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81–577 PDF 2002

S. HRG. 107–641

THE ADMINISTRATION’S NATIONAL

MONEY LAUNDERING STRATEGY FOR 2001

HEARING

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

ON

THE EXAMINATION OF THE ADMINISTRATION’S NATIONAL STRATEGY

TO COMBAT DOMESTIC AND INTERNATIONAL MONEY LAUNDERING

SEPTEMBER 26, 2001

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

(

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

ZELL MILLER, Georgia

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JON S. CORZINE, New Jersey

DANIEL K. AKAKA, Hawaii

PHIL GRAMM, Texas

RICHARD C. SHELBY, Alabama

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

JOHN ENSIGN, Nevada

STEVEN B. HARRIS, Staff Director and Chief Counsel

WAYNE A. ABERNATHY, Republican Staff Director

STEPHEN R. KROLL, Special Counsel

MARTIN J. GRUENBERG, Senior Counsel

LINDA L. LORD, Chief Counsel

MADELYN SIMMONS, Republican Professional Staff

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

(II)

(III)

CONTENTS

WEDNESDAY, SEPTEMBER 26, 2001

Page

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

Prepared statement .......................................................................................... 62

Opening statements, comments, or prepared statements of:

Senator Gramm ................................................................................................ 3

Senator Stabenow ............................................................................................. 11

Senator Shelby .................................................................................................. 12

Prepared statement ................................................................................... 63

Senator Johnson ............................................................................................... 17

Prepared statement ................................................................................... 63

Senator Reed ..................................................................................................... 18

Senator Allard ................................................................................................... 18

Prepared statement ................................................................................... 64

Senator Schumer .............................................................................................. 19

Senator Bayh .................................................................................................... 20

Senator Corzine ................................................................................................ 21

Senator Miller ................................................................................................... 36

Senator Enzi ..................................................................................................... 65

Senator Bunning ............................................................................................... 65

WITNESSES

Carl Levin, a U.S. Senator from the State of Michigan ....................................... 4

Prepared statement .......................................................................................... 66

John F. Kerry, a U.S. Senator from the State of Massachusetts ........................ 7

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

Charles E. Grassley, a U.S. Senator from the State of Iowa ............................... 10

Prepared statement .......................................................................................... 71

John J. LaFalce, a U.S. Representative in Congress from the State of

New York .............................................................................................................. 71

James A. Leach, a U.S. Representative in Congress from the State of Iowa ..... 73

Marge Roukema, a U.S. Representative in Congress from the State of

New Jersey ........................................................................................................... 74

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

of the Treasury, Washington, DC ....................................................................... 22

Prepared statement .......................................................................................... 75

Response to written questions of Senator Carper .......................................... 104

Michael Chertoff, Assistant Attorney General, Criminal Division, U.S.

Department of Justice, Washington, DC ............................................................ 27

Prepared statement .......................................................................................... 79

Stuart E. Eizenstat, Former Deputy Secretary, U.S. Department

of the Treasury, Washington DC ........................................................................ 41

Prepared statement .......................................................................................... 81

William F. Wechsler, Former Advisor, U.S. Department of the Treasury,

Washington, DC ................................................................................................... 49

Prepared statement .......................................................................................... 88

Jonathan Winer, Former Deputy Assistant Secretary for International Law

Enforcement, U.S. Department of State, Washington, DC ............................... 51

Prepared statement .......................................................................................... 93

Page

IV

Alvin C. James, Jr., Former Special Agent, Criminal Investigation, Internal

Revenue Service, U.S. Department of the Treasury, Washington, DC ............ 53

Prepared statement .......................................................................................... 98

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Various letters and attachments submitted by Senator Carl Levin .................... 106

H.R. 2922 .................................................................................................................. 152

(1)

THE ADMINISTRATION’S NATIONAL

MONEY LAUNDERING STRATEGY FOR 2001

WEDNESDAY, SEPTEMBER 26, 2001

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

The Committee met at 9:05 a.m., in room SD–538 of the Dirksen

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

Committee) presiding.

OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

Chairman SARBANES. The hearing will come to order.

I want to welcome our colleagues that are here with us this

morning. They represent, of course, a bipartisan element in the

Congress who have taken a long interest and advocated significant

legislative initiatives to counter money laundering.

This morning’s hearing will focus on the Federal Government’s

effort to fight money laundering—what has been done, what must

be done. Its starting point will be the National Money Laundering

Strategy for 2001. We will be hearing from the Administration.

That is mandated by the Money Laundering and Financial Crimes

Act of 1998.

First, we will hear from our Congressional colleagues. They will

be followed by Jimmy Gurule ́, the Under Secretary of Treasury for

Enforcement; Michael Chertoff, the Assistant Attorney General for

the Criminal Division of the Department of Justice. They will be

followed by Former Deputy Secretary of the Treasury, Stuart

Eizenstat. And then we will conclude with a panel at the end of

the hearing: William Wechsler, Former Advisor to the Treasury on

money laundering; Jonathan Winer, Former Deputy Assistant Secretary of State for International Law Enforcement; and Former IRS

Special Agent, Alvin James.

We meet in the shadow of the terrorist attacks of September 11.

It is obviously more urgent now than ever to develop and put in

place the array of tools necessary to trace and interdict the funds

on which terrorists like Osama bin Laden rely to pay for their operations. This effort cannot be carried out without major investments

of time and planning. Obviously, they have a well developed network of financial means to pay the bills. Our response to terrorism

must include national and international programs to checkmate it

that are every bit as complex and sophisticated as the practice of

terrorism itself.

I think September 11 has sharpened our focus on the ways that

vulnerabilities in regulatory and enforcement procedures in our fiVerDate 11-MAY-2000 08:31 Sep 12, 2002 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 SEPT26.XXX SBANK4 PsN: SBANK4
2

nancial system can be exploited, although I might note that this

hearing on terrorism had been scheduled before those events occurred, and in fact, was to take place the very next day. The IMF

estimates that the global volume of laundered money to be between

2 to 5 percent of global GDP. In other words, between $600 billion

and $1.5 trillion. Money laundering uses the investment banking

and payment system mechanisms of our existing financial system.

It fuels organized crime. It creates a transmission belt for money

spirited out of national treasuries in numerous countries by corrupt

officials. And it is a terrorist source of financial oxygen.

The United States has long taken the initiative in efforts to stop

the laundering of proceeds from crime and corruption, beginning

with the passage in 1970 of the Bank Secrecy Act. That Act requires banks to report suspicious activities and large currency

transactions. But despite the progress we have made, especially

over the last 15 years, money laundering has become more difficult

to detect. Globalization, which eliminates barriers to free capital

movements and relies on advanced technology, makes it possible to

move money virtually instantly between any two points on the

globe. These changed circumstances have left normal banking practices and traditionally tolerated offshore banking facilities open to

grave abuse.

Recent investigations by Senator Levin’s Permanent Subcommittee on Investigations have revealed that correspondent

banking facilities and private banking services offered by U.S.

banks can contribute to international money laundering by impeding financial transparency and hiding foreign client identity and

activity. The committee’s extensive reports described how crime

syndicates, corrupt foreign dictators, and narcotics traffickers use

these practices and exploit loopholes in current U.S. law. Thus,

criminals and terrorists achieve hidden access to the U.S. financial

system, moving under the radar screen of U.S. law enforcement officials and financial supervisors.

The Administration, as we all know, has now issued an Executive Order a couple of days ago freezing the assets of 27 groups and

individuals. This is certainly a step in the right direction. But in

the judgment of most experts, it is not enough and we need to

move forward with these multilateral efforts to deal with the

money laundering situation.

It is long past time to cut the financial lifelines which facilitate

terrorist operations by closing the loopholes in our financial system. Over the past week, both The Washington Post and The New

York Times have argued forcefully for tougher and broader laws. In

fact, The Washington Post urged in an editorial on Saturday:

The existing requirements that banks report suspicious activity to regulators

should be extended to other types of financial institutions, such as stock brokers,

insurers, and even casinos. The reports that allies of last week’s hijackers may have

bought financial auctions to profit from the carnage underscores the suspicion that

a bank-only focus is too narrow. Broader reporting requirements already are enforced in Europe. The United States should now follow.

And 2 days ago, The New York Times called on the Administration and the Congress to revive ‘‘international efforts to pressure

countries . . . to adopt and enforce stricter rules. These need to be

accompanied by strong sanctions against doing business with financial institutions based in these nations.’’

3

This is obviously the time to move forward decisively to address

a situation that has plagued us for years and which today poses an

unprecedented challenge.

I very much look forward to hearing our witnesses this morning,

and I yield to the Ranking Minority Member of the Committee,

Senator Gramm.

STATEMENT OF SENATOR PHIL GRAMM

Senator GRAMM. Mr. Chairman, thank you very much, I appreciate these hearings.

Let me say that I am very pleased with the actions of the Bush

Administration to this point. I have had extensive discussions with

the Secretary of the Treasury and with the Under Secretary of the

Treasury, and I am very pleased that they are working to put together an effective program, and to coordinate their efforts with us,

and that they are committed to due process of law.

I think it is very important that we recognize that you can do

almost anything that you need to do to deal with problems of

money laundering, but you can do it the right way or you can do

it the wrong way. I do not intend to be involved in doing it the

wrong way.

And let me just give a couple of examples to try to explain the

concerns I have. If we go out and freeze assets, which we have

every obligation to do when we believe that those assets have been

used to harm Americans and they represent a clear and present

danger to our people, when we do that, we have to establish a process where people have the right to challenge that action.

So if a guy named Bobby bin Loden from Iraan, Texas, has his

assets frozen, he should have an opportunity on a timely basis to

come forward and say, ‘‘I am from Iraan, Texas. My name’s Loden.

You made a mistake here.’’ And in fact, if a mistake has been

made, if this person’s business has been harmed, then that person

has to be compensated.

The second example I would like to use is related to unchecked

authority. The Secretary of the Treasury, in any money laundering

bill, is given extraordinary power. I believe that power is needed

to take action, and I do not want to do anything to impede the ability of the Secretary to take action. But it is very important that in

taking that action, the rule of law be followed.

For example, if the Secretary of the Treasury determines that a

country, say France, is not adequately participating in our moneylaundering effort, and he decides to take action to deny the ability

of American banks to operate in France, I would have to say that

I prefer Bush’s proposal, which would deny the ability of French

banks to operate in the United States, because it is fairer and I

think it would be a more effective inducement.

But whatever course of action he decides, it seems to me that he

has to come forward with findings in taking that action that are

potentially rebuttable in court. And if there are security concerns

in those findings, at least he should have to go before a circuit

judge in private and present those findings. I cannot imagine that

we would give anyone in a free society the authority to take actions

that would destroy tens of millions of dollars of someone else’s

property without requiring some system of checks and balances.

4

So let me say that I think the most important thing we can do

in this area is to enhance enforcement. I think that has been the

primary approach of the Bush Administration. It is an approach

that I support. I want to be certain that we have every power that

is needed to do the job. But every power has to include with it due

process of law that protects the right of innocent people who may

be caught up by a mistake in this process. And I think any action

that is taken should be taken through regulation and not by order,

so that people have an opportunity to be heard and comment on

proposals before they become final.

We can do everything that we want to do within the rule of law,

within the establishment of due process, and with checks and balances to protect ourselves from abuse. The question is doing it

right or doing it wrong. I am determined to see we do it right—

I believe we can, and I am confident we will.

Chairman SARBANES. Thank you very much, Senator Gramm.

I say to my colleagues, we are going to take the testimony of our

colleagues because I know they have other conflicting engagements

this morning—Senator Levin, for one, has his responsibilities as

Chairman of the Armed Services Committee—and then we will

come back and take statements from the Members of the Committee as we go on to the next panel.

Senator Levin, we would be happy to hear from you. And just let

me note that Senator Levin has played an instrumental role in exposing how criminals have used the U.S. financial system.

As the Ranking Member of the Permanent Subcommittee on Investigations, he has published two comprehensive reports on how

correspondent and private banking activities make U.S. banks vulnerable to money laundering and he has introduced a very important piece of legislation—The Money Laundering Abatement Act of

2001. The work of the Subcommittee was very thorough, very comprehensive, very carefully done, and we are very appreciative that

Senator Levin is with us this morning.

STATEMENT OF CARL LEVIN

A U.S. SENATOR FROM THE STATE OF MICHIGAN

Senator LEVIN. Mr. Chairman, Senator Gramm, Members of the

Committee, thank you for holding these hearings, for your leadership in going after money laundering, which is very much a part

of the terrorist effort to terrorize us and the world.

Tightening money laundering laws would strike an important

blow against terrorism, and we are all determined to take those

steps. One of the steps is set forth in a bill which I introduced,

along with my principal Republican cosponsor, Senator Grassley.

Senator Sarbanes, thank you for your cosponsorship. It is also cosponsored by Senators Kyl, DeWine, Bill Nelson and Durbin.

As you said, Mr. Chairman, we know already that the September

11 terrorists have used our banks, our financial institutions, to accomplish their ends. They have used checks, credit cards, wire

transfers involving our banks. There is even pictures of two of the

terrorists using an ATM. And there are reports of large unpaid

credit card bills as well.

Terrorists, drug traffickers, and other criminals can get money

into our banks and into our banking system through the use of forVerDate 11-MAY-2000 08:31 Sep 12, 2002 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 SEPT26.XXX SBANK4 PsN: SBANK4
5

eign banks. And that is the correspondent banking issue which the

Chairman has referred to and which we have addressed in a series

of hearings that we have had and in a series of reports, and in the

bill which we have introduced.

As a matter of fact, terrorists and criminals can even create foreign banks for the purpose of getting money into our banks

through the correspondent banking system. This has been going on

with terrorists, including bin Laden, and criminals for years. We

just simply have to do something about it.

I just want to use one example of where a correspondent bank

was used by bin Laden. This testimony came out recently at the

criminal trial in New York where bin Laden’s associates were testifying, and they testified to the following. That an associate of bin

Laden testified that he had received $250,000 by a wire transfer

from a bank called the Al Shamal Islamic Bank, which is in the

Sudan. This was in the early 1990’s.

The Al Islamic Shamal Bank, according to the State Department,

is owned or partly owed by bin Laden and it is apparently still true

that bin Laden owns an interest in that Sudanese bank, or at least

was true as of March 16, 2000, when a respected international

newsletter on intelligence called the Indigo Publication, said that

bin Laden remains the leading shareholder of that bank.

Now testimony at this trial, which was a trial relating to the terrorist bombings in Kenya and Tanzania.

Chairman SARBANES. The bombings of our embassies.

Senator LEVIN. Of our embassies. Thank you. Showed that this $250,000 came through or from the bank that was owned by bin

Laden in the Sudan to this bank in Texas. There was a correspondent relationship, either directly or indirectly, to that bank

from the bank in Sudan. The associate bought an airplane with the

$250,000 and flew it to bin Laden and delivered the keys to that

plane him. That was done through the wire transfer to an American bank of $250,000.

Now in the mid-1990’s, Sudan was placed on the list of countries

that our banks could not do business with. That occurred after this

transfer. But the question then arises, well, if they cannot transfer

money directly to an American bank through a wire transfer,

through a correspondent account, is there a way to do it indirectly?

And I am afraid the answer is yes.

But before I show you how they can do indirectly what we have

stopped them from doing directly, I want to just say that as of

today, the website of that Sudanese bank shows that they still have

correspondent banking relations with western banks, including

American banks. Now, we think the American bank accounts are

either closed or no longer operative. But the website of this bank,

the Al Shamal Bank, you can see it on your own computers, still

shows that European banks, Southeast Asian banks, North American banks, including American banks, still have correspondent relations with the bank, which as late as April 2000, was said by a

reputable newsletter relating to intelligence activities, that bin

Laden had an ownership interest in.

We are trying to find out, by the way, whether in fact these

banks—there are a lot of reputable banks on that list—have an

open account with the Al Shamal Bank. We are trying to determine

6

that as we speak. But the website of the Al Shamal Bank shows

that that correspondent relationship continues to exist to this day.

Finally, I want to go back to the direct and indirect issue.

If we could put that first chart back on about how bin Laden

used banks, not just could used, but actually did access the one

bank on the left, but then on the right shows how, when that was

stopped in the mid-1990’s, when the OFAC list was created by the

Treasury Department, which prohibited our banks basically from

dealing with Sudanese banks and banks in other countries such as

Sudan, what the Al Shamal Bank now can do, and does do, according to its website, instead of having a direct correspondent relationship with an American bank and opening an account in an American bank instead opens an account in a foreign bank. And then

that foreign bank has a correspondent account in a U.S. bank.

Now that process, it seems to me, has also got to be very much

tightened. And we do it in our bill in a number of ways. I think

because of the time constraints of the Committee, I will not go into

the ways in which we constrain it in any depth, other than to say

this. Our bill will prohibit an American bank from having a correspondent relationship at all with what is called a shell bank.

That is a bank that has no physical presence anywhere. It is licensed by a country, but has no physical presence anywhere.

We would prohibit a correspondent relationship with that bank.

We very much tightened the rules as to a correspondent relationship between an American bank and two other types of banks. One

is an off-shore bank, which is not allowed to do business in the

country where it is registered, has a physical presence somewhere,

but the country that registers it says, we are not going to let you

do business with our citizens. And so we very much tighten that

up. We would require that they disclose to the American bank who

their customers are. And the same thing would be true under our

bill with banks in jurisdictions that are so-called suspect jurisdictions because they have no very strong banking regulations.

There is a third area which Senator Kerry’s bill gets to in a very

important way. And that is where he would give in his bill, which

I cosponsor, the Treasury Department the right, and he will describe his own bill, but I want to show you how it complements.

These bills work together. In fact, I will leave that to Senator

Kerry, other than to say that these bills work together to complement each other.

Finally, let me just say this. There are a number of bills that are

outstanding here, a number of efforts that are being made. They

complement each other.

We received a letter from the U.S. Department of Justice which

is very supportive of our bill. We also received a letter from my

own Attorney General in Michigan, Jennifer Granholm, very

strongly supporting our bill. But there are significant loopholes in

the correspondent banking area. These loopholes have to be closed

if we are going to truly wage a comprehensive war on terrorism.

I want to thank you again, Mr. Chairman, for giving us the opportunity to testify.

Chairman SARBANES. Well, thank you very much. And we want

to thank you for the very careful, comprehensive hearings that

your Permanent Subcommittee on Investigations undertook.

7

Next, we will hear from Senator John Kerry, who has been at the

forefront of Congressional efforts to deal with domestic and international money laundering.

Earlier this year, Senator Kerry reintroduce the International

Counter Money Laundering and Foreign Anti-Corruption Act of

2001, which, as Senator Levin pointed out, gives the Secretary of

the Treasury authority to impose new special measures against foreign jurisdictions and entities that are of primary money laundering concern to the United States.

Senator Kerry, we know you have been working this issue for a

considerable amount of time. We would be happy to hear from you.

STATEMENT OF JOHN F. KERRY

A U.S. SENATOR FROM THE STATE OF MASSACHUSETTS

Senator KERRY. Thank you very, very much. Thank you for having these critical hearings and thank you for the opportunity to testify today. And to all the Members of the Committee, I am honored

to be in front of you.

I thank Senator Levin for his leadership in the Permanent Subcommittee. I think he did a terrific job just now of helping to show

the linkages here and why this is so important.

I would like to sort of build a little bit on what he said, if I may.

There are a lot of tools, Mr. Chairman, in this new war. I would

ask unanimous consent to put my entire text in the record.

Chairman SARBANES. The full statement will be included in the

record.

Senator KERRY. Let me just chat about a few of the most important points, if I may.

We have declared a new war on terrorism. And it is appropriate,

because it is new, it is going to be unlike anything that we have

ever engaged in. And unlike other wars where our technological superiority was the difference, Kosovo, for instance, where we did not

lose a person. We could bomb for days and achieve our goal. Or

Haiti, where our overpowering numbers, or Panama, where our

overpowering numbers, or even Vietnam, where troops and helicopters made a difference. Here, the single most important weapon

is going to be information. It is intelligence. And it is perhaps the

area in which we are our weakest today, sadly.

But coupled with intelligence is this management, if you will, of

the source of the power of these terrorist organizations, their capacity to survive, to buy airplanes, to buy explosives, to pay people’s

living expenses, to move them around the world, to literally harbor

and succor them.

And I think, Mr. Chairman, that for years now, what we have

known is that this war is really more law enforcement than traditional military enterprise. It has to be multilateral. It has to raise

the standards on the planet, if you will, in order to be able to cooperate adequately to do this.

We currently have some 36 jurisdictions that the OECD still

cites as being renegades, I guess is the best way to describe them,

with respect to their policies for accountability, for transparency,

movement of money, even tax policy.

Now, Senator Gramm and others have in the past been wary,

and I recognize that wariness, of having the United States impose

8

its will because somebody else might have a different tax structure.

I want to emphasize—that is not the rationale. It is not the differential in a tax rate that would motivate us to say that those

places ought to be more accountable. It is the lack of transparency,

the lack of accountability, the different treatment between foreign

and domestic individuals, and the way they attract capital.

And I would just direct the attention of the Committee to its own

memorandum of the staff in preparation for this hearing, in which

they properly say: Money laundering poses an ongoing threat to the

United States. The economic costs associated with money laundering include increased risks to bank soundness with potentially

large fiscal liabilities, reduced ability of a country to attract foreign

investment, increased volatility of international capital flows and

exchange rates, the distortion of the allocation of resources, distribution of wealth, and it can be costly to detect and eradicate.

Most importantly, Mr. Chairman, it is literally the lifeblood of all

criminal enterprises that these revenues generate. And all of these

are interconnected.

For instance, in Afghanistan, Osama bin Laden and the Al

Qaeda has been involved in drug trafficking, as the Taliban has

been. Now some point to the fact that the Taliban has tried to reduce the drug trafficking, principally because the Northern Alliance and the Al Qaeda were sort of undercutting them, and so they

came in to move in on it. But three quarters of the world’s opium

has been coming out of there.

So you have a linkage. It is a linkage also, I might add, to much

of the proliferation issues, the movement of arms, arms trafficking,

illicitly. So if you are going to be serious about fighting a war on

terrorism, which we obviously should and must be, the first order

of priority is to implement an extraordinary diplomatic effort to

raise the international standards of accountability and transparency and exchange of information.

Now I agree with Senator Gramm, there must be a due process

component here. And indeed, the Office of Foreign Asset Control,

OFAC, had an incident with Columbia, one individual, and they

moved rapidly to make certain that they addressed it and that

there was no unfairness in the application of any of these standards. Should it be de jure? Most likely. We should have it either

by regulation or by legislation, a structure so that we guarantee it.

But I have to also say, Mr. Chairman, over the 14 years or more

that I have been involved in this, I have witnessed a remarkable

reluctance by the financial community, the banking institutions, to

participate. I have traveled to England, met with a board of governors there, others, talking about various jurisdictions under their

control, where you have known remarkable exchange of money

laundering efforts, havens.

These havens, I might add to everybody, put all of our legitimate

businesses at remarkable disadvantage and they are an incentive

for tax evasion, for every legitimate government on the face of the

planet that is struggling with the question of revenues. These renegades offer an alternative to our capacity to do what we do without

unfairly distributing the burden of taxes. And so, we have an enormous interest in pressing this as a matter of governance, as well

as a matter of fairness.

9

I think it is time to get tough. Fair but tough. We have the

strongest market in the world. People must access our market to

be meaningful players. And we must use the access to our market,

whether it is the Chip system in New York, where we clear checks,

or the partition placing in the marketplace itself, as the leverage

for the behavior of these countries.

And I would say to my colleagues, since the OECD has publicized

the names of many of these renegades, a large number of them

have already moved to change their laws because they understand

what the implications are. And as a consequence of what happened

on September 11, this is the best opportunity we have had ever to

try to do this.

Now many of you may remember the BCCI Bank which tried to

illegally enter our system. Osama bin Laden had a number of accounts at BCCI. And we have learned, we did not know it at the

time. It was collateral to what we were doing in trying to protect

the laws of our banking structure.

But we have learned since through law enforcement and intelligence that when we shut it down, we dealt him a very serious

economic blow because of the size of those accounts and his dependency on that flow that Senator Levin has already described for

his money. So it is critical that we empower the Secretary of State

and I might add, the Secretary of Treasury, we have to go beyond

what the Bush Administration has done.

I support what they have done. I am glad they did what they did

this week. But as former Assistant Secretary of State, Jonathan

Winer, will show you in a while on a huge chart, the number of

Osama bin Laden linkages is mind-boggling. And when you see

this chart and measure the 27 that we have now named versus all

of those that we know in the public domain exist, this is a first step

that does not amount to the kind of war we need to be engaged in.

Now, I know that there are sensitivities and reasons for why we

want to try to take a few days to pull that together. But all of us

need to recognize that we have to be prepared to go further.

So, Mr. Chairman, in summary, the bill that we are hoping will

be embraced in the context of these larger efforts empowers the

Secretary of the Treasury to designate these primary money laundering concerns, and after the designation, to take one of several

steps to move on the kind of corresponding banking situations Senator Levin has described—to require identification of those who use

the foreign banks’ payable-through account with a domestic financial institution, to require the identification of those who use the

foreign banks’ correspondent account with a domestic financial institution, to restrict or prohibit the opening or maintaining of certain corresponding account for foreign financial institutions.

But most importantly, ultimately, we have to empower the Secretary of the Treasury with due process to prevent any country,

government, or financial institution that harbors or continues to

not adhere to the higher standards of banking behavior from taking part in the upside benefits of the United States of America’s

marketplace strength. And that is the way we have to play this if

we are going to really conduct a war on terrorism.

Thank you, Mr. Chairman.

Chairman SARBANES. Thank you very much, Senator Kerry.

10

Senator Grassley has played a very pivotal role in increasing

awareness about money laundering. Senator Grassley served as cochair of the Senate Caucus on Narcotics Control and authored the

Senate version of the Money Laundering and Financial Crimes

Strategy Act of 1998.

That Act mandates the development of a national strategy on

money laundering and requires submission of this strategy to the

Congress. In fact, our next panel from the Administration will actually be responding to the provision of the legislation that Senator

Grassley authored.

He is also the cosponsor of the bills that both Senator Levin and

Senator Kerry have introduced in this Congress, and Chuck, we are

pleased to have you here. We would be happy to hear from you.

STATEMENT OF CHARLES E. GRASSLEY

A U.S. SENATOR FROM THE STATE OF IOWA

Senator GRASSLEY. Thank you, Chairman Sarbanes, and my colleagues. And I am glad to be here with the authors of this legislation and to support their efforts.

If this were pre-September 11, I would probably be here just to

talk about money laundering as it dealt with drug trafficking and

our efforts to stop that. But, with the happenings of September 11,

it takes on a whole new side and obviously, we get to the point

where efforts to stop money laundering becomes also an essential

tool of going after terrorists that have been so well described by my

colleagues here at the table with me.

Our focus needs to be not only on the specific assets of terrorists,

but also on identifying their methods and eliminating their sources

of funding. The events of 2 weeks ago, it is because of that that

we are now faced with another group of thugs. We used to refer

just to drug thugs. But now the terrorists that are able to launder

illegal proceeds to pay for their activities, must be included. For

them, money, access to it and to the mechanisms for placing it in

the legitimate economy are the equivalents of their war industries.

And to strike at them, we must strike at their ability to wage war.

That reality has increased the importance to what we are here

talking about today. Two weeks ago, we might have said, passing

these bills was an important thing to do. It seems to me, passing

these bills now is an imperative.

These bills, of course, are not new. The elements in them have

received careful consideration over the last several years because

of money laundering, particularly as related to drug trafficking.

These bills are not full of hastily assembled items. They contain

needed changes and add important tools to our arsenal. We also

need to work with the banking and the financial services industry

to ensure that we act smart as we go quickly down this road. We

also need to see that they are on board. This is not a burden that

government here or elsewhere can carry alone. We need to combine

all of our strengths and our capabilities. But circumstances demand meaningful action now and these bills give useful, important

tools of adding them to our toolkit.

So even though we are here talking about legislation, I think we

are here to plead with bankers everywhere who are in as much

harm’s way of terrorists as anybody else in America. Normally in

11

government, we respect bankers’ relationships with each other.

This has been a very cozy community, and I do not say that in a

denigrating way. This community has certain sensitivities in the

banking community—respect for each other’s relationships with clients, kind of the lack of transparency that my colleague has already talked about, maintaining privacy, respect for secrecy. Well,

in normal times, I think we would also back up and respect that.

But these are not normal times, Mr. Chairman. I think it is time

to put these sensitivities that we have respected within the banking community, to put them aside. And in a sense, we are here not

just to legislate, we are here to plead to have the ultimate of cooperation of the United States bankers and international bankers

in this effort to defeat terrorism.

Without this cooperation, without even ideas from them, without

even their coming to government and saying, you are overlooking

something here by not going at it this way. This is the sort of mobilization of the private sector as well as the public sector if we are

going to defeat terrorism.

Chairman SARBANES. Well, Senator Grassley, thank you very

much. I think that was an extremely thoughtful statement and I

want to pick up on just two points in it.

First of all, the legislation we are considering has been well developed. As you point out, it is not hasty. In fact, Senator Kerry’s

legislation was reported out by the House Banking Committee in

the last Congress on a vote of 33 to 1 that came out of the Committee deliberation.

Senator Levin’s legislation, as I indicated earlier, reflects a long

process of very thorough and careful hearings. In fact, I think your

reports stand about this high [indicating], if I am not mistaken,

coming out of that Committee.

Senator LEVIN. Almost as tall as my newest grandchild, as a

matter of fact, Mr. Chairman.

[Laughter.]

Chairman SARBANES. Fair enough. And Senator Grassley, I think

your observation about the participation and cooperation of the private sector is very important. They can be extremely helpful. They

know what these practices are.

And the kind of just resistance to any action at all I think has

to be jettisoned now and there has to be a different attitude that

says, well, we have to have legislation. We have to tighten up this

system and strengthen it. We are here to provide some ideas and

to help move this forward. I appreciate those comments very much.

I am going to forego any questions to forward the agenda here

this morning. Do any of my colleagues have any questions of our

colleagues?

Senator STABENOW. Mr. Chairman? If I might just ask—

Chairman SARBANES. Well, let me yield to Senator Shelby first.

Senator STABENOW. I was only going to say, Mr. Chairman I

have to preside at 10 a.m.

Senator SHELBY. I will yield to her, Mr. Chairman.

COMMENTS OF SENATOR DEBBIE STABENOW

Senator STABENOW. Thank you. I do not really have a question.

I just wanted to thank you for holding the hearing and indicate my

12

strong support for these efforts, and apologize in advance for having to leave the Committee to preside over the Senate.

But I am hopeful I will be back before the hearing is concluded.

Thank you.

Chairman SARBANES. Thank you very much, Senator Stabenow.

Senator Shelby.

COMMENTS OF SENATOR RICHARD C. SHELBY

Senator SHELBY. Mr. Chairman, thank you.

I want to thank my colleagues for their work. I have a few questions and maybe you answered them in your detailed statements.

How do you get into the extraterritorial way that we would enforce

this? This is very important if we are going to do it, and I think

it has to be done. I agree with all of you and I commend all three.

How do you do the extraterritorial reach. Carl? John?

Senator LEVIN. In a couple of ways. First, you can require our

bank—— Senator SHELBY. It is central to this, is not it?

Senator LEVIN. It is an important issue. First, you can require

our banks under the circumstances that we set forth to require

that, where there is a correspondent account under the circumstances described with a bank abroad, that that bank disclose

its banking customers to our bank so that we have disclosure, various types of disclosure under different circumstances. But, nonetheless, disclosure of who that foreign bank’s banking customers

are under our circumstances.

Second, we allow for the freezing of assets. There is no reason

why a correspondent bank account should not be subject to the

same freeze of assets—if I used the word seizure, I meant freeze— the same freezing of assets as an American individual’s accounts

can be frozen. Where there is probable cause that a crime has been

committed, then we allow the freezing of assets.

Senator SHELBY. Due process.

Senator LEVIN. Due process. We have due process very carefully

laid out. Senator Gramm is surely right. You want to have due

process and a right to appeal a freezing of an account. But right

now, we do not permit the freezing of a correspondent account of

the assets in that account except under almost impossible proofs.

You have to prove that the bank itself was involved in the criminal

activity. It is not enough to prove that the criminal’s money is in

that corresponding account.

Senator SHELBY. Apparently, we do not have the tools to do the

job.

Senator LEVIN. And we need that tool, too, to freeze assets in the

correspondent account.

Finally, through service or process and jurisdiction over foreign

banks that have correspondent accounts, we can have longer reach

for our courts.

Those are three ways in which we can accomplish the goal you

set forth.

Senator SHELBY. Senator Kerry.

Senator KERRY. I would add to that that much of what we are

seeking to do is not in fact extraterritorial. Obviously, there are

limits on our capacity to order a bank in another country over

13

which you have no—there is no long-arm reach, and so forth, statute otherwise which would have any validity. But the powerful tool

here is the control over our own marketplace. That is essentially

what Senator Levin was describing.

We are not extraterritorial in requiring them to adhere to a

standard of behavior if they want to be in our country, or if they

want to be a corresponding bank with our banks. The behavior that

you are really controlling is our marketplace, our banks, and access

thereto. On those components which reach into extraterritoriality,

for instance, in the order President Bush issued on Monday, that

works for those countries like Italy or Germany where they have

the same laws we do with respect to freezing. But Spain does not.

So if you have a foreign bank and you say you are going to freeze

the assets and the assets in fact are partly in Spain, you cannot

do that unless they change their law or come to some other international agreement. That is why the multilateral component of this

is so critical. And to some degree, I would disagree with the early

indicators of the Bush Administration. They seem to be wanting to

be more unilateral in their approach, not as multilateral as we

have been in the last 10 years.

And I think that may have changed, incidentally, in the last

week or so. But my hope is it will change because there is a huge

multilateral component to this that will require ratcheting up the

diplomatic effort very significantly in order to get countries to

change their laws. So, again, you are not forcing them, but you are

leveraging them to the greatest degree possible through legitimate

means in our marketplace and our laws.

Senator SHELBY. To get them to raise the international standards, right?

Senator KERRY. Raise the international standard, or to live by

our standard if they want to participate in our marketplace. And

that is a powerful incentive, incidentally.

Senator SHELBY. How do you separate the legitimate banking

going on from what we would deem to be illegitimate? In other

words, do you review this? Somebody reviews these transfers?

Senator KERRY. First of all, you have your so-called SAR reports.

Senator SHELBY. We have that, I know.

Senator KERRY. And you build on that. Second, I mentioned information earlier.

Senator SHELBY. Do you think that is enough by itself, John?

Senator KERRY. Of course not. Absolutely not. Most of them sit

there. People do not know how to interpret them. Second, we do not

have enough people.

Go up to the financial assets control—how many people are up

there now? Two? Three? I think we may have 3 or 4 people up

there, something like that, maximum. We do not have enough. We

have not put the computer capacity up to speed, the personnel capacity, et cetera, do a lot of this. But let me go one step further.

This is where the law enforcement component, intelligence component, and what Senator Grassley was saying, the participation of

the bankers themselves. The international banking standard under

the Basel Convention is ostensibly, know your customer. Well, an

awful lot of bankers do know their customers. And there has been

a sad history of not sharing what they know about that customer,

14

where they know it is illicit and dangerous activity, with the rest

of the world. That is the behavior that has to change.

And so, if the flow of information is such, you will distinguish,

and if you have the adequate due process protections, law enforcement has to have reasonable cause. There has to be a reasonable

standard here.

The Secretary of the Treasury under our bill has to do this in

consultation with the Secretary of State, Defense, NSA, et cetera.

So it seems to me that while nothing is perfect, what we have

today is in fact an empowerment of the criminal enterprises, an

empowerment of terrorism, and we have to begin to move in the

other direction in order to take back the control, mindful of the

need to be thoughtful about the due process components.

Senator SHELBY. Thank you.

Thank you, Mr. Chairman.

Chairman SARBANES. Are there any other questions?

Senator GRAMM. Let me just make the following point.

We had 157,000 reports last year of questionable activities from

banks. We do not have the resources to process those now. And the

most immediate effect that can be had is providing the resources

to go through those 157,000 suspicious activity reports and try to

ferret out what is suspicious and what represents a threat.

I would say, in response to Richard’s point, the good thing that

the Administration has done, and it is unilateral, but it sends a

very clear signal, is that if you want to do banking in the United

States, you are going to have to meet these standards. And that I

think is the kind of signal that you need to send up front if you

expect to raise international standards.

And as I looked at the actions that the Bush Administration

took, that action was the strongest in terms of sending the right

signal. We cannot make banks in other countries do what we want

them to do. But we can set standards if they want to do business

in the United States. If you want to be in the banking business,

you have to do business in the United States. So, I think that is

the right approach. That was the focal point of what they did, and

I think that that was the right thing.

Senator LEVIN. If I could just add, that is the basis of our bills

as well.

Senator SHELBY. That is right. Your bills actually both target in

a way that has not been done in the past. So you are not caught

up in the morass of hundreds of thousands of reports. In fact, the

Kerry bill provides a procedure to identify special measures against

foreign jurisdictions or entities. So you identify, in a sense, the bad

actors. They are subjected to a very detailed scrutiny, and I think

that makes a lot of sense.

Senator KERRY. Can I just add one quick thing?

Chairman SARBANES. Certainly.

Senator KERRY. The question of this leverage is something we

honestly have been pushing for for some period of time and regrettably, have not had a sense of urgency about doing. So, I hope that

we will really follow through on it. But may I say to all of my colleagues on this Committee, I want to underscore this informational

component of it and the sharing of it and the structure by which

we do it.

15

It is not caught up in this bill. But the fellow, Rochman, who was

involved in the bombing of the Trade Center in 1993, was on the

watchlist in Saudi Arabia, in Egypt. And when he came over here,

there was just a complete wall between the watchlist, the intelligence community, and the law enforcement community. So nobody watched him and nobody tracked him. I am told that several

of the people involved in this most recent attack fall into that same

kind of barrier between intelligence and law enforcement.

Again, I repeat for all of us, this capacity to begin to improve our

gathering of information, the movement of the information, the

analysis of the information, and the personnel components of that,

are the front line of this war. And we need to do it.

Chairman SARBANES. Gentlemen, thank you very much, and we

look forward to consulting closely with you in the days—I want to

underscore that—in the days ahead, because this is a matter of import and of some emergency. We appreciate your testimony.

Senator CORZINE. Mr. Chairman, may I ask one question with regard to whether private banking standards are addressed in your

bills as much as the commercial banking and financial institutions

that are generally the subject, at least as I have read them?

So much of access of the system comes through the investment

process. Institutions such as hedge funds are left out of regulatory

structures and easy for funds to access. I would like to hear whether your bills address these kinds of other intermediaries, as opposed to clearly identifiable financial institutions.

Chairman SARBANES. Go ahead.

Senator LEVIN. Could I just respond briefly to that?

Chairman SARBANES. Yes.

Senator LEVIN. We do address the private banking situations in

our bill and require enhanced know-your-customer rules in the private banking area based on the hearings that we had into the

abuses of private banking which were extensive hearings.

On to the latter part of your question, we actually have hearings

that we are going to be getting into in that area. They are not yet

covered in the bill, but the hearings that are scheduled by my Permanent Subcommittee on Investigations will get into that area.

