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



 
                     STARVING TERRORISTS OF MONEY:
                       THE ROLE OF MIDDLE EASTERN
                         FINANCIAL INSTITUTIONS

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

                             JOINT HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                                AND THE

                  COMMITTEE ON INTERNATIONAL RELATIONS

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 4, 2005

                               __________

       Printed for the use of the Committee on Financial Services
              and the Committee on International Relations

                    Committee on Financial Services

                           Serial No. 109-24

                  Committee on International Relations

                           Serial No. 109-120






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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
                  COMMITTEE ON INTERNATIONAL RELATIONS

                   HENRY J. HYDE, Illinois, Chairman
JAMES A. LEACH, Iowa                 TOM LANTOS, California
CHRISTOPHER H. SMITH, New Jersey,    HOWARD L. BERMAN, California
  Vice Chairman                      GARY L. ACKERMAN, New York
DAN BURTON, Indiana                  ENI F.H. FALEOMAVAEGA, American 
ELTON GALLEGLY, California               Samoa
ILEANA ROS-LEHTINEN, Florida         DONALD M. PAYNE, New Jersey
DANA ROHRABACHER, California         ROBERT MENENDEZ, New Jersey
EDWARD R. ROYCE, California          SHERROD BROWN, Ohio
PETER T. KING, New York              BRAD SHERMAN, California
STEVE CHABOT, Ohio                   ROBERT WEXLER, Florida
THOMAS G. TANCREDO, Colorado         ELIOT L. ENGEL, New York
RON PAUL, Texas                      WILLIAM D. DELAHUNT, Massachusetts
DARRELL ISSA, California             GREGORY W. MEEKS, New York
JEFF FLAKE, Arizona                  BARBARA LEE, California
JO ANN DAVIS, Virginia               JOSEPH CROWLEY, New York
MARK GREEN, Wisconsin                EARL BLUMENAUER, Oregon
JERRY WELLER, Illinois               SHELLEY BERKLEY, Nevada
MIKE PENCE, Indiana                  GRACE F. NAPOLITANO, California
THADDEUS G. McCOTTER, Michigan       ADAM B. SCHIFF, California
KATHERINE HARRIS, Florida            DIANE E. WATSON, California
JOE WILSON, South Carolina           ADAM SMITH, Washington
JOHN BOOZMAN, Arkansas               BETTY McCOLLUM, Minnesota
J. GRESHAM BARRETT, South Carolina   BEN CHANDLER, Kentucky
CONNIE MACK, Florida                 DENNIS A. CARDOZA, California
JEFF FORTENBERRY, Nebraska
MICHAEL McCAUL, Texas
TED POE, Texas

         Thomas E. Mooney, Sr., Staff Director/General Counsel
      Subcommittee on International Terrorism and Nonproliferation

                 EDWARD R. ROYCE, California, Chairman
PETER T. KING, New York              BRAD SHERMAN, California
THOMAS G. TANCREDO, Colorado         ROBERT MENENDEZ, New Jersey
DARRELL ISSA, California, Vice       ROBERT WEXLER, Florida
    Chairman                         JOSEPH CROWLEY, New York
MICHAEL McCAUL, Texas                BETTY McCOLLUM, Minnesota
TED POE, Texas                       DENNIS A. CARDOZA, California
JERRY WELLER, Illinois               DIANE E. WATSON, California
J. GRESHAM BARRETT, South Carolina











                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 4, 2005..................................................     1
Appendix:
    May 4, 2005..................................................    37

                               WITNESSES
                         Wednesday, May 4, 2005

Bukhari, Zahid H., Director, American Muslim Studies Program 
  Fellow, Center for Muslim-Christian Understanding, School of 
  Foreign Service, Georgetown University.........................    29
Byrne, John, Director, Department of Compliance, American Banking 
  Association....................................................    26
Levey, Hon. Stuart, Under Secretary for Enforcement, Department 
  of the Treasury................................................    12
Simons, Hon. Paul, Principal Deputy Assistant Secretary, Bureau 
  for Economic and Business Affairs, Department of State.........    14

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    38
    Kelly, Hon. Sue W............................................    42
    Royce, Hon. Edward R.........................................    51
    Bukhari, Zahid H.............................................    53
    Byrne, John..................................................    57
    Levey, Hon. Stuart...........................................    70
    Simons, Hon. Paul............................................    77

