```

[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

 
  TERRORIST FINANCING SINCE 9/11: ASSESSING AN EVOLVING AL-QAEDA AND 
                      STATE SPONSORS OF TERRORISM

=======================================================================

                                HEARING

                               before the

                    SUBCOMMITTEE ON COUNTERTERRORISM
                            AND INTELLIGENCE

                                 of the

                     COMMITTEE ON HOMELAND SECURITY
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 18, 2012

                               __________

                           Serial No. 112-93

                               __________

       Printed for the use of the Committee on Homeland Security
                                     

[GRAPHIC] [TIFF OMITTED]

                                     

      Available via the World Wide Web: http://www.gpo.gov/fdsys/

                               __________

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20402-0001

                     COMMITTEE ON HOMELAND SECURITY

                   Peter T. King, New York, Chairman
Lamar Smith, Texas                   Bennie G. Thompson, Mississippi
Daniel E. Lungren, California        Loretta Sanchez, California
Mike Rogers, Alabama                 Sheila Jackson Lee, Texas
Michael T. McCaul, Texas             Henry Cuellar, Texas
Gus M. Bilirakis, Florida            Yvette D. Clarke, New York
Paul C. Broun, Georgia               Laura Richardson, California
Candice S. Miller, Michigan          Danny K. Davis, Illinois
Tim Walberg, Michigan                Brian Higgins, New York
Chip Cravaack, Minnesota             Cedric L. Richmond, Louisiana
Joe Walsh, Illinois                  Hansen Clarke, Michigan
Patrick Meehan, Pennsylvania         William R. Keating, Massachusetts
Ben Quayle, Arizona                  Kathleen C. Hochul, New York
Scott Rigell, Virginia               Janice Hahn, California
Billy Long, Missouri                 Vacancy
Jeff Duncan, South Carolina
Tom Marino, Pennsylvania
Blake Farenthold, Texas
Robert L. Turner, New York
            Michael J. Russell, Staff Director/Chief Counsel
               Kerry Ann Watkins, Senior Policy Director
                    Michael S. Twinchek, Chief Clerk
                I. Lanier Avant, Minority Staff Director

                                 ------                                

           SUBCOMMITTEE ON COUNTERTERRORISM AND INTELLIGENCE

                 Patrick Meehan, Pennsylvania, Chairman
Paul C. Broun, Georgia, Vice Chair   Brian Higgins, New York
Chip Cravaack, Minnesota             Loretta Sanchez, California
Joe Walsh, Illinois                  Kathleen C. Hochul, New York
Ben Quayle, Arizona                  Janice Hahn, California
Scott Rigell, Virginia               Vacancy
Billy Long, Missouri                 Bennie G. Thompson, Mississippi 
Peter T. King, New York (Ex              (Ex Officio)
    Officio)
                    Kevin Gundersen, Staff Director
                   Zachary Harris, Subcommittee Clerk
               Hope Goins, Minority Subcommittee Director

                            C O N T E N T S

                              ----------                              
                                                                   Page

                               Statements

The Honorable Patrick Meehan, a Representative in Congress From 
  the State of Pennsylvania, and Chairman, Subcommittee on 
  Counterterrorism and Intelligence:
  Oral Statement.................................................     1
  Prepared Statement.............................................     3
The Honorable Brian Higgins, a Representative in Congress From 
  the State of New York, and Ranking Member, Subcommittee on 
  Counterterrorism and Intelligence..............................     4

                               Witnesses

Mr. Jonathan Schanzer, Vice President of Research, Foundation for 
  Defense of Democracies:
  Oral Statement.................................................     6
  Prepared Statement.............................................     8
Mr. John A. Cassara, Private Citizen:
  Oral Statement.................................................     9
  Prepared Statement.............................................    11
Mr. Dennis M. Lormel, President and CEO, DML Associates, LLC:
  Oral Statement.................................................    16
  Prepared Statement.............................................    17
Ms. Sue E. Eckert, Senior Fellow, Watson Institute for 
  International Studies, Brown University:
  Oral Statement.................................................    22
  Prepared Statement.............................................    23

                                Appendix

Questions From Chairman Patrick Meehan for Jonathan Schanzer.....    31
Questions From Chairman Patrick Meehan for John A. Cassara.......    35
Questions From Chairman Patrick Meehan for Dennis M. Lormel......    42
Questions From Chairman Patrick Meehan for Sue E. Eckert.........    50
Questions From Ranking Member Brian Higgins for Sue E. Eckert....    53

  TERRORIST FINANCING SINCE 9/11: ASSESSING AN EVOLVING AL-QAEDA AND 
                      STATE SPONSORS OF TERRORISM

                              ----------                              

                          Friday, May 18, 2012

             U.S. House of Representatives,
                    Committee on Homeland Security,
         Subcommittee on Counterterrorism and Intelligence,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 11:17 a.m., in 
Room 311, Cannon House Office Building, Hon. Patrick Meehan 
[Chairman of the subcommittee] presiding.
    Present: Representatives Meehan, Long, and Higgins.
    Mr. Meehan. The Committee on Homeland Security Subcommittee 
on Counterterrorism and Intelligence will come to order.
    The subcommittee is meeting today to hear testimony 
regarding the evolution of al-Qaeda and state sponsors of 
terrorism in regards to terrorism financing since September 11. 
I now recognize myself for an opening statement.
    I would like to welcome everyone to today's hearing of the 
Subcommittee on Counterterrorism and Intelligence examining the 
United States Government's approach to combating terrorist 
financing more than a decade after the September 11 attacks. I 
look forward to hearing from today's expert witnesses--and I 
mean expert--on the unique role of terrorist financing and what 
it plays in the war on terrorism and on the evolving trends in 
this field.
    The September 11 hijackers used United States and foreign 
financial institutions to hold, move, and retrieve their money. 
They deposited money into United States accounts via wire 
transfer and deposits of travellers checks and cash that was 
brought from overseas. They kept funds in foreign accounts, 
which they accessed through ATMs and credit card transactions 
here in the homeland. According to the September 11 Commission, 
the plot cost al-Qaeda somewhere in the rage of $400,000 to 
$500,000, of which approximately $300,000 passed through the 
hijacker's bank accounts here in the United States.
    After the attacks, the United States publicly declared that 
the fight against al-Qaeda financing was as critical as the 
fight against al-Qaeda itself. The charge of the United States 
intelligence and law enforcement communities was clear: If we 
choke off the terrorists' money, we limit their ability to 
conduct mass casualty attacks.
    Within months of the attacks, the Department of Defense, 
the FBI, the CIA, and, perhaps most importantly, the Department 
of Treasury launched a swift and unprecedented crackdown on 
domestic and international terrorist financing. I am very 
pleased, in fact, some of the very people who are responsible 
for that are sitting on our expert panel today.
    Since then, the Treasury's Office of Terrorism and 
Financial Intelligence has played a critical intelligence and 
enforcement role against terrorist financing through its dual 
aims of safeguarding the United States financial system against 
illicit use and combating rogue nation's terrorist 
facilitators, money launderers, drug kingpins, and other 
National security threats.
    The Department of Treasury and the intelligence community's 
successes against al-Qaeda financing and fundraising is without 
question. In 2005, the 9/11 Commission issued a report card 
that evaluated progress the Government had made in implementing 
that group's recommendations. It gave the Government an A-. Not 
too many A-'s at this day or any day in Government, but it gave 
it an A- in combating terrorist financing, the best mark on the 
scorecard.
    But despite our successes, and this is important, we can't 
become complacent. Because al-Qaeda and its affiliates continue 
to expand their geographic reach worldwide. State sponsors of 
terrorism like Iran and Syria are highly sophisticated, and 
they continue to take advantage of the United States and 
international financial systems in order to skirt international 
sanctions.
    The United States military and counterterrorism efforts 
have largely decimated core al-Qaeda leadership in Afghanistan 
and Pakistan, and the group is under significant financial 
strain and is struggling to secure steady financing to plan and 
execute attacks against the United States homeland and Western 
interests.
    The terrorist enemies we now face are more diverse, 
diffuse, and decentralized than ever. Al-Qaeda and their 
affiliates have concluded that, to bring America down, they 
will attack with, ``smaller but more frequent operations,'' 
what some may refer to as the strategy of a thousand cuts. The 
aim is to bleed the enemy, meaning us, to death.
    In June 2011, the Obama administration released a National 
Strategy for Counterterrorism, where the evolution of terrorist 
financing was documented: AQAP receiving charitable donations 
in Yemen, FARC, and the Taliban drug trafficking, Hezbollah's 
drug and criminal activities, AQAM's link to drug trafficking 
an kidnapping, and the role of Boko Haram and al-Shabaab in 
kidnapping for ransom and extortion.
    Hezbollah facilitators were particularly savvy in skirting 
U.S. restrictions on terrorist financing and have been charged 
in a number of high-profile criminal schemes. As a former 
United States Attorney in Philadelphia, I initiated 
investigations into Hezbollah's fund-raising activities that 
included attempts to transport stolen laptop computers, 
passports, and Sony PlayStation systems. A separate intricate 
Hezbollah scheme illustrates the interconnectedness of these 
networks where a Lebanese bank laundered money from Colombian 
drug cartels and mixed it with proceeds from used car sales 
that were bought in the United States and then sold in Africa. 
The cash was then moved back into Lebanon and poured into 
Hezbollah's coffers. Clearly, these groups are highly 
innovative and motivated, and we must be up to the challenge.
    Terrorist groups and state sponsors of terrorism turning to 
criminal activities to set up additional networks to acquire 
logistical support and to raise financial resources is another 
evolving trend which could point to future activities of 
terrorist financing.
    Given this shifting trend and the relatively low amounts of 
money required to undertake an attack, the United States 
Government may need to recalibrate some of its tactics and 
examine how the intelligence and law enforcement communities 
and I believe also the financial entities--the private 
financial entities will adapt their strategies in order to 
address remaining vulnerabilities in combating terrorist 
financing.
    I thank the witnesses for the time to be with us today, and 
I look forward to hearing from this distinguished panel.
    [The statement of Mr. Meehan follows:]
                  Statement of Chairman Patrick Meehan
                              May 18, 2012
                                welcome
    I'd like to welcome everyone to today's hearing of the Subcommittee 
on Counterterrorism and Intelligence examining the U.S. Government's 
approach to combating terrorist financing more than a decade after the 
9/11 attacks.
    I look forward to hearing from today's expert witnesses on the 
unique role terrorist financing plays in the war on terrorism and on 
the evolving trends in this field.
                       post-september 11 actions
    The September 11 hijackers used U.S. and foreign financial 
institutions to hold, move, and retrieve their money. They deposited 
money into U.S. accounts via wire transfers and deposits of cash or 
travelers checks brought from overseas. They kept funds in foreign 
accounts, which they accessed through ATMs and credit card transactions 
here in the homeland. According to the 9/11 Commission, the plot cost 
al-Qaeda somewhere in the range of $400,000-$500,000, of which 
approximately $300,000 passed through the hijackers' bank accounts in 
the United States.
    After the attacks, the United States publicly declared that the 
fight against al-Qaeda financing was as critical as the fight against 
al-Qaeda itself. The charge of the U.S. intelligence and law 
enforcement communities was clear: If we choke off the terrorists' 
money, we limit their ability to conduct mass casualty attacks.
    Within months of the attacks, the Department of Defense, the FBI, 
the CIA, and perhaps most importantly the Department of the Treasury, 
launched a swift and unprecedented crackdown on domestic and 
international terrorist financing.
    Since then, Treasury's Office of Terrorism and Financial 
Intelligence has played a critical intelligence and enforcement role 
against terrorist financing through its dual aims of safeguarding the 
U.S. financial system against illicit use and combating rogue nations, 
terrorist facilitators, money launderers, drug kingpins, and other 
National security threats.
                            today's hearing
    The Department of the Treasury and the intelligence community's 
successes against al-Qaeda financing and fundraising is without 
question. In 2005, the 9/11 Commission issued a ``report card'' that 
evaluated progress the Government had made in implementing the group's 
recommendations. It gave the Government an ``A-'' in combating 
terrorist financing--the best mark on the report card.
    Despite our successes, we must not become complacent. Al-Qaeda and 
its affiliates continue to expand their geographic reach worldwide. 
State sponsors of terrorism like Iran and Syria are highly 
sophisticated and continue to take advantage of the U.S. and 
international financial systems in order to skirt international 
sanctions.
                 new terrorist tools used in the fight
    Since U.S. military and counterterrorism efforts have largely 
decimated core al-Qaeda leadership in Afghanistan and Pakistan, the 
group is under significant financial strain and is struggling to secure 
steady financing to plan and execute attacks against the U.S. homeland 
and Western interests.
    The terrorist enemies we now face are more diverse, diffuse, and 
decentralized than ever. Al-Qaeda and their affiliates have concluded 
that to bring America down they will attack us with ``smaller, but more 
frequent operations in what some may refer to as the strategy of a 
thousand cuts. The aim is to bleed the enemy to death.''
    This was the aim with the AQAP cargo bomb plot of October 2010, 
where the group boasted that the overhead cost for the attack was only 
$4,200 and would provoke the U.S. and Western countries to respond with 
``billions of dollars in new security measures.''
    In June 2011, the Obama administration released a National Strategy 
for Counterterrorism, where the evolution of terrorist financing were 
document: AQAP receiving charitable donations in Yemen; FARC and 
Taliban drug trafficking, Hezbollah's drug and criminal activities, 
AQIM's links to drug trafficking and kidnapping, and the role of Boko 
Haram and al-Shabaab in kidnapping for ransom and extortion.
    Hezbollah facilitators are particularly savvy in skirting U.S. 
restrictions on terrorist financing and have been charged in a number 
of high-profile criminal schemes. As a former U.S. Attorney in 
Philadelphia, I initiated investigations into Hezbollah's fundraising 
activities that included attempts to transport stolen laptop computers, 
passports, and Sony PlayStation systems. A separate intricate Hezbollah 
scheme illustrates the interconnectedness of these networks, where a 
Lebanese bank laundered money from Colombian drug cartels and mixed it 
with proceeds from used cars bought in the United States and then sold 
in Africa where the cash was moved back to Lebanon and poured into 
Hezbollah's coffers. Clearly these groups are highly innovative and 
motivated and we must be up to the challenge.
    Terrorist groups and state sponsors of terrorism turning to 
criminal activities to set up additional networks, to acquire 
logistical support, and to raise financial resources is another 
evolving trend which could point to the future of terrorist financing.
    Given this shifting trend, and the relatively low amounts of money 
required to undertake an attack, the U.S. Government may need to 
recalibrate some of its tactics and examine how the intelligence and 
law enforcement communities will adapt their strategies in order to 
address remaining vulnerabilities in combating terror financing.
                               conclusion
    I thank the witnesses for taking the time to be with us today and I 
look forward to hearing from this distinguished panel.

    Mr. Meehan. The Chairman now recognizes the distinguished 
Ranking Member of the Subcommittee on Counterterrorism, the 
gentleman from New York, Mr. Higgins, for any statement he may 
have.
    Mr. Higgins. Thank you, Mr. Chairman.
    Just briefly, in reference to your opening statement, we 
have learned in prior hearings that Hezbollah, which is a 
terrorist organization, a Shia Muslim group committed to 
violent jihad, acts as a proxy for Venezuela, for Syria, and 
for Iran. They have a presence in the 20-country region of 
Latin America. Additionally, they have a presence in 15 
American cities, including four major cities in Canada. We have 
also been told that we are not to be too concerned about this, 
that their activities are limited to fund-raising. Well, I see 
the fund-raising activities by a terrorist group as an act of 
terrorism, at least, at least in a preliminary way.
    So those are some of the concerns that I have. But, in the 
interest of time, I will submit my opening statement for the 
record, so that we can get to the expert witnesses. Thank you 
for being here.
    Thank you, Mr. Chairman. I yield back.
    Mr. Meehan. Thank you.
    Other Members of the committee are reminded that opening 
statements may be submitted for the record.
    We are pleased to have a distinguished panel of witnesses 
before us today, on this important topic.
    Dr. Jonathan Schanzer is the vice president of research at 
the Foundation for Defense of Democracies. He worked as a 
terrorism finance analyst at the United States Department of 
Treasury, where he played an integral role in the designation 
of numerous terrorist financiers.
    Dr. Schanzer has also worked for several other United 
States-based think tanks, including the Washington Institute 
for Near East Policy and Jewish Policy Center and the Middle 
East Forum. He studied Middle East history in four countries 
and most recently received his Ph.D. from King's College in 
London where he wrote his dissertation on the U.S. Congress and 
its efforts to combat terrorism in the 20th Century.
    Mr. John Cassara enjoyed a 26-year career in the Federal 
Government intelligence and law enforcement community as an 
expert in anti-money laundering and terrorist financing. He 
worked at the Department of Treasury's Financial Crimes 
Enforcement Network, and this was the first institution set up 
to take on the issue of terrorist financing, and at the United 
States Financial Intelligence Unit. He was detailed to work in 
the Office of Terrorism Finance and Financial Intelligence at 
the Department of Treasury and the Department of State's Bureau 
of International Narcotics and Law Enforcement Affairs and 
Anti-Money Laundering Section. That had to be quite a business 
card.
    During his law enforcement investigative career, Mr. 
Cassara conducted a large number of money laundering, fraud, 
intellectual property rights, smuggling, and diversion of 
weapon and high technology investigations. Just the scope of 
that demonstrates the numerous schemes that are possible. These 
investigations took place in Africa, the Middle East, and 
Europe for a variety of Federal agencies, including directing 
the first truly international money laundering task force and 
serving as an undercover arms dealer.
    Mr. Dennis Lormel is the president and CEO of DML 
Associates, a full-service investigative consultancy. Mr. 
Lormel retired from the Federal Bureau of Investigation in 2003 
after 30 years of Government service and almost 28 as a special 
agent in the FBI.
    In December, 2000, he was appointed the chief of the FBI's 
Financial Crimes Program. Following the terrorist attacks of 
September, 2001, Mr. Lormel established and directed the FBI's 
Terrorist Financing Initiative, which evolved into the 
Terrorist Financing Operations Section within the 
Counterterrorism Division. Since leaving law enforcement, he 
has provided risk advisory consulting services and has served 
as an advisor to the Congressional Anti-Terrorist Financing 
Task Force.
    The Honorable Sue Eckert is a senior fellow at the Thomas 
J. Watson Institute at Brown University, where her research is 
concentrated on making United Nations sanctions more effective 
through targeting and combating the financing of terrorism.
    Prior to joining Brown University, Ms. Eckert was employed 
at the Institute of International Economics; and from 1993 
until 1997, Ms. Eckert was appointed by President Clinton and 
confirmed by the Senate as the assistant secretary of commerce 
for export administration. Previously, she served on the 
professional staff of the House of Representatives Committee on 
Foreign Affairs. In addition, she has worked with business 
groups and served on numerous working groups and committees 
addressing security and technology issues.
    I am very grateful for this panel. You bring in expertise 
on an issue which I think is dramatically under-appreciated by 
most Americans, and few realize the importance of this as we 
conduct investigations and do our best to protect not just this 
Nation but Western interests from around the world from 
terrorist activity and threats.
    A critical element is the ability to understand how they 
are funded, how they are supported, how they operate, and we 
have seen a remarkably changing capacity for them to do it. You 
have been there at the front end of this. We really need your 
insights to understand how things have evolved and what we 
ought to be looking for to continue to do the best job that we 
can to be on top of the ability to control their ability to 
carry out acts of terrorism against us.
    So, at this point, I appreciate your being here. We are 
going to be called again to votes at 11:50, but we want to get 
the benefit of your testimony. We are going to do as much as we 
can to probe on questions as soon as we complete that. So I ask 
you to do your best to focus on the essence of your testimony 
and see if we can stay within the 5-minute period.
    So the Chairman now recognizes Dr. Schanzer to testify.

  STATEMENT OF JONATHAN SCHANZER, VICE PRESIDENT OF RESEARCH, 
             FOUNDATION FOR DEFENSE OF DEMOCRACIES

    Mr. Schanzer. Chairman Meehan, Ranking Member Higgins, and 
Members of the subcommittee, on behalf of the Foundation for 
Defense of Democracies I thank you for the opportunity to 
testify.
    I base my testimony today on my experience as an analyst at 
the U.S. Treasury's Office of Intelligence and Analysis, where 
I worked from 2004 to 2007 and was directly involved in 
designating several terrorist financiers.
    Mr. Chairman, after the September 11 attacks, the U.S. 
Treasury immediately went to work uncovering terrorist funds. 
On September 23, President George W. Bush issued an Executive 
Order designating terrorist entities that threatened America. 
That list quickly grew and became a powerful tool for capturing 
terrorist money.
    The 9/11 Commission report at least in 2004 gave Treasury 
high marks for its efforts, but in denying terrorists the use 
of the formal banking sector, we have driven terror financing 
underground, and we are now victims of our own success. 
Terrorists have adapted in part by hatching cheaper plots. It 
cost al-Qaeda of the Arabian Peninsula, AQAP, just $4,200 to 
place two bombs on cargo planes in October, 2010. The group 
bragged openly of this, underscoring that it is nearly 
impossible now to stop such low-cost operations.
    Other terrorist groups rely heavily on bulk cash smuggling 
to evade detection with couriers delivering suitcases full of 
cash to terrorist masterminds. Still others engage in trade-
based money launderings, where they plow illicit cash into 
legitimate businesses to further finance terrorist activities.
    Broadly speaking, terrorist financiers are increasingly 
shifting to criminal activity. Earlier this year, U.S. 
authorities indicted a vast Hezbollah network of money 
laundering, cocaine deals, and more, exposing 30 U.S.-based car 
dealerships that helped the group move cash. Similarly, Senator 
Dianne Feinstein recently noted how the Taliban relies heavily 
on profits from the heroin trade to finance its operations.
    If this trend continues, it is reasonable to assume that 
criminal investigations will play an increasingly prominent 
role in U.S. efforts to counter terror finance. For its part, 
Treasury must continue to issue designations, even if fewer of 
them lead to actually capturing cash. The naming and shaming of 
terrorist financiers lets them know that they are being 
watched, and that helps to stem the flow of cash that can 
finance attacks on the homeland or against allies abroad.
    Designations can also expose key nodes of terrorist groups. 
That has been critical in exposing al-Qaeda's relationship with 
Iran. In July 2011, Treasury designated al-Qaeda leader Yasin 
al-Suri and five others who moved money and recruits to 
Pakistan, the Gulf, and Iraq. Treasury declared that al-Suri's 
network operates as part of a ``secret deal'' between al-Qaeda 
and the Iranian Government.
    In January 2009, Treasury designated four other al-Qaeda 
operatives in Iran. All of them, including Osama bin Laden's 
son, Sa'ad bin Laden, served on al-Qaeda's executive council.
    Of course, none of this comes as a surprise. The 9/11 
Commission in 2004 expressed concern over the Iran-al-Qaeda 
operational relationship, noting that it requires ``further 
investigation by the U.S. Government.'' Treasury is doing just 
that, and it shares its findings through the designation 
process.
    Remarkably, Treasury's robust counterterrorism program is 
the only one of its kind in the world. None of America's allies 
come close to our investment in human and financial resources 
to combat terror finance. This can be blamed on a combination 
of tight budgets and a lack of political will.
    Though the international Financial Action Task Force, or 
FATF, recently beefed up its standard, it is insufficient. FATF 
allows members to self or mutually evaluate, operates according 
to recommendations, and enables states like Saudi Arabia and 
Qatar to give themselves high marks regardless of the 
realities. The system is full of holes, and terrorists 
predictably gravitate to the areas of weakest authority.
    Looking ahead, Treasury's policy shop, the Office of 
Terrorism Finance and Financial Crimes, TFFC, needs to prompt 
both allies and adversaries to do more to combat terror 
finance. But, for the short term, the most glaring challenge is 
the threat of a nuclear Iran. On this front, Treasury has had a 
real impact. Tehran now faces tougher sanctions than ever 
before, and the regime is cash-strapped. Though Teheran 
continues to push forward with its nuclear program, the regime 
reportedly finds it increasingly difficult to bankroll 
terrorist proxies, Hamas, and Hezbollah to the extent that it 
had in the past. Admittedly, we may now be past the point where 
economics can prevent a nuclear Iran, but Treasury's efforts 
have nevertheless been instructive. They demonstrate that, if 
properly applied, sanctions can truly diminish a state 
sponsor's ability to finance terror.
