[Senate Hearing 107-]
[From the U.S. Government Publishing Office]
S. Hrg. 107 - 660
HAWALA AND UNDERGROUND TERRORIST
FINANCING MECHANISMS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
INTERNATIONAL TRADE AND FINANCE
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
ON
HAWALAS AND UNDERGROUND TERRORIST FINANCING MECHANISMS: INFORMAL
INTERNATIONAL FINANCING NETWORKS THAT CAN SERVE AS A PIPELINE OF FUNDS
FOR TERRORIST
__________
NOVEMBER 14, 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
Martin J. Gruenberg, Senior Counsel
Madelyn Simmons, Republican Professional Staff Member
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
______
Subcommittee on International Trade and Finance
EVAN BAYH, Indiana, Chairman
CHUCK HAGEL, Nebraska, Ranking Member
ZELL MILLER, Georgia MICHAEL B. ENZI, Wyoming
TIM JOHNSON, South Dakota MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii
Catherine Cruz Wojtasik, Staff Director
Daniel M. Archer, Republican Staff Director
(ii)
C O N T E N T S
----------
WEDNESDAY, NOVEMBER 14, 2001
Page
Opening statement of Senator Bayh................................ 1
Prepared statement........................................... 36
Opening statements, comments, or prepared statements of:
Senator Ensign............................................... 3
Senator Sarbanes............................................. 8
Senator Hagel................................................ 39
WITNESSES
James F. Sloan, Director, Office of Financial Crimes Enforcement
Network (FinCEN), U.S. Department of the Treasury.............. 3
Prepared statement........................................... 39
John Varrone, Assistant Commissioner, Office of Investigations,
U.S. Customs Service........................................... 6
Prepared statement........................................... 41
Rahim Bariek, Bariek Money Transfer.............................. 22
Prepared statement........................................... 42
Tarik M. Yousef, Assistant Professor, Department of Economics,
School of Foreign Service, Georgetown University, Washington,
DC............................................................. 26
Prepared statement........................................... 43
Patrick Jost, Product Development Manager, SRA International,
Inc., Formerly of FinCEN, and Coauthor of the 1998 Report...... 28
Prepared statement........................................... 45
(iii)
HAWALA AND UNDERGROUND TERRORIST FINANCING MECHANISMS
----------
WEDNESDAY, NOVEMBER 14, 2001
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Subcommittee on International Trade and Finance,
Washington, DC.
The Subcommittee met at 2:37 p.m., in room SD-538 of the
Dirksen Senate Office Building, Senator Evan Bayh (Chairman of
the Subcommittee) presiding.
OPENING STATEMENT OF SENATOR EVAN BAYH
Senator Bayh. The Committee on Banking, Housing, and Urban
Affairs, Subcommittee on International Trade and Finance, will
come to order.
Senator Hagel will be about 15 minutes late, so I am going
to hold down the fort by my lonesome until he gets here.
I would like to thank our witnesses for being here today
and I would like to thank members of the audience for your
attendance and your interest.
Let me begin with my opening statement and then we will
hear from our witnesses.
Since the tragedy of September 11, Americans have become
much more aware of how the terrorist threat and our response to
it will affect all facets of society--how we travel, how we
communicate, our health care system, and much, much more.
We have also become more aware, thanks in part to the good
work of this Committee and the leadership of Senator Sarbanes,
to the essential role that finances play in the terrorist's
ability to attack Americans, both at home and abroad.
Simply put, the terrorist's ability to generate funds and
transfer funds to plan and carry out their attacks are an
essential part of the terrorist threat that we face.
In this war against terrorism, one of the most critical
battles will take place not in a foreign land, but in the
financial world, as we seek to paralyze terrorist activities by
taking weapons out of their hands by cutting off their
finances. In an interview in October with a Pakistani
newspaper, Osama bin Laden seemed unconcerned about our efforts
to shut off the flow of his money. He said Al Qaeda has three
financial systems organized by backers who are as, ``aware of
the cracks inside the Western financial system as they are
aware of lines on their hands.'' He also said: ``These are the
very flaws of the Western financial system, which are becoming
a noose for it.''
One system which bin Laden and his terrorist cells use to
covertly move funds around the world is through Hawalas, an
ancient and formerly widely unknown system of transferring
money. Today's hearing will examine Hawalas and how they have
been exploited by Osama bin Laden. Although most Americans have
never heard of a Hawala, that system almost certainly helped Al
Qaeda terrorists move the money that financed their attacks on
the World Trade Center and the Pentagon on September 11.
Just last week, the President used his emergency powers to
shut down a Somalian conglomerate connected to Al Qaeda that
was operating in several U.S. cities, including Fairfax City
and Falls Church, Virginia. The Al Barakaat network used
Hawalas to move funds to Somalia, Afghanistan and the Sudan--
funds used by Al Qaeda.
On our first panel, Jim Sloan, Director of the Treasury
Department's Financial Crimes Enforcement Network, FinCEN, will
testify about the Al Barakaat case.
Mr. Sloan, thank you for joining us today.
FinCEN has been aware of the law enforcement problems
raised by Hawalas for several years. In 1998, FinCEN released
one of the only reports on Hawalas. FinCEN is also the agency
charged with enforcing the money service business regulations
effective on December 31 of this year, which now cover Hawalas
as well. We look forward to hearing from Mr. Sloan about
Hawalas, Al Barakaat, and the money service business
regulations.
Also testifying will be Mr. Rahim Bariek. Mr. Bariek, I
hope I pronounced that correctly. Mr. Bariek is a Hawala broker
who runs his business in northern Virginia. Mr. Bariek provides
important Hawala services to the Afghan community with family
in Pakistan.
Welcome, sir. I thank you for joining us today.
This will be, I believe, the first opportunity for Congress
to hear firsthand from a Hawaladar, so we appreciate your
courtesy in joining us today to explain what you do.
Our final panel will include two experts on Hawalas,
Professor Tarik Yousef from Georgetown University, who is a
specialist in Middle Eastern and Asian banking systems; and Mr.
Patrick Jost, formerly of FinCEN and coauthor of the 1998
report I referred to previously.
Thank you for joining us, gentlemen.
While much of the money that flows through the Hawala
system in the United States is used for legitimate purposes,
Hawalas also allow terrorists and drug dealers to smuggle money
into the United States, outside the detection of the global
banking system. Congress has recognized the danger of
unregulated Hawalas, and moved to regulate their activities in
1994, with passage of a law requiring check-cashing businesses
and informal financial enterprises like Hawalas to register
with the Government; subsequent regulations also required money
services businesses, including those enterprises to report
suspicious transactions.
Unfortunately, the regulations implementing this statute
have remained unpublished, while Hawalas continue to operate in
the United States without supervision. That was the reason that
I and others proposed an amendment that will expedite
enforcement of Hawala regulations and give U.S. law enforcement
and intelligence authorities some of the tools they need to
intercept terrorist financing before it is too late.
Targeting the financial network of terror groups like Al
Qaeda will not, by itself, strike a deathblow to international
terrorism. However, it will disrupt the criminal financial
network supporting terrorism and it will give our law
enforcement and intelligence communities a better chance of
detecting and preventing terrorist activities. We must also
aggressively seek out every angle that
terrorists use to finance their operations. We must make sure
that every cent of U.S. aid is going to the people who need it
the
most in developing countries and not to terrorist groups for
train-
ing and arms.
In consultation with Senator Sarbanes, I intend to hold
future hearings on other forms of terrorist financing, like the
link between Al Qaeda and certain charities and nongovernmental
organizations. Reports have surfaced that some terrorists use
funds received from charities.
The war against terrorism demands that we strengthen our
resolve, sharpen our skills, and redouble our efforts. It also
requires that all of our agencies involved in this battle make
striking at the heart of terrorists' financing a top priority,
that they bring a sense of urgency to this mission, and that
they coordinate with other agencies who are involved in this
struggle.
I look forward to all of the testimony we will hear today
and to taking the next step to cut off terrorist financing.
And again, I would like to thank our witnesses for joining
us today. We are looking forward to hearing from you.
Senator Ensign.
COMMENT OF SENATOR JOHN ENSIGN
Senator Ensign. No opening statement, Mr. Chairman.
Senator Bayh. Just hear to listen? Well, then, Mr. Varrone,
why don't I recognize you and thank you for your testimony
today as well. I appreciate your courtesy in joining us.
Having said that, Mr. Sloan, I think we are going to hear
from you first. Again, I want to thank you for your presence
and the information you will provide us.
STATEMENT OF JAMES F. SLOAN, DIRECTOR
OFFICE OF FINANCIAL CRIMES ENFORCEMENT
NETWORK (FINCEN)
U.S. DEPARTMENT OF THE TREASURY
Mr. Sloan. Good afternoon and thank you, Chairman Bayh and
Senator Ensign.
I want to thank you for the opportunity to discuss today
the important issue of informal banking systems, specifically
Hawalas, and their potential for abuse, in particular, Hawala
systems in terrorist financing, drug trafficking, alien
smuggling and tax evasion.
As you noted, I am joined here today by John Varrone, the
Assistant Commissioner of the Office of Investigations at the
U.S. Customs Service, who will be able to discuss in greater
detail some of the investigative matters.
The context of today's hearing--the potential
vulnerabilities of informal banking systems to terrorist
financing in the wake of September 11--underscores the need to
study the use, legal and
illegal, of such systems. The Patriot Act, recently signed by
the
President and enacted, recognizes this need and FinCEN will be
working with the Treasury Department to prepare recommendations
for Congress regarding the need for any additional legislation.
This requirement in the Act dovetails with FinCEN's ongoing
efforts to conduct an in-depth examination of these systems in
the United States, as you mentioned in your opening statement.
As the Subcommittee is aware, FinCEN is developing a
compre-
hensive regulatory program to register and require money
service businesses, or as we refer to them the MSB's, to report
suspicious activity. We have been taking preliminary steps to
look at these informal financial systems for several years.
Money Service Business, or MSB, is a term used to denote
the subgroup of nonbank financial institutions being required
to register under the Bank Secrecy Act by the end of next
month, December 31. This subgroup, which includes businesses
such as Hawalas, that are in effect informal money remitters,
is comprised of: money transmitters, issuers of traveler's
checks or money orders, sellers or redeemers of traveler's
checks or money orders, check cashers and currency dealers, or
exchangers.
Because there are variations on the definition of
``Hawala,'' it is essential that this and similar systems be
thoroughly examined and understood. Towards this end, FinCEN
has, and continues, to participate in several initiatives. For
example, the Financial Action Task Force regional body in Asia,
the Asia Pacific Group, is undertaking a study of informal
banking practices in Asia. The APG project began in 1999 and
has focused on investigative case examples from member
countries, including the United States, which demonstrate how
these systems are used and whether there has been evidence of
the movement of the proceeds of crime utilizing these systems.
The APG project group met most recently just a few weeks
ago, after the events of September 11. Case examples surfaced
to date show the continued use of Hawala-type systems in moving
funds associated with such crimes as drug trafficking, alien
smuggling, kidnapping, customs fraud and tax evasion. Anecdotal
information has also been presented in the APG process on the
use of such systems to fund terrorist activity. Other studies,
such as one done by the Dutch Ministry of Justice in 1999,
indicate that Hawala was, in fact, used to support terrorism in
the Kashmir region in the early 1990's.
In 1999, a report to which you referred was prepared by
FinCEN, in fact, prepared by one of your subsequent witnesses,
Mr. Jost, which described typical Hawala transactions and
discussed how Hawala is used to facilitate money laundering.
Mr. Jost's study noted that this method of monetary value
transmission is an ancient system originating in South Asia.
Today it may be used around the world to conduct legitimate
remittances. When I say
legitimate, I am referring to remittances that may be those of
expatriate workers who use a Hawala system believing that they
are sending money quickly and reliably to family members in
their home country. And again, I understand you have a witness
who will be discussing that exact issue.
Earlier this year, FinCEN began a comprehensive study of
Hawalas and other informal value transfer systems as they
operate inside the United States. The findings of that study
will feed into a broader joint project on Hawalas and similar
systems with FinCEN's counterpart in the United Kingdom, the
National Criminal Intelligence Service.
The National Institute of Justice may also provide a grant
to support the international scope of the project. The
project's objective is to document, based on actual law
enforcement evidence from the United States and around the
world, just how Hawalas and other such systems are possibly
being used as conduits for terrorist financing and other
illegal activity. As FinCEN works with this Committee to
address the requirements of the Patriot Act, I am confident
that its work to date on this issue will be a valuable
component of the study mandated by the Act.
As the Subcommittee knows, FinCEN in general, has proceeded
very deliberately with its money service business program. We
have taken this approach for a number of reasons.
First, money service businesses have not been regulated at
the Federal level and therefore, it has taken time to identify
and to understand the various money service business sectors
and how they operate.
Second, many money service businesses are very small and
serve ethnic communities, making the task of shaping
appropriate regulatory programs even more complex.
And finally, because of the absence of a Federal regulatory
infrastructure developing a positive working relationship like
the one which currently exists between regulators and the
depository institutions will take time.
Having said this, Mr. Chairman, one of the first actions I
undertook when I became Director of FinCEN was to expedite the
process of issuing the final MSB regulations. It was clear that
until the money service businesses were brought into a
Federally regulated BSA program, law enforcement could not
begin to take effective steps aimed at reducing the
vulnerabilities of money service businesses to financial crime.
Within months of assuming my office, FinCEN had issued two
regulations--registration and suspicious activity reporting.
The first regulation, as I mentioned, requires the principals
of all MSB's to register by the end of next month. The second
would require money transmitters, issuers and sellers of
traveler's checks and money orders, and the U.S. Postal
Service, to report suspicious activity transactions shortly
thereafter.
To ensure that money service businesses are familiar with
these new requirements and to develop better demographics about
who and where many of the smaller, independent money service
businesses, including Hawalas, are located, we have been
engaged in an extensive education and outreach program over the
past year. FinCEN entered into this multifaceted contract with
Burson-Marstellar, a leading public relations firm with
extensive experience in conducting such nationwide campaigns.
FinCEN, in conjunction with Burson-Marstellar, intends to
continue this education effort throughout the coming year.
Working with the Internal Revenue Service's Office of
Examination, we hope to alert all money service businesses to
their registration and reporting obligations under these new
rules. If necessary, the regulations will provide us with the
use of penalties against money service businesses if they fail
to comply with the regulations. Our primary interest, however,
is encouraging voluntary compliance with these businesses.
In conclusion, Mr. Chairman, we have already begun to
develop a comprehensive regulatory program for money service
businesses. We are now involved in plans to learn more about
these varied businesses and their different needs, including
Hawalas. We will keep the Subcommittee and the Committee well
informed on a regular basis about our findings as we work with
other agencies and organizations to provide effective Federal
regulation and oversight of the money service businesses.
Again, I appreciate the opportu-
nity to testify and look forward to your questions.
Thank you.
Senator Bayh. Thank you, Mr. Sloan.
Mr. Varrone, before I turn to you, I would like to
recognize the presence of our Chairman, Senator Sarbanes, and
ask if he would like to make any comments at this time.
Senator Sarbanes. Mr. Chairman, why don't I defer until Mr.
Varrone completes his statement.
Senator Bayh. Very good, Mr. Chairman.
Mr. Varrone.
STATEMENT OF JOHN VARRONE
ASSISTANT COMMISSIONER, OFFICE OF INVESTIGATIONS
U.S. CUSTOMS SERVICE
Mr. Varrone. Chairman Bayh and Members of the Committee,
thank you for the opportunity to testify before you today.
First of all, my testimony is in draft form. We did not
have enough time to get it formally cleared.
The U.S. Customs Service has long served as one of the
premier money laundering investigative agencies in Federal law
enforcement. For years, the agency has worked to disrupt and
dismantle the money laundering techniques used by the world's
drug cartels to launder narcotics proceeds.
Our criminal investigators are well trained in all types of
financial crimes. Using a systems-based approach, we target not
only the individuals involved in money laundering and those who
finance and fund criminal activity, but also the networks they
use to carry out their criminal activities.
Now, we are turning this expertise full force on terrorist
organizations and their financial backers and supporters, and
against those who help move money for terrorists.
Three weeks ago, Customs Commissioner Robert Bonner joined
Deputy Secretary of the Treasury Kenneth Dam, Treasury Under
Secretary of Enforcement Jimmy Gurule, and Assistant Attorney
General Michael Chertoff, in the announcing of Operation Green
Quest, a new, multiagency financial enforcement initiative.
