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EVALUATING THE SECURITY OF 

THE U.S. FINANCIAL SECTOR 

HEARING 

BEFORE THE

TASK FORCE TO INVESTIGATE 

TERRORISM FINANCING 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

JUNE 24, 2015 

Printed for the use of the Committee on Financial Services 

Serial No. 114–36 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

TASK FORCE TO INVESTIGATE TERRORISM FINANCING

MICHAEL G. FITZPATRICK, Pennsylvania, Chairman 

ROBERT PITTENGER, North Carolina, Vice 

Chairman 

PETER T. KING, New York 

STEVE STIVERS, Ohio 

DENNIS A. ROSS, Florida 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

DAVID SCHWEIKERT, Arizona 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

FRENCH HILL, Arkansas 

STEPHEN F. LYNCH, Massachusetts, 

Ranking Member 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

KYRSTEN SINEMA, Arizona 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

June 24, 2015 .................................................................................................... 1 

Appendix: 

June 24, 2015 .................................................................................................... 39 

WITNESSES 

WEDNESDAY, JUNE 24, 2015 

Carlson, John W., Chief of Staff, Financial Services Information Sharing 

and Analysis Center (FS-ISAC) .......................................................................... 10 

Poncy, Chip, Senior Advisor, Center on Sanctions and Illicit Finance at the 

Foundation for Defense of Democracies, and Founding Partner, Financial 

Integrity Network ................................................................................................ 8 

Vance, Hon. Cyrus R., Jr., District Attorney, New York County ........................ 6 

APPENDIX 

Prepared statements: 

Carlson, John W. .............................................................................................. 40 

Poncy, Chip ....................................................................................................... 60 

Vance, Hon. Cyrus R., Jr. ................................................................................ 81 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Ellison, Hon. Keith: 

Article from the New York Times entitled, ‘‘Homegrown Extremists Tied 

to Deadlier Toll Than Jihadists in U.S. Since 9/11,’’ dated June 24, 

2015 ................................................................................................................ 86 

Southern Poverty Law Center Hate Map (Active U.S. Hate Groups by 

State) .............................................................................................................. 89 

Written responses to questions for the record submitted to John W. 

Carlson ........................................................................................................... 90 

(1) 

EVALUATING THE SECURITY OF 

THE U.S. FINANCIAL SECTOR 

Wednesday, June 24, 2015 

U.S. HOUSE OF REPRESENTATIVES, TASK FORCE TO INVESTIGATE

TERRORISM FINANCING, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The task force met, pursuant to notice, at 2:30 p.m., in room 

2128, Rayburn House Office Building, Hon. Michael Fitzpatrick 

[chairman of the task force] presiding. 

Members present: Representatives Fitzpatrick, Pittenger, King, 

Stivers, Ross, Barr, Rothfus, Schweikert, Williams, Poliquin, Hill; 

Lynch, Sherman, Green, Ellison, Himes, and Sinema. 

Ex officio present: Representative Waters, 

Chairman FITZPATRICK. Thank you everyone for joining us today 

for the third hearing of the House Financial Services Committee’s 

Task Force to Investigate Terrorism Financing. Today’s hearing is 

entitled, ‘‘Evaluating the Security of the U.S. Financial Sector.’’ 

Through the first hearings of this task force, we have heard 

about the extensive reach—both in terms of impact and funding— 

of the terror groups that the United States and allied nations face 

today. From the Middle East to South America, we have examined 

the new methods of financing that these organizations are utilizing 

to spread and carry out their warped ideological aims. 

Terrorist groups no longer rely solely on ‘‘big-pocket donors,’’ or 

even state sponsors, but have diversified their streams of revenue 

to include a wide array of activities. Non-traditional funding methods—from antiques dealing and the sale of illicit oil in Iraq and 

Syria, to the drug trade and extortion in the Tri-Border Area of Argentina, Brazil, and Paraguay—have transformed these groups 

from regional entities to trans-national criminal syndicates. 

With this global scope, it is vital that the United States works 

with the international community to address these challenges. 

However, it is equally important that we look inward to assess the 

security of our own financial sector. 

That is the focus of today’s hearing. 

Many groups are constantly seeking to access and exploit the 

U.S. financial system. The complexity and sheer size of our financial system has created avenues within which criminals may move, 

hide, and launder their funds. Many of these groups understand 

our system’s weaknesses and gray areas with respect to beneficial 

ownership and customer due-diligence standards and they exploit 

it to our detriment. 

2 

Aside from the threat of actors operating within it, the United 

States financial system itself should also be considered a target for 

terrorists. 

Over the past several years, there has been a noticeable rise in 

the number of cyber-related attacks on United States businesses 

and government agencies, launched by state and non-state actors 

alike. This is attributed to the fact that such attacks cost very little 

to carry out, but have potential to cause severe problems and inflict 

great costs on the victim attempting to carry out the defense. 

The United States financial sector is too important for this task 

force to overlook when seeking to address the nexus of terrorism 

and finance. The continued innovation and evolution by our enemies highlights the importance of this body’s role in the fight 

against terror. 

The United States must do better when defending our financial 

system and addressing the threats operating within it. The risk is 

too great to ignore. 

I am confident that today’s dialogue between this bipartisan 

group of Members and the panel of expert witnesses that we have 

before us will help us to understand where our system is vulnerable and how these vulnerabilities should be corrected. 

At this time, I would like to recognize for 3 minutes the task 

force’s ranking member, my colleague from Massachusetts, Mr. 

Lynch, who has been a valuable asset to the task force. 

Mr. LYNCH. Thank you, Mr. Chairman. I want to thank the 

members of the panel as well, the witnesses, for helping the task 

force with its work. 

This is our third hearing. The first two were focused on the global reach of anti-terrorist financing. And I look forward to this third 

hearing which is going to actually look at the opportunity to evaluate the domestic security of the U.S. financial sector in order to 

better protect it from terrorist threats. 

It is an inward-focused perspective which I think is eminently 

necessary. It is crucial that our task force, as part of the Financial 

Services Committee, devotes resources to assessing the security of 

the U.S. financial sector. As our witnesses highlighted in their prepared remarks, the size and complexity of the financial sector 

makes it vulnerable for abuse by terrorist organizations. 

Shell companies and vulnerabilities in our financial system’s 

cyber infrastructure are two areas that are particularly susceptible 

to exploitation by terrorists. 

Shell companies particularly are being used to mask the identities of people who actually control or profit from these companies, 

the beneficial owners. And unfortunately, the United States does 

not currently collect information on beneficial owners. 

As Mr. Vance, a seasoned New York County district attorney, described in his prepared remarks, criminals and terrorists exploit 

our inadequate incorporation procedures and the anonymity in 

those procedures in order to conceal the illicit conduct. This makes 

it hard for law enforcement to follow the money to the ultimate 

owner. 

At this point, I want to yield to Mr. Brad Sherman of California 

for a brief opening statement. 

3 

Mr. SHERMAN. I have a very quick statement that relates to the 

chairman’s comments about cyberattacks from state actors. It is a 

step away from the exact focus of the hearing. 

The best defense against state actors attacking our cyber system 

is a good offense. We are too politically correct to have a good offense. We only go after government targets, we only take the information for government files. 

China is uniquely vulnerable to us if we choose to be politically 

incorrect. What we need to do is gather information about the assets and expenditures of their top 1,000 governmental officials, 

none of whom, I might add, are reported on personal financial disclosure statements filed with the ethics committee of any parliament. And if we were to expose even a few of the tasty tidbits, 

China would no longer be hacking into our system. 

But that is not politically correct. We will have bureaucrats asking us for money. They will only want to spend money on defense; 

they are a little wary of offense. And so, we will continue to be a 

punching bag, trying only to defend ourselves. 

I yield back. 

Mr. LYNCH. I would like to also yield 1 minute for a brief statement to Ms. Sinema of Arizona. 

Ms. SINEMA. Thank you, Chairman Fitzpatrick, and Ranking 

Member Lynch. 

The Administration has identified the financial services sector as 

critical infrastructure integral to our national security. 

Cyberattacks on U.S. critical infrastructure, including the financial 

sector, come from states, terrorists, criminals, and hacktivists. 

Sharing information about cyber breaches and threats is critical 

to ensuring the financial institutions and affected parties effectively prepare for and respond to cyberattacks. However, this 

doesn’t always occur. 

Firms and industry groups have cited concerns over violating privacy and antitrust laws as a reason that they are reluctant to 

share information. So we must make it easier for the private sector 

to successfully access threat information and remove barriers to 

sharing within the private sector and with the Federal Government. 

Information sharing is an important tool for protecting information systems and their contents from unauthorized access from 

cyber criminals. But it is only one of the many assets of cybersecurity that organizations must address to secure their systems and 

information. 

I am looking forward to continuing to work with my colleagues 

on both sides of the aisle to reduce vulnerabilities in the cybersecurity ecosystem and strengthen measures to protect our critical infrastructure. And I am looking forward to hearing more from our 

witnesses today about the essential elements of effective cyberthreat information-sharing legislation. 

Thank you. I yield back. 

Chairman FITZPATRICK. I now recognize the vice chairman of the 

task force, Mr. Pittenger of North Carolina, for 1 minute for the 

purpose of making an opening statement. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

4 

And thank you to Ranking Member Lynch for your continued efforts with this task force. 

Recent reports from the State Department and the Treasury Department have further highlighted the priority that we must place 

in our counter-terrorist financing efforts. 

The 2014 State Department Country Reports on Terrorism make 

it clear that terrorism is becoming more prevalent. The number of 

attacks increased by 35 percent with 3,000 more attacks in 2014 

than 2013, and fatalities increased 81 percent to 32,727 deaths in 

2014. 

And the National Terrorist Financing Risk Assessment shows 

that while we have made progress in undermining terrorist financing, there are still vulnerabilities in our system and more could be 

done. 

While the United States is in compliance with the majority of the 

Financial Action Task Force (FATF) recommendations, we have our 

own noncompliance issues. I look forward to continuing to work 

with this task force to achieve this, including efforts to increase the 

cooperation between the public and the private sector. 

I look forward to the testimony today and the views of our distinguished witnesses on what else can be done to stop the flow of 

money to terrorists. 

Thank you, Mr. Chairman. And I yield back. 

Chairman FITZPATRICK. We now welcome our witnesses. And I 

recognize the gentleman from New York, Mr. King, for the purpose 

of introducing the district attorney of New York County. 

Mr. KING. Thank you, Mr. Chairman. Thank you for giving me 

this privilege because it really is a privilege to introduce Cy Vance 

to this committee. 

Cy Vance comes from a tradition of district attorneys in New 

York where his two predecessors, Frank Hogan and Robert Morgenthau, between the 2 of them served for more than 65 years. So 

this is a very distinguished office and Cy Vance more than fits the 

bill; he more than lives up to the standards of that office. 

He was elected in 2009. He was re-elected with 91 percent of the 

vote in 2013. All of us can only envy that vote margin. But before 

that, he was a leading prosecutor and also had a very successful 

career in the private sector. 

The main reason he is uniquely qualified today is that his office, 

the district attorney’s office located in the world financial capital, 

has been extremely active in international financial issues, recovering billions of dollars from institutions that have violated sanctions, and on the issue of terrorism itself; he was the first district 

attorney to obtain a terrorist conviction in New York State courts. 

It was the Pimentel case which other prosecutors, including the 

Federal Government, did not want to go near because they thought 

it could not be won. The fact is a conviction was obtained and it 

was a very, very significant conviction for the district attorney. So 

I look forward to District Attorney Vance’s testimony here today. 

I can tell you—I am saying this as a Republican—that he is universally respected in New York by all political parties, by members of 

the bar, by police, by law enforcement, and by defense counsel. And 

his testimony today will be extremely illuminating and helpful. 

And Cy, it is a real privilege to have you here today. 

5 

Mr. Chairman, I yield back. 