    Mr. Chairman, there are many other challenges on the 
terrorism financing front that I did not have time to address 
today. If I have missed anything you wish to discuss, I am 
happy to answer your questions; and on behalf of the Foundation 
for Defensive Democracies, I thank you for inviting me today.
    [The statement of Mr. Schanzer follows:]
                Prepared Statement of Jonathan Schanzer
                              May 18, 2012
    Chairman Meehan, Ranking Member Higgins, and Members of the 
subcommittee, on behalf of the Foundation for Defense of Democracies, 
thank you for the opportunity to testify.
    I base my testimony today on my experience as an analyst at the 
U.S. Treasury Office of Intelligence and Analysis, where I worked from 
2004 to 2007, and was directly involved in designating several 
terrorist financiers.
    Mr. Chairman, after the September 11 attacks, the U.S. Treasury 
immediately went to work uncovering terrorist funds. On September 23, 
President George W. Bush issued an Executive Order designating 
terrorist entities that threatened America.\1\ That list grew quickly 
and became a powerful tool for capturing terrorist money.
---------------------------------------------------------------------------
    \1\ ``Executive Order on Terrorist Financing,'' September 23, 2001, 
http://georgewbush-whitehouse.archives.gov/news/releases/2001/09/print/
20010924-1.html.
---------------------------------------------------------------------------
    The 9/11 Commission report, released in 2004, gave Treasury high 
marks for its efforts.\2\ But in denying terrorists the use of the 
formal banking sector, we have driven terror finance underground, and 
we are now victims of our own success.
---------------------------------------------------------------------------
    \2\ http://govinfo.library.unt.edu/911/report/index.htm.
---------------------------------------------------------------------------
    Terrorists have adapted, in part, by hatching cheaper plots. It 
cost al-Qaeda of the Arabian Peninsula just $4,200 to place two bombs 
on cargo planes in October 2010. The group bragged openly of this, 
underscoring that it is nearly impossible to stop such low-cost 
operations.\3\
---------------------------------------------------------------------------
    \3\ See the November 2010 issue of AQAP's Inspire magazine: http://
info.publicintelligence.net/InspireNovember2010.pdf.
---------------------------------------------------------------------------
    Other terrorist groups rely heavily on bulk cash smuggling to evade 
detection, with couriers delivering suitcases full of cash to terrorist 
masterminds.\4\ Still others engage in trade-based money laundering, 
where they plow illicit cash into legitimate businesses to further 
finance terrorist activities.\5\
---------------------------------------------------------------------------
    \4\ John Diamond, ``Terror Funding Shifts To Cash,'' USA Today, 
June 18, 2006, http://www.usatoday.com/news/washington/2006-06-18-
terror-cash_x.htm.
    \5\ Avi Jorisch, Tainted Money: Are We Losing the War on Money 
Laundering and Terrorism Financing? (VA: Red Cell Publishing, 2009), 
pp. 95-104.
---------------------------------------------------------------------------
    Broadly speaking, terrorist financiers are increasingly shifting to 
criminal activity. Earlier this year, U.S. authorities indicted a vast 
Hezbollah network for money laundering, cocaine deals, and more--
exposing 30 U.S.-based car dealerships that helped the group move 
cash.\6\ Similarly, Senator Dianne Feinstein recently noted how the 
Taliban relies heavily on profits from the heroin trade to finance its 
operations.\7\
---------------------------------------------------------------------------
    \6\ United States of America vs. Lebanese Canadian Bank, et al. 
http://www.justice.gov/dea/pubs/pressrel/pr121511_filed-complaint.pdf.
    \7\ ``GOP lawmaker concerned over strength of Taliban,'' Los 
Angeles Times, May 4, 2012. http://latimesblogs.latimes.com/world_now/
2012/05/washington-us-intelligence-afghanistan-taliban-stronger-
president-obama.html.
---------------------------------------------------------------------------
    If this trend continues, it's reasonable to assume that criminal 
investigations will play an increasingly prominent role in U.S. efforts 
to counter terror finance.
    For its part, Treasury must continue to issue designations, even if 
fewer of them lead to capturing terrorist cash. The naming and shaming 
of terrorist financiers lets them know they're being watched. And that 
helps us stem the flow of cash that can finance attacks on the homeland 
or against allies abroad.
    Designations also expose key nodes of terrorist groups. This has 
been critical in exposing al-Qaeda's relationship with Iran.
    In July 2011, Treasury designated al-Qaeda leader Yasin al-Suri and 
five others who moved money and recruits to Pakistan, the Gulf, and 
Iraq. Treasury declared that al-Suri's network operates as part of a 
``secret deal'' between al-Qaeda and the Iranian government.\8\
---------------------------------------------------------------------------
    \8\ ``Treasury Targets Key Al-Qa'ida Funding and Support Network 
Using Iran as a Critical Transit Point,'' July 28, 2011, Page Content 
http://www.treasury.gov/press-center/press-releases/Pages/tg1261.aspx.
---------------------------------------------------------------------------
    In January 2009, Treasury designated four other al-Qaeda operatives 
in Iran. All of them, including Osama bin Laden's son, Sa'ad bin Laden, 
served on al-Qaeda's executive council.\9\
---------------------------------------------------------------------------
    \9\ ``Treasury Targets Al Qaida Operatives in Iran,'' January 16, 
2009. http://www.treasury.gov/press-center/press-releases/Pages/
hp1360.aspx.
---------------------------------------------------------------------------
    Of course, none of this comes as a surprise. The 9/11 Commission in 
2004 expressed concern over the Iran-al-Qaeda operational relationship, 
noting that it required ``further investigation by the U.S. 
government.'' Treasury is doing just that, and it shares its findings 
through the designation process.
    Remarkably, Treasury's robust counter-terrorist program is the only 
one of its kind in the world. None of America's allies come close to 
our investment in human and financial resources to combat terror 
finance. This can be blamed on a combination of tight budgets and a 
lack of political will.
    Though the international Financial Action Task Force (FATF) 
recently beefed up its standards,\10\ it is insufficient. FATF allows 
member states to self-evaluate, and operates according to 
``recommendations,''\11\ enabling states like Saudi Arabia and Qatar to 
give themselves high marks, regardless of the realities. The system is 
full of holes, and terrorists predictably gravitate to the areas of 
weakest authority.
---------------------------------------------------------------------------
    \10\ Amit Kumar, ``The Revised FATF Standards: A Shot in the Arm 
for Countering the Financing of Terrorism Efforts,'' April 16, 2012, 
Center for National Policy, http://cnponline.org/ht/display/
ViewBloggerThread/i/37450/pid/35636.
    \11\ See the FATF mandate here: http://www.fatf-gafi.org/media/
fatf/documents/FINAL%20FATF%20MANDATE%202012-2020.pdf.
---------------------------------------------------------------------------
    Looking ahead, Treasury's policy shop--the Office of Terrorism 
Finance and Financial Crimes\12\--needs to prompt both allies and 
adversaries to do more to combat terror finance. But for the short 
term, the most glaring challenge is the threat of a nuclear Iranian.
---------------------------------------------------------------------------
    \12\ See: http://www.treasury.gov/about/organizational-structure/
offices/Pages/Office-of-Terrorist-Financing-and-Financial-Crimes.aspx.
---------------------------------------------------------------------------
    On this front, Treasury has had a real impact. Tehran now faces 
tougher sanctions than ever before, and the regime is cash-strapped. 
Though Tehran continues to push forward with its nuclear program, the 
regime reportedly finds it increasingly difficult to bankroll terrorist 
proxies Hamas and Hezbollah to the extent it had in the past.
    Admittedly, we may now be past the point where economics can 
prevent a nuclear Iran. But Treasury's efforts have nevertheless been 
instructive. They demonstrate that, if applied properly, sanctions can 
truly diminish a state sponsor's ability to finance terror.
    Mr. Chairman, there are many other challenges on the terrorism 
financing front that I did not have time to address today. If I have 
missed anything you wish to discuss, I am happy to answer your 
questions.
    On behalf of the Foundation for Defense of Democracies, I thank you 
again for inviting me here today.

    Mr. Meehan. Thank you, Doctor. Very grateful for your 
testimony.
    The Chairman now recognizes Mr. Cassara to testify.

         STATEMENT OF JOHN A. CASSARA, PRIVATE CITIZEN

    Mr. Cassara. Chairman Meehan, Ranking Member Higgins, and 
Members of the subcommittee. Thank you for the opportunity to 
testify today. It is an honor for me to be here. While there 
are no simple solutions to all of the challenges identified by 
this subcommittee, I believe there are three realistic and 
cost-effective steps we should take.
    Mr. Chairman, I believe you used the term ``recalibrate 
tactics.'' I think that is a very, very good way of putting it. 
I have broadly categorized my proposed recalibrations, if you 
will, as transparency, technology, and draining the swamp. The 
three are intertwined and complementary. I elaborate upon them 
in my written statement. Because of time constraints, I will 
just briefly summarize them.
    Let's begin with transparency. Shortly after the September 
11 terrorist attacks, I had a very interesting conversation 
with a Pakistani businessman involved in the gray markets and 
the underworld of crime. He told me something I will never 
forget. He said: Mr. John, don't you understand that criminals 
and terrorists are moving money and transferring value right 
under your noses? But the West doesn't see it. Your enemies are 
laughing at you. His words infuriated me because I knew he was 
right. I worked overseas for years with frequent travels to the 
Arabian Peninsula, Africa, South Asia. I became intrigued with 
the opaque, indigenous, but very effective ways of transferring 
money and value so different from our own. For example, the 
Pakistani businessman was referring to various forms of what we 
would loosely call trade-based money laundering. It involves 
the transfer of value via commodities and trade goods.
    In addition to simple but effective customs fraud, trade-
based value transfer is often used to provide counter-
valuation, or a way of balancing the books in many global 
underground financial systems, including some that are used to 
finance terror. Without going into detail, some of these trade-
based value schemes are found in hawala networks, most other 
regional forms of alternative remittance systems, the Afghan 
transit trade, suspect international Lebanese Hezbollah 
networks, trading syndicates, and non-bank lawless regimes in 
the Horn of Africa.
    Now, in theory, spotting anomalies in trade data and 
overlapping these anomalies with financial data transportation 
data, travel data, would allow us to kind of peer into these 
underground networks by in effect going in through the back 
door.
    When a buyer and seller are working together, the price of 
a good or a service can be whatever they want it to be. There 
is no invoice police. Now, this is a very simple example. This 
pen, it is a nice pen. Let's say it cost roughly $50. Buyer and 
seller, via, say, false invoicing could overvalue this to say 
it is worth $100. Simply, similarly, they could undervalue it 
to show it is worth say $10, or say even $1. Now, why is this 
important? Well, to move money out of a country, participants 
import goods at overvalued prices or export goods at 
undervalued prices. To move money into a country, the 
participants import goods at undervalued prices, or export 
goods at overvalued prices. For the most part, all of this 
avoids countries' financial transparency reporting 
requirements. We are not picking this up. This vulnerability is 
what Osama bin Laden himself once himself called cracks in the 
Western financial system.
    I once had a conversation with an Iranian freight forwarder 
in Dubai and I was talking about this type of money laundering, 
trade manipulation, over- and under-invoicing. He says to me: 
Mr. John, money laundering, but that is what we do. Precisely, 
it is the way of life out there. It is the way they do 
business.
    Now, in order to help combat this type of trade-based money 
laundering the Department of Homeland Security's Immigrations 
and Customs Enforcement, or ICE, established the world's first 
trade transparency unit, or TTU. There are approximately eight 
additional TTUs in the Western hemisphere and more planned. 
Congress can help promote transparency by ensuring the U.S. TTU 
has sufficient resources to systematically examine trade fraud 
in the United States for reasons of both National security and 
to enhance our revenue. Our TTU should be encouraged to further 
expand the TTU network overseas, particularly in areas where 
adversaries operate, and we should also promote trade 
transparency overseas by building it into the U.S. trade 
agenda.
    Let me briefly switch now and talk about technology. Over 
the last few years, there have been tremendous advances in the 
amount of data collected and available for analysis. Just a few 
examples include financial, trade, and transport data. 
Communications and social networking are growing exponentially. 
Industry calls these record sets of information big data. 
Concurrently, there have been major advances in data 
warehousing, data mining, and advanced analytics. I am not a 
technical person; however, I am excited about some of the new 
tools and resources that have been recently developed to 
exploit big data and help the modern criminal investigator. Yet 
those tools are not in our investigators' hands, not at the 
Federal, State, or local level. I am convinced the only way we 
are going to realistically stay abreast of some of these 
challenges we face in financial crimes and terror finance is to 
use technology as a force multiplier.
    Now, if we are talking about financial data, we have to 
talk about Treasury's Financial Crimes Enforcement Network, 
FinCEN. FinCEN is mandated to collect, analyze, and disseminate 
financial intelligence. FinCEN is the gatekeeper and should be 
the U.S. Government's premier financial crimes resource. 
However, as I documented in my first book, ``Hide and Seek: 
Intelligence, Law Enforcement, and the Stalled War on Terrorist 
Finance,'' FinCEN has never lived up to its early promise and 
potential. The expertise and managerial will simply do not 
exist to fully exploit the data and----
    Mr. Meehan. I am going to have to, because we are going to 
get called. It is all worth developing in our follow-up 
questions. Let me ask if I can: Is there a quick point you want 
to make in summary?
    Mr. Cassara. No, I refer the committee to my statement, and 
my statement elaborates on these points.
    [The statement of Mr. Cassara follows:]
                 Prepared Statement of John A. Cassara
                              May 18, 2012
    Chairman Meehan, Ranking Member Sanchez, and Members of the 
Subcommittee on Counterterrorism and Intelligence, thank you for the 
opportunity to testify today. It is an honor for me to be here.
    In 2005, I retired after a 26-year career as a case officer for the 
Central Intelligence Agency and as a special agent for the U.S. 
Department of Treasury. I believe I am the only individual to have ever 
been both a covert case officer and a Treasury special agent.
    Much of my career with Treasury was involved with combating 
international money laundering and terror finance. I currently work as 
a contractor and consultant for a number of U.S. departments, agencies, 
and business enterprises, although the views that I express here are 
only my views and not necessarily representative of these 
organizations. I have been fortunate to continue my domestic and 
international travels primarily providing training and technical 
assistance in financial crimes enforcement. I have written three books 
on terror finance and numerous articles. I have direct experience with 
many of the issues being discussed here today.
    A few days after the most successful terrorist attack in U.S. 
history, President George W. Bush stated, ``Money is the lifeblood of 
terrorist operations. Today we are asking the world to stop payment.'' 
We are meeting here this morning in part to ask whether that request 
has been fulfilled and, if not, what more can and should be done.
    The short answer is both ``yes'' and ``no.'' Completely eradicating 
terror finance is impossible. There is no magic bullet. Yet after 10 
years of concerted effort, it is now harder, costlier, and riskier for 
terrorists to raise and transfer funds, both in the United States and 
around the world. That's the good news. Unfortunately, there is no 
doubt that our financial countermeasures have not been as smart or 
efficient as they could be and that we will continue to face new 
challenges in the coming years.
    The learning curve has been steep. For example, in the years 
immediately after September 11, most policymakers within the Treasury 
Department were convinced that ``financial intelligence'' or Bank 
Secrecy Act (BSA) data was the key to following the terrorist money 
trail. They had misplaced faith in the approximately in (2012 numbers) 
17 million pieces of financial data that are filed annually with 
Treasury, including approximately 1 million Suspicious Activity Reports 
(SARs). This is in addition to the countless millions of additional 
pieces of financial information filed around the world. This data comes 
from a wide variety of sources, including banks, money service 
businesses, and individuals.
    ``Financial intelligence,'' also known as ``BSA data,'' or 
``financial transparency reporting requirements'' was initiated during 
the early years of the ``War on Drugs'' when enormous amounts of 
illicit proceeds from the international narcotics trade regularly 
sloshed around Western financial institutions. So it is important to 
understand the financial reports were not originally designed to combat 
terror finance where small amounts of both illicit and licit monies are 
commonly used. It shouldn't really be a surprise that out of the tens 
of millions of pieces of financial intelligence filed annually in the 
United States and around the world not one piece of financial 
intelligence was filed on any of the 19 September 11 hijackers. And 
even if there had been, the United States did not have the programs and 
management structures in place that would have detected the suspicious 
financial activity. I say this with confidence because I worked at 
Treasury's Financial Crimes Enforcement Network (FinCEN) at the time. I 
demonstrated the failings in my first book, Hide & Seek: Intelligence, 
Law Enforcement and the Stalled War on Terror Finance (Potomac Books, 
2006). The same dearth of financial intelligence has subsequently held 
true for major terrorist attacks from Bali to Baghdad.
    Although the last 10 years have demonstrated that financial 
intelligence here and abroad is not the panacea for counter-terrorist 
finance, much of the financial data does contain excellent information 
and some has proved vital in ``connecting the dots.'' The data is 
invaluable in money laundering and other investigations. That being 
said, it is not being effectively exploited.
    Over the past 10 years, our adversaries' operational and financial 
tactics have evolved. We are faced with immense challenges. The 
situation is made worse by the comparatively small amounts of funding 
involved with terror finance. For example, it is estimated that 
September 11 cost al-Qaeda approximately $300,000-$500,000. Even this 
relatively small amount towers over the recent attempt to hide 
explosives in a printer cartridge aboard an air cargo flight to the 
United States. Al-Qaeda in the Arabian Peninsula boasted in its on-line 
magazine that, ``It is such a good bargain for us to spread fear 
amongst the enemy and keep him on his toes in exchange for a few months 
work and a few thousand dollars.''
    While there are no simple solutions to all of the challenges 
identified by this subcommittee, I believe there are some 
straightforward and cost-effective steps we should take. I have broadly 
categorized them as technology, transparency, and draining the swamp. 
The three are intertwined and complimentary.
                               technology
    Over the last few years, there have been tremendous advances in the 
amount of data collected and available for analysis. Just a few 
examples include financial, trade, transport, and travel data. 
Communications and social networking are growing exponentially. 
Industry calls these record sets of information, ``big data.'' I will 
not discuss the collection of classified data.
    Concurrently, there have been major advances in data mining and 
advanced analytical capabilities that can help organizations derive the 
``intelligence'' from this vast amount of data. Data warehousing and 
retrieval are enhanced by cutting-edge technologies that search, mine, 
analyze, link, and detect anomalies, suspicious behaviors, and related 
or interconnected activities and people. Fraud frameworks can be 
deployed to help concerned Government agencies and departments detect 
suspicious activity using scoring engines that can both rate, with high 
degrees of statistical accuracy, behaviors that warrant further 
investigation while generating alerts when something of importance 
changes. Predictive analytics use elements involved in a successful 
case or investigation and overlays these elements on other data sets to 
detect previously unknown behaviors or activities, enhancing and 
expanding an investigator's knowledge, efforts, productivities while 
more effectively deploying resources. Social network analytics helps 
investigators detect and prevent criminal activity by going beyond 
individual transactions to analyze all related activities in various 
mediums and networks uncovering previously unknown relationships. 
Visual analytics is a high-performance, in-memory solution for 
exploring massive amounts of data very quickly. It enables users to 
spot patterns, identify opportunities for further analysis, and convey 
visual results via web reports or the iPad. Moreover, it is now 
possible to engineer ``red flag indicators'' in financial reports--both 
within the Government and in commercial enterprises that file the 
information--that will identify likely suspect methodologies such a 
hawala or trade-based money laundering.
    Unfortunately, while the Federal Government is beginning to 
incorporate these advanced analytical capabilities, it lags far behind 
in its deployment of commercially available and viable technologies. As 
a subset, the Federal financial investigative resources trail even 
further behind. FinCEN is mandated to collect, house, analyze, and 
disseminate financial intelligence. FinCEN should be the U.S. 
Government's premier financial crimes resource. However, FinCEN has 
never lived up to its early promise and potential. One important 
problem with FinCEN is that although it has attempted to implement a 
number of data mining activities over the years, they have not been 
successful. Recently, progress has been made developing and employing 
new analytical tools. However, the FinCEN analysts are only able to use 
perhaps 10 percent of their new analytical capacity. The expertise and 
managerial will simply do not exist to fully exploit many of the tools 
now finally at their disposal.
    Within the next few years, it is estimated that approximately 500-
700 million additional pieces of financial information in the form of 
wire transfer data will be routed annually to FinCEN. If FinCEN is not 
able to successfully analyze the current 1 million BSA filings it 
receives annually it is highly doubtful that it will succeed with this 
new tasking. Yet law enforcement and intelligence professionals should 
have access to the data and be able to interpret it. Technology will be 
the force multiplier and the only realistic solution to effectively 
exploit current and new streams of financial data.
    In order to move forward, we must move to get around the FinCEN 
impediment. I propose that we ``downstream'' both financial information 
and analytics platforms directly to end-users in the law enforcement 
community. For example, the financial data and an accompanying user-
friendly analytics platform could be made directly accessible to 
various task forces, U.S. attorney offices, regional Suspicious 
Activity Report (SAR) review teams, appropriate Federal, State, and 
local law enforcement departments and agencies. Since FinCEN is 
mandated by the Department of Treasury to administer the Bank Secrecy 
Act (BSA) and accompanying data, FinCEN could license and control the 
release of the data and the analytics platform.
    Moreover, in my discussions with members of the U.S. intelligence 
and defense communities, frustration is often expressed that they do 
not have direct access to appropriate and targeted financial databases 
that intersect with their international areas of responsibility. 
Instead of looking for ways to increase the dissemination of necessary 
data, legal advisors within Treasury work to impede the release of 
information. While I certainly understand and endorse privacy and other 
concerns, the technology exists today to engineer safeguards into the 
dissemination of the data to prevent abuse. I urge that our colleagues 
be given increased access to this vital information in order to help 
safeguard our security.
                              transparency
    Shortly after the September 11 terrorist attacks, I had a 
conversation with a Pakistani businessman involved with the underworld 
of crime. He was involved in the gray markets of South Asia and the 
Middle East. He said, ``Mr. John, don't you know that the criminals and 
the terrorists are moving money and transferring value right under your 
noses? But the West doesn't see it. Your enemies are laughing at you.''
    His words infuriated me because I knew he was right. I worked 
overseas for years with frequent travels to the Arabian peninsula, 
Africa, and South Asia. For the most part, U.S. officials could not 
understand or identify the opaque, indigenous, but very effective ways 
of transferring money and value so different from our own. For example, 
the above Pakistani businessman was referring to various forms of what 
we loosely call ``trade-based money laundering.'' It involves the 
transfer of ``value'' via commodities and trade goods. In addition to 
customs fraud, trade-based value transfer is often used to provide 
``counter-valuation'' or a way of balancing the books in many global 
underground financial systems--including some that have been used to 
finance terror.
    In theory, by promoting trade transparency and using technology to 
spot anomalies in trade data (and overlapping those flagged anomalies 
with financial, travel, transportation, law enforcement, and other 
databases) we may be able to use trade as a ``back door'' to enter into 
previously hidden underground financial networks.
    Trade-based money laundering scams take a wide variety of forms. 
For example, it could be simple barter or a commodity-for-commodity 
exchange. In certain parts of Afghanistan and Pakistan, for example, 
the going rate for a kilo of heroin is a color television set. Drug 
warlords exchange one commodity they control (opium) for others that 
they desire (luxury and sports utility vehicles). In the United States 
and Mexico, weapons go south and drugs come north. However, generally 
speaking, money laundering and value transfer through simple invoice 
fraud and manipulation are most common. The key element here is the 
misrepresentation of the trade good to transfer value between importer 
and exporter. The quantity, quality, and description of the trade goods 
can be manipulated. The shipment of the actual goods and the 
accompanying documentation provide cover for ``payment'' or the 
transfer of money. The manipulation occurs either through over- or 
under-valuation, depending on the objective to be achieved. To move 
money out of a country, participants import goods at overvalued prices 
or export goods at undervalued prices. To move money into a country 
participants, import goods at undervalued prices or export goods at 
overvalued prices. For the most part, all of this avoids countries' 
financial intelligence reporting requirements.
