Testimony 

Before the Caucus on International 

Narcotics Control, U.S. Senate 

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 2:00 p.m. EST 

Thursday, March 4, 2004 COMBATING TERRORISM 

Federal Agencies Face 

Continuing Challenges in 

Addressing Terrorist 

Financing and Money 

Laundering 

Statement of Loren Yager, Director 

International Affairs and Trade 

and Richard M. Stana, Director 

Homeland Security and Justice Issues 

GAO-04-501T 
www.gao.gov/cgi-bin/getrpt?GAO-04-501T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Loren Yager at 

(202) 512-4128 or yagerl@gao.gov or 

Richard Stana at (202) 512-8777. 

Highlights of GAO-04-501T, a testimony 

before the Caucus on International 

Narcotics Control, U.S. Senate 

Thursday, March 4, 2004

COMBATING TERRORISM 

Federal Agencies Face Continuing 

Challenges in Addressing Terrorist 

Financing and Money Laundering 

The U.S. government faces various challenges in determining and monitoring 

the nature and extent of terrorists’ use of alternative financing mechanisms, 

according to GAO’s November 2003 report. Alternative financing 

mechanisms are outside the mainstream financial system and include the 

use of commodities (cigarettes, counterfeit goods, illicit drugs, etc.), bulk 

cash, charities, and informal banking systems to earn, move, and store 

assets. GAO recommended more systematic collection, analysis, and sharing 

of information to make alternative financing mechanisms less attractive to 

terrorist groups. In response to our recommendation that the FBI, in 

consultation with other agencies, systematically collect and analyze 

information on terrorists’ use of these mechanisms, Justice did not 

specifically agree or disagree with our recommendation, but other agencies 

agreed with the need for improved analysis. The Treasury agreed with our 

recommendation to issue an overdue report on precious stones and 

commodities, but it remains unclear how the resulting product may be used 

as the basis for an informed strategy as expected under the 2002 NMLS. The 

Internal Revenue Service (IRS) agreed with our recommendation to develop 

and implement procedures for sharing information on charities with states 

and issued IRS procedures and state guidance on December 31, 2003. 

To resolve jurisdictional issues and enhance interagency coordination of 

terrorist financing investigations, the FBI and ICE have taken steps to 

implement most of the key provisions of the May 2003 Memorandum of 

Agreement. According to GAO’s February 2004 report, the agencies have 

developed collaborative procedures to determine whether applicable ICE 

investigations or financial crimes leads may be related to terrorism or 

terrorist financing—and, if so, determine whether the FBI should thereafter 

take the lead in pursuing them. GAO’s report noted that continued progress 

will depend largely on the ability of the agencies to establish and maintain 

effective interagency relationships. 

From a broader or strategic perspective, the annual NMLS generally has not 

served as a useful mechanism for guiding coordination of federal efforts to 

combat money laundering and terrorist financing, according to GAO’s 

September 2003 report. While Treasury and Justice had made progress on 

some strategy initiatives designed to enhance interagency coordination of 

investigations, most initiatives had not achieved the expectations called for 

in the annual strategies. The report recommended (1) strengthening the 

leadership structure for strategy development and implementation, (2) 

identifying key priorities, and (3) establishing accountability mechanisms. 

In commenting on a draft of the September 2003 report, Treasury said that 

our recommendations are important, should the Congress reauthorize the 

legislation requiring future strategies; Justice said that our observations and 

conclusions will be helpful in assessing the role that the strategy process has 

played in the federal government's efforts to combat money laundering; and 

Homeland Security said that it agreed with our recommendations. 

The September 11, 2001, terrorist 

attacks highlighted the importance 

of data collection, information 

sharing, and coordination within 

the U.S. government. Such efforts 

are important whether focused on 

terrorism or as an integral part of a 

broader strategy for combating 

money laundering. In this 

testimony, GAO addresses (1) the 

challenges the U.S. government 

faces in deterring terrorists’ use of 

alternative financing mechanisms, 

(2) the steps that the Federal 

Bureau of Investigation (FBI) and 

Immigration and Customs 

Enforcement (ICE) have taken to 

implement a May 2003 

Memorandum of Agreement 

concerning terrorist financing 

investigations, and (3) whether the 

annual National Money Laundering 

Strategy (NMLS) has served as a 

useful mechanism for guiding the 

coordination of federal efforts to 

combat money laundering and 

terrorist financing. 

