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DISMANTLING THE FINANCIAL INFRASTRUCTURE

OF GLOBAL TERRORISM

HEARING

BEFORE THE

COMMITTEE ON

FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

OCTOBER 3, 2001

Printed for the use of the Committee on Financial Services

Serial No. 107–46

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

MARGE ROUKEMA, New Jersey, Vice Chair

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Ohio

BOB BARR, Georgia

SUE W. KELLY, New York

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

GARY G. MILLER, California

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR., New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

JOHN J. LAFALCE, New York

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

BARBARA LEE, California

FRANK MASCARA, Pennsylvania

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missouri

STEVE ISRAEL, New York

MIKE ROSS, Arizona

BERNARD SANDERS, Vermont

Terry Haines, Chief Counsel and Staff Director

(III)

C O N T E N T S

Page

Hearing held on:

October 3, 2001 ................................................................................................. 1

Appendix:

October 3, 2001 ................................................................................................. 65

WITNESSES

WEDNESDAY, OCTOBER 3, 2001

Eizenstat, Hon. Stuart E., former Deputy Secretary of the Treasury ................. 47

Gurule ́, Hon. Jimmy, Under Secretary for Enforcement, U.S. Department

of the Treasury ..................................................................................................... 15

Lackritz, Marc E., President, The Securities Industry Association ..................... 45

Lormel, Dennis, Chief, Financial Crimes Section, Criminal Investigations

Division, Federal Bureau of Investigation ......................................................... 20

Moynihan, John F., Partner, BERG Associates, LLC ........................................... 49

O’Neill, Hon. Paul H., Secretary, U.S. Department of the Treasury .................. 7

Warren, Mary Lee, Deputy Assistant Attorney General, Criminal Division,

U.S. Department of Justice ................................................................................. 19

Yingling, Edward L., Deputy Executive Vice President and Executive Director

of Government Relations, American Bankers Association ............................... 44

APPENDIX

Prepared statements:

Oxley, Hon. Michael G. .................................................................................... 66

Bachus, Hon. Spencer ...................................................................................... 69

Bereuter, Hon. Doug ........................................................................................ 70

Carson, Hon. Julia ............................................................................................ 105

Ford, Hon. Harold Jr. ....................................................................................... 107

Israel, Hon. Steve ............................................................................................. 108

Kelly, Hon. Sue W. ........................................................................................... 109

LaFalce, Hon. John J. ...................................................................................... 114

Chertoff, Hon. Michael, delivered by Mary Lee Warren ............................... 131

Eizenstat, Hon. Stuart E. ................................................................................ 179

Gurule ́, Hon. Jimmy ......................................................................................... 121

Lackritz, Marc E. .............................................................................................. 164

Lormel, Dennis ................................................................................................. 140

Moynihan, John F. ........................................................................................... 198

O’Neill, Hon. Paul H. ....................................................................................... 117

Yingling, Edward L. ......................................................................................... 150

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bereuter, Hon. Doug:

Department of the Treasury letter dated August 29, 2001 ........................... 72

Financial Action Task Force on Money Laundering Report, June 22,

2001 ................................................................................................................ 75

Kelly, Hon. Sue W.:

‘‘Terror on a Budget,’’ Wall Street Journal, Sept. 20, 2001 ........................... 111

America’s Community Bankers and Independent Community Bankers of

America, joint prepared statement ..................................................................... 204

(1)

DISMANTLING THE FINANCIAL

INFRASTRUCTURE OF GLOBAL TERRORISM

WEDNESDAY, OCTOBER 3, 2001

U.S. HOUSE OF REPRESENTATIVES,

COMMITTEE ON FINANCIAL SERVICES,

Washington, DC.

The committee met, pursuant to call, at 10 a.m., in room 2128,

Rayburn House Office Building, Hon. Michael G. Oxley, [chairman

of the committee], presiding.

Present: Chairman Oxley; Representatives Leach, Roukema, Bereuter, Bachus, Castle, Kelly, Weldon, Riley, Manzullo, Shadegg,

Fossella, Miller, Cantor, Grucci, Capito, Tiberi, Lucas of Oklahoma,

Ney, Paul, Gillmor, Biggert, Green, Shays, Ferguson, Rogers, LaFalce, Frank, Kanjorski, Waters, C. Maloney of New York, Gutierrez, Watt, Bentsen, Sandlin, Lee, Schakowsky, Moore, Gonzalez,

Lucas of Kentucky, Clay, Israel and Ross, J. Maloney of Connecticut, Hooley, Sherman, Mascara, Inslee, Capuano, Ford, Shows,

Crowley.

Chairman OXLEY. The hearing will come to order.

Today, the Committee on Financial Services meets to hear testimony on the issue of terrorist financing and money laundering. We

remember today the thousands of people who died in the four attacks in September. The terrorists used American freedoms and

American dollars against us. They executed their plans with access

to our financial systems, including credit cards, ATMs, local checking accounts and wiring money overseas. The best way for our committee to commemorate the victims’ lives is to take every step possible to ensure that the gates to the financial services system in

this country are locked to terrorists.

Today, along with Ranking Member LaFalce and other Members

of this committee, I will introduce bipartisan legislation that will

demonstrate to our friends and enemies here and abroad that the

United States Congress stands shoulder to shoulder with the President in his campaign to dismantle the financial infrastructure of

terrorism and to ‘‘starve terrorists of funding.’’ I applaud the President and our distinguished witness today,

Treasury Secretary Paul O’Neill, for taking swift action to block

terrorist assets that may be located here in the United States and

to warn foreign banks that the U.S. is poised to block their assets

in this country and deny them access to U.S. markets if they refuse

to freeze terrorist assets overseas.

The Secretary is also to be commended for setting up a new Foreign Terrorist Asset Tracking Center, which I hope will become a

2

model for interagency cooperation in law enforcement and in the

sharing of financial intelligence.

Finally, I applaud the Administration for sending us its legislative proposals, many of which are included in our bill.

This crime was not about money, but about mass murder, so we

have a major challenge before us. Many in Congress and in the financial services sector are asking questions like: ‘‘What is terrorist

financing?’’ For example, are terrorist organizations moving funds

into the U.S. banking system through third-party correspondent accounts at major U.S. banks, or are they relying more on cash transfers through underground money services businesses?

How did they get credit cards, checking accounts, and the like,

without raising suspicion? If the attacks could be executed without

leaving an obvious financial trail, what might be missing now? And

finally, the chilling question, is it possible that terrorist financing

is continuing undetected in the United States?

These are urgent questions, and our goal today is to learn the

answers and to craft effective legislation to stop it whenever, wherever and however it happens.

I am not convinced our money laundering laws are adequate to

address the particular features of terrorist financing we have witnessed. The current money laundering regime seems better designed to detect the kind of money laundering associated with the

crimes that generate significant proceeds. It does not appear to be

particularly well-suited to cash an unconventional terrorist operation.

We know, too, that there are limitations to what we can expect

from Federal laws that allow for the freezing of terrorist assets.

Osama bin Laden and his organization, al Qaeda, have been on

Treasury’s blocking list for a couple of years. Any financial role bin

Laden and his organization played in those horrific acts appears to

have escaped detection and to have fallen below our financial

radar.

The committee’s work on money laundering will produce effective, targeted solutions to the immediate problems we encounter

following the events of September 11. We will not throw in the legislative kitchen sink for no clear purpose. This is our first important step on money laundering, but it will be, by no means, our

last.

With that in mind, Members of this committee will introduce

today comprehensive anti-terrorism and money laundering legislation that focuses on three major goals: One, bolster law enforcement’s ability to find and destroy the financing of terrorist organizations, whether in banks or in underground ‘‘hawala’’ systems;

two, establish a Government-industry partnership to stop terrorist

funding in real time; and three, track any terrorist money kept in

secret offshore havens and increase foreign cooperation with U.S.

efforts.

Today marks the beginning of the legislative process on this comprehensive package, which should be enacted before Congress adjourns this year. It is time for the civilized international community to exclude financial outlaws, whether they are bin Laden’s terrorist operatives or shadowy offshore banks, from access to the

3

international financial system. This is the time and this is the

place to draw that line.

The time has expired, and I yield to the gentleman from New

York, the Ranking Member, Mr. LaFalce.

[The prepared statement of Hon. Michael G. Oxley can be found

on page 66 in the appendix.]

Mr. LAFALCE. Thank you Mr. Chairman. I ask unanimous consent to put my entire statement in the record.

Chairman OXLEY. Without objection, all the Members’ statements will be made part of the record.

Mr. LAFALCE. Money laundering represents a serious threat to

global, political and economic security. The International Monetary

Fund has estimated the amount of money laundered annually to be

between $600 billion to $1.5 trillion, or 2 to 5 percent of the world’s

annual gross domestic product. Since the 1970s, I have been very

concerned about this, but the events of 3 weeks ago demonstrate

that the very safety of our citizens depends on effective national

and international anti-money-laundering policies. There is a need

for a new, concerted anti-money-laundering offensive, internationally and domestically.

The President’s action to freeze assets of persons and organizations associated with bin Laden, al Qaeda and other terrorist organizations was a very important first step in cutting off bin Laden

and other terrorists from the funds that sustain them. However, if

we are to lead the world in this fight against terrorism, we must

ensure that our own anti-money-laundering laws are up to the difficult task at hand. And yesterday, Chairman Oxley and I agreed

that we will work together on a bipartisan basis to enact legislation

as soon as possible that will give the United States the tools it

needs to combat international money laundering and to disrupt the

funding of international terrorist organizations. I look forward to

working with the Chairman and all the other Members of this committee and the Administration to develop most expeditiously sound

legislation.

I am pleased to see that the initial draft of this bipartisan bill

includes the International Counter-Money Laundering and Foreign

Anticorruption Act that I worked on last year with Chairman

Leach, members of the Clinton Administration, including Ambassador Eizenstat, who will be testifying in a later panel, which was

adopted by our Banking Committee last year on a bipartisan vote

of 33-to-1.

The International Counter-Money Laundering and Foreign

Anticorruption Act would greatly enhance the tools available to

combat money laundering in the United States and raise antimoney-laundering standards globally. While most of the debate at

that time was focused on the importance of the bill in the context

of combatting drug trafficking and organized crime, the Clinton Administration also designed the bill to be useful in disrupting terrorist funding. That bill fills a gap in the authorities of the Secretary of the Treasury to respond to money laundering threats from

institutions in foreign jurisdictions with an inadequate or nonexistent anti-money-laundering enforcement regime.

Right now, as I understand it, we have but two limited options.

At the one end of the scale, the Treasury Secretary can issue inforVerDate 11-MAY-2000 13:54 Apr 29, 2002 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 75656.TXT HBANK1 PsN: HBANK1
4

mational advisories to U.S. financial institutions about specific offshore jurisdictions, but these orders do not impose specific requirements, so they are often inadequate to address the complexity of

money laundering. At the other end of the scale, the President can

issue blocking orders under the International Emergency Economic

Powers Act following a Presidential finding of a national security

emergency, which operate to suspend financial and trade relations

with the offending targets.

The President appropriately invoked this authority on September

24 when he blocked transactions with foreign banks that did not

cooperate with his order to freeze the assets of bin Laden, his associates and related entities. But invocation of the International

Emergency Economic Powers Act is not always appropriate, because the United States might not want to block all transactions

with an offending target, such as a country, or because our concern

centers around the inadequacy of anti-money-laundering regimes in

a foreign country. So the Act which I reintroduced earlier this Congress with Representative Vela ́zquez, Representative Roukema,

and so forth, would provide the Treasury Secretary with the ability

to fashion measured, precise and cost-effective ways to address this

problem.

It is unfortunate that neither the full House nor the Senate took

up the bill that we reported out last year, almost unanimously. I

hope we will enact that as part of the bill. But there are many

other proposals that others have made that are worthy of inclusion

in a comprehensive legislative package. Congresswoman Roukema

has an excellent bill which I have co-sponsored that addresses the

inadequacies of our bulk cash smuggling laws. National due diligence standards to help prevent the use of fraudulent identification

in the opening of bank accounts should also be considered.

I think that we should provide for better coordination of antimoney-laundering efforts within the Federal Government and for

enhancing the ability of law enforcement agencies to obtain important investigative information from financial institutions. I look

forward to working with the Administration in developing this

package. I thank you.

Chairman OXLEY. I thank the gentleman.

The Chair now recognizes the gentleman from Alabama, Mr.

Bachus, the Chairman of the Financial Institutions Subcommittee.

Mr. BACHUS. Thank you.

I thank the Chairman for having this hearing, and, Secretary

O’Neill, I want to thank you and the President for the decisive action that you took last week to block and freeze terrorist assets,

both in this country and around the world. I am gratified, and I

think all America is, to hear the Treasury is receiving a high degree of cooperation from our allies and that you are following the

money trail and that they are assisting you in helping to choke off

the sources of this terrorist funding. So a job well done.

From what investigators have pieced together of the evidentiary

trail thus far, there are still more questions than answers on how

the operation that culminated in the horror of September the 11th

was bankrolled. But what we do know suggests that we should

place a much higher priority on non-traditional or ‘‘underground’’ banking systems. These systems fall largely outside the scope of

5

the formal reporting and recordkeeping requirements that have

been the backbone of the Government’s anti-money-laundering efforts for the last three decades.

While we need to give our law enforcement officials the additional tools they need to uncover and root out the financial infrastructure of terrorism, we also must make sure that the existing

tools are being used effectively and wisely.

As Chairman of the Banking Committee’s Oversight Subcommittee in the 104th and the 105th Congresses, I chaired a number of hearings which examined the operations of the Financial

Crimes Enforcement Network, FinCEN, which is the Government’s

lead agency in collecting and analyzing financial intelligence. Those

hearings yielded troubling findings, substantiated by several GAO

studies that I commissioned, and I would direct the Secretary’s attention to those at some time. They suggest that more can and

must be done to enhance and to coordinate the Government’s efforts to track dirty money that fuels narco-traffickers, international

terrorists and other large criminal organizations.

The President’s Executive Order freezing and blocking terrorist

assets was a powerful first step. It sends a strong message, a message that we will track down and cut off terrorist blood money

wherever we can find it. Congress needs to examine other measures, including an approach similar to the one I put forward in the

context of the genocide taking place in Sudan. That is, conditioning

access to U.S. financial markets on other countries’ willingness to

assist us in the financial war on terrorism declared by our President.

I want to conclude, Mr. Chairman, by thanking the members of

the staff who have basically worked for 16 and 18 hours putting

together this effort; the cooperation we received from Treasury and

law enforcement agencies. And I want to, in particular, commend

Jim Clinger for his work. Thank you.

[The prepared statement of Hon. Spencer Bachus can be found

on page 69 in the appendix.]

Chairman OXLEY. Thank the gentleman.

The Chair now recognizes the Ranking Member of the committee,

the gentlelady from California, Ms. Waters.

Ms. WATERS. Thank you very much. Mr. Chairman, thank you

for calling this hearing on money laundering. It is crucial that we

take steps to ensure the terrorist funding is cut off at its source.

I have been working on money laundering issues for years, and

I believe that the time has come. The time for action is long overdue. I have long maintained that the way to capture criminals is

to follow the money. If we deny these criminals, terrorists, drug

traffickers and bloody dictators access to the world markets, they

will not be able to function.

Money laundering has become an indispensable element of drug

trafficking, for example, and other criminal activities as organized

crime has expanded its economic influence both domestically and

internationally. Without the ability to manipulate our financial institutions, the illegal drug trade, for example, would be brought to

its knees. If there were no drug profits, there would be no drugs

on the street.

6

Similarly, the terrorists took advantage of the weaknesses in our

financial system. They had credit cards and somehow paid significant sums of money for flying lessons. Some of them even may

have profited from the advance knowledge of September 11 by selling airline and insurance stocks short.

I don’t understand how these individuals, some of whom were

suspected associates of bin Laden, were able to reside in the United

States virtually undetected. Their financial transactions left a trail,

a trail that must be followed, and we must ensure that every financial institution that is a part of that trail fully cooperates with law

enforcement to root out the sources. We must close the loopholes

in our financial system that permit illegal activities to flourish undetected. We must punish America’s financial institutions that

launder money, whether it is tied to financing terrorism or other

illegal activities.

The day is over when our own financial institutions are too big

to touch. According to a 1990 report by the Financial Crimes Enforcement Network, FinCEN, drug profits have injected an estimated $100 billion into the financial systems of the United States.

Nonetheless, information I received from the U.S. Department of

Justice states that no U.S. or foreign depository institution, none,

not one, has ever lost its license as a result of money laundering

activities in the United States of America, although many institutions have received substantial penalties for money laundering activities. For some of these institutions, penalties were merely the

cost of doing business.

We need to focus national and international attention on the

money laundering vulnerabilities of private banking relationships

and the concentration accounts used by some private bankers. In

an October 28, 1999, letter, Citibank private bank division defined

private banks as ‘‘banks which provide specialized and sophisticated investments and other services to wealthy families and individuals.’’ The letter went on to say that ‘‘private banks are inevitably exposed to the risk that an unscrupulous client will attempt

to launder proceeds of illegal activities through the bank.’’

This is stating the situation mildly. A 1998 GAO report on private banking detailed how known drug trafficker and international

criminal Raoul Salinas was able to transfer between $90 to $100

million of proceeds through Citibank’s private banking system. In

November of 1999, the Senate’s Committee on Governmental Affairs Permanent Subcommittee on Investigations presented revealing accounts of how Raoul Salinas and other private banking customers were able to launder funds through Citibank’s private banking system.

According to the subcommittee Minority staff report, a key problem area within the private banking system is the use of concentration accounts. Concentration accounts are bank accounts maintained by financial institutions in which funds from various bank

branches and bank customers are commingled into one single account. Banks have used concentration accounts as a convenient internal banking transfer mechanism. However, by combining funds

from various sources into one account and then wire-transferring

those funds into separate accounts, the true ownership and identity

7

of the funds are temporarily lost, and, more importantly, the paper

trail is effectively ended.

Law enforcement officials have stated that one of the biggest

problems they encounter in money laundering investigations, particularly where there is an international flow of funds, is the inability of investigators to reconstruct an audit trail for prosecution purposes. This was a major obstacle in the case of Citibank and Raoul

Salinas and has also presented problems for law enforcement in

the Bank of New York money laundering scandal. In a sound practices guideline paper issued in 1997, the Federal Reserve Bank of

New York reported the use of concentration accounts—— Chairman OXLEY. Could the gentlelady sum up, please? We want

to get to the Secretary.

Ms. WATERS. Well, let me just say that until we deal with our

own banks here in the United States, we can’t begin to talk about

forcing other banks in other countries to clean up their acts. I am

still waiting on reports that I have requested on the investigation

of the money laundering schemes of Raoul Salinas and Citibank,

and since that time Citibank has continued to purchase banks that

they know launder money, and they launder drug money.

This is tell the truth time, and I want to see what we are going

to do right here before we talk about what we are going to do offshore.

Chairman OXLEY. The gentlelady’s time has expired.

We now turn to the distinguished Secretary of the Treasury, Mr.

O’Neill. Thank you for appearing before the committee. The Chair

would inform the Members, the Secretary has another obligation

on the other side of the Capitol, but we will keep you as long as

we possibly can, but we understand the time constraints as well.

Thank you again. Obviously your appearance today shows a

strong interest in the money laundering issue from the highest levels of this Administration, and we appreciate your testimony today.

STATEMENT OF HON. PAUL H. O’NEILL, SECRETARY, U.S.

DEPARTMENT OF THE TREASURY

Secretary O’NEILL. Thank you, Mr. Chairman, Congressman LaFalce and Members of the committee. Thank you very much for inviting me to be with you today. Under Secretary Gurule ́ is with me

and will appear on the next panel and will provide more details on

our view of actions that could usefully be taken.

And I do want to make a special point of saying to the committee, to the Chairman and to the committee Members, how much

we appreciate the interaction we have had with you and the leadership that you have shown over the years in working on these

issues. Now is the time when we have to bring all of these things

to bear, because this issue of financial affairs and movement of

money of terrorists and suspected terrorists is a very important

and essential part of the broad-front war the President has indicated we are going to wage against these evil people.

