[House Hearing, 108 Congress]
[From the U.S. Government Printing Office]



 
                     IMPROVING FINANCIAL OVERSIGHT:
                  A PRIVATE SECTOR VIEW OF ANTI-MONEY
                           LAUNDERING EFFORTS

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 18, 2004

                               __________

       Printed for the use of the Committee on Financial Services







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                           Serial No. 108-87

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California                 RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut       STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona             MIKE ROSS, Arkansas
VITO FOSSELLA, New York              CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
MELISSA A. HART, Pennsylvania        JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
TOM FEENEY, Florida                  DAVID SCOTT, Georgia
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey            CHRIS BELL, Texas
TIM MURPHY, Pennsylvania              
GINNY BROWN-WAITE, Florida           BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director
              Subcommittee on Oversight and Investigations

                     SUE W. KELLY, New York, Chair

RON PAUL, Texas, Vice Chairman       LUIS V. GUTIERREZ, Illinois
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
MARK GREEN, Wisconsin                DENNIS MOORE, Kansas
JOHN B. SHADEGG, Arizona             JOSEPH CROWLEY, New York
VITO FOSSELLA, New York              CAROLYN B. MALONEY, New York
JEB HENSARLING, Texas                JIM MATHESON, Utah
SCOTT GARRETT, New Jersey            STEPHEN F. LYNCH, Massachusetts
TIM MURPHY, Pennsylvania             ARTUR DAVIS, Alabama
GINNY BROWN-WAITE, Florida           CHRIS BELL, Texas
J. GRESHAM BARRETT, South Carolina














                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 18, 2004.................................................     1
Appendix:
    May 18, 2004.................................................    31

                               WITNESSES
                         Tuesday, May 18, 2004

Aufhauser, David D., Senior Counsel, Center for Strategic and 
  International Studies and Counsel, Williams & Connolly LLP.....     6
Byrne, John J., Director of Center for Regulatory Compliance, 
  American Bankers Association...................................     8
Cachey, Joseph III, Vice President, Global Compliance and Chief 
  Compliance Officer and Counsel, Western Union Financial 
  Services, Inc..................................................    10
Emerson, Steven, Executive Director, The Investigative Project...    14
Richards, James, Operations Executive for Global Anti-Money 
  Laundering, Bank of America....................................    12

                                APPENDIX

Prepared statements:
    Kelly, Hon. Sue W............................................    32
    Aufhauser, David D...........................................    34
    Byrne, John J................................................    40
    Cachey, Joseph III...........................................    50
    Emerson, Steven..............................................    61
    Richards, James..............................................    72












                      IMPROVING FINANCIAL OVERSIGHT:
                  A PRIVATE SECTOR VIEW OF ANTI-MONEY
                           LAUNDERING EFFORTS

                              ----------                              


                         Tuesday, May 18, 2004

             U.S. House of Representatives,
      Subcommittee on Oversight and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 10:07 a.m., in 
Room 2128, Rayburn House Office Building, Hon. Sue Kelly 
[chairwoman of the subcommittee] presiding.
    Present: Representatives Kelly, Hensarling, Garrett, 
Gutierrez, Inslee, Moore, Maloney, and Matheson. Also present 
was Representative Royce.
    Chairwoman Kelly. [Presiding.] This hearing of the 
Subcommittee on Oversight and Investigations will come to 
order.
    An effective money laundering system relies on a 
collaborative effort from the public and private sectors. This 
effort has received additional scrutiny recently due to 
problems at Riggs Bank, an instance where the public-private 
collaboration stumbled badly in protecting the public's best 
interest. It is evident that the public and private sectors 
must continue to improve the way that suspicious activity is 
detected, reported and analyzed.
    Today we examine ways to improve the oversight and 
utilization of transaction information by regulatory and law 
enforcement agencies so the failures at Riggs are the last of 
their kind in our country.
    The current enforcement structure we have put in place to 
enforce our anti-money laundering laws disperses various levels 
of responsibility through a convoluted group of Treasury 
bureaus and independent agencies. It resembles somewhat a bowl 
of spaghetti. While these agencies have been focused on efforts 
to oversee the safety and soundness of our financial 
institutions for decades, they must embrace new 
responsibilities which acknowledge that money laundering is no 
longer a second-tier issue for financial regulators.
    Of particular interest to this subcommittee are proposals 
to simplify the governmental structure so that regulation and 
compliance for these laws are better unified, perhaps even 
under the auspices of a single entity.
    Given the vulnerabilities exposed by the Riggs case, I am 
inclined to believe that the current structure is a relic of a 
foregone era and that substantive organizational reforms are 
necessary. At a bare minimum, Congress should begin now an 
active and thorough assessment of proposals aimed at 
strengthening our enforcement regime. This subcommittee intends 
to do just that in the coming weeks and months, and therefore I 
look forward to testimony from some of our witnesses as to how 
we might significantly improve the effectiveness of our system 
without creating yet another layer of bureaucracy.
    Our financial regulators must place a strong emphasis on 
compliance through rigorous oversight, taking swift and 
forceful action for non-compliance when necessary. This 
oversight includes working with the private sector to develop 
accurate risk assessments that enable examiners to focus on 
specific institutions, because resources need to be 
concentrated appropriately.
    The continued leadership of the administration and the 
Treasury Department is essential to improving financial 
oversight. Earlier this year, President Bush signaled his 
commitment to the war against terror by proposing a 14 percent 
increase in funding for the Financial Crimes Enforcement 
Network. FinCEN plays a key role in efforts to stop financial 
crimes by working with the financial community and supporting 
local, State and Federal law enforcement and intelligence 
agencies.
    The administration has also announced the creation of the 
Office of Terrorism and Financial Intelligence--the acronym for 
that they are using is TFI, Terrorism and Financial 
Intelligence--within the Department of the Treasury to unify, 
under one structure, the functions of several offices. I 
applaud the administration for its efforts to streamline and 
centralize our anti-money laundering efforts. There must be 
greater communication between FinCEN, law enforcement, banking 
regulators and financial institutions, and I believe this 
office was an important step toward improving this 
coordination.
    Now we must work to bring the next steps into focus. As 
evidenced by the failures of Riggs Bank and its regulator, the 
OCC, it is time to explore further reforms that improve the 
overall structure of our anti-money laundering efforts. It is 
unacceptable that a Washington, D.C.-based bank with the 
largest embassy banking clientele allowed tens of millions of 
dollars to pass unnoticed and unreported through accounts 
belonging to Saudi Arabian government officials. This activity 
continued even after a consent order was put in place last 
year. The mechanisms we put in place to detect and report 
suspicious activity failed, and they failed repeatedly. We no 
longer live in a world where such failures can be tolerated.
    I thank the witnesses for appearing here today. You are on 
the front line of these efforts, and I look forward to hearing 
your views on how we can continue improving financial 
oversight.
    I turn now to our ranking member, Mr. Gutierrez.
    [The prepared statement of Hon. Sue W. Kelly can be found 
on page 32 in the appendix.]
    Mr. Gutierrez. Good morning, Madam Chairman, and thank you 
very much for calling this hearing today. It is important, 
especially given recent events, that we closely examine our 
anti-money laundering efforts and whether they are sufficient. 
I welcome the witnesses here today and look forward to their 
testimony.
    I understand that many financial institutions are truly 
committed to this effort, and I welcome their suggestions for 
improving compliance. However, I am concerned about the 
commitment of the relevant regulators to this effort, because 
criminals will always seek out the weakest link in the chain 
and will exploit any lapses in supervision.
    After September 11, the passage of the PATRIOT Act, bank 
regulators were given more tools to combat terrorist financing, 
building on the foundation of existing anti-money laundering 
efforts. I am truly troubled by the Riggs situation. It 
represents not merely a failure of one institution's internal 
controls but a fundamental flaw in its regulation. It is my 
understanding that the flaws in Riggs' systems were long-
standing and systematic, dating back well before the PATRIOT 
Act.
    The consent order of last week is something that should 
have happened 2 years ago, if not earlier. I don't understand 
why the OCC was not more vigilant on this front and why it took 
them so long to take these actions. September 11 was a wake-up 
call for the industry and should have been for regulators as 
well. Our safety depends on banks and bank regulators to be on 
the forefront, on the front lines and prevent terrorists from 
using international financial systems to fund their activities.
    I understand that the regulators take the risk-based 
approach to examining books under their purview, and I can't 
imagine why Riggs' book of embassy business would not have 
placed them in a category demanding extra scrutiny.
    I am very concerned that the regulator has not made this 
responsibility a higher priority or that their resources may be 
spread too thin to fulfill their obligations. I have previously 
expressed concern about the OCC's attempt to broaden their 
portfolio into areas that Congress has not authorized without 
commensurately increasing their operational budget. In fact, 
the Financial Services Committee is on record in agreement with 
me on this point.
    This recent incident with Riggs makes me even more 
concerned about the OCC's operations, and I really believe they 
should be testifying here today. Chairwoman Kelly, I know you 
share my concerns here, and I hope we can work together to get 
the OCC to testify before our subcommittee regarding this 
issue. I want to know if they have actively looked at every 
major bank that could have potential terrorist financing issues 
and what steps they have taken to aggressively control these 
issues.
    One final point: The OCC issued its findings late last 
Thursday, and Friday a Maryland woman called her congressman 
and she was very concerned about her account at Riggs Bank. She 
was referred to the Banking Committee staff, and she said she 
wanted to talk to the regulators. My staff supplied the phone 
number for the OCC's Customer Assistance Group, but, 
unfortunately, they don't operate on Fridays. They only work 4 
days a week. They only talk to consumers 4 days a week and then 
only from 9 o'clock to 4 o'clock.
    So that woman had to wait from Thursday until Monday before 
she could possibly reach someone at the OCC. I think this 
agency is not concerned about consumers, and I have doubts 
about their commitment to anti-money laundering efforts.
    Thank you, again, Chairman Kelly, for calling this hearing 
and for your leadership on this vital issue.
    Chairwoman Kelly. Thank you, Mr. Gutierrez, and it is my 
intention, as you know, to continue discussing with the various 
agencies who have this responsibility what we can do to make 
sure there are no more failures of this type.
    Mr. Royce?
    Mr. Royce. Let me begin by thanking the Chair for calling 
this hearing today, and I am very grateful for your interest 
and leadership on this topic.
    I think we are very fortunate to have with us this morning 
two of the countries foremost experts on terrorism, and I think 
it is unfortunate that both Mr. Aufhauser and Mr. Emerson have 
for so long been right on their predictions about our long 
fight against terrorism.
    In both cases, they have warned us that what we are in for 
is a long struggle against a movement, not an organization but 
a movement, and it is a movement of a very extreme arm of the 
Wahabi Sect that is determined to ruin our way of life.
    From the perspective of a member of this committee and of 
the International Relations Committee, I could not agree more 
with the assessments that they have made. We cannot win the war 
on terror unless the global community works to cut off the flow 
of funds that terrorists use and that terrorists receive. 
Certain terrorist acts do not require vast amounts of funding; 
however, the costs of indoctrination, the costs of recruitment 
and sustainability for their operations are quite high. If 
these rogue terror groups have no financial support, it is very 
difficult for them to continue to operate effectively.
    In my view, the question we need to ask as members of the 
committee is how can the Financial Services Committee play a 
lead role in the fight on terror? We have the world's best 
safety and soundness financial regulators. As a part of their 
job, these regulators are also tasked to enforce the Bank 
Secrecy Act and certain provisions of the PATRIOT Act. This 
committee needs to emphasize the importance of that role to 
these regulatory agencies.
    I think we may need to create a new structure and we may 
need statutory changes whereby each safety and soundness 
regulator would have a designated group that works hand in hand 
with the newly created Office of Terrorism and Financial 
Intelligence in the Treasury Department.
    The Bank Secrecy Act and the PATRIOT Act give our examiners 
a number of tools to fight terror finance. This committee 
should lead Congress down the path of creating an environment 
where financial intelligence is gathered and then is shared and 
analyzed and used appropriately and effectively.
    As Mr. Aufhauser argued in his testimony that he is going 
to present to us, ``Much of the information that is submitted 
to the government under the Bank Secrecy Act is merely lodged 
like a book like a library shelf without a card catalog,'' in 
his words.
    In the absence of an express and pointed request from law 
enforcement, he says, ``the information remains unexploited. 
Surely we ought to have an artificial intelligence program that 
red flags patterns and concerns for investigation without 
specific targeted inquiry.'' He is absolutely correct. Not only 
do we need to utilize the PATRIOT Act, but we need to use it to 
data mine and to uncover terrorist activity.
    And, again, I thank Chairwoman Kelly for her leadership on 
this subject, and I very much look forward to hearing the 
testimony of our witnesses this morning.
    Chairwoman Kelly. Thank you very much, Mr. Royce.
    Ms. Maloney?
    Mrs. Maloney. In the interest of time, I am just going to 
place my comments in the record and wait for the testimony. 
Thank you.
    Chairwoman Kelly. Thank you.
    Mr. Hensarling, you have no statement?
    Mr. Matheson?
    Mr. Moore?
    Mr. Garrett? Oh, all right.
    We now turn to our panel of witnesses. Thank you. It is a 
pleasure to welcome back to the committee Mr. David Aufhauser, 
the former general counsel of the Treasury Department who is 
currently with the law firm, Williams & Connolly. While at the 
Treasury Department, Mr. Aufhauser was the Chair of the U.S. 
Government Coordinating Committee on Terrorism Financing and a 
leader in implementing the USA PATRIOT Act. Through his work, 
he has helped shape our war against terror.
    I am also very pleased to introduce Mr. John J. Byrne, the 
director of the Center for Regulatory Compliance for the 
American Bankers Association. Mr. Byrne has over 20 years of 
experience in regulatory and educational efforts on money 
laundering, asset forfeiture, computer security, privacy and 
other general electronic banking and compliance issues. He was 
the first private sector recipient of FinCEN's Director's Medal 
for Exceptional Service.
    In addition, the subcommittee welcomes Mr. Joseph--let me 
make sure I am pronouncing it, Cachey? Cachey--representing 
Western Union. Mr. Cachey is responsible for administering 
compliance with the requirements of the Bank Secrecy Act. 
Regulations of the Office of Foreign Assets Control and related 
anti-money laundering and anti-terrorist financing laws in 196 
countries in which the Western Union conducts its business.
    Our next witness is James Richards, a senior anti-money 
laundering executive at Bank of America. Mr. Richards was 
formerly a supervisor of the Narcotics Forfeiture Group as the 
Massachusetts district attorney. He is also a Canadian 
barrister and later served as the BSA compliance and financial 
intelligence director with Fleet Financial.
    Finally, the subcommittee will hear from Steven Emerson, 
the executive director of the Investigative Project, a well-
known expert on international terrorism and terrorist 
financing. Mr. Emerson has shared his very important insights 
with this subcommittee on a number of occasions in recent 
years. His expertise is based on daily contact with sources in 
government and key financial institutions as well as his 
participation in major terrorist financing cases.
    I thank all of our witnesses for your appearance here today 
and for your testimony. Without objection, your written 
statements will be made part of the record. You will each be 
recognized for a 5-minute summary of your testimony. I don't 
know if anyone needs this, but I am going to remind you that 
there is a box on the end of each table. The green light means 
you have 5 minutes for your testimony, the yellow light means 
there is one minute remaining, and the red light means that we 
would like you to summarize your testimony. If you haven't 
gotten to the end, please summarize and let us move on to the 
next witness. Thank you very much.
    And let us begin with you, Mr. Aufhauser. Thank you very 
much for being here.