GAO’s testimony is based on two 

reports written in September 2003 

(GAO-03-813) and November 2003 

(GAO-04-163) for the Caucus and 

congressional requesters within the 

Senate Governmental Affairs 

Committee, as well as a February 

2004 report (GAO-04-464R) on

related issues for the Senate 

Appropriations Subcommittee on 

Homeland Security. 
Page 1 GAO-04-501T Combating Terrorism 

Mr. Chairman and Members of the Caucus: 

We are pleased to be here today to discuss some of the challenges the U.S. 

government faces in addressing the problems of terrorist financing and 

money laundering. The terrorist attacks of September 11, 2001, highlighted 

the importance of data collection, information sharing, and coordination 

within the U.S. government. Such efforts are important whether focused 

on terrorism or as an integral component of a broader strategy for 

combating money laundering. This is particularly true given that terrorist 

financiers and money launderers may sometimes use similar methods to 

hide and move their proceeds. 

As requested, today, we will address three issues. First, what challenges 

does the U.S. government face in deterring terrorists’ use of key 

alternative financing mechanisms—methods outside the mainstream 

financial system—such as the use of commodities, bulk cash, charities, 

and informal banking systems to earn, move, and store assets? Second, to 

what extent have the two applicable law enforcement agencies—the 

Federal Bureau of Investigation (FBI) and Homeland Security’s U.S. 

Immigration and Customs Enforcement (ICE)—taken steps to implement 

a 2003 Memorandum of Agreement (Agreement) to resolve jurisdictional 

issues and enhance interagency coordination of terrorist financing 

investigations; and, how has the Agreement affected the mission or role of 

ICE in investigating money laundering and other traditional financial 

crimes? Finally, how has the annual National Money Laundering Strategy 

(NMLS) served as a useful mechanism for guiding the coordination of 

federal efforts to combat money laundering and terrorist financing? 
Page 2 GAO-04-501T Combating Terrorism 

Our testimony is based on two reports we have provided to this Caucus1

and a recently issued report2

 we have provided to the Congress on related 

issues. We should also mention that we are in the process of conducting 

additional work specifically on the issue of coordination of U.S. agencies 

abroad in combating terrorist financing. We look forward to presenting 

those findings to the Caucus. 

Our November 2003 report noted various challenges that the U.S. 

government faces when addressing terrorists’ use of key alternative 

financing mechanisms. While we were unable to determine the extent of 

terrorists’ use of alternative financing mechanisms such as diamonds, 

gold, and informal financial systems, we did find that terrorists earn, 

move, and store their assets based on common factors that make these 

mechanisms attractive to terrorist and criminal groups alike. For example, 

the commodities terrorists use tend to be of high value, easy to conceal, 

and hold their value over time. In addition, we described the challenges 

that U.S. agencies faced in monitoring terrorists’ use of alternative 

financing mechanisms, such as accessibility of terrorists’ close knit, 

nontransparent financing networks; terrorists’ adaptability to avoid 

detection; and competing U.S. government priorities and demands. As a 

result of our findings, we made recommendations to various U.S. agencies 

to more systematically collect, analyze, and share information to make 

these alternative methods less attractive to terrorist groups. In response to 

our recommendation that the FBI systematically collect and analyze 

information on terrorists’ use of these mechanisms, Justice did not 

specifically agree or disagree with our recommendation. The Treasury 

agreed with our recommendation to issue an overdue report on precious 

 1

U.S. General Accounting Office, Terrorist Financing: U.S. Agencies Should 

Systematically Assess Terrorists’ Use of Alternative Financing Mechanisms, GAO-04-163

(Washington, D.C.: Nov. 14, 2003). This study was also requested by the Ranking Minority 

Member, Senate Subcommittee on Oversight of Government Management, the Federal 

Workforce and the District of Columbia; Committee on Governmental Affairs. U.S. General 

Accounting Office, Combating Money Laundering: Opportunities Exist to Improve the 

National Strategy, GAO-03-813 (Washington, D.C.: Sept. 26, 2003). This study was also 

requested by the Ranking Minority Member, Permanent Subcommittee on Investigations, 

Senate Committee on Governmental Affairs. 

2

U.S. General Accounting Office, Investigations of Terrorist Financing, Money 

Laundering, and Other Financial Crimes, GAO-04-464R (Washington, D.C.: Feb. 20, 

2004). Our study was mandated by Title I of the Senate Appropriations Committee report 

on the Department of Homeland Security Appropriations Bill for 2004; Senate Report 108-

86 (July 2003). 

Summary 
Page 3 GAO-04-501T Combating Terrorism 

stones and commodities but it remains unclear how the resulting product 

may be used as the basis for an informed strategy as expected under the 

2002 NMLS. The Internal Revenue Service (IRS) agreed with our 

recommendation to develop and implement procedures for sharing 

information on charities with states and issued IRS procedures and state 

guidance on December 31, 2003. 