Green Quest is targeted against terrorist organizations. It
is aimed at freezing and seizing the accounts and assets of
terrorist organizations; not just those groups associated with
the attacks of September 11, but all the terrorist entities
that pose a threat to the United States and to all nations of
the world.
Green Quest brings the money laundering investigative
expertise of the Treasury against these to bear on terrorist
networks and their financial supporters. It is led by the U.S.
Customs Service, and includes the Internal Revenue Service, the
Secret Service, Postal Inspectors, Treasury's Office of Foreign
Asset Control, and the Financial Crimes Enforcement Network,
FinCEN.
The operation also draws on the new Foreign Terrorist Asset
Tracking Center and is supported by the FBI and Federal
prosecutors from the Criminal Division of the Department of
Justice.
Green Quest seeks to combine our strengths in a more
effective way, by melding the intelligence gathering abilities
of FinCEN with the investigative expertise of agencies like
U.S. Customs, IRS and the U.S. Secret Service.
A senior U.S. Customs special agent serves as the Director
of Operation Green Quest and the Deputy is a supervisory
Internal Revenue criminal investigative supervisory agent.
Green Quest operates with two components--a command and
coordination center here at Customs headquarters in Washington,
and a field task force made up of dedicated and highly
experienced agents in New York.
These agents have been drawn from a long-term, highly
successful money laundering initiative based in New York, known
as Operation El Dorado. Drawing on the expertise of Customs and
IRS agents who have worked money laundering cases in New York
and elsewhere, Green Quest will supply the investigative muscle
and expertise to identify, freeze, and seize the accounts and
assets of terrorist organizations and their supporters.
This operation will also generate new information on
sources of terrorist funding and the systems used to fund
terrorist activities. In short, Operation Green Quest will
deprive terrorist organizations of the financial means to carry
out their activities in the United States and elsewhere in the
world.
One week ago today, Green Quest delivered the first major
blow against terrorist financing, in a coordinated enforcement
action against the global money laundering transfer network
known as Al Barakaat. Acting on intelligence, and equipped with
Federal search warrants and blocking orders, Federal agents
conducted raids on a number of affiliated U.S. companies of Al
Barakaat, which had been identified as the source of funding
for Osama bin Laden's Al Qaeda organization and other terrorist
groups.
The raids took place in six cities across the country--
Boston, Falls Church and Alexandria, Virginia, Columbus, Ohio,
Minneapolis and Seattle. Eight Al Barakaat businesses were shut
down or searched, their assets frozen and voluminous evidence
was seized. Since those raids, additional searches of U.S.
firms affiliated with Al Barakaat have also taken place.
These are the first of what we expect to be many law
enforcement actions by the highly-trained and experienced
investigators working under Operation Green Quest. We will
pursue all avenues of terrorist funding--those that exploit our
global banking system, those that manifest themselves through
the more informal Hawala network, and other insidious methods,
including the use of international trade.
We suspect terrorist organizations of employing trade-based
schemes to mask funding sources. What does that mean? Terrorist
front companies might overvalue or undervalue merchandise. They
might double invoice. They might fabricate shipments
altogether.
It is no coincidence that the U.S. Treasury Department now
has three Yemen-based honey businesses on the list of companies
tied to Osama bin Laden.
Customs enjoys a longstanding expertise in identifying
trade-based money laundering schemes also. Our dual mission to
facilitate trade and enforce laws gives us access to vast
amounts of financial and trade data. In the trade data area, we
can look at the import and export history of thousands of
companies. We can cross-reference that information against
other records and various law enforcement databases through
special applications developed by Customs. That allows us to
spot trends and anomalies in the particular company or a
particular industry.
Terrorists may resort to simpler methods of money
laundering, such as Bulk Cash Smuggling. New antimoney
laundering laws enacted by Congress and signed by President
Bush strengthen the laws against those who smuggle concealed
cash out of the country, above the $10,000 allowable amount.
Prior to this new legislation, the smuggling of cash was
mainly a reportable offense. The new statute provides for
criminal forfeiture of the property involved, and outlines more
stringent penalties against violators.
Customs has taken its own, aggressive measures to combat
bulk cash smuggling into and out of the United States. Outbound
inspections alone of persons and vehicles have resulted in
currency seizures over the past 6 years of approximately $340
million.
Again, whatever the terrorist funding source may be, we
will pursue it. The combined strength of Federal law
enforcement, as manifested in Operation Green Quest, makes for
a formidable defense along this crucial front in our global war
on terrorism. The active support of the Congress, as
demonstrated by this hearing today, lends yet further strength
to that effort.
Mr. Chairman, thank you for the opportunity to testify. I
look forward to answering any questions that you or the
Subcommittee may have.
Senator Bayh. Thank you, Mr. Varrone.
I would now like to recognize the Chairman of the Banking
Committee, Senator Sarbanes, for his comments.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Well, Mr. Chairman, I want to commend you
for holding this afternoon's hearing on this very important
subject of Hawalas and other underground financing mechanisms
that can be used by terrorists to accomplish their purposes.
I think any effort to find and shut down the sources of
terrorist funding must include an examination of those informal
money transmittal operations, and today's hearing contributes
to that.
Until recently, I think I, like most Americans, was really
not very cognizant of Hawala, the ancient and informal system
that is the prevalent form of money transmittal in the Middle
East and South Asia.
In the aftermath of September 11, we have learned that
Osama bin Laden's terrorist network not only exploited
vulnerabilities in the regulatory and enforcement procedures in
the formal financial system, but also used the informal system
to move significant amounts of cash around the world, without
leaving an electronic fingerprint or paper.
Hawalas facilitate money transfers in areas around the
globe where banking institutions are inaccessible. But the
system's relative anonymity and lack of legal record-keeping
makes it an
attractive mechanism for drug traffickers, weapons brokers, tax
evaders, corrupt officials, and terrorists seeking to move
money
surreptitiously.
Since little is known about Hawalas, this informal system
poses difficulties for law enforcement officials seeking to
track the funds utilized for these various purposes.
On September 26, we received testimony before this
Committee warning that failure to address informal money
transmitting businesses and antimoney laundering efforts would
create a substantial vulnerability by which terrorists could
anonymously obtain cash below the radar screen of our financial
services regulatory system.
That is when we joined together in moving through the
antimoney laundering legislation, which put an array of tools
necessary to trace and interdict the funds on which terrorists
like bin Laden rely to pay for their operations.
It was Senator Bayh's very important amendment to that
legislation, and I really commend you for that effort. I think
it markedly strengthened the bill. And that amendment made it
clear that underground money transmitters such as Hawalas are
subject to the same record-keeping rules and the same penalties
for violating those rules as above-ground recognized money
transmitters.
It also directs the Secretary of the Treasury to report to
Congress no later than October 26 of next year, on the need for
additional legislative or regulatory controls relating to the
underground banking system. The bill also clarifies that
operators of money transmitter businesses can be prosecuted
under Federal law for operating an illegal money transmitting
business if they do not have a required State license.
Prior to this new legislation, Federal officials rarely
prosecuted Hawala operators because the charge of operating an
unlicensed money transmittal business was difficult to prove.
So, Mr. Chairman, I really appreciate what you have done in
this area and the follow-up that is represented by this
hearing. I understand that Treasury has reconsidered its
decision to delay the effective date of regulations requiring
that money service businesses,
including Hawalas, register and begin reporting suspicious
activities. And I certainly welcome action in this area. Such
regulations will go a long way in helping law enforcement to
better understand Hawalas and to trace funds used to finance
terrorist activities.
I just want to say that I think that this issue of money
laundering is one that the Committee obviously intends to stay
with in terms of overseeing now the implementation of the
legislation which we only recently passed, both for its
vigorous execution and also in case of other loopholes that may
continue to exist which we need to address in order to close
them up.
I appreciate these witnesses and those to follow them for
being here today and your leadership in holding this hearing.
Senator Bayh. Thank you, Senator Sarbanes.
Before you arrived, I took the opportunity to thank you for
your leadership in enacting the money laundering legislation in
what must be record time in face of the threat that our country
faces. And that is a testimony to your ability to work through
very difficult issues in a very expeditious manner. Also, in
allowing us to focus on the informal organizations that we
addressed, both in that legislation and here today.
I thank you for your leadership and support in this effort.
Senator Sarbanes. I appreciate that very much. I would note
that we brought that legislation out on a 21 to nothing vote in
the Committee. So, we had very strong bipartisan support. We
received a number of suggestions from Members of the Committee,
as I have already indicated, not the least of which was, of
course, your efforts dealing specifically with the Hawalas.
I think the Committee can take a good deal of satisfaction
from having done a very good legislative job with that
legislation. I think because we were so united, and also
because we worked through it so carefully, it was able to move
through the Senate and sustain itself in conference, and it is
now into law.
Thank you very much.
Senator Bayh. Well, thank you, Mr. Chairman.
Senator Ensign, before we begin questions, would you like
to make any comments?
Senator Ensign. No, thank you, Mr. Chairman.
Senator Bayh. Okay. Very good. We are going to enforce the
5 minute rule here. We will all try and live with that. If we
go a little bit over, I hope you will understand, and if there
is the need for an additional round of questioning, we will
take a little extra time.
Gentlemen, I am going to have three different lines of
question-
ing. The first one, both for Mr. Sloan and Mr. Varrone, relates
to why no action was taken against Al Barakaat until last week,
which raises the issue of the priority that was placed on this
ac-
tivity, cracking down on this kind of activity, and the
coordina-
tion among different agencies involved in our effort to fight
money
laundering. That is going to be the first line of questioning
for both of you.
The second, Mr. Sloan, will relate to the issue of the
regulations. As you mentioned, it was one of your first acts
upon assuming your position. I commend you for that. But I do
want to ask about why it took so long, both before and then the
timing thereafter, it raises issues of the balance between
protecting the public from the consequences of money
laundering, on the one hand, versus the convenience and
ramifications for the regulated community on the other. You
mentioned some of those factors in your testimony.
Then the third line of questioning, which should be very
brief, is basically, also for you, Mr. Sloan. Where do we go
from here in terms of the report that the legislation calls
for. Who is going to be in charge, if you have already selected
someone? When you think there might be a draft report?
And my own hope is that it will go beyond and not just be a
mere duplication of the 1998 that you spoke to and I spoke to
in both of our prepared remarks.
To begin, Mr. Sloan, you must be one of the foremost
experts on fighting terrorism in the country. I just thought it
might bear sharing with the Committee and for the record your
qualifications. You were a high-ranking antiterrorism expert
with the Secret Service. You, in that capacity, served as the
Secret Service's representative to the Counterterrorism
Strategy Group, CSG. Since becoming
Director of FinCEN, I understand you occasionally have
continued to participate in CSG's deliberations.
I would like to say for the record--I am not sure I need
you to corroborate this--but we have been told by a former
member of the NCS that the NCS placed a very high priority on
combatting Al Qaeda and that FinCEN, the Customs Service, and
other arms of the Treasury law enforcement knew that Al
Barakaat was linked to Osama bin Laden and Al Qaeda as far back
as 1999. Do you want to comment on that?
Mr. Sloan. I am also familiar with the issues that were
raised this morning in the press.
I think it is very, very important that the Members of this
Committee fully understand exactly the chronology of events
from 1999 until today, assuming that that is responsive to your
question.
But given the fact that, at least from my perspective, and
we do not investigate anything at FinCEN. We provide
information to law enforcement. But given the sources of our
information, both the domestic financial information and the
privacy concerns associated with it, and maybe any associated
intelligence information that accompanied that, I think it is
important that we discuss those areas in a closed session
rather than an open session.
Senator Bayh. Well, if we need to get into particulars, Mr.
Sloan, I would agree with you.
I was just stating for the record that the NSC placed a
priority on fighting Al Qaeda. I do not think that that is
compromising anything of an intelligence nature. And that we
were generally aware of a link between Al Barakaat and Al Qaeda
as far back as 1999. I do not intend to get any more specific
than that.
Mr. Sloan. Yes, the link from the FinCEN perspective
clearly comes from our analysis of the financial data,
accompanied by other data. And for me to discuss how we worked
that link would be probably inappropriate in an open hearing.
Senator Bayh. I do not intend to get into how you worked
the link, just the fact that we were aware of the link.
Mr. Sloan. The answer is that we have been working for some
time in that area, yes.
Senator Bayh. Thank you, Mr. Sloan.
When did the first suspicious activity reports, when were
they filed with regard to Al Barakaat? Not what they involved.
I do not want to get into that, but just when they were filed.
Mr. Sloan. I am not sure that I would talk specifically
about suspicious activity reports, mentioning Al Barakaat
specifically. But we have been monitoring suspicious activity
reporting in this area for several months prior to September
11. I can get the exact date and I can provide that.
Senator Bayh. As far back as a year, maybe?
Mr. Sloan. Perhaps. I would have to look back on exact
dates in that regard.
Senator Bayh. When were these concerns relayed to the other
law enforcement authorities and the investigative authorities--
Customs, IRS, FBI?
Mr. Sloan. The information that we provide to those
agencies is done on a continuous basis.
Senator Bayh. Are you talking about contemporaneous with
your first receiving the reports?
Mr. Sloan. We report information to law enforcement.
The nature of FinCEN is that law enforcement actually
resides at FinCEN, and there are law enforcement
representatives of every agency there to receive information as
it is developed.
Again, it would be difficult for me to talk about the
specific elements of the information we provided to any one
agency, but the fact remains that we would usually provide
information in a contemporaneous way.
Senator Bayh. Again, I do not want to get into the details
of the reports and that kind of thing.
Mr. Sloan. Right.
Senator Bayh. I am just interested in the timing.
Mr. Sloan. As they were conducting their investigations, we
would continue to provide them----
Senator Bayh. Do you get the reports and you just as a
matter of course, in a fairly short order of time----
Mr. Sloan. Well, certainly any report, whether it is a drug
case or a terrorist case or a fraud case, we would do it both
proactively and in response to requests. And as the
investigations continued, if more information was required, we
would reactively search the data base.
Senator Bayh. I guess as I alerted you to in my initial
comments, my question is, since we had been investigating this
for several months, possibly up to a year before the events of
September 11, and this had been shared with the other agencies,
why were no arrests put into effect until last week?
Mr. Sloan. Again, we are not an investigative agency and I
am not sure that the information would be something even to
this date that led specifically to arrests, except for one that
I understand occurred in Boston last Wednesday as an
unregistered money remitter. Perhaps Mr. Varrone could speak to
the operational aspects of the case.
Senator Bayh. Mr. Varrone, do you want to address that for
us?
Mr. Varrone. I think it is fair to say that the development
of any criminal case and the development of probable cause, as
everyone knows, to get you to a threshold of where you can take
an enforcement action, is largely dependent on a lot of
different pieces of information.
The pieces that FinCEN collects, the analysis that they do,
the passing on to all of law enforcement, and in the
appropriate law enforcement agency, having the jurisdiction to
conduct that investigation. Recently, as I stated in my
testimony, is that we have initiated Operation Green Quest to
do just that. So this jurisdiction will become a little bit
clearer.
But, yes, there were two arrests, one that was a
provisional arrest up in Canada. Actually, he surrendered with
an attorney. But the other arrest did occur in Boston.
I think it is fair to say that the collection of
intelligence information does not always lead to an arrest or
an enforcement action. It leads us down that path, and
hopefully, we can turn that into some success.
Senator Bayh. I have already exceeded my time. I just have
one more question before turning to my colleagues, and then
perhaps I will follow up when they are concluded.
Mr. Varrone, I would like to follow up with one additional
question. Both of you get a lot of the suspicious activity
reports, probably more than you can handle in a timely fashion.
There must be some way to prioritize these. I guess what I am
driving at here, since we were generally--obviously fighting Al
Qaeda had become a priority. We were generally aware of the
links between Al Barakaat and Al Qaeda.
The fact that there were suspicious activity reports
involving Al Barakaat, shouldn't that move that up the priority
list? Didn't that raise red flags, Mr. Varrone, to expedite the
enforcement actions?
Mr. Varrone. If that were the case, if it was presented to
the U.S. Customs Service, Office of Investigations, as a
potential lead of a suspect terrorist organization a year, 2
years ago, that would have clearly been under the jurisdiction
of the FBI. The U.S. Customs Service would not pursue that
lead. We would anticipate the FBI to pursue that lead because
of just clear jurisdiction.
