[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
                    TERRORIST RESPONSES TO IMPROVED

                        U.S. FINANCIAL DEFENSES

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 16, 2005

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 109-3



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                            WASHINGTON : 2005

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio                  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           DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois         MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North          HAROLD E. FORD, Jr., Tennessee
    Carolina                         RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
VITO FOSSELLA, New York              STEVE ISRAEL, New York
GARY G. MILLER, California           CAROLYN McCARTHY, New York
PATRICK J. TIBERI, Ohio              JOE BACA, California
MARK R. KENNEDY, Minnesota           JIM MATHESON, Utah
TOM FEENEY, Florida                  STEPHEN F. LYNCH, Massachusetts
JEB HENSARLING, Texas                BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey            DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida           ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina   AL GREEN, Texas
KATHERINE HARRIS, Florida            EMANUEL CLEAVER, Missouri
RICK RENZI, Arizona                  MELISSA L. BEAN, Illinois
JIM GERLACH, Pennsylvania            DEBBIE WASSERMAN SCHULTZ, Florida
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin,
RANDY NEUGEBAUER, Texas               
TOM PRICE, Georgia                   BERNARD SANDERS, Vermont
MICHAEL G. FITZPATRICK, 
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina

                 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
EDWARD R. ROYCE, California          DENNIS MOORE, Kansas
STEVEN C. LaTOURETTE, Ohio           CAROLYN B. MALONEY, New York
MARK R. KENNEDY, Minnesota           STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey            ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina   EMANUEL CLEAVER, Missouri
TOM PRICE, Georgia                   DAVID SCOTT, Georgia
MICHAEL G. FITZPATRICK,              DEBBIE WASSERMAN SCHULTZ, Florida
    Pennsylvania                     GWEN MOORE, Wisconsin
GEOFF DAVIS, Kentucky                BARNEY FRANK, Massachusetts
PATRICK T. McHENRY, North Carolina
MICHAEL G. OXLEY, Ohio



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 16, 2005............................................     1
Appendix:
    February 16, 2005............................................    35

                               WITNESSES

                      Wednesday, February 16, 2005

Factor, Mallory, President, Mallory Factor Inc...................    21
Farah, Douglas, Author...........................................    23
Zarate, Hon. Juan C., Assistant Secretary for Terrorist 
  Financing, Department of the Treasury..........................     7

                                APPENDIX

Prepared statements:
    Factor, Mallory..............................................    36
    Farah, Douglas...............................................    41
    Zarate, Hon. Juan C..........................................    59

              Addtional Material Submitted for the Record

Written letter to Hon. Juan C. Zarate from Hon. Luis V. Gutierrez    68
Written response to Hon. Luis V. Gutierrez from Hon. Juan C. 
  Zarate.........................................................    72
``Economic Posts Unfilled Despite Big Pushes Ahead,''article, The 
  New York Times, February 24, 2005..............................    88


                    TERRORIST RESPONSES TO IMPROVED


                        U.S. FINANCIAL DEFENSES

                              ----------                              


                      Wednesday, February 16, 2005

             U.S. House of Representatives,
      Subcommittee on Oversight and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 10:04 a.m., in 
Room 2128, Rayburn House Office Building, Hon. Sue Kelly 
[chairwoman of the subcommittee] presiding.
    Present: Representatives Kelly, Kennedy, Price, 
Fitzpatrick, Gutierrez, Moore of Kansas, Maloney, Cleaver, 
Scott, Wasserman Schultz, and Moore of Wisconsin.
    Also present: Representatives Royce and Feeney.
    Chairman Kelly. [Presiding.] This hearing of the 
Subcommittee on Oversight and Investigations will come to 
order.
    Since September 11, 2001, the Subcommittee on Oversight and 
Investigations has conducted a series of hearings on terrorist 
finance. This subcommittee has led efforts to improve our 
financial defenses and shut off the flow of terrorist money 
into this country. Working with the Treasury Department, we 
have created the Office of Terrorism and Financial Intelligence 
and increased the resources available to FinCEN, OFAC, and the 
Office of Intelligence Analysis. Since the attacks on our 
country, our financial defenses have improved dramatically. We 
are constantly making strides forward and discouraging 
terrorists and international criminals from using our financial 
systems against us.
    The global war on terror is a dynamic process, however, and 
our foe is ruthless and cunning. The improved state of our 
financial defenses requires Al Qaida and its allies to find new 
means to carry out their ends. In turn, our own nation must 
ensure that new financial routes do not become safe havens for 
terrorist finance.
    Finally, we must make sure that our efforts to detect and 
prevent money laundering and terrorist finance do not drive out 
legitimate cash-handling institutions, drive them out of 
business. I appreciate Secretary Snow and Under Secretary 
Levey's recent public comments on this issue. The U.S. does not 
have the resources to police all monetary transactions for 
money laundering and terrorist connections. In West Africa, 
South Asia, and the Middle East, cooperation with local 
regulators and financial institutions is essential for 
achieving our policy goals. Multilateral associations such as 
the Financial Action Task Force and the Egmont Group can help 
facilitate this cooperation.
    FATF is a group of 33 nations, including the United States, 
that develop anti-money laundering policy and best practices. 
The Egmont Group consists of 94 financial intelligence units 
from around the world who share information on terrorist 
financing and money laundering. Encouraging the creation of the 
FIUs and strengthening their information-gathering capacities 
is essential to tracking changes in the terrorist financial 
activities.
    Unfortunately, not all nations that are committed to 
establishing an FIU have done so, leaving a gap in our ability 
to fight terrorism and threatening relations with nations that 
do not match their words with actions against our mutual 
enemies. An example of the important role an FIU might play 
arose earlier this month. New reports emerged that Arab Bank in 
New York was being used to transmit funds form Saudi Arabia, 
convert them to dollars or shekels, and then transmit them as 
rewards to the families of terrorist bombers. This reported 
that families would simply present martyrdom certificates at 
Arab Bank branches and receive compensation. From what I have 
seen, when they present these martyrdom certificates, the Arab 
Bank would then list that they had given $7,000 to the family 
or 20,000 shekels to a family that had in fact had a child or a 
family member who had blown themselves up, and in the process 
blown up other people.
    There is a priced that has been paid to people to kill 
others through the Arab Bank branches, as far as we can see. If 
that is true, perhaps a Saudi FIU could have accelerated the 
flow of information to the U.S. so our Treasury Department and 
financial regulators could have responded and responded 
quickly. Perhaps there are other instances where the absence of 
a Saudi FIU slowed or entirely prevented action against 
terrorist activity. Saudi Arabia announced that it established 
an FIU in 2002. However, it appears that there was no 
corresponding action with this announcement. In August of 2004, 
Treasury Under Secretary Levey informed the financial services 
committee that the Saudi FIU had still not been established, 
despite their announcement in 2002. Today, more than 2 years 
after that announcement, it is quite reasonable to doubt that 
an operational Saudi FIU exists. There is a news report this 
morning where a Saudi spokesman states that an FIU has been 
established, and that to say otherwise disregards the facts.
    This subcommittee recognizes Saudi Arabia as a critical 
ally in fighting terrorism, and welcomes any additional 
information that the Saudi Arabian government is willing to 
provide on the FIU issue and other matters which Mr. Royce and 
I have recently raised regarding terror finance initiatives. We 
share their deep interest in continuing strengthening the U.S.-
Saudi partnership and fighting mutual enemies, but we will not 
be placated by press releases and glossy generalities. We will 
welcome future discussions on this matter.
    The necessity of cooperation in fighting terror financing 
and encouraging governments to enforce the laws on their books 
cannot be denied. Our witnesses have first-hand experience in 
the difficulty of identifying nontraditional financial 
networks, of creating a climate of compliance that foreign 
regulators feel comfortable in, and of ensuring that 
communities are backed by action. One way to provide measurable 
evidence of a nation's cooperation with the United States in 
stopping terror financing is to create a certification regime 
on terror finance. Such a measure would give our Treasury 
officials another tool in convincing their colleagues overseas 
of the necessity of fighting terror finance on their own and to 
reassure investors in compliant nations that their financial 
sectors are clean. I introduced legislation to create a 
certification regime in the last Congress and I will 
reintroduce this legislation for the committee's consideration 
again.
    This morning, the committee will take testimony from three 
individuals with expertise on the current state of our 
financial defenses, those of our allies, and the areas in which 
terrorist financing may be moving in response to our new laws. 
Without objection, all members's opening statements are going 
to be made part of the record.
    With that, I will turn to Mr. Gutierrez.
    Mr. Gutierrez. Good morning. I want to thank Chairwoman 
Kelly for having this hearing, the first one for the Oversight 
Subcommittee in the 109th Congress. I want to extend a warm 
welcome to all the members of the subcommittee, some of whom 
are returning and others who are new to the subcommittee or new 
to the Congress.
    It is particularly appropriate that the subcommittee's 
first hearing of this new Congress is focused on the issue of 
terrorist financing. Chairwoman Kelly and I have frequently 
worked together on this issue, both within the subcommittee and 
as founding members of the Terrorist Finance Task Force. 
Ensuring that Treasury has the necessary resources to perform 
its mandated functions is a high priority for us. We worked 
hard together last year to secure an additional $25 million in 
funding for FinCEN. Given our history on this matter, I expect 