Our February 2004 report noted that the FBI and ICE had implemented or 

taken concrete steps to implement most of the key provisions in the May 

2003 Memorandum of Agreement on terrorist financing investigations. For 

instance, the agencies had developed collaborative procedures to 

determine whether applicable ICE investigations or financial crimes leads 

may be related to terrorism or terrorist financing—and, if so, determine 

whether these investigations or leads should thereafter be pursued under 

the auspices of the FBI. However, the FBI and ICE had not yet issued a 

joint report on the status of implementation of the Agreement, which was 

required 4 months from its effective date. The Agreement did not affect 

ICE’s statutory authorities to conduct investigations of money laundering 

and other traditional financial crimes. But, regarding terrorist financing 

investigations, we noted that the FBI and ICE have confronted and will 

continue to confront a number of operational and organizational 

challenges, such as establishing and maintaining effective interagency 

relationships and ensuring that the financial crimes expertise and other 

investigative competencies of both agencies are appropriately and 

effectively utilized. 

Our September 2003 report noted that the annual NMLS generally has not 

served as a useful mechanism for guiding the coordination of federal law 

enforcement agencies’ efforts to combat money laundering and terrorist 

financing. While Treasury and Justice had made progress on some strategy 

initiatives designed to enhance interagency coordination of investigations, 

most initiatives had not achieved the expectations called for in the annual 

strategies. We recommended that, if the requirement for a national 

strategy is reauthorized, the Secretaries of the Treasury and Homeland 

Security and the Attorney General (1) strengthen the leadership structure 

for strategy development and implementation, (2) require processes to 

ensure key priorities are identified, and (3) establish accountability 

mechanisms. In commenting on a draft of the September 2003 report, 

Treasury said that our recommendations are important, should the 

Congress reauthorize the legislation requiring future strategies; Justice 

said that our observations and conclusions will be helpful in assessing the 

role that the strategy process has played in the federal government’s 
Page 4 GAO-04-501T Combating Terrorism 

efforts to combat money laundering; and Homeland Security said that it 

agreed with our recommendations. 

Cutting off terrorists’ funding is an important means of disrupting their 

operations. As initial U.S. and foreign government deterrence efforts 

focused on terrorists’ use of the formal banking or mainstream financial 

systems, terrorists may have been forced to increase their use of various 

alternative financing mechanisms. Alternative financing mechanisms 

enable terrorists to earn, move, and store their assets and may include the 

use of commodities, bulk cash,3

 charities, and informal banking systems, 

sometimes referred to as hawala.4

 In its fight against terrorism, the United 

States has focused on individuals and entities supporting or belonging to 

terrorist organizations including al Qaeda, Hizballah, HAMAS (Harakat alMuqawama al-Islamiya—Islamic resistance Movement), and others. These 

terrorist organizations are known to have used alternative financing 

mechanisms to further their terrorist activities. Government officials and 

researchers believe that terrorists do not always need large amounts of 

assets to support an operation, pointing out that the estimated cost of the 

September 11 attack was between $300,000 and $500,000. However, 

government officials also caution that funding for such an operation uses a 

small portion of the assets that terrorist organizations require for their 

support infrastructure such as indoctrination, recruitment, training, 

logistical support, the dissemination of propaganda, and other material 

support. 

In response to the terrorist attacks of September 11, the Departments of 

the Treasury and Justice both established multiagency task forces 

dedicated to combating terrorist financing. Treasury established Operation 

Green Quest, led by the Customs Service—now ICE in the Department of 

Homeland Security—to augment existing counterterrorist efforts by 

targeting current terrorist funding sources and identifying possible future 

sources. On September 13, 2001, the FBI formed a multiagency task 

 3

The use of bulk cash refers to smuggling currency, travelers checks, or similar instruments 

across borders by means of a courier rather than through a formal financial system. 

4

According to the 2002 NMLS, informal value transfer systems (referred to here as 

“informal banking systems”) are known by a variety of names reflecting ethnic and national 

origins predating the emergence of modern banking and other financial institutions. These 

systems provide mechanisms for the remittance of currency or other forms of monetary 

value—most commonly gold—without physical transportation or use of contemporary 

monetary instruments. 

Background 
Page 5 GAO-04-501T Combating Terrorism 

force—which is now known as the Terrorist Financing Operations Section 

(TFOS)—to combat terrorist financing. The mission of TFOS has evolved 

into a broad role to identify, investigate, prosecute, disrupt, and dismantle 

all terrorist-related financial and fundraising activities. The FBI also took 

action to expand the antiterrorist financing focus of its Joint Terrorism 

Task Forces (JTTFs)—teams of local and state law enforcement officials, 

FBI agents, and other federal agents and personnel whose mission is to 

investigate and prevent acts of terrorism.5

 In 2002, the FBI created a 

national JTTF in Washington, D.C., to collect terrorism information and 

intelligence and funnel it to the field JTTFs, various terrorism units within 

the FBI, and partner agencies. 