STATEMENT OF DAVID D. AUFHAUSER, COUNSEL, WILLIAMS AND CONNOLLY 
                              LLP

    Mr. Aufhauser. Thank you. It is an honor to be here. When I 
was at a Treasury I had a big staff and so I would get my 
testimony in early. I apologize that I got it into you about 7 
minutes ago.
    Chairwoman Kelly. Don't worry about that Mr. Aufhauser. It 
is valuable one way or another, so we accept it.
    Mr. Aufhauser. For that reason, I am actually going to 
refer to much of it, but I think I can do it in 5 minutes. It 
was written knowing how this committee operates.
    Probably one of the most vexing issues that this committee 
faces is the unprecedented nature of the threat of terrorism. 
The DNA of war has changed and changed inalterably. Confirming 
the asymmetry power of our military, no force is going to 
confront the United States on a conventional battlefield, at 
least currently, with a uniformed army under a recognized flag 
of state. Nor is there, importantly, a finite list of strategic 
targets to bunker with concrete and steel. Rather, the highest 
of profile targets are said to be soft, open to the most 
outrage and the most unspeakable scenes of mayhem. It is a 
school bus, it is a marketplace, it is a monument, it is a 
place of worship, indeed, it is this hall of Congress.
    The greatest infamy, of course, in this uncommon war is the 
premium placed on the death of innocent people. Bullets and 
boots on the ground will not alone protect us. This is shadow 
warfare and it requires a rethink of how do you defend a 
nation. Every element of national power must be brought to 
bear, even the finance ministry of the United States, as 
anomalous as that may sound to folks.
    With so many targets that defy military purpose and, 
therefore, escape common measures of detection, the three most 
critical factors that emerge as you talk about forging a new 
national power defense are, one, the need for enhanced 
intelligence, two, the leveraging effect of disrupting the 
logistical lines that constitute the purchase for stealth, and 
the need for a genuine partnership between business and 
government.
    The funding of terror, the financing of terror, the money 
of terror is the one common denominator in all three theorems. 
First, as Congressman Royce pointed out, it is virtually the 
only intelligence that has true integrity in this war. The rest 
is a product of deceit or treachery or bribery or betrayal and 
sometimes torture. But the record, the financial records that 
you discover don't lie. They are diaries, they are confessions 
of which can save a populace, as was the case from a mass 
poisoning of ricin in the London subway system.
    Indeed, when we read about the capture of Hambali several 
months ago, what was trumpeted was of course what we can learn 
from his interrogation. What was not trumpeted, and probably 
was more important than anything we are learning from his 
interrogation, is what was in his PC and what the PC contained 
in terms of his financial dealings.
    Second, the ambition of a terrorist cell is defined by its 
resources, much like the ambitions of a business or a 
government. Moreover, the only link in the chain of terror that 
is subject to deterrence is the would-be banker who otherwise 
enjoys his anonymity and his affluence and his family's 
prominence. If he can be deterred--that is to be distinguished 
from the man who puts a bomb, straps a bomb on himself and 
walks into a marketplace, he is implacable, he is beyond 
redemption--but the banker who enjoys his anonymity, he can be 
stopped if he fears discovery and the loss of his freedom. If 
we can cut him short, we can cut the designs of terrorism 
short.
    Third, no one is better suited to help police our financial 
borders than the financial services community and most of the 
folks on this panel. Indeed, the infinite number of ways that 
money can be spirited around the globe with the intention of 
killing people drives the need for more gatekeepers than this 
government has. That is in part the genius and in part the 
burden of Title III of the PATRIOT Act. To be sure, it is was 
and is at best a proxy for getting at a lethal challenge that 
we have never encountered before. I think, as I say later, it 
is very hard to judge the character of money. And in fact, when 
you talk to professionals to my left, it is characterized as a 
cliquesodic adventuresome idea.
    And maybe it oughtn't be tried in a time of peace but we 
are at war, and if we don't try it, we abdicating the single 
most promising way to stop violence attributed to terror. 
Changing people's hearts and minds is a generational challenge. 
Stopping the logistical lines that fuels the terror, which is 
to say the money, is what we can do and what we should do and 
what our resources should be devoted to doing.
    Now, there were great successes, as my testimony suggests, 
from the existence of the scrutiny at our financial borders, 
and my time is running fast. There are six specific suggestions 
I set forth in my testimony for continuing oversight by this 
committee. The most promising, I think, is the 314 safe harbor 
that has been established for discussions between one financial 
institution and another to do their own kind of scrutiny.
    For whatever reasons, and perhaps the professionals to my 
left will tell us, I don't think that has borne the fruit it 
can bear. There are a host of other recommendations that I 
make--do I have--well, I had more time than I thought.
    Chairwoman Kelly. Mr. Aufhauser, just go ahead and 
summarize. We are here to hear your testimony.
    Mr. Aufhauser. Well, let me refer to this because it is 
constructive. I mentioned 314 and the dialogue that we ought to 
encourage between financial institutions to talk about 
suspicious activity. Similarly, the government has an 
obligation to share reciprocal information with the financial 
institutions. That has been devilishly difficult because to do 
so has a procedural hurdle, which is the secure transmission of 
very sensitive data, and a substantive hurdle, which is you 
don't want to jeopardize ongoing investigations.
    A lot of people are thinking about that. No one has found 
the panacea. Perhaps this committee can help, help examine 
that, so that the dialogue from government to financial 
institutions is complete and seamless and that we can be allied 
in guarding our financial borders.
    We have yet to develop a topology for terrorist financing. 
I think it is because it is very difficult, but with all the 
intellectual caliber of the Silicon Valley and the financial 
community, I am convinced we can do it and that we have to have 
a war-like cabinet to make it happen.
    Finally, very significantly, a lot of foreign countries 
have followed our lead in the adoption of anti-money laundering 
legislation, but it is at the wholesale level, as the finance 
minister of Pakistan said to me, ``David, we need to take it 
retail, and we don't have the capability of taking it retail.'' 
So this committee should explore and urge a significant uptick 
in capacity-building, particularly in transitional economies 
about how to enforce and how to train people to enforce 
effectively anti-money laundering legislation and to combat 
terrorist financing.
    I have more but I don't want to intrude on other people's 
time.
    [The prepared statement of David D. Aufhauser can be found 
on page 34 in the appendix.]
    Chairwoman Kelly. Mr. Aufhauser, thank you. I know you have 
more. All of your testimony will be in the record, and if we 
have time, I hope that the questions will bring out any 
testimony that you may be unable to give at this moment. But if 
not, I will probably go back and ask everyone to summarize 
again because this is a very important topic.
    We move to you, Mr. Byrne.