We believe money can be as lethal as a bullet. If we are to deter

and prevent future calamities, and if we are to root out terrorists

that threaten to do violence to our people and our communities, we

have to enlist the active help of financial institutions to hunt down

the financial benefactors who underwrite murder and mayhem. We

8

have already made an excellent start with the President’s Executive Order and the adoption of the United Nations Security Council

resolution. The U.N. resolution represents a confirmation by the

global community that an aggressive hunt for terrorist funds is underway and merits the cooperation of all countries.

The importance of this global campaign cannot be overstated.

Building an action-taking coalition for the financial campaign

against terrorism is as important as a military campaign. We have

set a deliberate course to prosecute that campaign. First we are engaged in an effort to identify the potential financial intermediaries

of suspected terrorists and their associates. The interagency task

force that we chair includes the CIA, the Departments of State and

Justice, the FBI and the NSC.

Second, we are acting on that intelligence with the issuance of

domestic blocking orders that freeze accounts and bar all trade

with terrorist associates.

Third, we are engaged with the FBI in the investigation of the

financing of the September 11 attacks and are making significant

contributions in ferreting out those who financed those horrendous

acts.

Fourth, we are engaged in an outreach to secure the endorsement of our blocking orders by allies in the G7, the EU, and

throughout the world.

Fifth, we have begun to link the disparate databases and to analyze the patterns of terrorist financing.

Here at home, you can help arm us with additional legislative

tools to enhance Treasury’s capability to track, block and seize

those assets, to secure our borders, and to freely share information

about terrorist activity between law enforcement and U.S. intelligence services. Our intent is straightforward: to remove structural

limitations that handicap the Government efforts to eliminate the

violence of terrorism.

To date, the President’s program has produced meaningful results. As this committee knows, we have taken action domestically,

and, just as importantly, scores of countries have followed suit with

bank freezes and pledges to take measures to heighten scrutiny of

suspicious transactions. In our effort we are partnering with the

private U.S. banking industry which has helped us to interpret and

analyze financial data. Finally, international financial regulators

have made clear their willingness and commitment to provide us

with whatever assistance we may need to track down the assets of

international terrorists. Other countries have been asked to provide

assistance under treaties that provide Treasury and the Justice Department with evidence in the current probe and to share leads for

the pursuit of new names. In addition, numerous international

banks have made plain that they will assist us in any manner lawfully permitted under their respective domestic laws.

Additionally, we have formed the Foreign Terrorist Asset Tracking Center to help identify patterns in terrorist financing practices

discoverable only through interagency coordination and analysis.

The center joins for the first time disparate databases from law enforcement, the intelligence community, banking regulators and

open-access data libraries. The data is then linked to build a mosaic of terrorist financing activity. This operation allows us to take

9

a different tack by sustaining a targeted effort at terrorist financing. This approach is not limited to the episodic, targeted and staccato-like pace of a case-specific criminal problem. Instead, we are

using intelligence and law enforcement resources to find patterns

that will allow us to address the global problem of terrorist financing.

This is admittedly ambitious, but it is at the core of our declared

end. This hunt is not about money. It is about money that kills.

Our approach is proactive and preventative. Our goal is to drain

the financial lifeblood that allows terrorists to finance and accomplish their deadly goals, and in doing so, we aim to shackle their

ability to strike again.

The Treasury Department is committed to this purpose. It is for

this reason that we believe the provisions of the Administration’s

anti-terrorism bill are essential. In particular, the IEEPA amendment that would protect classified data from disclosure would remove barriers to the successful prosecution of our cause. While I

understand these provisions are not currently a part of the House

anti-terrorism package, we are hopeful that they will ultimately be

included.

In addition, I look forward to working with this committee on

some issues not addressed in the anti-terrorism package; in particular, additional provisions to ensure more effective sharing of information between law enforcement and intelligence agencies.

Government should not be handcuffed in this endeavor. More can

usefully be done, and Under Secretary Gurule ́ is prepared to outline potential additional measures.

But my pledge to you is simple. The Treasury Department will

use every tool we have at our disposal to shut down terrorist fundraising and dismantle their organizations one dollar at a time.

Their moral bankruptcy will be matched by an empty wallet.

I thank you very much for the opportunity to appear, and I look

forward to your questions, Mr. Chairman.

[The prepared statement of Hon. Paul H. O’Neill can be found on

page 117 in the appendix.]

Chairman OXLEY. Thank you, Mr. Secretary. It is good to have

you with us this morning.

Let me make an announcement. The Chair will recognize Members in the following order for questioning our witnesses: the Chair

and Ranking Minority Member of the full committee, the Chairs

and Ranking Minority Members of the subcommittees, and other

Members in the order of their appearance, with seniority determining the order of Members present at the fall of the gavel.

Because of the size of the committee and the importance of the

issues, the time limit for our witnesses, the Chair will vigorously

enforce the 5-minute rule. The Chair appreciates the cooperation of

the Members and witnesses.

Mr. Secretary, based on what Treasury has learned in the investigation so far, is it fair to say that the vast majority of the financial assets used to underwrite the terrorist operations of al Qaeda

are overseas rather than in the United States?

Secretary O’NEILL. What we have seen so far, we believe that to

be true, but that doesn’t mean we are not continuing to pay attention to the possibility of financing that we don’t yet know about.

10

But your suggestion is like what we have seen so far, specifically

the al Qaeda resources seem to be mostly in non-U.S. accounts.

Chairman OXLEY. Can you share with the committee the effect

so far that the President’s September 24 Executive Order has had

in freezing known assets of terrorists and their financial supporters?

Secretary O’NEILL. Well, the President indicated the other day

on the basis of an interim report that we had identified 27 specific

accounts and individuals that we wanted assets frozen. And we

have blocked assets in the U.S. The numbers are changing on a

daily basis. The figure the President used the other day was $6

million. The amounts of money that have now been targeted, but

without a return yet from the financial institutions that have been

tasked, we are looking at something over $13 million in the U.S.

and substantially larger sums offshore. The UK has indicated that

their total blocking numbers are $88 million, and on the same

basis, if you incorporate data even before the 11th of September

that has been blocked or challenged on the basis of authorities that

existed before and then the President’s expansion, the numbers in our case equivalent to the Brit number is something over $250 million.

But, we are at the beginning of this phase, and your question

prompts me to say this: In discussions with the President, he has

made very, very clear how he intends to measure our effectiveness,

and that is by the number of individuals that are identified and accounts that are identified and by the amounts of assets that are

blocked. So it is not our intention to measure effectiveness by inputs, but by actions taken to actually interfere with, and hopefully

near-term, close down al Qaeda’s financing operations and those of

other terrorist organizations.

Chairman OXLEY. You mentioned the list of 27 organizations. I

am led to believe that there is another list forthcoming. Could you

share with us exactly, or perhaps when that might be available,

and perhaps how many other groups would be involved?

Secretary O’NEILL. Hopefully in the next few days we will be

adding a substantial number of additional names to the list. As we

are doing this, and I think it is pertinent to the legislation that you

are considering, and to the past practices, for the first time there

is a dedicated and determined sharing and vetting of information

between the law enforcement and intelligence agencies that, for a

variety of reasons, has not taken place before, some blockages and

some narrowness of scope in earlier Executive Orders. This is now

a full-front effort that involves all the resources.

And I might say in furtherance of what I said about the response

of countries outside the U.S., without exception I have had, I would

guess, dozens, maybe even more than 100, letters from Presidents,

Prime Ministers and Ministers assuring us, both at Treasury and

in my role as the Treasury Secretary, that they are fully committed

to doing anything and everything that they can, including amending their own laws where that is necessary to do, in order to be full

partners in going after the financial networks of terrorists, individual terrorists and terrorist groups.

We have had nothing but outstanding cooperation. Last week I

had about a 90-minute telephone call linking the Finance Ministers

11

of the G7, and their response was without reservation they will be

here this Saturday for a full-day meeting in the furtherance of pursuing this objective.

And so we are getting nothing but what we ask for, including

from all the financial institutions that we have talked to in the

United States.

Chairman OXLEY. The Chair’s time has expired.

The gentleman from New York.

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

Secretary O’Neill, are you familiar with the bill that was reported out of the House Banking Committee in the last Congress

by a vote of 33-to-1 that we worked on with the Clinton Administration? And if so, is your Administration supportive of that bill?

Secretary O’NEILL. Yes. Generally there is one provision that the

Under Secretary reminds me. I think we have filed them, a memorandum with you indicating that we would like to provide what we

call a due process provision so that—— Mr. LAFALCE. That could be accommodated.

Secretary O’NEILL. With that change we are going to be fine with

what you are proposing to do.

Mr. LAFALCE. OK. Good.

Now we have got this Financial Action Task Force list of noncooperating countries and territories. Is the United Arab Emirates

on that list?

Secretary O’NEILL. I don’t think so. No, they are not on that specific list.

Mr. LAFALCE. Is Pakistan on that list?

Secretary O’NEILL. I don’t think so.

Mr. LAFALCE. OK. Well, with respect to countries that are not

on that list, but whose standards might not be what we think they

should be, do we have a different list, and are we trying to get

them to improve both their laws and their practices? I mean, I

have heard and read that much of al Qaeda’s funding has come

from accounts belonging to charities and others and banks in the

United Arab Emirates. And apparently Mohamed Atta received a

wire transfer of $100,000 from a bank account in Pakistan under

the control of one of bin Laden’s lieutenants. And so I am just curious about that.

Secretary O’NEILL. The President has said, in this war against

terrorism, that other countries and people are either with us or

against us. And as I said to you, we believe running the financial

network of the terrorists to the ground is an essential part of waging this war, and we are going to put to all the other nations of

the world the issue of finally coming to grips with issues that in

the past were looked at under the umbrella concept of money laundering and put each of them to the test of providing information

in a structured way that we have said we want to do with everyone.

And as I said to you, so far, as we have put these questions, people have been very responsive. Finance Ministers of——

Mr. LAFALCE. Mr. Secretary, I have a limited amount of time,

and I concur with the language that is being used by virtually

every country that has corresponded with you. The question is not

so much the language and the good intent. The question is, you

12

know, the proof is in the pudding. And so I am just wondering— it is difficult to bring about international harmonization of standards, and somehow we have got to do it quickly, within weeks or

so. And we have to have some standards. We have to know whether each country, especially certain targeted countries where the terrorists might be most active, have in place a set of standards that

we think is adequate, and if not, we have got to get them to do it

yesterday. And that is why I am focusing in on the United Arab

Emirates and Pakistan, for example, not getting letters of good intent.

Secretary O’NEILL. The answer is I agree with you, and I am also

a results-oriented person, as your question suggests. I am not interested in having more paper and good wishes and resolutions. I

am interested in getting action, and, yes, we are going to work with

every one of these countries, including the list of countries that

have not yet entered information-sharing treaties with the U.S. so

we can prosecute this part of the war as diligently and successfully

as I am sure the President and the military establishment will

prosecute the more familiar part of the war.

Mr. LAFALCE. Thank you, Mr. Secretary.

Chairman OXLEY. The gentleman’s time has expired.

The gentleman from Alabama, Mr. Bachus.

Mr. BACHUS. I thank the Chairman.

Secretary O’Neill, I will be yielding my time to Mr. Riley, but I

did want to commend you for one statement. Your opening statement, I thought, was magnificent.

Secretary O’NEILL. Thank you.

Mr. BACHUS. You said the hunt is not about money, it is about

money that kills. And I think that is really the essence of what we

are talking about here. Prior to September the 11th, I said the

issue is very basic: dollars or lives. And sometimes that is going to

be the choice. When it comes to a question of dollars or lives, there

should be no question. And we are going to have that—that is

going to confront us from time to time. So thank you.

I will yield at this time my remaining time to the gentleman

from Alabama, Mr. Riley, who is very knowledgeable on these

issues.

Mr. RILEY. Thank you, Mr. Bachus. I appreciate that. I have got

another meeting I was going to, but I did want to ask a couple of

questions, Mr. Secretary. Following up on Mr. LaFalce’s line of

questioning, how many countries would you say today are not being

helpful?

Secretary O’NEILL. So far, as I said, no one has said no. Most

have volunteered a willingness to do anything and everything that

we suggest they might do within their own boundaries. But you all

know, because you have followed this subject for a very long time,

there is a long list of countries that don’t have information-sharing

treaties with the United States so that we can track even the narrower subject of money laundering, and I believe it is now time to

put the question to them, actually the demand to them, that we finally create a basis so that we can follow money around the world,

both for the broader purpose of money laundering and for the specific purpose of interdicting and confiscating the money of terrorists

and suspected terrorists.

13

Mr. RILEY. Well, I couldn’t agree with you more, Mr. Secretary,

but, again, I think Mr. LaFalce is absolutely right. Now time is of

the essence. If we could, I would love to see a list of the number

of countries that have not participated or have been reluctant to

participate.

But, because our time is short, let me ask you one other question. Prior to September the 11th, what kind of policies and procedures did the Treasury Department have in place that allowed us

to track the terrorist money before the attack on New York?

Secretary O’NEILL. I guess I would say, now I am thinking about

on the intelligence side, we had an ability in the intelligence community to identify terrorists and to look at information on a worldwide basis outside of the United States to pursue the financial affairs of terrorists. But we had a habit and a practice, and I think

even a legal prohibition, against using in a direct way the information collected by the international intelligence agencies without a

very complex procedure to bring it on board in the United States

and to systematically pursue potential terrorists inside the geographic borders of the United States.

And, you know, one of the things that is happening, as a consequence of these terrorist acts, I think we are finally going to use

the resources of our own community and the intelligence agencies

of the rest of the world to go after terrorists, not without protections to make sure that there isn’t overreach, but to take away the

handcuffs that I think perhaps were applied and supplied with the

best of intentions to protect individual liberties, but at a cost that

made it very difficult to systematically erase the financial sources

of terrorist operations.

Mr. RILEY. Well, sir, again, prior to September the 11th, could

you categorize on a scale of 1-to-10, compared to what you are

doing today, how active your department was, or how active this

Government was, in tracking terrorist money, knowing where the

accounts were, and did we have the ability before to do something

preemptively that we should have done?

Secretary O’NEILL. I think one measure of where we were is

frankly not one I like very much, but one measure of where we are,

you can look at the annual reports on so-called money laundering

activity and attempts to interdict money that was flowing from illicit, base purposes. If memory serves me right, last year the number was $670 million. That is a fair amount of money. And, you

know, I began, when I came asking the question, and what did we

get for it, and I was not, frankly, satisfied that we were getting results for dollars spent.

I have a great deal of confidence that we are now going to start

seeing results for dollars spent, because at the very top of our Government, the President of the United States has said he wants to

know how many individuals have we identified; how many accounts have we blocked; how much money have we either blocked

or confiscated. So I think with a clarity of purpose you are going

to begin seeing results.

And I think also, as a consequence of these unbelievable acts, the

cooperation from other governments around the world is going to

be the difference between night and day. This is no longer going

to be a conversation about convenience or something else. What I

14

have seen from everyone that I have talked to is a determination

that the world is not going to be a hostage to terrorists, and we

are going to use every means at our disposal, including attacking

their financial sources, to put them out of business.

Chairman OXLEY. The gentleman’s time has expired.

The gentlelady from California.

Ms. WATERS. Thank you very much.

Mr. Secretary, I would like to see the legislation. I am seeing it

for the first time. We just got it last night. I would like to see this

be a three-pronged attack. While most of the references in this Act

are to terrorists, it should be terrorists, drug traffickers and corrupt dictators. There is a nexus in all of this. Even as we talk

about the terrorists and the Taliban, I don’t know at this time how

much drug trafficking plays a role in this. It appears that the

Taliban is only going to be able to finance anything, even war,

through its drug trafficking, and it appears that that is on the rise

in Afghanistan. So I would like to see us talk about terrorists, drug

traffickers and corrupt dictators in all that we do.

Number two, are you willing to shut down big banks right here

at home who are found to be laundering terrorist money, along

with—and I would like to see in that also drug money and money

that is deposited in our banks by bloody dictators. Are you willing

to shut down the big boys?

Secretary O’NEILL. If I believe that we find evidence that big

banks or small banks or medium-size banks are aiding and abetting terrorists, you bet my recommendation to the President will be

that we shut them down tomorrow morning.

Ms. WATERS. Thank you.

Mr. Secretary, also, one of the biggest banks in this country was

under investigation for laundering drug money at the same time

they were under investigation they were purchasing small banks in

Latin America that had strong representations for laundering drug

money. Can you think of, or will you think about, as we should

think about, ways by which we can discontinue the practice of our

banks buying banks that have strong representations for laundering money, because they end up using it as an excuse. ‘‘It is not

the bank’s policy,’’ they will say, ‘‘but some individual in the bank

who is misusing his or her power like a private banker,’’ and so

forth. But they knew when they bought that bank that that is what

they had the reputation for doing, and the same employees are in

the bank. Are you willing to deal with that issue?

Secretary O’NEILL. Not on the basis that you suggest. I don’t

think that—and this is a question of protecting our freedoms as we

work the subject diligently. I don’t think that we should act on the

basis of so-called reputational opinions. I think we should operate

on the basis of facts. And if we can demonstrate through intelligence and investigation that institutions deserve, as you say, the

reputation that they have, then I am for stopping their activity,

interdicting their activity, taking their money away. But I am not

for operating on something as flimsy as reputation, because I am

wary of the dangers that are associated with attacking individuals

or institutions on the basis of reputation.

Ms. WATERS. I am not thinking about reputation in the case of

Citibank. They bought a bank called Confia. It was under invesVerDate 11-MAY-2000 13:54 Apr 29, 2002 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 75656.TXT HBANK1 PsN: HBANK1
15

tigation by our own DEA agents, and they covered and they documented that it was involved in laundering money, and they bought

the bank anyway.

Finally, can you give me an update or have someone give me an

update if the statute of limitations has not run on the investigation

of the Salinas money that was deposited in Citibank, assigned a

private banker who purchased all of the assets for Salinas through

the private banking situation, just as in our book today we find

that one of our U.S. bankers helped to—testimony demonstrated

how a U.S. banker was used by bin Laden to send money from the

Shamal Bank to a bin Laden associate in Texas using a corresponding account. Essam Al Ridi, who worked for bin Laden, testified that he received $250,000 wire-transferred at his bank in

Texas that was sent by the Shamal Bank, which he then used to

purchase a plane for bin Laden, which he later delivered himself

to bin Laden.

I want to tell you again, let me just reiterate, we have got to

clean up our act. Our banks have got to be willing to stop taking

money from every bloody dictator, terrorist-associated persons and

drug traffickers. Until we get tough on them, other countries are

not going to believe us.

Chairman OXLEY. The gentlelady’s time has expired.

Mr. Secretary, again, we appreciate your testimony today, and

your appearance really sent a strong signal of the Administration’s

intense desire to work on a money laundering bill, and we most appreciate it. We understand your time constraints to go over to the

other body. We appreciate your testimony, and we look forward

also to your excellent colleague, Mr. Gurule ́, who will testify on the

next panel. Thank you very much.

Secretary O’NEILL. Mr. Chairman, Members of the committee,

thank you all very much.

Chairman OXLEY. We are pleased to have our second panel, and

let me introduce the panel as they are taking their seats. The

aforementioned, the Honorable Jimmy Gurule ́, Under Secretary for

Enforcement, the Department of the Treasury; Mary Lee Warren,

Deputy Assistant Attorney General, the Criminal Division; Mr.

Dennis Lormel, Chief, Financial Crimes Section, from the Criminal

Investigations Division of the FBI.

Gentlemen and lady, we appreciate your appearance today before

the committee, and Mr. Gurule ́, we will begin with you.

STATEMENT OF HON. JIMMY GURULE ́ , UNDER SECRETARY

(ENFORCEMENT), DEPARTMENT OF THE TREASURY

Mr. GURULE ́. Chairman Oxley, Chairman LaFalce and other distinguished Members of the House Committee on Financial Services, permit me to begin by thanking you for inviting me to testify

before the committee on the Administration’s policies and proposals

for dealing with the threats posed to the United States and the

global financial systems by international terrorists and terrorist

groups. It is an honor to meet with you this morning as we assess

the Treasury Department’s strategy to cut off the financial lifeblood

of the individuals and organizations responsible for the heinous,

cowardly acts of September 11.

