[Senate Hearing 107-908]
[From the U.S. Government Publishing Office]


                                                      S. Hrg. 107-908
 
                   THE FINANCIAL WAR ON TERRORISM AND
                  THE ADMINISTRATION'S IMPLEMENTATION
                  OF TITLE III OF THE USA PATRIOT ACT
=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                                   ON

   THE ADMINISTRATION'S IMPLEMENTATION OF THE ANTI-MONEY LAUNDERING 
PROVISIONS (TITLE III) OF THE USA PATRIOT ACT (PUBLIC LAW 107-56), AND 
         ITS EFFORTS TO DISRUPT TERRORIST FINANCING ACTIVITIES

                               __________

                            JANUARY 29, 2002

                               __________

  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

                      Steve Kroll, Special Counsel

                      Patience Singleton, Counsel

                  Martin J. Gruenberg, Senior Counsel

                Linda L. Lord, Republican Chief Counsel

             Madelyn Simmons, Republican Professional Staff

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)





                            C O N T E N T S

                              ----------                              

                       TUESDAY, JANUARY 29, 2002

                                                                   Page

Opening statement of Chairman Sarbanes...........................     1
    Prepared statement...........................................    40

Opening statements, comments, or prepared statements of:
    Senator Gramm................................................     3

    Senator Reed.................................................     4

    Senator Enzi.................................................     4

    Senator Stabenow.............................................     4
        Prepared statement.......................................    41

    Senator Bayh.................................................    14
        Prepared statement.......................................    41

    Senator Miller...............................................    14

    Senator Corzine..............................................    26
        Prepared statement.......................................    42

                               WITNESSES

Charles E. Grassley, a U.S. Senator from the State of Iowa.......     5
    Prepared statement...........................................    43

Michael G. Oxley, a U.S. Representative in Congress from the
  State of Ohio..................................................     7
    Prepared statement...........................................    44

John J. LaFalce, a U.S. Representative in Congress from the
  State of New York..............................................     9
    Prepared statement...........................................    45

Carl Levin, a U.S. Senator from the State of Michigan............    12
    Prepared statement...........................................    47

John F. Kerry, a U.S. Senator from the State of Massachusetts....    50

Kenneth W. Dam, Deputy Secretary, U.S. Department of the Treasury    15
    Prepared statement...........................................    51
    Response to written questions of:
        Senator Reed.............................................    74
        Senator Bayh.............................................    75
        Senator Corzine..........................................    77

Michael Chertoff, Assistant Attorney General, Criminal Division,
  U.S. Department of Justice.....................................    27
    Prepared statement...........................................    59
    Response to written questions of:
        Senator Sarbanes.........................................    78
        Senator Johnson..........................................    81

Richard Spillenkothen, Director, Division of Banking Supervision 
  and
  Regulation Board of Governors of the Federal Reserve System....    31
    Prepared statement...........................................    65
    Response to written questions of:
        Senator Sarbanes.........................................    83
        Senator Johnson..........................................    87

Annette L. Nazareth, Director, Division of Market Regulation,
  U.S. Securities and Exchange Commission........................    33
    Prepared statement...........................................    70
    Response to written questions of:
        Senator Sarbanes.........................................    88
        Senator Johnson..........................................    94

              Additional Material Supplied for the Record

Letter to U.S. Department of the Treasury Secretary Paul H. 
  O'Neill from Senators Stabenow, Levin, and Grassley, dated 
  January 11, 2002...............................................    96



                   THE FINANCIAL WAR ON TERRORISM AND



                  THE ADMINISTRATION'S IMPLEMENTATION



                  OF TITLE III OF THE USA PATRIOT ACT

                              ----------                              


                       TUESDAY, JANUARY 29, 2002

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:10 a.m. in room SD-538 of the 
Dirksen Senate Office Building, Senator Paul S. Sarbanes 
(Chairman of the Committee) presiding.

         OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

    Chairman Sarbanes. Let me call this hearing to order.
    We would ask people in the audience to tighten up a bit. We 
have a lot of people outside who want to get in. We will try to 
accommodate as many of them as possible.
    The Committee meets today to hear testimony about the 
financial aspects of the ongoing war on terrorism and about the 
Administration's implementation of the anti-money laundering 
provisions of Title III of the USA PATRIOT Act, which was 
signed into law by the President last October.
    We are first going to turn to our Congressional colleagues. 
Senator Levin is meeting with President Karzai of Afghanistan, 
who is here with us today on the Hill. We are also going to 
hear from Senator Grassley, Chairman Oxley, and if he is able 
to join us, Congressman LaFalce. These colleagues of ours, 
along with Senator Kerry, made a very forceful and persuasive 
case for tougher anti-money laundering rules and enforcement 
over a sustained period of time. I was pleased to work with 
Chairman Oxley as we put the legislation together last October.
    After our Congressional colleagues, we will then hear from 
a panel from the Administration and I will refrain from 
introducing them until they come to the table.
    The United States and many other countries have been 
engaged for the last 5 months in what must surely be the most 
intensive financial investigations that have taken place. To 
date, the United States has seized or frozen more than $34 
million in terrorist-
related assets. In, addition, our allies have frozen almost $46 
million more. More than 165 persons have been identified as 
involved in the financing of terrorist activities and the 
Administration witnesses, in fact, may have more up-to-date 
figures than the ones I am using, and if so, we urge them to 
bring them forward. Although the details of the investigations 
and their methods are classified, each of the witnesses that we 
will be hearing from can describe to the Committee how specific 
approaches or resources have been coordinated and targeted--
using the expanded information access which was provided by our 
legislation, and how our experience thus far will contribute to 
shaping our continued effort to end money laundering.
    A broad strategy for this effort is essential. The United 
States must lead both by example and by promoting concerted 
international action. Our goal must be not only to apprehend 
particular individuals, but also to cut off the pathways in the 
international financial system, along which terrorists and 
other criminal elements move money. We must act to make it 
impossible to create the chains of obscure corporations or 
partnerships so tangled that not even experienced and dedicated 
investigators can figure out with certainty who owns what, or 
where the money trail begins and ends. This effort depends 
crucially on concerted international action. Even as we build 
stronger, more effective anti-money laundering programs at 
home, we must press for comparable programs and for an end to 
unreasonable ``bank secrecy'' around the world, offering 
technical assistance wherever possible, but employing stronger 
influence where necessary.
    Title III of the USA PATRIOT Act constitutes the most 
extensive updating of our civil anti-money laundering laws 
since 1970. It means little if it is not promptly and 
effectively implemented, a formidable task. Under the new law, 
the Treasury Department, working with the Federal financial 
regulators and the Department of Justice, must issue a number 
of new Bank Secrecy Act rules, in many cases, by April of this 
year. It must also submit important reports to Congress about 
issues that were deferred last year. These include application 
of the Bank Secrecy Act to investment companies, especially 
hedge funds, a subject which was raised by Senators Dodd and 
Corzine, and its application to underground banking systems, a 
subject on which Senator Bayh has already held a Subcommittee 
hearing. At the same time, the agencies must establish the 
operating programs for training, audit, intelligence analysis, 
and enforcement, the programs that turn words into realities. 
Even as a broader strategy is put into place, attention must be 
focused on such matters as budgets, training, interagency 
coordination, and allocation of investigative resources. I note 
that Deputy Secretary Dam announced last week a $3.3 million 
budget increase for the Financial Crimes Enforcement Network, 
and we are looking forward today to learning more generally 
about how the agencies are marshaling the resources to get the 
job done.
    I want to close with a brief comment on the regulatory 
guidance to be issued by Treasury under Title III. That 
guidance obviously needs to be carefully drawn to carry through 
the intent of Congress. I commend Treasury for timeliness in 
issuing its first set of proposed rules. But I remain concerned 
about a couple of aspects of those draft rules relating to the 
ban on U.S. correspondent accounts for foreign shell banks. 
This rule would still allow a U.S. bank to rely without any due 
diligence solely on a certification by its foreign customers, 
even if the bank has reason to doubt the certification. I am 
frank to say I do not think this is consistent with the 
statutory language. Also, a provision which was intended to be 
a limited exception to the Act could become a broad loophole 
when, as the rule proposes, a shell bank is permissible so long 
as a regulated bank owns as little as 25 percent of the shell 
bank's shares. We hope that Treasury will revisit these issues 
and the Deputy Secretary may wish to comment on them in his 
testimony.
    With that, I am pleased to turn to the Ranking Member on 
the Republican side, Senator Gramm, and yield to him for a 
statement.

                STATEMENT OF SENATOR PHIL GRAMM

    Senator Gramm. Mr. Chairman, let me thank you for this 
hearing. I want to thank our colleagues who are with us today. 
I want to thank them for their contribution to what I believe 
is a good bill, one that I am proud of. But, Mr. Chairman, this 
is your bill and I want to especially thank you.
    In the environment that we were in after September 11, the 
plain truth is that you could have passed any bill you wanted 
to pass. And that puts you in a position where you had to make 
a decision as to whether you were going to listen to a broad 
range of concerns, or whether you were just going to pass a 
bill.
    I want to personally thank you for working with me and with 
others to be sure that we built in some safeguards for due 
process into this bill. This is a very good bill. I am proud to 
have supported it. We have two things in here that are very 
important, three things if you want to begin with the power of 
the bill itself.
    This bill gives the Treasury Department massive new powers 
to go in and freeze assets and to begin the process of seizing 
assets, to do it unilaterally, to do it with no advanced notice 
because timing is important. Secrecy and action is important in 
seizing assets. If people know that you are about to seize 
their assets, they tend to try to move them. But we also 
require that once they have acted, once they have achieved the 
goal of the bill, freezing the assets and initiating seizure, 
that they then have to follow the Administrative Procedures Act 
in publishing a notice as to why they took the action they did.
    This is very important from the point of view of due 
process because, then, you have a rebuttable presumption out 
there, so that if people feel that they were treated unjustly, 
if they feel a mistake was made, then they have the opportunity 
to go into court where they know why the Treasury took the 
action it did. And if they can rebut that, they have a basis to 
counter the Treasury's claim. I think that is vitally 
important. This bill would have certainly passed without that 
provision in it and I want to personally thank you for putting 
it in there. I think it is important.
    The second thing that we did which is also very important 
is that we did not put ourselves in the position of committing 
ourselves to enforce other countries' currency laws. A great 
concern I have is that in many countries around the world with 
oppressive governments, they try to prevent people from getting 
their assets out of the country. I do not ever want us to be in 
a position where we could have a situation like we did in Nazi 
Germany in the 1930's where we could literally, in our efforts 
to fight terrorism, be in a position of seizing people's money 
that they are trying to get out of a repressive country.
    I think that we have a well-balanced bill here and I do not 
think anybody can be critical that the bill is not strong 
enough. This bill is powerful medicine, it also is a bill that 
tries to be sure that in giving power to law enforcement, we 
preserve the right for any innocent party that may have been 
caught up in this process or erroneously targeted, to come back 
after the fact and have their day in court and have justice. 
And I think that is very important.
    This is a good bill and I am very proud of it. I think it 
is very important that we monitor the bill and that we follow 
its enforcement. If in the future there are changes that need 
to be made, then I think that those are changes that we can 
look at and make.
    Again, I want to thank and to congratulate you.
    Chairman Sarbanes. Thank you very much, Senator Gramm.
    Senator Reed.

                 COMMENTS OF SENATOR JACK REED

    Senator Reed. Thank you very much, Mr. Chairman, for 
holding this hearing. I am eager to hear my colleagues and the 
witnesses. I will defer any opening statement. I do want to 
recognize Representatives Oxley and LaFalce. Nice to see you, 
and of course, Senator Grassley.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. Senator Enzi.

              COMMENTS OF SENATOR MICHAEL B. ENZI

    Senator Enzi. I look forward to the testimony of the 
witnesses, Mr. Chairman. I have no statement.
    Chairman Sarbanes. Senator Stabenow.

              STATEMENT OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Mr. Chairman, I have a full statement for 
the record, but I want to make a couple of comments.
    I want to welcome my colleagues and former colleagues from 
the House. It is wonderful to see you. We came together in a 
bipartisan way and did something historic last year and it 
shows what can happen when people of goodwill in times like 
this are willing to work together. I think everyone, rightly 
so, deserves to be proud.
    I want to speak for a moment about an issue that we 
addressed in the bill. And that is the issue of the 
concentration accounts loophole. We need to continue to 
encourage Treasury to do more. I was pleased to offer the 
amendments that were accepted, strengthening due diligence and 
making it clear that the Treasury can issue regulations to 
crack down on the concentration accounts loophole. I remain 
concerned that we have, in fact, actions moving ahead. We need 
to make sure that the Treasury is addressing this issue.
    Concentration accounts are internal, administrative 
accounts that financial institutions operate to temporarily 
aggregate incoming money so that money comes into a pool until 
those funds can be properly identified and credited to the 
appropriate account. In the past, there is evidence that some 
institutions have allowed concentration accounts to serve as a 
secret conduit for drug monies.
    Even as long as 4 years ago, the Federal Reserve raised a 
red flag about lax concentration accounts protocols in its 
Sound Practices for Private Banking. However, the Fed issued 
only guidance and its warning does not have the impact of a 
regulation. That is why I hope this will be addressed as we 
move forward on regulations. Recently, my colleagues, Senator 
Levin, Senator Grassley, and I, joined together in writing to 
Treasury Secretary Paul O'Neill urging him to quickly act on 
this new explicit authority.
    I would like to enter that letter into the record, Mr. 
Chairman, and indicate again, congratulations to everyone who 
has worked on this bill. I hope that the concentration account 
issue will be addressed in a forthright manner through 
regulation by the Treasury Department and hope as we hear from 
the Secretary, we will hear about his actions in that regard.
    Thank you.
    Chairman Sarbanes. Thank you very much, Senator Stabenow.
    And we very much appreciate the way you are continuing to 
stay very close to this issue. We got a lot done, but that is 
not to say that there aren't some other things that still need 
to be addressed, and of course, that is one of the purposes of 
this hearing.
    Senator John Kerry, who has been involved with Senators 
Levin and Grassley in earlier times on this issue, is chairing 
another hearing this morning and unable to be with us, but he 
has submitted a statement for the record and it will be 
included in the record.
    I am now pleased to turn to our colleagues. Senator 
Grassley, why don't we hear from you first and then we will go 
to our House colleagues.

                STATEMENT OF CHARLES E. GRASSLEY

             A U.S. SENATOR FROM THE STATE OF IOWA

    Senator Grassley. Well, it is appropriate to thank you for 
your leadership on getting this very important legislation 
passed. But I am even happier to hear the strong statement you 
make about oversight and watching the regulations being written 
and the strategy being put in place because that follow-through 
is as important as the legislation itself. And your strong 
statement should signal to everybody involved in this 
legislation, particularly those in the private sector, what you 
intend to do to continue your leadership.
    I think people already know that, or you wouldn't have that 
long line of people waiting to get in here. I thought maybe I 
was going to the wrong hearing when I came up to this door.
    [Laughter.]
    But I am glad that there is that kind of interest.
    This legislation and what we are doing today is all about 
going after the bad guys and put out of business now and 
forever those willfully evil people who are targeting 
Americans, whether they are terrorists or not. Originally, when 
we had money laundering legislation, it was to go after the 
drug traffickers. Now it is traffickers and terrorists. We 
intend to say to all these evil people, no more holidays, no 
more free rides.
    I understand the Administration, the Congress, the public, 
and the business community, as well as other countries are 
committed to helping us shut down Terrorism Incorporated.
    I make an admonition that I made in the comments in support 
of the legislation last fall to the banking community, and I 
hope it is not unfair to separate them out. Only I do it in a 
respectful way. I do it to add to what Senator Gramm said about 
this being very powerful medicine. But it can even be more 
powerful medicine.
    The extent to which you cannot with our English language 
put everything down in a perfect way to get everything done 
that we want done, and even some things that are unanticipated 
in order to win the war against this very sophisticated people 
that we call terrorists, I call upon the banking community once 
again because they are a very closely knit business and 
profession, although I know they are very competitive.
    They understand each other and they know where the problem 
is and they know how to get at it. I just ask them to go above 
and beyond the spirit of the law to help us win this war on 
terrorism, particularly the money laundering that is the war 
industry, let us say, of terrorism. I hope I will see that 
spirit as we get into this legislation as we saw it last fall 
as it was passed. And I think that we will prevail.
    I applaud those efforts and commend those engaged on behalf 
of the good in this fight. There is no easy or royal road that 
lies before us. Much is expected and much is required of all of 
us. And I mean all of us, not just bankers when I say that. Our 
history speaks of our willingness and ability to rise to the 
challenge. We have our work cut out for us, and I think that we 
are up to it.
    While it is a bit early to expect much in the way of 
specific implementation of the measures, it is not too soon to 
check on how things are going, so I have these observations.
    The first of these concerns the need for a fully integrated 
national money laundering strategy. I felt strongly enough 
about this issue to have worked to pass legislation in the 
106th Congress to establish a requirement that our money 
laundering efforts be coherent, coordinated, and integrated. 
That was an important goal before September 11, and, in my 
view, is now more than ever important. That is a law of some 
standing, and we are now getting ready to see the third 
strategy required under the law.
    I am concerned, then, in this regard, that in the rush to 
do the many important things that must be done to combat 
terrorism and drug-trafficking, we are missing something. That 
something is the integrated, coherent, sustained, strategic 
thinking and coordinated responses that must be an essential 
part of what we are about. We expect what we do in the end to 
make a difference. And in my humble opinion, part of that is 
the need to be doing strong thinking in this regard. This does 
not mean some paper exercise in which we publish a strategy and 
then forget the need for strategic thinking and coordinated 
responses. I intend to pay close attention to this, to where 
things stand in regard to the need for such integrated 
strategic thinking, and I hope that this Committee will also 
join me to ensure that this is the case.
    I have a five-page letter that I am going to send to the 
Administration on this point, but I do not want to put it in 
the record because I think they should read it first. But I am 
following up my remarks with that.
    As we go ahead, I also think that it is important to pay 
attention to a couple of ongoing issues. In particular, I think 
we need to do some creative thinking on how we and others can 
address the problem of informal banking networks. Systems such 
as the hawala and the Black Market Peso Exchange activities. I 
also think we need a more sustained look at precious metals 
markets and the role that they play in money laundering. And we 
need to improve our efforts in a broader range of financial 
services, including money orders, stocks and bonds, and money 
exchange houses.
    In conclusion, I say that we also need to look at tax haven 
regulations and to some extent, we need to look at tax shelters 
as we deal with other problems facing this Congress as well. 
And that is under the jurisdiction of our Senate Finance 
Committee that will be looking into it. I know we need to 
remain competitive internationally, but we cannot permit money 
launderers the opportunity to shelter their money at the same 
time.
    Thank you.
    Chairman Sarbanes. Thank you very much for the statement 
and even more for the continuing interest that you have 
indicated.
    I saw the Administration people catch their breath when you 
mentioned the five-page letter.
    [Laughter.]
    We welcome that contribution to this effort.
    Chairman Oxley. And again, let me stress the very close 
working relationship we had as we harmonized the House and 
Senate bills in the course of bringing the legislation to a 
conclusion. We are pleased to have you here today.
    Senator Grassley. Mr. Chairman, you will not make me mad if 
you do not have questions, but if you have questions, I will 
stay. If you do not, we have the economic stimulus bill on the 
floor.
    Chairman Sarbanes. Yes, that is a good point, Chuck. I am 
glad you mentioned it.
    Do any of my colleagues have any questions of Senator 
Grassley?
    [No response.]
    Senator Grassley. Thank you very much.
    Chairman Sarbanes. Thank you for coming.

                 STATEMENT OF MICHAEL G. OXLEY

               A U.S. REPRESENTATIVE IN CONGRESS

                     FROM THE STATE OF OHIO

    Representative Oxley. Thank you, Mr. Chairman. Let me say, 
first of all, what a pleasure it was working with you and 
Senator Gramm on this important legislation. It is really a 
model of bipartisanship and bicameral legislation that perhaps 
can set a template for future activities in this area.
    I want to particularly thank you for your hospitality 
during a very difficult time on both sides of the Capitol, 
where we were unable to use our offices and were able to use 
your, not particularly spacious, Capitol office. But it worked 
very well and I think everyone got to know each other very well 
as a result.
    [Laughter.]
    Chairman Sarbanes. At close quarters.
    Representative Oxley. At close quarters.
    [Laughter.]
    But the product turned out to be very successful and we are 
most appreciative. I know I speak for my friend from New York 
as well in saying that we enjoyed the hospitality there at that 
critical time.
    In the 3 months since we were together in the East Room of 
the White House to watch President Bush sign the USA PATRIOT 
Act into law, we have seen a number of successes in the 
financial war on terrorism. The Bush Administration has pursued 
an aggressive strategy of blocking and freezing suspected 
terrorist funds, including closing down hawalas in cities 
across the country.
    I might point out, parenthetically, Mr. Chairman, that the 
first list that came out of some of these hawala operations, I 
was surprised and perhaps a little bit stunned to find that two 
of those operations were in Columbus, Ohio. It did not surprise 
me that the news came from New York and Chicago and other major 
cities, but Columbus, Ohio was quite a surprise.
    The Administration has also been active on the 
international front, working with Interpol and other 
governments to hammer out agreements and protocols that will 
facilitate greater cooperation on terrorist financing issues.
    The Treasury Department and other financial regulators are 
off to an impressive start in writing the rules to implement 
the new law. As you know, Mr. Chairman, one of our primary 
goals in the USA PATRIOT Act was to extend the anti-money 
laundering regime to segments of the financial services 
industry that had not previously been fully enlisted in that 
effort. I was pleased that among the first regulations rolled 
out by the regulators were rules to apply Suspicious Activity 
Reporting requirements to securities broker-dealers and so-
called ``money services businesses.'' By standardizing 
regulation and leveling the playing field among different 
industry groups, we also close possible loopholes that 
terrorists and other criminals are only too happy to exploit.
    I also want to compliment the Administration for its 
announcement last week that the President's 2003 budget will 
contain increased funding for the Financial Crimes Enforcement 
Network--FinCEN--which the USA PATRIOT Act elevated from agency 
to bureau status, and which has a critical role to play in 
supporting law enforcement efforts to track and seize terrorist 
assets.
    The financial services industry has been asked to do a lot 
in the wake of September 11, including responding to a blizzard 
of requests for information from law enforcement authorities 
and making significant, and costly, adjustments to internal 
operating procedures. The industry will be asked to do a lot 
more as regulatory implementation of the new anti-money 
laundering provisions gathers speed. This could be one of the 
financial service industry's finest hours as it rises to the 
challenge of shutting down the channels used by terrorists. As 
proud as we are of our legislative achievement, none of us has 
any illusions that Title III of the USA PATRIOT Act is the last 
word, or that we can afford to rest on our laurels in the fight 
against terrorism. The one thing that we can least afford is 
complacency.
    This hearing is the first of what I am sure will be many 
efforts in both the House and the Senate to exercise rigorous 
oversight of regulatory implementation of the USA PATRIOT Act 
to ensure that deadlines are met and Congressional intent is 
closely followed. We need to know from Treasury what parts of 
the new law are working well, and what parts are not. And 
indeed, I am glad to have the Treasury people in the next 
panel. As ongoing investigations proceed and additional 
intelligence is gathered in al Qaeda's former haunts in 
Afghanistan and elsewhere, we will undoubtedly learn things 
about the methods that terrorists use to move money through the 
international financial system that could serve as the basis 
for future legislative efforts.
    Previous investigations suggest that one of the techniques 
favored by terrorists in financing their operations is credit 
card fraud. This underscores the importance of the work that 
Senator Levin and others are doing to determine the potential 
money laundering vulnerabilities associated with credit cards, 
which we know are used extensively in Internet gambling and to 
transact business through unregulated offshore secrecy havens. 
At a minimum, credit card associations should be required to 
implement anti-money laundering programs, as mandated for all 
financial institutions in the USA PATRIOT Act.
    Finally, I will be paying particular attention--as I know 
industry is--to regulatory implementation of the provision in 
the USA PATRIOT Act requiring financial institutions to verify 
the identity of those who attempt to open accounts with them. 
The provision imposes legal obligations not only on financial 
institutions to verify the identity of account holders, but 
also on customers to supply institutions with accurate and 
truthful information.
    Let me close by thanking you once again, Chairman Sarbanes, 
for allowing me to appear this morning. I look forward to 
working with you and the other Members of this Committee, as 
well as our Committee, as we rededicate ourselves to the 
absolutely essential task of starving the terrorists of the 
funds needed to commit their acts of evil.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. Thank you very much, Chairman Oxley.
    Are there any questions for Chairman Oxley before I turn to 
Congressman LaFalce?
    [No response.]
    We would be happy to have you stay, Mike, if you want.
    Representative Oxley. I would be glad to stay and listen to 
my good friend from New York.
    Chairman Sarbanes. All right. Congressman LaFalce, we are 
very pleased to have you here and thank you again for all your 
efforts last fall as we enacted this legislation.

                  STATEMENT OF JOHN J. LAFALCE

               A U.S. REPRESENTATIVE IN CONGRESS

                   FROM THE STATE OF NEW YORK

    Representative LaFalce. Thank you very much, Chairman 
Sarbanes, Senators Bayh and Enzi, and former colleagues, some 
now Senators. Former colleague of the House is an even higher 
title.
    [Laughter.]
    It is a pleasure to be before you.
    Prior to enactment of the USA PATRIOT Act, successive 
Treasury Secretaries were limited in their ability to take 
proactive action on money laundering matters. The Secretary 
could either issue nonbinding informational advisories to U.S. 
financial institutions, or take the extreme approach of 
invoking sweeping and often disruptive economic sanctions. And 
because both approaches were 
impractical, and largely ineffective, neither was invoked with 
any regularity.
    To address this challenge, in the last Congress, I worked 
closely with the Treasury Department, most especially Stu 
Eizenstadt, and also with the then-Chairman of the Banking 
Committee, Jim Leach. We crafted an anti-money laundering bill 
that would grant the Secretary new, very practical authorities. 
And our Banking Committee passed bill H.R. 3886, 31 to 1. 
Congressman Paul opposed it. But it was never allowed to 
advance to the floor of the House for full House consideration. 
It was just stopped. We could not even get it to the Rules 
Committee. To my knowledge, there was no similar bill that was 
allowed to advance in the Senate. In the beginning of 2001, 
Senator John Kerry and I introduced a similar bill, hopefully 
to do more in the 107th Congress. Our legislation created a 
range of new measures that the Secretary could employ with 
precision against specific money laundering threats.
    We were not able to move it until September 11. And after 
those very tragic events, the need for stronger, more effective 
measures became quite clear. As a result of the USA PATRIOT 
Act, which includes many things, including our legislation, the 
Treasury Secretary's new, more flexible anti-money laundering 
powers will enable law enforcement to tackle with much more 
effectiveness abuses of our financial system by criminals and 
terrorists.
    The Secretary can identify a region, a particular 
institution, and even a foreign jurisdiction as an area of 
primary money laundering concern and impose a series of special 
measures. The Secretary can prohibit certain transactions with 
certain countries or regions, or require the collection of 
certain information. This information could be enormously 
useful in tracking the financial dealings of terrorists, or in 
blocking the opening of accounts in the United States by banks 
and other financial institutions from such jurisdictions.
    To date, to my knowledge, the Administration has not used 
those provisions of the new law to declare any parts of the 
world, through which terrorists funnel their cash, as areas of 
primary money laundering concern. Now the Administration has 
stated its success in seizing U.S. assets of terrorist 
organizations, which we are told now amounts to about $80 
million. But it is clear that the more we learn about 
terrorists' financial networks, and the various countries 
through which their money passed, the more compelling it 
becomes for the new measures to be invoked. But according to 
the information given me from Treasury, the Secretary has not 
yet imposed a single special measure against those 
jurisdictions.
    In terms of adopting one or all of the special measures 
under the USA PATRIOT Act, it seems to me that there are many 
candidates. Reports have surfaced that countries such as Saudi 
Arabia, Sudan, Egypt, and others have served as conduits and 
sources for terrorist funds. We must not forget that countries 
such as Lebanon, Russia, Israel, Guatemala, the Philippines, 
Hungary, and others have been named by the Financial Action 
Task Force as noncooperative jurisdictions in the fight against 
money laundering. The United Arab Emirates, another candidate, 
recently adopted a good anti-money laundering law, but it 
remains to be seen whether it is going to be implemented 
effectively. Clearly, whether it is to fight terrorism, 
organized crime, or drug trafficking, there are many 
opportunities for the Treasury to invoke even the mildest 
measures under the USA PATRIOT Act.
    I am very sensitive to the need to respect U.S. diplomatic 
prerogatives. I also understand that the Bush Administration 
may be 
reluctant to threaten special sanctions against a country that 
is cooperating with our current efforts to disrupt the 
financing of al Qaeda and our investigation of the September 11 
attacks. However, if countries that are linked to terrorist 
funding do not adopt permanent reforms now to strengthen their 
anti-money laundering regimes, and vigorously enforce these 
laws, then these countries will once again become the 
terrorists' portal into the global financial system. I hope the 
Bush Administration proceeds more aggressively in that regard.
    Now while the special measure provisions became fully 
operative October 26, when we were all at the White House with 
President Bush, Treasury still has to undertake rulemaking in 
two areas. Section 311 requires the Treasury Secretary to issue 
two sets of regulations. The first set defining beneficial 
ownership. And that is needed to implement recordkeeping 
requirements that are designed to help law enforcement ferret 
out who owns and controls the funds transferred to U.S. banks 
and other U.S. financial institutions--not just banks--from 
jurisdictions with weak financial controls.
    The other set of regulations is intended to define the 
term, correspondent account, for nonbanks. And without this 
definition, any special measure ordered by the Treasury 
Secretary would have gaping holes. It would almost apply only 
to banks, and not other financial institutions, such as broker-
dealers and money transmitters. These definitions are needed to 
fully implement another important section of the USA PATRIOT 
Act, namely, the Heightened Due Diligence Requirements of 
Section 312.
    I understand that Treasury has been engaged in informal 
discussions with industry about the regulations. Congress 
intended that they do exactly that, that they seek the input of 
industry in crafting these regulations. However, let me issue a 
caveat. I think this should be a more public and transparent 
process. I have been in tune with many negotiations with the 
financial services industry in the past when they have had an 
agenda that, in my judgment, has not always been in the public 
interest.
    Prior to September 11, they were not the most enthusiastic 
supporter of the bills that I had advanced. Immediately 
subsequent to September 11, I noticed a discernible change in 
attitude. It was a very forthcoming, very cooperative approach. 
But, as time elapses, I am just concerned about the possibility 
that they could lapse back to a pre-September 11 attitude. And 
that is something that Treasury and we, in particular, should 
be mindful of.
    Something else, too. We tend to focus in on banks, but 
there is a wide range of financial institutions. And I just 
want to mention one thing in particular. Gambling, and within 
the context of gambling, Internet gambling. I think this is 
growing astronomically. We need to have a much better handle on 
it. The Justice Department is here today. We have an Act 
dealing with wires that needs better definition. It needs 
beefing up. It needs much better enforcement. And if we do not 
deal with that issue, we are going to have unbelievable money 
laundering taking place globally via the Internet and Internet 
gambling sites.
    Mr. Chairman, let me just ask unanimous consent to revise 
and extend my remarks and include the entirety of my testimony 
at this point.
    Chairman Sarbanes. We will include the full testimony in 
the record. Thank you very much, Congressman LaFalce.
    We have been joined by Senator Levin, whose hearings a 
number of years ago on this issue were of immense assistance 
and also his legislative proposal when we came to deal with 
this issue. And we are glad he was able to come and be with us.
    Are there any questions of Congressman LaFalce, because the 
House Members may want to excuse themselves?
    [No response.]
    If not, thank you all very much.
    Carl, we will be happy to hear from you.

                    STATEMENT OF CARL LEVIN

           A U.S. SENATOR FROM THE STATE OF MICHIGAN

    Senator Levin. Thank you, Mr. Chairman, and Members of the 
Committee.
    A great deal of progress has been made in the war on 
terrorism, and one of the weapons that we now have in our 
arsenal is some very strong anti-money laundering legislation. 
Getting money out of the hands of terrorist groups is 
critically important, just as destroying their training camps, 
their leadership and destroying al Qaeda and their command 
structure, taking away the money laundering capabilities that 
they have had and their sources of revenue, is also critically 
important.
    I want to take my hat off to this Committee, to you, Mr. 
Chairman, to you, Senator Gramm, and to all the Members of the 
Committee who really acted with great speed in passing this 
legislation. If I can pay a special debt of gratitude to 
Senator Stabenow, my colleague from Michigan, for the special 
role she played on this Committee. The staff of this Committee 
also, working under very difficult constraints because of the 
fact our buildings were closed, were able, through literally 
night session after night session, to put together a very 
strong piece of legislation. Indeed, the strongest, toughest 
new anti-money laundering legislation that we have had in the 
last 15 years. And I know that Senator Grassley would join me 
in giving you our special thanks for adopting such a 
significant portion of the Levin-Grassley legislation, which we 
had worked on for many months and years, indeed. I just want to 
focus on one aspect of the bill this morning, and that has to 
do with its application to the securities industry.
    As Congressman LaFalce mentioned, this is not just banks we 
are talking about. It is financial institutions that are 
covered by the anti-money laundering legislation.
    The focus of our legislation, of course, is on the foreign 
financial institutions, which carry higher money laundering 
risks just by the nature of their business. They handle the 
money of their clients, transfer third-party funds through U.S. 
securities accounts.
    U.S. securities firms have very limited information about 
these accounts. Businesses and offshore jurisdictions that have 
corporate and bank secrecy laws that issue offshore licenses 
and businesses and jurisdictions that have been designated as 
noncooperative with international anti-money laundering efforts 
have even greater risks for us. So that is what the focus of 
our recent investigation has been. It is the offshore 
jurisdictions. It is the jurisdictions that have bank secrecy 
laws, the ones that issue offshore licenses, and it is 
businesses and jurisdictions that have been designated as 
noncooperative with international anti-money laundering risks 
and efforts. What we have done is taken a survey. We have asked 
22 securities firms in this country, for information about 
their accounts.
    The preliminary survey information that we have indicates 
the existence of significant money laundering risks in the 
securities field. We need the Treasury Department to continue 
to move very quickly to address these risks and to continue to 
include the securities industries as well as banks. This is the 
estimate we have received in the last few months in partial 
response to our surveys.
    Twenty-two firms were sent these surveys. We have asked 
them for information about their numerous offshore clients. Of 
the 22 firms, 10 have given us complete responses to their 
surveys. None of those 10 had less than 300 offshore entities 
as clients. One of the 10 firms had 16,000 offshore entities as 
clients. And together, the 10 firms had 45,000 offshore 
entities as clients.
    Now offshore entities, as we know, are these entities which 
are licensed by governments, usually in the Caribbean, that are 
not allowed to do business in those jurisdictions that are 
licensed to only act offshore. And they have a special risk for 
us for many reasons, money laundering being one, tax haven 
being another. But our focus has been on the money laundering 
aspect.
    We have just 10 securities firms that have gotten offshore 
clients, information showing the total of over 45,000 offshore 
entities as their clients. One of them has 16,000 offshore 
entities alone. The bottom line is that tens of thousands of 
offshore entities which are highly vulnerable to money 
laundering, have accounts at U.S. securities firms.
    This survey, also gives us some estimates, about how much 
money these offshore clients are putting into those securities 
accounts. Those 45,000 offshore entities at the 10 firms 
altogether have about $140 billion in assets in those U.S. 
securities accounts, most of that coming from offshore 
corporations and trusts, a small amount coming from offshore 
banks and from offshore insurance companies, but about 95 
percent comes from offshore corporations and trusts.
    What this preliminary information demonstrates is that the 
securities industry, like the banking industry, has clear money 
laundering risks that need to be addressed. The good news is 
that, as a whole, these high-risk accounts represent only about 
2 percent of all accounts. And that means that there is a small 
enough number of accounts that a focused anti-money laundering 
effort should be able to monitor the transactions to identity 
suspicious activity and to alert law enforcement in order that 
we can put out of business the terrorists or other criminals 
that are attempting to use our 
securities accounts to carry out their illegal activities.
    That is the preliminary findings of our Subcommittee, 
Chairman Sarbanes. It shows that the decision of the Congress 
to include the securities industry in our legislation was very 
much on target. We hope the Treasury Department will continue 
to move promptly. They seem to have been meeting their 
deadlines to be publishing regulations which look to be 
appropriate and apt. We hope they continue on that timeline so 
that we can move as quickly as we believe the terrorists move.
    We have to keep ahead of them and that means our anti-money 
laundering legislation needs to be strictly and promptly 
enforced. Again, this Committee will have a very critical role 
in seeing to it that that is done.
    Chairman Sarbanes. Thank you very much, Senator Levin, and 
thank you for that very helpful report on the survey which the 
Subcommittee you Chair and the Committee on Government Affairs 
has undertaken.
    Are there any questions from my colleagues?
    [No response.]
    Senator Levin. I would just ask that the entire statement 
be made a part of the record.
    Chairman Sarbanes. The full statement will be included in 
the record. And we very much appreciate you taking the time to 
come and be with us this morning.
    Senator Levin. Thank you.
    Chairman Sarbanes. Thank you very much.
    If the panel would now come forward, we are going to hear 
from: Kenneth Dam, the Deputy Secretary of the Treasury; 
Michael Chertoff, the Assistant Attorney General in charge of 
the Criminal Division of the Department of Justice; Richard 
Spillenkothen, the Director of the Division of Banking 
Supervision and Regulation at the Federal Reserve; and Annette 
Nazareth, who is Director of the Division of Market Regulation 
of the U.S. Securities and Exchange Commission.
    We are running a little behind schedule so I am going to 
bring everyone to the table. Secretary Dam, I know you have to 
leave, so we are going to hear from you first, and perhaps Mr. 
Chertoff, and direct questions to you. And then, I know you 
have to make an engagement at the White House at noon if I am 
not mistaken.
    We have been joined by Senator Bayh and Senator Miller. I 
will yield to them for any opening statement they might want to 
make.