  STATEMENT OF JOHN BYRNE, DIRECTOR OF CENTER FOR REGULATORY 
           COMPLIANCE, AMERICAN BANKERS' ASSOCIATION

    Mr. Byrne. Madam Chairman and members of the subcommittee, 
the ABA appreciates this opportunity to represent the committed 
men and women in the banking industry that work daily wit the 
USA PATRIOT Act on all of the laws covering the anti-money 
laundering obligations. When we last appeared before your 
subcommittee in March of 2003, ABA outlined a series of 
recommendations regarding needed areas of improvement to USA 
PATRIOT Act oversight.
    We are pleased to report that a number of areas of concern 
have been addressed, and our partners in the government 
continue to work closely with the industry on needed 
improvements. We ask, however, that the regulatory agencies and 
law enforcement address several of the remaining 2003 
recommendations.
    In addition, ABA has two more recommendations. First, there 
needs to be a dramatic change in routine cash reporting under 
the Bank Secrecy Act so that there can be intelligent and 
efficient use of resources by both the government and the 
private sector in the continuing challenge of preventing our 
financial system from being used by criminals. Next, with the 
increased attention being placed on risk-based compliance, the 
industry needs clear and concise guidance on suspicious 
activity reporting obligations.
    Last year, we repeated our frustration that the Treasury 
Department had never fulfilled the 1994 statutory mandate to 
publish an annual staff commentary on Bank Secrecy Act 
regulations. As we stated at the time, ``This indifference to 
congressional direction has contributed to industry confusion, 
examination conflicts and inconsistent interpretation of Bank 
Secrecy Act obligations.''
    We are pleased to report that FinCEN director, William Fox, 
has expressed his commitment to improved guidance through the 
use of advisories and commentary. We reiterate our promise to 
work with FinCEN and the appropriate agencies to achieve this 
overdue goal.
    While we repeat our 2003 call that Congress ask the 
regulatory agencies to report on efforts in coordinating Bank 
Secrecy Act exams, we have seen a commitment to consistency in 
the past several months. For example, not only has FinCEN 
Director Fox expressed public support for uniform assessments, 
but he has also directed the Bank Secrecy Act Advisory Group to 
form a Subcommittee on Exam Issues. This subcommittee, co-
Chaired by the ABA and the Federal Reserve Board, will review 
existing guidance and offer appropriate recommendations. We 
would be happy to report to this committee on our findings.
    With the increased entities required to file suspicious 
activity reports, as well as the heightened scrutiny by 
regulators on SAR policies and programs, it is essential for 
the regulatory agencies, law enforcement and FinCEN to assist 
SAR filers with issues as they arise. This need is particularly 
obvious in the area of terrorist financing. As you heard from 
Mr. Aufhauser, this crime is difficult, if not impossible, to 
discern as it often appears as a normal transaction.
    We have learned from many government experts that the 
financing of terrorist activities often can occur in fairly low 
dollar amounts and with basic financial products. Guidance in 
this area is essential if there is to be effective and accurate 
industry reporting. The bottom line is that terrorist financing 
can only be deterred with government intelligence shared with 
the financial services industry.
    Recently, several financial institutions have contacted ABA 
about examiner criticisms received in reviews of their 
Suspicious Activity Report programs due, in large part, to the 
number of SARs that the institution has filed. These financial 
institutions expressed the concern, which we share, that the 
number of SARs filed meets a minimum threshold or that 
institutions are not filing the same number of SARs as peer 
institutions. The concern expressed is that there be new 
requirements in the form of a quota for determining the 
adequacy of SAR programs consisting, in large measure, of 
counting the number of SARs filed and, in some instances, 
comparing the number of SARs filed between peer institutions. 
Obviously, this would be a significant and alarming development 
in the examination and review process.
    Moreover, regulatory scrutiny of SAR filings, and the 
recent civil penalty assessed against Riggs Bank for SAR 
deficiencies, has and will cause many institutions to file SARs 
as a purely defensive tactic to stave off unwarranted criticism 
or second guessing of an institution's suspicious activity 
determinations. Obviously, if that continues, the legitimacy of 
the information in the SAR database will be called into 
question.
    In terms of routine cash reporting, a February analysis by 
FinCEN shows that over half the CTRs filed would be eliminated 
if the current $10,000 threshold were raised $20,000 for 
businesses. The current dollar amount was created 35 years ago. 
While $10,000 is still a large amount of cash for individuals 
and probably should not be raised, reports on routine 
businesses simply clog the system.
    Those who would argue that a change in CTR reports will 
lessen the banks' focus on cash transactions need to be 
reminded that the industry will still have reporting 
infrastructures in place, be required to file SARs on 
suspicious transactions and would retain the mandate to report 
individual CTRs over $10,000. We believe now is the time to 
adjust a process that is in sorely need of repair.
    The ABA has been in the forefront of industry efforts to 
develop a strong public-private partnership in the areas of 
money laundering and now terrorist financing. This partnership 
has achieved much success but we know more can be accomplished. 
We commend the Treasury Department, the banking agencies and 
FinCEN for their recent efforts to ensure a workable and 
efficient process. We will continue our support for those 
efforts.
    Thank you for this opportunity, and we will be happy to 
answer any questions.
    [The prepared statement of John J. Byrne can be found on 
page 40 in the appendix.]
    Chairwoman Kelly. We thank you for your testimony, Mr. 
Byrne.
    Mr. Cachey?

