

regulations thereunder;

(3) provides for independent testing for compliance to be conducted by member

personnel or by a qualified outside party;

(4) designates an individual or individuals responsible for implementing and monitoring the day-to-day operations and internal controls of the program; and

(5) provides ongoing training for appropriate personnel.

After the SEC approved NASD Rule 3011, the Treasury Department stated that

broker-dealers would be deemed in compliance with the USA PATRIOT Act requirement to implement an anti-money laundering compliance program if they were in

compliance with NASD Rule 3011 and NYSE Rule 445.

NASD Rule 3011 allows NASD to examine and enforce compliance with antimoney laundering program requirements. We began that effort as soon as the rule

went into effect earlier this year. Through our examinations, we determine whether

firms have the required compliance programs and assess deficiencies in firms’ programs. On a firm-by-firm basis, we determine what action to take after each examination. In addition, the information we gather through our examinations enables

us to determine areas of common misunderstanding so that we can develop new

guidance for firms to help them comply. We are coordinating with the NYSE by

sharing examination procedures to ensure that, as regulators, we are following a

consistent approach and to make certain that our procedures are as comprehensive

as possible. In addition, where examinations involve firms that are members of both

NASD and the NYSE, we are coordinating our reviews for compliance with the antimoney laundering compliance program requirements.

According to our most recent examination results, approximately 94 percent of

firms had developed and implemented anti-money laundering compliance programs.

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Our goal, of course, is 100 percent compliance, but the examination results show

that firms recognize their responsibilities and have taken the necessary steps to

meet their obligations under the Act. Those firms that NASD examiners found to

be deficient in this area received a Letter of Caution and, pursuant to the terms

of the Letter of Caution, were required to demonstrate to NASD examiners that necessary procedures were in place, and deficiencies corrected, within 30 days. Firms

that continue to disregard their obligations to develop and implement anti-money

laundering compliance programs that contain all the necessary procedures will face

NASD Enforcement actions that could lead to substantial fines, suspensions, and

even expulsion from the industry.

While examining to determine whether firms have proper anti-money laundering

procedures, NASD examiners, at times, have confronted situations where firms had

evidence of suspicious activity but did not file a SAR. For example, in one instance,

an examiner conducting a routine examination noted signs of suspicious structuring

transactions. The customer, over a period of time and on numerous occasions, had

deposited a total of over $10,000 in money orders into an account. None of the

money orders was for more than $700. The customer then wired thousands of dollars to a bank located in a foreign country. The firm had not voluntarily filed a SAR.

NASD staff referred the matter to an appropriate Government agency for review.

As noted, while the SAR reporting requirements do not become effective until the

end of this year, NASD has suggested that firms make voluntary SAR filings, when

warranted. We will continue to be vigilant during our examinations of our firms

and, where appropriate, refer instances of suspicious activity to the appropriate Federal authorities.

Additional NASD Anti-Money Laundering Initiatives

NASD has also launched a variety of other anti-money laundering initiatives to

assist firms in developing and implementing their anti-money laundering compliance programs and in complying with other aspects of the USA PATRIOT Act.

NOTICES TO MEMBERS

NASD has published the following ‘‘Notices to Members’’ (Attachments held in

Senate Banking Committee Files):

Notice to Members 01–67, Terrorist Activity (October 2001). This Notice informed

members of President Bush’s Executive Order freezing the property of, and prohibiting transactions with, certain individuals. It explained how members could access

the Treasury Department’s Office of Foreign Assets Control’s (OFAC) website and

recommended that firms establish compliance programs to avoid violations and possible enforcement actions.

Notice to Members 02–21, Guidance to Member Firms Concerning Anti-Money

Laundering Compliance Programs (April 2001). This Notice explained in detail the

requirements that the USA PATRIOT Act and NASD Rule 3011 impose on brokerdealers and provided guidance to assist broker-dealers in developing anti-money

laundering compliance programs that fit their business models and needs.

Notice to Members 02–47, Treasury Issues Final Suspicious Activity Reporting

Rule for Broker/Dealers (August 2002). When the Treasury Department issued its

final rule governing SAR’s, NASD issued this Notice to Members to explain the requirements of the rule and to notify members of the deadline for comments on the

proposed SAR’s form for broker-dealers.

Notice to Members 02–50, Treasury and SEC Request Comment on Proposed Regulation Regarding Broker/Dealer Anti-Money Laundering Customer Identification Requirements (August 2002). This Notice explained to members the proposed regulations regarding customer identification and verification and notified them of the

deadline for submitting comments on the proposed rule.