              Additional Material Submitted for the Record

Kelly, Hon. Sue W.:
    Written letter to Prince Bandar bin Sultan bin Abdulaziz Al-
      Saud, Ambassador of the Kingdom of Saudia Arabia to the 
      United States of America from members of Congress, February 
      14, 2005...................................................    85
Written letter from the Royal Embassy of Saudi Arabia in response 
  to questions from Hon. Sue W. Kelly and Hon. Edward R. Royce, 
  February 25, 2005..............................................    88




















                     STARVING TERRORISTS OF MONEY:
                       THE ROLE OF MIDDLE EASTERN
                         FINANCIAL INSTITUTIONS

                              ----------                              


                         Wednesday, May 4, 2005

             U.S. House of Representatives,
      Subcommittee on Oversight and Investigations,
                   Committee on Financial Services,
                                     joint with the
            Subcommittee on International Terrorism
                              and Nonproliferation,
                      Committee on International Relations,
                                                   Washington, D.C.
    The subcommittees met, pursuant to call, at 2:19 p.m., in 
Room 2128, Rayburn House Office Building, Hon. Sue Kelly 
[chairman of the Subcommittee on Oversight and Investigations] 
presiding.
    Present from Subcommittee on Oversight and Investigations: 
Representatives Kelly, Royce, Kennedy, Garrett, Barrett, Davis 
of Kentucky, Gutierrez, Lynch, Scott, and Wasserman Schultz.
    Present from Subcommittee on International Terrorism and 
Nonproliferation: Representatives McCaul, Poe, Weller, Sherman, 
Schiff, and Berkley.
    Chairman Kelly. [Presiding.] I call this hearing of the 
Financial Services Committee on Oversight and Investigations 
and the International Relations Subcommittee on International 
Terrorism and Nonproliferation to order.
    This hearing was called to examine and assist efforts to 
reckon with the very difficult problem of charities being used 
to support terrorism and the spread of extremism.
    Since the vicious attacks on our country, we have placed 
special focus on this issue and despite the important progress 
we have made, this particular problem is not one that lends 
itself to simple solutions.
    As we continue our push for progress, our approach must 
continue to reflect an understanding of the complexities 
inherent in the task. We must consistently improve our 
understanding of the context which makes an honorable 
humanitarian impulse vulnerable to dangerous exploitation and 
misdirection.
    And while it is improper to think that the cure to this 
particular problem can be found through a stronger relationship 
with any one country, it is clear in this case that a key to 
greater success will involve improvements in our partnership 
with Saudi Arabia, which possesses a unique statue as a beacon 
in the Muslim world and has historically been a leader in 
Islamic charitable activities.
    There is good reason for us to be troubled with this aspect 
of U.S.-Saudi relationship in fighting terror finance. In that 
regard, I would like to enter for the record an exchange of 
letters that my colleague Congressman Royce and I had with 
Saudi Ambassador Bandar this year.
    So moved.
    Recently, attention has rightly focused on the Saudi Relief 
Committee for the Palestinians, one of the charitable 
committees run directly by the Saudi Government. Though it has 
provided legitimate relief aid, it also apparently provided a 
structured financial reward system for the families of 
Palestinian suicide bombers.
    This abominable practice was advertised openly on a 
government-run Web site that was only taken down about 2 weeks 
ago. Unfortunately, we have seen reports that Arab Bank and 
other institutions may have been involved in this payment 
scheme.
    Concerns related to this manner are emphasized by actions 
taken by the Treasury Department in response to inadequate 
money laundering controls at Arab Bank's branch at New York 
City.
    The OCC said, ``The inadequacy of the branch's controls 
over its funds transfer business is especially serious in light 
of the high-risk characteristics of many of the transfers.''
    The Oversight and Investigations Subcommittee is committed 
to learning more about these deeply troubling circumstances. 
The public has a right to know what has happened and how our 
Government has responded.
    The committee's attention to this issue in the coming 
months will remain focused on finding out what has happened. 
And I will be holding another hearing on this matter.
    The public will learn more about the Saudi charitable 
committee, the role of institutions used as conduits for 
supporting terrorism and the response of our Government to 
these circumstances.
    The public, and particularly the victims of these attacks 
and their families, deserve nothing less. This must be pursued, 
not only because of the critical importance of ensuring 
accountability for those who support terrorism, but also 
because of the disturbing precedent it ostensibly sets for 
other Saudi-run charitable committees which direct relief to 
other areas, such as Kosovo and Iraq.
    While on a fact-finding trip to Saudi Arabia last month, I 
learned about some of the positive effects from positive 
efforts undertaken by the Saudi Government in dealing with 
these charitable committees. There are significant efforts 
