USA Patriot Act: Better Interagency Coordination and Implementing Guidance for Section 311 Could Improve U.S. Anti-Money Laundering Efforts
Published: 2008-09-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since September 11, 2001, the United States has established tools to address the threat to the U.S. financial system of money laundering and terrorist financing. One such tool is Section 311 of the USA PATRIOT Act of 2001, which authorizes the Secretary of the Treasury (Treasury) to prohibit U.S. financial institutions from maintaining certain accounts for foreign banks if they involve foreign jurisdictions or institutions found to be of primary money laundering concern. To make this finding, Treasury examines several factors and generally issues a proposed rule announcing its intent to apply Section 311 restrictions. GAO was asked to examine (1) the process used to implement Section 311 restrictions, (2) the process Treasury follows to finalize or withdraw a proposed rule, and (3) how Treasury assesses the impact of Section 311. GAO reviewed financial and investigative U.S. government documents and met with government officials and representatives of affected banks.
section_title: What GAO Found
paragraphs: Treasury's informal process to implement Section 311 was consistent with requirements in U.S. law. From 2002 to 2005, Treasury identified 11 cases--3 jurisdictions and 8 institutions--as being of primary money laundering concern and issued proposed rules for 10 of these cases. As required, Treasury consulted with the Departments of Justice and State prior to issuing the proposed rules. However, Justice and State officials said that it was difficult for them to effectively assess the evidence on some Section 311 cases because Treasury provided them limited time. In 2006, Treasury changed its process by forming an interagency working group to discuss potential threats to the U.S. financial system. But it is unclear if the new process addressed the agencies' concerns since Treasury has issued no Section 311 findings since 2005. Treasury determines whether to finalize or withdraw a proposed Section 311 rule by reviewing written comments and sometimes meeting with interested parties. The duration of a proposed rule is significant because U.S. financial institutions act immediately in response to its announcement. However, Treasury has taken years to complete this process in some cases. In April 2008, Treasury withdrew two of three notices--all open for between 3 and 5 years--after GAO discussed the cases with Treasury officials. Contributing to this lag was the absence of required timeframes for completing the action and of written guidance specifying a Treasury office to finalize the actions. Treasury views Section 311 as effective because it isolates target institutions from the U.S. financial system and encourages some foreign governments to strengthen their anti-money laundering authorities. However, some foreign government officials said that Section 311's implementation precluded their own enforcement or regulatory actions against targeted institutions as U.S. action was unilateral or provided too little information for them to act. Justice officials said that if Section 311's application is viewed as unsubstantiated, some countries may be less likely to cooperate with the U.S. government on other law enforcement matters or sanctions. Treasury officials recognized the concerns, but did not believe they diminished Section 311's effectiveness.

section_title: Letter
paragraphs: National Money Laundering Strategy for 2007 (U.S. Government, Washington, D.C.: 2007).
Pub. L. 107-56, 115 Stat 272 (Oct. 26, 2001).
A correspondent account is an account established by a banking institution to receive  deposits from, make payments on behalf of, or handle other financial transactions for  another financial institution.
In this report, we (1) examined the process U. S. agencies used to  implement the USA PATRIOT Act Section 311 restrictions against targeted  financial institutions and countries and the results of these actions; (2)  assessed the process Treasury follows to determine whether to finalize or  withdraw a proposed rule; and (3) described how Treasury assesses the  impact of Section 311 restrictions.
To meet these objectives, we reviewed program documentation and  interviewed knowledgeable officials from key U.S. agencies at the  Department of Justice (Justice), Department of State (State), Treasury,  and the Board of Governors of the Federal Reserve System (Federal  Reserve) in Washington, D.C. We focused this performance audit on all  locations where the U.S. government has targeted financial institutions or  jurisdictions for Section 311 actions. These were Belarus, Burma, Latvia,  Macau, Nauru, Syria, Turkish Republic of Northern Cyprus, and Ukraine.  We met with U.S. and foreign government officials, and representatives of  financial institutions and financial institution associations, and reviewed  documents in Kyiv, Ukraine; Macau and Hong Kong, China; and Riga,  Latvia. We visited Kyiv, Ukraine; Macau and Hong Kong, China; and Riga,  Latvia, because they provided examples of different applications of  Section 311, specifically a targeted jurisdiction and targeted financial  institutions where Section 311 restrictions were finalized and withdrawn.  Treasury provided us with key documents it identified to show how it  implemented its 311 process. A detailed description of our scope and  methodology is included in appendix I of this report. We conducted this  performance audit from September 2007 through September 2008 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
subsections: section_title: Background
paragraphs: Section 311 is one of many legal and regulatory resources that the United  States uses to combat money laundering and financial crime. U.S. laws and  programs aimed at combating money laundering include the Bank Secrecy  Act (BSA), which includes Section 311 and authorizes Treasury to  promulgate regulations on the reporting and recordkeeping of certain  financial transactions; economic and trade sanctions implemented by the  Office of Foreign Assets Control (OFAC); and several Justice programs  focused on anti-money laundering. The United States is also a member of  the Financial Action Task Force (FATF), an intergovernmental body that  has created a comprehensive global framework for anti-money laundering  efforts and has called for countermeasures against countries that are not  complying with this framework.
These laws and programs, including Section 311, are part of a broad U.S.  money laundering strategy. Issued most recently in 2007, this strategy  states that it reflects the U.S. government’s ongoing commitment to attack  money laundering and terrorist financing on all fronts, including the  formal and informal components of both the domestic and international  financial systems. The strategy focuses on three major goals: (1) to more  effectively cut off access to the international financial system by money  launderers and terrorist financiers; (2) to enhance the federal  government’s ability to target major money laundering organizations and  systems; and (3) strengthen and refine the anti-money laundering  regulatory regime for all financial institutions to improve the effectiveness  of compliance and enforcement efforts. The strategy includes, among  other items, a commitment to target countries and financial institutions  that facilitate money laundering and terrorist financing, including using  the full range of measures provided by Section 311 of the USA PATRIOT  Act.