                 COMMENTS OF SENATOR EVAN BAYH

    Senator Bayh. I have no opening statement, Mr. Chairman. 
But I would like to thank you for what I understand were very 
positive remarks about the hearing we had on hawala.
    Chairman Sarbanes. Thank you. It was a very good hearing.
    Senator Miller.

                 COMMENT OF SENATOR ZELL MILLER

    Senator Miller. I have no opening statement.
    Chairman Sarbanes. All right. Thank you very much.
    Secretary Dam, we are very pleased you are here today. We 
know the important responsibilities that the Treasury has in 
this matter. We regard it as a good sign that the number-two 
person at Treasury is here with us this morning.
    We would be happy to hear from you.

         STATEMENT OF KENNETH W. DAM, DEPUTY SECRETARY

                  ACCOMPANIED BY: JIMMY GURULE

                UNDER SECRETARY FOR ENFORCEMENT

                U.S. DEPARTMENT OF THE TREASURY

    Mr. Dam. Thank you, Chairman Sarbanes, and distinguished 
Members of this Committee. I have a rather lengthy statement in 
writing which I would like to submit for the record.
    Chairman Sarbanes. The full statement will be included in 
the record.
    Mr. Dam. Thank you very much for inviting me to testify 
about our efforts to disrupt terrorist financing, in 
particular, the steps we are taking to implement the 
International Money Laundering Abatement and Anti-Terrorist 
Financing Act of 2001. I have asked Under Secretary for 
Enforcement Jimmy Gurule to join me here today, perhaps to 
answer any specific questions which I am not able to answer 
fully.
    On September 24 of this past year, President Bush said 
that, ``We will starve the terrorists of funding.'' The 
Treasury Department is determined to help make good on that 
promise. And I am here today to tell you about the progress 
that we have made and some of the complexities that we face.
    Now, we well recognize that much of our progress is 
attributable to the efforts of this Committee. After all, you 
helped give us the Act that we are here to talk about today. 
That Act and the USA PATRIOT Act, which is now part, have been 
indispensable to our efforts.
    Let me just cite one example which has already been 
mentioned, and that is the Act requires all financial 
institutions to have an anti-money laundering program in effect 
by April. And although many broker-dealers, already had such 
programs in place, the Act assures that all soon will.
    I thank this Committee and I also want to thank the other 
Federal agencies which have had an important role in 
implementing the Act and in the financial war on terrorism, 
more generally. They are the Departments of State, Defense, and 
Justice, the FBI, and the intelligence community. And also, the 
National Security Council has been focused on the entire 
question.
    There is the Working-Level Interagency Committee that 
handles the designations of foreign terrorist organizations and 
of foreign intermediaries that finance terrorism. We also have 
a new high-level NSC commission chaired by Treasury which is 
focusing on the strategy for the future.
    There was some talk earlier about the necessity to have a 
strategic approach and we are trying to follow that advice. 
There are also other interagency committees that are concerned 
with the regulations that we have to issue under various 
provisions of the Act.
    Let me talk first about the financial war on terrorism and 
give you a bit of a status report. Let me make it clear that 
our priority is to help prevent terrorist attacks by disrupting 
terrorist finances. Where there is a conflict between 
preventing terrorist attacks and say the prosecution of 
criminal cases against terrorists, preventing the attacks comes 
first. And we are also interested in preventing the attacks not 
just blocking and seizing money, important as that may be as a 
tool, but it is only one tool.
    In many ways, the financial strategy closely tracks our 
strategy in what I will call the physical war. We remain 
focused on finishing off al Qaeda, not just in the Afghanistan 
area, but throughout the world. We are focusing on not only the 
al Qaeda operatives, but also on those intermediaries and 
others who support them financially. We are beginning to focus 
more and more on other terrorist groups of global reach. And in 
addition, we are making important efforts to make sure that 
this is not a U.S.-only unilateral program, unilateral 
financial war, but it is not just led by the United States, but 
it is actually a multilateral effort led by a number of nations 
around the world, and I will talk about that later.
    One important question, and I think that this will become 
more important as we go along, is how should we measure our 
success? By its very nature, this is the first of a kind, and 
so we are focusing on making sure that we are making progress. 
Mr. Chairman, you mentioned blocked assets. That is very 
important. I have the same numbers you have, although I think 
we will be increasing those numbers from what I know is going 
on. But since September 11, the United States and other 
countries have frozen more than $80 million in terrorist-
related assets.
    We also have what I would call somewhat qualitative 
measure, and that is, how well are we doing in the effort to 
have international cooperation? After all, without cooperation, 
we really cannot do this. It is a little different from the war 
on the ground. After all, we cannot bomb a foreign bank 
account. We absolutely need the assistance of other countries. 
Foreign governments, as you mentioned, have blocked a good deal 
of money, over $46 million, which is over half the total of $80 
million. That is not surprising because I do not think the al 
Qaeda, for example, are going to be keeping much money in the 
United States given our efforts, and 147 countries and 
jurisdictions around the world have blocking orders in place.
    We also have success in multilateral fora, such as the 
United Nation, which has its own list, the G-7, and the G-20, 
which have adopted programs, and of course, the Financial 
Action Task Force, which has been mentioned earlier. As a 
matter of fact, in October, the United States hosted an 
extraordinary FATF hearing here in Washington which added to 
the money laundering program, the 40 recommendations. Also the 
recommendations in the area of terrorist financing.
    Another measure that we are working on is the flow of funds 
disrupted because that is really what we are getting at. 
Getting some money is important, but breaking down the flow is 
what is most important to disruption. And let me just give you 
one example. We shut down the al Barakaat hawala network, as 
someone mentioned earlier, and in so doing, we seized $1.9 
million in assets. But we disrupted the flow of much more. Our 
analysts believe that al Barakaat's worldwide network channeled 
as much as $15 to $20 million to al Qaeda on an annual basis. 
It is important, therefore, to keep an eye on the flow of 
funds--how much money moved through a pipeline that we froze--
as well as how much money was in the pipeline the day we froze 
it.
    Also, we collect what might be termed as ``anecdotal 
evidence of success'' because sometimes it is very revealing. 
We know from our intelligence reports that al Qaeda was 
suffering financially in the Afghanistan battle. We are 
beginning to see evidence that potential donors are being more 
cautious about giving money to organizations where the money 
might end up in the hands of the terrorists because the donors 
don't want to be tagged with this responsibility.
    Obviously, this is closely related to money laundering. And 
this Committee, of course, is very familiar with the money 
laundering problem. There are some differences, however. 
Stopping terrorist financing is perhaps a little more nuanced 
in some ways than money laundering because you can characterize 
terrorist financing as ``reverse money laundering.'' In money 
laundering, the proceeds of crime are laundered for legitimate 
use or for use in perpetrating more crimes. If you find 
evidence of the original crime, that may lead you to more other 
kinds of money laundering. In terrorist finance, in one sense, 
it is the other way around. Proceeds of legitimate economic 
activity in that case are used for illicit purposes and the 
money can come from almost anywhere.
    I am going to talk about, for example, charities a bit 
later. Now just a progress report on some institutional issues 
of interest to this Committee. We have the Foreign Terrorist 
Asset Tracking Center, the FTAT, up and running. It is under 
the direction of the Office of Foreign Assets Control. FTAT was 
funded by a Congressional appropriation for 2001, and it was 
being organized and staffed when the attacks occurred. When it 
is fully operational, which I hope to be quite soon, it will 
serve as an analytical and strategic center for attacking the 
problem of terrorist financing. Since September, it has been 
acting. It has been functioning. It just does not have all of 
the facilities it needs yet, but will soon. Since September, it 
has served not only to provide essential analysis of particular 
targets and networks, but also as an information hub where 
intelligence and law enforcement agencies can share and analyze 
information for a common purpose. This kind of interagency 
concentration on hunting the sources of terrorist financing is 
unprecedented at the U.S. Government. So while FTAT is still in 
its infancy, I believe it is making a significant impact and it 
will make more of an impact in the future.
    We also have something called Operation Green Quest, 
organized to use all of the resources of the Treasury, 
including the Secret Service, the IRS, forensic accountants, 
the customs union, which is used to investigating complicated 
financing schemes to run around our customs efforts. And it is 
working with the FBI and with other agencies.
    Thus far, in the short time it has been up and running, it 
has accounted for 11 arrests, three indictments, the seizure of 
nearly $4 million, and bulk cash seizures of over $8.5 million. 
So it is a promising beginning and I expect important results 
from it in the future.
    We have worked closely with the FBI as well. We, for 
example, immediately after September 11, put Treasury's people 
with the FBI's Financial Review Group in order to offer our 
technical assistance, our special competence, to the FBI, and I 
am proud of that.
    We have a lot more work to do. We want to encourage other 
countries to independently identify foreign terrorist financing 
organizations. At the end of September, the European Union did 
so. And we need them to work on other terrorist organizations. 
We want more countries to be involved in this process.
    We have to do much more with the documents that we found in 
Afghanistan, the e-mail, the hard drives and so forth, and that 
is a big job. That is quite interesting, but we need to make 
big efforts in that area.
    We also have to redouble our efforts in the area of 
intelligence with other countries to get at the hawala dealers 
and informal systems, for example, that was mentioned.
    Let me just say that some have said that the financial war 
on terrorism is an impossible task, and I understand why some 
people say that. Money is fungible and illegal money tends to 
flow to the country that is most hospitable. So it is not 
necessary to have a few key financial centers clean. We have to 
clean up the financial environment throughout the world. And 
that it is difficult does not mean it is impossible. It is an 
unconventional war where there are no boundaries, where 
civilians are the targets and where the people, the so-called 
martyrs, are themselves the weapons. We also have a situation 
in which we have electronic money transfers. We have electronic 
messaging, e-mails, and so forth. They are, in a sense, the 
logistics of the war against us. We have to recognize that in 
addition to disrupting the money, there is one other important 
thing that we can do here. That is that if we can identify the 
flows of money, we can identify through that the footprint of 
sleeper cells and disable them and perhaps prevent the next 
attack.
    That is my status report on the financial war on terrorism. 
Now, I want to come to the other question about the 
implementation of the Act. We are committed, and I want to 
assure you, to an aggressive and thorough implementation of the 
statute.
    First, we have been, and will continue to work closely with 
our sister agencies, with the private sector, which is very 
important in this case, and with Congress. We have made some 
progress.
    We have issued interim guidance and regulations covering 
four statutory provisions. And two of those sets of regulations 
took effect already in December. One is a prohibition against 
certain U.S. financial institutions maintaining correspondent 
accounts for foreign shell banks that are indirectly providing 
services to them, which is Section 313. And the other is the 
requirement that U.S. financial institutions obtain ownership 
and registered agent information from foreign banks for which 
they maintain correspondent accounts, Section 319(b). And then, 
in addition, on November 20--that was within a month of the 
passage of the Act--we issued interim guidance, as we call it, 
explaining the provisions of some other parts of the Act, 
identifying their scope and providing financial institutions 
with a form of certification. That is something that we can 
come back to if you wish, Mr. Chairman, because you mentioned 
it, that can be utilized to comply with the provisions. We have 
issued in December some interim guidance on regulatory 
standards, and--this is 4 months ahead of statutory deadline--
we have issued a regulation implementing Section 365 of the 
Act, which effectively gives FinCEN access to reports filed by 
nonfinancial trades or businesses when they receive $10,000 or 
more in cash or currency. Now, we also issued a proposed rule 
on securities brokers which has been discussed previously. And 
by the way, although it did not require the Act, we have also 
made effective a regulation on money services businesses which 
includes the hawalas, and there are a number in the United 
States, but also other organizations that sell money orders and 
travelers checks and so forth. And you have already mentioned 
the $3.3 million increase in FinCEN's budget. That is because 
we are going to have a lot more suspicious activity reports, 
for example, coming in from all of these new kinds of financial 
institutions, new in the sense that they newly have to file 
these SAR's. We have a Suspicious Activity Reporting Hotline 
which I am very proud of because we do not have to wait around 
for the paper to come in through the mail, or a fax to come in. 
We can get it over the hotline from financial institutions, 
where they see it either cheaper or more convenient to use the 
hotline or where they recognize that this is something that we 
should know about right away.
    Also, we tried to set for ourselves a series of principles 
that we want to use in interpreting the statute, drafting the 
regulations, and generally conducting our end of this war.
    First of all, we want to prevent unnecessary regulatory 
arbitrage. The principle should be that people should not be 
able to shift from one type of financial institution to another 
in order to avoid a regulatory scheme or to avoid money 
laundering controls.
    The second principle is that we need to enhance 
coordination and the information flow, and that is within the 
Administration, with financial institutions, and from financial 
institutions. And of course, with the Congress.
    The third is that we need to respect important privacy 
rights. We need to make sure that the reporting that we are 
requiring is the kind that we need for action, and not just for 
satisfying our curiosity, if I might characterize it that way.
    The fourth principle is that we also need to use this 
legislation to protect our financial system.
    In addition to principles, we have set some priorities. We 
need over the next 3 months because of the need to implement by 
April, which has been mentioned, to have implementation 
provisions addressing Section 314 on information sharing among 
financial institutions, law enforcement, regulatory 
authorities, of enhancing due diligence provisions under 
Section 312. Methods for identifying and confirming the 
identity of foreign nations under 326. Minimum requirements for 
anti-money laundering compliance programs, provisions on the 
role of the IRS in the Administration of the Bank Secrecy Act, 
which is Section 357. Methods for improving compliance with the 
obligation to report foreign bank accounts, which is Section 
361. And some more, Section 313, 319-B, 365.
    There are some other provisions that do not have an April 
deadline, but we are working on them now and will be addressing 
them more formally. The authority of the Secretary to designate 
primary money laundering concerns, I think that was mentioned 
earlier and impose special measures. That is Section 311. Also, 
the concentration account issue which is Section 325. Account 
opening procedures under Section 326. Suspicious activity 
reporting for futures commission merchants and others in the 
commodity field under Section 356. We also want to look at the 
exemptions. Some of those exemptions need to be broadened, not 
narrowed, because they are possibly broadened. We are going to 
look at that because they are burdensome, but they are done by 
organizations which are not a terrorist threat, and I may be 
able to say a few words about that later if you are interested.
    Then there are some other areas that I needn't address now.
    In short, just to summarize, Mr. Chairman, this is a long-
term battle against abuse of our financial systems and by many 
other kinds of criminal organizations. But the new focus has to 
be on terrorist financing.
    Treasury welcomes the ability to lead and we will continue 
to lead on the financial front of this war, and we are going to 
work closely with other agencies. And I want to assure you 
that, although we had to learn a little bit to get along with 
people we had not dealt with all that much in the past, the 
cooperation has really improving.
    We need to broaden and deepen our international cooperation 
with other countries, with supernational and international 
organizations. And of course, we have to move ahead on 
implementation of the Act. So, we are ready for this effort and 
we really appreciate your support. The foundation that the 
statute gives us to do what we need to do.
    That concludes my formal testimony.
    Chairman Sarbanes. Thank you very much.
    I say to my colleagues, I think what we are going to do 
here now, if Mr. Chertoff can stay on, Mr. Dam is going to have 
to go. We are going to have a vote scheduled at 11:30 a.m., if 
they stick to the schedule. So, I intend that we should now 
question Mr. Dam.
    Mr. Chertoff, are you able to stay on?
    Mr. Chertoff. I am, Mr. Chairman.
    Chairman Sarbanes. So that is not a problem. Why don't we 
do that? Each of us can ask Mr. Dam a question or two and try 
at least to have that opportunity before the vote interferes. I 
do not know whether Mr. Gurule will be able to stay behind 
after Mr. Dam leaves.
    Mr. Gurule. If you would like, I would be happy to stay, 
Chairman Sarbanes.
    Chairman Sarbanes. You can clean up the scene if it is 
necessary.
    [Laughter.]
    When do you think you will have the whole regulatory 
framework into place? I know you are now required under the 
statute to have some by April. Others you said you are working 
on. Under the best circumstances, when will we have the whole 
regulatory framework into place?
    Mr. Dam. Well, I certainly think by the end of the year, 
but I hope we can do it before that because it is very 
important.
    Some of the provisions require extensive consultation, not 
only with other departments, but also with industry, so we can 
learn a little bit more about the industry practice and make 
sure we are asking things that we can get straight answers to.
    There are also, as Senator Gramm has suggested, some issues 
which raise problems about overburdening people. In fact, 
perhaps they verge on the area of civil liberties. But we are 
going to be very careful what we do because we want to do it 
right. So it is a top priority for us.
    Chairman Sarbanes. All right. Obviously, it is a matter we 
intend to follow very closely, both to get it into place as 
quickly as possible, and then to review its workings once it is 
in place.
    Are you considering using the authorities Congress granted 
to the Treasury to invoke special measures against 
jurisdictions of primary money laundering concern?
    Mr. Dam. Yes, sir, we are. And that is one of the areas 
where we need to do some work because some of the provisions, 
some of the terms, for example, do not have definitions. That 
is not a complaint, because you had to work very quickly. But 
we want to make sure that the definitions are broad enough to 
do the job and not so broad that they bring in the information 
and impose burdens that are not necessary.
    Chairman Sarbanes. Of course, if those jurisdictions move 
to, in effect, put into place their own statutory arrangements, 
as some countries have done, and then implement them, they no 
longer would be a prospective target as a possible jurisdiction 
of primary money laundering concern. Is that correct?
    Mr. Dam. Mr. Gurule, I believe, can give a better answer to 
that.
    Mr. Gurule. I think, Mr. Chairman, that you are referring 
to the FATF list of the noncooperative countries and 
territories. And certainly with respect to the special measures 
provision, we are looking at that provision and applying it, 
considering using it with respect to, whether it would be 
appropriate to use it, these 19 countries that are on that 
list.
    The ultimate goal and objective, however, with respect to 
the FATF process, is to ensure that these countries are 
cooperating, that they are in compliance with the 
recommendations that FATF has made for establishing a strong 
anti-money laundering regime.
    If we can accomplish that through the FATF process, we 
intend to do so. If special measures will assist us in 
accomplishing that objective, we are certainly open to using 
311 for that purpose.
    Mr. Dam. Excuse me, Mr. Chairman.
    Chairman Sarbanes. Go ahead.
    Mr. Dam. When it gets to terrorist money, we are not held 
back by any of the dates that are in the FATF process. We can 
act immediately and we have acted against at least one country 
that I can think of, for accounts in their country, even though 
they are going through the FATF process and are not getting 
compliance.
    Chairman Sarbanes. Senator Gramm.
    Senator Gramm. Thank you, Mr. Chairman.
    Ken, let me just ask a couple of questions and then make a 
couple of points.
    First, in looking at the bill, and you have had it long 
enough to look at it, if not to implement, do you believe in 
this bill you have the powers you need to do the job you need 
to do?
    Mr. Dam. Yes, sir, I do. But if we find we do not have 
sufficient power, we will certainly be back to you. Moreover, 
if something has to be brought, and it probably would be in 
that area, and we would like a little broader authority, 
possibly. But at this point, we do not have anything to 
propose.
    Senator Gramm. Well, let me just emphasize two points. 
First of all, I think promoting a multilateral approach is 
vitally important.
    When we get into these things, it is always easy to assume 
that actions have tremendous benefits and no cost. But at the 
margin, you want to push these things to the point where the 
benefits and the costs are equal. The more countries we have 
participating, the more uniform in the developed world 
especially that you have standards, the less likely you are to 
move investment accounts and bank accounts based on 
differential regulatory costs, and I think that is important.
    The final point I would like to make is that it seems to me 
that judgment is going to be very important here. And that is, 
making a judgment as to where strict enforcement is going to 
yield the high return. And it gets back to costs and benefits.
    In listening to Carl talk about accounts at security firms, 
if a French insurance company has an account with Merrill Lynch 
that it does trading with, and it does not want to be known for 
doing the trading--perhaps it is concerned that one of its 
competitors in France will say, they are collecting French 
insurance premiums and they are investing in the United States. 
And don't we want people investing here? Or maybe some 
politician might make a crusade in saying that, this company is 
not investing in France. We could be creating jobs here.
    We have to exercise some judgment in looking at these 
things and deciding the areas where you are never going to have 
a strong enough law and you are never going to have enough 
money to proctor each and every account and each and every 
transaction.
    The question is going to be figuring out where you put in 
your efforts. Like duck hunting. You go the Eastern Shore of 
Maryland, you do not go to the desert. It is not that there are 
no ducks in the desert. It is just that there are very few of 
them. Hunting them there is not productive.
    [Laughter.]
    And what I want to be sure in implementing this law is that 
you use the parts intensively that help you get the job done, 
that you do not feel like you have to use resources in areas 
that you do not feel are productive. I hope you will work with 
us, keep us informed, and try to put the focus where it yields 
a return. I think that is vitally important.
    Mr. Dam. I certainly agree with that philosophy. We have to 
keep our eye on the ball. And it is urgent, in the terrorist 
area, particularly, that we move because the consequences 
affect us whether terrorist attacks occur or not. It is one of 
the reasons that we need to work with the industry.
    For example, I have heard, and I do not have any direct 
knowledge of this, but there is some question of what exactly 
is a correspondent account in the securities area. And that is 
something that we want to get right, not just make the 
definition as broad as possible to cover up our lack of 
understanding of some of these 
arrangements. We want to work with industry to be sure we 
understand what their practices are and that we are attacking 
the important things.
    Chairman Sarbanes. Senator Reed.
    Senator Reed. Thank you, Mr. Chairman. And thank you, Mr. 
Secretary, for your testimony. I agree with the point you made 
and the point that Senator Gramm just emphasized, the need for 
international cooperation.
    I would suspect that our strongest leverage is on American 
financial institutions. And one of the responsibilities is to 
know their customers much better. In that regard, could you 
give us some sense of how you feel that process is going, 
whether our institutions are being more careful about who they 
deal with?
    And second, do you think there is adequate, both legal and 
regulatory, incentives to report suspicions promptly to 
authorities if there is some suspicion about a customer dealing 
with an American institution?
    Mr. Dam. There are a number of provisions in the Act which 
deal with the question of some kinds of customers. Obviously, 
the prohibitions with regard to shell companies. There are the 
special due diligence requirements, Section 312, and the 
regulations are due in April on those.
    There is Section 326 on customer identification 
requirement. If you would like, we could perhaps give you a 
more coherent answer to that in writing than I am able to come 
up with on the spur of the moment.
    Senator Reed. That is entirely fair, Mr. Secretary.
    Well, if this system works as we hope it does, that our 
financial institutions are looking closely at people who they 
deal with overseas and they discover, at least they have 
suspicions, do we have the adequate incentives and regulatory 
structure so that those suspicions will be translated quickly 
to the authorities?
    Mr. Dam. Right. Well, in your first question, as you 
originally stated, would have to do with the suspicious 
activity reports. In some areas, organizations, even before 
they are required to, before the regulations become final, have 
been sending in the suspicious activity reports.
    But for those who are reluctant, the fact is that the 
reports are mandatory. This is quite important, I would think, 
to a regulated financial institution to not go too close to the 
cliff in interpreting that mandatory requirement because there 
are legal consequences.
    Senator Reed. Thank you, Mr. Secretary.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. Senator Bayh.
    Senator Bayh. Thank you, Mr. Chairman. I would like to 
thank all of our panelists for being here today.
    Mr. Dam, I have three brief items. I am not going to ask 
you about them, but if I could ask your staff to follow up with 
my staff on, I would be interested in the responses. Two have 
to do with the money service businesses. I will just refer to 
them as hawala, which I think you know, I have a special 
interest in.
    The Act that we passed require that the money service 
businesses begin to register by December 31 of last year and 
that they begin to file suspicious activity reports no later 
than the spring.
    I am just interested in how that is progressing. In fact, 
there has been a pretty good rate of compliance with regard to 
the December 31 date, and how are we doing on making progress 
toward them filing suspicious activity reports?
    Related to that, since a lot of these are, for lack of a 
better term, ``mom-and-pop'' type of operations, what kind of 
outreach have we engaged in to try and spread the word so they 
know about the provisions of the Act, that they need to 
register and begin to file it?
    If your staff can follow up with my office, I would be 
interested in that. Also, in the final point of interest, and I 
will get to my question, the report Treasury was supposed to 
put together on hawala, what other steps might be necessary? I 
would be interested in the status report of that and just when 
we could expect to maybe see some drafts or that kind of thing.
    My two brief questions, Mr. Secretary, relate to the use 
of--and you alluded to it in your remarks and I think you have 
spoken to it at greater length in your prepared testimony--
charities or development institutions and through them, 
nongovernmental organizations, as possible conduits for funds 
to terrorist organizations.
    If I had to look out beyond the horizon, I would anticipate 
that this might be an area of growing interest. I am just 
curious, and if you could just elaborate a little bit in terms 
of what the scope of this problem has been, what we are doing 
about it, where you would anticipate going from here?
    Mr. Dam. I am delighted to be able to talk about that. By 
the way, on the money service businesses with the hawalas, we 
must have done something to get the word out because in the 
first 2 weeks, 8,500 registered. But who knows how big the 
universe is? But we will be back to you on that.
    Senator Bayh. Yes.
    Mr. Dam. With regard to charities, we are talking largely 
now about charities in Islamic countries or that involve 
charitable work in those countries. Of course, the same thing 
is true of other kinds of charities in the sense that it has 
been my observation even in the United States that some 
charities are not closely looked after by their boards and 
sometimes the staff has their own private agenda.
    Generally speaking, this is not a situation that is special 
to terrorism. But in the terrorism area, it is serious. Many of 
these Middle Eastern charities, for example, do great 
charitable work, no question about it. I know that from my 
prior experience in the State Department that much of the 
support for the Palestinian community comes from Islamic 
charities. They support hospitals and they support orphanages 
and so forth.
    Senator Bayh. Forgive me for interrupting, but there were a 
couple of them that you identified that were providing some 
assistance to Hammas, I believe, or attempting to.
    Mr. Dam. Absolutely. We have moved against several 
charities, including their offices in the United States.
    Now the problem is that, in many cases, the staff also has 
another operation, a clandestine operation, out the back door, 
so to speak, supporting terrorism. And that is why we have to 
work on this and we have to work on it with the host countries.
    We have to be sure that the donors are aware of this 
problem because, in many cases, the donors really do not know. 
In some cases they do, or maybe some of them do not want to 
know because they are accustomed to paying what I would call 
protection money.
    We think that the directors who just volunteered their 
names may want to take a look more carefully now, and we also 
think in many cases, the governments do not want those kinds of 
organizations in their country and are taking steps to clean 
them up.
    So it is our strategy to work on all of those angles, as 
well as just designating the charity.
    Senator Bayh. Thank you, Mr. Secretary. I appreciate that. 
This is an interest of mine and I am going to continue to 
correspond with you about it. I appreciate your good work and I 
would like to thank the rest of the panel.
    Chairman Sarbanes. Senator Miller.
    Senator Miller. I will be quick. I know we have a vote 
going on. This is a follow-up to what Senator Gramm asked you 
about the law being adequate. I wanted to ask you, do you think 
that the personnel are adequate? I am not talking about their 
ability but about the number. For example, you talked about the 
SAR's coming in on the hotline. Do you have enough analysts to 
give the proper amount of analysis that they need?
    Mr. Dam. We certainly have gone through a budget process 
and I think the new budget is our best judgment about how to 
trade off the desire everyone has for more. And I am not just 
talking now about FinCEN, the Financial Crimes Enforcement 
Network, which receives the SAR's, but all of the entire 
apparatus that we have 
devoted to this problem.
    And we try to bring other groups in under the existing 
budget. I mentioned the Secret Service, the IRS, the Customs 
Bureau, to work on the kinds of problems that we have that 
utilize the SAR's.
    With regard to FinCEN itself there were substantial 
increases in the past. So while some people might not think 
that 6 percent is all that much, you have to remember, it is on 
a basis of an increase of some 26 percent in the past couple of 
years in FinCEN. It is our judgment that should be adequate. 
But if it is not, we would certainly consider it a priority and 
we will put it in the next budget if we need to.
    Senator Miller. When a country gets put on the FATF, how 
hard do they work to get off of it?
    Mr. Dam. My impression is that they make very strenuous 
efforts. In many cases, it is not so easy to get off because 
they need the right kind of statute. They need the right kinds 
of regulations, and their people need the right kind of 
training.
    Some of these countries are quite small. We are talking 
about countries with less than 100,000 in population. And even 
some of the larger ones are only 4 to 5 million. They do not 
have an enormous number of financially experienced regulatory 
personnel. We are working on those problems, and for such 
problems provide technical assistance. We have several 
organizations in the U.S. Government that are providing 
technical assistance and we are putting more focus on how to 
coordinate that and in getting our embassies involved in the 
coordination process.
    That is a very brief status report.
    Senator Miller. Thank you, sir.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. Good. We have tiny countries and tens of 
billions of dollars moving through those countries. That is 
going to be a focus of attention for a long time now.
    Senator Corzine, there is enough time for you to go ahead 
and do a questioning period.

               COMMENTS OF SENATOR JON S. CORZINE

    Senator Corzine. I will be very quick. One of the sub-
elements of the USA PATRIOT Act was investment company activity 
and more specifically, hedge funds. If we ever needed an 
example of how money can be moved without people fully 
understanding who the owner is or what it is, or its intent, I 
think we have a visible example on the front pages of the 
papers for the last few weeks, really reflecting private 
partnership that move money. I hope Treasury will work with the 
other appropriate agencies with regard to looking at how 
foreign transfers of money can be utilizing an unregulated 
element.
    You speak about the SAR's among securities brokers and 
banks. I think this is one of those places, not where I want to 
paint the industry with a broad brush, but if you were looking 
for means of moving money in an unregulated arena, not unlike 
the hawalas that Senator Bayh talked about. This is certainly 
one of those areas where large chunks of cash can be moved 
around. Could you just give me a quick posting? And I would be 
happy to sit down with your people.
    Mr. Dam. We welcome your interest in this, Senator Corzine. 
I know you are very interested in this. As a matter of fact, 
you have the attention of the industry because in at least one 
case, we heard from somebody very knowledgeable about the 
industry.
    Under Section 356, we are required to file a report, and we 
are working on that. It is not due until October 26, but 
perhaps, we certainly can work with you before the report is 
finished to tell you what we know.
    We also have been meeting with other kinds of financial 
organizations besides hedge funds because there are other kinds 
of investment companies. Mutual funds, for example, are 
involved in 356 and venture capital funds as well.
    And also, under Section 326, which is a customer 
identification section, it is possible that we can address the 
hedge fund issue under the existing legislation. But this is an 
area that I mentioned before when I was asked, do we need more 
authority?
    Because they are not regulated financial institutions, we 
have to learn a lot. And we do not want to try to regulate 
every financial institution in the world just because they are 
out there, but we want to know what we are doing and we are 
giving a lot of attention to the question of investment 
companies.
    Senator Corzine. There might be other reasons for excess 
leverage or heavy leverage and its implication on the financial 
system apart from the element of the ability to use them as a 
vehicle that is outside the regulatory net for most purposes, 
and can be significant as we have seen, through citings in the 
mid-1970's to 1998 to maybe even recently.
    Mr. Dam. One of the things we are doing, and it is related 
to some of these organizations--I would not say hedge funds in 
particular--is we are working aggressively to increase the 
number of agreements that we have with countries in the tax 
information exchange agreements.
    And we have just signed agreements with the Cayman Islands. 
You have heard of them in this context. The Bahamas, Antigua 
and Barbados, and there are more in the pipeline.
    Senator Corzine. Is there progress in the Gulf States?
    Mr. Dam. I can speak to that, but I would like to give you 
some information in writing on that, if I may. There has been 
great progress with the Gulf States in the terrorist financing 
area. But in this particular area, I am not able to address 
that out of my own personal knowledge.
    I view this as a question of cleaning up the financial 
environment so that we do not have jurisdictions which create a 
climate that lends itself to terrorist financing in particular.
    Senator Corzine. I totally agree. Thank you.
    Chairman Sarbanes. We are going to have to adjourn because 
we have a vote. We will excuse you, Secretary Dam, so you can 
stick to your schedule, and I will return.
    Mr. Gurule, I think if you could stay on, that would be 
helpful.
    Mr. Gurule. I am happy to do so, Mr. Chairman.
    Chairman Sarbanes. Secretary Dam, as you are departing, let 
me underscore how closely we intend to monitor this situation. 
I have a concern about the agreements with the Cayman Islands 
and the Bahamas because they give, I think it is 3 or 4 years, 
like a grace period in there, and a lot of mischief can happen 
during that period of time.
    The others I hope you would take back with you and look 
again at these concerns that I read in my opening statement, 
about the U.S. correspondent accounts for foreign shell banks, 
and that we are not in a posture of relying solely on the 
certification by the foreign customers without undertaking a 
due diligence process. I think that is extremely important.
    And the other is the 25 percent ownership of shell bank 
shares in terms of a regulated bank being permissible. It seems 
to me to be very low and open up again opportunities for a lot 
of mischief.
    But we will interact with you and Treasury over these 
issues in the coming days. Thank you very much for coming. We 
appreciate your testimony, and we look forward to continuing to 
work closely with Treasury as you move ahead.
    We will return very shortly and resume the hearing.
    Mr. Dam. Thank you, Mr. Chairman.
    Chairman Sarbanes. The hearing stands in recess.
    [Recess.]
    Chairman Sarbanes. The hearing will resume.
    Mr. Chertoff, we would be happy to hear from you.