The creation of Operation Green Quest, this multiagency
mechanism, would hopefully make sure that the more timely
evaluation and passing of those type of cases between agencies
for appropriate review or investigation.
Senator Bayh. I will turn to my colleagues and I will
follow up a little bit.
We have all learned a lot since September 11. What I hear
you telling me is that perhaps there were jurisdictional lines
blurred beforehand. But we are attempting to clarify those
lines now so that we can expedite and prioritize. We can
identify cases that should be a top priority and expedite their
treatment in the future. Is that what you are telling me, Mr.
Varrone?
Mr. Varrone. I would say jurisdiction, agency jurisdiction,
and
particularly if the information came forth that there was a
suspect
terrorist organization, specifically a suspect terrorist
organization,
the primary jurisdiction would be the FBI and they would inves-
tigate that. The Customs Service would, prior to September 11,
have not investigated that case. They would have expected that
the
FBI would.
Senator Bayh. That was not the case here, or was the FBI
aware of this and did not act upon it?
Mr. Varrone. I do not know what the FBI was aware of
relative to the process.
Mr. Sloan. Mr. Chairman, if I could just add one other
thing.
Absent being able to discuss more openly with you the
circum-
stances and the quality and the type of information that we
provided and shared, shared and share, I really need to
underscore another important point.
Senator Bayh. I understand.
Mr. Sloan. We are but one small arrow in a large quiver.
The information that FinCEN has provided over the last period
of time, either prior to or subsequent to September 11, is
almost useless without other information sort of augmenting it
in a way that makes sense to the investigators of terror or
drugs, for that matter.
So, I just want to make certain that we are not building up
some expectation here that the information that we may have
provided--and I would like you to know exactly what it is at
some point--would have been the magic bullet or the silver
bullet that would have been the key to a particular
investigation. In fact, I think it is fair to say that some of
the activities that occurred by the Customs and IRS through
Green Quest last Wednesday were probably in furtherance of the
same investigations that were the subject of some of the
activity that you are talking about today.
Senator Bayh. Thank you, Mr. Sloan.
Senator Ensign.
Senator Ensign. Thank you, Mr. Chairman.
Just to try to get a little more understanding for my own
edification, do you have any handle on the dollar volume that
has gone through these Hawalas, the total dollar volume?
Mr. Sloan. I do not have the total dollar figures here
today.
Senator Ensign. Do you have any estimates?
Mr. Sloan. Unlike drug movement for terrorist activity, it
would be much less. Interestingly, the terrorist activity
patterns that we may see, to the degree that we develop any
analysis in that regard, less than perhaps drug money.
Senator Ensign. Do we have any total dollar----
Mr. Sloan. I do not have total dollar figures here.
Senator Ensign. I do not mean just on the terrorist
activity. I mean total, and then what percentage of that would
be approximately.
Mr. Sloan. Through the Hawalas, I do not have a figure in
that regard.
Senator Ensign. Okay. We have a better handle, you are
saying, on the drug money that is going through than we do of
the----
Mr. Sloan. From analyzing data relative to drug activity,
drug activity was probably the principal reason that a lot of
the analysis we did was being done, in spite of the fact that
we were also engaged in some terrorist analysis.
But in the drug activity, for instance, I think the last
estimate in the United States was $63 billion of 5, 10, 20, 50
dollar bills off the streets of the United States into the
financial system and back to the people who supply the drugs to
the United States. That is a lot of money being funneled down
into the financial system.
In the case of terrorist activity, it is almost in reverse,
where you might have a lot of money coming down to just very
little money for utilization by an individual who might be
involved in terrorist activity.
Senator Ensign. How large are most of the transactions,
then? Are most of them small transactions?
Mr. Sloan. Well, the suspicious activity reporting from
financial institutions today do not get reported by law below a
$5,000 aggregate in 1 day. Now that does not mean that they
cannot report less than that. But that is the requirement of
depository institutions, $5,000 in the aggregate on a business
day.
Senator Ensign. Do you have any idea of how much of the
money that is involved with the drugs, is also involved with
the terrorism? Do we have that, either one of you?
Mr. Sloan. I do not have that estimate.
Senator Ensign. Have we established ties there at all?
Mr. Sloan. Yes.
Senator Ensign. Okay. We have. And maybe qualitatively, not
quantitatively.
Mr. Sloan. Correct.
Senator Ensign. Is it fairly substantial?
Mr. Sloan. Without the figures, I probably--relative to the
rest of the activity, I would have to get those figures. But I
can get those, to the degree that we have them.
Senator Ensign. Okay.
Mr. Sloan. Yes.
Senator Ensign. I would appreciate that.
Mr. Chairman, that is all I have.
Senator Bayh. Thank you, Senator.
Senator Sarbanes.
Senator Sarbanes. Thank you very much, Mr. Chairman.
Mr. Chairman, I have three questions. And then I have a
preliminary question. If I use up my 5 minutes before I ask my
three questions, what happens?
Senator Bayh. The Chair would be very happy to grant you an
extension.
[Laughter.]
This is an inside joke. I have tried that technique before.
[Laughter.]
I am not in a very good position to object, Mr. Chairman.
[Laughter.]
Senator Sarbanes. Do we regard Hawalas as having a
legitimate function for money transfer services?
Mr. Sloan. The quick answer is, yes, Senator, there are
legitimate Hawalas.
Senator Sarbanes. How do we distinguish between the misuse
of a Hawala and the legitimate function of a Hawala?
Mr. Sloan. I think you will hear later today from a
gentleman who is engaged in Hawala-type activity. But from our
perspective, the concern we would have is if someone offers
themselves as a wire remittance operation--in other words, they
are going to get money from point A to point B on your behalf,
and they do not register under the new rules Federally at the
end of next month, or in 45 States which now have State rules,
then they are in violation of the law because they have not
registered as a wire remitter, whether they are a Hawala or
not. But the experience has been that many of the Hawala
dealers, and using that term loosely, have not registered in
that area and, thus, are violating the law.
Senator Sarbanes. Do you intend to put these regulations
into effect by the end of December?
Mr. Sloan. The registration requirement takes effect
midnight, December 31, yes.
Senator Sarbanes. That was the one that you had delayed,
but subsequently moved forward. Is that correct?
Mr. Sloan. It had always been scheduled for December 31.
For a lot of reasons, it seemed good prior to September 11, it
was going to be delayed, but the delay never took effect. It
was never part of the Federal Register.
Although it was listed in the Administration's money
laundering strategy as a possibility, the events of September
11 stopped that delay action. So the rule, as I issued it on
February 2000, remained in effect for December 31.
Senator Sarbanes. Was that carrying out the Bank Secrecy
Act?
Mr. Sloan. Yes, sir.
Senator Sarbanes. When was that passed?
Mr. Sloan. I think the amendment that affected this was in
1994, I understand.
Senator Sarbanes. So here we were, 7 years later, without
the regulations to implement the Act. Is that correct?
Mr. Sloan. Absolutely. You are absolutely correct. I took
office at the end of April 1999, and made as my top regulatory
priority the issuance of the MSB regs, which were delivered to
Treasury by the end of that summer, and then announced with the
money laundering strategy of 2000, at the Treasury Department,
in February 2000. So it became a priority. It got on the fast
track as soon as I became Director, and is now going to be the
law effective at the end of next month. Unfortunately, I cannot
speak for anything prior to 1999.
Senator Sarbanes. I understand.
Mr. Chairman, I think that this kind of hearing and other
oversight hearings that we will need to hold should help to
ensure that we do not have these kind of gaps in carrying
through the system.
What good does it do if we pass the legislation and then it
does not get implemented? Obviously, we need to take some
responsibility because I guess we should have monitored,
obviously, we should have monitored it more closely.
But, on the other hand, I think we ought to send a clear
message downtown that we are going to stay on top of this issue
as we proceed ahead, including to legislation that we just
passed in terms of its implementation.
Let me ask this question. What steps is Treasury taking to
assure that underground money transmitters are given adequate
notice of the registration rules so that any application of
penalties to those transmitters would be effective? I am really
kind of asking what specific steps is Treasury taking to reach
these businesses?
Mr. Sloan. Well, whether they are the informal banking
systems or they are the utilization of the traditional--the
Western Unions, the American Express traveler's checks, or even
the Postal Service, for that matter--we discovered in moving up
to the enactment of the rule, which takes effect next month,
that there are roughly between 160,000 to 200,000 entities that
would be affected by the money service business regs. That
includes, of course, 37,000 postal facilities.
We, together with the Treasury Department, hired the
services--and I mentioned this, unfortunately, in my opening
statement and I think you may have not yet arrived.
Senator Sarbanes. I may have not yet arrived.
Mr. Sloan. But we have acquired the services for the past
year and continue for the next year the services of a pretty
renowned public relations firm known as Burson-Marstellar.
And they have with us, and with the IRS, by the way, who
does the exam functions for these money service businesses, has
been working closely in focus groups around the country to
identify and to spread the word, if you will, that these
regulations are going to take effect.
Now if we are talking about an underground operation that
is not likely to register to begin with, they are probably not
likely to register at the end of the day, either.
But we are certainly of the belief that our public
relations outreach program coordinated by the Office of Public
Education at Treasury, is reaching the largest, widest universe
possible in this regard.
Senator Sarbanes. Now how are you doing that? How is it you
are communicating?
Mr. Sloan. Well, for instance, FinCEN personnel, Office of
Public Outreach Personnel, together with public relations
firms, have set up focus groups in various cities around the
country, in which first we have gone in to identify the
universe. Then, we have gone in to identify what guidance might
be necessary for this universe to register and to ultimately
report suspicious activities.
By the way, we have been meeting with most, if not all, of
the trade groups associated with money service businesses, as
we call them, and the law enforcement community, which is
another important partner. In fact, I have brought all of the
major money transmission companies and money service providers
into FinCEN to meet with the law enforcement community to try
and make certain that whatever we put out into the field for
the purposes of suspicious activity reporting, A, makes sense
to law enforcement and, B, is not overly burdensome to the
industry, but still accomplishes the intended mission.
Senator Sarbanes. Now these Hawalas, presumably--if I could
just pursue this for a moment, Mr. Chairman, you can identify
geographic areas in our country where they function heavily,
can't you? Certain immigrant communities in various cities or
in other locations. Would that be correct?
Mr. Sloan. I think the traditional law enforcement
community has been able to do that for us. And to the degree
that we can reach out to that community, we are doing that as
well.
Senator Sarbanes. How do you reach out to them? How do you
let them know that they need to register?
Mr. Sloan. The specific Hawalas, obviously, we are not
going to reach them if they intend to remain underground. But
the public relations responsibilities that the firm and if
FinCEN and the Office of Public Education is to reach out in
trade publications--some of the Hawalas----
Senator Sarbanes. What language are you reaching out in?
Mr. Sloan. All languages. For instance, we have dispatched
people to Ria Via, a company that is predominantly Spanish wire
remittance, just to work with them and to make sure that we
have educated their transmission points of sale.
Clearly, I do not have a list of all the languages that we
are dealing in, but I do know that we have relied very heavily
upon the skills of the Office of Public Education and the
public relations outreach to reach as wide a universe as
possible in this regard.
Senator Sarbanes. Well, we may need to pursue this further.
I do not know. It seems to me that you need to have a very
focused effort in an identifiable community where you know
these kinds of activities are taking place amongst a certain
population. And the word really needs to move through those
communities that a different day is here.
Mr. Sloan. The registration itself, Senator, will probably
cover about 8,000 principal transmitters, the big transmitters,
if you will, the American Express, the Western Union, the
traveler's check companies and the post office, of course. They
are the ones who will be required to then, by law, register
their points of sale for the purposes of registration. In other
words, there is an assumption that if you are going to use--if
I may back up a second.
The traditional Hawala description usually did not have as
part of its equation the utilization of a modern wire
transmission system. It was usually, as this chart indicates--
and of course this is not my chart, so I do not want to speak
to it--but as this chart indicates, it was probably by phone
call or e-mail and utilization of trust to get the value of the
money from one point to another.
As the FinCEN report in 1998 indicated, the traditional
definition of Hawala was money transfer without money movement.
Senator Sarbanes. Right.
Mr. Sloan. So the target of most of the money service
business that we are referring to would be people who actually
use a system to move money from point A to point B, like a
Western Union or a bank wire or something of that nature.
The Hawalas, if they offer themselves as remittance, must
also register. But to the degree that we would reach them
through the principals is unlikely. So that we are going to
have to go back and identify through law enforcement sources
Hawala activity that does not choose to register. And if they
do not register, then they are in violation of the law.
Senator Sarbanes. What is the penalty?
Mr. Sloan. The penalty is, I think, up to $5,000 a day for
not registering. Now, of course, there is also criminal
penalties in some instances for not registering that law
enforcement could bring. But from our purposes, $5,000 a day
for not registering.
Senator Sarbanes. Thank you, Mr. Chairman.
Senator Bayh. Thank you, Mr. Chairman. Let me just say that
I share your concern for our continuing oversight to ensure
that we do not see a repetition of what happened following
1994.
I think all of us have a heightened appreciation for the
importance of implementing this new legislation and it is our
responsibility as much as the Administration's to see that that
is done. So, I think your emphasis is entirely correct.
I am going to have just a second round of questions here,
gentlemen. Mr. Sloan, I appreciated what you said about not
creating, I think, expectations. I do not want to cast
aspersions or raise doubts or that sort of thing. And I am done
with my line of questioning about what we knew, when we knew
it, why things came to a head last week.
If it is possible, I would like to ask if you and Mr.
Varrone would stay until after the next two panels so that we
could go for 10 minutes into Executive Session and perhaps get
into a level of specificity that is not appropriate in this
forum, just to wrap all this up so it is not just kind of
hanging out there.
Mr. Sloan. Absolutely. I would be delighted to. I think
that that would be important, sir.
Senator Bayh. Okay. I appreciate your courtesy in doing
that. Gentlemen, just a couple of other things and then, Mr.
Bariek, we are looking forward to hearing from you.
Mr. Sloan, I think you addressed some of this in response
to Senator Sarbanes' questions with regard to the timing of the
regulations becoming effective. Certainly it is no
responsibility of yours, the 5 year delay before you took
office. Obviously, there was something taking place there that
led this to not being on the fastest of tracks. You came in and
tried to expedite things.
Let me ask you, it has been suggested to me that the
regulations were promulgated immediately, but the effective
date was put off 2 years. And in the money laundering strategy,
it was at least contemplated putting off the effective date for
another 6 months. Why the delay in the effective date?
Mr. Sloan. Well, Senator, the effective date that takes
effect next month was set actually in February 2000. Given the
universe that I described to Chairman Sarbanes, it seemed to
make sense from all of the experts that we had spoken to, that
to educate,
and to continue to educate, 160,000 to 200,000 entities that
had
never been regulated by the Federal Government, let alone per-
haps even State or local government, that English may be the
second language in many cases, that were scattered all over the
United States.
To educate a universe that large, it was felt that we
probably needed every minute of the 19 or 20 months that we
propose for education purposes.
We could not begin the education until the rules were
announced. And the week after the rules were announced, we
began the process through the public relations firm, the Office
of Public Education, to begin the process. And that process has
been ongoing since that day.
Now there are other issues, too, that I hope I am not
boring you with, but I will tell you. We are not the only
player in this equation. We rely very heavily, of course, on
the forms that are required for the registration, both
registration and suspicious activity reporting, that, as you
may know, go to the IRS at the Detroit computing center.
We rely very heavily on the Internal Revenue Service's
Office of Examination for the examination functions necessary
to enforce compliance with these regulations.
So it is not dissimilar to perhaps being an orchestra
leader here trying to bring all the pieces together and make
sure they all work come December 31.
We are racing to that deadline. In fact, we announced the
registration formally in the Federal Register, 4 weeks ago. We
intend to make it public for the purposes of registration I
think next week. This is a major step in the right direction.
But I am not sure, even with the speed I wanted to have it
take, we could have done it many months sooner, given the time
that I got involved in it.
Now, I cannot speak obviously prior to May 1999. But I
examined it in every which way, and maybe we could have saved 2
or 3 months, but not much more than that.
Senator Bayh. Thank you, Mr. Sloan. I compliment you for
the new sense of urgency you brought to this. I understand the
concern about compliance when we are dealing with small
businesses and unregulated community, some people whose first
language is not English, and so forth. But let me just put a
fine point on it and let you respond.