Chairman FITZPATRICK. Thank you. 

Welcome to the panel, Mr. Vance. 

Next, we have Chip Poncy, a founding partner of the Financial 

Integrity Network, and a senior adviser of the Center on Sanctions 

and Illicit Finance at the Foundation for Defense of Democracies. 

Mr. Poncy previously served as the interim head of financial 

crimes compliance from Mexico and the Latin American region for 

one of the world’s largest banks. Mr. Poncy also served as the inaugural director of the Office of Strategic Policy for Terrorist Financing and Financial Crimes and as a senior adviser at the U.S. Department of the Treasury. 

From 2010 to 2013, Mr. Poncy led the United States delegation 

to the Financial Action Task Force where he co-chaired a policy 

working group and managed United States participation on illicit 

finance expert groups. 

Mr. Poncy graduated with honors from Harvard University, received a masters degree in international relations from the Johns 

Hopkins School of Advanced International Studies, and holds a law 

degree from the Georgetown University Law Center. 

He also graduated from high school with Representative Rooney 

of Florida, further distinguishing himself. 

So, we welcome you. 

And finally, we have John Carlson, the chief of staff at the Financial Services Information Sharing and Analysis Center, or the 

FS-ISAC. 

Prior to joining the FS-ISAC, Mr. Carlson served as the executive 

vice president of BITS, the Technology and Policy Division of the 

Financial Services Roundtable. There, Mr. Carlson led cybersecurity, technology, and collaboration programs for 12 years and participated in the Financial Services Sector Coordinating Council. 

Mr. Carlson also served as managing director of Morgan Stanley’s Operational Risk Department and in a variety of leadership 

roles at the Office of the Comptroller of the Currency, the Office 

of Management and Budget, the Federal Reserve Bank of Boston, 

and the United Nations Center for Human Settlements. 

Mr. Carlson graduated from the University of Maryland, and received a masters degree in public policy from the Kennedy School 

of Government at Harvard University. 

The witnesses will now be recognized for 5 minutes each to give 

an oral presentation of their testimony. And without objection, the 

witnesses’ written statements will be made a part of the record. 

Once the witnesses have finished presenting their testimony, each 

member of the task force will have 5 minutes within which to ask 

questions. 

On your table there are three lights: green; yellow; and red. Yellow means you have 1 minute remaining, and red means your time 

is up. 

The microphone is sensitive, so please make sure that you are 

speaking directly into it. 

With that, Mr. Vance, you are now recognized for 5 minutes. Just 

make sure the microphone is turned on as well. 

6 

STATEMENT OF THE HONORABLE CYRUS R. VANCE, JR., 

DISTRICT ATTORNEY, NEW YORK COUNTY 

Mr. VANCE. Good morning, Chairman Fitzpatrick, Ranking Member Lynch, Representative King, and members of the Task Force to 

Investigate Terrorism Financing. 

As the head elected law enforcement official for New York County, which is a target for terrorism from around the world, I want 

to thank you for taking on this crucial issue, and for the opportunity to talk to you and with you today. 

I came to share with you the perspective of State and local law 

enforcement on nontransparent beneficial ownership and the ease 

with which criminals and terrorists can operate anonymously in 

our jurisdictions. 

As Representative King indicated, because of my office’s location 

in Manhattan as a global financial capital, our office has the responsibility to interrupt terrorism financing and other financial 

crime. And for decades, our office has conducted investigations that 

rely on financial tracing and analysis to root out these crimes along 

with money laundering, sanctions violations, human trafficking, 

cyber crime, and other frauds. 

Like many in white-collar law enforcement, our way of doing 

business is to identify the money and to follow the money, which 

in most cases means issuing subpoenas for records from financial 

institutions and pursuing the leads that those records provide. But 

sometimes those records lead nowhere. 

I want to share an anecdote which should be disturbing. It is not, 

unfortunately, uncommon. 

While I was preparing for my testimony here, an investigator in 

my office entered the phrase ‘‘incorporate Delaware company’’ into 

a Google search. And she called an incorporation services vendor 

that appeared in her search results. 

Putting on her best accent, she stated that she lives in France, 

that she wanted to incorporate a company in Delaware, but that 

she wished to remain anonymous because of ‘‘estate issues’’ in her 

country. And she was told that wouldn’t be a problem. A corporation could be set up in 5 minutes; she needed to provide only a 

name and an email address. 

And that interchange, I believe, highlights starkly what I and my 

colleagues know very well: That criminals currently can and do 

make use of our lax incorporation procedures and the anonymity 

those procedures permit in order to carry out and conceal illegal 

conduct. 

On a nearly daily basis, we encounter a company or a network 

of companies involved in suspicious activity, but we are unable to 

glean who is actually controlling and benefiting from those entities 

and from their illegal activity. In other words, we cannot identify 

the criminal. 

And that is not because entities are incorporated in an offshore 

tax haven like the Cayman Islands. That country actually collects 

beneficial ownership information. Often, that entity is instead incorporated in the United States, and it is incorporated in the 

United States precisely because we don’t collect beneficial owner 

information. 

7 

And in this important way, a prosecutor sitting in the Cayman 

Islands is better positioned to root out terrorism finance in her own 

markets than I am in ours. 

Too frequently, an anonymous incorporation record spells the end 

to our investigative road. And when we are able with much time 

and effort to overcome that obstacle, we often find that the criminals have purposely relied on our lax incorporation requirements. 

Recently, for example, a New York County grand jury indicted 

eight individuals in a sprawling pump-and-dump securities fraud 

scheme in which stock promoters and company insiders reversemerged private companies with no publicly traded securities into 

existing public shell companies. 

They concealed their control of the shell companies by using 

nominees to purchase them and to hold the publicly traded shares 

in their names. But the scheme’s mastermind appears nowhere in 

the incorporation documents and held none of the company’s shares 

in his name. 

As in so many of our cases, disguised beneficial ownership is precisely what enabled this scheme. 

The perils of anonymous incorporation go well beyond securities 

fraud. Shell companies doing business in New York can be used to 

disguise the activities of entire foreign governments. 

In 2006, my office was investigating the Alavi Foundation, a notfor-profit organization which owned a 60 percent stake in a 36- 

story office building in midtown Manhattan. The remaining 40 percent was owned by the Assa Corporation, a New York incorporated 

entity, and by Assa Company Limited, which was incorporated in 

the Channel Islands. 

We ultimately determined that the Assa entities were merely 

shells being used to disguise the building’s actual owner, a bank 

called Melli. Bank Melli, as you may be aware, is wholly owned by 

the government of Iran. It was designated by the Office of Foreign 

Assets Control (OFAC) as a key financier to Iran’s nuclear and ballistic missiles program and as a banker to the country, the Revolutionary Guard, and the Quds Force. 

The building generated substantial rental income which was diverted to the shell companies and from there to Bank Melli. 

My office routinely collaborates with foreign law enforcement to 

incapacitate cross-border threats. But time and time again, we find 

that our international partners are better situated to assist us in 

thwarting terrorism and financial crime than vice versa. 

It is detrimental to those partnerships when we have to tell our 

international law enforcement friends that we can’t assist them in 

taking down U.S.-incorporated terrorist enterprises because information about the owners of the entities formed in our own States 

is beyond our reach. 

A simple requirement to identify beneficial owners on State incorporation forms would vastly improve the capacity of American 

law enforcement to attack terrorism finance and disrupt terror 

plots. 

Thank you for the opportunity to testify today. 

[The prepared statement of District Attorney Vance can be found 

on page 81 of the appendix.] 

8 

Chairman FITZPATRICK. Mr. Poncy, you are now recognized for 5 

minutes. 

STATEMENT OF CHIP PONCY, SENIOR ADVISOR, CENTER ON 

SANCTIONS AND ILLICIT FINANCE AT THE FOUNDATION 

FOR DEFENSE OF DEMOCRACIES, AND FOUNDING PARTNER, 

FINANCIAL INTEGRITY NETWORK 

Mr. PONCY. Chairman Fitzpatrick, Vice Chairman Pittenger, 

Ranking Member Lynch, and other distinguished members of the 

task force, I am honored by your invitation to testify today, particularly with such a distinguished panel. 

There are important steps that this task force can take to 

strengthen the security of our financial system, the integrity of our 

economic markets, and our national and collective security. 

Such steps will help combat terrorism, transnational organized 

crime, WMD proliferation, and corrupt elites by denying these and 

other national security threats access to the financial services they 

require. 

These steps will also strengthen our ability to identify, pursue, 

and disrupt illicit financing networks that fuel and enable these 

threats. These steps must focus on addressing systemic challenges 

to our financial integrity. Such challenges stem largely from weaknesses in implementing global anti-money-laundering and counterterrorist financing standards, standards that U.S. leadership has 

helped create through the Financial Action Task Force, or FATF. 

These global standards direct countries to implement comprehensive anti-money-laundering, counter-terrorist financing regimes 

that deliver financial transparency and financial accountability. 

Financial transparency allows us to track and trace illicit financing across an increasingly globalized financial system. Financial accountability ensures that our financial institutions implement the 

systems and controls required to deliver financial transparency. 

Financial accountability also ensures the aggressive pursuit, disruption, and deterrence of illicit financing activity, actors, and assets that infiltrate our system. 

In an increasingly globalized financial system, economy and 

threat environment, we must pursue a global approach to achieving 

these objectives. Such an approach must build upon our success in 

leading the global implementation of the international framework 

for anti-money laundering and combating the financing of terrorism (AML/CFT) regimes that deliver financial transparency and 

accountability. 

This requires legislation and rulemaking to close key gaps in implementing a number of FATF global standards essential to achieving financial transparency here at home. 

It also requires continued aggressive enforcement and a strengthened partnership with the financial sector to facilitate compliance 

with financial transparency requirements. And it requires additional resources to expand targeting of illicit financing networks. 

This committee can strengthen U.S. leadership in overcoming 

these challenges by taking the following 10 steps that will significantly enhance financial transparency and accountability. 

One, adopt legislation expanding the purposes of the Bank Secrecy Act (BSA) to explicitly include protecting the integrity of the 

9 

financial system. Such legislation is required to underscore the importance of partnership with the financial institutions that comprise our financial system. 

Two, adopt legislation to require the disclosure and maintenance 

of meaningful beneficial ownership information in our company formation processes. Such legislation is required to address the chronic abuse of legal entities that mask the identities and illicit financing activities of the full scope of criminal and illicit financing activities in actors. 

Three, collaborate with the Treasury Department to consider legislation that strengthens the information-sharing provisions of Section 314 of the USA Patriot Act. Such action may assist in addressing systemic challenges to financial integrity posed by informationsharing constraints. 

Four, support the issuance of Treasury’s proposed rule on customer due diligence, consistent with that of standards. Such action 

is required to address the systemic challenges posed by CDD practices that fall below global standards here in the United States and 

particularly with respect to beneficial ownership. 

Five, support Treasury’s consideration to extend AML/CFT preventive measures to investment advisers and financial intermediaries and real estate transactions, consistent again with global 

standards. 

This action is required to help address the systemic challenges 

created by gaps in our financial system that are not covered by 

AML/CFT regulation. This includes a blind spot with respect to 

more than $66 trillion of assets under management, held by investment advisers that currently sit outside the scope of AML/CFT regulation in our markets. 

Six, support Treasury’s consideration of lowering the recordkeeping and travel-rule thresholds, consistent with that of standards. 

Seven, provide protective resources for Treasury to enhance examination and supervision of BSA-covered industries that lack a 

Federal functional regulator. 

Eight, provide protective resources for the IRS and Department 

of Justice to enhance financial investigations of illicit financing networks. Such action is needed to strengthen the systemic pursuit of 

illicit financing networks of the criminal investigative and prosecutorial authorities that are the best suited and the best trained to 

support this mission. 