that we will continue our efforts on this issue, especially as 
we review the budget. I look forward to working with you, 
Chairwoman Kelly.
    Today, I am pleased that we will be hearing from Assistant 
Secretary Juan Zarate, who is with us today only because his 
wife has not yet made him a father, which we understand could 
happen any second. I congratulate you, Mr. Zarate, and I have 
to say that being a father is the best job I have ever had. I 
wish you much luck and happiness.
    I look forward to asking Mr. Zarate about the evolution of 
the current structure of the terrorist finance operations at 
Treasury. I also have some questions about the budget relating 
to his department, specifically regarding their computer 
system. In addition, we have been informed that a number of 
employees will be transferred from OFAC to the office of 
intelligence, and I would like to hear how this will affect the 
day-to-day operations.
    I look forward to the testimony of the other witnesses. Mr. 
Mallory Factor points out in his testimony that the U.S. 
government should increase its information sharing with the 
financial services industry under the PATRIOT Act so that that 
industry may better understand how the data they provide are 
used. Coming from Chicago where I hear the word 
``commodities,'' I tend to think of corn and pork bellies as 
futures on the finest exchanges in the world, the Chicago Board 
of Trade and the Chicago Mercantile Exchange. Mr. Douglas Farah 
will talk about the use of commodities that do not grow in the 
Midwest, particularly diamonds and their use in financing 
terrorism. I look forward to hearing from him about his 
research.
    All of these witnesses have valuable experiences to share 
with the subcommittee. I am eager to hear their testimony, and 
I yield back to the gentlelady the balance of my time.
    Chairman Kelly. Thank you very much, Mr. Gutierrez.
    Mr. Royce?
    Mr. Royce. Thank you, Chairwoman, for calling this 
important hearing.
    I also want to welcome Juan Zarate. I think he brings 
considerable skill and a tremendous amount of institutional 
knowledge to cracking this problem. It is good to see somebody 
from Orange County leading this fight. The Chairwoman and I 
have developed I think a very good working relationship on 
terror finance issues. I know that we are both looking forward 
in serving on this subcommittee to continue building on that. I 
have been named the international relations chair for the 
subcommittee on terrorism and nonproliferation. I think there 
is a chance for us to hone in together, Chairwoman Kelly, on 
this important and critical issue.
    Chairman Kelly. I look forward to that, Mr. Royce.
    Mr. Royce. Thank you. Thank you. I think the United States 
has improved our financial defenses against terrorist 
operations. I think the Office of Terrorism and Financial 
Intelligence has been effectively formed within the Treasury 
Department. I think changes in money laundering law through the 
PATRIOT Act have proven vital. I think we in the Congress have 
also stepped up efforts on a bipartisan basis through the 
Congressional Anti-terrorist Financing Task Force. I commend 
Chairwoman Kelly, again, for her leadership on that.
    However, money is the lifeblood of terrorists, and we 
should fully expect that as soon as we act to tighten our 
defenses in one area, that the terrorists will change their 
tactics and move in a different direction. We have to challenge 
ourselves at every step to think and act creatively. It is a 
chess match, and these are urgent issues. I think for those of 
us who have served in government for a while. We know that the 
U.S. governmental agencies typically have not proven as 
flexible as the ruthless terrorist groups targeting our nation. 
So I think a lot more energy on our part needs to go into 
thinking this through, hearing what additional tools 
individuals like Juan Zarate need in order to effectively 
outsmart our enemies, and we need to be prepared to give them 
those tools.
    I look forward to your testimony. Thank you.
    Chairman Kelly. Thank you very much, Mr. Royce.
    Mr. Scott?
    Mr. Scott. Thank you very much, Chairwoman Kelly. I 
certainly appreciate this hearing. It is a most important and 
timely hearing on a very, very vital issue.
    This hearing today is an important review of efforts by the 
government and the financial industry to identify and eliminate 
terrorist financing. Since 9/11, several sectors of the 
financial industry, new cabinet offices, and task forces have 
been created to track and disrupt terrorist financing. While 
there has been some early success in closing down identified 
financing schemes, new methods of transferring funds between 
terrorists and rogue nations or crime syndicates continue.
    The United States must continue to improve financial 
intelligence in order to identify and track down terrorist 
cells and eliminate them once and for all. We must understand 
that closing one network provides incentives for another 
opportunity to transfer resources between cells. It is also 
imperative that our enforcement agencies continue to 
collaborate and not become entangled in bureaucratic 
differences.
    Finally, I am concerned that several despotic nations have 
allowed lawless segments of their countries to become safe 
havens for terrorist operatives. We know who these countries 
are and we need to move forcefully to deal with these countries 
if the world is going to be safe from terrorism. We must not 
ignore the threats that have been brewing in some of the 
world's poorest countries. This is where the action is.
    I look forward, Chairlady Kelly, to this hearing from this 
distinguished panel of witnesses, who will provide us with an 
update on current efforts to track terrorist financing.
    Thank you.
    Chairman Kelly. Thank you, Mr. Scott.
    Ms. Moore?
    Ms. Moore of Wisconsin. Thank you, Madam Chair, for 
recognizing me. I am a very new member to this committee and 
subcommittee, so I am very eager to hear from our witnesses 
today. I am hoping that throughout the testimony, particularly 
of our first witness, the Honorable Juan Zarate, that I will 
learn more about the structure and command of his division, and 
how you plan to use the increased funding for your department 
to explore the strategies for anti-terrorist financing.
    You also have some vacancies in your department, and there 
is going to be some reorganization. I would be very interested 
in your focusing on that.
    Thank you.
    Chairman Kelly. Thank you, Ms. Moore.
    Mr. Fitzpatrick?
    Mr. Fitzpatrick. Thank you, Chairwoman Kelly.
    To our distinguished panelists, thanks for taking the time 
to meet with us here today. Even though I am new to this 
committee, it is apparent that our government has made great 
strides to identify and prevent terrorists from using America's 
financial systems to support their activities. With the 
freezing of terrorist assets worth millions and millions of 
dollars, Americans are safer today than they were on September 
11, 2001.
    Despite the wide-ranging viewpoints in Congress, we can 
always stand together on one thing. We must continue to do 
everything in our power to prevent another terrorist attack. I 
commend the Treasury Department for its continued efforts to 
block the flow of terrorist funds to terrorist organizations. 
However, terrorist financiers are constantly adjusting to our 
domestic and our international efforts. They are finding 
inventive ways to finance terror with commodities that are 
difficult to track, like gold and diamonds. Despite 
extraordinary global efforts, in particular the Financial 
Action Task Force and the Egmont Group, I am concerned that our 
efforts abroad are not sufficient. There are significant 
hurdles that remain before information flows seamlessly across 
nations.
    I represent a district that was affected directly by the 
September 11 attack. Seventeen residents from Pennsylvania's 
eighth district were killed in the attack on the World Trade 
Center. The families of those 17 people that tragically died 
that day want these cowards brought to justice. It is critical 
that we never forget that our efforts to cut off terrorist 
organizations's funding will save lives of our constituents.
    I yield back the balance of my time.
    Chairman Kelly. Thank you.
    Mr. Cleaver?
    Mr. Cleaver. Madam Chairperson, I am honored to have the 
opportunity to serve on this subcommittee. I believe the agenda 
is significant to the preservation of our way of life and I 
think it is one of the great responsibilities we have if we are 
successful in tracking down the source of dollars that go into 
the pockets of terrorists.
    I look forward to working with you and the other committee 
members. Being new is sometimes a new experience.
    Chairman Kelly. Thanks, Mr. Cleaver.
    Mr. Moore?
    Mr. Moore of Kansas. Thank you, Madam Chair, and I thank 
the witnesses for being present. I just want to say that I 
learned a long time ago that I learn more when I listen than 
when I speak. So today, I am here to learn and not to speak.
    Thank you.
    Chairman Kelly. Thank you, Mr. Moore.
    Ms. Wasserman Schultz?
    Ms. Wasserman Schultz. Thank you, Madam Chair.
    I am looking forward to hearing from the panelists that are 
going to be testifying today. Although we have made some 
progress since the attacks of September 11, obviously the fight 
is not over. Al Qaida continues to pose a great threat to this 
country's national security and Congress has a responsibility 
to take action and protect our citizens from the threat of 
terrorism.
    It is the job of this subcommittee, under your leadership, 
Madam Chair and Ranking Member Gutierrez, and the 
responsibility of all members of Congress, regardless of which 
side of the aisle that we sit on, to destroy the mechanisms of 
terrorist financing. We must take every necessary step to 
uproot the sources of funding for terrorist activity, while at 
the same time making sure that we protect the free flow of 
capital for legitimate commercial purposes. I think that is the 
balance that is going to be important for this committee to 
eventually strike.
    I look forward to hearing from today's panelists and will 
work with my colleagues on the subcommittee to address this 
grave problem. Thank you.
    I yield back the balance of my time.
    Chairman Kelly. Thank you.
    Mr. Price, I understand you do not have an opening 
statement. Is that correct?
    Mr. Price. I appreciate the opportunity and look forward to 
the testimony.
    Chairman Kelly. Thank you.
    With that, with us today here on the first panel is 
Assistant Secretary of the Treasury for Terrorist Finance Juan 
Zarate. Prior to working at the Department of Treasury, Mr. 
Zarate served as a prosecutor in the Department of Justice's 
Terrorism and Violent Crime Section. In that role, he helped to 
investigate and prosecute several terrorism-related cases, 
including the USS Cole investigation. While at the Department 
of Justice, he also specialized in cases relating to weapons of 
mass destruction and prosecuted firearms-related cases in the 
District of Maryland, as well as serving a short term as an 
attorney in the Appellate Section of the Criminal Division.
    Mr. Zarate, you come to this job with a tremendously strong 
background. We welcome you and we welcome you here on our 
panel. You may proceed.