The reason for my first questions about the NSC focusing on
Al Qaeda and the connections to Al Barakaat and the emerging
knowledge that perhaps Hawalas were being utilized pursuant to
those kind of activities, shouldn't that have tipped the
balance in favor of expeditious enforcement and then kind of
worry about the compliance later on, on the part of innocent
folks who might have gotten caught up in that?
Mr. Sloan. And, quite frankly, truth be known, that may be,
in fact, what happens come December 31. We are going to start
the compliance and we probably have to rely on some good faith
rather than be too heavy-handed to get this thing out the door.
There is no question. I think that that is a fair philosophy to
take. Whether or not we should have done that 2 months earlier
as opposed to
2 months later, I think I could probably discuss with you.
Senator Bayh. Thank you, Mr. Sloan.
My last line of questioning, but I did have one quick
additional question for Mr. Varrone.
With regard to the report required by the legislation, I
think that is a year from the legislation being signed--so that
would be, what? A year from October.
Mr. Sloan. October 26.
Senator Bayh. The date is etched indelibly in your mind, I
can tell.
Mr. Sloan. Yes, sir, very much so.
Senator Bayh. Have you identified who's going to be in
charge?
Mr. Sloan. As I previously mentioned to your staff, we have
identified, I want to say--I do not want to sound like I am
being unfair--but the working B level, both within FinCEN, we
are trying to put together the right people that can be our
partners in the law enforcement community, to include, I might
add, the international community.
By coincidence, a week after the enactment of the Patriot
Act, we met with all of our partners in the international
financial intelligence unit environment, called the Egmont
Group, and we said to them, we may need your help in this
regard, too, to help feed into a project that we are going to
be undertaking.
Once we have our side of the equation together, we are
going to be coming to your staff and indicating that we would
like to make certain that we work together so that, A, the
report shows up on time and, B, it is what was intended by the
legislation.
Senator Bayh. Thank you, Mr. Sloan. I appreciate that. And
obviously, anything that we can do about where we go from here,
what additional tools are necessary for you folks to do your
job, we would be particularly interested in.
Mr. Sloan. Thank you, Mr. Chairman.
Senator Bayh. Mr. Varrone, just quickly, two very brief
questions for you.
We focused on Al Barakaat. There have been reports
regarding an organization called Al Taqua and any possible
links to bin Laden. That has all been rather vague. Do you have
any information to provide us on the connection between bin
Laden, Al Qaeda and Al Taqua? Or is that the kind of thing that
we need to----
Mr. Varrone. It needs to be, yes, sir.
Senator Bayh. Okay. Well, I guess I answered my own
question, Chairman Sarbanes.
My final question for you would be, the figure has been
used that 5 percent of Al Barakaat's profits are going to Al
Qaeda. I am curious about the methodology used in arriving at
the 5 percent. Is that a standard rule that they had, or what
was our----
Mr. Varrone. I have no idea what the basis of the fees or
the 5 percent of any remittances.
Senator Bayh. That is just our best estimate at this time?
Mr. Varrone. Yes, sir.
Senator Bayh. Okay. Gentlemen, I appreciate it and I
appreciate your forbearance, too, in staying. I do not think
the questioning will be very long for the next two panels and
we can wrap this up in an appropriate setting.
Mr. Sloan. Yes, sir.
Senator Bayh. Thank you both very much.
Mr. Varrone. Thank you.
Mr. Sloan. Thank you.
Senator Bayh. Mr. Bariek? Am I pronouncing that correctly?
Mr. Bariek. ``Borek.''
Senator Bayh. Forgive me. My last name is difficult to
pronounce as well, so I can empathize with you. Thank you for
your presence today. We are looking forward to hearing from
you.
I just want to say before you testify, as with regard to so
many examples in life and our society today, very often we
focus upon the misuses of organizations and some of the things
that we need to improve.
And so, there has been a lot of publicity and a lot of
focus upon the misuse of the Hawala system. But I want to say
up front that there are many, many legitimate operators. You
are among them, providing legitimate services to your
customers.
And I want to say that up front here on the record, and
thank you for your willingness to come and help explain to the
American people the way the system operates, the services you
provide, so we can help educate the public about the type of
organization we are dealing with here.
And I want to thank you for your willingness to appear
before the Subcommittee today.
Mr. Bariek. You are welcome.
STATEMENT OF RAHIM BARIEK
BARIEK MONEY TRANSFER
Mr. Bariek. Chairman Bayh, Senator Hagel, and other Members
of the Subcommittee, my name is Rahim Bariek, and I run Bariek
Money Transfer business in Northern Virginia. I was born in
Kabul, Afghanistan and lived there until 1986. I moved to
Pakistan and then the United States. My father sponsored me to
come to the United States in 1989, and I became a U.S. citizen
in September 1994.
In 1997, I wanted to send money to my father-in-law in
Pakistan. I went to my local branch of Chevy Chase Bank to wire
the money. The bank told me that there was no way that they
could guarantee a money transfer to Pakistan, because there is
a great deal of corruption in the formal banking system in
Pakistan and money often disappears. I tried to send a money
order, but it was stolen from the mail. The only way that I
could get the money to my father-in-law in Pakistan was through
a Hawala. It was safe, faster, and cost less.
That same year, 1997, my brother-in-law invited us to his
wedding in Peshawar, Pakistan. I met with my cousins who own a
money exchange business and Hawala, Insaf Exchange, Ltd.
Insaf is in the choke yadgar--a large market where all forms
of currency are exchanged. Most Afghan refugees in Pakistan
use Hawala, because they cannot get the money through banks or
the mail.
My cousin asked me if I would like to go into the Hawala
business with him. My experience trying to send money through
Chevy Chase Bank illustrated that there was a great need for
Hawala to exist. I agreed to work with him as a money transfer
broker.
As a second job, I now run Bariek Money Transfer in my
community in Northern Virginia. I have between 200 and 300
customers, who generally send money to Pakistan once a month.
Many Afghan families moved to Pakistan with the understanding
that they would receive funds from their families in places
like the United States, Canada, Australia, and England. Many of
my customers make regular monthly deposits with me, by mailing
me personal checks or leaving them at the local Afghan stores.
They send anywhere between $20 to $400 to their families in
Pakistan to help them pay rent and buy food and other things
and a source of income. Without the money families send from
the United States and other countries, many of the families in
Pakistan would not be able to pay rent or afford food and other
basic needs.
Families also send larger sums of money--between $1,000 and
$5,000--for weddings, when someone passes away, and other big
events. For all these reasons, I consider my job very important
and humanitarian in nature.
Let me emphasize--I know all of my customers, and I would
never send money for a family I do not know.
This is how my business works. One of my customers comes to
me with $300 and asks to send it to his brother in Pakistan.
Charging about 5 percent commission, I take the money and give
my customer a transfer/code number which they give to their
family in Pakistan. They will need that transfer/code number
and identification to get the money from Insaf Exchange. The
family member in Pakistan must also sign a form to show that
they received the money. I call and fax Insaf Exchange with the
name of the person who will get the money and the transfer/code
number. Within 24 hours, the money is guaranteed safe in the
hands of my customer's family in Pakistan. That is how I do
Hawala. Other Hawala brokers may operate differently.
In order to balance our accounts, I pay some of the bills
Insaf Exchange owes to other businesses not located in
Pakistan. The money I receive in the United States never goes
directly to Pakistan. But it does get to the families in
Pakistan that need it.
Hawala is very important to families in my community.
Without Hawala, people would never be able to send money to
their families abroad. We provide a very legitimate service.
Unfortunately, as we saw last week, some Hawala are used for
illegal activity or to move terrorist funds. The informal and
paperless nature of Hawala makes it easy to take advantage of,
but the vast majority of Hawala are legitimate. As I said
earlier, I would never send money for a family that I did not
personally know.
In Afghan culture, the Hawaladar is an honest person.
People trust him, and he has a good reputation and credit with
people. For that reason, I strongly commend you on your
efforts, Senator Bayh. I pay taxes on my Hawala business, and I
comply with the law. I am happy to comply with the new Federal
law, which you wrote, and to register and to file suspicious
activity reports. I believe that all legitimate Hawalas will be
happy to comply. It is upsetting to us that there are Hawalas
used for illegal activity. They give all Hawalas a bad name.
Chairman Bayh and other distinguished Senators, I
appreciate the opportunity to appear before you today. The
Afghan people love the United States. The United States helped
the Afghan people during the war with Russia. America also
accepted many refugees from Afghanistan and continues to help
the Afghan people in Pakistan. I am very proud to be a citizen
of the United States.
Right now, the Afghan people do not like the Taliban,
Pakistan, and the Arab people who are using Afghanistan for
terrorism. Afghan people support America's fight to rid the
world and Afghanistan of terrorism.
Four months ago in France, the great Afghan Commandant
Mousaud announced on television that he would fight against
terrorism in Afghanistan. He did not want Afghanistan to be
used by terrorists any longer. Soon after his statement, he was
killed by Arab terrorists. Commandant Mousaud was a hero to the
people of Afghanistan.
That completes my testimony before you today about the
important work that I do for my community and refugees from
Afghanistan. I will be happy to answer any questions that you
may have.
Thank you so much.
Senator Bayh. Thank you very much, Mr. Bariek. We
appreciate your willingness to come before the Committee and
offer your testimony. I also congratulate you on becoming a
citizen of this country.
Mr. Bariek. Thank you.
Senator Bayh. And I would point out to Chairman Sarbanes
and others, we have a chart here that visually depicts the flow
of funds through the Hawala system, so that, graphically,
people can appreciate our witnesses' testimony. You have done a
very good job of explaining how the Hawala system functions,
Mr. Bariek. I just have a few very brief questions.
Confidentiality--the system as you have described it can be
used for legitimate purposes because it is fast, inexpensive
and discreet, offering a legitimate service to people who are
in need of that service. I would like to ask you about the
confidentiality part. You say that you use code words or code
numbers in transfers. How important is the confidentiality
aspect of the service to the customers that you represent?
Mr. Bariek. Because when I give the code number to my
customer, my customer finally they give to the family in
Pakistan, that is the code. And when they go to Insaf, Insaf
Exchange business, and also they check their ID and the code
number because they know that people are different people. And
they give not the right code and also, they do not give the
money to him.
Senator Bayh. And my understanding is that there are not
many written records kept of these transactions. The code
numbers or words, are they destroyed after the transaction is
completed?
Mr. Bariek. Yes, because the code number is important for
the people, like a special number, they take the number to the
Insaf Exchange, and then they give to them.
Senator Bayh. And this is what really makes it difficult to
follow these transactions.
Mr. Bariek. They check ID also. Without ID and the code
number, they never receive the money from them.
Senator Bayh. For other dealers who are using the system
for inappropriate purposes, the lack of records I understand is
what makes it difficult to follow these transactions.
Mr. Bariek. Yes. I have no idea about different, but only
just I work for Afghan refugees and Pakistan because it is a
very bad situation. Right now, they are very poor and there are
not jobs there. They need to support the family out of
Pakistan, like in other countries, I think.
Senator Bayh. Mr. Bariek, as I understand it, you operate
in Virginia and you comply with all of the laws and regulations
of Virginia, and are perfectly willing to comply with the new
statutory requirements that will go into effect on December 31.
As I understand your testimony, a legitimate Hawaladar should
have no complaint complying with the new regulations.
Mr. Bariek. Okay. Thank you.
Senator Bayh. Well, thank you, Mr. Bariek.
Senator Sarbanes.
Senator Sarbanes. Thank you very much, Mr. Chairman.
First of all, we very much appreciate your testimony and it
was very interesting. I just have a couple of questions. If I
were to come to you, can you tell me everyone who gave you
money and who the money went to over, say, the last year or the
last 2 years?
Mr. Bariek. Yes. If you come to me, if I do not know you,
if
you are from Afghanistan, I transfer your money. And if you
come
to me and you give me money, I ask you, check your ID, and
also,
I give you a telephone number and address. And then after that,
I accept the money. That is it. We have file from 2, 3 years,
that
is all.
Senator Sarbanes. But suppose the man from the Treasury who
testified on the panel before you, came to you and said, we
would like to know who gave you money and who it was sent to,
do you have records that you could tell him that?
Mr. Bariek. Yes, I have records for that.
Senator Sarbanes. How far back do you keep it?
Mr. Bariek. Two years.
Senator Sarbanes. Two years.
Mr. Bariek. Because the Hawala system should be, the money
goes for 24 hours. And we keep that record for 1 and 2 years.
After that, we do not need that record because if they not
receive the money, they will be complaining about it, the
family. But Hawala system is very important system in
Afghanistan because there is not banking system in Afghanistan.
Between Afghanistan and Pakistan, this is important.
They save business people for life, because they cannot
move the money from Afghanistan to Pakistan, and because there
is thief. They take them and kill them.
Senator Sarbanes. Now, we were discussing before while you
were sitting there waiting to testify, about how we let the
people who run the Hawalas know that now they are supposed to
register.
Mr. Bariek. Yes.
Senator Sarbanes. Do you have any ideas on how we could let
them know about that, what would be a quick way to let them
know?
Mr. Bariek. That will need a few seminars, also. And on TV,
newspaper, and that will be good.
Senator Sarbanes. Do you know most of the people who do
Hawala, or are there a lot of people that you do not know
anything about?
Mr. Bariek. I do not know because I work in the family. I
do not know because I work only by self and for Afghan
community. But I do not know about other countries or other
people. I do not know who is.
Senator Sarbanes. How do people find out about you to come
to you to ask you to transfer money?
Mr. Bariek. Afghan community is small community. It is too
close. But I put it in the Afghani yellow page and also Afghan
radio. And I put it also--I give my business card for the
people.
Senator Sarbanes. So, if they wanted to let them know, they
should make sure that they do Afghan radio and Afghan yellow
pages.
Mr. Bariek. For the money transfer, for 24 hour, and money
for your family.
Senator Sarbanes. Yes. Well, thank you very much.
Mr. Bariek. You are welcome.
Senator Sarbanes. We appreciate it.
Senator Bayh. Thank you, Mr. Bariek.
Mr. Bariek. You are welcome, Senator.
Senator Bayh. Good luck to you.
Now, I would like to ask the witnesses for our next panel
to step forward, Mr. Yousef and Mr. Jost.
Thank you, gentlemen, for your time today.
[Pause.]
Mr. Yousef, why don't we begin with you?
STATEMENT OF TARIK M. YOUSEF, ASSISTANT PROFESSOR
DEPARTMENT OF ECONOMICS, SCHOOL OF FOREIGN SERVICE
GEORGETOWN UNIVERSITY, WASHINGTON, DC
Mr. Yousef. Mr. Chairman, distinguished Members of the
Subcommittee, I am pleased to testify before you today on the
topic of the Hawala, its origin, how it functions, and what can
be done to regulate it. In the interest of time, I will briefly
summarize my testimony and enclose the text for the record.
Let me first provide a context for understanding the place
of the Hawala in the modern financial system. I will do so by
reference to my own personal experience. Prior to the last
decade, in all of my travel and living experience in numerous
countries in the Muslim world, I had never observed others, nor
did I settle a personal or business transaction by any means
other than cash. The reasons are not hard to find. For
historical and policy reasons, financial development in many
countries, many developing countries, including the Muslim
world, has lagged behind the advanced nations. Financial
systems in most countries in the Muslim world lack depth and
sophistication and institutions of regulation and supervision
are not fully developed.
Extensive government intervention in these societies,
including through repressive financial policies, excessive
taxation, foreign exchange and trade restrictions and a banking
system that is driven by the needs of governments, all of which
have retarded the emergence of modern financial systems.
Reflecting these conditions, cash remains the preferred
medium for settling transactions. Banking institutions are
concentrated in urban centers. Modern habits of banking have
yet to affect the majority of populations, especially in rural
areas. Protection of personal property is imperfect,
enforcement of contracts is weak, government corruption is
endemic, and tax evasion is widespread.
The Hawala institution should be understood in this broader
context as an informal means of transferring funds or other
assets within or across borders that is used primarily by
individuals who are constrained by the level of financial
development and government policies.
As is well known, individuals interested in transferring
money
to remote parts of the world who may want to circumvent trade
and foreign exchange restrictions, make use of the Hawala. As
has
been mentioned already, it is simple, efficient, and low cost
relative
to other options and, in some cases, the only means to remit
in-
come to families in distant parts of the world. Millions of ex-
patriate workers in the world remit incomes through informal
money transfer services including the Hawalas, and the funds
involved while significant in total are generally small per
person and per transaction.