     STATEMENT OF JOSEPH CACHEY III, VICE PRESIDENT, CHIEF 
       COMPLIANCE OFFICER AND COUNSEL, GLOBAL COMPLIANCE

    Mr. Cachey. Thank you, Madam Chairman and committee 
members. Western Union is a global leader in money transfer, 
and you are correct, we do business in 195 countries and 
territories around the world through 185,000 global locations. 
Internationally, over 70 percent of these locations are banks 
or national post office systems. Domestically, in the United 
States, we have over 45,000 locations which were made up of 
grocery store chains, convenience stores and check cashers, 
among other businesses. The important thing to note is that 
these are local businesses serving local communities' needs.
    I just want to highlight three or four areas of my 
submitted testimony today in my opening comments. First, it is 
important for the committee to realize that from an anti-money 
laundering compliance standpoint, this is still a fairly new 
game to money services businesses. SAR reporting became a 
requirement for our industry at the beginning of 2002, and the 
Section 352 PATRIOT Act compliance programs went into effect 
the summer of 2002. So we are only 2 years in the process of 
educating an industry and getting an industry up to speed as to 
the responsibilities and how to do this right.
    Our goal in working with our agents in the U.S. is twofold: 
First, education, and, second, to make it cost effective. From 
an educational standpoint, we have provided agents with turnkey 
compliance guidelines to get them up to speed as to something 
as simple as what does a compliance officer do? What do 
policies and procedures for anti-money laundering compliance 
program typically look like? What is employee education on 
these issues, and how do you document that? And then of course 
the internal reviews that need to occur.
    We also provide our agents with ongoing regional training, 
topic-specific workshops and one-on-one training if they 
request it. And then we are currently and constantly enhancing 
these tools so that our agents are getting new information, 
information in a variety of languages, information that will 
allow them to build their programs and monitor their activities 
so they can fulfill the suspicious activity reporting 
requirement. We continue these efforts today and believe that 
the regulatory community should continue this effort in the 
same way.
    Education is key. As a compliance officer, I tell my 
business clients, internal clients all the time that to start 
at ground zero and work your way to a full-fledged, mature 
compliance program takes 3 to 5 years. We have been scrambling 
to get it done in two to three ways, and I think we are well on 
our way, but we need to keep this in mind as we move forward.
    Secondly, and a number of panel members have mentioned 
this, the regulations call for a risk-based approach, and we 
appreciate that. Industry and regulators should focus resources 
where the highest risk is actually located. In Western Union, 
for example, we treat different categories of our agents 
differently. We break agents down to national accounts, 
networks and independents, or what we commonly refer to in the 
industry as mom-and-pops.
    A national account is typically a publicly traded 
corporation. They have internal legal departments, internal 
audit departments, typically you can start at the top, express 
what needs to be done for your particular service, and that 
could get pushed through to an organization in a very efficient 
manner. It takes less work to get a national account to do what 
needs to be done than any other account because they want to do 
it the right way.
    Networks typically are regional. They also have internal 
infrastructures, if you will, but they typically need more help 
on the legal aspect: ``What is BSA compliance, what is AML 
compliance, can you help us build our program?'' But, again, 
once that program is built, they have good mechanisms and 
infrastructures in place to roll those programs out.
    And then probably the greatest challenge is the mom-and-
pops because they don't have access to lawyers readily, you 
don't want to make them hire a lawyer or a consultant to have 
to go figure out what the BSA is and how to build a program. 
They don't have a need for intense infrastructure within their 
business, and so you really need to walk them hand in hand 
through the process.
    Western Union views this as a risk-based approach because 
each organization poses different levels of risk in getting 
programs rolled out, and we believe that FinCEN and the IRS 
should take the same approach in applying their resources, both 
for education and then also the IRS' examination process.
    Finally, I would just like to say a word on terrorist 
financing. As we have all indicated, today's terrorist cells 
strive to weave themselves into the fabric of our society to 
camouflage a financial legitimacy. Typically, they enter 
whatever jurisdiction they are entering into legally, they get 
valid government IDs, they get bank accounts, they get credit 
cards, they get debit cards, and, as we all know, we need a 
surprisingly small amount of money to do what they are striving 
to do. If a name gets put a public list, like the OFAC list, we 
will make sure that that person doesn't receive or send any 
transactions.
    But the key is better non-public information, non-public 
intelligence from the government to let us know what should we 
be looking for? What are the government intelligence agencies 
seeing, what patterns are they seeing, what activities they are 
seeing so that we can look for that in our back room and 
identify that type of activity which is most useful to law 
enforcement.
    Thank you very much for this opportunity, and I will be 
happy to answer any of your questions.
    [The prepared statement of Joseph Cachey III can be found 
on page 50 in the appendix.]
    Chairwoman Kelly. Thank you, Mr. Cachey. I was interested 
that you pointed out in your testimony that the terrorists can 
use rather discrete amounts of money in various ways, and I 
think that is an important piece of your testimony. I thank you 
for pointing that out.
    Mr. Richards?

 STATEMENT OF JAMES RICHARDS, OPERATIONS EXECUTIVE FOR GLOBAL 
             ANTI-MONEY LAUNDERING, BANK OF AMERICA

    Mr. Richards. Thank you, Madam Chairman, Ranking Member 
Gutierrez, members of the subcommittee. As pointed out, I am 
the senior vice president and the global anti-money laundering 
operations executive for Bank of America. I held a similar 
position at FleetBoston Financial prior to the merger.
    In both rolls, I have or had responsibility for the bank's 
operational aspects of preventing, detecting and reporting 
potential money laundering or terrorist financing. I stress, 
Madam Chairman, the operational aspects or operational 
perspective, as I bring to this subcommittee the perspective of 
someone who sees the Bank Secrecy Act and USA PATRIOT Act, the 
regulations and regulatory expectations and guidance firsthand 
and in operation.
    From a purely operational point of view, money laundering 
and terrorist financing are two, very, very different problems. 
Traditional money laundering prevention is a transaction-
focused internally sourced issue where transactions lead to 
relational links. Terrorist financing prevention is very 
different. It is a relationship-focused, externally sourced 
issue where relational links lead to transactions.
    Take a typical money laundering case. We are required to 
detect and report potential structuring. Customers have come 
into the bank and structure cash transactions so as to avoid 
the large cash reporting requirements. Looking solely at those 
large cash transactions is a pretty basic exercise and can lead 
to potentially suspicious activity but building a tool and 
having a program that enables you to take every customer who 
opens up an account without a taxpayer identification number, 
with an opening deposit of less than $100, who structures cash 
deposits in the United States and withdraws money through ATM 
machines in high-risk countries. Now, that is interesting and 
frankly is not that difficult to do.
    Compare that typical money laundering case with a typical 
terrorist financing case. Almost every one of them starts with 
some sort of request from the government, whether it is a grand 
jury subpoena or a Section 314(a) information-sharing request. 
Let's say the request is for Bin Laden Enterprises, 123 Main 
Street. That would be a very typical 314(a) request. First, we 
have to scrub our various customer and transactional systems to 
determine if we have a match on that name.
    Let us assume we don't have that customer at that address 
but we have Khalid Sheikh Mohamed and KSM Enterprises at the 
same address. We would have to then review our transactional 
systems, and we would find that KSM Enterprises sent wires to 
another entity called AQ Recruiting. We would use a surface web 
search engine, such as Google, to find more information on 
Khalid Sheikh Mohamed, KSM Enterprises and AQ Recruiting. Very 
often, even more important than what we find is what we do not 
find. Legitimate businesses generally cannot hide from the 
Internet.
    We would also use what we call the invisible web resources 
such as Search Systems to find that Khalid Mohamed was an 
officer of both KSM and AQ, and there were six others that were 
officers of both. We may also find that those six were officers 
of six other companies. We then go back into our systems and 
perhaps find another 15 customers and 6 addresses that appear 
linked to all the people either transactionally or 
relationally. We would run those addresses and telephone 
numbers, and we would add more entities.
    If one of our targets had a web site, let's say one of them 
is a charitable organization, we would then be able to go into 
the historical web and look at all of their web sites back as 
far as 1996. What we would have is something that was sourced 
by the government: even though it was not a match under 314(a), 
we would now have a case that involved at least 15 people, 10 
companies transacting between themselves where the public 
information doesn't match their activity. And if the totality 
of the relationships and transactions led to a standard of 
suspiciousness, we then have a very effective and very good 
Suspicious Activity Report to file.
    The success of the financial sector's anti-money laundering 
and terrorist financing prevention efforts is entirely 
dependent on two things: First, cooperation between and 
coordination by all of the parties involved: the law 
enforcement and intelligence communities, the regulatory 
community, the private sector, our trade associations, such as 
the ABA, and others; and, second, creative, committed 
professionals dedicated to this task.
    In my experience, Madam Chairman, the American financial 
sector has both.
    Thank you for this opportunity to testify on this very 
important topic. Bank of America remains committed to meeting 
its obligations of protecting, preventing, reporting and indeed 
mitigating the effects of money laundering and terrorist 
financing and recognizes and applauds the efforts of its 
private sector colleagues and public sector partners in these 
efforts. Thank you.
    [The prepared statement of James Richards can be found on 
page 72 in the appendix.]
    Chairwoman Kelly. Thank you, Mr. Richards.
    Mr. Emerson?