USA PATRIOT Act Section 311 is currently implemented by Treasury’s  Financial Crimes Enforcement Network (FinCEN). Until 2004, the Office  of Terrorist Financing and Financial Crime (TFFC) implemented Section  311, according to Treasury officials. Both offices report to Treasury’s  Office of Terrorism and Financial Intelligence (TFI). This office contains  intelligence and enforcement functions and has the stated twin missions of  safeguarding the U.S. financial system against illicit use and combating  national security threats. Figure 1 shows the organization of TFI.
Section 311 allows Treasury to require domestic financial institutions and  agencies to take certain special measures outlined in the provision if it  finds reasonable grounds to conclude that a designated foreign  jurisdiction, financial institution, or class of transactions is of “primary  money laundering concern.” In making a finding that a jurisdiction is of  primary money laundering concern—in addition to any information that  the Secretary of the Treasury might deem relevant—the Secretary is to  consider seven potentially relevant factors. These additional factors  include the extent to which the jurisdiction offers special bank secrecy or  regulatory advantages to nonresidents as well as the substance and quality  of the bank supervisory and anti-money laundering laws in the jurisdiction.  In making a finding that an institution, transaction, or type of account is of  primary money laundering concern, the Secretary is to consider–in  addition to any information the Secretary determines is relevant–three  potentially relevant factors, including the extent to which the institution is  used to facilitate money laundering and the extent to which it is used to  facilitate legitimate business. For a list of all potentially relevant factors  Treasury is required to consider, see appendix II. According to the law, the  Secretary of the Treasury must consult with State and Justice before  designating an institution, jurisdiction, or class of transactions is of  primary money laundering concern.
Once an institution is designated as being of primary money laundering  concern, the Secretary of the Treasury is required to consult with a variety  of parties including the Secretary of State, the Chairman of the Board of  Governors of the Federal Reserve System, and other appropriate federal  agencies, to determine which of the five available special measures to  apply. The first four special measures relate to requirements put on U.S.  financial institutions or agencies for record keeping, reporting, and  collection of certain financial information. The fifth special measure  prohibits U.S. financial institutions or agencies from opening or  maintaining correspondent accounts or payable through accounts for or  on behalf of a foreign bank if the account involves a designated  jurisdiction or institution. This special measure may be imposed only by  regulation. In selecting which special measures to apply, the Secretary is  required to consider four factors. These factors are listed in appendix III.
The Administrative Procedure Act, which governs federal rule-making,  generally requires that notice of proposed rule-making be published in the  Federal Register. It also requires that, after the notice is given, the agency  provide interested persons an opportunity to participate in the rule-making  through submission of written data, views, or arguments. After  consideration of these submissions, the agency is required to incorporate  in the rules adopted a concise general statement of their basis and  purpose.
section_title: Process to Implement USA PATRIOT Act Section 311 Was Consistent with Legal Requirements, but Some Agencies Expressed Concerns about Consultation
paragraphs: To implement USA PATRIOT Act Section 311, Treasury used an evolving  informal rule-making process that was consistent with requirements in  Section 311 and resulted in 11 cases in eight countries from 2002 through  2005. However, Treasury’s process for consulting with two U.S. agencies  on findings of primary money laundering concern sometimes made it  difficult to provide meaningful consultation during certain key phases of  the process, according to Justice and State officials. In the absence of  established time frames, officials of these agencies expressed concerns  about the amount of time they had for consultation about Section 311  findings. In addition, Treasury did not include these other agencies with  expertise in money laundering and international affairs in developing its  initial list of targeted financial institutions. Starting in 2006, Treasury  changed its targeting procedures and, with Justice, established an  interagency working group to discuss potential threats to the U.S. financial  system at an earlier stage in the process. However, it is unclear whether  the new procedures improved consultation because Treasury’s current  process has not resulted in any new Section 311 findings since 2005.
subsections: section_title: Treasury Developed Informal Rule-making Process to Implement USA PATRIOT Act Section 311
paragraphs: To implement USA PATRIOT Act Section 311, Treasury generally pursued  the following steps from 2002 through 2005 that evolved over time:  1.  Identified target jurisdictions (countries) and financial institutions that  presented a potential threat to the U.S. financial system because of  money laundering or terrorist financing where Section 311 might be  applied.  2.  Conducted research to determine which of these jurisdictions or  financial institutions were “of primary money laundering concern” and  determined which special measures should be applied.  3.  Drafted a finding and special measures, usually in a notice of proposed  rule-making.  4.  Reviewed the proposed rule for legal sufficiency.  5.  Consulted with relevant agencies (Justice, State, the Federal Reserve,  and other agencies) on a finding and the application of special  measures.  6.  Obtained clearance to proceed from Treasury’s management.  7.  Published a finding or notice of proposed rule-making in the Federal  Register.  8.  Received and reviewed comments.  9.  Consulted, if applicable, with Justice, State, and the Federal Reserve,  on the application of special measure 5.  10. Finalized or withdrew the proposed rule, as appropriate.
Treasury officials said that they had no single established process to  implement Section 311, but developed informal rule-making processes that  evolved over time. Prior to 2004, all work on Section 311 cases was  conducted by the Office of Enforcement and was primarily the  responsibility of Treasury’s Deputy Assistant Secretary for Terrorist  Financing and Financial Crime and his staff. At the beginning of 2004,  Treasury officials told us a decision was made to move the function of  building an administrative record of the supporting evidence associated  with each Section 311 case and proposed rule to FinCEN. However, TFFC  is still involved in making the determination of when a proposed rule  should be published, finalized, or withdrawn, according to Treasury  officials.
To date, Treasury has issued findings of primary money laundering  concern against three jurisdictions and eight financial institutions in eight  countries. The first finding of primary money laundering concern was  issued in December 2002 and the most recent finding occurred in  September 2005. The three countries in these findings were: (1) Ukraine,  (2) Nauru, and (3) Burma. The eight financial institutions in these findings  were: (1) Asia Wealth Bank (Burma), (2) Myanmar Mayflower Bank  (Burma), (3) Commercial Bank of Syria (Syria), (4) First Merchant Bank  OSH Ltd. (Turkish Cyprus), (5) Belmetalnergo/Infobank (Belarus), (6)  Multibanka (Latvia), (7) VEF Banka (Latvia), and (8) Banco Delta Asia  (Macau, China).