    Trade-based value transfer is found in every country around the 
world. I believe it is the ``new frontier'' in international money 
laundering and counter-terrorist finance countermeasures. Without going 
into detail, trade-based value transfer is found in hawala networks, 
most other regional ``alternative remittance systems,'' the misuse of 
the Afghan Transit Trade, Iran/Dubai commercial connections, suspect 
international Lebanese/Hezbollah trading syndicates, non-banked lawless 
regimes such as Somalia, etc.
    I have written extensively about trade-based money laundering. I 
invented the concept of trade-transparency units (TTUs), which is now 
part of the U.S. Government National Anti-Money Laundering Strategy. I 
am delighted that the Department of Homeland Security's Immigration and 
Customs Enforcement (ICE) has adopted this concept by establishing the 
world's first TTU. There are approximately eight additional TTUs in the 
Western Hemisphere and more TTUs are planned.
    In addition to being an innovative countermeasure to trade-based 
money laundering and value transfer, systematically cracking down on 
trade-fraud is a revenue enhancer for participating governments. 
Frankly, it is for this reason that many countries outside of the 
United States have expressed interest in the concept. In essence, these 
governments understand that they are not collecting the appropriate 
amount of duties on the goods because the values on the invoices are 
mis-stated. Finding new revenue, without actually having to raise tax 
rates, is an economic imperative.
    TTUs are already proving to be valuable resources for our 
government and international partners. For example, in 2008 the United 
States and Mexico partnered in the creation of a TTU in Mexico City. 
Such efforts should be promoted and expanded. Congress can help by 
ensuring that the TTUs have sufficient resources to systematically 
examine trade fraud in the United States for reasons of both National 
security and to enhance our revenue. We should also promote trade 
transparency overseas by building it into the U.S. trade agenda.
                            drain the swamp
    Since the end of the Cold War, there has been a dramatic decline in 
the number of countries that support and finance targeted acts of 
terrorism in order to achieve their national objectives. Today, Iran is 
the major ``state sponsor'' of terrorism. In the early days of al-
Qaeda, the terrorist group received much of its financial resources 
from Osama bin Laden's personal family wealth, along with contributions 
from wealthy Saudi and other donors. Today, al-Qaeda and other jihadist 
groups have been forced to disperse and receive little centralized 
direction or funding. This is the good news.
    With the decline of the above historical model--that is, groups 
with centralized command and control receiving most of their money from 
``state sponsors,'' evil regimes, and wealthy donors--terrorists and 
their supporters must increasingly rely on self-finance. In many cases, 
a symbiosis is developing between organized crime and terrorist 
organizations, and this sort of link has been observed around the 
world. As I detail in a book I co-authored with former Treasury 
official Avi Jorisch, On the Trail of Terror Finance: What Law 
Enforcement and Intelligence Officers Need to Know (Red Cell Publishing 
2010) we have observed individual terrorists and terrorist groups 
involvement with narcotics trafficking, intellectual property rights 
violations or trafficking in counterfeit goods, cigarette smuggling, 
robberies, credit card scams, fraud, trafficking in stolen cars, 
kidnapping for ransom, extortion, and other serious crimes. 
Unfortunately, self-finance in this way is much harder to detect, 
track, and disrupt.
    Given the above, ``draining the swamp'' or cracking down at home 
and abroad on local and transnational financial crime might eventually 
become one of the most effective strategies to combat terrorism. Even 
the U.S. military and international peacekeeping forces operating in 
lawless states have come to recognize that their adversaries, many with 
terrorist links, increasingly engage in traditional crime to help 
finance their activities.
    For this strategy to succeed, law enforcement, intelligence, and 
military organizations must learn to look beyond the immediate 
circumstances of a given local crime. Whether they are confronted with 
narcotics trafficking, organized robbery, human trafficking or other 
activities, street cops, criminal investigators, and analysts alike 
must learn to ask whether these seemingly isolated acts have more 
sinister ties. Officials, both in the United States and overseas, must 
learn to ``ask the next question'' during the course of routine 
investigations: Where is the money going?
    Yet most law enforcement officers get caught up in the quick 
statistic. That is how they are recognized and rewarded. They are not 
interested, often times not allowed, and do not have the networks to 
determine if the local crime they uncovered has broader implications.
    In my travels around the United States and overseas, I have 
observed first-hand how little law enforcement groups actually know 
about following the money. It is particularly shocking because outside 
of crimes of passion, criminals and criminal organizations engage in 
criminal activity because of greed; i.e., money. For example, Karachi, 
Pakistan's largest city and economic hub, is heavily infiltrated by 
militants and terrorists making money through criminal activities such 
as cigarette smuggling, selling counterfeit goods, bank robbery, street 
robbery, kidnapping for ransom, and other heinous crimes. Mr. 
Sharfuddin Memon, a director of a Karachi citizens' crime watch group, 
described the motivations behind this activity: ``The world thinks this 
is about religion, but that's a mistake. It's about money and power. 
Faith has nothing to do with it.''
    I urge Congress to support effective training programs that educate 
law enforcement and intelligence officers on the importance of ``asking 
the next question'' and following the money trail. I also believe we 
should make much more concerted efforts--using various means--to work 
with international public media and other communications networks and 
brand terrorists for what they are: International thugs. They should 
not be allowed to glorify themselves. The last 10 years have 
demonstrated that criminals are using jihad as a concept to legitimize 
their activities. By using publicity, transparency, and draining the 
swamp we will delegitimize them.
    As I said at the outset, our enemies are adept at exploiting the 
weaknesses in the U.S. financial reporting system. Osama bin Laden once 
called these ``cracks in the Western financial system.'' Their 
financial behavior has evolved. I also mentioned new financial threats 
on the horizon. Some of these include pre-paid gift and stored value 
cards; service-based laundering; mobile payments commonly referred to 
as ``m-payments'' or the use of cell phones to store, receive, and 
transmit money; digital currencies; virtual currencies in the on-line 
virtual world, etc. Unfortunately, time does not permit a full review. 
However, many of these and other financial threats and countermeasures 
that may merit scrutiny by this subcommittee were articulated over 5 
years ago in the 2007 National Money Laundering Strategy written by the 
Departments of Treasury, Justice, and Homeland Security. The document 
was a blueprint for further action in the areas of financial crimes and 
threat finance. Unfortunately, in many areas, little or nothing has 
been done. I urge the subcommittee to review the document and ask hard 
questions about progress to date.
    ``Without money there is no terrorism.'' While this is a simplistic 
formula, our adversaries know that they need money to survive and fund 
their operations. They are proving adept and creative at finding new 
ways to access this lifeblood. I have profound respect for our 
intelligence and enforcement communities. The challenges they face in 
following illicit financial trails are immense.
    I appreciate the opportunity to appear before you today and I'm 
happy to elaborate on my experiences and to answer any questions you 
may have.

    Mr. Meehan. Anybody who is watching these hearings should 
appreciate the tremendous amount of work that went into the 
written testimony, which is far more expansive, and I think 
lays out for those who are studying this issue.
    Mr. Lormel, let me turn to you for 5 minutes before we--and 
Ms. Eckert. Thank you.

     STATEMENT OF DENNIS M. LORMEL, PRESIDENT AND CEO, DML 
                        ASSOCIATES, LLC

    Mr. Lormel. Thank you, sir. I appreciate----
    Mr. Meehan. May want to push your button.
    Mr. Lormel. Sorry. I appreciate the fact you are having 
this hearing and I admire your desire to continue this. It is 
very heartening to see that the committee wants to address this 
topic. It is very important.
    I was in a unique position on 9/11. I was in a position of 
leadership in the FBI where I got to follow the money, and I 
saw first-hand in the 3 years that I was there how well we used 
proactive techniques. One of the things that you are interested 
in are investigative techniques and tactics. How we succeed is 
being proactive. How we succeed is to look at financial 
information and how we can take financial intelligence and use 
it from a strategic, tactical, and historic standpoint, and use 
that in furtherance of investigative initiatives. We did it 
then. The Government is doing it today, and they do it pretty 
well, but we can do things better than what we do, and I hope 
that the committee can come away with that sense in going back 
and looking and assessing the Government on some of these 
issues.
    In any event, let me start with the Government and the 
private sector in terms of perspectives. Perspective is very 
important, and the Government and private sector have some good 
partnerships, but we can partner better. One of the things we 
have to look at is the Bank Secrecy Act and the important of 
bank secrecy information and how we can use that in furtherance 
of investigative developments and initiatives. Quite frankly, 
when you look at the Bank Secrecy Act you are looking at 
identifying suspicious activities in terms of who, what, when, 
where, how. When it comes to the private sector they are 
interested in the how. The Government is interested in the why. 
So we have to blend those two and bring them together better 
than we do. Terrorists, and you said it in your statement, Mr. 
Higgins said it, and I have heard it here with the other 
panelists, of how challenged we are in terms of moneys being 
used differently and smaller denominations of moneys being 
used. So the Government is more challenged in terms of 
identifying terrorist financing. That goes to the fact that 
again, going back to the financial sector, it is possible to 
identify terrorist financing, but it is not probable. The 
lesser amounts that are used, the more challenging it gets, and 
it plays then to the importance of the partnerships between the 
public and private sector, and again, bringing the why and how 
together to be able to accomplish these things.
    I testified on October 3, 2001, and I was asked 
specifically to testify about what the biggest vulnerabilities 
in the financial sector were. I said the biggest 
vulnerabilities were wire transfers, correspondent banking, and 
money services businesses. Today, I kind of look at this a 
little differently. I say that the problems we have are 
basically two-fold. You have criminal problems, crime problems, 
and you have got problems in terms of facilitation tools. The 
crime problems are fraud and money laundering, and money 
laundering in the greater context of all types of activities 
that require money being laundered back through the financial 
industry. Then the facilitation tools would be things like wire 
transfers, correspondent banking, money service businesses. If 
you--I am sorry, not money-service businesses, illegal money 
remitters.
    The Iranian sanctions, for instance, if you look at wire 
transfers, correspondent banking, shell companies, those are 
things that they take advantage of. Illegal money remitters, to 
me, is the biggest problem we have in the financial sector. The 
banks don't recognize who their clients are, customers are that 
have illegal money remittance operations. Then electronic 
mechanisms. That is the wave of the future. We have tremendous 
capabilities. We are getting away from cash. The more we get 
away from cash and the more like cash these mechanisms become, 
the more vulnerable we are to money laundering. I think if you 
look at Africa as a flashpoint, that is a good case in point of 
how terrorists are using these mechanisms to be able to launder 
money.
    I think there are some very good partnerships, again, and 
one in particular, is JPMorgan Chase and the Department of 
Homeland Security investigations. They have partnered to 
strategically collect information and, through targeted 
transaction monitoring, have really done a tremendous job in 
dealing with human smuggling. We can do the same thing in 
terrorist finance, but it takes a more concerted effort. So 
those are things that we need to look at.
    In my written statement, I put in it some recommendations, 
Chairman, about certain things that we need to do.
    [The statement of Mr. Lormel follows:]
                 Prepared Statement of Dennis M. Lormel
                              May 18, 2012
    Good morning Chairman Meehan and distinguished Members of the 
committee. Thank you for inviting me to testify at this hearing. 
Terrorist financing is a subject that is extremely important to me. 
This topic does not receive the attention it deserves. I greatly 
appreciate the fact that you are taking the time to delve into this 
subject.
    There are few events in a lifetime that evoke deep-seated emotion 
and vivid recollection. The terrorist attacks against the United States 
by al-Qaeda on September 11, 2001 (9/11), are clearly one of those 
historic moments that remain frozen in our minds. I poignantly remember 
my personal reaction then and how it affects me now. September 11 
changed my life, as it did for so many of us. As the agent in charge of 
the FBI's Financial Crimes Program at that time, I was in a unique 
situation where I was afforded an opportunity to respond in a manner 
few other people could. I was in a position to ``follow the money.'' I 
witnessed, first-hand, investigative successes which disrupted or 
deterred funding intended to support terrorist activities. I am an 
ardent believer that terrorist financing is a critical component of the 
war against terrorism.
    By way of background, immediately after 9/11, I was responsible for 
the formation and oversight of the FBI-led, multi-agency, Financial 
Review Group, which evolved into a formal Section within the FBI's 
Counterterrorism Section, known as the Terrorist Financing Operations 
Section (TFOS). Since retiring from the FBI, I have provided consulting 
services regarding fraud, money laundering, and terrorist financing. 
Many of my clients are in the financial services sector.
    My Government investigative and private sector consulting 
experience has provided me a rare opportunity to understand two very 
distinct perspectives. For over 30 years, I had a law enforcement 
perspective. In that capacity, my perspective was Government- and 
investigative-driven. For the last 9 years, in my current position as a 
consultant, my perspective has shifted to one that is industry- and 
compliance-driven. This provides me with a unique understanding of the 
responsibilities, sensitivities, challenges, and frustrations 
experienced by the Government and financial sectors in dealing with 
anti-money laundering (AML) and terrorist financing considerations. 
There is a notable difference in perspectives. This is one of the many 
challenges we face in dealing with terrorist financing and other 
criminal problems.
    Identifying suspicious activity in financial institutions, 
especially involving terrorist financing, is extremely challenging. 
This is where understanding perspective is critically important. When 
it comes to identifying and reporting suspicious activity, you must 
consider the ``who, what, where, when, why, and how.'' Law enforcement 
typically focuses on the ``why'' as the most important element while 
financial institutions are most concerned about the ``how.'' This is 
one of the areas where collaboration between law enforcement and 
financial institutions is not as consistent as it could be. Law 
enforcement frequently shares ``war stories'' about investigative 
successes with industry. However, they do not often provide specific 
information about ``how'' financial institutions were used by the bad 
guys. The Internal Revenue Service is one agency that does provide this 
type of information to financial institutions at industry training 
forums.
    In order to succeed, individual terrorists, such as lone wolves, 
and terrorist groups must have access to money. They require funding in 
order to operate and succeed. Invariably, their funding sources will 
flow through financial institutions. To function, terrorists must have 
continuous access to money. Regardless of how nominal or extensive, the 
funding flow is operationally critical. Terrorists, like criminals, 
raise, move, store, and spend money in furtherance of their illicit 
activity. This is why Bank Secrecy Act (BSA) reporting requirements are 
essential to our National Security. This fact becomes more compelling 
in view of the actuality that finance is one of the two most 
significant vulnerabilities to terrorist and criminal organizations.
    Terrorist financing is not adequately understood and extremely 
difficult to identify, especially when funding flows are more nominal. 
This is where Government, through the interagency community engaged in 
terrorist financing, must interact more efficiently with the financial 
services sector to identify terrorist financing. It is possible for 
financial institutions to identify terrorist financing, but it is 
highly improbable. We must take continual actions that increase the 
probability factor, thereby increasing the possibility of identifying 
funding flows. The challenge confronting the Government and banking 
community is to improve the effectiveness of the process. This is where 
the Government needs to be more effective and efficient in the ``how'' 
of assisting financial institutions in identifying suspicious activity. 
Government should develop better feedback mechanisms to financial 
institutions about ``how'' terrorists use financial institutions and 
provide them with typologies that financial institutions could use for 
transactional monitoring.
    The interagency community that has jurisdiction and responsibility 
for terrorist financing should be commended for their contributions. 
Terrorist financing is one area where the Government excelled following 
9/11 and where they continue to perform admirably.
    Terrorist financing is every bit as challenging today as it was in 
the immediate aftermath of 9/11. Law enforcement, regulators, and 
intelligence agencies here, in the United States (U.S.), and abroad, 
have achieved noteworthy and meaningful accomplishments. New proactive 
and progressive methodologies have been developed and implemented in 
furtherance of such efforts. When the Government succeeds in 
implementing and executing proactive methodologies, the ability of 
terrorists to carry out operations is diminished. However, lingering 
concerns and the resiliency of terrorists to adapt to change, coupled 
with the ease of exploitation of systemic vulnerabilities in the 
financial sector, will perpetuate the challenge of addressing the 
issues presented by terrorist financing.
    Despite the gains we've made, the financial services sector is as 
inherently vulnerable today as it was on 9/11. On October 3, 2001, as a 
senior executive in the FBI, I testified before the House Financial 
Services Committee. One of the issues I addressed was vulnerabilities 
or high-risk areas in the financial services sector. I testified that 
wire transfers, correspondent banking, fraud, and money services 
businesses were the biggest areas of vulnerability to the financial 
services industry at that time.
    Today, I have refined the vulnerabilities in two categories: Crime 
problems and facilitation tools. The most significant crime problems we 
currently face in the financial services industry are fraud and money 
laundering. Fraud was magnified during the recent financial crisis and 
continues to represent a significant threat to our economy. Money 
laundering encompasses all other criminal activity where the proceeds 
of crime are laundered through financial institutions. The key 
facilitation tools used in furtherance of fraud and money laundering 
are: Wire transfers, correspondent banking, illegal money remitters, 
shell companies, and electronic mechanisms.
    Illegal money remitters represent one of the most significant 
problems confronting banks. This has been an on-going challenge. Many 
banks cannot identify customers who operate illegal money remittance 
operations. On the surface, they appear to be a legitimate business. 
However, if like the Carnival Ice Cream Shop in Brooklyn, New York, 
they actually functioned as illegal money remitters funneling money to 
high-risk countries. Consequently, terrorist and criminal groups have 
used illegal money remitters in furtherance of their illicit 
activities. There are a number of cases we can point to that illustrate 
this problem to include the Time Square bombing case.
    Sanctions against Iran have caused Iranian entities to regularly 
use shell companies to hide beneficial ownership, as well as rely on 
correspondent banking and wire transfers to illegally move funds. The 
Lloyds Bank ``stripping'' case is a prime example of how correspondent 
banking was used by Iran as a facilitation tool. In this matter, Lloyds 
stripped SWIFT messaging information to hide Iranian bank 
identification in order to avoid U.S. banking monitoring detection. The 
Alavi Foundation case was an example of how Iran used shell companies 
to hide beneficial ownership in a New York City office building. Both 
cases involved the use of wire transfers.
    The use of electronic payment mechanisms is an area of growing 
concern regarding how terrorists move money due to the anonymity and 
instant settlement it affords. Electronic payment mechanisms are 
becoming more prolific and vulnerable to misuse by criminals and 
terrorists. Africa is a venue of concern for the growing use of 
electronic mechanisms.
    The Government has made consistent incremental progress in 
addressing terrorist financing. Individual agencies and entities 
responsible for terrorist financing have matured and evolved. They have 
individually and collectively developed investigative methodologies to 
effectively deal with the constant and emerging challenges. Although on 
an agency-by-agency level, we can point to enhanced capabilities, the 
true measure of Government success is the ability of the interagency 
community to work as a unified team, and to parlay their collective 
investigative capabilities into a joint Government-wide terrorist 
financing strategy. In the aftermath of 9/11, I was part of such a 
working group that was led by David Aufhauser, then the General Counsel 
at the Treasury Department. Mr. Aufhauser was a true leader who 
marshaled the interagency collaborative initiative. He was an unsung 
hero and visionary. I recommend that the committee periodically assess 
the status of the interagency terrorist financing working group to 
ensure that it is effectively coordinating the broader interagency 
initiatives.
    The face of terrorism since 9/11 has been altered significantly. 
The last few years have seen tremendous change and instability in the 
Middle East. Core al-Qaeda has been decimated and affiliate groups have 
evolved into greater threats. Our homeland has experienced a growing 
concern involving lone wolf terrorists and other home-grown threats. 
These developing factors have modified terrorist financial typologies.
    The evolving terrorist landscape has led to less costly terrorist 
plots. As noted earlier, the more nominal amounts have been more 
challenging to identify. This is due to the fact they are generally 
more undetectable. For example, many lone wolf terrorists such as 
Farooque Ahmed, who plotted to detonate a bomb on the Washington, DC 
metro system, relied on money from their legitimate jobs to pay for 
their illicit activity.
    The Government must continuously identify and assess emerging 
trends and develop case typologies they can share with financial 
institutions. In so doing, the financial services sector can implement 
transaction monitoring strategies to identify patterns of activity 
consistent with the case typologies of criminals and terrorists. The 
Government has not done this as consistently as they could have.
    In general, law enforcement and the Financial Crimes Enforcement 
Network (FinCEN) have done a good job in sharing information with the 
financial services sector. However, they have not done as much as they 
think they have or they could. I do not make this comment lightly. When 
I was in the FBI, I thought I had maximized liaison relationships. It 
was not until after my retirement from law enforcement and my 
consulting work with the financial services sector that I realized I 
could have done more. It was a matter of perspective. If only I knew 
then, what I know now, I would have been dangerous. Law enforcement and 
FinCEN should do a better job of listening and providing feedback to 
financial institutions in the form of ``how'' terrorists and criminal 
organizations use the financial system in furtherance of their illicit 
activities.
    What is important, especially in dealing with more minimal dollar 
amounts, is identifying case typologies and using them to develop 
targeted transaction monitoring strategies. This leads to the need for 
more consistent collaboration between law enforcement and the financial 
services sector. The model for this type of public- and private-sector 
collaboration was set in recent years by JPMorgan Chase under the 
leadership of compliance executive William Langford and senior 
investigator Phil DeLuca. Working in conjunction with the ICE 
Department of Homeland Security Investigations (HSI), JPMorgan Chase 
was able to identify financial patterns for human smugglers and 
traffickers. This was because HSI provided specific typologies to 
JPMorgan Chase setting forth the ``how.'' This enabled JPMorgan Chase 
to identify patterns of transactional activity and develop targeted 
transactional monitoring. In so doing, JPMorgan Chase was able to 
provide HSI with financial intelligence information which led to 
successful criminal investigations. This initiative was greatly 
supported by an informal task force involving DHI and the financial 
services sector that was led by John Byrne and the Association of Anti 
Money Laundering Specialists (ACAMS). Because of the successful impact 
of this public-private partnership, ACAMS provided a special award to 
JPMorgan Chase and HSI, which was presented at the recent Money 
Laundering.com annual anti-money laundering conference. This is a great 
example of how law enforcement, in this case HSI, provided the ``how'' 
to a financial institution, JPMorgan Chase, and how the bank used the 
information to identify patterns of illicit activity. I recommend that 
the committee look at this collaboration as a model of the type of 
cooperative initiative that could be used to fight terrorist financing.
    This type of initiative could be effectively used to identify 
terrorist financing. There are a number of scenarios that could be 
identified and targeted in a similar fashion. An example would be the 
case of a lone wolf terrorist who leaves the United States and travels 
to Pakistan to attend a terrorist training camp. During the time that 
this individual attends the training camp, it is unlikely he or she 
would incur any financial activity, virtually falling off the financial 
grid. The combination of travel to Pakistan, a high-risk country for 
terrorism, and a gap in financial activity, could be identified by 
targeted financial monitoring in a financial institution.
    One of the perceived impediments to banks in regard to targeted 
transactional monitoring is the challenge of satisfying the regulators. 
Regulators are not generally forward thinkers. They deal with black-
and-white issues and are more prone to a check-the-box mentality that 
tends to stymie progressive and innovative thinking. In fairness to 
regulators, their mandate is not to think outside the box but to ensure 
that regulatory requirements are met by financial institutions. This is 
a daunting task. There is often a perplexing triangle involving 
financial institutions, law enforcement, and the regulators. BSA 
reporting requirements were established to benefit law enforcement. 
Unfortunately, financial institutions are generally more concerned with 
placating their regulators than providing the ``why'' to law 
enforcement. Financial institutions, law enforcement, and regulators 
need to come to a better consensus about the balance of law enforcement 
and regulatory considerations. This is an area that this committee or 
the House Financial Services Committee should look into.
    Certain countries pose a challenge to deal with in terms of their 
capacity or political will to establish terrorist financing regimes. 
Other countries, most notably Iran, pose a significant threat and are 
indifferent to complying with international standards as they flaunt 
their nuclear and/or other ambitions. The first step to deal with these 
situations is to coordinate a strong interagency response at the 
domestic level. This calls for relying on a combination of diplomatic, 
regulatory, intelligence, military, and law enforcement responses. By 
orchestrating a choreographed response strategy, pressure could be 
leveraged against these countries. The second step is to coordinate 
international responses and strategies with the Financial Action Task 
Force (FATF), the United Nations and other international bodies.