The appearance of the Hawala institution in the United
States is directly linked to the growth of immigrant
communities especially from South Asia. Although the well-
developed U.S. financial system is available for domestic
transactions, foreign money transfers remain subject to the
problems noted above in the receiving countries. Hence, the
Hawala flourishes as a business.
Unfortunately, the simplicity and anonymity of the Hawala
system has attracted individuals and groups engaged in
illegitimate businesses or those exploiting the Hawala to fund
illegal activities, whether they involve money laundering,
gambling, smuggling, or terrorism. Hawala operators may or may
not be accomplices in such transactions. Their minimal
documentation requirements act as both an asset to their
business and a liability in case of un-
intended wrongdoing. More worrisome, the lack of a ``paper
trail''
undoubtedly frustrates any effort by law enforcement agencies
investigating the source and destination of Hawala-driven fi-
nancial flows.
The recent antiterrorism bill under your leadership Senator
Bayh took the important step of extending the reach of basic
U.S. regulations of money transfer services to the Hawala. By
requiring Hawala businesses, among other things, to be
licensed, maintain records, and report suspicious transactions,
the legislation struck an important balance between protecting
U.S. financial and security interests and allowing Hawala
operations to serve legitimate purposes for which they had been
designed. Hawala operators and customers are both served. As a
result, we may in fact witness a growth in these money
transfers, benefiting individuals and families in distant
countries. On the other hand, noncompliant Hawala businesses or
those engaged in illegal activities would potentially face
tough sanctions for violating the new legal requirements.
This gradual approach adopted recently by the U.S. Congress
to regulate the Hawala will prove more effective than what has
been attempted elsewhere in the world, especially when outright
prohibition was enacted. The latter approach did not achieve
its intended goals and only served to drive the Hawala further
underground. They also became more prone to engaging in other
illegal activities as part or in parallel with the money
transfer operations.
But like all laws, the effectiveness of any legislation,
including the most recent, will depend on its implementation
and enforcement. And while there is every reason to believe
that the majority of Hawala businesses will want to comply with
the new legal requirements, it will be some time before
effective businesses will come under the regulatory umbrella.
Apprehension, confusion, and fear characterize the mood within
some immigrant communities at present. Language and cultural
barriers also act as obstacles to understanding the
implications of the U.S. war on terrorism on their daily lives.
Bringing the Hawalas under the new regulatory umbrella will
lift the veil of secrecy that governs its operations. In
particular, it could provide authorities with important
technical information about its operations across borders,
including the methods of settling accounts, the geographic
distribution of operators, the size and destination of
financial flows, and the use of the rest of the
financial system.
But we should be realistic about the limits of what can be
achieved within our national borders. So long as there remains
a divergence between the United States and other countries in
fi-
nancial development, banking efficiency, taxation levels, and
laws
pertaining to foreign exchange transfers, there will exist a
demand
for the Hawalas and other means of moving money across the
globe. More importantly, differences in regulation and
supervision
standards across countries will create loopholes to be
exploited.
In this case, international cooperation in sharing information
and closer monitoring of international money transfers would
prove
indispensable.
Again, Mr. Chairman, I appreciate the opportunity to
testify before this Subcommittee and I look forward to any
questions.
Senator Bayh. Thank you very much, Mr. Yousef. I am
grateful for your time.
Mr. Jost.
STATEMENT OF PATRICK JOST
PRODUCT DEVELOPMENT MANAGER
SRA INTERNATIONAL, INC.
Mr. Jost. Thank you, sir.
As Mr. Yousef, I will also be truncating my testimony in
the interest of time.
I would just like to introduce myself. My name is Patrick
Jost. I am currently with SRA International. We make a product
called Assentor,' which is a----
Senator Bayh. Never run for the U.S. Senate, Mr. Jost. We
rarely truncate our remarks in the interest of time.
[Laughter.]
But I appreciate your courtesy. Thank you.
Mr. Jost. This is a compliance tool for the financial
community. We look for things that people should not be talking
about in their e-mail, such as insider trading and money
laundering. And we are currently thinking about expanding this
to things like Hawala and terrorist financing.
Before that, as Director Sloan indicated, I was at FinCEN.
I was, and I must make this clear for the record, the coauthor
of a report on Hawala with a gentleman named Harjit Sandhu, who
is with the India Central Bureau of Investigation. I spoke to
him last week just prior to his return to India. He will be the
Inspector General for the Central Bureau of Investigation in
Monipor, which is a region rampant with terrorism. So, he has
firsthand experience in this area, and I wish him well.
What I am going to do, my colleagues have done a remarkable
job of explaining how Hawala works. You do not need to hear
that again. What I would like to talk about for the remainder
of my time is some things that I think can be done about the
misuse of Hawala.
We have heard about how it has a legitimate purpose. We
have heard why it works, how it works. But we all know that
there are some problems with it. I would like to make some
remarks about those problems.
First, I believe that it is essential for banks and other
financial institutions already required to file Suspicious
Activity Reports SAR's, to develop an understanding of ``what
Hawala looks like'' and then act accordingly.
This will help in the identification of Hawaladars. If a
bank has a client who is conducting Hawala transactions, and
this client is identified as doing so, and a SAR is filed, this
can be used by the authorities to determine whether or not the
Hawaladar is licensed appropriately.
Even though some Hawaladars advertise, not all of them do,
so efforts to locate them based solely on these advertisements
will be of limited effectiveness. Many Hawaladars conduct
Hawala transactions as part of other business operations; this
behavior can, with the proper training, be identified by the
banks holding the business accounts.
The relationship between Hawala and financial institutions
in the United States is important. In South Asia and in the
Middle East, it is possible to do all business by Hawala and
avoid regulated financial institutions altogether. This is
possible, but difficult to do, in the United States. It is
possible to conduct private party automobile sales and various
personal transactions using cash, but real estate and various
business transactions are almost impossible to execute without
a banking relationship.
Even though it is certainly possible for terrorists and
other criminals to move vast amounts of money into the United
States via Hawala with little or no trace, some of this money
is useless unless it can be converted to an acceptable form.
This necessitates a relationship between banks and Hawalas.
This relationship is a potential vulnerability in a Hawala
money laundering or terrorist financing scheme, and this
vulnerability should be exploited.
One important aspect of this relationship is the
interaction between Hawaladars and financial institutions. Many
Hawaladars maintain bank accounts, and transactions involving
these accounts may exhibit behavior or behaviors indicative of
Hawala, allowing, at a minimum, for the potential
identification of Hawaladars and, if appropriate, other
actions.
Another important aspect of this relationship is the
interaction between the clients of Hawaladars, including the
beneficiaries of Hawala transactions, and financial
institutions. Even though cash is very often the preferred
medium of the Hawala payment, it is possible that a person
receiving cash may need to convert it into another form, and
this conversion may have to take place at a regulated financial
institution. As with transactions involving Hawala-
dars, these transactions with Hawala clients provide some
visibility into the participants in Hawala operations.
There is a very interesting phenomenon that relates to a
point in the part I have redacted about how Hawala is very
simple. It is on the chart there. That is really all there is
to it. But it is kind of like jazz. It is all theme and
variations. So this deals with the relationship between
Hawaladars and financial institutions, as well as the
relationship between financial institutions and the clients of
Hawaladars. Recently, I have become aware of cases where the
delivery of Hawala funds is not cash, but, rather, a brokerage
account already established in the name of the designated
recipient of the funds. It is clear that the Hawaladars
involved in these transactions have more than a casual
relationship with the brokerage. They are establishing not just
their own accounts, but accounts on the behalf of others. It is
also clear that the owners of these accounts requested them so
that they can develop a long-term relationship with the
brokerage.
Banks and other financial institutions have experience in
analyzing transactions and making necessary reports. I believe
that this experience, and the infrastructure associated with
it, should be combined with knowledge of Hawala to expand the
scope of suspicious activity reporting. If this can be done, I
believe it will contribute toward solving the problem posed by
the criminal use of Hawala.
The second area I would like to address deals with the
difference between money laundering and terrorist financing. In
brief, money laundering is the process of taking money from
``dirty'' sources and making it clean, so that it can be used
for what are often legitimate purposes.
This is not always the case with terrorist financing. In
many cases, terrorist money has a ``clean'' origin and a dirty
purpose. Some terrorists, such as Osama bin Laden, are wealthy
and use their own funds, often derived from legitimate sources,
to finance acts of terror. Other terrorists make use of funds
received from charity. Some of these organizations appear to
have been established solely for the purpose of raising money
for terrorists, others are possibly unwitting participants in
terrorism. In both of these cases, the money comes from
legitimate sources--business dealings or charitable
contributions--so what happens with the money is not money
laundering.
What happens in many instances of terrorist financing can
almost be seen as the inverse of money laundering--clean money
becomes dirty money--money used to finance acts of terror.
So, from one perspective, and with a certain amount of
simplification, money laundering and terrorist financing are
opposites. In money laundering, dirty money becomes clean. In
terrorist financing, clean money becomes dirty.
From another perspective, however, the processes have much
in common. If financial institutions are used, the three steps
in money laundering--placement, layering, and integration--are
common to both money laundering and terrorist financing.
Many antimoney laundering countermeasures, such as account
opening procedures and Currency Transaction Reports, CTR's,
concentrate on placement. I believe that the scope of
placement-
oriented countermeasures should be enacted to include Hawala
transactions. Initially, I would recommend that this take place
by educating financial institutions about Hawala. As more is
learned, it is likely that more sophisticated countermeasures
could be devised and implemented.
With respect to layering, I believe that more data needs to
be gathered in order to identify patterns of layering
indicative of possible terrorist finance activities.
I also believe that there should be more emphasis on
integration, as this is where the dirty work of terrorist
financing takes place. Initially, I believe that the awareness
of the fact that funds from legitimate sources can, indeed,
have been, used to finance acts of terror is an important first
step. As more is learned through investigation and research, it
will be possible to specify guidelines enabling financial
institutions to identify the possible integration of terrorist
funds.
I would like to conclude by summarizing these last two
points and by offering a general observation.
First, I believe that it is essential that financial
institutions
currently subject to SAR reporting requirements develop an un-
derstanding of Hawala. This will, I believe, make it more
difficult
for terrorists and other criminals to use Hawala to finance
their
activities.
Second, I believe that it is essential that what is known
about terrorist financing be made available to financial
institutions to assist them not only in complying with
reporting requirements, but also to aid them in developing new
information about methods. Even though a certain amount of what
has been learned about money laundering can be used, terrorist
financing is not always the same, so new indicators will have
to be developed.
Finally, I would like to commend the Members of Congress
for having identified the potential threat posed by Hawala for
the movement of funds by terrorists and other criminals. I
would also like to commend the U.S. Department of the
Treasury's Office of Foreign Assets of Control--OFAC--for its
systematic approach in addressing this problem.
Thank you for the opportunity to testify, sir.
Senator Bayh. Thank you, Mr. Jost, very much. I thought
your summary was excellent. It is difficult to enlist the
regulated financial community if they do not have a full
understanding and appreciation of the potential threat and have
some of the information that we can share with them. So, I
thought that was very good.
I was also interested in your point about integration,
legitimate generation of funds being used for illicit purposes.
I think that is certainly a big part of the threat we face
right now.
Let me be brief, gentlemen. I thank you for your time. Let
me just ask a couple of questions.
Mr. Jost, I had a whole lengthy series of questions here
qualifying you as an expert. Let the record show I am
stipulating you as an expert. You have a very extensive
background, and if anyone is interested, we can get into that
in greater detail. When did the U.S. Government first take
notice of Hawala, in your experience?
Mr. Jost. There is a DEA report, I believe it is called,
``Asian Money Movement,'' which has a short section on Hawala
and a short section on the Chinese system. And I speak Indian,
but not Chinese, so I am not even going to attempt to pronounce
the second one. I believe that that is either from the late
1980's or the early 1990's.
Senator Bayh. Late 1980's or early 1990's. What prompted
our interest in this initially? The drug trade using this
system?
Mr. Jost. Yes. I believe the author of that report is Mr.
Harkin with the DEA, who served with them in Hong Kong.
Senator Bayh. Let me ask you a couple of questions about
the element of trust, which is an essential part of the Hawala.
How likely is it that a legitimate Hawaladar would knowingly
transfer funds for illicit purposes?
Mr. Jost. I think that would be very rare, as Mr. Bariek
has previously testified.
Senator Bayh. Would that go to the very heart of the trust
relationship?
Mr. Jost. Yes. It would be bad for business, just like it
would be bad for a bank to get tied up with something
illegitimate.
Senator Bayh. What we are likely looking at here is a
significant majority of Hawaladar are perfectly legitimate,
likely to remain legitimate, but that the bad ones are bad
through and through, not really combining legitimate with
illegitimate purposes?
Mr. Jost. Yes. In some of the cases I assisted on at
FinCEN, we saw that Hawala networks had been established by the
bad guys to do bad things.
Senator Bayh. From your experience, can you give us a rough
estimate of the amount of money that flows through Hawala?
Mr. Jost. No, I cannot.
Senator Bayh. There is an honest answer. I would assume
that it is fairly significant.
Mr. Jost. Yes, it is a big number. The only number that I
feel comfortable floating is there was a study done by the
government of India where they estimate approximately half the
money in India is Hawala money.
Senator Bayh. One half. And is it increasing in prevalence,
in your opinion?
Mr. Jost. It is sensitive to political events. For example,
when there is political unrest in India, the rupee is devalued.
That puts the Hawala traffic up. When things are calmer, the
Hawala traffic drops a little bit because you can get
effectively the same rate through formal channels.
Senator Bayh. Let me ask you about the interface between
banks and Hawala. You have touched upon the connection, the
potential vulnerability between Hawala money laundering and
terrorist
financing activities. How can we enlist the support of
financial
institutions? You mentioned about the importance of sharing
information with them, having them learn more about Hawala, and
that interchange, in our country, at least, being a potential
point
of vulnerability. How can we go about enlisting their aid and
informing them?
Mr. Jost. Well, I think you have answered your own
question.
The banks know what they have to do. What they do not know
about Hawala could be going on on a large scale right in front
of their face and they do not know what it is. We have had some
cases where the bank will say, oh, I know what this is. I read
that Interpol report.
So, I think the first step is to disseminate as much
information as possible about how this works, what it looks
like, in as much detail as possible, so that they will know
what to report on.
Senator Bayh. And from your experience, would most be eager
to cooperate or is it a nuisance, another regulatory burden?
Perhaps the events of September 11 have opened some eyes about
the importance of being serious about this.
Mr. Jost. I am not a banker. I do business with them in my
current position. But I think most of them are willing to
comply with the law and certainly willing to help.
Senator Bayh. My last two questions are to Mr. Jost and Mr.
Yousef, they are also directed at you. And they relate to the
use of charities or nongovernment organizations as a source of
funds for terrorist enterprises. Can you elaborate on that a
little bit,
Mr. Yost? In your experience, is that a significant source of
funds,
either charities or NGO's, for illicit organizations?
Mr. Jost. Well, I would say it is significant in that it
happens. Once again, since I do not know the money volume that
goes through this, I do not know that it is significant in
terms of
volume. It is a significant aspect of the system because, as
char-
ities and NGO's, they are not subject to the same scrutiny
other
activities are.
Senator Bayh. So, you do not know about the amount,
obviously. But the incidence? Is that----
Mr. Jost. Yes, the incidence and the fact that people are
taking advantage of the fact that these are respectable
activities, in that it is being used to hide the illicit money
movement.
Senator Bayh. And as we crack down on the financial system,
formal and informal, trying to stay one step ahead, is that, in
your opinion, a fruitful area for future inquiry and scrutiny?
Mr. Jost. Yes, Senator, I believe it is.
Senator Bayh. Thank you, Mr. Jost. Since we intended to
have hearings on that, I find your answer to be very helpful.
Mr. Yousef, what about charities and NGO's, in your
opinion? Is that a significant area of financing for some of
these organizations, terrorist organizations?
Mr. Yousef. I doubt it, personally. I think that some
charities may be involved, unknowingly, in laundering not just
money, but laundering also personnel, on behalf of terrorist
organizations or organizations engaged in terrorist activities.
But in general, it is really difficult for us to make any
general remarks about the work of charities, in part because
there is a huge variance in their objectives, their internal
organization, their practices, their financial standards.
