    [Senate Hearing 107-682]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 107-682

      TREASURY AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL YEAR 2003
    =======================================================================

                                    HEARINGS

                                    before a

                              SUBCOMMITTEE OF THE

                COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                          ONE HUNDRED SEVENTH CONGRESS

                                 SECOND SESSION

                                       on

                               H.R. 5120/S. 2740

     AN ACT MAKING APPROPRIATIONS FOR THE TREASURY DEPARTMENT, THE UNITED
       STATES POSTAL SERVICE, THE EXECUTIVE OFFICE OF THE PRESIDENT, AND
     CERTAIN INDEPENDENT AGENCIES FOR THE FISCAL YEAR ENDING SEPTEMBER 30,
                          2003, AND FOR OTHER PURPOSES

                                   __________

                           Department of the Treasury
                       Executive Office of the President

                                   __________

             Printed for the use of the Committee on Appropriations

     Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                     senate

                                     ______

                           U. S. GOVERNMENT PRINTING OFFICE
    78-492                          WASHINGTON : 2002
    ___________________________________________________________________________
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                          COMMITTEE ON APPROPRIATIONS

                    ROBERT C. BYRD, West Virginia, Chairman
    DANIEL K. INOUYE, Hawaii             TED STEVENS, Alaska
    ERNEST F. HOLLINGS, South Carolina   THAD COCHRAN, Mississippi
    PATRICK J. LEAHY, Vermont            ARLEN SPECTER, Pennsylvania
    TOM HARKIN, Iowa                     PETE V. DOMENICI, New Mexico
    BARBARA A. MIKULSKI, Maryland        CHRISTOPHER S. BOND, Missouri
    HARRY REID, Nevada                   MITCH McCONNELL, Kentucky
    HERB KOHL, Wisconsin                 CONRAD BURNS, Montana
    PATTY MURRAY, Washington             RICHARD C. SHELBY, Alabama
    BYRON L. DORGAN, North Dakota        JUDD GREGG, New Hampshire
    DIANNE FEINSTEIN, California         ROBERT F. BENNETT, Utah
    RICHARD J. DURBIN, Illinois          BEN NIGHTHORSE CAMPBELL, Colorado
    TIM JOHNSON, South Dakota            LARRY CRAIG, Idaho
    MARY L. LANDRIEU, Louisiana          KAY BAILEY HUTCHISON, Texas
    JACK REED, Rhode Island              MIKE DeWINE, Ohio
                      Terrence E. Sauvain, Staff Director
                     Charles Kieffer, Deputy Staff Director
                   Steven J. Cortese, Minority Staff Director
                Lisa Sutherland, Minority Deputy Staff Director
                                     ------

                Subcommittee on Treasury and General Government

                    BYRON L. DORGAN, North Dakota, Chairman
    BARBARA A. MIKULSKI, Maryland        BEN NIGHTHORSE CAMPBELL, Colorado
    MARY L. LANDRIEU, Louisiana          RICHARD C. SHELBY, Alabama
    JACK REED, Rhode Island              MIKE DeWINE, Ohio
    ROBERT C. BYRD, West Virginia        TED STEVENS, Alaska
      (ex officio)                         (ex officio)

                               Professional Staff

                                  Chip Walgren
                                 Nicole Rutberg
                             Pat Raymond (Minority)
                            Lula Edwards (Minority)

                                C O N T E N T S

                                  ----------

                            Thursday, March 14, 2002

                                                                       Page

    Department of the Treasury: Office of the Secretary..............     1

                           Wednesday, March 20, 2002

    Executive Office of the President: Office of Management and
      Budget.........................................................    53

                           Wednesday, April 17, 2002

    Department of the Treasury: Office of Enforcement................    95
        U.S. Secret Service..........................................   112
        Bureau of Alcohol, Tobacco and Firearms......................   126
        Financial Crimes Enforcement Network.........................   143
        Federal Law Enforcement Training Center......................   152

                            Thursday, April 18, 2002

    Department of the Treasury: U.S. Customs Service.................   193

                           Wednesday, April 24, 2002

    Executive Office of the President: Office of National Drug
      Control Policy.................................................   237

                            Wednesday, May 15, 2002

    Department of the Treasury: Internal Revenue Service.............   293

      TREASURY AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL YEAR 2003

                                  ----------

                            THURSDAY, MARCH 14, 2002

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 2:21 p.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Byron L. Dorgan (chairman)
    presiding.
        Present: Senators Dorgan and Reed.

                           DEPARTMENT OF THE TREASURY

                            Office of the Secretary

    STATEMENT OF HON. PAUL H. O'NEILL, SECRETARY
    ACCOMPANIED BY EDWARD KINGMAN, ASSISTANT SECRETARY FOR MANAGEMENT AND
                CHIEF FINANCIAL OFFICER

                                opening remarks

        Senator Dorgan. The hearing will come to order. First, let
    me apologize to the Secretary. We had a vote that is still
    underway and we were delayed. Some of my colleagues will be
    here shortly, but I want to begin the hearing knowing that your
    time requirements are tight. We thank you, Mr. Secretary, for
    joining us today. This is the hearing of the Subcommittee on
    Treasury and General Government Appropriations subcommittee to
    talk about funding for those functions that exist in your
    agency.
        Let me make just a couple of brief comments. I will put my
    entire statement in the record and then we will hear from you,
    Mr. Secretary, and have some questions. This hearing kickoff
    the subcommittee's series of hearings on President Bush's
    Fiscal Year 2003 budget request for the Treasury Department and
    other agencies under our jurisdiction.
        To no one's surprise, this is going to be a very difficult
    budget year. The anticipated budget surpluses have vanished and
    our resources are stretched thin. We have had an economic
    slowdown, a recession of sorts. We are not sure how deep and
    whether we are completely out of that recession, but we also
    face a war against terrorism, both at home and abroad. So
    things have changed dramatically since the last time we met.
        The Treasury Department is a key player in all of these
    activities. At a hearing 2 years ago I held up an orange rubber
    cone and talked about northern border security and the fact
    that at many ports of entry on the northern border that rubber
    cone represented America's security after 10:00 at night. I
    proposed early last year a northern border initiative and
    included $25 million in the budget to deal with that.
        September 11, of course, intervened and we not only
    provided that $25 million but also additional funding. That was
    made available for the Customs Service, the Border Patrol, and
    the INS. So we have had a lot to do with respect to the issue
    of border security. Mr. Secretary, you and I have had some
    meetings about the issue of the Customs Service and border
    security and the level of staffing that is required. I think
    that we on this subcommittee want to work with you to reach the
    right result in all of those areas.
        One of the things that concerns me about this budget
    request, and we will want to talk about at some length today,
    is the Customs Service budget which relies in part, on a $250
    million fee. That fee to deal with the issue of ACE and other
    related issues, in many ways, is a substitute for a tax
    increase. Congress has rejected similar fees on previous
    occasions and will again this year likely reject it. So the
    question is, if that funding mechanism is not approved, what
    will be the method by which we fund these issues?
        I am going to talk a little today, Mr. Secretary, in my
    questions about the issue of tax shelter abuses and the amount
    of resources you believe we ought to provide to combat that
    because I fear that what we have is a proliferation of tax
    shelter abuses. Having chaired some of the Enron hearings and
    knowing that hundreds of their subsidiaries have been run out
    of one post office box in the Cayman Islands, I am very
    concerned about what has been happening with respect to these
    tax shelter abuses. There have been some announcements by the
    Treasury Department that have concerned me so I want to talk
    about that.
        I think accounting firms, lawyers, and others have become
    very aggressive in trying to find ways for their clients to
    avoid taxes. In fact overly aggressive in my opinion that
    requires us to provide the resources necessary to try to thwart
    this kind of activity so that those big institutions can begin
    to pay their fair share of the cost of Government for America
    as well. So I want to talk a little about that today.
        I want to congratulate you, Mr. Secretary, on another
    matter, for your willingness to take a good look at the issue
    of debt relief and development in the Third World. Yesterday,
    Mr. Bono of U2 came by. He has met with many people in this
    town. He has a great passion, of course, for these issues, and
    he spoke very highly of your focus and the discussions
    apparently you have had. He is a very articulate and
    interesting person.
        I understand that you are going to be in Africa in May
    taking a look at some of these issues dealing with the plague
    of AIDS in Africa, which is also something this country has to
    be greatly concerned about.

                               prepared statement

        So with that as a brief introduction, let me ask Senator
    Reed if he has some introductory comments and then we will hear
    from the Secretary.
        [The statement follows:]

                 Prepared Statement of Senator Byron L. Dorgan

        Welcome Mr. Secretary. We are pleased that you are here today to
    kick-off this Subcommittee's series of hearings on President Bush's
    fiscal year 2003 budget request for the Treasury Department and other
    agencies under our jurisdiction.
        To no one's surprise this will be a difficult budget year. The
    anticipated budget surpluses have vanished and our resources are
    stretched thin by the war against terrorism both at home and abroad.
        The Treasury Department is a key player in this war.
        At a subcommittee hearing 2 years ago, I held up an orange rubber
    traffic cone and stated that the cone was our nighttime guardian at far
    too many ports of entry along our northern border. I used the orange
    cone to illustrate a chronic lack of attention to security resources on
    that 4,000 mile long border. The attempted incursion by Ressam--the so-
    called Millenium bomber--at a border crossing in Washington State 2
    years ago served as a wake-up call. The tragic events of September 11
    brought the needs of our northern border into clear focus.
        I am pleased that the Administration has listened to the concerns
    of northern border Members and others regarding the need for additional
    resources along this vast frontier. Indeed, page 21 of the President's
    budget document has a color photo of a northern border point of entry
    patrolled by orange cones.
        I think we can jointly state today that the era of the orange
    traffic cone is over.
        It took us awhile to get to this point, however.
        You and I had a difference of opinion about the need for the
    Customs Service to have additional people and resources post September
    11. I understand your belief that a business case must be made before
    dumping more money on a given program. But I suggest that law
    enforcement requirements should be justified differently than those for
    office supplies or computer systems. I do not think you can make a
    sound ``business'' case for placing two law enforcement officers at
    non-24 hour ports-of-entry which have fewer than 50 cars entering the
    country on a given day. But you certainly can make a strong ``national
    security'' case for the enhanced presence of those law enforcement
    personnel.
        That said, I think we can agree that the resources the Congress
    provided to the Customs Service in December appear to be well targeted.
    And I agree that it probably makes sense for us to pause this year and
    allow Customs to hire the new personnel and get the new technology in
    place before we attempt to add additional resources.
        But it seems to me that the message still may not be getting
    through. Your budget request to fund a significant portion of the
    Customs Service budget relies on a $250 million tax increase. Yes--it
    is couched as a ``user fee''--but that is merely a tax increase under a
    different name. When the last Administration tried to fund part of
    Customs operations using this increase, Congress did not go along. I
    doubt that we will this time. But times have changed since then. We
    face a war against terrorism at home. Customs and Treasury are key
    players in this war. The Defense Department and Justice Department are
    budgeted for significant, ``hard dollar'' increases. Yet we appear to
    be playing budgetary games with the Customs Service. To me, this
    demonstrates a lack of seriousness on the part of the Treasury
    Department when it comes to the war on terrorism which I will want to
    further explore with you when we get to the questions.
        Mr. Secretary, I will also want to focus my questions on the
    Administration's apparent lack of zeal when it comes to pursing tax
    shelter abuses. If you need additional resources to combat the war on
    terrorism, I suggest you and your staff review this policy. The last
    Administration aggressively started this process, yet you and your team
    have changed course. For instance, I have read that Enron was able to
    operate more than 600 firms through one post office box in the Cayman
    Islands. Cracking down on this tax avoidance is one way to find the
    funds to fight the war while at the same time ensuring a level of tax
    fairness for the American taxpayer.
        Finally, on the issue of appropriate staffing and policy direction
    when operating within limited budgets, I want to get into the targeting
    of your Department's limited resources. Specifically, I want to address
    the aggressive pursuit of U.S. citizens traveling to Cuba by the Office
    of Foreign Assets Control instead of the aggressive pursuit of foreign
    terrorists' assets.
        We welcome you here this afternoon and look forward to your
    testimony. But first, let me turn to my Ranking Member, Senator
    Campbell, for any remarks he wishes to make.

                         STATEMENT OF SENATOR JACK REED

        Senator Reed. Thank you, Mr. Chairman, and thank you, Mr.
    Secretary. Welcome. We appreciate your appearance this
    afternoon. We all understand the challenges this year in the
    budget because of many factors, not the least of which is the
    September 11 attack and its aftermath.

                               PREPARED STATEMENT

        Indeed, that attack has underscored the many law
    enforcement responsibilities that the Department of Treasury
    has. I know that there has been some increases particularly in
    those areas, but I would suspect that we still have significant
    challenges facing IRS and Customs modernization, also bringing
    online and increasing the Financial Crimes Enforcement Network.
    There is a host of other issues that I would like to deal with
    in my questions, but thank you very much, Mr. Secretary, for
    joining us this afternoon.
        [The statement follows:]

                    Prepared Statement of Senator Jack Reed

        Thank you Mr. Chairman. I appreciate the appearance of Secretary
    O'Neill before the Subcommittee this afternoon, so that we may get a
    better picture of what the Administration believes are its priorities
    for the coming year at the Treasury Department.
        I recognize the tightness of budgets this year, and I appreciate
    that the Department does have an overall increase, particularly in
    homeland defense areas. It is critical that we increase our efforts at
    protecting our borders through Customs, as well as aggressively go
    after financial terrorist infrastructures through the Financial Crimes
    Enforcement Network (FinCen), and just as important, prevent terrorists
    from gaining access to firearms.
        However, I believe that we probably still have many areas where
    there are a lack of increases, which are critical to other domestic
    needs. This includes continued IRS and Customs modernization projects.
    In addition, I do have several other issues that I would like to pursue
    with the Secretary.

        Senator Dorgan. Mr. Secretary, you may proceed. We will
    include your entire statement as a part of the record. You may
    summarize. And if you would introduce your colleague as well we
    would appreciate it.

                      STATEMENT OF SECRETARY PAUL O'NEILL

        Secretary O'Neill. With me today is Assistant Secretary
    Kingman. I am happy for him to be here. I am happy for him to
    be on board. He is a very talented individual. He has had years
    of progressively responsible experience in the private sector.
    I think he is on his way to making a great contribution in the
    public sector as well.
        Mr. Chairman, and Senator Reed, thank you very much for
    inviting us here today to testify on the budget. I would like
    to insert my full statement, as you suggest, in the record and
    then I will make an abbreviated statement just for openers.
        In the year since I spoke to this subcommittee the world
    has changed. The change is very evident at the U.S. Treasury
    where we are center stage for some of the toughest challenges
    facing our country. Treasury's top three priorities are
    familiar to every American. First, we are responsible for
    implementing the President's domestic and international
    economic security agenda, creating jobs at home and boosting
    economic growth abroad.
        Second, Treasury is securing our homeland through the work
    of the U.S. Customs Service, the Secret Service, the Bureau of
    Alcohol, Tobacco, and Firearms, and the Federal Law Enforcement
    Training Center.
        Third, the Treasury is leading the financial war on
    terrorism. We have already blocked more than $34 million in
    terrorist assets and our allies around the world have blocked
    more than $70 million.
        I know that this committee appreciates the importance of
    these tasks and in a moment I will highlight six critical
    budget items that we need most to achieve our objectives for
    the year. But I would first like to comment on our efforts to
    make Treasury a world-class organization because my top
    priority as Secretary of the Treasury is to lead this
    organization to excellence.
        A world-class organization treats all of its people with
    dignity and respect, gives them the tools to do meaningful
    work, and recognizes them for their accomplishments. It sets
    goals at the limits of possibility and then stretches to meet
    them, measuring results, not just efforts. At Treasury, we are
    a long way from achieving true excellence. Computer systems do
    not lead excellence. Dollars do not lead excellence. People
    lead excellence.
        We need to develop a team of people who know what world-
    class looks like. This is never easy, but it is especially
    difficult for a Government enterprise which has so many
    constraints on its options.
        The first thing I did when I got this job was to ask every
    one of our bureaus and offices to review what they do and why
    they do it. The review is not finished but we are already
    making progress. For example, early in the review process I
    discovered that every year it takes 5 months to close the books
    of the department. That just did not make any sense to me. How
    can we say to people that their work is important when they are
    required to rework the numbers for 5 months every year?
        I know from experience that companies as large as the
    Treasury Department close their books in a matter of days. So I
    asked our people to figure out how to close the books faster.
    We examined the process, we streamlined it, and now we are
    closing the books in an average of 3 days.
        I will give another example. When we looked at the IRS
    large case audits we found that 40 percent of the resources
    were spent on compliance issues for just two regulations: the
    research and experimentation tax credit and the capitalization
    guidance. We resolved the confusion in these regulations and
    now we can devote those audit resources to more pressing,
    important issues.
        Of course, this is just plucking hairs off the tax code
    beast. Ideally we would revamp the whole thing to make it
    easier, to make it possible in fact to administer the tax code
    at a reasonable cost for taxpayers and the Government alike.
        These examples show a few early efforts to find and fix
    institutional problems at the Treasury. But many of our
    problems and their solutions are buried beneath decades of
    business as usual bad habits. For example, over the years there
    have been at least 29 audit findings showing material
    weaknesses in Treasury operations, some dating back to the
    1980s. Few have been corrected, and we find this unacceptable.
        The Treasury management team is dedicated to diagnosing our
    problems and implementing step by step solutions that produce
    real measurable value for the American taxpayers, our
    shareholders. We do not have all the answers yet. In fact I do
    not think we even have all the questions yet, but we intend to
    keep you, the Congress, our Board of Directors, fully informed
    of our progress.
        Let me comment further on some of the most important
    requests in our budget for the coming year. First in the area
    of information technology, this year's budget includes
    significant increases for two information technology projects
    in the Treasury Department: the IRS business systems
    modernization and the Customs Service automated commercial
    environment. We are continuing these projects but we are also
    relooking at them.
        We are asking fundamental questions such as, is IT platform
    design part of the core Treasury mission or central competency?
    If not, why are we designing and building these systems in-
    house? Why are we buying computer hardware that is likely to be
    obsolete by the time it is in full use? Can we streamline
    deployment so that we see a return on investment sooner and so
    that we avoid the risk of ugly surprises when we flip the
    switch at the end?
        We do need to invest in these technology upgrades to begin
    raising department productivity to 21 century levels, just as
    the private sector has raised productivity through technology
    investment over the past decade. Higher productivity means
    taxpayers get more service for less money. But we are not
    stamping approval on projects because they are already
    underway.
        Second on the subject of resource levels for the Treasury
    Department law enforcement activities. As I said, much of
    homeland security takes place at Treasury. I believe that our
    budget represents the funding levels necessary to accomplish
    the current missions of the Treasury law enforcement activity.
    As the committee knows, outside of our proposed business
    strategy adjustment, our fiscal year 2003 request maintains the
    current program levels of Treasury law enforcement.
        As I testified last year, if there is a solid business case
    to increase the funding level for a Treasury program I will be
    the first to request that increase. But I do not believe in
    spending tax dollars when we have no way of measuring whether
    we are successful. Every dollar spent on Treasury law
    enforcement we believe should produce a more secure homeland.
        Third, with regard to improving the performance of the IRS,
    under the leadership of Commissioner Rossotti, the IRS has made
    progress toward improving customer satisfaction and improving
    compliance rates. While the Commissioner and I have no
    intention of returning the IRS to peak employment levels, we do
    feel that the IRS needs to increase its staffing in order to
    provide America's taxpayers with top quality service. This
    year's funding will enable us to better promote electronic
    filing, stabilize audit rates, and increase IRS efforts to
    combat money laundering.
        In the area of information technology modernization, this
    year's budget includes significant increases for the two
    information technology projects that I have already mentioned.
    We are just now beginning to see the benefits of these efforts,
    and we must maintain the momentum with full funding in order to
    achieve IRS and Customs core missions.
        The Treasury Departmental Offices develop the Executive
    Branch's domestic and international fiscal policy, oversee
    nearly 40 percent of Federal law enforcement, and manage the
    Government's finances, all on about 1 percent of the overall
    Treasury budget. In fiscal year 2002, the Departmental Offices
    hit a 5 percent shortfall in mandatory costs and as a result we
    put into place tighter management processes for all staffing
    and expenses. We have instituted a hiring chill, cut travel,
    and streamlined procurement. The funding level we are
    requesting is the minimum to maintain the effectiveness of the
    Department Offices.
        On the issue of, Mr. Chairman, a Customs user fee, as you
    said this budget does propose a $250 million increase in the
    user fee to fund an equivalent amount of Customs Service
    operations for enhanced homeland security. These user fees have
    not increased since 1985, and based on inflation and our
    increased scrutiny of incoming air and sea passengers since
    September 11 I believe this increase is a reasonable fee to be
    charged. We need to enact it by July 1, 2002 to ensure
    uninterrupted Customs functioning.
        Finally, with regard to the business strategy adjustment
    that I know the committee will have some interest in,
    throughout my career in both business and Government I have
    challenged my organization to reduce cost through increased
    efficiency. I started this cost-cutting process last year at
    the Departmental Offices. This year I have asked each Treasury
    bureau to follow suit and examine the way they do business in
    order to identify and eliminate low value activities.
    Specifically, I have asked everyone to identify savings equal
    to 25 percent of the Administration's projected non-pay
    inflationary increases.

                               PREPARED STATEMENT

        I thank you for your consideration today. With your support
    we can and we will make the United States Treasury Department a
    world-class organization that will be a model for Government
    and deserving of support from America's taxpayers. Finally, Mr.
    Chairman and Mr. Reed, I would say to you, we will know we have
    arrived when the private sector comes to see how to do things
    better.
        [The statement follows:]

                Prepared Statement of Secretary Paul H. O'Neill

        Mr. Chairman, Senator Campbell, and members of the Committee, I
    appreciate this opportunity to discuss Treasury's fiscal year 2003
    budget request.
        As you know, Treasury plays a crucial role in the core functions of
    government, and serves as tax administrator, revenue collector, law
    enforcer, financial manager, as well as leading policymaker for tax
    policy, banking policy and international and domestic economic policy.
        For fiscal year 2003, we are proposing a performance budget that
    will enable Treasury to continue to provide the American public with
    both the service and program reliability it expects and deserves. I
    have challenged each of my bureaus to carefully examine their
    operations to achieve improved effectiveness in business practices. I
    expect that Treasury can realize reasonable savings from this type of
    review through reviewing programmatic efforts on a continual basis and
    reducing or removing those producing little or no value.
        Our budget request totals $16.654 billion for all operations.
    Taking into account the offset from the proposed $250 million dedicated
    toward Customs commercial operations, our program level totals $16.903
    billion, compared to $16.5 billion appropriated in fiscal year 2002,
    and $14.8 billion in fiscal year 2001.
        Mr. Chairman, the budget request includes the impact of proposed
    legislation for retirement and health costs for Federal employees and I
    will speak to that proposal later in my statement. However, I do want
    to note that the budget presents for the Committee the comparative
    information on this proposal for prior fiscal years, in order to not
    materially affect the real changes being proposed and reviewed by the
    Committee for fiscal year 2003.
        We have provided the Committee with a detailed breakdown and
    justification for Treasury's fiscal year 2003 budget request. I would
    like to take the opportunity today to highlight four important areas of
    focus for fiscal year 2003.
        Treasury's fiscal year 2003 budget recognizes the importance of,
    and provides adequate and appropriate funding for, the following:
      --Protecting our Nation from Terrorists and Terrorist Activity;
      --Stewarding Change through Technological Improvement;
      --Improving Customer Service & Compliance at the Internal Revenue
            Service;
      --Achieving the President's Management Agenda.
        FIRST.--In light of the recent events concerning terrorism in the
    U.S., I would like to discuss Treasury's role in protecting our Nation
    from terrorists and terrorist activity.
        The tragic events of September 11, 2001 sparked a Nation-wide
    effort to prevent and combat terrorism. Treasury has been at the
    forefront of these efforts with all of its law enforcement bureaus
    participating in counter-terrorism functions, including internal bureau
    and agency security and ensuring the continuity of operations. We bear
    the responsibility of protecting the Nation on three fronts:
      --At its borders;
      --In the banks; and
      --At home.
        In fiscal year 2002, Treasury received $683 million in additional
    counter-terrorism funding through the Emergency Supplemental. In the
    proposed fiscal year 2003 budget, the follow-on costs associated with
    the funding provided in fiscal year 2002 have been estimated in the
    amount of $518 million.
        Our nation's first line of defense against terrorists and terrorist
    activity is the security of our borders.
        Following the attacks of September 11, the border threat level was
    raised from Alert Level 4 (normal operations) to the highest level,
    Alert Level 1 (Code Red). The Customs Service, our Nation's first line
    of defense at 301 ports of entry into the Nation, has made the fight
    against terrorism its number one priority. In response to this
    heightened state of alert, Customs has hired additional personnel to
    staff our borders and seaports, and has engaged members of the National
    Guard to increase security around our Nation's borders.
        Customs received almost $400 million in new fiscal year 2002
    appropriations for addressing homeland security matters (in addition to
    $65 million provided through separate presidential releases). Of this
    amount, $235 million is being used for a combination of personnel and
    new equipment in ports of entry on the northern border and at critical
    seaports, along with selected investments on the southern land border.
        Customs has set out an expenditure plan for this funding for
    Congressional review that responds to both short and long-term security
    concerns. The recurring cost of labor-intensive efforts will be coupled
    with technology investments that will increase efficiencies and enhance
    the level and degree of scrutiny for various ports of entry.
        The fiscal year 2003 proposal for the U.S. Customs Service includes
    $365 million to fund counter-terrorism efforts in the second year,
    continuing to focus principally on Northern Border and Marine Port
    security efforts, but also addressing other areas of vulnerability,
    such as: international money laundering, security infrastructure,
    southwest border staffing, and funding for the backup of commercial
    data facilities. Ports of Entry (POE) have been identified as main
    entry points for terrorists as well as the most likely avenue for them
    to introduce implements of terror into the country. The danger this
    presents has become a focus for the fiscal year 2003 request.
        In fiscal year 2003, Customs will add 626 new positions, in
    addition to the 1,075 positions allocated in fiscal year 2002, to
    vulnerable locations on the northern and southern land borders, and in
    seaports with the highest volume of containerized cargo. They will
    counter the terrorist threat while facilitating legitimate trade and
    travel.
        The fiscal year 2003 request also includes a large complement of
    inspection and targeting technology (including a modest research
    component), a further expansion of the Advance Passenger Information
    System (APIS) to real-time processing capability, and technology to
    expedite the passage of goods imported by highly trusted entities.
        Finally, low volume Ports of Entry would be protected through
    ``hardening'' measures including physical barriers, sensors and
    monitoring devices to prevent and detect unauthorized crossings.
    Customs serves as the lead agency for Operations Green Quest and Shield
    America. These multi-agency task forces are dedicated to: (1)
    identifying, disrupting, and dismantling terrorist financing sources
    and systems, and (2) ensuring that munitions and sensitive U.S.
    technologies are not unlawfully exported into the hands of terrorists.
    The fiscal year 2003 budget supports and maintains these critical task
    forces.
        Equally important with protecting our Nation's borders is deterring
    the terrorists from being able to finance their operations.
        Treasury's Financial Crimes Enforcement Network (FinCEN), along
    with the Office of Foreign Assets Control (OFAC), lead the Nation's war
    against global terrorism financing.
        In his November 7 address at Treasury, President Bush proclaimed
    that ``the first strike in the war against terror targeted the
    terrorists' financial support.'' Following the attacks, FinCEN and OFAC
    were able to identify and stymie numerous supporters of the Al Qaida
    and other terrorist organizations by freezing $34 million in terrorist
    assets and working with allies overseas to freeze over $45 million.
    Funding levels proposed for fiscal year 2003 will better enable FinCEN
    to sustain and maintain these activities.
        While leading protection efforts on the borders and in the banks,
    Treasury has also placed an increased emphasis on security within the
    Nation in the protection of our Nation's leaders, foreign dignitaries
    and, ultimately, our Nation's freedom. The United States Secret
    Service, Bureau of Alcohol, Tobacco and Firearms, and Federal Law
    Enforcement Training Center are at the forefront of these efforts.
        The United States Secret Service is the only Federal Government
    entity charged with the challenging mission of protecting the President
    and foreign dignitaries. In response to increasing homeland security
    threats, the Secret Service has been assigned new protectees and has
    seen significant workload increases in its protective functions. The
    fiscal year 2003 budget provides funding to enable the Secret Service
    to meet its protective requirements, including funding for travel,
    overtime, and follow-on costs associated with Special Agents and
    Uniformed Division Officers hired in fiscal year 2002.
        Around the world, firearms and explosives are the most frequent
    tools of terrorist attacks. The Bureau of Alcohol, Tobacco and Firearms
    is charged with enforcing Federal laws relating to commerce in, and the
    criminal misuse of, firearms and explosives, and ATF's authority and
    technical expertise is an integral component in fighting the Nation's
    war against terrorism. Through the awareness that terrorists need funds
    to operate, ATF has found that illegal commerce in alcohol and tobacco
    products serve as attractive and lucrative sources for generating funds
    for illegal activities.
        As new law enforcement officials are being recruited and hired to
    fulfill the various positions critical to the Nation's war on
    terrorism, training for these individuals to perform their duties in a
    safe and highly proficient manner has become an immediate necessity.
    The Federal Law Enforcement Training Center (FLETC) serves as the
    Federal Government's leading provider of law enforcement training.
    FLETC currently provides training for 74 Federal Partner Organizations,
    and also for State, local and international law enforcement
    organizations on a reimbursable basis. Training is provided in the most
    cost-effective manner by taking advantage of economies of scale
    available only from a consolidated law enforcement training
    organization. The fiscal year 2003 request provides funding to maintain
    current levels prior to the September 11 terrorist attacks, while also
    providing additional funding to support the training of new agents
    hired as a result of the attacks.
        SECOND.--The fiscal year 2003 budget is Treasury's continuing
    commitment to stewarding change through technological improvement. This
    effort entails modernizing two of Treasury's mission-critical
    technological systems.
        The budget continues critical support for the IRS computer
    modernization. The Internal Revenue Service is committed to providing
    excellent customer service and takes pride in the integrity of their
    systems. As a result, they are continually making improvements in
    operations efficiency and performance by adopting best business
    practices and state-of-the-art technology.
        The IRS is replacing its antiquated computer system with an
    information technology capacity that is appropriate for the new
    century. Modernizing the agency's technology will enable it to deliver
    on its pledge to provide better customer service for all.
        The Business Systems Modernization effort was begun not just to
    keep up with modern systems, but also because it was a necessity due to
    the fundamentally deficient nature of the IRS core data systems. The
    Master File system, on which all taxpayer accounts reside, is based on
    outdated 1960s technology.
        It is important, if the agency is to provide quick and reliable
    service to its customers, to continue the ongoing shift to modern
    standards of technology by adopting a new architecture. As this is the
    project's fourth year, much has been achieved, but the process is still
    incomplete.
        This multi-year endeavor is providing IRS with the technological
    tools and revamped business processes needed to deliver first class
    customer service to American taxpayers and to ensure that compliance
    programs are administered efficiently and fairly.
        Fiscal year 2002 and fiscal year 2003 are key transition years for
    IRS Modernization efforts, as the foundation of our Nation's tax system
    is being replaced, building a bridge to providing interactive and
    improved customer service.
        The Department's fiscal year 2003 budget provides $450 million for
    the continuation of effort in re-engineering business processes and
    developing new business systems to replace their antiquated and
    obsolete system. This amount is $58 million above the fiscal year 2002
    enacted level of $392 million, and $378 million above the fiscal year
    2001 enacted level of $72 million.
        The budget also continues important investments initiated for the
    Customs modernization effort. Illegitimate trade and contraband
    trafficking have been of the utmost concern to the Department, the
    Administration, the Congress and the American public. This concern was
    heightened due to the tragic events of September 11, and increased
    pressure has been placed on the Customs Service to inspect all cargo
    entering and exiting the United States.
        The strains on our Customs Service are growing increasingly severe
    every day. Since the Customs Modernization Act was passed in 1993, the
    value of exports has grown by 36 percent while the value of imports has
    risen by 51 percent. The agency is required to cope with this sharp
    rise in input and export volumes with the same outdated technology it
    had when the Act was passed.
        Customs is not alone in having to work with antiquated technology.
    We believe we are on the right track in our efforts to modernize IRS
    technology and we have learned a great deal from this experience. Given
    the critical role of Customs in handling enormous volumes of goods and
    in combating drug and other types of trafficking, it is important that
    they are equipped with the best tools available to fulfill these goals.
        In fiscal year 2003, the Customs Service expects to process 27
    million formal trade entries. Customs is dedicated to replacing the
    outdated and unreliable Automated Commercial System (ACS), which has
    been subject to an increasing number of system outages, with the
    Automated Commercial Environment (ACE). The replacement system will
    enable Customs to adopt a paperless, account-based process for
    importers. Fiscal year 2003 marks the third year of funding for this
    modernization effort.
        Besides trade facilitation and compliance, ACE will play an
    integral role, in conjunction with other targeting and inspection
    tools, in assisting Customs with the evaluation of high-risk cargo for
    possible contraband as it passes the Nation's borders.
        The Department's fiscal year 2003 proposal provides for: (1)
    additional investments in the automation modernization program to
    further develop and migrate to the Automated Commercial Environment
    ($307.5 million), as well as continued funding for a government-wide
    trade data interface through the International Trade Data System ($5.4
    million); and (3) sufficient funding to maintain the existing Automated
    Commercial System while modernization efforts are underway.
        THIRD.--Our fiscal year 2003 budget request addresses the
    improvement of customer service and compliance at the Internal Revenue
    Service. This has been of significant concern to the Committee and the
    Department, and the Internal Revenue Service has been making great
    strides for improvement in this area.
        To achieve its mission of ``providing America's taxpayers top
    quality service by helping them understand and meet their tax
    responsibilities and by applying the tax law with integrity and
    fairness to all,'' the IRS has realized that organizational
    improvements and increased employee satisfaction lead to improved
    customer satisfaction. As a result, strategic objectives focus not only
    on the taxpayer, but also on the improvement of the bureau as a whole.
        Under the leadership of Commissioner Rossotti, the IRS has already
    made impressive progress towards providing a more responsive and
    effective service to its customers. But there is still more to
    accomplish. An inefficient tax system imposes costs on all. The longer
    it takes to implement improvements, the greater the cost to the
    consumer and the economy.
        The IRS is well down the road towards modernizing its
    organizational structure and computer systems. Although the IRS has no
    intention of returning to its peak employment, recognizing that real
    productivity has made the agency more effective and efficient, modest
    staffing increases, along with improvements from systems modernization
    are needed to provide the best service in both compliance and customer
    service areas.
        This is the ideal moment to re-engineer the agency to serve all
    Americans by providing the most effective, up-to-date service possible.
    We must not allow this opportunity to pass us by.
        During its strategic planning and budget process, the IRS
    identified $260 million in requirements to improve processing, customer
    service and compliance across its organization as part of its tax
    administration responsibilities. Using a combination of strategic
    redeployment of staff and identification of labor savings programs, the
    IRS has been able to internally redirect $158 million from existing
    resources to focus on customer service, compliance and workload
    requirements.
        The fiscal year 2003 request seeks additional funding for the
    remaining requirement of $102 million needed to meet this mission-
    critical goal. The request supports efforts that are already underway
    to improve customer service and compliance operations. Re-engineering
    and Quality Improvement projects and programs are focusing on
    redesigning internal processes, policies and procedures. These
    additional resources, in addition to the redirected resources discussed
    earlier, will be realized by the American taxpayer through the
    following improvements:
      --Providing additional assistance and forms, schedules and new return
            types to its e-file website in order to meet the Congressional
            goal of having 80 percent of all returns filed electronically;
      --Through effective implementation of the e-file and e-services
            programs, the IRS will save more than 500 FTE to be redirected
            to assist in achieving other parts of this initiative.
      --Hiring of lower-cost employees to handle the submission processing
            growth anticipated increase from new tax returns filed,
            reducing the number of high cost employees needed for
            compliance during filing season;
      --Increasing the level of telephone service to taxpayers with respect
            to tax law inquiries;
      --Providing almost instant access to return at Customer service
            sites, assisting staff in providing top-quality customer
            service to business taxpayers.
        FOURTH.--And overriding area of focus for this year's request,
    addresses Treasury's role in becoming a results-driven organization,
    consistent with the President's Management Reform Agenda. Although it
    may referred to as the President's Management Agenda, the concept of
    the agenda is very similar to the types of results this Committee is
    concerned with.
        The Agenda's five areas of emphasis are:
      --Strategic Management of Human Capital;
      --Expanded Electronic Government;
      --Improved Financial Performance;
      --Budget and Performance Integration; and
      --Competitive Sourcing.
        Only through the delicate balance of all five Presidential
    Management Initiatives can an organization achieve true world class
    performance.
        In working to achieve world-class status, the Department emphasizes
    the importance of leadership, accountability, excellence, people, trust
    and integrity, and improving the work environment. In addition, as the
    principal custodian of the revenue collected and debt issued on behalf
    of the Federal Government, the Department strives to demonstrate fiscal
    stewardship of each congressionally authorized dollar by linking
    investments with specific, measurable results.
    Presidential Management Initiative 1: Strategic Management of Human
            Capital
        Treasury's most valuable and strategic asset is its employees, who
    are responsible for carrying out the Department's vast array of duties
    which affect the lives of every American citizen. Without employees,
    the Department would be unable to meet the obligations placed on it by
    the American public. I have reemphasized the importance of my employees
    and have made every effort to ensure that each employee is (1) used to
    their full potential, (2) working in a safe and positive environment,
    and (3) providing value-added work to the organization.
        I have emphasized that organizations known for excellence are built
    on a foundation of dignity and respect for its employees. The
    Department is focused on evaluating its work and processes so that each
    and every employee feels that their work is meaningful and contributes
    to the mission and objectives of the organization. In addition, because
    job satisfaction is a number one priority for many employees, I am
    dedicated to creating a work culture of performance, challenge,
    meaning, and dignity, while providing employees with flexibility to
    balance their work and personal lives. Examples of this flexibility
    include tele-work and flexiplace programs, alternative work schedules,
    and offering family-sensitive benefits.
        In order to implement this Presidential Management Initiative, the
    Department is continually reassessing its human resource strategies and
    support systems to strengthen the quality of both its workforce and its
    management.
        In the aftermath of September 11, 2001, an increasing number of
    Americans have become eager to consider service opportunities in
    government. It is imperative that the Department exploits this
    opportunity and is able to recruit the best and brightest. As a result,
    innovative approaches to recruit high-caliber candidates into mission-
    critical positions are underway.
        A broad variety of private industries have experienced a direct
    correlation between employee satisfaction and customer satisfaction.
    Similarly, I believe that high levels of employee satisfaction within
    the portfolio of Treasury employees will lead to enhanced service
    provided to its citizens, thus yielding higher customer satisfaction
    from both stakeholders and service users.
    Presidential Management Initiative 2: Expanded Electronic Government
        In addition to the strategic management of human capital, the use
    and improvement of information technology will assist the Department in
    providing solutions to common challenges facing all areas of the
    Department. The benefits of these improvements will not only improve
    the effectiveness of Treasury operations, but they will also produce
    tangible benefits for the American public.
        Treasury is currently in the process of reviewing its IT portfolio
    for adherence to common standards, and updating and maintaining cost-
    benefit analyses for new and ongoing systems. This will yield an
    integrated comprehensive enterprise architecture at the Department
    level that saves money and reduces the cycle time of major products.
        For example, the Internal Revenue Service continues to work towards
    the Congressional goal of having 80 percent of all tax and information
    returns filed electronically by 2007. As this method of tax filing
    becomes more popular, the IRS has reduced processing costs
    significantly per document, with less input errors and reduced handling
    time and storage costs as well.
        Working with the Internal Revenue Service, the Bureau of Alcohol,
    Tobacco and Firearms continues to operate systems that electronically
    capture revenue and allow forms to be electronically submitted for
    tobacco taxation collection.
        In efforts to streamline human resources applications, HR Connect,
    which is currently operational in six Treasury bureaus, serves as a
    single, integrated automated environment for human resource operations
    across all Treasury bureaus. When fully operational, HR Connect will
    replace the 90+ legacy stand-alone human resources systems that
    currently exist. HR Connect will provide standardized information and
    will facilitate results-driven decision-making.
        As a highly visible agency, Treasury maintains websites that are
    among the most frequently accessed, and are therefore tailored to the
    specific needs of its customer base--citizens, businesses and other
    government agencies. The following are examples of Treasury bureau
    websites that were created with the customer in mind, while improving
    the cost effectiveness of Treasury:
        The U.S. Mint offers a large portion of their services, resources
    and products through the Internet. Recognized as one of the top 30 ``e-
    tailers'' in the Nation in fiscal year 2000, the Mint's Web sales
    exceeded $109 million and their return on investment has reached 20
    percent.
        Working closely with the Financial Management Service, Mellon Bank,
    MasterCard and IBM, the Bureau of Public Debt now sells U.S. Savings
    Bonds to the public on a 24/7 basis over the Internet. Within the first
    10 months of its operation, the Savings Bond Connection generated $63
    million in bond sales, resulting in a 180 percent return on investment.
    Presidential Management Initiative 3: Improved Financial Management
        Treasury has the responsibility of principal custodian of the
    revenue collected and debt issued on behalf of the Federal Government.
    To improve financial performance and expand electronic government, it
    is imperative that the Department implement modern financial management
    systems that are capable of providing timely, accurate and reliable
    information.
        In recognizing that real-time information is much more valuable
    than information that is 5 months old, I have challenged each of the
    bureaus to improve their reporting capabilities by moving to a 3-day,
    monthly closing of their books by no later than July 3, 2002.
        Once all bureaus are implementing a 3-day, monthly close, they will
    be able to submit better financial data for consolidated reporting to
    bureau and Department. This will enable bureau and Department
    management to make results driven decisions, instead of spending the
    majority of time aggregating the data. This will also contribute to
    increased employee job satisfaction by showing employees that the work
    they do contributes to the overall decision-making process.
        Bureaus are also in the process of conducting internal risk
    assessments focusing on payment controls, determining and investigating
    those areas that contain the most potential risk for improper payments.
    These assessments will result in improved operational performance,
    which will contribute to improved customer service.
    Presidential Management Initiative 4: Budget and Performance
            Integration
        Integrating performance information into the budget decision-making
    process allows agencies to more directly focus their resource decisions
    on strategies and programs that produce desired results. This effort
    has been evolving and ongoing for the past 6 years. The following are
    examples of Departmental improvements in this area:
      --Bureaus have submitted performance information along with their
            budget requests to the Department for several years. The
            Department is moving to target better use of this information,
            lining up resources, performance data and metrics to become a
            more effective decision-making tool for the bureau, the
            Department, OMB and Congress, as senior officials are better
            able to make resource decisions based on the performance of
            programs and initiatives.
      --Work continues on presenting bureau measures, which address key
            activities using balanced, results-oriented performance
            measures, and on improving the quality of this data.
    Presidential Management Initiative 5: Competitive Sourcing
        Treasury continues its efforts in competitive sourcing, utilizing
    contractors whenever necessary to meet its goals. Expanded steps are
    underway with each bureau, to enhance competitive sourcing knowledge
    sharing, and knowledge management Department-wide so that necessary
    sourcing competitions can begin as soon as possible. The Department is
    committed to evaluating the merits of its internal efforts, by
    understanding competitive sourcing options--migrating to those
    outsourced options when it makes sense for the American people based on
    cost and value, while retaining those specific mission areas that are
    inherently governmental. A number of the Department's bureaus rely
    heavily on the private sector.
      --The Bureau of Alcohol, Tobacco and Firearms employs a broad array
            of contractors to support its mission, and integrates in-house
            solutions with outsourced vendors. This allows ATF's leadership
            team to focus on their core deliverables and mission-oriented
            goals.
      --At the Financial Management Service, contractors are involved in 41
            percent of the total management support functions.
      --The U.S. Mint contracted out 26 percent of its operating expenses
            in fiscal year 2000. These contractors performed not only
            administrative tasks, but were also responsible for other
            functions at the Mint such as advertising, public relations,
            printing, numismatic order processing, telemarketing services,
            and custodial and facilities management operations. During late
            fiscal year 2001 and early fiscal year 2002, the U.S. Mint
            built a strategic plan that ensures its employee focus on those
            critical areas of performance. They have leveraged the actual
            business execution of their operations using contractors, while
            their core employee base provides leadership, direction and
            critical business efforts.
      --IRS and the Department will study the possibilities of outsourcing
            some aspects of the collection process.
              legislative proposal on retirement and health costs
        Mr. Chairman, our budget includes the impact of proposed
    legislation for the full funding of certain Federal employee retirement
    and health costs. Because Treasury has the third largest agency
    financial impact with the implementation of this proposal, I'd like to
    provide the some additional background for the Committee.
        The President's fiscal year 2003 Budget corrects a long-standing
    understatement of the true cost of thousands of government programs.
        For some time, the accruing charge of costs associated with the
    Federal Employee Retirement System (FERS) and Military Retirement
    System (MRS), and a portion of the old Civil Service Retirement System
    (CSRS), have been allocated to the affected salary and expense
    accounts, and the remainder (a portion of CSRS, other small retirement
    systems, and all civilian and military retiree health benefits) has
    been charged to central accounts.
        The President's Budget presents the amounts associated with
    shifting this cost from central accounts to affected program accounts,
    starting in fiscal year 2003, predicated on the enactment of
    authorization legislation. By shifting this cost to the affected salary
    and expense accounts, budget choices for program managers and budget
    decision-makers will not distorted by inaccurate cost information. The
    proposal does not increase or lower total budget outlays or alter the
    surplus/deficit, since the higher payments will be offset by receipts
    in the pension and health funds. This change in treatment of costs is
    the first in a series of steps that will be taken to ensure that the
    full annual cost of resources used--including support services, capital
    assets and hazardous waste--is charged properly in the budget
    presentation.
                                   conclusion
        Mr. Chairman, let me conclude on a personal note. Since becoming
    Treasury Secretary last year, I have been deeply impressed by the
    intelligence, professionalism and dedication of the people with whom I
    have worked, and together, we are working to making this Department a
    model for management and service to the American people. I hope the
    Committee shares my confidence in the uses that are being made of
    taxpayer's funds. In that spirit, I ask that you approve our fiscal
    year 2003 budget request to support the work of the Treasury Department
    in fulfilling its wide range of responsibilities in serving the
    American people. I look forward to working with you, Mr. Chairman, as
    well as members of the Committee and your staff, to come up with a
    budget that maximizes Treasury's resources in the best interest of the
    American people and our country. Thank you again for giving me the
    opportunity to meet with you and personally present the Department's
    budget. I am willing to answer any questions the Committee may have
    concerning the Department's fiscal year 2003 budget.

          REACTION TO IMMIGRATION AND NATURALIZATION SERVICE PUBLICITY

        Senator Dorgan. Mr. Secretary, thank you very much. Let me
    ask a series of questions about a range of issues and then I
    will call on Senator Reed.
        Let me ask you a question that has nothing to do with your
    agency. Yesterday when I was eating Grape Nuts in the morning I
    read the Washington Post and the front page story about the INS
    sending out a couple of approved visas to Mohamed Atta and one
    of the other terrorists. That is not your agency but I assume
    you saw that as all of us did and said, what on earth could
    allow this to happen, because all of us have systems in our
    agencies that deal with massive numbers of names and
    information. Give me your reaction to having read that. You are
    a businessman. What do we do about things like that?
        Secretary O'Neill. I tell you, my first instinct was to
    say, it is unimaginable that this could happen with the two
    individuals who have become so well known through the media
    coverage of September 11. I must tell you my second reaction
    was to feel sorry for the employees of the INS. This comes, I
    suppose, from having been a Federal Government lifer for 15
    years and knowing what it is like to wear the shame of this
    kind of an event when it clearly was not done intentionally.
    Systems fail.
        We tend to make an awful lot of these kind of symbolic
    things when they happen in Washington. I understand why we do
    that but I have got to tell you, my heart goes out to the
    people who work in that agency, who would like to take pride in
    what they do. From the reaction to yesterday's revelation I
    think, now you have got thousands of people who feel that they
    are on the defensive, whose intelligence is under question. So
    that was my quick reaction.
        And third, a sense--it is partly what I had in mind when I
    said to you, we will know we have really succeeded in being an
    excellent organization at the Treasury Department when the
    private sector comes to see how to do it. It is a reflection of
    how I felt when I was here before.
        When I came here in 1961 and received 18 months of training
    in designing computer systems, I had a high degree of
    confidence that I was working for the leading edge organization
    in the application of computer technology. Because when I went
    out to find out what was going on in Pittsburgh, to see what
    U.S. Steel was doing, I came back reassured that they would
    never catch up with us because we were so good at taking this
    new, marvelous computer technology and applying it to the mass
    problems that we had to deal with in those days with Social
    Security and veterans benefits programs, both insurance and
    dependent benefits. We were so good at what we did and so proud
    of what we were doing.
        I think for a variety of reasons we have lost that edge.
    But I am convinced that we can have that edge again. It is
    mostly not about huge increases in funding. It is about
    leadership. It is about continuity. It is about understanding
    what excellence really is. And it is about the deployment of
    good ideas and equipment in a sensible way.
        So my hope is that the INS people will pick themselves up
    and they will demonstrate to the world that American citizens
    should be proud of the people who work for their Government.
        Senator Dorgan. The reason I ask that question, and I
    appreciate your response, is in putting Customs officers at our
    borders we are trying to control our borders. We do not want to
    keep people out of this country but we certainly do not want to
    let terrorists in, or those who associate with terrorists. In
    order to do that we have to have some confidence in the systems
    that we have established by which we grant visas and grant
    entry to our country.

                                  CUBAN TRAVEL

        Let me ask a series of questions. One, you know I would ask
    about OFAC and Cuba. If you were a retired, little old lady
    from Illinois, a schoolteacher who is now interested in
    bicycling and joined a Canadian bicycle tour of Cuba and then a
    year and-a-half later got a fine from the Treasury Department
    of $9,500 you would be apoplectic about it.
        I guess I understand that the law is the law. But I am
    wondering whether you think it is a particularly wise use of
    resources to ratchet up more energy towards enforcing the law
    like this at a time when in OFAC we are trying to chase
    terrorists. I wonder whether it is not a lower priority or
    should not be a lower priority with you to use those numbers of
    people in OFAC to track terrorist activities and leave the
    little old ladies that are riding bicycles alone for a while?
        Secretary O'Neill. Senator, let me agree with you and with
    the implication of your question and then I think I have to at
    the same time disagree. If I were responsible for doing this
    function in the private sector, and I had the discretion to
    decide where to deploy my resources, I would agree with you
    completely. I would follow the 80/20 rule. I would concentrate
    on those areas that were going to produce the most value. So
    sentimentally I want to agree with you.
        But I do not know how to bring the notion of discretion to
    a law that I feel tells us that we do not have discretion. Now
    if we could agree that we could amend the law so that in fact
    we did have discretion, then I think we would be on much better
    ground.
        In fact, as a general proposition, I think we would be so
    much better off if we did a thorough review of the laws that
    tell us what we should do and must do, and provide a sensible
    discretion of the sort that you are suggesting. We would get
    much more value for the American people. We would give much
    more freedom to the people who are supposed to be making
    decisions on the operating activities of the Government. So I
    am very much inclined to want to be where you are and it would
    be very helpful if we could work together to figure out a way
    that we can not put ourselves in violation of the law because
    we exercised what seemed like common sense discretion and in
    fact then get hauled up for failing to uniformly enforce the
    law.
        Senator Dorgan. Our job in Congress is to repeal the travel
    restriction with respect to Cuba. But to the extent it exists,
    I simply observe that all law enforcement has discretion. If
    there is jaywalking occurring at the same time that a bank
    robbery is occurring, law enforcement officers will move to
    deal with the bank robbery. So that discretion exists all over.
    I guess my hope would be that OFAC would understand that there
    is a greater good these days to deal with the terrorist threat
    than the threat of a retired teacher bicycling in Cuba.

                       DISCLOSURE OF ENFORCEMENT ACTIONS

        Having said that a quick question. The Washington Post had
    a story on March 6 about OFAC secretly settling more than 100
    enforcement actions in 1998 to 2000 against corporations,
    banks, and other entities, for violating the trade embargoes
    against Cuba and other countries. That is before you came to
    the Treasury Department.
        The information was disclosed only because of a suit filed
    by public interest groups. I am wondering, because OFAC is
    being forced by a lawsuit to disclose the settlement of these
    cases, will future settlements be made public as a matter of
    course?
        Secretary O'Neill. It is an issue I think we should look
    at. As I have looked at some of the individual cases that are
    involved here, it is not clear to me from looking at the law
    that it was the intent of Congress to hold people up to public
    humiliation for agreeing to settle some of the allegations that
    are made. These are not of a class where people have--basically
    they have stipulated to an allegation or to a settlement. So I
    think we need to look at that and see.
        One of the things I find interesting in the way the
    language was used, in this particular story the term secret was
    used, although to me secret conveys a sense of a willful intent
    to hide. I do not think that that is an appropriate
    characterization of what took place in this particular case. I
    do not think there was a willful intent to restrict access to
    things.
        Senator Dorgan. Except there was not willful disclosure,
    and those who wanted it had to actually file actions in order
    to get it. I understand the Commerce Department, State
    Department, and others that take enforcement actions routinely
    disclose the results of those settlements. I would encourage
    you to take a hard look at that. I do not believe it ought to
    have to be pried out of the agency.
        Again, this story is about a time when you were not there,
    but I would encourage you to take a look at it because I think
    this information ought to be public.
        Secretary O'Neill. Senator, we will do that. We will do
    that and we will work with the committee and see if we cannot
    find a road that seems sensible.

                              JOINT BORDER AGENCY

        Senator Dorgan. Mr. Secretary, it is my understanding that
    Governor Ridge is moving closer to a proposal that would
    combine the Customs Service in some sort of joint border agency
    with other agencies such as the Immigration Service under the
    Department of Justice perhaps.
        I am wondering how you feel about that and how would the
    revenue-generating responsibilities of the Customs Service, for
    example, fit in with such a plan? Especially given the news
    this week with respect to the INS, I am wondering if there are
    some concerns about that, and what kind of discussions are now
    underway. I have only heard them rumored, but they have
    obviously been in print with those rumors. What is your
    impression of what is happening there, and how do you feel
    about it?
        Secretary O'Neill. I will not just tell you my impression,
    I will tell you what the facts are. Since the terrorist events
    of September 11 and the President's appointment of Governor
    Ridge as our Director of Homeland Security, we have been asking
    ourselves a wide-ranging set of questions about how do we
    imagine and envision what homeland security should mean and
    what we should be striving for going forward.
        For most of us, I guess I would say for all of us, this is
    a whole new area of inquiry, because we have never really had
    to think, I think, in the past about what is now a current
    reality of being attacked on American soil. It is a very
    different proposition. I think all of us believe that we need
    to rethink the mission.
        The example you cited with the two orange cones in the
    middle of the road as though that was somehow keeping people
    out of the United States is an absurdity on the face of it. And
    probably the absurdity was not so awful so long as it was
    believable that we were not subject to terrorist attack. That
    is clearly not the case anymore.
        So indeed, we have had wide-ranging, ongoing conversations
    about this question of how to organize so that we can give
    assurance to the American people that we have thought about the
    right questions, and we have distributed resources in the way
    most likely to avoid more American casualties.
        I think we are getting close to a Presidential decision. In
    fact, I told you I would tell you what is going on. At 5:00
    this afternoon we have another meeting on this subject. There
    have been lots of papers written, I am sure, because you are a
    student of Government and you know these things. The subject of
    changing the organization of border-related activities is one
    that has been studied in the public administration community I
    think for 40 years or so. There are all kinds of papers
    available on the Internet on the subject. We have looked at all
    of that.
        I would say to you at the outset, I do not know of any
    institutions, public or private, who rush to change. So as you
    might imagine, the immediate response to any idea that anything
    is not perfect is, for every individual organization, to put on
    the brakes and say, we are perfect; how could we be any better?
    So if there is going to be consolidation it ought to be under
    our flag. Those are all natural, human reactions.
        I think the process of deliberation we are having is a
    thorough going over. It involves, for my money, from an
    executive branch point of view, all of the correct people that
    need to be involved in these considerations. I suspect in the
    not-too-distant future the President will decide what he thinks
    of all of this analysis work that has been done and then we
    will see what we should do.
        Let me tell you from my point of view, I have had an
    opportunity to visit some Customs locations and to get to know
    some of the Customs people and other bureau and departmental
    people in the Treasury. These are great people. I was down in
    Jacksonville a few weeks ago and I had an opportunity to go out
    and look at our aircraft that is doing surveillance work in, if
    I can call it, the Latin cone. I talked to the people there.
    Their sense of dedication and determination and purpose is
    something really to be highly admired I think.
        I went out on the wharf and looked at the new electronic
    surveillance equipment that the Congress has funded and
    provided to see how we are now able to electronically scan
    containers that are coming into the country. I think one of the
    great things about the Customs Service is what I said about the
    people in the INS, these people believe in what they do. They
    believe in the Customs Service. They believe in the tradition.
    It is a thing to be highly prized and valued.
        So as long as we are organized the way we are, I am proud
    to carry the flag. If the President with his perspective, and
    after listening to all the arguments decides there is a better
    way to give the right assurance to the American people, I will
    be the advocate for that.
        Senator Dorgan. Mr. Secretary, thank you very much. I want
    to ask just a couple additional questions if Senator Reed is
    not time constrained, and then I will recognize Senator Reed
    and then come back and ask a couple of additional questions.
    Just one follow-up point. Do you have any notion of when we
    might expect a recommendation or a decision by the President on
    this?
        Secretary O'Neill. I will know better after 5:00 today. I
    do not know. Frankly, I came directly here from the President's
    speech announcing a new $5 billion initiative to get results in
    the area of economic development and I just arrived back 15
    minutes before I got in the car with him from New York so I do
    not really know.
        Senator Dorgan. But is it days or weeks or months?
        Secretary O'Neill. I would say certainly less than months.
    The President, I expect, will make a decision--I guess I would
    say weeks if those are my choices; no more than weeks.

                             ABUSIVE TAX PRACTICES

        Senator Dorgan. Let me ask just a couple of questions about
    tax shelters. I have a couple of charts that describe some of
    what has happened with respect to reporting. I expect most of
    it is accurate but you correct it if it is not. These are
    mostly Wall Street Journal stories. There was a report in March
    that suggested there is going to be an easing with respect to
    the curbs on tax shelters.
        The previous Administration under Secretary Summers said,
    look, we have got a huge problem here. The tax advisors,
    accountants, and attorneys are really trying to find the edge
    with their clients. They are becoming very aggressive--very
    aggressive in trying to find ways to avoid taxes and we really
    need to clamp down on this. As I indicated to you, I have been
    chairing some Enron hearings and Enron alone has something over
    800 subsidiaries in the Cayman Islands and other tax haven
    countries to avoid paying taxes, I assume. I assume people do
    not establish a post office box and a company in the Cayman
    Islands because that is where their customers are. That is just
    symbolic of how aggressive all of this has become.
        I have become very concerned about it because there are
    estimates by some that we are losing, some say $10 billion,
    some say up to $30 billion a year through these aggressive tax
    shelters that really require us to clamp down. Some of the
    headlines suggest--I will not go through all of this but I want
    to give you a chance to respond to some of it. If I might show
    the rest of the charts.
        One, says that the Bush Administration appears to ease
    curbs on tax shelters. The next one, this is March 1, 2002, the
    Washington Post, tax shelter disclosure falls short and
    agencies seek to halt corporate abuses. This deals with a
    specific effort that they expected would have a lot of
    companies providing information about the advice they give to
    clients; very few of them in fact are.
        If I might show the last one. U.S. corporations are using
    Bermuda to slash tax bills. That is February 2002. The point
    is--I think you understand my meandering question. The point
    is, about a year and-a-half, 2 years ago it looked like we were
    going to start to squeeze this lemon called tax shelters in an
    aggressive and an appropriate way in my judgment.
        News reporting has suggested that this Administration
    thinks they want to move in the other direction. I would be
    very concerned about that--am very concerned about that. So can
    you tell me what is behind the headlines here? What are you
    doing and how do you feel about these tax shelters?
        Secretary O'Neill. Yes, I am delighted to have an
    opportunity to respond to this set of questions. Let me begin
    by saying, I think tax shelters is a really bad phrase because
    it is a value-laden phrase that I do not think we should use.
    As a matter of fact when I work with my public relations
    people-they will tell you--and I see those words, I write in
    what I think the real intention is, which is abusive tax
    practices.
        Now when I went to school, and it was a long time ago, I
    was taught these things about taxes. That they are due and
    payable, and that those who do not meet their responsibility
    are either guilty of evasion, which is illegal-that is to say,
    they did not do what they were supposed to do, or of finding a
    way under the law to avoid paying the taxes that someone
    thought they should pay. There is a distinction between what is
    illegal, which is evasion, and what for one reason or another
    is not illegal because it has not been specifically banned,
    which is avoidance.
        It leads me to a conclusion I am happy to say all over the
    country, and I do on every opportunity. Our tax code, Senators,
    is an abomination. We would not have either evasion or
    avoidance if we did not have 10,000 pages of code and
    legislation that takes a genius to understand. I would be
    willing to bet you that most of the corporate CEOs could not
    find their way through the tax code. They have legions of the
    smartest people in the country trying to figure out how to
    avoid--not to evade, for the most part, but to avoid-taxes,
    which is a legal, lawful activity in our society.
        Now, I believe deeply that Americans and American
    institutions should pay their tax bills. So what we have
    underway right now are several different efforts at the same
    time. One, a series of white papers in the individual income
    tax area and in the corporate tax area, that goes to the heart
    of the issue of simplification. Because I think the more we can
    simplify, the more likely we will have an enforceable tax code
    that does not take tens of millions of people to administer.
        Two an effort to tighten up this area of tax avoidance by
    forcing, through a series of penalties, corporations to self-
    report where they are walking the edge between avoidance and
    evasion. I think most often to give the filers the benefit of
    the doubt, where people have found a crease in the law that was
    written by the Congress and they are using that crease as a way
    to decrease their tax liability.
        Senator Dorgan. Mr. Secretary, I apologize for interrupting
    you, but often those creases are created by the taxpayers
    themselves coming to Congress and saying, create this crease
    for us.
        Secretary O'Neill. I agree with you.
        Senator Dorgan. Congress does it. Having been a tax
    administrator for many years, I know that most of those 10,000
    pages are there because someone came to lawmakers to say, by
    the way, here is a little thing you ought to do to change it or
    tweak it for us because it gives us an advantage. So page after
    page after page is complexity that is induced by those who want
    advantage in the system. Those little creases you talk about,
    most of those are put there by people coming here wanting
    advantage.
        Secretary O'Neill. I certainly agree with you. I think
    there are no words in the tax code that are the result of
    immaculate conception.
        Senator Dorgan. Do not be so sure about that. If you have
    ever witnessed a conference committee from the inside you will
    see----
        Secretary O'Neill. I take your point, Senator.
        Senator Dorgan. I want to be more specific about tax
    shelters. Let me just ask one final question. Your predecessor,
    Secretary Summers called, let me use your term, abusive tax
    practices, the most serious compliance issue facing the
    American tax system today. Do you feel that?
        Secretary O'Neill. No, I think this is a terrible problem,
    but I think the complexity of our tax code is the most crucial
    problem facing our society, in this way, Senator. I am very
    concerned--this is from working around the world in lots of
    different countries and seeing where complexity becomes the
    enemy of civil society and a sense of civil duty. You get to a
    point where people say, the Government will not know whether I
    did the right thing or not because even they cannot figure it
    out. I will not name names, but there are countries that are
    today going down the drain because only 40 percent of the
    people pay the taxes that are theoretically due and owing.
        I worry a lot about this issue of so complicating the code,
    maybe with the best of intentions, that it turns us into--maybe
    this is not too pejorative--a banana republic in terms of how
    we run our fiscal system. It is a dangerous thing.
        Senator Dorgan. I will come back to this issue.
        Senator Reed, thanks for being indulgent.

            NATIONAL INSTANT CRIMINAL BACKGROUND CHECK SYSTEM (NICS)

        Senator Reed. Thank you, Mr. Chairman. Again, thank you,
    Secretary O'Neill. As my initial comment suggested, September
    11 highlighted the law enforcement aspects of the Department of
    Treasury; some aspects that most people do not associate with
    the Department of Treasury, and several agencies. One is the
    Bureau of Alcohol, Tobacco and Firearms.
        I met several weeks after September 11 with officials of
    the ATF and they indicated to me that FBI officials compared
    the audit log of approved gun sales under the NICS system to
    the Government's terrorist watch list based on their request.
    We later read about this in the New York Times. It was made
    public. So it was clear that at that moment of incredible
    danger and vulnerability, many seasoned law enforcement people
    felt that this system, this NICS system, had very valuable
    information to preempt another attack.
        But since that time the Department of Justice and the
    Attorney General have suggested that Federal law prohibits any
    type of comparison of the NICS records with terrorist records.
    I wonder, since the request emanated from your department, Mr.
    Secretary, what are your thoughts on the Justice Department's
    position and would you support legislation that would make
    these records available in antiterrorism investigations?
        Secretary O'Neill. I must say I have not looked at this
    issue in detail but let me give you a general answer to your
    question that flows directly from what I have heard the
    President say over and over again. I think we should use all of
    the sources and resources that are available to us to track
    down, interdict and stop terrorist activity-all of the sources
    that we have. So I would not agree that we should in any way
    limit our ability to go after people with evil intent.
        Senator Reed. Thank you, Mr. Secretary. I followed up my
    meeting with a letter and asked the Attorney General what were
    the results of this matching process, and you might not have
    specific information, but if you could for the record later
    provide it. He responded to me, ``Following the September 11
    attack the FBI requested that the Bureau of Alcohol, Tobacco,
    and Firearms compare ATF databases related to multiple sales,
    stolen firearms, and trace crime guns with the watch list
    arising out of the investigation. The FBI was advised there
    were six matches from this comparison.''
        I wonder if you have any information on what those matches
    might be in terms of the types of weapons or anything else.
        Secretary O'Neill. No, I am sorry, we do not, but we will
    provide that for the record, Senator.
        [The information follows:]

                   Use of ATF Databases for Firearms Tracing

        The names of 8 individuals from the terrorist watch list matched
    the names of individuals found in records of 47 previously traced
    firearms or 2 multiple sales reports. These records included traces of
    32 pistols, 10 rifles, 5 shotguns and 2 revolvers.

                                   GUN SHOWS

        Senator Reed. Thanks very much, Mr. Secretary.
        Mr. Secretary, there is another area that has been a
    persistent focus of attention, and particularly my attention,
    and that is the area of gun shows. In January 1999, a report by
    the Department of Treasury entitled, Gun Shows, Brady Checks,
    and Gun Crime Traces, concluded that, ``a review of ATF's
    recent investigations indicates that gun shows provide a forum
    for illegal firearms sales and trafficking.''
        My question would be if that is the still the position of
    the Department? And regardless, would you support closing the
    gun show loophole, the provision in the law that allows private
    sellers to continue and operate without background checks at
    gun shows?
        Secretary O'Neill. I know this is the eggshell area and I
    have not, frankly, personally looked at it close enough to give
    you an off-the-top-of-the-head answer. So rather than lurch
    into an area without consideration, I would rather give you an
    answer for the record.
        [The information follows:]

        The Administration supports in principle amending the Brady Act to
    require background checks for all firearms transactions at gun shows.
    We must ensure that terrorists and other criminals are prevented from
    purchasing weapons at gun shows through an instant criminal background
    check that does not unduly burden the law-abiding gun buyers at these
    events.

        Secretary O'Neill. But I want to go back just for one
    second to your earlier question, if I may, and offer this to
    you. If you see things that do not make any sense to you in
    this area of terrorism, I wish you would feel free to call me
    or have one of your staff people call me on the phone so that
    we can take immediate action. We should not wait until we have
    a formal hearing. If you have knowledge or suspicion that we
    are not using all the resources appropriately in our society
    working on these terrorist things, believe me, the President
    has made it clear to me I do not have a higher priority than
    this. I will take your call immediately if you have any
    concerns.

               EXCLUSION OF SPORTING GUN FIREARMS FOR IMPORTATION

        Senator Reed. Thank you, Mr. Secretary. I certainly
    appreciate the fact that you want to present an informed answer
    so it is entirely fair that you do so on the record
    subsequently. I also appreciate your offer of contacting. You
    have been very responsive in our previous relationship and I
    appreciate that very much.
        This other question might go in that same category of I'll
    get back to you. Under Title XVIII, the bureau has the right to
    exclude from importation firearms that ``are not generally
    recognized as particularly suitable for or readily available to
    sporting purposes.'' I wonder if you might comment on this now
    or later, particularly since there has been some, at least in
    the media, discussion of weapons like .50 caliber sniper rifles
    and others which do not seem to be of a sporting purpose.
        Secretary O'Neill. We will be happy to give you something
    for the record.
        [The information follows:]

                       Policy for Importation of Firearms

        The Bureau of Alcohol, Tobacco and Firearms has determined that a
    .50 caliber rifle is importable as a sporting firearm because it is
    particularly suitable for, or readily adaptable to sporting purposes.
    Specifically, ATF's longstanding interpretation of ``sporting
    purposes'' includes competitive shooting events. In the United States,
    there exist numerous organizations that sponsor competition in
    silhouette and target shooting events for .50 caliber rifles.

                             ADEQUACY OF ATF BUDGET

        Senator Reed. Thank you very much, Mr. Secretary.
        Mr. Secretary, let me just ask one other question which I
    think you might be able to respond to now. That is your
    estimate of the adequacy of the ATF's budget this year to meet
    all the issues we talked about, and issues emerging each day
    with respect to terrorism. Do you think it is adequate?
        Secretary O'Neill. I think we are fine, and if it looks
    like we are not going to be able to fully discharge our
    responsibility in a professional way we will come back to you.

                      PROGRESS OF ACE MODERNIZATION SYSTEM

        Senator Reed. Thank you, Mr. Secretary. One final question
    and that is with respect to the Customs Service. They are in an
    effort to replace their automated commercial system with the
    new automated commercial environment. Are you pleased with the
    progress to date? Do you see there are any problems that
    Customs might be facing? Generally what is your assessment?
        Secretary O'Neill. In my oral comments at the beginning I
    indicated, and let me maybe even sharpen a little bit what I
    intended with my comments, both about the so-called ACE system
    and the IRS modernization. Over the last 25 years or so that I
    was in the private sector, I was involved both as a board
    member and as a CEO working on adoption of very large computer
    systems, and I have some scar tissue that I would show you to
    prove it.
        This whole business of using and deploying complex systems,
    and hardware and software technology is one where it is more
    frequently the case than not that when you get to that switch-
    flipping stage at the end where you hope and pray everything
    works, it does not work quite the way you thought.
        When I came and began getting briefed on these systems, I
    must tell you I was concerned about the development period, for
    this reason. In my experience, if you have a very long
    development system for computer-based systems, by the time you
    get to the end of a very long period, say 10 years, the world
    is so changed that you never arrive at the intersection. The
    intersection never comes.
        As a consequence of that, since Assistant Secretary Kingman
    has been on board the last few months, I have asked him and his
    staff to give a really concentrated look at these things
    because I know that there have been troubles in the past with
    IRS modernization, and there has been some skepticism and
    concern about the ACE system.
        I want to be able to make a personal representation to you,
    off the work the Assistant Secretary and his people are doing,
    that we buy where we are, and we have confidence in what we are
    doing. It would probably take us another 3 or 4 months to be at
    a stage where we are willing to say, this is it and we own it.
        Because I think we have that obligation to you all, that
    even though this was not begun on our watch, that we owe it to
    you and the American people to say, we own this. Because it
    would really be unfortunate to deploy a whole lot more money,
    and then have us or some subsequent administration official
    say, we are sorry, for 10 different reasons it did not work.
        So we are hard at work trying to get to a point that we can
    make a representation to you that we can stand behind with some
    confidence.
        Senator Reed. Thank you, Mr. Secretary.
        Thank you, Mr. Chairman.

                             ABUSIVE TAX PRACTICES

        Senator Dorgan. Mr. Secretary, let me go back to the tax
    issue. When I showed you the Wall Street Journal articles and
    the Washington Post article you did not respond with vigor so I
    do not--let me try to understand how you feel about this and
    what you are doing as Secretary.
        In recent months Treasury and IRS have announced an amnesty
    program of sorts for corporations who have used tax shelters to
    come in and abate part of the penalty, have chosen not to
    appeal a Federal court ruling against the IRS and a decision
    that appears to open the door to some companies to double
    deduct certain losses from subsidiaries, signalled they would
    issue more generous standards for deducting some business
    investments, largely along the lines favored by some people
    that have lobbied very hard.
        The implication of these stories that would be, for
    somebody taking a look at it, that it looks like we're stepping
    back here from an aggressive enforcement regime with respect to
    abusive tax practices. Is that what is happening?
        Secretary O'Neill. Let me respond in a real sharp way:
    absolutely not. If anything, I think we are more dedicated to
    operating the Government with excellence than maybe anybody who
    has ever been here before. We have had some capable people come
    to work in this Administration. People who have proven they can
    do it. It is not a theory.
        Let me tell you why I did not react to these things. I will
    pay for this, but I am going to tell you anyway what I think
    about this. There is so much stuff in the newspapers parading
    as reports that is really editorial--that is to say, someone
    having an opinion--that I have just gotten immune to paying any
    attention to most of it. There is so much of it that is not
    worth reading or knowing because it is misleading and
    misrepresenting what is truly going on. Somebody has an axe to
    grind.
        I do not have enough time in my life to care about people
    who are out there, doing whatever they are doing in the
    newspapers. I am going to make the world better to the degree I
    can, using the great people that we have assembled. The people
    who get paid for writing this stuff for a living can go on
    doing whatever the hell they want.
        Senator Dorgan. That was sharp enough.
        Secretary O'Neill. Not to be strong about it.
        Senator Dorgan. That was sharper. Tell me then, as somebody
    who really believes that what is happening is very abusive out
    there, we are losing anywhere from $10 billion to $30 billion I
    think, and probably with transfer pricing even more. Tell me
    what is happening inside Treasury that demonstrates that this
    Treasury Department is really aggressive in going after these
    companies and those who are advocating tax shelters that are
    abusive.
        Secretary O'Neill. The Assistant Secretary for Tax Policy
    and his people are very close to having a set of proposals,
    some of which actually are not proposals, they are
    administrative actions we are going to take, and some that will
    require legislative action, to tighten the noose around people
    who would create abuses of the tax system, and to highlight
    what we would say are abusive practices.
        Now as we agreed before, in most of these areas it is going
    to turn out that, by intent, the tax Code provided for people
    to do some of the things that are now being called abusive. We
    are going to have to work with the Congress one by one to
    change the language, if we can get the majority of members of
    both houses of Congress to agree to cut off this source of
    funds that people are taking advantage of. But we are going
    after this on a daily, tough-minded way and you will see
    something very soon.
        Senator Dorgan. So if someone said, look, this is just a
    pro-business administration and when they see companies prying
    open the curtain and slipping through, there are folks in this
    Administration who say, we will just let them do that. They are
    our friends.
        Secretary O'Neill. You are not going to see any of that in
    this Administration. If anything, I think you are going to see
    people responding the way they responded to the ideas about
    CEOs being responsible for their behavior that the President
    put forward as a result of the task force that I led that said
    we should have a new standard, and CEOs should certify that
    they have told their shareholders and their employees every
    quarter everything they know that is material.
        The screams and outcries from the community out there were
    quite loud. But, I think it demonstrates the intent of this
    President and this Administration to work for the highest
    standards, and the expectations of people obeying the law, and
    beyond obeying the law, following what I would characterize as
    the American value system of being able to trust each other.

                              OECD AND TAX HAVENS

        Senator Dorgan. Mr. Secretary, when I tell you that the
    Enron Corporation had apparently over 800 subsidiaries in the
    Cayman Islands and other tax haven countries, that is a
    startling number to me for the Enron Corporation. But the more
    I have looked at that corporation, the more I have understood
    that it was a company run by people searching for the edge so
    they could get near it and probably over it, if possible.
        But this describes to me again why it is important for us
    to work through the OECD and with other countries in the OECD
    to take a good whack at these issues together. We are not in
    this alone. Every country has a similar interest in taking a
    look at these international enterprises that want to find a way
    to do business everywhere, make profits everywhere if possible,
    and pay taxes nowhere.
        Are you interested in the work that is going on in the OECD
    with respect to mutual cooperation in tax abusive practices?
        Secretary O'Neill. Yes, indeed. I think you probably know
    this. At a hearing, I think it was last June with Senator
    Levin, we talked about the subject of the OECD project and the
    so-called tax haven work.
        I said to him, I know it is probably unusual for witnesses
    to make a commitment off the top of their head, but I will
    commit to you that before a year passes, the United States will
    enter agreements, treaties with the so-called tax haven
    countries covering more than 50 percent of all the accounts
    that are known about in the so-called tax haven countries, that
    will permit us to interact and exchange information as never
    before. He told me on that occasion that he had been working on
    the problem since 1986 and no one had ever made such a
    commitment, no one had ever delivered that kind of a treaty
    response.
        We are now over 50 percent, I think. Now my staff is going
    to die. We may be able to get to 75 percent before we get to
    the anniversary, because we have gone out there and we have
    created treaty agreements to exchange information with four new
    jurisdictions. We will be announcing some more fairly soon.
        Again, Senator, I am really interested in producing
    results, not just rhetoric. Going back to Senator Levin's
    point, we are not just looking at the data since 1986 and
    lamenting the fact that we do not have any tax treaties. In 6
    months, we have created more tax treaties covering more
    accounts than have been done, I think, in history, and we are
    going to keep at it.
        Senator Dorgan. Mr. Secretary, I wonder if you would have
    your people working on the tax shelter issue just provide for
    the committee just a very short report describing what the
    goals are and what activities you are undertaking, what kind of
    legislation might be necessary to close some of these loopholes
    and shelters? That would be very helpful to us.

                   ADDITIONAL FUNDING REQUIREMENTS FOR FLETC

        Let me talk just for a moment or ask you about FLETC, the
    Federal Law Enforcement Training Center. With the ramping up of
    resources in a number of areas in the Federal Government,
    especially including INS, Border Patrol, Customs, and also the
    Department of Transportation airport security, you have
    provided sufficient money I believe for current workloads, but
    it appears to me that beyond current workloads in training in
    the FLETC facilities we likely would have the opportunity and
    would want to train substantially more people, especially those
    coming on board through the Department of Transportation. Have
    you thought about that, and if so, how would we fund that, the
    increases necessary for FLETC to be able to handle that?
        Secretary O'Neill. I think two things about this. First of
    all, I think this is a really first-rate organization. I had an
    opportunity to go down with George Bush, Sr. to dedicate the
    FLETC center. I was really impressed with what we have there.
    Sometimes I think you can be a little discouraged if you go
    look at things that are a little decrepit and have a sense of
    being a little shopworn. That is not the feeling about the
    FLETC training center. It is a fabulous place with great
    facilities and great trainers, I think with a capacity, if I
    remember right, of 2,200 students a day in that one facility.
    It is really quite impressive.
        After we started talking about air marshals, I said to the
    President and my colleagues, this is the time when we should
    focus those resources on getting air marshals up fast, and then
    had some follow-on conversation with Pete Domenici about the
    New Mexico facility and what we could do there. Believe me, I
    think where we have great activity--I think this is great
    activity--we should use it to the fullest. I think we have the
    ability to be reimbursed from departments and agencies.
        The concern that I had that my people taught me last year
    about this whole activity is that because of the delay in the
    appropriations process, departments and agencies hold back on
    making commitments to fill the slots in these wonderful
    training facilities, so we have been getting a very uneven
    utilization of the facilities, which does not make any sense to
    me at all. So I suggested that we needed kind of a working
    capital fund, if you will, in Treasury so that we could say to
    departments and agencies, we know you are going to eventually
    get your money. In effect, we will float you a loan so that we
    can keep the facilities open.
        I continue to believe we ought to use that kind of
    innovation to make sure that we get full utilization that for
    silly budget reasons we do not have peaks and valleys in the
    utilization of facilities. So we will work with you to make
    sure that we have that result.

                         HEALTH OF THE AMERICAN ECONOMY

        Senator Dorgan. All right. Let me ask you a question about
    the economy, if I might. The answer to the question of how we
    fund all of these things and what kind of a revenue stream we
    get in the Federal Government has a lot to do with the health
    of the American economy. We have had a recession, apparently a
    reasonably shallow recession of short duration. You have
    listened obviously to Mr. Greenspan's assessment of where we
    are. Can you give me your analysis of his assessment and then
    tell me where you think we are in this economy and what you
    expect for the coming year?
        Secretary O'Neill. I am happy to do that. In order to do it
    with a little sense of continuity let me go back, if I can, to
    September 10. I think the data show pretty clearly now that
    until September 10 we were in fact moving out of the shallowest
    period of the slowdown. That is to say, I think the lowest
    period was really experienced sometime back maybe in March or
    April of last year and when we got to September we were already
    visibly moving out of the slow period into rates of growth that
    were not great, but they were not questionably positive; they
    were clearly positive.
        The shock of September 11 turned our economy off for more
    than a week for airlines. I think because of what it did to us
    as a people in terms of people just sitting in shock and
    looking at their televisions and trying to take on board the
    implications of what terrorism was going to mean to our lives,
    it was not a surprise that the third quarter had a negative
    growth rate.
        The day the numbers came out, I did a television interview
    and the people said, now we are going to have a recession for
    sure, and I said, I do not think so. At least I think there is
    still a possibility that the fourth quarter will be positive
    GDP, because as I talked to people that I know out in the
    country about what was going on, while most of them were
    wringing their hands, they were also taking action. They were
    taking action in eliminating inventories.
        In December, there were no inventories in the automotive
    supply chain. When I went out to Cleveland in December and had
    breakfast meetings with suppliers to the assembly companies, to
    General Motors and Ford and Daimler-Chrysler, all of those
    people who supplied wiring harnesses and tires and the like had
    no inventory and no expectation of orders, so that they had
    really clamped down. So the reason we had a 5.2 percent
    productivity growth rate in the fourth quarter--which is
    unexperienced in our economy, to have a slow economic period
    and have productivity growth of over 5 percent. It is because
    out there millions of American business people took timely
    action.
        It turned out, I am happy to say, I was right, the fourth
    quarter real GDP number was 1.4 percent. Now it is not heaven
    but it is certainly not zero and it is certainly not two
    quarters in a row of negative growth.
        Where I think we are now is this, I think we are continuing
    to move away from the slow period. I think when the data that
    is available--this is dangerous; this is forecasting a little
    bit. But I think when the data is available for the first
    quarter it will show that the low period in this cycle, if you
    can call it a cycle, for company earnings, will turn out to be
    the fourth quarter of last year.
        Part of the reason for that is it was still low, but it was
    also because there was an awful lot of housecleaning done in
    the fourth quarter of the year. Lots of companies said, this
    year, because of what happened in the third quarter, it was
    just a mess, and for all those things that we see we are going
    to have to write off; we are going to do it now. So there was a
    lot of clean-up in the fourth quarter, which means earnings are
    at a very low reported rate.
        I think the first quarter is almost certain to be better
    than that, and the second quarter I think will be a
    continuation of growth. I am expecting by the fourth quarter
    that we are going to be operating at what one would like to see
    on a continuous basis of 3 percent to 3.5 percent real growth.
        The important question here is what happens in the June,
    July, August period in terms of business decisions to invest.
    Again, from talking to business people, I am confident there
    are lots of projects that have been delayed that have economic
    return rates of 30 percent or more. Those projects will be
    funded when the optimism improves out there in the leadership
    of the business community. That is critical to keeping this
    going.

                                 TRADE DEFICIT

        Senator Dorgan. You must be concerned about the trade
    deficit, are you not? Maybe you are not. I think I asked you
    that before.
        Secretary O'Neill. No, I am not.
        Senator Dorgan. Bad question, for you at least. The trade
    deficit, in my judgment, certainly represents some storm clouds
    in the future, and also the fiscal policy budget deficit that
    we are facing is difficult.

                                CLOSING REMARKS

        I just wanted to get your perspective of where we are. We
    have a series of other questions I would like to submit. I
    think that what I would like to do is ask if my staff can
    continue meeting with your key people.
        Let me just say something that you alluded to. I too have
    visited facilities. I think the people who are working in
    Customs, and FLETC, and OFAC, and a whole series of areas in
    Treasury have been working very hard. I know I have gone to the
    border and I have seen people working 12 hours a day, 6 days a
    week. These are dedicated men and women and they do an
    excellent job and we want to commend them.

             PREPARED STATEMENT OF SENATOR BEN NIGHTHORSE CAMPBELL

        Senator Campbell had hoped to be back by the end of this
    hearing but he obviously has not been able to do that. He asked
    that I submit his statement for the record and ask for your
    indulgence. He had other business.
        [The statement follows:]

             Prepared Statement of Senator Ben Nighthorse Campbell

        Thank you, Chairman Dorgan. I, too, would like to welcome Secretary
    O'Neill. Thank you for appearing before the Subcommittee to discuss the
    fiscal year 2003 budget request for the Department of the Treasury. I
    would also like to congratulate Mr. Edward Kingman on his new position
    as the Assistant Secretary for Management and Chief Financial Officer
    in the Department of the Treasury--welcome.
        The tragic events of September 11 put this nation into a tail spin,
    and we are all still trying to recover. The fight against terrorism has
    become the number one priority and the Department of the Treasury has
    stepped up to the plate and taken on some very challenging duties.
      --The Financial Crimes Enforcement Network and the Office of Foreign
            Assets Control moved quickly to identify and freeze funds used
            for terrorist activities.
      --The Bureau of Alcohol, Tobacco and Firearms worked along with
            others to sift through the rubble of terrorist attack sites to
            help recover remains and personal belongings, using techniques
            developed from years of investigating bombing and arson cases.
      --The Customs Service has worked long and hard to make sure that our
            borders are secure.
      --The Secret Service was given the task of making sure that events
            like the Superbowl and the 2002 Winter Olympic Games were safe
            for both athletes and spectators.
      --And, the Federal Law Enforcement Training Center has geared up to
            train all the needed new Federal law enforcement officers,
            including air marshals.
        The Department of the Treasury is one of the most diversified
    departments within the Federal Government and I look forward to
    learning more about the fiscal year 2003 resources needed to carry out
    the Department's key priorities:
      --Protecting our nation from terrorists and terrorist activities,
      --Necessary technological improvements,
      --Improving customer service and compliance at the Internal Revenue
            Service, and
      --Achieving the President's management agenda.
        We are also interested in learning how the resources received to
    date by the bureaus have been used to help fight the war on terrorism.
        Finally, Mr. Secretary, I think the lessons learned through the
    GREAT program, managed by the Bureau of Alcohol, Tobacco and Firearms,
    are very important resources for at-risk youth of our country. I
    appreciate your continued support.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Dorgan. So what I would like to do is say that the
    record will remain open until the close of business tomorrow
    for anyone to submit additional questions or statements for the
    Secretary.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]

                 Questions Submitted by Senator Byron L. Dorgan

                            cobra user fee proposal
        Question. The Administration is claiming that the Customs Service
    fiscal year 2003 budget will receive an increase from fiscal year 2002.
    This is largely based on the Administration's proposal for a tax
    increase to cover $250 million of homeland security efforts. It is my
    understanding that this user fee must be authorized by July 1, 2002 to
    begin accruing the total $250 million. Are you working with the
    authorizing committees to pass this proposal and what plans do you have
    to cover the $250 million shortfall if the legislation is not enacted?
        Answer. The Administration will soon send a legislative proposal
    for a COBRA fee increase to the House Committee on Ways and Means and
    the Senate Committee on Finance. The Administration strongly urges the
    enactment of the fee increase because it is essential to the successful
    accomplishment of Customs' overall mission. The allocation of the fee
    increase would not be restricted to any aspect of that mission.
    Consequently, the Administration has not contemplated an operating
    approach for Customs based on resources that are $250 million less than
    the total availability assumed in the budget request.
                          business strategy adjustment
        Question. You have mandated a business strategy adjustment for most
    of the agencies under the Department during fiscal year 2003. This is
    essentially forcing agencies in a very tight budget year with no
    programmatic increases, to find a total of $84.7 million in savings.
    Only one agency, Treasury Inspector General for Tax Administration has
    addressed this with a proposal that would result in the elimination of
    48 FTE. In addition, the Bureau of Alcohol, Tobacco, and Firearms could
    also be forced to decrease personnel as a result of absorbing these
    costs. How do you rationalize this policy if law enforcement agencies
    are forced to downsize personnel in a time when homeland security is
    most needed?
        Answer. This type of business review is a common practice among
    America's most successful corporations and must occur continuously over
    the course of a fiscal year. Highly successful managers in these
    organizations seek better uses of limited resources to achieve improved
    outcomes at the same or lower cost.
        Because this budget is proposed 8 months in advance of fiscal year
    2003, this business review exercise is a work in progress. Bureau heads
    and financial plan managers are expected to work creatively on mid-
    course adjustments until the final quarter of fiscal year 2003, thereby
    achieving the most efficient use of all available resources and being
    able to more accurately predict fiscal year 2003 requirements.
        The actual percentage decrease from fiscal year 2002 in the
    Treasury budget request as a result of the Business Strategy Adjustment
    is--0.5 percent or $84.7 million, of which approximately half or $38.5
    million would be absorbed by the Internal Revenue Service. In the past
    decade, worker productivity has grown enormously, leading to growth in
    the economy. It is not too much to expect that, by fiscal year 2003,
    productivity will once again exceed 1 percent given continued process
    re-engineering and technology improvements. Therefore, it is safe to
    assume that Treasury can accommodate an adjustment downward of 0.5
    percent.
                              joint border agency
        Question. It is my understanding that Governor Ridge is moving
    closer to a proposal combining the Customs Service in a joint border
    agency with other agencies such as the Immigration and Naturalization
    Service (INS) under the Department of Justice. Given the INS's poor
    record and this week's most recent blunder of sending approval letters
    for student visas of two of the terrorists from September 11, is it the
    most appropriate thing to combine these agencies at this time?
        Answer. The President recognized the need to make fundamental
    changes in the organizational structure of the INS and proposed a
    restructuring of that agency last year. I am certain the President will
    take all issues into account when considering the recommendation from
    the Office of Homeland Security to consolidate border security
    agencies.
        Question. Do you support Governor Ridge in his efforts to create a
    joint border agency and how would the revenue generating
    responsibilities of the Customs Service fit in with such a plan?
        Answer. I am working with Governor Ridge and the Office of Homeland
    Security to ensure that the best advice and a full range of options are
    available to the President. It is premature to comment on specific
    border agency configurations, which may or may not be officially
    proposed to Congress. I am proud to have the U.S. Customs Service
    within the Department of the Treasury. The President is listening to
    all the arguments and considering various options. Whatever he decides,
    I will be an advocate for the President's proposal.
        Question. What is the President's timeline for making a decision on
    this proposal?
        Answer. The Office of Homeland Security has submitted a border
    security proposal to the President for his consideration. The White
    House has indicated the President will make his decision after a full
    review.
        Question. What resulted from your 5pm meeting on March 14th, and
    any subsequent meetings, on this issue?
        Answer. The Principals Committee, on which I serve, met and
    deliberated the border security proposal presented by Governor Ridge.
    Subsequently, Governor Ridge submitted a proposal to the President for
    review.
                             counterterrorism fund
        Question. The Treasury Counterterrorism Fund (CT Fund) was first
    appropriated in fiscal year 1997 as a central fund to reimburse any
    Treasury organization for the costs of providing support to counter,
    investigate, or prosecute terrorism, including payment of rewards in
    connection with these activities.
        The President's fiscal year 2003 Budget attempts to transform the
    Counterterrorism Fund under the Department of Treasury into a
    reimbursable account for any agency in the Federal Government for it's
    role in a National Special Security Event (NSSE). Congress has
    cautioned the Administration on the use of this fund to pay for events
    such as the Olympics and other NSSE's. Is it your intention that this
    fund be used to reimburse any agency for its participation in these
    events?
        Answer. The Counterterrorism Fund is available to provide funding
    for costs associated with support to counter, investigate, or prosecute
    unexpected threats or acts of terrorism. The Fund can also be used to
    re-establish the operational capability of an office, facility, or
    other property damaged or destroyed as a consequence of any unexpected
    domestic or international terrorism act. This authority includes, but
    is not limited to, National Special Security Events (NSSEs). NSSEs are
    often unpredictable and expensive, and the Counterterrorism Fund has
    been an available source of funding that enables us to provide the
    level of security necessary for such events.
        The U.S. Secret Service, in its responsibilities for designing,
    planning, and implementing security for events designated as NSSEs, is
    authorized to call on other Federal agencies to provide security
    support for NSSEs as may be necessary. The proposed language would
    enable those agencies to be reimbursed for costs associated with that
    support. The language with respect to authorization for reimbursement
    to any Federal agency for costs of providing security at NSSEs is also
    framed within limiting parameters: agencies may be reimbursed for costs
    of responding to the United States Secret Service's request to provide
    such security.
        Question. Aren't you concerned that this fund will be depleted by
    planned activities that should be budgeted for in all affected
    agencies, rather than unforeseen events that will require the
    involvement of agencies within the Department of Treasury?
        Answer. The language itself sets out the parameters for use of the
    Fund, and is very clear in that the Fund is to be used to reimburse the
    costs of providing support to counter, investigate, or prosecute
    unexpected threats or acts of terrorism.
        Due to the limiting nature of the term ``unexpected'' which
    precludes the use of the Fund for activities or operations that are
    planned, as well as the level of Departmental oversight of the Fund's
    administration, we are not concerned that this fund will be depleted by
    planned activities.
                     law enforcement resource requirements
        Question. In the past, we have not seen eye to eye on the need for
    additional resources for the Customs Service. Even after the events of
    September 11 and the clear evidence of shortfalls along our nation's
    borders, the Department did not seek additional staffing resources
    necessary for the Customs Service. That is why I was very pleased to
    see the annualization of these resources in the fiscal year 2003 budget
    (with the exception of the proposed tax increase of $250 million to
    cover much of these additional costs). In a time when homeland security
    is vital and the strengthening of our nation's borders is a frontline
    defense requirement, what is your commitment to providing the U.S.
    Customs Service and all Treasury law enforcement agencies with the
    necessary resources and support they require from the Department?
        Answer. The President and I are in agreement that the resource
    requirements for any given Federal agency must be evaluated in the
    context of government-wide coordination among agencies with related
    missions. To succeed in protecting our borders, we must be willing to
    reposition our human and financial resources to meet the shifting
    avenues for terrorist assault. We will beat terrorism only if we are
    more ingenious than the terrorists. Government is sometimes needlessly
    expensive and unproductive because there is not the drive to make
    effective resource allocation choices for the common good of the
    Nation. Each subsequent budget will give us the opportunity to rethink
    how best to direct taxpayer dollars to the critical issue.
        Question. I understand your belief that a business case must be
    made before dumping more money on a given program. But I suggest that
    law enforcement requirements should be justified differently than those
    for office supplies or computer systems. I do not think you can make a
    sound ``business'' case for placing two law enforcement officers at
    now--24hr ports-of-entry which have fewer than 50 cars entering the
    country on a given day. But you certainly can make a strong ``national
    security'' case for the enhanced presence of those law enforcement
    personnel. In keeping with the need to secure our nation's borders,
    will you also consider national security needs when determining
    resources?
        Answer. I do not see a conflict between a sound business case for
    resource allocation and concerns for national security. The President
    has made homeland security a top priority in his budget and I intend to
    carry out that commitment by ensuring that the Federal resources we
    devote to homeland security are spent wisely, and in fact add to our
    Nation's security.
                            ntia narrowband mandate
        Question. All land mobile radios, principally used by law
    enforcement, must be replaced to meet NTIA's narrowband mandate by
    January 1, 2005. The Department has been working on this effort since
    fiscal year 2001 and estimates a cost of $362 million. With the amount
    included under the Administration's fiscal year 2003 budget, we are
    looking at an estimated $80 million shortfall that will require a
    request of $191 million in fiscal year 2004. How does the Department
    plan on completing this vital technology conversion for law enforcement
    by the deadline within the current budget proposal? What will it mean
    for law enforcement if the conversion does not occur by January 1,
    2005?
        Answer. Based on the fiscal year 2003 President's budget request,
    significant infrastructure requirements and implementation have been
    shifted into fiscal year 2004 and the first part of fiscal year 2005 in
    order to address the NTIA mandate. Budget policy for fiscal year 2004
    and fiscal year 2005 will need to reconcile with the requirements of
    the Integrated Treasury Network (ITN) business case.
        In fiscal year 2001, the program budget request was $52.9 million
    and the appropriation was $29.8 million, resulting in a $23.1 million
    shortfall. Due to the fiscal year 2001 shortfall, the revised budget
    requirement for fiscal year 2002 became $101.6 million and included the
    original fiscal year 2002 requirement of $86.8 million plus the
    carryover from fiscal year 2001 of $14.8 million. The proposed fiscal
    year 2002 President's budget included $25.0 million \1\ for the ITN--
    resulting in a revised program shortfall of $76.6 million that was
    redistributed evenly between fiscal year 2003 and fiscal year 2004.
    This shortfall, combined with a re-evaluation of program requirements
    (which reduced the fiscal year 2003 budget request), led to an overall
    fiscal year 2003 budget request of $121.3 million. Based on the fiscal
    year 2003 President's budget of $31.9 million, infrastructure and
    implementation requirements have shifted primarily into fiscal year
    2004.
    ---------------------------------------------------------------------------
        \1\ The actual fiscal year 2002 appropriation was $25.9 million,
    however, the fiscal year 2003 budget was formulated based on the
    President's proposed budget of $25.0 million and associated $76.6
    million shortfall. The additional .9 million in fiscal year 2002
    funding was utilized to offset program requirements in fiscal year
    2004.
    ---------------------------------------------------------------------------
        Treasury, in consultation with OMB, is prepared to take the
    necessary budget actions, including those in the current year budget,
    to achieve the maximum benefits offered by the ITN and will make
    necessary adjustments to meet the NTIA mandate. For example, we may
    consider:
      --Directing the bureaus to use supplemental wireless communications
            funds they may receive from Homeland Security and counter-
            terrorism funding to augment ITN implementations, rather than
            purchasing equipment in support of their own independent
            systems.
      --Pursuing a mechanism that would redirect bureau baseline funds that
            support their own legacy radio systems into the ITN planning
            and implementation effort.
      --Establishing a mechanism to recover bureau operations and
            maintenance (O&M) costs from their decommissioned legacy radio
            systems and redirect toward ITN investment and O&M.
        It is important to note that the Department realizes that the
    budget process is not independent from other critical aspects of
    successful organizational management. In addition to alternative
    funding sources, Treasury will also continue to pursue the following
    program objectives:
      --As requirements dictate, partner and share portions of radio
            infrastructure with other Federal agencies. Our MOU with the
            Department of Justice researching common architectures and
            infrastructures is the start of a process that could lead to
            the sharing of public safety infrastructures, and potentially
            decrease some ITN life cycle costs.
      --Opportunities to partner, leverage, and share infrastructures with
            other Federal agencies will continue to be pursued.
        The consequences of failing to meet the January 1, 2005 NTIA
    narrowband mandate are significant:
      --Treasury agents and officers will probably become secondary users
            on their current frequencies.
      --Agents and officers may find themselves with no communications in
            an emergency situation.
      --The lives of Department law enforcement and protective personnel
            may be endangered.
      --Critical Departmental missions affecting national security may be
            compromised.
      --Horizontal (Department-wide and Federal) and vertical (State and
            local first responders) communications interoperability will be
            further delayed
      --Operations of other Federal agencies dependent on a coordinated
            transition to narrowband may be jeopardized.
                                cobra user fees
        Question. COBRA user fees fund all Customs inspectional overtime as
    well as over 1,000 positions. The President's budget DOES NOT assume
    the reauthorization of COBRA, which is set to expire in September 2003.
    What are the President's legislative recommendations to deal with the
    loss of this funding?
        Answer. The fiscal year 2003 budget does not reflect a specific
    Administration position on the extension of the COBRA fee, in either
    its existing or proposed form, beyond fiscal year 2003. The extension
    issue will be addressed during the fiscal year 2004 budget cycle.
                       secret service workload balancing
        Question. We have been concerned for sometime that the overtime
    requirements for Secret Service agents were resulting in significantly
    high rates of attrition. For this reason, we initiated a ``workload
    balancing'' plan and provided funds for the Service to hire additional
    agents and bring their overtime levels to acceptable ranges. Last fall,
    this subcommittee provided funding for what we anticipated was the
    third and final year for this initiative. However, the spike in the
    number of protectees requiring Secret Service attention as a result of
    the events of September 11 may undermine the workload initiative. It
    could once again return the overtime levels to unacceptable levels and
    restart the cycle of attrition.
        Are you concerned about attrition in the Secret Service and have
    you discussed this situation with the Director?
        Answer. Yes, I have discussed these issues with the Director. The
    agent hiring initiative has empowered the Secret Service so that it is
    well underway in achieving its goal to reduce the attrition rate for
    non-retirees, the early resignation or other type of separation from
    the Secret Service of young or mid-career agents. However, the Secret
    Service has not yet achieved its fiscal year 1994 benchmark attrition
    rate of .48 percent. This is largely due to the lag time attributed to
    bringing an agent trainee from training to an operational status in the
    field.
        Question. If this cycle starts again will you be willing to work
    with the Secret Service to find the resources to address this critical
    problem?
        Answer. Yes, I would be willing to work with the Secret Service to
    find the resources to address this critical problem in the event that
    this cycle starts again.
              federal law enforcement training center requirements
        Question. The Federal Law Enforcement Training Center is charged
    with providing training for a significant portion of the Federal law
    enforcement workforce. In budget briefings with our staff, it appears
    that the fiscal year 2003 budget request is sufficient to meet FLETC's
    currently planned needs for the coming fiscal year. As you are aware,
    the Transportation Security Administration (TSA) is in the midst of a
    large ramp-up for various aspects of their new responsibilities. A key
    part of those responsibilities are going to be law enforcement
    activities, including Federal Air Marshals and other law enforcement
    agents for the airports. We understand the number of new hires may be
    in the thousands, all of whom will need training.
        What role will Treasury's Federal Law Enforcement Training Center
    have in this undertaking?
        Answer. FLETC continues to coordinate with the Transportation
    Security Administration (TSA) in determining what their training
    requirements will be in the future. FLETC is supporting the TSA through
    a three-tiered approach--screeners training assistance, Federal Air
    Marshal training, and training for the proposed formation of a new law
    enforcement agent group.
    Screener Training Assistance
        At the request of the TSA, a proposed FAA-developed curriculum was
    reviewed and expanded by FLETC subject matter experts for law
    enforcement and security content. In February 2002, FLETC hosted a
    mini-conference of TSA, FAA, USSS, and loaned executives from the
    private sector to the TSA. A pilot program was conducted utilizing a
    combination of FAA personnel and FLETC-identified retired law
    enforcement officers, who could serve as a potential train-the-trainer
    cadre. This was conducted in Glynco, GA.
        Starting in March 2002, a second session of course development and
    a basic screeners pilot program was conducted at Glynco. It is our
    understanding that TSA will conduct the training on a regional and
    local basis across the country. FLETC's role will be limited to
    providing training validation and assistance on an as-requested basis.
    Federal Air Marshal Training
        FLETC began training for increased numbers of Federal Air Marshals
    in October 2001 at the request of FAA. Program agreement has been
    reached between FAA and FLETC on the training format to be used.
    Adjustments will continue to be made, as more information becomes
    available concerning the long-term mission goals of the TSA, and
    FLETC's role in assisting to achieve those goals. FLETC is now
    conducting intensive training through its Artesia, NM site on a 6-day
    workweek for new Federal Air Marshals. A reimbursement agreement has
    also been signed between the two agencies that will cover costs for
    tuition, staffing, and equipment needs for this training.
    Training for the proposed formation of a new law enforcement agent
            group
        FLETC and TSA are working on an agreement of training program
    content and resources needed for training a new law enforcement agent
    workforce under TSA's auspices. TSA expects to begin sending trainees
    to Glynco in the summer of 2002. In anticipation of this, the two
    agencies are looking at space and training capacity options for
    conducting all training at the Glynco facility. Final decisions on
    facilities and workload projections have not yet been determined.
        Question. Do you plan to provide additional funding and staffing
    resources to FLETC, whose fiscal year 2003 request already indicates
    their capabilities are stretched to the limits with training
    requirements following the September 11 attacks?
        Answer. FLETC's fiscal year 2003 budget included sufficient funding
    for the requirements that were known at the time of its submission. At
    the time the fiscal year 2003 budget was submitted, the TSA
    requirements were not known, in fact those requirements are still being
    developed. Currently, the cost of the additional training being
    provided to TSA by FLETC is being reimbursed by TSA. This arrangement
    will have to continue at least through fiscal year 2003 or additional
    resources will have to be provided to FLETC for both funding and
    staffing.
        Question. I would like to follow up with you on our discussion
    about the possible creation of a ``working capital fund'' within
    Treasury to allow for a more regularized flow of students through
    FLETC's training facilities. I am encouraged that you are aware of the
    spikes and lulls in the throught-put of students and have given some
    thought to this problem. Exactly how do you envision this problem being
    addressed? How can we assist you in this endeavor?
        Answer. The practicality of a working capital fund that conducts
    continuing cycles of business-like activity, in which the fund charges
    for the provision of training or training-related services and uses the
    proceeds to finance its spending without the uncertainties endemic to
    the annual appropriations process, is appealing. Sometimes inherent
    delays in the appropriations process cause departments and agencies to
    hold back on making commitments to fill FLETC training slots; and as a
    result, FLETC periodically experiences an uneven utilization of its
    staff, facilities, and resources. On the other hand, we must not
    jeopardize the availability of mandatory and qualitative law
    enforcement training. Although the concept is appealing from an
    enterprise perspective, it also raises challenges when participating
    agencies have insufficient funding. As we continue to evaluate such a
    funding mechanism we will let the Committee know how it can assist us
    in this regard.
                        visiting customs ports of entry
        Question. As a former CEO, you recognize the importance of visiting
    your facilities, meeting with the workers and seeing the conditions in
    which they must work. In that vein, and recognizing how busy your
    schedule is, have you been to any northern border ports-of-entry since
    you became Secretary? Have you visited any in the winter? For that
    matter, have you been to the southwest border in the summer?
        Answer. On February 25, 2002, I visited the Port of Jacksonville,
    Florida, as well as the Customs Air Marine Interdiction Division branch
    in Jacksonville. I also visited the Customs facility at JFK Airport,
    shortly after the September 11, 2001 terrorist attacks. I am especially
    looking forward to my site visit to the Detroit port of entry on April
    16, 2002. I had two additional visits scheduled to the Northern and
    Southwest Borders, but unfortunately both visits were cancelled due to
    scheduling conflicts. I look forward to visiting these sites in the
    future.
              use of technology at the borders and ports of entry
        Question. You are aware of the dynamic tension facing the Customs
    Service as it pursues its dual role of facilitating the flow of
    legitimate trade while at the same time preventing illegal substances
    from entering the country. Recently, Customs Commissioner Bonner spoke
    about his interest in using technology overseas at some of the largest
    seaports--Hong Kong, Rotterdam--to verify the contents of cargo
    containers before they are loaded on ships and sent to the U.S. Then
    these containers would be tracked as they made their way to their
    ultimate destination to ensure that they are not tampered with en-
    route. This system would be used to assist the exporters and importers
    who participated in the program by significantly reducing any
    processing time once the cargo reaches the U.S. border. At the same
    time, on his recent trip to Mexico, Governor Ridge noted that
    technology on the border is woefully outdated. Do you agree with these
    assessments? How can we jointly better use technology to protect both
    the border as well as legitimate trade?
        Answer. Customs is in the process of expanding its layered
    enforcement approach at our nation's borders. Inspectors have recently
    been deployed to Canada in the port cities of Vancouver, Montreal and
    Halifax, and Canadian inspectors have been deployed to the U.S. port
    cities of Newark and Seattle/Tacoma. A state-of-the-art targeting tool,
    the Automated Targeting System (ATS), has been provided to these
    targeting teams to pre-screen sea containers arriving in Canada that
    are destined for the U.S. and vice versa. In addition, Canada has begun
    procuring advanced inspection equipment such as the Vehicle and Cargo
    Inspection System (VACIS) to assist in the inspection process. The U.S.
    ports mentioned above currently have this equipment and are utilizing
    it to inspect both United States-and Canadian-bound sea containers.
        Customs has deployed over 80 non-intrusive inspection (NII) systems
    around the country to protect our nation's borders and facilitate
    legitimate trade. These X-ray and gamma ray based systems are state-of-
    the-art and are capable of screening sea containers, trucks, rail cars
    and cargo in a matter of minutes. It would take hours to search each of
    these inspections by hand. In addition to the NII systems, Customs is
    testing and deploying a number of other new technologies aimed
    specifically at radiation detection. Pager-sized, hand-held devices or
    portals capable of scanning a truck or container are either on the job
    or being tested. In addition, the Customs Handheld Acoustic Inspection
    System (CHAIS) is being developed to identify suspicious liquid and
    gaseous compounds without having to open the item.
        Customs currently uses technology throughout its layered
    enforcement approach to target, screen and conduct intensive
    inspections. Technology that we use has been shared with Mexico and
    Canada. In addition to the Canadian NII system, Mexico has deployed a
    number of NII systems, both X-ray and gamma ray based, to screen and
    inspect commercial trucks and railcars. Customs continues to work
    closely with Mexican authorities on plans for the deployment and
    utilization of this type of equipment.
        Currently, the majority of land border shipments arriving from
    Mexico by truck are cleared by Customs using the cargo selectivity
    system or the Border Release Advanced Selectivity and Screening (BRASS)
    system. Both of these systems are paper-based for the most part on the
    land border and could benefit from new technologies available.
        There is, for instance, no automated truck manifest system
    available yet in Customs Automated Commercial System. A system of pre-
    filed information from the carrier about the conveyance, driver and
    carrier's knowledge of the shipments would serve as a valuable
    targeting tool. This is planned as one of the first deliveries of the
    Automated Commercial Environment, with an expected delivery by the end
    of 2003. The National Customs Automation Program prototype release
    program available now only in the port of Laredo does offer some
    manifest information on conveyance and driver, but it is limited to
    restricted importers and merchandise.
        The targeting capabilities of the major release systems, cargo
    selectivity and BRASS, are not as wide ranging and flexible as those of
    the Automated Targeting System, but many of the selectivity entries can
    be piped into ATS provided the data is received in advance of truck
    arrival. Future changes to ATS or any new targeting provided in ACE
    will provide these capabilities in all release systems.
        Additionally, inspectors working in areas away from the office, in
    railroad marshalling yards and at bonded facilities in the port could
    be supplied with computers capable of remote access. This would provide
    them the capability of querying the available targeting, enforcement
    and reference databases, while performing their work away from the port
    office.
                        earned income tax credit program
        Question. Late last month, the Treasury Department and the IRS
    announced the formation of a new task force to examine the Earned
    Income Tax Credit (EITC) program. This popular program which benefits
    low-income workers has been the target of what I believe to be unfair
    criticism in some small, but vocal, quarters. While there have been
    some difficulties with the program, an IRS report found that the $716
    million we have appropriated for the program resulted in the collection
    of $5 billion in EITC funds over 5 years. Do you support the EITC
    program? What steps can we take together to ensure that the goals of
    the program are being met?
        Answer. The Administration supports the goals of the EITC as set
    out by the Congress. In addition, EITC receives a separate
    appropriation from Congress, and therefore, the Department is directed
    to apply increased attention to this program. The EITC is intended to
    reward work and help families out of poverty. But an error rate of 27
    to 32 percent is unacceptably high, and as a result, the EITC has been
    consistently listed among the Federal programs most vulnerable to waste
    and error. Fortunately, we are already taking steps to control the
    error rate.
        The Economic Growth and Tax Relief Reconciliation Act of 2001
    simplified the income and child definitions used to determine EITC
    eligibility. These rules will take effect on tax year 2002 returns
    filed next year. The Department is in the process of developing a
    proposal for a uniform definition of ``qualifying child''. The proposal
    would reduce confusion and the potential for duplicate and erroneous
    claims by standardizing the definition of child used for the EITC and
    for four other tax benefits (the dependent exemption, child tax credit,
    child and dependent care tax credit and head of household filing
    status).
        Finally, as you know, Treasury and IRS are working now to further
    improve the integrity of the program while maintaining its key
    benefits. The Treasury/IRS task force will be making recommendations to
    me this summer. In the meantime, I ask that you continue to support the
    IRS compliance activities that have collected $5 billion between 1998
    and 2002. I would also add that we need to be looking at compliance in
    the tax code as a whole, and not just in the EITC. IRS is moving in
    that direction through the new National Research Program. I encourage
    the Congress to continue to support this new research.
                          information systems security
        Question. According to a recent review by the Inspector General, 82
    percent of the Department's information systems are not accredited for
    security. Proper safeguards and secure operations have been a mandate
    since the Computer Security Act of 1987, and this is a failing grade
    for the Department of Treasury. Not only is information security even
    more important now, but given the information under the jurisdiction of
    the department, it should have been a top priority all along. What are
    you plans to correct this situation, especially in relation to the
    major modernization projects at agencies like the IRS and the Customs
    Service?
        Answer. Treasury's Office of Information Systems Security (OISS)
    has initiated a very aggressive Department-wide strategy to address
    security accreditation. This strategy includes comprehensive site
    visits Department-wide, thereby providing OISS senior staff an
    opportunity to ensure that Treasury policy and guidance are followed
    regarding all facets of IT Security.
        As part of an ongoing partnership with the National Institute of
    Standards and Technology (NIST), Treasury has actively assisted NIST in
    drafting Federal Certification and Accreditation Guidelines. It should
    be noted that prior to the recent review by the Inspector General, OISS
    established a Department-wide performance measure to address the
    certification and accreditation of Information Technology systems with
    a goal of having 100 percent of the Department's systems certified and
    accredited for operation by fiscal year 2004. OISS has created a
    compliance program to monitor bureau progress in achieving this
    performance objective.
        As a result, there is a renewed emphasis Department-wide on this
    vital component of IT security. Earlier this fiscal year, the Customs
    Service awarded a contract to accelerate the certification and
    accreditation process for their systems. The goal is to reach 100
    percent certification and accreditation of all Customs Service systems
    by the end of fiscal year 2003. The Internal Revenue Service has also
    awarded multiple contracts relating to certification and accreditation
    of their systems, and has purchased an automated tool to assist with
    part of the certification and accreditation process. The goal is to
    reach 100 percent certification and accreditation of all Internal
    Revenue Service systems by the end of fiscal year 2004.
               tax-exempt bonds financing of recycling facilities
        Question. Last year, you were before this committee and indicated
    that you had undertaken a review of the Department's policy in this
    area and that you would be getting back to us after meeting with
    industry groups. It is my understanding the National Association of
    Bond Lawyers has submitted comments and a detailed proposal for
    changing regulations to clarify the issue of when something is waste
    and thus qualifies for tax-exempt financing and when it does not.
    Please provide an update about your discussions with the affected
    parties and give us the status of your review.
        Answer. Existing law permits tax-exempt financing for solid waste
    disposal facilities, including certain recycling property, even if the
    property is owned and operated by a private business. The Treasury
    Department has received a number of comments requesting clarification
    of the existing regulatory definition of ``solid waste disposal
    facilities,'' particularly as it applies to recycling facilities.
    Treasury personnel considered these comments, and met with industry
    groups, and have concluded that additional clarification on this issue
    is necessary. Accordingly, the Treasury Department's Office of Tax
    Policy intends to undertake, as part of its Priority Guidance Plan for
    the period July 1, 2002 through June 30, 2003, a guidance project to
    address the definition of solid waste disposal facilities. As part of
    this process, the Treasury Department will solicit additional comments
    from interested parties.
                                  tax shelters
        Question. Mr. Secretary, in addition to the report that you said
    during the hearing you would provide to me on what the Department is
    doing regarding tax shelters, I would appreciate responses to the
    following questions.
        Answer. The Department will soon be releasing Enforcement Proposals
    for Abusive Tax Avoidance Transactions, which will be sent to the
    Committee as soon as it is available. In addition to detailing a
    comprehensive set of administrative and legislative proposals to
    address the problem of abusive tax practices, these Enforcement
    Proposals will also describe the Treasury Department and IRS' recent
    experience with the current enforcement regime, the current actions
    being taken to combat abusive tax avoidance transactions at all levels,
    and the reasons why the Treasury Department believes that its proposals
    will materially improve the Treasury Department and IRS' ability to
    combat these types of transactions. The Department is already working
    with the IRS and Congress to move these proposals forward.
        Question. What kinds of tax shelters are you aware of that are
    currently being used by taxpayers to avoid their tax responsibility?
    What tax shelters is the Treasury Department most concerned about at
    this time?
        Answer. The Treasury Department is concerned with all tax avoidance
    transactions that are structured to obtain unintended tax benefits, as
    well as with tax scams typically targeted at individuals and small
    businesses. The sophistication of these transactions and scams varies
    considerably, ranging from very complex transactions designed to
    satisfy technical rules while yielding unintended tax benefits, to
    patently fraudulent arguments and positions that tax is not due. Many
    of these transactions and scams will be discussed in the Treasury
    Department's Enforcement Proposals.
        The Treasury Department, however, is most concerned about the
    transactions and schemes that we do not know about. The current
    enforcement regime requiring disclosure, registration, and customer-
    lists for questionable transactions must be made clearer and broader so
    that questionable transactions can be identified and scrutinized.
    Unfortunately, too many taxpayers and promoters are reading the
    requirements narrowly and construing the exceptions broadly to avoid
    maintaining customer lists and disclosing and registering transactions.
        Therefore, we will be proposing a comprehensive set of
    administrative and legislative proposals that will significantly
    simplify and broaden the existing enforcement regime and add new and
    increased penalties for the failure to comply with these rules. We
    believe that early and vigorous scrutiny will allow the Department and
    the IRS to address questionable transactions quickly through published
    guidance or by proposing legislation, and to develop the best cases for
    litigation when appropriate.
        Question. Would you please tell us what major legislation, if any,
    the current Administration has proposed in its fiscal year 2003 budget
    submission to deal with the tax shelter problem?
        Answer. The Administration's proposed fiscal year 2003 budget
    contains two proposals targeted at abusive tax practices. The first
    would increase the frivolous return penalty and extend the penalty to
    cover other frivolous submissions made to the IRS. The second proposal
    would give the IRS the authority to treat false claims for refundable
    credits as nullities not subject to existing deficiency procedures.
        Question. Do you anticipate that the Administration will be
    recommending any legislation in the future?
        Answer. As noted above, the Treasury Department will soon be
    releasing a comprehensive set of administrative and legislative
    proposals for combating the problem of abusive tax avoidance
    transactions. The legislative proposals will include new penalties on
    taxpayers for the failure to disclose questionable transactions,
    increased penalties on promoters who fail to register questionable
    transactions and maintain customer lists, SEC reporting of penalties
    relating to identified tax avoidance transactions, expanded injunction
    authority for promoters who repeatedly disregard the registration and
    customer-list requirements, and two substantive law changes to stop
    specific types of abusive transactions that have been identified.
        Question. Are there regulation projects underway at the Treasury
    Department or IRS notices to curb the use of tax shelters?
        Answer. The Treasury Department and the IRS are closely working
    together to identify new transactions to be identified in notices as
    tax avoidance transactions that are required to be disclosed on a
    return, including new transactions that have been identified in
    response to the IRS' recent disclosure initiative (Announcement 2002-
    2).
        The Department and IRS are also working to implement the regulatory
    actions which will be outlined in the Treasury Department's Enforcement
    Proposals, including significant revisions to the regulations for the
    disclosure, registration, and customer-list requirements. These changes
    will increase transparency and allow the Department and the IRS to
    evaluate questionable transactions early in the process and determine
    whether regulatory or legislative responses are required.
        Question. Is the IRS effectively imposing monetary or other
    penalties in the tax shelter cases they uncover? Do you know the number
    of times the IRS has imposed additional penalties in tax shelter cases
    and actually how much in tax shelter-related penalties the IRS has
    sustained in dollar terms?
        Answer. The Department and IRS must work continually to ensure that
    all penalties are fairly, impartially, and consistently applied.
    Ensuring the consistent and judicious application of penalties often
    requires clear guidance coupled with experienced oversight. For
    example, the IRS' Large and Mid-Size Business Division (LMSB) recently
    issued guidelines for the application of the accuracy-related penalty
    on potentially abusive tax avoidance transactions. This policy includes
    instructions to examiners regarding the development and imposition of
    the penalty as well as executive oversight by the Directors of Field
    Operations (DFOs), who have the final decision-making authority
    regarding the imposition or non-imposition of penalties. These
    guidelines are also a clear signal to taxpayers that penalties will be
    developed and considered in appropriate cases.
        With respect to specific data regarding the assertion of penalties,
    I have asked the Department and IRS to review the existing data, and I
    will forward any information responsive to your specific question when
    it becomes available.
        Question. What is the Administration doing to allow our tax
    officials to get the information they need for examinations from these
    tax-haven countries?
        Answer. In July 2001, I made a public commitment to significantly
    expand our network of tax information exchange agreements, with a
    particular focus on achieving such agreements with significant offshore
    financial centers that have not been interested in cooperating with us
    on tax matters in the past. We are very pleased to have signed new tax
    information exchange agreements with the Cayman Islands, Antigua and
    Barbuda, the Bahamas, and the British Virgin Islands.
        These new tax information exchange agreements contain the elements
    that are critical to the effective exchange of information. They cover
    both civil and criminal tax matters, and ensure that bank secrecy and
    other rules will not stand as a bar to access needed information. They
    also provide for essential protections with respect to the privacy and
    confidentiality of the information to be exchanged.
        We believe these new relationships will prove to be very valuable
    in our efforts to ensure full and fair enforcement of our tax laws. We
    also believe that these new agreements will help us to encourage other
    jurisdictions to establish information exchange relationships with us.
    I remain committed to broadly expanding the U.S. network of tax
    information exchange agreements, and expect to be able to announce
    additional agreements in the coming weeks.
        Question. Does the Administration support the OECD's current
    initiative to force tax havens to cooperate with international tax
    enforcement efforts and what are you doing specifically to support the
    OECD's effort?
        Answer. After a careful review of the OECD harmful tax practices
    project early last year, I concluded that the United States must
    attempt to refocus the OECD project on its core element--the need for
    countries to be able to obtain specific information from other
    countries upon request in order to prevent noncompliance with their tax
    laws.
        I was concerned that unrelated elements of the OECD project, which
    had the potential to encroach on the sovereign rights of all countries
    to determine their own internal tax and economic policies, were
    distracting from and interfering with progress in the important area of
    effective tax information exchange.
        Working together with other OECD member countries, we have made
    substantial progress in focusing the OECD initiative on encouraging tax
    haven jurisdictions to improve their transparency and information
    exchange practices. We are very pleased with the progress that has been
    achieved because of this refocusing, which has allowed the project to
    proceed with considerably less resistance than it was encountering 12
    months ago. Indeed, more than 20 jurisdictions have committed to
    achieve transparency and effective information exchange since the
    project was refocused. We look forward to continuing to work together
    to achieve real advances in this critically important area.
                                     ______

                    Questions Submitted by Senator Jack Reed

                                   gun shows
        Question. In a January 1999 report, ``Gun Shows: Brady Checks and
    Crime Gun Traces,'' the Department of the Treasury concluded that ``a
    review of ATF's recent investigations indicates that gun shows provide
    a forum for illegal firearms sales and trafficking.''
        Do you support legislation to close the ``gun show loophole'' that
    exempts private sales at gun shows from the Brady background check
    requirement that applies to sales by licensed dealers?
        Answer. The Administration supports, in principle, amending the
    Brady Act to require background checks for all firearms transactions at
    gun shows. We must ensure that terrorists and other criminals are
    prevented from purchasing weapons at gun shows through an instant
    criminal background check that does not unduly burden the law-abiding
    gun buyers at these events.
        Question. I met with staff from the Treasury Department's Bureau of
    Alcohol, Tobacco and Firearms and the Department of Justice last
    November and was told that in the immediate aftermath of the September
    11 attacks, FBI officials compared the audit log of approved gun sales
    under the NICS to the government's terrorist watch lists based on a
    request from ATF. We later read about inspection of the audit log in
    the New York Times. So it was clear that these NICS records contained
    important information for investigators. But since then, the Department
    of Justice has suggested that Federal law prohibits NICS records from
    being used in terrorism investigations. Since the request came from
    your Department, what are your thoughts on DOJ's decision, and do you
    support legislative efforts to make audit log records available for
    anti-terrorist investigations?
        Answer. As a point of clarification, ATF made the request to the
    FBI to compare the audit log of approved gun sales under the NICS to
    the government's terrorist watch list in response to a request for
    information from the Joint Terrorism Task Force (JTTF). It is our
    understanding that the Department of Justice interprets its current
    regulations to prohibit the use of the NICS audit log for this purpose.
    To the extent that legislation would be necessary to make audit log
    records available for anti-terrorist investigations, the Department
    would review such legislation in consultation with others in the
    Administration.
                   use of atf databases for firearms tracing
        Question. In a written response to my inquiry about cooperation
    between the Department of Justice and ATF on anti-terrorist issues, the
    Attorney General stated that ``Following the September 11 attack, the
    FBI requested that the Bureau of Alcohol, Tobacco and Firearms (ATF)
    compare ATF databases relating to multiple sales, stolen firearms and
    traced crime guns with the [terrorist] watch list arising out of the
    investigation. The FBI was advised there were 6 matches from this
    comparison.''
        How many and what types of weapons were involved, i.e. were they
    assault weapons, handguns, etc.?
        Answer. The names of 8 individuals from the terrorist watch list
    matched the names of individuals found in records of 47 previously
    traced firearms or 2 multiple sales reports. These records included
    traces of 32 pistols, 10 rifles, 5 shotguns and 2 revolvers.
                       policy for importation of firearms
        Question. The Bureau of Alcohol, Tobacco and Firearms has the
    authority under 18 USC Sec. 925 (d) to exclude from import firearms
    that are not ``generally recognized as particularly suitable for or
    readily adaptable to sporting purposes. . . ''
        What is the policy of the Department, and specifically the Bureau
    of Alcohol, Tobacco and Firearms with respect to the importation of
    weapons that have significant potential for terrorist use?
    Specifically, what is ATF's policy with respect to the importation of
    .50 caliber sniper rifles? These weapons have been identified by the
    RAND Corporation as posing a significant and real threat to the
    security of air force bases because they have the capability to disable
    aircraft. Moreover, the Violence Policy Center has documented that 25
    of these long-range, high-caliber weapons were transferred to Osama bin
    Laden. Would it be the policy of the Department to exclude the
    importation of such weapons on the grounds that they would fail the
    ``sporting purposes'' test since they pose a threat to national
    security?
        Answer. The Bureau of Alcohol, Tobacco and Firearms has determined
    that a .50 caliber rifle is importable as a sporting firearm because it
    is particularly suitable for, or readily adaptable to, sporting
    purposes. Specifically, ATF's longstanding interpretation of ``sporting
    purposes'' includes competitive shooting events. In the United States,
    there are numerous organizations that sponsor competition in silhouette
    and target shooting events for .50 caliber rifles.
                       elimination of corrupt gun dealers
        Question. In a June 2000 study, ``Following the Gun: Enforcing
    Federal Laws Against Firearms Traffickers,'' the Department identified
    federally licensed firearms dealers (FFLs) as the single largest source
    of illegally trafficked firearms.
        What steps have been taken, or are planned, to identify and
    eliminate corrupt gun dealers?
        Answer. The Bureau of Alcohol, Tobacco and Firearms (ATF) focuses
    its inspection resources on dealers who have potential firearms
    trafficking indicators associated with their businesses. ATF's
    comprehensive focused inspection program targets certain dealers based
    on firearms tracing data and information about their compliance
    history. During these inspections, ATF examines the dealers'
    recordkeeping procedures, their compliance with the Brady law, and any
    inventory discrepancies.
        When warranted, ATF opens criminal investigations of licensees.
    During fiscal year 2000 and 2001, the Bureau initiated criminal
    investigations of 39 licensees for various violations, including the
    sale of illegal weapons and transactions with prohibited individuals.
    In addition to criminal prosecutions, when willful violations by
    Federal firearms licensees are discovered, ATF moves to revokes those
    licenses. In fiscal year 2000 and fiscal year 2001, nearly 70 dealers
    had their licenses revoked for willful violations of the Gun Control
    Act.
        Question. Is the balance of resources sufficient to perform the
    required increase in explosives investigations and inspection due to
    the events of 9/11 without shifting resources away from firearms
    enforcement, the GREAT grant program, and all other mandates of the
    BATF?
        Answer. Shortly after September 11, 2001, ATF directed that all
    field divisions conduct inspections of the vast majority of explosive
    licensees and permittees. These inspections were recently completed.
    During these inspections, ATF re-emphasized the importance of promptly
    reporting the theft or loss of explosive materials, as well as the
    importance of reporting any suspicious activity, attempted break-ins,
    and suspicious purchase attempts. ATF believes it is important to fully
    investigate every incident of the theft or loss of explosive materials
    and to conduct compliance inspections on all explosives licensees and
    permittees. With the level of inspector resources as they currently
    exist, we plan to inspect 50 percent of this total population on an
    annual basis. Our policy will be to first follow-up on problems we
    found during our post September 11 explosives field program. To
    continue our explosives inspection program at post September 11 levels
    would require additional resources or a reallocation of existing
    resources.
                        automated commercial environment
        Question. As you have mentioned in your testimony, the Customs
    Service is in the third year of funding for its modernization effort,
    specifically replacing the outdated Automated Commercial System (ACS)
    with the Automated Commercial Environment (ACE).
        Is the Department pleased with the progress of this modernization
    effort? In light of the dramatic increase in imports to our nation's
    ports, and the increased chance of illegal products coming into the
    country for possible terrorist actions, does the Department feel that
    there should be a further increase for Customs to assist in their
    monitoring of our ports of entry? Should the ACE modernization project
    be sped up?
        Answer. Customs Modernization has gained great momentum since the
    systems integration contractor began work on the Automated Commercial
    Environment (ACE) in August 2001. The Department is satisfied with the
    progress of ACE and recognizes its critical role in the foundation of
    Customs-wide modernization. Additionally, the Department monitors the
    progress of ACE through its oversight role on the Joint Capital
    Investment Review Board (J-CIRB). As the project progresses,
    capabilities will be improved and expanded to all modes of
    transportation and trade partners, creating national accounts for
    brokers, carriers, sureties, exporters, and government agencies. The
    infrastructure built for ACE will also serve as the foundation for
    modernization projects in Customs enforcement and administration areas.
        The benefits of ACE have become even clearer in light of the recent
    terrorist attacks. In addition to reforming the way Customs conducts
    business with the trade, ACE will provide the tools, information, and
    foresight needed to both expedite trade, and through quicker more
    effective targeting, prevent cargo from becoming an instrument of
    terrorism. ACE is an important project for our country, Customs, the
    business community, and for the future of global trade.
        Consideration of any acceleration of ACE funding beyond the
    requested $312.9 million level (including funding for the International
    Trade Data System) will be part of the Administration's Fiscal Year
    2004 budget development, and will take into consideration the pace of
    spending approvals and procurements as the project progresses. Treasury
    will also continue to derive guidance from GAO and from communications
    issued by the Appropriations Committees in their review and approval of
    requests for release of already appropriated funding. The most recent
    such communication from the House Appropriations Committee continues to
    counsel caution, and that care be taken to assess the risks and their
    acceptable mitigation in any acceleration of development of such a
    complex project as ACE.
                  modernization and improvement of irs systems
        Question. You have outlined in your testimony the continued efforts
    of the Department and the IRS to modernize the Service's systems as
    well as to improve its taxpayer service and compliance, and I laud your
    efforts in this area.
        What other areas do you see that need increased efforts at
    improvement? What are the levels of complaints lodged against the
    Service by taxpayers over the course of the modernization effort? I was
    wondering too if you could expand a bit more about the IRS' plans to
    encourage electronic filings, and particularly how this might conflict
    with private sector efforts in this area?
        Answer. The IRS Oversight Board has stated that ``service to
    taxpayers is inadequate.'' In spite of the short-term gains the IRS
    achieved, they are still not consistently providing service to
    taxpayers at a level they expect and deserve.
        The IRS received 108 million telephone calls, covering a very wide
    range of subject matter. The quality of that telephone service, while
    continually improving, is still not on a level with the services
    received in the private sector.
        Not only must the IRS continue to improve taxpayer access to toll-
    free lines, but they must also improve the accuracy of the responses
    given to tax law and account questions. Unfortunately, this problem is
    not confined to telephone assistance. The IRS also has a steep learning
    curve at taxpayer assistance centers. The GAO testified in April 2001
    that ``walk-in sites are continuing to provide poor tax law
    assistance.''
        The IRS is not providing adequate service in other areas. For
    example, employers, particularly first-time employers, are often
    discouraged by the delays and difficulties in obtaining an Employer
    Identification Number (EIN).
        The IRS is currently administering 71 taxpayer rights provisions
    resulting from the Restructuring and Reform Act of 1998 (RRA 98). Many
    of the provisions, such as innocent spouse protection, due process in
    collections and offers in compromise, would individually be considered
    major projects. Collectively, they represent a challenge of learning
    new ways of doing business for nearly every one of IRS' 100,000
    employees. During this process, the IRS encountered a number of
    problems and demands that are still being addressed.
        The Administration proposes in its budget submission ``an easy, no-
    cost option for taxpayers to file their tax returns online.''
    Unfortunately, there has been some confusion regarding this proposal.
    The Administration's proposal to give taxpayers the option to file
    their tax returns on-line without charge is based on two principles:
    (1) that no one should be forced to pay extra just to file his or her
    tax return; and (2) the IRS should not get into the software business.
    The IRS is working with private industry representatives who have
    proven expertise and experience to develop these options.
        As I stated on January 30, 2002, ``I don't intend for the IRS to
    get into the software business, but rather to open a constructive
    dialogue with those who already have established expertise in this
    field. In the end, this effort should come up with a better way to save
    time and money for both taxpayers and the government.''
                                     ______

             Questions Submitted by Senator Ben Nighthorse Campbell

                          business strategy adjustment
        Question. Just about every account within Treasury has been asked
    to examine their operations to achieve improved effectiveness in
    business practices. As you can imagine, this idea has raised some
    concerns and I would like to explore the proposal just a bit:
        What is the nature of the Business Strategy Adjustment?
        Answer. The business strategy adjustment reflects Treasury's
    expectation of reasonable savings from better business practices. Each
    bureau is expected to review all programmatic efforts on a continual
    basis and reduce or remove those producing little or no programmatic
    value.
        Question. How were the amounts determined?
        Answer. The adjustment for each Bureau was 25 percent of the total
    mandatory costs of the proposed pay raise and non-pay inflation factor,
    developed historically using OMB economic assumptions. However, when
    the Administration revised the non-pay inflation factor downward from
    2.1 percent to 1.8 percent, Bureaus were allowed to keep the 0.3
    percent savings from this downward revision. Consequently, each
    Bureau's adjustment is now slightly less than 25 percent of their total
    mandatory inflationary costs.
        Question. Why wasn't the Departmental Offices account asked to come
    up with these savings?
        Answer. It was determined that given the funding denied for the
    Departmental Offices (DO) for fiscal year 2002, they could not manage
    another absorption in fiscal year 2003. DO was denied most of the
    requested funding to make the base whole in fiscal year 2002, as well
    as an initiative to provide secure LAN services, totaling $9.743
    million in absorbed costs. These absorbed costs included: (1) $3.8
    million for unavoidable inflationary increases to IT contracts and DTS
    communications costs; (2) $0.7 million in non-pay inflation, which was
    only a 50 percent restoration of non-pay inflation compared to other
    bureaus, and means the absorption of inflationary costs of GSA rent,
    equipment contracts, and facility related contracts, etc.; (3) $3.0
    million for Treasury Secure Data Network (TSDN), which must be
    installed to meet security requirements; and (4) as a result of
    receiving only a partial amount of the $5.6 million for the Labor Cost
    Infrastructure project, DO had to reduce its authorized FTE ceiling by
    65. Over the past few years DO has carried a higher FTE count than it
    could sustain. It was hoped that the labor cost increase would help to
    better manage the FTE authorization level. The net effect of all these
    absorptions is a very tight management of costs and staffing changes,
    all of which are under very close review before moving forward.
        Question. Can you give us some examples of what bureaus can do to
    achieve these savings?
        Answer. I believe that every organization's financial planning must
    include expectations of continuous productivity improvement. This
    adjustment is not about cutting back programs and services due to a
    lack of resources. This adjustment is about re-engineering processes
    and the judicious use of new technology to maintain or increase
    performance at lower cost. Every bureau will approach this challenge
    differently, but they all should be: (1) reviewing business processes
    throughout their organizations to remove roadblocks that are costly and
    hinder performance; and (2) continually reviewing programmatic efforts
    to reduce or remove those producing little or no programmatic value.
    For one bureau that might be an unwieldy procurement process. For
    another bureau it might be a program that does not support its core
    mission and is not producing results that justify continued
    expenditures. I have empowered each of my bureau heads the freedom to
    make these determinations in the best interest of their bureau and am
    more than happy to work with them in achieving this improvement.
                        office of foreign assets control
        Question. Lately there have been numerous news reports about Cuba
    sanctions and travel to Cuba. For example, there was a Washington Post
    article on March 6, 2002 about the Office of Foreign Assets Control
    (OFAC) secretly settling more than 100 enforcement actions from 1998 to
    2000 against corporations, banks and other entities for violating trade
    embargoes with rogue nations and there was some concern expressed that
    this was not disclosed to the public.
        Are there specific guidelines OFAC uses in deciding whether to
    disclose these cases?
        Answer. In the past, OFAC did not typically release the names of,
    or information concerning, companies or individuals who settled cases
    of alleged sanctions violations through the payment of a negotiated
    settlement amount, unless it served the purpose of enhancing
    enforcement of the embargo.
        These settlements typically occur after OFAC informs the respondent
    through the issuance of a pre-penalty notice of the alleged violation
    and OFAC's intent to assess a fine. The respondent is then afforded 30
    days to refute the allegation, plead mitigating circumstances and/or
    enter into settlement negotiations. These negotiations often result in
    an offer by the respondent to pay an agreed upon amount to the U.S.
    Government in settlement of the allegation. In these instances there is
    no admission or formal agency finding of guilt, so OFAC traditionally
    has not released the names of the alleged violators.
        OFAC is carefully reviewing this disclosure policy and will soon
    issue a Federal Register Notice soliciting public comment on proposals
    to release certain settlement information.
        Question. Why were the cases referred to in the Washington Post
    article not disclosed earlier?
        Answer. As noted above, it was not OFAC's policy to disclose such
    information. The cases referred to in the Washington Post were released
    pursuant to the Freedom of Information Act.
        Question. Who is responsible for determining which cases are
    disclosed and when the cases are disclosed?
        Answer. The Director of OFAC has made these determinations in the
    past, after consultation with other relevant U.S. Government officials,
    in accordance with the policy described above.
        Even though OFAC is an entity of the Departmental Offices, we have
    a hard time getting specific information about funds allocated to that
    office for fiscal years 2000, 2001 and 2002.
        Question. What is the total number of full time employees at OFAC?
        Answer. The numbers of full-time employees (FTEs) for OFAC in
    fiscal year 2000, fiscal year 2001 and fiscal year 2002 are as follows:
      --Fiscal year 2000--68 (actual usage)
      --Fiscal year 2001--75 (actual usage)
      --Fiscal year 2002--129 (authorized ceiling)
        In addition, provided as Attachment 1 is a chart from the
    Departmental Offices Congressional Justification on Enforcement funds
    for fiscal year 2000 through fiscal year 2003.