16

Insofar as possible, my testimony today is structured along the

lines requested by you, Mr. Chairman, in your September 27 letter

to Secretary O’Neill inviting him to testify. On September 24,

President Bush stated, and I quote: ‘‘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.’’ It is that last statement by the President that has been the mandate for the Department of the Treasury, starving terrorists of

funding. The strategy that we can employ to accomplish that goal

is a multistep process. It includes the following: The Department

of the Treasury is intensely involved in investigating and identifying targets; second, identifying assets for potential blocking or

seizure; third, identifying methodologies, systems, techniques used

to move funds for operational support of these terrorist organizations; fourth, the sharing of information with appropriate law enforcement personnel, specifically the FBI and Department of Justice officials; and lastly, application of an array of authorities, regulatory tools and law enforcement initiatives to deprive terrorists of

access to their funds within the United States.

With respect to the first question that you have asked the Department of the Treasury to address today, the financial networks

and operations of terrorist groups, let me say the following: The

schemes used by these terrorist organizations to move money that

underwrites these terrorist activities are challenging and complex,

to say the least. Make no mistake about it. It is very complex, varied schemes that are used, and they defy easy definition. So I don’t

want to create any unreasonable expectations with respect to the

ease in identifying these systems of operation.

Certainly, we know from our investigation that in some instances

these organizations use charitable organizations that on the one

hand are involved in raising funds for humanitarian and legitimate

activities, but at the same time are involved in raising funds that

are used to underwrite terrorist activities. They use front companies, businesses, banks, and underground money transfer systems

such as the ‘‘hawala’’ system, which we are actively investigating.

And, of course, they attempt to smuggle bulk cash in and out of the

country to support their activities.

And so our strategy with respect to undermining these financial

networks must be multilayered, must attempt to address and confront these diverse and varied schemes. There isn’t a kind of single,

one-fits-all type of strategy that we can implement if we intend to

be successful in dismantling these operations.

What are the tools that we are currently using to dismantle

these financial networks? Secretary O’Neill spoke briefly about

IEEPA, the International Emergency Economic Powers Act. This is

the principal tool that is being used to stop terrorism financing.

President Bush issued Executive Order 13224 on September 24 declaring a national emergency under IEEPA with respect to acts of

terrorism and threats of terrorism committed by foreign terrorists

against the United States. This Executive Order is important for

a number of reasons. First, it expands the coverage of existing Executive Orders from terrorism in the Middle East to global terVerDate 11-MAY-2000 13:54 Apr 29, 2002 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 75656.TXT HBANK1 PsN: HBANK1
17

rorism. Further, it expands the targeted groups to include those

who provide financial or other support or services to terrorist

groups or persons associated with terrorist groups. So it is much

broader in its scope and coverage.

It further makes clear our ability to block U.S. assets and deny

access to the U.S. financial markets to foreign institutions that

refuse to assist the United States in tracking and freezing terrorist

assets abroad.

With respect to this Executive Order, we have put in place the

means to carry out the goals of the Executive Order. The vehicle

that is being used for this purpose is the Foreign Terrorist Asset

Tracking Center that is being administered by the Office of Foreign

Assets Control.

Its goal is to identify the source of funding for terrorist organizations and to cut off the cash flow to these groups. It has been in

operation, as you know, a short period of time. However, I do believe that the progress that we are making with respect to the

tracking center is substantial, and the early news is certainly encouraging, and we are very optimistic about with respect to the future effectiveness and success that is going to be realized by use

of the Foreign Terrorist Asset Tracking Center.

As the Secretary stated, its value is multifold. It brings together

and accesses multiple databases, law enforcement databases, intelligence community databases, public source information, and the

Bank Secrecy Act databases, which include currency transaction report information and suspicious activity report information. So we

are pulling together, coordinating the utilization of these important

bases of information and doing so in a coordinated fashion with the

law enforcement community and the intelligence community.

One additional tool that we are using in this war against these

financial terrorist networks is the Bank Secrecy Act. As you know,

the Bank Secrecy Act is administered by the Financial Crimes Enforcement Network, or FinCEN. The Bank Secrecy Act permits us

with a database—the data that is collected via the Bank Secrecy

Act permits us to develop linkages between individuals and particular banks and particular bank accounts with respect to specific

transactions. It gives us a much clearer picture of who is involved

in the financial network. And, of course, we are sharing the information that we are learning through FinCEN with the Federal Bureau of Investigation and Department of Justice prosecutors and officials. So it is one other important tool that is available to us.

At the same time, Treasury enforcement bureaus are actively engaged in investigating the terrorist acts of September 11th, including the United States Customs Service, which has extensive expertise in the area of anti-money-laundering; IRS-C.I., which, again,

has extensive knowledge and expertise with respect to investigating complex money laundering schemes, following the money,

following the paper. We are working closely with IRS and the Secret Service. So we have a strong intra-agency cooperative effort.

And again, these agencies, Treasury bureaus are working closely

with the Department of Justice and the Bureau.

What additional legislation is needed? Well, let me address that

in general terms initially, and I am happy to respond in a more

specific way during the question-and-answer session. There are

18

current laws on the books that make it difficult for law enforcement to do its job with respect to investigating these financial networks. For example, there are some provisions that permit access

to relevant data by Department of Justice officials, but prohibit or

deny access to the same information by the Department of the

Treasury law enforcement officials. And it seems to me that if the

evidence or the information is relevant for criminal justice law enforcement purposes, it should be accessible at the same time by

FinCEN, by the Office of Foreign Assets Control, and by the Foreign Terrorist Asset Tracking Center.

Currently, laws on the books do not permit the sharing of that

information by Treasury bureaus. At the same time, there is information that Treasury may access, but is prohibited from sharing

with the intelligence community. So we can share it internally

within Treasury, but we are prohibited from sharing it with the intelligence community. And, again, I think these are obstacles and

hurdles that make it difficult to do the job that we need to do in

an expeditious and efficient way.

And the Secretary commented on IEEPA and the importance of

being able to defend, let’s say, a blocking action in court by being

able to submit in camera, ex parte to a judge, the classified information that was used to support a blocking order. If we don’t have

that ability, it really places the tracking center in a quandary, if

you will, because they are having to decide whether or not to block

accounts based upon classified information. And if the fear is that

we may have to disclose this classified information, then the question is perhaps we shouldn’t block the account. Or if we block the

account, maybe we should block it on information other than classified information. And so the underlying evidentiary basis for the

blocking is not as strong as it otherwise would be. Or if we block

the account, we may find ourselves in a situation at court where

the blocking order is being challenged where—because it is classified information, and if we are ordered to disclose it, we may then

have to make a decision to withdraw the blocking order, because

we can’t disclose the classified information in open court.

So, we certainly would welcome your support with respect to

amendments to the IEEPA legislation to fix this problem.

Lastly, let me just comment briefly on the extent of international

cooperation. There isn’t much that I can add to what the Secretary

stated in his statement. The cooperation has been—first of all, the

activity has been aggressive, and it has been on multiple fronts.

The effort has first and foremost been one of seeking cooperation

with our allies to block accounts that we believe are linked to terrorist activities, and the response has been quite positive.

With respect to the Financial Action Task Force, we are undertaking efforts to ensure that banks that maintain accounts that are

linked to terrorist organizations, that that is prohibited conduct

under the 40 recommendations of FATF, and that may serve as a

basis to have such a country listed on the list of noncooperating

countries and territories.

These are just a few of the things that we are undertaking at

this time. And again, thank you for the invitation. I am happy to

answer any questions that you have at the appropriate time.

Thanks very much.

19

[The prepared statement of Hon. Jimmy Gurule ́ can be found on

page 121 in the appendix.]

Chairman OXLEY. I thank you.

Our next witness, Mary Lee Warren from the Justice Department, speaking for Michael Chertoff.

STATEMENT OF HON. MICHAEL CHERTOFF, ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, DELIVERED BY

MARY LEE WARREN, DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, DEPARTMENT OF JUSTICE

Ms. WARREN. Thank you, Mr. Chairman, and I appreciate the opportunity to appear today before this distinguished committee to

discuss the Administration’s strategy to attack the financial lifeblood of these individuals and organizations responsible for the

September 11th attack. Mr. Chertoff, the Assistant Attorney General for the Criminal Division, regrets not being here today, but the

White House has tasked him with other anti-terrorism matters

today.

Let me report for my part that we are making substantial

progress toward unraveling the network that provided the financial

support for the attacks of September 11th. Unfortunately, our work

is made much more difficult, because many of our existing money

laundering laws are out of date. As this committee well knows,

those laws that were originally enacted in 1986 sought to address

what was then a domestic problem of money laundering. It is now

an international, global problem of money moving across borders,

being transferred electronically and smuggled from time to time.

The seriousness of this problem has been repeatedly underscored

in the days since the attack. Press reports have indicated that

some of the money was drawn from other crimes, that cash was

smuggled, and that money moved electronically.

The terrorists, and certainly other international organized criminals, are fully aware that the United States, among other countries, is ill-equipped to permit the international cooperation necessary to restrain and forfeit the funds as they move around the

globe. We need to modernize our money laundering laws to be able

to respond to today’s threats of terrorism as well as the international crime problem today.

Our present laws are simply inadequate to deal with these, or

with the variety of new methods that our criminals are now using

to move money across borders, of moving money as proceeds of

crimes they committed abroad into the United States, and money

that is the profits of crimes here moved out of our country. To meet

this challenge we must do all we can to prevent foreign criminals,

first of all, from using our banking system to hide their dirty

money; and second, we must ensure that criminals who commit

crimes here and send their money abroad will also be subject to the

confiscation and prosecutions necessary.

Our Federal courts must be able to enforce foreign judgments of

forfeiture. When crimes have been found and forfeiture ordered by

a foreign court, we are able to enforce those judgments if it is a

drug case, but not for any other crime, including terrorism, today.

Such enforcement is in the broad interest of international justice,

but it is also in our own justice interest. Foreign courts will be less

20

likely to work with us and cooperate on enforcement of our judgments if we cannot provide the same reciprocal authority.

In addition, we must take steps to crack down on the ease with

which foreign criminals use correspondent accounts of foreign

banks maintained here in U.S. banks to hide the profits of their

crimes. We must prevent fugitives from hiding behind a corporate

veil or ‘‘front’’ from challenging those forfeitures. They can’t do it

in their own right while they are on the run. They shouldn’t be

able to do it behind a corporate front.

We also have to take new steps to address the most recent methods that money launderers have employed to hide the proceeds of

their domestic crimes by moving that money abroad. The success

that we have had in enforcing the Bank Secrecy Act has led criminals to deal increasingly in cash. Hoards of cash are routinely

moved across borders, and couriers move that cash interstate. They

conceal it in many different ways and move through many types of

transportation. It should be a violation of Federal law for a person

to transport such currency knowing that it is derived from crime

or that it is intended to be used for an unlawful purpose. Similarly,

it should be a crime to smuggle cash across borders to avoid the

reporting requirements that we have.

The Money Laundering Act of 2001, which the Attorney General

sent to Congress on the 18th of this month, contains many of these

and numerous other provisions intended to update our money laundering laws to address today’s globalization of crime. We are gratified to see that many of these provisions are incorporated in the

House bill.

The inadequacy of our present laws has been brought into sharp

and sad relief by the horrific events of September 11th and the ensuing reports of the means by which the terrorists financed their

crimes, but this is a problem that goes beyond terrorism in this era

of globalization. We must find ways to make our laws keep pace

with the methods employed by all those who would prey upon our

citizens. We look forward to working with this committee and your

colleagues in the House and those in the Senate in realizing our

shared commitment to an effective anti-money-laundering regime

in the United States.

Thank you very much. I look forward to your questions.

[The prepared statement of Hon. Michael Chertoff can be found

on page 131 in the appendix.]

Chairman OXLEY. Thank you, Ms. Warren.

Agent Lormel.

STATEMENT OF DENNIS M. LORMEL, CHIEF, FINANCIAL

CRIMES SECTION, CRIMINAL INVESTIGATIONS DIVISION,

FEDERAL BUREAU OF INVESTIGATION

Mr. LORMEL. Thank you, sir. On behalf of the FBI, I would like

to express my gratitude to the committee to afford us the opportunity to participate today. I have submitted a written statement

for the record which broadly addresses the issues your invitation

letter asked me to address.

The terrorist acts of September 11th were among the most horrific crimes ever committed. We in the FBI are deeply committed

to conducting a comprehensive investigation. Director Mueller has

21

committed the full resources of the FBI to this initiative. An important adjunct component of the investigation has been the formation

and inclusion of a multiagency financial review group. My colleagues here at the table have both referenced some of the initiatives, and we will get into a little more detail on that.

From the financial investigative standpoint, our mandate is to

conduct a collateral investigation consistent with the terrorism investigation, and certainly to rely on our friends in Treasury in accomplishing this. My oral comments will briefly touch on the specific questions you asked me to address.

First, the description of the financial networks and operations of

the terrorist groups involved in the September 11th attack. Mr.

Gurule ́ and Ms. Warren each made some references to them. I

don’t think it is appropriate to get into specifics; however, it is important to note there was a financial network and a support mechanism that supported the hijackers responsible for the September

11th attack. We are conducting, as I mentioned, an exhaustive and

comprehensive financial investigation in this regard, unlike anything we have done before. I applaud the committee for your efforts

and your initiative in addressing this issue and recognizing the importance of cutting off the lifeblood of financial support to the terrorist organizations.

Second, you asked about the FBI’s strategy for identifying and

taking action against those involved in financing the individuals

and the organizations involved in the terrorist attacks. Again, I

don’t think it is appropriate because of the ongoing nature of the

investigation to comment specifically on that, but I would like to

specifically emphasize that there is a partnership among the Federal law enforcement community including the Department of Justice and the Department of Treasury and coupled with the financial

services community, the financial institutions of America, and the

general businesses, the general business community itself. In fact,

personally I find it very heartening the response and the cooperative initiatives that we are receiving.

You asked about vulnerabilities and high-risk areas in the financial services sector. There are a number of those areas, and, again,

my colleagues have addressed those a little bit, but certainly the

areas of wire transfers, correspondent banking, money service businesses. You referenced the ‘‘hawala’’ system. Traditional fraud

schemes; certainly the use of false identification, credit card fraud,

insurance fraud and traditional fraud schemes are what are prevalent here. We have seen that with the hijackers in this case.

As an aside, I would also like to address a vulnerable area which

is internet gambling. The internet gambling and online capabilities

have become a haven for money laundering activities. We believe

there is a huge potential for offshore sites being utilized to launder

money, and there are examples of pending cases, particularly in

our organized crime program, involving enterprises using these

types of services as conduits for money laundering.

You asked about any obstacles the FBI is encountering in its efforts to obtain the cooperation of U.S. financial institutions. I would

like to say that in my 25 years of experience, I have never seen

the level of cooperation and support toward law enforcement that

we are encountering in this particular case. The responsiveness of

22

the financial industry, financial services sector and the entire business community has been most heartening and symbolic of the

spirit of patriotism that has galvanized the country.

You asked about the extent to which the current law provides

the necessary tools for the FBI and other law enforcement agencies

to stop the financial operations of the terrorist groups. Again, my

colleagues here at the table have addressed those issues, and I will

certainly defer to their comments. I have articulated in my written

statement that the FBI strongly supports the Money Laundering

Act of 2001, which the Justice Department submitted to Congress.

We are encouraged by what we have seen in your write-up, sir.

And we concur with Ms. Warren’s testimony. Enactment of these

proposals would greatly assist our efforts to fight terrorism as well

as a wide variety of financial crimes.

If I may just make one anecdotal comment. Mr. Gurule ́ commented about the machinations and some of the prohibitions that

we deal with in dealing with sharing of information. In our financial review group, FinCEN is an active partner, yet we have some

problems that we are trying to overcome in sharing information

and taking full advantage of the capabilities and databases that

FinCEN offers us, and that would certainly be an area we would

like to see pursued.

You asked about the degree to which the FBI, FinCEN, Customs,

DEA and other law enforcement agencies are working collaboratively to end terrorist funding. In conjunction with the Assistant

Attorney General Mr. Chertoff and his staff, to include Ms. Warren, the Financial Crimes Section of the FBI recognized the importance of establishing a financial review group to participate in the

immediate criminal and terrorist investigation as well to establish

a template for future terrorist and significant criminal enterprise

investigations that certainly we have to coordinate with the Department of the Treasury.

In order to succeed, the financial review group will require the

full participation of the Federal law enforcement community. Secret Service, the Internal Revenue Service, the Customs Department, the Postal Inspection Service, FinCEN, the CIA, and the National Drug Intelligence Center are full partners in our financial

review group, kind of an ad hoc task force if you would. We have

reached out to the entire Inspector General community and have

gotten their pledge of support, and they are reviewing their databases for any type of linkage and nexus to the terrorist groups.

It should be noted that there are myriad agencies in addition to

the agencies I have mentioned here that participate in the terrorist

side of the investigation. This is a very unique case for the FBI because it is first time, I believe, that we have a fully integrated financial component in a terrorist investigation.

You asked about the nature and extent of international collaboration on law enforcement. Again, based on my experience, the full

international coordination and cooperation is unprecedented. The

worldwide law enforcement community has rallied to support our

investigative efforts.

In conclusion, cutting off the financial lifeblood of the individuals

and organizations responsible for the September 11th acts of terrorism is a vital step in dismantling the organization and preVerDate 11-MAY-2000 13:54 Apr 29, 2002 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 75656.TXT HBANK1 PsN: HBANK1
23

venting future terrorist attacks. With the assistance of Congress,

the combined resources of the Federal law enforcement community

and law-abiding people throughout the world, we are confident we

can succeed in this challenging mission.

With that, sir, we are all available for questions.

[The prepared statement of Dennis M. Lormel can be found on

page 140 in the appendix.]

Chairman OXLEY. Thank you, Agent Lormel, and thanks to all of

our witnesses.

The Chair now recognizes the Vice Chairlady of the full committee, Mrs. Roukema.

Mrs. ROUKEMA. I thank the Chairman.

I have been listening very carefully here, and I want you to know

about my own background on this subject not only with bulk cash

smuggling, but the McCollum-Roukema bill of 2 or 3 years ago,

Congressman McCollum, formerly a Member of this panel as well

as a major senior representative of the judiciary panel probably.

And that bill went noplace, but it is my understanding from the Attorney General that their proposal and the proposal that I hope we

are going to be marking up hopefully next week here in this committee and the one that is reflected in the Senate is 90 percent of

what we were doing at that time.

Now, what does that have to do with our hearing here today? I

was more than a little disappointed that Secretary O’Neill had to

leave before we were able to ask him with more specificity what

he would be recommending. I would like to know a little bit more

from this panel with specificity what we should be doing to get corrective legislation.

I was concerned that, Mr. Gurule ́—I am sorry, Mr. Gurule ́, people mispronounce my name all the time, too—but, Mr. O’Neill implied that we have the legal authority to close some of these money

launderers down tomorrow. I don’t believe that. I don’t believe that

that is possible. But I wonder if Mr. Gurule ́ would please help us,

when you say the Bank Secrecy Act permits—you made it sound

as though that is adequate. I don’t believe that is adequate, and

I think we need additional legislation. And you did indicate that

Treasury, law enforcement, the current law restricts Treasury and

law enforcement cooperation. You did indicate that.

Now, are you familiar with not only the bulk cash smuggling portion of our legislation, which I am forcefully advancing, but the

more comprehensive proposal that we and the Senate hope to get

passed? Could you please give us your assessment of that legislation not only in terms of bulk cash smuggling, but also in terms

of how we are going to facilitate information gathering and the cooperation as was already stated about the correspondent banking

and wire transfers that I believe the FBI representative here today

referenced? Could you give us your help on that, please?

Mr. GURULE ́. Certainly. Since taking office as Under Secretary

for Enforcement, I have identified money laundering as the top priority for the enforcement office at the Treasury. The first task upon

becoming Under Secretary was the development and publication of

the 2001 National Money Laundering Strategy, and that was released just a few weeks ago. It was released in September, and it

24

sets forth a very comprehensive strategy with respect to antimoney-laundering efforts.