     STATEMENT OF STEVEN EMERSON, EXECUTIVE DIRECTOR, THE 
                     INVESTIGATIVE PROJECT

    Mr. Emerson. Madam Chairman, members of the committee, I 
want to thank you for inviting me, and I also want to commend 
your for assembling a phenomenal panel this morning--the best 
panel I have seen on money laundering and counterterrorism 
issues. I also want to let you know, Madam Chairwoman, that I 
am very appreciative of the incredible leadership you have 
played the last 2.5 years since September 11 in terms of 
bringing to the attention of the American public, Congress, the 
media and other institutions the role that needs to be played 
by the private sector and government in fighting the scourge of 
terrorism.
    I also want to express my appreciation to Congressman Royce 
who I have had the privilege of working with very closely 
following September 11 when Congressman Royce invited me to 
join his squatter's movement in various members' offices until 
they agreed to approve and support the PATRIOT Act. And I 
understand and appreciate very much what it takes to pass 
legislation in this great body.
    I also want to let you know that I am very appreciative of 
my staff, Jon Levin and Dana Lessman, of the Investigative 
Project for their help in preparing this testimony.
    One of the issues that we obviously would be looking at 
today in much greater detail, and are looking at, is the Riggs 
case. The question is does Riggs represent an exception or does 
it represent a pattern? Its failure to obey the order and file 
SARs, a suspicious activity report, in deference to the 
client's desire, principally that of the government of Saudi 
Arabia for secrecy, is the most single, serious breach every in 
the first line in U.S. history of financial controls against 
terrorism.
    The bank officials who participated in these willful 
violations should be held personally responsible, and there are 
many questions that need to be answered. Whether clients are 
assured of a quid pro quo? How long did it continue to operate? 
To what activities have drawn funds from diplomatic accounts 
from Saudi Arabia at the Riggs branches? And considering the 
long-term problems with Riggs, why didn't the OCC consider it a 
high-risk institution?
    I urge this committee to conduct a thorough and 
comprehensive review of the reports prepared by financial 
regulators and to work closely with law enforcement and 
financial oversight institutions to see exactly what went wrong 
in the Riggs case.
    And although the Riggs case represents the failure of the 
financial sector in oversight, there are cases and examples 
that represent the courageous successes of institutions in 
helping to track and interdict possible terrorist operations. 
In this category, although he is very humble, my co-panelist, 
Jim Richards, I must tell you, has played a singular role in 
helping and actually leading the government in identifying 
terrorists in the United States and helping to stop operations 
because of his recognition of actual activities in financial 
reporting that led the government to identify and issue law 
enforcement sanctions against possible terrorists.
    Also, David Aufhauser has continued to play a leadership 
role in the war of terrorism financing. His vision and 
leadership is thoroughly needed as we move forward.
    In one instance where I can discuss, and it has been 
publicly cited in previous reports, a major financial 
institution cut ties with a terrorist-linked bank after being 
advised to do so. In the year 2000 and 2001, Citigroup was 
participating in joint ventures with the al-Aqsa Bank, which 
has ties to Hamas. When informed by the Israeli government of 
those ties, Citicorp contacted the U.S. Treasury for guidance 
and subsequently terminated its relationship with al-Aqsa Bank.
    So what is the true relationship and paradigm here? Is it 
Citigroup taking the initiative with the Treasury Department or 
is it Riggs Bank's failure to comply with the government 
mandates? Al Qaida and other terrorist groups have found huge 
crevices and holes in the financial structures of Western 
nations, exploiting not just their freedom of regulation but 
also the freedom of religion and freedom of thought, the 
freedom of expression to basically promote religious extremism 
under the guise of financial transactions.
    That is something that necessarily financial regulators 
will not always be advised of or even be aware of, and in this 
case the concept advanced by Congressman Royce for a much 
needed financial intelligence ability, the creation of which is 
equivalent of having a CIA at Treasury that could recognize 
patterns, activities from those who established accounts to 
those who are the recipient, is absolutely critically needed 
for the first time in the war against terrorism.
    Al Qaida itself has established its own banking system 
outside of European and U.S. law. Al-Taqwa Bank, for example, 
was created by the Muslim brotherhood in 1988 to move and 
safeguard large quantities of cash for terrorist causes. It was 
designated a terrorist entity by U.S. authorities in 2001. In 
January 2002, the Treasury deputy general counsel wrote to a 
Swiss prosecutor notifying that as of October 2000 Al-Taqwa 
seemed to be providing a clandestine line of credit for a close 
associate of Bin Laden. Reportedly, the Justice Department 
might now be close to bringing indictments.
    The questions that you face in the future, and as you have 
faced in the last 2.5 years, is to what extent we can enlist 
and ensure that the private sector participates aggressively in 
the interdiction and recognitions of the dangers.
    One very good statistic that I will tragically leave you 
with is the ratio of what the costs were to the damage of 
September 11. The costs of carrying out September 11 to the 
terrorists was about $500,000, largely in transfers of less 
than $5,000. The cost to the U.S. economy was $500,000 billion. 
That is a ratio, I don't need to do the match of a million to 
one. If we had spent a little bit more money ahead of time and 
invested it paying the price that we should have paid, we might 
have been able to prevent this incredible tragedy.
    Thank you, Madam Chairwoman.
    [The prepared statement of Steven Emerson can be found on 
page 61 in the appendix.]
    Chairwoman Kelly. Thank you, Mr. Emerson.
    Mr. Aufhauser, there was a discussion in the April 20 
Summit Banking Committee hearing about your suggestion of a 
separate examination and compliance force within the Treasury. 
In that hearing, there was some resistance from one of the 
witnesses, a head of one of the regulatory agencies. His 
resistance was based, first, on the idea that regulators should 
be given more time to prove that they can perform at the level 
that we expect in a post-September 11 environment. He went on 
to suggest that implementing new structural reforms would take 
time that we do not have.
    I am very interested in your thoughts on these concerns. I 
think most of us would agree that we are in a new security 
environment for the long haul, but we should probably make sure 
that we have in place now a regulatory and compliance structure 
that will be capable of serving us all at a high level of 
effectiveness over a long period of time.
    If we don't act now, aren't we just deferring legal reforms 
to a later date? And if, as suggested, I think we give the 
current regulators some time and we still don't reach the 
performance levels that we expect, then do we face the 
possibility of being in similar circumstances a couple of years 
down the road, having gained nothing during the way?
    The Riggs Bank failed to report, the OCC failed to detect, 
this was something that I am wondering if it wouldn't happen 
again if we don't act now to do something. And I would be 
interested in what you have to say about that.
    Mr. Aufhauser. Well, I can't divine whether if we had 
changed the structure, Riggs would have been discovered 
earlier, but what informed my testimony earlier, and I still 
endorse it, is two concerns. One is for uniformity. Two is 
without discounting in any way the professionalism of the folks 
at the OCC and the Federal Reserve, their larger mandate is 
safety and soundness when they take look at financial 
institutions.
    AML issues and terrorist financial issues, which is a 
subset of AML in my judgment, are at risk. I am not saying it 
happens necessarily but are at risk of becoming stepchildren to 
the examinations. And in the best of all possible worlds, to 
quote, Penglas, I do believe it would be better to have one 
uniform compliance office that was enforcing the BSA 
regulations.
    The second thing that informs that judgment is that the 
Treasury Department has relied on OCC and the Federal Reserve 
and indeed the SEC on delegating the authority and 
responsibility for examining compliance, because they are 
already heavily involved in the regulation of their industry 
actors. But the PATRIOT Act extended AML requirements to a 
whole host of industry sectors that do not have any coverage by 
any Federal regulator, whether it is casinos or whether it is 
insurers or whether it is car dealers and jewelry stores, and 
hedge funds, by way of example, also.
    So there is a complete community of interest out there, 
which under 352 of the PATRIOT Act is responsible for complying 
and establishing AML programs, yet no one is policing them--no 
one, no one.
    Chairwoman Kelly. That is really serious, and I think that 
it is something that we have got to--that is one of the reasons 
why we are having this hearing. I think it is very important 
that we move on with it.
    I would like to ask both you and Mr. Emerson, should the 
new Undersecretary at the Office of the Treasury--that office 
is designated to coordinate anti-terrorist financial efforts. 
Should that office have the enforcement authority or should 
they just have intelligence capability and let the enforcement 
authority go to another agency?
    And I would like to start with you, Mr. Aufhauser and move 
to you, Mr. Emerson.
    Mr. Aufhauser. That is a hard question. That is a hard 
question because I haven't thought about it. I have always 
married the two interests, and I think it wildly inefficient 
not to have both. I do agree with what Steve said, and I am 
sure he will say more, we need a professional first-class, 
best-in-class financial intelligence unit in the U.S. 
government.
    We have extraordinarily people populating various agencies 
of the government that pursue that interest. There is no one 
FIU right now, and there is no one woman or man charged with 
not only directing the resource application, directing the 
analysis but also holding people accountable. So that is a very 
important part of your question which is that there ought to be 
a very strong intelligence FIU unit.
    What you do with that next in terms of enforcement, you 
used the word, ``enforcement.'' It may not be enforcement. It 
may be other endeavors that you undertake, diplomatic or 
otherwise, to make sure that you are frustrating somebody's 
attempt to penetrate our financial borders to kill people.
    I do think the person who possesses the best knowledge of 
the intelligence and who is charged with responsibility for 
establishing a strategy ought to be charged also with the 
responsibility for executing.
    In the past, during my tenure, a lot of that was done by 
committee at the NSC, and although I think we did a really 
credible job, I do think the NSC is the wrong place to have an 
operational organization. It sets policy; it doesn't execute.
    Chairwoman Kelly. Mr. Emerson?
    Mr. Emerson. I think you rightfully point out that the 
problem exists today. I remember reading the hearings, I think, 
last week or the week before, various officials in the Treasury 
as well as ICS where the number of three-and four-letter 
acronyms, I was dizzy by the time I read the third testimony. I 
think there were 19 I read and it was sort of like a Reuben 
Goldberg machine, and obviously there really wasn't some type 
of coordinating mechanism but there was a stovepipe 
relationship.
    And I think your question goes to the heart of what is now 
being faced at the FBI, which is to the extent to which there 