    There is a growing and troubling nexus between transnational 
criminal organizations, drug cartels, and terrorist organizations. Each 
has their own objective and is willing to deal with the others to 
further their own interests. The Lebanese Canadian Bank investigation 
manifests this emerging problem. It illustrated the alliance between 
Hezbollah, a terrorist organization, the Joumaa drug trafficking and 
money laundering organization in Lebanon, and the Los Zetas Mexican 
drug cartel. This troubling alliance relied on drug trafficking and 
trade-based money laundering, among other activities to facilitate the 
illicit activities of three dangerous transnational groups. The 
interagency community should closely assess the collaborative 
operations of these organizations and develop strategies to deal with 
other similar associations.
    As noted earlier, it is possible to identify terrorist financing 
but highly improbable. This is one area where collaboration and 
partnership between the public and private sector are essential. In 
2009, I wrote an article addressing how to increase the probability 
through such collaboration. For the most part, the same points I 
articulated then are applicable today. Accordingly, there are six steps 
the Government and financial services industry should take to 
collectively and unilaterally increase the probability of identifying 
terrorist financing. They are:
    1. The Government and financial sector must recognize the 
        importance of terrorist financing-specific training. This is a 
        dimension that is lacking on both sides, although more on the 
        part of financial institutions. Without specific training, the 
        ability to understand and disrupt terrorist financing is more 
        difficult to achieve.
    2. The Government must develop a means to legally provide security 
        clearances to select personnel in financial institutions in 
        order to share limited intelligence information that could be 
        scrubbed against bank monitoring systems to identify account or 
        transactional information associated with terrorists. The FBI 
        has been discussing this challenging issue since 9/11, in 
        concert with select industry compliance leaders and experts.
    3. A consistent and comprehensive feedback mechanism from law 
        enforcement must be developed that demonstrates the importance 
        of BSA reporting, especially the significance of Suspicious 
        Activity Reports (SARs). FinCEN's SAR Activity Review is a good 
        mechanism that provides insightful information. In addition, 
        specific feedback from law enforcement to financial 
        institutions concerning the value and benefit of BSA data, 
        including SAR filings, would have a dramatic impact on the 
        morale of individuals responsible for SAR reporting.
    4. There must be an assessment by the Government of all SARs 
        related to or identifiable with terrorism cases. Such a review 
        would identify specific red flags that could be used as a 
        training mechanism and more importantly, could be factored into 
        identifying typologies that could be used for the monitoring/
        surveillance capabilities of financial institutions. In 
        addition, a determination could be made as to why the financial 
        institution filed a SAR. In many instances, the SAR was filed 
        for violations other than terrorist financing. Understanding 
        what triggered the SAR filing; in tandem with how the SAR 
        ultimately was linked to terrorist interests would be 
        insightful.
    5. In addition to assessing SARs, the Government and industry 
        should collectively identify and assess as many case studies, 
        of terrorist financing-related investigations, as can be 
        identified and legally publicly accessed. The case studies 
        should be compared to determine what types of commonalities and 
        patterns of activity exist. In addition, common red flags 
        should be easily discernible. This type of case study 
        assessment, coupled with the SAR analysis, would provide more 
        meaningful information to consider in identifying terrorist 
        financing characteristics, especially in cases involving more 
        nominal financial flows. This would enable financial 
        institutions to more effectively use surveillance and monitor 
        techniques to identify questionable transactional information.
    6. A combination of BSA data, particularly SARs, combined with 
        empirical and anecdotal information would enable the Government 
        and financial sector to collectively and unilaterally conduct 
        trend analyses. This would be a significant factor in 
        identifying emerging trends. On a Government level, this would 
        contribute to implementing investigative and enforcement 
        strategies. On the institutional level, this would enable the 
        financial sector to implement strategies to mitigate risk.
    Although the landscape has changed, and methodologies have evolved 
since 9/11, terrorist financing remains the same. In essence, 
terrorists must have access to funds when they need them in order to 
operate. It is incumbent that Government agencies cooperate, 
coordinate, and communicate on both an interagency level and with the 
private sector in order to deny terrorists from moving and accessing 
funds and thereby diminishing their ability to operate.
    I would again like to thank the committee for affording me the 
opportunity to participate in this forum. I would be happy to answer 
any questions or to elaborate on my statement.

    Mr. Meehan. Let me say one thing. Unfortunately, there is 
just 6 minutes left in the vote that I must go vote on right 
now. I am struggling with how best to do this. I think they are 
going to give me a minute to sprint, so what I am going to do 
is ask Ms. Eckert to do her testimony, and then I am going to 
have to reconvene with the rest of the committee.
    Let me go to Ms. Eckert's testimony and then I will give 
you a closing comment and we will try to work from there, but I 
want to make sure you get your opportunity to hit the essence, 
Ms. Eckert. So the Chairman now recognizes Ms. Eckert.

STATEMENT OF SUE E. ECKERT, SENIOR FELLOW, WATSON INSTITUTE FOR 
            INTERNATIONAL STUDIES, BROWN UNIVERSITY

    Ms. Eckert. Mr. Chairman, thank you very much for the 
opportunity to be here, and I want to commend you and the 
committee for focusing on this vitally important issue. I don't 
think enough attention has been paid to it. Ten years with 
experience in countering the financing of terrorism, I think it 
is a very opportune time to focus on it.
    I have a number of recommendations. So I am not going to 
review what has been done with regard to al-Qaeda. There are 
specific initiatives that I am part of that we are looking at, 
the effectiveness of sanctions, for example, against Iran and 
North Korea, other sponsors of terrorism. My comments in the 
testimony and today are primarily focused on al-Qaeda.
    I won't focus right now in terms of some of the unintended 
consequences of the regime countering financing of terrorism, 
but I think it is important to pay attention to some of those 
because they have the potential to weaken what is a critically 
important initiative both globally and Nationally.
    So what I would do is just very briefly offer a couple of 
points that I think that we need to take account of as we look 
at strengthening the CFT measures.
    First is, I think it is important to understand that we 
need enhanced information analysis. There is still a great deal 
we don't know. New electronic payment methods through cell 
phones and stored value cards, digital currencies that some of 
my colleagues have been talking about are very important to 
focus on. We need to understand differences in terms of not 
only the terrorist organizations, but how they move, raise, and 
store funds. We need to develop metrics. In the past, the only 
metrics that we have had are the number of designations and the 
amount frozen. Those are clearly inadequate to--and they can be 
misleading. We haven't seen a steady progress with regard to 
that, but that doesn't mean that our terrorist financing 
initiatives are not working.
    Finally, I think one of the--for information, we need to 
analyze the information that we have and evaluate it. The 
private sector provides ample amount of information, but it 
goes into a process, as one of my colleagues has said, and it 
is not really utilized and not really analyzed except when it 
gets to the law enforcement side.
    So I think that there is an awful lot that can be done 
within the current system to be able to discern patterns that 
could assist financial institutions in identifying terrorist 
financing.
    The second major area is collaboration and information 
sharing with the private sector. The central role in this is 
the private sector. Governments don't freeze assets; the 
private sectors do. There are a number of ways. We have all 
talked about the need for greater collaboration, but I think 
that the partnerships so far has been a pretty much one-way 
flow of information.
    I think there is more that can be done. Security clearances 
for certain individuals in financial institutions; the British 
have done it to great effect. What we need to do is to 
understand that initiatives to enhance information will make 
our law enforcement intelligence efforts smarter and more 
effective.
    Inadequate capacity in other countries. We cannot do this 
alone. The United Nations has played a very important role, 
Egmont and a number of the FATF have played important roles in 
establishing this global regime, but more needs to be done to 
provide assistance to other countries to be able to put in 
place the necessary legal, administrative, and enforcement 
mechanisms to carry out this prohibition in the financing of 
terrorism.
    Further, I think that it is time, 10 years later, really 
for a critical assessment of effectiveness. In this regard 
there has been, you know, a lot focused on some of the positive 
things, but not necessarily the cost or limitations of the 
current approach and whether or not we are focusing on where 
the challenges are going and how the terrorists are raising 
moneys now. It is still focused primarily on the formal 
financial sector, and I think that we really need to take a 
good hard look at what we are doing now. As you said, I had to 
strike in my testimony the number of times I said recalibrate, 
so I am pleased that we are thinking in the same vein.
    But in short, there has been an impressive global effort to 
regulate transport or movement of funds through formal sector 
financial institutions, but al-Qaeda and other groups have 
adapted and they continue to have access to funds. In order to 
be effective we have to reassess and recalibrate policies and 
create a genuine partnership with the private sector.
    Thank you, sir.
    [The statement of Ms. Eckert follows:]
                  Prepared Statement of Sue E. Eckert
                              May 18, 2012
    Chairman Meehan, Ranking Member Higgins, and distinguished Members 
of the subcommittee, thank you for the opportunity to appear before you 
to discuss the critical issue of terrorist financing. As the disrupted 
airline bombings plot out of Yemen last week indicates, terrorist 
threats to the United States persist notwithstanding the death of Osama 
bin Laden and decline of the hierarchical organization of al-Qaeda.
    My comments are based on my previous experience as assistant 
secretary of commerce responsible for regulating dual-use goods and 
technology, as well as more recent academic initiatives to strengthen 
the instrument of U.N. sanctions. Currently, my colleague at the 
Graduate Institute in Geneva, Thomas Biersteker, and I are leading the 
Targeted Sanctions Consortium, an international group of scholars and 
practitioners conducting a comprehensive and comparative analysis of 
the impacts and effectiveness of U.N. sanctions, including those 
targeted on al-Qaeda and affiliated groups, as well as sanctions 
against Iran and DPRK. I've also worked with the United Nations 
Counterterrorism Implementation Task Force to explore the 
identification of indicators that might be useful to financial 
institutions in detecting potential terrorism financing activity. In 
this regard, I've had the opportunity to interact with the private 
sector, National regulators, and international counterterrorism 
policymakers involved in the global effort to combat the financing of 
al-Qaeda and affiliated groups. The views expressed however, are my 
own, and not necessarily endorsed by any entity or colleagues with whom 
I am affiliated.
    Due to time constraints, this abbreviated statement focuses on 
terrorism financing related primarily to al-Qaeda (AQ) and lays out 
some considerations for ways forward. I am happy, however, to provide 
an expanded statement based upon our book, Countering the Financing of 
Terrorism, and more recent initiatives assessing the effectiveness of 
U.N. sanctions.
                 evolving threat and means of financing
    Al-Qaeda today is profoundly transformed from the group that 
engineered the attacks on 11 September 2001. The once-hierarchical 
organization evolved into a confederation of allied entities, and 
subsequently into a general jihadi movement, with al-Qaeda core (AQC) 
serving more as an inspirational vanguard, a source of legitimization 
and justification for acts of global terrorism by affiliates, rather 
than as a source of the planning, financing, and execution of terrorist 
attacks. Regional affiliates such as AQ in the Arabian Peninsula 
(AQAP), AQ in the Islamic Maghreb (AQIM), and al-Shabaab in Somalia, 
now outnumber AQC remnants in Pakistan and remain committed to al-Qaeda 
ideology. Even with new revelations about bin Laden's final activities 
in Abbottabad, the AQ affiliates constitute the more significant 
contemporary terrorist threat.
    Likewise, the means by which terrorists finance activities have 
changed, and today largely consist of criminal means conducted within a 
state. Formal sector transactions and even the transnational movement 
of funds by AQ have been severely constrained, in part due to the 
success to the extensive global efforts to counter the financing of 
terrorism (CFT). Formal sector financial institutions generally have 
not been used for the transfer of funds across international borders to 
AQ since 2003; rather, AQ affiliates have increasingly resorted to the 
use of cash couriers and barter trade to move funds. Self-financed 
criminal activities such as credit card and check fraud, theft, 
extortion, and kidnapping for ransom represent more common methods 
utilized by terrorists to finance their activities.\1\ Charitable 
donations as a significant means of financing terrorism also appears to 
have diminished, as recent evidence concerning the diversion from 
Islamic charities is lacking (and most of the legal cases resulting in 
successful convictions have been based more on violations of tax and 
reporting rules, rather than terrorist financing). While informal value 
transfer systems or hawala were used for the transfer of funds prior to 
the attacks of 11 September and most recently by the Times Square 
bomber, the overwhelming majority of such transfers are legitimate and 
advance important social and global developmental functions.
---------------------------------------------------------------------------
    \1\ Note that this is not the case with the Taliban which has 
adapted over time in Afghanistan and Pakistan, in large part due to 
territorial control facilitating revenues through taxation of drug 
production, transiting goods, diversion of international assistance, 
and ransom from kidnappings.
---------------------------------------------------------------------------
    Recognition of the changing structure and financing of AQ and 
affiliated groups is important, as effective strategies for countering 
the financing of terrorism must similarly adapt to the current threat. 
With more than a decade of CFT experience, now is an opportune time to 
take stock of what has been accomplished in order to recalibrate U.S. 
and international efforts to more effectively address the evolving 
nature of terrorist financing. I commend the subcommittee for focusing 
on this issue, and hope additional review will be undertaken.
    In this regard, it is worth remembering that prior to 9/11, there 
was little concerted attention focused on terrorist financing, with al-
Qaeda able to raise funds from donors in Gulf States and charitable 
organizations and move them through financial institutions. Few 
requirements other than those mandated by UNSCR 1267 existed to 
restrict financing, with almost no emphasis on implementation (indeed, 
country reports prior to 2001 largely consisted of one sentence--``We 
have taken all necessary steps to comply with the resolution.'') In the 
past decade, there has been a sea-change in the recognition and 
implementation by Member States of legal, administrative, and 
enforcement measures to combat terrorism financing.
                    cft developments and challenges
    Since 9/11, we've witnessed an impressive global initiative to 
disrupt financial support for terrorism. The United States has worked 
diligently to launch a worldwide campaign to make it more difficult, 
costly, and risky for AQ and affiliated groups to raise and move money 
around the world. As a result, new and significant international 
institutional frameworks have evolved to address CFT, including crucial 
roles by the United Nations Security Council, the Financial Action Task 
Force, the World Bank, IMF, Egmont Group, as well as private-sector 
initiatives like the Wolfsberg Group. UN Security Council Resolutions 
1267, 1373, and 1540 (and successor resolutions) provide the legal 
basis and legitimacy for Member States to take necessary steps to put 
into place National legal and administrative mechanisms to freeze 
terrorist assets. Multilateral CFT efforts have been essential in 
stemming terrorist funds.
    The global CFT regime utilized preexisting policy instruments but 
greatly expanded them. Through designations or listings of individuals, 
organizations, and corporate entities and the freezing of their assets, 
CFT efforts have primarily focused on preventing the use of formal 
sector financial institutions for the trans-border transfer of funds 
that could be used to support acts of terrorism. Initiatives to license 
informal value transfer systems and register charities have also 
resulted.
    Notwithstanding the important accomplishments of terrorism 
sanctions to date, complications and unintended consequences have 
arisen. National and regional courts have faulted the U.N. process of 
designating individuals as well as with the adequacy of procedures for 
challenging those designations. Perceptions of unfairness in the 
application of targeted sanctions and potential violation of due 
process have generated concern and public opposition in several 
countries, including among legislatures, threatening to undermine the 
credibility and effectiveness of U.N.-targeted sanctions. The most 
prominent case of Saudi businessman Yassin Abdullah Kadi, is still 
under appeal at the European Court of Justice, but if successful could 
force the European Union not to implement mandatory Chapter VII 
sanctions thereby establishing a dangerous precedent and potentially 
undermining U.N. terrorism sanctions. Notwithstanding important 
procedural enhancements in recent years, however, legal challenges 
persist. This problem cannot be ``solved'' definitively, but rather 
must be managed to dissuade national or regional courts from 
questioning the underlying security rationale for listings. Continued 
review of U.N. designations and innovations in the delisting process 
are necessary for the legitimacy of international CFT measures and the 
future utility of the instrument of multilateral sanctions.
    The freezing of assets or exclusion from the international 
financial system are indeed powerful terrorist financing tools, but 
such measures can have far-reaching consequences. Fears that there 
would be a decline in charitable contributions to Muslim charities have 
been realized to an extent, which could have implications for efforts 
to address root causes of terrorism. Targeted financial sanctions are 
not as targeted as they might initially appear; in the case of al 
Barakaat, the collateral damage of freezing the assets of the broad 
group of companies led to severe disruption of fund transfers to a 
large portion of the Somali population. Concerns for the risks involved 
with money service businesses (MSBs) resulted in the shuttering of 
Somali MSBs in several states, leaving large diaspora communities 
without viable means to transmit money cheaply and efficiently to 
relatives since there is no functioning banking system in Somalia.
    Moreover, the regulatory burden on financial institutions has 
increased considerably. Compliance with enhanced reporting 
requirements, new internal procedures to screen customers, and train 
staff to block or freeze individual transactions have escalated costs 
as responsibility for CFT implementation rests primarily with the 
private sector. In addition, banks have terminated relationships with 
perceived risky sectors--MSBs, embassy banking, and certain 
correspondent banking relationships, resulting in the labeling of some 
sectors as ``unbankable.'' The dramatic increase in the volume of 
information submitted by financial institutions, including the millions 
of SARs filed annually, which remain largely unanalyzed and continues 
to be a source of frustration to financial institutions. Processing 
information is far more important than simply accumulating it, and it 
is important that regulation be prudently designed with this in mind.
    Likewise, the success of CFT instruments ultimately depends on 
parallel implementation by other countries. Despite progress since 
September 11, serious deficiencies of capacity within Member States to 
implement CFT measures exist (e.g. to criminalize terrorist financing, 
prohibit financial support to terrorists, and freeze the assets of 
those who commit or support terrorist acts). Implementation is uneven, 
and in some states, capacity is virtually nonexistent. Enhanced 
initiatives to assist countries in building the legal and 
administrative infrastructure to implement and enforce financial 
sanctions are necessary.
    Overall, however, CFT efforts have constrained AQ and its 
affiliates in their ability to access essential support. As noted by 
the 1267 Monitoring Team in a recent report, financial sanctions have 
among other things, restricted the ability of those listed to continue 
to promote the objectives of AQ and their associates, alerted law 
enforcement to the activities of listed parties, and signaled to the 
world (and other potential financiers of terrorism) the resolve of the 
international community to combat funding of terrorism. While far from 
perfect and with much more that can and should be done to strengthen 
CFT measures, it is important to keep these accomplishments in mind--
indeed, the glass is more than half full!
        considerations for the second decade of cft initiatives
    As the United States and the international community move forward 
to strengthen CFT policies in the coming years, the following 
considerations are useful to keep in mind:
   The importance of realistic expectations as to what 
        financial sanctions can reasonably achieve. Terrorism will 
        continue, and AQ still exists (with access to funds). This does 
        not mean that TF initiatives are ineffective, but rather we 
        must be cognizant of the appropriate role of TF sanctions play 
        as but one element in a larger CT strategy.
   When assessing the impact and effectiveness of CFT measures, 
        it is essential to appropriately define the purposes. An 
        innovation of the Targeted Sanctions Consortium's methodology 
        \2\ includes evaluating effectiveness of sanctions in terms of 
        multiple and differing purposes of sanctions, to: (1) Coerce or 
        change targets' behavior; (2) constrain terrorist activities 
        (or access to essential resources such as funds thereby raising 
        costs and forcing changes in strategy); and (3) signal/
        stigmatize targets violating international norms through 
        terrorist acts.
---------------------------------------------------------------------------
    \2\ For more information about the Targeted Sanctions Consortium, a 
comprehensive, systematic, and comparative assessment of the impacts 
and effectiveness of U.N. targeted sanctions regimes over the past 20 
years, see http://graduateinstitute.ch/internationalgovernance/
UN_Targeted_Sanctions.html.
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   While progress has been made in CFT, terrorists are 
        constantly evolving the means by which they raise and use 
        funds; the international response needs to be dynamic as well. 
        The basic framework focusing on preventing the use of formal 
        sector institutions for cross-border transfers of funds remains 
        largely unchanged. New strategies and tools to address current 
        financing (e.g. cash couriers, stored-value instruments, 
        informal value transfer systems (IVTS), kidnapping etc.) are 
        necessary.
   CFT measures are considered among the most ``effective'' 
        sanctions, yet there is public perception that sanctions 
        generally are not effective. More needs to be done to 
        demonstrate and make the case regarding the effectiveness of TF 
        sanctions.
    With terrorists' evolution of financing means, it is critical to 
continually review and adapt U.S. and international CFT responses. 
Military planners are famous for preparing for the last war, and it is 
important that those concerned with countering the financing of 
terrorism not make such a mistake. Al-Qaeda has changed. The nature of 
its fundraising has changed. The ways in which it moves, stores, and 
uses funds have changed. It is important that CFT efforts proceed from 
this knowledge, rather than squander limited resources.
    The following are general areas that could be considered in future 
efforts to strengthen CFT measures:
Enhanced information and analysis
    The old adage--the more you know, the more you realize how much you 
don't know--applies amply to the subject of terrorist financing There 
is still a great deal we do not know, for example, regarding the use of 
informal value transfer systems, trade diversion, traditional cash 
smuggling, and new electronic payment methods through cell phones, 
stored value cards, and digital currencies. Notwithstanding greater 
understanding regarding AQ's financing of terrorism, and ``despite all 
of our sophistication, we have neither starved the beast nor produced 
very good intelligence on how exactly these organizations continue to 
finance themselves,'' as Lee Hamilton noted. There is a significant 
need for the further research and analysis in this area.
            Differentiate among groups and means to finance terrorist 
                    operations
    It is important that CFT initiatives distinguish between (and 
differentiate among) groups committing acts of terrorism. Those acting 
on a global scale, like AQ, have different needs and means of financing 
themselves, particularly when they are compared to groups acting on a 
local or regional scale. Territorial-based groups can extract resources 
in ways that approximate the state (i.e. Taliban exacting tariffs or 
quasi-taxes from the population). There are fundamental differences in 
the goals, scope of operations, and the ultimate objectives of groups 
acting globally and groups contained within a defined territorial 
space. Extending existing CFT efforts aimed at al-Qaeda to other 
circumstances risks diffusing the effort and decreasing effectiveness. 
One size does not fit all.
            Develop metrics
    There are relatively few quantitative indicators and reliable 
sources of information to assess CFT initiatives but it would be useful 
to try to devise additional metrics of effectiveness. Metrics most 
commonly associated with terrorist financing--the total number of 
designations and the amount of money frozen--are inadequate and can be 
misleading. As difficult as such an endeavor would be, it is important 
to attempt to assess the effectiveness of CFT efforts. The consequences 
of failing to do so are inappropriate and potentially ineffective 
policies to thwart terrorist acts. Policymakers and academics alike 
must demand better and more transparent sources of information in order 
to more thoroughly understand and assess terrorist financing efforts.
            Evaluate and analyze TF information
    As noted by others, FinCEN receives nearly a million Suspicious 
Activity Reports (SARs) from financial entities annually, of which less 
than 1% relate to TF, yet little systematic analysis of the information 
results. FinCEN generally passes SARs on to the FBI who integrates the 
information into their database in order to identify trends and 
suspicious transactions. However, the current system lacks requirements 
for the systematic analysis of data to be able to discern patterns that 
could assist FIs in screening for terrorist-related transactions.\3\ 
The same applies to sharing of case information at the international 
level through which comprehensive analyses, lessons learned, policy-
useful conclusions and guidance for both Government agencies and the 
private sector could possibly emerge. Is it an issue of resources or 
lack of priority? What could and should be done to most effectively 
mine the information reported by FIs? USG officials have previously 
referenced the number of cases in which financial information from SARs 
played a role; this information should be updated and made available.
---------------------------------------------------------------------------
    \3\ An initiative by a group of researchers to collect and analyze 
examples of terrorist financing (TF) through financial institutions in 
order to discern indicators of terrorism finance was stymied by the 
lack of access to information (sanitized SARs redacted of identifying 
info which DoJ was willing to provide).
---------------------------------------------------------------------------
            TF prosecutions
    Successful prosecution on TF grounds are limited--in many cases of 
suspected financing, convictions are easier to obtain on alternative 
charges. Should we be concerned with the relatively small number of 
successfully prosecuted TF cases? What are the obstacles, and are 
legislative changes needed?