   STATEMENT OF HON. JUAN C. ZARATE, ASSISTANT SECRETARY FOR 
        TERRORIST FINANCING, DEPARTMENT OF THE TREASURY

    Mr. Zarate. Chairman Kelly, thank you very much for the 
very warm introduction. Ranking Member Gutierrez, I want to 
thank you very much for your warm thoughts in the conversation 
we had before. I will be looking to your example and others on 
this committee as to how to be a good parent, so I really 
appreciate the thought.
    Chairman Kelly, Ranking Member Gutierrez and distinguished 
members of the subcommittee, thank you very much for this 
opportunity to talk to you today about the abuse by terrorists 
of informal means of financing and the U.S. government's 
efforts to combat those efforts. This is an important and 
complex issue, and I again applaud the subcommittee for its 
continued focus on the changing face of terrorist financing.
    The Treasury Department particularly appreciates the 
leadership of you, Madam Chair, as well as the subcommittee, 
and your support in terms of the Office of Terrorism and 
Financial Intelligence. We thank you very much.
    The axiom now accepted around the world is that we must 
concentrate our national and collective power on breaking the 
financial ties that bind terrorist networks. Since September 
11, we have focused on financially isolating those who support 
terrorism, while at the same time building systems and 
capacities in the international financial system to heighten 
the risks and costs associated with moving tainted capital. 
Throughout this period, U.S. leadership has helped foster a 
growing realization internationally that securing the financial 
systems and all vulnerable sectors, in addition to targeting 
the sources of terrorist support, is an essential element of 
our fight against terrorism and financial crimes.
    Through an unprecedented global effort to attack terrorist 
financing, it is now harder, costlier and riskier for 
terrorists to raise and move money around the world. Terrorist 
assets and conduits of funding have been frozen, shut down or 
otherwise neutralized. Key facilitators have been captured or 
killed. Otherwise sympathetic donors have been deterred or 
isolated, and through training and technical assistance, we 
have increased the capacity of our global partners to combat 
terrorist financing.
    In addition to concentrating on the formal mechanisms used 
by terrorists and criminals to hide sources and eventual uses 
of money, we have addressed the various informal ways that are 
vulnerable to terrorist abuse. In this realm, we know that 
terrorist groups of all stripes use a variety of mechanisms to 
raise and move money. Al Qaida has relied on the corruption of 
charities and deep-pocket donors for financial support. Hamas 
holds fundraising events.
    The terrorist cell that launched the devastating attacks on 
Madrid's train system raised money through drug dealing. 
Colombia's notorious FARC, ELN and AUC narco-terrorists 
maintained drug cartels and kidnapping operations in order to 
support their terrorist operations. Still others like 
Hezbollah, ETA and Jemaah Islamiyah employ front companies and 
phony businesses to funnel cash or extortion taxes meant to 
subsidize their networks. In addition, as Al Qaida balkanizes, 
the organizations and those localized cells that are aligned 
with it are relying on additional sources of financing to 
survive and proliferate.
    We have applied a consistent approach to these evolving 
challenges. This has involved confronting the relevant systemic 
risks attendant to different sectors of the international 
financial system, both formal and informal. This is done in 
order to bring greater transparency and accountability to 
financial transactions globally. To this end, we have supported 
and encouraged the worldwide expansion of regulatory oversight 
to previously unregulated sectors, garnered more information 
from the newly regulated communities, and applied enforcement 
pressure when and where needed to help ensure compliance. In 
many respects, these efforts have shown the light of day on 
previously unseen or untended corners of the financial world.
    In my written testimony, I lay out for the subcommittee in 
some detail the various informal or non-bank mechanisms that we 
think are vulnerable to terrorist abuse, as well as steps that 
we have taken to address the attendant risks. It bears 
mentioning that we have applied our resources in a manner that 
is consistent with the level of risk we ascribe to the 
vulnerable systems. With respect to charities, our strategy has 
combined designations and concentrated enforcement actions with 
greater oversight efforts, heightened international standards, 
and private sector awareness. With respect to previously 
unregulated sectors like hawalas, we have started the process 
of building awareness in the financial community, as well as in 
a new regulatory system both domestically and internationally, 
that has catered to these less formal sectors. Combined with 
targeted enforcement actions, these efforts are taking effect, 
but there is much more to do to ensure that this sector is 
fully identified and is operating legitimately and with full 
transparency.
    Given increasing reliance on cash couriers by Al Qaida, we 
have launched an international response starting with the 
adoption of a new special recommendation by the Financial 
Action Task Force last year, which has resulted in 
jurisdictions like Hong Kong passing new laws and instituting 
new reporting and search practices at their borders. In 
addition, we are looking at innovative strategies of melding 
certain types of financial data available to us to try to 
pinpoint couriers moving in and out of the United States.
    In the case of vulnerabilities attendant to the trade in 
precious commodities, we have applied a similar approach, but 
have also used the international outrage and response to the 
conflict diamond issue as a means of bringing some degree of 
transparency and accountability to the sector. Through the 
Kimberley process, as well as the application of targeted 
sanctions on Charles Taylor and the former elements of his 
regime in Liberia, we are applying other tools to bring 
accountability to the use of precious stones from conflict 
regions.
    We must continue to build upon this broader strategy to 
reduce the risks associated with the movement of money in the 
less formal sectors of the international financial system. With 
this in mind, we are looking to other financial sectors around 
the world that could be used not only to skirt financial 
regulations, but also to facilitate criminal activity and 
possibly terrorism. In this regard, we are working with our 
partners in the interagency to take a closer look at the 
vulnerabilities attendant to trade-based systems around the 
world.
    Madam Chair, there is no doubt that Al Qaida and like-
minded terrorist groups and their supporters will constantly 
search for the weak link in the preventive systems that we have 
put in place in the U.S. and around the world. It was bin Laden 
himself who indicated that Al Qaida well understood the cracks 
in our financial system that could be exploited. Thus, we are 
challenged to innovate ways of securing international financial 
systems and disrupting terrorist financing, without doing 
damage to the workings of the free market. This is part of our 
challenge, but we also see this as an opportunity to disrupt 
the financing that fuels terror, while securing the 
international financial system against the corruption of 
tainted capital.
    Madam Chair, we appreciate the subcommittee's continued 
support and concentration on these issues. We look forward to 
continuing to work with you on all of these evolving issues.
    Thank you.
    [The prepared statement of Hon. Juan Zarate can be found on 
page 59 in the appendix.]
    Chairman Kelly. Thank you, Mr. Zarate.
    Other witnesses are going to testify about the unique 
monetary and cultural role that gold plays in Saudi Arabia. 
Without an FIU in place, it seems that our efforts to 
effectively track and understand the flow of gold and other 
commodities there are lacking a critically important tool. Of 
course, there are other obvious benefits to having an 
operational FIU in Saudi Arabia. When I asked about the status 
of the Saudi FIU in August of 2004, Assistant Secretary Levey 
said, ``It has not happened yet.'' As you know, he said this 
almost 2 years after the Saudi government had declared that 
they had established an FIU. He went on to talk about the 
Saudis, and I am quoting again from the record, ``There are 
lots of areas in which they have made significant progress, 
progress that is very valuable to us, but there are also 
situations where they need to move further and we need to 
continue to push them.''
    The FIU situation is one of them. Another is that while 
they announced the regime to monitor charities in the kingdom, 
it does not cover certain organizations that we have long 
thought have terrorist financing concerns. You and I have had 
subsequent conversations about this in the September hearing, 
and I know that together we share a strong desire to 
continually improve the value of the important alliance that we 
have with Saudi Arabia in this horrible fight against 
terrorism, but Under Secretary Levey's comments resonated with 
many of us who really want to strengthen that U.S.-Saudi 
partnership.
    My question is whether or not you are optimistic that we 
can continue to make substantive progress in making sure that 
Saudi Arabia is an effective partner in combating the terror 
financing that unfortunately flows from their country.
    Mr. Zarate. Madam Chair, I am optimistic. I think the 
relationship with Saudi Arabia in the context of terror 
financing is essential. As you have mentioned, sources within 
Saudi Arabia as well as other sources in the Gulf have proven 
to be sources for Al Qaida and other like-minded terrorist 
groups. So it is essential, and this is why we have devoted so 
much attention to this issue. It is essential that we have in 
place mechanisms with the Saudis to not only share information, 
but to ensure that the Saudis themselves can take control over 
these issues.
    I think what is most encouraging, Madam Chair, is that in 
particular after the bombings in Riyadh, the Saudis have taken 
very seriously the threats attendant to their own regime, based 
on the threats of Al Qaida and other groups. They recently 
hosted the worldwide counterterrorism conference attended by 
Homeland Security Adviser Fran Townsend and a member of my 
office, and a high-level delegations from the U.S. government. 
The Saudis are taking this issue very seriously, but I will 
reiterate what Under Secretary Levey has said, which is there 
are a range of issues that we continue to push the Saudis on, 
some of which you have identified. It is essential that we 
continue to do so, and continue to work with them.
    Chairman Kelly. Do you think we are going to be able to 
ensure that there is a more rigorous approach to the designated 
individuals in Saudi Arabia?
    Mr. Zarate. Madam Chair, I believe so. I think one of the 
highlights of our engagement with the Saudis has been a more 
progressive willingness on the Saudis' part to take preventive 
administrative actions to freeze assets. That has been part of 
the cornerstone of our international efforts to staunch the 
flow of funds to terrorist groups. It has been a number of 
joint designations with the Saudis that has proven in large 
respects their willingness and their seriousness with respect 
to applying those types of measures.
    But I think what we need to continue to do is to work with 
them on identifying known conduits, known sources of funding, 
and working with them to isolate those individuals. We did so 
in December with an individual by the name of Adil Batterjee. 
We have done so previously with individuals like Yasin al Qadi 
and Mr. Julaiden. We have certainly done so with the case of Al 
Haramain and the threat that that charity posed worldwide. I am 
hopeful that those actions will continue not only because they 
are important to us, but I think the Saudis now realize they 
are important for their own safety.
    Chairman Kelly. And you feel that the Saudis are actually 
following up once we do this designation and discussion with 
them, they are actually going to do something about these 
things. The list you just gave, for instance, have they done 
anything to freeze assets or stop the individuals, especially 
Al Haramain? What have they done? Do you know anything about 
these?
    Mr. Zarate. Madam Chair, based on the information I have, 
and I was last in Riyadh in November talking about a number of 
these issues, some of the issues that you raised earlier. Based 
on the information I have, they have certainly taken actions to 
freeze the assets of those individuals, in particular the Al 
Haramain charity which presented numerous legal complications 
for them, given the extent of the reach of that organization 
within the kingdom, as well as internationally.
    So I am confident that they are taking actions, but I have 
to be honest with you, Madam Chair, we are constantly working 
with the Saudis to ensure that that is the case. One of the 
issues that we have talked to them about is ensuring that we 
have a complete record of the assets that have been frozen 
since September 11.
    Chairman Kelly. And they are cooperating, I hope.
    I am out of time here.
    Mr. Gutierrez?
    Mr. Gutierrez. Thank you, Madam Chair.
    I would like to start by asking you about your Under 
Secretary is proposing to transfer in 2006 the 23 people from 
the terrorist assets division of OFAC to the departmental 
offices. What is your view on this change? Weren't there a 
minimum number of employees statutorily established for OFAC of 
employees and people, and wouldn't this violate that floor of 
employees?
    Mr. Zarate. Congressman, with respect to the OFAC floor, 
which I believe you are referring to, I think the floor is 120 
FTEs, if I am not mistaken, but we can verify that for you. I 
think this transfer, with the infusion of additional FTEs for 
other functions under OFAC keeps us above the OFAC floor. So we 
have been working very closely with members of Congress as well 
as the budget and management folks to ensure that we are in 
complete compliance with those strictures.
    On the broader issue with respect to the transfer of the 23 
employees who were part of the Foreign Terrorist Division 
within OFAC, this is, in my opinion, a necessary and natural 
evolution of how the Treasury is going to be working on these 
issues. One of the key and important elements of the new Office 
of Terrorism and Financial Intelligence was the establishment 
of a robust and very real office of intelligence and analysis. 
At the heart of what that office will do will in essence be a 
good bit of the analytical work with respect to terrorist 
financing, with respect to the movement of illicit flows of 
funds, with respect to money laundering, which has been done in 
large part within the structure within OFAC.
    So what this is, is a rationalization of the process and a 
bringing into Treasury proper resources and the know-how and 
the human capital to be able to deal in the long term with the 
broader issues that we are talking about. That is in addition 
to new hires that we are bringing on in terms of our analytical 
capabilities.
    Mr. Gutierrez. So we are going to move them to the 
intelligence part of Treasury. I know you are not the Under 
Secretary, but as we move 23 people, don't you think we should 
have the Assistant Secretary for Intelligence in place, instead 