Chairman SARBANES. Thank you.

Senator SCHUMER. Mr. Chairman.

Chairman SARBANES. Senator Schumer.

Senator SCHUMER. I just had one quick question as well. I put

in a bill with the late Senator Coverdale and Congressman Leach

very similar to yours, Senator. But here is the thing that plagues

us, Carl. How do you deal with other countries, and John touched

on this, that do not cooperate, which tend to be large countries?

That chart you had, which is the Sudan bank, we can cut them

out of America, but if we cannot cut them out of other major countries that have sophisticated banking systems, and those systems

deal with our banks, then, for all practical purposes, we have not

accomplished much.

And that is the fundamental dilemma that I have been wrestling

with this issue. Could either of you—I know we talk about pressure. But shouldn’t we consider something further than pressure?

Senator KERRY. Yes.

16

Senator SCHUMER. Which is to say, if a large country with a sophisticated banking system continues to deal with the banks in one

of these small countries that we know are just designed to hide

money, that they will have to face penalties in dealing with our

banking system, because even the French or the Germans or the

British or the Japanese, which have huge banking systems, have

to be part of our system.

Otherwise, what I am worried about is they will just—they are

very clever and very nimble and these terrorists, as well as other

kinds of money launderers, will rejigger things and make their

base of operations another country that has a sophisticated banking system, but does not have the rules and laws that we have.

Senator KERRY. Senator Schumer, that is a very good question

and it is one that has been asked by the financial community for

a number of years. In fact, one of the arguments that you heard

against moving was, well, if you get too strict, they will move offshore and then you wind up diminishing your capacity. But I think

we have moved in the last 10 years, beginning, I might add, with

President Bush in 1989, and moving forward since then, there has

been a significant effort on the international front.

You are going to hear from former Assistant Secretary of State

Jonathan Winer, who negotiated a lot of these efforts internationally. Others have been involved in this. The OECD is pressing this

issue now. We have urged the G–7, G–8, even G–16, to become the

focus of this effort. If you have the developed world, essentially,

joining together in this effort and they seem to be, as a consequence of what happened on September 11, then you really begin

to create a new structure. And so that is why I said a moment ago,

it has to be multilateral with a major ratcheting up of the diplomatic effort simultaneously. We cannot do all of this alone.

Senator LEVIN. And if I could just add one word. We have to also

be consistent. There is a very strong international effort in the area

of tax evasion, which we have lagged behind. So when we do that,

we are sending a mixed signal about the importance of the international community being involved in correcting some of these.

Senator SCHUMER. But am I wrong to think that if even one or

two major countries resist this pressure, that we then have a gaping loophole here?

Senator LEVIN. There would still be access to our market, which

the Chairman has pointed out, and others, that they still want, and

that access is going to be restricted.

Senator SCHUMER. Well, that is the point. We might have to say

to a major country, if you do not do this, all your banks cannot deal

with us unless you join up with this. And I do not know whether

we say that through diplomacy. But when they resist, where do we

go from there? That is the question that has plagued me about this

for the longest time.

Senator KERRY. But, Senator Schumer, there is a level of reasonableness in these standards. It is very difficult for a nation that is

a member of the WTO, that is at the United Nations, Security

Council, elsewhere, participating in global affairs, to legitimately

resist the diminimus standards of accountability, transparency, exchange here, that most of the developed countries are utilizing anyway in one form or another. There are not huge differences here,

17

frankly. There just are not. There may be nuances of particular law

or particular protection or access or rapidity with which somebody

has access to redress in the court system or something. Sure. But

the fundamentals that criminals should not be using the financial

marketplace with impunity, to be able to wage war against that

very marketplace. And what we are seeing in response, I think the

United Arab Emirates, the Saudi break of relations with the

Taliban, the current movement of countries to agree that they have

to become part of this effort, is because they recognize they are

threatened.

Every country is threatened by a terrorist organization that has

access to these financial services without accountability. And they

all recognize it is in their interest and in the interest of governance

and security to move in this direction. I think the weight of history

as well as the weight of reasonableness is on our side.

Senator SCHUMER. Thank you, Mr. Chairman.

Chairman SARBANES. I do not want to close out any of my colleagues. This is a very knowledgeable and informative panel. And

while a short while ago I was trying to move it along so we could

move ahead, I do not want any of my colleagues who have questions not to have the opportunity to put them. If there are, we will

do that. In fact, I will go to the regular order and move through

and recognize people for their 5 minutes if they wish to ask any

questions.

Senator LEVIN. Could I leave expressing the hope that money

laundering provisions be included in any anti-terrorism bill? That

is going to be an important test and it is coming up soon.

Chairman SARBANES. Well, that is why I said earlier that we

look for your counsel over the next few days, yes.

Thank you all very much. You have been extremely helpful.

Senator LEVIN. Thank you.

Senator KERRY. Thank you, Mr. Chairman.

Senator GRASSLEY. Thank you.

Chairman SARBANES. Thank you.

If the next panel would come up and take their seats, I will now

recognize the Members of the Committee for any brief statements

they may wish to make.

Senator Johnson.

COMMENTS OF SENATOR TIM JOHNSON

Senator JOHNSON. Thank you, Mr. Chairman. I will be very brief

and submit a full statement for the record.

I simply want to commend you for rescheduling this important

hearing so quickly. As we all know, anti-money laundering tactics

will play a critical role in our war against terrorism. And I would

like to note that the Chairman had the foresight to schedule a

hearing on this topic well before the attacks of 2 weeks ago.

Senator Sarbanes identified early on that our National Money

Laundering Strategy is a critical weapon in our arsenal against terrorists, drug lords, organized crime syndicates, and others, and I

am pleased that this Committee will play a critical role in our Nation’s anti-money laundering efforts.

I would also like to thank President Bush for taking decisive action this week to move forward with at least the first step in a siVerDate 11-MAY-2000 08:31 Sep 12, 2002 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 SEPT26.XXX SBANK4 PsN: SBANK4
18

lent war on the financial assets of those who so cowardly attacked

America 2 weeks ago.

Mr. Chairman, I do believe that the challenges to deal with

money laundering will be one of the critical pieces in our overall

strategy against terrorism and I would like to commend our colleagues for bringing forward legislation. I look forward to reviewing

the President’s plan.

And as our colleague and friend, Senator Levin of Michigan,

noted, we cannot have a war on terrorism without also have a significant component dealing with the choking off of financial resources available to these terrorists.

Again, thank you Mr. Chairman for rescheduling this hearing. I

look forward to the testimony and working with my colleagues

across the aisle on a bipartisan effort to make our significant contribution through this Committee to the war on terrorism.

Chairman SARBANES. Very good.

Senator Shelby.

Senator SHELBY. I would just ask, Mr. Chairman, that my entire

statement be made part of the record. I am looking forward to

hearing from the Justice Department and the Treasury.

Chairman SARBANES. Good. Your full statement will be included

in the record.

Senator Reed.

COMMENTS OF SENATOR JACK REED

Senator REED. Well, thank you, Mr. Chairman. I also want to

commend you for holding this hearing. It is incredibly important.

We face a daunting challenge to counteract terrorists who have attacked our country. There are many different responses that we

will have to undertake—intelligence gathering, military operations.

But not the least of these is disrupting the financing of these terrorist networks.

And to that end, this hearing is extremely important. I look forward to the witnesses today and also to prompt action on legislation to provide the tools that our Government needs to counteract

money laundering and terrorist financing throughout the world.

And I thank you, Mr. Chairman.

Chairman SARBANES. Very good.

Senator Allard.

COMMENTS OF SENATOR WAYNE ALLARD

Senator ALLARD. Thank you, Mr. Chairman. I also have an opening statement I would like to make a part of the record.

Chairman SARBANES. The full statement will be included in the

record.

Senator ALLARD. I just want to congratulate you on the hearing.

It is timely and something that we need to work on.

I do think that we need to figure out a way to evaluate a measured response. In other words, as we pass these rules, regulations,

requirements, and reporting, measure in some way how effective

they really are. I think that is an important concept.

Chairman SARBANES. Good. Thank you very much.

As Senator Schumer observed earlier, he and Senator Coverdale,

our late and very highly regarded colleague, had joined together in

19

introducing the Foreign Money Laundering Deterrence and AntiCorruption Act in 1999. That bill had a number of very important

provisions in it. Some of the aspects of that have already been discussed, and I will not take the time now to review the items.

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

STATEMENT OF SENATOR CHARLES S. SCHUMER

Senator SCHUMER. Well, thank you, Chairman Sarbanes. And I

want to thank you for your leadership and your ongoing interest

in this issue.

I think as was mentioned, this hearing was scheduled and your

interest predated what happened here. And of course, now we are

going to move very quickly because of what happened. Let me just

make a couple of points.

First, the timing of this hearing is so important because these

kinds of well-organized, well-funded terrorist attacks are at the

heart of this seemingly intractable problem of money laundering.

The funds they use that are either proceeds from or investments

in illicit activities seem to filter through the international banking

system like water. Jurisdictions that provide total opacity for the

owners of these accounts and by statute refuse to cooperate with

international law enforcement are the spigot.

There are countries that set up banking systems that then go on

the web to brag that no one will find out who you are, where your

money comes from, and where it is going to. A Yahoo search produces over 30,000 websites that provide corporate structures and

bank accounts that allow for the transfer of funds to places like— I cannot even pronounce some of them—Vaunatu and Naru in the

South Pacific, and St. Vincent and Anguila in the Caribbean. And

Treasury’s FinCEN, the Financial Crimes Enforcement Network,

estimates that $4.8 trillion in hidden assets in these jurisdictions

is concealed to cover up some crime.

That is a pretty powerful statement, and this is not just terrorism, obviously, but money laundering, tax evasion, and so many

other things. And the domestic laws of these jurisdictions make it

a crime—listen to this—a crime to divulge any information about

the banks’ officers, depositors, transfers, or any financial activity

relating to banks to law enforcement, without exception.

Our law enforcement people go there, try to find out what is

going on, and the bank officer or the bank cannot tell under penalty of law. In these countries, they have made it a business.

Anguila, for instance, charges $60,000 to open a bank, $20,000

a year to keep it there, and then you are completely on your own,

except, as Senator Levin’s charts show, you have complete access

to our system. And I would like to just switch the focus a little bit.

I think it is going to be very hard to get total global cooperation

on this. It has been the history in the past that we make effort

after effort and then you just get a couple of bad apples that spoil

the bunch. But if we can get rid of the opacity, if we can make this

transparent and we can trace the money, even if it is going to flow,

we can make a huge difference in finding out these people and

their sources, et cetera.

And that is an important point to make, that in our new electronic world, money just flows. But what stopped us is the terrorVerDate 11-MAY-2000 08:31 Sep 12, 2002 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 SEPT26.XXX SBANK4 PsN: SBANK4
20

ists and others, money launderers, drug runners, find the places

where no law enforcement can go and find out what goes on.

If we want to stop the actual transfers of money, we should consider—I am not advocating it yet because it is a major step and I

agree with Senator Kerry that the diplomatic efforts have to be

first—but we should even consider penalties on big countries that

do not help cooperate. We are at that stage.

So, Mr. Chairman, once again, I thank you. I look forward to participating in your efforts to put together a strong bill. I want to

thank our witnesses, present and past, for testifying.

Chairman SARBANES. Senator Bayh.

STATEMENT OF SENATOR EVAN BAYH

Senator BAYH. Thank you, Mr. Chairman, for your foresight on

this issue and for the emphasis you have placed upon it.

Let us make no mistake about it. Our attempts to dry up the

funding for these terrorist organizations literally will take weapons

out of the hands of those who wish to do us harm.

Our attempts to combat money laundering, Mr. Chairman, are

the financial equivalent of launching smart bombs, Smart weapons,

against the terrorists and those who aid and abet them. So, I want

to thank you for your leadership in gathering us here today.

Since September 11, the outlines of Osama bin Laden’s financial

network have become clearer. He has relied upon electronic banking, ties to a number of charities in the Middle East and elsewhere.

But many experts feel that the most likely source of the funds

used to perpetrate the attacks on the United States were derived

either from small wire transfers or from an informal banking system known as Hawalas. This system is used to transfer large

amounts of money from one country to another without the cash

ever crossing national boundaries.

Mr. Chairman, in today’s edition of one of the large national

daily newspapers, the Hawala banking system was described as follows. It relies on something older than money itself—a person’s

word. Nothing could be more discreet. There is no need to smuggle

large amounts of cash from one country to another or to fill out

bank forms that can draw unwanted attention. No need, in fact, for

any detailed bank records whatsoever. A person simply hands over

cash at one end and is paid out at the other end, leaving virtually

no paper trail to follow.

This is an area of inquiry, Mr. Chairman, I think would warrant

some of the Committee’s time and attention with your blessing, of

course. It is beyond the purview of many of our existing laws. In

1993, however, Congress did act, requiring both regulation reporting of Hawalas. Both the past and the previous Administration,

however, have delayed the implementation of the regulations. The

previous Administration, until later in 1999, and the current Administration until June 30 of 2002. These regulations, Mr. Chairman, and an extension upon them could be important tools in the

hands of law enforcement in drying up the funds available to terrorist organizations such as Al Qaeda.

So, Mr. Chairman, I want to thank you again for holding these

hearings and would respectfully suggest we look at several actions,

some of which were touched upon by our previous panelists.

21

First, as I mentioned, we need to look closely at the activities of

the Hawalas to see how they are regulated in other jurisdictions.

They happen to be illegal in Pakistan, for example. To separate

those that are legitimate from those that are not, and to do what

we can to close down the illegitimate ones or their activities in this

country. As Senator Kerry mentioned, to prohibit banks who do

business with terrorists from doing business in this country. As

Senator Schumer suggested, it is time to get serious about this, to

take a more hard-nosed approach. I could not agree more, Senator,

with your suggestion.

We also need to look at stopping commercial enterprises from

doing business with commercial enterprises owned and operated by

known terrorist organizations. Osama bin Laden has invested significantly in some commercial enterprises. They should not escape

our attention, either. And we should ensure that aid that is given

by our country to those overseas is accounted for and goes to those

for whom it is intended and not to diver it.

And Mr. Chairman, I would finally suggest that we look at the

possibility of enlisting the aid of the World Bank and the International Monetary Fund in the war against money laundering and

in some ways perhaps tie assistance from those organizations to

the cooperation of countries in this battle.

Thank you, Mr. Chairman.

Chairman SARBANES. Thank you very much, Senator Bayh.

Senator Corzine.

STATEMENT OF SENATOR JON S. CORZINE

Senator CORZINE. Yes. I have a complete statement that I would

ask be put in the record.

Chairman SARBANES. The full statement will be included in the

record.

Senator CORZINE. I congratulate you on your foresight here as

well, Mr. Chairman.

This is a subject that needs an extraordinarily comprehensive

view of. The kinds of things that Senator Schumer talked about in

regard to global cooperation are certainly key. But the need to

make sure that we do not limit our sightline to financial institutions and regulated institutions is just as important as dealing only

with financial institutions. So much of the access into the system

comes from ways that are not necessarily opening a bank account

and transferring money. Much of this is done in cash.

The efforts that Congresswoman Roukema was going to talk

about, smuggling of cash, the commercial transactions that Senator

Bayh talked about, and frankly, unregulated money managers’ access to the system without the identity of those who own the accounts, tend to be ways that are very easy for the process to get

started. And being a State that has a casino, there are enormous

amounts of ability to access systems in additional commercial

transactions. So, I hope that we do not get a sense that we are

somehow solving the problem if we limit this to financial institutions and just simple, straight-forward financial transactions.

Thank you.

Chairman SARBANES. Our panel now consists of the recently confirmed Under Secretary of the Treasury for Enforcement, Jimmy

22

Gurule ́, and Michael Chertoff, the Assistant Attorney General for

the Criminal Division. In their respective capacities in the Treasury Department and in the Justice Department, they are responsible for developing and implementing the Bush Administration’s

national money laundering strategies.

Now, to be very clear about this, the formulation of the National

Money Laundering Strategy was underway before these events

took place. In other words, pursuant to the Grassley legislation

that I mentioned earlier. And the Administration has come in with

that report. But it did not come after the events of September 11.

It was being developed prior to the events, just as this hearing on

money laundering had been scheduled before the events of September 11. So, we are very pleased to have the Administration here

and, gentlemen, we are looking forward to hearing from you.

I do not know if you have worked out an arrangement between

yourselves. Mr. Gurule ́, are you to go first?

STATEMENT OF JIMMY GURULE ́

UNDER SECRETARY FOR ENFORCEMENT

U.S. DEPARTMENT OF THE TREASURY

Mr. GURULE ́. Yes, Mr. Chairman. Thank you.

Mr. Chairman, Senator Gramm, and other distinguished Members of the Committee, I appreciate the opportunity to share with

you the Treasury Department’s ongoing commitment to the fight

against money laundering. In light of the tragic events of September 11, I am more convinced than ever of the importance and

necessity of a comprehensive money laundering strategy. I know

that the Members feel the same way and I look forward to sharing

with you some of the key aspects of President Bush’s plan to combat domestic and international money laundering.

Let me begin by saying that criminal acts of violence, such as the

horrific terrorist acts of September 11, need more than just cunning leadership and dedicated followers to be successful. Such undertakings also require extensive financial funding. Let me be

clear—the Treasury Department is committed to identifying the

sources of funding used to underwrite attacks of this nature and

will take whatever action is necessary to shut them down. Although the complexities of money laundering have long been associated with concealing the true nature of funds that are generated

by drug cartels, and other criminal activity, the tragedies of September 11 also underscore the need for aggressive and vigilant

anti-money laundering efforts which target the movement of funds

into this country for the purpose of criminal activity—especially

funds earmarked for terror. In response to this need, the implementation of the 2001 National Money Laundering Strategy includes several specific steps to dismantle and disrupt the financing

of terrorist activities.

I would like to take a few moments to summarize the key provisions of the National Money Laundering Strategy, but at the same

time highlight some of the steps consistent with that blueprint that

the Bush Administration has undertaken since September 11. On

Monday, President Bush stated, ‘‘We will direct every resource at

our command to win the war against terrorists, every means of diVerDate 11-MAY-2000 08:31 Sep 12, 2002 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 SEPT26.XXX SBANK4 PsN: SBANK4
23

plomacy, every tool of intelligence, every instrument of law enforcement, every financial influence.’’ We will starve the terrorists of funding. I am here to tell you

that this is the mandate of the Treasury Department—to starve

the terrorists of funding. This is the mandate of the Office of Enforcement at Treasury. To accomplish that goal, the Enforcement

Office has implemented the Foreign Terrorist Asset Tracking Center. The goal of the Center, or FTAT is the acronym that has been

used, is three-fold.

The first goal is to map the financial infrastructure of all terrorist organizations worldwide. So while at the moment we are certainly focusing on Al Qaeda and Osama bin Laden, it is not limited

to this particular organization or organizations, but is more broad

in its scope. Second, it is intended to shut down the source of fundraising of these organizations. And third, curtail their ability to

move money through the international banking system, including

the U.S. domestic banking system. Its approach is preventative,

proactive, and strategic.

It relies upon interagency cooperation and with respect to the

tracking center, we have undertaken efforts to work closely with

the Department of Justice, specifically the FBI and all of the Treasury’s law enforcement agencies, including the IRS, criminal investigations, the Secret Service, Customs, as well as Defense and the

Financial Crimes Enforcement Network.

In addition, the Department of the Treasury has undertaken substantial efforts with respect to international cooperation. Everyone

here certainly appreciates that the challenge before us with respect

to anti-terrorism efforts is global in nature. And therefore, the law

enforcement response must be in kind global.

With respect to Treasury’s efforts, we are undertaking efforts not

only to block assets in domestic banks that are related to the 27

terrorist entities that were identified pursuant to the Executive

Order signed by President Bush on Monday of this week, but we

are also looking to cooperate with respect to blocking those funds

located in foreign bank accounts. And with respect to that effort,

we are seizing upon recent gestures by our allies who have offered

their cooperation and condolences with respect to the terrorist

events in New York City and in Washington, DC.

We are seeking to seize upon that momentum, to cause them to

not only express their goodwill, their support, but to take concrete

action with respect to assets, bank accounts that are attributable

to these terrorist organizations and entities. And we believe that

we are making some substantial progress in that direction.

In addition, we are working aggressively with our partners in the

Financial Action Task Force, or FATF. As you know, the Treasury

Department leads the U.S. delegation with respect to FATF. Again,

we work closely with the Department of Justice in that effort. We

have currently reached out to our counterparts in FATF to ensure

that we focus on revising the 40 recommendations that serve as the

measuring stick which FATF measures whether a country is cooperating with respect to implementing a strong anti-money laundering regime. And we are looking to focus those efforts on terrorist

activities and prohibit banks from maintaining accounts where the

money is attributable or traceable to terrorist organizations.

24

With respect to the 2001 National Money Laundering Strategy,

let me briefly comment on the key provisions of that strategy.

When it comes to law enforcement efforts, the strategy seeks to

focus and concentrate finite and limited Federal law enforcement’s

resources on major money laundering operations. We seek to focus

on the financial operations that are underwriting the activities of

international drug cartels, international terrorist organizations, as

well as organizations that traffic in firearms. We are seeking to

focus our efforts where they will have the greatest impact. And we

believe the greatest impact will be felt, will be realized with respect

to these large-scale money laundering operations. To that end, we

are going to be enhancing, seeking to enhance our efforts with respect to the use of the criminal and civil forfeiture laws.

We believe that it is important that any strategy with respect to

money laundering not only focuses on the trail of the money, but

also seeks to seize those monies, forfeit those monies to the United

States. So, we will see an enhanced effort with respect to utilization, enforcement of our Federal asset forfeiture laws.

We will be relying in large part to implement the strategy on the

HIFCA’s, the High-Intensity Money Laundering and Related Financial Crimes Areas. These are kind of super money laundering

task forces that will be used to focus on these large-scale money

laundering operations. The strategy designates two additional

HIFCAs in addition to the four HIFCAs that existed prior. Those

two new HIFCAs are located in San Francisco and Chicago. These

HIFCAs are interagency in nature. I had an opportunity to have

several conversations with Mr. Chertoff with respect to the operation of these HIFCAs and how the Department of Treasury law

enforcement agencies can work closely hand-in-hand, close coordination, with the Department of Justice.

Chairman SARBANES. Why not put the location of the other four

on the record?

Mr. GURULE ́. Thank you, Mr. Chairman The other four HIFCAs

include a HIFCA in New York, New Jersey—this is often referred

to as the El Dorado Task Force. It is the largest Federal money

laundering task force in the country. Also, there is a HIFCA in

Puerto Rico, and in Los Angeles. Last, a HIFCA that focuses more

on a system of money laundering, and that is a HIFCA that is focusing on the black market peso exchange system of financial

money laundering. So these HIFCAs are central to our law enforcement anti-money laundering efforts.

A second key provision with respect to the strategy and a way

in which it departs dramatically from prior strategies is the emphasis being placed on accountability. Secretary O’Neill strongly

believes that we in law enforcement must be able to measure results. He is looking for results, not simply Federal law enforcement

activity.

It is not enough that we are actively engaged in investigating

money laundering operations. It is not enough that we have enhanced the number of HIFCAs across the country. He is looking for

results. He is looking at the bottom line.

At the end of the day, he wants me to be able to report to him

which strategies have proven to be most effective and why. And if

25

the strategy is not working, then it should be discarded and we

should be focusing our law enforcement efforts on other strategies.

With respect to this emphasis on accountability, we are going to

be putting in place a reporting system that will track the money

of money laundering cases, number of arrests and convictions with

respect to those cases, a reporting system that is going to be focusing on money laundering related forfeitures, so that we can track

from year to year the dollar amount of money that is going into the

Department of Justice forfeiture account, as well as the Treasury

asset forfeiture account.

But we are not simply going to be focusing on numbers. We are

going to be looking at the types of investigations that we develop

and we pursue, to see whether these types of investigations are

having an impact on money laundering activities in this country.

We are going to be looking at the complexity of the size of these

operations as well.

And then, last, we are going to be looking to see whether our

strategy has an impact, a positive impact, with respect to the cost

of laundering money. As you know, the efforts with respect to laundering funds, the individuals who participate in these efforts

charge a commission. They charge a fee for their activities, for

their talents, their nefarious and illicit talents.

We think if we are making an impact, that the commission price

will go up because it is riskier for them to undertake this type of

efforts and they are running the risk of being prosecuted and incarcerated for lengthy prison terms. So we are intending to track

those numbers as well with respect to the fees charged.

Next, preventative efforts.

We certainly understand that the banking industry has to be an

important partner in this effort. We need to work more closely with

the banking and financial industry to assist in this national and

global effort. We are looking at ways in which we can strengthen

that partnership. We can work more closely with the financial

banking system. At the same time, we are seeking to expand the

SAR’s to the money-service businesses, as Senator Bayh referred

to, as well as broker-dealers and casinos. Also, we need to ensure

that the information that we are receiving at the Treasury and

that FinCEN is analyzing is valuable information.

With respect to the CTR’s, we know that approximately 12 million CTR’s are filed every year. Our sense is that at least 30 percent of those CTR’s have little or no value to law enforcement. And

because they have no value to law enforcement, they should not be

reported to the Treasury Department. So, we are seeking to work

with the banking industry with respect to statutory exemptions

that have been put in place that exempt the filing of certain currency transaction reports to ensure compliance.

Chairman SARBANES. I want to be very clear on that point. As

I understand it, under existing law, there is a waiver, an exemption procedure, that can be invoked which would not require the filing of those reports. Is that correct?

Mr. GURULE ́. That is correct.

Chairman SARBANES. That existing provision in law is not being

utilized. Is that correct?

Mr. GURULE ́. In my opinion, it is not being fully utilized.

26

Chairman SARBANES. It is your intention to work with the private sector to have a better understanding of that.

Mr. GURULE ́. Yes. And I have already undertaken efforts in that

direction, Mr. Chairman.

Chairman SARBANES. All right. Anything else, Mr. Gurule ́.

Mr. GURULE ́. With respect to legislation, let me speak briefly.

The Department of Justice has been working on a legislation initiative, anti-money laundering legislative initiative. I have had an

opportunity to speak at length with Mr. Chertoff with respect to

that effort. I have had an opportunity to review the legislation that

they are proposing. I believe that it is a good piece of legislation

and the Treasury Department supports that effort.

With respect to the Kerry bill, I am very pleased to hear Senator

Kerry’s comments with respect to a due process provision because

the Treasury Department likewise believes that that is essential.

And so, we welcome the opportunity to engage in discussions with

respect to crafting what the due process or what processes do

under these circumstances. But at the same time, I understand

your direction, Chairman Sarbanes, that this effort must be done

on a fast track. As you stated, we are dealing with days with respect to any new legislation. We are anxious to meet with the Senator’s staff, your staff, to carve out that addition, if you will, to the

Kerry bill.

Chairman SARBANES. Well, we intend to have a very intense consultation, both amongst Members, certainly on the Committee, but

including the Members who have taken initiatives and have proposals, and with the Administration, with both the Department of

the Treasury and the Department of Justice, with an eye to formulating a piece of legislation that draws the best out of all of that

process, takes into account important questions that have been

raised and tries to, if possible, reach a consensus on an effective

and directed piece of legislation. And we welcome your statement

and we look forward to working very closely with you. But as you

say, this is on and should be on a fast track.

There are things happening elsewhere in the Congress, too. And

to be part of that process, we have to move with some vigor and

some energy here, and we obviously intend to do just that.

Mr. GURULE ́. And last, let me also commend Senator Levin for

his leadership with respect to this very important issue. I have had

an opportunity to review the Levin bill. There are several provisions in the Levin bill that I think we can support, again, and I

look forward to working with your staff and Senator Levin’s staff

on those issues.

In conclusion, the Treasury Department has language with respect to some legislative initiatives on money laundering that we

would like to have added to the Kerry bill. We do have that language and we can bring that up to you as early as tomorrow.

So thank you for the opportunity and I look forward to responding to any questions that you might have.

Chairman SARBANES. Very good. Thank you for your statement.

Assistant Attorney General Chertoff.

27

STATEMENT OF MICHAEL CHERTOFF

ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION

U.S. DEPARTMENT OF JUSTICE

Mr. CHERTOFF. Thank you, Mr. Chairman.

Chairman SARBANES. I just have to add, it is nice to have you

back before the Committee in a different capacity, if I may note,

from previous appearances.

Senator SHELBY. Mr. Chairman, if you would like. A lot of us

liked you in that other capacity.

[Laughter.]

Mr. CHERTOFF. Well, it is nice to be back. But times change and

things on the front burner become different. And we obviously have

something very hot on the front burner.

Mr. Chairman, Senator Gramm, and distinguished Members of

the Committee, I am delighted to be here in support of the 2001

National Money Laundering Strategy that was recently released.

And also, I am particularly delighted to be here in the wake of a

legislative proposal which we have submitted, which addresses I

think the urgent need for reform in the money laundering area.

I am going to be very brief. I am going to touch on just some of

the highlights and then I will be delighted to answer questions. I

would request that my full statement be made part of the record.

Chairman SARBANES. It will be included in the record.

Mr. CHERTOFF. We are obviously sitting here in the wake of a

terrible event 2 weeks ago which has kept all of us busy in a variety of different settings. But it is very timely that we are addressing money laundering because it is a key element in the strategy

toward combatting not only terrorism, but also other serious forms

of international crime.

In the wake of this event, we know one thing. We know that if

terror operates in cells, the lifeblood of those cells is money. They

cannot exist, survive, and flourish if they cannot fund their activities. So it becomes critical that we strike at that funding.

The mandate from the President is very clear—we have to prevent terrorism. We have to disrupt it. And we have to incapacitate

those who practice it. As part of that effort, all the agencies of the

Federal Government are working together currently to examine the

information and evidence that we can collect on the financial activities of terrorists and to pursue those terrorists and their supporters

and economic aiders and abetters anywhere we can find them. So

in taking that approach, it becomes very critical that we look at the

tools we have in our toolbox to strike at those economic supporters.

And money laundering seems to us to be the most vital way in

which we can approach that.

We have a lot of laws which were great laws when they were

passed 10 or 15 years ago, but have not kept pace with the times.

And I might add that when we talk about money laundering and

the targets of our money laundering effort, we talk not only about

terrorists, but also we talk about international organized crime,

international drug dealing, international corruption, not only because these are bad in themselves, but also because, we cannot differentiate between terrorism, organized crime, and drug dealing.

These groups do not hold themselves independently. They work

with one another. Terrorists get engaged in drug activity. They

28

have relationships with organized crime. So that we cannot simply

lock the barn door for the horse that just got out. We have to go

and lock all the other barn doors that are out there.

The legislative proposal which the Department has put forward,

I think in many respects, is, if not identical, very similar to portions of Senator Levin’s bill, focuses on a number of both large and

small efforts to fix and improve the money laundering laws. And

let me review just a few of them.

First, under the proposed approach we would take, laundering of

the proceeds of foreign crimes, an increased number of foreign

crimes, would become a crime in this country. Simply put, we do

not want to be a safe haven for the ill-gotten gains of corrupt international bribe-takers or for terrorists who commit violent acts

abroad. We have to expand our law so that we can attack those

who would launder the proceeds of foreign crimes in this country.

At the same time, we need to have the authority to enforce foreign court judgments against terrorists in this country, both because we do not want their money here, and to show our foreign

partners that we will work with them in attacking terrorism.

Second, correspondent banks. Some of the greatest experts in the

world on the impact of correspondent banking have testified in the

earlier panel. I think we need to respond to the dangers that they

have identified. We need to be able to say to correspondent banks

that they cannot raise an innocent owner defense to protect the assets of foreign terrorists that are being held in foreign correspondent bank accounts in U.S. banks. And the legislation that

we would propose would attack that.

We need to be able to say to foreign correspondent banks that

if they want to have bank accounts with U.S. banks, they have to

appoint people who will respond to subpoenas and to American

process so that we can get the information that we need to track

down and prosecute those who launder terrorist bank accounts and

terrorist monies.

Finally, we need to deal with the movement of cash outside the

formal banking system. Where there is bulk transfer of money in

interstate or foreign commerce, we need to be able to make that a

criminal offense.

That is part of our proposal. And at the same time, we need to

strengthen the criminal laws against smuggling cash illegally into

our own country.

These parts of the package and the other parts put together a

comprehensive approach to deal with money laundering. And I

might say that we do not have pride of authorship. Many of the

proposals here have been proposed by Members of this body and

Members of the House of Representatives. They have been looked

at for years. I think the consensus is they are sound and effective.

Mr. Chairman, we very much look forward to working with the

Committee, other Members of the Senate, Members of the House,

in moving within days to put together an effective package that we

can get into law and we can begin to enforce.

Chairman SARBANES. Thank you very much. As I indicated, it is

our intention to work very closely with you in that endeavor.

Senator Gramm.

29

Senator GRAMM. Well, let me thank both of you for your excellent

testimony.

Mr. Gurule ́, I would like to ask you a question. I have had an

opportunity to talk to the Secretary. I first simply want to say that

I appreciate the approach that has been taken by the Administration. I think the actions that you have taken thus far have been

excellent. And I am especially appreciative of the Secretary’s sensitivity to the fact that, while we want to grab terrorists by the

throat and not let them go to get a better grip, we are defending

basic rights in this country. We have been successful with a system

that is based on the rule of law.

I would like to ask you specifically about the Secretary’s discretionary power. Quite frankly, the factor that was an impediment

last year in the adoption of this bill really boiled down to one issue:

the unilateral power of the Secretary of the Treasury to take action

without any necessity of issuing any findings, without any accountability on the Secretary’s part, even though that action might have

profound consequences to people in the private sector. One of the

options that I proposed then and that I will be supporting now is

the following.

If the Secretary determines—and let me go back to my example

about France. If the Secretary determined that we were not getting

proper cooperation from France, then the Secretary would have the

power either to impose a penalty on French banks operating in the

United States, which would be my preference because the problem

is with the French government and not with our own Government,

but he would also have the power, under the Kerry bill, to force

American banks in France, in essence, to close their doors.

Now, I have felt that when you are talking about such powers,

first of all, it is obvious that we need them. But the question is,

what should be the system of checks and balances?

And I would like to just throw out two things that I would appreciate the Treasury examining to determine whether you have a better way. It seems to me that if the Secretary of the Treasury is

going to make a unilateral decision to force American banks to shut

down their operations in another country, the Secretary should be

required to issue findings which are potentially rebuttable in court.

There should be some system whereby the findings of the Secretary

in making the decision are made public, or if they cannot be made

public because of security concerns, perhaps we should require the

Secretary or the Secretary’s designee to appear before a Federal

judge to present this evidence so that there is some review, rather

than giving one person this massive unilateral power with no

checks and balances or, as you have said, with no accountability.

I would like to get your reaction to that.

Mr. GURULE ́. Well, as you know, the Kerry bill, before any special measures are ordered by the Secretary of the Treasury, would

require the Secretary of the Treasury to find a primary money

laundering concern. That is a term of art under the Kerry bill. And

that primary money laundering concern would be with respect to

a particular correspondent account.

However, in addition, the Kerry bill would require the Secretary

to do so in consultation with several Federal agencies, or heads of

agencies, including the Attorney General, the Secretary of State,

30

the Chairman of the Fed, the Secretary of Commerce, and the U.S.

Trade Representative. So there is a consultative process that is required under the Kerry bill. So it is not simply a single individual

taking action unilaterally.

With respect to the due process concern, I do believe that fundamental fairness requires that an affected bank be afforded an opportunity, first of all, notice, and then an opportunity for comment.

In the event that maybe what appears to be suspicious on the surface, there is a legitimate explanation. I think that there should be

an opportunity for the bank to come in. And it could be after the

fact. I am not suggesting that the notice and comment must in

every case be—— Chairman SARBANES. It would have to be after the fact, otherwise, they could move the money.

Mr. GURULE ́. I understand.

Chairman SARBANES. I understand that the President, when he

issued his Executive Order, did it at midnight and then had the

press conference the next morning. And he did that in order to

avoid the possibility that the money would just move.

Mr. GURULE ́. I agree. I agree. The Kerry bill gives the Secretary

certain discretion. I think it is important that the Secretary have

the ability to exercise that discretion in an expeditious way to

avoid exactly the problem that you have highlighted.

After there is an imposition of the special measures that are set

forth in the bill, again, I think that fundamental fairness requires

that the bank have an opportunity to come in and make its case

to the Secretary that the transactions are legitimate transactions.

There is no money laundering involved, if in fact that is the case.

I think the real question comes down to, what process is due? What

should that procedure look like? And I am prepared to meet and

engage in discussions on that precise issue.

Chairman SARBANES. I just want to note that Senator Gramm’s

use of France was completely hypothetical or by way of illustration.

Senator GRAMM. Completely.

[Laughter.]

Chairman SARBANES. Because in fact, the French—— Senator GRAMM. I decided to use it twice because having already

made people in France mad, I did not want to add another country.

[Laughter.]

I used Hong Kong last time and then I thought, well, gosh, I may

be going back there some day. I prefer to speak in examples rather

than beating around the bush theoretically.

Chairman SARBANES. I understand that, but you know about sensitivities, Gallic sensitivities in particular. In all fairness, I do want

to read from the FATF mutual evaluations that were made.

The initiatives of France and its 2 year presidency of FATF have

contributed considerably to the success achieved so far. By adopting measures often more binding than those contained in the FATF

recommendations and by introducing a system of compulsory reporting of suspicious transactions for all financial and nonfinancial

professions, France has created a real model for money laundering

control. And then they say it was done fairly recently and this was

the first round back in the mid-1990’s, so they do not go through

on how effectively it has been enforced.

31

I just wanted to get that on the record and make sure that—because we need all the friends we can get, and those that are working at it, we want to acknowledge that they are working at it.

Senator Reed.

Senator REED. Thank you very much, Mr. Chairman.

Since money laundering is an integral part of our overall

counter-terrorism strategy, what role is envisioned for Governor

Ridge with his new position as the leader of homeland operations?

Or has any role been even thought about yet? Either Mr. Gurule ́

or Mr. Chertoff.

Mr. GURULE ́. It is a good question. I think the specific, precise

role has not yet been defined. It is my understanding that this office will be used to coordinate anti-terrorism activities and that

would certainly include anti-money laundering efforts. And so, exactly how that is going to take place, what the command structure

is going to be with respect to Treasury anti-money laundering efforts is, at least for me, unknown.

But I do believe that we need to do, and can do, a better job of

coordinating and targeting our efforts. And I certainly welcome the

opportunity to work closely with Governor Ridge to that end.

Senator REED. That just raises the obvious point that this is a

multifacet responsibility. The FBI, the Secret Service, the Treasury

Department, and I could think of, and you could both think of probably 20 other institutions and agencies. And the task I think is not

only to get the framework right, but to make sure that we have

some point of thorough integration. I would hope, as you go forward, you would think about that and let us know what we have

to do to provide you that type of organizational integration.

Let me just touch on another topic, and Senator Schumer alluded

to it, the notion not just simply of money laundering, but of excessive bank secrecy in some parts of the world that inhibit investigations. I just wonder, are you thinking about ways in which, through

due legal process, we can get access to financial information in

other countries? I guess by way of comparison, to what extent do

we open up our institutions to that type of legal process?