We should have some guidelines that all charities ought to
be expected to comply with. And so far as they raise money or
engage in humanitarian or political fund-raising, we ought to
be able to look into their books, know who does the fund-
raising, where does the money go.
But I think if the Hawala has been a challenge, I think the
charities and NGO's in general will even be a bigger challenge,
in part because the variance within them on many dimensions is
just way too big for any one agency or one authority to get
good control
and handle over. My own gut feeling is that charities may be
used,
but that is not the predominant way for terrorists to get their
work done.
Senator Bayh. So, you are a skeptic with regard to some of
the reports of September 11 about charities in various
countries, not in bulk, but in part, having funds going to
illicit purposes.
Mr. Yousef. Yes.
Senator Bayh. You are skeptical about that?
Mr. Yousef. Yes, sir. I am a skeptic here. I guess I am
more of the mind that even if charities are involved, in some
cases, they may not be aware of what they have been doing.
Especially, I can speak to charities from the Middle East.
I have not been impressed by how well organized they are and
their own internal standards and financial practices. It is
possible that an individual or a number of individuals could
exploit these, especially the big, respectable charities, which
have mega-operations scattered all across the globe.
Senator Bayh. Let me ask you about international
cooperation. What type of outreach should the United States be
doing to facilitate international cooperation? And is there a
role for the International Monetary Fund here?
Mr. Yousef. I think the International Monetary Fund and
other multilateral institutions have been calling for a very
long time for the harmonization of many things, including
definitions, practices, especially insofar as the international
movement of capital.
Part of the problem we have is countries are starting from
very different levels of financial development. Some countries
are not
at all convinced by the whole notion of capital mobility or
globaliza-
tion. Hence, they resist all the requirements. And what they
entail in terms of significant financial and training costs.
But a lot of these initiatives remain on the table and I think
the United States has the leadership and the resources to push
many of them.
In particular, in the case of a number of Middle Eastern
and Muslim countries, part of the problem is, in fact, the cost
entailed to bring their financial systems up to speed to
introduce supervision, regulation, that same sort of standards
that we take for granted in the United States.
Perhaps the United States may look beyond just providing
mere financial aid, technical aid, expertise, and encourage
countries to move in that direction.
In the long run, that is about the only thing we can do to,
in fact, bring the Hawala into the modern world and perhaps no
longer need informal means of moving money, other than those
that are, plain and simple, illegal and unlawful.
Senator Bayh. Mr. Yousef, my last question to you would be
with regard to the extent to which Hawala are used by drug
traffickers to transfer money. How prevalent is that, in your
experience?
Mr. Yousef. In my experience, when the Hawala was made
illegal, when it was prohibited in a number of countries, when
the government attempted to crack down on their work,
especially when Hawala were only confined to foreign exchange
operations, they went underground. And by going underground,
they opened themselves up to all kinds of influences. In
particular, they need protection. That brings them into contact
with smuggling rings, drug rings, and corrupt politicians.
One country to look at in particular in this regard is
India, where there have been a number of very serious scandals
involving top politicians, involving Hawala dealers and other
underground activities.
I think the approach we have adopted here of bringing them
to the surface, giving them a legal cover, will in fact perhaps
go a long way into clarifying the Hawala to us and clarifying
us to them. If I may just add one more point in this regard.
I am particularly concerned about the knowledge out there
of what the new legal requirements are, and there is a lot of
concern that was expressed earlier by a number of questions.
I think a grassroots level approach is really highly
appropriate and highly needed. Language is a big barrier.
Culture at times is a big barrier. And we are operating in an
atmosphere where there is a lot of fear and apprehension.
Newspapers may be helpful, but there are a lot of community
centers, community networks, mosques and shops, et cetera. In
fact, reaching out to these may be low cost and more effective.
And I hope we can move in that direction.
Senator Bayh. Thank you, Mr. Yousef.
I think as Mr. Sloan testified, as we move aggressively
forward to implement these regulations and try to disseminate
information about what is required under the law, it may take
some forbearance on the part of enforcement authorities with
regard to legitimate, innocent participants in this system who
are simply caught up because of ignorance, rather than focusing
on those who clearly are involved in illicit activity that we
should target and crack down on and put out of business.
So that is going to be a challenge in terms of implementing
the standard. But we need to get it put into law, so we can go
after the bad guys, even as we exercise some forbearance with
regard to innocent people who are simply caught up in this and
not attempting to harm anyone. I think your point is well
taken.
Gentlemen, thank you very, very much for your time. I would
like to thank others in attendance today, other witnesses.
Thank you, Mr. Bariek, again.
This hearing will now move into Executive Session for a few
moments and I will give us to conclusion after that. Thank you
all very much.
[Whereupon, at 4:28 p.m., the Subcommittee proceeded to
Executive Session.]
[Prepared statements supplied for the record follow:]
PREPARED STATEMENT OF SENATOR EVAN BAYH
Since the attacks of September 11, much has changed in America. One
area where our mind-set should never be the same is in our approach to
national security. The new world we operate in requires us to take a
comprehensive look at our national security strategy through an
entirely new set of eyes. In this war against terrorism, one of the
most critical battles will take place not in a foreign land, but in the
financial world, as we seek to paralyze terrorist activities by cutting
off the financial head of groups like Al Qaeda. In an interview in
October with a Pakistani newspaper, Osama bin Laden seemed unconcerned
about our efforts to shut off the flow of his money. He said Al Qaeda
has three finance systems organized by backers who are as ``aware of
the cracks inside the Western financial system as they are aware of
lines on their hands.'' ``These are the very flaws of the Western
fiscal system, which are becoming a noose for it,'' bin Laden said.
One system which bin Laden and his terrorist cells use to covertly
move funds around the world is through ``Hawalas'' an ancient,
informal, and widely unknown system of transferring money. Today's
hearing will examine Hawalas and how they have been exploited by bin
Laden. Although most Americans have never heard of a Hawala, that
system almost certainly helped Al Qaeda terrorists move the money that
financed their attacks on the World Trade Center and the Pentagon.
Hawala, from the Hindi word for ``trust,'' is a system of brokers
that provides paperless banking transactions and enables individuals to
transfer large sums of cash from one country to another without the
funds ever crossing borders or be-
ing recorded. The Hawala system predates conventional banking by
thousands of
years and is prevalent in Afghanistan, India, Pakistan, the Middle
East, and parts
of Africa.
Just last week, the President used his emergency powers to shut
down a Somalian conglomerate connected to Al Qaeda that was operating
in several United States cities, including Fairfax City and Falls
Church, Virginia. The Al Barakaat network used Hawalas to move funds to
Somalia, Afghanistan, and the Sudan--funds used by Al Qaeda.
On our first panel, Jim Sloan, Director of the Treasury
Department's Financial Crimes Enforcement Network (FinCEN) will testify
about the Al Barakaat case. FinCEN has been aware of the law
enforcement problems raised by Hawalas for many years. In 1998, the
Agency released one of the only reports on the subject. FinCEN is also
the Agency charged with enforcing the money service business
regulations effective on December 31, 2001, which now cover Hawalas as
well. Welcome Mr. Sloan. We look forward to hearing your testimony with
regard to Hawalas, Al Barakaat, and the money service business
regulations.
Also testifying will be Mr. Rahim Bariek. Mr. Bariek is a Hawala
broker, who runs his business in Northern Virginia. Mr. Bariek provides
important Hawala services for the Afghan community with family in
Pakistan. Welcome Mr. Bariek. Thank you for joining us today. This will
be the first opportunity for Congress to hear first hand from a
Hawaladar.
Our final panel will include two experts on Hawalas. Professor
Tarik Yousef from Georgetown University, who is a specialist in Middle
Eastern and Asian banking systems. And Mr. Patrick Jost formerly of
FinCEN and coauthor of the 1998 report. Welcome gentlemen.
While much of the money that flows through the Hawala system in the
United States is used for legitimate purposes, Hawalas also allow
terrorists and drug dealers to smuggle money into the United States,
outside the detection of the global banking system. Congress too has
recognized the danger of unregulated Hawalas, and moved to regulate
their activities in 1994 with passage of a law requiring check-cashing
businesses and informal financial enterprises like Hawalas to register
with the Government and report transactions over $3,000.
Unfortunately, the regulations implementing this statute remained
unpublished for 6 years, while Hawalas continue to operate in the
United States without supervision. That was the reason that I proposed
an amendment that will expedite the enforcement of Hawala regulations
and give U.S. law enforcement and intelligence authorities some of the
tools they need to intercept terrorist financing before it is too late.
My proposal was included in the antiterrorism legislation, which the
President signed on October 26, 2001.
Targeting the financial network of groups like Al Qaeda will not,
by itself, strike a deathblow to international terrorism. However, it
will disrupt their terrorist activities and it will give our law
enforcement and intelligence communities a better chance of detecting
and preventing terrorist acts. We must also aggressively seek out every
angle that terrorists use to finance their operations. We must make
sure that every cent of U.S. aid is going to the people who need it the
most in developing countries--not to terrorist groups for training and
arms.
I intend to hold future hearings on other forms of terrorist
financing, like the link between Al Qaeda and certain charities and
nongovernmental organizations. Reports have surfaced that some
terrorists use funds received by charities.
The war against terrorism demands that we strengthen our resolve,
sharpen our skills, and redouble our efforts. I look forward to all of
the testimony we will hear today, and to taking the next step to cut
off terrorist financing.
* * *
NEW LAW TO MONITOR HAWALAS IN THE UNITED STATES
The antimoney laundering bill, which passed out of the Senate
Banking Committee on October 4, 2001, was incorporated into the
antiterrorism bill which President Bush signed into law on October 26,
2001.
That bill included Hawala provisions authored by U.S. Senator Evan
Bayh. The effect of the new provisions is to:
Require all Hawalas to register with the Federal Government
and report all suspicious transactions.
Require the Department of the Treasury to extend registration
and Suspicious Activity Reporting (SAR) requirements to Hawalas.
Require the Secretary of the Treasury to report to Congress,
within a year of enactment of this legislation, on Hawalas and
other underground banking systems, and report on the need for any
additional legislation, including whether the threshold for SAR
requirements should be lowered in the case of Hawalas.
PREPARED STATEMENT OF SENATOR CHUCK HAGEL
Thank you, Chairman Bayh, for holding this hearing on such an
important and timely issue.
We have known for years that terrorist groups have been able to
move money successfully through conventional banking systems. Last
month, this Committee passed meaningful money laundering legislation
that will help banks and the Treasury
Department work in a coordinated fashion to target terrorist
operations.
However, in the wake of the September 11 terrorists attacks, we
have been able to link the system of money transfers known as
``Hawala'' to the financing of terrorism. This informal and centuries-
old system operates outside the traditional banking world, with little
or no paper trail to trace the sources of funds. Traditional means of
tracking suspicious financial activities will not work within this
system.
The ``Hawala'' system has recently been the focus of significant
attention both from law enforcement officials and from the media. The
raiding of the Somali ``Hawala'' firm Al Barakaat last week
demonstrates that our determination to cut off terrorist funding has
expanded from traditional banking systems to these unconventional
methods. If we are to continue to track terrorist activity through
these sources, we must comprehend how they work and determine whether
additional information is needed for banks and law enforcement
officials.
I do want to emphasize today that the majority of Hawala dealers
are good, honest people who help fellow countrymen send money abroad.
These dealers work to get money to friends and family members who do
not have access to the modern banking system that we all enjoy.
Through this hearing today, we look forward to gaining a greater
understanding of this system and developing ideas on how to curtail
financing of terrorist networks such as Al Queda.
Thank you again, Mr. Chairman, for holding this important hearing
today.
----------
PREPARED STATEMENT OF JAMES F. SLOAN, DIRECTOR
Office of Financial Crimes Enforcement Network (FinCEN)
U.S. Department of the Treasury
November 14, 2001
Good afternoon, Chairman Bayh and Members of the Subcommittee.
Thank you for this opportunity to discuss with you the important issue
of informal banking systems, specifically Hawalas, and the potential
for abuse of this particular system in terrorist financing, drug
trafficking, alien smuggling and tax evasion.
The context of today's hearing--the potential vulnerabilities of
informal banking systems to terrorist financing in the wake of the
September 11 tragedies--underscores the need to study the use, legal
and illegal, of such systems. The Patriot Act recognizes this need and
FinCEN will be working with Treasury to prepare recommendations for
Congress regarding the need for any additional legislation. This
requirement in the Act dovetails with FinCEN's ongoing efforts to
conduct an in-depth examination of these systems in the United States.
As the Subcommittee is aware, FinCEN is developing a comprehensive
regulatory program to register and require money service businesses, or
MSB's, to report suspicious activity (or SAR's). We have been taking
preliminary steps to look at these informal financial systems for
several years.
MSB is the term used to denote the subgroup of nonbank financial
institutions being required to register under the Bank Secrecy Act (or
BSA) by December 31, 2001. This subgroup, which includes businesses
such as Hawalas that are in effect informal money remitters, is
comprised of: money transmitters, issuers of traveler's checks or money
orders, sellers or redeemers of traveler's checks or money orders,
check cashers and currency dealers or exchangers.
Because there are variations on the definition of ``Hawala,'' it is
essential that this and similar systems be thoroughly examined and
understood. Toward this end, FinCEN has, and continues, to participate
in several initiatives. For example, the Financial Action Task Force
regional body in Asia, the Asia Pacific Group (or APG), is undertaking
a study of informal banking practices in Asia. The APG project began in
1999 and has focused on investigative case examples from member
countries, including the United States, which demonstrate how these
systems are used and whether there has been evidence of the movement of
proceeds of crime. The APG project group met most recently a few weeks
ago, after the events of September 11. Case examples surfaced to date
show the continued use of Hawala-type systems in moving funds
associated with such crimes as drug trafficking, alien smuggling,
kidnapping, customs fraud and tax evasion. Anecdotal information has
also been presented in the APG process on the use of such systems to
fund terrorist activity. Other studies, such as one done by the Dutch
Ministry of Justice in 1999, indicate that Hawala was used to support
terrorism in Kashmir in the early nineties.
In 1999, a report was prepared at FinCEN, which described typical
Hawala transactions and discussed how Hawala is used to facilitate
money laundering. This study was prepared by Patrick Jost, whom I
understand also will be testifying today. As that study noted, this
method of monetary value transmission is an
ancient system originating in South Asia. Today it may be used around
the world
to conduct legitimate remittances. When I say ``legitimate,'' I am
referring to
remittances that may be those of expatriate workers who use a Hawala
system
believing they are sending money quickly and reliably to family members
in their home country.
Earlier this year, FinCEN began a comprehensive study of Hawalas
and other informal value transfer systems as they operate in this
country. The findings of that study will feed into a broader joint
project on Hawalas and similar systems with FinCEN's counterpart in the
UK--the National Criminal Intelligence Service. The National Institute
of Justice may also provide a grant to support the international scope
of the project. The project's objective is to document, based upon
actual law enforcement evidence from the United States and around the
world, how Hawalas and other such systems are possibly being used as
conduits for terrorist financing and other illegal activity. As FinCEN
works with the Committee to address the requirements of the Patriot
Act, I am confident that its work to date on this issue will be a
valuable component of study mandated by the Act.
As the Subcommittee knows, FinCEN, in general, has proceeded very
deliberately with its MSB regulatory program. We have taken this
approach for a number of reasons: (1) MSB's have not been regulated at
the Federal level and therefore it will take time to identify and
understand the various MSB sectors and how they operate; (2) many MSB's
are small and serve ethnic communities making the task of shaping
appropriate regulatory programs even more complex; and, finally, (3)
because of the absence of a Federal regulatory infrastructure
developing a positive working relationship like the one which currently
exists between regulators and the depository institutions will take
time.
Having said this Mr. Chairman, one of the first actions I undertook
when I became Director of FinCEN, over 2 years ago, was to expedite the
process of issuing the final MSB regulations. It was clear that until
MSB's were brought into a Federally regulated BSA program, law
enforcement could not begin to take effective steps aimed at reducing
the vulnerabilities of MSB's to financial crime. Within months of
having assumed my office, FinCEN had issued two regulations--
registration and SAR reporting. The first regulation requires the
principals of all MSB's to register by December 31, 2001, and the
second requires money transmitters, issuers and sellers of traveler's
checks and money orders and the U.S. Postal Service to report
suspicious activity transactions shortly thereafter.