Following September 11, representatives of the FBI and Operation Green 

Quest met on several occasions to attempt to delineate antiterrorist 

financing roles and responsibilities. However, such efforts were largely 

unsuccessful. The resulting lack of clearly defined roles and coordination 

procedures contributed to duplication of efforts and disagreements over 

which agency should lead investigations.6 In May 2003, to resolve 

jurisdictional issues and enhance interagency coordination, the Attorney 

General and the Secretary of Homeland Security signed a Memorandum of 

Agreement concerning terrorist financing investigations. The Agreement 

and its related procedures specified that the FBI was to have the lead role 

in investigating terrorist financing and that ICE was to pursue terrorist 

financing solely through participation in FBI-led task forces, except as 

expressly approved by the FBI. 

Regarding strategic efforts, the Money Laundering and Financial Crimes 

Strategy Act of 1998 (Strategy Act) required the President—acting through 

the Secretary of the Treasury and in consultation with the Attorney 

General and other relevant federal, state, and local law enforcement and 

regulatory officials—to develop and submit an annual NMLS to the 

Congress by February 1 of each year from 1999 through 2003.7

 Unless 

reauthorized by the Congress, this requirement ended with the 2003 

strategy, which was issued on November 18, 2003. The goal of the Strategy 

Act was to increase coordination and cooperation among the various 

 5

According to the FBI, the first JTTF came into being in 1980, and the total number of task 

forces has nearly doubled since September 11, 2001. Today, there is a JTTF in each of the 

FBI’s 56 main field offices, and additional task forces are located in smaller FBI offices. 

6

See GAO-03-813. 

7

Pub. L. No. 105-310, 112 Stat. 2941 codified as 31 U.S.C. §§ 5340-42, 5351-55 (1998). 
Page 6 GAO-04-501T Combating Terrorism 

regulatory and enforcement agencies and to effectively distribute 

resources to combat money laundering and related financial crimes. The 

Strategy Act required the NMLS to define comprehensive, research-based 

goals, objectives, and priorities for reducing these crimes in the United 

States. The NMLS has generally included multiple priorities to guide 

federal agencies’ activities in combating money laundering and related 

financial crimes. In 2002, the NMLS was adjusted to reflect new federal 

priorities in the aftermath of September 11 including a goal to combat 

terrorist financing. 

The U.S. government faces myriad challenges in determining and 

monitoring the nature and extent of terrorists’ use of alternative financing 

mechanisms. Terrorists use a variety of alternative financing mechanisms 

to earn, move, and store their assets based on common factors that make 

these mechanisms attractive to terrorist and criminal groups alike. For all 

three purposes—earning, moving, and storing—terrorists aim to operate in 

relative obscurity, using mechanisms involving close knit networks and 

industries lacking transparency. More specifically, first, terrorists earn 

funds through highly profitable crimes involving commodities such as 

contraband cigarettes, counterfeit goods, and illicit drugs. For example, 

according to U.S. law enforcement officials, Hizballah earned an estimated 

profit of $1.5 million in the United States between 1996 and 2000 by 

purchasing cigarettes in a low tax state for a lower price and selling them 

in a high tax state at a higher price. Terrorists also earned funds using 

systems such as charitable organizations that collect large sums in 

donations from both witting and unwitting donors. Second, to move 

assets, terrorists seek out mechanisms that enable them to conceal or 

launder their assets through nontransparent trade or financial transactions 

such as the use of charities, informal banking systems, bulk cash, and 

commodities that may serve as forms of currency, such as precious stones 

and metals. Third, to store assets, terrorists may use similar commodities 

because they are likely to maintain value over a longer period of time and 

are easy to buy and sell outside the formal banking system. 

The true extent of terrorists’ use of alternative financing mechanisms is 

unknown, owing to the criminal nature of the activity and the lack of 

systematic data collection and analysis. The limited and sometimes 

conflicting information available on alternative financing mechanisms 

adversely affects the ability of U.S. government agencies to assess risk and 

prioritize efforts. U.S. law enforcement agencies, and specifically the FBI, 

which leads terrorist financing investigations and maintains case data, do 

not systematically collect and analyze data on terrorists’ use of alternative 

U.S. Government 

Faces Significant 

Challenges in 

Deterring Terrorists’ 

Use of Key Alternative 

Financing 

Mechanisms 
Page 7 GAO-04-501T Combating Terrorism 

financing mechanisms.8 The lack of such a method of data collection 

hinders the FBI from conducting systematic analysis of trends and 

patterns focusing on alternative financing mechanisms. Without such an 

assessment, the FBI would not have analyses that could aid in assessing 

risk and prioritizing efforts. 