In all of the cases above, Treasury issued a designation of primary money  laundering concern. In all cases but one, Treasury also issued proposed  rules regarding the institution or jurisdiction designated to be of primary  money laundering concern. These rules proposed that U.S. financial  institutions employ Special Measure 5, prohibiting U.S. financial  institutions covered by the rule from opening or maintaining  correspondent accounts with foreign banks if the account involved  designated institutions or jurisdictions. Of the 10 proposed rules it issued  under Section 311, Treasury later withdrew 3 and finalized 6, with one rule  still outstanding. For additional information on these countries and  financial institutions, see appendix IV.
section_title: Treasury Identified Targeted Institutions Where Section 311 Might be Applied
paragraphs: To implement the key first step of targeting areas of primary money  laundering concern, according to Treasury officials, Treasury identified  jurisdictions and financial institutions from several sources. These were  multilateral organization recommendations, U.S. law enforcement  investigations, joint strategy with State, and broader national security  concerns.
For the jurisdictions it targeted from 2002 through 2005—the countries of  Burma, Nauru, and Ukraine—Treasury officials said they relied largely on  recommendations from the FATF, an international body whose purpose is  the development and promotion of national and international policies to  combat money laundering and terrorist financing, as well as on internal  Treasury research and other sources. The first opportunity to use Section  311 arose out of the FATF’s Non-Cooperative Countries and Territories  (NCCT) process, according to Treasury officials. Once a country was  placed on the NCCT list, FATF member states, including the United States,  had an obligation to advise financial institutions in their country to give  enhanced scrutiny to financial transactions with financial institutions on  the FATF NCCT list. If after a year, a country had not taken the  appropriate measures to be removed from the NCCT list, then FATF would  request that its member countries place additional countermeasures  against the country, according to Treasury officials. Treasury officials told  us that prior to the passage of Section 311, the United States had no real  countermeasures to impose on countries when FATF called for them.  After Section 311 was passed, Treasury decided to use the provision in  response to the FATF’s call for additional country countermeasures. In  early 2000, FATF called for countermeasures against Ukraine and Nauru  and, in 2003, called for countermeasures against Burma. Subsequently,  Treasury responded by invoking Section 311 against all three countries,  according to Treasury officials.
For financial institutions it targeted, Treasury used a different approach  from that used for jurisdictions. It developed a list of possible targets for  the purpose of using the new Section 311 authority, according to U.S.  government officials. In 2002 and 2003, Treasury officials said, the Office  of Enforcement, which preceded TFFC, assigned each of its five to six  staff to review a region of the world in order to review intelligence reports  and identify potential targets in each region. Ultimately, the office  produced a list of over 20 banks of money laundering concern that were  potential targets for Section 311 action. Treasury officials told us that their  offices developed the list of targeted financial institutions internally. While  Treasury officials said that they did not consult other agency officials with  expertise in money laundering and international affairs in developing the  initial list of targets, Treasury developed the list from various sources,  based on material developed by other agencies.
Treasury officials identified several sources as the impetus for its findings  of primary money-laundering concern for various financial institutions.
The finding against one bank occurred because there was an ongoing FBI  investigation of the bank, according to Treasury officials. They said that  this case was the first opportunity Treasury had to use Section 311 in  conjunction with law enforcement.
The findings against two other banks emerged from a concern that a  foreign government was not reforming its anti-money laundering laws,  according to Treasury officials. They said that the U.S. government had  been concerned for some time with lack of anti-money laundering controls  in the country, but had not pursued the issue until it became apparent that  anti-money laundering controls were not going to be addressed. At that  point, Treasury met with State to develop a strategy for dealing with the  country’s anti-money laundering control issues. Following the Section 311  finding, the foreign government passed legislation to improve its national  anti-money laundering controls.
The findings against two other targeted banks emerged from several  national security working groups and were part of a higher National  Security Council strategy for these particular countries, according to  Treasury officials.
After developing the target list, Treasury conducted research to support a  finding for each targeted institution on the list. If it determined that it had  enough evidence to support a Section 311 finding, it published a proposed  rule in the Federal Register identifying the institution as being of “primary  money laundering concern.”
section_title: Treasury Process for Implementing Section 311 Was Consistent with Legal Requirements
paragraphs: Treasury’s process for implementing Section 311 was consistent with  requirements set forth in the USA PATRIOT Act. From 2002 through 2005,  in accordance with USA PATRIOT Act Section 311, Treasury generally  considered the seven factors outlined in Section 311 when determining  whether a jurisdiction is of primary money laundering concern, including  the quality of bank supervision and anti-money laundering laws in the  jurisdiction. For example, for the jurisdiction of Burma, Treasury found  that Burma lacked a basic set of anti-money laundering laws and that the  Burmese Central Bank had no anti-money laundering regulations for  financial institutions. For proposed rules determining whether an  institution was of primary money laundering concern, Treasury considered  the three factors outlined in Section 311 for financial institutions. For  example, Treasury determined that the Commercial Bank of Syria was  being used to facilitate or promote money laundering because numerous  transactions were indicative of money laundering passed through that  bank. Treasury also determined that any legitimate business activity at the  bank was significantly outweighed by the apparent use of the bank to  promote money laundering.
When determining which special measures to apply under Section 311,  Treasury considered the four factors required by the law. For example,  Treasury considered whether similar action was being taken by other  nations or organizations, the burden of special measures for U.S. financial  institution compliance, the impact of special measures on the international  financial system, and the effect of special measures on U.S. national  security and foreign policy when it announced Section 311 special  measures for Banco Delta Asia. Appendix II provides a more detailed  description of these factors. In addition, consistent with Section 311 of the  USA Patriot Act, Treasury’s process for instituting special measure 5 was  imposed only through rule-making.
section_title: Two Agencies Noted Limited Opportunities to Contribute Their Views
paragraphs: While Treasury met the statutory requirements of USA PATRIOT Act  Section 311 to consult with designated agencies, Justice and State officials  expressed concerns with the amount of time they had for consultation  about Section 311 findings in the absence of established time frames.