AML TEMPLATE

Many smaller securities firms did not have the extensive experience with antimoney laundering regulations of the large, bank-affiliated firms, and were uncertain

about how the various USA PATRIOT Act requirements would apply to them. To

assist them, NASD developed a detailed template that firms can use in fulfilling

their responsibilities to establish an anti-money laundering compliance program. (A

copy of the template is being held in Senate Banking Committee files.)

Congress wisely made the anti-money laundering program requirement flexible

enough so that each firm could tailor its program to the firm’s size, business activities, and customer base. The template, which firms can download from our website,

www.nasd.com, provides language that firms can tailor to address their particular

situations. Our template urges firms to develop procedures even for those activities,

such as cash transactions, that the firm prohibits. That way, the firm will have proVerDate 11-MAY-2000 14:39 Dec 04, 2003 Jkt 000000 PO 00000 Frm 00075 Fmt 6621 Sfmt 6621 90722.TXT SBANK4 PsN: SBANK4
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cedures to detect when the policy has been breached and, if breached, to ensure that

the firm complies with any applicable anti-money laundering regulations.

In addition to giving detailed explanations of the many regulations and how they

would apply to various business relationships and financial products, the template

contains instructions and links to other resources that are useful for developing an

anti-money laundering compliance program. The NASD template has had over 7,600

visits since going live in July of this year.

WORKSHOPS

NASD also conducted two phone-in workshops for member firms concerning the

USA PATRIOT Act and anti-money laundering compliance. We held these workshops on April 19 and May 21 of this year and over 1,000 participants called in to

join them. We plan to conduct another workshop this month to address the customer

identification and verification requirements, which firms will have to implement by

October 26. In addition to the workshops for member firms, NASD has hosted two

anti-money laundering workshops for our examiners.

OFAC SEARCH TOOL

NASD has created a search tool, which is accessible through NASD’s anti-money

laundering website and enables firms to electronically search OFAC’s ‘‘Specially

Designated Nationals and Blocked Persons’’ list. There have been over 17,000 visits

to our OFAC search tool since its launch in June.

WEBSITE INFORMATION AND ONLINE TRAINING

In addition to our Notices to Members, our template and our OFAC search tool,

our Web page provides links to all of the reporting forms that firms will need for

anti-money laundering compliance, as well as to various other sources of anti-money

laundering information. NASD attorneys have also participated in numerous speaking engagements to discuss anti-money laundering issues and to answer firms’ questions, and they will continue to do so at our upcoming Fall Conference in San Diego

and at the NASD Institute in Baltimore.

We have also developed an online anti-money laundering training course, which

firms can use to meet their statutory obligations under the USA PATRIOT Act and

NASD Rule 3011 to develop an on-going anti-money laundering training program

for employees. As of August 31, over 6,000 people had registered for our online

training course.

Coordination Between NASD and Government

Coordination and communication with the Treasury Department and the SEC

have been indispensable in this area. Throughout this process, the Treasury Department and the SEC have provided us with information that we have needed to

develop anti-money laundering initiatives to assist broker-dealers, and they have

provided helpful and timely comments on our template and the various publications

that we have issued. This has enabled NASD to work efficiently, to present consistent interpretations and instructions to the industry and to define our expectations for firms under the regulations.

Continued coordination among regulators will remain critical in the future. Significant issues remain concerning how this regulatory regime that has historically

applied to depository institutions will apply to the securities industry. We are

pleased that the Treasury Department was receptive to hearing about how the application of these proposed regulations might affect the various participants in the

securities industry, and we look forward to continuing our dialogue with Treasury

on these and similar issues in this very important area.

Conclusion

I am pleased to have this opportunity to share with the Committee NASD’s part

of the extensive efforts that have been made over the course of the last year to ensure compliance with the anti-money laundering provisions of the USA PATRIOT

Act. NASD pledges to continue to work with Congress, Treasury, the SEC, and other

regulators in implementing and enforcing this important law.

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PREPARED STATEMENT OF ALVIN C. JAMES, JR.

FORMER SENIOR MONEY LAUNDERING POLICY ADVISOR

U.S. DEPARTMENT OF THE TREASURY

OCTOBER 3, 2002

Thank you, Mr. Chairman, Senator Gramm, and Members of the Committee. I am

very pleased to be given this opportunity to return to your Committee to speak to

you today about our Government’s anti-money laundering programs and strategy.