Moreover, despite an acknowledged need from some U.S. government 

officials and researchers for further analysis of the extent of terrorists’ use 

of alternative financing mechanisms, U.S. government reporting on these 

issues has not always been timely or comprehensive, which could affect 

planning and coordination efforts. For example, the Departments of the 

Treasury and Justice did not produce a report on the links between 

terrorist financing and precious stone and commodity trading, as was 

required by March 2003 under the 2002 NMLS. Moreover, we found widely 

conflicting views in numerous interviews and available reports and 

documentation concerning terrorists’ use of precious stones and metals. 

In monitoring terrorists’ use of alternative financing mechanisms, the U.S. 

government faces a number of significant challenges including 

accessibility to terrorist networks, adaptability of terrorists, and 

competing demands or priorities within the U.S. government. First, 

according to law enforcement agencies and researchers, it is difficult to 

access or infiltrate ethnically or criminally based networks that operate in 

a nontransparent manner, such as informal banking systems or the 

precious stones and other commodities industries. Second, the ability of 

terrorists to adapt their methods hinders efforts to target high-risk 

industries and implement effective mechanisms for monitoring high-risk 

industry trade and financial flows. According to the FBI, once terrorists 

know that an industry they use to earn or move assets is being watched, 

they may switch to an alternative commodity or industry. Finally, 

competing priorities create challenges to federal and state officials’ efforts 

to use and enforce applicable U.S. laws and regulations in monitoring 

terrorists’ use of alternative financing mechanisms. For example, we 

reported to you in November 2003 the following: 

 8

Once a U.S. law enforcement agency (for example, the Drug Enforcement Administration, 

ICE, etc.) identifies a terrorist nexus in an investigation it is to notify the FBI. Information 

is to be shared through the FBI-led JTTFs in the field or the National JTTF in FBI 

headquarters. Agencies have representatives at each other’s locations to facilitate 

information sharing. 
Page 8 GAO-04-501T Combating Terrorism 

• Although the Internal Revenue Service (IRS) agreed with us in 2002 to 

begin developing a system, as allowed by law, to share with states data 

that would improve oversight9

 and could be used to deter terrorist 

financing in charities, the IRS had not made this initiative a priority. 

The IRS had not developed and implemented the system, citing 

competing priorities. 

• The Department of the Treasury’s Financial Crimes Enforcement 

Network (FinCEN) officials stated the extent of the workload created 

under the 2001 Uniting and Strengthening America by Providing 

Appropriate Tools Required to Intercept and Obstruct Terrorism Act 

(USA PATRIOT Act)10 initially increased the amount of work required 

and may have slowed efforts to take full advantage of the act 

concerning the establishment of anti-money laundering programs. 

FinCEN anti-money laundering program rules for dealers in precious 

metals, stones, or jewels were proposed on February 21, 2003, and had 

not been finalized when we recently contacted FinCEN on February 24, 

2004. 

• FBI officials told us that the 2002 NMLS contained more priorities than 

could be realistically accomplished, and Treasury officials said that 

resource constraints and competing priorities were the primary 

reasons why strategy initiatives, including those related to alternative 

financing mechanisms, were not met or were completed later than 

expected. 

As a result of our earlier findings: 

• We recommended that the Director of the FBI, in consultation with 

relevant U.S. government agencies, systematically collect and analyze 

information involving terrorists’ use of alternative financing 

mechanisms. Justice agreed with our finding that the FBI does not 

systematically collect and analyze such information, but Justice did not 

 9

The appropriate state officials can obtain details about the final denials of applications, 

final revocations of tax-exempt status, and notices of a tax deficiency under section 507, or 

chapter 41 or 42, under the Internal Revenue Code. However, IRS does not have a process 

to regularly share such data. See U.S. General Accounting Office, Tax-Exempt 

Organizations: Improvements Possible in Public, IRS, and State Oversight of Charities, 

GAO-02-526 (Washington, D.C.: Apr. 30, 2002). 

10The U.S. PATRIOT Act, enacted shortly after the terrorist attacks of September 11 

expanded the ability of law enforcement and intelligence agencies to access and share 

financial information regarding terrorist investigations. 
Page 9 GAO-04-501T Combating Terrorism 

specifically agree or disagree with our recommendation. However, both 

ICE and IRS senior officials have informed us that they agree that law 

enforcement agencies should have a better approach to assessing the 

use of alternative financing mechanisms. 

• We recommended that the Secretary of the Treasury and the Attorney 

General produce the report on the links between terrorism and the use 

of precious stones and commodities that was required by March 2003 

under the 2002 NMLS based on up-to-date law enforcement 

investigations. The Treasury responded that the report would be 

included as an appendix in the 2003 NMLS. Precious stones and 

commodities were given a small amount of attention in an appendix on 

trade-based money laundering within the 2003 NMLS that was released 

in November 2003. It remains unclear as to how this will serve as a 

basis for an informed strategy. 