With respect to legislation specifically, I have had an opportunity

to review the bill that has been prepared by the Department of

Justice, and I think that the provisions that are contained therein

are important provisions, necessary provisions in terms of strengthening our current anti-money-laundering laws.

So, on one hand, with respect to new legislation, again, the provisions articulated there are ones that we view quite favorably. In

addition, as the Secretary stated, we have had an opportunity to

review the Kerry bill or the House version that, of course, has been

submitted sponsored by Congressman LaFalce, and we believe that

the authority, the discretionary authority, that is set forth in that

bill with respect to the Secretary of the Treasury being able to impose special measures where there is a finding of a primary money

laundering concern is important. It is valuable.

The one caution, the one objection that we have raised with respect to that is the need for a due process provision, which I believe, if I understand Congressman LaFalce, he supports as well.

We have been working with the staff of Senator Sarbanes, who is

the Chairman of the Banking Committee, the staff of Senator

Gramm, who is the Ranking Member. We have been working cooperatively there in an effort to craft what that due process provision

should look like and what process should be due under the circumstances that are set forth therein. So there, again, is another

specific example of where I think we can support legislative initiatives that are currently being undertaken.

Chairman OXLEY. The gentlelady’s time has expired.

The gentleman from New York, Mr. LaFalce.

Mr. LAFALCE. Thank you very much.

Mr. Gurule ́, I thank you for your endorsement of the bill that I

have introduced so long as we can come up with some due process

provisions. I do want to caution you, however, that the same bill

was held up in the Senate last year by one individual, the former

Chairman of the Senate Banking Committee. I caution you that it

is possible to come in with due process provisions that will choke

the effectiveness of the bill. And so I would encourage your staff

to work with my staff in coming up with some reasonable due process provisions.

Next point: Your office is extremely important. It is responsible

for money laundering, but it is also responsible for the Customs

Bureau. And as a northern border Congressman, I have the following questions. First of all, do we know how many of the 19 or

so hijackers who were killed may have come in from Canada, if at

all, if any?

Number two: Do we know if any came in illegally as opposed to

legally from wherever they came?

And number three: There has been a gross inadequacy over the

years in the number of Customs and Immigration personnel on the

northern border. We have increased the amount of traffic exponentially, and we have fewer personnel. Second, the Customs Department has had on the books for about a decade what is known as

a proposal for ACE, an automated commercial environment, that

would cost in excess of a billion dollars, but we are woefully behind

25

the times in implementing that. Is there any way that we can

make a giant leap forward both with respect to numbers of personnel and to an automated commercial environment that would:

A, enhance our security and: B, facilitate the flow of traffic?

Mr. GURULE ́. I think that was four questions, so let me see how

I can respond to them and take them in order.

Let me first comment that I am pleased to announce that the

U.S. Customs Service has a new Commissioner as of last week.

Robert Bonner was sworn in as the new head of the Customs Service. Mr. Bonner is someone that I worked closely with when he was

a U.S. attorney for the U.S. Attorney’s Office in Los Angeles and

I was a Federal prosecutor heading up the drug section, deputy

chief there.

The issues that you raised with respect to ACE, the issue that

you raised with respect to the inadequacy of Customs inspectors at

the northern border are issues that Commissioner Bonner and I

are addressing. Clearly, both of those are important, and I agree

with you. I think the numbers in terms——

Mr. LAFALCE. There is $40 billion that we have appropriated, a

significant portion of which can be used in the absolute discretion

of the President. Is your office putting in for a significant portion

of that for more personnel and the most expeditious of ACE that

is possible?

Mr. GURULE ́. With respect to additional Customs Service inspectors, yes. They are being addressed, and there will be and there is

a request in there for additional inspectors.

With respect to the ACE program, the Secretary has spoken on

that as well. We are going to do everything that we can to ensure

that it is implemented. We understand and appreciate the importance of it.

Mr. LAFALCE. I want you to come back to me with the—when

ACE was first suggested, how much it would cost in toto, what the

implementation plans are for it right now, and what the most ambitious implementation plan for it could be if you had all the financial resources you need; second, the number of additional personnel

that you have requested of the Administration for the northern border.

Now, what about individuals coming in from Canada? Have we

identified any as having come in from Canada at all?

Mr. GURULE ́. I am not aware of any.

Mr. LAFALCE. Of those who have come in, the 19 hijackers, do

we know if any have come in illegally, or did they all come in quite

legally, or do we know that?

Mr. GURULE ́. Perhaps that question may be better addressed

with Mary Lee Warren.

Mr. LAFALCE. Mary Lee, your answer.

Ms. WARREN. The best that comes to my recollection at the moment, they came in legally, but then overstayed their visas or went

beyond the authority of their visa.

Mr. LAFALCE. They all came in legally. So it wasn’t a question

of a deficiency of a border question to your present knowledge?

Ms. WARREN. At the moment not to my knowledge, but I remind

you that Ressam, who came in, who was captured at the time of

the Millennium, came across the Canadian border.

26

Mr. LAFALCE. I am well aware of that. I am talking about these

19.

Mr. LORMEL. If I may follow up. We don’t believe that any of

them came in through Canada. They may have all had legitimate

identification, but some of it may have been counterfeit. That is a

possibility and certainly is something we are looking at.

Chairman OXLEY. The gentleman from Nebraska, Mr. Bereuter.

Mr. BEREUTER. Thank you, Mr. Chairman. I would like to use my

time for comments directed to the panel or the people they work

for.

First, Mr. Lormel, I want to tell you that one of your highest priorities is to protect the American citizens here and abroad against

terrorism. It is an important but lower priority to bring these terrorists to courts. You must share information with the intelligence

agencies and with the other domestic agencies and not put your

first priority on simply protecting information so that you can prosecute terrorists.

I hope that change in attitude can affect the FBI. I know Mr.

Mueller had only been there 6 days when this terrorist attack happened.

I, too, am disappointed that Secretary O’Neill is not here, but I

understand perfectly. Just want to say if you will take this back

to him, Mr. Gurule ́, that, first of all, I appreciate his statement

that you are going to use every tool at your disposal, and that the

President has given you the authority under an EPA to go after the

U.S. assets of foreign banks that refuse to freeze terrorist assets

abroad.

I have an interesting nexus between my service on this committee and service on the Intelligence Committee where I am doing

my second tour as Vice Chairman, and I would like to say that we

have notoriously had insufficient cooperation between the law enforcement agencies and the intelligence agencies in this country. It

has been going on for decades. That has to be corrected.

I wrote a letter to Secretary O’Neill on August 2nd to clarify the

position of Treasury with respect to the Financial Actions Task

Force, which is an international effort primarily focused on OECD,

and he clarified that indeed the Administration is very supportive

of identifying the noncooperative countries and territories. I hope

you will keep the pressure on those countries and territories. We

have to have their cooperation.

With respect to Treasury’s Office of Foreign Assets Control, my

experience with them gives me only minimum at the most—minimum confidence that they are the entity that should be placed

with some responsibility for pursuing this important task for

Treasury. I hope that the Secretary will look, Mr. Gurule ́, at Section 116 in our draft legislation which relates to the Financial

Crime Enforcement Network. I think Section 116 has to go forward, and I hope that Treasury will support it. I am not at all enthused, and I think many people on the staff and Members here

in this committee are not enthused, about the organizational structure that you are coming up with.

Finally, I want to say that within our Government we have information about a relatively small number of financial managers and

lawyers and law firms in the world, primarily in Europe, but also

27

in the United States, that are facilitating the movement of massive

amounts of money for drug trafficking, for international criminal

syndicates and for terrorist organizations, and we need to come

down hard on those. The Treasury bureaucracy, I hope, will be

fully behind an effort to come down on those groups. Among the

few Americans are people who actually live and work in Manhattan. And if they survive a terrorist attack, I hope they never have

a peaceful night of sleep in the future.

So you have got your work cut out for you, and I think you can

count on the Congress to give you the tools. I only regret that you

are coming to us—not you personally, but Treasury is coming us

to and Justice is coming to us so late in the game. We all have

some catching up to do. We all have some responsibilities. But I

hope you will understand that we want to work cooperatively. We

will work cooperatively to try to close the loopholes that do exist.

And, finally, I would say to all of you as key representatives for

our Government, I hope you are going to investigate whether you

are getting the degree of cooperation you need from the U.S. Postal

Service on this matter as well, because I understand there are

some real problems there.

Thank you, Mr. Chairman.

Mr. LORMEL. May I make a couple of observations? First, a couple of comments that you made at the outset about the investigation and the interagency cooperation, your points are well taken.

I think that the playing field has changed forever, and I believe

firmly that there is a growing consensus and a sharing as allowable in terms of the investigation. Mr. Mueller has made it his top

priority to look at future activities, and in that regard that is the

primary investigative focus right now.

In terms of Postal, from our involvement with Postal, they have

been nothing but absolutely cooperative and a full partner. In fact,

we are relying heavily on some of their databases.

Chairman OXLEY. The gentlelady from California, Ms. Waters.

Ms. WATERS. Yes. I would like to ask any of the members of the

panel who would like to answer, what do you know about private

banking and concentration accounts, and do you think there are

loopholes that we can close?

Mr. GURULE ́. Well, in terms of loopholes that we can close, my

view is that with respect to criminal investigations involving

money laundering, that everything should be on the table. I mean,

if there is any vehicle that is being used to conceal criminal proceeds to make it appear that the funds were generated from legitimate activity, we need to follow the money trail, wherever it leads

us. If it leads us to a concentration account, then so be it. If it leads

us to a bank, and if the bank officials are knowingly

complicitous——

Ms. WATERS. Yes, I know. Reclaiming my time. Are you in favor

of closing down concentration accounts as a method of operation

where you lose the identity of the persons who have money in those

accounts, usually transferred or operated or handled by private

bankers?

Mr. GURULE ́. Not based on that alone. What I would want to

know is whether or not these accounts—just because they create— or perhaps there is a possibility of misuse, I don’t believe that.

28

Ms. WATERS. Do you know what a concentration account is?

Mr. GURULE ́. Yes.

Ms. WATERS. Would you describe it for us?

Mr. GURULE ́. I think you described it quite well in terms of different sources of funds that are being directed into a particular account intermingled, commingled, if you will, and then the monies

are being distributed into separate entities or separate accounts.

Ms. WATERS. Does the money lose its identity?

Mr. GURULE ́. Perhaps.

Ms. WATERS. Do you think that is a problem?

Mr. GURULE ́. It might be.

Ms. WATERS. If you tried to freeze assets and follow the money

line for traffic evidence and money launderers, do you think it is

important to be able to follow the money? If you lose the identity

of the account, doesn’t that cause you some problems?

Mr. GURULE ́. It does. It complicates law enforcement’s mission.

Ms. WATERS. Don’t you want to do something about that?

Mr. GURULE ́. In a particular case I certainly would. If there was

evidence that that system was being used to further criminal activity, absolutely.

Ms. WATERS. Well, you need to know that there are some bankers who are coming forward and saying, yes, it is bad, and they are

going to voluntarily stop using concentration accounts. Will you

please take a look at that?

Second, would you describe to us what is expected of private

bankers in relationship to know your customer? In the case of Raul

Salinas, there was not even a card on file to tell us where he lived,

where he got his money from. He had a private banker that was

assigned to him who purchased cars and homes, and so forth, and

so forth. Are private bankers required to follow know your customer rules, laws, and so forth? How do they escape that?

Mr. GURULE ́. You want me to comment on which of the many

questions that you asked?

Ms. WATERS. I wouldn’t have asked you if I didn’t want you to

comment. Please do your best.

Mr. GURULE ́. Know your customer certainly is important, and it

is certainly important with respect to aggressive and successful enforcement of money laundering.

FTAF, as you know, is a multilateral organization that the U.S.

Treasury and the Department of Justice are actively involved in.

We have assumed a strong leadership role with respect to FTAF.

One of the 40 recommendations is the know your customer recommendation. It is one that we support. It is a measurement by

which countries are measured in terms of their cooperation and

whether or not the banking systems have an aggressive banking

regulatory regime that is not vulnerable to money laundering.

Ms. WATERS. I yield back the balance of my time.

Chairman OXLEY. The gentlelady yields back.

The gentlelady from New York, Mrs. Kelly.

Mrs. KELLY. Thank you, Mr. Chairman. I just have a couple of

questions. One is about an article in the September 20th Wall

Street Journal, I have a copy of this, and I would like to enter it

into the record, Mr. Chairman. I would like unanimous consent to

do that.

29

Chairman OXLEY. Without objection.

[The information can be found on page 111 in the appendix.]

Mrs. KELLY. It talks about the bin Laden network, and it refers

to a money exchange called ‘‘hawala.’’ Hawala is something that

bothers me a great deal, because I don’t see how—given the nature

of the beast, how you are going to be able to address that with regard to drying up any money that is being moved. How would you

combat this? I am throwing this out to each of you. I have only 5

minutes, and I really want to ask another question as well as a follow-up, because in this article it talks about the bin Laden networking run on a shoestring. Other people say that bin Laden’s

network is extremely wealthy, that he has put a lot of money into

it, and there is lot of money there. I need a clarification on that

as well.

Could we start with you, Mr. Lormel?

Mr. LORMEL. Yes, ma’am. I am not familiar with the article,

number one. I will just speak from an investigation.

Mrs. KELLY. Are you familiar with ‘‘hawala’’?

Mr. LORMEL. Yes.

Mrs. KELLY. Have you any idea what we can do to try to stop

or reach into that to regulate it?

Mr. LORMEL. In terms of regulation no, ma’am, I would defer to

the Department of Justice. But in terms of investigation, certainly

we will do everything in terms of tracking back and exploiting all

of our databases and exploiting the expertise of all of our fellow

agencies in terms of tracking it back.

Mrs. KELLY. Mr. Gurule ́. Mr. GURULE ́. Hawala, as you stated, and accurately so, certainly

complicates the ability to follow the money, because based upon a

hawala system, money can be exchanged without the money ever

being transferred from a foreign country into the United States.

Mrs. KELLY. Therefore you have no record anywhere, and you

can’t go to a database and try to extract it?

Mr. GURULE ́. It depends. I am not sure, up to that the point. But

what if the request in the foreign country is for, let’s say, $25,000

to be transferred by a hawala dealer in the United States to someone that is associated with a terrorist organization, unless that

$25,000 is being kept in a shoe box in the broker’s business in the

United States, you are right, in that situation there would be no

money trail. But if the hawala dealer in the United States has to

go to a bank to withdraw $25,000 to make the payment in the

United States, certainly that would generate a CTR and might, in

addition, generate a suspicious activity report that would be submitted to FinCEN.

So, I am not convinced that we need to throw up our hands and

despair that there is no way that we can trace the money. I think

it makes it more complicated, you are absolutely right. It may

make it necessary for us to rely upon informants more than we

have with respect to these types of money laundering operations.

But it is a challenge. It certainly poses a challenge.

Mrs. KELLY. I am surprised that you would assume that someone

would have to go to a bank to withdraw something like $25,000.

Having been on this committee for a little while, we have had other

hearings that indicate there is a lot of cash that is lying around

30

in suitcases and so forth. There is no way to find that because

there is no record.

Mr. GURULE ́. I agree.

Mrs. KELLY. I would suggest that there be some thinking about

how we combat this. I also want to know if any of you can give me

any information about whether you think that the bin Laden network was actually run on a shoestring rather than having a great

deal of money pumped into it?

Mr. LORMEL. I think that is highly speculative. I believe that

there were clearly monies—and significant amounts of monies— coming directly to the 19 terrorists from the support mechanisms.

In some regard, they will be linked to Mr. bin Laden.

With regard to your concerns about the hawala accounts, we are

in the front end of our investigation. What we are seeing is a pattern of cash activity which I believe—— Mrs. KELLY. Flight school cost $20,000. They had to get that

money somewhere.

Mr. LORMEL. Yes. Right on the front end, ma’am, they wired over $100,000 in to Mr. Atta a year ago, and we are aware of that. And

we tracked that back to accounts in the UAE.

Mrs. KELLY. Just want to make one final statement. We know

that there is a problem with agencies sharing information, but if

you don’t trust each other to share information, how can we trust

you to protect us?

Mr. LORMEL. I don’t believe it is a matter of trust, ma’am. I think

that is what the heart of this hearing is about. It is the ability to

share information. I don’t believe for a second, and I represent the

financial section at headquarters with the Bureau, we have no

qualm about sharing information. We went out at the outset of this

investigation specifically to bring in our fellow agencies because we

need their expertise, and I don’t believe it is a matter of the sharing as much as the regulatory concerns as to what we can share.

Chairman OXLEY. The gentlelady’s time has expired.

Mr. Frank.

Mr. FRANK. On the point of sharing, and Mr. Gurule ́ mentioned

the constraints currently on the sharing information, the anti-terrorism part of the legislation does include, as you know, sections

that greatly increase the ability to share tax information, but it

does look to me like we have dealt with that. On that subject I

want to thank you, Mr. Gurule ́, and maybe stress there is one

thing you ought to share with the Justice Department, and that

was the very commendable concern you and Secretary O’Neill

showed for adding due process provisions to this kind of regulatory

legislation. Frankly, when some of us in the Judiciary Committee

held up the anti-terrorism bill for exactly that purpose, we had to

explain that to people. So I agree that providing due process provisions is a very important thing to do.

People should understand that is one of the things that was happening in the Judiciary Committee on anti-terrorism, because obviously we don’t think that due process is only important for people

with money and not for people without it. So we are putting it in

both places.

I want to return in my question to a point that the gentlemen

from Nebraska raised, and that is the question of the OECD apVerDate 11-MAY-2000 13:54 Apr 29, 2002 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 75656.TXT HBANK1 PsN: HBANK1
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proach. What bothered me, frankly, was earlier in July—I am

sorry, too, that with we could only get 45 minutes or 50 minutes

from the Secretary—he told Senator Levin’s committee that he was

not at this point in favor of sanctions to force compliance from

countries that were allowing total bank secrecy. And what particularly disturbed me was that was raised in a September 24th press

conference, and Ari Fleischer was asked about this whole question,

the OECD has been going after tax havens, the Administration

hasn’t shown support, is it changing, his answer, and his answer

troubles me. It is, ‘‘I think you should not confuse the two issues.

One deals with domestic laws and dealing with tax consequences

and tax dodgers or tax evasions. This deals with terrorism.’’ In fact, what we are talking about is total secrecy of financial assets, and that can be for purposes of tax evasion or drug money or

terrorism. So this separation, this notion that worrying about the

tax havens—and maybe we shouldn’t call them tax havens, we

should call them total bank secrecy entities—seeing that not related to terrorism is disturbing to me. I wonder if you would comment on that.

Mr. GURULE ́. First, make no mistake that the Department of the

Treasury and Secretary O’Neill are deeply committed to investigating and prosecuting tax fraud.

Mr. FRANK. Excuse me. We only have 5 minutes. You have got

to get specific. OECD, is, in fact, that notion of bank secrecy relative to terrorism or not?

Mr. GURULE ́. I believe that is certainly has the potential. With

respect to how to go about confronting the problem, I was going to

say that the Secretary has undertaken to engage with our foreign

counterparts information, and tax-sharing agreements so that we

have the information that is needed to aggressively prosecute

cases. He made that commitment to Senator Levin, and we are well

on our way.

Mr. FRANK. But he also said to Senator Levin that at this point

he did not want to threaten sanctions. I think that is a mistake.

The question is has there—we are not just talking about tax fraud.

That is what he said. We are talking about—Mr. Gurule ́, you have

got to wait. We are not just talking about tax fraud. I asked you

about bank secrecy. You went back to tax fraud. I quote, for instance, Mr. Chertoff, who noted in Senator Levin’s committee, ‘‘We

are dealing not only with the issues of Americans who put money

in these banks, we are talking about foreign criminals who put

money in these banks and then move them into the United States.’’

In other words, this is not a tax haven issue only. Allowing this

total bank secrecy which the OECD was going after has to do with

exactly what we are talking about, leaving aside the tax issue. The

Secretary said, well, he didn’t want to threaten sanctions yet

against these countries that would not put an end to that. I want

to know what the status of that is.