Officials of two U.S. agencies expressed concerns about the amount of  time they had for consulting with Treasury on Section 311 cases prior to  issuing proposed rules. Before a proposed rule was issued for public  comment, Treasury provided it to Justice and State for consultation, as  required by the act. Though the consultations fulfilled requirements  under Section 311, Justice and State officials said that consultations often  occurred under short time frames, affording them insufficient opportunity  to provide meaningful input to the Section 311 process. Treasury  established no operational guidance with set time frames for this  consultation requirement. For example, one Justice official stated that  Justice generally received an e-mail from Treasury asking Justice if it  wanted to comment on a proposed rule and setting very tight time  frames—in one case as little as 1 to 2 days—with no explanation as to why  time frames were so tight. Other Justice officials said that the short time  frame required that most of the feedback from Justice to Treasury was  oral, but that in one case neither Justice nor Treasury had access to a  Sensitive Compartmented Information Facility to discuss classified  information during the time period provided. As a result, all conversations  between the two agencies needed to be general and could not be  classified. This was problematic because one Justice official said that most  of Justice’s comments regarded evidence that was highly classified. Also,  short time frames made consultation difficult because they did not allow  the relevant Justice official who had reviewed the classified evidence time  to collect comments or concerns from other officials in Justice.
Treasury officials disagreed with concerns expressed about their  consultation roles. They stated their belief that Treasury coordinates  extensively. Treasury worked with other agencies on various cases. For  example, in one case, Treasury worked for months with the intelligence  agencies in developing the case and with State, including the Secretary of  State, on the designation, according to the officials. Treasury officials said  that they also consulted with State’s Undersecretary for Economic and  Business Affairs as required. In addition, Treasury officials said that they  delayed one case because of law enforcement interests in the targeted  institution and that law enforcement equities are a primary concern for  Treasury. Moreover, Treasury said that it has accommodated other  agencies’ concerns and always ensured that it did not endanger the  operational interests of law enforcement and the intelligence community.  Treasury stated that it had never gone forward with Section 311 actions  without consultation or over the objections of other agencies.
section_title: Treasury Changed Its Process for Implementing Section 311
paragraphs: In early 2006, FinCEN changed Section 311 procedures in order to make  better use of the staff’s time, according to a Treasury official. Targeted  assessments of financial institutions that may be of primary money  laundering concern are now prepared instead of complete Section 311  packages. This is because preparing a complete package took  considerable time, according to this official, and then had to be assessed  to determine if there was sufficient evidence to justify a finding and  proposed rule. The process now begins when a request for preparing an  assessment comes from either (1) within FinCEN, based on a daily  FinCEN review of intelligence and public materials looking for threats to  the U.S. financial system or (2) other parts of Treasury or other agencies  with suggestions for a targeted assessment. In deciding whether or not to  prepare a targeted assessment, FinCEN first considers whether an  institution has access to the U.S. financial system. If not, FinCEN takes no  action to assess it. Once an assessment is prepared, it is presented either  to the Under Secretary for Terrorism and Financial Intelligence or to the  Director of FinCEN, or both, for a policy decision on whether further  action should be taken. None of the targeted assessments has resulted in  Section 311 actions, but Treasury said it has selected other options to  address these threats.
The second change in the implementation process was the formation of an  interagency working group to review suspect banks. This group developed  over time but formally began meeting in January 2008. According to the  Chief of Justice’s Asset Forfeiture & Money Laundering Section (AFMLS),  he developed an informal working relationship with Treasury, primarily  through meetings with the Deputy Assistant Secretary of TFFC, on a  monthly or bimonthly basis. This evolved into a working group to review  suspect banks for possible anti-money laundering efforts, including  Section 311 actions. This process was formalized in the first 6 months of  2008 and the working group has met about 6 times. The Deputy Assistant  Secretary for TFFC at Treasury noted that this group gives the Section 311  process a broader perspective on suspect banks. The Chief of Justice’s  AFMLS section also said that this working group is a significant  improvement over Treasury’s previous process for identifying banks for  possible Section 311 action, which had not been clear to Justice officials.  The working group also allows Justice to learn about possible Section 311  actions early, thus alerting Justice to actions that could impact ongoing  covert operations. The Justice official noted that one of its goals for the  working group is to maintain anti-money laundering expertise and a law  enforcement perspective, since TFFC is not a law enforcement agency.  The Justice official emphasized that the group has good potential but that  it will take another 6 months to see how well it works.
Membership in the suspect banks’ working group consists of a wide  variety of organizations. The Chief of Justice’s AFMLS co-chairs the group  with Treasury’s Deputy Assistant Secretary for TFFC. Other members of  the group are State (representatives from its division of International  Narcotics and Law Enforcement bureau); staff from TFFC and FinCEN,  and the international division at Treasury; and components of the  intelligence community. These agencies are the core group that now  attends all meetings, but other agencies may be also asked to attend  specific meetings. State was not initially at the first meetings of the  working group but had been invited after the first few meetings when it  became clear that its input was needed.
section_title: Treasury’s Process for Implementing Section 311 Followed Requirements of the Law but Took Years to Finalize Some Proposed Rules
paragraphs: It has sometimes taken Treasury years to finalize or withdraw a proposed  Section 311 rule, though these delays are not inconsistent with  requirements under the law. This has occurred, in part because (1) there  are no requirements to designate time frames for completing actions and  (2) Treasury officials were unclear about which office in Treasury was  responsible for finalizing or withdrawing proposed rules. Nonetheless, the  Section 311 proposed rules had a significant impact because U.S. financial  institutions took immediate action on the basis of their being announced,  effectively implementing them before they were finalized.
subsections: section_title: Treasury’s Timeline for Issuing Proposed and Final Rules Follows Requirements in the Administrative Procedure Act
paragraphs: Though sometimes delayed, Treasury’s process for issuing proposed and  final rules follows requirements in the Administrative Procedure Act. The  Administrative Procedure Act generally requires that agencies issue a  proposed rule in the Federal Register and that they give interested persons  an opportunity to participate in rule-making through the submission of  written data, views, or arguments. Treasury officials said they reviewed all  comments they received in response to proposed rules. Officials said that  in some cases, they also met with affected financial institutions at the  institutions’ request. Treasury then determines whether to finalize or  withdraw a proposed rule. This step is important because, in contrast to a  proposed rule, a final rule imposes legal requirements on U.S. financial  institutions. However, rule-making requirements of the Administrative  Procedure Act do not place any time frames on officials specifying by  when a proposed rule must be finalized or withdrawn.
section_title: Treasury Took Years to Finalize Some Proposed Rules
paragraphs: In some cases, Treasury took years to finalize proposed rules. For  example, as of February 2008, 3 of the 11 cases it had opened still had not  been finalized, with two open for more than 3 years (44 and 49 months,  respectively) and one open for 5 years (60 months). These cases contrast  sharply with other Section 311 cases where Treasury took as little as 4  months to follow up on a finding of primary money laundering concern or  a proposed rule. Figure 2 shows the length of time proposed rules were  open for all Section 311 actions. Additional information on the date of  issuance of findings of primary money laundering concern, proposed rules,  and final rules for all Section 311 actions is in appendix IV.