Mr. GURULE ́. Well, with respect to getting access to information,

account information in particular, in foreign banks, we are presently working closely, diligently, with our foreign counterparts, the

G–7 financial ministers and our other allies, with respect to the 27

entities that were named by President Bush on Monday. And every

indication is that that cooperation has been robust and quite positive. So, I am certainly encouraged. We just need to continue and

building on that momentum.

In addition, FATF, the Financial Action Task Force, is another

vehicle that we have used at the Treasury Department to enhance

cooperation to ensure that foreign countries have in place a strong

anti-money laundering regime, to ensure that countries that have

bank secrecy laws repeal those laws, so that there can be greater

transparency, and to ensure that the countries have money laundering laws on the books that prohibit money laundering.

There are still some countries today that do not have such domestic legislation. And FATF has proven to be a very effective multilateral agency, organization, and effort to ensure that those steps

are being taken.

32

Mr. CHERTOFF. I would like to add that one additional approach

we want to take, which is embodied in this legislative proposal is

to make foreign banks that maintain correspondent accounts with

U.S. banks, designate someone who will respond to subpoenas and

furnish information. So that the price of entry into the international banking system, if you want to deal with the United

States, is a willingness to furnish information when we need it.

Senator REED. Thank you very much.

Thank you, Mr. Chairman.

Chairman SARBANES. Thank you, Senator Reed.

Senator Shelby.

Senator SHELBY. Mr. Chairman, thank you.

Mr. Chertoff, I first want to congratulate you in this open forum

here for President Bush and Secretary Ashcroft’s selecting you to

head the criminal division.

Mr. CHERTOFF. Thank you.

Senator SHELBY. You bring a lot of experience. You are no

stranger to the Banking Committee. We enjoyed when you were

Special Counsel here and enjoyed working with you.

I have read your testimony which has been made part of the

record and I just want to quote from that. You say, ‘‘In this environment, law enforcement is challenged, and the criminals often

hold the advantage. Criminals are able to adapt to changing circumstances quickly.’’ Of course, you are including terrorists as

criminals. And they are big ones. They pay no heed to the requirements of laws and regulations and recognize no sovereign’s orders.

Further, these criminal groups have learned to be adaptable and

innovative, and as we succeed in a new enforcement effort or implement a new regulatory regime, they quickly alter their methods

and modes of operations to adopt to the new circumstances. Will

this change if we adopt substantially the proposals that are before

us? And second, will these proposals protect the due process rights

of our citizens?

Mr. CHERTOFF. I think the answer to both questions is yes. I cannot predict.

Senator SHELBY. I know that.

Mr. CHERTOFF. And I would be foolish to say that these proposals

are going to solve the problem.

Senator SHELBY. By themselves.

Mr. CHERTOFF. But they can certainly move a considerable direction in giving us the tools we need to diminish the problem. And

one of the features of this set of attacks we had 2 weeks ago is the

diabolical way in which terrorists used our own technology and our

own advanced society against us. They turned our aircraft into

bombs. They use our financial system, our global system, as a way

of fueling their own criminal activities.

But we have an ability to turn that on them as well. If they need

to use our global economic system, we can police that system and

start to dry up the streams of money that they rely upon. So, I

think we can go a considerable distance with this legislation, and

it is legislation which respects the rule of law and due process.

The Department of Justice package operates within the acceptable framework of criminal laws that we are all familiar with and

33

that the courts have upheld. We are modernizing and improving,

but we are not overturning.

Senator SHELBY. I believe the Assistant Secretary mentioned

other countries passing laws to make money laundering and other

things like it illegal. But these laws by themselves, Mr. Secretary,

will not mean anything unless you have enforcement, will it?

Mr. GURULE ́. Absolutely. You are absolutely correct, Senator.

With respect to the FATF and the 40 recommendations that are

used to determine whether or not those countries are being cooperative in our international anti-money laundering efforts, one of

those recommendations focuses not only on whether the country

has laws, but also if they are effectively implementing and enforcing those laws.

That is something that the FATF organization is monitoring and

monitoring on a regular basis. And if the answer is no, we have a

law, but it is not being enforced, then that country would not be

in compliance and could be listed on that basis as a noncooperating

country and territory. On the shame list, if you will, of countries.

Senator SHELBY. Thank you, Mr. Chairman.

Chairman SARBANES. Senator Bayh.

Senator BAYH. Thank you, Mr. Chairman. And thank you to the

panel for being here.

I would like to ask, again, with regard to the regulations that

would have been put into effect in the 1993 law requiring informal

enterprises like Hawalas, casinos, broker-dealers, to report transactions over $3,000, that was scheduled to go into effect earlier this

summer. It has been delayed until, as I understand it, June 30 of

next year? Why the delay and who is objecting?

Mr. GURULE ́. Let me speak first to the strategy and why in the

strategy the date was moved back to June 30. But then let me also

kind of bring things up to date with respect to changes that have

been made to move that date up.

With respect to the MSB’s, the money expanding the suspicious

activity reports, the money service businesses, this is going to affect approximately 200,000 businesses in this country alone. These

are 200,000 businesses that under this regulation would be required to submit suspicious activity reports. It is a huge number,

number one.

Second, it is going to affect small corner ‘‘ma and pa’’ businesses

that perhaps issue money orders. And therefore, the level of education and expertise is not that we have seen with respect to the

banking industry.

Therefore, with respect to those two concerns, FinCEN has been

actively involved in an education campaign with these affected

businesses so that they understand what is required under the

SAR’s when the SAR’s go into effect because we want to make sure

that they are being responsive, that they are submitting the right

kind of information to the Treasury, information that is going to be

valuable to law enforcement.

At the same time, the thinking was that this additional time

would give FinCEN the time needed to really gear up for receiving

the volume of reports that we think are going to be submitted

under this regulation. That, by the way, when the strategy came

out, was prior to September 11.

34

The world is different. As a result of the events of September 11,

we have decided to move the date back to the original date, which

is the registration date for these money service businesses, being

December 31 of this year. So, we are looking at roughly approximately 3 months for these companies, these 200,000 businesses

registering.

Senator BAYH. I would encourage you in that area, Mr. Gurule ́. Obviously, some are sophisticated enough to know how to comply.

Some, as you say, of the ‘‘ma and pas’’ may not. Because some may

not, this is a critical enough area, it should not keep us from moving forward in the areas of those who are.

Mr. GURULE ́. I agree.

Senator BAYH. What about NGO’s, and this is to either one of

you? There have been reports about the charities, charitable activities helping to fund Al Qaeda. What are we doing to crack down

on that—either Mr. Chertoff or Mr. Gurule ́—in the legislation that

we are contemplating, or in the Administration’s approach?

Mr. CHERTOFF. We have in this legislation—I should add also, in

the package of anti-terrorism proposals which has been submitted—proposals to take money laundering and make it clearer

and more broadly applicable to those organizations which assist

terrorism or terrorist organizations, as designated by the President.

So clearly again, the money laundering piece is an important

piece, although I should add that we already have laws on the

books that make it illegal to be assisting terrorist organizations.

What we need to do, and what we are doing, is pursuing those organizations vigorously and aggressively, to use the existing laws

and hopefully any additional laws, in order to shut them down.

Senator BAYH. Thank you. My time is about up. I appreciate

your presence, both of you.

Chairman SARBANES. Thank you very much, Senator Bayh.

Senator Allard.

Senator ALLARD. Thank you, Mr. Chairman.

I would like to follow up a little bit on the volume that we are

talking about here. The suspicious account reports, you say we

have about 200,000.

Mr. GURULE ́. Approximately 200,000 businesses will be affected.

Senator ALLARD. Okay, it is 200,000 businesses. But how many

reports are we talking about?

Mr. GURULE ́. Well, at present, we are receiving approximately

150,000 a year under the current system.

Senator ALLARD. That is the 157,000 that Senator Gramm referred to in his opening comments.

Mr. GURULE ́. Right.

Senator ALLARD. Okay. The cash transaction reports.

Senator GRAMM. Seventy-seven million.

Senator ALLARD. That 77 million is the kind of figure I am looking at. Would you agree with that?

Mr. GURULE ́. The currency transaction reports are approximately

12 million a year. It is a very large number, certainly.

Senator ALLARD. Yes.

Mr. GURULE ́. And it is that number that I am concerned with

with respect to, a significant percentage not being all that valuable

to law enforcement.

35

Senator ALLARD. What is your solution? Are you suggesting that

maybe—the threshold is 10,000. Are you suggesting that maybe we

need to raise that threshold?

Mr. GURULE ́. The solution that we are proposing and that is set

forth under the strategy is to work with the banking industry to

see if we can achieve greater compliance with exemptions to the filing of the CTR’s. FinCEN, through work that they have done, research that they have done, estimate that approximately 30 percent of the 12 million CTR’s that we receive have no value to law

enforcement. So if we could just get compliance, if we could achieve

greater compliance with the statutory exemptions, we could reduce

that number significantly.

Senator ALLARD. And you need to bring me up a little bit on

these exemptions. What kind of exemptions are we talking about?

Mr. GURULE ́. For example, let us say that we have a K-Mart that is making bank deposits every day that are in excess of $10,000.

There is no good reason to believe that K-Mart or any—and again,

I do not want to—— Chairman SARBANES. It is just a hypothetical.

Mr. GURULE ́. Hypothetical. Exactly. I just want to qualify that.

Thank you.

[Laughter.]

But any commercial business such as that, that transaction is

suspicious or would be beneficial to law enforcement with respect

to money laundering investigations and therefore, it should not be

reported. My intent is to work closely, again in partnership with

the banking community, to see if we could achieve greater compliance, or at least seek to identify what the obstacles are to compliance with these exemptions.

Senator ALLARD. So, you would do a background check on a business or perhaps individuals that frequently have to get involved

with cash transaction reports. You would exempt them. Then those

that are occasional, that come through that you do not have that

information on, would not. Is that basically the way that that

would work?

Mr. GURULE ́. In fact, the exemptions that I am referring to are

actually statutory exemptions passed by Congress. Those are the

exemptions that are not being fully complied with by the banking

industry. I do not know this for a fact—but I suspect that the reason is that the banking systems, the banks have set up a system

for reporting. And perhaps it is just easier to report every transaction over $10,000, rather than segregate out certain transactions

that would fall under the exemption. So we need to work together.

Senator ALLARD. But I could see where maybe the information

would not be available to a bank. And so, in order to cover themselves, they would just require it as a bank.

Is there ready access to this information from a bank, where they

can get this kind of assurance that this business is legitimate and

that it would fall under the exemption?

Mr. GURULE ́. I think that, certainly, we need to enhance our efforts to work with the bank to make sure that they have a good

understanding or better understanding of what they need to report.

But with the CTR’s, except for the exemptions, it is mandatory.

There is no discretion. With the SAR’s, that is discretion. If they

36

have reason to believe that the particular transaction is suspicious

and tied to criminal activity, then they have the discretion.

Senator ALLARD. There is no exemption with the CTR. That was

not clear. So all CTR’s, cash transaction reports, anything over $10,000 has to be reported. There is no exemptions on that.

Mr. GURULE ́. I probably confused the issue. With the CTR’s,

there is a mandatory reporting requirement, except for the statutory exemptions.

Senator ALLARD. Okay.

Mr. GURULE ́. With the SAR’s, those are ones that the judgment

call has to be made by the particular industry.

Senator ALLARD. Yes, that is the way I perceived it worked.

Okay. Very good. Thank you.

Mr. Chairman, I see my time has expired. Thank you.

Chairman SARBANES. Good. Mr. Gurule ́, I thought that was a

very rational, common sense response to the questions. My own

view is that we should not change the statutory level because it

just would provide another target for people to play off of. But as

long as you have sufficient discretion or exemption authority to

deal with those instances in which it is serving no reasonable purpose—because then, you could always swing back if you discover

that there is some abuse taking place.

You can take a company which says, well we consistently be- cause of our business want to transfer $15,000 or $20,000, or whatever it is. And I guess, conceivably, you give them an exemption.

But then, all of a sudden, it might start spiking up because there

is some game being played within the company ranks somewhere

or something of that sort. I think it is very important that you

come at it in this rational, common sense way that you outlined in

your answer.

Senator Miller.

COMMENTS OF SENATOR ZELL MILLER

Senator MILLER. Mr. Chairman, I would like to yield my time to

my colleague, Senator Corzine, because, quite frankly, I think his

questions might be better than the ones that I have before me,

given his experience.

Chairman SARBANES. Well, I will let you yield your time without

concurring in the premise of the yield.

[Laughter.]

Senator CORZINE. The Chairman is very wise.

[Laughter.]

I have a couple of questions with regard to Swiss banking laws

and the privacy of their accounts.

First, do we feel that we have the full cooperation and access at

the kind of transparency that would break through what really

sounds, in my experience, to be prohibited by Swiss banks, a number of the things that we are asking for in this legislation and what

would be necessary to actually intervene in this?

Second, I have this concern about unregulated entities. And one

of the most important ones of those are money management firms

that are outside of both the SEC and most countries’ regulatory

structures, often labelled generically. I am not trying to undermine

their credibility, but hedge funds in general are without any kind

37

of supervision, particularly with respect to deposit activity. And

whether you have looked at that and whether there are elements

of that that make sense.

Then there has been much discussion about people profiteering

off of the anticipated September 11 events. Is there anything that

you would want to comment on? But more importantly, have we

put in place checks into our trading and transaction systems that

in a way would provide foresight with regard to the kinds of actions that might take place?

This happens to be one of those standard practices of the SEC

to be reviewing these audit trails, if you could track those to certain individuals ahead of time that might have looked like—I guess

there might be some element of profiling there. But I do think that

it is an element that needs to be talked about.

So those are generally my questions.

Mr. CHERTOFF. Let me try to address some of the questions, Senator Corzine. And my colleague will probably have something to

say about others.

First, I know because we are from the same State, and I know

where your hometown is, that you must have felt personally what

happened 2 weeks ago. And I know that is something which all of

us, when we discuss proposals, we are oftentimes reminded of the

very personal dimension to this. Let me deal first with the issue

of the question about whether people profited by knowing in advance about these acts.

I do not think it is a secret that the press has reported that there

were allegations or indications, not necessarily here, but overseas,

that people may have shorted or engaged in other transactions in

stock at a time which is suggestive of advanced knowledge. Of

course, we have laws against insider trading. Still more important,

anybody who had advanced knowledge of a terrorist act would be

a prime suspect for being a part of a terrorist conspiracy. That is

an issue which we are looking at very aggressively. It involves not

only U.S. entities or U.S. stocks, but it involves foreign stocks.

As you know, the SEC does track unusual trading. This is an

area where we have to coordinate with overseas regulatory entities

in making sure that both in general and specifically as it relates

to these issues, we are in a position to identify groups that may

have traded in advance. If we can do that, then to pursue them.

Senator CORZINE. The same leverage that you would use in financial transactions with normal commercial banks and/or depository institutions needs to be used, I suspect.

Mr. CHERTOFF. Exactly.

Senator CORZINE. I hope the legislation takes that into account.

Mr. CHERTOFF. Our legislation, I think, deals broadly with financial institutions.

But having said that and, again, saying we have no pride of authorship, if there is a way to better define the subject area or make

it clearer, so that we are absolutely confident that we are addressing even unregulated money managers, I think it is important that

we do that.

It is my understanding, for example, that in certain parts of the

world, including parts of the Middle East, because of various objections to the earning of money through interest, money managers

38

often use various kinds of derivatives as a way of profiting from activity. And those are normally perfectly legal. But, of course, if one

is trying to profit off of a terrorist act, we need to be able to look

at transactions in various kinds of derivatives and forward contracts, and we want to make sure that we are doing that.

So, I think the legislation covers the waterfront. But if there is

any doubt about that, we would be more than happy to work with

you and the Committee to make sure that we are plugging in the

loopholes.

Senator CORZINE. About the Swiss banking issues.

Mr. GURULE ́. With respect to Switzerland, I would say this. It is

certainly my understanding that they have been cooperating. I say

this from the perspective again of FATF and looking to the 40 recommendations, the guidelines by which the international community measures a country’s cooperation on money laundering. They

are certainly in compliance with those recommendations. Beyond

that, I would not want to comment.

Mr. CHERTOFF. I would only add that I think in general, over recent years, Switzerland has become one of our most significant

partners in pursuing asset forfeiture and sharing for criminal activities. I think there are other countries where we do need to do

a lot of work, though.

Chairman SARBANES. Senator Schumer.

Senator SCHUMER. Thank you, Mr. Chairman.

I apologize to the witnesses. I was watching you on the closed

circuit TV. These days, being a Senator from New York, it is overwhelming. So I had to try to do two things at once. Let me just

follow up where I left off before.

When we talk about going after terrorists and the nations that

harbor them, we cannot just be talking about going after those

states that give physical shelter to bin Laden. We are also talking

about those who assist in sheltering his assets. Some do it knowingly. Many do it unwittingly. The effect is the same. So I am curious about the Administration’s view about going after jurisdictions

that have enabled bin Laden and other terrorists to finance their

campaigns of terror. Would the Administration consider sanctions

against countries that do not cooperate with international law enforcement? In other words, countries who say, when you go and our

FBI, or whomever, goes to a bank and says, we want to know the

money that came in and the money that came out here. And the

country says, you cannot do that, which some countries allow us to

now and some do not, depending on the country. Would we consider

sanctions against countries that do not cooperate?

The bills that Senators Levin, Kerry, Grassley, and myself have

mainly go after the banking institutions. But then your worry is,

they set up another one and it starts all over again. I am beginning

to feel that going after some of these countries is the most important. Is the Administration planning to lead an international effort

to cut off jurisdictions that do not cooperate with law enforcement?

I have had conversations with some large New York banks that

do a lot of the correspondent banking. And they have admitted

openly that cutting off noncompetitive jurisdictions will not affect

their major banking institutions, because these tend to be smaller

39

countries, et cetera. Would you gentlemen want to comment on

that?

Mr. GURULE ́. Let me quote a statement that President Bush

made last Thursday. He stated, ‘‘If you do business with terrorists,

if you support or sponsor them, you will not do business with the

United States.’’ He made that statement.

Senator SCHUMER. Was that aimed at countries? Was that aimed

at banking institutions? It is a very powerful statement. I am glad

he made it.

Mr. GURULE ́. I think that it was intended to have breadth, not

be restricted.

With respect to the implementation of that statement, putting

some teeth behind it, the Administration’s international efforts include a focus on United Nations Security Resolution 1333, that prohibits terrorists financing, fund-raising, and such. We are moving

on that front with respect to getting that resolution passed within

the United States and then using that as an international cudgel,

if you will, against countries that permit this type of fund-raising

and financing activity.

In addition, we are moving on another front with respect to the

international convention against the suppression of international

terrorist financing. We are supporting that and moving forward

with respect to that. That is an international convention that has

been signed, but has not yet been ratified.

Senator SCHUMER. What does it do? It seems to me that the terrorists are not going to make their monies available they are going

to try to be very much sub rosa on this.

Mr. GURULE ́. I think what it does, though, is it requires cooperation. It requires that foreign states have legislation that punishes

and criminalizes fund-raising of this kind. It requires the enforcement of that legislation. It requires stiff penalties. And it gives us

an international forum to advance this.

Senator SCHUMER. I would like to ask some specific questions,

with the indulgence of the Chair.

Would we take the lead in cutting off any financial institution in

these countries that doesn’t go along with what we need in terms

of openness and allowing our law enforcement to find where transactions go?

Mr. GURULE ́. I think with respect to our U.S. banking system,

the answer is absolutely yes.

Senator SCHUMER. Okay. Second question. Good. That is good.

Now what happens if—the question, I do not know if you were

in the audience, that I posed to Senators Levin and Kerry, who

have just done great work on this.

We know Country X is a bad-apple country and their whole

banking system is founded on opacity—you know, come bank here.

Nobody will find out. We cut them off. Then they go to an ally of

ours and start doing business there. And once they are in a large

ally country with a sophisticated banking system, the money can

flow to the United States through that third country, through that

intermediate country.

What would you consider we do in those situations to the intermediate country if they do not go along? And as you know, history

has shown that after a year or two, sometimes months, these counVerDate 11-MAY-2000 08:31 Sep 12, 2002 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 SEPT26.XXX SBANK4 PsN: SBANK4
40

tries revert back to saying, hey, we can make some money here. We

can have a relationship. Maybe we will get contracts and things

like this. What are we going to do to those intermediate countries?

Mr. GURULE ́. Well, with respect to the Executive Order that went

into effect on Monday, if we had evidence that this third-party

country, if you will, was maintaining, or its banks were maintaining assets that are traceable to international terrorist organizations, then those assets could be blocked. And the bank that is

maintaining those accounts could be blocked from doing business

with the U.S. banks, would be denied access to the U.S. banks.

Senator SCHUMER. Okay. So let us say that the Sudan bank, this

little bank in Senator Levin’s example, does business with a large

French bank. Would we consider saying to that French bank, you

cannot do business in the United States if they do not have the

same rules as we do about that Sudanese bank?

Mr. GURULE ́. I think we would seek the cooperation of our allies

to assist us with respect to cutting off those funds.

Senator SCHUMER. Understood. But the allies say, we agree with

you on these three points, but not on these three, and we are going

to do the first three, but not the second three. And our law enforcement, Mr. Chertoff here over in the Justice Department tells you

that we need those second three points. What would we do?

Mr. GURULE ́. It is very difficult for me to speculate through all

of these different hypotheticals and scenarios.

Senator SCHUMER. Okay. My only point is, if we really want to

get serious about the finances, as the President has made clear on

so many others, we are going to have to get pretty tough. And that

may take some belt-tightening in ways for all of us.

Thank you, Mr. Chairman.

Chairman SARBANES. Thank you, Senator Schumer.

There is a vote on. I think we have concluded with this panel.

We will take a brief recess in order to go and vote. And then we

will return and we will have Ambassador Eizenstat at the table as

our witness.

Mr. Gurule ́, Mr. Chertoff, thank you very much for your testimony, and even more, for the proffer of working closely now with

the Committee as we shape this legislation. Obviously, we are on

a very fast track to do that. I think we can appropriately deal with

some of the questions that were raised here today about being careful and prudent as we deal with this matter.

But on the other hand, a lot of very good work has been done.

The Department of Justice has done work in terms of what they

have come forward with. Treasury has done work in terms of where

they are. Senators Levin and Kerry, I think, have done excellent

pieces of work in terms of their legislation. And as Senator Grassley pointed out, their legislation is not hastily put together or illconsidered. It evolved over a very sustained period of time. The

Kerry bill actually was reported out by the House Committee 33 to

1. The Levin bill reflects a very extended work program by his Permanent Subcommittee on Investigations.

I think we have really a lot of material that has been brought

to a very high level in terms of being close to being finalized. And

I think it is now a question of working together to put that all together in a sensible framework and moving it ahead and giving our

41

law enforcement people the tools that they really need in order to

come to grips with this problem. Now it is quite true, then it is carrying it out, it is implementing it, and that is your burden.

But on the other hand, your chances of implementing are better

if you are working within a framework that is comprehensive, rational, interrelated, and that should be our objective in terms of

what we provide to you.

That does not preclude trying to weed out some things that are

now being done that are not helpful and do not serve a purpose.

But the fact that you may need to do that is no argument for not

extending out to cover the sort of activities that Senator Corzine

was underscoring, the need to be brought in under the umbrella.

We thank you very much for your testimony and we look forward

to working very closely with you.

The Committee will take a brief recess and then we will return

and we will hear from Ambassador Eizenstat.

[Recess.]

Chairman SARBANES. The hearing will resume.

It is our intention now to hear from Ambassador Eizenstat. Then

following that, we will go to the panel that was scheduled. And so,

we intend to go straight through as far as we have to into the

lunch period in order to try to conclude. I know some of our witnesses need to travel and we want to try to accommodate that also.

I want to thank Stu Eizenstat for coming today and being willing

to testify. He has had a very distinguished record in public service,

now a partner at Covington & Burling. But he was the Deputy Secretary of the Treasury in the previous Administration, was in fact

the lead official on the anti-money laundering initiatives. He has

previously served as Under Secretary of Commerce, Under Secretary of State, Ambassador to the European Union.

I simply want to express my very deep appreciation to him for

his willingness to take the time and to make the commitment in

order to come and be with us today and let us have the benefit of

his thinking and his knowledge on this very important issue.

Stu, thank you again for coming.

STATEMENT OF STUART E. EIZENSTAT

FORMER DEPUTY SECRETARY

U.S. DEPARTMENT OF THE TREASURY

Mr. EIZENSTAT. Mr. Chairman, thank you for inviting me and

thank you for your leadership on this issue and for holding the

hearing and for your leadership on S. 398.

Stopping money laundering and the syndicates it finances is critical to the fight against narcotics trafficking, organized crime, and

corruption, and now we know that it is also critical to the personal

safety of our citizens.

Money laundering is the financial side of crime and money

launderers are the criminals’ investment bankers. As you yourself

noted today, Mr. Chairman, the IMF has estimated that the

amount of money laundered annually is between $600 billion and

$1.5 trillion, or 2 to 5 percent of the world’s annual gross domestic

product. And it is also estimated that about a third of that amount,

up to perhaps half a trillion dollars annually, passes through U.S.

financial institutions at least once on its clandestine journey.

42

Money laundering also affects the vitality of our goods as the

Black Market Peso Exchange Program indicates, and undermines

the credibility and safety of our whole global financial system upon

which our prosperity depends.

Now, we are brought face to face with another aspect of the

criminal financial system and its use by the merchants of terror.

Terrorists must have money to pay for weapons, travel, training

and even benefits for the family members of suicide bombers. Terrorists raise funds in many ways, through commissions of crime,

through payment from state sponsors, and through fund-raising of

what are said to be humanitarian organizations. More on that in

a second.

But however raised, the funds must be transmitted across borders, marshaled, and spent—with the application of new layers of

camouflage at each step. The fight to curtail money laundering has

been a product of bipartisan consensus. President Reagan signed a

law which for the first time outlawed money laundering as such.

In 1989, President Bush led the way by creating the Financial Action Task Force and then FinCEN a year later. President Clinton

launched a coordinated 5 year effort reflected in two national

money laundering strategies. I would like to talk about just for a

second some of our efforts.

The President issued two Executive Orders targeting terrorist

groups in 1995 and 1998. The Executive Order on August 22, 1998,

added bin Laden and Al Qaeda to those other terrorist organizations, permitting the freezing of their assets if they could be found.

Rick Newcombe, the longtime and excellent leader of OFAC in

Treasury, who reported to me on two occasions, along with Will

Wechsler, who we brought over from the NSC to head money laundering, in July 1999 and in January 2000, led delegations with the

National Security Council to four gulf states—Saudi Arabia, Kuwait, Bahrain and UAE.

The purpose was, Mr. Chairman, to look for charitable organizations and banks who might be involved in money laundering. We

felt that as a result of those two trips, that in particular, Kuwait

and Bahrain were helpful in trying to identify those wayward organizations. In addition, in July 1999, in implementing the 1998 Executive Order, $250 million in Taliban money was found in the

United States. There was suspicion that Al Qaeda and bin Laden

were using charitable organizations, and those were being investigated during our Administration.

I am very pleased that President Bush has now added three panIslamic funding organizations which may have been used for terrorists. We were certainly on the same track. So, indeed, this is a

bipartisan issue.

I have described the major components of our approach in my

written statement and I hope those will continue to be employed

by this Administration.

For example, the Financial Action Task Force (FATF) published

a broad listing for the first time of those countries that do not meet

international financial standards, what we call the ‘‘name and

shame’’ list. We also helped build the Egmont group of financial intelligence units. And at home, we issued guidance in the last weeks

of our Administration to financial institutions, alerting them to

43

special scrutiny in dealing with foreign officials, their relatives and

close friends, as well as preparing the legislation which you have

talked about today. And I want to applaud Senator Kerry, Senator

Grassley, and yourself for this important step in introducing legislation that passed 33 to 1, as you pointed out, in the House Committee under Chairman Leach last year.

The fact is we have too few tools to protect the financial system

from international money laundering. At one end of the spectrum,

Mr. Chairman, Senator Corzine, the Secretary can issue Treasury

advisories, as we did in the summer of 2000, to encourage U.S. financial institutions to pay special attention to targeted transactions involving certain jurisdictions.

On the other end of the spectrum, we have the IEEPA powers

that the President invoked and that President Clinton had done

again in 1995 and 1998. Following a Presidential finding of national security emergency, you can have a full scale set of sanctions

and blocking orders.

The problem is, although President Bush’s order was absolutely

appropriate, there is nothing in between the advisories, on the one

hand, and IEEPA on the other. And there are many situations

when advisories are not enough and when IEEPA may be inappropriate, situations in which we might not want to block all transactions, or in which our concern centers on underregulated foreign

financial institutions or holes in foreign counter-money laundering

efforts. A more flexible tool is needed. We do not have one available

now. That is what your legislation and Senator Kerry’s would do.

The key to the operation of S. 398 is that a determination by the

Secretary of Treasury, after consultation with other senior Government officials, that a specific foreign jurisdiction, financial institution operating outside the United States or class of international

transactions, is a primary money laundering concern.

And may I say, although Senator Gramm is not here, regarding

his concern about judicial review, it is important to recognize that

any action taken under S. 398, that finding would be a determination that would be fully reviewable under the Administrative Procedures Act by a court. This is not, after all, a forfeiture process.

But even the determination could be challenged under the Administrative Procedures Act.

So the trigger authorizing the Secretary to act imposes several

types of special reporting, recordkeeping, and customer identification requirements linked to the object of primary concern or, in extreme cases, to impose conditions upon or prohibit the opening of

certain correspondent accounts.

The bill is carefully tailored to actions against real abuse. It is

graduated, targeted, and discretionary. Graduated, so the Secretary

can act in a manner proportional to the threat; targeted, so he can

focus on his or her response, on particular facts and circumstances;

and discretionary, so that Treasury can integrate any possible action in the bilateral and multilateral diplomatic efforts, to persuade

offending jurisdictions to change their practices, so invocation of

the authority would be unnecessary. I also want to deal with the

privacy issue.

It is incorrect that this would compromise in any significant way

the privacy of American citizens. The focus of the legislation is not

44

on American citizens. It is on foreign jurisdictions, foreign financial

institutions, or classes of transactions with or involving jurisdictions outside the United States.

They involve the abuse of U.S. banks facing especially identified

primary money laundering concern. The legislation is drawn so as

not to add unnecessary burdens to financial institutions.

We also hoped last year to see the passage of legislation which

the Justice Department had long sought, to make crimes against

foreign governments, like misappropriation of public funds, fraud

and official bribery, arms trafficking and certain crimes of violence,

specified unlawful activities for purposes of money laundering. Unless this change is made, Mr. Chairman, and Senator Corzine, a rapacious foreign dictator, a corrupt foreign dictator can bring his

funds to the United States and hide them without fear of detection

or prosecution in many cases. And I think it is important to recognize that there really is a confluence of official foreign corruption

and money laundering. The two go hand in hand and we have to

deal with both.

I am pleased that S. 1371, introduced by Senator Levin and cosponsored by yourself, Mr. Chairman, Senator Grassley, Senators

Kyl, Nelson, and DeWine, include the necessary change and important related changes to our forfeiture laws.

I hope that the program outlined in the National Money Laundering Strategy of 2001, this Administration’s first, does not shortchange appropriate legislative and regulatory efforts to shore up

weaknesses in our financial mechanism that money launderers can

exploit.

We need the kind of enforcement that is at the center of the Administration’s strategy. But we also need the kind of structural

changes that your legislation would provide. The acid test for me

is whether the Administration will support passage of S. 398.

Again, as you have emphasized and as I mentioned, it had strong

bipartisan support in the House Banking Committee last year.

Permit me to add one additional word about money laundering

and terrorism. My written statement contains a number of recommendations on steps to fight terrorism that the Administration

can take to follow up Monday’s forceful action by the President.

This includes greater efforts to penetrate underground banking

practices, the Hawala system, greater efforts in particular in the

Persian Gulf, to go after phony charitable organizations that serve

as conduits for terrorism and for Osama bin Laden’s organization,

and guidance to U.S. financial institutions in identifying bank accounts, beneficial ownership accounts, so that they have a better

idea of the beneficial owners with whom they are dealing.

We cannot overstate our chances of immediate success because

our adversaries are good at hiding funds, they use nontraditional

underground systems that are outside sophisticated financial channels, and they often operate on meager budgets. However the fact

that clues are not easy to find and have to be pieced together must

not deter us.

To sum up, the rapid growth of international commerce along

with advances in technology are making it easier for criminals and

foreign jurisdictions to launder money through foreign institutions

in the United States and, hence, to finance the expansion of the

45

global criminal economy and the growth of organized criminal

groups and international terrorists as substate threats to our security. That is why it is essential for this Committee to act to shore

up our national defense against money laundering.

Thank you, Mr. Chairman, for this opportunity to testify.

Chairman SARBANES. Well, thank you very much, Ambassador

Eizenstat. And I also want to express our appreciation for this very

well-developed and comprehensive statement. And obviously, the

entire statement will be included in the record.

At the outset of this hearing, of course, we heard from Senator

Kerry, who introduced S. 398, and Senator Levin, who introduced

S. 1371. And I thought that we had a very appropriate comment by

Senator Grassley, who was at the witness table with them, that

both of these pieces of legislation represented a well-considered,

carefully thought-through approach that had been developed over

a rather sustained period of time. Neither represents a sort of

hasty, quickly put together legislative proposal.

As you note, S. 398 actually came out of the House Committee

with a 33 to 1 vote. Regrettably, it did not move beyond that. My

question to you I guess is, do you see these bills as being compatible in a way that they can be combined along with other suggestions? We have both the Treasury and the Department of Justice

who have some proposals of their own as well, and of course, our

effort here will be to bring these together, meld them. Do you see

these two bills as compatible and therefore, subject to combination?

Mr. EIZENSTAT. Yes, sir, I believe they can be combined. The core

provisions of the two bills deal with the same set of issues. Namely,

the misuse of correspondent and payable through accounts, the

lack of financial transparency involving non-U.S. customers of U.S.

financial institutions and the need for enhanced due diligence in

certain high-risk accounts.

The primary difference between the two bills, Mr. Chairman, is

that S. 398 keys action to a specific finding by the Secretary of

‘‘money laundering concern,’’ where S. 1371 takes a broader approach mandating general rules on the same subject.

For example, S. 1371 requires U.S. banks to identify each foreign

person having a direct or beneficial ownership interest in a U.S. account, while, again, S. 398 would key special rules to a particular

finding of money laundering concern. But I think that they can be

melded together. Many of the provisions of both are very positive.

For example, S. 1371’s provision about private banking and enhanced due diligence for private banking and correspondent account recordkeeping could easily be incorporated into the S. 398

structure. In addition, S. 1371 makes a useful expansion of the

number of predicate crimes that form the basis of money laundering expenses, such as, as I mentioned, acts against foreign governments like official foreign corruption.

There are important changes in S. 1371 that could be melded into

S. 398, such as the changes in the forfeiture laws, long-arm jurisdiction against foreign money launderers, and criminally prosecuting those who knowingly make false statements regarding the

identity of their customers. So, I think that, while there obviously

are differences, these could be melded and combined into an even

more powerful bill.

46

Chairman SARBANES. Good. I appreciate that. I know you are

now in the private sector, and your time and commitment are not

unlimited. But I hope we can draw on you for your advice and

counsel as we try to deal with this problem.

Mr. EIZENSTAT. I would be glad to work with you and Steve and

others on that.

Chairman SARBANES. I appreciate that very much.

We have discussed, and I see Senator Corzine had to depart because this is a matter that he is focused on. The Washington Post,

in an editorial, said, ‘‘The existing requirement that banks report

suspicious activity to regulators should be extended to other types

of financial institutions, such as stock brokers, insurers, and even

casinos.’’ What is your reaction to that recommendation?

Mr. EIZENSTAT. Well, I agree with that. In fact, we did extend

this to casinos and on the broker-dealers, as was mentioned earlier,

there is a decision to do that.

The regulations did not come out. I wish they had come out a little earlier. There were a variety of reasons for that, including the

fact that we had to try to implement the Gramm–Leach–Bliley Act

that shifted certain responsibilities from Treasury to the SEC, and

there were a lot of complications in doing that. But I would hope

that the Administration by the end of the year would be able to

have the regulations to permit the extension of this so that we

have a level playing field for our banks and we have casinos and

broker-dealers covered.

Chairman SARBANES. I would like to draw you out a little bit on

the privacy issue because I was asked by a member of the press

on the way back to this hearing about the privacy question.

My response was that, actually, we are seeking to gain financial

information about foreigners that Americans are already exposed to

under our current framework. This does not represent any further

intrusion into the financial privacy as it now exists for American

citizens. It is actually, to the extent that it does anything, it gets

at foreigners who go free from some of these transparency reporting requirements. Would you agree with that statement?

Mr. EIZENSTAT. I agree fully, and may I add just a few other

things on the privacy issue because it is one of the things as we

were drafting the legislation that did pass the House Banking

Committee last year so overwhelmingly. We spent an enormous

amount of time trying to balance the privacy issues against effective law enforcement.

First of all, no one has a privacy right to commit crime. And the

Supreme Court has made it clear a number of times, the crucial

opinion being authored by Justice, now Chief Justice, Rehnquist,

that the whole Bank Secrecy Act is itself completely constitutional.

And that is in a way an effort to try and get at the names of people

who may be doing untoward things.

Moreover, the Supreme Court has made clear that bank records

are not within a constitutional zone of privacy. But that is not the

full answer. For one thing, the very specificity of the statute that

you have drawn is a protection against privacy.

Second, any required records are subject to the general privacy

protections imposed by law, including Gramm–Leach–Bliley, and

subject to recognized exceptions for law enforcement.

47

And third, the very legislation expands the nondisclosure rules of

suspicious activity reports to make it plain that government officials, as well as bankers, can violate the law by improperly disclosing information from those reports. So all of these provide

ample protection against privacy invasions.

Chairman SARBANES. Obviously, this has to be an international

effort. I wonder if you could comment a bit about the international

arrangements that currently exist or could be strengthened to deal

with this. And in particular, there seems to be an assumption on

the part of some that our efforts to deal with money laundering exceed or go beyond that being done by other countries.

But I am told that, actually, there are a number of countries who

have a more rigorous statutory framework for dealing with money

laundering than the United States, and that in some of these international fora in which we are working at this problem, we are not

necessarily the leaders in trying to address this matter.

Mr. EIZENSTAT. Mr. Chairman, that is a very important point.

We would like to think of ourselves as the world’s only superpower

and the leader in a whole range of things.

The fact is that in the attack on money laundering, we are not

as advanced as a number of members of an organization set up

under the Bush Administration, called the Financial Action Task

Force. This now has some 29 members and many of those have

tougher rules on money laundering than do we.

The important advance that we made is that for the first time,

and this was under the leadership of people like Will Wechsler and

Jody Meyers and others in Treasury, we identified 15 countries

that did not meet basic international money laundering standards.

They did not outlaw money laundering. They had no financial intelligence units. They did not share any information.

I am frankly proud of the fact that we did not pull any punches.