                                  DEPARTMENT OF THE TREASURY--DEPARTMENT OFFICIES--DISPLAY OF ENFORCEMENT POLICIES AND PROGRAMS
                                                                     [Dollars in thousands]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Fiscal year
                                               -------------------------------------------------------------------------------------------------------------
                                                    2000 actuals          2001 actuals          2002 enacted          2002 fin plan         2003 proposed
                                               -------------------------------------------------------------------------------------------------------------
                                                 Dollars      FTE      Dollars      FTE      Dollars      FTE      Dollars      FTE      Dollars      FTE
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Office of Enforcement: \1\
        11.0 Personnel Compensation...........     $3,681         51     $4,038         46     $4,278         48     $4,417         48     $4,556         48
        12.0 Personnel Benefits...............        718  .........        763  .........        958  .........        609  .........        639  .........
        21.0 Travel...........................        238  .........        259  .........        295  .........        259  .........        259  .........
        22.0 Transportation of Things.........          0  .........          0  .........          0  .........          0  .........          0  .........
        23.0 Communications, Utilities & Misc.         23  .........         23  .........         25  .........         24  .........         24  .........
        25.0 Other Services...................        164  .........      3,018  .........      3,051  .........      2,929  .........      2,991  .........
        26.0 Supplies.........................          6  .........         17  .........         23  .........         22  .........         22  .........
        31.0 Equipment........................          3  .........         27  .........          9  .........          9  .........          9  .........
        91.0 Confidential Expenditures........          5  .........          7  .........          0  .........          0  .........          0  .........
                                               -------------------------------------------------------------------------------------------------------------
          Subtotal, Office of Enforcement.....      4,837         51      8,152         46      8,639         48      8,269         48      8,500         48
    Legislative Proposal on Full Costing of     .........  .........        402  .........  .........  .........        435  .........        451  .........
     Benefits.................................
    Executive/Administrative Support \2\......      2,681         12      4,684         21      5,111         21      5,211         21      5,306         21
                                               -------------------------------------------------------------------------------------------------------------
          Total, Office of Enforcement........      7,518         63     13,238         67     13,750         69     13,915         69     14,257         69
                                               =============================================================================================================
    Office of Foreign Assets Control: \1\
        11.0 Personnel Compensation...........      4,401         68      5,605         75      9,928        129      7,853        129      8,799        141
        12.0 Personnel Benefits...............      1,048  .........      1,208  .........      2,774  .........      1,725  .........      2,000  .........
        21.0 Travel...........................        238  .........        313  .........        663  .........        663  .........        717  .........
        22.0 Transportation of Things.........          0  .........         24  .........        914  .........        119  .........        122  .........
        23.0 Communications, Utilities & Misc.         16  .........         17  .........        205  .........        129  .........        168  .........
        25.0 Other Services...................        336  .........      2,928  .........      3,940  .........      4,959  .........      6,672  .........
        26.0 Supplies.........................         25  .........         70  .........        517  .........        547  .........        563  .........
        31.0 Equipment........................         48  .........      1,010  .........        791  .........      2,171  .........      2,611  .........
        91.0 Confidential Expenditures........          0  .........          0  .........          0  .........          0  .........          0  .........
                                               -------------------------------------------------------------------------------------------------------------
          Subtotal, Office of Foreign Assets        6,112         68     11,175         75     19,732        129     18,166        129     21,652        141
           Control............................
    Legislative Proposal on Full Costing of     .........  .........        656      1,170      1,286  .........
     Benefits.................................
    Executive/Administrative Support \2\......      3,574         16      7,605         35     13,735         56     14,004         58     15,146         61
                                               -------------------------------------------------------------------------------------------------------------
          Total, Office of Foreign Assets           9,686         84     19,436        110     33,467        185     33,340        187     38,084        202
           Control............................
                                               =============================================================================================================
    Total, Enforcement Policies and Programs:
        11.0 Personnel Compensation...........      8,082        118      9,643        121     14,206        177     12,270        177     13,355        189
        12.0 Personnel Benefits...............      1,767  .........      1,971  .........      3,732  .........      2,334  .........      2,639  .........
        21.0 Travel...........................        475  .........        572  .........        958  .........        922  .........        976  .........
        22.0 Transportation of Things.........          0  .........         24  .........        914  .........        119  .........        122  .........
        23.0 Communications, Utilities & Misc.         39  .........         40  .........        230  .........        153  .........        192  .........
        25.0 Other Services...................        500  .........      5,946  .........      6,991  .........      7,888  .........      9,663  .........
        26.0 Supplies.........................         30  .........         87  .........        540  .........        569  .........        585  .........
        31.0 Equipment........................         51  .........      1,037  .........        800  .........      2,180  .........      2,620  .........
        91.0 Confidential Expenditures........          5  .........          7  .........          0  .........          0  .........          0  .........
                                               -------------------------------------------------------------------------------------------------------------
          Subtotal, Enforcement Policies and       10,949        118     19,327        121     28,371        177     26,435        177     30,152        189
           Programs...........................
    Legislative Proposal on Full Costing of             0  .........      1,058  .........  .........      1,605  .........      1,737  .........
     Benefits.................................
    Executive/Administrative Support..........      6,255         28     12,289         56     18,846         77     19,215         79     20,452         82
                                               -------------------------------------------------------------------------------------------------------------
          Total, Enforcement Policies and          17,204        146     32,674        177     47,217        254     47,255        256     52,341        271
           Programs...........................
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ If sufficient funds become available the Office of Enforcement may staff up to 58 full time equivalent positions and OFAC up to 138 full equivalent
      positions.
    \2\ Administrative Support distribution only and the methodology used to distribute these costs is based on thepervious activity structure.

        Question. How much money was spent by OFAC and how were those funds
    used?
        Answer. OFAC's expenditures for the fiscal years 2000, 2001, and
    2002 are as follows:
      --2000: $6.1 million
      --2001: $11.2 million
      --2002: $25.7 million (includes No-Year funds for Plan Colombia and
            fiscal year 2001 Emergency Supplemental)
        OFAC currently administers 24 economic sanctions programs, most
    commonly imposed by the President under authority of the International
    Emergency Economic Powers Act, the Trading with the Enemy Act, the
    United Nations Participation Act or mandated by Congress under specific
    statutes, such as the Foreign Narcotics Kingpin Designation Act. OFAC
    currently has offices in Washington, Miami and Bogota. OFAC's expenses
    consist primarily of personnel, travel-related costs, and other
    services and equipment as shown in the table below.

                                                                          [In dollars]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                    Fiscal year 2002 financial plan
                                                                                Fiscal year  Fiscal year ---------------------------------------------------
                                                                                    2000         2001                      Drug      Emergency
                                                                                  actuals      actuals         SE        kingpin       suppl.       Total
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Office of Foreign Assets Control:
        11.0 Personnel compensation...........................................        4,402        5,605        7,852        1,045          750        9,637
        12.0 Personnel benefits...............................................        1,048        1,208        1,726          386          174        2,286
                                                                               =============================================================================
        21.0 Travel...........................................................          236          313          663           22           48          733
        22.0 Transporation of things..........................................            0           24          119            0            0          119
        23.0 Communications, utilities & misc.................................           16           17          179            0          610          789
        25.0 Other services...................................................          336        2,928        5,494            0        3,631        9,125
        26.0 Supplies.........................................................           25           70          547            0           14          561
        31.0 Equipment........................................................           71        1,010        2,121            0          324        2,445
                                                                               -----------------------------------------------------------------------------
          Subtotal, Non-Pay...................................................          684        4,362        9,123           22        4,627       13,772
                                                                               =============================================================================
          Total, Office of Foreign Assets Control.............................        6,134       11,175       18,701        1,453        5,541       25,695
    --------------------------------------------------------------------------------------------------------------------------------------------------------

        Question. What happens to the fine money paid by those who have
    violated the embargo?
        Answer. Both agreed upon settlements and assessed fines are paid
    into the General Fund.
                           irs resource requirements
        Question. It sometimes appears to us that the needs of the Internal
    Revenue Service (IRS) are never ending. For example:
        In fiscal years 2001 and 2002 Congress provided for additional
    full-time employees to restore customer service and enforcement levels.
    So, why does IRS need additional staffing for compliance workload in
    fiscal year 2003?
        Answer. Despite fiscal year 2001 hiring of nearly 1,500 new
    employees in these field compliance programs, losses from attrition and
    internal migration totaled 2,500 employees. The recent hiring
    represents the first substantial recruitment of compliance staff in
    over 5 years. By way of example, in fiscal year 1995, the IRS employed
    over 8,000 field revenue officers, compared to fewer than 5,800 at the
    beginning of this year. Prior to this initiative, the Staffing Tax
    Administration for Balance and Equity (STABLE) initiative funded the
    hiring of front-line personnel, which allowed us to keep other
    employees in their compliance positions.
        By using STABLE funds to hire staff to perform service and
    educational functions, we avoided the need to use more expensive
    compliance personnel on details during the filing season. STABLE
    allowed us to accomplish two objectives efficiently: increase our level
    of taxpayer education and taxpayer service; and increase the number of
    staff years applied to exam and collection work. STABLE did not fund
    new compliance positions. The staffing losses we have suffered over the
    past several years, in addition to similar losses among revenue agents
    and tax compliance officers, have substantially reduced collection case
    closures and audit coverage rates.
        The IRS budget request for fiscal year 2003 is $482 million higher
    than the fiscal year 2002 appropriation of $9.936 billion. The largest
    programmatic component of this increase is $102 million for the
    Customer Service, Compliance and Workload Initiative. This initiative
    actually costs $260 million, but IRS has achieved internal efficiencies
    through a redeployment of resources within its base budget to cover
    $158 million of this initiative. During this review, the IRS found
    2,287 FTE that could be re-deployed to high priority areas in customer
    service and compliance. We have requested an additional $102 million
    for fiscal year 2003 to supplement the savings found by the IRS for
    this initiative.
            irs customer service, compliance and workload initiative
        Question. I understand that the IRS wants to redirect the employees
    who currently handle customer service back to their regular jobs, and
    then fill those positions with lower-paid employees. I thought the
    purpose of the existing organization was to have experts available to
    answer questions.
        What is the purpose of the redirection of IRS resources for part of
    the Customer Service, Compliance and Workload Initiative and how will
    IRS be able to manage this redirection?
        Answer. As recently as fiscal year 2000, we detailed substantial
    numbers of compliance staff to support filing season customer service
    programs (i.e., toll-free telephones, walk-in assistance and taxpayer
    education). In that year alone, we pulled over 2,500 revenue agents,
    tax auditors and revenue officers off-line to assist taxpayers--
    representing over 1,000 FTE. In fiscal year 2002, we will use just over
    300 FTE from these field compliance programs. Field office staffing now
    includes new Tax Specialists and Tax Resolution Representatives--new
    higher-graded positions designed to offer ``one-stop-service'' on a
    broad range of issues that include technical tax law questions and
    account-specific payment problems.
        Question. What effect will this redirection have on IRS operations
    and programs?
        Answer. For Examination, we estimate we will forego approximately
    22,000 return closures and $117 million in recommended tax in fiscal
    year 2002. For Collection, we estimate the opportunity costs to be
    approximately $219 million for fiscal year 2002.
        The following table depicts the revenue agents, tax compliance
    officers, and revenue officers FTE performing customer service duties
    from fiscal year 1996 through fiscal year 2001 as well as plans for
    fiscal year 2002.

    ----------------------------------------------------------------------------------------------------------------
                                                                                Fiscal year
                                                      --------------------------------------------------------------
                                                         1996     1997     1998     1999     2000     2001     2002
    ----------------------------------------------------------------------------------------------------------------
    Revenue Agents...................................      148      148      293      451      549      268      160
    Tax Compliance Officers..........................       34      121      158      151      209      129       59
    Revenue Officers.................................       28       31       73      146      201       93       95
    ----------------------------------------------------------------------------------------------------------------

                youth crime gun interdiction initiative program
        Question. Mr. Secretary, the President's budget overview states
    that $11 million will be provided to the Bureau of Alcohol, Tobacco and
    Firearms in order to expand the Youth Crime Gun Interdiction Initiative
    to 10 additional sites. Currently there are 50 cities in 32 States and
    the District of Columbia.
        What new cities will be designated YCGII sites? How were these
    locations determined?
        Answer. The requirements developed to qualify as a YCGII city are
    (1) a minimum population of 250,000; (2) youth and juvenile crime
    rates; (3) known trafficking source or market area; (4) history of
    firearms tracing; and (5) the mix of city size and demographics. YCGII
    is established in 50 high-density population locations nationwide. Over
    the period that YCGII has existed, cities with populations of under
    250,000 have indicated an interest in participating in YCGII. The 2000
    Census indicates approximately 24 cities with a population currently
    qualifying for YCGII. Some of these cities are located in proximity to
    current YCGII cities. Therefore, if ATF is to continue partnerships to
    combat youth violence, we must be flexible in considering the
    population qualification.
        ATF must also consider the Administration's Project Safe
    Neighborhood (PSN) initiative. Since the YCGII and the PSN are part of
    our overall Integrated Violence Reduction Strategy, we hope to
    associate our efforts (where possible) with the Department of Justice
    expansion of PSN. The level of funding and personnel resources
    requested will allow the expansion of the initiative to 10 cities. If
    the city selection criteria are revised to incorporate smaller
    populations, then we would propose a more flexible approach to assign
    personnel. Currently, a list of potential city partners has been
    developed and once ATF has concurrence from the cities, they will be
    announced.
              gang resistance education and training (g.r.e.a.t.)
        Question. As you know, I have consistently supported the Gang
    Resistance Education and Training program, called GREAT. In fact, a few
    years ago we invited several graduates of that program from all over
    the country to testify about their experiences. The budget requests a
    change in the ATF statutory language to drop the specific authority to
    make grants to State and local law enforcement for this effort.
        Does this mean that ATF will no longer participate in this program?
    If so, what happens to the money Congress previously appropriated
    specifically for this purpose?
        Answer. The G.R.E.A.T. program has had a positive impact on
    millions of children across the country who have been through the
    curriculum. Given this success, the Administration proposes to continue
    the program in fiscal year 2003. Language has been drafted to continue
    the grant/cooperative agreement authority for the G.R.E.A.T. program in
    fiscal year 2003. This language is part of the Administration's budget
    amendment package, transmitted to Congress on March 14, 2002.
                        automated commercial environment
        Question. Mr. Secretary, the Customs Commissioner has expressed
    support for accelerated development of the Automated Commercial
    Environment--ACE--project. Some concern has been expressed that
    compressing the current 5-year schedule down to 4 years could be
    significantly more risky--both financially and operationally. We all
    want to see ACE finished but it is also important that it be an
    integrated, functioning system and that takes both time and expertise.
        How involved will your office be in the final decision about the
    ACE schedule?
        Answer. I am committed to ensuring that the ACE project, including
    the accelerated development effort, be fully successful. The incredibly
    rich set of improvement opportunities further underscores my commitment
    towards this project. The ACE project has an effective management
    structure based upon key partnerships between Customs and oversight
    organizations. Project managers have developed extensive plans and
    rigorous processes to ensure that cost, performance, and schedule
    targets are met. ACE project managers have also collaborated with
    operations and field personnel, other government agencies, and the
    trade community to develop requirements and plans. Additionally, my
    involvement, in concert with the Customs Commissioner, Customs Chief
    Information Officer, and the Treasury Deputy Assistant Secretary for
    Information Systems and Chief Information Officer will continue to be
    proactive in reaching critical decisions concerning the ACE project,
    including compression of the development schedule.
        Additionally, the Treasury Assistant Secretary for Management and
    Chief Financial Officer and the Treasury Deputy Assistant Secretary for
    Information Systems and Chief Information Officer are my
    representatives on the Joint Capital Investment Review Board (J-CIRB).
    The Customs Modernization Office updates the J-CIRB periodically on the
    status of the project. All released funds must be approved by the J-
    CIRB and the Under Secretary for Enforcement prior to spending by the
    U.S. Customs Service. Through our participation in the J-CIRB, we can
    monitor the progress of ACE.
                         customs service spending plan
        Question. Mr. Secretary, the Committee provided additional funding
    to the Customs Service as part of the fiscal year 2002 emergency
    supplemental. Before those funds could be obligated, Customs was
    required to develop and deliver to you a specific spending plan for
    those monies. We did receive your written comments.
        Do you have any further observations or comments on the Customs
    spending plan you would like to share with us today?
        Answer. To achieve the most cost-effective allocation of resources,
    Customs needs to continually assess its use of all resources to achieve
    desired results. That is why I have asked Customs, on an ongoing basis,
    to evaluate the relative effectiveness of people and technology in
    different settings. This extends to looking for cost-effective results
    based on whether people or technology are used first at each inspection
    setting, and to reviewing the marginal return in results for each added
    piece of technology or inspector compared with the previously added
    one. Our goal is to seek hoped-for returns on these investments that
    directly affect security and trade facilitation, and I will be looking
    for Customs to seek expression of these results in measurable terms, as
    part of the process of balancing these two missions. A key element of
    total success of our collective objectives will be the assurance that
    Customs, and other agencies recognize their relative expertise in
    particular settings that calls for improved coordination to attain the
    greatest overall effectiveness.
        This concept is at the heart of the President's Management Agenda,
    which seeks to link Congressionally authorized dollars with specific
    results. The Committee and the Department can play a particularly
    strong role in enhancing the Customs Service's overall performance by
    making these inquiries part of the ongoing assessment of such
    investments--investments which are at the heart of meeting our security
    objectives. Your efforts will complement the efforts already underway
    at Treasury.
        The Commissioner's proposal for major investments in effective
    inspection, targeting, and infrastructure technology bodes well for
    long term, qualitative improvement in Customs' interdiction goals.
    Every successful business in the 21 century will continually look to
    technology investments to increase productivity and enable valuable and
    costly labor resources to be reallocated for maximum program impact.
    This is no less true of government.
        In conjunction with a wise and selective use of technology, I have
    also charged every Treasury organization, including Customs, to search
    relentlessly for ways to work more effectively. This includes removing
    obsolete rules, barriers and constraints, increasing our level of
    support for programs that are yielding benefits, and decommissioning
    efforts that are consuming resources with little or no programmative
    value. In my experience, organizations that are quick to respond to
    changing conditions and that continually make results-oriented spending
    choices are key to the unparalleled success of America's economy. This
    same responsiveness, and the leadership to make sometimes difficult
    resource choices, must characterize successful government programs. I
    am challenging the Customs Service to not view these added Homeland
    Security resources in isolation, but to strive continually to achieve
    improved outcomes at a lower cost throughout the organization, and to
    be accountable for the results we seek.
                        use of the counterterrorism fund
        Question.First of all, Mr. Secretary, congratulations to you and
    the entire Treasury Department for the efforts to make sure that the
    2002 Winter Olympic Games were safe and secure. The Secret Service put
    together a comprehensive security plan, and the Treasury law
    enforcement agencies contributed most of the needed manpower to be able
    to implement that plan.
        There were several hundred non-Treasury Federal law enforcement
    personnel helping out at the Winter Games in response to the Secret
    Service request for their particular expertise--from the Forest
    Service, the National Park Service, the Bureau of Land Management, the
    Fish and Wildlife Service and the Department of Defense. That is
    exactly what Presidential Decision Directive 62 envisioned and directs.
        That brings me to my question. You have requested an appropriation
    of $40 million for the Counterterrorism Fund, which would be expanded
    to allow for reimbursements to ``any Federal agency'' which assists the
    Secret Service at a national special security event.
        How do you intend to use this fund? Would you reimburse non-
    Treasury agencies for the help of their personnel?
        Answer. The Fund was established to enable the Department of the
    Treasury to undertake activities and operations to counter, investigate
    or prosecute unexpected threats or acts of terrorism. This fund has
    been the means for covering the costs associated with providing
    security for unanticipated National Special Security Events (NSSEs),
    and other large protective events.
        The U.S. Secret Service is responsible for the design, planning,
    and implementation of security and security support for events
    designated as National Special Security Events. As such, the Secret
    Service is authorized to call on other Federal agencies to provide
    security support for NSSEs as may be necessary. Given the unanticipated
    nature of NSSEs, it is likely that non-Treasury agencies would not have
    available resources to cover the costs associated with such support.
    Under these circumstances, these agencies would be reimbursed for those
    costs.
        Question. If so, why? After all, if the President of the United
    States instructs agencies to assist the Secret Service in the
    implementation of their overall security plan, would an agency refuse
    to respond?
        Answer. If an agency is instructed to support a National Special
    Security Event by the President of the United States, the agency would
    certainly do so. However, there are major costs associated with these
    events and there needs to be a mechanism available to pay these
    extraordinary costs.
                        cobra user fee increase proposal
        Question. I am told that a Customs COBRA fee advisory committee was
    established in 1999 to advise the Customs Commissioner on issues
    related to the performance of the inspectional services of the Customs
    Service. The membership is to include representatives from airline,
    cruise ship, and other transportation industries who may be subject to
    COBRA fees. The meetings were intended to be a forum for discussions
    about the proper number and deployment of inspectors, the level of
    fees, and the appropriateness of any proposed fees.
        Mr. Secretary, the fiscal year 2003 budget request again includes a
    proposal to increase the COBRA fees for airline passengers and cruise
    vessel passengers. What was the reaction of the members of the COBRA
    Fee Advisory Committee to this suggestion?
        Answer. It is my understanding that this committee has not yet met.

                              SUBCOMMITTEE RECESS

        Senator Dorgan. The subcommittee will next convene on
    Wednesday, March 20, at 1:30 p.m. in Dirksen 192 where we will
    hear from the Director of the Office of Management and Budget,
    Mitch Daniels.
        Mr. Secretary, thank you for being with us. This hearing is
    recessed.
        [Whereupon, at 3:31 p.m., Thursday, March 14, the
    subcommittee was recessed, to reconvene at 1:35 p.m. Wednesday,
    March 20.]

      TREASURY AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL YEAR 2003

                                  ----------

                           WEDNESDAY, MARCH 20, 2002

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 1:35 p.m., in room SD-192, Dirksen
    Senate Office Building, Hon. Byron L. Dorgan (chairman)
    presiding.
        Present: Senators Dorgan, Reed, Campbell, and Stevens.

                       EXECUTIVE OFFICE OF THE PRESIDENT

                        Office of Management and Budget

    STATEMENT OF MITCHELL E. DANIELS, JR., DIRECTOR

                                OPENING REMARKS

        Senator Dorgan. The subcommittee will come to order.
        Mr. Director, good afternoon. We are pleased with your
    appearance here today. We welcome you to discuss the
    President's fiscal year 2003 budget request for the Office of
    Management and Budget. You are probably getting tired of
    testifying before North Dakotans, having spent some time before
    the Budget Committee, but that is life in the United States
    Senate, I guess.
        This subcommittee, as you know, is responsible for funding
    the operations of the Department of Treasury and all of its
    agencies, such as the IRS, Customs Service, and other agencies.
    We are also responsible for funding the operation of your
    agency, the Office of Management and Budget, as well as the
    other component agencies which make up the executive branch of
    the Presidency. It is also in this subcommittee's bill that we
    carry provisions affecting the operations of all Federal
    agencies. We will focus on some of those proposals today.
        It has been a while since the Budget Director last appeared
    before this committee and we appreciate very much your being
    here. Your task of assembling and producing the budget for the
    Federal Government is not an easy one. We recognize that. The
    Government is an enormous entity. In order to watch over it,
    one can see how some smaller tasks might fall through the
    cracks from time to time, and when it happens, it gives us
    pause, but nonetheless, it is a very large undertaking to run a
    bureaucracy of this size and we appreciate your service.
        The budget this year for the Federal Government and also
    the budget for the Office of Management and Budget is something
    we will discuss at some length today. Some of our colleagues
    will be joining us shortly. This budget proposes to make a
    sweeping change in how the government funds a significant
    portion of the Federal retirement system, but it assumes
    Congressional approval of that proposal in the budget numbers
    submitted for each agency.
        Ordinarily, this type of change would be submitted to the
    appropriate authorizing committees for their consideration and
    action and then be taken up by the appropriators. That is not
    the case this year when it comes to the proposal for the
    treatment of retirement accruals and we will visit a bit about
    that. Nor is it the case for how you want the administration of
    the Federal workers' compensation account treated. The
    authorizers have the experience on these matters and the
    expertise on these matters. These proposals really should be
    submitted to them for their consideration and action, not to us
    first.
        Your office, I think, has not gotten the word out to all of
    the agencies. We have met with some 30 agencies for which we
    appropriate money. During the staff briefings with each of
    them, the more than 30 agencies funded in this bill, we learned
    that not all of the agencies were aware of the proposed new
    treatment of either the retirement accruals or the workers'
    compensation or both. Some of them did not get the word about
    the proposed pay raise. Most were aware that pay disparity was
    proposed in the budget, but instead of planning on a 2.6
    percent pay raise, some budgeted for a 3.9 percent pay increase
    or some other number in between. Their numbers did not add up,
    but yet they were submitted on February 4 when the budget was
    delivered.
        Now, these might seem to be smaller problems, but to many
    of the smaller agencies we fund, in some cases they can make a
    very big difference, and that is why I think that when we take
    a look at the fact sheets that your office produced and
    delivered when the budget was released, we have to take a look
    behind the numbers.
        For example, Mr. Daniels, you suggested that there would be
    an overall 5.4 percent increase in funding for the Customs
    Service from 2002 to 2003, with an 18.4 percent increase for
    salaries and expense accounts alone, but when you back out the
    policy changes with respect to retirement accounts, the real
    dollars are about 9.1 percent below 2002 levels. I hope perhaps
    you would respond to that, and there is a longer list than
    that.

                               PREPARED STATEMENT

        What we want to do today is talk about your specific
    budget, the Office of Management and Budget budget. I would
    like to talk about a number of other policy issues and your
    role in them.
        [The statement follows:]

                 Prepared Statement of Senator Byron L. Dorgan

        Good Afternoon, Mr. Director. We welcome your appearance today to
    discuss the President's fiscal year 2003 budget request for the Office
    of Management and Budget. You may be getting tired of testifying before
    North Dakotans, but we appreciate your coming.
        This subcommittee is responsible for funding the operations of the
    Department of the Treasury and all of its agencies--such as the IRS and
    the Customs Service. This subcommittee is also responsible for funding
    the operation of your agency--the Office of Management and Budget--as
    well as all the other component agencies which make up the Executive
    Office of the President. It is also in this subcommittee's bill that we
    carry provisions affecting the operations of all Federal agencies. We
    will focus on some of those proposals today.
        It has been a few years since a Budget Director last appeared
    before this subcommittee. That is why we appreciate your willingness to
    appear today.
        Your task of assembling and producing the budget for the Federal
    government is not a task I envy or one to which I aspire. The
    government is an enormous entity to watch over and one can see how some
    smaller tasks might fall through the cracks. But when this happens, it
    gives one pause.
        For instance, this budget not only proposes to make a sweeping
    change in how the government funds a significant portion of the Federal
    retirement system, but it assumes Congressional approval of the
    proposal in the budget numbers submitted for each agency. Ordinarily,
    this type of change should be submitted to the appropriate authorizing
    committees for their consideration and action--then be taken up by the
    appropriators. But that is not the case this year when it comes to your
    proposal for treatment of retirement accruals. Nor is it the case for
    how you want the administration of the Federal worker's compensation
    account treated. The authorizers have the expertise on these matters.
    These proposals should have been submitted to them for their
    consideration and action, not to us. This troubles me.
        And your office appears to have had some difficulty getting the
    word out to all the agencies about these new proposals. During staff
    briefings with each of the more than 30 agencies funded in this bill,
    we learned that not every agency was aware of the new treatment of
    either the retirement accruals or the worker's compensation proposal or
    both. Some of them also did not get the word from your office about the
    proposed pay raise. Most were aware that pay disparity was proposed in
    the budget, but instead of planning on a 2.6 percent pay raise, some
    budgeted for a 3.9 percent pay increase or some other number in
    between. Their numbers did not add up, but were submitted as fact on
    February 4 when the budget was delivered.
        These might appear to be little problems, but to many of the
    smaller agencies we fund here, they make a big difference. That is why
    I was even more disturbed by some of the ``fact'' sheets your office
    produced and delivered to the media when the budget was released.
        In essence, your numbers did not add up. Your office claimed that
    the Treasury agencies were receiving big increases compared to last
    year when in fact most budgets dropped when actual dollars are
    compared. For instance, the document your people delivered trumpeted an
    overall 5.4 percent increase in funding for the Customs Service between
    fiscal year 2002 and fiscal year 2003 with an 18.4 percent increase for
    the salaries and expenses account alone. But when real dollars are
    compared, Customs funding for fiscal year 2003 is 9.1 percent below
    fiscal year 2002 levels. The same is true for the Federal Law
    Enforcement Training Center--which you claimed was receiving a 4.9
    percent increase, when in fact it faces a 14.6 percent decrease.
        The list goes on. Perhaps many of these agencies do not need huge
    budget increases. Perhaps cuts are justified. Perhaps Customs should
    have a year to pause and hire and deploy the people it needs at the
    borders before we require additional hiring.
        But the fact remains that all of these indicators give me reason
    for concern.
      --Asking appropriators to carry sweeping authorizing language is
            putting the cart before the horse.
      --Not getting specific budget direction to every Federal agency is
            more than careless.
      --And playing semantic games with the numbers casts a larger shadow
            on the veracity of the budget requests.
      --Individually, they can be explained perhaps. But taken together
            they are very troubling. This makes it even harder to support
            requests which would further reduce the amount of information
            already being provided to the Congress.
        But we will dig into these issues during the questioning rounds. We
    welcome you here this afternoon, but first let me turn to my Ranking
    Member, Senator Campbell, for any statement he would like to make.

        Senator Dorgan. Before I ask you to present your statement,
    Mr. Daniels, I will ask Senator Campbell, the ranking member,
    to make his statement.

                  STATEMENT OF SENATOR BEN NIGHTHORSE CAMPBELL

        Senator Campbell. Thank you, Mr. Chairman, and welcome,
    Director Daniels. I appreciate your willingness to appear
    today. I notice with interest there are four people with big
    thick briefcases and paperwork on the front row. Are they all
    resource people for you or are you here on your own?
        Mr. Daniels. They are here of their own free will. I do not
    expect to call on them.
        Senator Campbell. I see. I will not take much time this
    afternoon. We have a lot of ground to cover.
        The chairman has already mentioned a couple of things that
    I am particularly interested in. The retirement accrual
    proposal is one, I would like to learn the status of your
    efforts to secure the necessary statutory language. I would
    like to ask you a couple questions when we get going about
    that. I am also interested in learning more about the Office of
    Homeland Security and how you define the homeland security
    items that you are going to be requesting in the budget, too.
        With that, I will submit the rest of my statement for the
    record, Mr. Chairman.
        Senator Dorgan. Senator Campbell, thank you very much.
        [The statement follows:]

             Prepared Statement of Senator Ben Nighthorse Campbell

        Thank you, Mr. Chairman. And, welcome Director Daniels. I
    appreciate your willingness to appear before us today to talk about the
    budget request for the Office of Management and Budget. I full expect
    that we will also talk about other areas of the President's budget
    request as well.
        I won't take much time this afternoon; I know we have a lot of
    grown to cover. But I would like to mention a couple of things. I am
    interested in talking about the accrual proposal contained in the
    budget, and learn the status of your efforts to secure the necessary
    statutory language. I am also interested in learning more about the
    Office of Homeland Security and how you define homeland security items
    in the budget request.

        Senator Dorgan. Mr. Daniels, why do you not proceed. We
    will include your full statement as a part of the record and
    you may summarize.

                   OPENING STATEMENT MITCHELL E. DANIELS, JR.

        Mr. Daniels. Mr. Chairman, Senator Campbell, thanks very
    much. Let me just make two preliminary comments excerpted from
    the testimony that we will submit for the record.
        First, I would say with regard to our budget, and I would
    assert that this is so for the entirety of the budget the
    President has submitted, we believe and the President believes
    this is not a ``business as usual'' approach, and even though
    through the valor and leadership of our armed forces and those
    working on homeland security, the world looks very different
    than it did 6 months ago. The President is always quick to
    remind everybody this will be a very long struggle and we hope
    that Congress, as it looks at this budget, will continue to
    bring a mindset to their deliberations that is constantly
    mindful of the differences and of the need to avoid business as
    usual.
        When we put OMB's budget together, we delivered to you a
    dollar figure that is flat with last year. In part, this is
    because we do believe we can operate more productively and do
    more work with the same amount of money. In part, it is to
    reflect solidarity with the policy I just talked about.
        The only other comment I would make is to thank you, each
    of you, for bringing up what is to some a small or obscure
    item. This is the matter of full cost accounting in the Federal
    budget and it is reflected in at least two ways in the budget
    submissions. For example, we are proposing that the full cost
    of retiree benefits be reflected in those programs for which it
    is inexplicably not reflected now. For most of our retirement
    programs, the FERS and the military, for instance, the full
    cost is shown in the accounts where the costs are created. But
    for historical reasons, not so for all accounts, and we would
    like to see that done.
        I appreciate your looking at this issue and mentioning it
    this morning. If there was ever a year in which events have
    reminded us of the value and importance of transparency in
    accounting and of not having hidden costs around an enterprise,
    this has been that year and we would like to get this cleaned
    up.
        I am a little disturbed that as I understand the resolution
    being debated at this very hour by the Senate Budget Committee,
    they would not accept that reform, would continue to leave the
    costs hidden, and would, worse yet, take the $9 billion from
    the mandatory to the discretionary side and spend it on other
    purposes. So we will resist that idea and try to talk them out
    of it, but we appreciate your looking at it and we hope you
    will look at it sympathetically when we are done.
        Senator Dorgan. Mr. Daniels, thank you very much.
        [The statement follows:]

                 Prepared Statement of Mitchell E. Daniels, Jr.

        Mr. Chairman, Senator Campbell, Members of the Subcommittee, I am
    pleased to be here this morning to discuss the President's fiscal year
    2003 Budget request for the Office of Management and Budget (OMB).
                                  introduction
        Let me start by noting that my colleagues at OMB and throughout the
    Executive Branch have worked hard to present this Congress and our
    fellow citizens with a very different budget for fiscal year 2003. I
    would like to bring to the Committee's attention some new features
    which I hope will now become part of your annual expectations and
    deliberations.
        This budget takes seriously the assessment of government
    performance, and its relationship to future spending. Activities where
    effectiveness can be proven are maintained and often reinforced; those
    that demonstrably fail, or can make no showing of effectiveness, in
    many cases are looked to as sources of funding. The days when programs
    float along year after year, spending taxpayer dollars with never a
    showing of reasonable results or return, must give way to an era of
    accountable government. This and all future budgets must no longer be
    permitted to answer only ``How much?'' They must also answer the
    question ``How well?''
        This innovation responds to decades of calls by good government
    advocates. While long overdue, it is essential at a time when the
    physical safety of Americans requires that the Federal Government take
    on many additional, expensive tasks. It would be unconscionable to fund
    poorly performing programs given the realities of our economy and
    homeland security needs.
                        two-front war against terrorism
        Mr. Chairman, we presented a budget for a two-front war. It
    proposes substantial increases, those the President believes necessary
    to deliver on the paramount duty of the Federal Government, to secure
    the safety of the American people.
        Last year's budget began the reconstruction of a neglected national
    defense base, and that project continues now with new urgency. Funding
    for the category of activities we now term ``Homeland Security'' will
    double under the President's plan: airline security, first responders,
    bioterrorism, border security and preventive law enforcement, are all
    scheduled for major increases as recommended to the President by
    Governor Tom Ridge.
        We have worked closely with the Office of Homeland Security to
    define and budget for these activities. We will guard against and
    oppose efforts to divert funds from Homeland Security requirements or
    to misclassify unrelated funding under Homeland Security's priority
    status.
        Winning our two-front war is not optional, and will be expensive.
    As in other times of national conflict, tradeoffs will be required. We
    propose a very reasonable level that allows spending not related to the
    war or homeland defense to grow by around 2 percent. Within this ``Rest
    of Government'' category the President proposes $355 billion in
    spending. It must be noted that the activities it encompasses have
    enjoyed rapid funding increases during recent years, growing by an
    average annual rate of more than 8 percent since 1998.
        Within this enormous sum, it is both possible and desirable to
    increase high priority programs of proven effectiveness. Dozens of
    programs across the government are scheduled for growth based on
    demonstrated results.
                  measuring performance and delivering results
        For decades, good government advocates have called for systematic
    measurement of government's performance, and its reflection in the
    allocation of resources. In 1993, Congress passed the Government
    Performance and Results Act (GPRA), which was intended to implement
    this reform, but the potential of GPRA has been only partially
    realized. The President's budget for 2003 responds to Congress'
    instruction, differentiating where the facts are available between
    programs that work and those that do not. Many programs of proven
    effectiveness are strengthened by shifting funds from those which can
    make no proof of performance.
        A serious attitude toward performance is long overdue. It takes on
    special urgency at a time when the demands of national security assert
    a heavy claim on our resources. We hope the findings of this budget
    will trigger interest in performance assessment, and bring forth much
    new information about that large majority of programs for which we have
    no useful data at all.
                     full funding for federal retiree costs
        In the interest of both accuracy and sound management, the
    President's fiscal year 2003 Budget takes a major step toward full cost
    accounting of programs and departments by recording the costs of health
    and retirement benefits at the time and in the accounts where the costs
    are borne. At long last, the true cost of these programs will be
    visible, and managers will have full incentive to control the costs of
    additional personnel.
        This budget corrects a long-standing understatement of the true
    cost of literally thousands of government programs. For some time, the
    accruing costs of the Federal Employee Retirement System (FERS) and the
    Military Retirement System (MRS) have been charged to the affected
    salary and expense accounts, but agencies have only paid a portion of
    the costs for Civil Service Retirement System (CSRS) employees and a
    few other small retirement systems. A large portion of the liability
    has been unfunded and the remainder hidden in OPM's mandatory accounts.
    The full cost of accruing benefits should be charged to the affected
    salary and expense accounts, so that choices for program managers and
    budget decision-makers are not distorted by inaccurate cost
    information.
        To state the obvious, if Congress chooses to reject this reform,
    the Administration will strongly oppose the $9 billion in requested
    discretionary appropriations from being seized and spent on other
    programs. These resources need to be available for Federal employee
    retirements one way or another, but obviously we do not intend for them
    to be spent twice.
                                   omb budget
        For fiscal year 2003, the Office of Management and Budget requests
    budget authority of $73.5 million. This request is the same as the
    fiscal year 2002 enacted level, adjusted for the Administration's
    proposal to fully fund accruing Federal retiree costs. The OMB budget
    request will provide 510 full-time equivalent (FTE) positions, 17 below
    the fiscal year 2002 FTE level of 527.
        The Office of Management and Budget assists the President in the
    development and implementation of government-wide budget, fiscal, and
    management policies. As the chief management and budget office of the
    Executive Branch, we have a special obligation to adhere to budgetary
    discipline and maximize productivity. As you can see from our budget
    request for fiscal year 2003, OMB is committed to maintaining budgetary
    restraint while funding new initiatives including emphasis on
    government-wide information technology and E-Government.
        As it has for agencies across government, OMB has compared its
    management capabilities and organization against the standards for
    success of the President's Management Agenda. The baseline evaluation
    as of September 30, 2001 indicated that there is work to be done at OMB
    in each of the five areas targeted by the President for government-wide
    improvement. Our particular focus will be to better manage OMB's human
    capital and effectively harness information technology.
          consolidated executive office of the president appropriation
        As you know, the Executive Office of the President (EOP), despite
    the name, has never been budgeted for as a single entity and is not
    currently covered under a single appropriation. As part of the fiscal
    year 2003 Budget, the Administration is again requesting a
    consolidation and financial realignment for the EOP. The initiative
    would consolidate 15 EOP components and fund them with a single
    appropriation for a total of $336.2 million.
        This will give the President maximum flexibility in allocating
    resources and staff in support of his office and is intended to: permit
    a more rapid response to changing needs and priorities; allow the
    President to address emergent national needs; produce greater economies
    of scale and other efficiencies in procuring goods and services; and,
    enhance accountability for performance. This initiative will allow the
    President to align EOP resources to meet changing national priorities--
    something he cannot do now under the current account structure.
                         electronic government (e-gov)
        I'd like to spend a little time discussing an item that is
    important to the President and is under the purview of this
    subcommittee--``The E-Gov Fund.'' Let me start by highlighting the
    recent Council for Excellence in Government Survey that found 70
    percent of Americans favor investing in E-Government to make government
    simpler and more accessible. The President is committed to addressing
    this and has proposed to accelerate efforts to implement electronic
    government through his Management Agenda and E-Government Strategy.
        The Vice President recently launched the newly designed FirstGov
    web site and the Administration released its E-Government strategy.
    There are four target audiences for this endeavor, each providing
    opportunities to transform delivery of services: individuals,
    businesses, other governments, and Federal employees.
        This strategy is primarily being implemented through 24 multi-
    agency E-Government initiatives that will lead to significant
    improvements in productivity. These initiatives will transform
    government operations by making citizen's needs paramount. Each of
    these initiatives will result in the elimination of duplicative agency
    IT programs and savings could reach several billion dollars. For
    example, FEMA is leading an initiative to create a one-stop portal with
    information applicable to public and private organizations involved in
    disaster preparedness and response. Accurate and timely data from this
    project may result in saved lives and reduction of property damage; it
    may also save millions of dollars by eliminating redundant programs and
    agency costs.
        The fiscal year 2003 Budget seeks $45 million for the second
    installment of this fund, totaling $100 million over the next 3 years.
    OMB would manage allocations from the fund housed in an account in the
    General Services Administration. Projects will be selected that create
    savings by replacing redundant efforts, and that have viable business
    cases and implementation plans.
        We appreciated this subcommittee's support of this initiative last
    year and hope it will continue to place a high priority on funding
    innovative interagency projects that would deliver services directly to
    the public, or create the infrastructure to support such delivery. We
    look forward to continuing to work with you and your staff in this
    important initiative.
                                   conclusion
        The OMB budget request for fiscal year 2003 reflects the
    President's commitment to hold down spending levels in light of our
    Nation's new priorities in the war against terrorism at home and
    abroad.
        I want to thank you for the opportunity to meet with you today to
    discuss the OMB budget request. I look forward to working with the
    Committee. I would be happy to address any questions the Committee may
    have on the OMB budget or other budgetary issues.

        Senator Dorgan. Let me call on Mr. Reed if you have an
    opening statement.
        Senator Reed. I do not.

                               HOMELAND SECURITY

        Senator Dorgan. Once again, let us thank you for appearing.
    I have a series of questions.
        Let me begin by asking about the Office of Homeland
    Security. My colleague, Senator Campbell, indicated an interest
    in that, as well. I note that the Office of Homeland Security
    has asked for a substantial amount of additional money, I
    believe $38 billion, in funding for this coming fiscal year.
        There is also a proposal floating around, I understand from
    some reports that it is now being considered by the President,
    to consolidate agencies, such as the Customs and the
    Immigration Services. Can you give us some information about
    what is happening inside the administration in consideration of
    consolidation and how that consolidation might work?
        Mr. Daniels. The President has made no decision. Governor
    Ridge has been, I think, very open in indicating he is
    examining this issue and has studied it carefully with other
    administration officials to see if there are better ways of
    arranging the Federal structure to make our borders more
    secure. I will not go into the deliberations except to say that
    they are proceeding and I think the President is considering
    some recommendations and you may hear more about it soon.
        Senator Dorgan. Let me just say, I oppose the consolidation
    of Customs and INS. I think that we ought not visit on Customs
    the problems of the INS at this point. Last week's granting of
    a visa to Mohamed Atta, or at least the mailing of the visa
    received in Minneapolis for Mohamed Atta, suggests very
    significant problems. We have known for some long while that,
    for example, the INS, when someone flies into this country and
    overstays their visa, they by and large do not have the
    foggiest idea that someone is here illegally at that point, and
    so we have got big problems in the INS that we have to resolve.
    I do not think that it makes any sense to combine the Customs
    Service with the INS at this point and I think the President
    would find significant resistance in the Congress to a
    suggestion of that type. I hope that you might take that back.
        Also, I should say that the Customs function is very
    different than the Immigration Service in many ways. Customs
    raises revenue for the Federal Government, it is the second-
    largest revenue raiser next to the Internal Revenue Service,
    facilitates the flow of trade, and prevents illegal goods from
    coming in. But I think that proposal, if recommended by the
    administration, will meet with some very stiff resistance, and
    justifiably so. I will be one of those that will be involved in
    resisting it.
        Let me ask about the full cost accounting, as you indicated
    that you recommended, and you suggested that perhaps the Budget
    Committee will not accept that and use the money in other ways.
    But is it not the case, Mr. Daniels, that the manner in which
    it was portrayed in the budget really gave us a false sense of
    how you were funding agencies? Do you agree with my statement
    when I started that the trumpeting of an increase in the
    Customs Service is really not an increase at all when you
    eliminate the change that you suggest with respect to the full
    cost accounting?
        Mr. Daniels. I do not think I do, but I will have to go
    back and have a look. Based on the recommendations of Governor
    Ridge, we provided substantial increases in the Customs Service
    and I do believe they result in a true, real increase, even
    absent the adjustment we are talking about, but I will go back
    and have a look.
        Senator Dorgan. Would it surprise you to find out that when
    you take the cost accounting adjustments out, that Customs
    actually will end up with less money? I mean, you indicated
    that times have changed. This is not budgeting as usual, and
    clearly, when you talk about homeland security, one would
    expect a boost in real funding for the Customs Service, as an
    example.
        Mr. Daniels. I will go back and have a look. My
    recollection is that the 2003 proposal recommends substantially
    more agents in the Customs Service as well as new technology,
    too, so I do not have the same understanding's.

                          ADMINISTRATION'S PAY POLICY

        Senator Dorgan. Let me ask about the issue of pay parity.
    Can you review with us the recommendations on pay increases for
    the military and also for the rest of the Federal Government?
        Mr. Daniels. Yes, sir. We looked very carefully at this,
    again, recognizing that this is wartime and that everything had
    to be examined in that light and determined to recommend a pay
    increase of 2.6 percent for civilian employees. I would note
    that this is substantially more than many Americans in the
    private sector will be receiving this year. If we are coming
    out of recession, that will probably still be the case. So we
    thought 2.6 percent was adequate and something that, at a time
    of war, civilians in Federal service would find very fair.
        Then the second question became whether there should be any
    premium or additional compensation for men and women in uniform
    who run unusual risks for our country, and the President
    decided, yes, it would be appropriate to do something
    additional for our servicemen and women and that led to a 4.1
    percent recommendation for them.
        We think both are fair. We think 2.6 percent for civilian
    employees as a general rule is fair and that some premium in
    recognition of special dangers and special burdens that the
    uniform personnel carry is warranted.
        Senator Dorgan. Are there any problems with the retention
    of Federal workers with the 2.6 percent? Are there general
    retention issues in any of our Federal agencies, and if so,
    what are they and do you see this recommendation exacerbating
    that?
        Mr. Daniels. There are some retention issues. I do not
    think they center around pay at all. I think sometimes they
    center around the quality of work, they center around the
    severe handicaps we place on managers in Federal service who
    are not permitted to manage in many of the ways that their
    skills and professional aspirations would allow them to
    elsewhere. So I do not see these as the same issue at all.
        We have retirement issues to address in the Federal
    service, large numbers of people who we are not having trouble
    retaining, but they are due to retire soon, and so that may be
    a larger issue.

                          OFFICE OF HOMELAND SECURITY

        Senator Dorgan. Does Governor Ridge have operational
    responsibility in the executive branch of Government, and if
    so, what would that be?
        Mr. Daniels. He does not. He is an advisor to the
    President, certainly a coordinator in much the same way that
    the National Security Advisor, for example, is a coordinator of
    policy on the international side.
        Senator Dorgan. So in the area of recommending funding for
    homeland security, the $38 billion that Governor Ridge has been
    moving around the country talking about, meeting with various
    folks, speaking to the mayors, speaking to the governors and so
    on, saying that the administration has developed a budget of
    $38 billion, what role would Governor Ridge have had in that
    recommendation?
        Mr. Daniels. He would have looked at the suggestions of
    individual agencies, coordinated among them on responsibilities
    that they share, and where duties overlap, as, for example,
    they do at the border, where we have multiple agencies all
    conducting inspections, sometimes side by side, it is his job
    under the Executive Order to pass judgment, to advise the
    President that he can certify that the resources proposed are
    adequate to the job. I think that is his prime responsibility
    and that he sees that as his primary responsibility.
        Senator Dorgan. So on the issue of the plan for homeland
    security, because Governor Ridge is not available to testify
    before the Congress, we do not have access to him to evaluate
    what is the broader plan envisioned by the Governor. I assume
    the President put him in charge in order to have someone in
    charge, and you say it is not an operational role yet if we are
    to evaluate the ``plan'' for national security, homeland
    security in this case, we shall try to derive from those 50
    different sources and 50 different people who will come and
    testify what their piece of the plan is and aggregate that to
    the $38 billion because we are not able to get the head of
    homeland security to come talk about the broader plan. Do you
    think that is reasonable and do you support that approach?
        Mr. Daniels. It would not be if that was your only
    recourse, but I think you will want to do both. Governor Ridge
    has had scores of meetings with Members of Congress. He is
    going to be available. I know he is very sensitive to this
    question and wants to be available in a variety of formats.
    Lately, as I understand it, the larger issue visible to our
    people is they have been holding briefings and very few members
    have availed themselves, I am told only about 18 or 20 attended
    the last session that they put on.
        This only resolves to a question of sworn testimony, as I
    understand it, and I will refer you to the White House
    Counsel's Office for the legal particulars, but it is a
    longstanding policy that advisors, such as the National
    Security Advisor to the President, who are not Senate
    confirmed, do not come for sworn testimony. Clearly, the
    Congress is entitled to understand Governor Ridge's thinking
    and his views about the adequacy of these resources and I know
    he is willing to make that claim to you in your office or in
    groups or at the White House or elsewhere.
        Senator Dorgan. Mr. Daniels, late last year we invited
    Governor Ridge to come and testify before this subcommittee and
    he indicated that he was not free to do so, so we actually do
    not have the opportunity to have a public discussion with Mr.
    Ridge about the ``plan'' of what homeland security is about,
    how much it will require this year, how much it will require
    next year, how we work with the administration to coordinate
    that and to fund it. So, I think we are at somewhat of a
    disadvantage.
        I guess I do not feel that the creation of this new
    position is equivalent to the National Security Advisor. It is
    quite clear that Mr. Ridge is playing a very different role
    with respect to homeland security than Condoleeza Rice is
    playing with respect to the National Security Council.
        But at any rate, I guess you have answered the question. I
    do not expect you to come up here and say that you disagree
    with the President and Governor Ridge. You are not wanting to
    say that at this moment, are you?
        Mr. Daniels. It was not my intention, no, sir.
        Senator Dorgan. I have some other questions, but let me
    call on Senator Campbell.
        Senator Campbell. Thank you, Mr. Chairman. I would defer--
    if Senator Stevens has a tight schedule here, I would be glad
    to defer to him first. I do not know how your schedule is.
        Senator Stevens. Thank you very much. I just had one
    question for our friend, if I may, and then I think we can
    defer the others, if I may. May I proceed?
        Senator Dorgan. Yes. Senator Stevens?
        Senator Stevens. Good afternoon. It is nice to see you.
        Mr. Daniels. Hi, Senator.

                  FOREST SERVICE EMERGENCY FIREFIGHTING FUNDS

        Senator Stevens. Last year, we provided $280 million for
    the Forest Service for emergency money. Of that, $200 million
    was to repay accounts from which you had to borrow to finance
    the 2001 fire season, which was a bad one, and I am told that
    you released those funds, OMB did, and for that we are all very
    grateful.
        The remaining $80 million was for fire prevention, not fire
    fighting, and it was specifically addressed to reducing the
    fuel loads in the national forests. I am advised that you have
    indicated those will not be released until July 1, which is the
    height of the fire season, particularly in my State. Included
    in that $80 million was an estimated $6 million to work on the
    forests of South Central Alaska and that is why I have come to
    address this question to you today.
        This is an area that is probably the largest of all the
    forests. It is not all within the Forest Service, per se, but
    it is primarily on Federal land. It is ravaged by the spruce
    bark beetle. That beetle literally sucks the juice right out of
    a tree. It kills it and it leaves the tree standing but dead,
    just completely dead.
        In the area from Homer, which is the tip of our Kenai
    peninsula, to Wasila, which is right up near Mount McKinley,
    there are four Federal conservation systems, the Kenai Fjords
    National Park, the Kenai National Wildlife Refuge, the Alaska
    Maritime National Wildlife Refuge, and the Chugach Forest,
    which is the second largest national forest in the country.
    This is an area of 2.5 million acres of Federal forest and it
    also, however, contains half of Alaska's population. The cities
    are interspersed through this magnificent forest country. The
    area is four times the size of Rhode Island. It is really
    larger than many States.
        It literally now, because of information we have received
    from the Weather Bureau, a ticking bomb. Conditions there are
    very bad. We are told that the nation itself will have a near
    record drought this summer and Alaska is going to be the worst
    hit. The East Coast, I am told, will have the worst drought
    since the depression days, but we are predicted to have an
    extremely severe drought, is what it is called.
        This money was not to fight fires but to prevent them.
    Because the prevailing northerly winds there, if the fire
    starts anywhere on the peninsula, it can come north very
    rapidly. Some time ago, we had what we called the Miller's
    Reach fire. I flew over it with the head of FEMA at that time
    and you could tell from the helicopter that the fire was
    literally following a path, the serpentine path of the dead
    timber killed by the beetle.
        We have an estimate that even a small fire of around 3,000
    acres right now would cause $350 million damage in the
    Anchorage area alone. We believe that this fire, if it starts,
    can only be prevented by stepping in now and removing some of
    that timber and to really cut paths so that it cannot jump the
    way it has in the past.
        There was 30,000 acres burned last summer. As a matter of
    fact, I was there and went over and watched it, but thank God
    we had a rain and that fire stopped. If we have a drought this
    year, I fear that the half of our State's population that is in
    the path of this fire is in jeopardy. I have come to ask if you
    would consider looking at this again to see if it would be
    possible to release some of the funds for fire prevention
    rather than fire fighting. I am told the date that was selected
    by your people was, in fact, the prediction of when the fire
    fighting would start, and we do not dispute that. If a fire
    starts, it will be sometime in early July, but we could act
    before then and prevent a substantial amount of damage if we
    got after that spruce beetle kill now.
        Would you take a look at that and see if it is possible to
    release some funds to fight fires? It is not a lot of money,
    really, $6 to $8 million out of the $80 million. It would take
    care of the initial steps that are necessary to reduce the fuel
    load there. It is all Federal land. Now, this is Federal land
    that we are asking that we work on. I would hope that we would
    find a way to do that. That is why I would like to ask you to
    take a good look at it.
        Mr. Daniels. I think we will do more than that, Senator. I
    think we will get this addressed quickly. I became aware of
    this issue through your advocacy and also some Western
    Governors recently. We did look and the news reports are
    accurate, that the President will be designating the entire
    amount of $346 million, including the two amounts you talked
    about as ``emergency funding,'' as the statute requested. We
    will move quickly on the $200 million, or immediately, I would
    say, and on the $80 million or at least those parts of it that
    meet the description of fire suppression like the piece you
    just talked about. So I think we will have this solved for you
    in short order.
        Senator Stevens. I have another question that concerns the
    Corps of Engineers and a specific project. I will just submit
    it for the record, if I can, and ask for your reply.
        Mr. Daniels. Thank you.
        Senator Stevens. Thank you very much.
        Thank you, Mr. Chairman.
        Senator Dorgan. Thank you. Senator Campbell?
        Senator Campbell. First, I would like to associate myself
    with the last few comments of Senator Stevens. Out West where
    we come from, believe me, it is low snow pack and some real
    dangers, and if that money for prevention is not released, I,
    frankly, think we are going to see millions of acres go up in
    flames. I know the administration does not want that and
    certainly we from the West do not want that, either.

                               EOP CONSOLIDATION

        I want to ask you a few questions, but while Senator
    Stevens was speaking, I was just reading through your written
    presentation here. On page three, the administration is again
    requesting a consolidation of the President's appropriations.
    That did not meet with a lot of support the last time around.
    You probably know that, but I thought I would mention that to
    you.

                              U.S. POSTAL SERVICE

        Let me ask you just a couple of questions here. We provided
    $500 million to the Postal Service in last year's emergency
    supplemental for their biohazard and remediation project. Those
    funds were not available for obligation until the Postal
    Service provided a comprehensive plan, which they have done on
    March 7, as I understand it, but I understand that you need an
    additional $87 million. Is that $87 million being requested of
    this committee or going to be requested as part of the spring
    supplemental?
        Mr. Daniels. Senator, it is going to be part of the
    supplemental. I spoke to the Postmaster General and then he
    spoke also to Governor Ridge, to whom we look, again, for
    guidance in these matters. Among us, we have agreed that that
    is appropriate. This will allow the completion of the cleanup,
    as I understand it, and the safeguarding of the mail that
    became necessary after the bioterrorism events.
        I think, by the way, there is a good news story here that
    you probably already noticed, but hats off to the Postal
    Service who took an open stance toward technology, identified,
    as I understand it, a detection technology that is apparently
    going to be very effective, that will allow the mail to move
    more quickly without some of the problems that a total
    irradiation strategy would have created, and, incidentally,
    that is much less expensive. So I think they are to be
    commended for that, and as I understand it from the Postmaster
    General, this amount will allow us to move down that path.

                           HOMELAND SECURITY FUNDING

        Senator Campbell. I hope so. Since you mentioned homeland
    security and Governor Ridge, what was the process used to
    determine funding, what funding is associated with homeland
    security and what funding is to allow the agency to continue
    what they were doing before September 11?
        Mr. Daniels. This goes, I guess, in part to the question of
    definitions. It is a very, very important question, and in our
    budget we do list those things that Governor Ridge's office has
    to this point defined as part of homeland security strategy.
    That may evolve over time. There may be new measures or new
    areas that we all agree ought to be considered part of that,
    but----
        Senator Campbell. How did you come up with the number of
    $37.8 billion in the President's budget?
        Mr. Daniels. We took what for OMB is a little different
    approach, which was to say we did not start with a number and
    work backwards. We did not say, make it all fit within a
    certain size. The President was very clear that if either front
    of this war--either defeating terror abroad or defending
    Americans in their homeland--was involved, we were going to do
    what it took and we were to include those things that were
    reasonably related and necessary to those tasks. This just
    happened to add to $38 billion, about a 111 percent increase
    over even the enhanced levels of last year. Congress, of
    course, strengthened homeland security during last year, pre-
    and post-9/11.
        So, it just came to that amount of money and Governor Ridge
    and his office reviewed all of the proposals, and there were
    many that were not finally included, but the Office of Homeland
    Security certified that these were appropriate and sufficient
    for the moment.
        Senator Campbell. I see. Okay. Thank you.

               FEDERAL EMPLOYEES COMPENSATION ACT (FECA) PROPOSAL

        One last question, Mr. Chairman. Mr. Daniels, I would like
    to know a little bit more about the proposal to require
    agencies to reimburse the Department of Labor for the FECA
    costs. As I understand it, this requires some legislative
    change, but you want it on this bill, an appropriation bill?
        Mr. Daniels. We think this is the available vehicle. What
    we said earlier about seeking these changes through the
    authorizing process is quite appropriate and correct. And, we
    have, with regard to the other full cost accounting measures,
    sought support from the authorizing committees to do that. This
    proposal is very much akin to the one related to full cost
    accounting for Federal retiree benefits.
        We think the costs ought not be hidden, that they ought to
    be visible for two reasons, one, so that we can examine them
    and weigh them fairly in the open, and secondly, so that
    managers have the right incentives. If you are going to add
    another employee, you ought to know exactly what that employee
    costs. In the case of the retiree situation, we hide about 10
    percent of the cost of a GS-15. It looks like a $133,000 cost
    to the manager the way we do it now--this is somebody who is
    not in the FERS system. The real cost is about $148,000. In the
    FECA situation, the numbers are smaller, but it is the same
    principle.
        Senator Campbell. Thank you, Mr. Chairman. I have no
    further questions.
        Senator Dorgan. Senator Reed?

               LOW-INCOME HOME ENERGY ASSISTANCE PROGRAM (LIHEAP)

        Senator Reed. Thank you. Welcome, Mr. Daniels. OMB
    continues to withhold $300 million in LIHEAP funding,
    contingency LIHEAP funding. Last September, 23 Senators wrote
    to you and asked you to release this money. The majority of
    Governors have contacted your office, including Governor Bush
    of Florida, Governor Shaheen of New Hampshire, and many others.
        We have seen at the local level an increase in
    applications, and as we understand, the LIHEAP demand is a
    function not just of the weather but also of the economic
    circumstances of people. We are coming through a recession. The
    numbers in the GNP might be turning around, but unemployment
    grows, particularly affecting low-income and minority workers
    who are the typical recipients of LIHEAP support, along with
    seniors.
        I wonder if OMB is ready and willing and able to quickly
    release those funds.
        Mr. Daniels. No, sir, we are not. The emergency LIHEAP
    money is intended for unusual and extraordinary energy costs.
    The combination of low energy prices and a mild winter has led
    to an extraordinarily low energy burden this year, ranging from
    the West to the East, as I recall, from 28 to 41 percent lower
    energy costs per household. It is very interesting to me.
    Translated to an average income or an average family, this is
    about a $400 savings, for which we should all be grateful.
        You are right that economic circumstances, of course, play
    a role, but LIHEAP funds have never been released for that
    purpose. Our view is that that would not be a useful precedent
    to set. Most of all, I would say that we are very mindful that
    there is a summer ahead. Energy bills can be a real problem in
    a hot summer. We may have that. We would like to have that
    money in reserve so we could move immediately if energy prices
    spike or if energy costs go up.
        Senator Reed. Well, again----
        Mr. Daniels. I am sorry, Senator. Let me add one other
    thing----
        Senator Reed. Go right ahead, Director.
        Mr. Daniels [continuing]. Because we are very alert and we
    have read carefully the reports that you have brought to our
    attention and to the attention of others. We have been able to
    work with a number of States to allow them to use, for example,
    unspent TANF or welfare funds which are available in large
    amounts in, many States. And we have worked with many States to
    provide the flexibility or to encourage them to use those funds
    to address individual energy problems where there are pockets
    of need.
        Senator Reed. Mr. Director, again, I think with the growing
    number of people qualifying--the applications do not depend on
    the price of gasoline at the pump or heating oil going into
    your home. They depend upon your economic circumstances and
    whether, relatively, you are falling behind in your fuel bills,
    and that seems to be a growing phenomenon, not one which is
    going away. So I would ask you--you have been pretty clear, but
    I would ask you to think again, if you would.
        Mr. Daniels. We will do so. We are watching it all the
    time.
        Senator Reed. Thank you, Mr. Director.

                            HOUSE BUDGET RESOLUTION

        Let me raise another issue. I understand that House
    Republicans in doing some of their budgeting are considering a
    5-year budget window for their tax cuts and a 10-year budget
    window for Medicare. Regardless of the substantive arguments
    about increasing or cutting taxes or increasing or cutting
    Medicare, does it not make sense to have a consistent measure
    to conduct this analysis?
        Mr. Daniels. I think it probably does. I think that, as our
    budget reflects, we believe 5 years is probably the more
    appropriate window. Just because we have proven now, especially
    in the last few years, that nobody can predict very accurately
    even to 5 years, let alone beyond, and so we proposed a budget
    at 5 years, which was the practice until about the mid-1990s.
    In fact, until 1971, I think it was, we only tried to forecast
    3 years in advance. But the idea of using the traditional time
    frame, I think has a lot to recommend it.
        Senator Reed. Thank you, Mr. Director.

                                ERGONOMICS RULE

        A final question. It has been a year since the ergonomics
    rule was legislatively repealed. The Secretary of Labor has
    indicated that she has been working very hard on preparing a
    rule that was announced almost immediately after the
    legislative repeal was enacted. It has been many months now.
    Can you give us an insight as to what the status of this
    ergonomics rule is?
        Mr. Daniels. I cannot tell you much more than you have just
    recounted, Senator. It is certainly true that the Secretary has
    worked hard on it. She has discussed its progress with others
    in the administration over the last month or two. But we have
    not received one for review at OMB and I do not know when to
    expect it.
        Senator Reed. One of the things that is difficult in terms
    of estimating the progress of the rule is that the Secretary
    has not as yet come up to testify before the committee. I
    understand that the rule is not before OMB. You are not in a
    position to testify. It seems to fall into the void.
        I would hope that you might communicate to the Secretary
    that it would be helpful to us if she or someone appropriately
    could come formally before either this committee or the
    Committee on Health, Education, Labor, and Pensions to discuss
    the status of the rule. Again, I heard almost immediately from
    many of the people who opposed the rule and voted for its
    repeal that this rule would be forthcoming.
        Mr. Daniels. I will take that back.
        Senator Reed. Thank you, Mr. Director.
        Mr. Daniels. Yes, sir.

                               EOP CONSOLIDATION

        Senator Dorgan. Mr. Daniels, let me ask you about a couple
    of additional items. One is the item raised by my colleague,
    Senator Campbell, of consolidation. As you know, that proposal
    was not met with favor last year. I was one of those who
    opposed it.
        You proposed consolidating 15 different components of the
    Executive Office of the President and fund them with a single
    appropriation of something over a third-of-a-billion dollars.
    Tell us why you think that is necessary, with the backdrop of
    understanding that we believe it would provide less oversight
    from the standpoint of the Congress.
        Mr. Daniels. Well, I think it is a little silly the way we
    do it today. I mean, the Government will not come to a halt and
    the sky will not fall if we continue to micromanage the Office
    of the President, but to us, it is a small example of the lack
    of freedom to manage that afflicts the entire government. There
    are many larger examples that probably have more negative
    impact.
        I am sorry the committee did not support the proposal last
    year. We had a lot of support, in fact, but when it came to
    you, Mr. Chairman, and you have the power of life or death over
    such an idea, we were unable to persuade you and I wish we
    could have.
        We have under secretaries and assistant secretaries all
    over the Government who have greater flexibility over more
    dollars than the President of the United States does, and the
    idea that he does not have the ability, as circumstances
    change, to pick up a head count or a few dollars from the
    Council on Environmental Quality, let us say, and move it to
    the Council on Economic Advisors or vice-versa, I think is a
    little senseless. To us, it is just a common sense reform that
    we wish you would permit, but we can muddle through if it does
    not happen.
        Senator Dorgan. Would it surprise you to know, when you use
    the term ``micromanage,'' that there are a fair number of
    agencies that suggest that is the case with OMB, micromanaging,
    but I suppose that is all in the eye of the beholder.

                              U.S. CUSTOMS SERVICE

        Let me ask about Customs user fees. You are proposing $250
    million in Customs user fees and submit the budget as if the
    Congress has approved them. As you know, the Congress has
    traditionally rejected those fee increases. I guess the
    question I would ask is, what will be the result of Congress
    again rejecting it? Where will we find the money? You are
    submitting the budget and anticipating that it is a done deal.
    In fact, I think Congress will reject the suggestion.
        Mr. Daniels. Well, that is the way we submit all our
    budgets. We do assume the passage of their components and if
    something is turned down, then we look to make an adjustment
    elsewhere.
        I guess I would say we do believe the Customs Service needs
    the resources that have been suggested, the new resources to
    strengthen it and help it pursue its mission.
        On the user fee front, there are some legitimate questions.
    These fees have not been changed in 16 years, so to go from $5
    to $11, that simply tracks the inflationary difference in the
    meantime. Viewed the other way, the $5 fee that Congress
    thought was fair in 1986 is worth $2 today. So it was really
    just looked at, I think, as a modernization of that fee, or
    those fees, after a long time.
        I know that, for instance, some of the airlines would say
    that what was not troublesome 16 years ago looks a little
    different today because Congress has put an awful lot of other
    fees into the price of an airline ticket, and that is an
    interesting point. But I suppose one way to ask this question
    is, if bringing this fee current with inflation is a bad idea,
    maybe you should not be there at all. But that would be the
    explanation, at least. It was simply a way to try to modernize
    something that has not been touched in a long time.

                              COMPETITIVE SOURCING

        Senator Dorgan. Let me ask you a question on the issue of
    contracting out. Can you describe the administration's views on
    contracting out? You are suggesting that you need flexibility
    to do more of that. Are there, in fact, savings? How do you
    describe the savings and where do you achieve the savings?
        Mr. Daniels. Governments all over the world at all levels
    have now achieved very well documented savings from the
    selective introduction of competition into areas in which the
    private sector does offer the same service that we seek to buy
    for taxpayers and these savings typically run from 20 to 40
    percent, depending on the service in question. So good
    government advocates on a bipartisan or nonpartisan basis, I
    think, have been working in this direction at all levels and in
    all countries for a long time.
        It needs to be done carefully. It needs to be done on the
    basis of competition. Outsourcing is not the goal. Competition
    and a better deal for taxpayers is the goal. We have all sorts
    of places and possibilities in which the Federal Government
    could get a better deal for taxpayers, either because a private
    vendor wins or because the incumbent government employees find
    a more efficient way to meet the competition. We really do not
    care who provides the service as long as the service is
    provided more efficiently.
        But we are doing our own laundry, we are cutting our own
    grass, we are still doing an awful lot of things in the Federal
    Government that somebody out there is making a specialty of
    doing all day, every day, and in the right places. We ought to
    be taking advantage of that for the benefit of taxpayers.
        Senator Dorgan. Let me submit some additional questions to
    you on the issue of outsourcing Federal jobs. I do not disagree
    that in some circumstances, it can be appropriate and has been
    appropriate. In other circumstances, it simply reflects a
    desire by some to get rid of Federal employees because they do
    not much like the Federal Government and believe everything can
    be done better in the private sector, which----
        Mr. Daniels. Let me just say on behalf of the President,
    and I think we are very scrupulous to always make it plain,
    that is not the motivation here and we would agree with you
    that it ought not be.
        Senator Dorgan. Mr. Daniels, let me ask you one final
    question. Do you have additional questions, Senator Campbell?
        Senator Campbell. Just one.

                            U.S. CORPS OF ENGINEERS

        Senator Dorgan. Let me ask you one final question. This is
    not about your budget, but the infamous letter last week. I
    have no idea how it became public, but it was all over
    Congress, the letter that you wrote to the White House, the
    memo that you wrote to Mr. Card and then the political folks on
    the Mike Parker issue. I would like to ask you a question about
    that.
        I want to ask you specifically a question about General
    Flowers in the second paragraph. You indicate in your letter to
    the White House, ``General Flowers' statements about stopping
    projects and lost jobs is totally bogus. In fact, spending the
    money on the existing backlog of projects would speed them up.
    I can supply detail if necessary.''
        Would you be willing to supply that detail to this
    subcommittee?
        Mr. Daniels. We would, because I think that the important
    issues here really are around the merits of how we ought to be
    approaching the Corps of Engineers, and we think that the
    proposal that the President's budget contains is very important
    on two scores. One is that we strongly believe and recommend
    that the Corps ought to confine and concentrate its activities
    on its historical core mission, flood control and dredging and
    locks and dams and the like, and there has been a tendency over
    recent years to begin to wander off around the fringes into
    marinas and waterfronts and things that really are not, we
    think, what the Corps is there to do.
        Maybe the larger issue is that there has been a dominant
    tendency over recent years to keep adding and adding and adding
    new projects, new project starts, and that has the effect of
    delaying the completion of the ones already on the books. We
    have a $21 billion backlog of projects that are already
    started. It is going to take ten or 12 years--if we did not
    start another one from this day on to finish those. We would
    like to finish them, get some of the best of them onstream now
    so taxpayers could start receiving the benefits that were
    forecast for them.
        Those are the two principal issues and we would be glad to
    supply you some more of our thinking on this issue.
        Senator Dorgan. On that subject, let me just say that,
    obviously, the administration has every right to fire Mike
    Parker or have him resign or whatever happened with Mr. Parker,
    but on the subject of the statements about the projects, lost
    jobs, increasing costs, General Flowers is a very distinguished
    three-star general, someone I have worked with a great deal. I
    have great respect for him. And the implication of your
    memorandum here suggests that General Flowers was, as you say,
    providing statements to Congress that were just bogus. I do not
    agree with that.
        I think General Flowers described the circumstances with
    the projects the Corps is involved with in an accurate way and
    I regret very much you have decided to do this, but I hope that
    if you believe his statements were bogus, I hope you will
    supply the detail to us that you suggested you would supply to
    the White House.
        Mr. Daniels. Okay.
        Senator Dorgan. Senator Campbell?

                               EOP CONSOLIDATION

        Senator Campbell. One last thing, Mr. Chairman, and it
    deals again with this consolidated account for the executive
    office. It always sounds good, I think, when you talk about
    streamlining and flexibility, as you have in your testimony,
    but my own view, I think shared by Senator Dorgan, is that
    sometimes some departments get shortchanged if they have an
    important mission, perhaps a smaller voice in the
    administration, and there are also certainly some
    constitutional types around here that believe that it really
    erodes the authority of Congress to oversee the expenditure of
    funds.
        I just wanted to ask one thing, though. You used the number
    $336.2 million under a combined consolidated executive office.
    How does that compare with the amount we appropriate for the
    full 15 separate entities?
        Mr. Daniels. You mean how does it compare with last year's
    number? I can tell you OMB, of course, but my recollection is
    that the total is about a 1-percent increase, excluding
    additional homeland security requirements.
        Senator Campbell. Increased by consolidating?
        Mr. Daniels. Well, not by virtue of the consolidation, but
    if you were to roll them all together and compare them to the
    individuals from last year, I think it came to about a 1-
    percent increase not including homeland security. OMB's was
    zero, but some of the others were several percent. Nearly all
    of the other increases were due to additional homeland security
    requirements.
        We did not suggest, as I recall, that you would effect a
    savings by virtue of rolling them all together. That might
    happen over time, but that was not really the intent. It was
    simply to have a little more flexibility to shift people and
    resources as good management seemed to dictate.
        Senator Campbell. I understand. Thank you, Mr. Chairman.
        Senator Dorgan. Mr. Daniels, it is not new for us to hear
    from someone who hears a government agency the message, ``Give
    me the money and get out of the way.'' That is not a new
    message. But you know our interest. Our interest is in trying
    to have accountability and make sure that we have oversight
    responsibility that we can achieve.
        My view of the consolidation has not changed at all. I
    think you will admit that this subcommittee has been very
    helpful to the administration on individual requests throughout
    the years. As the administration needs the flexibility, we
    provide flexibility. But I have not changed my view on the
    question of consolidation.
        Mr. Daniels. Let me say to you, Senator, that so be it. I
    mean, we have made the best case we can. As I say, the earth
    will not tremble if we do not get this changed. I would hope
    that you would, however, or this committee would look hard at
    some of the bigger questions. It would be very, very helpful--
    forget the White House--across the Government if we had even a
    little more ability to reprogram money within accounts, even at
    the margins in order to meet the shifting circumstances that
    happen in a fiscal year.
        Senator Dorgan. But we do that all the time. We are always
    receiving requests here and have been enormously helpful. I
    mean----
        Mr. Daniels. Some subcommittees are and some are not. I am
    just saying that--and there are other examples I could give,
    but in general, I think we do face an issue in terms of
    delivering to the Congress what it rightly expects, more
    efficiency and a better managed government, and also an issue
    in recruiting talented people to come into Federal service
    that, in many ways, the ability of managers to manage is
    constrained, and this is the bigger question we would like to
    work with you on as time goes forward.
        Senator Campbell. If I might interject, Mr. Chairman, since
    we have worked together on this committee, I do not ever
    remember a time that we have refused reprogramming money when
    it has been asked for, do you?
        Senator Dorgan. Well, we have delayed a time or two, but we
    have ultimately never refused.
        Senator Campbell. Yes.
        Senator Dorgan. The point is that we have been enormously
    helpful to agencies, forcing them to make the case if they can,
    and they have been able to make the case that here is why they
    need to move some money and we have been very helpful to allow
    them to do that, but I still feel very strongly about oversight
    responsibility.
        And again, if you will come back to us with the details
    regarding General Flowers.
        Let me again urge you, especially with people like General
    Flowers, who I think is a very distinguished person, the
    implication of this letter is to throw him into a political
    basket someplace in terms of the convivial attitude you
    suggest. I hope you will not do that. That is----
        Mr. Daniels. Let me just say, first of all, I meant no
    personal disrespect to the general, whom I have not had the
    chance to meet. Secondly, that note fired off in the course of
    a day got out accidentally. It was never intended to embarrass
    him in any way. We cannot find justification in the facts as
    they were reported. All we had is what he was reported to have
    said. We will show you why we have a different view, but----
        Senator Dorgan. Well, you had a transcript, though.
        Mr. Daniels [continuing]. We certainly meant no disrespect
    to him.
        Senator Dorgan. But you had a transcript. I mean, it is not
    as if you were relying on third-hand reports. You fired a memo
    off as a result of a transcript.
        Mr. Daniels. That is right. We know what he said and we do
    not find validity in it, but that is a different question than
    whether we have a high regard for him.
        Senator Dorgan. All right. Again, I take a different view.
    I think what he said was absolutely correct with respect to the
    job loss and the inability to fund the projects that the
    Congress has approved. I mean, after all, Congress makes
    judgments about these projects, approves them, and then
    attempts to fund them, and the underfunding of these projects
    in the President's budget was what was being discussed.

                         ADDITIONAL COMMITTEE QUESTIONS

        Having said all that, Mr. Daniels, we appreciate your
    willingness to come today. We do want to work with you on a
    range of issues. We have common responsibilities and we look
    forward to working with you this year.
        Mr. Daniels. Thanks.
        [The following questions were not asked at the hearing, but
    were submitted to the Office for response subsequent to the
    hearing:]

                 Questions Submitted by Senator Byron L. Dorgan

                                customs user fee
        Question. Part of the Homeland Security budget the Administration
    has been touting B the part that funds the Customs Service B is
    comprised of a $250 million tax increase referred to as a ``user fee.''
    Similar tax increases were requested by a Democratic President and
    rejected by Republican Congresses.
      --If Customs role in Homeland Security is so vital and I believe it
            is why should it be funded by a tax increase instead of hard
            dollars?
      --To be able to generate sufficient revenues, the tax increase must
            be authorized by July 1. What efforts have you undertaken with
            the Finance and Ways and Means Committees to get this tax
            increase authorized?
      --COBRA user fees fund all Customs inspection overtime as well as
            over 1,000 positions. The President's budget DOES NOT assume
            the reauthorization of COBRA which is set to expire in
            September 2003. What are the President's legislative
            recommendations to deal with the loss of this funding?
        Answer. These fees are collected from international travelers and
    are used to pay overtime and other inspection costs incurred by the
    Customs Service. These same travelers will pay the updated fee, and the
    receipts from that fee will enhance Customs services. We view the
    proposal as a well-justified update to an existing fee.
        The updated fee would need to go into effect in the first quarter
    of fiscal year 2003 to generate the funding assumed in the proposal.
    The budget proposal assumes that the fee will be in place for a full
    year, but that, consistent with the current fee collection procedures
    (fees deposited with Customs one month after close of previous fiscal
    quarter), only three-quarters of the year's collections will be
    available for expenditure. The Administration has submitted
    Appropriations language to enact the fee, and authorizing language is
    currently being crafted to submit to the Ways and Means Committee. We
    will work with the authorizers to enact the fee language.
        The fiscal year 2003 budget does not reflect a specific
    Administration position on extension of the COBRA fee, in either its
    existing or proposed form beyond fiscal year 2003. Although no
    decisions have been made on the issue of extension of these fees, we
    expect to address this subject in the fiscal year 2004 budget, if not
    sooner.
        Question. OMB is proposing major changes in funding significant
    portions of the Federal retirement system and the administrative costs
    associated with the Federal Employees' Compensation Act (FECA) program.
    Aside from the fact that not all agencies were informed of these
    additional costs and will therefore have to absorb them, you are asking
    the Appropriations Committee to perform the task of the authorizing
    committee without even attempting that route to begin with.
        Why did you choose this route? What is the status of moving these
    proposals through the appropriate authorizing committees? What agency
    is responsible for moving this legislation through the committees?
        Answer. The Administration chose to advance its FECA surcharge
    proposal through the appropriations process because it dovetails with
    the Budget. Although the proposal amends FECA, it changes the program's
    administrative funding mechanism, not the program itself. It does not
    affect the Act's benefits, coverage, or claims provisions. The
    surcharge is a change to the assignment of program administrative
    costs, which will affect the budget of virtually every Federal agency
    that has Federal workers' compensation costs. Where the Administration
    is proposing substantive program changes, it will pursue them through
    the appropriate authorizing committees. The Department of Labor, which
    administers FECA, is the lead agency on the surcharge and other FECA-
    related proposals.
        Our fiscal year 2003 Budget policy was to include the surcharge
    amount in each agency's funding level. We regret if some agencies--
    particularly those with budgetary bypass--were not appropriately
    informed of the surcharge. This proposal is not intended to generate
    short-term Government-wide discretionary cost savings. It is, however,
    expected to produce long-term mandatory savings, as it strengthens
    agencies' incentives to prevent injuries and cooperate in efforts to
    help beneficiaries return to work when appropriate.
        Any confusion experienced this year would be eliminated once the
    proposal is enacted. Under current law, agencies are billed by the
    Department of Labor for FECA benefits that have been paid to their
    employees, include those amounts in their subsequent budget requests,
    and pay them once they have received their appropriation. If enacted,
    the surcharge would be handled through this well-established process.
        Question. It is my understanding that these proposals are in an
    effort to show agencies the true costs of employees for the sake of
    ``good government.'' To that extent, the shifting of administrative
    costs for FECA is supposed to encourage an agency to make the necessary
    changes in its work environment resulting in a decrease of FECA cases.
    If this is the true motivation behind this proposal, why has the
    Administration yet again delayed the announcement of its ergonomic
    policy?
        Answer. On April 5 Secretary Chao announced the Administration's
    comprehensive plan to reduce ergonomic injuries through a combination
    of industry-targeted guidelines, tough enforcement measures, outreach,
    research, and dedicated efforts to protect Hispanic and other immigrant
    workers. This approach was developed based on input provided at the
    Secretary's three ergonomics forums last year; relevant information
    from a number of sources, including the information from the ergonomics
    rulemaking record; and injury and illness data from the Bureau of Labor
    Statistics. I want to assure you that no part of the Administration had
    been stalling this initiative. In developing this plan, we sought to
    carefully consider all options, rather than rushing to an ill-conceived
    solution. The announcement last week is the product of this careful
    consideration and we expect it to result in greater protection for
    workers.
        Question. This is not the first time this Administration has
    proposed shifting the administrative costs associated with the Federal
    Employees' Compensation Act (FECA) program into each individual agency.
    You proposed this change in your fiscal year 2002 budget request, only
    you removed the funding from the Department of Labor and did not fund
    it amongst the affected agencies. Given your past performance and the
    fact that many smaller agencies were unaware of this proposal during
    the fiscal year 2003 budget, what assurances do we have that you will
    continue to provide the necessary resources for these agencies without
    forcing them to absorb these costs out of programmatic adjustments?
        Answer. Our fiscal year 2003 Budget policy was to include the
    surcharge amount in each agency's funding level. We regret if some
    agencies--particularly those with budgetary bypass--were not
    appropriately informed of the surcharge. This proposal is not intended
    to generate short-term Government-wide discretionary cost savings. It
    is, however, expected to produce long-term mandatory savings, as it
    strengthens agencies' incentives to prevent injuries and cooperate in
    efforts to help beneficiaries return to work when appropriate.
        Any confusion experienced this year would be eliminated once the
    proposal is enacted. Under current law, agencies are billed by the
    Department of Labor for FECA benefits that have been paid to their
    employees, include those amounts in their subsequent budget requests,
    and pay them once they have received their appropriation. If enacted,
    the surcharge would be handled through this well-established process.
                             border security agency
        Question. Yesterday we learned that Governor Ridge and the
    President's Homeland Security Council formally recommended to President
    Bush that the Customs Service be combined with the INS and Border
    Patrol under the jurisdiction of the Department of Justice.
        Setting aside the wisdom of this proposal, and the lack of
    consultation with the Congress prior to the recommendation being made,
    what role did you and your office play in this discussion and
    recommendation? Do you anticipate any out-year budgetary savings if
    such a proposal ultimately was agreed to by Congress and created?
        Answer. The Administration has not submitted a Border Security
    proposal at this time. It is inappropriate for me to comment on such a
    proposal before it is submitted or to speculate about the out-year
    savings without reviewing a specific proposal.
                          office of homeland security
        Question. Governor Ridge's operations are funded by this
    Subcommittee as part of the budget of the Executive Office of the
    President through the White House Office. The budget request for the
    OHS operations is approximately $24.8 million.
        Given the extraordinary function of the Governor and this office,
    are these funds sufficient?
        Answer. Yes. The requested funds are sufficient.
        Question. Approximately $38 billion of the government-wide fiscal
    year 2003 budget request is attributable to Homeland Security. Of that
    total, $10.6 billion is directed to the goal of ``securing America's
    borders.'' Other goals and initiatives are targeted at ``supporting
    first responders,'' or ``defending against biological terrorism.''
      --How was the level of $38 billion reached? Did you set the amount as
            a target and then develop the various budgets to fit that
            number? Or was the number reached as the various agency budgets
            were submitted?
        Answer. As the fiscal year 2003 Budget states, the homeland
    security budget was calculated by capturing those activities that are
    focused on combating terrorism and occur within the United States and
    its territories. Such activities include efforts to detect, deter,
    protect against and, if needed, respond to terrorist attacks. As a
    starting point, funding estimates for these activities are based on
    data that has been reported since 1998 in the Office of Management and
    Budget's Annual Report to Congress on Combating Terrorism, and include
    combating terrorism and weapons of mass destruction (WMD), critical
    infrastructure protection (CIP), and continuity of operations (COOP).
    Since homeland security focuses on activities within the United States,
    estimates do not include costs associated with fighting terrorism
    overseas. In addition, homeland security estimates include all funding
    associated with border security and aviation security. The $38 billion
    reflects the Federal Government-wide total for requested for these
    activities.
        Question. Is this the right mix of dollars to goals and targets?
        Answer. The Office of Homeland Security (OHS) and OMB worked in
    conjunction with individual bureaus, Agency Heads, and other White
    House Offices, to ensure that the President's fiscal year 2003 Budget
    supports the most immediate, high-priority needs to protect our Nation
    from terrorists threats. Moving forward, in the National Strategy and
    the fiscal year 2004 Budget cycle, OHS will continue to work with all
    stakeholders--Federal agencies, Congress, state and local governments,
    and the private sector--to articulate a longer-term, comprehensive
    framework to make our homeland stronger, better, and more secure
    against terrorism. OMB will lend its expertise to ensure that your
    concern is addressed: that we have the right mix of dollars to goals
    and targets.
        Question. One aspect of Homeland Security, and a component of the
    goal of ``defending against biological terrorism,'' is protection of
    the mail. Four (Five?) people were killed in this country last year
    because letters laced with anthrax were sent through the Postal System.
    The Administration provided $175 million to initially address this
    threat, and the Congress added $500 million. In a report just delivered
    to us, the Postal Service has identified an additional $87 million for
    this current fiscal year, and nearly $800 million in requirements to
    address the biological terror threat and ensure the safety of the mail.
    Yet the budget before us today has no additional funding for the Postal
    Service.
      --Does this mean that the safety of the mail is not a component of
            homeland security or that it is a lesser priority when compared
            with other threats?
        Answer. The safety of the mail is an important homeland security
    concern. In fact, the President included $87 million for the U.S.
    Postal Service as part of his fiscal year 2002 Emergency Supplemental
    Appropriations request (submitted on March 21, 2002). This $87 million
    was identified by the Postal Service in its Emergency Preparedness Plan
    for near-term needs.
        The USPS Emergency Preparedness Plan covers 5 years and was
    submitted well after the President's fiscal year 2003 Budget was sent
    to Congress. The Plan, including the longer-term needs assessment, is
    under review by my staff, the Homeland Security Council, and others in
    the Administration.
                                   pay parity
        Question. Once again the President's budget seeks to preserve the
    concept of pay disparity by establishing a pay tiering system. This is
    sort of a ``some Federal employees are more important than others''
    kind of approach to governing. It is a slap in the face to hard-working
    Federal civilian employees who often work side-by-side with the
    military. It says to the armed female Customs Service inspector manning
    a one-person port of entry along the Northern Border that her work
    product is valued less than that of a female paratrooper protecting her
    country overseas. And it is a significant disincentive to recruiting
    talented people who are thinking about a career in government.
      --How can you support and justify this inequality in pay?
        Answer. We strongly believe that both our military members and
    civilian employees make significant contributions to the welfare of
    this country every day. At the same time, we feel that the
    Administration's fiscal year 2003 pay raise policy is responsible and
    sensible. The proposed civilian pay raise is justified because Federal
    civilian pay raises for 2002 and 2003 greatly exceeded projected
    inflation and, for the past 3 years (2000-2002), also have exceeded the
    Employment Cost Index (ECI). In addition, most Federal employees also
    receive within-grade (or step) increases every one to 3 years.
    Furthermore, civilian employees have benefited from a number of recent
    enhancements to their compensation package, such as paying the Federal
    Employees Health Benefits Program premiums out of pre-tax income and an
    increase in the amount of tax-deferred contribution to Thrift Savings
    Plan (TSP).
        We are committed to setting pay at levels that will enable the
    Federal Government to recruit and retain a skilled and dedicated
    workforce. We are also committed to meeting this objective in a manner
    consistent with prudent use of taxpayers' dollars. This Administration
    will continue to review Federal pay policy annually, and evaluate
    military and civilian pay raise policies on the basis of the particular
    circumstances applicable to each.
                   office of financial assets control (ofac)
        Question. I have been a strong opponent of the travel ban to Cuba.
    I believe that it is a poor use of scarce resources for OFAC to be
    tracking down and fining retired social workers who travel to Cuba for
    a bike trip, instead of tracking down the assets of possible
    terrorists. Secretary O'Neill came before this committee last week and
    agreed with me on this point.
      --Don't you agree that given the fiscal reality that we are now
            facing and the fact that the Administration submitted a budget
            with deficit spending for the first time in years, that we must
            use these scarce resources for homeland security and anti-
            terrorist activities? Would you support an effort to limit
            OFAC's mission and prevent that office from using personnel and
            money to enforce an outdated travel ban?
        Answer. The President has stated that ``The Administration will
    oppose any effort to loosen sanctions against the Cuban regime until it
    frees political prisoners, holds free and democratic elections, and
    allows for free speech.'' I fully support this policy, and have
    confidence that enforcement of sanctions by Treasury's Office of
    Foreign Assets Control (OFAC) is fair and fully consistent with legal
    requirements.
                              great grant program
        Question. The Administration initially proposed a fiscal year 2003
    budget for the Bureau of Alcohol, Tobacco, and Firearms (BATF) that did
    not include funding for the GREAT grant program. According to the OMB
    passback to the Department of Treasury, ``This level does not fund
    grants for the Gang Resistance Education and Training Program. Given
    the elements of September 11 and the need to reorder priorities, we
    assume these functions will be provided through state and local
    entities or through other Federal agencies with core missions in
    education and youths.''
      --The Administration recently submitted a budget amendment that
            amended the request to include the GREAT grant program;
            however, no additional funds were included. How can the BATF
            absorb the additional $13 million and still meet the challenges
            they face for homeland security and the ongoing mandates and
            responsibilities required under statute?
        Answer. The President's Budget, initially submitted on February 4,
    2002, provided $13 million for ATF's GREAT grants and $3 million for
    administrative costs. The budget appendix incorrectly displayed the
    language related to the GREAT program, but an amendment transmitted on
    March 14, 2002 corrected the appropriation language to ensure that ATF
    has the authority to implement and distribute GREAT grants.
        The President's fiscal year 2003 Budget proposes $913.114 million
    for ATF, $61 million or 7 percent above fiscal year 2002 enacted
    (including fiscal year 2002 comparables for accruals and excluding
    funding from the Emergency Response Fund). This increase includes $13
    million for second-year costs related enhancements in homeland security
    such as agents to participate in Joint Terrorism Task Forces and
    additional canine handlers and expansion of ATF's canine training
    facility in Front Royal, Virginia.
                        treasury counter terrorism fund
        Question. The Treasury Counterterrorism Fund (CT Fund) was first
    appropriated in fiscal year 1997 as a central fund to reimburse any
    Treasury organization for the costs of providing support to counter,
    investigate, or prosecute terrorism, including payment of rewards in
    connection with these activities.
      --The President's fiscal year 2003 Budget attempts to transform the
            Counterterrorism Fund under the Department of Treasury into a
            reimbursable account for any agency in the Federal Government
            for its role in a National Special Security Event (NSSE).
            Congress has cautioned the Administration on the use of this
            fund to pay for events such as the Olympics and other NSSE's.
            Is it your intention that this fund be used to reimburse any
            agency for its participation in these events?
      --Aren't you concerned that this fund will be depleted by planned
            activities that should be budgeted for in all affected
            agencies, rather than unforeseen events that will require the
            involvement of agencies within the Department of Treasury?
        Answer. The Budget proposes language that would enable Treasury to
    reimburse any Federal agency that provides security at National Special
    Security Events (NSSEs) (at the request and direction of the U.S.
    Secret Service). The language is specific and is intended to improve
    the U.S. Secret Service's ability to carry out its responsibilities
    related to operational and perimeter security at NSSEs outlined in
    Presidential Decision Directive 62. Each NSSE is different, and the
    Secret Service requires the flexibility to call on various Federal
    partners, as necessary, to assist with security operations. Given the
    variation in NSSEs the Federal partners participating may change from
    event to event. Providing Treasury the opportunity to reimburse other
    agencies as needed will ensure uninterrupted planning and protection at
    NSSEs and allow proper tailoring of security responses. This funding
    mechanism mirrors the one in place for FEMA in consequence management.
        Forecasting the unforeseeable is difficult and while the U.S.
    Secret Service makes every attempt to plan for NSSEs, recent events
    have led to a proliferation of events that are now designated NSSEs,
    such as the NFL Superbowl and the United Nations General Assembly.
    Currently, the Counter-Terrorism Fund is carrying balances of $64.6
    million. The President's Budget provides an additional $40 million in
    fiscal year 2003 for potential resources of up to $104.6 million. The
    Administration, working with Treasury and the U.S. Secret Service,
    believes the proposed funding levels for the CT Fund will adequately
    provide for unforeseen events such as NSSEs.
                           omb representation account
        Question. Last year your office requested B and the Congress
    provided B the creation of a ``representation account'' at OMB so that
    you can entertain your counterparts at official functions in your
    office. We authorized the use of up to $3,000 for these purposes.
      --Now that nearly half of the fiscal year is over, how much of that
            fund has been used to date?
        Answer. To date, no expenditures have been made from the
    representation account.
                        scoring of small business loans
        Question. The Small Business Administration provides loan
    guarantees for small businesses through the 504 program. Unfortunately,
    the Office of Management and Budget uses an artificially high rate of
    default, higher than the actual rate of default. Because of the way
    that this program is scored, fewer loans can be made. So the result of
    this arcane way of scoring the program is that fewer businesses can
    benefit. My understanding is that the default rate has been
    extrapolated from a very small time frame and does not take into
    account the full history of the program.
      --Could you explain why OMB is unwilling or unable to use a more
            accurate default for this program?
        Answer. The Small Business Administration (SBA) provides loan
    guarantees through a number of programs, including the Section 504
    Community Development Company program. We disagree with the contention
    that the Administration is unwilling or unable to use an accurate
    default rate. OMB treats the 504 program as prescribed by the Budget
    Enforcement Act of 1990. The Federal Credit Reform Act of 1990, as
    amended requires that SBA estimate the subsidy cost of its loan
    programs as the net present value of the expected cashflows to and from
    the Government over the life of the loan(s) being guaranteed. SBA must
    estimate these cash flows for each year of the loan's maturity, based
    upon historical program experience (or, in the case of new program, a
    suitable proxy) and incorporating performance over a variety of
    economic conditions. OMB guidelines require at least a maturity's worth
    of data on which to estimate the subsidy cost, although few agencies
    other than SBA have sufficient, usable data to meet that requirement at
    this point.
        We also disagree with the contention that fewer businesses benefit
    from the program because of the way the default rates are developed.
    The 504 program has always met loan demand and the available loan
    volume frequently exceeds demand. For instance, the President's fiscal
    year 2003 budget supports a 504-program loan volume of $4.5 billion,
    which is more than $2 billion above the fiscal year 2002 expected loan
    demand.
        With respect to the amount of data used to estimate the default
    rate, we note that SBA uses all 16 years of available historical
    performance data to predict future defaults and recoveries (the program
    started in 1986). Using historical data to estimate default rates is
    commonly used by SBA and other credit agencies and reflects actual
    program performance during a variety of economic conditions. However,
    some of the larger Federal credit programs are moving towards use of an
    econometric model, which can incorporate the effects of programmatic
    changes as well as economic variables in developing default estimates.
    In fact, SBA expects to use an econometric model for its 7(a) General
    Small Business Loan program in the fiscal year 2004 Budget. SBA will
    then build from that effort to develop a new 504 model in future
    budgets.
                              regulatory oversight
        Question. OMB provides oversight of Federal rule-making. Recently
    at a hearing in the House, the Administrator of the Office of
    Information and Regulatory Affairs (OIRA) testified that since July,
    OIRA has returned more than 20 proposed rules to agencies because of
    ``poor quality analysis.'' That is nearly one per week.
      --It sounds like this Administration has a flawed process. Do you
            think that the small staff at OIRA has more expertise in these
            areas than the agencies who deal with these issues all the
            time? Why doesn't OIRA work with the agencies on the front end
            of the process, to ensure that significant amounts of time and
            energy are not wasted redoing work that the agencies have done?
            Shouldn't there be more of a partnership between OMB and the
            agencies on developing regulations? Hasn't the repeated
            rejection by OIRA of rules that have been worked on for months
            by agencies substantially slowed the regulatory process?
        Answer. The issuance of Presidential regulatory principles, and the
    centralized review of draft regulations, has been an accepted part of
    regulatory development for 30 years in one form or another. This began
    with President Nixon's ``Quality of Life'' review program, and
    continued in the 1970s with President Ford's requirement in Executive
    Order Nos. 11821 and 11949 for agencies to prepare inflation/economic
    impact statements and with President Carter's Executive Order No. 12044
    on ``Improving Government Regulations.''
        The OMB review process became more formalized with President
    Reagan's Executive Order No. 12291, which was in effect from 1981 to
    September 1993 (the Reagan and Bush Administrations and the first nine
    months of the Clinton Administration). In September 1993, President
    Clinton issued Executive Order No. 12866, which retained the OMB review
    process in essentially the same form. The Executive Order No. 12866
    review process remains in effect today.
        This review process ensures that agencies, to the extent permitted
    by law, comply with the regulatory principles stated in Executive Order
    No. 12866, and that the President's policies are reflected in agency
    rules. It also serves to ensure adequate interagency review of draft
    rules, so that agencies coordinate their rules with other agencies to
    avoid inconsistent, incompatible, or duplicative policies.
        During the course of OMB's review of a draft regulation, the
    Administrator of the Office of Information and Regulatory Affairs
    (OIRA) may decide to send a letter to the agency that returns the rule
    for reconsideration. Such a return may occur if the quality of the
    agency's analysis is inadequate, if the regulatory standard adopted is
    not justified by the analysis, if the rule is not consistent with the
    regulatory principles stated in the Order or with the President's
    policies and priorities, or if the rule is not compatible with other
    Executive orders or statutes.
        Early in this Administration, I stressed to agencies the importance
    of improving regulatory impact analyses. In a memorandum to agency
    heads, I stated:

        ``The Bush Administration is committed to improving the quality of
    the Regulatory Impact Analyses (RIAs) that departments and agencies
    prepare under Executive Order 12866. Improved analysis will lead to
    more effective and efficient regulation by providing the public and
    policy officials with better information on the effects of these
    important rules. If OMB determines that more substantial work is
    needed, OMB will return the draft rule to the agency for improved
    analysis.'' (Memorandum to the Heads of Executive Departments and
    Agencies, ``Improving Regulatory Impact Analyses'' (OMB Memorandum M-
    01-23, June 19, 2001).)

        Since that memorandum was issued, OIRA has returned 21 agency draft
    rules. As the OIRA Administrator, Dr. John D. Graham has testified, two
    of his priorities have been to establish more openness and transparency
    in how OIRA does its work, and to stimulate more analytic rigor in the
    process of regulatory analysis throughout the Federal government. These
    return letters are publicly available, and posted on OIRA's web-site,
    at ``http://www.whitehouse.gov/omb/inforeg/return__letter.html''.
    Through the public posting of these letters, Dr. Graham provides any
    interested party the opportunity to comment on the content of the
    letters, thus allowing detailed challenge to the expertise therein
    displayed.
        In your question, you raise the issue of OIRA expertise. OIRA staff
    are highly trained and experienced in analysis, particularly benefit-
    cost analysis, and the types of review that are required by Executive
    Order No. 12866. We believe OIRA can supplement and improve its already
    outstanding expertise. Consequently, Dr. Graham is in the process of
    hiring several new staff with backgrounds in science, including
    epidemiology, risk assessment, and engineering to complement existing
    expertise in policy analysis, economics, statistics, and information
    technology.
        You also suggest that OIRA should work, in partnership, with
    agencies earlier in the regulatory development process and express your
    concern about the possible delay entailed by Executive regulatory
    review. We agree that OIRA should work in a cooperative manner with
    agencies more at the front end of the regulatory development process,
    and have been working with agencies to do this whenever possible.
    Knowing that OIRA cares about the quality of agency regulatory impact
    analysis appears to be encouraging agencies to invite OIRA into the
    early stages of regulatory deliberations, where OIRA's analytic
    approach can have a greater impact.
        The return letters relate to 12 proposed draft rules, one interim
    final draft rule, 6 final draft rules, and two notices. Thus, 14 of the
    21 return letters raised OIRA's analytic concerns at the early stages
    of agency rulemaking. Moreover, 6 of the 21 have already been
    resubmitted and OIRA has concluded review. It is a measure of the
    effectiveness of OIRA's return letters that agencies are able to
    respond quickly and OIRA is able to conclude its subsequent review
    expeditiously.
        We can also assure you that the OIRA Administrator is concerned
    about timeliness of OIRA's regulatory reviews. This is demonstrated by
    comparing the time period for the returns (07/20/01 to 02/12/02) with
    the same period for the previous year, a time period in which OIRA did
    not send any return letters. During the time that OIRA returned 21
    rules for reconsideration, OIRA conducted a total of 347 regulatory
    reviews with an average review time of 53.7 days. This compares to 489
    reviews with an average review time of 66.4 days for the previous
    year--close to a 20 percent decrease in review time.
                       federal accounting standards board
        Question. For more than 10 years, the Federal Accounting Standards
    Board has been tasked with working with agencies to ensure that they
    all use uniform accounting standards. This is an important role because
    it allows agencies to provide financial statements as required by the
    Federal Chief Financial Officers Act. Because FASAB creates standards
    for Federal agencies, it has had predominantly Federal officials on it,
    including OMB, Treasury, GAO and CBO.
        Recently, OMB and Treasury announced that the make-up of FASAB
    would be drastically changed. Of the 9-member board, representation
    from Federal agencies will be slashed in half: from 6 to 3.
    Representation from the private sector will increase from 3 to 6. This
    seems illogical given the mission of FASAB. While there may be value in
    having private sector input, the previous make-up of one-third from the
    private sector seems to me to be sufficient. Clearly, Federal agencies
    have unique circumstances compared to the private sector and a Board
    with Federal perspective is more helpful than one that is heavily
    weighted toward the private sector.
      --What is the rationale for having this board which governs Federal
            agencies so heavily weighted with private sector
            representatives? Don't you agree that Federal agencies have a
            unique contribution to make to the process that the private
            sector cannot add?
        Answer. At the August and October 2001 Joint Financial Management
    Improvement Program (JFMIP) Principals' meetings, the three Principals
    addressed concerns about the independence of the Federal Accounting
    Standards Advisory Board (FASAB), which was raised in 1999 by the
    American Institute of Certified Public Accountants (AICPA) when it
    recognized FASAB as the body designated to establish generally accepted
    accounting principles (GAAP) for Federal Government entities. The AICPA
    said it would review its position in 5 years, and expressed a concern
    that the Board, which at that time consisted of six Federal and three
    non-Federal members, did not possess sufficient independence because of
    the predominance of Federal members. The Principals agreed that
    revising board membership to consist of three Federal and six non-
    Federal members would address the AICPA's concern. In addition, they
    agreed to lengthen the terms of the non-Federal members to ensure
    continuity on the Board. The Principals believed that these changes
    would improve the FASAB's consideration and development of accounting
    standards as well as enhance the Board's independence. The FASAB
    Memorandum of Understanding (MOU) was revised accordingly, and signed
    on January 11, 2002, to implement the Principals' decisions.
        Certainly Federal agencies have made and can continue to make
    unique contributions to the FASAB process. Nothing in the new structure
    will prevent Federal entities from presenting views and suggestions to
    FASAB either through its Principals (OMB, Treasury, and GAO) or through
    FASAB's formal, structured due process for vetting all of its
    proposals. It is important to note that, under the revised MOU, each of
    the Principals would still retain his or her right to veto any FASAB
    proposal. Also, non-Federal appointments would still be vetted through
    an appointments panel which includes representatives of the JFMIP
    Principals as well as non-Federal members. All FASAB appointments must
    be approved unanimously by the JFMIP Principals. We believe that the
    new FASAB structure addresses the AICPA's concerns and continues to
    provide ample opportunity for all Federal entities to contribute to the
    deliberative process.
        Question. Also, under the previous make-up of the FASAB, the 6
    Federal representatives included 2 from the legislative branch. With
    the elimination of CBO as a representative, the legislative branch's
    input has been drastically cut. In addition, I understand that CBO was
    never consulted about this change and in fact, that Director Dan
    Crippen resigned in protest.
      --Why was there no consultation of the other Federal members of the
            FASAB before they were removed from the board? Also, please
            explain why you have chosen to marginalize the legislative
            branch by cutting its representation in half.
        Answer. The issue of FASAB independence has been discussed publicly
    since AICPA raised concerns about the Board's independence in 1999 when
    it recognized FASAB as the body designated to establish GAAP for
    Federal government entities. The JFMIP Principals debated the issue and
    chose to move quickly to address AICPA's concerns and thus remove a
    potential distraction from their efforts to improve Federal financial
    performance.
        The decision to reconstitute FASAB by increasing the non-Federal
    memberships and reducing the Federal membership was made to address the
    AICPA's concern that the Board, which at that time consisted of six
    Federal and three non-Federal members, did not possess sufficient
    independence because of the predominance of Federal members. The AICPA
    said that this issue would be considered when it reviewed its position
    in 5 years. This action will not marginalize the Legislative Branch of
    the government. The Comptroller General of the United States, an
    official of the Legislative Branch of the government and the current
    chair of the JFMIP, strongly supported the reconstitution of the FASAB
    to three government members. Moreover, the Legislative Branch retains
    the same proportional representation relative to the Executive Branch
    as the original FASAB make-up.
        Representatives from the CBO and the other two Executive Branch
    agencies have made important contributions to the Board's deliberations
    since 1990, and still have the opportunity to do so through the
    Principals or the formal due process for vetting all FASAB proposals.
    The Department of Defense (DOD), which has provided the member from the
    defense/international agencies since FASAB was established in 1990,
    accepted the Principals' offer to remain involved in FASAB proceedings
    as an observer. The Principals would be pleased to welcome a CBO
    representative under an informal ``observer status'' which would allow
    CBO to participate with DOD, but without voting privileges.
                       the president's management agenda
        Question. The President's Management Agenda proposes to use the
    budget process to discipline agencies who do not ``get to green'' on
    the five scorecard items related to the President's management goals.
    Tell us what that means.
      --Please explain how the Administration's authority to do so relates
            to, and does not conflict with, the role of Congress in
            authorizing and appropriating funds to achieve statutory
            missions of Federal agencies?
        Answer. The President's Management Agenda (PMA) has the shared
    Congressional goal of improving the performance of Federal programs
    across government. Changes in the management of programs that require
    modifications to existing law or to agency budgets will be proposed as
    a part of the President's Budget or as legislative changes.
        In fact, the GPRA (Government Performance and Results Act of 1993)
    specifically calls for a more focused and serious approach to measure
    the effectiveness of Federal programs and most importantly to use
    performance based budgeting to accomplish this objective. The PMA is a
    focused initiative to address the most glaring government-wide problems
    and fix them. The role of Congress and the Executive in this initiative
    is one of mutual cooperation and a shared goal-the efficient use of
    taxpayer dollars. The PMA will over time help Congress in identifying
    the most effective programs and the worst performing programs to best
    allocate tax dollars.
                       government's human capital crisis
        Question. How and where does the President's budget identify and
    request the funds necessary to pay for the expenses that agencies must
    face to in response to the Federal ``human capital crisis''?
        Just to name a few of the cost considerations that are not visible
    in the budget but which are critical to the functioning of the Federal
    government:
      --retirements which are expected to include approximately one-third
            of the regular Federal workforce, and about half of the SES by
            2004.
      --buy outs and early outs
      --massive recruiting
      --the need for competitive salaries and positions among technical and
            scientific specialists and experts
      --retention strategies including pay increases, promotions Y
      --training for the next generation of entry level employees and
            training for the new wave of managers
      --systems to provide agencies with better knowledge management of
            their own people, competency needs, skills, and accountability.
        Answer. OMB Circular A-11 provided guidance to agencies on
    preparing their fiscal year 2003 budget requests and annual performance
    plans. Agencies were instructed to prepare a five-year workforce
    restructuring plan, which identified the specific organizational
    changes the agency is proposing to make the government more citizen-
    centered. The plan also was to include the human resources tools and
    flexibilities needed to implement the plan. Decisions on these plans
    were made on an agency-by-agency basis and are included in each
    agency's budget request. Integrating human capital strategies into
    agency strategic and budget processes is essential to building,
    sustaining, and effectively deploying a high-performing workforce to
    meet the needs of the nation. OMB will continue to evaluate future
    agency budget requests to ensure that they are linked to the achieving
    the President's vision to make Government more citizen-centered,
    results-oriented, and market-based.
                            outsourcing federal jobs
        Question. The Administration and OPM are advocating using the
    President's support of increased outsourcing to include Federal jobs.
    This has been the subject of heated discussion in the Senate
    Governmental Affairs Committee, as recently as a hearing on March 6,
    2002.
      --What are the budgetary implications and estimates for such an
            effort?
        Answer. We were pleased to help update the Senate Government Reform
    Committee on March 6 on the Administration's progress in implementing
    our competitive sourcing program. Almost every Cabinet agency and
    several smaller agencies have submitted competitive sourcing plans to
    us. Some agencies are obviously further along than others. In addition,
    OMB is providing staff assistance to every agency that requests the
    help, especially important since most civilian agencies have never
    conducted a public/private competition before.
        Additionally, through the management scorecard and progress
    reports, we're holding each agency accountable for implementing the
    President's competitive sourcing initiative. These competitions are
    often lengthy and that's why we're hoping to streamline them and will
    oppose efforts to add hurdles. We're focusing on having agencies build
    the infrastructure for public/private competitions.
        Regarding the budget implications, DOD has achieved and continues
    to estimate future savings. Without service or logistical support
    reductions, these funds will be available for redirection into other
    DOD priorities.
        Question. What cost estimates do you have to support that it will
    be more cost effective or as accountable as necessary once these
    positions are outsourced?
        Answer. One of the key benefits to competitive sourcing is the
    savings to the taxpayer. Savings have been documented by every group
    that has ever seriously studied this issue. Organizations such as the
    GAO, the Center for Naval Analysis, and RAND have all documented
    significant savings. On March 6, 2002, GAO testified to the significant
    cost savings from A-76 competitions. On average, the statistics show a
    20-30 percent savings, regardless of whether the public or private
    sector wins the competition. Some studies, such as the 1998 Center for
    Naval Analysis (CNA) analysis of 44 competitions indicate a 42 percent
    cost savings. These savings have been achieved without service
    reductions, terminations or arbitrary FTE ceiling reductions.
        Question. What happens when the company providing the outsourcing
    decides that the government's business isn't as profitable a market as
    it would like?
        Answer. Only the firm itself can decide if it is interested in
    renewing its contract with a client, whether that client be government
    or private. If the firm no longer sees it as profitable, it is under no
    obligation to participate in a re-competition.
                             government downsizing
        Question. Government downsizing in the 1990s led to significant
    skill and structural imbalances, as well as agencies not positioned to
    fulfill their mission. Nonetheless, the Administration is pursuing
    continued downsizing and several agencies appear to be ready to offer
    early outs and buy outs to agencies.
      --What is the Administration doing to ensure that the downsizing
            going on now won't repeat those problems? Are the early outs
            and buy outs allowing the government to distinguish between the
            talent they need to keep and others who may lack the skills,
            knowledge, and experience to assist the agency now and into the
            future?
        Answer. The Administration recognizes the numerous challenges
    facing the government now and in the future, such as the growing
    percentage of the workforce that is eligible to retire over the next 10
    years; competing for talent with the private sector; and closing skill
    gaps created by past downsizing. In response, the President has placed
    Strategic Management of Human Capital on his list of government-wide
    management initiatives. The U.S. Office of Personnel Management (OPM),
    together with OMB, will work very closely with Federal agencies to
    implement human capital strategies to attract and retain the right
    people, in the right places, at the right time; make high performance a
    way of life in the Federal service; and deliver high quality services
    the American public deserves. The President's approach is not driven by
    arbitrary numerical goals and is intentionally flexible and aligned
    with other initiatives to ensure that numbers do not drive good
    management strategy.
        In addition, I will work with others within and outside of the
    Administration to help advance the Managerial Flexibility Act, which is
    an important step toward achieving the President's vision to make
    Government more citizen-centered, results-oriented, and market-based.
    This proposal would give every Federal manager increased discretion and
    flexibility in attracting, managing, and retaining a high quality
    workforce. Furthermore, it would empower Federal agencies to determine
    when, if, and how they might offer new employee incentives, and it
    enhances the agencies' authority to use recruitment, retention, and
    relocation bonuses to compete better with the private sector. It would
    also enable managers to offer early outs and buyouts for downsizing
    and/or restructuring, which would allow agencies to target buyouts
    based on a number of factors, including skills, knowledge and
    abilities, geographic location, organizational unit, and occupation to
    assist in agency workforce planning efforts.
                     shared responsibilities with congress
        Question. In the Budget, the President notes that ``getting to
    green'' is a shared responsibility of the Congress and the Executive
    Branch. If true, transparency will be essential to make that
    meaningful. What information about agency evaluations, plans, progress,
    and strategies to address their management deficiencies will be made
    available to Congress and, if requested, to the General Accounting
    Office?
        Answer. Status reports on agency progress toward ``getting to
    green'' on the management scorecard will be regularly made available in
    the President's budget and the Mid-Session Review.
                        ridge testifying on capitol hill
        Question. In the March 20 Washington Post, columnist David Broder
    suggests that--just as you have significant jurisdiction over agency
    budgets and are required to testify before Congress--Homeland Security
    Director Ridge also should testify on the Hill because of the
    substantial sway he holds over the development and targeting of agency
    budgets.
        Do you think that it would help improve the dialogue between the
    White House and the Congress if Gov. Ridge did testify in a mutually-
    agreed upon setting?
        Answer. As I mentioned in my March 14th testimony, while this is
    not my area of responsibility, I know that Governor Ridge wants to
    communicate as openly and effectively as he can with this Congress.
                                 risk analysis
        Question. In the March 20 Washington Post, there is an article that
    discusses efforts at OIRA to make risk analysis more scientific. Part
    of this effort will be to analyze risks and benefits on the basis of
    ``life years'' instead of ``lives'' saved. I am troubled by this type
    of analysis because it seems to put a lower value on the elderly.
      --Under this formulation, isn't it true that a regulation that would
            save lives of the people in their 60s would be considered less
            beneficial than one that saved lives of teenagers? Doesn't this
            type of ``scientific'' analysis create all sorts of moral
            hazards? More importantly, doesn't this proposal underscore the
            problem of trying to quantify risks and benefits when lives are
            at stake?
        Answer. The March 20 Washington Post article refers to the release
    of OMB's 2002 draft report to Congress on the Costs and Benefits of
    Federal Regulations. The draft report states that OIRA has initiated a
    process to refine its formal analytic guidance documents. As a part of
    that initiative, the draft report requested public comment on several
    specific issues, including: ``The methods employed to evaluate the risk
    of premature death, particularly the relative advantages and
    disadvantages of differing statistical approaches including the
    quality-adjusted-life year (QALY) approach.'' We decided to address the
    difficult issues involved in valuing premature death by the ``life
    year'' approach instead of the ``lives saved'' approach in response to
    several comments on OMB's draft cost-benefit report to Congress
    published in the Federal Register on May 2, 2001, received from several
    government agencies and interest groups (e.g., the Children's
    Environmental Health Network). We recognize that there are a variety of
    important factors that must be considered in the evaluation of risk
    reducing measures and that no single approach may be sufficient. The
    QALY approach is widely used in the medical literature and has recently
    been recommended for use in analysis by an expert panel assembled by
    the U.S. Department of Health and Human Services. We believe that this
    approach deserves careful review and we look forward to the public
    comments on the role this approach (and similar approaches) might have
    in regulatory analysis.
        Question. The article also indicates that OMB plans to hire more
    scientists at OIRA. It was my understanding that OIRA is already
    stretched very thinly, given the increased interest in information
    policy.
      --What areas of staffing are you planning to cut in order to make
            room for the scientists at OIRA? What role is it that they will
            fill? Conversely, do you plan to seek additional funds to
            adequately pay for these new hires without cutting on-going
            programs?
        Answer. In developing a vision of how to make OMB more effective, I
    have made OMB's ability to analyze regulations a management priority. I
    am therefore implementing a staffing plan that will reverse a twenty-
    year decline in OIRA staffing while enhancing our analytic capabilities
    in a number of scientific disciplines, such as engineering, toxicology,
    public health, risk assessment, and health economics. These new staff
    resources will help OIRA adapt to the changing focus of Federal
    regulatory policy, occasioned by economic deregulation and an expansion
    of social regulation in science-related fields.
        Historically, OIRA's staff has possessed significant expertise in
    economics, policy analysis, statistics, and information technology.
    OIRA's new staff specialists will have scientific backgrounds that will
    complement OIRA's institutional strengths by enhancing its ability to
    analyze regulations concerning public health, safety, and the
    environment. Specifically, the new staff will be involved in the review
    of agency regulatory analyses that raise complex technical issues
    (e.g., human health risk assessments based on toxicology and public
    health science). This, in turn, should stimulate a greater focus on
    science in the regulatory agencies.
        In deciding to devote some of OMB's existing vacancies to new
    specialist positions that will strengthen OMB's ability to review
    regulations, I consulted extensively with OIRA and OMB's other
    divisions. OMB will thus not be seeking additional funds or FTE. For
    details on OMB's proposed fiscal year 2003 budget, please see the
    President's February budget submission to Congress.
                                general flowers
        Question. As you offered to do during the questions today, please
    provide the subcommittee with the specific details referred to in your
    memo of why statements made by General Flowers ``about stopping
    projects and lost jobs'' are ``bogus.''
        Answer. General Flowers stated that the Budget would result in a
    job loss that could be ``in the neighborhood'' of 45,000 jobs. I
    understand that the Army Corps of Engineers has requested that the
    Senate Budget Committee change the hearing transcript to indicate that
    the General now estimates an impact of 4,500 jobs, an order of
    magnitude less than the figure used at the hearing. This correction
    confirms OMB's assessment that the job loss claims as stated in the
    original transcript were inaccurate.
        At the time I sent the memo to which you refer, my staff had ample
    reason to believe that the agency's estimates were greatly overstated.
    Later, OMB staff reviewed material that the Army Corps of Engineers
    provided after I sent the memo. That review, and the Corps's own re-
    examination, both confirmed OMB's initial assessment.
        The Corps' modification of its testimony speaks for itself.
    However, even with this revision, the revised Corps' estimate of job
    losses at projects funded in the budget is based on several
    questionable assumptions.
        First, the Corps estimate fails to account for job increases that
    would result at projects where the Budget proposes increases in
    funding, such as the Olmsted Lock and Dam in Illinois and Kentucky,
    which would receive a $37 million (90 percent) increase in funding over
    the fiscal year 2002 enacted level. The Corps estimate is not a net
    figure.
        Second, the Corps estimate assumes that there will be no effort to
    reduce potential job losses by managing current and future contract
    schedules. It assumes, for example, that the Corps would award new
    contracts in August 2002 even in the face of knowing there would be
    inadequate funds to support such new contracts in the next fiscal year.
        Third, the Corps estimates assume that all fiscal year 2002
    construction contracts will be awarded on schedule and that all work
    under these contracts will proceed throughout fiscal year 2002 and 2003
    on schedule. Historically, many projects do not stay on schedule. The
    Corps often encounters construction delays that are unrelated to the
    availability of funds. Schedule delays lower the likelihood of contract
    termination and job loss.
        Fourth, the Corps assumes that no one else will step into the
    breach. Local project sponsors can advance funds to continue contracts
    (and receive credit against their future cost``)share, where
    applicable); the contractor could continue to work and qualify for
    reimbursement plus interest, subject to the future availability of
    funds; or the Corps could cover the shortfall by reprogramming funds
    from other projects.
        Regardless, we recognize that there would be some termination costs
    under the Budget proposal. This is true especially for projects that
    are outside the Corps' three principal missions and other objectionable
    projects that the Budget does not fund. However, terminating these
    objectionable projects would yield substantial savings to taxpayers. As
    noted in the Budget, it would require about $5 billion to complete all
    the projects added by the Congress that are inconsistent with Corps
    policies--that's $5 billion diverted from nationally important
    priorities, including commercial navigation, flood damage reduction,
    and environmental restoration projects that are already underway.
        The alternative proposed in the Budget is to focus the Corps on
    reducing the backlog of ongoing construction projects that fall within
    its primary missions. This approach would ensure that these projects
    are completed and their expected benefits realized sooner than would be
    possible under current spending tends.
                                    veterans
        Question. Clinics in North Dakota are turning away patients because
    they are so full and the Department of Veterans Affairs has decided
    that they will not open a new clinic in Dickinson, North Dakota due to
    lack of funds. Veterans in my home state can wait up to 10 months and
    have to drive up to 12 hours one-way to receive a routine medical
    visit. I believe that taking care of our veterans is part of the cost
    of our national defense. Yet, the even though the budget included a $48
    Billion increase for Defense, it did not include sufficient funds to
    serve all veterans.
      --What is your explanation for this oversight? Don't you agree that
            we must keep our promises to our veterans if we want to recruit
            and maintain a strong military? What should I tell veterans in
            North Dakota who have been turned away from community based
            outpatient clinics because the Administration has not requested
            sufficient funds?
        Answer. The Department of Veterans Affairs is committed to ensuring
    that all veterans seeking medical care at VA this year have access to
    the system. New VA patients in areas of high demand may have to travel
    to VA hospitals (instead of using the community outpatient clinics).
    This ensures that the local clinics in these areas can continue to
    handle current patient load as well as all emergencies.
        The influx of new patients, particularly PL 7 veterans, into the VA
    system has resulted in higher than expected demand--varying
    significantly throughout the country. Prior to 1996, only 2 percent of
    patients were PL 7 veterans. Today, that number is 21 percent and it is
    projected to be 42 percent by 2010.
        In January 2002, Dr. Robert Petzel, Director of VA Upper Midwest
    Health Care Network (covering North Dakota, South Dakota, Minnesota,
    and small parts of Iowa and Wisconsin) issued a letter to County
    Veterans Service Officers and Congressional Offices stating its new
    policy: ``Veterans seeking care at community clinics where workload is
    projected to exceed the capped level [September 30, 2001 levels], will
    be referred to our [five] VA medical Centers.'' In response to
    questions, Dr. Petzel released a clarifying letter stressing his
    commitment to community clinics for veterans and his plans for the
    current fiscal year. He supported the goal of bringing quality care
    close to where veterans live, but does not want to compromise the
    quality and timeliness of care.
        Since many of the clinics in this Network have exceeded their
    planned capacities, new patients can only be added to the clinics as
    space becomes available. In the meantime, new patients will be offered
    appointments at the VA medical centers. Veterans who have emergency
    needs are being seen or scheduled for an appointment immediately.
        Question. I understand that the supplemental that you intend to
    send up to Congress will include an additional $12 Billion for the
    Department of Defense and an additional $142 million for veterans. I am
    told that the VA funds, if provided, would prevent further reductions
    in service from being implemented but would do nothing to improve the
    level of service or allow additional enrollees. I am surprised that the
    Administration has put such a low priority on our veterans during this
    period of increased military activity.
      --Why isn't the Administration doing more to ensure that the veterans
            who are eligible for health are able to access it? When the
            Administration had the opportunity to address this problem in
            the supplemental, why did veterans get only one percent of the
            requested funds that DOD received?
        Answer. The fiscal year 2002 Supplemental request that was
    transmitted to the Congress on March 21, 2002, includes an additional
    $142 million to provide sufficient funding for the VA to take care of
    all veterans who wish to enroll for VA health care benefits in fiscal
    year 2002. VA estimates that this amount of funding will ensure that
    all requesting care will be treated.
                               corps of engineers
        Question. The Corps of Engineers was dramatically underfunded in
    the President's budget request. Just in my state, there were several
    projects that were funded below capability by tens of millions of
    dollars. The Grand Forks Flood Control project, for example, was funded
    at less than half of the level necessary to keep the project on
    schedule. If this project is not substantially completed by December
    2004, the city has been told that FEMA will spend money to remap the
    100 year floodplain, which would include over 90 percent of Grand Forks
    and East Grand Forks and thousands of new properties, forcing residents
    to pay between $10-$15 million annually in additional flood insurance.
    This mapping will need to be redone a year or two later when the flood
    control project is complete. Mapping this area twice in the course of a
    couple of years seems like a huge waste of Federal dollars and would be
    totally unnecessary if the Corps of Engineers' budget wasn't so
    severely underfunded.
        Grand Forks is just one example of the additional costs involved in
    underfunding projects currently underway at the Army Corps of
    Engineers. All across the country, this underfunding causes overall
    costs to rise because the projects are drawn out and not built on the
    most efficient schedule. In addition, it leaves tens of thousands of
    people vulnerable to flooding for years beyond the original deadline
    goal.
      --Why wouldn't the Administration pursue a policy of finishing
            projects on the most efficient time frame?
        Answer. The Budget does give priority to completing ongoing
    construction projects that are within the Corps' primary missions--
    commercial navigation, flood and storm damage reduction, and
    environmental restoration. The Grand Forks/East Grand Forks project is
    an ongoing construction project to provide flood damage reduction for
    these two cities. The project reflects an innovative solution that
    combines traditional levee work with non-structural activities,
    including removing a substantial number of structures from the most
    flood-prone areas of this project. The fiscal year 2003 funding of $30
    million that the Administration proposes would enable the Corps to
    build the project more quickly, so that this area does not experience a
    repeat of the devastating floods of 1997.
        Question. Earlier this month, the press reported on a memo from you
    to Andrew Card, Josh Bolton and Karl Rove about Mike Parker's colloquy
    with Senator Conrad and General Flowers. In this memo, you describe
    General Flowers' statements about stopping Corps projects and losing
    jobs as a result of underfunding of Corps projects as ``totally
    bogus.''
        I have a few Corps projects in my state, like the Grand Forks Flood
    Control project, that were dramatically underfunded in your budget and
    the result of your budget will very clearly be work stoppage and
    subsequent layoffs. I sympathize with General Flowers' concerns and
    really regret the Administration's decision to fire Mike Parker based
    on his testimony to the Senate Budget Committee. In my estimation, I
    think he was just giving a straightforward assessment of the result of
    your budget. As you know, a number of my colleagues from both sides of
    the aisle agree with me.
      --My question is whether you still believe that the testimony given
            by the Corps about the dangers of underfunding of Corps
            projects is ``totally bogus?''
        Answer. I understand that the Army Corps of Engineers has requested
    that the Senate Budget Committee modify the hearing transcript to
    indicate that the General said that the funding impact was 4,500 jobs
    rather than ``in the neighborhood of 45,000 jobs.'' I believe this
    confirms OMB's assessment that the job loss claims as stated in the
    original transcript were inaccurate by an order of magnitude. Even with
    this revision, the Corps estimate of job losses is overstated for
    reasons explained in my answer to your previous question.
                             transportation funding
        Question. The President's budget included a cut in highway funding
    of more than $8 Billion. For North Dakota alone, this would mean a
    reduction in highway construction funds of $45 million and the loss of
    nearly 2,000 high paying jobs. It seems ironic that at a time when the
    Administration was pushing hard for an economic recovery package, OMB
    was proposing a budget that would eliminate thousands and thousands of
    jobs and would drastically reduce important stimulative construction
    projects.
      --The Senate Budget Committee has wisely added back over $4 Billion
            in highway construction funding. Will the Administration
            publicly support this increase?
      --How can you reconcile the seemingly inconsistent policy of asking
            for an economic recovery package while making huge reductions
            in highway spending?
      --Why would the Administration blindly follow an arbitrary formula
            which prevents funds already collected from being used [the
            TEA-21 formula] instead of providing some discretionary funds,
            given the economic situation?
        Answer. The Administration is committed to working with Congress to
    ensure a process exists that adequately funds highway programs
        One of the guiding principles behind Transportation Equity Act for
    the 21st Century (TEA-21) was ensuring that highway funding levels
    track actual and anticipated revenue into the Highway Trust Fund, and a
    mechanism (RABA) was included in that legislation to set guaranteed
    funding levels accordingly. In fiscal year 2000-2002 this
    Administration and the last adhered to this principle when revenue into
    the Highway Trust Fund was higher than what was anticipated in TEA-21
    and provided States with an additional $9 billion to support the
    Nation's highway infrastructure. In fiscal year 2003 actual and
    anticipated revenue into the Highway Trust Fund are lower than what was
    anticipated in TEA-21. Our fiscal year 2003 budget request reflects
    this decline in receipts.
        On the eve of the reauthorization of TEA-21 it is important that we
    not abandon the principle of linking highway funding levels to revenue
    coming into the Highway Trust Fund. We will however work with Congress
    to address the wild swings in funding created by the RABA mechanism in
    a manner consistent with TEA-21 principles and fiscal restraint.
                         agriculture and payment limits
        Question. One of OMB's responsibilities is to coordinate and issue
    Statements of Administration Policy (SAP) and to approve letters from
    agencies that state Administration policy. During the debate on the
    Farm bill there have been some confusing messages included in the
    Administration's SAPs, and some troubling omissions as well.
    Specifically, the Administration has never taken a position on the
    payment limitation amendment that Senator Grassley and I successfully
    offered to the Farm Bill.
        The amendment appears to me to address the very concerns that the
    Administration has raised. You yourself have said that there were
    objections to legislation that would direct ``all the money to rich
    farmers and leave large sectors of the farm economy unattended.'' The
    Department of Agriculture has raised similar concerns. It seems that
    the Administration would embrace our efforts to limit payments and
    close the loopholes so that payments are more targeted to family
    farmers. And yet, OMB has declined to comment on the amendment or to
    publicly endorse the Dorgan-Grassley amendment; and a recent letter
    from Secretary Veneman which was presumably cleared through OMB is
    oddly silent on the issue.
      --Can you explain this inconsistency?
        Answer. The Administration shares your concern raised here and in
    your February 14, 2002 letter to the President about providing too much
    Federal assistance to those producers least in need. We believe that
    the policies articulated in Secretary Veneman's March 13th letter to
    Chairman Combest will best address this issue by broadening the types
    of farm support and more effectively targeting limited funds. Key
    points in the Secretary's letter include:
      --Adhere to the Congressional Budget Resolution funding limits and
            avoid frontloading funding in the first 5 years, thereby
            placing farm programs in jeopardy in the second 5 years;
      --Support farmers without encouraging overproduction and further
            depressing farm prices through overly high loan rates;
      --Maintain compliance with our international trade obligations
            through ``circuit breaker'' language and use of ``green box''
            payments such as the House bill's fixed decoupled payments;
      --Provide new risk management tools to help non-program crop
            producers and others through use of farm savings accounts.
      --Support a strong conservation title that also bolsters farm and
            ranch income.
        We appreciate your concerns and look forward to working with you to
    develop programs that will better target agriculture assistance to
    those who need it.
                                    defense
        Question. Last year in the DOD Authorization bill, the Congress
    included language that permitted the Administration to implement so-
    called ``concurrent receipt.'' This allows disabled veterans to receive
    both disability compensation and military retirement pay without being
    penalized with an offset. Unfortunately, the Administration did not
    take the steps necessary to implement concurrent receipt. Even though
    there was a $48 Billion increase in the defense budget, the
    Administration was unable to identify funds that would finally allow
    this problem to be corrected.
      --Why did the Administration choose not to make this change?
      --Why do you think military retirees should be penalized with an
            offset when other retirees are not?
        Answer. Many veterans have served this country long and faithfully
    and subsequently suffered from illness or injury. The Administration
    deeply appreciates their service and sacrifice. The principle behind
    the statutory prohibition of concurrent receipt of military retirement
    and VA disability compensation benefits is the idea that no one should
    be able to receive concurrent retirement benefits and disability
    benefits based upon the same service. This is because all Federal
    employee-benefit systems aim for an equitable percentage of income
    replacement in the case of either work-related injury or retirement.
    Compensating for both simultaneously over-compensates the individual
    and the Administration opposes repeal of the current prohibition on
    concurrent receipt.
        A retired civil servant, for example, may not receive civil service
    disability benefits or workers' compensation benefits in addition to
    civil service retirement benefits. A similar ban exists against
    concurrent payment of retirement and disability benefits by the Social
    Security Administration. Within the military retirement system,
    retirees can receive up to 75 percent of basic pay based on years of
    service or percentage disability rating, whichever gives them the
    greatest benefit, but not both. With regard to veteran survivor
    benefits, survivors cannot receive annuities under VA's Dependency and
    Indemnity Compensation (DIC) and military retirement survivor benefits
    without offset either. If we reverse our approach on veterans, the
    principle would have to be reconsidered for civil servants as well.
        If a VA disability compensation recipient (based on military
    service) qualifies for Federal civilian retirement (based on civil
    service), there is no offset because civilian retirement is a benefit
    for civil service. Similarly, an individual receiving Federal workers'
    compensation benefits (based on work-related injuries in a Federal
    civilian job) incurs no offset from military retired pay, since the
    retirement benefits were earned for military service.
        Recently, VA and DOD evaluated the impact of lifting the
    restrictions on veterans receiving both retirement pay and disability
    compensation. Over a ten-year period the costs would be nearly $58
    billion. Moreover, this expansion would stress the Department of
    Veterans Affairs' ability to meet its current responsibilities to
    veterans, requiring the Department to process over 800,000 new or
    reopened claims over the next 5 years.
        Section 641 of the National Defense Authorization Act for Fiscal
    Year 2002 requires that the $58 billion cost of this proposal be
    offset. As we wage the war against terrorism, our highest priority must
    be to provide the resources the Department of Defense needs. We must
    take a hard look at every issue. Undoing the principle underlying the
    law creates a $58 billion impact on the budget, and potentially impacts
    the Department of Veterans Affairs' ability to serve our veterans.
                                   renewables
        Question. The Renewable Energy and Energy Efficiency office at the
    Department of Energy conducted a strategic review of its programs last
    year, and this review is being held up and has not been released to
    Congress.
      --What is the status of this review?
      --Has completed the OMB process, which agency currently has the
            document and at what stage of review, and why it has not yet
            been released?
      --If this review is used for the RE/EE Office to develop its budget
            proposal, how are we supposed to evaluate that proposal and the
            rationale for some of the budget cuts we are seeing, without
            the benefit of having seen this review document, in its
            original form? When can we expect to see this important
            document?
        Answer. DOE's Office of Energy Efficiency and Renewable Energy
    (EERE) conducted the Strategic Program Review (SPR) review throughout
    the summer of 2001. DOE submitted the draft SPR for OMB review in
    December 2001. OMB carefully reviewed the draft document and worked
    closely with EERE to ensure that all comments (which largely dealt with
    internal inconsistencies) were addressed. On March 25, OMB approved the
    SPR. DOE has posted the SPR on its web-site (www.eren.doe.gov/ee.html)
    and expects hard copies to be available by mid-May.
        The President's budget reflects some--but not all--of the SPR
    recommendations due to the timing of the review of the draft SPR. It is
    important to note that many of the SPR recommendations are not budget-
    related and will not be accomplished overnight (e.g., implementation
    across programs of ``best program practices'' that the SPR identified).
                                     ______

                Questions Submitted by Senator Mary L. Landrieu

                            army corps of engineers
        Question. The President's budget reduces the Army Corps of
    Engineers Civil Works projects from $4.486 billion in fiscal year >2002
    to $4.026 billion for fiscal year >2003, a reduction of 10 percent. I
    am particularly concerned with how these cuts will affect the Corps'
    work in Louisiana. The Army Corps of Engineers is currently building
    flood control systems on the Comite River and hurricane protection
    systems around Lake Ponchartrain, as well as improving the Inner Harbor
    Navigation Canal Lock where the Inter-Coastal Waterway meets the
    Mississippi River. Flood control and hurricane protection are life and
    death issues in Louisiana. That lock on the Inter-Coastal Waterway and
    the Mississippi means jobs and economic development in the region.
        I also noticed in the budget that the Corps was rated ``Moderately
    Effective'' or ``Effective'' in 7 out of 9 of its program areas,
    including ``Effective'' ratings for: 1) Flood Control and Storm Damage
    Reduction and 2) Emergency Response, as well as a ``Moderately
    Effective'' rating for its work on Inland Waterways.
        What is the justification for cutting the Corps given the essential
    and important nature of the work it does and its record of
    effectiveness?
        Answer. The President's proposal must be viewed in the context of
    the need to target resources to winning the war against terrorism, and
    improving the Nation's homeland and economic security. For this reason,
    funds are redirected in the President's Budget. The Budget for the
    Corps is $4.175 billion, excluding the government-wide retirement
    funding proposal. This represents a reduction of seven percent from the
    fiscal year 2002 level of $4.486 billion. Most of this reduction is due
    to excluding projects added by Congress in fiscal year 2002 that are
    outside the Corps' primary missions (commercial navigation, flood
    damage reduction, and environmental restoration), are not economically
    justified, or are inconsistent with long-standing Corps policies. In
    light of the existing $21 billion backlog of ongoing construction
    projects, and the aforementioned national security needs, the Budget
    proposes to use available funds to accelerate the completion of
    priority, ongoing construction projects. This acceleration will allow
    the Nation to realize sooner the benefits of these projects.
        In addition to completing construction of ongoing projects, the
    budget focuses on increasing overall effectiveness of Corps programs.
    While it is true that the Corps was rated ``moderately effective'' or
    ``effective'' in seven out of nine out of its program areas, it was
    only rated effective in two of these areas. Whether the funding level
    for a program needs to change to improve performance will depend on the
    specific circumstances of that program.
        For example, the budget rates the Corps' Inland Waterways program
    as ``moderately effective,'' primarily because some segments of the
    inland waterway system operated by the Corps provide few commercial
    benefits to the Nation. To improve the performance of this program, the
    Budget targets funds to those waterways that provide the greatest
    economic return, and substantially reduces funding for those that
    provide minor commercial benefits to the Nation. For other Corps
    programs, additional funding was requested to improve performance. For
    example, the Budget proposes to increase funding of the Hydropower
    program, which is also rated ``moderately effective'' by allowing the
    Power Marketing Administrations to directly finance from power revenues
    the Corps' costs to operate and maintain its hydropower facilities.
    This change would enable the Corps to reduce facility downtime and
    increase power production.
                          office of homeland security
        Question. The Administration request for the White House Office is
    $84.6 million, an increase of nearly $30 million, or 55 percent over
    last year. The bulk of this increase, according to the budget, is for
    the Office of Homeland Security and 40 full time equivalent employees.
    That is a significant investment for what I consider to be an area of
    national concern. Given the importance of this office, I encourage
    Governor Ridge to appear before Congress to report on his vision for
    the Office of Homeland Security.
        How many employees does the Office of Homeland Security currently
    have? How many of those employees are working in that office on detail
    from other agencies?
        Of the 40 FTE you are planning to hire for the Office, what roles
    will those employees play? How many will be experts in law enforcement
    and/or counter terrorism? How many of these employees will be support
    personnel? How many will be involved in public affairs, press
    relations, and outreach efforts? Will these positions be filled from
    outside of the Federal Government or from within the Federal
    Government?
        Will the Office of Homeland Security be entering any contracts for
    consulting or other services as part of its work? Are there any
    contracts in place at this time? Can you provide the Subcommittee with
    an accounting of any contracts, their cost, and the type of consulting
    work being performed as part of those contracts.
        Answer. It is our understanding that the Office of Homeland
    Security currently employs 91 personnel, of whom 62 are detailees.
        The Office of Homeland Security does plan to hire 40 FTE who will
    work in the areas that you describe. We do not have an exact breakdown
    of their fields of expertise at this time.
        It is our understanding that OHS expects that the contracts it
    executes will fulfill the following needs:
      --Review and assess the adequacy of the Federal emergency response
            plans.
      --Develop criteria for reviewing security measures for critical
            infrastructure, e.g., energy production, telecommunications,
            utilities.
      --Ensure coordination of public health preparedness.
      --Design and review programs to facilitate incident response and
            exchange of information by and among Federal, State and local
            agencies as well as private entities.
        None of these contracts has been executed to date.
                            child care and adoption
        Question. As the largest employer in the United States, the Federal
    Government has a unique responsibility to serve as a leader in
    developing policies that address certain quality of life that are not
    only important to their employees but also society as a whole. In
    particular, the provision of affordable, accessible high quality child
    care and equity in workplace benefits for employees who adopt. In
    fiscal year 1999, I proposed that language be inserted into the
    Treasury Postal Appropriations bill that allowed for Executive agency
    funds to provide child care services for their employees. I fought very
    hard to ensure that the child care that was provided with these funds
    was high quality, affordable care that was accessible to the families
    in need. While this was a success, lack of child care remains a
    critical issue for hundreds of thousands of Federal employees. Members
    of my own staff have tried unsuccessfully to get access to these
    services and have found there are very long waiting lists. What is OMB
    doing to address this issue?
        Answer. The fiscal year 2000 Treasury General Government
    appropriations bill authorized the use of certain appropriated funds to
    provide child care services for Federal civilian employees. This
    authority was made permanent on November 12, 2001. The Office of
    Personnel Management (OPM) issued the ``Guide for Implementing Child
    Care Legislation,'' which provides information to Federal agencies,
    Federal employees, child care providers, and child care governing
    boards on how to develop and implement child care programs for lower
    income employees. The guide contains various tuition assistance models
    to help agencies choose a model that suits their needs.
        Furthermore, GSA supports the national commitment to provide
    quality child care as an essential component of a quality work
    environment. GSA has over 110 Child Care Centers across 32 states and
    the District of Columbia. Federal agencies have the authority to
    establish child care centers for Federal families with the requirement
    that at least 50 percent of the children enrolled in a child care
    center must be children of Federal employees.
        OMB's role in this process is to evaluate agency budget requests in
    the context of their overall program priorities and human capital
    strategy. We will look to agencies to demonstrate, as a part of their
    annual performance plans and performance reports, how their human
    capital strategies, including work/life programs, are linked to the
    accomplishment of agency mission requirements.
        Question. In the past, Senator Bond and I have worked to pass a
    piece of legislation entitled, the Federal Adoption Assistance Act to
    provide $2,000 in reimbursement for adoption expenses. We are again
    working to pass this legislation, what if anything, is the OMB doing to
    ensure that there is equity in the benefits offered (paid leave,
    reimbursements, etc.) to employees who adopt versus those who give
    birth to a child?
        Answer. The Administration has proposed substantial assistance for
    all taxpayers seeking to adopt children. In the past, families who
    adopt children were provided a nonrefundable tax credit of 100 percent
    of the first $5,000 per adoption. Building on a proposal in the
    President's fiscal year 2002 budget, Congress included a provision in
    the Economic Growth and Tax Relief Reconciliation Act of 2001 to
    increase this credit to $10,000.
        In addition, the Federal Government already has an impressive and
    flexible array of family-friendly leave options that support Federal
    employees' family responsibilities and enhance the productivity of its
    workforce. The two most notable laws for adoptive parents are the Sick
    Leave for Adoption Act and the Family and Medical Leave Act (FMLA). The
    Sick Leave for Adoption allows Federal employees to use sick leave for
    absences relating to adopting a child. The FMLA ensures that family and
    medical leave is available on a gender-neutral basis to both male and
    female employees and mandates job security for employees who take
    leave. In addition, it entitles an eligible Federal employee to 12
    workweeks of unpaid leave during any 12-month period for certain family
    and medical needs. Furthermore, Federal employees may cover a legally
    adopted child or a foster child under their Federal Employees Health
    Benefits family enrollment upon showing proof of the child's
    eligibility as a family member.
                      improving the current federal budget
        Question. In several speeches on the budget, you have clearly
    outlined the goals of your agency and the Bush Administration for
    improving the current Federal budget.
        Among these goals you include the following principles:
      --Eliminating ``pork projects'' or ``earmarks'' so as to preserve our
            limited national resources for national programs and
            priorities.
      --A move away from Federal programs and toward a greater use of
            performance based block grants with broad goals and greater
            state and local flexibility.
      --An effort to rate the performance of programs funded and to fund
            only those found to be ``effective.''
        While I appreciate these goals and in a theoretical sense would
    support them, I am curious as to how in reality these goals would be
    applied and what effect they would have on certain important ongoing
    national priorities such as education and health care. As you may know,
    in almost every case, when programs are shifted away from a line item
    and into a block grant, it almost always results in a gradual decline
    in funding. What's more, outcomes for programs such as child abuse
    prevention, prenatal health care, and education reforms may be hard to
    quantify and a poorly constructed rating system may not reflect the
    real success of a more subjective program.
        Could you better explain how you see these goals being incorporated
    into this and future budgets?
        Answer. For years, serious advocates of public policy have sought
    to better link information on program performance with budget decision
    making. The major reason for doing so is precisely to better address
    important national priorities such as education and health care. For
    too long, regular spending increases for programs has been the measure
    of success in how well the public is served. Less attention has been
    paid to how well these programs have been achieving their objectives.
    We propose to transform this equation by better linking information on
    program performance to the decisions that are made on the budget.
        Evaluations of the effectiveness of programs are only one of many
    factors that go into decisions on spending. Policy makers must also
    consider priorities, the proper role of the Federal government, and
    many other factors. But surely there is no argument with a proposition
    to better inform budget decision making with the best possible
    information on program performance. This information will be used to
    highlight areas that require management attention, and also to inform
    budget decision making to reward good performers, and reform, curtail,
    or terminate activities that are not producing good results.
        As a way to expand the use of information during the coming year,
    we will increase the use of the effectiveness ratings that were used in
    last year's budget, and report on selected crosscutting common
    performance measures in some program areas. Agencies will be expected
    to provide information on the effectiveness of their programs as a part
    of their September budget request to OMB. Where that is lacking, the
    OMB staff will review the information that agencies prepare as a part
    of reporting on the Government Performance and Results Act. OMB will
    also be working with the agencies to develop other specific information
    on program effectiveness, and in selected areas to compare measures of
    performance across programs. To supplement information provided by
    agencies, the OMB staff will be reviewing evaluative information
    provided by the General Accounting Office, the Congressional Research
    Service, and other analyses of program effectiveness produced by
    entities in and out of government. To the extent practicable, OMB staff
    will spend time in the field learning at first hand the operation of
    agency programs. All of this information will be used to support OMB
    budget decisions based on program performance.
        As we expand the use of performance related information in the
    budget, we will continue to hold a dialogue with the Congress--we are
    very interested to hear congressional views.
                                     ______

                    Questions Submitted by Senator Jack Reed

                                     liheap
        Question. Your Office continues to withhold $300 million in LIHEAP
    contingency funds appropriated last year to help low-income families
    and senior citizens pay their energy bills. In September, 23 Senators
    sent a letter to you requesting release of the funding due to last
    winter's high energy prices and the significant increase in utility
    disconnections. In addition, a majority of our nation's Governors,
    including Governor Bush of Florida and Governor Shaheen of New
    Hampshire, requested release of these funds. The only response we
    received from the Administration is that the contingency funding
    remains available in case of an emergency. The statute defines an
    emergency to include a significant increase in home energy
    disconnections, a significant increase in participation in a public
    benefit program or a significant increase in unemployment, layoffs, or
    the number of households with an individual applying for unemployment
    benefits. Please explain why the Administration does not believe that
    working low-income families and senior citizens going without adequate
    heat or food or medicine because they cannot pay their energy bills
    does not constitute an emergency? And why the current recession which
    is causing an increase in individuals applying for unemployment
    benefits and other public benefit programs does not constitute an
    emergency as defined by the statute?
        Answer. LIHEAP emergency funds have traditionally been used to
    assist states experiencing unusually sever weather or high home energy
    prices. By any measure, the current situation does not meet previously-
    used standards for emergency assistance. We were very fortunate this
    past winter to have record high temperatures and lower fuel prices. In
    fact, the Northeast and Midwest experienced their warmest winter since
    the government began keeping records in 1895.
        The combination of warmer weather and low fuel prices means that
    heating costs will be invariably lower than last year. The Department
    of Energy recently updated its estimate of household heating bills for
    selected fuels. DOE's calculations show the following expectations for
    the six-month period ending March 31 compared to the 2000-2001 heating
    season: a 42 percent reduction in average natural gas heating bills per
    gas-heated household in the Midwest, a 36 percent falloff in oil-heated
    household heating costs in the Northeast, and a 37 percent decline in
    comparable expenditures for households using propane for heating in the
    Midwest.
        These conditions can change quickly, which makes it all the more
    important to ensure resources are available when a crisis emerges. We
    plan to continue to carefully monitor energy needs in the weeks and
    months ahead with this in mind.
                                   ergonomics
        Question. Over a year ago, after repealing the ergonomics
    regulation, the President promised to ``pursue a comprehensive approach
    to ergonomics.'' Unfortunately, there has been no substantive action
    over the past year by the Administration to protect America's workers
    from the leading cause of workplace injury. In fact, the Department of
    Labor has not yet even put forward an action plan on the issue despite
    repeated deadlines for doing so. Apparently, the release of the
    Administration's plan is now held up at the Office of Management and
    Budget. Why is this process taking so long and why is this Department
    of Labor initiative stalled at OMB? What kind of regulation to protect
    workers from ergonomic injury would OMB support?
        Answer. On April 5 Secretary Chao announced the Administration's
    comprehensive plan to reduce ergonomic injuries through a combination
    of industry-targeted guidelines, tough enforcement measures, outreach,
    research, and dedicated efforts to protect Hispanic and other immigrant
    workers. This approach was developed based on input provided at the
    Secretary's three ergonomics forums last year; relevant information
    from a number of sources, including the information from the ergonomics
    rulemaking record; and injury and illness data from the Bureau of Labor
    Statistics. I want to assure you that no part of the Administration had
    been stalling this initiative. In developing this plan, we sought to
    carefully consider all options, rather than rushing to an ill-conceived
    solution. The announcement last week is the product of this careful
    consideration and we expect it to result in greater protection for
    workers.
                                     ______

             Questions Submitted by Senator Ben Nighthorse Campbell

        Question. Presidential Decision Directive 62 provides authority for
    Federal agencies to make sure that National Special Security Events are
    safe and secure. The Secret Service is responsible for putting together
    a comprehensive security plan and enlisting the assistance of other
    Federal agencies for law enforcement personnel to carry out that plan.
    Although budgets have been tight, the majority of Federal law
    enforcement agencies have provided the necessary support B because
    that's what the PDD-62 envisioned.
        The President's fiscal year 2003 budget includes a request for $40
    million for the Treasury Counterterrorism Fund, and specifically
    requests statutory language which would allow payments from this fund
    to ``any Federal agency'' which provides assistance to the Secret
    Service at these events.
      --Are we rewarding inappropriate behavior by providing reimbursement
            to Federal agencies which have a track record of refusing to
            cooperate with a Presidential directive without additional
            funding? What message does this send to those agencies which
            have consistently responded to the call?
      --If such a fund is the appropriate way to go, should it rest within
            the Treasury Department? Wouldn't it make more sense to have
            the funding reside with the entity which is responsible for
            making the initial NSSE designations?
      --I assume that under the current review process, consideration is
            given to the need for this high level of security. What
            consideration, if any, is given to the cost of such a
            designation? I would appreciate it if you could outline for me
            exactly what process is followed in making these
            determinations.
        Answer. Due to the events of September 11, the frequency of NSSE
    designations has increased. After September 11, the annual United
    Nations General Assembly meeting and the Superbowl were designated
    NSSEs for the first time. Security measures at the Winter Olympics (an
    NSSE) were also increased. The expected increase in NSSE designations
    as well as the unpredictability of the NSSE designation process (i.e.
    which agencies will be asked to help at which event) make planning and
    implementation of a Secret Service security plan at future NSSEs much
    more difficult. A Counterterrorism Fund with wider eligibility covering
    both Treasury and non-Treasury entities will provide the flexibility
    necessary for the Secret Service to complete its mission under
    Presidential Decision Directive (PDD-62).
        PDD-62 gave the Secret Service the responsibility of planning and
    designing operational and perimeter security at NSSEs, the FBI the
    responsibility for crisis management, and FEMA the responsibility of
    consequence management. Funding for the Secret Service to carry out its
    responsibilities as described in PDD-62, which may include enlisting
    assistance of Treasury and non-Treasury entities, appropriately rests
    within the Treasury Department just as funding for FBI and FEMA, Secret
    Service's partners in carrying out PDD-62, lies in their respective
    agencies.
        The Office of Homeland Security currently considers requests for
    NSSE designation, in consultation with the Secret Service, FBI, and
    FEMA. Consistent with section 3(e)(iv) of Executive Order 13228, the
    Assistant to the President for Homeland Security is responsible for
    recommending to the Attorney General and the Secretary of the Treasury
    whether events should be designated as NSSEs. The primary factors taken
    into account when making an NSSE designation are the scope of the
    event, jurisdictional and local public safety agency concerns, and
    threat considerations.
                                     ______

                   Question Submitted by Senator Ted Stevens

        Question. I have been informed that OMB budget examiners are
    beginning to examine Corps of Engineer infrastructure projects using an
    internal OMB cost-benefit analysis. This is after the Corps has
    completed a Chief's Reports with well grounded cost-benefit analysis,
    Congress has authorized the project and Congress has funded the
    projects.
        This is happening in the case of Seward and Wrangell Harbors. Both
    were authorized and funded after the Corps of Engineers found a
    positive cost-benefit ratio associated with the projects. Why is OMB
    second guessing the work performed by expert engineers who actually
    visit the sites and meet with local leaders thousand of miles from
    D.C.? This threatens to create an even larger backlog of Corps
    projects.
        Answer. OMB examiners do review the Assistant Secretary of the
    Army's recommendations for the disposition of Chief's reports that he
    is sending to Congress. Executive Order 12322 directs OMB to review all
    agency water projects for consistency with the polices and programs of
    the President and with Federal guidelines for water resources projects,
    which are supposed to be followed by the Chief in preparing his
    reports. This executive order was issued by President Reagan in 1981.
    The OMB review does not add to the backlog. Rather, this review ensures
    that only the best projects are eligible for construction.
                                     ______

               Question Submitted by Senator Christopher S. Bond

        Question. Please supply the Subcommittee with the number of program
    examiners at OMB who work on budget, management, and other issues
    related to programs administered by each of the following agencies: the
    U.S. Army Corps of Engineers, the Department of Commerce, the
    Department of the Interior, the Department of State, the Environmental
    Protection Agency, the Federal Emergency Management Agency, and the
    National Science Foundation.
        Answer. OMB currently has: 4 full-time and 1 part-time staff with
    primary responsibility for oversight of the Corps of Engineers civil
    works programs; 4 examiners working on Department of Commerce issues; 9
    examiners with primary oversight for the Department of the Interior and
    its bureaus and programs (8 are in the Interior Branch and 1 is in the
    Water and Power Branch); 8 program examiners for State Department
    programs; 8 program examiners who work on budget, management, and other
    issues related to programs administered by the Environmental Protection
    Agency; 2 full-time examiners with responsibility for FEMA programs;
    and, 1 full-time staff person with primary responsibility for oversight
    of the National Science Foundation programs.
                                     ______

                              SUBCOMMITTEE RECESS

        Senator Dorgan. This hearing is recessed.
        [Whereupon, at 2:30 p.m., Wednesday, March 20, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      TREASURY AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL YEAR 2003

                                  ----------

                           WEDNESDAY, APRIL 17, 2002

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 1:30 p.m., in room SD-192, Dirksen
    Senate Office Building, Hon. Byron L. Dorgan (chairman)
    presiding.
        Present: Senators Dorgan, Reed, and Campbell.