Nine, provide protective resources for Treasury to enhance targeting of primary money-laundering concerns under Section 311 of 

the Patriot Act and targeting of illicit financing networks under national security authorities. Such action is needed to give the Treasury the resources it requires to continue applying targeted financial 

measures that effectively disrupt a growing range of criminal and 

national security threats. 

And ten, provide protective resources for Treasury to develop foreign capacity in critical financial centers to support the effective 

implementation of targeted financial measures. 

These 10 steps outline the foundation for an action plan that this 

committee can move forward with to strengthen our financial integrity and the effectiveness of our counter-illicit-financing mission. 

10 

Once again, I am honored to testify here today in support of 

those who, across our government and financial services industries, 

fight every day to protect our financial integrity. They are literally 

the best in the world in advancing this mission and their continued 

success will require your ongoing support. Thank you. 

[The prepared statement of Mr. Poncy can be found on page 60 

of the appendix.] 

Chairman FITZPATRICK. Thank you. 

Mr. Carlson, you are now recognized for 5 minutes. 

STATEMENT OF JOHN W. CARLSON, CHIEF OF STAFF, FINANCIAL SERVICES INFORMATION SHARING AND ANALYSIS 

CENTER (FS-ISAC) 

Mr. CARLSON. Great. Thank you very much, Mr. Chairman. 

My name is John Carlson, and I am the chief of staff of the Financial Services Information Sharing and Analysis Center (FSISAC). FS-ISAC is a not-for-profit formed in 1999 in response to 

Presidential Decision Directive 63 of 1998. 

My written statement includes some details on our 16-year history, our 6,000 member organizations, what we do, and how we engage with the United States and others around the globe. 

Briefly, we play a critical role in sharing cyber and physical 

threat information, conducting coordinated contingency planning 

exercises, managing rapid response communications for both cyber 

and physical events, such as Hurricane Sandy of 2012, and fostering collaborations with other key sectors and government agencies. 

Thank you for inviting me to testify today at this hearing on 

evaluating the security of the U.S. financial sector. 

The current security threat environment continues to evolve and 

intensify. It affects all institutions regardless of size and type. Increasingly other sectors such as retailers and health care providers 

and, yes, even our own Federal Government, face these same 

threats. 

We see malicious cyber actors with increasing sophistication and 

growing persistence. These actors vary considerably in terms of motivation and capability. They range from nation states conducting 

espionage and sponsoring what we call distributed denial of service 

(DDOS) attacks, advanced cyber criminals who seek to steal 

money, terrorists looking to finance their activities, and hacktivists 

intent on making political statements. 

There are numerous tactics that malicious cyber actors use to 

target financial institutions. Among these, the following are concerning: targeted spear phishing campaigns; ransom-ware attacks; 

distributed denial of service attacks; a new one, business email 

compromise leading to fraudulent wire transfers; supply chain 

risks; a blending of physical and cyberattacks like we have seen in 

some of the attacks going after ATM networks; and of course, insider threats which oftentimes yield the most damaging results. 

The quote often attributed to Willy Sutton that he robbed banks 

because that is where the money is, reminds us why financial institutions are often the subject of cyberattacks. However, that quaint 

quote does not capture the entirety of the situation we face today. 

11 

We are also observing that financial institutions are being targeted in response to international conflicts. Perhaps the best visible 

example of this was the DDOS attack several years ago when an 

organization backed by a foreign country targeted dozens of financial institutions over many months. 

The persistent, organized attacks were very disruptive. The only 

silver lining is that they resulted in unprecedented levels of information sharing among financial institutions and with the U.S. Government. 

For example, the information shared by firms that were attacked 

during the first wave benefited firms targeted during the second, 

third, and fourth waves. They also resulted in elevating cyber to a 

CEO-level issue, where it remains today. 

The financial sector is increasingly concerned with the potential 

for attacks that could undermine the integrity of the financial system through data manipulation and destruction. 

In response, my organization, working with others, has launched 

a task force with over 80 representatives from firms and government agencies to develop best practices on how to mitigate and respond to potential destructive malware attacks. 

These are serious concerns and we are addressing them in a serious manner. We are investing in the future and fostering collaborations to better match the threat environment. 

For example, last year we launched with the Depository Trust 

and Clearing Corporation, Soltra Edge, a game-changing new service that automates cyber threat information sharing. Soltra Edge 

leverages two open standards: the Structure Threat Information 

eXpression, or STIX; and the Trusted Automated eXchange and Indicator Information, also called TAXII, that the Department of 

Homeland Security funded and the MITRE Corporation developed. 

I certainly don’t want to leave you with the impression that the 

financial sector needs more regulation to address the cyber challenge. In my written statement, I explain the extent to which the 

financial sector is regulated based in part on the Gramm-Leach-Bliley Act of 1999, as well as extensive supervisory guidance that regulators have issued over the past 15 years. 

I also explain how our sector’s strong risk management culture 

and our leadership in collaborating with other sectors and government agencies is critical to our success in repelling these attacks. 

Let me conclude by saying that the information-sharing practices 

that our sector uses today are working well to the point that other 

sectors are looking to us for guidance and best practices. However, 

much more needs to be done given the increasing risks our sector 

and country faces. 

I outline in my written statement some recommendations for actions for the Congress and the Administration that could supplement these efforts. In short, the Congress can play a constructive 

role by enacting cyber-threat information-sharing legislation, which 

I know the House has passed, and it is awaiting action in the Senate; encouraging financial regulators to harmonize regulatory requirements; and supporting other efforts by the Administration to 

enhance information sharing and cyber protections. 

Thank you for the opportunity to testify. 

12 

[The prepared statement of Mr. Carlson can be found on page 40 

of the appendix.] 

Chairman FITZPATRICK. We thank the panel of expert witnesses 

for your opening statements here to the task force. 

At this point, each of the Members will be recognized for 5 minutes for the purpose of asking questions. 

I now recognize myself for questions. 

Mr. Poncy, in your testimony you mentioned actions, and you 

have mentioned this in the past as well, actions that could be 

taken by the United States to meet the FATF global standards, 

customer due diligence rule, you have mentioned lowering the travel record-keeping threshold from $3,000 to $1,000. What are the obstacles the United States Treasury Department is encountering 

which are prohibiting adoption of some of these rules at this point? 

Is it lack of resources? Is it political will? What do you believe it 

is? 

Mr. PONCY. Thank you, Congressman. Two great questions, and 

I think the answer is a combination of a lack of understanding of 

the importance of those rulemakings to protecting our financial integrity, and a stretch of resources that are required to advance our 

counter-illicit-financing mission. 

The Treasury Department, the investment of the Treasury Department to manage the security of the financial system is a fraction of the investment that is made across our national security infrastructure. That is no secret. Main Treasury is very small. It operates like a professional firm. 

It also has responsibility to manage the integrity of not just the 

U.S. financial system, but in today’s globalized economy, pretty 

much the global financial system. The people at the Treasury Department work harder than any of the folks that I have worked 

with throughout my career. 

To ask them to continue the expansion of this mission, due to its 

success, what started as a counterterrorism financing campaign 

built on the back of AML systems and has now expanded to include 

threats against transnational organized crime, WMD proliferation, 

grand-scale corruption, cyber crime, is being done with the same 

group of people who were working 24-hour shifts to combat terrorism financing after 9/11. They need more resources. It is just 

that simple. 

But in addition to that, they need support, not only of the Congress, but of the general public. The American Bankers Association 

and the American Bar Association have been visibly absent from 

supporting Treasury’s role in customer due diligence. This is evident in the comments with respect to the rulemakings that Treasury has proposed. 

Some of the concerns they have raised are important concerns. 

Treasury has engaged in historic outreach on these rulemakings. In 

the 40-year history of the BSA, the Treasury Department had 

never conducted a cross-country campaign in New York, Washington, Miami, Chicago, or L.A. with banks, with broker dealers, 

with insurance companies, with futures commissions merchants, 

with money service businesses, to understand the challenges of implementing customer due diligence and to get it right. 

13 

I would submit that the proposed rule that Treasury issued last 

July gets it right. Getting that rule from a proposed rule to a final 

rule requires more visibility and more support from the Congress 

and from the general public. Thank you. 

Chairman FITZPATRICK. Mr. Vance, you have been one of the Nation’s leaders ringing the bell on the whole issue of beneficial ownership. You are doing it as a law enforcement professional working 

with mainly State, city, county, and other law, and there is some 

intersection with Federal agencies. 

Recently, the Treasury issued a notice of rulemaking on this subject of beneficial ownership. I was wondering if you were familiar 

with that notice and if you have any comments on that? 

Mr. VANCE. In all honesty, Congressman, I am not familiar with 

it in detail, so I don’t want to mislead you before I answer the 

question. 

Chairman FITZPATRICK. What it would do, is ease compliance 

burdens compared with the advanced notice of proposed rulemaking which would have forced institutions to verify that beneficial owners listed by an account holder were actually the entity’s 

beneficial owner. 

Mr. VANCE. Congressman, our issue is our ability to access that 

information for State prosecutors. So if we have to go to the IRS, 

for example, to get that information, current law does not permit 

us to just go to the IRS and obtain information that we can then 

use to investigate. 

So I think that is a step, but my preference, as I indicate in my 

testimony, is that there be a 50-State solution to this whereby beneficial ownership is required upon incorporation and that will give 

prosecutors like myself equal and direct access through grand jury 

subpoenas to information that is vital for us to protect our communities. 

Chairman FITZPATRICK. I am going to ask each of you, if you can 

make one suggestion on the issue of information sharing, we will 

start with Mr. Carlson, a suggested amendment or change to Section 314 of the USA Patriot Act, what would it be? 

Mr. CARLSON. I don’t know the specifics on Section 314, but I 

think in general we are looking for protections to share information 

so you are not held liable for sharing that information, as well as 

protections from disclosure, such as the Freedom of Information 

Act, if you are sharing information with the government. 

I think within the financial sector, we actually have developed a 

mechanism to share that kind of information, but we need further 

protections in order to encourage others to start sharing and to 

give them some legal cover in case they do share and that information gets released. 

Chairman FITZPATRICK. Mr. Poncy, could you quickly suggest a 

recommendation? 

Mr. PONCY. Thank you, Congressman. There are two elements of 

Section 314 that bear re-examination. One is that 316B allows financial institutions to share information related to combating financial crime and achieving safe harbor from different types of liability associated with information sharing. 

But the type of information sharing that is anticipated under 314 

is not necessarily the most expansive imaginable. What we want, 

14 

what we need is to have our best compliance teams sitting in our 

global banks working with one another to map illicit financing networks. 

We know a lot of people who do this. They used to do this at the 

Treasury Department. They used to do this at the FBI. They used 

to do this in the Manhattan DA’s office. And they are some of the 

best investigators in this we have. They cannot sit down with one 

another with their customer data and link this up to figure out 

where illicit networks are penetrating our institutions. 

So one is the kind of information sharing that we are talking 

about. 

And two is what is a permissive allowance perhaps should be a 

requirement. 

So those would be two suggestions to start. 

Chairman FITZPATRICK. Thank you. 

My time has expired. 

I would like to recognize the ranking member of the full Financial Services Committee, Ms. Waters of California. 

Ms. WATERS. Thank you very much. 

I would like to address this question to Mr. Cyrus Vance. 

The Patriot Act allowed FinCEN to temporarily exempt certain 

categories of entities and institutions from having to establish a 

basic anti-money-laundering program that entails developing internal policies, procedures, and controls, designating a compliance officer, providing for ongoing employee training, and an independent 

audit function to test programs. 

Today, nearly 14 years after the Patriot Act was passed, there 

are a number of categories of institutions that remain exempt from 

these basic requirements. The list of exempted entities includes 

pawn brokers, travel agencies, sellers of vehicles, including automobiles, airplanes and boats, persons involved in real estate closings and settlements, private bankers, commodity pool operators, 

commodity trading and advisers, and investment companies. 

