[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.
                               ----------
            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.
                               ----------
               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.
                               ----------
             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.
                               ----------
               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.
                               ----------
                  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.
                               ----------
               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.
                               ----------
                 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.
                               ----------
                  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.
                               ----------
                   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.
                               ----------
                 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.
                               ----------
             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.






















































































































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