[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
U. S. GOVERNMENT PRINTING OFFICE
86-403 WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.