of having a career professional who is probably doing a great, 
job but it is a career professional in a vacant position. We do 
not have an Assistant Secretary for Intelligence, but we are 
moving people into a division where we have it. Can you tell us 
where we are at on that issue, if you know?
    Mr. Zarate. Congressman, first of all, I think that the 
movement of personnel is very important in terms of the 
holistic functioning of this office. I think, even though there 
is not an Assistant Secretary in place, it is important to make 
this move now and to make it quickly, to do it quickly and 
efficiently. I will tell you that the Deputy Assistant 
Secretary Janice Gardner, who is operating the Office of 
Intelligence Analysis, is not only a committed career employee, 
but she is a true professional through and through and doing an 
enormous job for the U.S. government and for the Treasury. With 
Under Secretary Levey's leadership, I do not see there being a 
problem.
    With respect to getting a person in place, I know that the 
White House continues to work on that and it is a top priority.
    Mr. Gutierrez. In my humble opinion, I am thankful for 
professionals and I am sure she is doing a great job, but it 
just seems to me that somebody who is, I mean, I look at you 
and your role and the development that you have had as 
Assistant Secretary. I say to myself, we need a person who sees 
this as their focus, their job, much as you have seen this as 
your focus, your job, in terms of developing leadership. You 
know how it works. The person is not going to be there maybe 
next month. Who knows what happens in the chain of command with 
people, and how you have priorities and a vision and you take 
that to the Under Secretary and then to the Secretary of 
Treasury to make sure that those patterns get carried out.
    I am going to have, because of the constraints of time, I 
am going to have a few questions that I am going to hand to you 
in writing. I am just going to ask you two more. Given the 
fact, you know, this lack of a Secretary here, and your 
involvement, does OFAC report to you now?
    Mr. Zarate. Based on the legislation coming out of the 
intelligence bill, OFAC reports to the Under Secretary. That 
authority can be delegated to me. The way this has operated, 
after the Homeland Security transition, OFAC did in fact report 
to me in my previous capacity as Deputy Assistant Secretary for 
Terrorist Financing and Financial Crimes. We have been 
operating for the last year-and-a-half with that construct, 
where OFAC reports up to me.
    Mr. Gutierrez. Okay. And it continues to report to you to 
this day under the authority of the Under Secretary to be able 
to delegate it to you?
    Mr. Zarate. That authority has not been technically 
delegated, to my knowledge, but the organization within TFI is 
fairly fluid, so we all work together very closely.
    Mr. Gutierrez. Because when I read section C, it says the 
Office of Foreign Assets Control, in this section referred to 
as OFAC, which shall report directly to the Under Secretary for 
Terrorism and Financial Crimes. I am just wondering if they are 
reporting to you, how that delegation of reporting to you, how 
would I say, blends with the statute as I read it. Do you see 
any contradiction between the statute and the fact that OFAC 
reports to you?
    Mr. Zarate. Well, again, as I said, technically OFAC 
reports to the Under Secretary. In past form and function, they 
have reported to me, given the Treasury orders and organization 
charts. There is not really a problem in the sense that we read 
and our lawyers read the legislation, to allow for the 
delegation of that authority down to me. As I indicated, I 
would have to check with our Treasury lawyers, I do not think 
that that authority has yet been delegated officially to me.
    Mr. Gutierrez. Does FinCEN report to you?
    Mr. Zarate. FinCEN, based on the bill, now reports to the 
Under Secretary. The way that we read the language, that 
authority cannot be delegated based on what the legislation 
says.
    Mr. Gutierrez. So when it comes, and I will finish now, 
Madam Chairwoman, so as Treasury see it, OFAC, as your lawyers 
and your people read it, the Under Secretary can delegate that 
to someone else, but not FinCEN, so FinCEN does not report to 
you.
    I will hand over the rest of the questions in writing. 
Thank you very much.
    Mr. Zarate. Thank you, Congressman.
    Chairman Kelly. Thank you.
    Mr. Fitzpatrick?
    Mr. Fitzpatrick. I want to say thank you for your testimony 
today and also for your service to our nation as a prosecutor 
and now at the Department of Treasury. I appreciate that.
    I was wondering if you could talk to us about whether you 
have seen or are aware of any credible evidence that Al Qaida 
is operating the conflict diamond sector in Africa.
    Mr. Zarate. Congressman, that is a very good question. Let 
me take this opportunity to compliment one of the next 
panelists, Doug Farah, who has done incredibly important 
reporting on these issues and has been intrepid in the work 
that he has done. I admire him greatly. I wanted just to 
mention that because he has in large part been a driver in the 
public sphere on this issue.
    With respect to the connection, I leave that specific 
question to my FBI and intelligence colleagues. The FBI has 
sent a couple of teams out to West Africa to investigate ties. 
I will tell you, from my experience we have not seen direct 
links. We looked at this issue early on, even as the first 
article from Mr. Farah was coming out in November, 2001. I have 
met with Belgian authorities. We have had Treasury officials 
meet with the Diamond Council around the world. There is no 
direct evidence that we see that ties Al Qaida.
    That being said, the trade in precious commodities, in 
particular conflict diamonds, is an area rife with potential 
corruption. As Congressman Scott, I believe, indicated, it is 
these untended corners of the world where there is opportunity 
for great mischief. We have seen that with Charles Taylor and 
what he did in Liberia. We have seen what that produced in 
terms of not just fomenting of rebellion in Sierra Leone with 
the RUF, but also with arms trafficking and other nefarious 
behavior.
    So even if there is not a direct link to Al Qaida, it is an 
issue of concern to us because it presents a gap or an opening 
for criminals and rogue leaders to take advantage.
    Mr. Fitzpatrick. Does your department have the ability to 
control directly or indirectly through regulation or otherwise 
that kind of trade?
    Mr. Zarate. We are certainly part of it. By ``we,'' I mean 
the greater U.S. government, part of the Kimberley Process, 
which is the first attempt to apply a certification regime to 
the diamond trade, which I think is a good first step. It 
certainly is not the silver bullet for this issue, but it is a 
good first step. We domestically, the Treasury Department that 
is, have the ability to regulate dealers in precious stones and 
commodities. We have put out an interim rule, a proposed rule 
about 3 years ago now. We are in the final stages of coming out 
with a final rule, so we do have the ability internally to 
control to a certain extent the trade and dealing in precious 
stones.
    The other element of this, and I think you alluded to this, 
Congressman, very aptly in your opening remarks, part of this 
is creating mechanisms where we can share information more 
fluidly. Part of that is doing so in the Egmont Group, making 
that a more strategic information-sharing body. That is one of 
my priorities. That is one of Bill Fox's priorities as director 
of FinCEN. Another issues, as I referred to in my testimony, is 
looking at sharing data with respect to trade anomalies and 
trade transactions in a much more robust way.
    So there are different ways of getting at this, even if we 
do not have jurisdiction to reach into West Africa or reach 
into Southwest Africa or reach into different parts of the 
world that are proving problematic.
    Mr. Fitzpatrick. I yield back my time. Thank you.
    Chairman Kelly. Thank you.
    Mr. Scott?
    Mr. Scott. Thank you very much, Madam Chairman.
    Assistant Secretary Zarate, it seems to me that while 
seizing the asset is very important, it seems to me that much 
more important is maybe backing off of that and being able to 
watch and follow the flow of that money trail as a really more 
effective way of that. And that requires, of course, using 
intelligence. It concerns me that in the department the 
position of Assistant Secretary for Intelligence is not filled 
and has not been filled.
    So that is a gaping hole in dealing with perhaps the most 
fundamental area and really putting a dent in terrorist 
financing if we do not even have the position filled in the 
Treasury Department of the very person who is charge of 
gathering intelligence. This is devastating not only in terms 
of our not being able to follow the money trail, but really in 
getting to the issue of understanding the depth of these 
nations and these countries who are providing safe havens. How 
could the Treasury Department allow this most crucial position 
of Assistant Secretary of the Treasury for Intelligence to go 
unfilled? What is it doing to hamper our progress?
    Mr. Zarate. Congressman, you raise a serious issue. Again, 
I reiterate the fact that the White House has it as a priority. 
Certainly, Secretary Snow understands the seriousness of this 
and we are moving as quickly as possible to fill that position. 
That being said, Congressman, I will tell you that the lack of 
having someone in that position is not hampering our 
effectiveness with the intelligence community at large and our 
ability to balance the tradeoffs that you are talking about, 
the tradeoffs between taking action now based on information 
and intelligence we have, versus waiting and watching and 
allowing for a longer-term approach in terms of following the 
money trail.
    That is something, frankly, that we have been doing since 
September 11 very closely with the intelligence community. That 
is part of the reason we have had a very effective policy 
coordinating committee that has done precisely what you 
indicate, which is a balancing of that tradeoff. In a post-9/11 
world where you have terrorist groups not only intent on 
killing us, but perhaps doing so with apocalyptic force, it 
becomes a very important debate as to whether or not we take 
actions to prevent certain elements of support and activity, 
versus waiting and watching. That goes to the heart of how we 
function.
    Mr. Scott. It has been 2 years. I mean, I am trying to 
figure, is there any reason why this has not been done?
    Chairman Kelly. If the gentleman will yield, the Chair 
would remind members that nominations and confirmations are not 
within the constitutional authority of the House. The questions 
are appropriate, but this is not a constitutional authority 
that we have in the House of Representatives.
    Mr. Scott. I realize that, Madam Chairlady, and I certainly 
respect that, but I do think that the American people are 
certainly owed an understanding as to why this very vital 
position of intelligence continues to go unmanned.
    Let me go to another point. We have dealers in precious 
metals, in stones and jewels, that are included among the many 
types of financial institutions defined under the Bank Secrecy 
Act. Yet the Treasury Department has not issued a regulation 
pursuant to section 352 of the PATRIOT Act requiring diamond 
dealers to establish anti-money laundering programs. Let me ask 
you this question, if I can get an answer to this one: When 
will Treasury propose a rule to address this provision of the 
PATRIOT Act?
    Mr. Zarate. Congressman, as I indicated earlier, it was 2 
years ago that we laid out the proposed rule, which does in 
fact create obligations on dealers in precious stones. What we 
have is an ongoing process which I think and hope will be 
finalized very soon when we put out the final rule with respect 
to this important sector. What I will mention is that this is 
part of the grand expansion of the Bank Secrecy Act, post-9/11. 
Heretofore, there has not been federal regulation of this 
sector, which I will remind this committee, leads very easily 
into the retail sector and the complications attendant to that 
and the potential economic outflow from the regulations we come 
out with are serious and severe.
    So we have been working at this diligently, trying to get 
as much information as possible. As I indicated, this was not a 
sector that we had previously regulated, so a lot of this was 
writing on a blank slate, but I am hopeful that we will very 
shortly have a final rule that helps explicate what the 
obligations finally are.
    Mr. Scott. Finally, let me just ask you this question.
    Chairman Kelly. I am sorry, but you are out of time.
    Mr. Scott. That is fine. Thank you.
    Chairman Kelly. We come now to Ms. Moore.
    Ms. Moore of Wisconsin. Thank you, Madam Chair, for this 
opportunity.
    I also was interested in sort of the administrative work 
that is needed to be done to combat terrorism. My question 
really relates to what the timing is in issuing guidelines for 
handling MSBs. You stated in your opening comments that the 
hawalas are a primary source of criminal movement of money.
    At the same time, this is a primary resource for many folks 
in urban areas who have no checking accounts, and many other 
poor people. I recall in my own lifetime that money orders were 
primarily the ways and means that my family could best do 
business. And there are many financial institutions that are 
deciding to pull out of these instruments because of the 
perceived regulatory problems and no guidelines really being 
issued.
    So I am concerned about the timetable for putting that in 
place, so that we can effectively track terrorist activity, but 
not hamper the ability of poor people to conduct business.
    Mr. Zarate. Congresswoman, you raise an incredibly 
important issue, and it goes to the heart of our function, 
which is to balance the regulatory burden placed on the 
financial community with the benefits associated with those 
regulatory burdens.
    What we have done, and what I said in my written testimony, 
and I hope this is reflected well, is that hawalas certainly, 
and money service businesses writ large, are essential elements 
in many cases to the economy. MSBs, as they are referred to, 
form an essential part of remittances to the developing world, 
and it has been a consistent U.S. government and Treasury 
policy to ensure that we are encouraging those types of flows 
of money. That, I think, is an essential point.
    With respect to guidance on this issue, I think this is 
very important. This is something that Secretary Snow addressed 
publicly before the Florida Bankers Association. I did as well. 
What we are planning on doing is having an MSB conference in 
the context of the Bank Secrecy Act Advisory Group, to in part 
talk about not just the regulatory and enforcement challenges 
which we have, which are real and which I indicated in my 
testimony, but also to deal with the economic impact and the 
regulatory response that we are seeing from the private sector.
    Part of the outflow from that I hope will be joint guidance 
from the Treasury and the regulatory body with respect to what 
is expected and anticipated of the financial community when 
dealing with money service businesses.
    We did something similar in the context of embassy banking 
after the Riggs enforcement actions led to some confusion with 
respect to how to deal with embassy bank accounts. I see 