Treasury lacks operational guidance and clear lines of authority for  finalizing proposed rules, which may have contributed to the length of  time it took to do so. Federal government management control standards  require that agencies have policies and procedures for implementing  management directives and that agencies clearly define key areas of  responsibility throughout their organization. However, Treasury does not  have policies and procedures that provide operational guidance as to  when proposed rules should be finalized or other procedures that  Treasury staff should follow when implementing Section 311 actions. In  addition, we observed that there are not clear lines of responsibility as to  which office within Treasury should finalize these proposed rules.
Treasury officials said that they follow the law and rule-making  procedures outlined in the Administrative Procedure Act when  implementing proposed rules. However, as mentioned earlier, the law  provides no time frames to which officials are expected to adhere between  the issuance of a notice of proposed rule-making and a final rule. Instead,  Treasury officials told us that the events that occur in a case and the  priorities of the office implementing the rule affect the amount of time that  elapses between when a rule is proposed and when it is finalized. For  example, one FinCEN official said that his work on finalizing a proposed  rule was delayed when another Section 311 case became a higher priority.  The proposed rule in this case was eventually finalized after more than 3  years.
Several additional factors accounted for the interval of time between  issuing findings and proposed rules and finalizing or withdrawing them.  Staff at FinCEN said that often the decision to postpone a case is made  simply because there are not enough resources to concentrate on all of the  cases at hand. For example, one official said that he was working on  resolving the proposed rule-making for one bank when another case  began. Once the second case became a priority, work on the first was put  on hold so that all staff could work on the other case, since only a few  staff within FinCEN work on Section 311 cases, according to the official.
In addition, Treasury officials said, they extended a comment period for  two banks, while in another case, they postponed final action on an  institution for several months pending completion of a law enforcement  investigation. Also contributing to the interval between a proposed rule  and a final or withdrawn rule is that Treasury monitors financial  institutions on an ad hoc basis after a proposed rule is issued. For  example, in one case FinCEN required several months in 2007 to confirm  whether banks under Section 311 restrictions were still in business and an  additional 9 months to withdraw the proposed rule after receiving the  information.
Treasury officials’ uncertainty about clear lines of responsibility added to  delays in finalizing proposed rules. Both FinCEN and TFFC officials told  us Treasury has prepared no written guidance outlining the  responsibilities of each bureau for administering Section 311. In addition,  it appears that the bureaus have not determined their respective  responsibilities in finalizing proposed rules. For example, in February  2008, three proposed rules were open, with two having been open for  more than 4 years beyond the 30-day comment period. Senior TFFC  officials were not aware that these cases were still open until we brought  this fact to their attention. In contrast to TFFC, FinCEN officials were  aware that these cases were open, as their status was listed on FinCEN’s  website. In addition, a lack of clear lines of responsibility led to confusion  over the responsibility for closing these cases. FinCEN officials did not  believe that they were responsible for closing them. They stated that TFI is  responsible for deciding when to decide to finalize or withdraw a  proposed rule, although FinCEN staff may sometimes take the initiative to  suggest that a rule be finalized or postponed. TFFC officials, on the other  hand, said that FinCEN was responsible for finalizing proposed rules.  TFFC officials followed up on the proposed rules that were outstanding  after we discussed the rules with them. Although Treasury stated that it  had started action to withdraw two of the proposed rules prior to our  discussion with TFFC, Treasury documents showed that FinCEN  previously had started to draft a withdrawal notice for one case in 2005  but never completed it, and had started again in October 2007 to draft  withdrawal notices for this and a second case, before issuing them 6  months later.
In response to our observation of unclear lines of authority, senior  FinCEN and TFFC officials said that, pursuant to law and a related  Treasury order, FinCEN is the administrator of the BSA, of which USA  PATRIOT Act amendments are a part. Therefore, FinCEN is technically  responsible for administering Section 311. The Treasury officials added  that FinCEN coordinates closely with TFFC on all aspects of Section 311  rule-making.
section_title: Proposed Rules Had an Immediate Impact on Targeted Countries and Financial Institutions
paragraphs: Despite taking years to finalize in some cases, proposed rules under  Section 311 had an immediate impact on targeted institutions and  jurisdictions. Treasury, State, and Justice officials told us that once a  proposed rule is issued, almost all U.S. financial institutions immediately  implement it voluntarily, stopping financial transactions with designated  financial institutions or jurisdictions. Federal Reserve and Treasury’s  Office of the Comptroller of the Currency officials also said that U.S.  banks often treat proposed Section 311 rules as final and generally cut off  all financial interactions with the targeted institution. Federal Reserve  officials noted that this response to a proposed rule is unusual and, within  the context of BSA requirements, appears to be unique to proposed rules  under Section 311. Officials explained that U.S. banks may be taking this  action because the proposed rule is associated with a finding of primary  money laundering concern and, in many instances, Treasury issued a  finding together with a notice of proposed rule-making. Because it makes  good business sense to protect banks from risks to their reputation and  possible government penalties, banks may discontinue business with other  banks labeled a primary money laundering concern to reduce their  reputational risk. Banks may be concerned that continuing business with a  bank labeled as of “primary money laundering concern” would negatively  impact their reputation. Moreover, U.S. financial institutions must take  publicly available information into account when implementing their anti- money laundering programs and assessing risks. In addition, banks are  generally given a short time frame to come into compliance with rules  under Section 311 once they are finalized, so they may cut off all financial  interaction with a targeted entity when the proposed rule is issued to  ensure that they have minimized their risk of non-compliance.