                           DEPARTMENT OF THE TREASURY

                             Office of Enforcement

    STATEMENT OF JAMES GURULE, UNDER SECRETARY FOR
                ENFORCEMENT

                                OPENING REMARKS

        Senator Dorgan. We will call the hearing to order today.
    This is the Subcommittee on Treasury and General Government of
    the Senate Appropriations Committee. We welcome our witnesses
    and also the guests.
        I would like to mention I am joined by the ranking member,
    Senator Campbell. After we had scheduled this hearing,
    Secretary Rumsfeld has now scheduled a top secret briefing
    beginning at 2:30 in the Capitol building, and so because of
    that--that will deal with the war in Afghanistan, and because
    of that, I want to try to expedite this hearing so that we
    might be able to access the information that Secretary Rumsfeld
    is going to provide to the Senate this afternoon.
        We will ask witnesses to put their entire statement in the
    record by consent and ask that they limit their oral statements
    to 5 minutes each.
        I also want to note that each of the law enforcement
    agencies here will be represented at the annual Law Enforcement
    Technology Show April 30 in SD-106, right around the corner.
    That is something that my colleague, Senator Campbell, started
    some while ago and I was pleased to participate with him. We
    are continuing that tradition and we appreciate the cooperation
    of the agencies to do that.
        Let me make a very brief statement and then call on my
    colleague, Senator Campbell. This afternoon, we continue our
    series of hearings on President Bush's fiscal year 2003 budget
    request for agencies under the jurisdiction of this
    subcommittee. Today, we will receive testimony from the Under
    Secretary for Enforcement as well as the Director of the Secret
    Service, the Director of the Bureau of Alcohol, Tobacco and
    Firearms, the Director of the Financial Crimes Enforcement
    Network, and the Acting Director of the Federal Law Enforcement
    Training Center.
        Because of the size of its budget and the specific homeland
    security issues it faces, we will have a second Treasury law
    enforcement hearing tomorrow afternoon with the U.S. Customs
    Service. There are other issues that relate to the Customs
    Service with respect to reorganization and so on and we will
    have a second hearing tomorrow.
        The events of September 11 have focused the attention of
    this Nation on its ability to protect itself as never before.
    We witnessed the heroism of our first responders, the fire
    fighters, police, and EMS workers as they rushed to rescue
    innocent Americans at the World Trade Center and the Pentagon
    and also in Pennsylvania. We cheered the rescuers and we
    grieved with the families of those who made the ultimate
    sacrifice in the line of duty.
        Our Nation has begun to learn the extent to which the men
    and women who serve our country in various Treasury law
    enforcement bureaus represent us and contribute to our homeland
    defense. Although we repeat it every year, few people realize
    that the Treasury Department agencies comprise about 40 percent
    of all Federal law enforcement.
        With respect to all of the agencies that are here today, I
    want to say on behalf of my colleagues in the Senate that the
    men and women who work in your agencies, who serve our country
    in times of great difficulty, have the admiration and deep
    respect of the American people for their service and we hope
    that the manner in which we work with you and the manner in
    which you work with the men and women who serve under you would
    allow that understanding to exist among all those who serve our
    country in these times.
        I am going to put my entire statement in the record. It is
    probably clear to all of us that we face significant budget
    problems this year. The President has requested a $49 billion
    increase for national security at the Pentagon for funding
    requests for armed forces. About a $35 billion request is made
    for homeland security. Some of that affects your agencies. I
    believe that Congress will react favorably to most of those
    requests.

                               PREPARED STATEMENT

        It is clear to every American that we face very serious
    challenges in all of these areas. Your agencies, in many
    respects, are at the front line of the search for terrorists,
    the search for homeland defense that will be impenetrable to
    would-be terrorists, and it is very important to us that you
    have the resources and the men and women who work for you and
    with you have the resources to do their job that our country
    needs doing at this point.
        So with that, I will put my entire statement in the record.
        [The statement follows:]

                 Prepared Statement of Senator Byron L. Dorgan

        This afternoon we continue our series of hearings on President
    Bush's fiscal year 2003 budget requests for agencies under the
    jurisdiction of this Subcommittee.
        Today we will receive testimony from: Under Secretary for
    Enforcement, Jimmy Gurule; Director of the Secret Service, Brian
    Stafford; Director of the Bureau of Alcohol, Tobacco and Firearms,
    Bradley Buckles; Director of the Financial Crimes Enforcement Network,
    James Sloan; and Acting Director of the Federal Law Enforcement
    Training Center, Paul Hackenberry.
        Because of the size of its budget and the specific homeland
    security issues it faces, we will have a second Treasury law
    enforcement hearing tomorrow afternoon with the United States Customs
    Service.
        The events of September 11 have focused the attention of this
    Nation on its ability to protect itself as never before. We witnessed
    the heroism of our first responders--the firefighters and police and
    EMS workers--as they rushed to rescue innocent Americans at the World
    Trade Center and the Pentagon. We cheered the rescues and we grieved
    with the families of those who made the ultimate sacrifice in the line
    of duty.
        Similarly, the Nation has begun to learn of the extent to which the
    men and women who serve the country in the various Treasury law
    enforcement bureaus represented here today are part of our homeland
    defense. Although we repeat it every year, few people realize that the
    Treasury Department agencies comprise approximately 40 percent of all
    Federal law enforcement.
      --The Secret Service has taken the lead in designing and implementing
            protective plans for major public events such as the Winter
            Olympics in Salt Lake City and the Super Bowl in New Orleans.
      --The ATF has been charged with preventing terrorists from obtaining
            the firearms and explosives with which they can carry out acts
            of terrorism.
      --FinCEN is a major player in the efforts to unravel the
            international web of terrorist financing for groups such as al
            Quaeda.
      --And FLETC is agency whose sole responsibility it is to train almost
            all Federal law enforcement employees--not just those of the
            Treasury Department.
        Together, these agencies provide a strong foundation for the
    protection of the Nation.
        Unfortunately, while claiming increases in funding over the current
    fiscal year for these agencies, the President's budget shortchanges the
    vital activities of nearly all Treasury law enforcement agencies.
        The President's budget claims to increase funds for these agencies
    because the budget chose not to include the Supplemental appropriations
    for homeland security added for most agencies' activities post-
    September 11. The OMB director was quoted as recently as Monday stating
    that much of the homeland security funding was a one-time expense. That
    may be true for the National Institutes of Health or the Department of
    Agriculture, but that is not the case at Treasury. Much of those costs
    were associated with hiring additional agents and other law enforcement
    personnel to protect the homeland. They are not hired for one-year and
    then let go. They become important, and hopefully, long-term Federal
    employees. Thus a true, apples-to-apples comparison in funding between
    Fiscal year 2002 and the request for fiscal year 2003 reveals that:
      --FLETC faces a 4.6 percent cut in its salaries and expenses account
            at a time when it is being tasked to train one of the largest
            group of law enforcement hiring classes in the history of its
            operation and
      --The Secret Service faces a 4.4 percent funding reduction at a time
            when the number of people it protects has more than doubled and
            when it is being stretched thin in protecting the integrity of
            our currency.
        To be fair, FinCEN and ATF would receive modest increases under the
    President's budgets, but not without making difficult cuts to meet what
    appears to be an arbitrary bottom-line.
        We will explore these requests, and the additional needs of each of
    these agencies, during the hearing. This will be a difficult year to
    find additional and much needed funding for our law enforcement
    agencies. We are waging a war overseas and face a weak economy at home.
    This subcommittee fully supports each of the agencies testifying today
    and commends the hard work that the women and men perform for the
    Nation each and every day.
        We look forward to your testimony and will make your complete
    statements part of the record. Before we hear from our witnesses,
    however, I call upon the Ranking Member, Senator Campbell, for his
    remarks.

        Senator Dorgan. Let me call on our ranking member, Senator
    Campbell.

                  STATEMENT OF SENATOR BEN NIGHTHORSE CAMPBELL

        Senator Campbell. Thank you, Mr. Chairman. With your
    permission, I will also put my written statement in the record.
    I know we will be short of time and I believe every one of the
    people that are on this panel have been in to speak to me, as
    they have you, about their needs this year, so we are pretty
    well aware of what you want us to do.
        I would like to associate my comments with yours, too. This
    is a new kind of war, and certainly the gentlemen that
    represent their agencies here today are on the front line of
    that new kind of war. As I saw the reaction, not only from
    September 11 by your agency and the ongoing things, such as the
    terrific job that you did at the world Olympic Games in Salt
    Lake City, I am well aware that even though we do not have a
    surplus anymore--that sort of disappeared after September 11--
    that the priorities that you need are going to be important to
    all of us in the Nation.
        I cannot imagine anything worse than not funding this
    agency at the highest level we can, and then having something
    terrible happen, as we were told just recently by former Prime
    Minister Netanyahu when he gave us a briefing about the Middle
    East crisis, he said it is only a matter of time. ``It is only
    a matter of time before you are facing the same thing we are,''
    i.e., Israel with terrorist attacks of suicide bombers and so
    on. I cannot imagine anything worse than us not taking action
    and funding these agencies as well as we can and then having
    that happen.

                               PREPARED STATEMENT

        So, I just want to tell the men that are here at this
    table, that I am certainly going to do everything I can within
    the limits of what we have to spend to make sure that you are
    well taken care of in our appropriations bill.
        Thank you, Mr. Chairman.
        Senator Dorgan. Senator Campbell, thank you.
        [The statement follows:]

             Prepared Statement of Senator Ben Nighthorse Campbell

        Thank you, Mr. Chairman. And, thank you for scheduling this hearing
    on Treasury Law Enforcement. We should have an interesting afternoon.
        The events of September 11 will forever remain in the psyche of all
    americans, but even more so for law enforcement officers whose jobs
    have taken on even more urgency.
        The responsibilities of Treasury agencies touch just about every
    aspect of Federal law enforcement--tracking terrorist financing,
    blocking access to assets, training, keeping firearms out of the hands
    of criminals, border security, and protection of our Nation's leaders.
        But, Mr. Chairman, you know as well as I do that there is more to
    our Treasury Law Enforcement agencies than that.
        We all tend to think of the individual protection responsibility
    when someone mentions the Secret Service but that is only a part of
    their duties. They also investigate things such as computer and other
    electronic crimes, identity theft which has become a huge problem in
    our country, and counterfeiting which requires a global presence to
    name a few.
        Most people instinctively think of guns when talking about the
    bureau of alcohol, tobacco and firearms but there is so much more to
    that agency. They protect the American public by making sure that
    alcohol products are safe for legal consumption, that explosives are
    properly stored. They also collect close to $15 billion in revenue from
    the alcohol, tobacco, firearms, and explosives industries.
        The Financial Crimes Enforcement Center or FinCEN has been working
    at top speed since Septemer 11 doing what they do best--tracking the
    money. While they are currently mainly focused on terrorist assets,
    they are still providing support to investigations into money
    laundering and other financial crimes.
        And, border security is only part of what the customs service does.
    We will talk more about them tomorrow afternoon.
        However, one of the most important agencies is one which works
    behind the scenes to provide comprehensive and consistent basic
    training to about 85 percent of all Federal law enforcement officers--
    the Federal Law Enforcement Training Center. FLETC was the quiet
    workhorse of treasury law enforcement prior to September 11 and they
    have been called upon to do even more since that time.
        Mr. Chairman, I am looking forward to talking with the
    representatives of these agencies this morning to learn what they are
    doing during fiscal year 2002 and what resources they need in fiscal
    year 2003. Thank you.

        Senator Dorgan. Senator Reed?
        Senator Reed. Mr. Chairman, I just want to commend the law
    enforcement professionals that are here and your colleagues who
    protect us so well. I associate myself with the comments of the
    chairman and ranking member and yield back my time.
        Senator Dorgan. Senator Reed, thank you.
        The Secret Service this year took the lead in designing and
    implementing the protective plans for the major public events,
    the Winter Olympics and the Super Bowl, among other things. ATF
    has been charged with preventing terrorists from obtaining
    firearms and explosives with which they can carry out acts of
    terrorism. FinCEN is a major player in the efforts to unravel
    the international web of terrorist financing for groups such as
    al Qaeda. And FLETC, of course, is the agency whose sole
    responsibility it is to train almost all Federal law
    enforcement employees, not just those of the Treasury
    Department. So this is a very important hearing and the budget
    issues here are paramount these days in terms of their
    importance with what we are doing in Congress, dealing with
    terrorism.
        Let me call on Jimmy Gurule, who is the Under Secretary for
    Enforcement at the Treasury Department. Mr. Gurule, why don't
    you proceed.

               OPENING REMARKS FROM UNDER SECRETARY JIMMY GURULE

        Mr. Gurule. Thank you. Chairman Dorgan, Ranking Member
    Campbell, and Senator Reed, I am privileged to be here today to
    introduce the President's 2003 budget request for the
    Department of the Treasury's Office of Enforcement. Each of the
    bureau directors is certainly prepared to answer any questions
    that you have with respect to their programs and initiatives,
    but I would like to take the limited time that I have and just
    highlight a couple of key areas, beginning first with the
    budget overview.

                        FISCAL YEAR 2003 BUDGET REQUEST

        The President's fiscal year 2003 budget request seeks a
    program level of $5.497 billion and 31,847 FTEs for Treasury
    Enforcement. This level is significantly higher than the
    President's initial fiscal year 2002 request. It is due in
    large part to the response to the horrific events of September
    11. The request is 20 percent above the President's initial
    fiscal year 2002 budget request for Treasury Enforcement and it
    provides an increase of 2,403 FTEs for Treasury Enforcement.
        The resources that are requested in this budget are
    essential to ensure that Treasury Enforcement is able to
    continue the efforts that it has undertaken since September 11
    to combat terrorism and specifically terrorist financing. As I
    am sure you are well aware, since September 11, under Secretary
    Paul O'Neill's leadership, the Treasury Department's
    enforcement bureaus have launched a number of new initiatives
    to identify, disrupt, and dismantle the financial networks of
    the terrorist organizations that are responsible for the
    attacks on the World Trade Center and the Pentagon.
        I am pleased to report to the subcommittee today that
    Treasury has named 192 individuals and entities as financiers
    of terror and has blocked over $34 million in assets
    domestically. Our coalition partners have blocked an additional
    $70 million, for a total of approximately $104 million.
        The resources that are set forth in this budget will enable
    the Treasury Enforcement offices to continue in a very
    aggressive way to go after the funds, to block the funds, and
    bring the perpetrators of acts of terror and the would-be
    perpetrators (the conspirators) to justice. This effort has
    truly been a cooperative intra-agency and interagency effort.
    OFAC has been at the forefront of this effort with respect to
    investigating and providing the financial profiles for the
    organizations and entities that we have blocked.

                             OPERATION GREEN QUEST

        In October of last year, Treasury Enforcement established a
    new multi-agency task force, Operation Green Quest. It brings
    together, in a very coordinated way, the best of Treasury
    Enforcement, the extensive expertise that exists in the
    Treasury Department with respect to investigating complex
    financial crimes, including, of course, IRS-CI, Customs agents,
    FinCEN, OFAC, as well as our interagency partners in the FBI
    and the Department of Justice. The Secret Service has also been
    an important player in Green Quest, as has been ATF with
    respect to some investigations that they have conducted.
        Additionally, this strategy is an international strategy.
    It requires international cooperation. At the forefront of the
    international cooperative strategy has been the Financial
    Action Task Force. We have tasked FATF to move its multilateral
    organization that is focused on money laundering to kind of
    refocus and target on terrorist financing. As a result of an
    extraordinary plenary session that was held in Washington,
    D.C., in October, FATF announced for the first time eight
    international standards on terrorist financing. So this work is
    important. The resources that we are requesting are essential
    to continue this work and to upgrade our efforts.

                              2002 WINTER OLYMPICS

        As you stated, Senator Campbell, we have also been involved
    with respect to preventing terrorism, and one specific case, of
    course, is the Winter Olympics. I think that is a model example
    of how Federal law enforcement agencies, as well as State and
    local agencies, can work together in a cooperative way, and
    when we do, you see the results.
        This was a model for the world of what law enforcement can
    do to prevent, protect, and deter terrorist attacks, and to
    that end, clearly, my hat is off to Director Stafford. The work
    of the U.S. Secret Service was exemplary. Customs was an
    essential player in this, as was BATF (the Bureau of Alcohol,
    Tobacco and Firearms).

                                BORDER SECURITY

        And finally, and I will close on this point, border
    security. I know that we will have an opportunity to get into
    this in greater detail tomorrow, but that is one other top
    priority for the Treasury enforcement office. Of course, there
    are important terrorism implications with respect to enhancing
    security at our border. We have undertaken efforts to do that
    with respect to multiple, diverse components, including
    increasing inspectors at the border, increasing the
    distribution of technology at the border, working very closely
    with our law enforcement counterparts in Mexico and Canada,
    sharing of information, and now a new program, the Customs
    Trade Partnership Against Terrorism program that was announced
    at the Ambassador Bridge yesterday, which involves the trade
    community. So we are doing a lot to ensure that our borders are
    safe.

                               PREPARED STATEMENT

        Thank you for the opportunity to provide an overview of the
    President's fiscal year 2003 budget request and to highlight
    some of the efforts of the Office of Enforcement. I look
    forward to answering any questions that you may have.
        Senator Dorgan. Mr. Gurule, thank you very much.
        [The statement follows:]

                       Prepared Statement of Jimmy Gurule

        Chairman Dorgan, Ranking Member Campbell, and Members of the
    Subcommittee, I am privileged to be here today to introduce the
    President's fiscal year 2003 budget request for the Department of the
    Treasury's law enforcement bureaus and offices. It is indeed an honor
    to appear before you this week to represent the more than 31,000
    dedicated men and women who quietly and selflessly serve their country
    every day--often at great personal peril and sacrifice.
        Testifying with me this afternoon are Bradley A. Buckles, Director
    of the Bureau of Alcohol, Tobacco and Firearms (ATF), James F. Sloan,
    Director of the Financial Crimes Enforcement Network (FinCEN), Brian L.
    Stafford, Director of the United States Secret Service (USSS), and Paul
    Hackenberry, Acting Director of the Federal Law Enforcement Training
    Center (FLETC). Tomorrow, I will be joined by Robert C. Bonner,
    Commissioner of the United States Customs Service (Customs).
        I am pleased to note that this week's hearings are the first time
    this Subcommittee will hear from five, rather than four, Treasury
    Enforcement bureaus, since FinCEN recently was authorized as a bureau
    within Treasury Enforcement with enactment of the USA PATRIOT Act. I
    take this opportunity to thank the members of this Subcommittee for
    your support of this provision and the many new tools which the USA
    PATRIOT Act provided to the Treasury Department to fight terrorism and
    dismantle and disrupt terrorist financing.
        The President's fiscal year 2003 budget seeks a program level of
    $5.497 billion and 31,847 FTEs for Treasury Enforcement. This level is
    significantly higher than the President's initial fiscal year 2002
    request largely due to additional resource needs associated with the
    horrific events of September 11 and the overall support of this
    Subcommittee. The request is 20 percent ($879 million) above the
    President's initial fiscal year 2002 budget request for Treasury
    Enforcement, and it provides for an increase of 2,403 FTEs for Treasury
    Enforcement. The 2,403 FTE increase includes 1,779 FTE for Customs; 381
    FTE for the Secret Service; 124 FTE for ATF; 94 FTE for FLETC; and 25
    FTE for FinCEN. Furthermore, the fiscal year 2003 budget request
    indicates a staffing level of 48 FTE for the Office of Enforcement,
    with the provision of staffing up to 58 FTE within the Office's
    appropriated level--the same level for the third consecutive year.
        In response to the terrorist attacks of September 11, Congress
    provided essential fiscal year 2002 emergency appropriations of $674.1
    million to the Treasury Enforcement bureaus: approximately $428.6
    million to Customs; $141.5 million to the Secret Service; $31.4 million
    to ATF; $31.5 million to FLETC; and $1.7 million to FinCEN. Much of
    this emergency funding was for one-time, non-recurring costs. I am
    pleased to inform the Subcommittee that the recurring costs from the
    Terrorism Supplemental have been annualized and incorporated in the
    President's budget request.
        When the President submitted his budget request on February 4,
    2002, he indicated it ``recognized the new realities confronting our
    Nation, and funds the war against terrorism and the defense of our
    homeland.'' To implement this objective, the President's fiscal year
    2003 request contains $159 million in new funding for Homeland Security
    program initiatives for Customs ($158 million) and FinCEN ($1 million).
    The fiscal year 2003 budget request includes $29.2 million for other
    program initiatives--$21.7 million for ATF and an additional $7.5
    million for the Customs Automation Modernization programs. The budget
    request also includes $8 million in additional resources for Secret
    Service protection services to begin preparation for the 2004
    Presidential campaign.
        The fiscal year 2003 Budget includes inflation type increases and
    Homeland Security annualizations of $259.2 million. Although the
    immediate Office of Enforcement ($8.5 million) fiscal year 2003 budget
    request is $231,000 more than the fiscal year 2002 Financial Plan, it
    is $139,000 less than the ($8.6 million) fiscal year 2002 Enacted. As I
    mentioned, the staffing level remains the same.
        Over the next 2 days, the Subcommittee will hear from the Treasury
    Enforcement Bureau Directors regarding their respective bureaus' new
    initiatives and programs. Therefore, I would like to take this
    opportunity to provide the Subcommittee with an overview of the newest
    challenges facing the men and women in Treasury law enforcement and the
    exemplary manner in which they have responded. That they have been able
    to do so effectively is due, in large part, to the support that this
    Subcommittee and the Congress have provided us both before and in the
    aftermath of September 11.
        We have all been deeply affected by the horrific acts of that day.
    We at Treasury lost a respected member of our law enforcement family,
    Secret Service Master Special Officer Craig Miller, who perished in the
    World Trade Center. And of course, the New York offices of Customs,
    Secret Service, and ATF were destroyed.
        Combating terrorism has become the Nation's primary agenda. As you
    are aware, on September 24, 2001, President Bush stated, ``We will
    direct every resource at our command to win the war against terrorists,
    every means of diplomacy, every tool of intelligence, every instrument
    of law enforcement, every financial influence. We will starve the
    terrorists of funding.'' Under Secretary Paul O'Neill's leadership, we
    in Treasury Enforcement have devoted extensive resources and expertise
    to fulfill this mandate.
        We have worked, and continue to work, in close coordination with
    the Justice Department, the Federal Bureau of Investigation (FBI),
    State Department, the intelligence community and the Defense
    Department. Specific examples of our close cooperation include joint
    activities in the September 11 investigations and on the Financial
    Review Group (FRG). In these investigations, Treasury has added its
    investigative expertise and access to unique databases to support the
    U.S. Government's efforts.
        Our war against terrorist financing extends to financial
    intermediaries and facilitators who infuse terrorist organizations with
    money, materiel, and support. We have come to clearly appreciate and
    understand that terrorism has been nourished by ample funding channeled
    from a plethora of sources, including banks, charities, hawalas,\1\
    narcotics traffickers, and money launderers.
    ---------------------------------------------------------------------------
        \1\ Hawala is a type of alternative remittance system that is
    common in many parts of the world, including the Middle East and Far
    East.
    ---------------------------------------------------------------------------
                 disrupting and dismantling terrorist financing
        Since September 11, Treasury Enforcement, including its component
    bureaus, has launched a number of new initiatives to identify, disrupt,
    and dismantle terrorist financial networks both domestically and
    abroad. I am pleased to report to the Subcommittee this morning that
    Treasury has named 192 individuals and entities as financiers of
    terrorism, and has blocked over $34 million in assets. Our Coalition
    partners have blocked another $70 million. A portion of that amount has
    since been unblocked for the new Afghan Interim Authority to assist in
    its critical period of rebuilding. This is truly a global effort--196
    Nations have expressed support to disrupt terrorist financing and 149
    Nations can block terrorist assets.
        We are grateful that you and your colleagues made significant
    improvements in the laws that allow us to tackle the issue of terrorist
    financing in a more unified, aggressive manner. Of particular
    importance to our counter-terrorism efforts is the USA PATRIOT Act that
    clarifies the law enforcement and intelligence communities' authority
    to share financial information regarding terrorist investigations.
    These provisions are already being utilized and are bearing fruit in
    disrupting financing networks.
    Office of Foreign Assets Control
        The Office of Foreign Assets Control (OFAC), an office within
    Treasury Enforcement, plays a key role on the inter-agency working
    group, chaired by Treasury, that has been targeting and listing
    individuals and entities pursuant to Executive Order 13224 which
    President Bush signed on September 23, 2001. In this process, we have
    identified, among other entities, front companies, charities, banks,
    and a hawala conglomerate that served as the financial support networks
    for al-Qaeda and other global terrorist groups. We have shut down the
    operations of these entities in the United States and abroad. Foreign
    countries have been remarkably cooperative in this process.
        OFAC has widely disseminated the names of new designated terrorists
    to the business and financial communities through websites, Fedwire
    Alerts, CHIPS system notices, communications to Federal and State
    regulators, and electronic broadcasts to 175 key industry groups.
    Information on terrorist designations is also distributed to the public
    by way of Customs, the Government Printing Office, and other agency
    networks.
        As you will recall, the Foreign Terrorist Asset Tracking Center
    (FTAT) was in the process of being organized and staffed when the
    terrorist attacks of September 11 occurred. In fact, the Financial
    Crimes Enforcement Network (FinCEN) had already been staffed for the
    purpose of providing analytical support to the interagency FTAT and was
    supplying the product of that staffing to the Office of Foreign Assets
    Control (OFAC). Immediately following the attacks, the Treasury
    Department helped to accelerate the development of the interagency FTAT
    by establishing a temporary operational presence within the secure
    environment of FinCEN. The unit quickly began to serve as an analytical
    center for combating the problem of terrorist financing.
        Section 906 of the USA PATRIOT Act requires that the Director of
    the CIA, the Attorney General and the Secretary of the Treasury jointly
    file a report on the ``feasibility and desirability'' of reconfiguring
    FTAT. This matter was reviewed by senior Government officials,
    including the Principals Committee of the National Security Council.
    Based on that review, a decision was made to move and reconfigure FTAT
    to ensure it was fully integrated into the ongoing terrorist financing
    activities of other agencies. Treasury will continue its support of
    FTAT and its broader efforts to disrupt and dismantle terrorist
    financing.
    Blocking Assets
        One of the higher profile results of OFAC analysis was the
    identification of Al-Barakaat as a major financial operation that
    supported terrorist organizations. The Al-Barakaat case is a good
    example of model coordination between the Treasury Department, the FBI,
    and other enforcement agencies both domestically and abroad.
        Al-Barakaat is a Somali-based hawaladar \2\ operation, with
    locations in the United States and in 40 countries, that was used to
    finance and support terrorists around the world.\3\ The investigative
    work of the FBI, Customs, and IRS-Criminal Investigation, along with
    analysis by OFAC, FinCEN, and the intelligence community, identified
    Al-Barakaat as a major financial operation that was providing material,
    financial, and logistical support to Usama bin Laden and other
    terrorist groups.
    ---------------------------------------------------------------------------
        \2\ A hawaladar is an entity that engages in hawala transactions.
        \3\ Some individuals may have used Al-Barakaat as a legitimate
    means to transfer value between individuals in different countries
    without passing through the formal international banking system.
    ---------------------------------------------------------------------------
        Treasury, along with the Department of Justice, coordinated efforts
    to block assets and to take law enforcement actions against Al-
    Barakaat. On November 7, 2001, Federal agents executed search warrants
    in three cities across the country--Boston, Columbus, and Alexandria--
    and shut down eight Al-Barakaat offices across the U.S., including
    locations in the following cities: Boston, Massachusetts; Columbus,
    Ohio; Alexandria, Virginia; Seattle, Washington; and Minneapolis,
    Minnesota.
        As part of that action, OFAC was able to freeze approximately
    $1,100,000 domestically in Al-Barakaat-related funds. Treasury also
    worked closely with the United Arab Emirates (UAE) to enable the UAE to
    block Al-Barakaat's assets at its financial center of operations in
    Dubai. Disruptions to Al-Barakaat's cash flows, resulting from OFAC's
    designation actions and international cooperation, are estimated to be
    in excess of $65 million from the United States alone. In addition, the
    combined work of OFAC, Operation Green Quest, and law enforcement had
    led to additional leads in the Al-Barakaat investigation.
        This is an example of what our combined efforts can accomplish when
    we join our resources and our expertise to fight the common scourge of
    terrorist financing.
    Joint Designations
        On March 11, on the 6 month anniversary of the September 11
    attacks, the Treasury Department, joined by the Saudi government, took
    a new step in the war on terrorist financing by making its first joint
    designation of a financial supporter of terrorism. Prior to that date,
    Treasury received significant cooperation from other countries in
    blocking accounts of those named by the United States, and our European
    allies have made designations of their own. The joint blocking action
    on March 11 is especially significant for it is a sign of the growing
    strength of the anti-terror coalition and marks a new level of
    international coordination and cooperation.
        Treasury and the Saudi government blocked the accounts of the
    Somalia and Bosnia-Herzegovina branches of the Saudi Arabia-based Al-
    Haramain Islamic Foundation. While the Saudi headquarters for this
    private charitable entity is dedicated to promoting Islamic teachings,
    Treasury and our Saudi Arabian allies determined that those specific
    branches of Al-Haramain have been engaged in supporting terrorist
    activities and terrorist organizations such as al-Qaeda, AIAI (al-
    Itihaad al-Islamiya), and others.
        Last month, Treasury Secretary O'Neill visited the Persian Gulf
    region, where he had the opportunity to meet with King Fahd and Crown
    Prince Abdullah, others in the Saudi government, and the leadership in
    Bahrain, Kuwait and the UAE. Throughout the region, the Secretary
    encountered a clear understanding that the September 11 attacks were
    not only an attack on the United States, but were an attack on the
    civilized world. These Governments' leaders assured Secretary O'Neill
    that they, like others in the world, are doing what they can to cut off
    terrorists' access to funds, wherever those funds are found.
        This action also highlights the special need to safeguard
    charities, so that well-intentioned donors can be assured that their
    donations will be used only for their intended good purposes, and not
    for acts of terrorism. During his trip to the Gulf, Secretary O'Neill
    underscored that misusing charity funds to support terrorism harms the
    people who gave the donation, harms the people who should have received
    it and is dangerous to us all. The Treasury Department is committed to
    finding those organizations that use charities to fund terrorists or
    terrorist acts, exposing them, and shutting them down.
    Operation Green Quest
        On October 25, 2001, Treasury created Operation Green Quest
    (``Green Quest''), a new multi-agency financial enforcement initiative
    designed ``to augment existing counter-terrorist efforts by bringing
    the full scope of the Government's financial expertise to bear against
    systems, individuals, and organizations that serve as sources of
    terrorist funding.'' This task force is led by the Customs Service and
    includes the Internal Revenue Service, the Secret Service, ATF, OFAC,
    FinCEN, the Postal Inspection Service, the FBI, the Department of
    Justice, and the Naval Criminal Investigative Service. Operation Green
    Quest also receives support from Interpol's National Central Bureau,
    based in Washington, D.C. Green Quest brings together the extensive
    financial expertise of the Treasury Enforcement bureaus along with the
    exceptional experience of our partner agencies and departments to focus
    on terrorist financing.
        Green Quest has complemented the work of OFAC in identifying
    terrorist networks at home and abroad, and it has served as an
    investigative arm to aid in blocking actions. Green Quest's work has
    led to 12 arrests, 4 indictments, the seizure of nearly $4 million, and
    bulk cash seizures--cash smuggling--of over $11 million. Green Quest
    agents, along with those from the FBI and other Government agencies,
    have traveled abroad to follow leads, exploit documents recovered, and
    to provide assistance to foreign governments. In this effort, Green
    Quest has made full use of its overseas Customs Attaches to investigate
    suspect networks and to gather information for its own use and the use
    of OFAC. The work of these financial experts is just starting as they
    have opened well over 200 terrorist financing investigations and are
    following leads on a daily basis. Green Quest's work, in combination
    with the work of OFAC, serves as a seminal part of our enforcement
    efforts.
    International Cooperation
        Our efforts will not have the greatest success if prosecuted
    unilaterally, and may ultimately fail if we cannot obtain the
    cooperation of other ations. To date, all but a handful of countries
    have expressed their support for the international fight against
    terrorist financing. Currently, 149 countries and jurisdictions around
    the world can block terrorist assets. The Office of Enforcement, in
    concert with other Federal agencies, is providing technical assistance
    to a number of countries to strengthen their capacity to freeze
    terrorist funds. Daily, we are in contact with foreign financial
    officials and are engaged in bilateral and multilateral discussions
    regarding international cooperation and action against terrorist
    activities and financing.
        The Office of Enforcement has also helped coordinate the deployment
    of financial ``jump teams'' consisting of experienced accountants, bank
    examiners, and other financial experts from OFAC, the Customs Service,
    IRS, FinCEN, the FBI, and other agencies. These experts review business
    records and possible links to money associated with bin Laden's al-
    Qaeda network.
        Treasury has engaged in numerous international fora, including the
    G-7, G-8, G-20, the Financial Action Task Force (FATF), the Egmont
    Group--the global network of Financial Intelligence Units (FIUs) of
    which FinCEN is a key member--and the international financial
    institutions to combat terrorist financing in a global, systematic way.
        The Treasury Department, in conjunction with the Departments of
    Justice and State, hosted an Extraordinary Plenary session of the
    Financial Action Task Force in Washington, D.C., at the end of October
    2001 to address terrorist financing. This meeting was immediately
    followed by a meeting of the Egmont Group to discuss information
    sharing and terrorism. At the plenary session, FATF established eight
    Special Recommendations regarding terrorist financing which represent
    an important step to establishing a global regime to cut terrorists off
    from the international financial system.
        These new Recommendations were endorsed by countries throughout the
    world at a special FATF Forum on Terrorist Financing held in February
    and attended by over 55 jurisdictions. Moving forward, FATF, with the
    strong support of the U.S., is now leading a global effort to bring all
    countries in compliance with these new standards. The U.S. has recently
    completed a self-assessment questionnaire against these standards,
    which is posted on the Treasury web site. In June, FATF will begin to
    consider a process with respect to countries that are not cooperating
    in the international effort against terrorist financing.
        While countering terrorist financing is a Treasury Enforcement
    priority, we are also committed to preventing terrorist acts on U.S.
    soil and against U.S. interests abroad, and to reducing violent crime
    here at home.
                preventing terrorism and reducing violent crime
        Not only is the mission of Treasury law enforcement uniquely suited
    to combating terrorist financing, but we play a leading role in
    homeland security efforts--from protecting the Nation's borders to
    protecting its leaders, to ensuring the integrity of our financial
    institutions and critical infrastructures. The President's budget
    request will ensure that Treasury bureaus can continue to effectively
    fulfill missions that are integral to protecting the homeland.
    U.S. Secret Service
        The U.S. Secret Service protects the Nation's top leaders, combats
    financial fraud, protects the integrity of the financial systems
    against cyberattacks, and leads the effort to ensure the safety of
    thousands of citizens participating in designated National Special
    Security Events (NSSEs). We have seen the stellar work of the Secret
    Service in providing security for two recent NSSEs--the Super Bowl and
    the Winter Olympic Games in Salt Lake City. The complexity of these
    security events highlighted the special expertise and professionalism
    of the Secret Service. The dedicated men and women of the Secret
    Service are to be commended for their outstanding work at protecting
    thousands of spectators, employees, and athletes at these events. The
    President's budget request will allow the Secret Service to strengthen
    its efforts in an increasingly complex and threatening environment.
    U.S. Customs Service
        The U.S. Customs Service also played a key role in security for the
    Salt Lake City Olympic Games. The Customs Service role included
    providing air surveillance in restricted air space, ground support to
    the United States Secret Service, increased presence at the Northern
    Border, and screening general aviation aircraft and their passengers
    and pilots. A total of 500 Customs officers were committed to day-to-
    day oversight of the Games.
        The Customs Service is the vanguard agency in protecting the
    country against weapons of mass destruction as it monitors travelers
    and cargo crossing the northern and southern borders and through the
    Nation's seaports and airports. Last November, Secretary O'Neill,
    Commissioner Bonner, and I met with our Canadian counterparts in
    Ottawa, Canada, to discuss cooperative efforts between the U.S. and
    Canada along our shared border. We have since been engaged in a number
    of new collaborative initiatives to strengthen security along our
    shared border, while working on ways to expedite the flow of trade.
    Commissioner Bonner and I also are working with the Office of Homeland
    Security to help implement the 30-point Action Plan announced in
    December by Governor Ridge and Deputy Prime Minister John Manley. The
    ``Action Plan for Creating a Secure and Smart Border'' has four
    pillars: (1) The secure flow of people; (2) The secure flow of goods;
    (3) Secure infrastructure; and (4) Coordination and information
    sharing. I can assure this Subcommittee today that the coordination and
    cooperation among Federal border agencies and their Canadian
    counterparts has never been stronger.
        A similar Smart Border Accord is now in place for the U.S.-Mexico
    border. On March 22, 2002, President Bush and President Fox announced
    in Monterrey, Mexico, a 22-point agreement to build a smart border for
    the 21st century between our two countries. In their joint
    announcement, President Bush stated, ``President Fox and I are
    determined to make our shared border modern, efficient, and secure. The
    Smart Border Declaration our countries have just signed will move us
    toward this important goal. Our common border must be closed to drugs
    and terrorists, and open to trade and legitimate travel.'' The U.S.
    Customs Service and the Treasury Department will play a key role in
    implementing this important Smart Border Accord.
    Bureau of Alcohol, Tobacco and Firearms
        The President's budget request will ensure that the Bureau of
    Alcohol Tobacco and Firearms will be able to expand its training
    capacity at the Canine Training Facility in Front Royal, VA, increase
    ATF Canine Handler teams, and expand ATF's participation in critical
    Joint Terrorism Task Force activities. ATF has developed the most
    respected program in the world for detection of explosives and
    accelerants. This expertise is vital in our war on terrorism, in which
    explosives is the terrorists' weapon of choice.
        ATF also played a significant role in the security of the Winter
    Olympics. For several years, ATF worked with its law enforcement and
    public safety partners on a comprehensive and integrated Olympic
    security plan. ATF committed over 330 special agents and support
    personnel to support security for the Olympic Games. ATF Special Agent
    Certified Explosive Specialists, Explosive Enforcement Officers,
    Explosive Detection Canines/Handlers, and National Response Team
    members were assigned to the Olympic Bomb Management Center. These
    experts were available to respond to any critical incident, explosive
    or suspected device at any of the venues. At these Olympic Games,
    unlike at the Atlanta Olympics, ATF had a new mobile crime laboratory
    with state of the art detection and analysis equipment on-site. The
    crime lab could identify explosives and other evidence within minutes,
    which would provide immediate leads to investigators on the ground.
    Federal Law Enforcement Training Center
        The Federal Law Enforcement Training Center, known as FLETC,
    conducts the training for the vast majority of the Federal Government's
    law enforcement personnel. FLETC is projecting the greatest increase in
    training requirements in its history as it responds in full measure to
    the September 11 attacks.
        In the days following September 11, representatives of the U.S.
    Department of Transportation's Federal Air Marshal Division reached out
    to FLETC regarding increased training needs for the Federal Air Marshal
    Program (FAMs). These requests have resulted in an increase of over
    20,000 student weeks of training. In October, the FLETC and the FAA
    developed a 5-week integrated basic training program and a 3-week
    agency specific basic follow-on training program.
        In January, Transportation Security Administration (TSA)
    representatives met with FLETC staff to identify resources needed to
    develop a training curriculum for the TSA Security Screeners. FLETC
    subject matter experts then met with TSA and FAA representatives to
    develop that training curriculum. The result was a pilot TSA Basic
    Screeners training program conducted at FLETC in February. The TSA
    Management Team continues to meet with FLETC personnel to determine the
    extent to which the FLETC will be asked to further assist the TSA in
    training Federal Law Enforcement Officers/Agents within a very short
    time frame. The quality of training developed and delivered by FLETC
    will set the standard for our level of protection in the air for years
    to come.
    FinCEN
        The increased funding in the President's request for the Financial
    Crimes Enforcement Network will strengthen FinCEN's law enforcement
    investigative support efforts to enforce the Bank Secrecy Act, combat
    money laundering and other financial crimes, and implement its new
    responsibilities under the USA PATRIOT Act of 2001.
        Immediately after the tragedy of September 11, FinCEN redirected
    approximately 30 percent of its resources to the initial investigation
    of the terrorist attacks. Those efforts included: establishing a 24-
    hour operation center to enhance liaison with the FBI Counter-terrorism
    Center; establishing a telephone hotline for financial institutions to
    report suspicious activity; facilitating a multi-agency effort using
    their specialized tools and secure facility; and developing valuable
    investigation referrals and financial lead information by redirecting
    100 percent of its intelligence liaison office to that effort.
        On November 7, 2001, President Bush, Treasury Secretary O'Neill,
    Secretary of State Powell and Attorney General Ashcroft visited the
    FinCEN offices where the President thanked all of the FinCEN employees
    for their work on the front lines in the war against terrorist
    financing. At that time, the President stated: ``We put the world's
    financial institutions on notice: if you do business with terrorists,
    if you support them or sponsor them, you will not do business with the
    United States of America.'' FinCEN plays a critical role in this effort
    and will continue to provide this invaluable service to our Nation.
    IRS Criminal Investigation
        While the Office of the Under Secretary for Enforcement does not
    have direct oversight authority over IRS-Criminal Investigation, we do
    provide policy guidance for IRS-CI criminal investigators. These
    investigators offer a unique blend of accounting and enforcement
    expertise that is invaluable in perfecting complex financial
    investigations, including cases involving leaders and members of
    extremist groups who have committed tax, money laundering, or currency
    violations and individuals engaged in fundraising activities to support
    terrorism, especially if tax exempt organizations are being used. In
    the aftermath of September 11, IRS criminal investigators have played
    critical roles in the Strategic Information Operations Center; the
    Joint Terrorism Task Force; Operation Green Quest; the Office of
    Foreign Assets Control; the Anti-Terrorism Task Forces throughout the
    country; the High Intensity Money Laundering and Related Financial
    Crime Area Task Forces, and the Air Marshal Program.
                           combating money laundering
        The Office of Enforcement is currently developing the 2002 National
    Money Laundering Strategy, as well as overseeing the implementation of
    the 2001 Strategy. The main focus of the Strategy is on enforcement and
    investigation of money laundering enterprises and sophisticated
    networks. This work has been significantly impacted by the passage of
    the USA PATRIOT Act. We have been working with the Treasury General
    Counsel to draft timely implementing regulations for the various
    provisions of the USA PATRIOT Act, such as the provision that
    terminated the relationship between U.S. financial institutions and
    shell banks.
        The Office of Enforcement is overseeing the progress and
    development of the six High Intensity Money Laundering and Related
    Financial Crime Area (HIFCA) Task Forces. The six HIFCAs are now
    focused on operational activities, in addition to gathering
    intelligence which is useful in money laundering investigations. I am
    confident the HIFCAs will play a significant role in our anti-money
    laundering efforts.
        At this point, I take the opportunity to highlight for the
    Subcommittee the recent success of Operation Wire Cutter, a 2\1/2\-year
    joint DEA/Customs undercover operation targeting the largest Colombian
    Black Market Peso Exchange (BMPE) money brokers. These brokers are
    professional money launderers who sell their services to the Colombian
    drug cartels.
        On January 15, 2002, U.S. and Colombian officials arrested 37
    people in the U.S. and Colombia and seized over $8 million in cash,
    over 800 pounds of cocaine, and a total of over 1,000 pounds of
    narcotics. One suspect tried to evade arrest in New York City by
    throwing a suitcase with $400,000 in cash out of his apartment window.
    The El Dorado Task Force, operating out of the office of the U.S.
    Customs Service Special-Agent-in-Charge in New York, played an
    important role in this law enforcement operation.
        The Multinational Black Market Peso Exchange (BMPE) Experts Working
    Group (Colombia, Aruba, Panama, Venezuela, and the United States), led
    by the Office of Enforcement, has produced a report that recommends
    BMPE initiatives to participating Governments to improve international
    cooperation in efforts to combat and dismantle the BMPE. Last month a
    joint statement was issued embodying the conclusions and
    recommendations of this Working Group. We are also working closely with
    senior executives of major trade associations and corporations
    operating in the United States whose products are vulnerable to being
    involved in BMPE transactions.
        Treasury Enforcement also works closely with the Department of
    Justice's Bureau of Justice Assistance to oversee the Financial Crime-
    Free Communities Support Program (C-FIC) which awards anti-money
    laundering grants to State and local law enforcement agencies and
    prosecutors' offices through a competitive grant award program.
    Treasury has awarded approximately $4.2 million in grants to 17
    recipients in the first 2 years of this program.
                           reducing firearms violence
        One of the top priorities of the Bush Administration is to make a
    lasting reduction in the gun crime rate in America. Last May the
    President announced Project Safe Neighborhoods, a comprehensive
    approach that targets violent offenders and crime guns.
        Project Safe Neighborhoods has been implemented by U.S. Attorneys
    across the country, working in partnership with communities and State
    and local law enforcement. The strategy has five components: (1)
    Partnership/Coordination; (2) Strategic Planning; (3) Training; (4)
    Community Outreach and Public Awareness; and (5) Accountability.
    Stronger relationships among Federal prosecutors and agents with their
    State and local counterparts has strengthened their ability to
    identify, investigate and prosecute gun violence.
        The Treasury Department, through its Bureau of Alcohol, Tobacco and
    Firearms, plays an integral role in implementing Project Safe
    Neighborhoods through its Integrated Violence Reduction Strategy
    (IVRS). The strategy provided additional resources to ATF to add new
    agents, inspectors and support staff to enhance its enforcement and
    investigation of firearms violations and efforts to reduce violent
    crime. Under IVRS/Project Safe Neighborhoods, ATF has a broader impact
    in target cities by educating police departments about the
    effectiveness of crime gun tracing and firearms trafficking. ATF
    supports Project Safe Neighborhoods through the excellent work of its
    National Tracing Center, which performs traces of crime guns, and its
    Youth Crime Gun Interdiction Initiative.
                              countering narcotics
        One of Treasury Enforcement's highest priorities is reducing the
    supply of dangerous drugs entering the United States. It is also one of
    our most difficult challenges. We are confronted by well-financed
    criminal organizations that adapt quickly to every advance we make in
    the detection of illegal drugs. Moreover, interdiction is only one
    piece of a comprehensive drug control strategy that includes
    eradication of drug production abroad, sanctions against drug kingpins,
    investigation and disruption of trafficking activities within the
    United States, treatment of drug users, and, as mentioned above,
    combating money launderers.
        The Office of Enforcement and its bureaus are decisively engaged as
    part of the Federal Government's effort in support of Plan Colombia,
    which is a comprehensive and balanced response to that nation's
    multiple challenges. In addition to targeting the critical drug
    trafficking problem, the integrated strategy addresses human rights,
    democratization, judicial reform, social development, the economy, and
    the peace process. Colombia's lawlessness, corruption, and long
    internal conflict are exacerbated by the immense profits generated by
    the drug trade. Ninety percent of the cocaine supplied to the United
    States originates in or passes through Colombia, as does two-thirds of
    the heroin seized in this country. As a result, Colombia is the central
    focus of the United States' Western Hemisphere efforts to reduce the
    supply of illicit drugs.
        Treasury's support of Plan Colombia is an integral part of the U.S.
    Government's programs aimed at strengthening the justice sector and
    financial infrastructure throughout Colombia. The Emergency
    Supplemental provided funding to the State Department under the
    provisions of the Foreign Assistance Act, by which State transfers
    authority to Treasury and its components for programs via specifically
    negotiated letters of agreement (``632 agreements''). However,
    sustainment of most Treasury Plan Colombia programs beyond amounts
    appropriated by the Terrorism Supplemental will rely on assistance
    provided by the State Department in 2002 and 2003.
        We appreciate the Subcommittee's support for Treasury's role in
    Plan Colombia. The Plan Colombia package passed by Congress included
    programs with $71.5 million in specific line item allocations for
    Treasury. These are:
      --$68 million for Customs detection and monitoring aircraft radar
            upgrades;
      --$2 million for the Office of Foreign Assets Control;
      --$1 million for banking supervision assistance (Office of the
            Assistant Secretary for International Affairs/Office of
            Technical Assistance);
      --$500,000 for tax revenue enhancement (OASIA/OTA).
        In addition to these specific allocations for Treasury components,
    we have received $14.67 million for law enforcement programs from
    Justice accounts in the legislation, for a total of $86.17 million. We
    anticipate all Treasury programs should be completed by June 2003,
    approximately 24 months from the transfer of Plan Colombia spending
    authority from State to Treasury and its components in June of 2001.
                        enforcing tariff and trade laws
        The United States is the world's largest exporting and importing
    country, and the volume of both exports and imports is growing rapidly.
    Over the 5-year period from 1994 to 1999, the dollar value of exports
    increased by over a third (about 36 percent). During the same period
    the dollar value of imports increased by more than half (about 51
    percent). These increases translate into increased workload for the
    Customs Service.
        Our trade with other Nations is vital to our economic strength and
    our standard of living, and we want to do everything we can to ensure
    that the movement of trade across our borders is as expeditious as
    possible. At the same time, however, we recognize our responsibility to
    assure Congress and the American public that laws enacted to protect
    public health and safety, as well as other interests, are being
    effectively enforced at the border.
        Treasury Enforcement's Office of Regulatory, Tariff, and Trade
    Enforcement performs a variety of important functions, including review
    of all regulations relating to enforcement of trade laws, participation
    in negotiations of international trade agreements, and management of
    the private sector Advisory Committee on the Commercial Operations of
    the Customs Service (COAC).
        The COAC is a legislatively constituted advisory committee of 20
    private sector members, which meets with Enforcement and Customs
    officials quarterly. Until September 11, their advice focused on trade
    facilitation. After September 11, I requested COAC's input on border
    security and the role the private sector can play in increasing cargo
    security. Utilization of the group's expertise provides a unique
    opportunity to examine synergies between enhanced cargo security and
    the private sector concern that the smooth flow of trade not be impeded
    unnecessarily due to increased security concerns.
        The COAC produced an excellent report in January with 60
    recommendations. Many of these have already been implemented, and
    others are under close examination by Customs and Treasury officials.
    Three COAC members also have entered into agreements with Customs under
    the new Customs-Trade Partnership Against Terrorism program.
                         president's management agenda
        The Treasury Department's fiscal year 2003 budget recognizes the
    importance of achieving the President's Management Agenda. The Office
    of Enforcement is working with the law enforcement bureaus to support
    Secretary O'Neill's goal of Treasury becoming a results-driven world
    class organization, consistent with the President's five Presidential
    Management Initiatives:
      --Strategic Management of Human Capital;
      --Expanded Electronic Government;
      --Improved Financial Performance;
      --Budget and Performance Integration; and
      --Competitive Sourcing.
        Only through a balance of implementing all five Presidential
    Management Initiatives will the Treasury Department and its enforcement
    offices and bureaus be able to achieve world class status and become an
    organization that is performance-driven with specific, measurable
    results linked to investment of resources. In working towards this
    goal, the Department emphasizes the importance of leadership,
    accountability, integrity, improving the work environment, and giving
    employees the tools they need to do their jobs with excellence.
                            enforcement organization
        The Office of the Under Secretary for Enforcement has oversight
    responsibility for more than a third of all Federal criminal
    investigators, including roughly 32,000 personnel and a $5 billion
    operating budget. Moreover, Treasury Enforcement collects about $35
    billion in revenues. When I assumed the duties of the Under Secretary,
    one of my first imperatives was to ensure that the Office had an
    efficient organization to be informed adequately about the day-to-day
    functions and operations of the bureaus and offices it supervises. This
    became even more critical in the post September 11 environment. In
    coordination with the Treasury Department's leadership, we have
    implemented a reorganization of the Office of Enforcement, within
    existing FTE ceilings, that I am convinced will enable the Office to
    achieve its mission more effectively and efficiently.
        The reorganization strengthens Enforcement's ability to address
    critical budgetary, resource, and training needs for the immediate
    Office of the Under Secretary as well as the Enforcement Bureaus.
    Additionally, the new organization also provides needed emphasis in the
    major areas of Terrorism and Violent Crime and Money Laundering and
    Financial Crimes.
                    strategic goals and performance measures
        Each year, the world becomes a more complex place. The events of
    September 11 only emphasize this point. As a result, Treasury's law
    enforcement mission grows in complexity, scope, and impact. The
    Enforcement Bureaus must continue to meet these challenges as they
    perform their critical roles in advancing America's law enforcement
    priorities. To provide a long range focus, the Office of Enforcement
    identified six strategic goals for fiscal year 2000-fiscal year 2005:
      --Combat money laundering and other financial crimes;
      --Protect our Nation's borders and major international transportation
            terminals from traffickers and smugglers of illicit drugs and
            weapons of mass destruction;
      --Reduce violent crime and the threat of terrorism;
      --Protect our Nation's leaders and visiting dignitaries;
      --Provide high quality training for law enforcement personnel; and
      --Collect revenue due to the Federal Government.
        In the aftermath of September 11, we plan to add an additional
    strategic goal and supporting objectives in the next revision of the
    Treasury Strategic Plan. This new goal will focus on ``Targeting,
    disrupting and dismantling terrorist financing and terrorist financing
    organizations.''
        In addition, Treasury's law enforcement bureaus support two other
    Treasury strategic goals through the following strategic objectives:
      --Protect the public and prevent consumer deception in specific
            regulated commodities; and
      --Facilitate legitimate trade, enhance access to foreign markets, and
            enforce trade agreements.
        To ensure excellence in achieving these goals, and in keeping with
    the spirit of the Government Performance and Results Act, Treasury
    continues to engage in a strategic management process to enhance and
    improve the results we deliver to the American people. To that end, the
    Office of Enforcement is committed to setting long-term strategic and
    annual performance goals, managing our resources and investments to
    achieve those goals, instituting measures, and reporting annually on
    the results of our performance.
        Overall, Treasury law enforcement bureaus' achievement against
    established performance targets continues to improve. For example, in
    fiscal year 1999, the law enforcement bureaus achieved 64 percent of
    the established performance targets. In fiscal year 2000, 77 percent of
    the established targets were achieved, and in fiscal year 2001, 79
    percent of all performance targets were achieved. While not every goal
    was met, the results were significant.
        For fiscal year 2003, the Office of Enforcement and the Treasury
    law enforcement bureaus will continue to work hard to accomplish our
    defined strategic goals and objectives. We will also strive to achieve
    an even higher percentage of our established performance targets. Doing
    so will help to ensure excellence in protecting our borders and our
    Nation's leaders, disrupting and dismantling terrorist financing,
    fighting terrorism and violent crime, combating money laundering and
    financial crimes, and training our law enforcement personnel for the
    challenges they will face in the future.
        Thank you for the opportunity to provide an overview of the
    President's fiscal year 2003 budget request and to highlight the
    efforts of the Office of Enforcement in support of the mission of
    Treasury's enforcement bureaus. I look forward to answering any
    questions you may have.

                              U.S. Secret Service

    STATEMENT OF BRIAN STAFFORD, DIRECTOR
        Senator Dorgan. Next, let us hear from Mr. Stafford, the
    Director of the United States Secret Service. Mr. Stafford?
        Mr. Stafford. Chairman Dorgan, Senator Campbell, Senator
    Reed, it is a pleasure for me to be here today and represent
    the dedicated men and women of the Secret Service. With me
    today are the recently appointed Deputy Director Danny Spriggs
    and Assistant Directors Steve Colo and Paul Irving. With your
    permission, I will highlight my statement and submit the
    remainder.

                         SECRET SERVICE MISSION FUNDING

        The fiscal year 2003 funding request recognizes the Secret
    Service's commitment to enhance and strengthen the security of
    our Nation. Specifically, this budget will enable the Secret
    Service to satisfy our mandate of safeguarding the Nation's
    leaders and visiting heads of state. This budget also provides
    the resources for our historic investigative mission of
    protecting the Nation's currency and financial infrastructure.
        Since September 11, the Secret Service has experienced
    unprecedented growth in our protective and our investigative
    missions. We have assumed additional duties with new protective
    assignments and we continue to adjust the depth of coverage to
    enhance the Presidential, Vice Presidential, and former
    Presidential details. These enhancements, coupled with the
    designations of Super Bowl XXXVI and the Winter Olympics as
    National Special Security Events, have had a substantial impact
    on our staffing.

                        NATIONAL SPECIAL SECURITY EVENTS

        After a thorough review of security operations at the
    Olympics, I am pleased to report that the planning effort
    involving unprecedented interagency cooperation among over 60
    Federal, State, and local law enforcement and public safety
    agencies and the military, was a complete security success; in
    no small part because of the support of this subcommittee. The
    Winter Olympics included 15 venues, 900 square miles, 3,500
    athletes, and more than 2 million visitors during the 4-week
    period. It was the largest coordinated security effort in our
    Nation's history.

                             INVESTIGATIVE MISSION

        Despite the demands of our protective mission, the Secret
    Service continues to provide this Nation with a very
    significant investigative program. The thrust of our
    investigative efforts is to safeguard our currency, our
    financial payment systems, and our critical infrastructure; all
    are fundamental components of our homeland security.

                                  CYBER-CRIME

        Even though the Secret Service is our country's oldest
    investigative Federal enforcement agency, the enhanced
    investigative authority provided in the recently-enacted USA
    PATRIOT Act has made this a landmark year. The USA PATRIOT Act
    authorized the Secret Service to establish a national network
    of electronic crime task forces, made permanent our statutory
    authority to investigate financial institution fraud, and
    expanded our existing authority with regard to computer-based
    crimes.
        We have entered an age where most types of financial fraud
    and counterfeiting involve electronic crime committed through
    the Internet. Recognizing this transformation, the Secret
    Service continues to invest in the nucleus of our cyber-crime
    effort, the Electronic Crime Special Agent Program. These
    agents are highly trained, mobile, and qualified experts in the
    preservation and analysis of electronic evidence and in the
    investigation of network intrusions and database theft. In the
    course of investigating cyber-crime and developing strategies
    in search of the best formula, we have found prevention,
    information sharing, training, and speed, to be essential
    factors.

                              FORWARD EDGE PROGRAM

        The Secret Service, in partnership with the International
    Association of Chiefs of Police, has recently released our
    Forward Edge program. Forward Edge represents what we believe
    is a cutting-edge training program providing state-of-the-art
    computer training on proper ways to secure electronic crime
    scenes. It is geared for law enforcement of all levels of
    jurisdiction. We have distributed more than 20,000 copies of
    Forward Edge nationwide.
        Mr. Chairman, the common denominator in our approach to
    protection and investigations is prevention. In financial
    crimes, the cost of consequence can be too high. In protection,
    the cost of consequence is unacceptable.

                       COUNTERFEIT UNITED STATES CURRENCY

        The Secret Service also works with foreign law enforcement
    officials to investigate financial crimes and counterfeit U.S.
    currency. In fiscal year 2001, nearly 50 percent of all
    counterfeit U.S. currency passed in the United States
    originated overseas, predominately in Colombia. Approximately
    85 percent of all counterfeit currency seized in fiscal year
    2001 was produced outside the United States. That trend is
    likely to continue as other countries move to adopt the dollar
    as their official unit of currency. We will continue to explore
    establishing foreign offices in regions that make strategic
    sense and offer the potential for a favorable return on the
    investment.

                         MISSING AND EXPLOITED CHILDREN

        I also want to mention our continued commitment in working
    with the National Center for Missing and Exploited Children and
    to thank you for the subcommittee's strong support of this
    partnership. Protecting our children is a noble cause and we
    derive enormous professional and personal satisfaction from the
    analytical, forensic, and investigative support we provide to
    the National Center.

                   WORKLOAD RETENTION AND WORKLOAD BALANCING

        Finally, I want to thank you for your actions in
    recognizing and providing the resources to hire and train
    additional personnel for the Secret Service. This initiative,
    as you know, was designed to address the excessive overtime and
    quality of life issues facing our personnel. We are now in the
    final phase of this initiative and I want to express my sincere
    appreciation for the investment you have made in our most
    valuable resource, our people.

                               PREPARED STATEMENT

        Mr. Chairman, this concludes my statement and I am happy to
    answer questions.
        Senator Dorgan. Mr. Stafford, thank you very much.
        [The statement follows:]

                    Prepared Statement of Brian L. Stafford

        Chairman Dorgan, Senator Nighthorse Campbell, and distinguished
    Members, it is indeed a privilege to be here today before the
    Subcommittee, and to be afforded the opportunity to represent the 5,800
    dedicated men and women of the Secret Service, to testify on the fiscal
    year 2003 budget.
        With me today Mr. Chairman is C. Danny Spriggs, who was recently
    appointed as Deputy Director.
                     fiscal year 2003 appropriation request
        The Secret Service's fiscal year 2003 funding request totals $1,048
    million and 6,111 FTE, and includes funding from two sources: the
    Salaries and Expenses appropriation, and the Acquisition, Construction,
    Improvements and Related Expenses appropriation.
        The fiscal year 2003 funding request recognizes the Secret
    Service's commitment to enhance the security of our homeland by
    accomplishing the goals and objectives set forth in our 5-year
    Strategic Plan. Specifically, this budget will enable the Secret
    Service to pursue its primary goal of protecting our Nation's leaders,
    visiting heads of state, other protectees, and providing security for
    events designated as National Special Security Events (NSSEs). With
    regard to our investigative mission, this budget helps advance our
    ability to safeguard the Nation's currency and financial infrastructure
    against those who would aspire to exploit computer-based advances to
    attack our critical banking, telecommunications and other financial
    systems. Finally, this budget allows the Secret Service to provide a
    responsive support infrastructure to meet the needs of our protective
    and investigative missions.
                          salaries and expenses (s&e)
        The Secret Service's Salaries and Expenses appropriation request
    for fiscal year 2003 totals $1,044,070,000 and 6,111 full-time
    equivalents (FTE). This is an increase of $89,820,000 from the level
    appropriated, excluding Supplemental appropriations, to the Service for
    this fiscal year. It is an increase of 120 FTE over this fiscal year's
    staffing level. This budget includes: $3,527,000 in funding for the
    Administration's legislative proposal on full costing of benefits;
    $30,206,000 needed to maintain current program performance levels, and
    cover base pay and benefits annualization costs; $8,090,000 for the
    start-up costs of the protective effort relative to the 2004
    presidential campaign; $19,180,000 to annualize the cost of staffing
    provided in the fiscal year 2002 Budget Supplemental; and a permanent
    transfer of $358,000 from the Department of Labor for administrative
    costs involved with processing Federal Employees Compensation Act
    claims. These increases are offset by $102,673,000 in non-recurring
    costs, and $6,824,000 resulting from business strategy adjustments.
     acquisition, construction, improvements, and related expenses (acire)
        The Secret Service's fiscal year 2003 request for its Acquisition,
    Construction, Improvements, and Related Expenses (ACIRE) account totals
    $3,519,000, an increase of $62,000 from the fiscal year 2002
    appropriated level of $3,457,000. This increase is to maintain current
    program performance levels. There are no programmatic changes or
    initiatives proposed for this account.
        The past 7 months have been unlike any other period in the Secret
    Service's 137-year history. The September 11 attacks left our New York
    Field Office within the ruins of what used to be the World Trade
    Center. Beneath the rubble was Master Special Officer Craig Miller, who
    we believe was assisting in the rescue effort when the World Trade
    Center towers collapsed. These attacks on our own soil have increased
    both the complexity and the scope of our protective and investigative
    missions.
                               protective program
        Consistent with our Strategic Plan, the Secret Service's goal is to
    protect our Nation's leaders, visiting world leaders and other
    protectees, provide the safest environment to those participating in
    National Special Security Events (NSSEs), and to reduce threats posed
    by global terrorists and other adversaries. We perform this mission by
    providing continuous protective operations that offer comprehensive
    protection, as mandated by law and executive order, for our protectees
    and the facilities where they work and live; and, by coordinating,
    planning and implementing security plans at important events and
    functions designated as National Special Security Events. Secret
    Service protectees include: the President, the Vice President, their
    families, former Presidents, visiting foreign heads of state and
    government, as well as major Presidential and Vice Presidential
    candidates and their spouses. We also provide security for the White
    House complex, the Vice President's residence, and 463 foreign missions
    within the Washington, D.C., area.
        Last year began with an extended election cycle. This anomaly had a
    direct impact on our protective workload. As we proceed in the current
    fiscal year, the Secret Service continues, as a matter of practice, to
    assess the threat and evaluate the application of our protective
    methodologies. We have assumed new responsibilities in the form of
    additional details, and we continue to adjust the depth of coverage to
    enhance the Presidential, Vice-Presidential, and former presidential
    details. At the beginning of this fiscal year, the Secret Service had
    17 full time protectees; as a result of the September 11 attacks we now
    have 39 full time protectees. Also, additional fixed posts and mobile
    assignments at the White House Complex, Vice President's Residence and
    other facilities have been incorporated. The necessary changes have
    impacted staffing.
        To provide more effective security for 39 full time protectees,
    NSSEs, and facilities in a changing environment, the Secret Service has
    recently incorporated the ``Counter-Surveillance'' program into our
    protective methodology. The ``Counter-Surveillance'' program is
    essential to all protective operations. This approach employs state-of-
    the-art technology in a cost-effective manner to enhance the threat
    assessment and countermeasure aspects of all protective operations.
    Utilizing assessment matrices, digital photography and other tools, the
    ``Counter-Surveillance Team'' assesses areas of vulnerability at all
    venues and motorcade routes from an ``outside-in'' perspective by
    observing events in physical locations from which threats or attacks
    are likely to occur. After conducting the analysis, the ``Counter-
    Surveillance Team'' then recommends ways (countermeasures) to diminish
    those vulnerabilities or threats. To improve efficiency while not
    sacrificing effectiveness, in-progress studies are being conducted to
    determine the viability of using hand held computing devices and two-
    way paging devices to provide the ``real time'' flow of intelligence or
    other information obtained by ``Counter-Surveillance Teams'' to command
    centers, protective details or ``Counter-Surveillance'' teams
    concurrently operating at different venues associated with the same
    event or protective visit.
        We consider the protective mission as an evolutionary process,
    essential to the security of our homeland. We apply that thought
    process when planning and executing security; and, we analyze the
    actual and potential threats during increasingly complex protective
    operations. Adapting to changing situations in a changing environment,
    sound planning on all planes, and employing technology or other
    applications to our advantage is fundamental to our strategy.
        To further illustrate our adaptability to changing conditions, the
    Secret Service in collaboration with Computer Emergency Response Team
    (CERT) of Carnegie Mellon University in Pennsylvania, has recently
    embarked on an 18-month project entitled, ``The Critical Systems
    Protection Initiative,'' also known as the CSPI. The goal of the CSPI
    is to strengthen the planning phase of the Secret Service's protective
    mission by analyzing how critical information networks are related to
    physical protection activities. This study is designed to:
      --Find ways to identify, assess, and enhance the critical systems
            upon which Secret Service protective operations rely; and
      --Find ways to identify, assess and manage individuals who may have
            the potential to compromise those systems. These individuals
            could include past or present employees.
        By virtue of this relationship between the CERT and our core of
    agents specializing in computer crimes through the Electronic Crimes
    Special Agent Program (ECSAP) or Electronic Crimes Task Forces, we look
    to prevent network intrusions in the systems that are controlled by
    computers, capable of disrupting a protective visit or NSSE in the
    event of a computer attack. Those systems include: water, gas, and
    electric utilities controlling venue power or plumbing; air
    conditioning, heating and ventilation systems that control the intake
    and quality of air; internal building operations such as elevators,
    back-up generators, or fire alarm control panels; or something
    seemingly inconsequential such as a scoreboard.
        The Secret Service relies on the utilization of related networks
    that are now essential considerations when developing and implementing
    security plans. At the conclusion of the study, we plan to release the
    findings in a report, and provide operational guidance on methods of
    preventing network intrusions that could impact physical security. When
    completed, these findings and other publications will be made available
    to law enforcement and industry.
        The analysis of critical systems and other forms of cyber security
    were integral components in the planning and execution of the security
    plans for both Super Bowl XXXVI, in New Orleans, and the 2002 Winter
    Olympics in Salt Lake City, Utah.
    National Special Security Events
        Presidential Directive 62 (PDD-62) issued in 1998, and codified in
    our authorizing statute, Title 18 United States Code 3056, names the
    Secret Service as the lead Federal agency for the planning, designing
    and implementation of security plans at events designated as National
    Special Security Events (NSSEs). Since January 2002 the Secret Service
    has implemented security for the following events designated as NSSEs:
    the 2002 Winter Olympics and Super Bowl XXXVI. The actual planning and
    coordinating however, is a much longer effort, sometimes months or
    years. The other events last year declared NSSEs were: the 2001
    Presidential Inauguration; the 56 United Nations General Assembly; and
    the planned International Monetary Fund/World Bank Meetings scheduled
    to be held in Washington D.C. this past fall. Within the last 90 days
    the Secret Service has also been on the forefront of the security
    effort for the World Economic Forum in New York, even though these
    meetings were not designated as NSSEs. With the completion of the
    Winter Olympics, the Secret Service coordinated and implemented
    security plans for each of the thirteen events declared NSSEs, starting
    with the World Energy Congress held in Houston, Texas in 1998.
        I would like to acknowledge the support of the Chairman, Senator
    Nighthorse Campbell and Members of the Subcommittee in recognizing,
    early in the process, the amount of human and other resources required
    to develop and execute a sound physical security plan for each of the
    NSSEs, especially the Winter Olympics. The 2002 Winter Olympics
    involved an unprecedented interagency collaboration of Federal, State,
    and local law enforcement, and the military working with the Salt Lake
    Organizing Committee, the Utah Olympic Public Safety Command, the
    International Olympic Committee, the State of Utah, and other entities.
    Security for the competition and ceremonies was provided for an
    estimated 65,000 daily spectators, and 2,500 athletes in 15 protected
    venues, in an area covering 900 square miles for about a 4-week period.
                             investigative program
        As you know Mr. Chairman, the Secret Service's investigative roots
    began with our creation in 1865 to suppress counterfeiting. In addition
    to the demands of our protective mission, the Secret Service continues
    to provide the Nation with a very productive and efficient
    investigative program. The thrust of our investigative efforts and
    authority is to protect our currency, and financial and banking systems
    from criminal acts or from attacks used as tools of terrorism. The
    financial infrastructure and confidence in that infrastructure is a
    critical component of our homeland security. The Secret Service's
    investigative methodology is directed at maximizing the effect of our
    core areas of expertise, leveraging technology, efficiently partnering
    with other Federal, local and State law enforcement, sharing
    information, and avoiding redundancy caused by overlapping
    jurisdiction. Our approach and investigations of counterfeiting and
    computer crimes involving attacks on our financial systems are
    consistent with the goals and objectives set forth in the Secret
    Service's 5-year Strategic Plan. As in protection, the focus of our
    energy in investigations is prevention.
        Because of the new and enhanced investigative authority provided in
    the recently enacted Uniting and Strengthening America by Providing
    Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
    2001, also known as the USA Patriot Act, the current fiscal year can be
    described as a landmark year. The USA Patriot Act provisions applicable
    to the investigative activities of the Secret Service include:
      --Expansion of National Electronic Crime Task Force Initiative. This
            section directs the Secret Service to develop a national
            network of electronic crimes task forces, based on the model of
            our operational and successful New York Electronic Crimes Task
            Force. The purpose of the task forces authorized in this
            section is to prevent, detect, and investigate various forms of
            electronic crimes, including potential terrorist attacks
            against critical infrastructure and financial payment systems.
      --Permanent Jurisdiction for Financial Institution Fraud. The USA
            Patriot Act re-authorized and made permanent our statutory
            authority to investigate financial institution fraud and
            identity theft. The amendments contained in this section
            recognized the evolution of technology and the impact
            technology has on traditional methods of crimes against
            financial institutions. This section also expanded our
            jurisdiction in computer crime under Title 18 U.S.C 1030.
      --Counterfeiting Domestic Currency and Obligations. Enhancements to
            the existing counterfeit statutes were made to reflect the
            impact that digital and analog computer technology has had on
            counterfeiting U.S. and foreign currency.
      --Extraterritorial Jurisdiction. The changes in this section amend
            the Access Device statute to expand jurisdiction, under certain
            conditions, to persons outside the jurisdiction of the United
            States.
    Computer Crime
        Since 1984, and with the re-authorization contained in the USA
    Patriot Act, the Secret Service has been authorized to investigate
    crimes committed with the use of a computer. We have entered the age
    where most types of financial institution fraud, counterfeiting and
    other attacks against our financial infrastructure are increasingly
    supported by electronic crime occurring on-line through the Internet on
    various platforms including computers, telecommunications devices,
    printers, scanners and other electronic equipment. Financial crimes and
    counterfeiting are inextricably linked to what is now referred to as
    cyber-crime.
        In realizing this transformation, the Secret Service continues to
    invest in the nucleus of our cyber-crime effort--the Electronic Crimes
    Special Agent Program, or ECSAP program. The ECSAP program consists of
    159 agents, of which 111 are stationed throughout the country in our
    field offices. These personnel are highly trained, highly mobile,
    qualified experts in the preservation and analysis of electronic
    evidence. They are proficient in the investigation of network
    intrusions and database theft. The ECSAP agents are also trained to
    examine the variety of devices utilized in furtherance of today's
    criminal activity. Some of these devices include credit card
    generators, electronic organizers, telecommunications equipment,
    scanners, computer hard drives, and most devices manufactured or
    altered to intercept or duplicate telecommunications services.
        In fiscal year 2001, ECSAP agents completed over 1,168 forensic
    examinations on computer and telecommunications related equipment.
    ECSAP agents are known for their excellence in accuracy and efficiency;
    their investigative skills are continually sought after on a referral
    basis by industry and law enforcement at all levels of jurisdiction.
        The development of hardware and software tools produced for the
    benefit of the average consumer, small business, or large corporation
    is frequently utilized, in illicit ways, with impressive quality. The
    use of relatively inexpensive computers and printer equipment, often
    referred to as ``desktop publishing equipment,'' has enhanced the ease
    and manufacturing standard of counterfeit currency, checks, bonds,
    securities, false identification and other financial instruments or
    obligations.
        The Secret Service works closely with stakeholders in the financial
    services industry, electronics manufacturing sector, and information
    services, to provide feedback regarding the misapplication of advances
    in computer related products. This approach returns dividends because
    industry representatives also provide valuable training to ECSAP agents
    in the form of current information and material relating to
    capabilities and methods that could be used for the wrong purposes.
        The growth in computer-related crimes witnessed by the Secret
    Service only mirrors similar trends experienced in the jurisdictional
    areas of our sister law enforcement agencies within the Treasury
    Department. The increasing complexity of computer crime has posed a
    challenge to those responsible for investigating, collecting, analyzing
    and preserving electronic evidence. The Secret Service, through the
    sharing of resources and collaboration with our sister Treasury
    Enforcement Bureaus has been able to optimize our ability to
    investigate and solve cyber-crime. The cooperation of the Treasury
    agencies, in this Departmentally coordinated effort known as the
    Computer Investigative Specialist (CIS) program has resulted in an
    organized program of training, equipping and facilitating
    communications among special agents tasked with the analysis of
    electronic evidence. The CIS program has created efficiencies and added
    value to the investigative effectiveness of the Secret Service.
        In the field, we have experienced that the first line of defense in
    combating cyber-crime is often an agent or officer who is well trained
    in methods of preserving and securing evidence at electronic crime
    scenes. In recognition of the time sensitivities associated with
    computer crime, the importance of properly seizing computer-related
    evidence, and the increasing complexity of cyber-related crime, we
    continue to see the value in promoting partnerships and training. In
    the course of investigating electronic crime and developing strategies
    in search of the best formula, we have found prevention, collaboration,
    information sharing and timely response to be essential factors in the
    equation. We have worked to advance these characteristics as a solution
    to investigate computer crime.
        To underscore our philosophy in this area, the Secret Service, in
    cooperation with the International Association of Chiefs of Police,
    recently introduced the ``Forward Edge'' training package. ``Forward
    Edge'' represents what we consider to be a cutting edge training
    program, utilizing state-of-the-art computer training for all law
    enforcement: local, State, and Federal, with regard to securing
    electronic crime scenes and safely seizing computer-related evidence.
    The ``Forward Edge'' training package includes an 8-hour CD-ROM,
    utilizing a three-dimensional, ``virtual reality'' interactive training
    format, to provide the officer or agent with different scenarios
    involving identity theft, financial crimes, network intrusion, credit
    card fraud, counterfeiting, data theft and other computer-related
    crimes. The ``Forward Edge'' CD also furnishes a field guide that
    contains practical information such as local laws concerning computer
    crimes for every State jurisdiction, along with sample search warrants
    pertaining to the seizure and safe handling of computer-related
    evidence, drugs and weapons. Each scenario guides the user through
    crime scenes and enables him/her to interact with objects, individuals
    and situations they may encounter in real life. In late fiscal year
    2001, the Secret Service, through our network of field offices and
    headquarters began a nationwide distribution of 20,000 copies of the
    CD-ROM to local, State and Federal law enforcement agencies.
        For fiscal year 2003 and beyond, we intend to follow through with
    the development and implementation of additional specialized training,
    and pursue recently enacted legislative authority by forming electronic
    crimes task forces based on the New York Electronic Crimes Task Force
    model.
    Electronic Crimes Task Forces
        The New York Electronic Crimes Task Force (NYECTF) continues to
    grow in membership and achievements. This task force represents a
    strategic alliance of more than 250 regional members or groups
    including: prosecutors; local, State and Federal law enforcement;
    academia; and companies in private industry with interests in banking,
    financial services, brokerage, and telecommunications. The common
    denominator in the NYECTF is that each member, be it law enforcement or
    industry, is a stakeholder with a business or investigative interest in
    preventing electronic crime. Each member adds value through specialized
    knowledge or expertise in contributing to the common goal. Since its
    inception in 1995, through the third quarter of fiscal year 2001, the
    NYECTF has made 826 State and locally prosecuted arrests investigating
    an estimated $500 million in actual and potential loss due to fraud. As
    a testament to the resolve and adaptability of the agents and members,
    the NYECTF resumed operations within 48 hours of the loss of its base
    of operations in the New York Field Office. The NYECTF defines the
    Secret Service's priority on partnerships, and demonstrates the
    economies of scale inherent in the task force approach.
        Based on the mission and organization of the NYECTF, the Secret
    Service, beginning in fiscal year 2003, plans to establish other
    electronic crimes task forces throughout the country, in locations with
    significant or specialized interests in the critical financial, banking
    or information infrastructures.
    Counterfeiting
        Technology continues to be used in illicit ways to manufacture
    counterfeit U.S. and foreign currency, securities, bonds, checks and
    other obligations. Despite the inclusion of enhanced security features
    on the new series of Federal Reserve Notes, counterfeiting is
    accomplished with varying degrees of quality on desktop printers, color
    copiers, scanners, computers, software and other ``off the shelf''
    desktop publishing equipment. The amount of counterfeit activity
    attributed to computing devices and other electronics, as a percentage
    of all counterfeit currency and obligations passed or seized, continues
    to rise. For fiscal year 2001, we estimated that 40 percent of all
    counterfeit currency and obligations seized was computer generated. To
    prevent such attacks on our financial infrastructure, the Secret
    Service sponsors awareness and education events through our field
    offices and headquarters at home and abroad. We also publish and issue
    brochures describing security features to educate business owners and
    the public. Advances in the methods of counterfeiting have accompanied
    the advances in technology, and the USA Patriot Act revisions to the
    counterfeit statutes were necessary and reflected the impact of
    technology on what was predominantly and historically accomplished
    through an offset printing press.
        We estimate that nearly 50 percent of all counterfeit U.S. currency
    passed in the United States originates overseas. Recent counterfeit
    plant suppressions and seizures indicate that Colombia is the leading
    producer of counterfeit U.S. currency. The Secret Service maintains a
    permanent office in Bogota, Colombia, our only continued permanent
    presence in Latin America. While lacking jurisdiction overseas, we work
    closely in an investigative assistance capacity with law enforcement
    and government officials in Colombia, and the region, to provide
    training and investigative support aimed at deterrence, education and
    early detection.
        One of the ongoing enforcement initiatives to combat counterfeit
    currency at the source is the Congressionally funded ``Plan Colombia.''
    In May 2001, the Department facilitated $1.5 million in funding to the
    Secret Service for the purpose of working with the Colombian government
    to establish specialized anti-counterfeiting units. With the funding,
    the Secret Service conducted polygraph examinations to clear and
    sanction candidates selected from law enforcement agencies for
    participation in these task forces. We also purchased and delivered
    police equipment to the units and increased our staffing in Bogota.
    Less than one year in operation, ``Plan Colombia'' has disrupted crime
    directed at our currency, and has yielded early successes through
    several arrests, the execution of dozens of search warrants, and most
    recently, resulted in the seizure of approximately $40 million in
    counterfeit U.S. currency, the largest seizure of counterfeit U.S.
    currency in Latin America. The Secret Service has learned through
    investigation that this counterfeit currency was destined for Ecuador,
    a country that has recently converted to the U.S. dollar.
        With the decision of certain countries in Latin America to adopt
    the U.S. dollar as their base unit of currency, the Secret Service
    believes that counterfeiting activity in newly ``dollarized'' economies
    will increase because of the lack of familiarity with the dollar.
    Within the Latin American countries that have recently converted to the
    dollar, Ecuador, El Salvador and Guatemala, the smuggling and
    distribution of counterfeit U.S. currency has already been documented.
    Ecuador, which shares a border with Colombia, ``dollarized'' in 2000.
    During that year $3.5 million in counterfeit U.S. currency was seized
    in Ecuador, compared with only $50,000 seized in 1994. Just prior to
    ``dollarization,'' local media estimated that 92 percent of the
    population had never seen a U.S. dollar. In preparation for Ecuador's
    conversion, the Secret Service provided twenty-eight training seminars
    attended by over 2,600 police, Government officials, bankers, business
    owners and others. We continue to receive similar requests for currency
    recognition training, instruction on methods of investigation, and
    liaison from other Latin American countries, Europe and elsewhere.
    Financial Crime is Global
        The Secret Service believes that our professional and effective
    relationships with the Colombian government and elsewhere do not happen
    by accident. The success there and our other eighteen foreign field
    offices and resident agencies, including Interpol, can be attributed
    to, in large measure, our long-term commitment in working with the host
    Nation. Long-term relationships build trust and offer the benefits of
    consistent and reinforced liaison, timely assistance, face-to-face
    communication, and result in the sharing of information and expertise.
        Where permanent assignments are not available, the Secret Service
    relies on temporary overseas assignments to satisfy the requests for
    participation in overseas financial crimes and counterfeit task forces.
    Within the last two years alone, the impact of our work through
    temporary assignments in Lagos, Bucharest and Frankfurt has resulted in
    the opening of permanent offices. The temporary duty concept allows us
    to conduct a survey in a specific area to determine if the cost of
    opening a field office in that country is warranted.
        In addition to the protection of our currency, the Secret Service's
    efforts overseas, in Canada and in Mexico are directed at protecting
    the integrity of our critical financial infrastructure through
    responsiveness and timely assistance at the point of attack. The ease
    of using of computers, the expanded use of electronic payments, and
    speed of transactions has ``globalized'' our economy, but can make the
    systems upon which the infrastructure relies just as vulnerable
    overseas as at home. The Secret Service will establish additional
    foreign offices in areas where there is a demand for our expertise,
    continued requests for partnerships, and in regions that make sense
    strategically and offer a high probability of a favorable return on the
    investment.
    Identity Theft
        It remains an investigative priority of the Secret Service to work
    with law enforcement at all levels in communicating and educating the
    public about identity theft. The first line of defense against identity
    theft is for private citizens to be equipped with the awareness and
    knowledge of what identity theft is, and how they can effectively
    safeguard their private information. In its purest form, the goal of
    stealing one's identity is to provide criminals with the tools and
    information necessary to establish good credit and obtain things of
    value through illicit means. Using personal information belonging to
    someone else, criminals usually establish bank accounts, obtain credit
    or debit cards, or use the information to gain unauthorized access to
    financial accounts or other sources of capital. It is a fact that most
    financial crimes including bank fraud and credit card fraud involve
    identity theft.
        The basic pieces of information required to achieve the theft of
    another's identity are name, date of birth and social security number.
    Additional information of value includes bank account numbers, credit
    card numbers, and maiden names. There are several effective first line
    precautions individuals can take to safeguard their personal
    information from being compromised. Some of these include:
      --Protecting social security numbers at all times.
      --Not providing social security numbers to requestors if at all
            possible during business or non-business transactions.
            Admittedly, this is not always practical when applying for
            loans, leases, mortgages or similar transactions.
      --Not placing social security numbers on personal checks.
      --Destroying documents no longer needed that contain personal
            information.
      --Being judicious in providing personal information over the
            Internet.
      --Reviewing bank and credit card statements carefully for indications
            of fraudulent activity.
        The Secret Service provides identity theft presentations on a
    community level to businesses, civic groups, community organizations
    and other law enforcement bureaus concentrating on best practices
    methods in order to raise the level of awareness regarding the impact
    of identity theft. We also work closely with the financial industry to
    share information on the misapplication of technology and feasible
    means of deterrence.
    National Center for Missing and Exploited Children
        The Secret Service derives enormous professional and personal
    satisfaction from our relationship with the National Center for Missing
    and Exploited Children (NCMEC). Through the Forensic Services Division
    (FSD), the Service will continue to provide the valuable analytical,
    forensic and laboratory support, and other assistance that the Center
    has benefited from in recent years.
        Since the passage of the Violent Crime Control and Law Enforcement
    Act of 1994, the Secret Service has provided forensic and technical
    support to NCMEC. The types of support include: the use of the
    Automated Fingerprint Identification System (AFIS); the Forensic
    Information System for Handwriting (FISH); ink analysis and comparison;
    traditional handwriting and fingerprint comparison; polygraph
    examinations and consultation; visual information services such as
    image enhancement, suspect drawings and video and audio enhancement;
    graphic and photographic support; and age regression/progression
    drawings.
        In fiscal year 2001, the Secret Service conducted 35 polygraph
    examinations in direct support of NCMEC's mission. The examinations for
    these cases involved missing, abused and murdered children.
        We actively support the Center's Operation Safe Kids initiative.
    Operation Safe Kids is a national, community based awareness effort.
    FSD personnel utilize a computer-enhanced application known as the
    Children's Identification System (KIDS), to photograph, fingerprint and
    store biographical data at public events throughout the country. To
    date, we have entered more than 25,000 children into the KIDS program.
        Through outreach, the Secret Service has communicated with and
    provided law enforcement groups with information about our services.
    Recipients of such presentations include the International Association
    of Chiefs of Police, the INTERPOL Standing Working Party on Offenses
    against Minors, and the Federal Law Enforcement Training Center.
    Various publications and brochures have also aided in promoting FSD's
    ability to provide critical forensic support in these cases. FSD has
    provided the Center with an icon and a web page of information, which
    has been included on the desktops of more than 1,500 computers
    belonging to State and local law enforcement agencies nationwide.
        The FSD staff is currently developing a Forensic Investigative
    Response and Support Team (FIRST). FIRST will be composed of forensic
    experts, who would be able to respond on short notice to requests for
    assistance from State, local, or other Federal law enforcement
    agencies. The goal would be to provide time sensitive forensic support
    (handwriting analysis, ink and paper analysis, fingerprint evaluations,
    polygraph examinations and other services) to requesting agencies in
    cases involving missing or exploited children. In essence, when the
    NCMEC is notified by a local law enforcement department of an
    abduction, the Secret Service at the NCMEC's request, will launch a
    FIRST to respond within the first 8 hours of abduction, to provide
    computer, forensic and ``real-time'' investigative support to the
    department that may lack the resources to respond in an effective
    manner during that critical period.
                         office of protective research
    Intelligence Division
        The protective research and intelligence programs continue to serve
    a critical role in support of the protective and investigative mission
    of the Secret Service. Within the Office of Protective Research, the
    Intelligence Division oversees the identification, assessment, and
    management of threatening communications and incidents directed toward
    Secret Service protectees and events of national significance. The
    division develops threat assessments in support of domestic and foreign
    protectee visits; conducts evaluations of risk potential associated
    with specific and generalized threats; prepares analyses of protectee-
    specific threats; maintains liaison with other law enforcement, mental
    health, and intelligence agencies; plans and reviews the case
    management for high risk subjects; and, through our National Threat
    Assessment Center, collaborates in the design and implementation of
    program evaluation studies and other risk assessment research designed
    to improve our understanding of violence directed toward public
    officials.
        Other Intelligence Division activities during fiscal year 2001 and
    fiscal year 2002 included support provided for the development and
    implementation of the security plans for the Winter Olympics, Super
    Bowl XXXVI, the United Nations General Assembly, the World Economic
    Forum, the 2001 Presidential Inauguration, and the planned
    International Monetary Fund meetings.
        Prior to the September 11 attacks, the Secret Service actively
    participated in Department of Justice led Joint Terrorism Task Forces
    (JTTFs). We remain committed to continued representation and have
    increased that representation since September 11. In addition to
    collaborating in a combined and coordinated effort, the Secret Service
    provides and derives the benefits of sharing information on
    investigative matters that may be related to our protective mission.
    The Intelligence Division coordinates our participation in the JTTFs
        In addition to directing and performing such operational
    activities, the Intelligence Division continues to provide leadership
    for the Protective Detail Intelligence Network (PDIN), a consortium of
    Washington, D.C., area law enforcement, security, and public safety
    agencies with protective and security related functions. Initiated in
    1999 by the Secret Service, the PDIN has emerged as an important forum
    for sharing intelligence information that affects security planning
    issues across agencies in the metropolitan area. Hosted on a regular
    basis by the Intelligence Division, PDIN meetings include briefings and
    training concerning significant and designated major security events
    coordinated by the Secret Service, and they facilitate cooperative
    partnerships among agencies who share protective and security
    responsibilities. Through the PDIN, the Secret Service has offered
    assistance in the preparation of security assessments for incoming
    Cabinet members and senior officials of the administration.
    National Threat Assessment Center
        As part of the Secret Service's protective intelligence mission,
    our National Threat Assessment Center (NTAC) continues to gain national
    attention through its training, outreach, consultation, and research
    efforts in the specialized field of targeted violence. Its principal
    goal since its inception encompasses the spectrum of threat assessment
    and targeted violence as it relates to our protective mission. As a
    natural extension of our protective intelligence methodology, we have
    shared our knowledge and depth of experiences by expanding the concept
    and findings through outreach and training in the area of school and
    workplace violence. The outreach effort has had a national impact.
        Following the attack at Columbine High School in 1999, NTAC entered
    into a partnership with the Department of Education and the National
    Institute of Justice to apply the methodology used in our traditional
    analysis of targeted violence, in the form of a study designed to
    examine if similar behavior was involved in school shootings. This
    study, known as the Safe School Initiative, reviewed 37 school
    shootings occurring in the United States in the preceding 25 years. The
    Safe School Initiative was completed in 2000.
        With the support of this Subcommittee, the NTAC staff has been able
    to communicate what we have learned in assessing threats on public
    officials and discuss our findings in the Safe School initiative and
    other assessments of school violence to those with an interest in
    preventing school and workplace violence. This is accomplished in a
    practical and tangible way. NTAC offers weeklong and abbreviated threat
    assessment seminars attended by law enforcement, other public safety
    officials, educators, and school administrators nationwide. In fiscal
    year 2001 alone, NTAC conducted more than 100 seminars and forums,
    attended by approximately 30,000 State and local educators, school
    administrators and law enforcement personnel. We continue to provide
    and participate in these events sponsored by local communities,
    administration officials, Members of Congress, and former Presidents.
        Following through on the success of this initiative, NTAC, in
    collaboration with the Department of Education, is currently writing a
    guide to suggest methods for school administrators, educators, law
    enforcement personnel, and mental health professionals to conduct
    threat assessments in their schools. This guide will be published and
    released in the spring, 2002.
    Technical Security Division
        The Technical Security Division (TSD) is responsible for all
    chemical/biological/hazardous materials countermeasures programs of the
    Secret Service that safeguard our protectees, protect the workforce and
    facilities, and mitigate the threats of terrorism.
        As part of its ongoing support mission, TSD identifies and
    implements ways to improve its detection capabilities in and around the
    White House Complex, Naval Observatory and other protected locations.
    Outside of Washington, chemical/biological/hazardous material support
    is integral to any protective security plan during motorcade movements
    or at fixed locations, including the recently completed Super Bowl
    XXXVI and the 2002 Winter Olympics.
        In addition to chemical/biological/hazardous material efforts, TSD
    engineers serve on several committees within a Treasury led, multi-
    agency consortium known as the Technical Security Working Group (TSWG).
    The TSWG is charged, in part, with researching and developing ways to
    enhance the Secret Service's protective and investigative mission
    capability, by recommending methods, materials or technology that could
    improve efficiency yet maintain the integrity of mission and safety of
    the workforce. Some of the projects in progress include: enhancing the
    capability of our armored limousine fleet; developing lighter yet
    stronger ballistic glass; researching advanced generation body armor;
    studying blast mitigation; and, biometrics testing in the form of
    facial recognition technology and fingerprint scanning.
    Information Resources Management Division
        The Information Resources Management Division (IRMD) is committed
    to the continuation of its objective to provide an information and
    communications infrastructure to support the protective and
    investigative missions of the Secret Service. To that end, IRMD will
    continue to make progress to achieve its goals of upgrading and
    improving efficiencies in radio, telephone and wireless communications
    system-wide. In fiscal year 2001, digital narrowband system radio
    upgrades were installed in ten field offices, with upgrades projected
    for ten more offices by the end of fiscal year 2002. Radio
    interoperability efforts are also in progress to continue to improve
    communications within Secret Service entities and with other Federal,
    State and local law enforcement agencies. During fiscal year 2001, IRMD
    completed the issuance of wireless pagers nationwide, moving from a
    regional paging system with more than 40 contracts to a single
    contract. The uniform contract and service provider now enables Secret
    Service users to provide alphanumeric messages through a web-based
    Intranet application.
        IRMD is also pursuing operational efficiencies through its
    involvement with the Treasury SmartCard/Public Key Infrastructure (PKI)
    Proof of Concept. In February 2002, the Treasury Chief Information
    Officer Council appointed the Secret Service as the Executive Agent for
    the SmartCard/PKI project. This initiative is managed and operated by a
    committee consisting of representatives from the Bureau of Alcohol,
    Tobacco and Firearms, the Internal Revenue Service, the Bureau of
    Engraving and Printing, Treasury Departmental Offices, in addition to
    the Secret Service. The Committee has developed a set of standards and
    specifications governing a uniform Treasury SmartCard, which will be
    designed for physical access to facilities, authorized access to
    computers, property and inventory control. The SmartCards will also be
    used to hold and manage PKI Certificates, which will enable Treasury
    Department employees to send and receive digitally signed and encrypted
    e-mail. The Proof of Concept will set the benchmark for how other
    business processes can be improved within the Department.
    Emergency Preparedness Program
        Established in 1999, the Emergency Preparedness Program (EPP) is
    responsible for coordinating the emergency preparedness programs of the
    Secret Service. The EPP concentrates its efforts on program areas,
    which ensure our commitment to emergency preparedness, operations
    security, the continuity of Government, and critical infrastructure
    protection. The EPP staff actively engages in liaison and coordination
    with the White House Military Office, the Federal Emergency Management
    Administration, and the CIA regarding matters involving the Continuity
    of Government and emergency preparedness. Internally, EPP staff
    coordinates emergency preparedness exercises and provides frequent
    educational material and training to staff in all areas of emergency
    preparedness, especially Operational Security (OPSEC).
                          human resources and training
    Workforce Retention/Workload Balancing Initiative
        This Subcommittee has recognized and supported my priority to
    confront the declining quality of life of the workforce caused by
    excessive overtime and out-of-district travel, by making the resources
    available to recruit, train and hire 678 additional agents and support
    personnel for field assignments. In fiscal year 2002, the Secret
    Service plans to hire the final 280 men and women called for under
    Phase III of the Workforce Retention/Workload Balancing initiative. The
    safety, morale and job satisfaction of the entire workforce are of
    paramount importance.
    Diversity
        It is the policy of the Secret Service to attract, develop, retain
    and maximize the potential of a diverse workforce in a changing and
    competitive environment. We are committed to this policy. As a means of
    fully achieving and emphasizing an organizational culture that
    recognizes the value added by a diverse workforce, the Service has
    formalized its Diversity Management Program to fall under the direction
    of a Deputy Assistant Director for Recruitment, Employment and
    Diversity Programs (REDP). Through a coordinated process, the REDP
    develops and implements recruitment policies with the Service's
    Recruitment and Hiring Coordination Center and the Chief of the
    Personnel Division. Some of ongoing and recent efforts include:
      --Job Fairs and Recruiting Seminars: In fiscal year 2001 the Service
            sponsored thirteen recruiting seminars attended by nearly 2,500
            potential applicants for Uniformed Division and Special Agent
            positions. The Recruitment and Hiring Coordination Center has
            continued to maintain liaison with colleges and universities
            throughout the country, including Historically Black Colleges
            and Universities and Hispanic Servicing Institutions. In fiscal
            year 2001 the Service participated in and/or sponsored over 100
            nationwide job fairs.
      --Media: The Service utilizes nationwide print, radio and electronic
            media to attract qualified candidates with diverse skills and
            backgrounds for all positions.
      --Internet: Presently, a diversity web site is under development.
            Once completed, this Internet tool will be used to inform all
            employees of the diversity initiatives, conferences and
            objectives. For potential applicants, the Service has conducted
            outreach by advertising on public and campus career websites
            targeting college students. We will continue to explore and
            utilize the Internet as a valuable recruiting aid.
        The Secret Service supports and encourages employee participation
    in conferences dedicated to minority interests. In fiscal year 2001,
    approximately 120 employees attended the following conferences: the
    Women in Federal Law Enforcement Conference; the Hispanic American
    Police Command Officers Association Training Conference; the National
    Organization of Black Law Enforcement Executives Training Conference;
    the Blacks in Government Training Conference; and the National Native
    American Law enforcement Association Training Conference.
        The Secret Service is committed to diversity within the
    organizational and management ranks. As of January 1, 2002 twenty seven
    percent of the Secret Service's GS-14 and GS-15 positions were occupied
    by women and minorities. Twenty eight percent of the Senior Executive
    Service positions in the Secret Service as of January 1, 2002 were held
    by women or minorities.
        In the past year, the Service has developed a core training course
    curriculum for our Equal Opportunity Program to lay a foundation for
    highly skilled and trained personnel to work in special emphasis
    programs and provide EEO counseling services. Additionally, we have
    established collateral duty special emphasis program manager positions
    for Hispanic, African-American, Asian-Pacific Islander, Native
    American, Persons with Disabilities/Disabled Veterans and Federal
    Women's Program constituency groups.
    Personnel Division
        One of the major initiatives of the Personnel Division is H.R.
    Connect, an integrated human resources information system being
    developed by the Department of the Treasury. The goal of this system is
    to enhance efficiency by providing access to managers and employees to
    review and update human resources information, including on-line
    processing of personnel actions and training requests.
    James J. Rowley Training Center (JJRTC)
        The staff, curriculum and facilities at the James J. Rowley
    Training Center (JJRTC) continue to provide state of the art, real
    world, performance based training. The emphasis for future operations
    at JJRTC will be to add value to both the content of the training and
    the facility as a continued center of excellence by ensuring efficient
    operations and improving the management of existing resources. To
    improve operations and administration at the Center, the JJRTC staff is
    developing a scheduling database that will enable the efficient
    scheduling and usage of all facilities within the complex.
        Improvements in the area of course content and course evaluation
    remain a top priority. Recently, the JJRTC staff completed a special
    agent curriculum review and revision, and included a ``real-world,'' 6-
    day performance based field office practical exercise involving
    interactive, team oriented exercises in the areas of investigative case
    work management and arrest procedures for financial crimes,
    counterfeiting, and protective intelligence investigations. Further
    curriculum review addressing the duplication of effort at JJRTC and the
    Federal Law Enforcement Training Center (FLETC), in Glynco, GA has
    resulted in an estimated savings of $24,000 per special agent class.
    JJRTC is currently applying the same curriculum review and methodology
    to the Uniformed Division Officer Basic Training Course.
        JJRTC in collaboration with the Office of Protective Operations has
    completed the development and implementation of an improved protective
    methodology initiative. This course is entitled ``Counter Surveillance
    Unit Training,'' incorporates greater emphasis on the identification
    and utilization of surveillance skills for use during protective and
    investigative assignments. The methodology is aimed at improving
    performance efficiency and effectiveness in protective and
    investigative operations.
        Given our emerging function as the lead Federal law enforcement
    bureau involved in the planning, coordination and implementation of
    security plans at NSSEs, JJRTC has integrated improved training through
    hands-on practical exercises, tabletop exercises and computer
    simulations with local, State, other Federal law enforcement bureaus
    and hosting entities.
        The pursuit of academic excellence is in the best interest of the
    agency and essential to the success of the training program at JJRTC. A
    foundation to achieve this goal is seen in our continued partnership
    and commitment with Johns Hopkins University. This relationship
    incorporates management programs, validation and revision to special
    agent basic training testing, policy, test automation and statistical
    efficacy. Additional efforts are underway to develop advanced degree
    management courses of study.
        Consistent with Departmental guidance, the Secret Service, through
    the innovative use of resources, continues to develop effective methods
    and improve ways to train the workforce. One way this is being
    accomplished is through the Distance Learning Initiative. This
    initiative makes available to all employees, regardless of location,
    learning tools formatted on CD-ROM, video teleconferencing, and the
    Secret Service Intranet. Topics include diversity training, CPR and
    first aid kit review, conflict resolution, computer applications, legal
    information and other developmental courses. For the immediate future,
    the Secret Service is engaged in the evaluation and design of improved
    multi-media technology based applications for training to be used for
    improved and expanded distance learning courses to save on the expense
    of traveling to Washington, D.C. for training.
        During fiscal year 2001, the JJRTC facilities were used to train
    ten Special Agent Training Courses (240 students), nine Uniformed
    Division Officer Training Courses (192 students), and approximately
    32,000 in-service and re-qualification training visits for the
    workforce. The following construction improvements were also made
    during fiscal year 2001: completion of the Beltsville Field Office;
    infrastructure improvements on the support generator station and sewage
    lift station; security enhancements on the perimeter and inside
    facilities; and repairs to JJRTC and ``off site'' firing ranges. To
    ensure the continuity of operations (COOP), the Secret Service
    continues to examine the viability of using JJRTC as a designated
    relocation site in the event of catastrophe.
                                   conclusion
        Mr. Chairman, the Secret Service remains committed to the security
    of our homeland through the daily performance of our dual mission of
    protecting our Nation's leaders and safeguarding the critical financial
    infrastructure and payment systems. We will continue to utilize
    technology to our advantage to create efficiencies and enhance the
    effectiveness of our investigative and protective operations. Through
    developing partnerships and information sharing, especially in the
    areas of cyber crime, we see value being achieved.
        On behalf of the men and women of the Secret Service, I would like
    to thank you Mr. Chairman, Senator Nighthorse Campbell and the Members
    of the Subcommittee, for your leadership, vision and guidance. The
    Secret Service would not be where it is today without your support.
        This concludes my statement. I would be pleased to answer any
    questions that you or other members of the Subcommittee may have.

                    Bureau of Alcohol, Tobacco and Firearms

    STATEMENT OF BRADLEY BUCKLES, DIRECTOR
        Senator Dorgan. Next, we will hear from the Director of the
    Bureau of Alcohol, Tobacco and Firearms, Mr. Bradley Buckles.
    Mr. Buckles, you may proceed.
        Mr. Buckles. Thank you, Mr. Chairman, Senator Campbell,
    Senator Reed. I am proud to be here today representing the
    outstanding men and women of ATF. On behalf of all ATF
    employees, I would like to take this opportunity to thank you
    and your staff for your continuing support for our mission.
        The budget request for ATF today is for $913,114,000 in
    direct budget authority and 5,106 FTEs. With my full statement
    submitted for the record, I will keep these remarks brief.

                        TERRORISM AND HOMELAND SECURITY

        When I was here last year, the focus of ATF's budget
    request was on violent crime. However, ATF, along with law
    enforcement agencies throughout the United States, has reformed
    its priorities to meet the new challenge of terrorism and
    homeland security. Explosives and firearms remain the
    terrorists' tools of choice and we cannot afford to
    underestimate the dangers they present. As the agency charged
    with enforcing Federal firearms and explosives statutes, ATF
    will continue to play a critical role in the war on terrorism.
        Terrorists need money to buy explosives and firearms and
    otherwise fund their activities, and terrorists have found that
    there is untapped illegal money in alcohol and tobacco
    diversion schemes. ATF is investigating these crimes as well.
        Traditional firearms and explosives work, and the
    collection of $14 billion in revenue will continue to dominate
    the bulk of our efforts. However, ATF's responsibilities
    towards homeland security will be our top priority.
        In Joint Terrorism Task Forces, National Special Security
    Events, and other multi-agency endeavors, ATF is engaging in
    preventing and investigating terrorist activity. For example,
    through our explosives detection canine program, we have
    partnered with over 450 State, local, Federal, and foreign law
    enforcement agencies to help them prepare for and prevent
    potential terrorist acts.
        Having America safe from foreign terrorists is essential,
    but it is not enough. A mother afraid to let her children play
    outside because of the sound of gunshots feels terrorized, as
    well. And though gun homicides are down from their peak in the
    early to mid-1990s, the numbers are still chilling, at 10,000 a
    year. Moreover, recent statistics report that over half-a-
    million crime victims faced an assailant with a gun in calendar
    year 2000. Our collective goal must be to make the criminal
    with the gun the one who feels unsafe in America.

                        FISCAL YEAR 2003 BUDGET REQUEST

        Our fiscal year 2003 request addresses the challenges of
    fighting terrorism and violent crime that I have mentioned.
    With respect to these items, directly related to terrorism, we
    are seeking to annualize FTE funding from the 2002 terrorism
    supplemental provided for canine teams and for agents to be
    assigned to Joint Terrorism Task Forces.
        With respect to violent crime, our request builds on a
    foundation of existing initiatives to be deployed to the
    President's Project Safe Neighborhoods initiative. This request
    includes $11 million and 41 FTE for these continuing efforts.
        Finally, we are requesting $10.7 million to support
    construction of our new headquarters building. While this is a
    GSA building project, these funds are needed in the ATF budget
    for agency costs associated with security, technology, and
    technical support for the construction.