something similar here in this case.
    Ms. Moore of Wisconsin. Thank you.
    Chairman Kelly. Mr. Cleaver?
    Mr. Cleaver. Thank you, Madam Chairperson.
    Mr. Secretary, is there a delegation in Saudi Arabia at 
this time from Treasury?
    Mr. Zarate. We had a delegation as part of the Fran 
Townsend delegation that was attending the Saudi 
counterterrorism conference. We do have on a permanent basis a 
working relationship. This is an important point and we have 
made this point before, an important working relationship with 
Saudi security forces internally in a Joint Terrorist Financing 
Task Force, which has been an important element of our 
information sharing and an evolution of how it is that the 
Saudis work at these issues.
    Three years ago, the Saudis, and this goes, Madam Chair, to 
some of your questions, 3 years ago the Saudis did not 
necessarily look at financing the way that we do. They did not, 
when conducting searches, pick up receipts and look for 
financial records. We have engaged in intense training with 
them, intense collaboration. What we have on the ground now, 
led by the FBI, is a Joint Terrorist Financing Task Force which 
is proving valuable.
    Mr. Cleaver. Is it possible that you could provide the 
committee with a list of the individuals in that delegation 
from Treasury and their titles, and the roles that they are 
playing while there?
    Mr. Zarate. Certainly, Congressman, we can provide both the 
names of the delegation that attended the conference with Ms. 
Townsend. We could also in consultation with the NSC, 
obviously, and then we can certainly provide names as 
appropriate as to who is on the ground. There may be some 
sensitivity to that, given the security relationship, and to a 
certain extent we will have to go back and talk to the FBI 
about that, but I will try my best and we will take that back.
    Mr. Cleaver. Thank you.
    Thank you, Madam Chair.
    Chairman Kelly. Thank you, Mr. Cleaver.
    Mr. Moore?
    Mr. Moore of Kansas. Thank you, Madam Chair.
    Again, Mr. Zarate, I appreciate your being here. I want to 
follow up on a question that Ms. Moore asked you and that you 
answered, and this may partially already answer my question, 
but I just want to refine it a little bit.
    As you know, MSBs play an important role in many urban 
communities. These small community-based businesses, in 
partnership with the banks or other financial institutions, 
provide necessary money transfers to many neighborhoods with 
significant immigrant populations. Often, at times community 
members will feel more comfortable with the local MSB than they 
might with a large national bank that does not have a presence 
in their community.
    Certain regulatory requirements contained in the PATRIOT 
Act are causing some banks to sever their relationships with 
MSBs, is my understanding, because these banks have a business 
relationship that unless conducted separately require a review 
of MSB policies. In fact, this is including their anti-money 
laundering policies, their financial information third party 
references, information on owners and other business 
information. These relatively new reporting requirements have 
apparently caused some banks to believe they should not carry 
on these relationships with MSBs because of the increased 
regulatory burden associated with doing that.
    I think we all, I think everybody on this committee and 
probably every member of Congress feels we must do all we can 
to protect our country and our people from money laundering 
that is associated with financing terrorist organizations in 
this post-9/11 world. I think we all agree that is a reasonable 
thing that must be done in a reasonable manner.
    You have already kind of answered this question, but do you 
agree that MSBs can play a useful role in our cities? And what 
steps can Treasury Department take to alleviate the problems 
they are facing? You indicated that there might be an MSB 
conference coming up. Is there a timeframe for that and where 
and when might that be? If you can tell me if you have that 
information, we would like to get information from that to see 
if this issue, if it is an issue and a problem, can be 
addressed in an administrative fashion, or does it need to be 
addressed by Congress for further action?
    Thank you.
    Mr. Zarate. Thank you, Congressman.
    Again, you and Congresswoman Moore raise very good and 
important issues. These are issues that we hear as well, and I 
know you hear it from various banking associations and 
proprietors. This is a serious issue because money service 
businesses form part of the financial sector that is important. 
It is important to rural communities, to ethnic communities, to 
less-serviced communities. Access to the financial system by 
individuals is incredibly important and it is a part of 
Treasury's mission, frankly. So that is important.
    What I think we are seeing, sir, is part of the growing 
pains of the post-9/11 expansion and deepening of the anti-
money laundering system. You have sectors, as I mentioned in my 
testimony, that have previously been unregulated, at least 
federally, and an attempt to try to mesh the federal system 
with ongoing practices, as well as with the more formal sectors 
that are well regulated and know how the system works.
    Part of our challenge, and again I think this is what the 
MSB conference will in part focus on, will be finding the right 
balance of expectations. What is expected of the formal 
financial sector? What is expected of the MSB sector? I think 
the conference will go a long way. Our intent is to have that 
fairly soon, sir. I would hope sometime in the next three to 
four weeks, as soon as we can schedule it with the appropriate 
parties.
    Chairman Kelly. Thank you, Mr. Moore.
    Ms. Wasserman Schultz?
    Ms. Wasserman Schultz. Thank you, Madam Chair.
    Mr. Zarate, I am from the state of Florida. You might be 
familiar with the case of Sami Al-Arian in Florida and the fact 
that it took approximately 7 years, if not longer, to bring 
indictments against Mr. Al-Arian. He was a full tenured 
professor at the University of South Florida, operating an 
Islamic academic institute on the campus, was here legally in 
the country, and ultimately was accused of and is now in jail 
for operating a terrorist financing network. In fact, one of 
his lieutenants actually went back to the Middle East to head 
Islamic Jihad. So obviously not a very good guy.
    One of the concerns that I have, and I would just like you 
to respond to it, is that there is a balance that I referred to 
in my opening statement about balancing how we interact with 
commercial financial institutions and suspicious activity 
reports, needs to be struck carefully. On the one hand, it took 
almost 7 years to bring indictments against Mr. Al-Arian, but 
you can actually potentially drive this activity underground if 
you are overly aggressive in pursuing this, because they will 
just find another way to interact and pursue their financial 
transactions.
    So as it relates to that kind of activity, how are you 
striking that balance?
    Mr. Zarate. Congresswoman, again, you hit a very good 
point. It is a consistent message that we have stated both 
domestically and internationally. Frankly, we have done so very 
forcefully internationally. The idea that bringing, and this is 
reflected in my testimony, the strategy is bringing these 
previously unregulated sectors into the light of the regulated 
community so that there is greater transparency, there is 
greater accountability, so that we have access to information 
that we did not have access to before, and to deal with it in 
as open and transparent a way as possible.
    So part of it is developing international standards, which 
we have done which reiterate that very point. The United Arab 
Emirates has hosted a number of hawala conferences. They are 
going to have their third conference here in April where that 
theme is reiterated over and over again, because the last thing 
we want is for providers of financial services to be driven 
underground.
    You are right. There is a potential here in the MSB context 
for certain money service businesses, hawalas or otherwise, to 
be driven underground either because of regulatory burdens or 
because they are not being serviced by the formal financial 
sector.
    So that is precisely what we are trying to avoid, and it is 
a common message that we have with banking associations, with 
the general public, and will be a major theme of this 
conference which I think will be an important step in setting 
forth expectations.
    Ms. Wasserman Schultz. How are you trying to, if you could 
be more specific, how in the future are we going to ensure that 
it does not take almost a decade to prosecute and discover the 
activities of someone like Sami Al-Arian?
    Mr. Zarate. Congresswoman, I cannot speak, although I was 
formerly part of DOJ, I cannot speak for DOJ and that 
prosecution in particular. I will tell you that those types of 
cases and terrorist financing and support and material support 
cases are very difficult to make. We have prosecutors on the 
frontlines of this every day who are doing yeoman's work and 
phenomenal work to make these cases, but I think it bears 
mentioning that prosecutions are, as we say often with 
designations, one tool in our tool shed to bring to this issue.
    And quite frankly, we have been preaching since 9/11 the 
importance of the preventive aspects of the designation. 
Designations and the freezing of assets are a way of using our 
administrative authorities and the President's executive powers 
to preventively arrest assets, not individuals, but arresting 
assets in a preventive way and in a way that does not tie us 
into the criminal legal process.
    So I think there is a larger point in what you are 
indicating in that it is very difficult to often draw the clear 
ties between someone who is engaging in support activities 
generally to terrorism more specifically. Our prosecutors are 
doing great work around the country to do just that, but it is 
difficult work.
    Ms. Wasserman Schultz. In light of your comments, then, the 
ones you are just making now, what relevant portions of the 
PATRIOT Act, since this administration has continued to point 
to the PATRIOT Act as being evidence of the positive steps we 
have taken to prevent cases like Sami Al-Arian, what relevant 
portions of the PATRIOT Act are going to help ensure that that 
type of activity is discovered more quickly and caught?
    Mr. Zarate. Congresswoman, again I cannot speak to all the 
various titles of the PATRIOT Act. I am more expert on Title 
III, which is relevant to the subject that we are talking about 
here. I will tell you that given my past experience at DOJ and 
given the changes provided and tools provided in the PATRIOT 
Act in terms of allowing the flow of information to flow 
between government agencies in a much more robust way, allows 
for these types of cases to theoretically be brought to 
fruition much sooner.
    In the Title III context, we have the ability now, and this 
was an innovation from Congress and a very good one, the 
ability to share more information with the financial community 
and frankly to provide safe harbors to the financial community 
to share information with each other. That is very important 
because as we see trends, we see customers trying to move from 
one financial sector to another or one institution to another, 
it is important for these financial institutions to speak to 
each other.
    Just 2 weeks ago, FinCEN announced the establishment of the 
314(a) secure network, which allows for the passing of more 
secure information to the financial community, which is 
something that they have been hungry for, something that we 
have wanted to do, and build on the 314 process which is in the 
PATRIOT Act, which has allowed us to get leads and information 
out to the financial community and to get information back.
    So all of that, the theme of greater information sharing, 
greater flows of information both vertically and horizontally I 
think is the key element of the PATRIOT Act and why it is so 
important.
    Let me just say, one other element of the PATRIOT Act that 
we have found incredibly important from a diplomatic and 
strategic standpoint. Madam Chair, you talked about the 
certification process. One of the tools you all provided us was 
Section 311 of the PATRIOT Act, which gives the Secretary of 
the Treasury the power to identify foreign jurisdictions, 
foreign entities or classes of transactions as a primary money 
laundering concern. We have used that now eight times. We are 
using it strategically. It is part of the national security 
thinking now, and that is incredibly important.
    Chairman Kelly. Thank you very much, Ms. Wasserman Schultz.
    Ms. Wasserman Schultz. Has my time expired?
    Chairman Kelly. Yes. The red light up there indicates it. 
When the green light is on, you have 5 minutes. When the yellow 
light is on, you have 1 minute to sum up. And when the red 
light goes, you are out of time.
    Ms. Wasserman Schultz. Thank you.
    Chairman Kelly. Thank you.
    Mr. Zarate, during your testimony you spoke about goods. 
Beyond precious gems, a lot of physical goods are moved through 
international trading systems legitimately every day. The 
system can also be abused by terrorists and I am concerned 
about whether or not the Treasury is worried about this, or 
focused on this. I would like to know your thoughts about what 
the vulnerabilities are there.
    Mr. Zarate. Madam Chair, I think the trade-based 
vulnerabilities are real, and we are very concerned about it. I 
present in the written testimony a discussion of the black 
market peso exchange process, which is in essence a trade-based 
value transfer system that has been used over the past couple 
of decades in South America to help launder money. It has been 
a primary way for the Colombian cartels, for example, to 
launder their funds by the use of trade transactions with the 
Caribbean and with the United States.
    So we are very concerned about it. We have addressed it in 
concrete ways in the black market peso exchange context, but we 
are also concerned as to how it relates to evolving free trade 
zones around the world, as well as with respect to trade 
anomalies, in particular with rogue regimes. So that is an 
important element of what we are starting to look at.
    Chairman Kelly. Thank you very much.
    The Chair notes that some members may have additional 
questions for this panel that they may wish to submit in 
writing. So without objection, the hearing record is going to 
remain open for 30 days for members to submit written questions 
to the witness and to place the responses in the record.
    Mr. Zarate, we wish you very good luck with the birth of 
your child and we thank you so much for spending time with us 
here this morning.
    This panel is dismissed.
    Mr. Zarate. Thank you, Madam Chair.
    Chairman Kelly. While the next panel is being seated, I 
would like to introduce our next panel.
    It consists of Mr. Mallory Factor, who is the President of 
Mallory Factor, Incorporated. He is a member of the Council of 
Foreign Relations Task Force on Terror Finance, and he is a New 
York State banking regulator.
    Our second witness is Mr. Douglas Farah, a former 
investigative reporter in West Africa. He is a frequent writer 
on terrorist finance and the author of a book, Blood for 
Stones.
    Gentlemen, any time you are ready, if you would give me 
that indication we will go forward. Is the panel indicating 
that they are ready?
    We begin with you, Mr. Factor.