To ensure that MSB's are familiar with these new requirements and
to develop better demographics about who and where many of the smaller,
independent MSB's, including Hawalas, are located, we have been engaged
in an extensive education and outreach program for the past year.
FinCEN entered into a multifaceted contract with Burson-Marstellar, a
leading public relations firm with extensive experience in conducting
nationwide campaigns. FinCEN, in conjunction with Burson-Marstellar,
intends to continue this education effort throughout the coming year.
Working with the Internal Revenue Service's Office of Examination, we
hope to alert all MSB's to their registration and reporting obligations
under these new rules. If necessary, the regulations provide us with
the use of penalties against MSB's if they fail to comply with the
regulations. Our primary interest, however, is in encouraging voluntary
compliance with these businesses.
In conclusion, Mr. Chairman, we have already begun to develop a
comprehensive regulatory program for MSB's. We are now involved in
plans to learn more about these varied businesses and their different
needs, including Hawalas. We will keep the Subcommittee and the
Committee informed on a regular basis about our findings as we work
with other agencies and organizations to provide effective Federal
regulation and oversight of MSB's. Again, I appreciate the opportunity
to testify before this Subcommittee.
Thank you.
PREPARED STATEMENT OF JOHN VARRONE
Assistant Commissioner, Office of Investigations
U.S. Customs Service
November 14, 2001
The U.S. Customs Service appreciates the opportunity to provide
this statement for the record.
The U.S. Customs Service has long served as one of the most active
money laundering investigative agencies in Federal law enforcement. For
years, the agency has worked to disrupt and dismantle the money
laundering techniques used by the world's drug cartels to launder
narcotics proceeds.
Our criminal investigators are well trained in all types of
financial crimes. Using a systems-based approach, we target not only
the individuals involved in money laundering and those who finance and
fund criminal activity, but also the networks they use to carry out
their criminal activities. Now, we are turning this expertise full-
force on terrorist organizations and their financial backers and
supporters, and against those who help move money for terrorists.
Three weeks ago, Customs Commissioner Robert Bonner joined Deputy
Secretary of the Treasury Kenneth Dam, Treasury Under Secretary of
Enforcement Jimmy Gurule, and Assistant Attorney General Michael
Chertoff in announcing the launch of a new financial enforcement
initiative known as Operation Green Quest.
Green Quest is a multiagency task force targeted against terrorist
organizations. It is aimed at freezing and seizing the accounts and
assets of terrorist organizations; not just those groups associated
with the attacks of September 11, but all the terrorist groups that
pose a threat to the United States and to all nations of the world.
Green Quest brings the money laundering investigative expertise of
the Treasury agencies to bear on terrorist networks and their financial
supporters. It is led by U.S. Customs, and includes the Internal
Revenue Service, the Secret Service, Treasury's Office of Foreign Asset
Control (OFAC) and FinCEN.
The Operation also draws on the new Foreign Terrorist Asset
Tracking Center, and will be supported by the FBI and Federal
prosecutors from the Criminal Division of the Department of Justice.
Green Quest seeks to combine our strengths in a more effective way,
by melding the intelligence gathering abilities of offices like FinCEN
with the investigative
expertise of agencies like U.S. Customs, IRS, OFAC, and Secret Service.
A senior U.S. Customs special agent serves as the Director of
Operation Green Quest. An IRS criminal investigator is the Deputy
Director.
Green Quest operates through two components: a command and
coordination center here at Customs Headquarters in Washington, and a
field task force made up of dedicated and experienced agents in New
York.
These agents have been drawn from a long-term, highly successful
money laundering initiative based in New York known as Operation El
Dorado. Drawing on the expertise of Customs and IRS agents who have
worked money laundering cases in New York and elsewhere, Green Quest
will supply the investigative muscle and the expertise to identify,
freeze, and seize the accounts and assets of terrorist organizations
and their supporters.
This operation will also generate new information on sources of
terrorist funding and the systems used to fund terrorist activities. In
short, Operation Green Quest will deprive terrorist organizations of
the financial means to carry out their activities in the United States
and elsewhere in the world.
One week ago today, the United States delivered a major blow
against terrorist financing in a coordinated action against a global
money transfer network known as Al Barakaat. Acting on intelligence,
and equipped with Federal search warrants and blocking orders, agents
from Operation Green Quest executed warrants and served blocking
notices on a number of affiliated U.S. companies of Barakaat, which had
been linked to Osama bin Laden's Al Qaeda organization and other
terrorist groups.
Green Quest executed warrants and served blocking notices in six
cities across the country, Boston, Falls Church and Alexandria,
Virginia; Columbus, Ohio, and Minneapolis and Seattle. Eight Al
Barakaat businesses were shut down or searched and, their assets were
frozen. In the days that followed, more searches of U.S. firms
affiliated with Al Barakaat took place.
These are the first of what we expect to be many actions by
Operation Green Quest. We will pursue all avenues of terrorist
funding--those that exploit our global banking system, those that
manifest themselves through the more informal Hawala network, and other
insidious methods, including the use of international trade.
We suspect terrorist organizations of employing trade-based schemes
to mask funding sources. What does that mean? Terrorist front companies
might overvalue or undervalue merchandise. They might use double
invoicing. They might fabricate shipments altogether.
Customs enjoys a longstanding expertise in identifying trade-based
money laundering schemes too. Our dual mission to facilitate trade and
enforce laws gives us access to vast amounts of financial and trade
data. In the trade area, we can look at the import and export history
for tens of thousands of companies. We can cross-reference that
information against other records and various law enforcement databases
through special applications developed by Customs' employees. That
allows us to spot trends and anomalies in a particular company's or a
particular industry's activities.
Other terrorists may resort to simpler methods of money laundering,
such as Bulk Cash Smuggling. New antimoney laundering laws enacted by
Congress and signed by President Bush strengthen the laws against those
who smuggle concealed cash out of the country, above the $10,000 dollar
allowable amount.
Prior to this new legislation, the smuggling of cash was mainly a
reporting offense. The new statute provides for criminal forfeiture of
the property involved, and outlines more stringent penalties against
violators.
Customs has taken its own, aggressive measures to combat bulk cash
smuggling into and out of the United States. Outbound inspections alone
of persons and vehicles have resulted in currency seizures over the
past 6 years of close to $340 million.
Again, whatever the terrorist funding source may be, we will pursue
it. The combined strength of Federal law enforcement, as manifested in
Operation Green Quest, makes for a formidable defense along this
crucial front in our global war on terrorism. The active support of the
Congress, as demonstrated by this hearing today, lends yet further
strength to that effort.
Thank you for this opportunity to provide the views of the U.S.
Customs Service on this important new initiative.
----------
PREPARED STATEMENT OF RAHIM BARIEK
Bariek Money Transfer
November 14, 2001
Chairman Bayh, Senator Hagel, and other Members of the
Subcommittee, my name is Rahim Bariek, and I run Bariek Money Transfer
business in Northern Virginia. I was born in Kabul, Afghanistan and
lived there until 1986. I moved to Pakistan and then the United States.
My father sponsored me to come to the United States in 1989, and I
became a U.S. citizen in September 1994.
In 1997, I wanted to send money to my father-in-law in Pakistan. I
went to my local branch of Chevy Chase Bank to wire the money. The bank
told me that there was no way that they could guarantee a money
transfer to Pakistan, because there is a great deal of corruption in
the formal banking system in Pakistan and money often disappears. I
tried to send a money order, but it was stolen from the mail. The only
way that I could get the money to my father-in-law in Pakistan was
through a Hawala. It was safe, faster and cost less.
That same year (1997), my brother-in-law invited us to his wedding
in Peshawar, Pakistan. I met with my cousins who own a money exchange
business and Hawala, Insaf Exchange Ltd. Insaf is in the choke yadgar--
a large market where all forms of currency are exchanged. Most Afghan
refugees in Pakistan use Hawala, because they cannot get the money
through banks or the mail. My cousin asked me if I would like to go
into the Hawala, business with him. My experience trying to send money
through Chevy Chase Bank illustrated that there was a great need for
Hawala to exist. I agreed to work with him as a money transfer broker.
As a second job, I now run Bariek Money Transfer in my community in
Northern Virginia. I have between 200 and 300 customers, who generally
send money to Pakistan once a month. Many Afghan families moved to
Pakistan with the understanding that they would receive funds from
their families in places like the United States, Canada, Australia, and
England. Many of my customers make regular monthly deposits with me, by
mailing me personal checks or leaving them at the local Afghan stores.
They send anywhere between $20 to $400 to their families in Pakistan to
help them pay rent and buy food and other things that they need. There
are very few jobs in Pakistan, and many people are without work and a
source of income. Without the money families send from the United
States and other countries, many of the families in Pakistan would not
be able to pay rent or afford food and other basic needs. Families also
send larger sums of money--between $1,000 and $5,000--for weddings,
when someone passes away, and other big events. For all of these
reasons, I consider my job very important and humanitarian in nature.
Let me emphasize--I know all of my customers, and I would never
send money for a family that I do not know.
This is how my business works. One of my customers comes to me with
$300 and asks to send it to his brother in Pakistan. Charging about a 5
percent commission, I take the money and give my customer a transfer/
code number which they give to their family in Pakistan. They will need
that transfer/code number and identification to get the money from
Insaf Exchange. The family member in Pakistan must also sign a form to
show that they received the money. I call and fax Insaf Exchange with
the name of the person who will get the money and the transfer/code
number. Within 24 hours, the money is guaranteed safe in the hands of
my customers family in Pakistan. That is how I do Hawala. Other Hawala
brokers may operate differ-
ently. In order to balance our accounts, I pay some of the bills Insaf
Exchange owes to other businesses not located in Pakistan. The money I
receive in the United States never goes directly to Pakistan. But it
does get to the families in Pakistan that need it.
Hawala is very important to families in my community. Without
Hawala, people would never be able to send money to their families
abroad. We provide a very
legitimate service. Unfortunately, as we saw last week, some Hawala are
used for
illegal activity or to move terrorist funds. The informal and paperless
nature of
Hawala makes it easy to take advantage of, but the vast majority of
Hawala are
legitimate. As I said earlier, I would never send money for a family
that I did not
personally know.
In Afghan culture, the Hawaladar is an honest person. People trust
him, and he has a good reputation and credit with people. For that
reason, I strongly commend you on your efforts, Senator Bayh. I pay
taxes on my Hawala business, and I comply with the law. I am happy to
comply with the new Federal law, which you wrote, and to register and
to file suspicious activity reports. I believe that all legitimate
Hawala will be happy to comply. It is upsetting to us that there are
Hawala used for illegal activity. They give all Hawala a bad name.
Chairman Bayh and other distinguished Senators, I appreciate the
opportunity to appear before you today. The Afghan people love the
United States. The United States helped the Afghan people during the
war with the Russians. America also accepted many refugees from
Afghanistan and continues to help the Afghan people in Pakistan. I am
very proud to be a citizen of the United States.
Right now, the Afghan people do not like the Taliban, Pakistan and
the Arab people who are using Afghanistan for terrorism. Afghan people
support America's fight to rid the world and Afghanistan of terrorism.
Four months ago in France, the great Afghan Commandant Mousaud
announced on television that he would fight against terrorism in
Afghanistan. He did not
want Afghanistan to be used by terrorists any longer. Soon after his
statement, he was killed by Arab terrorists. Commandant Mousaud was a
hero to the people of Afghanistan.
That completes my testimony before you today about the important
work that I do for my community and refugees from Afghanistan. I will
be happy to answer any questions that you may have.
Thank you so much.
----------
PREPARED STATEMENT OF TARIK M. YOUSEF
Assistant Professor
Department of Economics, School of Foreign Service
Georgetown University, Washington, DC
November 14, 2001
Mr. Chairman and distinguished Members of this Subcommittee, I am
pleased to testify before you today on the topic of the Hawala
institution, its origin, how it functions and what can be done to
regulate it. The Hawala institution has drawn much attention recently
in the context of the U.S. war on terrorism whose goals
include interrupting and preventing the mobilization of resources and
transfer of funds through formal or informal channels to finance
terrorist activities in the United States or elsewhere.
Let me first provide a context for understanding the place of the
Hawala in the modern financial system including in the Muslim world. I
will do so by reference to my own personal experience. Prior to the
last decade, in all my travel and living experience in numerous
countries in the Muslim world, I had never observed others nor did I
settle a personal or business transaction by any means other than cash.
The reasons are not hard to find. For historical and policy reasons,
financial development in many developing countries including the Muslim
world has lagged behind the advanced OECD countries.
The late start with modernization in the post-WWII era has implied
that the financial systems of most countries in the Muslim world lack
depth and sophistication and that the institutions of regulation and
supervision are not fully developed. More importantly, extensive
government intervention in these societies including through repressive
financial policies, excessive taxation, foreign exchange and trade
restrictions and a banking system that is driven by the needs of the
governments have retarded the emergence of modern financial systems.
Reflecting these conditions, cash remains the preferred medium for
settling transactions and dominates the composition of liquidity in
many banking systems. Banking institutions are concentrated in urban
centers and cater mainly to the needs of governments and elite segments
of society. Modern habits of banking have yet to affect the majority of
populations especially in rural areas. Protection of personal property
is imperfect, enforcement of contracts is weak, government corruption
is endemic, and tax evasion is widespread.
The Hawala institution should be understood in this broader context
as an in-
formal means of transferring funds or other assets within or across
borders that
is used primarily by individuals who are constrained by the level of
financial de-
velopment and government policies. It is a market response by economic
agents to
their economic environment. Evidence of its existence goes back
thousands of years and it is widely in use throughout the world
especially in Africa, Asia, and more recently in the United States. It
is but one example of numerous informal institutions in credit and
foreign exchange markets that have given rise to and reflect the
existence of large ``underground,'' ``unofficial,'' and ``parallel''
economic sectors in many countries.
As is well known, individuals interested in transferring money to
remote parts of this world and who may want to circumvent trade and
foreign exchange restrictions or minimize other risks to their funds
make use of the Hawala. It is simple, efficient and low cost relative
to other options and, in some cases, the only means to remit income to
families in distant parts of the world. Millions of expatriate workers
in the world remit incomes through informal money transfer services
including the Hawala and the funds involved while significant in total
are generally small per person and per transaction.
The appearance of the Hawala institution in the United States is
directly linked to the growth of immigrant communities' especially from
South Asia. Although the well-developed U.S. financial system is
available for domestic transactions, foreign money transfers remain
subject to the problems noted above in the receiving countries. Hence,
the Hawala flourishes as a business in this country. Most individuals
utilizing the Hawala system and most operators of the system in the
United States could be safely presumed to be conducting legitimate
activities at both the sending and receiving end of transactions.
Unfortunately, the simplicity and the anonymity of the Hawala
system has also
attracted the individuals and groups engaged in illegitimate businesses
or those
exploiting the Hawala to fund illegal activities whether they involve
money laundering, gambling, smuggling, or terrorism. Hawala operators
may or may not be accomplices in such transactions. Their minimal
documentation requirements act as both an asset to their business and a
liability in case of unintended wrongdoing. More worrisome, the lack of
a ``paper trail'' undoubtedly frustrates any effort by law enforcement
agencies investigating the source and destination of Hawala driven
financial flows.
Reports that the Hawala was used in the past by terrorist
organizations and most recently by those responsible for the September
11 attacks have prompted calls for legal authority and executive steps
to investigate and when applicable seize assets and prosecute those
guilty of aiding terrorists financially including Hawala operators.
Already, a number of money transfer services have been closed down and
their assets frozen worldwide. The Anti-Terrorism Bill passed a few
weeks ago empowers the Government to monitor many channels suspected of
use to launder money and finance terrorism including the Hawala. In
particular, the recent bill took the important step of extending the
reach of basic U.S. regulations of money transfer services to the
Hawala.
By requiring Hawala businesses, among other things, to be licensed,
maintain records and report suspicious transactions, the legislation
struck an important balance between protecting U.S. financial and
security interests and allowing Hawala operations to serve legitimate
purposes for which they had been designed. Hawala operators and
customers are both served. The business owner acquires a legal standing
that facilitates his operations and the customer is protected by legal
recourse. As a result, we may in fact witness a growth in these money
transfers, benefiting individuals and families in distant countries. On
the other hand, noncompliant Hawala businesses or those engaged in
illegal activities would face sanctions for violating the new legal
requirements, potentially limiting their customer base.
