[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
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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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