  STATEMENT OF MALLORY FACTOR, PRESIDENT, MALLORY FACTOR INC.

    Mr. Factor. Chairwoman Kelly, Congressman Gutierrez and 
distinguished members of the Subcommittee on Oversight and 
Investigations, thank you for inviting me to testify today.
    Chairwoman Kelly, I would like to commend you in particular 
for addressing head-on the complex issue of terror financing 
through your introduction in the 108th Congress last September 
of a tariff financing certification regime, and your commitment 
which continues on this issue. Thank you very much for your 
leadership.
    My remarks are informed by two reports of an independent 
Task Force on Terrorist Financing on which I served as Vice-
Chair and which was sponsored by the Council on Foreign 
Relations. I am testifying in my personal capacity, as is 
customary, and not on behalf of the task force or the Council 
on Foreign Relations. In my written testimony, I set forth 
seven forward-looking recommendations for Congress to improve 
U.S. efforts against terrorism financing, three of which I will 
discuss briefly today. I welcome your questions, however, on 
any of these recommendations.
    First, Congress should enact a Treasury-led certification 
regime specifically on terrorist financing. A certification 
regime should require the Treasury Department to provide a 
written certification on an annual basis, classified in whole 
or in part if necessary, detailing the steps each foreign 
nation has taken to cooperate in U.S. and international efforts 
to combat terror financing. To be truly meaningful, a 
certification regime must focus first on the nation's laws and 
regulations against terror financing and second, on the extent 
to which the nation actually implements these laws and 
regulations to combat terror financing.
    The certification regime should provide for sanctions under 
Section 311 of the PATRIOT Act on nations that do not receive 
certification. These sanctions would include denial of U.S. 
foreign assistance monies and limitations on access to the U.S. 
financial system. Of course, sanctions would be subject to 
waiver by the President if required by vital U.S. national 
interests.
    A certification regime for terror financing would ensure 
that the special measures provided by Section 311 of the 
PATRIOT Act are used appropriately and thoughtfully against 
rogue jurisdictions. Although the PATRIOT Act gives the 
Administration powerful tools against terror financing, my 
understanding is that the Administration has used its Section 
311 powers only once in the context of terror financing. A 
separate certification regime for terror financing ensures that 
stringent requirements are maintained and revisited annually 
with respect to each nation's practices on terror financing.
    U.S. News and World Report reported that the State 
Department appears unenthused about a terror financing 
certification regime ``because it could end up citing allies 
like Indonesia, Nigeria and the Philippines.'' This objection 
precisely highlights the need for a certification regime. The 
Executive Branch needs to formally review the progress of each 
nation on terror financing annually without regard to whether 
such a nation is a so-called ``ally'' of the United States.
    Second, the U.S. government should increase sharing of 
information with the financial services sector as permitted by 
Section 314(a) of the PATRIOT Act so that the sector can 
cooperate more effectively with the U.S. government in 
identifying terror financiers. Helping private sector financial 
institutions become effective partners in identifying 
financiers of terror should be a top priority. The procedures 
of Section 314(a) of the PATRIOT Act which promote information 
sharing between the U.S. government and financial institutions 
to increase detection of terror financing are not working as 
well as they should. Banking industry officials tell me that 
the U.S. government is still not providing financial 
institutions with adequate information to enable the 
institutions to detect terror financing.
    Financial institutions are used primarily to assist in 
investigating known or suspected terror financiers, not in 
identifying unknown ones. Very little information is flowing 
from the government to financial institutions. I recognize that 
the information that would enable financial institutions to 
become effective partners may be highly protected intelligence 
information. In other industries such as defense and 
transportation, however, persons can be designated by the U.S. 
government to receive access to certain high-value information 
as necessary. A similar approach could be used to facilitate 
information sharing and cooperation between the U.S. government 
and private financial institutions. I strongly encourage this 
subcommittee to hold an oversight hearing on Section 314 of the 
PATRIOT Act to determine how more effective procedures for 
information sharing with financial institutions can be 
developed and implemented.
    Third, the National Security Council (NSC) and the White 
House Office of Management and Budget (OMB) should conduct a 
cross-cutting analysis of the budgets of all U.S. government 
agencies as they relate to terrorist financing. A terrorist 
financing cross-cut would allow policymakers to gain clarity 
about who is doing what, how well, and with what resources. 
With this information in hand, the Administration and Congress 
can begin to assess the efficiency of existing efforts and the 
adequacy of appropriations relative to the threat.
    I thank you and I look forward to your questions.
    [The prepared statement of Mallory Factor can be found on 
page 36 in the appendix.]
    Chairman Kelly. Thank you, Mr. Factor.
    Mr. Farah? I want to say, Mr. Farah, I read your book. I am 
very interested in what you have to say here today.