needs to be a separate intelligence branch broken out of the 
FBI for enforcement; that is let the enforcement people do the 
enforcement and let the intelligence people specialize the 
intelligence.
    As much as I theoretically would like to endorse the notion 
of a combined enforcement and intelligence position, my feeling 
is that the intelligence people need to be thoroughly 
instructed, mandated and only focused on intelligence 
gathering. They have to live and breath it all the time. They 
have to work on an equal playing field, perhaps even in a 
higher playing field in terms of being able to mandate 
sanctions or enforcement, but there has to be a cadre.
    As Congressman Royce has pointed out, the financial 
intelligence that needs to be created is only going to come 
from people. You can have the best software in the world, the 
best link analysis--I know that in our office we use Analyst 
Notebook, it is wonderful but in the end it is garbage in, 
garbage out--and it is only on the ability of people like Jim 
Richards to look at transactions in the actual account to say, 
``You know, there is something suspicious.''
    Last night I was reading over the actual transactions in 
the Sami Al-Hussayen case, that is the IANA prosecution that is 
being carried out in Idaho right now. And what was interesting 
to me I was looking over an 80-page matrix of financial 
transactions from his bank account over the last 2 years, and I 
was trying to figure out if I was a bank officer or a teller, 
could I have detected a pattern here of suspicious activity 
merely by looking at it.
    If I look at the numbers, no, even though there are large 
numbers sometimes of $10,000, $15,000, $20,000 transfers within 
days of one another. But in terms of who was making the 
deposits and withdrawals in terms of either the Saudi cultural 
offices or Saudi government, this would have triggered 
something automatically, and it would have taken somebody who 
was read on to this and sensitized to this issue.
    So I think to be comprehensive about it, a new 
undersecretary should be vested with everybody who reports to 
him on intelligence matters and I think actually have a 
position that oversees issues of enforcement.
    Chairwoman Kelly. That is very interesting.
    Mr. Richards and Mr. Cachey, I will start with you, Mr. 
Richards, but, Mr. Cachey, I want to go to you too. Can you 
identify any particular case in which your companies worked 
with law enforcement to stop the flow of funds to a terrorist 
group or an activity of some sort?
    Mr. Richards. Madam Chairman, off the top of my head, I can 
think at least two particular cases: One prior to September 11 
and one after September 11. In both cases, we identified what 
we thought was suspicious activity. Again, we are not required 
to detect money laundering or terrorist financing, we are 
required to detect and report suspicious activity. We did that.
    In both cases, we felt it was significant enough that we 
immediately contacted law enforcement, which we are entitled 
and indeed perhaps required to do if it is an ongoing, serious 
matter. And in this case, it was the Boston U.S. Attorney's 
Office, and they immediately contacted us and sought the 
underlying records that were the basis of our suspicious 
activity reports. Subsequent news events confirmed that what we 
had reported was indeed tied to potential terrorist financing.
    Chairwoman Kelly. Mr. Cachey?
    Mr. Cachey. I think the important thing that I took away 
from Mr. Richards' comments was he discovered that they had 
done something wonderful through a news report, and I think 
that is the challenge we have. When we see suspected activity 
that we think is terrorist related, we report it directly to 
certain agencies within the government along with FinCEN, 
particularly Operation Green Quest when that was in effect and 
now Homeland Security.
    But we don't get the type of feedback from law enforcement 
that we would like to get to say that SAR you filed or that 
phone call you made led to this activity. Because if you don't 
read about it in the newspaper, you really don't get any 
feedback, so we do have processes in place, both through our 
Compliance Department and our Security Department with several 
fellow agencies that we report suspected activity to, but 
feedback is hard to get, particularly if there is an ongoing 
investigation, which you can understand.
    Chairwoman Kelly. Thank you both very much.
    Mr. Gutierrez?
    Mr. Gutierrez. Than you very much. I would like to thank 
all of the witnesses. It seems to me from listening to all the 
panelists that there are a couple of things that maybe we can 
improve on.
    I kept hearing the phrase, ``educating people,'' starting 
with you, Mr. Aufhauser, and others about who do we need to 
educate on our financial industries and how could we go about 
doing it better in terms of watching for suspicious activity 
and getting to it. Do we call them all in for--I mean they call 
us all in for meetings and I get educated on ethics rules and 
my staff does, and we get constantly--I know the doctors--good 
doctors will continuously get reeducated after. What do we need 
to do so that we can better do this?
    Mr. Aufhauser. If I said the financial community needs to 
be educated, I only said half of what I intended to say. So 
does the government. I mean it really is a two-way street, and 
without the reciprocity, the exchange of the knowledge universe 
that each has, it is a fruitless endeavor.
    I think what we have to educate each other on is getting 
smarter, ironically. My brief experience in my private life for 
the last 3 months has been there is actually overreporting of 
SARs, in part, simply out of a cautionary note by financial 
institutions and, in part, because with the exception of 
perhaps Jim Richards who seems to be very long on the tooth on 
what to look for, a lot of the new actors who are subject to 
SAR reporting don't exactly know what to be looking for.
    Jim is exactly right, they don't file a SAR because they 
know it is terrorism and you don't file a SAR because you know 
it is a crime. You file a SAR because there is a suspicion, 
something to the character.
    Mr. Gutierrez. I gathered that from your comments and from 
what Mr. Richards said. So is there a way of taking Bank of 
America and the kinds of things that we have heard here today 
and ensuring that other institutions do more?
    Mr. Aufhauser. I don't know if it is that institutions need 
to do more. I just think we need to be smarter about what we 
are looking for, and that requires what used to my office 
talking more to private industry.
    Mr. Gutierrez. How do we----
    Mr. Aufhauser. What we didn't have the genius, Congressman, 
and I didn't have the genius for is how do you do that without 
jeopardizing something incredibly sensitive? And I mean it in 
terms of broadcasting the information, sort of these 314 
requests that go out and say, ``Hey, this guy, Aufhauser, is 
suspicious. Do you have anything on him?'' The most important 
dialogue I ever had with people like Jim or Joseph--and, by the 
way, there are stories one could tell about Western Union being 
terrific ally of the U.S. government in the war on terror which 
has nothing to do with capture but has everything to do with 
helping us abroad.
    I think what we--you know, I have actually lost my train of 
thought there. What we need to be--the most productive thing I 
ever did was a specific targeted request for information 
because of a very sensitive piece of information. And I went to 
somebody I trusted in that institution. There was an element, a 
bond of personal trust. If we can figure out how to multiply 
that so that we can do more broadcasting of sensitive 
information, we will be more effective.
    One last very soft observation: This is not about just 
capturing bad guys, it is about them fearing capture. And I 
have read plenty of intelligence, actually overheard intercepts 
where bad guys abroad said, ``We can't use the U.S. financial 
banking system; they will catch us.''
    Mr. Gutierrez. And I guess what I have heard is maybe we 
are going to need to look into this a little further. And 
anybody who has any other comments on what we can do to better 
educate our folks and who we need to educate within that system 
that certainly, I think, would be helpful from your 
perspective. And, as you say, obviously we both need to educate 
each other. We need to do a better job on our side.
    I have limited of time so I just want to--can we ask the 
other--thank you.
    Mr. Byrne and Mr. Cachey, please.
    Mr. Byrne. Congressman Gutierrez, I want to make a couple 
of points about education. I don't want the committee leaving 
today thinking that there hasn't been for a good number of 
years a whole host of programs on big picture education, 
certainly, not just the laws and regulations but examples of 
money laundering cases once they are closed and the typologies 
that we share with bankers on what to look for going forward in 
the areas of money laundering and fraud and those sorts of 
crimes. So that goes on on a regular basis, and many of us 
participate in those sorts of programs.
    I was at a program a couple of weeks ago on the west coast 
in which law enforcement, bank regulators and bankers met for 3 
days and worked on terrorist financing and PATRIOT Act issues 
in which, for example, the IRS Criminal Division or the FBI 
would do a presentation on how a particular line of SAR 
reporting turned into a conviction, what to look for--while we 
don't have enough of these, what to look for in terms of 
terrorist financing going forward or money laundering.
    Law enforcement does a very good job of doing training and 
programs. We in the industry need to be part of those as much 
as we can. We are not talking about investigations as they are 
pending, we are talking about once they are closed and we get 
some information going forward. So a lot of that has been 
occurring for the longest time that I have been at the ABA.
    Mr. Gutierrez. I understand that. I mean I wish I had--I 
could take excerpts of what you have all said and either I am 
taking things out of context but I kind of heard here that we 
could do better.
    Mr. Byrne. Absolutely.
    Mr. Gutierrez. So I don't want anybody to be defensive 
about what we are already doing well but what we can do better, 
and I kind of heard that we could do better from almost 
everybody, from Mr. Aufhauser all the way to Mr. Emerson. So 
from left to right, I heard we could do better.
    So that is all I want to know is what we could do better. I 
understand that the institutions have done well and especially 
since we called this hearing because of what happened at the 
Riggs institution. So, obviously, Riggs would not be in the 
situation it is in today and Mr. Aufhauser said that the OCC 
and the Federal Reserve, which I agree with him, have safety 
and soundness as their basic mission. And they are expanding, 
the OCC is expanding its purview of what it decides it wants to 
do as a regulatory institution.
    So, obviously, we could do better, and we want to be able 
to command those resources, and I think that is what this 
hearing is all about is to look at Riggs and how we move 
forward.
    One last question, if I could, Madam Chair, and that is to 
the Bank of America and Mr. Richards. It seems to me you have 
harnessed common resources of the Internet and Excel to develop 
the systems to detect and prevent money laundering. What kind 
of compliance guidance have you gotten from your regulator 
regarding anti-money laundering efforts?
    Was the system developed within your own institution or 
with the help from the government? Are you working together 
with us to develop the system at Bank of America or just by 
yourself in the private? How closely does your regulator 
monitor those activities? And how often do you hear back from 
the regulator after seeking--you file a SARs report, send them 
your report?: How often do you hear back from them, the 
regulators? That was a big question.
    Mr. Richards. I think it was perhaps four questions. I will 
try to answer them all.
    Our program was developed at the former FleetBoston 
Financial. It was developed starting in January of 1999, and I 