• We recommended that the Commissioner of the IRS, in consultation 

with state charity officials, establish interim IRS procedures and state 

charity official guidelines, as well as set milestones and assign 

resources for developing and implementing both, to regularly share 

data on charities as allowed by federal law. The IRS agreed with our 

recommendation, and we are pleased to report that the IRS expedited 

efforts and issued IRS procedures and state guidance on December 31, 

2003, as stated in its agency comments in response to our report. 

In May 2003, to resolve jurisdictional issues and enhance interagency 

coordination, the Attorney General and the Secretary of Homeland 

Security signed a Memorandum of Agreement concerning terrorist 

financing investigations. The Agreement and its related procedures 

specified that the FBI was to have the lead role in investigating terrorist 

financing and that ICE was to pursue terrorist financing solely through 

participation in FBI-led task forces, except as expressly approved by the 

FBI. Also, the Agreement contained several provisions designed to 

increase information sharing and coordination of terrorist financing 

investigations. For example, the Agreement required the FBI and ICE to 

(1) detail appropriate personnel to each other’s agency and (2) develop 

specific collaborative procedures to determine whether applicable ICE 

investigations or financial crimes leads may be related to terrorism or 

terrorist financing. Another provision required that the FBI and ICE jointly 

report to the Attorney General, the Secretary of Homeland Security, and 

the Assistant to the President for Homeland Security on the status of the 

implementation of the Agreement 4 months from its effective date. 

Federal Agencies 

Have Taken Steps to 

Coordinate 

Investigations of 

Terrorist Financing, 

but Operational and 

Organizational 

Challenges Still Exist 
Page 10 GAO-04-501T Combating Terrorism 

In February 2004, we reported to the Senate Appropriations’ 

Subcommittee on Homeland Security that the FBI and ICE had 

implemented or taken concrete steps to implement most of the key 

Memorandum of Agreement provisions.11 For example, the agencies had 

developed collaborative procedures to determine whether applicable ICE 

investigations or financial crimes leads may be related to terrorism or 

terrorist financing—and, if so, determine whether these investigations or 

leads should thereafter be pursued under the auspices of the FBI. 

However, we noted that the FBI and ICE had not yet issued a joint report 

on the status of the implementation, which was required 4 months from 

the effective date of the Agreement. 

By granting the FBI the lead role in investigating terrorist financing, the 

Memorandum of Agreement has altered ICE’s role in investigating 

terrorism-related financial crimes. However, while the Agreement 

specifies that the FBI has primary investigative jurisdiction over confirmed 

terrorism-related financial crimes, the Agreement does not preclude ICE 

from investigating suspicious financial activities that have a potential 

(unconfirmed) nexus to terrorism—which was the primary role of the 

former Operation Green Quest. Moreover, the Agreement generally has not 

affected ICE’s mission or role in investigating other financial crimes. 

Specifically, the Agreement did not affect ICE’s statutory authorities to 

conduct investigations of money laundering and other traditional financial 

crimes. ICE investigations can still cover the wide range of financial 

systems—including banking systems, money services businesses, bulk 

cash smuggling, trade-based money laundering systems, illicit insurance 

schemes, and illicit charity schemes—that could be exploited by money 

launderers and other criminals. According to ICE headquarters officials, 

ICE is investigating the same types of financial systems as before the 

Memorandum of Agreement. 

Further, our February 2004 report noted that—while the Memorandum of 

Agreement represents a partnering commitment by the FBI and ICE—

continued progress in implementing the Agreement will depend largely on 

the ability of these law enforcement agencies to meet various operational 

and organizational challenges. For instance, the FBI and ICE face 

challenges in ensuring that the implementation of the Agreement does not 

create a disincentive for ICE agents to initiate or support terrorist 

financing investigations. That is, ICE agents may perceive the Agreement 

 11See GAO-04-464R. 
Page 11 GAO-04-501T Combating Terrorism 

as minimizing their role in terrorist financing investigations. Additional 

challenges involve ensuring that the financial crimes expertise and other 

investigative competencies of the FBI and ICE are effectively utilized and 

that the full range of the agencies’ collective authorities—intelligence 

gathering and analysis as well as law enforcement actions, such as 

executing search warrants and seizing cash and other assets—are 

effectively coordinated. Inherently, efforts to meet these challenges will be 

an ongoing process. Our interviews with FBI and ICE officials at 

headquarters and three field locations indicated that long-standing 

jurisdictional and operational disputes regarding terrorist financing 

investigations may have strained interagency relationships to some degree 

and could pose an obstacle in fully integrating investigative efforts. 