               STATEMENT OF DOUGLAS FARAH, AUTHOR

    Mr. Farah. Thank you very much, and thank you for the 
invitation to be here. And thank you, Chairman Kelly, 
especially for your leadership in the investigation of Arab 
Bank and the possible support for suicide bombers in the Middle 
East. I think that is an incredibly important part of the 
terrorist financial relationship.
    Commodities such as gold, diamonds and tanzanite have 
played a vital role in the global terrorist infrastructure. 
Gemstones have played a particularly important role in Al 
Qaida's financial architecture and has been used to raise 
money, launder funds, and store value. Gold, for a variety of 
cultural and logistical reasons, has been used primarily as a 
way to hold and transfer value. These commodities are not 
tangential to the terrorist financial structure, but a central 
part of it.
    Diamonds have also been used extensively by Hezbollah and 
other terrorist groups in the Middle East that have a long 
tradition of access to diamonds in West Africa through the 
Lebanese Diaspora there. Gemstones are ideal for several 
reasons. They hold their value; they are easy to transport; 
they do not set off metal detectors in airports; and they can 
be converted back to cash when necessary. This is especially 
true of blood diamonds or diamonds armed by armed groups, 
mostly in sub-Saharan Africa in order to finance their wars.
    Al Qaida sought to exploit gemstones in West Africa, East 
Africa and Europe almost since its inception. There is strong 
evidence of Al Qaida's ties to the African diamond trade, 
despite the reluctance of some in the U.S. intelligence 
community to acknowledge this link. The data comes from 
testimony of Al Qaida members convicted in the1998 U.S. embassy 
bombings in East Africa; my own investigations into the ties in 
West Africa, particularly to Charles Taylor in Liberia and his 
allies in the Revolutionary United Front in Sierra Leone; 
investigations by the London-based NGO Global Witness; Belgian 
police investigations; and most recently, a growing body of 
evidence accumulated by the U.N.-backed Special Court for 
Sierra Leone, charged with investigating crimes against 
humanity in that brutal conflict.
    In two reports presented to some members of Congress, the 
court's chief prosecutor and chief investigator, each with 30 
years experience in the Department of Defense, have summarized 
the large volume of evidence of these ties from sources that 
are different from and independent of other investigations. I 
would be happy to provide members of the subcommittee with any 
of these documents.
    Groups like Al Qaida and Hezbollah chose West Africa as a 
base because in states such as Liberia, Sierra Leone, and 
others in the region, governments are weak, corrupt and 
exercise little control over much of the national territory. 
Some states like Liberia under Charles Taylor were in essence 
functioning criminal enterprises. For the right price, Taylor 
let Al Qaida, Russian organized crime, Ukrainian organized 
crime, Balkan organized crime, Israeli organized crime and 
Hezbollah operate under his protection.
    The evidence points to two distinct phases in Al Qaida's 
diamond activities. The first started sometime before 1996, 
when bin Laden lived in the Sudan and this was aimed at helping 
to finance the organization. The latter years of this activity 
also overlapped with the large-scale Al Qaida-dominated 
purchase of tanzanite in East Africa.
    Wadi el Hage, bin Laden's personal secretary until he was 
arrested in September 1998, spent a great deal of time on 
gemstone deals. El Hage's file of business cards, personal 
telephone directory and handwritten notebooks were introduced 
as evidence in his trial, where he was sentenced to life in 
prison. The notebooks contain extensive information on buying 
diamonds and appraising diamonds and tanzanite. There is a page 
on Liberia with telephone numbers and names. His address book 
and business card file were full of the names of diamond 
dealers and jewelers, many containing the purchaser's home 
phone number.
    It is not clear how profitable Al Qaida's gemstone ventures 
were. It is clear that the efforts to acquire gemstones, 
particularly diamonds, were frequent, widespread and a matter 
of priority for Al Qaida. In late 1998, following the Al Qaida 
attacks on the U.S. embassies in Kenya and Tanzania, Al Qaida 
moved to the second phase of its diamond operations. The 
impetus was the Clinton administration's successful freezing of 
$240 million in assets belonging to the Afghan Taliban 
government and bin Laden. The funds were mostly stored in gold 
reserves in the United States central banks.
    The picture of Al Qaida's activities in West Africa changed 
dramatically in the latter half of 2000, when senior Al Qaida 
operatives arrived in Monrovia, Liberia. Having set up a 
monopoly arrangement for the purchase of diamonds through 
Taylor with the RUF, Al Qaida buyers went on a spree that 
lasted several months. But here the intention was not to make 
money, but rather to buy the stones as a way of transferring 
value from other assets. Telephone records from the middlemen 
handling the purchases show telephone calls to Afghanistan 
until September 10, 2001. The available evidence gathered by 
Belgian police and bank investigators points to Al Qaida 
purchasing some $20 million worth of RUF diamonds during the 14 
months prior to 9/11.
    In the terrorist financial architecture, the use of gold is 
different from that of precious stones. Gold is used primarily 
to store value and facilitate the movement of money cross the 
world's financial markets. Cultural and regional factors have 
made gold a favorite commodity of both the Taliban and Al 
Qaida. In the waning days of Taliban control in Afghanistan, 
Sheik Omar and bin Laden sent waves of couriers carrying gold 
bars and bundles of dollars, the treasury of the terrorist 
movement, across the porous border of Afghanistan into 
Pakistan.
    From the Afghan-Pakistan border area, the assets were 
consolidated and taken by couriers to Karachi, Pakistan. There, 
the Taliban consul general oversaw the movement of the wealth 
to Dubai in the UAE. The transfer to Dubai relied on couriers 
and the virtually untraceable informal money transfer system 
known as hawala. Taliban consul Kaka Zada personally acted as a 
courier at least once, carrying $600,000 in a diplomatic pouch 
to Dubai in late November, 2001.
    During the war in Afghanistan, the Taliban promised to 
clear the roadblocks to petty warlords, and in exchange to 
receive from the transportation syndicates substantial backing, 
mostly in gold. Donations to the Taliban and Al Qaida from 
wealthy Saudi backers was also made in gold. When U.S.-led 
forces occupied Afghanistan, they found Al Qaida training 
manuals that included not only chapters on weapons and 
explosives, but sections on how to smuggle gold. Using 
specially-made vests, gold smugglers can carry up to 80 pounds, 
worth $500,000, on their person. Cash is far bulkier. There 
have also been rewards offered for killing U.S. officials in 
Iraq, payable in gold.
    There are several lessons one can draw about this financing 
of Middle East terror in West Africa and the terrorist use of 
commodities. One is that terrorist groups are sophisticated in 
their exploitation of gray areas where states are weak, 
corruption is rampant, and the rule of law nonexistent. They 
correctly bet that Western intelligence services do not have 
the capacity, resources or interest to track their activities 
there.
    A second lesson is that terrorist groups learn from their 
own mistakes, as well as from each other. They are adaptable in 
ways that make them extremely hard to combat. Hezbollah has 
been using diamonds from West Africa to finance its activities 
for 20 years. Al Qaida operatives simply plugged into the same 
network.
    The third lesson is that small clues matter in trading 
terrorist funding and the use of commodities. There has been a 
limited understanding of the financial structure of Al Qaida 
and Hezbollah both before and after 9/11. The intelligence 
community carried out its first comprehensive assessment of Al 
Qaida's financial structure in 1999, 11 years after the 
organization came into existence. Rather than understanding the 
web of commodities, charities and individual donors that filled 
Al Qaida's coffers, the conventional wisdom was that bin Laden 
was using his personal wealth to finance his organization's 
operations.
    A fourth lesson is that terrorist networks and criminal 
networks can overlap and function in failed states like 
Liberia. Commodities like diamonds are the coin of choice as 
the different groups provide different services to governments 
or rebel groups in exchange for cheap access to commodities.
    The fifth lessons is that the intelligence community reacts 
very poorly to information it does not initiate. Thus, much 
information generated by journalists, the Special Court for 
Sierra Leone, and others was dismissed out of hand. More than 2 
years later, the tide is changing, but if the terrorists's use 
of commodities is to be understood and effectively cut off, the 
intelligence community must begin to look beyond the 
traditional methods of raising and moving money, and begin to 
look at commodities much more seriously.
    Thank you, and I look forward to your questions.
    [The prepared statement of Douglas Farah can be found on 
page 41 in the appendix.]
    Chairman Kelly. Thank you, Mr. Farah.
    Mr. Factor, certification regimes have enabled Congress and 
the public to clearly measure how well other countries perform 
on various issues. They also allow investors to measure how 
well a market meets the demand for safety and transparency. If 
a certification regime for terrorist finance were to be put in 
place, what kind of metric would be the most use to the 
financial markets?
    Mr. Factor. That is a very good question. I think that the 
metrics are fairly simplistic. FATF in the past has looked at 
rules and regulations against terror financing, but almost no 
one has looked thoroughly at implementation. I think the 
implementation metric is absolutely vital. A number of 
countries have some of the best rules and regulations on their 
books, but their implementation of those rules and regulations 
is poor, to say the least.
    I think that the implementation of rules, as well as the 
rules and regulations, would be the key metric.
    Chairman Kelly. Thank you very much.
    Mr. Farah, your reporting on some of the issues relating to 
the use of precious stones by Al Qaida in West Africa has been 
polarizing in some circles. As you well know, some of your 
assessments and those made by others were not accepted by the 
9/11 Commission report on terror finance. I have discussed this 
with my staff, and apparently they had discussed this with you. 
You know that many of us in Congress are trying to approach the 
issue with an open mind. We simply want to learn more about how 
this issue might be affecting the financial infrastructure of 
the groups that are trying to attack us.
    Some people I know and deeply respect disagree with your 
assessments. Others seem ambivalent. They say that you are 
right; this happened several years ago; it is largely a moot 
issue so far as our current efforts are concerned. Of course, 
there are others who would say the same thing that you have. I 
recall, for instance, a news report from last August in which a 
senior U.S. intelligence official said, ``Charles Taylor was in 
the back pocket of Al Qaida. He was helping them launder money 
through the diamond mines.''
    I noted this morning an article that is in the Detroit Free 
Press with a headline that says, ``Al Qaida has bases in 
Africa.'' The opening sentence reads, ``Al Qaida has opened 
recruiting and training bases in Nigeria, Somalia, Tanzania, 
and Uganda, the United Nations said Tuesday in a report that 
warned that terror group attacks should be expected to 
increase.'' With unanimous consent, I am going to make a copy 
of this article from the Detroit Free Press a part of this 
record.
    One thing I think that should be clear to everyone is that 
the issues surfaced by your investigations remind us that there 
is a very dense cloak of uncertainty that we are trying to 
pierce in this fight against terrorism. Many parts of this 
terrorist apparatus cannot be fully seen and they never will 
be. But some things that we believe to be true dangers may not 
be provable in a court of law, and I think we have learned that 
our inability to find fire in certain areas where there is 
smoke does not mean that we should ignore that thick smoke. We 
cannot afford to.
    I am interested in hearing your thoughts on why some of the 
central assessments of your book are so important to us right 
now. Can you give a perspective on why the issues raised by 
your book and the other writings should warrant continued 
attention in our fight against terrorist financing, and about 
why we should have a strong presence in such places such as 
Africa where we previously may not have had a very robust 
intelligence operation?
    Mr. Farah. Thank you for the question.
    I think you are right. I think that there has been a lot of 
discussion about the use of commodities, especially diamonds, 
in the intelligence community. I think that one of the huge 
differences between the initial reports that were done by 
myself and others and what has come subsequently is that we 
actually spent considerable time on the ground, in some cases 
years, getting to know the structures. It is very hard to send 
a two-person team in for one week into a country and expect 
them to come back with an adequate assessment of what actually 
happened there.
    I think there is also a real loss of the sense of the 
history of what Al Qaida was doing, which you can only gain if 
you go back and read the trial transcripts and read bin Laden's 
early writings. If you look at that extensively, you will find 
that gemstones, especially in the trial of Wadi el Hage and 
others, are a consistent in huge part with what they talk 
about. It is not an isolated incident.
    Finally, when they expelled a Senegalese man from Germany 
last year, the BBC asked him if he really knew bin Laden. He 
said yes, he had visited bin Laden three times while bin Laden 
was in the Sudan. They said, why were you doing that? And he 
said because bin Laden was financing my diamond deals between 
West Africa and Belgium. It was interesting. The weight of 
evidence and the things especially the Special Court has come 
up with, from being on the ground over a considerable period of 
time varies with the assessment of people who can come and go, 
or only read someone's intelligence report, especially when 
your human intelligence in that region is essentially 
nonexistent.
    As to why it is relevant now, I think it points to an MO of 
terrorist structures. In my mind, it is tremendously 
significant that Hezbollah has developed this incredible 
financial apparatus using diamonds out of West Africa that Al 
Qaida was simply able to plug into across the Shi'a-Sunni 
divide and into a business thing. What is even more stunning, 
and I go into it a little bit in my written testimony, is that 
on the ground in Africa, especially in the DRC and in Sierra 
Leone, you can find Israelis who are doing business with 
Hezbollah knowing who each other are and they are perfectly 
happy to do it because it is business there. It is a way of 
moving money and generating wealth. It is an MO that is very 
easy to use and escape public notice of scrutiny.
    Finally, I would say that the presence of RUF in Guinea 
just before Christmas of two South Africans who had initially 
been arrested with Mr. Ghailani in Pakistan, Ghailani being one 
of the key people in my book and a key person in the Al Qaida 
financial infrastructure. When he was arrested in Pakistan in 
July of last year, these two gentlemen were arrested with him. 
They were sent back to South Africa. They were freed after 2 
days in South Africa. They were arrested in December trying to 
get from Guinea into Sierra Leone into the diamond fields.
    To me, especially presence of Dr. Ganchi who was providing 
medical attention to Ghailani when he was arrested, and his 
attempt to get back to the diamond fields indicates that there 
is a clear threat that this is something that they continue to 
want to do.
    Finally, I would point to the work of the U.S. European 
Command in the military. They have been on the ground there for 
a significant period of time and have looked at my reporting 
and other reporting and their own reporting over the last 3 
years. They have come out very strongly and publicly, General 
Wald and others, that this in fact is happening and is an 
ongoing threat to us.