We included Israel. We included Panama. We included Russia on

that list, as well as places like Nairu. So this was just not an easy

list to compile. We called it like we saw it. And the important thing

about that list is that now about half of those countries have acted

rapidly to pass new legislation to establish functioning financial intelligence units like the one that Jim Sloane so ably leads here, the

FinCEN.

A number of those countries have gotten off the list, like Panama

and a number of others. I hope Israel will get off shortly. And this

Administration, to its credit, in June, added another six countries

and in September, another two, including Ukraine.

This we call the Name and Shame List. It really focused a spotlight on those countries and has gotten them to act. But if we want

to continue to be a leader in the Financial Action Task Force, we

have to demonstrate that we are at the forefront of being tough on

money laundering and that is why, again, S. 398 and S. 1371 are

so important.

Without those, a lot of our leadership is rhetorical, frankly, and

not backed up by the kind of tough actions that I think are necessary. So the process has worked.

And I heard an earlier question about Switzerland. The fact is

that the Swiss have really turned over a new leaf. I negotiated

with them on the Holocaust issues for several years and it was

48

very tough and very difficult. They have recognized that if they are

going to be leaders in the international financial community, they

have to have transparency.

They are members of FATF. They have tough rules. They are

complying. They are sharing information. So, we cannot point the

finger at a lot of countries—they can almost point the finger at us.

Chairman SARBANES. Some have argued, or at least put forward,

the proposition that, in light of the President’s Executive Order of

September 24, that that sort of takes care of the situation and we

do not need any further legislation. Could you address that?

Mr. EIZENSTAT. Yes, sir. If anything, the President’s actions,

which again are highly welcomed and should be applauded, if anything, underscore the need for the legislation, the reason being that

it is true the President can act in the dramatic fashion that he did

under IEEPA. But we used to call that the atomic bomb. You take

that when you are going after Osama bin Laden.

The only other authority that we have under the Treasury Department or anywhere else in Government are these very mild

advisories. There is nothing in between. And there will be many instances in dealing with money laundering—foreign jurisdictions,

types of transactions, and foreign countries—when using the, in a

sense, nuclear weapon of IEEPA, as appropriate as it was for President Bush to use here, would be inappropriate to use. So we want

to give the Treasury the full range of powers in between the

advisories, on the one hand, and IEEPA on the other.

So, again, to me, if anything, the use of IEEPA in this circumstance, as dire and unique as it was, dramatizes and underscores the need for more flexible ranges of powers to deal with

other perhaps less dramatic, but still terribly important, money

laundering problems.

Chairman SARBANES. Well, thank you very much. This has been

extremely helpful testimony and we obviously appreciate the initiatives which you undertook when you were in the Government to

address this issue.

We very much appreciate your willingness to be available for us

to call on you for counsel in the days ahead, as I think you heard

in our earlier discussions, we proceed to shape the legislation.

Mr. EIZENSTAT. I have gotten more and more used to pro bono

work, Mr. Chairman, so why not here.

Chairman SARBANES. Thank you very much, Stu.

If the next panel would come forward.

[Pause.]

Our concluding panel consists of William Wechsler, who served

as a Special Advisor to the Secretary and the Deputy Secretary of

the Treasury, where he led the Department’s day-to-day programs

and policy initiatives to combat money laundering between 1999

and 2001. Prior to that, he had served as the National Security

Council staff member, where he chaired the interagency working

group seeking to disrupt Osama bin Laden’s financial network.

Jonathan Winer is a leading authority on domestic and international money laundering initiatives, a former U.S. Deputy Assistant Secretary of the Treasury for Transnational Law Enforcement,

one of the architects of U.S. international policy and enforcement.

49

He also led the Senate’s investigation of BCCI in the late 1980’s

and early 1990’s.

And Alvin James, who has had extensive experience in investigating money laundering schemes, particularly the Columbian

Black Market Peso Exchange. Mr. James has served as the Senior

Money Laundering Policy Advisor to the Financial Crimes Enforcement Network and is a Special Agent in the IRS Criminal Investigation Division, serving as an undercover agent specializing in

international money laundering efforts.

Gentlemen, we are very pleased you all are here. I regret, in a

sense, the lateness of the hour, but we have had a very full morning, I think, as you have observed. And we would be happy to take

your testimony.

We will include the full statements in the record, if you care to

compress them or abridge them.

Mr. Wechsler, we will just move right across the panel. So, Mr.

Wechsler?

STATEMENT OF WILLIAM F. WECHSLER

FORMER SPECIAL ADVISER

U.S. DEPARTMENT OF THE TREASURY

Mr. WECHSLER. Yes, Mr. Chairman, I will be brief, since you

have my full testimony.

What I do want to take is just a little bit of time to describe the

nature of the Al Qaeda financial network, what has been done,

what can we do against it specifically, and then a couple of statements on the general issue of money laundering, not to repeat all

the fine and excellent statements that Former Deputy Secretary

Eizenstat just gave.

Unlike most terrorist leaders, Osama bin Laden did not become

famous for leading a terrorist cell or having military victories. This

is key to understanding the problem. He became famous for building a financial architecture that supported the Mujadin fighting in

Afghanistan against the Russians. It is this financial architecture

that continued with him when he turned to terrorism, and it is this

financial architecture that is at the heart of how Al Qaeda today

gets its finances.

The other key thing to understand is that the general impression

that is out there in the media that this is a product of one rich person sort of writing checks out of his own personal account is false.

If that were the problem, it would be much, much easier to solve.

What it is, as has been alluded to earlier today, is a complicated

system of charitable donations, of individual donors, of legitimate

businesses, of criminal enterprises, of banks, of cash smugglers,

and so forth, all of which eventually give money to do terrible acts,

as we saw on September 11. Most important for the United States

is what then you do about this problem.

The key thing that was done happened in 1998. And in that

time, the strategy changed from a law enforcementcentric strategy

to a more strategic strategy that was designed to take down and

disrupt the financial network and the key notes. As Former Deputy

Secretary Eizenstat just said, President Clinton at the time invoked IEEPA law, as President Bush did on Monday.

50

It is very nice if sometimes funds are actually found in the

United States and they are blocked, as several hundred million

were blocked in the United States that belonged to the Taliban.

But there is a common misperception out there that is the goal of

all these activities.

It is not the goal of the activities. It is nice when it happens. The

goal of the activities is to use the leverage that you have, use the

Sword of Damocles that the United States holds hanging over the

heads of foreign persons, foreign companies, foreign financial institutions, the threat of being cut off from the U.S. economy and the

U.S. financial system, to try to get them quietly sometimes, behind

the scenes often, try to get them to give you information and to

take certain actions that previously they would not be willing to do.

This was a strategy that we had after 1998. This is a strategy

that President Bush is continuing as of Monday. It is a strategy

that can work. We had some very good successes. We stopped, for

instance, the Afghan National Airline, Aeriana Airlines, which was

a key mechanism that Osama bin Laden and the Al Qaeda network

used to move funds, material, and personnel back and forth in Afghanistan. We shut it down around the world, not just in the

United States, but also other airports did not want to risk the notion that they would be cut off from U.S. air travel. So, they decided, quite logically, to cut themselves off from Aeriana. That is

the power of this.

The problem is that we were not always successful. Sometimes

there is lack of political will in other countries that we go to. Sometimes when we go to the other countries, they cannot even get the

information that we want them to get because they lack the appropriate regulatory regime.

That, amongst other reasons, is why it is so important to quickly

address, as I know you are, Mr. Chairman, the legislation that

passed through the House Banking Committee last year and is on

your table this year, because it would allow, as Deputy Secretary

Eizenstat said, a number of intermediary steps.

Most importantly, particularly for the war against terrorism, it

would allow you to focus them not just on the country at large, but

also on the particular financial institution, and the level of proof

that you would need to take action.

Under IEEPA, you have to be able to show publicly, with open

source information, not just intelligence, that there is a terrorist

nexus going through this bank.

Under the legislation in front of you, you would be able to take

action if you can show that there is a primary money laundering

concern going on there. This could have to do with the regulatory

environment. This could have to do with a pattern of practices.

This is easier to do without the use of intelligence and therefore,

would give us much more leverage.

Thank you very much.

Chairman SARBANES. Thank you very much.

Mr. Winer.

51

STATEMENT OF JONATHAN WINER

FORMER DEPUTY ASSISTANT SECRETARY FOR

INTERNATIONAL LAW ENFORCEMENT

U.S. DEPARTMENT OF THE TREASURY

Mr. WINER. Thank you.

Mr. Chairman, before you is a chart which displays what is probably a small portion of Osama bin Laden’s financial network. Every

one of the more than 100 boxes on this chart reflects a publicly reported alleged financial link of bin Laden and related terrorists organizations involving more than 20 countries, in the Americas,

Asia, Africa, Europe and the Middle East. Public information demonstrates terrorist funds moving through Islamic charities, travel

agents, construction businesses, fisheries, import-export businesses,

stock markets, chemical companies, and a significant number of

banks. All of this is public record and is far from complete. There

simply is not room on a single chart, or even four of them, to include everything connected to bin Laden-related terrorist groups as

has been publicly reported in open source material.

A few of these entities are now defunct, as a result of law enforcement and other operations. Others may have only marginal

ties to terrorist finance. These charts illustrate why responding to

this multifaceted network will require sustained, tenacious cooperation by many, many governments.

The actions announced by the Bush Administration on Monday

represent potentially significant steps. If followed by further action,

and international cooperation, they could begin to have consequences. But that will only be true if every component of the financial services sector internationally, not just banks and certainly

not just U.S. banks or foreign banks with offices in the United

States, are all subject to similar rules and regulations. An anti-terrorist finance regime must be globalized, standardized, harmonized, and it must be multisectoral to have impact. While there

are many steps that should be taken, I wish to focus on seven

areas for action. My written testimony provides more details them.

First, register and regulate Money Services Businesses, including

Hawala institutions, as the Congress directed the Executive

Branch to do since 1993. Our failure to complete this process has

created a substantial vulnerability by which terrorists can anonymously obtain cash below the radar of our financial services regulatory system. This is the Department of the Treasury’s job. It

should be completed without further delay, so that nonbank money

services businesses in the United States are subject to obligations

at least as tough as those already required of banks. To be effective, these laws must then be vigorously enforced. We should use

Federal law enforcement injunctive powers to shut down and freeze

all Hawala assets for firms that do not register. If the Department

of Justice does not think it has that power, it should urgently ask

the Congress for it, though I believe the power exists already pretty

much in 31 USC 5320.

Second, increase the international pressure on countries that

have yet to put into place financial regulatory enforcement regimes

that facilitate accountability and the tracking of assets. We have

begun doing this already, but we need to push harder and faster.

Financial regulation and enforcement cannot stop at borders, when

52

terrorist finances do not. Financial regulations and enforcement

must be evenly promulgated and evenly enforced on a global basis.

Third, the United States needs to accelerate efforts to ensure

that every nation signs up to the U.N. Terrorist Finance Convention, that every country criminalizes terrorist finance, that every

country freezes and seizes terrorist funds and the assets of organizations that support terrorism.

Fourth, the United States must do more to build our own terrorist finance database from existing cases. This means not merely

going through and scouring the records associated with every terrorist prosecution, but we need to do that with cases that abut or

adjoin terrorist activity and involve other terrorist activity. The

Bush Administration has announced it has now begun this task.

Adequate resources, substantial resources need to be devoted to it

and devoted to it immediately.

Fifth, the Congress should support Presidential use of economic

war powers to broaden the reach of U.S. sanctions policy in true

national security emergencies, as the President announced he

would do on Monday. Unilateral action, however, is inherently insufficient. We must obtain the support of key partners, including

the G–8 and the European Union. If the European Union agrees

to put into place the same sanctions we are putting into place, all

the European accessor states, the wannabes, including countries

like Cyprus, have to put in the same laws, the same protections,

the same rules. That is tremendously important. You push the

OAS, and then you begin to get all of Latin America in, and you

push from there.

Sixth, the United States needs to secure domestic and international action against entities that have wittingly or unwittingly

provided support to terrorists. These include a number of Islamic

charities, some of which are prominent and otherwise do many

good works. We will need to work with other governments, including many in the Middle East, to cleanse charities that have supported terrorism unwittingly and to protect them from abuses by

terrorists. Other charities, who have systematically supported terrorism, should be closed down, with their assets seized and made

available to assist terrorism’s victims. Mr. Chairman, my chart

shows 17 charities that have been publicly listed in one or another

press accounts, trials, whatever, over the last few years. Most of

them are not yet on any list anywhere, other than in the public

record and perhaps that public list needs to be expanded.

Seventh, we need to strengthen international regulatory cooperation in our securities markets and close regulatory gaps, so that no

terrorist who engages in the obscene act of market manipulation in

connection with an attack ever gets away with it. Countries whose

bank secrecy laws, anonymous trusts, and untraceable business

companies are used by terrorists need to understand there will be

consequences if they do not quickly change their laws and practices

to help the world, every country, trace and seize terrorist finances.

In summary, cutting off terrorist finance is like cutting off the

heads of the hydra. Every time we chop off one head, more will

grow back in its place. To survive, we must kill the entire beast,

and that means more than a single bin Laden, or any one part of

his or related terrorist finance networks.

53

Thank you, Mr. Chairman.

Chairman SARBANES. Thank you very much.

Mr. James.

STATEMENT OF ALVIN C. JAMES, JR.

FORMER SPECIAL AGENT

CRIMINAL INVESTIGATION, INTERNAL REVENUE SERVICE

U.S. DEPARTMENT OF THE TREASURY

Mr. JAMES. Thank you, Mr. Chairman. I am honored to be here

before you today to speak to you on an issue that affects the national security of our country.

I am currently the practice leader of the Anti-Money Laundering

Solutions group at Ernst & Young. Prior to that, I spent 27 years

in Federal law enforcement where I culminated my career at the

Financial Crimes Enforcement Network. It was at FinCEN that a

DEA colleague, Greg Passic, and I collaborated on developing a

model that explained what is generally recognized as the largest

money laundering system in the Western Hemisphere—the Colombia Black Market Peso Exchange—commonly referred to as BMPE.

The BMPE presents two fundamental dangers to our country— it facilitates the Colombian drug trade by purchasing and laundering billions of dollars each year of Colombian wholesale drug

proceeds. In turn, it makes these funds available to anyone, including terrorists, seeking a source of discreet, untraceable U.S. dollars.

Mr. Chairman, I have submitted a written statement for the

record that centers on the Black Market Peso Exchange as a global

money laundering system. I would like to take this opportunity to

address the use of the BMPE and other underground financial systems by criminals, particularly international terrorists.

We know that, like all criminals, terrorists need secrecy to succeed. Terrorists do not need a separate and distinct system of laundering or concealing money for terrorist activity. They use systems

that are readily available in their homelands that leave no paper

trail and are discreet, cheap and reliable. By tapping into existing

systems, such as BMPE and Hawala, the terrorist network can conceal their financial activity from law enforcement.

Hawala and BMPE are parallel payment systems that use brokers who buy money as a commodity and then transfer it internationally by accepting funds in one country and paying them out

from a pool of money available in another country.

The money is placed in the traditional financial systems by the

brokers, but the source of the money and the true identify of the

owner or client of the broker is completely unknown to the financial system and therefore, completely without a paper trail. This

system is attractive to terrorist groups and those who move the

money they need to support their activity.

Law enforcement has evidence that the BMPE has been used by

Middle Eastern terrorist organizations in the past and is more

available and attractive to them now than ever. Correspondent

banking is the vehicle that is allowing these underground systems

to broaden their access to U.S. financial systems from anywhere in

the world. I believe the legislation referenced here earlier this

morning will be an important step toward closing that unguarded

back door to the U.S. financial system.

54

Mr. Chairman, I believe if we are to stop terrorist money movement, we must disrupt and dismantle systems like the BMPE that

make drug money available to terrorists not only in the Middle

East, but also throughout the world. I further believe that U.S. law

enforcement has the ability to take on this vital task. But it must

overcome two challenges before it can succeed.

The first challenge is coordination: Money laundering is like a

balloon—if you squeeze it one place, it will just get bigger some

place else. Unless we attack these money laundering systems with

a coordinated plan to squeeze in all directions at once, we will not

pop the balloon. Overlapping money laundering jurisdictions frustrate our ability to coordinate our attack. Law enforcement is a

competitive business and to date, these agencies have not been able

to effectively cooperate with one another in a global assault on

these systems. Asset forfeiture funds that return monies to the

seizing agency exacerbate this competition between agencies.

A second problem involves the natural focus of law enforcement

on the prosecution of individuals. The BMPE is a financial system

with an infrastructure and as such, is not dependent on any one

individual or group of individuals. Therefore, a plan that is directed

primarily toward arresting and prosecuting the drug traffickers,

the money launderers and the terrorists who use this system will

not by itself stop the system.

The final challenge I see before law enforcement is to place the

goal of disruption and dismantlement of the system on an equal

footing with prosecuting the individuals who use it.

Mr. Chairman, in conclusion, I would like to restate that our

Government has the ability, the authority, and the knowledge to

take action now against the BMPE and similar systems used by

terrorists to launder funds.

I firmly believe that unless a high-level position is designated to

have the sole ownership of this problem and the responsibility to

solve it, we will continue to have impact on these systems, but fail

to stop the process, as we have failed to do for the last 20 years.

I hope that the Cabinet-level Homeland Security post will be

used as such a position. Without this or a similar overarching position to marshal and direct the tools and abilities we have available,

I fear that we will continue to fail to take these underground and

unregulated financial systems out of the reach of international terrorists and other criminal elements who thrive on discreet and

untraceable funds.

Thank you, Mr. Chairman.

Chairman SARBANES. Thank you all very much for some very

helpful statements.

I wonder if someone could develop a little bit how the Hawala

system works.

Mr. JAMES. I will be glad to take a first shot at it. As was mentioned earlier this morning, this system is hundreds of years old.

And it really operates through a network of brokers that are in

place throughout the financial centers of the world, and in the Middle Eastern area that has the people that need to use the system.

A good example of how it might work is that a person in the Middle East might need to pay a bill, say in London, that is due for

goods that they have imported from London to the Middle East. So

55

that person in the Middle East would go to a Hawala broker with

the equivalent value of the debt owed in whatever the currency of

that area. He would basically make a deposit with that broker.

The broker would then contact his counterpart in London and he

would tell that counterpart to draw on a pool of money already

there and send a payment to whoever the exporter was that was

owed the debt. Those two brokers then would square up their accounts as they went along. Usually, the account would be squared

up because someone in London would owe money to someone in the

Middle East. So, they would go to the broker on their side and they

would bring in pounds sterling and say, I want this amount of

money transferred to an individual in the Middle East to pay my

debt. The brokers would then work the transaction the other way

and in that way, eventually square up their books. The important

thing about this system is that no money moves internationally.

There is no international wire transfer.

The two individuals who handle the transaction know each other,

trust each other. The individuals who do business with them know

them, trust them. No records are kept. And although these pools

of money may be kept in the financial systems of the various countries that they are working in, the financial institutions have no

idea whose money this really is and on whose behalf deposits are

being made and moved around. This is a complex system, but that

is my stab at a simple answer.

Chairman SARBANES. How do they even up their accounts? Your

example sort of posited a two-way street that would roughly balance out. And so, therefore, the broker in the United States who

provides dollars on the direction from elsewhere money provided

would then turn around and works a deal the other way. But suppose it does not balance out? How do they even up their accounts?

Mr. WINER. Mr. Chairman, if I may on that point. They have ties

to the official banking system. They will have a cash-intense business, whether it is a grocery store or a hotel or a restaurant or a

casino, or whatever, and they will move money through that and

they will reconcile through wire transfers like anybody else with

whatever they need to do pushed into their legitimate business. So

the legitimate funds hide the underground funds when necessary

for reconciliation.

Mr. JAMES. I would also add just for one second, that I have described the most common way that Hawala works, which is two

quasi-independent brokers doing business with one another.

Another way that these underground systems can operate, and

Hawala does at times, Black Market Peso does quite often, is that

the operatives in the United States are actually minions of the

broker in Colombia or Venezuela or wherever. So, in that case, they

do not really need to balance up because it is all operatives of the

same guy. He just has two parallel accounts, one in each country.

The Hawala can also work that way, but usually does not.

Mr. WECHSLER. And the other key element is, the word Hawala

is a Hindi word which means in trust. The people that are involved

in the system have been doing it because their families have been

involved in this for generations. You just cannot show up one day

and say, I am a Hawala broker and I want to join this business.

It does not work like that. It is a more connected network.

56

So unlike we would think in the western sense where you need

to balance the books everyday or every week, unbalanced books

might go on for a while because at the end of the day, you know

that your fifth cousin is good for it. It might be a while before these

kinds of balancing networks that my two colleagues here have described might actually take place.

Chairman SARBANES. Now, I take it that there are people functioning as Hawalas who just do a normal range of legitimate activities. Is that correct?

Mr. JAMES. Yes, sir.

Mr. WECHSLER. There is nothing inherently illegitimate about it.

It has been going on for hundreds of years. I am sure that the

Hawala system, like any other banking system, the predominate

number of people in it use it legitimately.

In some places of the world, it is the only banking system. It unfortunately provides a lot of real advantages for people who are interested in covering dirty money, though, and that is where the

real concern comes in.

Mr. WINER. The State Department for a number of years has

identified underground alternative remittance systems, including

Hawala, which is South Asian-based, the Iron Triangle of Hawala

is Dubai, Pakistan, and India, and the Hundi system, which is an

old Chinese system which is similar, sometimes called chop houses

or flying money houses, as a mechanism by which drug traffickers,

international criminals, and terrorists can launder their money, because the money does not have to cross borders and it can be completely anonymous.

You go in, you put your cash on the table, you pay the broker’s

fee, you arrange for the secret code at the other end in the other

country, you wait until that is paid. When you get the word that

it has been paid, you pay it over to the broker in this country. As

a result, this has been identified as a tremendous vulnerability all

over the world by the State Department going back at least 6, 7,

8 years.

Hong Kong, when it decided it had to create a modern antimoney laundering system, found that it could not enforce any antimoney laundering laws unless it required the registration of every

Hawala broker in Hong Kong. That registration requirement came

into effect last year and it is one of the most important steps that

Hong Kong took.

It is a step the Congress commanded the Administration to take

in 1993, in Annunzio–Wylie, but which has yet to be put into effect

as of today. Once you put it into effect, you can go after people who

do not register and you can work your way up the chain, you can

seize assets, and you can shut down that vulnerability.

Chairman SARBANES. Where does the bin Laden Hawala representative here get his pool of cash to respond to the directive that

this cash should be furnished, let us say, to bin Laden’s operatives

who are here undercover?

Mr. WINER. Remittances from good, honest, honorable people.

Suppose that I am originally from Pakistan, for example, and I

have made a lot of money in the United States working incredibly

hard, 60 hours a day. I have taken care of my family and now I

want to take care of my mother and father who are still back in

57

Pakistan. If I send the money through the formal banking system,

they may have to deal with corrupt officials. They may have to deal

with different types of taxes or other problems. They are not used

to it. They do not have bank accounts.

Mr. WECHSLER. Or it might not exist in their city.

Mr. WINER. They might not even have bank accounts or a bank.

So, you go to the Hawala with your cash and you say, I want it

delivered to such and such city in Pakistan. Can you do that?

The Hawala broker goes to the back room, uses his e-mail system—it used to be faxes. Before that it was phones. Before that it

was mail. Before that it was mules and camels. But today it is email. He e-mails a person in that city. He says, yes, we have money

in that city. I can do it. He then arranges for it. Now the currency

is in the United States and the mother and the father have gotten

their remittances to take care of them.

Honest people at that point doing honest transactions, but it is

totally anonymous. That anonymous money is now available to be

used when an agent of bin Laden goes to that Pakistani or Dubai

broker or anywhere else where the system is in place and says,

here is $100,000. I want this $100,000, or the equivalent thereof,

to be made available to a fellow in Vera Beach who is going to use

the password pilot. The person in Vera Beach uses the password

pilot and now has currency, the same currency provided by good

people for good purposes to take care of their parents.

Mr. JAMES. Actually—— Chairman SARBANES. What does Hawala—excuse me. Go ahead.

Mr. JAMES. Well, I was just going to add to that that he probably

will not even get it in currency. The Hawala broker will arrange

a transfer right to a bank account he already has set up, probably

with a credit card available to it. They can go either way.

Mr. WINER. That is one place where there is minor disagreement

in the currency for terrorists that becomes operational security.

And so, they can provide that currency both ways. In the case of

remittances, currency often is preferred. That is one of the differences between the black market in the Americas and the way

Hawala has worked in some of the cases in South Asia.

Chairman SARBANES. What does the Hawala broker here do with

the money that has been given to him by the honest worker, which

was then remitted in the country from which the worker came to

his family, so that we have the transaction?

The Hawala broker here then has presumably cash or a check

from this honest worker. So, he has this money, what does he do

with that money in the interim?

Mr. JAMES. Well, that is part of what Jonathan and I were just

talking about. He can either hold it in cash, put it in a little black

box under his bed, if you will, or he can put it in a financial institution, in an account that he controls.

Chairman SARBANES. He may put it into the financial system.

Mr. JAMES. Oh, yes, sir.

Chairman SARBANES. Do they generally do that, or do they generally hold it in cash? Do you know?

Mr. WINER. It is a mix, sir. We do not know nearly as much

about the system as we need to. But people in the U.S. Government, particularly at FinCEN, who have spent the most time invesVerDate 11-MAY-2000 08:31 Sep 12, 2002 Jkt 000000 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 SEPT26.XXX SBANK4 PsN: SBANK4
58

tigating this, together with my colleague to my left, Mr. James and

Mr. Passic, people who have really spent a lot of time with this,

have found constant intermingling between the underground alternative remittance economy and the official economy, which is why

they often have other businesses in addition to being Hawalas.

Mr. WECHSLER. We should also not overstate at all, notwithstanding the very good work that a few dedicated people, particularly at FinCEN have done on this, on understanding the system,

should not overstate by any way the knowledge that the Federal

Government has about the extent and the uses of Hawala in the

United States.

In my opinion, as a general matter, U.S. law enforcement has

done a very poor job over the years of understanding this system,

of getting inside the system, of figuring out who uses the system.

And that is something that needs to change quickly.

Mr. WINER. I concur.

Mr. JAMES. I would agree with that. I would add that one of the

gaping holes in our knowledge of how this Hawala system works

is their use of a second international network of gold brokers, buyers and sellers of gold, that also interplay with the Hawala system.

And we do not know exactly how that works.

But we know that they use gold as a hedge and they may also

call up a gold broker in a different country where they do not have

funds, but they have a relationship with a series of gold brokers

and use that to move the money. There are experts at FinCEN who

have information on that, but we have not studied it fully at all.

Mr. WINER. I would like to add one quick comment to that, which

is that there is a brain drain in the Federal Government which

takes place a lot of times because of salaries, benefits, changes in

policy, whatever.

The best expert that I know in the United States Government on

these alternative systems, who used to be with the Financial Enforcement Center, does not work for the Government anymore. I

found out recently that he left around the same time that I left.

And that brain drain problem and the lack of focused, concentrated

effort over an extended period of time and adequate resources further impairs our ability to do good work in this area because when

somebody gets good, they tend to get snapped up at a substantially

higher salary in the private sector. Literally, the best person I

know, Patrick Jost, who was at FinCEN, is now in the private sector. I do not know what capacity exists since his departure.

Chairman SARBANES. We are going to draw to a close, but I

wanted to ask about the chart to my left, your right, Jonathan.

Mr. WINER. Yes, sir.

Chairman SARBANES. I have been looking at the copy. These are

helpful charts, but they are very hard to read, particularly at a distance. That chart which shows the charitable organizations box and

all the different charities that are feeding into it, now how have

you been able to determine that these are front organizations that

are moving money into the bin Laden operation?

Mr. WINER. This chart is not based on classified or secret government information. It is based on the following kinds of sources. It

is based on statements made at trials, in the 1993 bombing trial,

for example, the first World Trade Center attack trial, where a

59

number of these came up, and statements that came out in the

course of investigations. It is based on scandals, such as where people in other governments have been tied to terrorist activity.

For example, in the Philippines, the International Economic Relief Organization ran into a scandal where the minister of tourism

in the Philippines was associated with it while it was supporting

Abu Sahaf, an organization which bin Laden has been supporting,

which was named by President Bush on his list on Monday.

Mr. WECHSLER. Osama bin Laden’s brother-in-law.

Mr. WINER. His brother-in-law was the financier there.

Every one of these represents either a scandal that has emerged,

or very significant allegations, or material that has come out in law

enforcement cases. This was designed to be representative, to provide the flavor of the multifaceted network that is out there. Now

some of these charities that are listed here as front organizations

have been so identified in public records. Other charities are primarily or substantially legitimate enterprises doing good works

whose funds have been diverted, taken advantage of, or used for

terrorist purposes, according to one account or another over time.

The point of showing so many of them, and there are 17 charities

on this chart and there are about as many banks and about as

many industry and service companies, is that dealing with this requires a multinational effort on many sectors simultaneously.

The holes and sieves in our existing money laundering enforcement system are very substantial. And they are particularly substantial in the Middle East, where no country that I know of in the

Middle East has ever brought a money laundering prosecution.

Only a couple of them even have comprehensive money laundering

laws, and none did a few years ago.

The United States has put very heavy pressure, for example, on

Cyprus, as has the European Union, because Cyprus used to be a

major center for terrorist finance. The Cypriots, who want to be in

the European Union, responded by changing all their laws, very aggressively moving to create comprehensive protections.

The next thing that the United States and the United Kingdom

found out, was that Cyprus was being used by Slobadon Milosovich

to move his money. They went back to the Cypriots. The Cypriots

said we have a great system. It is the best system in the world.

We do not have any of that money. But then after that,

Milosovich’s money was no longer in Cyprus. That tends to be the

pattern. We have had the same kinds of sets of initiatives with

Lebanon, with Israel, with the United Arab Emirates, and quite recently, with Nigeria and Egypt. This process has to be accelerated

and it has to be comprehensive. And these countries need to put

transparency in place in their systems. There is a history in these

countries because a lot of the money comes from the top down, of

not wanting necessarily to have really good oversight mechanism

that would allow you to trace assets. This demonstrates why it is

essential that every part of the world begin to have that.

Chairman SARBANES. What about the industry service sectors?

What does that represent?

Mr. WINER. It represents legitimate businesses and front companies both, through which the terrorists associated with bin Laden’s

financed terrorist activities and hid terrorist activities. If you are

60

in the gum arabic business, which are ingredient in most tonics or

sodas and any number of other candies and consumables, that is

a great business to generate legitimate revenues. You can then use

those legitimate revenues to support illicit activity.

Same with the fishery, anchovy business. If you have a construction business, that pretty much speaks for itself. Drug trafficking

organizations have often gone into construction as a way to launder

their money. They did that in Colombia, Venezuela and Panama,

at the height of the reinvestment of drug money in the Americas.

So these are relatively standard mechanisms used to launder

money and to conflate and integrate illicit funds with licit funds.

Chairman SARBANES. Now, Mr. Wechsler, you talked about the

international effort. You were very much involved in helping to put

that together. Ambassador Eizenstat made reference to it. I gather

there has been some significant progress through working through

these international groups and getting countries to upgrade their

regimes. Mr. Winer just made reference to the improvements in

Cyprus as a consequence of the interaction with the European

Union, and so forth. So what is your view of the progress that is

being made in that area?

Mr. WECHSLER. Well, the world took a real turn last year when

it really, as Former Deputy Secretary Eizenstat explained, when

the Financial Action Task Force went after these countries. A lot

of progress has been made. But there are two real questions that

are outstanding.

Chairman SARBANES. Actually, we need to stay abreast of it because, as he pointed out, there was one view that was prevailing

about Switzerland and how they were performing. And now, we

have a very different view prevailing about Switzerland.

Mr. WECHSLER. That is exactly right, sir.

Chairman SARBANES. And I gather, you mentioned Cyprus. But

they have also apparently markedly changed their system.

Mr. WINER. Yes, sir.

Chairman SARBANES. So we need to stay current in terms of who

is trying to come into the community of nations and who remains

outside of it. Would you agree with that observation?

Mr. WECHSLER. I would absolutely agree with that observation.

Two things to look at. The first is, a little over a year ago, the

G–7 finance ministers, when Secretary Summers met with his colleagues, they made explicit threats about what would happen to

these countries that were outside the international standards, if

they stayed outside too long. And explicitly, they threatened to cut

off from, not just the U.S. financial system, but also the entire G– 7 financial system. The last time the finance ministers met, that

threat was toned back to issue stronger advisories warning. And

the deadline was extended, mostly to allow Russia more time to

pass a money laundering law, which they have, although they have

done nothing thus far on implementation of that law. So if I could

suggest, a role for the Congress would be really to stay abreast of

this and make sure that adequate pressure is still being put on.

The second thing is there was a parallel effort to go after tax havens because tax evasion is of course a crime, just like other

crimes. All too often, criminals can disguise their money as just the

proceeds of tax evasion, not the proceeds of other types of crimes.

61

And there are some countries, not the United States, but there are

some countries that treat this as a difference. Switzerland, as you

mentioned, has done very good on money laundering recently, but

still refuses to cooperate on all tax evasion cases. They do not believe it is a crime. This is, unfortunately, one of Treasury Secretary

O’Neill’s first decisions, was to really withdraw in many ways the

United States from the international efforts to combat tax evasion,

and they have really suffered as an effect.

Chairman SARBANES. He has come back into it some.

Mr. WECHSLER. Well, he got the rest of the world to agree to

change it the way that he wanted to change it. And the main way

that he wanted to change it was to take off the table the threat

of sanctions. And if there is no threat of sanctions—some countries

will improve because they do not like bad publicity. But at the end

of the day, there are going to be some countries that will weigh the

costs and benefits and say, it is better for them to take tax evasion

money. If sanctions are off the table, or off the table at least in the

foreseeable future, that is a real problem.

Chairman SARBANES. Let us see how it develops. I know that

Secretary Summers was very intensely interested in this issue and

very willing to take some very strong positions. Obviously, this is

something that we will need to monitor closely.

Well, gentlemen, thank you very much. Sorry.

Mr. WINER. Mr. Chairman, there is one issue which arose earlier

which I would like to have a brief opportunity to address.

Chairman SARBANES. Sure.

Mr. WINER. Which is the issue of due process. I believe it is true

that there is already an established right of review of Treasury

Secretary administrative decisions in this area. So a due process

system is already in place. The key relevant case is a case called

Paradissiotis v. Rubin, 171 Fed. 3rd 983, 1999. This was a challenge to a decision by the Office of Foreign Asset Control at Treasury to freeze an individual’s assets. And this said the review in district and appeals court is appropriate with administrative action.

So for those people who are concerned about that, I think the Federal courts have already answered that question.

I am happy to share that case name and cite with the Committee. Thank you, sir.

Chairman SARBANES. Well, that is helpful and we will certainly

look into that because the due process question is one that we will

have to address or deal with as we formulate this legislation.

Is there anything you gentlemen would like to add?

Mr. JAMES. No, thank you, Mr. Chairman.

Mr. WECHSLER. No, thank you.

Chairman SARBANES. We thank you all very much for coming

and for the contributions you have made.

The hearing stands adjourned.

[Whereupon, at 1:10 p.m., the hearing was adjourned.]

[Prepared statements, response to written questions, and additional material supplied for the record follow:]

62

PREPARED STATEMENT OF SENATOR PAUL S. SARBANES

I want to begin by welcoming Senators Levin, Kerry, and Grassley, as well as

Representatives LaFalce, Leach, and Roukema to our hearing. They along with a

bipartisan group of Members of Congress, including Senator Schumer and Representative Velazquez, have long advocated aggressive legislative initiatives to

counter money laundering.

This morning’s hearing focuses on the Federal Government’s efforts to fight

money laundering—what has been done, and what must be done. Its starting point

is the National Money Laundering Strategy for 2001, mandated by the Money Laundering and Financial Crimes Act of 1998.

We will first hear from our Congressional colleagues. They will be followed by

Jimmy Gurule ́, Under Secretary of Treasury for Enforcement and Michael Chertoff,

Assistant Attorney General for the Criminal Division of the Department of Justice.

Next we will hear from Ambassador Stuart Eizenstat, Former Deputy Secretary of

the Treasury. He will be followed by William Wechsler, Former Clinton Administration National Security Council staff member and Treasury Money Laundering Advisor; Jonathan Winer, Former Deputy Assistant Secretary of State for International

Law Enforcement; and Former Treasury Special Agent Alvin James.

We meet, of course, in the shadow of the terrorist attacks of September 11. It is

more urgent now than ever before for us to develop and put in place the array of

tools necessary to trace and interdict the funds on which terrorists like Osama bin

Laden rely to pay for their operations. Make no mistake—the terrorist campaign

confronting us is not a penny-ante proposition. It cannot be carried out without

major investments of time, planning, training, and practice—and the financial

means to pay the bills. Our response to terrorism must include national and international programs to checkmate terrorism that are as complex and sophisticated as

the practice of terrorism itself.

September 11 has sharpened our focus on the ways that vulnerabilities in regulatory and enforcement procedures in our financial system can be exploited to support terrorism. We have long known, however, the toll that money laundering takes

on world economic activities. The IMF estimates the global volume of laundered

money to be 2 to 5 percent of global GDP annually—that is, between $600 billion

and $1.5 trillion. Money laundering combines the investment banking and payment

system mechanisms of the criminal financial system; it fuels organized crime; it creates the transmission belt for money spirited out of national treasuries in numerous

countries by corrupt officials. It is the terrorists’ source of financial oxygen.

The United States has long taken the initiative in efforts to stop the laundering

of proceeds from crime and corruption, beginning with the passage in 1970 of the

Bank Secrecy Act. That Act requires banks to report suspicious activities and large

currency transactions. But despite the progress we have made, especially during the

last 15 years, money laundering has become more difficult to detect. Globalization,

which eliminates barriers to free capital movement and relies on advanced technology, makes it possible to move money virtually instantly between any two points

on the globe. These changed circumstances have left normal banking practices and

traditionally tolerated offshore banking facilities open to grave abuse.

Recent investigations by Senator Levin’s Permanent Subcommittee on Investigations have revealed that correspondent banking facilities and private banking services offered by U.S. banks can contribute to international money laundering by

impeding financial transparency and hiding foreign client identity and activity. The

Committee’s reports also described how crime syndicates, corrupt foreign dictators,

and narcotics traffickers use these practices and exploit loopholes in current U.S.

law. Thus criminals and terrorists achieve hidden, but direct, access to the U.S. financial system, moving under the radar screen of U.S. law enforcement officials and

financial supervisors.

The Administration has yet to clarify fully its views on money laundering. In the

wake of the September 11 attacks the Administration has asserted the need to track

down the financial circuits that support terrorism, and the President’s Executive

Order of September 24 freezes the assets of 27 groups and individuals. This is certainly a step in the right direction. In the past, however, Administration officials

have expressed skepticism about anti-money laundering laws already on the books,

and about at least some aspects of U.S. involvement in multilateral efforts aimed

at offshore bank secrecy havens.