                               PREPARED STATEMENT

        In closing, I would again like to thank the committee and
    your staff for your continued commitment to ATF and its mission
    and I would be pleased to answer any questions you might have.
        Senator Dorgan. Mr. Buckles, thank you very much for your
    testimony.
        [The statement follows:]

                    Prepared Statement of Bradley A. Buckles

        Thank you Mr. Chairman, Senator Campbell, and members of the
    Subcommittee. I welcome this opportunity to appear before the
    subcommittee to report on the pivotal year just ended as well as to
    present ATF's goals for fiscal year 2003.
        As with all law enforcement agencies in the United States today,
    ATF faces an unprecedented challenge. Our world in 2002 is very
    different than it was a year ago. The magnitude and effect of the
    attacks on September 11 cannot be measured, but we are committed and
    united in ensuring the safety of all Americans from future attacks and
    from the continuing tragedy of violent crime in our society.
        In response, ATF has aligned its priorities to the current
    priorities of the President and the Nation--to the fight against
    terrorism and to make our communities safe from violence. ATF special
    agents, inspectors, and professional support personnel are making daily
    and significant contributions in the Nation's battle against terrorism.
    In furtherance of the objectives of Presidential Decision Directives 39
    and 62, ATF is charged with the responsibility of preventing terrorists
    from acquiring firearms and explosives, the principal instruments by
    which they carry out their terrorist acts. ATF's statutory mandates and
    unparalleled investigative expertise places us on the forefront of the
    battle against terrorism. We expect this to continue for some time, yet
    we recognize that we must strike a balance between the war against
    terrorism and the continuing battle of reducing armed violence in
    America.
        Our new national vigilance carries additional responsibilities, and
    I assure you ATF is up to the task. Whether the work being done
    involves investigation of a bombing or gun trafficking; participation
    in the Joint Terrorism Task Forces (JTTFs) with the FBI and other law
    enforcement agencies; or examination of explosives and firearms
    licenses and permit applications, possible terrorist connections must
    be examined and identified.
        ATF has always played a lead role in the investigation of violent
    crimes involving explosives, arson, or firearms, whether committed by
    terrorists or other criminals, and we are more determined and committed
    to our partnerships with other Federal, State, and local agencies in a
    broad range of prevention efforts and direct investigative efforts.
        Since the horrific events of September 11, the ATF is facing
    increased demands on its resources. The battle against violent crime,
    whether in the form of terrorism or otherwise, is a part of ATF's core
    mission responsibility. However, the dramatic increase in the threat of
    terrorism and the consequent shift in national priorities has required
    ATF to direct resources to JTTFs, National Security Special Events,
    inspections of explosives permittees and licensees, and other areas
    essential to homeland security, while still attempting to hold the line
    against violent criminals whose activities are not politically
    motivated.
        With the tremendous support of this committee during the past
    several years, we have hired entry-level agents and inspectors to
    reinvigorate our workforce. Because our mission is complex, and the
    laws and regulations we enforce intricate; it will take our new
    personnel 2 to 3 years of training to become proficient. The majority
    of our current investigative and terrorism-specific work will require
    our experienced agents, intelligence specialists, and explosives
    technicians to focus a majority of their time actively pursuing
    investigations with multi-agency peer partners. Therefore, even with
    these new personnel resources, we must still achieve a balance between
    protecting the public against further terrorist acts and ensuring that
    violent career criminals are also taken off the street.
        In an immediate response to the September 11 terrorist attacks, ATF
    provided 500 special agents and other investigative personnel to JTTF
    operations, dramatically increasing our on-going support to the
    Nation's anti-terrorism efforts. Participation in the JTTFs is one of
    ATF's top priorities for fiscal year 2002, and ATF continues to assign
    its most experienced criminal investigators to the JTTFs. With the
    support received from this Committee through supplemental funds, an
    additional 28 special agents will be assigned to JTTFs in fiscal year
    2002, including a full-time ATF program manager for the FBI's Counter-
    Terrorism Center.
        With the fiscal year 2002 supplemental funding received for our
    Canine Explosives Detection Program, ATF plans to train 30 additional
    special agent explosives detection handler/canine teams to provide
    canine support to the National Security Special Events, JTTFs, and
    other counter-terrorism efforts, but still remain involved in non-
    terrorism-related investigations and activities. The additional canine
    teams will be strategically located throughout the U.S. These teams
    will be able to meet critical needs in the field that directly
    contribute to the Bureau's goals of reducing violent crime and
    protecting the public. The canine teams will augment the efforts of
    ATF's field divisions, National Response Team (NRT) callouts, and
    special agent and explosive enforcement officer activities. The canine
    teams will establish partnerships with State and local agencies that
    lack canine resources, and they will be available to assist with
    counter-terrorism measures, such as searches and security sweeps at
    special events. The expanded program will allow ATF to perform
    diagnostic field evaluations of ATF-certified teams belonging to
    Federal, State, and local agencies.
        ATF is providing personnel to support Treasury's ``Operation Green
    Quest,'' a task force program created to combat terrorist financing and
    money laundering. ATF's expertise in alcohol and tobacco diversion and
    smuggling schemes will greatly serve this task force. Illegal proceeds
    from global and domestic tobacco and alcohol diversion and smuggling
    are often used to further criminal and terrorist activities. We will
    enhance the ``Operation Green Quest'' effort by having the ability to
    identify individuals who may have ties to terrorist organizations, and
    who utilize legitimate business fronts to conceal proceeds that finance
    terrorist activity. In response to the national investigation, ATF
    analyzed information of potential terrorists and their associates, and
    focused on possible alcohol and tobacco product diversion in support of
    their criminal activities.
        ATF detailed 45 special agents to the FAA's Federal Air Marshal
    Program for 6 to 18-month assignments.
        ATF provided, and continues to provide, analytical intelligence in
    support of joint Federal anti-terrorism efforts. There is important
    intelligence data available from ATF's internal investigative and
    regulatory databases, including the Arson and Explosives Incidents
    System (AEXIS), firearms tracing, permit holders, revenue collection
    and licensing. We have modified the AEXIS reporting system to interface
    with the Department of Justice, allowing the FBI to use ATF reports to
    identify possible terrorist connections. Additionally, numerous Bomb
    Data Centers throughout the world actively contribute to ATF's Arson
    and Explosives National Repository.
        Following the September 11 terrorist attacks, ATF sent a letter
    urging all explosives licensees and permittees to take immediate
    measures to ensure the security of their explosives inventories.
    Between October and December 2001, ATF field personnel conducted 7,459
    inspections of explosives licensees/permittees (out of a total of
    9,400). ATF personnel encouraged the proprietors to emphasize
    explosives security and accountability following the terrorist attacks,
    and to report thefts, losses, or suspicious activity to ATF and the
    appropriate local authorities. ATF carried out these inspections in
    order to gauge internal security controls and report any unusual
    purchase attempts; break-ins; or any other anomalies that would
    indicate a breach to security.
        In connection with the 7,459 inspections, ATF uncovered over 200
    instances of possible criminal violations. We also found 1,763
    instances of violations in record keeping, storage and conduct of
    business. Many follow-up inspections will be required to ensure that
    corrective actions were taken. In one instance we issued a notice of
    revocation and seized approximately four million pounds of explosives
    materials that were stored in violation of Federal explosives law.
        Since 1993, ATF has assigned a senior special agent as a
    representative to the Central Intelligence Agency's Counter-Terrorism
    Center. This ATF representative facilitated an exchange of operational
    intelligence that proved critical during the investigation of the first
    attack against the World Trade Center in 1993. Operational intelligence
    will be an essential component in resolving the latest terrorist events
    and preventing future events. On an ongoing basis, our ATF CIA
    representative is involved with tracking the international movement of
    U.S. manufactured firearms, explosives, and other contraband used in
    terrorist operations or the financing of terrorist operations.
        In addition, ATF's representatives to the FBI and CIA Counter-
    Terrorism Centers coordinate their activities with ATF representatives
    to the Financial Crimes Enforcement Network (FinCEN), the El Paso
    Intelligence Center, and the INTERPOL National Central Bureau. In so
    doing, they are able to share intelligence related to suspicious
    financial transactions and other activities within ATF's purview. Most
    important is the sharing of threat assessments, which focus enforcement
    action.
        ATF has expanded its electronic link to the intelligence community
    and has initiated protocols for transmitting classified terrorism-
    related intelligence from ATF Headquarters to field investigative
    elements. This link includes access to State Department and Defense
    Department classified data processing systems. The National Security
    Agency (NSA) has established a permanent detail position within the ATF
    Intelligence Division to provide ATF with real-time access to
    classified intelligence, international cable traffic, and national
    security information relevant to ATF's counter-terrorism efforts.
        ATF special agents and intelligence research specialists have
    supported security operations in numerous National Security Special
    Events, including the NATO 50 celebration, the Republican and
    Democratic National Conventions, the IMF/World Bank Conference, the
    United Nations General Assembly Millennium Meeting, and the
    Presidential Inaugural Ceremony. ATF had approximately 300 personnel
    participating in the security operation for the 2002 Winter Olympics in
    Salt Lake City and provided personnel and equipment throughout the
    event. ATF was well represented in the joint intelligence center, as
    well as the joint operational component.
        ATF is also a key player in the intelligence community-based Law
    Enforcement Working Group sponsored by the National Reconnaissance
    Office, under the direction of the Director of Central Intelligence.
    The Law Enforcement Working Group brings together representatives from
    Federal law enforcement and intelligence community organizations to
    focus on the appropriate and legal uses of technologies and data
    collected in support of law enforcement operations.
        ATF is appropriately situated and prepared to respond to the needs
    of our Nation, whether in our traditional role of investigating the
    criminal misuse of explosives and firearms, arson investigation,
    alcohol and tobacco diversion schemes, or contributing to our Nation's
    call to prevent and investigate terrorist acts. I would like to take
    this opportunity to briefly describe significant investigations that
    highlight ATF's integration and contribution to these efforts.
                          atf terrorism case examples
        ATF West Palm Beach Field Office.--This investigation was initiated
    as a firearms trafficking case. Foreign nationals, as well as U.S.
    citizens, were involved in the illegal purchase of explosives and
    firearms, including stinger missiles, on behalf of persons associated
    with the Taliban in Pakistan and Afghanistan. The suspects negotiated
    with an undercover ATF agent for the purchase of 200 stinger missiles,
    as well as a large quantity of assault rifles, T.O.W. missiles, and
    L.A.W.S. rockets. The weapons were to be transferred to members of the
    Taliban for use in Afghanistan. All suspects were arrested and
    indicted. ATF seized assets of individuals who had been hired to assist
    in money transfers and to launder diverted foreign funds into U.S.
    dollars. The funds for the purchase of the weapons came from Taliban
    and/or Al Qaeda sources in the Middle East. ATF partnered with the
    United States Customs Service, the FBI, the West Palm Beach Police
    Department, and the Palm Beach County Sheriff's Office in successfully
    investigating this case.
        ATF Ft. Lauderdale Field Office.--Firearms Trafficking
    Investigation: This case involved active members of the Provisional
    Irish Republican Army (IRA) who illegally purchased firearms and
    smuggled them into the Republic of Ireland for distribution in Northern
    Ireland. The suspects purchased the firearms at various Federal
    firearms licensees (FFLs) and through newspaper advertisements and gun
    shows in Ft. Lauderdale and Hollywood, Florida. The firearms were
    disassembled and packed into children's toys for shipment to Ireland.
    Once in Ireland, they were recovered by members of the Provisional IRA.
    All suspects in the U.S. were arrested, indicted and convicted of all
    firearms charges and are currently awaiting sentencing. Funds for the
    purchase of the firearms came from the Provisional IRA.
        Our fiscal year 2003 budget request will allow ATF to continue its
    efforts to reducing violent crime, contributing to homeland security,
    collecting all revenue due and protecting the public. The men and women
    of ATF are very appreciative of the Committee's trust and continued
    support, and as you will see, your investments have paid dividends. I
    now wish to highlight our accomplishments and detail our fiscal year
    2003 budget request, which will enable us to build on your investment.
                        fiscal year 2003 budget request
        ATF has a unique combination of law enforcement and regulatory
    responsibilities. As Director, I will continue to focus on our core
    mission and vision of ``Working for a Sound and Safer America . . .
    Through Innovation and Partnership,'' through our three principal
    strategic goals: (1) to reduce violent crime; (2) to collect all
    revenue due to the United States; and (3) to protect the public. ATF's
    unparalleled expertise in firearms, explosives, and arson makes it an
    essential component of the Nation's homeland security efforts. ATF will
    continue to target its resources towards preventing and responding to
    crime and violent acts that threaten public safety and seek to instill
    fear in Americans.
        ATF's fiscal year 2003 Salary and Expense (S&E) request is
    $913,114,000 in direct budget authority and 5,106 full-time equivalents
    (FTE). Our request represents an increase of $30,836,000, or 3.5
    percent over the total fiscal year 2002 enacted level of $882,278,000.
        A share of this increase will assist in maintaining current
    services program levels for mandatory payroll costs and inflation. The
    remainder is required for the new ATF headquarters facility and to
    enhance ATF's Integrated Violence Reduction Strategy (IVRS) efforts, of
    which the Youth Crime Gun Interdiction Initiative (YCGII) is an
    integral part.
        A new ATF national headquarters building and relocation remain a
    top priority of the Department and the Bureau to ensure the safety and
    security of ATF's workforce. An increase of $10,700,000 is requested to
    support the construction project. These funds are needed for one-time
    agency costs associated with security-related aspects of the building,
    as well as contracts for technology and agency technical support and
    management.
        The $11,000,000 and 41 full-time equivalents requested for IVRS
    will allow ATF to apply lessons learned from the YCGII program and
    institute these successful practices in smaller communities, thereby
    having more of an impact on the youth crime gun problem. It will also
    allow ATF to expand YCGII to 10 additional cities. This request will
    enable ATF to further implement our critical role in the
    Administration's Project Safe Neighborhoods initiative, which is
    designed to reduce firearms violence through Federal and State and
    local law enforcement partnerships throughout the Nation.
        To carry out our duty to be sound stewards of the taxpayers'
    resources, we will continue to focus on improving our business
    practices, seeking better results at the lower cost. We will continue
    to refine the integration of budget and performance and use
    performance-based budgeting to determine the best way to use available
    resources.
        Because of your unwavering support, ATF is healthy and able to
    achieve its mission goals in a more effective and productive manner. I
    believe the Committee will be pleased with its investment in ATF, which
    is best demonstrated through our accomplishments.
                      fiscal year 2001 atf accomplishments
    Reduce Violent Crime
        ATF initiated 15,852 YCGII, National Instant Criminal Background
    Check System (NICS), and other firearms investigations in fiscal year
    2001, resulting in 3,663 indictments and 4,179 convictions, which are
    16 and 36 percent higher, respectively, than in fiscal year 2000.
    Specifically, YCGII investigations rose 277 percent over fiscal year
    2000 levels to 2,306 investigations, producing a 62 percent rise in
    indictments and a 115 percent rise in convictions.
        ATF initiated 881 explosive investigations in fiscal year 2001,
    resulting in 271 cases being referred for prosecution, and 295
    convictions. This represents an increase over fiscal year 2000 of 22
    percent in investigations, 36 percent in cases referred for
    prosecution, and 235 percent in convictions. Additionally, ATF
    initiated 1,546 arson investigations in fiscal year 2001 and referred
    222 cases for prosecution, producing 136 indictments. This represents a
    23 percent increase in cases referred for prosecution and a 25 percent
    increase in indictments over fiscal year 2000.
        Some cases initiated in fiscal year 2001 are still ongoing and will
    ultimately result in additional cases referred for prosecution and,
    consequently, in additional indictments, defendants, and convictions.
        I would now like to present the primary programs in our efforts to
    combat violent crime and terrorism.
          integrated violence reduction strategy (ivrs)/project safe
                                 neighborhoods
        IVRS focuses on investigating violent career criminals and others
    prohibited from possessing firearms, as well as firearms traffickers
    who are responsible for diverting firearms to criminals. While IVRS is
    a national enforcement strategy, ATF recognizes that different
    communities have different law enforcement concerns. Therefore, IVRS
    integrates several core concepts that are adapted and applied in
    varying formulas to address the specific law enforcement needs of a
    community. Included in these efforts are the investigation of violators
    under the Youth Crime Gun Interdiction Initiative; the comprehensive
    tracing of crime guns by Federal, State, and local law enforcement
    agencies; and the effective regulation of the firearms industry. ATF
    also promotes community outreach through G.R.E.A.T., the Gang
    Resistance Education and Training curriculum that is delivered to
    middle-school students nationwide.
        Fiscal year 2002 enacted appropriations provided $3 million over
    the President's budget to increase the number of ATF agents to enforce
    existing firearms laws in support of the Administration's Project Safe
    Neighborhoods initiative. IVRS is an integral part of the President's
    Project Safe Neighborhoods initiative. It is a multi-agency initiative
    designed to tailor approaches to reducing gun violence to the unique
    needs of communities across the country.
        The following provides additional detail about several of the
    programs that make up IVRS:
    Armed Violent Criminal Apprehension Program
        This program seeks to identify, investigate, and recommend
    prosecution of a wide range of firearms offenders: career criminals who
    use firearms, individuals who are actively involved in armed violent
    criminal activities or armed drug trafficking, and other categories of
    prohibited persons in possession of firearms (e.g., convicted felons,
    fugitives from justice, illegal aliens, and individuals convicted of
    certain domestic violence misdemeanors or subject to certain domestic
    violence restraining orders).
    National Instant Criminal Background Check System (NICS) Referrals
        Since the implementation of the permanent provisions of the Brady
    Law in November 1998, 276,603 referrals of firearms purchase denials
    have been forwarded to ATF's Brady Operations Branch by the FBI
    National Instant Criminal Background Check System (NICS). The Brady
    Operations Branch, has reviewed and forwarded 70,899 of both delayed
    and standard (firearms not transferred) denials referrals to ATF Field
    Offices throughout the country for further investigation. Of this
    number, 12,657 were ``delayed denials,'' instances where a transfer of
    a firearm may have occurred.
        To date, a total of 2,737 NICS cases have been forwarded to U.S.
    Attorneys' Offices for prosecution, resulting in convictions of 340
    defendants. From November 1998 to the present, ATF has recovered or
    accounted for 7,058 firearms reported by the FBI to have been sold to
    prohibited persons.
        During the past fiscal year, the Brady Operations Branch initiated
    a system of screening the referrals received from the FBI in order to
    maximize the efficiency of limited personnel resources. These efforts
    on the part of the Bureau to maximize the efficiency of the NICS
    referral process greatly reduced the strain on existing resources thus
    allowing more focus on anti-terrorism efforts and other law enforcement
    efforts.
    National Integrated Ballistics Identification Network (NIBIN)
        In addition to the firearms tracing process, which helps law
    enforcement officials identify the perpetrators of violent crime, ATF
    provides investigative support through its leadership role in the
    National Integrated Ballistic Identification Network (NIBIN), a
    contributing program of the IVRS initiative. NIBIN provides for the
    nationwide installation and networking of automated ballistic imaging
    equipment in partnership with State and local law enforcement agencies.
    This technology uses automation to compare more ballistics evidence
    than would be possible using only manual comparisons. Links between
    otherwise seemingly unrelated crimes are discovered, and investigative
    leads are generated for police follow-up. In addition, the system makes
    it possible to share intelligence across jurisdictional boundaries,
    enabling State and local law enforcement agencies to work together to
    stop violent criminals.
        In fiscal year 2001, NIBIN equipment assisted law enforcement
    agencies in finding 956 links, or ``hits.'' In each of these instances,
    evidence from two or more crime scenes was identified as being
    potentially connected. The evidence was then referred to a certified
    firearms examiner for physical comparison and confirmation of the
    links. Currently, 125 law enforcement agencies are making use of this
    valuable technology, and it will be available to more than 200 agencies
    by the end of fiscal year 2002. As additional agencies participate in
    the program, ATF expects that greater numbers of hits will be generated
    that will ultimately lead to the resolution of more violent crimes
    nationwide.space
    Illegal Firearms Trafficking Enforcement Program
        The goal of ATF's illegal firearms trafficking enforcement is to
    reduce violent crime by identifying, investigating, and arresting
    individuals who illegally supply firearms to others prohibited from
    possessing them and to deter the diversion of firearms from lawful
    commerce into the illegal market.
    Youth Crime Gun Interdiction Initiative (YCGII)
        YCGII, a component of IVRS (as well as the Illegal Firearms
    Trafficking Enforcement Program) focuses agent and inspector resources
    on contributing to a reduction in youth violence, using the unique
    assets of crime gun tracing. The goals of the YCGII are to identify and
    interrupt the illegal supply of firearms to youths through enforcement
    and research efforts. The initiative, which consists of partnerships
    with State and local law enforcement agencies in 50 metropolitan areas,
    involves the tracing of every crime gun recovered in those localities.
    Through the National Tracing Center (NTC), the Bureau is able to obtain
    investigative leads to develop cases against illicit firearms
    traffickers who supply firearms to youths.
        During the 1990's, ATF developed new information systems to
    reinforce our firearms enforcement efforts. We can now use the crime
    gun itself as a vital investigative and evidentiary tool by tracing it
    back to its criminal user or its illegal supplier. In doing so, we are
    able to identify, arrest, and refer for prosecution both armed violent
    felons and those who are illegally supplying criminals and juveniles
    with guns. The YCGII has been the platform for systematically
    developing and managing crime gun tracing information.
        During fiscal year 2001, ATF provided focused YCGII training to
    7,976 ATF, Federal, State, and local law enforcement officers. ATF also
    conducted two seminars for ATF YCGII coordinators and their State and
    local counterparts. These seminars reached 150 law enforcement
    personnel and increased the awareness of and participation in
    comprehensive crime gun tracing by the attending agencies.
        ATF recently submitted its first YCGII quarterly report to the
    Committee, outlining the results and substantial progress made in
    implementing the recommendations made by the Treasury Inspector
    General.
    Comprehensive Crime Gun Tracing
        The Comprehensive Crime Gun Tracing Initiative that began in fiscal
    year 2001 provides nationwide comprehensive tracing capability and will
    provide faster trace results as technological upgrades are implemented.
    Consequently, there has been an increase of approximately 11 percent of
    trace requests over the year 2000, a percentage that is expected to
    rise. The National Tracing Center (NTC) provides State and local
    agencies with information on crime guns to support their law
    enforcement efforts by conducting over 230,000 traces in fiscal year
    2001 along with additional analysis. The NTC expects to receive in
    excess of 240,000 firearms trace requests in fiscal year 2002. The NTC
    provides valuable investigative leads to assist in solving crimes
    committed with firearms, and identifies those persons responsible for
    supplying crime guns to criminals. The NTC maintains the record of all
    crime guns traced by ATF, firearms stolen from firearms dealers and
    multiple sales of handguns. The Firearms Tracing System (FTS) provides
    data on firearms that is used by ATF special agents and inspectors to
    identify illegal firearms trafficking. The NTC has established direct
    electronic connectivity to transmit trace requests with over 159 law
    enforcement agencies to include Mexico and Colombia to further improve
    the accuracy and efficiency of firearms tracing and analysis. In fiscal
    year 2001, 50 percent of the trace requests received by the NTC were
    transmitted electronically using this technology. ATF is also
    developing a web-based trace submission, response and analysis system
    to reach a greater customer base at a substantially reduced cost with
    further improvements the accuracy and efficiency of trace request
    submissions.
    Gang Resistance Education and Training (G.R.E.A.T.)
        Another component of IVRS is ATF's Gang Resistance Education and
    Training (G.R.E.A.T) program. G.R.E.A.T. is a life skills competency
    program designed to provide middle-school children the ability to avoid
    gangs, resist conflict, make responsible decisions and develop a
    positive relationship with the law enforcement community. G.R.E.A.T. is
    designed to make attitudinal changes in children that will lead to a
    change in behavior. In fiscal year 2001, ATF provided funding to 200
    different agencies to support their participation in the G.R.E.A.T.
    Program, and 3,685 officers were certified to instruct in the
    G.R.E.A.T. program. Over 1,662 agencies have over 4,875 officers
    certified to teach the program. During fiscal year 2001, G.R.E.A.T.
    officers around the country taught approximately 389,787 school-aged
    children. Since the program began in 1992, nearly 3 million children
    have been taught. In addition, the program underwent a five-year
    longitudinal study by the National Institute of Justice. This study
    showed that the students who received the G.R.E.A.T. curriculum
    displayed less risk-seeking behaviors, showed lower rates of
    victimization, more negative attitudes towards gangs, and more positive
    attitudes towards police. This evaluation shows the effectiveness of
    the program and ATF's commitment to reducing youth violence nationwide.
        In fiscal year 2001, we continued our work with the Bureau of
    Indian Affairs (BIA) in an initiative to provide tribal police agencies
    training in the G.R.E.A.T. program. ATF provided two on-site training
    courses to BIA officers on tribal lands. These officers in turn then
    began to teach the G.R.E.A.T. curriculum to Native American children in
    their localities. We have scheduled an additional on-site training
    activity in fiscal year 2002 and will continue to work in a
    collaborative effort with BIA through their national conference and
    other conferences to promote the G.R.E.A.T. program to Native American
    officers and the community at large.
    Arson and Explosives Enforcement
        ATF has been resourceful in addressing violent arson and
    explosives-related crimes through enforcement and training. ATF's arson
    and explosives programs function interactively to provide a
    comprehensive proactive and reactive force in the fight to protect the
    American public from the criminal use of fire and explosives. Through
    these programs, ATF personnel work to thwart criminal and terrorist
    activity involving explosives at nearly every level of the
    implementation process. ATF's focus on arson and explosives crimes
    continues to be a major Bureau priority.
        Our National Response Teams (NRTs) are comprised of highly trained
    and well-equipped professionals that can be deployed within 24 hours to
    major bombing and fire scenes anywhere in the United States. The NRTs
    were activated 26 times in fiscal year 2001 to investigate major fire
    and explosives incidents. Of these 26 activations, 24 were to fire
    scenes in the United States. Eleven fires were determined to be arson,
    seven were determined to be accidental fires, and the causes of six
    fires were undetermined. One response was to the September 11, 2001
    attack on the Pentagon, and one was to an incident that was determined
    to be an accidental explosion. These 26 activations involved 93 deaths,
    25 injuries, and nearly $700 million in estimated property damages.
    After-action customer survey results rate our NRT services at 90
    percent or higher in the law enforcement community. Since its inception
    in 1978, there have been 511 NRT activations.
        In addition to investigating fire and explosives incidents, the
    NRTs provide assistance to other Federal, State, and local law
    enforcement agencies during special events. In fiscal year 2001, the
    NRT provided support at the Special Olympics in Anchorage, the Asian
    Bank Conference in Honolulu, the Presidential Inauguration, and most
    recently, to the Winter Olympics in Salt Lake City.
        ATF's International Response Team (IRT) participates with the
    Diplomatic Security Service of the Department of State to provide
    investigative assistance at international explosives and fire
    incidents. There have been 21 IRT activations since its inception in
    1991. The team has responded to vehicle bombings in Peru and Macedonia,
    explosions in Argentina targeting the Israeli Embassy, and other
    incidents in El Salvador, Ecuador, Surinam, Pakistan, Grenada, and
    Korea. The IRT was activated three times in 2001, to assist foreign
    governments in explosives investigations and fire scene examinations.
    The IRT activations were as follows:
      --Peru in March of 2001 following a fire in the National Bank of Peru
            that occurred during civil disturbances following the
            Presidential elections;
      --The Federated States of Micronesia in March to examine a fire scene
            in a government facility; and
      --In April of 2001 to assist the Guatemalan National Police in
            examining improvised explosive devices.
        Also present at many of these events were ATF's explosives
    enforcement officers (EEOs), or bomb technicians. In fiscal year 2001,
    ATF EEOs traveled with the Department of State's Antiterrorism
    Assistance Team to assess the capabilities of 10 foreign countries to
    respond to terrorist or explosives incidents. In addition, the EEOs
    participated in each National and International Response Team callout,
    testified in criminal proceedings 24 times, rendered 237 technical
    assists, wrote 389 technical statements, and performed many other tasks
    in support of ATF's explosives mission.
        ATF conducted 1,546 arson investigations across the country in
    fiscal year 2001. ATF's highly trained special agent certified fire
    investigators respond to incidents at all times of the day and night to
    make an initial fire cause determination when there is evidence of
    potential criminal acts warranting further investigation. Our 85
    certified fire investigators are the only Federally trained fire
    investigators in the government.
        ATF opened investigations on 58 explosives thefts in fiscal year
    2001, and ATF's Arson and Explosives National Repository Branch (AENRB)
    recorded the thefts of nearly 50,000 pounds of explosives and the
    recovery of over 12,000 pounds.
        In 1996, Congress, recognizing ATF's expertise in the investigation
    of fire/arson and explosives-related incidents, passed legislation
    authorizing the Secretary of the Treasury to establish a National
    Repository of information regarding arson incidents and the actual and
    suspected criminal misuse of explosives throughout the United States.
    Treasury's authority over this system was included in an amendment to
    Title 18, United States Code, Section 846. Subsection (b) was added, as
    follows:
        ``The Secretary is authorized to establish a national repository of
    information on incidents involving arson and the suspected criminal
    misuse of explosives. All Federal agencies having information
    concerning such incidents shall report the information to the Secretary
    following such regulations as deemed necessary to carry out the
    provisions of this subsection. The repository shall also contain
    information on incidents voluntarily reported to the Secretary by State
    and local authorities.'' The Secretary of the Treasury tasked ATF with
    establishing this National Repository.
        The AENRB maintains a state-of-the-art database that now contains
    detailed information on over 112,000 arson and explosives incidents.
    This database, the Arson and Explosives Incidents System (AEXIS), is
    used to trace stolen and recovered explosive material and military
    ordnance. In addition to providing vital investigative services to law
    enforcement personnel worldwide, the AENRB uses information from AEXIS
    to provide threat assessment support to Federal agencies and major
    event security task forces.
        For example, in 2001, the AENRB played a significant role in the
    investigation and subsequent conviction of a former Chicago police
    laboratory evidence technician/chemist. The technician was responsible
    for six bombings in Freemont, California. Targets included the chief of
    police, a city councilman, a water tower, and a wealthy Taiwanese
    national. The AENRB used AEXIS to compare the devices' design and
    components with other device data already in the system. Based on the
    comparison, AENRB personnel deemed the devices the most sophisticated
    they had ever seen. After a 3-month State trial, the technician was
    sentenced to 37 years to life in state prison.
        In the spring of 2001, the AENRB embarked on a measured and focused
    program to connect the Nation's fire and explosion investigators to the
    latest in information communications and management technology. The
    project, known as the Bomb Arson Tracking System (BATS), is designed to
    facilitate and promote the collection and dissemination of fire, arson,
    and explosives information among participating agencies. As presently
    envisioned, participating law enforcement agencies and members with
    established National Crime Information Center (NCIC) access will be
    able to access BATS via personal computer and Internet. Once connected
    to the ATF-secured and maintained extranet server, participants will be
    able to enter information, query information (both locally and across
    agencies), and produce relevant reports.
        The AENRB coordinates explosives intelligence internationally with
    12 Bomb Data Centers throughout the world and is involved in planning
    and coordinating the establishment of Explosive Repository Centers in
    Mexico and Colombia (Plan Colombia). In fiscal year 2001, AENRB
    personnel provided presentations on the Repository's capabilities to
    2,158 representatives of Federal, State, local, and foreign law
    enforcement or explosives industry representatives.
        ATF continues to vigorously enforce the Federal explosives laws
    (which include the crime of arson) by providing state-of-the-art
    training and expertise to Federal, State, local, and international law
    enforcement partners. This training will be instrumental in preparing
    our law enforcement partners for the fight against terrorists using
    their conventional ``tool,'' explosives. AEXIS is a vital investigative
    threat assessment tool used to reduce the incidences of bombings and
    arsons. The value of ATF's investigative skills is demonstrated by the
    fact that arsons at houses of worship have been solved at approximately
    twice the commercial arson solution rate.
    Explosive Detection Canines
        ATF-certified arson and explosives detection handler/canine teams
    support ATF's fire and explosives investigations. In fiscal year 2001,
    ATF's six special agent/canine teams searched 10,356 vehicles,
    buildings, or items during the execution of Federal, State, or local
    search warrants or in conjunction with searches or sweeps during ATF or
    Federal security details. Our canines supported preventive security
    efforts at such diverse events as the response to the September 11
    attack on the Pentagon, the Special Olympics, the execution of Timothy
    McVeigh, the 2001 Superbowl, and many others.
        The ATF Canine Training Center, located in Front Royal, Virginia,
    is now open and the kennels have been completed. In a training
    arrangement with the U.S. Department of State, ATF trains explosives
    detection canines for foreign countries to be used overseas in the war
    against terrorism, and to protect American travelers abroad. Since the
    start of the program in 1998, ATF has trained and certified 94
    accelerant-detection canines for State and local agencies. ATF has also
    trained and certified 310 explosives-detection canine teams for
    deployment in 13 countries around the world. Additionally, ATF has
    trained 47 explosives detection canine teams for other Federal, State,
    and local agencies, including the Federal Bureau of Investigation, the
    Central Intelligence Agency, and the Internal Revenue Service. With the
    funding provided in the fiscal year 2002 Anti-Terrorism Supplemental we
    will be expanding the canine training center in order to meet the
    increasing demand for these resources.
    Explosives Study Group
        ATF's Explosives Study Group (ESG) is examining the tagging of
    explosive materials for purposes of detection and identification;
    possibilities for rendering of common chemicals used to manufacture
    explosive materials inert; imposing controls on certain precursor
    chemicals used to manufacture explosives; State licensing requirements
    for the purchase and use of commercial high explosives; and the
    possible use of new prevention (explosives detection) technologies, as
    directed by section 732 of the Antiterrorism and Effective Death
    Penalty Act of 1996, as amended by the Omnibus Consolidated
    Appropriations Act for fiscal year 1997. A report on these findings is
    in the final stages of review.
        The ESG has also compiled a comprehensive list of State Licensing
    Requirements for the purchase and use of commercial high explosives,
    and is currently consulting with State regulators and industry members
    to develop recommendations for consideration by Congress that would
    advance public safety.
        The ESG has worked with The Fertilizer Institute (TFI) to expand
    the ``Be Aware for America'' program to address areas of vulnerability
    for distributors of ammonium nitrate fertilizer and agricultural
    chemicals. This expansion, the ``Be Secure for America'' program (an
    enhancement of the ``Be Aware for America'' program), is aimed at
    ensuring the security of the transportation, storage, and manufacturing
    of the agricultural chemicals produced and distributed.
        Additionally, the ATF is funding promising research at the Oak
    Ridge National Laboratory, including prototype development,
    engineering, and training on advanced sensing technologies for
    explosives detection. The ultimate objective is the development of a
    portable explosives detector that will function with a short, real-time
    response rate for trace amounts of explosives.
        The ESG has continued to communicate and work with other Federal
    agencies such as the Federal Aviation Administration, the U.S. Customs
    Service, the Department of Justice, and the Department of Energy. The
    goal is to achieve a coordinated effort to identify and direct
    resources toward the most promising technologies for both the detection
    of additives and the detection of explosives and explosive materials
    themselves.
    Partnerships
        ATF continues its tradition of partnering with other Federal,
    State, and local agencies on developing protocols and partnerships that
    will enable us to efficiently utilize our resources in the fight
    against terrorism and violent crime. Some of the agencies we have
    partnered with include the Central Intelligence Agency, the United
    States Department of State, the Customs Service, the Secret Service,
    the National Transportation Safety Board, the Department of Justice,
    Federal Bureau of Investigation, the United States Department of
    Agriculture, and the United States Chemical Safety and Hazard
    Investigation Board and the new Transportation Security Administration.
        Additionally, ATF has worked to establish a rapport with industry
    organizations such as the International Society of Explosives
    Engineers, the Institute of Makers of Explosives, the American
    Pyrotechnic Association, and the National Shooting Sports Foundation.
        ATF's criminal investigative analysts (Profilers), assigned to the
    FBI's National Center for the Analysis of Violent Crime (NCAVC), spent
    2 years conducting research and interviewing 38 imprisoned bombing
    offenders. In June, they published the findings of their joint study
    with the NCAVC. The study, ``Behavior and Characteristics of Bomb
    Related Offenders,'' will serve as a catalyst for further research into
    understanding the motivations and characteristics of subjects who use
    explosives for criminal intent.
        Our profilers are also assisting in our Nation's war on terrorism.
    They are developing in-depth assessments of the 19 hijackers and the
    individual(s) responsible for utilizing mail services to deliver
    Anthrax spores, and they are working with their FBI counterparts to
    conduct ongoing threat assessments.
        ATF continues to serve on the United States Delegation to the
    Framework Convention on Tobacco Control at the World Health
    Organization and takes a lead in the negotiations on the protocol aimed
    at preventing smuggling and illicit trade in tobacco products that
    deprive the Government of revenues from these products. As such, ATF is
    considering hosting a conference for countries to begin informal
    negotiations on illicit tobacco trade later this summer.
        In March 2001, ATF entered into an agreement with United States
    Customs Service, the Royal Canadian Mounted Police, and the Canadian
    Customs and Revenue Agency to establish a working partnership on
    Contraband Cigarette Trafficking. As a first step, a Tobacco Threat
    Assessment is being developed to determine the nature and scope of the
    tobacco black market in the United States and Canada to gauge the
    threat posed by large scale cross-border and international cigarette
    trafficking.
                            collect the revenue due
        For fiscal year 2001, ATF continued to honor its obligation to
    fairly and efficiently collect approximately $14.1 billion in revenue
    in accordance with current laws. In fiscal year 2001, ATF collected the
    following revenue: $13.8 billion in alcohol and tobacco excise taxes;
    $176 million in firearms and ammunition excise taxes; $103.6 million in
    special occupational taxes; and $6 million in licensing and transfer
    fees, for a total of $14.1 billion.
        In fiscal year 2001, ATF collected an additional $4.2 million due
    to excise tax examinations and accepted approximately $1.6 million in
    penalties, interest, and offers to compromise taxes due for unpaid or
    underpaid taxes, and offers-in-compromise for other violations, such as
    record keeping violations.
        Additionally, in fiscal year 2001, ATF opened 77 alcohol and
    tobacco diversion investigations. Seizures of alcohol and tobacco
    monies and real property involved in criminal violations totaled over
    $1.8 million. Alcohol diversion investigations in fiscal year 2001
    resulted in 10 cases with 16 defendants being recommended for
    prosecution. Tobacco cases referred for prosecution were 20 with 37
    defendants being recommended for prosecution. There were 39 convictions
    recorded as a result of these criminal prosecutions. Several members of
    organized crime groups were successfully prosecuted for alcohol and
    tobacco related criminal activity.
        During 2001 and 2002, ATF mailed informational notices and floor
    stock tax returns to over 307,000 sellers of cigarettes for floor stock
    taxes that are due in April 2002. To date, we have collected over
    $980,000 in floor stocks taxes.
        In August of 2001, ATF's Strategic Leadership Team approved a
    proposal to establish a new ``Tax Audit Division'' within the Office of
    Alcohol and Tobacco. This new division will, when fully implemented,
    assume responsibility for field audits of excise taxpayers with annual
    tax liability over $250,000. This organizational change is intended to
    address concerns over decline in field audit activity in recent years
    and to ensure adherence to audit standards in the work performed. Much
    of the decline in audit activity is the result of redirecting inspector
    resources to firearms and explosives programs. ATF believes that an
    effective and efficient audit program is in the best interest of both
    the Government and the industry.
        In addition, in fiscal year 2001, ATF instituted a pilot program
    under Pay.gov. For fiscal year 2001, $1.9 billion, or 13 percent of all
    revenue collected by ATF, was through Pay.gov. Based on the collection
    figures, we estimate a modest increase of our tax collections will be
    received through the Pay.gov program in fiscal year 2002. ATF is
    committed to expanding availability of Pay.gov to all excise taxpayers.
    This E-gov initiative supports both the Government Paperwork
    Elimination Act and the President's Management Reform Agenda.
                               protect the public
    Firearms Regulation
        As of January 2002, there were 103,358 Federal firearms licensees
    in the U.S. authorized to conduct commerce in firearms. In an effort to
    ensure firearms industry members fully understand the regulatory
    requirements of maintaining their license, we conducted 52 seminars for
    licensees in fiscal year 2001.
        ATF's National Firearms Act Branch maintains the National Firearms
    Registration and Transfer Record (NFRTR), which is the central registry
    of NFA firearms, such as machineguns, short-barreled rifles, short-
    barreled shotguns, silencers, and destructive devices. At the end of
    calendar year 2001, the NFRTR had 1,419,220 items in the registry. ATF
    searches the NFRTR in support of criminal investigations and regulatory
    enforcement inspections. The NFA Branch is in the process of imaging
    and indexing all NFA records back to 1934, which will make it easier to
    verify the accuracy of the data in the computerized registration
    system.
        Our Firearms and Explosives Imports Branch (FEIB) is responsible
    for processing all applications for permits to import firearms,
    ammunition, and other defense articles into the United States, and for
    maintaining the registry of commercial importers of such articles. In
    calendar year 2001, FEIB received and processed 16,423 import permit
    applications, and 300 registration applications.
        In fiscal year 2001, ATF inspected approximately 4,000 licensees,
    resulting in the detection of 6A,675 violations and 1,011 referrals to
    law enforcement. ATF also inspected approximately 5,500 Federal
    Firearms License (FFL) applicants, resulting in the detection of 182
    violations and 184 referrals to law enforcement.
        To supplement the general inspections, ATF continues the
    implemented ``focused'' inspection policy begun in October 1998, that
    directs field personnel to select Federal firearms licensees (FFLs) for
    inspection based on information developed by the Crime Gun Analysis
    Branch of the NTC. This valuable information provides indicators of
    possible illegal firearms trafficking.
    Explosives Regulation
        In addition to the inspections of explosives industry members after
    the September 11 attacks, ATF inspectors carried a considerable
    workload throughout the year in helping to ensure the lawful storage of
    explosives materials. In fiscal year 2001, inspectors completed 5,364
    full inspections, which encompassed both explosives applications
    inspections and part of the 9,400 explosives licensees and permittees.
    They identified and corrected 1,813 violations. In fiscal year 2002 we
    will direct additional resources to conduct explosives inspections with
    the goal of achieving a 100 percent inspection rate.
    Alcohol Regulation
        In fiscal year 2001, ATF processed over 81,000 applications for
    beverage alcohol label approval. This represents a 10 percent increase
    over the previous year. Twenty percent of these applications were
    denied approval due to non-compliance with regulatory and statutory
    requirements. Eighty percent of these applications were processed in 13
    days.
        ATF also initiated a project to develop and implement electronic
    submission of applications for label approval via the Internet. This
    will enhance processing time and efficiency and should increase
    customer satisfaction. We are holding a series of meetings with
    industry representatives to explain the system, answer their questions,
    and listen to their recommendations.
        ATF settled 12 cases involving alcohol beverage mislabeling in
    fiscal year 2001. Most resulted in monetary settlements while one
    particularly egregious case produced a 45 day suspension of winery
    operations.
        ATF continues to participate in various trade delegations headed up
    by the United States Trade Representatives' office that relate to
    global trade in the commodities that we regulate. Through this effort,
    we assist in improving the conditions for international trade that
    increases consumer protection and choices with respect to these
    commodities. Additionally, these improvements in global trade enhance
    the United States economy and the economies of our trading partners.
        We have initiated a number of projects to revise forms and
    regulations in the plain language style. These changes help to make
    requirements easier to understand and improve compliance by more
    effectively communicating legal obligations for industry members.
                            bureau-wide initiatives
    Training for Foreign, Federal, State, and Local Authorities
        ATF continues to assist other Federal, State, and local agencies in
    their fight against terrorism and violent crime by providing training
    based on our unique expertise. For example, ATF is the leader in
    Federal law enforcement when it comes to providing training to
    thousands of Federal, State, local, and international law enforcement
    officers in the areas of arson investigation, explosive identification
    and regulation, firearms trafficking, and post-blast investigations.
    Sharing ATF expertise, technology and lessons learned helps to prepare
    America's first responders for preventing, mitigating, and
    investigating potential terrorist incidents, thus helping in the global
    fight against terrorism.
        I would now like to take a moment to highlight some of the
    outstanding training we provide.
    Explosives Training
        For the past several years, to protect the Nation's largest
    airports, the Federal Aviation Administration (FAA) and ATF have teamed
    together to conduct national Seminars on Terrorism and Explosives
    (SEMTEX) and field training exercises that better prepare and train
    aviation, security, and law enforcement personnel in explosive
    countermeasure techniques. In fiscal year 2001, ATF trained 312
    personnel. ATF and FAA are currently updating this curriculum in light
    of September 11. In fiscal year 2002, 300 additional personnel are
    expected to be trained.
        During fiscal year 2001, we delivered the Advanced Explosives
    Destruction Techniques (AEDT) course 8 times to approximately 200
    students. This has been one of our most successful State and local
    training programs and is in great demand. The audience for this
    training is State and local bomb technicians. ATF explosives experts
    developed this course because more bomb technicians are injured while
    trying to dispose of recovered explosive materials than performing any
    other activity, including render safe operations on unknown improvised
    devices discovered in the field. It is the only training of its kind in
    the country. To meet the large demand we again have increased the
    number of courses to be offered this fiscal year to twelve.
        During fiscal year 2002, ATF in conjunction with the U.S.
    Department of Education, will develop a CD-ROM training platform titled
    Bomb Threat Management and Response. This training CD-ROM will provide
    a standardized bomb threat management and response template that can be
    used by school administrators to develop a customized response program
    for their individual school. This CD-ROM will be completed in April
    2002 and distributed to all school districts, local law enforcement
    offices and ATF offices. It is anticipated that ATF field personnel
    will be called upon by the school districts to help establish and
    implement these management and response plans.
    International Training
        Through a continuing partnership with the Department of State, ATF
    conducted 5 training sessions at various International Law Enforcement
    Academies (ILEAs). We provided training to 1,031 law enforcement
    officers from more than 30 countries, including courses on basic and
    advanced firearms and explosives identification, firearms trafficking,
    postblast investigation, serial number restoration, and alcohol and
    tobacco licensing, taxation, and diversion.
    Firearms Training
        In support of the President's Project Safe Neighborhoods (PSN)
    initiative, ATF has developed a training program that will provide
    necessary tools and information to all participants. The target
    audience for this training includes Federal, State, and local line
    prosecutors, Federal, State, and local investigators, and uniformed
    police officers and local police department managers. Last month
    (January), ATF provided an intensive three-day training program in
    Reno, Nevada to the U.S. Attorney's Office, the Reno Police Department,
    and other State and County law enforcement and prosecutorial personnel
    from the area. This training event provided nearly 300 law enforcement
    officials with training that will enable them to implement the PSN
    strategy in the Reno, Nevada area and make their community a safer
    place for all.
        Through the National Firearms Examiner Academy (NFEA), ATF
    developed a unique and innovative training program that has received
    much acclaim and recognition. This successful program represents a firm
    partnership between ATF, State and local police departments, and the
    firearms and ammunition industry. Designed to provide comprehensive
    training to entry level firearms examiners from State and local crime
    labs, the NFEA has developed a yearlong training curriculum that has
    become an all-inclusive benchmark for education in this field. The
    selection process is highly competitive and the course work demanding;
    to date, ATF has graduated 18 examiners. Examiners completing this
    training are skilled in the ATF NIBIN technology, which greatly
    enhances the efficiency and effectiveness of ballistics evidence
    analysis and gun crimes solved.
    Arson Training
        ATF and the U.S. Fire Administration (USFA) are redesigning and
    deploying a web-based system managed by the USFA, entitled ``Fire and
    Explosion Investigation Management System.'' This system will include
    information on fires and fire-related explosives incidents that occur
    nationwide for use by the fire and explosion investigation community.
    In partnership with the insurance industry, we have finalized the
    development and begun the distribution of InterFIRE, a virtual reality,
    CD-ROM-based training tool that is intended to establish ``best
    practices'' in fire investigation and bring fire investigators to a
    base level of knowledge. To date, we have contracted to create and
    distribute approximately 30,000 CD-ROMs.
        To strengthen cooperation between investigators and prosecutors,
    and to encourage prosecution of cases, ATF provided four Advanced Arson
    for Prosecutors classes in fiscal year 2001, training 119 prosecutors
    from across the country.
        During fiscal year 2001, two classes were delivered in Advanced
    Cause and Origin/Courtroom Techniques at the Federal Law Enforcement
    Training Center. This highly advanced and technical program provided
    training to 60 students from across the country. These individuals are
    full-time public safety employees whose workloads are focused primarily
    upon the investigation of arson-related crimes.
    Human Resource Strategies and Accomplishments
        fiscal year 2000 annualization of expanded programs and
    supplemented by fiscal year 2001, action by the Committee created an
    intensive hiring effort by ATF this past year. Expansions were made to
    the IVRS and its component program, YCGII, crime gun tracing and NIBIN.
    In an effort to backfill positions lost through normal attrition and
    simultaneously hire hundreds of new personnel, ATF processed 367 gains
    to the agent rolls, 184 gains to the inspector rolls, and 310 support
    positions, totaling 861 personnel actions. These efforts supported a
    489 net gain to the Bureau's rolls with 291 agents, 153 inspectors, and
    45 support personnel. ATF started the year with 4,597 on duty and ended
    with 5,086. Over 200 new special agents and 148 new inspectors were
    provided basic training classes at the Federal Law Enforcement Training
    Center.
        ATF completed the second year of a pilot Treasury Demonstration
    Project for Designated Critical Positions that addresses major
    recruitment and retention issues. The pilot program, authorized by
    Congress in 1998, allowed ATF to test new management practices designed
    to improve our capacity to recruit, develop and retain a workforce of
    the highest caliber. The project includes a broad banding and pay-for-
    performance compensation system. Also included are other flexible
    recruitment and retention options, such as expanded recruitment and
    relocation bonuses, retention allowances, certification and licensure
    bonuses, and education supplements. Unlike other demonstration
    projects, ATF employees were given the option of participating.
    Approximately 90 percent of the eligible employees (primarily in our
    scientific and technical occupations) elected to participate in the
    project.
        We are continuing to enhance our pilot flexi-place program for
    field inspectors that we established last year. Data collected during
    the implementation of the flexi-place pilot for field inspectors
    indicates significant interest in continuing the program. Therefore,
    ATF is preparing to expand the flexi-place pilot project to include
    bargaining unit employees at ATF Headquarters within the next few
    months.
    Internal Training Activities
        Excellence in performance and programs requires continuous training
    and development, and the Bureau is committed to fully developing the
    individual and collective skills of its employees. ATF provides high
    quality, innovative training programs, thus improving individual and
    organization performance in support of ATF's Strategic Plan.
        In fiscal year 2001, ATF provided nearly 9,000 training sessions
    for ATF personnel. ATF provided basic training to 212 agents and 148
    inspectors through the New Professional Training program (NPT). The New
    Professional Training Program is designed to provide a uniform approach
    to the training and development of new ATF employees. Training
    initiatives enhance employee development and performance in a variety
    of technical training programs, which seek to expand the base of
    employee knowledge and improve skills regarding ATF's roles, missions,
    and capabilities. In much of the technical training provided, there are
    either pre-tests for admission or academic requirements for graduation.
    In addition, lessons on ethics and integrity, customer service,
    teamwork, and accountability to the American public are woven into many
    of the training programs.
    Physical Security and Safety Program Focus
        Although we have always treated the safety and security of our
    employees and assets as high priority concerns, the events of September
    11 and subsequent events increased both our sensitivity to the risks
    that confront us and our efforts to enhance protection and
    responsiveness. Our multi-faceted response to terrorist threats
    included and continues to include a range of activities. We have re-
    evaluated our physical security program throughout the Bureau and have
    already begun addressing areas in which we see room for improvement.
    Working both as an individual bureau and as part of a Treasury-wide
    effort, we have enhanced our emergency management efforts by updating
    our Continuity of Operations plans, establishing an Emergency
    Management Operation Center, improving employee understanding of
    evacuation and relocation plans, and upgrading the functionality of our
    relocation sites.
        To prevent job-related injuries and illnesses, we acquired
    respiratory protection equipment for all special agents and other
    employees who may be exposed to hazardous materials. We made
    substantial progress on an ATF hazardous material protection directive
    that addresses a wide range of issues including use of respiratory
    equipment, training, physical requirements, and medical monitoring of
    individuals who have had exposures. The various components of our
    hazardous materials protection program are of vital importance to ATF
    because of our responsibilities in investigating arsons and because of
    the risk of chemical and biological exposures during investigations of
    terrorist activities. That directive will be issued in the first half
    of fiscal year 2002. Through information dissemination and training, we
    have educated our employees so they may identify and properly handle
    any potential threat that may be present in the large volume of
    packages and documents we receive. In addition, we have implemented
    special mail handling and routing procedures to minimize the
    possibility of exposure to biological and chemical threats.
                        critical infrastructure projects
    New Headquarters Facility
        Today, a new site for the permanent home of the Bureau of Alcohol,
    Tobacco and Firearms is a reality. With the unwavering support of this
    body, ATF and GSA made significant progress in fiscal year 2001 towards
    relocation of ATF to a safer and more secure headquarters for its
    workforce and mission. Our new headquarters is being heralded as having
    one of the most significant design concepts for a Federal office
    building located in a major urban center. Building construction for the
    new ATF headquarters will begin in January 2003. Accordingly, in our
    fiscal year 2003 budget, we are requesting $10.7 million to fund our
    project involvement with GSA, which includes reimbursable agency
    construction items, and a state-of-the-art technology and security
    infrastructure and construction process. ATF will remain a full partner
    to GSA for daily management and coordination activities throughout the
    construction project. Strategies to provide the best opportunity for
    cost controls and savings are being incorporated at each juncture. ATF
    plans to occupy this landmark facility in the second quarter of fiscal
    year 2005.
    New National Laboratory Center
        The ATF National Laboratories provide service for the domestic war
    on terrorism through our expertise in investigating and analyzing
    evidence related to firearms, explosives and arson crimes. ATF is
    grateful our scientific operations and national forensic investigation
    programs will soon be carried out in a new ATF National Laboratory
    Center facility. During 2001, enormous strides were made on this
    project. By the end of the fiscal year, we were 60 percent complete
    with site and construction, major mechanical systems on site to be
    installed. Today, the interior systems are being prepared and
    technology infrastructure and wiring are about to begin. ATF will move
    from its outdated Rockville laboratory to the new facility by December
    of this year. We are excited to have the opportunity to advance our
    mission and provide even greater capabilities in identifying criminals
    and collecting revenue. Important breakthroughs in facilities
    engineering during the design of the Fire Research Center of the new
    National Laboratory will allow ATF to test and gather scientific data
    from reconstructed fire scenes as large as a two-story town house. The
    fire science and arson investigation communities will greatly benefit
    from the work of the Fire Research Center. As members of the Committee
    are aware, costs for the project went beyond what was anticipated. ATF
    is grateful for the support received through fiscal year 2001
    reprogramming and Treasury commitments, and we are confident these
    investments are in the very best interest of the law enforcement, the
    science community, and the citizens we protect.
    Expansion and Renovation of Martinsburg Facility
        Renovation of the Martinsburg facility is a 10-month construction
    effort projected to begin on June 1, 2002. We believe that we will be
    able to begin relocation of the Tracing Center prior to final
    completion of the construction as individual areas in the building are
    completed. If there are no delays in the construction, it should be
    completed by March 31, 2003. Complete relocation of ATF'S National
    Tracing Center will follow immediately. The Committee's support of this
    facility is greatly appreciated.
                         president's management agenda
    Information Technology
        We continue to place the best available technology into the hands
    of each ATF employee, enabling us to work more efficiently and to
    achieve our strategic goals. In August 2001, we began our first seat
    management equipment refresh cycle, which will replace about 6,500 ATF
    desktop and laptop computers under our Seat Management contract. We
    will complete the nation-wide replacement by mid-March 2002. We
    continue to lead the Federal Government in outsourcing our end-user-
    computing support to Unisys Corporation, and in providing the best
    possible support to the personnel responsible for carrying out the
    Bureau's missions.
        One significant effort we started in May 2001 was the
    implementation of a disaster recovery system. This system will provide
    ATF with the ability to run either any mission critical application
    from a primary or an alternate location. This effort took on a greater
    significance after the events of September 11. This project is almost
    complete; we have successfully tested the recovery of all Headquarters
    mission critical applications at our alternate site in West Virginia.
    Security Measures
        Another significant information technology effort for the Bureau is
    improving the security posture of all systems. All ATF systems undergo
    a rigorous certification and accreditation process to ensure risks are
    assessed and either addressed or mitigated. Internet vulnerabilities
    are assessed and addressed on a continuing basis. The Bureau has
    implemented rigorous configuration management and systems development
    life-cycle processes. These processes ensure that systems in
    development are designed to be as secure as possible, and that changes
    to operational systems do not introduce security vulnerabilities. ATF
    has a documented computer security incident response plan that provides
    early indication of potential problems and a proactive response to
    actual problems. Finally, a system auditing capability is being
    implemented to track detailed user actions in all systems and identify
    additional potential security issues. We have made remarkable progress
    in securing our information technology systems over the past year.
    E-Government
        In May 2001, ATF's Strategic Leadership Team approved the formation
    of an office under the CIO to manage ATF's electronic filing projects
    and strategies. Using current Internet based technologies; ATF's goal
    is to provide the necessary tools to permit the 630,000 members of the
    alcohol, tobacco, firearms and explosives industries to file required
    forms and reports using secure Internet transactions.
        ATF developed a Business Case for fiscal year 2002 and fiscal year
    2003 for its E-Government Investment. The fiscal year 2002 Business
    Case was presented to and endorsed by Treasury's Capital Investment
    Review Board.
        Although the completion of full electronic transactions with
    external customers relies on integration projects, ATF is developing
    the following interim solutions:
      --E-COLA.--Responding to the alcohol beverage industry's request to
            file Certificates of Label Approval electronically, ATF funded
            the development of the electronic Certificate of Label Approval
            system. The system is scheduled to be completed by the end of
            fiscal year 2002.
      --Firearms Services Technological and Management Enhancements.--In
            fiscal year 2001, appropriated funds were earmarked to provide
            technological and management enhancements to the National
            Licensing Center, the National Firearms Act Branch, and the
            Firearms and Explosives Imports Branch. The 2 million earmark
            was utilized for three significant developments:
            standardization of all the data elements between the various
            Services databases, so that all the databases will be
            consistent and will be able to ``speak'' to each other;
            development of retrievable management analytical reports
            through creation of a metadata layer; and development of a
            prototype which, after development and testing, will enable
            electronic submission (e-filing) of the Imports permit
            application.
      --Firearms Tracing.--In fiscal year 2001, web-based tracing
            capabilities for the Electronic Trace Submission System (ETSS)
            began a pilot project. Since ETSS saves at least 4 days in the
            processing time for firearms trace requests, the current phase
            of the FIT project is developing solutions to expand the system
            for use by other police agencies.
      --Pay.gov.--In fiscal year 2000, ATF entered into a partnership with
            Treasury's Financial Management Service (FMS) to pilot a
            Government-wide system, called Pay.gov, for conducting
            financial transactions between agencies and their external
            customers. Beginning in fiscal year 2001, a limited number of
            excise taxpayers have participated in filing their excise tax
            returns and payments through Pay.gov. As of October 1, 2001,
            $1.9 billion in tax payments have been processed through this
            system. In fiscal year 2002, FMS will extend the capabilities
            of Pay.gov to include a pilot with ATF for filing monthly
            operating reports submitted by the companies included in the
            tax return pilot.
      --FFL-EZ Check.--Responding to a need for firearms licensees to check
            the license status of purchasers who identify themselves as
            Federal firearms licensees, ATF developed the FFL-EZ Check
            system in fiscal year 2000. Currently, the FFL-EZ check system
            has been accessed over 100,000 times for FFL verification.
                                   conclusion
        Since the tragic events of September 11, our National priorities
    and the priorities of our Government institutions appropriately
    changed. Although it has always been the responsibility of Government
    to ensure the safety and well being of those we serve, ATF's
    contribution to these efforts are even more critical. I assure you that
    ATF is ready to meet the new challenges that lie ahead.
        ATF will continue our National effort in combating terrorism and
    violent crime through effective use of investigative techniques,
    cutting-edge technology and collaborative sharing of Federal resources
    with our Federal, State and local law enforcement counterparts. Through
    judicious management and use of the resources you provide the Bureau
    will continue to make America sounder and safer by reducing violent
    crime, collecting revenue, and protecting the public. I would be
    pleased to answer any questions you may have and I would like to
    express my sincere appreciation for the support that the Committee has
    provided us. I look forward to working with the Committee to further
    our mutual goals of providing the best service to the American people.

                      Financial Crimes Enforcement Network

    STATEMENT OF JAMES SLOAN, DIRECTOR
        Senator Dorgan. Next, we will hear from the Director of the
    Financial Crimes Enforcement Network, Mr. James Sloan. Mr.
    Sloan, you may proceed.
        Mr. Sloan. Thank you, Mr. Chairman, Senator Campbell,
    Senator Reed. Thanks to all of you for this opportunity to
    appear today to discuss the Financial Crimes Enforcement
    Network's fiscal year 2003 budget. We greatly appreciate your
    ongoing consideration of our needs.
        Last year was an important and pivotal year for FinCEN. The
    tragedy of September 11 brought about a greater demand for our
    unique network and analytical expertise in the areas of
    financial crime and terrorist financing. Mr. Chairman, I would
    like to say how very proud I am of the men and women of FinCEN
    who, like many of my colleagues you have heard from today
    throughout Government, are making significant contributions in
    our Nation's war against terrorism.
        My remarks today will briefly summarize our priorities as
    we move forward to meet our obligations, and thank you for
    including my entire statement in the record.

                        COUNTERTERRORISM INVESTIGATIONS

        Today, FinCEN's top priority is supporting counterterrorism
    investigations. On September 13, because of our unique mission
    capabilities and our existing infrastructure, we were able to
    immediately implement several new initiatives and enhance core
    programs to assist in the investigation of the attacks on the
    United States.
        We directed over 30 percent of our resources to the initial
    investigation and those efforts included, for instance, the
    establishment of a 24-hour operations center to coordinate
    investigative requests and responses, which included enhanced
    on-site liaison with the FBI's Counterterrorism Center and
    eventually U.S. Customs' Operation Green Quest. We established
    a 24-hour, toll-free hotline for financial institutions to
    report the essence of suspicious transactions that might relate
    to terrorist activity. We began facilitating multi-agency
    efforts by temporarily housing the Foreign Terrorist Asset
    Tracking Center at FinCEN in our secure facility, alongside our
    own existing interagency task force operations, and by
    enhancing international cooperative efforts with other Nations'
    financial intelligence units. In fact, in October of 2001,
    following the FATF meeting that was earlier discussed, FinCEN
    hosted a special meeting of the Egmont Group of FIUs on
    terrorist financing to support the law enforcement
    investigation in the wake of September 11.

                                USA PATRIOT ACT

        In addition to FinCEN's immediate responses to September
    11, Title III of the USA PATRIOT Act has provided us with new
    authorities and opportunities to augment our primary mission to
    support law enforcement. In fact, FinCEN is responsible for
    implementing over half of the 44 provisions contained in Title
    III and has a key role in many of the working groups
    established by the Department of the Treasury to address the
    other provisions; all of which have various due dates over the
    next 9 months.
        Though we are making good strides in implementing the
    numerous provisions of the USA PATRIOT Act, I would be remiss
    if I did not add that the resource implications of the Act
    cannot be fully estimated at this time, and could be
    substantial in the years to come. So I would like to thank you
    and the members of the subcommittee for the timely support you
    have already provided to FinCEN through the Homeland Security
    Emergency Supplemental. Your responsiveness is enabling us to
    meet our immediate increased obligations.

                         USE OF INFORMATION TECHNOLOGY

        As Director, I can assure you that FinCEN will continue to
    explore creative ways to effectively leverage resources. In
    fact, two of our most successful programs for providing
    Federal, State, and local law enforcement with Bank Secrecy Act
    data rely heavily on leveraging our resources with cutting-edge
    information technology. That would include our popular Gateway
    program. In fact, in fiscal year 2001, we supported a 10
    percent increase in investigative requests through that
    program.
        More than 300 Gateway customers now participate in our
    Secure Outreach Direct Net, which allows them to obtain Bank
    Secrecy Act data over the Internet in a secure mode. In fact,
    one of the most useful features of the Gateway program alerts
    FinCEN that two or more agencies have an interest in the same
    subject. Last year alone, there were over 1,500 opportunities
    for FinCEN to connect law enforcement agencies at the State,
    local, or Federal level with one another because they were
    inquiring on the same individual.
        Besides providing case support to law enforcement, FinCEN
    continues to provide a unique capability to identify trends,
    patterns, and national level security issues, disseminate
    information on money laundering methodologies, and prepare
    geographic threat assessments associated with money laundering
    and other financial crimes. We have established a Geographic
    Financial Crimes Assessment Branch to enhance FinCEN's capacity
    to produce strategic analysis, threat assessments, and
    financial lead information.

                          FINCEN'S REQULATORY MISSION

        FinCEN's regulatory mission that serves as the foundation
    of our ability to carry out our primary function of providing
    support to law enforcement investigations was heavily impacted
    by the USA PATRIOT Act. Although FinCEN was in the process of
    expanding certain provisions of the Bank Secrecy Act to
    financial sectors beyond depository institutions, the USA
    PATRIOT Act has accelerated that effort.
        We are working closely, for instance, with the securities
    industry to issue the broker-dealer suspicious activity report
    rule and recently proposed a casino suspicious activity report
    rule to ensure that we have fully explained to that industry
    how the standard for reporting suspicious activity will be
    applied.
        Moreover, as the subcommittee is aware, FinCEN's regulatory
    program to register and require money services businesses to
    report suspicious activity has been, and continues to be, a
    significant undertaking. Today, I am pleased to report that the
    response of money services businesses has been outstanding. In
    fact, within 2 weeks of the requirement, over 80 percent of the
    almost 11,000 money service business principals in the United
    States that were required to register had, in fact, registered.
    The efforts are continuing to pay off as FinCEN continues to
    work with its public relations contractor to continue an
    outreach effort with the industry through the remainder of the
    year.
        In addition, we are working closely with the Internal
    Revenue Service's Office of Examination to reinforce and build
    on this effort to alert all money services businesses to their
    registration and reporting obligations. And our new MSB
    website, www.msb.gov, provides guidance, forms, and other
    information to assist the industry in complying with the rules.
        In the international arena, FinCEN's steady, persistent
    efforts to promote global cooperation are another of our
    success stories. The financial intelligence unit network, which
    FinCEN has been in the forefront of helping to promote, has
    grown from a handful in 1995 to the current membership of
    almost 60 Nations.

                               PREPARED STATEMENT

        I once again want to thank the subcommittee for its
    continued support of FinCEN over the years. Without your
    support, FinCEN could not have progressed so far or been nearly
    as effective. We respectfully request your continued support as
    we work with other Federal agencies to fight terrorism, conduct
    our core business activities, and implement the USA PATRIOT
    Act. Thank you.
        Senator Dorgan. Thank you, Mr. Sloan.
        [The statement follows:]

                      Prepared Statement of James F. Sloan

        Mr. Chairman, Senator Campbell, and members of the Subcommittee,
    thank you for this opportunity to appear before you today to discuss
    the Financial Crimes Enforcement Network's (FinCEN) fiscal year 2003
    budget request. We greatly appreciate your ongoing consideration of our
    needs.
        As everyone knows, the horrific events of September 11 changed our
    Nation forever. That tragic day also changed FinCEN forever and the
    demand for FinCEN's services rose exponentially. Mr. Chairman, I would
    like to say how very proud I am of the men and women of FinCEN, who,
    like their colleagues throughout the Government, have risen to the
    challenge and are making significant contributions in our Nation's war
    against terrorism.
        Last year was a pivotal year for FinCEN--the tragedy of September
    11 brought about a greater recognition of, and appreciation for, our
    unique network and analytical expertise in the areas of financial crime
    and terrorist financing. Moreover, the USA Patriot Act of 2001 codified
    FinCEN as a bureau and added numerous responsibilities and accelerated
    deadlines in the regulatory area. In addition, we continued our Money
    Services Businesses (MSBs) outreach program and implemented the
    registration and suspicious activity reporting requirements, effective
    at the end of last year.
        My statement today will elaborate on these and other ways in which
    FinCEN is supporting the September 11 investigation and carrying out
    the agency's most immediate obligations under the USA Patriot Act. I
    will then focus on our fiscal year 2003 budget request and the
    accomplishments we have achieved in fiscal year 2001.
       fincen's top priority--supporting counter-terrorism investigations
        Prior to the terrorist attacks of September 11, FinCEN's
    Intelligence Liaison Office had been analyzing Bank Secrecy Act (BSA)
    information in support of law enforcement investigations into terrorist
    financing. On September 13, FinCEN's expertise in money laundering and
    financial crime was recognized and we were requested by law enforcement
    to provide immediate assistance to the investigation. The agency was
    well positioned to act quickly to this request. FinCEN's mission and
    its programs already had been designed to provide exactly the type of
    comprehensive, interagency information sharing and support that is now
    needed in this Nation's war against terrorism.
        Because of our existing infrastructure, FinCEN was able to
    immediately implement several new initiatives and enhance core programs
    to assist in this investigation. With our workforce of less than 300
    FinCEN employees, contractors, and detailees, these additional demands
    placed a significant strain on our ability to perform day-to-day
    mission-related activities. We directed approximately 30 percent of our
    resources to the initial investigation and these efforts included:
        Establishing a 24-Hour Operation Center.--To coordinate
    investigative requests and responses which included enhanced on-site
    liaison with the FBI Counter-terrorism Center and the U.S. Customs
    Service's Operation Green Quest;
        Establishing a Toll-Free, 24-Hour Hotline.--For financial
    institutions to report suspicious transactions that might relate to
    terrorist activity, thus making the information available to law
    enforcement in real time;
        Facilitating a Multi-Agency Effort.--Using our specialized tools
    and secure facility. FinCEN was called upon to make its secure facility
    available to the Foreign Terrorist Asset Tracking Center (FTAT) as a
    temporary measure. Aside from logistical assistance provided to the
    FTAT, FinCEN's importance to FTAT lies in our ability to network
    agencies having common investigative interests, the information
    contained in our BSA databases, and in the human and technological
    expertise used in manipulating financial data to identify relationships
    between people, places, organizations, and financial transactions; and,
        Enhancing International Cooperation Efforts.--With other Nations'
    Financial Intelligence Units (FIUs) to share information and work
    together on joint analytical projects. These specialized agencies,
    created by Governments to fight money laundering, first met in 1995 at
    the Egmont-Arenberg Palace in Belgium. Now known as the Egmont Group,
    FIUs meet annually to find ways to cooperate, especially in the areas
    of information exchange, training, and the sharing of expertise. In
    October 2001, FinCEN hosted a special meeting of the Egmont Group on
    terrorist financing to support the unprecedented law enforcement
    investigation in the wake of the events of September 11.
        Before I proceed with my statement, I would like to thank you and
    members of this Subcommittee for the support that was provided to
    FinCEN in the Homeland Security Emergency Supplemental. The $1.7
    million and 9 FTE gave FinCEN the funding necessary to cover our
    expanded responsibilities in the wake of the terrorist attacks of
    September 11.
                            usa patriot act of 2001
        Congress recognized the need to expeditiously make additional tools
    available to law enforcement to fight money laundering and terrorist
    financing by passing the USA Patriot Act (the Act). On October 26, the
    President signed this landmark bill into law. Title III of the Act
    provides FinCEN with new authorities and opportunities to augment our
    primary mission to support law enforcement investigative efforts and
    foster interagency cooperation against domestic and international
    financial crime.
        In fact, FinCEN is responsible for implementing 23 of the 44
    provisions contained in Title III and also has a key role in many of
    the working groups established by Treasury to address the other
    provisions. Fortunately, many of the 23 provisions reaffirmed, and in
    some cases, codified many programs and initiatives that were already in
    place or under discussion at FinCEN. Briefly, I would like to provide
    the Subcommittee with a short summary of the progress FinCEN has made
    to date on implementing some of these provisions.
                 cooperative efforts to deter money laundering
        Section 314 of the Act requires that the Treasury Department
    promulgate regulations, within 120 days, to encourage further
    cooperation among financial institutions, their regulatory authorities,
    and law enforcement to share information with financial institutions on
    individuals, entities, etc., that are reasonably suspected to be
    engaged in terrorism or money laundering.
        On February 25, the Secretary approved an interim final rule
    immediately implementing information sharing procedures between
    financial institutions that are designed to enhance the institutions'
    ability to identify and report to the Federal Government instances of
    terrorism or money laundering. The interim final rule requires
    financial institutions that wish to share information with one another
    to provide a yearly certification to FinCEN, which can be accomplished
    through our web site. The certification requires participants to
    protect the confidentiality and security of shared information and use
    the information solely for identifying and reporting suspected
    terrorism or money laundering.
        At the same time, the Secretary approved the issuance of a notice
    of proposed rulemaking of a regulation designed to establish a link
    between Federal law enforcement and financial institutions so that
    vital information about terrorism and money laundering can be quickly
    and efficiently exchanged between them. The proposed rule uses the
    communications resources and networking ability of FinCEN to quickly
    locate the accounts of persons and entities engaged in such illegal
    activity. Federal law enforcement will provide the identities of
    suspected terrorists and money launderers to FinCEN, which will
    distribute the information to financial institutions to check for
    accounts and transactions. Any matches found will be immediately
    transmitted to law enforcement for appropriate follow up. The rule is
    intended to formalize and streamline the information sharing and
    reporting process the Federal Government undertook following the
    attacks of September 11, 2001, by permitting FinCEN to serve as a
    conduit for information sharing between Federal law enforcement
    agencies and financial institutions.
    Bureau Status for FinCEN
        Section 361 of the Act establishes FinCEN as a bureau within the
    U.S. Department of the Treasury. Codification of bureau status also
    reflects the Congress' recognition that FinCEN is a small but highly
    effective Government agency that should be put on equal footing with
    the other Treasury bureaus. FinCEN has now been given full
    administrative authorities associated with such status. For example,
    bureau status allows for the acceleration and streamlining of the
    hiring and procurement process.
    Electronic Filing of BSA Reports
        Section 362 of the Act requires FinCEN to develop a highly secure
    network to allow financial institutions to file BSA reports and to
    supply financial institutions with alerts and other information
    regarding suspicious activities that warrant immediate and enhanced
    scrutiny. FinCEN has been working to implement this requirement and has
    awarded a contract for the prototype and pilot. We expect the pilot
    program to be completed in late summer.
    Law Enforcement Access to Currency Reports by Non-Financial Businesses
            (Form 8300)
        Section 365 of the Act requires that the Treasury Department
    prescribe new regulations for filing currency reports by non-financial
    businesses with FinCEN. (Before the Patriot Act became law, the
    Internal Revenue Service (IRS) was required to collect Form 8300
    information under Section 6050I of the Internal Revenue Code. This
    information was considered tax return information and was not readily
    available to law enforcement.) FinCEN has worked diligently with
    Treasury to issue these new regulations and on December 20, 2001, an
    interim rule and a companion notice of proposed rulemaking were issued.
    As of February 20, FinCEN began receiving the 8300 data from IRS.
        Our fiscal year 2003 budget request will allow FinCEN to continue
    its efforts to support law enforcement investigations to prevent and
    detect money laundering, terrorist financing, and other financial
    crimes. We are very appreciative of the Subcommittee's continued
    support, which has enabled us to construct a cost-effective
    technological infrastructure. I would like to now discuss in detail our
    fiscal year 2003 budget request and highlight our accomplishments in
    fiscal year 2001.
                        fiscal year 2003 budget request
        FinCEN has a unique combination of law enforcement and regulatory
    responsibilities. As Director, I can assure you that FinCEN will
    continue to explore creative ways to effectively leverage its
    resources. Given the uncertain resource implications of the USA Patriot
    Act, this approach will be essential to our success.
        In fiscal year 2003, FinCEN is requesting $52,289,000 and 254 full-
    time equivalents (FTE). This request includes $1 million and 8 FTE to
    begin to meet the challenges of the USA Patriot Act. Also included in
    this request is $2.1 million to allow FinCEN to continue operations at
    the current level, and $400,000 and 8 FTE to provide us with the
    funding necessary to continue the 17 new positions approved in the
    Homeland Security Emergency Supplemental. Now I would like to highlight
    the accomplishments FinCEN has achieved in fiscal year 2001. These
    milestones would not have been possible without the valuable counsel
    and funding the Subcommittee has provided to FinCEN over the years.
                        fiscal year 2001 accomplishments
               supporting the financial aspects of investigations
        In fiscal year 2001, Federal, State and local law enforcement
    officials accessed BSA data directly through FinCEN's popular Gateway
    and Platform programs to support more than 9,000 investigations. FinCEN
    analysts used BSA data to support over 4,000 investigations--an
    increase of 10 percent over fiscal year 2000. I would now like to
    briefly highlight some of these key programs that serve our principle
    partners--the law enforcement, regulatory and international
    communities.
    Gateway Program
        One of our flagship programs, the Gateway program, continues to
    demonstrate its effectiveness in saving investigators time and money
    because participating agencies can conduct their own research and not
    rely on the resources of an intermediary agency to obtain financial
    records. Using the Gateway process, State, local, and, more recently,
    Federal law enforcement agencies can search records such as Currency
    Transactions Reports (CTRs), Suspicious Activity Reports (SARs), and
    Reports of International Transportation of Currency or Monetary
    Instruments (CMIRs) to aid them in their investigations. Form 8300 is
    now available to law enforcement through Gateway access.
        We are constantly making technological upgrades to Gateway to
    include enhanced security and monitoring processes. FinCEN audits the
    Gateway process through both record reviews and on-site visits to
    ensure that all inquiries are connected to actual or potential criminal
    violations.
        One of the most outstanding and useful features of this system is
    its ``alert'' mechanism that automatically alerts FinCEN that two or
    more agencies have an interest in the same subject. In this way, FinCEN
    is able to assist Federal, State and local law enforcement agencies in
    coordinating their investigations among themselves. Last year, there
    were over 1,500 opportunities for networking investigations that
    originated from the Gateway inquiries.
        Last month, we hosted the Gateway Coordinators Conference to
    provide an overview of FinCEN and the variety of services available to
    State and local law enforcement. The conference was attended by 65
    coordinators from the U.S. and Puerto Rico, and several gave
    informative presentations on how Gateway has assisted them in their
    investigations.
    Platform Program
        FinCEN's Platform Program, one of our most valuable law enforcement
    services, enables Federal agencies to send their representatives to
    FinCEN to use its databases and receive technical assistance. These
    individuals know the needs of their organization and can support that
    need directly through database access. FinCEN pioneered the Platform
    program in 1994, and it has grown steadily. In fiscal year 1997,
    Platform had 49 participants. By fiscal year 2001, participation had
    grown to nearly 80 participants from approximately 40 agencies.
    Analytical System for Investigative Support (ASIS)
        Last year we introduced you to ASIS, a case management software
    system developed by FinCEN that gives Federal, State and local law
    enforcement officials the ability to make sense of the information they
    gather through their investigations. FinCEN continues to use ASIS
    successfully to support major investigations. Immediately after
    September 11, we used ASIS to check activities surrounding the
    hijackers, and presented the analytic charts at meetings with the FBI.
    The ASIS data was a helpful beginning. We have continued to use ASIS to
    assist the FBI in analyzing the large volumes of data from the National
    Drug Intelligence Center's Real-Time Analytical Intelligence Database
    (RAID). Additionally, ASIS has enabled our analysts to link FinCEN's
    other databases to RAID data. The linkages reveal connections to other
    information from financial records such as suspicious activity reports.
                identifying financial crime trends and patterns
        FinCEN provides a unique capability to identify trends, patterns
    and national-level security issues, disseminate information on money
    laundering methodologies, and prepare geographic threat assessments
    associated with money laundering and other financial crimes.
        In fiscal year 2001, FinCEN, in conjunction with the financial,
    regulatory and law enforcement communities, began publishing a semi-
    annual report on the use and utility of suspicious activity reporting
    by financial institutions that includes current money laundering trends
    and patterns. [The USA Patriot Act, Section 314, mandates FinCEN to
    report semi-annually on suspicious activity reporting.] FinCEN also
    disseminated 53 strategic analytical products covering money laundering
    methodologies, trends and patterns, statistical reports, and geographic
    threat assessments, including the issuance in June 2001 of the
    Suspicious Activity Report Bulletin on activity related to phone card
    businesses. In addition, a Geographic Financial Crimes Threat
    Assessment Branch was established last year to enhance FinCEN's
    capability to produce strategic analyses, threat assessments, and
    financial lead information.
                       administering the bank secrecy act
        FinCEN's regulatory mission--administering the BSA--serves as the
    foundation for FinCEN's ability to carry out our primary function of
    providing support to law enforcement investigations. As such, the
    strengthening and effectiveness of our regulatory program directly
    affects the quality and efficiency of FinCEN's efforts to serve its
    diverse and growing universe of customers. The effective administration
    of the BSA has been challenging on many fronts--from the development of
    streamlined internal processes and industry-specific expertise, to the
    formation of an ever-widening circle of industry, regulatory, and law
    enforcement partnerships in order to obtain data of immeasurable value
    to law enforcement. We further challenge ourselves by achieving these
    goals within the context of two unequivocal standards that influence
    all that we do at FinCEN--maintaining appropriate privacy safeguards
    and minimizing burdens on the industry.
        Although FinCEN was in the process of expanding certain provisions
    of the BSA to financial sectors beyond depository institutions, the
    urgency of this effort has been accelerated by the USA PATRIOT Act, and
    FinCEN has risen to the challenge. For example, we are working closely
    with the Securities industry to issue a broker/dealer SAR rule while
    simultaneously focusing on the MSB program with its extensive outreach
    component.
        In fiscal year 2001, FinCEN continued to work towards expanding its
    regulatory outreach efforts, responding to over 1,563 telephone
    inquiries, 129 publication requests, 115 written inquiries, and 91 e-
    mail inquiries. FinCEN also worked to draft regulations requiring the
    securities industry to establish programs to detect and report
    suspicious activity. These draft regulations were issued on December
    20, 2001. In addition, FinCEN made tremendous progress in implementing
    the money services businesses (MSBs) regulations. A short synopsis
    follows on this progress.
    Money Services Businesses (MSBs)
        The term MSBs is used to denote the sub-group of non-bank financial
    institutions comprised of money transmitters, issuers of traveler's
    checks or money orders, sellers or redeemers of traveler's checks or
    money orders, check cashers and currency dealers or exchangers.
        As the Subcommittee is aware, FinCEN's regulatory program to
    register and require MSBs to report SARs has been and continues to be a
    significant undertaking. The support and funding provided by this
    Subcommittee has been crucial to the development and implementation of
    this mandated initiative.
        FinCEN, in general, has proceeded very deliberately with its MSB
    regulatory program. We have taken this approach for a number of
    reasons: (1) MSBs have not been regulated at the Federal level and
    therefore it will take time to identify and understand the various MSB
    sectors and how they operate; (2) many MSBs are small and serve diverse
    communities making the task of shaping appropriate regulatory programs
    even more complex; and, finally (3) because of the absence of a Federal
    regulatory infrastructure, developing a positive working relationship
    like the one which currently exists between regulators and the
    depository institutions will take time.
        Because the education process is so important, FinCEN had been
    considering moving the effective dates of the regulations back several
    months allowing more time to reach out to this community which could
    number upwards of 200,000 entities versus the smaller universe of
    approximately 21,000 depository institutions with which we have
    traditionally worked. Following the attacks of September 11, however,
    we felt it was imperative that the effective dates remain unchanged.
    The potential value of the information that MSBs could provide to law
    enforcement was too significant to delay the implementation of the
    regulations. As a result, the first regulation requiring the principals
    of all MSBs to register by December 31, 2001, and the second, requiring
    money transmitters, issuers and sellers of traveler's checks and money
    orders and the U.S. Postal Service to report suspicious activity
    transactions effective January 1, 2002 went into effect on these dates
    as scheduled.
        Fortunately, to ensure that MSBs are familiar with these new
    requirements and to develop better demographics about who and where
    many of the smaller, independent MSBs are located, we had already
    conducted an extensive education program. This effort resulted in an
    excellent registration response. More than 80 percent of the total
    known universe of 10,745 MSB principals, required to register, had
    responded within the first 2 weeks of January and initial SAR filings
    indicate our efforts are paying off. FinCEN, in conjunction with Burson
    Marstellar, will continue this outreach effort throughout the coming
    year.
        Finally and importantly, we are working closely with the IRS'
    Office of Examination to reinforce and build on this effort to alert
    all MSBs to their registration and reporting obligations. In addition,
    FinCEN has developed a new dedicated MSB website (www.msb.gov) to
    provide guidance, forms and other information to assist industry in
    complying with the rules.
                      fostering international cooperation
        FinCEN's steady, persistent efforts to promote global cooperation
    are one of this agency's greatest success stories. The financial
    intelligence unit (FIU) network, which FinCEN has been at the forefront
    in helping to promote, has grown from a handful in 1995 to the current
    membership of 58 countries.
        In fiscal year 2001, FinCEN coordinated 435 investigative
    information exchanges with 67 foreign jurisdictions, including support
    for 114 domestic law enforcement cases. We provided technical
    assistance to 22 countries to include extensive training courses and
    review of draft anti-money laundering legislation and hosted visits by
    law enforcement agencies or diplomatic representatives from over 53
    countries. In addition, FinCEN drafted the chapters on the state of
    anti-money laundering programs in all of the 95 countries included in
    the State Department's Annual International Narcotics Control Strategy
    Report. Lastly, FinCEN issued numerous Advisories in conjunction with
    the Financial Action Task Force (FATF) and the G-7.
                        strengthening management support
    Information Technology
        As the Subcommittee is aware, FinCEN's effectiveness is based upon
    our emphasis on networking. This ``networking'' capability is crucial
    to the fulfillment of our information gathering and sharing mission.
    The creative use of technology is an essential component to the
    successful execution of our mission. For example, tools such as the
    Secure Outreach Network and advances in data mining applications allow
    FinCEN to strengthen its network capability and produce sophisticated
    analytical products.
        In fiscal year 2001, FinCEN, taking advantage of emerging
    technologies, significantly expanded the Secure Outreach Network's
    access capability to BSA data via the Internet. More than 300 Federal,
    State, and local Gateway customers are now participating in the system
    that is known as the Secure Outreach Direct-Net. To ensure the widest
    use of the Secure Outreach Network, FinCEN also has a dial-up
    capability for those entities without access to the Internet. Over the
    next year, FinCEN envisions an even greater increase in user
    participation in this system as we continue to explore and make use of
    the most efficient technological options.
        In our ongoing efforts to explore various data mining techniques,
    FinCEN recently completed a 90-day pilot program on new, state-of-the-
    art software for link analysis. We have been extremely encouraged by
    the results of this pilot and by the end of fiscal year 2003, we plan
    to incorporate all BSA data into the system.
    President's Management Agenda
        FinCEN supports the President's Leadership Initiatives and
    participates on a number of working groups. As you know, the Treasury
    Department has outlined strategies to meet the President's goals for
    human capital, e-government, competitive sourcing, financial
    management, and budget/performance integration. FinCEN will perform a
    self-assessment over the next few months to further refine areas that
    need improvement. As we move forward to implement the newly acquired
    administrative authorities granted by bureau status, the strategies
    mentioned above provide a basis for examining our administrative
    processes to develop the best mix between in-house services and
    competitive sourcing with other Federal agencies.
    Lease Renewal
        Lastly, as I discussed with this Subcommittee last year, FinCEN is
    facing a lease renewal. Our current 10-year lease will end in April
    2003 on the space we occupy in Vienna, Virginia. FinCEN has been
    working over the past year with the General Services Administration
    (GSA) and they advise us that a competitive solicitation will be issued
    this spring for a lease renewal, with an award expected in late summer
    or early fall of this year. In addition to issuing the solicitation,
    GSA recently completed a security threat assessment of our facility.
    FinCEN is working with GSA to implement a series of recommendations.
                                   conclusion
        On November 7, 2001, FinCEN was greatly honored with a visit by
    President George W. Bush, Secretary of Treasury Paul O'Neill, Secretary
    of State Colin Powell, and Attorney General John Ashcroft. The fact
    that the leaders of our country took time out of their demanding
    schedules to personally thank the men and women of FinCEN for their
    contribution to our Nation's war on terrorism was a great tribute to
    all the hard work of our dedicated employees. In turn, I would like to
    thank this Subcommittee for its unfailing support of FinCEN over the
    years. Without such support, FinCEN could not have progressed so far
    nor been nearly as effective. We respectfully request your continued
    support as we work with other Federal agencies to fight terrorism,
    conduct our core business activities, and implement the USA Patriot
    Act.
        Thank you again for this opportunity to appear before this
    Subcommittee. I would be happy to answer any questions you may have at
    this time.

                     Federal Law Enforcment Training Center

    STATEMENT OF PAUL HACKENBERRY, ACTING DIRECTOR
        Senator Dorgan. Next, we will hear from Mr. Paul
    Hackenberry, the Acting Director of the Federal Law Enforcement
    Training Center. Mr. Hackenberry, you may proceed.
        Mr. Hackenberry. Thank you, Mr. Chairman, Senator Campbell,
    Senator Reed, members of the subcommittee. I am pleased to be
    here today to support our appropriations request for fiscal
    year 2003 and I will keep my remarks brief and submit a longer
    written statement for the record.
        The FLETC has experienced remarkable growth, development,
    and achievement since it was established in 1970. Over the last
    30 years, more than 400,000 law enforcement agents and officers
    across all branches of Government have now graduated from
    training conducted at FLETC. I would like to especially thank
    this committee for their most generous support in funding the
    consolidated training.

                               WORKLOAD INCREASE

        The horrific events surrounding the terrorist attacks of
    last September 11 have brought about the greatest challenge yet
    for FLETC. During fiscal year 2002, the FLETC is projected to
    train nearly 50,000 students, resulting in over 200,000 student
    weeks of training. Those numbers are about double what FLETC
    had been asked to do previously in any single fiscal year.
        The consolidated concept for law enforcement training at
    FLETC continues to be the most efficient and economical means
    for delivering this essential service to the law enforcement
    community and to the Nation. Because of the excellent
    cooperation with its many partners, we believe FLETC is fully
    achieving the vision of its founders in this critical
    undertaking.

                            FISCAL YEAR 2003 REQUEST

        The Center's fiscal year 2003 request is for a total of
    $149,357,000, and with this funding, we anticipate the training
    objectives of our partner agencies as thus far projected would
    be met.

                      WASHINGTON, D.C. AREA SITE PROGRESS

        With regard to the Washington, D.C. site progress, with the
    funding provided by this committee, excellent progress is being
    made in the design and development work at the Cheltenham,
    Maryland, site. A director and core staff to manage the site's
    conversions have been hired, and in keeping with the direction
    of Congress, we have placed the highest priority on completion
    of an in-service academy operation for the U.S. Capitol Police.
    In February of this year, the Capitol Police began using an
    interim facility at Cheltenham and the permanent facility for
    them is slated for occupancy by September of 2002. We
    anticipate that the design work will be finished by this summer
    for all the facilities and construction completed in late 2003.

                                WORKLOAD GROWTH

        As a result of September 11, our partner agencies' workload
    projections have increased significantly, and as previously
    stated, FLETC is projecting the greatest increase in training
    requirements in its history. Over the years, the FLETC has
    experienced a number of periods of sustained growth in the
    training requests by its partner agencies and we have been able
    to accommodate most of these increases by being innovative and
    undertaking extraordinary measures. That is certainly going to
    be the case in fiscal year 2002 and probably for the
    foreseeable future.
        Even though the training requirements currently scheduled
    have drastically increased, they may not represent the entire
    training needs of our partner agencies. Due to facility
    capacity and agency hiring constraints and issues, the impact
    of the increased workload will likely be spread over the next
    several years.
        In the emergency supplemental, sufficient funding was
    provided to allow us to schedule all the projected workload
    needs identified thus far for fiscal year 2002. The fiscal year
    2003 request includes sufficient funding to maintain the same
    level of training as provided in fiscal year 2002.

                        TRANSPORTATION SECURITY TRAINING

        With regard to transportation security training, in October
    of 2001, the Federal Aviation Administration requested that
    FLETC undertake training for the newly-expanded Federal Air
    Marshal program authorized by the administration and Congress.
    In concert with the FAA, training programs were adapted to
    provide training for both new hire personnel with previous law
    enforcement experience and those with no previous law
    enforcement experience. This training began quickly at the
    Artesia Center and is expected to continue well into the next
    fiscal year.
        Also, for the last several weeks, FLETC has been engaged in
    discussions with the Transportation Security Administration
    officials about other specific training needs. FLETC is helping
    to design training for airport screeners and train-the-trainer
    programs for those who will be responsible for delivering this
    training. FLETC sites would not be the focus of this training
    because of the heavy requirements for law enforcement training
    already identified. However, we will continue to consult with
    TSA and help validate the training given to the screeners.
        Finally, with respect to TSA, we are now working closely
    with them on possible options for training a cadre of law
    enforcement agents that TSA has under consideration for
    deployment to the Nation's airports. As this situation becomes
    clearer and decisions are made, we will keep the committee
    informed of our role in this development.

                          FACILITIES MASTER PLAN STUDY

        Mr. Chairman, I would like to comment on the status of the
    progress that has been made in expanding the FLETC facilities.
    The funding that this committee has provided over the years in
    support of our construction plan has positioned FLETC to better
    meet the surge in training workload requirements experienced
    after September 11. Prior to the events of that date, the
    FLETC's plan for construction focused on maximum utilization of
    the facilities at both Glynco, Georgia, and Artesia, New
    Mexico.
        In the aftermath of the terrorist attacks, the training
    capacity of FLETC has been pushed to the limit. The development
    of an updated comprehensive facilities master plan to address
    the post-September 11 demands is crucial and has been
    initiated. A contract has been awarded to a private firm
    experienced in planning activities to complete such a
    comprehensive study within a year. This study would also
    include the new site in Cheltenham, Maryland.

                                CLOSING REMARKS

        Mr. Chairman, FLETC is committed to providing the highest
    quality law enforcement training at the lowest possible cost.
    Substantial savings are being realized through the operation of
    consolidated training sites and we know that the challenge
    ahead of us may be the most important of all. I look forward to
    your continued support as FLETC strives to remain a partnership
    committed to excellence, and I am available to answer any of
    your questions. Thank you.

                               PREPARED STATEMENT

        Senator Dorgan. Mr. Hackenberry, thank you very much.
        [The statement follows:]

                   Prepared Statement of Paul A. Hackenberry

        Mr. Chairman, Senator Campbell, and Members of the Subcommittee, I
    am pleased to be here today to report on the current operations and
    performance of the Federal Law Enforcement Training Center (FLETC) and
    to support our appropriations request for fiscal year 2003.
                                opening remarks
        The Federal Law Enforcement Training Center (FLETC) has experienced
    remarkable growth, development and achievement since its establishment
    in 1970, when a handful of agencies partnered together and created a
    concept of consolidated training for Federal agencies. Over the years,
    more than 400,000 law enforcement agents and officers across all
    branches of Government have now graduated from training conducted at
    FLETC.
        However, the horrific events surrounding the terrorist attacks of
    last September 11 have brought about the greatest challenge yet for
    FLETC in its brief 32-year history. During fiscal year 2002, the FLETC
    is projected to train nearly 50,000 students resulting in over 200,000
    student weeks of training. Those numbers are about double what FLETC
    previously has been asked to do in any single fiscal year.
        Mr. Chairman, FLETC will do whatever is required to meet this
    daunting challenge because we recognize that high quality training is
    the essential element necessary in preparing law enforcement personnel
    to assume their enormous responsibilities in these difficult times.
        The Department of the Treasury has been the lead agency for the
    United States Government in providing the administrative oversight and
    day-to-day direction for the FLETC since its creation. Under the
    leadership of the Secretary of the Treasury and the Under Secretary of
    the Treasury for Enforcement, the FLETC has received strong support and
    active assistance in carrying out its responsibilities. I want to
    especially thank this Committee for the trust it has continued to place
    in the FLETC. Throughout our history of service to Federal law
    enforcement, this Committee has been especially supportive and most
    generous in its funding of consolidated training. We extend our
    appreciation and look forward to working with you in the coming years.
        The Administration and Congress can be proud of the quality of
    training being provided at the FLETC and the savings realized through
    consolidation. The consolidated concept for law enforcement training at
    the FLETC continues to be the most efficient and economical means for
    delivering this essential service to the law enforcement community and
    the Nation. Because of the excellent cooperation of its many partners,
    we believe the FLETC is fully achieving the vision of its founders in
    this critical undertaking.
        Before I comment on our fiscal year 2003 budget request, I want to
    acknowledge the leadership of our former Director, W. Ralph Basham. At
    the end of January 2002, Director Basham left the FLETC to assume a
    senior position in the newly formed Transportation Security
    Administration. During Mr. Basham's 4 years at the helm of FLETC, much
    was achieved. He is a pragmatic and inspiring leader and he gained the
    respect of all whom came in contact with him. We wish him well in his
    new endeavors, and believe we will continue to have occasion to work
    with him on training matters of mutual interest.
                            fiscal year 2003 request
        Today, I am prepared to discuss the President's fiscal year 2003
    budget request. The FLETC's fiscal year 2003 request is for a Salaries
    & Expenses (S&E) appropriation of $126,028,000 and 748 FTE, a decrease
    of $2,652,000 below the fiscal year 2002 level. Our request for the
    Acquisition, Construction, Improvements, & Related Expense (ACI&RE)
    appropriation is for $23,329,000, a decrease of $18,605,000 below the
    fiscal year 2002 appropriation. Most of the decrease in the S&E
    appropriation is related to one-time, non-recurring, costs such as
    permanent change of station (PCS) costs for hiring new staff, equipment
    and furniture costs, and one-time minor construction items funded in
    the Emergency Supplemental resulting from the September 11 attacks. The
    decrease in the ACI&RE appropriation is related to construction costs,
    which do not recur in fiscal year 2003. FLETC supports the President's
    fiscal year 2003 request, and we anticipate that the training
    objectives of our partner agencies, as thus far projected, will be met.
        Together, the S&E and ACI&RE request totals $149,357,000 for fiscal
    year 2003. Coupled with an estimated $35,000,000 in funds to be
    reimbursed to the FLETC for training related services by our partner
    agencies, the total budget for fiscal year 2003 is $184,357,000.
                 government performance and results act (gpra)
        Before providing this Committee with an overview of our operations
    in more detail, I want to address the progress being made in complying
    with the requirements of the Government Performance and Results Act
    (GPRA). As you know, the GPRA requires agencies to publish annual
    performance plans that are tied to their strategic plans. Performance
    plans are to include measurable goals which agencies are required to
    report after a fiscal year is completed. These performance plans are
    now an integral part of the budget documents sent to the Congress
    annually.
        As noted in the FLETC's testimony last fiscal year, we have revised
    our performance measures in an effort to more accurately reflect
    performance indicators and to better align them with the organization's
    mission. The new measures were base-lined in fiscal year 2001 and have
    now been submitted in this request as our final measures for fiscal
    year 2002.
        There are a total of six proposed performance measures in our
    budget request for fiscal year 2003. The performance measures proposed
    for the Law Enforcement Training activity include: (1) results of the
    student quality of training survey, (2) results of the Partner
    Organization survey, (3) cost of a student-week of training, and (4)
    results of the employee satisfaction survey. The performance measures
    proposed for the Plant Operations activity include: (1) results of the
    student quality of services survey and (2) the percentage of training
    classes held within 15 days of the requested start date by the 74
    Partner Organizations.
        The student quality of services survey and student quality of
    training survey performance measures are outcome measures. The ratings
    for student quality of training and student quality of services are
    based on a percentage of students who answer satisfactory or better to
    the questions presented in the survey. Both were computed using
    evaluations completed by students attending FLETC programs.
        I am pleased to report that the Center's overall performance
    against established target goals for fiscal year 2001 was very good.
    The most critical performance measure in our plan, the student quality
    of training survey measure, was 99.9 percent. This exceeded the
    Center's performance plan target goal of 90 percent. The FLETC's
    training costs were below the cost figure established for the variable
    unit cost per basic student-week of training. The plan projected a per
    week cost of $149 and the actual cost was $133. The volume of training
    conducted and the efficient management of facilities scheduling allowed
    us to realize significant reduction in costs. In the Plant Operations
    activity, all performance measures were either met or exceeded.
                         fiscal year 2002 achievements
        Finally, before I discuss operational areas, I want to report on
    some of the FLETC's other specific achievements resulting from the
    appropriations provided by this Committee.
        In fiscal year 2002, the FLETC had its second complete audit of its
    financial records and systems and received another ``unqualified
    opinion'' for its operations in fiscal year 2001. We believe this to be
    significant because FLETC has to interact with so many different
    agencies on the Federal, State and local and international levels.
        At the request of the Department of the Treasury, FLETC has assumed
    the lead for the establishment of a United States International Law
    Enforcement Academy (ILEA) operation in Gaborone, Botswana, the first
    of its kind on the African continent. The academy under the joint
    direction of the Departments of State, Justice and Treasury, is
    providing training to law enforcement officers from Nations throughout
    that region. The in-country program director is a senior FLETC manager,
    who is overseeing the program management and facility construction,
    jointly funded by the Government of Botswana and the U.S. State
    Department.
        I want to mention that the FLETC has completed, or will soon
    complete, the following construction projects in fiscal year 2002. In
    Artesia, NM, two dormitory buildings, two additional environmentally
    safe firearms ranges and a classroom building have been completed. An
    administration building is under construction and will be completed
    during fiscal year 2003. In Glynco, GA, we will complete renovation of
    an office building and the auditorium as well as renovation of various
    smaller facilities, and complete construction of a new anti-terrorism
    training facility and a new gas training range. This fall, FLETC will
    open a 600-bed dormitory complex in Glynco that is notable because it
    is our first build-lease venture with a private corporation in a
    facility near, but not on, Government property. These new facilities
    are especially welcome at this time because of the projected huge ramp-
    up in training requirements for all of our customer agencies.
        Finally, I want to note the progress that is being made in the area
    of accreditation and standardization of Federal law enforcement
    training. Through seed funding provided by the Department of the
    Treasury's Asset Forfeiture Fund in fiscal year 2001 and this
    Committee's appropriation for $650,000 in fiscal year 2002, a project
    is fully underway that will improve the training provided all Federal
    agents and officers. FLETC is working in collaboration with Federal
    agencies, including the Federal Bureau of Investigation, the Drug
    Enforcement Administration, the U. S. Postal Inspection Service,
    private organizations, professional associations, and others, to
    develop a format to accredit training facilities, instructors and
    programs and courses provided by every Federal law enforcement
    organization. When implemented over the next several years, this
    project may have the most far-reaching impact on the way law
    enforcement training is conducted at the Federal level since the
    establishment of consolidated training itself.
                             overview of operations
        Now Mr. Chairman, I would like to provide the Committee with a
    brief overview of the operations of the Federal Law Enforcement
    Training Center.
        With few exceptions, the FLETC conducts basic and advanced training
    for the vast majority of the Federal Government's law enforcement
    officers. We also provide training for State, local and international
    law enforcement officers in specialized areas and support the training
    provided by our partner agencies that is specific to their individual
    mission needs. In all, there are now more than 200 separate training
    programs offered through the FLETC and its partners. Twenty-three
    agencies now maintain training academy operations at Glynco and three
    are housed at Artesia. These academies provide mission specific
    training to their agency trainees.
        The FLETC provides entry level training programs in basic law
    enforcement for police officers and criminal investigators, along with
    advanced training programs in areas such as marine law enforcement,
    anti-terrorism, computer forensics, health care fraud, and
    international banking and money laundering. Training is conducted at
    the Glynco, Georgia center, the Artesia, New Mexico center, and at a
    temporary training site in Charleston, South Carolina.
        The temporary training site in Charleston was established in fiscal
    year 1996 to accommodate a large increase in the demand for basic
    training, particularly, the U.S. Border Patrol (USBP). The training
    workload increase for the U.S. Border Patrol and other INS training
    categories is the direct result of prior Administration and
    Congressional initiatives to control illegal immigration along the
    United States' borders. That training is expected to reach even higher
    levels over the next several years.
        In addition to the training conducted on-site at the FLETC's
    residential facilities, some advanced training, particularly that for
    State, local and international law enforcement, is exported to regional
    sites to make it more convenient and/or affordable for our customers.
    At a time when the FLETC residential sites have been stretched to
    capacity limits to meet increased Federal training requirements, the
    use of export sites for other types of training has proved highly
    successful. In utilizing export sites, most of which are local police
    academies, the FLETC does not incur any capital expenditure
    obligations.
                       washington, dc area site progress
        Construction activity authorized by Public Law 106-346, enacted by
    Congress in fiscal year 2001, provided $30,000,000 for the development
    of a training site within the Washington, DC area, primarily for short-
    term requalification training and as a site for in-service U.S. Capitol
    Police training. Public Law 107-117, enacted by Congress in fiscal year
    2002, provided an additional $8,500,000 toward site development and to
    accelerate facility construction for the U.S. Capitol Police. The site
    ultimately selected, following an extensive review of available,
    surplused Federal sites, was the former naval communications base in
    Cheltenham, Maryland. Transfer of the 247-acre site by the General
    Services Administration and the Navy was completed in May 2001 to the
    FLETC inventory
        Since assuming ownership of the Cheltenham property, excellent
    progress is being made in design and development work. A site Director
    and core staff to manage the site conversion work for a law enforcement
    training center have been hired, an environmental assessment completed,
    other required studies undertaken and design is now well underway for
    new and upgraded facilities. Plans call for a completely enclosed and
    environmentally safe firearms complex, a vehicle training complex for
    non-emergency, obstacle and pursuit driving and related support
    facilities. In keeping with the direction of Congress, FLETC has placed
    the highest priority on completion of an in-service academy operation
    for the U.S. Capitol Police. In February 2002, the Capitol Police began
    using an interim facility at Cheltenham that FLETC renovated for them,
    while a more permanent facility, slated for occupancy by September
    2002, is completed. The interim building contains classrooms, offices
    and support capabilities to train 50-100 officers at any one time. We
    would like to acknowledge the commitment and assistance the retiring
    Chief of Police, James Varey, and the Capitol Police Board have
    rendered in getting this endeavor underway.
        We anticipate that design work will be finished by this summer for
    all facilities and construction completed by late 2003. The District of
    Columbia Metropolitan Police Department (MPDC) has indicated its
    intention to transfer funds to FLETC to help defray the cost of the
    firearms range complex. MPDC is one of the principal agencies
    specifically incorporated into the legislation as a partner
    organization at Cheltenham. In total, the FLETC projects more than 50
    agencies in the Washington, DC area will receive requalification
    training at Cheltenham when it is opened.
        The Cheltenham project came about as a result of a serious
    shortfall for over a decade in adequate firearms and driver skills
    training capabilities in this region, which has one of the highest
    concentrations of Federal law enforcement officers in the United
    States. These officers are mandated to receive short-term
    requalification training on a periodic basis to refresh perishable
    skills that, left unaddressed, can lead to liability issues.
                                    workload
        During fiscal year 2001, 25,689 students graduated from the Center,
    representing 106,407 student-weeks of training. This total included
    19,435 students who were trained at Glynco, GA; 2,543 students trained
    at Artesia, NM; 829 students trained at the temporary training site in
    Charleston, SC; and 2,882 students trained in export programs. There
    were 10,735 basic students; 11,525 advanced students; 3,151 State and
    local students, and 278 international students trained providing for an
    average resident student population (ARSP) of 2,046.
        As a result of the September 11th attacks, our partner agencies'
    workload projections increased significantly. As previously stated,
    FLETC is projecting the greatest increase in training requirements in
    its history. In fiscal year 2002, the FLETC will train 49,773 students
    representing 202,842 student-weeks of training. This total includes
    32,377 students to be trained at Glynco; 9,147 students at Artesia;
    2,269 students at the temporary site in Charleston; and 5,980 students
    in export programs. A total of 23,511 basic students; 18,259 advanced
    students; 6,073 State and local students; and 1,487 international
    students are projected for a total ARSP of 3,900. Simply stated, this
    growth is unprecedented.
        Over the years, the FLETC has experienced a number of periods of
    sustained growth in the training requests by its partner agencies and
    we have been able to accommodate most of these increases by being
    innovative and undertaking extraordinary measures. That is certainly
    going to be the case in fiscal year 2002 and probably for the
    foreseeable future. To meet the training influx, the FLETC has gone to
    a 6-day workweek at both the Glynco and Artesia centers which provides
    nearly 36 more training days this fiscal year. By implementing this
    format, FLETC will be able to accelerate training to get students
    graduated more quickly and ``on the streets.'' The FLETC realizes that
    the implementation of the 6-day training week will take a toll on the
    FLETC and partner agency staff and resources and we will closely
    monitor and do everything possible to minimize adverse impacts. Even
    though the training requirements currently scheduled have drastically
    increased, they may not represent the entire training needs of our
    partner agencies. Due to facility capacity and agency hiring
    constraints and issues, the impact of the increased workload will
    likely be spread over 2 years. In the Emergency Supplemental, Congress
    has provided sufficient funding to allow the FLETC to schedule all of
    the projected workload needs identified thus far for fiscal year 2002.
    The fiscal year 2003 request includes sufficient funding to maintain
    the same level of training as provided for in fiscal year 2002.
                        transportation security training
        In October 2001, the Federal Aviation Administration (FAA)
    requested that FLETC undertake training for the newly expanded Federal
    Air Marshal (FAM) program authorized by the Administration and
    Congress. In concert with FAA, training programs were adapted to
    provide training for both new hire personnel with previous law
    enforcement experience and those with no previous law enforcement
    experience. This training started quickly at the Artesia center and is
    expected to continue into next fiscal year. Over 500 FAMs already are
    in training, or have graduated from these programs. To supplement
    FLETC's staff resources, a number of reemployed annuitants are on board
    to support this training. FAA also has contracted with a private firm
    to assist in the FAM specialized mission training. Recently, three 727
    aircraft were obtained for use in more realistic training scenarios for
    the FAMs. FAA has agreed to reimburse FLETC for the costs of training
    tuition, staffing needs, overtime, and special effects equipment.
        Also, for the last few weeks FLETC has been engaged in discussions
    with Transportation Security Administration (TSA) officials about other
    specific training needs. FLETC is helping to design training for
    airport screeners and train-the-trainer programs for those who will be
    responsible for delivering this training. FLETC sites will not be the
    focus of this training because of the heavy requirements for law
    enforcement training already identified. However, FLETC will continue
    to consult with the TSA and to help validate the training given to
    screeners.
        Finally, with respect to TSA, we are now working closely with them
    on possible options for training a cadre of law enforcement agents that
    TSA has under consideration for deployment to the Nation's airports. As
    the situation becomes clearer and decisions are made, we will keep the
    Committee informed of our role in this development.
               facilities master plan/five year construction plan
        Now, Mr. Chairman, I would like to brief you and the Committee on
    the status of the progress that has been made in expanding the FLETC's
    facilities. A Master Plan, first presented to Congress in June 1989,
    was intended to provide for efficient and orderly development of the
    FLETC's land and facility resources to meet anticipated workload needs
    through fiscal year 1998. It was a comprehensive blueprint and a guide
    for expansion of capacities to meet all of the requirements identified
    at the time to accomplish multi-agency law enforcement training.
        Over the years, the original Master Plan was updated to reflect
    refined cost estimates and to incorporate changes necessary to meet the
    evolving training needs of our customers.
        In fiscal year 1999, due to the U.S. Border Patrol and Immigration
    and Naturalization Service (INS) projected multi-year hiring and
    advanced training buildup, the FLETC Master Plan was changed to a 5-
    year plan to focus exclusively on addressing the FLETC facility
    capacity constraints. Under this modified plan, $83,000,000 in new
    construction at Glynco and Artesia was proposed. Through fiscal year
    2002, Congress has appropriated nearly $53,000,000 for this purpose.
        The funding that this Committee has provided over the years in
    support of our construction plan has positioned the FLETC to better
    meet the surge in training workload requirements experienced after the
    September 11 attacks. Prior to the events of that date, the FLETC's
    plan for construction focused on maximum utilization of facilities at
    both the Glynco, GA and Artesia, NM sites.
        In the aftermath of the terrorist attacks, training capacity at
    FLETC has been pushed to the limit. The development of an updated,
    comprehensive, Facilities Master Plan, to address the post-September 11
    training demands, is crucial and has been initiated. A contract is
    being awarded to a private firm, experienced in planning activities, to
    complete a comprehensive study within about 1 year. This study will
    also include the new site at Cheltenham, MD.
                       maintenance and renovation request
        The FLETC's fiscal year 2003 ACI&RE request of $23,329,000 will
    provide funding for all of the cyclical maintenance and up-keep of our
    permanent sites. The FLETC is not seeking any additional funding for
    new construction projects this fiscal year, but the funding requested
    will permit us to continue the renovation of several older facilities
    in Glynco which need to be brought up to current code and design
    regulations
                                    closing
        Mr. Chairman, FLETC is committed to providing the highest quality
    law enforcement training at the lowest possible cost. Substantial
    savings are being realized through the operation of consolidated
    training sites and we know that the challenge ahead of us may be the
    most important of all. I thank you for your continued support as the
    FLETC strives to remain a partnership committed to excellence.
        I am available to answer any questions you may have concerning this
    appropriation request.

        Senator Dorgan. Senator Campbell?
        Senator Campbell. Mr. Chairman, I have got another
    committee I have got to drop by before we have that briefing at
    2:30, so with your permission, I am going to submit questions
    to several of the gentlemen here at the table and ask for them
    in writing.
        I am particularly interested, Director Buckles, about the
    expansion of the GREAT program, particularly on Indian
    reservations, and how you are coordinating with the Bureau. For
    Director Hackenberry, I am interested in knowing how you are
    handling that new workload of 5,000 new air marshals that you
    have to train. But those things, I will submit in writing, and
    I thank you.
        Senator Dorgan. Thank you, Senator Campbell.
        Senator Reed?
        Senator Reed. Thank you very much, Mr. Chairman. Again, let
    me commend all of you for not only your testimony, but for your
    service to the Nation and also convey that to the men and women
    who serve with you.

                               EXPLOSIVES PERMITS

        Mr. Buckles, given the aftermath of September 11 and the
    images emanating from the Middle East, we have to be concerned
    about the use of explosives by terrorists, and your Bureau is
    on the front lines of this effort to protect Americans from
    these types of explosive incidents. In your estimate, how easy
    would it be today for an individual with violent intentions to
    obtain commercial or improvised explosives in this country?
    What kinds of permits are required? Is it difficult?
        Mr. Buckles. Senator, under current Federal law, it is
    fairly simple to acquire explosive materials. It requires less
    of a background check, for example, than is currently required
    for firearms. Under Federal law, if you have a driver's
    license, can establish that you have residency in a State, and
    you complete a form that says you are not a felon and that you
    are not otherwise disqualified from purchasing explosives, a
    licensed dealer, at that point, is free to sell you any kind of
    explosives. Some States have their own laws that require
    blasters' permits before these can be purchased, but that is
    not uniform around the country.
        Senator Reed. I understand that Senators Kohl and Hatch
    have introduced legislation, the Safe Explosives Act. Are you
    supportive of that Act and might you elaborate on why you are?
        Mr. Buckles. Yes, Senator, and we have been working closely
    with the Administration and the committees to finalize some
    language on that. Principally, what that statute would do is
    require that all persons purchasing explosives would have to
    have a permit. Currently, only purchasers who buy explosives in
    interstate commerce are required to have a permit. This would
    require all purchasers to have a permit. To get the permit,
    there would have to be a background investigation, fingerprints
    would be submitted, et cetera. Some of the details on how it
    would work with some limited users and those issues are
    continuing to be worked out, but we believe that this is
    important legislation.
        Senator Reed. Do you have the resources now to actively
    monitor and implement existing law and the additional law if
    this Kohl bill is passed?
        Mr. Buckles. We do not have the resources to enforce the
    new law, were it to pass, and we have developed some budget
    projections on that already for people in the Department.
        As for today, we currently have about 500 inspectors in the
    field in ATF, and those inspectors are responsible for the
    collection of $14 billion in revenue, monitoring about 100,000
    firearms licensees, as well as the current number of Federal
    explosives licensees and permitees, which is about 9,000. We
    are very strapped under the current situation to really
    adequately follow everything we need to be doing in this area.
        Senator Reed. Thank you, Mr. Buckles.

                      BACKGROUND CHECKS FOR GUN SHOW SALES

        Let me turn to another issue, and that is, again, in the
    wake of September 11 and recent press reports, there have been
    indications that individuals, some at least allegedly
    associated with terrorist groups like al Qaeda, like Taliban,
    like the IRA, have attempted to use gun shows to acquire
    weapons. In this concept, would you consider a law requiring
    background checks on all firearms sales at gun shows to be
    helpful to you in enforcing the laws?
        Mr. Buckles. Yes, Senator. A couple of years ago, ATF
    prepared a report on gun shows, in terms of how they operate as
    part of a larger firearms market in the United States, and we
    made some recommendations, at that time, that applying, for
    example, the background checks that are required of Federal
    firearms dealers today and requiring those in gun show
    environments is something that should be done.
        Senator Reed. Thank you, Mr. Buckles.

                   NATIONAL INSTANT CRIMINAL BACKGROUND CHECK

        Let me just ask about one other aspect of this issue. As
    you indicate, federally licensed firearms dealers must go ahead
    and institute a background check before a sale is processed. I
    understand that in your formal testimony, you indicated that
    the Bureau referred to its field offices over 12,000 ``delayed
    denials'' under the National Instant Criminal Background Check
    system. As I understand it, these delayed denials are
    situations in which an individual, at least a question comes
    about their fitness for acquiring the weapon, is that correct?
        Mr. Buckles. Correct. Under the Brady Law, a decision must
    be made within 3 days as to whether or not the person is
    disqualified. If the FBI National Instant Check System does not
    have final data in 3 days, they continue to search for any
    information that they come up with. After those 3 days, they
    will report it to the dealer, and that is what is sometimes
    called a ``delayed denial''.
        Senator Reed. Now, as I understand it, again, from the
    information I have, of those 12,000 delayed denials, the Bureau
    has recovered or accounted for about 7,000 firearms. I also
    understand another 3,000 were found to be ultimately not
    transferred or the purchase was not prohibited. So this leaves
    about 2,000 potentially illegal firearms transfers under
    investigation by the Bureau at this point, is that correct?
        Mr. Buckles. I believe those are the correct numbers, yes.
        Senator Reed. And how long do you investigate these delayed
    denials? I mean, are you working through them or they will be
    forever in limbo?
        Mr. Buckles. No, Senator. We give these delayed denials a
    high priority and continue to work them. As you can see just
    from the numbers, there are an awful lot of them. The reason
    they are delayed in finalizing on those is because there are
    complicated issues about whether or not the person is, in fact,
    actually convicted and whether or not the firearms have been
    properly disposed of. But we continue following up on those.
        Senator Reed. Thank you.
        Mr. Chairman, you have been most gracious. Let me turn back
    my time to you and additional questions, I will direct to the
    witnesses in writing. But thank you, Mr. Chairman, and thank
    you, Mr. Buckles, and all of you gentlemen for your efforts.
    Thank you.
        Senator Dorgan. Senator Reed, thank you very much.
        Let me begin with you, Mr. Stafford. There has been, I
    understand, a substantial increase in the number of people in
    the Federal Government who are provided protection. I know that
    you will not want to describe the details for me, but can you
    tell me about the increased workload of the Secret Service for
    providing protection for those in the executive branch and
    legislative branch, for that matter?

                         INCREASE IN PROTECTIVE DETAILS

        Mr. Stafford. Yes, I can, Mr. Chairman. Prior to 9/11, we
    had 17 full-time protectees in addition to a number of foreign
    heads of state that visit our country.
        Senator Dorgan. That 17 is 24 hours a day, 7 days a week
    protection?
        Mr. Stafford. That is correct, including the foreign heads
    of state who visit the country, but these visits are sporadic
    and normally not for long-term periods of time.
        We have gone up to 38 full-time protectees as a result of
    what happened to us on 9/11. Additionally, as was mentioned
    earlier, the National Special Security Events have been a drain
    on our manpower. In January, we had the World Economic Forum in
    New York with over 40 heads of state visiting our country. It
    was our responsibility to safeguard their visit. In February,
    we had the Super Bowl, which was designated a National Special
    Security Event, and, of course, the Olympics. As I mentioned
    earlier, the Olympics was enormous with the 900 square miles,
    15 venues, and required our presence for over a month. It was
    very manpower-intensive.

                   WORKFORCE RETENTION AND WORKLOAD BALANCING

        Senator Dorgan. For the last couple of years, we have
    provided funding--last year was the third year--in the
    workforce retention, workload balancing effort that we have
    had, a 3-year phase-in. We had been seeing a massive quantity
    of overtime in your agency and so we were trying to phase in
    something that would remedy that. Does the 2003 budget request
    provide sufficient funds to fully annualize the new hires that
    you have received under our initiative?
        Mr. Stafford. We are in the third phase of that hiring and
    have been very grateful for the support of this committee. The
    quality of life issues for the men and women in the Secret
    Service were very serious 3 years ago. Our people were working,
    on average, over 80 hours of overtime a month, which was too
    much.

                                    OVERTIME

        This is the third phase. Prior to 9/11, we saw an
    improvement in that. We were down to 72 hours. Of course, after
    9/11, with the enhancements, we have seen overtime revert to
    the 80-hour mark. But with the continued hiring, we think we
    will see that be reduced again. We are going to hire almost 500
    people this year, with attrition, and that is a very positive
    thing for us. The annualization for those people in 2001 and
    2002 is not in the 2003 budget, and that is approximately $27
    million.
        Senator Dorgan. Mr. Gurule, can you tell me why that is not
    in the budget? I think the administration has supported this.
    The Congress obviously feels strongly about it and has
    initiated the approach, but why has the administration chosen
    not to annualize the funding for that?
        Mr. Gurule. I believe that the funds included in the budget
    are sufficient to go ahead and cover that particular item. It
    is something that I would like to talk to Director Stafford
    about and see if there is something there that can be done to
    address that. But it was my understanding that the budget that
    was submitted was sufficient in that regard, so----
        Senator Dorgan. Okay. Well, I will need to understand that
    at some later date. Either the budget provides sufficient funds
    to annualize it or it does not.
        Mr. Gurule. I understand.
        Senator Dorgan. That is something we can work on, if our
    staff can work with your budget folks to understand it. The
    reason I raise that point is this program was designed for a
    very specific purpose. We were having trouble with retention,
    working people to the bone, massive quantities of overtime, and
    working with Treasury and with Secret Service, we decided to
    try to do something about it. We put in place a three-phased
    approach, and if that is going to work, then the cost of that
    has to be annualized so that we say, yes, now we have phased it
    in and it is here and here is the funding for it, and the
    funding is either there or it is not there, and I am not quite
    sure I understand the answer, but we will work with you to get
    that answer.

                        NEW YORK FIELD OFFICE RELOCATION

        Mr. Stafford, tell us about the relocation of the New York
    field office at this point. How is that going?
        Mr. Stafford. It is going slowly. I just came back from New
    York this morning. I was there all day yesterday visiting with
    our supervisors in New York and we have moved from Ground Zero.
    Obviously, we lost our entire office, most of our fleet, and
    unfortunately, we lost one employee, as you are well aware, and
    we had a number of injuries.
        Some operations moved to Brooklyn. We are finding the
    commute is becoming a bit cumbersome as well as other
    difficulties relative to our responsibilities in Manhattan. We
    are in three different locations now; two temporary locations
    in Manhattan, the post office in Manhattan, and also at John
    Jay College. Within the next 3 to 4 months, employees at those
    two locations will all co-locate at our new office facility in
    Brooklyn. At that time, I think we will be in much better
    shape.
        Senator Dorgan. Thank you.

                 GANG RESISTANCE EDUCATION AND TRAINING PROGRAM

        Mr. Buckles, is the GREAT program funded in this budget?
        Mr. Buckles. Yes, Senator, it is. There was some question
    earlier about whether the appropriate language was included in
    the budget to indicate that. That is the grant authority that
    would allow us to put out $13 million in grants. It is my
    understanding that that issue has been resolved and that the
    appropriate language is being provided to the committee to
    ensure that that funding is available.

                          BUSINESS STRATEGY ADJUSTMENT

        Senator Dorgan. Mr. Buckles, was the business strategy
    adjustment your idea?
        Mr. Buckles. No, Mr. Chairman, it was not.
        Senator Dorgan. So what savings do you propose from your
    budget to cover the $7.6 million business strategy adjustment?
        Mr. Buckles. Mr. Chairman, we are going to be looking at an
    entire range of possibilities in terms of ways to achieve those
    savings. We do not have the precise plans on what we will do,
    and one way or another, they will eat into some of our base
    resources that we are facing. But we are hoping that we can
    achieve savings in the way in which we are going to go about
    renting space by trying some innovative ways of housing people.
    We have a lot of new space issues coming up with the growth we
    have had over the years, so we are going to try to minimize the
    cost in that area. We are also looking at other ways in which
    we can cut down on the expenses without really cutting into the
    muscle of the agency, but we do not have precise plans on how
    we are going to meet that entire $7 million.

                          OFFICE OF HOMELAND SECURITY

        Senator Dorgan. Have you placed any reimbursable or non-
    reimbursable employees within the Office of Homeland Security
    at this point?
        Mr. Buckles. No, Chairman, we have not.
        Senator Dorgan. Mr. Stafford, have you placed any employees
    within the Office of Homeland Security?
        Mr. Stafford. Yes, we have.
        Senator Dorgan. Can you tell me how many?
        Mr. Stafford. Right now, we have two detailees.
        Senator Dorgan. Mr. Sloan, have you?
        Mr. Sloan. Mr. Chairman, no, we have not.
        Senator Dorgan. Mr. Hackenberry?
        Mr. Hackenberry. No, sir.
        Senator Dorgan. All right. The reason I asked the question
    is I believe the budget request from the White House for the
    Office of Homeland Security describes 95 detailees and I am
    going to try to get a list of where they are coming from, but
    it sounds like, with the exception of the Secret Service having
    two, it sounds like they are not coming from this group.
        Mr. Stafford. Let me correct that. I think we have three.
        Senator Dorgan. Three, I am sorry.
        So, Mr. Gurule, this business strategy adjustment, is that
    yours?

                          BUSINESS STRATEGY ADJUSTMENT

        Mr. Gurule. No, it is not my idea, but I think it is a good
    idea, nonetheless, and I think it is based on a very sound
    principle that attempts to enhance the effective utilization of
    limited resources. I think that any agency, if it is going to
    call itself a world class agency, should continue to examine
    how it does business and pursue ways to enhance the
    effectiveness of operations and identify programs that are not
    being effective and are not adding value, and either eliminate
    those programs or reduce those.
        So I think the idea is a sound idea, one that the Bureaus
    have, I believe, ample time to take; to examine their
    operations and identify ways, whether through renting space, or
    whether through looking at travel. I know the Secret Service is
    looking at ways in which they could reduce travel expenses by
    making sure that agents are leaving out of airports in the D.C.
    area that provide the least cost and housing them together in
    ways that will reduce cost. So I think we can do it.
        Senator Dorgan. Would you recommend that we have the same
    kind of business strategy adjustment for the Office of
    Management and Budget?
        Mr. Gurule. Well, I am not going to speak for OMB. I think
    it is a sound principle and----
        Senator Dorgan. Would it be helpful to them?
        Mr. Gurule. I think that every agency has an obligation to
    continue to look for ways in which to conduct their operations
    in a more effective, the most, maximum effective way.
        Senator Dorgan. That is a fair point and I accept it. My
    only point was that while we do not fund--well, we do fund the
    Office of Management and Budget and the White House, I noticed
    that there was no business strategy adjustment for the White
    House or the Office of Management and Budget. If you make the
    point that it is an awfully good thing to require everyone to
    look at how well they are doing and making adjustments, then
    would you recommend it for the White House and the Office of
    Management and Budget?
        Mr. Gurule. I am not going to tell them what to do. The
    only thing that I would suggest is that with respect to our
    boss, and I am referring to Secretary O'Neill, he has been a
    very successful businessman and I think that the principles
    that have caused him to realize the kind of success that he has
    realized in the private sector, he is bringing to the Treasury
    and we welcome those.
        Senator Dorgan. That is a fair point. You answered it well.
    I just would say that if we suggest this for the White House
    and OMB, I will tell them that you indicated that it was a good
    thing for them.
        Mr. Gurule. I was afraid you were going to take my words
    and----
        Senator Dorgan. Let me amend that. I will not say that you
    said it was a good thing for them, but if we do it to them, I
    will say that you said it was a good thing.
        Senator Dorgan. That, I think, is technically accurate.
        Mr. Gurule. Why do we not state it this way, that for any
    organization to achieve world class status as a world class
    organization, I think this principle should be adopted and
    incorporated.
        Senator Dorgan. Mr. Gurule, thank you.
        Let me ask Mr. Hackenberry a couple of questions, and then,
    Mr. Sloan, I have a question or two for you.

                          FEDERAL AIR MARSHAL TRAINING

        Mr. Hackenberry, let me ask, where are you going to train
    air marshals and how many do you envision will be trained over
    the next 2 years, or what do you know about the training of air
    marshals at this point?
        Mr. Hackenberry. Actually, several things. The first is
    that the air marshal training that is being conducted, for the
    most part, is being conducted at our facility in Artesia, New
    Mexico. Post 9/11, very shortly after 9/11, we met with
    officials from the FAA, prior to the creation of TSA, and
    developed a training program specifically for air marshals.
    Prior to that, there were very few air marshals that were
    trained on a yearly basis and they went through the regular
    criminal investigative training program at FLETC-Glynco.
        In meeting with the FAA and subsequently with TSA
    representatives, a specific training program for the air
    marshals was developed and it is being delivered in Artesia,
    New Mexico. By July, the end of July this year, we will have
    trained, or we will have in training, the number of students
    for the air marshal training program that was mentioned earlier
    by yourself and by Senator Campbell.
        The training is in two phases. One is training for people
    who come in with former law enforcement experience. That
    training is brief. It is actually only 1 week long, and that
    has now been moved to, and is being conducted in, Atlantic City
    in an FAA facility. For the non-law enforcement new hires, who
    receive a 5-week basic training program and then a 1-week
    follow on----

                       TRAINING CAPACITY FOR AIR MARSHALS

        Senator Dorgan. And what is your capacity to train at this
    point? How many can you handle, especially in the second case,
    without law enforcement training?
        Mr. Hackenberry. We are about at capacity now. We are
    handling an overlap of, say, 700 per week at Artesia, New
    Mexico.

                        TRANSPORTATION SCREENER TRAINING

        Senator Dorgan. Let me ask you about baggage screeners. Who
    will be making the decision, in your judgment, about who will
    undertake that kind of training?
        Mr. Hackenberry. As far as baggage screeners, in that they
    are not law enforcement, our involvement on that was simply to
    meet with the FAA. We brought in experts from the Secret
    Service, from FLETC training and from the FAA and looked at a
    program that the FAA had developed to train the screeners. We
    had what we call a ``curriculum review conference'' and
    reviewed the curriculum content and helped FAA develop the
    curriculum to train-the-trainers for the screeners.
        Then we piloted a program in Glynco, and now we have
    actually piloted a second program in Glynco to train-the-
    trainers that the Transportation Security Administration has
    hired. It is my understanding TSA plans to deploy those
    trainers to do training across the country, in locations such
    as Oklahoma City and other places, where facilities are
    available. This training will be conducted by trainers that
    have been trained at the initial pilot programs in Glynco and
    then additional trainers will be trained elsewhere, and that is
    how they plan to accomplish their goal for screener training.
        Senator Dorgan. All right. Mr. Sloan, does your 2003 budget
    request cover the requirements that you have as a result of the
    USA PATRIOT Act?

                    FISCAL YEAR 2003 AND THE USA PATRIOT ACT

        Mr. Sloan. Mr. Chairman, the quick answer is yes. As I sit
    here today on April 17, I am comfortable that, for lack of a
    better term, we are keeping our head above water. But as I said
    in my opening statement, I am not going to be shy about coming
    forward, either, to the committee, to your staff, and to
    Treasury if we start to see that balance change in a negative
    way. But based on what we have proposed and based on what I see
    in my resource allocations, I am comfortable that we can
    maintain momentum in those requirements.
        Senator Dorgan. Can you describe your relationship with the
    Office of Homeland Security?

                    COOPERATION WITH OTHER FEDERAL AGENCIES

        Mr. Sloan. We do not have----
        Senator Dorgan. Have you had a relationship with them?
        Mr. Sloan. Our relationship with the Office of Homeland
    Security would typically be through the Office of Enforcement
    at Treasury. Although I think we have had one person go to a
    meeting. Other than that, it would be through Enforcement.
        Senator Dorgan. Let me ask Mr. Gurule, then. There was a
    Los Angeles Times article that I noted, who knows the accuracy
    of these things, but here is what it said. It said the
    financial war on terrorism has been hamstrung by turf battles
    between Federal agencies. Allegedly, Treasury and Justice have
    opened hundreds of independent investigations, independent of
    each other, and so on.
        First of all, respond to that, because that went out in a
    press story, and then, second, what kind of cooperation exists
    at this point between, for example, your agency and the FBI?
        Mr. Gurule. I am very familiar with that L.A. Times story,
    and in my opinion, it is riddled with a number of inaccuracies.
    I am very suspicious of articles where the sources are
    anonymous and even the agencies that they are working for are
    not disclosed in the article.
        But the short answer is that we are cooperating. In fact,
    the FBI and Treasury Enforcement are cooperating. In fact, when
    Operation Green Quest was announced publicly, there was a press
    conference that was held in October at the Customs Service and
    Assistant Attorney General Michael Chertoff actually
    participated in that press conference and voiced his support of
    Operation Green Quest.
        Since then, FBI agents have been assigned to work at Green
    Quest. Most recently, there have been two that were pulled back
    and now some additional agents are going to be reassigned, so
    there was a gap period there where, quite candidly, we did not
    have FBI agents assigned.
        But let me add that I had an opportunity on Thursday of
    last week to meet with FBI Director Mueller and it was in
    direct response to the L.A. Times article. Commissioner Vaughn
    was also present at that meeting. Obviously, Director Mueller
    was very concerned, as was I, because both of us believe
    strongly that with respect to the challenge at hand, and that
    is to combat and defeat global terrorism, we cannot have a
    situation where agencies are not working closely and sharing
    information, and if that is the case, I am determined to take
    whatever appropriate action is necessary with respect to the
    individuals who are not cooperating.
        However, at that meeting, I committed, as I have in the
    past, to Director Mueller that any information, any
    investigative information that we have developed, they have
    access to, unfettered access to, and he committed the same to
    me.
        We have also put in place--this has been in operation for
    some time--a system and method to resolve conflicts. It is
    certainly possible that there could be some operational
    conflicts with an investigation that the FBI is involved in,
    and so we have that in place to resolve conflicts and ensure
    that cooperation is what it should be.
        Senator Dorgan. Mr. Gurule, one last question about the
    business strategy adjustment, if I might. What percent was
    applied to the BSA, business strategy adjustment?

                          BUSINESS STRATEGY ADJUSTMENT

        Mr. Gurule. What percentage is----
        Senator Dorgan. What percent of the----
        Mr. Gurule. It is a very small percent. I do not recall the
    exact number, but I think it is in the maybe 3 percent, 4
    percent range, but I do not have that number right in front of
    me, but it is a very small percent of the overall figure.
        Senator Dorgan. Does anybody in your budget office know
    that?
        Mr. Gurule. Excuse me, one-half of 1 percent.
        Senator Dorgan. One-half-of-one percent?
        Mr. Gurule. Yes.
        Senator Dorgan. Okay. We are doing a lot of things in the
    area of defense, Defense Department, national security,
    homeland security. All of it relates to the same meat and
    muscle that is necessary to protect this country. In my
    judgment, we are going to take a look at these budgets. I want
    to make sure that we have annualized what we have tried to do
    to give the Secret Service what it needs to retain its people.
    I want to make sure that we have the muscle in these agencies
    dealing with counterterrorism, with homeland security.
        I do not know whether the business strategy adjustment is
    good or not. It is arbitrary, and it seems to me that every
    agency ought to take a look at where it is spending money it
    ought not spend, and if they cannot find it, we will look for
    it, we will find it, and we ought to dump that out of the
    budget, number one.
        Number two, we ought to fully fund those things that we
    know we need to do in these agencies, especially in these days
    when we talk about homeland security. If we are going to put
    $49 million more in the Department of Defense, and it is likely
    Congress will do that, without a business strategy adjustment,
    then those agencies that are involved in homeland defense need
    to have the same muscle and the same investment that we do with
    respect to the Defense Department.
        So we are going to take a hard look at all of these things
    and evaluate what needs to be done to annualize the things that
    we have tried to do to strengthen all of these agencies. We are
    not interested in wasting money. We are very interested in
    investing in this country's strength.
        I worry, as I believe does Governor Ridge, the President,
    and others, that, God forbid, there could be another terrorist
    act committed in this country. Terrorists would love to commit
    a terrorist act in this country again and kill additional
    Americans. Your agencies are part of the critical agencies that
    need to work together to make sure that does not happen. We
    have, knock on wood, been successful since September 11. It is
    not as if they have not tried, but a number of terrorist
    threats have been thwarted through the good work of a lot of
    dedicated Federal agents and law enforcement personnel and
    others, both Federal, State, and local.
        But my point is, this issue of homeland defense is
    critically important because this was is not just waged on
    foreign soil. This war exists here, as well, and it is a
    defensive war, and your agencies, the success of your agencies
    will depend a lot on whether we see future terrorist acts
    foiled or whether they actually occur in this country, and so I
    want the investment to be made to make sure that your agencies
    can tell me that you have got what you need to do the job and
    the men and women who work for you in the middle of the day and
    the middle of the night have what they need to do the job, as
    well, to defend this country.