Do you believe it is time for Treasury to revisit whether the exemptions for the entities I just listed continue to be appropriate? 

Mr. VANCE. I do, Congresswoman. I think you answered your 

question by asking it. We have 5 years—much more experience 

now as a result of the Patriot Act and I think some of the categories of industry that you talk about are now ones that should 

be looked at in order to consider whether they should be included. 

Ms. WATERS. Thank you very much. 

Let me go to Mr. Poncy. 

I understand that you were at Treasury, is that right? 

Mr. PONCY. That is right, ma’am. 

Ms. WATERS. And so the question that I just asked, could you 

please give us your take on that? 

Mr. PONCY. Thank you very much. And I am always happy to 

have the Manhattan district attorney take the words out of my 

mouth. I couldn’t agree more. 

I certainly think it is time to re-examine it, but it is important 

how we do it. 

The limited resources we have over our regulatory system are 

such that even for sectors that we have nominally regulated, we 

cannot ensure their integrity. 

15 

So we have at the moment BSA regulation requirements over 

high-priced commodity merchants and dealers. There is no Federal 

regulator over that. It is the same for money service businesses 

and insurance companies. 

One of the recommendations that I have in my testimony is that 

we invest targeted resources to strengthen oversight of sectors that 

are already covered so that they actually understand and implement the obligations that are already on the books. 

The second recommendation that I have in my testimony is to do 

exactly what you suggested, to examine the coverage of the financial system with existing requirements. 

In particular, the investment adviser sector is one that controls $66 trillion of assets under management, that is ‘‘trillion,’’ with a 

‘‘t.’’ That is 5 times our GDP. That sector does not have any AML/ 

CFT obligations right now, so I would start there. 

And then I have also recommended taking a look at financial 

intermediaries involved in real estate closings. All of us have seen 

the exposes in New York and Miami and elsewhere about high-luxury properties going to offshore interests often on the back of corrupt proceeds. If we want to stop those activities, then I suggest 

that we start with those two sectors in particular. 

And I know the Treasury Department is strongly considering 

that. Again, it is a question of resources and a question of public 

visibility. So, support to the Treasury Department for what is already an effort to try to get ahead of this might help the Administration get over the fence. 

Ms. WATERS. In your testimony, you also stated that the long 

string of U.S. enforcement actions against global banks and other 

financial institutions in recent years underscores the U.S. commitment to global anti-money-laundering and counterterrorism financing regime and financial integrity. 

And then you say it also raises questions about the state of industry compliance and the cultural commitment to compliance on 

critical national security matters across the banking sector. 

I want to tell you that I was very surprised. We spent quite a 

bit of time on HSBC Bank. And of course, there was a big fine 

against them. But when we began to delve deeply into how they 

manage their controls, and we had staff go up to HSBC and get the 

regular tour and all that, we had a whistleblower, we were surprised at what we consider was a lack of really tough controls that 

were absolutely managed and overseen by those at the very highest 

levels. 

So what about that? And why do you think we have such a commitment if we have these banks that are still involved with money 

laundering and they get a slap on the wrist with some fines? 

Mr. PONCY. That is such a fantastic question. I would spend the 

whole hearing on that if I could. It is an incredibly important one. 

I will try to be brief, starting with what we know. 

One, the United States enforcement community is stronger than 

any community in the world by a long shot. Many of the banks, including HSBC, are foreign banks that operate within the United 

States. 

Our law enforcement combined with our supervisors is frankly 

the only enforcement game in town, and this is in a global financial 

16 

system that we are connected to. So let’s start with the recognition 

that despite the challenges that we face, we are operating in a 

global environment in which we are already putting tremendous 

pressure on institutions that operate here versus offshore. And we 

are competing with those same institutions. 

Second, our law enforcement efforts have substantially changed 

the efforts of financial institutions that are operating in the United 

States. So when you look at these monitor shifts and you look at 

these injunctive actions and enforcement actions that the Manhattan district attorneys office, that the Southern District of New 

York, Eastern District of New York and others have taken, there 

is no doubt in my mind, I have been in these banks, that they are 

a different place than they were 5 years ago. And that is entirely 

owing to our enforcement commitment. 

The question you raised, though, is important, and this is in my 

testimony. It is not clear whether the current enforcement environment that is so essential is going to be enough to change a global 

challenge of compliance, a culture of compliance that is questionable across not just the global banking industry, the global banking 

industry, these are our best, right? These are the ones who can 

block and tackle. 

What about the non-banks? What about capital markets? What 

about money service businesses? 

So it is just the beginning of the answer to your question, but 

it deserves more time. 

Chairman FITZPATRICK. Thank you, Mr. Poncy. 

The gentlelady’s time has expired. 

Mr. Pittenger, you are recognized for 5 minutes. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

Mr. Poncy, in my discussions with the officials at FATF, I have 

raised the concerns about the compliance of the other 34 member 

countries with the 40 recommendations. And they come back to me 

and say the question asked by so many of these countries is the 

U.S. compliance, particularly as it relates to the beneficial ownership. 

Would you speak to the importance of our compliance and how 

this affects our other member countries in causing them to be in 

greater compliance? 

Mr. PONCY. Thank you, Congressman. That is a great question. 

The strength of our financial system, the integrity of it, rests upon 

our leadership globally. And the work that we have done in FATF 

and the credibility that we have achieved through our work at 

FATF and the work that we do back here at home is second to 

none. 

But people are always looking at the United States naturally as 

a position of leadership and of vulnerability in an economy that we 

dominate as to how is the United States doing and is the United 

States practicing what it is preaching. 

And when it comes to beneficial ownership, we have work to do. 

I want to go back to, and this answers your question, Congressman Pittenger, some of what Congressman Fitzpatrick was asking 

about, customer due diligence versus what the Manhattan district 

attorney Cyrus Vance has mentioned about company formation reVerDate Nov 24 2008 16:06 Mar 17, 2016 Jkt 096997 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\96997.TXT TERI
17 

form. These are two ends that are both essential to achieve transparency on beneficial ownership. 

They do it in different ways and they are not mutually exclusive; 

in fact, they are both absolutely necessary to comply with FATF 

and to achieve financial transparency. 

On the one hand, anybody who wants access to financial services 

should be somebody that we know who they are. That is what customer due diligence is supposed to do. We need the Treasury rule 

out to meet FATF standards and have confidence that our banks 

and our financial institutions understand the people they do business with. That is one element. 

The other element that the FATF is concerned with, with the 

United States, concerns company formation, which Mr. Vance has 

discussed. And to achieve compliance with that requirement requires us to reform company formation processes. 

I know Mr. Vance’s testimony and mine both recommend legislation to fix this. It will require legislation, and there are a number 

of ways to do it. But the point is that there are now solutions on 

the table that require action. 

If we achieve compliance with beneficial ownership requirements, 

both with respect to customer due diligence and company formation, we will have addressed the overwhelming concern from FATF 

with U.S. compliance. And at that point, that strengthens our hand 

to continue to demand that other countries step forward on other 

matters. 

Mr. PITTENGER. That is really the point I wanted to make. You 

emphasized the impact it has on our ability to lead and cause accountability from our other member countries. 

Mr. PONCY. Exactly. 

Mr. PITTENGER. Mr. Carlson, you referenced business email compromise. Have you seen evidence of the hacking of CFOs to exploit 

their system with wire transfers? Do you see this as a concern and 

possibility that terrorist organizations would deploy this type of 

method for financing their own operations? 

Mr. CARLSON. I don’t know to what extent it involves terrorist organizations, but we did issue last Friday a joint advisery with the 

FBI and the Secret Service on this new type of wire fraud, to try 

to alert the community that this is going on and to also provide 

some tips on how they can prevent it. 

So we are seeing this where oftentimes a CEO or CFO is going 

on vacation, someone will get access to their email accounts, divert 

the email account, and then instruct the staff to transact a wire 

transfer. And it does require going through and developing some 

stronger controls around validating the request and confirming the 

request, particularly when you are talking about large dollar transactions and transfers that oftentimes are difficult to pull back or 

impossible to pull back, particularly if they are going overseas. 

So we are seeing some evidence of that, but we are trying to be 

proactive and working in partnership with law enforcement to raise 

awareness and to provide guidance. 

Mr. PITTENGER. Thank you. 

Mr. Vance, regarding cyber, do we have the proper and necessary 

authorities in place to be able to bring justice to those who are inVerDate Nov 24 2008 16:06 Mar 17, 2016 Jkt 096997 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\96997.TXT TERI
18 

volved in the cyber war? And are those mechanisms in place to 

close out this behavior? 

And if so, would Section 311 be a proper a method to use in that 

regard? 

Mr. VANCE. Congressman, I first would say that it is the Federal 

Government that to date has been responding to foreign attacks on 

American institutions and companies. And so, I cannot speak for 

the Federal Government. 

And quite honestly, Section 311 is not something that I am familiar with, and I don’t want to answer a question that— 

Mr. PITTENGER. I’m sorry. Maybe I should direct it to Mr. Poncy. 

Chairman FITZPATRICK. The gentleman’s time has expired. 

Mr. PITTENGER. Thank you. 

Chairman FITZPATRICK. So we will move to the ranking member 

of the task force, Mr. Lynch, for 5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. 

Thank you all for your testimony. You have been very helpful. 

Mr. Vance, the centrality of New York and Manhattan as a global financial center gives us some leverage and some ability to impact money flows to some of these terrorist organizations. So it 

gives us a little bit of leverage as well as the fact that the major 

reserve currency is the American dollar, the U.S. dollar. 

So we are having negotiations right now with Iran, ongoing, 

about reducing the sanctions, and the negotiations have really centered around the nuclear development within Iran. And the sanctions seem to be being weighed as a consequence of eliminating the 

possibility of developing a nuclear weapon in Iran. 

However, in practice, through Section 311 with the special measures there and 314, we have been able to use the legitimate banking system as a way to sanction Iran for funding terrorist activity. 

It is a totally different direction that they go in. 

Actually, back in the day, I don’t know if they still do it, Iran 

used to carry a line item in their budget for Hezbollah and Hamas, 

a direct line item for funding those terrorist organizations. I am 

not sure they still do that. I wouldn’t be surprised. 

So we have this difficult, this Gordian knot that we are trying 

to untie here, the idea that the Administration has said we will 

lower sanctions against Iran if they agree to cease and desist from 

developing a nuclear weapon. 

However, the institutions that will benefit from the reduction in 

sanctions are the very same banks, Bank Melli and others and 

their central bank, that have been guilty of financing not only 

Hezbollah and Hamas, but also Al-Shabaab and Boko Haram and 

other groups throughout the Middle East, the Taliban more recently. 

Is there a way—this is a tough question and you can all have a 

crack at it—to make that framework operate the way we wish? In 

other words, even though the Administration might say, okay, they 

have done away with their nuclear program and we feel we have 

verified that, I think there are a lot of banks out there that are 

going to keep those sanctions in place because they don’t want to 

be tainted with the fact that they are now financing some of these 

terrorist organizations. 

19 

It is a dilemma that we are facing here. And while I would like 

to eliminate the nuclear threat, certainly there are a whole lot of 

other things in play here that I am not so comfortable with. 

Please. 

Mr. VANCE. Congressman, I would just say from my perch in 

Manhattan having done now eight of these cases involving foreign 

banks and terror funding and interruption of that financing, that 

much more than simply the dollar fines that have been taken as 

a result of the misconduct, but it has changed, I believe, significantly the attitude in foreign banking toward dealing with the 

American banking system, State and Federal. 

So I think it has been, from my perspective, it has achieved what 

we wanted to achieve, which is honest banking as well as not having rogue regimes and countries being able to move money around 

the world, let alone through New York. 

I have seen—even though I am a State and not a Federal person, 

and even though I am not an expert on foreign policy, I can draw 

a direct connection between the positions that we have taken in enforcement and the impact on a country like Iran which is a present 

and real danger, not just for the region, but for our country. 

