[Senate Hearing 107-641]
[From the U.S. Government Publishing Office]
S. Hrg. 107-641
THE ADMINISTRATION'S NATIONAL
MONEY LAUNDERING STRATEGY FOR 2001
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
ON
THE EXAMINATION OF THE ADMINISTRATION'S NATIONAL STRATEGY TO COMBAT
DOMESTIC AND INTERNATIONAL MONEY LAUNDERING
__________
SEPTEMBER 26, 2001
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PAUL S. SARBANES, Maryland, Chairman
CHRISTOPHER J. DODD, Connecticut PHIL GRAMM, Texas
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii JOHN ENSIGN, Nevada
Steven B. Harris, Staff Director and Chief Counsel
Wayne A. Abernathy, Republican Staff Director
Stephen R. Kroll, Special Counsel
Martin J. Gruenberg, Senior Counsel
Linda L. Lord, Chief Counsel
Madelyn Simmons, Republican Professional Staff
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
----------
WEDNESDAY, SEPTEMBER 26, 2001
Page
Opening statement of Chairman Sarbanes........................... 1
Prepared statement........................................... 62
Opening statements, comments, or prepared statements of:
Senator Gramm................................................ 3
Senator Stabenow............................................. 11
Senator Shelby............................................... 12
Prepared statement....................................... 63
Senator Johnson.............................................. 17
Prepared statement....................................... 63
Senator Reed................................................. 18
Senator Allard............................................... 18
Prepared statement....................................... 64
Senator Schumer.............................................. 19
Senator Bayh................................................. 20
Senator Corzine.............................................. 21
Senator Miller............................................... 36
Senator Enzi................................................. 65
Senator Bunning.............................................. 65
WITNESSES
Carl Levin, a U.S. Senator from the State of Michigan............ 4
Prepared statement........................................... 66
John F. Kerry, a U.S. Senator from the State of Massachusetts.... 7
Prepared statement........................................... 69
Charles E. Grassley, a U.S. Senator from the State of Iowa....... 10
Prepared statement........................................... 71
John J. LaFalce, a U.S. Representative in Congress from the State
of
New York....................................................... 71
James A. Leach, a U.S. Representative in Congress from the State
of Iowa........................................................ 73
Marge Roukema, a U.S. Representative in Congress from the State
of
New Jersey..................................................... 74
Jimmy Gurule, Under Secretary for Enforcement, U.S. Department
of the Treasury, Washington, DC................................ 22
Prepared statement........................................... 75
Response to written questions of Senator Carper.............. 104
Michael Chertoff, Assistant Attorney General, Criminal Division,
U.S.
Department of Justice, Washington, DC.......................... 27
Prepared statement........................................... 79
Stuart E. Eizenstat, Former Deputy Secretary, U.S. Department
of the Treasury, Washington DC................................. 41
Prepared statement........................................... 81
William F. Wechsler, Former Advisor, U.S. Department of the
Treasury,
Washington, DC................................................. 49
Prepared statement........................................... 88
Jonathan Winer, Former Deputy Assistant Secretary for
International Law
Enforcement, U.S. Department of State, Washington, DC.......... 51
Prepared statement........................................... 93
Alvin C. James, Jr., Former Special Agent, Criminal
Investigation, Internal Revenue Service, U.S. Department of the
Treasury, Washington, DC....................................... 53
Prepared statement........................................... 98
Additional Material Supplied for the Record
Various letters and attachments submitted by Senator Carl Levin.. 106
H.R. 2922........................................................ 152
THE ADMINISTRATION'S NATIONAL
MONEY LAUNDERING STRATEGY FOR 2001
----------
WEDNESDAY, SEPTEMBER 26, 2001
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 9:05 a.m., in room SD-538 of the
Dirksen Senate Office Building, Senator Paul S. Sarbanes
(Chairman of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES
Chairman Sarbanes. The hearing will come to order.
I want to welcome our colleagues that are here with us this
morning. They represent, of course, a bipartisan element in the
Congress who have taken a long interest and advocated
significant legislative initiatives to counter money
laundering.
This morning's hearing will focus on the Federal
Government's effort to fight money laundering--what has been
done, what must be done. Its starting point will be the
National Money Laundering Strategy for 2001. We will be hearing
from the Administration. That is mandated by the Money
Laundering and Financial Crimes Act of 1998.
First, we will hear from our Congressional colleagues. They
will be followed by Jimmy Gurule, the Under Secretary of
Treasury for Enforcement; Michael Chertoff, the Assistant
Attorney General for the Criminal Division of the Department of
Justice. They will be followed by Former Deputy Secretary of
the Treasury, Stuart Eizenstat. And then we will conclude with
a panel at the end of the hearing: William Wechsler, Former
Advisor to the Treasury on money laundering; Jonathan Winer,
Former Deputy Assistant Secretary of State for International
Law Enforcement; and Former IRS Special Agent, Alvin James.
We meet in the shadow of the terrorist attacks of September
11. It is obviously more urgent now than ever to develop and
put in place the array of tools necessary to trace and
interdict the funds on which terrorists like Osama bin Laden
rely to pay for their operations. This effort cannot be carried
out without major investments of time and planning. Obviously,
they have a well developed network of financial means to pay
the bills. Our response to terrorism must include national and
international programs to checkmate it that are every bit as
complex and sophisticated as the practice of terrorism itself.
I think September 11 has sharpened our focus on the ways
that vulnerabilities in regulatory and enforcement procedures
in our financial system can be exploited, although I might note
that this hearing on terrorism had been scheduled before those
events occurred, and in fact, was to take place the very next
day. The IMF estimates that the global volume of laundered
money to be between 2 to 5 percent of global GDP. In other
words, between $600 billion and $1.5 trillion. Money laundering
uses the investment banking and payment system mechanisms of
our existing financial system. It fuels organized crime. It
creates a transmission belt for money spirited out of national
treasuries in numerous countries by corrupt officials. And it
is a terrorist source of financial oxygen.
The United States has long taken the initiative in efforts
to stop the laundering of proceeds from crime and corruption,
beginning with the passage in 1970 of the Bank Secrecy Act.
That Act requires banks to report suspicious activities and
large currency transactions. But despite the progress we have
made, especially over the last 15 years, money laundering has
become more difficult to detect. Globalization, which
eliminates barriers to free capital movements and relies on
advanced technology, makes it possible to move money virtually
instantly between any two points on the globe. These changed
circumstances have left normal banking practices and
traditionally tolerated offshore banking facilities open to
grave abuse.
Recent investigations by Senator Levin's Permanent
Subcommittee on Investigations have revealed that correspondent
banking facilities and private banking services offered by U.S.
banks can contribute to international money laundering by
impeding financial transparency and hiding foreign client
identity and activity. The committee's extensive reports
described how crime syndicates, corrupt foreign dictators, and
narcotics traffickers use these practices and exploit loopholes
in current U.S. law. Thus, criminals and terrorists achieve
hidden access to the U.S. financial system, moving under the
radar screen of U.S. law enforcement officials and financial
supervisors.
The Administration, as we all know, has now issued an
Executive Order a couple of days ago freezing the assets of 27
groups and individuals. This is certainly a step in the right
direction. But in the judgment of most experts, it is not
enough and we need to move forward with these multilateral
efforts to deal with the money laundering situation.
It is long past time to cut the financial lifelines which
facilitate terrorist operations by closing the loopholes in our
financial system. Over the past week, both The Washington Post
and The New York Times have argued forcefully for tougher and
broader laws. In fact, The Washington Post urged in an
editorial on Saturday:
The existing requirements that banks report suspicious
activity to regulators should be extended to other types of
financial institutions, such as stock brokers, insurers, and
even casinos. The reports that allies of last week's hijackers
may have bought financial auctions to profit from the carnage
underscores the suspicion that a bank-only focus is too narrow.
Broader reporting requirements already are enforced in Europe.
The United States should now follow.
And 2 days ago, The New York Times called on the
Administration and the Congress to revive ``international
efforts to pressure countries . . . to adopt and enforce
stricter rules. These need to be accompanied by strong
sanctions against doing business with financial institutions
based in these nations.''
This is obviously the time to move forward decisively to
address a situation that has plagued us for years and which
today poses an unprecedented challenge.
I very much look forward to hearing our witnesses this
morning, and I yield to the Ranking Minority Member of the
Committee, Senator Gramm.
STATEMENT OF SENATOR PHIL GRAMM
Senator Gramm. Mr. Chairman, thank you very much, I
appreciate these hearings.
Let me say that I am very pleased with the actions of the
Bush Administration to this point. I have had extensive
discussions with the Secretary of the Treasury and with the
Under Secretary of the Treasury, and I am very pleased that
they are working to put together an effective program, and to
coordinate their efforts with us, and that they are committed
to due process of law.
I think it is very important that we recognize that you can
do almost anything that you need to do to deal with problems of
money laundering, but you can do it the right way or you can do
it the wrong way. I do not intend to be involved in doing it
the wrong way.
And let me just give a couple of examples to try to explain
the concerns I have. If we go out and freeze assets, which we
have every obligation to do when we believe that those assets
have been used to harm Americans and they represent a clear and
present danger to our people, when we do that, we have to
establish a process where people have the right to challenge
that action.
So if a guy named Bobby bin Loden from Iraan, Texas, has
his assets frozen, he should have an opportunity on a timely
basis to come forward and say, ``I am from Iraan, Texas. My
name's Loden. You made a mistake here.'' And in fact, if a
mistake has been made, if this person's business has been
harmed, then that person has to be compensated.
The second example I would like to use is related to
unchecked authority. The Secretary of the Treasury, in any
money laundering bill, is given extraordinary power. I believe
that power is needed to take action, and I do not want to do
anything to impede the ability of the Secretary to take action.
But it is very important that in taking that action, the rule
of law be followed.
For example, if the Secretary of the Treasury determines
that a country, say France, is not adequately participating in
our money-laundering effort, and he decides to take action to
deny the ability of American banks to operate in France, I
would have to say that I prefer Bush's proposal, which would
deny the ability of French banks to operate in the United
States, because it is fairer and I think it would be a more
effective inducement.
But whatever course of action he decides, it seems to me
that he has to come forward with findings in taking that action
that are potentially rebuttable in court. And if there are
security concerns in those findings, at least he should have to
go before a circuit judge in private and present those
findings. I cannot imagine that we would give anyone in a free
society the authority to take actions that would destroy tens
of millions of dollars of someone else's property without
requiring some system of checks and balances.
So let me say that I think the most important thing we can
do in this area is to enhance enforcement. I think that has
been the primary approach of the Bush Administration. It is an
approach that I support. I want to be certain that we have
every power that is needed to do the job. But every power has
to include with it due process of law that protects the right
of innocent people who may be caught up by a mistake in this
process. And I think any action that is taken should be taken
through regulation and not by order, so that people have an
opportunity to be heard and comment on proposals before they
become final.
We can do everything that we want to do within the rule of
law, within the establishment of due process, and with checks
and balances to protect ourselves from abuse. The question is
doing it right or doing it wrong. I am determined to see we do
it right--I believe we can, and I am confident we will.
Chairman Sarbanes. Thank you very much, Senator Gramm.
I say to my colleagues, we are going to take the testimony
of our colleagues because I know they have other conflicting
engagements this morning--Senator Levin, for one, has his
responsibilities as Chairman of the Armed Services Committee--
and then we will come back and take statements from the Members
of the Committee as we go on to the next panel.
Senator Levin, we would be happy to hear from you. And just
let me note that Senator Levin has played an instrumental role
in exposing how criminals have used the U.S. financial system.
As the Ranking Member of the Permanent Subcommittee on
Investigations, he has published two comprehensive reports on
how correspondent and private banking activities make U.S.
banks vulnerable to money laundering and he has introduced a
very important piece of legislation--The Money Laundering
Abatement Act of 2001. The work of the Subcommittee was very
thorough, very comprehensive, very carefully done, and we are
very appreciative that Senator Levin is with us this morning.
STATEMENT OF CARL LEVIN
A U.S. SENATOR FROM THE STATE OF MICHIGAN
Senator Levin. Mr. Chairman, Senator Gramm, Members of the
Committee, thank you for holding these hearings, for your
leadership in going after money laundering, which is very much
a part of the terrorist effort to terrorize us and the world.
Tightening money laundering laws would strike an important
blow against terrorism, and we are all determined to take those
steps. One of the steps is set forth in a bill which I
introduced, along with my principal Republican cosponsor,
Senator Grassley. Senator Sarbanes, thank you for your
cosponsorship. It is also cosponsored by Senators Kyl, DeWine,
Bill Nelson and Durbin.
As you said, Mr. Chairman, we know already that the
September 11 terrorists have used our banks, our financial
institutions, to accomplish their ends. They have used checks,
credit cards, wire transfers involving our banks. There is even
pictures of two of the terrorists using an ATM. And there are
reports of large unpaid credit card bills as well.
Terrorists, drug traffickers, and other criminals can get
money into our banks and into our banking system through the
use of foreign banks. And that is the correspondent banking
issue which the Chairman has referred to and which we have
addressed in a series of hearings that we have had and in a
series of reports, and in the bill which we have introduced.
As a matter of fact, terrorists and criminals can even
create foreign banks for the purpose of getting money into our
banks through the correspondent banking system. This has been
going on with terrorists, including bin Laden, and criminals
for years. We just simply have to do something about it.
I just want to use one example of where a correspondent
bank was used by bin Laden. This testimony came out recently at
the criminal trial in New York where bin Laden's associates
were testifying, and they testified to the following. That an
associate of bin Laden testified that he had received $250,000
by a wire transfer from a bank called the Al Shamal Islamic
Bank, which is in the Sudan. This was in the early 1990's.
The Al Islamic Shamal Bank, according to the State
Department, is owned or partly owed by bin Laden and it is
apparently still true that bin Laden owns an interest in that
Sudanese bank, or at least was true as of March 16, 2000, when
a respected international newsletter on intelligence called the
Indigo Publication, said that bin Laden remains the leading
shareholder of that bank.
Now testimony at this trial, which was a trial relating to
the terrorist bombings in Kenya and Tanzania.
Chairman Sarbanes. The bombings of our embassies.
Senator Levin. Of our embassies. Thank you. Showed that
this $250,000 came through or from the bank that was owned by
bin Laden in the Sudan to this bank in Texas. There was a
correspondent relationship, either directly or indirectly, to
that bank from the bank in Sudan. The associate bought an
airplane with the $250,000 and flew it to bin Laden and
delivered the keys to that plane him. That was done through the
wire transfer to an American bank of $250,000.
Now in the mid-1990's, Sudan was placed on the list of
countries that our banks could not do business with. That
occurred after this transfer. But the question then arises,
well, if they cannot transfer money directly to an American
bank through a wire transfer, through a correspondent account,
is there a way to do it indirectly? And I am afraid the answer
is yes.
But before I show you how they can do indirectly what we
have stopped them from doing directly, I want to just say that
as of today, the website of that Sudanese bank shows that they
still have correspondent banking relations with western banks,
including American banks. Now, we think the American bank
accounts are either closed or no longer operative. But the
website of this bank, the Al Shamal Bank, you can see it on
your own computers, still shows that European banks, Southeast
Asian banks, North American banks, including American banks,
still have correspondent relations with the bank, which as late
as April 2000, was said by a reputable newsletter relating to
intelligence activities, that bin Laden had an ownership
interest in.
We are trying to find out, by the way, whether in fact
these banks--there are a lot of reputable banks on that list--
have an open account with the Al Shamal Bank. We are trying to
determine that as we speak. But the website of the Al Shamal
Bank shows that that correspondent relationship continues to
exist to this day. Finally, I want to go back to the direct and
indirect issue.
If we could put that first chart back on about how bin
Laden used banks, not just could used, but actually did access
the one bank on the left, but then on the right shows how, when
that was stopped in the mid-1990's, when the OFAC list was
created by the Treasury Department, which prohibited our banks
basically from dealing with Sudanese banks and banks in other
countries such as Sudan, what the Al Shamal Bank now can do,
and does do, according to its website, instead of having a
direct correspondent relationship with an American bank and
opening an account in an American bank instead opens an account
in a foreign bank. And then that foreign bank has a
correspondent account in a U.S. bank.
Now that process, it seems to me, has also got to be very
much tightened. And we do it in our bill in a number of ways. I
think because of the time constraints of the Committee, I will
not go into the ways in which we constrain it in any depth,
other than to say this. Our bill will prohibit an American bank
from having a correspondent relationship at all with what is
called a shell bank. That is a bank that has no physical
presence anywhere. It is licensed by a country, but has no
physical presence anywhere.
We would prohibit a correspondent relationship with that
bank. We very much tightened the rules as to a correspondent
relationship between an American bank and two other types of
banks. One is an off-shore bank, which is not allowed to do
business in the country where it is registered, has a physical
presence somewhere, but the country that registers it says, we
are not going to let you do business with our citizens. And so
we very much tighten that up. We would require that they
disclose to the American bank who their customers are. And the
same thing would be true under our bill with banks in
jurisdictions that are so-called suspect jurisdictions because
they have no very strong banking regulations.
There is a third area which Senator Kerry's bill gets to in
a very important way. And that is where he would give in his
bill, which I cosponsor, the Treasury Department the right, and
he will describe his own bill, but I want to show you how it
complements. These bills work together. In fact, I will leave
that to Senator Kerry, other than to say that these bills work
together to complement each other.
Finally, let me just say this. There are a number of bills
that are outstanding here, a number of efforts that are being
made. They complement each other.
We received a letter from the U.S. Department of Justice
which is very supportive of our bill. We also received a letter
from my own Attorney General in Michigan, Jennifer Granholm,
very strongly supporting our bill. But there are significant
loopholes in the correspondent banking area. These loopholes
have to be closed if we are going to truly wage a comprehensive
war on terrorism.
I want to thank you again, Mr. Chairman, for giving us the
opportunity to testify.
Chairman Sarbanes. Well, thank you very much. And we want
to thank you for the very careful, comprehensive hearings that
your Permanent Subcommittee on Investigations undertook.
Next, we will hear from Senator John Kerry, who has been at
the forefront of Congressional efforts to deal with domestic
and international money laundering.
Earlier this year, Senator Kerry reintroduce the
International Counter Money Laundering and Foreign Anti-
Corruption Act of 2001, which, as Senator Levin pointed out,
gives the Secretary of the Treasury authority to impose new
special measures against foreign jurisdictions and entities
that are of primary money laundering concern to the United
States.
Senator Kerry, we know you have been working this issue for
a considerable amount of time. We would be happy to hear from
you.
STATEMENT OF JOHN F. KERRY
A U.S. SENATOR FROM THE STATE OF MASSACHUSETTS
Senator Kerry. Thank you very, very much. Thank you for
having these critical hearings and thank you for the
opportunity to testify today. And to all the Members of the
Committee, I am honored to be in front of you.
I thank Senator Levin for his leadership in the Permanent
Subcommittee. I think he did a terrific job just now of helping
to show the linkages here and why this is so important.
I would like to sort of build a little bit on what he said,
if I may. There are a lot of tools, Mr. Chairman, in this new
war. I would ask unanimous consent to put my entire text in the
record.
Chairman Sarbanes. The full statement will be included in
the record.
Senator Kerry. Let me just chat about a few of the most
important points, if I may.
We have declared a new war on terrorism. And it is
appropriate, because it is new, it is going to be unlike
anything that we have ever engaged in. And unlike other wars
where our technological superiority was the difference, Kosovo,
for instance, where we did not lose a person. We could bomb for
days and achieve our goal. Or Haiti, where our overpowering
numbers, or Panama, where our overpowering numbers, or even
Vietnam, where troops and helicopters made a difference. Here,
the single most important weapon is going to be information. It
is intelligence. And it is perhaps the area in which we are our
weakest today, sadly.
But coupled with intelligence is this management, if you
will, of the source of the power of these terrorist
organizations, their capacity to survive, to buy airplanes, to
buy explosives, to pay people's living expenses, to move them
around the world, to literally harbor and succor them.
And I think, Mr. Chairman, that for years now, what we have
known is that this war is really more law enforcement than
traditional military enterprise. It has to be multilateral. It
has to raise the standards on the planet, if you will, in order
to be able to cooperate adequately to do this.
We currently have some 36 jurisdictions that the OECD still
cites as being renegades, I guess is the best way to describe
them, with respect to their policies for accountability, for
transparency, movement of money, even tax policy.
Now, Senator Gramm and others have in the past been wary,
and I recognize that wariness, of having the United States
impose its will because somebody else might have a different
tax structure. I want to emphasize--that is not the rationale.
It is not the differential in a tax rate that would motivate us
to say that those places ought to be more accountable. It is
the lack of transparency, the lack of accountability, the
different treatment between foreign and domestic individuals,
and the way they attract capital.
And I would just direct the attention of the Committee to
its own memorandum of the staff in preparation for this
hearing, in which they properly say: Money laundering poses an
ongoing threat to the United States. The economic costs
associated with money laundering include increased risks to
bank soundness with potentially large fiscal liabilities,
reduced ability of a country to attract foreign investment,
increased volatility of international capital flows and
exchange rates, the distortion of the allocation of resources,
distribution of wealth, and it can be costly to detect and
eradicate.
Most importantly, Mr. Chairman, it is literally the
lifeblood of all criminal enterprises that these revenues
generate. And all of these are interconnected.
For instance, in Afghanistan, Osama bin Laden and the Al
Qaeda has been involved in drug trafficking, as the Taliban has
been. Now some point to the fact that the Taliban has tried to
reduce the drug trafficking, principally because the Northern
Alliance and the Al Qaeda were sort of undercutting them, and
so they came in to move in on it. But three quarters of the
world's opium has been coming out of there.
So you have a linkage. It is a linkage also, I might add,
to much of the proliferation issues, the movement of arms, arms
trafficking, illicitly. So if you are going to be serious about
fighting a war on terrorism, which we obviously should and must
be, the first order of priority is to implement an
extraordinary diplomatic effort to raise the international
standards of accountability and transparency and exchange of
information.
Now I agree with Senator Gramm, there must be a due process
component here. And indeed, the Office of Foreign Asset
Control, OFAC, had an incident with Columbia, one individual,
and they moved rapidly to make certain that they addressed it
and that there was no unfairness in the application of any of
these standards. Should it be de jure? Most likely. We should
have it either by regulation or by legislation, a structure so
that we guarantee it.
But I have to also say, Mr. Chairman, over the 14 years or
more that I have been involved in this, I have witnessed a
remarkable reluctance by the financial community, the banking
institutions, to participate. I have traveled to England, met
with a board of governors there, others, talking about various
jurisdictions under their control, where you have known
remarkable exchange of money laundering efforts, havens.
These havens, I might add to everybody, put all of our
legitimate businesses at remarkable disadvantage and they are
an incentive for tax evasion, for every legitimate government
on the face of the planet that is struggling with the question
of revenues. These renegades offer an alternative to our
capacity to do what we do without unfairly distributing the
burden of taxes. And so, we have an enormous interest in
pressing this as a matter of governance, as well as a matter of
fairness.
I think it is time to get tough. Fair but tough. We have
the strongest market in the world. People must access our
market to be meaningful players. And we must use the access to
our market, whether it is the Chip system in New York, where we
clear checks, or the partition placing in the marketplace
itself, as the leverage for the behavior of these countries.
And I would say to my colleagues, since the OECD has
publicized the names of many of these renegades, a large number
of them have already moved to change their laws because they
understand what the implications are. And as a consequence of
what happened on September 11, this is the best opportunity we
have had ever to try to do this.
Now many of you may remember the BCCI Bank which tried to
illegally enter our system. Osama bin Laden had a number of
accounts at BCCI. And we have learned, we did not know it at
the time. It was collateral to what we were doing in trying to
protect the laws of our banking structure.
But we have learned since through law enforcement and
intelligence that when we shut it down, we dealt him a very
serious economic blow because of the size of those accounts and
his dependency on that flow that Senator Levin has already
described for his money. So it is critical that we empower the
Secretary of State and I might add, the Secretary of Treasury,
we have to go beyond what the Bush Administration has done.
I support what they have done. I am glad they did what they
did this week. But as former Assistant Secretary of State,
Jonathan Winer, will show you in a while on a huge chart, the
number of Osama bin Laden linkages is mind-boggling. And when
you see this chart and measure the 27 that we have now named
versus all of those that we know in the public domain exist,
this is a first step that does not amount to the kind of war we
need to be engaged in.
Now, I know that there are sensitivities and reasons for
why we want to try to take a few days to pull that together.
But all of us need to recognize that we have to be prepared to
go further.
So, Mr. Chairman, in summary, the bill that we are hoping
will be embraced in the context of these larger efforts
empowers the Secretary of the Treasury to designate these
primary money laundering concerns, and after the designation,
to take one of several steps to move on the kind of
corresponding banking situations Senator Levin has described--
to require identification of those who use the foreign banks'
payable-through account with a domestic financial institution,
to require the identification of those who use the foreign
banks' correspondent account with a domestic financial
institution, to restrict or prohibit the opening or maintaining
of certain corresponding account for foreign financial
institutions.
But most importantly, ultimately, we have to empower the
Secretary of the Treasury with due process to prevent any
country, government, or financial institution that harbors or
continues to not adhere to the higher standards of banking
behavior from taking part in the upside benefits of the United
States of America's marketplace strength. And that is the way
we have to play this if we are going to really conduct a war on
terrorism.
Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you very much, Senator Kerry.
Senator Grassley has played a very pivotal role in
increasing awareness about money laundering. Senator Grassley
served as cochair of the Senate Caucus on Narcotics Control and
authored the Senate version of the Money Laundering and
Financial Crimes Strategy Act of 1998.
That Act mandates the development of a national strategy on
money laundering and requires submission of this strategy to
the Congress. In fact, our next panel from the Administration
will actually be responding to the provision of the legislation
that Senator Grassley authored.
He is also the cosponsor of the bills that both Senator
Levin and Senator Kerry have introduced in this Congress, and
Chuck, we are pleased to have you here. We would be happy to
hear from you.
STATEMENT OF CHARLES E. GRASSLEY
A U.S. SENATOR FROM THE STATE OF IOWA
Senator Grassley. Thank you, Chairman Sarbanes, and my
colleagues. And I am glad to be here with the authors of this
legislation and to support their efforts.
If this were pre-September 11, I would probably be here
just to talk about money laundering as it dealt with drug
trafficking and our efforts to stop that. But, with the
happenings of September 11, it takes on a whole new side and
obviously, we get to the point where efforts to stop money
laundering becomes also an essential tool of going after
terrorists that have been so well described by my colleagues
here at the table with me.
Our focus needs to be not only on the specific assets of
terrorists, but also on identifying their methods and
eliminating their sources of funding. The events of 2 weeks
ago, it is because of that that we are now faced with another
group of thugs. We used to refer just to drug thugs. But now
the terrorists that are able to launder illegal proceeds to pay
for their activities, must be included. For them, money, access
to it and to the mechanisms for placing it in the legitimate
economy are the equivalents of their war industries. And to
strike at them, we must strike at their ability to wage war.
That reality has increased the importance to what we are here
talking about today. Two weeks ago, we might have said, passing
these bills was an important thing to do. It seems to me,
passing these bills now is an imperative.
These bills, of course, are not new. The elements in them
have received careful consideration over the last several years
because of money laundering, particularly as related to drug
trafficking. These bills are not full of hastily assembled
items. They contain needed changes and add important tools to
our arsenal. We also need to work with the banking and the
financial services industry to ensure that we act smart as we
go quickly down this road. We also need to see that they are on
board. This is not a burden that government here or elsewhere
can carry alone. We need to combine all of our strengths and
our capabilities. But circumstances demand meaningful action
now and these bills give useful, important tools of adding them
to our toolkit.
So even though we are here talking about legislation, I
think we are here to plead with bankers everywhere who are in
as much harm's way of terrorists as anybody else in America.
Normally in government, we respect bankers' relationships with
each other. This has been a very cozy community, and I do not
say that in a denigrating way. This community has certain
sensitivities in the banking community--respect for each
other's relationships with clients, kind of the lack of
transparency that my colleague has already talked about,
maintaining privacy, respect for secrecy. Well, in normal
times, I think we would also back up and respect that.
But these are not normal times, Mr. Chairman. I think it is
time to put these sensitivities that we have respected within
the banking community, to put them aside. And in a sense, we
are here not just to legislate, we are here to plead to have
the ultimate of cooperation of the United States bankers and
international bankers in this effort to defeat terrorism.
Without this cooperation, without even ideas from them,
without even their coming to government and saying, you are
overlooking something here by not going at it this way. This is
the sort of mobilization of the private sector as well as the
public sector if we are going to defeat terrorism.
Chairman Sarbanes. Well, Senator Grassley, thank you very
much. I think that was an extremely thoughtful statement and I
want to pick up on just two points in it.
First of all, the legislation we are considering has been
well developed. As you point out, it is not hasty. In fact,
Senator Kerry's legislation was reported out by the House
Banking Committee in the last Congress on a vote of 33 to 1
that came out of the Committee deliberation.
Senator Levin's legislation, as I indicated earlier,
reflects a long process of very thorough and careful hearings.
In fact, I think your reports stand about this high
[indicating], if I am not mistaken, coming out of that
Committee.
Senator Levin. Almost as tall as my newest grandchild, as a
matter of fact, Mr. Chairman.
[Laughter.]
Chairman Sarbanes. Fair enough. And Senator Grassley, I
think your observation about the participation and cooperation
of the private sector is very important. They can be extremely
helpful. They know what these practices are.
And the kind of just resistance to any action at all I
think has to be jettisoned now and there has to be a different
attitude that says, well, we have to have legislation. We have
to tighten up this system and strengthen it. We are here to
provide some ideas and to help move this forward. I appreciate
those comments very much.
I am going to forego any questions to forward the agenda
here this morning. Do any of my colleagues have any questions
of our colleagues?
Senator Stabenow. Mr. Chairman? If I might just ask--
Chairman Sarbanes. Well, let me yield to Senator Shelby
first.
Senator Stabenow. I was only going to say, Mr. Chairman I
have to preside at 10 a.m.
Senator Shelby. I will yield to her, Mr. Chairman.
COMMENTS OF SENATOR DEBBIE STABENOW
Senator Stabenow. Thank you. I do not really have a
question. I just wanted to thank you for holding the hearing
and indicate my strong support for these efforts, and apologize
in advance for having to leave the Committee to preside over
the Senate.
But I am hopeful I will be back before the hearing is
concluded. Thank you.
Chairman Sarbanes. Thank you very much, Senator Stabenow.
Senator Shelby.
COMMENTS OF SENATOR RICHARD C. SHELBY
Senator Shelby. Mr. Chairman, thank you.
I want to thank my colleagues for their work. I have a few
questions and maybe you answered them in your detailed
statements. How do you get into the extraterritorial way that
we would enforce this? This is very important if we are going
to do it, and I think it has to be done. I agree with all of
you and I commend all three. How do you do the extraterritorial
reach. Carl? John?
Senator Levin. In a couple of ways. First, you can require
our bank----
Senator Shelby. It is central to this, is not it?
Senator Levin. It is an important issue. First, you can
require our banks under the circumstances that we set forth to
require that, where there is a correspondent account under the
circumstances described with a bank abroad, that that bank
disclose its banking customers to our bank so that we have
disclosure, various types of disclosure under different
circumstances. But, nonetheless, disclosure of who that foreign
bank's banking customers are under our circumstances.
Second, we allow for the freezing of assets. There is no
reason why a correspondent bank account should not be subject
to the same freeze of assets--if I used the word seizure, I
meant freeze--the same freezing of assets as an American
individual's accounts can be frozen. Where there is probable
cause that a crime has been committed, then we allow the
freezing of assets.
Senator Shelby. Due process.
Senator Levin. Due process. We have due process very
carefully laid out. Senator Gramm is surely right. You want to
have due process and a right to appeal a freezing of an
account. But right now, we do not permit the freezing of a
correspondent account of the assets in that account except
under almost impossible proofs. You have to prove that the bank
itself was involved in the criminal activity. It is not enough
to prove that the criminal's money is in that corresponding
account.
Senator Shelby. Apparently, we do not have the tools to do
the job.
Senator Levin. And we need that tool, too, to freeze assets
in the correspondent account.
Finally, through service or process and jurisdiction over
foreign banks that have correspondent accounts, we can have
longer reach for our courts.
Those are three ways in which we can accomplish the goal
you set forth.
Senator Shelby. Senator Kerry.
Senator Kerry. I would add to that that much of what we are
seeking to do is not in fact extraterritorial. Obviously, there
are limits on our capacity to order a bank in another country
over which you have no--there is no long-arm reach, and so
forth, statute otherwise which would have any validity. But the
powerful tool here is the control over our own marketplace.
That is essentially what Senator Levin was describing.
We are not extraterritorial in requiring them to adhere to
a standard of behavior if they want to be in our country, or if
they want to be a corresponding bank with our banks. The
behavior that you are really controlling is our marketplace,
our banks, and access thereto. On those components which reach
into extraterritoriality, for instance, in the order President
Bush issued on Monday, that works for those countries like
Italy or Germany where they have the same laws we do with
respect to freezing. But Spain does not.
So if you have a foreign bank and you say you are going to
freeze the assets and the assets in fact are partly in Spain,
you cannot do that unless they change their law or come to some
other international agreement. That is why the multilateral
component of this is so critical. And to some degree, I would
disagree with the early indicators of the Bush Administration.
They seem to be wanting to be more unilateral in their
approach, not as multilateral as we have been in the last 10
years.
And I think that may have changed, incidentally, in the
last week or so. But my hope is it will change because there is
a huge multilateral component to this that will require
ratcheting up the diplomatic effort very significantly in order
to get countries to change their laws. So, again, you are not
forcing them, but you are leveraging them to the greatest
degree possible through legitimate means in our marketplace and
our laws.
Senator Shelby. To get them to raise the international
standards, right?
Senator Kerry. Raise the international standard, or to live
by our standard if they want to participate in our marketplace.
And that is a powerful incentive, incidentally.
Senator Shelby. How do you separate the legitimate banking
going on from what we would deem to be illegitimate? In other
words, do you review this? Somebody reviews these transfers?
Senator Kerry. First of all, you have your so-called SAR
reports.
Senator Shelby. We have that, I know.
Senator Kerry. And you build on that. Second, I mentioned
information earlier.
Senator Shelby. Do you think that is enough by itself,
John?
Senator Kerry. Of course not. Absolutely not. Most of them
sit there. People do not know how to interpret them. Second, we
do not have enough people.
Go up to the financial assets control--how many people are
up there now? Two? Three? I think we may have 3 or 4 people up
there, something like that, maximum. We do not have enough. We
have not put the computer capacity up to speed, the personnel
capacity, et cetera, do a lot of this. But let me go one step
further.
This is where the law enforcement component, intelligence
component, and what Senator Grassley was saying, the
participation of the bankers themselves. The international
banking standard under the Basel Convention is ostensibly, know
your customer. Well, an awful lot of bankers do know their
customers. And there has been a sad history of not sharing what
they know about that customer, where they know it is illicit
and dangerous activity, with the rest of the world. That is the
behavior that has to change.
And so, if the flow of information is such, you will
distinguish, and if you have the adequate due process
protections, law enforcement has to have reasonable cause.
There has to be a reasonable standard here.
The Secretary of the Treasury under our bill has to do this
in consultation with the Secretary of State, Defense, NSA, et
cetera. So it seems to me that while nothing is perfect, what
we have today is in fact an empowerment of the criminal
enterprises, an empowerment of terrorism, and we have to begin
to move in the other direction in order to take back the
control, mindful of the need to be thoughtful about the due
process components.
Senator Shelby. Thank you.
Thank you, Mr. Chairman.
Chairman Sarbanes. Are there any other questions?
Senator Gramm. Let me just make the following point.
We had 157,000 reports last year of questionable activities
from banks. We do not have the resources to process those now.
And the most immediate effect that can be had is providing the
resources to go through those 157,000 suspicious activity
reports and try to ferret out what is suspicious and what
represents a threat.
I would say, in response to Richard's point, the good thing
that the Administration has done, and it is unilateral, but it
sends a very clear signal, is that if you want to do banking in
the United States, you are going to have to meet these
standards. And that I think is the kind of signal that you need
to send up front if you expect to raise international
standards.
And as I looked at the actions that the Bush Administration
took, that action was the strongest in terms of sending the
right signal. We cannot make banks in other countries do what
we want them to do. But we can set standards if they want to do
business in the United States. If you want to be in the banking
business, you have to do business in the United States. So, I
think that is the right approach. That was the focal point of
what they did, and I think that that was the right thing.
Senator Levin. If I could just add, that is the basis of
our bills as well.
Senator Shelby. That is right. Your bills actually both
target in a way that has not been done in the past. So you are
not caught up in the morass of hundreds of thousands of
reports. In fact, the Kerry bill provides a procedure to
identify special measures against foreign jurisdictions or
entities. So you identify, in a sense, the bad actors. They are
subjected to a very detailed scrutiny, and I think that makes a
lot of sense.
Senator Kerry. Can I just add one quick thing?
Chairman Sarbanes. Certainly.
Senator Kerry. The question of this leverage is something
we honestly have been pushing for for some period of time and
regrettably, have not had a sense of urgency about doing. So, I
hope that we will really follow through on it. But may I say to
all of my colleagues on this Committee, I want to underscore
this informational component of it and the sharing of it and
the structure by which we do it.
It is not caught up in this bill. But the fellow, Rochman,
who was involved in the bombing of the Trade Center in 1993,
was on the watchlist in Saudi Arabia, in Egypt. And when he
came over here, there was just a complete wall between the
watchlist, the intelligence community, and the law enforcement
community. So nobody watched him and nobody tracked him. I am
told that several of the people involved in this most recent
attack fall into that same kind of barrier between intelligence
and law enforcement.
Again, I repeat for all of us, this capacity to begin to
improve our gathering of information, the movement of the
information, the analysis of the information, and the personnel
components of that, are the front line of this war. And we need
to do it.
Chairman Sarbanes. Gentlemen, thank you very much, and we
look forward to consulting closely with you in the days--I want
to underscore that--in the days ahead, because this is a matter
of import and of some emergency. We appreciate your testimony.
Senator Corzine. Mr. Chairman, may I ask one question with
regard to whether private banking standards are addressed in
your bills as much as the commercial banking and financial
institutions that are generally the subject, at least as I have
read them?
So much of access of the system comes through the
investment process. Institutions such as hedge funds are left
out of regulatory structures and easy for funds to access. I
would like to hear whether your bills address these kinds of
other intermediaries, as opposed to clearly identifiable
financial institutions.
Chairman Sarbanes. Go ahead.
Senator Levin. Could I just respond briefly to that?
Chairman Sarbanes. Yes.
Senator Levin. We do address the private banking situations
in our bill and require enhanced know-your-customer rules in
the private banking area based on the hearings that we had into
the abuses of private banking which were extensive hearings.
On to the latter part of your question, we actually have
hearings that we are going to be getting into in that area.
They are not yet covered in the bill, but the hearings that are
scheduled by my Permanent Subcommittee on Investigations will
get into that area.
Chairman Sarbanes. Thank you.