                 STATEMENT OF MICHAEL CHERTOFF

         ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION

                   U.S. DEPARTMENT OF JUSTICE

    Mr. Chertoff. Thank you, Mr. Chairman.
    It is a pleasure to appear before the Committee to address 
our progress on the financial front of the ongoing war on 
terrorism. I have a longer statement which I would request be 
included.
    Chairman Sarbanes. We will include the full statement in 
the record.
    Mr. Chertoff. I will just give you a summary of that 
statement now and, of course, I will be happy to answer 
questions.
    What I would like to focus on is our efforts to fight the 
financial front of the war on terrorism, as well as what we 
have been doing to implement the authorities set forth in the 
USA PATRIOT Act, Title III, relating to money laundering.
    At the outset, I would like to thank the Members of the 
Committee and Congress for their prompt response to the 
terrorist threat posed to the United States. The USA PATRIOT 
Act provided those of us whose mission it is to protect the 
people of the United States with a wide array of new measures 
that will enhance our ability to deal with both financial and 
other dimensions of terrorism. We welcome the new authority 
granted by the Act, thank this Committee, and look forward to 
using our new powers in a vigorous but responsible manner.
    Mr. Chairman, let me turn first to the issue of the 
financial aspects of our anti-terrorism initiative. And while, 
of course, I am not at liberty to get into information that is 
protected by grand jury or other elements of confidentiality 
that govern criminal investigations, I can nevertheless provide 
a list of areas in which the Department of Justice, working 
with other agencies, and with our partners abroad, has been 
making headway in dealing with the issue of terrorist 
financing.
    Within a matter of days after September 11, the Department 
and the FBI established what we call the Financial Review 
Group, which is an interagency task force including many 
components of the Treasury, the intelligence community, as well 
as the FBI itself, investigating terrorist financing and 
operating out of FBI headquarters. And the idea here was simply 
to gather, to vacuum in all kinds of financial information--
transactions, travel data, telephone records--and bring them 
into a centralized database that would allow us to manipulate 
and analyze the information to develop leads and begin to put 
together investigative cases.
    By collecting the information in one central depository, we 
now have and are accumulating a central focus for forensic 
analysis. At the same time that we established the Financial 
Review Group, the Department also created a Terrorist Financing 
Task Force which is composed of prosecutors who are dedicated 
to working with the FRG specifically to develop terrorist 
financing cases, particularly with an emphasis on nongovernment 
organizations and charities that may be providing financial aid 
for terrorist activity.
    And again, the point of the task force was this. The 
financial trail is important in doing all of our terrorist 
cases. But we wanted to make sure that we had people who were 
specifically focused on the issue of terrorist financing and 
who would be looking to make cases against nongovernmental 
organizations or charities that are providing some of the money 
that aids and abets terrorism.
    Finally, the another piece of our effort here is to link 
the Terrorist Financing Task Force and the FRG with the 
individual U.S. Attorney's offices in the 94 districts, each of 
which have been mandated to set up anti-terrorism task forces 
which network in State and local law enforcement officials, as 
well as the various Federal agencies in the field.
    So, we have all of this network to bring together. And I am 
pleased to say that we have made some very substantial progress 
in tracing financing as it relates not only to the September 11 
attacks, but also more broadly, to the al Qaeda and other 
terrorist organizations.
    Through financial information, for example, we have 
established how the hijackers of September 11 received their 
money, how and where they were trained, where they lived, and 
perhaps most significantly, the names and whereabouts of 
persons with whom they worked and with whom they came into 
contact.
    The efforts of the FRG, the Terrorist Financing Task Force, 
and the ATTF's, have resulted in targeted law enforcement 
actions that are at the heart of the Administration's assault 
on terrorism. For example, my most recent information tells me 
that we have, through the FRG, put together a centralized 
terrorist financial database which includes transaction details 
from over 90,000 documents, that we have coordinated and 
assisted in the financial investigations of over 250 
individuals and groups who are suspects of FBI terrorist 
investigations. The group has catalogued and reviewed 
approximately 271,000 financial documents and has analyzed over 
61,000 financial transactions from over 90 foreign banks. So, 
we have this tremendous pool of information which is growing 
and which we are now able to make use of.
    To get into a couple of specific cases, on November 7, 
2001, the Attorney General announced a nationwide enforcement 
action in conjunction with Treasury against the al Barakaat 
money-transfer network, which included coordinated arrests and 
the execution of search warrants in Massachusetts, Virginia, 
and Ohio. And of course, these actions were teamed up with 
Treasury's execution of blocking actions against al Barakaat-
related entities in Georgia, Minnesota, and Washington State.
    In addition to this coordinated shutdown, we are currently 
prosecuting the principals of al Barakaat's Boston branch for 
operating an unlicensed money transmitting business that caused 
the transfer of over $3 million to banks in the United Arab 
Emirates. On November 14, 2001, both Liban Hussein, President 
of al Barakaat, and his brother, Mohamed Hussein, were indicted 
for violations of Title 18, U.S.C. Sec. 1960, arising out of 
this unlawful operation.
    More recently, on December 4, 2001, the President, along 
with the Attorney General and the Secretary of the Treasury, 
announced the designation and blocking action against the 
Texas-based charity known as the Holy Land Foundation, which 
was alleged to be a North American front for the terrorist 
organization, Hamas. This, of course, emphasizes that our fight 
against terrorist financing extends beyond al Qaeda to other 
organizations as well.
    There is another aspect of what we are doing in terrorist 
financing that I think is promising. We are using computers to 
analyze information that we are gathering through this effort 
to uncover patterns of behavior that, before the advent of this 
new kind of technology, we might not have been able to 
reconstruct. And I am told that they call this data mining and 
predictive technology. Through this technology, which uses 
algorithms and other kinds of analytical techniques, we seek to 
identify patterns that could lead us to locate other potential 
terrorists and terrorism networks. This is a technology which I 
gather has been previously used by the business community 
probably to telemarket and things of that sort. But it comes in 
very handy here.
    For example, we have reason to believe that terrorists have 
long utilized identity theft and Social Security number fraud 
to help them obtain employment and access to secure locations. 
They have used these documents to obtain driver's licenses, 
hazardous material licenses, bank and credit accounts through 
which terrorism 
financing flows.
    The Utah ATTF, under the leadership of the U.S. attorney 
out there, recently undertook a computerized data verification 
operation using data mining that uncovered fraud committed by 
some 60 persons who were employed in sensitive locations 
throughout the Salt Lake City International Airport. And of 
course, locating these people and focusing on them and removing 
them is an important part of the Attorney General's stated goal 
of using law enforcement techniques to prevent potential 
threats to our national security. So that is something which we 
are going to continue to do.
    Chairman Sarbanes. And those are people who obtained Social 
Security numbers and used them in a fraudulent manner. Is that 
correct?
    Mr. Chertoff. Correct.
    Chairman Sarbanes. And then they built everything else off 
of that. Is that correct?
    Mr. Chertoff. That is correct. And though we are not 
accusing them of being terrorists, what we have been able to 
do, using the predictive technology, is identify them as 
lawbreakers, recognize they are in sensitive locations, and 
then prosecute them for the violations of law.
    Chairman Sarbanes. Well, I commend you on that. And it 
sends a very powerful message that people can engage in this 
deceit and deception. In the end, they get documents that 
appear to be legitimate. But they are all based off of a phony 
premise. Correct?
    Mr. Chertoff. That is absolutely correct. And of course, we 
saw that with respect to the driver's licenses, which played a 
role in the September 11 episode.
    Chairman Sarbanes. Right.
    Mr. Chertoff. So, we are going to be continuing in this 
data mining and predictive effort. We are also working closely 
with Treasury and international agencies as well.
    Let me now just turn very briefly to our use of the new USA 
PATRIOT Act authorities. We have already started to deploy some 
of these new legal weapons. For example, the new civil 
forfeiture authority provided in the USA PATRIOT Act, which is 
codified at 18 U.S.C. 981(a)(1)(G), was used in November by the 
U.S. Attorney's Office for the District in New Jersey, to 
obtain nine seizure warrants for bank accounts that had been 
used by some of the terrorists who were involved in September 
11. And of course, this was something that we could not have 
done under the old law. Notice of the proposed forfeiture of 
these accounts has been made and, not surprisingly, no one has 
stepped forward to claim an interest in the money in those 
accounts.
    We also have used Section 319 of the USA PATRIOT Act, which 
allows us to forfeit monies held in a correspondent account of 
a foreign bank where the person against whom we seek the 
forfeiture has deposited money in the foreign branch of that 
bank. We recently used Section 319 of the USA PATRIOT Act to 
recover almost $1.7 million in funds from the perpetrator of a 
fraud scheme, which we can use to compensate his victims. As 
you know, Mr. Chairman, Section 319 gave us a tool that we had 
not previously had to reach those who take their ill-gotten 
gains and deposit them abroad out of the reach of U.S. justice.
    Because there was money in the correspondent bank account 
of the bank which held the deposits, we used the new tool to 
regain money for the victims. And this will be important not 
only for fraud, but also for terrorism as well.
    We are, of course, working on how to implement the other 
authorities. Congress granted us a very important tool in the 
ability to use subpoena power against correspondent bank 
accounts of foreign banks. We are working now to delegate the 
authority to use that tool and I am anticipating that we will 
be using it in our terrorist cases going forward.
    I would like to conclude, Mr. Chairman, by again expressing 
the appreciation of the Department for your support and the 
support of the Committee in our anti-money laundering and anti-
terrorist financing initiatives.
    I appreciate the opportunity to appear and I am happy to 
answer questions.
    Chairman Sarbanes. We are very pleased to have you. I would 
be remiss if I did not also once again state for the record the 
tremendous help that you were as we tried to formulate the 
legislation and move it through, and we appreciated your strong 
support. And, indeed, Mr. Gurule, your efforts in that regard 
as well.
    I am going to go ahead and take the testimony of the other 
two witnesses, and then I may have just a few questions.
    Mr. Spillenkothen, we would be happy to hear from you.

         STATEMENT OF RICHARD SPILLENKOTHEN, DIRECTOR,

         DIVISION OF BANKING SUPERVISION AND REGULATION

        BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Spillenkothen. Thank you, Mr. Chairman. We submitted an 
extended statement, but I will make some summary comments.
    Chairman Sarbanes. If you get that microphone a little 
closer to you, I think it will work a little better.
    Mr. Spillenkothen. I am extremely pleased to be here to 
discuss the Federal Reserve's work in implementing the USA 
PATRIOT Act and our efforts to help law enforcement track 
terrorist financing activities.
    Last November 26, the Board issued a supervisory letter 
concerning the USA PATRIOT Act to all domestic and foreign 
banking organizations under its supervision. The letter 
described the provisions of the Act, highlighted those that 
should receive the banks' and supervisors' immediate attention, 
and described new rules that would be issued under the Act.
    As you all are aware, and as has been discussed here today, 
the primary responsibility for issuing these regulations rests 
with Treasury. However, at the request of Treasury staff and 
consistent with statutory requirements for consultation, the 
Federal Reserve has been actively assisting the Treasury 
Department. Treasury has established 20 working groups for 
different regulatory projects required by the USA PATRIOT Act 
and the Federal Reserve is involved in 15 of these groups.
    As the USA PATRIOT Act effective dates have approached and 
proposed rules have been issued, the Federal Reserve is making 
certain that banking organizations are aware of the new 
requirements and that they are taking reasonable steps to 
comply. We are doing this through the bank examination process, 
the process that is going to be significantly revised and 
enhanced in the Federal Reserve System as a result of the USA 
PATRIOT Act.
    The Federal Reserve believes that banking organizations and 
their employees are the first and strongest line of defense 
against financial crimes and, in particular, money laundering.
    With respect to terrorism, we are working with law 
enforcement, as discussed today, and the industry to see 
whether there are any specific indicators, red flags, of 
terrorist money laundering that may be distinguishable from 
money laundering from corruption and drugs. This effort will be 
crucial not only for law enforcement to identify suspects, but 
also for supervisors to determine if there is a way in the 
future for potential suspicious activity related to terrorism 
to be detected proactively.
    Shortly after September 11, the FBI sought our assistance 
in circulating to banks a list of suspected terrorists. Within 
24 hours of that request, the Federal Reserve and the other 
Federal banking agencies disseminated the list to virtually 
every banking organization in the country.
    Beginning in the middle of September and running through 
October of last year, the proliferation of various requests 
continued as banks received increasingly longer lists from a 
variety of law enforcement sources, both domestically and 
abroad. To alleviate the burden of searching for names on these 
multiple lists, many of which were duplicative, the FBI and the 
other law enforcement agencies prepared a unified Control List 
to supersede the other lists. To ensure that the broadest 
number of financial institutions received this Control List, it 
was agreed that e-mail would be the most efficient and 
expeditious method of distribution. The Federal Reserve and the 
other Federal banking supervisors issued a joint agency request 
explaining this system to almost 20,000 financial institutions 
and then proceeded to circulate the list.
    The Federal Reserve has also provided the Control List to 
the Basel Committee for circulation among its member countries, 
primarily the G-10 countries. In addition, we provided the 
Control List to over a dozen other central banks around the 
world.
    Finally, I can report that starting on September 17 of last 
year, the New York Reserve Bank, at the request of law 
enforcement and pursuant to subpoenas, began searching the 
records of Fedwire, the Federal Reserve's large dollar 
electronic payment system, for any information related to the 
terrorist acts. Search results have been provided to various 
law enforcement agencies, which have reported to us that the 
information we provided has been useful to their ongoing law 
enforcement investigations.
    In addition, multiagency teams led by various U.S. 
Government agencies have been deployed to foreign countries to 
analyze bank and other financial records. On several of these 
occasions, senior Reserve Bank examiners have traveled abroad 
and worked with these teams.
    So in the wake of the terrorist attacks, the FBI, as 
mentioned previously, formed the Financial Review Group, a 
multiagency law enforcement task force to trace transactions 
and assist in seizing assets of terrorists and their supporters 
here and abroad. Recognizing the particular expertise that bank 
supervisors can bring to these investigations, and regulators' 
and supervisors' facility with bank records, representatives 
from the Federal Reserve participated in these efforts. Our 
staff regularly participates in the Financial Review Group's 
efforts.
    All of the actions I have described underscores the Federal 
Reserve's strong commitment to the bank regulatory community's 
anti-money laundering and anti-terrorism mission. We will 
continue our cooperative efforts with Congress, the banking 
industry, the other bank supervisors and securities industry 
supervisors, and the international community to develop and 
implement effective programs addressing the ever-changing 
strategies of terrorists and other criminals who attempt to 
launder funds through banking organizations both here and 
abroad.
    The Federal Reserve will also continue to lend our 
expertise to the U.S. law enforcement community anywhere in the 
world when it seeks to track or intercept terrorist funds.
    Thank you.
    Chairman Sarbanes. Thank you very much.
    Ms. Nazareth is the Director of the Division of Market 
Regulation for the Securities and Exchange Commission. We would 
be happy to hear from you.

                STATEMENT OF ANNETTE L. NAZARETH

            DIRECTOR, DIVISION OF MARKET REGULATION

            U.S. SECURITIES AND EXCHANGE COMMISSION

    Ms. Nazareth. Thank you, Chairman Sarbanes.
    I am pleased to appear before you today to testify on 
behalf of the Securities and Exchange Commission concerning the 
steps the Commission has taken to assist in the financial 
aspects of U.S. anti-terrorism initiatives, and the 
implementation of the USA PATRIOT Act.
    My appearance before you today comes during a period of 
close intergovernmental cooperation to implement the USA 
PATRIOT Act's new mandates in the fight against money 
laundering and terrorism. Chairman Pitt has made clear the 
Commission's full partnership in these efforts. Within hours of 
the September 11 attacks, the Commission and its staff began 
the process of identifying and executing the steps we could 
effectively take in this collaborative effort. The enactment of 
the USA PATRIOT Act further strengthened this process.
    I will first address the SEC's contributions to the 
financial aspects of the Government's anti-terrorism efforts 
that respond most directly to questions raised by the attacks. 
There are two key components to this work.
    First, on September 12, 2001, the staff of the Division of 
Enforcement commenced a review of certain trading activity 
preceding the terrorist attacks of September 11. Working with 
the surveillance staff of the U.S. securities self-regulatory 
organizations, Commission staff reviewed trading activity in 
over 125 individual securities and index products. The results 
of this inquiry have been, and continue to be, shared with 
criminal law enforcement authorities.
    Second, we have supported the effective use of the Control 
List of individuals or entities identified by the Federal 
Bureau of Investigation and other law enforcement agencies. At 
the request of the Department of Justice, the Commission issued 
a release to enlist the voluntary review by securities-related 
entities of the Control List to identify name matches with 
accounts at each institution. To date, nearly 1,800 entities 
have agreed to conduct such reviews.
    The Commission is an active participant in working groups, 
led by the Department of the Treasury, that were established to 
help implement the USA PATRIOT Act. Regulatory implementation 
of the USA PATRIOT Act is proceeding in a timely fashion. New 
regulations, either proposed or soon-to-be proposed, should 
provide appropriate tools to deny money launderers and 
terrorists the use of the Nation's financial institutions to 
launder the proceeds of crime for profit, or for the 
furtherance of their criminal activities, including terrorism.
    One important tool is the proposed suspicious activity 
reporting rule for broker-dealers. Treasury proposed this rule 
on December 20, after close consultation with Commission staff. 
This proposal will require broker-dealers to file with the 
Government reports of suspected illegal activity through their 
firms.
    The proposed rule focuses broker-dealers on the money 
laundering risks stemming from their client-base and on the 
types of business in which they engage. This risk-based 
approach to identifying and to reporting suspicious 
transactions should empower broker-dealers to focus their SAR 
detection and reporting resources appropriately.
    As the Committee knows, broker-dealers affiliated with 
banks have already long been subject to the bank regulators' 
SAR rules. Other broker-dealers have filed SAR's on a voluntary 
basis. We believe that this rulemaking proposal completes the 
process of assuring that all broker-dealers report possible 
money laundering.
    We are also working with the other members of the working 
groups, including the bank regulators, the Commodity Futures 
Trading Commission, the Department of Justice, and the Internal 
Revenue Service to move forward with the full complement of 
rules called for under the USA PATRIOT Act.
    For example, on December 19, Treasury issued a proposed 
rule to implement the USA PATRIOT Act's new prohibition against 
providing correspondent accounts to foreign shell banks that 
are not affiliated with a supervised bank.
    Other forthcoming rulemaking projects should complement the 
shell bank proposal. In particular, interagency discussions are 
underway concerning the identification of customers at account 
opening and due diligence policies for correspondent and 
private banking accounts.
    The USA PATRIOT Act also requires financial institutions to 
establish anti-money laundering programs by April 24, 2002. In 
order to implement this provision effectively, the NASDR and 
the New York Stock Exchange developed a rule that was fully 
vetted through the Section 352 interagency working group. We 
expect the NASDR to file this proposed rule for Commission 
consideration shortly. A companion rule is scheduled to be 
considered by the New York Stock Exchange Board in February. 
These proposals will, when completed, enable frontline 
examiners for broker-dealers, as part of their ongoing 
responsibilities, to examine and enforce this key provision of 
the USA PATRIOT Act.
    The Commission is continuing in other ways to focus its 
attention, and the securities industry's attention, on money 
laundering. The Bank Secrecy Act provisions that are applicable 
to broker-
dealers have been included in our examination program for 
decades. Also, we have long had an open dialogue with the 
Securities Industry Association-affiliated group of senior 
broker-dealer compliance officials who meet to share anti-money 
laundering approaches with one another, and with the 
Government.
    A current, broader Commission examination initiative was 
announced in May 2001. Commission staff, along with the staff 
from the New York Stock Exchange and the NASD, began conducting 
a series of comprehensive risk-based anti-money laundering 
examinations to assess industry practices for anti-money 
laundering compliance. The ongoing examinations are helping to 
shape our understanding of existing practices at all types of 
firms, and of how they should be strengthened.
    The SEC staff also has been working with Treasury and the 
private sector to address the application of the Bank Secrecy 
Act and anti-money laundering programs to investment companies 
registered with the Commission under the Investment Company Act 
of 1940.
    I am heartened to be able to provide the Committee with so 
many examples of action taken since the adoption of the USA 
PATRIOT Act. Together, the regulators and the industry have 
made substantial progress on some difficult issues in a short 
period of time. On behalf of the Commission, I appreciate the 
opportunity to participate in this hearing. We look forward to 
continuing to share our views with this Committee, the 
Treasury, and other participants in the implementation of the 
USA PATRIOT Act.
    Thank you.
    Chairman Sarbanes. Thank you all very much. They have 
called another vote, so I will ask some questions very quickly 
before I draw the hearing to a close.
    First of all, is the SEC cooperating with other national 
securities regulators in the money laundering fight? You talked 
about, I think you said, intragovernmental cooperation and you 
have all spoken about within our own Government. What is the 
SEC doing with relationship to comparable agencies in other 
countries?
    Ms. Nazareth. The SEC is active in a number of 
international initiatives, including through IOSCO. We 
participate in a lot of the FATF initiatives. I personally am a 
member of the Financial Stability Forum that has taken an 
active interest in international money laundering and the 
problems with offshore centers. So, we have had our focus on 
the international arena as well.
    Chairman Sarbanes. And I take it that is true of the 
Federal Reserve coordinating with other central banks as well. 
Is that right?
    Mr. Spillenkothen. Yes, sir, that is true.
    Chairman Sarbanes. Now this formulation of these 
regulations, how is that being done? Is there a standing 
interagency group that is putting together the regulations?
    Mr. Gurule. Yes, Mr. Chairman. In fact, at the Treasury 
Department, right after the USA PATRIOT Act was signed into 
law, the general counsel took charge of the implementation 
process, working closely with staff from the Treasury's 
enforcement office. And several working groups were established 
with respect to each provision, so that we would have a team of 
experts.
    Chairman Sarbanes. Is the Justice Department part of that 
process?
    Mr. Gurule. Justice has been involved in the process as 
well. We have been working very closely with Justice.
    Mr. Chertoff. That is correct.
    Chairman Sarbanes. Now, we want the consultation. Does the 
consultation noticeably slow up getting the regulations into 
place?
    Mr. Gurule. I do not think that it does. We have been on a 
very short timeline with respect to action items and deadlines 
to accomplish these action items.
    The cooperation that we have received from the Department 
of Justice has been excellent. I believe that is the reason 
that we are on track with respect to the implemention of 
regulations for these provisions.
    Chairman Sarbanes. One of the provisions in that 
legislation was about sharing information about specific 
individuals, the financial institutions, where there was reason 
for concern.
    I gather from what is being said here today, that there 
have been quite extensive lists that have been developed by law 
enforcement and then have been moved along by the financial 
regulators to institutions. Is that correct?
    Mr. Gurule. Again, it is my understanding that the 
cooperation is going well, that we are on the right track in 
terms of the timeline to get this implemented, and good 
progress is being made.
    I am very pleased and encouraged by the progress to date. I 
do not see any major issues to implementing these regulations 
in a timely fashion.
    Chairman Sarbanes. You are the ones who send the lists on 
to the private institutions?
    Mr. Spillenkothen. Right. Our experience has been that the 
information was in the hands of the private-sector banks in a 
very timely way and that they have run these lists to see if 
they have transactions or relationships with these individuals, 
and have informed law enforcement when they have found 
information to suggest that they have.
    Chairman Sarbanes. Ms. Nazareth.
    Ms. Nazareth. Our experience was equally positive. In fact, 
when the requests first went out to the brokerage firms, as you 
all know, a number of the brokerage firms were themselves very 
adversely affected by the events of September 11, and 
notwithstanding that the requests were going to compliance 
people in firms who had themselves been affected and were not 
able to operate out of their offices, they nevertheless 
undertook extensive efforts in a very timely fashion to check 
the control lists and to report back on any activity that they 
thought should be reported.
    Chairman Sarbanes. Do you think that a correspondent 
account for foreign shell banks, that a U.S. bank should be 
able to rely simply on the certification by its foreign 
customers or that it should exercise some due diligence in that 
regard?
    Mr. Gurule. I think with respect to the Section 313, that 
it is important that Section be read in conjunction with 
Section 312. As you know, Section 312 is a provision that 
requires due diligence. For example, where the particular 
correspondent account involves a foreign bank, and the license 
has been issued by a country that is on the noncooperative 
countries and territories list.
    I think that, in such a case, there would be a requirement 
of filing additional reports under these due diligence 
requirements. If it turned out that information uncovered that 
perhaps the bank had not been accurate or forthcoming in 
identifying its status as a shell bank, then that information 
could ultimately lead to Section 311 special measures taken 
under that provision. I think that it is important that we look 
at Section 313 and read it in conjunction with Sections 312 and 
311.
    Chairman Sarbanes. We intend to monitor this very closely. 
We want to be very careful that the regulations as they are put 
in place do not contain in them some opening that is then 
exploited and, in effect, results in undermining the whole 
system. That is why I am worried also about the 25 percent on 
the shell bank shares. But we will come back to that.
    I am going to yield now to Senator Corzine because I know 
he has been here for a while. Let me just make this point.
    We do not think that the statute is the be-all and end-all. 
We understand that there may be further statutory adjustments 
that need to be made. Are you all looking at that as well, as 
you seek to put the statute into place, whether, as you go 
through this process, whether you see something and say, you 
know, if we really could have a modification or an addition 
here, it would really help us in this effort?
    Mr. Chertoff. We are, Mr. Chairman. And I have to agree 
with what Secretary Dam said just before the adjournment.
    One of the things we want to be careful about is, as we run 
it out into practice, to make sure that we do not have 
unintended asymmetries where, by moving from one regulatory 
scheme to another, you can get a lesser degree of coverage. I 
think we are all mindful of that as we deploy these new powers.
    Chairman Sarbanes. Well, we will be in constant touch with 
you. But to the extent that you can identify additional changes 
that need to be made in the fine-tuning of the law, we are very 
anxious to get those recommendations from you.
    Senator Corzine.
    Senator Corzine. Thank you, Mr. Chairman. Just two quick 
questions, one general and one specific.
    Implementation sounds as if it is moving in a positive 
direction and cooperation is in place. Once you implement, 
there is a collection of an unbelievable amount of data, I 
suspect.
    Practically speaking, are the means in place to be able to 
use the data? Sometimes we take false comfort from rules and 
regulations without the ability to implement. That is the first 
question.
    The second is more toward Ms. Nazareth. Without revealing 
any specifics, are there indications that some of the insider 
trading, the manipulative trading, or advanced trading that was 
talked about in the press prior to September 11, are there 
indications that that was a reality, without trying to get at 
any kind of specifics.
    Thank you. First, if any of you could comment on it, but I 
am concerned about those that have to use that data.
    Mr. Gurule. Well, certainly with respect to resources, we 
feel that we have sufficient resources at this point in time to 
implement the provisions of the USA PATRIOT Act.
    FinCEN's budget, as Secretary Dam indicated, was increased 
for 2003, since 2001 was increased approximately 25 percent. So 
in that area, we feel confident that we can get the job done. 
Having said that, certainly, if we find in the process of 
implementing these provisions that we need additional 
resources, manpower, so to speak, to get the job done----
    Senator Corzine. Do you feel confident that, with all the 
suspicious activity reports, you will be able to look at those 
and draw the kinds of conclusions that are necessary to protect 
the public?
    Mr. Gurule. At this point, yes. But, again, I reserve the 
right that if we find that we need additional resources, we are 
certainly prepared to come back and request the support that we 
need to get the job done. The key here is to get the job done 
and we are committed to doing that.
    Mr. Chertoff. Senator, I basically can echo that. We 
received enhanced resources in the most recent budget. As you 
know, the FBI is in the process now again of redeploying some 
of its resources and we anticipate that will give us what we 
need. Of course, if that turns out to be incorrect, we will not 
be bashful.
    But I also think it is important that we are trying to use 
some of the new technologies in terms of interpreting and 
analyzing the data. These technologies include data mining and 
some of the algorithms in use in the private practice, which 
enable firms to combine and recombine data to connect and find 
patterns that might not be discernible to the human eye.
    We are starting to take advantage of these techniques. My 
hope is that by using these computerized techniques, we can 
actually multiply our ability to make use of the information 
that we are collecting.
    Mr. Spillenkothen. At the Federal Reserve, we are 
galvanizing our existing resources and also expanding the 
people we have to provide oversight to the reserve banks and 
the implementation effort of the USA PATRIOT Act.
    As a routine part of our examination process, we have long 
had instructions to our examiners to review SAR's filed by 
individual institutions before we conduct on-site examinations.
    We have a procedure for doing that. And we also are going 
to be expanding our resources to develop and draft regulations 
and new guidelines, exam procedures, and training for the new 
requirements under the USA PATRIOT Act.
    Senator Corzine. Ms. Nazareth, can you comment on the 
second question?
    Ms. Nazareth. The Commission has not publicly stated what 
the results of its examination were, so I do not feel prepared 
to do that at this time.
    We did share all of the information that we had with the 
criminal authorities and obviously, they have a much larger 
picture of all the activities, so it is really for them to take 
the information and determine how it all fits together.
    Senator Corzine. Thank you.
    Chairman Sarbanes. We want to thank the panel very much. 
You have been enormously helpful. And we look forward to 
staying in close touch with you as we continue to work on this 
matter.
    The hearing stands adjourned.
    [Whereupon, at 12:40 p.m., the hearing was adjourned.]
    [Prepared statements, response to written questions, and 
additional material supplied for the record follow:]
             PREPARED STATEMENT OF SENATOR PAUL S. SARBANES
    The Committee meets today in its oversight capacity. It will hear 
testimony about the financial aspects of the ongoing war on terrorism 
and about the Administration's implementation of the anti-money 
laundering provisions of Title III of the USA PATRIOT Act, which was 
signed into law by the President on October 26, 2001.
    I am especially pleased to turn first to Senators Levin and 
Grassley. Along with Senator Kerry, they were the first witnesses to 
appear before this Committee, two weeks after the September 11 tragedy, 
to make the case forcefully and persuasively for tougher anti-money 
laundering rules and enforcement. Senator Kerry is chairing another 
hearing this morning, but he has submitted a statement for the record. 
I am also pleased to welcome Chairman Oxley and Ranking Member LaFalce 
of the House Financial Services Committee, who led the effort in the 
House last October; we worked closely together to craft the final 
version of Title III.
    After our Congressional colleagues, our witnesses are Kenneth W. 
Dam, the Deputy Secretary of the Treasury; Michael Chertoff, the 
Assistant Attorney General of the Criminal Division of the Department 
of Justice; Richard Spillenkothen, Director of the Division of Banking 
Supervision and Regulation, Board of Governors of the Federal Reserve 
Board; and Annette L. Nazareth, Director of the Division of Market 
Regulation of the U.S. Securities and Exchange Commission.
    The United States and many other countries have been engaged for 
the last 5 months in what must surely be the most intensive financial 
investigations in history. To date, the United States has seized or has 
frozen more than $34 million in terrorist-related assets, and our 
allies have frozen almost $46 million more. More than 165 persons have 
been identified as involved in the financing of terrorist activities. 
Although the details of the investigations and their methods are 
classified, each of the witnesses can describe to the Committee how 
specific approaches or resources have been coordinated and targeted--
using the expanded information access 
granted by the USA PATRIOT Act, and how our experience thus far will 
contribute to shaping our continuing effort to end money laundering.
    A broad strategy for this effort is essential. The United States 
must lead both by example and by promoting concerted international 
action. Our goal must be not only to apprehend particular individuals, 
but also to cut off the pathways in the international financial system 
along which terrorist and other criminal money moves. We must act to 
make it impossible to create the chains of obscure corporations, 
trusts, or partnerships so tangled that not even experienced and 
dedicated investigators can figure out with certainty who owns what, or 
where the money trail begins and ends. This effort depends crucially on 
concerted international action. Even as we build stronger, more 
effective anti-money laundering programs at home, we must press for 
comparable programs and for an end to unreasonable ``bank secrecy'' 
around the world, offering technical assistance wherever possible, but 
employing stronger measures where necessary.
    Title III of the USA PATRIOT Act constitutes the most extensive 
updating of our civil anti-money laundering laws since 1970. But it 
means little if it is not promptly and effectively implemented, and 
implementation is a formidable task. Under the new law the Treasury 
Department, working with the Federal financial regulators and the 
Department of Justice, must issue a number of new Bank Secrecy Act 
rules, in many cases by April 2002. It must also submit several 
important reports to Congress about issues that were deferred last 
year. These include application of the Bank Secrecy Act to investment 
companies, especially hedge funds, a subject raised by Senators Dodd 
and Corzine, and its application to underground banking systems, a 
subject on which Senator Bayh has already held a Subcommittee hearing. 
At the same time the agencies must establish the operating programs--
for training, audit, intelligence analysis, and enforcement--that turn 
words into realities. Even as the broader strategy is put in place, 
attention must be focused on such matters as budgets, training, 
interagency coordination, and allocation of investigative resources. I 
note that Deputy Secretary Dam announced last week a $3.3 million 
budget increase for the Financial Crimes Enforcement Network, and we 
are looking forward to learning today more generally about how the 
agencies are marshaling their resources to get the job done.
    I want to close with a brief comment on the regulatory guidance to 
be issued by Treasury under Title III. That guidance must be carefully 
drawn to reflect accurately the intent of Congress. While I commend 
Treasury for timeliness in issuing its first sets of proposed rules, I 
remain concerned about the draft rules relating to the ban on U.S. 
correspondent accounts for foreign shell banks. This rule would permit 
a U.S. bank to rely without any due diligence solely on a certification 
by its foreign customers, even if the bank has reason to doubt the 
certification, which in my view is not consistent with the statutory 
language, with other BSA rules, or with general guidance for banks 
provided by the Basel Committee on Banking Supervision. In addition, 
what was intended in my opinion to be a limited exception in the USA 
PATRIOT Act becomes a broad loophole when, as the rule proposes, a 
shell bank is permissible so long as a regulated bank owns as little as 
25 percent of the shell bank's shares. I would hope that Treasury will 
revisit these issues.
    I look forward to hearing from our witnesses.
                               ----------
             PREPARED STATEMENT OF SENATOR DEBBIE STABENOW
    Thank you, Mr. Chairman. I am glad that you have called this 
hearing.
    The legislation that this Committee considered shortly after the 
September 11 attacks and that was ultimately incorporated into the USA 
PATRIOT Act of 2001 was profoundly important and truly historic.
    As you have noted, it brings a new level of scrutiny to money 
laundering activities. And, we should acknowledge the hard work of so 
many of our colleagues. We are fortunate today to be joined by a few 
key leaders on the subject.
    I would like to welcome the senior Senator from my home State, 
Senator Carl Levin, whose thorough investigations on this subject are 
well-known by all of us here and are deeply appreciated. I would also 
like to welcome Senator Grassley and the leaders of the House Financial 
Services Committee: Chairman Oxley and Ranking Member LaFalce.
    The final legislation that we reported out of this Committee is a 
demonstration of what is possible when we join together in a spirit of 
cooperation in the best interests of the country.
    I am happy that we were able to incorporate important amendments 
that I offered to the bill. In particular, I am glad that we have 
enacted strong ``due diligence'' 
requirements and that we have clarified the ability of the Treasury to 
issue regulations to crack down on the ``concentration accounts 
loophole.'' The concentration 
accounts loophole is a serious concern of mine and I want to take a 
moment to highlight the subject. As all of us know, concentration 
accounts are internal, administrative accounts that financial 
institutions operate to temporarily aggregate incoming monies until 
those funds can be properly identified and credited to an appropriate 
account. In the past, there is evidence that some institutions have 
allowed concentration accounts to serve as a secret conduit for drug 
monies. This has been such a problem that, over 4 years ago, the 
Federal Reserve raised a red flag about lax concentration account 
protocols in its Sound Practices for Private Banking. However, the Fed 
issued only guidance and its warning does not have the impact of a 
regulation. That is why I felt it was so important for us to address 
this loophole with a regulation.
    Recently, my colleagues, Senators Levin and Grassley, joined me in 
writing to Treasury Secretary Paul O'Neill. We urged him to act quickly 
on his new explicit authority.
    In the aftermath of September 11, Senators Levin, Grassley, and I 
remain concerned about drug money laundering, but also are newly 
concerned that terrorists might seek to use the concentration accounts 
loophole to hide transfers of money among terrorist operatives around 
the world.
    I hope that our witnesses appearing before us today from Treasury 
will be able to update us on the preparation that the Department is 
doing so that they may proceed with a proposed concentration accounts 
rule.
    I think it would be very unfortunate for the Administration not to 
move forward with their new explicit authority. We all realize that the 
war against terrorism is going to be a prolonged struggle. The decisive 
steps that this Committee, the entire Congress, and the Administration 
have taken show that we are completely committed to stopping the flow 
of terrorist money, eradicating terrorism, and protecting our families 
both abroad and on our own soil.
    I look forward to hearing from our witnesses today about how the 
new law is being implemented. Thank you, Mr. Chairman.
                               ----------
                PREPARED STATEMENT OF SENATOR EVAN BAYH
    Chairman Sarbanes, thank you for holding today's oversight hearing 
on our 
recently enacted International Money Laundering Abatement and Financial 
Anti-Terrorism Act of 2001. It is important to hold such a hearing 
early in the implementation process, so that we can ensure that any 
regulatory actions taken accurately 
reflect the legislation that we passed. I would also like to welcome 
today's witnesses, and thank them for their efforts in this financial 
war on terrorism.
    In the past, consultation and coordination among the agencies 
charged with fighting the financial war on terrorist organizations was 
not effective. The 2001 Act addressed that problem and provided the 
Administration with the weapons it needs to successfully fight the war. 
In fact, the legislation has resulted in the United States seizing more 
than $34 million in terrorist related assets, and our allies seizing 
$46 million more. That fact is very important, because no criminal 
syndicate--whether it is organized crime, a drug cartel, or terrorist 
cells--can survive without extensive financing.
    Nor can a war be fought and won without adequate resources. For 
that reason, I was pleased to hear Deputy Secretary Dam's announcement 
last week that the Administration will be requesting a $3.3 million 
increase for FinCEN's budget to $52.3 million. This is of special 
interest to me because the Deputy Secretary indicated that the budget 
increase would specifically go toward implementation and enforcement of 
the money service business regulations--which include hawala. I look 
forward to your testimony, Deputy Secretary, and to hearing an update 
on the implementation of the money service business regulations.
    As I have discussed with Chairman Sarbanes, I intend to hold a 
hearing in my Subcommittee--the International Trade and Finance 
Subcommittee--on another terrorist financing mechanism. That mechanism 
is the link between al Qaeda and certain charities and nongovernmental 
organizations.
    Just last December, Green Quest announced action to block the 
assets of three entities that provide financial and material support to 
the terrorist organization HAMAS--including the Holy Land Foundation 
for Relief and Development, which raises millions of dollars annually 
that is used by HAMAS. Holy Land supports HAMAS activities through 
direct fund transfers to its offices in the West Bank and Gaza that are 
affiliated with HAMAS and transfers of funds to Islamic charity 
committees and other charitable organizations that are part of HAMAS or 
controlled by HAMAS members. Holy Land Foundation funds are used by 
HAMAS to support schools that serve HAMAS ends by encouraging children 
to become suicide bombers and to recruit suicide bombers by offering 
support to their families.
    We must continue to aggressively seek out every angle that 
terrorists use to finance their operations, and make sure that every 
cent of U.S. aid or charity is going to the people who need it the most 
in developing countries and not to terrorist groups for training and 
arms. I hope that you will comment of this issue Deputy Secretary Dam.
    Thank you, Chairman Sarbanes, for holding this important hearing, 
and I look forward to the witnesses' testimony.
                               ----------
              PREPARED STATEMENT OF SENATOR JON S. CORZINE
    Thank you, Mr. Chairman, for holding this important hearing.
    I also want to welcome Senators Kerry, Levin, and Grassley, 
Chairman Oxley and Congressman LaFalce and the other witnesses who have 
joined us to testify before the Committee this morning.
    Mr. Chairman, I would be remiss if I did not applaud your 
stewardship in the process that resulted in the passage of the Title 
III money laundering provisions that were included in the USA PATRIOT 
Act.
    As the President has said on more than one occasion, we must leave 
no stone unturned in attempting to root out terrorism and the source of 
terrorist financing. The new authorities granted under this legislation 
to the Treasury and Justice departments and to other financial 
regulators and law enforcement communities will do just that.
    In light of the September 11 attacks, there is no doubt that the 
new enemy that we face is not only highly trained and sophisticated in 
the ways of terrorism--but also very well-financed. We must root out 
the financial sources of terrorism, including those linked to money 
laundering and the drug trade, and eliminate them.
    Mr. Chairman, while we applauding this effort, we should not 
consider our work done. What we have seen with Enron is an example of 
how secrecy and deceit can undermine an entire financial structure. 
Imagine what that type of offshore anonymity can provide to the 
terrorist seeking to undermine our democracy. We must ensure that our 
laws, in protecting our citizens, are not used to protect the 
identities of those who would see us harmed.
    The veil of offshore secrecy that Enron utilized is analogous to 
the types of financial activities that Senator Dodd and I sought to 
have looked at by the Treasury, the SEC, and the Fed with regards to 
hedge funds and other unregulated money managers.
    The report language included in Section 356 of Title III requires 
our Federal agencies to study the extent to which unregulated financial 
entities like hedge funds could be used to launder money or finance 
terrorism. The very nature of these funds, and the anonymity that many 
of their investors enjoy, necessitate they undergo this scrutiny.
    With demand for these types of funds growing, I find it very 
troubling that we currently lack the ability to ascertain the who, 
what, and where of many of the individuals who invest in these funds 
offshore, which is done primarily through private banks and trusts.
    The inability to obtain access to beneficial owner information for 
these types of entities leaves a glaring hole in the security of our 
financial system, and potentially in our homeland security. That is 
something that we must not allow to happen.
    Thank you, Mr. Chairman.
                               ----------
               PREPARED STATEMENT OF CHARLES E. GRASSLEY
                 A U.S. Senator from the State of Iowa
    Mr. Chairman, Members of the Committee, I want to thank you for the 
opportunity to speak this morning on an interest that we all share. 
This Committee and this Congress passed important legislation last year 
to deal with terrorist money laundering. Our interest now is about 
getting down to brass tacks. It is about finding the means and 
employing those means to go after bad guys. To put out of business now 
and forever those willfully evil men who have targeted the United 
States and its citizens. Whether they are terrorists or drug 
traffickers, what we intend is to ensure no more holidays, no free 
rides.
    I understand that the Administration, this Congress, the public, 
the business community, and other countries are committed to doing what 
must be done in shutting down Terrorism Incorporated. It is gratifying 
to see the spirit, here and abroad, that prevails in this regard. I 
want to applaud those efforts and to commend those engaged on behalf of 
good in this fight. There is no easy or royal road that lies before us. 
Much is expected and much is required of us. Our history speaks of our 
willingness and ability to rise to challenge. We have our work cut out 
for us, but we are up to it.
    While it is a bit early to expect much in the way of specific 
implementation of the measures that we passed in the USA PATRIOT Act, 
it is not too soon to check on how things are going. In this regard, I 
have a few observations.
    The first of these concerns the need for a fully integrated 
national money laundering strategy. I felt strongly enough about this 
issue to have worked to pass legislation in the 106th Congress to 
establish a requirement that our money laundering efforts be coherent, 
coordinated, and integrated. That was an important goal before 
September 11, and, in my view, is now more important that ever. That is 
a law of some standing and we are now getting ready to see the third 
strategy required under the law.
    I am concerned, however, that in the rush to do the many important 
things that must be done to combat terrorism and drug trafficking, we 
are missing something. That something is the integrated, coherent, 
sustained strategic thinking and coor-
dinated responses that must be an essential component of what we are 
about. We expect what we do to make a difference. And in my humble 
opinion, part of what we need to be doing is thinking. This does not 
mean a paper exercise in which we publish a strategy and then forget 
the need for strategic thinking and coordinated responses. I intend to 
pay close attention to where things stand in regard to the need for 
such integrated strategic thinking, and I hope that this Committee will 
also join me to ensure that this is the case.
    As we look ahead, I also think that it is important to pay 
attention to a couple of on-going issues. In particular, we need to do 
some creative thinking on how we and others can address the problem of 
informal banking networks. Systems such as the hawala system and Black 
Market Peso Exchange activities. I also think we need a more sustained 
look at precious metals markets and the role that they play in money 
laundering. And we need to improve our efforts in the broader range of 
financial services, including money orders, stocks and bonds, and money 
exchange houses.
    We need to think about tax haven regulations to ensure that we 
remain competitive internationally but do not permit money launderers 
the opportunity to shelter their money at the same time. These efforts 
that I have noted will require us to be diligent and prudent. We need 
to be sure that we do not regulate ourselves out of our rights; and to 
ensure our rights do not become the means to take us for a ride. 
Government and the financial sector need to explore more and better 
means to cooperate. We need a spirit of cooperation and reasonableness. 
The challenges ahead have no easy solutions. They inevitably will 
involve frustration. They require our best thinking, our honest 
efforts, and a spirit of working to common purpose.
                               ----------
                 PREPARED STATEMENT OF MICHAEL G. OXLEY
        A U.S. Representative in Congress from the State of Ohio
    Thank you, Chairman Sarbanes, for the invitation to testify this 
morning, and for holding this important hearing. The anti-money 
laundering provisions of the USA PATRIOT Act that were enacted last 
October were a model of bipartisan and bicameral cooperation. I salute 
you, Mr. Chairman, Senator Gramm, your colleagues on the Committee, and 
my fellow panelists for a job well done.
    In the 3 months since we were together in the East Room of the 
White House to watch President Bush sign the USA PATRIOT Act into law, 
we have seen a number of successes in the financial war on terrorism. 
The Bush Administration has pursued an aggressive strategy of blocking 
and freezing suspected terrorist funds, including closing down 
``hawalas'' in cities across the country. The Administration has also 
been active on the international front, working with Interpol and other 
governments to hammer out agreements and protocols that will facilitate 
greater cooperation on terrorist financing issues.
    The Treasury Department and other financial regulators are off to 
an impressive start in writing the rules to implement the new law. As 
you know, Mr. Chairman, one of our primary goals in the USA PATRIOT Act 
was to extend the anti-money laundering regime to segments of the 
financial services industry that had not previously been fully enlisted 
in the effort. I was pleased that among the first regulations rolled 
out by the regulators were rules to apply Suspicious Activity Reporting 
requirements to securities broker-dealers and so-called money service 
businesses. By standardizing regulation and leveling the playing field 
among different industry groups, we also close possible loopholes that 
terrorists and other criminals are only too happy to exploit.
    I also want to commend the Administration for its announcement last 
week that the President's 2003 budget will contain increased funding 
for the Financial Crimes Enforcement Network (FinCEN), which the USA 
PATRIOT Act has elevated from agency to bureau status, and which has a 
critical role to play in supporting law enforcement efforts to track 
and seize terrorist assets.
    The financial services industry has been asked to do a lot in the 
wake of September 11, including responding to a blizzard of requests 
for information from law enforcement authorities and making significant 
(and costly) adjustments to internal operating procedures. The industry 
will be asked to do a lot more as regulatory implementation of the new 
anti-money laundering provisions gathers speed. This could be one of 
the financial services industry's finest hours, as it rises to the 
challenge of shutting down the channels used by terrorists.
    As proud as we are of our legislative achievement, none of us has 
any illusions that Title III of the USA PATRIOT Act is the last word, 
or that we can afford to rest on our laurels in the fight against 
terrorism. The one thing we can least afford is complacency.
    This hearing is the first of what I am sure will be many efforts in 
both the House and Senate to exercise rigorous oversight of regulatory 
implementation of the USA PATRIOT Act, to ensure that deadlines are met 
and Congressional intent is followed. We need to know from Treasury 
what parts of the new law are working well, and what parts are not. As 
ongoing investigations proceed and additional intelligence is gathered 
in al Qaeda's former haunts in Afghanistan and elsewhere, we will 
undoubtedly learn things about the methods that terrorists use to move 
money through the international financial system that could serve as 
the basis for future legislative efforts.
    Previous investigations suggest that one of the techniques favored 
by terrorists in financing their operations is credit card fraud. This 
underscores the importance of the work that Senator Levin and others 
are doing to determine the potential money laundering vulnerabilities 
associated with credit cards, which we know are used extensively in 
Internet gambling and to transact business through unregulated offshore 
secrecy havens. At a minimum, credit card associations should be 
required to implement anti-money laundering programs, as mandated for 
all financial institutions in the USA PATRIOT Act.
    Finally, I will be paying particular attention--as I know industry 
is--to regulatory implementation of the provision in the USA PATRIOT 
Act requiring financial institutions to verify the identity of those 
who attempt to open accounts with them. The provision imposes legal 
obligations not only on financial institutions to verify the identity 
of accountholders, but also on customers to supply institutions with 
accurate, truthful information.
    Let me close by thanking you once again, Chairman Sarbanes, for 
allowing me to appear this morning. I look forward to working with you 
and the other Members of this Committee as we rededicate ourselves to 
the absolutely essential task of starving the terrorists of the funds 
needed to commit their acts of evil.
                               ----------
                 PREPARED STATEMENT OF JOHN J. LAFALCE
      A U.S. Representative in Congress from the State of New York
    Chairman Sarbanes, Senator Gramm, and Members of the Committee, I 
appreciate the opportunity to appear before the Committee today to 
discuss the Administration's approach to the financial war on 
terrorism, as well as the progress made in implementing the financial 
provisions of the USA PATRIOT Act.
    I am pleased to be at the witness table in the company of Senators 
Levin, Grassley, and Chairman Mike Oxley of the House Financial 
Services Committee, on which I serve as Ranking Member. All of us came 
together last year at a crucial time in our Nation's history, and in 
the wake of the most egregious acts of terrorism ever on U.S. soil, to 
enact far-reaching and meaningful anti-money laundering laws. Today, we 
examine the progress made thus far in implementing the new powers 
granted to the law enforcement and intelligence agencies under the USA 
PATRIOT Act. My testimony today will address the following:

 First, the Bush Administration's efforts to capitalize on 
    provisions in the USA PATRIOT Act that help the United States 
    identify and target areas of primary money laundering concern 
    around the world; these special measures are designed to strengthen 
    anti-money laundering controls in jurisdictions with inadequate or 
    nonexistent anti-money laundering regimes.
 Second, the need to strengthen international cooperation to 
    root out terrorists' infiltration of offshore secrecy havens, and 
    the world's financial system.
 Third, the Treasury Department's progress in issuing 
    regulations that will have the effect of preventing U.S. financial 
    institutions from doing business with terrorists, terrorist 
    organizations, and their fronts.
Strengthening Global Regulation
    Prior to enactment of the USA PATRIOT Act, successive Treasury 
Secretaries were limited in their ability to take proactive action on 
money laundering matters. The Secretary could either issue nonbinding 
informational advisories to U.S. financial institutions, or take the 
extreme approach of invoking sweeping, and often disruptive, economic 
sanctions. Because both approaches were impractical--and largely 
ineffective--neither was invoked with any regularity.
    To address this challenge, the Clinton Administration's Treasury 
and I crafted legislation in the 106th Congress to grant the Secretary 
new, more practical authorities. The House Banking Committee passed 
this bill, H.R. 3886, on a vote of 31 to 1, but it was never allowed to 
advance to full House consideration. In March 2001, Senator Kerry and I 
both introduced a similar bill to accomplish this in the 107th 
Congress. Our legislation created a range of new measures the Secretary 
could employ with precision against specific money laundering threats.
    After the tragic events of September 11, the need for stronger, 
more effective measures became quite clear. As a result of the USA 
PATRIOT Act, which includes our legislation, the Treasury Secretary's 
new, more flexible anti-money laundering powers will enable law 
enforcement to tackle with much more effectiveness abuses of our 
financial system by terrorists and criminals.
    Under the USA PATRIOT Act, the Secretary can identify a region, a 
particular institution, and even a foreign jurisdiction as an area of 
primary money laundering concern and impose a series of special 
measures. The Secretary can prohibit certain transactions with certain 
countries or regions, or require the collection of certain 
information. This information could be enormously useful in tracking 
the financial dealings of terrorists, or in blocking the opening of 
accounts in the United States by banks and other financial institutions 
from such jurisdictions.
    To date, the Administration has not used the new law, to my 
knowledge, to declare any parts of the world, through which terrorists 
funneled their cash, as areas of primary money laundering concern. To 
be sure, the Administration has touted its success in seizing the U.S. 
assets of terrorist organizations, which we are told now amount to 
nearly $80 million. But it is clear that the more we learn about 
terrorists' financial networks, and the various countries through which 
their money passed, the more compelling it becomes for the new measures 
to be invoked. But according to the Treasury Department, the Secretary 
has not yet imposed a single special measure against these 
jurisdictions. Not one.
    In terms of adopting a special measure under the USA PATRIOT Act, 
it seems to me that many candidates exist. Reports have surfaced that 
countries such as Saudi Arabia, Sudan, Egypt, and others have served as 
conduits and sources for terrorist funds. And we must not forget that 
countries such as Lebanon, Russia, Israel, Guatemala, the Philippines, 
Hungary, and others have been named by the Financial Action Task Force 
as noncooperative jurisdictions in the fight against money laundering. 
The United Arab Emirates, which has been linked to al Qaeda funding, 
recently adopted anti-money laundering laws, but it remains to be seen 
whether it will be enforced effectively. Clearly, whether it is to 
fight terrorism, organized crime, or drug trafficking, there are many 
opportunities for the Treasury to invoke even the mildest measures 
under the USA PATRIOT Act.
    I am very sensitive to the need to respect U.S. diplomatic 
prerogatives. I also understand that the Bush Administration may be 
reluctant to threaten special sanctions against a country that is 
cooperating with our current efforts to disrupt the financing of al 
Qaeda and our investigation of the September 11 attacks. However, if 
countries that are linked to terrorist funding do not adopt permanent 
reforms now to strengthen their anti-money laundering regimes, and 
vigorously enforce these laws, then these countries will once again 
become the terrorists' portal into the global financial system. By 
failing to impose, or even to threaten to impose, special measures, I 
fear that the Bush Administration is missing an opportunity to seek 
permanent changes in these countries.
Regulations Under the USA PATRIOT Act
    While the special measure provisions became fully operative on 
October 26, 2001, if the U.S. Government is to fully utilize those 
provisions, the Treasury must undertake rulemaking in two areas. 
Section 311 of the USA PATRIOT Act requires the Treasury Secretary to 
issue two sets of regulations. The first set, defining ``beneficial 
ownership,'' is needed to implement recordkeeping requirements that are 
designed to help law enforcement ferret out who owns and controls the 
funds transferred to U.S. banks and other U.S. financial institutions 
from jurisdictions with weak financial controls.
    The other set of regulations is intended to define the term 
``correspondent account'' for nonbanks. Without this definition, any 
special measure ordered by the Treasury Secretary would have gaping 
holes. It would almost of necessity apply only to banks, and not other 
financial institutions, such as broker-dealers and money transmitters. 
These definitions are also needed to fully implement another important 
section of the USA PATRIOT Act, namely, the heightened due diligence 
requirements of Section 312.
    I understand that the Treasury has been engaged in informal 
discussions with industry about the regulations. Congress intended that 
Treasury would seek the input of industry in crafting these 
regulations. However, that process should be a public and a transparent 
process. In this way the Congress and the people can judge 
whether the regulations were crafted without inappropriate 
accommodations to industry.
    I understand that the Treasury Department has been given many 
additional responsibilities under the new legislation, and I appreciate 
the work that has been done to date. However, if the Bush 
Administration is serious about implementing these new anti-money 
laundering provisions, it should proceed as soon as possible to 
complete the regulatory work in an open and transparent process.
    Prior to September 11, the Bush Administration showed little 
interest in the enactment of new anti-money laundering laws. In fact, 
to the contrary, in August 2001 the Treasury and Justice Departments 
completed a National Money Laundering Strategy in August 2001 (which 
was actually release after September 11) that was grossly deficient. 
The Congress and the American people need assurances from the 
Administration that it is committed to fully implementing the new anti-
money laundering laws, and that its support for these laws will not 
fade after the current crisis has ended.
Internet Gambling
    The FBI has identified Internet gambling as a very serious money 
laundering threat. We must address this threat through legislation that 
clarifies that the Federal Wire Act already prohibits Internet gambling 
and adds a new prohibition against the use of credit cards and other 
payment methods to pay for wagers over the Internet. Congress must 
adopt a strong anti-Internet gambling bill this year.
Voluntary Efforts Are No Substitute for Compliance
    I have also become aware of what have been characterized as 
voluntary efforts regarding terrorist funding by some in the financial 
services industry to coordinate and share information with Federal law 
enforcement agencies. There is no question that financial institutions 
are the first line of defense against money launderers.
    However, while I believe that these voluntary arrangements are 
laudable, and contribute to the overall fight against money laundering, 
I welcome these efforts with a certain amount of caution. The Federal 
Government must ultimately be in charge of this effort, and there must 
be public accountability for the voluntary program, if we are to insure 
that is designed to further the Federal Government's public policy 
interests.
    Moreover, such voluntary efforts cannot serve as a substitute for 
compliance with the USA PATRIOT Act and other laws. The current 
arrangement cannot be a substitute for the law, which is why it is so 
vital for the success of this legislation that the Administration issue 
the USA PATRIOT Act regulations--and issue them now.
Looking to the Future
    All of us have contributed in meaningful ways to the enactment of 
the USA PATRIOT Act this past year, and all of us are hopeful that, by 
destroying terrorism's international financial networks, it will help 
the American people regain the confidence and sense of security that is 
the hallmark of our great Nation. Chairman Sarbanes, I commend your 
leadership in holding this hearing, and appreciate the opportunity to 
present my views on these very important matters. Thank you.
                               ----------
                    PREPARED STATEMENT OF CARL LEVIN
               A U.S. Senator from the State of Michigan
    Progress is being made in the war on terrorism, and one powerful 
weapon in our arsenal has been the worldwide effort by the United 
States and other countries to locate and dismantle terrorist financing. 
We are told that about $80 million in suspected terrorist funds have 
been frozen worldwide since September 11. In addition, terrorist profit 
centers have been disrupted, from wire transfer activities at U.S. 
banks to sales of honey to hawalas and other enterprises still under 
investigation. Eighty million dollars is a lot of money--many times 
over what it cost al Quaeda to bring down the World Trade Center--and 
taking this money out of terrorist hands and depriving them of new 
income is as important as destroying their training camps, taking apart 
their command structure, and eliminating their military weaponry.
    I would like to discuss two topics this morning. First, I would 
like to make some observations about the ongoing implementation of the 
new anti-money laundering law and, second, I would like to give you a 
preview of some of the latest anti-money laundering work that the 
Permanent Subcommittee on Investigations is doing.
    Last year, Congress enacted the toughest new anti-money laundering 
law in 15 years. My hat is off to this Committee for the key role it 
played. Congratulations are due, in particular, to Chairman Sarbanes 
who, not only committed the Committee to drafting a bill in record time 
and won unanimous bipartisan support for the Committee draft, but also, 
after the anthrax scare closed three Senate office buildings, hosted 
about 50 Congressional staffers in his Capitol Hill office in all night 
sessions until the bill was done. I also want to thank him, Senator 
Stabenow, Senator Gramm, and the other Committee Members for their 
careful consideration of the anti-money laundering work done by my 
Subcommittee, for including my staff every step of the way, and for 
including so much of the Levin-Grassley bill in the final legislation.
    This year, 2002, is key to the effectiveness of the new law. We all 
know that regulations can strengthen, weaken, or alter the intent of 
enacted legislation, and dozens of implementing regulations are due 
throughout the calendar year. So far, the Treasury Department has done 
a good job meeting the deadlines and writing proposed regulations on 
shell banks, foreign bank ownership, and suspicious activity reporting 
by securities firms. Particularly important has been the Department's 
willingness to meet head on the requirement in the law to extend anti-
money laundering obligations to all U.S. financial institutions, not 
just banks. It hasn't shied from that requirement and, equally 
important, the proposed regulations have been careful not to start down 
the road of making exceptions or special rules for various players in 
the financial community. Instead, everyone has been made subject to 
essentially the same anti-money laundering requirements. Also important 
was the signal sent by the Department's prompt and straightforward 
implementation of the December deadline for closing shell bank 
accounts.
    So at this stage I have had few complaints about how the Treasury 
Department has been implementing the new anti-money laundering law. 
That is not the same as saying I have no concerns. One issue that has 
come up repeatedly, for example, are provisions that appear to postpone 
compliance with the law's requirements. We must hold to the dates set 
in the law. We do not have the luxury of time. Osama bin Laden and al 
Quaeda have not quit; there is plenty of evidence that they still may 
strike; and, if they do, they will again try to use our financial 
institutions against us. That is why it is more important than ever 
that we seal the cracks in our anti-money laundering defenses as 
quickly and as completely as possible, and why we need to continue to 
push U.S. financial institutions to get their anti-money laundering 
programs up and running now. I urge the Committee to hold the 
Department's feet to the fire on the compliance deadlines.
    Some of the biggest implementation challenges are looming as, over 
the course of the next 6 months, the Department will issue regulatory 
guidance on the law's requirements for money laundering programs, 
enhanced due diligence reviews, customer verification, and 
identification of beneficial owners. How these complex issues are 
addressed will determine whether the new anti-money laundering law 
lives up to its potential. A good start has been made, and this 
oversight hearing sends the right message about how important these 
issues are and how many people are watching to make sure they are 
handled the right way.
    One of the biggest changes wrought by the new law has been to 
extend the anti-money laundering obligations to all U.S. financial 
institutions, not just banks. One of the key financial sectors affected 
by these new obligations is the securities industry, which is also the 
recent focus of my Subcommittee's anti-money laundering efforts.
    Last year, a GAO report I requested identified a number of gaps and 
inadequacies in the anti-money laundering efforts in the U.S. 
securities field. The study showed that thousands of U.S. securities 
firms do not have even basic anti-money laundering controls in place. 
It also indicated that, while some large securities firms have 
voluntarily established sophisticated anti-money laundering programs, 
those programs are the exception rather than the rule in the industry. 
The intent of the GAO report was to help the securities industry 
evaluate what needs to be done next to strengthen their anti-money 
laundering controls.
    This year, to get a better sense of the foreign financial 
institutions and offshore businesses that have U.S. securities 
accounts, the Subcommittee is surveying 22 large and small U.S. 
securities firms with a variety of clients and services.
    Foreign financial institutions carry higher money laundering risks 
because, by the nature of their business, they handle the money of 
their clients and transfer these third-party funds through their U.S. 
securities accounts. U.S. securities firms often have limited 
information about these third parties. Businesses in offshore 
jurisdictions that have corporate and bank secrecy laws and issue 
offshore licenses, and businesses in jurisdictions that have been 
designated as noncooperative with international anti-money laundering 
efforts, pose even greater risks. These offshore and noncooperative 
jurisdictions are identified and discussed in the State Department's 
key anti-money laundering publication, the International Narcotics 
Control Strategy Report, which expresses concern at the growing use of 
these jurisdictions for criminal purposes, from terrorism to narcotics 
trafficking to tax evasion. That is why the new anti-money laundering 
law requires U.S. financial institutions to conduct enhanced due 
diligence reviews of foreign financial institutions in offshore or 
noncooperative jurisdictions to ensure that the foreign financial 
institutions they do business with are legitimate enterprises and not 
conduits for terrorists or other criminals.
    All of the firms contacted by the Subcommittee immediately agreed 
to respond to the survey and have cooperated in this effort, although 
many that gave us initial survey responses have agreed to refine or 
revise certain aspects of the data they submitted to make the data more 
comparable and detailed. To date, 10 of the survey responses are 
entirely complete.
    This preliminary survey information indicates the existence of 
significant money laundering risks in the securities field that need to 
be addressed. The first indication of the extent of the problem came to 
us right after the survey went out. All but a few firms called back and 
indicated that they would be unable to provide an accurate count of 
their offshore clients, because their data systems did not identify 
offshore entities, despite the higher money laundering risks involved. 
The surveyed firms agreed to undertake an analysis of their client 
information and provide the best estimates they could to enable us to 
develop overall estimates of the U.S. securities accounts held by 
offshore entities. Over the last 2 months, firms provided us with the 
following good faith estimates. All 22 of the firms indicated that they 
have numerous offshore clients. Of the 10 firms with completed survey 
responses, none had less than 300, and one firm had more than 16,000 
offshore entities as clients. Altogether, those firms show a total of 
over 45,000 offshore entities as clients, consisting of over 38,000 
offshore corporations and trusts, 4,400 offshore banks, 2,160 offshore 
securities firms, and 670 offshore insurance companies. While the data 
reflects the fact that offshore entities may open accounts at more than 
one securities firm, the bottom line is that tens of thousands of 
offshore entities, which are highly vulnerable to money laundering, now 
have accounts at U.S. securities firms.
    The survey responses also give some estimates about how much money 
offshore clients are putting into their U.S. securities accounts. The 
data indicates that the 45,000 offshore entities at the 10 firms have, 
altogether, about $140 billion in assets in their U.S. securities 
accounts, with most of that, about $137 billion, coming from offshore 
corporations and trusts. The next biggest category is offshore banks 
with about $2 billion in their U.S. securities accounts. Offshore 
insurance companies have about $280 million, and offshore securities 
firms have about $235 million. Looking at the individual survey 
responses shows that the smallest amount of these assets at any one 
firm is about $90 million, while the most is $67 billion.
    The survey has identified only four foreign shell bank accounts at 
U.S. securities firms, all four of which are required to have been 
closed by the end of the year under the new law. Foreign shell banks 
are those banks that have no physical presence in any jurisdiction and 
which carry the highest money laundering risks in the banking world. 
Another category of interest is foreign banks in countries that have 
been designated by the Financial Action Task Force or FATF as 
noncooperative with international anti-money laundering efforts. The 
data shows that five firms have accounts for about 400 of these high-
risk foreign banks, with the number ranging from a low of about 50 to a 
high of about 140 at any one securities firm. These 400 foreign banks 
have about $375 million in assets in their U.S. securities accounts, 
with two-thirds of that total, about $255 million, at just two of the 
U.S. securities firms.
    Another category of interest is money service businesses outside of 
the United States, such as foreign money exchange houses that deal in 
foreign currencies, cash checks, and wire funds. This category 
includes, for example, the Dubai money houses that transmitted funds 
for the 19 al Quaeda terrorists. The preliminary survey information 
indicates that only three firms have money service business clients.
    The preliminary information collected by the Subcommittee 
demonstrates that the securities industry, like the banking industry, 
has clear money laundering risks that need to be addressed. These risks 
include tens of thousands of high-risk clients and hundreds of billions 
of dollars in high-risk funds. The good news is that, as a whole, these 
high-risk accounts represent only about 2 percent of all accounts. That 
means that they represent a small enough number of accounts that a 
focused anti-money laundering effort should be able to monitor their 
transactions, identify suspicious activity, and alert law enforcement 
in order to possible terrorists or other criminals attempting to use 
U.S. securities accounts to carry out their illegal activities.
    The Subcommittee data also indicates that the U.S. Treasury 
Department is on the right track in its decision to apply the same 
anti-money laundering rules to U.S. securities firms as apply to U.S. 
banks. I also applaud the Department's decision to apply the rules to 
U.S. insurance companies that are registered as broker-dealers and sell 
annuities. While many insurance products present low risks for money 
laundering, some products such as annuities sold to offshore shell 
corporations present very different risks that require appropriate 
controls.
    Which brings me to a final point--the need to focus our anti-money 
laundering efforts on the highest risks. It is important to realize 
that this principle is embedded in the new law, which is designed to 
focus scarce resources on the worst problems--such as shell banks, 
offshore jurisdictions, and noncooperative countries. With 
respect to the provisions that will be applied across the board to all 
U.S. financial institutions--the requirements for anti-money laundering 
programs and client verification--the law does not require a one-size-
fits-all approach. For example, it permits, and I hope the regulators 
will include in the regulations, a direction to all U.S. financial 
institutions to engage first in a money laundering analysis to identify 
their risk areas and then to design programs that focus on those risks.
    Congratulations again on holding this very important oversight 
hearing on this landmark legislation.
                  PREPARED STATEMENT OF JOHN F. KERRY
             A U.S. Senator from the State of Massachusetts
    Mr. Chairman, I would first like to thank you for the opportunity 
to testify on the implementation of the anti-money laundering 
provisions included in the USA PATRIOT Act that were enacted into law 
last year. I know that these anti-money laundering provisions would not 
have been included in the law without your hard work and dedication. I 
would also like to thank your staff along with the other Members of the 
Senate Banking Committee, Senator Daschle, Senator Levin, Senator 
Grassley, and Congressman LaFalce, for their hard work and assistance 
in developing and enacting this important law. However, I believe that 
there is still much work that remains to be done to appropriately 
implement the anti-money laundering provisions of the new law and to 
renew our efforts to work with our 
allies to stop the flow of tainted money into the United States.
    This important new law greatly expands the ability of the Federal 
Government to take actions to combat international money laundering. I 
look forward to working with Treasury Secretary O'Neill and others to 
ensure that the new law is implemented to prevent laundered money from 
slipping undetected into the U.S. financial system and, as a result, to 
increase the pressure on foreign money laundering and tax havens to 
bring their laws and practices into line with international anti-money 
laundering standards. I appreciate the efforts of the Treasury 
Department to implement the complicated provisions of this new law. As 
the regulatory process continues, I will specifically be interested in 
the final definition of both the beneficial owner of an account and the 
definition of correspondent banking. These definitions will be crucial 
to ensuring that the new anti-money laundering provisions are 
implemented fully. I plan to work closely with Chairman Sarbanes, 
Senator Levin, and Congressman LaFalce to ensure they are acceptable.
    The USA PATRIOT Act provides a clear warning to those who have 
assisted or unwittingly assisted those involved in the al Qaeda network 
or other terrorist organizations in laundering money that the United 
States will take whatever actions are necessary, including denying 
foreign banks and jurisdictions access to the United States economy, to 
stop terrorists and international criminal networks from laundering 
money into the United States through the international financial 
system.
    The new law includes legislation which I sponsored, that provides 
the tools the United States needs to crack down on international money 
laundering havens and protect the integrity of the U.S. financial 
system from the influx of tainted money. The United States has the 
largest and most accessible economic marketplace in the world. Foreign 
financial institutions and jurisdictions must have unfettered access to 
markets to effectively work within the international economic system. 
It will give the Treasury Secretary, in conjunction with our allies in 
the European Union and the Financial Action Task Force, the authority 
to leverage the power of our markets to force countries or financial 
institutions with lax money laundering laws or standards to reform 
them. If they refuse, the Treasury Secretary will have the authority to 
deny foreign financial institutions or jurisdictions access to the U.S. 
marketplace. This will help stop international criminals from 
laundering the proceeds of their crimes into the U.S. financial system 
or using the proceeds to commit terrorist acts.
    The USA PATRIOT Act also includes a number of important provisions 
that have begun to seal the cracks in existing law and provide new 
tools to law enforcement to stop money laundering. First, the law 
requires U.S. financial institutions to use appropriate caution and 
diligence when opening and managing accounts for foreign financial 
institutions. It prohibits foreign shell banks, who have no physical 
location in any country, from opening accounts in the United States and 
requires our financial institutions to take reasonable steps to ensure 
that foreign banks are not allowing shell banks to use their U.S. 
accounts to gain access to the U.S. financial 
system. It expands the list of money laundering crimes and assists our 
law enforcement efforts by making it easier to prosecute those crimes. 
It requires financial institutions to develop appropriate anti-money 
laundering programs. It prohibits the use of concentration accounts 
that allow foreign banks to transfer large amounts of cash into the 
United States without including appropriate information on the 
beneficial owner of the funds.
    The events of September 11 and other more recent events have also 
shown the need for additional efforts by the United States and its 
allies to limit the ability of international terrorists and others to 
use tax havens to hide the proceeds of their crimes.
    I remain very concerned about the Bush Administration's policy to 
take a unilateral approach to the issue of tax havens and to step away 
from the bilateral efforts of the European Union and the Organization 
of Economic Cooperation and Development (OECD) to place appropriate 
limits on tax havens. Tax havens assist terrorists and international 
criminal organizations looking to hide money derived from the sale of 
drugs, weapons, and other criminal enterprises. In many cases, the 
funds that criminals hide in countries who are considered ``tax 
havens'' have already been laundered in the international financial 
system. Contrary to what some claim, the OECD approach does not punish 
countries just for having low tax rates or seek a harmonization of tax 
policy. Instead, the OECD attempts to reduce the number of countries 
whose tax systems have a lack of transparency, a lack of effective 
exchange of information and those that have different tax rules for 
foreign customers than for its own citizens.
    The OECD has currently targeted 36 jurisdictions that it believes 
participate in unfair tax competition and undermine other nations' tax 
bases. I strongly believe that international terrorists and others 
should not be allowed to hide the proceeds of their illegal acts by 
simply claiming to be evading what they consider unfair taxes. I 
believe the Bush Administration approach will make it more difficult 
for the international community to track and freeze the assets 
international terrorists like Osama bin Laden and expand upon the 
recent progress in fighting financial crimes we have achieved.
    Working together, we have achieved a great deal to crack down on 
international money laundering havens and protect the integrity of the 
U.S. financial system from the influx of tainted money. I look forward 
to working with Chairman Sarbanes and others to insure that the new law 
is properly implemented to stop international criminal and terrorist 
networks from laundering the financial proceeds of their crimes and to 
stop the use of the international financial system to develop terrorist 
networks.
                               ----------
                  PREPARED STATEMENT OF KENNETH W. DAM
           Deputy Secretary, U.S. Department of the Treasury
                            January 29, 2002
    Chairman Sarbanes and the distinguished Members of the Senate 
Banking Committee, thank you for inviting me to testify about the 
Treasury Department's efforts to disrupt terrorist financing and, in 
particular, the steps that we are taking to implement the provisions of 
the International Money Laundering Abatement and Financial Anti-
Terrorist Financing Act of 2001. I have asked Under Secretary for 
Enforcement Jimmy Gurule to join me today.
    On September 24, 2001, President Bush stated, ``We will direct 
every resource at our command to win the war against terrorists, every 
means of diplomacy, every tool of intelligence, every instrument of law 
enforcement, every financial influence. We will starve the terrorists 
of funding.'' The Treasury Department is determined to help make good 
on this promise. I am here today to tell you about the progress we have 
made and some of the complexities we still face.
    Much of our progress is directly attributable to the Congress and 
this Committee. The swift passage of the USA PATRIOT Act and, in 
particular, Title III of that Act--the International Money Laundering 
Abatement and Anti-Terrorist Financing Act of 2001, have given us 
important new tools in the financial front of the war on terrorism. To 
highlight just two aspects of the Act:

 The Act requires financial institutions to terminate 
    correspondent accounts maintained for foreign shell banks and to 
    take reasonable steps to ensure that they do not indirectly provide 
    banking services to foreign shell banks. Treasury provided 
    immediate, interim guidance to financial institutions, suggesting 
    that they obtain certification from all foreign banks with 
    correspondent accounts that they were not shells and that the 
    foreign banks did not themselves maintain correspondent accounts 
    for shell banks.
 The Act requires all financial institutions to have an anti-
    money laundering program in place by April. Although many broker-
    dealers already had anti-money laundering programs in place, the 
    Act ensures that all will.