My name is Alvin James and currently I serve as the leader of the Anti-Money

Laundering Solutions Group at Ernst & Young, LLP. However, the views I am expressing here are my own and do not necessarily reflect the views of Ernst & Young.

A little over 3 years ago, I retired from Federal service after 27 years of law enforcement within the U.S. Treasury Department. Most of my public service was

spent as a Special Agent with IRS Criminal Investigation Division where I specialized in International Undercover Money Laundering Investigations. I spent the last

5 years of my Federal law enforcement service at the Financial Crimes Enforcement

Network (FinCEN) concluding the last 2 years as its Senior Anti-Money Laundering

Policy Advisor. It was at FinCEN that I collaborated on developing a model that

explained what is generally recognized as the largest money laundering system in

the Western Hemisphere—the Colombia Black Market Peso Exchange (BMPE).

That model, which was developed using law enforcement intelligence, describes how

this underground financial system works and identifies vulnerable choke points.

During my tenure at FinCEN I also served as the founding Chairman of the Treasury Under Secretary for Enforcement’s BMPE Working Group.

Introduction

Mr. Chairman, I believe the current efforts and strategy of our Government to

prevent the laundering of illicit funds or the transferring of funds for illicit purposes

within our borders are falling short of the mark. This failing is not primarily due

to a lack of diligence on the part of our criminal justice and regulatory agencies.

It stems more from the nature of our enforcement system and the means by which

the performance of our enforcement agencies are measured than from a basic unwillingness to work together and get the job done.

The source of this failure lies at a fundamental level. We continue to fail as a

Government to adopt an enforcement strategy to disrupt and deter the way money

is laundered through our nations financial institutions. The major money laundering

is a systemic crime. Systemic crime is crime brought about by an illicit demand

within society that is not dependant upon the action of any particular individual or

group of individuals. Therefore, the criminal conduct cannot be effectively deterred

by the threat of prosecution, fines, or imprisonment. Systemic crime is crime that

for various reasons will always have a new criminal ready to step up when his predecessor falls to criminal sanctions. Systemic crime is not limited to the financial

arena. Indeed, there are broader and more serious areas of crime that also fall within this definition. When they thrive it is largely do to the choice of our Government

to use the singular weapon of prosecution as our only deterrent. When we fail to

acknowledge the shortcoming of prosecution as the sole deterrent in critical areas

then we also fail to strategize toward a more effective means of disruption and

elimination of the criminal systems that plague our Nation.

To illustrate my point let us look at two well-known areas of systemic crime. The

demand for narcotics and the systems that fuel that demand is an example of systemic crime. One of the reasons we have not done better in fighting the war on

drugs is that we continue to pursue the fight on a case-by-case basis. And yet there

seems to be no limit to drug users, sellers, distributors, smugglers, manufacturers,

and money launderers. The performance of the agencies charged with fighting the

war on drugs is measured by the respective arrests and prosecutions to their credit.

This performance measure of course skews their strategies in that direction whether

or not those strategies have an ultimate impact on the criminal system. These performance measures also tend to steer them away from coordinated action with other

agencies, with which they would have to share the credit. Worst of all, they are dissuaded from the development of a more effective strategic approach even when they

try to do so. We are not winning the war on drugs and yet we have continued to

fight for over 20 years without any sustained deviation in our strategy.

Our internal war on terrorism and the movement of terrorist funds is another

area of systemic crime. Our efforts to combat terrorism within our borders seems

to be gaining ground because we have not focused on prosecution as our only tool

or even our primary tool to disrupt and dismantle the terrorist’s ability to harm to

our country and our people. Cooperation and coordination of strategy continue to be

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key areas of concern. Yet, we seem to recognize that we can offer no form of prosecution and punishment that will deter an individual who will give up his own life, not

as a sacrifice for his cause, but as a privilege that will bring everlasting rewards

to the individual and substantial financial rewards to his family? Our law enforcement community is well-suited to address these terrorist systems, just as they are

well-suited to address the systems that distribute illegal drugs and launder the profits from their sale. For the war on terrorism to continue to be effective and for the

war on drugs and major money laundering to begin to have a deterrent effect, the

enforcement community must be unfettered by removing total reliance on performance measures directed solely toward the arrest and conviction of individuals. They

have the knowledge and expertise to develop strategies, within the boundaries and

individual protections of the Constitution, which will disrupt and dismantle the

principal criminal systems wreaking havoc in our country today. They must be encouraged to develop and implement these systemic strategies. We cannot afford to

wait for another 20 years.