Senator Schumer. Mr. Chairman.
Chairman Sarbanes. Senator Schumer.
Senator Schumer. I just had one quick question as well. I
put in a bill with the late Senator Coverdale and Congressman
Leach very similar to yours, Senator. But here is the thing
that plagues us, Carl. How do you deal with other countries,
and John touched on this, that do not cooperate, which tend to
be large countries?
That chart you had, which is the Sudan bank, we can cut
them out of America, but if we cannot cut them out of other
major countries that have sophisticated banking systems, and
those systems deal with our banks, then, for all practical
purposes, we have not accomplished much.
And that is the fundamental dilemma that I have been
wrestling with this issue. Could either of you--I know we talk
about pressure. But shouldn't we consider something further
than pressure?
Senator Kerry. Yes.
Senator Schumer. Which is to say, if a large country with a
sophisticated banking system continues to deal with the banks
in one of these small countries that we know are just designed
to hide money, that they will have to face penalties in dealing
with our banking system, because even the French or the Germans
or the British or the Japanese, which have huge banking
systems, have to be part of our system.
Otherwise, what I am worried about is they will just--they
are very clever and very nimble and these terrorists, as well
as other kinds of money launderers, will rejigger things and
make their base of operations another country that has a
sophisticated banking system, but does not have the rules and
laws that we have.
Senator Kerry. Senator Schumer, that is a very good
question and it is one that has been asked by the financial
community for a number of years. In fact, one of the arguments
that you heard against moving was, well, if you get too strict,
they will move offshore and then you wind up diminishing your
capacity. But I think we have moved in the last 10 years,
beginning, I might add, with President Bush in 1989, and moving
forward since then, there has been a significant effort on the
international front.
You are going to hear from former Assistant Secretary of
State Jonathan Winer, who negotiated a lot of these efforts
internationally. Others have been involved in this. The OECD is
pressing this issue now. We have urged the G-7, G-8, even G-16,
to become the focus of this effort. If you have the developed
world, essentially, joining together in this effort and they
seem to be, as a consequence of what happened on September 11,
then you really begin to create a new structure. And so that is
why I said a moment ago, it has to be multilateral with a major
ratcheting up of the diplomatic effort simultaneously. We
cannot do all of this alone.
Senator Levin. And if I could just add one word. We have to
also be consistent. There is a very strong international effort
in the area of tax evasion, which we have lagged behind. So
when we do that, we are sending a mixed signal about the
importance of the international community being involved in
correcting some of these.
Senator Schumer. But am I wrong to think that if even one
or two major countries resist this pressure, that we then have
a gaping loophole here?
Senator Levin. There would still be access to our market,
which the Chairman has pointed out, and others, that they still
want, and that access is going to be restricted.
Senator Schumer. Well, that is the point. We might have to
say to a major country, if you do not do this, all your banks
cannot deal with us unless you join up with this. And I do not
know whether we say that through diplomacy. But when they
resist, where do we go from there? That is the question that
has plagued me about this for the longest time.
Senator Kerry. But, Senator Schumer, there is a level of
reasonableness in these standards. It is very difficult for a
nation that is a member of the WTO, that is at the United
Nations, Security Council, elsewhere, participating in global
affairs, to legitimately resist the diminimus standards of
accountability, transparency, exchange here, that most of the
developed countries are utilizing anyway in one form or
another. There are not huge differences here, frankly. There
just are not. There may be nuances of particular law or
particular protection or access or rapidity with which somebody
has access to redress in the court system or something. Sure.
But the fundamentals that criminals should not be using the
financial marketplace with impunity, to be able to wage war
against that very marketplace. And what we are seeing in
response, I think the United Arab Emirates, the Saudi break of
relations with the Taliban, the current movement of countries
to agree that they have to become part of this effort, is
because they recognize they are threatened.
Every country is threatened by a terrorist organization
that has access to these financial services without
accountability. And they all recognize it is in their interest
and in the interest of governance and security to move in this
direction. I think the weight of history as well as the weight
of reasonableness is on our side.
Senator Schumer. Thank you, Mr. Chairman.
Chairman Sarbanes. I do not want to close out any of my
colleagues. This is a very knowledgeable and informative panel.
And while a short while ago I was trying to move it along so we
could move ahead, I do not want any of my colleagues who have
questions not to have the opportunity to put them. If there
are, we will do that. In fact, I will go to the regular order
and move through and recognize people for their 5 minutes if
they wish to ask any questions.
Senator Levin. Could I leave expressing the hope that money
laundering provisions be included in any anti-terrorism bill?
That is going to be an important test and it is coming up soon.
Chairman Sarbanes. Well, that is why I said earlier that we
look for your counsel over the next few days, yes.
Thank you all very much. You have been extremely helpful.
Senator Levin. Thank you.
Senator Kerry. Thank you, Mr. Chairman.
Senator Grassley. Thank you.
Chairman Sarbanes. Thank you.
If the next panel would come up and take their seats, I
will now recognize the Members of the Committee for any brief
statements they may wish to make.
Senator Johnson.
COMMENTS OF SENATOR TIM JOHNSON
Senator Johnson. Thank you, Mr. Chairman. I will be very
brief and submit a full statement for the record.
I simply want to commend you for rescheduling this
important hearing so quickly. As we all know, anti-money
laundering tactics will play a critical role in our war against
terrorism. And I would like to note that the Chairman had the
foresight to schedule a hearing on this topic well before the
attacks of 2 weeks ago.
Senator Sarbanes identified early on that our National
Money Laundering Strategy is a critical weapon in our arsenal
against terrorists, drug lords, organized crime syndicates, and
others, and I am pleased that this Committee will play a
critical role in our Nation's anti-money laundering efforts.
I would also like to thank President Bush for taking
decisive action this week to move forward with at least the
first step in a silent war on the financial assets of those who
so cowardly attacked America 2 weeks ago.
Mr. Chairman, I do believe that the challenges to deal with
money laundering will be one of the critical pieces in our
overall strategy against terrorism and I would like to commend
our colleagues for bringing forward legislation. I look forward
to reviewing the President's plan.
And as our colleague and friend, Senator Levin of Michigan,
noted, we cannot have a war on terrorism without also have a
significant component dealing with the choking off of financial
resources available to these terrorists.
Again, thank you Mr. Chairman for rescheduling this
hearing. I look forward to the testimony and working with my
colleagues across the aisle on a bipartisan effort to make our
significant contribution through this Committee to the war on
terrorism.
Chairman Sarbanes. Very good.
Senator Shelby.
Senator Shelby. I would just ask, Mr. Chairman, that my
entire statement be made part of the record. I am looking
forward to hearing from the Justice Department and the
Treasury.
Chairman Sarbanes. Good. Your full statement will be
included in the record.
Senator Reed.
COMMENTS OF SENATOR JACK REED
Senator Reed. Well, thank you, Mr. Chairman. I also want to
commend you for holding this hearing. It is incredibly
important. We face a daunting challenge to counteract
terrorists who have attacked our country. There are many
different responses that we will have to undertake--
intelligence gathering, military operations. But not the least
of these is disrupting the financing of these terrorist
networks.
And to that end, this hearing is extremely important. I
look forward to the witnesses today and also to prompt action
on legislation to provide the tools that our Government needs
to counteract money laundering and terrorist financing
throughout the world.
And I thank you, Mr. Chairman.
Chairman Sarbanes. Very good.
Senator Allard.
COMMENTS OF SENATOR WAYNE ALLARD
Senator Allard. Thank you, Mr. Chairman. I also have an
opening statement I would like to make a part of the record.
Chairman Sarbanes. The full statement will be included in
the record.
Senator Allard. I just want to congratulate you on the
hearing. It is timely and something that we need to work on.
I do think that we need to figure out a way to evaluate a
measured response. In other words, as we pass these rules,
regulations, requirements, and reporting, measure in some way
how effective they really are. I think that is an important
concept.
Chairman Sarbanes. Good. Thank you very much.
As Senator Schumer observed earlier, he and Senator
Coverdale, our late and very highly regarded colleague, had
joined together in introducing the Foreign Money Laundering
Deterrence and Anti-Corruption Act in 1999. That bill had a
number of very important provisions in it. Some of the aspects
of that have already been discussed, and I will not take the
time now to review the items.
Senator Schumer, we would be happy to hear from you.
STATEMENT OF SENATOR CHARLES S. SCHUMER
Senator Schumer. Well, thank you, Chairman Sarbanes. And I
want to thank you for your leadership and your ongoing interest
in this issue.
I think as was mentioned, this hearing was scheduled and
your interest predated what happened here. And of course, now
we are going to move very quickly because of what happened. Let
me just make a couple of points.
First, the timing of this hearing is so important because
these kinds of well-organized, well-funded terrorist attacks
are at the heart of this seemingly intractable problem of money
laundering. The funds they use that are either proceeds from or
investments in illicit activities seem to filter through the
international banking system like water. Jurisdictions that
provide total opacity for the owners of these accounts and by
statute refuse to cooperate with international law enforcement
are the spigot.
There are countries that set up banking systems that then
go on the web to brag that no one will find out who you are,
where your money comes from, and where it is going to. A Yahoo
search produces over 30,000 websites that provide corporate
structures and bank accounts that allow for the transfer of
funds to places like--I cannot even pronounce some of them--
Vaunatu and Naru in the South Pacific, and St. Vincent and
Anguila in the Caribbean. And Treasury's FinCEN, the Financial
Crimes Enforcement Network, estimates that $4.8 trillion in
hidden assets in these jurisdictions is concealed to cover up
some crime.
That is a pretty powerful statement, and this is not just
terrorism, obviously, but money laundering, tax evasion, and so
many other things. And the domestic laws of these jurisdictions
make it a crime--listen to this--a crime to divulge any
information about the banks' officers, depositors, transfers,
or any financial activity relating to banks to law enforcement,
without exception.
Our law enforcement people go there, try to find out what
is going on, and the bank officer or the bank cannot tell under
penalty of law. In these countries, they have made it a
business.
Anguila, for instance, charges $60,000 to open a bank,
$20,000 a year to keep it there, and then you are completely on
your own, except, as Senator Levin's charts show, you have
complete access to our system. And I would like to just switch
the focus a little bit.
I think it is going to be very hard to get total global
cooperation on this. It has been the history in the past that
we make effort after effort and then you just get a couple of
bad apples that spoil the bunch. But if we can get rid of the
opacity, if we can make this transparent and we can trace the
money, even if it is going to flow, we can make a huge
difference in finding out these people and their sources, et
cetera.
And that is an important point to make, that in our new
electronic world, money just flows. But what stopped us is the
terrorists and others, money launderers, drug runners, find the
places where no law enforcement can go and find out what goes
on.
If we want to stop the actual transfers of money, we should
consider--I am not advocating it yet because it is a major step
and I agree with Senator Kerry that the diplomatic efforts have
to be first--but we should even consider penalties on big
countries that do not help cooperate. We are at that stage.
So, Mr. Chairman, once again, I thank you. I look forward
to participating in your efforts to put together a strong bill.
I want to thank our witnesses, present and past, for
testifying.
Chairman Sarbanes. Senator Bayh.
STATEMENT OF SENATOR EVAN BAYH
Senator Bayh. Thank you, Mr. Chairman, for your foresight
on this issue and for the emphasis you have placed upon it.
Let us make no mistake about it. Our attempts to dry up the
funding for these terrorist organizations literally will take
weapons out of the hands of those who wish to do us harm.
Our attempts to combat money laundering, Mr. Chairman, are
the financial equivalent of launching smart bombs, Smart
weapons, against the terrorists and those who aid and abet
them. So, I want to thank you for your leadership in gathering
us here today.
Since September 11, the outlines of Osama bin Laden's
financial network have become clearer. He has relied upon
electronic banking, ties to a number of charities in the Middle
East and elsewhere.
But many experts feel that the most likely source of the
funds used to perpetrate the attacks on the United States were
derived either from small wire transfers or from an informal
banking system known as Hawalas. This system is used to
transfer large amounts of money from one country to another
without the cash ever crossing national boundaries.
Mr. Chairman, in today's edition of one of the large
national daily newspapers, the Hawala banking system was
described as follows. It relies on something older than money
itself--a person's word. Nothing could be more discreet. There
is no need to smuggle large amounts of cash from one country to
another or to fill out bank forms that can draw unwanted
attention. No need, in fact, for any detailed bank records
whatsoever. A person simply hands over cash at one end and is
paid out at the other end, leaving virtually no paper trail to
follow.
This is an area of inquiry, Mr. Chairman, I think would
warrant some of the Committee's time and attention with your
blessing, of course. It is beyond the purview of many of our
existing laws. In 1993, however, Congress did act, requiring
both regulation reporting of Hawalas. Both the past and the
previous Administration, however, have delayed the
implementation of the regulations. The previous Administration,
until later in 1999, and the current Administration until June
30 of 2002. These regulations, Mr. Chairman, and an extension
upon them could be important tools in the hands of law
enforcement in drying up the funds available to terrorist
organizations such as Al Qaeda.
So, Mr. Chairman, I want to thank you again for holding
these hearings and would respectfully suggest we look at
several actions, some of which were touched upon by our
previous panelists.
First, as I mentioned, we need to look closely at the
activities of the Hawalas to see how they are regulated in
other jurisdictions. They happen to be illegal in Pakistan, for
example. To separate those that are legitimate from those that
are not, and to do what we can to close down the illegitimate
ones or their activities in this country. As Senator Kerry
mentioned, to prohibit banks who do business with terrorists
from doing business in this country. As Senator Schumer
suggested, it is time to get serious about this, to take a more
hard-nosed approach. I could not agree more, Senator, with your
suggestion.
We also need to look at stopping commercial enterprises
from doing business with commercial enterprises owned and
operated by known terrorist organizations. Osama bin Laden has
invested significantly in some commercial enterprises. They
should not escape our attention, either. And we should ensure
that aid that is given by our country to those overseas is
accounted for and goes to those for whom it is intended and not
to diver it.
And Mr. Chairman, I would finally suggest that we look at
the possibility of enlisting the aid of the World Bank and the
International Monetary Fund in the war against money laundering
and in some ways perhaps tie assistance from those
organizations to the cooperation of countries in this battle.
Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you very much, Senator Bayh.
Senator Corzine.
STATEMENT OF SENATOR JON S. CORZINE
Senator Corzine. Yes. I have a complete statement that I
would ask be put in the record.
Chairman Sarbanes. The full statement will be included in
the record.
Senator Corzine. I congratulate you on your foresight here
as well, Mr. Chairman.
This is a subject that needs an extraordinarily
comprehensive view of. The kinds of things that Senator Schumer
talked about in regard to global cooperation are certainly key.
But the need to make sure that we do not limit our sightline to
financial institutions and regulated institutions is just as
important as dealing only with financial institutions. So much
of the access into the system comes from ways that are not
necessarily opening a bank account and transferring money. Much
of this is done in cash.
The efforts that Congresswoman Roukema was going to talk
about, smuggling of cash, the commercial transactions that
Senator Bayh talked about, and frankly, unregulated money
managers' access to the system without the identity of those
who own the accounts, tend to be ways that are very easy for
the process to get started. And being a State that has a
casino, there are enormous amounts of ability to access systems
in additional commercial transactions. So, I hope that we do
not get a sense that we are somehow solving the problem if we
limit this to financial institutions and just simple, straight-
forward financial transactions.
Thank you.
Chairman Sarbanes. Our panel now consists of the recently
confirmed Under Secretary of the Treasury for Enforcement,
Jimmy Gurule, and Michael Chertoff, the Assistant Attorney
General for the Criminal Division. In their respective
capacities in the Treasury Department and in the Justice
Department, they are responsible for developing and
implementing the Bush Administration's national money
laundering strategies.
Now, to be very clear about this, the formulation of the
National Money Laundering Strategy was underway before these
events took place. In other words, pursuant to the Grassley
legislation that I mentioned earlier. And the Administration
has come in with that report. But it did not come after the
events of September 11. It was being developed prior to the
events, just as this hearing on money laundering had been
scheduled before the events of September 11. So, we are very
pleased to have the Administration here and, gentlemen, we are
looking forward to hearing from you.
I do not know if you have worked out an arrangement between
yourselves. Mr. Gurule, are you to go first?
STATEMENT OF JIMMY GURULE
UNDER SECRETARY FOR ENFORCEMENT
U.S. DEPARTMENT OF THE TREASURY
Mr. Gurule. Yes, Mr. Chairman. Thank you.
Mr. Chairman, Senator Gramm, and other distinguished
Members of the Committee, I appreciate the opportunity to share
with you the Treasury Department's ongoing commitment to the
fight against money laundering. In light of the tragic events
of September 11, I am more convinced than ever of the
importance and necessity of a comprehensive money laundering
strategy. I know that the Members feel the same way and I look
forward to sharing with you some of the key aspects of
President Bush's plan to combat domestic and international
money laundering.
Let me begin by saying that criminal acts of violence, such
as the horrific terrorist acts of September 11, need more than
just cunning leadership and dedicated followers to be
successful. Such undertakings also require extensive financial
funding. Let me be clear--the Treasury Department is committed
to identifying the sources of funding used to underwrite
attacks of this nature and will take whatever action is
necessary to shut them down. Although the complexities of money
laundering have long been associated with concealing the true
nature of funds that are generated by drug cartels, and other
criminal activity, the tragedies of September 11 also
underscore the need for aggressive and vigilant anti-money
laundering efforts which target the movement of funds into this
country for the purpose of criminal activity--especially funds
earmarked for terror. In response to this need, the
implementation of the 2001 National Money Laundering Strategy
includes several specific steps to dismantle and disrupt the
financing of terrorist activities.
I would like to take a few moments to summarize the key
provisions of the National Money Laundering Strategy, but at
the same time highlight some of the steps consistent with that
blueprint that the Bush Administration has undertaken since
September 11. On Monday, President Bush stated, ``We will
direct every resource at our command to win the war against
terrorists, every means of diplomacy, every tool of
intelligence, every instrument of law enforcement, every
financial influence.''
We will starve the terrorists of funding. I am here to tell
you that this is the mandate of the Treasury Department--to
starve the terrorists of funding. This is the mandate of the
Office of Enforcement at Treasury. To accomplish that goal, the
Enforcement Office has implemented the Foreign Terrorist Asset
Tracking Center. The goal of the Center, or FTAT is the acronym
that has been used, is three-fold.
The first goal is to map the financial infrastructure of
all terrorist organizations worldwide. So while at the moment
we are certainly focusing on Al Qaeda and Osama bin Laden, it
is not limited to this particular organization or
organizations, but is more broad in its scope. Second, it is
intended to shut down the source of fund-raising of these
organizations. And third, curtail their ability to move money
through the international banking system, including the U.S.
domestic banking system. Its approach is preventative,
proactive, and strategic.
It relies upon interagency cooperation and with respect to
the tracking center, we have undertaken efforts to work closely
with the Department of Justice, specifically the FBI and all of
the Treasury's law enforcement agencies, including the IRS,
criminal investigations, the Secret Service, Customs, as well
as Defense and the Financial Crimes Enforcement Network.
In addition, the Department of the Treasury has undertaken
substantial efforts with respect to international cooperation.
Everyone here certainly appreciates that the challenge before
us with respect to anti-terrorism efforts is global in nature.
And therefore, the law enforcement response must be in kind
global.
With respect to Treasury's efforts, we are undertaking
efforts not only to block assets in domestic banks that are
related to the 27 terrorist entities that were identified
pursuant to the Executive Order signed by President Bush on
Monday of this week, but we are also looking to cooperate with
respect to blocking those funds located in foreign bank
accounts. And with respect to that effort, we are seizing upon
recent gestures by our allies who have offered their
cooperation and condolences with respect to the terrorist
events in New York City and in Washington, DC.
We are seeking to seize upon that momentum, to cause them
to not only express their goodwill, their support, but to take
concrete action with respect to assets, bank accounts that are
attributable to these terrorist organizations and entities. And
we believe that we are making some substantial progress in that
direction.
In addition, we are working aggressively with our partners
in the Financial Action Task Force, or FATF. As you know, the
Treasury Department leads the U.S. delegation with respect to
FATF. Again, we work closely with the Department of Justice in
that effort. We have currently reached out to our counterparts
in FATF to ensure that we focus on revising the 40
recommendations that serve as the measuring stick which FATF
measures whether a country is cooperating with respect to
implementing a strong anti-money laundering regime. And we are
looking to focus those efforts on terrorist activities and
prohibit banks from maintaining accounts where the money is
attributable or traceable to terrorist organizations.
With respect to the 2001 National Money Laundering
Strategy, let me briefly comment on the key provisions of that
strategy.
When it comes to law enforcement efforts, the strategy
seeks to focus and concentrate finite and limited Federal law
enforcement's resources on major money laundering operations.
We seek to focus on the financial operations that are
underwriting the activities of international drug cartels,
international terrorist organizations, as well as organizations
that traffic in firearms. We are seeking to focus our efforts
where they will have the greatest impact. And we believe the
greatest impact will be felt, will be realized with respect to
these large-scale money laundering operations. To that end, we
are going to be enhancing, seeking to enhance our efforts with
respect to the use of the criminal and civil forfeiture laws.
We believe that it is important that any strategy with
respect to money laundering not only focuses on the trail of
the money, but also seeks to seize those monies, forfeit those
monies to the United States. So, we will see an enhanced effort
with respect to utilization, enforcement of our Federal asset
forfeiture laws.
We will be relying in large part to implement the strategy
on the HIFCA's, the High-Intensity Money Laundering and Related
Financial Crimes Areas. These are kind of super money
laundering task forces that will be used to focus on these
large-scale money laundering operations. The strategy
designates two additional HIFCAs in addition to the four HIFCAs
that existed prior. Those two new HIFCAs are located in San
Francisco and Chicago. These HIFCAs are interagency in nature.
I had an opportunity to have several conversations with Mr.
Chertoff with respect to the operation of these HIFCAs and how
the Department of Treasury law enforcement agencies can work
closely hand-in-hand, close coordination, with the Department
of Justice.
Chairman Sarbanes. Why not put the location of the other
four on the record?
Mr. Gurule. Thank you, Mr. Chairman The other four HIFCAs
include a HIFCA in New York, New Jersey--this is often referred
to as the El Dorado Task Force. It is the largest Federal money
laundering task force in the country. Also, there is a HIFCA in
Puerto Rico, and in Los Angeles. Last, a HIFCA that focuses
more on a system of money laundering, and that is a HIFCA that
is focusing on the black market peso exchange system of
financial money laundering. So these HIFCAs are central to our
law enforcement anti-money laundering efforts.
A second key provision with respect to the strategy and a
way in which it departs dramatically from prior strategies is
the emphasis being placed on accountability. Secretary O'Neill
strongly believes that we in law enforcement must be able to
measure results. He is looking for results, not simply Federal
law enforcement activity.
It is not enough that we are actively engaged in
investigating money laundering operations. It is not enough
that we have enhanced the number of HIFCAs across the country.
He is looking for results. He is looking at the bottom line.
At the end of the day, he wants me to be able to report to
him which strategies have proven to be most effective and why.
And if the strategy is not working, then it should be discarded
and we should be focusing our law enforcement efforts on other
strategies.
With respect to this emphasis on accountability, we are
going to be putting in place a reporting system that will track
the money of money laundering cases, number of arrests and
convictions with respect to those cases, a reporting system
that is going to be focusing on money laundering related
forfeitures, so that we can track from year to year the dollar
amount of money that is going into the Department of Justice
forfeiture account, as well as the Treasury asset forfeiture
account.
But we are not simply going to be focusing on numbers. We
are going to be looking at the types of investigations that we
develop and we pursue, to see whether these types of
investigations are having an impact on money laundering
activities in this country. We are going to be looking at the
complexity of the size of these operations as well.
And then, last, we are going to be looking to see whether
our strategy has an impact, a positive impact, with respect to
the cost of laundering money. As you know, the efforts with
respect to laundering funds, the individuals who participate in
these efforts charge a commission. They charge a fee for their
activities, for their talents, their nefarious and illicit
talents.
We think if we are making an impact, that the commission
price will go up because it is riskier for them to undertake
this type of efforts and they are running the risk of being
prosecuted and incarcerated for lengthy prison terms. So we are
intending to track those numbers as well with respect to the
fees charged.
Next, preventative efforts.
We certainly understand that the banking industry has to be
an important partner in this effort. We need to work more
closely with the banking and financial industry to assist in
this national and global effort. We are looking at ways in
which we can strengthen that partnership. We can work more
closely with the financial banking system. At the same time, we
are seeking to expand the SAR's to the money-service
businesses, as Senator Bayh referred to, as well as broker-
dealers and casinos. Also, we need to ensure that the
information that we are receiving at the Treasury and that
FinCEN is analyzing is valuable information.
With respect to the CTR's, we know that approximately 12
million CTR's are filed every year. Our sense is that at least
30 percent of those CTR's have little or no value to law
enforcement. And because they have no value to law enforcement,
they should not be reported to the Treasury Department. So, we
are seeking to work with the banking industry with respect to
statutory exemptions that have been put in place that exempt
the filing of certain currency transaction reports to ensure
compliance.
Chairman Sarbanes. I want to be very clear on that point.
As I understand it, under existing law, there is a waiver, an
exemption procedure, that can be invoked which would not
require the filing of those reports. Is that correct?
Mr. Gurule. That is correct.
Chairman Sarbanes. That existing provision in law is not
being utilized. Is that correct?
Mr. Gurule. In my opinion, it is not being fully utilized.
Chairman Sarbanes. It is your intention to work with the
private sector to have a better understanding of that.
Mr. Gurule. Yes. And I have already undertaken efforts in
that direction, Mr. Chairman.
Chairman Sarbanes. All right. Anything else, Mr. Gurule.
Mr. Gurule. With respect to legislation, let me speak
briefly.
The Department of Justice has been working on a legislation
initiative, anti-money laundering legislative initiative. I
have had an opportunity to speak at length with Mr. Chertoff
with respect to that effort. I have had an opportunity to
review the legislation that they are proposing. I believe that
it is a good piece of legislation and the Treasury Department
supports that effort.
With respect to the Kerry bill, I am very pleased to hear
Senator Kerry's comments with respect to a due process
provision because the Treasury Department likewise believes
that that is essential. And so, we welcome the opportunity to
engage in discussions with respect to crafting what the due
process or what processes do under these circumstances. But at
the same time, I understand your direction, Chairman Sarbanes,
that this effort must be done on a fast track. As you stated,
we are dealing with days with respect to any new legislation.
We are anxious to meet with the Senator's staff, your staff, to
carve out that addition, if you will, to the Kerry bill.
Chairman Sarbanes. Well, we intend to have a very intense
consultation, both amongst Members, certainly on the Committee,
but including the Members who have taken initiatives and have
proposals, and with the Administration, with both the
Department of the Treasury and the Department of Justice, with
an eye to formulating a piece of legislation that draws the
best out of all of that process, takes into account important
questions that have been raised and tries to, if possible,
reach a consensus on an effective and directed piece of
legislation. And we welcome your statement and we look forward
to working very closely with you. But as you say, this is on
and should be on a fast track.
There are things happening elsewhere in the Congress, too.
And to be part of that process, we have to move with some vigor
and some energy here, and we obviously intend to do just that.
Mr. Gurule. And last, let me also commend Senator Levin for
his leadership with respect to this very important issue. I
have had an opportunity to review the Levin bill. There are
several provisions in the Levin bill that I think we can
support, again, and I look forward to working with your staff
and Senator Levin's staff on those issues.
In conclusion, the Treasury Department has language with
respect to some legislative initiatives on money laundering
that we would like to have added to the Kerry bill. We do have
that language and we can bring that up to you as early as
tomorrow.
So thank you for the opportunity and I look forward to
responding to any questions that you might have.
Chairman Sarbanes. Very good. Thank you for your statement.
Assistant Attorney General Chertoff.
STATEMENT OF MICHAEL CHERTOFF
ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION
U.S. DEPARTMENT OF JUSTICE
Mr. Chertoff. Thank you, Mr. Chairman.
Chairman Sarbanes. I just have to add, it is nice to have
you back before the Committee in a different capacity, if I may
note, from previous appearances.
Senator Shelby. Mr. Chairman, if you would like. A lot of
us liked you in that other capacity.
[Laughter.]
Mr. Chertoff. Well, it is nice to be back. But times change
and things on the front burner become different. And we
obviously have something very hot on the front burner.
Mr. Chairman, Senator Gramm, and distinguished Members of
the Committee, I am delighted to be here in support of the 2001
National Money Laundering Strategy that was recently released.
And also, I am particularly delighted to be here in the wake of
a legislative proposal which we have submitted, which addresses
I think the urgent need for reform in the money laundering
area.
I am going to be very brief. I am going to touch on just
some of the highlights and then I will be delighted to answer
questions. I would request that my full statement be made part
of the record.
Chairman Sarbanes. It will be included in the record.
Mr. Chertoff. We are obviously sitting here in the wake of
a terrible event 2 weeks ago which has kept all of us busy in a
variety of different settings. But it is very timely that we
are addressing money laundering because it is a key element in
the strategy toward combatting not only terrorism, but also
other serious forms of international crime.
In the wake of this event, we know one thing. We know that
if terror operates in cells, the lifeblood of those cells is
money. They cannot exist, survive, and flourish if they cannot
fund their activities. So it becomes critical that we strike at
that funding.
The mandate from the President is very clear--we have to
prevent terrorism. We have to disrupt it. And we have to
incapacitate those who practice it. As part of that effort, all
the agencies of the Federal Government are working together
currently to examine the information and evidence that we can
collect on the financial activities of terrorists and to pursue
those terrorists and their supporters and economic aiders and
abetters anywhere we can find them. So in taking that approach,
it becomes very critical that we look at the tools we have in
our toolbox to strike at those economic supporters. And money
laundering seems to us to be the most vital way in which we can
approach that.
We have a lot of laws which were great laws when they were
passed 10 or 15 years ago, but have not kept pace with the
times. And I might add that when we talk about money laundering
and the targets of our money laundering effort, we talk not
only about terrorists, but also we talk about international
organized crime, international drug dealing, international
corruption, not only because these are bad in themselves, but
also because, we cannot differentiate between terrorism,
organized crime, and drug dealing.
These groups do not hold themselves independently. They
work with one another. Terrorists get engaged in drug activity.
They have relationships with organized crime. So that we cannot
simply lock the barn door for the horse that just got out. We
have to go and lock all the other barn doors that are out
there.
The legislative proposal which the Department has put
forward, I think in many respects, is, if not identical, very
similar to portions of Senator Levin's bill, focuses on a
number of both large and small efforts to fix and improve the
money laundering laws. And let me review just a few of them.
First, under the proposed approach we would take,
laundering of the proceeds of foreign crimes, an increased
number of foreign crimes, would become a crime in this country.
Simply put, we do not want to be a safe haven for the ill-
gotten gains of corrupt international bribe-takers or for
terrorists who commit violent acts abroad. We have to expand
our law so that we can attack those who would launder the
proceeds of foreign crimes in this country.
At the same time, we need to have the authority to enforce
foreign court judgments against terrorists in this country,
both because we do not want their money here, and to show our
foreign partners that we will work with them in attacking
terrorism.
Second, correspondent banks. Some of the greatest experts
in the world on the impact of correspondent banking have
testified in the earlier panel. I think we need to respond to
the dangers that they have identified. We need to be able to
say to correspondent banks that they cannot raise an innocent
owner defense to protect the assets of foreign terrorists that
are being held in foreign correspondent bank accounts in U.S.
banks. And the legislation that we would propose would attack
that.
We need to be able to say to foreign correspondent banks
that if they want to have bank accounts with U.S. banks, they
have to appoint people who will respond to subpoenas and to
American process so that we can get the information that we
need to track down and prosecute those who launder terrorist
bank accounts and terrorist monies.
Finally, we need to deal with the movement of cash outside
the formal banking system. Where there is bulk transfer of
money in interstate or foreign commerce, we need to be able to
make that a criminal offense.
That is part of our proposal. And at the same time, we need
to strengthen the criminal laws against smuggling cash
illegally into our own country.
These parts of the package and the other parts put together
a comprehensive approach to deal with money laundering. And I
might say that we do not have pride of authorship. Many of the
proposals here have been proposed by Members of this body and
Members of the House of Representatives. They have been looked
at for years. I think the consensus is they are sound and
effective.
Mr. Chairman, we very much look forward to working with the
Committee, other Members of the Senate, Members of the House,
in moving within days to put together an effective package that
we can get into law and we can begin to enforce.
Chairman Sarbanes. Thank you very much. As I indicated, it
is our intention to work very closely with you in that
endeavor.
Senator Gramm.
Senator Gramm. Well, let me thank both of you for your
excellent testimony.
Mr. Gurule, I would like to ask you a question. I have had
an opportunity to talk to the Secretary. I first simply want to
say that I appreciate the approach that has been taken by the
Administration. I think the actions that you have taken thus
far have been excellent. And I am especially appreciative of
the Secretary's sensitivity to the fact that, while we want to
grab terrorists by the throat and not let them go to get a
better grip, we are defending basic rights in this country. We
have been successful with a system that is based on the rule of
law.
I would like to ask you specifically about the Secretary's
discretionary power. Quite frankly, the factor that was an
impediment last year in the adoption of this bill really boiled
down to one issue: the unilateral power of the Secretary of the
Treasury to take action without any necessity of issuing any
findings, without any accountability on the Secretary's part,
even though that action might have profound consequences to
people in the private sector. One of the options that I
proposed then and that I will be supporting now is the
following.
If the Secretary determines--and let me go back to my
example about France. If the Secretary determined that we were
not getting proper cooperation from France, then the Secretary
would have the power either to impose a penalty on French banks
operating in the United States, which would be my preference
because the problem is with the French government and not with
our own Government, but he would also have the power, under the
Kerry bill, to force American banks in France, in essence, to
close their doors.
Now, I have felt that when you are talking about such
powers, first of all, it is obvious that we need them. But the
question is, what should be the system of checks and balances?
And I would like to just throw out two things that I would
appreciate the Treasury examining to determine whether you have
a better way. It seems to me that if the Secretary of the
Treasury is going to make a unilateral decision to force
American banks to shut down their operations in another
country, the Secretary should be required to issue findings
which are potentially rebuttable in court. There should be some
system whereby the findings of the Secretary in making the
decision are made public, or if they cannot be made public
because of security concerns, perhaps we should require the
Secretary or the Secretary's designee to appear before a
Federal judge to present this evidence so that there is some
review, rather than giving one person this massive unilateral
power with no checks and balances or, as you have said, with no
accountability.
I would like to get your reaction to that.
Mr. Gurule. Well, as you know, the Kerry bill, before any
special measures are ordered by the Secretary of the Treasury,
would require the Secretary of the Treasury to find a primary
money laundering concern. That is a term of art under the Kerry
bill. And that primary money laundering concern would be with
respect to a particular correspondent account.
However, in addition, the Kerry bill would require the
Secretary to do so in consultation with several Federal
agencies, or heads of agencies, including the Attorney General,
the Secretary of State, the Chairman of the Fed, the Secretary
of Commerce, and the U.S. Trade Representative. So there is a
consultative process that is required under the Kerry bill. So
it is not simply a single individual taking action
unilaterally.
With respect to the due process concern, I do believe that
fundamental fairness requires that an affected bank be afforded
an opportunity, first of all, notice, and then an opportunity
for comment. In the event that maybe what appears to be
suspicious on the surface, there is a legitimate explanation. I
think that there should be an opportunity for the bank to come
in. And it could be after the fact. I am not suggesting that
the notice and comment must in every case be----
Chairman Sarbanes. It would have to be after the fact,
otherwise, they could move the money.
Mr. Gurule. I understand.
Chairman Sarbanes. I understand that the President, when he
issued his Executive Order, did it at midnight and then had the
press conference the next morning. And he did that in order to
avoid the possibility that the money would just move.
Mr. Gurule. I agree. I agree. The Kerry bill gives the
Secretary certain discretion. I think it is important that the
Secretary have the ability to exercise that discretion in an
expeditious way to avoid exactly the problem that you have
highlighted.
After there is an imposition of the special measures that
are set forth in the bill, again, I think that fundamental
fairness requires that the bank have an opportunity to come in
and make its case to the Secretary that the transactions are
legitimate transactions. There is no money laundering involved,
if in fact that is the case. I think the real question comes
down to, what process is due? What should that procedure look
like? And I am prepared to meet and engage in discussions on
that precise issue.
Chairman Sarbanes. I just want to note that Senator Gramm's
use of France was completely hypothetical or by way of
illustration.
Senator Gramm. Completely.
[Laughter.]
Chairman Sarbanes. Because in fact, the French----
Senator Gramm. I decided to use it twice because having
already made people in France mad, I did not want to add
another country.
[Laughter.]
I used Hong Kong last time and then I thought, well, gosh,
I may be going back there some day. I prefer to speak in
examples rather than beating around the bush theoretically.
Chairman Sarbanes. I understand that, but you know about
sensitivities, Gallic sensitivities in particular. In all
fairness, I do want to read from the FATF mutual evaluations
that were made.
The initiatives of France and its 2 year presidency of FATF
have contributed considerably to the success achieved so far.
By adopting measures often more binding than those contained in
the FATF recommendations and by introducing a system of
compulsory reporting of suspicious transactions for all
financial and nonfinancial professions, France has created a
real model for money laundering control. And then they say it
was done fairly recently and this was the first round back in
the mid-1990's, so they do not go through on how effectively it
has been enforced.
I just wanted to get that on the record and make sure
that--because we need all the friends we can get, and those
that are working at it, we want to acknowledge that they are
working at it.
Senator Reed.
Senator Reed. Thank you very much, Mr. Chairman.
Since money laundering is an integral part of our overall
counter-terrorism strategy, what role is envisioned for
Governor Ridge with his new position as the leader of homeland
operations? Or has any role been even thought about yet? Either
Mr. Gurule or Mr. Chertoff.
Mr. Gurule. It is a good question. I think the specific,
precise role has not yet been defined. It is my understanding
that this office will be used to coordinate anti-terrorism
activities and that would certainly include anti-money
laundering efforts. And so, exactly how that is going to take
place, what the command structure is going to be with respect
to Treasury anti-money laundering efforts is, at least for me,
unknown.
But I do believe that we need to do, and can do, a better
job of coordinating and targeting our efforts. And I certainly
welcome the opportunity to work closely with Governor Ridge to
that end.
Senator Reed. That just raises the obvious point that this
is a multifacet responsibility. The FBI, the Secret Service,
the Treasury Department, and I could think of, and you could
both think of probably 20 other institutions and agencies. And
the task I think is not only to get the framework right, but to
make sure that we have some point of thorough integration. I
would hope, as you go forward, you would think about that and
let us know what we have to do to provide you that type of
organizational integration.
Let me just touch on another topic, and Senator Schumer
alluded to it, the notion not just simply of money laundering,
but of excessive bank secrecy in some parts of the world that
inhibit investigations. I just wonder, are you thinking about
ways in which, through due legal process, we can get access to
financial information in other countries? I guess by way of
comparison, to what extent do we open up our institutions to
that type of legal process?