Foreign government officials and representatives from targeted financial  institutions in countries we visited also agreed that proposed rules have an  immediate impact on these institutions and jurisdictions. Foreign  government officials told us that, following the issuance of proposed rules,  U.S. correspondent accounts of targeted banks were immediately closed.  Bank representatives also told us that the proposed rules had a significant  impact on their business. Bank managers from one targeted institution  stated that the banks’ deposits had decreased by one third of their original  amount 3 days after the proposed rule was issued. In another case, a bank  lost approximately 80 percent of its business as a result of a proposed rule,  according to a bank representative. Attorneys for targeted financial  institutions with whom we spoke emphasized that the amount of time  between the proposed and final rule is important to targeted institutions  since a long delay can weaken a bank financially. One legal representative  noted that long delays between the proposed and final rule can put a bank  in a financial position where it cannot afford to take legal action in U.S.  court opposing special measures if a rule is finalized against it.
section_title: Treasury Views Section 311 as Effective, despite Concerns Expressed by Others about the Process
paragraphs: Treasury views Section 311 restrictions as effective, despite concerns  expressed by others about the process. Section 311 restrictions are  intended to achieve (1) the anti-money laundering goal of isolating target  financial institutions from the U.S. financial system and (2) a broader  national security goal of encouraging foreign governments to strengthen  their anti-money laundering laws and regulations, according to Treasury  officials. Treasury views Section 311 actions as effective in achieving both  goals because U.S. financial institutions respond immediately to proposed  rules, and several foreign governments have strengthened their laws and  regulations in response to proposed rules. However, Treasury does not  view the long-term impact of proposed and final rules, including negative  foreign perceptions of their implementation, as outweighing the  observable achievements of Section 311.
subsections: section_title: U.S. Agencies and Foreign Governments View Section 311 as Effective
paragraphs: U.S. and foreign government officials with whom we spoke said that they  consider Section 311 to be an effective anti-money laundering tool and to  have had a significant impact on target financial institutions and countries.  According to Treasury officials, Section 311 restrictions are intended to  achieve (1) the anti-money laundering goal of isolating target financial  institutions from the U.S. financial system and (2) a broader national  security goal of encouraging foreign governments to strengthen their anti- money laundering laws and regulations.
Several U.S. government officials said that Section 311 was effective in  achieving the first goal of isolating targeted financial institutions or  jurisdictions from the U.S. financial system. For example, one State official  said that the imposition of Section 311 was very effective for the majority  of countries targeted because financial systems in other countries were so  closely tied to the U.S. financial system. Generally, the imposition of a  Section 311 action, beginning with the issuance of a proposed rule, caused  U.S. banks to voluntarily cut off transactions with the targeted financial  institutions even when proposed rules were not finalized. In addition, the  action has a chilling effect on foreign investment through the bank or in  the country because the banking industry pays close attention to the  actions of U.S. financial institutions, according to the official.
Several U.S. and foreign government officials said that Section 311 was  effective in achieving the second goal because it influenced some foreign  governments to strengthen their anti-money laundering laws and  regulations. Officials specifically cited the Latvia, Macau, and Ukraine  cases as examples of this. For example, one Treasury official noted that,  after the Section 311 action occurred, the government of Latvia worked  closely with the U.S. Embassy and State to address problems related to  financial crime which had caused Treasury to issue the Section 311  findings. While foreign government officials in these countries did not  dispute the statement, some said either that their governments had already  started to strengthen their laws and regulations when the Section 311  action occurred, or that they had responded as much or more to other  actions, such as the FATF call for countermeasures, than to the U.S.  restrictions.
section_title: Concerns about Section 311 Exist Both in the United States and Abroad
paragraphs: Despite the achievements observed from initial monitoring of Section 311  actions, we identified several concerns about the impact of Section 311’s  implementation. U.S. embassy officials with whom we spoke and  representatives of one targeted institution indicated that the impact of the  proposed rule continued on the institution and the country even after the  rule had been withdrawn. A number of U.S. banks have avoided holding  correspondent bank accounts with any banks in the country since the  Section 311 restriction was issued, according to embassy officials. They  noted that the issuance of Section 311 creates a large stigma against  banking with both the targeted banks under the proposed rule and other  banks in the country where the proposed rule was targeted. Embassy  officials said that several U.S. businessmen in the country have been told  by U.S. bankers that they decided to withdraw from doing business in the  country because of the Section 311 action. Foreign banking officials stated  that the proposed rule continued to impact the country even though it was  not targeted at the country specifically, and the United States had  acknowledged the government’s efforts in the anti-money laundering  arena. One representative of a foreign institution pointed out that the  consequences of Section 311 action against his country continue and may  not have been intended. For example, American banks continue to be  hesitant to do business with his country’s banks and many have cut off  business altogether. The official said that he believes this is because  American banks do not believe that guidelines are clear as to what anti- money laundering standards they should be following. In order to  minimize the risk of noncompliance with their regulators, many banks  have stopped business with his country’s banks altogether, regardless of  whether they believe that a bank is following U.S. anti-money laundering  standards.
Foreign regulatory and law enforcement agencies in some countries we  visited said that how Section 311 actions were implemented did not  provide them sufficient opportunity or information from U.S. government  sources to prosecute crimes or regulate the targeted banks. For example,  foreign government officials in one country that we visited noted that  there were many steps that the government’s monetary authority could  have undertaken to put pressure on the targeted institution to improve its  anti-money laundering controls. These actions might have solved the  problem to the extent that the U.S. government would not have had to take  action, according to the officials. The officials said that the monetary  authority has the ability to obtain information from financial institutions,  attach conditions to institutional operation, work with the Financial  Intelligence Unit to investigate financial crimes, and, in more drastic  situations, appoint an advisor or director to take over a private bank.  Treasury officials said that it discussed Section 311 actions with foreign  government representatives when appropriate and provided ample notice  that a Section 311 action was forthcoming in some cases. In some  instances, however, such communications would be inappropriate,  according to Treasury officials. Treasury officials noted that it is obligated  under the USA PATRIOT Act to consider “the extent to which that  jurisdiction is characterized by high levels of official or institutional  corruption” when making a finding that a jurisdiction is of primary money  laundering concern.