On a broader scale, as discussed below, we also have reported that 

opportunities exist to improve the national strategy for combating money 

laundering and other financial crimes, including terrorist financing.12

The 1998 Strategy Act required the President—acting through the 

Secretary of the Treasury and in consultation with the Attorney General 

and other relevant federal, state, and local law enforcement and regulatory 

officials—to develop and submit an annual NMLS to the Congress by 

February 1 of each year from 1999 through 2003. Also, in 2002, the NMLS 

was adjusted to reflect new federal priorities in the aftermath of 

September 11 including a goal to combat terrorist financing. Unless 

reauthorized by the Congress, the requirement for an annual NMLS ended 

with the issuance of the 2003 strategy.13

To assist in congressional deliberations on whether there is a continuing 

need for an annual NMLS, we reviewed the development and 

implementation of the 1999 through 2002 strategies. In September 2003, we 

reported to this Caucus that, as a mechanism for guiding the coordination 

of federal law enforcement agencies’ efforts to combat money laundering 

and related financial crimes, the annual NMLS has had mixed results but 

generally has not been as useful as envisioned by the Strategy Act. For 

example, we noted that although Treasury and Justice had made progress 

on some NMLS initiatives designed to enhance interagency coordination of 

investigations, most had not achieved the expectations called for in the 

 12See GAO-03-813. 

13The 2003 NMLS was issued on November 18, 2003. 

Opportunities Exist to 

Improve the National 

Strategy for 

Combating Money 

Laundering and Other 

Financial Crimes, 

Including Terrorist 

Financing 
Page 12 GAO-04-501T Combating Terrorism 

annual strategies, including plans to (1) use a centralized system to 

coordinate investigations and (2) develop uniform guidelines for 

undercover investigations. Headquarters officials cited differences in the 

various agencies’ anti-money laundering priorities as a primary reason why 

initiatives had not achieved their expectations. 

Most financial regulators we interviewed said that the NMLS had some 

influence on their anti-money laundering efforts because it provided a 

forum for enhanced coordination, particularly with law enforcement 

agencies. Law enforcement agency officials said the level of coordination 

between their agencies and the financial regulators was good. However, 

the financial regulators also said that other factors had more influence on 

them than the strategy. For example, the financial regulators cited their 

ongoing oversight responsibilities in ensuring compliance with the Bank 

Secrecy Act14 as a primary influence on them. Another influence has been 

anti-money laundering working groups, some of which were initiated by 

the financial regulators or law enforcement agencies prior to enactment of 

the 1998 Strategy Act. The officials said that the U.S. government’s 

reaction to September 11, which included a change in government 

perspective and new regulatory requirements placed on financial 

institutions by the USA PATRIOT Act, has driven their recent anti-money 

laundering and antiterrorist financing efforts. Although the financial 

regulators said that the NMLS had less influence on their anti-money 

laundering activities than other factors, they have completed the tasks for 

which the NMLS designated them as lead agencies over the years, as well 

as most of the tasks for which they were to provide support to the 

Treasury. 

In our September 2003 report, we noted that our work in reviewing 

national strategies for various crosscutting issues has identified several 

critical components needed for their development and implementation, 

including effective leadership, clear priorities, and accountability 

mechanisms. For a variety of reasons, these critical components generally 

have not been fully reflected in the development and implementation of 

the annual NMLS. For example, the joint Treasury-Justice leadership 

structure that was established to oversee NMLS-related activities generally 

has not resulted in (1) reaching agreement on the appropriate scope of the 

 14Currency and Foreign Transactions Reporting Act (commonly referred to as the Bank 

Secrecy Act), Pub. L. No. 91-508, 84 Stat. 1114 (1970) (codified as amended in 12 U.S.C. §§ 

1929(b), 1951-1959; 31 U.S.C. §§ 5311-5330. 
Page 13 GAO-04-501T Combating Terrorism 

strategy; (2) ensuring that target dates for completing strategy initiatives 

were met; and (3) issuing the annual NMLS by February 1 of each year, as 

required by the Strategy Act. 

Also, although the Treasury generally took the lead role in strategy-related 

activities, the department had no incentives or authority to get other 

departments and agencies to provide necessary resources and compel 

their participation. And, the annual strategies have not identified and 

prioritized issues that required the most immediate attention. Each 

strategy contained more priorities than could be realistically achieved, the 

priorities have not been ranked in order of importance, and no priority has 

been explicitly linked to a threat and risk assessment. Further, although 

the 2001 and 2002 strategies contained initiatives to measure program 

performance, none had been used to ensure accountability for results. 