    This Committee played an important role in securing the passage of 
these and other provisions. On behalf of the Treasury Department--
including our 25,000 law enforcement officers--I thank you.
    I also wish to thank the many Federal agencies that have worked 
with Treasury. This is a team effort. We have worked closely with the 
State Department, the Defense Department, the Department of Justice, 
the Federal Bureau of Investigation, the intelligence community, and 
many other parts of the Federal Government. We coordinate daily at all 
levels and, I think, have done a good job of setting aside some of our 
historical rivalries. To cite just one of many examples of this 
coordination, the Administration recently created a new high-level 
strategies and priorities committee that I chair. This committee brings 
together senior officials from across the Government to chart our 
strategy for pursuing terrorist finances over the coming months and 
years.
Summary of Developments in Financial Aspects of
U.S. Anti-Terrorism Initiatives
    Our priority is to help prevent terrorist attacks by disrupting 
terrorist finances. As the President has said, we seek to ``starve the 
terrorists of funding.'' Our goal is to deprive terrorists of one of 
the raw ingredients in terrorism: Money for arms, explosives, plane 
tickets, and even the day-to-day sustenance of operatives. I will tell 
you candidly that where there is a conflict between preventing 
terrorist attacks and the prosecution of criminal cases against 
terrorists, preventing terrorist attacks comes first.
    The strategy for the financial front of the war on terrorism 
closely tracks our strategy in the rest of the war. We remain focused 
on finishing off al Qaeda. We are targeting not only al Qaeda 
operatives, but also their financial intermediaries and others that 
support them. Increasingly, we are also focussing on other terrorist 
groups of global reach. In addition, we are striving to ensure that 
fight on the financial front is not a unilateral effort or even a U.S.-
led effort, but, like the rest of the war, a multilateral effort led by 
nations around the world.
    We use several tactics on the financial front of the war on 
terrorism. Some of our tactics are public--like the public designation 
of terrorist organizations and the civil blocking of terrorist assets. 
Other tactics are private--for example, we work with foreign 
governments to enable them to designate and block terrorist assets on 
their own behalf. I would be pleased to tell you more about our private 
efforts in a closed session.
    One thing that is different about the financial front from the rest 
of the war is that it is perhaps harder to measure success in the 
financial effort. To address this, we measure success in many ways. For 
example, we track the total amount of terrorist assets blocked. Since 
September 11, the United States and other countries have frozen more 
than $80 million in terrorist-related assets. We expect the amount of 
blocked assets to continue to grow--although we also expect to release 
some of the money. For example, assets once controlled by the Taliban 
regime of Afghanistan will be returned to the legitimate government of 
Afghanistan.
    The amount of assets blocked underscores the importance of another 
measure--the amount of international cooperation in the financial front 
of the war. I cannot emphasize enough how vitally important 
international cooperation is. After all, we cannot bomb foreign bank 
accounts. We need the cooperation of foreign governments to investigate 
and block them. So far, we have received a remarkable degree of 
cooperation. Foreign governments have blocked more than $46 million--
over half of the total of $80 million. One hundred forty-seven 
countries and jurisdictions around the world have blocking orders in 
place. We work with these countries daily to get more information about 
their efforts and to ensure that the cooperation is as deep as it is 
broad. For example, we are providing technical assistance to a number 
of countries to help them develop the legal and enforcement 
infrastructure they need to find and freeze terrorist assets.
    We have also had success pursuing international cooperation through 
multilateral fora including the UN, the G-7, the G-20, the Financial 
Action Task Force (FATF), and the international financial institutions 
to combat terrorist financing on a global scale. A good example of 
Treasury leadership on this issue is in the role of the United States 
in the FATF on Money Laundering, a 31 member organization. In late 
October 2001, the United States hosted an Extraordinary FATF Plenary 
session, at which FATF members established eight Special 
Recommendations on Terrorist Financing. These recommendations quickly 
became the international standard on steps that countries can take to 
protect their financial systems from abuse by terrorist financiers. Our 
delegation is at a meeting in Hong Kong as I speak establishing a 
process by which all countries will engage in a self-assessment of 
compliance with these recommendations.
    Still another measure is the flow of funds disrupted. For example, 
when we shut down the al Barakaat hawala network, we seized $1.9 
million in assets. But we disrupted the flow of much more. Our analysts 
believe that al Barakaat's worldwide network channeled as much as $15 
to $20 million to al Qaeda a year. It is important, therefore, to keep 
an eye on the flow of funds--how much money moved through a pipeline 
that we froze--as well as how much money happened to be in the pipeline 
when we froze it.
    Finally, we do not ignore nonquantified measures of success. I 
would be willing to elaborate upon these measures in a closed session. 
I can tell you in open session, however, that we believe from our 
intelligence channels that al Qaeda and other terrorist organizations 
are suffering financially as a result of our actions. We also 
believe that potential donors are being more cautious about giving 
money to organizations where they fear that the money might wind up in 
the hands of terrorists.
    Having discussed some of our successes, I wish to spend a moment on 
some of the complexities we face. This Committee is intimately familiar 
with the challenges facing our anti-money laundering efforts. Stopping 
terrorist financing is perhaps more nuanced than money laundering 
because terrorist financing could be described as ``reverse money 
laundering.'' In money laundering, the proceeds of crime are laundered 
for legitimate use or for use in perpetrating more crimes. If you find 
evidence of the original crime, you are likely to be placed on the 
trail of some money laundering. In terrorist finance, it is often the 
other way around. Proceeds of legitimate economic activity are used for 
illicit purposes. The money can come from almost anywhere.
    A particular form of this problem is presented by the case of 
illicit charities. Illicit charities are organizations that exploit 
their charitable status to funnel money to terrorists. Such 
organizations are, in my view, particularly deplorable. But at the same 
time, it cannot be doubted that some of them do perform some charitable 
acts and that many donors believe that their donations are paying for 
charitable works. To solve this problem, we are developing a 
comprehensive, coordinated, interagency strategy to clean up illicit 
charities while still providing vehicles for legitimate charitable 
works.
    I would like to highlight a few additional steps that we have 
taken. First, we got the Foreign Terrorist Asset Tracking Center (FTAT) 
up and running under the direction of the Office of Foreign Assets 
Control (OFAC). FTAT was funded by Congress in the fiscal year 2001 
Appropriations Bill and was being organized and staffed when the 
attacks occurred. When fully operational, FTAT will serve as an 
analytical and strategic center for attacking the problem of terrorist 
financing. Since September, FTAT has served not only to provide 
analysis of particular targets and networks, but also as an information 
hub where intelligence and law enforcement agencies can share and 
analyze information for a common purpose. Thus far, the Department of 
Defense, the Department of Justice, and the intelligence community have 
made vital contributions to this interagency effort to hunt down the 
sources of terrorist financing. Though FTAT is still in its infancy, it 
is making a significant impact on this cooperative and concentrated 
interagency venture.
    Second, on October 25, 2001, Treasury created Operation Green Quest 
(Green Quest), a new multiagency financial enforcement initiative 
intended ``to augment 
existing counter-terrorist efforts by bringing the full scope of the 
Government's financial expertise to bear against systems, individuals, 
and organizations that serve as sources of terrorist funding.'' Green 
Quest is made up of investigators and analysts from the U.S. Customs 
Service, the IRS-Criminal Investigation Division, the Financial Crimes 
Enforcement Network (FinCEN), OFAC, the Secret Service, and the FBI 
with support from the Department of Justice. These agencies have 
brought their world-renowned financial expertise to bear on terrorist 
financing and have seen remarkable results in the 3 months FTAT has 
been in existence.
    Green Quest has complemented the work of FTAT in identifying 
terrorist networks at home and abroad, and it has served as an 
investigative arm in aid of blocking actions. Green Quest's work, in 
cooperation with the Department of Justice, has led to 11 arrests, 3 
indictments, the seizure of nearly $4 million, and bulk cash seizures 
of over $8.5 million. Green Quest agents, along with the FBI and other 
Government agencies, have traveled abroad to follow leads, exploit 
documents recovered, and to provide assistance to foreign governments. 
The work of these financial experts is just starting but they have 
already opened well over two hundred terrorist financing investigations 
and are following new leads on a daily basis.
    Third, we have worked closely with the FBI-led investigation into 
the September 11 attacks. Immediately after the attacks, Treasury 
deployed personnel to the FBI's Financial Review Group, bringing 
additional financial investigative capabilities, contacts in the 
financial sector, and expertise to the FBI's group. Treasury has also 
deployed people to serve on various Joint Terrorism Task Forces 
(JTTF's) headed by the FBI. Since then, those committed to this mission 
have made real significant contributions, in the Group and in the 
field, to tracking the perpetrators of those heinous acts.
    The November 7, 2001, designation of al Barakaat as a terrorist-
related financial entity is an example of how Treasury efforts, along 
with the fine work of our interagency partners, can lead to results in 
this war on terrorist financing. Al Barakaat is a Somali-based 
hawaladar \1\ operation, with locations in the United States and in 40 
countries, that was used to finance and support terrorists around the 
world.\2\ FTAT analysis identified al Barakaat as a major financial 
operation that supported terrorist organizations and was providing 
material, financial, and logistical support to Osama bin Laden, al 
Qaeda, and other terrorist groups.
---------------------------------------------------------------------------
    \1\ Hawala is a type of alternative remittance system that is 
common in many parts of the world, including the Middle East and Far 
East. A hawaladar is an entity that engages in hawala transactions.
    \2\ Some individuals may have used al Barakaat as a legitimate 
means to transfer value 
between individuals in different countries without passing through the 
formal international banking system.
---------------------------------------------------------------------------
    Treasury coordinated efforts to block assets and to assist other 
law enforcement agencies to take actions against al Barakaat. On 
November 7, 2001, Federal agents executed search warrants in three 
cities across the country (Boston, Columbus, and Alexandria) and shut 
down eight al Barakaat offices across the United States, including 
locations in the following cities:

   Boston, Massachusetts;
   Columbus, Ohio;
   Alexandria, Virginia;
   Seattle, Washington; and
   Minneapolis, Minnesota.