Mr. Gurule. Well, with respect to getting access to
information, account information in particular, in foreign
banks, we are presently working closely, diligently, with our
foreign counterparts, the G-7 financial ministers and our other
allies, with respect to the 27 entities that were named by
President Bush on Monday. And every indication is that that
cooperation has been robust and quite positive. So, I am
certainly encouraged. We just need to continue and building on
that momentum.
In addition, FATF, the Financial Action Task Force, is
another vehicle that we have used at the Treasury Department to
enhance cooperation to ensure that foreign countries have in
place a strong anti-money laundering regime, to ensure that
countries that have bank secrecy laws repeal those laws, so
that there can be greater transparency, and to ensure that the
countries have money laundering laws on the books that prohibit
money laundering.
There are still some countries today that do not have such
domestic legislation. And FATF has proven to be a very
effective multilateral agency, organization, and effort to
ensure that those steps are being taken.
Mr. Chertoff. I would like to add that one additional
approach we want to take, which is embodied in this legislative
proposal is to make foreign banks that maintain correspondent
accounts with U.S. banks, designate someone who will respond to
subpoenas and furnish information. So that the price of entry
into the international banking system, if you want to deal with
the United States, is a willingness to furnish information when
we need it.
Senator Reed. Thank you very much.
Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you, Senator Reed.
Senator Shelby.
Senator Shelby. Mr. Chairman, thank you.
Mr. Chertoff, I first want to congratulate you in this open
forum here for President Bush and Secretary Ashcroft's
selecting you to head the criminal division.
Mr. Chertoff. Thank you.
Senator Shelby. You bring a lot of experience. You are no
stranger to the Banking Committee. We enjoyed when you were
Special Counsel here and enjoyed working with you.
I have read your testimony which has been made part of the
record and I just want to quote from that. You say, ``In this
environment, law enforcement is challenged, and the criminals
often hold the advantage. Criminals are able to adapt to
changing circumstances quickly.'' Of course, you are including
terrorists as criminals. And they are big ones. They pay no
heed to the requirements of laws and regulations and recognize
no sovereign's orders. Further, these criminal groups have
learned to be adaptable and innovative, and as we succeed in a
new enforcement effort or implement a new regulatory regime,
they quickly alter their methods and modes of operations to
adopt to the new circumstances. Will this change if we adopt
substantially the proposals that are before us? And second,
will these proposals protect the due process rights of our
citizens?
Mr. Chertoff. I think the answer to both questions is yes.
I cannot predict.
Senator Shelby. I know that.
Mr. Chertoff. And I would be foolish to say that these
proposals are going to solve the problem.
Senator Shelby. By themselves.
Mr. Chertoff. But they can certainly move a considerable
direction in giving us the tools we need to diminish the
problem. And one of the features of this set of attacks we had
2 weeks ago is the diabolical way in which terrorists used our
own technology and our own advanced society against us. They
turned our aircraft into bombs. They use our financial system,
our global system, as a way of fueling their own criminal
activities.
But we have an ability to turn that on them as well. If
they need to use our global economic system, we can police that
system and start to dry up the streams of money that they rely
upon. So, I think we can go a considerable distance with this
legislation, and it is legislation which respects the rule of
law and due process.
The Department of Justice package operates within the
acceptable framework of criminal laws that we are all familiar
with and that the courts have upheld. We are modernizing and
improving, but we are not overturning.
Senator Shelby. I believe the Assistant Secretary mentioned
other countries passing laws to make money laundering and other
things like it illegal. But these laws by themselves, Mr.
Secretary, will not mean anything unless you have enforcement,
will it?
Mr. Gurule. Absolutely. You are absolutely correct,
Senator.
With respect to the FATF and the 40 recommendations that
are used to determine whether or not those countries are being
cooperative in our international anti-money laundering efforts,
one of those recommendations focuses not only on whether the
country has laws, but also if they are effectively implementing
and enforcing those laws.
That is something that the FATF organization is monitoring
and monitoring on a regular basis. And if the answer is no, we
have a law, but it is not being enforced, then that country
would not be in compliance and could be listed on that basis as
a noncooperating country and territory. On the shame list, if
you will, of countries.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Sarbanes. Senator Bayh.
Senator Bayh. Thank you, Mr. Chairman. And thank you to the
panel for being here.
I would like to ask, again, with regard to the regulations
that would have been put into effect in the 1993 law requiring
informal enterprises like Hawalas, casinos, broker-dealers, to
report transactions over $3,000, that was scheduled to go into
effect earlier this summer. It has been delayed until, as I
understand it, June 30 of next year? Why the delay and who is
objecting?
Mr. Gurule. Let me speak first to the strategy and why in
the strategy the date was moved back to June 30. But then let
me also kind of bring things up to date with respect to changes
that have been made to move that date up.
With respect to the MSB's, the money expanding the
suspicious activity reports, the money service businesses, this
is going to affect approximately 200,000 businesses in this
country alone. These are 200,000 businesses that under this
regulation would be required to submit suspicious activity
reports. It is a huge number, number one.
Second, it is going to affect small corner ``ma and pa''
businesses that perhaps issue money orders. And therefore, the
level of education and expertise is not that we have seen with
respect to the banking industry.
Therefore, with respect to those two concerns, FinCEN has
been actively involved in an education campaign with these
affected businesses so that they understand what is required
under the SAR's when the SAR's go into effect because we want
to make sure that they are being responsive, that they are
submitting the right kind of information to the Treasury,
information that is going to be valuable to law enforcement.
At the same time, the thinking was that this additional
time would give FinCEN the time needed to really gear up for
receiving the volume of reports that we think are going to be
submitted under this regulation. That, by the way, when the
strategy came out, was prior to September 11.
The world is different. As a result of the events of
September 11, we have decided to move the date back to the
original date, which is the registration date for these money
service businesses, being December 31 of this year. So, we are
looking at roughly approximately 3 months for these companies,
these 200,000 businesses registering.
Senator Bayh. I would encourage you in that area, Mr.
Gurule. Obviously, some are sophisticated enough to know how to
comply. Some, as you say, of the ``ma and pas'' may not.
Because some may not, this is a critical enough area, it should
not keep us from moving forward in the areas of those who are.
Mr. Gurule. I agree.
Senator Bayh. What about NGO's, and this is to either one
of you? There have been reports about the charities, charitable
activities helping to fund Al Qaeda. What are we doing to crack
down on that--either Mr. Chertoff or Mr. Gurule--in the
legislation that we are contemplating, or in the
Administration's approach?
Mr. Chertoff. We have in this legislation--I should add
also, in the package of anti-terrorism proposals which has been
submitted--proposals to take money laundering and make it
clearer and more broadly applicable to those organizations
which assist terrorism or terrorist organizations, as
designated by the President.
So clearly again, the money laundering piece is an
important piece, although I should add that we already have
laws on the books that make it illegal to be assisting
terrorist organizations. What we need to do, and what we are
doing, is pursuing those organizations vigorously and
aggressively, to use the existing laws and hopefully any
additional laws, in order to shut them down.
Senator Bayh. Thank you. My time is about up. I appreciate
your presence, both of you.
Chairman Sarbanes. Thank you very much, Senator Bayh.
Senator Allard.
Senator Allard. Thank you, Mr. Chairman.
I would like to follow up a little bit on the volume that
we are talking about here. The suspicious account reports, you
say we have about 200,000.
Mr. Gurule. Approximately 200,000 businesses will be
affected.
Senator Allard. Okay, it is 200,000 businesses. But how
many reports are we talking about?
Mr. Gurule. Well, at present, we are receiving
approximately 150,000 a year under the current system.
Senator Allard. That is the 157,000 that Senator Gramm
referred to in his opening comments.
Mr. Gurule. Right.
Senator Allard. Okay. The cash transaction reports.
Senator Gramm. Seventy-seven million.
Senator Allard. That 77 million is the kind of figure I am
looking at. Would you agree with that?
Mr. Gurule. The currency transaction reports are
approximately 12 million a year. It is a very large number,
certainly.
Senator Allard. Yes.
Mr. Gurule. And it is that number that I am concerned with
with respect to, a significant percentage not being all that
valuable to law enforcement.
Senator Allard. What is your solution? Are you suggesting
that maybe--the threshold is 10,000. Are you suggesting that
maybe we need to raise that threshold?
Mr. Gurule. The solution that we are proposing and that is
set forth under the strategy is to work with the banking
industry to see if we can achieve greater compliance with
exemptions to the filing of the CTR's. FinCEN, through work
that they have done, research that they have done, estimate
that approximately 30 percent of the 12 million CTR's that we
receive have no value to law enforcement. So if we could just
get compliance, if we could achieve greater compliance with the
statutory exemptions, we could reduce that number
significantly.
Senator Allard. And you need to bring me up a little bit on
these exemptions. What kind of exemptions are we talking about?
Mr. Gurule. For example, let us say that we have a K-Mart
that is making bank deposits every day that are in excess of
$10,000. There is no good reason to believe that K-Mart or
any--and again, I do not want to----
Chairman Sarbanes. It is just a hypothetical.
Mr. Gurule. Hypothetical. Exactly. I just want to qualify
that. Thank you.
[Laughter.]
But any commercial business such as that, that transaction
is suspicious or would be beneficial to law enforcement with
respect to money laundering investigations and therefore, it
should not be reported. My intent is to work closely, again in
partnership with the banking community, to see if we could
achieve greater compliance, or at least seek to identify what
the obstacles are to compliance with these exemptions.
Senator Allard. So, you would do a background check on a
business or perhaps individuals that frequently have to get
involved with cash transaction reports. You would exempt them.
Then those that are occasional, that come through that you do
not have that information on, would not. Is that basically the
way that that would work?
Mr. Gurule. In fact, the exemptions that I am referring to
are actually statutory exemptions passed by Congress. Those are
the exemptions that are not being fully complied with by the
banking industry. I do not know this for a fact--but I suspect
that the reason is that the banking systems, the banks have set
up a system for reporting. And perhaps it is just easier to
report every transaction over $10,000, rather than segregate
out certain transactions that would fall under the exemption.
So we need to work together.
Senator Allard. But I could see where maybe the information
would not be available to a bank. And so, in order to cover
themselves, they would just require it as a bank.
Is there ready access to this information from a bank,
where they can get this kind of assurance that this business is
legitimate and that it would fall under the exemption?
Mr. Gurule. I think that, certainly, we need to enhance our
efforts to work with the bank to make sure that they have a
good understanding or better understanding of what they need to
report. But with the CTR's, except for the exemptions, it is
mandatory. There is no discretion. With the SAR's, that is
discretion. If they have reason to believe that the particular
transaction is suspicious and tied to criminal activity, then
they have the discretion.
Senator Allard. There is no exemption with the CTR. That
was not clear. So all CTR's, cash transaction reports, anything
over $10,000 has to be reported. There is no exemptions on
that.
Mr. Gurule. I probably confused the issue. With the CTR's,
there is a mandatory reporting requirement, except for the
statutory exemptions.
Senator Allard. Okay.
Mr. Gurule. With the SAR's, those are ones that the
judgment call has to be made by the particular industry.
Senator Allard. Yes, that is the way I perceived it worked.
Okay. Very good. Thank you.
Mr. Chairman, I see my time has expired. Thank you.
Chairman Sarbanes. Good. Mr. Gurule, I thought that was a
very rational, common sense response to the questions. My own
view is that we should not change the statutory level because
it just would provide another target for people to play off of.
But as long as you have sufficient discretion or exemption
authority to deal with those instances in which it is serving
no reasonable purpose--because then, you could always swing
back if you discover that there is some abuse taking place.
You can take a company which says, well we consistently
because of our business want to transfer $15,000 or $20,000, or
whatever it is. And I guess, conceivably, you give them an
exemption. But then, all of a sudden, it might start spiking up
because there is some game being played within the company
ranks somewhere or something of that sort. I think it is very
important that you come at it in this rational, common sense
way that you outlined in your answer.
Senator Miller.
COMMENTS OF SENATOR ZELL MILLER
Senator Miller. Mr. Chairman, I would like to yield my time
to my colleague, Senator Corzine, because, quite frankly, I
think his questions might be better than the ones that I have
before me, given his experience.
Chairman Sarbanes. Well, I will let you yield your time
without concurring in the premise of the yield.
[Laughter.]
Senator Corzine. The Chairman is very wise.
[Laughter.]
I have a couple of questions with regard to Swiss banking
laws and the privacy of their accounts.
First, do we feel that we have the full cooperation and
access at the kind of transparency that would break through
what really sounds, in my experience, to be prohibited by Swiss
banks, a number of the things that we are asking for in this
legislation and what would be necessary to actually intervene
in this?
Second, I have this concern about unregulated entities. And
one of the most important ones of those are money management
firms that are outside of both the SEC and most countries'
regulatory structures, often labelled generically. I am not
trying to undermine their credibility, but hedge funds in
general are without any kind of supervision, particularly with
respect to deposit activity. And whether you have looked at
that and whether there are elements of that that make sense.
Then there has been much discussion about people
profiteering off of the anticipated September 11 events. Is
there anything that you would want to comment on? But more
importantly, have we put in place checks into our trading and
transaction systems that in a way would provide foresight with
regard to the kinds of actions that might take place?
This happens to be one of those standard practices of the
SEC to be reviewing these audit trails, if you could track
those to certain individuals ahead of time that might have
looked like--I guess there might be some element of profiling
there. But I do think that it is an element that needs to be
talked about.
So those are generally my questions.
Mr. Chertoff. Let me try to address some of the questions,
Senator Corzine. And my colleague will probably have something
to say about others.
First, I know because we are from the same State, and I
know where your hometown is, that you must have felt personally
what happened 2 weeks ago. And I know that is something which
all of us, when we discuss proposals, we are oftentimes
reminded of the very personal dimension to this. Let me deal
first with the issue of the question about whether people
profited by knowing in advance about these acts.
I do not think it is a secret that the press has reported
that there were allegations or indications, not necessarily
here, but overseas, that people may have shorted or engaged in
other transactions in stock at a time which is suggestive of
advanced knowledge. Of course, we have laws against insider
trading. Still more important, anybody who had advanced
knowledge of a terrorist act would be a prime suspect for being
a part of a terrorist conspiracy. That is an issue which we are
looking at very aggressively. It involves not only U.S.
entities or U.S. stocks, but it involves foreign stocks.
As you know, the SEC does track unusual trading. This is an
area where we have to coordinate with overseas regulatory
entities in making sure that both in general and specifically
as it relates to these issues, we are in a position to identify
groups that may have traded in advance. If we can do that, then
to pursue them.
Senator Corzine. The same leverage that you would use in
financial transactions with normal commercial banks and/or
depository institutions needs to be used, I suspect.
Mr. Chertoff. Exactly.
Senator Corzine. I hope the legislation takes that into
account.
Mr. Chertoff. Our legislation, I think, deals broadly with
financial institutions.
But having said that and, again, saying we have no pride of
authorship, if there is a way to better define the subject area
or make it clearer, so that we are absolutely confident that we
are addressing even unregulated money managers, I think it is
important that we do that.
It is my understanding, for example, that in certain parts
of the world, including parts of the Middle East, because of
various objections to the earning of money through interest,
money managers often use various kinds of derivatives as a way
of profiting from activity. And those are normally perfectly
legal. But, of course, if one is trying to profit off of a
terrorist act, we need to be able to look at transactions in
various kinds of derivatives and forward contracts, and we want
to make sure that we are doing that.
So, I think the legislation covers the waterfront. But if
there is any doubt about that, we would be more than happy to
work with you and the Committee to make sure that we are
plugging in the loopholes.
Senator Corzine. About the Swiss banking issues.
Mr. Gurule. With respect to Switzerland, I would say this.
It is certainly my understanding that they have been
cooperating. I say this from the perspective again of FATF and
looking to the 40 recommendations, the guidelines by which the
international community measures a country's cooperation on
money laundering. They are certainly in compliance with those
recommendations. Beyond that, I would not want to comment.
Mr. Chertoff. I would only add that I think in general,
over recent years, Switzerland has become one of our most
significant partners in pursuing asset forfeiture and sharing
for criminal activities. I think there are other countries
where we do need to do a lot of work, though.
Chairman Sarbanes. Senator Schumer.
Senator Schumer. Thank you, Mr. Chairman.
I apologize to the witnesses. I was watching you on the
closed circuit TV. These days, being a Senator from New York,
it is overwhelming. So I had to try to do two things at once.
Let me just follow up where I left off before.
When we talk about going after terrorists and the nations
that harbor them, we cannot just be talking about going after
those states that give physical shelter to bin Laden. We are
also talking about those who assist in sheltering his assets.
Some do it knowingly. Many do it unwittingly. The effect is the
same. So I am curious about the Administration's view about
going after jurisdictions that have enabled bin Laden and other
terrorists to finance their campaigns of terror. Would the
Administration consider sanctions against countries that do not
cooperate with international law enforcement? In other words,
countries who say, when you go and our FBI, or whomever, goes
to a bank and says, we want to know the money that came in and
the money that came out here. And the country says, you cannot
do that, which some countries allow us to now and some do not,
depending on the country. Would we consider sanctions against
countries that do not cooperate?
The bills that Senators Levin, Kerry, Grassley, and myself
have mainly go after the banking institutions. But then your
worry is, they set up another one and it starts all over again.
I am beginning to feel that going after some of these countries
is the most important. Is the Administration planning to lead
an international effort to cut off jurisdictions that do not
cooperate with law enforcement?
I have had conversations with some large New York banks
that do a lot of the correspondent banking. And they have
admitted openly that cutting off noncompetitive jurisdictions
will not affect their major banking institutions, because these
tend to be smaller countries, et cetera. Would you gentlemen
want to comment on that?
Mr. Gurule. Let me quote a statement that President Bush
made last Thursday. He stated, ``If you do business with
terrorists, if you support or sponsor them, you will not do
business with the United States.'' He made that statement.
Senator Schumer. Was that aimed at countries? Was that
aimed at banking institutions? It is a very powerful statement.
I am glad he made it.
Mr. Gurule. I think that it was intended to have breadth,
not be restricted.
With respect to the implementation of that statement,
putting some teeth behind it, the Administration's
international efforts include a focus on United Nations
Security Resolution 1333, that prohibits terrorists financing,
fund-raising, and such. We are moving on that front with
respect to getting that resolution passed within the United
States and then using that as an international cudgel, if you
will, against countries that permit this type of fund-raising
and financing activity.
In addition, we are moving on another front with respect to
the international convention against the suppression of
international terrorist financing. We are supporting that and
moving forward with respect to that. That is an international
convention that has been signed, but has not yet been ratified.
Senator Schumer. What does it do? It seems to me that the
terrorists are not going to make their monies available they
are going to try to be very much sub rosa on this.
Mr. Gurule. I think what it does, though, is it requires
cooperation. It requires that foreign states have legislation
that punishes and criminalizes fund-raising of this kind. It
requires the enforcement of that legislation. It requires stiff
penalties. And it gives us an international forum to advance
this.
Senator Schumer. I would like to ask some specific
questions, with the indulgence of the Chair.
Would we take the lead in cutting off any financial
institution in these countries that doesn't go along with what
we need in terms of openness and allowing our law enforcement
to find where transactions go?
Mr. Gurule. I think with respect to our U.S. banking
system, the answer is absolutely yes.
Senator Schumer. Okay. Second question. Good. That is good.
Now what happens if--the question, I do not know if you
were in the audience, that I posed to Senators Levin and Kerry,
who have just done great work on this.
We know Country X is a bad-apple country and their whole
banking system is founded on opacity--you know, come bank here.
Nobody will find out. We cut them off. Then they go to an ally
of ours and start doing business there. And once they are in a
large ally country with a sophisticated banking system, the
money can flow to the United States through that third country,
through that intermediate country.
What would you consider we do in those situations to the
intermediate country if they do not go along? And as you know,
history has shown that after a year or two, sometimes months,
these countries revert back to saying, hey, we can make some
money here. We can have a relationship. Maybe we will get
contracts and things like this. What are we going to do to
those intermediate countries?
Mr. Gurule. Well, with respect to the Executive Order that
went into effect on Monday, if we had evidence that this third-
party country, if you will, was maintaining, or its banks were
maintaining assets that are traceable to international
terrorist organizations, then those assets could be blocked.
And the bank that is maintaining those accounts could be
blocked from doing business with the U.S. banks, would be
denied access to the U.S. banks.
Senator Schumer. Okay. So let us say that the Sudan bank,
this little bank in Senator Levin's example, does business with
a large French bank. Would we consider saying to that French
bank, you cannot do business in the United States if they do
not have the same rules as we do about that Sudanese bank?
Mr. Gurule. I think we would seek the cooperation of our
allies to assist us with respect to cutting off those funds.
Senator Schumer. Understood. But the allies say, we agree
with you on these three points, but not on these three, and we
are going to do the first three, but not the second three. And
our law enforcement, Mr. Chertoff here over in the Justice
Department tells you that we need those second three points.
What would we do?
Mr. Gurule. It is very difficult for me to speculate
through all of these different hypotheticals and scenarios.
Senator Schumer. Okay. My only point is, if we really want
to get serious about the finances, as the President has made
clear on so many others, we are going to have to get pretty
tough. And that may take some belt-tightening in ways for all
of us.
Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you, Senator Schumer.
There is a vote on. I think we have concluded with this
panel. We will take a brief recess in order to go and vote. And
then we will return and we will have Ambassador Eizenstat at
the table as our witness.
Mr. Gurule, Mr. Chertoff, thank you very much for your
testimony, and even more, for the proffer of working closely
now with the Committee as we shape this legislation. Obviously,
we are on a very fast track to do that. I think we can
appropriately deal with some of the questions that were raised
here today about being careful and prudent as we deal with this
matter.
But on the other hand, a lot of very good work has been
done. The Department of Justice has done work in terms of what
they have come forward with. Treasury has done work in terms of
where they are. Senators Levin and Kerry, I think, have done
excellent pieces of work in terms of their legislation. And as
Senator Grassley pointed out, their legislation is not hastily
put together or ill-considered. It evolved over a very
sustained period of time. The Kerry bill actually was reported
out by the House Committee 33 to 1. The Levin bill reflects a
very extended work program by his Permanent Subcommittee on
Investigations.
I think we have really a lot of material that has been
brought to a very high level in terms of being close to being
finalized. And I think it is now a question of working together
to put that all together in a sensible framework and moving it
ahead and giving our law enforcement people the tools that they
really need in order to come to grips with this problem. Now it
is quite true, then it is carrying it out, it is implementing
it, and that is your burden.
But on the other hand, your chances of implementing are
better if you are working within a framework that is
comprehensive, rational, interrelated, and that should be our
objective in terms of what we provide to you.
That does not preclude trying to weed out some things that
are now being done that are not helpful and do not serve a
purpose. But the fact that you may need to do that is no
argument for not extending out to cover the sort of activities
that Senator Corzine was underscoring, the need to be brought
in under the umbrella.
We thank you very much for your testimony and we look
forward to working very closely with you.
The Committee will take a brief recess and then we will
return and we will hear from Ambassador Eizenstat.
[Recess.]
Chairman Sarbanes. The hearing will resume.
It is our intention now to hear from Ambassador Eizenstat.
Then following that, we will go to the panel that was
scheduled. And so, we intend to go straight through as far as
we have to into the lunch period in order to try to conclude. I
know some of our witnesses need to travel and we want to try to
accommodate that also.
I want to thank Stu Eizenstat for coming today and being
willing to testify. He has had a very distinguished record in
public service, now a partner at Covington & Burling. But he
was the Deputy Secretary of the Treasury in the previous
Administration, was in fact the lead official on the anti-money
laundering initiatives. He has previously served as Under
Secretary of Commerce, Under Secretary of State, Ambassador to
the European Union.
I simply want to express my very deep appreciation to him
for his willingness to take the time and to make the commitment
in order to come and be with us today and let us have the
benefit of his thinking and his knowledge on this very
important issue.
Stu, thank you again for coming.
STATEMENT OF STUART E. EIZENSTAT
FORMER DEPUTY SECRETARY
U.S. DEPARTMENT OF THE TREASURY
Mr. Eizenstat. Mr. Chairman, thank you for inviting me and
thank you for your leadership on this issue and for holding the
hearing and for your leadership on S. 398.
Stopping money laundering and the syndicates it finances is
critical to the fight against narcotics trafficking, organized
crime, and corruption, and now we know that it is also critical
to the personal safety of our citizens.
Money laundering is the financial side of crime and money
launderers are the criminals' investment bankers. As you
yourself noted today, Mr. Chairman, the IMF has estimated that
the amount of money laundered annually is between $600 billion
and $1.5 trillion, or 2 to 5 percent of the world's annual
gross domestic product. And it is also estimated that about a
third of that amount, up to perhaps half a trillion dollars
annually, passes through U.S. financial institutions at least
once on its clandestine journey.
Money laundering also affects the vitality of our goods as
the Black Market Peso Exchange Program indicates, and
undermines the credibility and safety of our whole global
financial system upon which our prosperity depends.
Now, we are brought face to face with another aspect of the
criminal financial system and its use by the merchants of
terror. Terrorists must have money to pay for weapons, travel,
training and even benefits for the family members of suicide
bombers. Terrorists raise funds in many ways, through
commissions of crime, through payment from state sponsors, and
through fund-raising of what are said to be humanitarian
organizations. More on that in a second.
But however raised, the funds must be transmitted across
borders, marshaled, and spent--with the application of new
layers of camouflage at each step. The fight to curtail money
laundering has been a product of bipartisan consensus.
President Reagan signed a law which for the first time outlawed
money laundering as such. In 1989, President Bush led the way
by creating the Financial Action Task Force and then FinCEN a
year later. President Clinton launched a coordinated 5 year
effort reflected in two national money laundering strategies. I
would like to talk about just for a second some of our efforts.
The President issued two Executive Orders targeting
terrorist groups in 1995 and 1998. The Executive Order on
August 22, 1998, added bin Laden and Al Qaeda to those other
terrorist organizations, permitting the freezing of their
assets if they could be found.
Rick Newcombe, the longtime and excellent leader of OFAC in
Treasury, who reported to me on two occasions, along with Will
Wechsler, who we brought over from the NSC to head money
laundering, in July 1999 and in January 2000, led delegations
with the National Security Council to four gulf states--Saudi
Arabia, Kuwait, Bahrain and UAE.
The purpose was, Mr. Chairman, to look for charitable
organizations and banks who might be involved in money
laundering. We felt that as a result of those two trips, that
in particular, Kuwait and Bahrain were helpful in trying to
identify those wayward organizations. In addition, in July
1999, in implementing the 1998 Executive Order, $250 million in
Taliban money was found in the United States. There was
suspicion that Al Qaeda and bin Laden were using charitable
organizations, and those were being investigated during our
Administration.
I am very pleased that President Bush has now added three
pan-Islamic funding organizations which may have been used for
terrorists. We were certainly on the same track. So, indeed,
this is a bipartisan issue.
I have described the major components of our approach in my
written statement and I hope those will continue to be employed
by this Administration.
For example, the Financial Action Task Force (FATF)
published a broad listing for the first time of those countries
that do not meet international financial standards, what we
call the ``name and shame'' list. We also helped build the
Egmont group of financial intelligence units. And at home, we
issued guidance in the last weeks of our Administration to
financial institutions, alerting them to special scrutiny in
dealing with foreign officials, their relatives and close
friends, as well as preparing the legislation which you have
talked about today. And I want to applaud Senator Kerry,
Senator Grassley, and yourself for this important step in
introducing legislation that passed 33 to 1, as you pointed
out, in the House Committee under Chairman Leach last year.
The fact is we have too few tools to protect the financial
system from international money laundering. At one end of the
spectrum, Mr. Chairman, Senator Corzine, the Secretary can
issue Treasury advisories, as we did in the summer of 2000, to
encourage U.S. financial institutions to pay special attention
to targeted transactions involving certain jurisdictions.
On the other end of the spectrum, we have the IEEPA powers
that the President invoked and that President Clinton had done
again in 1995 and 1998. Following a Presidential finding of
national security emergency, you can have a full scale set of
sanctions and blocking orders.
The problem is, although President Bush's order was
absolutely appropriate, there is nothing in between the
advisories, on the one hand, and IEEPA on the other. And there
are many situations when advisories are not enough and when
IEEPA may be inappropriate, situations in which we might not
want to block all transactions, or in which our concern centers
on underregulated foreign financial institutions or holes in
foreign counter-money laundering efforts. A more flexible tool
is needed. We do not have one available now. That is what your
legislation and Senator Kerry's would do.
The key to the operation of S. 398 is that a determination
by the Secretary of Treasury, after consultation with other
senior Government officials, that a specific foreign
jurisdiction, financial institution operating outside the
United States or class of international transactions, is a
primary money laundering concern.
And may I say, although Senator Gramm is not here,
regarding his concern about judicial review, it is important to
recognize that any action taken under S. 398, that finding
would be a determination that would be fully reviewable under
the Administrative Procedures Act by a court. This is not,
after all, a forfeiture process. But even the determination
could be challenged under the Administrative Procedures Act.
So the trigger authorizing the Secretary to act imposes
several types of special reporting, recordkeeping, and customer
identification requirements linked to the object of primary
concern or, in extreme cases, to impose conditions upon or
prohibit the opening of certain correspondent accounts.
The bill is carefully tailored to actions against real
abuse. It is graduated, targeted, and discretionary. Graduated,
so the Secretary can act in a manner proportional to the
threat; targeted, so he can focus on his or her response, on
particular facts and circumstances; and discretionary, so that
Treasury can integrate any possible action in the bilateral and
multilateral diplomatic efforts, to persuade offending
jurisdictions to change their practices, so invocation of the
authority would be unnecessary. I also want to deal with the
privacy issue.
It is incorrect that this would compromise in any
significant way the privacy of American citizens. The focus of
the legislation is not on American citizens. It is on foreign
jurisdictions, foreign financial institutions, or classes of
transactions with or involving jurisdictions outside the United
States.
They involve the abuse of U.S. banks facing especially
identified primary money laundering concern. The legislation is
drawn so as not to add unnecessary burdens to financial
institutions.
We also hoped last year to see the passage of legislation
which the Justice Department had long sought, to make crimes
against foreign governments, like misappropriation of public
funds, fraud and official bribery, arms trafficking and certain
crimes of violence, specified unlawful activities for purposes
of money laundering. Unless this change is made, Mr. Chairman,
and Senator Corzine, a rapacious foreign dictator, a corrupt
foreign dictator can bring his funds to the United States and
hide them without fear of detection or prosecution in many
cases. And I think it is important to recognize that there
really is a confluence of official foreign corruption and money
laundering. The two go hand in hand and we have to deal with
both.
I am pleased that S. 1371, introduced by Senator Levin and
cosponsored by yourself, Mr. Chairman, Senator Grassley,
Senators Kyl, Nelson, and DeWine, include the necessary change
and important related changes to our forfeiture laws.
I hope that the program outlined in the National Money
Laundering Strategy of 2001, this Administration's first, does
not short-change appropriate legislative and regulatory efforts
to shore up weaknesses in our financial mechanism that money
launderers can exploit.
We need the kind of enforcement that is at the center of
the Administration's strategy. But we also need the kind of
structural changes that your legislation would provide. The
acid test for me is whether the Administration will support
passage of S. 398. Again, as you have emphasized and as I
mentioned, it had strong bipartisan support in the House
Banking Committee last year.
Permit me to add one additional word about money laundering
and terrorism. My written statement contains a number of
recommendations on steps to fight terrorism that the
Administration can take to follow up Monday's forceful action
by the President. This includes greater efforts to penetrate
underground banking practices, the Hawala system, greater
efforts in particular in the Persian Gulf, to go after phony
charitable organizations that serve as conduits for terrorism
and for Osama bin Laden's organization, and guidance to U.S.
financial institutions in identifying bank accounts, beneficial
ownership accounts, so that they have a better idea of the
beneficial owners with whom they are dealing.
We cannot overstate our chances of immediate success
because our adversaries are good at hiding funds, they use
nontraditional underground systems that are outside
sophisticated financial channels, and they often operate on
meager budgets. However the fact that clues are not easy to
find and have to be pieced together must not deter us.
To sum up, the rapid growth of international commerce along
with advances in technology are making it easier for criminals
and foreign jurisdictions to launder money through foreign
institutions in the United States and, hence, to finance the
expansion of the global criminal economy and the growth of
organized criminal groups and international terrorists as
substate threats to our security. That is why it is essential
for this Committee to act to shore up our national defense
against money laundering.
Thank you, Mr. Chairman, for this opportunity to testify.
Chairman Sarbanes. Well, thank you very much, Ambassador
Eizenstat. And I also want to express our appreciation for this
very well-developed and comprehensive statement. And obviously,
the entire statement will be included in the record.
At the outset of this hearing, of course, we heard from
Senator Kerry, who introduced S. 398, and Senator Levin, who
introduced S. 1371. And I thought that we had a very
appropriate comment by Senator Grassley, who was at the witness
table with them, that both of these pieces of legislation
represented a well-considered, carefully thought-through
approach that had been developed over a rather sustained period
of time. Neither represents a sort of hasty, quickly put
together legislative proposal.
As you note, S. 398 actually came out of the House
Committee with a 33 to 1 vote. Regrettably, it did not move
beyond that. My question to you I guess is, do you see these
bills as being compatible in a way that they can be combined
along with other suggestions? We have both the Treasury and the
Department of Justice who have some proposals of their own as
well, and of course, our effort here will be to bring these
together, meld them. Do you see these two bills as compatible
and therefore, subject to combination?
Mr. Eizenstat. Yes, sir, I believe they can be combined.
The core provisions of the two bills deal with the same set of
issues. Namely, the misuse of correspondent and payable through
accounts, the lack of financial transparency involving non-U.S.
customers of U.S. financial institutions and the need for
enhanced due diligence in certain high-risk accounts.
The primary difference between the two bills, Mr. Chairman,
is that S. 398 keys action to a specific finding by the
Secretary of ``money laundering concern,'' where S. 1371 takes
a broader approach mandating general rules on the same subject.
For example, S. 1371 requires U.S. banks to identify each
foreign person having a direct or beneficial ownership interest
in a U.S. account, while, again, S. 398 would key special rules
to a particular finding of money laundering concern. But I
think that they can be melded together. Many of the provisions
of both are very positive.
For example, S. 1371's provision about private banking and
enhanced due diligence for private banking and correspondent
account recordkeeping could easily be incorporated into the S.
398 structure. In addition, S. 1371 makes a useful expansion of
the number of predicate crimes that form the basis of money
laundering expenses, such as, as I mentioned, acts against
foreign governments like official foreign corruption.
There are important changes in S. 1371 that could be melded
into S. 398, such as the changes in the forfeiture laws, long-
arm jurisdiction against foreign money launderers, and
criminally prosecuting those who knowingly make false
statements regarding the identity of their customers. So, I
think that, while there obviously are differences, these could
be melded and combined into an even more powerful bill.
Chairman Sarbanes. Good. I appreciate that. I know you are
now in the private sector, and your time and commitment are not
unlimited. But I hope we can draw on you for your advice and
counsel as we try to deal with this problem.
Mr. Eizenstat. I would be glad to work with you and Steve
and others on that.
Chairman Sarbanes. I appreciate that very much.
We have discussed, and I see Senator Corzine had to depart
because this is a matter that he is focused on. The Washington
Post, in an editorial, said, ``The existing requirement that
banks report suspicious activity to regulators should be
extended to other types of financial institutions, such as
stock brokers, insurers, and even casinos.'' What is your
reaction to that recommendation?
Mr. Eizenstat. Well, I agree with that. In fact, we did
extend this to casinos and on the broker-dealers, as was
mentioned earlier, there is a decision to do that.
The regulations did not come out. I wish they had come out
a little earlier. There were a variety of reasons for that,
including the fact that we had to try to implement the Gramm-
Leach-Bliley Act that shifted certain responsibilities from
Treasury to the SEC, and there were a lot of complications in
doing that. But I would hope that the Administration by the end
of the year would be able to have the regulations to permit the
extension of this so that we have a level playing field for our
banks and we have casinos and broker-dealers covered.
Chairman Sarbanes. I would like to draw you out a little
bit on the privacy issue because I was asked by a member of the
press on the way back to this hearing about the privacy
question.
My response was that, actually, we are seeking to gain
financial information about foreigners that Americans are
already exposed to under our current framework. This does not
represent any further intrusion into the financial privacy as
it now exists for American citizens. It is actually, to the
extent that it does anything, it gets at foreigners who go free
from some of these transparency reporting requirements. Would
you agree with that statement?
Mr. Eizenstat. I agree fully, and may I add just a few
other things on the privacy issue because it is one of the
things as we were drafting the legislation that did pass the
House Banking Committee last year so overwhelmingly. We spent
an enormous amount of time trying to balance the privacy issues
against effective law enforcement.
First of all, no one has a privacy right to commit crime.
And the Supreme Court has made it clear a number of times, the
crucial opinion being authored by Justice, now Chief Justice,
Rehnquist, that the whole Bank Secrecy Act is itself completely
constitutional. And that is in a way an effort to try and get
at the names of people who may be doing untoward things.
Moreover, the Supreme Court has made clear that bank
records are not within a constitutional zone of privacy. But
that is not the full answer. For one thing, the very
specificity of the statute that you have drawn is a protection
against privacy.
Second, any required records are subject to the general
privacy protections imposed by law, including Gramm-Leach-
Bliley, and subject to recognized exceptions for law
enforcement.
And third, the very legislation expands the nondisclosure
rules of suspicious activity reports to make it plain that
government officials, as well as bankers, can violate the law
by improperly disclosing information from those reports. So all
of these provide ample protection against privacy invasions.
Chairman Sarbanes. Obviously, this has to be an
international effort. I wonder if you could comment a bit about
the international arrangements that currently exist or could be
strengthened to deal with this. And in particular, there seems
to be an assumption on the part of some that our efforts to
deal with money laundering exceed or go beyond that being done
by other countries.
But I am told that, actually, there are a number of
countries who have a more rigorous statutory framework for
dealing with money laundering than the United States, and that
in some of these international fora in which we are working at
this problem, we are not necessarily the leaders in trying to
address this matter.
Mr. Eizenstat. Mr. Chairman, that is a very important
point. We would like to think of ourselves as the world's only
superpower and the leader in a whole range of things.
The fact is that in the attack on money laundering, we are
not as advanced as a number of members of an organization set
up under the Bush Administration, called the Financial Action
Task Force. This now has some 29 members and many of those have
tougher rules on money laundering than do we.
The important advance that we made is that for the first
time, and this was under the leadership of people like Will
Wechsler and Jody Meyers and others in Treasury, we identified
15 countries that did not meet basic international money
laundering standards. They did not outlaw money laundering.
They had no financial intelligence units. They did not share
any information.
I am frankly proud of the fact that we did not pull any
punches. We included Israel. We included Panama. We included
Russia on that list, as well as places like Nairu. So this was
just not an easy list to compile. We called it like we saw it.
And the important thing about that list is that now about half
of those countries have acted rapidly to pass new legislation
to establish functioning financial intelligence units like the
one that Jim Sloane so ably leads here, the FinCEN.