It is time to cut the financial lifelines which facilitate terrorist operations by reducing the vulnerabilities and closing the loopholes in our financial system. I note

with great interest that within the past week both The Washington Post and The

New York Times have argued forcefully for tougher and broader laws. In an editorial

on Saturday, September 22, The Post urged that current reporting requirements be

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extended beyond banks ‘‘to other types of financial institutions, such as stockbrokers, insurers, and casinos. The reports that allies of last week’s hijackers may

have bought financial options to profit from the carnage underscore the suspicion

that a bank-only focus is too narrow.’’ And 2 days ago The New York Times called

upon the Administration and the Congress to revive ‘‘international efforts begun

during the Clinton Administration to pressure countries . . . to adopt and enforce

stricter rules. These need to be accompanied by strong sanctions against doing business with financial institutions based in these nations.’’ This is the time to move forward decisively, to address a confused and hazy situation that has plagued us for years, and today poses an unprecedented challenge.

I look forward to hearing from our witnesses.

—————

PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY

I recognize that Chairman Sarbanes scheduled a hearing on money laundering

long before the tragic events of September 11. However, since that day, many have

discussed the need to rush money laundering legislation through the Congress to

address ongoing terrorist activities. While addressing money laundering is a very

important matter, I think we need to be very careful as we proceed.

In order to be effective, it is very important that we clearly establish what area

of concern we are trying to address. By definition, money laundering involves the

process by which ‘‘dirty’’ money obtained from criminal activity is funneled through

various conduits until it appears to be ‘‘clean’’ proceeds of legal activities. Targeting

money laundering, therefore, is a means to combat criminal activity such as the

drug trade, illegal gambling, and other forms of organized crime that generate considerable amounts of cash.

In general, it appears that financial gains are very rarely made or are difficult

to discern as a result of terrorist activity. From what we currently know, terrorists

do not routinely employ traditional money laundering methods. The vast proportion

of financing for terrorist activities is provided by networking relatively small

amounts of ‘‘clean’’ money to terrorist cells that use it to achieve their cowardly

ends. Yesterday’s Wall Street Journal pointed this out, noting:

. . . Instead of laundering money from illegitimate enterprises such as drug

trafficking, bin Laden, and other suspected sponsors of terrorism do the opposite: They take money from legitimate businesses and charitable organizations and . . . use it for terrorist activities.

The article very aptly described this kind of financing as ‘‘reverse money laundering.’’

I raise this issue because I want to make sure that recent events do not confuse

our efforts. We must deal with terrorism with the tools best able to combat it; we

must address organized crime with the tools best able to combat it. While in some

cases the same tools may prove effective on both fronts, we need to be able to recognize the wide range of criminal activities and adopt measures that can most effectively defeat them.

I look forward to hearing from today’s witnesses.

—————

PREPARED STATEMENT OF SENATOR TIM JOHNSON

Mr. Chairman, let me begin by commending you for rescheduling this very important hearing so quickly. As we all know, anti-money laundering tactics will play a

critical role in our war against terrorism, and I would like to note for the record

that Senator Sarbanes had the foresight to schedule a hearing on this topic well before the attacks of 2 weeks ago.

Chairman Sarbanes identified early on that our National Money Laundering

Strategy is a critical weapon in our arsenal against terrorists, drug lords, organized

crime syndicates, and others. I am proud to be a Member of this Committee, which

plays a critical role in our Nation’s anti-money laundering efforts. I also would like

to thank President Bush for taking decisive action this week to move forward with

what is at least the first step in a ‘‘silent’’ war on the financial assets of those who

so cowardly attacked America 2 weeks ago.

Over the past 2 weeks, we have all learned the power and strength of a united

front. Americans have come together against a common enemy, and I am confident

that we will prevail in achieving justice. We in Congress are working in a bipartisan

fashion to make sure that our Nation’s law enforcement personnel have the weapons

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they need to win the war on terrorism, whether these weapons are F–16 fighter jets,

computer capability, or access to financial activity that bears further investigation.

I look forward to hearing from today’s witnesses. The President has just released

his National Money Laundering Strategy, which sets out the Administration’s plan

to choke off the lifeblood of terrorists and other groups that use the American and

global financial system to further their destructive ends. Together, we need to determine whether our current laws provide law enforcement with sufficient ammunition

to defeat the enemy.

Of course, even with the best laws, we must work together to promote strong enforcement of these laws. Clearly, our efforts will be much more fruitful if the spirit

of cooperation that has helped Congress respond quickly to our national tragedy

spreads to the law enforcement community.

We must continue to encourage U.S. law enforcement agencies to cooperate in

their anti-money laundering efforts. The Treasury, the FBI, the CIA, and other national, State, and local enforcement agencies can be particularly effective when they

share vital information and work together toward a common goal.

We also need to work with our banking regulatory agencies to review which procedures and examinations required under current law are effective. And we need to

take care that any new legislation provides those agencies with sufficient regulatory

flexibility to respond to constantly changing money laundering strategies. And we

need to pay special attention not just to mainstream financial institutions, but also

to money services businesses (MSB). MSB’s are notoriously difficult to monitor, but

are a critical component of any successful national anti-money laundering strategy.

We also need to call on the financial services sector to continue their cooperation

with law enforcement to root out terrorists and others who abuse our financial institutions. We need to craft laws that banks can implement without undue burden or

intrusion into customer privacy. At the same time, we ask our financial institutions

to be patient and do all they can to help this Nation in its war against terrorism.

Finally, we must encourage international cooperation and information sharing

that allows the freedom-loving global community to shut down financial systems

that support these cowardly acts of terrorism. Cooperation must extend beyond our

borders to be effective.

The Senate Banking Committee has an important opportunity to help wage our

silent war on terrorism, and I am pleased to be part of that.

—————

PREPARED STATEMENT OF SENATOR WAYNE ALLARD

I would like to thank Chairman Sarbanes for holding this hearing. I know that

money laundering has been an important issue to him, and that importance was

brought into sharp focus by the terrorist attack on September 11. Mr. Chairman,

I appreciate the speed and purpose with which you have moved forward.

Money laundering is a significant problem for this Nation. Not only does the financial gain of money laundering provide an incentive for crime, but it is also used

to finance further criminal activity. The recent terrorist attacks are an excellent example of why we must focus on eradicating money laundering. Such an operation

clearly took a great deal of financial backing, and it is doubtful that the terrorists

earned the money through legitimate means. We have to find a way to cut off the

financial fuel for these criminals. As we examine this issue, though, we must not

forget the civil liberties that have made our Nation the greatest nation on earth.

In an effort to combat financial crime we must avoid the temptation to inappropriately infringe on the rights of law abiding citizens.

One example of this is the so-called Know Your Customer regulations proposed

by the four Federal banking regulators under the Clinton Administration. These

regulations would have forced banks to know the identity of all their customers,

know the source of customers’ funds, create a profile of normal and expected transactions for each customer, monitor each account for activity that deviated from the

profile, and report deviations. I believe these regulations went too far, and I led the

effort in this Committee and on the Senate floor to get the Senate on record as

unanimously opposing the regulations. The Know Your Customer regulations were

subsequently withdrawn. Through thoughtful, careful discussions such as this, I believe that we can find the proper balance between fighting money laundering and

respecting civil liberties. I would like to express my willingness to work with my

colleagues and the Administration to find the appropriate balance.

I would also like to commend the Administration for their willingness to examine

the cost and effectiveness of current money laundering strategies. As we consider

possible new legislation it is important that we have a clear understanding of the

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current status. I have been a long time supporter of outcome-based management,

and I am hopeful that this will be an example of those principles.

I would like to thank the witnesses for being here today, especially since this

hearing had to be rescheduled. I know that you all have important points to make,

and I look forward to your testimony.

—————

PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI

Thank you, Mr. Chairman.

First of all, I would like to thank all of our witnesses for appearing before the

Committee today. They all have extensive knowledge dealing with this issue, and

I am sure they will be able to offer us special insights into the hidden world of

money laundering. I would also like to thank our colleagues, Senators Grassley,

Kerry, and Levin who have all done a lot of work to combat this problem, and Congressman LaFalce and Congresswoman Roukema for their efforts in the House.

With the recent attacks against the United States, a new urgency exists in dealing with money laundering. While we already pour heavy resources into anti-money

laundering efforts, our results have not been at the levels we need. Drug cartels,

terrorists, and other types of organized crime continue to prosper through complex

financial networks that elude the law enforcement community. These funds help

provide a foundation for these groups to grow their illegal empires. Until we are

able to effectively reduce the funds these groups receive, we will be unable to curtail

the violence that follows.

Over the past 30 years, since passage of the Bank Secrecy Act, the Congress has

passed a number of good anti-money laundering initiatives. Now, we need to look

to see if these measures go far enough. The Financial Crimes Enforcement Network

has proven to be an efficient coordinator of our efforts, but when over $2 million

of laundered money runs through the U.S. economy each day, it is obvious we have

no where near the law enforcement mechanisms we need to combat these problems.

We must give the people on the front lines of this fight the needed tools with

which to work. We may need to reevaluate where existing funds are being directed

and confirm whether this is the best place for them. We also need to ensure that

the proper communication is taking place between law enforcement agencies. We

will in no way be able to win this fight without everyone working together. These

agencies must have open lines of communication.

I, for instance, was unaware that suspicious activity transaction reporting indicated that shell companies appear to be incorporated and registered disproportionately in Wyoming when compared with most other States. I intend to work with our

State banking officials to see what we can do to minimize any possible illegal activities that could be taking place.

In addition, we cannot place an undue burdens on industry. While we can expect

industry to help monitor banking transactions and assist our law enforcement agencies as an integral front line player, we cannot force them to assume unnecessary

or repetitive requirements.

Again, thank you Mr. Chairman for holding this hearing, and I look forward to

hearing from our witnesses.

—————

PREPARED STATEMENT OF SENATOR JIM BUNNING

I would like to thank you, Mr. Chairman, for holding this very important hearing

and I would like to thank our witnesses for testifying today. You should be commended for your interest in this issue, even before the President’s actions on Monday made this hearing so timely.

Last week, when Secretary O’Neill was before this Committee testifying, we

touched on the subject of money laundering. I am looking forward to hearing what

my colleagues, the Senators from Michigan and Massachusetts have to say in their

testimony. I am looking forward to learning more about their bills.

I am also looking forward to hearing the Administration’s thoughts from Under

Secretary Gurule ́. I want to follow-up with him on what we touched upon last week.

And I want to see what the other distinguished panelists have to say about how

these proposals will affect the financial services industry.

This is not the first time we have attempted to tackle this issue. Though no one

wants to get in the way of stopping terrorists, drug lords, and other criminals, there

has been a lot of fear surrounding the issue. If my colleagues got the mail I did

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in 1999, and I think they did, they know there was a lot of animosity toward some

of the ‘‘know your customer’’ proposals.

We have to ensure that we balance security with privacy and make sure that we

are focusing efforts in the most effective way to combat criminals to choke off their

money supply.

We also have to ensure that banks can actually comply with the laws and regulations that we put upon them, especially small banks. The small bankers in my State

already know their customers. If there is a criminal enterprise washing its money

through a small bank in Kentucky, my bankers will know it and I have faith that

they will report it. But obviously we cannot just rely on the honor system. I guess

what I would like to get out of this hearing is whether we need more legislation,

or we just need to give our regulators the tools to better enforce current legislation.

Unfortunately, because of the despicable actions of September 11, our lives are

going to change. The challenge now is balancing freedom and security. This is a

challenge the Senate is going to continue to wrestle with for the foreseeable future.

We will have to think hard about the implications of this challenge. Every time we

take a vote on these issues, we may be harming one at the expense of the other.

There will not be many easy answers.

Thank you, Mr. Chairman.

—————

PREPARED STATEMENT OF CARL LEVIN

A U.S. SENATOR FROM THE STATE OF MICHIGAN

Thank you, Mr. Chairman, for the opportunity to testify. I am here this morning

to share with you the work of the Permanent Subcommittee on Investigations with

respect to international money laundering. Over the past 3 years we have conducted

an extensive investigation into the use of U.S. banks for money laundering purposes. We have held 3 sets of hearings and produced 2 extensive reports as well as

a 5 volume record on how correspondent banking has been used as a tool for money

laundering. To address the problems we have uncovered, in August I introduced— along with Senator Grassley, Chairman Sarbanes, and Senators Kyl, DeWine, Bill

Nelson, and Durbin—S. 1371, the Money Laundering Abatement Act. This bill has

been referred to this Committee, and I hope to work with the Committee’s Members

to get it enacted into law.

Tightening our money laundering laws will strike a blow against terrorism, because a consensus has emerged that any effective anti-terrorism campaign must

include tracking the money supply that funds terrorism and shutting it down. Disrupting terrorists’ financial networks is vital to ending their ability to carry out

massive terrorist operations like the September 11 tragedy.

Unlike drug and organized crime operations, terrorist acts sometimes do not generate illegal proceeds that have to be laundered. Terrorists use financial networks

to collect funds from both legitimate and illegitimate sources and make them available to carry out terrorist acts. Look at what we know so far about the September

11 terrorists. According to press reports, the 19 terrorists identified by the FBI used

cash, checks, credit cards, and wire transfers involving U.S. banks in States such

as Florida, New York, and Pennsylvania. We have seen the photograph of 2 terrorists using a U.S. bank’s ATM. There are also reports that the 19 terrorists left behind large unpaid credit card bills, in effect using U.S. credit card companies to help

finance the September 11 attack. The fact that these terrorists used U.S. financial

institutions to accomplish their ends does not mean that any U.S. bank or credit

card company did anything wrong; these terrorists may have met every requirement

for credentials and credit histories, false though such information may prove to be.

But the evidence is clear that terrorists are using our own financial institutions

against us, and we need to understand our vulnerabilities and take new measures

to protect ourselves from similar abuses down the road.

One of the vulnerabilities that the Permanent Subcommittee on Investigations

has concentrated on is how correspondent banking is used for money laundering.

Correspondent banking occurs when one bank provides services to another bank to

move funds or carry out other financial transactions. For example, if a bank in London has a client who wants U.S. dollars available to him or her in the United

States, the London bank needs a correspondent relationship with a U.S. bank willing to make those dollars available in the United States. That means the U.S. bank

has to agree to open and manage a correspondent account for the London bank.

We found that U.S. banks often perform an inadequate background review of the

foreign banks seeking to open a correspondent account in the United States. Too

often the U.S. banks assumed—and we heard this verbatim—that a bank is a bank

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is a bank. But that is not the reality. There are good banks and there are bad

banks, and we found numerous situations where U.S. banks held accounts for

foreign banks engaged in criminal activity or operated with such poor banking practices that they provided an open invitation for criminals to bank with them. Criminals can then use these bad banks to gain access to the U.S. banking system

through their U.S. correspondent accounts. We found that current law has many

holes in how it treats money laundering through correspondent accounts. So, I designed my bill to close them and tighten anti-money laundering controls over correspondent banking.

Look at what we have recently learned about the Al Qaeda terrorist organization

headed by bin Laden. Numerous media reports have described the many corporations and businesses that bin Laden has helped establish and finance over the

years. According to a 1996 State Department fact sheet, in 1991, bin Laden helped

establish a bank in the Sudan called the Al Shamal Islamic Bank, allegedly providing it with initial capital of $50 million. An article dated March 16, 2000, in the

Indigo Publication’s Intelligence Newsletter states that bin Laden remains the leading shareholder of the bank.

Testimony provided in February 2001 at the trial concerning the 1998 terrorist

bombings of the U.S. embassies in Kenya and Tanzania described the Shamal

bank’s use by bin Laden and Al Qaeda. One bin Laden associate, Jamal Ahmed alFadl, who had handled financial transactions for Al Qaeda, testified that Al Qaeda

had used a half dozen accounts at the Shamal bank; one account was in the name

of bin Laden. He described a 1994 incident in which the Shamal bank was used by

Al Qaeda to provide al-Fadl $100,000 in US $100 dollar bills which he was directed

to take on a plane to an individual in Jordan, which he did. This testimony shows

that, in 1994, the Shamal bank maintained accounts used by bin Laden and Al

Qaeda and was supplying bin Laden operatives with funds.

Testimony also demonstrated how a U.S. bank was used by bin Laden to send

money from the Shamal bank to a bin Laden associate in Texas using a correspondent account. Essam al Ridi, who worked for bin Laden, testified that he received a $250,000 wire transfer at his bank in Texas that was sent by the Shamal

bank, which he then used to purchase a plane for bin Laden and which he later

delivered himself to bin Laden. Transactions like this one were the focus of our recent investigation into correspondent banking and money laundering, and that is

what I want to focus on this morning—how criminals, including terrorist organizations, can use the correspondent accounts of foreign banks to gain access to the U.S.

financial system. The Shamal bank’s website currently lists an extensive correspondent network including banks in Europe and the United States. I have a

chart that shows some of the correspondent banks listed on the Shamal bank’s website. Three of the banks are U.S. banks—Citibank, American Express, and the

Arab American Bank which was recently acquired by the National Bank of Egypt.

Thankfully all three banks told us that the correspondent accounts they had with

the Shamal bank are either closed or have been largely inactive since 1997 or 1998.

This followed action taken by the U.S. Government in November 1997 to add Sudan

to its official list of countries that support terrorism.

But the Shamal bank’s website also lists as correspondents major banks in other

countries, including Credit Lyonnais in Switzerland, Commerz Bank in Germany,

ING Bank in Indonesia, and Standard Bank in South Africa, each of which also has

correspondent accounts with U.S. banks, and that is a problem.

First, we have to ask how the Shamal bank was able to open its correspondent

accounts in the United States when U.S. banks are supposed to exercise due diligence about their customers; the bank is located in the Sudan, a country known for

lawlessness and weak-to-nonexistent banking regulation and anti-money laundering

controls; and the bank is also known to be associated with bin Laden. Under the

legislation I have sponsored, U.S. banks would have to exercise enhanced due diligence, that means they would have to take an extra hard look at any bank from

the Sudan and could accept a Sudanese bank as a customer only if the U.S. bank

were convinced the Sudanese bank was completely above board and had appropriate

money laundering controls.

Second, we need to look at the current status of the Shamal bank’s correspondent

accounts in other countries. We learned in our Subcommittee investigation that bad

banks can nest in other foreign banks and obtain access to U.S. banks that way.

They can open a correspondent account with a foreign bank that already has a U.S.

correspondent account, and then take advantage of the correspondent chain to access the U.S. financial system. This chart shows how bin Laden could be using the

Shamal bank to gain access to U.S. banks through the banks’ correspondent networks. We talked to four of these correspondent banks in countries other than the

United States, and they indicated to us that they still have Shamal bank corVerDate 11-MAY-2000 08:31 Sep 12, 2002 Jkt 000000 PO 00000 Frm 00071 Fmt 6633 Sfmt 6621 SEPT26.XXX SBANK4 PsN: SBANK4
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respondent accounts that are not frozen. While at least three of these accounts have

reportedly experienced little activity and one was reported to law enforcement a few

weeks ago, all of these accounts are still open and could be used at any time. That

means any customer of the Shamal bank—including a member of bin Laden’s organization—could penetrate the U.S. banking system by going through one of these

other correspondent accounts.

The Shamal bank is, of course, not the only bank of concern. Testimony in the

criminal trial identified several other banks with accounts being used by Al Qaeda.

Press reports indicate that Barclays Bank in London has already closed one suspect

account, and banks in countries as diverse as Switzerland, the United Arab Emirates, Malaysia, and Hong Kong are checking their records for suspicious activity.

Banks in Afghanistan also warrant scrutiny, as indicated by this Bankers Almanac

printout which lists 9 banks with offices in Afghanistan, including two with correspondents in the United States and elsewhere. While the U.S. accounts may,

again, be inactive, given the absence of Afghan banking and anti-money laundering

controls and the elevated status of bin Laden and Al Qaeda in Afghan society, we

need to ask how these banks were able to open correspondent accounts in the first

place and what steps, if any, its correspondents have taken to ensure terrorist funds

were not and are not moving through them.

Another possibility is that bin Laden has set up his own shell banks to handle

terrorist activities. Shell banks are unaffiliated with any other bank and have no

physical presence in any jurisdiction. They are licensed by a handful of jurisdictions

around the world including Nauru, Vanuatu, and Montenegro. This chart shows

how shell banks can be used to gain entry to the U.S. banking system. My Subcommittee’s investigation found shell banks carry the highest money laundering

risks in the banking world because they are inherently unavailable for effective

oversight. There is no office where a bank regulator or law enforcement official can

go to observe bank operations, review documents, or freeze funds. Essentially no one

but the shell bank’s owners know what the bank is up to. Our staff report provides

four detailed case histories of shell banks that opened U.S. correspondent accounts

and used them to move funds related to drug trafficking, bribe money, and financial

fraud money. The possibility that terrorists are using such banks to conduct their

operations is one that cannot be ignored.

Some good news is that more countries than ever before have passed anti-money

laundering laws requiring their financial institutions to know their customers and

report suspicious activity. More countries have empowered law enforcement to

freeze suspect assets. New technologies can scan millions of financial transactions

to link seemingly unrelated transactions and detect suspicious patterns and transactions. Financial intelligence units have been established in over 50 countries with

the authority, technology, and resources to identify and investigate suspicious activity. They have formed the Egmont Group and developed international protocols for

sharing financial information. New groups, like the six country Gulf Cooperation

Council which includes Saudi Arabia and the United Arab Emirates, have joined the

fight to stop criminals from exploiting international financial systems.

These developments have better prepared the world to identify and freeze terrorist assets, trace connections from terrorist cells to those directing their activities,

deny access to terrorist-affiliated businesses and foundations, and provide valuable

evidence of the financing of terrorist acts.

Much more needs to be done. The Administration established a new interagency

task force focused exclusively on rooting out terrorist assets and by expanding the

country’s official list of known terrorists and terrorist-affiliated businesses and foundations. That is a good step. Congress needs to take the next step by strengthening

and modernizing our outdated and inadequate anti-money laundering laws. Here

are a few key areas where change is needed.

First, Congress needs to stop unscrupulous individuals and foreign banks from

gaining entry to the U.S. banking system through U.S. correspondent accounts. As

I said earlier, my bill would require U.S. banks to exercise enhanced due diligence

when opening accounts for offshore banks, banks in jurisdictions with poor antimoney laundering controls, or for foreign persons with $1 million or more in a private bank account and it would outright prohibit U.S. banks from opening

correspondent accounts for foreign shell banks.

Second, Congress needs to eliminate a forfeiture loophole in U.S. law that now

makes its almost impossible for U.S. law enforcement to freeze suspect funds in U.S.

correspondent accounts opened for foreign banks. Under current law, in order for

law enforcement to seize the funds of a criminal with money in a U.S. correspondent

account, the law enforcement agency has to prove that the foreign bank with the

correspondent account was involved in the criminal activity. That is because the

money in the correspondent account is treated as the foreign bank’s money and not

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the money of the foreign bank’s depositors. My bill would change the law to treat

money that is attributable to an individual depositor but held in a U.S. correspondent account as the depositor’s money and make it subject to the same civil

forfeiture rules that apply to depositor’s funds in other U.S. bank accounts.

Third, we need to make it easier for prosecutors to prosecute money laundering

cases. My bill would provide such basic improvements as simpler pleading requirements, clear long-arm jurisdiction over foreign money launderers acting inside the

United States, easier ways to serve legal papers on foreign banks with U.S. accounts, and the assistance of court-appointed Federal receivers to find money laundering assets hidden at home or abroad.

Fourth, we need to make bulk cash smuggling a crime. There is currently no statutory basis for seizing bulk cash from a terrorist transporting it over our borders

or on U.S. roads or common carriers, even though seizing cash from terrorists could

go a long way to disrupting their operations. Legislation introduced by Congresswoman Roukema addresses this issue, and it deserves our support and enactment

into law.

Fifth, we need to increase the number of financial institutions required to report

suspicious activity when they see it, particularly stock brokers. Media reports indicate that terrorists may have used stock trades to profit from the September 11

attack. Suspicious activity reports provide vital leads and evidence for law enforcement, and we are the only G–7 country that does not require all of our brokerage

firms to file them right now. Past Administrations have promised but failed to issue

regulations requiring these reports, in part due to lobbying by financial institutions

that do not want to have to spend the time and resources to fill out the paperwork.

Well, times have changed and shown all too clearly the high cost of not reporting

suspicious activity. The President ought to require these reports by January 1, 2002.

If he does not, Congress should.

Sixth, we need to give the Treasury Secretary greater flexibility to take measures

against foreign banks and foreign countries believed to be involved in money laundering. Right now, we have only two weapons—blocking a bank’s assets or issuing

a voluntary advisory urging U.S. banks not to do business with the suspect country

or institution. We need more tools, such as options for requiring specific know-yourcustomer or reporting requirements, as set out in S. 398 introduced by my friends

Senator Kerry, Senator Grassley, and others.

New anti-money laundering legislation is an essential companion to the Executive

Order issued by the President earlier this week. The Executive Order is an emergency measure; these bills go beyond emergency measures to prevent terrorists and

other criminals from gaining entry to the U.S. banking system in the first place.

U.S. banks would be barred from opening correspondent accounts for shell banks,

and they would be required to do a lot more homework on foreign banks before letting them into the United States. Had our legislation been in place earlier, it is possible the Shamal bank would never have obtained a correspondent account in the

United States.

Finally, let us not forget the need to galvanize the international community to join

us in our efforts to chase down terrorist assets and deny terrorists access to international financial networks. We need to convince other countries to enact the same

anti-money laundering controls we are talking about today.

The conclusion is clear: stronger laws are critical if we are to stop terrorists and

other criminals from benefitting from the safety, soundness, efficiency, and profitability of the U.S. banking system. We must deny terrorists access to our banks,

to our credit cards, to our stock brokers, and to all of the other modem financial

tools we have developed to move money around the world.

I ask unanimous consent to include in the hearing record a letter from the Department of Justice supporting my bill, letters of support from the Drug Enforcement Agency, the Federal Deposit Insurance Corporation, the Attorney Generals for

the States of Michigan, Arizona, and Massachusetts, and other materials relevant

to my testimony.

—————

PREPARED STATEMENT OF JOHN F. KERRY

A U.S. SENATOR FROM THE STATE OF MASSACHUSETTS

Mr. Chairman, I would like to take this opportunity to thank you for holding this

important hearing on efforts to control the scourge of money laundering. I would

also like to take this opportunity to express my appreciation to Senator Charles

Grassley, who has been working with me to enact anti-money laundering legislation

and Senator Carl Levin who, as Chairman of the Senate Governmental Affairs SubVerDate 11-MAY-2000 08:31 Sep 12, 2002 Jkt 000000 PO 00000 Frm 00073 Fmt 6633 Sfmt 6621 SEPT26.XXX SBANK4 PsN: SBANK4
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committee on Investigations, has held a series of important hearings which have

clearly shown the need to update our money laundering laws.

On September 11, the tragic and dastardly attack on the United States could not

have taken place without the movement of the terrorists’ assets through the global

financial system. These terrible events underscore the need for a concerted antiterrorism offensive, both internationally and domestically.

Osama bin Laden’s terrorist network, known as Al Qaeda, which is believed to

be responsible for the attacks on the Pentagon and the World Trade Center, has for

years obtained funding by taking advantage of an open system of international financial transactions. With the help of the Taliban in Afghanistan, the Al Qaeda receives funding through the sale of opium. They have stolen or diverted money intended to assist refugees or religious organizations. They have raised money from

wealthy Islamic donors. Finally, Osama Bin Laden himself has not only a substantial personal fortune but either owns or controls a vast number of businesses and

investments in Saudi Arabia and around the world.

In many cases, the funds that fuel Al Qaeda are moved through an underground

system of brokers built on trust, called Hawala, which allow enormous amounts of

cash to be moved without any paper trail. Obviously, this method of moving money

cannot be controlled by international restrictions. However, the profits that the Al

Qaeda receives from the sale of opium do move through the existing international

financial systems.

Because this terrorist network obtains funding through a variety of sources, we

must develop, in conjunction with our allies, a variety of different initiatives to stop

the flow of funds to the Al Qaeda. The United States is currently administering

sanctions against the Taliban regime for their part in the drug trade. However,

these sanctions have proven inadequate to stop the illegal activities of the Al Qaeda.

If we are to lead the world in the fight against terror, we must ensure that our

own laws are worthy of the difficult task ahead. I strongly support the Bush Administration’s decision to freeze the financial assets of 27 entities associated with terrorism and I support attempts to enhance the use of Federal criminal and civil asset

forfeiture laws. However, if we are to win this war on terrorism, there is more that

we need to do. This work has already begun in the European Union, where just last

week, they approved stronger measures against money laundering.

Today, too many nations—some small, remote islands—have laws that provide for

excessive bank secrecy, anonymous company incorporation, economic citizenship,

and other provisions that directly conflict with well-established international antimoney laundering standards. These nations have become money laundering havens

for international criminal organizations like the Al Qaeda.

The United States and the European Union have made great strides in the fight

against money laundering over the past 12 years. The Financial Action Task Force

(FATF), an intergovernmental body, was established at the urging of the United

States and President George H.W. Bush in 1989 to develop and promote policies to

combat financial crime. The Organization of Economic Cooperation and Development (OECD) began a new crackdown on tax havens by targeting 36 jurisdictions

which it said participate in unfair tax competition and undermine other nations’ tax

bases. The OECD approach does not punish countries just for having low tax rates,

instead, it looks for tax systems that have a lack of transparency, a lack of effective

exchange of information, and those countries that have different tax rules for foreign customers than for its own citizens. The United States and the European

Union have been working together to force jurisdictions that fall short of international standards to update and improve their anti-money laundering laws and to

lift the veil of secrecy around tax havens by threatening to limit their access to our

financial systems.

Today, the FATF reports that 19 jurisdictions—including Lebanon, Hungary, Nigeria, Russia, and the Philippines—have failed to take adequate measures to combat international money laundering. Since a report naming many of these countries

was released last year, many of these countries have already begun to update their

anti-money laundering laws.

However, I am concerned that the money laundering strategy recently released

by the Bush Administration begins to step away from the bilateral efforts that have

proven successful in fighting financial crime and contradict the tough stance rightly

taken by President George W. Bush in his recent Executive Order. The new strategy, combined with efforts previously announced by Treasury Secretary O’Neill related to tax havens, seems to support a more unilateral approach toward fighting

financial crimes instead of the successful multilateral approach adopted by the

OECD and the FATF. I believe this will make it more difficult to track and freeze

the assets of international terrorists like bin Laden and expand upon the recent

progress we have achieved. I also believe that this is the wrong time to pull back

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our efforts to stop money laundering into the United States by increasing the

amounts necessary to require a Suspicious Activity Report issued by a financial institution.

It is now time for the United States to do its part to stop international money

laundering and stop international criminals from laundering the proceeds of their

crimes into the U.S. financial system.

First, I believe the Bush Administration should call an emergency meeting of the

G–7 nations and the Financial Action Task Force to implement a more vigorous

international strategy to cut off the blood money that these international criminal

networks use.

Second, the United States should immediately peruse bilateral and multilateral

sanctions against any country that has, through neglect or design, permitted its financial systems to be used by bin Laden or other terrorist groups.

Third, the Congress should pass the International Counter-Money Laundering

and Foreign Anti-Corruption Act of 2001, which I introduced along with Senators

Grassley, Sarbanes, Levin, and Rockefeller. During the 106th Congress, the House

Banking Committee passed this bill with a bipartisan 33–1 vote. The bill will give

the Secretary of the Treasury the tools necessary to crack down on international

money laundering havens and protect the integrity of the U.S. financial system. The

bill provides for actions that will be graduated, discretionary, and targeted, in order

to focus actions on international transactions involving criminal proceeds, while allowing legitimate international commerce to continue to flow unimpeded.

I believe that the Congress should enact this legislation this year to help stop the

flow of assets and money that fund bin Laden and other terrorist groups. I look forward to working with the Members of this Committee on this important issue.

Thank you.

—————

PREPARED STATEMENT OF CHARLES E. GRASSLEY

A U.S. SENATOR FROM THE STATE OF IOWA

Mr. Chairman, I join my colleagues in thanking you for holding this important

hearing and the opportunity you have afforded us of talking on the matter. As you

know, because of my work on trying to stop international drug trafficking, I have

worked for many years on going after their money. Money is one of the most critical

elements in going after the drug thugs. I have joined with Senator Levin and Senator Kerry in sponsoring legislation that is timely and necessary. Our focus needs

to be not only on the specific assets of terrorists, but also, on identifying their methods and eliminating their sources of funding.

After the events 2 weeks ago, we now face another group of thugs that rely on

being able to launder illegal proceeds to pay for their activities. For them, money,

access to it, and to the mechanisms for placing it in the legitimate economy are the

equivalent of their war industries. To strike at them, we must strike at their ability

to wage war against us. That reality has added increased importance to what we

are here today to talk about. Two weeks ago, passing the bills before the Committee

today was, in my view, important. Today, passing them is imperative.

Let me add that these bills are not new. The elements in them have received careful consideration over the last several years. They are not full of hastily assembled

items. They contain needed changes and add important tools to our arsenal. In the

days and weeks ahead we are going to have to examine further things we need to

do. I hope that we do that wisely. I trust that we will pay attention to ensuring

that we preserve important liberties while denying our enemies the means to hurt

us further. We also need to work with the banking and the financial services industry to ensure that we act smart, as well as quickly down the road. That they are

on board with what we need to do. This is not a burden that government, here or

elsewhere, can carry alone. We need to combine all our strengths and capabilities.

But circumstances demand meaningful action now, and these bills give use important tools for our tool kit.

—————

PREPARED STATEMENT OF JOHN J. LAFALCE

A U.S. REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK

The campaign to prevent future terrorist acts against our Nation will not be successful unless we cut off the funds that fuel terrorism. The horrendous attacks of

September 11 could not have taken place without the movement of the terrorists’

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assets through the global financial system. The events of last week underscore the

need for a concerted anti-money laundering offensive, both internationally and domestically. The hearing that the Senate Banking Committee is holding today would

be important, if the tragic events of September 11 had never occurred. But, our National crisis brings a new sense of urgency to Congress’ consideration of money laundering issues and the National Money Laundering Strategy.

I have been for many years concerned that our counter-money laundering laws

are not sufficiently nimble to permit the United States law enforcement community

to respond to the malicious inventiveness of a fast-moving and remarkably adaptable class of criminals and murderous terrorists. I believe that our laws need to be

changed to provide more flexibility for the law enforcement community, including

the Treasury, to combat money laundering, and provide meaningful criminal penalties for all significant money laundering violations.

Before I turn to a discussion of the Administration’s new money laundering strategy and new legislation, I want to say that I am encouraged by the actions that

the Administration has taken to trace the ‘‘financial finger prints’’ of bin Laden, his

Al Qaeda terrorist network, and the entities that support them.

First, the Department of the Treasury announced the creation of an interagency

team dedicated to the disruption of terrorist fund raising and the proposed creation

of a Foreign Terrorist Asset Tracking Center within the Treasury. Second, on Monday, the President issued an Executive Order that identified international terrorist

groups, individuals, and their operatives connected to the attack and froze the assets of these groups in the United States. The order expands on a previous order

of President Clinton’s. The new order identifies three charities and one business

which supply financial support to bin Laden and Al Qaeda. It also permits the Secretary of the Treasury to block any noncooperating foreign financial institution from

doing business with U.S. financial institutions and other U.S. firms. This will help

the U.S. Government uproot the financial underpinnings of a network that would

seek to do grave harm to the United States and its citizens. The Bush Administration appears to be off to a very sound start in its efforts to cut off bin Laden from

his funds.

The National Money Laundering Strategy was developed before the September 11

attack, and I believe that parts of it should be reevaluated in light of those tragic

events and what our intelligence and law enforcement agencies have learned about

the funding of the attack.

While the Strategy sets out strong enforcement goals, including calling for more

vigorous enforcement of asset forfeiture statutes in connection with money laundering offenses, the focus of some of the regulatory goals in the Strategy seems

somewhat inconsistent with the strong world leadership position that the United

States has taken over the past decade in raising international money laundering

standards. I am particularly concerned that the Strategy calls for a cost benefit

analysis of compliance with the Bank Secrecy Act and a survey of financial institutions for the purposes of possibly expanding the types of currency transactions that

are exempt from current Bank Secrecy Act reporting requirements.

I am concerned these activities could result in a relaxation of current BSA reporting requirements and raise questions about our own resolve in the fight against

international money laundering. I want to work cooperatively with the Administration to develop a new strategy that addresses the concerns that I have raised.

There are indications that the Administration has begun to rethink the Strategy.

I was pleased that Under Secretary Gurule ́ announced that Treasury has scrapped

its plan to delay implementation of regulations requiring money service businesses

(for example, money transmitters) to register with the Treasury and to file suspicious activity reports with the Treasury. I believe that these regulations will over

time give our law enforcement and intelligence agency important investigative and

prosecutorial tools that are needed to control the Halawa system of international

money exchange. Many believe the Halawa system to be one of primary channels

for the global funding of terrorist activities, including the activities of Al Qaeda.

If we are to lead the worldwide effort to cut off bin Laden and other terrorist

groups from the funds needed to carry out their deadly missions, we must ensure

that our own laws are adequate for the difficult task at hand. Several Members in

the House and Senate have introduced money laundering legislation that deserve

serious consideration not only as a part of our response to acts of terrorism, but also

as a part of our overall money laundering strategy.

I, along with Senator Kerry, have introduced legislation that strengthens the arsenal of the Government in the fight against money laundering. Senator Sarbanes,

Senator Levin, Senator Grassley, and other Senate colleagues are cosponsors of the

legislation. Our bill, the International Counter-Money Laundering Act of 2001, provides the Treasury Secretary with the authority and discretion to address a specific

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money laundering problem with precision—which cannot be done under current law.

This legislation would give the United States increased leverage in dealing with foreign jurisdictions and foreign financial institutions that aid drug kingpins, money

launderers, and terrorists.

The existing laws against bulk cash smuggling are inadequate. Currently, the

couriers of illicit cash are subject to only minimal jail sentences for failing to file

currency reports. I am an original cosponsor of legislation that will make smuggling

currency for unlawful purposes a serious criminal offense under Federal law.

Given the events of September 11, I believe that the Administration will want to

move quickly to acquire the necessary legislative authority to combat international

terrorism and international money laundering. I look forward to working cooperatively with the Administration in the development of sound and effective anti-money

laundering legislation.

—————

PREPARED STATEMENT OF JAMES A. LEACH

A U.S. REPRESENTATIVE IN CONGRESS FROM THE STATE OF IOWA

As you know, a money laundering bill was considered by the House Banking Committee during the last Congress. The approach taken in that bill was one where,

with Mr. LaFalce, I put forth an initial model and requested the Treasury and Justice Departments to review the legislation’s content. We proceeded to mark-up using

the revised comments of the Administration as base text and the legislation passed

with broad Committee support.

Law enforcement was in strong support of the legislation but parts of the financial

community objected to the degree of regulatory intrusion. ‘‘Following the money’’ is

an effective law enforcement tool to track criminals after a crime has been committed. It also serves as a retardant to the capacities of wrongdoers to collect and

distribute resources while preparing for a crime. While there is a case that individual and institutional freedoms are fractionally restrained by recordkeeping measures of this nature, there is always a pendulum that swings in our society between

freedom and order. When order is challenged, it is sometimes necessary to prudently

restrain some freedom of action.