    So I think it is an MO that these people use and will 
continue to use because it works. Until you cut it off, they 
will keep using it.
    Chairman Kelly. Thank you.
    Mr. Gutierrez?
    Mr. Gutierrez. Mr. Factor, in your testimony you indicate 
that the U.S. government should increase its information 
sharing with the financial services industry under Section 
314(a) of the PATRIOT Act. I agree that the filers of CTRs and 
SARs would benefit from learning what data the government found 
most useful. I understand that the regulators are working 
currently on examiner guidance to provide some certainty and 
consistency between what is said by the policymakers and what 
is done by the examiners in the field. I urge them to issue 
this guidance as soon as possible.
    Mr. Factor, what information do you believe would be most 
helpful to the industry, and how do you recommend the 
information sharing be improved and accomplished?
    Mr. Factor. First of all, thank you for the question. You 
are right that there is a need for fair information. You really 
brought up two separate issues, and I would like to address 
them both, if I may. One is the CTR issue. In 2003, which is 
the last available statistic I have, there were over 12.7 
million CTRs filed. I have been told by bank representatives 
that it takes about a half-hour to process each CTR, to put 
that number in some perspective. The largest floating vessel in 
the world ever built was the Queen Mary II a few years ago. It 
took about 6 million man-hours to build that vessel. We spend 
more than 6 million man-hours on CTRs each year.
    The problem I find is that when we ask Treasury 
specifically if CTRs led to any arrests, convictions or 
prosecutions, they could not point to a single one. I am not 
against collecting information. I am against collecting 
information that cannot be used. Likewise, with respect to the 
suspicious activity report, SARs, as you brought up, in 2003, 
again the last full statistic I have, there were over 288,000 
of them filled. I cannot imagine how we could follow up on 
288,000 SARs.
    I think one of the problems is that we are collecting 
information for the sake of collecting information. Just the 
sheer collecting this information puts undue burdens on 
businesses and the American people. I believe that information 
collection may sometimes be necessary, but it is not necessary 
if you are not going to do anything with the information.
    I am not intimately knowledgeable about FinCEN, but I look 
at FinCEN as some huge, huge library with stacks of books with 
no card catalog. It is all there, but if you cannot use, it is 
not as much value. I think the real key is using the 
information that we get and figuring out a way. I mean, look at 
what we are doing with all sorts of logic that is being 
programmed into things. We have our Silicon Valley, our high-
tech industries. We could utilize businesses that have 
knowledge of how to take information like this and put it into 
some way that is usable, not just collect it for the sake of 
collecting it.
    Your second part about information sharing, and I think 
that is one of the key things. Again, I ask you all to please 
hold a hearing on Section 314 because I think it would be 
extremely useful, and how to share information for the benefit 
of the American people. In other industries like the 
transportation industry and industries like, oh, a number of 
other industries, we share information that is classified, 
high-value information. We designate people. I think you are 
going to have to designate some people. I think the outcome is 
going to be much more sharing.
    I think coming from the Treasury Department, people have to 
be taught and informed how to use that information and the 
sharing of information, not just how to follow up on suspects. 
I do not think the procedures and policies necessary are in 
place yet, and I think we need to put them in place. I think it 
is Treasury's obligation to do that, and I believe they 
eventually will, but I would rather see them do it sooner than 
later.
    Mr. Gutierrez. I think we would be well served to look at 
the section and to have hearings, particularly on this section, 
because you have over 200,000 SARs filed and maybe trying to 
find a mechanism so that we can pick what is relevant 
information. I think bankers are just being very, very careful 
in following the law, and being careful and if something looks 
suspicions, let's send it in, when we may not need that 
information.
    Go ahead.
    Mr. Factor. I am sorry. I do not mean to interrupt you.
    First of all, it is almost 300,000 2 years ago. Second of 
all, some bankers are filing everything but the kitchen sink 
and others are filing almost nothing. There are no real set 
policies and procedures. As a member of the New York State Bank 
Board, I talk to bankers frequently. I think we need leadership 
and guidance on this issue to a greater degree than we have 
now. I understand that Treasury is doing a good job and they 
are moving forward. I think we have to move forward faster and 
we have to move forward in a more methodical way. I agree with 
you completely, and I thank you for your interest in this 
because I think it is vital to stopping the financing of 
terror.
    But remember, if I may have just 1 more second, the only 
true intelligence in this whole area of terrorism is with 
respect to money and money equivalents. If we can really begin 
to use finance intelligence effectively and zero-in on it, we 
have ways of stopping terrorism. The actual cost of an act of 
terror is not really the true cost. The true cost is the 
infrastructure needed for those organizations, and those 
organizations's resources determine their ambitions. The 
greater their ambitions, the more resources they develop. We 
can find them if we follow the money.
    Mr. Gutierrez. Thank you. My time is up. Thank you very 
much.
    Mr. Factor. I apologize.
    Mr. Gutierrez. No, it is okay. Thank you so much for 
coming. My time is up.
    Maybe we could figure out a way where I get an e-ticket 
now, it is always good because I used to always lose my ticket. 
Now I just show my ID. Maybe all these hundreds of thousands of 
pieces of paper, they do not have to be on paper. Maybe we can 
figure out a way to electronic them. That is just one instance, 
because until we do this stuff electronically, we are never 
going to be able to garner the information and be able to 
siphon what is really necessary.
    Thank you so much for coming, Mr. Factor, and thank you so 
much for being here this morning.
    Chairman Kelly. Thank you, Mr. Gutierrez. I think there are 
a lot of us who would like to see the paper chase end and go 
electronic. The problem is the cost of going electronic at this 
point, I think. We are looking at it, but we have been looking 
at it. As you know, this committee has been very instrumental 
in trying to make sure that FinCEN especially has the money it 
needs to be an electronic agency.
    We go now to Ms. Moore.
    Ms. Moore of Wisconsin. Thank you, Madam Chair.
    I really appreciate this panel for coming forward. Mr. 
Factor, I was particularly drawn to comments that you made on 
page two of your testimony, the fourth paragraph, where it 
says, ``the certification regime should provide for sanctions 
under Section 311 of the PATRIOT Act, including denial of U.S. 
foreign assistance monies and limitations on access to U.S. 
financial systems on nations that do not receive certification. 
Of course, sanctions would be subject to waiver by the 
President if required by vital U.S. national interests.''
    I guess that leads me into the real contradiction that I 
think Mr. Farah raised in his testimony. This certification 
regime, how does it deal with, and I am just going to throw out 
some examples, we talked about Liberia. I mean, they were our 
buddies, our friends, as long as there were hostilities against 
the Soviets; Saudi Arabia; we are a debtor nation to China. We 
need the oil in Nigeria and so on and so forth. The South 
African diamond industry, in Mr. Farah's testimony he talked 
about how we did not want to acknowledge that because it would 
be a blemish on the CIA and we had a relationship with them.
    How, in fact, will this certification regime process enable 
us to certify nations, be they friend or foe, particularly when 
our vital interests can trump anything else?
    Mr. Factor. You raise a very good point. In the drug area, 
Presidential waivers have been used. I think that when you are 
talking about terror financing, the public will react a little 
differently, but as important as that is, the fact is that we 
do not even name and shame those people who are helping finance 
terror which is killing U.S. citizens. I cannot even imagine 
not enacting a certification regime for terrorist financing 
because we want to keep certain issues off the table. I do not 
think we can any longer keep those issues off the table when 
our domestic security is involved.
    You may want to grant security waivers, but I think the 
naming and shaming process is the barest minimum step we have 
to take.
    Ms. Moore of Wisconsin. Madam Chair, a follow-up?
    Chairman Kelly. Yes, of course. Anytime the green light is 
on, ma'am, you have that time as yours.
    Ms. Moore of Wisconsin. Okay.
    Chairman Kelly. But at red, I am going to cut you off.
    Ms. Moore of Wisconsin. Yes, ma'am.
    I guess I am wondering what sanctions we have against 
people where we are in their pocket. We owe them; we need their 
resources; we need their oil. Your testimony seems to suggest 
that this certification regime process would somehow hold 
people to task because we would have some sanctions. It is not 
clear to me what we could do to the examples that I gave. Maybe 
Mr. Farah might want to jump in, because I am very, very 
interested in this as a process question.
    Mr. Factor. Section 311 provides specific sanctions. It 
provides limitations on access to U.S. financial systems, which 
is deadly to the financial systems of another country. It would 
hurt their ability to have a financial system. That is for 
openers. Sanctions also include denial of U.S. foreign 
assistance monies. There are a whole host of things that can be 
done.
    What has happened is, we are not in the pocket of a lot of 
these countries. We have just taken certain issues off the 
table, which has been going on for multiple administrations. 
Saudi Arabia is an example, and there are other countries 
besides Saudi Arabia. We have to treat them in the way we 
treated the Soviet Union and later Russia, the way we treat 
China, where no domestic issues are off the table. In the past, 
as an example, our relationship with Saudi Arabia was such that 
we would help with their security; they would help with 
regional security and oil, and the Palestinian issue. Domestic 
issues were off the table. Again, this goes back multiple 
administrations.
    The times have changed. Our domestic security is involved. 
There can be no longer domestic issues which affect us that are 
off the table. I do not believe we are in anyone's pocket.
    Chairman Kelly. Thank you, ma'am.
    The Chair would point out that there are certain problems 
with a public listing of noncompliant countries, not the least 
of which would be investment by outside companies and some of 
the ways to pull some of these countries back into cooperation 
is to make sure that they have a vital stake in a safe world. 
We can explore that further.
    I would like to ask a question of both Mr. Factor and Mr. 
Farah. The cultural differences in financial institutions can 
have a powerful affect on intelligence analysis, as I believe 
the testimony of both of you made clear. I want to know if you 
have an idea about what steps Congress should be taking to try 
to foster an understanding of these differences. I am just 
throwing that out to both of you for an answer. Whoever wants 
to can go first.
    Mr. Farah. I would say that the first thing that comes to 
my mind is that, and it is one of the areas that this 
administration is seeking to remedy quickly, but I think in 
some areas not in the right geographic areas, and that is I do 
not think you can do this without good human intelligence. I do 
not think you can understand the cultural factors and 
understand, for example, in West Africa, how the Lebanese 
diaspora community controls through intermarriage and different 
groups that work together and families that work together, a 
lot of the commodity trade, not only diamonds, but frozen 
chickens, wines, and everything.
    Until you understand how those relationships work and what 
the clan structure is that imposes order on certain types of 
commodity trades, you cannot begin to understand how the actual 
system works. That is one of the big black holes in the 
intelligence community's understanding of what goes on in West 
Africa, because they have never done this type of analysis of 
how things moves.
    I think for Congress, I am not sure what the role would be 
except to be pushing the community in that direction. I think 
we also have to be, as several members mentioned earlier, 
incredibly sensitive to the impact of going after, for example, 
the hawala system. As people mentioned, millions and billions 
of dollars flow into Pakistan and India through that system. 
The people have no other way to receive that, and you could cut 
that off and bring those economies to a halt, an unintended 
consequence for a very small trickle of dirty money.
    I would also say that in diamonds, you are talking probably 
in the blood diamond trade that is probably never more than 7 
or 8 percent of the diamond trade, of which the terrorists 
probably took 10 percent of that. You are talking about a 
minuscule flow of dirty stuff through largely clean operations. 
If you take a sledge hammer approach to regulation, you end up 
ruining a lot more than you end up fixing.
    So I would be wary of regulation, and I would say that what 
Congress's main role perhaps could be is in pushing Treasury 
and FinCEN and the intelligence community to look at these 
interculturally appropriate ways to regulate, and then coming 
back with the information they gather.
    Chairman Kelly. Thank you.
    Mr. Factor, the cultural differences within the financial 
institutions themselves sometimes have an effect on the 
intelligence analysis. What would you say to that question 
about what Congress should be doing to try to take into 
consideration the understanding and development of the 
differences?
    Mr. Factor. There are cultural differences, no question 
about it, but I think major cultural difference, and this has 
to be explored and worked on through bodies like the United 
Nations, is that the notion that any act of terror be 
legitimized by a charitable activity or some political 
motivations of the perpetrator has to be completely, totally, 
not be allowed to be bought into. No cause, however legitimate, 
justifies the use of terror.
    Indeed, the use of terror must delegitimize even the most 
worthy cause. We should not allow, and our true allies should 
not allow people to be part of it, countries and jurisdictions 
to be part of the world community that does not accept that 
principle.
    For us to allow people to be our allies and get away from 
that principle makes no sense to me. I think that is a foreign 
policy issue that Congress should be taking up, specifically 
those differences that you ask about and talk about in many 
cases have to do with, a lot of these societies are opaque. 
Things happen in the shadows. As long as things happen in the 
shadows, then these societies allow this opaqueness to exist 
with regard to enforcement of rules and regulations, we will 
never change that culture.
    And if we do not change that culture, we will allow 
breeding grounds for terrorism, and the mother's milk of 
terrorism, which is money and the financing of terrorism to 
exist. It is our fault for not pursuing that.
    Chairman Kelly. I appreciate the comments from all of you.
    This is a very busy day, as you probably noticed people 
coming in and out from this panel. So the Chair notes that 
members may have additional questions for this panel. 
Personally, I have a couple that I am going to submit in 
writing, and others may wish to submit in writing.
    So without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses and to place their responses in the record.
    I thank both of you for your time this morning. It has been 
very informative and I hope will be very helpful to us in the 
long run, both with our dealings with agencies and in drafting 
legislation.
    With that, this hearing is adjourned.
    [Whereupon, at 11:56 a.m., the subcommittee was adjourned.]



                            A P P E N D I X

                           February 16, 2005

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