                         ADDITIONAL COMMITTEE QUESTIONS

        So having said all that, I appreciate your testimony. This
    subcommittee will meet tomorrow at 2:30 in this same room to
    discuss the 2003 budget request for the United States Customs
    Service. Mr. Gurule, you will be back tomorrow. I will have
    some additional questions for you then, as well.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]

                      Questions Submitted to James Gurule

                 Questions Submitted by Senator Byron L. Dorgan

                           financial war on terrorism
        Question. An April 7th LA Times article stated that the financial
    war on terrorism has been ``hamstrung'' by turf battles between Federal
    agencies. In fact, recently we learned that the FBI pulled out of
    Operation Green Quest. Allegedly Treasury and Justice have opened
    hundreds of investigations independent of each other. Undersecretary
    Gurule was quoted as saying that the groups perform important but
    separate functions. Mr. Gurule states that Treasury pursues broader
    financial investigations while the FBI pursues September 11 activity.
        What is the current status of the disparate financial
    investigations?
        Answer. The Departments of Justice and Treasury continue to work
    closely to investigate terrorist financing networks. Since its
    inception in October 2001, Operation Green Quest has initiated
    approximately 300 investigations targeting the finances of terrorist
    organizations and their infrastructure. Many of these investigations
    have been developed independently by Green Quest or referred by various
    sources; however, those cases that appear to crossover with FBI
    investigations are coordinated at either the headquarters or field
    level. We have established a mechanism at the departmental level to
    resolve any disputes and coordinate overarching policies and
    activities. These investigations often complement one another, and
    there is a need for all agencies with relevant expertise to bring their
    assets to bear on this campaign against terrorist financing. In
    addition, the activities of the law enforcement agencies dealing with
    terrorist financing are coordinated as part of the larger U.S. strategy
    in the inter-agency context.
        Question. Are they truly separate, and if so is there any
    coordination?
        Answer. There are separate task forces that utilize expertise from
    various parts of the Government devoted to the task of fighting
    terrorist financing. As mentioned above, Operation Green Quest has
    generated and is pursuing a number of investigations that target
    terrorist financing. These cases, as well as those that crossover with
    current FBI investigations are coordinated at the headquarters and
    field level to ensure case coordination. The FBI-led Financial Review
    Group (FRG) originally began as an arm of the September 11
    investigation but has since expanded its mission to include
    investigation of terrorist financing cases generally. Treasury Bureaus,
    including Customs, IRS-CI, ATF, FinCEN, and OFAC have been committed to
    the FRG since its inception and have provided invaluable resources and
    expertise to the FRG's efforts. There are currently representatives
    from all the relevant bureaus at the FRG. In addition, Treasury
    participates fully in the inter-agency Joint Terrorism Task Forces as
    well as the various High Intensity Money Laundering and Related
    Financial Crimes Areas (HIFCAs). The FBI also participates in Operation
    Green Quest, and the DOJ has committed attorneys to Green Quest's
    efforts. In general, there is good coordination and cooperation, but we
    are always striving to improve our overall U.S. Government efforts in
    this area.
        Question. Is Treasury denying the FBI access to Treasury's
    financial information and is the FBI doing the same to Treasury?
        Answer. The question appears to stem from a false and uninformed
    allegation in a recent LA Times article. The Treasury does not deny FBI
    access to any information it obtains. In fact, information sharing in
    this unprecedented law enforcement and intelligence endeavor, thanks in
    large part to provisions of the USA PATRIOT Act, has been very good.
    Operation Green Quest and the FBI are working together on several major
    investigations. Information, to include financial data, is routinely
    exchanged in the pursuit of these cases, and information is constantly
    being shared among the intelligence and law enforcement communities.
        The allegation in the article stems from a misunderstanding of how
    ``blocked'' documents, those that have been blocked but not seized
    because of a designation made by the Office of Foreign Assets Control,
    can be reviewed by the U.S. Government. In cases where documents have
    been blocked, a search warrant, subpoena, or consent of the owner must
    be obtained to actually read the contents of the documents. Thus, the
    alleged ``denial'' of information set forth in the article was simply a
    reflection that no agency had access to the documents for purposes of
    reading or searching them.
                         treasury counterterrorism fund
        Question. The CT Fund was first appropriated in fiscal year 1997 as
    a central fund to reimburse any Treasury organization for the costs of
    providing support to counter, investigate, or prosecute terrorism,
    including payment of rewards in connection with these activities.
        The President's fiscal year 2003 Budget proposes to transform the
    Counterterrorism Fund under the Department of Treasury into a
    reimbursable account for any agency in the Federal Government for its
    role in a National Special Security Event (NSSE). Congress has
    cautioned the Administration on the use of this fund to pay for events
    such as the Olympics and other NSSEs. Is it your intention that these
    Treasury funds be used to reimburse any agency for its participation in
    these events?
        Answer. The Counterterrorism Fund is available to provide funding
    for unanticipated costs associated with support to counter,
    investigate, or prosecute domestic or international terrorism. Also,
    the Fund can be used to re-establish the operational capability of an
    office, facility, or other property damaged or destroyed as a
    consequence of any unexpected domestic or international terrorism act.
    NSSEs are expensive and unpredictable, and the Counterterrorism Fund
    has been a ready source of funding that enables us to carry out our
    mission even in the instances when we need to reimburse other agencies.
        Question. Aren't you concerned that this fund will be depleted by
    planned activities that should be budgeted for by the affected
    agencies, rather than unforeseen events that will require the
    involvement of agencies within the Department of Treasury?
        Answer. We are not particularly concerned that this fund will be
    depleted by planned activities largely due to senior Departmental
    oversight in the fund's administration.
                          business strategy adjustment
        Question. The Secretary of the Treasury mandated that all of its
    subordinate agencies plan for a ``business strategy adjustment.'' This
    represents an attempt to force the agencies to realize savings through
    economies of purchases and contracts, etc. The effect, however, is a
    cut in Agency budgets in real dollars. For example, U.S. Customs faces
    an approximate $18 million dollar adjustment. Similarly, U.S. Secret
    Service faces a $6.8 million cut.
        How does the Secretary reconcile the very real needs of his law
    enforcement bureaus with a business model more appropriate to ALCOA
    than to an agency protecting the American public?
        Answer. The Secretary would not view a distinction between a highly
    productive corporate business model and a Treasury enforcement bureau
    striving for greater success. While it is true that Treasury has
    historically been a labor-intensive group of bureaus, the experience of
    some of them, including IRS and the Bureau of the Public Debt,
    demonstrates that continued productivity improvements are both possible
    and necessary.
        Treasury's enforcement mission, given even greater urgency within
    the homeland security context, will need to draw on every facet of
    American ingenuity and creativity to meet that challenge. This requires
    constant improvement in labor force productivity, using a combination
    of technology and better management. An example of this is the Customs
    Service Container Security Initiative (CSI). The CSI would secure an
    indispensable, but vulnerable, link in the chain of global trade: the
    oceangoing sea container. Ensuring the security of the maritime trade
    system is essential, given that approximately 90 percent of the world's
    cargo moves by container. This initiative consists of four core
    elements: (1) establishing criteria to identify high-risk containers;
    (2) pre-screening those containers identified as high-risk before they
    leave the port of origin; (3) using technology to quickly pre-screen
    high-risk containers; and (4) developing and using smart and secure
    containers. Customs has already rolled this initiative out at three
    Canadian seaports and they are actively engaging other large overseas
    seaports, and working with the foreign governments within which those
    large international ports are located, to cooperatively develop a
    program to implement the four key elements of the CSI.
        Thus, the recurring cost of labor-intensive efforts will be coupled
    with technology investments and smarter management to increase
    efficiencies and enhance the level and degree of scrutiny for various
    ports of entry. Rather than just accepting the conventional wisdom
    that, without a vast influx of new human resources, there is an
    unavoidable trade-off between efficiency and security, this new
    endeavor is an improvement in both. When we are at our best--both in
    Government and in the private sector--we can accomplish anything we set
    our mind to. Dramatic increases in labor productivity are responsible
    for an American economy that is the envy of the world. So also, that
    same quest for productivity improvement will be critical for Treasury
    enforcement bureaus to achieve the best outcome at the lowest cost to
    the American taxpayer.
                          office of homeland security
        Question. We have been briefed that there was no Treasury
    Departmental Offices interface with Governor Ridge's staff at the
    Office of Homeland Security during the fiscal year 2003 budget process.
    In fact OMB was the liaison on behalf of the Department for resources.
    Partly as a consequence, Treasury only received a $518 million pass-
    back for CT efforts although $1 Billion was required and requested. On
    the other hand, the Administration proposes funding DOJ significantly
    more than that, and in real dollars, (NOT through a proposed user fee/
    tax). This is has been an annual sore point between the Treasury law
    enforcement agencies and those at Justice.
        Now that Governor Ridge is coordinating between those Departments
    and agencies involved in Homeland Defense, what efforts are being made
    to properly advocate Treasury's needs in funding for Homeland Defense?
        Answer. I have always considered, and will continue to consider,
    our Nation's security needs, as a high priority, when determining the
    allocation of bureau resources for Homeland Defense. I will also
    continue to serve as an advocate for the bureaus and continue to work
    closely with the Office of Homeland Security. Furthermore, I will
    continue to work closely with each of the law enforcement bureaus to
    achieve and maintain a World Class organization, to ensure the
    connection between Homeland Defense resources and results.
        Question. Are your needs being met by the Administration?
        Answer. Yes. The Office of Enforcement will continue to work with
    the Office of Homeland Security during the fiscal year 2004 budget
    process, to ensure that limited Federal resources are spent wisely, to
    obtain the best results for the investments made. However, any
    additional tools that the Treasury Department determines may be needed
    will be fully considered in coordination with OMB.
                              joint border agency
        Question. There has been considerable discussion within the
    administration, on Capitol Hill, and in the press about creating some
    sort of joint border agency. This could involve combining Customs with
    some elements of INS, and possibly other agencies (FEMA/Coast Guard).
        Do you support such a plan?
        Answer. Homeland security is a top priority for the President and
    the entire Cabinet. The Administration is engaged in a full review of
    options to ensure that all homeland security resources are deployed in
    the most effective way possible. The Treasury Department works with the
    Office of Homeland Security to ensure that the best advice and a full
    range of options are available to the President. I will encourage the
    implementation of any plan that best supports strong border enforcement
    and an efficient flow of cross border commerce.
        Question. If this were to happen, under which Department do you see
    this new agency being placed or should it become a new, stand-alone
    Department?
        Answer. As noted in the above question, the Administration is
    engaged in a full review of options to ensure that all homeland
    security resources are deployed in the most effective way possible. The
    Office of Homeland Security has submitted a border security proposal to
    the President for his consideration. The White House has indicated the
    President will make his decision after a full review.
        Question. How would the revenue generating responsibilities of
    Customs fit in with such a plan?
        Answer. A specific border agency configuration has not yet been
    determined. The issue you raise is under review by the Office of
    Homeland Security.
                                     ______

             Questions Submitted by Senator Ben Nighthorse Campbell

        Question. Almost immediately following September 11, the Financial
    Crimes Enforcement Network--FinCEN--went into action to begin to trace
    the funds utilized by the terrorists who attacked our Nation. Then, the
    Office of Foreign Assets Control took steps to freeze those assets.
        I know that you have a particular interest in this function. I
    would be interested in learning how that effort is going.
        Answer. In keeping with its mission to support law enforcement,
    FinCEN applies leading edge technologies to analyze Bank Secrecy Act
    and law enforcement data as well as information from other sources to
    assist law enforcement in following and identifying the financial
    aspects of an investigation. Law enforcement agencies use the
    information that FinCEN provides according to their respective
    missions. In the case of the Office of Foreign Assets Control (OFAC),
    the information is used to help OFAC identify and build its asset
    freezing cases. Post 9/11, FinCEN has been responding on an expedited
    basis as required to related case requests from OFAC.
        The April 7 edition of the Los Angeles Times carried a very
    disturbing article which began with the following sentence, and I
    quote: ``The U.S. Government's much-touted financial war on terrorism
    has been hamstrung by bitter turf battles among Federal agencies,
    questionable evidence against targeted Middle Eastern groups and a lack
    of cooperation by foreign allies, senior government officials said.''
    The article goes on to say that the Departments of the Treasury and
    Justice have established parallel and oftentimes conflicting programs
    which has led to confusion among law enforcement and intelligence
    agencies both here and abroad.
        Question. I would be interested in knowing your view of this
    article and, if the allegation of infighting is even a little bit
    accurate, what actions you have taken to make sure that components of
    this one Government work together for a common goal.
        Answer. The article, named ``Crackdown on Terror Funding is
    Questioned,'' contained several inaccuracies about the Administration's
    efforts to disrupt terrorist financing worldwide. First, no agency can
    unilaterally designate an individual or organization as a terrorist
    financier without the unanimous approval of every participant in the
    inter-agency task force made up of the Treasury Department, the State
    Department, the Justice Department, the FBI and the CIA. Treasury and
    Justice Department lawyers assess the sufficiency of the evidence
    before we move forward on any name.
        Second, the article claims that the U.S. Customs Service with the
    Treasury Department has removed its two agents who were detailed to the
    FBI's Financial Review Group. This is untrue-one agent was recently
    promoted and another is working off-site as per his duties within the
    Financial Review Group. Similarly, Operation Green Quest has enjoyed
    the support of the Justice Department from day one, when Assistant
    Attorney General Michael Chertoff joined Treasury at a news conference
    in welcoming its creation.
        Finally, the story makes assertions about information sharing that
    are simply ignorant of the law. The Treasury Department cannot turn
    over ``blocked'' documents to any law enforcement agency, including the
    FBI, unless the law enforcement agency obtains either consent, a search
    warrant, or a subpoena to review the contents of the blocked documents.
    The article failed to recognize the distinction between ``blocked''
    documents and seized documents. Clearly, it is crucial that all our
    efforts remain well within the law to respect the parameters of the law
    and to protect the integrity of investigations.
        The Department of Treasury and the Department of Justice have
    worked closely together, with the State Department, the intelligence
    community and others, to track and block terrorist funding.
    Specifically, all the entities I've mentioned participate on a weekly
    if not daily basis in the fight against Terrorist Financing. The
    financial front on the war on terrorism, while quite different from the
    military or humanitarian fronts, requires continued cooperation to
    ensure success. To date, we have received such cooperation and look
    forward to continued success.
        In mid-November of last year the Treasury Inspector General issued
    a report which outlined the results of their audit of the performance
    measures for the Treasury law enforcement program. Unfortunately, due
    to the fact that most of our mail has been significantly delayed due to
    the bio-terrorism attack on the Hill, we just received that report. I
    am pleased to note that your Office of Enforcement generally concurred
    with the findings, and that you planned to take corrective action.
        Question. Agencies are to include copies of their performance plans
    with the budget request every year. Were you able to include any of
    your planned corrective actions in the plans we received in February of
    this year?
        Answer. While the IG's report did identify areas for improvement, I
    believe more importantly it indicated that there are ``difficulties
    inherent in designing a clear and complete set of outcome-related
    performance measures for Federal law enforcement.'' The IG agreed that
    it will take quite some time to develop a good set of performance
    measures. Still, we are taking action to implement the recommendations
    included in the report. However, due to the timing of its release (when
    our bureaus were finalizing their fiscal year 2002 performance plans),
    along with the inherent challenges involved in developing effective
    performance measures, the planned corrective actions that we submitted
    to the IG will be implemented in fiscal year 2003 and fiscal year 2004
    performance plans.
        Specifically, we are working hard to develop good outcome measures
    as recommended by the IG. As an example, the Attorney General
    instructed the Drug Enforcement Administration (DEA) to develop drug
    flow models for the four major drugs (heroin, cocaine, marijuana, and
    methamphetamine) by the end of the year. Treasury representatives,
    along with other Federal law enforcement organizations, recently
    attended a meeting hosted by DEA to discuss a process to develop drug
    flow models for the four major drugs.
        Also, as recommended by the IG's report, the Office of Enforcement
    will continue to work closely with the Department of Justice, DEA, the
    Office of National Drug Control Policy, and the Federal law enforcement
    community to develop drug flow models and to improve drug interdiction
    and drug investigation performance measures. An example of this
    partnership is the fact that Treasury and Justice are in the process of
    developing an outcome measure for the Organized Crime Drug Enforcement
    Task Forces that would measure disruption and dismantling of drug
    trafficking organizations.
                                     ______

                    Questions Submitted to Brian L. Stafford

                 Questions Submitted by Senator Byron L. Dorgan

                workforce retention--annualization of new hires
        Question. In fiscal year 2002, we provided funding for the 3rd year
    of a workforce retention/workload balancing initiative. The events of
    September 11, however, have further strained your already overworked
    agents.
        Does the fiscal year 2003 budget request provide sufficient funds
    to fully annualize the new hires?
        Answer. Although the funding to fully cover the annualized cost of
    this new hiring is not included as an increase in the Secret Service's
    fiscal year 2003 budget request, the Service is reviewing its options
    for covering this cost within it base budget.
        Question. Are you concerned that the Service may again start
    falling into an overtime-retention cycle?
        Answer. There should be an improvement in overtime levels when the
    full complement of agents hired under the re-balancing initiative for
    fiscal year 2002 (204 agents) are hired, trained and assigned to the
    field. At the present time the Service is not concerned that we will
    again fall into an overtime-retention cycle.
                          business strategy adjustment
        Question. Secretary O'Neill is requiring that all agencies incur a
    Business Strategy Adjustment. He feels that every agency can find
    savings, but all those we asked were absent any ideas that wouldn't
    affect mission-related activities. He proposed something similar in
    fiscal year 2002, but this Subcommittee restored the funds for law
    enforcement agencies. In fiscal year 2003, the BSA for Secret Service
    totals $6.824 million.
        How do you plan to meet these targets? Hasn't the Secret Service
    already proved itself to be fairly efficient in achieving savings in
    areas such as the purchase of airline tickets?
        Answer. The Service is developing action plans and strategies to
    set a course for improved management, and to monitor the progress made
    in improving performance. These efforts extend to improved uses of
    human capital, better financial management, expanded use of technology,
    and competitive sourcing of appropriate business lines.
        The improvement of current business processes has been made a
    priority in the Secret Service, as evidenced by the creation of the
    Logistics Resource Center (LRC). The LRC is just one example of the
    Service's recent efforts and commitment to promoting fiscal
    responsibility, and complying with the spirit of implementing new
    business strategies.
        The Secret Service spends millions every year on Government travel-
    related expenses. The LRC was created last year to review our travel
    procedures and implement cost effective measures, while enhancing our
    ability to meet operational needs. The goal of the LRC is to
    institutionalize a formal structure within the Service that provides
    for a more efficient operation in the utilization of human resources,
    scheduling, and travel logistics. The LRC complements the existing
    joint structure of the Investigations/Protective Operations Manpower
    section by: implementing a systematic process to produce more informed
    decision-making; providing a central point to address travel related
    issues and policy; and most importantly, promoting overall fiscal
    responsibility and sound financial management practices within the
    Secret Service, while balancing cost considerations with operational
    needs.
        Ultimately, our success in achieving the savings to offset the
    $6.8M business strategy adjustment will depend on our ability to manage
    current resources efficiently.
                          electronic crimes task force
        Question. The Secret Service has been involved for some time in the
    area of investigating computer-related crimes. The USA Patriot Act
    authorized the establishment of additional task forces.
        Are funds included in the President's budget for this purpose? If
    not, how much additional funding is required to meet the authorized
    targets?
        Answer. The Secret Service plans to spend $21.8 million in fiscal
    year 2003 to fully implement what is authorized in the USA Patriot Act.
    Of this total, $17.2 million will be used to develop a national network
    of electronic crimes task forces.
        Question. Also, why is this important to the Secret Service and
    Homeland Security?
        Answer. Since the Secret Service was given primary jurisdiction for
    investigating the counterfeiting of identification documents, and
    access device fraud, and concurrent jurisdiction for investigating
    computer fraud, the nature of these financial crimes has expanded to
    new areas, both geographic and technological. This has resulted from
    the effects of globalization combined with the information technology
    revolution. Computers and the Internet are an integral part of an ever-
    increasing amount of the criminal activity investigated by the Secret
    Service, either as targets of the criminal activity, tools used in the
    commission of the crime, or a repository of evidence.
                        protection of the u.s. currency
        Question. The Secret Service was initially established by President
    Abraham Lincoln to protect the Federal currency. When we met last week
    you discussed your concerns about the use of the dollar as the currency
    of choice by many other countries.
        Please describe your concerns about this and how the creation of
    overseas Secret Service offices can help protect the dollar.
        Answer. When Guatemala's Congress voted on legislation that would
    pave the way for the dollarization of their economy, that decision made
    it the third South or Latin American country to do so in less than a
    year.
        When El Salvador announced that it would fix the colon--the local
    currency--to the U.S. dollar, initial contact by agents in the Miami
    Field Office with banking and law enforcement officials in El Salvador
    indicated that most people in El Salvador would not be able to
    distinguish between a genuine and counterfeit Federal Reserve Note. The
    Miami Field Office has continued to receive urgent requests from
    banking and law enforcement contacts to provide assistance with the
    training of cash handling personnel and forensic specialists.
        Ecuador's recent conversion to the U.S. dollar as its base unit of
    currency has made it vulnerable to the exportation of criminal activity
    from Colombian organized crime. The Secret Service has seen a sharp
    increase in the importation, distribution and passing of Colombian-
    generated counterfeit U.S. dollars since Ecuador formally converted to
    the U.S. dollar. Ongoing investigations in Colombia reveal that
    organized criminal groups are operating multiple schemes within their
    criminal enterprises, and are using the same courier network for both
    counterfeit and narcotics trafficking.
        Currently, there are fifteen (15) \1\ other countries and/or
    territories that have formally adopted the U.S. dollar as their
    official ``coin of the realm.'' Many other countries have tied the rate
    of exchange for their internal currencies with the U.S. dollar and are
    ``de facto'' dollarized economies, e.g. Argentina. Economists have
    speculated that all of South and Central America will be dollarized
    within the next 10 years, with the possible exception of Brazil. It is
    anticipated that this process will be further expedited by the
    development and implementation of cash disbursement/payment systems,
    e.g. ATMs. On the other hand, it is also important to note that the
    rapid increase of ATMs and electronic transfers may ameliorate this
    labor-intensive effort.
    ---------------------------------------------------------------------------
        \1\ El Salvador, Ecuador, Panama, Guam, Marshall Islands,
    Micronesia, Northern Mariana Islands, Palau, Pitcairn Island, Turks and
    Caicos Islands, British Virgin Islands, East Timor, Puerto Rico, U.S.
    Virgin Islands, and American Samoa.
    ---------------------------------------------------------------------------
                        national special security events
        Question. Your agency has already accomplished the design of and
    conducted two National Security Special Events (NSSEs) this year--the
    Winter Olympics in Salt Lake City and the Super Bowl in New Orleans.
    These events place an additional strain on your personnel.
        Has any thought been given to reducing the number of NSSEs each
    year or to limiting the amount of Secret Service resources going into
    these events?
        Answer. The Secret Service does not designate events as National
    Special Security Events. The designation process is coordinated by the
    Office of Homeland Security, with the final determination regarding
    designation being made by the Secretary of the Treasury and the
    Attorney General. For an event to be designated as an NSSE, there must
    be unanimous agreement from the director of Homeland Security, and from
    the Attorney General and Treasury Secretary.
        Since 1998, fourteen events have received designation as National
    Special Security Events. The number of NSSE's by year is as follows:
    1998-1; 1999-2; 2000-4; 2001-4; 2002-3. It is important to note that
    one event that did receive designation as an NSSE--the IMF/World Bank
    Fall Meetings scheduled to be held in late September 2001--was canceled
    as a result of the September 11, 2001 attacks on America.
        Each NSSE is unique. The specific resource requirements for events
    vary due to a number of factors, such as the size and significance of
    the event, number of attendees, location of the event, and
    vulnerabilities. After preparing for 14 NSSE's, the Secret Service has
    developed a cost efficient and effective approach to managing security
    for major events. However, the events of September 11, 2001 have caused
    the Service to plan for new and emerging threats. As a result, the
    resource requirements for NSSE's will continue to be significant for
    the foreseeable future.
                        new york field office relocation
        Question. The September 11 terrorist attacks destroyed the Secret
    Service's New York Field Office--including the loss of vehicles and,
    tragically, one of your men.
        How are the efforts progressing to establish a new office and
    relocate the personnel?
        Answer. The General Services Administration (GSA) has acquired
    office space for the New York Field Office at 335 Adams Street,
    Brooklyn, N.Y. Currently, personnel occupy one of the three floors.
    This floor requires minimal renovation. The remaining personnel are
    currently utilizing two temporary office locations in Manhattan.
        The GSA is working on finalizing an agreement for obtaining the
    services of an architect who will begin designing the space relative to
    the remaining two floors, after which renovation of the space will
    commence. We anticipate all personnel will be in our new Brooklyn
    office by the end of December 2002.
                                     ______

             Questions Submitted by Senator Ben Nighthorse Campbell

        Question. I noted that in fiscal year 2003 the Secret Service will
    begin gearing up for the 2004 Presidential campaign. You have requested
    $1.16 million to lease 120 vehicles late in the fiscal year so that you
    have enough time to install the necessary communications and emergency
    equipment. Then, after the election, you will need to remove the
    equipment and return the vehicles to the rental company.
        Why don't you simply purchase the vehicles as part of your normal
    vehicle-purchase cycle, permanently install the equipment, and continue
    to use them as part of the Service's fleet after the election?
        Answer. Historically, the Service has leased vehicles to increase
    the size of the fleet due to the spike in workload during campaign
    years. Once the campaign is over these vehicles are returned to the
    rental company reducing the fleet back to its normal size.
        However, following the 2000 campaign the Service purchased 55 of
    the leased all-terrain vehicles that had been used during the campaign,
    because they were fully equipped and the Service needed to replace
    older all-terrain vehicles within its fleet. Had this been done up-
    front the Service would have realized a savings. As a result, the
    service has reconsidered the lease vs. purchase issue in regard to
    campaign vehicles.
        Some of your employees have been enticed to join former Secret
    Service Director John Magaw at the Transportation Security
    Administration. From what I understand, this is particularly true of
    the Uniformed Division. When you combine these departures with the
    number of agents and officers who will be eligible to retire this year
    and next year, you're looking at a huge number of potential vacancies.
        Question. What steps are you taking now to try to retain your
    workforce, and recruit new agents and Uniformed Division Officers? How
    does the Secret Service go about recruiting agents? How does the
    Service recruit for the Uniformed Division?
        Answer. The Secret Service recognizes that retention concerns are
    closely associated with quality of life issues. Through aggressive
    recruitment, and the subsequent hiring of additional agents and
    officers, the Secret Service is achieving increased staffing levels. By
    increasing the number of agents assigned to Secret Service field
    offices, the amount of time spent on protection assignments away from
    home, will ultimately be reduced for each agent. Additionally, the
    amount of required overtime for agents and officers will be reduced, as
    the number of assignments is dispersed among a larger work force.
        The Secret Service is also deeply concerned that our employees are
    being lured away by other agencies that offer both better salaries, and
    other compensations. This situation is particularly acute in our
    Uniformed Division (UD).
        We are currently exploring options within the Department (e.g.,
    ``pay banding,'' recruitment bonuses, and other financial incentives).
        The President's budget request for the Secret Service contains new
    language which would allow training of other Federal law enforcement
    officers at the James J. Rowley Training Center in Beltsville,
    Maryland, as well as training of State and local law enforcement and
    even private sector security officials but on a space-available basis.
        Question. What is the purpose of this language? Is the Training
    Center currently under-utilized? Have you had requests from other
    Federal or State or local law enforcement entities for training at your
    facility?
        Answer. The purpose of the proposed language is to allow the
    Director the discretion to request, not require, reimbursement from
    other Federal, State and local law enforcement, and from private or
    foreign entities, for training provided by the Secret Service at the
    James J. Rowley Training Center. The Secret Service receives numerous
    requests each year from outside sources for protective and
    investigative training. These requests are not to be confused with the
    invitational training sponsored and hosted by the Secret Service during
    our Dignitary Protection Seminars.
        The JJRTC is currently operating at or near full capacity to
    provide core mission training for our Uniformed Officer and Special
    Agent basic training classes, and for in-service training provided for
    current employees. This is the highest priority and primary mission of
    the JJRTC. The Secret Service rarely has the opportunity to entertain
    or satisfy any training requests originating from other agencies. Any
    opportunity to train or actual training for other agencies would never
    be done at the expense of our core mission requirements.
                                     ______

                     Questions Submitted to Bradley Buckles

                 Questions Submitted by Senator Byron L. Dorgan

                            shortfalls to the budget
        Question. ATF began their budget process with a $3.6 million
    shortfall to their MCL's (Maintain Current Levels). OMB provided
    direction that the $13 million GREAT Grant Program would no longer be
    funded out of their base because they deemed it the responsibility of
    State and local Governments. Therefore, ATF felt they had the necessary
    flexibility in their budget to cover the $3.6 million shortfall and the
    proposed Business Strategy Adjustment (see #2). When asked about GREAT
    at our ATF budget briefing on their fiscal year 2003 budget, they
    informed us of the Administration's position on the Program. Knowing
    that the Senate would reinstate the program, OMB came back and said
    ``no, we never said that and of course the $13 million is in their
    base''. Now ATF is left with a $3.6 million shortfall to start off the
    budget process, which will only be aggravated by the BSA and pay
    parity.
        What savings do you recommend to cover the proposed $7.6 million
    business strategy adjustment?
        Answer. ATF is committed to the Administration's goal of improving
    business practices and seeking programmatic efficiencies. ATF is
    currently reviewing how to achieve the savings required by the $7.6
    million business strategy adjustment. ATF will be considering a broad
    range of possible ways to achieve the required savings, including the
    re-evaluation of on-going programs to determine whether there may be
    more efficient and cost effective ways of doing business.
        For example, ATF invests a significant amount of resources in the
    area of space rental. The Bureau is considering some innovative ways of
    saving or avoiding costs in this area so we can decrease the amount of
    space required, while still supplying employees with the physical space
    they need to accomplish their jobs.
        Current practice dictates a dedicated office workstation for each
    employee. As new personnel are added, the standard process calls for
    either expanding the amount of office space and parking or relocating
    the entire office to accommodate the increased personnel. It is
    estimated that increased space and parking requirements resulting from
    recent increases in Bureau staffing will cost the Bureau approximately
    $9 million per year. We are considering an alternative approach
    utilizing one or more of the following processes:
        Hoteling.--An individual would not be assigned a specific
    workstation, but rather would be expected to work the majority of their
    duty hours (80 percent or more) outside the office. On the occasions
    where a need exists to come into the office (approximately 20 percent),
    the individual would call into the office and reserve one of the shared
    workstations. Upon arrival, the person would move their personal files
    to the assigned station and work for the required period of time. On
    their departure the desk would be emptied, files returned to their
    storage place and the workstation ready to be reassigned the next day.
    It is anticipated that four workstations could accommodate 10-12
    personnel.
        Flexi-place.--The normal duty station of an individual would be
    located in their personal residence. The individual would not normally
    be expected to appear in the office except in infrequent instances for
    required meetings or individual conversations with management (or other
    such activities). There would be no dedicated workstation for this
    individual at the office site. There is no theoretical maximum to the
    number of persons who could be assigned to a flexi-place arrangement.
        Alternative Worksites.--In this scenario, an individual would not
    have an assigned, ATF-controlled office space. If there were a need to
    occupy a workspace, the person would report to one of the satellite
    office locations maintained by the General Services Administration
    (GSA). The individual would report to ATF-controlled office sites only
    in such instances when their physical presence was required, but would
    not occupy office space during the visit. It should be noted that there
    are some limits to the availability of satellite office locations.
        Question. What would the affect be on your agency if forced to
    absorb the business strategy adjustment and a 1.5 percent pay raise?
        Answer. The estimated cost to fund a 1.5 percent pay raise
    increment would be $5.323 million. This would equate to roughly 53
    full-time equivalent employees (FTE) if one estimates using a $100,000
    average annual salary. It should be noted that this pay raise estimate
    has been coordinated with the Department and refined since original
    draft estimates were provided to the Subcommittee staff.
        ATF is committed to the Administration's goal of improving business
    practices and seeking programmatic efficiencies. However, ATF does not
    yet have specific plans for how to achieve the savings that would be
    required by the $7.6 million business strategy adjustment and an
    additional $5.3 million increment in the pay raise. The Bureau will be
    considering a broad range of possible ways to achieve the required
    savings, including the re-evaluation of on-going programs to determine
    whether there may be more efficient and cost effective ways of doing
    business. ATF would be reluctant to impact staffing levels.
        As stated in the response above, ATF invests a significant amount
    of resources in the area of space rental. We are considering some
    innovative ways of saving or avoiding costs in this area so we can
    decrease the amount of space required, while still supplying employees
    with the physical space they need to accomplish their jobs. We are
    considering an alternative approach utilizing the concepts of
    ``hoteling,'' ``flexi-place,'' and alternative worksites.
                              supplemental funding
        Question. It is my understanding that your agency has proposed a
    number of explosives related initiatives to further our efforts in
    homeland security. I also understand that these proposals were met with
    resistance by the Administration and were never requested through the
    fiscal year 2003 budget submission or the recent fiscal year 2002
    supplemental request.
        Please describe any initiatives that ATF has proposed, the costs
    associated with these projects, how they will further our efforts in
    homeland security, and where they stand in the Administration.
        Answer. The canine and Joint Terrorism Task Force initiatives were
    funded through the fiscal year 2002 supplemental request and annualized
    in the fiscal year 2003 President's Budget request.
                            g.r.e.a.t. grant program
        Question. Please describe the status of the grant program in
    relation to expanding into Native American communities and any
    involvement in North Dakota.
        Answer. There have been 177 Bureau of Indian Affairs (BIA) Officers
    trained to teach G.R.E.A.T. to the 27,893 Native American students in
    the program.
        In fiscal year 2002 the inter-agency agreement with BIA in support
    of Native American law enforcement for G.R.E.A.T. is $200,000. In
    addition to the inter-agency agreement with BIA, ATF funded Lummi
    Nation Law & Order in Bellingham, Washington ($6,900), and Menominee
    Tribal Police Department in Keshena, Wisconsin ($25,000), and provided
    $25,000 to Grand Forks Police Department, North Dakota. We were able to
    satisfy all funding requests from law enforcement agencies that applied
    in fiscal year 2002.
        In October of 2001, ATF was a co-sponsor of the National Native
    American Law Enforcement Association's annual conference that was held
    in Albuquerque, New Mexico. ATF presented three workshops, which
    covered information on the new G.R.E.A.T. Curriculum Firearms Tracing
    and Identification, and Less Than Lethal Use of Force.
        In mid April, ATF provided an 80-hour G.R.E.A.T. Officer Training
    specifically for BIA in Rapid City, South Dakota to train 28 students.
    This session included four students from New Town, North Dakota and two
    students from Belcourt, North Dakota.
        ATF is working through a collaborative effort with BIA and the Boys
    and Girls Clubs of America to develop pilot sites for G.R.E.A.T.
    Officers to teach the G.R.E.A.T. Curriculum in Boys and Girls Clubs in
    Native American communities.
        There is a G.R.E.A.T. National Conference is in Keystone, Colorado,
    from August 28-August 30, 2002. One thousand people are expected to
    attend.
                        national special security events
        Question. More and more communities are requesting NSSE designation
    for certain events. The Administration proposes in the fiscal year 2003
    budget that the Treasury Counterterrorism Fund be used to reimburse ANY
    Federal agency for expenditures from NSSE's.
        What resources did ATF use during the Olympics and the Superbowl,
    how did it affect your overall mission responsibilities, and how were
    your expenses covered?
        Answer. ATF received Olympics funding through the Department of the
    Treasury from the Supplemental Appropriations Act, 2001, Public Law
    107-20. Costs incurred by ATF in support of the 2002 Winter Olympic
    Games in Salt Lake City are being reimbursed by the Treasury Department
    pursuant to an interagency agreement on Olympics funding. Expenses
    related to preparation and planning for the Winter Olympics, which
    occurred prior to October 1, 2001, were covered under ATF's salaries
    and expenses and through utilization of the Treasury Counter Terrorism
    Fund.
        ATF provided 300 personnel to assist in the overall security
    mission during the 2002 Winter Olympics. These personnel included 75
    Special Agent Certified Explosive Specialists, 20 Explosive Enforcement
    Officers, 27 National Response Team members, 10 explosive detection
    canine teams, 100 special agents for standing post, 17 intelligence
    officers and research specialists, and additional agents, supervisors
    and support staff to work in the various command posts and assist the
    Joint Terrorism Task Force in Salt Lake City, UT. ATF also supported
    the mission with two state-of-the-art fire and explosive response
    vehicles, a mobile laboratory and bomb technician vehicles and
    equipment.
        Prior to the games ATF sent a cadre of experienced inspectors into
    Utah to inspect the Federal explosive and firearms licensees to ensure
    compliance with proper storage and distance regulations and to provide
    security awareness. ATF's costs associated with protection activities
    at the Super Bowl in New Orleans were minimal, and were absorbed within
    the Bureau's salaries and expense accounts.
        ATF supported the security efforts at the Super Bowl with two
    Explosive Enforcement Officers, one explosive detection canine team,
    and local agents from the New Orleans Field Division. ATF worked
    closely with the other Federal, State and local law enforcement
    agencies in planning and determining the appropriate level of resources
    for these events.
                       office of homeland security (ohs)
        Question. Have you placed any reimbursable or non-reimbursable
    employees within OHS?
        Answer. No.
        Question. Please describe your agency's relationship with OHS?
        Answer. ATF Intelligence Division personnel established an initial
    relationship with the OHS during the fall of 2001 to provide background
    on the core mission responsibilities of ATF and our strong fundamental
    working relationships with State and local law enforcement agencies.
        The Bureau's involvement with the Law Enforcement Working Group
    (LEWG) was briefed as a process by which the Intelligence Community and
    law enforcement could work more closely together.
        ATF currently participates in the Law Enforcement/Investigations
    Policy and Coordination Group and the Detection, Surveillance and
    Intelligence Policy and Coordination Group of OHS.
        Question. Has your agency been intimately involved in any homeland
    security decisions made by OHS that are directly related to your
    mission?
        Answer. No
                                    staffing
        Question. The fiscal year 2002 Treasury Appropriations Bill and the
    fiscal year 2002 Supplemental provided an additional 73 positions.
        Please detail your progress on hiring these positions.
        Answer. The following table shows current projected hiring for
    canine handlers, canine trainers and JTTF positions.

    ------------------------------------------------------------------------
                   Fiscal year                    Quarter        Positions
    ------------------------------------------------------------------------
    2002....................................             2nd               9
    2002....................................             3rd              22
    2002....................................             4th              38
                                             -------------------------------
          Subtotal..........................  ..............              69
                                             ===============================
    2003....................................             1st               4
                                             -------------------------------
          Total.............................  ..............              73
    ------------------------------------------------------------------------

                                     ______

                    Questions Submitted by Senator Jack Reed

        Question. The General Accounting Office recently released a
    preliminary report that found that the Justice Department's proposal to
    destroy NICS audit log records of approved gun sales within 24 hours
    would allow hundreds of disqualified buyers, including felons and
    domestic abusers, to purchase guns each year. The GAO review found that
    between July and October of last year, there were 100 cases in which
    authorities used data that is currently kept for 90 days to go back to
    try to retrieve guns from people who were not authorized to buy them.
        As the head of the agency that is responsible for illegal firearm
    retrievals, were you consulted in connection with this investigation?
        Answer. ATF responded to questions from GAO regarding ATF's
    activities and processes involving NICS referrals from the FBI.
        Question. What is your view of the Justice Department's proposal to
    destroy records of NICS approvals within 24 hours? Were you consulted
    during development of the proposal, and were your recommendations
    included in the proposed rule?
        Answer. ATF was consulted during the development of DOJ's proposal
    and ATF provided input on how we would change our existing procedures
    to deal with the proposed change. The Department of the Treasury did
    not formally comment to DOJ's Notice of Proposed Rulemaking.
        Question. My understanding is that the Justice Department let the
    90-day rule for retaining NICS records go into effect while the new
    rule is pending. Has ATF been able to use the information in the audit
    log in connection with dealer inspections? If so, how has the
    information been used?
        Answer. ATF inspectors provide information obtained from the
    records of Federal firearms licensees (FFLs) to the FBI to be compared
    against the NICS audit log as a deterrent against misuse. The FBI notes
    any discrepancies and refers this information back to ATF for further
    investigation as needed. To date, the use of this information has not
    produced significant results beyond the deterrent value.
        Question. In defense of its proposed rule, the Justice Department
    maintains that it can perform ``real-time'' audits? What role would ATF
    play in this real-time audits? And can you explain how these audits
    would work?
        Answer. ATF would play no role in the FBI's ``real-time'' audits.
        Question. In the aftermath of the September 11 attacks, your Bureau
    asked the FBI to check the names of 186 individuals against the NICS
    audit log. How do audit log records help you to streamline your
    investigations with the limited resources you have available? (For
    example, in the absence of a NICS audit log record, if you receive
    information--perhaps an anonymous tip--that indicates a potential
    terrorist may have inappropriately obtained a gun, how would you go
    about identifying the dealer, the point of sale, and the firearm? How
    would the process differ if you had access to a NICS audit log record?)
        Answer. As a point of clarification, ATF made the request mentioned
    above to the FBI in response to a request for information from the
    Joint Terrorism Task Force (JTTF). ATF only uses NICS audit log
    ``proceed'' information during compliance inspections of FFLs. It is
    the Attorney General's opinion that NICS audit log ``proceed''
    information may not be used a general law enforcement tool. The
    Treasury Department defers to the Attorney General and his Office of
    Legal Counsel as the interpreter of Federal statutes.
        Question. Could you explain step-by-step the mechanics of a firearm
    retrieval operation?
        Answer. Initially the FBI refers information to ATF's Brady
    Operations Branch in Martinsburg, West Virginia regarding alleged
    prohibited individuals who purchased (or received) a firearm and all
    persons who were denied after a NICS background check. All referrals
    involving possible receipt of a firearm by a prohibited person are sent
    to the appropriate ATF field office for further investigation.
        Question. Would you please provide a break-down of the prohibited
    categories into which the individuals fall from whom firearms have been
    retrieved?
        Answer. Breakdown of prohibited categories include:
      --Possession of firearm by previously convicted felon;
      --Possession of firearm by fugitive from justice;
      --Possession of firearm by illegal narcotic user;
      --Possession of firearm by illegal alien;
      --Possession of firearm by person dishonorably discharged from armed
            forces;
      --Possession of firearm while under restraining order;
      --Possession of firearm by person having misdemeanor conviction of
            crime of domestic violence;
      --Persons who have renounced citizenship; and
      --Persons adjudicated mental defectives.
        Question. What types of firearms are typically retrieved?
        Answer. Handguns are the type of firearm typically retrieved from
    Brady/NICS referrals.
        Question. In the last 10 years, how many firearms that fall within
    the definition of ``semi-automatic assault weapon'' pursuant to 18 USC
    Sec. 921(a)(30) have been retrieved''?
        Answer. 315 semi-automatic assault weapons have been retrieved from
    individuals in the various categories of prohibited persons since 1993.
        (It is noted that statistical information in the National Field
    Office Case Information System (NFOCIS) contains data since 1993, which
    was migrated into automated investigative case reporting system (N-
    FORCE) sometime in 1998. It is further noted that the responses to next
    three questions are also from data compiled since 1993.)
        Question. For the same period of time, how many retrieved firearms
    are handguns?
        Answer. 8,386 handguns
        Question. How many are sporting rifle or shotguns?
        Answer. 7,587 shotguns/rifles
        Question. Were any of the firearms machine guns?
        Answer. Two machineguns.
        Question. How many firearms are retrieved in the typical retrieval
    operation? Is it ever the case that agents find more than one firearm
    in the possession of the individual from whom firearms are being
    retrieved?
        Answer. One firearm is usually retrieved in a typical case although
    there are instances where more than one firearm is retrieved from
    violators.
        Question. If the answer to the previous question is yes, have
    trafficking or other criminal charges been initiated following the
    execution of a retrieval?
        Answer. Yes, the United States Attorney, depending on prohibited
    category of suspect and prosecutorial guidelines of that office, files
    criminal charges.
        I note from your testimony that out of about 276,000 FBI referrals
    of denied firearms purchases since 1998, only 2,737 have been forwarded
    to U.S. Attorney's offices for prosecution. That's about 1 percent. I'm
    sure you're aware that the previous Administration received an enormous
    amount of criticism for not prosecuting more of these illegal purchase
    attempts under the Brady Law.
        Question. Why haven't more of the FBI's referrals of NICS
    violations been sent to U.S. Attorneys?
        Answer. We believe there are several contributing factors:
      --Standard Denial cases reviewed/filtered by Brady Operations Branch
            personnel that do not meet United States Attorneys'
            prosecutorial guidelines are not referred.
      --It may be revealed after cases (Standard & Delayed Denial) are
            referred to the field for follow-up investigation that the
            suspect was not prohibited and no violation occurred.
      --ATF and United States Attorneys' Offices around the country have a
            coordinated approach to NICS referrals and have established
            criteria for these cases. Not all referrals are presented for
            prosecution as a result of mutual agreement between ATF and the
            local United States Attorney.
      --Standard Denial cases are usually prioritized for those involving
            the most violent offenders who meet prosecutive guidelines of
            the respective United States Attorney's Office.
      --All Delayed Denial cases are referred to the field for immediate
            follow-up investigation and are reported on with a disposition.
        [Clerk's Note.--A Statement received from the Institute of Makers
    of Explosives, is going to be inserted in the record.]
                                     ______

             Questions Submitted by Senator Ben Nighthorse Campbell

        Question. As you know, I have long been a supporter of the
    ``G.R.E.A.T.'' program so I was pleased to see the budget amendment
    which clarifies the Administration's intention to continue that program
    at the current level of funding.
         I do have a question about the use of the ``G.R.E.A.T.'' program
    curriculum on Indian reservations. I recognize that ATF must coordinate
    those efforts with the Bureau of Indian Affairs. I'd appreciate it if
    you could describe for me exactly how that is working out.
        Answer. In addition to the inter-agency agreement with the Bureau
    of Indian Affairs (BIA), ATF funded Lummi Nation Law and Order in
    Bellingham, Washington ($6,900); and Menominee Tribal Police Department
    in Keshena, Wisconsin ($25,000).
        In October of 2001, ATF was a co-sponsor of the National Native
    American Law Enforcement Association's annual conference that was held
    in Albuquerque, New Mexico. Through the inter-agency agreement with
    BIA, law enforcement officers from BIA and Tribal law enforcement
    agencies attend this conference. ATF presented three workshops, which
    covered information on the new G.R.E.A.T. Curriculum, Firearms Tracing
    and Identification, and Less Lethal Use of Force.
        In mid-April, ATF provided an 80-hour G.R.E.A.T. training session
    for 28 Native American law enforcement officers in Rapid City, South
    Dakota.
        ATF is presently working through a collaborative effort with BIA
    and the Boys and Girls Clubs of America to develop pilot sites for
    G.R.E.A.T. Officers to teach the G.R.E.A.T. Curriculum in Boys and
    Girls Clubs in Native American communities.
        In the wake of September 11, there was an emphasis on making sure
    that firearms are not brought into this country by non-citizens. I
    understand that on February 5, ATF issued a temporary rule regarding
    import permits required for non-immigrant aliens who wish to bring
    firearms and ammunition into the country for perfectly legitimate
    things like shooting competitions or hunting trips. While I applaud you
    for taking action to further protect our citizens, I also noted that
    this temporary rule went into effect very quickly--before the permit
    application could even be printed or distributed.
        Question. I am interested in knowing how this transition worked
    out. Were there any incidences where foreign visitors were not aware of
    this change in policy? If so, what happened when they reached our
    shores?
        Answer. On February 19, 2002, a temporary rule affecting
    nonimmigrant aliens entering the United States for legitimate hunting
    or lawful sporting purposes took effect. Prior to February 19,
    nonimmigrant aliens did not need to file an Application for the
    Importation of Firearms, Ammunition and Implements of War, an ATF Form
    6, to enable them to bring firearms and ammunition into the Untied
    Sates. ATF coordinated this transition with our colleagues at the U.S.
    Customs Service, the Department of State and the Immigration and
    Naturalization Service. Months prior to enactment of the temporary
    rule, meetings and teleconferences were held with these agencies to
    elicit cooperation and understanding for the express purpose of
    facilitating nonimmigrant aliens coming to the United States to
    participate in competitive shooting events or engage in hunting
    activities.
        ATF proactively sought to inform the international hunting and
    shooting community. ATF sent letters to the Fish and Game commissioners
    for each of the 50 States, asking them to inform nonimmigrant aliens
    seeking to obtain a hunting license of the new ATF F6 requirement. We
    contacted the international travel agency association and asked them to
    make their oversees members aware of the new requirement. Further, we
    contacted the international airline association, seeking their
    assistance in informing their potential passengers of the need to
    submit this form. Press releases went out over the wire services both
    domestically and internationally. In addition, several months before
    enactment, through ATF's attach in Ottawa, we established a solid
    working relationship with our Canadian counterparts and enlisted their
    support and aid in widely publicizing this new requirement to
    Canadians. The ATF website prominently displayed the new requirements,
    and provided a thorough Q&A section, in addition to links to the form
    itself and other information. The ATF F6 was available immediately on
    the effective date. The form could be downloaded from our website,
    Imports Branch employees were faxing the form upon request, and also
    accepting completed faxed forms.
        Let me give you one example of what happened when some travelers
    did arrive at a port of entry without the ATF F6 properly completed. A
    large group of competitive shooters arrived at a port of entry to
    participate in a competitive shooting event in a southern State. They
    were not in possession of the required ATF F6. Because of the extensive
    communication between Customs and us, the Customs Inspectors were well
    aware of the new requirements. The inspectors called our Imports Branch
    personnel, and through the mutual dedication of these employees, the
    nonimmigrant aliens filled out the forms at the port of entry, forms
    were faxed to ATF, they were reviewed for completeness, accuracy and to
    ensure the firearms were not prohibited and the travelers were not from
    a prohibited country. The approved forms were then returned to Customs
    officials at the port of entry. The nonimmigrant aliens experienced
    some minor delays, but arrived at their competitive shoot in more than
    enough time to participate, and were extremely appreciative of the
    assistance they received.
        Up until late 1999, two Federal agencies were providing competing
    ballistics imaging technology to State and local law enforcement
    agencies. ATF had the ``CEASEFIRE'' technology and the FBI had the
    ``DRUGFIRE'' system, and each had its own supporters. Unfortunately,
    one system couldn't share information with the other. In December of
    1999, the FBI and ATF agreed that ATF would provide the hardware--the
    ``CEASEFIRE'' system--and that the FBI would provide the communications
    network to tie the machines together. ATF has been hard at work to
    replace the ``DRUGFIRE'' systems with funding provided by this
    Subcommittee. Now, I understand that the FBI has reneged on their part
    of that written agreement.
        Question. What does this mean for ATF? Do you have sufficient funds
    to take over this responsibility as well? What about the one area where
    the FBI Communications Network is already in place?
        Answer. ATF has accepted sole agency responsibility for management
    and administration of the NIBIN network, and is confident that single
    agency management will maximize the efficient operation of the program.
        In order to create and maintain the communications network for
    NIBIN, ATF will incur some costs. These include the following:
      --One-time charges for network encryption equipment purchase and
            installation of encryptor and router;
      --Recurring costs for ongoing network circuit and maintenance charges
            for network equipment;
      --Special labor costs for project engineering and onsite technician
            labor;
      --Recurring telecommunications costs; and
      --ATF contractor support costs for site installation and travel and
            network design support.
        As the question notes, one of the sixteen regions (Florida) is
    currently operating on a communications network operated by the FBI.
    This region will be transferred to the ATF-owned frame relay network,
    enabling nationwide connectivity.
        Funds for these requirements are included in the fiscal year 2002
    appropriation level and in the fiscal year 2003 President's Budget
    request.
                                     ______

                       Questions Submitted to James Sloan

                 Questions Submitted by Senator Byron L. Dorgan

                               terrorist funding
        Question. Prior to September 11, FinCEN's Intelligence Liaison
    Office had been analyzing Bank Secrecy Act (BSA) information in support
    of law enforcement investigations into terrorist financing. Immediately
    after the terrorist attacks, FinCEN was able to immediately implement
    several new initiatives and enhance core programs to assist in this
    investigation. In addition, the USA Patriot ACT expeditiously made
    additional tools available to law enforcement to fight money laundering
    and terrorist financing. FinCEN is responsible for implementing 23 of
    the 44 provisions contained in Title III of that Act and also has a key
    role in many of the working groups established by Treasury to address
    the other provisions.
        Do we anticipate any criminal cases resulting from the millions in
    terrorist assets frozen through FinCEN investigations?
        Answer. Most criminal cases in the terrorist area utilizing FinCEN
    investigations are brought by Operation Green Quest at the Customs
    Service or the Financial Review Group at the FBI. FinCEN analysis is
    also used in research and actions conducted by the Office of Foreign
    Assets Control (OFAC). For example, the Office of Foreign Assets
    Control used information derived from FinCEN investigations in partial
    support of its blocking of Al Barakaat, the Somali money remitter. In
    general, we anticipate that FinCEN resources will prove important to
    all the U.S. Government's efforts to combat terrorist financing.
        Question. Does your fiscal year 2003 budget request cover your
    requirements as a result of the USA Patriot Act?
        Answer. FinCEN and Treasury are analyzing what additional resources
    may be needed for hiring both personnel and contractual support in
    order to fully implement all of the mandates of the USA PATRIOT Act.
    Until the regulations or programs are finalized, and we review funding
    options with OMB, it would be premature to accurately predict the
    overall resource implications that will be needed to implement these
    mandates.
        Question. Are you working on the necessary funding adjustments in
    fiscal year 2004 to make these pilot projects permanent as a result of
    the Patriot Act? How much would that cost?
        Answer. FinCEN is beginning the fiscal year 2004 planning process
    in preparation for the next President's Budget submission. During this
    process, FinCEN will work with the Department and OMB to consider ways
    to make the pilot projects permanent to meet the new mandates in the
    Patriot Act. It would be premature to accurately predict the level of
    resources needed to fully meet the requirements of the Patriot Act.
        Question. How have your increased activities under the Patriot Act
    affected your initial mission?
        Answer. FinCEN is responsible for implementing 23 of the 44
    provisions contained in Title III and also has a key role in many of
    the working groups established by Treasury to address the other
    provisions all of which have due dates over the next 9 months. The
    Patriot Act also accelerated the implementation of many of the goals
    articulated in the 2002 National Money Laundering Strategy. Currently,
    FinCEN is making good strides in implementing the numerous provisions
    of the Act, however, the workload increase is significant. For example,
    in the regulatory area, the accelerated deadlines for expanding certain
    Bank Secrecy Act (BSA) requirements to additional financial services
    providers have placed a substantial burden on resources in terms of
    consulting with industry, drafting and issuing regulations, and
    managing the resulting comment periods. These mandated requirements are
    occurring at a time when a major new regulatory program, money service
    businesses (MSBs), was already being implemented. Additionally,
    management of technology-driven projects such as the Patriot Act
    Communications System (PACS) under the tightened deadlines is also
    requiring human and monetary resources.
                            fiscal year 2003 budget
        Question. Secretary O'Neill is requiring that all agencies incur a
    Business Strategy Adjustment. He feels that every agency can find
    savings, but all those we asked were absent any ideas that wouldn't
    affect mission-related activities. He proposed something similar in
    fiscal year 2002, but this Subcommittee restored the funds for law
    enforcement agencies. In fiscal year 2003, the BSA for FinCEN totals
    $481,000.
        What savings do you recommend to cover the proposed $481,000
    business strategy adjustment?
        Answer. FinCEN continually reviews its business processes and
    technologies to ensure that best business practices are in place and
    that new technologies are explored that will enhance services or
    provide efficiencies. For fiscal year 2003, we are reviewing ongoing
    programs with the goal of identifying any cost savings from current
    business practices. While some programs are being enhanced through the
    use of technology, the results will be qualitative, in terms of
    enhanced analysis and services. Examples of the type of efforts
    previously identified include the Gateway and the Platform programs
    which allow customers to do their own research using our technology
    tools and other resources.
        Question. What would the affect be on your agency if forced to
    absorb the business strategy adjustment and a 1.5 percent pay raise?
        Answer. At this time, FinCEN would review on-going programs and
    staffing levels to absorb the 1.5 percent pay raise and extend out
    several of the information technology or law enforcement support
    initiatives to meet the business strategy adjustment. We would look for
    program efficiencies to reduce the impact of the reduction in future
    years.
                       office of homeland security (ohs)
        Question. Have you placed any reimbursable or non-reimbursable
    employees within OHS?
        Answer. No, FinCEN has not been requested to place any employees
    within OHS.
        Question. Please describe your agency's relationship with OHS?
        Answer. FinCEN does not have a direct relationship with OHS. These
    issues are addressed through Treasury's Office of Enforcement.
        Question. Has your agency been intimately involved in any homeland
    security decisions made by OHS that are directly related to your
    mission?
        Answer. No. As mentioned in the previous response, any involvement
    with OHS is coordinated through Treasury's Office of Enforcement.
                                     ______

             Questions Submitted by Senator Ben Nighthorse Campbell

        Question. I understand that the lease on your current location will
    expire in April of next year, and that you are searching for new space.
        What is wrong with the existing location? Are you being forced to
    leave? Is FinCEN the only Federal tenant in that building? How much
    would it cost to move to a different location?
        Answer. The current location is included in the geographic area
    selected as part of the competitive solicitation. The lease renewal
    follows standard acquisition process including a competitive
    solicitation. Therefore, the ultimate selection of the lease location
    could be other than the current lease. At this time, it is premature to
    comment on a forced move from the current location or the costs
    associated with a different facility.
        Currently, FinCEN is the only Federal tenant in the building.
    However, it is our understanding that another Federal agency is in
    negotiations with the building concerning a possible lease.
        Question. The USA Patriot Act of 2001 established the Financial
    Crimes Enforcement Network as a separate Treasury bureau, much like ATF
    or Customs or the Secret Service. Other than the prestige of this
    change, what has been the effect of becoming a separate bureau?
        Answer. In many respects, FinCEN has been treated as a bureau--
    having its own appropriation, participating with other bureau heads at
    Treasury meetings, and producing many of the same products required by
    larger bureaus. However, the bureau status does provide a number of
    basic administrative authorities to perform numerous activities and
    functions. Examples of these administrative functions include debt
    collection, records management, mail distribution, personnel security,
    physical security, procurement, personnel, travel cards, and other
    areas or programs.
        FinCEN has been examining its administrative processes to develop
    the best mix between in-house services and competitive sourcing with
    other agencies. In many instances, FinCEN has an adequate structure in
    place so the impact may just be a new or enhanced reporting
    responsibility. For example, FinCEN now has its own Records Group
    Number from National Archives and Records Administration. Also, FinCEN
    has begun to streamline its personnel processes to include taking
    responsibility for final classification of positions and partial
    recruitment activities while continuing to use a service provider for
    systems related processing. These streamlined activities have realized
    a combined savings of 90-180 days in the time needed to fill vacant
    positions.
        Immediately following September 11, FinCEN moved into high speed to
    trace the funding of terrorist groups. This was followed by various
    news reports which only touched on the efforts of your agency.
        Question. I would appreciate it if you could explain, in layman's
    terms, how FinCEN goes about tracing the money. How do you receive the
    raw data used to follow the financial trail?
        Answer. Since its inception, part of FinCEN's anti-money laundering
    mission has been to identify illegal financial activity, regardless of
    the specified unlawful activity. Over the years, advances in
    technology, analytical training, and liaisons with other agencies have
    enhanced FinCEN's financial tracking techniques.
        A requisite to tracing funds is the requirement of some ``tidbit''
    of terrorist-related information--a starting point. It may be
    information related to an account, an address, a business, or
    individual, etc. that serves as the basis for tracing funds. The
    process may start: with a ``tip'' from our newly established Hotline;
    or be discovered through proactive efforts; or result from some type of
    information from law enforcement; or may be derived from sensitive
    information. Regardless of its origin, once the information is
    determined to be reliable, the tracing process begins.
        As an example, using just an account number, the first step would
    be to identify whether the account is in any way connected to Bank
    Secrecy Act (BSA) reports, such as (Currency Transaction Reports
    [CTRs], Currency Transaction Reports by Casinos [CTRCs], Suspicious
    Activity Reports [SARs], Currency or Monetary Instrument Reports
    [CMIRs], Foreign Bank and Financial Accounts Reports [FBARs]. If the
    account is found as part of a BSA report, it provides additional
    information that can be used to broaden the field used for tracing,
    i.e., an address, additional persons associated with the account,
    biographic data relative to account owner or party. From that point,
    consideration is given to transaction amounts, number and frequency of
    transactions, whether monetary instruments or money transfers are
    prevalent. If a SAR has been filed, the narrative can enhance the
    tracing process even more by providing additional data such as
    associates, bank accounts, financial institutions, beneficiary names,
    and locations.
        Through thorough research, FinCEN analysts exploit every bit of
    information that surfaces during the research phase, and then develop
    what FinCEN refers to as ``multi-generation link analysis.'' Analytical
    techniques used by FinCEN analysts incorporate link analysis and
    timelines that aid in the tracking and overall flow of funds. Such
    analysis considerably expands the overall scope of a financial
    investigation. In tracking terrorist funds, FinCEN has realized
    particular value through proactive initiatives. In the absence of a
    ``tip,'' FinCEN analysts routinely conduct proactive queries of SARs to
    identify possible indicators of terrorist financing. Proactive cases
    normally originate from SARs, and are then augmented by law
    enforcement, commercial, and additional financial information. When
    proactive cases are fully developed, they are referred to law
    enforcement as lead information.
        FinCEN's counter-terrorism efforts are far reaching and utilize
    diverse sources of information to include designated foreign terrorist
    organizations and nationals, the Department of Commerce's Denied
    Persons List, and information from the law enforcement and intelligence
    communities.
                                     ______

                    Questions Submitted to Paul Hackenberry

                 Questions Submitted by Senator Byron L. Dorgan

                      facilities construction master plan
        Question. In your statement, you discuss the need to update the 5-
    year FLETC facilities construction master plan to respond to the
    increased demand for training. This makes a great deal of sense.
    However, you only plan to review the facility needs at Glynco, GA,
    Artesia, NM and Cheltenham, MD.
        You already have a significant and potentially growing presence in
    Charleston, SC. Given the increased demand for training, as well as
    some potential expansion limitations at the other FLETC facilities, why
    not take another look at Charleston?
        Answer. Unlike the Glynco, Artesia and Cheltenham sites, which are
    owned and operated by FLETC for multiple agencies, Charleston is leased
    by the Department of Justice and is used exclusively for entry level
    U.S. Border Patrol training. FLETC helped the INS/U.S. Border Patrol to
    set up operations in the mid-1990's and we have supported their
    training with instructional, contract and technical assistance. FLETC
    has developed a business case study that advocates the consolidation of
    all Border Patrol training in Artesia at a significant cost savings to
    the government. Discussions are underway with Justice and INS on the
    issue. The facilities master plan now under development by an
    experienced site planning firm, Clark Nexon, Inc. of Norfolk, VA, will
    include consideration of U.S. Border Patrol training needs, but the
    indications are that they still can be accommodated by FLETC without
    recourse to yet another permanent training site.
        Question. Also, how does the new Customs Service facility being
    constructed in Harpers Ferry, WV fit into your plan?
        Answer. Congress provided funding directly to the U.S. Customs
    Service in fiscal year 2000 for the development of a requalification
    firearms training site at Harpers Ferry, WV. The appropriation language
    in the bill stated this site was for a specific, limited purpose and
    was not to duplicate training conducted at FLETC sites. FLETC, U.S.
    Customs Service and the Office of Enforcement in the Department of
    Treasury signed a Memorandum of Understanding for operations of the
    Harpers Ferry location consistent with Congressional intent. U.S.
    Customs Service continues to be a major partner in FLETC training, and
    all FLETC sites, including the newest location in Cheltenham, MD, are
    available to the U.S. Customs.
                         transportation security agency
        Question. In your statement, you note that the FAA requested that
    you undertake training for the newly expanded Federal Air Marshall
    program. There also appears to be discussion about who will train the
    new Federal baggage screeners. The uncertainty about who will be
    providing the training in the long run makes it difficult to budget
    effectively.
        Where are you training the air marshals? How many do you envision
    will be trained in over the next 2 years?
        Answer. In agreement with the Department of Transportation, FLETC
    began training of Federal Air Marshals (FAA) at our Artesia, NM center
    in October 2001. A number of steps have been taken to ensure that air
    marshals are accorded the training needed for their important
    assignments, including the use of three 727 aircraft fuselages for
    practical training at the site. Artesia will continue as a major source
    of air marshal training for the foreseeable future, but FAA's Atlantic
    City site is also being used for certain types of training conducted by
    FAA. The precise number of air marshals to be trained is still being
    determined by the Transportation Security Administration.
        Question. As for the baggage screeners, who will be making the
    decision about who will undertake this training? If it is decided that
    FLETC will conduct the training, where do you envision this training
    will occur? Would a new site be required? Also, are funds for this new
    mission included in your fiscal year 2003 budget request? If not, how
    much would be required and when?
        Answer. FLETC's involvement in the training of baggage screeners at
    U.S. airports has been limited. FLETC's chief responsibility is to
    conduct and support training for Federal law enforcement personnel.
    Baggage screeners will not have law enforcement powers. Thus, FLETC's
    involvement has been as a consultant on curriculum development and on
    formulation of a train-the-trainer program for would-be trainers of
    baggage screeners. FLETC conducted two pilot programs in February and
    March 2002 to prepare trainers, but no further training of this nature
    is expected at FLETC. It is our understanding the Transportation
    Security Administration intends to offer this training through a
    contractor and at locations across the country. FLETC may continue to
    provide training validation assistance for these programs.
                          border agency consolidation
        Question. There is a recommendation pending to fold the Customs
    Service into the Justice Department via the INS. There is also
    discussion and legislation to create a new border agency or department
    comprising a number of agencies.
        Should any of these recommendations occur, how will they require
    you to modify your current training regime? Would you also consolidate
    training at a given location or make some other arrangement or maintain
    current practices--at least for the time being?
        Answer. Both the U.S. Customs Service and the Immigration
    Naturalization Service are member agencies in FLETC; thus we have had
    significant experience with the type of training they receive and the
    facility requirements for conducting that training. Should any
    consolidation of these two agencies or others occur under a
    Congressional mandate, FLETC is prepared to help redesign curricula and
    realign training to meet new objectives, including cross designation
    training. If a new border security agency is formed in the future,
    FLETC will work with the affected agencies to determine the duration,
    special requirements and location to best conduct this training.
                              cheltenham facility
        Question. You are in the process of modifying the Cheltenham, MD
    facility for use by Washington, DC-area law enforcement personnel.
        Who will be trained at this facility? Do you envision it being used
    by other Federal law enforcement personnel who need to qualify as
    weapons carriers?
        Answer. The Cheltenham facility will serve two major needs: an in-
    service academy operation for the U.S. Capitol Police and an
    interagency requalification site for firearms and law enforcement
    vehicle skills training. The U.S. Capitol Police already have begun
    training in interim quarters at Cheltenham, and their permanent
    facility is expected to be ready in September 2002. The firearms and
    vehicle facilities are under design and expect to be opened to use by
    late fiscal year 2003 and early fiscal year 2004. The legislation
    establishing the Cheltenham site in fiscal year 2000 specifically
    identified the Treasury law enforcement bureaus, U.S. Capitol Police
    and the Washington, DC Metropolitan Police Department. The legislation
    also makes this site available to all Federal agencies with law
    enforcement personnel assigned to the Washington, DC area who need
    requalification training of a short duration. FLETC calculates that
    over fifty Federal agencies will participate at Cheltenham, but the
    precise number of personnel is still being determined. Training
    provided at this location will be conducted on a reimbursable basis
    similar to the way advanced training is done in Glynco and Artesia for
    partner agencies.
                         rural law enforcement project
        Question. For the past few years, this Subcommittee has added a
    limited amount of funds to your budget to assist in the development of
    a rural law enforcement training curricula. That work has been
    performed primarily by the Rural Law Enforcement Education Project at
    Minot State University in Minot, ND. I understand that FLETC finds the
    work product delivered by MSU to be valuable and that there is interest
    in expanding the program.
        Please describe your impression of the current program and the
    interest level in expanding the program. Also, if additional funds are
    needed to accomplish this expansion, how much additional funding would
    be required and for what purposes?
        Answer. Minot State University (MSU) has provided a number of
    excellent work products in connection with the Rural Law Enforcement
    Education Project, which was first initiated in 2000 under the National
    Center for State and Local Law Enforcement. ``The Training Needs
    Assessment for the Northern Plains States'' research surveyed rural
    agencies as to the types of crimes impacting rural law enforcement
    agencies. Minot State University has contracted with the National
    Center to provide longitudinal studies on the effectiveness of the law
    enforcement training offered to agencies as determined in the Northern
    Plains States. Longitudinal studies are continuing for ongoing
    training. MSU has created a clearinghouse as specified in the contract,
    and they are serving as a resource center for rural law enforcement
    agencies seeking training, research, and grant availability and writing
    assistance. MSU is sending two representatives to the National Center
    for an 8-week period to work with these projects. MSU has conducted
    post training surveys on the National Center's train-the-trainer
    programs to validate and strengthen much needed specialized training
    for rural law Enforcement agencies. As a result of their research, they
    have recommended that a Rural Policing Institute (RPI) be created to
    link the work of MSU and the National Center, which will strengthen the
    programs provided by the National Centers' Small Town And Rural (STAR)
    Project and reach additional rural agencies. The mission of the RPI
    would be to develop and deliver specialized and advanced training,
    based upon sound research, for small town and rural law enforcement
    officers, supervisors, and managers. The training would be held at the
    FLETC facilities, MSU, and throughout the U.S. We are studying their
    proposal and can make recommendations once this assessment is complete.
                                     ______

             Questions Submitted by Senator Ben Nighthorse Campbell

        Question. The biggest question on all of our minds with regard to
    the Federal Law Enforcement Training Center concerns the training needs
    of the new Transportation Security Administration. We know that 5,000
    new Federal Air Marshals need to be trained this year, and that there
    will be at least 4,000 more next year--not to mention the continuing
    need to train replacements.
        I'd appreciate it if you would give us an update on the role of
    FLETC in this regard. And, secondly, does FLETC have sufficient
    resources for this effort?
        Answer. FLETC began training for increased numbers of Federal Air
    Marshals in October 2001 at the request of the Federal Aviation
    Administration (FAA). Program agreement has been reached between the
    FAA and the FLETC on the training format to be used. Adjustments will
    continue to be made as more information becomes available as to the
    long-term mission goals of the TSA. FLETC is now conducting intensive
    training at its Artesia, New Mexico site on a 6-day workweek for new
    Federal Air Marshals. The increased training requirements of the FAA
    were not fully known when the fiscal year 2003 President's budget was
    submitted; however, the FAA has provided a reimbursable agreement to
    pay for the cost of providing this training for fiscal year 2002.
        Funding was provided by this Committee in late 2000 to develop a
    D.C. metropolitan area law enforcement training center at Cheltenham,
    Maryland. This site was primarily envisioned as a location for firearms
    and vehicle operation requalifications, as well as providing training
    space for the Capitol Hill Police.
        Question. Please give us an update on what progress has been made,
    and when this facility is expected to be open for business.
        Answer. The Cheltenham, MD site was transferred to FLETC's
    inventory in May 2001 from the U.S. Navy. Significant progress has been
    achieved thus far, and the timelines for design and construction are on
    track. An environmental study was completed, with a finding of no
    significant impact issue. Other studies such as noise levels and
    traffic patterns also have been concluded, and local meetings within
    the private communities near Cheltenham have been successfully
    undertaken. An interim building for U.S. Capitol Police training was
    opened in February 2002. Their permanent academy site is expected to be
    ready by September 2002. Design is complete, or nearly so, on several
    projects, including the firearms range complex and vehicle training
    range. Construction will begin in May and throughout the summer of 2002
    on these buildings and related facilities, such as office space,
    security and registration, a haz-mat storage facility and other
    permanent structures. Much of the $33.5 million appropriated for
    Cheltenham will be obligated in fiscal year 2002. The anticipated
    opening for most facilities at Cheltenham is early fiscal year 2004.
    More than 50 Federal agencies and the District of Columbia Metropolitan
    Police Department are projected to train in excess of 8,000 law
    officers in the first year or two of operation.
                                     ______

          Prepared Statement of the Institute of Makers of Explosives

        On behalf of the Institute of Makers of Explosives (IME), I am
    submitting a statement for inclusion in the Subcommittee's hearing
    record regarding the proposed fiscal year 2003 budget for the Bureau of
    Alcohol, Tobacco & Firearms (BATF).
                              interest of the ime
        The IME is the safety association of the commercial explosives
    industry. Our mission is to promote safety and the protection of
    employees, users, the public and the environment; and to encourage the
    adoption of uniform rules and regulations in the manufacture,
    transportation, storage, handling, use and disposal of explosive
    materials used in blasting and other essential operations.
        Commercial explosives are key to our way of life. Without them,
    materials used in nearly every item in our society would be practically
    impossible to remove from the earth. Effective recovery of energy
    resources, such as coal and oil, cannot be accomplished without
    explosives. Our transportation system, which underpins our economy, is
    built on minerals and aggregates mined with explosives. Specialty
    applications for fire and avalanche control or demolition and
    construction rely on commercial explosives. Last year, 2.7 million
    metric tons of explosives were consumed in the United States of which
    IME member companies produced over 95 percent. These products are used
    in every state in the Union and are distributed worldwide.
        The production, distribution, storage and use of explosives are
    highly regulated. BATF is one of the agencies that plays a primary role
    in assuring that explosives are identified, tracked, and stored only to
    and by authorized persons. The ability to manufacture, distribute and
    use these products safely and securely is critical to this industry.
    With this perspective, we have carefully reviewed the Administration's
    fiscal year 2003 budget request and have the following comments.
              budget resources are inadequate for responsibilities
        Our industry relies on BATF to efficiently and effectively perform
    a number of functions to ensure that the legitimate commerce of
    explosives can go forward safely and unimpeded. Additionally, when
    explosives are stolen, lost, or used for illegal purposes, we rely on
    the BATF to recover products and investigate incidents as necessary. In
    this regard, we support all necessary resources for these essential
    services. However, the BATF budget request does not adequately support
    these essential services.
        BATF claims in its budget justification ``to provide a
    comprehensive proactive and reactive force in the fight to protect the
    American public against the criminal use of explosives [and] to have
    the potential to thwart terrorist activity at every level of the
    execution process, i.e., from the theft or purchase of explosives to
    the deployment of those explosives for terrorist purposes at public
    events.'' \1\ The commercial explosives industry and the public are
    served best by the prevention portion of this mandate. However, the
    budget clearly points to gaps in BATF's ability to perform assigned
    functions.
    ---------------------------------------------------------------------------
        \1\ Fiscal year 2003 BAFT Budget Justification, Volume 1, pages 2-
    3.
    ---------------------------------------------------------------------------
        BATF has admitted in the past that its explosives program is not
    adequately covered. While BATF has stated that it is making efforts to
    better balance its responsibilities, this budget request would suggest
    otherwise. In the wake of the events of September 11, BATF set out to
    inspect all licensees/permittees, currently a class of about 9,400, of
    which IME represents about 3.4 percent. These were not all full
    inspections. The task would be too daunting. Despite BATF's efforts,
    the Bureau came 2,000 licensees/permittees short of its inspection
    goal. As a result of the inspections it did perform, BATF found about
    2,000 violations, about 10 percent being referred for enforcement.\2\
    Although less than 2.7 percent of licensees/permittees were the source
    of these violations, BATF still must follow-up to ensure that
    corrective actions have been taken. At the time the Bureau's budget
    document was prepared, BATF estimated that its corrective action
    workload would be about 850 in fiscal year 2003.\3\ The violations data
    from the post-September 11 inspection drive as well as that from fiscal
    year 2001, indicate that 850 corrective actions is less than half the
    current workload.\4\ In the meantime, no matter how serious the number
    of violations discovered may seem to be, it appears that BATF has
    issued only one notice of license revocation.\5\ Yet, BATF's fiscal
    year 2003 budget request asks for no additional FTE under the budget
    function that includes these and other inspection activities of the
    Bureau's regulated commodities, holding at 529 FTE.\6\ With this
    resource commitment, BATF states that it will only be able to inspect
    50 percent of the explosives industry and that it will ``strive'' to
    investigate 100 percent of reported explosives thefts and losses.\7\
    ---------------------------------------------------------------------------
        \2\ Statement of Bradley A. Buckles, Director, BATF, Subcommittee
    on Treasury, Postal Service and General Government, House
    Appropriations Committee, February 28, 2002, page 3.
        \3\ Fiscal year 2003 BATF Budget Justification, Volume 2, page 20.
        \4\ Op. Cit., Statement of Bradley A. Buckles, February 28 2002,
    page 17. Fiscal year 2001--1,813 violations; 1st quarter fiscal year
    2002--1,763 violations.)
        \5\ Ibid.
        \6\ Fiscal year 2003 BATF Budget Justification, Volume 1, page 13.
        \7\ Fiscal year 2003 BATF Budget Justification, Volume 2, page 20.
    (The Budget Justification does not disclose data to evaluate whether or
    not the Bureau has met its goal to investigate 100 percent of reported
    explosives thefts and losses.)
    ---------------------------------------------------------------------------
        The Subcommittee should also be aware that, in the aftermath of
    September 11, legislation has been introduced with Administration and
    industry support to close loopholes in Federal explosives permitting
    law.\8\ Currently, all manufacturers, importers, and distributors of
    commercial explosives are required to obtain Federal licenses. However,
    only interstate, but not intrastate, users of explosives, with one
    minor exception, are required to obtain Federal permits to purchase
    commercial explosives. This legislation would close the intrastate
    loophole. It would also significantly broaden the base of those
    employees of licensees/permittees that are required to obtain
    background checks and broaden the scope of the background check before
    such employees can ``possess'' or otherwise ``direct'' the management
    or policies of businesses engaged in the manufacture, importation,
    distribution, purchase, receipt or use of explosives. While IME is
    extremely supportive of these legislative efforts, we are concerned
    that BATF have in place the systems and resources necessary to
    implement these additional requirements in a timely manner.
    Regrettably, BATF lacks the data to estimate what the additional
    workload will be.\9\
    ---------------------------------------------------------------------------
        \8\ S. 1956. We also understand that similar legislation is being
    developed by the House Judiciary Committee.
        \9\ BATF did estimate that the number of additional background
    checks for those that ``direct'' would be in the neighborhood of 80,000
    checks per year. This figure does not capture the number required for
    those that ``possess'' explosives, nor the workload to process the
    intrastate purchase permits.
    ---------------------------------------------------------------------------
        There is a price to safety and security. Industry and the public
    trust that BATF has the resources to fulfill its regulatory
    responsibilities. It is up to Congress and, in particular, this
    Subcommittee, to ensure that BATF has the resources it needs.
                                strategic goals
        A key to rebalancing the Bureau's statutory responsibilities is the
    identification of performance standards that can measure BATF's
    progress or areas needing attention. In fact, such performance measures
    are demanded by the Government Results and Performance Act. Currently,
    BATF has identified six customer service standards to measure its
    delivery of services to its regulated community.\10\ None of these
    standards address the needs or concerns of the explosives industry.
    Nearly 2 years ago, we approached BATF with suggestions of measures
    appropriate for our industry.\11\ While the Bureau has discussed our
    suggestions, no final decisions have been made as to whether our
    suggestions are appropriate, could be modified, or if other standards
    would better measure service to the explosives industry. In the
    meantime, measurable indices remain unavailable to assess Bureau's
    service to the explosives industry.
    ---------------------------------------------------------------------------
        \10\ Fiscal year 2003 BATF Budget Justification, Volume 2, page 24.
        \11\ Letter to Wayne Miller, BATF, from Cynthia Hilton, IME, July
    19, 2000.
    ---------------------------------------------------------------------------
            rulemaking concerns--closing the import marking loophole
        Currently, BATF regulations require domestic manufacturers to mark
    all explosive materials they manufacture for sale or distribution.\12\
    These marks consist of the manufacturer identity and the location,
    date, and shift of manufacture, commonly referred to in the industry as
    the ``date-plant-shift code.'' These marks are necessary for reasons of
    security and safety. The BATF has emphasized that the failure to apply
    these markings inhibits law enforcement from tracking explosives to the
    source, and proving criminal activity. The date-plant-shift code
    enhances safety because some explosives deteriorate over time and the
    code allows users to keep inventory fresh. Additionally, the date-
    plant-shift code is one of industry's ``QA/QC'' tool, allowing the
    manufacturer the ability to trace product quality problems back to the
    point of manufacture and distribution.
    ---------------------------------------------------------------------------
        \12\ 27 CFR 55.109(a).
    ---------------------------------------------------------------------------
        These marking rules, however, do not apply to foreign
    manufacturers. During the last 3 years, we became aware of heretofore
    unprecedented large imports of unmarked explosives being shipped to the
    United States from China.\13\ This development prompted IME to petition
    BATF for a rulemaking to close this loophole as it applies to high
    explosives and blasting agents. Our petition would make it unlawful for
    any licensee to import such explosive materials without legibly
    identifying by marking all explosives materials in the same manner
    prescribed by the BATF for domestic manufacturers.
    ---------------------------------------------------------------------------
        \13\ Regrettably, not all countries that manufacture explosives
    maintain the same high standards for stewardship and security
    that.underpin the BATF's marking requirements for domestic
    manufacturers. This disparate regulation gives rise to concerns about
    trade practices. In terms of high explosives, the United States has
    already lost its ability to domestically manufacture TNT, and only one
    company still makes dynamite. We do not think it is in the national
    interest to lose more of our high explosive domestic manufacturing
    capability to unfair trade requirements.
    ---------------------------------------------------------------------------
        While stating general agreement with our concern, BATF expressed
    doubt that they could go forward with our proposal without more
    information about the economic consequences to the explosives industry
    irrespective of whether or not the product was a ``high'' or ``low''
    explosive. Nevertheless, to the Bureau's credit, an advanced notice of
    proposed rulemaking (ANPRM) was issued.\14\ Although all comments to
    the ANPRM supported the need to close this loophole, the Bureau remains
    reluctant to go forward with a rulemaking because it did not receive a
    greater number of comments. It is unclear to us what additional ``me
    to'' comments would substantively add to the Bureau's understanding of
    this issue as it relates to the problem at hand, namely unmarked
    imports of high explosives and blasting agents. In the meantime, we
    have seen at least one State unilaterally act to preclude the
    introduction in commerce of unmarked imported explosives in that State
    in the face of BATF delay.\15\ While we understand and applaud this
    State's initiative, we are concerned that over time other states will
    feel compelled to act independently and possibly inconsistently to
    address this issue. The lack of urgency given this rulemaking,
    especially in light of the priority given to strengthening homeland
    security, is without justification. We ask that you join with us in
    asking the Bureau to close this security and safety loophole.
    ---------------------------------------------------------------------------
        \14\ 65 FR 67669 (November 13, 2000).
        \15\ CO 9-6-105, (2001).
    ---------------------------------------------------------------------------
                                    research
        As manufacturers of explosive materials, we have a special interest
    in doing everything possible to prevent the misuse of our products. We
    are interested in the development of new technologies to safeguard the
    public, and support efforts to develop detection and prevention
    technologies that will enhance our national security. Nevertheless,
    from time to time efforts are made to mandate technologies that are
    unproven or unsupported by sound science and cost-benefit analyses.
    Efforts to mandate identification taggants in explosives are a case in
    point. In 1996, Congress refused to bend to such demands and enacted,
    with IME support, anti-terrorism legislation that instead directed BATF
    to study the feasibility of placing identification taggants in
    explosives.\16\
    ---------------------------------------------------------------------------
        \16\ Public Law 104-132, Section 732.
    ---------------------------------------------------------------------------
        BATF initially planned to submit the report to Congress by the end
    of fiscal year 2001. IME had worked with BATF to ensure that they have
    the industry data that they require. Throughout the process BATF made
    efforts to keep us informed of the work on the study and preliminary
    findings. As late as August 2001, we were lead to believe that BATF's
    research had concluded, as did contemporary assessments by the National
    Academy of Sciences, that identification taggants cannot be supported
    with current technology. However, following the events of September 11,
    BATF informed us that the report had been pulled back and its
    conclusions are being reassessed. As tragic and sobering as the events
    of September 11 are, it does not alter the fact that current technology
    does not support identification taggants. In the Subcommittee's
    oversight capacity, BATF should be asked about the release date of the
    1996-mandated report and, after 5 years of study, what if any of the
    reports recommendations have been changed due to the events of
    September 11.
                      need for federal agency coordination
        Events in the last 12 months have prompted concerns about BATF
    intrusion into the jurisdiction of another Federal agency. A critical
    shipment of explosives to a mine is northern Alaska was frustrated, for
    a number of weeks last summer, in large part because a BATF agent sent
    to a local Chief of Police a letter the agent wrote to the area Captain
    of the Port questioning the U.S. Department of Transportation's (DOT)
    authority to regulate the shipment and disputing its advisability
    because of the devastating consequences that would occur if the
    shipment detonated.\17\ Throughout the incident, DOT vigorously
    defended its jurisdiction over and the safety of this movement. Before
    the resolution of this matter, Senator Stevens was prompted to include
    a provision in law to ensure that a port would always be available to
    the shipment of this critical supply.\18\ More recently, BATF has
    described the scope of its proposals to broaden the applicability of
    Bureau background check requirements to include truck ``drivers'' and
    presumably other employees who may ``possess'' explosives in the course
    of transportation. We are concerned about these statements inasmuch as
    current Federal explosives law does not apply to any aspect of the
    transportation of explosives regulated by DOT.\19\ Regulatory overlap
    leads to confusion and non-compliance. To reduce such overlaps
    particularly with DOT where the interface should be seamless, BATE
    should work with DOT to establish a general protocol to minimize
    regulatory overlaps. We believe Congress should insist that these
    agencies show progress in clarifying and respecting each other's
    jurisdictional authority.
    ---------------------------------------------------------------------------
        \17\ Letter to Captain James Spitzer, USCG, from Gary Bangs, BATE,
    copy to Chief Lane Wintermute, Astoria, OR, May 10, 2001.
        \18\ Public Law 107-107, Section 1046.
        \19\ 18 U.S.C. 845(a)(1).
    ---------------------------------------------------------------------------
                                   conclusion
        The manufacture and distribution of explosives is accomplished with
    a remarkable degree of safety. We recognize the important role played
    by BATF in helping our industry achieve and maintain safe and secure
    workplaces. We, therefore, strongly recommend full funding for BATF.
        Thank you for your attention to these issues.

                              SUBCOMMITTEE RECESS

        Senator Dorgan. This concludes today's hearing. Thank you
    for being here.
        [Whereupon, at 2:40 p.m., Wednesday, April 17, the
    subcommittee was recessed, to reconvene at Thursday, April 18.]

      TREASURY AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL YEAR 2003

                                  ----------

                            THURSDAY, APRIL 18, 2002

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 2:33 p.m., in room SD-192, Dirksen
    Senate Office Building, Hon. Byron L. Dorgan (chairman)
    presiding.
        Present: Senators Dorgan, Reed, and Campbell.

                           DEPARTMENT OF THE TREASURY

                              U.S. Customs Service

    STATEMENTS OF:
            JAMES GURULE, UNDER SECRETARY FOR ENFORCEMENT
            ROBERT BONNER, COMMISSIONER, U.S. CUSTOMS SERVICE

                                OPENING REMARKS

        Senator Dorgan. I will call the subcommittee to order.
        This is a hearing of the Subcommittee on Treasury and
    General Government, a hearing on the United States Customs
    Service fiscal year 2003 budget.
        Yesterday we had a hearing on the budget for a number of
    law enforcement agencies within the Department of the Treasury
    that was exclusive of the Customs Service. Today we will
    receive testimony from the largest and the oldest law
    enforcement agency within the Treasury Department, the U.S.
    Customs Service.
        Aside from the IRS, which dwarfs all Treasury agencies in
    the size of its budget, Customs is the largest agency within
    Treasury, both in terms of the size of its budget as well as
    the number of people it employs. Its budget passed the $3
    billion mark this current year with an FTE level of 18,595
    employees. While the budget decreases in real terms next year,
    the number of FTEs would be increased by 1,024.
        The events of September 11 serve to reinforce the critical
    role of the Customs Service and the role it plays, particularly
    in protecting our country. To the long list of prohibited items
    your agents and inspectors attempt to apprehend before they
    cross into this country from cocaine to ecstasy to Iranian
    pistachios and counterfeit Chinese copies of Hollywood movies
    and Silicon Valley computer software, we must now add weapons
    of mass destruction, as well as persons attempting to enter
    this country by enclosing themselves in shipping containers.
        It started a few years back when an alert Customs inspector
    in Washington State, at Port Angeles, not an orange rubber cone
    but actually a live human inspector at a small port of entry,
    apprehended Ahmad Ressam, the so-called Millennium Bomber. Now
    Customs officials are at a Level 1 alert and every port of
    entry into this country is staffed 24/7 by at least two Federal
    officials. This is what we must expect to be the normal
    operating environment for the near future as we fight a war on
    terrorism.
        Mr. Commissioner, I am pleased that the effort begun by
    this subcommittee a couple of years go to refocus attention on
    the northern border and its chronic lack of resources and
    personnel has been embraced by the Customs Service under your
    leadership. Customs is creatively attempting to address this
    new environment by looking at how resources, both people and
    technology, can be effectively used to provide homeland
    security.
        I also applaud your container security initiative,
    Commissioner. This was a topic of considerable debate during
    the last week's full committee hearings and I look forward to
    discussing this concept today with you.
        It is no secret that the discussion of modifying Customs
    operations, folding Customs into the INS, for example, at the
    Justice Department or creating a new border security agency is
    a prospect that troubles me greatly. In my judgment, the
    Customs Service works. The Customs Service is unique. Not only
    does Customs protect our borders, it also keeps our economy
    moving by facilitating legitimate trade. Also, it is the second
    largest revenue raiser for the Federal Government, after the
    Internal Revenue Service.
        During your brief tenure, Mr. Bonner, the Customs Service
    has moved out aggressively to address the needs at our land
    borders and at our seaports. I do not want to see all of this
    good effort and momentum lost as the boxes on organizational
    charts are moved. I do not happen to think you solve
    organizational issues by creating larger organizations or
    greater bureaucracy. The Customs Service should not be visited
    by the problems of the Immigration Service, in my judgment.
        Mr. Commissioner you, of course, are restricted and
    restrained to support whatever the Administration says it
    intends to do, and I understand that. But I want you to
    understand, and those in the Administration who are discussing
    this, that there are those of us in Congress who believe the
    Customs Service does a fine job, has a unique role, and we
    would not look favorably upon visiting upon the Customs Service
    some problems that other agencies have.
        Let me call on the ranking member, Senator Campbell.
        Senator Campbell. Thank, Mr. Chairman, just a brief
    comment.
        I also believe the Customs Service is doing a fine job.
    Certainly the additional role that they have taken on since the
    9/11 tragedy cannot be overstated. Certainly, there is more to
    the Customs Service than just the vital security of the
    physical borders.
        The Customs Service works with the trade industry to make
    sure that the legitimate goods can come into our country on a
    timely basis, and that counterfeit goods cannot. Both have a
    major impact on the economic well-being of our Nation.
        Customs is also involved in reducing the flow of illegal
    drugs into our country. I noted with interest the part of
    Commissioner Bonner's prepared remarks which showed that the
    Level 1 security at the border has had the added benefit of
    much higher than normal drug seizures. Customs is also involved
    in disrupting money laundering efforts by implementing parts of
    the National Money Laundering Strategy, and that too protects
    our economy while at the same time combating terrorism.
        So I look forward to the testimony, Mr. Chairman. Thank
    you.
        Senator Dorgan. Let me call on my colleague, Senator Reed.
        Senator Reed. Mr. Chairman, I have no formal statement. I
    just want to welcome the witnesses and proceed to the
    questioning. Thank you, Mr. Chairman.
        Senator Dorgan. Commissioner Bonner, I know you are
    accompanied by Under Secretary Gurule today. He was with us
    yesterday. Let me ask you to proceed any way that you choose to
    proceed. Did you want to proceed first, Mr. Secretary?

              OPENING REMARKS FROM UNDER SECRETARY OF JIMMY GURULE

        Mr. Gurule. Yes, Mr. Chairman. Let me just begin with a
    very brief opening statement.
        Chairman Dorgan, Ranking Member Campbell, and Senator Reed,
    I am privileged to return to be with you here today to support
    the President's 2003 budget request for the Department of the
    Treasury's Office of Enforcement and the U.S. Customs Service
    in particular.
        In the interest of time, I refer the subcommittee to my
    statement in yesterday's record for an overview of the
    President's fiscal year 2003 budget request for the Treasury
    Department's Office of Enforcement and its law enforcement
    bureaus.
        Today I am pleased to join Robert C. Bonner, the
    Commissioner of the United States Customs Service, who will
    testify regarding that bureau's programs and initiatives. I
    have had the privilege to work with Commissioner Bonner in
    various capacities over many years, and it is indeed a pleasure
    to work with him again in this capacity. He brings a wealth of
    experience and leadership ability to his position and already
    has launched a number of new Customs initiatives to make our
    nation more secure.
        Yesterday, during my testimony, I discussed three priority
    areas of the Office of Enforcement and the law enforcement
    bureaus: terrorist financing, security for the Winter Olympics,
    and border security. The Office of Enforcement and the Customs
    Service have worked closely in each of these areas, and I would
    like to highlight briefly for the Subcommittee some of those
    initiatives.
        With respect to terrorist financing, last October Treasury
    created Operation Green Quest, which is a multi-agency
    financial enforcement investigative initiative designed to
    augment existing counterterrorist efforts by bringing the full
    scope of the Government's financial expertise to bear against
    systems, individuals, and organizations that serve as sources
    of terrorist financing. The work of this task force that is
    headed by the U.S. Customs Service already has led to 12
    arrests, six indictments, and the seizure of nearly $4 million
    and bulk cash seizures, cash smuggling of over $11 million.
        Green Quest agents, along with those from the FBI and other
    Government agencies, including the IRS-CI, have traveled abroad
    to follow leads, exploit documents recovered, and provide
    assistance to foreign governments. The work of these financial
    experts is just starting, as they have opened well over 300
    terrorist financial investigations.
        International cooperation is an important part of our
    strategy in the war against terrorist financing. Today, all but
    a handful of countries have expressed their support for the
    international fight against terrorism. The Office of
    Enforcement, in conjunction with the Customs Service and other
    Federal agencies is providing technical assistance to countries
    to strengthen their capacity to freeze terrorist funds and are
    working with foreign financial officials on new cooperative
    actions against terrorist activities and financing.
        The Office of Enforcement has helped coordinate the
    deployment of financial jump teams consisting of experienced
    accountants, bank examiners, and other financial experts from
    the Customs Service, OFAC, IRS-CI, FinCEN, the FBI, and other
    agencies. These experts review bank records and possible links
    to money associated with bin Laden's al Qaeda network.
        With respect to Olympic security, yesterday I testified
    before this subcommittee about the excellent coordination among
    Treasury law enforcement bureaus in providing security support
    for the 2002 Winter Olympic games in Salt Lake City. With
    Commissioner Bonner here today, I take this opportunity to
    commend him and the dedicated men and women of the United
    States Customs Service for the key security role they played
    for these Olympic games. I personally visited a number of the
    Olympic venues and met with many of the men and women of the
    Treasury enforcement bureaus who were involved in providing
    security for the Olympic games.
        I personally toured the U.S. Customs Service command and
    coordination center in which Customs was monitoring the general
    aviation of flights that were flying into Salt Lake City, into
    the restricted fly zone during the Winter Olympics. The Customs
    Service provided critical air surveillance in restricted air
    space, ground support to the Secret Service, increased presence
    at the northern border, and screening of general aviation
    aircraft and their passengers and crew. At least 500 Customs
    officers were committed to the day-to-day oversight of the
    Winter Olympic games.
        The total success of this coordinated enforcement effort in
    a heightened security environment is a tribute to the dedicated
    men and women who serve in the Customs Service and in the other
    Treasury enforcement bureaus.
        Last, border security. One key component of defending our
    homeland is protecting our Nation's borders while facilitating
    the flow of travelers and cargo. Last November, Secretary
    O'Neill, Commissioner Bonner and I met with our Canadian
    counterparts during the G-20 meeting in Ottawa to discuss
    cooperative efforts to strengthen security along our shared
    border while expediting the flow of trade.
        Commissioner Bonner and I are also working with the Office
    of Homeland Security to help implement the 30-point action plan
    announced in December by Governor Ridge and then Foreign
    Minister, now Deputy Prime Minister, John Manley. A similar
    smart border accord is now in place for the United States-
    Mexico border. On March 22 of this year, President Bush and
    President Fox announced in Monterrey, Mexico a 22-point
    agreement to build a Smart Border for the 21st century between
    our two countries.
        I can assure the subcommittee today that the coordination
    and cooperation not only among Federal border agencies, but
    also with their Canadian and Mexican counterparts, has never
    been stronger.
        Finally, on Tuesday of this week, Secretary O'Neill,
    Commissioner Bonner, Governor Ridge, and Governor Engler
    visited the port of entry at the Ambassador Bridge, in Detroit,
    to announce C-TPAT. Under this program, major companies work
    with the Customs Service to implement security procedures
    throughout the supply chain. In exchange, the Customs Service
    expedites the processing of these companies' products when
    entering the country.
        Commissioner Bonner will discuss this initiative in greater
    detail, but this stands as a model for ways in which the
    Government and the private sector can work together to ensure
    enhanced security at our Nation's borders.
        In conclusion, I want to thank you for the opportunity to
    testify today in support of the President's fiscal year 2003
    budget, and I want to thank you sincerely for the support that
    you have provided to the Treasury Department, to Treasury
    enforcement, and specifically to the Customs Service. I look
    forward to answering any questions that you may have.
        Senator Dorgan. Secretary Gurule, thank you very much.
        Next we will hear from Commissioner Bonner, the
    Commissioner of the Customs Service. Mr. Commissioner, I
    understand you have a short video presentation, but we will be
    happy to include your entire statement as a part of the record,
    and you may summarize and proceed as you will.

           OPENING REMARKS FROM CUSTOMS COMMISSIONER ROBERT C. BONNER

        Mr. Bonner. I appreciate that, Mr. Chairman. I want to make
    a few remarks before I show the video.
        I want to thank you, Senator Campbell, and Senator Reed. I
    am very pleased to be able to appear before the subcommittee
    this afternoon with Under Secretary Gurule in connection with
    the fiscal year 2003 budget request for the U.S. Customs
    Service.
        I know, from conversations I have had with the Chairman,
    that everybody recognizes that the mission of the U.S. Customs
    Service, actually in the history of our country, has always
    been very important. But since September 11, that mission has
    never been more important. From that day forward, since
    September 11, the number one priority of the U.S. Customs
    Service has been protecting and defending our country against a
    real and a continuing terrorist threat.
        The fiscal year 2003 budget request reflects this priority.
    It reflects it, number one, at our borders, where U.S. Customs
    inspectors and canine enforcement officers defend our country
    day in and day out, at our land port of entries, at our
    airports, and our seaports. Customs role certainly is, in
    addition to all of the other things that the chairman indicated
    at the outset of the hearing, in addition to interdicting drugs
    and other contraband, it is a mission to detect and prevent
    terrorists and terrorist weapons from entering our country. We
    need the resources to strengthen border security. But at the
    same time, we also need these resources so we can do so without
    choking off the flow of trade that is so important to our
    country's economy.
        But we are not just playing defense. We also, as Under
    Secretary Gurule has indicated, have gone on the offense with
    our Customs agents who are, and have been, investigating and
    disrupting terrorist financing through Operation Green Quest
    which is, as Mr. Gurule indicated, a multi-agency task force
    led by the U.S. Customs Service.
        And our Customs Agents, through Project Shield America, are
    also protecting against international terrorist organizations
    and rogue nations that support the acquiring of strategic
    weapons, components, technology and equipment by illegally
    exporting those kinds of materials.
        This priority, in fact all of the counterterrorism
    initiatives of the Customs Service, have been supported by
    Congress in the fiscal year 2002 supplemental and they are
    supported by the Administration in its 2003 budget request in
    the form of program increases and annualizations.
        I want to thank you particularly, Mr. Chairman, and members
    of this subcommittee for the support that you have given to the
    U.S. Customs Service in the 2002 appropriation and the 2002
    supplemental, and for your continuing support of the U.S.
    Customs Service and its mission.
        Regarding border security, I believe that we can
    dramatically improve security of our country against the
    terrorist threat and keep commerce flowing if Customs has the
    right strategy, if it has the right tools and technology, and
    if it has sufficient staffing. That strategy is, and should be
    in my view, two fold. First, it involves applying risk
    management principles to sort out the high risk from the low
    risk cargo, vehicles and people, so that we can concentrate our
    efforts and our inspections on those goods and those cargo
    containers and those vehicles and people that pose a potential
    risk. And secondly, I believe we need to push our security out.
    And that is, working with industry and working with other
    nations, we need to do far more to increase security along the
    entire supply chain and we need to start pre-screening cargo
    containers before they arrive in the United States.
        As part of our efforts to push the security of our country
    outward, Customs has established--in fact, Customs has been
    working very hard with industry, with U.S. importers and
    others, to establish a partnership to dramatically increase
    security along the entire supply chain of goods into the United
    States. This is the Customs Trade Partnership Against
    Terrorism.
        Last Tuesday, Secretary O'Neill, Governor Ridge, and I
    announced the Customs Trade Partnership Against Terrorism at
    the Ambassador Bridge in Detroit. I proposed this partnership
    to the trade last November at the Customs trade symposium that
    was held here in Washington in November. I am pleased to report
    that, as a result of, let me say, a lot of dialogue with the
    trade, a lot of listening on the part of the Customs Service,
    and a whole lot of hard work on the part of Customs Service
    working with the trade, we have developed a program, a
    partnership to prevent legitimate commercial cargo from being
    used by terrorists. That is to say, we have developed a program
    to increase the supply chain security literally from the
    foreign loading docks to our land borders and our seaports.
        The companies that have joined with Customs in the
    Partnership Against Terrorism include General Motors, Ford,
    Daimler-Chrysler, Motorola, Sara Lee, Target Stores, and BP-
    Amoco. Those were the charter partners in the Partnership
    Against Terrorism. Since that time, we have added 74 companies
    who have committed, who have signed an agreement with Customs,
    to implement tighter security guidelines to significantly
    increase supply chain security, and also to use their leverage
    as importers with their foreign suppliers to increase security.
        Customs has also developed the Container Security
    Initiative which, if implemented, will extend our zone of
    security to foreign seaports and also protect an indispensable
    means of global trade, which is containerized shipping. Under
    the Container Security Strategy, in cooperation and in
    partnership with other nations, we will target and pre-screen
    high risk containers before they depart foreign ports headed
    for the United States.
        I want to tell this committee that the Container Security
    Initiative is not just some theoretical program. It is not an
    academic pilot project. We have already implemented the
    Container Security Strategy with Canada. Last month, we
    stationed U.S. Customs Officers in the ports of Vancouver,
    Halifax, and Montreal to target high-risk containers off-loaded
    at those Canadian ports that are in transit to the United
    States.
        And by the way, there are about 500,000 sea containers that
    arrive at those three ports in Canada annually, which are the
    major Canadian ports, that are not going to Canada. They are
    coming to the United States, either by truck or rail. So we are
    targeting and pre-screening those containers there.
        We are also participating with the Canadian Customs Service
    to screen these high risk containers before they are shipped to
    the United States. The strategy is to expand the Container
    Security Initiative to the major ports in Europe and Asia,
    starting with the largest 20 container ports.
        Mr. Chairman, there are about 5.7 million sea containers
    that arrive in the United States annually, let us say almost 6
    million, at our various seaports around the country. Of those,
    nearly two-thirds either originate from or transit through 20
    foreign container ports. So you can see that these are choke
    points. If we could have a screening and security system at
    just these 20 ports, you would cover something along the lines
    of two-thirds of all of the sea containers that are being
    shipped and imported into the U.S.
        We are actively discussing the expansion of the Container
    Security Initiative with several nations in both Europe and
    Asia. The prospects look good for rapid expansion of this
    important security initiative because these nations understand
    that world trade would be severely disrupted if international
    terrorist organizations used a container to conceal or detonate
    a weapon of mass destruction.
        With your permission, Mr. Chairman, I would like to
    conclude my remarks by showing what is about a three minute
    video tape of several of our northern border ports of entry and
    the men and women of the Customs Service who staff them. If I
    could roll that now.
        Senator Dorgan. Please proceed.
        Mr. Bonner. Thank you.
        As that is indicating up there, Mr. Chairman, I think it is
    very important to note that there are 659 new positions in the
    U.S. Customs Service that were given to the Customs Service
    under the 2002 appropriation and the 2002 supplemental
    combined. 659 positions that are for the northern border. 591
    of those are Customs officers, Customs inspectors, and canine
    enforcement officers; and 69 are Customs agents.
        Most importantly, not only are many of these personnel
    already hired by the Customs Service, but I can report to this
    committee that we will have hired all 659 before the end of
    this fiscal year, by September 30 of this year.
        Secondly, let me just also say that if you looked at the
    total number of new positions for the U.S. Customs Service
    under the 2002 appropriation and the 2002 supplemental, the
    total number of new positions for the Customs Service is 1,300.
    That is about 919 inspector positions and 381 agent positions.
    This is including the northern border positions. All of those
    positions, Mr. Chairman, will be hired and on board before the
    end of fiscal year 2002.

                               PREPARED STATEMENT

        Because of attrition, when you add the attrition and the
    new hires, we will actually hire, train and bring on board to
    the U.S. Customs Service this year, 2002, 1,975 new inspectors
    and new agents to the Customs Service. We have already hired
    1,037 of those, which is over half. And we will have all of
    them hired and on board by the end of this fiscal year.
        I would be happy to answer any questions that you or other
    members of the committee might have.
        [The statement follows:]

                     Prepared Statement of Robert C. Bonner

                           introduction and overview
        Chairman Dorgan, Senator Campbell, and members of the Subcommittee,
    it is a privilege to appear before you today to discuss U.S. Customs
    2003 budget request. As you know, this is my first appearance before
    the Subcommittee and I welcome this unique and very important
    opportunity to discuss U.S. Customs' priorities at this challenging
    time for our agency and for our Nation.
        I want to begin by expressing my thanks to the Subcommittee for its
    continuing support of U.S. Customs and its mission. You have played an
    invaluable role in assisting Customs with the guidance and the
    resources it needs to defend America's borders and to protect and
    promote America's economy.
        The Customs Service has stood as a pillar of American stability and
    strength for over 200 years, by defending our country's borders and by
    facilitating international trade and travel. That is why it is such an
    honor for me to serve as Customs Commissioner, and to have been chosen
    by President Bush to lead an organization whose origins stretch back
    the very founding of our Republic.
        At the direction of the President, the battle against international
    terrorism is now the number one priority of the United States Customs
    Service. Over the past several months, I have visited Customs employees
    in locations throughout the U.S., and I can assure you that they are
    working extremely hard to protect our Nation. Their dedication and
    commitment are truly inspiring.
        Their efforts have been supported greatly by the Congress and the
    Administration in Public Law 107-117, the 2002 Terrorism Supplemental,
    which provided approximately $465 million in additional counter-
    terrorism funding for our agency, and in the additional $365 million in
    program increases and annualizations provided in our fiscal year 2003
    budget request.
        The funding provided in the 2002 supplemental and in our 2003
    budget will enable Customs to meet the full range of its mission-
    critical responsibilities. First among these, as I mentioned, is the
    battle against terrorism. As Commissioner, I will also devote needed
    resources to strengthen Customs' drug fighting capabilities, improve
    the management and overall operations of the agency, enhance Customs'
    relationship and partnership with the trade community, and build a new
    system of trade automation to strengthen our national security and
    improve the flow of commerce across our borders.
        Mr. Chairman, I want to touch briefly on each of these priority
    areas in my statement, and outline the actions the Customs Service has
    taken or is planning to take in each. And I want to begin with our
    overarching concern, which is the critical role of Customs in our
    Nation's homeland security.
                 u.s. customs' top priority: counter-terrorism
    The Immediate Response
        Immediately following the terrorist attacks on September 11, at
    10:05 a.m. on September 11, Customs went to a Level 1 alert across the
    country at all official border entry points--land border ports of entry
    (POEs), seaports, and international airports. Level 1 requires
    sustained, enhanced scrutiny and questioning of those entering the
    U.S., and includes increased inspections of travelers and goods at
    every port of entry. Because of the continued terrorist threat, we
    remain at the Level 1 alert today.
        As part of our response, we also implemented round-the-clock
    coverage by at least two officers at every authorized, public land
    border crossing, even at low volume crossings along our northern
    border. To do this on a 24 by 7 basis, and to keep trade moving at our
    high volume ports--in Detroit, Buffalo, and elsewhere--we temporarily
    detailed about 100 Customs inspectors to the Northern Border. To this
    day, Customs inspectors are, in many places, working 12 to 16 hours a
    day, 6 and 7 days a week. At some ports, the National Guard has been
    augmenting our officers, providing some much-needed relief.
        Despite the demands of extended shifts and a vastly increased
    workload, these employees have carried out their duties with quiet
    determination. Many even volunteered to go to remote border locations
    to serve and protect their country.
        As U.S. Customs shifted into its highest security posture after
    September 11, we experienced extraordinarily lengthy delays at the
    northern border, especially at Detroit, Port Huron and Buffalo. The
    wait times at these ports of entry quickly swelled to 10 to 12 hours. I
    am pleased to report that, in response, Customs and the trade community
    immediately worked together to reduce those delays to pre-September 11
    levels, without compromising our Level One security.
        These initiatives included assigning additional Customs inspectors
    to these entry points and opening more lanes for longer hours, and with
    the assistance of Governor Engler of Michigan, detailing national
    guardsmen to assist Customs in prescreening passengers and cargo and
    conducting secondary inspections. We also posted--for the first time--
    wait times at the border on our Customs website, to assist importers
    and carriers with logistics. And we still do, for ports of entry on the
    Canadian and Mexican borders.
        In the days immediately following September 11, Customs was also
    quick to join the investigative front in the war on terrorism. We
    assigned many of our special agents to Joint Terrorism Task Forces
    across the country, and at the SIOC at FBI Headquarters. At one point,
    almost a third of our investigative workforce, over 1000 agents, were
    engaged in investigations related to the terrorist attacks. That
    proportion has gradually declined since last October. Customs has also
    contributed approximately 110 agents to the Federal sky marshal
    program. In addition, we have assumed a leading role in the Treasury
    Department's efforts to disrupt and dismantle terrorist financing
    networks, through our longstanding expertise in anti-money laundering
    operations.
    The Response in New York City
        Mr. Chairman, as you also know, the Customs Service was struck
    directly by the attacks of September 11. Our building at 6 World Trade
    Center, which served as Customs' Headquarters for much of our most
    important northeast operations, was completely destroyed by falling
    debris from the twin towers.
        I toured that area during my first visit to the field as Customs
    Commissioner, the day after I was sworn in. I will never forget that
    trip, nor the images of destruction I witnessed. During that time, I
    also met with Customs employees from our World Trade Center site, all
    eight hundred of whom escaped unharmed. Ultimately, the loss of our
    building was nothing in comparison to the thousands of innocent people
    murdered on that day.
        Nonetheless, the sudden disruption to such a large and important
    area of Customs' operations threatened to compromise the immediate
    security of area ports and the integrity of ongoing Customs
    investigations and trade and enforcement activities. But Customs' New
    York employees responded heroically to the challenge, setting up a
    temporary operations center within hours at nearby JFK airport. And
    within just 3 weeks of the attacks, they succeeded in permanently
    relocating our New York Customs Office into new office space in
    Manhattan. I believe that is a remarkable achievement by any standard.
        In fact, we recently concluded a highly successful drug money
    laundering investigation in New York known as Operation Wire Cutter.
    Much of the evidence and case history for Wire Cutter was buried along
    with other files in the 6 World Trade Center rubble. After the attacks,
    our agents had to go back into the piles of debris, hoisted up in
    cranes, to salvage evidence for the case. Undeterred, they recovered
    crucial files that allowed them to continue their investigation and,
    just last month, bring down a notorious ring of Colombian money brokers
    involved in laundering illicit proceeds for the drug cartels.
    Support of the Congress
        The support of the Congress in providing immediate assistance to
    Customs was critical, and we are very grateful for that help. The
    approximately $36 million in up-front reconstruction funding enabled
    Customs to reestablish operations in New York and begin replacing badly
    needed equipment in a very short period of time.
        I also want to acknowledge the immediate Congressional support for
    overtime funding for Customs inspectors and agents assigned to the
    battle against terrorism, and the support given to our Air and Marine
    units to patrol our airspace and our coastal waters. This prompt
    congressional response allowed Customs to secure our borders quickly in
    the face of an immediate threat.
    Looking ahead: Three Core Areas of Counter-Terrorist Response
        Since the implementation of the Level 1 alert and the emergence of
    a clear new mission priority, we have identified three primary areas of
    focus in our efforts to protect America from international terrorism.
    They are: (1) border security; (2) the disruption and dismantling of
    terrorist financing networks; and (3) the monitoring of strategic
    exports. Customs is actively engaged and is playing a leading role in
    each of these areas of our national counter-terrorist response.
                                border security
        First and foremost is the critical job of border security, and our
    mission to prevent individuals and items that may pose a threat to the
    United States from crossing our borders. This includes stopping and
    seizing terrorists, terrorist weapons and weapons of mass destruction
    that could be used in an attack on American soil. The actions we have
    taken to date--our Level 1 alert, the mobilization of inspectors to the
    northern border, and the deployment of additional inspection technology
    to our borders since September 11--have all been directed at this goal.
        At the same time, our ports of entry are the vehicles by which
    lawful international trade and travel enters the U.S. Accordingly, we
    must ensure that our anti-terrorism efforts do not slow legitimate
    international commerce and travel, for the health of the U.S. economy
    depends on the timely movement of goods and people into the U.S.
        Customs is focusing on several initiatives because there is no
    single, key component of a strategy designed to increase security and
    facilitate trade. Instead, such a strategy involves a combination of
    factors: (A) expanding advance information on people and goods and
    improving targeting systems; (B) fostering initiatives that ``push the
    border outwards'' and extend our security perimeter; (C) developing
    industry partnerships to protect trade; (D) strengthening northern
    border security through our partnership with Canada; (E) enhancing
    information-sharing and cooperation with Mexico on our southern border;
    (F) protecting ocean-going sea containers, a vital artery of global
    trade; (G) deploying state-of-the-art inspection technology; and (H)
    increasing staff positions for border security.
        As a first, fundamental step in coordinating these various
    initiatives, I established a new Office of Anti-Terrorism within the
    agency. I appointed an experienced security expert and senior military
    leader to head that office, who reports directly to me.
        The Director of the Office of Anti-Terrorism is also helping to
    coordinate Customs' role within our national security architecture,
    with the Office of Homeland Security, our fellow border inspection
    agencies such as the Immigration and Naturalization Service and the
    U.S. Coast Guard, and other government entities. This cooperation is
    essential to ensure that we are effectively responding to the threat of
    terrorism and to our other mission priorities. In addition, effective
    coordination by all the government partners involved in counter-
    terrorism will help to relieve the strain that each of our agencies,
    individually, may face.
    The Key Role of Advance Information and Targeting
        Better targeting will be achieved not only through new equipment
    but also by improving the quality and the quantity of advance
    information we receive from airlines, shippers, and businesses. Having
    such information allows us to do a much more effective job of sifting
    out the potential threats from the vast flow of legitimate
    international trade and travel that Customs processes every day.
    Indeed, good information is the crux of effective targeting, and we
    have already taken steps to ensure that Customs receives more of it.
        As part of our immediate response to September 11, we moved quickly
    to make available more information on arriving air passengers into the
    United States. We promptly sought, and the Congress promptly enacted,
    legislation that made the submission of data on incoming passengers to
    Customs' Advanced Passenger Information System, or ``APIS,'' mandatory
    for all airlines. That law was passed last November as part of the
    Aviation Security Bill. Let me take this opportunity to thank the
    members here for their support of that bill. I told those airlines that
    initially balked at submitting APIS data to comply with the new
    regulations, which took effect in December, or face 100 percent
    questioning and inspection of all people and luggage disembarking from
    their flights. Not surprisingly, nearly all the airlines came around
    quickly and began supplying Customs with the needed information, even
    before the law took effect.
        On February 18, 2002, Under Title 19, section 1436 of the United
    States Code, a civil monetary penalty was put into place against the
    pilot of any commercial passenger aircraft that fails to transmit APIS
    data. The penalties range from $5,000--$10,000 for each violation. For
    habitual violators, Customs has the authority to revoke landing rights,
    and we will for any airlines that seek to defy the new law. In all
    cases, we are committed to working with our partners in the airline
    industry toward achieving the mutual benefits of timely APIS reporting.
        In allocating funds from the fiscal year 2002 Supplemental and
    fiscal year 2003 budget, Customs has dedicated more than $49 million to
    upgrade and expand the Advance Passenger Information System (APIS).
    With this funding, the APIS will be able to collect and process advance
    information on all commercial passengers entering and exiting the
    United States. In addition, the APIS will be transformed into a real-
    time system that will run advance passenger information against law
    enforcement databases on a passenger-by-passenger basis and will issue
    board/no board recommendations to international carriers.
        Securing the legislative mandate for APIS data represented a strong
    start in Customs' efforts to improve targeting with more advance
    information. However, we would also like to expand that mandate to
    cover shipments of goods entering the U.S. Currently, the submission of
    advance information on most trade entering the country is done on a
    voluntary basis. This information is not always complete or accurate.
    And it is not necessarily provided before cargo departs from the
    foreign port for the U.S.
        Customs already collects a large amount of advance information on
    incoming shipments. In fact, we receive this information on 98 percent
    of the containers that land on our shores, thanks to a system known as
    the Automated Manifest System, or AMS. Customs has developed an
    extensive database of information on the shipping industry, its
    patterns, and all who participate in it through the manifests that
    every shipper is required to submit.
        Using a targeting program known as the Automated Targeting System,
    we can sort through the vast AMS database and pick up anomalies and
    ``red flags.'' Whatever deviates from the norm or is otherwise viewed
    as ``high-risk'' is scrutinized at the port of entry. This system has
    functioned as Customs' main method of picking the needles out of the
    haystacks, and it has served us well.
        But this system could be improved. We need mandatory and accurate
    data in a form we prescribe. But even with those enhancements, if we
    select a container for inspection by x-ray technology at the port of
    entry on the suspicion that it contains a weapon of mass destruction,
    by that time it could be too late. And that is why we also need
    shippers and importers to provide more complete information up-front in
    the import process, before those goods leave their last foreign port.
        S. 1214, which has passed the Senate, would make the filing of
    electronic transmission cargo manifest information in advance of port
    entry or clearance mandatory. For Customs, this would increase the
    amount and timeliness of information we can input into our targeting
    systems, thereby enhancing our ability to spot the red flags. We will
    continue to work with the Congress to secure much broader manifest
    advance information, not only for inbound cargo but for outbound trade,
    for outbound air passengers, and for inbound and outbound land and sea
    passengers.
        Finally, to enhance our information-gathering abilities in our
    targeting of goods and people, I established the Office of Border
    Security at Customs to develop more sophisticated anti-terrorism
    targeting techniques. I have allocated almost $10 million over the next
    2 years to provide the necessary computer equipment and permanent
    staffing for the office.
    ``Pushing Security Beyond Our Physical Borders''
        In approaching our primary mission of border security, I believe
    that Customs must also do everything possible to ``push security beyond
    our physical borders''--that is, to expand our perimeter of security
    away from our national boundaries and towards foreign points of
    departure. In other words, we can no longer afford to think of ``the
    border'' merely as a physical line separating one nation from another.
    We must also now think of it in terms of the actions we can undertake
    with our foreign partners and with industry to pre-screen people and
    goods before they reach the U.S.
        The concept of ``pushing security beyond our physical borders''
    focuses on building and reinforcing security layers against the
    terrorist threat, beginning with our immediate borders. The ultimate
    aims of this concept are to allow U.S. Customs more time to react to
    potential threats--to stop threats before they reach us--and to
    expedite the flow of low-risk commerce across our borders.
    The Critical Role of the Trade Community
        Any effort to ``pushing security beyond our physical borders'' must
    include the direct involvement of the trade community. In November, I
    proposed a new Customs Trade Partnership Against Terrorism to the trade
    community at a Customs-Trade Symposium I hosted. I am pleased to tell
    you that we are entering into partnership with some of the biggest U.S.
    importers. This Customs-Trade partnership will vastly improve security
    along the entire supply chain, from the factory floor, to foreign
    vendors, to our land borders and seaports. ``C-TPAT,'' as its acronym
    is known, builds on past, successful security models between Customs
    and the trade that were designed to prevent commercial shipments from
    being used to smuggle illegal drugs. The good news is that we already
    have much of the security template in place to protect trade from being
    exploited by terrorists. Our challenge now is to apply that to as broad
    a range of the trade community as possible.
        In working with importers in the battle against terrorism, we are
    looking at such criteria as where their goods originated; the physical
    security and integrity of their overseas plants and those of their
    foreign suppliers; the background of their personnel; the means by
    which they transport goods; and those whom they have chosen to
    transport their goods into our country. We are examining the security
    practices of their freight transporters, and the routes their shipments
    travel. We are also reaffirming to importers the importance of ``know
    your customer,'' and we are assessing the overall ``air-tightness'' of
    their supply chains. Every single link in that chain will be made more
    secure against the terrorist threat.
        At the same time, Customs will provide incentives to companies who
    partner with us to improve our national security against the terrorist
    threat. Those companies that adopt or have a program that meets
    security standards will be given the ``fast lane'' through border
    crossings, and through seaports and other ports of entry. We are
    working on initiatives now to make that happen.
        The benefits of the C-TPAT are threefold. First, the security of
    the U.S. against the terrorist threat will be increased with respect to
    shipments made by trade partners. Second, the volume of commerce that
    will need to be targeted and examined by the Customs Service will be
    reduced, thereby allowing us to concentrate our resources on high-risk
    shipments. Third, the U.S. economy will benefit because trade partners
    will be able to move goods into the U.S. more expeditiously and with
    less cost. Accordingly, I have allocated more than $11 million in
    combined fiscal year 2002 and fiscal year 2003 funding for the
    technology and staffing necessary to begin implementing this critical
    initiative.
        The C-TPAT is also key part of our efforts to better secure our
    northern border with Canada. U.S. Customs and the Canadian Customs and
    Revenue Agency are working closely together to implement systems and
    programs that will both enhance security and at the same time allow for
    the free flow of commerce between our two countries. The C-TPAT is a
    core plank in the 30-point Secure and Smart Border Action Plan, which
    was part of the Smart Border Declaration signed in December 2001 by
    Homeland Security Director Tom Ridge and Deputy Prime Minister John
    Manley.
        Under the Ridge/Manley plan, the United States and Canada are
    attempting to harmonize commercial processing between the two
    countries. The Canadian and U.S. Governments have been working
    independently on systems designed to increase security of cargo and
    help sort low risk shipments from high risk ones. The U.S. Customs
    program, C-TPAT, and the Canadian Customs program, the Customs self-
    assessment program (CSA), are both designed to achieve the dual
    objectives of greater security and faster processing for low risk
    shipments. Some questions remain, however, as to the extent of security
    that should be required for shipments to qualify for low risk status.
    Discussions are ongoing between the two Governments to resolve the few
    remaining security-related questions. The U.S. Customs Service is
    optimistic that the remaining issues will be quickly settled.
    Strengthening our Northern Border and our Partnership with Canada
        Recently, I met with the Commissioner of Canada Customs, the
    Commissioner of the U.S. Immigration and Naturalization Service, and
    the Deputy Minister for Citizenship and Immigration Canada to continue
    implementing the Ridge/Manley plan. We agreed on many action items and
    made substantial progress on others. This was the seventh meeting in 5
    months between myself and Canada Customs Commissioner Rob Wright. I
    will continue this ongoing and productive dialog next month when I meet
    again with Commissioner Wright.
        In addition to harmonizing the standards of our respective industry
    partnerships, our talks are aimed broadly at expanding our security
    perimeter outward from our national borders. We are focusing on
    initiatives to improve information exchange and adopt benchmarked
    security measures. This will help us to expand our mutual border and
    reduce the terrorist threat to the North American continent, and it
    will expedite the flow of trade.
        The Smart Border Declaration focuses on four primary areas: the
    secure flow of people; the secure flow of goods; investments in common
    technology and infrastructure to expedite trade and minimize threats;
    and coordination and information sharing to defend our mutual border.
    An action plan put together to advance the Smart Border Declaration
    includes initiatives that will allow us to do more prescreening of
    people and goods entering the U.S. from Canada, and vice-versa, far in
    advance of their arrival at the border.
        Part of that plan includes placing U.S. Customs and Canadian
    Customs personnel in each other's ports to help in the targeting and
    pre-screening of cargo that arrives in one country and is headed to the
    other. To implement this initiative, I have directed that U.S. Customs
    inspectors be stationed in the ports of Vancouver, Halifax, and
    Montreal to assist in the targeting and pre-screening of cargo that
    arrives there and is destined for the U.S. That is happening as we
    speak. Likewise, Canada Customs will soon be stationing inspectors at
    U.S. ports such as Seattle and Newark. I have set aside approximately
    $2.4 million in fiscal year 2002 and 2003 funding to place Customs
    inspectors in Canada to enhance our targeting abilities.
        Using funding from fiscal year 2003, I have allocated almost $6
    million to expand a NEXUS-like program to high-volume ports of entry
    along the Northern Border. The NEXUS program, which is being piloted in
    Port Huron, allows low-risk Canadian and U.S. residents to travel
    across the border with minimal customs or immigration processing by
    either country. Like the growth of the C-TPAT, the expansion of a
    NEXUS-like program will improve security by identifying low risk
    travelers and by allowing the Customs Service to focus its targeting
    and inspection resources on people about whom it knows relatively
    little.
        Even with the implementation of these types of initiatives, the
    lack of certain infrastructure at the Northern Border would still be a
    significant impediment to enhancing security. As you know, before
    September 11, many of the low-volume POEs were closed for a portion of
    each day with nothing more than an orange cone to prevent someone from
    making an unauthorized crossing into the U.S. Since September 11, these
    low-volume POEs have been staffed 247 with two inspectors per
    shift to prevent such unauthorized crossings.
        Over the longer term, the Customs Service could provide a
    comparable level of security for less cost by permanently ``hardening''
    these low-volume POEs. Such hardening would include installing physical
    barriers, sensors, and monitoring devices at the low-volume POEs to
    prevent and detect unauthorized crossings. Accordingly, I have
    allocated $41 million to harden the low-volume POEs during fiscal year
    2002 and fiscal year 2003.
        Providing comparable security at the low-volume POEs would also
    include developing a mobile response capability to respond to
    unauthorized crossings. Indeed, such a capability could and should also
    respond to unauthorized crossings between the POEs. The principal
    benefit of developing such a combined response capability would be that
    it would allow agencies to pool existing resources and air assets,
    including helicopters. The Customs Service and the INS have agreed to
    launch the combined mobile response concept by establishing two teams
    at locations along the Northern Border. I have allocated approximately
    $10 million to fund the Customs Service's contribution to these two
    pilot projects during the remainder of fiscal year 2002 and in fiscal
    year 2003.
        U.S. and Canada Customs will also integrate our systems for
    intelligence and information gathering to improve our mutual targeting
    abilities. We will engage in a broad range of information exchange,
    including APIS and trade data.
    Mexico
        We are also engaged in implementing the U.S.-Mexico Border
    Partnership Action Plan. This 22-point plan was signed by Secretary of
    State Colin Powell during President Bush's 21-22 March trip to
    Monterrey, Mexico. The action plan outlines specific measures that will
    be taken to ensure a modern border that assures the secure flow of
    people and goods. Customs is the lead agency for eight of the 22 action
    items. Specifically, we are focusing on information sharing about goods
    and people, provision of Mexican APIS information; a possible joint
    system for processing rail shipments; shared border technology; and the
    assembly of a joint investigative task force to deter trade fraud.
    The Container Security Initiative
        In addition to meeting part of the goals of the Ridge/Manley
    declaration, the placement of Customs inspectors in Canada is a first
    step in another core area of our efforts to ``push the border
    outwards,'' and that is implementation of the Container Security
    Initiative, or CSI. I proposed the CSI this January to address the
    vulnerability of cargo containers to the smuggling of terrorists and
    terrorist weapons.
        Ocean-going sea containers represent a vital artery of global
    commerce. Over 200 million containers move between the world's major
    seaports each year. Forty-six percent of the total value of all imports
    received into the United States annually arrives by sea container. That
    percentage is higher for other countries that are even more dependent
    upon the use of seaports for international trade.
        The sheer volume of sea container traffic and the multitude of
    opportunities it presents for use by terrorists are alarming. And the
    threat is by no means farfetched. Some of you may recall that last
    October, Italian authorities found a suspected Al Qaeda operative
    locked inside a shipping container bound for Canada. Inside the
    container were a bed and bathroom for the journey to Halifax, as well
    as airport maps, airport security passes and an airplane mechanic's
    certificate.
        Of ever-greater concern are the possibilities that international
    terrorists such as Al Qaeda could smuggle a crude nuclear device in one
    of the more than fifty thousand containers that arrive in the U.S. each
    day. One can only imagine the devastation of a small nuclear explosion
    at one of our seaports.
        Such an event would have a massive impact upon global trade and the
    global economy. Even a 2-week shutdown of global sea container traffic
    would be devastating, costing billions. But the shutdown would, in all
    likelihood, be much longer, as Governments struggled to figure out how
    to build a security system that could find the other deadly needles in
    the massive haystack of global trade.
        Obviously, such a shutdown would also greatly impact the American
    economy, sending the prices of major imported products spiraling
    upwards. Cities and seaports dependent upon sea container trade would
    be crippled, as business would dry up--resulting in massive layoffs.
        We must do everything possible to prevent this scenario from
    happening. For that reason, I have proposed a ``Container Security
    Strategy'' to protect the use of ocean-going sea containers in
    international trade. The core elements of that strategy are the
    following:
      --Establish criteria for identifying high-risk containers;
      --Pre-screen containers before they are shipped to the U.S.;
      --Use technology to pre-screen high risk containers; and
      --Develop and use smart and secure containers.
        The initial phase of the Container Security Strategy would focus on
    the top ten largest foreign seaports or ``mega-ports'' that are
    responsible for shipping the greatest number of sea containers to the
    U.S. We have identified these ten ports, which combined account for
    nearly half (49 percent) of all oceangoing sea containers arriving in
    the U.S. each year.
        Working with these ten ports, I want to build a common security
    regime for the processing of sea containers. I want to see more pre-
    screening of cargo that is bound for the United States done overseas,
    at the port of origin or the port of transshipment, rather than at the
    port of entry in the U.S. For example, we should know all there is to
    know about a container that arrives in Rotterdam and is destined for
    the U.S. before that container even departs from the country of origin
    for the Netherlands. And if an anomaly appears, we should inspect it at
    that port, the outbound port--the port of origin, not the port of
    destination.
        Again, I would stress the importance of advance information to
    achieve this level of pre-screening. The sooner in the importation
    process we can get that information from the shipper or carrier, the
    better. Ideally, we would like to have complete manifest information in
    electronic form the moment cargo leaves the factory, warehouse, or
    loading dock abroad en route to its final destination.
    The Importance of Technology
        Outbound inspections of containers at the mega-ports will also be
    enhanced by making the latest x-ray inspection machines and radiation
    detectors available to or required by all who participate in the
    Container Security Strategy. The use of inspection technology is a
    major asset in our current efforts to inspect cargo coming inbound to
    our ports of entry, both in terms of our ability to expedite trade and
    to detect security breaches in containerized cargo. I am referring to
    devices such as mobile, truck and seaport container x-ray systems that
    obviate the need for costly, time-consuming physical inspection of
    containers and provide us a picture of what is inside the container.
        Thanks to the 2002 Terrorism Supplemental, Customs has been able to
    acquire more non-intrusive technology to protect America. With this
    funding, we will deploy 16 Mobile VACIS systems, 64 Handheld Acoustic
    Inspection Systems, 172 Portal Radiation Detectors, 8 Tool Trucks, and
    128 Isotope Identifiers to the Northern Border with Canada. We will
    also deploy 20 Mobile VACIS, provide 4 VACIS upgrades, and supply 10
    Tool Trucks to enhance security at our seaports. The use of this
    technology will greatly enhance security as well as our capacity to
    speed the flow of commerce through our ports.
        Other technology we are exploring includes a crane-mounted
    radiation detection system to detect radiological materials in
    containers. This system would supplement the four thousand radiation
    pagers currently in use by Customs officers. We're also moving ahead on
    the development of electronic seals that would alert us to cargo
    tampering while in transit.
    Staffing
        As important as our efforts to build international partnerships and
    acquire technology are in thwarting international terrorism, I must
    also stress the essential human element involved in a sound border
    security strategy. The most important component of Customs success in
    protecting American lives and the American economy lies in the men and
    women who work directly on our Nation's frontlines. I am referring
    specifically to the requirement for an adequate number of Customs
    inspectors, and canine enforcement officers at the border to meet our
    security and trade facilitation mission.
        One need only recall that it was a Customs inspector, Diana Dean,
    who in December 1999 stopped an Algerian terrorist bomber from crossing
    into the United States from Canada with a trunk load of powerful
    explosives in his car. His mission, as we now know, was to blow up Los
    Angeles International Airport.
        Inspector Dean relied on nothing but her Customs training to pick
    up on Ahmed Ressam's nervous behavior, his unusual travel itinerary,
    and his evasive responses to her questions. And thanks to her skill and
    professionalism, and the skill and professionalism of her fellow
    inspectors at Port Angeles, Ressam was arrested and a deadly terrorist
    conspiracy to do great harm to American lives was foiled.
        In the near term, a substantial increase in inspectors is necessary
    to maintain our level one alert status while decreasing the
    extraordinary amounts of overtime being worked by Customs inspectors.
    It is also critical in ensuring the two inspectors per shift
    requirement for officer safety and for phasing-out increased levels of
    National Guard support. To actually increase security beyond that
    provided in our Level 1 alert status and facilitate trade, additional
    inspectors are required to conduct targeting analyses, operate
    additional non-intrusive inspection equipment, staff all available
    lanes, question more people, and perform additional physical
    inspections while quickly processing an increasing volume of commercial
    and passenger traffic.
        Thanks to funding from the fiscal year 2002 Terrorism Supplemental,
    immediate help is on the way. Over the remainder of fiscal year 2002,
    Customs will be bringing on 543 new inspectors to support northern
    border security and to enhance maritime security at the nation's
    seaports. And with funding in our fiscal year 2003 budget, Customs is
    hoping to hire an additional 472 inspectors to bolster these areas over
    the course of the next fiscal year.
                        anti-terrorist money laundering
        Staffing is also critical for Customs on the investigative front in
    the war on terrorism. To bolster our immediate investigative efforts
    with respect to anti-terrorist money laundering, northern border
    security, maritime security at our ports, the investigation of
    strategic exports, I have allocated funding from the fiscal year 2002
    supplemental to hire 363 special agents and 80 additional investigative
    support personnel. Agents will be assigned as needed to these priority
    areas. In addition, I have designated funding from our 2003 budget for
    the hiring of fifty more special agents to assist with these
    activities.
    Operation Green Quest
        In accordance with the President's mandate to identify, disrupt and
    dismantle terrorist financing networks, the Secretary of the Treasury
    established Operation Green Quest, a joint investigative team led by
    U.S. Customs and supported by the IRS, Secret Service, Treasury's
    Office of Foreign Asset Control (OFAC) and other Treasury Department
    bureaus, as well as the FBI and the Department of Justice.
        Operation Green Quest is based in Washington at Customs
    Headquarters and is led by a Senior Customs Supervisory Special Agent.
    The Green Quest team also includes a dedicated staff of field agents
    based in New York. These agents are highly trained and experienced in
    anti-money laundering techniques, the result of their extensive work in
    Operation El Dorado, a longstanding, Customs-led investigation into the
    laundering of illicit drug proceeds by major narcotics-smuggling
    organizations. Now, they are turning that expertise to the war on
    terrorism.
        I am pleased to report that so far, actions involving Operation
    Green Quest have led to the seizure of approximately $4.3 million in
    suspected terrorist assets and 12 arrests. Included in this was the
    disruption of a major middle-eastern money transfer network known as
    Al-Barrakaat, which had been tied to terrorist groups. But we are by no
    means resting on these successes. Work to trace sources of terrorist
    financing is ongoing under Operation Green Quest, and it will continue
    until, working with our law enforcement colleagues from the Treasury
    Department, the IRS, and the Department of Justice, we have starved
    terrorist groups of the funding they need to survive.
    Operation Oasis
        In addition, Customs began Operation Oasis, a terrorist-related
    outbound currency initiative, on October 10, 2001. This national
    operation is directed at identifying, detecting, and halting the
    illegal exportation of unreported currency to terrorist entities. As of
    March 1, 2002, Operation Oasis has resulted in 253 currency seizures,
    totaling nearly $9.4 million, and 6 arrests related to violations of
    currency reporting requirements. Most importantly, these seizures have
    generated dozens of leads that have been passed on to Operation Green
    Quest agents. Operation Green Quest staff, in turn, have shared
    investigative leads with frontline inspectors monitoring movements of
    illegal outbound cash.
                        monitoring of strategic exports
        We must work diligently to close the avenues for terrorist funding,
    and we must also deprive terrorist groups of the weapons and strategic
    materials they need to carry out their activities. The third major area
    in which we will focus our counter-terrorist efforts is strategic
    export control. We are working to prevent international terrorist
    groups from obtaining sensitive U.S. technology, weapons and equipment
    that could be used in a terrorist attack on America and its people.
    Operation Shield America
        The capstone of this effort is Operation Shield America, a Customs-
    led initiative that also involves the Department of Commerce in working
    directly with American companies to prevent these types of strategic
    items from getting out of our country and into the wrong hands.
        Since the inception of Operation Shield America, Customs agents
    have visited approximately 1,000 companies in the United States. These
    companies were selected for visits because they manufacture or sell
    items that may be sought by terrorists or State sponsors of terrorism.
    During these visits, Customs agents have shared information about
    specific products that these firms manufacture or sell that may be
    sought by terrorists. Customs agents have also passed out information
    about Operation Shield America and encouraged these companies to report
    attempts to illegally acquire or export such materials. In many areas,
    Customs agents have coordinated with local FBI, Commerce Department,
    and Defense Department officials prior to their visits. Commerce
    Department officials have also accompanied Customs agents on many of
    their visits to U.S. companies. Operating abroad, several Customs
    Attache Offices have begun reaching out to foreign law enforcement
    counterparts to help raise awareness among businesses in their nations.
             safeguarding the economy; improving the flow of trade
    Building a Better System of Trade
        While Customs is providing security at our borders, we do not want
    to choke off the flow of commerce to achieve security. We must be
    careful not to sacrifice our openness as a society. America's strength
    as a nation derives from its open society and its open economy. And
    these should not be allowed to fall victim to terrorism.
        I believe that with the right level of industry partnership and the
    right combination of resources, we can succeed not only in protecting
    legitimate trade from being used by terrorists, we can actually build a
    better, faster, more productive system of trade facilitation for the
    U.S. economy. And I believe this is an important and worthy goal to
    strive for--if, from the devastation of ``9-11,'' we can succeed in
    constructing a system that thwarts the terrorists, and at the same time
    facilitates and improves the movement of legitimate business and trade,
    faster and more efficiently than before September 11.
        One of my goals when President Bush selected me last May to be
    Commissioner was to build a strong U.S. Customs Service that listens to
    the trade community, an agency that considers the needs of business as
    part of deciding how we do business. And this remains my goal. But this
    objective must now be viewed against the backdrop of the terrorist
    threat to our nation. And that threat is continuing and it is real. It
    is a threat not just to harm and kill American citizens; it is a threat
    to harm the American economy. Al Qaeda and its associated terrorist
    organizations are on the run but they are intent on striking back, and
    on damaging our economy. For that reason, we must not let down our
    guard.
    The Office of Trade Relations
        I have been very impressed with the level of communication between
    Customs and the trade community on these and other major issues. There
    are very few other Fderal agencies in which this level of communication
    exists between government and industry. I want to promote that
    communication, especially now during these challenging times. That is
    the main reason I revamped the Office of the Trade Ombudsman at Customs
    and renamed it the Office of Trade Relations. I wanted there to be a
    central point through which the trade community could convey issues to
    me, especially the broad issues of how we do business together, and how
    we improve the security of our country against the terrorist threat.
        That involves more than just the specific complaints of a
    particular member of the trade community, complaints that the Office of
    Trade Relations will continue to address. It must also focus on the
    proposals and solutions to issues impacting the long-term relationship
    between Customs and the trade, and the security challenges we both
    face. I also wanted the office to communicate Customs' issues and
    concerns to the trade community. In short, I wanted and I continue to
    want more dialogue.
    Trade and Security Benefits of the C-TPAT
        One of the top priorities of the Office of Trade Relations is to
    continue developing and adding companies to the Customs Trade
    Partnership Against Terrorism. The promotion of trade and the
    protection of our country should go hand-in-hand. Customs cannot
    succeed in protecting our country without the help and the
    participation of the business community--without partnering with the
    trade.
        Our goal under the C-TPAT is nothing less than to work with
    importers, transporters, brokers and others in the trade community to
    protect every aspect of the supply chain against the terrorist threat--
    from the foreign loading dock, to transportation of goods, to the port
    of entry in the U.S. No one knows those systems better than the
    companies that oversee them, and what it will take to safeguard those
    systems against potential terrorist use--against the concealment of
    terrorist weapon of mass destruction at some point along the supply
    chain.
        Through the C-TPAT, through our efforts to build a common security
    framework with our NAFTA partners Canada and Mexico, and through
    initiatives such as the Container Security Strategy, I believe we can
    make vast strides not only towards ensuring our defenses against a
    terrorist threat coming via commercial trade--we can actually build a
    better system for the processing of international trade. We have an
    opportunity not only to protect America through these initiatives, but
    to build a better system for trade facilitation.
    Improving Internal Processes
        Internally, I have also issued several challenges to Customs
    departments that play a key role in our relations with the trade
    community. I have asked these departments to focus on, streamline and
    improve various processes.
        First and foremost, these include our Office of Regulations and
    Rulings (OR&R), and specifically the time it takes for Customs to issue
    commercial rulings. I believe the current delays are unacceptable. I
    want to dramatically shorten the time it takes for Customs to issue
    commercial rulings, to no more than 90 days. I outlined this as a top
    priority to OR&R and I expect to see progress very shortly.
        I have also challenged our Office of Strategic Trade and our
    Regulatory Audit Division to move forward with the focused assessment
    process, which will enhance trade security and compliance. And, I have
    challenged our Office of Field Operations to dramatically improve
    uniformity in trade processing. I want to eliminate disparate treatment
    of goods between different ports of entry in the U.S.
                   the automated commercial environment (ace)
    Importance of ACE to trade facilitation and Counter-terrorism
        Still, Mr. Chairman, no discussion of a successful strategy to
    protect America and its economy in the 21st century would be complete
    without consideration of the central importance of new automation to
    the mission of the U.S. Customs Service.
        That system, the Automated Commercial Environment (ACE), is an
    important project for Customs and an important project for the business
    community. It is an important project for our country and for the
    future of global trade. It should, if done properly, reform the way
    Customs does business with the trade community. It should also greatly
    assist Customs in the advance collection of information for the
    targeting of high-risk cargo to better address the terrorist threat.
    And in doing so, it will help us to expedite the vast majority of low-
    risk trade.
        The successful and timely design, implementation and funding of ACE
    is a priority of the U.S. Customs Service. It is one of my top
    priorities as Commissioner. I believe that ACE is so important to our
    country's security and the future of trade facilitation that I have set
    a goal that the system be completed within 4 years, and I have
    instructed our Office of Information Technology to plan for such a
    schedule.
        Increasing Administration and congressional support for ACE in
    Customs' recent budget requests has been essential to the development
    of the new system. As you know, Customs received $130 million for ACE
    in fiscal year 2001 and $300 million in fiscal year 2002. That funding
    has allowed us to establish the fundamental design framework for ACE
    and to begin developing user requirements for the new system, in
    concert with our prime contractor, the e-Customs partnership led by
    IBM.
    Update on ACE
        Since April 2001, Customs, the e-Customs Partnership, the
    international trade community, and other Federal agencies whose
    regulations are enforced by Customs have worked to develop requirements
    for the ACE system. This collaborative effort has:
      --Defined the enterprise architecture to support and enhance trade
            compliance, and set the framework for future integration of
            Customs enforcement and administrative mission areas.
      --Defined ``Desired Business Results'' and their linkages to Customs
            Strategic Intents. These set the baseline for development and
            measurement of the system's performance.
      --Provided the foundation for full import-export views of trade flows
            and web-enabled exchange of commercial data.
      --Validated the business benefits of ACE and estimated their value.
      --Established a robust technical architecture that will enable
            Customs to take advantage of new technology, including
            commercially available software components, in modernizing the
            commercial, enforcement, and business systems.
        As I stated earlier, ACE will not only replace our existing
    automated system and functionality--it will transform the way Customs
    does business. ACE will enable Customs to process and monitor import
    and export shipments and related trade activity more efficiently
    through account versus individual transactions. It will enable Customs
    to release cargo more efficiently by integrating international law
    enforcement intelligence, commercial intelligence, and data mining
    results to focus our efforts on high-risk importers and accounts.
        In developing ACE requirements and plans, Customs continues to
    review system requirements, concepts, and technology to take advantage
    of global customs ``best practices,'' advances in web development,
    wireless computing, and supply chain technology. Moreover, as the
    nation reviews its homeland security priorities, Customs will continue
    to research and analyze emerging national security requirements as they
    develop for possible integration with ACE.
        I want to thank the Congress, and in particular the members of this
    Subcommittee, for their past support of ACE, and acknowledge the
    Administration for providing the $313 million contained in Customs'
    fiscal year 2003 budget request. This level of funding will allow us to
    keep pace with our 4-year time frame for completion and, most
    importantly, begin to deliver on the first installment of ACE benefits
    to the trade community.
    Sustaining ACS
        As Commissioner, I will continue to focus on the sound management
    and implementation of ACE. However, at the same time, Customs must also
    take care to maintain its existing system of automation, the Automated
    Commercial System (ACS), until ACE is fully brought ``on-line.''
    Critical ACS ``life support'' funds from our fiscal year 2002 budget
    and fiscal year 2003 request have been and will continue to be invested
    in infrastructure upgrades to improve ACS performance, reliability and
    availability to both the trade and Customs field users.
        As you know, Customs was provided $122 million for ACS ``life
    support'' in fiscal years 2001 and 2002. This funding is being used
    systematically to address the major structural weaknesses in the
    information technology infrastructure that supports ACS. As a result of
    this investment, there are no longer ACS brownouts occurring in the
    data center, user response time has improved, and ACS availability has
    been expanded. In addition, Customs 15-year-old communications network
    has been substantially replaced with a modern system.
        Customs fiscal year 2003 budget request again includes $122 million
    in ACS life support. That funding will be used to continue upgrades on
    data center processing capabilities, network capacity, and the support
    structure to enable ACS to process increased trade volumes. It will
    also go towards enhancing an information technology security program
    that will enhance the system's response to a higher threat level.
                      other core mission responsibilities
    Drug Interdiction
        In accordance with the President's direction, since September 11
    the U.S. Customs Service has made the defense against terrorism our
    highest priority. At the same time, we remain firmly committed to our
    other, core law enforcement responsibilities, first and foremost the
    protection of our nation from illegal drugs.
        I believe that our counter-terrorism and counter-narcotics missions
    are not mutually exclusive. One does not necessarily come at the
    expense of the other. There is an undeniable nexus between drug
    trafficking and terrorism. We have seen that in Colombia, where the
    FARC has channeled funds from its protection of illegal drug
    manufacturing into its terrorist campaign to disrupt and destabilize
    Colombia's legitimate government. We have seen it in Afghanistan, where
    the Taliban harbored the terrorist murderers of September 11 and their
    leadership, supporting their activities and their own repressive regime
    through the heroin trade. And, there are indications that Middle
    Eastern terrorist organizations are engaged in drug trafficking and
    other crimes in the U.S. to support terrorist activities.
        The models and lessons U.S. Customs has developed in our battle
    against international drug trafficking organizations can and will help
    us in the fight against international terrorist organizations. This has
    been evidenced so far in the results achieved by the highly capable
    field agents of Operation Green Quest, our lead anti-terrorist money
    laundering investigation. These agents, who are on detail from
    Operation El Dorado, an extremely successful, Customs-led drug money
    laundering investigation, have applied their knowledge and experience
    of drug money laundering techniques effectively in the effort to deny
    terrorists the financing they need to conduct their operations.
        In this and many other respects, Customs' new mission focus to
    prevent terrorists or the implements of terror from crossing our
    borders is a natural outgrowth of our interdiction role. The two
    functions are interrelated, and increased attention to the terrorist
    threat will likely enhance our drug-fighting capabilities. As we add
    staffing on our borders, acquire more inspection technology, conduct
    more questioning of travelers, and carry out more inspections of
    passengers and goods in response to the terrorist threat, it should
    come as no surprise that drug seizures will increase as well.
        Indeed, it is thanks to its interdiction success that the Customs
    Service has the knowledge, the experience, and the tools to serve as a
    critical deterrent to terrorists who would attempt to target America.
    But it would be a grave mistake for the drug traffickers and other
    criminals to misinterpret our focus on terrorism as a weakening of
    resolve on other fronts. If anything, we will make life even more
    miserable for drug smugglers as we intensify our overall presence along
    America's borders. Our heightened state of security along America's
    borders will strengthen, not weaken, our counter-drug mission. So far,
    the evidence we have seen confirms this.
        Soon after implementation of our Level 1 alert, Customs witnessed a
    dramatic decline in drug seizures. We believe that drug traffickers
    reacted to the heightened level of security along our land borders by
    witholding shipments until the Level 1 alert subsided.
        That alert did not subside. But the pressure on the smugglers to
    bring their illicit goods to market became too great to bear. Not only
    did our drug seizures begin to rise once again a few weeks after
    September 11--they started to increase dramatically from the same
    period a year earlier. In fact, the overall amount of narcotics seized
    by Customs in October, the month immediately following the terrorist
    attacks, was up about 30 percent from the same month in previous year.
    Even more impressive, the total quantity of drug seizures for the first
    quarter of fiscal year 2002 were up dramatically in all major
    categories compared to the first quarter of fiscal year 2001:
    marijuana, up 19 percent; cocaine, up 60 percent; and heroin, up over
    135 percent. Meanwhile, the total number of drug seizures climbed 17
    percent.
        Efforts to strengthen our borders through the deployment of
    additional manpower and non-intrusive technology equipment are expected
    to further enhance Customs counterdrug successes. In addition, Customs
    continues to play a significant role in counterdrug programs such as
    the Organized Crime Drug Enforcement Task Forces, High Intensity Drug
    Trafficking Area enforcement teams, and the Special Operations Division
    of the U.S. Department of Justice.
        Furthermore, although intelligence resources and assets have been
    redirected to border security and counter-terrorist missions, Customs
    retains a highly active Counterdrug Intelligence Program. The agency's
    Tactical Intelligence Center is focused entirely on drug intelligence
    priorities and the processing of national level intelligence. It is
    also continuing to monitor and report on Eastern Pacific and Caribbean
    drug transportation movements.
        Examples of successes against drug smuggling since September 11,
    2001 include:
      --September 26, Palm Beach, Florida: As part of an ongoing joint
            operation, and with the assistance of Customs' air unit,
            Customs Special Agents and local law enforcement intercepted a
            suspicious vessel coming from Grand Bahamas and seized 2,210
            pounds of marijuana.
      --October 23 and 24, Falcon Heights, Texas: Customs Special Agents,
            working together with the Customs air branch and the Border
            Patrol, seized 2,644 pounds of marijuana in a 24-hour period as
            a result of investigative leads regarding smuggling activity
            along the banks of the Rio Grande.
      --November 21, Puerto Rico: Customs air and marine officers, with the
            assistance of other law enforcement entities, intercepted a 33-
            foot speed boat several miles offshore that was transporting
            about 2,000 pounds of cocaine.
      --November 28, Nogales, Arizona: Customs agents seized 956 pounds of
            cocaine after developing information about a home that was
            being used to facilitate a drug smuggling enterprise.
      --October-December 2001, El Paso, West Texas and New Mexico: During
            the first quarter of fiscal year 2002, Customs Inspectors,
            Special Agents and Canine Enforcement Officers performing
            antiterrorism operations seized 86,603 pounds of marijuana,
            cocaine, and heroin, compared to 47,910 during the same period
            last year.
      --January 2002, New York: Operation Wire Cutter, a major 2\1/2\ year
            drug money laundering investigation, was conducted with the
            assistance of the Drug Enforcement Administration and Colombian
            law enforcement. As I noted earlier in my statement, Customs
            agents based at the World Trade Center in New York continued to
            pursue this case despite the destruction of their offices in
            the September 11 terrorist attack. Their efforts resulted in
            the dismantling of a ring of Colombian money brokers
            responsible in recent years for laundering an estimated
            hundreds of millions of dollars in illicit drug proceeds. This
            investigation was groundbreaking in that, for the first time,
            Customs and Colombian law enforcement collaborated to trace the
            entire cycle of the conversion of narcotics proceeds, from cash
            pick-ups in the U.S. to the laundering of those funds in
            Colombia.
        Despite the dedication of investigative resources to the fight
    against terrorism, there has been no substantial reduction in the time
    our special agents have devoted to drug investigations. Before
    September 11, Customs had 1,475 agents cross-designated by the DEA to
    conduct narcotics investigations under our Title 21 authority. I have
    no intention of reducing that number. We will continue to work
    effectively with the DEA to investigate drug traffickers and we will
    continue our strong drug interdiction efforts.
        Clearly, our Level 1 alert is having the collateral effect of
    increasing our drug seizures. It is also likely to effect drug
    smuggling trends in other ways. We are anticipating those trends, and
    we will react to them quickly. That includes deploying an active Air
    and Marine presence in the Eastern Pacific and the Caribbean, routes
    the drug smugglers will turn to as we choke off their access to land
    border crossings. Although we have redirected our P-3 Advanced Early
    Warning (AEW) aircraft to homeland security, we continue to fly air
    assets in support of counterdrug operations in the transit and arrival
    zones.
        As you also know, before September 11 our AEWs flew a substantial
    portion of their missions in the Source Zone for narcotics. It was
    because of the tragic shoot-down over Peru of a missionary flight by
    host country forces last April 20, not September 11, that those flights
    and all others conducted by U.S. agencies in the Source Zone were
    suspended. Thus, the events of September 11 have not diverted our AEW
    assets as much as might otherwise be the case. In addition, we
    anticipate that the deployment of new P-3 AEWs and crews since the
    shoot-down incident will help us to balance future demands for our air
    assets in the source as well as the transit and arrival zones.
        Air and Marine Interdiction efforts continue to result in
    interdiction of drug smugglers in the Bahamas and Northern Mexico,
    where smuggling activity remains robust. In Mexico, Customs continues
    to cooperate with the Government of Mexico under Operation Halcon.
    Operation Halcon is a cooperative initiative that teams Customs and
    Mexican enforcement personnel aboard Customs aircraft based in Mexico.
    Since September 11, Operation Halcon has resulted in the seizure of
    approximately 11,000 kilograms of marijuana and close to 900 kilograms
    of cocaine.
        In order for Customs' Air and Marine Interdiction Division (AMID)
    to continue to play a strong and effective role in the national
    counterdrug effort, I believe that modernization of existing assets is
    essential. In addition, as Commissioner, one of my priorities is to
    ensure that AMID's mission goals are reviewed and reassessed with
    frequency and consistency to maximize results.
        We are also actively engaged on the personnel front, particularly
    with respect to retaining a skilled and talented pilot workforce.
    During the past 2 years, a 10 percent retention bonus has been in
    effect for Customs pilots, and a streamlined pilot recruitment and
    selection process was put in place. Customs also increased the P-3
    pilot career ladder to GS-14, and identified non-P-3 Customs pilots
    eligible to be trained to fly P-3s. We will continue retention pay at
    the rate of 10 percent for all pilots through fiscal year 2002, and
    maintain our efforts to streamline the recruitment, selection, and
    background investigation clearance processes.
        In addition, the Customs Service has made substantial progress in
    modernizing its marine program. Marine program staffing has increased
    from 65 Marine Enforcement Officers (MEOs) in November 1999 to 77 MEOs
    in February 2002. An additional 22 officers who have accepted positions
    will soon join the agency.
        Replacement of aging ``open ocean interceptors'' is the number one
    equipment procurement priority of the Marine program and is proceeding
    well. Eight interceptors have been obtained through the sale and/or
    exchange of excess vessels. Fiscal year 2002 appropriations of $9.3
    million will allow for the replacement of the remaining interceptors in
    the current inventory (with $6.4 million coming from the $35 million
    allocated for the Western Hemisphere Drug Elimination Act funds, as
    outlined in the fiscal year 2002 budget). Funds from the sale and
    exchange of aging ``open ocean interceptors'' will be used to replace
    aging utility vessels.
        As directed by Congress, the Customs Service continues to consider
    a wide range of options for basing and deploying its interceptor
    vessels in the most effective and economical way. In June 2001, the Air
    and Marine Interdiction Division conducted a performance-based
    assessment of the Air and Marine program and then developed a
    redeployment strategy in response to those findings. Approximately 90-
    percent of the redeployment is complete. Customs is currently exploring
    the option of using mobile support vessels to provide for on-station
    mission support, supplies, maintenance, and personnel needs in support
    of long-term offshore drug interdiction efforts.
    Other Enforcement Priorities
        Mr. Chairman, as you know the enforcement mission of the U.S.
    Customs Service extends well beyond drug interdiction to include:
    Internet child pornography and cybercrime; forced child and prison
    labor; violations of Intellectual Property Rights; illegal textile
    transshipment; tobacco smuggling; international auto theft; and other
    criminal activities related to our border mission. Customs will
    continue to actively pursue and fund priorities in each of these areas
    in fiscal year 2003.
        In fact, one of our most well-publicized cases in 2001 involved the
    dismantling of a despicable ring of child pornographers operating over
    the Internet from Russia. Under Operation Blue Orchid, Customs agents
    from our CyberCrimes Center in Fairfax, Virginia and our Moscow attache
    office worked closely with Russian authorities to identify and arrest
    both the proprietors of the pornographic site and their customers, many
    of whom were located in the U.S. That Operation also resulted in the
    identification of the young victims of the ring and their subsequent
    rescue from further abuse.
        Despite our focus on counter-terrorism, Customs has achieved
    noteworthy successes in other, critical areas of our enforcement work.
    To mention just a few, since September 11, Customs has also managed to
    shut down a major stolen luxury car smuggling ring operating out of New
    York; dismantle a highly sophisticated internet piracy network known as
    ``Warez'' that was stealing and distributing billions of dollars worth
    of software; and secure the largest seizure ever of pirated computer
    software, over $100 million worth of fraudulent merchandise.
        These successes testify to the diversity of threats Customs must
    contend with and the skill of our people in protecting America, on all
    fronts. I realize that with the added strain of September 11, balancing
    our traditional enforcement priorities with counter-terrorism is a
    difficult challenge. Yet it is one our employees have proven this
    agency can meet. Protecting our citizens and our communities from
    illegal drugs and other criminal threats was a core responsibility of
    the U.S. Customs Service before September 11. And it remains at the
    heart of our mission after September 11 as well.
                                    closing
        Mr. Chairman, members of the Subcommittee, I have outlined a broad
    array of initiatives today that, with your assistance, will help the
    U.S. Customs Service to protect America from a terrorist threat while
    fulfilling our traditional trade and enforcement mission. Make no
    mistake, Customs faces some very great challenges in balancing its
    established mission priorities with the war on terrorism--perhaps the
    greatest challenges in its long history of service to the American
    people. But I am fully confident that, with the continued support of
    the President, the Treasury Department, and the Congress, Customs will
    succeed in meeting the great demands placed upon it, as it has done
    throughout two centuries of change and challenge in our Nation.
        Doing so will require a highly coordinated and concerted effort to
    integrate Customs' strengths within the national strategy for Homeland
    Security. That effort is well underway and is producing marked results,
    as I have testified today. The funding provided to Customs by the
    Administration and the Congress in the fiscal year 2002 Terrorism
    Supplemental has enabled our agency to begin a profound and
    unprecedented transformation to become a leading force against
    international terrorism, while at the same time allowing us to protect
    and promote the vital flow of commerce and our system of international
    trade. It is a role that, as the guardian of our Nation's borders, we
    are called upon by tradition and by modern-day responsibilities to
    play. With your support for Customs' 2003 budget request, we will be
    able to build upon these successes, and continue our efforts to defend
    America's health, liberty and prosperity at this momentous time for our
    Nation.
        Thank you again for this opportunity to testify. I would be happy
    to answer any questions you might have.