    As part of that action, OFAC was able to freeze $1,900,000 
domestically in al Barakaat-related funds on November 7, 2001. Treasury 
also worked closely with key officials in the Middle East to facilitate 
blocking of al Barakaat's assets at its financial center of operations. 
Disruptions to al Barakaat's worldwide cashflows could be as high as 
$300 to $400 million per year, according to our analysts. Of that, our 
experts and experts in other agencies estimate that $15 to $20 million 
per year would have gone to terrorist organizations. The al Barakaat 
investigation exemplifies the importance of the flow of funds 
disruption measure that we are attempting to use more broadly. In 
addition, the combined work of FTAT and law enforcement led to 
additional leads in the al Barakaat investigation.
    This is an example of what our combined efforts can do when we join 
our resources and our expertise to fight the scourge of terrorist 
financing. Although we have made much progress, we still have much work 
to do.
    First, we must encourage more independent identification of 
terrorist groups by other countries. The EU designation at the end of 
December is a step in the right direction, but we need more countries 
to initiate more designations.
    Second, we have to ensure that more countries issue blocking orders 
for more of the entities identified, by the United States, other 
countries, and the international community, as being part of terrorist 
financial networks. We must also do a better job of following up with 
the countries to make sure that their orders, once issued, are fully 
implemented and obeyed.
    Third, we must do a better job of exploiting the ``industrial 
quantity'' of documents captured in Afghanistan and increasingly 
elsewhere. Hard drives and e-mails must be exploited as well. This is a 
massive task. To do it, we must bring documents together from all over 
the world, translate them, cross-reference them, and thereby build a 
complete picture. No one document can tell us that much.
    Fourth, we must redouble efforts by United States and allied 
intelligence services against such financial intermediaries as hawala 
dealers and other informal systems.
    To conclude this portion of my testimony, I believe that we have 
had several important successes on the financial front of the war on 
terrorism. We have marshaled the considerable expertise of our Treasury 
law enforcement personnel to execute the President's mission to detect, 
disrupt, and dismantle the financial infrastructure of terrorist 
financing. We have worked closely with other agencies of the Federal 
Government and, I believe, have obtained an unprecedented level of 
cooperation and coordination. We have worked extensively with foreign 
governments to ensure that 
terrorist money has nowhere to hide.
    Some have said that the financial war on terrorism is an impossible 
task. After all, money is fungible and illegal money tends to flow to 
the most hospitable country. I disagree. That the task is difficult 
does not mean that it is impossible. This is an unconventional war 
where there are no boundaries, where civilians are the targets, where 
people (or so-called ``martyrs'') are the weapons, and where electronic 
money transfers and messaging are the fuel and the logistics train. 
Among other things, identifying the flow of money helps us find the 
footprint of sleeper cells, disable them, and perhaps prevent the next 
attack.
Implementation of the International Money Laundering Abatement and
Anti-Terrorist Financing Act of 2001
    The Treasury Department is committed to the aggressive and thorough 
implementation of the International Money Laundering Abatement and 
Anti-Terrorist Financing Act of 2001. In the aftermath of September 11, 
efforts to enhance the Federal Government's ability to combat 
international money laundering, which had already begun before 
September 11, were given a whole new level of priority by Congress and 
the Administration. The Government and the financial community were 
forced to rethink assumptions, to reevaluate risks of money laundering 
and abuse in 
connection with terrorist financing, and, ultimately, to take the steps 
necessary to protect the country's financial system. The results of 
this reassessment were dramatic. Through the Act, which is also known 
as Title III of the USA PATRIOT Act, Congress took up the challenge of 
eliminating vulnerabilities within our anti-money laundering regime. 
Now, we at Treasury will continue this initiative through implementing 
regulations.
    The Act is ambitious not only in scope, but also in its aggressive 
implementation schedule. The inclusion of numerous key provisions 
demonstrates remarkable resolve by Congress following the September 
attacks. Perhaps the most striking 
aspect of the Act is that in one legislative package, Congress 
addressed many deficiencies identified in our counter-money laundering 
regime. Treasury must address a wide array of challenging issues and 
promulgate regulations with far-reaching consequences--all on an 
accelerated schedule.
Treasury's Implementation Plan
    Our plan for implementation relies heavily on tapping the existing 
resources and expertise found in the Government to develop creative 
solutions to complex issues. Once the Act became law, we formed 
interagency working groups to handle each of the statutory provisions 
requiring implementation or reports. After identifying the appropriate 
Treasury personnel to chair these working groups, we solicited 
interagency participation. This system offers two distinct advantages: 
(1) it brings the collective knowledge and expertise of the various 
Governmental agencies and departments together; and (2) it facilitates 
the consultation requirements found in many provisions of the Act. I am 
pleased to say that the results thus far have been remarkable. Other 
agencies and departments stepped forward immediately, committing 
personnel and resources. For example, less than 1 month after the Act 
was signed by the President, Treasury issued interim guidance on two 
key provisions that were set to take effect on December 26, 2001. When 
Treasury requested consultation, the other agencies and departments 
responded quickly, assisting with our analysis of the issues and the 
completion of the guidance in time for the affected financial 
institutions to use it. And the cooperation continues. Working groups 
and subgroups meet almost daily. Drafts are being circulated and 
comments are received when requested. We are grateful for the 
assistance.
    Another encouraging result of this process has been the response of 
the private sector and industry groups. With respect to several key 
provisions, we have received not only positive comments about the 
legislation, but also helpful insight into implementation issues. 
Others have contributed by simply taking the time to educate us on 
their particular industry and existing practices and procedures. 
Regulations cannot be conceived and drafted in a vacuum. Creative and 
constructive suggestions from those who will be affected by the 
regulations allow us to identify issues early and then find solutions 
early.
    As I have noted, our implementation plan has met with some early 
success. Since October of last year, we have issued interim guidance 
and regulations covering four statutory provisions. The two provisions 
that took effect in December were the prohibition against certain U.S. 
financial institutions maintaining correspondent accounts for foreign 
shell banks or indirectly providing services to them (Section 313) and 
the requirement that U.S. financial institutions obtain ownership and 
registered agent information from foreign banks for which they maintain 
correspondent accounts (Section 319(b)). On November 20, less than 1 
month after the passage of the Act, Treasury issued interim guidance 
that explained the provisions, identified their scope, and provided 
financial institutions with a certification that could be utilized to 
comply with the provisions. Treasury subsequently issued a formal 
proposed rule in December that codified the Interim Guidance as a 
regulatory standard. On a separate front, 4 months ahead of the 
statutory deadline, Treasury issued in December a regulation 
implementing Section 365 of the Act, which effectively gives FinCEN 
access to reports filed by nonfinancial trades or businesses when they 
receive $10,000 or more in coins or currency. Finally, as required by 
Section 356 of the Act, Treasury issued in December a proposed rule 
that would require securities brokers and dealers to file suspicious 
activity reports. In support of FinCEN's increased responsibilities 
under the Act, the President's fiscal year 2003 budget calls for a $3.3 
million increase in FinCEN's budget to help FinCEN expand suspicious 
activity reporting to a number of new industries and maintain the 
Suspicious Activity Reporting Hotline, begun this fall, to expedite the 
investigation of suspicious financial activities.
    We have many additional regulations to promulgate and reports to 
file with Congress. We are determined to promulgate these regulations 
and prepare the reports expeditiously. We are always cognizant of the 
urgency of our task. At the same time, we are also working closely with 
other agencies, the private sector, and, of course, the Congress to 
ensure that we do our job not just fast, but well.
Treasury's Implementation Principles
    As we implement the Act, we are guided not only by the express 
statutory 
language, but also by certain core principles that reflect our vision 
of what this legislation should accomplish and the manner in which it 
should be implemented. This legislation addresses broad issues and 
relies heavily on implementing regulations to define the scope of the 
provisions. Through the regulatory process, we will take the general 
and make it specific, exercising our discretion where appropriate. In 
this role, it is essential that we remain true to our core principles, 
which are as follows:
Prevent Regulatory Arbitrage
    The Act takes aim at those areas of our financial and regulatory 
system that present opportunities for exploitation. Treasury embraces 
this goal, and, through the regulatory process, will adhere to the 
principle that people should not be able to shift from one type of 
financial institution to another in order to avoid a regulatory scheme 
or anti-money laundering controls. The test is a very functional one, 
namely, can a similar financial transaction be accomplished through 
another financial institution with less regulation. The justification 
for this principle is two-fold: First, our financial system is only as 
secure as its most vulnerable point; and second, a regulatory scheme 
must not create a competitive advantage for one type of financial 
institution over another when they perform the same or similar 
functions.
    Our proposed regulation for Section 319(b) illustrates the point. 
Section 319(b) provides the Secretary of the Treasury and the Attorney 
General with administrative subpoena authority to compel the production 
of documents from foreign banks with correspondent accounts in the 
United States. The Section also requires ``covered'' U.S. financial 
institutions that maintain a correspondent account on behalf of a 
foreign bank to maintain records identifying the owners of the foreign 
bank as well as its registered agent. But Section 319(b) does not 
define ``financial institution'' for purposes of the Section. Based on 
the notion that similar activity should be regulated similarly, instead 
of limiting the application to depository institutions--such as banks, 
thrifts, credit unions--Treasury proposed to extend the rule to 
securities brokers and dealers who also maintain correspondent accounts 
for foreign banks. In this way, the rule does not create the 
opportunity to shift from a bank to a securities broker or dealer in 
order to avoid regulation.
    The provision of the Act requiring Treasury to issue a rule 
requiring securities brokers and dealers to file suspicious activity 
reports embodies this same principle. Banks and other depository 
institutions must file suspicious activity reports because such reports 
are important to the fight against money laundering. Because the 
potential for money laundering exists in the securities industry, a 
similar rule will soon apply. Section 356 of the Act also directs us to 
recommend whether and how to bring investment companies under the Bank 
Secrecy Act. For this as well we will analyze the functional activities 
of such entities, compare them with the activities of regulated 
entities, and identify the money laundering risks presented. With this 
information, Treasury will be able to proffer methods for applying the 
BSA to such entities.
Honor a Central Purpose of the Act: To Enhance Coordination and
Information Flow
    An overarching goal of this legislation, and an important lesson we 
are learning as we continue our work to disrupt the financial 
underpinnings of terrorism, is that appropriate information must be 
made available to enable law enforcement, the 
intelligence community, and the regulators to protect our financial 
system. The 
financial institutions themselves have a critical role in sharing and 
reporting information. The Act facilitates information sharing on a 
number of levels: (1) among law enforcement and financial institutions; 
(2) among regulators, law enforcement, and the intelligence community; 
and (3) among financial institutions themselves. We will fulfill this 
goal of enhancing the ability to use and share information to combat 
terrorism and money laundering.
    Treasury, through FinCEN, is well positioned to continue to expand 
its role as the lynchpin for information sharing and coordination 
between the Government and the financial sector. Indeed, Section 361 of 
the Act, among other things, requires FinCEN to establish a high-speed 
network for access to its extensive BSA data and information. 
Similarly, Section 362 requires Treasury to establish a highly secure 
network through which financial institutions can make Bank Secrecy Act 
filings and receive alerts regarding suspicious activities or persons 
requiring immediate attention. Treasury is charged with establishing a 
highly secure network through which financial institutions can make 
Bank Secrecy Act filings and receive alerts regarding suspicious 
activities or persons requiring immediate attention. I am pleased to 
report that FinCEN is on schedule to have a working prototype for 
initial testing by mid-April.
    Additionally, Section 314 of the Act contemplates an expanded role 
for Treasury in the sharing of information regarding terrorism and 
money laundering not only among law enforcement and financial 
institutions, but also among financial institutions themselves. 
Treasury is completing work on a regulation that will be issued by the 
February deadline that, in part, first sets up the procedures by which 
financial institutions may share information among themselves regarding 
suspected terrorist financing, including money laundering, after 
providing notice to Treasury.
Respect Important Privacy Rights
    The significant anti-money laundering provisions of the Act also 
serve to highlight the tension between the need to share information 
and the legitimate need for 
financial privacy. We acknowledge, as we must, that now more than ever 
law enforcement and the intelligence community must have the ability to 
obtain and share 
financial information. However, that need must always be balanced 
against our fundamental notions of privacy. Striking that balance is 
the challenge for Treasury as we implement this legislation.
Require Only the Degree of Reporting That Results in Action by
the Government
    The potential new reporting obligations created by the Act mean 
that we must be even more vigilant in ensuring that the information 
reported is useful and, in fact, will be used effectively by the 
Government. One consequence of an aggressive 
regulatory scheme is increased reporting obligations. But additional 
reporting requirements in and of themselves cannot serve as proxies for 
an effective anti-money laundering regime. If the information is not 
going to be used, it should not be requested. This principle guided our 
approach to implementing Section 365. That Section requires that 
nonfinancial trades or business file a report when they receive over 
$10,000 in coins or currency--a requirement that is virtually identical 
to the requirement placed on the very same businesses to file a report 
with the IRS under Section 6050I of the Internal Revenue Code. Although 
the purpose of Section 365 was unquestionably to provide law 
enforcement and regulatory authorities with access to the same 
information currently received by the IRS--information that could not 
be easily shared because of the IRS confidentiality statute--as 
written, Section 365 seemed to impose a new reporting requirement. 
Thus, we crafted a rule that permits businesses to file a single cash 
reporting form that will go to both FinCEN and the IRS, thus satisfying 
both reporting requirements with a single report.
Protect Our Financial System
    The Bank Secrecy Act exists to protect our financial system. The 
Act provides Treasury with additional authority to systematically 
eliminate known risks to the financial system, as well as to act in 
response to a specific threat that may arise. Proven high-risk 
accounts, such as correspondent accounts maintained on behalf of 
foreign shell banks, will no longer be permitted access to our system. 
In Section 311, you have also given us a powerful weapon with which we 
can apply graduated, proportionate measures when specific money 
laundering risks involving foreign jurisdictions and individuals arise. 
This new authority makes it clear that the Secretary, in consultation 
with other agencies, can impose an array of special measures that are 
tailored to the particular risk presented. Treasury is conducting 
active training and outreach to educate law enforcement agencies about 
this new tool.
Treasury's Implementation Priorities
    Within the framework of the principles I have outlined above, the 
first priority for Treasury is to take all reasonable steps to meet the 
deadlines imposed by the Act. We have devoted considerable resources to 
this task, redirecting our policy 
objectives to accommodate this effort. I will not sit here today and 
assure this Committee that, without fail, we will meet each deadline. 
The issues presented are complex and, as we proceed, new ones continue 
to arise. I can assure you, however, that we are working and will 
continue to work diligently on implementation, while taking the time 
that may be necessary to resolve difficult legal and policy questions.
    Beyond the deadlines imposed in the Act, we have identified various 
provisions which, for a variety of reasons, we seek to pursue at the 
outset. These are provisions that, in our view, should be addressed on 
an expedited basis if possible. Finally, certain provisions with no 
immediate deadlines will inevitably have to be implemented after the 
more immediate priorities.
The First Tranche--To be Implemented by April
     Over the next 3 months, we are striving to implement statutory 
provisions addressing: (1) information sharing among financial 
institutions, law enforcement and regulatory authorities (Section 314); 
(2) enhanced due diligence provisions applicable to financial 
institutions that maintain either private bank accounts or 
correspondent accounts for non-U.S. persons (Section 312); (3) methods 
for identifying and for confirming the identity of foreign nationals 
(Section 326); (4) the minimum requirements for anti-money laundering 
compliance programs for financial institutions; (5) the role of the IRS 
in the administration of the Bank Secrecy Act (Section 357); and (6) 
methods for improving compliance with the obligation to report foreign 
bank 
accounts (Section 361). Additionally, we will be issuing final 
regulations covering the foreign shell bank correspondent account 
prohibition (Section 313), the recordkeeping provision under Section 
319(b), and the cash reporting requirements (Section 365).
The Second Tranche--To Be Implemented as Expeditiously as Possible
    Treasury is moving forward now to implement the following 
provisions addressing: (1) the authority of the Secretary, in 
consultation with other agencies, to designate primary money laundering 
concerns and impose special measures against them (Section 311); (2) 
concentration accounts (Section 325); (3) account opening procedures 
(Section 326); (4) suspicious activity reporting for futures commission 
merchants, commodity trading advisors, and commodity pool operators 
(Section 356); and (5) the efficient use of exemptions for currency 
transaction reports (Section 366). We intend to issue regulations 
further defining terms contained in Section 311 at the same time we 
issue regulations implementing the due diligence provisions 
of Section 312. Also, Treasury and the regulators are aggressively 
moving forward to draft regulations setting forth customer 
identification procedures for financial institutions.
  Immediate Results
    Although we have much to do to fully implement the provisions of 
the Act, I wish to emphasize that the Act has helped us generate 
immediate results in the financial front of the war on terrorism. I 
alluded to two of those results at the beginning of my testimony.
  Information Sharing
    The amendments to the Bank Secrecy Act clarify the authority of the 
Secretary to share BSA information with the Intelligence Community for 
intelligence or counterintelligence activities related to domestic or 
international terrorism, regardless of whether the BSA information is 
related to law enforcement. The amendments to the Right to Financial 
Privacy Act (RFPA) further enhance the ability of Government to obtain 
and share relevant financial records with another agency or department, 
such as FinCEN and OFAC, involved in intelligence or 
counterintelligence activities related to international terrorism 
without notifying the targets. The amendment to the Fair Credit 
Reporting Act facilitates Government access to information contained in 
suspected terrorists' credit reports when the inquiry relates to 
international terrorism. This amendment allows those investigating 
suspected terrorists prompt access to credit histories that may reveal 
key information about the terrorists' plan or source of funding--
without notifying the targets.
    The Act also allows for greater information sharing with the 
private sector and self-regulatory organizations. Under the Act, for 
example, financial institutions that submit voluntary disclosures of 
information relating to terrorism and money laundering are immunized 
from liability, and Bank Secrecy Act reports can now be made available 
to securities and commodities self-regulatory organizations.
  IEEPA Amendments That Have Helped in Our Freezing Efforts
    This Committee was also largely responsible for amendments to the 
International Emergency Economic Powers Act (IEEPA) that clarified the 
authority of the President and the Treasury Department to target and 
block terrorist assets successfully and efficiently. On December 14, 
2001, OFAC utilized this authority to block suspect assets and records 
during the pendency of an investigation in the case of Global Relief 
Foundation and Benevolence International Foundation, two charities with 
locations in the United States.
    In addition, it has become easier to share and use intelligence 
information for freezing assets since the USA PATRIOT Act authorized 
courts to consider classified information under the Act without such 
information being disclosed to those challenging the blocking. The 
IEEPA amendment also grants the President the power to confiscate and 
vest in the United States Government property of countries or persons 
involved in hostilities or attacks against the United States. Though 
this authority has not been used, it is a powerful new tool available 
to the Executive and a deterrent effect to those who would support 
terror.
New Tools To Follow the Money and To Deter Money Laundering
    The Act also strengthens existing money laundering provisions and 
enhances the Treasury Department's ability to deal with this problem--
which, in many respects, is related to the issue of terrorist 
financing. For example, the Act now requires that trades or businesses 
receiving more than $10,000 in coins or currency file reports with 
FinCEN. In addition, as of January 1, 2002, certain money service 
businesses are required to register with FinCEN and are now required to 
file suspicious activity reports (SAR's) for money orders, travelers 
checks, and all transactions by money transmitters. While Congress gave 
Treasury the authority to impose some of these requirements before the 
Act was enacted, the Act extended the requirement to underground money 
transmitters. We have acted promptly to take full advantage of this new 
extension of authority. To date, it appears that registration is on 
track, and we will be able to begin the process of finding those 
underground money remitters who fail to register and charge them 
criminally if they have not registered in accordance with the law. In 
addition, the Act has given sharper teeth to these provisions by 
increasing civil and criminal penalties for Bank Secrecy Act 
violations.
    In all, the Act enables us to fulfill our mission of thwarting the 
criminal use of the financial system in a way that was unavailable or 
impossible before October 25, 2001.
Conclusion
    Mr. Chairman, we are engaged in a long-term battle against illegal 
abuse of the financial system. Whether it is terrorist financing or 
classic narcotics money laundering, we need to take every measure 
possible to combat the evil deeds that soil our financial system and 
pose a real threat to our security.
    Treasury will continue to use the powers and assets at its disposal 
to ferret out terrorist financiers and networks and choke the funding 
source for terrorists here at home and abroad. We will continue to work 
in close coordination with our sister departments and agencies and with 
our international partners to make our campaign against terrorist 
financing as effective as possible. Furthermore, we will continue to 
fight the battle against money laundering and the criminal misuse of 
the financial system. An essential part of this mission is the complete 
and efficient implementation of the provisions of the Act. We are ready 
for this sustained effort, and we appreciate your support.
    Mr. Chairman, this concludes my formal testimony. I would be 
pleased to answer any questions that you, or Members of the Committee, 
may have regarding the 
Administration's goals and policies regarding terrorist financing and 
the Act.
    Thank you.
                               ----------
                 PREPARED STATEMENT OF MICHAEL CHERTOFF
             Assistant Attorney General, Criminal Division
                       U.S. Department of Justice
                            January 29, 2002
    Chairman Sarbanes, Ranking Member Gramm, Members of the Committee, 
I am pleased and honored to appear before the Committee on Banking, 
Housing, and Urban Affairs to address our progress on the financial 
front of the ongoing war on terrorism. As Assistant Attorney General of 
the Criminal Division, I appreciate the opportunity to provide you with 
a summary of the Department of Justice's efforts in this endeavor, 
including our actions to implement the authorities set forth in Title 
III of the USA PATRIOT Act, also known as the International Money 
Laundering Abatement and Anti-Terrorist Financing Act of 2001.
    Initially, I would like to thank the Members of this Committee and 
Congress for their prompt response to the terrorist threat posed to the 
United States and all civilized countries. The USA PATRIOT Act provided 
those of us whose mission it is to protect the people of the United 
States with a wide array of new measures that will serve to enhance our 
ability to carry out this work. We welcome the new authority granted by 
the USA PATRIOT Act and are committed to using our new powers in a 
vigorous but responsible manner.
    As the Members of this Committee are well aware, our country faces 
an extraordinary and grave threat to its national security and the 
safety of our citizens. As a result of the terrorist acts of September 
11, 2001, in which over 3,000 innocent civilians were murdered by 
terrorists in New York City, in Pennsylvania and at the Pentagon, the 
United States is actively pursuing a worldwide anti-terrorism campaign 
today. Osama bin Laden has told the world that, ``the battle has moved 
inside America.'' Let there be no doubt: He and the forces of al Qaeda 
and other terrorist groups intend to continue their heinous acts of 
terrorism.
    Accordingly, preventing future terrorist attacks and bringing 
terrorists to justice is now the top priority of the Department of 
Justice. Law enforcement is currently engaged in a cooperative effort 
to identify, disrupt, and dismantle terrorist networks. Terrorism 
requires financing, and terrorists rely on the flow of funds across 
international borders. To conceal their identities and their unlawful 
purpose, terrorists exploit weaknesses in domestic and international 
financial systems. As this Committee well knows, therefore, curtailing 
terrorism requires a systemic approach to investigating the financial 
links to the terrorist organizations.
    As you may recall, on September 24, 2001, less than 2 weeks after 
the terrorist attacks, Attorney General John Ashcroft appeared before 
the House Judiciary Committee, and then on September 25, before the 
Senate Judiciary Committee to testify about the Administration's 
proposed new money laundering legislation. The Department of Justice 
encouraged the prompt adoption of the Administration's bill because it 
was necessary to update our money laundering laws. The proposed 
legislation included a large number of proposals that would provide law 
enforcement with new investigative tools to prosecute financial crimes 
related to terrorism and to enhance our ability to cooperate with our 
international counterparts in the tracing, freezing, and forfeiture of 
funds used to support terrorist organizations.
    Due in great part to important work done by this Committee, 
Congress responded expeditiously, enacting a major part of the 
Administration's proposal. On October 26, 2001, 1 month after I had the 
honor of last appearing before you, Congress passed the USA PATRIOT 
Act, which included as Title III, the International Money Laundering 
Abatement and Anti-Terrorist Financing Act of 2001. Title III of the 
USA PATRIOT Act has provided law enforcement with important new 
authority to investigate and prosecute the financing of crime, 
including terrorism.
    Among the many new provisions of the USA PATRIOT Act is the 
authority to seize terrorist assets, both foreign and domestic, if the 
property (or its owner) is 
involved in, related to, or used in support of acts of domestic or 
international terrorism. The new law also furthered our ability to 
fight transnational crime by making the smuggling of bulk cash across 
our border unlawful, adding terrorism and other offenses to the list of 
racketeering offenses, and providing prosecutors with the authority to 
seize money subject to forfeiture in a foreign bank account by 
authorizing the seizure of such a foreign bank's funds held in a U.S. 
correspondent account. Other important provisions expanded our ability 
to prosecute unlicenced money transmitters, provided authority for the 
service of administrative subpoenas on foreign banks concerning records 
for foreign transactions, and allowed law enforcement more immediate 
access to reports of currency transactions in excess of $10,000 by a 
trade or business. These provisions will prove to be powerful new 
weapons in our fight against international terrorism, as well as other 
kinds of international criminal activity.
The Financial Aspects of U.S. Anti-Terrorism Initiatives
    Mr. Chairman, I would like to offer this Committee a brief summary 
of the Department's work to date using our present money laundering 
laws against terrorism. While I am not, of course, at liberty to 
disclose information that might compromise or undermine ongoing 
criminal investigations, I am nevertheless able to provide a list of 
areas in which the Department of Justice, in conjunction with other 
departments and agencies, is making headway to expose terrorist 
financing and to promote robust cooperation with our international 
partners in the global war on terrorism.
    Through financial analysis, we continue our work to reconstruct the 
web of planning and finance that supported the September 11 terror 
attacks, and we continue to work to detect other threats to our 
national security, whether by persons affiliated with al Qaeda or by 
other state or nonstate actors who target the United States or its 
interests anywhere in the world. Moreover, we have found that, as in 
many other criminal cases, following the money trail not only leads to 
other coconspirators, but also provides strong proof of the conspiracy, 
its membership, and its criminal actions.
    Within days of September 11, the Department established the 
Financial Review Group (FRG), an interagency task force investigating 
terrorist financing and operating out of FBI Headquarters. The FRG 
consists of over 100 agents and analysts from the Federal law 
enforcement community, including the Department of the Treasury and 
analysts from the National Drug Intelligence Center. The FRG is under 
the leadership of the FBI's Financial Crimes Section, and Criminal 
Division attorneys from the Terrorism and Violent Crimes Section, the 
Asset Forfeiture and Money Laundering Section, and the Office of 
International Affairs, under my supervision. Over the past several 
months, the FRG has compiled and analyzed financial information 
gathered by Federal agents and U.S. Attorneys' Offices around the 
country in the course of the ongoing terrorism investigation. By 
collecting this information in one central location, we have created a 
central depository for relevant evidence--bank records, travel records, 
credit card, and retail receipts--for financial and forensic analysis. 
This evidence can then be interpreted and integrated with the fuller 
body of terrorist evidence collected by law enforcement and others. The 
work of the FRG is, of course, international in scope as we continue to 
work with our counterterrorism partners in other countries to follow 
the money trail. I fully expect the FRG will play a continuing critical 
role in all terrorist financing investigations.
    At the same time we established the FRG, the Department created a 
task force of prosecutors to work with the FRG and other law 
enforcement entities in developing terrorist financing cases, with an 
emphasis on nongovernmental organizations and charities that may be 
providing cover for terrorist activity. This Terrorist Financing Task 
Force, located in the Terrorism and Violent Crime Section of the 
Criminal Division, also includes representatives from the Criminal 
Division's Fraud, Asset Forfeiture and Money Laundering, and Appellate 
Sections, the Tax Division's Criminal Enforcement Sections, and 
Assistant U.S. Attorneys from Virginia, New York, and Colorado.
    The FRG has made substantial progress in tracing financing related 
to the September 11 attacks, as well as the financial underpinnings of 
Osama bin Laden's al Qaeda organization. Through financial information, 
we have established how the 
hijackers received their money, how and where they were trained to fly, 
where they lived and--perhaps most significantly--the names and 
whereabouts of persons with whom they worked and came into contact.
    The Terrorist Financing Task Force and the FRG are working directly 
with the Anti-Terrorism Task Forces, or ATTF's, which the Attorney 
General created in each judicial district. The ATTF's are comprised of 
Federal prosecutors from the U.S. Attorney's Office, members of the 
Federal law enforcement agencies, as well as the primary State and 
local law enforcement officials in each district. They coordinate 
closely with many of the existing FBI Joint Terrorism Task Forces 
(JTTF's). The ATTF's form a national network, which is the foundation 
of our effort to coordinate the collection, analysis, and dissemination 
of information and to develop the investigative and prosecutorial anti-
terrorism strategy for the country.
    The efforts of the FRG, the Terrorist Financing Task Force and the 
ATTF's, along with the work of the Treasury Department, have resulted 
in targeted law enforcement actions that are at the heart of the 
Administration's assault on terrorism. On November 7, 2001, the 
Attorney General announced that a nationwide enforcement action against 
the al Barakaat network, including coordinated arrests and the 
execution of search warrants in Massachusetts, Virginia, and Ohio. 
These actions were coordinated with Treasury's execution of blocking 
actions pursuant to the Executive Order 13224 against al Barakaat-
related entities in Georgia, in Minnesota, and in Washington State. 
More recently, on December 4, 2001, the President, along with the 
Attorney General and the Secretary of the Treasury, announced the 
designation and blocking action against the Texas-based charity known 
as the Holy Land Foundation for Relief and Development, alleged to be a 
North American ``front'' for the terrorist organization Hamas. These 
actions demonstrate that our fight against 
terrorist financing is a broad-based effort extending well beyond the 
al Qaeda network.
    In addition to the coordinated shutdown of al Barakaat's operation 
on November 7, the United States Attorney for the District of 
Massachusetts is prosecuting the principals of al Barakaat's Boston 
branch for operating an unlicenced money transmitting business. Between 
January and September 2001, while operating without a license under 
Massachusetts law, Barakaat North America knowingly caused the transfer 
of over $3,000,000 to banks in the United Arab Emirates. On November 
14, 2001, a Federal grand jury in Boston returned an indictment 
charging Liban Hussein, the President of al Barakaat, and his brother, 
Mohamed Hussein, with a violation of 18 U.S.C. Sec. 1960 (prohibition 
of illegal money transmitting businesses). Mohamed Hussein has been 
detained pending trial, and we are seeking to extradite Liban Hussein 
through a request made to Canada.
    There is another aspect of our terrorist financing efforts that is 
particularly promising. We are using computers to analyze information 
obtained in the course of criminal investigations, to uncover patterns 
of behavior that, before the advent of such efficient technology, would 
have eluded us. Through what has come to be called ``data mining'' and 
predictive technology, we seek to identify other potential terrorists 
and terrorism financing networks. In our search for terrorists and 
terrorist cells, we are employing technology that was previously 
utilized primarily by the business community.
    We have reason to believe that terrorists have long utilized 
identity theft and 
Social Security number fraud to enable them to obtain employment and 
access to secure locations, such as airports. In addition, they have 
used these and similar means to obtain driver's licenses, hazardous 
material licenses, and bank and credit accounts through which terrorism 
financing dollars are transferred. The Utah ATTF, under the leadership 
of U.S. Attorney Paul Warner, recently undertook a computerized data 
verification operation that uncovered fraud committed by some 60 
persons employed in sensitive locations throughout the Salt Lake City 
International Airport. These efforts are part the Attorney General's 
stated goal of aggressively using existing law enforcement tools and 
Government-maintained data to 
bolster our national security.
    As you know, in addition to United States v. Liban Hussein, et al., 
in Boston, a number of other criminal prosecutions related to terrorism 
are underway. For example, last month, a Federal grand jury in 
Alexandria, Virginia, returned an indictment charging Zacarias 
Moussaoui of France with six criminal conspiracy charges, each of which 
carries a maximum penalty of death. As the indictment alleges, 
Moussaoui is linked to the al Qaeda organization in part through 
financial connections. And, earlier this month, a Federal grand jury in 
Boston indicted another al Qaeda-trained operative for his attempt to 
destroy an American Airlines jet in December over the Atlantic, in part 
for a new offense created by the USA PATRIOT Act (18 U.S.C. 1993(a) 
(attempted destruction of mass transportation vehicle)). We will bring 
all available financial evidence and analytic techniques to bear in 
these prosecutions, as well.
    And the Department of Justice is also using the civil forfeiture 
laws to combat the financing of terrorism. While few details are 
publicly available at this point in time, bank accounts used by, or 
related to, the September 11 terrorists have been seized by the United 
States Attorneys in New Jersey and the Southern District of New York.
    We continue to work with other Government departments and agencies, 
including the Department of the Treasury's ``Operation Green Quest,'' 
in connection with the investigation and freezing of bank accounts and 
assets related to various organizations claiming to be charitable 
entities, but which have channeled funds to al Qaeda or other terrorist 
organizations.
    In conjunction with our international partners, we have made 
substantial progress in the global war against terrorism. Even before 
September 11, the Criminal Division was involved in efforts to attack 
terrorist financing on a global scale. Beginning in 1997, we played a 
key role in negotiations that led to the development of the 
International Convention for the Suppression of the Financing of 
Terrorism. This Convention obligates State parties to create criminal 
offenses specific to terrorist financing, and to extradite or submit 
for prosecution persons engaged in such offenses. On October 18, 2001, 
it was my privilege to testify before the Senate Foreign Relations 
Committee in support of this important international instrument and the 
implementing legislation. The Senate is to be commended for its swift 
action to grant advice and consent to ratification of that Convention. 
We look forward to working with the Congress to resolve any outstanding 
issues regarding the Convention's implementing legislation.
    The Department of Justice, together with the Departments of 
Treasury and State, continues to plays a leading role in the G-7 
Financial Action Task Force against Money Laundering (FATF). Prior to 
September 11, the FATF adopted its 40 Recommendations on Money 
Laundering, which have become the global standard for an effective 
anti-money laundering regime, and fostered an initiative on ``Non-
Cooperative Countries and Territories'' (NCCT), which endeavors to 
identify publicly the 
locations of the most prevalent money laundering activities in the 
world and the jurisdictions with the weakest anti-money laundering 
legal and regulatory framework. Following September 11, FATF convened 
an emergency session in Washington on terrorist financing and agreed to 
focus its efforts and expertise on the global effort to combat 
terrorist financing. Attorney General Ashcroft addressed the group of 
international anti-money laundering experts on October 30. At the 
conclusion of this extraordinary session, the FATF issued new Special 
Recommendations on Terrorist Financing, which, among other things, call 
upon all countries to criminalize the financing of terrorism and 
terrorist organizations, freeze and confiscate terrorist assets, report 
suspicious transactions linked to terrorism, and impose anti-money 
laundering controls on nontraditional banking systems, such as hawalas. 
The FATF set forth a timetable for action, which requires the 
development of additional guidance for financial institutions on the 
techniques and mechanisms used in the financing of terrorism.
    As you know, the Criminal Division also works extensively to 
provide assistance to countries that seek to improve their money 
laundering and asset forfeiture laws and enhance their enforcement 
programs. Prior to September 11, the Criminal Division designed and 
presented a training course to share with foreign governments and 
practitioners our knowledge and expertise in rooting out terrorist 
financing. Since September 11, we have placed increased emphasis on 
providing training and assistance to other countries to aid them in 
developing mechanisms to detect and to disrupt financial crime. At 
present, we have attorneys from the Asset Forfeiture and Money 
Laundering Section participating as members of interagency training and 
technical assistance assessment teams overseas. These teams will 
evaluate the various countries' mechanisms to identify money laundering 
and to freeze or seize terrorist assets. The assessment reports will be 
used to develop specific action plans for each of these countries as we 
provide training and technical assistance in the future.
    Similarly, we have already held several training sessions on the 
new USA PATRIOT Act provisions for our own prosecutors and law 
enforcement agents. These efforts include a conference for prosecutors 
in December at our National Advocacy Center in South Carolina and a 
joint national Justice/Treasury conference earlier this month in New 
York as part of the National Money Laundering Strategy. We have 
additional training sessions scheduled for February.
Implementation and Use of the New USA PATRIOT Act Authorities
    We are working in close coordination with other departments and 
agencies within the Executive branch to ensure the new authorities of 
the USA PATRIOT Act are used appropriately and implemented consistent 
with Congressional intent. The provisions of Title III of the USA 
PATRIOT Act provide important new authority to investigate financial 
crimes and attack those crimes on a system-wide basis, yet we remain 
ever mindful of our obligation to implement those authorities in a 
manner that protects the rights of U.S. citizens. Accordingly, and 
shortly after enactment of the USA PATRIOT Act, the Department issued 
interim guidance to the United States Attorneys regarding the 
provisions of the new legislation, including Title III.
    The Department is also working closely with other departments and 
agencies, particularly the Departments of State and Treasury and 
FinCEN, to implement the various sections of the USA PATRIOT Act. On a 
daily basis, there are interagency meetings involving the drafting of 
implementing regulations and other guidance to ensure that the new 
authorities are used effectively and in a manner consistent with 
Congressional intent.
    Some of the new provisions in the Act have already been deployed 
with successful results. For example, the Department of Justice relied 
on the new civil forfeiture authority provided in the USA PATRIOT Act 
to seize six bank accounts in New Jersey and three in Florida related 
to the September 11 terrorists. On November 8, 2001, the United States 
Attorney's Office for the District of New Jersey obtained nine seizure 
warrants for bank accounts used by the terrorists based on the newly 
enacted USA PATRIOT Act authority codified at 18 U.S.C. 981(a)(1)(G), 
which provides for the seizure of all assets owned, acquired, or used 
by any individual or or-
ganization engaged in domestic or international terrorism. Notice of 
the proposed forfeiture of these accounts has been made and, not 
surprisingly, no one has claimed an interest in the accounts.
    In addition, we recently used Section 319 of the USA PATRIOT Act to 
good effect. Section 319(a) provided us with a new tool to seize and 
forfeit criminal assets deposited into a foreign bank account through 
the foreign bank's correspondent bank account in the United States. 
This Section provides that assets which are subject to forfeiture in 
the United States, but which are deposited abroad in a foreign bank may 
be deemed to be held in the foreign bank's correspondent account in the 
United States. Thus, where a criminal deposits funds in a bank account 
in a foreign country and that bank maintains a correspondent account in 
the United States, the Government may seize and forfeit an equivalent 
sum of money in the correspondent account, irrespective of whether the 
money in the correspondent account is traceable to the proceeds 
deposited in an account held by the foreign bank.
    Although I was recused from the case because of a past 
representation, I can report that last month we recovered almost $1.7 
million in funds using Section 319, which will be used to compensate 
the victims of a fraud scheme. On January 18, 2001, a grand jury in the 
Southern District of Illinois indicted James R. Gibson for various 
offenses, including conspiracy to commit money laundering, mail and 
wire fraud. Gibson defrauded clients of millions of dollars by 
fraudulently structuring settlement agreements for numerous tort 
victims. Gibson and his wife, who was indicted later, fled to Belize, 
depositing some of the proceeds of their fraud scheme in two Belizean 
banks.
    Our efforts to recover the proceeds at first were unsuccessful. 
Although the government of Belize initially agreed to restrain the 
assets, a Belizean court ordered the freeze lifted, because local law 
prohibited legal assistance to the United States: The treaty providing 
for legal assistance between the two countries has not entered into 
force. The court also prohibited the government from assisting the 
United States law enforcement agencies further, including providing 
information regarding Gibson's money laundering activities. Efforts to 
break the impasse failed, and all the while the Gibsons systematically 
looted their accounts in Belize.
    Following the passage of the USA PATRIOT Act, and interagency 
consultation, the Criminal Division authorized the use of the Section 
319(a) authority. A seizure warrant was served on the correspondent 
bank, and the remaining funds were recovered. In our judgment, this 
case presents a compelling example of the need for, and appropriate use 
of, the new authority under Section 319(a).
    While this instance involved fraud, the facts of this case 
demonstrate the utility of this particular tool, particularly in the 
area of terrorist financing. Section 319(a) is, of course, an important 
enhancement to the law enforcement's ability to pursue assets overseas. 
It is also a very powerful tool and one that can affect our 
international relationships. Accordingly, the Criminal Division is 
developing a policy to provide prosecutorial oversight regarding the 
use of this new provision.
    Similarly, Section 319(b) of the Act provides new summons and 
subpoena authority with respect to foreign banks that have 
correspondent accounts in the United States. This section authorizes 
the Attorney General and the Secretary of the Treasury to issue 
subpoenas and summonses to foreign banks that maintain corre-
spondent accounts with banks in the United States in order to obtain 
records related to the U.S. correspondent accounts. We also anticipate 
delegating authority to use Section 319(b) to a level below the 
Attorney General, but because of the international sensitivities 
involved, we anticipate that the use of such authority will remain 
subject to departmental review and approval and interagency 
consultation. I am currently reviewing a proposal regarding the best 
way to implement this important new authority.
    Earlier I mentioned that the Department is working to implement the 
new USA PATRIOT authorities with a view to balancing law enforcement 
effectiveness and valid privacy interests. Section 358 of the USA 
PATRIOT Act exemplifies the Department's efforts in that regard. Among 
the important changes made by Section 358 is an amendment to the Right 
to Financial Privacy Act of 1978. As you know, the Right to Financial 
Privacy Act, 12 U.S.C. Sec. 3402, places restrictions on the 
Government's ability to obtain records from financial institutions. 
Although the USA PATRIOT Act did not change the general statutory 
authority or process for obtaining financial information through 
subpoenas or summons, as amended by Section 358, the principal 
provisions of the Right to Financial Privacy Act no longer apply to 
letter requests by a Government authority authorized to conduct 
investigations or intelligence analysis for purposes related to 
international terrorism. While we continue to conduct financial 
investigations using subpoenas and summonses subject to the full 
protections of the Right to Financial Privacy Act, the Department is 
currently studying how to implement this new USA PATRIOT Act authority.
    We are quite enthusiastic about the new investigative and 
prosecutorial tools set forth in the USA PATRIOT Act. As described in 
detail earlier, Section 319 is of critical importance. This provision 
enhances our ability to seize and forfeit criminal assets previously 
beyond our reach and it provides a mechanism to obtain foreign bank 
records through administrative subpoenas. We are presently implementing 
it in consultation with the Treasury Department and the State 
Department. We have plans for other provisions as well. Although 
presently subject to the very restrictive 1 year limit of 18 U.S.C. 
984(c), the new authority to forfeit terrorist assets, codified at 18 
U.S.C. 981(a)(1)(G), has been used effectively already, and we believe 
it will be of enormous importance to prosecutors. We are also confident 
that other USA PATRIOT Act tools, such as the enhanced ability to 
prosecute unlicenced money transmitters acting in violation of the 
amended 18 U.S.C. 1960, and to seek forfeiture based on conspiracies to 
evade the reporting requirements in Title 31, will be of substantial 
future use in the fight against terrorism.
Conclusion
    I would like to conclude by expressing the appreciation of the 
Department of Justice for the continuing support that this Committee 
has demonstrated for the Administration's anti-money laundering 
enforcement efforts.
    Mr. Chairman and Members of the Committee, thank you for this 
opportunity to appear before you today. I look forward to working with 
you as we continue the war against terrorist financing. I welcome any 
questions you may have at this time.
                               ----------
              PREPARED STATEMENT OF RICHARD SPILLENKOTHEN
        Director, Division of Banking Supervision and Regulation
            Board of Governors of the Federal Reserve System
                            January 29, 2002
Introduction
    Mr. Chairman, I am pleased to appear before the Committee on 
Banking, Housing, and Urban Affairs to discuss the Federal Reserve's 
work on implementing the USA PATRIOT Act and our efforts to help law 
enforcement track terrorist financing activities. The U.S. Government's 
response to the terrorist attacks on September 11 has necessitated 
unprecedented cooperation among Federal bank supervisors, the private 
sector, law enforcement agencies, and the international financial 
community. Over the past several months, the Federal Reserve has played 
an important role in many joint activities with bank supervisory and 
law enforcement authorities and the banking community here in the 
United States and abroad.
    As you requested, today I will describe many of the Federal 
Reserve's efforts--some of which you may appreciate can only be 
discussed in general terms in order to avoid compromising on-going law 
enforcement inquiries. At the outset, I will discuss our current robust 
anti-money laundering program and the ways that we are enhancing it to 
address terrorist financing. I will then describe how the Federal 
Reserve is actively involved in the implementation of the USA PATRIOT 
Act; how the Federal Reserve staff has been participating in the work 
of numerous international organizations; and how we have been providing 
support and technical assistance to law enforcement.
    As a preliminary matter, I would like to highlight an important 
fact about 
terrorist financing activities that is presenting a major challenge to 
the Federal 
Reserve, the other bank supervisory agencies, the banking community, 
and law enforcement. Terrorist financing activities are unlike 
traditional money laundering in a very significant respect. Money used 
to finance terrorism does not always originate from criminal sources. 
Rather, it may be money derived from legitimate sources that is then 
used to support crimes. Developing programs that will help identify 
such funds before they can be used for their horrific purposes is a 
daunting task, but we are trying to meet this responsibility along with 
our colleagues at the U.S. Departments of Treasury and Justice, the 
Securities and Exchange Commission, and other U.S. and international 
regulatory and law enforcement agencies.
    Fortunately, we have a strong foundation upon which to build. Many 
of the provisions of the USA PATRIOT Act are amendments to the Bank 
Secrecy Act (BSA), the core of U.S. anti-money laundering efforts. 
Therefore, I would like to first describe our existing BSA compliance 
examination program, then explain how we are revising it to address 
terrorist funding activities and the new provisions of the USA PATRIOT 
Act.
The Federal Reserve's Anti-Money Laundering Program
    The Federal Reserve has a longstanding commitment to combating 
illicit activity by or through the domestic and foreign banking 
organizations that it supervises. In 1993, in recognition of the 
importance of fighting financial crimes such as money laundering, the 
Board created the Special Investigations Section in its bank 
supervision division. This Section's functions continue to include 
overseeing the Reserve Banks' Bank Secrecy Act compliance examination 
programs, reviewing information developed during the course of 
examinations, and conducting specialized inquiries to determine whether 
any of our supervised banking organizations are involved in violations 
of law. Section staff notifies the appropriate law enforcement agency 
when apparent violations are detected, and provides support and 
technical assistance when requested. The Special Investigations Section 
also conducts financial investigations, provides expertise to the U.S. 
law enforcement community for investigation and training initiatives, 
and provides training to various foreign central banks and Government 
agencies.
    Throughout the Federal Reserve System, the Reserve Banks have 
designated senior experienced examiners as BSA /Anti-Money Laundering 
Contacts. During every Federal Reserve examination of a State member 
bank or U.S. branch or agency of a foreign bank, specially trained 
examiners review the institution's compliance with the BSA. Examiners 
also evaluate compliance with regulations that require banks to 
establish internal control and training procedures and to perform 
independent testing to assure and to monitor compliance with the BSA. 
Prior to commencing an examination of a State member bank or U.S. 
branch or agency of a foreign bank, examiners also make use of the BSA 
database of Currency Transaction Reports (CTR's) and Suspicious 
Activity Reports (SAR's) filed by the particular banking organization 
in order to check, among other things, whether the bank, branch, or 
agency has adequate systems in place to identify and report currency 
transactions and suspicious activities in accordance with Treasury's 
and the Board's rules.
    When supervised institutions fail to have the appropriate internal 
controls and procedures for compliance with the BSA, as well as for 
anti-money laundering purposes, the Board may issue formal enforcement 
actions and assess civil penalties to correct the systemic 
deficiencies. These actions are public and are available on the Board's 
website. In cases of significant BSA violations, relevant examination 
materials are referred to Treasury for action under its authority to 
assess fines for BSA violations. When potential money laundering (or 
other criminal activity) is identified through an examination, or self-
disclosure, or from information received from law enforcement, a 
targeted examination may be conducted, and all relevant information is 
referred to the appropriate law enforcement agency.
    The Federal Reserve's examiners are provided with comprehensive 
training on the latest trends in money laundering. However, even with 
appropriate training, it is still difficult for the most experienced 
examiners to detect sophisticated money laundering schemes during the 
course of an examination. In this regard, I must emphasize that our 
examiners are not criminal investigators. It is the examiner's primary 
responsibility to evaluate the effectiveness of the institution's own 
policies and procedures to identify and manage the risks associated 
with money laundering. As a Federal bank supervisory agency, we view 
the Federal Reserve's role as complementary to the law enforcement 
duties of criminal justice agencies.
Working with Treasury on the Implementation of the USA PATRIOT Act
    On November 26, 2001, the Board issued a supervisory letter to all 
domestic and foreign banking organizations under its supervision 
concerning the USA PATRIOT Act. The letter described the provisions of 
the Act, highlighted those that should receive banking organizations' 
and Federal Reserve supervisors' immediate attention, and described new 
rules that would be issued under the Act.
    As you are aware, the primary responsibility for these regulations 
rests with Treasury; however, at the request of Treasury staff and 
consistent with statutory requirements for consultation, the Federal 
Reserve has been actively assisting that agency. Treasury has 
established twenty working groups for the different regulatory projects 
required by the USA PATRIOT Act, and Federal Reserve staff is involved 
in fifteen of these groups.
    Along with Treasury, Federal Reserve staff started working on those 
provisions of the USA PATRIOT Act that have effective dates in the 
immediate future. Treasury's recently proposed rules on the prohibition 
of correspondent accounts with shell banks; the recordkeeping 
requirements on foreign bank ownership and designation of agents for 
service of legal process for correspondent accounts; and the broker-
dealer suspicious activity reporting requirements all reflect 
consultation with the Federal Reserve.
    Further, Treasury is expected to issue more proposed rules shortly, 
one setting forth minimum standards for financial institutions to 
verify the identification of their customers and another requiring 
financial institutions to conduct due diligence to identify suspicious 
activities involving correspondent and private banking accounts. Board 
staff is providing material assistance to Treasury in the drafting of 
both of these regulations.
USA PATRIOT Act Examination Enhancements
    As USA PATRIOT Act effective dates have approached and proposed 
rules have been issued, the Federal Reserve has been making certain 
that banking organizations are aware of the new requirements and have 
been taking reasonable steps to comply. We are doing this through the 
bank examination process--a process that is being significantly 
enhanced throughout the Federal Reserve System.
    At the Board, we have established a USA PATRIOT Act Working Group 
comprised of senior, experienced Bank Secrecy Act /Anti-Money 
Laundering examiners from throughout the Federal Reserve. This Working 
Group, which is charged with overseeing the System's implementation of 
the new law, is drafting new examination procedures and developing a 
new training curriculum for examiners who conduct Bank Secrecy Act and 
anti-money laundering examinations.
    We have also increased the staff of the Board's bank supervision 
division to include several senior examiners from our Reserve Banks to 
draw upon their field 
experiences. These new Special Examiners will lead the Working Group; 
coordinate the System-wide adoption and consistent application of the 
new examination procedures and training program; and consult with the 
other Federal supervisors on common issues.
Cooperation with the Private Sector
    The Federal Reserve believes that banking organizations and their 
employees are the first and strongest line of defense against financial 
crimes and, in particular, money laundering. A banking organization's 
best protection against criminal activities is its own policies and 
procedures designed to identify and understand with whom it is 
conducting business and to identify suspicious activity.
    While many of our banks have robust compliance procedures in place, 
clearly, the recent events underscore the absolute need for banking 
organizations to conduct 
effective enhanced due diligence. We are working with law enforcement 
and the industry to see whether there are any specific indicators of 
terrorist-related money laundering that may be distinguishable from 
money laundering involving corruption or drugs. This effort will be 
crucial not only for law enforcement to identify suspects but also for 
supervisors to determine if there is a way in the future for potential 
suspicious activity related to terrorism to be detected proactively.
    Another example of industry cooperation is our work with the New 
York Clearing House (NYCH), which is comprised of representatives from 
some of the leading U.S. and international financial institutions. On 
October 11, 2001, senior executives from the NYCH member institutions, 
and senior level representatives from the Federal Reserve, law 
enforcement, Treasury and Justice, and other Federal bank supervisors 
met for the first time to plan how to work together to identify and 
intercept the flow of funds to and from terrorists and their 
organizations.
    Under the auspices of the NYCH and in cooperation with the Federal 
Reserve and the other bank regulators, working groups have been 
established to: Review account opening and monitoring procedures; 
develop a database for financial institutions to share information 
about suspicious activity with law enforcement and each other; 
determine patterns of terrorism financing; broaden international 
cooperation on 
information sharing; and ensure that a useful flow of information 
between law enforcement and financial institutions continues. Federal 
Reserve staff participates in all of these groups.
    Since the issuance of our supervisory letter in November to Federal 
Reserve-
supervised financial institutions, Board and Reserve Bank staffs have 
reached out to the banking industry, fielding numerous written and 
telephone inquiries and participating in many seminars, conferences, 
and meetings with banking organizations and their representatives. 
Federal Reserve staff welcomes the opportunity to assist the industry 
in responding to new challenges, and we believe that a strong 
relationship with our supervised organizations can only further our 
collective goals.
    Banks and other financial institutions have raised many questions 
about how they ensure that they are not doing business with shell banks 
and ensure that they have all necessary ownership information about the 
foreign banks with whom they are doing business. Working with Treasury, 
the NYCH, and the Federal Reserve and other bank regulatory agency 
staff, banks have begun using the ``certification process'' provided 
for by Treasury's regulations and have been searching for correspondent 
accounts with shell banks through deposit accounts, as well as other 
business lines. Through our contacts with banking organizations 
examined by the Reserve Banks we have learned that several 
correspondent accounts with shell banks have been closed by U.S. banks.
    Financial institutions supervised by the Federal Reserve have also 
raised questions about the application of the requirement to determine 
ownership of foreign correspondent banks. Treasury has specifically 
requested comments on this provision in connection with its proposed 
regulations. In the meantime, we believe that banks are making their 
best efforts to comply. We are encouraged that banking organizations 
have taken steps to prepare for compliance with the USA PATRIOT Act, 
and we have seen an increase in the number of banks that have improved 
existing systems or implemented new or more sophisticated systems to 
monitor funds transfers and identify suspicious activity.
International Initiatives
    The international supervisory community plays an important role in 
ensuring that banking organizations make every effort to stop illicit 
activity. The Federal Reserve's foreign initiatives include bilateral, 
as well as multilateral efforts. Over the years, we have provided 
extensive training and technical assistance on anti-money laundering 
procedures to foreign law enforcement officials and central bank 
supervisory personnel in dozens of foreign countries including Russia, 
Poland, Hungary, the Czech Republic, and a number of the Baltic states, 
as well as Brazil, Ecuador, Argentina, and other countries in Africa, 
and the Middle and Far East.
    With respect to multilateral organizations, Board staff 
participates in the Financial Action Task Force (FATF). The FATF, 
established in 1989 at the G-7 Economic Summit, develops and promotes 
policies to combat money laundering. The FATF has working groups that 
are reviewing some of the same issues addressed by the USA PATRIOT Act 
such as minimum standards for customer identification and due diligence 
requirements for correspondent banking, as well as other practices 
susceptible to money laundering.
    The FATF held an extraordinary plenary session in October in 
response to the terrorist attacks and adopted eight special 
recommendations regarding terrorist financing. To implement the new 
recommendations, FATF members agreed to draft guidance for financial 
institutions on the techniques and mechanisms used in the financing of 
terrorism and to provide technical assistance to nonmembers to assist 
them in complying with the special recommendations. Board staff is 
involved in all of these projects.
    Another important international initiative to which the Federal 
Reserve contributes is the Basel Committee on Banking Supervision. The 
Basel Committee is comprised of representatives of central banks and 
supervisory agencies from a dozen countries. The Committee does not 
possess any supervisory authority but formulates broad supervisory 
standards, guidelines, and recommendations for best practices.
    On October 4, the Basel Committee issued minimum standards for 
customer due diligence for banks. In issuing these standards, the 
Chairman of the Committee, William J. McDonough, President of the New 
York Reserve Bank, reiterated that due diligence is an essential 
element of banks' risk management systems, the importance of which has 
been underscored by the recent terrorist attacks.
    Another organization working on anti-terrorist financing 
initiatives is the Wolfsberg Group. It is comprised of representatives 
from several large multinational financial institutions. This Group 
held a meeting on terrorism financing in early January and invited 
Government and banking experts to discuss these issues. Board staff 
attended and gave a presentation on U.S. initiatives taken since 
September 11. The Group intends to issue a paper identifying ``best 
practices'' on the prevention of terrorism financing and hopes that 
these practices will be adopted by the international banking community.
    The Board also participates in the G-7 group, composed of the 
finance ministers and central bank governors of large industrial 
countries, and the G-20 group, composed of ministers and governors of 
emerging-market countries. Following the G-7 meeting in Washington on 
October 6, 2001, the G-7 ministers and governors issued a statement 
that highlighted the commitment of its members ``to vigorously track 
down and intercept the assets of terrorists and to pursue the 
individuals and countries suspected of financing terrorists.'' On 
November 17, 2001, finance ministers and central bank governors of the 
G-20 announced a comprehensive action plan of multilateral cooperation 
to deny terrorists access to their financial systems. The plan commits 
members of the G-20 to take a number of concrete steps in cooperation 
with other international bodies to combat terrorist financing and money 
laundering.
Assistance to Law Enforcement
    Earlier in my testimony, I emphasized that as a Federal bank 
supervisory agency we view the Federal Reserve's role as complementary 
to law enforcement's duties. That being said, however, bank supervisors 
have an important role in ensuring that criminal activity does not pose 
a systemic threat to the financial system. Since its inception, our 
Special Investigations Section staff has provided financial 
investigative expertise to law enforcement agencies, and we have 
continued and expanded those efforts. Also, since September 11, many of 
our Reserve Banks have assisted law enforcement in various ways.
    Shortly after September 11, the FBI sought our assistance in 
circulating a list of suspected terrorists to banks. The Bureau wanted 
the banks to check their account and transaction records against this 
list and report any positive responses to law enforcement as quickly as 
possible. Within 24 hours of that request, the Federal Reserve and the 
other Federal banking supervisors disseminated the list to virtually 
every banking organization in the country. The Federal Reserve 
distributed this list by issuing a supervisory letter to all of its 
banking organizations.
    Soon thereafter, Treasury's FinCEN set up a telephone hotline so 
that banks and others could report suspicious activities related to 
terrorism through FinCEN to the FBI, thereby enabling law enforcement 
to receive information on almost a real time basis. We advised the 
financial institutions supervised by the Federal Reserve about this new 
procedure as soon as it was in place by issuing another supervisory 
letter.
    From the middle of September through October, the proliferation of 
various requests continued as banks received increasingly longer lists 
from a variety of law enforcement sources, both domestically and 
abroad. To alleviate the burden of searching for names on these 
multiple lists, many of which were duplicative, the FBI and other law 
enforcement agencies prepared a unified ``Control List'' to supersede 
all other lists.
    To ensure that the broadest number of financial institutions 
received this Control List, it was agreed that electronic communication 
would be the most efficient and expeditious method of distribution. The 
New York Reserve Bank, working with the U.S. Attorney for the Southern 
District of New York, devised a dedicated e-mail account that allows 
banks to receive one Control List from law enforcement. Banks respond 
with positive information back to this same e-mail account, and the 
information is then forwarded promptly to law enforcement for further 
action such as an issuance of a subpoena. The Federal Reserve and the 
other Federal bank supervisors issued a Joint Agency Request explaining 
this system to almost 20,000 financial institutions. Cooperation from 
the banking industry has been outstanding 
despite the time consuming effort that is needed to run name checks on 
many similar names with few identifiers. This system continues to be 
active, and, to date, there have been over two hundred responses 
forwarded to law enforcement.
    The Federal Reserve provided the Control List to the Basel 
Committee for circulation among its member countries. In addition, the 
Federal Reserve sent the Control List to over a dozen other central 
banks around the world.
    The Control List is different, of course, from Treasury's Office of 
Foreign Assets Control (OFAC) list. OFAC disseminates its own list for 
which many banks have automated filters to block transactions and 
assets or to deny transactions altogether. Most banks are notified of 
additions and modifications to the OFAC list through Fedwire, the 
Federal Reserve's large value electronic payments system. The OFAC list 
has been amended numerous times since September 11, and U.S. banks have 
diligently complied with their responsibilities to block and freeze 
accounts.
    Finally, I can report that starting on September 17, 2001 the New 
York Reserve Bank, at the request of law enforcement and pursuant to 
subpoenas, began searching the records of Fedwire for information 
related to terrorist acts. Search results have been provided to various 
law enforcement agencies, which have reported to us that the 
information we provided has been useful in their on-going 
investigations.
    In addition, multiagency teams led by various U.S. Government 
agencies have been deployed to foreign countries to analyze bank and 
other financial records. On several of these occasions, senior Reserve 
Bank examiners have traveled and worked with the teams. The feedback we 
received is that our expertise was of great assistance and that the 
foreign jurisdictions welcomed the presence of a central bank 
examiner on the investigative teams. Based on information developed by 
the team members, OFAC included new entities and individuals on its 
lists.
    In the wake of the terrorist attacks, the FBI formed the Financial 
Review Group (FRG), a multiagency law enforcement task force to trace 
transactions and assets of terrorists and their supporters here and 
abroad. Recognizing the particular expertise that we have in financial 
investigations and our facility with bank records, 
representatives from the group of specialized examiners that I referred 
to previously--the Federal Reserve's Special Investigations Section--
were requested to participate. Staff from this group regularly 
participates in the FRG's efforts.
    Over the past several months, Federal Reserve staff has assisted in 
the evaluation of financial data collected by the FRG and has provided 
other valuable services to the law enforcement officials participating 
in the FRG. For example, a need very quickly developed for information 
on specific foreign banking organizations. Law enforcement sought 
details such as ownership, organizational structure, nonbank 
subsidiaries, and geographic location of operations. Special 
Investigations Section staff was able to obtain this information very 
promptly. Additionally, FRG staff needed information relating to funds 
transfer systems; wire transfer practices, particularly in the Middle 
East; nontraditional funds transfer methods; and general banking 
practices, such as account opening procedures. Federal Reserve staff 
helped to answer these questions.
    The Federal Reserve has also provided assistance and technical 
support to the OFAC's Foreign Terrorist Asset Tracking Center. This 
OFAC group gathers information relating to terrorist groups' methods of 
fundraising and funds movement.
Conclusion
    As a bank supervisor, the Federal Reserve believes that it is 
necessary to take all reasonable and prudent steps to assure that 
banking organizations are not victims of, and do not knowingly 
participate in, illicit activities such as money laundering and the 
funding of terrorist activities. Bank supervisors must ensure that 
criminal activity does not pose a systemic threat, and that banking 
organizations operating in the United States protect themselves fully 
from such illicit activities.
    All of the actions I described underscore the Federal Reserve's 
significant commitment to the bank regulatory community's anti-money 
laundering and anti-terrorism mission. We will continue our cooperative 
efforts with the Congress, the banking industry, the other bank and 
securities supervisors, and international communities to develop and 
implement effective programs addressing the ever-changing strategies of 
terrorists and other criminals who attempt to launder funds through 
banking organizations here and abroad. The Federal Reserve will also 
continue to lend our expertise to the U.S. law enforcement community 
anywhere in the world when it seeks to track or intercept terrorist 
funds.
                               ----------
               PREPARED STATEMENT OF ANNETTE L. NAZARETH
                Director, Division of Market Regulation
                U.S. Securities and Exchange Commission
                            January 29, 2002
    Chairman Sarbanes, Ranking Member Gramm and Members of the 
Committee, I am pleased to appear before you today to testify on behalf 
of the Securities and Exchange Commission (SEC or Commission) 
concerning steps the Commission has taken to assist in the financial 
aspects of U.S. anti-terrorism initiatives, and the implementation of 
the International Money Laundering Abatement and Anti-Terrorist 
Financing Act of 2001--which is Title III of the Uniting and 
Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act).
    My appearance before you today comes during a period of close 
intergovernmental cooperation. The Departments and Agencies represented 
by those of us testifying on this panel and the other members of 
Government and independent private sector working groups put into place 
after the horrible attacks of September 11, 2001 are working to 
implement the USA PATRIOT Act's new mandates in the fight against money 
laundering and terrorism. Chairman Pitt has made clear the Commission's 
full partnership in these efforts. Within hours of the September 11 
attacks, the Commission and its staff began the process of identifying 
and executing the steps we could effectively take in this collaborative 
effort. The enactment of the USA PATRIOT Act further strengthened this 
process.
Financial Aspects of the War on Terrorism
    I will first address the SEC's contributions to the financial 
aspects of the Government's anti-terrorism efforts that respond most 
directly to questions raised by the attacks. There are two key 
components to this work. First, on September 12, 2001, the staff of the 
Division of Enforcement commenced a review of certain trading 
activity preceding the terrorist attacks on September 11. Working with 
the surveillance staff of the U.S. securities self-regulatory 
organizations, Commission staff 
reviewed trading activity in over 125 individual securities and index 
products. The results of this inquiry have been, and continue to be, 
shared with criminal law enforcement authorities.
    Second, we have supported the effective use of the ``Control List'' 
of individuals or entities identified by the Federal Bureau of 
Investigation and other law enforcement agencies in their ongoing 
investigations of the events of September 11. At the request of the 
Department of Justice, the Commission issued a release to enlist the 
voluntary review by securities-related entities of the Control List to 
identify name matches with accounts at each institution.\1\ The 
Commission's release followed meetings among Government and private 
sector representatives working together to 
uncover financial aspects of the terrorist attacks. To date, the 
Commission has received nearly 1,800 responses to this release and has 
coordinated the collection of account documentation relevant to these 
responses. Under what have often been challenging personal and 
professional circumstances, securities firm personnel have searched 
their records in order to aid the Government's efforts. The cooperative 