Mr. GURULE ́. I don’t think that is—that is not what the Secretary

said. The Secretary said that he doesn’t want to go ahead and impose sanctions based upon a requirement of uniform tax rates; that

simply because there isn’t a uniform tax rate, that all——

Mr. FRANK. I am sorry, but that is not an accurate representation because we were not talking only about uniform tax rates. InVerDate 11-MAY-2000 13:54 Apr 29, 2002 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 75656.TXT HBANK1 PsN: HBANK1
32

deed that wasn’t specifically part of it. I read the testimony. The

Secretary seemed to be saying that he was not ready to threaten

sanctions for a period of time on the question of secrecy. I am not

now talking about taxes.

Secrecy helps tax evasion, but secrecy enables a lot of other

things. That is my problem with Ari Fleischer. He seems to, again,

equate the anti-bank secrecy thing to the tax evasion issue. So,

from the standpoint of bank secrecy, should we not be threatening

sanctions right away against these countries?

Mr. GURULE ́. We are against bank secrecy. I think our position

on that is clear. With respect to the role we played if FTAF, I think

it is further clear based upon the Secretary’s statements with respect to these tax information——

Mr. FRANK. Sanctions if they don’t comply. Has the time come to

threaten sanctions against countries that continue to maintain the

kind of secrecy that frustrates our efforts to find out where that

money is?

Mr. GURULE ́. It is a hypothetical. I would want to look at the

particular——

Mr. FRANK. It is not hypothetical. I am talking about the world

today. There are countries that refuse to sign those treaties that

still have bank secrecy. Not hypothetical. It is real. There are countries that still maintain that secrecy. Should we threaten them

with sanctions against their banking situations here if they don’t

immediately comply?

Mr. GURULE ́. FTAF may have to implement sanctions, countermeasures, and further list these countries that are not complying

on the list of noncooperating countries and territories. And the U.S.

has been at the forefront of that effort, as has the Department of

the Treasury.

Chairman OXLEY. The gentleman’s time has expired.

The gentleman from Iowa, Mr. Leach.

Mr. LEACH. Thank you, Mr. Chairman. I want to express my appreciation for the thoughtful legislation you have just proffered. I

would also like to express my appreciation for the comments of the

FBI present on two scores; one, the cooperation of U.S. financial institutions in this probe, and second, the notion that internet gambling has many difficulties, but one of them is that it is a money

laundering haven, and that is something that the committee has to

bear in mind.

I want to note that, as the committee Members know, last year

we passed legislation both in this area of money laundering as well

as on internet gambling. And at other levels of the Congress and

other parts of the Congress, this was pretty highly objected to, even

though it had strong votes from this committee, and objected to by

industry representatives in particular. And I think we all have to

recognize that there is a burden involved in implementing money

laundering and internet gambling kinds of approaches.

On the other hand, ironically, the people that opposed this legislative approach yesterday are those most in need of protection

today. And I stress this as strongly as I can, because if you look

at vulnerabilities in our society, this is obviously very significant.

But if you look at American institutions most vulnerable in the

world today, there are diplomatic outposts, and there are financial

33

services outposts, and it strikes me that for the financial industry

to continue, if they choose to, to object to approaches that do involve some extra burden on constraining terrorism and narco-trafficking, that not only weakens the fabric of our society, but puts

in jeopardy the very lives of the people most identified with democratic market-oriented kinds of values that are globalist in nature.

And so I just have a couple of questions, one to the Justice Department. You know, when it comes, for example, to internet gambling, we have the Wire Act and other prohibitions that might well

apply. But many of us have come to the conclusion that one of the

most effective tools to deal with internet gambling relate to prohibitions and financial instruments. And I understand that is the Justice Department’s position. Is that the case?

Ms. WARREN. That is correct. But beyond that, I mean, in principle we support the provision as written. There are a few suggestions we might make in subprovisions, but in principle we support

it.

Mr. LEACH. I appreciate that.

Second, as we look around the world—and Mr. Frank, I think,

was going at a point that I think many on this committee shared

his concern about the United States is always in a difficult position

if it acts alone in that there is a lot of international cooperation

that is needed, but also the United States is in a difficult position

if it doesn’t have model laws that can be looked at by other countries. And it strikes me that if we don’t enact that kind of legislation here at home, we are going to have a very hard time expecting

other countries to enact similar approaches in their lands.

And so, to some degree, when we deal with legislation, it is simply an expression of how it affects our sovereign laws. But by the

same token, as we deal with legislation that is often looked at as

models for our societies, and it puts the Treasury in particular, but

not alone, in a position of saying to other countries, ‘‘We have done

this, why don’t you follow a similar pattern?’’ Does that make sense

to you, representative from the——

Mr. GURULE ́. Well, it certainly does, and that is a position that

we have taken with respect to the Executive Order on blocking assets. I think it is important that this new Executive Order be

signed by the President that the Foreign Terrorist Asset Tracking

Center be up and operating in order to block assets. Having established that foundation, then we have much greater credibility when

we reach across to our allies and ask them to do the same with respect to blocking of assets in foreign bank accounts.

So, by analogy, certainly it holds true. We need to be the model.

We need to demonstrate strong leadership with respect to criminal

justice issues and enforcement of our laws.

Mr. LEACH. Thank you.

Ms. WARREN. If I could just add something to that, also. When

we are lagging behind, that sets a very poor example. One of those

instances is that we cannot enforce foreign forfeiture judgments,

but we ask other countries to do that for our judgments. They have

many foreign crimes as predicates to their money laundering act.

We have very few. We need to increase those to be the leader that

we need to be.

Chairman OXLEY. The gentleman’s time has expired.

34

The gentleman from Pennsylvania, Mr. Kanjorski.

Mr. KANJORSKI. Thank you very much, Mr. Chairman. A couple

of observations. Actually just one. One of the successes learned at

Treasury from the IRS is the award for performance. If I remember

reading somewhere, almost two-thirds of the successful prosecutions occur because either the accountants or the spouses become

the informant. Now, it would seem to me that if you are serious

about using that methodology with tax collection, why can’t you

create an informant’s reward for money laundering? An informant

would get to keep half the proceeds if he or she turns the perpetrator in. I don’t think you are going to be able to cover all the

cases of information you will get from bank employees or from cohorts of the smugglers themselves. Quite frankly, it may upset the

entire money laundering scheme in this country and abroad and

probably be quite rewarding. Why hasn’t someone thought about

that stimulus?

Mr. GURULE ́. Actually we do have that authority.

Mr. KANJORSKI. Well, it is good you have the authority. How

about implementing it?

Mr. GURULE ́. Well, absolutely. I don’t necessarily want to go into

specific cases with specific individuals other than to say that with

respect to some major Federal money laundering investigations,

those money laundering investigations were made possible, the success possible, based upon cooperating informants and cooperating

informants that were ultimately paid for their services.

Mr. KANJORSKI. Well, they may be paid, but that is on a one-byone or an ad hoc basis. Why don’t we make it a public policy in

the Treasury of the United States and the Justice Department that

if people come forward in the laundering of illegal money in this

country or externally, then they are going to get a 30 or 50 percent

reward. Let’s see what we can upset. There must be an awful lot

of people in the drug countries that would love to retire to Miami

Beach if they could stop the transfer of $100 million in drug

money. There must be an awful lot of people in Mexico or Colombia

that would like to do the same thing. I would also imagine that

some of the lawyers that were talked about in New York with their

level of ethics, they may just as easily turn on their clients instead

of getting fees to get rewards as being informants. So why don’t we

use that mechanism?

Mr. GURULE ́. I agree with you. I was a Federal and State prosecutor for 10 years and was deputy chief of the major narcotics section in Los Angeles, and we had to rely extensively on informants

to make these important cases.

Mr. KANJORSKI. Nest week, I am going to see if the Treasury announces they are going to pay informants, announce the amount,

and let it be publicly known. Come forth if you have any ideas.

The next thing I want to do is off the subject. We are talking

about what laws we can pass, what rules and regulations and simplicity. And I get to worry about implementation. I am not sure,

particularly at Treasury, that Congress is going to get all of the

laws we pass implemented. I will tell you why, and I would like

you to take the message back.

Besides money laundering and security, we have a problem with

the economy in the United States. I mean, Congress is trying to

35

put together fiscal programs, and one of the things that disturbed

me is we passed a fiscal program last year in the omnibus bill

called the New Markets Initiative, and the law said it had to be

implemented in 120 days, and that would have ended April 15.

Now, I know we had a change in Administration, but it is now

more than 150 days since the law was on its face to be implemented, and it is still not implemented. The New Markets Initiative is a major economic development tool and a fiscal tool to help

the economy. And if Treasury can’t implement these acts, I am not

certain any powers we give you will be able to be implemented.

Now we are going into a meeting this afternoon that I would like

to favorably report back that this program will be implemented. We

have already lost the first year of the billion dollars in credits

under the Initiative. We are into the second year, another a billionand-a-half. That is $2.5 billion in tax credits that are to be released, and we are thinking of doubling or tripling that amount to

help the economy. Mr. Gurule ́, can you tell me on behalf of Treasury when I can tell my colleagues that this is a worthwhile activity

for us to undertake because it will be done?

Mr. GURULE ́. With respect to the issues that you raise involving

domestic policy, I am happy certainly to take those concerns back

to the Under Secretary for Domestic Policy, Peter Fisher, and have

him prepare a more specific response, to your questions.

With respect to your general concerns about the Treasury’s ability to get the job done, make no mistake about it, we are going to

get the job done. We are going to get the job done with respect to

these terrorists and undermining and dismantling their financial

networks, seizing accounts, and convincing our foreign counterparts

to do the same. We are committed to that, and the job will get

done.

Mr. KANJORSKI. I am going to test you on that, on the fact of offering rewards publicly for money laundering, and see how fast

that gets out on the street.

Chairman OXLEY. The gentleman’s time has expired.

The gentlelady from New York, Mrs. Maloney.

Mrs. MALONEY. Thank you Mr. Chairman.

I would first like to thank all of the panelists and their agencies

and really the entire Administration for your extraordinary efforts

in New York in the wake of the attack, especially the FBI. Some

of my neighbors told me that the FBI agents saved their lives rushing them out of buildings, rushing them out of the vicinity before

the buildings fell, and I am aware of one agent that fell and died,

and I want to express our appreciation. I know I speak for many

New Yorkers for all that you have done to help us during this tremendously difficult time.

I have always been of the opinion that the country needs stricter

money laundering laws and enforcement. Whether it’s terrorism or

the drug war, cutting off the money that funds criminal activities

is sometimes the most effective way for the Government to stop unlawful acts. I would like to know if you have any proof if hawala

was involved in the September 11 attack, that medieval financing

system. Do you have any indication that that was involved?

Mr. LORMEL. No, ma’am, not at this juncture. Certainly there a

lot of questionable cash transactions that we are looking at and

36

questionable cash that we are looking at, but at this point we have

no direct correlation.

Mrs. MALONEY. But it seems from listening to your testimony

today that we are talking about all types of high-tech sharing of

information, sort of Star Wars technology. But what we are really

looking at is a Middle Age financing system that seems the prevalent way that they are moving their monies. The bank, the al

Shamal Bank, has correspondent accounts with European and

other non-U.S. banks, and what steps has the Administration

taken to identify these banks, and what steps have you taken to

prevent money from al Shamal banks from entering the U.S. banking system?

Mr. GURULE ́. Well, the Foreign Terrorist Asset Tracking Center

is the vehicle that is being used to identify monies, bank accounts

that are linked or associated with terrorists and terrorist organizations, and more specifically, we are taking advantage of and examining all relevant sources of intelligence, law enforcement intelligence, CIA intelligence information, classified information, Bank

Secrecy Act information, as well as open-source public records information. So we are looking at a multiple array of different

sources to make those determinations. We are doing it now. And

as the Secretary stated, in addition to the 27 individuals and entities that were listed a little over a week ago, we anticipate that in

the next couple of days that there will be others that will be added

to that list and a significant number of others and additional accounts being blocked with respect to this first group and this anticipated second group.

With respect to a particular bank and a particular one that you

mention, I would prefer not to comment publicly on anything that

specific.

Ms. WARREN. Could I just comment on correspondent banking

generally? We could do a lot better in law enforcement with some

additional tools, and one of those that we have suggested is that

if a foreign bank is going to maintain a correspondent account in

a U.S. bank, that they must also have a representative for acceptance of service of subpoenas here in the U.S. so that we don’t have

to try to find a bank that has no physical existence anywhere in

the world. If they are going to do that kind of business in a U.S.

bank, they need to have someone who will accept service of process

and can respond to our investigative inquiries.

Mrs. MALONEY. Sounds like a good idea to me. I would say there

is a great deal of bipartisan support and cooperation now during

this time of crisis, and really you should use all of your leverage

for increased funding or whatever tools you feel you need to get the

job done to track these people down.

Some of our allies and some of our friends in the international

community have told us that they will only support U.S. military

action in Afghanistan if we can prove that bin Laden is responsible

for the attacks. And could you comment, any of you who wish to

comment, on how existing laws have contributed to your efforts to

prove that the hijackers are tied to al Qaeda and the Osama bin

Laden network?

Ms. WARREN. Maybe if I could just——

37

Mrs. MALONEY. Specifically, how have you tied him to the hijackers?

Ms. WARREN. That I won’t be able to do, but I can tell you that

we do use the financial side to not only track the money, but also

to prove associations. The ways they work together, the people who

share accounts, draw money from another’s account, that it is as

good as evidence of a conspiracy and association as it is a financial

tracking system. So we use that kind of information, both ways. In

this particular case, I cannot comment.

Chairman OXLEY. The gentlelady’s time has expired.

The Chair recognizes the gentleman from Nebraska Mr. Bereuter.

Mr. BEREUTER. Mr. Chairman, I would ask unanimous consent

that a letter of August 2 to Secretary O’Neill and his response of

August 29 be made a part of the record and, incorporated by reference, the latest report of the Financial Action Task Force on

Money Laundering dated June 22, 2001.

Chairman OXLEY. Without objection.

[The information can be found on page 72 in the appendix.]

Chairman OXLEY. The gentleman from Texas, Mr. Gonzalez.

Mr. GONZALEZ. Thank you very much, Mr. Chairman. A couple

of questions and comments from the witnesses. You say there are

impediments to the sharing of the information. I have always just

been under the impression that once the appropriate law enforcement agency or department zeroes in on somebody and identifies

them as a suspect, then all sorts of doors would be open regardless

of the other agency or department that may be in possession of information as a result of the regulatory obligations. My understanding is what you are asking for now is not necessarily being

privy to that information once you have established that somebody

is a suspect, but rather more of a coordination between departments, agencies and so on, with all the information that they may

be gathering in the regulatory duty or responsibilities that would

not be privy to law enforcement agencies, for instance.

What I am saying is the FBI or the Department of Justice can’t

make certain requests of financial institutions for the sake of making the request for that kind of information and such. Treasury can

in the regulatory scheme of things, which is appropriate. So we

would be expanding that universe of individuals or parties that

would be privy to this information in the past; would we not? So

I suspect that you want this coordination so that you can have this

information-gathering facilitated to identify individuals in such

suspicious activities.

Now, what you are also saying is now we can’t have that without

some sort of due process consideration. I am not really sure what

we mean by due process today. I mean, it is always in the eye of

the beholder, and at the present time my question is I am not really sure about our vision being 20/20 under the circumstances. So

I am looking at potential abuses, misuse. What do you all see is

the downside, the potential abuse of what we are contemplating in

doing? Because we are going to do it because we have to do it, and

there has to be some sort of a downside, and no one has addressed

that. So I would want you all to tell me what you see is the potential abuses of opening up all of the information that different deVerDate 11-MAY-2000 13:54 Apr 29, 2002 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 75656.TXT HBANK1 PsN: HBANK1
38

partments might have that at one time you weren’t sharing for all

the obvious reasons.

The second question is if, in fact, we had moved forward with everything that you are asking, and had this been in place prior to

September 11, would it have prevented the occurrence, the criminal

acts of September 11? And I would like your views or whatever

your thoughts are on that.

Mr. GURULE ́. Let me respond first to your question with respect

to the legislative proposals that we are supporting or considering

or asking you to consider. It isn’t simply a question of coordinating.

I mean, coordination is certainly important here. But, for example,

with respect to Section 6103, the sharing of tax record information,

the Department of Justice, upon an application to a judge, to a

Federal judge, may obtain tax record information in furtherance of

a criminal investigation, but that information is limited to the Department of Justice attorneys; I mean, in terms of its sharing, cannot be shared outside of the Department of Justice attorneys in furtherance of that investigation.

So, if Treasury went to the Department of Justice and said, ‘‘Gee,

this information would be very helpful to the blocking efforts underway involving the Foreign Terrorist Asset Tracking Center,’’

DOJ would say, ‘‘We would like to help, but we can’t, because we

are prohibited under Section 6103 from sharing that information

because it is not in furtherance of our criminal investigation. It is

in furtherance of this blocking effort that you are involved in.’’ So

they can’t do it.

We could take a look at grand jury secrecy information as well

under Rule 6(c), what FinCEN is doing, or the use that FinCEN

would be making of grand jury information with respect to its use

for comparing and analyzing Bank Secrecy Act information, or the

use that would be made of that information with respect to the

Foreign Terrorist Asset Tracking Center would not necessarily be

part of the criminal investigation, and therefore, the Department

of Justice would say, we would like to help, but we can’t.

And so these are ways in which the Department of the Treasury

is being handcuffed in its ability to investigate these kinds of cases

as aggressively as possible.

With respect to whether, you know, if we had these laws prior

to September 11, would it have prevented, I mean, we can only

speculate. I mean, there are some other issues here with respect

to airport security that obviously need to be considered. But I think

the point is that it certainly would have made it more difficult. I

think we would have the ability to be more proactive in terms of

disrupting the ability of these organizations to fund their operations, and, therefore, they are valuable tools that we need, and we

need them now.

Chairman OXLEY. The gentleman’s time has expired.

The gentlelady from Illinois, Ms. Schakowsky.

Ms. SCHAKOWSKY. Were Secretary O’Neill here, I really had a

message for him that I hope, therefore, you will relay back to him.

The amount of money that we are going to need to investigate and

fight this terrorist attack, and all the other costs associated with

the attack, is just immense, and we need to spend the money. But

it seems to me that as we are rethinking the spending side of the

39

ledger, we also ought to be looking at revenue; that many of us who

are concerned that the $1.7 trillion, whatever it was—some of us

think more—tax cut—feared that it left no cushion to deal with

emergencies or possible economic downturn, and in the last few

weeks, now we see that we face both. And as we take money from

the Social Security and Medicare Trust Funds to pay for this, it

seems to me that it is time to rethink the tax cut that gave the

wealthiest Americans such a disproportionate amount of that, in

my view, and particularly since Social Security is only paid for on

wages up to $80,000 a year. So those people are paying a disproportionate amount, it seems. So I would hope that we would

step back as we are stepping back on spending and look at revenue

as well.

You answered in part my question. You know, this whole attack

has been estimated, at least in press accounts, to cost about

$500,000. Relative to the amount now that we are looking at

spending in response, it seems like such a small amount of money,

and I wanted to ask you what specifically are the new tools that

we need that would have addressed this specific incident, not some

hypothetical future incident, but what could we have done on the

investigative and the enforcement side that would have made us

safer and protected us from this attack that we absolutely need to

have?

Throughout this morning we have talked about some, and I wonder if you could just quickly enumerate those things that you think

would have, could have perhaps prevented this.

Ms. WARREN. One of the new tools we are looking at is just expansion of the foreign predicates for money laundering. We could

have looked at a lot of these individuals on—and certainly the larger organization on money laundering crimes if we had those foreign

predicates. Terrorism at the moment is not a predicate to money

laundering. We have used other violent crimes as substitutes in

some instances, but it should be declared a predicate.

There are other parts of the proposed legislation that I think

would assist as well, and one was raised in the inability to share

information. One bit of information that might be corrected by the

proposed legislation and the legislation as drafted by this committee is to move the 8300 reporting requirements out of Title 26

into Title 31 so that information can be shared broadly with law

enforcement so that we can look at who is purchasing an aircraft

in cash, or paying for other things with large amounts of cash,

against other databases that we already have. We might find them

on our drug registers. We might find them elsewhere. But that information now is kept separately under the Tax Code and not

available broadly to law enforcement. So there are more ways that

we could get more information that would help us.