often joked that it was two guys and two laptops, but that is 
exactly what it was.
    What we did was try to build a--rather than build an anti-
money laundering program, we tried to build a data management 
program. Our belief was that we needed to marshal all of the 
data and information that we had in the bank, and once we were 
able to marshal it, we could then look at it in a creative way 
for any purpose, whether it was money laundering or terrorist 
financing or marketing--any purpose.
    As we developed that program our primary Federal 
regulators, which are the Federal Reserve and the OCC, 
monitored our development of that program literally on a 
continual basis. We met with them through our compliance 
partners in the bank on a quarterly basis, and they were very, 
very intrigued by it, not only because it was developed at a 
very low cost and used tools that people had on their desktops 
but hadn't before been using for anti-money laundering, but 
they were intrigued by the fact that it was a program that 
seemed to work reasonably well in a large institution but was 
applicable to the very, very smallest institutions.
    And so the feedback we got was very, very positive. They 
were very, very interested in it, and indeed they have had me 
down to the FFIEC on I believe now four occasions to talk to 
the Federal bank examiners from all five agencies and tell them 
how we developed the program. And I know that John Byrne, the 
ABA, has directed other banks to speak with us, to see what we 
did and how we did it, and we have been sharing what we have 
done with every bank that is interested, which is a number of 
them. And I know that Western Union has also shown a great 
interest, and we have worked very closely with them as well.
    So I think I have answered at least some of your questions. 
But, particularly, the OCC I think has been very, very 
interested in what we have done and how we have done it. And we 
are working very, very closely with them.
    Mr. Emerson. Mr. Gutierrez, if I could just add one thing 
here, because I think you have raised a very good point, and 
Mr. Aufhauser also raised the issue of sensitivity and 
information. Before September 11, the debate was always secrecy 
versus shared. After September 11, we realized that more people 
in the JTTFs and in law enforcement need to get intelligence, 
and the risks of having that information leak out was 
outweighed by the issue of having other people basically in 
line and aware of the threat and the information.
    I think we should consider the possibility of certain bank 
institutions in need of certain thresholds to having designated 
officers that would be read on to certain classified 
information that they would be privy to information that is not 
made available just to the general public but made available to 
certain classified security programs, which they would be able 
to then use to help discern patterns in the larger context for 
transactions.
    And, of course, there is always the risk of operational 
secrecy and leakage, but I think that would far outweigh the 
problems that would ensue if we didn't do that. So maybe that 
is something to consider to ensure that there is this financial 
intelligence of a nature that goes just beyond what the public 
stores documents, which, unfortunately, most of the time does 
not give a bank officer enough information to determine whether 
the transaction is sinister or not.
    Mr. Gutierrez. Thank you. Thank you all for your service.
    Mr. Cachey. Madam Chairman, could I address that----
    Chairwoman Kelly. Yes, by all means.
    Mr. Cachey.--just briefly? First, on the question of 
education, I think it is important from a money services 
businesses standpoint to realized that a number of the types of 
businesses that Mr. Aufhauser mentioned before, the money 
transmitters, the pawnbrokers, the car dealerships, everybody 
that has become part of the PATRIOT Act family, if you will, 
are typically licensed and regulated at the State level.
    So I think there needs to be greater cooperation between 
States that are licensing all these separate entities and the 
Federal Government and figuring out who is actually a money 
service business and should be having a program in place and 
reporting out on suspicious activity, and then coordinating 
those efforts between the Federal Government and the States.
    Because right now you could have an IRS representative walk 
into your company and tell you X and then a State banking 
examiner from one of 47 different States come in and tell you 
why Z or A or B. And it is difficult, number one, to build 
consistent programs nationwide, but it is also difficult for 
the smaller MSBs to say who is correct here and what is the 
right thing for me to do because what we have discovered is we 
have worked through our agent basis.
    Ninety-nine point nine, nine, nine percent of these 
business want to do the right thing, but they need somebody to 
tell them what is the right thing.
    Mr. Gutierrez. You know something, I agree with you 
totally, and, unfortunately, we get results at the State level. 
Because when I try to reign in Western Union and Money Gram on 
the exchange rate, we could do nothing here in the Congress of 
the United States, but we could do things at the local level so 
that your exchange rate at Western Union is comparable to Mr. 
Byrne's Association of Bankers exchange rate. So I think we 
will have a difference of opinion on that.
    Thank you very much.
    Chairwoman Kelly. Mr. Hensarling?
    Mr. Hensarling. Thank you, Madam Chair.
    Mr. Aufhauser, in your testimony, I believe you mentioned 
some anecdotal evidence of some intelligence intercepts where 
some of the bad guys were saying, ``We have to steer away from 
the U.S. financial services system. It is not going to work for 
us.'' So I take that as very good news. As a former student of 
economics, I typically think in terms of cost and benefits. So 
the anecdotal evidence is persuasive but as a society what are 
we getting for all of these suspicious activity reports and the 
currency transaction reports? How do we measure success here?
    Mr. Aufhauser. If you want to put a calculus on this, I 
have read studies that have suggested that the adverse 
consequence, that is the cost, of the World Trade Center is in 
the trillions of dollars. It wasn't just the loss of 3,000 
lives, it wasn't just the disintegration of the buildings, it 
wasn't just the closing of our financial markets, but it was a 
market cap loss of an astonishing historic amount of money and 
the now daily tax, as I say in my testimony, that we all pay 
for enhanced security at virtually every door you pass through 
in America today. And that cost to me is almost incalculable 
and immeasurable, but it is certainly large.
    So I measure that against--that is to say another calamity. 
If I measure the cost of another calamity, what it will do to 
our markets, our capital markets, what it will do to even more 
tightening of what our freedoms are and more security cops and 
more machines and more taxes on the airline tickets and less 
freedoms, it strikes me that the cost and the burdens of a SAR 
compliance program are diminimus.
    In addition, if you take it on a microeconomic level, every 
institution that is at risk of losing its good name, which is 
the principal asset any company has today because one errant 
transaction goes through there which is the cause of massive 
death, I think if you talk to many institutions, many of which 
are my clients, nothing is a higher priority than protecting 
their good name. And they don't measure it in dollars and 
cents.
    Mr. Hensarling. Mr. Emerson, part of your testimony, if I 
understood you properly, you said that most, if not all, of the 
financing of September 11 took place in financial transfers of 
approximately $5,000 increments. Did I understand you correctly 
on that point?
    Mr. Emerson. Yes. Most of them took--I think there were a 
couple of increments--not that all of this has come out or that 
I am privy to all of the transactions, but many of the 
transfers took place from banks, institutions in the Middle 
East, UAE, and transfers to corresponding accounts in the 
United States of $5,000 or less and then ATM transfers 
withdrawals of $300 or less by some of the September 11 
hijackers.
    Mr. Hensarling. So right now if we have a $10,000 level on 
our currency transaction reports, in all probability those 
transactions would not be discovered in the system. Is that a 
fair assessment?
    Mr. Emerson. A $10,000 threshold would not have covered 
those $5,000 transfers, that is correct.
    Mr. Hensarling. Mr. Byrne, a question for you on the cost 
side of the equation. I was here last week participating in a 
hearing dealing with the regulatory burden on community banks. 
I represent the 5th Congressional District of Texas, which is 
kind of urban, suburban and rural, and we heard from a number 
of community bankers. For example, a banker in the city of 
Athens, Texas, a city roughly the size of 13,000. He was 
complaining about--and he wants to do his part as an American--
the question of who reads all these reports, and is it doing 
good, and is it really worth the amount of money that I am 
having to put into the system in order to generate all these 
reports? Can you just very briefly tell us a little about your 
impression of the costs?
    Mr. Byrne. Well, first, I would just like to say in terms 
of the September 11 hijackers, those transfers that were 
mentioned were not necessarily cash transactions. So the CTR 
threshold issue really isn't relevant to whether we would or 
would not have caught those, because ATM withdrawals are not 
reportable today. You would have to have a suspicious reporting 
regime and looking at particular individuals.
    But in terms of your question, I don't want to hang it on 
cost. I want to talk about policy, because, clearly, the small 
community bank does wonder about 13 million currency reports, 
the lion's share of those on Wal-Mart and JC Penny, what 
happens with those? And I would argue that even an IRS agent 
will tell you, ``Not much.'' Suspicious activity reports, those 
are more subjective, and certainly more goes into those 
reports, and I would argue that those are valuable, especially 
when we get the additional guidance.
    So I think you have to look at the risk of a particular 
community bank and what type of response that institution has 
to have to make a determination whether they should have the 
same infrastructure as Jim Richards has at Bank of America. But 
the bottom line is we think you should focus more on suspicious 
reporting versus cash reporting, and that will help the small 
bank and the large bank if we make some dramatic changes there.
    Mr. Hensarling. Madam Chairman, I see I am out of time. 
Would I be able to ask one more question?
    Chairwoman Kelly. Yes, please.
    Mr. Hensarling. Thank you, Madam Chair.
    Mr. Richards, I believe in your testimony you stated that 
money laundering or terrorist financing is not a problem but a 
symptom of a problem. Could you elaborate and explain that 
statement?
    Mr. Richards. Yes. We believe that within the context of 
the total issue of operating risk, that the act of filing a 
suspicious activity report is not the end of your duty but 
indeed you take the suspicious activity reports and then you go 
back and look at the commonalities between them to determine 
whether the money laundering that you have reported or 
suspicious activity you are reported is caused by issues 
relating to account opening, failure to collect the proper 
identification, it might be a branch training issue where you 
have to train the people in the branch environment, something 
like that.
    So that rather than looking at the end game being the 
filing of a suspicious activity report, you look at it as just 
the beginning of trying to see if there is an underlying 
operational issue in the bank. If you address the underlying 
operational issue, you may resolve the suspicious activity that 
is occurring in your bank. So, again, if you look at it as not 
a problem but a symptom, you can then drill down and see what 
the real underlying operational problem may be.
    Mr. Hensarling. Thank you.
    And thank you, Madam Chair, for your indulgence.