Officials attributed this to the difficulty in establishing such measures for 

combating money laundering. In addition, we noted that the Treasury had 

not provided annual reports to the Congress on the effectiveness of 

policies to combat money laundering and related financial crimes, as 

required by the Strategy Act. 

In summary, our September 2003 report recommended that—if the 

Congress reauthorizes the requirement for an annual NMLS—the Secretary 

of the Treasury, working with the Attorney General and the Secretary of 

Homeland Security, should take appropriate steps to 

• strengthen the leadership structure responsible for strategy 

development and implementation by establishing a mechanism that 

would have the ability to marshal resources to ensure that the 

strategy’s vision is achieved, resolve disputes between agencies, and 

ensure accountability for strategy implementation; 

• link the strategy to periodic assessments of threats and risks, which 

would provide a basis for ensuring that clear priorities are established 

and focused on the areas of greatest need; and 

• establish accountability mechanisms, such as (1) requiring the 

principal agencies to develop outcome-oriented performance measures 

that must be linked to the NMLS’s goals and objectives and that also 

must be reflected in the agencies’ annual performance plans and (2) 

providing the Congress with periodic reports on the strategy’s results. 

In commenting on a draft of the September 2003 report, Treasury said that 

our recommendations are important, should Congress reauthorize the 
Page 14 GAO-04-501T Combating Terrorism 

legislation requiring future strategies; Justice said that our observations 

and conclusions will be helpful in assessing the role that the strategy 

process has played in the federal government’s efforts to combat money 

laundering; and Homeland Security said that it agreed with our 

recommendations. 

Our review of the development and implementation of the annual 

strategies did not cover the 2003 NMLS, which was issued in November 

2003, about 2 months after our September 2003 report. While we have not 

reviewed the 2003 NMLS, we note that it emphasized that “the broad fight 

against money laundering is integral to the war against terrorism” and that 

money laundering and terrorist financing “share many of the same 

methods to hide and move proceeds.” In this regard, one of the major 

goals of the 2003 strategy is to “cut off access to the international financial 

system by money launderers and terrorist financiers more effectively.” 

Under this goal, the strategy stated that the United States will continue to 

focus on specific financing mechanisms—including charities, bulk cash 

smuggling, trade-based schemes, and alternative remittance systems—that 

are particularly vulnerable or attractive to money launderers and terrorist 

financiers. 

To be successful, efforts to disrupt terrorists’ ability to fund their 

operations must focus not only on the formal banking and mainstream 

financial sectors but also on alternative financing mechanisms. The 2003 

NMLS, which was issued last November includes a focus on alternative 

financing mechanisms; however, it is too soon to determine how well 

these efforts are working. We were pleased that IRS implemented our 

recommendation by expediting the establishment of procedures and 

guidelines for sharing data on charities with states. We continue to believe 

that implementation of our other two recommendations would further 

assist efforts to effectively address vulnerabilities posed by terrorists’ use 

of alternative financing mechanisms. 

Also, regarding investigative efforts against sources of terrorist financing, 

the May 2003 Memorandum of Agreement signed by the Attorney General 

and the Secretary of Homeland Security represents a partnering 

commitment by two of the nation’s premier law enforcement agencies, the 

FBI and ICE. In the 9 months since the Agreement was signed, progress 

has been made in waging a coordinated campaign against sources of 

terrorist financing. Continued progress will depend largely on the ability of 

the agencies to establish and maintain effective interagency relationships 

and meet various other operational and organizational challenges. 

Concluding 

Observations 
Page 15 GAO-04-501T Combating Terrorism 

Finally, from a broader or strategic perspective, the annual NMLS has had 

mixed results in guiding the efforts of law enforcement and financial 

regulators in the fight against money laundering and, more recently, 

terrorist financing. Through our work in reviewing national strategies, we 

identified critical components needed for successful strategy development 

and implementation; but, to date, these components have not been well 

reflected in the annual NMLS. The annual NMLS requirement ended with 

the issuance of the 2003 strategy. If the Congress reauthorizes the 

requirement for an annual NMLS, we continue to believe that 

incorporating these critical components—a strengthened leadership 

structure, the identification of key priorities, and the establishment of 

accountability mechanisms—into the strategy could help resolve or 

mitigate the deficiencies we identified. 

Mr. Chairman, this concludes our prepared statement. We would be happy 

to respond to any questions that you or Members of the Caucus may have. 

For further information about this testimony, please contact Loren Yager 

at (202) 512-4128 or Richard M. Stana at (202) 512-8777. Other key 

contributors to this statement were Christine M. Broderick, Danny R. 

Burton, Barbara I. Keller, R. Eric Erdman, Kathleen M. Monahan, Tracy M. 

Guerrero, and Janet I. Lewis. 

GAO Contacts and 

Staff 

Acknowledgments 

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