Ms. SCHAKOWSKY. Let me ask you this: Are there things that

were left on the table in the way of tools that we need to now make

sure that we are making better use of? And it would seem to me

there are those who think that there were intelligence failures, but

are there tools of investigation that we did not fully utilize that we,

in addition to new ones, need to be concentrating on?

Mr. LORMEL. From the standpoint of lessons learned, I think

what we will see more emphasis on predictive financial analysis

40

and profiling, for lack of a better word, but I think that there is

a predictive analytical tool out there that perhaps we need to focus

on collectively as the law enforcement community in terms of

proactively looking to deter or prevent any future activities.

This was a very well-planned act that took an incredible period

of time to carry off. And I think when the template is set, and we

are able to really go back and do a study of how they conducted

and the characteristics that they followed, we can do and implement, I think, predictive analytical steps that will help us identify

future such attacks.

Chairman OXLEY. The gentlelady’s time has expired.

The gentleman from Texas, Mr. Bentsen.

Mr. BENTSEN. Thank you, Mr. Chairman. Let me say at the outset I know Mr. LaFalce brought up the issues of the Customs Service. And after September 11, I met with the Customs Service personnel who worked the Port of Houston Authority. And I think this

is true elsewhere. I would hope that the Administration, when we

work the final Treasury-Postal bill, will accept the higher figures

of either the House or the Senate bill than what was in the original

budget request. I think the original budget request was about a 4.6

percent increase in the Customs Service budget. The Senate passed

a 12 percent increase, the House a 17 percent increase, and obviously, things have changed since this past March or February

when the new Administration submitted their budget requests. But

if we are going to want to enhance our security, we obviously are

going to have to pay for it. So I would hope that would you take

that back to your superiors.

We heard some talk from both the previous Chairman and Mr.

LaFalce about the bill that we passed last year in this committee,

and it never went beyond that committee, and I supported it. Most

of the Members supported it, and I would support it again. All

right. A lot of that bill is in the draft bill that I have looked at

today, it appears, with some modifications. And I want to raise a

couple of issues about that. But before I do, Ms. Warren, in response to an earlier question, you talked about the ability—in

order to enhance cooperation with other nations in tracking and

freezing assets, that we should enhance our ability to freeze assets

that might be the result of, or would be part of, a foreign judgment

against a U.S. party. Now, I don’t necessarily disagree with that,

but I think it does raise some concerns that we should look at very

closely.

There was some discussion about the OECD and their efforts to

fight laundering and corruption, and some saw that as a way to

equalize tax levels throughout the industrialized world, and there

was some objection to that in the Administration and throughout

this town. But I would hope you all would look very closely at that,

that we are not in some way ceding some rights of U.S. citizens

that we do not want to cede. And I assume you all are doing that.

And you don’t need to respond. If you want to, you can, but I just—

that is something that I—you know more than I, but I would hope

you would look at that.

Ms. WARREN. Let me just offer some of the safety provisions in

that, enforcing foreign judgments of confiscation, of forfeiture. First

of all, the Attorney General must certify that the judgment was obVerDate 11-MAY-2000 13:54 Apr 29, 2002 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 75656.TXT HBANK1 PsN: HBANK1
41

tained according to due process, and it cannot proceed without that

kind of certification from the Attorney General. And the second, the

forfeiture must be for a crime that we recognize, either through our

extradition relationship or on our predicate list.

Mr. BENTSEN. I appreciate that.

Now, I also want to ask you about the way your bill is drafted,

and this is an issue that came up with us last year, and I pulled

the file from last year. I have got a letter from a State banking association, I won’t say which State it is, but that raised a great deal

of concerns about how the bill was drafted and the enhanced requirements. And the gentleman from the FBI raised the issue of

CTRs and SARs and what—and I don’t think you quite said this,

but I at least interpreted or inferred that you might be saying

whether the levels were accurate. But in your bill on the one hand

you talk about enhancing the criminal penalties for failure to file

SARs or CTRs, and then in another section of the bill, you raise

the concern that too many CTRs are being filed for otherwise exempted persons or accounts, and that, if, in fact, that it requests

a study, and, in fact, that there might be some additional penalty

for those institutions which file, I don’t want to say, erroneous, but

unnecessary CTRs.

And I understand what you are getting at, but I just want to

warn you where you are going to hear a great deal of criticism from

otherwise law-abiding institutions that are going to say that, in our

efforts to help in tracking the money laundering of terrorists or

drug traffickers or others, we are going to get hit with an avalanche of regulations that will make it impossible for us to conduct

our business. And, again, I would urge you—again, I supported the

bill last year, and I am going to support the bill this year, because

I think we need to do these things. But I would urge you to take

a very hard look at that.

I read the testimony of the banking institutions that are going

to be here next, and they don’t quite say this, and we are all being

cautious because we do want to be together, and we want the Administration to succeed in this effort. But I would urge you to take

a very hard look at how you approach those issues going forward.

Chairman OXLEY. The gentleman’s time has expired.

Let me ask Mr. Gurule ́, under my time, we have provisions in

the bill that Mr. LaFalce and I will be introducing later today that

attempt to address the obstacles to information-sharing among the

agencies that you identified in your testimony. To the extent that

there are specific areas that we have not addressed in the bill, can

I have the Treasury’s commitment that you will work with us over

the next few days to make sure that those necessary revisions are

made?

Mr. GURULE ́. Certainly. Absolutely.

Chairman OXLEY. Thank you.

Ms. Warren, what is the Department’s position on the Leach-authored internet gambling provisions of the bill that we are going

to be introducing today?

Ms. WARREN. In principle we support it. We can offer some suggestions on some of the subparts. For example, I believe there is

a requirement before instituting a civil injunctive action for the AtVerDate 11-MAY-2000 13:54 Apr 29, 2002 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 75656.TXT HBANK1 PsN: HBANK1
42

torney General to seek either advice or consultation with the bank

regulators. We believe we should be able to go right into court.

Chairman OXLEY. Thank you.

Agent Lormel, in prior hearings and staff investigations on the

issue of internet gambling, we have heard from law enforcement officials that there is a link between offshore internet gambling and

money laundering. A lax regulation of offshore internet gambling

operations would seem to lend itself to the possibility that large

amounts of terrorists’ funds could be laundered through these sites

with relative impunity. What are your comments in that regard?

Mr. LORMEL. Well, sir, it is certainly a possibility and a concern,

as we have seen here. This network of terrorists, if you use them

as a model, they have certainly exploited the system, our system,

as well as they could, and that is a very attractive and lucrative

area of financing and potential financing. So it certainly is a concern, and we certainly should be vigilant in monitoring that. And

certainly, beyond the terrorism, the network of enterprises that

certainly do exploit that particular area is something we must look

at.

Chairman OXLEY. I won’t ask you to discuss specifics, but is the

Bureau pursuing any cases that involve a linkage between internet

gambling and money laundering?

Mr. LORMEL. Yes, sir. There are a minimum of two pending investigations as we speak that I am aware of. It is more in keeping

with our organized crime side of the house, which is not my area

of expertise, but from my prior assignment in Pittsburgh, I am

aware of a case that we actually worked in our shop out there.

Chairman OXLEY. And are you pursuing any cases linking organized crime to internet gambling?

Mr. LORMEL. I believe so, sir, yes.

Chairman OXLEY. Thank you.

The gentleman from New York.

Mr. LAFALCE. I thank you, Mr. Chairman.

The bipartisan bill which Chairman Oxley and I are working on,

hopefully to be introduced sometime this week, is a work in

progress, very much so. For example, there has been an agreement

to include the money laundering bill that was authored by myself

and Chairman Leach with the assistance of Stu Eizenstat of the

Clinton Administration and passed this committee. But, while I

have agreed to go along with some due process provisions, it is due

process provisions that I would find productive to the approach of

the bill rather than counterproductive. And I am recalling that

Senator Gramm unilaterally stopped this bill in the last Congress

on the Senate side. So I am a little concerned about your negotiations with him. I would prefer you be negotiating with some of us

who are promotive of the bill.

Second, something similar is true with respect to internet gambling. I offered the bill that created the national commission to

study the problems of gambling, and I introduced legislation to effectuate the recommendations with respect to internet gambling.

And the former executive director of that commission endorsed my

bill. My bill is not the one that is included in the draft so far, and

I am very, very fearful that the bill that is presently in the draft

could be counterproductive. I mean, if we are going to say that we

43

will choke off credit for unlawful gambling, then we have to define

unlawful gambling, and we don’t. Or if the State defines something

as lawful and we are not preemptive, or if an offshore entity permits some type of gambling lawfully and we do not make it unlawful, then the provisions of our bill can be counterproductive.

I am also concerned that we have to act expeditiously, and knowing the huge gambling industry that is out there that has hampered internet gambling legislation in the past, I am not sure

whether we will be able to move expeditiously with such a provision in this bill.

So my first question, and I do want to get around to Justice so

I can go into the subject of short-selling and FBI pursuits of illegal

short-selling, taking advantage of this situation, or inappropriate

use, or use of information about short-selling to detect individuals

that might have been involved in.

My first question is to Justice, though, on internet gambling. Are

you aware that the principal intent of the bill could be counterproductive if the wording of the bill is not helpful?

Ms. WARREN. Well, I understand your point. Perhaps the best

thing that can I offer, and both for Justice and Treasury at this

time, that we are more than willing to have our staffs work with

your staff to try and find these problems and iron them out in the

next minutes, hours, days.

Mr. LAFALCE. Understand there is a fundamentally different approach between saying we are going to choke off credit for internet

gambling unless the following conditions are met and to say we will

not choke off credit unless it is deemed unlawful. Very different approaches.

With respect to FBI, what are you doing to detect inappropriate

short-selling that may have taken place in connection with airline

stocks, insurance stocks, and so forth?

Mr. LORMEL. That is a very good observation. One of the very

first things we did in forming our financial review group was to

have a team specifically designated to look at that particular area.

The team has coordinated with all of our field offices and with all

of the regulatory agencies, particularly SEC, for any such activity.

To date there are no flags or indicators that the people that were

associated with this particular attack, nor are there any indications

that people took advantage of this. That is certainly not to say that

didn’t happen, and there are certainly some rumors out there to

that effect, but we are fully exploring that. And as I said, we have

a team totally dedicated to that aspect of the investigation.

Chairman OXLEY. The gentleman’s time has expired.

And, again, we thank all of you for your participation today. It

has been most helpful.

The Chair will call the third panel. While they are making their

way up, let me introduce the panel. Mr. Edward Yingling, Deputy

Executive Vice President of the American Bankers Association; Mr.

Marc E. Lackritz, President of the Securities Industry Association;

Ambassador Stuart E. Eizenstat, former Deputy Secretary of the

Treasury; and Mr. John F. Moynihan, partner of BERG Associates.

Gentlemen, thank you, and we appreciate your appearance

today. Thank you all for your appearance.

Let us begin with Mr. Yingling.

44

STATEMENT OF EDWARD L. YINGLING, DEPUTY EXECUTIVE

VICE PRESIDENT, AMERICAN BANKERS ASSOCIATION, ACCOMPANIED BY JOHN BYRNE, SENIOR COUNSEL AND COMPLIANCE MANAGER, AMERICAN BANKERS ASSOCIATION

Mr. YINGLING. Mr. Chairman, thank you for inviting ABA to testify today on this critical issue. Accompanying me is John Byrne,

Senior Counsel with ABA. He is responsible for ABA’s efforts on

money laundering and is a well-known expert in this field.

We were all shocked and saddened by the events of September

11, and we mourn for those who lost their lives that day and their

families. The financial community was particularly hard hit by the

attack. Nevertheless, the banking system continued to run smoothly and consumer confidence in the system held steadfast. We are

proud of our preparedness and response. We are also proud about

how we have assisted law enforcement agencies in tracking the

money trail of terrorists, and we immediately instituted the account freeze order announced by the President. Today we reaffirm

our pledge to support fully efforts to find and prosecute perpetrators of these acts and their supporters. We commend you, Mr.

Chairman, for holding this hearing and moving so quickly to address this issue.

Today, I would like to emphasize three points. First, the banking

industry strongly supports efforts to track the flow of money that

finances terrorism, and we will do everything in our power to help

shut that flow down. It takes close coordination with the Government to identify individuals and groups suspected of illegal activities. While banks facilitate $2 trillion a day in transactions, a large

volume flows outside traditional banking channels. Dealing with

these flows is critical. We believe that by forging an aggressive

public-private partnership, we will make significant progress in the

fight against terrorism.

Second, it is important to understand there is already a strong

base in law and regulation to prevent money laundering through

the U.S. banking system. In my written statement I outline extensive laws and regulations already applicable. A feel for the extent

of current laws is given by the fact that banks filed over 12 million

currency transactions reports last year.

Our third point is that we are committed to strengthening and

extending current law where needed. By working together we can

assure that any new laws maintain the right balance, one that is

both effective and that protects the due process concerns of Americans.

Let me touch on a few of our recommendations. The ABA strongly supports the President’s initiatives announced on September 24,

and we will continue to fully implement them as more names are

added to the freeze list and as international efforts are extended.

The ABA strongly supports the 2001 national money laundering

strategy recently announced by the Treasury and Justice.

The ABA recommends advanced training for law enforcement

agents in techniques for combatting money laundering and investigating financial transactions of terrorists.

ABA strongly supports expanding money laundering laws to all

providers of financial services including those in the nontraditional

channels. This is essential for effectiveness.

45

The ABA strongly supports the expansion of money laundering

laws recommended in recent days by the Attorney General.

The ABA strongly supports provisions that would make currency

smuggling a criminal offense.

The ABA strongly supports giving the Secretary of the Treasury

more flexible authority to designate matters that should be subject

to special treatment because they raise money laundering concerns.

However, we do suggest that bank regulators be included in the

process and that a public comment be required. We believe our suggestions will make the authority even more effective.

And finally, ABA strongly recommends that improved methodologies be developed for identifying individual account holders, particularly for non-U.S. Citizens.

We hope our recommendations are helpful to the committee, and

we pledge to work with you on an expedited basis as you move forward. Thank you.

[The prepared statement of Edward L. Yingling can be found on

page 150 in the appendix.]

Mr. TIBERI. [Presiding.] Thank you.

Mr. Lackritz.

STATEMENT OF MARC E. LACKRITZ, PRESIDENT, SECURITIES

INDUSTRY ASSOCIATION

Mr. LACKRITZ. Thank you, Mr. Chairman.

I am Marc E. Lackritz, President of the Securities Industry Association, and I am pleased to appear before you today to testify

about strengthening the means to cut off the financial activities of

terrorists or terrorist organizations. We strongly commend the committee for holding these hearings.

I also want to take this opportunity to express the very deep appreciation of everyone in our securities industry for the heroic firemen, policeman, FBI agents and other rescue workers who made

unimaginable sacrifices, including their lives in far too many instances, trying to save the lives of others.

The atrocities of September 11 also inflicted a terrible toll on the

securities industry. While that day was a grievous one for our Nation and our business, our industry has shown remarkable resilience, reopening the bond markets 2 days after the attacks and the

equity markets the following Monday. In fact, the New York Stock

Exchange handled record trading volumes in the first trading session after the attacks, and NASDAQ handled almost a record volume. We, in cooperation with our regulators, our self-regulatory organizations, utilities and data facilities, have all pulled together

magnificently in this difficult time, and I have never been prouder

to represent this industry.

SIA and our member-firms have long been strong supporters of

the Government’s anti-money-laundering efforts. Public trust and

confidence in our industry is our most important asset, and we are

fully committed to completely eliminating any possible money laundering from the securities industry. Securities firms presently are

subject to a number of statutory and regulatory requirements that

enable the Federal Government to better identify and combat

money laundering.

46

Since 1970, broker-dealers have been subject to certain Federal

anti-money-laundering laws imposing reporting and recordkeeping

requirements. Like banks, securities firms have been required by

the Bank Secrecy Act to report currency transactions over $10,000.

Most major broker-dealers also file suspicious activity reports with

the Treasury Department. Further, securities firms, like banks, are

subject to the provisions of various sanctions programs administered by the Office of Foreign Assets Control, known as OFAC.

While the securities industry has been subject to many specific

rules, many firms have gone beyond these requirements and developed their own anti-money-laundering programs. Most firms on

their own initiative have developed a policy of prohibiting or restricting the receipt of currency or cash equivalence at the firm.

Firms also have procedures when an account is opened, pursuant

to self-regulatory organization know your customer rules, to obtain

information pertaining to the customer. As a matter of good business practice, many securities firms go beyond the know your customer rules and suitability rules and seek even more information.

Many firms, particularly large firms, have adopted special procedures and written software programs to monitor transactions and

detect even very sophisticated patterns of money laundering. For

many years we in our firms have worked very closely with regulatory agencies and Members of Congress on anti-money-laundering initiatives. Among other things, we have worked with financial regulators to develop regulations extending the requirements

to file suspicious activity reports to all broker-dealers, and we have

worked with the SEC on its examination program for anti-moneylaundering compliance, and we have also taken additional systems

that I have outlined in my written testimony.

I would like to now turn to what our industry is doing in response to the President’s September 24 order freezing U.S. assets

of and blocking transactions with 27 individuals and organizations.

We immediately sent notice of that order to our member firms and

posted it on our website and have asked firms to check their

records for individuals or organizations named in that order or in

the list of names issued by the FBI. Many of our firms have received requests from self-regulatory organizations for information

on certain trading in securities that occurred before September 11,

and they are responding to those requests. Firms are going beyond

those requests, however, and are examining and looking for unusual trading patterns in equities, fixed income, options and futures in certain industries.

SIA is also supportive of the need to have further anti-moneylaundering legislation and would welcome any legislative tools that

will enable our members to combat money laundering. To the extent any legislation imposes additional due diligence obligations,

we think it is important to provide flexibility with respect to those

requirements.

We also think legislation should facilitate communication between broker-dealers and between banks and broker-dealers when

they are investigating suspicious activity. Presently brokerage

firms are constrained from sharing with each other or with banks

information they have received which they believe may be suspicious.

47

We support the expansion of the Bank Secrecy Act Advisory

Group’s mandate to include terrorism and other issues related to

the security of our financial system. Alternatively we would support the creation of a joint industry-government task force to examine these issues.

We have had a long and constructive working relationship with

regulators and Congress on preventing money laundering, and we

look forward, Mr. Chairman, to continuing those efforts. Thank you

very much.

[The prepared statement of Marc E. Lackritz can be found on

page 164 in the appendix.]

Mr. BACHUS. Thank you.

Ambassador Eizenstat.

STATEMENT OF HON. STUART E. EIZENSTAT, FORMER DEPUTY

SECRETARY OF THE TREASURY

Mr. EIZENSTAT. Mr. Chairman, Mr. LaFalce, I want to thank you

for the leadership that you have shown in the last Congress and

in this one, Mr. LaFalce, and the fact that you and Chairman

Oxley are going to have a joint bill I think is a tremendous step

forward.

Money laundering is the financial side of crime, and money

launderers are the criminals’ investment bankers. The IMF has estimated that the amount of money laundered annually is between

$600 billion and $1.5 trillion, or 2 to 5 percent of the world’s annual GDP, and at least a third of that amount, up to half a trillion

dollars annually, is thought to pass through U.S. financial institutions at least once on its clandestine journey.

Now we are brought face to face with another aspect of the criminal financial system that is used by merchants of terror. Terrorists

must have money to pay for weapons, travel, training, and even

benefits for the family members of suicide bombers. We shouldn’t

be misled by the supposed low cost of the September 11 atrocities.

The fact is, huge amounts of money are raised by the central operations of bin Laden and al Qaeda to support terrorism around

the world. Terrorists raise funds in many ways through financial

donors, through so-called charitable organizations by relying on

state sponsors of terrorism, by making investments, some legal,

and by the commission of crime. Each of these is camouflaged at

each step.

The fight to curtail money laundering has always been a product

of bipartisan consensus and should remain so, and hopefully an

Oxley-LaFalce bill will be a further indication of that.