                               FORCED CHILD LABOR

        Senator Dorgan. Mr. Commissioner, thank you very much. When
    I met with you in my office I asked if you could provide me a
    report on two provisions that we included in last year's
    appropriations bill. One is the forced child labor funding. We
    added funding to that activity in Customs. I will ask if you
    would provide me and the committee members with an analysis of
    what has been done with the funding for the enforcement with
    respect to forced child labor issues.
        Second, we included money for an intellectual property
    rights center that is dealing with counterfeiting and various
    things. We would like to get a report from the Customs Service
    also on the implementation of that and the use of those funds
    and the progress that is being made.

                       SEA CONTAINER SECURITY INITIATIVE

        Let me turn to the container area just for a moment. The
    Container Security Initiative, I indicated that when I heard
    that you were going to do this, I was pleased, because I think
    this is a significant threat to our country. There is such a
    lack of inspection of containers coming in. And we understand
    that it takes only one weapon of mass destruction in one
    container at one port to cause massive, massive damage in our
    country.
        You, I think, mentioned did you say 5.6 million containers
    per year?
        Mr. Bonner. 5.7 million last year, and so it is around 6
    million per year.
        Senator Dorgan. And if two-thirds of those come from 20, 30
    ports?
        Mr. Bonner. They originate in or come through those 20
    ports. So if you think of Singapore, some of those are
    originating, being trucked down from Malaysia to Singapore.
    Some of them are literally coming from Pakistan and other areas
    and then on-loaded, transhipped through Singapore. Singapore,
    for example, would be a real choke point in terms of a lot of
    sea container traffic.
        Senator Dorgan. It is probably not something we can do, to
    inspect 100 percent of all containers coming into this country.
    When you talk about two-thirds of nearly 6 million containers
    going through 20 ports, I understand that there are ways to
    work with other governments to pre-clear certain shippers.
    There are ways to deal with it at the point of origin? Also,
    here in the United States.
        But if you talk about 6 million with 20 points representing
    two-thirds of the traffic, that means 2 million containers are
    not from those 20 ports. And so you have got a couple of
    million containers that we also have to worry about. And as I
    said, only one container containing one weapon of mass
    destruction can wipe out a city.
        So this is a very important issue. Speaking as one member
    of this subcommittee, I am very anxious to work with you on
    aggressive and robust funding for this initiative because I
    think we are talking about a lot of things, Immigration, Border
    Patrol, Customs, Homeland Security, so many different facets of
    protection for our country. I think this issue is critically
    important.
        You, I am sure, read the story about the fellow from the
    Middle East who had packed himself in a container, along with a
    GPS, a computer, a heater, a water supply, and he was shipping
    himself to Canada. And he was apprehended, but it describes the
    great, great difficulty we have in dealing with this container
    traffic.
        Without asking a question about that, let me just tell you
    that I think you are on the right track and I want to be
    helpful and work with you on that.

                      NATIONAL GUARD ASSISTANCE TO CUSTOMS

        Let me ask a couple of other quick questions. We are
    supplementing some resources at the ports of entry with the
    National Guard, but there is some concern that the National
    Guard are going up to these areas, working with your Customs
    agents and others, and the National Guard is not armed. Yet,
    they are up there in full uniform. Do you know what the factors
    were behind the decision not to arm the National Guard? Were
    you involved in that?
        Mr. Bonner. We made the initial request of the Department
    of Defense in late October. It went over to the Treasury
    Department and was submitted in early November, our request for
    National Guard. We were very specific. We had done an analysis.
    We wanted 626 National Guard to provide some relief to what
    were, and still are, some extraordinarily hard-working U.S.
    Customs inspectors at our borders who are working extraordinary
    amounts of overtime. They have been working far more than
    normal, Mr. Chairman, since September 11, to maintain the 24-
    by-7-by-2 security at our ports of entry, and also to make sure
    that we have lanes, including commercial lanes, open for longer
    periods of time.
        My position, by the way, has never been that the National
    Guard should be unarmed. Essentially, after several months,
    after funding issues had been taken care of, we received from
    the Department of Defense an MOA, a memorandum of agreement,
    that they provided to us in which they were saying we were
    getting the Guard, and that they were going to be unarmed.
        My own view is that we have never taken the position that
    the Guard should be unarmed, and frankly there are some
    locations in which it would be certainly preferable that the
    Guard be armed.
        We were prepared, we have indicated to the DOD going back
    to November and December, that we were prepared to provide the
    training, both in terms of use of force of policy, and in terms
    of the training with some sort of a sidearm pistol, a nine
    millimeter pistol. And for whatever reason, essentially to get
    the Guard, we had a memorandum of agreement that they would not
    be armed.
        Now we can use, at the large commercial ports and
    warehouses and things like that, we can certainly use the Guard
    and are using the Guard for appropriate purposes where they do
    not need to be armed. But in my judgment it would be
    preferable, certainly at the remote ports of entry, and also
    the other locations, that they be armed.
        So that is my position on the subject matter. We just
    yesterday had a further discussion with the appropriate
    representatives of the Department of Defense and I think their
    position now is to simply--and by the way, we already have
    these Guards and it is for 179 days. Now their position, in
    midstream, is that they have made some analyses of the number
    of Guard that they think need to be armed, that appeared to pay
    little or no attention to the Customs Service's analysis of
    where we need Guard and where we need them to be armed.
        So we are following up promptly and as expeditiously as
    possible with DOD to get this resolved, to identify those
    members of the Guard that frankly, do need to be armed, and
    then taking the steps--and Customs will absorb the cost of
    this--to send them for what is going to be perhaps as many as a
    10-day training course in the use of force policy and weapons
    training.
        The sad part of this is that this is not the time to be
    doing it. This should have been done before the Guard were ever
    deployed. But we are working on the issue.
        Senator Dorgan. First of all, thank you for being candid
    about it. It may get you in some hot water in one corner or
    another, but I think it is an important issue here. The
    National Guardsmen and women, I think feel strongly about this
    issue, being sent to in some cases pretty remote places in full
    military uniform with a security role but being told, by the
    way you cannot carry a weapon. It is just an inexplicable
    decision.
        I do not know when we are going to get a decision. We have
    appealed that and asked DOD to take a look at that issue. From
    your discussion, apparently there are active discussions and we
    are expecting some sort of decision.
        Mr. Gurule, do you agree with Commissioner Bonner?
        Mr. Gurule. Yes. I was just going to add, I spoke with
    General George Casey yesterday on this issue. There was
    actually a meeting that was held yesterday between DOD
    officials and Customs officials. I think that we are close to
    resolving the matter and he certainly seemed anxious to resolve
    it as quickly as possible. So I think we are very close to
    having this behind us.
        Again, as the Commissioner stated, it is unfortunate that
    it has taken this long, but I think we are close to resolving
    it.
        Senator Dorgan. Can you describe close? Is it days or is it
    weeks?
        Mr. Gurule. It is hard to say. My sense, from the
    conversation that I had with General Casey, is that we are
    literally days away from resolving it. I think it is that
    close. And I certainly sense that there is a strong willingness
    on the General's part to move as quickly and as expeditiously
    towards resolving it.
        And I think the spirit of cooperation here is very strong,
    so I am optimistic.

                          PROPOSED COBRA FEE INCREASE

        Senator Dorgan. Let me just ask one additional question and
    then I will turn to Senator Campbell.
        This administration, just like the past administration, has
    recommended a user fee of sorts that would be used to fund a
    portion of the Customs Service. The Administration says that
    the Customs Service is actually receiving an increase in its
    budget from 2002 to 2003. That is based largely on the $250
    million proposal for a user fee.
        We have not embraced the user fee under the previous
    administration, under the Clinton administration. I doubt very
    much whether we will this year. If we do not, what will we do
    about funding here? In order to have a user fee, you would have
    to work with the authorizing committee and have it authorized
    by July 1st. Is that work underway, Mr. Gurule?
        Mr. Gurule. Well, OMB and the Treasury General Counsel's
    Office have been engaged in extensive discussions on the
    legislation that would be needed to affect the change. It is my
    understanding that it is in the final stages. Again, when I say
    final stages, within a few days of being resolved, the language
    to be submitted to the Hill for consideration. So we are very
    close to having the language up here to authorize the user fee.
        Senator Dorgan. Do you believe Congress would enact that?
        Mr. Gurule. I do not know. I cannot speculate. The theory,
    as you know, underlying the proposal with respect to the user
    fee was that the user fee was established back in 1985. It has
    not been changed, has not been increased in the last 17 years.
        I have not done the math but I would suspect that if we
    took the user fee and tied it to the rate of inflation, we
    could justify going from $5 to $11 with respect to just
    inflation and related costs incurred in conducting these
    inspections.
        And then finally I would add that post September 11, I
    believe that we are seeing more scrutiny, close scrutiny of
    international passengers. And therefore, there is increased
    costs that are being incurred, as well.
        Senator Dorgan. I understand that, but the point I was
    trying to make is the Clinton administration could not sell it
    here, and I do not believe the Bush administration can. If you
    cannot, then you are $250 million short. And the question is
    where will we come up with that shortage? Any ideas?
        Mr. Gurule. Well, if the Congress rejects the COBRA fee,
    and I am certainly hopeful that it will not, but if it rejects
    it then we will need to meet and work closely with Congress to
    see ways in which we might be able to fill the gap that is
    created in the absence of such a fee. I would welcome the
    opportunity to work with you and your staff to that end.
        Senator Dorgan. Senator Campbell?
        Senator Campbell. Thank you, Mr. Chairman.
        Before I ask Mr. Bonner a couple of questions, let me
    congratulate Mr. Gurule on some of his recent staff additions.
    I speak with some authority, Mr. Chairman, because Mike
    Russell, who is sitting behind him, was my deputy chief of
    staff over 5 years. I still find myself, when I am in trouble,
    saying where is Mike, where is Mike? He is now doing a fine job
    for Mr. Gurule.
        Mr. Gurule. Absolutely.
        Senator Campbell. He was my loss and the Administration's
    gain.
        Let me also make a comment on the so-called user fee. We
    have dealt with these user fees under different names for years
    and years. I can remember 15 years ago, on the House side, when
    we had the tourism caucus, when we were trying to just increase
    tourism by adding some kind of a fee that could be called a
    landing fee or some kind of a fee. And it absolutely fell on
    its face then because of opposition from the tourism industry.
        I do not think we are in any better shape now when we talk
    about adding fees for people that want to come to the United
    States.

                           SEA CONTAINER INSPECTIONS

        Mr. Bonner, I am really interested in the numbers expressed
    on these containers, and I do not know much about these
    containers, and math is not my long suit either. But it appears
    there is probably about 15,000 per day coming into the United
    States roughly, 15,000 or 16,000 containers a day.
        Mr. Bonner. That is about right.
        Senator Campbell. You mentioned that the inspections now
    are based on high risk, did I understand you to say that?
        Mr. Bonner. Yes.
        Senator Campbell. How do you identify high risk? Location
    or intelligence or something?
        Mr. Bonner. Obviously, any time you have specific tactical
    intelligence, that is the best thing. But to be perfectly blunt
    about it, we do not get a lot of tactical intelligence that
    says you ought to take a look at x container coming in on x
    vessel.
        What you do, Senator, is first of all Customs has a very
    significant volume of trade information in its databases. It
    also collects, right now on a voluntary basis, advance manifest
    information that is provided to us. By the way, it is
    incomplete, it is not adequate in my opinion.
        Senator Campbell. It could be counterfeit, and so on.
        Mr. Bonner. But nonetheless, we do get a very large amount
    of information. And we essentially, using targeting principles
    and rules, we have developed and are getting more and more
    sophisticated in developing a rules-based targeting methodology
    which allows us to identify containers that are high risk.
        By high risk I mean those at potential risk for terrorist
    threat.
        By the way, I do not think it is perfect. It is not perfect
    because we are not getting complete information. We need
    complete information and if the Congress makes it mandatory
    that Customs be provided with complete manifest information,
    this will assist us. But we do have a lot of information.
        And so we make judgments that are based upon a risk
    targeting methodology as to which containers we should inspect.
    That is number one. That is our general approach to sorting out
    high risk from low risk.
        Senator Campbell. Out of those 15,000 or 16,000 a day, what
    percent are actually inspected?
        Mr. Bonner. I would say you are probably talking about
    maybe 2 to 3 percent that are inspected as posing a potential
    risk.
        Senator Campbell. You are primarily inspecting for some
    potential terrorist threat. But I was wondering, has your
    inspections had a spinoff of finding increased smuggled goods
    or counterfeit goods or so on that you have always been
    concerned with?
        Mr. Bonner. Let me distinguish two things here. We were
    initially talking about sea containers, but we are also using
    this same methodology in terms of, for example, commercial
    trucks that are crossing our border and so forth.
        So there, by the way, the Canadian border, I just want you
    to know we are actually inspecting, in some way or another, a
    significantly higher percentage than 2 to 3 percent.
        But going back to your question, yes, there has been, by
    virtue of increased scrutiny and increased inspections, there
    has been a significant increase in the seizure, for example, of
    illegal drugs coming into the country. A lot of that has been
    at the southwest border because, as you know Senator, the
    estimates are 65 to 70 percent of all of the illegal drugs that
    are smuggled into the United States come across the border with
    Mexico.
        Senator Campbell. Have you found any more people, as
    Senator Dorgan suggested about that one guy that snuck in in a
    container.
        Mr. Bonner. That was an individual that was actually on his
    way from Egypt through Genoa, Italy to Halifax, Canada. I think
    he was originating in Port Sayeed, Egypt and, by the way, very
    troubling, he had an air mechanics certificate and some other
    identification on him. He never reached the United States.
        In the broadest sense, of course, the inspection technology
    that we are using can detect a number of anomalies, illegal
    drugs, terrorist weapons, and it is certainly capable of
    detecting individuals that might be concealed either in a
    tractor-trailer truck or in a sea container.
        Senator Campbell. I have seen some of those gizmos that can
    measure heart rates inside of a container. I have seen them
    used.
        Mr. Bonner. Again there have been instances in which sea
    containers have been used to--at least we have some evidence--
    where they have been used to transport people. I am not saying
    terrorists. And we certainly have images, x-ray images of, for
    example, train cars coming across from Mexico that have
    individuals in them. This is something that you pick up on the
    non-intrusive inspection technology, the large x-ray and gamma
    ray machines that can image these containers.
        So yes, leaving aside the radiation detection devices that
    we have that we are also using, but the same kind of imaging
    technology, in my judgment, is increasing the numbers of
    seizures of illegal drugs that are coming into the United
    States.

                  POST-SEPTEMBER 11 BORDER CROSSING WAIT TIMES

        Senator Campbell. Let me ask you about impeding the flow of
    trade. I do not know much about containers but I know a little
    bit about the trucking industry. I was told by a number of
    truckers that travel from Canada to the United States that, for
    quite a while after 9/11, there was 24 hours or more wait at
    the border while being inspected. Do you know if there is still
    a huge wait like that? Or have we increased the speed?
        Mr. Bonner. I know exactly what the wait times are,
    Senator, because one of the things I did even before I was
    confirmed as the Commissioner of Customs, I think on or about
    September 13, is I directed the U.S. Customs Service to start
    measuring with exactitude what the wait times were for a truck
    to come across the U.S. border. The reason that I did that was
    that we were experiencing what were 10 to 12 hour wait times to
    cross into Michigan, into Buffalo, New York, and some other
    points on the border.
        So not only are we measuring these wait times, but we take
    two snapshots, 8:00 a.m. and 4:00 p.m. every day at all the
    major ports of entry, both on the northern border and the
    southern border with Mexico. They are posted on the U.S.
    Customs website, which is www.customs.gov, and have been since
    a few days after September 11.
        So if you want to know what wait times are for commercial
    trucks, and it also goes for passenger vehicles, you can go to
    that site. So I know, actually I track this if not on a daily
    basis, at least every week. I look at the wait times. And I can
    tell you, Senator, that while there were 10 to 12 hour wait
    times essentially in the week after September 11, that through
    a combination of efforts by U.S. Customs, with the trade, and
    with getting some National Guard deployed, by TDY-ing,
    temporary duty assignments, for Customs inspectors, to man more
    of the lanes more often, and some other measures, we got the
    wait times down, by about September 17, to what were pretty
    close to pre-September 11 levels.
        Senator Campbell. I am just looking at a chart here that
    indicates in some places not more than 10 minutes delay or some
    places no delay, some places 20 minutes. That is not bad.
        Mr. Bonner. It is not bad, and it is as good, by the way,
    in most places--there are some exceptions here, by the way,
    that we need to work on that are not commercial truck traffic
    so much as POV or privately owned vehicle traffic.

                  CUSTOMS TRADE PARTNERSHIP AGAINST TERRORISM

        Senator Campbell. Let me ask you another couple of
    questions on containers. You mentioned working with the
    industry on inspecting the containers. Does that mean industry
    sometimes inspects their own containers? Or is that always done
    with Federal agents, too?
        Mr. Bonner. Well, it is our responsibility to certainly use
    our authority to inspect any containers that we think have
    contraband or pose a risk. But what we have done with the
    Customs Trade Partnership Against Terrorism is----
        Senator Campbell. I do not have too much time.
        Mr. Bonner. I will try to put it in a nutshell. It is
    essentially to use the leverage of major U.S. importers to
    increase the security, not just----
        Senator Campbell. You do that at point of origin, rather
    than here then, do you not?
        Mr. Bonner. Point of origin, yes. The origin of the foreign
    manufacturer to increase the security along the supply chain.
        But that does not mean that we stop doing inspections. It
    just means that it adds another layer, if you will, of security
    with respect to goods, containers and cargo coming into the
    United States.
        Senator Campbell. Thank you. Thank you, Mr. Chairman.
        Senator Dorgan. Senator Reed?
        Senator Reed. Thank you, Mr. Chairman, and thank you
    gentleman for your testimony.
        Commissioner Bonner, it is good to hear that you are
    increasing the number of personnel across the northern border
    because that is a major access point to the United States. But
    I also sympathize with your general comment about the need for
    additional personnel for Customs Service. Indeed, in my home
    State of Rhode Island, we are one person short of our full
    complement of 12 people. That has been the case since the end
    of the year. I hope not only can you fill up the northern
    border, but also other places around the country that need
    additional Customs officers for the very reasons you pointed
    out so well in your testimony.

                        CUSTOMS AUTOMATION MODERNIZATION

        Let me ask you a question with respect to the Automated
    Commercial Environment. How well is that going, which
    represents a major effort to increase the efficiency and
    effectiveness of the Service and replace the old ACS system?
        Mr. Bonner. This is, of course, a very, very important
    procurement project at the U.S. Customs Service, and which had
    started somewhat before my arrival and my confirmation on
    September 19 last year.
        But number one, I want this committee to know that this is
    one of my highest priorities, the successful design,
    implementation, and the funding necessary to design and
    implement ACE in a timely manner. It is an incredibly important
    system because it does hold the potential, and if we do it
    right we will reform the way that the U.S. Customs Service does
    business with the trade. It also will significantly add to our
    ability to perform our security function against the terrorist
    threat by getting ACE implemented.
        Where it stands right now is that before I arrived, there
    was a contract entered into with the E-Customs Partnership,
    which is a consortium of companies led by IBM, to do the design
    and the development of ACE, working closely with and being
    overseen by U.S. Customs. In fact, this whole process is also
    being overseen by the Office of Management and Budget and GAO
    and this Committee, rightly so. It is a big project and it is
    an expensive project.
        We have just gotten approval, and I want to thank this
    Committee, for the second expenditure spending plan. A few
    weeks ago when I met, as I do on an almost monthly basis, with
    the executive steering committee for the ACE project, we
    approved and put forward the third spending plan, which is
    making its way to this Appropriations Committee, but which is
    right now somewhere between Treasury and OMB.
        In any event, we believe that we will start receiving
    deliverables, the first release of deliverables, under the ACE
    system by, I believe, this coming fall. So right now, I would
    say we are making reasonably good progress toward getting ACE
    designed and beginning now, the implementation phase and
    starting to roll out the deliverables.
        As you know, this is being done in phases. At the current
    level of funding, we should be able to complete the
    implementation of the ACE system and get off the old ACS life
    support system within 5 years. I am looking at seeing if there
    is a way, without materially in any way increasing the risk to
    ACE and its development, of actually completing the ACE project
    within 4 years. That is being discussed right now. If, in fact,
    we conclude that it can be completed within 4 years, then the
    question is what kind of funding implications that would have.
        I am not at a point to discuss that further with this
    Committee. I chatted briefly with the Chairman about this last
    Monday, but as soon as I have formulated my own conclusions and
    discussed those appropriately within the executive branch, if
    we think this can be done, I would look forward to coming over
    and briefing not just the staff, but the members of this
    committee as to how we might do that and what would be the
    funding implications.
        Senator Reed. If I may, a quick follow up. Did the events
    of September 11 and all of the heightened security issues cause
    you or the architects of the system to look again at whether or
    not the system design is the right one for the new security
    needs? And if you did, do you foresee any changes in the
    system?
        Mr. Bonner. We certainly are, and we are looking at the
    possibility of seeing if we cannot push forward certain things
    that would help us with respect to security issues. That is
    being looked at, to see if we can do that.
        Certainly, I mean if the system were in place now it would
    be of immense benefit to the U.S. Customs Service in being able
    to do even more sophisticated targeting and analysis of the
    type that I was talking about with Senator Campbell. So we want
    to see if there are some things, without again putting the
    system or its development at risk, that could be done to push--
    there are a couple of items that might be pushed forward that
    would be particularly beneficial in terms of better dealing
    with the security issue and the security threat.

                                JEWELRY MARKING

        Senator Reed. Thank you. One final point, if I may, we all
    have industries in our home States that are vital. The jewelry
    industry has a long time been a vital, not only economic but
    cultural and social force in Rhode Island. For many, many years
    now I have been trying to give them a level playing field by
    suggesting legislation which would require indelible markings
    on foreign jewelry, the major form of competition. Today there
    are requirements of some type of non-permanent marking, piece
    of paper, et cetera, which mysteriously disappear.
        I am wondering what the Customs Service perspective might
    be on this matter? I think it is something that Senator
    Campbell might be familiar with since Indian jewelry requires a
    permanent indelible mark, which I think is very appropriate. Do
    you have any thoughts? Or could you get back to us?
        Mr. Bonner. You know, I would be happy to get back to you
    on it. I must say, as I sit here right now, I have not given
    that detailed thought. And I would want to make sure that any
    system we have is one that Customs can----
        Senator Campbell. If the senator would yield on that
    specific point? Years ago, when Bill Richardson was in the
    House, we tried to put an amendment in the trade bill to make
    indelible stamping of metal. Several national groups, including
    the National Jewelers Association, opposed it and we could not
    get the thing passed.
        Everybody wants some protection, but if it bites into their
    bottom line profit, sometimes the line gets blurred.
        Senator Reed. If you could get back to me, I would
    appreciate it, Mr. Commissioner. Thank you, Mr. Chairman, thank
    you Senator Campbell, for your comments.

                        ARMING NATIONAL GUARD DETAILEES

        Senator Dorgan. Thank you, Senator Reed. Mr. Bonner, two
    other areas.
        I just looked at an April 9th memorandum from the
    Department of Defense on this issue of arming the National
    Guard and I wanted to just share this with you. This is
    recommended to the chairman of the JCS that 411 soldiers be
    armed, 337 on the northern border, 74 on the southern border it
    appears. SECAR recommended approval, also. Forwarded to J-5 on
    March 22 for coordination with lead agencies. I assume that
    includes yours.
        When approved by the lead agencies, it will be forwarded to
    the Secretary of Defense for approval. Upon approval by the
    Secretary of Defense, both MOAs will need to be amended before
    arming can occur. It appears we are at least 8 weeks away from
    arming our soldiers at the earliest. That is dated April 9th.
        Does that conform to what you are hearing?
        Mr. Gurule. I think the reason for the delay is that there
    is going to have to be a training period. We are talking about
    the decision, when we would have a decision resolved on this
    issue. And my sense is that that is shortly to occur.
        But after that decision is made, then there is still the
    training issue that needs to be resolved. So it will be some
    additional time before they are actually armed at the border
    because they need this additional training requirement.
        Senator Dorgan. You are talking about 10 days training,
    right? I mean, the problem is this starts on March 2 and it
    looks like you are talking the potential of mid-June. It is
    sort of frustrating because I think the Commissioner indicated,
    and many of us feel as well, some of these soldiers should not
    have been deployed without arms. And as weeks and weeks and
    weeks go by, I think it is inappropriate to have to wait this
    long for an answer.
        Mr. Gurule. Again, I do not think the issue is that
    difficult, so I am surprised that they are referring to this in
    an 8 week time frame. I do not think the issue is that
    difficult to resolve. The training is not that long. So I am
    not sure what other factors are being weighed into the equation
    here that is extending this for such a long time.
        Senator Dorgan. I am not sure this even contemplates a
    training time. I think it contemplates a decisionmaking time.
    It talks about when it goes to the Secretary of Defense,
    dealing with lead agencies, then goes to SecDef, SecDef
    approved, both MOAs need to be amended.
        I mean, I suspect this is probably just kind of a
    bureaucratic slowdown here.
        Mr. Bonner. As I said, Mr. Chairman, they are available to
    Customs only for 179 days. And my full intention, as I told DOD
    all along, is to recruit, hire, train and deploy the new
    Customs inspectors to replace the Guard, because I only have
    the funding for 6 months anyway. So that is the problem we are
    into now. By the time they approve all of this, it does not
    make sense to take them away for 10 days and train them because
    they are only going to have another month or so left on their
    service. It was not done in an orderly way.
        And second, the determination as to which Guard need to be
    armed is essentially a unilateral determination by DOD. All we
    are saying is here are the ones we need armed. It is not 411,
    actually it is quite fewer than that who need to be armed. Let
    us get them trained. I think we can probably get a training
    program put in place and I am going to take this out of my own
    budget, get the travel money to get them to FLETC or wherever
    we need to put them to get them trained and redeployed.
        The DOD proposal does not take into consideration that--we
    are the ones that requested this and we are the ones that are
    actually paying for it. Now granted, OMB has been helpful here
    to Customs on the budget, but the DOD does not take into
    account first of all, where we want them, and second which
    Guard we think need to be armed. At this point it does not make
    sense to, I do not think, to arm as many as they want. We are
    using some of them--actually, in this film you saw we are using
    some of them in situations at major commercial ports where
    there are a lot of Customs inspectors around who are armed, and
    we probably do not need them armed at this juncture in those
    locations.
        But we certainly need them armed at remote ports of entry
    where they, along with one other Customs inspector, are
    essentially standing sentry at our border.
        Senator Dorgan. When did you alert DOD to the fact that you
    felt that this certain group should be armed? About what
    timeframe?
        Mr. Bonner. You know, the problem is--the evolution of
    this, frankly it has taken so long. But let me just say, I am
    going back to the discussions that we were having back in
    December with DOD. And in those discussions, we were proposing
    the training program for armed Guard that we would have, we
    would put together the training program, that we would be
    putting on the training for them.
        And somehow, I honestly do not know Mr. Chairman, but
    somehow or another, as this evolved, and it was taking so long,
    we were presented with a memorandum of agreement. At that
    point, I thought we should just get the Guard and move on with
    life. But it was always our view that either all of the Guard
    would be armed, or at least some of the Guard where it made
    sense to have them armed would be armed. It was not our
    decision to have them all unarmed.
        Senator Dorgan. You made that recommendation early and were
    overruled by the DOD, who determined the conditions under which
    they would be deployed; is that right?
        Mr. Bonner. I think that is a fair way of characterizing
    it. You have to know that there were all sorts of other issues
    going on that were making this an excruciating process, in
    terms of the delay in the negotiation.

                           MEXICAN LONG HAUL TRUCKING

        Senator Dorgan. Let me ask one other quick item. I have
    been told, it has not been made public yet, but I have been
    told the Administration is prepared to proceed with a June 30
    decision point for allowing Mexican long haul trucks to come
    into this country. Many of us will have great heartburn about
    that, because I do not think anybody is ready for it. Certainly
    not DOT, certainly not the people who are engaged in
    inspections, and so on. And I think that will pose a danger on
    America's roads.
        But tell me when the decision is made to allow Mexican long
    haul trucks to come into this country, what impact will that
    have on Customs? And is Customs ready?
        Mr. Bonner. I think we are ready for it. There are some
    issues here that probably are beyond my province that have to
    do with safety of trucks and drivers and that sort of thing. We
    are working, by the way, with the Department of Transportation
    and Federal Highway Administration to do everything we
    reasonably can to assist them with being in a position to
    satisfy themselves that the Mexican trucks that would be going
    past the 20 mile zone are safe and all of that.
        I honestly think, Mr. Chairman, in terms of the
    inspectional issues, the only issue I see--first of all, I
    think we are ready for it when it happens because it is
    essentially the same tractor-trailer truck that is coming
    across. It is just not going back right away empty. Some of
    them would be continuing on into the highway system of the
    United States.
        But I do not see it as, for example, significantly
    increasing in any way the numbers of tractor-trailer trucks
    and/or the numbers that we would need to screen and inspect.
        Senator Dorgan. Had you heard of the June 30 proposal? In
    your discussions with DOT are they talking about a date?
        Mr. Bonner. I have heard that--I did not know whether it
    was a firm date or a fixed date, but I knew that they were
    trying to work toward being in a position so that they were
    able to certify the tractor-trailer trucks coming in from
    Mexico sometime in June. But I do not know that I have actually
    seen, whether that was some specific legislation or regulation,
    or what the exact driver of that timetable was.
        Senator Dorgan. But this issue is more for DOT, because I
    think you allow that quantity of Mexican trucks to come in and
    long haul without nearly the capability to inspect, and there
    is not the capability to inspect. And with massive problems,
    lack of log books, lack of the requirements on Mexican drivers
    that exist here, I mean a whole series of problems, we are
    going to run into real serious safety issues on our highways.
        That is an issue I will pursue more with DOT, but I was
    curious about what you had been doing.

                         ADDITIONAL COMMITTEE QUESTIONS

        Mr. Commissioner, thank you for testifying today. We look
    forward to working with you. Please tell the men and women of
    the Customs Service that we admire what they have done.
    September 11 underscored again their value to this country and
    the importance of having secure borders and their contribution
    to making those borders secure.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]

                 Questions Submitted by Senator Byron L. Dorgan

                              customs tax increase
        Question. The Administration is claiming that the Customs Service
    fiscal year 2003 budget will receive an increase from fiscal year 2002.
    This is largely based on the Administration's proposal for a tax
    increase to cover $250 million of homeland security efforts. It is my
    understanding that this user fee must be authorized by July 1, 2002 to
    begin accruing the total $250 million.
        Are you working with the authorizing committees to pass this
    proposal? If not, who is responsible in the Administration for pursuing
    this legislation?
        Answer. We have had discussions with the House and Senate
    authorizing committees and expect to continue working with them when
    the legislation is finalized.
        Question. What plans do you have to cover the $250 million
    shortfall if the legislation is not enacted?
        Answer. Given that Customs must address its existing labor costs
    prior to embarking on new recruitments, it is essential that the COBRA
    fee increase be enacted for the programs supported by the
    Administration's budget request to achieve success. The allocation of
    the fee increase would not be restricted to any aspect of that
    mission.. The Administration will soon send a legislative proposal for
    a COBRA fee increase to the House Committee on Ways and Means and the
    Senate Committee on Finance. The Administration is willing to work with
    the Congress to ensure that the fee increase gets enacted because it is
    essential to the successful accomplishment of Customs overall mission.
    Consequently, the Administration has not contemplated an operating
    approach for Customs based on resources that are $250 million less than
    the total availability assumed in the budget request. If the fee
    increase is not enacted, the Administration is committed to funding
    discretionary spending within the total submitted in the President's
    Budget and would work with this Committee to fashion acceptable trade-
    offs among all the important domestic spending priorities.
        Question. What effect will this have on the Customs mission if this
    ``tax increase'' is not implemented?
        Answer. As noted, the Administration is keenly aware that the
    funding associated with the fee increase is essential to the successful
    accomplishment of Customs overall mission. Consequently, the
    Administration has not contemplated an operating approach for Customs
    based on resources that are $250 million less than the total
    availability assumed in the budget.
                              joint border agency
        Question. It is my understanding that the Administration is moving
    closer to Governor Ridge's proposal that would combine the Customs
    Service in a joint border agency with other agencies such as the
    Immigration and Naturalization Service (INS) under the Department of
    Justice.
        Given the INS's poor record and the most recent blunder of sending
    approval letters for student visas of two of the terrorists from
    September 11th, is it the most appropriate thing to combine these
    agencies at this time?
        Answer. The U.S. Customs Service is committed to protecting the
    security of our Nation's borders and will continue to do so through
    enhanced programs aimed to deter and detect terrorists or implements of
    terrorism from entering the U.S. The U.S. Customs supports and is
    prepared to comply with any direction from the Administration designed
    to enhance overall border security.
        Question. Do you support Governor Ridge in his efforts to create a
    joint border agency and how would the revenue generating
    responsibilities of the Customs Service fit in with such a plan?
        Answer. As stated, Customs supports and is prepared to comply with
    any direction from the Administration designed to enhance overall
    border security. Governor Ridge has observed Customs border security
    operations first hand, and Customs is working with the Office of
    Homeland Security on a number of initiatives directed toward enhancing
    border security and supporting trade facilitation.
        Question. What is the President's timeline for making a decision on
    this proposal?
        Answer. Customs is not aware of a Presidential timeline for making
    a decision on this proposal. (Response reflects pre-June 6 Presidential
    announcement.)
                  business strategy adjustment and pay parity
        Question. Secretary O'Neill is requiring that all agencies incur a
    Business Strategy Adjustment. He feels that every agency can find
    savings, but all those we asked were absent any ideas that wouldn't
    affect mission-related activities. He proposed something similar in
    fiscal year 2002, but this Subcommittee restored the funds for law
    enforcement agencies. In fiscal year 2003, the BSA for Customs totals
    $18,377,000. To reach parity to the military 4.1 percent from the
    President's request of 2.6 percent, it will cost Customs $15,115,000.
        What savings do you recommend to cover the proposed $18.377 million
    business strategy adjustment?
        Answer. Savings will be accomplished through an enterprise approach
    toward administrative services and functions that will create synergies
    within the Treasury Department and lead to economies of scale. Customs
    will work with main Treasury and other Treasury Bureaus to identify
    areas in which cost savings can be achieved. These areas could include
    but are not limited to reengineering the drawback process, implementing
    CD-ROM EEO Training, conducting EEO investigations at the Treasury
    Bureau level, and establishing a corporate approach to Treasury
    Acquisitions.
        Question. What would be the affect on your agency if forced to
    absorb the business strategy adjustment and a 1.5 percent pay raise?
        Answer. Customs would try to achieve even more cost savings using
    the enterprise approach mentioned in Question S-USCS7. Regardless of
    the types of management efficiencies, how they are achieved, and how
    successful they are, Customs will not compromise the security of the
    United States.
                                usa patriot act
        Question. This law authorizes the tripling of INS and Customs
    personnel from fiscal year 2001 levels along the Northern Border.
    Assuming the President's fiscal year 2003 budget is implemented, there
    is still a hiring shortfall of 1261 Inspectors and 355 Agents under
    Customs, while the shortfall for INS is significantly lower. I estimate
    that Customs will need an additional $188 million to reach this goal.
    INS is short only 447 Inspectors and 280 Border Patrol Agent to reach
    the goal of tripling its personnel.
        Would the tripling of staff from fiscal year 2001 levels fill the
    necessary holes in staffing the Northern Border to place you at optimal
    levels? Please detail what you would need to be at optimal levels along
    the Northern Border and separately along the Southwest Border.
        Answer. We believe that if Northern Border Inspector staffing were
    tripled from fiscal year 2001 levels, coupled with appropriate
    hardening of low volume ports and installation of electronic
    surveillance equipment and Non-Intrusive Inspection Equipment (NII),
    Customs Inspector staffing would be adequate.
        Southern Border Inspector staffing maintained at existing baseline
    levels, combined with additional staffing provided for in the fiscal
    year 2002 Emergency Supplemental and fiscal year 2003 funding requests,
    is sufficient for efficient and effective operations at the border. The
    Southern Border has been hardened over the past several years due to
    the ongoing contraband threat.
                      container security initiative (csi)
        Question. Commissioner Bonner has been stressing the need to push
    out our borders away from the conventional border. CSI is designed to
    place Customs inspectors and agents in offices abroad to secure
    containerized cargo entering the U.S. at the 10 largest mega-ports (50
    percent of all cargo to the U.S. enters through these 10 ports).
        Why is this important?
        Answer. The U.S. Customs Container Security Initiative (CSI),
    proposed by Commissioner Bonner in a January 17, 2002, speech given at
    the Center for Strategic and International Studies, would secure an
    indispensable, but vulnerable, link in the chain of global trade: the
    oceangoing sea container. Ensuring the security of the maritime trade
    system is essential, given that approximately 90 percent of the world's
    cargo moves by container.
        Each year, more than 16 million containers arrive in the United
    States by ship, truck, and rail. In 2001, U.S. Customs processed more
    than 214,000 vessels and 5.7 million sea containers. A proactive stance
    by Customs in screening sea containers before they reach the United
    States will significantly contribute to the agency's overall efforts to
    secure the borders against dangers that might be introduced through
    commercial traffic. A key goal of the CSI is to identify potential
    high-risk shipments at the earliest point in the supply chain, thus
    helping to protect the global maritime trading system.
        Osama bin Laden and the Al Qaeda terrorist network have vowed to
    cripple the U.S. and world economy. More than half of all goods that
    enter the United States arrive by oceangoing cargo containers.
        Question. What are the ramifications and complications of
    stationing Customs Agents and Inspectors in foreign ports?
        Answer. The ramifications and complications of deploying CSI teams
    overseas vary from port to port because each situation is completely
    different (e.g., ownership of the ports, relevant government agencies
    involved, the private sector, legal/regulatory issues, etc.)
        Several reoccurring issues have been raised during discussions with
    foreign representatives such as sovereignty, port risk assessments,
    data sharing, container inspection procedures, and reciprocity. As our
    foreign partners gain a better understanding of our intentions under
    the CSI program and how we want to work with them, these issues do not
    elevate to insurmountable problems.
        Also, we are coordinating with domestic agencies to answer foreign
    representatives' potential questions. We are working out a response
    process in the event a weapon of mass destruction is found in a CSI-
    participating port. We are working with closely with USCS' Office of
    Anti-Terrorism to coordinate our efforts with the Department of State
    and its Foreign Emergency Support Team. Feeding off the Department of
    Energy's Second Line of Defense Program we expect to send DOE teams to
    potential ports to assess the host nation's ability to address this
    issue.
        Question. Are there jurisdictional or safety issues? What
    conditions or constraints do you face?
        Answer. The implementation of the Container Security Initiative
    (CSI) is not expected to encounter any jurisdictional issues. U.S.
    Customs officers stationed in foreign ports will be instructed to defer
    to their host country counterparts with regard to the actual inspection
    of containers. Host country inspectors will inspect the containers
    previously identified as potentially high-risk. U.S. officers will
    witness the inspections and ensure that any targeted containers have
    been adequately screened prior to their clearance for the United
    States.
        The safety issues and potential conditions and restraints are
    addressed in the above answer. We are coordinating with domestic
    agencies to answer foreign representatives' potential questions
    regarding safety issues.
        Question. What will full implementation of the CSI program cost?
    What time frame? What are the costs of a pilot project? In which Ports
    would a pilot be most likely?
        Answer. We anticipate full implementation of CSI would cost
    approximately $63 million for the start-up year using standard costs
    for overseas positions and estimates for establishing a new office.
    Second year costs would be approximately $35 million. The estimated
    timeframe to reach full CSI implementation is January 2004. The average
    cost of a pilot project is $800,000. U.S. Customs has already
    established CSI teams in Vancouver, Montreal, and Halifax, Canada. All
    three sites rely on current resources. Our next step is to pilot CSI in
    one port in Europe and one port in Asia. Following the establishment of
    the initial pilots, U.S. Customs will incrementally work with the
    Treasury Department and OMB to deploy teams in the world's top 20
    megaports as well as other strategic locations. The typical
    configuration of a team would include two inspectors, one special
    agent, and one intelligence analyst. Of course, this configuration may
    vary from port to port.
                                 port security
        Question. During last week's full Committee Homeland Security
    hearings, we focused on port security. Witnesses highlighted the
    challenges regarding port security. One issue concerns identifying
    which Federal entity is responsible for the ports. One witness stated
    that the Department of Transportation and the U.S. Customs Service both
    claim control.
        Commissioner Bonner, please state for the record, who is
    responsible for containers entering the U.S. through these ports? Who
    is responsible for security at the port itself?
        Answer. Various Federal, State, and local agencies share the
    responsibility for security at seaports, including the Customs Service
    and the Coast Guard. However, the ultimate responsibility for seaports
    rests with the states, which charter seaports within their territories.
    Port authorities act on behalf of State or local governments and
    operate some marine terminals while private sector tenants of the port
    authority run others.
        The Customs Service is the entity responsible for the security of
    containers entering the United States. Customs is the lead Federal law
    enforcement agency in the screening, examination and release of
    commercial conveyances, persons, and cargo entering the United States
    and a key stakeholder in the seaport security arena. Customs enforces
    hundreds of laws for dozens of different Federal agencies at our
    nation's air, land and seaports of entry.
        Customs authority extends to the examination of cargo at both ends
    of the transport chain and Customs is equipped with the infrastructure,
    personnel, inspection equipment and computer systems to target, screen,
    examine and process cargo shipments entering the United States through
    our nation's seaports.
        In general, State or local municipalities and terminal authorities
    govern most seaport facilities in the United States. These facilities
    are used to facilitate the movement of not only international shipments
    that are imported or exported, but also facilitate the movement of
    domestic cargo shipments that move between U.S. ports. As a result of
    the multiple roles our nation's seaports play in the overall
    international and domestic economies, there are multiple Federal
    agencies with interests in seaport security. Customs is a key Federal
    stakeholder in seaport security because Customs regulates the key
    entities (shippers, carriers, importers, brokers, etc.) which are
    involved in the importation/exportation of goods into and out of the
    United States.
        Question. Also, please illustrate your relationship with the U.S.
    Coast Guard and other Federal, State and local entities at these ports.
    Who is tasked with what responsibilities?
        Answer. At the national level, the Customs Service and the
    Department of Transportation (DOT) have been collaborating in a joint
    Container Working Group (CWG) initiative that is focused on improving
    the security of sea containers entering the United States. The U.S.
    Coast Guard is one of many DOT sub-agencies represented on the CWG.
    Additionally, Customs also works closely with the U.S. Coast Guard to
    address seaport security issues through the Marine Transportation
    System (MTS) and the Marine Transportation System National Advisory
    Committee (MTSNAC), and promotes Customs best-practice security
    standards through the U.S. Coast Guard at the International Maritime
    Organization (IMO).
        On a local level, Customs is the lead Federal law enforcement
    agency in the screening, examination and release of commercial
    conveyances, persons, and cargo entering the United States and is a key
    stakeholder in the seaport security arena.
        Customs authority extends to the examination of cargo at both ends
    of the transport chain. Customs is equipped with the infrastructure,
    personnel, inspection equipment and computer systems to target, screen,
    examine and process cargo shipments entering the United States through
    our nation's seaports. Customs is a key Federal stakeholder in sea port
    security because Customs regulates the key entities (shippers,
    carriers, importers, brokers, etc.) which are involved in the movement
    of goods into and out of the United States.
        Customs enforces hundreds of laws for dozens of different Federal
    agencies. Additionally, Customs participates in Port Safety Committees
    and coordinates enforcement activity with the proper Federal, State and
    local entities, including the U.S. Coast Guard when necessary.
                                 national guard
        Question. The National Guard has been assigned to augment security
    at the border and at Ports of Entry during on and off-hours after 9/11.
    Critically, these troops are UNARMED. (Customs instituted a Level 1
    alert wherein all Ports of Entry are manned 247 by at least
    two people. This applied even to those border crossings, which have set
    hours of operation, traditionally left unmanned). The National Guard
    became dependant on the law enforcement officers of Customs and INS to
    protect them. A decision to reverse the policy of not arming the
    National Guard along the border is currently pending in DOD.
        What were the factors behind the decision not to arm the National
    Guard along our borders, especially given that they are armed at our
    airports and at posts with the Capitol Police?
        Answer. The Memorandum of Agreement (MOA) between the Department of
    the Treasury and the Department of Defense (DOD) calls for DOD
    personnel assigned to U.S. Customs to be unarmed for a number of
    reasons. One reason is to avoid giving the appearance that the U.S.
    government is militarizing its borders. Additionally, DOD personnel
    will only be used to support very low-risk missions and will always be
    under the immediate supervision of an armed Customs Inspector who can
    provide force protection in the rare event it becomes necessary.
    Furthermore, not arming DOD personnel helps minimize the possibility of
    a use of force incident. Last, these additional DOD resources are being
    utilized in a manner that is consistent with DOD support already in
    place and also serving in an unarmed capacity.
        DOD personnel assigned to U.S. Customs are detailed to our agency
    under Title 10 USC. Title 10 soldiers are under the direction of the
    President of the United States, and are funded by the Federal
    Government. Therefore, the agreement to not arm the DOD soldiers
    assigned to U.S. Customs was made between the Customs Service and the
    DOD. On the other hand, the DOD personnel assigned to major airports
    and the Capitol Police are detailed to those entities under Title 32
    USC. Title 32 soldiers are under the direction of the State governors,
    remain under the control of the States' Adjutant Generals, and receive
    funding from their respective States. Therefore, the decision to arm
    the soldiers assigned to major airports and the Capitol Police was made
    among the respective States' governors, Adjutant Generals, and the
    individual departments/agencies.
        Question. What is the status of reversing this decision?
        Answer. On April 12, 2002, the DOD requested to renegotiate the MOA
    between our agencies, with the intent of selectively arming Title 10
    DOD personnel assigned to the Customs Service. In an effort to
    streamline the renegotiating process, Customs and DOD officials met at
    the Pentagon on April 17, 2002, to discuss issues related to arming
    Title 10 personnel. The DOD is currently drafting the proposed language
    changes to the existing MOA, which will be forwarded to U.S. Customs
    for consideration upon completion. Although the proposed changes have
    not officially been agreed to at this time, the Customs Service has
    orally agreed with DOD to arm the Title 10 personnel assigned to the
    Northern Border locations. Both agencies have established this
    renegotiating process as a very high priority. Every effort is being
    made to ensure that the necessary changes are made and implemented as
    soon as possible.
                          overtime cap for inspectors
        Question. The USA Patriot Act lifted the overtime cap for INS
    inspectors, but not for Customs. It is my understanding that Customs
    did not ask for a similar provision because the Commissioner has the
    authority to waive the cap upon special request. When visiting Ports of
    Entry along the Northern Border, the overtime cap was a top concern of
    many inspectors.
        The USA Patriot Act lifted the overtime cap for INS inspectors, but
    not for Customs. It is my understanding that Customs did not ask for a
    similar provision because the Commissioner has the authority to waive
    the cap upon special request. When visiting Ports of Entry along the
    Northern Border, the overtime cap was a top concern of many inspectors.
        You detail in your prepared statement that inspectors are working
    12 to 16 hour days, 6 and 7 days a week. Why did you not request
    lifting the caps through the Patriot Act, and do you require such a
    provision at this time?
        Answer. We do not require such a provision at this time. 19 U.S.C.
    Section 267 (c) (1) authorizes the Commissioner of Customs to grant a
    waiver of the statutory overtime cap to individual Customs officers. As
    of April 26, 2002, I have granted overtime waivers to 94 inspectors for
    fiscal year 2002.
        Officers working 12 to 16 hour days, 6 and 7 days a week are more
    an issue of available labor at certain locations than a cap waiver
    issue for Customs.
                            cobra user fee shortfall
        Question. Customs collects nine different user fees covering
    services provided to the traveling public and trade community. These
    COBRA fees reimburse the Salaries and Expenses account to address
    overtime, benefits, salaries, and equipment, etc. COBRA receipts for
    fiscal year 2002 are $35 million below fiscal year 2001 collections,
    due primarily to a drop in air passenger travel. Treasury did not
    request any funding in the Administration's recently released fiscal
    year 2002 Supplemental Request (of 3/21). However, it should be noted
    that the Administration proposes $35 million for INS to make up for the
    ``significant decline in international air travel to the United States
    and an equally significant decline in projected immigration user fee
    revenue.''
        Please provide your understanding of why the Administration
    requested funding for an INS shortfall in receipts from user fees and
    nothing similar for Customs.
        Answer. This question regarding INS funding is best answered by the
    Office of Management and Budget.
        Question. COBRA authorization expires 9/30/03. What efforts are
    being made to address this?
        Answer. The fiscal year 2003 budget does not reflect a specific
    Administration position on extension of the COBRA fee, in either its
    existing or proposed form, beyond fiscal year 2003. The Administration
    will address this during the fiscal year 2004 budget cycle.
        Question. The Administration is proposing an increase to COBRA user
    fees to cover an estimated $250 million of homeland security needs.
    With the drop in collections and the sunset of COBRA at the end of
    fiscal year 2003, how do you envision the future and purpose of this
    user fee?
        Answer. The Administration plans to address the future of COBRA
    during the fiscal year 2004 budget cycle.
                                  ace funding
        Question. You have expressed interest in completing ACE--the
    Customs trade processing system--within a four year timeframe. The
    Subcommittee strongly supports ACE and we have added funds to previous
    budgets to keep the program on track. I am pleased that the
    Administration now also seems to be supportive of the program.
        How much is needed in additional funds in the next three years to
    accomplish this goal?
        Answer. Customs has performed an analysis of the benefits and risks
    of a 4 versus 5-year plan, and is discussing with the Department and
    OMB pursuing the 4-year ACE schedule (ending March 2006). We are
    currently formulating the funding requirements for the President's
    fiscal year 2004 Budget and the Modernization Executive Steering
    Committee is considering the assumptions upon which the 4-year funding
    requirements are based.
        Question. How much additional funding would be required in fiscal
    year 2003?
        Answer. None
        Question. Given the past experience with the IRS and its wasting of
    millions of dollars on its earlier, failed systems modernization
    program, are you concerned at all about moving too fast?
        Answer. Customs goal to complete ACE in 4-years (ending March 2006)
    is undergoing careful analysis. We believe that the benefits outweigh
    the risks. The members of the Modernization Executive Steering
    Committee (which includes representatives from the Treasury Department,
    OMB, GAO and the trade) considered this issue when briefed on April 24,
    2002. In the post-September 11 era, we are maintaining a determined yet
    measured approach to putting ACE capabilities to work on America's
    borders as soon as it is feasible.
        ACE, like every development program, has a set of inherent risks
    that are generally dictated by inter-related variables including
    technical complexity, schedule, cost, and impact to the organization,
    among others. The decision to proceed with a 4-year schedule is based
    on not only the risk analysis, but also tangible factors including
    benefits to Participating Government Agencies (PGA) that have yet to be
    quantified, positive impacts on national anti-terrorism and border
    security efforts, and the incremental development that will be
    undertaken by the Customs Modernization Office (CMO).
        The incremental development is extremely important as it provides
    tremendous management leverage to facilitate mid-course corrections, as
    necessary, throughout the development of ACE. This strategy will help
    ensure that ACE meets the goals of the Customs Service and PGAs in a
    manner that maximizes lifecycle benefit while remaining within planned
    acquisition cost.
        A more detailed risk analysis is being sent to Senators Dorgan and
    Campbell via separate correspondence.
                               forced child labor
        Question. Over the past three fiscal years, Customs received Forced
    Child Labor (FCL) funding for initiatives to combat the illegal
    importation of goods produced with forced or indentured child labor.
    With this funding, Customs opened overseas offices in Brazil and the
    Philippines. The State Department has also approved the establishment
    of an office in New Delhi. Approval is being sought for Dubai and
    another site in Africa. Staffing was also increased in Pretoria and
    Moscow and backfilled in Beijing. Three overseas symposia were offered
    in Thailand, Germany and Panama, as well as two in the U.S. There are
    32 open FCL investigations. Customs' focus to combat FCL is through (a)
    Foreign government training (b) International outreach and symposia and
    (c) International investigations at the source.
        How successful is this multi-tiered approach in addressing Forced
    Child Labor?
        Answer. The multi-tiered approach to addressing Forced Child Labor
    (FCL) has been successful in ensuring that the relevant foreign
    government entities, non-governmental organizations and U.S. Embassies
    are informed on the mission of the Customs Forced Child Labor program.
    In those offices where the FCL program has been established for at
    least two or more years, our officers have often been successful in
    gaining access to factories which export goods to the United States to
    determine if Forced Child Labor is used in the manufacture of goods.
    For example, the Customs Attache Office in Bangkok has had two FCL
    dedicated agents since 1999. After successfully establishing an
    international outreach program in their Area of Responsibility (AOR),
    the Bangkok office has now been able to conduct several factory visits
    in their AOR. In the last year they have visited 67 factories that
    export goods to the United States with no findings of forced child
    labor. Our offices in Panama and Uruguay have been able to accomplish
    similar access for site visits in some countries in their AOR as well.
        The multi-tiered outreach approach with foreign governmental
    entities has also been effective in enlisting the support of foreign
    governments in the FCL issue. For example, the Customs Attache Panama
    Office has been able to cultivate support from politicians in the
    Panamanian National Assembly and Ministry of Labor in tackling this
    issue in Panama.
        The success of tackling the issue of Forced Child Labor on a multi-
    layered front comes from the fact that this issue can only be addressed
    by focusing on all the entities that play a role in this issue from the
    relevant foreign ministries to Non-Governmental Organizations. Our
    overseas offices with FCL responsibilities have been vigorously
    utilizing this approach to this issue.
        Question. What more could you do, or do you intend to do
    internationally to address FCL?
        Answer. At the international level, the U.S. Customs Service plans
    on opening a Customs Attache Office in India in July 2002 to address
    FCL issues in South Asia. Customs is also seeking approval from the
    Department of State to establish a presence in Dubai, United Arab
    Emirates and Nairobi, Kenya to address FCL issues in the Middle East
    and East Africa respectively. Customs plans to add an additional
    Special Agent to address FCL issues in our current Customs Attache
    Offices in Moscow, Russia and Pretoria, South Africa. In addition, we
    are back-filling an existing Agent vacancy in Beijing, China to support
    the FCL program.
        Customs will also be providing formalized FCL enforcement training
    to foreign officials based on a training plan that has been devised to
    focus on how foreign governments can assist Customs in tackling Forced
    Child Labor. This training will further enhance the international
    outreach programs that have already been performed in those countries
    suspected of having FCL problems.
                                     ______

             Questions Submitted by Senator Ben Nighthorse Campbell

                              commissioner bonner
        Question. Mr. Bonner, as you are probably aware, the Senate
    Appropriations Committee has begun a series of hearings on homeland
    security. The first sessions were held last week, and included two
    witnesses who spoke about port security. Dr. Stephen E. Flynn of the
    Council on Foreign Relations in New York spoke about the need for
    security checks before shipment containers reach our shores. Admiral
    Richard Larrabee of the Port Authority of New York and New Jersey
    echoed that observation and spoke of Operation Safe Commerce as an
    example of a private-public partnership. It was interesting that none
    of the witnesses even mentioned the ongoing Customs efforts to pre-
    screen containers at the international mega-ports--the Container
    Security Initiative.
        Please tell us more about the Customs Container Security
    Initiative. Where are you concentrating your current efforts? Are U.S.
    port officials and others involved in port security aware of this
    initiative?
        Answer. The U.S. Customs Container Security Initiative (CSI), which
    I proposed in a January 17, 2002, speech given at the Center for
    Strategic and International Studies, will enhance the security of an
    indispensable, but vulnerable, link in the chain of global trade: the
    oceangoing sea container. Ensuring the security of the maritime trade
    system is essential, given that approximately 90 percent of the world's
    cargo moves by container.
        Each year, more than 16 million containers arrive in the United
    States by ship, truck, and rail. In 2001, U.S. Customs processed more
    than 214,000 vessels and 5.7 million sea containers. A proactive stance
    by Customs in screening sea containers before they reach the United
    States will significantly contribute to the agency's overall efforts to
    secure the borders against dangers that might be introduced through
    commercial traffic.
        The Container Security Initiative consists of four core elements.
    These are: (1) establishing security criteria to identify high-risk
    containers; (2) pre-screening those containers identified as high-risk
    before they arrive at U.S. ports; (3) using technology to quickly pre-
    screen high-risk containers; and (4) developing and using smart and
    secure containers. The fundamental objective of the CSI is first to
    engage the ports that send highest volumes of container traffic into
    the United States, as well as the governments in these locations, in a
    way that will facilitate detection of potential problems at their
    earliest possible opportunity.
        As a first step, U.S. Customs has identified the top 20 ``mega-
    ports'' that send containers to the United States, and has entered into
    discussions with the governments in these locations to solicit their
    participation in the CSI. These locations were identified based on
    their volume of sea container traffic destined for the U.S.; however,
    the CSI program will not be restricted to only these locations. Risk
    assessments and trade analysis play an important part in future
    deployments, and increased security measures are vital to the
    operations of any port in today's environment.
        U.S. Customs has undertaken an extensive outreach program to bring
    CSI to the public's attention. Briefings have been provided to numerous
    groups including the trade, Congressional offices, other government
    agencies, the press, and associations such as the American Association
    of Port Authorities which I addressed on March 19, 2002.
        TOP TWENTY MEGA-PORTS: Hong Kong; Antwerp; Shanghai; Nagoya;
    Singapore; LaHavre; Kaohsiung; Hamburg; Rotterdam; La Spezia; Pusan;
    Felixstowe; Bremerhaven; Algeciras; Tokyo; Kobe; Genoa; Yokohama;
    Yantian and Laem Chabang.
        Mr. Bonner, there has been some discussion at the Customs Service
    and throughout the trade industry about escalating the development of
    the Automated Commercial Environment or ACE project. As you know, we
    have some concerns about the added risks inherent in this idea,
    especially considering that the General Accounting Office has
    consistently identified agency management control weaknesses, which
    have not yet been fully addressed.
        Question. What is the status of a decision to reduce the ACE
    project schedule from 5 to 4 years? What steps have been or will be
    taken to address the management control weaknesses cited by GAO?
        Answer. Based on an analysis of the benefits and risks of a 4
    versus 5-year plan, Customs is discussing with the Department and OMB
    pursuing the 4-year schedule (ending March 2006). This issue was
    considered by the members of the Modernization Executive Steering
    Committee when briefed on April 24. Customs has taken, and will
    continue to take, prudent steps to address the risks associated with
    the Modernization Program. This includes actions to address concerns of
    the Committee and useful recommendations provided by the General
    Accounting Office (GAO). A more detailed response of actions taken is
    being sent to you and Senator Dorgan via separate correspondence. Key
    actions are highlighted below:
      --Tasked e-Customs Partnership (e-CP) to update and extend the
            existing enterprise architecture to provide the requisite
            design content, consistency, and integration across the full
            scope of the Customs business areas. Enterprise architecture
            certification is scheduled for June 2002.
      --Developed a new, expanded organizational structure that doubles the
            size of the Customs Modernization Office (CMO). Positions are
            being filled now.
      --Completed 75 percent of the software acquisition controls that span
            the Software Engineering Institute's entire Software
            Acquisition Capability Maturity Model (CMM).
      --Continued to focus first on the most critical plans, processes and
            procedures across all CMM Key Process Areas.
      --Employed the use of both an independent government cost estimator
            and software tools that enable reliable cost estimation
            process.
      --Identified the inherent risks of the 4-year approach, analyzed the
            potential impacts, and briefed the Modernization Executive
            Steering Committee.
      --Employed risk management procedures that conform to Software
            Engineering Institute standards to mitigate program risks.
        I am told that a Customs COBRA fee advisory committee was created
    in 1999 to advise the Customs Commissioner on issues related to the
    performance of the inspectional services of the Customs Service. The
    membership is to include representatives from airline, cruise ship, and
    other transportation industries who may be subject to COBRA fees. The
    meetings are intended to be a forum for discussions about the proper
    number and deployment of inspectors, the level of fees, and the
    appropriateness of any proposed fees. Mr. Bonner, the fiscal year 2003
    budget request again includes a proposal to increase the COBRA fees for
    airline and cruise vessel passengers. This proposal has landed with the
    same resounding thud as earlier efforts by the previous Administration,
    in part because the travel industry does not believe it is necessary.
        Question. Why hasn't the Customs COBRA Fee Advisory Committee been
    actually established? After all, if you can convince the industry
    committee members that an increase is warranted, even a modest
    inflationary increase, the battle has been won.
        Answer. By enactment of the Miscellaneous Trade and Technical
    Corrections Act of 1999, (Public Law 106-36), section 13031 of the
    Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 (19
    U.S.C. 58c) was amended to direct the Commissioner of Customs to
    establish an advisory committee whose membership shall consist of
    representatives from the airline, cruise ship, and other transportation
    industries who may be subject to fees under 19 U.S.C. 58c. The Customs
    Service has published three separate Federal Register Notices
    soliciting applications for this committee. The first two Federal
    Register Notices only produced applicants from four of the seven
    eligible COBRA user fee sectors. After publication of the third Notice,
    five applicants were tentatively selected.
        Notification letters to the selectees will be mailed by the first
    week in May 2002.
        Along those lines, the fiscal year 2003 budget request assumes the
    increase in these fees to the tune of almost $250 million which would
    be used to augment funds appropriated by Congress for operations of the
    Customs Service. Let us assume for a moment that Congress refuses to
    increase those COBRA fees, which is not a stretch of the imagination,
    and that we do not have sufficient funds to simply appropriate that
    amount.
        Question. What steps will you be forced to take if your operating
    budget is, in effect, reduced by $250 million?
        Answer. We expect the fee increase to be enacted because it is
    essential to the successful accomplishment of Customs overall mission.
    The Administration would work with this Committee to fashion acceptable
    trade-offs among all the domestic spending priorities in order to
    accommodate Customs' requirements if the fee increase were not enacted.
        Mr. Bonner, every Federal agency faces normal attrition, either by
    retirements or resignations, and those positions must be refilled. In
    the case of the Customs Service, this recruitment effort is further
    complicated by the need to fill additional positions authorized and
    funded by Congress. I am told that you hope to hire 1,244 Inspectors
    and 731 Special Agents this year, and your fiscal year 2003 request
    contains funding for even more positions next year. While I completely
    understand the need for more Inspectors and Special Agents, this is a
    huge recruitment undertaking.
        Question. What is the status of your fiscal year 2002 hiring plan?
    How many applications are currently in the pipeline? Most importantly,
    how do you compete with other Federal law enforcement agencies,
    including the Transportation Security Administration, for the small
    pool of qualified potential employees?
        Answer. We are making excellent progress in hiring against our
    fiscal year 2002 hiring plan. We have filled 57 percent of our
    positions and expect to meet all of our hiring objectives.

            Hiring                                          Customs Officers
    Hiring Plan (includes projected attrition)........................ 1,955
    Hired to Date.....................................................   854
    Cleared Pre-Employment & Scheduled for Training...................   269
    Remaining to be Hired.............................................   832

        We currently have an applicant pipeline of 3,000 Inspectors and
    1,000 Agents who are pending pre-employment (medical, drug screening,
    and background investigation). They will fill our remaining positions
    for this year and be available for fiscal year 2003 hiring needs.
        However, there has been a recent increase in the number of Customs
    employees who have transferred to the Transportation Security
    Administration (TSA). Seventy employees already have transferred to TSA
    this fiscal year. TSA offers a higher career ladder (GS-13 vs. GS-9 for
    Inspectors) and law enforcement retirement (wanted by most Inspectors).
    If losses continue at this rate, this will be the first time we have
    had problems in retaining Inspectors. (Our normal attrition rate for
    inspectors is 4 percent--half of which are retirements.)

                              SUBCOMMITTEE RECESS

        Mr. Bonner. Thank you, Mr. Chairman.
        Senator Dorgan. This hearing is recessed.
        [Whereupon, at 3:40 p.m., Thursday, April 18, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      TREASURY AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL YEAR 2003

                                  ----------

                           WEDNESDAY, APRIL 24, 2002

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 1:35 p.m., in room SD-192, Dirksen
    Senate Office Building, Hon. Byron L. Dorgan (chairman)
    presiding.
        Present: Senators Dorgan, Reed, Campbell, and DeWine.

                       EXECUTIVE OFFICE OF THE PRESIDENT

                     Office of National Drug Control Policy

    STATEMENT OF JOHN P. WALTERS, DIRECTOR
    ACCOMPANIED BY MICHELE C. MARX, DIRECTOR, FINANCIAL MANAGEMENT

                                OPENING REMARKS

        Senator Dorgan. I call the hearing to order. This is the
    Subcommittee on Treasury and General Government Appropriations
    here in the Senate, and good afternoon, Mr. Director. We are
    pleased that you are here.
        This is the first time that you have testified before our
    subcommittee. Myself and Senator Campbell and a couple of other
    colleagues who will be joining us welcome you.
        The purpose of this hearing is to discuss the fiscal year
    2003 budget request for the Office of National Drug Control
    Policy and to discuss your agency's jurisdiction over our
    national drug control programs. I look forward to working with
    you and supporting the necessary programs that will have the
    greatest effect on our Nation to deter the use, promotion,
    production, and the importation of drugs. And I know that my
    colleagues on the subcommittee share that view.
        I want to make a couple of observations as we begin. I will
    not make a lengthy statement here, but I will put a statement
    in the record.
        I support and am interested in interdiction efforts,
    interdiction efforts that are successful and help us interdict
    the supply of drugs that come in. But I am also very concerned
    about and very supportive of efforts to provide drug treatment
    that is essential for those who are addicted to drugs. Those
    who are addicted to drugs will find a supply somewhere at some
    price, and they will find a way to pay for it, if necessary
    through a life of crime.
        Regrettably, our country has spent much more energy and
    effort to interdict than it has providing treatment. We ought
    to start, just as a starting point, with everybody who is
    incarcerated. Those in law enforcement tell me that there are
    two functions with respect to incarceration. You take a look at
    guns and drugs, and you will find an attachment to most people
    who are put behind bars to either guns or drugs. And especially
    with respect to drugs, we have the capability for those that we
    have incarcerated to treat them and allow them to leave
    incarceration free of the drug addiction. Turning someone back
    on to the streets with an addiction to drugs turns them back to
    a life of crime.
        It is almost unforgivable, in my judgment, for someone to
    be addicted to drugs in our country and not able to find a slot
    in a treatment center with which they can get treated. And that
    exists around this country today, and we have people walking
    America's streets and having this terrible addiction and unable
    to find access to get treatment for it. So we must, even as we
    talk about all these other issues, which I support, we must pay
    much, much more attention to drug treatment than we have paid
    in the past, and we ought to start especially with those that
    we are incarcerating because we have the capability to address
    all of those issues at the Federal, State, and local level.
        I also want to mention that we have embarked on this
    experiment of spending hundreds of millions of dollars on
    television commercials to try especially to convince America's
    youth not to take drugs. And we want to spend a lot of time
    analyzing the effects of that. Has it been successful or hasn't
    it?
        We know that television advertising can have a profound
    impact on behavior. We know that. Everyone knows that. That is
    why people pay a massive amount of money to put a 30-second ad
    on during the Super Bowl, for example. They know it has an
    impact.
        Does it have an impact, can it have an impact, has it had
    an impact with respect to convincing young people that they
    ought not experiment with drugs?
        I think the jury is still out on that. I think that we have
    had some analysis that is encouraging, some that it really
    doesn't give us much of a road map here on what has happened.
    So I want to visit with you about that as well.
        But the media campaign, the National Youth Media Campaign
    has been something that I have supported, Senator Campbell has
    supported, but let's take a hard look at what we are getting
    for that and exactly how we continue it, if we continue it. I
    know the authorizers are taking a look at that as well at this
    point.
        But we welcome you here. I know you have assumed this role
    with an attitude of wanting to provide great public service and
    having an impact on what is happening with respect to drugs in
    our country. And we pledge to you that we want to help you in
    that mission. Our job as appropriators is to use the public's
    money wisely. We have limited money and unlimited wants, and
    our job is to economize in a way that provides the best
    investment possible for the American taxpayer.

                               PREPARED STATEMENT

        Investing in your agency is one part of that, and we want
    to do it in the most effective way possible as well. So we will
    need your guidance and help in order to accomplish that. Thank
    you for being here.
        [The statement follows:]

                 Prepared Statement of Senator Byron L. Dorgan

        Good Afternoon, Mr. Director. This is your first time testifying
    before our subcommittee, and we welcome you here today. The purpose of
    this hearing is to discuss the fiscal year 2003 budget request for the
    Office of National Drug Control Policy and to discuss your agency's
    jurisdiction over our national drug control programs. I look forward to
    working with you on supporting the necessary programs that will have
    the greatest affect on our nation to deter the use, promotion,
    production, and importation of drugs.
        As you know from our meeting prior to your confirmation, I believe
    the issue of drug treatment is critically important. In December 2001,
    I wrote a letter to Acting Director Jurith on how much weight should be
    given to drug treatment issues in developing this Administration's
    first National Drug Control Strategy. Drug treatment is a necessary and
    vital component of our drug control strategy yet in recent years, the
    lack of facilities and options have left people who need treatment out
    in the cold. I was encouraged to see the commitment of both your agency
    and the Administration to this effort in the National Drug Control
    Strategy that was released in February.
        We must not lose sight that this is a long term investment and
    commitment which we are making to close the gap on drug treatment. The
    $224.2 million increase for substance abuse programs provided in the
    fiscal year 2003 budget request is a step in the right direction. I
    agree with many of your insights and ideas detailed in the National
    Drug Control Strategy and will continue to be supportive of any effort
    to increase drug treatment programs.
        A crucial component of drug treatment resides within our criminal
    populations. This sector of the population should be one on which we
    have the most effect with regard to substance use. I commend the Bureau
    of Prisons for continuing its efforts to serve as a model system for
    many states and localities and for frequently modifying their ideas on
    how to tackle this growing problem. I am concerned that the $7 million
    increase to the Residential Substance Abuse Treatment Program (RSAT)
    under the Department of Justice is not nearly enough to begin this
    effort on a state level. As I stated in my letter, ``The National Drug
    Control Strategy should include a comprehensive budget and plan to
    test, treat, and monitor every person within the criminal justice
    system. This plan should incorporate Federal, State, and local prison
    systems.'' I am hopeful that in your capacity as Director of the Office
    of National Drug Control Policy, you will increase funding
    substantially for these programs and expand existing pilot projects in
    next year's budget submission.
        Another area I would like to focus on is the National Youth Media
    Campaign. I understand that efforts are underway to reauthorize the
    campaign. My staff has been working with the Senate Judiciary
    Committee, representing the views of the appropriations Subcommittee
    responsible for funding the campaign. As you know, there continues to
    be enormous scrutiny over the Campaign, and with good reason. I look
    forward to viewing some of the new commercials you brought with you
    today and I understand that we will have an opportunity to see the
    commercials specifically tailored to targeting the use of ecstasy by
    our youth. This was something I felt very strongly about in the fiscal
    year 2002 budget process and I remain concerned about the increased use
    of this and similar club drugs.
        Given the strain on our budget, it will be a difficult year for our
    appropriations bill. In the past, it has always been difficult to
    provide sufficient funding for the media campaign and this year will be
    no different. To that extent, you have an obligation to spend this
    money wisely and prove to this Subcommittee and to the American public
    that this investment is worthwhile. When you aired commercials linking
    terrorism to drug use during the Super bowl and the Olympics, two of
    the highest premium commercial air times, many people were concerned
    about the decision. I am hopeful that you can provide this Subcommittee
    with data on why you chose to spend media campaign on these spots and
    evidence of the impact/effect of those advertisements.
        Finally, in the fiscal year 2002 budget submission, the
    Administration proposed the creation of the Parents for a Drug Free
    Future Program. ONDCP requested $5 million for this program, but never
    provided my staff with sufficient information on how you planned to
    spend the money. There may have been good intentions behind the concept
    of this program, but I remain concerned when the Administration
    requests funds for a program without providing a detailed plan to
    Congress on allocating the funds. This was precisely the reason that
    Congress chose not to fund this program. Not surprisingly, the
    Administration is requesting this program during fiscal year 2003
    through the Corporation for National and Community Service. This agency
    falls under the jurisdiction of another subcommittee; however, my staff
    informs me that they are having similar issues with getting more
    information on the proposal. It concerns me greatly that there seems to
    be no change in the Administration's practices, and even greater
    concern that they have tried to circumvent this Subcommittee.
        We welcome you here this afternoon and look forward to your
    testimony. But first, let me turn to my Ranking Member, Senator
    Campbell, for any remarks he wishes to make.

        Senator Dorgan. Now let me call on the ranking member,
    Senator Campbell.

                  STATEMENT OF SENATOR BEN NIGHTHORSE CAMPBELL

        Senator Campbell. Thank you, Mr. Chairman. Just a short
    statement. I will include my prepared statement in the record.
        I agree totally with the chairman. I think we have made
    some really big mistakes on our so-called war on crime, and
    maybe that is our fault as elected officials. We put so much
    emphasis on incarceration. I guess it helps you get elected if
    you talk tough on crime and talk to everybody about how you are
    going to put the bad guys away and make them break rocks
    forever and that kind of thing. But it is very foolish on our
    part because we don't put enough resources towards either
    education or trying to recover people that could be recovered.
        Years ago, I was a volunteer police counselor in Folsom
    Prison and talked to a number of people, and I was absolutely
    convinced, after I came out of that experience, that if you
    don't do something about rehabilitation--and we don't--you just
    end up with a larger and larger and larger turnover of the same
    prisoners. I believe we have something like a 72 percent now of
    repeat offender, and an awful lot of them have something to do
    with alcohol or drugs. So I absolutely agree with the chairman
    that we are not putting enough emphasis towards parts of the
    war on crime and too much maybe on the other.
        We have done an awful lot from the standpoint of education
    with the ONDCP, and I have to tell you that--you haven't been
    with us in past years, but we have gotten some really
    questionable results. I believe we spent something like $930
    million in the last 5 years on a national ad campaign to get
    youngsters away from drugs. And the result is not encouraging
    to me. In addition to that, how the money was spent bothered
    both the chairman and me. When I was the chairman and he was
    ranking, we felt we were completely left out of the loop on how
    the millions and millions of dollars were spent in the face of
    what we had sort of agreed to years ago when Senator Kohl and I
    were on the committee. And we were worried at that time that if
    we provided all that Federal money without some very, very
    careful oversight, it would become sort of a cash cow for all
    of the television stations, all of the networks, and magazines
    as well.
        In some respects I think it did, we began to see them trade
    time for money rather than actually take the ads out, which was
    what the ad campaign was originally designed for. So I have
    some questions about that, too.
        I think these other programs are just doing terrific. I
    followed HIDTA very carefully and the growth of HIDTA, and I
    visit the HIDTA outlets in different cities, in Denver and some
    of the other ones. And as near as I can tell, that coordinating
    effect it had with local, State, and Federal law enforcement
    agencies has really done a lot of good.

                               PREPARED STATEMENT

        Another program that I am just a big supporter of is the
    Counterdrug Technology Assessment Center, CTAC. I have been to
    three, I guess, seminars where the Federal agents demonstrated
    the kinds of things local police departments who do not have
    the operation money or the research money or the development
    money to build the different kinds of highly skilled apparatus
    that the Federal Government already has. I have seen how much
    that can help the local communities when they get them. And I
    think we have transferred around, oh, I don't know, 3,000 or
    3,500 pieces of equipment to local police departments through
    that program. I think it is just a terrific program.
        So, in any event, thank you for calling this hearing, Mr.
    Chairman, and I look forward to asking a few questions as we
    have the time.
        [The statement follows:]

             Prepared Statement of Senator Ben Nighthorse Campbell

        Thank you, Mr. Chairman. I am looking forward to this afternoon's
    hearing. I know that our witness has time constraints, so I will keep
    this short.
        The Office of National Drug Control Policy was created to oversee
    and coordinate this Ntion's efforts to reduce illegal drug use. There
    have been both successful and not-so-successful periods during the past
    13 years of ONDCP'S Existence. It is my hope that fiscal year 2003 will
    be a successful year.
        This subcommittee provides funding to ONDCP through four separate
    accounts:
      --Salaries and expenses.--Which funds the oversight and coordination
            function.
      --Counterdrug technology assessment center.--Which provides needed
            technology to State and local Law Enforcement agencies.
      --High intensity Drug Trafficking areas.--Which are designed to
            reduce Drug trafficking in specified high-risk areas.
      --And the special forfeiture fund.--Which, among other things, funds
            the anti-drug national media campaignthis year we have been
            asked to.
        Provide a total of $523,588,000 for these accounts, over $457
    million of which would go to the HIDTA program and the anti-drug
    campaign.
        That is a lot of money. It is our job to make sure that we provide
    the funds required for these necessary programs without crossing the
    line to wasting taxpayers' money. And, Director Walters, it is your job
    to make sure we have the information necessary to make difficult
    funding decisions

                               PREPARED STATEMENT

        Senator Dorgan. Thank you, Senator Campbell.
        Senator DeWine, do you have a statement?
        Senator DeWine. No opening statement. I will actually have
    an opening statement submitted for the record.
        Senator Dorgan. All right.
        [The statement follows:]

                   Prepared Statement of Senator Mike DeWine

        Good afternoon. Thank you, John, for taking the time to talk to us
    about the national drug control budget and your efforts to stop drug
    use, heal America's drug users, and reduce drug demand.
        I know you are well aware of how seriously I take the drug problem
    and how committed I am to helping America fight against illegal drug
    use. The illicit drug trade is all-pervasive, threatening our children
    here at home and bolstering terrorist groups abroad. That is why, as I
    have said repeatedly in the past, to combat illicit drugs in this
    country, we need a balanced, comprehensive anti-drug strategy.
        The first step in this balanced strategy is achieved by eradicating
    drugs at their source. In doing this, we can take an important step
    toward reducing domestic supply and demand. Right here in our own
    hemisphere, the Revolutionary Armed Forces of Colombia, or FARC,
    receives $300 million a year from drug sales. And, Colombia's right-
    wing paramilitaries get 40-70 percent of their income from the illegal
    drug trade. These groups use drug profits to carry out murder,
    kidnappings, and extortion on a routine, if not daily, basis. Since
    1990, 73 Americans have been taken hostage in Colombia. Since 1995, 12
    have been murdered.
        I look forward to working with you to help solve these problems--to
    help stop the flow of drugs at their source, well before they can ever
    reach our streets. I am pleased to see that your budget includes $731
    million for Plan Colombia and the Andean Counterdrug Initiative.
    Funding for this effort will help achieve our mutual objectives of
    strengthening democracy, eliminating drug trafficking, and enforcing
    the rule of law.
        I read your op-ed supporting renewal of the Andean Trade Preference
    Act (ATPA). I completely agree with your assertions that letting the
    ATPA lapse threatens our regional security, and that our goal should be
    to create an environment in which legitimate industry can thrive. For
    us to be reliable partners with the countries of the Andean Region, we
    must pass this critical piece of legislation as soon as possible.
        As I said already, the drug war has many fronts and we must take
    special care to address our problems here at home. We all know that
    prevention, education, and treatment programs help reduce drug demand.
    Your Drug Control Strategy supports these initiatives and indicates a
    commitment to achieving a sustained reduction in drug use in the United
    States. I support your efforts to focus on programs that work and to
    set new goals--a 10 percent reduction in current drug use over 2 years
    and a 25 percent reduction over 5 years. The President's support has
    been encouraging, and the budget includes the resources necessary to
    achieve these goals. I look forward to hearing more about it today.
        I am particularly pleased to see the $644 million in funding for
    the Safe and Drug-Free Schools Program. Over the years, Senator Dodd
    and I have fought to continue and improve this vital program, which
    provides funds to over 97 percent of our school districts nationwide to
    keep schools safe and drug-free. I also support your request for $9.4
    million in additional funding for the Drug-Free Communities Program.
    This program works hand-in-hand with the Drug-Free Schools Program and
    requires schools to implement proven, science-based prevention programs
    to reduce and prevent drug and alcohol use. Your leadership and
    coordination will be pivotal to the success of these two programs.
    Already, you have taken a leadership role in your new media campaign
    focusing on where the money spent on drugs actually goes--to
    terrorists, for example. It is imperative that we educate our children
    and the public about the evils and dangers of drug use. You have taken
    a very positive step with this new media campaign, and your website is
    fantastic. You are doing some very good work.
        Thank you again for being here today. I look forward to hearing
    your testimony.

        Senator Dorgan. Mr Director, thank you very much for being
    with us. We will include your entire statement as a part of the
    permanent record, and we will ask you to summarize. Since this
    hearing was scheduled, Secretary Powell has scheduled a
    briefing for members of the Senate, so we will perhaps be
    somewhat shorter in this hearing than we would otherwise. But
    we want to have a good discussion with you about your agency
    and the direction it is taking, and so why don't you proceed to
    summarize your testimony. Your entire testimony will be made a
    part of the permanent record.

                          STATEMENT OF JOHN P. WALTERS

        Mr. Walters. Thank you, Mr. Chairman, Ranking Member
    Campbell, and Senator DeWine. I am pleased to be here. I
    appreciate the opportunity to talk about our fiscal year 2003
    budget and to review some of the programs with you. I look
    forward to continuing to work with each of you. I had an
    opportunity prior to taking office during the confirmation
    process to visit with you briefly, and I appreciate the time
    you gave me at that point. As I am still in the beginning of my
    term of office as director, I look forward to continuing those
    discussions, here and afterwards.
        I am joined by Michele Marx, who is our Director of
    Financial Management, to help with any questions you have that
    may not be answerable by me at this point. So I will call on
    her, if you do not mind.
        Just to summarize the high points and then to follow the
    issues that you want to pursue, we are requesting a total of
    $523.1 million in the four accounts that make up the budget of
    the Office of National Drug Control Policy. In Salaries and
    Expenses, we are requesting $25.5 million to support 116 FTE
    and 30 nonreimbursable detailees, as well as some conference
    activity, the clearinghouse that we are responsible for, and
    some policy research.
        As you know, the President's request is part of the
    consolidated appropriation request for the Executive Office of
    the President. We have broken this out to help the Committee in
    doing its work.
        Let me just summarize the highlights of----
        Senator Dorgan. I just would point out, as you know, the
    committee has not supported the consolidated budget, and we
    intend not to. I can't speak for the entire committee, but I
    expect that the committee will again intend not to do that this
    year. So we appreciate your breaking it out, and we will break
    it out even further for you in the future.
        Mr. Walters. I understand.

                    COUNTERDRUG TECHNOLOGY ASSESSMENT CENTER

        Let me start with the Counterdrug Technology Assessment
    Center. We are requesting $40 million for the research and
    development part of that effort and the Technology Transfer
    Program. This supports, as you know, both demand and supply
    reduction activities. Demand reduction activities, for example,
    include neuro-imaging technology, medical instrumentation at
    medical research institutions, and in this current fiscal year,
    $2 million to begin a brain-imaging system at the University of
    North Dakota.
        Supply reduction activities include improving non-intrusive
    inspection technologies, strengthening law enforcement
    capabilities in such things as wireless communications-
    interoperability, such as the Test Bed Project at Lakewood,
    Colorado.
        Since fiscal year 1998, the Technology Transfer Program has
    delivered a total of 4,750 pieces of equipment to over 3,800
    State and local law enforcement agencies. We agree this is a
    good use of the Federal Government's ability to translate
    technology into usable devices and make them available to local
    and State officials who can use them. They sometimes are hard-
    pressed and find these items very valuable.

                    NATIONAL YOUTH ANTI-DRUG MEDIA CAMPAIGN

        The second area I would like to talk about that you
    referred to is the National Youth Anti-Drug Media Campaign. We
    are requesting $180 million to allow the Campaign to continue
    the national multimedia paid advertisement campaign to its two
    target audiences: parents and adults who influence young
    people, and young people themselves.
        During the past year, the Campaign, according to the
    research we have, reached 90 percent of America's youth at
    least four times a week. Ninety percent of youth and parents
    recall seeing or hearing anti-drug ads at least once per week.
        The last evaluation report released in October, 2001
    provided data collected from the first three collection periods
    or waves. It was retrospective to the first half of last year.
    We are beginning to see some changes in attitudes among youth,
    and we saw some decline in past-month use since the Campaign's
    start in the target age group of 12- and 13-year-olds. For
    example, past-month marijuana use among 12- and 13-year-olds
    decreased from 1.8 percent to 0.7 percent between the beginning
    and the third period of evaluation.
        The next evaluation report, which is crucial because it
    covers the full implementation of the whole program for the
    first time and addresses the last half of 2001, is due next
    month. So we are weeks away from that report, which we will, of
    course, share with you as soon as we get it.
        The pro-bono match component of this program has been
    successful. From January 1998 through September 2002, total
    value is projected to reach $659 million. The Campaign has also
    been pursuing actively corporate involvement in the plan, and
    my written statement includes a list of some of the
    corporations that have been quite forward-leaning in their
    assistance to the Campaign in a variety of areas.
        In response to the terrorist attacks of last September, the
    Campaign mobilized to educate the public on what has long been
    recognized as the link between terror and funding from
    trafficking in drugs. We did the most extensive process of
    focus-group testing for what became the final ads that have now
    been aired, beginning with release during the Super Bowl, and
    found them to be some of the most powerful ever tested in both
    their affect on young people, young adults, and parents, in
    both encouraging parents to talk to young people, but also in
    discouraging--or creating attitudes that would discourage
    tendencies to use drugs.
        We will have the results of that part of the Campaign in
    the evaluation report that will be due, for the first half of
    this year, in the fall of this year.
        Also, as you know, our multicultural and subcultural and
    language parts, especially foreign language, or language
    adaptations of the Campaign are delivered to target audiences.
    $38 million worth of drug prevention messages have gone in this
    venue annually. The Campaign has just completed the
    Government's first Native American anti-drug TV ads along with
    a print complement and will be launched in the next several
    weeks in targeted markets.
        Pursuant to the report language for fiscal year 2002, the
    Campaign is allocating $5 million for Ecstasy advertising
    directed toward youth, which will appear on youth-oriented
    network programs. With your permission, I have two examples of
    these two ads that are only 30 seconds, I promise. I know
    everybody loves their own videotapes, but since this is an
    expensive program and I know you are concerned, I thought you
    might want to see the ones that are about to be released in the
    two areas you are interested.
        Mr. Walters. We are committed to reauthorizing the Media
    Campaign and will be sending language that we are working to
    get both bipartisan and bicameral support for to Congress and
    have its introduction shortly.
        Let me just mention a couple of the other programs that I
    know you have been interested in and that make up our request.

                   THE DRUG-FREE COMMUNITIES SUPPORT PROGRAM

        The Drug-Free Communities Support Program, we are
    requesting $60 million to expand the program. It now supports
    463 communities in 50 States. We have also tried to expand this
    program to all communities. Approximately 25 grants have been
    awarded to communities with predominantly Native American and
    Alaskan populations. Reauthorization of this program included
    the creation of a National Coalition Institute to provide
    scientific and technical support to the coalitions. The
    Institute will help local coalitions measure outcomes in their
    work and improve overall performance.

                              ANTI-DOPING EFFORTS

        The United States Anti-Doping Agency and the World Anti-
    Doping Agency have requested $1 million to support research and
    administrative initiatives, educational programs, and efforts
    to inform athletes of the rules governing the use of
    performance-enhancing substances, and $800,000 to pay U.S. dues
    for the World Anti-Doping Agency that coordinates efforts in
    sports and with intergovernmental organizations, public
    authorities, and athletes, respectfully.

                 COUNTERDRUG INTELLIGENCE EXECUTIVE SECRETARIES

        Our Counterdrug Intelligence Executive Secretariat is
    requesting $6 million to support approximately 30 reimbursable
    detailees to continue improving intelligence architecture. The
    ONDCP is completing an overall review as a part of the review
    directed by the President of all counterdrug programs, and we
    are working with the Counterdrug Intelligence Executive
    Secretariat to both complete and hopefully implement the
    results of that review.

                         NATIONAL DRUG COURT INITIATIVE

        For the National Drug Court Institute, we have requested $1
    million to continue expanding the Drug Court Training Program,
    to convene special advisory groups to develop criteria for new
    disciplines, and to develop a national community probation
    initiative and expand the Institute's research library
    resources.

                        PERFORMANCE MEASURES DEVELOPMENT

        In the area of performance measures development, we are
    requesting $2 million to develop and implement data sources for
    performance measurement and management. ONDCP is committed to
    management by results. We have started at the top. The National
    Drug Control Strategy released by the President in February
    sets the goal for this Nation of reducing drug use amoung
    teenagers and adults by 10 percent in 2 years and by 25 percent
    in 5 years. The President, I believe, took the bold step of
    making his administration politically accountable in the period
    with bold and aggressive, but I think achievable goals. We
    intend to build that into all other program structures using
    ourselves as an example.

                  NATIONAL ALLIANCE FOR MODEL STATE DRUG LAWS

        For the National Alliance for Model State Drug Laws, we
    have requested $500,000 to enable the alliance to encourage
    States to implement laws, policies, and regulations that will
    help reduce drug use.

                     HIGH INTENSITY DRUG TRAFFICKING AREAS

        For the HIDTA program, we have requested $206,350,000 to
    enable the HIDTAs to coordinate efforts to reduce the
    production, manufacture, distribution, and transport of drugs
    and to assist in money-laundering investigations.
        We are requesting $2.1 million of the total to continue
    auditing services and implement data collection systems. ONDCP
    is conducting a review to ensure that HIDTAs are targeted and
    results driven. In regard to the $20 million that Congress
    added to the Administration's request for fiscal year 2001 in
    discretionary funds, we plan to transfer $5 million to the
    Department of Defense for National Guard counterdrugs efforts
    that are supported largely by many in the field. This is a high
    priority to maintain current operational levels and will not
    affect current funding for existing HIDTAs. ONDCP will allocate
    the remaining $15 million based on program priorities,
    including intelligence operations, information technology,
    infrastructure, training, money-laundering initiatives, and
    communications interoperability.

                          FEDERAL DRUG CONTROL BUDGET

        Finally, I will just mention what is in the National Drug
    Control Strategy. We announced our intention to begin the
    discussion with the goal of next year reorganizing the way in
    which we present the drug control budget. I was in Government
    before working on this issue all the way back in the Reagan
    administration. I know that for very good reasons the budget
    has tried to be a measure of what the drug problem costs the
    Federal Government, the many things that various programs have
    as expenses, as well as those that are targeted on supply and
    demand.
        What has happened in that time, though, is we have
    accumulated many programs in this budget that we do not manage,
    and we would like to focus our resources on the programs that
    are directly targeted on reducing supply and demand. So we have
    a proposal there, a preliminary proposal, to focus the arraying
    and presentation of the budget on real programs that cross-walk
    directly with the President's Budget and will for the first
    time allow us to use results-based evaluations to drive money
    to programs that work, not only within supply and demand
    categories, but across supply and demand categories.

                               PREPARED STATEMENT

        I know many of us have talked about shifting money to
    programs of higher priority. This would be the first time that
    this office would actually have the structural ability to do
    that in an effective and concrete way. I have worked closely
    with Director Daniels, and we intend to try to employ this this
    time around in the budget process. But we announced it ahead of
    time so that we could have conversations with yourselves,
    people in the agencies, and others as we implement this
    program.
        That is my summary of ONDCP's fiscal year 2003 budget
    request. I would be happy to answer questions about specifics.
        [The statement follows:]

                     Prepared Statement of John P. Walters

                                  introduction
        Chairman Dorgan, Ranking Member Campbell, and distinguished members
    of the Subcommittee: I am pleased to appear before you today to discuss
    the fiscal year 2003 budget request for the Office of National Drug
    Control Policy (ONDCP). I want to thank the Subcommittee for its strong
    bipartisan commitment to our shared national goal of reducing drug use
    in America, especially among our youth. This Subcommittee provides
    critical funding to support ONDCP's programmatic, policy, and budget
    development functions.
        Your support of ONDCP's $523.1 million budget request permits ONDCP
    to continue fulfilling our unique dual mission of serving as the
    President's primary Executive Branch support for counter-drug policy
    and program oversight while simultaneously managing our own diverse
    programmatic responsibilities to achieve measurable results. ONDCP
    takes seriously its primary statutory charge to develop national drug
    control policy and a supporting budget; coordinate and oversee the
    implementation of that policy and budget; and evaluate drug control
    programs to ensure that our efforts are coordinated and focused on
    obtaining measurable results. In addition to our policy role, ONDCP has
    become increasingly responsible for managing and evaluating four key
    programs: the National Youth Anti-Drug Media Campaign, the Drug-Free
    Communities Program, the High Intensity Drug Trafficking Areas Program
    (HIDTA), and the Counterdrug Technology Assessment Center (CTAC).
        In addition to setting forth ONDCP's fiscal year 2003 Budget
    Request, this statement includes brief updates on the President's
    National Drug Control Strategy, the consolidated fiscal year 2003
    national drug control budget request, and current drug use trends.
                 the president's national drug control strategy
        As you know, developing an effective and comprehensive drug control
    strategy and supporting budget is a complex challenge. I am confident,
    however, that our nation is prepared to meet this challenge. Upon
    assuming the office of Director of National Drug Control Policy last
    December, I began conducting an in-depth review of existing policies
    and program priorities. The first phase of that review culminated in
    the National Drug Control Strategy released by President Bush on
    February 12. At this release, the President reiterated his commitment
    to combat drug use and emphatically stated that reducing drug use is at
    the center of our national agenda. I welcome the subcommittee's
    involvement as we continue to review our approach and will continue to
    ask for your guidance as we implement policies and programs to make our
    nation a safer and healthier place in which to live and to raise our
    families.
        The fundamental elements of effective drug control policy are
    consistent with common sense. We are committed to mobilizing our
    nation's efforts along three major themes:
        Stopping Use Before it Starts.--We are using parents, educational
    institutions, the media, and community action to prevent young people
    from experimenting with drugs in the first instance and from starting
    on the path that all too often leads to addiction, crime, and personal
    and familial destruction.
        Healing America's Drug Users.--We are placing a strong emphasis on
    drug treatment. The President has made a historic commitment of $1.6
    billion over 5 years in increased treatment funding. We will work to
    deploy these resources to areas and populations that need it most and
    provide more effective outreach to the chronically addicted drug using
    population.
        Disrupting the Market.--We are readjusting our efforts in supply
    reduction based on market principles. We will identify and target
    strategic vulnerabilities in the business of drug trafficking. We will
    attack the drugs, money and corrupt financial institutions, precursor
    chemicals, key managers and individuals, crops, key transit routes, and
    key communication links that facilitate drug trafficking.
        This Strategy places a heavy emphasis on obtaining measurable
    results and providing accountability to the American people, to
    Congress, and to our international partners. We will measure our
    success against the national goals of achieving a 10 percent reduction
    in teenage and adult current drug use over the next 2 years, and a 25
    percent reduction in current drug use, nationally, over the next 5
    years, as reported by the National Household Survey on Drug Abuse
    (NHSDA). The Strategy recognizes that entities with counterdrug
    responsibilities have not worked as effectively as they should.
    Consistent with the goals of the President's Management Agenda, it is
    our task to encourage and enable these entities to enhance their
    performance. Good government demands it, and it is our responsibility
    to future generations to ensure it. Finally, in the past, our ability
    to manage counter-drug programs has been complicated by the methods
    used to calculate the national drug control budget. The Administration
    is developing a new way to report the national drug control budget that
    will be readily identifiable and will reflect policy and management
    decisions guiding our counter-drug efforts (see discussion on page 7).
             assessing the extent of the drug problem in our nation
        The Administration is committed to using science, research, and
    performance management to direct our drug policy decisions. This
    informed decision-making process will enable us to accomplish our goal
    of reducing drug use in America. Everyone who cares about the drug
    issue knows that our nation's drug problem is not a recent phenomenon.
    Unfortunately, drug use among our nation's youth has remained at
    unacceptably high levels for most of the past decade. Sadly, illicit
    drug use has once again become all too acceptable among our young
    people. This acceptance threatens to reverberate for years to come in
    areas as disparate as crime rates, higher education, economic
    competitiveness, and cohesiveness of community and family. For all
    these reasons, it is incumbent on us to do all we can to empower
    individuals to say ``no'' to drug use. The following is a snapshot of
    the state of drug use in our country and the enormous harmful
    consequences it inflicts upon our society:
        Overall Trends.--According to the NHSDA, in 2000, 6.3 percent of
    the household population aged 12 and older (14.0 million persons) were
    ``current'' or past month users of an illicit drug, a level that was
    unchanged from 1999. Three of four current users (10.7 million)
    reported using marijuana, either alone or in combination with other
    drugs. Trend data prior to 1999 are not directly comparable to these
    numbers because a new methodology to improve and expand the survey was
    implemented in 1999. Nevertheless, historical data show that drug use
    peaked in 1979, when 25 million people (or 14.1 percent of the
    population) used illegal drugs.
        Adult Trends.--According to the NHSDA, current drug use among
    adults--aged 18 or older--remained statistically unchanged between 1999
    and 2000, at 5.8 percent and 5.9 percent, respectively. Four out of ten
    report having tried an illicit drug in their lifetime.
        Youth Trends.--Drug use among 12-17 year olds also remained
    relatively unchanged--9.8 percent in 1999 and 9.7 percent in 2000.
    According to NHSDA, in 2000, 7.2 percent were current marijuana users,
    and about one in four youth (26.9 percent) have tried an illicit drug
    in their lifetime. The school-based Monitoring the Future study shows
    that among 8th graders, 11.7 percent reported past-month (current) use
    of any illicit drugs in 2001, lower than the 1996 peak of 14.6 percent.
    Among 10th graders, 22.7 percent reported current drug use in 2001,
    relatively stable in recent years and down slightly from the 1996 peak
    of 23.2 percent. For 12 graders, 25.7 percent reported current drug use
    in 2001, also relatively stable compared to the decade's peak of 26.2
    percent recorded 1997. We are concerned that every day in 1999 (the
    latest year for which data are available), more than 3,800 young people
    tried marijuana for the first time, 1,800 tried hallucinogens, and
    about 1,700 tried inhalants. Every day over the same period, over 8,000
    youths first used alcohol.
        Consequences of Drug Use.--There were 19,102 deaths as a result of
    drug-induced causes in 1999, a slight drop from the 20,227 deaths in
    1998. In 2000, there were 601,563 drug-related emergency room episodes
    in the United States. This is an increase of 16 percent over the
    518,800 episodes reported for 1994. Episodes including cocaine remain
    at their historic highs; in 2000 there were 174,881 mentions of
    cocaine, an increase of 22 percent since 1994.
        Drug Consumption and Expenditure Estimates.--Americans spent over
    $64 billion on illegal drugs in 2000. Most of the expenditure was for
    cocaine ($35 billion), followed by marijuana ($10.5 billion) and heroin
    ($10 billion). The amount of cocaine consumed in the United States has
    been declining over the past 10 years, from over 440 metric tons in
    1990 to 260 metric tons in 2000. Heroin consumption has been stable at
    13 to 14 metric tons per year, over the past 5 years.
        Drug Availability.--Though overall coca cultivation decreased
    between 1995 and 2000, a 25 percent increase in Colombia resulted in an
    overall 18 percent increase in overall Andean Coca production in 2001.
    The primary coca cultivation country is now Colombia, which accounts
    for 580 metric tons, or 75 percent of the potential production. This
    compares with 1995, where Colombia's potential production was less than
    25 percent of world production. In 1995, Peru contributed 50 percent of
    the total potential production. DEA's Heroin Signature Program, which
    chemically analyzes heroin seizures, suggests that Colombia is the
    source of over 60 percent of the heroin entering the United States and
    Mexico is the source of an additional 20 percent.
        Drug Seizures.--Worldwide cocaine seizures, over the past 5 years,
    have averaged 280 metric tons (an average of 28 percent of the
    potential production). Those seizures are distributed equally among
    three components: (1) South America, (2) in transit to the U.S. market,
    and (3) domestic United States, which includes seizures at and within
    the United States border. Each of those components contributes to 30
    percent of worldwide seizures. The remaining 10 percent are from
    seizures in overseas markets. Seizures in transit to United States
    markets have been rising (reaching 110 metric tons in 2001), while
    seizures at the border have fallen (down to 34 metric tons in 2001),
    suggesting that we are removing drugs farther from our borders. Federal
    cocaine seizures have varied between 100 to 130 metric tons over the
    past 5 years. Federal heroin seizures have been averaging 1,500
    kilograms annually, but exceeded 1,600 kilograms in 2000. Federal
    seizures of marijuana, which occur primarily at the Southwest border,
    have increased annually about 20 percent for the past 5 years. In 2000,
    these seizures exceeded 1,200 metric tons. Federal seizures of
    methamphetamine rose dramatically in the late 1990s, and exceeded 3,300
    kilograms in 2000. The number of clandestine methamphetamine labs
    destroyed is projected to exceed 7,000 when the 2001 figures are
    finalized. This compares with fewer than 4,000 labs destroyed in 1998.
        It is all too obvious that despite our best efforts, too many
    Americans are using drugs. Too many of our young people are using drugs
    at a very early age. Too many of our citizens are addicted. The drug
    trade is too prosperous. These statistics make abundantly clear that
    achieving our goals will be a tremendous challenge. We are heartened
    that Americans will never acquiesce to those who believe there is
    nothing more we can do to reduce drug use--that we should be satisfied
    with the status quo. We will meet this challenge by uniting as a nation
    to begin the long and complex task of stopping use among youth before
    it starts, transforming drug users back to health, and disrupting drug
    markets to reduce the flow of illegal drugs into our country.
         the consolidated fiscal year 2003 national drug control budget
        The President's fiscal year 2003 Budget presents a balanced
    approach for drug control programs, fully supporting the National Drug
    Control Strategy. In fiscal year 2003, critical initiatives
    significantly expand the Administration's commitment to drug treatment,
    support essential drug prevention programs targeting youth, and
    continue assistance to our partners in the Andean region. As reflected
    in the following table, the President's fiscal year 2003 request for
    aggregate national drug control funding and the drug-related functions
    of Executive departments and agencies constituting the total is an
    estimated $19.2 billion, an increase of $356.9 million (+1.9 percent)
    over the fiscal year 2002 enacted level of $18.8 billion.

        The President's fiscal year 2003 Budget Request puts the necessary
    resources behind our commitment to reduce drug use in the near term.
    The following are key budget highlights that will contribute to our
    shared effort to stop drug use before it starts:
      --Safe and Drug-Free Schools and Communities Program: $644 million
            ($634.8 million drug-related).--The budget continues funding
            for this school-based drug and violence prevention program
            aimed at young people, level funding the state grants program.
            To improve evaluation and better direct program activities in
            fiscal year 2003, ONDCP will work with the Department of
            Education to develop a useful evaluation plan that will provide
            the data needed to impose program accountability, while
            alerting schools to problem areas.
      --National Youth Anti-Drug Media Campaign: $180 million.--The Media
            Campaign uses multi-media advertising and public communications
            strategies aimed at youth and parents to promote anti-drug
            attitudes and behavior. The campaign is a comprehensive
            national effort that integrates paid advertising at national
            and local levels with public information outreach through a
            network of public and private partnerships to amplify and
            provide local context for campaign messages.
      --Drug-Free Communities Support Program: $60 million.--This ONDCP
            program provides assistance to community groups on forming and
            sustaining effective community and anti-drug coalitions that
            fight the use of illegal drugs, alcohol, and tobacco by youth.
            Further, the President's request includes $2 million for the
            National Community Anti-Drug Coalition Institute. The Institute
            will provide education, training, and technical assistance for
            coalition leaders and community teams to enable coalitions to
            evaluate their own performance.
      --Parents Drug Corps Program: +$5 million.--This new
            initiative, funded through the Corporation for National and
            Community Service, will encourage parents to help children stay
            drug-free by training them in drug prevention skills and
            methods.
        The President's fiscal year 2003 Budget builds upon the significant
    bipartisan interest we enjoy in expanding our nation's commitment to
    effective drug treatment programs and research. We are proud to be
    associated with the President's historic commitment of providing $1.6
    billion over 5 years to increase funding for treatment. We look forward
    to working with the Department of Health and Human Services to
    implement this commitment in such a way that the resources are targeted
    to areas and populations with the greatest need. This Administration is
    committed to going beyond merely providing additional funding for drug
    treatment. We will seek to achieve a greater understanding of addiction
    and of the types of programs that prove effective, as well as to foster
    a climate where drug users are empowered to take an active, responsible
    role in their recovery. The following are key highlights that will
    begin an unprecedented effort to heal America's drug users:
      --Targeted Capacity Expansion (TCE) Program: +$109 million.--This
            additional funding will help to expand the Treatment TCE
            program, which is designed to support a rapid, strategic
            response to emerging trends in substance use. Included in this
            proposal is $50 million to be used for a new component of the
            TCE program. This new component will be structured to reserve
            funding for state-level competitions, weighted according to
            each state's need for treatment services.
      --Substance Abuse Prevention and Treatment (SAPT) Block Grant:
            +$60 million ($43 million drug-related).--This
            increase in the SAPT Block Grant will provide additional
            funding to states for treatment and prevention services. States
            use these funds to extend treatment services to pregnant women,
            women with dependent children, and racial and ethnic
            minorities.
      --Residential Substance Abuse Treatment (RSAT): +$7
            million.--This enhancement will expand total funding for the
            RSAT program to $77 million in fiscal year 2003. The RSAT
            program is a formula grant that distributes funds to states to
            support drug and alcohol treatment in state corrections
            facilities.
      --Drug Courts: +$2 million.--These additional resources
            will expand total funding for the Drug Courts program to $52
            million in fiscal year 2003. This program provides alternatives
            to incarceration by using the coercive power of the court to
            force abstinence and alter behavior through a combination of
            escalating sanctions, mandatory drug testing, treatment, and
            strong aftercare programs.
        The President's fiscal year 2003 Budget enhances our ability to
    protect our borders and cooperate fully in the international effort to
    combat drug trafficking. The following key highlights will enable us to
    disrupt the market at home and at the source:
      --Andean Counterdrug Initiative (ACI): $731 million.--The fiscal year
            2003 Budget includes an increase of $106 million over funding
            enacted for the ACI account in fiscal year 2002 for Colombia,
            Peru, Bolivia, Ecuador, Brazil, Venezuela, and Panama. This
            fiscal year 2003 request includes resources to continue
            enforcement, border control, coca and poppy eradication,
            alternative development, institution building, and
            administration of justice and human rights programs. For
            Colombia, the fiscal year 2003 funding will be used for several
            broad categories including: operations and maintenance of air
            assets provided with Plan Colombia supplemental funding;
            Colombian National Police and Army counternarcotics Brigade
            operational support; and herbicide application programs. The
            additional funding requested will support USAID-implemented
            humanitarian, social, economic and alternative development
            programs, support for vulnerable groups, and resources for
            justice sector reform projects.
      --Deepwater Project: +$500 million.--This proposal continues to
            support the United States Coast Guard's Deepwater Project. The
            Deepwater Project focuses on the re-capitalization and
            modernization of the Coast Guard's assets including sensors and
            communications equipment for the aging deepwater cutters,
            aircraft and command centers. Although only a portion of this
            initiative is related to drug control, the re-capitalization of
            these assets will enhance the Coast Guard's ability to conduct
            counterdrug activities.
      --Border Control and Enforcement: +$76.3 million ($11.4 million drug-
            related).--This enhancement for the Border Patrol includes
            hiring an additional 570 agents to enforce national borders and
            to combat international drug trafficking. For the new Border
            Patrol Agents, a portion of their time will involve drug
            control activities.
      --Southwest Border Prosecutor Initiative: $50 million.--The
            President's 2003 Budget maintains funding of $50 million for
            the Southwest Border Prosecutor Initiative. This initiative
            provides critical support to counties along the Southwest
            Border for the costs of detaining and prosecuting drug cases
            referred to them by U.S. Attorneys.
    Restructuring the National Drug Control Budget
        The President has instructed the Federal Government to manage by
    results. Effectively managing the Federal drug control program, which
    involves coordinating the work of more than 50 national drug control
    program agencies, presents unique problems that require creative
    solutions. Previously, our ability to manage anti-drug programs has
    been complicated by the methods used to calculate the drug control
    budget. The national drug control budget presented in the Strategy each
    year does not represent actual managed dollars. With a few exceptions,
    the dollars reported are not reflected as line items in the President's
    budget or in appropriations acts. Instead, they reflect percentages of
    total appropriations for agencies and programs, with a number of
    different methods used to estimate the portion of the funds dedicated
    to drug control.
        Recent independent analyses commissioned by ONDCP, as well as
    ongoing, required reviews by Inspectors General, have identified
    weaknesses in the methodologies agencies use to measure spending
    related to drug control. These reviews are unambiguous; we need to
    reform the National Drug Control Budget. The Administration is
    developing a new way to report the drug budget, based on the following
    guidelines:
      --All funding items displayed in the drug budget should be readily
            identifiable line items in the President's Budget or agency
            budget justifications; and
      --The budget presentation should be simplified by eliminating several
            supporting agencies from the drug budget tabulation. Only
            agencies with a primary demand reduction or supply reduction
            mission should be displayed in the drug budget. Agencies with
            no, or little, direct involvement in drug control would be
            excluded from the revised drug budget presentation.
        Furthermore, the budget presentation has historically included
    costs that are a consequence of drug use rather than expenditures aimed
    at reducing drug use. As these costs do not reflect judgments about
    drug policy, they would be excluded from the National Drug Control
    Budget. ONDCP, however, will continue to report these costs as part of
    the biennial report, Economic Costs to Society of Drug Abuse.
        This proposal will enable the Administration, Congress, and the
    general public to distinguish between funding for drug control efforts
    and funding for the consequences of drug use. While this presentational
    change will decrease the amount of funding attributed to the National
    Drug Control Budget, it will not negatively affect the total size of
    our Federal drug control efforts. In fact, this restructuring will
    improve our ability to manage those efforts by enabling policymakers to
    focus on managing programs genuinely directed at reducing drug use. The
    President's fiscal year 2004 Budget will implement the proposed changes
    to the National Drug Control Budget.
                    ondcp's fiscal year 2003 budget request
        ONDCP is requesting $523.1 million in budget authority for fiscal
    year 2003. ONDCP requested $519.1 million for fiscal year 2002. The
    fiscal year 2002 enacted level is $533.313 million. The budget request
    reflects four program accounts: Salaries and Expenses; the Counterdrug
    Technology Assessment Center (CTAC); the Special Forfeiture Fund; and
    the High Intensity Drug Trafficking Areas (HIDTA) program.
    Salaries and Expenses: $25.458 million
        For fiscal year 2003, ONDCP is requesting $25.458 million for
    salaries and expenses to support 115 Full-Time Equivalents (FTEs) and
    30 non-reimbursable detailees. ONDCP requested $25.1 million for fiscal
    year 2002. The fiscal year 2002 enacted level is $25.263 million. This
    request is essential if ONDCP is to carry out its policy, budget, and
    programmatic responsibilities in a manner consistent with achieving
    measurable results. Major expenses include:
      --$24.108 million to provide compensation and benefits for all
            authorized FTEs including a full complement of Executive Level
            (EX) positions; contract services; rental payments to the
            General Services Administration; travel and transportation;
            communications and utilities; and equipment.
      --$1.35 million to continue and expand ONDCP's policy research
            program. For the past 10 years, ONDCP has conducted a program
            of research and produced a series of studies and reports on key
            policy issues surrounding drug demand and supply, law
            enforcement, and consequences of drug use. With each round of
            funding, ONDCP seeks to expand and improve the methodology used
            in producing these studies and reports to improve the precision
            and accuracy of the resulting estimates.
        As you know, the President requested funds for this account in the
    consolidated appropriation for the Executive Office of the President.
    The preceding discussion is included only to facilitate the work of the
    Appropriations Committees.
    Counterdrug Technology Assessment Center: $40.0 million
        For fiscal year 2003, ONDCP is requesting $40 million to support
    the Counterdrug Technology Assessment Center (CTAC). ONDCP requested
    $40 million for fiscal year 2002. The fiscal year 2002 enacted level is
    $42.3 million. The aggregate request includes funding for two distinct
    components: Research and Development ($18 million) and the Technology
    Transfer program ($22 million).
        Research and Development.--Concerning demand reduction, CTAC's
    work, in conjunction with the National Institute on Drug Abuse (NIDA),
    to expand the understanding of substance abuse and addition is
    producing some of the most scientifically significant developments we
    have seen in this field. These funds enable CTAC to sponsor advanced
    neuroimaging technology, medical instrumentation, and facilities at
    leading academic medical research institutions. In order to receive
    CTAC sponsorship, research facilities must agree to use the equipment
    to concentrate on drug abuse research and commit to train other
    professionals who will continue to advance the body of knowledge on the
    scientific aspects of substance abuse. Deploying proven or promising
    technologies for imaging the human brain activity of a subject on drugs
    is providing invaluable data and dramatically increasing our
    understanding of the short- and long-term effect of drugs on the human
    brain. Finally, this program supports developing and evaluating
    therapeutic drugs for treating addiction with minimal physical side
    effects.
        By the end of fiscal year 2003, 12 of the nation's leading
    substance abuse research institutions will have benefited from CTAC's
    program. World-class medical expert teams at Massachusetts General
    Hospital, Emory University, the University of Pennsylvania, Harvard
    University, McLean Hospital, the University of Colorado, Oregon Health
    Science University, and UCLA have benefited. In most cases, their
    leading-edge drug abuse research efforts are sponsored by grants from
    NIDA. Two new centers will be started to advance our understanding of
    the genetics and phenotypes of the addicted brain.
        It is time for these facilities be linked to form a central
    information exchange allowing the transfer and sharing of images, data,
    and research findings over a substance abuse research data backbone.
    This data exchange backbone will make it possible for scientific
    advances, achieved by individual applications of technology, to benefit
    all of the nation's premier substance abuse research teams and
    accelerate the rate at which research can progress.
        Concerning supply reduction, CTAC R&D concentrates on high priority
    scientific and technological needs of local, State, and Federal law
    enforcement agencies. These efforts improve capabilities for conducting
    non-intrusive inspection of cargo and containers for illegal drugs and
    strengthen law enforcement capabilities to combat drug-related crime
    and violence. Tactical tools are under development to improve
    capabilities to intercept and process drug-related criminal
    communications and to improve law enforcement capabilities to
    communicate with each other. Advanced tactical repeaters and phone
    intercept systems developed under CTAC funding are being evaluated in
    the field by Federal, State, and local law enforcement agencies in the
    New York City and Baltimore/Washington areas.
        CTAC also sponsors technology testbeds. Last August in the
    metropolitan Denver area, the wireless communications interoperability
    testbed project demonstrated the interoperability of radios used by the
    U.S. Customs Service, Drug Enforcement Administration, Lakewood Police
    Department, Front Range Task Force and the Aurora Police Department.
    Since the August 2001 demonstration hosted by the Lakewood Police
    Department, the system has been used on a regular basis. By this
    summer, a Colorado-wide capability will be demonstrated to law
    enforcement agencies from across the country. This model allows state
    and local police to continue using their existing radios inter-
    connected through off-the-shelf interoperable communications systems.
    The system used in Colorado is being added to the Technology Transfer
    Program this year. In fiscal year 2003, CTAC plans to continue to
    develop near-term improvements to law enforcement communications
    interoperability and management of investigative data. These
    capabilities assist in preventing, thwarting and prosecuting drug-
    related crimes, as well as terrorist activities.
        Technology Transfer Program.--The Technology Transfer Program (TTP)
    provides technologies developed with Federal funding directly to state
    and local law enforcement agencies that may otherwise be unable to
    benefit from the developments due to limited budgets or lack of
    technological expertise. CTAC utilizes technology testbeds to test and
    evaluate new items before they are included in the program. The TTP is
    unique because it provides hands-on training and support with the
    delivery of the equipment to each recipient. The periodic follow-up
    evaluations (at 90, 180, and 270 days) assures proper employment of the
    technologies and helps the TTP to assess the effectiveness of both the
    program as a whole and the individual technologies transferred.
        The $79.498 million appropriated since the TTP began in fiscal year
    1998 has made possible the delivery of 4,750 pieces of equipment to
    over 3,800 state and local law enforcement agencies (as of April 15,
    2002). During fiscal year 2003, the requested appropriation will allow
    the transfer of much-needed technology to more than 1,200 state and
    local law enforcement agencies across the country. By the end of fiscal
    year 2003, TTP deliveries will have been made to over one-fourth of the
    18,500 sheriffs and police departments across the nation.
    Special Forfeiture Fund: $251.3 million
        ONDCP's fiscal year 2003 budget requests $251.3 million for the
    Special Forfeiture Fund. ONDCP requested $247.6 million for fiscal year
    2002. The fiscal year 2002 enacted level is $239.4 million. This
    account provides funds to a diverse group of ongoing programs: the
    National Youth Anti-Drug Media Campaign, the Drug-Free Communities
    Program, the United States Anti-Doping Agency, the Counterdrug
    Intelligence Executive Secretariat, the National Drug Court Institute,
    and the National Alliance for Model State Drug Laws. Furthermore, this
    account contains a request for two new initiatives: Performance
    Measures Development and World Anti-Doping Agency (WADA) Membership
    Dues.
    The National Youth Anti-Drug Media Campaign: $180 million
        For fiscal year 2003, ONDCP is requesting $180 million for the
    National Youth Anti-Drug Media Campaign. ONDCP requested $185 million
    for fiscal year 2002. The fiscal year 2002 enacted level is $180
    million. The Media Campaign uses multi-media advertising and public
    communications strategies aimed at youth and parents to promote anti-
    drug attitudes and behavior. The Campaign is a comprehensive national
    effort that integrates paid advertising at national and local levels
    with public information outreach through a network of public and
    private partnerships.
        Clearly, the goal of the Campaign is to reduce drug use among
    youth. A statistically significant decline was found in past month
    marijuana use among 12- to 13-year olds from 1.8 percent to 0.7 percent
    between Waves 1 and 3. For 14- to 15-year-olds, however, there was a
    statistically significant increase in past month use from 2.1 percent
    in Wave 1 to 5.6 percent in Wave 3.
        During the past year, the Campaign reached 90 percent of America's
    youth at least four times a week in multiple languages to various
    ethnic groups. A multi-cultural sub-set of the Campaign delivers $38
    million worth of drug prevention messages annually to diverse
    audiences, making it one of the largest multicultural communications
    efforts ever launched by the Federal Government, and rivaling that of
    most corporate efforts. The Campaign has just completed development of
    the government's first-ever Native American anti-drug television ads
    which, along with a strong print ad complement, are set to be launched
    soon in targeted markets.
        In addition to its primary effort against youth drug use, the Media
    Campaign also developed and, through its partnership with the Ad
    Council, operates a national multi-media public service advertising
    campaign promoting community anti-drug coalitions. The campaign seeks
    to expand community involvement against drugs by demonstrating the
    positive effect coalitions can have in their own communities.
        Paid anti-drug advertising placed in key television and radio time
    slots and high readership publications is the foundation of the
    Campaign. An integrated advertising program focused on specific
    Campaign themes and messages is running nationally and in 102 local
    U.S. markets (through more than 2,250 media outlets nationwide during a
    5-year period). One unique aspect of the Campaign is that Congress
    mandated that media accepting advertisements must match the Campaign's
    purchases with an equal value of public service in the form of public
    service advertising time or space, or other activities related to youth
    drug use prevention. The Campaign has exceeded this ambitious ``pro-
    bono match'' goal. For the period beginning January 1998 through
    September 2002, the total value of the pro-bono match is projected to
    reach $659 million. The pro-bono match was negotiated using paid media
    valued at $614 million, and includes ``in-kind'' corporate
    contributions of $72 million, bringing the total value of the Anti-Drug
    Media Campaign to over $1.3 billion. Most of the match (86 percent) was
    PSAs. Eligible PSAs aid in drug prevention by encouraging activities
    such as mentoring, greater parental involvement, after-school programs,
    and other nationally relevant youth-related issues.
        The Campaign is uniquely positioned to educate American youth and
    parents about the link between drug money and terror in the United
    States and around the world. In the aftermath of the terror attack of
    September 11, we realized that few Americans knew of the link between
    money spent for drugs and the support of terrorist organizations like
    Al Qaeda and the FARC. Twelve of the 28 international terrorist
    organizations recognized by the State Department engage in drug
    trafficking, and many other drug trafficking organizations engage in
    widespread acts of terror--kidnapping, torture, bombings, and the
    murder of innocents.
        We subjected the ad concepts to an unprecedented level of testing
    to assure their effectiveness with target audiences. The ads were
    exposed to more than 1,300 individuals in 20 cities across the country.
    Youth that participated in the testing found that the ads significantly
    reduced their intent to use drugs in the future. Parents said the
    information gave them timely new information to use in talking to their
    children about drugs.
        As the Subcommittee is aware, ONDCP launched the new ads during the
    Super Bowl program and they are still in use. Our anti-terror
    television, newspaper, and magazine ads are running currently and will
    continue through June.
        The ads have generated a large response from across the country.
    Viewers are directed to www.theantidrug.com, which is the Campaign's
    parenting Web site, where traffic surged after the ads were introduced.
    From the ads' launch on February 3 through February 27, page views on
    the site rose more than 21 percent. Visitors to the site doubled from
    an average 125,000 per month to 250,000, and the time spent at the site
    by visitors rose from an average 6 minutes to 10 minutes. During the
    same Feb. 3-Feb. 27 period, 1,282 parents signed up to receive a weekly
    parenting tips email.
        ONDCP's fiscal year 2003 request will also support continued public
    communications outreach which builds on and complements the advertising
    component. Significant efforts under this ``non-advertising'' component
    include a public information campaign that directly supports our
    advertising messages and builds credibility for the Campaign, a robust
    partnership initiative that expands the collective communications
    output of the Campaign by building relationships with a wide range of
    private sector media organizations and nonprofit organizations
    committed to the goals of the Campaign.
        The Campaign makes extensive use of interactive media. The outreach
    component operates a family of Campaign Websites--the two most
    important of which are ``Freevibe.com'', our youth site, and
    ``www.theantidrug.com'', our parents site. The growth and popularity of
    the Internet, particularly among the nation's youth, enabled the
    Campaign to achieve more than 1.2 billion match impressions on as many
    as 50 consumer Web sites, including America Online. The efforts have
    led to more than 40.7 million page views on the Media Campaign Web
    sites, as of February 2002.
        To further leverage the appropriated dollars allocated to the
    Campaign, ONDCP is pursuing aggressively a corporate participation
    plan. Pursuant to fiscal year 2002 report language, ONDCP submitted to
    the Committee (on February 11) a report summarizing the Media
    Campaign's corporate participation program, including its evolution,
    value to the Campaign, accomplishments to date, and promise for the
    future. This report focuses primarily on the corporate participation
    effort that was initiated four months ago to recruit and engage
    America's businesses in the Media Campaign. It also describes how
    corporate participation fits within the context of overall private
    sector involvement in the Campaign.
        Evaluation Component.--The evaluation of Phase III is designed to
    determine the extent to which changes in drug abuse-related knowledge,
    attitudes, beliefs, and behaviors can be attributed to exposure to the
    Campaign. Thus far, the evaluation has detected increases in awareness
    and some positive changes in perceptions and attitudes toward drugs.
    The parent findings are particularly positive, indicating changes in
    behavior among parents--slightly ahead of the expected timeframe of 2
    to 3 years for behavioral change.
        The Campaign has successfully exposed its target audience to anti-
    drug ads. Ninety percent of youth and parents recall seeing or hearing
    some form of general anti-drug advertising at least once per month. For
    recall of specific Campaign ads, 83 percent of youth recall seeing at
    least one of the Campaign ads in the past 2 months, and 44 percent of
    parents recall seeing at least one of the parent-targeted ads in the
    past 2 months. Furthermore, a key aspect of the Phase III Campaign is
    the introduction of the branding concept to both youth and parent
    messages: about 60 percent of 12- to 18-year-olds recalled the youth
    brand, and about 46 percent of parents recalled the parent branding
    phrases. Parents are becoming more involved in addressing drugs with
    their children. Building on positive findings reported in the second
    semi-annual evaluation report, there was an increase in parent reports
    for four of five key outcomes, including talking to their children
    about drugs and monitoring their behavior. The most significant
    increases are among those with the highest levels of exposure to the
    Campaign ads.
        Recognizing that the funds are authorized to be appropriated to the
    Campaign through fiscal year 2002, ONDCP is committed to reauthorizing
    this program. With the support of members from both houses, we hope a
    reauthorization measure will be introduced in the next month.
    The Drug-Free Communities Support Program: $60 million
        For fiscal year 2003, ONDCP is requesting $60.0 million for the
    Drug-Free Communities Support Program (DFCSP). ONDCP requested $50.6
    million for fiscal year 2002. The fiscal year 2002 enacted level is
    $50.6 million. The Administration is pleased that Congress recently
    reauthorized this program from fiscal year 2003 through fiscal year
    2007.
        The DFCSP provides matching Federal grants directly to local
    community anti-drug coalitions to improve or expand their efforts to
    prevent substance use among children (including the underage use of
    alcohol and tobacco). The DFCSP truly serves communities throughout our
    nation, currently supporting 463 communities located in all fifty
    States, Puerto Rico, the U.S. Virgin Islands, and the District of
    Columbia. Furthermore, approximately twenty-five of the grants have
    been awarded to communities with predominately Native American and
    Native Alaskan populations. We anticipate awarding approximately 70
    additional grants during the fiscal year 2002 grant cycle (September,
    2002).
        Of the total $60.0 million ONDCP is requesting for this program,
    approximately $54.4 million will be granted directly to community anti-
    drug coalitions. We anticipate awarding approximately 166 new grants
    and approximately 12 mentoring grants in fiscal year 2003, bringing the
    cumulative 6-year total to more than 700 grants awarded to over 600
    community anti-drug coalitions.\1\ The Drug-Free Communities
    Reauthorization Act of 2001 (Public Law 107-82) requires grant
    recipients to match their Federal grant funds with other non-Federal
    sources of support, including cash and in-kind contributions.
    Coalitions competing for new awards after completing their initial 5-
    years of eligibility must meet an increased threshold for matching
    funds as a condition of eligibility for further awards.
    ---------------------------------------------------------------------------
        \1\ A number of community coalitions that received their initial
    award in fiscal year 1998 have completed the 5-year period of
    eligibility contemplated under the original DFCSP authorization. As the
    reauthorization permits these coalitions to reapply as a ``new''
    grantee at the completion of the initial 5-year period, some coalitions
    will begin receiving their second ``new'' award in fiscal year 2003.
    ---------------------------------------------------------------------------
        ONDCP policy provides that grantees may receive a maximum award of
    $100,000 for years 1, 2, and 3, and $75,000 for years 4 and 5. The
    rationale for the funding reduction in years 4 and 5 is to encourage
    the coalitions to become less reliant on Federal funds and more self-
    sufficient. The statutorily-created Advisory Commission has informed
    the ONDCP Director that this formulation is the most equitable and has
    the greatest chance of securing the long-term success of the
    coalitions.
        Of the total $60.0 million request, $2.0 million, the maximum
    authorized amount, is to award a grant to support a National Community
    Anti-Drug Coalition Institute. The DFCSP Reauthorization Act requires
    ONDCP to award a grant to a national nonprofit organization that
    represents, provides technical assistance and training to, and provides
    expertise and broad national-level experience in, community anti-drug
    coalitions. ONDCP is working with the Center for Substance Abuse
    Prevention to create an Interagency Agreement for them to administer
    this grant. We anticipate awarding this initial grant in fiscal year
    2002.
        Of the total $60.0 million request, only $3.6 million will support
    ``administrative costs.'' These activities include grants management
    and program evaluation, and program administration. We anticipate
    allocating $3.28 million to OJJDP for grants management and evaluation,
    up to $120,000 for grant management costs associated with the National
    Coalition Institute, and $200,000 to support the DFCSP Program
    Administrator and the Advisory Commission on Drug Free Communities.
    United States Anti-Doping Agency: $1 million.
        For fiscal year 2003, ONDCP is requesting $1.0 million to support
    the United States Anti-Doping Agency (USADA). ONDCP requested $3.0
    million for fiscal year 2002. The fiscal year 2002 enacted level is
    $4.8 million. ONDCP is proposing fiscal year 2003 appropriation
    language to allow ONDCP to transfer the entire amount of funds to the
    USADA without restrictions on the type of transfer. This will ensure
    that the Federal Government can provide appropriate financial oversight
    and ensure accountability for these funds.
        Now that the Salt Lake Games are concluded, the $1 million request
    would support research and administrative initiatives, educational
    programs, and efforts to inform athletes of the rules governing the use
    of performance enhancing substances, and the ethics of doping and its
    harmful health effects. Furthermore, USADA is developing an out of
    competition program that will occur during the off years of the Olympic
    and PanAm games.
    Counterdrug Intelligence Executive Secretariat: $6 million
        For fiscal year 2003, ONDCP is requesting $6.0 million for the
    administration and operations of the Counterdrug Intelligence Executive
    Secretariat (CDX). ONDCP requested $3.0 million for fiscal year 2002.
    The fiscal year 2002 enacted level is $3.0 million. The General
    Counterdrug Intelligence Plan (GCIP) created the CDX to implement the
    recommendations contained it. The GCIP originally contemplated a staff
    of approximately 35 people for the CDX. Current funding at $3 million
    can support only 5 management/administrative staff and limited
    substantive work to achieve GCIP action items. Of the total request,
    $1.8 million will support existing administrative staff and continuing
    efforts to complete GCIP action items. The remaining $4.2 million will
    support approximately 30 reimbursable detailees from other Federal
    agencies. This increase is necessary as participating agencies have
    been unable to provide the number of non-reimbursable detailees
    necessary to ensure sufficient support to the CDX.
        A fully-staffed CDX will continue to improve our nation's
    counterdrug intelligence architecture by enhancing information sharing,
    operational coordination, and technical connectivity among Federal
    counterdrug components and their State and local law enforcement
    counterparts. CDX has reached a staff level of 16 (5 management and
    administrative staff, plus 11 full-time non-reimbursed professional
    detailees). Efforts are underway to address nearly all of the 73 action
    items. Approximately 33 percent have been completed, substantial
    progress has been made on approximately 30 percent, and some progress
    has been made on approximately 30 percent. Additionally, the member
    agencies have referred 16 interagency intelligence coordination or
    policy issues to the senior Counterdrug Intelligence Coordinating Group
    (CDICG) for review.
    National Drug Court Institute: $1 million.
        For fiscal year 2003, ONDCP is requesting $1.0 million for the
    National Drug Court Institute (NDCI). ONDCP requested $1.0 million for
    fiscal year 2002. The fiscal year 2002 enacted level is $1.0 million.
    The NDCI's research program requires these funds to continue the
    expansion of its drug court training program for practitioners, to
    convene special advisory groups to develop curricula in new
    disciplines, to develop a national community probation initiative, and
    to expand and update the Institute's video instruction library.
        Research conducted by the National Center on Addiction and
    Substance Abuse, Columbia University, June 1998, demonstrates that drug
    courts provide more comprehensive and closer supervision of the drug-
    using offender than other forms of community supervision. Drug courts
    have been tremendously successful in creating a comprehensive and
    coordinated environment among the criminal justice and public health
    systems and the community in which they operate. Furthermore,
    individuals graduating from a drug court have lower rates of additional
    criminal behavior and/or recidivism. In contrast to the traditional
    ``revolving door'' approach, drug courts provide an effective solution
    to drug addiction and drug-related crime through the innovative use of
    and sanctions and incentives, comprehensive supervision, drug testing,
    and judicial monitoring. Defendants who complete the program either
    have their charges dismissed (in a diversion or pre-plea model) or have
    their probation sentences reduced (in a post-plea model). Drug courts
    provide closer, more comprehensive supervision and much more frequent
    drug testing and monitoring during the program than other forms of
    community supervision.
        To date, there are over 1,100 drug courts operating in the
    community or are in various planning stages across the nation. These
    include approximately 167 juvenile courts and 37 family courts. Since
    their inception, almost 230,000 people have enrolled in drug court
    programs and almost 75,000 have graduated. For fiscal year 2003, the
    Department of Justice is requesting $52 million for the Drug Court
    Program, an all-time high.
    Performance Measures Development: $2 million
        For fiscal year 2003, ONDCP is requesting $2.0 million for
    Performance Measures Development. This is a new initiative; no funds
    were requested or appropriated for fiscal year 2002. ONDCP will use the
    requested funding to develop and implement data sources for performance
    measurement and management for counterdrug programs government-wide.
    Many measures are currently lacking or inadequate for informing policy
    decisions. Over the past 4 years, ONDCP identified such shortfalls in
    its annual Performance Measures of Effectiveness report, and described
    efforts through its Data Subcommittee to address these limitations.
    Additionally, last year, the results of the ONDCP-funded study from the
    National Research Council containing a review and recommendations on
    drug policy research were released. Both of these activities have
    highlighted, among other topics, (a) the need for improvement in
    estimates of the price and purity of illegal drugs, (b) the supply of
    drugs flowing to the United States, and the amount of drugs consumed in
    the United States; (c) evaluations of the effectiveness of prevention,
    treatment, and law enforcement programs; and (d) empirical study of
    drug markets. ONDCP will lead an interagency effort to address these
    research and data issues. As a result of this effort, ONDCP will make
    use of data generated to improve and refine program performance and
    consider new initiatives.
    World Anti-Doping Agency Membership Dues: $0.8 million
        For fiscal year 2003, ONDCP is requesting $0.8 million for World
    Anti-Doping Agency (WADA) Membership Dues. This is a new initiative; no
    funds were requested or appropriated for fiscal year 2002. WADA's
    mission is to promote and coordinate the effort against doping in sport
    at the international level. To accomplish this task, WADA cooperates
    with intergovernmental organizations, governments, public authorities,
    athletes, and other public and private bodies working against doping in
    sport. Furthermore, WADA coordinates a comprehensive anti-doping
    program, including out-of-competition controls.
        The requested funds represent full membership dues for the United
    States in the WADA. The dues assessment is formula driven. The
    International Olympic Committee (IOC) pays fifty percent of the costs
    associated with WADA; participating governments and other agencies
    (which are divided into six geographic regions) pay the remaining fifty
    percent. The Americas' region is responsible for a twenty-eight percent
    share of the governments' and other agencies' fifty percent. The United
    States and Canada each pay one-third of the twenty-eight percent share
    ($0.8 million); the rest of the Americas pay the remaining one-third.
    National Alliance for Model State Drug Laws: $0.5 million
        For fiscal year 2003, ONDCP is requesting $0.5 million for the
    National Alliance for Model State Drug Laws (NAMSDL). ONDCP requested
    $1.0 million for fiscal year 2002. The fiscal year 2002 enacted level
    is $1.0 million. These funds will enable the NAMSDL to encourage states
    to adopt and implement laws, policies, and regulations to reduce drug
    use and its adverse consequences. The funding reduction is in no way
    reflective of dissatisfaction with the MSDL. However, the ONDCP
    appropriation has been the NAMSDL's only source of support since fiscal
    year 1997, and we believe NAMSDL should become less reliant on Federal
    funds. We are working with NAMSDL to identify additional funding
    sources. This approach is consistent with the Administration's
    philosophy that Federal dollars should not necessarily be the only
    source of funding for a program in perpetuity; these limited resources
    should be used to leverage additional funds, thereby making the
    organization/program able to survive even if Federal funds are reduced
    or eliminated.
    High Intensity Drug Trafficking Areas: $206.35 million
        For fiscal year 2003, ONDCP is requesting $206.35 million for the
    HIDTA program. ONDCP requested $206.35 million for fiscal year 2002.
    The fiscal year 2002 enacted level is $226.35 million.
        The ONDCP Director, in consultation with the Attorney General,
    Secretary of Treasury, heads of National Drug-Control Program agencies,
    and appropriate governors, designates the most critical regions in the
    United States as HIDTAs. The HIDTA Program enhances and helps
    coordinate efforts among State, local, and Federal law enforcement
    entities in 28 designated areas to reduce the production,
    manufacturing, distribution, transportation and chronic use of illegal
    drugs and its consequences, as well as the attendant money laundering
    of drug proceeds. Resources are allocated to link local, State, and
    Federal drug enforcement efforts and to optimize the investigative
    return on limited fiscal and personnel resources. ONDCP will work with
    all involved entities to ensure that HIDTA resources are properly
    targeted to offer maximum effectiveness. When HIDTA resources are
    appropriately targeted, drug law enforcement entities will have a
    greater chance of obtaining measurable results in their effort to
    disrupt the illegal drug market through cooperative investigations,
    intelligence sharing (coordinated at HIDTA Investigative Support
    Centers), and joint operations against drug-trafficking organizations.
        The philosophy underlying the HIDTA Program is to allow each region
    the flexibility to address its unique drug threat in an appropriately
    tailored manner. An Executive Board (the ``Board''), which consists of
    an equal number of local/State and Federal law enforcement agency
    leaders, is the governing body of each individual HIDTA. The Board
    develops and implements the HIDTA Threat Assessment, Strategy, and
    Initiatives, as well as the fiscal administration operations of the
    HIDTA. The Board hires a HIDTA Director to administer the day-to-day
    operations of the HIDTA, implement appropriate oversight controls, and
    remain in contact with ONDCP. In contrast to the administrative
    management functions, the participating law enforcement agencies
    maintain sole operational control of initiatives.
        The fiscal year 2003 HIDTA request includes $2.1 million to
    continue auditing services and associated activities, and at least $0.5
    million shall be used to develop and implement a data collection system
    to measure the performance of the HIDTA Program. ONDCP contracted with
    Klynveld, Peat, Marwick, Goerdeler (KPMG) to perform external financial
    audits on the HIDTA grantees and Federal agencies. Thus far, KPMG has
    conducted 13 full-scope audits and 16 limited-scope reviews. With
    regard to the 13 full-scope audits, the HIDTAs grantees received all
    unqualified ``clean'' opinions. With regard to the limited-scope
    audits, the HIDTAs grantees and Federal agencies received no major
    findings. In addition to issuing the final audit reports, KPMG will
    prepare a Best Practices Report which will be shared with all of the
    HIDTAs. Internally, ONDCP has begun a review process that includes on-
    site visits to HIDTAs by ONDCP staff, as well as members from the
    Departments of Justice and Treasury. The on-site reviews help
    strengthen management at the individual HIDTAs and at ONDCP. To date,
    we have reviewed 13 HIDTAs and we plan to conduct an additional 5 to 6
    program reviews in fiscal year 2002 and an additional 5 to 6 in fiscal
    year 2003. The program reviews have proven beneficial to the HIDTAs and
    ONDCP as best practices are identified and shared.
        Concerning the allocation of the $20 million in fiscal year 2002
    funding, having obtained the concurrence of the Department of Defense,
    ONDCP will be transferring $5 million to the Department of Defense for
    National Guard counterdrug enforcement efforts. We believe that this
    transfer is a high priority to maintain current operational levels for
    the National Guard Bureau, and it will not affect current funding for
    existing HIDTAs. ONDCP will prioritize the remaining $15 million based
    on program priorities and other issues specific to the HIDTAs.
        Since January 1990, counties in the following 28 areas have been
    designated as HIDTAs: Houston; Los Angeles; South Florida; New York;
    and the Southwest Border, which includes South Texas, West Texas, New
    Mexico, Arizona and Southern California (in 1990); Baltimore/
    Washington, DC; and Puerto Rico/U.S. Virgin Islands (in 1994); Atlanta;
    Chicago; and Philadelphia/Camden (in 1995); Gulf Coast (Alabama,
    Louisiana, and Mississippi); Lake County (Indiana); the Midwest (Iowa,
    Kansas, Missouri, Nebraska, North Dakota, and South Dakota); Northwest
    (Washington); and Rocky Mountains (Colorado, Utah, and Wyoming) (in
    1996); Northern California (San Francisco Bay Area); and Southeastern
    Michigan (in 1997); Appalachia (Kentucky, Tennessee, and West
    Virginia); Central Florida; Milwaukee; and North Texas (in 1998);
    Central Valley California; Hawaii; New England (Connecticut, Maine,
    Massachusetts, New Hampshire, Rhode Island, and Vermont); Ohio; and
    Oregon (in 1999); and Northern Florida; and Nevada (in 2001). HIDTA
    designated counties comprise approximately 10 percent of United States
    counties; they are present in 41 States, Puerto Rico, the U.S. Virgin
    Islands, and the District of Columbia.
                                   conclusion
        In announcing the release of the National Drug Control Strategy
    this February, President Bush stated the Administration's view that we
    need to have clear goals that can be measured, that we take
    responsibility for achieving them, and that we explain how we will meet
    them. The President's statement is worth quoting in this context: ``I
    told John [Walters] when he signed on, I'm the kind of fellow that
    likes to say, what are the results? I like to know, actually, are we
    making a difference? And so here's our goal, here's the goal by which
    we'll be measured--here's the goal which I'll be measured first, and
    then John will definitely be measured if I'm measured. I want to see a
    10 percent reduction in teenage and adult drug use over the next 2
    years, and a 25 percent reduction in drug use, nationally, over the
    next 5 years. Those are our goals. We understand we can't do it alone
    here in Washington. And that's why our approach is a community-based
    approach. That's why we recognize the true strength of the country is
    our people. And we know there's thousands of parents, thousands of
    educators, thousands of community activists, law enforcement officials,
    all anxious to come together to achieve this national strategy.''
        We look to this Subcommittee, and indeed the entire Congress, to
    provide bipartisan leadership and support in this effort.