Justice officials said that in cases where application of Section 311 is  perceived as unsubstantiated, it harms the United States. Countries may be  less likely to cooperate with the U.S. government on other sanctions or  law enforcement matters if they feel that the United States is acting in an  unreasonable or unsubstantiated manner regarding Section 311 or that the  United States cannot articulate the standards used to reach such a  decision. In addition, when countries distrust actions the United States has  taken under Section 311, their trust in U.S. actions in other areas is  undermined. A Justice official noted that there are times when Justice  needs to request the assistance of others based on classified information  and sometimes it cannot immediately reveal this information or its source.  In these cases, Justice needs foreign governments to trust the United  States and act on its requests. If trust in the U.S. government has been  eroded due to actions that appear to be unsubstantiated, then foreign  governments may be less likely to cooperate with Justice investigations.
In addition, some U.S. government officials, foreign government officials,  and representatives of banks in countries we visited, characterized the  imposition of Section 311 special measures as a “political tool” and as  sanctions. They saw Section 311 actions to be more like unilateral U.S.  sanctions used for political purposes than law enforcement mechanisms  used for anti-money laundering purposes. Some similarities between  Section 311 actions and sanctions—such as their being unilateral,  designation of targeted persons or institutions, announcement of these  designations in the Federal Register, prohibition of certain financial  transactions, and denial of access to the U.S. financial system for  designated parties—may contribute to this perception. Also, an official of  Treasury’s Office of the Comptroller of the Currency said that the only  other process in his view that was similar to the Section 311 process is  Treasury’s OFAC sanctions process. Under such sanctions, according to  the official, banks also automatically stop doing business with an  institution once it is cited.
Treasury officials acknowledge that this perception exists but maintain  that Section 311 is an anti-money laundering mechanism, not a sanction. In  testimony in April 2008, the Under Secretary of the Treasury for  Terrorism and Financial Intelligence stated:  Treasury adopted a new strategy of using targeted, conduct-based  financial measures aimed at particular bad actors. I intentionally refer  to these targeted actions as “financial measures” rather than  “sanctions” because the word “sanctions” often evokes such a negative  reaction. These targeted financial measures are proving to be quite  effective, flying in the face of a widely-held historical view that  dismisses sanctions as ineffective, harmful to innocents, or both. In the  case of broad, country-wide sanctions that are often perceived as  political statements, it can be difficult to persuade other governments  and private businesses to join us in taking action.
Treasury reiterated its view that Section 311 actions are not sanctions  despite the perception that they are by some U.S. officials and foreign  governments. Senior Treasury officials regularly work to educate the  public and foreign governments that these actions are not sanctions,  according to Treasury officials. Treasury’s OFAC administers the U.S.  sanctions programs, which operate under very different authorities.
Finally, some U.S. government officials and foreign government officials  we met with in countries where financial institutions had been targeted  felt that there were several financial institutions of greater money  laundering concern that had not been targeted and suggested that  Treasury targeted financial institutions that were politically expedient  rather than financial institutions that were of the greatest concern. For  example, officials we spoke with about two countries we visited where  financial institutions were identified for Section 311 actions told us that  other banks in those countries had anti-money laundering controls that  were as bad as, or worse than the banks that were targeted. They noted  that it was not clear why Treasury chose the banks it chose as targets for  Section 311 action. Treasury officials explained that it was important for  Treasury to have flexibility in implementing Section 311 and that Treasury  could have targeted other banks in one country, for example, that were  larger than those it targeted. However, Treasury did not want to  undermine the country’s financial system but that, by selecting the smaller  banks, it would still send the message to government authorities that they  needed to reform the country’s anti-money laundering systems.
section_title: Conclusion
paragraphs: U.S. government officials consider Section 311 to be an effective tool in  restricting access to the U.S. financial markets for financial institutions or  jurisdictions that are of primary money laundering concern and in  encouraging foreign governments to strengthen their anti-money  laundering laws and regulations. While using Section 311 has helped  achieve success towards these goals in specific instances, shortcomings in  Treasury’s implementation of the law may be preventing the law from  achieving a greater potential. Without written operational guidelines to  clarify when to complete the Section 311 actions or clear lines of authority  for which office is responsible for completing the action, Treasury has  taken years to complete the Section 311 process for certain cases. Because  a proposed rule applying Section 311 in practice has had the same effect as  a final rule, Treasury may lack incentive to finalize or withdraw such rules.  More expeditious completion of Section 311 cases could be an important  counterbalance to concerns about the Section 311 process by affected  jurisdictions, financial institutions, and other parties.
section_title: Recommendation for Executive Action
paragraphs: In order to improve implementation of the Section 311 process, we  recommend that the Secretary of the Treasury establish implementing  guidance for Section 311 of the USA PATRIOT Act. This guidance should  specify the responsibilities and activities of offices within Treasury,  including the Office of Terrorist Financing and Financial Crime and the  Financial Crimes Enforcement Network, for implementing and finalizing  Section 311 actions.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to Justice, State, and Treasury. Justice  and State had no comments on this report.
Treasury said that it will take action to clarify its Section 311 processes in  response to this report’s recommendation, even though it emphasized that  the current coordination and implementation of Section 311 within  Treasury components today has been significantly improved. It noted that  some of the report’s conclusions were based on actions that occurred  years ago and that current coordination and implementation of Section  311 within components of Treasury’s Office of Terrorism and Financial  Intelligence have addressed those actions. Although Treasury said that it  has well-defined mechanisms in place to implement Section 311, it  nonetheless stated that the Under Secretary of the Office of Terrorism and  Financial Intelligence will ensure that mechanisms for implementing  Section 311 are clarified in response to this report and its  recommendation.