The fact is, we have too few tools to protect the financial system

from international money laundering. On one end of the spectrum,

the Secretary of the Treasury can issue advisories, as we did in the

summer of 2000, to encourage U.S. financial institutions to pay

special attention to transactions involving certain jurisdictions, but

they are only advisories. At the other end of the spectrum, IEEPA,

the International Emergency Economic Powers Act, following a

Presidential finding of a national security emergency, can be used

for a full-scale set of sanctions and blocking orders to suspend financial and trade relations with the offending targets. President

Clinton issued two of these, one in 1995 and the other in 1998, and

48

President Bush, a week ago Monday, invoked IEEPA, appropriately

sending a forceful and blunt message.

The problem is, however, there is nothing in between these two

ends of the spectrum, and there are other situations where we will

not want to block all transactions or in which our concern centers

on underregulated foreign financial institutions or holes in the foreign counter-money-laundering effort. We need these more flexible

tools, and that is what H.R. 1114, which Mr. LaFalce has introduced, and what the discussion draft seems to provide. There

would have to be a finding of primary money laundering concern,

and that would then trigger, subject to very significant protections

which I will get to in a moment, special recordkeeping, customer

identification requirements, especially important being the identification of foreign beneficial owners of accounts opened in the U.S.

and permitted through correspondent or payable-through accounts.

H.R. 1114 and the discussion draft is carefully tailored against

real abuse. Actions would be graduated in the sense that the Secretary could act in a manner proportional to the threat. They would

be targeted so the Secretary could focus his or her response to particular facts and circumstances, and they would be discretionary so

the Treasury could integrate any possible action into bilateral and

multilateral diplomatic efforts.

On the due process concern, which has been mentioned several

times, the fact is that the bill you passed last year in H.R. 1114,

Mr. LaFalce does have significant due process already built into it;

namely, the Secretary, for one thing, can only act after consulting

with other members of the Cabinet, including the Secretary of

State and Attorney General. But more important, the Secretary’s

determination there is a primary money laundering concern is

itself fully reviewable under the Administrative Procedure Act in

court by any bank which feels that that determination is inappropriate.

Importantly, the legislation would not jeopardize privacy. The

focus of the legislation is not on American citizens, but on foreign

jurisdictions, foreign financial institutions and certain classes of

transactions with or involving a jurisdiction outside the U.S. It is

narrowly tailored and does not burden financial institutions.

Let me close by just saying that there ought to be a whole range

of steps that we take in addition to passing this legislation promptly and giving the Secretary of the Treasury the authority that is

required. First, in addition to this, additional crimes should be

added, including terrorism, official bribery, arms trafficking and

certain crimes of violence which are now not predicate crimes and,

therefore, against which we cannot use money laundering tools. So

we should broaden the number of predicate crimes.

Second, we should level the playing field for U.S. banks by assuring, as Mr. Lackritz, I think, appropriately said, that broker-dealers and casinos are covered. The regulations for that have been delayed. They need to be promptly issued so that broker-dealers and

casinos know the rules under which they are playing.

Third, the hawala system, which clearly was a part of the bin

Laden process here, the informal money traders should be required

to register. There is a hawala in every major city in this country,

and they are facilitating terrorism in many cases. This is an ageVerDate 11-MAY-2000 13:54 Apr 29, 2002 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 75656.TXT HBANK1 PsN: HBANK1
49

old practice that goes back decades, if not centuries, in the Middle

East and South Asia, but if they are going to operate in the United

States, they should be required to register.

Fourth, diplomatic efforts should be marshaled to bring foreign

money laundering regimes up to international standards. The so

called FATF process has been successful, but it needs to be accelerated with particular attention to the Arab world.

Fifth, we should identify and publicize foreign world banks as we

identify those countries whose own regimes don’t come up to international standards.

And last, we should apply much greater scrutiny to charitable organizations in the United States and particularly encourage our

friends abroad in the Gulf and in the Arab world to more closely

check Pan Islamic charities or so-called charities which are often

front groups for terrorism.

This kind of multiplicity of actions is necessary to deal with the

problem, and certainly this committee can take an important first

step by trying to pass the same legislation you did last year and

by moving on the joint legislation that Mr. LaFalce and Mr. Oxley

are considering cosponsoring this year. Thank you.

[The prepared statement of Hon. Stuart E. Eizenstat can be

found on page 179 in the appendix.]

Mr. BACHUS. Mr. Moynihan.

STATEMENT OF JOHN F. MOYNIHAN, PARTNER, BERG

ASSOCIATES, LLC

Mr. MOYNIHAN. Mr. Chairman and Members of the committee, I

want to thank you for inviting me here today for this very important hearing. For the record, my name is John Moynihan, and I am

founding member and owner of the consulting firm BERG Associates. Among other things, BERG offers our clients services that assist them in prevention and detection of money laundering and

other related forms of financial crime. My experience in this area

of investigative expertise derives from my professional background

both in public and private sector, which I have summarized in my

written statement which I have submitted for the record.

Let me begin by stating that the Achilles heel of any criminal organization is its financial infrastructure. If you can break the link

between a terrorist like Osama bin Laden and Pablo Escobar and

his money, you have greatly impacted on his ability to succeed in

realizing his stated objective.

Mr. Chairman, today there is much that we do not know about

the financial dealings of Osama bin Laden and his surrogates

across the globe. However, we do understand how informal money

markets work.

Unregistered, unlicensed money remittance businesses: In the

United States there exist many individuals at international business corporations that have opened bank accounts at U.S. banks

for the purpose of engaging in the unlicensed exchange of monies

and/or for the remittance of these monies to recipients. These accounts, which are used by these persons and businesses, are

opened as mainstream retail accounts or through the private banking departments. These accounts can generate millions and sometimes billions of dollars in transactions within a given year.

50

So what exactly is being accomplished by these underground

banking systems? The underground banking system provides the

following services or benefits: one, a source of money; two, a system

for aiding in avoiding of taxes; three, a system for moving wealth

anonymously; four, a system to move money to support or sustain

criminal activity.

The underground banking system thrives in the United States

because the people who move money know how to exploit the key

vulnerabilities in our financial and banking system. If I may, I

would like to present an example. One, a man from a Middle Eastern company sells perfume in Boston. He sells wholesale and retail

and collects payments in checks and cash for deposits into his regular checking account.

Second, a second man, with cash or checks, wishes to send his

money home to a South American country. He approaches the perfume seller. He purchases from the perfume seller either, one, a

check in dollars that is not filled in on the payee line, or, two, perfume for resale in a South American country.

Three, if the South American man purchases checks, he carries

this check to his country and sells it to an intermediary broker, a

money exchanger, at a discount to the value of the check. He in

turn receives the local currency sought. The money exchanger can

now resell the check to another customer seeking these dollars.

Given that the check has not been endorsed and the payee section

has not been filled in, the check can be sold to anyone or used to

pay for anything.

Fourth, if the South American man purchased perfume, and he

does not want to pay import duties, he smuggles the perfume into

the country and resells it, thus accomplishing his goal of converting

his dollars from Boston to local currency without paying duties or

exchange fees for just converting the funds.

Fifth, the Boston perfume man now has his customer’s funds,

and he wants to accumulate his wealth in his country of origin in

the Middle East without paying taxes. He, therefore, sells the

funds received to an intermediary in the Middle East who is seeking to purchase dollars. Upon the sale of these dollars, the intermediary instructs the perfume man where he or his agent can pick

up the local Middle Eastern currency.

Six, the Middle Eastern intermediary tells the perfume man a

number or code, and it is to be used by the man who purchased

the dollars in the Middle East with the local currency.

Seventh, the Middle Eastern intermediary tells his Middle Eastern customer the code and where to pick up the dollars in the U.S.

All transactions are complete and everybody wins.

My recommendations: The issue of underground banking and

payment systems must be immediately addressed by the Legislature. The Federal law criminalizing the act of engaging in money

exchanging without a license should be promulgated. Although 18

U.S.C. 1960, Subsection (b)(1)(B) provides for violations for people

who fail to comply with the money transmitting registration requirement, the regulations have not been promulgated, and therefore, law enforcement has had to rely on 18 U.S.C. 982 for criminal

forfeitures. It is recommended that 18 U.S.C. 1960 be included in

the civil forfeiture statute, 18 U.S.C. 981.

51

As well, such underground banking should be identified as a

specified unlawful activity so as to be able to seize and forfeit real

property and funds that facilitate the activity. This will significantly hinder persons who are engaging in underground banking

from delivering monies to person as a favor, for those people will

fear criminal sanctions.

Second, if it is the intent of the Congress to add to existing forfeiture laws a component addressing terrorism, the assets associated with the terrorist groups that are identified should be forfeited using guidelines prior to CAFRA 2000. There exists a carveout section to this law, to the existing civil forfeiture statute.

Under present conditions, the reality is that it is going to be incredibly difficult to investigate and develop the kind of evidence required to meet the burden of proof with regard to identified terrorist assets. Without the use of hearsay evidence, barred under

the new law, there is a very high probability that there won’t be

much more evidence. The truth is if we believe differently, then we

are fooling ourselves and being somewhat naive.

Three, future laws to combat money laundering and illegal transfers of funds must address all identified forms of this activity, including those involved through banking financial institutions and

the sale of goods and services. Additionally, said laws must be

flexible enough to allow U.S. law enforcement agencies to address

new and creative forms of money laundering as they appear.

Fourth, ensure that the United States Drug Enforcement Administration plays a vital role in the investigation of these terrorists.

The people who appear to be responsible for these acts are not religious. They are thugs and criminals who have distorted religion

and hijacked the country. Osama bin Laden’s accomplices are clearly protected by the Taliban, a group of fanatics who have distorted

the Islam faith and want us to think that they are religious and

acting as a government over Afghanistan.

The reality is that Afghanistan is the major producer of heroin,

and the verdict is out on what role the Taliban plays in this heroin

trade. The DEA has the best international informant and intelligence-gathering capability on transnational drug crime. They are

expert on the collection and presentation of conspiracy evidence.

Mr. Chairman, Members of the committee, this concludes my remarks. I would be pleased to answer any questions that you may

have.

[The prepared statement of John F. Moynihan can be found on

page 198 in the appendix.]

Mr. BACHUS. I appreciate your testimony, and I will commence

questions, and then we will go to other Members of the committee.

Ambassador Eizenstat, let me direct the first question to you. I

can recall back in 1997 as Oversight Chairman the Treasury Department trying to come up with new money laundering business

regulations, and we still don’t have those regulations in place. Law

enforcement has given sort of short shrift to addressing these underground-type movements of money, hawalas and others. Why is

it that the Treasury Department has taken years to put these requirements in place?

Mr. EIZENSTAT. I am not familiar with the particular regulations

you refer to.

52

Mr. BACHUS. Yeah. The MSB regulations.

Mr. EIZENSTAT. I think that the Treasury was so preoccupied

with the Financial Modernization Act and all the requirements

that it had that that may have delayed action, but certainly there

should be movement on this. And there should be movement on

covering the regulations which have also been delayed in covering

broker-dealers and casinos and others.

And I agree very much also with Mr. Moynihan that we need to

take much firmer action to license and register and criminalize if

they don’t, those informal underground money exchangers or the

so-called hawala system.

Mr. BACHUS. Some have argued that terrorist funding differs in

significant ways from traditional money laundering. And what I

mean by that, if you have drug traffickers, they take dirty money

and they try to convert it into clean money. With terrorist organizations, they are taking basically clean money—we talked about

money given to charities—and converting that to dirty money, or

money used for dirty purposes to kill people.

Do you agree, and if so, are money laundering statutes ill-suited

to deal with the kind of terrorist operations that we are now confronted with?

Mr. EIZENSTAT. Well, first I think terrorism, particularly as organized by bin Laden and al Qaeda, represent a level of sophistication that one rarely sees in drug traffickers, although they are also

very sophisticated, but even more so. And they differ in the following ways as well, Mr. Chairman. That is, with respect to drug

traffickers, they are making, as you indicate, their money illegally

at the outset. Here, money is being organized through so-called

lawful donations, and those donations through charitable organizations, which the donors in some cases know to be fronts for terrorist organizations, and others do not. They are advertised as

being for Bosnian orphans, for example, or for Gazans. Get very

wealthy donors to make presumably lawful contributions.

So that is why we need the legislation that Mr. LaFalce and Mr.

Oxley are talking about. But in addition, we need a much broader

net. We need to get foreign financial institutions to come up to

international standards. We need to have our diplomacy work to

get the Gulf States and Arab countries to look through these charitable organizations. We need them to educate their own citizens

about being careful not to donate to such organizations. We need

a kind of panoply of powers that I have talked about in addition

to going after the registration of hawalas, because you are quite

right. This is a qualitatively different set of problems.

Mr. BACHUS. All right.

Mr. Moynihan, let me ask you a question. There have been news

reports that some of the funding associated with the hijackers can

be traced to formal banking networks, particularly in Islamic banks

like al Shamal in the Sudan and banks in the United Arab Emirates. Do those banks handle funds for bin Laden, al Qaeda or charitable groups that have been associated with al Qaeda?

Mr. MOYNIHAN. I can’t say precisely right now, but the commentary on the unlicensed money remitters, unlicensed banking

that goes on in this country is prolific. I am very involved with my

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own clients and with the United States Government as an expert

for cases in helping them dismantle these things.

What I think needs to be recognized here is that there are different groups of people within the hijackers. There are those people

who might have been more organizers of the efforts, and others

who might have been more underlings of the efforts. The crime

that was committed on 9/11/01, in my opinion, was only the conclusion to the crime that began last February in 1993. To investigate

this case, I think people should recognize that maybe the reason

they went after the World Trade Center is they tried it one time

before and failed. They didn’t bring the building down.

To go further in this investigation, people might want to look

back at that time period and shortly thereafter for those people

who were involved at that time period or those associations. Money

laundering is only about relationships and association, and that

might be the time period I would suggest people start to look and

bring that forward. You might find people that were involved in

this incident on 9/11 having been in this country, in geographical

areas, having somewhat of a loose affiliation or some relationships

to those previous acts. This was just a culmination of it, and that

is where I would suggest people should look.

Mr. EIZENSTAT. Mr. Bachus, may I just add one more point to

your very important question about the difference in terrorism and

other criminal activities, and that is, in addition to the donors and

the charitable organizations, in most instances drug traffickers and

other criminals don’t have overt state sponsorship. In the case of

terrorism, they do. State sponsors provide money, provide sanctuary, provide camps for training, provide facilities without which

terrorist groups would have a great difficulty operating.

Mr. BACHUS. You know, Ambassador, I was surprised after these

attacks to again read actual information that we had before, but

I think none of us focused on with the same attention, that many

of these terrorist organizations were receiving $100 million or more

a year from certain Middle Eastern countries, and this was a yearly annual funding of these organizations. So you are talking about

very well-funded organizations, and, obviously, it took state sponsored funding.

Mr. LaFalce.

Mr. LAFALCE. I will yield to Mr. Frank.

Mr. FRANK. I have a meeting with the Governor of Massachusetts in a few minutes, so I appreciate this.

Mr. Eizenstat, particularly with your experience, I want to get

back to the OECD issue, because the Administration had taken the

position that that had to be reconsidered, and they had watered

down the support, and the Secretary of the Treasury did tell Senator Levin in July that he thought he would like a chance to negotiate before deciding whether or not they were going to try to implement sanctions.

But part of my problem with the approach is over and above the

question of taxes, part of the problem that I tried to get across to

Mr. Gurule ́, and I think, frankly, he kind of reinforced the mistake,

I asked him about it, and he said, well, we are working hard on

tax evasion. Part of the problem is collapsing the OECD effort into

that single issue of tax evasion.

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And, again, I was unhappy to see Mr. Fleischer’s answer. Just

last week he was asked about this. The question, the OECD has

been going after tax havens for a while. The Administration hasn’t

shown a whole lot of support for that effort. Mr. Fleischer: I think

you should not confuse the two issues. One deals with domestic

laws in dealing with tax consequences and tax dodgers or tax evaders. This deals with terrorism.

And the problem, of course, is that once you have bank secrecy,

you don’t know whether it is just your garden variety tax evader

or somebody else. I mean, isn’t that the problem?

Mr. EIZENSTAT. Yes. And I—frankly, some of the pre-September

11 signals both on money laundering and on tax havens were very

discouraging. With respect to the OECD effort on tax havens, this

is part and parcel of the problem. That is terrorists, terrorist organizations and other criminals will seek out those jurisdictions to

put their money in whose bank laws have no questions asked, who

don’t have to file suspicious activity reports, and they will also seek

to hide from taxation their ill-gotten goods by going to tax havens

so that there is a definite relationship.

And the other point, Mr. Frank, which you properly raised, it is

in the OECD, and this will never be successful, the whole effort to

attack this problem, unless it is done multilaterally. Otherwise, for

one thing, we are disadvantaging our own institutions, but it will

simply squeeze money to jurisdictions that don’t abide by them. So

they ought to be considered as simply problems, and both should

be addressed.

Mr. FRANK. I would hope that would mean that we have to tell

other countries that are refusing to end this total bank secrecy and

refusing to allow their financial institutions to be used to provide

total cover that they will be subject to sanctions if their financial

institutions will not have the access to ours, and that up until September 11 the Administration hasn’t been willing to say.

Let me just say to reinforce this, just to paraphrase some comments, because I had been reading the uncorrected transcript, I acknowledge, of the eleven hearings, but Assistant Attorney General

Chertoff, whose deputy testified, saying essentially we are dealing

not only with Americans who put money in these banks, we are

talking about foreign criminals who put money in the bank and

then move them into United States; for example, not a tax issue,

but an issue of using that anonymity for criminal purposes. And

District Attorney Morganthau, I think, the world’s oldest living

prosecutor, says for all of these defendants the principal attraction

of doing business in offshore havens was not the nonexistent tax

rates. They sought to take advantage of other benefits that provided tax haven jurisdictions, strict bank and corporate secrecy,

lack of transparency, lack of any meaningful law enforcement supervision.

So again we want to be clear. The OECD effort is an essential

part of an anti-terrorism fight. It is not simply an anti-tax fight.

Mr. EIZENSTAT. Yes, and I would also say that those countries

which are tax havens tend to be those countries which have the

most lax money laundering laws.

Mr. FRANK. Thank you.

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One other point I just want to make, because I was confused

about this, I have been asked by some members of the press, and

that is, you know, what is the legislative status here. And I think

we ought to be clear. The Administration has clearly decided that

there are two levels of urgency here. I am on the Judiciary Committee. At 2:00 we will be marking up a compromised version of

the Anti-terrorism Act. It did not include, as submitted by Attorney

General Ashcroft or as amended by the Republicans and Democrats

on the Judiciary Committee, any money laundering pieces. It did

deal with one of the things that Under Secretary Gurule ́ mentioned, and that was the lack of sharing information. And the bill

that will be marked up in Judiciary as a compromise does explicitly

authorize sharing of tax information for appropriate legislative purposes. It has got a 2-year sunset for people who are worried about

how that will work out.

So the use by the Justice Department and others in fighting terrorism of tax information will now be clearly allowed in this bill,

but, at least to date—and I am told the Judiciary Committee has

a lot of the jurisdiction here, and I have been at all these Judiciary

Committee meetings and conversations—we have not been asked

by the Administration to take any action on the money laundering

issue.

Now, that is apparently coming, but people should understand

that, that the money laundering piece, much of which is under the

jurisdiction of the Judiciary Committee, isn’t part of the anti-terrorism bill and wasn’t part of the anti-terrorism bill as requested.

So probably there is a second order. I would hope, because it now

looks as if the Judiciary Committee will be voting out the first part

of the anti-terrorism package that the Attorney General sent us,

that the Administration will now show some eagerness to get the

other part through.

And I would just say in closing, finally, Mr. Chairman, I appreciate this. I was pleased, and I want to repeat this, when Secretary

O’Neill and Under Secretary Gurule ́ said they liked Mr. LaFalce’s

bill as long as it had due process protection. That is what we said

about Ashcroft’s bill on the Judiciary Committee, and I think we

ought to be very clear what is due process source for money laundering is due process source for the anti-terrorism bill, too. That is

one of the reasons why we did not instantly enact what the Attorney General asked us, but held it back to put in precisely the kind

of due process provisions that he has asked for and that Mr. LaFalce agrees should be in there.

Thank you, Mr. Chairman.

Mr. BACHUS. I thank you.

Mr. LaFalce.

