[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.
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