A number of those countries have gotten off the list, like
Panama and a number of others. I hope Israel will get off
shortly. And this Administration, to its credit, in June, added
another six countries and in September, another two, including
Ukraine.
This we call the Name and Shame List. It really focused a
spotlight on those countries and has gotten them to act. But if
we want to continue to be a leader in the Financial Action Task
Force, we have to demonstrate that we are at the forefront of
being tough on money laundering and that is why, again, S. 398
and S. 1371 are so important.
Without those, a lot of our leadership is rhetorical,
frankly, and not backed up by the kind of tough actions that I
think are necessary. So the process has worked.
And I heard an earlier question about Switzerland. The fact
is that the Swiss have really turned over a new leaf. I
negotiated with them on the Holocaust issues for several years
and it was very tough and very difficult. They have recognized
that if they are going to be leaders in the international
financial community, they have to have transparency.
They are members of FATF. They have tough rules. They are
complying. They are sharing information. So, we cannot point
the finger at a lot of countries--they can almost point the
finger at us.
Chairman Sarbanes. Some have argued, or at least put
forward, the proposition that, in light of the President's
Executive Order of September 24, that that sort of takes care
of the situation and we do not need any further legislation.
Could you address that?
Mr. Eizenstat. Yes, sir. If anything, the President's
actions, which again are highly welcomed and should be
applauded, if anything, underscore the need for the
legislation, the reason being that it is true the President can
act in the dramatic fashion that he did under IEEPA. But we
used to call that the atomic bomb. You take that when you are
going after Osama bin Laden.
The only other authority that we have under the Treasury
Department or anywhere else in Government are these very mild
advisories. There is nothing in between. And there will be many
instances in dealing with money laundering--foreign
jurisdictions, types of transactions, and foreign countries--
when using the, in a sense, nuclear weapon of IEEPA, as
appropriate as it was for President Bush to use here, would be
inappropriate to use. So we want to give the Treasury the full
range of powers in between the advisories, on the one hand, and
IEEPA on the other.
So, again, to me, if anything, the use of IEEPA in this
circumstance, as dire and unique as it was, dramatizes and
underscores the need for more flexible ranges of powers to deal
with other perhaps less dramatic, but still terribly important,
money laundering problems.
Chairman Sarbanes. Well, thank you very much. This has been
extremely helpful testimony and we obviously appreciate the
initiatives which you undertook when you were in the Government
to address this issue.
We very much appreciate your willingness to be available
for us to call on you for counsel in the days ahead, as I think
you heard in our earlier discussions, we proceed to shape the
legislation.
Mr. Eizenstat. I have gotten more and more used to pro bono
work, Mr. Chairman, so why not here.
Chairman Sarbanes. Thank you very much, Stu.
If the next panel would come forward.
[Pause.]
Our concluding panel consists of William Wechsler, who
served as a Special Advisor to the Secretary and the Deputy
Secretary of the Treasury, where he led the Department's day-
to-day programs and policy initiatives to combat money
laundering between 1999 and 2001. Prior to that, he had served
as the National Security Council staff member, where he chaired
the interagency working group seeking to disrupt Osama bin
Laden's financial network.
Jonathan Winer is a leading authority on domestic and
international money laundering initiatives, a former U.S.
Deputy Assistant Secretary of the Treasury for Transnational
Law Enforcement, one of the architects of U.S. international
policy and enforcement. He also led the Senate's investigation
of BCCI in the late 1980's and early 1990's.
And Alvin James, who has had extensive experience in
investigating money laundering schemes, particularly the
Columbian Black Market Peso Exchange. Mr. James has served as
the Senior Money Laundering Policy Advisor to the Financial
Crimes Enforcement Network and is a Special Agent in the IRS
Criminal Investigation Division, serving as an undercover agent
specializing in international money laundering efforts.
Gentlemen, we are very pleased you all are here. I regret,
in a sense, the lateness of the hour, but we have had a very
full morning, I think, as you have observed. And we would be
happy to take your testimony.
We will include the full statements in the record, if you
care to compress them or abridge them.
Mr. Wechsler, we will just move right across the panel. So,
Mr. Wechsler?
STATEMENT OF WILLIAM F. WECHSLER
FORMER SPECIAL ADVISER
U.S. DEPARTMENT OF THE TREASURY
Mr. Wechsler. Yes, Mr. Chairman, I will be brief, since you
have my full testimony.
What I do want to take is just a little bit of time to
describe the nature of the Al Qaeda financial network, what has
been done, what can we do against it specifically, and then a
couple of statements on the general issue of money laundering,
not to repeat all the fine and excellent statements that Former
Deputy Secretary Eizenstat just gave.
Unlike most terrorist leaders, Osama bin Laden did not
become famous for leading a terrorist cell or having military
victories. This is key to understanding the problem. He became
famous for building a financial architecture that supported the
Mujadin fighting in Afghanistan against the Russians. It is
this financial architecture that continued with him when he
turned to terrorism, and it is this financial architecture that
is at the heart of how Al Qaeda today gets its finances.
The other key thing to understand is that the general
impression that is out there in the media that this is a
product of one rich person sort of writing checks out of his
own personal account is false. If that were the problem, it
would be much, much easier to solve.
What it is, as has been alluded to earlier today, is a
complicated system of charitable donations, of individual
donors, of legitimate businesses, of criminal enterprises, of
banks, of cash smugglers, and so forth, all of which eventually
give money to do terrible acts, as we saw on September 11. Most
important for the United States is what then you do about this
problem.
The key thing that was done happened in 1998. And in that
time, the strategy changed from a law enforcementcentric
strategy to a more strategic strategy that was designed to take
down and disrupt the financial network and the key notes. As
Former Deputy Secretary Eizenstat just said, President Clinton
at the time invoked IEEPA law, as President Bush did on Monday.
It is very nice if sometimes funds are actually found in
the United States and they are blocked, as several hundred
million were blocked in the United States that belonged to the
Taliban. But there is a common misperception out there that is
the goal of all these activities.
It is not the goal of the activities. It is nice when it
happens. The goal of the activities is to use the leverage that
you have, use the Sword of Damocles that the United States
holds hanging over the heads of foreign persons, foreign
companies, foreign financial institutions, the threat of being
cut off from the U.S. economy and the U.S. financial system, to
try to get them quietly sometimes, behind the scenes often, try
to get them to give you information and to take certain actions
that previously they would not be willing to do.
This was a strategy that we had after 1998. This is a
strategy that President Bush is continuing as of Monday. It is
a strategy that can work. We had some very good successes. We
stopped, for instance, the Afghan National Airline, Aeriana
Airlines, which was a key mechanism that Osama bin Laden and
the Al Qaeda network used to move funds, material, and
personnel back and forth in Afghanistan. We shut it down around
the world, not just in the United States, but also other
airports did not want to risk the notion that they would be cut
off from U.S. air travel. So, they decided, quite logically, to
cut themselves off from Aeriana. That is the power of this.
The problem is that we were not always successful.
Sometimes there is lack of political will in other countries
that we go to. Sometimes when we go to the other countries,
they cannot even get the information that we want them to get
because they lack the appropriate regulatory regime.
That, amongst other reasons, is why it is so important to
quickly address, as I know you are, Mr. Chairman, the
legislation that passed through the House Banking Committee
last year and is on your table this year, because it would
allow, as Deputy Secretary Eizenstat said, a number of
intermediary steps.
Most importantly, particularly for the war against
terrorism, it would allow you to focus them not just on the
country at large, but also on the particular financial
institution, and the level of proof that you would need to take
action.
Under IEEPA, you have to be able to show publicly, with
open source information, not just intelligence, that there is a
terrorist nexus going through this bank.
Under the legislation in front of you, you would be able to
take action if you can show that there is a primary money
laundering concern going on there. This could have to do with
the regulatory environment. This could have to do with a
pattern of practices. This is easier to do without the use of
intelligence and therefore, would give us much more leverage.
Thank you very much.
Chairman Sarbanes. Thank you very much.
Mr. Winer.
STATEMENT OF JONATHAN WINER
FORMER DEPUTY ASSISTANT SECRETARY FOR INTERNATIONAL LAW
ENFORCEMENT
U.S. DEPARTMENT OF THE TREASURY
Mr. Winer. Thank you.
Mr. Chairman, before you is a chart which displays what is
probably a small portion of Osama bin Laden's financial
network. Every one of the more than 100 boxes on this chart
reflects a publicly reported alleged financial link of bin
Laden and related terrorists organizations involving more than
20 countries, in the Americas, Asia, Africa, Europe and the
Middle East. Public information demonstrates terrorist funds
moving through Islamic charities, travel agents, construction
businesses, fisheries, import-export businesses, stock markets,
chemical companies, and a significant number of banks. All of
this is public record and is far from complete. There simply is
not room on a single chart, or even four of them, to include
everything connected to bin Laden-related terrorist groups as
has been publicly reported in open source material.
A few of these entities are now defunct, as a result of law
enforcement and other operations. Others may have only marginal
ties to terrorist finance. These charts illustrate why
responding to this multifaceted network will require sustained,
tenacious cooperation by many, many governments.
The actions announced by the Bush Administration on Monday
represent potentially significant steps. If followed by further
action, and international cooperation, they could begin to have
consequences. But that will only be true if every component of
the financial services sector internationally, not just banks
and certainly not just U.S. banks or foreign banks with offices
in the United States, are all subject to similar rules and
regulations. An anti-terrorist finance regime must be
globalized, standardized, harmonized, and it must be
multisectoral to have impact. While there are many steps that
should be taken, I wish to focus on seven areas for action. My
written testimony provides more details them.
First, register and regulate Money Services Businesses,
including Hawala institutions, as the Congress directed the
Executive Branch to do since 1993. Our failure to complete this
process has created a substantial vulnerability by which
terrorists can anonymously obtain cash below the radar of our
financial services regulatory system. This is the Department of
the Treasury's job. It should be completed without further
delay, so that nonbank money services businesses in the United
States are subject to obligations at least as tough as those
already required of banks. To be effective, these laws must
then be vigorously enforced. We should use Federal law
enforcement injunctive powers to shut down and freeze all
Hawala assets for firms that do not register. If the Department
of Justice does not think it has that power, it should urgently
ask the Congress for it, though I believe the power exists
already pretty much in 31 USC 5320.
Second, increase the international pressure on countries
that have yet to put into place financial regulatory
enforcement regimes that facilitate accountability and the
tracking of assets. We have begun doing this already, but we
need to push harder and faster. Financial regulation and
enforcement cannot stop at borders, when terrorist finances do
not. Financial regulations and enforcement must be evenly
promulgated and evenly enforced on a global basis.
Third, the United States needs to accelerate efforts to
ensure that every nation signs up to the U.N. Terrorist Finance
Convention, that every country criminalizes terrorist finance,
that every country freezes and seizes terrorist funds and the
assets of organizations that support terrorism.
Fourth, the United States must do more to build our own
terrorist finance database from existing cases. This means not
merely going through and scouring the records associated with
every terrorist prosecution, but we need to do that with cases
that abut or adjoin terrorist activity and involve other
terrorist activity. The Bush Administration has announced it
has now begun this task. Adequate resources, substantial
resources need to be devoted to it and devoted to it
immediately.
Fifth, the Congress should support Presidential use of
economic war powers to broaden the reach of U.S. sanctions
policy in true national security emergencies, as the President
announced he would do on Monday. Unilateral action, however, is
inherently insufficient. We must obtain the support of key
partners, including the G-8 and the European Union. If the
European Union agrees to put into place the same sanctions we
are putting into place, all the European accessor states, the
wannabes, including countries like Cyprus, have to put in the
same laws, the same protections, the same rules. That is
tremendously important. You push the OAS, and then you begin to
get all of Latin America in, and you push from there.
Sixth, the United States needs to secure domestic and
international action against entities that have wittingly or
unwittingly provided support to terrorists. These include a
number of Islamic charities, some of which are prominent and
otherwise do many good works. We will need to work with other
governments, including many in the Middle East, to cleanse
charities that have supported terrorism unwittingly and to
protect them from abuses by terrorists. Other charities, who
have systematically supported terrorism, should be closed down,
with their assets seized and made available to assist
terrorism's victims. Mr. Chairman, my chart shows 17 charities
that have been publicly listed in one or another press
accounts, trials, whatever, over the last few years. Most of
them are not yet on any list anywhere, other than in the public
record and perhaps that public list needs to be expanded.
Seventh, we need to strengthen international regulatory
cooperation in our securities markets and close regulatory
gaps, so that no terrorist who engages in the obscene act of
market manipulation in connection with an attack ever gets away
with it. Countries whose bank secrecy laws, anonymous trusts,
and untraceable business companies are used by terrorists need
to understand there will be consequences if they do not quickly
change their laws and practices to help the world, every
country, trace and seize terrorist finances.
In summary, cutting off terrorist finance is like cutting
off the heads of the hydra. Every time we chop off one head,
more will grow back in its place. To survive, we must kill the
entire beast, and that means more than a single bin Laden, or
any one part of his or related terrorist finance networks.
Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you very much.
Mr. James.
STATEMENT OF ALVIN C. JAMES, JR.
FORMER SPECIAL AGENT
CRIMINAL INVESTIGATION, INTERNAL REVENUE SERVICE
U.S. DEPARTMENT OF THE TREASURY
Mr. James. Thank you, Mr. Chairman. I am honored to be here
before you today to speak to you on an issue that affects the
national security of our country.
I am currently the practice leader of the Anti-Money
Laundering Solutions group at Ernst & Young. Prior to that, I
spent 27 years in Federal law enforcement where I culminated my
career at the Financial Crimes Enforcement Network. It was at
FinCEN that a DEA colleague, Greg Passic, and I collaborated on
developing a model that explained what is generally recognized
as the largest money laundering system in the Western
Hemisphere--the Colombia Black Market Peso Exchange--commonly
referred to as BMPE.
The BMPE presents two fundamental dangers to our country--
it facilitates the Colombian drug trade by purchasing and
laundering billions of dollars each year of Colombian wholesale
drug proceeds. In turn, it makes these funds available to
anyone, including terrorists, seeking a source of discreet,
untraceable U.S. dollars.
Mr. Chairman, I have submitted a written statement for the
record that centers on the Black Market Peso Exchange as a
global money laundering system. I would like to take this
opportunity to address the use of the BMPE and other
underground financial systems by criminals, particularly
international terrorists.
We know that, like all criminals, terrorists need secrecy
to succeed. Terrorists do not need a separate and distinct
system of laundering or concealing money for terrorist
activity. They use systems that are readily available in their
homelands that leave no paper trail and are discreet, cheap and
reliable. By tapping into existing systems, such as BMPE and
Hawala, the terrorist network can conceal their financial
activity from law enforcement.
Hawala and BMPE are parallel payment systems that use
brokers who buy money as a commodity and then transfer it
internationally by accepting funds in one country and paying
them out from a pool of money available in another country.
The money is placed in the traditional financial systems by
the brokers, but the source of the money and the true identify
of the owner or client of the broker is completely unknown to
the financial system and therefore, completely without a paper
trail. This system is attractive to terrorist groups and those
who move the money they need to support their activity.
Law enforcement has evidence that the BMPE has been used by
Middle Eastern terrorist organizations in the past and is more
available and attractive to them now than ever. Correspondent
banking is the vehicle that is allowing these underground
systems to broaden their access to U.S. financial systems from
anywhere in the world. I believe the legislation referenced
here earlier this morning will be an important step toward
closing that unguarded back door to the U.S. financial system.
Mr. Chairman, I believe if we are to stop terrorist money
movement, we must disrupt and dismantle systems like the BMPE
that make drug money available to terrorists not only in the
Middle East, but also throughout the world. I further believe
that U.S. law enforcement has the ability to take on this vital
task. But it must overcome two challenges before it can
succeed.
The first challenge is coordination: Money laundering is
like a balloon--if you squeeze it one place, it will just get
bigger some place else. Unless we attack these money laundering
systems with a coordinated plan to squeeze in all directions at
once, we will not pop the balloon. Overlapping money laundering
jurisdictions frustrate our ability to coordinate our attack.
Law enforcement is a competitive business and to date, these
agencies have not been able to effectively cooperate with one
another in a global assault on these systems. Asset forfeiture
funds that return monies to the seizing agency exacerbate this
competition between agencies.
A second problem involves the natural focus of law
enforcement on the prosecution of individuals. The BMPE is a
financial system with an infrastructure and as such, is not
dependent on any one individual or group of individuals.
Therefore, a plan that is directed primarily toward arresting
and prosecuting the drug traffickers, the money launderers and
the terrorists who use this system will not by itself stop the
system.
The final challenge I see before law enforcement is to
place the goal of disruption and dismantlement of the system on
an equal footing with prosecuting the individuals who use it.
Mr. Chairman, in conclusion, I would like to restate that
our Government has the ability, the authority, and the
knowledge to take action now against the BMPE and similar
systems used by terrorists to launder funds.
I firmly believe that unless a high-level position is
designated to have the sole ownership of this problem and the
responsibility to solve it, we will continue to have impact on
these systems, but fail to stop the process, as we have failed
to do for the last 20 years.
I hope that the Cabinet-level Homeland Security post will
be used as such a position. Without this or a similar
overarching position to marshal and direct the tools and
abilities we have available, I fear that we will continue to
fail to take these underground and unregulated financial
systems out of the reach of international terrorists and other
criminal elements who thrive on discreet and untraceable funds.
Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you all very much for some very
helpful statements.
I wonder if someone could develop a little bit how the
Hawala system works.
Mr. James. I will be glad to take a first shot at it. As
was mentioned earlier this morning, this system is hundreds of
years old. And it really operates through a network of brokers
that are in place throughout the financial centers of the
world, and in the Middle Eastern area that has the people that
need to use the system.
A good example of how it might work is that a person in the
Middle East might need to pay a bill, say in London, that is
due for goods that they have imported from London to the Middle
East. So that person in the Middle East would go to a Hawala
broker with the equivalent value of the debt owed in whatever
the currency of that area. He would basically make a deposit
with that broker.
The broker would then contact his counterpart in London and
he would tell that counterpart to draw on a pool of money
already there and send a payment to whoever the exporter was
that was owed the debt. Those two brokers then would square up
their accounts as they went along. Usually, the account would
be squared up because someone in London would owe money to
someone in the Middle East. So, they would go to the broker on
their side and they would bring in pounds sterling and say, I
want this amount of money transferred to an individual in the
Middle East to pay my debt. The brokers would then work the
transaction the other way and in that way, eventually square up
their books. The important thing about this system is that no
money moves internationally. There is no international wire
transfer.
The two individuals who handle the transaction know each
other, trust each other. The individuals who do business with
them know them, trust them. No records are kept. And although
these pools of money may be kept in the financial systems of
the various countries that they are working in, the financial
institutions have no idea whose money this really is and on
whose behalf deposits are being made and moved around. This is
a complex system, but that is my stab at a simple answer.
Chairman Sarbanes. How do they even up their accounts? Your
example sort of posited a two-way street that would roughly
balance out. And so, therefore, the broker in the United States
who provides dollars on the direction from elsewhere money
provided would then turn around and works a deal the other way.
But suppose it does not balance out? How do they even up their
accounts?
Mr. Winer. Mr. Chairman, if I may on that point. They have
ties to the official banking system. They will have a cash-
intense business, whether it is a grocery store or a hotel or a
restaurant or a casino, or whatever, and they will move money
through that and they will reconcile through wire transfers
like anybody else with whatever they need to do pushed into
their legitimate business. So the legitimate funds hide the
underground funds when necessary for reconciliation.
Mr. James. I would also add just for one second, that I
have described the most common way that Hawala works, which is
two quasi-independent brokers doing business with one another.
Another way that these underground systems can operate, and
Hawala does at times, Black Market Peso does quite often, is
that the operatives in the United States are actually minions
of the broker in Colombia or Venezuela or wherever. So, in that
case, they do not really need to balance up because it is all
operatives of the same guy. He just has two parallel accounts,
one in each country. The Hawala can also work that way, but
usually does not.
Mr. Wechsler. And the other key element is, the word Hawala
is a Hindi word which means in trust. The people that are
involved in the system have been doing it because their
families have been involved in this for generations. You just
cannot show up one day and say, I am a Hawala broker and I want
to join this business. It does not work like that. It is a more
connected network.
So unlike we would think in the western sense where you
need to balance the books everyday or every week, unbalanced
books might go on for a while because at the end of the day,
you know that your fifth cousin is good for it. It might be a
while before these kinds of balancing networks that my two
colleagues here have described might actually take place.
Chairman Sarbanes. Now, I take it that there are people
functioning as Hawalas who just do a normal range of legitimate
activities. Is that correct?
Mr. James. Yes, sir.
Mr. Wechsler. There is nothing inherently illegitimate
about it. It has been going on for hundreds of years. I am sure
that the Hawala system, like any other banking system, the
predominate number of people in it use it legitimately.
In some places of the world, it is the only banking system.
It unfortunately provides a lot of real advantages for people
who are interested in covering dirty money, though, and that is
where the real concern comes in.
Mr. Winer. The State Department for a number of years has
identified underground alternative remittance systems,
including Hawala, which is South Asian-based, the Iron Triangle
of Hawala is Dubai, Pakistan, and India, and the Hundi system,
which is an old Chinese system which is similar, sometimes
called chop houses or flying money houses, as a mechanism by
which drug traffickers, international criminals, and terrorists
can launder their money, because the money does not have to
cross borders and it can be completely anonymous.
You go in, you put your cash on the table, you pay the
broker's fee, you arrange for the secret code at the other end
in the other country, you wait until that is paid. When you get
the word that it has been paid, you pay it over to the broker
in this country. As a result, this has been identified as a
tremendous vulnerability all over the world by the State
Department going back at least 6, 7, 8 years.
Hong Kong, when it decided it had to create a modern anti-
money laundering system, found that it could not enforce any
anti-money laundering laws unless it required the registration
of every Hawala broker in Hong Kong. That registration
requirement came into effect last year and it is one of the
most important steps that Hong Kong took.
It is a step the Congress commanded the Administration to
take in 1993, in Annunzio-Wylie, but which has yet to be put
into effect as of today. Once you put it into effect, you can
go after people who do not register and you can work your way
up the chain, you can seize assets, and you can shut down that
vulnerability.
Chairman Sarbanes. Where does the bin Laden Hawala
representative here get his pool of cash to respond to the
directive that this cash should be furnished, let us say, to
bin Laden's operatives who are here undercover?
Mr. Winer. Remittances from good, honest, honorable people.
Suppose that I am originally from Pakistan, for example,
and I have made a lot of money in the United States working
incredibly hard, 60 hours a day. I have taken care of my family
and now I want to take care of my mother and father who are
still back in Pakistan. If I send the money through the formal
banking system, they may have to deal with corrupt officials.
They may have to deal with different types of taxes or other
problems. They are not used to it. They do not have bank
accounts.
Mr. Wechsler. Or it might not exist in their city.
Mr. Winer. They might not even have bank accounts or a
bank. So, you go to the Hawala with your cash and you say, I
want it delivered to such and such city in Pakistan. Can you do
that?
The Hawala broker goes to the back room, uses his e-mail
system--it used to be faxes. Before that it was phones. Before
that it was mail. Before that it was mules and camels. But
today it is e-mail. He e-mails a person in that city. He says,
yes, we have money in that city. I can do it. He then arranges
for it. Now the currency is in the United States and the mother
and the father have gotten their remittances to take care of
them.
Honest people at that point doing honest transactions, but
it is totally anonymous. That anonymous money is now available
to be used when an agent of bin Laden goes to that Pakistani or
Dubai broker or anywhere else where the system is in place and
says, here is $100,000. I want this $100,000, or the equivalent
thereof, to be made available to a fellow in Vera Beach who is
going to use the password pilot. The person in Vera Beach uses
the password pilot and now has currency, the same currency
provided by good people for good purposes to take care of their
parents.
Mr. James. Actually----
Chairman Sarbanes. What does Hawala--excuse me. Go ahead.
Mr. James. Well, I was just going to add to that that he
probably will not even get it in currency. The Hawala broker
will arrange a transfer right to a bank account he already has
set up, probably with a credit card available to it. They can
go either way.
Mr. Winer. That is one place where there is minor
disagreement in the currency for terrorists that becomes
operational security.
And so, they can provide that currency both ways. In the
case of remittances, currency often is preferred. That is one
of the differences between the black market in the Americas and
the way Hawala has worked in some of the cases in South Asia.
Chairman Sarbanes. What does the Hawala broker here do with
the money that has been given to him by the honest worker,
which was then remitted in the country from which the worker
came to his family, so that we have the transaction?
The Hawala broker here then has presumably cash or a check
from this honest worker. So, he has this money, what does he do
with that money in the interim?
Mr. James. Well, that is part of what Jonathan and I were
just talking about. He can either hold it in cash, put it in a
little black box under his bed, if you will, or he can put it
in a financial institution, in an account that he controls.
Chairman Sarbanes. He may put it into the financial system.
Mr. James. Oh, yes, sir.
Chairman Sarbanes. Do they generally do that, or do they
generally hold it in cash? Do you know?
Mr. Winer. It is a mix, sir. We do not know nearly as much
about the system as we need to. But people in the U.S.
Government, particularly at FinCEN, who have spent the most
time investigating this, together with my colleague to my left,
Mr. James and Mr. Passic, people who have really spent a lot of
time with this, have found constant intermingling between the
underground alternative remittance economy and the official
economy, which is why they often have other businesses in
addition to being Hawalas.
Mr. Wechsler. We should also not overstate at all,
notwithstanding the very good work that a few dedicated people,
particularly at FinCEN have done on this, on understanding the
system, should not overstate by any way the knowledge that the
Federal Government has about the extent and the uses of Hawala
in the United States.
In my opinion, as a general matter, U.S. law enforcement
has done a very poor job over the years of understanding this
system, of getting inside the system, of figuring out who uses
the system. And that is something that needs to change quickly.
Mr. Winer. I concur.
Mr. James. I would agree with that. I would add that one of
the gaping holes in our knowledge of how this Hawala system
works is their use of a second international network of gold
brokers, buyers and sellers of gold, that also interplay with
the Hawala system. And we do not know exactly how that works.
But we know that they use gold as a hedge and they may also
call up a gold broker in a different country where they do not
have funds, but they have a relationship with a series of gold
brokers and use that to move the money. There are experts at
FinCEN who have information on that, but we have not studied it
fully at all.
Mr. Winer. I would like to add one quick comment to that,
which is that there is a brain drain in the Federal Government
which takes place a lot of times because of salaries, benefits,
changes in policy, whatever.
The best expert that I know in the United States Government
on these alternative systems, who used to be with the Financial
Enforcement Center, does not work for the Government anymore. I
found out recently that he left around the same time that I
left. And that brain drain problem and the lack of focused,
concentrated effort over an extended period of time and
adequate resources further impairs our ability to do good work
in this area because when somebody gets good, they tend to get
snapped up at a substantially higher salary in the private
sector. Literally, the best person I know, Patrick Jost, who
was at FinCEN, is now in the private sector. I do not know what
capacity exists since his departure.
Chairman Sarbanes. We are going to draw to a close, but I
wanted to ask about the chart to my left, your right, Jonathan.
Mr. Winer. Yes, sir.
Chairman Sarbanes. I have been looking at the copy. These
are helpful charts, but they are very hard to read,
particularly at a distance. That chart which shows the
charitable organizations box and all the different charities
that are feeding into it, now how have you been able to
determine that these are front organizations that are moving
money into the bin Laden operation?
Mr. Winer. This chart is not based on classified or secret
government information. It is based on the following kinds of
sources. It is based on statements made at trials, in the 1993
bombing trial, for example, the first World Trade Center attack
trial, where a number of these came up, and statements that
came out in the course of investigations. It is based on
scandals, such as where people in other governments have been
tied to terrorist activity.
For example, in the Philippines, the International Economic
Relief Organization ran into a scandal where the minister of
tourism in the Philippines was associated with it while it was
supporting Abu Sahaf, an organization which bin Laden has been
supporting, which was named by President Bush on his list on
Monday.
Mr. Wechsler. Osama bin Laden's brother-in-law.
Mr. Winer. His brother-in-law was the financier there.
Every one of these represents either a scandal that has
emerged, or very significant allegations, or material that has
come out in law enforcement cases. This was designed to be
representative, to provide the flavor of the multifaceted
network that is out there. Now some of these charities that are
listed here as front organizations have been so identified in
public records. Other charities are primarily or substantially
legitimate enterprises doing good works whose funds have been
diverted, taken advantage of, or used for terrorist purposes,
according to one account or another over time.
The point of showing so many of them, and there are 17
charities on this chart and there are about as many banks and
about as many industry and service companies, is that dealing
with this requires a multinational effort on many sectors
simultaneously.
The holes and sieves in our existing money laundering
enforcement system are very substantial. And they are
particularly substantial in the Middle East, where no country
that I know of in the Middle East has ever brought a money
laundering prosecution. Only a couple of them even have
comprehensive money laundering laws, and none did a few years
ago.
The United States has put very heavy pressure, for example,
on Cyprus, as has the European Union, because Cyprus used to be
a major center for terrorist finance. The Cypriots, who want to
be in the European Union, responded by changing all their laws,
very aggressively moving to create comprehensive protections.
The next thing that the United States and the United
Kingdom found out, was that Cyprus was being used by Slobadon
Milosovich to move his money. They went back to the Cypriots.
The Cypriots said we have a great system. It is the best system
in the world. We do not have any of that money. But then after
that, Milosovich's money was no longer in Cyprus. That tends to
be the pattern. We have had the same kinds of sets of
initiatives with Lebanon, with Israel, with the United Arab
Emirates, and quite recently, with Nigeria and Egypt. This
process has to be accelerated and it has to be comprehensive.
And these countries need to put transparency in place in their
systems. There is a history in these countries because a lot of
the money comes from the top down, of not wanting necessarily
to have really good oversight mechanism that would allow you to
trace assets. This demonstrates why it is essential that every
part of the world begin to have that.
Chairman Sarbanes. What about the industry service sectors?
What does that represent?
Mr. Winer. It represents legitimate businesses and front
companies both, through which the terrorists associated with
bin Laden's financed terrorist activities and hid terrorist
activities. If you are in the gum arabic business, which are
ingredient in most tonics or sodas and any number of other
candies and consumables, that is a great business to generate
legitimate revenues. You can then use those legitimate revenues
to support illicit activity.
Same with the fishery, anchovy business. If you have a
construction business, that pretty much speaks for itself. Drug
trafficking organizations have often gone into construction as
a way to launder their money. They did that in Colombia,
Venezuela and Panama, at the height of the reinvestment of drug
money in the Americas. So these are relatively standard
mechanisms used to launder money and to conflate and integrate
illicit funds with licit funds.
Chairman Sarbanes. Now, Mr. Wechsler, you talked about the
international effort. You were very much involved in helping to
put that together. Ambassador Eizenstat made reference to it. I
gather there has been some significant progress through working
through these international groups and getting countries to
upgrade their regimes. Mr. Winer just made reference to the
improvements in Cyprus as a consequence of the interaction with
the European Union, and so forth. So what is your view of the
progress that is being made in that area?
Mr. Wechsler. Well, the world took a real turn last year
when it really, as Former Deputy Secretary Eizenstat explained,
when the Financial Action Task Force went after these
countries. A lot of progress has been made. But there are two
real questions that are outstanding.
Chairman Sarbanes. Actually, we need to stay abreast of it
because, as he pointed out, there was one view that was
prevailing about Switzerland and how they were performing. And
now, we have a very different view prevailing about
Switzerland.
Mr. Wechsler. That is exactly right, sir.
Chairman Sarbanes. And I gather, you mentioned Cyprus. But
they have also apparently markedly changed their system.
Mr. Winer. Yes, sir.
Chairman Sarbanes. So we need to stay current in terms of
who is trying to come into the community of nations and who
remains outside of it. Would you agree with that observation?
Mr. Wechsler. I would absolutely agree with that
observation.
Two things to look at. The first is, a little over a year
ago, the G-7 finance ministers, when Secretary Summers met with
his colleagues, they made explicit threats about what would
happen to these countries that were outside the international
standards, if they stayed outside too long. And explicitly,
they threatened to cut off from, not just the U.S. financial
system, but also the entire G-7 financial system. The last time
the finance ministers met, that threat was toned back to issue
stronger advisories warning. And the deadline was extended,
mostly to allow Russia more time to pass a money laundering
law, which they have, although they have done nothing thus far
on implementation of that law. So if I could suggest, a role
for the Congress would be really to stay abreast of this and
make sure that adequate pressure is still being put on.
The second thing is there was a parallel effort to go after
tax havens because tax evasion is of course a crime, just like
other crimes. All too often, criminals can disguise their money
as just the proceeds of tax evasion, not the proceeds of other
types of crimes. And there are some countries, not the United
States, but there are some countries that treat this as a
difference. Switzerland, as you mentioned, has done very good
on money laundering recently, but still refuses to cooperate on
all tax evasion cases. They do not believe it is a crime. This
is, unfortunately, one of Treasury Secretary O'Neill's first
decisions, was to really withdraw in many ways the United
States from the international efforts to combat tax evasion,
and they have really suffered as an effect.
Chairman Sarbanes. He has come back into it some.
Mr. Wechsler. Well, he got the rest of the world to agree
to change it the way that he wanted to change it. And the main
way that he wanted to change it was to take off the table the
threat of sanctions. And if there is no threat of sanctions--
some countries will improve because they do not like bad
publicity. But at the end of the day, there are going to be
some countries that will weigh the costs and benefits and say,
it is better for them to take tax evasion money. If sanctions
are off the table, or off the table at least in the foreseeable
future, that is a real problem.
Chairman Sarbanes. Let us see how it develops. I know that
Secretary Summers was very intensely interested in this issue
and very willing to take some very strong positions. Obviously,
this is something that we will need to monitor closely.
Well, gentlemen, thank you very much. Sorry.
Mr. Winer. Mr. Chairman, there is one issue which arose
earlier which I would like to have a brief opportunity to
address.
Chairman Sarbanes. Sure.
Mr. Winer. Which is the issue of due process. I believe it
is true that there is already an established right of review of
Treasury Secretary administrative decisions in this area. So a
due process system is already in place. The key relevant case
is a case called Paradissiotis v. Rubin, 171 Fed. 3rd 983,
1999. This was a challenge to a decision by the Office of
Foreign Asset Control at Treasury to freeze an individual's
assets. And this said the review in district and appeals court
is appropriate with administrative action. So for those people
who are concerned about that, I think the Federal courts have
already answered that question.
I am happy to share that case name and cite with the
Committee. Thank you, sir.
Chairman Sarbanes. Well, that is helpful and we will
certainly look into that because the due process question is
one that we will have to address or deal with as we formulate
this legislation.
Is there anything you gentlemen would like to add?
Mr. James. No, thank you, Mr. Chairman.
Mr. Wechsler. No, thank you.
Chairman Sarbanes. We thank you all very much for coming
and for the contributions you have made.
The hearing stands adjourned.
[Whereupon, at 1:10 p.m., the hearing was adjourned.]
[Prepared statements, response to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF SENATOR PAUL S. SARBANES
I want to begin by welcoming Senators Levin, Kerry, and Grassley,
as well as Representatives LaFalce, Leach, and Roukema to our hearing.
They along with a bipartisan group of Members of Congress, including
Senator Schumer and Representative Velazquez, have long advocated
aggressive legislative initiatives to counter money laundering.
This morning's hearing focuses on the Federal Government's efforts
to fight money laundering--what has been done, and what must be done.
Its starting point is the National Money Laundering Strategy for 2001,
mandated by the Money Laundering and Financial Crimes Act of 1998.
We will first hear from our Congressional colleagues. They will be
followed by Jimmy Gurule, Under Secretary of Treasury for Enforcement
and Michael Chertoff, Assistant Attorney General for the Criminal
Division of the Department of Justice. Next we will hear from
Ambassador Stuart Eizenstat, Former Deputy Secretary of the Treasury.
He will be followed by William Wechsler, Former Clinton Administration
National Security Council staff member and Treasury Money Laundering
Advisor; Jonathan Winer, Former Deputy Assistant Secretary of State for
International Law Enforcement; and Former Treasury Special Agent Alvin
James.
We meet, of course, in the shadow of the terrorist attacks of
September 11. It is more urgent now than ever before for us to develop
and put in place the array of tools necessary to trace and interdict
the funds on which terrorists like Osama bin Laden rely to pay for
their operations. Make no mistake--the terrorist campaign confronting
us is not a penny-ante proposition. It cannot be carried out without
major investments of time, planning, training, and practice--and the
financial means to pay the bills. Our response to terrorism must
include national and international programs to checkmate terrorism that
are as complex and sophisticated as the practice of terrorism itself.
September 11 has sharpened our focus on the ways that
vulnerabilities in regulatory and enforcement procedures in our
financial system can be exploited to support terrorism. We have long
known, however, the toll that money laundering takes on world economic
activities. The IMF estimates the global volume of laundered money to
be 2 to 5 percent of global GDP annually--that is, between $600 billion
and $1.5 trillion. Money laundering combines the investment banking and
payment system mechanisms of the criminal financial system; it fuels
organized crime; it creates the transmission belt for money spirited
out of national treasuries in numerous countries by corrupt officials.
It is the terrorists' source of financial oxygen.
The United States has long taken the initiative in efforts to stop
the laundering of proceeds from crime and corruption, beginning with
the passage in 1970 of the Bank Secrecy Act. That Act requires banks to
report suspicious activities and large currency transactions. But
despite the progress we have made, especially during the last 15 years,
money laundering has become more difficult to detect. Globalization,
which eliminates barriers to free capital movement and relies on
advanced technology, makes it possible to move money virtually
instantly between any two points on the globe. These changed
circumstances have left normal banking practices and traditionally
tolerated offshore banking facilities open to grave abuse.
Recent investigations by Senator Levin's Permanent Subcommittee on
Investigations have revealed that correspondent banking facilities and
private banking services offered by U.S. banks can contribute to
international money laundering by
impeding financial transparency and hiding foreign client identity and
activity. The Committee's reports also described how crime syndicates,
corrupt foreign dictators, and narcotics traffickers use these
practices and exploit loopholes in current U.S. law. Thus criminals and
terrorists achieve hidden, but direct, access to the U.S. financial
system, moving under the radar screen of U.S. law enforcement officials
and financial supervisors.
The Administration has yet to clarify fully its views on money
laundering. In the wake of the September 11 attacks the Administration
has asserted the need to track down the financial circuits that support
terrorism, and the President's Executive Order of September 24 freezes
the assets of 27 groups and individuals. This is certainly a step in
the right direction. In the past, however, Administration officials
have expressed skepticism about anti-money laundering laws already on
the books, and about at least some aspects of U.S. involvement in
multilateral efforts aimed at offshore bank secrecy havens.