Mr. LYNCH. Mr. Poncy? 

Mr. PONCY. Congressman, thank you. This is a hugely important 

question that is being debated now on the front pages for good reason. 

There are three points I would make. 

First, obviously if the Administration can secure a deal in which 

we eliminate the threat of nuclear proliferation from our greatest 

proliferation threat, Iran, that is something we should all support. 

The way that is done has to be very carefully crafted in a way that 

ensures that we have verification of the commitments that Iran can 

make, that Iran makes in that deal. And that is within the province of the Administration. And obviously, I wish them success in 

that. 

But second, assuming that deal goes through and that it is 

verifiable, there is the question of how you unwind sanctions that 

have been imposed for a variety of derogatory behaviors, to your 

point. 

And it will require very careful consideration not just by the Administration, but by banks to think about, what was the basis for 

the sanctions on Iran in the first place? 

Long before proliferation, there was terrorism, to your point. 

They are still a state sponsor of terror. They are subjected to more 

terrorism financing and counter-terrorist financing controls than 

any other country around the world. 

They are also subjected to intensive and preventive measures associated with money laundering and corruption. 

These activities and human rights abuses and other bases for 

sanctions continue, regardless of whether or not there is an agreement on nuclear proliferation. That has to be a consideration in 

how sanctions are unwound. 

And lastly, the AML obligations will continue to exist, even in 

the absence of sanctions, through which financial institutions 

should take very good care in how they deal with any Iranian financial institutions. 

20 

Chairman FITZPATRICK. Mr. Carlson, can you respond quickly? 

Mr. CARLSON. I am not an expert on the AML rules. I do know 

that when we have these conflicts with countries like Iran, they do 

show up in my domain in terms of cyberattacks and responding to 

those issues. 

So we are interconnected. Obviously, the financial services industry implements the rules that you put in place and that the Treasury Department puts in place. 

I will say there is a growing concern within the industry around 

the compliance burden of a lot of these AML anti-terrorism laws. 

We at the same time are encouraging the Administration to do 

more, to create more of a deterrence against cyberattacks. And we 

know there is an Executive Order that was issued in April that basically leverages the AML and sanctions rule in order to do that. 

We generally support it, but we have some concerns about the 

implementation and the additional burden it puts on the industry. 

Mr. LYNCH. Thank you. 

Chairman FITZPATRICK. I now recognize the gentleman from New 

York, Mr. King, for 5 minutes. 

Mr. KING. Thank you, Mr. Chairman. 

District Attorney Vance, actually all the members of the panel, 

but District Attorney, you supported in the last Congress the Incorporation Transparency and Law Enforcement Assistance Act which 

was introduced by Congresswoman Maloney. And I was a cosponsor. I believe Chairman Fitzpatrick was a cosponsor, and the ranking member of the full committee, Ms. Waters, was a cosponsor. 

Basically, that would just require companies with fewer than 20 

employees and/or less than $5 million in revenue to file information 

with Treasury disclosing beneficial ownership. And this is intended 

for the purpose of cracking down on shell companies. 

Now, that and also the FinCEN rule have been opposed by the 

American Bankers Association. And I know Congresswoman 

Maloney’s legislation, which I supported then and support now, has 

been looked upon as too much of a regulatory burden. 

Can you address that and how much of a burden this is and how 

this would compare with other requirements that are imposed on 

the banking community? 

Mr. VANCE. Let’s just start, Congressman, with the issue of currency transaction reports. As in most cases, when there is a regulation that is going to be applied to an industry, industry usually, 

many industries, cry that the world is going to end and that it is 

going to be too expensive and it is going to drive businesses out of 

business or away from America. 

We have learned how to live with currency transaction reports 

and it has been a powerful investigative tool in ordinary crime as 

well as terrorism. 

Now, I understand that at least under one bill as drafted there 

would be an interim period where these rules would be applied to 

the States. There would be funding for the States in order to cover 

the costs of making this transition. 

And so from my perspective, that all seems reasonable and appropriate and that the additional burden placed on a corporation 

by checking off one box and filling out a couple of names seems a 

small price to pay when the benefit is law enforcement, where necVerDate Nov 24 2008 16:06 Mar 17, 2016 Jkt 096997 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\96997.TXT TERI
21 

essary, being able to investigate and prosecute crimes that are impacting not just our government, but our citizens, and many of 

those investigations relate to terrorism. 

There are also—I understand people oppose it, but I also know 

that at least with regard to the Senate bill, there were many who 

supported it, including the Main Street Alliance, the American Sustainable Business Council, the National Money Transmitters Association, and on and on. There were many folks, including all of law 

enforcement, who supported that bill. So there is support and opposition, but I think the support is powerful. 

Mr. KING. I know that the Federal Law Enforcement Officers Association, FLEOA, Fraternal Order of Police strongly supported it. 

Mr. Poncy, can you comment on that? 

Mr. PONCY. Thank you, Congressman. 

I would just say that this happens often, but the proposed legislation that you are referring to was, in my view, terrific and would 

have gone a long way toward addressing the abuse of legal entities 

that we have seen and that Mr. Vance has outlined so eloquently. 

The challenge in part is that you have two ways to get this beneficial ownership information, right? One is through company formation reform. And there are a lot of ways to do that, including the 

proposed legislation that you have cosponsored in the past. 

Another is through requiring banks to obtain beneficial ownership information when customers seek access to the financial system. 

Both of these requirements are necessary. These are not either/ 

or. 

So for example with the banks, the banks frankly on company 

formation, company formation reform is the bank’s friend because 

there is no burden to the banks on that. That is a burden on 

States, on incorporation processes that will deliver the information 

that Mr. Vance is describing and should help banks because at that 

point there is more information for banks to then obtain from their 

customers. 

Curiously, the banking industry has been somewhat absent from 

supporting the bill, but they don’t directly oppose it because it is 

not their burden. It will ultimately accrue to their benefit. 

And part of the reason why they may not be supportive is because if that goes through it will be easier for Treasury to get its 

rule out that requires banks to get that information when it is 

available, right? 

So the two of these are related, but they are distinct and they 

are both essential. So I would simply recommend, and I have this 

in my testimony, that both ends of this become a priority to this 

committee. 

One, let’s table and adopt meaningful legislation to obtain beneficial ownership information that can be available to law enforcement in the company formation process. 

There are a couple of different ways to do that. You are familiar 

with them. That needs to move forward. There is some burden associated with it, but it is nowhere near the benefit that reform 

would achieve not just for law enforcement, but frankly for our financial institutions that we are now hitting with enforcement action after enforcement action to manage risk. 

22 

And the second piece is to get Treasury to move on the customer 

due diligence rule with the support that it needs so that we require 

banks to obtain that information. 

With those two elements in place, we comply with FATF standards, we increase our credibility globally, we manage risk to the financial system and we give law enforcement what it needs to pursue illicit financing networks. 

Chairman FITZPATRICK. The gentleman’s time has expired. 

Mr. KING. Thank you, Mr. Chairman. 

Chairman FITZPATRICK. We now recognize the gentleman from 

California, Mr. Sherman, for 5 minutes. 

Mr. SHERMAN. This task force is focusing on terrorist financing 

that includes not only the non-state actors, but Syria, Iran, and 

certain other governments. 

I would hope, Mr. Chairman, that we would get Administration 

witnesses here that can focus particularly on Iran, whether the 24 

Iranian banks that have been sanctioned will continue to be sanctioned under this nuclear deal, whether the Iranian banks will continue to be denied access to the SWIFT system, and whether those 

banks found to be of money-laundering concern not because of the 

Iranian nuclear program, but for other reasons, will continue to be 

listed. 

I would love to ask these witnesses, but asking them what the 

Administration will do may not be a good use of time. 

But Mr. Vance, you identified that an Iranian bank, a sanctioned 

Iranian bank, ended up being the beneficial owner of certain property in New York. Have you seized that property? 

Mr. VANCE. Actually, the Federal Government did. The Southern 

District of New York, which came along later and proceeded on the 

Federal asset forfeiture, and that occurred— 

Mr. SHERMAN. If the Federal Government would stop objecting to 

the victims of Iranian terror suing the Iranian government, that 

could be used as a source to finance those victims. 

Enforcement in this area requires prosecution. One thing that is 

related is a number of Swiss and other foreign banks have been hit 

with multi-hundred-million-dollar, in some cases billion-dollar, 

fines for conspiring with very wealthy Americans to allow those 

Americans to have secret bank accounts. Those secret bank accounts were for tax evasion, not avoidance. 

So we get a chunk of money from the banks, we will get a chunk 

of money from the—I will call them taxpayers, but I guess I would 

call them non-taxpayers, these folks have also—and of course, we 

aren’t prosecuting any of them, so we are not going to really effectively deter this in the future. 

Those who cheat on their Federal taxes always do so on their 

State and City income tax returns as well. 

Are you getting the information about those who have deliberately defrauded your State and City? And are you prosecuting 

them? 

Mr. VANCE. Congressman, the answer is, to date, no. But in 

terms of what our current investigative posture is going forward, 

I think I can just indicate that is something we are looking at. 

Mr. SHERMAN. The IRS has a policy of providing State tax collection agencies with information. And the too-big-to-jail should not 

23 

apply to those who, on their Federal and usually State tax returns, 

check a box saying, I have no foreign bank accounts, and in fact 

have foreign bank accounts so significant that we get a billion-dollar fine from the bank just for hosting that account. 

Another area is we need the retailers to do a better job of holding 

onto the private information about credit cards. Does it make sense 

for us to impose liability on the retailer or to stick with the current 

system in which all the costs of these data breaches of credit card 

numbers are borne by the financial institutions? 

Does any witness have a comment on that? 

Mr. Carlson? 

Mr. PONCY. Thank you, Congressman. Again, a hugely important 

question. 

But in looking at the information sharing and liability issues, 

there is a tension, right? Because on the one hand, we want to 

make sure that institutions, whether retail or financial, that have 

sensitive personal information protect that information. That policy 

interest is well-established and obviously justifiable. 

At the same time, liability for sharing that information is exactly 

what prevents us from putting together the information that we 

need to connect the dots. 

Mr. SHERMAN. Yes, I am not saying that they should be liable for 

sharing the information with you. They should be liable for unintentionally sharing the information with criminal gangs based in 

Russia who are now selling my credit card information. 

I want to sneak in one more question with Mr. Vance. But he 

may want to answer this for the record. 

Perhaps you could give us a proposed statute requiring States to 

register beneficial ownership of closely held corporations keeping in 

mind that we may have to, for federalism reasons, exclude those 

corporations that have only beneficial owners within the borders of 

those States, but also letting us know whether this would really be 

useful or whether people would just form a Cayman Islands entity 

which would then be the sole and disclosed owner of the Delaware 

corporation. 

Chairman FITZPATRICK. If the gentleman could answer quickly, 

or make a proposal to the committee in writing, whichever you prefer. 

Mr. VANCE. Very good, thank you. 

Chairman FITZPATRICK. Thank you. 

The Chair now recognizes the gentleman from Florida, Mr. Ross, 

for 5 minutes. 

Mr. ROSS. Thank you, Mr. Chairman. 

Gentlemen, we know that Iran is a major exporter of terrorism 

and that their Islamic Revolutionary Guard has helped Hezbollah 

in training, not in cyber, but has helped in many ways. 

Is there any known threat or at least perceived threat that Iran 

is in the process of training for cyber terrorism purposes? 

Mr. PONCY. Congressman, I am not aware of any known, but it 

is clear as a state sponsor of terror, we, as you know, have grave 

concerns about the terrorism financing activity of Iran well beyond 

the nuclear proliferation concerns that are the subject of the deal. 

Mr. ROSS. Correct. In fact, they have been described, Tehran has 

been described as being the central bank of terrorism. So is it more 

24 

likely than not that we would expect that not only the United 

States, but even our allies may be subject to cyber terrorism that 

has been brought about through Iran? 