    Chairwoman Kelly. Thank you. We have been called for a 
vote.
    Mr. Garrett, I am going to call on you, but I know Mr. 
Royce has very specific questions he would like to ask. So I 
will call on your Mr. Garrett, and then we will go--Mr. Royce, 
I know you have very specific questions you would like to ask, 
and with the indulgence of this panel, I would like to let Mr. 
Garrett go, we will then take a brief break and go to our vote, 
because it is apparently only one vote. We should be able to do 
that quickly and----
    Mr. Royce. Could I inquire if we have 15 minutes, there 
might be time for Mr. Garrett and myself. He could go first and 
then I could follow up.
    Chairwoman Kelly. Let's see what we can do.
    Mr. Royce. Thank you, Madam Chair.
    Chairwoman Kelly. Mr. Garrett?
    Mr. Garrett. Thank you, and I will keep it brief. There was 
an article in the American Banker publication with regard to 
the hearings that we had just a week ago and also the hearings 
that the Senate had, and I wasn't following the Senate hearings 
but they were, and they said they saw a difference between the 
two panels. The House panel was raising some questions such as 
Jeff Seer, that I asked as well, with regard to some of the 
reporting requirements that maybe there is too much. Whereas 
the Senate hearings were sort of going in the opposite 
direction saying that failure of compliance is endemic, I think 
was the caption in the article, on behalf of the industry.
    And nothing that I have heard so far or either one of the 
hearings indicates to me that there is an endemic problem as 
far as the industry is concerned. I am a little bit more 
concerned as to what we can do as far as the regulatory side of 
the equation. Mr. Gutierrez raised the point but we agree that 
a lot has been done already, some more, from your 
recommendations, can be done, and so I am just going to go 
along those lines very quickly.
    Mr. Byrne, you raised the question, I would make a comment 
about the frustrations we have had over the time with the 
Department of the Treasury's failure to comply way after a 1994 
mandate to publish an annual staff summary on the commentary on 
the Bank Secrecy Act. I don't know whether there are any 
repercussions on the Treasury Department for failure to comply. 
I don't know whether there are repercussions that had it been 
the other way around on the industry failing to comply with the 
Treasury Department, I have a feeling there probably would be.
    Where are we now exactly on that? What is the explanation--
because we don't have somebody here from them to ask--what is 
the explanation that we have had that we had a 10-year hiatus 
and failure to comply with congressional intent, as far as you 
are aware?
    Mr. Byrne. It is not clear that there is a proper answer to 
why there has been delay, but the good news, I believe, is that 
with the appointment of Mr. Fox at FinCEN, one of the first 
things that he said he would do is put together that long 
awaited commentary so that the industry could have the 
interpretations in one place so that both the regulators and 
the industry would have some place to go for some of those 
questions that are very difficult to discern for the local 
banker out in--you pick a place.
    So from our perspective, we are trying to point out it has 
been there, it has been delayed, but we see some major 
progress, and we certainly have offered to work with them to 
communicate the final commentary or guidance when it comes out.
    There have been some advisories, Mr. Garrett, in the past 
couple of years to give us some particular advice on certain 
issues, but it has not been enough. So we are very hopeful that 
Mr. Fox will come through with his commitment, and we are going 
to work with him and help him do that.
    Mr. Garrett. I am amazed, I guess, in a positive sense, by 
Mr. Emerson's testimony that last night or the last couple of 
nights you have been studying an 80-page matrix of these 
reports. There is nothing else that you would rather be doing 
at night than reading over these reports.
    Mr. Emerson. It is the life I live or the fact that this is 
the only thing that keeps me awake. And I would be happy to 
provide you a copy if you would like to see it.
    Mr. Garrett. Maybe your executive summary. I applaud that 
you do that, and I applaud that the industry has done that. I 
guess it is the overarching question as to where the dividing 
line comes as far as what the industry's responsibility is in 
these areas, and the suggestion has been made even as far as 
allowing some additional information, as far as security 
measures being woven over to the industry and how far we can go 
for that certainly for the large institutions and how far we 
can go for that as far as the smaller institutions as well. Can 
you comment as to how much of this burden can we actually place 
on the industry and where it should be laid best for the 
government?
    Mr. Emerson. Congressman, you raise an excellent question, 
and I don't know that I have the answer here, in part, because 
we haven't traversed this avenue before and in part because 
what has been done in the past hasn't really worked.
    And I was speaking to a senior government official last 
night and I was asking him, ``How can you expect a bank teller 
to make a determination that somebody is making a deposit and 
therefore triggering some type of--should trigger an 
investigation and report it?'' And he says, ``You are right, 
you can't really expect a bank teller to do that.'' On the 
other hand, the ability for someone like Mr. Richards or others 
who sort of have an inside intuitive nature because of their 
previous experience as prosecutors and the fact that they have 
good connections with law enforcement gives them an ability to 
discern patterns that ordinarily wouldn't accrue to somebody.
    Now, you can't buy that off the shelf. It comes from hiring 
the right people, investing in the right people and making sure 
that the industry understands that people like Mr. Richards 
play a critical role in saving their institutions as opposed to 
sort of being a tolerated necessity that they have to endure as 
opposed to somebody that really should be brought in fully 
vested with as much financial resources as they can provide to 
give them that ability.
    And, again, you raise an excellent question about what that 
dividing line is, and, unfortunately, it is impossible to 
discern it ahead of time.
    Mr. Garrett. And I thank all the members of the panel, and 
I am going to take this home and digest what you have said 
today. Thank you.
    Chairwoman Kelly. Thanks, Mr. Garrett.
    Mr. Royce?
    Mr. Royce. Yes. I would like to go to Mr. Aufhauser and in 
my opening statement I talked about the need for better 
computer-aided efforts that would be used against terror 
finance, and right now the Financial Crimes Enforcement Network 
at Treasury has to depend on the IRS for its computer back 
office. No one I know thinks that the IRS is all that good with 
computers, and my question is would FinCEN be better at its job 
if it owned and operated its own computer systems?
    Mr. Aufhauser. I actually don't think it is a question of 
hardware. It is almost irrelevant where the data is stored or 
the sophistication of the machine. I think it is the software. 
I think it is the need to have a dynamic technology platform 
that exploits the information as it rolls in. It answers both 
the question of trying to divine, as difficult as it is, 
whether something is afoot, and it also in the longer run 
answers the question about whether these forms that get filed 
have utility and how to smarten both of those up; that is, the 
regulatory community and the regulator in terms of under what 
circumstances forms should be filed.
    Going back to Mr. Garrett's question, it is, in part, 
burden, but it is also a genuine opportunity for each complying 
institution to participate in trying to know their customers 
and know the nature of the transaction that is ferreting 
through their institutions, because the risk to their 
reputation and their franchise is so great.
    Mr. Royce. If Congress passed legislation that would create 
one key financial intelligence unit that would be housed in 
Treasury, that had appropriate powers, that had stature, not 
something in NSC but something really is given stature in 
Treasury, could that legislation be effective in solving the 
problem that we are talking about in terms of not only 
computer-aided efforts but the wider aspect of how you pull all 
the information together under one brain, under one controlling 
system that is able to analyze all of this?
    Mr. Aufhauser. I am mindful of George Tenet's testimony 
before the 9-11 Commission when he said, ``If you think 
establishing one single director of intelligence in this town 
is a smart idea, you don't know this town.'' You know, it is 
not the be all and end all but it is a necessary first step 
that is necessary but not sufficient.
    I think it would be very important. There were literally 
times when I was told I was in charge of a theater of the war, 
and I responded, ``I don't have troops.'' It would be better to 
have troops.
    Mr. Royce. So that is a role that Congress, frankly, could 
solve. If we go, Mr. Aufhauser, to Mr. Emerson's testimony, one 
of the things he said in his printed testimony is permanent 
renewal of a strong and effective PATRIOT Act is fundamental to 
maintaining maximum pressure on the terrorisms advanced 
financial apparatus and machinations. And I would ask if you 
agree with that assessments?
    Mr. Aufhauser. Yes. I am going to be parochial about this. 
With respect to Title 3 of the PATRIOT Act, absolutely. With 
respect to the broader content of the PATRIOT Act in terms of 
breaking down the wall, that is the ability of intelligence and 
law enforcement to talk to each other, and then Title 3, which 
breaks down the wall further of the ability of the government 
to talk to the financial community, it is absolutely essential.
    If there is any lesson out of Madrid, if there is a lesson 
in the finance area out of Madrid, it is that every template 
that we have been looking at in the past for the financing of 
global terrorism, which is cross-border trafficking, is now 
actually betrayed. Because the financing from Madrid was local 
and pedestrian crime, as I said in my testimony. We need to 
marry cops with intelligence officials, with banks to stop the 
terror.
    Mr. Royce. You mentioned the Hashish trade, you mentioned 
illegal immigration and how localities or whatever you would 
call them, they got information--they got funding through 
handling illegal immigrants that came across the border, and 
there was a third source of funding?
    Mr. Aufhauser. Forged identity papers.
    Mr. Royce. Oh, and the forged identity papers, again, used 
in immigration.
    Mr. Aufhauser. What I call common crime.
    Mr. Royce. Out of that they put the resources together that 
allowed them to organize and carry out that crime.
    Mr. Aufhauser. They used it to purchase the explosives and 
to plan and to execute.
    Mr. Royce. I would just close by asking Mr. Emerson if 
there is any other role for Congress here that you see besides 
what you have advanced in this paper that you would like to 
articulate, and then I guess we would better go and run and 
make that vote, Madam Chair.
    Chairwoman Kelly. Yes. Unfortunately, because of the vote, 
I had expected to allow the panel some extra time to sum up 
anything that they had wanted to include in their testimony. I 
would ask you to do that in writing, please, because we haven't 
the time. So the Chair notes that some members may have 
additional questions for this panel which they may wish to 
submit in writing. So without objection, the hearing record 
will remain open for 30 days for the members to submit written 
questions to these witnesses and to place their responses in 
the record.
    I am very grateful to all of you. You have been a 
wonderful, intelligent, very helpful panel. Thank you so much 
for sharing time with us today. This hearing is adjourned.
    [Whereupon, at 11:41 a.m., the subcommittee was adjourned.]





                            A P P E N D I X



                              May 18, 2004