It is time to cut the financial lifelines which facilitate
terrorist operations by reducing the vulnerabilities and closing the
loopholes in our financial system. I note with great interest that
within the past week both The Washington Post and The New York Times
have argued forcefully for tougher and broader laws. In an editorial on
Saturday, September 22, The Post urged that current reporting
requirements be extended beyond banks ``to other types of financial
institutions, such as stockbrokers, insurers, and casinos. The reports
that allies of last week's hijackers may have bought financial options
to profit from the carnage underscore the suspicion that a bank-only
focus is too narrow.'' And 2 days ago The New York Times called upon
the Administration and the Congress to revive ``international efforts
begun during the Clinton Administration to pressure countries . . . to
adopt and enforce stricter rules. These need to be accompanied by
strong sanctions against doing business with financial institutions
based in these nations.''
This is the time to move forward decisively, to address a confused
and hazy situation that has plagued us for years, and today poses an
unprecedented challenge.
I look forward to hearing from our witnesses.
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PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY
I recognize that Chairman Sarbanes scheduled a hearing on money
laundering long before the tragic events of September 11. However,
since that day, many have discussed the need to rush money laundering
legislation through the Congress to address ongoing terrorist
activities. While addressing money laundering is a very important
matter, I think we need to be very careful as we proceed.
In order to be effective, it is very important that we clearly
establish what area of concern we are trying to address. By definition,
money laundering involves the process by which ``dirty'' money obtained
from criminal activity is funneled through various conduits until it
appears to be ``clean'' proceeds of legal activities. Targeting money
laundering, therefore, is a means to combat criminal activity such as
the drug trade, illegal gambling, and other forms of organized crime
that generate considerable amounts of cash.
In general, it appears that financial gains are very rarely made or
are difficult to discern as a result of terrorist activity. From what
we currently know, terrorists do not routinely employ traditional money
laundering methods. The vast proportion of financing for terrorist
activities is provided by networking relatively small amounts of
``clean'' money to terrorist cells that use it to achieve their
cowardly ends. Yesterday's Wall Street Journal pointed this out,
noting:
. . . Instead of laundering money from illegitimate
enterprises such as drug trafficking, bin Laden, and other
suspected sponsors of terrorism do the opposite: They take
money from legitimate businesses and charitable organizations
and . . . use it for terrorist activities.
The article very aptly described this kind of financing as
``reverse money laundering.''
I raise this issue because I want to make sure that recent events
do not confuse our efforts. We must deal with terrorism with the tools
best able to combat it; we must address organized crime with the tools
best able to combat it. While in some cases the same tools may prove
effective on both fronts, we need to be able to recognize the wide
range of criminal activities and adopt measures that can most
effectively defeat them.
I look forward to hearing from today's witnesses.
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PREPARED STATEMENT OF SENATOR TIM JOHNSON
Mr. Chairman, let me begin by commending you for rescheduling this
very important hearing so quickly. As we all know, anti-money
laundering tactics will play a critical role in our war against
terrorism, and I would like to note for the record that Senator
Sarbanes had the foresight to schedule a hearing on this topic well
before the attacks of 2 weeks ago.
Chairman Sarbanes identified early on that our National Money
Laundering Strategy is a critical weapon in our arsenal against
terrorists, drug lords, organized crime syndicates, and others. I am
proud to be a Member of this Committee, which plays a critical role in
our Nation's anti-money laundering efforts. I also would like to thank
President Bush for taking decisive action this week to move forward
with what is at least the first step in a ``silent'' war on the
financial assets of those who so cowardly attacked America 2 weeks ago.
Over the past 2 weeks, we have all learned the power and strength
of a united front. Americans have come together against a common enemy,
and I am confident that we will prevail in achieving justice. We in
Congress are working in a bipartisan fashion to make sure that our
Nation's law enforcement personnel have the weapons they need to win
the war on terrorism, whether these weapons are F-16 fighter jets,
computer capability, or access to financial activity that bears further
investigation.
I look forward to hearing from today's witnesses. The President has
just released his National Money Laundering Strategy, which sets out
the Administration's plan to choke off the lifeblood of terrorists and
other groups that use the American and global financial system to
further their destructive ends. Together, we need to determine whether
our current laws provide law enforcement with sufficient ammunition to
defeat the enemy.
Of course, even with the best laws, we must work together to
promote strong enforcement of these laws. Clearly, our efforts will be
much more fruitful if the spirit of cooperation that has helped
Congress respond quickly to our national tragedy spreads to the law
enforcement community.
We must continue to encourage U.S. law enforcement agencies to
cooperate in their anti-money laundering efforts. The Treasury, the
FBI, the CIA, and other national, State, and local enforcement agencies
can be particularly effective when they share vital information and
work together toward a common goal.
We also need to work with our banking regulatory agencies to review
which procedures and examinations required under current law are
effective. And we need to take care that any new legislation provides
those agencies with sufficient regulatory flexibility to respond to
constantly changing money laundering strategies. And we need to pay
special attention not just to mainstream financial institutions, but
also to money services businesses (MSB). MSB's are notoriously
difficult to monitor, but are a critical component of any successful
national anti-money laundering strategy.
We also need to call on the financial services sector to continue
their cooperation with law enforcement to root out terrorists and
others who abuse our financial institutions. We need to craft laws that
banks can implement without undue burden or intrusion into customer
privacy. At the same time, we ask our financial institutions to be
patient and do all they can to help this Nation in its war against
terrorism.
Finally, we must encourage international cooperation and
information sharing that allows the freedom-loving global community to
shut down financial systems that support these cowardly acts of
terrorism. Cooperation must extend beyond our borders to be effective.
The Senate Banking Committee has an important opportunity to help
wage our silent war on terrorism, and I am pleased to be part of that.
----------
PREPARED STATEMENT OF SENATOR WAYNE ALLARD
I would like to thank Chairman Sarbanes for holding this hearing. I
know that money laundering has been an important issue to him, and that
importance was brought into sharp focus by the terrorist attack on
September 11. Mr. Chairman, I appreciate the speed and purpose with
which you have moved forward.
Money laundering is a significant problem for this Nation. Not only
does the financial gain of money laundering provide an incentive for
crime, but it is also used to finance further criminal activity. The
recent terrorist attacks are an excellent example of why we must focus
on eradicating money laundering. Such an operation clearly took a great
deal of financial backing, and it is doubtful that the terrorists
earned the money through legitimate means. We have to find a way to cut
off the financial fuel for these criminals. As we examine this issue,
though, we must not forget the civil liberties that have made our
Nation the greatest nation on earth. In an effort to combat financial
crime we must avoid the temptation to inappropriately infringe on the
rights of law abiding citizens.
One example of this is the so-called Know Your Customer regulations
proposed by the four Federal banking regulators under the Clinton
Administration. These regulations would have forced banks to know the
identity of all their customers, know the source of customers' funds,
create a profile of normal and expected transactions for each customer,
monitor each account for activity that deviated from the profile, and
report deviations. I believe these regulations went too far, and I led
the effort in this Committee and on the Senate floor to get the Senate
on record as unanimously opposing the regulations. The Know Your
Customer regulations were subsequently withdrawn. Through thoughtful,
careful discussions such as this, I believe that we can find the proper
balance between fighting money laundering and respecting civil
liberties. I would like to express my willingness to work with my
colleagues and the Administration to find the appropriate balance.
I would also like to commend the Administration for their
willingness to examine the cost and effectiveness of current money
laundering strategies. As we consider possible new legislation it is
important that we have a clear understanding of the current status. I
have been a long time supporter of outcome-based management, and I am
hopeful that this will be an example of those principles.
I would like to thank the witnesses for being here today,
especially since this hearing had to be rescheduled. I know that you
all have important points to make, and I look forward to your
testimony.
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PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI
Thank you, Mr. Chairman.
First of all, I would like to thank all of our witnesses for
appearing before the Committee today. They all have extensive knowledge
dealing with this issue, and I am sure they will be able to offer us
special insights into the hidden world of money laundering. I would
also like to thank our colleagues, Senators Grassley, Kerry, and Levin
who have all done a lot of work to combat this problem, and Congressman
LaFalce and Congresswoman Roukema for their efforts in the House.
With the recent attacks against the United States, a new urgency
exists in dealing with money laundering. While we already pour heavy
resources into anti-money laundering efforts, our results have not been
at the levels we need. Drug cartels, terrorists, and other types of
organized crime continue to prosper through complex financial networks
that elude the law enforcement community. These funds help provide a
foundation for these groups to grow their illegal empires. Until we are
able to effectively reduce the funds these groups receive, we will be
unable to curtail the violence that follows.
Over the past 30 years, since passage of the Bank Secrecy Act, the
Congress has passed a number of good anti-money laundering initiatives.
Now, we need to look to see if these measures go far enough. The
Financial Crimes Enforcement Network has proven to be an efficient
coordinator of our efforts, but when over $2 million of laundered money
runs through the U.S. economy each day, it is obvious we have no where
near the law enforcement mechanisms we need to combat these problems.
We must give the people on the front lines of this fight the needed
tools with which to work. We may need to reevaluate where existing
funds are being directed and confirm whether this is the best place for
them. We also need to ensure that the proper communication is taking
place between law enforcement agencies. We will in no way be able to
win this fight without everyone working together. These agencies must
have open lines of communication.
I, for instance, was unaware that suspicious activity transaction
reporting indicated that shell companies appear to be incorporated and
registered disproportionately in Wyoming when compared with most other
States. I intend to work with our State banking officials to see what
we can do to minimize any possible illegal activities that could be
taking place.
In addition, we cannot place an undue burdens on industry. While we
can expect industry to help monitor banking transactions and assist our
law enforcement agencies as an integral front line player, we cannot
force them to assume unnecessary or repetitive requirements.
Again, thank you Mr. Chairman for holding this hearing, and I look
forward to hearing from our witnesses.
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PREPARED STATEMENT OF SENATOR JIM BUNNING
I would like to thank you, Mr. Chairman, for holding this very
important hearing and I would like to thank our witnesses for
testifying today. You should be commended for your interest in this
issue, even before the President's actions on Monday made this hearing
so timely.
Last week, when Secretary O'Neill was before this Committee
testifying, we touched on the subject of money laundering. I am looking
forward to hearing what my colleagues, the Senators from Michigan and
Massachusetts have to say in their testimony. I am looking forward to
learning more about their bills.
I am also looking forward to hearing the Administration's thoughts
from Under Secretary Gurule. I want to follow-up with him on what we
touched upon last week. And I want to see what the other distinguished
panelists have to say about how these proposals will affect the
financial services industry.
This is not the first time we have attempted to tackle this issue.
Though no one wants to get in the way of stopping terrorists, drug
lords, and other criminals, there has been a lot of fear surrounding
the issue. If my colleagues got the mail I did in 1999, and I think
they did, they know there was a lot of animosity toward some of the
``know your customer'' proposals.
We have to ensure that we balance security with privacy and make
sure that we are focusing efforts in the most effective way to combat
criminals to choke off their money supply.
We also have to ensure that banks can actually comply with the laws
and regulations that we put upon them, especially small banks. The
small bankers in my State already know their customers. If there is a
criminal enterprise washing its money through a small bank in Kentucky,
my bankers will know it and I have faith that they will report it. But
obviously we cannot just rely on the honor system. I guess what I would
like to get out of this hearing is whether we need more legislation, or
we just need to give our regulators the tools to better enforce current
legislation.
Unfortunately, because of the despicable actions of September 11,
our lives are going to change. The challenge now is balancing freedom
and security. This is a challenge the Senate is going to continue to
wrestle with for the foreseeable future. We will have to think hard
about the implications of this challenge. Every time we take a vote on
these issues, we may be harming one at the expense of the other. There
will not be many easy answers.
Thank you, Mr. Chairman.
----------
PREPARED STATEMENT OF CARL LEVIN
A U.S. Senator from the State of Michigan
Thank you, Mr. Chairman, for the opportunity to testify. I am here
this morning to share with you the work of the Permanent Subcommittee
on Investigations with respect to international money laundering. Over
the past 3 years we have conducted an extensive investigation into the
use of U.S. banks for money laundering purposes. We have held 3 sets of
hearings and produced 2 extensive reports as well as a 5 volume record
on how correspondent banking has been used as a tool for money
laundering. To address the problems we have uncovered, in August I
introduced--along with Senator Grassley, Chairman Sarbanes, and
Senators Kyl, DeWine, Bill Nelson, and Durbin--S. 1371, the Money
Laundering Abatement Act. This bill has been referred to this
Committee, and I hope to work with the Committee's Members to get it
enacted into law.
Tightening our money laundering laws will strike a blow against
terrorism, because a consensus has emerged that any effective anti-
terrorism campaign must
include tracking the money supply that funds terrorism and shutting it
down. Disrupting terrorists' financial networks is vital to ending
their ability to carry out massive terrorist operations like the
September 11 tragedy.
Unlike drug and organized crime operations, terrorist acts
sometimes do not generate illegal proceeds that have to be laundered.
Terrorists use financial networks to collect funds from both legitimate
and illegitimate sources and make them available to carry out terrorist
acts. Look at what we know so far about the September 11 terrorists.
According to press reports, the 19 terrorists identified by the FBI
used cash, checks, credit cards, and wire transfers involving U.S.
banks in States such as Florida, New York, and Pennsylvania. We have
seen the photograph of 2 terrorists using a U.S. bank's ATM. There are
also reports that the 19 terrorists left behind large unpaid credit
card bills, in effect using U.S. credit card companies to help finance
the September 11 attack. The fact that these terrorists used U.S.
financial institutions to accomplish their ends does not mean that any
U.S. bank or credit card company did anything wrong; these terrorists
may have met every requirement for credentials and credit histories,
false though such information may prove to be. But the evidence is
clear that terrorists are using our own financial institutions against
us, and we need to understand our vulnerabilities and take new measures
to protect ourselves from similar abuses down the road.
One of the vulnerabilities that the Permanent Subcommittee on
Investigations has concentrated on is how correspondent banking is used
for money laundering. Correspondent banking occurs when one bank
provides services to another bank to move funds or carry out other
financial transactions. For example, if a bank in London has a client
who wants U.S. dollars available to him or her in the United States,
the London bank needs a correspondent relationship with a U.S. bank
willing to make those dollars available in the United States. That
means the U.S. bank has to agree to open and manage a correspondent
account for the London bank.
We found that U.S. banks often perform an inadequate background
review of the foreign banks seeking to open a correspondent account in
the United States. Too often the U.S. banks assumed--and we heard this
verbatim--that a bank is a bank is a bank. But that is not the reality.
There are good banks and there are bad banks, and we found numerous
situations where U.S. banks held accounts for
foreign banks engaged in criminal activity or operated with such poor
banking practices that they provided an open invitation for criminals
to bank with them. Criminals can then use these bad banks to gain
access to the U.S. banking system through their U.S. correspondent
accounts. We found that current law has many holes in how it treats
money laundering through correspondent accounts. So, I designed my bill
to close them and tighten anti-money laundering controls over
correspondent banking.
Look at what we have recently learned about the Al Qaeda terrorist
organization headed by bin Laden. Numerous media reports have described
the many corporations and businesses that bin Laden has helped
establish and finance over the years. According to a 1996 State
Department fact sheet, in 1991, bin Laden helped establish a bank in
the Sudan called the Al Shamal Islamic Bank, allegedly providing it
with initial capital of $50 million. An article dated March 16, 2000,
in the Indigo Publication's Intelligence Newsletter states that bin
Laden remains the leading shareholder of the bank.
Testimony provided in February 2001 at the trial concerning the
1998 terrorist bombings of the U.S. embassies in Kenya and Tanzania
described the Shamal bank's use by bin Laden and Al Qaeda. One bin
Laden associate, Jamal Ahmed al-Fadl, who had handled financial
transactions for Al Qaeda, testified that Al Qaeda had used a half
dozen accounts at the Shamal bank; one account was in the name of bin
Laden. He described a 1994 incident in which the Shamal bank was used
by Al Qaeda to provide al-Fadl $100,000 in US $100 dollar bills which
he was directed to take on a plane to an individual in Jordan, which he
did. This testimony shows that, in 1994, the Shamal bank maintained
accounts used by bin Laden and Al Qaeda and was supplying bin Laden
operatives with funds.
Testimony also demonstrated how a U.S. bank was used by bin Laden
to send money from the Shamal bank to a bin Laden associate in Texas
using a correspondent account. Essam al Ridi, who worked for bin Laden,
testified that he received a $250,000 wire transfer at his bank in
Texas that was sent by the Shamal bank, which he then used to purchase
a plane for bin Laden and which he later delivered himself to bin
Laden. Transactions like this one were the focus of our recent
investigation into correspondent banking and money laundering, and that
is what I want to focus on this morning--how criminals, including
terrorist organizations, can use the correspondent accounts of foreign
banks to gain access to the U.S. financial system. The Shamal bank's
website currently lists an extensive correspondent network including
banks in Europe and the United States. I have a chart that shows some
of the correspondent banks listed on the Shamal bank's website. Three
of the banks are U.S. banks--Citibank, American Express, and the Arab
American Bank which was recently acquired by the National Bank of
Egypt. Thankfully all three banks told us that the correspondent
accounts they had with the Shamal bank are either closed or have been
largely inactive since 1997 or 1998. This followed action taken by the
U.S. Government in November 1997 to add Sudan to its official list of
countries that support terrorism.
But the Shamal bank's website also lists as correspondents major
banks in other countries, including Credit Lyonnais in Switzerland,
Commerz Bank in Germany, ING Bank in Indonesia, and Standard Bank in
South Africa, each of which also has correspondent accounts with U.S.
banks, and that is a problem.
First, we have to ask how the Shamal bank was able to open its
correspondent accounts in the United States when U.S. banks are
supposed to exercise due diligence about their customers; the bank is
located in the Sudan, a country known for lawlessness and weak-to-
nonexistent banking regulation and anti-money laundering controls; and
the bank is also known to be associated with bin Laden. Under the
legislation I have sponsored, U.S. banks would have to exercise
enhanced due diligence, that means they would have to take an extra
hard look at any bank from the Sudan and could accept a Sudanese bank
as a customer only if the U.S. bank were convinced the Sudanese bank
was completely above board and had appropriate money laundering
controls.
Second, we need to look at the current status of the Shamal bank's
correspondent accounts in other countries. We learned in our
Subcommittee investigation that bad banks can nest in other foreign
banks and obtain access to U.S. banks that way. They can open a
correspondent account with a foreign bank that already has a U.S.
correspondent account, and then take advantage of the correspondent
chain to access the U.S. financial system. This chart shows how bin
Laden could be using the Shamal bank to gain access to U.S. banks
through the banks' correspondent networks. We talked to four of these
correspondent banks in countries other than the United States, and they
indicated to us that they still have Shamal bank correspondent accounts
that are not frozen. While at least three of these accounts have
reportedly experienced little activity and one was reported to law
enforcement a few weeks ago, all of these accounts are still open and
could be used at any time. That means any customer of the Shamal bank--
including a member of bin Laden's organization--could penetrate the
U.S. banking system by going through one of these other correspondent
accounts.
The Shamal bank is, of course, not the only bank of concern.
Testimony in the criminal trial identified several other banks with
accounts being used by Al Qaeda. Press reports indicate that Barclays
Bank in London has already closed one suspect account, and banks in
countries as diverse as Switzerland, the United Arab Emirates,
Malaysia, and Hong Kong are checking their records for suspicious
activity. Banks in Afghanistan also warrant scrutiny, as indicated by
this Bankers Almanac printout which lists 9 banks with offices in
Afghanistan, including two with correspondents in the United States and
elsewhere. While the U.S. accounts may, again, be inactive, given the
absence of Afghan banking and anti-money laundering controls and the
elevated status of bin Laden and Al Qaeda in Afghan society, we need to
ask how these banks were able to open correspondent accounts in the
first place and what steps, if any, its correspondents have taken to
ensure terrorist funds were not and are not moving through them.
Another possibility is that bin Laden has set up his own shell
banks to handle terrorist activities. Shell banks are unaffiliated with
any other bank and have no physical presence in any jurisdiction. They
are licensed by a handful of jurisdictions around the world including
Nauru, Vanuatu, and Montenegro. This chart shows how shell banks can be
used to gain entry to the U.S. banking system. My Subcommittee's
investigation found shell banks carry the highest money laundering
risks in the banking world because they are inherently unavailable for
effective oversight. There is no office where a bank regulator or law
enforcement official can go to observe bank operations, review
documents, or freeze funds. Essentially no one but the shell bank's
owners know what the bank is up to. Our staff report provides four
detailed case histories of shell banks that opened U.S. correspondent
accounts and used them to move funds related to drug trafficking, bribe
money, and financial fraud money. The possibility that terrorists are
using such banks to conduct their operations is one that cannot be
ignored.
Some good news is that more countries than ever before have passed
anti-money laundering laws requiring their financial institutions to
know their customers and report suspicious activity. More countries
have empowered law enforcement to freeze suspect assets. New
technologies can scan millions of financial transactions to link
seemingly unrelated transactions and detect suspicious patterns and
transactions. Financial intelligence units have been established in
over 50 countries with the authority, technology, and resources to
identify and investigate suspicious activity. They have formed the
Egmont Group and developed international protocols for sharing
financial information. New groups, like the six country Gulf
Cooperation Council which includes Saudi Arabia and the United Arab
Emirates, have joined the fight to stop criminals from exploiting
international financial systems.
These developments have better prepared the world to identify and
freeze terrorist assets, trace connections from terrorist cells to
those directing their activities, deny access to terrorist-affiliated
businesses and foundations, and provide valuable evidence of the
financing of terrorist acts.
Much more needs to be done. The Administration established a new
interagency task force focused exclusively on rooting out terrorist
assets and by expanding the country's official list of known terrorists
and terrorist-affiliated businesses and foundations. That is a good
step. Congress needs to take the next step by strengthening and
modernizing our outdated and inadequate anti-money laundering laws.
Here are a few key areas where change is needed.
First, Congress needs to stop unscrupulous individuals and foreign
banks from gaining entry to the U.S. banking system through U.S.
correspondent accounts. As I said earlier, my bill would require U.S.
banks to exercise enhanced due diligence when opening accounts for
offshore banks, banks in jurisdictions with poor anti-money laundering
controls, or for foreign persons with $1 million or more in a private
bank account and it would outright prohibit U.S. banks from opening
correspondent accounts for foreign shell banks.
Second, Congress needs to eliminate a forfeiture loophole in U.S.
law that now makes its almost impossible for U.S. law enforcement to
freeze suspect funds in U.S. correspondent accounts opened for foreign
banks. Under current law, in order for law enforcement to seize the
funds of a criminal with money in a U.S. correspondent account, the law
enforcement agency has to prove that the foreign bank with the
correspondent account was involved in the criminal activity. That is
because the money in the correspondent account is treated as the
foreign bank's money and not the money of the foreign bank's
depositors. My bill would change the law to treat money that is
attributable to an individual depositor but held in a U.S.
correspondent account as the depositor's money and make it subject to
the same civil forfeiture rules that apply to depositor's funds in
other U.S. bank accounts.
Third, we need to make it easier for prosecutors to prosecute money
laundering cases. My bill would provide such basic improvements as
simpler pleading requirements, clear long-arm jurisdiction over foreign
money launderers acting inside the United States, easier ways to serve
legal papers on foreign banks with U.S. accounts, and the assistance of
court-appointed Federal receivers to find money laundering assets
hidden at home or abroad.
Fourth, we need to make bulk cash smuggling a crime. There is
currently no statutory basis for seizing bulk cash from a terrorist
transporting it over our borders or on U.S. roads or common carriers,
even though seizing cash from terrorists could go a long way to
disrupting their operations. Legislation introduced by Congresswoman
Roukema addresses this issue, and it deserves our support and enactment
into law.
Fifth, we need to increase the number of financial institutions
required to report suspicious activity when they see it, particularly
stock brokers. Media reports indicate that terrorists may have used
stock trades to profit from the September 11
attack. Suspicious activity reports provide vital leads and evidence
for law enforcement, and we are the only G-7 country that does not
require all of our brokerage firms to file them right now. Past
Administrations have promised but failed to issue regulations requiring
these reports, in part due to lobbying by financial institutions that
do not want to have to spend the time and resources to fill out the
paperwork. Well, times have changed and shown all too clearly the high
cost of not reporting suspicious activity. The President ought to
require these reports by January 1, 2002. If he does not, Congress
should.
Sixth, we need to give the Treasury Secretary greater flexibility
to take measures against foreign banks and foreign countries believed
to be involved in money laundering. Right now, we have only two
weapons--blocking a bank's assets or issuing a voluntary advisory
urging U.S. banks not to do business with the suspect country or
institution. We need more tools, such as options for requiring specific
know-your-customer or reporting requirements, as set out in S. 398
introduced by my friends Senator Kerry, Senator Grassley, and others.
New anti-money laundering legislation is an essential companion to
the Executive Order issued by the President earlier this week. The
Executive Order is an emergency measure; these bills go beyond
emergency measures to prevent terrorists and other criminals from
gaining entry to the U.S. banking system in the first place. U.S. banks
would be barred from opening correspondent accounts for shell banks,
and they would be required to do a lot more homework on foreign banks
before letting them into the United States. Had our legislation been in
place earlier, it is possible the Shamal bank would never have obtained
a correspondent account in the United States.
Finally, let us not forget the need to galvanize the international
community to join us in our efforts to chase down terrorist assets and
deny terrorists access to international financial networks. We need to
convince other countries to enact the same anti-money laundering
controls we are talking about today.
The conclusion is clear: stronger laws are critical if we are to
stop terrorists and other criminals from benefitting from the safety,
soundness, efficiency, and profitability of the U.S. banking system. We
must deny terrorists access to our banks, to our credit cards, to our
stock brokers, and to all of the other modem financial tools we have
developed to move money around the world.
I ask unanimous consent to include in the hearing record a letter
from the Department of Justice supporting my bill, letters of support
from the Drug Enforcement Agency, the Federal Deposit Insurance
Corporation, the Attorney Generals for the States of Michigan, Arizona,
and Massachusetts, and other materials relevant to my testimony.
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PREPARED STATEMENT OF JOHN F. KERRY
A U.S. Senator from the State of Massachusetts
Mr. Chairman, I would like to take this opportunity to thank you
for holding this important hearing on efforts to control the scourge of
money laundering. I would also like to take this opportunity to express
my appreciation to Senator Charles Grassley, who has been working with
me to enact anti-money laundering legislation and Senator Carl Levin
who, as Chairman of the Senate Governmental Affairs Subcommittee on
Investigations, has held a series of important hearings which have
clearly shown the need to update our money laundering laws.
On September 11, the tragic and dastardly attack on the United
States could not have taken place without the movement of the
terrorists' assets through the global financial system. These terrible
events underscore the need for a concerted anti-
terrorism offensive, both internationally and domestically.
Osama bin Laden's terrorist network, known as Al Qaeda, which is
believed to be responsible for the attacks on the Pentagon and the
World Trade Center, has for years obtained funding by taking advantage
of an open system of international financial transactions. With the
help of the Taliban in Afghanistan, the Al Qaeda receives funding
through the sale of opium. They have stolen or diverted money intended
to assist refugees or religious organizations. They have raised money
from wealthy Islamic donors. Finally, Osama Bin Laden himself has not
only a substantial personal fortune but either owns or controls a vast
number of businesses and investments in Saudi Arabia and around the
world.
In many cases, the funds that fuel Al Qaeda are moved through an
underground system of brokers built on trust, called Hawala, which
allow enormous amounts of cash to be moved without any paper trail.
Obviously, this method of moving money cannot be controlled by
international restrictions. However, the profits that the Al Qaeda
receives from the sale of opium do move through the existing
international financial systems.
Because this terrorist network obtains funding through a variety of
sources, we must develop, in conjunction with our allies, a variety of
different initiatives to stop the flow of funds to the Al Qaeda. The
United States is currently administering sanctions against the Taliban
regime for their part in the drug trade. However, these sanctions have
proven inadequate to stop the illegal activities of the Al Qaeda.
If we are to lead the world in the fight against terror, we must
ensure that our own laws are worthy of the difficult task ahead. I
strongly support the Bush Administration's decision to freeze the
financial assets of 27 entities associated with terrorism and I support
attempts to enhance the use of Federal criminal and civil asset
forfeiture laws. However, if we are to win this war on terrorism, there
is more that we need to do. This work has already begun in the European
Union, where just last week, they approved stronger measures against
money laundering.
Today, too many nations--some small, remote islands--have laws that
provide for excessive bank secrecy, anonymous company incorporation,
economic citizenship, and other provisions that directly conflict with
well-established international anti-money laundering standards. These
nations have become money laundering havens for international criminal
organizations like the Al Qaeda.
The United States and the European Union have made great strides in
the fight against money laundering over the past 12 years. The
Financial Action Task Force (FATF), an intergovernmental body, was
established at the urging of the United States and President George
H.W. Bush in 1989 to develop and promote policies to combat financial
crime. The Organization of Economic Cooperation and Development (OECD)
began a new crackdown on tax havens by targeting 36 jurisdictions which
it said participate in unfair tax competition and undermine other
nations' tax bases. The OECD approach does not punish countries just
for having low tax rates, instead, it looks for tax systems that have a
lack of transparency, a lack of effective exchange of information, and
those countries that have different tax rules for foreign customers
than for its own citizens. The United States and the European Union
have been working together to force jurisdictions that fall short of
international standards to update and improve their anti-money
laundering laws and to lift the veil of secrecy around tax havens by
threatening to limit their access to our financial systems.
Today, the FATF reports that 19 jurisdictions--including Lebanon,
Hungary, Nigeria, Russia, and the Philippines--have failed to take
adequate measures to combat international money laundering. Since a
report naming many of these countries was released last year, many of
these countries have already begun to update their anti-money
laundering laws.
However, I am concerned that the money laundering strategy recently
released by the Bush Administration begins to step away from the
bilateral efforts that have proven successful in fighting financial
crime and contradict the tough stance rightly taken by President George
W. Bush in his recent Executive Order. The new strategy, combined with
efforts previously announced by Treasury Secretary O'Neill related to
tax havens, seems to support a more unilateral approach toward fighting
financial crimes instead of the successful multilateral approach
adopted by the OECD and the FATF. I believe this will make it more
difficult to track and freeze the assets of international terrorists
like bin Laden and expand upon the recent progress we have achieved. I
also believe that this is the wrong time to pull back our efforts to
stop money laundering into the United States by increasing the amounts
necessary to require a Suspicious Activity Report issued by a financial
institution.
It is now time for the United States to do its part to stop
international money laundering and stop international criminals from
laundering the proceeds of their crimes into the U.S. financial system.
First, I believe the Bush Administration should call an emergency
meeting of the G-7 nations and the Financial Action Task Force to
implement a more vigorous international strategy to cut off the blood
money that these international criminal networks use.
Second, the United States should immediately peruse bilateral and
multilateral sanctions against any country that has, through neglect or
design, permitted its financial systems to be used by bin Laden or
other terrorist groups.
Third, the Congress should pass the International Counter-Money
Laundering and Foreign Anti-Corruption Act of 2001, which I introduced
along with Senators Grassley, Sarbanes, Levin, and Rockefeller. During
the 106th Congress, the House Banking Committee passed this bill with a
bipartisan 33-1 vote. The bill will give the Secretary of the Treasury
the tools necessary to crack down on international money laundering
havens and protect the integrity of the U.S. financial system. The bill
provides for actions that will be graduated, discretionary, and
targeted, in order to focus actions on international transactions
involving criminal proceeds, while allowing legitimate international
commerce to continue to flow unimpeded.
I believe that the Congress should enact this legislation this year
to help stop the flow of assets and money that fund bin Laden and other
terrorist groups. I look forward to working with the Members of this
Committee on this important issue.
Thank you.
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PREPARED STATEMENT OF CHARLES E. GRASSLEY
A U.S. Senator from the State of Iowa
Mr. Chairman, I join my colleagues in thanking you for holding this
important hearing and the opportunity you have afforded us of talking
on the matter. As you know, because of my work on trying to stop
international drug trafficking, I have worked for many years on going
after their money. Money is one of the most critical elements in going
after the drug thugs. I have joined with Senator Levin and Senator
Kerry in sponsoring legislation that is timely and necessary. Our focus
needs to be not only on the specific assets of terrorists, but also, on
identifying their methods and eliminating their sources of funding.
After the events 2 weeks ago, we now face another group of thugs
that rely on being able to launder illegal proceeds to pay for their
activities. For them, money, access to it, and to the mechanisms for
placing it in the legitimate economy are the equivalent of their war
industries. To strike at them, we must strike at their ability to wage
war against us. That reality has added increased importance to what we
are here today to talk about. Two weeks ago, passing the bills before
the Committee today was, in my view, important. Today, passing them is
imperative.
Let me add that these bills are not new. The elements in them have
received careful consideration over the last several years. They are
not full of hastily assembled items. They contain needed changes and
add important tools to our arsenal. In the days and weeks ahead we are
going to have to examine further things we need to do. I hope that we
do that wisely. I trust that we will pay attention to ensuring that we
preserve important liberties while denying our enemies the means to
hurt us further. We also need to work with the banking and the
financial services industry to ensure that we act smart, as well as
quickly down the road. That they are on board with what we need to do.
This is not a burden that government, here or elsewhere, can carry
alone. We need to combine all our strengths and capabilities. But
circumstances demand meaningful action now, and these bills give use
important tools for our tool kit.
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PREPARED STATEMENT OF JOHN J. LAFALCE
A U.S. Representative in Congress from the State of New York
The campaign to prevent future terrorist acts against our Nation
will not be successful unless we cut off the funds that fuel terrorism.
The horrendous attacks of September 11 could not have taken place
without the movement of the terrorists' assets through the global
financial system. The events of last week underscore the need for a
concerted anti-money laundering offensive, both internationally and
domestically. The hearing that the Senate Banking Committee is holding
today would be important, if the tragic events of September 11 had
never occurred. But, our National crisis brings a new sense of urgency
to Congress' consideration of money laundering issues and the National
Money Laundering Strategy.
I have been for many years concerned that our counter-money
laundering laws are not sufficiently nimble to permit the United States
law enforcement community to respond to the malicious inventiveness of
a fast-moving and remarkably adaptable class of criminals and murderous
terrorists. I believe that our laws need to be changed to provide more
flexibility for the law enforcement community, including the Treasury,
to combat money laundering, and provide meaningful criminal penalties
for all significant money laundering violations.
Before I turn to a discussion of the Administration's new money
laundering strategy and new legislation, I want to say that I am
encouraged by the actions that the Administration has taken to trace
the ``financial finger prints'' of bin Laden, his Al Qaeda terrorist
network, and the entities that support them.
First, the Department of the Treasury announced the creation of an
interagency team dedicated to the disruption of terrorist fund raising
and the proposed creation of a Foreign Terrorist Asset Tracking Center
within the Treasury. Second, on Monday, the President issued an
Executive Order that identified international terrorist groups,
individuals, and their operatives connected to the attack and froze the
assets of these groups in the United States. The order expands on a
previous order of President Clinton's. The new order identifies three
charities and one business which supply financial support to bin Laden
and Al Qaeda. It also permits the Secretary of the Treasury to block
any noncooperating foreign financial institution from doing business
with U.S. financial institutions and other U.S. firms. This will help
the U.S. Government uproot the financial underpinnings of a network
that would seek to do grave harm to the United States and its citizens.
The Bush Administration appears to be off to a very sound start in its
efforts to cut off bin Laden from his funds.
The National Money Laundering Strategy was developed before the
September 11 attack, and I believe that parts of it should be
reevaluated in light of those tragic events and what our intelligence
and law enforcement agencies have learned about the funding of the
attack.
While the Strategy sets out strong enforcement goals, including
calling for more vigorous enforcement of asset forfeiture statutes in
connection with money laundering offenses, the focus of some of the
regulatory goals in the Strategy seems somewhat inconsistent with the
strong world leadership position that the United States has taken over
the past decade in raising international money laundering standards. I
am particularly concerned that the Strategy calls for a cost benefit
analysis of compliance with the Bank Secrecy Act and a survey of
financial institutions for the purposes of possibly expanding the types
of currency transactions that are exempt from current Bank Secrecy Act
reporting requirements.
I am concerned these activities could result in a relaxation of
current BSA reporting requirements and raise questions about our own
resolve in the fight against international money laundering. I want to
work cooperatively with the Administration to develop a new strategy
that addresses the concerns that I have raised.
There are indications that the Administration has begun to rethink
the Strategy. I was pleased that Under Secretary Gurule announced that
Treasury has scrapped its plan to delay implementation of regulations
requiring money service businesses (for example, money transmitters) to
register with the Treasury and to file suspicious activity reports with
the Treasury. I believe that these regulations will over time give our
law enforcement and intelligence agency important investigative and
prosecutorial tools that are needed to control the Halawa system of
international money exchange. Many believe the Halawa system to be one
of primary channels for the global funding of terrorist activities,
including the activities of Al Qaeda.
If we are to lead the worldwide effort to cut off bin Laden and
other terrorist groups from the funds needed to carry out their deadly
missions, we must ensure that our own laws are adequate for the
difficult task at hand. Several Members in the House and Senate have
introduced money laundering legislation that deserve serious
consideration not only as a part of our response to acts of terrorism,
but also as a part of our overall money laundering strategy.
I, along with Senator Kerry, have introduced legislation that
strengthens the arsenal of the Government in the fight against money
laundering. Senator Sarbanes, Senator Levin, Senator Grassley, and
other Senate colleagues are cosponsors of the legislation. Our bill,
the International Counter-Money Laundering Act of 2001, provides the
Treasury Secretary with the authority and discretion to address a
specific money laundering problem with precision--which cannot be done
under current law. This legislation would give the United States
increased leverage in dealing with foreign jurisdictions and foreign
financial institutions that aid drug kingpins, money launderers, and
terrorists.
The existing laws against bulk cash smuggling are inadequate.
Currently, the couriers of illicit cash are subject to only minimal
jail sentences for failing to file currency reports. I am an original
cosponsor of legislation that will make smuggling currency for unlawful
purposes a serious criminal offense under Federal law.
Given the events of September 11, I believe that the Administration
will want to move quickly to acquire the necessary legislative
authority to combat international terrorism and international money
laundering. I look forward to working cooperatively with the
Administration in the development of sound and effective anti-money
laundering legislation.
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PREPARED STATEMENT OF JAMES A. LEACH
A U.S. Representative in Congress from the State of Iowa
As you know, a money laundering bill was considered by the House
Banking Committee during the last Congress. The approach taken in that
bill was one where, with Mr. LaFalce, I put forth an initial model and
requested the Treasury and Justice Departments to review the
legislation's content. We proceeded to mark-up using the revised
comments of the Administration as base text and the legislation passed
with broad Committee support.
Law enforcement was in strong support of the legislation but parts
of the financial community objected to the degree of regulatory
intrusion. ``Following the money'' is an effective law enforcement tool
to track criminals after a crime has been committed. It also serves as
a retardant to the capacities of wrongdoers to collect and distribute
resources while preparing for a crime. While there is a case that
individual and institutional freedoms are fractionally restrained by
recordkeeping measures of this nature, there is always a pendulum that
swings in our society between freedom and order. When order is
challenged, it is sometimes necessary to prudently restrain some
freedom of action.
Enforcement of money laundering laws to diminish threats of
terrorism and narcotrafficking would seem a relatively modest
inconvenience relative to the human costs wreaked on society by
international thugs.