The gradual approach adopted recently by the U.S. Congress to
regulate the Hawala will prove more effective than what has been
attempted elsewhere in the world especially when outright prohibition
was enacted. The latter approach did not achieve its intended goals and
only served to drive the Hawala further underground. This allowed
Hawala businesses to charge customers higher fees and further conceal
their operations. They also became more prone to engaging in other
illegal activities as part or in parallel with their money transfer
operations. Their need for protection brought them under the influence
of smuggling rings, money laundering networks and corrupt politicians.
But like all laws, the effectiveness of any legislation including
the most recent will depend on its implementation and enforcement. And
while there is every reason to believe that the majority of Hawala
operators will want to comply with the new legal requirements, it will
be some time before affected businesses will come under the regulatory
umbrella. Apprehension, confusion, and fear characterize the mode
within some immigrant communities at present. Language and cultural
barriers also often act as obstacles to understanding the implications
of the U.S. war on terrorism on their daily lives. A concerted effort
needs to be made at the grassroots level throughout these scattered
communities to explain the changes and clarify the obligations of those
affected by any legislation.
Bringing the Hawalas under regulatory control will lift the veil of
secrecy that
governs its operations. In particular, it would provide authorities
with important technical information about its working across borders
including the methods for settling accounts, the geographic
distribution of operators, the size and destination of financial flows,
and the use of deposits in the formal financial system. This
information could prove invaluable for law enforcement agencies and
future legislation especially when international cooperation is sought
among national monetary
authorities to harmonize definitions and regulatory practices.
But we should be realistic about the limits of what can be achieved
in the short-term within our national borders to bring the Hawala
institution into the modern world. So long as there remains a
divergence between the United States and other countries in financial
development, banking efficiency, taxation levels, and laws pertaining
to foreign exchange transfers, there will exist a demand for the Hawala
and other means of moving money across the globe. More importantly,
difference in regulation and supervision standards across countries
will create loopholes to be exploited by Hawala operators and other
informal practices. In this case, international cooperation in sharing
information and closer monitoring of international money transfers
would prove indispensable.
Beyond the Hawala, efforts to track terrorist financing will lead
to consideration of other formal and informal institutions suspected of
acting as conduits for raising or moving money across international
borders. Specifically, several reports have
indicated that national and foreign charities are being investigated
for suspicious
financial activities and other connections to terrorist organizations.
In this regard,
we face even bigger challenges than in the case of the Hawala. The
variance in the
objectives, scope of work, internal organization, and financial
practices of charities
is wide, making it difficult to apply uniform regulations. Given that
these charities
in many countries represent the only avenues for the emergence of civil
society,
we must proceed with caution and seek local cooperation for information
and law
enforcement.
----------
PREPARED STATEMENT OF PATRICK JOST
Product Development Manager
SRA International, Inc.
November 14, 2001
Mr. Chairman and distinguished Members of this Subcommittee, my
name is
Patrick Jost. I am currently with SRA International, developers of
Assentor,' which is a system for the analysis of e-mail
messages, instant messages, and faxes in brokerages and other financial
institutions. Assentor looks for indicators of activities such as money
laundering and price fixing, and quarantines messages containing these
indicators for review. We are currently enhancing the product to
analyze other types of documents for possible indicators of Hawala and
terrorist financing.
Prior to joining SRA, I was with FinCEN, the U.S. Department of the
Treasury's Financial Crimes Enforcement Network. At FinCEN, I was
responsible for South Asia--India, Pakistan, and neighboring countries.
While at FinCEN, I assisted many domestic and international law
enforcement agencies with the analysis of cases involving Hawala. I
have seen Hawala, or what I might refer to as ``Hawala techniques''
used as a component of money laundering schemes for predicate offenses
including narcotics trafficking, alien smuggling, insider-trading, and
political corruption.
In conjunction with Harjit Sandhu of India's Central Bureau of
Investigation, then detailed to Interpol, I undertook a detailed study
of Hawalas that resulted in the publication of three reports--one on
Hawalas, one on the money laundering situation in India and one on the
money laundering situation in Pakistan. Among his significant
contributions to these reports, Mr. Sandhu provided valuable
information on the use of Hawala as a component of terrorist financing.
In the course of the preparation of these reports and my other work
at FinCEN, I spent a great deal of time in South Asia. Given my
longstanding interest in that part of the world, I improved my
knowledge of Hindi and Urdu, and learned some Gujarati to assist me in
my study of Hawala and to provide effective support to investigations
and analysis.
I would now like to provide an overview of the mechanics of a
Hawala transaction. Before doing so, I would like to point out that
there are two essential characteristics of Hawala--the first is a
network of Hawala brokers or dealers, called Hawaladars in Hindi and
Urdu and often referred to as ``Hawala operators'' in the English
language South Asian press, and the second is the trust that exists not
only between Hawaladars but also between Hawaladars and their clients.
With this context, let me proceed with an example of a typical
Hawala transaction. Suppose an individual in a large United States city
wishes to remit the sum of $5,000 to a relative living in South Asia.
This individual contacts a Hawaladar, and they negotiate terms.
These terms often include the rate of exchange and the manner of
delivery of the money. The Hawaladar will take the money, and make
contact with an associate in or near the place where the money is to be
delivered. This second Hawaladar will make the necessary delivery
arrangements. This can be done by sending a courier to the person with
the money, or by providing a phone number to be called to
arrange delivery.
It is useful to think of the above example as a Hawala ``theme'';
and what actually happens, is, as in improvised music the
``variations'' on the theme. The Hawala system is very flexible, so
many variations occur. This can be seen in the ways Hawaladars settle
their debts. Sometimes, the flow between two Hawaladars is balanced,
so, in a reasonable amount of time, debts are settled automatically.
Another possibility is that the Hawaladar has money in a country
and cannot remove it due to measures designed to counter capital
flight. These measures can be circumvented via Hawala. The Hawaladar
accepts money in his current country of residence, and has an associate
``drain'' the supply of money in the other country until it is gone.
Some Hawaladars utilize invoice manipulation schemes to settle their
debts. These schemes are often necessary because of remittance
controls.
For example, a Hawaladar operating in the United States could send
an associate $100,000 by purchasing $200,000 worth of goods that his
associate wants. He ships the merchandise with an invoice for $100,000.
The associate receives the merchandise and pays the first Hawaladar
$100,000. This payment appears to be legitimate because of the shipment
and the invoice. The associate has $200,000 worth of merchandise for
which only $100,000 was paid. This technique, known as ``under
invoicing'' is one way of circumventing remittance controls, as well as
settling debts between Hawaladars.
The inverse of this, ``over invoicing'' also exists. It would, for
example, be used to transfer money to the United States. A Hawaladar
operating in the United States would purchase $100,000 worth of goods
that his associate wants. He would ship the goods with an invoice for
$300,000. Payment of this amount would allow the associate to move
$200,000 to the United States. Like ``under invoicing'' this technique
can be used to circumvent remittance controls and settle debts between
Hawaladars.
What might be termed ``debt assignment'' also takes place. If
Hawaladar A owes money to Hawaladar B, and Hawaladar B owes money to
Hawaladars C and D, Hawaladar B might ask A to settle the debts with C
and D, settling his debt with B. As with other aspects of Hawala
transactions, there is a great deal of flexibility. Hawaladars will use
these settlement methods--or variations on them--as needed and dictated
by circumstances.
The majority of Hawala transfers out of the United States are
remittances by South Asians living and working here to friends or
relatives still in South Asia. There are several reasons for this. The
first is a cultural preference for Hawala. Hawala was developed as a
remittance mechanism in South Asia before the appearance of ``western''
style banking, and continues to be used. The second is cost
effectiveness. Since Hawaladars do not necessarily respect official
exchange rates, they can often deliver more rupees per dollar than an
institution that respects official exchange rates. This is an important
part of Hawala; Hawaladars make a certain amount of their profit off of
exchange rate speculation, and much ``colorful language'' is often used
while bargaining over very small differences in exchange rates! A third
is speed--many Hawaladars offer service ``in 2 hours'' even though 24
hours is more realistic, given time differences, but is, in any case,
almost always faster than bank transfers. The final consideration is
reliability, closely related to the trust component of Hawala--
transfers are not ``lost in the mail'' or ``held up at the bank''; when
someone places an order with a Hawaladar, there is little if any doubt
that the money will be delivered.
In some respects, the Hawala system is self-regulating. Hawaladars
form an extended community, and it is rare for them to defraud one
another or their clients. In the rare cases where this has happened,
other Hawaladars have been known to make good on the debts of their
colleague. While it is possible that some sort of ``disciplinary
action'' will be taken, a Hawaladar who commits fraud is one who cannot
be trusted. Without the trust of other Hawaladars, he can no longer
function effectively. To summarize, Hawala is a system that is cost-
effective, quick, reliable and secure. These characteristics of Hawala
account, in large part, for its use instead of other remittance
systems. There are also places, like Afghanistan, where Hawala is the
only viable remittance system.
These factors also account for the use of Hawala by certain
terrorist organizations. Osama bin Ladin is a Saudi with connections to
Afghanistan and Somalia. All of these are countries where Hawala is the
preferred means of remitting money.
Terrorists, drug traffickers and other criminals also exploit
another characteristic of Hawala. This is its frequent lack of a
complete paper trail documenting all parties to a transaction. It is
not uncommon for Hawaladars to maintain only logs of debts with other
Hawaladars. Records of remittance clients and beneficiaries are kept
only long enough to facilitate the transaction, and the debt logs are
often kept until the debts have been settled.
The lack of a paper trail is but one of several difficulties in
investigating the criminal use of Hawala. Even when records are
available, they are rarely in English, necessitating translation. Even
though the records may contain names of other Hawaladars, the names are
rarely, if ever complete enough to facilitate proper identification--
references to ``Ali Hussein'' or ``Shahbhai'' are typical.
The most significant investigative barrier is probably the fact
that ``Hawala behavior'' lies well outside the cultural experience of
most U.S. investigators. Hawala is a system where large amounts of
money are handed over without receipts, confirmation numbers, or
identification. Hawala transactions take place in the context of a
large network unlike a ``traditional'' corporate structure. The
business of Hawala is conducted informally, with little in the way of
overhead and almost nothing in the way of a regulatory infrastructure,
making it, in this respect, nearly the antithesis of banking.
I would like to devote the remainder of my remarks to possible
solutions to the problems posed by Hawala.
Recent legislative changes calling for the registration and the
supervision of Hawaladars, as well as for identifying Hawala
transactions as potentially suspicious are commendable first steps, but
I do believe that much remains to be done. There are two areas that I
believe need to be addressed.
First, I believe that it is essential for banks and for other
financial institutions
already required to file Suspicious Activity Reports (SAR's) to develop
an understanding of ``what Hawala looks like'' and act accordingly.
This will help in the identification of Hawaladars. If a bank has a
client who is conducting Hawala transactions, and this client is
identified as doing so, and a SAR is filed, this can be used by the
authorities to determine whether or not the Hawaladar is licensed
appropriately.
Even though some Hawaladars advertise, not all of them do, so
efforts to locate them based solely on advertisements will be of
limited effectiveness. Many Hawaladars conduct Hawala transactions as
part of other business operations; this behavior can, with the proper
training, be identified by the banks holding the business accounts.
The relationship between Hawala and financial institutions in the
United States is important. In South Asia and the Middle East, it is
possible to do all business by Hawala and avoid regulated financial
institutions altogether. This is pos-
sible, but difficult to do, in the United States. It is possible to
conduct private party
automobile sales and various personal transactions using cash, but real
estate and various business transactions are almost impossible to
execute without a banking relationship.
Even though it is certainly possible for terrorists and other
criminals to move vast amounts of money into the United States via
Hawala with little or no trace, some of this money is useless unless it
can be converted into an acceptable form. This necessitates a
relationship between banks and Hawala. This relationship is a potential
vulnerability in a Hawala money laundering or terrorist financing
scheme, and this vulnerability should be exploited.
One important aspect of this relationship is the interaction
between Hawaladars and financial institutions. Many Hawaladars maintain
bank accounts, and transactions involving these accounts may exhibit
behavior(s) indicative of Hawala, allowing, at a minimum, for the
potential identification of Hawaladars and, if appropriate, other
actions.
Another important aspect of this relationship is the interaction
between the clients of Hawaladars (including the beneficiaries of
Hawala transactions) and financial institutions. Even though cash is
very often the preferred medium of a Hawala payment, it is possible
that a person receiving cash may need to convert it into another form,
and this conversion may have to take place at a regulated financial
institution. As with transactions involving Hawaladars, these
transactions with Hawala clients provide some visibility into the
participants in Hawala operations.
There is a very interesting phenomenon that goes back to a point I
made earlier about variations in Hawala and is an excellent example of
the relationship between Hawaladars and financial institutions as well
as the relationship between financial institutions and the clients of
Hawaladars. Recently, I have become aware of cases where the
``delivery'' of Hawala funds is not cash, but a brokerage account
already established in the name of the designated recipient of the
funds. It is clear that the Hawaladars involved in these transactions
have more than a casual relationship with the brokerage; they are
establishing not just their own accounts, but accounts on the behalf of
others. It is also clear that the owners of these accounts requested
them so that they can develop a long-term relationship with the
brokerage.
Banks and other financial institutions have experience in analyzing
transactions and making the necessary reports. I believe that this
experience, and the infrastructure associated with it should be
combined with knowledge of Hawala to expand the scope of suspicious
activity reporting. If this can be done, I believe it will contribute
toward solving the problem posed by the criminal use of Hawala.
The second area deals with the difference between money laundering
and terrorist financing. In brief, money laundering is the process of
taking money from ``dirty'' sources and making it ``clean'' so that it
can be used for what are often legitimate purposes. This is not always
the case with terrorist financing. In many cases, terrorist money has a
``clean'' origin and a ``dirty'' purpose. Some terrorists, such as
Osama bin Ladin are wealthy, and use their own funds--often derived
from legitimate sources--to finance acts of terror.
Other terrorists make use of funds received from charities; some of
these organizations appear to have been established solely for the
purpose of raising money for terrorists, others are possible unwitting
participants in terrorism. In both of these cases, the money comes from
legitimate sources--business dealings or charitable contributions--so
what happens with it is not money laundering.
What happens in many instances of terrorist financing can almost be
seen as the inverse of money laundering. ``Clean money'' becomes
``dirty money''--money used to finance acts of terror.
So from one perspective, and with a certain amount of
simplification, money laundering and terrorist financing are opposites.
In money laundering, dirty money becomes clean; in terrorist financing,
clean money becomes dirty.
From another perspective, however, the processes have much in
common. If financial institutions are used, the three steps in money
laundering--placement, layering and integration--are common to both
money laundering and terrorist financing.
Many antimoney laundering countermeasures, such as account opening
procedures and Currency Transaction Reports (CTR's) concentrate on
placement. I believe that the scope of ``placement-oriented''
countermeasures should be enacted to include Hawala transactions.
Initially, I would recommend that this take place by educating
financial institutions about Hawala. As more is learned, it is likely
that more sophisticated countermeasures could be devised and
implemented.
With respect to layering, I believe that more data needs to be
gathered in order to identify patterns of layering indicative of
possible terrorist finance activities.
I also believe that there should be more emphasis on integration,
as this is where the ``dirty work'' of terrorist financing takes place.
Initially, I believe that the awareness of the fact that funds from
legitimate sources can, indeed have been, used to finance acts of
terror is an important first step. As more is learned through
investigation and research, it will be possible to specify guidelines
enabling financial institutions to identify the possible integration of
terrorist funds.
I would like to conclude by summarizing these last two points and
by offering a general observation.
First, I believe that it is essential that financial institutions
currently subject to SAR reporting requirements develop an
understanding of Hawala. This will, I
believe, make it more difficult for terrorists and other criminals to
use Hawala to
finance their activities.
Second, I believe that it is essential that what is known about
terrorist financ-
ing be made available to financial institutions to assist them not only
in complying
with reporting requirements but also to aid them in developing new
information about methods. Even though a certain amount of what has
been learned about money laundering can be used, terrorist financing is
not always the same, so new indicators will have to be developed.
Finally, I would like to commend the Members of Congress for having
identified the potential threat posed by Hawala for the movement of
funds by terrorists and other criminals. I would also like to commend
the U.S. Department of the Treasury's Office of Foreign Assets of
Control (OFAC) for its systematic approach in addressing this problem.