Enforcement of money laundering laws to diminish threats of terrorism and

narcotrafficking would seem a relatively modest inconvenience relative to the

human costs wreaked on society by international thugs.

To give a free ride to money launderers not only makes justice more difficult to

obtain, but it also denies a credible approach to address one of the causes of terrorism: the decadence and corruption that exists in certain parts of the world where

extreme inequities in wealth accentuate social divisions. While money laundering

may not in itself seem like a great crime, the underlying manner in which resources

are marshaled can threaten international order and the freedoms that order is

meant to protect.

Particularly in circumstances where civilized values are challenged by terrorist

acts, the U.S. Government has an obligation to question the access given to our financial system by outlaw entities and make it very clear that funds from abroad

and possibly fundraising at home that supports terrorism, or for that matter

narcotrafficking or government corruption, ought to be monitored and, where legally

appropriate, confiscated.

In the last Congress, some large banks had an understandable angst about the

regulatory burdens related to the recordkeeping necessary to implement money

laundering statutes. Ironically, the people that opposed this approach the most yesterday, need protection the most today. The two American institutions most vulnerable to terrorism around the world are our diplomatic and financial outposts. For

banks to refuse to join the war on terrorism and narcotrafficking is not only to

weaken the fabric of civilized society, but also it is to put in jeopardy the lives of

people who are most symbolically intertwined with democratic, market-oriented values that are globalist in nature.

Finally, I would be remise not to point out that in the last Congress the House

Banking Committee passed out a second bill which I initiated that also did not become law, one that restrains Internet gambling. The issue of gambling and money

laundering are interrelated—albeit, tangentially—because Internet gambling not

only weakens our economy, but also serves as a haven for money laundering activities. I would hope that the Senate and House Committees of jurisdiction would take

renewed interest in both of these bills this year.

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PREPARED STATEMENT OF MARGE ROUKEMA

A U.S. REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JERSEY

Mr. Chairman, thank you for allowing me the opportunity to testify before this

Committee this morning. I deeply appreciate the courtesy.

Mr. Chairman, for years I have been deeply concerned that we have not done

enough to dry up the lifeblood of the illegal drug trade—free flowing cash. Now as

our Nation struggles to recover from the vicious and unprovoked attack on our

homeland on September 11, our focus has expanded to include terrorism. As our investigators work to ‘‘follow the money’’ to trace financial transactions back to their

source it is becoming more and more clear that free flowing cash is also critically

important to terrorists as they plan, organize, and execute their murderous plots.

Over the years, I have been a strong advocate of better enforcement and stronger

laws that will provide law enforcement the tools needed to fight drug dealers, money

launders, and terrorists. In the wake of last week’s terrorist attacks, this has never

been more important.

In the 106th Congress, I worked closely with the Department of Justice and Congressman Bill McCollum who was then a Member of the House Judiciary Committee

to craft a comprehensive money laundering proposal to address many of the problems our law enforcement officials currently face. It is my understanding that much

of that draft will be included in the legislation that the Administration will soon

send to Congress for its immediate attention.

While I strongly support passage of comprehensive money laundering strategy

and will continue to work with this Administration to that end. Today, I am here

to discuss legislation that I introduced on September 20, H.R. 2922, the Bulk Cash

Smuggling Act of 2001. This bill is similar to ones I introduced in both the 105th

and 106th Congresses and is strongly supported by the Department of Justice. This

legislation takes aim at criminal activities that support terrorists and drug dealers

by making currency smuggling a criminal offense.

The transport of large sums of cash in, out, and through the United States is a

major problem which is growing everyday. We call this bulk cash smuggling. As the

Federal banking regulators and law enforcement officials have made money laundering through insured depository institutions more difficult, money launderers

have apparently resorted to the smuggling of large amounts of U.S. cash and currency over the border. It has been reported that over $30 billion a year is smuggled

in, out, and through the United States each year by drug dealers, organized crime,

and terrorist organizations. This money moves by planes, trains, automobiles, ships,

and even by mail.

My colleagues should note that law enforcement authorities suspect that one tactic used by terrorist organizations to avoid having their funds detected in the international financial system is to move cash by courier or though bulk shipments. This

may explain how so many of the individuals involved in the September 11 attacks

were able to live and train in our country for extended periods of time while leaving

few identifiable footprints in the banking system.

The existing laws governing bulk cash smuggling are totally inadequate. Presently, the only law enforcement weapon against bulk cash smuggling is Section 5316

of Title 31, U.S. Code. This statute makes it an offense to transport more than

$10,000 in currency or monetary instruments into, or out of, the United States without filing a form with the U.S. Customs Service. Section 5316 has been rendered

largely ineffective as a law enforcement tool by a 1998 Supreme Court decision,

United States v. Bajakajian, in which the Court held that violations of Section 5316

constitute mere reporting violations, and do not warrant the confiscation of bulk

cash—even if the smuggler has taken elaborate steps to conceal the money from

Customs inspectors.

H.R. 2922 will give law enforcement authorities a critical tool in disrupting the

channels used by terrorists to finance their activities in the United States. The bill

would make it a Federal crime to smuggle cash or currency in excess of $10,000 into

or out of the United States. Violations of the law could result in the forfeiture of

the terrorists’ cash or currency as well as up to 5 years in prison—an individual

would be provided the opportunity to show that the money came from a legitimate

source in which case there may be little or no forfeiture whatsoever.

Interstate currency couriers are part of the problem. One of the bill’s key provisions would make it a crime to transport more than $10,000 in criminal proceeds

in interstate commerce, thereby making it more difficult for terrorists to move cash

within the United States once they have succeeded in getting it into the country.

This measure takes on particular relevance in light of press reports that suspected

bin Laden operatives taken into custody since the September 11 attacks have been

found with large sums of cash in their possession. By making bulk cash smuggling

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a crime—whether it is conducted within the United States or across our borders—

we will give law enforcement an effective weapon for separating the terrorists from

the funds they need to support their operations in this country.

As Chairwoman of the Financial Institutions Subcommittee in the last Congress,

I presided over numerous hearings on the Government’s anti-money laundering

enforcement efforts, including a field hearing in Newark in May of last year that

focused particular attention on the bulk cash smuggling problem. Time and again

in those hearings, I heard from Federal and State law enforcement agents and prosecutors that the biggest loophole in the current statutory scheme for combating

money laundering is the one that allows criminal organizations to transport the proceeds of their illegal activities without fear of meaningful criminal sanctions.

For this reason, I was very pleased that several weeks before the horrific events

of September 11, Attorney General Ashcroft gave a speech in which he identified

the criminalization of bulk cash smuggling as one of the Administration’s highest

legislative priorities in combating money laundering.

Law enforcement officials have said for years that cutting off the money is one

of the most effective ways of combating organized crime. Seizing bulk cash shipments will deprive terrorists of at least some of the resources they need to carry

out their hideous acts. Choking off the financial lifeblood of terrorists will of course

take more than any one specific legislative proposal or law enforcement initiative.

It will require a comprehensive approach.

Now I have heard some naysayers complain that some of the provisions in my legislation may cast a net so wide as to ensnarl innocent Americans. The question has

been asked, ‘‘what about the innocent American who happens to be legally transporting large sums of cash or is discovered carrying his lifesaving around in the

trunk of his car?’’

My answer is simple—each and every day our dedicated and alert law enforcement officials encounter situations that require their careful investigation. Let us

give them the tools they need to conduct those investigations and protect Americans

from terrorists and drug dealers.

We need comprehensive reforms to our money laundering laws, and I wholeheartedly support the Administration’s efforts to enact those reforms. The provisions

included in H.R. 2922 are only part of the solution, but they represent straight forward common sense reforms of our money laundering laws that we can enact right

now. For the record, I am attaching a copy of my legislation—H.R. 2922—and a section by section outlining the provisions of the bill. In addition I would be happy to

provide the Committee and individual Senators with the Bulk Cash Hearing transcript from my May 2000 hearing at which the Department of Justice, Treasury,

and the Customs Department testified in favor of this legislation.

Again, thank you for giving me the opportunity to testify before this Committee

and I look forward to working with my colleagues on both sides of the Capitol to

see to it that this important legislation gets signed into law before we leave here

this year.

—————

PREPARED STATEMENT OF JIMMY GURULE ́

UNDER SECRETARY FOR ENFORCEMENT, U.S. DEPARTMENT OF THE TREASURY

SEPTEMBER 26, 2001

Chairman Sarbanes, Senator Gramm, and distinguished Members of the Committee, I appreciate the opportunity to share with you the Treasury Department’s

ongoing commitment to the fight against money laundering. I appear before you

today more convinced than ever of the importance and necessity of a comprehensive

money laundering strategy. I know you feel the same way and I look forward to

sharing with you some of the key aspects of President Bush’s plan to combat domestic and international money laundering.

Let me begin by saying that criminal acts of violence, such as the horrific terrorist

attacks of September 11, need more than just cunning leadership and dedicated followers to be successful. Such undertakings also require extensive financial funding

as well. Let me be clear—the Treasury Department is committed to identifying the

sources of funding used to underwrite attacks of this nature and we will take whatever action is necessary to shut them down. Although the complexities of money

laundering have long been associated with concealing the true nature of proceeds

generated from the drug cartels, the tragedies of September 11 also underscore the

need for aggressive and vigilant anti-money laundering efforts which target the

movement of funds into this country for the purpose of criminal activity—especially

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funds earmarked for terror. In response to this need, the implementation of the

2001 Money Laundering Strategy includes several specific steps to dismantle and

disrupt the financing of terrorist activities.

Recent Steps

As Secretary O’Neill has stated publicly, the Treasury Department’s top priority

is to dismantle the financial infrastructure of the terrorist groups in question. To

that end, we will deploy all of our resources to trace and block the funds of those

who engage in these heinous acts of murder, as well as those who harbor them and

fund them. Two days ago, President Bush signed a new Executive Order under the

International Emergency Economic Powers Act (IEEPA) blocking the assets of, and

transactions with, terrorist organizations and certain charitable, humanitarian, and

business organizations that finance or support terrorism. To fulfill President Bush’s pledge to eliminate safe havens for those who perpetrate acts of terror, we will use

every tool at our disposal to pursue and eliminate terrorist fundraising networks.

International Cooperation

Because terrorism is global in nature, international cooperation must be an essential component of any enforcement strategy if it is to be successful. The Treasury

Department has already taken steps to capitalize on the spirit of international cooperation and is in the process of working diligently with our counterparts abroad

to ensure that accounts under their jurisdiction linked to terrorist organizations will

be frozen.

Foreign Terrorist Asset Tracking Center

Another important step that Treasury has taken in light of the September 11 attacks, was to get our new interagency team, the Foreign Terrorist Asset Tracking

Center (FTAT) up and running. FTAT is dedicated to identifying the financial infrastructure of terrorist organizations worldwide and to curtail their ability to move

money through the international banking system. FTAT represents a preventative,

proactive, and strategic approach to using financial data to target and curb terrorist

financing worldwide. This team will ultimately be transformed into a permanent

Foreign Terrorist Asset Tracking Center in the Treasury Department’s Office of Foreign Asset Control (OFAC). This is an extraordinary effort that really illustrates the

Treasury Department’s creativity in developing new ways to combat terrorism.

In addition, agents and analysts from Treasury’s law enforcement bureaus—the

U.S. Customs Service, U.S. Secret Service, Internal Revenue Service—Criminal Investigation, and Financial Crimes Enforcement Network, as well as analysts from

the intelligence community will be coordinating efforts, and Treasury law enforcement bureaus will continue to coordinate closely with the Department of Justice and

Federal Bureau of Investigation on these matters.

These efforts will act in concert with the 2001 National Money Laundering Strategy, which calls for unprecedented levels of intraagency, interagency, and international coordination and cooperation to combat money laundering and related

financial crime. With respect to the Strategy, I want to take a few minutes to outline for the Committee some of the key components of the Administration’s plan.

The 2001 Money Laundering Strategy

The 2001 National Money Laundering Strategy represents the combined input

and approval of more than 20 Federal agencies, bureaus, and offices. It is a comprehensive plan designed to disrupt and to dismantle major money laundering

enterprises and prosecute the professional money launderers through aggressive enforcement, measured accountability, preventative efforts, and enhanced intraagency,

interagency, and international coordination. By major enterprise, I mean complex,

large-scale, large-volume, transnational money laundering schemes perpetrated by

professional money launderers. Our policy should focus and will focus on pursuing

terrorist funds and these kinds of high-impact and high-profile investigations.

Aggressive Enforcement

The first goal of the 2001 Strategy is to focus law enforcement’s efforts on the

prosecution of major money laundering systems and terrorist groups moving funds

into this country for the sole purpose of conducting criminal activity and wreaking

havoc in our society. We recognize that we must concentrate our resources in highrisk areas and target major money laundering organizations. To focus our limited

Federal resources, the Strategy calls for the organization, supervision, and training

of specialized money laundering task forces located in High Risk Money Laundering

and Related Financial Crimes Areas (HIFCA’s). In a departure from precedent, the

HIFCA’s will function primarily in an operational capacity. They will be tasked with

coordinating the law enforcement and regulatory assets against corrupt entities enVerDate 11-MAY-2000 08:31 Sep 12, 2002 Jkt 000000 PO 00000 Frm 00080 Fmt 6633 Sfmt 6621 SEPT26.XXX SBANK4 PsN: SBANK4
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gaging in money laundering activities. I am hopeful that the two newest HIFCA’s,

Chicago and San Francisco, as well as the existing Los Angeles HIFCA, can complement ongoing enforcement efforts to infiltrate and isolate the terrorist financial

networks. HIFCA Task Forces will be jointly supervised by the Departments of

Treasury and Justice and will be composed of all relevant Federal, State, and local

agencies, and will serve as the model of our anti-money laundering efforts.

One aspect of the 2001 Strategy that I am particularly proud of is establishment

of an advanced money laundering training program. I believe that such a program

is imperative to providing our agents and inspectors with the proper investigative

tools to combat the complex and ever-changing money laundering schemes of the

criminals. The Federal Law Enforcement Training Center (FLETC) and the Department of Justice’s Asset Forfeiture and Money Laundering Section will be spearheading this effort to train our teams to investigate sophisticated money laundering

schemes.

An aggressive anti-money laundering attack requires that law enforcement utilize

all available statutory authorities to dismantle large-scale criminal enterprises. The

2001 Strategy mandates an emphasis on Federal asset forfeiture laws in conjunction

with money laundering investigations and prosecutions to strip criminals of their illgotten gains and dismantle criminal organizations by attacking their financial base.

We will also continue our ongoing efforts to uncover the sophisticated schemes devised by professional criminal enterprises and seek to disrupt the financial operations of these illicit organizations. For example, we will continue to partner with

the private sector and our international colleagues to combat the Black Market Peso

Exchange, the largest trade-based money laundering system in the Western Hemisphere. I would especially like to note the contributions that the governments of

Colombia, Venezuela, Panama, and Aruba have made to this effort.

Measured Accountability

Another concept unique to this year’s Strategy is the idea of ‘‘measured accountability.’’ To raise our standards of performance, we must measure the effectiveness

of our efforts. For too long, Federal law enforcement has not been subject to accountability through measured evaluation. Secretary Paul H. O’Neill, in particular, is

dedicated to changing business as usual. Therefore, we will seek to create and implement a uniform system that measures the Government’s anti-money laundering

results. Emphasis will be placed on measured results, rather than the level of law

enforcement activity.

We will establish a system to collect reliable information that will provide law enforcement with an accurate picture of its anti-money laundering programs. Once we

institutionalize these databases, we can begin to meaningfully evaluate the success

of our approaches. Our measurement methods will include an examination of:

• quantitative factors, such as the number of money laundering investigations, prosecutions, and convictions, which will provide a numerical snapshot of our efforts

from year to year; • qualitative factors—each investigation, prosecution, or conviction will be assigned

a weighted value to mirror the case’s complexity, importance, and scope of impact; • forfeiture and seizure data related to money laundering activity that will represent a monetary value of our efforts; and • the criminal marketplace price of laundering money that will help determine

whether our anti-money laundering efforts are making it more expensive and

more difficult for criminals to launder their illicit proceeds.

We will ensure accountability and raise our standards of performance, expectation, and success. Measured evaluation will identify money laundering ‘‘hot spots,’’ indicate areas where law enforcement must enhance or prioritize its investigations

and prosecutions, and allow law enforcement to articulate measurable goals.

Preventative Efforts

A comprehensive money laundering strategy must also include an effective regulatory regime that denies money launderers easy access to the financial sector. The

2001 Strategy continues previous efforts to expand and implement proposed suspicious activity reporting requirements to financial institutions that are particularly

vulnerable to money laundering activity. We will also seek to establish a true partnership with the private sector to create a vigorous anti-money laundering regime

and to eliminate vulnerabilities that money launderers seek to exploit. Treasury will

encourage the private sector to develop and implement a rigorous set of ‘‘best practices and procedures,’’ thus enabling the industry to aid in the protection of the integrity of the U.S. financial system.

Our principal focus will be to ensure that law enforcement fully utilizes reported

information. To this end, law enforcement must seek to receive only those reports

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that have law enforcement value. In 2000, the Financial Crimes Enforcement Network (FinCEN) received and processed 12,000,000 Currency Transaction Reports

(CTR’s), 30 percent of which had no meaningful law enforcement value and would

not have been filed if existing reporting exemptions had been used. The 2001 Strategy calls on law enforcement to work with the private sector to ensure fuller use

of the regulatory reporting exemptions and seeks to expand the exemptions to other

low-risk transactions, if appropriate.

Effective utilization also requires that law enforcement evaluate the usefulness of

reported currency transactions. The Strategy will require law enforcement agencies

that use CTR or Suspicious Activity Report (SAR) information to provide operational

feedback to FinCEN. In turn, FinCEN will use the feedback to evaluate or change

its database programs to fit the needs of law enforcement.

We will also continue our work to ‘‘level the playing field’’ between banks and

nonbank financial institutions. Currently, only those institutions that come under

the jurisdiction of the Federal bank supervisory agencies are required to file SAR’s.

I am in the process of working with my staff and the relevant FinCEN personnel

to reevaluate the proposed dates regarding the implementation of the SAR requirements on money services businesses (MSB’s). It is the position of the Treasury Department that in light of the horrific events of September 11 that these regulations

need to be put into place as soon as prudently possible. We cannot afford to permit

terrorists the luxury of moving funds through any avenue of our financial system

undetected.

Enhanced Coordination

Last and perhaps most importantly, 2001 Strategy stresses the importance of Federal, State, local, and international coordination by creating structured, interagency,

operational task forces that provide supervision and accountability. In addition,

there will be new cooperation-based incentives.

As I mentioned earlier, the HIFCA Task Forces will be the driving force that

unites Federal, State, and local law enforcement agencies. To ensure coordination,

HIFCA Task Forces will prepare a detailed action plan and regularly brief Treasury

and Justice officials on the progress of major money laundering investigations as

well as the involvement of State and local law enforcement agencies in the HIFCA’s.

Similarly, the Department of the Treasury will conduct evaluations of existing Financial Crime-Free Communities Support Program (C–FIC) grant recipients to ensure local officials are including HIFCA Task Forces in their efforts. Further, the

Strategy strongly encourages U.S. attorneys in each judicial district to create SAR

Review Teams, which will incorporate State and local officials whenever possible.

Money laundering is a problem of global dimensions that requires concerted and

cooperative action on the part of a broad range of institutions. At the international

level, the Strategy seeks to remove all barriers that inhibit international cooperation. Appropriate officials from the Departments of State, Justice, and Treasury will

review key existing extradition and mutual legal assistance treaties and recommend

that coverage of money laundering offenses be considered an important objective in

assessing future treaty negotiations. The Strategy will mandate increased use of the

international asset-sharing program, which will provide incentive for international

cooperation.

Our participation within the Financial Action Task Force (FATF) also provides a

unique opportunity for us to work internationally with other member countries to

require that countries in good standing with FATF have rules or regulations in

place to address the issue of terrorist fundraising within their borders. The United

States will push for FATF to take action to address these new issues of concern.

Because money laundering has the potential to increase risks to the global financial system, Treasury and the other G–7 nations have worked extensively with the

International Financial Institutions (IFI’s), and, as a result, the IFI’s have agreed

to take on an enhanced role in the global fight against money laundering. The

United States will coordinate with G–7 and FATF members to ensure that the IMF

and World Bank incorporate the Forty Recommendations into their operational

work and promote the Forty Recommendations as the international standard for

combating money laundering consistent with the mission and responsibilities of the

IFI’s. The United States, its G–7 partners, and other FATF members are urging the

IFI’s to institute a separate Report on Observance of Standards and Codes (ROSC)

module on money laundering. Such a module would provide a comprehensive and

articulated assessment of the status and performance of a country’s anti-money

laundering regime, and we anticipate having the IFI’s full cooperation in this effort.

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Conclusion

In closing, I leave you today with my personal assurance that during my tenure

as Under Secretary (Enforcement), the Department of Treasury will continue to aggressively pursue money launderers with every tool that we have at our disposal.

Last week, I had the opportunity to visit Ground Zero at what remains of the World

Trade Center and see the devastation firsthand. It was a sight I will never forget

and I am here today to make sure that this Committee and the United States Congress know that we will continue to pursue terrorist fundraising networks and other

money laundering operations diligently and with passion.

—————

PREPARED STATEMENT OF MICHAEL CHERTOFF

ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE

SEPTEMBER 26, 2001

Chairman Sarbanes, Senator Gramm, and distinguished Members of the Committee, I am pleased to appear before the Committee today to discuss the ever-increasingly important issue of money laundering and the Bush Administration’s 2001

National Money Laundering Strategy.

As I understand it, today’s hearing was originally scheduled for September 12.

Any testimony prepared for that day was rendered obsolete by the events of September 11. Tuesday, September 11 marked a turning point in this country’s fight

against terrorism and all other kinds of unlawful activity. President Bush has announced that we will meet that unspeakable attack on democracy with a full commitment of resources and with a firm resolve to rid the world of terrorism. As the

President so eloquently stated, ‘‘Whether we bring our enemies to justice or bring

justice to our enemies, justice will be done.’’

We in law enforcement must do everything within our powers to apprehend those

persons who have committed and seek to commit terrorist acts, and we must eradicate the forces of terrorism in our country and around the world. As an initial step

toward accomplishing this national mission against terrorism, the Attorney General

has directed the creation of an Anti-Terrorism Task Force within each judicial district to be made up of prosecutors from the U.S. Attorney’s Office, members of the

Federal law enforcement agencies, including the FBI, INS, DEA, Customs Service,

Marshals Service, Secret Service, IRS, and the ATF, as well as the primary State

and local police forces in that district. These task forces will be arms of the national

effort to coordinate the collection, analysis, and dissemination of information and to

develop the investigative and prosecutive strategy for the country. As an integral

part of this national effort, the Department of Justice and FBI have established an

interagency Financial Review Group to coordinate the investigation of the financial

aspects surrounding the terrorist events of September 11 and beyond. All members

of this Committee recognize the importance of understanding financial components

of terrorist and criminal organizations. These financial links will be critical to the

larger criminal investigation, while also providing a trail to the sources of funding

for these heinous crimes. The importance of ‘‘following the money,’’ in this instance,

as well as in the investigation of all criminal enterprises, cannot be overstated.

The Members of this Committee are also well aware that money laundering constitutes a threat to the safety of our communities, to the integrity of our financial

institutions, and to our national security. In order to address this serious threat,

we must apply and coordinate all the efforts and available resources of the Federal

Government, along with those of our State and local authorities, as well as our foreign counterparts, if we are to be effective in our campaign against domestic and

international money launderers. Money laundering techniques are innumerable, diverse, complex, subtle, and secret. The 2001 National Money Laundering Strategy

not only sets forth a plan to identify, disrupt, and dismantle major money laundering organizations and the various financial systems they use, but also continues

previous efforts to establish and expand effective countermeasures to detect and

deter present and emergent money laundering techniques. Under Secretary Gurule ́

has detailed the principal provisions of the 2001 Strategy. I would like to focus on

an area of the Strategy in which we especially need the Congress’ help—updating

the money laundering laws.

The Need for New Legislation

In his address to the Nation last Friday, President Bush stated:

We will direct every resource at our command—every means of diplomacy, every tool of intelligence, every instrument of law enforcement, every

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financial influence, and every necessary weapon of war—to the destruction

and to the defeat of the global terror network.

However, as Attorney General Ashcroft stated in his remarks in Chicago on August 7 to the Organized Crime Conference sponsored by the Chicago Police Department, and as I and other representatives of the Department of Justice have stated

on several occasions in testimony before this and other Committees, we are fighting

with outdated weapons in the money laundering arena today. When the money

laundering laws were first enacted in 1986, they were designed to address what was

primarily a domestic problem. Since 1986, money laundering increasingly has become a global problem, involving international financial transactions, the smuggling

of currency across borders, and the laundering in one country of the proceeds of

crimes committed in another country. Currency, monetary instruments, and electronic funds flow easily across international borders, allowing criminals in foreign

countries to hide their money in the United States, and allowing criminals in this

country to conceal their illicit funds in any one of hundreds of countries around the

world with scant concern that their activities will be detected by law enforcement.

International organized criminal groups based in Asia, Africa, Europe, and this

hemisphere have seized upon these opportunities for laundering of their assets.

These criminals look upon globalization as an invitation to vastly expand the size

and scope of their criminal activities—whether these organized criminal groups engage in narcotics trafficking, securities fraud, bank fraud, and other white collar

crimes, trafficking in persons, or terrorism. With their expanded power and reach,

international organized criminals seek to corrupt police and public officials in countries around the world to protect their criminal enterprises and enhance their

money-making opportunities. Foreign organized crime groups today threaten Americans, their businesses, and their property, as these groups work to expand their influence into this country.

In this environment, law enforcement is challenged, and the criminals often hold

the advantage. Criminals are able to adapt to changing circumstances quickly. They

pay no heed to the requirements of laws and regulations and recognize no

sovereign’s borders. Further, these criminal groups have learned to be adaptable

and innovative and as we succeed in a new enforcement effort or implement a new

regulatory regime, they quickly alter their methods and modes of operation to adapt

to the new circumstances.

The reality of international money laundering in this new century has caused

countries from Northern Europe to South Africa, and from here in the West to the

financial centers of the Far East, to look for ways to update their domestic laws to

address this threat to our security. Equally important, countries around the globe

are searching for ways to work together to address this problem jointly, irrespective

of our different legal systems, customs, and traditions. Criminal proceeds can be

moved from country-to-country in an instant. It is critical that our laws are brought

up to date, so that we may act effectively and cooperate fully with our partners in

law enforcement abroad. The United States should be the leader in this process, but

sadly we are falling behind. While our laws have remained mostly static for 14

years, other countries are moving ahead to criminalize international money laundering and to take other steps to separate criminals from their criminal proceeds.

Legislative Initiatives

We are not suffering in this endeavor from the lack of ideas or proposals. The provisions of our proposed Money Laundering Act of 2001 would go a long way toward

modernizing our money laundering laws by authorizing new and improved tools for

our law enforcement agents and prosecutors, and by increasing our ability to cooperate with our international counterparts in tracing, freezing, and seizing criminal

funds in the United States.

In addition to the Department’s legislative proposals, Members of Congress have

also recognized the need to update our money laundering laws. For example, Senators Levin, Grassley, DeWine, Kyl, Bill Nelson, and Chairman Sarbanes recently

introduced a money laundering bill, S. 1371. We look forward to working with you

as you consider these and related proposals.

I would like to highlight a few of the pending legislative proposals for the Committee that we believe would be particularly beneficial.

First, we must make it a crime to launder the proceeds of specified foreign crimes

in the United States. People who commit crimes abroad, and then hide that money

in the United States, are committing an offense that is at least as serious as the

one committed by our homegrown criminals who hide their money at the local bank.

The potential for terrorist organizations to finance their atrocities with money generated by committing crimes in other countries is obvious. (S. 1371, Sec. 3; Money

Laundering Act of 2001, Sec. 6).

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1 I would like to thank Debra R. Volland of Covington & Burling and Stephen Kroll, formerly

Chief Counsel of the Treasury’s Financial Crimes Enforcement Network and now in private

practice, for their assistance in preparing this testimony. Mr. Kroll’s public service in combating

money laundering was a singular contribution to the United States.

Second, it is important that the Federal courts be given authority to restrain a

criminal defendant’s assets pending trial, so that he is not free to disburse his

money before he is convicted and ordered to turn it over to the Government. It is

meaningless to authorize the courts to enter post-conviction forfeiture judgments— as the current laws provide—yet allow the criminal to send the money beyond the

reach of the court in the months before he is convicted. (DOJ Anti-Terrorism Act

of 2001, § 406).

Third, the Federal courts should be given authority to enforce the orders of foreign courts relating to criminal proceeds in the United States. Federal law already

permits this in drug cases: a court in Virginia can enforce an order from a court

in London if it relates to drug money found in the U.S. (28 U.S.C. § 2467). As we

speak, foreign countries are working to determine what assets of terrorist acts occurring within their borders may have involved funds in the United States. If foreign courts issue orders to confiscate that money, we need to be able to enforce

them. As a result, the current law needs to be expanded beyond drug trafficking

crimes. (Money Laundering Act of 2001, § 39).

Fourth, the limitations period on seizing electronic funds from a bank account

should be extended from 1 year to 2 years. Current law requires that the Government trace the money it wants to seize to the offense in which the money was involved. The law recognizes, however, that money is fungible, and that one dollar in

a given bank account is the same as any other dollar. This ‘‘fungible property’’ rule,

however, only applies for 1 year (18 U.S.C. § 984). If the money has been in the bank

account for more than a year, the Government cannot seize it without a strict tracing analysis—something that is all but impossible if the account was active. We

need to be able to go back at least 2 years to give true effect to the purposes underlying this law. (Money Laundering Act of 2001, § 15, S. 1371, § 10).

There are other provisions in the Department’s anti-money laundering bill that

would help us enormously in tracking the assets of terrorists. I mention these few

as among the most critical, but a comprehensive revamping of these laws is necessary if we are to make meaningful headway against terrorism and other forms

of international organized crime. The Department’s Money Laundering Act of 2001

sets out a core group of statutory tools that are necessary to meet the domestic and

transnational organized crime threats of the 21st Century. Attorney General

Ashcroft considers passage of this legislation essential to any success in disrupting

and dismantling the business of organized crime and the cruel reality of terrorism.

Conclusion

I believe that the extraordinary events of September 11 should provide the impetus to jump-start consideration of money laundering legislation that will allow us

to address the threats presented to us by international terrorists and criminals. The

Department stands ready to provide any assistance it can to facilitate prompt consideration of its legislative proposals.

I would like to conclude by expressing the gratitude of the Department of Justice

for the continuing support this Committee has demonstrated for our anti-money

laundering activities. We in the Department of Justice look forward to working

alongside our Treasury colleagues, with this Committee, with your other colleagues

in the Senate, and your counterparts in the House to strengthen the U.S. antimoney laundering regime at this critical hour.

Thank you, Mr. Chairman. I welcome any questions you may have at this time.

—————

PREPARED STATEMENT OF STUART E. EIZENSTAT 1

FORMER DEPUTY SECRETARY, U.S. DEPARTMENT OF THE TREASURY

SEPTEMBER 26, 2001

Mr. Chairman, Senator Gramm, and Members of the Committee, good morning.

This is my first appearance before this Committee since my return to private life,

and I am glad to see you again. But more important, I am honored to have this

opportunity to contribute to your examination of money laundering and the problems it raises for the United States. Stopping money laundering, and the syndicates

it finances, is critical to the fight against narcotics trafficking, organized crime, foreign corruption, and software counterfeiting and other intellectual property crimes,

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as well as to preserving the health of the global financial system. After the events

of September 11, it is clear that stopping money laundering is also critical to the

personal safety of our citizens.

The Committee’s decision to put these issues on its agenda is thus highly appropriate and, sadly, very timely. In the past two decades, in Republican and Democratic Administrations, the groundwork has been laid for effective action against the

criminal financial system. But we are now at a crucial point in deciding what that

action should be and how to take it. Answering those questions is not easy, as today’s hearings will confirm, but our commitment to robust, effective, and balanced

action against domestic and international money laundering must remain focused

and firmly in place.

My experience during the last 8 years makes that plain to me. At the Department

of Commerce, I could see how difficult it was for our companies honestly to bid

against competitors who could draw on hidden sources of funds. At the Department

of State, I came more fully to understand how money laundering fuels the

kleptocracy that can undermine even the most well-thought-through economic development efforts or policies to build civil society. And at the Treasury Department I

was confronted with the role money laundering plays in driving the narcotics trade

and the other crimes I have already mentioned, the way it infects the vitality of our

trade in goods—through the operation of the Black Market Peso Exchange—and the

degree to which it can undermine the credibility and safety of the global financial

system upon which our prosperity depends.

Now, we are brought face to face with another aspect of the criminal financial system—its use by the merchants of terror. Monday’s issuance by President Bush of

a new Executive Order aimed squarely at terrorist financing and expanding the

blocking of terrorist assets forcefully pinpoints an essential target. Terrorists must

have money to pay for weapons, travel, training, and even benefits for the family

members of suicide bombers. The September 11 terrorists spent tens, if not hundreds, of thousands of dollars on U.S. flight training, and their U.S. living expenses

were likely even higher. They often paid cash, flashing rolls of bills. Estimates of

the total cost of the September 11 attacks exceed $1 million.

The capital that terrorists require comes from several sources. The first is pure

criminal activity, harking back to the daring daylight robbery of a Tzarist banking

van in 1907 by a gang led by a young Bolshevik named Josef Stalin. Terrorists engage in credit card fraud, kidnapping, robbery, and extortion. Their paymasters can

include covert state sponsors, who can also conveniently look the other way at strategic partnerships between terrorists and organized criminal groups, especially narcotics traffickers.

Large sums come from old fashioned fund raising through ‘‘charitable’’ organizations here and abroad; a recent World Bank study indicates that the globe’s civil

wars are primarily funded by contributions from diaspora populations. In some

cases donations are understood to be destined for use by terrorists, even when

raised for ostensibly humanitarian purposes. There are ‘‘charities,’’ for example, in

various Gulf States that may serve as conduits for Osama bin Laden and his Al

Qaeda movement.

Wealthy individuals may make large contributions. Bin Laden, whose private fortune is often estimated as having at least once amounted to $300 million, is likely

a special case, providing seed capital to nascent terrorist groups and operations

around the world. Evidence produced at the trial of defendants in the 1998 embassy

bombings in Kenya and Tanzania indicated that bin Laden’s web included various

trading and investment companies, with accounts in several world financial centers.

Reports that bin Laden’s operatives sold the shares of leading international reinsurers short on September 10 are simply speculative at this point. But his funds

are somewhere earning a return as part of the very system he has vowed to destroy.

However obtained, terrorist funds need to be transmitted across borders, marshaled, and spent—with application of a new layer of camouflage at each step. This

is the money launderer’s domain and brings us directly back to the broader subject.

The sheer size of the criminal financial system provides a rough measure of the

problem at hand. The IMF has estimated the amount of money laundered annually

at between $600 billion and $1.5 trillion, or 2–5 percent of the world’s annual gross

domestic product. At least a third of that amount, up to half a trillion dollars annually, is thought to pass through U.S. financial institutions at least once on its clandestine journey. While these are estimates, they are as likely as not to be on the

conservative side. Whatever the precise number, it is far too high in real terms and

reminds us that the risks money laundering creates simply are not going away.

Money laundering is the financial side of crime. If the so-called ‘‘smurfs’’ can seem

merely odd as they dribble drug-tainted dollars into our financial institutions to stay

under the $10,000 threshold for reporting currency transactions, the sophisticated

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cartel bankers who operate behind the shield of bank secrecy, offshore havens, or

suborned officialdom, with millions of dollars at their disposal, are anything but

quaint. And that is why, as I mentioned earlier, the fight to curtail money laundering has been in the past the product of a bipartisan consensus.

• The landmark legislation making money laundering a distinct and very serious

felony in the United States was the product of the Reagan Administration.

• The Bush Administration led the way in creating the Financial Action Task Force,

at the G–7 Summit in 1989, and establishing the Financial Crimes Enforcement

Network at the Treasury a year later, and President Bush signed the AnnunzioWylie Anti-Money Laundering Act in 1992; that landmark legislation authorized

suspicious transaction reporting and uniform funds transfer recordkeeping rules,

among other pillars of today’s counter-money laundering programs in the United

States and around the world.

• President Clinton used the occasion of his nationally televised address on the occasion of the United Nations’ 50th Anniversary to call for an all-out effort against

international organized crime and money laundering, kicking off a coordinated 5

year effort to bring the world’s mafias and cartels to heel and finally to close the

gaps in our laws and regulatory systems that had permitted those criminal groups

to thrive.

The unhappy experience of the Bank of New York highlights the vulnerability of

our financial institutions. The Bank was involved in an alleged money laundering

scheme in which more than $7 billion was transmitted from Russia into the Bank

through various offshore secrecy jurisdictions. At least one relatively senior official

of the Bank was suborned, and she suborned others. We do not know to this day

how much of the money came from the accounts of the Russian ‘‘Mafiya,’’ how much

represented assets stolen in the course of the privatization of state industries—undermining the hopes of Russian reformers—and to what extent was the money hidden to escape legitimate taxation, destroying the fiscal projections on which the

reformers depended to lower taxes for ordinary citizens. We do know that the money

came out of Russia through accounts in shell banks chartered in places such as the

South Pacific island of Nauru. The Deputy Chairman of Russia’s Central Bank has

estimated that, in 1998 alone, $70 billion was transferred from Russian banks to

accounts in banks chartered in Nauru; not all of that money went to Bank of New

York, of course, but none of it was ever intended to stay in Nauru.

At the same time, everyone should understand that the growth of money laundering is the dark side of globalization. It is an unfortunate by-product of the persistent leveling of barriers to trade and capital flows since the end of World War

II, most importantly, of course, the end of capital controls around the world. As Secretary Rubin famously pointed out in his address to the Summit of the Americas

in 1995—when that Summit produced a hemispheric declaration against money

laundering—few of the acts that the money launderer takes are, in themselves, illegal. All of our national policies are designed to stimulate saving, the free movement

of funds, and the operation of efficient payment systems.

What makes money laundering illegal is knowledge of the criminal origin of the

funds involved, the criminal purpose to which the funds will be put, or both, and

deliberate efforts to fog the transparency of the financial system for criminal ends.

The task confronting both Government and the financial sector is to shape cost-effective policies to filter out that tainted conduct, to find the one person in the bank

line who is a money launderer in the clothing of an honest bank customer. We devoted immense time and effort in the last 8 years to striking the necessary balance.

Our policy had a number of major components. We continued the drive for creative criminal and civil enforcement of our counter-money laundering laws.

We greatly expanded the information resources available to State and local officials who were building their own money laundering efforts, through programs such

as FinCEN’s Project Gateway.

We sought to level the playing field by closing gaps in coverage of previously inadequate regulated money transmitters and other nontraditional financial service providers, following our enforcement successes in the New York area against the flow

of funds to Colombia and the Dominican Republic in 1996–1998.

We issued guidance to help U.S. financial institutions build their own defenses

to protect their business reputations and avoid entanglement with crime—and give

appropriate scrutiny to private banking and similar high dollar-value accounts, especially for transactions that could involve transfer of the proceeds of corruption by

senior foreign officials. Unlike more general ‘‘know your customer’’ ideas that attracted a great deal of criticism 2 years before, our guidance was carefully tailored

to help banks deal with identifiable situations in high-risk accounts.