                                 MEDIA CAMPAIGN

        Senator Dorgan. Director Walters, thank you very much.
        Let me ask a couple of questions about the media campaign
    first. The information that I have says that, in fact, the goal
    of the media campaign is to reduce drug use among youth. You
    say a statistically significant decline was found in the past-
    month marijuana use among 12- and 13-year-olds, from 1.8
    percent to 0.7 percent between waves one and three. For 14- to
    15-year-olds, however, there was a statistically significant
    increase in the past-month use from 2.1 percent in wave one to
    5.6 percent in wave three. That is nearly a doubling of the 14-
    to 15-year-olds.
        You indicate that the campaign during the past year reached
    90 percent of America's youth at least four times a week, and
    now those of us in politics understand about reach and gross
    rating points. And I think what you are saying here is that you
    have purchased enough points so that you expect that 90 percent
    of your target group has seen four messages a week.
        Mr. Walters. That may be a month, I think, but----
        Senator Dorgan. Is it a month?
        Mr. Walters. It is a week. I am sorry.
        Senator Dorgan. All right. So that is a pretty significant
    reach to your target audience, and, you know, we have been at
    this now some number of years, and this year we are talking
    about, what, $180 million again. That is a significant
    expenditure.
        Tell me, how can we know whether we are making a difference
    here? If 14- and 15-year-olds--I would expect 12- to 13-year-
    olds last-month drug use, I am guessing that is probably
    marijuana in school or something--or I shouldn't say
    ``school,'' but marijuana use has gone from 1.8 percent to 0.7
    percent. I assume that it is a very small number. The 14- to
    15-year-olds has gone from 2.1 to 5.6. That is more than
    doubled, and yet that comes at a time when the average 14- to
    15-year-old has seen four messages a week for a year's worth of
    messages in our media campaign.
        How do we reconcile that, and what does that say to you?
        Mr. Walters. First of all, I believe the only way to judge
    this Campaign is whether it reduces drug use. We have interim
    measures of awareness such as ``have you seen this and are you
    remembering contact with it.'' But my goal for this and other
    programs is reducing drug use. That is why the President set
    the goals. If we can not reduce drug use with either our supply
    or demand programs generally or individually, then my view is
    we have to make changes and support the programs that do.
        In regard to the Campaign, I think in fairness, from the
    look I have been able to have at it so far, there has been a
    lag, of course, in the period of the first appropriation to the
    full implementation of the plan. We are now, for the first
    time, going to get the evaluation in May to show us the first
    full 6 months of the fully implemented campaign on nationwide
    effects on drug use. I think that will be an important part of
    our ability to say whether or not it is working at an adequate
    level to justify the support it has been given.
        Senator Dorgan. Let me ask you a hypothetical about that.
    What if that shows pretty much what you have seen here? You
    talk about full implementation. This is a pretty significant
    implementation, the reach of targeted audience four times a
    week for a lengthy period of time, and what it shows is that
    your target audience is aware of the ads, but that 14- to 15-
    year-olds, which is a pretty crucial area for us, it seems to
    me, have more than doubled in their last month's use of drugs.
        What if you discover that your first 6 months of full
    usage, as you describe it, shows exactly the same thing? What
    would that say to you?
        Mr. Walters. I think we have two choices in that regard. If
    it is working for younger kids, if it continues to show a
    relationship to working for younger kids, then I think that
    what you are seeing is at least part of the Campaign that is
    targeted on younger kids, either directly or through trying to
    influence parents, which is the other part of the target
    audience to reinforce these messages with young kids, which we
    know will have maximum effect, then we could say that part is
    working. The direction of the Campaign against older students
    needs to be changed, strengthened, or expanded.
        In fact, I have begun discussions with my staff saying that
    for years we have seen that, in fact, drug use doubles between
    junior high school and high school. If we have shown success in
    this age category, I think we have to do it across the board--
    not just here but with things like the Drug-Free Schools
    Program and others--we need to do a better job in high school.
    We need to raise the awareness of people that we are losing the
    battle at the high school level. We know that we are trying to
    get kids not to experiment during their teenage years. We have
    had long, hard experience here. If they do not use drugs during
    their teenage years--the same is true of alcohol and
    cigarettes--they are unlikely to go on to use later on; and if
    they don't start experimenting, they will not go on to
    addiction.
        Our goal has to be to not only follow them in the early
    teenage years, but we have to provide an effective prevention
    effort throughout that whole period if we are going to be
    successful. But the good news is, if we are successful, that is
    the way to contain this problem for subsequent----
        Senator Dorgan. I agree with that, but the question that I
    am asking is: Is the media campaign successful? We are spending
    potentially $180 million again this year on it, and at some
    point, we are going to have to make a judgment. Are we just
    putting a lot of money out there, running a lot of commercials,
    and making kids more aware of the commercials, but, in fact,
    among 14- and 15-year-olds last month's drug use is doubling?
    Is there a point at which we say there is a much more effective
    way to spend that money?
        Mr. Walters. Yes, I agree with you entirely.
        Senator Dorgan. And what is that point?
        Mr. Walters. I think in fairness, the point will be
    probably in the next two evaluation rounds. If we do not see
    significant improvements in drug use, then we have to face the
    problem of is this a matter of restructuring or is this a
    matter of, for one reason or another, what seemed to be a good
    idea is not working.
        Senator Dorgan. Can I ask you, when you say a statistically
    significant decline was found in the past month of 12- to 13-
    year-olds from 1.8 to 0.7 percent, what kind of polling is this
    or sampling? What kind of error rate exists with this sampling?
        Mr. Walters. I am not an expert on the statistics. We
    should probably provide you a full answer for the record. My
    understanding, though, is that the samples are--especially
    given the lower rates of use at that age group, the samples are
    relatively small. So a statistically significant change will
    have to be a larger change than it would be if we had a broader
    sample with more ability to have significant changes measured
    at smaller increments.
        That is significant. I believe that means it is 95 or 99
    percent certain. That is probably not an accident based on the
    statistics. But we should give you a complete answer for the
    record.
        Senator Dorgan. All right. I have some other questions, but
    let me turn to my colleagues. Senator Campbell?
        Senator Campbell. Thank you, Mr. Chairman. Let me also talk
    about the Anti-Drug Media Campaign. I think I have been
    concerned with it, as you have.
        I would like to first add that I like that second ad,--
    about 10 percent of South Dakota are Indian people, and many
    youngsters we lose not from high-powered drugs like, you know,
    cocaine or something that is expensive. We lose them to paint
    and glue, canned heat, cold medicines, oven cleaners, I mean
    the stuff that just burns out their skull. It just gives them
    no future at all. And I would like to see some resources put
    there.
        But as the chairman mentioned, we put an awful lot of money
    in this ad campaign, and I am not altogether sure that we put
    it in the right places, because it seems to me you have
    mentioned targeting yourself a couple times, though, we have
    had some disagreement with your predecessor about who they are
    targeting and who is actually watching or viewing what it is.
        As an example, I understand we spent a great deal of money
    on the Super Bowl ads at roughly a million bucks a minute. I am
    not too sure how many 12-year-olds watch the Super Bowl. I am
    sure their dads all watch it, but I am not too sure how many of
    those youngsters watch it. So whether it is cost-effective or
    not, I don't know.
        But I know one thing. We are not targeting and we are not
    asking--we make too many decisions around here in the White
    House and the agencies about where we put the money without
    asking the people that are going to be affected.
        I just happened to notice, while you were speaking, a bunch
    of youngsters came in the back of the room, and we are always
    very pleased to see young people attend these hearings. But if
    I might, Mr. Chairman, I would like to ask the young people
    back there: What kind of magazines do you read? Do you read
    teen magazines, or People or some of those? Somebody just give
    me a type of magazine you read. Yes, you. Seventeen and People.
    And what is the third one? Sports Illustrated.
        Well, if young people are using those, it seems to me that
    that is where we ought to be taking out the ads. But last year,
    or perhaps it was the year before--I am sorry, I lose track. I
    have been around here too long. Your predecessor put a whole
    bunch of money into an ad campaign buying ads for teenagers
    U.S. News & World Report. And how many young people read U.S.
    News & World Report? There might be one once in a while, but
    that is a specialty magazine that tends to go to--you know, it
    might go to bankers or investment people or business people,
    but not many teenagers read that. It seemed to me it was just a
    terrific waste of money. What we ought to be doing is taking
    the word of young people like this saying what they are
    interested in reading and putting those adds in there. And we
    can't micromanage the agency from here, obviously, but somebody
    over there that is making the decisions, it seems to me, needs
    to find out who the heck they are trying to get to before they
    start signing contracts with high-powered magazine agencies and
    television media consultants and so on, because I think it is
    just not getting to a lot of young people. And as I understand
    the numbers, they support--the use of marijuana is going down.
    You said 12- and 13-year-olds, if I am not mistaken. But use of
    other drugs has gone up in other places. And yet we have spent
    930 million bucks.
        So I just want to pass that on. If you want an expert in
    what young people are reading, ask the experts, and that is the
    young people, not us or not somebody over at the White House or
    in the agency. Ask the young people what they are reading, and
    that, I would suggest, is where we ought to put our money, Mr.
    Walters.
        Now, let me go on to just a couple of other things.
        Mr. Walters. Could I address that issue?
        Senator Campbell. Yes, please do.
        Mr. Walters. I think it is important that we have a common
    understanding about what you want to have the program do.
        My understanding in part of the answer to the question is
    the decision was made when the Campaign started to divide the
    program into two target audiences. One was the young people,
    and I agree with you that ``U.S. News'' is not a good vehicle
    to reach young people. The other part of the program was
    parents, and to try to give the message with the information
    that they needed to talk to their children based on the
    research that if parents--I know parents sometimes feel they
    are not listened to, but parents are the biggest influence.
    They are the most important teacher; they are the biggest
    example. And the research has showed that if parents state
    clearly their sense of right and wrong in this area, it is the
    most powerful thing. So to have reinforcement of the message
    that is going directly to the kids with a message, that was
    targeted on parents to get them to talk to young people.
        Now, that is a technique. It may or may not work
    effectively. The initial research or the evaluation showed that
    there was both a greater engagement of parents on this, and
    there were children reporting greater engagement by parents to
    them talking about this. So it is bifurcated. But that may be
    part of the reason why you are seeing this in different places.
        Obviously, a children's ad should not be in ``U.S. News &
    World Report.'' I am not taking issue with that.
        On the Super Bowl, we did more focus group testing, on this
    ad than any other came on late in this process, but I made the
    decision to do the Super Bowl ads for the office. I personally
    watched the most extensive set of focus group tests that we did
    with parents and young people and saw the reaction to this. And
    the reason we used the Super Bowl, while it is expensive, it is
    a huge audience. It crosses all demographics that we are trying
    to reach better than any other single vehicle that we could
    find. And, in addition, it is the most watched program where
    parents watch with kids so we get reinforcement.
        Now, this concept is one thing. It cannot be the whole
    game, and I am not saying that I am an expert on media. But
    what I am saying is from what I heard, the reason we did that
    that way was, dollar per eyeball, we got a good bargain on
    that.
        But, again, I want to be clear. I agree with you entirely.
    I am not arguing, I am not equivocating. If this program
    through the evaluation we have, which is one of the most
    sophisticated ever constructed, to my knowledge, in a
    Government program, does not change patterns of drug use, all
    the good feelings, all the awards for ads, all the awareness
    that does not translate into changes in use does not matter. We
    will have to change what we do.
        Senator Campbell. Well, I am not an expert on a lot of
    things, and I am certainly not an expert on parenting with the
    new styles of communicating all the problems with your
    youngsters and dealing with them in some kind of a manner. I
    guess I am kind of old-fashioned. I have a youngster who is a
    grown man now, a very productive, hard-working, good citizen.
    When he was a young teenager, if I had caught him using drugs,
    I would have knocked the hell out of him. It is as simple as
    that. I guess I am old-fashioned, because I remember that is
    the way my dad did things. And sometimes I think that the new
    method of parenting doesn't get it done.
        Mr. Walters. I understand.
        Senator Campbell. But, in any event, there is another
    problem with that, too, and that is, sometimes the parents are
    drug users, as you know.
        Mr. Walters. Yes, I know.
        Senator Campbell. If they are, I don't know how we give the
    kids a chance if the parents are fooling around with the stuff.
        Let me go on, Mr. Chairman, just maybe a couple others. I
    am using too much time. Let me skip a couple of them.
        This new drug called Ecstasy, we carved out $5 million in
    the National Anti-Drug Media Campaign last year for that. How
    do you plan to spend that, if it is going to be directed
    specifically to Ecstasy?
        Mr. Walters. We have a series of ads. I showed one here. We
    have some also that are targeted----
        Senator Campbell. A general ad dealing with everything.
        Mr. Walters. Yes. And we are about to launch the actual
    showing of these ads in target markets. Because $5 million in
    the national advertising market is not a lot of money, although
    I am not saying I do not recognize it is substantial money we
    are going to try to use some target areas so that we get enough
    of a concentration that we can measure effect. If it works we
    will try to expand it.
        Senator Campbell. Okay. And one last question, I guess, Mr.
    Chairman, is: Why are we doing this at all? Because when I was
    the chairman of this subcommittee, in 1997, your predecessor
    requested funding for this National Media Campaign. It was
    supposed to be a 5-year effort. So basically what we are
    saying, now is that this is the 60 year. Where do we go from
    here?
        Are you working with an authorization committee to extend
    this, or are we?
        Mr. Walters. Yes. We will submit language with
    representatives in both chambers, bipartisan, to reauthorize
    the program. Now, again, we may reach an issue where you want
    to make changes, but unless we have an authorization there, we
    will not have the option of continuing. But that will be
    forthcoming in--I think next month is when we are going to be
    able to introduce it.
        Senator Campbell. Well, in closing, I just have to tell
    you, I really support any effort we can to educate youngsters
    about the dangers of it. I have a nephew that is 50 years old
    now, my nephew. When he was a youngster in high school, as a
    freshman and sophomore, he was a straight A student. He was on
    the wrestling team. He was in the band. Just a terrific kid.
    And somehow he got to fooling around with speed and something
    else; I have forgotten what it was now. Well, he is still in an
    institution, 50 years old. And he did something to himself that
    was not recoverable, and he has to be on medication all the
    time. If he goes off medication, he hallucinates, he gets
    violent, he does all kinds of things.
        When they let him go home, as long as he takes the
    medication, he is in pretty good shape. But if he doesn't, he
    ends up back in the institution in California. And that is his
    life, and that is what is going to be the rest of his life, 50
    years old, never have a family, never have children, never be
    able to enjoy the fruits of America, all the things that we do,
    because of a mistake he made when he was a youngster fooling
    around with the wrong kind of stuff. Oh, I know what it was,
    TCP? What is that stuff called?
        Mr. Walters. PCP.
        Senator Campbell. It is something, I guess, that alters
    your mind so that it doesn't grow back. And he did that, as I
    understand it, just a few times as sort of a dare with some
    other kids, and it has ruined his life. That is what has
    happened to our family.
        Mr. Walters. I think that is an important point, and I do
    not mean to take too much time. But I think it is important
    that you understand what we are trying to do or what I will try
    to do here.
        The discussion about the drug problem in general tends to
    lapse into a view that the drug problem is about 28-year-olds
    or 32-year-olds deciding to use drugs as a recreational
    activity. That is not what the drug problem is in America, and
    we cannot say that enough. It is about kids. It is about
    teenagers. If they do not start at that age, they are not going
    to be using drugs later on. It is about addiction when they
    start young and they start too young, and it is about damaged
    and destroyed lives through the use of those drugs.
        We need to do a better job with our teenagers. We believe
    we can do a better job and that we can help reduce the number
    of people who will go on to adulthoods of wrecked lives. But we
    are not going to do that by not making clear what the reality
    is here, what the danger is here, and that the process of
    addiction is a change in the human brain. The use of drugs is a
    preventable behavior. Addiction has characteristics of disease.
    It physically changes the brain.
        We are taking young people when their brains are in
    development, and we are damaging them, and we have difficulty
    many times bringing them back from that dependency. That is
    what this is really about. It has been distorted.
        The Media Campaign, may not work. We may want to change it.
    But I believe it was partly a response to the claims by a lot
    of parents and adults by saying the culture is against me. I am
    trying to do this at home, but all the messages coming from the
    media and the culture in too many situations are the wrong ones
    for my kids about drugs.
        This may not work. It is a bold experiment. It is risky. It
    is high visibility. It is a lot of money. But if we can do
    something to help create a better environment for the way
    parents and people in communities are trying to work this
    problem, I think it is worth the risk. But I want to repeat: I
    have no hesitation. If it does not work and I think we have a
    reliable evaluation, we will change it.
        Senator Campbell. Director Walters, I think we are on the
    same wavelength. Thank you.
        Thank you, Mr. Chairman.
        Senator Dorgan. Senator DeWine?
        Senator DeWine. Thank you, Mr. Chairman.
        Mr. Director, I want to continue on the ad issue, and I
    guess I come from this maybe a little different perspective,
    but maybe not so much.
        It seems to me that when you try to change the culture, as
    you pointed out--which I think is a good point. I think that is
    what we are trying to do, is try to change the culture, or at
    least attempt to do that. And when you try to reduce
    consumption, the demand side, there are many factors that go
    into that. And I think it is very difficult to pull out one
    thing that you are doing and isolate that and determine whether
    or not that is working. It seems to me you have to do a lot of
    things.
        It is sort of like, if I could reference a political
    campaign for my colleagues, you end up in a political campaign
    doing a lot of different things, and at the end of the day when
    election day is held, you are really not sure exactly what
    worked, but you either won or you lost. But you did a whole
    bunch of different things, and you hope a lot of them worked if
    you won.
        So I think it is difficult, very, very difficult to pull
    this one out and say this is responsible for a reduction or it
    is not responsible for a reduction.
        Now, having said that, let me ask you, who do you rely on
    to make the determination about what type ad, where the ad is
    placed, what the target is? And do those people who advise you
    in regard to that, who I assume are the advertising experts,
    also figure out some way of measuring the success or failure?
        Mr. Walters. Yes, there is a multi-part process that
    includes staff in my office, but then working with a panel of
    behavior-change experts that include child psychologists as
    well as advertising people, to measure whether particular ads
    or particular approaches are likely to be successful. So those
    are all screened, and then the buys are based on advice from
    advertising folks given the target audience and the nature of
    the particular item that message is being placed.
        I have begun to become more familiar with this. We do not
    want to have amateurs entirely; but, on the other hand, we also
    do not want to not be responsible for a large program. I have
    asked them to make sure that if I can not understand what is
    going on here, we better figure out how we can either make it
    understandable----
        Senator DeWine. But let me take an example, though. The
    determination of what specific age we are targeting, who makes
    that decision, and how is that made?
        Mr. Walters. There was a strategy conducted when the
    program started that we can provide you that was based on
    advice of prevention people in the field on where to start and
    what might be a target audience. As I said, I have directed a
    reconsideration of a part of that strategy to focus on older
    young people, high school age, basically because of the data
    that we have seen from the first part of the campaign where it
    may be working against the younger target audience, which has
    been a target. We have to give them credit for that. But we are
    not getting follow-through on the older kids where drug use
    starts to increase.
        Senator DeWine. You know, it would seem to me from what I
    know--I am new to this committee. I am not new to the issue. I
    have dealt with this for a long time. I don't pretend to be an
    expert. I don't think we have any experts. But it would seem to
    me that most of the information I have read and most of the
    people I have talked to would indicate that, like most other
    things in life, the earlier you are reaching someone, the
    better off that you are. And then you have to sustain that.
        So your problem is you have got to reach them young, and
    then you have got to keep reaching them and keep reaching them
    and keep reaching them.
        Mr. Walters. Yes.
        Senator DeWine. An example of a problem we have had--and
    you and I have talked about this--is the Drug-Free School
    Program. The problem with the Drug-Free School Program is not
    that a lot of the programs don't work--some of them don't work;
    but we have tried to correct that--but that we don't do it
    consistently. We don't have a K-12 program because there isn't
    enough money to do it.
        If you had a K-12 program, you would have a decent shot at
    maybe doing something. So it seems to me that that is the same
    problem that you are facing with a finite amount of money.
        My time is up, Mr. Chairman, but I just would say that I am
    not--I think this committee should have oversight. We should
    keep questioning you about how that money is spent. I know you
    are questioning the experts. But at least this member of the
    committee is not convinced that we shouldn't be spending money
    on advertising. If it is good enough to try to get Mike DeWine
    elected to the U.S. Senate and change people's minds, it seems
    to me--and we all do it. There isn't a one of us that doesn't
    do it. It seems to me that it is good enough--and it is good
    enough to do anything else in society, then it ought to play a
    part--it ought to play a part of our anti-drug strategy. It is
    not everything. But if you look at the total amount of
    dollars--the total amount of dollars, not what we give to you
    but the total amount of dollars in the Federal Government that
    we spend on anti-drug efforts, what we spend on advertising is
    a very small amount of money.
        Mr. Walters. I agree.
        Senator DeWine. Thank you, Mr. Chairman.
        Mr. Walters. I just want to be clear. The evaluation I am
    talking about is not to say what is happening with drug use
    globally and then hold only the Media Campaign, $180 million,
    out of more than $19 billion in the drug control budget
    requested for fiscal year 2003. The evaluation we have and we
    have been submitting to you is the state of the art, very
    sophisticated. It is expensive. But the goal was, since this
    was a very expensive campaign for the Federal Government to do,
    as much as possible to isolate the contribution the Campaign
    itself makes to these behavior changes. We are not citing
    generalized numbers. We are citing the numbers within the
    component of use that is part of the evaluation of the
    Campaign.
        Now, all these things are not perfect, but I have not heard
    anyone say that the evaluation for the campaign will not give
    us the best results and pretty reliable results at this point.
    We will see what they say.
        Senator Dorgan. Senator Reed?

                     HIGH INTENSITY DRUG TRAFFICKING AREAS

        Senator Reed. Thank you very much, Mr. Chairman.
        Thank you, Director Walters, for joining us today. Let me
    speak about the High Intensity Drug Trafficking Area Program.
    It is extremely popular with law enforcement officials in New
    England, and New England is somewhat unusual. It has a sixth
    State as part of its region, one of the larger concentrations
    of States. They would like more money. Last year, Congress put
    an additional $20 million to raise the total up to $226
    million, but this year the President's budget goes back to $206
    million. Why was the $20 million, which you are using already,
    lopped off the budget?
        Mr. Walters. I have been personally meeting with the HIDTA
    directors. I met with them when they assembled in Washington,
    actually right after I was confirmed, and I met with them more
    recently. I am personally visiting--and I intend to go to all
    the HIDTAs.
        I was actually in the ONDCP when this program was started
    back in the President's father's administration. The question
    with this program is how much additional value, given other
    forms of law enforcement support and other activities the
    Federal Government does, is appropriate.
        My own view is--and when I have talked to the HIDTA
    directors about it--if this program as it exists in some of the
    best HIDTAs, I think, that are out there that I have seen, can
    be used to build coordination, which it has, to target law
    enforcement resources on enforcement activities that make a
    difference, we are prepared in the course of the review to
    drive more dollars here.
        Now, this request got put together at the end of my coming,
    and I am not making an excuse. I defend the President's budget.
    But if the program simply provides an add-on in a competitive
    environment for budgets that actually should be placed in
    another program or put in another direction, we intend to do
    that. But my goal to the HIDTA directors is to tell them--
    across the board we have talked about what works here as a
    criteria because, I think the greatest single thing--you talk
    about this as well as I do--that we face as a threat in the
    area of fighting the problem of drug abuse is cynicism that
    nothing works.
        I have asked them to not just talk about coping with the
    drug problem. Give me a plan in every program, demand and
    supply, including HIDTA, give me a plan using your resources,
    with your coordination, to reduce the problem in your area. We
    intend to attack the supply side as a market, and I have asked
    them to give me a plan to do that. The additional $20 million,
    with the exception of the $5 million of that that we have sent
    to support the shortfall for National Guard that many of the
    HIDTAs use, we have asked them to give us plans for directing
    their efforts and expanding their efforts in that direction of
    shrinking the problem.
        If we can get those kinds of proposals, we are prepared to
    support it as heavily as the results will warrant. But if it is
    going to cope with it--and I am not saying there are not
    valuable activities going on there--then I have to ask myself
    where are there opportunities to reduce the problem.
        Senator Reed. Well, I get very, very strong comments from
    law enforcement professionals, and they are in the field. They
    are the proverbial people on the front lines. And I think they
    have got a good sense of what works and what doesn't, and they
    go out of their way to tell me how important this is to New
    England. One aspect of HIDTA is the Investigative Support
    Center. That gets very good reviews, too, and I would urge you
    to make sure that this program is funded adequately.
        Mr. Walters. I understand.
        Senator Reed. There is another aspect of this up our way.
    Route 95 cuts right through the heart of New England. Last
    year, in our report, we directed your office to work with State
    law enforcement officials to combat interstate shipment of
    drugs in the New England region. I wonder if you could comment
    at all about any efforts that are underway or any specifics.
        Mr. Walters. I do not know the specific operations that are
    there. I will be happy to supply those for the record.
        Senator Reed. Thank you, Mr. Director.
        There is another aspect of the drug problem that has reared
    its ugly head in Rhode Island. Just recently, the first
    methamphetamine lab was discovered by Rhode Island law
    enforcement officials. This marks a new chapter and a very
    sinister chapter. Can you comment about your efforts to combat
    the meth trade up in New England?
        Mr. Walters. Yes. As you know, we have seen this problem
    essentially start at the West Coast and move east. I was just
    at the DEA Training center earlier this week looking at the
    training they are doing for State and local law enforcement
    officials to certify them. They essentially have to be
    certified as hazardous materials handlers in order to conduct
    enforcement operations and clean up sites. DEA has resources
    appropriated by Congress to help in cleaning up such sites.
        When I leave here today, I am going out to the Northwest to
    look at what has, unfortunately, a more mature meth problem in
    labs. We have used both parts of the HIDTA resources but other
    programs in coordination with DEA and other Federal agencies to
    go after this problem. We are continuing to look at ways, both
    in terms of controlling precursors but also in, of course,
    targeting the labs, to more effectively look after the issue.
    The diversion of things like pseudoephedrine off the licit
    market but in large quantities is obviously something that we
    can take a look at. When you get the small labs, which are
    essentially quantities you can go into larger discount stores
    and buy off the shelf, even if you have to use a couple of
    buyers because some of the stores have put in rules about how
    many packs of pseudoephedrine you can buy, that is a different
    problem.
        But it is a serious problem. It is a growing problem. We
    intend to both try to focus our law enforcement resources
    effectively. I think we are--in some cases, doing a better job
    of staying on top of it, but we are not where we need to be
    there.

                            PRESCRIPTION DRUG ABUSE

        Senator Reed. Thank you, Mr. Walters.
        I just want to raise two final issues that are unrelated,
    but give you a chance to comment on both, because the chairman
    is very kind about his time, and I am sure he has other
    questions.
        We often focus in terms of drug abuse will regard to
    illegal drugs, yet prescription drug abuse is becoming--not
    becoming, it is a critical problem. One of the marquee issues
    is OxyContin, which not only is being abused but people are
    breaking into drugstores and stealing it at gunpoint in some
    cases. That is one issue.
        The second issue is when you go into the juvenile justice
    system, you find very troubled youngsters, most of them with
    substance abuse problems. Here is literally a captive audience.
    You don't have to catch them watching the Super Bowl. You have
    got them. And yet it seems to me that we do just an absolutely
    deplorable job in trying to get them the type of support,
    assistance, and resources to cope and to get off this problem.
    And sometimes they leave those places worse than when they get
    in.
        So can you comment briefly on the issue of prescription
    drugs, your strategy to deal with that type of abuse? And,
    also, what are we doing with incarcerating youth in juvenile
    justice?
        Mr. Walters. On the diversion of--or the illicit use of
    prescription drugs, we have begun discussions. I have met with
    the Deputy FDA Commissioner and I have been in conversations
    with DEA. I have also conversations with one of the physicians
    that has been a leader in--Tennessee had an unusual
    concentration of a diversion problem, and I met with a
    professor there at Vanderbilt who was a leader in helping to
    create programs for physicians.
        There are two different problems here. Part of it is the
    criminal diversion of drugs through, you know, either stealing
    or the writing of criminal prescriptions knowingly. Another big
    problem, which OxyContin is part of that, is physicians simply
    not being careful or not being fully trained or not being aware
    of what to look for: people shopping from one physician to
    another to get multiple prescriptions; people being duped when
    they present the alleged needs for pain or other kinds of
    medication.
        They have created an educational program in Tennessee that
    has helped reduce the problem there. We are looking at ways
    that we could be a convener to do that more broadly at medical
    schools, with State licensing boards, because there is some
    education that could help reduce a substantial part of this
    problem.
        There also is a need for referral because some of this
    diversion is physicians writing prescriptions which are dubious
    to friends or colleagues or family members and themselves,
    frankly. So there needs to be kind of an intervention in the
    profession, but there also needs to be better education. And I
    think we can make some headway on this. It will probably take
    us a few months to get everything together to convene that. But
    I am hopeful that we can make a contribution here that will
    help some of that problem.
        The other part is tighter diversion controls, and we will
    look at that with FDA, DEA, and the State Agencies involved as
    well.
        On the treatment effort, no one knows how long you are
    going to be in these positions. You borrow them for a short
    time from the American people. But I would like to have--one of
    the results, I hope, of what our work can be removing the
    current sharp line in people's minds between the criminal
    justice system and the treatment system. I think criminal
    justice has been going in this direction where people have been
    leading and sorting people who have a dependency problem and
    using the resources and, frankly, the authority of the criminal
    justice system to get them treatment. We know if we start
    younger, we have better outcomes. We know that if we do this
    consistently and the longer people stay in treatment, the
    better off they are. We know that if we follow up with them and
    we provide a way of tying services that may be educational or
    employment services to them, including mental health services,
    we have better outcomes.
        The criminal justice system through diversion programs for
    youth and adults, drug courts, treatment in prisons, and
    follow-up can be a very important source. We are going to
    increase--the President has asked, as you probably know, to add
    $1.6 billion to Federal treatment spending over the next 5
    years. The Federal Government makes a big contribution. It is
    not the only contribution. I would like to see us continue to
    move in the direction of using the criminal justice system as a
    way of effectively providing both intake when people have
    problems and present themselves, but also as a kind of case
    management to give people who are not violent offenders, who
    are not hard-core criminals, and are not engaged in major
    trafficking the impetus they may need to get into treatment and
    to get into recovery and stay there.
        Our goal is to make people well. The criminal justice
    system is already an important intake point. I think there is
    actually a better story here than most people know. We need to
    make that clear. We need to reinforce it. I have asked my staff
    as a part of the review to see how rapidly we could contribute
    to an expansion of the drug court system and the system that
    provides treatment in prisons. We should have that review done
    to begin to shape the budget for the next fiscal year.
        Senator Reed. Well, thank you, Director Walters. I would
    suggest--and I know you are doing this--that in your analysis
    you come up with some dollar figures which might be very
    impressive in their size if we are going to really deal with
    this treatment problem throughout the country. But I commend
    you for that initiative, and I thank you.

                                 DRUG TREATMENT

        Senator Dorgan. Senator Reed, thank you.
        Director Walters, is the $1.6 billion all new money?
        Mr. Walters. It would be all new money. It would be over 5
    years.
        Senator Dorgan. My understanding is that some of it in the
    2003 request is paid for by reductions in other treatment
    programs. I don't have the list of that, but I think it is
    important to understand when the administration says $1.6
    billion over 5 years, is this a commitment to new money or is
    it a commitment to rearrange old programs?
        Mr. Walters. It is a commitment to new money, and I will
    supply the detail for the record. There were some service-
    providing programs that were consolidated and removed, but the
    net increase meets the President's commitment, and the
    reductions were not used--we did not rob Peter to pay Paul. I
    understand the point of the question.

                    NATIONAL YOUTH ANTI-DRUG MEDIA CAMPAIGN

        Senator Dorgan. Now, let me go back to this issue of the
    media campaign because--I don't want to dwell too much on it. I
    am going to submit a series of questions to you in writing.
    But, you know, we would have expected at the end of 5 years to
    be able to say, yes, we did it and it worked, or we did it and
    it didn't work. We spend, what $500 million on your agency;
    almost $200 million of that is the media campaign, so it is a
    significant part of what we do.
        The question, I guess, is: Why after 5 years do we not have
    a pretty clear answer, yes, it worked or, no, it didn't work?
        Mr. Walters. I think there are two reasons for that at this
    point. One is there was a lag from the beginning of the program
    to when it got fully implemented.
        Two, the operating strategy, which, again, these are all
    best guesses of how this is going to work, was to provide
    messages both to parents and to young people that would first
    try to get them to change the way they think, and then there
    would be some lag between that process of re-analyzing the
    issue and then the actual change in behavior; that there would,
    in short, be a delay from first--it would not be watch one ad,
    do something different; that it would take some exposure and
    some time to create the environment.
        Now, again, that may be true. That may not be true. But
    what we will have in the period of the report that should be
    available next month and then the next 6-month review available
    in the fall is the first full implementation nationwide, and I
    think the first period of time such that, if this follows as
    predicted, the behavior change should be there.
        Now, it may be--and, again, I want to emphasize I agree
    with the premise of the question. It may be the Campaign either
    does not work or is not big enough to counter things, and then
    you have got to decide do you want to change it or do you want
    to put the money somewhere else.
        Senator Dorgan. But, you know, the behavior change isn't
    like breaking the sound barrier. I assume if it exists it is
    incremental. Over 5 years you ramp up, you have incremental
    change, and at the end of the full phase-in, you measure where
    that incremental change took you.
        My feeling is that if this were the private sector, after 5
    years you would decide whether you were making progress or not
    making progress. And when I say ``you,'' you have just recently
    arrived, but, you know, after--the anticipate was to spend
    close to $1 billion in a 5-year period and then hand it off to
    corporate sponsors and expect to be able, by the end of the 5
    years, to evaluate with what accomplishment did we spend this
    money.
        The only reason I am raising that issue is I know the
    authorizers will take a look at it, we in the Appropriations
    Committee will take a hard look as well, at whether this is an
    effective use of money, and whether there are other ways to use
    this money that might be more effective.
        Let me just also comment quickly, I think the record on
    drug treatment for those who are incarcerated in this country
    is abysmal. Most people who are incarcerated--we have well over
    94 or 95 percent of the people incarcerated are incarcerated by
    State and local governments. And I understand we have a
    different standard at the Federal level, although it is not
    perfect. But in most areas of State and local government,
    county jails, State penitentiaries and so on, a substantial
    portion of those in those incarceration facilities with drug
    addictions are not getting treatment and not getting effective
    treatment and are being released from incarceration with a drug
    issue unresolved.
        I think it requires a great deal of money to address that.
    I don't know how much, but addressing the drug problem also
    requires us to address that issue, I think, in a very
    aggressive way. And so I hope--based on your testimony, I know
    you will take a look at that.
        I am going to submit a series of questions to you because
    of Secretary Powell's briefing on his Middle East trip.
        Mr. Walters. Can I say one thing about that?
        Senator Dorgan. Yes, of course.
        Mr. Walters. I have made clear my own concern about our
    rigorous evaluation of the ad Campaign. But I also want to be
    fair to you in this opportunity about what I think from my
    experience the underlying factors are.
        The closest thing we have to the kind of research about
    attitude versus behavior in my experience over the long term
    has been something like the high school survey that was
    conducted for years that also measured both use and measured
    attitudes of disapproval and change. We always saw that
    attitudes about the danger of using drugs or disapproval were
    about a year to 18 months or 2 years ahead of the change in
    behavior. It would not be impossible--in fact, it is not
    unreasonable to expect that there would be a similar pattern
    here.
        But, again, we are guessing as to what is the most likely
    story of how these things work across a large population. Some
    individuals are going to be different. That is not to say that
    I do not think we have to be rigorous, and I understand exactly
    what you are saying. If it does not work, we are not going to
    continue funding it. And I understand the frustration with
    after 5 years and this amount of investment how much change do
    we see.
        We also know that there are important factors here that we
    have seen from the evaluation. An important factor in whether
    kids use is the percentage that say they have been presented
    with drugs through peers and others.
        So the Campaign will play a part, we will be able hopefully
    to measure that part, but we also have to hopefully empower
    parents and other adults in their lives to supervise young
    people. We cannot just have them watch ads and then inoculate
    them and dip them into a society which is otherwise not doing
    other parts of crucial activity here. So it has to be a part--
    we will examine it as a part, but I understand what you are
    saying.
        Senator Dorgan. Well, you know, we used to raise horses,
    and we actually drove some horses with a buggy, and we used to
    use blinders on the horses from time to time, especially one of
    them that would shy at almost anything. And the blinders, of
    course, prohibit the horse from looking anywhere but ahead,
    straight ahead. The only reason I am raising these questions is
    we are moving straight ahead on this campaign. I resisted the
    attempt by those in the Senate 2 years ago to interrupt the
    campaign by saying that a much bigger problem in America's
    schools is the issue of alcohol and drinking, and let's take
    some of this money and move it to deal with that issue.
        And I was one of those who resisted that and said, no, we
    have embarked on a course here for 5 years to evaluate with
    what effect can we achieve a reduction in drug use and a change
    in behavior with respect to drugs among America's young people.
        As I said, if this were the private sector, my guess is
    they would have at this point been about the business of
    deciding does this make sense or doesn't it, do we continue it
    or don't we.
        We still have those who believe that we ought to be doing
    this with respect to teenage drinking, and I am very
    sympathetic to that, I must say. I mean, I think there are
    going to be far more kids in the next month killed by underage
    drinking than drugs. It doesn't suggest--I don't think this
    program has--I mean, I am really anxious to see the measurement
    of it. But I will bet everybody in this room knows of a young
    kid that is dead because of drunk driving. I have got several
    in my family that have been killed from drunk driving, loved
    ones and so on. And I think if you go to a school today and
    talk to these kids, you will discover the really big problem is
    somebody getting drunk and somebody else getting in a car and
    having three of them killed in an accident.
        So we will have those in Congress continue the effort to
    say this campaign is spending $1 billion on this issue and the
    issue in most high schools these days continues to be, as it
    has been for 50 years, that kids are not responsible with
    respect to alcohol. And a lot of our kids are dying because of
    it.
        Well, that took me off in a different discussion. Again,
    the reason that I think it is important that we discuss this,
    we are at the end of 5 years. This subcommittee doesn't have an
    unlimited quantity of money. We are going to do with the money
    that we have from the American taxpayer the most effective job
    possible to address a range of issues. We want to provide good
    funding for you so that you can do your job, and we have tried
    to work very cooperatively with your agency over time.
        Mr. Walters. I appreciate that.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Dorgan. So let me do this: There are other things I
    wanted to inquire about, but because of time I will forfeit
    that. But let me ask if you will submit to some questions in
    writing.
        Mr. Walters. Absolutely.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]

                 Questions Submitted by Senator Byron L. Dorgan

                    national youth anti-drug media campaign
        Question. Has ONDCP used media campaign funds for creative costs
    associated with producing advertisements? If so, how much and for which
    ads?
        Answer. Of the $658.1 million spent for paid advertising in the
    last 4 fiscal years, $3.4 million (0.5 percent) has been spent on
    creative labor costs. This was primarily for the production of internet
    creative materials, for ethnic, in-language advertising addressing
    important ``niche'' audiences, and for strategic brand development;
    create material that the Partnership for a Drug Free America was not
    able to produce.
        Question. In each year, how much of the media campaign allocation
    is used for media buys versus all other costs for producing
    advertisements?
        Answer. Advertising production is a small percentage of the overall
    advertising budget, which is primarily allocated for media buying. Over
    the last 4 fiscal years, 96 percent of the advertising budget was used
    to purchase time and space with 4 percent used for production costs
    (including creative labor). This compares favorably to private sector
    allocations which typically include 90 percent for time and space and
    10 percent for production. Production and media planning budgets have
    varied from year to year depending on the need to develop creative
    materials and when those materials were needed versus the cost of
    television and radio time. Additionally, the media-planning year runs
    from July to June, which crosses over calendar years.\1\
    ---------------------------------------------------------------------------
        \1\ Program Year July and June Historical Media spending is higher
    than CY spending as noted below due to FAR obligation requirements and
    budget allocation procedures.
    ---------------------------------------------------------------------------

                            [In millions of dollars]

    1998/1999......................................................... 157.5
    1999/2000......................................................... 143.0
    2000/2001......................................................... 143.2
    2001/2002......................................................... 140.0

        The following provides the calendar year commitments for media and
    production materials and labor, along with media budgets for the July
    through June plan years:

                         MEDIA AND PRODUCTION BUDGET FOR THE MEDIA CAMPAIGN CALENDAR YEAR BASIS
                                                [In millions of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                                                        Production
                               Fiscal year                              Media spend        spend       Percent/split
    ----------------------------------------------------------------------------------------------------------------
    1999............................................................          $140.6            $6.8            95/5
    2000............................................................           125.0             5.0            96/4
    2001............................................................           134.0             4.0            97/3
    2002............................................................       \1\ 130.0         \2\ 4.9           96/4
    ----------------------------------------------------------------------------------------------------------------
    \1\ Budgeted.
    \2\ Estimated.

        Questions. How is the $5 million for ecstasy targeting being spent?
        Answer. Fiscal year 2002 Conference report language directed the
    Campaign to allocate $5 million (out of the $180 million appropriated)
    ``for advertising time and space specifically targeted at combating the
    drug Ecstasy.'' ONDCP intends to base this effort on anti-ecstasy
    television ads already developed by the Partnership for a Drug Free
    America. This anti-ecstasy advertising will be directed toward youth
    and will appear on popular youth-oriented network television programs.
        Question. What are the targeted media outlets and times?
        Answer. The ecstasy campaign will air on a variety of popular
    programs on the key networks that youth watch most, such as WB, MTV,
    UPN, ESPN, Fox, and Much Music. Programs may include shows such as WB's
    (``Seventh Heaven,'' ``Gilmore Girls,'' ``Dawson's Creek,''); UPN's
    (``The Hughleys,'' ``Wolf Lake,'' ``The Parkers''); MTV's (``Real
    World,'' ``WWF Heat''); Fox's (``Mad TV,'' ``Family Guy''); ESPN's
    Sports Center; and Much Music's (``Live at Much Music,'' ``Oven
    Fresh''). These programs air in primetime (8-11 p.m.) and late night
    (11:30 p.m.).
        The above schedule is based on ONDCP's April-June 2002 planned
    television schedule. Actual programs airing ecstasy advertising will
    vary depending upon availability and scheduling and will air between
    June and September 2002.
        Question. Why are you not continuing this effort in fiscal year
    2003?
        Answer. The Campaign is first and foremost a primary prevention
    effort and its focus must be on the primary entry-level drug,
    marijuana. We simply must respond to the fact that marijuana is the
    single most significant factor in overall drug use by America's youth.
        The Campaign focuses on primary prevention for three key reasons.
    First, primary prevention targets the underlying causes of drug use,
    and, therefore, has the greatest potential to reduce the scope of the
    problem over the long term. Second, over time, a primary prevention
    campaign will lessen the need for drug treatment services. And third, a
    media campaign has greater potential to affirm and reinforce the anti-
    drug attitudes of youth who are not involved in drug use than to
    persuade experienced drug users to change their behavior.
        When we examine the most recent findings from the 2000 National
    Household Survey category of ``12-17 year old past 30-day use of all
    drugs,'' we find that marijuana accounts for the 9.7 percent reporting
    such use, approximately 75 percent of the total. This use is mostly by
    itself, but also to a smaller extent is in combination with other
    drugs. Therefore, as we look to focus our communications power against
    youth drug use, the most obvious entry point has to be marijuana.
        The communications challenge of this is significant. Of all illegal
    drugs, marijuana is clearly the drug about which youth attitudes are
    the softest and their parents attitudes are the most ambivalent. It
    should be clear that we cannot expect to make progress in youth drug
    use until we significantly reduce the use of marijuana, the
    preponderant drug of choice.
        To include a significant effort against ecstasy or any other
    specific drug, will drain funds from focussing on the primary issue of
    marijuana, fragment our messages, and result in a less effective and
    efficient program.
        Question. How will you monitor the effects of a targeted campaign?
        Answer. As the primary focus of the campaign is on illegal drugs in
    general and marijuana and inhalants specifically, the bulk of the
    advertising component and therefor the evaluation focus on related
    awareness, attitudes, and beliefs.
        As with the core Campaign, we use a range of tools to monitor the
    effects of our efforts. To ensure communications are strategically
    sound and grounded in behavioral science, communications are reviewed
    by our Behavior Change Expert Panel, by target audience specialists,
    and by PDFA's Creative Review Council. All communications are
    qualitatively tested in focus groups throughout the country to ensure
    the intended message is being clearly communicated and understood by
    our target audiences.
        Measures in the market include our on-going Advertising Tracking
    Study which tracks advertising awareness and related attitude and
    behavior change. Further, our regular focus group testing of
    advertising also provides us an opportunity to learn first hand the
    impact of our advertising in-market and provide us with insight into
    effects of targeted efforts. In addition we monitor the traffic to our
    various web-sites and the NCADI Clearinghouse activity.
        Question. How does the campaign intend to change with the
    alterations recognized in youth drug behavior?
        Answer. Based on the Westat Evaluation Report (May 2002), ONDCP is
    pursuing a number of changes to improve the effectiveness of the
    Campaign. First, ONDCP will become much more involved and at an earlier
    stage in the development of the messages of the Campaign. Second, ONDCP
    is changing the core target age of the Campaign from 11-14 years to 14-
    16 years. Third, ONDCP is requiring that all television ads be tested
    twice before they are aired, first in concept form and second after
    they are produced, before target audiences in several cities. ONDCP
    will continue to work closely with Congress and key Campaign partners
    to ensure that the Campaign plays a significant role in our effort to
    achieve the President's goal of achieving a 10 percent reduction in
    teenage and adult drug use over the next 2 years, and a 25 percent
    reduction in drug use, nationally, over the next 5 years.
        Question. Why is the focus on marijuana, the most difficult drug to
    unsell and the drug with flat lined behavior studies?
        Answer. We focus on marijuana precisely because of its insidious
    nature as an entry-level drug that accounts for the majority of
    adolescent treatment episodes. Marijuana is the most prevalent drug of
    use for the Campaign's youth target (as well as for young adults and
    adults). If we are to produce a dramatic reduction in drug use overall,
    we must begin with marijuana.
        The Campaign leverages its communications power to produce maximum
    impact on youth and drugs. As the Media Campaign is a primary
    prevention campaign for youth, it focuses on the primary entry-level
    drug, marijuana. According to the NHSDA, in 2000, 6.3 percent of the
    household population aged 12 and older (14.0 million persons) were
    ``current'' or past month users of an illicit drug, a level that was
    unchanged from 1999. Three of four current users (10.7 million)
    reported using marijuana, either alone or in combination with other
    drugs. More than 70 percent of the total ``Past 30-day drug use'' of
    12-17 year olds in 2001, which combines data on all types of drugs, is
    marijuana. The campaign's budget for media purchases is committed
    against this entry-level, primarily marijuana strategy.
        Question. Why are you not focusing on drugs that you can make
    stronger claims on the potential dangers?
        Answer. Marijuana is a dangerous drug and we can make strong claims
    on its potential dangers. We will attack the pervasive myth that
    marijuana is not addictive. A drug is addicting if it causes
    compulsive, often uncontrollable drug craving, seeking, and use, even
    in the face of negative health and social consequences. According to
    the National Institute on Drug Abuse (NIDA), marijuana meets these
    criteria. Moreover, treatment seeking for marijuana dependency has
    increased almost twofold over the past 10 years. Research findings
    suggest that marijuana dependence is more similar than dissimilar to
    other forms of drug dependence. In 1999, the Treatment Episode Data Set
    recorded more than 220,000 admissions for primary marijuana abuse to
    publicly funded substance abuse treatment, or 14 percent of the 1.6
    million admissions for alcohol or drug treatment in these facilities.
    Marijuana activates the same pleasure centers in the brain that are
    targeted by heroin, cocaine and alcohol. A Scripps Research Institute
    study reports the stress and anxiety associated with the long-term use
    of marijuana produces the same bio-chemical changes associated with the
    withdrawal from other drugs, blurring the distinction, according to the
    researcher, between what is considered hard and soft drugs because they
    all do the same thing.
        Well-funded and fully entrenched pro-marijuana interests have been
    at work for many years seeding their messages throughout our popular
    culture. However, no one of common sense will argue that marijuana use
    is appropriate for our adolescent youth. We will conduct our effort
    against marijuana by giving youth the facts in contexts they can
    identify with, exploding the myths, and allowing them to draw their own
    conclusions.
        Further, while claims against the stronger drugs' may seem easier
    to make, the rate of prevalence of these substances are dramatically
    lower than for marijuana use, suggesting that the potentially largest
    return for investment in an anti-drug campaign is in the area of
    marijuana.
        Question. Why do you wait until you reach a certain threshold to
    target a given drug? Why would you not attempt to get ahead of the
    curve? Isn't prevention a goal as well?
        Answer. Clearly, the Media Campaign is a drug prevention program
    primarily for youth, but the Campaign has finite resources, and
    therefore, focuses on the primary entry-level drug, marijuana. Primary
    prevention addresses all drugs. If the Campaign attempted to address
    all thrusts, we would be unlikely to achieve our goals.
                                  parent corp
        Question. When Congress chose not to fund the fiscal year 2002
    initiative for lack of information, why are you repeating the same
    behavior?
        Answer. The President is requesting $5 million for this initiative
    within in the Corporation for National and Community Service's budget.
    The program will encourage parents to help children stay drug-free by
    training them in drug prevention skills and methods. It is my
    understanding that CNCS included a description of the program in its
    Congressional Budget Justification, but I would be pleased to continue
    working with CNCS to ensure that all relevant Subcommittees obtain all
    necessary information.
        Question. Why circumvent this subcommittee and place it under the
    Corporation for National & Community Service?
        Answer. The Administration's decision to request funding for this
    initiative is not intended to circumvent this Subcommittee. During the
    formulation of the President's fiscal year 2003 Budget Request, the
    Administration reached the conclusion that the CNCS would be the most
    appropriate agency to administer this program because of their
    extensive experience in community-based volunteer programs.
        Question. Do you have details to provide to this or any other
    subcommittee on how the $5 million will be disbursed?
        Answer. The President's request is for $5 million to make grants to
    national parents' organizations to train thousands of parents in
    communities nationwide in how to reduce drug use and form parent drug
    prevention groups. This effort will promote cooperation among national
    parent groups and enable them to have a significant impact by working
    through the network of community anti-drug coalitions nationwide and
    with other local and state anti-drug efforts.
        The Parent Drug Prevention Corps will provide an opportunity for
    parents of school-age children to give 2 years of service to their
    country to prevent drug use among children. Key parent leaders will be
    trained in all aspects of the drug problem in communities, including
    how to make their neighborhoods and schools safe and drug-free. The
    parent leaders will mobilize other parents in the community who have a
    few hours per week to volunteer in this effort.
        Parents are a key in the effort to prevent drug use by teenagers.
    Research has established that parents have a significant influence over
    a child's drug use. For this reason, many drug prevention efforts are
    targeted at sending messages and support to parents. The Parent Drug
    Prevention Corps is built on the notion that other parents are often in
    the best position to assist in delivering this message.
        In fiscal year 2003, CNCS anticipates making one or two national
    grants for this purpose. In turn, the grantee will support programs in
    50-75 communities. Approximately 10,000 parent volunteers are expected
    to be involved in this effort. Further, the grantees will share
    information and technical assistance with anti-drug use programs
    engaging parents as volunteers in other communities throughout the
    country.
                                 drug treatment
        Question. With the drain on state budgets due to increased homeland
    security efforts and needs, many states are facing tough decisions
    about where to cut. Drug treatment in prisons could be a prime
    candidate. How will a $77 million program cover the entire country? Who
    gets left out and how can we help?
        Answer. This Subcommittee, and indeed, the entire Congress can help
    additional drug users obtain treatment by fully-funding the President's
    request expanding funding for treatment services by $1.6 billion over 5
    years.
        Concerning drug treatment in prisons, the Department of Justice's
    Residential Substance Abuse Treatment (RSAT) Program is not intended to
    provide all funding necessary for State prison drug treatment programs.
    Rather, the program supplements funding the individual States allocate
    for this purpose. The President's fiscal year 2003 request includes an
    additional $7 million (for a total of $77 million) for the RSAT Program
    to support treatment of an additional 2,572 offenders. The Corrections
    Program Office (CPO) estimates having resources in place to treat
    45,913 offenders. As programs mature and move through preparation,
    hiring and training stages to actually admitting clients and providing
    substance abuse treatment, CPO anticipates that the numbers of
    offenders treated will increase at a much slower rate than experienced
    during the early years of the program. In fiscal year 2002, RSAT
    program funds were first made available to support transitional
    substance abuse treatment services, which involve coordination between
    the correctional institutional treatment program and other human
    service and rehabilitation programs in the community. Funding these
    services may reduce the number of offenders able to receive treatment,
    but should reduce relapse and recidivism.
        Question. If the Administration is committed to increasing efforts
    in drug treatment, then how will drug treatment in prison be addressed
    in the out-years?
        Answer. As the Subcommittee is aware, the President has proposed an
    additional $1.6 billion over 5 years to expand drug treatment. ONDCP,
    with the participation of Federal demand reduction and drug control
    agencies, is now conducting a strategic review of all treatment and
    prevention programs and developing the strategic plan that will define
    next steps. This review will help inform the policy process as the
    Administration contemplates adjustments to the National Drug Control
    Strategy and potential budget initiatives for the President's fiscal
    year 2004 Budget Request.
        Question. Do you have data on the extent to which drug treatment
    programs operate in state correctional facilities?
        Answer. The RSAT Program provides formula grants to states to help
    them develop and implement residential substance abuse treatment
    programs that provide individual and group treatment activities for
    offenders in residential facilities operated by state correctional
    agencies. The Corrections Program Office (CPO), which administers this
    program, conducted technical assistance workshops and conferences on
    effective treatment programs and strategies to over 1,238 policymakers,
    correctional practitioners, and treatment practitioners. Also in 2001,
    39,718 offenders received treatment from 151 programs initiated or
    expanded with 2001 funds. In 2002, CPO estimates that 40,840 offenders
    will receive treatment from about 185 programs.
        Question. The President stated his commitment to add $1.6 billion
    to the drug treatment system over 5 years. In the fiscal year 2003
    budget request, not all of the increase is new money. In fact, some of
    it is paid for by reductions in other drug treatment programs. Will the
    Administration commit to adding new money to these programs to
    accurately account for a $1.6 billion increase?
        Answer. The Administration has launched a major new treatment
    initiative. In May 2001, the President committed to expanding funding
    for treatment services by $1.6 billion over 5 years. We are on track to
    meet the President's commitment with net increases in fiscal years 2002
    and 2003. We are fulfilling this commitment gradually. In fiscal year
    2002, an additional $95.4 million was provided to the Substance Abuse
    and Mental Health Services Administration (SAMHSA) to begin to fulfill
    this pledge. The Administration's fiscal year 2003 budget builds upon
    this increase with additional funding for SAMHSA. The Budget proposes a
    net +$127 million increase for the President's Drug Treatment
    Initiative to help narrow the gap between the number of people in need
    of drug treatment and the number getting it. The request includes a $60
    million (+4 percent) increase to the Substance Abuse Block Grant, a
    $109 million (+56 percent) increase to discretionary substance abuse
    treatment grants, and a $43 million (-45 percent) reduction in drug
    treatment research and demonstration grants. The request will support
    52,000 additional drug treatment slots.
        In addition, ONDCP has directed the major Departments and agencies
    involved in funding and support of drug treatment to provide clear and
    targeted input on what they will do to address the identified treatment
    need, including efficiencies that can be implemented to help available
    treatment funding support more and better treatment.
        It is clear that we need to expand treatment capacity. But simply
    expanding capacity nationwide will not ensure adequate support for
    locations or populations in greatest need, nor will it ensure increases
    in the kinds of treatment most needed. And broad increases are not
    enough to get people into needed treatment and help them see it through
    to completion. Addiction is a life-long challenge, requiring the
    sustained efforts of the drug user to stay drug free. Some will
    relapse, falling back into drug-taking behavior. As a society, we must
    continue to take an active role in supporting these individuals
    including providing appropriate, individualized treatment and follow-up
    support to maintain recovery. For those who accept responsibility and
    obtain treatment services, treatment can prove successful. Only by
    developing this broad-based continuum of services and resources can we
    provide the essential and life-saving assistance to those who need it.
                           drug free communities act
        Question. Do you intend on granting the $2 million for a National
    Community Anti-Drug Coalition Institute to the Community Anti-Drug
    Coalitions of America?
        Answer. As you know, the Reauthorization created a National
    Coalition Institute ($2 million authorized in fiscal years 2002 &
    2003). We have reserved $2 million for a grant award in late fiscal
    year 2002. Pursuant to Federal grant law and report language
    accompanying the Drug-Free Communities Support Program Reauthorization
    Act, the grant will be awarded through a competitive process. CSAP will
    award a grant to a national nonprofit organization with expertise and
    broad national-level experience in community anti-drug coalitions to
    provide technical assistance and training to community anti-drug
    coalitions.
                                     ______

                    Questions Submitted by Senator Jack Reed

                        drug trafficking in new england
        Question. As you know, there is a great deal of concern about drug
    traffickers' increasing use of the interstate highway system in New
    England to distribute illegal drugs from urban centers to rural areas.
    This Subcommittee's fiscal year 2002 report directed your office to
    work with State law enforcement drug control task forces to combat
    interstate shipment of drugs in the region.
        Could you describe your efforts to address this problem and any
    progress you have made?
        Answer. We have worked to address this serious threat throughout
    the New England HIDTA. The most significant threat confronting the
    HIDTA is the transportation of drugs from sources of supply in New York
    to New England. Consequently, it is the major concentration of efforts
    for the NEHIDTA. The New England HIDTA recently completed its first
    year of operations and already is supported by representatives from
    over eighty Federal, State and local agencies.
        The New England HIDTA developed a cohesive and comprehensive
    program combining regional and state specific initiatives. The
    NEHIDTA's initiatives focus on reducing and disrupting the flow of
    drugs along the pipeline. To accomplish this, the HIDTA is coordinating
    thirteen initiatives in fiscal year 2002. These initiatives are
    organized into and support four (4) counter-drug subsystems, with each
    subsystem integral to the success of the HIDTA. Initiatives that were
    approved to implement the 2000 New England HIDTA Strategy include:
      --Southern New England HIDTA Task Force (CT)--this is a collocated
            task force that is concentrating on mid-level to major
            traffickers in the Fairfield county area of Connecticut and
            will be comprised of Federal, State and local investigators in
            Bridgeport, CT.
      --Southern New England Street Sweep Initiative (CT)--this is a multi-
            agency task force that targets violent narcotic traffickers in
            the Fairfield and New Haven counties of Connecticut. This task
            force will target those criminal groups whose activities
            negatively impact quality of life issues in the neighborhoods
            and communities in these counties.
      --Bradley Airport Transportation Group (CT)--this task force is led
            by the Connecticut State Police, and is staffed by special
            agents of the Drug Enforcement Administration and the U.S.
            Customs Service. This interdiction task force will concentrate
            on cargo shipments containing drugs and general airport
            enforcement programs.
      --Northeast New England HIDTA Task Force (ME)--this task force is
            located in Portland, ME and is a multi-agency, collocated task
            force. This task force is targeting core and secondary heroin,
            cocaine and crack cocaine criminal distribution organizations.
      --New England HIDTA Financial Task Force (MA)--this task force is led
            by the U.S. Customs Service and the Internal Revenue Service,
            Criminal Investigation Division. It is staffed with Customs and
            IRS special agents, Massachusetts State Police and Boston
            Police Department detectives. This task force is identifying,
            investigating and prosecuting large scale money laundering
            organizations in New England and internationally.
      --Greater Boston Task Force (MA)--led by the FBI, this multi-agency,
            collocated task force will target mid to upper level criminal
            organizations in the Greater Boston area. This initiative also
            manages a smaller task force in Lawrence, Massachusetts.
      --Central Massachusetts Task Force (MA)--this task force is led by
            the DEA and consists of Federal, State and local investigators
            targeting widespread criminal organizations in Central
            Massachusetts.
      --Northern New England HIDTA Task Force (NH)--established in
            Manchester, New Hampshire this DEA led, collocated State,
            Federal and local task force investigates core and secondary
            drug distributors in Hillsborough County, New Hampshire.
      --Rhode Island HIDTA Task Force (RI)--the Rhode Island HIDTA Task
            Force is an FBI led, multi-agency task force that is co-managed
            by the FBI and Rhode Island State Police. This task force will
            primarily target violators in the greater Providence, Rhode
            Island area.
      --Providence County HIDTA Transportation Task Force (RI)--this task
            force is DEA led and is working in the major rail, bus and
            airport terminals, as well as cargo terminals and express
            package delivery services. This interdiction task force was
            established to intercept and seize illicit drugs and currency
            derived from criminal activities.
      --Northern Vermont HIDTA Task Force (VT)--this DEA led, multi-agency
            task force will concentrate its efforts in the greater
            Burlington, VT area and will target mid to upper level criminal
            organizations.
                         methamphetamine in new england
        Question. I understand that two weeks ago the first methamphetamine
    lab was discovered by law enforcement in Rhode Island.
        Given the significant crime and health concerns associated with use
    of this drug in other parts of the country, what plans do you have to
    address potential growth of the meth trade in New England?
        Answer. This past year OxyContin, MDMA (Ecstasy), hydroponic
    marijuana, and the methamphetamine precursors, ephedrine and
    pseudoephedrine, became significant and formidable threats for the New
    England HIDTA. In response, the HIDTA has brought together over 100
    Federal, State and local law enforcement and prosecution agencies;
    medical examiners; prevention and treatment professionals; health
    providers; emergency medical services; emergency room doctors and
    personnel and others to assist in the preparation of a comprehensive
    and inclusive strategy for heroin and the emerging methamphetamine/
    precursor and other drug threats. HIDTA brought these professionals
    together to discuss the epidemic heroin problem and to establish
    cooperative and coordinated communications to assess the drug problem
    and provide recommendations. This was the first time professionals from
    all the different disciplines met and formed a strong cooperative
    coalition.
        The basic element of the strategy is to build a coalition of
    professionals and establish communication links that will provide a
    system to alert law enforcement, health providers, treatment and
    education and emergency services professionals and others with an
    ``early warning system.'' A significant problem is obtaining timely,
    accurate, multi-source information/intelligence on emerging drug
    trends/epidemics and disseminating that information to law enforcement,
    education/prevention, emergency medical services, hospitals and others
    to ensure a timely, efficient, coordinated response. Our common goal is
    to save lives and ensure a thorough investigation and successful
    prosecution of the Drug Trafficking Organizations, distributors and
    violent criminals. When intelligence/information detects a new drug or
    trend or a drug problem that is reaching epidemic proportions, as is
    the case with heroin in New England, all disciplines will be alerted to
    immediately focus on the threat. This same system will be used to warn
    all the disciplines of new emerging drug threats as we are doing with
    methamphetamine. We have started to build a system using email
    addresses that will provide the basis for a more sophisticated alert
    system, if necessary.
        HIDTA participating agencies seized 3 clandestine methamphetamine
    laboratories in 3 months. Furthermore, NEHIDTA Task Forces are
    providing training courses for state and local law enforcement on the
    investigation of clandestine laboratories.
                    national youth anti-drug media campaign
        Question. In your testimony you note that the National Youth Anti-
    Drug Media Campaign integrates paid advertising at the national and
    local levels with public information outreach through a network of
    public and private partnerships to provide local context for campaign
    messages. How is the media campaign tailored to address issues of
    specific concern to New England? Who are your key partners in this
    effort?
        Answer. The media campaign is tailored to address issues of
    specific concern to New England via targeted media buys to key markets
    and areas in the region (markets are defined as Designated Marketing
    Areas/DMAs a standard media/population measurement).
        Examples of media placed in New England are as follows:
    Maine (Portland-Auburn DMA)
        General Market.--Newspapers--Portland Press Herald Telegram, The
    Sun-Journal, Kennebec Journal; Spot Television: WGME, WMTW, WPXT, WCSH;
    Spot Radio: WJBQ-FM.
    Vermont (Burlington DMA)
        General Market.--Newspapers: Burlington Free Press, Plattsburgh
    Press-Republican, Rutland Herald; Spot Television: WCAX, WPTZ, WVNY;
    Spot Radio: WXXX-FM.
        Multi-cultural.--African-American: WWBI (Syndicated TV).
    Massachusetts (Boston DMA)
        General Market Newspapers.--Boston Globe, Worcester Telegram
    Gazette, The Boston Herald; Television: WLVI, Boston Interconnect
    (cable), WSBK; Radio: WBOT-FM, WJMN-FM.
        Multi-cultural.--The Boston DMA has a high concentration of African
    American and Hispanic teens and Parents. Media is strategically
    deployed to reach these key population groups; African American: Bay
    State Banner (Newspaper), WSBK, WLVI, WHDH (Syndicated TV); Asian:
    Boston Chinese News (Newspaper); Hispanic: TV--Univision WUNI,
    Telemundo WWDP, W32AY; Radio--WHAV, WRCA, WORC.
    Worchester, MA Hispanic
        Radio--WKOX.
    Connecticut (Hartford/New Haven DMA)
        General Market.--Newspapers: Hartford DMA--Hartford Courant, New
    Haven Register, Waterbury Republican-American, Manchester Journal
    Inquirer, New London Day, Meriden Record-Journal; New York DMA--
    Connecticut Post, The Danbury News-Times, The Norwalk Hour, Stamford
    Advocate/Greenwich Times; Spot Television: WCTX, WTIC, WTXX; Spot
    Radio: WZMX-FM;
        Multi-cultural.--African American: WTXX, WCTX, WTNH (Syndicated
    TV); Hispanic: TV--Univision W47AD, Telemundo WRDM; Radio--WPRX, WRYM.
    Rhode Island (Providence/New Bedford DMA)
        General Market.--Newspapers: Providence Journal Bulletin, The New
    Bedford Standard Times, Spot Television: WLWC, WNAC, WLNE; Spot Radio:
    WPRO-FM
        Multi-cultural.--African American: WLWC, COX--(Syndicated TV);
    Hispanic: TV--Telemundo WRIW; Radio--WRIB, WPMZ, WJYT.
        New Hampshire, which does not have its own DMA (Designated Market
    Area), receives Newspaper and Broadcast coverage from Boston with some
    additional spill from Portland.
        In addition several dozen community coalitions, and other local
    organizations and agencies routinely receive Campaign materials,
    newsletters, updates and e-mails from the Campaign.
        Importantly, several organizations in New England have benefited
    from the Campaign's Pro Bono Matching program, which has provided
    opportunities to deliver important public health/anti-drug messages at
    the local level at no cost. Working with American Advertising
    Federation (AAF), local New England coalitions were able to participate
    in the local television and local radio match activity. The local
    activity aired from April 2000 through January 2001. The following
    outlines the organizations and their match value (dollars are gross)
    and match units:

    ----------------------------------------------------------------------------------------------------------------
                              Organization                              Match value       Unites           Media
    ----------------------------------------------------------------------------------------------------------------
    American Symphony Orchestra League-Boston.......................         $46,409              50         ( \1\ )
    Cenikor Foundation-Boston.......................................          19,518              22         ( \1\ )
    PDFA-Boston.....................................................          19,776              35         ( \1\ )
    PDFA-New Hampshire..............................................          37,999              65         ( \2\ )
    Rhode Island Dept. of Mental Health, Retardation & Hospitals....         787,832           3,957         ( \3\ )
                                                                     -----------------------------------------------
          TOTAL.....................................................         911,534           4,129  ..............
    ----------------------------------------------------------------------------------------------------------------
    \1\ Spot TV.
    \2\ Spot TV/Radio.
    \3\ Spot Radio.

             substance among youths in the juvenile justice system
        Question. More than 2 million youth under the age of 18 are
    arrested each year, and more than 100,000 of these youth will be placed
    in juvenile detention and correction facilities on any day. Research
    indicates that approximately twenty percent of all youths who enter the
    juvenile justice system experience serious mental disorders, with a
    much higher percentage experiencing some level of mental health
    problems. Studies have consistently found the rate of mental disorders
    to be higher among the juvenile justice population than among youths in
    the general population. There is also a growing recognition that many
    of these youths--between 50 and 75 percent--have serious substance
    abuse problems.
        What is your strategy for addressing this problem? What steps can
    we implement to help these troubled youth break this destructive cycle?
        Answer. We must link public safety with public health in a
    systematic manner. We must intervene early, before problems have
    worsened to the point where intensive, specialized treatment is
    necessary. Working in concert, justice and public health agencies can
    establish a continuum of accountability and treatment for juvenile
    offenders with substance use disorders.
        The juvenile justice system should operate--in concert with other
    service systems--as a series of opportunities for intervention with
    offenders experiencing substance use disorders. Interventions should be
    carried out in a systematic manner and at the earliest possible
    opportunity to prevent entry into the juvenile justice system for those
    who can be safely diverted to community social service systems; to
    limit penetration into the juvenile justice system for nonviolent
    offenders through community justice interventions in concert with other
    social service systems; and to intervene with those who must be
    securely confined, through appropriate treatment and supervision, both
    during and after the period of confinement.
        Successful interventions are based on thorough assessments and
    maintained with structured case management. The National Drug Control
    Strategy has supported many effective efforts: the juvenile Breaking
    the Cycle program in Eugene, OR; the juvenile assessment centers in
    Miami and Tampa, FL; the juvenile justice/treatment network in Denver,
    CO; and juvenile drug courts and TASC programs to name a few.
        The most cost-effective interventions will take place before the
    juvenile breaks the law and before the juvenile becomes drug dependent.
    There is considerable evidence that brief interventions can be
    effective in helping drug users who are not yet dependent stop their
    use. ONDCP is working with Federal drug control agencies to incorporate
    brief interventions into a number of social settings, including
    schools, community prevention programs, child welfare programs, primary
    healthcare programs, and community policing.
        On a broader scale, the National Drug Control Strategy is designed
    to foster the active and skilled involvement of families, faith-based
    and community organizations, anti-drug coalitions, child welfare
    workers, civic groups, healthcare workers, and workplaces in delivering
    prevention and intervention programs, persuading drug users in need to
    seek help, and supporting their neighbors who are in recovery.
                                     ______

             Questions Submitted by Senator Ben Nighthorse Campbell

                    national youth anti-drug media campaign
        Question. Director Walters, last year this subcommittee carved out
    $5 million of the anti-drug national media campaign funding
    specifically for efforts to combat the drug ``Ecstasy''. Use of this
    prescription drug for illegal purposes has become a widespread problem
    in all areas of our country.
        What, exactly, are you doing to address this problem?
        Answer. Fiscal year 2002 Conference report language directed the
    Campaign to allocate $5 million (out of the $180 million appropriated)
    ``for advertising time and space specifically targeted at combating the
    drug Ecstasy.'' ONDCP intends to base this effort on anti-ecstasy
    television ads already developed by the Partnership for a Drug Free
    America. This anti-ecstasy advertising will be directed toward youth
    and will appear on popular youth-oriented network television programs.
        Question. How do you plan to spend this $5 million?
        Answer. ONDCP intends to base this effort on anti-ecstasy
    television ads already developed by the Partnership for a Drug Free
    America. This anti-ecstasy advertising will be directed toward youth
    and will appear on popular youth-oriented network television programs.
        Question. I noticed the ONDCP ads during this year's Super Bowl
    game. Those spots are usually pretty expensive.
        Why did you decide to purchase time during the Super Bowl?
        Answer. We purchased time during the Super Bowl because we could
    reach a very large, diverse audience. In the aftermath of the terror
    attack of September 11, we realized that few Americans knew of the link
    between money spent for drugs and the support of terrorist
    organizations like Al Qaeda and the FARC. Twelve of the 28
    international terrorist organizations recognized by the State
    Department engage in drug trafficking, and many other drug trafficking
    organizations engage in widespread acts of terror--kidnapping, torture,
    bombings, and the murder of innocents.
        Question. Do you have any evidence that these ads actually reached
    your target audience?
        Answer. The ads have generated a large response from across the
    country. Viewers are directed to www.theantidrug.com, which is the
    Campaign's parenting Web site, where traffic surged after the ads were
    introduced. From the ads' launch on February 3 through February 27,
    page views on the site rose more than 21 percent. Visitors to the site
    doubled from an average 125,000 per month to 250,000, and the time
    spent at the site by visitors rose from an average 6 minutes to 10
    minutes. During the same Feb. 3-Feb. 27 period, 1, 282 parents signed
    up to receive a weekly parenting tips email. Wave 5 of the Evaluation
    Report will provide more details.
        Question. Director Walters, the ad which tied drug money to
    terrorism was very powerful. The question is, though, whether it had
    any impact upon your target audience.
        What were the reactions of your test audiences to this ad?
        Answer. We subjected the ad concepts to an unprecedented level of
    testing to assure their effectiveness with target audiences. The ads
    were exposed to more than 1,300 individuals in 20 cities across the
    country. Youth that participated in the testing found that the ads
    significantly reduced their intent to use drugs in the future (6 of 10
    youth said they would not use drugs if they knew about the link between
    drugs and terror). Parents said the information gave them timely new
    information to use in talking to their children about drugs.
        Question. Are you able to tell us whether this particular ad had
    any tangible results?
        Answer. Wave 5 of the NIDA/Westat evaluation will address the
    terrorism ads.
        Question. Director Walters, I was chairman of this subcommittee in
    1997 when your predecessor requested funding for an anti-drug national
    media campaign. It was described to us as a 5-year effort which would
    then be transitioned to a private sector responsibility. I have to tell
    you that I was concerned that once we started to fund this campaign, it
    would become a cash cow.
        Director Walters, we are now being asked to fund the 6 year of this
    5-year program. While we have all seen the ads and can appreciate the
    effort which went into producing them, there is little information to
    indicate that the $930 million we have provided so far has had a
    specific impact upon drug use by the youth of this country.
        Director Walters, why should we continue to fund this program?
        Answer. Admittedly, the latest evaluation of the Campaign has
    proved disappointing. While the ads aimed at parents are performing
    quite well, the ads aimed at teens appear not to have had any
    meaningful effect on their attitudes and decisions about drug use. We
    are committed to addressing the problems that have been identified and
    creating a more effective and robust Campaign. The President, Congress,
    and the American people rightly have high expectations for the
    Campaign, and it can be one of America's most important tools for
    addressing the national priority of reducing youth drug use.
        Therefore, we are implementing a number of changes, effective
    immediately:
      --Prior to being aired, all TV ads will undergo rigorous testing.
      --The age target for youth ads will be shifted from 12-13 year-olds
            to 14-16 year-olds.
      --Sharper, more focused advertising will be created to ensure
            effectiveness with youth, especially targeting the drug most
            frequently abused by youth: marijuana.
      --ONDCP staff will become more directly involved in the message
            development process.
        No initiative can break through pro-drug attitudes and reduce drug
    use without broad public support and strong efforts by parents,
    schools, and law enforcement. Although the evaluation has revealed
    serious shortcomings, the Campaign has been bolstered by local anti-
    drug coalitions across the country joining the cause and building
    strong programs that protect local youth from the threat of drugs. New
    advertising prepared by the Ad Council supports these efforts. Further,
    a number of major corporations are joining the national effort to keep
    kids off drugs by delivering the Campaign's messages and resources to
    their employees and customers, adding to the chorus of parents,
    educators, and youth-serving groups already involved.
        It is also important to note that our hard-hitting drugs and
    terrorism ads, released during the Super Bowl, were not measured by
    this evaluation. These ads were among the most rigorously tested in the
    Campaign's history, and we are confident that they will have a positive
    impact on reducing youth drug use.
        ONDCP will continue to work closely with Congress and key Campaign
    partners to ensure that the Campaign plays a significant role in our
    effort to achieve the President's goal of achieving a 10 percent
    reduction in teenage and adult drug use over the next 2 years, and a 25
    percent reduction in drug use, nationally, over the next 5 years.
        With these changes, the Campaign will become much more effective
    with teens, and its influence with parents will grow even stronger.
    Therefore, we will continue to support the budget request of $180
    million in fiscal year 2003, and will seek Congressional
    reauthorization for the Media Campaign.
        Question. Does it need to be reauthorized by Congress?
        Answer. Yes. The Campaign is an important tool in reducing youth
    drug use to meet the goals of the National Drug Control Strategy. It
    should be reauthorized.
        Question. If so, what are you doing to secure that reauthorization?
        Answer. ONDCP is working with authorizing committees and individual
    members in both houses to prepare a reauthorization measure.
                      government-wide drug control efforts
        Question. Director Walters, the Office of National Drug Control
    Policy was created to oversee and coordinate government-wide drug
    control efforts. As you know, the Office of Homeland Security was
    created for a similar purpose with regard to homeland security efforts.
    The major difference, however, is that your office has been authorized
    by Congress and your duties and responsibilities and authority clearly
    outlined by statute.
        I would appreciate if you could give us a thumbnail sketch of how
    you carry out this coordination effort and what specific authorities
    you use.
        Answer. The President promulgates a National Drug Control Strategy
    and a supporting budget. ONDCP coordinates implementation of the
    Strategy within the Executive branch. ONDCP takes seriously its primary
    statutory charge to develop national drug control policy and a
    supporting budget; coordinate and oversee the implementation of that
    policy and budget; and evaluate drug control programs to ensure that
    our efforts are coordinated and focused on obtaining measurable
    results.
        ONDCP is effective in carrying out its coordination function when
    it works closely with other Federal Drug Control Departments and
    Agencies. ONDCP staff and senior policy officials remain in close
    contact with their interagency counterparts, as well as with Congress,
    state and local officials, international partners, and non-governmental
    organizations. This collaboration enables ONDCP to assist in developing
    a coordinated national drug control policy focused on obtaining
    measurable results. Specifically, ONDCP is taking a lead role in
    mobilizing our Nation's effort to achieve the President's goal of
    achieving a 10 percent reduction in teenage and adult current drug use
    over the next 2 years, and a 25 percent reduction in current drug use,
    nationally, over the next 5 years, as reported by the National
    Household Survey on Drug Abuse (NHSDA).
        Question. Do you tell other Federal Departments and agencies what
    they are expected to do and how much money they are expected to spend?
        Answer. Upon assuming the office of Director of National Drug
    Control Policy last December, I began conducting an in-depth review of
    existing policies and program priorities. The first phase of that
    review culminated in the National Drug Control Strategy released by
    President Bush on February 12th. At this release, the President
    reiterated his commitment to combat drug use and emphatically stated
    that reducing drug use is at the center of our national agenda. This
    Strategy places a heavy emphasis on obtaining measurable results and
    providing accountability to the American people, to Congress, and to
    our international partners.
        ONDCP's authorization statute requires that by July 1st of each
    year we issue funding guidance to Federal Drug Control Program
    Departments and Agencies for the next fiscal year and for subsequent
    outyears. This guidance highlights broad areas that the agencies should
    focus on as they formulate their budgets in order to implement
    adequately the Strategy. We rely on that guidance as the bench mark by
    which we judge if agency budgets are adequate during our review of
    budgets each summer and fall. Working collaboratively with the agencies
    during this process assists in ensuring the adequacy of the
    submissions.
        Question. What happens if they disagree with you?
        Answer. ONDCP's focus is to work closely with Federal Drug Control
    Program Departments and Agencies when developing budgets and policy to
    avoid disagreement. However, ONDCP recognizes that we possess statutory
    budget certification authorities that could be employed if absolutely
    necessary to ensure that budgets are adequate to implement the
    President's national drug control program.
        Question. Absent your statutory authority, would you be able to
    effectively coordinate this government-wide effort?
        Answer. Any coordinating entity is going to achieve the greatest
    results when it works collaboratively with its interagency partners.
    While the current statutory structure is effective for ONDCP, there are
    a number of models, depending on the specifics of the agency mission
    (including statutory or Executive Order), that would enable an agency
    to coordinate effectively government-wide efforts.
        Question. As you noted in your prepared testimony, the National
    Drug Control Strategy envisions a 10 percent reduction in teenage and
    adult current drug use over the next 2 years AND a 25 percent reduction
    over the next 5 years. Those are admirable goals and there are several
    departments and agencies which have a piece of the action.
        How do you define ``current use''?
        Answer. Current drug use is defined in the National Household
    Survey on Drug Abuse as using an illegal drug within the last 30 days.
        Question. What was the percentage of reduction in current drug use
    over the past 2 years?
        Answer. According to the National Household Survey on Drug Abuse
    (NHSDA), in 2000, 6.3 percent of the household population aged 12 and
    older (14.0 million persons) were ``current'' or past month users of an
    illicit drug, a level that was unchanged from 1999. Drug use among 12-
    17 year olds also remained relatively unchanged--9.8 percent in 1999
    and 9.7 percent in 2000.
        Trend data prior to 1999 are not directly comparable to these
    numbers because a new methodology to improve and expand the survey was
    implemented in 1999. However, between 1996 and 1998, past month use of
    any illicit drug for the household population increased 4.6 percent for
    those aged 12 and older and 15 percent for those aged 12 to 17.
        We are confident that we can achieve the President's goal of
    reducing drug use by 10 percent over the next 2 years, as our nation
    achieved an 11 percent decrease in past month use between 1990 and 1992
    for the household population aged 12 and older and a 19 percent
    decrease for those aged 12-17.
        Question. Five Years?
        Answer. Trend data prior to 1999 are not directly comparable to
    current data because a new methodology to improve and expand the survey
    was implemented in 1999. However, according to the NHSDA between 1993
    and 1998, past month use of any illicit drug for the household
    population increased 11 percent for those aged 12 and older and 64
    percent for those aged 12 to 17.
        We are confident that we can achieve the President's goal of
    reducing drug use by 25 percent over the next 2 years, as our nation
    achieved a 42 percent decrease in past month use between 1985 and 1990
    for the household population aged 12 and older and a 50 percent
    decrease for those aged 12-17.
        Question. What, exactly, do you plan to do to coordinate efforts to
    reach these goals?
        Answer. The President's National Drug Control Strategy contains
    three principal objectives: stopping drug use before it starts, healing
    America's drug users, and disrupting the market. Each objective is
    described below in greater detail.
        Stopping Drug Use Before It Starts.--Every American can play an
    important role in the fight against illegal drugs through education and
    community action. In homes, schools, places of worship, the workplace,
    and civic and social organizations, Americans must set norms that
    reaffirm the values of responsibility and good citizenship while
    dismissing the notion that drug use is consistent with individual
    freedom. The National Drug Control Strategy ties national leadership
    with community-level action to help recreate the formula that helped
    America succeed against drugs in the past.
        Healing America's Drug Users.--The vast majority of the millions of
    people who need drug treatment are in denial about their addiction.
    Getting people into treatment--including programs that call upon the
    power of faith--will require us to create a new climate of
    ``compassionate coercion,'' which begins with family, friends,
    employers, and the community. Compassionate coercion also uses the
    criminal justice system to get people into treatment. Americans must
    begin to confront drug use--and therefore drug users--honestly and
    directly. We must encourage those in need to enter and remain in drug
    treatment.
        Disrupting the Market.--The demand for drugs tends to vary with
    their price and availability. Disrupting this market relationship
    provides policymakers with a clear lever to reduce use. Domestically,
    attacking the economic basis of the drug trade involves cooperative,
    combined efforts of Federal, State, and local law enforcement.
        Question. If those goals are not met, who is to blame?
        Answer. In announcing the release of the National Drug Control
    Strategy this February, President Bush stated the Administration's view
    that we need to have clear goals that can be measured, accepted
    responsibility for achieving them, and explained how we would meet
    them. The President's statement is worth quoting in this context: ``I
    told John [Walters] when he signed on, I'm the kind of fellow that
    likes to say, what are the results? I like to know, actually, are we
    making a difference? And so here's our goal, here's the goal by which
    we'll be measured--here's the goal which I'll be measured first, and
    then John will definitely be measured if I'm measured. I want to see a
    10 percent reduction in teenage and adult drug use over the next 2
    years, and a 25 percent reduction in drug use, nationally, over the
    next 5 years. Those are our goals. We understand we can't do it alone
    here in Washington. And that's why our approach is a community-based
    approach. That's why we recognize the true strength of the country is
    our people. And we know there's thousands of parents, thousands of
    educators, thousands of community activists, law enforcement officials,
    all anxious to come together to achieve this national strategy.''
                                      ctac
        Question. One of my favorite programs under your jurisdiction is
    the Counterdrug Technology Assessment Center. I've seen first-hand how
    excited State and local law enforcement offices are about additional
    equipment from the Federal Government to make their jobs easier. I
    commend you, Director Walters, for requesting money to continue this
    program. And, as an aside, Mr. Chairman, we will be able to see some of
    this technology at the law enforcement tech display you have scheduled
    for April 30.
        The President's budget request includes $40 million for CTAC, of
    which $18 million is for research and development. That amount is
    divided between supply reduction--$4 million--and demand reduction--$14
    million.
        What technology is currently under development for supply
    reduction?
        Answer. CTAC's Research and Development (R&D) efforts concentrate
    on high priority scientific and technological needs of local, State,
    and Federal law enforcement agencies.
        Nonintrusive Inspection.--R&D projects for nonintrusive inspection
    capabilities are in the areas of chemical based sensors, selective
    breeding and olfactory studies of detector dogs, methods to make it
    harder to use anhydrous ammonia in the manufacture of methamphetamine,
    and a portable capability to detect drugs and contraband in shipboard
    liquid filled tanks.
        Tactical Technologies.--R&D projects for tactical technologies
    include advanced concepts to enhance capabilities in the areas of
    miniaturized covert tagging and tracking devices, case management
    tools, improved communications systems to share data across platforms,
    and communications interoperability technologies. Successful R&D
    projects become candidates for state and local agencies through the
    Technology Transfer Program (TTP).
        Test and Evaluation Support.--Technology testbeds have been
    established to develop a central architecture for all systems and
    equipment to work together. Items available under the TTP are being
    evaluated at the testbed located at the Navy's SPAWAR Systems Center
    located in San Diego, CA. Technology applications also are tested in
    several operational state and local settings before they are added to
    the TTP.
        Question. For demand reduction?
        Answer. CTAC's overall goal for R&D relating to demand reduction is
    to put the capability in place to generate and share neuroscientific
    data among those research scientists and to focus their research
    efforts on the prevention and treatment of drug abuse. To accelerate
    progress, each team will be linked to a central backbone/clearinghouse
    so that images, data and research findings can be shared. In addition
    CTAC funding stimulates technological advancements to support
    neuroscience, specifically to improve the performance characteristics
    of systems produced for imaging, to increase our understanding of the
    genetic and environmental risk and protective factors to prevent drug
    use.
        Advanced Brain Imaging Technology.--In conjunction with NIDA,
    leading academic and addiction research institutions receive funding to
    support medical instrumentation and facilities for research teams to
    focus their work on substance abuse prevention and treatment. The
    leading academic and addiction research institutions receiving this
    equipment have all agreed to concentrate on drug abuse research and
    train other professionals who will continue to advance our state of
    knowledge and to share their findings with other research teams across
    the country.
        Data collection systems.--CTAC funding is supporting an assessment
    of the effectiveness of drug treatment through the Drug Evaluation
    Network System (DENS). The database rich in detail on the profiles of
    2,000 patients enrolled in 21 treatment programs and an additional 29
    randomly selected treatment programs will provide a nationally
    representative sample for research and analysis. The new sites also
    support the Random Access Monitoring of Narcotics Abusers (RAMONA) to
    allow the size, characteristics, and geographic distribution of the
    ``hardcore'' drug using population in the U.S. to be monitored over
    time.
        Question. Of the types of equipment currently available for
    transfer, please give us some examples of some that fall into each of
    these two categories.
        Answer. Congress created the TTP to provide technologies developed
    with Federal funding directly to state and local law enforcement
    agencies that may otherwise be unable to benefit from the developments
    due to limited budgets or lack of technological expertise. Therefore,
    demand reduction technologies are not available through the TTP.
        Some supply reduction oriented R&D projects will provide improved
    capabilities or additional options to systems currently in the TTP:
      --The wireless communications interoperability system was
            demonstrated in Denver in August 2001. This system provides a
            cost-effective option to enable the smaller state and local
            agencies to continue to use their existing radios and still be
            able to communicate with other agencies using different
            communications systems.
      --Additional functionality, called CRYSTAL, will be available for the
            AG-SMS tracking system currently in the TTP. This system links
            criminal and background information derived from drug-related
            investigations to geo-positional information in real-time.
            CRYSTAL is being tested under operational conditions with the
            Rockland County Narcotics Task Force (NY).
        Other R&D projects will be completed and considered for transition
    to the TTP
      --Solutions have been developed to the problem of intercepting
            cellular phones operated in ``Push to Talk'' radio mode.
            Testing is being conducted under operational conditions with
            the Rockland County Narcotics Task Force and Westchester
            District Attorney's Office (NY), the Baltimore Police
            Department (MD), U.S Customs Service in El Paso (TX), and DEA
            Technology Development Unit in Lorton (VA).
        Question. The largest part of the CTAC budget is for the technology
    transfer program--$22 million. I understand from staff that 3,255
    pieces of equipment have been distributed to 2,533 State and local
    agencies in the past 4 years.
        What kind of technology is provided to state and local agencies?
        Answer. There are 22 distinct technologies available under the
    program, with varying degrees of complexity and cost that allow state
    and local law enforcement entities of all sizes to take advantage of
    this program. The following are the available technologies: Air-Ground
    Surveillance Management System (AG-SMS); AIRNET32; Audio Surveillance
    System; Advanced Vehicle Tracking System (AVTS); Body Worn; Borderline
    System; Cellular-Based Surveillance System (CBSS); Drugwipes; LINCOLN
    Wiretap System; Mini-Buster Contraband Detector; Multimedia Processing
    System (MPS); Night Vision Kit; Pen-Link Analysis Software; PicoDAC;
    R3000 Navigator Telephone Surveillance System; Small Look; Suspect
    Pointer Index Network (SPIN); Thermal Imager--Handheld; Thermal
    Imager--Vehicle; Video Stabilization System; VisuaLinks Software; and
    Wireless Communications Interoperability.
        Question. What is the most expensive equipment, and how does CTAC
    determine who gets it?
        Answer. The wireless communications interoperability system is the
    most expensive item available under the TTP. These systems cost from
    $250,000 to $750,000, depending on the coverage required (citywide or
    statewide).
        Concerning how decisions are made on each application, Fort
    Huachuca, CTAC's contracting agent, receives the applications from the
    requesting entity and distributes them to teams of regional experts who
    evaluate the choices of the entities to make certain that they are
    appropriate. Priority is placed on a first-come first-served basis each
    fiscal year for each item contained in the program, with remainder
    carried over to next fiscal year.
        Question. What equipment is used the most?
        Answer. Due to the large volume of requests and the affordability/
    utility of the technologies to any state or local law enforcement
    entity, the TTP provides more thermal imagers and mini-busters than any
    other technology.
                                     hidta
        Question. Director Walters, I am also interested in the High
    Intensity Drug Trafficking Areas program--called HIDTA. I am very
    familiar with this program and have spent time talking with folks at
    the Rocky Mountain HIDTA. The concept of a Federal/State/local
    partnership has worked extremely well to increase drug-related
    investigations and decrease the natural tension between these entities.
        Last year, Congress provided $20 million more than requested for
    the HIDTA program. Although we did not specify how you were to spend
    the money, we expected that each HIDTA program would provide
    justification for some additional funding and that ONDCP would consider
    applications for new HIDTAs.
        The fiscal year 2003 budget does not request the continuation of
    that additional $20 million. Given that there is no guarantee that
    Congress will again provide more than the budget request, distribution
    of those fiscal year 2002 funds becomes more difficult since the
    funding may not continue.
        What is the status of that $20 million?
        Answer. The National Guard (NG) is experiencing a funding situation
    in fiscal year 2002 that is causing NG members to be redirected away
    from counterdrug missions. A number of Senators and Representatives
    have written the Administration asking for assistance. Having obtained
    the concurrence of the DOD, ONDCP has transferred $5 million to the DOD
    for NG counterdrug enforcement efforts. This is a high priority to
    maintain current operational levels for the NG; it will not affect
    current funding for existing HIDTAs.
        ONDCP prioritized the remaining $15 million based on program
    priorities (the allocation is as follows).
      --Provide additional funding to bring the HIDTAs designated in 2001
            (Nevada and Northern Florida) to $2.0 million. This funding
            will enable the HIDTAs to make incremental progress on HIDTA
            Program priorities related to combating their regional threat,
            including intelligence/information sharing, training, and
            communications interoperability.
      --Provide necessary funding to support the designation of additional
            counties to existing HIDTAs. The following HIDTAs submitted
            requests for discretionary funding to support the designation
            of additional counties: Gulf Coast, Houston, Milwaukee, New
            England, Northwest, Oregon, Rocky Mountain, and Southeast
            Michigan. ONDCP currently is leading an interagency review to
            determine which, if any, of these requests meet the statutory
            criteria for designation. ONDCP anticipates a decision on
            additional designations by July.
      --Enhance several HIDTA intelligence centers.
      --Enhance existing and fund new HIDTA training, community based
            prevention, and law enforcement (including money laundering and
            General Counterdrug Intelligence Plan) initiatives.
      --Provide $7.5 million in funding to a new initiative: the HIDTA
            National Priority Targeting Project. This program will make
            funds available to HIDTA initiatives that develop and conduct
            investigations against major drug trafficking organizations
            affiliated with National Priority Targets and meet the criteria
            outlined within this Project. HIDTA funds will be used to
            supplement, not supplant existing agency/program budgets.
        Question. What instructions have been given to the individual HIDTA
    programs with regard to applying for those funds?
        Answer. The National HIDTA Program Office informed the HIDTAs of
    the availability of the discretionary funding and the need to submit
    supplemental budget requests if they wanted to be eligible for funding.
    The individual HIDTAs are aware that the $20 million in fiscal year
    2002 is supplemental funding that has not been requested for fiscal
    year 2003.
        Question. A recent Montana newspaper article stated that the Rocky
    Mountain HIDTA will be expanded to include five counties in Montana,
    and that each of these counties will receive $100,000 a year to fight
    methamphetamine use and production.
        Is this report accurate?
        Answer. ONDCP is reviewing requests for additional counties to be
    designated as part of existing HIDTAs, including a request to designate
    several counties in Montana as part of the Rocky Mountain HIDTA.
        Question. If so, will the Rocky Mountain HIDTA be provided
    additional funds for this expansion?
        Answer. ONDCP has set aside $1.55 million to provide necessary
    funding to support the designation of additional counties to existing
    HIDTAs. The following HIDTAs submitted requests for discretionary
    funding to support the designation of additional counties: Gulf Coast,
    Houston, Milwaukee, New England, Northwest, Oregon, Rocky Mountain, and
    Southeast Michigan. ONDCP currently is leading an interagency review to
    determine which, if any, of these requests meet the statutory criteria
    for designation. ONDCP anticipates a decision on additional
    designations by July.
        Question. If additional funds are not provided, how will the
    expansion be funded?
        Answer. Whenever additional counties are designated as part of an
    existing HIDTA, there are two options for funding: (1) additional
    funding to the HIDTA or (2) the existing HIDTA reallocates from within
    existing resources.
        Question. Funding was provided last year to conduct outside audits
    of the various HIDTA programs. I understand that there have been 13
    full-scale audits so far, and that more are planned.
        What were the results of these audits?
        Answer. ONDCP contracted with KPMG to perform external financial
    audits on the HIDTA grantees and Federal agencies. Thus far, KPMG has
    conducted 13 full-scope audits and 16 limited-scope reviews. With
    regard to the 13 full-scope audits, the HIDTAs grantees received all
    unqualified ``clean'' opinions. With regard to the limited-scope
    audits, the HIDTA grantees and Federal agencies received no major
    findings. In addition to issuing the final audit reports, KPMG will
    prepare a Best Practices Report which we will share will all HIDTAs.
    The Best Practices Report will summarize the recommendations on how to
    improve grantees' internal controls and compliance requirements.
        Is the taxpayer money being spent wisely?
        Answer. Based on the audit results, we are confident that proper
    financial controls are in place. Implementation of the auditing
    recommendations will assure us that such confidence can continue.
        Question. What types of ``Best Practices'' have been discovered,
    and when will they be shared with all of the HIDTA programs?
        Answer. HIDTA Program Policy currently directs both internal and
    external reviews of the individual HIDTAs. These reviews, when coupled
    with ONDCP directed external audits ensure that the HIDTAs are operated
    in accordance with applicable directives. They also result in the
    identification of ``best practices'' that can be shared with all. As a
    result of this interagency policy review, a white paper will be
    published that includes information on the HIDTA Program. The Best
    Practices Report will summarize the recommendations on how to improve
    grantees' internal controls and compliance requirements. We expect to
    receive this Best Practices Report by the end of May. Once published,
    ONDCP would be pleased to provide that white paper to Congress.
        Question. I also understand that ONDCP has begun on-site visits to
    the various HIDTA programs to help strengthen management, and that you
    plan to share information on best practices.
        How do these on-site visits differ from the audits you mentioned
    before?
        Answer. The KPMG audits are financial audits of the HIDTA grantees
    and participating Federal agencies. Internally, ONDCP has begun a
    programmatic review process that includes on-site visits to HIDTAs by
    ONDCP staff, as well as staff from the Departments of Justice and
    Treasury. The on-site reviews help strengthen management at the
    individual HIDTAs and at ONDCP. To date, we have reviewed 13 HIDTAs and
    we plan to conduct an additional 5 to 6 program reviews in fiscal year
    2002 and an additional 5 to 6 in fiscal year 2003. The program reviews
    have proven beneficial to the HIDTAs and ONDCP as best practices are
    identified and shared.
        Question. What exactly are you looking for?
        Answer. The HIDTA Program Review Process addresses the following
    areas with regard to the individual HIDTAs:
      --Support of the National Drug Control Strategy by the strategies and
            initiatives of the individual HIDTAs;
      --Effectiveness of the HIDTAs' efforts in accomplishing their
            missions;
      --Efficiency in the use of HIDTA resources;
      --Accountability in the use of HIDTA resources; and
      --Compliance with ONDCP/HIDTA policies, program guidance, and
            directives.
        The review process is conducted in three phases. Phase 1 consists
    of reviewing the Annual Report and the Strategy, Initiatives & Budget
    submitted by each HIDTA. Phase 2 consists of Internal Program Reviews
    conducted by the HIDTAs, with results forwarded to the National HIDTA
    Program Office. Phase 3 consists of On-Site Program Reviews conducted
    at the HIDTAs, coordinated by the National HIDTA Program Office.
        Question. Can you give us some examples of the best practices you
    have found?
        Answer. Best practices have been identified in the following areas:
      --Executive Board Involvement/Subcommittees;
      --HIDTA Memorandums of Understanding (MOUs) and Standard Operational
            Plans/Policies (SOPs);
      --Property Accountability Systems;
      --Fiscal Tracking Methods;
      --HIDTA Facility Layouts; and
      --Intelligence Center Locations/Organization.
        Best practices are shared with HIDTAs during on-sites visits both
    informally and formally via recommendations, with recently designated
    HIDTAs, and at HIDTA Directors meetings. At the conclusion of this on-
    site review cycle (June 2002), best practices observed during the first
    14 on-site reviews will be cataloged and distributed.
                      the united states anti-doping agency
        Question. Director Walters, last night it was my privilege to
    attend a dinner honoring the U.S. participants at the 2002 Winter
    Olympic Games which were held in Utah. As you know, I have been a
    strong supporter of the Games, and of the United States Anti-Doping
    Agency.
        USADA, as it is called, was created to oversee testing, education,
    research, and adjudication on behalf of our country's athletes
    competing in international sports events. They reach out to athletes to
    educate them on health issues and the ethics of competing fairly in
    sports.
        The fiscal year 2003 budget requests only $1 million for this
    important and valuable function. This is significantly less than what
    has been provided in the past.
        It is my understanding that USADA needs more than last year, not
    less, to continue their work and expand their message to athletes at
    the earliest stages of their involvement in sports.
        Why was the funding requested for this program significantly
    reduced from fiscal year 2002?
        Answer. Now that the Salt Lake Olympic and Paralympic Games are
    complete, less funding is required. The $1 million requested will
    support research and administrative initiatives, educational programs,
    and efforts to inform athletes of the rules governing the use of
    performance enhancing substances, and the ethics of doping and its
    harmful health effects.
                               general questions
        Question. How many Full-Time Equivalent positions are currently on
    board at ONDCP?
        Answer. As of May 30th, we have 111 FTE on-board.
        Question. When do you expect to be fully staffed?
        Answer. We expect to be fully-staffed by the end of July.
                     drug-free communities support program
        Question. The Drug-Free Communities Act established a cap on the
    administrative costs of that program. The cap was recently increased to
    6 percent as part of the Drug-Free Communities Act reauthorization.
        Is this sufficient?
        Answer. The new 6 percent ($3.6M) administrative cap is sufficient
    to ensure effective management of the current and expanded program.
    ONDCP signed a Memorandum of Understanding with the Department of
    Justice, Office of Juvenile Justice and Delinquency Prevention (OJJDP)
    in December for them to continue administering the grant award process.
        Question. How are you allocating the six percent?
        Answer. Of the total $60.0 million request, only $3.6 million will
    support ``administrative costs.'' These activities include grants
    management and program evaluation, and program administration. We
    anticipate allocating $3.28 million to OJJDP for grants management and
    evaluation, up to $120,000 for grant management costs associated with
    the National Coalition Institute, and $200,000 to support the DFCSP
    Program Administrator and the Advisory Commission on Drug Free
    Communities.
                                     ______

                   Questions Submitted by Senator Mike DeWine

        Question. How will ONDCP work with the Department of Education to
    ensure that the uniform management information and reporting system
    required by the Safe and Drug Free Schools and Communities program can
    determine which school based prevention programs are effective?
        Answer. ONDCP began a policy and program review in March 2002, in
    which the Department of Education has been actively involved. The
    management information and reporting system is being addressed as part
    of that review. To date, the Department's efforts to get states to
    base-funding decisions on objective data and to implement research-
    based programs have met with modest success. The Department reports
    that states and localities have increasingly emphasized research-based
    programs in response to the ``SDFSCA Principles of Effectiveness,''
    which were incorporated into program regulations in 1998. However, only
    baseline data about program implementation are available to date.
        To move the program toward the outcome data needed to evaluate
    program effectiveness, ONDCP is supporting the Department's formal
    assessment of the extent and quality of the data collected at the local
    level regarding drug use and violence. The anticipated next step will
    be a large scale evaluation of SDFSC programs, based on student outcome
    data. In addition, ONDCP is working with the Department to incorporate
    uniform outcome measures into program reporting requirements.
        Question. Given ONDCP's overall coordinating role for drug policy,
    how will your office ensure that the Safe and Drug Free Schools
    Advisory Committee effectively administers the program?
        Answer. ONDCP began a policy and program review in March 2002, in
    which the Department of Education has been actively involved. The
    Advisory Committee is being addressed as part of that review and ONDCP
    anticipates that it will be operational by the end of the summer. The
    Department views the Committee as an opportunity to enhance interagency
    and intergovernmental collaboration.
        ONDCP will use its role as a key member of the Committee to ensure
    that the members are informed of opportunities for needed improvement
    in a number of significant areas, including: focusing the program on
    research-based approaches; using specific outcome indicators as the
    basis for program evaluation; assessing the quality of data at local
    level; preparing for a comprehensive evaluation of student outcome data
    on youth drug use and violence; incorporating student assistance as
    important prevention and intervention component of the program; and
    incorporating school drug testing as a component of deterrence in
    context of comprehensive prevention.

                              SUBCOMMITTEE RECESS

        Senator Dorgan. We look forward to continuing to work with
    you.
        This hearing is recessed.
        Mr. Walters. Thank you, Senator.
        [Whereupon, at 2:46 p.m., Wednesday, April 24, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      TREASURY AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL YEAR 2003

                                  ----------

                            WEDNESDAY, MAY 15, 2002

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 2:09 p.m., in room SD-192, Dirksen
    Senate Office Building, Hon. Byron L. Dorgan (chairman)
    presiding.
        Present: Senators Dorgan and Campbell.

                           DEPARTMENT OF THE TREASURY

                            Internal Revenue Service

    STATEMENT OF CHARLES O. ROSSOTTI, COMMISSIONER

                                OPENING REMARKS

        Senator Dorgan. This hearing will come to order. This is
    the Subcommittee on the Appropriations Committee dealing with
    Treasury and General Government.
        This afternoon, we welcome Commissioner Rossotti for what I
    understand may be your last appearance before this
    Appropriations Subcommittee inasmuch as your term expires later
    this year. I think President Bush would be wise to appoint you
    to another term, but I understand that you have indicated that
    you are going back to the private sector. Let me thank you for
    the service that you have given this country.
        You took over the Internal Revenue Service when its
    reputation was at one of its lowest ebbs. There had been
    investigatory hearings by Congress on a range of issues and you
    undertook the responsibility to try to bring the Service into
    the 21st century. I think, although we are not there yet, you
    should be enormously proud of what you have accomplished so
    far. If you do leave at the end of this year, Commissioner, you
    will have left your successor with a stable foundation upon
    which he or she may build.
        I want to thank you also on a personal note from the
    standpoint of North Dakota. As you know, I have been working
    with you and have been concerned about a couple of things. One
    is the issue of taxpayer assistance, which is easier to get in
    urban areas and harder to get in rural areas and you have put
    together a model program in North Dakota extending taxpayer
    assistance to rural areas, for which I am grateful.
        And also, you have partnered with companies in North
    Dakota, particularly one company, to do processing of
    information services, which I think is a terrific thing to do.
    Rather than have centralized processing in the major cities,
    you are doing it around the country and that is beneficial to a
    range of interests, especially in North Dakota. The contracts
    that you have had there have benefitted Native Americans, have
    substantially benefitted people who are coming off the welfare
    programs, and so I want to thank you for what you are doing
    there.
        I think that we are going to have a vote very soon, and
    what I would like to do is try to make sure that we get this
    hearing in and have the opportunity to ask some questions, so I
    think I will recognize you, Commissioner, for your statement.
    Your entire statement will be made a part of the permanent
    record and you may summarize your statement. I am told that
    some of my colleagues will be here. We are having a vote on the
    floor right now. I just voted and rushed over. Why do you not
    begin, and if and when my colleagues show up, we will invite
    them to ask questions, as well.

                               PREPARED STATEMENT

        But again, Commissioner Rossotti, let me understate how
    much I appreciate your service. You have been the first of the
    professional tax administrators to be appointed to the IRS for
    a term certain and I think it is the right thing to do. It is a
    good way to deal with the head of our taxing agency and I think
    your term of service has been an extraordinary one.
        [The statement follows:]

                 Prepared Statement of Senator Byron L. Dorgan

        Good Afternoon, Mr. Director. We welcome your appearance today to
    discuss the President's fiscal year 2003 budget request for the Office
    of Management and Budget. You may be getting tired of testifying before
    North Dakotans, but we appreciate your coming.
        This subcommittee is responsible for funding the operations of the
    Department of the Treasury and all of its agencies--such as the IRS and
    the Customs Service. This subcommittee is also responsible for funding
    the operation of your agency--the Office of Management and Budget--as
    well as all the other component agencies which make up the Executive
    Office of the President. It is also in this subcommittee's bill that we
    carry provisions affecting the operations of all Federal agencies. We
    will focus on some of those proposals today.
        It has been a few years since a Budget Director last appeared
    before this subcommittee. That is why we appreciate your willingness to
    appear today.
        Your task of assembling and producing the budget for the Federal
    government is not a task I envy or one to which I aspire. The
    government is an enormous entity to watch over and one can see how some
    smaller tasks might fall through the cracks. But when this happens, it
    gives one pause.
        For instance, this budget not only proposes to make a sweeping
    change in how the government funds a significant portion of the Federal
    retirement system, but it assumes Congressional approval of the
    proposal in the budget numbers submitted for each agency. Ordinarily,
    this type of change should be submitted to the appropriate authorizing
    committees for their consideration and action--then be taken up by the
    appropriators. But that is not the case this year when it comes to your
    proposal for treatment of retirement accruals. Nor is it the case for
    how you want the administration of the Federal worker's compensation
    account treated. The authorizers have the expertise on these matters.
    These proposals should have been submitted to them for their
    consideration and action, not to us. This troubles me.
        And your office appears to have had some difficulty getting the
    word out to all the agencies about these new proposals. During staff
    briefings with each of the more than 30 agencies funded in this bill,
    we learned that not every agency was aware of the new treatment of
    either the retirement accruals or the worker's compensation proposal or
    both. Some of them also did not get the word from your office about the
    proposed pay raise. Most were aware that pay disparity was proposed in
    the budget, but instead of planning on a 2.6 percent pay raise, some
    budgeted for a 3.9 percent pay increase or some other number in
    between. Their numbers did not add up, but were submitted as fact on
    February 4 when the budget was delivered.
        These might appear to be little problems, but to many of the
    smaller agencies we fund here, they make a big difference. That is why
    I was even more disturbed by some of the ``fact'' sheets your office
    produced and delivered to the media when the budget was released.
        In essence, your numbers did not add up. Your office claimed that
    the Treasury agencies were receiving big increases compared to last
    year when in fact most budgets dropped when actual dollars are
    compared. For instance, the document your people delivered trumpeted an
    overall 5.4 percent increase in funding for the Customs Service between
    fiscal year 2002 and fiscal year 2003 with an 18.4 percent increase for
    the salaries and expenses account alone. But when real dollars are
    compared, Customs funding for fiscal year 2003 is 9.1 percent below
    fiscal year 2002 levels. The same is true for the Federal Law
    Enforcement Training Center--which you claimed was receiving a 4.9
    percent increase, when in fact it faces a 14.6 percent decrease.
        The list goes on. Perhaps many of these agencies do not need huge
    budget increases. Perhaps cuts are justified. Perhaps Customs should
    have a year to pause and hire and deploy the people it needs at the
    borders before we require additional hiring.
        But the fact remains that all of these indicators give me reason
    for concern.
      --Asking appropriators to carry sweeping authorizing language is
            putting the cart before the horse.
      --Not getting specific budget direction to every Federal agency is
            more than careless.
      --And playing semantic games with the numbers casts a larger shadow
            on the veracity of the budget requests.
      --Individually, they can be explained perhaps. But taken together
            they are very troubling. This makes it even harder to support
            requests which would further reduce the amount of information
            already being provided to the Congress.
        But we will dig into these issues during the questioning rounds. We
    welcome you here this afternoon, but first let me turn to my Ranking
    Member, Senator Campbell, for any statement he would like to make.

        Senator Dorgan. Commissioner Rossotti, you may proceed.

                         STATEMENT OF CHARLES ROSSOTTI

        Mr. Rossotti. Thank you very much, Mr. Chairman, and let me
    also thank you for the support that you have given me and the
    agency, also for your comments, especially since I know that
    you were head of a agency yourself. I know that you really
    understand some of the challenges and also some of the things
    that we should be doing, so I really do appreciate your
    comments.
        I do think that we are improving our performance in the
    agency across the board and we are trying to do that by
    leveraging through better management and fundamental
    reengineering the resources that we have as opposed to just
    simply always asking for massive amounts of new resources. That
    is the theme that we are pursuing in this year's budget.
        Just to note a couple of things that, I think, show some of
    the progress we have made, we have certain surveys that track
    the public's view of our agency. There are two of them plotted
    on this chart. One of them goes back to the early 1980s by the
    Roper Starch organization, and as you can see, as you noted
    yourself, Mr. Chairman, our rating as viewed by the public
    really reached an unfortunate low point in the mid-1990s, and
    as you can also see, it has rebounded quite a bit. It is also
    shown in the red line University of Michigan survey.

                              PUBLIC RATING OF IRS

        I do not want to put too much emphasis on surveys, but I do
    think that the public's rating of how the IRS is doing its job
    is important for the health of the tax system. I do not think
    it is acceptable for the government agency that affects more
    Americans than any other agency to also be the lowest rated. So
    that was the mandate that we were given by RRA--one of them--
    and I think that we are starting to deliver on that, although
    we certainly have a way to go.
        In terms of internal management, there was also a report
    that just came out today called the Federal Performance Project
    that was sponsored by George Washington University and
    Government Executive magazine. They do this elaborate analysis
    of all dimensions of management and we were just given a rating
    of B-minus, which is certainly not something we are satisfied
    with, except for the fact that the last time they did it, we
    were down in a C or C-minus, so I think the trend is coming up.
        There are a lot of things that are needed to be done to
    continue that trend. I think that one of them that helps us
    both on productivity and on customer satisfaction is electronic
    filing, electronic tax administration. We had a very nice
    result this year with 46 million returns filed electronically.
    We have a legislative proposal in the President's budget to
    help us move forward even more on that, which would extend the
    filing date for those who pay and file electronically until
    April 30. That has been passed by the House, and when it gets
    to the Senate, we hope that the Senate will give that favorable
    consideration.

                        FISCAL YEAR 2003 BUDGET REQUEST

        Now, turning to the budget request itself for 2003, it is
    for $10.4 billion and 101,000 full-time equivalent personnel,
    which is a $482 million increase. I want to point out this
    chart, which I think you also have copies of, shows what we are
    trying to do here, and I think we are succeeding, to deliver
    more bang for the buck. A simple way to look at that is that we
    are proposing that we would fund $259 million worth of
    programmatic increases, that is, direct tax administration for
    customer service and compliance. Most of that would be funded
    through internal improvement efficiencies and reallocation,
    such as electronic filing and other results of our
    modernization program, such that about 76 percent of the total
    programmatic increase would be self-funded and only requiring a
    quarter of that, roughly, in net appropriations from the
    Congress.
        I do need to point out, Mr. Chairman, that this approach
    will only work if the funds are actually appropriated for
    mandated items, such as pay raises and other legislative items
    which, frankly, has been a bit of a problem in the past.
        The other big part--really, the only other part of our
    request that is a programmatic increase is $58 million for the
    Business Systems Modernization Program, which in turn is the
    foundation for our future productivity increases, and I want to
    turn briefly to that program. We have in the last year begun to
    graduate from the planning phase into the delivery phase.
        As shown in the chart there in the green blocks, it shows
    that in 2001 and 2002, there are three critical building blocks
    that we plan to put in place. One of them we already have,
    which is our new telephone system to handle customer inquiries
    coming in by the telephone, which is our biggest single source
    of requests from taxpayers.

                           MODERNIZATION AND SECURITY

        This year, we plan to do two other big things. One is to
    move, for the first time, some of the records of taxpayers out
    of a 1960s tape-based system into a modern, reliable database,
    and the second one is to establish a security system that will
    reliably allow us to communicate and access data internally and
    externally.
        These things are very, very important and fundamental
    building blocks of the modernization program. Getting them in,
    getting these initial deliveries in is difficult and it is
    complex and it is risky, but it is also, I think, without
    question, something that when we succeed, will leave lasting
    value for the whole tax system. The lack of these building
    blocks has really been one of the fundamental millstones around
    the neck, if you will, of the IRS for many years.
        We are also addressing issues that have been raised by
    ourselves, as well as by GAO, in our capacity to manage this
    program going forward. There are weaknesses that have been
    identified in our ability to reliably predict schedules and to
    manage some of the configuration control as we put more and
    more systems into production. We are giving equal attention to
    fixing those as to delivering the specific deliverables.
        So to just sum it up, we think the 2003 budget request by
    the President does reflect our twin goals of delivering
    improved performance in the near term while modernizing to
    improve further in the future. We are attempting to do that to
    the maximum extent possible through internal reallocations and
    efficiency improvements and only requesting from the Congress
    what we believe is absolutely necessary.
        So that sums up our request, Mr. Chairman, and, of course,
    I am happy to answer your questions.
        Senator Dorgan. Commissioner Rossotti, thank you very much.
        We have been joined by my colleague, Senator Campbell.
    Senator Campbell, do you have an opening statement?

                  STATEMENT OF SENATOR BEN NIGHTHORSE CAMPBELL

        Senator Campbell. I think, with your permission, I will
    just put my complete statement in the record since I arrived
    late, Mr. Chairman. I apologize for that. I was right over
    there on time to vote. How did you get here so quickly? You
    must have taken a fast train. But anyway, I do apologize for
    missing part of the Commissioner's statement.
        Let me just say one thing, and I am reading from the
    Government Executive magazine honoring your service as
    Commissioner, since you will soon be going back to private
    life. The article stated that, ``He,'' meaning Commissioner
    Rossotti, ``did not take the job for the vain glorious rush of
    policy making at higher levels but rather for the challenge of
    reforming the internal structure and management of an important
    institution in our government.'' I think that was really praise
    worthy. I think they hit it right on the button. When you do
    retire, you can retire knowing you did a job well done.
        I only heard you mention just in passing some group that
    gave you the measurement of a B-minus. Well, the college I was
    in, many of us would have aspired to be a B-minus.

                               PREPARED STATEMENT

        So, do not worry about the B-minus. I think that is
    considerably up from where the IRS was when you took the job,
    so thank you. Thank you, Mr. Chairman.
        Senator Dorgan. Senator Campbell, thank you very much.
        [The statement follows:]

             Prepared Statement of Senator Ben Nighthorse Campbell

        Thank you Chairman Dorgan. Good afternoon, and again, Welcome
    Commissioner Rossotti. My statement will be Brief. Commissioner
    Rossotti, it is a pleasure to have you appear before the Committee to
    express the needs, concerns and accomplishments of the Internal Revenue
    Service (IRS).
        Since your 5 year tenure will end later this year, I would like to
    thank you for doing a great job in reorganizing the IRS. The IRS has
    never been an agency with a lot of friends; in fact, the IRS may have
    been without any friends at all. But, as you move on to greener
    pastures, you will carry with you the accomplishments of:
      --Reorganizing the IRS by eliminating nearly 4,000 Jobs without a
            reduction-in-force;
      --Receiving an ``Unqualified'' opinion on the financial statements
            for both the revenue and administrative accounts from the GAO
            for the past 2 year;
      --Aligning the IRS along business, rather than geographical units;
      --Business system modernization is moving from the planning to
            implementation stages;
      --Transitioning of the old taxpayer records to a modern database;
      --Improving customer service and compliance; and
      --Providing better service for innocent spouse relief.
        There was a recent article in the ``Government Executive Magazine''
    honoring your service as Commissioner. The article stated that ``he did
    not take the job for the vainglorious rush of policy-making at high
    levels, but rather for the challenge of reforming the internal
    structure and management of an important institution in our
    Government''. That was truly a praiseworthy article and I agree with
    the interpretation of your commitment and for that, I commend you for a
    job well done.
        The IRS is requesting $10.418 billion which is an increase of 4.1
    percent over fiscal year 2002. Of that amount, $1.676 billion is for
    information systems, $450 million for business systems modernization,
    $3.988 billion for tax law enforcement, $4.150 billion for processing,
    assistance and management and $154 million for the earned income tax
    credit compliance initiative.
        All of these accounts are really big ticket items and we understand
    the need for the IRS to be able to improve the timeliness and accuracy
    of IRS'S ability to interact with taxpayers.
        In the 2001 Tax filing season, there was noticeable improvement. A
    recent news release stated that the 2002 tax filing season was one for
    the record books. If these reports are correct then the IRS is moving
    forward in the right direction even though there is still a lot to be
    done.
        The final analysis is that taxpayers should always receive
    courteous, accurate and expeditious service and I will continue to lend
    you my support.
        Thank you Mr. Chairman.

                               FEDERAL PAY RAISE

        Senator Dorgan. Mr. Commissioner, the President's budget
    proposes a 2.6 percent pay adjustment for Federal civilian
    employees and a 4.1 percent pay adjustment for those in the
    military. There will be a discussion here in Congress about
    whether to provide pay parity for civilian employees in the
    military. If the Congress were to choose to provide Federal
    civilian employees the same pay increase or pay raise that the
    military were provided, what would that cost the Internal
    Revenue Service?
        Mr. Rossotti. We are estimating it would cost slightly in
    excess of $70 million, which is a very substantial amount for
    us. If you look at it compared to what I just showed you on the
    chart, it basically reverses most of the programmatic increases
    we were hoping to gain.
        So I would say--and, of course, last year, we had a 1
    percent difference, which was $40 million, and, of course, that
    continues into the following year. So together, if you add
    those two together, you are up over $110, $115 million.
        My recommendation, or, I guess it could be a plea to the
    Congress would be, certainly, it is in the Congress's
    prerogative to decide what the pay raise should be, but in an
    agency like the IRS, which is heavily dependent upon personnel,
    if the pay is made higher, that the Congress would appropriate
    the funding for it. Without that, what we are doing is really
    just undermining the rest of the program.

                              ABUSIVE TAX SHELTERS

        Senator Dorgan. Commissioner Rossotti, there are more and
    more stories that appear in our papers these days about abusive
    tax shelters and about tax advisors who tell corporations that
    they can go right up to the line, in some cases too close to
    the line, with respect to sheltering their income. I just came
    from a 4-hour hearing on the Enron Corporation. The Enron
    Corporation, I believe, was running something like 600
    subsidiaries out of a single post office box in the Cayman
    Islands.
        So how prepared is the Internal Revenue Service to attack
    these abusive tax shelters? Do you think you have a ghost of a
    chance to make a difference there? Are you dealing with it
    aggressively? Can you tell me about that?
        Mr. Rossotti. Yes, Mr. Chairman. First of all, let me just
    say that I think we have better than a ghost of a chance. I
    really think that we are very clearly focused on this. There
    are a variety of different kinds of tax avoidance devices. The
    kind that you were referring to tend to be used mainly by large
    corporations and a few----
        Senator Dorgan. They tend to be what?
        Mr. Rossotti. They tend to be used by mainly large
    corporations and very wealthy individuals. I call them the
    designer tax shelters. There are other kinds of tax avoidance
    devices for middle-income and other people, such as using
    credit cards to hide income and offshore accounts. We have, at
    the present time, I think, very clear strategies and focus on
    both of these kinds of devices.
        With respect to the corporate-type shelters, the key thing,
    I believe, that has been a problem for us up until now. We are
    starting to make some progress on getting disclosure on these
    shelters. We had a regulation----
        Senator Dorgan. What do you mean by getting disclosure?
        Mr. Rossotti. Well, finding out about them, finding out who
    is using them, which taxpayers are using them. They are complex
    and they can be very--corporate tax returns are very huge and
    sometimes we, just because of the time it takes to audit these
    returns, do not get--we are not as current as we would like to
    be on which years we are auditing. We can simply miss or too
    much time can go by before we find out which corporations are
    using which shelters, and that hurts us in terms of reversing
    improper use of shelters on the taxpayers' past returns. It
    also causes a delay in shutting these down for the future.
        I think we are making some real progress on that. We had an
    initial regulation that was issued which was not as well
    complied with as we would have liked. Recently, we had a
    disclosure initiative, and I can report to you that we have
    close to 1,000 taxpayers now that have come forward, corporate
    taxpayers, some individuals that have disclosed these returns.
    Treasury and the IRS worked together to come up with a
    proposal, which was outlined about a month ago, to require even
    more disclosure. Some of those would require legislation. Some
    of them can be done administratively.
        With disclosure, which we are now starting to get, and the
    Treasury's proposals implemented even more successfully, we
    will do two things. One is we will go back to the taxpayers
    that have used these in the past and require them to pay to the
    extent that they are verified to be actually abusive shelters,
    and then we will shut them down for the future.
        I think we are on the case. I do think we need the help of
    Congress to pass the additional request that the Treasury has
    submitted legislatively to ensure disclosure.
        Senator Dorgan. There is a study out of Florida which I
    have last year added some funds so that we will
    institutionalize that in a short period to provide some
    additional information----
        Mr. Rossotti. Right.