Mr. Chairman, by continuing to provide a forum to air these critical issues. Your

Committee is providing the leadership needed to bring financial criminal enforcement to this new plateau. It is essential that our Nation begin to recognize the

shortcomings of our current strategies in regard to systemic crime. Only then can

we begin to develop new plans operating outside the box of conventional wisdom.

As I continue in my testimony I will set out numerous areas of systemic abuse of

our Nation’s financial structure. These areas of abuse do not seem to be deterred

by traditional means of arrest and prosecution. I will also suggest an approach to

most effectively design and implement a strategy to combat systemic crime within

our enforcement and regulatory communities. I urge you use the powers of this

Committee to continue to encourage this Nation’s financial enforcement and regulatory community to consider a more effective means of financial law enforcement

and regulation designed to combat these areas of systemic abuse.

Current State Assessment

As stated, the current focus of financial criminal investigations is most often on

individuals or a particular illicit enterprise. Even if this focus falls on a particular

area of systemic concern, such as Hawala and its movement of terrorist funds, it

still relies on fines or prosecution of individuals as the primary strategy of deterrence. What is even more troubling is the spirit of competition rather than cooperation fostered by these strategies of prosecution. There is little incentive to cooperate

when eventually only one agency will be credited with the prosecution. If a deal is

struck it usually involves some sharing of the count. This most often involves double

counting which then distorts the statistics and still does little to counter the systemic abuse.

Similarly, from the civil regulatory perspective, while regulatory efforts may be

aimed at areas of systemic concern, they generally rely on regulatory sanctions

aimed at an individual institution or business. As in the enforcement community,

there seems to be little regard for whether or not these sanctions will, in fact, impact the particular area of systemic abuse. Regulation of Money Service Businesses

(MSB’s) is a good example of this lack of effective strategy. The first phase of this

regulation is the registration of all MSB’s. The most infamous type of MSB at the

moment is the Hawala money remitter system that I will describe in more detail

later. For now, suffice it to say that even if Hawala brokers in the United States

are successfully registered, such registration is unlikely to impact the illicit use of

this system to move terrorist funds or launder drug money. It is too easy for this

system to hide its dealings inside other transactions. Registration will certainly not

have an impact unless it is part of an overarching strategy designed to eliminate

the illicit use of this system. It is not clear that such a strategy exists or which

agency would administer it if it did exist. From the criminal law enforcement perspective, in order to be effective the strategy will have to exceed reactive prosecution

of known illicit transfers through unregistered institutions. Without effective strategies in place, counting the number of Hawalas or other (MSB’s) that have been registered is meaningless as a measure of performance for any agency held responsible,

as well as a meaningless measure of effective money laundering control for our Government as a whole.

There is also little incentive for the enforcement and regulatory community to cooperate strategically toward a systemic target. The enforcement community views

the regulators, with some justification, as uncooperative when asked to respond with

specific information in regard to a particular institution or its client. In turn the

regulators view law enforcement, again with some justification, as ham fisted and

naive as to the working of financial institutionsm, as well as their interactions with

their regulators. The financial service sector itself has also offered little incentive

75

to observe or report systemic abuse of their systems. Most institutions see the Suspicious Activity Reports (SAR’s) they file on individual behavior as going into a

black hole with little if any feedback as to their relative effect. Once again they are

somewhat justified in this position. Why then would they take the extra step of

pointing out systemic abuse when there has been little or no effort on the part of

Government to describe the abuse or work with the institutions in a partnership to

build a defense?

Mr. Chairman, our National Money Laundering Strategy is replete with all the

right buzzwords—money laundering systems, interagency cooperation, coordination

of effort, and information sharing. Unfortunately, these strategies have failed to

enhance our ability to deter systemic money laundering. They have failed because

at the root of our efforts we cling to prosecution as primary tool and our primary

measure of success. We must use all the tools in our tool chest if we are to build

a solution to systemic money laundering.

Areas of Systemic Abuse

Correspondent Banking

International correspondent banking is the network within the traditional financial sector that facilitates global bank-to-bank business, as well as providing foreign

exchange for clients who do not have their own individual foreign accounts. Simply

stated, foreign banks maintain accounts similar to checking accounts in banks within countries that they or their clients wish to do business. Of course, the United

States is essential for any foreign bank wishing to offer the potential of foreign

trade financing to its clients. This network is especially vulnerable to money laundering because money is taken in through one governmental jurisdiction and placed

in another. The USA PATRIOT Act began to bring attention to these correspondent

relationships.