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2The list of NCCT’s in 2000 was: the Bahamas, the Cayman Islands, the Cook Islands, Dominica, Israel, Lebanon, Liechtenstein, Marshall Islands, Nauru, Niue, Panama, the Philippines,

Russia, St. Kitts and Nevis, and St. Vincent and the Grenadines. As indicated below, the Bahamas, the Cayman Islands, Liechtenstein, and Panama were removed from the list in June 2001

after curing most or all of the deficiencies FATF cited, and 8 new countries—Egypt, Grenada,

Guatemala, Hungary, Indonesia, Myanmar, Nigeria, and Ukraine—were added to the list in

June and September 2001.

We recognized the absolutely crucial importance of international cooperation to

disrupt the global flow of illicit money. We supported the work of the Financial Action Task Force in its revision of its landmark Forty Recommendations, under the

FATF Presidency of Treasury Under Secretary Ron Noble in 1996.

We led the way in building the Egmont Group of Financial Intelligence Units,

which now has over 50 member agencies that cooperate in sharing information to

fight money laundering around the world.

Even more important, we pushed forward the FATF’s noncooperative countries

and territories (‘‘NCCT’’) project in the Clinton Administration’s last 2 years. Fifteen

nations were cited as being noncooperative in the international fight against money

laundering in 2000,2 and the Treasury followed up the FATF’s action and its own

analysis by issuing hard-hitting advisories to our financial institutions recommending enhanced scrutiny against potential money laundering transactions involving those nations. I am especially proud that we did not play favorites. Russia was

on the list, but so was Israel. Liechtenstein was on the list, but so were the Philippines. We cited Nauru, but we also cited Panama and the Bahamas. And the reaction has been very positive. While I was Deputy Secretary of the Treasury I met

with senior officials of Panama and with Israel’s then-Minister of Justice, and I

learned of the steps those countries were taking to be removed from the NCCT list.

My Treasury, Justice, and State Department colleagues met with officials of the governments on the list at various levels to help get the necessary work done—with

clear results! Israel, and now Russia, have for the first time enacted laws to criminalize money laundering and are working to put serious anti-money laundering

programs into place. Liechtenstein has broken down its time-honored bank secrecy

traditions. Panama is now prepared to share information to assist law enforcement

investigations around the world.

Finally, we issued the Nation’s first two National Money Laundering Strategies,

to present a balanced strategic view of our efforts and point the way forward, yearby-year, as Congress asked us to do.

I would like to speak in more detail about several aspects of our work.

International Counter-Money Laundering Act of 2000—now S. 398. The International Counter-Money Laundering Act of 2000 (H.R. 3886), introduced on March

9, 2000, was an important part of our approach, because it would have given the

Executive Branch the tools necessary to deal in a measured, precise, and cost-effective way with particular money laundering threats. Under the legislation, which had

very strong support from senior Federal law enforcement professionals, the Secretary of the Treasury—acting in concert with other senior government officials and

with prompt notice to the Congress—would have had the authority to designate a

specific foreign jurisdiction, financial institution, or a class of international transaction as being of ‘‘primary money laundering concern’’ to the United States. Although the legislation had strong bipartisan support, and was approved by the

House Banking and Financial Services Committee by a 33–1 vote on June 8, 2000,

the legislation did not make it further in the 106th Congress.

I am very pleased that Senator Kerry has reintroduced the legislation, as S. 398,

with cosponsors including Senator Grassley and Chairman Sarbanes, as well as

Senator Levin, Senator Grassley, and Senator Rockefeller. I would like to explain

why Kerry–Grassley–Sarbanes is an extremely important step forward and deserves

the Committee’s, and the Congress’, support now.

Succinctly, we have few tools to protect the financial system from international

money laundering. On one end of the spectrum, the Secretary can issue Treasury

Advisories, as we did in the summer of 2000; those warnings encourage U.S. financial institutions to pay special attention to transactions involving certain jurisdictions. But they do not impose specific requirements, and they are not sufficient to

address the complexity of money laundering.

On the other end of the spectrum, the International Emergency Economic Powers

Act (‘‘IEEPA’’) provides authority, following a Presidential finding of a national security emergency, for full-scale sanctions and blocking orders that operate to suspend

financial and trade relations with the offending targets. President Clinton issued a

number of such orders, including two, in 1995 and 1998, directed at designated terVerDate 11-MAY-2000 08:31 Sep 12, 2002 Jkt 000000 PO 00000 Frm 00088 Fmt 6633 Sfmt 6621 SEPT26.XXX SBANK4 PsN: SBANK4
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rorist organizations that led to accelerated efforts to locate funds of those organizations in the United States.

Of course, President Bush invoked IEEPA, among a number of other authorities,

on Monday. The President’s order was obviously appropriate under the circumstances, and it sent a blunt and forceful message. There are many other situations in which we will not want to block all transactions, or in which our concern

centers around underregulated foreign financial institutions or holes in foreign

counter-money laundering efforts. In those cases a more flexible tool is necessary,

but we do not have one available, because under present law there is nothing between the two ends of the spectrum—a Treasury Advisory on the one hand, and fullblown IEEPA sanctions on the other.

As I noted, the key to the proposed statute’s operation is the determination by

the Secretary of the Treasury that a specific foreign jurisdiction, a financial institution operating outside the United States, or a class of international transactions is

of ‘‘primary money laundering concern’’ to the United States. The determination

would trigger the authority of the Secretary to take several actions in response.

After consultation with the Chairman of the Federal Reserve System, the Secretary could:

1. Require financial institutions operating in the United States to keep

records or file reports concerning specified types of transactions, in the aggregate or by individual transaction, and to make the records available to

law enforcement officials and financial regulators upon request. Requiring

such record retention could prove invaluable to law enforcement and help

the Government better to understand the specific money laundering mechanisms at work. As a corollary benefit, a requirement that U.S. institutions

increase the level of scrutiny they apply to transactions involving targeted

jurisdictions or institutions could result in pressure on the offending jurisdictions to improve their laws.

2. Require financial institutions to ascertain the foreign beneficial owners

of any account opened or maintained in the United States. Requiring financial institutions to ascertain foreign beneficial ownership would help cut

through layers of obfuscation that are one of the money launderers’ primary

tools.

3. Require identification of those who are allowed to use a bank’s correspondent accounts (as well as so-called ‘‘payable-through’’ accounts),

which allow customers of a foreign bank to conduct banking operations

through a U.S. bank just as if they were the U.S. bank’s own customers.

Requiring identification of those who are allowed to use a bank’s correspondent accounts and payable-through accounts would prevent abuse of

these technical financial mechanisms by foreign money launderers who seek

to clean their dirty money through U.S. financial institutions. The United

States needs to be able to find out who really benefits from these accounts,

and, by application of transparency, discourage abusive practices.

4. Where necessary in extreme cases, the Secretary would have the authority to impose conditions upon, or prohibit outright, the opening or maintaining of correspondent or payable-through accounts. Having that authority in reserve gives credibility to the rest of the statute’s measures, and

may, in cases of documented, continuing abuse of the financial system by

known criminals, be a necessary last resort.

The legislation would also have made necessary corrections in existing law. It

would have codified and strengthened the safe harbor from civil liability for financial institutions that report suspicious activity. It would have toughened the geographic targeting order (‘‘GTO’’) mechanism that was used so effectively in New

York, New Jersey, and Puerto Rico, against Colombian and Dominican narcotics

traffickers. It would have made it clear—as Congress intended—that the ‘‘structuring’’ penalties of the Bank Secrecy Act apply both to attempts to evade GTO’s

and to attempts to circumvent the funds transfer recordkeeping and identification

rules that Congress specifically authorized in 1992. In addition, the legislation

would have made it clear that banks could under certain circumstances include suspicions of illegal activity by former bank employees in written employment references sought by subsequent potential bank employers.

The legislation was designed to permit carefully tailored, almost surgical, action

against real abuse; that action was to be graduated, targeted, and discretionary

graduated so that the Secretary could act in a manner proportional to the threat

presented; targeted, so the Treasury could focus its response to particular facts and

circumstances; and discretionary, so the Treasury could integrate any possible

action into bilateral and multilateral diplomatic efforts to persuade offending jurisVerDate 11-MAY-2000 08:31 Sep 12, 2002 Jkt 000000 PO 00000 Frm 00089 Fmt 6633 Sfmt 6621 SEPT26.XXX SBANK4 PsN: SBANK4
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dictions to change their practices so that invocation of the authority would not be

necessary. There will be situations in which the United States may have to lead the

way alone, and if so the statute would have given it the capacity to do so.

Importantly, the legislation would not jeopardize the privacy of the American public. The focus of the recommended legislation is not on American citizens. The recommended legislation focuses on foreign jurisdictions, foreign financial institutions,

or classes of transactions with or involving a jurisdiction outside the United States,

that involve the abuse of U.S. banks facing a specifically identified ‘‘primary money

laundering concern.’’ For this reason, the recommended legislation is different from

the so-called ‘‘know your customer’’ rules proposed 2 years ago. And finally, it should

be noted that the proposed legislation is narrowly drawn, so as not to add burdens

to financial institutions. The approach targets major money laundering threats

while minimizing any collateral burden on domestic financial institutions or interference with legitimate financial activities.

Changes to the Definition of Money Laundering Offenses in Title 18. We had also

hoped to see through the passage of legislation, long sought by the Department of

Justice, to widen the range of money laundering offenses. As you know, money laundering under our criminal laws must involve the proceeds of ‘‘specified unlawful

activities.’’ Unless a particular set of transactions involves the proceeds of such a

predicate crime, it cannot serve as the basis for a money laundering investigation.

But there are important gaps in the definition, especially for crimes against foreign

governments, such as misappropriation of public funds, fraud, official bribery, arms

trafficking, and certain crimes of violence. Unless such crimes are made ‘‘specified

unlawful activities,’’ a rapacious foreign dictator can bring his funds to the United

States and hide them without fear of detection or prosecution in many cases; this

we should not, indeed we cannot, continue to allow. I am pleased that S. 1371, introduced this session by Senator Levin and cosponsored by Senator Grassley, Chairman Sarbanes, Senator Kyl, Senator Bill Nelson, and Senator DeWine, includes the

necessary change and important related changes to the Nation’s forfeiture laws.

FATF. We must continue to support FATF and other multilateral counter-money

laundering efforts. FATF’s work is ongoing; in June it designated 6 additional nations—Indonesia, Nigeria, Egypt, Hungary, Guatemala, and Myanmar—as non- cooperative, and it completed the most recent round of reviews in early September

by adding Grenada and Ukraine to the list. But it has also signaled the progress

made in the Cayman Islands, Liechtenstein, the Bahamas, and Panama, by removing those countries from the list, and it is working with other designated countries

to ameliorate the problems identified in the NCCT process. In particular, I hope

that Israel, which has already initiated at least one significant money laundering

prosecution, can be removed from the list shortly.

This is multilateral cooperation at its best. The efforts of our Government, at the

Departments of Treasury, Justice, and State, must continue to view the problem of

money laundering ‘‘holistically,’’ as part of the broader issue of global financial

standards—for banking supervision, tax administration, and counter-money laundering control—that are necessary to foster international prosperity and faith in

civil society, underlying the growth of democratic governance around the world. Before September 11, Treasury had yet to issue advisories concerning the countries

added to the FATF list this year; that may have been an accident of the calendar,

since the FATF had a supplementary meeting, at which it named Grenada and

Ukraine as noncooperative, in the first week in September. But I hope that the sort

of guidance that was issued in the past will continue to be the norm, rather than

a scaling back of the perceived consequences of the FATF designations.

I suspect that you would like me to compare the work in which we were engaged

more broadly with the approach of the new Administration to money laundering. It

is too early to make any firm comparisons. The Bush Administration’s first National

Money Laundering Strategy emphasizes strong enforcement and intensified use of

criminal and civil asset forfeiture laws and continues a number of specific enforcement initiatives—the High Intensity Financial Crime Areas or HIFCA program, expanded State and local involvement in money laundering investigations, and efforts

to dismantle the Black Market Peso Exchange—that we began. And I was glad to

see Attorney General Ashcroft announce in a recent speech that he will be seeking

legislation like that sought by the sponsors of S. 1371, to expand the money laundering laws in Title 18 to deal with the proceeds of foreign corruption, as I discussed

earlier in my statement. I understand the Administration’s anti-terrorism legislation also includes a necessary amendment to the money laundering laws to add support for designated terrorist organizations to the statute’s list of specified unlawful

activities; I support this change.

I hope, however, that the program outlined in the National Money Laundering

Strategy for 2001 does not shortchange appropriate legislative and regulatory efforts

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to shore up the weaknesses in our financial mechanisms that money launderers can

exploit. There is no substitute for creative and aggressive enforcement of our laws;

but enforcement itself is not enough. A targeted approach to strengthening our antimoney laundering rules is necessary to close loopholes through which criminal proceeds flow, and to reduce risks that later take countless resources to investigate and

prosecute, after the damage is done. We can never know who exploits the weaknesses in our network of transparent financial arrangements and anti-money laundering defenses, and a program that relies only on enforcement is unlikely to be as

effective as we would want.

I would also like to mention several recommendations relating specifically to the

financing of terrorism. The Administration moved forcefully on Monday to cut off

terrorists’ financial oxygen; as the President recognized, that is a critical part of the

effort the Nation is now embarked, and rules already in place can be applied forcefully and quickly to financial support for terrorism. Necessary steps include:

• Adequate staffing, funding, and authority for the Foreign Terrorist Asset Tracking

Center first sought by National Security Council officials 18 months ago and initially brought together last week at the Treasury. • Intensified analysis and matching for terrorist links of information reported under

the counter-money laundering rules. We must also obtain information reported in

other countries, using the multilateral ‘‘Egmont group’’ of anti-money laundering

agencies that now has more than 50 members.

• Investigation and blocking of underground banking practices such as the

‘‘Hawala,’’ through which a potentially significant portion of terrorist funds is

thought to pass into or out of the United States without ever touching the formal

banking system.

• Greater scrutiny of phony charitable organizations by our Government and our allies abroad, a move that was begun in the last 5 years and is, again, brought

forcefully forward by Monday’s Executive Order. That scrutiny must not be limited to the United States, because much of the money involved is simply not here,

and we should ask Saudi Arabia, Kuwait, Qatar, and the UAE to apply similar

scrutiny to ostensible charitable organizations operating in those nations.

• Pressure by the FATF for quick improvement in the anti-money laundering and

financial transparency rules of countries such as the UAE and Pakistan.

• Issuance of guidance about terrorist money laundering to U.S. financial institutions, with special emphasis on identification of beneficial account ownership.

• Continued careful coordination with the U.S. economic sanctions program aimed

at terrorists’ assets.

Of course, we cannot overestimate our chances of success; financial data alone, no

matter how good it is, rarely provides the archetypal ‘‘smoking gun’’ in investigations. Moreover, our adversaries are very good at hiding funds, using traditional

systems outside sophisticated financial channels to transfer funds, and, simply,

making do on a meager budget. And the amounts of money terrorism requires—even

for organized, purposeful, continuing terrorist organizations such as those that produced the September 11 tragedy—is never large enough even to cause a blip in the

daily stream of international cross-border payments. But the fact that the clues are

not easy to find cannot and should not deter us. Information is rarely determinative;

even the fabled naval code breakers of World War II at Bletchley Park and at the

Naval Intelligence Station in Washington could only track U-Boats, on good days,

to ocean ‘‘sectors’’ many hundreds of square miles in area.

The acid test for me of the Administration’s anti-money laundering strategy is

whether the Administration will support passage of S. 398, working with this Committee, which I hope will mark up the legislation and move it forward expeditiously.

Indeed the legislation was designed to give the Secretary of the Treasury the sort

of flexible targeted authority that can now be used to advantage in the fight against

financial aspects of terrorism, as well as against money laundering generally. I want

to emphasize again the bipartisan support we found in the House for last year’s

version of the legislation, and the 33–1 vote by which the House Banking Committee—led by Jim Leach of Iowa—sought to move that legislation, conscious of its

obligation to protect the expectations of our citizens about the credibility of our Federally insured financial institutions.

To sum up: the rapid growth of international commerce, along with advances in

technology, are making it easier for criminals in foreign jurisdictions to launder

money through foreign institutions into the United States, and hence to finance the

expansion of the global criminal economy and the growth of organized criminal

groups and international terrorists as substate threats to our security. Money laundering debilitates the integrity and stability of financial and government institutions worldwide, as a parasite that feeds on the very advances in global finance and

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free economies that make successful money laundering possible. That is why we

have had a strong history of support on both sides of the aisle for designing investigative, regulatory, and legislative steps to fight money laundering around the

world, and why it is both fitting and essential that this Committee monitor the work

of the Administration in this critical area and act where necessary to shore up our

national defenses against this criminal contagion.

Thank you very much. Again, it is a pleasure to be here and contribute to the

Committee’s work. I would be happy to answer your questions.

—————

PREPARED STATEMENT OF WILLIAM F. WECHSLER

FORMER SPECIAL ADVISER, U.S. DEPARTMENT OF THE TREASURY

SEPTEMBER 26, 2001

Mr. Chairman, Senator Gramm, distinguished Members of the Committee, I want

to commend you for calling attention to the important and growing problem of

money laundering and the ways by which terrorists in general and Al Qaeda in particular raises, moves, launders, and distributes its money. It has been a while since

this Committee last seriously addressed this issue. I feel honored to have been

asked to participate in this hearing, and I thank you for the opportunity.

I would like to divide my remarks into three parts. First, I will discuss in general

terms what we know about how Al Qaeda’s financial network operates. Second, I

will describe what has and what can be done about it. And third, I will discuss how

we can better combat the general problem of money laundering.

The Al Qaeda Financial Network

Unlike most terrorist leaders, Osama bin Laden did not first gain recognition

among Islamic radicals for leading an army in battle, or for personal acts of valor

in combat, or even for running a local terrorist cell. He first gained fame for his

abilities to raise, manage, and move money for the Afghan armies fighting the Russians in the 1980’s. He still derives much of his authority and influence from the

money under his control.

The terrorist financial network that Osama bin Laden helped build in the 1980’s provided the foundation for the financial network that supports Al Qaeda today.

This is commonly misunderstood. When reporting on Al Qaeda finances, journalists

generally focus on the $300 million bin Laden is reported to have inherited from

the family construction business, as if he is simply writing personal checks to terrorists in the field. If this was the case, the problem would be much easier to solve.

While his own funds have undoubtedly been helpful to his cause, his network of financial donors, international investments, legal businesses, criminal enterprises,

smuggling mechanisms, Muslim charitable organizations, Islamic banks, and underground money transfer businesses have been of far greater value.

Today this network continues to raise money throughout the world to constantly

replenish Al Qaeda’s coffers. And have no doubt that the money that is raised is

substantial. We should not be confused when we read that any one terrorist attack

likely only cost Al Qaeda a few thousand or a few hundred thousand dollars, or that

any one terrorist cell seemed to be just scraping by and committing petty crimes

to help fund their activities. There is an important difference in the amount of

money that is available to the organization overall, and the amount that is available

to any local element. This only makes sense. Think of the U.S. military: by any

measure it overall spends a lot of money each year. But if you go to any individual

army base, you will see sergeants desperately trying to scrape by with limited funds

and still achieve their mission.

As noted, Al Qaeda raises money from criminal schemes and seemingly legitimate

businesses—and now we are all reading reports of United States, European, and

Japanese regulators investigating whether Al Qaeda may have profited from shortselling reinsurance and airline stocks just before the recent attacks—a frightening

possibility.

But perhaps the most important source of Al Qaeda’s funds are direct solicitations

and charitable contributions. This does not mean that everyone whose money goes

to Al Qaeda knows that they are contributing to terrorism. Millions of Muslims

around the world believe as part of their religion that donating to charity is a fundamental part of their lives. No doubt most would be aghast if they knew that some

of the money they may have given to charities has been diverted to terrorist use.

Nor does it mean that the charities that support Al Qaeda do not also provide social

services. Hamas and Hizzbolah have demonstrated that it is very advantageous for

a terrorist organization to also help the poor and weak. It does mean, however, that

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Al Qaeda is able to get funds under the guise of charitable donations, mostly in

cash, and that money keeps coming. This is also, by the way, how the IRA has long

raised money in the United States. Once Al Qaeda has the money, it moves and

launders it through four primary methods.

First, there is simple cash movements and smuggling. We should remember that

the economies of much of the Middle East are much more cash intensive than our

own. If you lived there you would likely carry much more cash than you do today

and use electronic means much less. It is not terribly uncommon for people in say,

Saudi Arabia, to purchase something on the order of a car in cash. That means that

in general there is less of an electronic and paper trail in these societies, unfortunately.

Second, Al Qaeda uses what we think of as the global banking system to hold and

launder money. Terrorists are particularly attracted to underregulated money laundering havens. These places have little or no anti-money laundering regimes—strict

bank secrecy, poor customer identification, no bank supervision or examination, no

suspicious activity reporting, little or no cooperation with foreign law enforcement.

In an era of globalization and the internet such places provide no-questions-asked

banking services to clients from around the world who, for some reason or another,

are interested in hiding their money from authorities.

Third, Al Qaeda uses the Islamic banking system, which is an entirely legitimate

parallel system for those who feel their religion prohibits them from being involved

in the payment of interest. There is nothing inherently wrong with this system at

all—but it is in general even less regulated in many countries in which it operates.

And fourth, Al Qaeda undoubtedly makes good use of the hawala underground

banking system. The hawala system is particularly valuable to Al Qaeda because

it allows little or no paper trail, just money transfer without money movement.

There is also nothing inherently wrong with the hawala system—it has been in operation in South Asia and the Middle East for centuries, and there is a similarly

ancient system based out of China. In some remote areas of the globe the hawala

system is the banking system—there are no Citibank branches.

The system is run by South Asians along familial lines and has served people in

the Middle East for centuries. You are a Hawaladar because your family has for

generations. Moving money through the Hawala system is as easy as a phone call,

or a fax, or an e-mail from one Hawaladar to another. A client gives cash to a

Hawaladar in say, Pakistan, and asks him to make sure that another person gets

it in say, New York. So the hawaladar calls his colleague in New York, who hands

out an equivalent amount of money. At no time, however, is there any wire transfer

or basic connection with the wider banking system. Accounts are balanced quite

often over time, since there is thought to be quite a lot of money constantly rolling

through the system. But if accounts are unbalanced for a while between the two

Hawaladars, they are not concerned because fundamentally they trust each other.

They are good for it. They have been in this business for generations and they are

not going to cheat each other. And perhaps if the accounts get seriously unbalances,

then they will have to actually move cash from one place to another, or engage in

some under-invoicing scheme to transfer wealth.

As best we can tell, Al Qaeda distributes money to its decentralized, loose confederation of terrorist cells mostly as start up money or venture capital. The cells are

then required to help sustain themselves, sometimes from crimes such as cigarette

smuggling, a particular favorite of criminal networks around the world.

Combating the Al Qaeda Financial Network

We should also recognize what can and cannot be accomplished by targeting the

financial network. Such actions will not, by themselves, strike a death blow to Al

Qaeda. There is no silver bullet here. We are not likely to wake up one morning

and read in the newspaper that the United States and its allies have frozen all of

Al Qaeda’s money and therefore the terrorist organization is no more.

Here in the United States we have been going after organized crime’s financial

network ever since we convicted Al Capone for tax evasion. But organized crime still

exists. What we can do is identify key components of the financial network and disrupt them by rounding up key people, shutting down front companies, and targeting

the banks that provide laundering services. Every time a key component is disrupted it will force Al Qaeda to take time, money, and personnel to rebuild it—and

in the process likely deter or delay individual terrorist operations. Over the long

term, combined with additional military, diplomatic, intelligence, and law enforcement actions, these efforts will eventually seriously degrade Al Qaeda’s terrorist

capacity. Organized crime in the United States is not today what it was several decades ago. We can score a similar victory over Al Qaeda, but it will take time.

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That is as far as the analogy with organized crime can be taken, however. We

have tools that can be used against Al Qaeda that could never be used against organized crime—our military services and intelligence community. But we also face a

more difficult environment in which to target the Al Qaeda financial network. Here

in the United States we have over the years built a strong anti-money laundering

regime, including specific anti-money laundering laws and bank regulations. Virtually none of this exists where Al Qaeda raises and moves most of its money. This

makes the problem much more difficult.

Disrupting, degrading, and where possible, taking down the Al Qaeda financial

network will require actions by both the Bush Administration and the Congress.

The Administration’s efforts should focus on fully exploiting the power inherent in

the International Emergency Economic Powers Act, the law cited by President Bush

in his Executive Order on Monday. President Bush should be commended for his

announcement on Monday, and for his establishment of a new Terrorist Asset

Tracking Center in Treasury’s Office of Foreign Asset Controls. These acts have

started the Bush Administration off on the right path.

The most important provision of the Executive Order that President Bush announced Monday is not the one that freezes assets in the United States, although

this is nice to do in those rare moments when money is actually found. Most of the

time, however, people like Osama bin Laden are a little too smart to put money in

U.S. banks under their own names. That is why the first question that is always

asked in these instances is the wrong one—so how much money have we frozen?

A better question to ask is what is your plan for how you going to use this authority to get new information about and new actions against the Al Qaeda financial

network that you would otherwise not be able to get. The most important provision

of the Executive Order is the one that then allows the United States to threaten

to cut off anyone, anywhere that is found to ‘‘be controlled by’’ or ‘‘act on behalf’’ or ‘‘provide support for’’ Al Qaeda—any person, company, bank, or country. This allows the United States to quietly, behind the scenes, approach foreign governments

and institutions that might fall into that category, whether willfully or unwittingly,

and then present them with a simple proposition: be cut off from the U.S. economy

or quietly give the United States new information on terrorist financing and take

additional actions against the Al Qaeda financial network. I must stress that in

many cases this has to be done quietly to be effective.

This is the strategy that the Clinton Administration adopted after the terrorist

attacks on the U.S. embassies in East Africa in 1998, when President Clinton signed

similar Executive Orders against Al Qaeda and the Taliban government in Afghanistan. In some instances it was successful, and the United States was able to get

a degree of cooperation from certain countries that it had previously been denied.

For instance, these efforts helped ground the Afghan national airline around the

world, at the time a key way Al Qaeda moved resources back and forth from Afghanistan. There is no doubt that this action disrupted a key element of Al Qaeda’s

infrastructure.

But in the big picture we only had limited successes. In some cases, foreign governments responded with delay and denial due to a lack of political will. In other

cases the governments in question wanted to help, but had limited abilities to get

the information we wanted since they had no anti-money laundering regime and did

not routinely audit charities. In the current environment, however, and with a increased focus on the charities that provide a direct fundraising link between Al

Qaeda and the wider societies in the Middle East, the Bush Administration should

be able to be more effective in this effort.

Three things now need to be done. First, President Bush, Secretary Powell, and

Secretary O’Neill now should now, as part of their quiet discussions with their counterparts in key countries—particularly Saudi Arabia, Egypt, Pakistan, the United

Arab Emirates, and all generally friendly nations along the Persian Gulf—sully exploit the leverage inherent in the President’s Executive Orders and personally demand that their law enforcement and intelligence services fully cooperate with U.S.

efforts to trace and destroy the Al Qaeda financial network, no matter where the

money trail leads. They should also demand that these countries bring their antimoney laundering regimes up to full compliance with international standards. These

countries should also fully audit their domestic Muslim charitable organizations,

using outside auditors if necessary, to ensure that they are not being used as fronts

for terrorist cells. It will undoubtedly be difficult to get many of these countries to

take these steps. But without these actions U.S. efforts to combat the Al Qaeda financial network will continue to be only marginally effective.

Second, the Bush Administration should identify and take down individual foreign

banks that are found to be safe havens for terrorist funds. This might be done covertly, through information warfare. Or it might be done overtly if the AdministraVerDate 11-MAY-2000 08:31 Sep 12, 2002 Jkt 000000 PO 00000 Frm 00094 Fmt 6633 Sfmt 6621 SEPT26.XXX SBANK4 PsN: SBANK4
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tion can using Monday’s Executive Order, get enough publicly-releasable information that show that a specific foreign bank is moving money for Al Qaeda. But that

can be a high threshold. Quite often, in my experience, our intelligence may be

sketchy, or we may have enough intelligence but cannot release it for important reasons involving sources and methods of collection.

What is needed is a new set of powers to more easily and effectively cut rogue

banks off from the legitimate international financial system. The United States

needs to be able to approach suspected foreign rogue banks—again often quietly, behind the scenes—threaten to sanction them not because we can prove that there are

some specific terrorist funds going through an account, but because of general concerns that the bank has become a money laundering haven. This could mean that

the bank has no internal compliance system, that it has a pattern of illegal activities, or that it operates under a strict bank secrecy regime. These facts would be

much easier to prove openly, and therefore give the United States important additional leverage to use strategically.

Last year a bipartisan bill that would have done just that was supported by the

Clinton Administration. Unfortunately, even after passing out of the House Banking

Committee 31 to 1, it was killed without ever receiving a full vote. As of Monday,

the Bush Administration still had not figured out its position, even though Treasury

Secretary O’Neill was first briefed on this matter during his first weeks in office.

Let me be clear: I know that bill backward and forward. There is absolutely no good

reason why it should not be law as soon as possible. There are few things that the

Congress could do that would be more helpful in the fight against terrorism. The

Treasury and the diplomatic and intelligence communities should begin work now

behind the scenes to identify which specific foreign banks will be approached after

this becomes law.

And finally, the Bush Administration and the Congress together should make

sure that we are doing everything we can to prevent terrorist fundraising at home.

We should make it harder for websites to solicit funds for terrorist groups online.

U.S. financial institutions should be given specific guidance on how to identify

transactions that raise suspicions of terrorist financing. Moreover, the Hawala underground banking system is alive and well in virtually every major U.S. city, almost completely unregulated. Law enforcement has done a poor job at getting its

arms around the Hawala system and the role it plays in terrorist financing. A

Treasury Department regulation that would require these underground bankers to

register, and make it a Federal crime if they do not, has recently been delayed. This

decision should be reversed and the FBI should aggressively begin to use this new

legal tool against suspected terrorist moneymen. And the Congress should make

sure that the Treasury issues regulations immediately, under authority it already

has, to bring nondepository financial institutions such as casinos, securities brokers,

and insurance firms into the U.S. anti-money laundering regime. These steps are

required if the United States is to become in full compliance with international

standards. And given the new global investigations of possible terrorist stock manipulations, it is all the more important that the securities industry operating in the

United States should be required to report suspicious transactions just as those operating in Europe already do.

In all, efforts to take down terrorist groups and their supporters through military

actions will likely take longer than we now appreciate; efforts take down terrorism’s

financial network will likely take even more time. But I have no doubt that a fully

committed United States will eventually be successful in both.

The General Problem of Money Laundering

Many of the ways in which Al Qaeda moves and launders money are also used

by other criminal organizations and drug cartels around the world. Other witnesses

today, including Stuart E. Eizenstat, already have described the general threat the

United States faces from money laundering, at home and abroad. They have outlined how money laundering feeds, furthers, and facilitates criminal and terrorist

enterprises; how money laundering can corrupt the safety and soundness of individual financial institutions and can undermine the integrity of national financial

systems; and how money laundering can harm U.S. national interests around the

world.

I would like only to stress one aspect of this general problem for you here today,

before I move on to what can be done to combat it. We cannot fully discuss money

laundering today without taking into account globalization. Relatively recent advances in banking and communications technologies have allowed money to move

farther and faster around the world than ever before. Distant countries are now just

a mouse-click away and the bank next door may be doing business halfway around

the world.

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But just as this has opened great opportunities for legitimate commerce and investment, this has also opened great opportunities for criminals. The global financial system is only as strong as its weakest link, and money launderers and tax

evaders have been adept at finding, exploiting, and even creating some of those

weak links. So in recent years we saw the vast proliferation of money laundering

havens—places where drug cartels and terrorist organizations could easily find noquestions-asked banking secrecy. Many of these places even advertised their weak

bank regulatory systems and poor anti-money laundering regimes on the internet.

And once dirty funds have been washed clean in these money laundering havens,

they often find their way to the United States.

For instance, just a few years ago, the small South Pacific island of Nauru was

an exceedingly marginal player in the global banking system. But after it decided

to become a money laundering haven, things changed. A single bank registered in

Nauru was the ordering party for more than $3 billion of the $7.5 billion that illegally moved from Russia through the Bank of New York. And in 1998, according

to the Russian Central Bank, of the $74 billion that was transferred from Russia

to offshore accounts, $70 billion went to banks registered in Nauru.

The Clinton Administration appreciated how globalization had fundamentally

changed the environment for the fight against money laundering. Internationally,

we worked with our G–7 allies in a cooperative, multilateral, and eventually successful effort to combat global financial abuses—money laundering, tax evasion, and

rogue banking. Domestically, we issued the first-ever National Money Laundering

Strategy, which represented the most comprehensive approach ever taken on this

issue.

The Clinton Administration’s strategy was driven by one fundamental principle:

law enforcement and regulatory agencies must move forward together in order to

combat money laundering effectively. We had unprecedented law enforcement victories such as Operation Casablanca against Mexican money launderers. But notwithstanding those accomplishments, the Clinton Administration also recognized

that law enforcement alone would not do the job. Improved examination and regulation of the financial services industries for money laundering weaknesses had to be

part of the solution. Criminals were constantly developing new and ever more sophisticated money laundering techniques; our regulations had to keep pace.

This should not be a controversial principle. Indeed, the basic necessity of regulatory efforts to complement law enforcement efforts to combat money laundering

has been understood and attracted bipartisan support for years. President Nixon

signed the Bank Secrecy Act that created the regulatory framework that still exists

today. President Reagan made money laundering a crime in and of itself, fundamentally expanding that framework. President George H.W. Bush created the Treasury

Department’s Financial Crime Enforcement Network, the lead regulatory agency in

the fight against money laundering. This regulatory framework has received virtually unanimous support from the U.S. law enforcement community during both

Democratic and Republican Administrations. And finally, beginning with the first

Bush Administration and continuing throughout the Clinton Administration, the

United States worked with its international allies to establish strong international

anti-money laundering standards, including mandatory customer identification and

suspicious activity reporting by financial institutions. To put it bluntly, almost all

of the world’s well-developed financial centers have grown to accept the regulatory

anti-money laundering framework that the United States first invented.

But with globalization changing the nature of the money laundering problem, the

Clinton Administration also recognized that the United States could not continue to

push the international community to do more without making sure that we were

strengthening our own anti-money laundering regime here at home. So this, too,

was a reason why the Clinton Administration held as one of its driving principles

that law enforcement and regulatory improvements must go hand in hand.

Many long-time observers of the Federal bureaucracy did not think this would

work. Federal law enforcement agencies have long been notorious for not cooperating with each other, much less regulatory agencies. And I do not have to tell this

Committee about the historical problems the Federal financial services regulatory

agencies have had learning to cooperate with each other. But the strategy did work,

better then almost anyone had predicted, thanks in no small part to the skills of

Stuart Eizenstat and the leadership of Lawrence Summers. U.S. international

achievements were unprecedented as Mr. Eizenstat has described. New law enforcement programs were begun setting the stage for what the Bush Administration now

hopes to accomplish. And important new regulatory initiatives were unveiled, such

as the guidance issued to U.S. financial institutions to help protect the U.S. financial system from being abused by corrupt foreign leaders.

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Unfortunately, before the horrible events of September 11, the media reports indicated that there were wide philosophical divergences within the Bush Administration on how to best address money laundering. From Attorney General John

Ashcroft, we heard a commendable speech urging strong actions and proposing legislative changes that would help law enforcement. His proposals closely resembled

proposals made previously by the Clinton Administration but not then acted upon

by the House and Senate Judiciary Committees. Federal law enforcement agencies

are also reportedly stepping up a Clinton Administration initiative to measure the

effectiveness of their efforts and resources in the fight against money laundering.

These law enforcement efforts should be commended. I assume that the Bush Administration will seek the personnel and funding necessary to ensure they succeed.

On the other hand, many law enforcement officials have been concerned about

what they have heard from White House Economic Advisor Lawrence Lindsay for

many years: his strong opposition to the legal and regulatory foundations of the U.S.

anti-money laundering regime, even those regulations that are now at the heart of

international anti-money laundering standards. And Treasury Secretary Paul

O’Neill had also publicly questioned the value of fundamental, longstanding elements of the U.S. anti-money laundering regulatory regime. Just a few weeks ago

regulatory officials were being told to reevaluate some existing anti-money laundering rules, delay some long-planned regulatory enhancements, and forego altogether some anticipated new regulatory initiatives that would further assist law

enforcement and deter criminals from abusing the U.S. financial system. Treasury’s

cost-benefit analyses were focusing not on the horrible costs Americans bear from

drug trafficking, terrorism, and other crimes that money laundering helps finance,

but on the relatively minor costs U.S. banks bear from living up to internationally

accepted anti-money laundering regulations. As an institution the Treasury Department seemed to be caught in the middle with one part—the one represented here

today—responsible for law enforcement and wanting to take one step forward, and

another part responsible for overseeing regulatory policies and wanting to take one

step back. Perhaps in the wake of recent events this has all changed. If so, that

will be good news. Money laundering is vital to terrorists and other criminals

around the world. To fight them, we need law enforcement, diplomats, intelligence

officials, and the regulators all working together, all talking from the same script.

Thank you, once again, for giving me the opportunity to share my opinions on this

important subject. I look forward to answering any questions you might have.

—————

PREPARED STATEMENT OF JONATHAN WINER

FORMER DEPUTY ASSISTANT SECRETARY FOR INTERNATIONAL LAW ENFORCEMENT

U.S. DEPARTMENT OF STATE

SEPTEMBER 26, 2001

Mr. Chairman and distinguished Members of this Committee, I am grateful for

the opportunity to testify before you on the topic of domestic and international

money laundering and terrorist finance. Given our national emergency, I will focus

my testimony solely on what we can do to combat terrorist finance.

Mr. Chairman, there is much we do not know about terrorist finance, and about

Osama bin Laden’s financial networks. However, the many shards of information we

do have should concentrate our minds on the work ahead.

Before you is a chart displaying a portion of Osama bin Laden’s financial network.

Every one of the more than 100 boxes on this chart reflects a publicly reported financial link of bin Laden, residing in more than 20 separate countries, in the Americas, Asia, Africa, Europe, and the Middle East. Public information

demonstrates terrorist funds moving through Islamic charities, travel agents, construction businesses, fisheries, import-export businesses, stock markets, chemical

companies, and a number of banks. All of this is public record, and far from complete. There simply is not room on a single chart to include everything connected

to bin Laden and related terrorist groups.

Some of these entities are now defunct, as a result of law enforcement and other

operations. Others may have only marginal ties to terrorist finance. But the chart

illustrates why responding to this multifaceted network will require sustained, tenacious cooperation by many, many governments.