Mr. VANCE. I would say that it is greatly within the realm of possibility. 

Mr. ROSS. Speaking with regard to what Mr. Sherman was talking about in terms of beneficial ownership information, there is a 

Federal issue, there is a reason that people incorporate in Delaware and it has to do with the State jurisdiction that they have. 

The cumbersome way that we legislate here and the length that 

it takes, absent a crisis, we tend to just react at the time. And so, 

being able to promulgate legislation that would address the concerns in order to make sure that we have beneficial ownership information available for our law enforcement and others is monumental. 

Is there any effort being made through the States so that we preserve at least their ability to control the incorporation process, but 

then to require that they also have information pertaining to beneficial ownership interests? 

Mr. VANCE. Congressman, I am not aware, with the exception of 

two or three States, that there has been any interest in this beneficial ownership question at all. And I think the trend is very much 

in the opposite direction. 

The reason we were so grateful that the Federal legislators were 

looking at this was because we believed that— 

Mr. ROSS. I think it is absolutely important. 

And I think, Mr. Poncy, you raised some good points in your testimony that this at least gives us the ability, while all of the other 

countries require this, but we don’t. And I think we have to look 

at our States for that. 

Also as an aside to that, the regulatory process, as much as I 

hate to see it used the way it has been used here for the last 6 

years, might be the only avenue pursued in which we can require 

that this information be made available at least at the banking 

level. Wouldn’t you agree? 

Mr. PONCY. Absent regulation, it won’t happen. 

Mr. ROSS. Right. 

Mr. Poncy, you have talked about our programs and AML and 

CTF and trying to get stronger, more enforcement because there is 

so much out there that we don’t know. 

What can be done specifically with some of our allies and making 

sure that these programs are done globally? 

And specifically, if I could ask you to speak on our relationship 

with Turkey in regard to that. 

Mr. PONCY. There is no question that we have a global challenge 

outside the United States in understanding and implementing 

what we call broadly targeted financial measures. That includes 

conduct-based sanctions on terrorism, proliferation, state-based 

sanctions against Iran, the Russian regime, and others, and regime-based programs. 

Mr. ROSS. But we are being somewhat undermined, are we not, 

by some of our allies with these programs? 

25 

Mr. PONCY. The first point is that there is a global lack of capacity on this in general because of a lack of understanding that is 

owing to a lack of political will. 

Mr. ROSS. Right. 

Mr. PONCY. The second point is that within that lack of capability, there are different levels of challenges. One level is associated with our best partners, the EU, and legal restrictions that any 

time that you see a significant designation the EU is challenged for 

violation of human rights. And those challenges are winning, they 

are winning more often than not. 

The viability of our sanctions programs and partners across the 

EU is in serious jeopardy. It has been for quite some time. 

You take away the dollar clearing leverage in the United States 

and our sanctions programs wouldn’t exist outside the United 

States. So that is challenge number one. 

Challenge number two is in allies of ours that do not see politically sanctions the way that we see them. So the EU may see that 

politically, but is legally incapable of supporting it. 

A country like Turkey doesn’t politically agree with a lot of our 

sanction programs. 

Mr. ROSS. Correct. 

Mr. PONCY. And for those, those represent different 

vulnerabilities. 

Mr. ROSS. And any suspension of sanctions for any reason is not 

going to lead to an opportunity to snap them back instantaneously 

because there is going to be a sense of dependency, a sense of investment of capital and resources that would prevent any snap 

back. 

I see my time has expired. 

Thank you. 

Chairman FITZPATRICK. The Chair now recognizes the gentleman 

from Minnesota, Mr. Ellison, for 5 minutes. 

Mr. ELLISON. Yes, I want to thank the chairman and ranking 

member and also our panel and my colleagues who have asked a 

lot of great questions today, and so good that they took some of the 

questions I was going to ask. But I do have some. 

We have talked a lot about terrorism abroad, incredibly appropriate, but as the last few days have shown us, we have terrorism 

domestically, too. 

And I guess my question is, can you share with us what sort of 

focus has been done to address these organizations? We are about 

to bury nine people in these coming few days, and while it is not 

clear whether or not this particular incident was the result of an 

orchestrated group, there is indication that he relied on services 

from a group. 

And of course, we do know that in the case of several other attacks that they were affiliated. And these organizations do have 

money and resources and used them to do what they do. 

Not only do we think about the horrible events at Mother Emanuel, but there were three people killed at a Jewish community center and assisted living facility in Kansas City not too long ago, and 

six people were murdered in a Sikh temple in Wisconsin. 

The Southern Poverty Law Center publishes a hate map of internal hate groups that I think I have asked to be posted up there. 

26 

And some of these groups may be inciting violent action as we saw 

in South Carolina. 

So my question to the panel is, how are financial institutions responding when some of these neo-Nazi groups, White nationalist 

groups, Klan groups, anti-government groups try to access the financial system? And do these financial institutions report such 

groups to regulatory agencies? 

Mr. VANCE. Congressman, in New York City, in Manhattan, I 

have not experienced the problem you are talking about. 

But if I can answer the bigger, broader question briefly, the terrorism threat has evolved to what is currently today a real risk of 

homegrown violent extremists operating in our communities. 

What I think we can do is to make sure that there is the highest 

level of partnership between Federal investigators and, increasingly, local investigators. 

We are blessed to have a New York City Police Department that 

created competency in counterterrorism under Ray Kelly, that has 

continued under Commissioner Bratton. But the reality is that the 

Federal Government cannot do it all. It needs more hands and eyes 

and ears on street corners in every city in America. 

And our office has taken the challenge that we are going to find 

a way to support this counterterrorism mission by essentially developing leads, building cases independent of the Federal Government having to come up with those leads. And then the Federal 

Government can screen them and we can decide whether the case 

is a Federal case or a State case. 

But in the evolving threat, I believe that we need to see increased leadership from the Federal Government to bring into their 

anti-terrorism efforts the work not just of local police departments, 

but of prosecutors. Prosecutors around the country at the State 

level would be very happy to help in this regard. But many do not 

know where to begin. 

Mr. ELLISON. Mr. Poncy, is this on our radar screen? We are very 

appropriately focused on some of these foreign terrorists and 

groups that even come here and commit acts of terror for various 

motivations. But some of these historic groups are still a problem. 

Are we tracking them financially? 

Mr. PONCY. Thank you, Congressman. First, let me just say that 

I, in the strongest possible terms, support everything Mr. Vance 

has said. 

I do think, when you look at historically what we have done since 

9/11, the focus is clearly on foreign terrorist organizations. Our immediate focus after 9/11 was on what infiltration those organizations may have in our local communities. And so, we took immediate action, as you may recall, against a number of— 

Mr. ELLISON. Mr. Poncy, Mr. Poncy, I definitely think what you 

are saying is incredibly important. But one part, in these last 9 seconds, is that we do think about the 9/11 and the aftermath and we 

are right to do so. But are we having a broad approach to all the 

terrorist threats and not just the Islamic ones? Although I want 

you to go after them, too, I also want you to go after these other 

groups. And are we doing that financially? 

Mr. PONCY. I think we are trying. The challenge is that our effort 

is aimed at organizational capacity, right? So rogue terrorists, the 

27 

only way to stop that is through what Mr. Vance has said. And it 

doesn’t mean that we shouldn’t act and it doesn’t mean financial 

institutions don’t have a role. 

It is just to say that our ability to stop rogue terrorist acts, even 

inspired acts, as Mr. Vance has said, homegrown violent extremism 

of any stripe, really requires partnership at a local level. There is 

no substitute for that. 

Chairman FITZPATRICK. The gentleman’s time has expired. 

The gentleman from Kentucky, Mr. Barr, is recognized for 5 minutes. 

Mr. BARR. Thank you, Mr. Chairman. 

And Mr. Poncy, a question to you about the Society for Worldwide Interbank Financial Telecommunications or the SWIFT system, which as you know enables the transfer of trillions of dollars 

globally on an annual basis. It helps international transfers flow 

smoothly. 

As part of the U.S.-led sanctions against Iran, and pursuant to 

a law approved by the European Union in March of 2012, the 

SWIFT system disconnected all Iranian banks targeted by the 

United States and our European allies. These banks were targeted 

for their role in enabling Tehran to avoid sanctions and engage in 

illicit activities such as transferring funds and materiel to their 

proxies, Hezbollah and the like. 

My understanding is, in the course of these negotiations with 

Iran, one of the very first concessions in terms of the sanctions relief that Iran is seeking is reconnecting Iranian banks to the 

SWIFT system. 

So my question is, do you think that SWIFT access is useful leverage in terms of imposing sanctions? And how significantly has 

the disconnection to the SWIFT system impacted the Iranian banking sector? 

Mr. PONCY. Great questions. And there can be no doubt that was 

a monumental movement in what was a series of movements in a 

campaign to intensify financial pressure on the Iranian regime. 

That was a signature moment and it required the full support of 

our European colleagues to take that action. 

What led to that support was ongoing concern over the proliferation of nuclear technology and the building of a missile development program and nuclear technology in Tehran. 

The challenge that we are now facing, in many respects, is aside 

from the negotiations that are happening, about which I have an 

opinion, but it is not an expert one by any view, but obviously we 

should all hope that we can achieve an outcome where proliferation 

is no longer a threat. 

If that happens, two things are going to happen. One is the ongoing concerns that Iran presents to us, the threats that have led to 

over 40 years of sanctions, including, for the most part, for activities above and beyond proliferation financing, there has been no 

discussion of that activity because that is not what is in the confines of the deal. 

It is within the confines of the risks that our financial institutions need to worry about. It is also within the confines of sanctions 

programs that we have on the books. 

28 

It is not within the confines of the pressure that led to the deSWIFT’ing, so to speak, of Iranian banks. 

So if I were to prognosticate, if a deal moves forward in which 

commitments from Iran are credible on nuclear proliferation, the 

SWIFT program will go back into place. That does not mean that 

our sanctions necessarily are pulled back on nonproliferation activity and it certainly doesn’t mean that our financial institutions 

shouldn’t be watching, managing, monitoring, and preventing illicit 

financing transactions associated with any engagement with Iranian financial institutions. 

Mr. BARR. Let me ask you this question. Would reconnecting Iranian banks to the SWIFT system, in your judgment, lead to significantly increased risk that financing would flow to Hezbollah, 

Hamas, some of these proxies that Iran has allied itself with? 

Mr. PONCY. Unless there are controls associated with how they 

are plugged back in, unless there are controls associated with how 

they engage with our financial institutions, I would continue to 

worry about those risks. 

Mr. BARR. Let me shift gears a little bit to the Obama Administration’s announcement on a change to hostage policy. And while 

not directly related to the financial system, it could have an impact 

on the financial system in terms of family members now being allowed to negotiate with loved ones’ captors and accessing the financial system in order to transmit ransom. 

At first glance, the policy would appear to raise incentives for 

terrorist organizations to take Americans hostage. And also, what 

impact would this potentially have on the financial system? Any 

opinions about the policy and the risks that it may pose? 

Mr. PONCY. Thank you, Congressman. I had a few moments with 

Congressman Pittenger on this. And this is the worst dilemma 

imaginable, right, where you have to decide whether or not you 

allow families whose loved ones are kidnapped, and frankly with 

the beheadings we have seen I think any of us would do whatever 

we could in our power to save our loved ones. Asking the government to step in and aggressively enforce a policy against that is 

difficult. 

On the other hand, we all know that kidnapping for ransom is 

an increasing part of how these terrorist organizations finance 

their operations. It is a hellish dilemma. 