However, in spite of this attention, this network is currently being abused as the

primary narcotics currency placement vehicle for the Colombian Black Market Peso

Exchange (BMPE). The traditional means used to place narcotics currency into U.S.

bank accounts controlled by the BMPE dollar/peso broker was to make small deposits to accounts in the United States that were less than the threshold of the BSA

regulatory barrier. Due to increased enforcement and regulatory pressure, the

BMPE system has shifted its major currency placement to the foreign correspondent

banking network. Foreign banks, willing to accept anonymous currency deposits in

exchange for either checks or wire transfers drawn on their U.S. correspondent

banking accounts, now provide the means to place BMPE narcotics currency into the

U.S. financial system. These institutions are located throughout the world and are

certainly not limited to those countries that have been designated as noncompliant

for anti-money laundering purposes.

Once the currency is placed in the U.S. accounts the BMPE brokers sell the dollars and then transfers them for their clients via checks and wire transfers. These

instruments are used to make payment for foreign trade and to fund bank and brokerage accounts in the United States. These transactions completely break the chain

of transparency sought by the world’s financial institutions and their respective

governments.

Money Remitters

Numerous other systems similar to Hawala and BMPE exist throughout the

world. They all offer similar services of foreign exchange and small dollar money

remittance through informal networks based on ethnicity and trust. They exist in

Asia, Africa, and South America and they all have branches in other lands based

on the diasporas of their people. These branches often have brokers who use the traditional financial systems to maintain their parallel accounts that facilitate their

informal systems. By their very nature they are also vulnerable to money launders

and individuals who would surreptitiously transfer funds for illicit purposes.

Gold Broker Networks

The U.S. Government has taken little notice of the workings of these networks

within our country or the world. Nonetheless, it is possible to transfer millions of

dollars of value internationally within these amorphous networks with no paper

trail. The transfers can go from the souks of Dubai, India, and the Far East to the

brokers of Switzerland and Italy to the coin shops of the United States. As in the

remittance systems, the transfers are made on trust and settlement for the transfer

is usually arranged via parallel transactions going in the opposite direction. It is

very likely that recent transactions of terrorist funds were moved through this

network.

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False Invoicing

This means of covertly moving funds from one country to another has existed for

centuries and is well-known and well-documented. As with the others mentioned,

it remains basically untouched by U.S. law enforcement. The following is a simple

example of the process. A Colombian drug lord wishing to launder drug currency

held in the United States might first establish a front retail jewelry business in the

United States. Next, green glass is shipped from Colombia to the front business in

the United States and is described as emeralds. The front company deposits drug

currency disguised as business receipts and then wires out payments for phony emeralds to the Colombian drug lord. The drug lord has thus transferred his illicit proceeds to Colombia with a built-in legitimate story disguising their true source.

Remittance Companies

These firms should be distinguished from money remitters in that they offer discrete international transfers of funds for wealthy individuals and firms along the

lines of the services provided for private banking clients within the legitimate financial industry. They do so by moving these funds through their accounts without notice to anyone of the true ownership of the funds. There may be legitimate reasons

for the existence of these firms such as the need to amass funds secretly for strategic business advantage. However, due to their obvious potential to launder money

and facilitate other anonymous transfers, it should not be left totally up to the

banking community to regulate their activity through Suspicious Activity Reporting.

Hawala

Hawala is an ancient system based on trust within ethnic and familial relationships. It is important to note that this system has been unregulated for most of its

existence. An equally important factor is that most funds transmitted by this system

are legitimate foreign exchange or remittance transfers. However, it is clear that

illicit funds and funds intended for illicit purposes including terrorism are also

transmitted by this system. It is unlikely that this amorphous system will lend itself

to traditional forms of regulation. New regulatory and criminal enforcement strategies will have to be devised based on a more through understanding of the system

than we have today.

Another alternative is to outlaw the system altogether in the United States. However, an attempt to outlaw this system will only drive it from the front of the bodega

to the back room or the parlor upstairs. Attempts to outlaw this system will also

thwart its substantial legitimate purposes. One key use is foreign exchange for the

‘‘unbanked’’ third world, thus promoting desperately needed commerce in these

areas. Another important function is money transmissions to family ‘‘back home.’’