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

I thank you all for testifying, especially Ambassador Eizenstat.

It is always a pleasure to see you and to work with you. I thank

you for your comments about the administrative procedures, and

the fact of the matter is that we have heard nothing from the Administration with respect to so-called due process. I think they

were just responding to concerns that were expressed in the Senate, and they said, yes, we will be glad to have some. I see no language whatsoever that they think improved upon the bill, and that

56

is one of the difficulties in trying to do it quickly. But we will be

vigilant on that point.

You made the statement, Mr. Ambassador, that hawala exists in

every single major city in America, and, Mr. Moynihan, you made

some suggestions for dealing with underground illegal banking. I

need a better handle on that. Can you better explain what the difference between the hawala system and underground banking is,

if any? Is it one and the same? Is there something different about

it? To what extent would your existing law work? The proposals

that we have fashioned thus far deal with it. Is it necessary to go

beyond that? Because, you know, we don’t want to come up with

a solution to a decade ago problem. We want to come up with a solution to today’s modus operandi.

Mr. EIZENSTAT. Well, I’ll let Mr. Moynihan deal with some of the

underground banking systems. But the hawala system is a system

which would operate as follows. Someone would go to a hawala in,

say, Pakistan, Karachi, and these are often families that have been

in the business for decades or centuries, passed along, oftentimes

completely legally. And, say, we have a customer who is going to

pick up $5,000 in cash in Chicago or Buffalo. And this should be

honored, and he will have this identification number which we are

now giving you. That person then comes into Buffalo, picks up the

$5,000 in cash, and there is no actual movement of money between

Pakistan and Buffalo. There is no wire transaction. All there is— ‘‘hawala’’ means ‘‘trust,’’ and so there is ultimate accounting that

will go on between those two hawala dealers so that it is a system

that depends on informality and personal trust, and there seems to

be little doubt that some of the cash which was used at the end

of this process for the atrocity that was carried on probably came

through that kind of hawala system.

But we ought not to be daunted in going after money laundering by the difficulty of getting at that, because that $5,000 will, in

turn, have come from a hierarchy that at the central level has

raised tens of millions of dollars by state sponsorship, by charitable

organizations, and that will have touched, through investments

and other ways, the actual financial system.

Mr. LAFALCE. Now, the system of trust, though, has to be

verified or accounted for. So there has to be some type of

verification that the $5,000 was given in order for it to be accounted for wherever it originated.

Mr. EIZENSTAT. Yes, but the verification is often, Mr. LaFalce,

not by a paper transaction, not by a paper trail. It would be by perhaps a personal phone call or some other indication.

Mr. LAFALCE. There has got to be some method of communication though. There has to be some method of communication.

Mr. EIZENSTAT. Yes, there is.

Mr. LAFALCE. Either in person or electronically.

Mr. EIZENSTAT. There is, because there has to be accounting at

the end of the day.

Mr. LAFALCE. Yeah. Yeah.

Mr. Moynihan.

Mr. MOYNIHAN. Mr. LaFalce, I think there is so many permutations on what goes on, and we have to start at that point. It could

be as simple as a guy who owns a gas station down the street here

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who wants to secrete his wealth in Pakistan or Iran or whatever,

and he just flat out doesn’t want to send a wire transfer over there

because he is afraid someone’s going to see it at the Fed. He just

doesn’t want anybody to know what he is doing. So he offers that

money that he has earned here, cash, for sale simply through the

internet, maybe a message and putting it on the street, making a

phone call to someone who he knows on the other end who is either

an intermediary or someone who seeks out an intermediary. It is

merely a system of swapping money. That is it.

What is unique about the hawala, from my experience in doing

these cases, unlike Colombian drug traffickers who generally will

set up a contract, I have experienced this with a number of DEA

cases that I do, they will set up a contract and broker the money

at a discount some time out. It could be either a spot transaction,

but generally it goes out 30, 60, 90 days, and you earn different

discounts based upon how far it goes and the form of the money.

The hawala is different in that it is still underground. It is still

the gas station owner engaging in unlicensed money exchange, and

that is why I made the suggestion that should be criminalized

across the board. People should just not be using their checking accounts to make money on money. If you sell gas, sell gas. If you

want to be a money exchanger, go get licensed. That is not what

goes on. But here, in the hawala, it is more of a loose affiliation,

and, as the Ambassador has said, it is based on trust. These people

make these swaps and exchanges of money in volumes you just

can’t imagine. It is huge. It is massive. It is everywhere. It is not

reported. People trust it, and if those hawala participants aren’t

satisfied, they are back out of it, and they use somebody else. There

is so many people who do it.

The last thing I will say on this, of grave concern, from the cases

that I have been—— Mr. LAFALCE. If it is that widespread, it would seem to me that

the more widespread it is, the more detectable it would be, assuming we had widespread usage, utilization of undercover agents.

Mr. MOYNIHAN. That is the key. The techniques have to change.

The techniques for penetrating those organizations have to change.

One of my partners in my business, Larry Johnson, has been seen

on the television all week, and he keeps using the term, ‘‘you are

not going to catch these rats by not getting into the sewer.’’ And

that is true. These cases are not being made in the Vatican. If you

want to make these cases, you have got to get down and get dirty

with these people, and if you won’t, the techniques are not going

to work, and that is why it has proliferated.

Mr. EIZENSTAT. We have had some experience with similar systems. For example, the so-called black market peso system operates

in some respects in the way that Mr. Moynihan was describing

with respect to imports. In fact, oftentimes major American companies have their products used as part of the exchange, and we had

a meeting last year at the Justice Department with the Attorney

General and others, and we had some of the major corporations

come in to alert them to the fact that their products were being

used as part of this process.

The hawala system operates in a sense even more underground,

and it will require human intelligence and penetration if we are

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going to be successful at rooting that out. And, again, all of these

things we are talking about, including legislation, are not going to

end the practice per se. What we want to do is throw sand into the

gears, make it more difficult, complicated, make people come up

from the subterranean level they operate, take greater risks and

disrupt the process.

Mr. BACHUS. Thank you.

Ambassador Eizenstat, we actually had hearings on the black

market peso back, I think, in 1997.

Mr. EIZENSTAT. Yes. We appreciate it.

Mr. BACHUS. A lot of that is categorized as trade mispricing, too,

to avoid taxes. And I think some U.S. corporations have spoken up

against the practice.

Mr. EIZENSTAT. They have. But now that they have been alerted

to it, they are trying to be much more sensitive about suspicious

transactions involving their products.

Mr. BACHUS. And that, obviously, is something that ought to be

brought into this.

Mr. Yingling, without divulging any investigative details, can you

tell us whether or not any banks that are members of the ABA

have found and frozen any of the accounts of the parties that were

named in the President’s Executive Order?

Mr. YINGLING. We understand that there are several that have,

but they don’t report to us on an ongoing basis about it. They report to law enforcement.

Mr. BACHUS. I would ask Mr. Lackritz. Can you tell us whether

any securities firms have found and frozen any accounts of the persons named in the President’s Executive Order?

Mr. LACKRITZ. I can’t tell you right now. They are in the middle

of doing searches for all that information now, and as Mr. Yingling

said, they don’t have the obligation to report to us. I don’t have

that information at this time.

Mr. BACHUS. Does it concern you? And I am sure that you heard

the testimony of Under Secretary Gurule ́ about the al Qaeda

operatives using brokerage accounts.

Mr. LACKRITZ. Well, absolutely. It concerns us, and, in fact, our

members have all been working with the self-regulatory organizations and the SEC in terms of going back into unusual trading patterns prior to September 11. But, yes, of course that would concern

us.

Mr. BACHUS. OK. What are some of the operational differences

between a securities firm and a bank that we in Congress should

be mindful of as we craft legislation preventing money laundering?

Mr. LACKRITZ. Well, I think that they are very different businesses, and I suspect Mr. Yingling would be happy to point out

some of the differences between banking and securities. But, in

general, the relationship with customers is very different in the

sense that, generally speaking, when customers open accounts with

securities firms, there is an ongoing relationship that is fairly frequent, and there is many points of contact on a regular basis where

professionals from the industry will be talking to the customer

about what has happened.

In addition, when the account is actually opened, our firms are

subject to know your customer rules. I think it is Rule 401 of the

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New York Stock Exchange, and I think it is 3110 of the NASD,

have know your customer requirements for our firms when they

open accounts, and that is to assure that our firms, in fact, follow

suitability obligations which they have owing their customers to

make sure that their recommendations are suitable for that customer in the account.

In addition, the industry has a number of obligations under the

regulation to make reports on a regular basis to self-regulatory organizations. For example, U-4 reports about employees, U-5 reports

when they are terminated articulate reason for dismissal or reasons why something hasn’t worked out.

In addition, we have forms called RE3s to report possible rule

violations. We also have to report to our self-regulatory organization and the SEC.

And finally, Mr. Chairman, I would just suggest that the regulatory regimes that deal with banking and securities philosophically are very different and are grounded on very different assumptions. Banking regulation tends to be more focused on safety and

soundness of the financial system, and as a result there is a lot of

oversight and review of individual decisions by bankers. On the securities side the philosophy has to do with disclosing material fast,

protecting the integrity of the marketplace, protecting the investors, and let competition determine the outcome, and as a result

there are very substantial differences in that respect.

Mr. YINGLING. And if I could just comment, I think there are differences along the lines that Mr. Lackritz just outlined. But, we do

believe that it is very important to extend the rules beyond the

banking system, and we just had a long discussion about the underground system. We are not going to be effective if we don’t do

that. But it is very important that this be done in a flexible manner where the expertise of the regulators and the various industries can come into play to design the right response.

And I think one of the big advantages of the approach in Congressman LaFalce’s bill that was worked out in the Banking Committee last year, and Ambassador Eizenstat was involved in that,

is that the way it is written, it does give that kind of flexibility.

Therefore, you can identify the different types of transactions or relationships or groups or countries, and you can identify different

responses to each.

There is, on the Senate side, as you may know, similar legislation that is in the process of being looked at. And we support, Mr.

LaFalce, the kind of approach that you are talking about. We have

a couple of suggestions which we will get to you, but there is an

alternative out there that is very rigid, and we think that is a big

mistake because you are going to end up with situations where in

some cases you need a fly swatter, and you are going to have a

sledgehammer; then in other cases you need a tank, and you are

going to have a sledgehammer. So, we think the approach that you

are working on is the right approach, as opposed to a very rigid approach written into law.

Mr. BACHUS. We do hope to incorporate flexibility in how you

deal with your clients. You know, why, I mean, there are varying

ways in which firms conduct their business and take that into effect. And, Mr. Yingling, you actually—in your written testimony,

60

not in your oral testimony, but you made some suggestions on how

the legislation should be modified. So we will take those into account.

Mr. Moynihan, we earlier had testimony from the FBI, and Mr.

Lormel mentioned the offshore internet gambling sites and abuse

there. You have been in the trenches. I would like to get your opinion on any possible nexus between internet gambling and money

laundering and, you know, what we could do in that regard.

Mr. MOYNIHAN. In my firm, with my partner Bobby Evers and

Larry Johnson, we travel the globe doing anti-money-laundering

initiatives and investigations of internet gambling and the banks

associated with that. We have done a considerable amount of work

on it.

One of the keys that we have found has been where the actual

CPU that drives and conducts the transactions is actually located.

For example, you might have a person in New York City who gets

on his computer to play a sports book game. He thinks he is playing it in the Bahamas because that is where it was advertised out

of, but traditionally in many cases that CPU is resting in Belize.

The transactions will actually be transacting in that particular

country, where, in fact, in that country where they are looking for

hard currency and they try to drive hard currency into that location. They want this business. They want this business.

And as the Ambassador said, a bilateral approach to this is very

important because we may recognize ourselves as the First World

economic type of situation, and other nations want to rise to that

level of economic activity quickly because they watch the television

and they visit Disneyland. They want to get there as fast as they

can. That is just the reality of it. So they are going to offer things

that we want, whether it is drugs or whether it is internet gambling.

So the internet gambling situation is as complex as it gets, because the participants in the gambling aren’t necessarily participating in the way that they think they are. They think they are

participating in the Bahamas. They are not. They are not, and

their credit card might be clearing through a bank somewhere else.

So it is multi-jurisdictional.

Mr. BACHUS. Thank you.

Mr. Yingling, let me ask you one other question. In the money

laundering bill that we have drafted, there is a provision that

would prohibit the U.S. banks from having correspondent accounts

with offshore shell banks. Do you all have any objection to that?

Mr. YINGLING. We do not have any objection to that. We had

some questions about making sure we have a clear definition of

what a shell bank is so we know what the rules are. We haven’t

had a chance to look at it in detail, but I think you have a good

definition in there, so we are supportive of that.

Mr. BACHUS. Thank you.

Mr. LaFalce, do you have any questions?

Mr. LAFALCE. Just to the extent that any of you are involved in

future discussions or deliberations with respect to internet gambling, I want to, first of all, make one point. I have yet to discern

anything that is at all socially redeeming about the concept of

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internet gambling, so to even sanction a little bit of it causes me

some difficulty.

Second, please help impress upon others that the legislation that

they enact could have negative rather than positive consequences

if it is inappropriately drafted. And to say that internet gambling

is permitted unless it is specifically deemed unlawful would require

a finding of unlawfulness in virtually every State or the entire

United States or offshore jurisdictions, and so forth. That is not the

approach to take.

I do want to ask Mr. Yingling a question, and then I will conclude. You know, one way that terrorists can help shut down the

economy of the United States is by going to its transportation network. That could include airlines, buses, borders, and so forth. But

another way would be to choke off its source of credit. And as we

try to have redundancy and backup systems for our stock exchanges, and we were able to get them up in a relatively short period of time, what group within ABA, for example, discusses the redundancy of the capacity to make sure that credits, credit cards,

ATM machines, and so forth, are able to function and not shut off

at some choke points?

Mr. YINGLING. It is a very good question and one that is maybe

the other shoe here, if you will. We have the money laundering side

of it that we need to work on, and we have the securities side of

it. We are very proud of what happened in the immediate aftermath after the attack in terms of the way the banking system was

able to respond. Mr. Lackritz in his statement talked about the

great job the securities industry did.

Part of that, quite frankly, was a result of preparing for the

changeover in the Millennium—all the work we did there that a

few days afterwards everybody scratched their head and said,

‘‘Well, maybe we did more than we needed to.’’ A lot of that work

was building in redundancy, and a lot of that work was making

sure we had contingency plans.

There is no one group to address your point—although John

Byrne sitting behind me is an expert in security and does a lot of

work in that regard—because we are many different industries—

for example, the credit card industry, and we are the clearing industry for a lot of what goes on in the securities area. We also

transport cash around, so we have to cut across many different aspects of our business.

We have been talking internally about the need to really address

this question in a comprehensive fashion. We have had preliminary

discussions with Treasury about the need to do this. We have actually talked with the SIA about the importance of getting the key

groups together and reviewing everything we are doing in security.

Mr. LAFALCE. I would encourage you to create some type of a

committee or a task force, and so forth, because if we couldn’t use

the credit cards, if businesses couldn’t, you know, our economy is

really devastated. If we couldn’t have an effective clearinghouse

system, our economy would be devastated. And I think that this is

an extremely important issue, and I don’t know that we have a

problem. I hope we don’t. And it may have been anticipated, but

it is something that I think should be looked into very seriously.

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Mr. YINGLING. We will definitely do this, and we have also on a

very preliminary basis raised the issue with Governor Ridge that

this ought to be done in a comprehensive fashion. We agree completely with your concerns.

Mr. EIZENSTAT. If I could just reinforce what has been said, the

backup systems and the work which was done for the Y2K exercise

really proved themselves, because with the disaster that occurred,

the fact that the securities markets and banking system were able

to get back on their feet so quickly meant that there were sufficient

backup systems. The firm which handled all the bond work, much

of the bond work, for example, used their London system. So a lot

of that investment, although no one realized it would be for this,

did come in handy.

Mr. LAFALCE. All right. Thank you very much.

Mr. BACHUS. Mr. Leach.

Mr. LEACH. Let me first start with the big picture in terms of the

financial services community here. I think it has to be underscored

and underscored, and that is that despite this kind of instant stability in the United States, A, dependent on financial services and,

B, our financial services community is incredibly stable, and that

is the big picture, and that is wonderful and all that that represents. The financial community ought to take pride. This is for

a good cause, and it is principally private sector.

Having said that, there is a trauma on some little picture issues

that you can have some big pictures ramifications, and that is the

history of the 20th century has been one that too much regulation

has been helpful, and we all recognize that. On the other hand,

there is some regulation that is prudential. We don’t normally

think of this in the national security vein, but suddenly it has been

a national security vein.

So issues like money laundering have implications in tracking accountability of people who have committed crimes. They also have

some implications for preventing crimes before they are led forth,

and that can be in the realm of terrorism. It can be narco-trafficking. It can be corruption of many different levels. And I think

that the financial community is going to have to rethink the position they took in the last Congress on objecting to some legislative

approaches that were on the table at the time.

I have been particularly surprised that the banking community

hasn’t been leading the charge on everything to do with internet

gambling. In fact, I have been so startled with that, Mr. Yingling,

I cannot tell you. The approach that originally confronts one is that

based upon that, why should we take accountability, and that is a

very reasonable question. Why should the banks be the principal

law enforcement for internet gambling?

But it ends up, for whatever reason, all other approaches have

proved to be frail, if not lacking, in virtually any capacity to me.

For example, many of us believe current laws preclude internet

gambling, and yet they are unenforceable. And so the only way

that we know to bring some enforcement is through putting some

prohibitions in through financial instruments. I would wish there

were other approaches.

But I will tell you, forgetting everything you do with terrorism,

the implications of internet gambling for credit card companies is

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going to be stunning new losses as people are headed out with

these credit cards. There are people that get hooked on it, and it

looks like a small percentage of the American public easily gets

hooked on internet gambling. It is going to be very devastating on

the credit card industry. It is going to be very devastating for certain parts, with losses.

Now we come to the issue of terrorism. It appears that there is

a role for money laundering, and it also is pretty evident, perhaps,

not tied to the events of last month that gambling is historically

a wonderful technique for money laundering. Internet gambling in

particular is a good technique for money laundering.

It is also of interest in terms of terrorism that the country that

we are most interested in today is the country that has become one

of the leading heroin producers in the world, if not the leading heroin producer. And money laundering is traditionally a narco-trafficking circumstance. And so the linkage of narco-trafficking and

the potential of terrorism is not direct, but there is a tangential

link that I think we all have to be concerned with.

But I would, as strongly as I can, tell you that when I talk to

small bankers, they all are appalled by internet gambling. When

I talk to big bankers, there is no support for internet gambling.

And yet the body of conversation has gone to the assemblage of institutions that represent financial institutions. Some of the bigger

credit card companies have been in desperate opposition to anything that involves dealing with financial instruments and internet

gambling. And I think that is a true mistake, and I think people

ought to think about this in a very deep way, not only the implications for the issues of the week, but what it is going to mean for

our economy if this internet gambling takes off to the degree that

most people now assume it is going to. I think we are at the last

edges of the timetable to try to bring it down.

We worked very carefully with the Treasury in the last Congress,

and I am pleased that they came out with the approach that

seemed relatively realistic. I am very disappointed that in the bowels of the legislative channels, opposition was brought to bringing

this kind of approach to the floor. But I really think all of you are

going to have to think this through much deeper, much more carefully.

Finally, with regard to money laundering, I don’t think it is, by

any means, the answer to terrorism, but it is one of the tools that

can be applied. And I would only stress what I did a little bit earlier. It is self-evident. The institutions of finance abroad and in the

United States of America can be vulnerable to terrorism in the

years ahead. And I think, frankly, supporting legislative efforts of

this nature is about as prudential as anything I know of, and I just

am really, truly calling for a real look within the financial community at both of these issues.

I don’t want to ask for a response. I know you all have difficulties because you represent a processed way of reaching decisions,

but I am really hopeful that this is thought of in a new kind of parameter. Thank you.

Chairman OXLEY. Gentlemen, thank you for your testimony, and

I know you have answered numerous questions. The hearing is now

adjourned.

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[Whereupon, at 1:50 p.m., the hearing was adjourned.]

(65)

A P P E N D I X

October 3, 2001

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