Collaboration/information sharing with financial sector
    Despite 10 years of espousing the need for closer public-private 
partnership to combat TF, the two-way exchange of information remains 
limited--in most cases, it's the financial community providing input 
with very little feedback. The FBI created a financial sector working 
group that meets periodically, but compliance officials still complain 
about a lack of information to help detect terrorist transactions. 
Analysis of SARs information that aided in law enforcement 
investigations could help FIs identify typologies and trends they 
should be alert to.
    The United Kingdom has instituted a system whereby select 
representatives of financial institutions receive security clearances 
so sensitive information regarding transactions can be shared. A 
similar initiative has been discussed in the United States, but little 
progress seems to have been made. Is this a good idea, and if not, why 
not? What are other ways in which the USG can collaborate with 
financial institutions? Are additional protections (i.e. safe harbor 
provisions) needed?
    Notwithstanding the absence of reliable terrorism financing 
indicators, the information provided by financial institutions remains 
critically important to intelligence and law enforcement efforts to 
disrupt terrorism. When intelligence on possible terrorist activities 
is shared with financial institutions, the information they provide is 
often vital and unavailable from other sources. New initiatives to 
enhance information sharing between governments and the private sector 
should be prioritized.
Address inadequate CTF capacity in other countries
    To be effective, CFT measures must be implemented in a comparable 
manner by other countries. While the United Nations is an important 
source of legitimacy (requiring Member States to criminalize the 
financing of terrorism and to freeze the assets of individuals/entities 
designated as terrorists) only Member States can put into place the 
necessary legal, administrative, and enforcement measures to counter 
TF. Even with successes as noted, there remain significant deficiencies 
in the capabilities of many Member States to meet their international 
CFT obligations (to criminalize terrorist financing, prohibit financial 
support to terrorists, and freeze the assets of those who commit or 
support terrorist acts). More needs to be done to provide adequate 
assistance for MS to put into place the necessary legal, 
administrative, and compliance measures, and current initiatives should 
be enhanced
Great public awareness and understanding of CTF initiatives
    There is a need for broader understanding of the importance and 
utility of CFT measures, both designations and terrorist financing 
tracking. Most information regarding the reasons for designations and 
the effectiveness of the CFT in identifying networks or preventing acts 
of terrorism is closely held by Government agencies. While protection 
of sources and methods is necessary, excessive classification and lack 
of documentation to justify designations undermines public confidence 
in, and support for, the CFT regime.
Critical assessment of CFT effectiveness
    Ultimately, the effectiveness of National and global efforts to 
counter the financing of terrorism depends on the nature of the threat 
(the assessment of risk) and the appropriateness of the response to 
that threat (i.e. that the benefits of the policy response outweigh the 
costs of the measures enacted). When it comes to an assessment of the 
benefits of CFT efforts, there is strong evidence that it is more 
difficult for AQ and affiliated groups to use the formal financial 
sector to support operations today. The capacity of AQ and others to 
commit acts of terrorism has been degraded. Yet there is little 
systematic assessment of the costs and limitations of the current 
approach. ``Staying the course'' of current policy may nor be the most 
appropriate action, especially given the changing and adapting nature 
of al-Qaeda.
    Beyond these general areas, specific consideration should be given 
to:
    Charities.--Traditionally, al-Qaeda and other groups have utilized 
charities, NGOs, and mosques to raise funds through direct 
solicitations and diversion of donations intended for humanitarian 
purposes. While the risk of abuse of the charitable sector remains 
real, a differentiated approach, distinguishing between financing 
humanitarian networks affiliated with resistance groups and financing 
terrorism, is needed. Blanket condemnation of groups providing social 
welfare services alienates Muslim constituencies and prevents aid from 
reaching those most in need. Government efforts should focus on 
assisting charities to be more transparent; clarifying what constitutes 
financing of terrorism and association; designating independent bodies 
to regulate and investigate charities; and accrediting charities or 
developing indicators of trust/approval so that contributors know the 
group can be trusted to deliver support to appropriate projects.
    In addition, zakat contributions are central to the practice of 
Islam, and a policy that places charitable giving to Islamic 
organizations under general suspicion contributes to a perception that 
the effort is directed against the entire Muslim community, rather than 
a very small segment of that community. Not only is this profoundly 
unfair, but it will ultimately undercut the effectiveness of other 
counter-terrorism efforts. Special effort must be taken to reaffirm 
support for charitable giving through transparent processes.
    Informal Transfers.--Regulation of remittance vehicles is 
necessary, but should be done in a way that is proportionate to risk 
and appropriate to particular socio-economic environments. In countries 
where informal systems exist alongside a well-functioning conventional 
banking sector, hawala or other informal value transfer systems (IVTS) 
should be registered and required to keep adequate records. In states 
at risk of institutional collapse or states without functioning banking 
systems, requirements beyond registration may not be feasible. 
Governments should conduct outreach efforts to consult, engage, and 
build consensus among IVTS operators with regard to the most 
appropriate measures. Positive incentives should be created for 
participants in the sector to implement regulatory frameworks. In this 
regard, greater emphasis should be placed on the traceability of 
transactions, rather than centralization of data and should be 
sufficiently flexible so as not to drive IVTS underground.
    Trade Diversion.--International trade is vulnerable to abuse by 
terrorists, as well as other criminals, through false invoicing and the 
use of commodities to move funds, yet relatively little attention has 
been focused on this mechanism. Governments need a more concerted focus 
on trade diversion, both through greater understanding of the threat 
posed by lack of trade transparency and the techniques used, as well as 
specific efforts directed at anticipating, detecting, and thwarting 
attempts by terrorist groups or their supporters to take advantage of 
this mechanism. Trade transparency units to analyze, share, and track 
international trade data to identify anomalies have been formed, albeit 
more slowly than hoped. Greater cooperation with the private sector 
victimized by diversion schemes should be explored, and enhanced 
priority placed on interagency cooperation and prosecution of trade 
diversion cases.
    Since 9/11, an impressive global effort to regulate the trans-
border movement of funds through formal sector financial institutions 
has ensued, but AQ and other groups have adapted and developed 
alternative means to raise and move funds to continue their terrorist 
activities. In order to be effective, CFT policies continually must be 
reassessed and recalibrated. Genuine partnership between the private 
sector and Government is critical to effective CFT policies, and new 
ways of sharing information and creating incentives for compliance must 
be explored.
    Thank you for the opportunity to discuss terrorist financing since 
9/11--I look forward to questions and being of assistance to the 
committee.

    Mr. Meehan. Well, thank you each for your testimony. I am 
very frustrated that we are competing with what was a very 
dynamic schedule over in the House. I am going to at this point 
in time recess the committee, and I have to be candid in saying 
it is not likely we are going to be able to collect the 
membership that I think this issue deserves. I am hoping that 
we will recess and look for an opportunity to reconvene at a 
point in time that will be convenient for you and us. I am 
hoping that you would still be able to participate. The issue 
we are discussing is too important to rush through in this 
forum, and I think that you have laid the groundwork with your 
testimony today that will allow us to have a jumping-off point 
in any number of areas.
    The service that you each have given to our country at the 
critical time as we began this process was vital to the 
protection of this Nation, but it is the continuing ability for 
us to adapt as our enemy has adapted that is going to allow us 
to protect this Nation in the future. Few people are talking 
about this. You understand it. We have got to communicate this, 
and do it effectively.
    So I thank you. We will follow up at a later time, but at 
this point in time, without objection, the subcommittee is in 
recess subject to the call of the Chair.
    The Chair indicates that we will consult with the Minority 
in order to provide Members with adequate notice of when we 
will convene.* Thank you for your testimony, and I look forward 
to following up with you at an another forum in which we can 
develop these issues far more broadly. Thank you.
---------------------------------------------------------------------------
    * The subcommittee did not schedule a continuation of this hearing.
---------------------------------------------------------------------------
    [Whereupon, at 11:55 a.m., the subcommittee was adjourned.]

                            A P P E N D I X

                              ----------                              

      Questions From Chairman Patrick Meehan for Jonathan Schanzer
    Question 1a. With our military successes against al-Qaeda core 
leadership in Afghanistan and Pakistan, there is a growing trend of al-
Qaeda affiliated groups and adherents filling the void and taking the 
lead in launching attacks against the homeland.
    Given the relatively low amount of money required to plan and 
launch a terrorist attack, how realistic is it to expect U.S. and 
international counterterrorism entities to identify funds that might be 
used to undertake terrorism-related activity?
    Answer. The 9/11 Commission's Executive Summary notes that the 
United States must ``expect less from trying to dry up terrorist money 
and more from following the money for intelligence, as a tool to hunt 
terrorists, understand their networks, and disrupt their 
operations.''\1\ I fully agree with this assessment. This does not mean 
that we should stop trying to identify funds marked for terrorist 
activity. But recent years have seen a decline in the identification or 
seizure of such funds.
---------------------------------------------------------------------------
    \1\ ``The 9/11 Commission Report--Executive Summary,'' National 
Commission on Terrorist Attacks Upon the United States, July 2004, 
http://govinfo.library.unt.edu/911/report/911Report_Exec.pdf.
---------------------------------------------------------------------------
    Question 1b. What are some of the persistent challenges in 
identifying and investigating an activity suspected of financing 
terrorism? What are some of the trends in how terrorist groups 
acquiring funds to support their objectives?
    Answer. My sense is that there is just not enough collection being 
done for this purpose. Indeed, there are too many other intelligence 
challenges that our Government is working to meet. As always, 
allocation of resources requires tough choices. In terms of trends, as 
I noted in my prepared testimony, terrorists are increasingly 
gravitating to organized crime to support their objectives. This 
provides an opportunity for intelligence specialists to work hand-in-
hand with law enforcement.
    Question 1c. Is the decision to pursue a terror financing 
investigation based on the amount of money suspected of being acquired 
for terrorism-related purposes? If so, what is the minimum monetary 
amount of terrorism-related funds the U.S. Government assesses as 
worthy of investigating?
    Answer. I am no longer in a position to answer that. When I served 
in Government, the specific amount was not a primary consideration.
    Question 1d. Can you describe the decision-making process and 
considerations by which the U.S. intelligence and law enforcement 
communities decide whether to stop terrorism-financing related activity 
and charge a suspect arrest or choose to allow the activity to continue 
in hopes of following the trail of funds to a larger network of support 
or to entities that may be planning a terrorist attack?
    Answer. When I served in Government, the decision to designate was 
one undertaken by an inter-agency working group. The different agencies 
could, at times, disagree about the need for designation. This could 
sometimes slow the process.
    Question 2. President Obama recently signed an Executive Order 
allowing the Treasury Department to freeze U.S.-based assets of persons 
who the White House has identified as a ``threat to the peace, 
security, and stability'' of Yemen.
    Do you think this is an effective use of the designation authority? 
Especially when a group such as Boko Haram--who have killed thousands 
of civilians and are in constant contact with AQIM--remain 
undesignated?
    Answer. AQIM and Boko Haram are important targets. But governing is 
about choosing priorities. In this case, I think the Yemeni 
designations were the more pressing ones. Juan Zarate, a former Bush 
administration counterterrorism adviser, also agrees that these 
designations can ``help steer toward political stability in Yemen.''\2\
---------------------------------------------------------------------------
    \2\ Arshad Mohammed and Jason Lange, ``U.S. Sends Warning to Saleh 
Backers in Yemen,'' Reuters, May 16, 2012, http://www.reuters.com/
article/2012/05/17/us-usa-yemen-assets-idUSBRE84F1GS20120517.
---------------------------------------------------------------------------
    Question 3a. In 2011, the U.S. Government revealed the findings of 
a multi-year law enforcement operation to dismantle a complex, 
transnational network involved in money laundering and drug 
trafficking. The case involved Hezbollah, Mexican, and Colombian drug 
trafficking organizations, the Taliban, Lebanon, Colombia, Panama, 
several countries in West Africa, U.S. car buyers, a U.S. shipping 
company, bulk cash couriers, plans for weapons trafficking deals, and 
the Beirut-based Lebanese Canadian Bank (LCB).
    Does the fact that groups such as Hezbollah and the Islamic 
Revolutionary Guard Corps continue to use criminal ventures create 
opportunities for U.S. enforcement mechanisms--such as our robust 
counternarcotics tools--to roll up these vast networks?
    Answer. Yes, the involvement of terrorist groups in criminal 
ventures creates exploitable opportunities. David Aufhauser, former 
general counsel of the U.S. Department of Treasury, notes that ``both 
terrorist financing and traditional financial crimes have one thing in 
common--they leave a financial footprint that allows us to trace 
financial flows, unravel terrorist financing networks, and uncover 
terrorist sleeper cells.''\3\ Our Government has tools at its disposal 
to uncover that footprint.
---------------------------------------------------------------------------
    \3\ David Aufhauser, ``The Threat of Terrorist Financing,'' United 
States Senate Committee on the Judiciary, June 26, 2003, http://
www.au.af.mil/au/awc/awcgate/congress/terrorist_financing.htm.
---------------------------------------------------------------------------
    I have also noted that when terrorist groups--particularly 
religious ones--enter into the world of organized crime, it creates a 
liability from the perspective of public relations. When pious 
ideologies are sullied by criminal funds, this is something the U.S. 
Government should exploit.
    Question 3b. How does counterterrorism fit in this increasingly 
interconnected underworld?
    Answer. From what we have seen, Middle East terrorist groups 
maintain a pious public face in their home territories, but engage with 
the underworld in far-off places, such as Latin America or West Africa. 
In a few cases, such as that of the Colombian FARC, groups directly 
engage with the underworld to their own detriment.
    Question 4a. The U.S. Government's on-going investigation of the 
Lebanese Canadian Bank is of particular interest from a money 
laundering perspective because it highlights the consequences of poor 
compliance with anti-money laundering regulations in the formal 
financial system.
    Given the Lebanese Canadian Bank case, what more can be done to 
protect the formal financial system from exploitation by terrorists?
    Answer. This case exposed the weakness of the FATF system. The 
system simply does not put enough pressure on countries that are less 
motivated to fight terrorism. We need to strengthen the international 
system. There needs to be tougher penalties for noncompliance.
    Question 4b. How can the U.S. Government more effectively mitigate 
the threats posed by trade-based money laundering and bulk cash 
smuggling and other ways outside the formal financial sector?
    Answer. This is also a problem that stems from the weakness of the 
FATF system. We need to apply greater pressure on those countries where 
trade-based money laundering and bulk cash smuggling is pervasive. The 
primary problem is a lack of sustained effort. But, as always, even in 
countries where there is a will, there may be a lack of resources.
    Question 5. There is an increasing concern in the counterterrorism 
and intelligence community that terrorist organizations are 
increasingly using criminal activities that are outside of the formal 
international financial system to raise funds to carry out attacks and 
further their goals.
    How important are terrorist funds derived from criminal activities 
for the operational sustainability of major terrorist groups compared 
to other non-criminal sources of funds, including state sponsors and 
private sector donations?
    Answer. The problem is pervasive. In 2003, the Orlando Sentinel 
reported that according to Gen. James T. Hill, commander of the U.S. 
Southern Command, ``Radical Islamic groups in the Middle East are 
getting between $300 million and $500 million a year from various 
criminal networks in Latin America.''\4\ Moreover, Brazil estimates 
that ``more than US$6 billion a year in illegal funds is laundered in 
the [tri-border area],'' according to a recent U.S. Government report. 
The same report stated that ``Hizballah clearly derives a quite 
substantial amount of income from its various illicit activities in the 
TBA, in addition to financial support from the government of Iran and 
income derived from narcotics trafficking in Lebanon's Al Beqa'a 
Valley.''\5\
---------------------------------------------------------------------------
    \4\ ``U.S. General: Islamic Rebels Get Cash From Latin America 
Gangs,'' Orlando Sentinel, March 10, 2003, http://
articles.orlandosentinel.com/2003-03-10/news/0303100117_1_latin-
america-southern-command-miami.
    \5\ ``Terrorist and Organized Crime Groups in the Tri-Border Area 
(TBA) of South America,'' Federal Research Division--The Library of 
Congress, December 2010, http://www.loc.gov/rr/frd/pdf-files/
TerrOrgCrime_TBA.pdf.
---------------------------------------------------------------------------
    Question 6. Foreign Terrorist Organization designation by the 
Secretary of State is an important tool our Government uses to deter 
donations or contributions to and economic transactions with terrorist 
organizations. There are currently 50 groups listed by the State 
Department as designated Foreign Terrorist Organizations.
    Which FTO-designated groups would you say are the best resourced 
and most proficient at evading American and international financial 
regulations? Which use the U.S. financial system the most?
    Answer. Over time, just about every designated terrorist 
organization has learned how to evade U.S. sanctions. They have largely 
dropped out of the formal financial sector and severely limited their 
exposure to institutions where the United States has jurisdiction. This 
is why it has become harder to ``catch'' terrorist money.
    Question 7. All of the witnesses mentioned in their prepared 
testimony that the Government needs to interact with the financial 
sector to identify terrorist financing.
    How should the Government develop more effective case typologies 
and feedback mechanisms about how terrorists use financial 
institutions? Is this mostly an educational issue where we need to 
empower financial institutions in order to monitor transactions for 
suspicious or anomalous behavior?
    Answer. America's financial institutions employ compliance 
professionals to ensure that terrorists do not exploit their services. 
A robust continuing education program is something that could be 
considered.
    Question 8a. The Financial Action Task Force on Money Laundering is 
comprised of 36 member countries and territories and two international 
organizations and was organized to develop and promote policies to 
combat money laundering and terrorist financing. The FATF relies on a 
combination of annual self-assessments and periodic mutual evaluations 
that are completed by a team of FATF experts to provide information and 
to assess the compliance of its members to the FATF guidelines.
    What are the areas of greatest need for improvement in the FATF 
surveillance process?
    Answer. Special recommendations, rather than laws, create an 
environment where compliance appears less than mandatory. Similarly, 
mutual evaluations carry less weight than official oversight. FATF's 
multilateral structure makes it easy for countries to do the minimum 
required of them. This is a culture that, in my opinion, needs to be 
addressed.
    Question 8b. How does the United States evaluate the threats to the 
global economy arising from money laundering, terrorist financing, and 
financing the proliferation of weapons of mass destruction?
    Answer. I don't believe I am equipped to answer this question.
    Question 8c. How should we be prioritizing these threats and how 
effectively has the FATF process been in addressing these threats?
    Answer. I don't believe that FATF has been terribly effective in 
addressing these threats. These are topics of conversation at FATF, but 
not necessarily action items. As for the United States, our Government 
continues to assess threats and makes decisions based on priorities. In 
all of these areas, our Government has allocated significant resources.
    Question 9. KPMG, a private consulting firm, released in October 
2011 the findings of an anti-money laundering survey of major 
international banks. They found that 80% of respondents reported an 
increase in costs associated with anti-money laundering that averaged 
around 45% since 2007. The major sources of cost increases identified 
by the KMPG survey were: (1) Enhanced transaction monitoring, (2) 
increased external reporting requirements to internal regulators and 
external law enforcement agencies, and (3) increased anti-bribery and 
anti-corruption activities.
    In your opinion, are there sufficient resources devoted to 
countering the financing of terrorism and money laundering? 
Alternatively, are the resource costs associated with implementing such 
financial regulations too burdensome on either the private or public 
sectors?
    Answer. According to a Congressional Research Service report, 
``traditional anti-money-laundering tools appear to be of limited use 
in disrupting terrorist financing.''\6\ Accordingly, it may not make 
much sense to devote more resources to the anti-money-laundering 
component of the problem. Critics also question the need for increased 
funds going to the Treasury's counterterrorism efforts because less and 
less cash has been frozen. But this fails to take into account how 
effective Treasury has been in squeezing Iran with sanctions. This 
effort, designed to help prevent Iran from attaining a nuclear weapon, 
also happens to deprive the regime of the cash that it previously used 
to finance terrorism. This has been a net positive. For this reason, I 
believe the funding of Treasury's programs should continue.
---------------------------------------------------------------------------
    \6\ Rensselaer Lee, ``Terrorist Financing: The U.S. and 
International Response,'' Congressional Research Service, December 6, 
2002, http://www.law.umaryland.edu/marshall/crsreports/crsdocuments/
RL31658_12062002.pdf.
---------------------------------------------------------------------------
    Question 10. There has been growing concern at DHS, particularly 
within ICE, about the widespread use of prepaid and stored value cards 
as a way of smuggling illicit funds into the country which could fund 
terror activity. Some estimates are that $1 billion annually is moved 
into the country this way, with most of those funds nearly impossible 
to track.
    Would you agree that prepaid and stored value cards are a growing 
danger to being able to target terrorist financiers? What steps would 
you recommend DHS and the Department of the Treasury take to combat 
this emerging trend?
    Answer. According to Dennis Lormel, ``There is no empirical 
statistical data establishing the nexus between credit card 
exploitation and terrorism.'' Based on my experience, I largely agree 
with this. When I served at Treasury, I personally saw cases that 
proved to be rare exceptions.
    Lormel also states that ``The focus for credit card fraud should be 
placed on both the source and availability or distribution of funds.'' 
He notes that ``Al-Qaeda operatives commit credit card information 
theft and fraud more on an individual basis than as a group or cell 
activity; however, depending on the circumstances, they will commit 
fraud as a group or cells.'' In contrast, he says that ``Because 
Hezbollah functions like an organized crime family, their criminal 
activities, which include credit card information theft and fraud, are 
more likely to be group or cell oriented.''\7\ These are trends that 
need to be examined moving forward.
---------------------------------------------------------------------------
    \7\ Dennis Lormel, ``Terrorism and Credit Card Information Theft,'' 
Shift4 Corporation, September 2007, http://www.shift4.com/pdf/s4-
wp0806_terrorism-and-credit-card-information-theft.pdf.
---------------------------------------------------------------------------
    Question 11a. On June 29, 2012, the Obama administration imposed 
sanctions on a pair of informal money-exchange networks--known as 
hawalas--in Afghanistan and Pakistan in what officials described as the 
first use of the tactic to attack the financial underpinnings of 
Taliban militants who rely on the system to fund their insurgency. The 
Treasury Department said that the designations were coordinated with 
similar measures adopted by the United Nations as part of a broad 
effort to slow the flow of cash used by the Taliban to pay salaries and 
purchase weapons for attacks in Afghanistan. The United Nations also 
added the names of the same two institutions and their principal 
backers to a list of groups officially associated with Taliban 
militancy, meaning they will be subject to international sanctions as 
well.
    Considering how widespread their use is, how difficult is it for 
U.S. Government to really get a handle on some of the terror financing 
and money laundering activities being conducted under the hawala 
system?
    Answer. The hawala system is a tough challenge. While tens of 
billions of dollars pass through hawaladars each year, a recent GAO 
report states that ``officials and researchers we spoke with could not 
provide estimates on the extent of terrorist use of informal banking 
systems and other alternative financing mechanisms.''\8\
---------------------------------------------------------------------------
    \8\ ``Terrorist Financing,'' Government Accountability Office, 
November 2003, http://www.gao.gov/new.items/d04163.pdf.
---------------------------------------------------------------------------
    According to the 9/11 Commission's monograph on terror financing, 
the hawala system has become less of an issue when tracking the funds 
of al-Qaeda. After we began actively tracking terror financiers, 
operatives shifted to bulk cash smuggling.\9\
---------------------------------------------------------------------------
    \9\ ``Monograph on Terror Financing,'' National Commission on 
Terrorist Attacks Upon the United States, Accessed July 23, 2012. 
http://www.9-11commission.gov/staff_statements/
911_TerrFin_Monograph.pdf.
---------------------------------------------------------------------------
    And while hawalas may continue to pose a significant terror finance 
threat, according to Robert Looney, ``a crackdown by Arab and South 
Asian governments at the behest of Western governments is simply not 
feasible. The vast majority of the money is from legal, legitimate 
sources, and the hawala organizations are numerous and extremely 
powerful.'' He correctly adds that, ``if the desire of the authorities 
is to constrain or significantly reduce the importance of hawala 
activity, this means reducing the economic incentives to use the Hawala 
system. There is probably no better way to accomplish this than to 
facilitate cheap, fast remittances across international boundaries, and 
to do away with dual and parallel exchange markets, which are always an 
incentive to keep transactions underground.''\10\
---------------------------------------------------------------------------
    \10\ Robert E. Looney, ``Following the Terrorist Informal Money 
Trail: The Hawala Financial Mechanism,'' Strategic Insights, Volume 1, 
Issue 9 (November 2002), http://www.nps.edu/Academics/centers/ccc/
publications/OnlineJournal/2002/nov02/southAsia.html.