In addition to being legal and harmless this is arguably our most efficient and least

costly form of foreign aid. In any case, as with all the systems described here, this

system exists because there is a demand for it that has not been met otherwise. As

long as the demand exists there will most likely be a similar system to meet it,

whether we try to outlaw it or not.

Colombian Black Market Peso Exchange (BMPE)

The BMPE is perhaps the U.S. enforcement community’s best-known underground

money remitter and foreign exchange system. Although it has technically always

been illegal in Colombia, it began as a gray market designed to evade Colombian

import tariffs perceived to be excessive by the Colombian business community. However, its function became much more heinous from the international perspective

when its source of funds evolved to be almost exclusively wholesale narcotics proceeds.

Like all underground and unregulated systems this system is flexible and quickly

adapts to efforts to thwart its access to the world’s legitimate financial systems including those in the United States. I have described a major adaptation of this system in my previous section on Correspondent Banking. Although this system has

been known to U.S. law enforcement for over 20 years it continues to adapt and to

maintain its status as the vehicle of choice for the Colombian drug lords to launder

over $5 billion dollars per year.

A Proposal

A coordinated effort using all the tools available to the Government is the key to

disrupting and dismantling systemic financial crime. A home agency solely responsible for systemic criminal law enforcement and BSA regulatory policy and enforcement is the best means to achieve this coordination. I strongly suggest the new

agency be given the power via Presidential directive to coordinate all investigations

impacting systems of financial crime that are a threat to our national security. This

power should include investigations in other agencies that are related to these parVerDate 11-MAY-2000 14:39 Dec 04, 2003 Jkt 000000 PO 00000 Frm 00080 Fmt 6621 Sfmt 6621 90722.TXT SBANK4 PsN: SBANK4
77

ticular systems. I also believe it is essential to see that the new agency has the security clearances necessary to coordinate its strategies with the intelligence community. Finally, it is vital that this new agency include this Nation’s financial sector

as a partner in designing and implementing overarching strategies designed to impact systemic financial crime.

The problem of overlapping jurisdiction has always been an impediment to cooperation and coordination of the investigations related to systemic financial crime.

Anti-money laundering is necessarily a fragmented jurisdiction due to the numerous

substantive crimes that generate illicit funds. However, the recognition of systemic

crime gives rise to a logical division of effort along the lines of systemic enforcement

verses individual prosecution. The agency I have proposed that would be charged

with systemic financial enforcement could pass off individual cases to the appropriate agency, thus providing an incentive for cooperation rather than competition.

In addition, the performance of the systemic crime agency could be measured along

the lines of its strategy, which would not directly include individual prosecution.

As an example of the type of coordinated strategy that might arise from the

agency I propose, let me turn to the area I know best, BMPE. The goal of the following strategy is to force the BMPE money launder and the Colombian drug lord

to use processes to launder drug money that are less suited to their purpose and

thus easier to detect and attack by both systemic and traditional criminal enforcement. First, a coordinated series of disruption oriented undercover operations could

be added to the strategic plan. These operations can infiltrate the BMPE money

laundering organizations and then use their insider status at just the right moment

to seize or otherwise divert the funds they have been trusted to launder. Then a

BSA Geographic Targeting Order (GTO) directed at correspondent banking accounts

that are funded with substantial currency deposits. An international arm could be

included that would coordinate the impact of intelligence to be shared with Colombian or other foreign law enforcement agencies. In addition, related individual investigations could be coordinated in such a way as to maximize their effect on the overall system. Finally, the private sector could be included by advising them at the

most opportune moment of the overall scheme, as well as the specific countries, foreign banks, or particular accounts that are known to be involved in the system.

The overall strategy could be designed to shake the confidence of the illicit users

of the system. On the one hand they would lose confidence that the money they

launder is safe and will be returned to them. In addition the appropriate individuals

involved could be passed on for individual investigation not only in our country but

also by their own law enforcement as well. Those who maintain legitimate businesses could find their ability to use the financial institutions throughout the world

hampered by their link to narcotics crime. Providing the identity of the known users

of the money laundering system to the international press could further shame and

deter future use of the system. The final effect is to eliminate the market for BMPE

dollars in foreign exchange. Such a coordinated effort as part of an overall strategy

to attack a system of financial crime could begin to impact the system itself rather

than just chip away at the individuals involved.

Mr. Chairman, thank you for allowing me this opportunity to express my views.

At the least, I hope my comments will foster debate directed at more effective enforcement of systemic financial crime and more efficient use of the tools available

in our enforcement community.

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