efforts and practices developed through this early work are helpful to 
us as we consider how to encourage ongoing cooperation among financial 
institutions and Government, as Congress has called for in Section 314 
of the USA PATRIOT Act.
---------------------------------------------------------------------------
    \1\ See Securities Exchange Commission Press Release No. 2001-115 
(October 18, 2001).
---------------------------------------------------------------------------
Implementation of the USA PATRIOT Act for the Securities Industry
    We have also taken up the clear mandate Congress gave us in the USA 
PATRIOT Act. The Commission is an active participant in working groups, 
led by the Department of the Treasury (Treasury), that were established 
to help implement the USA PATRIOT Act. SEC enforcement and regulatory 
staff are providing their expertise in support of the working groups' 
efforts.
    Regulatory implementation of the USA PATRIOT Act is proceeding on 
time. This progress builds on the strong foundation of preexisting U.S. 
financial regulation and anti-money laundering efforts. New 
regulations, either proposed or soon-to-be proposed, should provide 
appropriate tools to deny money launderers and terrorists the use of 
the Nation's financial institutions to launder the proceeds of crime 
for profit, or for the furtherance of their criminal activities, 
including terrorism.
    One important tool is the proposed suspicious activity reporting 
rule for broker-dealers. Treasury proposed this rule on December 20, 
after close consultation with Commission staff. This proposal, which 
Treasury had underway well before September 11, was completed shortly 
after the enactment of the USA PATRIOT Act. It will require broker-
dealers to file with the Government reports of suspected illegal 
activity through their firms. These reports are widely known as 
SAR's.\2\
---------------------------------------------------------------------------
    \2\ 66 FR 67670 (December 31, 2001).
---------------------------------------------------------------------------
    SEC and Treasury staff readily reached consensus on extending 
comparable obligations to file SAR's across financial institutions. 
Treasury's proposal would implement a SAR regime for broker-dealers 
that closely mirrors existing requirements for depository institutions. 
In its proposal, Treasury points to the importance of strong compliance 
procedures and states that, for broker-dealers as for banks, the 
proposed suspicious transaction reporting requirements require 
financial institutions to evaluate customer activity and relationships 
for money laundering risks. The proposed rule focuses broker-dealers on 
the money laundering risks stemming from their client-base and the 
types of business in which they engage. For instance, because so little 
broker-dealer business is done in cash, there is relatively little 
``placement stage'' money laundering risk at broker-dealers.\3\ 
Nonetheless, the rule requires broker-dealers to remain vigilant with 
respect to any cash or cash equivalent business in which they may 
engage. This risk-based approach to identifying and to reporting 
suspicious transactions should empower broker-dealers to focus their 
SAR detection and reporting resources appropriately.
---------------------------------------------------------------------------
    \3\ In the ``placement'' stage, cash is converted to monetary 
instruments, such as money orders or travelers checks, or deposited 
into financial institution accounts. In the ``layering'' stage, these 
funds are transferred or moved to other accounts to further obscure 
their illicit origin. In the ``integration'' phase, the funds are used 
to purchase assets in the legitimate economy or to fund further 
activities. See Anti-Money Laundering: Efforts in the Securities 
Industry (GAO-02-111, October 2001) and The 2001 National Money 
Laundering Strategy, prepared by the U.S. Department of the Treasury, 
in consultation with the U.S. Department of Justice (available at 
www.ustreas.gov / press / release / docs / ml2001.pdf ).
---------------------------------------------------------------------------
    As the Committee knows, broker-dealers affiliated with banks have 
already long been subject to the bank regulators' SAR rules. Other 
broker-dealers have filed SAR's on a voluntary basis. We believe that 
this rulemaking proposal completes the process of assuring that all 
broker-dealers report possible money laundering. Moreover, this 
rulemaking will enable all broker-dealers registered with the 
Commission to be subject to the same SAR rule. In particular, we 
expect, as a result of Treasury's consultation with the Board of 
Governors of the Federal Reserve System, that the bank regulators will 
determine, once Treasury's broker-dealer rule becomes 
effective, that bank-affiliated broker-dealers should be subject to 
Treasury's rule, rather than two separate SAR rules.
    Apart from Treasury's proposed SAR rule for broker-dealers, we are 
also working with the other members of the working groups, including 
the bank regulators, the Commodity Futures Trading Commission, 
Department of Justice, and Internal Revenue Service to move forward 
with the full complement of rules called for under the USA PATRIOT Act. 
Significant steps are underway that should increase the information 
financial institutions have about customers they accept, as well as 
improve their decisions about whether to engage in certain business at 
all.
    For example, on December 19, Treasury issued a proposed rule to 
implement the USA PATRIOT Act's new prohibition against providing 
correspondent accounts to foreign shell banks that are not affiliated 
with a supervised bank.\4\ Commission staff consulted with Treasury 
throughout its rule drafting process, providing technical assistance as 
Treasury considered the scope of accounts that would be considered to 
be ``correspondent accounts.'' The proposed rule includes procedures 
designed to aid firms in meeting the challenges of determining whether 
their customers, or their customers' customers, are foreign shell 
banks. It also takes a bold step forward in excluding from the American 
financial system any ``brass-plate'' bank that blocks 
official scrutiny of the actors behind it. We look forward to working 
with Treasury to respond to technical questions received during the 
notice and comment process on this proposed rule.
---------------------------------------------------------------------------
    \4\ 66 FR 67460 (December 28, 2001).
---------------------------------------------------------------------------
    Other forthcoming rulemaking projects should complement the shell 
bank proposal. In particular, interagency discussions are underway 
concerning the identification of customers at account opening (as 
required under Section 326 of the USA 
PATRIOT Act) and due diligence policies for correspondent and private 
banking accounts (as required under Section 312). We expect that rule 
proposals in the coming months under these provisions will direct 
financial institutions, along with their 
examiners, to use risk-based approaches to acquiring and assessing 
information necessary to address money laundering.
    Section 352 of the USA PATRIOT Act also requires financial 
institutions to establish anti-money laundering programs by April 24, 
2002. In order to implement this provision fully and effectively, the 
National Association of Securities Dealers-Regulation (NASDR) and the 
New York Stock Exchange (NYSE) have stepped forward to create a 
regulatory framework. The NASDR and the NYSE developed a rule that was 
vetted fully through the Section 352 interagency working group. We 
expect the NASDR to file this proposed rule for Commission 
consideration shortly. A companion rule is scheduled to be considered 
by the NYSE Board in February. These proposals by the securities 
industry's self-regulatory organizations (SRO's) will, when completed, 
enable frontline examiners for broker-dealers, as part of their 
ongoing responsibilities, to examine and enforce this key provision of 
the USA PATRIOT Act.
    In addition to its role in these rulemaking efforts, the Commission 
is continuing in other ways to focus its attention, and the securities 
industry's attention, on money laundering. Bank Secrecy Act provisions 
that are applicable to broker-dealers have been included in our 
examination program for decades.\5\ In addition, we have long had an 
open dialogue with a Securities Industry Association-affiliated group 
of senior broker-dealer compliance officials who meet to share anti-
money laundering approaches with one another, and with Government.
---------------------------------------------------------------------------
    \5\ In addition, because the Commission has incorporated Bank 
Secrecy Act (BSA) recordkeeping and reporting requirements into its own 
rules, the Commission enforces these BSA requirements. See Securities 
Exchange Act Rule 17a-8.
---------------------------------------------------------------------------
    A current, broader Commission examination initiative was announced 
in May 2001. Commission staff, along with staff from the NYSE and NASD, 
began conducting a series of comprehensive risk-based anti-money 
laundering examinations to assess industry practices for anti-money 
laundering compliance.\6\ Preliminary results of the examinations, 
which have not been completed, support the recent assessment of the 
U.S. General Accounting Office in its October 2001 report.\7\ Larger 
firms, which effect the most securities transactions and hold most of 
the U.S. market's accounts and assets, have for the most part 
implemented a broad range of anti-money laundering measures. Middle-
sized and small firms, however, have further to go in focusing 
attention on money laundering risks. The ongoing examinations are 
helping shape our understanding of existing practices at all types of 
firms, and of how they should be strengthened.
---------------------------------------------------------------------------
    \6\ Money Laundering: It's on the SEC's Radar Screen, Remarks by 
Lori A. Richards at a conference program entitled Anti-Money Laundering 
Compliance for Broker-Dealers, organized by the Securities Industry 
Association (May 8, 2001).
    \7\ See supra, note 3.
---------------------------------------------------------------------------
    The working groups established by Treasury to implement the USA 
PATRIOT Act also are addressing other mandates of the USA PATRIOT Act. 
As mentioned earlier in my testimony, progress has been made in 
developing a proposal to facilitate the sharing of information between 
Government and financial institutions that may be critical in the fight 
against terrorism. In addition, interagency groups have had initial 
discussions regarding the definition of key terms under the USA PATRIOT 
Act, including the definition of ``concentration accounts'' as called 
for under Section 325. Another group has also begun the analysis of 
Government-wide access to information called for under Section 361.
    The SEC staff also has been working with Treasury and the private 
sector to address the application of the Bank Secrecy Act to investment 
companies registered with the Commission under the Investment Company 
Act of 1940. While investment companies have not to-date been directly 
covered by Bank Secrecy Act regulations, the broker-dealers that sell 
the funds are covered. Later this year, we expect a broader interagency 
working group under Section 356 to submit a report concerning 
regulations to apply the Bank Secrecy Act to registered investment 
companies along with hedge funds and personal holding companies. In the 
near term, however, the working group already is addressing the 
application of Section 352 (anti-money laundering programs) to 
investment companies. Moreover, as you may know, the Investment Company 
Institute (ICI) issued a paper entitled Money Laundering Compliance for 
Mutual Funds in May 1999 in order to focus its members' attention to 
the money laundering risks they face. Since the enactment of the USA 
PATRIOT Act, the ICI has offered its cooperation in extending these 
provisions to its members.
    I am heartened to be able to provide the Committee with so many 
examples of action taken since the adoption of the USA PATRIOT Act. 
Together, the regulators and the industry have made substantial 
progress on some difficult issues in a short period of time. On behalf 
of the Commission, I appreciate the opportunity to participate in this 
hearing. We look forward to continuing to share our views with this 
Committee, the Treasury, and other participants in the implementation 
of the USA PATRIOT Act. I would be happy to try to respond to any 
questions the Committee may have.

         RESPONSE TO A WRITTEN QUESTION OF SENATOR REED
                      FROM KENNETH W. DAM

Q.1. Could you give us some sense of how you feel that process 
is going, whether our institutions are being more careful about 
who they deal with?

A.1. We believe that financial institutions have taken greater 
care in identifying their customers in the wake of the 
September 11 terrorist attacks. Our evidence is mostly 
anecdotal, and it would be hard to prove this contention 
empirically since there are no baseline surveys or data that we 
can use to assess a change in behavior by financial 
institutions.
    Following the September 11 attacks, the American Banker's 
Association (ABA) formed an eight-member Account Opening Best 
Practices Group representing a cross-section of the ABA's 
membership. The Best Practices Group joined its efforts with a 
similar initiative organized by the New York Clearing House. In 
January 2002, the ABA released an industry resource guide on 
Identification and Verification of Account Holders in printed 
and electronic form.
    The resource guide recognized that the easy falsification 
of identity documents is one of the major challenges facing 
financial institutions in verifying a customer's identity at 
the account opening phase of a relationship. Additionally, 
financial institutions are not able to quickly and accurately 
access Government or commercial databases to verify information 
that they are provided. The resource guide called on each 
institution to examine its own operations and make appropriate 
risk-based determinations about whether any adjustments to 
their account opening procedures are necessary.
    The ABA resource guide recommended that financial 
institutions obtain certain information when opening personal 
and business accounts. The resource guide advised institutions 
to obtain and record, at a minimum, the following information 
when opening personal bank accounts: (1) the individual's name; 
(2) a Tax Identification Number; (3) address; (4) telephone 
number; (5) occupation; (6) date of birth; and (7) information 
concerning the person's business, if opening a sole proprietor 
business account. The guide urged financial institutions to 
verify the accuracy of the information provided by the customer 
to the extent practicable.
    For new accounts opened by a business (partnership, 
corporation, business trust or other entity other than a sole 
proprietor), the ABA guide directed that institutions should, 
at a minimum, obtain and record the following information: (1) 
business name; (2) business Tax Identification Number; (3) 
principal place of business operations; (4) business mailing 
address; (5) phone number; (6) type of business organization 
(corporation, partnership, trust, other); (7) ownership 
information, such as whether the business is publicly held, the 
number and/or identity of the owners; and (8) the website or 
the e-mail address of the business, if applicable. The ABA 
guide recommended that financial institutions verify the 
information provided by the business and, to the extent 
practicable, obtain documents confirming the existence of the 
business (such as its articles of incorporation) and conduct a 
site visit.
    The ABA guide also instructed financial institutions that 
it was imperative to determine at the time of an account 
opening whether a potential customer appears on any list of 
known or suspected terrorist suspects or organizations that may 
have been provided to the institution by law enforcement or 
other Government agencies. The financial institutions were 
urged to follow appropriate reporting processes if a match was 
identified.
    Thus, it is clear from the ABA guide that financial 
institutions are now paying more attention to their account 
opening procedures. We expect that all financial institutions 
will pay even more attention to their procedures when a 
Treasury-led interagency working group completes its work on 
devising regulations to implement Section 326 of the USA 
PATRIOT Act.

         RESPONSE TO WRITTEN QUESTIONS OF SENATOR BAYH 
                      FROM KENNETH W. DAM

Q.1. Last Tuesday, you announced that the Administration's 
fiscal year 2003 budget would seek an increase in the fiscal 
year 2003 budget of the Financial Crimes Enforcement Network 
(FinCEN) by 6.3 percent or $3.3 million, to $52.3 million. 
FinCEN is charged with implementing the money services 
businesses regulations, which include hawala.
    Prior to September 11, many of the agencies involved in 
tracking and cutting off terrorist funding did a poor job of 
coordinating and consulting each other. Part of the problem 
could have been a resource problem, and therefore solved by 
providing those agencies with additional funding. If Congress 
is, however, going to approve this budget increase for FinCEN--
an agency that has been criticized in the past--there has to be 
accountability for how the money will be spent.
    Could you please specify how the Administration plans on 
using the $3.3 million? Will it go to salaries and expenses? 
Will it go to enforcement or outreach? Please be as specific as 
possible.

A.1. FinCEN requests $52,289,000 and 254 full-time equivalents 
in its fiscal year 2003 budget. This request is a net increase 
of $3,293,000 and 16 FTE over the fiscal year 2002 funding 
level of $48,996,000. The increase includes $1 million and 8 
FTE to begin to meet the challenges of the USA PATRIOT Act. 
Also included in this increase are $2,293,000 and 8 FTE to 
allow FinCEN to continue operations at the current level.
    The $2,293,000 will provide funding for the following 
areas: $2,061,000 to maintain current operating levels; 
$400,000 to annualize the 17 positions authorized by the 
Homeland Security Emergency Supplemental; $313,000 to pay the 
full Government share of the accruing cost of retirement for 
current CSRS, as proposed in the fiscal year 2003 President's 
Budget; and a reduction of $481,000 to reflect the Secretary's 
expectation of reasonable savings from better business 
practices. FinCEN is also requesting $354,000 for the 
continuation of its efforts related to the Money Services 
Businesses (MSB) regulatory program. This request is to cover 
the costs of maintaining current levels of operation within the 
MSB program.

Q.2. As you know, I am interested in hawala and believe that 
this system is exploited by terrorist organizations to move 
money around the world and finance their criminal acts. For 
that reason, I had hawala explicitly included in the money 
services businesses regulations as part of the 2001 Act.
    The regulations required money services businesses to 
register and to begin to file suspicious activity reports by 
December 31, 2001. Since many of the money transfer businesses 
are very small businesses, it will take time to educate them 
about the registration and reporting processes. Could you tell 
the Committee what type of outreach FinCEN, or other parts of 
the Department of the Treasury, are currently undertaking with 
regard to money transfer businesses? What type of outreach has 
FinCEN conducted with regard to hawala?

A.2. FinCEN has engaged in a multifaceted outreach program to 
MSB's for the last 18 months. Upon signing a contract with the 
public relations firm Burson-Marstellar in the summer of 2000, 
focus groups were organized to help FinCEN design an effective 
outreach campaign. Through State licensing lists from the 45 
States that require some form of licensing and by using 
commercial databases, an initial registration contact list of 
approximately 10,745 entities was compiled. Attempts to contact 
each of the entities on the list were made, through the fall of 
2001, to verify addresses and to establish a point of contact. 
It was subsequently determined that approximately 2,000 
entities were either duplicates or no longer in business. An 
initial mailing which included the registration form and a fact 
sheet was done in December and coincided with the launching of 
FinCEN's dedicated website, www.msb.gov.
    These initial efforts produced excellent results. By mid-
January, approximately 80 percent had responded and, within 30 
days, approximately 9,500 responses were received. A follow up 
``Reminder'' postcard has been sent to the balance. In 
addition, SAR filings have begun.
    The next phase of the campaign, dealing primarily with SAR 
filing requirements, will include targeted advertising to 
communities with large concentrations of businesses who serve 
those for whom English may be a second language. This phase of 
the campaign will also include extensive speaking engagements, 
meetings with community groups, and the distribution of user-
friendly materials such as a Quick Reference Guide, posters, 
the development of a video and, possibly, a CD-ROM.
    With respect to the registration of hawalas, these money 
transfer operations fall within the money transmitter 
definition. Therefore, those that operate independently of the 
other money transfer companies are required to register. Our 
goal is to reach as many enterprises as possible with 
information that assists a business to comply with the MSB 
rules. Of course, determining whether a particular business 
type or individual business enterprise, such as hawala, is in 
compliance with the MSB rules, will involve field-level 
resources. The Internal Revenue Service (IRS), through both its 
civil arm responsible for Bank Secrecy Act (BSA) compliance 
examination and its law enforcement component, is undertaking 
that effort. In addition, as the IRS and other law enforcement 
agencies, such as the Customs Service and the FBI, identify 
nonregistered hawalas during the course of their criminal 
investigations, the MSB rules, which carry severe criminal 
penalties for noncompliance, become useful law enforcement 
tools.

Q.3. Treasury is charged with producing the study on hawala, 
that I requested as part of the 2001 Act. In 1998, FinCEN 
produced a report on hawala. It was very well done. I am 
hopeful, however, that this new report will not be a 
duplication of the 1998 report. Instead, I expect to see a 
report that addresses terrorist financing issues, including 
those raised prior to September 11. The report should also 
examine new tools that the law enforcement community needs to 
deal with hawala. Has Treasury decided how it will undertake 
the study? Who was selected to produce that report? When do you 
expect that drafts will be available for our review?

A.3. FinCEN will draft the report, as required under Section 
359 of the USA PATRIOT Act. The report will be produced by 
using information developed by and transferred from existing 
in-house staff, as well as the results of an ongoing contract 
that was in process prior to September 11. FinCEN expects that 
its report will go well beyond the scope of its 1998 report, 
and will address law enforcement and regulatory challenges 
posed by alternative remittance systems and their associated 
risks. FinCEN has established a Non-Traditional Methodologies 
Analysis Section, whose initial mission is to build an expert 
knowledge base on alternate remittance systems, including 
hawala. Although the unit will not be fully staffed by early 
summer 2002, its work has already begun.
    The contract referred to above requires the contractor to 
analyze information developed from law enforcement 
investigative cases to determine the risks posed by systems, 
such as hawala, in terrorist financing; the challenges to law 
enforcement raised by such systems; regulatory issues raised by 
the existence of such systems; and possible regulatory 
initiatives that could be adopted to reduce or eliminate 
terrorist financing risks associated with such systems. This 
information will be combined with the other knowledge and 
intelligence developed independently by FinCEN as part of its 
own research and analysis; ongoing interagency law enforcement 
and regulatory discussions; and other seminars, conferences, 
and information exchanges on alternative remittance systems. 
FinCEN will update your staff on its progress within the next 3 
months.

RESPONSE TO A WRITTEN QUESTION OF SENATOR CORZINE FROM KENNETH 
                             W. DAM

Q.1. Is there progress in the Gulf States?

A.1. The United States has tax information exchange agreements 
with 19 countries, mainly in the Caribbean and Central America. 
These tax information exchange agreements provide for the 
exchange of information for the purposes of administering and 
enforcing our tax laws. All of these agreements contain strict 
confidentiality requirements that are intended to ensure that 
information exchanged under the agreements can only be 
disclosed to persons or authorities involved in the 
Administration or enforcement of tax laws and can only be used 
for tax purposes. In our recent efforts to expand this network 
of tax information exchange agreements, we have focused on 
significant financial centers.
    In addition to our tax information exchange agreements, we 
have a very broad network of tax treaties that include 
provisions for the exchange of information for the purposes of 
administering and of enforcing our tax laws. These tax treaties 
contain the same strict confidentiality protections. Our tax 
treaty network, which covers 49 countries, includes treaties 
with Egypt, Israel, and Tunisia.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES FROM MICHAEL 
                            CHERTOFF

Q.1. Some critics claim that the Department of Justice is 
insufficiently engaged in righting money laundering as a 
separate crime committed by financial intermediaries (as 
opposed to ``own funds'' money laundering). They cite the 
disappearance of a separate money laundering section in the 
Criminal Division, the falling rate of money laundering 
prosecutions, and the fact that money laundering counts are 
often the first bargained away by prosecutors. To what extent 
do the recent ``Wire Cutter'' and al Barakaat investigations, 
and the Brennan prosecution in the District of New Jersey, 
indicate a general change in direction? Has that change in 
policy been communicated to the United States Attorneys? Would 
a national strike force, aimed at financial intermediaries, 
confirm the broader interest of the Department in money 
laundering?

A.1. The Department of Justice is fully committed to combating 
money laundering systems and those financial intermediaries who 
control them. Ever since our first money laundering laws were 
enacted in 1986, the Department has aggressively pursued an 
agenda to ``follow the money,'' whether it be criminal proceeds 
or, as a result of more recent events, funds used to finance 
acts of terrorism. It has been and remains our mission to 
follow that money around the globe as we try to identify, 
seize, and forfeit criminal funds. We have not wavered from 
that mission over the years and, in fact, are pursuing it with 
a renewed vigor as a result of the September 11 attacks.
    Happily, I am very pleased to report that our critics 
simply have their facts wrong when it comes to the Department's 
commitment to fighting money laundering. The Asset Forfeiture 
and Money Laundering Section, staffed with over 30 attorneys, 
provides nationwide support, training, and guidance to a 
network of Assistant United States Attorneys engaged in money 
laundering investigations. Additionally, it litigates cases 
involving money laundering organizations or systems which are 
international, multijurisdictional, or otherwise complex--cases 
not suited to a single U.S. Attorney's Office, and which draw 
on the strengths and the expertise of the Section. The Section 
has engaged in a number of groundbreaking cases involving the 
Black Market Peso Exchange, offshore banks, and attorneys and 
accountants acting as ``gatekeepers'' into financial markets.
    Prior to the enactment of the Civil Asset Reform Act of 
2000, the forfeiture provisions of our money laundering laws 
were our primary vehicles for forfeiting criminal proceeds. As 
a result it made sense to combine the expertise of the two 
sections that handled money laundering and asset forfeiture 
into one section. As a result of this consolidation, our 
attorneys are experts in both areas and provide valuable 
assistance and training on the use of the money laundering and 
asset forfeiture laws to Federal, State, and local law 
enforcement agents and prosecutors, as well as to our foreign 
counterparts.
    Moreover, our statistics show no decline in money 
laundering prosecutions. According to the data collected by the 
U.S. Sentenc-
ing Commission for fiscal year 2000, the latest available data, 
991 defendants were convicted of money laundering offenses. 
While this is down slightly from 1999 (1,001), it is up from 
prior years (913 in 1998, 895 in 1997, and 827 in 1996). An 
analysis of the seriousness of the offense for those convicted 
has also remained fairly stable. The percentage of defendants 
who were sentenced as a leader, manager, or organizer--an 
approximate indication as to whether we are attacking the 
``brains'' of the organization--remains roughly consistent over 
time at 20 percent. The percentage of defendants whose 
sentencing scores for the most serious money laundering charge 
reflected the laundering of in excess of $350,000--again an 
approximate measure of the significance of the cases we bring--
has remained relatively stable at roughly 42 percent.
    I would point out, however, that we anticipate a decline in 
the number of money laundering prosecutions over the next few 
years as a result of two developments. First, as a result of 
the Civil Asset Forfeiture Reform Act of 2000, which became 
effective in August 2000, prosecutors no longer need to charge 
money laundering in order to pursue the forfeiture of the 
proceeds of most Federal crimes. Section 2461(c) of Title 28, 
United States Code, now authorizes criminal forfeiture for any 
offense where civil forfeiture of property has been authorized, 
thus allowing for the criminal forfeiture of proceeds of any 
specified unlawful activity. Second, as a result of the changes 
in the sentencing guidelines for money laundering and fraud 
offenses that became effective on November 1, 2001, there is 
now a closer correlation between the offense levels for fraud 
and money laundering for those persons who commit both offenses 
and less of a need to resort to money laundering charges to 
attain adequate sentences for fraud offenses. As a result of 
these two developments, it would not be surprising to see money 
laundering charged in fewer cases in the future.
    With regard to the allegation that prosecutors bargain away 
money laundering crimes, we have no data or evidence that would 
support that conclusion. As pointed out in the Department's 
1996 ``Report for the House and Senate Judiciary Committees on 
the Charging and Plea Practices of Federal Prosecutors with 
Respect to the Offense of Money Laundering,'' Department of 
Justice guidelines on plea agreements strictly control the 
circumstances in which prosecutors can bargain away the most 
serious charge.
    There has been no change in the Department's overall 
strategy against money laundering except to the extent that we 
have placed a greater emphasis on seeking to identify and 
disrupt terrorism financing since September 11. The cases cited 
in your question include a drug money laundering case (Wire 
Cutter), a white collar money laundering case (the Brennan 
prosecution), and a terrorism financing case (al Barakaat), 
demonstrating that the Department is focusing on all kinds of 
money laundering. These cases are simply the most recent 
examples of our constant efforts to ensure that we remain 
flexible to the changes in operation made by money laundering 
organizations. Our primary strategy, as set forth in the 2001 
National Money Laundering Strategy, is to focus law enforcement 
efforts on major money laundering organizations and systems. 
This strategy is communicated to our prosecutors and agents in 
the field through a comprehensive program of conferences, 
training, and publications.
    With respect to your suggestion that a national strike 
force aimed at financial intermediaries might confirm the 
broader interest of the Department in money laundering, we 
believe that such a demonstration of commitment is not 
necessary. The Department's commitment has been stated clearly 
and frequently. For example, in a speech before an 
international conference on organized crime in Chicago in 
August 2001, Attorney General Ashcroft told the assembled group 
of law enforcement experts that: ``The Department of Justice is 
committed to helping you use our money laundering laws to the 
fullest extent possible to identify, investigate, and prosecute 
those who would launder the illegal proceeds of organized crime 
by giving law enforcement the tools to follow the trail.'' And, 
there should be no question of the Department's commitment in 
this area.
    This is not to say, however, that every possibility of 
increasing the effectiveness of our anti-money laundering 
enforcement should not be explored. As a result of the 
ingenuity and adaptability of money launderers, barriers remain 
to effective money laundering prosecutions, including an 
increasing reliance on bulk cash transfers, offshore accounts, 
and global financial institutions. As money laundering 
continues to become more sophisticated and global in nature, it 
is increasingly important to ensure that our money laundering 
laws--drafted in the 1980's to deal primarily with a domestic 
problem--keep up-to-date with these new developments. In this 
regard, we would like to express our appreciation to you for 
the powerful new anti-money laundering provisions in the USA 
PATRIOT Act. These provisions represent a significant milestone 
in addressing the needs of law enforcement to meet the 
continuously evolving challenges posed by money launderers. We 
look forward to working with you to keep our money laundering 
laws up to date and to fill gaps in the laws as they arise. 
Similarly, we must ensure that our investigative resources and 
techniques continue to develop. With respect to your suggestion 
of a national strike force aimed at financial intermediaries, 
we believe that our current network of Organized Crime Drug 
Enforcement Task Forces and High Intensity Financial Crime 
Areas, along with the anti-terrorism resources of the FBI's 
Financial Review Group and the informal network of money 
laundering contacts maintained by the Criminal 
Division's Asset Forfeiture and Money Laundering Section, are 
sufficient to address the challenges we face at this time. We 
welcome the opportunity to discuss with you this and any other 
possible recommendations for improving our ability to 
effectively address international money laundering.

Q.2. What principles should govern sharing of information about 
specific individuals by Government agencies with U.S. financial 
institutions (or the sharing of such information among 
financial institutions) under Section 314 of Title III of the 
USA PATRIOT Act? What procedures do you envision being adopted 
to structure and control the contemplated information sharing, 
and to determine when a person is ``reasonably suspected based 
on credible evidence of engaging in terrorist acts or money 
laundering activities?''

A.2. Any procedures promulgated under Section 314 of the USA 
PATRIOT Act should be guided by the principle that the private 
sector is an important component of our counterterrorism and 
money laundering efforts, and that information sharing should 
be maximized consistent with legitimate privacy concerns. In 
the September 11 investigation, the public-private partnership 
is best exemplified by the cooperation the FBI has received 
from the financial industry. In the immediate aftermath of the 
attacks, the FBI Financial Review Group (FRG) compiled a 
``financial control list,'' consisting of names of person who 
were demonstrably linked to the dead hijackers, the events of 
September 11, or terrorism in general both in the United States 
and abroad. We distributed that list, along with a financial 
profile the FRG developed of the hijackers, to financial 
industry groups to query their records for financial 
information related to the suspects. Where records were 
discovered, the private institutions reported their existence 
pursuant to the existing law and we obtained those material, 
generally through the use of subpoenas. This cooperative effort 
was complemented by periodic briefings we held with the 
international banking, credit card, and securities 
organizations who coordinated these organization's effort to 
assist our terrorist financing investigations.

Q.3. Do the data mining and predictive technology efforts about 
which you testified make use of Bank Secrecy Act information? 
Are they coordinated with Treasury's Financial Crimes 
Enforcement Network, the Foreign Terrorist Asset Tracking 
Center, and the Office of Foreign Assets Control? If not, why 
not? Are the results of the efforts available to FinCEN, FTAT, 
and OFAC?

A.3. The data mining and predictive technology efforts about 
which I testified, though FBI-based, seek to rely on data that 
exists anywhere in the world and to use the best technology 
available, irrespective of its source. The FRG includes members 
of the Treasury Department, including the Financial Crimes 
Enforcement Network (FinCEN) and the Office of Foreign Assets 
Control (OFAC), and makes use of their data. At the same time, 
our analysis is available to Treasury both through the FRG and 
the National Security Council's Policy Coordinating Committee 
on Terrorist Financing (PCC), which is chaired by the Treasury 
Department and includes senior FBI and Department of Justice 
officials. To accomplish our data mining goals, we are also 
engaged in discussions with the private sector in an effort to 
bring the most advanced technology to bear on the problem of 
this Nation's national security.

 RESPONSE TO WRITTEN QUESTION OF SENATOR JOHNSON FROM MICHAEL 
                            CHERTOFF

Q.1. Has the Bank Secrecy Act been an effective tool in 
combating financial crimes and potential terrorist activity? 
What provisions of the Act have proved to be particularly 
useful in combating illegal activity? Please provide some 
examples of enforcement actions that have been based on BSA 
authority in the past several years.

A.1. The Bank Secrecy Act (BSA) has been the cornerstone of the 
Government's anti-money laundering regime since its enactment. 
The BSA requires domestic financial institutions to report to 
the Government on transactions in currency in excess of 
$10,000. Such reports are known as Currency Transaction Reports 
or ``CTR's.'' The BSA also requires those who traverse the 
United States border (in either direction) with negotiable 
instruments in bearer form, valued in excess of $10,000, to 
report that event to the Government. Such reports are known as 
Currency and Monetary Instruments Reports or ``CMIR's.'' The 
BSA further requires U.S. persons with foreign bank accounts 
valued at more than $10,000 to report annually on that account 
to the Government. Such reports are known as Foreign Bank 
Account Reports or ``FBAR's.'' Finally, the BSA requires 
domestic financial institutions to report to the Government 
certain suspicious transactions. Such reports are known as 
Suspicious Activity Reports or ``SAR's.'' All of these reports, 
and the many other obligations imposed on financial 
institutions under the BSA, have proven useful in the fight 
against money laundering and in the fight against terrorist 
financing. The traditional money laundering model involves a 
three stage process:

          1. Placement of illegally derived funds into the 
        financial services system;
          2. Layering of those funds to further obscure their 
        origin and ownership; and
          3. Integration of the funds into apparently 
        legitimately derived assets.