---------------------------------------------------------------------------
    Question 11b. How could the United States be more effective in 
targeting the hawala systems being used by drug traffickers to fuel the 
Taliban insurgency in Afghanistan and Pakistan?
    Answer. If we have not done so already, the U.S. Government needs 
to establish assets within these hawala systems who could help identify 
these individuals and entities.
    Question 11c. Would closer collaboration with the United Nations 
help our Government's ability to identify hawala networks engaged in 
illegal behavior?
    Answer. While the United Nations can be effective in some specific 
instances, I don't have faith that it can have an impact here. The 
problem of hawalas is a sensitive one. I believe there is little to no 
chance that Member States would risk the political backlash that would 
undoubtedly arise from targeting these informal financial networks that 
effectively prop up the economies in some of the world's most neglected 
places. In short, the United Nations fosters an environment where the 
consensus determines policy. This will ensure that the United Nations 
remains largely irrelevant in the fight against illicit hawala 
transactions, and more broadly, terror finance, for years to come.
       Questions From Chairman Patrick Meehan for John A. Cassara
    Question 1a. With our military successes against al-Qaeda core 
leadership in Afghanistan and Pakistan, there is a growing trend of al-
Qaeda affiliated groups and adherents filling the void and taking the 
lead in launching attacks against the homeland.
    Given the relatively low amount of money required to plan and 
launch a terrorist attack, how realistic is it to expect U.S. and 
international counterterrorism entities to identify funds that might be 
used to undertake terrorism-related activity?
    Answer. Detecting the rather miniscule amount of funds needed to 
launch small-scale terrorist attacks is a daunting challenge. For 
example, the attempted 2010 cargo plane bombing is estimated to have 
cost our adversaries approximately $4,200. In my opinion, intelligence 
from human sources, coupled with robust analytics, are probably our 
best countermeasures.
    Question 1b. What are some of the persistent challenges in 
identifying and investigating an activity suspected of financing 
terrorism? What are some of the trends in how terrorist groups 
acquiring funds to support their objectives?
    Answer. In my experience, policy makers' early over-reliance on 
``financial intelligence'' to combat terror finance continues to be a 
tremendous bureaucratic and operational roadblock. Regulations have 
been the priority over field investigations. Another obstacle has been 
our intelligence and law enforcement officers' unfamiliarity with 
terror finance methodologies. A third impediment has been our over-
reliance on sanctions and designations. A fourth impediment has been 
the decimation of Treasury enforcement after the creation of the 
Department of Homeland Security. And, a fifth issue has been the 
unwillingness to utilize known capabilities to assess the financial 
intelligence that both industry and the Government spends tremendous 
resources on to produce.
    The most troublesome trend because it is so widespread is what I 
call ``local crime'' to finance terror. Narcotics trafficking, 
intellectual property rights violations, cigarette smuggling, etc. are 
just a few examples. Yet this development also holds promise because by 
cracking down on local crime--predicate offenses for money laundering--
we might also disrupt terrorist operations. I believe this premise 
would hold true for domestic crime and encouraging problematic 
countries to be more vigilant investigating predicate offenses.
    Question 1c. Is the decision to pursue a terror financing 
investigation based on the amount of money suspected of being acquired 
for terrorism-related purposes? If so, what is the minimum monetary 
amount of terrorism-related funds the U.S. Government assesses as 
worthy of investigating?
    Answer. I am not currently in a position to answer this question. 
However, given evolving abilities to link actors and actions, what 
might appear to be small dollar activities can now be traced to larger 
networks of actors and activities, as we are seeing in medical fraud 
for example. My hope is that FinCEN and other agencies aren't using 
dollar values as the litmus test because it simply isn't a good 
indicator of harm.
    Question 1d. Can you describe the decision-making process and 
considerations by which the U.S. intelligence and law enforcement 
communities decide whether to stop terrorism-financing related activity 
and charge a suspect arrest or choose to allow the activity to continue 
in hopes of following the trail of funds to a larger network of support 
or to entities that may be planning a terrorist attack?
    Answer. I am not currently in a position to answer this question.
    Question 2. President Obama recently signed an Executive Order 
allowing the Treasury Department to freeze U.S.-based assets of persons 
who the White House has identified as a ``threat to the peace, 
security, and stability'' of Yemen.
    Do you think this is an effective use of the designation authority? 
Especially when a group such as Boko Haram--who have killed thousands 
of civilians and are in constant contact with AQIM--remain 
undesignated?
    Answer. I believe sanctions and designations are one tool of many 
that should be employed to combat terrorists and those that support 
terrorists. However, in my opinion, the United States has relied far 
too heavily on sanctions and designations. Sanctions, designations, and 
other ``black lists'' are also not uniformly applied. In the years 
immediately after 9/11, I participated in a number of interagency 
discussions regarding targets of designations. The interagency time and 
resources expended on this exercise produced few actual results. The 
Government has finite resources and as a result of our fixation on 
designations other countermeasures were shortchanged. I concur with an 
unnamed retired diplomat who said, ``Sanctions (and designations) 
always accomplish their principal objective, which is to make those who 
impose them feel good.''
    Question 3a. In 2011, the U.S. Government revealed the findings of 
a multi-year law enforcement operation to dismantle a complex, 
transnational network involved in money laundering and drug 
trafficking. The case involved Hezbollah, Mexican and Colombian drug 
trafficking organizations, the Taliban, Lebanon, Colombia, Panama, 
several countries in West Africa, U.S. car buyers, a U.S. shipping 
company, bulk cash couriers, plans for weapons trafficking deals, and 
the Beirut-based Lebanese Canadian Bank (LCB).
    Does the fact that groups such as Hezbollah and the Islamic 
Revolutionary Guard Corps continue to use criminal ventures create 
opportunities for U.S. enforcement mechanisms--such as our robust 
counternarcotics tools--to roll up these vast networks?
    Answer. Yes. See my response to 1b above.
    Question 3b. How does counterterrorism fit in this increasingly 
interconnected underworld?
    Answer. Terrorism is increasingly financed by the underworld of 
transnational crime. By lifting the veil of underworld finance and 
operations, we can impact terror.
    Question 4a. The U.S. Government's on-going investigation of the 
Lebanese Canadian Bank is of particular interest from a money 
laundering perspective because it highlights the consequences of poor 
compliance with anti-money laundering regulations in the formal 
financial system.
    Given the Lebanese Canadian Bank case, what more can be done to 
protect the formal financial system from exploitation by terrorists?
    Answer. There are no short-term fixes to protect the formal 
financial system from exploitation. Although imperfect, the best 
international countermeasure regarding compliance measures in 
international banking continues to be recommendations, programs, 
policies, and mutual evaluations undertaken by the Financial Action 
Task Force (FATF) and FATF-style regional bodies. I have witnessed 
first-hand how countries respond to FATF-led international censure by 
putting in place world-standard anti-money laundering and counter-
terrorist finance countermeasures.
    Question 4b. How can the U.S. Government more effectively mitigate 
the threats posed by trade-based money laundering and bulk cash 
smuggling and other ways outside the formal financial sector?
    Answer. See No. 13 below. Additionally, I have suggested in other 
responses, the use of better technological solutions that can help the 
Government stay at least current with developing threats, and will help 
suggest optimal ways to mitigate, or prevent threats from being 
realized.
    Question 5. There is an increasing concern in the counterterrorism 
and intelligence community that terrorist organizations are 
increasingly using criminal activities that are outside of the formal 
international financial system to raise funds to carry out attacks and 
further their goals.
    How important are terrorist funds derived from criminal activities 
for the operational sustainability of major terrorist groups compared 
to other non-criminal sources of funds, including state sponsors and 
private-sector donations?
    Answer. With the decline of the state sponsorship of terrorism and 
efforts to crack down on private-sector donations, terrorist 
organizations and lone-wolf terrorist actors increasingly rely on local 
crime to finance their activities. I do not believe it is possible to 
quantify the extent of any particular source of terrorist funds.
    Question 6. Foreign Terrorist Organization designation by the 
Secretary of State is an important tool our Government uses to deter 
donations or contributions to and economic transactions with terrorist 
organizations. There are currently 50 groups listed by the State 
Department as designated Foreign Terrorist Organizations.
    Which FTO designated groups would you say are the best resourced 
and most proficient at evading American and international financial 
regulations? Which use the U.S. financial system the most?
    Answer. I am not currently in a position to answer this question.
    Question 7. All of the witnesses mentioned in their prepared 
testimony that the Government needs to interact with the financial 
sector to identify terrorist financing.
    How should the Government develop more effective case typologies 
and feedback mechanisms about how terrorists use financial 
institutions? Is this mostly an educational issue where we need to 
empower financial institutions in order to monitor transactions for 
suspicious or anomalous behavior?
    Answer. I do not believe the burden of spotting potential terror 
funding should be put on financial institutions. Rather, banks and 
money service businesses should continue to file financial intelligence 
and suspicious activity reports with the Department of Treasury. The 
spotlight should be on the Financial Crimes Enforcement Network's 
(FinCEN's) inability to effectively exploit the approximately 18 
million pieces of financial intelligence it receives annually and to 
identify suspect or anomalous behavior. FinCEN should also do a better 
job of alerting reporting institutions to current money laundering and 
terror finance schemes.
    Question 8a. The Financial Action Task Force on Money Laundering is 
comprised of 36 member countries and territories and two international 
organizations and was organized to develop and promote policies to 
combat money laundering and terrorist financing. The FATF relies on a 
combination of annual self-assessments and periodic mutual evaluations 
that are completed by a team of FATF experts to provide information and 
to assess the compliance of its members to the FATF guidelines.
    What are the areas of greatest need for improvement in the FATF 
surveillance process?
    Answer. I have spent many years working with the FATF, including 
participating in many mutual evaluations. In my opinion, a serious 
disconnect between ``process'' and ``results'' has developed. The 
bottom-line metric in evaluating countries' anti-money laundering 
``regimes'' is the number of successful arrests, prosecutions, and 
convictions. With few exceptions, most countries fail in this regard. 
Over the last 15 years, the emphasis has been on the process; i.e. 
laws, rules, regulations, creation of financial intelligence, creation 
of a financial intelligence unit, etc. Yet, the fixation on process or 
form rather than substance, combined with lack of expertise, 
corruption, and lack of political will all conspire against results. It 
may also be that the tools being deployed in the surveillance process 
are outdated and unable to provide the most insightful results.
    Question 8b. How does the United States evaluate the threats to the 
global economy arising from money laundering, terrorist financing, and 
financing the proliferation of weapons of mass destruction?
    Answer. I am not currently in a position to respond to this 
question.
    Question 8c. How should we be prioritizing these threats and how 
effectively has the FATF process been in addressing these threats?
    Answer. I am not currently in a position to respond to this 
question.
    Question 9. KPMG, a private consulting firm, released in October 
2011 the findings of an anti-money laundering survey of major 
international banks. They found that 80% of respondents reported an 
increase in costs associated with anti-money laundering that averaged 
around 45% since 2007. The major sources of cost increases identified 
by the KMPG survey were: (1) Enhanced transaction monitoring, (2) 
increased external reporting requirements to internal regulators and 
external law enforcement agencies, and (3) increased anti-bribery and 
anti-corruption activities.
    In your opinion, are there sufficient resources devoted to 
countering the financing of terrorism and money laundering? 
Alternatively, are the resource costs associated with implementing such 
financial regulations too burdensome on either the private or public 
sectors?
    Answer. In my opinion, per my response in 7a above, industry 
already bears too much of the regulatory AML/CFT burden. Industry 
produces an enormous amount of financial intelligence but there is very 
little return on investment. The primary reason is that the information 
that they spend so much money to generate is not systematically or 
comprehensively (strategically or tactically) exploited by Treasury's 
FinCEN. In that regard, I believe that FinCEN has been provided 
sufficient financial resources, but would question how they have 
utilized those resources. In particular, I don't believe they have made 
the best investments to help them effectively understand the financial 
intelligence that they already possess, nor to report that information 
to other Government or private-sector entities. I also question whether 
the Government has made proper investments in terms of recruiting, 
retaining, and developing the analytic community, especially with 
respect to evolving tools and capabilities.
    Question 10. There has been growing concern at DHS, particularly 
within ICE, about the widespread use of prepaid and stored value cards 
as a way of smuggling illicit funds into the country which could fund 
terror activity. Some estimates are that $1 billion annually is moved 
into the country this way, with most of those funds nearly impossible 
to track.
    Would you agree that prepaid and stored value cards are a growing 
danger to being able to target terrorist financiers? What steps would 
you recommend DHS and the Department of the Treasury take to combat 
this emerging trend?
    Answer. I agree that prepaid and stored value cards are a growing 
danger in targeting terrorist financiers and money launderers both in 
the United States and overseas. I suggest Congress and the 
administration review the 2007 National Money Laundering Strategy that 
discusses prepaid and stored value cards and outlines countermeasures. 
Unfortunately, after 5 years little has been done. I urge Congress and 
the administration to hold FinCEN and others accountable for the lack 
of action.
    Question 11a. On June 29, 2012, the Obama administration imposed 
sanctions on a pair of informal money-exchange networks--known as 
hawalas--in Afghanistan and Pakistan in what officials described as the 
first use of the tactic to attack the financial underpinnings of 
Taliban militants who rely on the system to fund their insurgency. The 
Treasury Department said that the designations were coordinated with 
similar measures adopted by the United Nations as part of a broad 
effort to slow the flow of cash used by the Taliban to pay salaries and 
purchase weapons for attacks in Afghanistan. The United Nations also 
added the names of the same two institutions and their principal 
backers to a list of groups officially associated with Taliban 
militancy, meaning they will be subject to international sanctions as 
well.
    Considering how widespread their use is, how difficult is it for 
U.S. Government to really get a handle on some of the terror financing 
and money laundering activities being conducted under the hawala 
system?
    Answer. The challenges involved in identifying the misuse of hawala 
and similar informal underground value transfer operations is 
enormous--both in the United States and overseas.
    Question 11b. How could the United States be more effective in 
targeting the hawala systems being used by drug traffickers to fuel the 
Taliban insurgency in Afghanistan and Pakistan?
    Answer. This is a complex question that requires a lengthy answer. 
To summarize, in the Afghanistan and Pakistan context trade is the 
primary vehicle used to provide ``counter-valuation'' between 
hawaladars. We need to work with Afghanistan, Pakistan, and countries 
in the surrounding region (including Iran) to promote the concept of 
``trade-transparency.'' If we present the issue as a revenue enhancer 
(combating customs fraud) the governments involved will be receptive. 
Trade-transparency should be made part of the regional Afghan Transit 
Trade Agreement. By promoting trade-transparency and combating customs 
fraud, we will shine the spotlight on underground finance and disrupt 
hawala operations. See the following article I wrote for more details: 
http://www.johncassara.com/
index.php?option=com_content&view=article&id=24:the-afghan-transit-
trade-how-afpak-drug-lords-and-terrorists-are-moving-money-and-
transferring-value&catid=2:articles&Itemid=8.
    Question 11c. Would closer collaboration with the United Nations 
help our Government's ability to identify hawala networks engaged in 
illegal behavior?
    Answer. The short answer is no. In my experience, most countries do 
not recognize hawala or other similar types of underground financial 
systems or collect data or intelligence on financial networks.
    Question 12. Mr. Cassara, in your prepared testimony you talked 
about ``draining the swamp,'' or how cracking down at home on local and 
transnational financial crime might become one of the most effective 
strategies to combat terrorism. You said that law enforcement, 
intelligence, and military organizations must learn to look beyond the 
immediate circumstances of a given local crime because these isolated 
acts could have more sinister ties.
    How do you get State and local law enforcement to change this 
mentality with regard to fighting crime domestically in teaching them 
to ``ask the next question'' during the course of a routine 
investigation and question where the money is going?
    Answer. At the State and local level the three-step solution is 
training, intelligence, and prioritization. Regarding training, I am 
familiar with a number of first-rate training initiatives such as the 
State and Local Anti-Terrorist Training (SLATT) program run by the 
Institute for Intergovernmental Research (IIR) and sponsored by the 
Bureau of Justice Assistance (see www.slatt.org). There are other 
training initiatives as well. Effective training programs should be 
expanded. Specifically, officers and analysts should be trained how to 
recognize terror finance indicators. They should be made familiar with 
the financial and analytical tools that they have available to them 
(sometimes these tools are not available but that is another issue). 
From personal experience in working with State and local law 
enforcement, I am appalled by the lack of knowledge of financial crimes 
and resources that could be made available. Once law enforcement 
officers and analysts have a better understanding of terror finance 
methodologies, they should use that information to task reporting 
sources to develop operational intelligence. They should also make it a 
matter of routine not to become fixated on the immediacy of the local 
crime they are investigating (narcotics, stolen cars, organized theft 
rings, human smuggling, etc) but rather to ``ask the next question,'' 
i.e., ``What about the money?'' Finally, Federal, State, and local law 
enforcement administrations should not become absorbed with the quick 
``statistic'' or easy bust. Rather, they should understand that money 
laundering and terror finance investigations are a long-term investment 
that often times fail. However, they are too important to short change 
for more immediate returns. Much of this conundrum is budget-driven. 
Scarce funding is provided based on perceived results; i.e. statistics. 
Unfortunately, the individuals that look at the statistics cannot 
differentiate between a quick case or an impact case because they are 
often reported the same way.
    Question 13a. Mr. Cassara, you mentioned in your prepared testimony 
that by promoting trade transparency and using technology to spot 
anomalies or discrepancies in trade data that intelligence or law 
enforcement entities may already possess, we may be able to use trade 
as a ``back door'' to enter into previously hidden financial networks.
    Can you elaborate on this idea and how sharing information with 
State and local law enforcement may aid in this process?
    Answer. There are a large number of underground financial systems 
in the United States; they are also known as ``parallel banking,'' 
``underground finance,'' ``informal value transfer systems, etc.'' 
Examples are hawala, the black market peso exchange, and the Chinese 
fei-chien systems. While there are a number of ways that underground 
financial brokers periodically balance their books, historically and 
culturally trade is the preferred method of providing ``counter-
valuation.'' Over- and under-invoicing is the primary vehicle used. 
Thus discrepancies or anomalies in trade-data could be indicators of 
simple fraud or possibly the back door to underground financial 
networks. So if a State or local law enforcement agency identifies a 
business that does not make economic or market sense, caters to suspect 
groups, or has a side business involved with remitting money or value 
overseas, it could be an entry point into previously hidden financial 
networks. Given the amount of data that law enforcement has access to, 
transparency can be enhanced by the use of technologies that seek out 
both anomalies, as well as previously undetected patterns. These 
technologies can be used with vast amounts of data that can't possibly 
be reviewed in relevant time periods (or at least not reviewed 
accurately), nor, given the amount of data, can humans understand 
correlations and causative relationships in the data. Technology can, 
and can also begin to create statistically significant linkages between 
transactions and actors. By using these technologies, which exist now, 
we can better prioritize where our law enforcement should be spending 
time, we have more meaningful information to share, and ultimately, we 
can be much more productive and successful with our limited enforcement 
resources.
    Question 13b. In some ways isn't this the future of combating 
terrorist financing?
    Answer. Since Richard Nixon declared ``War on Drugs'' in 1970, our 
primary countermeasure in following the dirty money trail has been 
tracking financial flows through banks and non-bank financial 
institutions. Our primary emphasis has been creating a domestic (Bank 
Secrecy Act et al) and then later an international network (FATF 
recommendations) of financial transparency reporting requirements.
    I believe trade-based money laundering is the ``next frontier'' in 
international money laundering and counter-terrorist finance. We should 
work to put in place a similar domestic and international network of 
trade-transparency. That said, the technologies that are critical to 
understanding terrorist financing exist now, so I could say that the 
future has arrived.
    Question 14a. Mr. Cassara, you mentioned in your prepared testimony 
that the Federal Government is lagging in its deployment of advanced 
analytical fraud frameworks such as ``predictive,'' ``social network'' 
and ``visual'' analytics.
    In your opinion, is this the result of a lack of manpower or funds 
within the Government to deploy these cutting-edge technologies?
    Answer. I am not really in a position to comment except to say, in 
my experience, there is a critical lack of understanding about what 
advanced analytics are and why they are relevant to the Federal 
Government.
    Question 14b. You rightly raise privacy and civil liberties 
concerns in your testimony with regard to exploiting social network 
analytics. Can you explain some of the technology that exists to 
safeguard the dissemination of personal financial information to 
prevent abuse?
    Answer. I am not a technologist, but let me suggest a couple of 
thoughts. First, many analytics don't actually rely on the movement of 
data from databases. Instead, they utilize ``metadata'', which is data 
about data. The reason this is important is that it provides an audit 
trail as to what data has been used, how it has been used, and who has 
had access to it. Warehouses utilizing analytics can be configured to 
include access controls--the more sensitive the data, the higher the 
clearance needed. Second, in many cases, analytics can be run in a 
manner that either the data is anonymized or the source of the data 
obscured. In the case of social analytics, the analytics are not 
necessarily looking for the identity of the ``speaker,'' but searching 
for specific content and sentiment. Visual analytics itself does not 
raise privacy concerns because its focus is presenting visual depiction 
of information derived from statistical analysis. It thus provides an 
easier, less abstract way of understanding data. Finally, predictive 
analytics has historically been misunderstood, particularly by the 
privacy community. I would submit that with predictive analytics, the 
data is allowed to speak for itself; rather than the analyst coming to 
the data with preconceived ideas of what is important or causative, 
predictive analytics allows the data to ``speak for itself,'' to reveal 
previously unknown patterns, or to reveal those factors that are truly 
important to an activity. In all of these cases, what is important to 
note is that the statistics never label activities as definitively 
fraudulent, or definitively linked to terrorist activity. What they do, 
however, is provide the analyst or investigator with unbiased 
information relating to abnormalities that require more human 
investigation.
    Question 15. Mr. Cassara, you also mentioned in your prepared 
remarks that within the next few years, approximately 500-700 million 
additional pieces of financial information in the form of wire transfer 
data will be routed annually to FinCEN.
    What are the implications for the Treasury Department and the 
intelligence community missing out on this crucial financial 
intelligence if the Government is not able to employ all available 
technologies to exploit it and act upon it in a timely fashion?
    Answer. Currently, FinCEN is tasked by the U.S. Government to 
receive, analyze, warehouse, and disseminate approximately 18 million 
pieces of financial intelligence. Currently FinCEN is not able to 
fulfill this mission. The reasons are many and complex, but the primary 
explanation is continued failed management. If FinCEN is not able to 
successfully complete today's mission involving 18 million pieces of 
financial intelligence, we should not expect that they can handle the 
increased workload, which is certain to occur. I worked at FinCEN for 6 
years. In my first book, ``Hide & Seek: Intelligence, Law Enforcement, 
and the Stalled War on Terror Finance,'' I discussed the entrenched 
FinCEN culture that remains the catalyst for mission failure. We can no 
longer afford business as usual. The implications for the U.S. law 
enforcement and intelligence communities are enormous. That is why in 
my testimony I advanced the idea of a Financial Intelligence Unit ``in 
a box'' or going further downstream with the data and the analytics 
directly to the consumer (see No. 16 below).
    Question 16. Mr. Cassara, in 2008, you raised concerns that 
financial intelligence is not being adequately exploited when 
Treasury's Financial Crimes Enforcement Network (FinCEN) analyzes and 
shares the hundreds of thousands of Suspicious Activity Reports (SARs) 
they come across every year. Last month, FinCEN reported that number of 
suspicious activity reports filed by financial institutions had 
increased last year by 13.5% to an all-time high.
    Can you explain your concerns regarding SARs to the Committee and 
elaborate on how you believe FinCEN should be most effectively 
exploiting the valuable financial intelligence in those Suspicious 
Activity Reports?
    Answer. As noted above, SARS are filed at great cost to industry. 