To give a free ride to money launderers not only makes justice more
difficult to obtain, but it also denies a credible approach to address
one of the causes of terrorism: the decadence and corruption that
exists in certain parts of the world where extreme inequities in wealth
accentuate social divisions. While money laundering may not in itself
seem like a great crime, the underlying manner in which resources are
marshaled can threaten international order and the freedoms that order
is meant to protect.
Particularly in circumstances where civilized values are challenged
by terrorist acts, the U.S. Government has an obligation to question
the access given to our financial system by outlaw entities and make it
very clear that funds from abroad and possibly fundraising at home that
supports terrorism, or for that matter narcotrafficking or government
corruption, ought to be monitored and, where legally appropriate,
confiscated.
In the last Congress, some large banks had an understandable angst
about the regulatory burdens related to the recordkeeping necessary to
implement money laundering statutes. Ironically, the people that
opposed this approach the most yesterday, need protection the most
today. The two American institutions most vulnerable to terrorism
around the world are our diplomatic and financial outposts. For banks
to refuse to join the war on terrorism and narcotrafficking is not only
to weaken the fabric of civilized society, but also it is to put in
jeopardy the lives of people who are most symbolically intertwined with
democratic, market-oriented values that are globalist in nature.
Finally, I would be remise not to point out that in the last
Congress the House Banking Committee passed out a second bill which I
initiated that also did not become law, one that restrains Internet
gambling. The issue of gambling and money laundering are interrelated--
albeit, tangentially--because Internet gambling not only weakens our
economy, but also serves as a haven for money laundering activities. I
would hope that the Senate and House Committees of jurisdiction would
take renewed interest in both of these bills this year.
PREPARED STATEMENT OF MARGE ROUKEMA
A U.S. Representative in Congress from the State of New Jersey
Mr. Chairman, thank you for allowing me the opportunity to testify
before this Committee this morning. I deeply appreciate the courtesy.
Mr. Chairman, for years I have been deeply concerned that we have
not done enough to dry up the lifeblood of the illegal drug trade--free
flowing cash. Now as our Nation struggles to recover from the vicious
and unprovoked attack on our homeland on September 11, our focus has
expanded to include terrorism. As our investigators work to ``follow
the money'' to trace financial transactions back to their source it is
becoming more and more clear that free flowing cash is also critically
important to terrorists as they plan, organize, and execute their
murderous plots. Over the years, I have been a strong advocate of
better enforcement and stronger laws that will provide law enforcement
the tools needed to fight drug dealers, money launders, and terrorists.
In the wake of last week's terrorist attacks, this has never been more
important.
In the 106th Congress, I worked closely with the Department of
Justice and Congressman Bill McCollum who was then a Member of the
House Judiciary Committee to craft a comprehensive money laundering
proposal to address many of the problems our law enforcement officials
currently face. It is my understanding that much of that draft will be
included in the legislation that the Administration will soon send to
Congress for its immediate attention.
While I strongly support passage of comprehensive money laundering
strategy and will continue to work with this Administration to that
end. Today, I am here to discuss legislation that I introduced on
September 20, H.R. 2922, the Bulk Cash Smuggling Act of 2001. This bill
is similar to ones I introduced in both the 105th and 106th Congresses
and is strongly supported by the Department of Justice. This
legislation takes aim at criminal activities that support terrorists
and drug dealers by making currency smuggling a criminal offense.
The transport of large sums of cash in, out, and through the United
States is a major problem which is growing everyday. We call this bulk
cash smuggling. As the Federal banking regulators and law enforcement
officials have made money laundering through insured depository
institutions more difficult, money launderers have apparently resorted
to the smuggling of large amounts of U.S. cash and currency over the
border. It has been reported that over $30 billion a year is smuggled
in, out, and through the United States each year by drug dealers,
organized crime, and terrorist organizations. This money moves by
planes, trains, automobiles, ships, and even by mail.
My colleagues should note that law enforcement authorities suspect
that one tactic used by terrorist organizations to avoid having their
funds detected in the international financial system is to move cash by
courier or though bulk shipments. This may explain how so many of the
individuals involved in the September 11 attacks were able to live and
train in our country for extended periods of time while leaving few
identifiable footprints in the banking system.
The existing laws governing bulk cash smuggling are totally
inadequate. Presently, the only law enforcement weapon against bulk
cash smuggling is Section 5316 of Title 31, U.S. Code. This statute
makes it an offense to transport more than $10,000 in currency or
monetary instruments into, or out of, the United States without filing
a form with the U.S. Customs Service. Section 5316 has been rendered
largely ineffective as a law enforcement tool by a 1998 Supreme Court
decision, United States v. Bajakajian, in which the Court held that
violations of Section 5316 constitute mere reporting violations, and do
not warrant the confiscation of bulk cash--even if the smuggler has
taken elaborate steps to conceal the money from Customs inspectors.
H.R. 2922 will give law enforcement authorities a critical tool in
disrupting the channels used by terrorists to finance their activities
in the United States. The bill would make it a Federal crime to smuggle
cash or currency in excess of $10,000 into or out of the United States.
Violations of the law could result in the forfeiture of the terrorists'
cash or currency as well as up to 5 years in prison--an individual
would be provided the opportunity to show that the money came from a
legitimate source in which case there may be little or no forfeiture
whatsoever.
Interstate currency couriers are part of the problem. One of the
bill's key provisions would make it a crime to transport more than
$10,000 in criminal proceeds in interstate commerce, thereby making it
more difficult for terrorists to move cash within the United States
once they have succeeded in getting it into the country. This measure
takes on particular relevance in light of press reports that suspected
bin Laden operatives taken into custody since the September 11 attacks
have been found with large sums of cash in their possession. By making
bulk cash smuggling a crime--whether it is conducted within the United
States or across our borders--we will give law enforcement an effective
weapon for separating the terrorists from the funds they need to
support their operations in this country.
As Chairwoman of the Financial Institutions Subcommittee in the
last Congress, I presided over numerous hearings on the Government's
anti-money laundering
enforcement efforts, including a field hearing in Newark in May of last
year that focused particular attention on the bulk cash smuggling
problem. Time and again in those hearings, I heard from Federal and
State law enforcement agents and prosecutors that the biggest loophole
in the current statutory scheme for combating money laundering is the
one that allows criminal organizations to transport the proceeds of
their illegal activities without fear of meaningful criminal sanctions.
For this reason, I was very pleased that several weeks before the
horrific events of September 11, Attorney General Ashcroft gave a
speech in which he identified the criminalization of bulk cash
smuggling as one of the Administration's highest legislative priorities
in combating money laundering.
Law enforcement officials have said for years that cutting off the
money is one of the most effective ways of combating organized crime.
Seizing bulk cash shipments will deprive terrorists of at least some of
the resources they need to carry out their hideous acts. Choking off
the financial lifeblood of terrorists will of course take more than any
one specific legislative proposal or law enforcement initiative. It
will require a comprehensive approach.
Now I have heard some naysayers complain that some of the
provisions in my legislation may cast a net so wide as to ensnarl
innocent Americans. The question has been asked, ``what about the
innocent American who happens to be legally transporting large sums of
cash or is discovered carrying his lifesaving around in the trunk of
his car?''
My answer is simple--each and every day our dedicated and alert law
enforcement officials encounter situations that require their careful
investigation. Let us give them the tools they need to conduct those
investigations and protect Americans from terrorists and drug dealers.
We need comprehensive reforms to our money laundering laws, and I
wholeheartedly support the Administration's efforts to enact those
reforms. The provisions included in H.R. 2922 are only part of the
solution, but they represent straight forward common sense reforms of
our money laundering laws that we can enact right now. For the record,
I am attaching a copy of my legislation--H.R. 2922--and a section by
section outlining the provisions of the bill. In addition I would be
happy to provide the Committee and individual Senators with the Bulk
Cash Hearing transcript from my May 2000 hearing at which the
Department of Justice, Treasury, and the Customs Department testified
in favor of this legislation.
Again, thank you for giving me the opportunity to testify before
this Committee and I look forward to working with my colleagues on both
sides of the Capitol to see to it that this important legislation gets
signed into law before we leave here this year.
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PREPARED STATEMENT OF JIMMY GURULE
Under Secretary for Enforcement, U.S. Department of the Treasury
September 26, 2001
Chairman Sarbanes, Senator Gramm, and distinguished Members of the
Committee, I appreciate the opportunity to share with you the Treasury
Department's ongoing commitment to the fight against money laundering.
I appear before you today more convinced than ever of the importance
and necessity of a comprehensive money laundering strategy. I know you
feel the same way and I look forward to sharing with you some of the
key aspects of President Bush's plan to combat domestic and
international money laundering.
Let me begin by saying that criminal acts of violence, such as the
horrific terrorist attacks of September 11, need more than just cunning
leadership and dedicated followers to be successful. Such undertakings
also require extensive financial funding as well. Let me be clear--the
Treasury Department is committed to identifying the sources of funding
used to underwrite attacks of this nature and we will take whatever
action is necessary to shut them down. Although the complexities of
money laundering have long been associated with concealing the true
nature of proceeds generated from the drug cartels, the tragedies of
September 11 also underscore the need for aggressive and vigilant anti-
money laundering efforts which target the movement of funds into this
country for the purpose of criminal activity--especially funds
earmarked for terror. In response to this need, the implementation of
the 2001 Money Laundering Strategy includes several specific steps to
dismantle and disrupt the financing of terrorist activities.
Recent Steps
As Secretary O'Neill has stated publicly, the Treasury Department's
top priority is to dismantle the financial infrastructure of the
terrorist groups in question. To that end, we will deploy all of our
resources to trace and block the funds of those who engage in these
heinous acts of murder, as well as those who harbor them and fund them.
Two days ago, President Bush signed a new Executive Order under the
International Emergency Economic Powers Act (IEEPA) blocking the assets
of, and transactions with, terrorist organizations and certain
charitable, humanitarian, and business organizations that finance or
support terrorism. To fulfill President Bush's pledge to eliminate safe
havens for those who perpetrate acts of terror, we will use every tool
at our disposal to pursue and eliminate terrorist fundraising networks.
International Cooperation
Because terrorism is global in nature, international cooperation
must be an essential component of any enforcement strategy if it is to
be successful. The Treasury Department has already taken steps to
capitalize on the spirit of international cooperation and is in the
process of working diligently with our counterparts abroad to ensure
that accounts under their jurisdiction linked to terrorist
organizations will be frozen.
Foreign Terrorist Asset Tracking Center
Another important step that Treasury has taken in light of the
September 11 attacks, was to get our new interagency team, the Foreign
Terrorist Asset Tracking Center (FTAT) up and running. FTAT is
dedicated to identifying the financial infrastructure of terrorist
organizations worldwide and to curtail their ability to move money
through the international banking system. FTAT represents a
preventative, proactive, and strategic approach to using financial data
to target and curb terrorist financing worldwide. This team will
ultimately be transformed into a permanent Foreign Terrorist Asset
Tracking Center in the Treasury Department's Office of Foreign Asset
Control (OFAC). This is an extraordinary effort that really illustrates
the Treasury Department's creativity in developing new ways to combat
terrorism.
In addition, agents and analysts from Treasury's law enforcement
bureaus--the U.S. Customs Service, U.S. Secret Service, Internal
Revenue Service--Criminal Investigation, and Financial Crimes
Enforcement Network, as well as analysts from the intelligence
community will be coordinating efforts, and Treasury law enforcement
bureaus will continue to coordinate closely with the Department of
Justice and Federal Bureau of Investigation on these matters.
These efforts will act in concert with the 2001 National Money
Laundering Strategy, which calls for unprecedented levels of
intraagency, interagency, and international coordination and
cooperation to combat money laundering and related
financial crime. With respect to the Strategy, I want to take a few
minutes to outline for the Committee some of the key components of the
Administration's plan.
The 2001 Money Laundering Strategy
The 2001 National Money Laundering Strategy represents the combined
input and approval of more than 20 Federal agencies, bureaus, and
offices. It is a comprehensive plan designed to disrupt and to
dismantle major money laundering
enterprises and prosecute the professional money launderers through
aggressive enforcement, measured accountability, preventative efforts,
and enhanced intraagency, interagency, and international coordination.
By major enterprise, I mean complex, large-scale, large-volume,
transnational money laundering schemes perpetrated by professional
money launderers. Our policy should focus and will focus on pursuing
terrorist funds and these kinds of high-impact and high-profile
investigations.
Aggressive Enforcement
The first goal of the 2001 Strategy is to focus law enforcement's
efforts on the prosecution of major money laundering systems and
terrorist groups moving funds into this country for the sole purpose of
conducting criminal activity and wreaking havoc in our society. We
recognize that we must concentrate our resources in high-risk areas and
target major money laundering organizations. To focus our limited
Federal resources, the Strategy calls for the organization,
supervision, and training of specialized money laundering task forces
located in High Risk Money Laundering and Related Financial Crimes
Areas (HIFCA's). In a departure from precedent, the HIFCA's will
function primarily in an operational capacity. They will be tasked with
coordinating the law enforcement and regulatory assets against corrupt
entities engaging in money laundering activities. I am hopeful that the
two newest HIFCA's, Chicago and San Francisco, as well as the existing
Los Angeles HIFCA, can complement ongoing enforcement efforts to
infiltrate and isolate the terrorist financial networks. HIFCA Task
Forces will be jointly supervised by the Departments of Treasury and
Justice and will be composed of all relevant Federal, State, and local
agencies, and will serve as the model of our anti-money laundering
efforts.
One aspect of the 2001 Strategy that I am particularly proud of is
establishment of an advanced money laundering training program. I
believe that such a program is imperative to providing our agents and
inspectors with the proper investigative tools to combat the complex
and ever-changing money laundering schemes of the criminals. The
Federal Law Enforcement Training Center (FLETC) and the Department of
Justice's Asset Forfeiture and Money Laundering Section will be
spearheading this effort to train our teams to investigate
sophisticated money laundering schemes.
An aggressive anti-money laundering attack requires that law
enforcement utilize all available statutory authorities to dismantle
large-scale criminal enterprises. The 2001 Strategy mandates an
emphasis on Federal asset forfeiture laws in conjunction with money
laundering investigations and prosecutions to strip criminals of their
ill-gotten gains and dismantle criminal organizations by attacking
their financial base.
We will also continue our ongoing efforts to uncover the
sophisticated schemes devised by professional criminal enterprises and
seek to disrupt the financial operations of these illicit
organizations. For example, we will continue to partner with the
private sector and our international colleagues to combat the Black
Market Peso Exchange, the largest trade-based money laundering system
in the Western Hemisphere. I would especially like to note the
contributions that the governments of
Colombia, Venezuela, Panama, and Aruba have made to this effort.
Measured Accountability
Another concept unique to this year's Strategy is the idea of
``measured accountability.'' To raise our standards of performance, we
must measure the effectiveness of our efforts. For too long, Federal
law enforcement has not been subject to accountability through measured
evaluation. Secretary Paul H. O'Neill, in particular, is dedicated to
changing business as usual. Therefore, we will seek to create and
implement a uniform system that measures the Government's anti-money
laundering results. Emphasis will be placed on measured results, rather
than the level of law enforcement activity.
We will establish a system to collect reliable information that
will provide law enforcement with an accurate picture of its anti-money
laundering programs. Once we institutionalize these databases, we can
begin to meaningfully evaluate the success of our approaches. Our
measurement methods will include an examination of:
quantitative factors, such as the number of money laundering
investigations, prosecutions, and convictions, which will provide a
numerical snapshot of our efforts from year to year;
qualitative factors--each investigation, prosecution, or
conviction will be assigned a weighted value to mirror the case's
complexity, importance, and scope of impact;
forfeiture and seizure data related to money laundering
activity that will represent a monetary value of our efforts; and
the criminal marketplace price of laundering money that will
help determine whether our anti-money laundering efforts are making
it more expensive and more difficult for criminals to launder their
illicit proceeds.
We will ensure accountability and raise our standards of
performance, expectation, and success. Measured evaluation will
identify money laundering ``hot spots,'' indicate areas where law
enforcement must enhance or prioritize its investigations and
prosecutions, and allow law enforcement to articulate measurable goals.
Preventative Efforts
A comprehensive money laundering strategy must also include an
effective regulatory regime that denies money launderers easy access to
the financial sector. The 2001 Strategy continues previous efforts to
expand and implement proposed suspicious activity reporting
requirements to financial institutions that are particularly vulnerable
to money laundering activity. We will also seek to establish a true
partnership with the private sector to create a vigorous anti-money
laundering regime and to eliminate vulnerabilities that money
launderers seek to exploit. Treasury will encourage the private sector
to develop and implement a rigorous set of ``best practices and
procedures,'' thus enabling the industry to aid in the protection of
the integrity of the U.S. financial system.
Our principal focus will be to ensure that law enforcement fully
utilizes reported information. To this end, law enforcement must seek
to receive only those reports that have law enforcement value. In 2000,
the Financial Crimes Enforcement Network (FinCEN) received and
processed 12,000,000 Currency Transaction Reports (CTR's), 30 percent
of which had no meaningful law enforcement value and would not have
been filed if existing reporting exemptions had been used. The 2001
Strategy calls on law enforcement to work with the private sector to
ensure fuller use of the regulatory reporting exemptions and seeks to
expand the exemptions to other low-risk transactions, if appropriate.
Effective utilization also requires that law enforcement evaluate
the usefulness of reported currency transactions. The Strategy will
require law enforcement agencies that use CTR or Suspicious Activity
Report (SAR) information to provide operational feedback to FinCEN. In
turn, FinCEN will use the feedback to evaluate or change its database
programs to fit the needs of law enforcement.
We will also continue our work to ``level the playing field''
between banks and nonbank financial institutions. Currently, only those
institutions that come under the jurisdiction of the Federal bank
supervisory agencies are required to file SAR's. I am in the process of
working with my staff and the relevant FinCEN personnel to reevaluate
the proposed dates regarding the implementation of the SAR requirements
on money services businesses (MSB's). It is the position of the
Treasury Department that in light of the horrific events of September
11 that these regulations need to be put into place as soon as
prudently possible. We cannot afford to permit terrorists the luxury of
moving funds through any avenue of our financial system undetected.
Enhanced Coordination
Last and perhaps most importantly, 2001 Strategy stresses the
importance of Federal, State, local, and international coordination by
creating structured, interagency, operational task forces that provide
supervision and accountability. In addition, there will be new
cooperation-based incentives.
As I mentioned earlier, the HIFCA Task Forces will be the driving
force that unites Federal, State, and local law enforcement agencies.
To ensure coordination, HIFCA Task Forces will prepare a detailed
action plan and regularly brief Treasury and Justice officials on the
progress of major money laundering investigations as well as the
involvement of State and local law enforcement agencies in the HIFCA's.
Similarly, the Department of the Treasury will conduct evaluations of
existing Financial Crime-Free Communities Support Program (C-FIC) grant
recipients to ensure local officials are including HIFCA Task Forces in
their efforts. Further, the Strategy strongly encourages U.S. attorneys
in each judicial district to create SAR Review Teams, which will
incorporate State and local officials whenever possible.
Money laundering is a problem of global dimensions that requires
concerted and cooperative action on the part of a broad range of
institutions. At the international level, the Strategy seeks to remove
all barriers that inhibit international cooperation. Appropriate
officials from the Departments of State, Justice, and Treasury will
review key existing extradition and mutual legal assistance treaties
and recommend that coverage of money laundering offenses be considered
an important objective in assessing future treaty negotiations. The
Strategy will mandate increased use of the international asset-sharing
program, which will provide incentive for international cooperation.
Our participation within the Financial Action Task Force (FATF)
also provides a unique opportunity for us to work internationally with
other member countries to require that countries in good standing with
FATF have rules or regulations in place to address the issue of
terrorist fundraising within their borders. The United States will push
for FATF to take action to address these new issues of concern.
Because money laundering has the potential to increase risks to the
global financial system, Treasury and the other G-7 nations have worked
extensively with the International Financial Institutions (IFI's), and,
as a result, the IFI's have agreed to take on an enhanced role in the
global fight against money laundering. The United States will
coordinate with G-7 and FATF members to ensure that the IMF and World
Bank incorporate the Forty Recommendations into their operational work
and promote the Forty Recommendations as the international standard for
combating money laundering consistent with the mission and
responsibilities of the IFI's. The United States, its G-7 partners, and
other FATF members are urging the IFI's to institute a separate Report
on Observance of Standards and Codes (ROSC) module on money laundering.
Such a module would provide a comprehensive and articulated assessment
of the status and performance of a country's anti-money laundering
regime, and we anticipate having the IFI's full cooperation in this
effort.
Conclusion
In closing, I leave you today with my personal assurance that
during my tenure as Under Secretary (Enforcement), the Department of
Treasury will continue to aggressively pursue money launderers with
every tool that we have at our disposal. Last week, I had the
opportunity to visit Ground Zero at what remains of the World Trade
Center and see the devastation firsthand. It was a sight I will never
forget and I am here today to make sure that this Committee and the
United States Congress know that we will continue to pursue terrorist
fundraising networks and other money laundering operations diligently
and with passion.
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PREPARED STATEMENT OF MICHAEL CHERTOFF
Assistant Attorney General, Criminal Division, U.S. Department of
Justice
September 26, 2001
Chairman Sarbanes, Senator Gramm, and distinguished Members of the
Committee, I am pleased to appear before the Committee today to discuss
the ever-increasingly important issue of money laundering and the Bush
Administration's 2001 National Money Laundering Strategy.
As I understand it, today's hearing was originally scheduled for
September 12. Any testimony prepared for that day was rendered obsolete
by the events of September 11. Tuesday, September 11 marked a turning
point in this country's fight against terrorism and all other kinds of
unlawful activity. President Bush has announced that we will meet that
unspeakable attack on democracy with a full commitment of resources and
with a firm resolve to rid the world of terrorism. As the President so
eloquently stated, ``Whether we bring our enemies to justice or bring
justice to our enemies, justice will be done.''
We in law enforcement must do everything within our powers to
apprehend those persons who have committed and seek to commit terrorist
acts, and we must eradicate the forces of terrorism in our country and
around the world. As an initial step toward accomplishing this national
mission against terrorism, the Attorney General has directed the
creation of an Anti-Terrorism Task Force within each judicial district
to be made up of prosecutors from the U.S. Attorney's Office, members
of the Federal law enforcement agencies, including the FBI, INS, DEA,
Customs Service, Marshals Service, Secret Service, IRS, and the ATF, as
well as the primary State and local police forces in that district.
These task forces will be arms of the national effort to coordinate the
collection, analysis, and dissemination of information and to develop
the investigative and prosecutive strategy for the country. As an
integral part of this national effort, the Department of Justice and
FBI have established an interagency Financial Review Group to
coordinate the investigation of the financial aspects surrounding the
terrorist events of September 11 and beyond. All members of this
Committee recognize the importance of understanding financial
components of terrorist and criminal organizations. These financial
links will be critical to the larger criminal investigation, while also
providing a trail to the sources of funding for these heinous crimes.
The importance of ``following the money,'' in this instance, as well as
in the investigation of all criminal enterprises, cannot be overstated.
The Members of this Committee are also well aware that money
laundering constitutes a threat to the safety of our communities, to
the integrity of our financial institutions, and to our national
security. In order to address this serious threat, we must apply and
coordinate all the efforts and available resources of the Federal
Government, along with those of our State and local authorities, as
well as our foreign counterparts, if we are to be effective in our
campaign against domestic and international money launderers. Money
laundering techniques are innumerable, diverse, complex, subtle, and
secret. The 2001 National Money Laundering Strategy not only sets forth
a plan to identify, disrupt, and dismantle major money laundering
organizations and the various financial systems they use, but also
continues previous efforts to establish and expand effective
countermeasures to detect and deter present and emergent money
laundering techniques. Under Secretary Gurule has detailed the
principal provisions of the 2001 Strategy. I would like to focus on an
area of the Strategy in which we especially need the Congress' help--
updating the money laundering laws.
The Need for New Legislation
In his address to the Nation last Friday, President Bush stated:
We will direct every resource at our command--every means of
diplomacy, every tool of intelligence, every instrument of law
enforcement, every financial influence, and every necessary
weapon of war--to the destruction and to the defeat of the
global terror network.
However, as Attorney General Ashcroft stated in his remarks in
Chicago on August 7 to the Organized Crime Conference sponsored by the
Chicago Police Department, and as I and other representatives of the
Department of Justice have stated on several occasions in testimony
before this and other Committees, we are fighting with outdated weapons
in the money laundering arena today. When the money laundering laws
were first enacted in 1986, they were designed to address what was
primarily a domestic problem. Since 1986, money laundering increasingly
has become a global problem, involving international financial
transactions, the smuggling of currency across borders, and the
laundering in one country of the proceeds of crimes committed in
another country. Currency, monetary instruments, and electronic funds
flow easily across international borders, allowing criminals in foreign
countries to hide their money in the United States, and allowing
criminals in this country to conceal their illicit funds in any one of
hundreds of countries around the world with scant concern that their
activities will be detected by law enforcement.
International organized criminal groups based in Asia, Africa,
Europe, and this hemisphere have seized upon these opportunities for
laundering of their assets. These criminals look upon globalization as
an invitation to vastly expand the size and scope of their criminal
activities--whether these organized criminal groups engage in narcotics
trafficking, securities fraud, bank fraud, and other white collar
crimes, trafficking in persons, or terrorism. With their expanded power
and reach, international organized criminals seek to corrupt police and
public officials in countries around the world to protect their
criminal enterprises and enhance their money-making opportunities.
Foreign organized crime groups today threaten Americans, their
businesses, and their property, as these groups work to expand their
influence into this country.
In this environment, law enforcement is challenged, and the
criminals often hold the advantage. Criminals are able to adapt to
changing circumstances quickly. They pay no heed to the requirements of
laws and regulations and recognize no sovereign's borders. Further,
these criminal groups have learned to be adaptable and innovative and
as we succeed in a new enforcement effort or implement a new regulatory
regime, they quickly alter their methods and modes of operation to
adapt to the new circumstances.
The reality of international money laundering in this new century
has caused countries from Northern Europe to South Africa, and from
here in the West to the financial centers of the Far East, to look for
ways to update their domestic laws to address this threat to our
security. Equally important, countries around the globe are searching
for ways to work together to address this problem jointly, irrespective
of our different legal systems, customs, and traditions. Criminal
proceeds can be moved from country-to-country in an instant. It is
critical that our laws are brought up to date, so that we may act
effectively and cooperate fully with our partners in law enforcement
abroad. The United States should be the leader in this process, but
sadly we are falling behind. While our laws have remained mostly static
for 14 years, other countries are moving ahead to criminalize
international money laundering and to take other steps to separate
criminals from their criminal proceeds.
Legislative Initiatives
We are not suffering in this endeavor from the lack of ideas or
proposals. The provisions of our proposed Money Laundering Act of 2001
would go a long way toward modernizing our money laundering laws by
authorizing new and improved tools for our law enforcement agents and
prosecutors, and by increasing our ability to cooperate with our
international counterparts in tracing, freezing, and seizing criminal
funds in the United States.
In addition to the Department's legislative proposals, Members of
Congress have also recognized the need to update our money laundering
laws. For example, Senators Levin, Grassley, DeWine, Kyl, Bill Nelson,
and Chairman Sarbanes recently introduced a money laundering bill, S.
1371. We look forward to working with you as you consider these and
related proposals.
I would like to highlight a few of the pending legislative
proposals for the Committee that we believe would be particularly
beneficial.
First, we must make it a crime to launder the proceeds of specified
foreign crimes in the United States. People who commit crimes abroad,
and then hide that money in the United States, are committing an
offense that is at least as serious as the one committed by our
homegrown criminals who hide their money at the local bank. The
potential for terrorist organizations to finance their atrocities with
money generated by committing crimes in other countries is obvious. (S.
1371, Sec. 3; Money Laundering Act of 2001, Sec. 6).
Second, it is important that the Federal courts be given authority
to restrain a criminal defendant's assets pending trial, so that he is
not free to disburse his money before he is convicted and ordered to
turn it over to the Government. It is meaningless to authorize the
courts to enter post-conviction forfeiture judgments--as the current
laws provide--yet allow the criminal to send the money beyond the reach
of the court in the months before he is convicted. (DOJ Anti-Terrorism
Act of 2001, Sec. 406).
Third, the Federal courts should be given authority to enforce the
orders of foreign courts relating to criminal proceeds in the United
States. Federal law already permits this in drug cases: a court in
Virginia can enforce an order from a court in London if it relates to
drug money found in the U.S. (28 U.S.C. Sec. 2467). As we speak,
foreign countries are working to determine what assets of terrorist
acts occurring within their borders may have involved funds in the
United States. If foreign courts issue orders to confiscate that money,
we need to be able to enforce them. As a result, the current law needs
to be expanded beyond drug trafficking crimes. (Money Laundering Act of
2001, Sec. 39).
Fourth, the limitations period on seizing electronic funds from a
bank account should be extended from 1 year to 2 years. Current law
requires that the Government trace the money it wants to seize to the
offense in which the money was involved. The law recognizes, however,
that money is fungible, and that one dollar in a given bank account is
the same as any other dollar. This ``fungible property'' rule, however,
only applies for 1 year (18 U.S.C. Sec. 984). If the money has been in
the bank account for more than a year, the Government cannot seize it
without a strict tracing analysis--something that is all but impossible
if the account was active. We need to be able to go back at least 2
years to give true effect to the purposes underlying this law. (Money
Laundering Act of 2001, Sec. 15, S. 1371, Sec. 10).
There are other provisions in the Department's anti-money
laundering bill that would help us enormously in tracking the assets of
terrorists. I mention these few as among the most critical, but a
comprehensive revamping of these laws is necessary if we are to make
meaningful headway against terrorism and other forms of international
organized crime. The Department's Money Laundering Act of 2001 sets out
a core group of statutory tools that are necessary to meet the domestic
and transnational organized crime threats of the 21st Century. Attorney
General Ashcroft considers passage of this legislation essential to any
success in disrupting and dismantling the business of organized crime
and the cruel reality of terrorism.
Conclusion
I believe that the extraordinary events of September 11 should
provide the impetus to jump-start consideration of money laundering
legislation that will allow us to address the threats presented to us
by international terrorists and criminals. The Department stands ready
to provide any assistance it can to facilitate prompt consideration of
its legislative proposals.
I would like to conclude by expressing the gratitude of the
Department of Justice for the continuing support this Committee has
demonstrated for our anti-money laundering activities. We in the
Department of Justice look forward to working alongside our Treasury
colleagues, with this Committee, with your other colleagues in the
Senate, and your counterparts in the House to strengthen the U.S. anti-
money laundering regime at this critical hour.
Thank you, Mr. Chairman. I welcome any questions you may have at
this time.
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PREPARED STATEMENT OF STUART E. EIZENSTAT \1\
Former Deputy Secretary, U.S. Department of the Treasury
September 26, 2001
Mr. Chairman, Senator Gramm, and Members of the Committee, good
morning. This is my first appearance before this Committee since my
return to private life, and I am glad to see you again. But more
important, I am honored to have this opportunity to contribute to your
examination of money laundering and the problems it raises for the
United States. Stopping money laundering, and the syndicates it
finances, is critical to the fight against narcotics trafficking,
organized crime, foreign corruption, and software counterfeiting and
other intellectual property crimes, as well as to preserving the health
of the global financial system. After the events of September 11, it is
clear that stopping money laundering is also critical to the personal
safety of our citizens.
---------------------------------------------------------------------------
\1\ I would like to thank Debra R. Volland of Covington & Burling
and Stephen Kroll, formerly Chief Counsel of the Treasury's Financial
Crimes Enforcement Network and now in private practice, for their
assistance in preparing this testimony. Mr. Kroll's public service in
combating money laundering was a singular contribution to the United
States.
---------------------------------------------------------------------------
The Committee's decision to put these issues on its agenda is thus
highly appropriate and, sadly, very timely. In the past two decades, in
Republican and Democratic Administrations, the groundwork has been laid
for effective action against the criminal financial system. But we are
now at a crucial point in deciding what that action should be and how
to take it. Answering those questions is not easy, as today's hearings
will confirm, but our commitment to robust, effective, and balanced
action against domestic and international money laundering must remain
focused and firmly in place.
My experience during the last 8 years makes that plain to me. At
the Department of Commerce, I could see how difficult it was for our
companies honestly to bid against competitors who could draw on hidden
sources of funds. At the Department of State, I came more fully to
understand how money laundering fuels the kleptocracy that can
undermine even the most well-thought-through economic development
efforts or policies to build civil society. And at the Treasury
Department I was confronted with the role money laundering plays in
driving the narcotics trade and the other crimes I have already
mentioned, the way it infects the vitality of our trade in goods--
through the operation of the Black Market Peso Exchange--and the degree
to which it can undermine the credibility and safety of the global
financial system upon which our prosperity depends.
Now, we are brought face to face with another aspect of the
criminal financial system--its use by the merchants of terror. Monday's
issuance by President Bush of a new Executive Order aimed squarely at
terrorist financing and expanding the blocking of terrorist assets
forcefully pinpoints an essential target. Terrorists must have money to
pay for weapons, travel, training, and even benefits for the family
members of suicide bombers. The September 11 terrorists spent tens, if
not hundreds, of thousands of dollars on U.S. flight training, and
their U.S. living expenses were likely even higher. They often paid
cash, flashing rolls of bills. Estimates of the total cost of the
September 11 attacks exceed $1 million.
The capital that terrorists require comes from several sources. The
first is pure criminal activity, harking back to the daring daylight
robbery of a Tzarist banking van in 1907 by a gang led by a young
Bolshevik named Josef Stalin. Terrorists engage in credit card fraud,
kidnapping, robbery, and extortion. Their paymasters can include covert
state sponsors, who can also conveniently look the other way at
strategic partnerships between terrorists and organized criminal
groups, especially narcotics traffickers.
Large sums come from old fashioned fund raising through
``charitable'' organizations here and abroad; a recent World Bank study
indicates that the globe's civil wars are primarily funded by
contributions from diaspora populations. In some cases donations are
understood to be destined for use by terrorists, even when raised for
ostensibly humanitarian purposes. There are ``charities,'' for example,
in various Gulf States that may serve as conduits for Osama bin Laden
and his Al Qaeda movement.
Wealthy individuals may make large contributions. Bin Laden, whose
private fortune is often estimated as having at least once amounted to
$300 million, is likely a special case, providing seed capital to
nascent terrorist groups and operations around the world. Evidence
produced at the trial of defendants in the 1998 embassy bombings in
Kenya and Tanzania indicated that bin Laden's web included various
trading and investment companies, with accounts in several world
financial centers. Reports that bin Laden's operatives sold the shares
of leading international reinsurers short on September 10 are simply
speculative at this point. But his funds are somewhere earning a return
as part of the very system he has vowed to destroy.
However obtained, terrorist funds need to be transmitted across
borders, marshaled, and spent--with application of a new layer of
camouflage at each step. This is the money launderer's domain and
brings us directly back to the broader subject.
The sheer size of the criminal financial system provides a rough
measure of the problem at hand. The IMF has estimated the amount of
money laundered annually at between $600 billion and $1.5 trillion, or
2-5 percent of the world's annual gross domestic product. At least a
third of that amount, up to half a trillion dollars annually, is
thought to pass through U.S. financial institutions at least once on
its clandestine journey. While these are estimates, they are as likely
as not to be on the conservative side. Whatever the precise number, it
is far too high in real terms and reminds us that the risks money
laundering creates simply are not going away.
Money laundering is the financial side of crime. If the so-called
``smurfs'' can seem merely odd as they dribble drug-tainted dollars
into our financial institutions to stay under the $10,000 threshold for
reporting currency transactions, the sophisticated cartel bankers who
operate behind the shield of bank secrecy, offshore havens, or suborned
officialdom, with millions of dollars at their disposal, are anything
but quaint. And that is why, as I mentioned earlier, the fight to
curtail money laundering has been in the past the product of a
bipartisan consensus.
The landmark legislation making money laundering a distinct
and very serious felony in the United States was the product of the
Reagan Administration.
The Bush Administration led the way in creating the Financial
Action Task Force, at the G-7 Summit in 1989, and establishing the
Financial Crimes Enforcement Network at the Treasury a year later,
and President Bush signed the Annunzio-Wylie Anti-Money Laundering
Act in 1992; that landmark legislation authorized suspicious
transaction reporting and uniform funds transfer recordkeeping
rules, among other pillars of today's counter-money laundering
programs in the United States and around the world.
President Clinton used the occasion of his nationally
televised address on the occasion of the United Nations' 50th
Anniversary to call for an all-out effort against international
organized crime and money laundering, kicking off a coordinated 5
year effort to bring the world's mafias and cartels to heel and
finally to close the gaps in our laws and regulatory systems that
had permitted those criminal groups to thrive.
The unhappy experience of the Bank of New York highlights the
vulnerability of our financial institutions. The Bank was involved in
an alleged money laundering scheme in which more than $7 billion was
transmitted from Russia into the Bank through various offshore secrecy
jurisdictions. At least one relatively senior official of the Bank was
suborned, and she suborned others. We do not know to this day how much
of the money came from the accounts of the Russian ``Mafiya,'' how much
represented assets stolen in the course of the privatization of state
industries--undermining the hopes of Russian reformers--and to what
extent was the money hidden to escape legitimate taxation, destroying
the fiscal projections on which the
reformers depended to lower taxes for ordinary citizens. We do know
that the money came out of Russia through accounts in shell banks
chartered in places such as the South Pacific island of Nauru. The
Deputy Chairman of Russia's Central Bank has estimated that, in 1998
alone, $70 billion was transferred from Russian banks to accounts in
banks chartered in Nauru; not all of that money went to Bank of New
York, of course, but none of it was ever intended to stay in Nauru.
At the same time, everyone should understand that the growth of
money laundering is the dark side of globalization. It is an
unfortunate by-product of the persistent leveling of barriers to trade
and capital flows since the end of World War II, most importantly, of
course, the end of capital controls around the world. As Secretary
Rubin famously pointed out in his address to the Summit of the Americas
in 1995--when that Summit produced a hemispheric declaration against
money laundering--few of the acts that the money launderer takes are,
in themselves, illegal. All of our national policies are designed to
stimulate saving, the free movement of funds, and the operation of
efficient payment systems.
What makes money laundering illegal is knowledge of the criminal
origin of the funds involved, the criminal purpose to which the funds
will be put, or both, and deliberate efforts to fog the transparency of
the financial system for criminal ends. The task confronting both
Government and the financial sector is to shape cost-effective policies
to filter out that tainted conduct, to find the one person in the bank
line who is a money launderer in the clothing of an honest bank
customer. We devoted immense time and effort in the last 8 years to
striking the necessary balance.
Our policy had a number of major components. We continued the drive
for creative criminal and civil enforcement of our counter-money
laundering laws.
We greatly expanded the information resources available to State
and local officials who were building their own money laundering
efforts, through programs such as FinCEN's Project Gateway.
We sought to level the playing field by closing gaps in coverage of
previously inadequate regulated money transmitters and other
nontraditional financial service providers, following our enforcement
successes in the New York area against the flow of funds to Colombia
and the Dominican Republic in 1996-1998.