We appreciate Treasury’s commitment to continuously improve the  implementation of Section 311 as an important tool against money  laundering and believe this is responsive to our recommendation regarding  the need to specify the responsibilities and activities of offices within  Treasury for implementing and finalizing Section 311 actions. As our  report noted, Treasury has modified the Section 311 process since its  inception, and the current process for its use differs in some significant  ways from the process that Treasury used for previous Section 311 cases.  We have made some additional modifications in our report to reflect  technical comments that Treasury provided for clarification.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to interested congressional  committees, and the U.S. Attorney General, and the Secretaries of State  and Treasury. We will also make copies available to others upon request.  In addition, this report will be available at no charge on the GAO Web site  at http://www.gao.gov. If you or your staff has any questions concerning this  report, please contact me at (202) 512-4347 or at yagerl@gao.gov. Contact  points for our Office of Congressional Relations and Public Affairs may be  found on the last page of this report. Staff acknowledgments are listed in  appendix VI.
section_title: Appendix I: Scope and Methodology
paragraphs: To examine the process U.S. agencies used to implement the USA  PATRIOT Act Section 311 restrictions against targeted financial  institutions and countries, we interviewed knowledgeable officials from  the Treasury offices of Terrorist Financing and Financial Crimes (TFFC)  and the Financial Crimes Enforcement Network (FinCEN), as well as  officials from State, Justice, and the U.S. Federal Reserve System who had  been involved in the Section 311 process. We reviewed Section 311 of the  USA PATRIOT Act and the Administrative Procedure Act in order to  identify mandated requirements in law that Treasury must follow when it  issues and finalizes a proposed rule. We focused this performance audit on  locations where the U.S. government has targeted financial institutions or  jurisdictions for Section 311 actions. These were Belarus, Burma, Latvia,  Macau, Nauru, Syria, Turkish Republic of Northern Cyprus, and Ukraine.  We also met with foreign government officials in Riga Latvia; Kyiv,  Ukraine; and Macau and Hong Kong, China; as well as with representatives  of financial institutions in these countries that had been targeted for  Section 311 actions. These countries provided examples of different  applications of Section 311, specifically a targeted jurisdiction and  targeted financial institutions where Section 311 restrictions were finalized  and withdrawn. We developed a data collection instrument for Treasury to  more quickly identify relevant documents, including memoranda and  emails. This helped us confirm that Treasury followed the steps in its  Section 311 process for each of the cases for Belarus, Burma, Latvia,  Macau, Nauru, Syria, Turkish Republic of Northern Cyprus, and Ukraine.  We also reviewed unclassified and classified documents, including  financial and investigative records, that Treasury compiled in its  evidentiary files for each case; State cable traffic and its annual  International Control Strategy Report on money laundering and financial  crimes; and reports and guidance issued by the multinational Financial  Action Task Force.
To assess the process Treasury used to determine whether to finalize or  withdraw a proposed rule, we interviewed knowledgeable officials from  TFFC and FinCEN, as well as officials from State, Justice, and the Federal  Reserve who were involved in the 311 process. We also discussed this  aspect of the Section 311 process with representatives of relevant financial  institutions in New York and Washington, D.C.; Riga, Latvia; Kyiv, Ukraine;  and Macau, China. We reviewed public comments on proposed rules that  were issued under USA PATRIOT Act, Section 311. We also met with  officials of Ernst and Young, and Deloitte Touche Tomatsu, two  independent audit organizations that were hired by targeted financial  institutions to help them reform their anti-money laundering controls. We  reviewed documents identified by Treasury through our document  collection instrument as being key documents related to the  implementation of Section 311 in Belarus, Burma, Latvia, Macau, Nauru,  Syria, Turkish Republic of Northern Cyprus, and Ukraine.
To determine how Treasury assessed the impact of Section 311  restrictions, we spoke with knowledgeable officials from TFFC and  FinCEN as well as officials from State and Justice who had been involved  in the 311 process. We also met with foreign government officials in Riga,  Latvia; Kyiv, Ukraine; and Macau and Hong Kong, China; as well as with  representatives of financial institutions in Latvia, Ukraine, and Macau that  were impacted by 311 actions. Also, we reviewed documents identified by  Treasury through our document collection instrument as being key  documents related to the implementation of Section 311 in Belarus,  Burma, Latvia, Macau, Nauru, Syria, Turkish Republic of Northern Cyprus,  and Ukraine. We also reviewed documentation, including sensitive and  classified cable traffic, which State provided for several 311 cases. State  and Treasury provided us with a combination of classified and unclassified  documents related to the cases.
We conducted this performance audit from September 2007 through  September 2008 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
section_title: Appendix II: Potentially Relevant Factors for Designating a Jurisdiction or Institution as of Primary Money Laundering Concern
paragraphs: The following table lists information the Secretary of the Treasury is  required to consider, in addition to any information that the Secretary  determines is relevant, when designating a jurisdiction or institution to be  of primary money laundering concern under USA PATRIOT Act Section  311.
section_title: Appendix III: Factors to Consider in Selecting Special Measures
paragraphs: The following are the factors the Secretary of the Treasury is required to  consider when selecting special measures for jurisdictions, financial  institutions, international transactions, or types of accounts of primary  money laundering concern under USA PATRIOT Act Section 311.  1.  Whether similar action has been or is being taken by other nations or  multilateral groups.  2.  Whether the imposition of any particular special measure would create  a significant competitive disadvantage, including any undue cost or  burden associated with compliance for financial institutions organized  or licensed in the United States.  3.  The extent to which the action or the timing of the action would have a  significant adverse systemic impact on the international payment,  clearance, and settlement system, or on legitimate business activities  involving the particular jurisdiction, institution, class of transactions,  or type of account.  4.  The effect of the action on United States national security and foreign  policy.
section_title: Appendix IV: Additional Information on Section 311 Cases
paragraphs: The following table shows the dates for each finding of money laundering  concern, proposed rule, and final rule issued in cases to-date where the  U.S. government has applied USA PATRIOT Act Section 311.
section_title: Appendix V: Comments from the Department of the Treasury
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
paragraphs: Loren Yager at (202) 512-4347 or yagerl@gao.gov.
subsections: section_title: Staff Acknowledgments
paragraphs: Anthony P. Moran, Assistant Director; Jeffrey D. Phillips; Lucia DeMaio;  Karen A. Deans; Etana Finkler; Mary E. Moutsos; Mark C. Speight; and  David S. Dornish made key contributions to this report.