    Despite the extreme difficulty in quantifying its impact, 
law enforcement has long recognized the Bank Secrecy Act's 
reporting obligations as deterrents that are also highly useful 
in identifying the placement of illicitly derived currency in 
the financial system. The transparency brought about as a 
result of CTR's makes it harder to deposit large amounts of 
illicitly derived currency in banks and financial institutions. 
Likewise, CMIR's deter the transport overseas of larger sums of 
currency or other bearer form negotiable instruments and 
provide important information about such transportation of 
funds and negotiable instruments.
    Both the CTR and CMIR have proven invaluable to law 
enforcement efforts addressing money laundering. BSA data plays 
some contributing role in almost every financial investigation. 
The CTR helps identify the parties involved in large currency 
transactions and deters others from engaging in such activity. 
The CMIR helps identify the parties involved in the 
international movement of currency and other negotiable, bearer 
form instruments. While these reporting obligations help 
identify those who place larger sums of ill-gotten gains into 
the financial services system and deter others from doing so, 
the most valuable reporting measure of the BSA is the SAR, 
which requires domestic financial institutions to report to the 
Government transactions that have no apparent business purpose 
or fail to comport with the context of a customer's ordinary 
banking needs. The SAR not only has deterrent value, it also 
has proactive value to law enforcement. It is a report from a 
financial institution, informing the Government of suspicious 
activity by that financial institution's customer. It can be 
and has been invaluable in identifying possible criminal 
activity. The SAR has proven its utility in identifying 
numerous possible money laundering violations. The SAR, 
particularly, and the BSA data, generally, is beginning to 
prove itself an invaluable tool in addressing possible 
terrorist financing violations, including providing material 
support or resources to designated foreign terrorist 
organizations or in support of terrorist activity. BSA data has 
been extremely useful in identifying financial and other links 
between various terrorist operatives, including al Qaeda 
members.
    The Bank Secrecy Act provisions that are the most important 
to our efforts to investigate and prosecute terrorist financing 
is the system of currency transaction reporting. This system 
creates the financial footprints that, prior to the BSA, would 
not have existed for cash transactions. I can give two examples 
of how these provisions assisted our recent counterterrorism 
efforts.
    In my testimony, I referred to our creation of the FRG, an 
interagency task force investigating terrorist financing and 
operating out of FBI Headquarters. One of the first tasks 
undertaken by the FRG was to create a financial profile of the 
19 dead hijackers--information that would describe with whom 
they came in contact, what banks and credit cards they used, 
and what borders they crossed. As part of this effort, the FRG 
analyzed information collected by FinCEN including the CTR's, 
SAR's, and CMIR's. In the early stages of the investigation, 
the FRG's focus on Zacharias Moussaoui uncovered evidence that 
he deposited some $30,000 in an Oklahoma bank account within 
days of his arrival in the United States. Prior to the BSA, it 
would have been difficult to determine the source of this 
income and whether it came from overseas. Somewhat 
surprisingly, Moussaoui actually declared this cash on a CMIR 
he filed at the border, and the report allowed investigators to 
discern where that money came from. Had he not followed the law 
in this instance, we could have used the CMIR violation to 
charge him while the investigation continued. The fact that he 
did gave us a leg up in tracing that money back to its London 
source.
    The second example involves the November 7, 2001 action 
against the al Barakaat network, including coordinated arrests 
and the execution of search warrants in Massachusetts, 
Virginia, and Ohio. These actions were coordinated with 
Treasury's execution of blocking actions pursuant to the 
Executive Order against al Barakaat-related entities in 
Georgia, Minnesota, and Washington State. These actions were 
made possible by BSA information that had been received and 
analyzed. This information resulted in the detection of the al 
Barakaat network that transmitted monies collected from the 
ethnic communities that relied on this al Qaeda-
related business to send remittances home. Were it not for the 
BSA-mandated reporting system, al Barakat might not have been 
discovered.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES FROM RICHARD 
                         SPILLENKOTHEN

Q.1. What issues raised by implementation of Title III of the 
USA PATRIOT Act are of most concern to you, as Director of the 
Division of Banking Supervision and Regulation?

A.1. Since the Federal Reserve testified in January about the 
USA PATRIOT Act, the staffs of the Board and the Reserve Banks 
have continued their work on implementing the law, as well as 
their efforts to help law enforcement track terrorist financing 
activities. Federal Reserve staff has been assisting the 
Treasury Department develop the new rules required by the law, 
and it has been providing information about the USA PATRIOT Act 
to the banking organizations supervised by the Board and to the 
examination staff about the law and the new regulations. Board 
staff has also been actively reviewing the Federal Reserve's 
existing anti-money laundering programs and considering all of 
the changes that will be necessary when the USA PATRIOT Act 
regulations are final. We have also been participating in the 
work of numerous international organizations and providing 
continued support and technical assistance to law enforcement.
    Board staff has found that the USA PATRIOT Act has had and 
continues to have a notable impact on the Federal Reserve 
System's supervision program. There are generally four major 
areas that the Federal Reserve is concentrating on and 
expanding its efforts: Awareness, implementation, compliance, 
and enforcement.
    The Federal Reserve has been taking steps to ensure that 
the banking organizations under its supervision and the 
examination staff who interact with them are aware of the USA 
PATRIOT Act and its requirements. On November 26, 2001, the 
Board issued a supervisory letter to all domestic and foreign 
banking organizations under its supervision concerning the USA 
PATRIOT Act. The supervisory guidance letter described the 
provisions of the Act, highlighted those that should receive 
banking organizations' and Federal Reserve supervisors' 
immediate attention, and described new rules that would be 
issued under the Act. The Federal Reserve has also issued 
subsequent supervisory letters on USA PATRIOT Act provisions 
concerning applications and information sharing. Over the past 
6 months, Board and Reserve Bank staff have also attended 
conferences, made presentations, and engaged in an ongoing 
dialogue with the industry about the USA PATRIOT Act and its 
implications.
    The Federal Reserve is also committed to the swift and 
effective implementation of the USA PATRIOT Act. We continue to 
work closely with the Treasury Department by assisting in the 
drafting and review of proposed rules. Also, by drawing upon 
our financial expertise, we hope to ensure that proposed rules 
are not only comprehensive and address the needs of law 
enforcement, but also that the objectives of the rules are 
clearly understandable by the industry and, to the extent 
possible, the rules are consistent with prudent, safe and sound 
banking practices.
    Once the USA PATRIOT Act provisions are implemented through 
final regulations, the Federal Reserve must evaluate the 
banking organizations under its supervision for compliance. 
This is a tremendous undertaking that will involve some 
revisions to our existing examination protocols and require 
extensive training not only for banking organizations but also 
for our examination staff. However, we are not waiting for 
final rules and have already begun to prepare. As USA PATRIOT 
Act effective dates have approached and proposed rules have 
been issued, the Federal Reserve has been making certain that 
banking organizations are taking reasonable steps to comply. We 
are doing this through our existing bank ex-
amination process--and through our continued dialogue with the 
industry.
    At the Board, we have established a USA PATRIOT Act Working 
Group comprised of senior, experienced Bank Secrecy Act /Anti-
Money Laundering examiners from throughout the System. This 
Working Group, which is charged with overseeing the System's 
implementation of the new law, has been drafting revised 
examination procedures and is developing a new training 
curriculum for examiners who conduct Bank Secrecy Act and anti-
money laundering examinations that, in the future, will include 
USA PATRIOT Act provisions.
    We have also increased the staff of the Board's bank 
supervision division to include several senior examiners from 
the Reserve Banks to draw upon their field experience. These 
new Senior Special Examiners are leading the Working Group and 
will coordinate the System-wide adoption and consistent 
application of the new examination procedures and training 
program. We are also working closely with the other bank 
regulatory agencies to ensure that there is consistency on 
common issues.
    Another important area is our continued support of law 
enforcement particularly with respect to the provisions of the 
USA PATRIOT Act. In the Federal Reserve's January 2002 
testimony, we described the supervision division's Special 
Investigations Section. This Section conducts financial 
investigations, provides expertise to the U.S. law enforcement 
community for investigation and training initiatives, and 
provides training to various foreign central banks and 
government agencies. We have continued to work with the FBI's 
Financial Review Group and Treasury's Operation Green Quest as 
well as other law enforcement agencies in support of their 
ongoing terrorist and anti-money laundering investigations.

Q.2. Do you have any figures about the number of shell bank 
correspondent accounts that have been closed, pursuant to 31 
U.S.C. 5318(j), or the number of certifications received by 
banks under your supervision, to permit such accounts to remain 
open?

A.2. We do not have specific figures. However, as stated 
previously, we have been engaged in an ongoing dialogue with 
the banking industry through the efforts of the USA PATRIOT Act 
Working Group, and, based on these contacts, the Board staff 
can provide some general information about how banking 
organizations are meeting their obligations to terminate 
prohibited shell banking relationships.
    All of the financial institutions with whom we have had 
contact are using the certification process proposed by the 
Treasury Department. Banking organizations have made 
significant efforts to send out requests for and to obtain the 
required information from their foreign bank correspondent 
customers. It is our experience that the response rate from 
these customers has been very good (perhaps as high as 90 
percent). Reserve Bank examiners have been advised that fewer 
than 20 accounts have been identified as ``shell banks'' and, 
therefore, closed.
    Banking organizations have also indicated that they are 
making follow-up requests to foreign bank correspondent 
customers that 
either have failed to respond or have provided incomplete 
information. Examiners have been advised that there will be 
additional account closings if this information is not 
forthcoming.

Q.3. How would you assess the risk that banks that are 
experiencing (or that fear) larger than expected loan losses 
may become involved in money laundering by ``looking the other 
way'' when seeking to attract deposits? How is that possibility 
reflected in the Federal Reserve Board and the Federal Reserve 
Bank examination programs?

A.3. During an examination, the examiners review for compliance 
with specific Bank Secrecy Act reporting and recordkeeping 
requirements, as well as for compliance with the Federal Reseve 
Board's BSA compliance-related regulations that require the 
establishment of internal control and training procedures and 
to perform independent testing. Here at the Board, those rules 
are set forth in Regulation H. These internal controls include 
general customer acceptance and account opening procedures that 
are consistent with sound due diligence and are critical 
elements in the effective management of banking risk.
    Also, prior to commencing an examination, examiners review 
FinCEN's BSA database of Currency Transaction Reports (CTR's) 
and Suspicious Activity Reports (SAR's) to check, among other 
things, whether the bank has adequate systems in place to 
identify and report currency transactions and suspicious 
activities. When potential money laundering (or other criminal 
activity) is identified, a targeted examination may be 
conducted, and all relevant information is referred to the 
appropriate law enforcement agency.
    Loan losses and money laundering are both significant risks 
to banking organizations. We expect banks to develop effective 
systems to manage these risks across business lines and 
commensurate with their size and complexity. Federal Reserve 
examiners have not seen a direct correlation between a bank's 
loan losses and money laundering. However, if a bank were 
experiencing financial difficulties (for example, loan losses), 
we would expect that supervisory staff would pay increased 
attention to other areas including the BSA program, to 
determine if the bank is exposing itself to additional risk.

Q.4. What is your view of the proposed rules relating to the 
ban on foreign shell bank correspondent accounts? How do you 
respond to the questions about the rule raised by Chairman 
Sarbanes?

A.4. In 2001, the Senate Permanent Subcommittee on 
Investigations concluded, after a lengthy investigation into 
correspondent banking, that correspondent relationships with 
foreign banks--
especially foreign shell banks--pose a particular risk of money 
laundering to U.S. banks. Partly in response to that finding, 
the Congress passed legislation that is now found in Section 
313 of the USA PATRIOT Act, which forbids U.S. banks from doing 
business with foreign shell banks. The Treasury Department has 
published a proposed regulation banning U.S. bank correspondent 
relationships with foreign shell banks and setting forth a 
certification mechanism for banks to use to comply with their 
statutory obligation (see the response to the previous 
question). At the January 2002 hearing, Chairman Sarbanes 
commented on the importance of closing foreign shell bank 
accounts at U.S. banks.
    The Federal Reserve supports the new law and the Treasury's 
proposed rules implementing it. As previously stated, we have 
found that banking organizations are diligently seeking to 
comply with their new statutory obligations through the use of 
the ``certification'' process established in Treasury's 
proposed rules.

Q.5. What principles should govern sharing of information about 
specific individuals by Government agencies with U.S. financial 

institutions (or the sharing of such information among 
financial institutions) under Section 314 of Title III? What 
procedures do you envision being adopted to structure and 
control the contemplated information sharing, and to determine 
when a person is ``reasonably suspected based on credible 
evidence of engaging in terrorist acts or money laundering 
activities?''

A.5. Congress has established reasonable standards and 
safeguards for the sharing of information between and among 
financial institutions and law enforcement. Section 314 of the 
USA PATRIOT Act is but one example of Congressional direction 
in this area. Treasury has issued a final interim rule for 
Section 314(b) and a notice of proposed rulemaking for Section 
314(a)--the two statutes that address information sharing among 
banking organizations and law enforcement. The public comment 
period for these rules has ended, and we understand that 
Treasury has received many comments.
    Under Treasury's proposal, FinCEN is the principal agency 
responsible for handling the procedures that banking 
organizations have to undertake in order to share pertinent 
information about money laundering and terrorist financing 
activities. FinCEN and law enforcement are responsible for 
determining that credible evidence exists to make a request 
under Section 314(a). FinCEN must have procedures in place with 
law enforcement to assure that the only requests made under 
Section 314(a) are for those individuals or entities reasonably 
suspected to be engaging in terrorist acts or money laundering. 
As regulators, we are not in position to make this 
determination but rely on FinCEN and law enforcement to adhere 
to the statutory requirements.
    At this time, the Board staff does not yet know how many 
banking organizations are availing themselves of the sharing 
provisions of Section 314(b). In this area, the inquiry should 
be directed to FinCEN.
    In the interim, the Federal Reserve provided guidance about 
the provisions of Sections 314(a) and 314(b) of the USA PATRIOT 
Act to its examiners and the financial institutions its 
supervises through a supervisory letter on March 14, 2002.

 RESPONSE TO WRITTEN QUESTION OF SENATOR JOHNSON FROM RICHARD 
                         SPILLENKOTHEN

Q.1. Has the Bank Secrecy Act been an effective tool in 
combating financial crimes and potential terrorist activity? 
Which provisions of the Act have proved to be particularly 
useful in combating illegal activity? Please provide some 
examples of enforcement actions that have been based on BSA 
authority in the past several years.

A.1. As previously stated, supervision staff believes that the 
SAR reporting requirements of the Bank Secrecy Act have been 
the most helpful part of that law in combating illegal 
activity. However, law enforcement is in the best position to 
respond to the part of this question relating to the Bank 
Secrecy Act. In our experience, law enforcement has recognized 
the importance of the SAR reporting system, has been diligent 
in their reviews of SAR's and has used them in many financial 
investigations. For instance, we understand that in some 
judicial districts, SAR review teams consisting of Assistant 
United States Attorneys and law enforcement representatives 
meet regularly to review and discuss SAR filings by banking 
organizations in their districts.
    For our part, examiners are expected to review SAR's before 
each examination and Reserve Banks are expected to conduct a 
periodic, comprehensive review of the SAR's filed in their 
district to assist in identifying suspicious or suspected 
criminal activity occurring at or through supervised financial 
institutions. Examiners also assess the procedures and controls 
used by reporting institutions to identify, monitor, and report 
violations and suspicious illicit activities and assess the 
adequacy of anti-money laundering programs. We have learned 
that a preexamination review of SAR's assists our supervisory 
staff in assessing compliance with the SAR requirements and 
provides useful information regarding potential problems that 
may require special attention during the course of an 
examination.
    By law, the Federal Reserve must evaluate the effectiveness 
and sufficiency of a banking organization's BSA compliance. The 
Federal Reserve does this at each safety and soundness 
examination it conducts. If a financial institution's BSA 
compliance program is found to be deficient, an appropriate 
enforcement action is taken. This could include the issuance of 
a cease and desist order, the assessment of a civil money 
penalty, the execution of a formal written agreement, or the 
issuance of an informal supervisory action, such as a 
Memorandum of Understanding. Over the past several years, the 
Federal Reserve has taken numerous enforcement actions 
involving compliance with the Bank Secrecy Act. Public formal 
enforcement actions, which are available on the Board's public 
website, include those against U.S. Trust Corp., the State Bank 
of India, the Gulf Bank, and Banco Popular de Puerto Rico.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES FROM ANNETTE 
                          L. NAZARETH

Q.1. Under the proposed suspicious activity reporting rule for 
broker-dealers, how is a broker supposed to know whether he is 
looking at a possible violation of the securities laws or 
something else? What would, or should, happen under the 
proposed rule if a broker-dealer finds a transaction that 
involves a breach of a Commission or SRO recordkeeping rule but 
that also appears to involve otherwise inexplicable 
transactions linked, say to an offshore financial center or a 
country on the FATF ``noncooperative'' list?

A.1. Section 103.19(c)(ii) of the Department of the Treasury's 
proposed broker-dealer suspicious activity reporting rule 
provides only a narrow exception to the SAR obligation. The 
exception extends only to violations that on their face would 
not be likely to be helpful to the fight against money 
laundering or terrorist financing.
    The Treasury recognized in its proposed rule that 
securities firms often bring directly to the Commission or the 
SRO's instances of securities law violations by the firms 
themselves, or by their employees. The proposed exception would 
promote the continued reporting of securities law violations 
directly to the securities regulators, enabling the Commission 
and the SRO's to continue to enforce effectively the securities 
law, without compromising anti-money laundering efforts.
    At times, financial institutions may not know what 
provisions of law a particular course of conduct violates, and 
would be required to file a SAR. In the event that a firm was 
able to identify that conduct violated both the securities laws 
(for example, provisions relating to market manipulation) and 
the narcotics laws (because the manipulation was being 
conducted to mask the payment for narcotics), then the 
exception would not be available and the suspicious activity 
would need to be reported on a Form SAR-BD.
    Because the exception is only available if the violation is 
reported to the Commission or an SRO, there is little risk that 
nominal violations of the securities laws would be reported to 
securities regulators masking more significant unusual 
transactions. If any leads reported to securities regulators 
appear also to be connected to wider, money laundering 
offenses, the leads can be forwarded by securities regulators 
to the appropriate law enforcement agencies. Similarly, if a 
reported violation clearly is not a securities violation, the 
Commission, or SRO receiving the report, would direct the firm 
to file a SAR.

Q.2. Does the reference in the proposed suspicious activity 
reporting rules for broker-dealers to Rules 17 CFR 240.17a-8 
and 17 CFR 405.4 create a circular situation in which it is 
impossible to know which report should be filed? Does the 
Commission intend to amend those rules to break any 
circularity? Will the final rule incorporate a reference to SRO 
rules relating to money laundering, to complement the 
references to Rules 17 CFR 240.17a-8 and 17 CFR 405.4?

A.2. The references in Treasury's proposed SAR rule for broker-
dealers to Rules 17a-8 and 405.4 clarify that violations of the 
reporting, recordkeeping, and record retention rules under the 
Bank Secrecy Act that have been incorporated into the 
Commission's rules are not within the exception to the SAR 
requirement--and accordingly must be reported on a Form SAR-BD. 
For example, a firm that discovers that it or one of its 
employees acted with a customer to avoid the filing of a 
currency transaction report required under the BSA rules would 
need to file a SAR, even though the conduct would also violate 
Commission rules. The link between Rules 17a-8 and 405.4 and 
proposed Rule 103.19 is intentional and not, in our view, 
circular. If a firm discovered violations of 103.19, that too 
would need to be filed on a Form SAR-BD. While we do not expect 
confusion on the part of broker-dealers, we nonetheless look 
forward to considering any comments filed with Treasury by the 
broker-dealers, and will work with Treasury to address any 
questions.
    We do not recommend that Treasury amend proposed 103.19 to 
refer to SRO rules. The SRO rules that make a direct reference 
to money laundering are the proposed New York Stock Exchange 
and NASD-Regulation rules regarding the establishment of anti-
money laundering programs. Because the BSA itself requires 
broker-dealers to have anti-money laundering programs in place 
by April 24, 2002 independent of complementary obligations 
under the SROs' rules, any discovered violation of the 
statutory requirement would have to be reported on a Form SAR-
BD. Moreover, as a practical matter, a compliance failure 
represented by inadequate anti-money laundering programs would 
probably not be useful to law enforcement as a suspicious event 
in its core money laundering or in its terrorist financing 
investigations or prosecutions. Instead, the compliance program 
quality would be addressed through the regulatory process.

Q.3. You mention that Commission staff consulted with Treasury 
throughout the process of drafting the rules implementing the 
ban on foreign shell bank correspondent accounts? How do you 
respond to the questions about the rule raised by Chairman 
Sarbanes, especially in light of the Commission's general rules 
about ``due diligence'' as a necessary component of compliance 
with statutory obligations, inter alia, the 1933 Act?

A.3. Chairman Sarbanes' opening remarks at the hearing on 
January 29 addressed the need for reasonable approaches to the 
implementation of the ban on foreign shell bank correspondent 
accounts--both direct and ``nested'' accounts. The Chairman's 
remarks addressed both the process for implementing the foreign 
shell bank ban, and the limited exception for afffliates of 
regulated banks.
    In discussions leading up to Treasury's draft rule, 
Treasury, law enforcement, and financial institution regulators 
contemplated a two-pronged approach to the implementation of 
the ban. First, as represented by Treasury's interim guidance 
and proposed Rule 104.40, financial institutions need to do a 
broad sweep of their overseas client base to gain 
certifications regarding the accounts. All recognized that this 
process--required of many accounts within a short time frame--
is only part of the process.
    The second prong of the approach to foreign shell bank 
correspondent accounts is found in Congress' mandate in Section 
312 of the USA PATRIOT Act for due diligence policies, 
procedures, and controls for correspondent accounts. Depending 
on the nature of particular accounts--whether by size of 
account, geographical 
location, or other relevant factors--financial institutions 
will need to engage in appropriate risk-based due diligence to 
learn, among other things, whether an account holder is a 
foreign shell bank. Regulators can test whether financial 
institutions make reasonable judgments about due diligence 
through the examination of anti-money laundering programs, 
which are required under Section 352 of the USA PATRIOT Act. We 
do not believe that Treasury intends in its proposed rule for a 
financial institution to be able to rely on a certification 
about which it clearly has doubts.\1\
---------------------------------------------------------------------------
    \1\ In its preamble, Treasury stated that it ``expects that covered 
financial institutions as required by 31 U.S.C. 5318(j), will 
immediately terminate all correspondent accounts with any foreign bank 
that it knows to be a shell bank that is not a regulated affiliate, and 
will terminate any correspondent account with a foreign shell that it 
knows is being used to indirectly provide banking services to a foreign 
shell bank.'' (emphasis added) 66 FR 67460, at 67462 (December 29, 
2001).
---------------------------------------------------------------------------
    With respect to bank affiliates, Treasury has proposed that 
a foreign shell bank with 25 percent ownership by a regulated 
bank would fall within Section 313 (and, accordingly, would be, 
outside the ban). We understand that Treasury chose that 
threshold by reference to the bank holding company rules of the 
Board of Governors of the Federal Reserve System, a number with 
which financial institutions were familiar. See 12 CFR 
225.2(e). We understand that Treasury viewed its position as 
conservative since under both banking and securities law, 
persons may be considered for some purposes to influence a 
financial institution with a lower percentage ownership. 
Treasury determined not to permit foreign shell banks with a 
lesser degree of ownership by a regulated bank to qualify for 
the exception. Because this particular provision was less 
relevant for institutions regulated by the Commission, 
Commission staff did not focus on it. Treasury or bank 
regulator staff may be able to provide the Committee with more 
information.
    Due diligence provisions under the Securities Act of 1933 
addressing reasonable investigations to have a reasonable 
ground to believe the accuracy of a registration statement are 
specific to the activities addressed in that Act, and the staff 
has not attempted to compare them with provisions under the 
Bank Secrecy Act. Instead, we are conferring with Treasury and 
other agencies with money laundering expertise regarding 
appropriate due diligence measures needed to detect and prevent 
money laundering.

Q.4. To whom is responsibility for money laundering compliance 
and enforcement on a Commission-wide basis assigned?

A.4. The Treasury has delegated to the Commission authority to 
examine brokers or dealers in securities to determine 
compliance with the requirements under the Bank Secrecy Act 
regulations. The Commission does not currently have enforcement 
authority under the BSA.
    Both the Commission and SRO's examine broker-dealers for 
compliance with the BSA regulations. In order to provide SRO's 
with authority to examine their members with these provisions, 
the Commission adopted Rule 17a-8 under the Securities Exchange 
Act in 1982. Rule 17a-8 requires broker-dealers that already 
are subject to the BSA regulations to comply with the 
recordkeeping, reporting, and record retention provisions under 
the regulations. While both the Commission and SRO's have cited 
firms for related compliance failures, the actions taken were 
under the Securities Exchange Act, not the BSA. The staff is 
discussing with Treasury whether it should also delegate 
enforcement authority under the BSA to the Commission.
    Staff from all of the Commission's offices work on the 
money laundering issues. The Division of Market Regulation 
generally coordinates interoffice consultations based upon the 
issues raised in particular projects.

Q.5. What is the progress of the money laundering program 
audits that the Office of Compliance and Inspection Director 
Richards described in her speech on money laundering last May? 
How many audits have been conducted? Can you provide us with a 
list of the firms that have been audited and expand on the 
summary in your testimony of what the audits have revealed?

A.5. Examiners from the Commission, NYSE, and NASD-Regulation 
are examining 26 broker-dealers to assess industry compliance 
with the Commission's Rule 17a-8, as well as other anti-money 
laundering concerns, including approaches to suspicious 
transaction reporting.\2\ Field work for 25 of the examinations 
has been conducted, and the staff is in the process of 
analyzing its findings.
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    \2\ The program includes examinations of five firms with net 
capital greater than $500 million, eleven firms with net capital 
between $100 million and $500 million, and 10 firms with net capital 
less than $100 million.
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    Information the staff is gathering will help examiners to 
conduct more effective examinations of broker-dealers for 
compliance with the anti-money laundering program requirement 
that takes effect on April 24, 2002 and the suspicious activity 
reporting requirement to become effective later this year. It 
will also help the staff to work with the industry as it 
develops stronger approaches to combat potential money 
laundering and terrorist financing through their firms.
    While the examinations are ongoing, they have so far 
revealed that most large firms have some type of anti-money 
laundering system in place. Mid-sized and smaller firms, 
however, have been less proactive in establishing anti-money 
laundering programs.
    Strengths and weakesses are highly dependent on the sizes 
of the firms that the staff has examined. For example, one 
particular strength was that large firms generally have 
dedicated, knowledgeable staff and appropriate surveillance 
systems in place to detect suspicious activity. In addition, 
large firms tend to have more comprehensive procedures to 
ensure that pertinent areas of the firm are supervised for 
anti-money laundering compliance.
    Weaknesses in anti-money laundering programs were more 
evident at mid- and small-sized firms. Many of these firms' 
procedures and surveillance systems evidenced a need for a 
greater focus on money laundering risks. In response to 
examiner requests for information on anti-money laundering 
programs, some smaller firms provided information on their 
anti-fraud departments, which may serve a different compliance 
purpose. In addition, supervision with regards to anti-money 
laundering procedures was not as stringent or focused as at 
large firms. Another weakness of smaller firms was that their 
training programs did not adequately cover anti-money 
laundering.
    The identity of firms being examined is sensitive. 
Moreover, the staff prefers to maintain confidentiality of 
details of both the most and least effective anti-money 
laundering practices in order to limit the possibility of 
inadvertently providing road maps to people who would try to 
circumvent firm procedures. To the extent that examinations 
result in findings of significant violations of existing law, 
the staff would recommend the institution of public enforcement 
proceedings-- either at the Commission or an SRO depending on 
the nature of the violations.

Q.6. How has the Division of Enforcement been involved in 
planning for money laundering compliance?

A.6. The Division of Enforcement maintains a strong interest in 
money laundering aspects of its enforcement cases. In the 
course of investigations, the staff uses a wide-range of tools 
to trace illegal proceeds and other assets. This tracing 
process sometimes reveals possible criminal activity, which the 
staff refers to the criminal 
authorities.
    In addition, the staff uncovered and prosecuted more than a 
dozen cases involving violations of the currency transaction 
reporting requirements in the 1980's and early 1990's. Our 
examination and enforcement programs have not uncovered serious 
problems under the CTR provisions recently. Commission staff 
reports any findings arising under both the Commission and the 
SROs' examination programs to FinCEN twice a year for its use 
in the overall administration of the BSA.
    Enforcement staff also participate in working groups with 
other regulators and agencies that combat money laundering. For 
example, senior representatives of our Enforcement Division 
participate in the Bank Fraud Working Group established by the 
Fraud Section of the Department of Justice, as well as some of 
the money laundering working groups led by Treasury over the 
past decade.

Q.7. What principles should govern the sharing of information 
about specific individuals by Government agencies with U.S. 
financial institutions (or the sharing of such information 
among financial institutions) under Section 314 of Title III? 
What procedures do you envision being adopted to structure and 
control the contemplated information sharing, and to determine 
when a person is ``reasonably suspected based on credible 
evidence of engaging in terrorist acts or money laundering 
activities?''

A.7. The SEC, like other Government agencies, has guidelines 
and safeguards for gathering and sharing information about 
specific individuals, entities, and organizations in 
furtherance of its statutory mandate. In our view, the rules 
implementing Section 314 of Title III should be designed to 
enhance the existing information gathering and sharing 
capabilities of Government agencies with respect to terrorist 
acts and money laundering activities, without limiting existing 
capabilities or providing a means for circumventing existing 
safeguards.
    SEC staff is working cooperatively with the staff of the 
Treasury Department to implement the provisions of Section 314. 
Treasury issued proposed and interim rules under Section 314 on 
February 26, 2002. The anticipated construct for information 
sharing between Government agencies and financial institutions 
involves: (a) FinCEN, on behalf of a Federal law enforcement 
agency, requesting one or more financial institutions to 
determine whether the financial institution maintains accounts 
for, or has engaged in transactions with, a specified 
individual, entity, or organization; and (b) the financial 
institution searching its records and, if it identifies an 
account or transaction with any individual, entity, or 
organization named in the request, reporting certain 
identifying information to FinCEN. Within this basic construct, 
we contemplate a number of procedures for structuring and 
controlling the sharing of information. For example, we 
contemplate procedures requiring each financial institution to 
designate a contact person to receive information requests from 
FinCEN, and procedures prohibiting the disclosure of 
information requests except for purposes of responding to the 
requests (or, under certain conditions, sharing the information 
with other financial institutions). We also expect procedures 
to assure that a person, entity, or organization that is the 
subject of an information request is ``reasonably suspected 
based on credible evidence of engaging in terrorist acts or 
money laundering activities.'' In this regard, Treasury is 
considering a certification procedure by which a Federal law 
enforcement agency making a request through FinCEN must certify 
that each individual, entity, or organization in the request 
meets the statutory standard.
    Treasury's proposed rules also provide for voluntary 
information sharing among financial institutions. In this 
regard, we anticipate procedures requiring a financial 
institution to notify FinCEN that it intends to engage in 
information sharing, procedures to restrict the use, and 
protect the confidentiality, of shared information, and 
procedures for reporting information resulting from information 
sharing efforts to FinCEN.

RESPONSE TO WRITTEN QUESTION OF SENATOR JOHNSON FROM ANNETTE L. 
                            NAZARETH

Q.1. Has the Bank Secrecy Act been an effective tool in 
combating financial crimes and potential terrorist activity? 
Which provisions of the Act have proved to be particularly 
useful in combating illegal activity? Please provide some 
examples of enforcement actions that have been based on BSA 
authority in the past several years.

A.1. The SEC does not routinely use the BSA as a tool in 
combating financial crimes or terrorist activity. While the 
Commission has obtained copies of suspicious activity reports 
(SAR's) or SAR information from the Financial Crimes 
Enforcement Network upon request, FinCEN takes the position 
that, as a civil enforcement agency, the Commission may not 
have routine, online access to SAR's or SAR information for use 
in its enforcement program.\1\ The Commission examines broker-
dealers for compliance with particular obligations under the 
BSA rules. Once the broker-dealer SAR rule comes into effect, 
we understand that the Commission's role will be to examine 
broker-dealers for compliance with the SAR reporting 
obligation, with access to that portion of the SAR database.\2\ 
However, the Commission has maintained an ongoing interest in 
the money laundering aspects of its securities cases. Criminal 
authorities have conducted parallel criminal prosecutions for 
money laundering originally detected and referred to them by 
the SEC. Descriptions of three recent prosecutions that 
involved both securities law and money laundering allegations 
are set out below.
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    \1\ The Commission has online access to Treasury's Currency and 
Banking Retrieval System, which is used to examine broker-dealers with 
thc CTR, CMIR, and FBAR requirements. We 
understand that FinCEN currently is determining whether to modify the 
SEC's access to broker-dealer SAR's.
    \2\ The SEC examines broker-dealers for compliance with the BSA 
rules under the authority it has been delegated by Treasury. Until the 
suspicious activity report requirements become effective at the end of 
the year, the compliance obligations (with the exception of a broad-
based anti-money laundering best practices series of examinations that 
began last year) principally focus on cash-based events, such as 
currency transaction reporting. Securities firms accept little cash, 
and generally have good compliance programs for assuring compliance 
with the CTR requirements. The Commission brought cases for CTR 
violations in the 1980's and early 1990's. These cases, however, were 
brought under the Securities Exchange Act, as the Commission does not 
have enforcement authority under the BSA.

 SEC v. William P. Trainor, et al., Litigation Rel. No. 
    17313 (January 15, 2002): The Commission sued William P. 
    Trainor for his role in two frauds concerning the 
    securities of HealthCare, Ltd. (HealthCare) and Novatek 
    International, Inc. (Novatek). The Commission alleged that 
    Trainor and others participated in fraudulent ``pump and 
    dump'' schemes involving the purchase and sale of 
    HealthCare and Novatek securities, both of which claimed to 
    own licenses to distribute medical diagnostic test kits 
    designed to rapidly diagnose HIV, cholera, and other 
    diseases. In addition, the U.S. Department of Justice filed 
    criminal charges against Trainor in the U.S. District Court 
    for the Southern District of Florida. The indictment 
    charges him with twenty-one counts of wire fraud and money 
    laundering.
 SEC v. Jerry A. Womack, Litigation Rel. No. 17293 
    (C.D. Cal., January 2, 2002): The Commission charged Womack 
    with committing securities fraud in offering and selling 
    $19 million in securities to about 400 investors nationwide 
    between August 1997 and June 1999. Womack represented to 
    investors that he would invest their money in the stock 
    market pursuant to an investment strategy that he claimed 
    to have developed and used successfully called the ``Womack 
    Dow Principle.'' In fact, Womack utilized only about a 
    quarter of the investors' money for securities trading and 
    suffered a net loss on that trading. Womack misused the 
    majority of investor funds for personal and unrelated 
    expenses and to pay some investors their purported profits 
    and principal. Among other things, Womack used the funds to 
    purchase homes, real property, art, jewelry, and cars and 
    to pay for his honeymoon, for cosmetic surgery for his 
    wife, and for his 
    divorce settlement. In May 2001, Womack was convicted of 
    wire fraud and money laundering in a criminal proceeding 
    before the U.S. District Court for the Central District of 
    California, arising out of the same facts as the 
    Commission's case. He is currently in custody and awaiting 
    sentencing.
 Securities and Exchange Commission v. Charles O. 
    Huttoe, et al., Litigation Rel. No. 16632 (D.D.C. July 20, 
    2000): The SEC filed a number of actions stemming from a 
    massive market manipulation by Systems of Excellence, Inc. 
    To date, six individuals also have been criminally charged 
    with felonies stemming from the SEC's investigations. These 
    individuals pled guilty to a wide-range of violations, 
    including: Money laundering, securities fraud, conspiracy 
    to commit securities fraud, bank fraud, and failure to file 
    tax returns. In addition to these criminal sentences, the 
    Commission will have recovered approximately $11 million 
    from its enforcement actions related to this fraud. The 
    Court-appointed Receiver holding these funds hopes to start 
    distributing the funds to defrauded investors within the 
    next several months.
    
    
    
    
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