We issued guidance to help U.S. financial institutions build their
own defenses to protect their business reputations and avoid
entanglement with crime--and give appropriate scrutiny to private
banking and similar high dollar-value accounts, especially for
transactions that could involve transfer of the proceeds of corruption
by senior foreign officials. Unlike more general ``know your customer''
ideas that attracted a great deal of criticism 2 years before, our
guidance was carefully tailored to help banks deal with identifiable
situations in high-risk accounts.
We recognized the absolutely crucial importance of international
cooperation to disrupt the global flow of illicit money. We supported
the work of the Financial Action Task Force in its revision of its
landmark Forty Recommendations, under the FATF Presidency of Treasury
Under Secretary Ron Noble in 1996.
We led the way in building the Egmont Group of Financial
Intelligence Units, which now has over 50 member agencies that
cooperate in sharing information to fight money laundering around the
world.
Even more important, we pushed forward the FATF's noncooperative
countries and territories (``NCCT'') project in the Clinton
Administration's last 2 years. Fifteen nations were cited as being
noncooperative in the international fight against money laundering in
2000,\2\ and the Treasury followed up the FATF's action and its own
analysis by issuing hard-hitting advisories to our financial
institutions recommending enhanced scrutiny against potential money
laundering transactions involving those nations. I am especially proud
that we did not play favorites. Russia was on the list, but so was
Israel. Liechtenstein was on the list, but so were the Philippines. We
cited Nauru, but we also cited Panama and the Bahamas. And the reaction
has been very positive. While I was Deputy Secretary of the Treasury I
met with senior officials of Panama and with Israel's then-Minister of
Justice, and I learned of the steps those countries were taking to be
removed from the NCCT list. My Treasury, Justice, and State Department
colleagues met with officials of the governments on the list at various
levels to help get the necessary work done--with clear results! Israel,
and now Russia, have for the first time enacted laws to criminalize
money laundering and are working to put serious anti-money laundering
programs into place. Liechtenstein has broken down its time-honored
bank secrecy traditions. Panama is now prepared to share information to
assist law enforcement investigations around the world.
---------------------------------------------------------------------------
\2\ The list of NCCT's in 2000 was: the Bahamas, the Cayman
Islands, the Cook Islands, Dominica, Israel, Lebanon, Liechtenstein,
Marshall Islands, Nauru, Niue, Panama, the Philippines, Russia, St.
Kitts and Nevis, and St. Vincent and the Grenadines. As indicated
below, the Bahamas, the Cayman Islands, Liechtenstein, and Panama were
removed from the list in June 2001 after curing most or all of the
deficiencies FATF cited, and 8 new countries--Egypt, Grenada,
Guatemala, Hungary, Indonesia, Myanmar, Nigeria, and Ukraine--were
added to the list in June and September 2001.
---------------------------------------------------------------------------
Finally, we issued the Nation's first two National Money Laundering
Strategies, to present a balanced strategic view of our efforts and
point the way forward, year-by-year, as Congress asked us to do.
I would like to speak in more detail about several aspects of our
work.
International Counter-Money Laundering Act of 2000--now S. 398. The
International Counter-Money Laundering Act of 2000 (H.R. 3886),
introduced on March 9, 2000, was an important part of our approach,
because it would have given the Executive Branch the tools necessary to
deal in a measured, precise, and cost-effective way with particular
money laundering threats. Under the legislation, which had very strong
support from senior Federal law enforcement professionals, the
Secretary of the Treasury--acting in concert with other senior
government officials and with prompt notice to the Congress--would have
had the authority to designate a specific foreign jurisdiction,
financial institution, or a class of international transaction as being
of ``primary money laundering concern'' to the United States. Although
the legislation had strong bipartisan support, and was approved by the
House Banking and Financial Services Committee by a 33-1 vote on June
8, 2000, the legislation did not make it further in the 106th Congress.
I am very pleased that Senator Kerry has reintroduced the
legislation, as S. 398, with cosponsors including Senator Grassley and
Chairman Sarbanes, as well as Senator Levin, Senator Grassley, and
Senator Rockefeller. I would like to explain why Kerry-Grassley-
Sarbanes is an extremely important step forward and deserves the
Committee's, and the Congress', support now.
Succinctly, we have few tools to protect the financial system from
international money laundering. On one end of the spectrum, the
Secretary can issue Treasury Advisories, as we did in the summer of
2000; those warnings encourage U.S. financial institutions to pay
special attention to transactions involving certain jurisdictions. But
they do not impose specific requirements, and they are not sufficient
to address the complexity of money laundering.
On the other end of the spectrum, the International Emergency
Economic Powers Act (``IEEPA'') provides authority, following a
Presidential finding of a national security emergency, for full-scale
sanctions and blocking orders that operate to suspend financial and
trade relations with the offending targets. President Clinton issued a
number of such orders, including two, in 1995 and 1998, directed at
designated terrorist organizations that led to accelerated efforts to
locate funds of those organizations in the United States.
Of course, President Bush invoked IEEPA, among a number of other
authorities, on Monday. The President's order was obviously appropriate
under the circumstances, and it sent a blunt and forceful message.
There are many other situations in which we will not want to block all
transactions, or in which our concern centers around underregulated
foreign financial institutions or holes in foreign counter-money
laundering efforts. In those cases a more flexible tool is necessary,
but we do not have one available, because under present law there is
nothing between the two ends of the spectrum--a Treasury Advisory on
the one hand, and full-blown IEEPA sanctions on the other.
As I noted, the key to the proposed statute's operation is the
determination by the Secretary of the Treasury that a specific foreign
jurisdiction, a financial institution operating outside the United
States, or a class of international transactions is of ``primary money
laundering concern'' to the United States. The determination would
trigger the authority of the Secretary to take several actions in
response.
After consultation with the Chairman of the Federal Reserve System,
the Secretary could:
1. Require financial institutions operating in the United
States to keep records or file reports concerning specified
types of transactions, in the aggregate or by individual
transaction, and to make the records available to law
enforcement officials and financial regulators upon request.
Requiring such record retention could prove invaluable to law
enforcement and help the Government better to understand the
specific money laundering mechanisms at work. As a corollary
benefit, a requirement that U.S. institutions increase the
level of scrutiny they apply to transactions involving targeted
jurisdictions or institutions could result in pressure on the
offending jurisdictions to improve their laws.
2. Require financial institutions to ascertain the foreign
beneficial owners of any account opened or maintained in the
United States. Requiring financial institutions to ascertain
foreign beneficial ownership would help cut through layers of
obfuscation that are one of the money launderers' primary
tools.
3. Require identification of those who are allowed to use a
bank's correspondent accounts (as well as so-called ``payable-
through'' accounts), which allow customers of a foreign bank to
conduct banking operations through a U.S. bank just as if they
were the U.S. bank's own customers. Requiring identification of
those who are allowed to use a bank's correspondent accounts
and payable-through accounts would prevent abuse of these
technical financial mechanisms by foreign money launderers who
seek to clean their dirty money through U.S. financial
institutions. The United States needs to be able to find out
who really benefits from these accounts, and, by application of
transparency, discourage abusive practices.
4. Where necessary in extreme cases, the Secretary would have
the authority to impose conditions upon, or prohibit outright,
the opening or maintaining of correspondent or payable-through
accounts. Having that authority in reserve gives credibility to
the rest of the statute's measures, and may, in cases of
documented, continuing abuse of the financial system by known
criminals, be a necessary last resort.
The legislation would also have made necessary corrections in
existing law. It would have codified and strengthened the safe harbor
from civil liability for financial institutions that report suspicious
activity. It would have toughened the geographic targeting order
(``GTO'') mechanism that was used so effectively in New York, New
Jersey, and Puerto Rico, against Colombian and Dominican narcotics
traffickers. It would have made it clear--as Congress intended--that
the ``structuring'' penalties of the Bank Secrecy Act apply both to
attempts to evade GTO's and to attempts to circumvent the funds
transfer recordkeeping and identification rules that Congress
specifically authorized in 1992. In addition, the legislation would
have made it clear that banks could under certain circumstances include
suspicions of illegal activity by former bank employees in written
employment references sought by subsequent potential bank employers.
The legislation was designed to permit carefully tailored, almost
surgical, action against real abuse; that action was to be graduated,
targeted, and discretionary graduated so that the Secretary could act
in a manner proportional to the threat presented; targeted, so the
Treasury could focus its response to particular facts and
circumstances; and discretionary, so the Treasury could integrate any
possible
action into bilateral and multilateral diplomatic efforts to persuade
offending jurisdictions to change their practices so that invocation of
the authority would not be necessary. There will be situations in which
the United States may have to lead the way alone, and if so the statute
would have given it the capacity to do so.
Importantly, the legislation would not jeopardize the privacy of
the American public. The focus of the recommended legislation is not on
American citizens. The recommended legislation focuses on foreign
jurisdictions, foreign financial institutions, or classes of
transactions with or involving a jurisdiction outside the United
States, that involve the abuse of U.S. banks facing a specifically
identified ``primary money laundering concern.'' For this reason, the
recommended legislation is different from the so-called ``know your
customer'' rules proposed 2 years ago. And finally, it should be noted
that the proposed legislation is narrowly drawn, so as not to add
burdens to financial institutions. The approach targets major money
laundering threats while minimizing any collateral burden on domestic
financial institutions or interference with legitimate financial
activities.
Changes to the Definition of Money Laundering Offenses in Title 18.
We had also hoped to see through the passage of legislation, long
sought by the Department of Justice, to widen the range of money
laundering offenses. As you know, money laundering under our criminal
laws must involve the proceeds of ``specified unlawful
activities.'' Unless a particular set of transactions involves the
proceeds of such a predicate crime, it cannot serve as the basis for a
money laundering investigation. But there are important gaps in the
definition, especially for crimes against foreign governments, such as
misappropriation of public funds, fraud, official bribery, arms
trafficking, and certain crimes of violence. Unless such crimes are
made ``specified unlawful activities,'' a rapacious foreign dictator
can bring his funds to the United States and hide them without fear of
detection or prosecution in many cases; this we should not, indeed we
cannot, continue to allow. I am pleased that S. 1371, introduced this
session by Senator Levin and cosponsored by Senator Grassley, Chairman
Sarbanes, Senator Kyl, Senator Bill Nelson, and Senator DeWine,
includes the necessary change and important related changes to the
Nation's forfeiture laws.
FATF. We must continue to support FATF and other multilateral
counter-money laundering efforts. FATF's work is ongoing; in June it
designated 6 additional nations--Indonesia, Nigeria, Egypt, Hungary,
Guatemala, and Myanmar--as noncooperative, and it completed the most
recent round of reviews in early September by adding Grenada and
Ukraine to the list. But it has also signaled the progress made in the
Cayman Islands, Liechtenstein, the Bahamas, and Panama, by removing
those countries from the list, and it is working with other designated
countries to ameliorate the problems identified in the NCCT process. In
particular, I hope that Israel, which has already initiated at least
one significant money laundering prosecution, can be removed from the
list shortly.
This is multilateral cooperation at its best. The efforts of our
Government, at the Departments of Treasury, Justice, and State, must
continue to view the problem of money laundering ``holistically,'' as
part of the broader issue of global financial standards--for banking
supervision, tax administration, and counter-money laundering control--
that are necessary to foster international prosperity and faith in
civil society, underlying the growth of democratic governance around
the world. Before September 11, Treasury had yet to issue advisories
concerning the countries added to the FATF list this year; that may
have been an accident of the calendar, since the FATF had a
supplementary meeting, at which it named Grenada and Ukraine as
noncooperative, in the first week in September. But I hope that the
sort of guidance that was issued in the past will continue to be the
norm, rather than a scaling back of the perceived consequences of the
FATF designations.
I suspect that you would like me to compare the work in which we
were engaged more broadly with the approach of the new Administration
to money laundering. It is too early to make any firm comparisons. The
Bush Administration's first National Money Laundering Strategy
emphasizes strong enforcement and intensified use of criminal and civil
asset forfeiture laws and continues a number of specific enforcement
initiatives--the High Intensity Financial Crime Areas or HIFCA program,
expanded State and local involvement in money laundering
investigations, and efforts to dismantle the Black Market Peso
Exchange--that we began. And I was glad to see Attorney General
Ashcroft announce in a recent speech that he will be seeking
legislation like that sought by the sponsors of S. 1371, to expand the
money laundering laws in Title 18 to deal with the proceeds of foreign
corruption, as I discussed earlier in my statement. I understand the
Administration's anti-terrorism legislation also includes a necessary
amendment to the money laundering laws to add support for designated
terrorist organizations to the statute's list of specified unlawful
activities; I support this change.
I hope, however, that the program outlined in the National Money
Laundering Strategy for 2001 does not shortchange appropriate
legislative and regulatory efforts to shore up the weaknesses in our
financial mechanisms that money launderers can exploit. There is no
substitute for creative and aggressive enforcement of our laws; but
enforcement itself is not enough. A targeted approach to strengthening
our anti-money laundering rules is necessary to close loopholes through
which criminal proceeds flow, and to reduce risks that later take
countless resources to investigate and prosecute, after the damage is
done. We can never know who exploits the weaknesses in our network of
transparent financial arrangements and anti-money laundering defenses,
and a program that relies only on enforcement is unlikely to be as
effective as we would want.
I would also like to mention several recommendations relating
specifically to the financing of terrorism. The Administration moved
forcefully on Monday to cut off terrorists' financial oxygen; as the
President recognized, that is a critical part of the effort the Nation
is now embarked, and rules already in place can be applied forcefully
and quickly to financial support for terrorism. Necessary steps
include:
Adequate staffing, funding, and authority for the Foreign
Terrorist Asset Tracking Center first sought by National Security
Council officials 18 months ago and initially brought together last
week at the Treasury.
Intensified analysis and matching for terrorist links of
information reported under the counter-money laundering rules. We
must also obtain information reported in other countries, using the
multilateral ``Egmont group'' of anti-money laundering agencies
that now has more than 50 members.
Investigation and blocking of underground banking practices
such as the ``Hawala,'' through which a potentially significant
portion of terrorist funds is thought to pass into or out of the
United States without ever touching the formal banking system.
Greater scrutiny of phony charitable organizations by our
Government and our allies abroad, a move that was begun in the last
5 years and is, again, brought forcefully forward by Monday's
Executive Order. That scrutiny must not be limited to the United
States, because much of the money involved is simply not here, and
we should ask Saudi Arabia, Kuwait, Qatar, and the UAE to apply
similar scrutiny to ostensible charitable organizations operating
in those nations.
Pressure by the FATF for quick improvement in the anti-money
laundering and financial transparency rules of countries such as
the UAE and Pakistan.
Issuance of guidance about terrorist money laundering to U.S.
financial institutions, with special emphasis on identification of
beneficial account ownership.
Continued careful coordination with the U.S. economic
sanctions program aimed at terrorists' assets.
Of course, we cannot overestimate our chances of success; financial
data alone, no matter how good it is, rarely provides the archetypal
``smoking gun'' in investigations. Moreover, our adversaries are very
good at hiding funds, using traditional systems outside sophisticated
financial channels to transfer funds, and, simply, making do on a
meager budget. And the amounts of money terrorism requires--even for
organized, purposeful, continuing terrorist organizations such as those
that produced the September 11 tragedy--is never large enough even to
cause a blip in the daily stream of international cross-border
payments. But the fact that the clues are not easy to find cannot and
should not deter us. Information is rarely determinative; even the
fabled naval code breakers of World War II at Bletchley Park and at the
Naval Intelligence Station in Washington could only track U-Boats, on
good days, to ocean ``sectors'' many hundreds of square miles in area.
The acid test for me of the Administration's anti-money laundering
strategy is whether the Administration will support passage of S. 398,
working with this Committee, which I hope will mark up the legislation
and move it forward expeditiously. Indeed the legislation was designed
to give the Secretary of the Treasury the sort of flexible targeted
authority that can now be used to advantage in the fight against
financial aspects of terrorism, as well as against money laundering
generally. I want to emphasize again the bipartisan support we found in
the House for last year's version of the legislation, and the 33-1 vote
by which the House Banking Committee--led by Jim Leach of Iowa--sought
to move that legislation, conscious of its obligation to protect the
expectations of our citizens about the credibility of our Federally
insured financial institutions.
To sum up: the rapid growth of international commerce, along with
advances in technology, are making it easier for criminals in foreign
jurisdictions to launder money through foreign institutions into the
United States, and hence to finance the expansion of the global
criminal economy and the growth of organized criminal groups and
international terrorists as substate threats to our security. Money
laundering debilitates the integrity and stability of financial and
government institutions worldwide, as a parasite that feeds on the very
advances in global finance and free economies that make successful
money laundering possible. That is why we have had a strong history of
support on both sides of the aisle for designing investigative,
regulatory, and legislative steps to fight money laundering around the
world, and why it is both fitting and essential that this Committee
monitor the work of the Administration in this critical area and act
where necessary to shore up our national defenses against this criminal
contagion.
Thank you very much. Again, it is a pleasure to be here and
contribute to the Committee's work. I would be happy to answer your
questions.
----------
PREPARED STATEMENT OF WILLIAM F. WECHSLER
Former Special Adviser, U.S. Department of the Treasury
September 26, 2001
Mr. Chairman, Senator Gramm, distinguished Members of the
Committee, I want to commend you for calling attention to the important
and growing problem of money laundering and the ways by which
terrorists in general and Al Qaeda in particular raises, moves,
launders, and distributes its money. It has been a while since this
Committee last seriously addressed this issue. I feel honored to have
been asked to participate in this hearing, and I thank you for the
opportunity.
I would like to divide my remarks into three parts. First, I will
discuss in general terms what we know about how Al Qaeda's financial
network operates. Second, I will describe what has and what can be done
about it. And third, I will discuss how we can better combat the
general problem of money laundering.
The Al Qaeda Financial Network
Unlike most terrorist leaders, Osama bin Laden did not first gain
recognition among Islamic radicals for leading an army in battle, or
for personal acts of valor in combat, or even for running a local
terrorist cell. He first gained fame for his abilities to raise,
manage, and move money for the Afghan armies fighting the Russians in
the 1980's. He still derives much of his authority and influence from
the money under his control.
The terrorist financial network that Osama bin Laden helped build
in the 1980's provided the foundation for the financial network that
supports Al Qaeda today. This is commonly misunderstood. When reporting
on Al Qaeda finances, journalists generally focus on the $300 million
bin Laden is reported to have inherited from the family construction
business, as if he is simply writing personal checks to terrorists in
the field. If this was the case, the problem would be much easier to
solve. While his own funds have undoubtedly been helpful to his cause,
his network of financial donors, international investments, legal
businesses, criminal enterprises, smuggling mechanisms, Muslim
charitable organizations, Islamic banks, and underground money transfer
businesses have been of far greater value.
Today this network continues to raise money throughout the world to
constantly replenish Al Qaeda's coffers. And have no doubt that the
money that is raised is substantial. We should not be confused when we
read that any one terrorist attack likely only cost Al Qaeda a few
thousand or a few hundred thousand dollars, or that any one terrorist
cell seemed to be just scraping by and committing petty crimes to help
fund their activities. There is an important difference in the amount
of money that is available to the organization overall, and the amount
that is available to any local element. This only makes sense. Think of
the U.S. military: by any measure it overall spends a lot of money each
year. But if you go to any individual army base, you will see sergeants
desperately trying to scrape by with limited funds and still achieve
their mission.
As noted, Al Qaeda raises money from criminal schemes and seemingly
legitimate businesses--and now we are all reading reports of United
States, European, and Japanese regulators investigating whether Al
Qaeda may have profited from short-selling reinsurance and airline
stocks just before the recent attacks--a frightening possibility.
But perhaps the most important source of Al Qaeda's funds are
direct solicitations and charitable contributions. This does not mean
that everyone whose money goes to Al Qaeda knows that they are
contributing to terrorism. Millions of Muslims around the world believe
as part of their religion that donating to charity is a fundamental
part of their lives. No doubt most would be aghast if they knew that
some of the money they may have given to charities has been diverted to
terrorist use. Nor does it mean that the charities that support Al
Qaeda do not also provide social services. Hamas and Hizzbolah have
demonstrated that it is very advantageous for a terrorist organization
to also help the poor and weak. It does mean, however, that Al Qaeda is
able to get funds under the guise of charitable donations, mostly in
cash, and that money keeps coming. This is also, by the way, how the
IRA has long raised money in the United States. Once Al Qaeda has the
money, it moves and launders it through four primary methods.
First, there is simple cash movements and smuggling. We should
remember that the economies of much of the Middle East are much more
cash intensive than our own. If you lived there you would likely carry
much more cash than you do today and use electronic means much less. It
is not terribly uncommon for people in say, Saudi Arabia, to purchase
something on the order of a car in cash. That means that in general
there is less of an electronic and paper trail in these societies,
unfortunately.
Second, Al Qaeda uses what we think of as the global banking system
to hold and launder money. Terrorists are particularly attracted to
underregulated money laundering havens. These places have little or no
anti-money laundering regimes--strict bank secrecy, poor customer
identification, no bank supervision or examination, no suspicious
activity reporting, little or no cooperation with foreign law
enforcement. In an era of globalization and the internet such places
provide no-questions-asked banking services to clients from around the
world who, for some reason or another, are interested in hiding their
money from authorities.
Third, Al Qaeda uses the Islamic banking system, which is an
entirely legitimate parallel system for those who feel their religion
prohibits them from being involved in the payment of interest. There is
nothing inherently wrong with this system at all--but it is in general
even less regulated in many countries in which it operates.
And fourth, Al Qaeda undoubtedly makes good use of the hawala
underground banking system. The hawala system is particularly valuable
to Al Qaeda because it allows little or no paper trail, just money
transfer without money movement. There is also nothing inherently wrong
with the hawala system--it has been in operation in South Asia and the
Middle East for centuries, and there is a similarly ancient system
based out of China. In some remote areas of the globe the hawala system
is the banking system--there are no Citibank branches.
The system is run by South Asians along familial lines and has
served people in the Middle East for centuries. You are a Hawaladar
because your family has for generations. Moving money through the
Hawala system is as easy as a phone call, or a fax, or an e-mail from
one Hawaladar to another. A client gives cash to a Hawaladar in say,
Pakistan, and asks him to make sure that another person gets it in say,
New York. So the hawaladar calls his colleague in New York, who hands
out an equivalent amount of money. At no time, however, is there any
wire transfer or basic connection with the wider banking system.
Accounts are balanced quite often over time, since there is thought to
be quite a lot of money constantly rolling through the system. But if
accounts are unbalanced for a while between the two Hawaladars, they
are not concerned because fundamentally they trust each other. They are
good for it. They have been in this business for generations and they
are not going to cheat each other. And perhaps if the accounts get
seriously unbalances, then they will have to actually move cash from
one place to another, or engage in some under-invoicing scheme to
transfer wealth.
As best we can tell, Al Qaeda distributes money to its
decentralized, loose confederation of terrorist cells mostly as start
up money or venture capital. The cells are then required to help
sustain themselves, sometimes from crimes such as cigarette smuggling,
a particular favorite of criminal networks around the world.
Combating the Al Qaeda Financial Network
We should also recognize what can and cannot be accomplished by
targeting the financial network. Such actions will not, by themselves,
strike a death blow to Al Qaeda. There is no silver bullet here. We are
not likely to wake up one morning and read in the newspaper that the
United States and its allies have frozen all of Al Qaeda's money and
therefore the terrorist organization is no more.
Here in the United States we have been going after organized
crime's financial network ever since we convicted Al Capone for tax
evasion. But organized crime still exists. What we can do is identify
key components of the financial network and disrupt them by rounding up
key people, shutting down front companies, and targeting the banks that
provide laundering services. Every time a key component is disrupted it
will force Al Qaeda to take time, money, and personnel to rebuild it--
and in the process likely deter or delay individual terrorist
operations. Over the long term, combined with additional military,
diplomatic, intelligence, and law enforcement actions, these efforts
will eventually seriously degrade Al Qaeda's terrorist
capacity. Organized crime in the United States is not today what it was
several decades ago. We can score a similar victory over Al Qaeda, but
it will take time.
That is as far as the analogy with organized crime can be taken,
however. We have tools that can be used against Al Qaeda that could
never be used against organized crime--our military services and
intelligence community. But we also face a more difficult environment
in which to target the Al Qaeda financial network. Here in the United
States we have over the years built a strong anti-money laundering
regime, including specific anti-money laundering laws and bank
regulations. Virtually none of this exists where Al Qaeda raises and
moves most of its money. This makes the problem much more difficult.
Disrupting, degrading, and where possible, taking down the Al Qaeda
financial network will require actions by both the Bush Administration
and the Congress. The Administration's efforts should focus on fully
exploiting the power inherent in the International Emergency Economic
Powers Act, the law cited by President Bush in his Executive Order on
Monday. President Bush should be commended for his announcement on
Monday, and for his establishment of a new Terrorist Asset Tracking
Center in Treasury's Office of Foreign Asset Controls. These acts have
started the Bush Administration off on the right path.
The most important provision of the Executive Order that President
Bush announced Monday is not the one that freezes assets in the United
States, although this is nice to do in those rare moments when money is
actually found. Most of the time, however, people like Osama bin Laden
are a little too smart to put money in U.S. banks under their own
names. That is why the first question that is always asked in these
instances is the wrong one--so how much money have we frozen?
A better question to ask is what is your plan for how you going to
use this authority to get new information about and new actions against
the Al Qaeda financial network that you would otherwise not be able to
get. The most important provision of the Executive Order is the one
that then allows the United States to threaten to cut off anyone,
anywhere that is found to ``be controlled by'' or ``act on behalf'' or
``provide support for '' Al Qaeda--any person, company, bank, or
country. This allows the United States to quietly, behind the scenes,
approach foreign governments and institutions that might fall into that
category, whether willfully or unwittingly, and then present them with
a simple proposition: be cut off from the U.S. economy or quietly give
the United States new information on terrorist financing and take
additional actions against the Al Qaeda financial network. I must
stress that in many cases this has to be done quietly to be effective.
This is the strategy that the Clinton Administration adopted after
the terrorist attacks on the U.S. embassies in East Africa in 1998,
when President Clinton signed similar Executive Orders against Al Qaeda
and the Taliban government in Afghanistan. In some instances it was
successful, and the United States was able to get a degree of
cooperation from certain countries that it had previously been denied.
For instance, these efforts helped ground the Afghan national airline
around the world, at the time a key way Al Qaeda moved resources back
and forth from Afghanistan. There is no doubt that this action
disrupted a key element of Al Qaeda's infrastructure.
But in the big picture we only had limited successes. In some
cases, foreign governments responded with delay and denial due to a
lack of political will. In other cases the governments in question
wanted to help, but had limited abilities to get the information we
wanted since they had no anti-money laundering regime and did not
routinely audit charities. In the current environment, however, and
with a increased focus on the charities that provide a direct
fundraising link between Al Qaeda and the wider societies in the Middle
East, the Bush Administration should be able to be more effective in
this effort.
Three things now need to be done. First, President Bush, Secretary
Powell, and Secretary O'Neill now should now, as part of their quiet
discussions with their counterparts in key countries--particularly
Saudi Arabia, Egypt, Pakistan, the United Arab Emirates, and all
generally friendly nations along the Persian Gulf--sully exploit the
leverage inherent in the President's Executive Orders and personally
demand that their law enforcement and intelligence services fully
cooperate with U.S. efforts to trace and destroy the Al Qaeda financial
network, no matter where the money trail leads. They should also demand
that these countries bring their anti-money laundering regimes up to
full compliance with international standards. These countries should
also fully audit their domestic Muslim charitable organizations, using
outside auditors if necessary, to ensure that they are not being used
as fronts for terrorist cells. It will undoubtedly be difficult to get
many of these countries to take these steps. But without these actions
U.S. efforts to combat the Al Qaeda financial network will continue to
be only marginally effective.
Second, the Bush Administration should identify and take down
individual foreign banks that are found to be safe havens for terrorist
funds. This might be done covertly, through information warfare. Or it
might be done overtly if the Administration can using Monday's
Executive Order, get enough publicly-releasable information that show
that a specific foreign bank is moving money for Al Qaeda. But that can
be a high threshold. Quite often, in my experience, our intelligence
may be sketchy, or we may have enough intelligence but cannot release
it for important reasons involving sources and methods of collection.
What is needed is a new set of powers to more easily and
effectively cut rogue banks off from the legitimate international
financial system. The United States needs to be able to approach
suspected foreign rogue banks--again often quietly, behind the scenes--
threaten to sanction them not because we can prove that there are some
specific terrorist funds going through an account, but because of
general concerns that the bank has become a money laundering haven.
This could mean that the bank has no internal compliance system, that
it has a pattern of illegal activities, or that it operates under a
strict bank secrecy regime. These facts would be much easier to prove
openly, and therefore give the United States important additional
leverage to use strategically.
Last year a bipartisan bill that would have done just that was
supported by the Clinton Administration. Unfortunately, even after
passing out of the House Banking Committee 31 to 1, it was killed
without ever receiving a full vote. As of Monday, the Bush
Administration still had not figured out its position, even though
Treasury Secretary O'Neill was first briefed on this matter during his
first weeks in office. Let me be clear: I know that bill backward and
forward. There is absolutely no good reason why it should not be law as
soon as possible. There are few things that the Congress could do that
would be more helpful in the fight against terrorism. The Treasury and
the diplomatic and intelligence communities should begin work now
behind the scenes to identify which specific foreign banks will be
approached after this becomes law.
And finally, the Bush Administration and the Congress together
should make sure that we are doing everything we can to prevent
terrorist fundraising at home. We should make it harder for websites to
solicit funds for terrorist groups online. U.S. financial institutions
should be given specific guidance on how to identify transactions that
raise suspicions of terrorist financing. Moreover, the Hawala
underground banking system is alive and well in virtually every major
U.S. city, almost completely unregulated. Law enforcement has done a
poor job at getting its arms around the Hawala system and the role it
plays in terrorist financing. A Treasury Department regulation that
would require these underground bankers to register, and make it a
Federal crime if they do not, has recently been delayed. This decision
should be reversed and the FBI should aggressively begin to use this
new legal tool against suspected terrorist moneymen. And the Congress
should make sure that the Treasury issues regulations immediately,
under authority it already has, to bring nondepository financial
institutions such as casinos, securities brokers, and insurance firms
into the U.S. anti-money laundering regime. These steps are required if
the United States is to become in full compliance with international
standards. And given the new global investigations of possible
terrorist stock manipulations, it is all the more important that the
securities industry operating in the United States should be required
to report suspicious transactions just as those operating in Europe
already do.
In all, efforts to take down terrorist groups and their supporters
through military actions will likely take longer than we now
appreciate; efforts take down terrorism's financial network will likely
take even more time. But I have no doubt that a fully committed United
States will eventually be successful in both.
The General Problem of Money Laundering
Many of the ways in which Al Qaeda moves and launders money are
also used by other criminal organizations and drug cartels around the
world. Other witnesses today, including Stuart E. Eizenstat, already
have described the general threat the United States faces from money
laundering, at home and abroad. They have outlined how money laundering
feeds, furthers, and facilitates criminal and terrorist enterprises;
how money laundering can corrupt the safety and soundness of individual
financial institutions and can undermine the integrity of national
financial systems; and how money laundering can harm U.S. national
interests around the world.
I would like only to stress one aspect of this general problem for
you here today, before I move on to what can be done to combat it. We
cannot fully discuss money laundering today without taking into account
globalization. Relatively recent advances in banking and communications
technologies have allowed money to move farther and faster around the
world than ever before. Distant countries are now just a mouse-click
away and the bank next door may be doing business halfway around the
world.
But just as this has opened great opportunities for legitimate
commerce and investment, this has also opened great opportunities for
criminals. The global financial system is only as strong as its weakest
link, and money launderers and tax evaders have been adept at finding,
exploiting, and even creating some of those weak links. So in recent
years we saw the vast proliferation of money laundering havens--places
where drug cartels and terrorist organizations could easily find no-
questions-asked banking secrecy. Many of these places even advertised
their weak bank regulatory systems and poor anti-money laundering
regimes on the internet. And once dirty funds have been washed clean in
these money laundering havens, they often find their way to the United
States.
For instance, just a few years ago, the small South Pacific island
of Nauru was an exceedingly marginal player in the global banking
system. But after it decided to become a money laundering haven, things
changed. A single bank registered in Nauru was the ordering party for
more than $3 billion of the $7.5 billion that illegally moved from
Russia through the Bank of New York. And in 1998, according to the
Russian Central Bank, of the $74 billion that was transferred from
Russia to offshore accounts, $70 billion went to banks registered in
Nauru.
The Clinton Administration appreciated how globalization had
fundamentally changed the environment for the fight against money
laundering. Internationally, we worked with our G-7 allies in a
cooperative, multilateral, and eventually successful effort to combat
global financial abuses--money laundering, tax evasion, and rogue
banking. Domestically, we issued the first-ever National Money
Laundering Strategy, which represented the most comprehensive approach
ever taken on this issue.
The Clinton Administration's strategy was driven by one fundamental
principle: law enforcement and regulatory agencies must move forward
together in order to combat money laundering effectively. We had
unprecedented law enforcement victories such as Operation Casablanca
against Mexican money launderers. But notwithstanding those
accomplishments, the Clinton Administration also recognized that law
enforcement alone would not do the job. Improved examination and
regulation of the financial services industries for money laundering
weaknesses had to be part of the solution. Criminals were constantly
developing new and ever more sophisticated money laundering techniques;
our regulations had to keep pace.
This should not be a controversial principle. Indeed, the basic
necessity of regulatory efforts to complement law enforcement efforts
to combat money laundering has been understood and attracted bipartisan
support for years. President Nixon signed the Bank Secrecy Act that
created the regulatory framework that still exists today. President
Reagan made money laundering a crime in and of itself, fundamentally
expanding that framework. President George H.W. Bush created the
Treasury Department's Financial Crime Enforcement Network, the lead
regulatory agency in the fight against money laundering. This
regulatory framework has received virtually unanimous support from the
U.S. law enforcement community during both Democratic and Republican
Administrations. And finally, beginning with the first Bush
Administration and continuing throughout the Clinton Administration,
the United States worked with its international allies to establish
strong international anti-money laundering standards, including
mandatory customer identification and suspicious activity reporting by
financial institutions. To put it bluntly, almost all of the world's
well-developed financial centers have grown to accept the regulatory
anti-money laundering framework that the United States first invented.
But with globalization changing the nature of the money laundering
problem, the Clinton Administration also recognized that the United
States could not continue to push the international community to do
more without making sure that we were strengthening our own anti-money
laundering regime here at home. So this, too, was a reason why the
Clinton Administration held as one of its driving principles that law
enforcement and regulatory improvements must go hand in hand.
Many long-time observers of the Federal bureaucracy did not think
this would work. Federal law enforcement agencies have long been
notorious for not cooperating with each other, much less regulatory
agencies. And I do not have to tell this Committee about the historical
problems the Federal financial services regulatory agencies have had
learning to cooperate with each other. But the strategy did work,
better then almost anyone had predicted, thanks in no small part to the
skills of Stuart Eizenstat and the leadership of Lawrence Summers. U.S.
international achievements were unprecedented as Mr. Eizenstat has
described. New law enforcement programs were begun setting the stage
for what the Bush Administration now hopes to accomplish. And important
new regulatory initiatives were unveiled, such as the guidance issued
to U.S. financial institutions to help protect the U.S. financial
system from being abused by corrupt foreign leaders.
Unfortunately, before the horrible events of September 11, the
media reports indicated that there were wide philosophical divergences
within the Bush Administration on how to best address money laundering.
From Attorney General John Ashcroft, we heard a commendable speech
urging strong actions and proposing legislative changes that would help
law enforcement. His proposals closely resembled proposals made
previously by the Clinton Administration but not then acted upon by the
House and Senate Judiciary Committees. Federal law enforcement agencies
are also reportedly stepping up a Clinton Administration initiative to
measure the effectiveness of their efforts and resources in the fight
against money laundering. These law enforcement efforts should be
commended. I assume that the Bush Administration will seek the
personnel and funding necessary to ensure they succeed.
On the other hand, many law enforcement officials have been
concerned about what they have heard from White House Economic Advisor
Lawrence Lindsay for many years: his strong opposition to the legal and
regulatory foundations of the U.S. anti-money laundering regime, even
those regulations that are now at the heart of international anti-money
laundering standards. And Treasury Secretary Paul O'Neill had also
publicly questioned the value of fundamental, longstanding elements of
the U.S. anti-money laundering regulatory regime. Just a few weeks ago
regulatory officials were being told to reevaluate some existing anti-
money laundering rules, delay some long-planned regulatory
enhancements, and forego altogether some anticipated new regulatory
initiatives that would further assist law
enforcement and deter criminals from abusing the U.S. financial system.
Treasury's cost-benefit analyses were focusing not on the horrible
costs Americans bear from drug trafficking, terrorism, and other crimes
that money laundering helps finance, but on the relatively minor costs
U.S. banks bear from living up to internationally accepted anti-money
laundering regulations. As an institution the Treasury Department
seemed to be caught in the middle with one part--the one represented
here today--responsible for law enforcement and wanting to take one
step forward, and another part responsible for overseeing regulatory
policies and wanting to take one step back. Perhaps in the wake of
recent events this has all changed. If so, that will be good news.
Money laundering is vital to terrorists and other criminals around the
world. To fight them, we need law enforcement, diplomats, intelligence
officials, and the regulators all working together, all talking from
the same script.
Thank you, once again, for giving me the opportunity to share my
opinions on this important subject. I look forward to answering any
questions you might have.
----------
PREPARED STATEMENT OF JONATHAN WINER
Former Deputy Assistant Secretary for International Law Enforcement
U.S. Department of State
September 26, 2001
Mr. Chairman and distinguished Members of this Committee, I am
grateful for the opportunity to testify before you on the topic of
domestic and international money laundering and terrorist finance.
Given our national emergency, I will focus my testimony solely on what
we can do to combat terrorist finance.
Mr. Chairman, there is much we do not know about terrorist finance,
and about Osama bin Laden's financial networks. However, the many
shards of information we do have should concentrate our minds on the
work ahead.
Before you is a chart displaying a portion of Osama bin Laden's
financial network. Every one of the more than 100 boxes on this chart
reflects a publicly reported financial link of bin Laden, residing in
more than 20 separate countries, in the Americas, Asia, Africa, Europe,
and the Middle East. Public information
demonstrates terrorist funds moving through Islamic charities, travel
agents, construction businesses, fisheries, import-export businesses,
stock markets, chemical companies, and a number of banks. All of this
is public record, and far from complete. There simply is not room on a
single chart to include everything connected to bin Laden and related
terrorist groups.
Some of these entities are now defunct, as a result of law
enforcement and other operations. Others may have only marginal ties to
terrorist finance. But the chart illustrates why responding to this
multifaceted network will require sustained, tenacious cooperation by
many, many governments.