                                TRANSFER PRICING

        Senator Dorgan [continuing]. But they feel very strongly
    that we are losing $30 to $40 billion a year, and that actually
    is through price transfers or transfer pricing, as it is
    called, and they study these things and show that companies
    that have United States subsidiaries are buying and selling
    from themselves and charging prices like $50 for a piano, $7.60
    for a tractor tire, $15 for a toothbrush.
        They overprice or underprice a product in order to zero out
    any income in the United States, and, therefore, they pay no
    income tax in the United States. They do this through a
    sophisticated scheme called transfer pricing, and for you to
    get to the bottom of it, you have to take the equivalent of two
    plates of spaghetti and connect the ends of the spaghetti. It
    is impossible to do. I do not think you can do it. I do not
    think you are doing it.
        And yet, the Treasury Department, as a matter of policy,
    they look around and act moon-faced and say, gee, things are
    just great. They are not great. You need more resources and we
    need a different strategy. What we need is a formula-based
    system rather than the arms-length system. But you will be long
    gone and I will still be debating this, and I probably will not
    win, but I am not going to quit because that is also part of
    abusive sheltering of income. What the big interests do not
    pay, the little folks end up paying in income taxes. It was
    therapeutic for me to say that, and I will----
        Mr. Rossotti. The transfer pricing is one aspect, but I
    think more generally, the use of various international
    techniques, if you will, a variety of them try to move income
    outside the United States is part of the problem, without
    question.
        Senator Dorgan. Is inversion legal, corporate inversion,
    where a corporation renounces its U.S. citizenship, pays a few
    bucks to a tax haven, becomes a citizen of that tax haven, and
    calls its operations in this country a subsidiary and then
    plays around between itself and its subsidiary in the United
    States as a foreign corporation? You know that inversion is
    happening.
        Mr. Rossotti. Yes, I do.
        Senator Dorgan. Is it legal?
        Mr. Rossotti. Well, first of all, let me just be
    cautionary. I am not--this gets into one of the most highly
    technical areas of the law that there is, and----
        Senator Dorgan. Yes, but I am in the middle of it, so----
        Mr. Rossotti. I know, and----
        Senator Dorgan. It does not mean I understand it. I am just
    asking----
        Mr. Rossotti [continuing]. And I do not want to overstep my
    level of expertise.
        Senator Dorgan. Well, go ahead.
        Mr. Rossotti. As far as I know, there are techniques that
    make some of these kind of inversions legal under current law.
    That is what I have been advised. Now, there probably are a
    wide range of facts that affect any individual one, so you can
    never comment in general, but my understanding, as I have been
    advised, is that, for the most part, people are following the
    letter of the law and they do have the right to do this.
        I will say that some of these transactions are taxable when
    they do them, I do know that, so that it does require a payment
    of capital gains tax at the time the inversion is done. That is
    part of the law.
        But this is an extremely complex area and it really
    requires, I think, some careful analysis by the appropriate
    committees as well as Congress.

                              POST 9/11 SITUATION

        Senator Dorgan. Let me ask your judgment about it, though.
    Post-9/11, when we are fighting terrorism and so on and we have
    a company that says, you know what I would like to do? In order
    to save on our tax bill, I would like to renounce my American
    citizenship. What is your impression of that?
        Mr. Rossotti. Well, I think as a citizen, that is not an
    appealing thing for somebody to do. I am speaking as a personal
    matter. Our job in tax administration is to administer the laws
    as they exist. There are plenty of them that I do not
    particularly like, but I have made up my mind that I would take
    the oath of office and administer them as they were passed.
        Senator Dorgan. I understand. I am asking the question
    because I find it pretty outrageous, frankly. I mean, the issue
    of patriotism is an important issue in this country----
        Mr. Rossotti. I agree.
        Senator Dorgan [continuing]. And the companies that do an
    inversion and essentially renounce their U.S. citizenship, who
    are they going to call, the Bahamian navy when they are in
    trouble? I do not think so. I mean, the best they get to offer
    is a post office box in these countries. All right. But you are
    nearing the end of your term and you can say whatever you like.
        Mr. Rossotti. What I have said many times, and I think it
    is not just on inversions but any misuse of the law or skirting
    of the tax law by people that have access to very sophisticated
    tax advisors or devices that are promoted in any form to not
    pay taxes that they should be paying, I think is probably the
    worst thing that can happen as far as the tax system is
    concerned for the very reason that you say. Most people have to
    pay their taxes. Most people do pay their taxes.
        We hear this all the time, not only anecdotally, but just
    going out and talking to people out in the community. They say,
    why are you guys picking on the little guy? Why do you guys not
    go out and really get the people that are really abusing the
    system? I agree with that. It is just that, sometimes, people
    are using laws as opposed to abusing laws and we can only deal
    with the ones that are abusing the laws. Without legislation,
    we cannot deal with the ones that are using the laws as they
    exist on the books.
        Senator Dorgan. Mr. Commissioner, I have a series of
    questions I will submit to you.

                                CONTRACTING OUT

        One last question, and then I will call on my colleague.
    The Office of Management and Budget is proposing that every
    agency meet a contracting out quota, 5 percent of their
    commercial jobs in fiscal year 2002 and 10 percent in fiscal
    year 2003. You are in the middle of a major reorganization. I
    am wondering, do you think these arbitrary contracting out
    quotas are good? Are they a good tool at this point or are they
    restrictive and difficult?
        Mr. Rossotti. We are attempting to manage this process in a
    way that will be as constructive in terms of our real
    objectives as we can. I mean, it is a quota of those jobs that
    you designate as being potentially outsourceable. It is not the
    whole agency, and so what we have been trying to do is to be
    very careful, and we are putting significant effort into
    analyzing those things. There are some, frankly, the ones we
    have identified in the first 2 years are reasonable to look at
    for outsourcing and they are commercial activities, like
    distributing forms, for example. We have some distribution
    centers that distribute forms. That is something that can
    reasonably be done by an outside group.
        I think that as long as we can manage this in a way that is
    reasonably consistent with our objective for increased
    productivity without making them arbitrary, then I think we
    will be fine.
        Senator Dorgan. Senator Campbell?
        Senator Campbell. Thank you, Mr. Chairman.
        Let me ask a few simple questions that will not tax your
    level of expertise, although I do not think here in the Senate
    that is a problem, because we do it every day.
        The IRS is looking into the feasibility of outsourcing some
    of the collection process to private collection agencies. I
    think that is what Senator Dorgan alluded to. In that 1996
    pilot program, expenses were equal to the revenue generated
    and, therefore, you did not make any money. At least, that is
    what I figure. What can private debt collection agencies do
    differently this time to collect more than it is costing?
        Mr. Rossotti. That is exactly the issue we are studying,
    and I think it is a good illustration of how we are trying to
    handle this, responding back to the Chairman's question. We are
    not going forward and doing the same thing that was basically a
    failure in 1996. What we are doing is, as part of our
    modernization of collection process, which is one of our
    modernization processes, we have invited private sector
    companies in. Let me just say, I can only go so far in this
    because I have an ethical conflict here and a recusal, so I can
    only comment at a very general level on this subject.
        But the basic idea is that we have invited these people to
    look at the way the process works and to determine whether
    there would be a business case and what portion of the
    collection process we would do before we actually do a project
    and study it and actually outsource it. So that is the process
    that we are following.
        I think as an intelligent way to manage it, it is
    reasonable, because we are getting the input from people that
    are in the business of doing private sector debt collection. We
    have them actually look at the way it works in the Federal
    Government and determine if there is, in fact, some portion of
    the debt that could be profitably outsourced, before we go just
    jumping in and saying this is what we are going to do.
        Senator Campbell. How do you ensure privacy when you
    outsource?
        Mr. Rossotti. Well, that is one of--what we have given
    through the process of consulting, we have actually put out an
    RFI, which is a request for information, a definition. We asked
    them to respond, and one of the key things that the vendors are
    looking at and coming in to tell us about, and they are not
    telling me because I am recused from the process, but what they
    are telling our staff is how they would, if they did come in,
    meet a variety of things that are particular to the Federal
    situation and privacy is paramount. Taxpayer rights is another
    one. The Congress has passed a lot of taxpayer rights
    provisions that are part of the----

                                CONTRACTING OUT

        Senator Campbell. Do you have some way of monitoring that
    with companies that are outsourced?
        Mr. Rossotti. Well, we have not gotten down to that point
    yet, but what we are asking the companies that are thinking
    about doing this business is to tell us how or if they could
    comply with these requirements, such as privacy and taxpayer
    rights, and then how we would ensure compliance if we went
    forward.
        Let me mention one other point, Senator, and that is that
    this would require legislation. The issue of outsourcing, that
    particular outsourcing of debt collection, we have been advised
    by Counsel would have to come before the Congress. It would
    require legislation.
        Senator Campbell. What you did was a demonstration project.
        Mr. Rossotti. Right.

                              OFFERS-IN-COMPROMISE

        Senator Campbell. The offers in Compromise, I guess it is
    called, the OIC program, which includes collecting that which
    could be reasonably collected at the earliest time with the
    least cost, meaning avoiding a costly litigation, I assume,
    things of that nature, gives taxpayers a fresh start to let
    them voluntarily comply----
        Mr. Rossotti. Right.
        Senator Campbell [continuing]. What was the total amount
    collected through that program in fiscal year 2001?
        Mr. Rossotti. That is a number that I would have to get you
    for the record, Mr. Chairman. I do not think I have the exact
    number.
        Senator Campbell. Then maybe you could tell me how you
    measure the effect of this, of offers as a collection tool.
        Mr. Rossotti. What we do, and let me just preface this by
    saying this is a relatively new program, or it is not
    completely new, but it was dramatically expanded in RRA. I have
    to be honest and say we have been struggling with this
    program--I do not want to mislead anybody--to get it in an
    efficient state so that it will accomplish its objectives, and
    I do not think we are quite there yet, but I think we are
    getting close.
        What the basic idea of this program is and a measure of
    effectiveness is if a taxpayer is willing to pay but cannot pay
    the full amount of their debt, which happens, there are a lot
    of reasons why people can get behind----
        Senator Campbell. It is cheaper to take what you can get
    rather than putting them in jail and going through all the
    litigation or all that stuff.
        Mr. Rossotti. Exactly. Let us take what we can get, and
    that is measured by something that is called the reasonable
    collection potential, which is a calculation that we can go
    through with a taxpayer to determine, based on their income and
    their assets, how much they could pay. If that is less than the
    full amount, then we compromise. We settle on that, we wipe it
    off the books and they get a clean slate.
        The difficulty has been that we have gotten a huge upsurge
    of these offers since RRA was passed and we have gotten a
    backlog of them which we are now just starting to work down.
        The other thing that we have had difficulty with is
    figuring out how to efficiently calculate what this reasonable
    collection potential is and coming to a conclusion, and we have
    put a lot of work into that. We have now got two sites that are
    set up specially to do this, and we just recently, in the last
    few months, made some additional decisions about how we can
    streamline this process. We really expect--right now, we have
    an inventory of 103--I think it was about 100,000 claims of
    these in process and we hope to get that down to about 55,000
    by the end of this year, cut it in half.
        Senator Campbell. So you do not actually know if the costs
    of monitoring it and doing this has collected more revenue
    than----
        Mr. Rossotti. Oh, it would be collecting more revenue than
    it is costing, but I will have to get you--I can get you, in
    fact, the numbers. I just do not have them with me today.
        Senator Campbell. I know it works sometimes, because when I
    was a young man, long before politics, Mr. Chairman, that
    happened to me, not through any fault of mine, but the guy that
    prepared my tax returns missed it by about $20,000 and I was
    called down and told that I owed $20,000 and I did not have any
    money. I just told them, well, send me to jail because I did
    not have any money and needed a vacation anyway. But they
    worked something out so I would pay part of it and pay part of
    it on time and all that and it worked pretty good. So they got
    more out of me, so I imagine it works with other people the
    same way.
        Mr. Rossotti. There is no question. I was one of the great
    proponents of doing this. It is just that it turns out to be a
    little complex on a case-by-case basis to actually come to a
    conclusion as to what the right amount is and get it off the
    books. But there is no question about the value of the program.

                             TAX RESOLUTION ISSUES

        Senator Campbell. According to the 2001-2003 Wage and
    Investment Strategy and Program Plan, the IRS plans to hire and
    train tax resolution representatives to provide a greater range
    of services. They will be expected to assist taxpayers with
    claims for innocent spouse relief. Have you presently trained
    and deployed these people in field offices yet?
        Mr. Rossotti. We have. We have trained and deployed some of
    them. We did some of them in 2001 and some of them in 2002. The
    budget is, of course, the constraining factor as to how fast we
    do them, but we definitely have established the position. I can
    get you the numbers on how many. I do not have it right here
    with me. I can get the numbers----
        Senator Campbell. I would also be interested in knowing the
    results, too, if you have any.
        Mr. Rossotti. The results, I think, are already--although
    we do not have perfect measurements--I think, without question,
    the response we have gotten from the public is very positive,
    because if you remember, I think we came out to your district--
    --
        Senator Campbell. You did. You talked to widowers, I
    remember, and a widow.
        Mr. Rossotti. And part of that was that there was no one
    that they could go to in person to get this problem resolved in
    one place, and that was the whole reason that we set these up.
    It is a new position in the IRS and I think it has a lot of
    value, and the idea is that someone can come in, make an
    appointment if they want to, and get one person to resolve
    their case.
        Senator Campbell. Instead of talking to a computer or a
    machine or something.
        Mr. Rossotti. Right----
        Senator Campbell. There are people in Colorado----
        Mr. Rossotti. We will get you the numbers on how many have
    been deployed so far.
        Senator Campbell. All right. Thank you. That trip you made
    to Colorado years ago, there are people that were in there that
    got a chance to talk to you personally about their problems.
    Some of them still come in the office and say how beneficial
    that was to them, how much it helped them.
        Mr. Rossotti. We learned a lot, too.

                          WALK IN TAXPAYER ASSISTANCE

        Senator Campbell. Thank you, Mr. Chairman.
        Senator Dorgan. Commissioner Rossotti, as I indicated, we
    will submit questions to you. One last point. As you know, last
    year, I added some money to the Inspector General's account and
    asked that he conduct an audit every second month of your walk-
    in taxpayer assistance centers, and the reason I did that is I
    was at home late in the evening reading an Inspector General's
    report prior to a hearing and discovered that the report showed
    that of those who showed up at these walk-in taxpayer
    assistance areas around the country, 73 percent, I believe it
    was, either got the wrong answer or no answer. I was very angry
    about that and said that that cannot continue. So I put money
    in the Inspector General's account and asked that every second
    month, he do a similar investigation and report the results
    back to us.
        One such investigation has now been done. It shows marginal
    improvement. It is an improved situation, although still not
    anywhere near where you and I would want it to be. I am going
    to monitor that very closely all year. Every second month, I am
    going to get a report, an investigative report. I know you are
    working on this very hard.
        If you have a tax law and expect people to comply with it,
    if they seek out the Internal Revenue Service and ask for
    assistance and get the wrong answer or get no answer or get
    treated rudely, as happened in a couple of cases, it is exactly
    the wrong thing and it upsets me as a lawmaker and I know it
    upsets you as a Commissioner.
        I just wanted to underscore with you again how important
    that is to me. You and I have had several discussions about it
    and these investigations will be relentless over the 12
    months----
        Mr. Rossotti. I understand.
        Senator Dorgan [continuing]. And there is no way to escape
    them because they are in law, but I think it is good for you
    and good for us to have this done.
        Mr. Rossotti. We are using the results of those, as you
    know, very carefully, and we have been working closely with the
    IG. As I think we have discussed on some other occasions,
    getting the correct answers in tax law questions in the in-
    person sites is one of the harder pieces of the puzzle, just
    because they are dispersed in 400 locations, 250 of them are
    small enough they do not even have a manager on site, and, of
    course, there is a wide range of questions that people can ask.
    So what we have done is quite a few different things to try to
    improve the quality, first of all, let me say, at two levels.
        The first level of quality is that people are treated
    properly regardless of the exact answer to the question. There
    is no excuse to have any level of failure in that area, and I
    think we did have some in the past. Very honestly, that
    particular part of the IRS was not given a lot of priority. As
    you can see from the report you have been given, we have
    largely, although not 100 percent, fixed that part of the
    problem. I think people, for the most part, are getting service
    and getting treated properly, and if there are isolated
    incidents where they are not, we are going to fix it.
        The next piece of it is to make sure that they not only are
    treated right and get an answer but that they do not get the
    wrong answer, that they get the right answer, and we have also
    made some progress on that. That is a harder problem because
    that involves technical questions and tax law training and
    repetitive work with employees to get the answers right.

                          TAXPAYER ASSISTANCE QUALITY

        I think we have some encouragement from what has happened
    on the telephone system because most of the people who contact
    us for tax law questions actually call by telephone. A few
    years back, we did not even have a measurement system for it,
    and when we did measure it, the results were no better than
    what you heard from the IG on the walk-in sites. This year, so
    far, on telephones, we are up to about an 83 percent correct
    response rate, which is still not as good as it should be, but
    it is way, way up from where it was.
        I think if you look at what percentage of the ones in the
    walk-in sites are correct now, they are probably down around
    the 60--of those that are answered, that it is probably around
    60, 65 percent or somewhere in there. So I think we clearly
    have a ways to go on both of these, but I think we are working
    on it very diligently.
        One of the things I would point out is structurally what we
    have done with the IRS so that it carries on is to have
    somebody that is in charge of it full time and that you know
    who they are and they are accountable for it.
        In the old IRS, these walk-in sites, there were 400 of
    them, they all reported to different people, they were an
    afterthought. We now have one chain of command. I know who--and
    I would be glad to introduce him to you if you would like to
    meet him--who is in charge of these walk-in sites, and then he
    has a few people under him. They work full time, every day,
    trying to make this better, and that will carry on year-after-
    year-after-year. I think that is a fundamental structural
    change that we have today in the IRS that we did not have, and
    that is true of the other programs, too. The taxpayer phone
    service, there is somebody else in charge of that.

             PREPARED STATEMENT AND ADDITIONAL COMMITTEE QUESTIONS

        So at the very least, as time goes on, we are not going to
    forget about this. We are going to have people that are
    measured every month and every quarter on how well they are
    doing in delivering these services.
        Senator Dorgan. Mr. Commissioner, thank you very much for
    your testimony today.
        [The information follows:]

                   Prepared Statement of Charles O. Rossotti

                                 budget summary
        Mr. Chairman, I want to take this opportunity to thank the
    President and Treasury Secretary O'Neill for their continued support of
    our critical mission on behalf of the American people and our efforts
    to modernize the Internal Revenue Service.
        During this time of national sacrifice and resolve, I am most
    grateful for the funding contained in the proposed IRS budget. The
    President's fiscal year 2003 budget request of $10.418 billion for the
    IRS will enable us to stay the course we embarked upon more than 3
    years ago. We will be able to continue to make short-term improvements
    in service, compliance and efficiency as well as investments in our
    long-term Business Systems Modernization (BSM) program.
        Mr. Chairman, let me also express my gratitude to you and the
    Members of the Subcommittee. After careful review, you have
    consistently approved a level of funding consistent with the requests
    of the President. Moreover, you have expressed a growing confidence in
    our ability to better manage the BSM program in spite of the challenges
    we confront. This was clearly demonstrated last year when you released
    a full year of funding for BSM. We still have much work to do to meet
    the high standards and goals you set, but this tangible vote of
    confidence is most appreciated and we will endeavor to earn it every
    day.
                                  introduction
        Mr. Chairman, 3 years after the passage of the IRS Restructuring
    and Reform Act of 1998 (RRA 98), we have developed and are carrying out
    a modernization program of short- and long-term improvements. They are
    designed to achieve the overall objectives of improved service, better
    treatment of taxpayers, more efficient and effective compliance and
    greater overall efficiency.
        We are proving that the long-standing problems at the IRS are not
    insolvable. We are gradually improving our performance across the
    board--not through massive infusions of new resources, but by
    leveraging our limited resources through better management and a
    fundamental reengineering of business processes. We have been able to
    reallocate precious resources and personnel to where they are needed
    most, such as improving customer service and stabilizing critical
    compliance activities.
        During fiscal year 2001, returns, payments and refunds were
    efficiently processed. The telephones were better answered. We tore
    down more barriers and added more incentives to electronic filing of
    returns and payment of taxes. More taxpayer problems are being solved
    in a telephone call or visit. We simplified some forms and regulations.
    We better administered RRA 98's taxpayer rights. We stabilized some key
    compliance activities. We worked to ease the burden of those affected
    by the September 11th terrorist attacks.
        However, if we look back on the progress we made in fiscal year
    2001, we also clearly see how far we still have to go. The IRS
    Oversight Board, the GAO and Treasury Inspector General for Tax
    Administration (TIGTA) have reported on numerous deficiencies. We still
    are not consistently providing service at a level that taxpayers expect
    or deserve. We still are not ensuring that everyone's neighbor or
    competitor is complying with the tax law and paying what he or she
    owes. We have many jobs that we must perform at higher quality and
    efficiency.
        There are no shortcuts to achieving our goals. The IRS' problems
    developed over a long period and are too widespread, deep and complex
    to yield to simple, quick remedies. We must carefully lay a foundation
    that will allow us to succeed in our rebuilding efforts. We have now
    restructured our organization, reducing management layers and achieving
    more customer focus and greater management accountability. We have
    developed and implemented a new set of balanced performance measures.
        Our biggest remaining task is to modernize all of our business
    processes using the appropriate and best technology. The real tangible
    benefits of modernization will materialize over the remainder of the
    decade in carefully planned and executed projects. The first of these
    were delivered this past year; taxpayers will see more in 2002.
        To ensure the success of IRS modernization, we must stay focused
    and committed to the intent of the Restructuring Act, making
    adjustments as necessary; but not losing sight of the goal which is to
    provide quality service and proper treatment to every taxpayer while
    collecting the taxes that are due under the law. The scope of the task
    ahead is still enormous but so is our resolve to finish the job we
    started in July 1998.
                           service improvements made
        We want to improve the entire way the IRS serves taxpayers--from
    filing and paying taxes to getting information and assistance to
    protecting their rights. More than the sum of its parts, the highly
    successful 2001 filing season continued to demonstrate how we can build
    on positive trends in service to taxpayers, especially as our major
    technology and organizational initiatives take effect.
        Indeed, a government-wide survey released in December 2001
    demonstrated improved customer satisfaction among individual taxpayers,
    especially among those who file their returns electronically. The IRS
    posted an 11 percent increase in satisfaction among all individual tax
    filers since 2000 and a 22 percent increase since 1999. It was the
    largest favorable gain of the 30 Federal agencies surveyed by the
    American Customer Satisfaction Index (ACSI) Survey. (Please see
    attached chart.)
    Electronic Tax Administration (ETA)
        In 2001, a little more than 40 million taxpayers filed
    electronically--a 13 percent rise from last year. Since 1997, e-filing
    increased by 110 percent, and on-line filing grew by a staggering 1,700
    percent. Clearly, the value taxpayers receive from all our e-programs
    is one reason behind the growth. Faster refunds, positive
    acknowledgement of receipt and fewer errors that require time consuming
    letters and telephone calls to correct are key benefits to taxpayers.
        One of the important reasons for the strong showing in the ACSI
    survey was the very high satisfaction rate among electronic filers. It
    was 77.2 points--higher than the previous year and the third year in a
    row that e-file taxpayers expressed increased satisfaction.
        For the 2001 filing season, we added 23 additional forms to the
    1040-e-file program. And we achieved a major milestone in the 2002
    filing season--virtually all 1040 forms and schedules can be filed
    electronically and no paper signature document is required. We are also
    expanding the electronic payment options available to taxpayers by
    accepting credit cards to pay installment agreements and delinquent
    taxes. In addition, we are repeating a popular option from the 2001
    filing season. Taxpayers who need a filing extension can get one
    automatically by making a simple phone call.
        In 2001, we also better served the business community's ETA needs.
    In September we introduced EFTPS OnLine (Electronic Federal Tax Payment
    System), which allows businesses to enroll in the system, securely make
    Federal tax payments and check their electronic payment history over
    the Internet. And businesses can now file electronically their Form 941
    (Employers Quarterly Federal Tax Return), as well as Form 1065
    (Reporting Partnership Income) and Form 940 (Employers Annual Federal
    Unemployment Tax Return). Individual taxpayers who make quarterly
    estimated tax payments could also use the system, eliminating paper
    forms and receiving on-line access to payment history.
        Taxpayer use of our web site also smashed all records. Four years
    ago, irs.gov received 260 million hits. This year, we estimate that it
    will post 2.6 billion hits with more than 317 million forms and
    publications downloaded. It has also been helpful in alerting taxpayers
    to a number of scams that are being perpetrated upon them, such as the
    bogus slavery reparations scheme.
        In 2001, we also launched the Small Business and Self-Employed
    Community web page. It is dedicated to the needs of this important
    group of taxpayers who often confront more complex tax issues than
    those who have their taxes withheld by an employer. And we recently
    unveiled a revamped IRS web site that will eventually take us from
    being an information-only portal to a world-class transaction based
    gateway.
        The Administration also proposes in its budget submission ``an
    easy, no-cost option for taxpayers to file their tax return online.''
    Unfortunately, there has been some confusion regarding this proposal.
    The Administration's proposal to give taxpayers the option to file
    their tax returns on-line without charge is based on two principles: no
    one should be forced to pay extra just to file his or her tax return
    tax, and the IRS should not get into the software business.
        In a statement issued on January 30, 2002, Treasury Secretary
    O'Neill stated, ``I don't intend for the IRS to get into the software
    business, but rather to open a constructive dialogue with those who
    already have established expertise in this field. In the end, this
    effort should come up with a better way to save time and money for both
    taxpayers and the government.'' The IRS totally concurs with the
    cooperative approach enunciated by the Secretary and we will follow it
    to the letter.
    Telephone Service
        Many taxpayers prefer telephoning the IRS, and our inability to
    deliver this basic service contributed significantly to the public's
    lack of confidence in the IRS in the 1990s. During that time, up to 80
    percent of taxpayer calls were met with a busy signal, and according to
    Roper Surveys, the public's rating of the IRS declined to an all-time
    low in 1998.
        Since 1998, we provided extended hours of telephone service during
    the filing season. We also put on more assistors at peak hours, rather
    than just during normal business hours. Almost 108 million taxpayers
    called on one of our toll-free lines during fiscal year 2001. We
    received 76 million automated and Teletax calls, and our live assistors
    handled 32 million taxpayer calls. Our San Patricio, Puerto Rico call
    site became fully operational in 2001 and will greatly assist us in
    providing better access and service to Spanish-speaking taxpayers.
        Nearly all callers now have almost immediate access to automated
    services, although some callers are forced to wait longer to receive
    assistor service. For taxpayers who wanted to reach an assistor in the
    2001 filing season, the overall wait time was 5 minutes and they
    reached an assistor 63.9 percent of the time, which often required them
    to call back. During the summer, a very large volume of telephone calls
    related to the special advance refund reduced the average service to
    below the previous year. And this level of service is still
    unacceptable to both taxpayers and the IRS. We are using every method
    at our disposal, including modern technology, to address this problem.
        Once connected, taxpayers must get prompt, accurate and courteous
    answers to their account and tax questions. Here, too, we have made
    substantial progress towards providing better service to taxpayers. The
    telephone quality rates for tax law and tax account questions showed a
    marked improvement in fiscal year 2001. They were up to 75.1 percent
    and 69.1 percent respectively as compared to 73 percent and 60 percent
    over the same period last year. Although we would agree with the GAO's
    assessment that we have not yet attained a world class customer service
    level, we believe that we are on the right track to achieving that
    goal.
        To increase productivity and quality of service, we must give our
    employees the technology and tools they need to do their jobs at a high
    level. The first of the BSM projects, Customer Communications 2001
    (CC01), was deployed in July 2001. It improves the efficiency and
    effectiveness of our systems for receiving, routing and responding to
    millions of taxpayer telephone calls. CC01 helped us increase the total
    number of calls answered, which surged by 32 percent over the past year
    due in large measure to the advanced tax refund. We must also give our
    assistors specialized knowledge so they can better answer taxpayer
    questions about a very complex, difficult and changing Tax Code.
    In-Person Service
        For those taxpayers who prefer to visit an IRS office, service is
    available at more than 400 locations nationwide. At many sites, in-
    person service is offered on Saturdays during the filing season.
        In the past, the IRS did not place a high priority on what were
    called ``walk-in'' sites. The services offered at them were limited and
    often of poor quality. However, under our new Field Assistance concept
    of operations, we will better serve taxpayers at our taxpayer
    assistance centers. We will help them meet their filing and paying
    responsibilities including answering their tax law questions and
    providing forms and limited courtesy return preparation.
        Throughout the year, and at a variety of locations, we also
    schedule the highly acclaimed Problem Solving Days to resolve long-
    standing taxpayer issues for those who cannot take advantage of weekday
    problem solving services.
        Problem Solving Days have an excellent track record. However, every
    day should be problem solving day at the IRS, not just three or four
    times a year. That means using a cross-functional approach to resolve
    most tax account issues with a single visit or phone call at any time
    throughout the year.
        To help us meet this need, we created a new job at the IRS, ``Tax
    Resolution Representative.'' These IRS employees will receive the
    training and authority to provide ``one-stop-service'' for a broad
    range of issues ranging from answering tax questions to resolving
    payment problems.
        Our Stakeholder Partnership, Education and Communications (SPEC)
    organization is also now working to energize the Volunteer Income Tax
    Assistance return preparation program. Last year, we worked with more
    than 18,000 volunteer sites across the country to assist an estimated
    4.3 million taxpayers wanting this service.
    Burden Reduction
        We are also working to provide immediate and far-reaching burden
    relief. For example, in fiscal year 2001, we overhauled the old,
    complicated rules governing the required minimum distributions from
    individual retirement accounts. Also, millions of taxpayers are no
    longer required to file the 54-line Schedule D, ``Capital Gains and
    Losses.'' The ``checkbox'' burden reduction initiative, which enables
    taxpayers to authorize the IRS to discuss their returns with their paid
    preparers, also made a very strong showing in its inaugural year. In
    addition, we provided burden relief to small businesses through a
    number of initiatives, including permitting many of them to use the
    cash versus the accrual method of accounting.
        However, burden reduction goes beyond filing and payment issues. It
    also means helping taxpayers with the sometimes complex RRA 98's
    taxpayer rights provisions, such as the innocent spouse and offers in
    compromise programs and enhanced due process rules. We are still
    working very hard to administer these provisions better. However, along
    with some remaining management challenges, there have also been some
    successes.
        Faced with a mounting backlog of 40,000 innocent spouse claims, we
    took several steps to promote greater efficiency. The innocent spouse
    program was centralized at one location in Cincinnati and we provided
    the necessary staff to dig out from under the backlog. The Innocent
    Spouse Program is now operating at a reasonable level of service and
    efficiency.
        Burden reduction also means communicating with taxpayers in plain
    English. As part of our continuing effort to improve our correspondence
    to taxpayers, and following RRA 98's directions, the IRS began sending
    out this year six redesigned notices, including those dealing with math
    errors, balance due, overpayments and offsets. These notices affect
    both individual and business taxpayers. The new notices should reduce
    the number of times taxpayers need to contact the IRS, be easier to
    understand, and help resolve inquiries. We continue to redesign 24
    additional notices. We plan to release four of them in January 2002,
    seven in July 2002 and the remaining 13 in January 2003.
    Advance Refund and September 11 Response
        Last year, the concept of service to taxpayers went far beyond what
    is normally expected of the IRS. Two events--the issuance of millions
    of advance refund checks and our response to the tragic events of
    September 11--demonstrated how we could provide service to taxpayers
    under extraordinary circumstances.
        For the advance refund, the IRS coordinated an unprecedented
    outreach to America's taxpayers, an intricate computer programming
    project, a flurry of news releases, an updated irs.gov site and
    additional assistors to handle record call volumes.
        Following the September 11 national tragedy, IRS and Treasury
    Department employees did their best to minimize the distraction of tax
    issues for the victims. By September 14, 3 days after the attack, we
    provided administrative relief to the victims in the form of extensions
    to file returns and pay taxes. We also suspended for 6 months many
    enforcement actions for the affected taxpayers. In addition, we
    established special toll-free numbers to answer any questions, and we
    set up a special disaster relief page on our web site.
        Before and after the terrorist attacks, the IRS' Tax Exempt/
    Government Entities (TE/GE) Operating Division also helped educate the
    public on the legal requirements organizations must meet to qualify for
    tax-exempt charitable status.
        On September 18, we placed a new, easy-to-understand publication on
    our web site that provided information to assist the public to make use
    of charitable organizations. We also announced that we would speed
    processing of requests for tax-exempt status from new charities formed
    to assist the victims. Although we expedited the process, we did not
    lower our standards for new organizations applying for the tax-exempt
    status.
        In addition, we worked with the September 11 charities in getting
    donations to the victims' families. On November 16, we issued interim
    guidance that recognized the unique circumstances caused by the
    tragedy. We wanted to send a clear message that charitable groups that
    act in a reasonable and good-faith manner to help the victims would not
    endanger their tax-exempt status.
                       stemming the decline in compliance
        Our tax system depends on each person who is voluntarily meeting
    his or her tax obligation having confidence that his or her neighbor or
    competitor is also complying. However, we simply do not have the
    resources to resolve every case of non-compliance. We must apply our
    resources where non-compliance is greatest while still maintaining
    adequate coverage of all other areas. Our near term goal in 2001 was to
    stabilize the level of our key compliance activities while beginning to
    focus on the areas of greatest risk to our nation's tax system.
        After careful study we identified and are addressing four important
    areas of systematic non-compliance. They are: misuse of devices such as
    trusts and passthroughs to hide income; use of complex and abusive
    corporate tax shelters to reduce taxes improperly; failure to file and
    pay large accumulations of employment taxes; and erroneous refund
    claims.
        Although major and systematic areas of non-compliance are our top
    priority, it is also important that we use all available tools to
    detect, correct and deter non-compliance of all kinds. For example, in
    2002, the IRS will begin processing and matching K-1s reporting almost
    $700 million of income and importantly, reported losses on trusts and
    passthroughs.
        However, no matter how effectively we use our resources and new
    techniques to identify and prevent problems, some cases require
    intervention by IRS compliance personnel. Although 80 percent of the
    individual income is reported by third parties, the remaining 20
    percent, mainly business income, are not reported and often require in-
    person auditing to verify. Also, business income, including that of
    passthrough corporations, partnerships and trusts can only be verified
    through auditing.
        Compliance activities began to stabilize in fiscal year 2001. The
    number of liens filed and levies issued increased by 49 percent and 103
    percent respectively over the previous year. Large corporate
    examinations and returns examined by correspondence increased by 27
    percent and 65 percent respectively. We also made 10 percent more
    determinations for innocent spouse cases and processed 40 percent more
    offers in compromise. However, the significant exception to achieving
    our compliance goals was our in-person examination rate, which declined
    about 20 percent.
        We also hired 568 Revenue Officers and 733 Revenue Agents in fiscal
    year 2001. This was the first time in 6 years that we were able to
    replenish these critical compliance positions. By stabilizing the
    number of compliance personnel, reengineering processes and setting
    clear goals, we believe that compliance activity levels will increase
    over the next 3 years. We will also be able to better identify and
    focus on key compliance problem areas. Research and other programs will
    support compliance operations. Taxpayer education, published guidance
    and pre-filing agreements will help us prevent compliance problems in
    the first place. However, compliance operations will not yet rise to
    the desired level of efficiency and effectiveness.
        In the long term, we will rely on our BSM program to increase the
    effectiveness and efficiency of these activities. Business Systems
    Modernization will enable us to increase coverage from audits and other
    income verification techniques with modest increases in staff. We also
    have the opportunity to allocate our compliance resources more
    efficiently, both in specific cases and around patterns of non-
    compliance. And when intervention is necessary, we can use
    analytically-based techniques to assist in determining the appropriate
    action.
    National Research Program
        Last month, the IRS proposed to reestablish a key component of its
    ongoing compliance effort to help ensure fairness for America's
    taxpayers. The National Research Program (NRP) is designed to
    accurately measure tax compliance while minimizing the need to contact
    taxpayers during the process.
        The NRP is developing innovative approaches to measure taxpayer
    compliance with the tax law. It will: (1) be far less intrusive and
    burdensome on taxpayers than previous compliance studies; (2) help the
    IRS build better compliance programs to more effectively catch tax
    cheating and help ensure all taxpayers pay a fair share; and (3) help
    reduce audits of taxpayers who filed an accurate return by at least
    15,000 tax returns a year.
        As part of ongoing compliance operations, NRP will focus on
    measuring three key areas of tax administration--filing compliance,
    payment compliance and reporting compliance. A key element involves
    measuring the accuracy of reporting information on tax returns. The IRS
    has overhauled the reporting component to minimize disruptions to
    taxpayers during the study.
        Ultimately, this project will help all taxpayers by giving the
    agency timely, accurate information about tax compliance. This
    information will allow the IRS to replace outdated audit formulas and
    develop compliance efforts directed toward the tax returns most likely
    to have errors, rather than those from honest taxpayers.
        In late fall of this year, the NRP will begin reviewing a small,
    statistically valid sample of individual returns from the 1040 family.
    The IRS will work closely with tax practitioners, Members of Congress
    and other key stakeholders to finalize the project.
       productivity through a quality work environment and modernization
        On January 30, 2001, the IRS Oversight Board approved the IRS
    Strategic Plan. It lays out how we will use our limited resources to
    achieve the greatest benefits in performance. Moreover, we will meet
    these goals while continuing to shrink in size relative to the economy.
    Indeed, we are planning most of our performance improvement from
    internal management improvements and modernization, not increased
    resources. Balanced measures in line with our strategic plan will have
    been rolled out to most of the new organization.
    Business Systems Modernization Program
        Our Business Systems Modernization effort is the largest ever
    undertaken in the public or private sector. And more than updating our
    antiquated technology, the modernization program changes the entire way
    the IRS interacts and conducts business with taxpayers and
    stakeholders.
        Key to BSM's success is the Tax Administration/Internal Management
    Vision and Strategy (TAVS/IMVS). It provides a clear, integrated view
    of how the IRS should work in the future. In 2001, the IRS Executive
    Steering Committee also approved the Enterprise Architecture--a
    strategic view of the initiatives that are managed by BSM. It will
    enable us to design and build new business and technology projects that
    will be the backbone of the modernized IRS.
        The BSM program was officially inaugurated on June 28, 1999. In 2
    years, we graduated from strategic planning and systems design to
    business results. In fiscal year 2001, we put two projects into
    production, including the Customer Communications fiscal year 2001
    Project that greatly improves the efficiency and effectiveness of our
    systems for receiving, routing and responding to millions of taxpayer
    calls. We also deployed a commercial tax computation software package,
    the Customer Relationship Management Exam. It was sent to over 500
    revenue agents in our Large and Mid-Size Business (LMSB) operating
    division and allows them to make accurate tax assessments for complex
    tax calculations. It will provide time and resource savings for both
    taxpayers and the government. The feedback we have received from
    Revenue Agents on the software has been overwhelmingly positive. Copies
    of the software will be delivered to the rest of the LMSB revenue
    agents by the end of fiscal year 2002.
        In 2002, the BSM program will achieve two extremely important and
    difficult milestones. And they are both firsts: the first movement of
    records of some taxpayers out of the old 1960's tape-based system to a
    modern, reliable data base; and the first establishment of an IRS-wide
    security system providing both internal and external secure access and
    communications to IRS systems.
        These two deliveries represent two of the most essential and most
    difficult building blocks of the entire modernization program. Given
    the scale, complexity, and fragmentation of existing IRS systems, and
    the sensitivity of storing and accessing taxpayer data, it was not
    surprising that developing and deploying new IRS-wide systems for these
    two key components eluded the IRS for decades.
        The lack of these two essential components severely impeded the
    ability of the IRS to modernize its systems and imposed enormous risks
    and costs on the whole tax administration system. For this reason,
    achieving these two milestones will represent a tremendous success for
    the BSM program. And as BSM progresses, these two essential building
    blocks will continue to be enhanced and deployed on an ever-increasing
    scale until they eventually support the entire tax system.
        I want also to stress that due to its enormous size, complexity and
    sensitivity, the BSM Program involves considerable risk. However, the
    fact that risk exists does not mean that the program will fail. It
    means that the program could fail if the risks are not adequately
    identified and appropriate action taken to address them on a timely
    basis.
        We are actively identifying and managing the risks in BSM, and we
    have not hesitated to make changes in programs when necessary. There is
    a critical point to understand about managing risks in this program:
    making constant adjustments to plans is an indication that they are
    being addressed and managed. It is one of the hallmarks of a successful
    systems program.
                            stewardship & resources
        America's taxpayers, the Congress and the Administration expect us
    to be able to properly account for their money and property. I am very
    pleased to note that the GAO rendered an ``unqualified'' or clean
    opinion on the IRS' fiscal year 2001 Financial Statement for both the
    Revenue and Administrative accounts. This means that for the second
    year in a row, the IRS could properly account for $8.3 billion in
    appropriated funds; over $2 trillion in revenues collected; and over
    $190 billion in refunds. Having a tax agency that performs this task
    honestly and accurately is an enormous asset to our nation.
        Over the past 8 years, the IRS oversaw 500 million remittances
    without a major problem. However, in 2001, more than 70,000 taxpayer
    checks valued at $1.2 billion were determined to be missing at the
    Mellon Bank Pittsburgh Lockbox site. The Lockbox Program is a network
    of financial institutions that process taxpayer remittances for the
    IRS. Operated through an agreement with the Department of Treasury's
    Financial Management Service, the system helps accelerate the flow of
    funds to the Treasury.
        Once detected, we took swift action to alert potentially-affected
    taxpayers to the problems. More importantly, these taxpayers will not
    be penalized by what occurred. They will be made whole, and the
    Treasury will receive its funds. The incident, although isolated, will
    be used to improve procedures and prevent any such problem in the
    future.
                      challenges remain to quality service
        The IRS Oversight Board has stated that, ``service to taxpayers is
    inadequate'' and we do not take issue with their position. In spite of
    the short-terms gains we achieved, we are still not providing service
    to taxpayers at a level that they expect and deserve. The facts speak
    for themselves.
        We received 108 million telephone calls on our telephone lines,
    covering a very wide range of subject matter. The quality of that
    telephone service--while improving--is still not on a level with what
    taxpayers receive in the private sector. Treasury Secretary Paul
    O'Neill characterized it as ``unacceptable.'' He is correct.
        Not only must we continue to improve taxpayer access to our toll-
    free lines, we must improve the accuracy of the response we give to tax
    law and account questions. Unfortunately, this problem is not confined
    to telephone assistance. We also have a steep learning curve at our
    taxpayer assistance centers. The GAO testified in April 2001 that
    ``walk-in sites are continuing to provide poor tax law assistance.''
        We are not providing adequate service in other areas. For example,
    employers, particularly first-time employers, are often discouraged by
    the delays and difficulties in obtaining an Employer Identification
    Number (EIN).
        As previously noted, we are now administering RRA 98's 71 taxpayer
    rights provisions. Many of the provisions, such as innocent spouse
    protection, due process in collections and offers in compromise, would
    individually be considered major projects. Collectively, they represent
    a challenge of learning new ways of doing business for nearly every one
    of our 100,000 employees. And during this process, we encountered a
    number of problems and demands that we are still addressing.
        RRA 98 added requirements that lengthened the offer-in-compromise
    (OIC) process. Over the past few years, the OIC Program's over-age
    inventory continued to grow in spite of applying more resources. To
    improve quality, timeliness and efficiency, we centralized OIC
    processing at our Memphis and Brookhaven Service Centers. By using
    revised procedures at the new consolidated sites, we hope to streamline
    the processing of over 120,000 applications submitted each year.
        RRA 98's collection due process provisions also presented new
    challenges and have resulted in a backlog of cases. However, through
    the training of additional Appeals Officers in collection processes and
    procedures, we believe we will be able to clear up the case backlog in
    2002. Improved resource allocations, case development practices, better
    management, communications and technology should also provide for more
    efficiency, greater productivity and better results.
        It will take time, resources and management attention to solve the
    challenges that RRA 98 presents. However, our Strategic Plan squarely
    addresses these issues. More importantly, it improves our quality and
    productivity through modernization and reengineering of our technology
    and business practices with minimal increases in resources.
                       fiscal year 2003 resource request
        Mr. Chairman, the IRS budget request for fiscal year 2003 is
    $10.418 billion and full-time equivalent employment (FTE) of 101,080.
    The request is $482 million more than last year's $9.936 billion
    appropriation. The largest programmatic component of this increase is
    $259 million to enhance customer service and compliance, of which $196
    million will be funded through a redeployment of resources within our
    base budget.
        Overall as shown in the attached chart, the IRS is proposing to
    achieve $259 million in increased program resources and program
    delivery at a net requested increase of only $63 million. Therefore, 76
    percent of the improvement is being achieved by improved internal
    efficiency and redeployments.
        The funding increase request also maintains momentum in the IRS
    Business Systems Modernization projects with $58 million. The budget
    increase for fiscal year 2003 will allow us to fund these critical
    projects as they move from the planning and design phase to development
    and implementation. The remaining increase would fund pay raises, and
    inflation, $10 million for Tier B Projects (see p. 21) and adjustments
    for Homeland Security funds appropriated in fiscal year 2002.
        In addition, $39 million of the total increase is requested as part
    of a legislative proposal to change the accounting of pension and
    retiree benefits costs. Please note that although the increase of $39
    million is the incremental change from the fiscal year 2002
    appropriation (as adjusted), the actual increase to our fiscal year
    2002 base for this proposal will be $503 million. These costs are
    transfers of funds that were previously included in other agency
    budgets and do not represent any net increases in IRS programs.
        To help create a ``World Class Treasury Department,'' Secretary
    O'Neill challenged each bureau to review all programs on a continual
    basis and redirect resources to meet needs, rather than asking for
    funding increases. Budget and performance integration, as part of the
    President's Management Agenda, requires this kind of business review,
    with an emphasis on best results at the lowest total cost.
        Indeed, let me stress the process that underlies the fiscal year
    2003 request. For the first time, we fully integrated the development
    of our budget with the establishment of performance measures. First, we
    determined the highest priority resources needed to increase customer
    service and compliance. In addition, as part of the budget process,
    IRS' senior team conducted a review and prioritization of agency-wide
    needs for fiscal year 2003 and searched for the most efficient
    allocation of resources. The realignment of resources woven throughout
    the fiscal year 2003 budget comes through reengineering, efficiencies
    and investment in modernized systems. To this end, the review developed
    2,287 FTE that could be re-deployed to high priority areas in customer
    service and compliance.
                                   operations
                        highest priority resource needs
    Customer Service and Workload Increases (+1,595 FTE, $91M)
        In fiscal year 2003, the IRS must build on the gains it has made in
    customer service if we are to achieve our first strategic goal, ``top
    quality service to each taxpayer in every interaction.'' We are still
    not providing a consistent high level of service that taxpayers expect
    and deserve. We must continue to improve taxpayer access to our toll-
    free telephone lines and the accuracy of the responses we give to tax
    law and account questions. We must continue to improve the service at
    our taxpayer assistance centers. We must further reduce taxpayer
    burden. We must continue to increase e-file options. We must better
    administer the RRA 98 taxpayer rights provisions. And we must give our
    employees the training and tools to meet these needs. The highlights of
    some of the following initiatives will help us meet our goals.
      --Increased Offer in Compromise (OIC) Cases.--This initiative is
            designed to address the escalating OIC inventory by
            centralizing and streamlining the processing. Cases sent to the
            field will include all background financial data needed to
            conduct the investigation, thereby reducing the amount of time
            that revenue officers must spend on gathering this information.
      --Telephone Level of Service.--Taxpayers must still speak to live
            assistors to answer tax law and account questions as well as
            Automated Collection System (ACS) inquiries. Additional FTE are
            necessary to address current demand and to meet taxpayers'
            legitimate expectations that they receive service comparable to
            what is offered by the best private sector companies.
      --Multi-Lingual ACS.--The Multi-Lingual Automated Collection Service
            (ACS) will help meet taxpayer growing demands for timely,
            accurate and efficient services in languages other than
            English.
      --Improving Correspondence.--We are improving the clarity of our
            communications with taxpayers through a redesign of 24 of our
            notices over the next 2 years.
      --Filing Services.--We must continue to provide filing services--from
            e-filing to submission processing to timeliness of refunds--and
            handle a projected increase in the number of returns filed.
    Enhanced Compliance Strategies (+1,857 FTE, $125 M)
        In 2001, we began to stabilize the long-term decline in compliance
    activities while beginning to focus effectively and efficiently on the
    four key areas of non-compliance and maintaining adequate coverage of
    other areas. However, we still must address a number of challenges. For
    example, from 1993 to 2001, the number of returns reporting adjusted
    gross income in excess of $100,000 grew by 163 percent. We must keep
    pace with this increase by expanding the number of these returns that
    are examined in IRS field and office programs. We must also tackle the
    $66 billion in our total potentially collectable inventory. And we must
    focus on the proliferation of tax scams ranging from sophisticated
    illegal offshore trust programs to the slavery reparations scheme being
    perpetrated upon African-Americans. The following are the highlights of
    our enhanced compliance strategies for fiscal year 2003. A detailed
    description can be found in our congressional justification.
      --Stabilize Audit Rates.--The IRS will devote resources to stop the
            overall declining audit rates and will dedicate more resources
            to auditing partnerships and other passthrough entities.
      --Abusive Trusts.-- Experts estimate that the revenue loss to our
            nation due to abusive trusts could run into the tens of
            billions of dollars. We now have a coordinated strategy to deal
            with this growing problem using a full range of tools from
            public education to civil and criminal enforcement against both
            promoters and participants.
      --High-income Returns.--From 1993 to 2001, the number of returns over
            $100,000 and $1 million dollars grew by 163 and 259 percent
            respectively. However, IRS examination of these returns has not
            kept pace and we must now narrow the gap.
      --Highest Priority Collection.--To address the mounting employment
            and income tax gaps, the IRS will dedicate more resources to
            high priority compliance and collection cases involving unpaid
            employment taxes.
      --Fraud Referral.--Referrals and leads generated from the Lead
            Development Centers and the Fraud Detection Centers will
            produce more quality criminal investigations cases and help
            ensure public confidence in the fairness of our of tax
            administration system.
      --Automated Underreporter.--To improve voluntary reporting on
            individual income tax returns, the Remote Automated
            Underreporter Program will utilize a national rotational
            inventory approach for case selection.
      --Employment Tax.--To combat non-compliance with employment tax laws,
            the IRS will boost resources for legal source tax crime cases
            with a special emphasis on emerging problems, such as the use
            of temporary employment agencies/employee leasing agencies to
            evade employment and income taxes.
      --Money Laundering.--IRS Criminal Investigation (CI) was delegated
            primary investigative jurisdiction in all money laundering
            investigations where the underlying conduct is a violation of
            the income tax laws.
      --e-Crimes.--CI must continue to develop investigative knowledge and
            techniques to keep pace with the growing number of e-crimes,
            such as fraud and theft.
      --Criminal Tax Cases.--Continued development of a close relationship
            between Chief Counsel Criminal Tax and CI will help to ensure
            that legal errors in the investigative process are minimized
            and the chances for successful prosecution are maximized.
    Contract Services (+$44M)
        The IRS must also pay for a number of non-labor program increases,
    many of which are mandated by Executive Order or departmental
    regulations. For example, in response to concerns raised by GAO and
    TIGTA, we must provide for enhanced guard services at our submission
    processing and computer centers. In addition, we are requesting funding
    for physical security upgrades such as more secure gates and entrances,
    and barriers that can be raised and lowered. Other items include the
    Public Transportation Subsidy, which was increased from $65 to $100/
    month.
      resources re-deployed through increased efficiency and productivity
        A combination of strategic redeployment of staff and labor saving
    programs will allow the IRS to improve its level of taxpayer service
    without commensurate increases in the number of FTE applied. Targeted
    improvement projects, such as Reengineering/Quality efforts and labor
    savings from e-file and e-Services can be reapplied to other high
    priority programs. Technology modernization programs will generate the
    bulk of the FTE savings.
    Improvement Projects (Redeployment of 1,779 FTE, $107M)
        The IRS identified FTE redeployments from improvement projects that
    are expected to come to fruition in fiscal year 2003 and are
    highlighted below. The FTE will be reinvested to fund the top priority
    needs identified below:
      --Reengineering/Quality Improvements.--Reengineering and Quality
            Improvement projects and programs will focus on redesigning
            internal processes, policies, and procedures. Updating the
            antiquated workload selection system will, for example, reduce/
            eliminate the substantial number of returns that are ordered,
            classified, and never worked.
      --e-file.--In addition to the many taxpayer benefits, e-file also
            provides clear cost savings and burden reductions for the IRS,
            enabling us to redirect precious resources from processing to
            customer service and compliance programs. In addition to
            expanding electronic filing for individual taxpayers, the IRS
            will promote the electronic filing of all business tax returns
            in fiscal year 2003. Our ultimate goal is to convert all
            business transactions with the IRS to fast, accurate, paper-
            free electronic methods. Through e-Services, we will also
            provide to tax practitioners easy-to-use electronic products
            and services.
      --Customer Relationship Management.--The funding for this project
            will pay for training travel, operating travel and support
            costs related to bringing IRS staff quickly up to speed on the
            newly improved Corporate Tax Analysis software. The software's
            main strengths are its capacity to do carryback/carryover
            calculations for net operating losses (and other losses), the
            interaction of losses and charitable contributions, alternative
            minimum tax calculations and the foreign tax credit
            calculations-- including carrybacks and carryforwards.
      --Information Technology Projects. Two projects are expected to begin
            realizing savings in fiscal year 2003: the Employee Plan
            Determination System Redesign (EDSR) and the Remittance
            Transaction Register (RTR). EDSR is expected to reduce cycle
            time and improve quality of determination letters. RTR is
            projected to improve efficiency in submission processing by
            providing all Lockbox payment information online soon after
            receipt, reducing from 1 month to just 3 days response time for
            reconciling payment information and responding to payment
            information queries.
    Workload Decreases (Redeployment of 508 FTE, $50.5M)
      --Reduced Field Innocent Spouse.--The initial high inventory of
            Innocent Spouse cases is expected to decline to a point where
            they can be processed without significant delays on our part.
            Revenue Agents and Tax Auditor FTEs assigned to this program
            will be re-deployed to address compliance in other areas.
      --Reduced Filing Season Support.--We will reduce the FTEs in the
            Small Business and Self-Employed operating division planned for
            customer service details.
      --Narcotics Program.--With redeployments realized from the narcotics
            program realignment, 67 FTE will be used in the Fraud Referral
            Program and 18 FTE will be used in the Money Laundering
            Strategy Program.
      --Reduced Tax Court Cases.--The number of cases filed in the Tax
            Court is declining. Emphasis on pre-filing resolution of cases
            through programs such as Advance Pricing Agreements is also
            expected to moderate increases in Tax Court litigation in the
            future, as well as Refund and Appellate litigation.
    Targeted Efficiency Improvements (Redeployment of $39M)
        Redeployment is expected from the Treasury's approach to better
    business practices to remove or reduce current efforts that do not have
    significant programmatic value. This is targeted to produce $39 million
    in redeployments.
                          maintain current operations
        The IRS is still a labor-intensive organization and a stable work
    force is critical to carrying out our mission. We must maintain current
    operations, protect the integrity of the tax filing season, oversee tax
    administration programs and continue to implement organizational
    modernization. To do so, the IRS must have the resources to pay for the
    inflationary costs associated with statutory pay and other mandatory
    increases described below .
      --Maintaining Current Services Level (+$295 M).--Needed to maintain
            fiscal year 2002 program levels in fiscal year 2003 by funding
            pay, benefits, and non-labor inflationary costs.
      --Within-Grade Increases (+$37M).--To cover the costs of within-grade
            pay increases for on-board employees.
      --Homeland Security (+$10M).--For the enhanced security arrangements
            required by the Homeland Security supplemental. These funds
            were appropriated as a consequence of the September 11, 2001
            terrorist attacks and other related security concerns.
      --Homeland Security Non-Recur (-$31M).--Funding in the amount of $31
            million from the fiscal year 2002 will be non-recurred in the
            fiscal year 2003 budget.
                      earned income tax credit initiatives
        In fiscal year 2003, funding requirements for the Earned Income Tax
    Credit (EITC) Compliance Initiative Appropriation are projected to be
    $154,346,000, an increase of $406,000 over the fiscal year 2002 funding
    level of $153,940,000. The FTE level of 2,353 is unchanged from fiscal
    year 2002.
        This appropriation provides for customer service and public
    outreach programs, enforcement activities and research efforts to
    reduce overclaims and erroneous filings associated with the EITC.
        business systems modernization and other information technology
                                    projects
        The IRS' antiquated computer systems do not efficiently or
    effectively serve America's taxpayers, nor meet today's business needs.
    They are one of the fundamental obstacles to providing consistent top-
    quality service. Failing to modernize IRS's tax administration business
    systems would require a significant increase in resources to maintain
    the old legacy systems while not addressing their underlying
    deficiencies that will only worsen with time.
        Business Systems Modernization will update our antiquated
    technology and change the entire way the IRS interacts and conducts
    business with taxpayers and stakeholders. Indeed, we do not view
    systems modernization as a separate entity, but rather as one of the
    major ways we can achieve all of RRA 98's goals within realistic budget
    resources.
        Over the past 2 years, BSM graduated from strategic planning and
    systems design to business results. The successful deployment of
    Customer Communications 2001 and the ongoing roll-out, deployment and
    training for Customer Relationship Management Examination in 2001
    provided IRS front-line staff with the right tools to do their jobs
    more efficiently and effectively. Valuable lessons were learned as we
    developed and implemented these projects utilizing the rigorous
    management processes of the Enterprise Life Cycle, while at the same
    time ensuring that all BSM projects adhere to the Enterprise
    Architecture.
        The proposed IRS fiscal year 2003 budget provides continued funding
    for BSM and builds upon last year's achievements. For example, we will
    continue to phase in the deployment of the Customer Account Data Engine
    and move additional filers into the modernized system. The IRS will
    also greatly strengthen its core financial systems through the
    deployment of the first phase of the Integrated Financial System. These
    projects coupled with entire BSM portfolio will deliver on IRS'
    commitment to meet the nation's revenue collection needs and provide
    world class service to our taxpayers.
        I want to stress, Mr. Chairman, that we will continue to use a
    formal methodology to prioritize, approve, fund and evaluate our
    portfolio of BSM investments. This methodology enforces a documented,
    repeatable and measurable process for managing investments throughout
    their life cycle. Investment decisions are approved by the IRS Core
    Business System Executive Steering Committee, chaired by the
    Commissioner.
    Fiscal year 2003 BSM Request
        The proposed $450 million fiscal year 2003 BSM budget request
    includes an increase of $58.4 million over last year's appropriation.
    Let me summarize the key BSM projects that are addressed in the funding
    request. A complete description of each can be found in our
    congressional justification.
                Customer Account Data Engine (CADE)
        CADE is the foundation for all of IRS' tax administration systems.
    It will replace the tape-based Master Files that currently contains the
    only authoritative information on all individual and business tax
    accounts. The IRS dependence on this 1960s Master File system today
    constitutes an insurmountable barrier to efficient service and
    compliance operations and is a very serious risk to the whole tax
    system.
        CADE will incrementally move individual filers from the 1960s tape
    system to a modernized database. CADE Individual Master File (IMF) will
    build the database that will replace the existing IMF processing
    systems. CADE will create applications for daily posting, settlement,
    maintenance, refunds processing and issue detection for taxpayer tax
    accounts and return data. The database and applications developed by
    CADE will also enable the development of subsequent modernized systems
    that improve customer service and compliance. Once implemented,
    modernized applications, such as Customer Account Management (CAM),
    will allow on-line posting of data in addition to daily batch
    processing.
        CADE will be deployed over time in five releases, each related to a
    specific taxpayer segment, phased in over a period of 6 years. At the
    conclusion of Release 5, CADE will have replaced IMF.
        Mr. Chairman, let me point out that due to a number of technical
    difficulties and schedule delays, Release 1 of CADE Production has been
    delayed by 6 months. We discovered in December 2001 a significant issue
    with Procurement of a Business Rules Engine (BRE). A key part of the
    overall CADE development strategy was predicated on the use of BRE
    software that would be used to generate some programming code.
    Unfortunately, the PRIME was unable to procure the BRE in time to be
    used in the development of Release 1 and we were forced to proceed
    using standard development language. We began mitigation on this
    situation.
        In addition to the technical difficulties, we encountered in late
    March 2002 an additional 1-month slippage to July 2002. We notified our
    Executive Steering Committee and Oversight Board of the problem and our
    corrective actions. The delay will provide time for the development,
    testing and implementation of the Release 1 pilot this summer.
    Currently, most of the software has been developed and testing has
    begun. Planning for production implementation in conjunction with the
    startup of the 2003 filing season has also started. The release will
    include both 1040EZ electronic and paper single refund filers--about 10
    million taxpayers. Therefore, based on this plan our most important
    business objective, which is to move the first block of taxpayers onto
    a new data base will be achieved.
                Integrated Financial System (IFS)
        IFS has three clear goals: (1) provide core financial capabilities
    and financial reporting; (2) meet Joint Financial Improvement Program
    requirements; and (3) provide an integrated framework for retirement of
    current financial systems.
        IFS will be accomplished in two releases, each representing a
    distinct usable segment. Release 1 will replace the Core Financial
    Systems (CFS) as defined by the Joint Financial Management Improvement
    Program (JFMIP). In addition to CFS, Release 1 will include budget
    formulation as well as implementation of a Cost Accounting System to
    allow the IRS to move into compliance with Statement of Federal
    Financial Accounting Standard Number 4. Release 1 creates a logical
    design for the core financial applications including Cost Accounting.
    The core financial applications consist of General Ledger (G/L),
    Accounts Payable (A/P), Accounts Receivable (A/R), Cost Management,
    Funds Management, Core Financial Management and Financial Reporting.
                Custodial Accounting Project (CAP)
        GAO identified the lack of an acceptable accounting system for the
    $2 trillion collected in tax revenue as one of the most significant
    material weaknesses in IRS' financial management. CAP will provide the
    IRS with the critical control and reporting capabilities mandated by
    Federal financial management laws.
        It will also support the appropriate custodial subledgers
    containing data from tax operations and help the IRS meet compliance
    issues with both the Federal Financial Management Improvement Act
    (FFMIA) and Federal mandates related to custodial revenue management.
    CAP will also help us to better manage, control and focus resources.
                Enterprise Data Warehouse (EDW)
        The ability of the IRS to make effective use of information about
    its operations is limited by the numerous fragmented databases that
    evolved over time. EDW provides the foundation for data mining and
    decision analytic tools. In addition, it enables risk-based analysis
    for case selection and provides the tools to report on IRS balanced
    performance measures.
    e-Services
        The e-Services project will support our ability to meet the overall
    goal of conducting most transactions with taxpayers and their
    representatives in an electronic format, as required by RRA 1998. e-
    Services will provide to third parties over the Internet the four most
    requested applications: electronic taxpayer identification number
    matching, electronic transcript delivery, disclosure authorization and
    Electronic Account Resolution. e-Services also directly supports the
    President's Management Agenda's government-wide initiative to expand
    electronic Government.
                Customer Account Management (CAM)
        The Customer Account Data Engine cannot be deployed beyond its
    initial limited releases without Customer Account Management. CAM
    allows us to go into CADE and update the data and will help taxpayers
    to receive timely and accurate responses to requests and inquiries.
        The CAM Individual Assistance and Self Assistance Operating Models
    will provide improved technology and business processes that will
    enable the IRS to: (1) better manage customer service functions; (2)
    maintain and utilize customer data to improve taxpayer interactions
    with the IRS; (3) provide comprehensive account and tax law assistance
    to taxpayers and practitioners; and (4) manage the case work flow of
    customer inquiries.
        Delivering customer assistance through a live IRS Customer Service
    Representative (CSR) is the Individual Assistance operating model's
    main function. In order to provide world-class service, CSRs must be
    equipped with the tools to access taxpayer information quickly and
    accurately in response to complex customer inquiries. Individual
    Assistance will provide this capability from a desktop information
    system.
        By being able to access and update comprehensive, current account
    information, CSRs will be able to respond quickly and accurately to
    customer inquiries. Workflow management tools and processes will also
    allow them to automatically inform relevant parties throughout the
    organization of actions taken on a particular customer's account and
    manage outstanding cases for follow-up work or to identify the status
    of an inquiry for a taxpayer.
        The CAM Self-Assistance operating model delivers many of the same
    capabilities. The main objective, however, is to provide taxpayers with
    the flexibility and convenience of accessing by telephone or the
    Internet on a 24/7 basis IRS-related information to resolve relatively
    simple inquiries.
                Filing and Payment Compliance (FPC)
        FPC is an end-to-end strategy to resolve collection issues quickly
    and fairly. Using industry best practices, it augments, refines and
    replaces existing processes and technology to enable the IRS to
    interact with taxpayers in a seamless and efficient manner. Protection
    of taxpayer rights is an important component of this strategy. The
    ultimate goals are to resolve all balance due cases above a minimum
    threshold, shorten the filing compliance lifecycle to ensure resolution
    before the next filing due date and shorten the payment compliance
    lifecycle to 6-months for non-enforcement cases.
                Information Technology Projects
        The Business Systems Modernization program is aimed at developing
    major, IRS -wide systems that are the underpinnings of overall tax
    administration. BSM also sets forth the enterprise architecture that
    defines required standards of equipment, software, communications and
    data. This program is not intended to meet every need for every
    business application in the IRS, even in the long term. However, by
    establishing a well-defined architecture, it assures that specific
    business applications developed for specific business purposes will
    operate consistently and use common equipment while meeting required
    standards, such as security.
        Through the strategic planning process, the IRS operating units
    identify specific business needs and prepare business cases for
    business applications that will not be met through the overall BSM
    process. There are many more projects with high returns than can
    possibly be funded. Therefore through the strategic planning process,
    these are then evaluated and those with the highest returns are
    selected. Many of the gains in performance projected in fiscal year
    2003 and fiscal year 2004 are enabled by these so-called Tier B
    projects. Tier B project implementation time is 2 to 3 years and the
    projects are monitored within the Business Performance Review process.
        The President's fiscal year 2003 budget includes a $10 million
    increase for Tier B projects beyond the fiscal year 2002 operating
    level of $39.8 million. They cut across the entire spectrum of IRS
    activities and functions. For example, Information Systems projects
    will support Criminal Investigation's activities by modernizing the
    equipment used to analyze forensic evidence. They will support the
    electronic filing of business forms and schedules and e-services will
    provide products and services to practitioner as well as the foundation
    for safe and secure electronic customer account management.
        Other projects will redesign and consolidate systems to support
    casework and the Taxpayer Advocate Service. Correspondence will be
    imaged and we will be able to convert existing collection systems to
    electronic case processing. The Employee Plan Determination System
    Redesign will also reduce cycle time and improve the quality of
    determination letters from our Tax Exempt and Government Entities
    operating division. The Remittance Transaction Register will improve
    submission processing efficiency by providing information payment
    online.
    legislative proposals and proposed adjustments (no net increase in irs
                                   programs)
        The President's budget requests $503 million (a $39 million
    increase over the fiscal year 2002 appropriation as adjusted) for
    proposed legislative changes that change the accounting of certain
    pension and retiree benefit costs. These costs are transfers of funds
    that were previously included in other agency budgets and do not
    represent any net increases in IRS programs. The $39 million increase
    will be used as follows:
      --Federal Employees' Compensation Act (FECA) Surcharge (+$3M).--The
            fiscal year 2003 President's Budget includes language in the
            General Provisions of the Treasury-Postal Appropriations bill
            to permit the Department of Labor to add an administrative
            surcharge to the amount it charges each agency for its Federal
            Employees' Compensation Act (FECA) benefits. Previously this
            administrative cost was borne by the Department of Labor.
      --Legislative Proposal on Full Costing of Retirement and Health
            Benefits(+$32M).--The budget also proposes legislation to
            require agencies, beginning in fiscal year 2003, to pay the
            full Government share of the accruing cost of retirement for
            current CSRS, CIA and Foreign Service employees, and the Coast
            Guard, Public Health Service and NOAA Commissioned Corps.
      --Inter-Departmental Reimbursements (+$5M).--This adjustment will
            allow permanent transfers of funds from the General Services
            Administration, the National Archives and Records
            Administration and the Department of Agriculture for services
            provided to IRS.
                                   conclusion
        Mr. Chairman, in conclusion, the President's proposed fiscal year
    2003 budget for the IRS reflects the Administration's continued
    commitment to modernization of the agency. Moreover, it underscores
    that through new technology, improved management and reengineering our
    business practices, we can perform our mission efficiently and
    effectively with only limited increases in resources. Three years ago,
    the Restructuring Act set an important new direction for the IRS.
    Today, I firmly believe that the IRS is on the right track and this
    budget will help us stay the course. Thank you.

                 Questions Submitted by Senator Byron L. Dorgan

                          business strategy adjustment
        Question. Secretary O'Neill has mandated that each Treasury
    Department agency achieve a certain level of savings through what he
    refers to as a ``Business Strategy Adjustment.'' I understand that for
    the IRS this adjustment would amount to the IRS finding an additional
    $39 million in savings.
        How do you plan to meet this goal? What cuts in people, programs or
    service will you have to make?
        Answer. The IRS expects to meet this goal through improved business
    practices: more effective uses of human capital, better financial
    management practices, expanded applications of technology uses across
    the Department, and competitive sourcing of appropriate business
    efforts.
                     bi-monthly audits of irs walk-in sites
        Question. The first bi-monthly audit of IRS walk-in taxpayer
    assistance sites, issued last month by the Treasury Inspector General
    for Tax Administration as a result of funds we added to their budget,
    states that of the 84 visits made to 40 taxpayer assistance centers
    correct responses to questions posed were only received 46 percent of
    the time. The audit observes improvement in other areas such as
    courtesy of the IRS employees and cleanliness of the facility, but I am
    sure you will agree that getting an incorrect answer to a tax inquiry
    more than 50 percent of the time is still outrageous.
        What steps are you taking to improve the assistance provided to
    taxpayers at the assistance sites?
        Answer. Based on TIGTA's March and April visits to 37 TAC offices,
    we continue to show improvements in providing correct answers to tax
    law questions. However, we believe the statistics in the report do not
    reflect the accuracy of our answers. We disagreed with the TIGTA
    assertion that a referral to a publication is the same as providing an
    incorrect answer. We also disagree that referrals to publications
    should be included in computing the accuracy rate. The percentage of
    correct answers based on the March and April TAC visits, without
    counting referrals to a publication as incorrect, is around 65 percent
    as opposed to the 55 percent identified in the report. This is clearly
    an unacceptably low accuracy rate, and IRS is committed to make
    improvements.
        During early February we met with TIGTA representatives to review
    the results of the January audit. After that meeting, we conducted a
    series of meetings with executives and managers at all levels advising
    them of January accuracy rates, soliciting ideas to improve tax law
    responses, and establishing zero tolerance for unprofessional conduct
    and performance. We added a requirement for all technical employees in
    Taxpayer Assistance Centers to complete one hour of uninterrupted,
    self-directed learning time each week. This hour is dedicated to tax
    law issues in: earned income credit, dependent qualifications,
    education credits, social security income, pension income, capital
    gains, filing status, individual retirement accounts, child care
    credits, child tax credit, rate reduction credit, student loan
    interest, and itemized deductions. The technical employees used
    Publication 17, Your Federal Income Tax, as their primary study guide.
    To supplement self-directed learning time, we are obtaining additional
    training aids, publications, and compact discs. The aids will include
    practice scenarios on a wide range of tax law topics including those
    mentioned above. We are including in this initiative Small Business/
    Self-Employed Division Employees assigned to work the customer service
    counter in Taxpayer Assistance Centers. We are also developing a
    training program, with some assistance from the North Dakota State
    University, that would allow remote access to electronic training.
                      aggressive audits of eitc recipients
        Question. Some Members have rightly expressed concern that, in a
    period when audits appear to be declining, the IRS is taking steps to
    aggressively increase the number of audits of EITC (earned income tax
    credit) recipients as opposed to taxpayers earning over $100,000 a
    year. I have seen reports that 1 in 50 EITC recipients are audited.
    This is about triple the rate of audits of taxpayers earning over
    $100,000. Secretary O'Neill blamed Congress for this increase in audits
    of EITC recipients.
        Do you think it is fair and just to audit aggressively the poor yet
    take a pass on auditing the rich?
        Answer. We audit EITC returns because IRS studies have found errors
    on nearly 50 percent of the returns filed.\1\ The Congress has
    appropriated specific funds to be used to improve EITC compliance. The
    funds are used to educate and assist taxpayers in determining if they
    are eligible for EITC, as well as funding examinations of those returns
    that appear to have claimed the EITC in error. During the 5-years the
    EITC appropriation for compliance, outreach, research, and educational
    efforts has been in effect, we protected and/or collected about $5
    billion in revenue from math error adjustments and compliance
    activities. However, noncompliance is still an issue. Our most recent
    study on compliance estimates that taxpayers overclaim up to $9 billion
    a year in EITC.
    ---------------------------------------------------------------------------
        \1\ Compliance Estimates for Earned Income Tax Credit Claimed on
    1999 Returns (February 28, 2002).
    ---------------------------------------------------------------------------
        Our Service Center Tax Examiners generally conduct EITC
    examinations by mail. This methodology differs significantly from the
    examinations that our Tax Auditors and Revenue agents conduct in our
    field offices. The examinations conducted in our field offices tend to
    be more complex and the scope of the examination is not limited to a
    few issues, as is the case with EITC examinations. Examinations our Tax
    Auditor/Revenue Agents perform in our field office are interviews with
    the taxpayer and/or his representative either in the IRS office or at a
    place of the taxpayer's choosing. This method tends to limit the number
    of examinations we can complete. In the service center, lower-salaried
    employees can work correspondence examinations and review documentation
    sent in by taxpayers on all shifts. Since this type of audit does not
    require person-to-person contact, more examinations can be started,
    worked, and closed.
        Our interaction with low-income taxpayers is not limited to audits;
    we also make taxpayers aware of tax benefits to which they may be
    entitled. We send notices when we receive tax returns that show the
    taxpayers might be eligible for the Earned Income Tax Credit. The
    notices allow the taxpayers to review the EITC eligibility criteria and
    determine to claim the EITC. We have also increased our number of
    partnerships with non-profit groups, faith-based organizations, and
    local governments to provide information about EITC and free tax return
    preparation. For example, the local governments in Chicago and Los
    Angeles have partnered with us to provide information to their citizens
    about EITC. They have partnered in turn with local non-profit groups to
    provide free tax preparation. Additionally, we have placed public
    service and paid radio and television ads about EITC from January
    through April 2002. These ads have run on network and cable television
    stations, and we have received a positive response from taxpayers and
    community organizations. These radio and television spots have provided
    information to individuals who may be eligible for EITC but who do not
    have a filing requirement. The ads reached a population that would not
    have any reason to contact us, and provided them the basic eligibility
    requirements for EITC. Also, we broadcast a thirty-minute paid
    television show about electronic filing that included EITC information
    on cable stations, including Telemundo (a Spanish television station).
    We undertook this effort based, in part, on research that reported
    Hispanic individuals are not claiming the EITC due to lack of
    knowledge.
        We are focusing significant resources on noncompliance in the high-
    income population even though our systems and workload identification
    methodologies are limited by the age of our compliance data. We will
    continue to make the most informed resource allocation decisions
    possible, using all available compliance research information. We will
    supplement this information by conducting short-term targeted studies
    to help us select the best strategies for addressing identified areas
    of high compliance risk.
        As reflected in our strategic priorities for fiscal year 2003, we
    are refocusing our compliance resources to address issues with high-
    income taxpayers:
      --In fiscal year 2002, we began matching Schedule K-1 information for
            taxpayers who invest in partnerships, S-corporations, and
            trusts. We are using this data on a limited basis to help
            identify for examination taxpayers who underreport this income.
            We plan to expand significantly the use of matched K-1 data
            significantly in fiscal year 2003.
      --We plan to continue to address promoters of and investors in
            illicit schemes designed to improperly eliminate or reduce tax
            liabilities.
      --We plan to institute a program to address taxpayers with incomes
            greater than $1 million who use flow-through entities to
            structure transactions that mask or improperly reflect taxable
            income.
        Through the National Research Program, we will begin to gather
    comprehensive compliance data for the first time since 1988. We intend
    to use this data to develop new cost-effective strategies for
    allocating our enforcement resources to improve the compliance of
    taxpayers in all income groups. In addition to ensuring a more
    efficient use of our resources, we expect that these strategies to
    reduce taxpayer burden associated with unnecessary audits.
        Question. Is the IRS performing sufficient audits and are you
    targeting the right groups for audits?
        Answer. To determine optimal audit rates, we must quantify the
    direct and indirect revenue effects of all enforcement and non-
    enforcement activities. Unfortunately, our ability to quantify those
    effects is in its infancy. We have to overcome significant data and
    statistical problems. We cannot yet determine the administratively
    optimal audit rate, or more precisely, the optimal mix of audit rates.
        Nonetheless, we are very concerned that recent audit rates have
    been below what most everyone agrees would be optimal. As a result,
    taxpayers who timely meet all of their tax obligations bear an
    inordinate share of the overall tax burden. As a first step in
    increasing these audit rates, the President's Budget Initiative for
    fiscal year 2003 reallocates 635 FTEs for the examination of abusive
    trusts (400 FTEs) and high income returns (235 FTEs). More than 50
    percent of these FTEs result from redirecting Examination reengineering
    savings.
        Through the National Research Program, we will begin to gather
    comprehensive compliance data for the first time since 1988. This new
    data will allow us to update our workload selection formulas, develop
    new cost-effective strategies for improving compliance for all taxpayer
    segments, and more accurately allocate enforcement resources to areas
    of high compliance risk.
        We will continue to analyze our processes and identify ways to
    improve the efficiency and effectiveness of our examination programs.
    Traditionally, we developed field examination work plans by return type
    and activity code. Starting in fiscal year 2003, we will develop
    examination work plans around specific non-compliance issues including:
      --Understatement of business income
      --Abusive Tax Schemes (including Abusive Trusts, Off-shore Activity,
            and Domestic Promotions)
      --Non-filing
      --Use of flow-through entities (Partnerships/S Corporations) by high
            income taxpayers to create structured transactions designed to
            reduce or eliminate tax liability.
        A key weakness of our current return selection process is the
    inability of Discriminant Function (DIF) to identify returns with a
    high potential for unreported income. Almost 60 percent of the gross
    individual income and employment tax gap for Small Business/Self-
    Employed (SB/SE) taxpayers arises from the understatement of business
    income, due to the underreporting of gross receipts and the
    overstatement of business expenses. SB/SE and the Office of Research
    recently completed testing of new Unreported Income DIF formulas
    (UIDIF) they designed to identify returns with a high probability of
    unreported income. The higher the UIDIF score, the greater the
    probability of unreported income. The UIDIF formulas create a new work
    source for SB/SE field examination. We will begin using the UIDIF
    formulas on October 1, 2002.
        By the end of fiscal year 2003, we will have completed the
    reengineering of our SB/SE Examination processes. A key component of
    this effort involves enhancing our return selection system to reduce
    taxpayer burden by focusing our resources on the most non-compliant
    returns. It also introduces new inventory management practices and
    enhanced auditing techniques that will further improve the quality and
    timeliness of our examinations.
                         business systems modernization
        Question. Your budget requests an additional $450 million to
    continue your agency's systems modernization program. By the end of
    this year, the IRS--and the American taxpayer--will have invested
    nearly $1 billion in this modernization effort.
        What has the average taxpayer experienced as a result of this
    effort?
        Answer. Over the past 2 years, BSM graduated from strategic
    planning and systems design to business results. We have put several
    projects into production.
      --In fiscal year 2001, the Customer Communications fiscal year 2001
            (CC01) Project was placed into operation. This project greatly
            improved the efficiency and effectiveness of our systems for
            receiving, routing, and responding to millions of taxpayer
            calls. The project went ``live'' just in time for the issuance
            of the advance tax refund notices and the resulting onslaught
            of telephone calls. We successfully handled over 39,000 of
            these calls during CCO1's busiest hour the first day of the
            job. This new capability also helped us better route callers to
            our 9/11-disaster hotline.
      --In fiscal year 2002, we are fully deploying a commercial tax
            computation software package, the Customer Relationship
            Management- Examination software. This software allows revenue
            agents to quickly and accurately calculate tax assessments for
            very complex tax scenarios, such as loss and credit carryback/
            carryforward, Alternative Minimum Tax, and Foreign Tax Credit.
            It also allows them to effortlessly re-compute the tax
            liability often required during the final stages of an
            examination. This will save time for the taxpayer and the
            government and increase accuracy. The software is a known and
            respected tool used by the private sector (taxpayers,
            accounting and legal firms.) We deployed the software and
            provided training to 2,777 Revenue Agents in our Large and Mid-
            Sized Business Division. The remaining LMSB Revenue Agents will
            receive the software and training by September 1, 2002
      --In fiscal year 2002, we implemented a new Internet-based service
            that allows taxpayers who filed Form 1040, Form 1040-A or Form
            1040-EZ and are due a refund to find out if we have processed
            their tax returns and when we will mail or direct deposit their
            refund. Taxpayers can also learn if a problem exists with their
            refund, find steps to resolve problems, and see if their check
            was returned to the IRS as undelivered. This new application is
            available through the IRS web site 24-hours a day from anywhere
            in the world. This capability marks the first time taxpayers
            have been able to access their accounts directly through the
            Internet in a secure environment. This web application, which
            we expect to be fully operational for the 2003 filing season,
            is a major step forward for IRS modernization. By the end of
            July we have had over 500,000 inquiries. The management
            information reports and on-line user-survey included with this
            application reveal:
      --Over 85 percent of the taxpayers are satisfied with the ease of
            this application.
      --10 percent of the IRS refund inquiries since deployment are coming
            via the Internet.
      --95 percent of the users receive response within 5 seconds.
      --71 percent of users receive response within 1 second.
      --This summer we will begin the pilot stage of the Customer Account
            Data Engine (CADE), using a modernized database. CADE will
            create applications for daily posting, settlement, maintenance,
            refunds processing, and issue detection for taxpayer tax
            accounts and return data. With CADE, taxpayers will receive
            faster refunds and our employees will have access to more
            accurate data. Due to the size and complexity of the software
            that analyzes and posts data onto the Master Files, and to
            minimize the risk of potential problems, we will first move
            simple accounts onto the CADE database, beginning with a subset
            of Form 1040EZ filers. Access to timely, consistent, and
            centralized corporate data is the key to modernization and CADE
            is the implementation vehicle. The CADE pilot will ensure
            readiness for the 2003-filing season. CADE will be deployed
            over time in five releases, each related to a specific taxpayer
            segment, phased in over a period of 6 years. At the conclusion
            of Release 5, CADE will have replaced the Individual Master
            Files. Subsequent releases of CADE will eventually replace the
            Business Master Files and Non-Master Files.
      --Because of enhancements to our security and telecommunications
            infrastructures, the e-services project will have its initial
            release late in 2002, offering some web-based products to tax
            practitioners who actively participate in the IRS e-file
            program, such as self-filing registration. These web based
            business products will encourage third parties to increase
            their e-filing. In addition, these enhancements will allow IRS
            to better manage its stakeholder relationships and conduct
            marketing and educational outreach activities to integrate
            information, coordinate activities, deliver service and measure
            performance. The e-services project will allow practitioners
            the ability to complete applications, submit disclosure
            authorization requests, make taxpayer inquiries for notice and
            account problems, verify taxpayer identification numbers (TIN
            Matching), and request and receive taxpayer transcripts. It
            will be easier for practitioners to transact business with the
            IRS and to receive faster responses from us. E-services
            functionality will be delivered in two releases, the first
            scheduled for late 2002 and the second planned for the spring
            of 2003.
        Question. If Congress appropriates these additional funds, what
    further enhancements to their service can they expect to see in the
    next year or two?
        Answer. See below:
      --In fiscal year 2003, we plan to launch an Internet EIN application
            to provide a web-based opportunity for employers, tax
            practitioners, and financial institutions to apply for and
            receive a validated employer identification number (EIN)
            directly from the IRS. This initiative will initially
            complement and eventually reduce the number of paper,
            facsimile, and telephonic requests for EINs. Businesses will be
            able to log onto a secure, government website from their
            office, bank, or state agency and file an electronic request
            for an identification number. The IRS will initially issue an
            EIN to the filer via the mail.
      --Over 5 years, releases of the CADE project will result in faster
            refund processing and authoritative account data for 1040
            returns filed on paper or electronically. The additional
            funding will enable us to continue the buildout of the new
            customer accounts data base (CADE) and ongoing retirement of
            the Individual Master File. Hence, an increasing number of
            taxpayers will receive refunds faster and improved customer
            service.
      --The additional funds will also be directed toward design and
            development work on a new customer service and e-filing
            capabilities, although these projects will not deliver benefits
            until they are implemented in fiscal year 2004
      --In addition to direct taxpayer benefits, a major portion of the BSM
            Program is dedicated to improving our internal operational
            effectiveness and remedying material weaknesses. These
            improvements are necessary to meet the requirements of the
            Federal Financial Management Improvement Act. For example:
        --The Custodial Account Project (CAP) will integrate taxpayer
                account information with the general ledger and make it
                accessible for analysis and reporting for the CFO. This
                project will provide integrated, reliable, and timely tax
                operations data to support evolving analytics, performance
                measurement, and management information needs.
        --The IFS Project (Integrated Financial System) will implement a
                commercial-off-the-shelf financial system for the general
                ledger, accounts payable and receivable; funds management,
                budget execution and formulation; cost management;
                financial reporting; core financial management; and
                property and asset management.
        --The HR Connect Project will pilot new human resources online
                functionality, enabling self-service capability for many
                routine HR transactions.
        These projects will significantly improve compliance with
    applicable Federal Financial management laws and standards and support
    to GAO audits.
                       impact of september 11 on the irs
        Question. The IRS was one of many Federal agencies directly
    affected by the tragic events of September 11. Many of your operations
    in New York were interrupted and Congress has appropriated over $38
    million to assist in the recovery efforts.
        How has the recovery effort gone? With so many critical records now
    contained on computers, what efforts are you undertaking to provide for
    systems back-up and redundancy in the event of a future incident along
    these lines? How secure are your systems from a terrorist or cyber
    attack?
        Answer. Following the catastrophic events of September 11, we moved
    quickly to repair and re-equip the offices destroyed in the WTC area
    for approximately 200 employees. We provided grief counseling for
    employees in the Manhattan area and other areas throughout the Nation.
    Enhanced physical security for all IRS buildings, which was put in
    place immediately following September 11, will continue to be a high
    priority, as will proper screening of all new employees. Following the
    September 11 attacks, we collaborated with other federal agencies to
    provide non-reimbursable related emergency assistance to taxpayers in
    the Manhattan area.
        The anthrax attacks impacting U.S. Post Offices and some Federal
    offices presented us with yet another challenge, since we process
    millions of pieces of mail during the first five months of each year.
    To protect our employees, and ensure that we can continue to respond
    timely to taxpayers, we conducted a Campus Security Readiness
    Initiative to help prepare campuses to safeguard against potential
    biologic attacks through the mail. This preventative program was multi-
    organizational and included:
      --Redesign and construction to isolate campus mail handling
            facilities
      --Review and update of disaster recovery, business resumption and
            occupant emergency plans at every campus
      --Distribution of gloves, coats, and masks to campus mail workers
        We undertook a similar initiative to prevent and handle potential
    biological attacks at IRS field offices. As a result of these efforts,
    campuses reported a significant increase in the number of incidents
    involving suspicious activities during the filing season. However, the
    impact on tax processing operations was minimal, and we safely
    completed the tax filing season.
        The IRS has long maintained intense focus on protecting taxpayer
    information. We continue to take short and long-term actions to further
    protect our personnel, facilities, and information. However, we need
    more safeguards to fully address the threats inherent of increased
    terrorist activities within the U.S. We take a comprehensive approach
    to protecting our information systems, beginning with the physical
    security of key processing locations, careful screening of personnel,
    security within the information systems themselves, and internal
    reviews to ensure employees follow policies.
        To improve the security of IRS assets, we have:
      --Improved adequate backup capability to support core tax processing
            recovery at IRS computing centers. The systems affected
            represent the entire customer database for all operating units.
            Our efforts are focused on real-time backup of these computer
            center systems to provide improved disaster recovery
            capability. We received funding to support this effort as part
            of the special Congressional appropriation, and the project is
            well underway. Procurements are scheduled for completion by
            June 30, 2002, with full implementation of the backup
            capability expected by December 31, 2002.
      --Increased guard services at IRS mission critical infrastructure
            facilities. However, to adequately protect the facilities from
            increased threats and risks, we may need additional guard
            forces. An independent Guard Force Analysis, completed in 2001,
            detailed additional requirements to adequately protect critical
            facilities. We are re-validating this study to consider the
            changes in the threat environment since September 11. If
            necessary, we will reprogram to cover unanticipated fiscal year
            2003 needs.
      --Taken or will soon take actions to further fortify physical
            security in Computing Centers, including installing stronger
            entrance protection, surveillance cameras or alarms, etc. The
            National Critical Infrastructure Assurance Office designated
            three IRS facilities as Critical Assets, necessitating these
            upgrades. These upgrades will provide safeguards that are
            commensurate with the increased threat. We will fortify high-
            risk facilities to better withstand the most common type of
            terrorist attacks. This fortification includes strengthening
            windows to either withstand blasts or minimize injuries as a
            result of blasts.
      --Prioritized our major business processes. We are identifying the
            vital records associated with critical processes and supporting
            information systems to ensure we have adequate redundancy and
            backups in place to continue our operations, including those
            relying on paper records.
      --Focused efforts on improving our response and recovery processes by
            implementing situation awareness and management centers in four
            IRS locations. These centers contain information,
            communications, and other decision support for emergency
            situations.
      --Implemented a computer security incident response capability that
            works with the IRS's information technology owners to monitor
            IRS network and Internet activity 24 hours a day, seven days a
            week.
      --Centralized the reporting of computer security and physical
            security incidents to a single location. Events that threaten
            the safety of personnel or interrupt business operations are
            reported through this center and are immediately sent to an
            executive who evaluates the threat and determines appropriate
            actions.
      --Implemented a layered defense to protect our critical assets. That
            is, we use various methods at different entry points to prevent
            attacks to our systems or facilities.
      --Actively sought information regarding notices of hardware or
            software vulnerabilities so we can take steps to implement
            appropriate safeguards. We have an ongoing security awareness
            program to remind our personnel of their security
            responsibilities. We also significantly improved our virus
            protection program over the last year and now manage it
            centrally, which allows us to provide the latest virus
            protection updates to computers connected to our network.
        We continue to aggressively identify and evaluate threats and
    vulnerabilities related to our personnel, facilities, and systems to
    prevent of mitigate any damage.
                               homeland security
        Question. Your budget request includes $10 million to annualize the
    costs for enhanced security arrangements associated with the Homeland
    Security Supplemental.
        What role does the IRS play in Homeland Security?
        Answer. The IRS's role is:
      --Maintaining taxpayers' confidence in government agencies and
            continuing to collect and account for internal revenue critical
            to running our government. We have several infrastructure
            protection assets that are essential to the economic security
            of the United States.
      --Assisting other federal law enforcement agencies in investigating
            terrorists' financial activities and providing computer
            forensic support when requested.
      --Supporting Homeland Security through the IRS Criminal Investigation
            (CI) division's participation in the Federal Bureau of
            Investigation's Joint Terrorism Task Forces (JTTF) and
            ``Operation Green Quest,'' the Department of Treasury's
            initiative to identify, disrupt, and dismantle terrorism
            fundraising activities.
      --Providing IRS special agents to support security efforts at
            important national events such as the UN 50 Celebration and the
            Olympic Games.
        In the aftermath of the September 11 attacks, CI:
      --Assisted the FBI in the investigation of the attacks.
      --Detailed agents to the FBI's Financial Review Group and Strategic
            Information Center (SIOC) to help evaluate financial
            information.
      --Provided agents to assist in recovery efforts at the World Trade
            Center and the Staten Island landfill where debris was examined
            for evidence and to identify victims of the attack.
      --Helped the Office of Foreign Asset Control develop evidence to
            block the bank accounts of Hawalas and other organizations used
            by terrorists or suspected of engaging in terrorist fund
            raising activities.
      --Helped protect employees and enhance security at Federal buildings
            and IRS Service and Computing Centers.
      --Detailed 67 special agents to support the Federal Air Marshal
            Program.
      --Assigned 205 special agents to enhance security at the Winter
            Olympic Games.
      --In May 2001, CI purchased an exclusive license to update and
            maintain the source code for the ILook Investigator computer
            forensic software. ILook is a suite of software tools that
            allows a computer forensic examiner to analyze and extract
            files from images of seized computer hard disks and other
            storage media. It is the most technically advanced computer
            forensic analytic tool available today. Under the terms of the
            license, CI is obligated to make ILook available free of charge
            to other law enforcement agencies. (The license also prohibits
            any sale or other commercial distribution of ILook outside the
            law enforcement community.) In the last year, the use of ILook
            within the law enforcement community has increased
            dramatically. CI has approximately 5,000 licensees in over
            thirty countries. ILook is in use in all of the Treasury law
            enforcement bureaus and has been adopted as the primary
            computer tool by the DOD Computer Forensic Laboratory, NASA,
            and the FBI. Since September 11th, CI has established a strong
            working relationship with the intelligence community, which is
            using ILook to analyze computers seized in military and
            intelligence agency operations overseas. Most of the computers
            seized in recent terrorist-related investigations have been
            analyzed using ILook. ILook has been designed to allow the
            insertion of foreign language character sets so that documents
            in Arabic, Farsi, several dialects of Chinese, and many other
            languages can be searched and printed.
        Question. What is your relationship, and the IRS relationship, with
    Governor Ridge and the Office of Homeland Security?
        Answer. We do not have a direct relationship with the Office of
    Homeland Security (OHS). We support the OHS at the invitation of the
    Department of the Treasury. For example:
      --We worked with Treasury to respond to the Homeland Security
            Advisory System (HSAS). We drafted protective measures
            associated with the proposed HSAS levels that integrate our
            physical security, incident management, or law enforcement
            personnel's response to terrorist threats. We are awaiting the
            final HSAS guidance before implementation.
      --We also worked with the OHS during a recent two-day conference,
            hosted by the RAND Corporation, for law enforcement, first
            responders, and health care professionals. During this
            conference, we provided comments and recommendations about law
            enforcement vulnerabilities within the area of economic crime.
      --On April 11, 2002, we provided to OHS an overview of CI's criminal
            jurisdiction, investigative expertise, and a summary of efforts
            to combat terrorism.
                      funding for cash transaction reports
        Question. Since September 11, tracking large cash transactions has
    become increasingly important to our national security. It is my
    understanding that the Currency Transaction Reports (CTRs) that
    document the transaction of large amounts of money by banks and other
    financial institutions are processed through the IRS Computing Center
    in Detroit. I am aware that there is concern within the IRS that there
    may not be sufficient funding in this fiscal year to continue the CTR
    processing at its current level of activity. Further, I am told that
    the fiscal year 2003 budget request may also not be adequate to process
    these documents. I consider this function of the IRS a very high
    priority and do not want to see any reduction in the processing of the
    CTRs.
        Please explain in detail whether there is adequate funding in this
    fiscal year to continue the processing of CTRs through the end of
    September without any reduction in the effort, and provide the
    Subcommittee with an estimate of the shortfall, if you predict there
    will be one.
        Answer. We do not expect a shortfall in funding to process CTRs in
    this fiscal year.
        Question. Also, please address whether the fiscal year 2003 budget
    request for this processing function will be adequate.
        Answer. At this time, we believe the fiscal year 2003 budget
    request will be adequate to maintain the basic level of service for
    this processing function.
                               contract with und
        Question. I am interested in knowing the status of the IRS
    workforce training initiative that will be implemented, in part, at the
    University of North Dakota (UND).
        Can you provide to the Subcommittee a description of the tasks to
    be performed, the timetable, the status of the contract with the
    University, the proposed overall budget and the portion of the budget
    that would be dedicated to the work conducted at UND?
        Answer. The task directs the contractor to develop a blended
    learning solution to train employees in our customer service telephone
    operations who respond to inquiries about account adjustments from
    individuals and businesses. The learning solution will combine web-
    based, self-directed e-learning, classroom training and related
    instructional forms and resources as appropriate. We plan to award the
    contract by July 1, 2002, and to complete the tasks by the end of the
    calendar year. The overall budget for this effort is $1.2 million; we
    expect the University of North Dakota to receive at least $500,000 of
    the contract.
        Question. It is my understanding that the workforce training model
    being developed calls for the conversion of traditional instructional
    methods to an e-learning delivery platform. Do you feel that this is a
    model that could be replicated in other federal agencies?
        Answer. The contract is part of the IRS Enterprise E-Learning
    Strategy. The strategy supports the government-wide E-Government
    Strategy, announced by the Office of Management and Budget in February
    2002. OMB's ``E-Gov'' initiative involves twenty-four high-payoff
    initiatives to improve the efficiency and effectiveness of the federal
    government through the use of improved technology and includes ``E-
    training'' as part of the strategy in support of the President's Human
    Capital initiative.
        The IRS, in coordination with the Department of the Treasury, is a
    member of the Training Technology Implementation Group at OPM. The IRS
    is partnering with Government On-Line (GO) Learn to meet our Learning
    Management System (LMS) and e-learning content development needs. We
    will be using the Specialized Technical and Technology Users Services
    (STATUS) contract at the Department of Transportation. IRS is also
    partnering with the Advanced Distributed Learning Co-op Lab (ADL CoLab)
    to establish standards and specifications for e-learning solutions that
    could be used governmentwide.
        Strategic Human Resource (SHR) developed criteria that considers
    the number of employees who would use the training, potential travel
    savings, portability and reusability across business units, and
    increases in productivity (reduced time spent in training to achieve
    the same level of competency) to maximize return on the E-Learning
    investment.
                                     ______

                    Questions Submitted by Senator Jack Reed

        Question. Mr. Commissioner, many Federal agencies have been
    encouraged to work in an environment with less resources and less
    staffing, but still accomplish the same amount or even more work than
    in the past. It has been noted before that IRS staff has decreased
    significantly in recent years, while the number of tax returns has
    increased. How does the Service continue to expect to reconcile those
    two facts, while still maintaining its goal of higher customer
    satisfaction? Do you feel that the Service has an appropriate amount of
    staffing and other resources to continue to work to achieve this goal?
        Answer. There will always be far more potential work then can be
    handled regardless of how many resources are applied. But, we have re-
    engineered our business practices and used technology to perform our
    mission more efficiently in line with the best private and public
    sector practices. Reengineering has also helped us to leverage
    resources against workload so we can achieve higher levels of service
    without significantly increasing staffing.
        Some of our other cost-saving initiatives include:
      --Reducing the number of Submission Processing centers as the number
            of paper returns decrease and e-file returns increase.
      --Expanding our use of automated telephone service to address the
            downstream impact of increased filings (increase in telephone
            calls and correspondence inquiries).
      --Developing Internet applications that allow taxpayers to secure
            information on-line. This effort will allow more customers to
            receive service on basic inquiries without affecting our
            resources. For example, the recently released Internet Refund
            Fact of Filing (IRFOF) program allows taxpayers to determine
            the status of their refund on-line. Resources that we would
            have used to respond to this inquiry can now be reprogrammed to
            work on other high priority programs.
      --Decreasing the number of tax returns prepared in our Taxpayer
            Assistance Centers. In fiscal year 2002, we had a 10 percent
            decline in demand for return preparation services. Our expanded
            partnerships with volunteers in our Volunteer Income Tax
            Assistance (VITA), Tax Counseling for the Elderly (TCE), and
            English as a Second Language (ESL) programs have allowed us to
            reprogram some of the resources we previously used to prepare
            returns.
        In addition, we have developed partnerships with other external
    stakeholders who have communication channels in market segments with
    the highest compliance risks. This effort allows us to reach a much
    larger audience and deliver educational and informational messages to
    the market segment while having a minimal impact on our resources. For
    example, we recently provided briefings to representatives of the AMA,
    ADA and Construction Industry on Tax Schemes and Scams. By partnering
    with these representatives we are able to reach larger numbers of
    taxpayers through their newsletters.
        Question. Mr. Commissioner, there has also been some attention
    recently to efforts by some people to encourage individuals and small
    businesses not to pay taxes, based on the erroneous assumption that the
    Constitution does not mandate it. Do you think those efforts are
    catching on at all? What is the IRS doing to counteract these efforts?
    What other actions in the realm of enforcement does the IRS plan to
    emphasize in the coming year?
        Answer. The number of taxpayers using the classic Constitutional
    arguments of the 1st, 4th, 5th, 13th, 14th, and 16th Amendments have
    remained relatively stable. Newer arguments against taxation, such as
    the Internal Revenue Code (IRC) Section 861 argument that Americans are
    exempt from taxation on income earned within the United States, caught
    on during the late 1990's and we received substantial filings of Zero
    Tax cases.
        In fiscal year 2000, we created the Frivolous Return Unit (FRU) at
    the Ogden IRS campus to focus specifically on combating false and
    frivolous claims. The Frivolous Return Program (FRP) centralized the
    processing of these claims and has protected $3 billion of revenue for
    fiscal year 2001. It also developed nationwide employee training keyed
    to this problem.
        Other IRS activities to counteract these abuses include:
      --Identifying the promoters and the schemes through summonses of
            records, audits of promoters, disclosure regulations, and
            active analysis of leads from all sources
      --Identifying participating taxpayers by auditing promoter records,
            screening tax returns, and matching of documents
      --Establishing an Abusive Tax Schemes Lead Development Center (LDC)
            within the Small Business/Self-Employed Division to increase
            our vigilance on web-promoted tax schemes. A key role of the
            LDC is to conduct Internet research to identify and develop
            potential Abusive Tax Scheme ``leads.'' The LDC began operating
            in early April 2002. We anticipate the LDC will provide
            significant new leads on abusive promoter cases and greatly
            enhance those leads identified from traditional sources.
      --Providing specific warnings to the public and to potential
            promoters through issuance of official notices and disclosure
            regulations to the media, partnerships with practitioner and
            business groups, and letters to potentially affected taxpayers
      --Linking our www.irs.gov web site to the Criminal Investigation
            ``Tax Fraud Alerts'' page on the Treasury web site to alert
            taxpayers and tax practitioners to tax scams and fraud schemes.
            This site contains in one location a wealth of information on
            these schemes, and case summaries of those convicted of
            committing the crimes.
      --Taking enforcement action against promoters, including civil
            injunctions, civil penalties, and criminal investigations.
            Since last year, we have worked closely with our colleagues at
            the Justice Department to establish a parallel approach where
            we can seek civil injunctions while criminal actions are
            proceeding. This will be a major breakthrough as promoters
            often continue to operate while criminal investigations are
            taking place.
      --Taking enforcement action against participating taxpayers,
            including audits, civil penalties, and criminal investigations.
      --Taking action to measure the size of the problem and improve
            identification methods for the future.
        Question. Mr. Commissioner, in my State of Rhode Island, we have
    had some very good feedback concerning the work of the Office of the
    Taxpayer Advocate. Are you satisfied with the work overall of the
    National Taxpayer Advocate? Do you see any room for improvement? Are
    their recommendations for legislative actions (such as for family
    status issues, joint and several liability, alternative minimum tax for
    individuals, etc.) outlined in their annual report being taken
    seriously by the IRS?
        Answer. I found the National Taxpayer Advocate's fiscal year 2001
    Annual Report to the Congress to be a comprehensive and thoughtful
    document that accurately portrays the problems taxpayers face in trying
    to comply with a complex tax code and receive quality service from the
    IRS. Last year's report identified tax code complexity as the top
    problem facing individual and business taxpayers. This year, the
    concept of tax complexity is incorporated into every aspect of the
    National Taxpayer Advocate's report. Of the top 5 ``Most Serious
    Problems Encountered by Taxpayers,'' three dealt with EITC eligibility
    and multiple definitions of ``qualifying child.'' We are devoting a
    great deal of attention and resources to both the service and
    complexity problems identified by the National Taxpayer Advocate.
        Question. Mr. Commissioner, about eighteen months ago you testified
    that you did not believe the IRS should get into the business of
    electronic tax preparation software, saying that this would erode the
    Voluntary Compliance system and would be a serious burden for IRS to
    assume. You testified that there was ``no gray area'' about that policy
    conclusion in your judgment. However, in a memorandum from the Office
    of Management and Budget in July 2001 to the heads of all executive
    agencies, they set forth their objective to have the federal government
    take on the function of providing ``automated tax preparation''
    services over the Internet. Since the OMB proposal runs counter to the
    declared policy position taken by the IRS (through your earlier
    testimony), do you still hold the position you testified to in October
    2000?
        Answer. Yes. Although there has been much confusion, the Secretary
    of the Treasury and I have clarified the purpose of the EZ Tax Filing
    proposal (which is for private industry to offer free tax preparation
    and electronic filing options). We have stated publicly that the
    Department of the Treasury and the Internal Revenue Service have no
    intention of expanding their roles in the tax advisory or preparation
    business. As the Secretary of the Treasury stated in a January 30, 2002
    press release, ``The Department of the Treasury does not intend for the
    IRS to enter the software business but rather to work with established
    expertise in private industry.''
        The Administration proposed in its fiscal year 2003 budget
    submission ``an easy no cost option for taxpayers to file their tax
    returns on-line.'' Through the EZ Tax Filing initiative, the IRS is
    committed to partnering with private industry representatives who have
    proven expertise in the tax software business. The objectives of this
    initiative are to:
      --Assure access to a free and secure electronic preparation and
            filing option for additional taxpayers, building on the free
            electronic tax preparation and filing options available in the
            commercial market today
      --Make tax return preparation and filing easier and reduce the burden
            on individual taxpayers
      --Support the RRA98 goal of having 80 percent of Federal tax and
            information returns filed electronically by the year 2007
      --Provide greater service and access to taxpayers
      --Implement the proposal in the President's fiscal year 2003 budget
            to encourage further growth in electronic filing by providing
            taxpayers the option to file their tax return on-line without
            charge.
        We achieved a major milestone by receiving over 46 million
    electronically filed returns in 2002 with the assistance of the
    taxpayer professional community. However, we know we need to do much
    more to encourage the remaining taxpayers to file their tax returns
    electronically.
        Question. In declaring its objective to have the government begin
    offering ``automated tax preparation'' services to the public, the OMB
    has indicated that they wanted initially to cover all EZ tax returns
    the first year, and expand to take on the preparation of all income tax
    returns over a period of years going forward. What would be the total
    budgetary impact on the IRS of the OMB EZ Tax Filing proposal in its
    initial phase? What would be the ongoing budgetary costs in the out
    years as the program progresses and is expanded?
        Answer. The initial phase of the EZ Tax Filing initiative involves
    establishing a consortium web page on the IRS' web site (irs.gov) and
    Firstgov.gov that contains links to commercial web sites offering
    eligible taxpayers free electronic tax preparation and filing options.
    As a result, the budgetary impact of this initiative on the IRS for
    fiscal year 2003 will be minimal. If the consortium agreement between
    the IRS and industry remains consistent in future years, the budgetary
    impact for the IRS will remain low.
        Question. What is the current status of the OMB proposal for the
    government to provide ``automated tax preparation'' services?
        Answer. The Government and Industry recently completed a proposed
    agreement to offer a variety of free electronic tax preparation and
    filing options to a significant number of individual taxpayers. We will
    make these offerings available to taxpayers through a Government
    managed consortium web site located at irs.gov and Firstgov.gov. We
    anticipate that the web site will be available for Filing Season 2003.
                                     ______

             Questions Submitted by Senator Ben Nighthorse Campbell

                         business systems modernization
        Question. Will the IRS still need the entire $450 million to fund
    business systems modernization for fiscal year 2003? If yes, what
    assurance can the IRS provide us that the $450 million will be managed
    effectively?
        Answer. Yes, we need the full $450 million to continue the
    Modernization program and fund the necessary program management
    activities to improve business operations and improve delivery of
    services to taxpayers. $450 million would enable us to provide a
    reasonably balanced program that builds out essential infrastructure,
    delivers taxpayer value, improves internal operations, and is within
    our ability to manage and implement.
        Our oversight partners have noted steady progress in the overall
    management of the program. BSMO progress has been marked by significant
    improvements, adjustments, discipline, and our exceptionally open
    relationship with our oversight partners. In the 3 years since the
    program began, management processes have greatly matured and will
    continue to show progress as we gain more experience and continue to
    reexamine our commitments. We have addressed many of the
    recommendations made by GAO, such as prudently slowing some projects,
    and deferring new ones when management capacity is inadequate to
    proceed within acceptable risk.
        We believe we have good governance--Control Boards, Core Business
    Systems Executive Steering Committees and Sub Executive Councils,
    Advisory Councils, the IRS Oversight Board- and a foundation in place
    to ensure a planned, repeatable modernization process. The established
    financial controls, the discipline of the Enterprise Life Cycle, a
    defined architecture, the required compliance architecture, security
    certifications, and the controls on when projects should advance within
    their life cycle are our tools for managing the Modernization program.
        These controls and governance, and our own management judgment,
    ensure that we have adequate management capacity and an acceptable risk
    before starting future work. Valuable lessons have been learned as we
    have developed and implemented the modernization projects. Making
    adjustments to plans is an indication that the risks are being
    addressed and managed.
        We are improving the quality and rigor of our management processes.
    We have established plans and schedules to implement fully
    Configuration Management, Risk Management, quality assurance, and cost
    and schedule estimating processes, as well as recommendations in human
    capital management and other areas. BSMO has launched a performance
    management program this past year to both track the ongoing level of
    performance during a project's lifecycle (such as quality, timeliness,
    cost, and schedule compared to plans), and to look at value delivered
    after an application has been deployed and compare that to the business
    case. In addition to the dedicated staff assigned to these
    improvements, both the IRS and PRIME have appointed senior executives
    to coordinate within and across our respective organizations to ensure
    we give top priority to completing their implementation.
        We firmly believe that we are making progress on all our
    commitments; are leveraging our precious resources; and are managing
    the considerable risk inherent in a program of the enormous size,
    complexity, and sensitivity as BSM. We have not, and will not hesitate
    to make changes when necessary. However, it takes time to establish and
    mature processes, procedures, and management controls. Sufficient funds
    are essential to maintaining the momentum and the continuity of the
    program so the projects can continue in an orderly manner. The
    extensive executive involvement and reviews, oversight, governance, and
    management controls and processes in place will ensure the proper use
    of the funds.
        Question. How will the IRS assess accountability if it is not?
        Answer. The BSM Program has been steadily working on managing
    program and projects based on best practices in cost and schedule
    planning, configuration management, risk management, management
    progress reporting and acquisition management. We will adjust our plans
    as we mature and learn from this large and complex business systems
    modernization program. However, we feel the established best practices,
    coupled with our strong governance process, and the rigorous and
    documented life cycle, will strike the proper balance between
    delivering business value, building critical infrastructure, and
    ensuring control and effectiveness.
        Question. What is the PRIME's schedule for implementing mature
    processes and what is the IRS's plan for ensuring that this happens on
    schedule?
        Answer. The PRIME already has mature processes in place.
        The PRIME uses both the Software Engineering Institute's Software
    Acquisition Capability Maturity Model (SA-CMM) and the Software
    Engineering Capability Model (SW-CMM) to measure the maturity of its
    processes. The models provide a framework for measuring process
    maturity and providing a roadmap for improving how the PRIME conducts,
    develops and acquires software to modernize IRS business systems. The
    models include a series of key process areas that measure how a program
    is managed. They include defined practices applied to documentation,
    training, oversight, and evaluation throughout the life cycle of the
    project. The PRIME uses the SW-CMM as well as the SA-CMM to bring
    continuous improvement to how it develops, acquires, manages, delivers,
    and maintains software to improve IRS services to the taxpayer.
        Within this environment, the PRIME manages the development and
    acquisition of software development services that fit into the
    Enterprise Architecture 2.0 blueprint for IRS modernization and follow
    the defined series of development steps as defined by the Enterprise
    Life Cycle, a key CSC software development methodology modified for IRS
    requirements. PRIME management applies rigorous Process Management,
    Configuration Control, and Change Control to software as it proceeds
    throughout the Enterprise Life Cycle.
        In 1999, the CSC Civil Group became the first organization in the
    world to acquire SA CMM Level 2. In 2000, the CSC Civil Group was rated
    again at level 2. The PRIME participated and was singled out as being
    well on the way to a higher maturity level. In April 2002, the PRIME
    conducted a self-assessment and developed a Process Improvement Plan
    based on identified weaknesses. The PRIME is aggressively working to
    correct weaknesses. This self-assessment is for a Software Capability
    Evaluation in August. If successful in August, the PRIME will become
    the first organization in the world to acquire SA CMM Level 3. In 2001,
    the CSC Civil Group attained an SW-CMM level 4 rating, a significant
    accomplishment considering the size of the organization evaluated and
    the inherent difficulty in achieving that rating.
        The IRS has engaged the Software Engineering Institute (SEI) to
    lead a formal evaluation (Software Capability Evaluation or SCE) using
    the SA-CMM in August of this year to reassess. The formally chartered
    BSMO Process Improvement Management Steering Group (MSG) chaired by
    senior BSMO executives oversees PRIME's process assessment and
    improvement initiatives on a regular basis.
        Question. Until this is done, what steps is the IRS taking to
    mitigate the risk associated with the PRIME not having the processes in
    place?
        Answer. Because the PRIME already possesses mature processes in
    both software engineering and software acquisition, no specific risk
    mitigation actions are necessary. However, the PRIME's effective
    implementation and improvement of these processes and good acquisition
    oversight is a key tenet of IRS's management of the PRIME. Toward that
    end, the IRS is on a path to improve its acquisition management
    capabilities.
        The IRS is working to achieve a Software Acquisition Capability
    Maturity Model (SA-CMM) rating. IRS Business Systems Modernization's
    immediate goal is SA CMM Level 2. In addition, the IRS has
    institutionalized a number of very disciplined management processes
    applying SA-CMM principles to how we acquire the services of the PRIME,
    and subsequently how we manage ongoing activities during the life cycle
    of developing a new modernized capability for the IRS.
        The IRS uses a series of oversight bodies, including the Core
    Business Systems Executive and Sub-Executive Steering Committees, the
    Business Systems Modernization Configuration Control Board, the
    Business Systems Modernization Project Control Board and the BSMO
    Process Improvement Management Steering Group (MSG) to ensure we
    monitor and track the status of modernization initiatives and process
    improvement plans.
        And finally, as a result of a recent GAO report addressing IRS
    management weaknesses, the IRS has developed and is implementing a
    comprehensive action plan to address every weakness the GAO identified.
        If the August SCE identifies remaining weaknesses, we will require
    the PRIME to update its Process Improvement Plan to address them. We
    understand process improvement is a long term and ongoing task.
        Question. How many Tax Resolution Representatives (TRR) have you
    presently trained and deployed in the field offices?
        Answer. 1,409
        Question. What assurance does the IRS have that trained TRRs will
    be available to assist taxpayers with innocent spouse claims in all
    field locations?
        Answer. Based on projections from the Innocent Spouse Project
    Office sufficient work does not exist to warrant training the number of
    employees we originally contemplated for processing innocent spouse
    claims. Field Assistance will use TRRs already trained to work cases
    they receive. In the future, TRRs will encounter the Innocent Spouse
    Issue as they expand their duties to conduct office examinations. We
    will add a lesson on Innocent Spouse issues to TRR training. TRRs can
    also use a software application to perform accurate determinations on
    these claims.
        Question. What were the IRS's actual audit rates in fiscal year
    2001 for low-income, middle-income, and high-income non-business, self-
    employed individual taxpayers?
        Answer. The fiscal year 2001 audit rates of self-employed
    individual taxpayers for examination and other compliance contacts
    (correspondence examination, in-person examination, and automated
    underreporter) was: 1.05 percent for income less than $25,000; 1.77
    percent for income from $25,000-$100,000; and 2.78 percent for income
    $100,000 and over. The overall rate was 1.83 percent.
        Question. What are the IRS's expected audit rates for fiscal year
    2002 for low-income, middle-income, and high-income non-business, self-
    employed individual taxpayers?
        Answer. The fiscal year 2002 expected audit rate of self-employed
    individual taxpayers for examination and other compliance contacts
    (correspondence examination, in-person examination, and automated
    underreporter) is: 1.28 percent for income less than $25,000; 2.47
    percent for income from $25,000-$100,000; and 4.02 percent for income
    $100,000 and over. The overall rate is 2.54 percent.
        Question. How does the IRS measure the effectiveness of offers as a
    collection tool?
        Answer. Our critical performance measure is disposition of cases.
    Through April 2002, we disposed of 74,343 cases. This amount includes:
      --Accepted offers of 17,498;
      --Rejected offers of 8,685;
      --Returned offers of 26,160;
      --Unprocessable offers of 13,992, and;
      --Withdrawn and terminated offers of 8,008.
        The fiscal year 2002 goal for Offer in Compromise (OIC)
    dispositions is 142,500 cases.
        Two other effectiveness measures we use for OIC are the percentage
    of cases closed within 6 months and the quality of the cases, based on
    the following criteria:
      --Clarity of the taxpayer action
      --Timeliness of case action
      --Completion of financial analysis
      --Determination of an acceptable offer
      --Use of appropriate negotiation skills
      --Observation of taxpayer rights
        Through April 2002, 34 percent of the cases we handled in OIC were
    closed within 6 months. The fiscal year 2002 goal for timely processing
    is 67 percent. For the same period, the quality of the field OIC cases,
    as reviewed by our Collection Quality Measurement System (CQMS), was
    79.8 on a scale of 100. We have not set a fiscal year 2002 goal for OIC
    case quality.
        Question. What was the total amount of revenue collected through
    OIC in fiscal year 2001?
        Answer. For fiscal year 2001 we accepted OICs in the amount of $341
    million. Payment terms can extend past the remaining life of the 10-
    year statutory period for collection. Some offers have collateral
    agreements that may require additional payments at an indefinite time
    and for an amount not yet determined (for example, the taxpayer will
    pay a percentage of future income over a specified dollar amount for
    the next 3 years). Our manual tracking reports show 95 percent of
    taxpayers who submit OICs comply with their payment terms. Therefore,
    of the $341 million offered, we expect to collect $324 million.
        Question. What were the total costs of the OIC program in fiscal
    year 2001, including staff hours spent by counsel, independent
    reviewers, managers and taxpayer advocate?
        Answer. In fiscal year 2001 we applied 1,138 Field FTEs plus 22
    FTEs for Independent Reviewers to the OIC program. Based on the average
    salary and benefit costs associated with OIC in the field and in the
    centralized sites, this translates into a cost of about $83.5 million.
    Staff hours for Counsel and Taxpayer Advocate are not recorded
    specifically for the OIC program and, therefore, are not included in
    the $83.5 million. Other costs we cannot quantify separately for OIC
    include form production, mailing, computer system maintenance, and
    software support.
        Question. How does IRS monitor taxpayer compliance with the terms
    of accepted offers?
        Answer. We enter follow-up dates for payments into our Automated
    Offer in Compromise system. Employees monitor this system to ensure
    taxpayers pay on time. If payments are not submitted, we contact the
    taxpayer. If the taxpayer fails to bring the payments up to date, the
    OIC is in default.
        We also monitor for timely filing of returns through a system that
    generates transcripts of account history. Again, if the taxpayer does
    not file a return on time, we contact him or her. If the taxpayer still
    does not file the return, the OIC is in default.
        These are both labor-intensive operations. We are enhancing our
    automated systems to reduce the administrative burden of these
    compliance checks.
        Question. How does the IRS monitor whether the quality of offer
    decisions is being adversely affected by its efforts to speed up the
    OIC processing?
        Answer. The IRS is developing a complete suite of balanced measures
    (business results, customer satisfaction, and employee satisfaction)
    for the OIC program. To ensure that we fully implement Balanced
    Measures for the OIC process, we monitor the quality of OIC field
    casework through the Collection Quality Measurement System (CQMS). We
    are also expanding this quality measurement to include the cases
    handled by the Centralized OIC sites. We also plan to study the
    effectiveness of process changes and associated cost benefit/risk of
    future changes made to the OIC process.
        Question. What steps, if any, is the IRS taking to reach delinquent
    taxpayers sooner so that taxpayers can resolve their tax debts before
    an offer becomes necessary and so that the IRS can improve it ability
    to collect past due taxes?
        Answer. We are using education programs to send key messages to
    taxpayers about collection alternatives, such as the installment
    agreement program. Through our expanded outreach efforts we have set up
    various partnership channels to assist taxpayers in timely complying
    with the tax laws. To better address those taxpayers who are likely to
    become delinquent, we have conducted research to profile various
    balance due and nonfiler market segments. This research, which is
    ongoing, provides an opportunity for us to determine the key
    demographic and compliance characteristics of these taxpayers and to
    facilitate tailored outreach methods and messages.
        In 2001 we issued a CD-ROM advising taxpayers of their rights and
    alternatives, including collection alternatives and alternative dispute
    resolution vehicles. In addition, we are redesigning our SB/SE website
    to provide information on collection alternatives. We are also
    developing new messages to emphasize the broad range of Collection
    options taxpayers should consider before contemplating an Offer in
    Compromise.

                             CONCLUSION OF HEARINGS

        Senator Dorgan. This subcommittee is recessed.
        [Whereupon, at 2:45 p.m., Wednesday May 15, the hearings
    were concluded, and the subcommittee was recessed, to reconvene
    subject to the call of the Chair.]

           LIST OF WITNESSES, COMMUNICATIONS, AND PREPARED STATEMENTS

                                  ----------
                                                                       Page
    Bond, Senator Christopher S., U.S. Senator from Missouri,
      question submitted by..........................................    94
    Bonner, Robert, Commissioner, U.S. Customs Service, Department of
      the Treasury...................................................   193
        Opening remarks..............................................   197
        Prepared statement...........................................   200
    Buckles, Bradley A, Director, Bureau of Alcohol, Tobacco and
      Firearms, Department of the Treasury...........................   126
        Prepared statement...........................................   127
        Questions submitted....................................... 177, 187

    Campbell, Senator Ben Nighthorse, U.S. Senator from Colorado:
       Prepared statements............................ 29, 56, 98, 241, 298
       Questions submitted by....42, 93, 172, 176, 180, 183, 186, 233, 283, 333
       Statements of...................................... 56, 98, 240, 297

    Daniels, Mitchell E., Jr., Director, Office of Management and Budget, Executive
     Office of the President........................................... 53
      Opening statement................................................ 56
      Prepared statement............................................... 57
    DeWine, Senator Mike, U.S. Senator from Ohio:
      Prepared statement.............................................. 242
      Questions submitted by.......................................... 291
    Dorgan, Senator Byron L., U.S. Senator from North Dakota:
      Prepared statements............................. 3, 54, 97, 239, 294
      Questions submitted by........ 30, 74, 169, 173, 177, 181, 184, 226, 275, 323

    Gurul�, James, Under Secretary for Enforcement, Office of Enforcement,
      Department of the Treasury....................................95, 193
        Opening remarks.............................................99, 195
        Prepared statement...........................................   101
        Questions submitted to.......................................   169

    Hackenberry, Paul, Acting Director, Federal Law Enforcement
      Training Center, Department of the Treasury....................   152
        Prepared statement...........................................   154
        Questions submitted to.......................................   184

    Institute of Makers of Explosives, prepared statement............   188

    Kingman, Edward, Assistant Secretary for Management and Chief
      Financial Officer, Office of the Secretary, Department of the
      Treasury.......................................................     1

    Landrieu, Senator Mary L., U.S. Senator from Louisiana, questions
      submitted by...................................................    89

    Marx, Michele C., Director, Financial Management, Office of
      National Drug Control Policy, Executive Office of the President   237

    O'Neill, Paul H., Secretary, Office of the Secretary, Department
      of the Treasury................................................     1
        Prepared statement...........................................     7
        Statement of.................................................     4

    Reed, Senator Jack, U.S. Senator from Rhode Island:
        Prepared statement...........................................     4
        Questions submitted by........................39, 92, 187, 279, 330
        Statement of.................................................     4
    Rossotti, Charles O., Commissioner, Internal Revenue Service,
      Department of the Treasury.....................................   293
        Prepared statement...........................................   308
        Statement of.................................................   295

    Sloan, James F., Director, Financial Crimes Enforcement Network,
      Department of the Treasury.....................................   143
        Prepared statement...........................................   145
        Questions submitted to.......................................   181
    Stafford, Brian L, Director, U.S. Secret Service, Department of
      the Treasury...................................................   112
        Prepared statement...........................................   114
        Questions submitted to.......................................   173
    Stevens, Senator Ted, U.S. Senator from Alaska, question
      submitted by...................................................    94

    Walters, John P., Director, Office of National Drug Control
      Policy, Executive Office of the President......................   237
        Prepared statement...........................................   247
        Statement of.................................................   243

                                 SUBJECT INDEX

                                  ----------

                           DEPARTMENT OF THE TREASURY

                    Bureau of Alcohol, Tobacco and Firearms

                                                                       Page
    ATF:
        Accomplishments, fiscal year 2001............................   130
        Terrorism case examples......................................   129
    Budget request, fiscal year 2003...............................127, 130
    Bureau-wide initiatives..........................................   138
    Collect the revenue due..........................................   136
    Critical infrastructure projects.................................   140
    Integrated violence reduction strategy (IVRS)/project safe
      neighborhoods..................................................   131
    President's management agenda....................................   141
    Protect the public...............................................   137
    Terrorism and homeland security..................................   126

                     Federal Law Enforcment Training Center

    Additional committee questions...................................   169
    Area site progress, Washington, D.C............................152, 157
    Border agency consolidation......................................   187
    Budget resources are inadequate for responsibilities.............   189
    Business strategy adjustment....................163, 164, 168, 170, 174
    Cheltenham facility..............................................   187
    Cooperation with other Federal agencies..........................   167
    Electronic crimes task force.....................................   174
    Explosives permits...............................................   159
    Facilities:
        Construction master plan.....................................   186
        Master plan study............................................   154
        Master plan/five year construction plan......................   158
    Federal:
        Agency coordination, need for................................   191
        Air marshal training.........................................   165
    Financial war on terrorism.......................................   169
    Fiscal year 2002 achievements....................................   156
    Fiscal year 2003:
        And the USA PATRIOT Act......................................   166
        Budget.......................................................   184
        Request....................................................152, 155
    G.R.E.A.T. grant program.........................................   178
    Gang resistance education and training program...................   163
    Government Performance and Results Act (GPRA)....................   155
    Gun show sales, background checks for............................   160
    Increase in protective details...................................   162
    Interest of the IME..............................................   189
    Joint border agency..............................................   171
    Maintenance and renovation request...............................   159
    National:
        Instant criminal background check............................   161
        Special security events....................................175, 178
    Office of Homeland Security..........................164, 171, 179, 184
    Overtime.........................................................   162
    Overview of operations...........................................   156
    Protection of the U.S. currency..................................   174
    Relocation, New York field office..............................163, 175
    Research.........................................................   191
    Rulemaking concerns--closing the import marking loophole.........   190
    Rural law enforcement project....................................   187
    Shortfalls to the budget.........................................   177
    Staffing.........................................................   179
    Strategic goals..................................................   190
    Supplemental funding.............................................   178
    Terrorist funding................................................   183
    Training capacity for air marshals...............................   166
    Transportation:
        Screener training............................................   166
        Security:
            Agency...................................................   186
            Training...............................................153, 158
    Treasury counterterrorism fund...................................   170
    Workforce retention:
        And workload balancing.......................................   162
        Annualization of new hires...................................   173
    Workload:
        Growth.......................................................   153
        Increase.....................................................   152

                      Financial Crimes Enforcement Network

    Accomplishments, fiscal year 2001................................   148
    Bank Secrecy Act, administering the..............................   149
    Budget request, fiscal year 2003.................................   147
    Counterterrorism investigations..................................   143
    Financial crime trends and patterns, identifying.................   149
    FINCEN'S:
        Requlatory mission...........................................   144
        Top priority--supporting counter-terrorism investigations....   146
    Fostering international cooperation..............................   150
    Management support, strengthening................................   150
    Money laundering, cooperative efforts to deter...................   147
    Supporting the financial aspects of investigations...............   148
    Technology, use of information...................................   144
    USA PATRIOT Act..................................................   144
        Of 2001......................................................   146

                            Internal Revenue Service

    Additional committee questions...................................   307
    Budget request, fiscal year 2003.................................   296
    Business:
        Strategy adjustment..........................................   323
        Systems modernization......................................325, 333
            And other information technology projects................   318
    Challenges remain to quality service.............................   314
    Contract with UND................................................   330
    Contracting out................................................302, 303
    Earned income tax credit initiatives.............................   317
    EITC recipients, aggressive audits of............................   323
    Federal pay raise................................................   298
    Fiscal year 2003 resource request................................   314
    Funding for cash transaction reports.............................   329
    Highest priority resource needs..................................   315
    Homeland security................................................   328
    Impact of September 11 on the IRS................................   327
    IRS:
        Public rating of.............................................   296
        Walk-in sites, bi-monthly audits of..........................   323
    Legislative proposals and proposed adjustments (no net increase
      in IRS programs)...............................................   320
    Maintain current operations......................................   317
    Modernization and security.......................................   297
    Offers-in-compromise.............................................   304
    Operations.......................................................   315
    Post 9/11 situation..............................................   301
    Productivity through a quality work environment and modernization   312
    Resources re-deployed through increased efficiency and
      productivity...................................................   316
    Service improvements made........................................   309
    Stemming the decline in compliance...............................   311
    Stewardship & resources..........................................   313
    Tax:
        Resolution issues............................................   305
        Shelters, abusive............................................   299
    Taxpayer assistance:
        Quality......................................................   307
        Walk in......................................................   306
    Transfer pricing.................................................   300

                             Office of Enforcement

    Border security..................................................   101
    Budget request, fiscal year 2003.................................    99
    Combating money laundering.......................................   107
    Countering narcotics.............................................   108
    Disrupting and dismantling terrorist financing...................   102
    Enforcement organization.........................................   110
    Operation Green Quest............................................   100
    President's management agenda....................................   109
    Preventing terrorism and reducing violent crime..................   105
    Reducing firearms violence.......................................   108
    Strategic goals and performance measures.........................   110
    Tariff and trade laws, enforcing.................................   109
    2002 Winter Olympics.............................................   100

                            Office of the Secretary

    Abusive tax practices............................................19, 24
    Additional:
        Committee questions..........................................    30
        Funding requirements for FLETC...............................    26
    Adequacy of ATF budget...........................................    23
    ATF databases for firearms tracing, use of.......................40, 22
    Automated commercial environment.................................41, 50
    Business strategy adjustment.....................................30, 42
    Cobra user fee:
        Increase proposal............................................    52
        Proposal.....................................................    30
    Counterterrorism fund............................................    31
        Use of the...................................................    51
    Cuban travel.....................................................    15
    Customs Service spending plan....................................    51
    Disclosure of enforcement actions................................    16
    Earned income tax credit program.................................    36
    Elimination of corrupt gun dealers...............................    41
    Federal Law Enforcement Training Center requirements.............    34
    Gang resistance education and training (G.R.E.A.T.)..............    50
    Gun shows........................................................22, 39
    Health of the American economy...................................    27
    Information systems security.....................................    37
    IRS:
        Customer service, compliance and workload initiative.........    49
        Resource requirements........................................    49
    Joint border agency..............................................17, 31
    Law enforcement resource requirements............................    32
    Legislative proposal on retirement and health costs..............    13
    Modernization and improvement of IRS systems.....................    42
    National instant criminal background check system (NICS).........    21
    NTIA narrowband mandate..........................................    32
    OECD and tax havens..............................................    25
    Office of Foreign Assets Control.................................    43
    Policy for importation of firearms...............................23, 40
    Progress of ACE modernization system.............................    23
    Reaction to Immigration and Naturalization Service publicity.....    14
    Secret Service workload balancing................................    33
    Sporting gun firearms for importation, exclusion of..............    22
    Tax shelters.....................................................    37
    Tax-exempt bonds financing of recycling facilities...............    37
    Trade deficit....................................................    29
    Use of technology at the borders and ports of entry..............    35
    Visiting Customs ports of entry..................................    35
    Youth crime gun interdiction initiative program..................    50

                              U.S. Customs Service

    ACE funding......................................................   231
    Additional committee questions...................................   226
    Anti-terrorist money laundering..................................   208
    Arming National Guard detailees..................................   223
    Automated commercial environment (ACE)...........................   210
    Border security..................................................   202
    Business strategy adjustment and pay parity......................   227
    COBRA user fee shortfall.........................................   231
    Container security initiative (CSI)..............................   228
    Customs:
        Automation modernization.....................................   221
        Tax increase.................................................   226
        Trade partnership against terrorism..........................   221
    Forced child labor.............................................214, 232
    Jewelry marking..................................................   223
    Joint border agency..............................................   227
    Mexican long haul trucking.......................................   225
    Monitoring of strategic exports..................................   208
    National Guard...................................................   230
        Assistance to Customs........................................   215
    Other core mission responsibilities..............................   211
    Overtime cap for inspectors......................................   231
    Port security....................................................   229
    Post-September 11 border crossing wait times.....................   220
    Proposed COBRA fee increase......................................   217
    Safeguarding the economy; improving the flow of trade............   209
    Sea container:
        Inspections..................................................   218
        Security initiative..........................................   215
    U.S. Customs' top priority: counter-terrorism....................   201
    USA PATRIOT Act..................................................   228

                              U.S. Secret Service

    Acquisition, construction, improvements, and related expenses
      (ACiRE)........................................................   115
    Counterfeit United States currency...............................   113
    Cyber-crime......................................................   113
    Fiscal year 2003 appropriation request...........................   114
    Forward edge program.............................................   113
    Human resources and training.....................................   123
    Investigative:
        Mission......................................................   112
        Program......................................................   116
    Missing and exploited children...................................   113
    Mission funding, Secret service..................................   112
    National special security events.................................   112
    Office of Protective Research....................................   121
    Protective program...............................................   115
    Salaries and expenses (S&E)......................................   114
    Workload retention and workload balancing........................   114

                       EXECUTIVE OFFICE OF THE PRESIDENT

                        Office of Management and Budget

    Additional committee questions...................................    74
    Administration's pay policy......................................    61
    Agriculture and payment limits...................................    87
    Army Corps of Engineers..........................................    89
    Border Security Agency...........................................    75
    Capitol Hill, Ridge testifying on................................    83
    Child care and adoption..........................................    90
    Competitive sourcing.............................................    70
    Consolidated Executive Office of the President appropriation.....    59
    Corps of Engineers...............................................    86
    Customs user fee.................................................    74
    Defense..........................................................    88
    Electronic government (E-Gov)....................................    59
    EOP consolidation............................................65, 69, 72
    Ergonomics.......................................................    93
        Rule.........................................................    68
    Federal:
        Accounting Standards Board...................................    80
        Employees Compensation Act (FECA) proposal...................    66
        Retiree costs, full funding for..............................    58
    Forest Service emergency firefighting funds......................    63
    General Flowers..................................................    84
    Government downsizing............................................    83
    Government's human capital crisis................................    82
    GREAT grant program..............................................    77
    Homeland security................................................    60
        Funding......................................................    66
    House budget resolution..........................................    68
    Improving the current Federal budget.............................    91
    Low-income home energy assistance program (LIHEAP)...............67, 92
    Measuring performance and delivering results.....................    58
    Office of:
        Financial Assets Control (OFAC)..............................    77
        Homeland Security........................................62, 75, 90
    OMB:
        Budget.......................................................    58
        Representation account.......................................    78
    Outsourcing Federal jobs.........................................    82
    Pay parity.......................................................    76
    President's management agenda....................................    81
    Regulatory oversight.............................................    79
    Renewables.......................................................    89
    Risk analysis....................................................    84
    Shared responsibilities with Congress............................    83
    Small business loans, scoring of.................................    78
    Transportation funding...........................................    87
    Treasury counter terrorism fund..................................    77
    Two-front war against terrorism..................................    57
    U.S.:
        Corps of Engineers...........................................    71
        Customs Service..............................................    69
        Postal Service...............................................    65
    Veterans.........................................................    85

                     Office of National Drug Control Policy

    Additional committee questions...................................   274
    Anti-doping efforts..............................................   245
    Counterdrug:
        Intelligence executive secretaries...........................   245
        Technology Assessment Center...............................243, 286
    Drug:
        Free Communities Act.........................................   279
        Problem in our Nation, assessing the extent of the...........   248
        Trafficking:
            Areas, high intensity....................................   268
            In New England...........................................   279
        Treatment..................................................271, 278
    Drug-free communities support program..........................245, 291
    Federal drug control budget......................................   246
    Fiscal year 2003, national drug control budget, the consolidated.   249
    General questions................................................   291
    Government-wide drug control efforts.............................   284
    High intensity drug trafficking areas (HIDTA)..................246, 288
    Media campaign...................................................   259
    Methamphetamine in New England...................................   280
    National:
        Alliance for Model State Drug Laws...........................   246
        Drug court initiative........................................   245
        Youth Anti-Drug Media Campaign..............244, 272, 275, 281, 283
    ONDCP's fiscal year 2003 budget request..........................   252
    Parent Corp......................................................   277
    Performance measures development.................................   246
    Prescription drug abuse..........................................   270
    President's national drug control strategy.......................   247
    Substance among youths in the juvenile justice system............   282
    United States Anti-Doping Agency.................................   290

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