The actions announced by the Bush Administration on Monday represent some

potentially significant new steps. If followed by further action and international cooperation, they could begin to have consequences. But that will only be true if every

component of the financial services sector internationally—not just banks and cerVerDate 11-MAY-2000 08:31 Sep 12, 2002 Jkt 000000 PO 00000 Frm 00097 Fmt 6633 Sfmt 6621 SEPT26.XXX SBANK4 PsN: SBANK4
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tainly not just U.S. banks or foreign banks with offices in the United States—are

all subject to similar rules and obligations. An anti-terrorist finance regime must

be globalized, standardized, harmonized, and it must be multisectoral to have impact. The United States cannot dictate to other countries if the consequence is that

the United States does not achieve cooperation with others. The United States must

integrate other national policies with our own. In financial services regulation, including dealing with terrorist finance, having varying rules for different jurisdictions, State, Federal, or international, invites trouble.

While there are many steps that should be taken, I wish to focus on seven areas

for action.

First, register and regulate money services businesses, including Hawala institutions, as Congress has directed the Executive Branch to do since 1993. Our failure

to complete this process has created a substantial vulnerability by which terrorists

can anonymously obtain cash below the radar of our financial services regulatory

system. This is the Department of the Treasury’s job. It should be completed without further delay, so that nonbank money services businesses in the United States

are subject to obligations at least as tough as those already required of banks. To

be effective, these laws must then be vigorously enforced.

Second, increase the international pressure on countries that have yet to put into

place financial regulatory and enforcement regimes that facilitate accountability and

the tracing of assets. We have been doing this already, but we need to push harder

and faster. Financial institutions that are based in jurisdictions that are not adequately regulated should not have unfettered access to our financial institutions, unless they can demonstrate that other adequate protections are in place. Adequate

financial services regulation, supervision, and enforcement is essential not only to

discourage terrorist finance, but also to protect international financial stability. The

recent apparent attacks on global markets by apparent terrorist short-sellers demonstrates why being able to trace financial transactions internationally cannot be

discretionary. Financial regulation and enforcement cannot stop at borders when

terrorist finances do not. They must be evenly promulgated and evenly enforced.

Third, the United States needs to accelerate efforts to ensure that every nation

signs up to the UN Terrorist Finance Convention, criminalizes terrorist finance, and

freezes and seizes terrorist funds and assets of organizations that support terrorism.

Fourth, the United States must do more to build our terrorist finance database

from existing cases. Not merely the records associated with every terrorist prosecution should be scoured but cases that abut or adjoin terrorist activity but involve

other criminal activity. The Bush Administration has announced that it has now

begun this task.

Fifth, the Congress should support Presidential use of economic war powers to

broaden the reach of U.S. sanctions policy in true national security emergencies, as

the President announced he would do on Monday. But unilateral action is inherently insufficient. We must obtain the support of key partners including the G–8

and the European Union.

Six, the United States needs to secure domestic and international action against

those entities that have wittingly or unwittingly provided support to terrorism, as

the President committed himself to doing in his announcement Monday. These include a number of Islamic charities, some of which are prominent and otherwise do

many good works. We will need to work with other governments, including many

in the Middle East, to cleanse charities that have supported terrorism unwittingly

and to protect them from abuses by terrorists. Other charities, who have systematically supported terrorism, should be closed down, with their assets seized and made

available to assist terrorism’s victims.

Seventh, we need to strengthen international regulatory cooperation in our securities markets, and close regulatory gaps, so that no terrorist who engages in the obscene act of market manipulation in connection with an attack ever gets away with

it. Countries whose bank secrecy laws, anonymous trusts and untraceable business

companies are used by terrrorists need to understand there will be consequences if

they do not quickly change their laws and practices to help the world trace and seize

terrorist finances.

In summary, cutting off terrorist finance is like cutting off the heads of the hydra.

Every time we chop off one head, more will grow back in its place. To survive, we

must kill the entire beast, and that means more than a single bin Laden, or any

one part of his or related terrorist finance networks. I am available to answer any

questions you may have.

Steps to be considered by the United States in connection with combating terrorist

finance.

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Regulating Hawala and MSB Regulations

Congress directed the Administration in 1993 in the Annuzio–Wylie Act to require

registration of all money services businesses. Because the Executive Branch had

never regulated money services businesses, uncertainty about how best to proceed,

and at what level suspicious transactions should be reported, delayed the issuance

of regulations until August 1999. The Clinton Administration delayed implementation of the MSB regulations until the end of 2001. This year, the Bush Administration announced that it was delaying the MSB regulations still further, to late 2002.

The Executive Branch has undertaken little focused attention on underground banking systems and money services businesses in the United States, and U.S. Government knowledge about these businesses remains limited. Actions regarding Hawala

and MSB that could be considered would include:

• Requiring all MSB’s to register within a very short period, rather than by late

2002. The form for MSB reporting already exists. Requiring registration immediately would transform those entities that are not registered illegal. This will inevitably include all or most Hawalas, which are unlikely to register, making them

vulnerable to being shut down by law enforcement as our intelligence regarding

Hawalas deepens.

• Issuing new suspicious activity reporting (SAR) requirements focused on Hawala

type business to existing U.S. financial institutions. This advisory would be issued

from FinCen and require enhanced scrutiny of the transactions that involve

Islamic countries and their neighbors, and which meet other indicia such as: apparent commingling of funds, dollar volume of business not commensurate with

stated nature of business; substantial number of transactions to locations in the

Middle East not commensurate with stated nature of business. Here, reference to

existing indicia applicable to Black Market Peso Exchange could be translated

into Hawala indicia.

• Issuing SAR requirements to MSB’s which in turn create various specifications on

possible indicia of activity involving unregistered MSB’s (Hawala, Hundi, chop or

‘‘flying money’’ houses) and as well, separately, other possible indicia of terrorist

finance.

• Reducing the threshold for MSB currency reporting requirements, which would

require revised regulations to be issued by Treasury/FinCen. Originally, MSB regulations would have required a low suspicious activity reporting requirement of

$500. The MSB’s objected, and the suspicious activity reporting requirement was

raised to $2,000 for some transactions, and $5,000 for others. Given what we have

learned about the use of currency by the terrorists who attacked the United

States, the Administration should consider revising the suspicious reporting requirement downward for money service businesses, with exceptions as appropriate

for larger institutions that have other, adequate controls. This lower reporting requirement could be amended as needed as experience is gained, or as we find ourselves beyond the current emergency. Lower reporting requirements for suspicious

reports for money services businesses will likely push some funds out of MSB’s

entirely into the formal regulated U.S. banking system. This outcome is not necessarily a negative, as our banks, thrifts, and credit unions are certainly better

regulated and more accountable than money service businesses have been to date.

• Consider adding to the existing MSB form another question which would require

MSB’s to specify whether they handle remittances directed to foreign countries,

and if so, to specify the countries where they regularly handle such remittances.

This question could provide a means of focusing which MSB’s may be used by

those in terrorist strongholds, for early on-site inspection.

• Immediately begin on-site inspections of registered MSB’s, focusing first on those

that handle remittances to the Middle East. There are two possible near term

options for conducting such inspections. First, the Congress or possibly the Administration by Executive Order, could grant such authority to the examiners of

the existing regulated banking industry, such as the Office of the Comptroller of

the Currency (OCC), the Office of Thrift Supervision (OTS), and the Federal Deposit Insurance Corporation (FDIC). The Federal Reserve could perhaps share in

this obligation. These organizations might defer their regular schedule of examinations on some institutions they already regulate to review the operations of the

newly registered MSB’s, when necessary, on-site. Second, the Federal Government

could encourage State banking officials and other regulators to examine money

service businesses where such they have authority at the State level. In some

States, MSB’s are already theoretically regulated. Nevertheless, in many jurisdictions oversight of MSB’s is irregular, inadequate, or nonexistent. On-site inspections may uncover a variety of poor practices, and could provide insights as to

which institutions are being used for illicit finance to terrorists. They would also

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likely provide information on MSB’s which remain unregistered, and thus illicit,

and thus provide leads to other criminal financial activity.

• Prosecute unregistered MSB’s for failure to register.

• Seize records and assets of unregistered MSB’s who fail to register.

• If deemed necessary, increase the penalties substantially for MSB failure to register or to report suspicious transactions involving currency.

• Amend existing MSB regulations to explicitly describe Hawala type institutions

as included within MSB’s. This could make it easier to demonstrate intentional

noncompliance in prosecutions, rather than accidental failure to register.

Enhanced Scrutiny of Financial Institutions in Underregulated Jurisdictions,

Especially Those in the Middle East

Banks in major money centers in the world have put into place increasingly

strong constraints against the placement of illicit funds. Some banks based in the

Middle East, operating globally, have equally good systems for preventing money

laundering and terrorist finance. However, to date there has been little to no money

laundering enforcement in the Middle East. Historical reasons abound. For example,

in oil rich states, those controlling oil resources have often preferred to require less

financial transparency as a means of discouraging oversight by others within their

country or outside it. In some oil rich countries, income taxes do not exist, and without such taxes some governments have had less incentive to maintain accounting,

auditing, and financial standards to trace funds. Endemic corruption in other countries has further impeded transparency and oversight. Currently in the Middle East,

the only countries with money laundering laws of any significant scope are Cyprus,

Israel, Lebanon, and the United Arab Emirates. Each of these countries has a history of money laundering and lack of financial transparency. For many years, until

it cleaned up its financial services sector in response to pressure from the European

Union, the United States, and others, Cyprus was one of the world’s centers for terrorist finance. In the remainder of the Gulf States, as well as in Algeria, Nigeria,

Sudan, Egypt, among other countries, there remains little obstruction to many

forms of financial crime and little to no scrutiny that would prevent money laundering. A week before the attack on the United States, Nigeria and Egypt were already placed on the list of noncooperative countries by the Financial Action Task

Force, as Israel and Lebanon had before them. The United States should consider

undertaking a twin regulatory and diplomatic approach in relation to the financial

institutions of those countries that place no barriers to the placement of terrorist

funds. The regulatory approach would require enhanced scrutiny of financial transactions coming from these countries. A concurrent diplomatic approach would require countries without money laundering laws or their enforcement, to enact and

enforce such laws or face sanctions from the United States such as enhanced scrutiny by U.S. financial institutions. Actions the United States could consider in pursuit of this objective might include:

• Asking the Financial Action Task Force to speed its consideration of sanctions

against noncooperative countries such as Nigeria and Egypt and to hold emergency meetings to consider further multilateral measures to combat terrorist finance; these could include enhanced efforts against underground banking systems

such as the Hawala as specified above.

• Asking Pakistan and the Gulf States to regulate Hawala without delay. Every

country in the world should be asked, and as appropriate, required to register

Hawalas.

• Advising countries that have failed to put money laundering laws into place of

the immediate steps needed to provide tightened scrutiny and recordkeeping on

financial transactions as mechanism to deal with the problem that institutions in

these countries have been used wholesale for the placement of terrorist funds.

• Advising countries that do not have the capacity to discourage the placement of

terrorist funds in their financial institutions of the United States intention to

place enhanced scrutiny on such institutions. The United States needs to consult

with these countries regarding the possible market implications of reduced access

to the United States upon failure to impose measures against money laundering.

Any actual enforcement decisions need to be rendered on a case-by-case basis to

ensure that financial institutions that have put into place strong anti-terrorist

and anti-money laundering compliance programs do not suffer from sanctions.

Building Momentum for Ceasing Terrorist Finance Internationally

While many countries have given lip service to combating terrorist finance, aggressive, coordinated, pragmatic action against this problem has been limited. To

date, the United States has not undertaken adequate action to stimulate immediate

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implementation of regimes to counter terrorist finance. Near term actions to build

international capacity against terrorist finance could include the following:

• Asking each country that has yet to sign on to the Terrorist Finance Convention

to demonstrate their opposition to terrorism by signing, ratifying, and implementing this Convention without delay.

• Seeking commitments by other countries to put into place sanctions similar to

those the United States has promulgated in connection with its use of the International Emergency Economic Powers Act (IEEPA).

• Instructing U.S. executive directors at World Bank and IMF to vote against funding to states that do not sign up to Terrorist Finance Convention and to promise

to implement it.

• Asking Finance Ministries of U.S. allies to similarly make action against terrorist

finance a precondition to receiving support from the World Bank and similar

international financial institutions. Concerted efforts by the major donor efforts

to channel funds in relationship to anti-terrorist efforts and to deny funds to jurisdictions that fail to take such steps could provide substantial incentives for appropriate action against terrorist finance.

• Asking Interpol in Lyon, France to undertake immediate efforts at pooling expertise on terrorist finance and make recommendations for further global actions to

combat terrorist finance; request experts at Europol in the Hague, and the World

Customs Organization in Paris, do the same, as well as the G–7/G–8 process.

• Requesting the Basel Committee of Bank Supervisors to work with the International Monetary Fund and other appropriate institutions important to the

development of international regulatory standards to meet and make recommendations on actions they can take to attenuate terrorist finance.

Building Intelligence From Existing Cases

In both State and Federal law enforcement, there are cases involving witnesses

or defendants involved in such activities as money laundering, document fraud,

credit card crime, alien smuggling, trafficking in women, drug smuggling, and other

crimes who may be in a position to shed light on terrorist finance, or on underground banking, or both, if the information were to be viewed as important by the

law enforcement officials investigating and prosecuting the original offense. The

United States should consider asking Federal and State law enforcement agencies

in jurisdictions across the Nation to review cases undertaken over the past 2 years

that involved any form of possible links to terrorist finance or to Hawala system,

or to underground banking. When field offices and locals report such cases, these

offices could present information pertaining to such cases, such as documents, information from transcripts or depositions, and names of possible witnesses/informants

to the task force at Treasury tasked with creating the integrated terrorist finance

database. This additional information could be used not only to investigate terrorism, but also to track unregistered Hawala and MSB’s to prosecute them for failure to register in connection with the MSB initiative discussed above. Such information may also provide the basis for asset seizures and record seizures. Such information can in turn be shared with U.S. intelligence agencies as a mechanism to better

target intelligence collection on terrorist finance, which can then in turn be pushed

back when appropriate to law enforcement, or else dealt with in an IEEPA or national security context, as specified below.

Broaden Information Base and Scope of Application of IEEPA

The United States has used the International Emergency Economic Powers Act

(IEEPA) to the limits of what may be possible to target bin Laden and the Taliban

within United States and among U.S.-based institutions. The historic effectiveness

of IEEPA has been limited in two respects. First, it appears that the United States

has yet to cover enough of bin Laden’s businesses under IEEPA, including the instruments through which he has laundered and hidden his resources. Second,

IEEPA’s unilateral nature and limitation to territory of the United States for foreign

institutions based here has impaired its effectiveness due to bin Laden’s use of financial institutions outside the United States. Accordingly, the United States

should urgently add names of specific terrorist support entities under IEEPA beyond the very short list provided to date. Also, the United States should secure the

support of other countries to adopt IEEPA-like sanctions, so that terrorist finance

does not simply slide from the United States to other countries. Harmonizing international efforts against terrorist finance is essential here for sanctions to be effective and fair. Given globalization, it makes little sense for financial institutions

based in the United States to be subject to more stringent rules than similar institutions outside of the United States.

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Require Enhanced Scrutiny of Islamic Charities

Contributing to charity is one of the five pillars of Islam. Islamic charities perform

numerous good deeds every day, all over the world. A number of Islamic charities

have, however, had either provided funds to terrorists or failed to prevent their

funds from being diverted to terrorist use. While the vast majority of the uses of

these charities are proper, ethical, and humane, a method to cleanse these charities

of their terrorist connections must be found. The United States should work with

foreign governments and with representatives of Islamic charities to develop programs that would provide better oversight of and controls on the uses of charitable

funds within the Islamic world. The United States has found over the years the

need to exercise substantial controls over the functioning of charities to prevent

abuses. Other countries, and the Islamic charities themselves, need to undertake

similar steps. If they do not, the United States should follow through on the commitment made by President Bush to freeze the funds of charities that have become

vehicles for terrorist finance.

Enhance Cooperation Among International Securities Regulators To Trace Cases

Involving Market Manipulation, Especially in Futures and Options Markets

The SEC has stated that it is investigating a possible case of market manipulation connected to the attacks on the United States, as have securities regulators of

some dozen other countries. We should use any information that is gathered in

these apparent cases of market manipulation by terrorism to assess the gaps within

the international regulatory system that impede efficient tracing of the proceeds of

such market manipulation and to close them. In addition to tracing these instances

of apparent market manipulation, the Securities and Exchange Commission (SEC)

and the Commodities Futures and Trading Commission (CFTC) should meet with

counterparts in Japan, Hong Kong, the UK, France, Germany, Switzerland, the

Netherlands, and other affected jurisdictions as soon as possible to identify any

weaknesses and impediments and to take collective action to improve mutual assistance in future cases of possible market manipulation by terrorists.

—————

PREPARED STATEMENT OF ALVIN C. JAMES, JR.

FORMER SPECIAL AGENT, CRIMINAL INVESTIGATION, INTERNAL REVENUE SERVICE

U.S. DEPARTMENT OF THE TREASURY

SEPTEMBER 26, 2001

Thank you, Mr. Chairman, Senator Gramm, and Members of the Committee, I am

very pleased to be given this opportunity to speak to you today about money laundering. My name is Alvin James and currently I serve as the leader of the AntiMoney Laundering Solutions group at Ernst & Young, LLP. However, the views I

am expressing here are my own and do not necessarily reflect the views of Ernst

& Young. Less than 2 years ago, I retired from Federal service after 27 years of

law enforcement within the U.S. Treasury Department. Most of my public service

was spent as a Special Agent with IRS Criminal Investigation Division where I specialized in international undercover money laundering investigations. I spent the

last 5 years of my Federal law enforcement service at the Financial Crimes Enforcement Network (FinCEN) concluding the last 2 years as their Senior Anti-Money

Laundering Policy Advisor. As this Committee knows, one of the truly unique characteristics of FinCEN is its networking capability. It serves as a sort of hub for representatives from Federal, State, and local law enforcement agencies from across the

United States. It was at the FinCEN that a DEA colleague, Greg Passic, and I collaborated on developing a model that explained what is generally recognized as the

largest money laundering system in the Western Hemisphere—the Colombia Black

Market Peso Exchange (BMPE). That model, which was developed using law enforcement intelligence, describes how this underground financial system works and

identifies vulnerable choke points. During my tenure at FinCEN I also served as

the Founding Chairman of the Treasury Under Secretary for Enforcement’s BMPE

working group.

Mr. Chairman, most of my testimony today will center on the BMPE as a global

money laundering system. However, I would like to begin with a few remarks to

highlight the use of the BMPE and other underground financial systems by international terrorists. Terrorists do not usually need to launder money because terrorism, unlike other criminal activity such as narcotics trafficking, does not generate

money. However, terrorists do need to move funds covertly. There are major similarities among all underground financial systems—also called parallel payment sysVerDate 11-MAY-2000 08:31 Sep 12, 2002 Jkt 000000 PO 00000 Frm 00102 Fmt 6633 Sfmt 6621 SEPT26.XXX SBANK4 PsN: SBANK4
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tems—including the BMPE, Hawala, and the Chinese Underground Banking or Chit

system. The most significant of these similarities is their ability to facilitate anonymous international transfers of money. This feature makes these systems attractive

to terrorist groups. We know that they use these systems to covertly move the

money they need to support their activities.

In light of recent events I would caution those who attempt to concentrate U.S.

law enforcement resources on terrorist money laundering. A separate and distinct

system of laundering or hiding money for terrorist activity does not exist. They use

those systems of transferring and hiding funds that are most readily available, discreet, and cheap. The longer we studied BMPE the more evident it became that this

system of money laundering was used for not only a multitude of criminal activities

but also legitimate commerce, capital flight, tax evasion, and the simple transfer of

assets. Recent developments also indicate that BMPE brokers have teamed up increasingly with partners in the Middle East. In addition to typical placement in the

United States, drug dollars are now being deposited in Lebanon, Israel, and Palestine. Persons responsible for the first World Trade Center bombing also received

funds from a BMPE broker working out of Venezuela. I feel that by fully identifying

those individuals, businesses, and banks handling BMPE transactions in the Middle

East, we have an opportunity to flag transactions supporting all types of illegal activity including terrorism. Recent U.S. drug money investigations have revealed

laundering through businesses in the Middle East. Some of those individuals are involved in terrorist circles. The knowledge that U.S. investigators gained by tracing

funds generated by the BMPE cells operating in the United States will prove tremendously valuable in developing a workable game plan to pursue terrorist finances. The BMPE system is funded almost exclusively by drug money while the

other systems that I mentioned are often funded by parallel transactions of legitimate trade. Thus for the BMPE, terrorism is yet another compelling reason to disrupt and ultimately dismantle this purely illegitimate system. In addition, we must

either bring the other systems under close scrutiny and regulation within the

world’s legitimate financial community or dismantle them as well.

The remainder of my testimony will focus on the BMPE as a global money laundering system and the danger it poses to our country, as well as the challenges it

presents to our law enforcement, business, and financial communities. The BMPE

presents numerous dangers to our country. Most directly this system facilitates the

Colombian drug trade by allowing the Colombian drug wholesaler a relatively safe

means to annually convert $5 billion generated by the sale of drugs in the United

States to pesos in Colombia. In turn the BMPE makes these billions of dollars available as a commodity for sale outside our regulated financial system. There they are

ready for those who need a discreet source of funds that is difficult to trace. As I

mentioned earlier, U.S. law enforcement has evidence that some of these funds have

been purchased in the past by middle-eastern terrorists including those who bombed

the World Trade Center in 1993. The links to possible terrorist funding through the

BMPE are even stronger today since, as we will see, the initial placement of drug

dollars into U.S. financial institutions now begins in nations throughout the world.

The funds are also available to Colombian importers who wish to hide their purchases of U.S. trade goods that they smuggle into their country. This smuggling, totally funded by the BMPE, is so prevalent that the Colombian government is unable

to tax the sales of almost 50 percent of retail goods sold in Colombia. This lack of

legitimate revenue destabilizes the Colombian government and hinders its ability to

fight the narcotics suppliers on their home turf. In addition, Colombia’s business

community has been destabilized because those businesses that choose to operate

legitimately find it almost impossible to compete with those who sell smuggled

goods. The Colombian drug traffickers are able to use their billions to fund the Colombian rebels who stand between cocaine and heroin production facilities and the

governments of the United States and Colombia who are trying to eliminate the Colombian narcotics business. Finally, the rebels use this drug money not only to fund

their military objectives, but also to finance acts of terrorism aimed at promoting

their cause and hindering their enemies in Colombia.

U.S. law enforcement has the authority, the ability, and the knowledge to severely

disrupt and ultimately dismantle the BMPE. By so doing it would force the drug

traffickers and money launderers to use laundering tactics more vulnerable to law

enforcement. There is considerable evidence that law enforcement can impact the

BMPE system. Vigorous enforcement of the Bank Secrecy Act (BSA) and other antimoney laundering laws have caused the Colombian drug trafficker to be willing to

sell his share of the drug proceeds to the BMPE peso broker for discounts in excess

of 30 percent rather than take the risk of either moving the funds or laundering

them himself in the United States. The application of the Geographic Targeting

Order to the money service businesses in New York City had a dramatic, although

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short-lived, impact on the ability of the BMPE system to place its drug currency and

then move its funds. Undercover operations designed to infiltrate the BMPE system

have been responsible for a shift away from currency placement in the United

States to placement in foreign locations. However, in spite of these and the numerous other activities that have made up 20 years of law enforcement efforts in this

area, I must also note that the BMPE still remains the primary vehicle used by Colombian traffickers to launder their drug proceeds. Money laundering systems are

like a balloon. If you squeeze them in one place, they just get bigger somewhere

else. The main challenge faced by U.S. law enforcement is to coordinate their activities in a systemic approach and pop the balloon.

It should be noted that many of our law enforcement efforts have been more notable for the degree to which they disrupted the system than for the law violators they

brought to trial. However, the BMPE is a financial system and as such it is not dependant on any one individual or group of individuals. Therefore, a plan that is directed entirely toward arresting and prosecuting the drug traffickers and the money

launderers who use this system will not by itself stop the system. The second major

challenge for law enforcement is to place the goal of disruption and dismantlement

of the system on an equal footing with prosecuting the individuals who use it. Of

course, the Congress and the Administration are also challenged to measure their

successes accordingly.

The U.S. financial institutions and their regulators face a different challenge. The

financial community has done a pretty good job of implementing our anti-money

laundering laws. Colombian drug traffickers have virtually stopped laundering their

funds in the United States. They pay a substantial fee to the BMPE peso brokers

to take this high-risk activity off their hands. The funds the brokers cannot handle,

the traffickers smuggle out of the country, but sale to the BMPE is their preferred

method. While the banks have not kept the drug money out of their institutions all

together, they deserve some of the credit for the current shift of drug currency placement from the United States to foreign locations. However, therein also lies their

challenge. A large portion of the drug currency that is being smuggled offshore is

still being placed in the U.S. financial system through the international correspondent banking relationships between the respective foreign banks and their

U.S. correspondent banks. While the front door of our U.S. financial institutions

closes ever more tightly to those who would bring in ill-gotten gains, the back door

of international correspondent banking gapes open. The challenge to U.S. financial

institutions and their regulators is to close the unguarded back door.

Before I discuss these topics in more depth, let me first briefly describe the system. The Colombian Black Market Peso Exchange is the most egregious example of

an underground financial system used to launder dirty money. We believe that as

much as $5 billion dollars in Colombian drug proceeds (or about half of U.S. wholesale drug proceeds) are laundered per year through this system. There are other underground financial systems or parallel banking systems that operate in much the

same way throughout the world, such as the Hawala system in the Middle East or

the Chinese Underground Banking or Chit system in Asia and the Pacific Rim.

However, the BMPE system is the only one that is funded almost exclusively with

illegal proceeds, namely drug dollars.

The sale of drugs in the United States generates currency. No one uses his or her

checkbook or his or her credit card to buy drugs—at, least not yet. Each tier of the

drug sales and distribution organizations in the United States takes their cut of the

cash and passes the remainder up the line. Finally the Colombian suppliers’ wholesale share is amassed in secret stash houses in ports of drug entry such as New

York City, Miami, Houston, Chicago, and Los Angeles. At this point, the Colombian

trafficker has a serious problem. Cash is not only heavier and bulkier than the narcotics he imported but also a more precious commodity. Drug manufacture and supply operations in Colombia operate at about 30 percent of capacity. Therefore, if a

shipment of drugs is seized, it is easily replaced, but if the money is lost it is irreplaceable. The Colombian drug trafficker’s dilemma is to get the value of cash home

to Colombia in pesos without detection by United States or Colombian authorities.

The BMPE peso brokers, always in need of a source of U.S. dollars, were a readymade solution. The BMPE has existed since the late 1960’s as a means for Colombian importers to pay for U.S. trade goods with dollars while avoiding tariffs

enforced by the Colombian central banking system. The peso brokers provided the

additional service of placing the dollars in the U.S. financial system and transferring them directly to the U.S. exporter on behalf of the Colombian importer. In the

beginning peso brokers used Colombian exporters of goods to the United States,

such as cut flowers and coffee, as their source of dollars. However, the Colombian

drug traffickers offered the peso broker a deal he could not refuse. The drug dollars

were offered at a substantial discount, as much as 30 percent, to compensate the

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peso broker for the fact that the dollars he was buying were in the form of currency

and carried considerable risk. The peso brokers began to alter the way they did

business in order to place the drug currency in the U.S. financial system and to

meet the needs of both sets of customers, the Colombian drug trafficker, and the

Colombian importer. Once the process was in place to handle the dirty money, there

was little reason to go back to the old ways and pay full price for the dollars. The

Colombian traffickers could provide a virtually unlimited supply of funds. If fact the

annual wholesale Colombian drug proceeds are estimated to be between $8 and $12

billion. There is only enough demand for dollars through the BMPE to accommodate

about half that amount. The end result is that the BMPE became almost wholly

funded with drug dollars.

As stated earlier, the greatest challenge for law enforcement is the need for a coordinated approach. We have made strides in several areas of BMPE enforcement,

but as yet we have not combined these successes in a coordinated attack on the

BMPE system as a whole. I firmly believe that our only hope to destroy this system

lies in the use of all our tools in a calculated effort to force drug dollars out of the

relative safety of the BMPE and into an arena that offers less security to the drug

trafficker and more susceptibility to law enforcement.

The substantially overlapping money laundering jurisdictions at the Federal,

State, and local levels is fundamentally responsible for the current lack of coordination in BMPE strategy. Most of our law enforcement agencies in this country have

some form of money laundering jurisdiction. At first glance this looks like optimum

coverage for money laundering enforcement. Let me also say at this point that there

can be no doubt of the will of each and every one of these agencies to do their utmost to enforce money laundering laws. However, especially at the Federal level,

law enforcement administration is a competitive endeavor. There are only so many

law enforcement dollars in the Federal budget. Competition for those funds between

the agencies is fierce. This problem is exacerbated by the Federal asset forfeiture

funds that return a proportional share of seized and forfeited funds back to the respective seizing law enforcement agencies. Asset forfeiture is a major part of most

money laundering prosecutions. The ability to return seized assets to individual

agency budgets only serves to fan the fires of competition in money laundering enforcement. Our efforts to include BMPE investigations in the National Money Laundering Strategy have not really addressed this problem.

These competitive pressures also work against cooperative investigations and

sharing of information. True sharing of information and full coordination of investigations is vital if we hope to pop the money laundering balloon. We must get past

the ugly questions of who gets credit for the prosecution or the seized assets. The

BMPE operates on a truly global basis and its only limitation is safety and profitability for its users. It thrives in an environment where its adversary is hindered

by a new set of rules each time a boundary is crossed, whether the boundary is between agencies, states, or countries. We cannot afford to allow interagency competition to continue in this already complex enforcement environment.

The second challenge for law enforcement centers on our measure of success in

this area. Our primary focus now is on the prosecution of individuals and the seizure and forfeiture of their assets. Of course, this traditional approach remains an

important leg of any enforcement initiative. However, the BMPE is not dependant

on any individual or group of individuals to continue its operation. It operates on

the demand for dollars available outside the traditional banking system. As long as

those dollars are available and can be supplied safely to the users, the system will

continue to operate. Further the system is large enough and the profits are substantial enough to entice replacements in spite of the risk of arrest and prosecution.

Therefore, individual cases and prosecutions should not be our sole goal or the sole

measure of our efforts in this area. Disruption of the system should be an equally

acceptable goal of law enforcement action. Once again the challenge here is not only

to pursue success along both lines of measurement, but also to do so in a coordinated fashion so as to keep up the pressure on all fronts at one time.

Earlier I spoke about the Bank Secrecy Act (BSA) and its administration by bank

regulators and how our financial institutions have had a profoundly negative impact

on the ability of narcotics traffickers to move their illicit funds through our financial

system. When Colombian narcotics began to arrive on the U.S. drug scene in mass,

the banks in the major entry ports, especially Miami, were literally awash in drug

currency. At the outset drug traffickers were able to bring suitcases of currency into

local banks and wire transfer it wherever they wanted. Law enforcement and bank

regulators raised the alarm and the enforcement of the currency reporting provisions of the BSA came into effect. The effectiveness of that statute and the resolve

of the banking community, as well as the enforcement and regulatory arms of the

Government to keep dirty money out of their institutions has severely dampened the

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ability of money launderers to use our financial systems. Unfortunately, it has not

been able to keep the dirty money out altogether.

Drug sales generate huge revenues and huge profits. The pressure generated by

the need to move and launder these funds is immense. The BMPE is the primary

vehicle used by Colombian drug traffickers to counter the BSA. In fact the discount

offered by Colombian drug wholesalers to the dollar peso brokers is one measure

of the effectiveness of the BSA. The drug traffickers would rather sell their profits

in U.S. currency at a discount of up to 30 percent than take the risk of laundering

the dollars themselves. In so doing they pass the money laundering enforcement

risk to the dollar peso broker. At first the peso broker was able to place the drug

currency into the U.S. financial institutions by using transactions structured below

the Government’s and the bank’s detection thresholds. But the pressure that drove

the trafficker to sell his funds at a substantial discount has mounted on the peso

broker as well.

The broker has countered the pressure against currency placement in the United

States through the use of international correspondent banking. The susceptibility of

correspondent banking relationships to money laundering has been highlighted in

a report compiled by the Permanent Subcommittee on Investigations. Senate bill

1371, sponsored by Senator Carl Levin, also addresses these weaknesses. The following is an example of money laundering through correspondent banking that relates directly to the BMPE.

The peso brokers have begun to smuggle large amounts of currency to nations

whose banks have correspondent relationships with major U.S. banks. The nations

of choice are those with either lax money laundering laws or lax enforcement of

those laws. In return the foreign bank may sell a U.S. dollar check drawn on the

foreign bank’s U.S. correspondent account. These dollar delineated bank checks

carry the same weight as fully negotiable cashiers checks in Latin American markets. Therefore, the checks are readily sold to the Colombian importer as dollar

based financial instruments that are readily acceptable in these Latin markets. The

brokers often go so far as to have the checks drafted with the name of the respective

payee specified by the Colombian importer. The foreign bank may also accept the

currency deposit and then order a wire transfer from their correspondent account

to the account designated by the depositor.

The foreign bank is left with a large amount of U.S. currency and no bank wants

to keep excess currency on hand. Since they do not have an account with the Federal Reserve, they get rid of the excess by sending a deposit of currency to their

correspondent bank. This replaces the funds withdrawn by the check sold and eliminates the excess currency problem. The effect of this transaction is that we are back

to suitcase deposits of U.S. drug currency into our financial system. The only difference is that the dollar peso broker uses the correspondent back door to the bank

rather than the front door in Miami or New York.

The BSA has worked in that we have begun to force the dollar peso brokers to

move their money offshore rather than structure the deposits here in the United

States. The challenge presented to banking community and their regulators is to

keep up the pressure in the United States while also keeping drug currency placement out of their correspondent institutions as well. Law enforcement sources have

noted an increase in correspondent BMPE activity in Haiti, Guatemala, the Dominican Republic, Venezuela, Israel, Lebanon, Palestine, and Australia. When one views

this list it is easy to see that these dollars can be made available to individuals with

much more heinous purposes in mind than smuggling duty-free refrigerators into

Colombia. The BMPE is a global problem calling for global coordination. Given the

recent terrorist acts, it is even more imperative that we force these billions of dollars out of this system that can make them so easily available on a truly global

basis to anyone with a need for covert funds.

In conclusion, I would like to restate that our Government has the ability, the authority, and the knowledge to take action now against the BMPE. The question is

how do we bring our forces to bear in such a way that the BMPE will be dismantled? I believe the answer lies in eliminating the problems brought on by fragmented anti-money laundering jurisdiction. I suggest that this can be accomplished

by the creation of a special task force at the highest possible level, which would

have the charge to coordinate and direct our law enforcement efforts against the

BMPE and other underground financial systems. The most important first step for

this task force is to create a single repository for law enforcement money laundering

intelligence. This repository must include a method to retrieve even the most sensitive law enforcement information on a real time basis. If we ever hope to truly

dismantle these systems we must put this most valuable recourse in the hands of

a task force that is responsible for the big picture. In addition, once they have this

information, they must have the authority to disseminate it, as they deem approVerDate 11-MAY-2000 08:31 Sep 12, 2002 Jkt 000000 PO 00000 Frm 00106 Fmt 6633 Sfmt 6621 SEPT26.XXX SBANK4 PsN: SBANK4
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priate for their mission. The task force should also have the power to take action

on their own or direct the efforts of other law enforcement operations working along

these lines. Law enforcement has seen the need for this type of combined effort, but

to date they have been unable to achieve the desired level of cooperation. I believe

a high level task force will achieve the sought after results.

That concludes my testimony.

Thank you, Mr. Chairman.

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR CARPER

FROM JIMMY GURULE ́

Q.1. It is my understanding that the U.S. Customs Service lacks

the clear authority to inspect mail and other postal items leaving

the United States. Given that money laundering activity and the

exportation of other contraband could be facilitated by the use of

the U.S. mail, what are Treasury and the Administration doing to

close this loophole, and grant Customs the authority to inspect outbound postal items?

A.1. Outbound international mail has been treated as exempt from

inspection, because of Postal Service insistence that its laws preclude Customs border search of such mail. This has created the

possibility that outbound mail is being used to facilitate major violations of U.S. law. The violations can range from the unreported

exportation of currency and other monetary instruments to strategic merchandise and intellectual property rights infringement.

U.S. mail shipments are the only shipments leaving the country,

other than diplomatic pouches, that are not subject to Customs’ examination.

U.S. Postal Services’ and Customs’ legal positions with respect to

this issue are exhaustively documented. Customs asserts authority

to search all mail leaving the country, under 31 U.S.C. 5317(b),

which authorizes Customs officers to stop and search items including ‘‘envelopes’’ entering and leaving the country without a warrant. The Postal Service maintains that 39 U.S.C. 3623(d), which

requires the Postal Service to maintain at least one class of mail

of domestic origin that is sealed against inspection without a

search warrant, directly conflicts with the authority in 31 U.S.C.

5317.

U.S. Customs Service has intensified their efforts to obtain outbound search authority. There has been movement on Capitol Hill

during this session to enact legislation granting outbound search

authority of U.S. mail by U.S. Customs.

Currently, Customs has internal procedures and policies in place

on the search of outbound mail.

Q.2. I understand that U.S. Customs does all of its enforcement

and security targeting on international shipments arriving in the

United States by running computer checks against the sender, the

recipient, the description of the contents, the country of origin, etc.

I also understand that some international carriers provide this information electronically to Customs in advance of shipment arrival,

while some do not, including the U.S. Postal Service.

a). Can Customs get accurate content information from the Postal Service?

b). If not, what impact does this have on Customs’ ability to inspect and screen items entering the United States via the U.S.

Postal Service?

A.2.a. At this time, the Postal Service does not provide content information to Customs either electronically or in hard copy format.

Rather, the content information is provided on a Customs declaration attached to each item, which is prepared by the individuals

sending the parcel, not by the Postal Service. Customs personnel

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must manually review these items and declarations to determine

which will be inspected, which greatly slows the process.

The Postal Service is dependent upon the electronic capabilities

of the originating countries, which vary dramatically. In addition,

the customer base for international mail is overwhelmingly individual to individual, while Express Consignment Operators carry

primarily business to business, which is more easily electronically

manifested.

The U.S. Customs Service has the ability to perform enforcement

and security checks on inbound international shipments. Advance

information pertaining to some cargo shipments is provided electronically by some international carriers. This information includes, but is not limited to, the name and address of the foreign

shipper and consignee, a description of the items contained in the

shipment, the country of origin, and the value. In the Express Consignment Operator environment, advance information is provided

to Customs electronically, as well as hard copy computer printouts.

With the Postal Service, enforcement and security checks must be

performed based on a manual review of Customs’ declarations in

real time.

A.2.b. The current process requires Customs’ personnel to manually review each parcel and accompanying declaration, delaying facilitation. An advantage to advance information is that it allows

Customs to perform their inbound inspections more efficiently.

Most Express Consignment Operators present their manifests to

Customs while the conveyance is en route to the United States.

Customs reviews the manifest data to identify those shipments

that are to be examined.

Ideally, Customs would like advance information on all shipments. This serves the interests of both Customs and the Postal

Service, enabling both agencies to utilize its limited resources to

conduct searches and clearances on those requiring immediate attention, without delaying those items not needing review.

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