The actions announced by the Bush Administration on Monday
represent some potentially significant new steps. If followed by
further action and international cooperation, they could begin to have
consequences. But that will only be true if every component of the
financial services sector internationally--not just banks and certainly
not just U.S. banks or foreign banks with offices in the United
States--are all subject to similar rules and obligations. An anti-
terrorist finance regime must be globalized, standardized, harmonized,
and it must be multisectoral to have impact. The United States cannot
dictate to other countries if the consequence is that the United States
does not achieve cooperation with others. The United States must
integrate other national policies with our own. In financial services
regulation, including dealing with terrorist finance, having varying
rules for different jurisdictions, State, Federal, or international,
invites trouble.
While there are many steps that should be taken, I wish to focus on
seven areas for action.
First, register and regulate money services businesses, including
Hawala institutions, as Congress has directed the Executive Branch to
do since 1993. Our failure to complete this process has created a
substantial vulnerability by which terrorists can anonymously obtain
cash below the radar of our financial services regulatory system. This
is the Department of the Treasury's job. It should be completed without
further delay, so that nonbank money services businesses in the United
States are subject to obligations at least as tough as those already
required of banks. To be effective, these laws must then be vigorously
enforced.
Second, increase the international pressure on countries that have
yet to put into place financial regulatory and enforcement regimes that
facilitate accountability and the tracing of assets. We have been doing
this already, but we need to push harder and faster. Financial
institutions that are based in jurisdictions that are not adequately
regulated should not have unfettered access to our financial
institutions, unless they can demonstrate that other adequate
protections are in place. Adequate financial services regulation,
supervision, and enforcement is essential not only to discourage
terrorist finance, but also to protect international financial
stability. The recent apparent attacks on global markets by apparent
terrorist short-sellers demonstrates why being able to trace financial
transactions internationally cannot be discretionary. Financial
regulation and enforcement cannot stop at borders when terrorist
finances do not. They must be evenly promulgated and evenly enforced.
Third, the United States needs to accelerate efforts to ensure that
every nation signs up to the UN Terrorist Finance Convention,
criminalizes terrorist finance, and freezes and seizes terrorist funds
and assets of organizations that support terrorism.
Fourth, the United States must do more to build our terrorist
finance database from existing cases. Not merely the records associated
with every terrorist prosecution should be scoured but cases that abut
or adjoin terrorist activity but involve other criminal activity. The
Bush Administration has announced that it has now begun this task.
Fifth, the Congress should support Presidential use of economic war
powers to broaden the reach of U.S. sanctions policy in true national
security emergencies, as the President announced he would do on Monday.
But unilateral action is inherently insufficient. We must obtain the
support of key partners including the G-8 and the European Union.
Six, the United States needs to secure domestic and international
action against those entities that have wittingly or unwittingly
provided support to terrorism, as the President committed himself to
doing in his announcement Monday. These include a number of Islamic
charities, some of which are prominent and otherwise do many good
works. We will need to work with other governments, including many in
the Middle East, to cleanse charities that have supported terrorism
unwittingly and to protect them from abuses by terrorists. Other
charities, who have systematically supported terrorism, should be
closed down, with their assets seized and made available to assist
terrorism's victims.
Seventh, we need to strengthen international regulatory cooperation
in our securities markets, and close regulatory gaps, so that no
terrorist who engages in the obscene act of market manipulation in
connection with an attack ever gets away with it. Countries whose bank
secrecy laws, anonymous trusts and untraceable business companies are
used by terrrorists need to understand there will be consequences if
they do not quickly change their laws and practices to help the world
trace and seize terrorist finances.
In summary, cutting off terrorist finance is like cutting off the
heads of the hydra. Every time we chop off one head, more will grow
back in its place. To survive, we must kill the entire beast, and that
means more than a single bin Laden, or any one part of his or related
terrorist finance networks. I am available to answer any questions you
may have.
Steps to be considered by the United States in connection with
combating terrorist finance.
Regulating Hawala and MSB Regulations
Congress directed the Administration in 1993 in the Annuzio-Wylie
Act to require registration of all money services businesses. Because
the Executive Branch had never regulated money services businesses,
uncertainty about how best to proceed, and at what level suspicious
transactions should be reported, delayed the issuance of regulations
until August 1999. The Clinton Administration delayed implementation of
the MSB regulations until the end of 2001. This year, the Bush
Administration announced that it was delaying the MSB regulations still
further, to late 2002. The Executive Branch has undertaken little
focused attention on underground banking systems and money services
businesses in the United States, and U.S. Government knowledge about
these businesses remains limited. Actions regarding Hawala and MSB that
could be considered would include:
Requiring all MSB's to register within a very short period,
rather than by late 2002. The form for MSB reporting already
exists. Requiring registration immediately would transform those
entities that are not registered illegal. This will inevitably
include all or most Hawalas, which are unlikely to register, making
them vulnerable to being shut down by law enforcement as our
intelligence regarding Hawalas deepens.
Issuing new suspicious activity reporting (SAR) requirements
focused on Hawala type business to existing U.S. financial
institutions. This advisory would be issued from FinCen and require
enhanced scrutiny of the transactions that involve
Islamic countries and their neighbors, and which meet other indicia
such as: apparent commingling of funds, dollar volume of business
not commensurate with stated nature of business; substantial number
of transactions to locations in the Middle East not commensurate
with stated nature of business. Here, reference to existing indicia
applicable to Black Market Peso Exchange could be translated into
Hawala indicia.
Issuing SAR requirements to MSB's which in turn create various
specifications on possible indicia of activity involving
unregistered MSB's (Hawala, Hundi, chop or ``flying money'' houses)
and as well, separately, other possible indicia of terrorist
finance.
Reducing the threshold for MSB currency reporting
requirements, which would require revised regulations to be issued
by Treasury/FinCen. Originally, MSB regulations would have required
a low suspicious activity reporting requirement of $500. The MSB's
objected, and the suspicious activity reporting requirement was
raised to $2,000 for some transactions, and $5,000 for others.
Given what we have learned about the use of currency by the
terrorists who attacked the United States, the Administration
should consider revising the suspicious reporting requirement
downward for money service businesses, with exceptions as
appropriate for larger institutions that have other, adequate
controls. This lower reporting requirement could be amended as
needed as experience is gained, or as we find ourselves beyond the
current emergency. Lower reporting requirements for suspicious
reports for money services businesses will likely push some funds
out of MSB's entirely into the formal regulated U.S. banking
system. This outcome is not necessarily a negative, as our banks,
thrifts, and credit unions are certainly better regulated and more
accountable than money service businesses have been to date.
Consider adding to the existing MSB form another question
which would require MSB's to specify whether they handle
remittances directed to foreign countries, and if so, to specify
the countries where they regularly handle such remittances. This
question could provide a means of focusing which MSB's may be used
by those in terrorist strongholds, for early on-site inspection.
Immediately begin on-site inspections of registered MSB's,
focusing first on those that handle remittances to the Middle East.
There are two possible near term
options for conducting such inspections. First, the Congress or
possibly the Administration by Executive Order, could grant such
authority to the examiners of the existing regulated banking
industry, such as the Office of the Comptroller of the Currency
(OCC), the Office of Thrift Supervision (OTS), and the Federal
Deposit Insurance Corporation (FDIC). The Federal Reserve could
perhaps share in this obligation. These organizations might defer
their regular schedule of examinations on some institutions they
already regulate to review the operations of the newly registered
MSB's, when necessary, on-site. Second, the Federal Government
could encourage State banking officials and other regulators to
examine money service businesses where such they have authority at
the State level. In some States, MSB's are already theoretically
regulated. Nevertheless, in many jurisdictions oversight of MSB's
is irregular, inadequate, or nonexistent. On-site inspections may
uncover a variety of poor practices, and could provide insights as
to which institutions are being used for illicit finance to
terrorists. They would also likely provide information on MSB's
which remain unregistered, and thus illicit, and thus provide leads
to other criminal financial activity.
Prosecute unregistered MSB's for failure to register.
Seize records and assets of unregistered MSB's who fail to
register.
If deemed necessary, increase the penalties substantially for
MSB failure to register or to report suspicious transactions
involving currency.
Amend existing MSB regulations to explicitly describe Hawala
type institutions as included within MSB's. This could make it
easier to demonstrate intentional noncompliance in prosecutions,
rather than accidental failure to register.
Enhanced Scrutiny of Financial Institutions in Underregulated
Jurisdictions,
Especially Those in the Middle East
Banks in major money centers in the world have put into place
increasingly strong constraints against the placement of illicit funds.
Some banks based in the Middle East, operating globally, have equally
good systems for preventing money laundering and terrorist finance.
However, to date there has been little to no money laundering
enforcement in the Middle East. Historical reasons abound. For example,
in oil rich states, those controlling oil resources have often
preferred to require less financial transparency as a means of
discouraging oversight by others within their country or outside it. In
some oil rich countries, income taxes do not exist, and without such
taxes some governments have had less incentive to maintain accounting,
auditing, and financial standards to trace funds. Endemic corruption in
other countries has further impeded transparency and oversight.
Currently in the Middle East, the only countries with money laundering
laws of any significant scope are Cyprus, Israel, Lebanon, and the
United Arab Emirates. Each of these countries has a history of money
laundering and lack of financial transparency. For many years, until it
cleaned up its financial services sector in response to pressure from
the European Union, the United States, and others, Cyprus was one of
the world's centers for terrorist finance. In the remainder of the Gulf
States, as well as in Algeria, Nigeria, Sudan, Egypt, among other
countries, there remains little obstruction to many forms of financial
crime and little to no scrutiny that would prevent money laundering. A
week before the attack on the United States, Nigeria and Egypt were
already placed on the list of noncooperative countries by the Financial
Action Task Force, as Israel and Lebanon had before them. The United
States should consider undertaking a twin regulatory and diplomatic
approach in relation to the financial institutions of those countries
that place no barriers to the placement of terrorist funds. The
regulatory approach would require enhanced scrutiny of financial
transactions coming from these countries. A concurrent diplomatic
approach would require countries without money laundering laws or their
enforcement, to enact and enforce such laws or face sanctions from the
United States such as enhanced scrutiny by U.S. financial institutions.
Actions the United States could consider in pursuit of this objective
might include:
Asking the Financial Action Task Force to speed its
consideration of sanctions against noncooperative countries such as
Nigeria and Egypt and to hold emergency meetings to consider
further multilateral measures to combat terrorist finance; these
could include enhanced efforts against underground banking systems
such as the Hawala as specified above.
Asking Pakistan and the Gulf States to regulate Hawala without
delay. Every country in the world should be asked, and as
appropriate, required to register Hawalas.
Advising countries that have failed to put money laundering
laws into place of the immediate steps needed to provide tightened
scrutiny and recordkeeping on financial transactions as mechanism
to deal with the problem that institutions in these countries have
been used wholesale for the placement of terrorist funds.
Advising countries that do not have the capacity to discourage
the placement of terrorist funds in their financial institutions of
the United States intention to place enhanced scrutiny on such
institutions. The United States needs to consult with these
countries regarding the possible market implications of reduced
access to the United States upon failure to impose measures against
money laundering. Any actual enforcement decisions need to be
rendered on a case-by-case basis to ensure that financial
institutions that have put into place strong anti-terrorist and
anti-money laundering compliance programs do not suffer from
sanctions.
Building Momentum for Ceasing Terrorist Finance Internationally
While many countries have given lip service to combating terrorist
finance, aggressive, coordinated, pragmatic action against this problem
has been limited. To date, the United States has not undertaken
adequate action to stimulate immediate implementation of regimes to
counter terrorist finance. Near term actions to build international
capacity against terrorist finance could include the following:
Asking each country that has yet to sign on to the Terrorist
Finance Convention to demonstrate their opposition to terrorism by
signing, ratifying, and implementing this Convention without delay.
Seeking commitments by other countries to put into place
sanctions similar to those the United States has promulgated in
connection with its use of the International Emergency Economic
Powers Act (IEEPA).
Instructing U.S. executive directors at World Bank and IMF to
vote against funding to states that do not sign up to Terrorist
Finance Convention and to promise to implement it.
Asking Finance Ministries of U.S. allies to similarly make
action against terrorist finance a precondition to receiving
support from the World Bank and similar international financial
institutions. Concerted efforts by the major donor efforts to
channel funds in relationship to anti-terrorist efforts and to deny
funds to jurisdictions that fail to take such steps could provide
substantial incentives for appropriate action against terrorist
finance.
Asking Interpol in Lyon, France to undertake immediate efforts
at pooling expertise on terrorist finance and make recommendations
for further global actions to combat terrorist finance; request
experts at Europol in the Hague, and the World Customs Organization
in Paris, do the same, as well as the G-7/G-8 process.
Requesting the Basel Committee of Bank Supervisors to work
with the International Monetary Fund and other appropriate
institutions important to the
development of international regulatory standards to meet and make
recommendations on actions they can take to attenuate terrorist
finance.
Building Intelligence From Existing Cases
In both State and Federal law enforcement, there are cases
involving witnesses or defendants involved in such activities as money
laundering, document fraud, credit card crime, alien smuggling,
trafficking in women, drug smuggling, and other crimes who may be in a
position to shed light on terrorist finance, or on underground banking,
or both, if the information were to be viewed as important by the law
enforcement officials investigating and prosecuting the original
offense. The United States should consider asking Federal and State law
enforcement agencies in jurisdictions across the Nation to review cases
undertaken over the past 2 years that involved any form of possible
links to terrorist finance or to Hawala system, or to underground
banking. When field offices and locals report such cases, these offices
could present information pertaining to such cases, such as documents,
information from transcripts or depositions, and names of possible
witnesses/informants to the task force at Treasury tasked with creating
the integrated terrorist finance database. This additional information
could be used not only to investigate terrorism, but also to track
unregistered Hawala and MSB's to prosecute them for failure to register
in connection with the MSB initiative discussed above. Such information
may also provide the basis for asset seizures and record seizures. Such
information can in turn be shared with U.S. intelligence agencies as a
mechanism to better target intelligence collection on terrorist
finance, which can then in turn be pushed back when appropriate to law
enforcement, or else dealt with in an IEEPA or national security
context, as specified below.
Broaden Information Base and Scope of Application of IEEPA
The United States has used the International Emergency Economic
Powers Act (IEEPA) to the limits of what may be possible to target bin
Laden and the Taliban within United States and among U.S.-based
institutions. The historic effectiveness of IEEPA has been limited in
two respects. First, it appears that the United States has yet to cover
enough of bin Laden's businesses under IEEPA, including the instruments
through which he has laundered and hidden his resources. Second,
IEEPA's unilateral nature and limitation to territory of the United
States for foreign institutions based here has impaired its
effectiveness due to bin Laden's use of financial institutions outside
the United States. Accordingly, the United States should urgently add
names of specific terrorist support entities under IEEPA beyond the
very short list provided to date. Also, the United States should secure
the support of other countries to adopt IEEPA-like sanctions, so that
terrorist finance does not simply slide from the United States to other
countries. Harmonizing international efforts against terrorist finance
is essential here for sanctions to be effective and fair. Given
globalization, it makes little sense for financial institutions based
in the United States to be subject to more stringent rules than similar
institutions outside of the United States.
Require Enhanced Scrutiny of Islamic Charities
Contributing to charity is one of the five pillars of Islam.
Islamic charities perform numerous good deeds every day, all over the
world. A number of Islamic charities have, however, had either provided
funds to terrorists or failed to prevent their funds from being
diverted to terrorist use. While the vast majority of the uses of these
charities are proper, ethical, and humane, a method to cleanse these
charities of their terrorist connections must be found. The United
States should work with foreign governments and with representatives of
Islamic charities to develop programs that would provide better
oversight of and controls on the uses of charitable funds within the
Islamic world. The United States has found over the years the need to
exercise substantial controls over the functioning of charities to
prevent abuses. Other countries, and the Islamic charities themselves,
need to undertake similar steps. If they do not, the United States
should follow through on the commitment made by President Bush to
freeze the funds of charities that have become
vehicles for terrorist finance.
Enhance Cooperation Among International Securities Regulators To Trace
Cases
Involving Market Manipulation, Especially in Futures and Options
Markets
The SEC has stated that it is investigating a possible case of
market manipulation connected to the attacks on the United States, as
have securities regulators of some dozen other countries. We should use
any information that is gathered in these apparent cases of market
manipulation by terrorism to assess the gaps within the international
regulatory system that impede efficient tracing of the proceeds of such
market manipulation and to close them. In addition to tracing these
instances of apparent market manipulation, the Securities and Exchange
Commission (SEC) and the Commodities Futures and Trading Commission
(CFTC) should meet with counterparts in Japan, Hong Kong, the UK,
France, Germany, Switzerland, the Netherlands, and other affected
jurisdictions as soon as possible to identify any weaknesses and
impediments and to take collective action to improve mutual assistance
in future cases of possible market manipulation by terrorists.
----------
PREPARED STATEMENT OF ALVIN C. JAMES, JR.
Former Special Agent, Criminal Investigation, Internal Revenue Service
U.S. Department of the Treasury
September 26, 2001
Thank you, Mr. Chairman, Senator Gramm, and Members of the
Committee, I am very pleased to be given this opportunity to speak to
you today about money laundering. My name is Alvin James and currently
I serve as the leader of the Anti-Money Laundering Solutions group at
Ernst & Young, LLP. However, the views I am expressing here are my own
and do not necessarily reflect the views of Ernst & Young. Less than 2
years ago, I retired from Federal service after 27 years of law
enforcement within the U.S. Treasury Department. Most of my public
service was spent as a Special Agent with IRS Criminal Investigation
Division where I specialized in international undercover money
laundering investigations. I spent the last 5 years of my Federal law
enforcement service at the Financial Crimes Enforcement Network
(FinCEN) concluding the last 2 years as their Senior Anti-Money
Laundering Policy Advisor. As this Committee knows, one of the truly
unique characteristics of FinCEN is its networking capability. It
serves as a sort of hub for representatives from Federal, State, and
local law enforcement agencies from across the United States. It was at
the FinCEN that a DEA colleague, Greg Passic, and I collaborated on
developing a model that explained what is generally recognized as the
largest money laundering system in the Western Hemisphere--the Colombia
Black Market Peso Exchange (BMPE). That model, which was developed
using law enforcement intelligence, describes how this underground
financial system works and identifies vulnerable choke points. During
my tenure at FinCEN I also served as the Founding Chairman of the
Treasury Under Secretary for Enforcement's BMPE working group.
Mr. Chairman, most of my testimony today will center on the BMPE as
a global money laundering system. However, I would like to begin with a
few remarks to highlight the use of the BMPE and other underground
financial systems by international terrorists. Terrorists do not
usually need to launder money because terrorism, unlike other criminal
activity such as narcotics trafficking, does not generate money.
However, terrorists do need to move funds covertly. There are major
similarities among all underground financial systems--also called
parallel payment systems--including the BMPE, Hawala, and the Chinese
Underground Banking or Chit system. The most significant of these
similarities is their ability to facilitate anonymous international
transfers of money. This feature makes these systems attractive to
terrorist groups. We know that they use these systems to covertly move
the money they need to support their activities.
In light of recent events I would caution those who attempt to
concentrate U.S. law enforcement resources on terrorist money
laundering. A separate and distinct system of laundering or hiding
money for terrorist activity does not exist. They use those systems of
transferring and hiding funds that are most readily available,
discreet, and cheap. The longer we studied BMPE the more evident it
became that this system of money laundering was used for not only a
multitude of criminal activities but also legitimate commerce, capital
flight, tax evasion, and the simple transfer of assets. Recent
developments also indicate that BMPE brokers have teamed up
increasingly with partners in the Middle East. In addition to typical
placement in the United States, drug dollars are now being deposited in
Lebanon, Israel, and Palestine. Persons responsible for the first World
Trade Center bombing also received funds from a BMPE broker working out
of Venezuela. I feel that by fully identifying those individuals,
businesses, and banks handling BMPE transactions in the Middle East, we
have an opportunity to flag transactions supporting all types of
illegal activity including terrorism. Recent U.S. drug money
investigations have revealed laundering through businesses in the
Middle East. Some of those individuals are involved in terrorist
circles. The knowledge that U.S. investigators gained by tracing funds
generated by the BMPE cells operating in the United States will prove
tremendously valuable in developing a workable game plan to pursue
terrorist finances. The BMPE system is funded almost exclusively by
drug money while the other systems that I mentioned are often funded by
parallel transactions of legitimate trade. Thus for the BMPE, terrorism
is yet another compelling reason to disrupt and ultimately dismantle
this purely illegitimate system. In addition, we must either bring the
other systems under close scrutiny and regulation within the world's
legitimate financial community or dismantle them as well.
The remainder of my testimony will focus on the BMPE as a global
money laundering system and the danger it poses to our country, as well
as the challenges it presents to our law enforcement, business, and
financial communities. The BMPE presents numerous dangers to our
country. Most directly this system facilitates the Colombian drug trade
by allowing the Colombian drug wholesaler a relatively safe means to
annually convert $5 billion generated by the sale of drugs in the
United States to pesos in Colombia. In turn the BMPE makes these
billions of dollars available as a commodity for sale outside our
regulated financial system. There they are ready for those who need a
discreet source of funds that is difficult to trace. As I mentioned
earlier, U.S. law enforcement has evidence that some of these funds
have been purchased in the past by middle-eastern terrorists including
those who bombed the World Trade Center in 1993. The links to possible
terrorist funding through the BMPE are even stronger today since, as we
will see, the initial placement of drug dollars into U.S. financial
institutions now begins in nations throughout the world.
The funds are also available to Colombian importers who wish to
hide their purchases of U.S. trade goods that they smuggle into their
country. This smuggling, totally funded by the BMPE, is so prevalent
that the Colombian government is unable to tax the sales of almost 50
percent of retail goods sold in Colombia. This lack of legitimate
revenue destabilizes the Colombian government and hinders its ability
to fight the narcotics suppliers on their home turf. In addition,
Colombia's business community has been destabilized because those
businesses that choose to operate legitimately find it almost
impossible to compete with those who sell smuggled goods. The Colombian
drug traffickers are able to use their billions to fund the Colombian
rebels who stand between cocaine and heroin production facilities and
the governments of the United States and Colombia who are trying to
eliminate the Colombian narcotics business. Finally, the rebels use
this drug money not only to fund their military objectives, but also to
finance acts of terrorism aimed at promoting their cause and hindering
their enemies in Colombia.
U.S. law enforcement has the authority, the ability, and the
knowledge to severely disrupt and ultimately dismantle the BMPE. By so
doing it would force the drug traffickers and money launderers to use
laundering tactics more vulnerable to law enforcement. There is
considerable evidence that law enforcement can impact the BMPE system.
Vigorous enforcement of the Bank Secrecy Act (BSA) and other anti-money
laundering laws have caused the Colombian drug trafficker to be willing
to sell his share of the drug proceeds to the BMPE peso broker for
discounts in excess of 30 percent rather than take the risk of either
moving the funds or laundering them himself in the United States. The
application of the Geographic Targeting Order to the money service
businesses in New York City had a dramatic, although short-lived,
impact on the ability of the BMPE system to place its drug currency and
then move its funds. Undercover operations designed to infiltrate the
BMPE system have been responsible for a shift away from currency
placement in the United States to placement in foreign locations.
However, in spite of these and the numerous other activities that have
made up 20 years of law enforcement efforts in this area, I must also
note that the BMPE still remains the primary vehicle used by Colombian
traffickers to launder their drug proceeds. Money laundering systems
are like a balloon. If you squeeze them in one place, they just get
bigger somewhere else. The main challenge faced by U.S. law enforcement
is to coordinate their activities in a systemic approach and pop the
balloon.
It should be noted that many of our law enforcement efforts have
been more notable for the degree to which they disrupted the system
than for the law violators they brought to trial. However, the BMPE is
a financial system and as such it is not dependant on any one
individual or group of individuals. Therefore, a plan that is directed
entirely toward arresting and prosecuting the drug traffickers and the
money launderers who use this system will not by itself stop the
system. The second major challenge for law enforcement is to place the
goal of disruption and dismantlement of the system on an equal footing
with prosecuting the individuals who use it. Of course, the Congress
and the Administration are also challenged to measure their successes
accordingly.
The U.S. financial institutions and their regulators face a
different challenge. The financial community has done a pretty good job
of implementing our anti-money laundering laws. Colombian drug
traffickers have virtually stopped laundering their funds in the United
States. They pay a substantial fee to the BMPE peso brokers to take
this high-risk activity off their hands. The funds the brokers cannot
handle, the traffickers smuggle out of the country, but sale to the
BMPE is their preferred method. While the banks have not kept the drug
money out of their institutions all together, they deserve some of the
credit for the current shift of drug currency placement from the United
States to foreign locations. However, therein also lies their
challenge. A large portion of the drug currency that is being smuggled
offshore is still being placed in the U.S. financial system through the
international correspondent banking relationships between the
respective foreign banks and their U.S. correspondent banks. While the
front door of our U.S. financial institutions closes ever more tightly
to those who would bring in ill-gotten gains, the back door of
international correspondent banking gapes open. The challenge to U.S.
financial institutions and their regulators is to close the unguarded
back door.
Before I discuss these topics in more depth, let me first briefly
describe the system. The Colombian Black Market Peso Exchange is the
most egregious example of an underground financial system used to
launder dirty money. We believe that as much as $5 billion dollars in
Colombian drug proceeds (or about half of U.S. wholesale drug proceeds)
are laundered per year through this system. There are other underground
financial systems or parallel banking systems that operate in much the
same way throughout the world, such as the Hawala system in the Middle
East or the Chinese Underground Banking or Chit system in Asia and the
Pacific Rim. However, the BMPE system is the only one that is funded
almost exclusively with illegal proceeds, namely drug dollars.
The sale of drugs in the United States generates currency. No one
uses his or her checkbook or his or her credit card to buy drugs--at,
least not yet. Each tier of the drug sales and distribution
organizations in the United States takes their cut of the cash and
passes the remainder up the line. Finally the Colombian suppliers'
wholesale share is amassed in secret stash houses in ports of drug
entry such as New York City, Miami, Houston, Chicago, and Los Angeles.
At this point, the Colombian trafficker has a serious problem. Cash is
not only heavier and bulkier than the narcotics he imported but also a
more precious commodity. Drug manufacture and supply operations in
Colombia operate at about 30 percent of capacity. Therefore, if a
shipment of drugs is seized, it is easily replaced, but if the money is
lost it is irreplaceable. The Colombian drug trafficker's dilemma is to
get the value of cash home to Colombia in pesos without detection by
United States or Colombian authorities.
The BMPE peso brokers, always in need of a source of U.S. dollars,
were a ready-made solution. The BMPE has existed since the late 1960's
as a means for Colombian importers to pay for U.S. trade goods with
dollars while avoiding tariffs
enforced by the Colombian central banking system. The peso brokers
provided the additional service of placing the dollars in the U.S.
financial system and transferring them directly to the U.S. exporter on
behalf of the Colombian importer. In the beginning peso brokers used
Colombian exporters of goods to the United States, such as cut flowers
and coffee, as their source of dollars. However, the Colombian drug
traffickers offered the peso broker a deal he could not refuse. The
drug dollars were offered at a substantial discount, as much as 30
percent, to compensate the peso broker for the fact that the dollars he
was buying were in the form of currency and carried considerable risk.
The peso brokers began to alter the way they did business in order to
place the drug currency in the U.S. financial system and to meet the
needs of both sets of customers, the Colombian drug trafficker, and the
Colombian importer. Once the process was in place to handle the dirty
money, there was little reason to go back to the old ways and pay full
price for the dollars. The Colombian traffickers could provide a
virtually unlimited supply of funds. If fact the annual wholesale
Colombian drug proceeds are estimated to be between $8 and $12 billion.
There is only enough demand for dollars through the BMPE to accommodate
about half that amount. The end result is that the BMPE became almost
wholly funded with drug dollars.
As stated earlier, the greatest challenge for law enforcement is
the need for a coordinated approach. We have made strides in several
areas of BMPE enforcement, but as yet we have not combined these
successes in a coordinated attack on the BMPE system as a whole. I
firmly believe that our only hope to destroy this system lies in the
use of all our tools in a calculated effort to force drug dollars out
of the relative safety of the BMPE and into an arena that offers less
security to the drug trafficker and more susceptibility to law
enforcement.
The substantially overlapping money laundering jurisdictions at the
Federal, State, and local levels is fundamentally responsible for the
current lack of coordination in BMPE strategy. Most of our law
enforcement agencies in this country have some form of money laundering
jurisdiction. At first glance this looks like optimum coverage for
money laundering enforcement. Let me also say at this point that there
can be no doubt of the will of each and every one of these agencies to
do their utmost to enforce money laundering laws. However, especially
at the Federal level, law enforcement administration is a competitive
endeavor. There are only so many law enforcement dollars in the Federal
budget. Competition for those funds between the agencies is fierce.
This problem is exacerbated by the Federal asset forfeiture funds that
return a proportional share of seized and forfeited funds back to the
respective seizing law enforcement agencies. Asset forfeiture is a
major part of most money laundering prosecutions. The ability to return
seized assets to individual agency budgets only serves to fan the fires
of competition in money laundering enforcement. Our efforts to include
BMPE investigations in the National Money Laundering Strategy have not
really addressed this problem.
These competitive pressures also work against cooperative
investigations and sharing of information. True sharing of information
and full coordination of investigations is vital if we hope to pop the
money laundering balloon. We must get past the ugly questions of who
gets credit for the prosecution or the seized assets. The BMPE operates
on a truly global basis and its only limitation is safety and
profitability for its users. It thrives in an environment where its
adversary is hindered by a new set of rules each time a boundary is
crossed, whether the boundary is between agencies, states, or
countries. We cannot afford to allow interagency competition to
continue in this already complex enforcement environment.
The second challenge for law enforcement centers on our measure of
success in this area. Our primary focus now is on the prosecution of
individuals and the seizure and forfeiture of their assets. Of course,
this traditional approach remains an important leg of any enforcement
initiative. However, the BMPE is not dependant on any individual or
group of individuals to continue its operation. It operates on the
demand for dollars available outside the traditional banking system. As
long as those dollars are available and can be supplied safely to the
users, the system will continue to operate. Further the system is large
enough and the profits are substantial enough to entice replacements in
spite of the risk of arrest and prosecution. Therefore, individual
cases and prosecutions should not be our sole goal or the sole measure
of our efforts in this area. Disruption of the system should be an
equally acceptable goal of law enforcement action. Once again the
challenge here is not only to pursue success along both lines of
measurement, but also to do so in a coordinated fashion so as to keep
up the pressure on all fronts at one time.
Earlier I spoke about the Bank Secrecy Act (BSA) and its
administration by bank regulators and how our financial institutions
have had a profoundly negative impact on the ability of narcotics
traffickers to move their illicit funds through our financial system.
When Colombian narcotics began to arrive on the U.S. drug scene in
mass, the banks in the major entry ports, especially Miami, were
literally awash in drug currency. At the outset drug traffickers were
able to bring suitcases of currency into local banks and wire transfer
it wherever they wanted. Law enforcement and bank regulators raised the
alarm and the enforcement of the currency reporting provisions of the
BSA came into effect. The effectiveness of that statute and the resolve
of the banking community, as well as the enforcement and regulatory
arms of the Government to keep dirty money out of their institutions
has severely dampened the ability of money launderers to use our
financial systems. Unfortunately, it has not been able to keep the
dirty money out altogether.
Drug sales generate huge revenues and huge profits. The pressure
generated by the need to move and launder these funds is immense. The
BMPE is the primary vehicle used by Colombian drug traffickers to
counter the BSA. In fact the discount offered by Colombian drug
wholesalers to the dollar peso brokers is one measure of the
effectiveness of the BSA. The drug traffickers would rather sell their
profits in U.S. currency at a discount of up to 30 percent than take
the risk of laundering the dollars themselves. In so doing they pass
the money laundering enforcement risk to the dollar peso broker. At
first the peso broker was able to place the drug currency into the U.S.
financial institutions by using transactions structured below the
Government's and the bank's detection thresholds. But the pressure that
drove the trafficker to sell his funds at a substantial discount has
mounted on the peso broker as well.
The broker has countered the pressure against currency placement in
the United States through the use of international correspondent
banking. The susceptibility of correspondent banking relationships to
money laundering has been highlighted in a report compiled by the
Permanent Subcommittee on Investigations. Senate bill 1371, sponsored
by Senator Carl Levin, also addresses these weaknesses. The following
is an example of money laundering through correspondent banking that
relates directly to the BMPE.
The peso brokers have begun to smuggle large amounts of currency to
nations whose banks have correspondent relationships with major U.S.
banks. The nations of choice are those with either lax money laundering
laws or lax enforcement of those laws. In return the foreign bank may
sell a U.S. dollar check drawn on the foreign bank's U.S. correspondent
account. These dollar delineated bank checks carry the same weight as
fully negotiable cashiers checks in Latin American markets. Therefore,
the checks are readily sold to the Colombian importer as dollar based
financial instruments that are readily acceptable in these Latin
markets. The brokers often go so far as to have the checks drafted with
the name of the respective payee specified by the Colombian importer.
The foreign bank may also accept the currency deposit and then order a
wire transfer from their correspondent account to the account
designated by the depositor.
The foreign bank is left with a large amount of U.S. currency and
no bank wants to keep excess currency on hand. Since they do not have
an account with the Federal Reserve, they get rid of the excess by
sending a deposit of currency to their correspondent bank. This
replaces the funds withdrawn by the check sold and eliminates the
excess currency problem. The effect of this transaction is that we are
back to suitcase deposits of U.S. drug currency into our financial
system. The only difference is that the dollar peso broker uses the
correspondent back door to the bank rather than the front door in Miami
or New York.
The BSA has worked in that we have begun to force the dollar peso
brokers to move their money offshore rather than structure the deposits
here in the United States. The challenge presented to banking community
and their regulators is to keep up the pressure in the United States
while also keeping drug currency placement out of their correspondent
institutions as well. Law enforcement sources have noted an increase in
correspondent BMPE activity in Haiti, Guatemala, the Dominican
Republic, Venezuela, Israel, Lebanon, Palestine, and Australia. When
one views this list it is easy to see that these dollars can be made
available to individuals with much more heinous purposes in mind than
smuggling duty-free refrigerators into Colombia. The BMPE is a global
problem calling for global coordination. Given the recent terrorist
acts, it is even more imperative that we force these billions of
dollars out of this system that can make them so easily available on a
truly global basis to anyone with a need for covert funds.
In conclusion, I would like to restate that our Government has the
ability, the authority, and the knowledge to take action now against
the BMPE. The question is how do we bring our forces to bear in such a
way that the BMPE will be dismantled? I believe the answer lies in
eliminating the problems brought on by fragmented anti-money laundering
jurisdiction. I suggest that this can be accomplished by the creation
of a special task force at the highest possible level, which would have
the charge to coordinate and direct our law enforcement efforts against
the BMPE and other underground financial systems. The most important
first step for this task force is to create a single repository for law
enforcement money laundering intelligence. This repository must include
a method to retrieve even the most sensitive law enforcement
information on a real time basis. If we ever hope to truly dismantle
these systems we must put this most valuable recourse in the hands of a
task force that is responsible for the big picture. In addition, once
they have this information, they must have the authority to disseminate
it, as they deem appropriate for their mission. The task force should
also have the power to take action on their own or direct the efforts
of other law enforcement operations working along these lines. Law
enforcement has seen the need for this type of combined effort, but to
date they have been unable to achieve the desired level of cooperation.
I believe a high level task force will achieve the sought after
results.
That concludes my testimony.
Thank you, Mr. Chairman.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CARPER FROM JIMMY
GURULE
Q.1. It is my understanding that the U.S. Customs Service lacks
the clear authority to inspect mail and other postal items
leaving the United States. Given that money laundering activity
and the exportation of other contraband could be facilitated by
the use of the U.S. mail, what are Treasury and the
Administration doing to close this loophole, and grant Customs
the authority to inspect outbound postal items?
A.1. Outbound international mail has been treated as exempt
from inspection, because of Postal Service insistence that its
laws preclude Customs border search of such mail. This has
created the possibility that outbound mail is being used to
facilitate major violations of U.S. law. The violations can
range from the unreported exportation of currency and other
monetary instruments to strategic merchandise and intellectual
property rights infringement. U.S. mail shipments are the only
shipments leaving the country, other than diplomatic pouches,
that are not subject to Customs' examination.
U.S. Postal Services' and Customs' legal positions with
respect to this issue are exhaustively documented. Customs
asserts authority to search all mail leaving the country, under
31 U.S.C. 5317(b), which authorizes Customs officers to stop
and search items including ``envelopes'' entering and leaving
the country without a warrant. The Postal Service maintains
that 39 U.S.C. 3623(d), which requires the Postal Service to
maintain at least one class of mail of domestic origin that is
sealed against inspection without a search warrant, directly
conflicts with the authority in 31 U.S.C. 5317.
U.S. Customs Service has intensified their efforts to
obtain outbound search authority. There has been movement on
Capitol Hill during this session to enact legislation granting
outbound search authority of U.S. mail by U.S. Customs.
Currently, Customs has internal procedures and policies in
place on the search of outbound mail.
Q.2. I understand that U.S. Customs does all of its enforcement
and security targeting on international shipments arriving in
the United States by running computer checks against the
sender, the recipient, the description of the contents, the
country of origin, etc. I also understand that some
international carriers provide this information electronically
to Customs in advance of shipment arrival, while some do not,
including the U.S. Postal Service.
a). Can Customs get accurate content information from the
Postal Service?
b). If not, what impact does this have on Customs' ability
to inspect and screen items entering the United States via the
U.S. Postal Service?
A.2.a. At this time, the Postal Service does not provide
content information to Customs either electronically or in hard
copy format. Rather, the content information is provided on a
Customs declaration attached to each item, which is prepared by
the individuals sending the parcel, not by the Postal Service.
Customs personnel must manually review these items and
declarations to determine which will be inspected, which
greatly slows the process.
The Postal Service is dependent upon the electronic
capabilities of the originating countries, which vary
dramatically. In addition, the customer base for international
mail is overwhelmingly individual to individual, while Express
Consignment Operators carry primarily business to business,
which is more easily electronically manifested.
The U.S. Customs Service has the ability to perform
enforcement and security checks on inbound international
shipments. Advance information pertaining to some cargo
shipments is provided electronically by some international
carriers. This information includes, but is not limited to, the
name and address of the foreign shipper and consignee, a
description of the items contained in the shipment, the country
of origin, and the value. In the Express Consignment Operator
environment, advance information is provided to Customs
electronically, as well as hard copy computer printouts. With
the Postal Service, enforcement and security checks must be
performed based on a manual review of Customs' declarations in
real time.
A.2.b. The current process requires Customs' personnel to
manually review each parcel and accompanying declaration,
delaying facilitation. An advantage to advance information is
that it allows Customs to perform their inbound inspections
more efficiently. Most Express Consignment Operators present
their manifests to Customs while the conveyance is en route to
the United States. Customs reviews the manifest data to
identify those shipments that are to be examined.
Ideally, Customs would like advance information on all
shipments. This serves the interests of both Customs and the
Postal Service, enabling both agencies to utilize its limited
resources to conduct searches and clearances on those requiring
immediate attention, without delaying those items not needing
review.