What I would argue, because I am not in a position to judge 

frankly what our policy is on this, is that understanding that kidnapping for ransom (KRF) is on the rise, understanding that puts 

us in an incredibly difficult position, that we need to go to our allies and say we understand why this is a difficult dilemma, we also 

know that state-sponsored, effectively allowance and support of 

ransom payments that facilitate KFR contribute to the problem, 

why don’t we develop a strategy for how to deal with territories 

that are under the control of terrorist organizations or where terrorist organizations operate that we know create risks of KFR. 

It is no secret that if you go into ISIS-controlled territory, KFR 

risks go up. It is no secret that if you are operating in areas controlled by Boko Haram, KFR goes up. These are well-known, established facts. 

29 

The real question is, what are we doing to deliver necessary relief and assistance to these areas in ways that allow our NGOs in 

to service needs that we recognize, in ways that protect them and 

others from this sort of activity? 

I don’t know that we have done enough thinking about that as 

a global community. And I do know that is something that the Financial Action Task Force members are looking at. How do we deal 

with terrorism financing associated with territory that is under the 

control of terrorist organizations? It is the biggest dilemma we face. 

Chairman FITZPATRICK. The gentleman’s time has expired. 

Mr. Rothfus of Pennsylvania is recognized for 5 minutes. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

Mr. Poncy, what can the U.S. Government do to improve the implementation of effective AML/CFT programs among financial institutions with foreign correspondent banking relationships? 

Mr. PONCY. That is hugely important. I am sure Mr. Vance could 

tell you that every enforcement case that I can think of that has 

grabbed the headlines in recent years has been one in which foreign correspondent relationships are key. And that happens for a 

couple of reasons that I tried to allude to earlier in my remarks. 

One is that our enforcement environment is so far above any 

other enforcement environment in the financial system that when 

financial institutions seek to clear dollars, and they must move 

through New York or through the U.S. financial system to do that, 

as a general matter, they encounter a different level of compliance 

concerns associated with the enforcement actions we have taken. 

What that means is that the correspondent relationships that are 

essential to clearing dollars become the pathway that exposes our 

financial system to all forms of illicit finance. 

And the enforcement actions that we have seen repeatedly bear 

that out, whether it is for violation of sanctions programs and 

stripping activity, whether it is for violation of AML controls and 

the taking of drug money through cash without appropriate customer due diligence, it is through our correspondent relationships 

that this dirty money enters our system. So it is critical to protecting our financial integrity. 

This Congress did an incredible job post 9/11, the Congress in 

general, in giving us authority as a government, giving the government authority under Section 312 of the Patriot Act to strengthen 

corresponding controls. And I would say that as a general matter, 

we have done a pretty good job at that. 

At the same time, I would say that the complexity of flows that 

are moving through those correspondent relationships bears stronger compliance programs. And that is exactly what many of the enforcement actions that have been taken to date have insisted on, 

is looking at stronger programs to monitor and manage risks associated with clearing dollars and any other form of correspondent 

activity that is flowing through our banks. 

Where this game is headed and where I think concerns need to 

be focused is in the non-banking space. What happens with respect 

to correspondent relationships between non-bank financial institutions? How are those being managed? And what kind of risks are 

we seeing? 

30 

Mr. ROTHFUS. Yes. I want to raise this. On June 12, 2015, The 

New York Times published an article that described how tough it 

is to impose and administer economic sanctions in an effective and 

meaningful way. It identified individuals and organizations that 

are crowdfunding the separatist conflict in eastern Ukraine. 

Individuals who are designated by both the United States and 

European Union for economic restrictions are freely raising donations, channeling funds to Sberbank, a prohibited state bank in 

Russia, to buy equipment and stand up modern combat-ready military units fighting the Ukrainian central government. 

Because correspondent transactions are permitted with otherwise 

restricted banks, Visa, PayPal and Western Union, the article 

claims, have all facilitated the crowdfunding. 

How can government agencies here and in Europe effectively impose economic sanctions when targeted entities can evade the effort? 

Mr. PONCY. The activity you are referring to, Congressman, I am 

not familiar with the specifics, but I can tell you that Sberbank, because it is subjected to a different kind of sanctions program, it is 

an SSI-designated entity. What that means is that there are sanctions against Sberbank with respect to debt and equity instruments 

that are used to benefit Sberbank. 

But those sanctions are calibrated to put financial pressure on 

the Russian regime in a way that changes their behavior in the 

Ukraine. But they are not designed to cut Sberbank off from the 

financial system. And there are a lot of reasons for that. 

But it does complicate efforts to then address what might be activity that offends or sanctions against Russia and parts of Ukraine 

for the activity that is going on there if that activity is not part of 

a specific targeted financial sanction program. 

And the Sberbank designation is really not a designation against 

Sberbank as much as it is against a Russian regime that we are 

trying to, through financial pressure, change its behavior. 

So it continues to represent a gateway that is permissible under 

the current sanctions programs and frankly is necessary to maintain what are complicated capital market flows between Eastern 

Europe and Russia on the one hand and the U.S. market. 

If those flows are squeezed through additional sanctions, that 

may have collateral consequences beyond that of what you are describing. 

I know the Administration has historically looked at this very 

closely. It is a very complicated set of measures. But I will say that 

the advent of this program, the SSI program, is exactly where 

sanctions needs to go, to target specific types of activity in addition 

to general actors that enter our financial system. 

Mr. ROTHFUS. If I could jump in really quick, going back to this 

issue of beneficial ownership and disclosure, are there any legitimate business reasons for an entity not to want to have its beneficial owner’s identity made public? 

If Mr. Vance, and maybe Mr. Poncy could comment on that? 

Mr. VANCE. Yes. I think there are understandable and legitimate 

reasons. It may be, for example, that someone, an individual is a 

well-known individual and does not want his or her identity made 

31 

public and, therefore, a target of harassment or cyber bullying 

there. And the same would apply for businesses. 

But the fact that there is a legitimate reason to want to remain 

anonymous does not mean, in my opinion, that there should not be 

an availability of the Federal Government, or State government to 

get this information by subpoena and have the other information 

remain in confidence at the State and not disclosed publicly. 

Chairman FITZPATRICK. The gentleman’s time has expired. 

Mr. Schweikert of Arizona is recognized for 5 minutes. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

Can I ask us all to sort of take a step backwards and say, what 

if I had this amazing ability to see money that is moving to all 

types of bad actors, whether it be money flowing from drug cartels, 

terrorist financing, bad actors out of Russia or wherever we may 

deem it, what would that money look like? 

My fear is that much of the conversation we have had in here 

is money moving through fairly formal channels. How much of that 

bad-actor money, let’s just call it that to make up a title, is moving 

in commodities? 

It was a decade or two ago we used to hear the stories of diamond exchanges that were just a way of moving value. Informal 

networks of deposit here and somehow it pops up in the rural areas 

in Pakistan. 

And I would like to start with Mr. Vance. Are we making a mistake in believing that a sanctions regime, a regulatory regime, an 

ID’ing, an intelligence regime that focuses on formal networks 

doesn’t just move the money to informal? 

Mr. VANCE. I think we are not fully attacking the problem if we 

are only looking at financial institutions as the group whose behavior we are trying to change. 

In our jurisdiction in Manhattan, we have a number of investigations moving money in the manner you describe, informal bases, 

not through official, organized entities that we believe are going to 

fund terrorist activities elsewhere in the country. 

We have a number of them in ongoing investigations, and so I 

can’t quantify that, Congressman, in terms of how big that number 

is in either New York City or the country. But I think it is something, again, that every, that large metropolitan prosecutors should 

be looking at to support the efforts that are being done by Federal 

prosecutors. 

Mr. SCHWEIKERT. I want to do a hop and then back one. 

Mr. Carlson, one of my fears here is we come up with both legislation in support for the Administration, we squeeze down and we 

make a more robust system of bad actors moving cash that is right 

under our nose that we cannot smell. Mixed metaphors. 

You have done compliance with, what, large institutions in the 

past. When you started to clamp down, did that money just stop 

or did you see it moving to other types of activities? 

Mr. CARLSON. I don’t have any personal experience to comment 

on that. I do know at least from where I sit that what we certainly 

need is better mechanisms to share information around these bad 

actors and how they are affecting institutions’ critical infrastructure, other parties. 

32 

Because right now we are in the world of playing constant defense in a constant flow of attacks, and so we feel like we are fighting this a little bit with our hands tied behind our backs in terms 

of not having all the tools that we could have to at least share the 

information so that we can take appropriate steps to respond. 

I think in response to some other questions that were raised, we 

certainly need a greater role for deterrence, and that includes obviously enforcement in terms of what you require reputable businesses to do to enforce it. 

But that is where I think the Congress needs to provide resources to law enforcement to go after these parties and to prosecute and not always go after the institutions that are implementing policy. 

Mr. SCHWEIKERT. But my fear is, do we end up enforcing and create a more robust mechanism that just goes right around our back 

door? 

Mr. Poncy? 

Mr. PONCY. It is a great question. I will make four quick points. 

The first is the game of illicit finance is a cops-and-robbers game 

that will never end, right? So in many respects, what we are chasing will always be there, it is a question of where it is and how 

disruptive we can be. 

Our objectives, in this campaign, as long as there are bad guys 

in the world, there will be bad-guy financing. Our objectives are to 

make it costlier, riskier, and more difficult for these guys to operate, get the money they need, move it from place one to place two. 

That is our objective. 

In that respect, moving people out of the formal banking system 

to make it harder for them to deal with value transfer is a sign of 

success, but it is not the end of the road. 

Mr. SCHWEIKERT. But in a world of technology where this is now 

my bank, it is cracking down on the institutions. 

I constantly wonder, and I know I am almost out of time, whether much of this resource we should be really doubling down on the 

financiers, the people who use their wealth and treasure for bad 

acts, and the receivers of that. 

So possible success on the barbells and not necessarily those who 

are in the middle of the transfer. 

Thank you. I yield back, Mr. Chairman. 

Chairman FITZPATRICK. The gentleman’s time has expired. 

The gentleman from Texas, Mr. Williams, is recognized for 5 

minutes. 

Mr. WILLIAMS. Thank you, Mr. Chairman. 

Mr. Vance, you mentioned specifically that your office has supported the Incorporation Transparency and Law Enforcement Assistance Act previously. 

As a former secretary of state myself, of Texas, our association 

has previously opposed this legislation due to concerns over implementation costs. In fact, State secretaries have advocated for the 

collection of ownership entity information by the best paper trail 

that already exists for Federal tax filings and customer due diligence requirements for the U.S. financial institutions at no additional cost to taxpayers or businesses. 

33 

So in addition, this proposal expands regulatory authority into 

an area that has traditionally been the jurisdiction of the States. 

I would like to hear your comments on the concerns we hear 

from the association. 

Mr. VANCE. I understand, Congressman, that there are questions 

of cost and that there will be some additional costs in various 

States for implementation of the beneficial ownership rule. 

What I would respond to is I think we have to measure the benefits versus the detriments. I personally, having listened to the arguments of those who oppose this legislation, I am more persuaded 

that the benefit of enabling our law enforcement officials to identify 

illegal money movement is outweighed by the incremental additional costs. 

I respect the fact that will occur, but that occurs, I think, in any 

regulatory scheme that is imposed upon the States. 

Mr. WILLIAMS. Return on investment. 

Mr. VANCE. Yes. I think you will get good return on investment 

criminally, in terms of criminal prosecution. 

Mr. WILLIAMS. Next question also to you, Mr. Vance. Based on 

your experience as a prosecutor, what are the challenges associated 

with prosecuting terrorist financing-related cases? 

Mr. VANCE. I am speaking from a State perspective. We are not 

like a typical State prosecutor’s office because we do a lot of this 

work and most don’t. But I still am not the Federal Government. 

So one problem from where I sit is the ability to trace money 

once it gets to Lebanon or some other jurisdiction where we no 

longer have eyes and ears on the ground. 

We have been involved in a number of cases where we believe 

we know what is going on, we can trace the money from wherever 

it is in the United States or even in South America to a Middle 

Eastern country typically, but then we lose the trail. 