Unfortunately, they have not been effectively exploited. The reasons 
are many including failed management, until recently a series of failed 
data mining/analytical systems, lack of skilled analysts, a revolving 
door of departing staff due to poor morale, and FinCEN turning itself 
away from its original mission of supporting law enforcement to 
emphasizing the regulation of the BSA. Under FinCEN's current 
framework, in order to address the above question regarding the lack of 
effective exploitation of SARS the other underlying problems will have 
to be addressed. However, there is a new idea on the horizon. The 
technology now exists to not only disseminate SARs and other financial 
intelligence directly to law enforcement users but allow a state-of-
the-art analytics platform to accompany the data. Per law and 
regulation, Treasury and FinCEN would still control the financial 
intelligence but we could do an ``end run'' around the current 
structure of FinCEN that acts as an impediment to effective 
exploitation of SARs and other financial intelligence by disseminating 
both the data and the analytical tools directly to the end-user. In 
effect, we could send a Financial Intelligence Unit (FIU) ``in a box'' 
to approved users at the Federal, State, and local level.
    Question 17. Mr. Cassara, you have written extensively about trade-
based money laundering and invented the concept of trade-transparency 
units which is now a part of the U.S. Government's National Anti-Money 
Laundering Strategy. In addition, the Department of Homeland Security's 
Immigration and Customs Enforcement has adopted this concept by 
establishing the world's first TTU.
    Can you explain this concept a bit, and how DHS has implemented 
their own TTU program through ICE?
    Answer. FATF defines trade-based money laundering (TBML) as the 
``process of disguising the proceeds of crime and moving value through 
the use of trade transactions in an attempt to legitimize their illicit 
origins.'' According to the U.S. State Department, this practice has 
reached ``staggering'' proportions in recent years. Although the 
problem is difficult to quantify precisely, TBML is found globally, 
including in the United States. In fact, some experts believe the 
majority of U.S. money being laundered abroad is moved out of the 
country via undervalued exports. The U.S. Department of Treasury 
estimates that the Black Market Peso Exchange, a single TBML 
methodology found in the Western hemisphere, launders billions of drug 
dollars every year.
    Criminal and terrorist groups that abuse trade are assisted by a 
number of factors:
   The massive amount of global trade that takes place daily.
   Financial diversity (i.e. the wide variety of financial 
        controls found in different countries, the diverse financial 
        arrangements made between governments, and the innumerable 
        different types of financial deals found in international 
        commerce).
   The co-mingling of licit and illicit funds and trade items.
   The low risk of detection.
   Limited Government understanding and resources to detect 
        suspect trade transactions.
    Trade-based money laundering scams take a wide variety of forms. 
For example, it could be simple bartering or a commodity-for-commodity 
exchange. In certain parts of Afghanistan and Pakistan the going rate 
for a kilo of heroin is a color television set. Drug warlords exchange 
one commodity they control (opium) for others that they desire (luxury 
and sports utility vehicles). However, generally speaking, money 
laundering through simple invoice fraud and manipulation is most 
common. The key element of this technique is the misrepresentation of 
the trade good in order to transfer value between importer and 
exporter. The quantity, quality, and description of the trade goods can 
be manipulated. The shipment of the actual goods and the accompanying 
documentation provide cover for ``payment'' or the transfer of money.
    In order to move money out of a country, practitioners import goods 
at overvalued prices or export goods at undervalued prices. In order to 
move money into a country, practitioners import goods at undervalued 
prices or export goods at overvalued prices.
    It is important to understand that when a buyer and seller are 
working together, the price of the item can be whatever they want it to 
be. As long as parties in an international trade transaction do not get 
too greedy and cause noticeable trade anomalies, their chances of 
detection by bankers, customs services, law enforcement, and other 
authorities are miniscule.
    Every country in the world has a customs service and keeps track of 
what comes in and what goes out. In fact, in many parts of the world 
customs duties are the primary source of Government revenue. So 
although there are differences in the way governments gather and store 
trade data, enough similarities exist to conduct effective analysis and 
TBML investigations. Such investigations require three basic elements:
   Access to import and export data. Moreover, if the trade 
        data can be augmented by combining it or overlaying it with 
        other data such as financial, travel, commercial, law 
        enforcement, etc. following the suspect activity will be 
        further enhanced.
   The ability to promptly exchange data (adhering to standard 
        international safeguards and privacy concerns) with other 
        countries.
   Expertise in analyzing and investigating TBML.
    Recognizing the growing threat of TBML, in 2004 the Department of 
Homeland Security's Immigration and Customs Enforcement (ICE) 
established the world's first trade-transparency unit or TTU. 
Subsequently, other TTUs have been created in Argentina, Brazil, 
Paraguay, Colombia, Panama, Mexico, and other countries. As 
demonstrated above, by comparing one country's targeted imports or 
exports against the corresponding data of another country, trade 
anomalies can be detected that could be indicative of customs fraud, 
tax evasion, contraband smuggling, or trade-based money laundering. The 
data could even be the back door into underground financial schemes 
including those linked to terror finance. I am pleased that DHS is 
beginning to look at how to augment this data analysis through the use 
of robust technologies that can parse through enormous amounts of data 
in very short time increments. Of course, data analysis will only go so 
far. Investigations in the field are also needed.
    The U.S. law enforcement and intelligence communities agree that 
one of the most effective counter-measures against organized crime, 
terrorists, systematic corruption, fraud, and many other types of 
serious crime is to ``follow the money trail.'' In the years to come, I 
am convinced we will increasingly learn to ``follow the value trail.''
      Questions From Chairman Patrick Meehan for Dennis M. Lormel
    Question 1a. With our military successes against al-Qaeda core 
leadership in Afghanistan and Pakistan, there is a growing trend of al-
Qaeda affiliated groups and adherents filling the void and taking the 
lead in launching attacks against the homeland.
    Given the relatively low amount of money required to plan and 
launch a terrorist attack, how realistic is it to expect U.S. and 
international counterterrorism entities to identify funds that might be 
used to undertake terrorism-related activity?
    Answer. Nominal funding requirements to support terrorist activity 
can be very challenging for U.S. and international counterterrorism 
entities to identify. It is possible to identify such funding but 
highly improbable. Counterterrorism entities need to develop and 
implement investigative and analytical methodologies to increase the 
probability factor. Few, if any, entities existed before 9/11 that were 
dedicated to identifying, investigating, and disrupting terrorist 
financing. Since then, many entities were established with the mission 
to investigate terrorist financing. By using the combination of 
financial intelligence, human intelligence, and signal intelligence, 
mechanisms have been, and will continue to be, developed to identify 
even nominal amounts of money. By analyzing case studies, ranging from 
grand to simple, such as the Mumbai bombing and lone wolf schemes like 
that of Farooque Ahmed, who planned to detonate a bomb in the 
Washington, DC Metro Transit System, counterterrorism entities 
responsible for terrorist financing can build typologies and develop 
proactive and progressive investigative strategies.
    Question 1b. What are some of the persistent challenges in 
identifying and investigating an activity suspected of financing 
terrorism? What are some of the trends in how terrorist groups 
acquiring funds to support their objectives?
    Answer. One of the persistent challenges I encountered in the FBI, 
and that I would continue to be concerned about today is the timely 
collection and assessment of financial intelligence. Did my FBI 
Section, the Terrorist Financing Operations Section (TFOS), have 
intelligence information that we did not identify that could have led 
us to a plot or potential attack? We collected and assimilated a 
tremendous amount of intelligence information that we endeavored to 
turn into actionable intelligence for field investigators. This is 
particularly important in cases where a lone wolf operative did not 
have a record, was unknown to intelligence agencies, and used funds 
from a legitimate job to finance terrorist plans. Time sensitivity in 
these matters was always challenging.
    A trend that has continued since 9/11, and has grown significantly 
since then, has been the movement to criminal activity as a fund-
raising mechanism for terrorists. In the aftermath of 9/11, the United 
States and our international partners made a concerted effort to cut 
off the flow of legitimate money from wealthy donors and charities. The 
more these efforts succeeded, the more terrorists were driven to 
criminal activity. This continues today. It will be interesting to 
assess the success of the sanctions against Iran and the revolution in 
Syria, two State sponsors of terrorism. This will probably result in 
the continued increase in criminal activity.
    Question 1c. Is the decision to pursue a terror financing 
investigation based on the amount of money suspected of being acquired 
for terrorism-related purposes? If so, what is the minimum monetary 
amount of terrorism-related funds the U.S. Government assesses as 
worthy of investigating?
    Answer. Terrorist financing investigations were not predicated on 
monetary considerations when I ran TFOS at the FBI. Terrorist financing 
investigations are probably still not and should never be predicated on 
monetary thresholds. Such investigations should be predicated upon the 
relation to terrorism and the potential threat represented. While I was 
still at the FBI in 2003, a process was established whereby all 
terrorism cases contained a financial investigative component. 
Terrorist financing investigations should focus on identifying all 
funding streams and disrupting terrorist activities through denying 
terrorists money. For terrorists to succeed, they must have a source of 
funds and access to their money when they need it. Disrupting the 
sources and/or access to money makes it extremely difficult for 
terrorists to succeed.
    Question 1d. Can you describe the decision-making process and 
considerations by which the U.S. intelligence and law enforcement 
communities decide whether to stop terrorism-financing related activity 
and charge a suspect arrest or choose to allow the activity to continue 
in hopes of following the trail of funds to a larger network of support 
or to entities that may be planning a terrorist attack?
    Answer. Terrorist financing investigations are a component of 
counterterrorism. They should be conducted in coordination with the 
broader counterterrorism mission and in conjunction with terrorism 
investigations. Terrorist financing is one tool in the arsenal. 
Terrorist financing investigations should be conducted with other 
investigative techniques to include undercover operations, use of 
informants, and/or wiretaps and tracking telephone calls and/or emails. 
The combination of these investigative techniques can be extremely 
productive.
    The decision to allow a terrorist financing or broader terrorism 
investigation to continue or to take it down is extremely important. It 
should be based on whether an attack is imminent or not. If an attack 
is imminent, you need to take down the investigation immediately and 
prevent the attack. If an attack is not imminent, you allow the 
investigation to continue. In so doing, you can develop evidence to 
identify additional co-conspirators and funding streams. As an example, 
consider the Lebanese Canadian Bank investigation. Although Hezbollah 
was involved, and is a violent terrorist organization, there was no 
specific threat or imminent danger associated with the investigation. 
In that situation, you allow the investigation to play out. In this 
case, the investigation was a multi-year investigation. A number of 
funding streams and co-conspirators were identified and dismantled. 
Take a case such as the Time Square bomber. As a hypothetical, had law 
enforcement and intelligence agencies been aware of Faisal Shahzad and 
his plan to detonate a bomb in Time Square, they would have allowed the 
plot to unfold up to the point of imminent danger. In that case, had 
they been aware and determined there was no imminent danger, they 
probably would have identified the funding source, through the Hawala 
operator. Had there been imminent danger, or if imminent danger could 
not be determined, they would have arrested Shahzad and developed 
additional information and evidence in the aftermath of the take down.
    When I ran TFOS at the FBI, we strove to take terrorist financing 
investigations in two directions: Forward to the strike team and 
backward to the point of financial origin. I believed there were three 
funding tracks, and I wanted investigations to disrupt activities in 
all three tracks. First, there was a fundraising track. Large sums of 
money, from the hundreds of thousands to millions of dollars, would be 
generated through mechanisms to include donations from wealthy donors, 
charities, State Sponsors (Iran most notably), criminal activities and 
other means. The money flowed into the terrorist organization for 
organizational use. Second, funding would be provided in a track from 
the organization, through a single facilitator or multiple 
facilitators, and to an operation. The funding flow here would be less 
than the flow into the organization. It would range from the hundreds 
of thousands to a few thousand dollars. Our primary investigative 
attention would be focused on the facilitators because that would take 
us to both the organization and to the operatives. Third, there was a 
track from the operation, through the facilitator(s), to the 
operatives. The funding flow here would be in the thousands to the 
hundreds of dollars.
    In general, when conducting terrorist financing investigations in 
the first track, the organizational track, you would be more inclined 
to allow the investigation to continue over a longer period of time and 
be more deliberate and methodical in your investigative methodology. 
When conducting investigations into the second track (operations) and 
the third track (operatives) you have to deal with a greater sense of 
urgency and constantly assess whether an attack is imminent. Most of 
these investigations were shorter term because, at some point, you had 
to be concerned about the threat of attack.
    Question 2. President Obama recently signed an Executive Order 
allowing the Treasury Department to freeze U.S.-based assets of persons 
who the White House has identified as a ``threat to the peace, 
security, and stability'' of Yemen.
    Do you think this is an effective use of the designation authority? 
Especially when a group such as Boko Haram--who have killed thousands 
of civilians and are in constant contact with AQIM--remain 
undesignated?
    Answer. If evidence exists to support designations, I am an ardent 
supporter for the designation process. Such actions disrupt funding 
flows and serve as a deterrent. Boko Haram is a violent and dangerous 
group. They have been very active and pose a formidable threat in 
Nigeria. With respect to designating other groups, I would not make 
designation decisions by comparing one group, such as Boko Haram, to 
other groups. A number of factors must be taken in consideration in the 
decision process to include the level of overall terrorist threat, 
threat to the United States, diplomatic considerations, and the need to 
continue the classification and protection of intelligence information.
    Question 3a. In 2011, the U.S. Government revealed the findings of 
a multi-year law enforcement operation to dismantle a complex, 
transnational network involved in money laundering and drug 
trafficking. The case involved Hezbollah, Mexican and Colombian drug 
trafficking organizations, the Taliban, Lebanon, Colombia, Panama, 
several countries in West Africa, U.S. car buyers, a U.S. shipping 
company, bulk cash couriers, plans for weapons trafficking deals, and 
the Beirut-based Lebanese Canadian Bank (LCB).
    Does the fact that groups such as Hezbollah and the Islamic 
Revolutionary Guard Corps continue to use criminal ventures create 
opportunities for U.S. enforcement mechanisms--such as our robust 
counternarcotics tools--to roll up these vast networks?
    Answer. All criminal activity undertaken by Hezbollah, the Islamic 
Revolutionary Guard Corps and other terrorist organizations leave them 
vulnerable to detection by law enforcement and intelligence services. 
Law enforcement, particularly the DEA and FBI, deserve considerable 
credit for conducting a well-disciplined, focused, and comprehensive 
investigation that tied transnational criminal organizations together 
with terrorist groups and a number of facilitation tools to include the 
Lebanese Canadian Bank. Through comprehensive investigation and 
financial tracing, multiple funding streams between Central America, 
the United States, Lebanon, West Africa, and Europe were identified and 
dismantled. There have been at least four other significant 
investigations conducted by the FBI and other agencies that exposed 
Hezbollah's involvement in raising large amounts of money through 
criminal activities in the United States. The most notable of these 
cases was the North Carolina cigarette smuggling case known as 
Operation Smokescreen. A Hezbollah cell operated an elaborate scheme to 
smuggle cigarettes from North Carolina to Michigan. This cell generated 
approximately $25 million in illicit funds.
    Question 3b. How does counterterrorism fit in this increasingly 
interconnected underworld?
    Answer. The nexus between criminal and terrorist organizations has 
continued to grow. This trend will persist. As the U.S. Government and 
our allies continue to exert pressure and cut off funding streams, 
terrorists will further align themselves with criminal organizations 
and participate in criminal activity to raise much-needed money. 
Terrorists are extremely adaptable and consistently look for new 
funding mechanisms. Many terrorist organizations have become engaged in 
drug trafficking because drug trafficking is the most profitable 
criminal activity. These terrorist groups are evolving into hybrid 
criminal and terrorist organizations. As they do, their ideology tends 
to give way to greed. Greed is a vulnerability law enforcement can 
exploit, unlike ideology. This makes these groups more susceptible to 
criminal investigation and prosecution.
    Question 4a. The U.S. Government's on-going investigation of the 
Lebanese Canadian Bank is of particular interest from a money 
laundering perspective because it highlights the consequences of poor 
compliance with anti-money laundering regulations in the formal 
financial system.
    Given the Lebanese Canadian Bank case, what more can be done to 
protect the formal financial system from exploitation by terrorists?
    Answer. There are some egregious examples of anti-money laundering 
(AML) compliance breakdowns that facilitated terrorists being able to 
exploit the formal financial system. The biggest failure in the 
Lebanese Canadian Bank case was the complicity of the Lebanese Canadian 
Bank with transnational organized criminal groups, a Mexican drug 
cartel, and Hezbollah. First, there was a total failure by the bank to 
have an AML program. This enabled criminal and terrorist elements to 
place money in the formal financial system, the first step in the money 
laundering process; and then to layer it, which is the second step, by 
moving it to other financial institutions and giving it a sense of 
legitimacy; and then in integrating the funds, the third step in the 
money laundering process, by using the illicit, but seemingly 
legitimate funds to purchase goods, in this case used cars from the 
United States, and shipping them to Africa for sale as legitimate 
transactions.
    One way to help strengthen the formal financial system is to make a 
comprehensive case study out of the Lebanese Canadian Bank and 
specifically show financial institutions how they were exploited in 
this case. By developing typologies that could be built into scenarios 
that could be incorporated into rules for AML transaction monitoring, 
we can improve the system. This case study should also be used as a 
wide-ranging training exercise.
    The Lebanese Canadian Bank case was exacerbated by the fact that 
Lebanon does not recognize Hezbollah as a terrorist organization. 
Therefore, banks in Lebanon, and banks in other countries that do not 
consider Hezbollah to be a terrorist organization, are inclined to bank 
Hezbollah. International consensus on who is a terrorist organization 
has been a longstanding problem.
    There are other cases that can be cited, such as HSBC. The Senate 
Permanent Subcommittee on Investigations conducted a thorough 
investigation and issued a formal report on July 17, 2012, in 
conjunction with a public hearing involving executives from HSBC. The 
hearing and report serve as tools for lessons learned and should 
provide a deterrent to other institutions for serious shortcomings in 
their AML programs.
    It should be pointed out that an overwhelming number of banks 
operating in the United States have outstanding AML programs. The AML 
compliance professionals in these institutions take a great deal of 
pride in their work ethic and dedication to rooting out money 
laundering and terrorist financing. I have seen this first-hand, both 
as an FBI agent and today as a consultant doing work in the financial 
services industry.
    Question 4b. How can the U.S. Government more effectively mitigate 
the threats posed by trade-based money laundering and bulk cash 
smuggling and other ways outside the formal financial sector?
    Trade-based money laundering has had a long history as a successful 
mechanism for criminals and terrorists. The Lebanese Canadian Bank case 
demonstrates how criminals and terrorists collaborated in different 
trade-based money laundering schemes to launder illicit funds. 
Likewise, bulk cash smuggling has long been, and continues to be, a 
significant problem for criminals and terrorists. In 2010 and 2011, 
both the Treasury Department and FBI reported that bulk cash smuggling 
was a huge terrorist financing concern.
    In my view, one of the most significant problems and 
vulnerabilities we are confronted with outside the formal banking 
system in the United States is unlicensed and unregistered money 
remitters. These illegal money remitters provide hawala-like services 
and do not comply with Bank Secrecy Act (BSA) reporting requirements. 
Many banks are unaware of how many of their clients operate as illegal 
money remitters. This is in spite of rigorous due diligence 
requirements. I believe that about 80% of money remitters in the United 
States are illegal.
    To the question of how the U.S. Government can more effectively 
mitigate the threats of these informal mechanisms, the answer is two-
fold. First, the Government interagency community should conduct 
targeted investigative initiatives addressing these problem areas. 
Through interagency cooperation, communication, and coordination, the 
Government should identify the highest-priority targets in these areas 
and determine which agencies could make the best impact by taking the 
lead and develop multi-agency strategies. Second, as a component of 
these initiatives, the U.S. Government should bring in the private 
sector and subject matter experts who could provide a different 
perspective and different sets of information that could develop 
valuable financial intelligence. Public-private partnerships like this 
are woefully lacking.
    Question 5. There is an increasing concern in the counterterrorism 
and intelligence community that terrorist organizations are 
increasingly using criminal activities that are outside of the formal 
international financial system to raise funds to carry out attacks and 
further their goals.
    How important are terrorist funds derived from criminal activities 
for the operational sustainability of major terrorist groups compared 
to other non-criminal sources of funds, including state sponsors and 
private sector donations?
    Answer. Following the terrorist attacks of 9/11, the United States 
and our allies made a concerted effort to deter donations to terrorists 
from wealthy donors, charities, and other funding sources to include 
State Sponsors. This was accomplished in the form of sanctions, OFAC 
and State Department designations, and targeted investigations by law 
enforcement and intelligence agencies. As a result, numerous funding 
sources were shut off and terrorist groups had to develop alternative 
funding mechanisms. They gravitated to criminal activity, which has 
consistently expanded over the years. Drug trafficking, kidnapping, 
extortion, counterfeit goods, and a variety of other crimes have become 
a staple for terrorist organizations.
    As mentioned earlier, terrorists must have a continuous flow of 
funds available that they can immediately access in order to succeed. 
As otherwise legitimate sources of funding have diminished, terrorists 
have had to increasingly rely on criminal activity as a funding 
mechanism.
    As more sanctions and pressure are exerted on Iran, it is less 
likely they will be able to maintain the level of State Sponsorship 
provided to Hezbollah and other terrorist organizations. Likewise, as 
Syria faces a regime overthrow, it is unlikely they will be able to 
provide funding and support to terrorists. This will result in an even 
steadier reliance on criminal activities by terrorist groups.
    Question 6. Foreign Terrorist Organization designation by the 
Secretary of State is an important tool our Government uses to deter 
donations or contributions to and economic transactions with terrorist 
organizations. There are currently 50 groups listed by the State 
Department as designated Foreign Terrorist Organizations.
    Which FTO-designated groups would you say are the best resourced 
and most proficient at evading American and international financial 
regulations? Which use the U.S. financial system the most?
    Answer. When it comes to resources, proficiency and exploitation of 
the U.S. financial system, as well as the global financial system, 
Hezbollah is in a league by themselves. In my view, Hezbollah is not 
only the most proficient terrorist organization; they are the most 
competent criminal organization in the world. Their global 
infrastructure could serve as a model for organized crime. Hezbollah 
has an incredible world-wide infrastructure that enables them to 
operate criminal enterprises and function as a serious terrorist 
threat. Including the Lebanese Canadian Bank case, there are at least 
five significant investigations involving Hezbollah operations that 
touch on the United States that demonstrate Hezbollah's criminal 
organizational skills. In aggregate, their activities represent 
hundreds of millions of dollars in criminal activity having a U.S. 
nexus.
    In today's environment and especially with the sanctions 
confronting them, Iran poses a significant challenge for the formal 
financial system. Their ability to hide behind shell companies and 
opaque beneficial ownership is a hindrance to meaningful sanctions. In 
addition, Iran's ability to use foreign banks as correspondent banks 
and to strip SWIFT messaging information from transactional records 
enables them to circumvent OFAC screening requirements. This is a huge 
problem that surfaced with Lloyds Bank a few years ago and currently 
with Standard Charter Bank. This is an issue that must be dealt with 
forcefully with offending institutions if we intend to have meaningful 
sanctions against Iran.
    Question 7. All of the witnesses mentioned in their prepared 
testimony that the Government needs to interact with the financial 
sector to identify terrorist financing.
    How should the Government develop more effective case typologies 
and feedback mechanisms about how terrorists use financial 
institutions? Is this mostly an educational issue where we need to 
empower financial institutions in order to monitor transactions for 
suspicious or anomalous behavior?
    Answer. In my written testimony for the record, I made six 
recommendations about improving the possibility and probability of 
identifying terrorist financing. Three of those recommendations address 
how the Government should develop more effective case typologies and 
feedback mechanisms for terrorist financing cases. They are:
    ``A consistent and comprehensive feedback mechanism from law 
enforcement must be developed that demonstrates the importance of BSA 
reporting, especially the significance of Suspicious Activity Reports 
(SARs). FinCEN's SAR Activity Review is a good mechanism that provides 
insightful information. In addition, specific feedback from law 
enforcement to financial institutions concerning the value and benefit 
of BSA data, including SAR filings, would have a dramatic impact on the 
morale of individuals responsible for SAR reporting.
    ``There must be an assessment by the Government of all SARs related 
to or identifiable with terrorism cases. Such a review would identify 
specific red flags that could be used as a training mechanism and more 
importantly, could be factored into identifying typologies that could 
be used for the monitoring/surveillance capabilities of financial 
institutions. In addition, a determination could be made as to why the 
financial institution filed a SAR. In many instances, the SAR was filed 
for violations other than terrorist financing. Understanding what 
triggered the SAR filing; in tandem with how the SAR ultimately was 
linked to terrorist interests would be insightful.