So how do we develop information and allies in those jurisdictions, which is a tough thing, to enable us to make those cases? 

I think that is the biggest problem. And this is particularly, this 

is money going out to those jurisdictions, we are not talking about 

large financial institutions clearing dollars to us. 

Mr. WILLIAMS. Let me give you a follow-up question. To what extent do U.S. law enforcement investigations and subsequent prosecutions strategically prioritize cases involving the most pressing 

terrorist financing threats? 

Mr. VANCE. I cannot speak to the Federal Government’s 

prioritization, which I think raises the question of, should there not 

be more coordination between Federal prosecutors and regulators 

on discussion of these priorities with State law enforcement who 

could in fact initiate or help in achieving those priorities? 

So I am not privy to what the U.S. Government, what their list 

of priorities are. But if I knew them and if I was told how we could 

help in achieving them, that is what I would do. 

Mr. WILLIAMS. Okay, thank you. 

And I appreciate all of your testimony. 

Mr. Chairman, I yield back. 

Chairman FITZPATRICK. The gentleman yields back. 

The gentleman from Arkansas, Mr. Hill, is recognized for 5 minutes. 

34 

Mr. HILL. Thank you, Mr. Chairman. 

And I thank the ranking member. 

I also want to thank Mr. Lynch and Mr. Sherman for their pointed and excellent questions on Iran and Iran financing and I think 

the fallacy of the deal as we come up on the June 30th negotiation 

deadline. 

Mr. Vance, I thought Mr. Williams did a good job of talking a little bit about the Secretaries of State and the burdens there. I understand those, some States are better than others. 

I am going to ask this question as a former Deputy Assistant 

Secretary of Treasury and a banker of 35 years. So on the credit 

side of all banks, people get beneficial information. And if we were 

asked by a law enforcement officer, we would certainly provide 

that. 

So I think the real challenge then becomes on the deposit side 

under Gramm-Leach-Bliley. We do know our customers, we do 

identify them, we do have two forms of ID. But in a business we 

also verify the business exists through the Secretary of State function, but we don’t always know beneficial owner on the depository 

side. 

One of the primary ways of finding depository ownership is 

through the tax system. Just about 6 years ago, we had a complete, 

wholesale redo of the Form 990 for private charity entities, which 

was very painful to implement. 

But we have LLCs and pass-through ownership and, by definition, beneficial ownership is contained in that tax return and public companies are, of course, public. So we are really talking about 

C corps, I guess, for IRS purposes. 

Could you reflect, as you did for Mr. Williams, on Secretaries of 

State, and talk about the use of existing IRS forms for determining 

and obtaining that information? 

Mr. VANCE. Congressman, as I indicated earlier in a response, 

our State government access to those records is limited. And therefore, I really can’t— 

Mr. HILL. From one State to the other as a district attorney? 

Mr. VANCE. —from the Federal Government to the State. And so 

therefore, we would appreciate it if there were changes in Federal 

legislation that permitted the IRS to provide information directly 

to a local prosecutor’s office upon a certain showing. 

That doesn’t really exist now, and so therefore I can’t comment 

further intelligently other than to say that access to Federal tax information, individual and otherwise, is not generally something 

that we at the state level get access to. 

Mr. HILL. But when you get access to it, you acknowledge that 

is where beneficial ownership lies. 

Mr. VANCE. I think there will be information relevant to beneficial ownership. But I am still, respecting that others disagree, I 

am having a hard time just personally understanding that the net 

negative of understanding when a corporation is formulated who is 

the owner of it and identification for that individual. 

I don’t necessarily think that is an inhibition to commerce, to 

business development. And so from my perspective, I don’t look at 

that as an impediment that outweighs the benefits to public safety 

on the other side. 

35 

Mr. HILL. But you would support some sort of beneficial ownership form for a C corp filing, for a private company’s C corp filing? 

Mr. VANCE. I will say I think I am going to have to understand 

more closely what the issues would be for a C corp. I don’t pretend 

to understand the specifics. 

But where one would want to be is, with any filing of any corporation in a State, is to understand who the owner is and to prove 

that person is in fact the owner. 

Mr. HILL. Mr. Poncy, on this FinCEN Treasury proposal, it suggests that beneficial owners, anyone who owns more than 25 percent of the equity interest in a company, and as somebody who has 

been doing this for 35 years, if I were hiding my interest, I 

wouldn’t own 25 percent, I would own 1 percent and 99 percent 

would be divided by as many people as possible. 

So I find I am not even sure as drafted it is particularly helpful 

to your mission. Do you want to comment on that? 

Mr. PONCY. Absolutely. Thank you, Congressman. There have 

been experts from both the financial system and from the counterillicit-finance community for decades who have looked at this question of beneficial ownership in the context of the Financial Action 

Task Force, from financial centers around the world. 

It is a difficult problem. You can’t draw a line and say this fixes 

it; I fully agree with you. 

At the same time, it is clear that if we were to obtain beneficial 

ownership information as defined in the proposal, which is not just 

25 percent ownership, because you are right, that just invites 

structuring, I will say that means you have to find five guys now 

who are willing to front for an organization rather than one. 

And that is not the only element of the definition. There is also 

an element of control. And if you think about what that means, it 

means that if there are meaningful consequences to not presenting 

information, law enforcement no longer has to prove money laundering, they have to prove that you committed fraud in representing who you represent. 

That is an easier case, it is a bigger lift. And those guys talk 

about whose interests they represent when they have to go to jail 

for not disclosing that truth. 

Mr. HILL. Thank you, Mr. Chairman. 

Chairman FITZPATRICK. The gentleman’s time has expired. 

The gentleman from Maine, Mr. Poliquin, is recognized for 5 

minutes. 

Mr. POLIQUIN. Thank you, Mr. Chairman. I appreciate the time. 

And thank you, gentlemen, for being here. I appreciate it. 

You folks have an awful lot of experience on the ground dealing 

with these issues. And it is so important that you help educate us 

here in Congress in making sure that our country stays on offense 

against these threats to our homeland and our freedoms. 

I hear on an ongoing basis the issue with regulation throughout 

our economy, in the financial services sector and elsewhere. Some 

of the numbers I looked at, gentlemen, and I am sure you have 

seen them, too, is that the annual cost of regulations, to comply 

with regulations, to our business community is something like $1.7 

trillion per year. That is about 1/10 of our GDP output every year. 

And that is a huge cost, waste of time and so forth and so on. 

36 

Now, at the same time, I know there has to be a balance between 

making sure there is proper regulation that the businesses can 

handle and pay for and in keeping us safe. 

Our economy has been, notwithstanding the problems we have 

now, the envy of the world for a very long period of time. It has 

given us the opportunity to have better lives, fatter paychecks, 

through more freedom. And the reason we have this strong economy that has lasted for so long, notwithstanding its problems, is 

because we have such a deep, diverse, and creative financial sector. 

Without this financial sector being healthy and growing, we do 

not have the economy we need to have; and therefore, we will not 

generate the tax revenues we need to protect ourselves. 

So this is absolutely critical. And I know we are all onboard here. 

We had a fellow who came into our office not long ago who is a 

senior manager at a financial services company. And he was going 

on about how many different regulators that he has to deal with 

when it comes to an examination dealing with cybersecurity. He 

deals with the Federal Reserve, the SEC, the Comptroller of the 

Currency, maybe FSOC, and also the FDIC. 

And I know this has been discussed earlier, gentlemen, and I am 

thrilled to death to hear that with all these problems that we have, 

it seems like we are all in agreement, is that why in the world 

can’t we coordinate this examination process to keep our financial 

services sector safe, as best we can keep money out of the hands 

of terrorist organizations, but not put these poor folks out of business? 

Now, you folks have the experience with this, I don’t. 

So Mr. Carlson, we will start with you, if you don’t mind, sir. Do 

these various regulators of the financial sector have the personnel 

and the talent to make sure they can do their work when it comes 

to investigating cyber activity? And what is the best way to coordinate this activity among these institutions? 

Mr. CARLSON. I think it is a qualified ‘‘yes’’ in that the agencies 

do have expertise to conduct cyber exams. 

I think an area we have been advocating that they do more on 

is to try to harmonize the requirements both at the policy level and 

at the examination level across all these different U.S.-based regulatory agencies. 

We have also advocated that they work with their counterparts 

overseas to also harmonize, given that many of the larger firms are 

global firms and have to deal with requirements in the EU and 

Asia as well. 

It is a huge issue in terms of cost and compliance. But they do 

have the capability. 

They are also struggling with some of the same issues we are 

struggling with in our sector, as is the government, and that is talent in the information technology field. There is a limited supply 

of talent and everyone is vying for those people. 

Mr. POLIQUIN. Mr. Carlson, is the information that is required 

from these regulators uniform enough? Is there enough overlap 

such that there might be uniformity when it comes to the type of 

information that is asked, the reporting requirements, how it is reported and so forth and so on? Because some of these folks come 

37 

to our office and they say it is different for everybody, even though 

they are generally asking for the same information. 

Is that too simplistic or can that be streamlined? 

Mr. CARLSON. It can be streamlined further. There are efforts already in place through what is called the Federal Financial Institutions Examination Council (FFIEC), which includes the Federal Reserve, the FDIC, the OCC, and the CFPB; they all coordinate together in terms of developing unified procedures. 

Mr. POLIQUIN. And do I hear you saying that there is one entity, 

separate from all these other institutions we have talked about, 

that coordinates this activity? 

Mr. CARLSON. It is a body that then coordinates with all of the 

other bodies. 

Mr. POLIQUIN. And in your opinion, are they effective? And do 

they have the support they need from Congress to make sure they 

are effective? 

Mr. CARLSON. They are effective. Could they do a better job? Yes. 

Mr. POLIQUIN. And how could they do a better job, Mr. Carlson? 

Mr. CARLSON. More intensive collaboration, more engagement 

with the sector in terms of new requirements, as well as constantly 

revisiting existing requirements to make sure they are relevant. 

Mr. POLIQUIN. Okay. So this is not a resource issue, this is not 

a money issue, it is just providing some leadership— 

Mr. CARLSON. Both. 

Mr. POLIQUIN. —making sure someone steps up and gets this 

done. 

Mr. CARLSON. It is both. It is a resource issue, but it is also a 

leadership coordination effort. 

Mr. POLIQUIN. Do you think there is enough intense focus and 

priority from the administrative branch to make sure this happens, 

the Executive Branch? 

Mr. CARLSON. There is an unprecedented level of engagement in 

the broader Administration on cybersecurity issues, from the White 

House to a multitude of agencies, from the Treasury Department, 

regulators, Homeland Security, law enforcement, intelligence communities. We are in a completely different world over the past 3 

years in terms of the level of engagement with multiple government agencies. 

Mr. POLIQUIN. And do you think, is there anything that we can 

do in this committee or Congress can do to help with that process? 

Mr. CARLSON. I think, number one, it would be immensely helpful to pass cyber-threat information-sharing legislation. 

Number two, it would be important to make sure that agencies 

are properly funded so they can fulfill their missions, whether it is 

law enforcement or even the regulatory agencies. 

And three, I think there is an importance in investing in R&D. 

It is an area where the government has really stepped back on 

kind of core R&D, particularly around technology and infrastructure and things of that nature. 

Mr. POLIQUIN. Gentlemen, thank you very much for being here. 

I appreciate it. Let’s make sure we solve this problem. Thank you. 

I yield back my time. 

Thank you, Mr. Chairman. 

Chairman FITZPATRICK. The gentleman’s time has expired. 

38 

The Members’ questions are concluded. 

Again, I would like to thank our witnesses for their testimony to 

the task force today. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

And without objection, this hearing is adjourned. 

[Whereupon, at 4:24 p.m., the hearing was adjourned.] 

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A P P E N D I X 

June 24, 2015 

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