    ``In addition to assessing SARs, the Government and industry should 
collectively identify and assess as many case studies, of terrorist 
financing-related investigations, as can be identified and legally 
publicly accessed. The case studies should be compared to determine 
what types of commonalities and patterns of activity exist. In 
addition, common red flags should be easily discernible. This type of 
case study assessment, coupled with the SAR analysis, would provide 
more meaningful information to consider in identifying terrorist 
financing characteristics, especially in cases involving more nominal 
financial flows. This would enable financial institutions to more 
effectively use surveillance and monitor techniques to identify 
questionable transactional information.''
    Financial institutions are required by the BSA to monitor 
transactions for and report suspicious activity. Overall, U.S. banks do 
a good job of reporting suspicious activity. This process could be 
improved through a meaningful feedback mechanism from the Government 
where the Government emphasizes the importance of SAR reporting, 
coupled with demonstrating ``how'' terrorists used financial 
institutions to move, store, and spend money.
    In addition, terrorist financing specific training would be 
important. This was another of the six recommendations I spoke about in 
my written testimony. Terrorist financing is not well understood. As I 
stated in my testimony, ``(w)ithout specific training, the ability to 
understand and disrupt terrorist financing is more difficult to 
achieve.''
    Question 8a. The Financial Action Task Force on Money Laundering is 
comprised of 36 member countries and territories and two international 
organizations and was organized to develop and promote policies to 
combat money laundering and terrorist financing. The FATF relies on a 
combination of annual self-assessments and periodic mutual evaluations 
that are completed by a team of FATF experts to provide information and 
to assess the compliance of its members to the FATF guidelines.
    What are the areas of greatest need for improvement in the FATF 
surveillance process?
    Answer. The FATF mutual evaluation process is one of the most 
significant accomplishments of the FATF 40 Recommendations regarding 
money laundering and terrorist financing as it provides peer and public 
pressure to enact and then operationalize AML laws. There are 
approximately 170 jurisdictions who have adopted the FATF 40 
Recommendations (FATF plus the FATF style regional bodies).
    FATF revised the 40 Recommendations and the methodology for 
assessment in February 2012. According to FATF, the FATF Standards have 
been revised to strengthen global safeguards and further protect the 
integrity of the financial system by providing governments with 
stronger tools to take action against financial crime. At the same 
time, these new standards will address new priority areas such as 
corruption and tax crimes.
    Ted Greenberg, a former Department of Justice and World Bank 
official, is an expert on FATF. He was involved in writing the 40 
Recommendations and has participated in the FATF evaluation process. 
According to Mr. Greenberg, the current methodology has proven to be 
repetitive in its application, not focused on assessment of 
effectiveness, and failed to take account of corruption issues in law. 
Mr. Greenberg believes the new process should focus on the main 
weaknesses in each jurisdiction, why they are/are not effective and 
make recommendations to fix the problem areas. He also believes the new 
process must focus more on corruption issues and their impact on AML.
    Question 8b. How does the United States evaluate the threats to the 
global economy arising from money laundering, terrorist financing, and 
financing the proliferation of weapons of mass destruction?
    Answer. When I was responsible for TFOS at the FBI, I was the FBI's 
representative on the Policy Coordinating Committee (PCC) for Terrorist 
Financing. All Government agencies with a nexus to money laundering and 
terrorist financing participated in that PCC. As an interagency group, 
we evaluated the threats from money laundering and terrorist financing. 
We collectively identified and prioritized the most significant 
threats. The PCC was then chaired by David Aufhauser. During that time 
period (2001-2003), Mr. Aufhauser served as General Counsel at the 
Treasury Department. As I mentioned in my written testimony, ``Mr. 
Aufhauser was a true leader who marshaled the interagency collaborative 
initiative. He was an unsung hero and visionary.'' My understanding is 
that this interagency working group is now directed by the National 
Security Council. The group is no longer referred to as the PCC for 
Terrorist Financing. I am not sure what it is currently identified as.
    Question 8c. How should we be prioritizing these threats and how 
effectively has the FATF process been in addressing these threats?
    Answer. In the United States, the threats should continue to be 
evaluated and prioritized by the interagency working group. Stopping 
the flow of funds to terrorists should be an extremely high interagency 
priority. Overall, the FATF evaluation process has been successful. 
When FATF first started there was no peer evaluation process of money 
laundering laws. In fact, few countries had AML laws. Since then, the 
FATF evaluation process has been widely accepted and followed. FATF has 
revised the evaluation process, which should result in an improved 
process.
    Question 9. KPMG, a private consulting firm, released in October 
2011 the findings of an anti-money laundering survey of major 
international banks. They found that 80% of respondents reported an 
increase in costs associated with anti-money laundering that averaged 
around 45% since 2007. The major sources of cost increases identified 
by the KMPG survey were: (1) Enhanced transaction monitoring, (2) 
increased external reporting requirements to internal regulators and 
external law enforcement agencies, and (3) increased anti-bribery and 
anti-corruption activities.
    In your opinion, are there sufficient resources devoted to 
countering the financing of terrorism and money laundering? 
Alternatively, are the resource costs associated with implementing such 
financial regulations too burdensome on either the private or public 
sectors?
    Answer. Overall, I do not believe sufficient resources are devoted 
to countering the financing of terrorism and money laundering, both in 
the private and public sectors. In the private sector, AML compliance 
is considered a cost center, as opposed to a revenue center. As such, 
AML compliance does not receive the support from business entities 
within a financial institution that should be given. The HSBC case 
illustrates this shortcoming. This problem was magnified during the 
financial crisis when banks were reducing staff. Invariably compliance 
staffs were cut before business staffs. The battle cry in AML 
compliance was ``do more with less''. The only winner under those 
circumstances is the money launderer. In the last few years, as the 
economy improved, AML compliance resources have improved. However, 
until the business entity (revenue center) versus compliance entity 
(cost center) mentality is dealt with, AML compliance will not be 
adequately resourced. As far as the Government is concerned, these are 
lean budget times. Consequently, staffing is impacted. In general, 
Government agencies responsible for investigating money laundering and 
terrorist financing do not have the necessary staffing. However, the 
Government has consistently done outstanding work in addressing the 
money laundering and terrorist financing crime problems.
    Question 10. There has been growing concern at DHS, particularly 
within ICE, about the widespread use of prepaid and stored value cards 
as a way of smuggling illicit funds into the country which could fund 
terror activity. Some estimates are that $1 billion annually is moved 
into the country this way, with most of those funds nearly impossible 
to track.
    Would you agree that prepaid and stored value cards are a growing 
danger to being able to target terrorist financiers? What steps would 
you recommend DHS and the Department of the Treasury take to combat 
this emerging trend?
    Answer. The use of prepaid cards has exploded and continues to gain 
popularity at a rapid pace. There are many legitimate and convenient 
uses of prepaid cards. However, prepaid cards have been a source of 
vulnerability since they came on the market. Law enforcement has 
constantly been concerned about criminals and terrorists using prepaid 
cards in furtherance of their illicit activities. The problem is not 
just a one-way problem. Prepaid cards coming into the country to 
support a potential terrorist attack is a direct threat to National 
security and should be considered a significant problem. There is also 
a serious outbound problem. One area where this is extremely 
problematic is with the Mexican drug cartels. Prepaid cards are being 
purchased in the United States for shipment to Mexico with drug 
proceeds.
    The Treasury Department, through FinCEN, established rules 
regarding prepaid cards in September 2011, which went into effect in 
March 2012. The rules, while helpful, do not solve the problem. What is 
needed is legislation making prepaid cards monetary instruments and 
subjecting them to BSA reporting requirements. Most notably, prepaid 
cards should be subject to reporting requirements when individuals 
travel internationally.
    The Treasury and Homeland Security Departments should work with the 
interagency community, especially the interagency working group for 
money laundering and terrorist financing to develop a Government-wide 
investigative strategy to deal with the threat posed by prepaid cards 
being exploited by terrorists. Likewise, the interagency community 
should reach out to the private sector to form strategic partnerships 
to address this crime problem.
    Question 11a. On June 29, 2012, the Obama administration imposed 
sanctions on a pair of informal money-exchange networks--known as 
hawalas--in Afghanistan and Pakistan in what officials described as the 
first use of the tactic to attack the financial underpinnings of 
Taliban militants who rely on the system to fund their insurgency. The 
Treasury Department said that the designations were coordinated with 
similar measures adopted by the United Nations as part of a broad 
effort to slow the flow of cash used by the Taliban to pay salaries and 
purchase weapons for attacks in Afghanistan. The United Nations also 
added the names of the same two institutions and their principal 
backers to a list of groups officially associated with Taliban 
militancy, meaning they will be subject to international sanctions as 
well.
    Considering how widespread their use is, how difficult is it for 
U.S. Government to really get a handle on some of the terror financing 
and money laundering activities being conducted under the hawala 
system?
    Answer. The problem of illegal money remitters operating in the 
United States is one of the most significant and challenging facing the 
U.S. Government. This is one of the biggest challenges facing the 
financial services sector. Financial institutions do not know the 
number of their customers who use their businesses to conduct illegal 
money remittance operations. This is a form of hawala. The interagency 
working group dealing with money laundering and terrorist financing 
should conduct a targeted and coordinated investigative initiative on 
two levels to identify and dismantle illegal money remittance 
operations. On an international level, hawalas linked to terrorism 
should be identified and targeted. The Government should employee 
techniques to identify wire transfers to and from the United States 
involving these hawalas, as well as telephone numbers and emails, among 
other communication modes linked to the hawalas. From there, 
investigation should focus on the identified illegal money remitters in 
the United States. Coordinated take-downs of targeted hawalas in the 
United States and abroad should take place. This would involve 
coordination with our international partners. On a second level, there 
should be an initiative to arrest a large number of illegal money 
remitters in the United States for operating illegal (unlicensed and 
unregistered) money remittance operations. This would generate 
considerable media attention to this problem, be impactful and have a 
deterrent effect on these types of businesses.
    Question 11b. How could the United States be more effective in 
targeting the hawala systems being used by drug traffickers to fuel the 
Taliban insurgency in Afghanistan and Pakistan?
    Answer. DEA has had the lead in the area of drug trafficking in 
Afghanistan. DEA should develop investigative strategies with the 
Department of Defense, law enforcement, and intelligence agencies. 
Those strategies should be fully coordinated. The collective financial 
intelligence from the various agencies should provide actionable 
intelligence information to prioritize and target hawala dealers who 
support the Taliban. The key is coordination, communication, and 
cooperation.
    Question 11c. Would closer collaboration with the United Nations 
help our Government's ability to identify hawala networks engaged in 
illegal behavior?
    Answer. On a practical operational level, collaboration with the 
United Nations would have little impact on U.S. investigative efforts. 
On a policy level, especially in considering regulating hawalas, 
collaboration with the United Nations and other international bodies 
could be extremely beneficial.
    Question 12. Mr. Lormel, in your written testimony you mentioned 
the Lloyds Bank ``stripping'' case as a prime example of how 
correspondent banking was used by Iran as a facilitation tool.
    This was a pretty egregious example of Iran using the formal 
banking system to skirt international financial system. Do you think 
this was a one-off or an instance of a larger problem, particularly 
with regard to SWIFT?
    Answer. I believe the problem of ``stripping'' is much larger. It 
is not a one-off situation. The Lloyds case was investigated jointly by 
the District Attorney of New York (DANY) and the Department of Justice. 
At the time the case was brought forward, DANY announced it was 
investigating nine other banks for similar ``stripping'' activity. On 
August 6, 2012, the New York State Department of Financial Services 
announced it was investigating Standard Charter Bank for ``stripping'' 
information related to Iran.
    SWIFT is not the problem. The problem is that certain banks have 
chosen to do business with Iran. There is tremendous profit for the 
banks in dealing with Iran, especially with the strong U.S. sanctions. 
However, Iran needs access to U.S. dollars, therefore the banks who are 
dealing with Iran must transact in the United States. They must have a 
correspondent banking relationship with a U.S. bank to access U.S. 
dollars. In the cases of Lloyds and Standard Charter, the banks knew 
that if they provided the proper SWIFT messaging data, the identities 
of the Iranian banks they were transacting with would have been 
disclosed through their correspondent relationship with a U.S. bank. 
They knew full well that if that occurred the U.S. bank would have 
declined the transaction. The U.S. bank's OFAC monitoring system would 
have identified the sanctioned Iranian bank and returned the 
transaction. Therefore, Lloyds and Standard Charter ``stripped'' out 
any reference or mention of the Iranian bank in the transaction, 
circumventing the OFAC monitoring. This gave the appearance to the U.S. 
bank that either Lloyds or Standard Charter were the originating bank 
in the transaction.
    Question 13a. Mr. Lormel, you suggested that providing security 
clearances to select personnel in financial institutions in order to 
share limited intelligence information that could be scrubbed against 
bank monitoring systems to identify transactional information 
associated with terrorists.
    How would you envision this to work?
    Answer. The Government provides security clearances to individuals 
working in the defense contracting industry. This enables defense 
contractors and consultants to work on classified projects, which is in 
the Government's best interest. The same should be true in the 
financial services industry. Financial institutions are a repository 
for significant financial intelligence information. If the Government 
could share selective classified information with a limited number of 
vetted and cleared bank officials that information could be run through 
transactional information. Hits in the transactional data, that 
otherwise would not have been identified, would be reported back to the 
agency providing the information. Legal process would have to be put in 
place to ensure any information provided back to the Government did not 
violate Bank Secrecy Act privacy provisions.
    Question 13b. What would you think of sending members of Treasury's 
Office of Financial Intelligence, or of the intelligence community, to 
certain high-risk financial institutions, in essence detailing them 
there for this purpose? Would this not also help with the challenge of 
helping the financial sector to identify activity consistent with 
typologies of terrorists?
    Answer. The idea of detailing members of the Treasury's Office of 
Financial Intelligence or from law enforcement is worth consideration. 
It would be important to distinguish law enforcement and the 
intelligence community in the sense that the CIA should be precluded 
from collecting domestic intelligence, especially involving U.S. 
persons. The FBI or other law enforcement agencies dealing with 
classified intelligence would be the appropriate Government 
representatives. However, before considering sending Government 
personnel to select high-risk institutions, a number of impediments 
would need to be resolved. The General Counsels from the financial 
institution and Government agencies would need to assess the legality 
and potential liabilities of such a relationship. Two other 
considerations would need to be considered. First, by sending personnel 
to select financial institutions would the Government be unwittingly 
providing that institution with an unfair competitive advantage? 
Second, does the Government have the resources to devote to this type 
of initiative?
    While I ran TFOS at the FBI, we actually had an operation with a 
financial services provider, similar to what was suggested in the above 
question. We worked through the impediments and formed a public-private 
partnership that achieved extremely productive investigative results. 
This was a terrific model of how the financial services sector and law 
enforcement could form a strategic partnership in furtherance of 
National security. Because of the sensitivity of that initiative, I 
cannot comment about it any further.
        Questions From Chairman Patrick Meehan for Sue E. Eckert
    Question 1a. With our military successes against al-Qaeda core 
leadership in Afghanistan and Pakistan, there is a growing trend of al-
Qaeda affiliated groups and adherents filling the void and taking the 
lead in launching attacks against the homeland.
    Given the relatively low amount of money required to plan and 
launch a terrorist attack, how realistic is it to expect U.S. and 
international counterterrorism entities to identify funds that might be 
used to undertake terrorism-related activity?
    Answer. Response was not received at the time of publication.
    Question 1b. What are some of the persistent challenges in 
identifying and investigating an activity suspected of financing 
terrorism? What are some of the trends in how terrorist groups 
acquiring funds to support their objectives?
    Answer. Response was not received at the time of publication.
    Question 1c. Is the decision to pursue a terror financing 
investigation based on the amount of money suspected of being acquired 
for terrorism-related purposes? If so, what is the minimum monetary 
amount of terrorism-related funds the U.S. Government assesses as 
worthy of investigating?
    Answer. Response was not received at the time of publication.
    Question 1d. Can you describe the decision-making process and 
considerations by which the U.S. intelligence and law enforcement 
communities decide whether to stop terrorism-financing related activity 
and charge a suspect arrest or choose to allow the activity to continue 
in hopes of following the trail of funds to a larger network of support 
or to entities that may be planning a terrorist attack?
    Answer. Response was not received at the time of publication.
    Question 2. President Obama recently signed an Executive Order 
allowing the Treasury Department to freeze U.S.-based assets of persons 
who the White House has identified as a ``threat to the peace, 
security, and stability'' of Yemen.
    Do you think this is an effective use of the designation authority? 
Especially when a group such as Boko Haram--who have killed thousands 
of civilians and are in constant contact with AQIM--remain 
undesignated?
    Answer. Response was not received at the time of publication.
    Question 3a. In 2011, the U.S. Government revealed the findings of 
a multi-year law enforcement operation to dismantle a complex, 
transnational network involved in money laundering and drug 
trafficking. The case involved Hezbollah, Mexican and Colombian drug 
trafficking organizations, the Taliban, Lebanon, Colombia, Panama, 
several countries in West Africa, U.S. car buyers, a U.S. shipping 
company, bulk cash couriers, plans for weapons trafficking deals, and 
the Beirut-based Lebanese Canadian Bank (LCB).
    Does the fact that groups such as Hezbollah and the Islamic 
Revolutionary Guard Corps continue to use criminal ventures create 
opportunities for U.S. enforcement mechanisms--such as our robust 
counternarcotics tools--to roll up these vast networks?
    Answer. Response was not received at the time of publication.
    Question 3b. How does counterterrorism fit in this increasingly 
interconnected underworld?
    Answer. Response was not received at the time of publication.
    Question 4a. The U.S. Government's on-going investigation of the 
Lebanese Canadian Bank is of particular interest from a money 
laundering perspective because it highlights the consequences of poor 
compliance with anti-money laundering regulations in the formal 
financial system.
    Given the Lebanese Canadian Bank case, what more can be done to 
protect the formal financial system from exploitation by terrorists?
    Answer. Response was not received at the time of publication.
    Question 4b. How can the U.S. Government more effectively mitigate 
the threats posed by trade-based money laundering and bulk cash 
smuggling and other ways outside the formal financial sector?
    Answer. Response was not received at the time of publication.
    Question 5. There is an increasing concern in the counterterrorism 
and intelligence community that terrorist organizations are 
increasingly using criminal activities that are outside of the formal 
international financial system to raise funds to carry out attacks and 
further their goals.
    How important are terrorist funds derived from criminal activities 
for the operational sustainability of major terrorist groups compared 
to other non-criminal sources of funds, including state sponsors and 
private-sector donations?
    Answer. Response was not received at the time of publication.
    Question 6. Foreign Terrorist Organization designation by the 
Secretary of State is an important tool our Government uses to deter 
donations or contributions to and economic transactions with terrorist 
organizations. There are currently 50 groups listed by the State 
Department as designated Foreign Terrorist Organizations.
    Which FTO-designated groups would you say are the best resourced 
and most proficient at evading American and international financial 
regulations? Which use the U.S. financial system the most?
    Answer. Response was not received at the time of publication.
    Question 7. All of the witnesses mentioned in their prepared 
testimony that the Government needs to interact with the financial 
sector to identify terrorist financing.
    How should the Government develop more effective case typologies 
and feedback mechanisms about how terrorists use financial 
institutions? Is this mostly an educational issue where we need to 
empower financial institutions in order to monitor transactions for 
suspicious or anomalous behavior?
    Answer. Response was not received at the time of publication.
    Question 8a. The Financial Action Task Force on Money Laundering is 
comprised of 36 member countries and territories and two international 
organizations and was organized to develop and promote policies to 
combat money laundering and terrorist financing. The FATF relies on a 
combination of annual self-assessments and periodic mutual evaluations 
that are completed by a team of FATF experts to provide information and 
to assess the compliance of its members to the FATF guidelines.
    What are the areas of greatest need for improvement in the FATF 
surveillance process?
    Answer. Response was not received at the time of publication.
    Question 8b. How does the United States evaluate the threats to the 
global economy arising from money laundering, terrorist financing, and 
financing the proliferation of weapons of mass destruction?
    Answer. Response was not received at the time of publication.
    Question 8c. How should we be prioritizing these threats and how 
effectively has the FATF process been in addressing these threats?
    Answer. Response was not received at the time of publication.
    Question 9. KPMG, a private consulting firm, released in October 
2011 the findings of an anti-money laundering survey of major 
international banks. They found that 80% of respondents reported an 
increase in costs associated with anti-money laundering that averaged 
around 45% since 2007. The major sources of cost increases identified 
by the KMPG survey were: (1) Enhanced transaction monitoring, (2) 
increased external reporting requirements to internal regulators and 
external law enforcement agencies, and (3) increased anti-bribery and 
anti-corruption activities.
    In your opinion, are there sufficient resources devoted to 
countering the financing of terrorism and money laundering? 
Alternatively, are the resource costs associated with implementing such 
financial regulations too burdensome on either the private or public 
sectors?
    Answer. Response was not received at the time of publication.
    Question 10. There has been growing concern at DHS, particularly 
within ICE, about the widespread use of prepaid and stored value cards 
as a way of smuggling illicit funds into the country which could fund 
terror activity. Some estimates are that $1 billion annually is moved 
into the country this way, with most of those funds nearly impossible 
to track.
    Would you agree that prepaid and stored value cards are a growing 
danger to being able to target terrorist financiers? What steps would 
you recommend DHS and the Department of the Treasury take to combat 
this emerging trend?
    Answer. Response was not received at the time of publication.
    Question 11a. On June 29, 2012, the Obama administration imposed 
sanctions on a pair of informal money-exchange networks--known as 
hawalas--in Afghanistan and Pakistan in what officials described as the 
first use of the tactic to attack the financial underpinnings of 
Taliban militants who rely on the system to fund their insurgency. The 
Treasury Department said that the designations were coordinated with 
similar measures adopted by the United Nations as part of a broad 
effort to slow the flow of cash used by the Taliban to pay salaries and 
purchase weapons for attacks in Afghanistan. The United Nations also 
added the names of the same two institutions and their principal 
backers to a list of groups officially associated with Taliban 
militancy, meaning they will be subject to international sanctions as 
well.
    Considering how widespread their use is, how difficult is it for 
U.S. Government to really get a handle on some of the terror financing 
and money-laundering activities being conducted under the hawala 
system?
    Answer. Response was not received at the time of publication.
    Question 11b. How could the United States be more effective in 
targeting the hawala systems being used by drug traffickers to fuel the 
Taliban insurgency in Afghanistan and Pakistan?
    Answer. Response was not received at the time of publication.
    Question 11c. Would closer collaboration with the United Nations 
help our Government's ability to identify hawala networks engaged in 
illegal behavior?
    Answer. Response was not received at the time of publication.
     Questions From Ranking Member Brian Higgins for Sue E. Eckert
    Question 1. Ms. Eckert, have Government officials identified any 
specific indicators of terrorist financing? What are the triggers that 
actually ``tip'' law enforcement into knowing that a specific group is 
engaging in illegal financial schemes that are actually funding 
terrorism? Would there be an exhaustive list given our diverse threat?
    Answer. Response was not received at the time of publication.
    Question 2. Ms. Eckert, what metrics are in place to actually 
measure the success of the targeted sanctions and statutes put in place 
to prevent terrorism funding since 9/11? What do we use to measure? We 
cannot count the amount of lives saved, but we can assess dollar 
figures and convictions, but these may also be misleading? What do you 
suggest?
    Answer. Response was not received at the time of publication.
    Question 3. Ms. Eckert, earlier this year, the American Bar 
Association had a panel discussing the disparate impact of terrorist 
finance enforcement on charities and non-profits. Explain how this 
enforcement has a disparate impact and what if anything that you know 
that the Treasury and Department of Justice are doing to make sure that 
their terrorist financing enforcement is fair?
    Answer. Response was not received at the time of publication.
    Question 4. The threat to the United States has diversified greatly 
since 9/11. How have our terrorist financing enforcement mechanisms 
adequately kept up with the diverse threat?
    Answer. Response was not received at the time of publication.

                                 
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