under way that we must acknowledge, but there is still more to 
learn about the controls for these government-run agencies.
    Recent reports about the Saudi Arabian chief justice 
encouraging the donation of funds to insurgents in Iraq should 
intensify our interest in assessing the effectiveness of Saudi 
charitable controls.
    In addition to these charitable committees, we must focus 
on international Islamic charities based in Saudi Arabia, such 
as the World Assembly of Muslim Youth, WAMY, and the 
International Islamic Relief Organization, IIRO, which are 
unaffected by the new Saudi Government regulations.
    These organizations are alleged to have supported Al Qaida 
and are known to proselytize a form of Islam which has shown 
itself prone to spawning extremist, militant movements, such as 
the Taliban.
    These Saudi-based charities still operate throughout the 
world with minimal transparency or controls. To date, Saudi 
officials have indicated that these charities operate largely 
outside of their sphere of influence.
    But it is difficult to accept this argument. There are deep 
interconnections. WAMY and IIRO were, in fact, created by the 
Saudi Government and are run currently by Saudi citizens.
    I note that even earlier this year, the Saudi Embassy put 
out a media release heralding a donation made by IIRO. This 
suggests a deep and continuing relationship.
    I very much agree with Undersecretary Levey's statement in 
his written testimony which underscored the acceptance and 
importance of placing these charities under the review of the 
charitable commission of the Saudi Government and that the 
Saudi Government is in the process of establishing for 
monitoring charitable donations outside the kingdom.
    These charities, however, are not included in the 
commission's portfolio. And I am talking about WAMY and IIRO.
    There must be open, continuing dialogue with the Saudis 
about this issue.
    Based on my meetings in Riyadh last month, I believe that 
Saudi officials would be willing participants in a more 
frequent discussion with Congress, as they, too, now bear the 
scars and burdens of being an Al Qaida target.
    Officials in Riyadh expressed to me repeatedly their 
interest in working with our Government and the Congress in 
fighting terrorism.
    We must engage that interest.
    In our discussions, we must also be prepared to refine our 
own approach to this issue.
    We have been mindful and we will be mindful that we are 
directly addressing one of the five pillars of the Islamic 
faith, that of Zakat, which guides Muslims to regularly donate 
a portion of their wealth to charitable causes.
    U.S. complaints regarding Muslim charities are often 
mistakenly perceived as lacking in respect for this fundamental 
obligation of the Islamic faith, thereby creating a serious 
complication for our hopes of resolving our national security 
concerns.
    It is critical that we continue discussions, not just with 
Saudi Arabia, but with all governments in the Middle East and 
North Africa, on steps they can take to strengthen their 
ability to detect and stop terrorist money flows without 
impeding important, honorable, humanitarian efforts.
    An important step forward in this effort has been the 
establishment of the Middle East-North Africa Financial Action 
Task Force. The MENA-FATF provides the ability for governments 
in the region to develop best practices and to share 
information on terrorists and their network within their 
different countries.
    I am pleased that the United States government and our U.S. 
Treasury is an official observer, has a delegation to MENA-
FATF, and has provided technical assistance to the organization 
and its members.
    Most nations have laws on their books to fight money 
laundering and terror financing, yet there is no way to measure 
the effectiveness. Banks, charities and agencies of our own 
government are left to use their own resources to find out 
whether certain countries are trustworthy business partners.
    While organizations like MENA-FATF can help, the U.S. 
Government must take action to protect institutions that deal 
with nations that are not enforcing their anti-terror finance 
laws.
    I have introduced H.R. 1952, along with Ms. Berkley and my 
friend Mr. Royce and Mr. Feeney, to do just that.
    A terror finance certification regime can eliminate 
uncertainty in businesses and charities facing and working 
overseas while spurring other countries to enforce their laws.
    I look forward to working with the Treasury and my 
colleagues to move this bill forward in the near future.
    The U.S. and its allies continue to fight a ruthless enemy 
that will use any weapon whatever at its disposal to try to 
defeat us--whether it is defaming its own religion, misleading 
banks and community leaders, or stealing aid meant for the poor 
and the starving.
    As we continue to take the necessary steps to defend 
ourselves, we must ensure that those who are victimized because 
of Al Qaida are not unduly hurt by those measures that we are 
trying to provide and are provided the means for making 
themselves as whole as possible.
    I turn now to Mr. Royce, my chairman.
    Mr. Royce. Thank you very much, Chairwoman Kelly.
    And by way of explanation, Chairwoman Kelly and I serve on 
the Anti-Terrorist Finance Task Force, the task force we put 
together over a year ago in order to kind of collaborate and 
work together to surface information. And her staff and my 
staff worked together.
    And so she has asked me, as the chairman of the 
Subcommittee on International Terrorism and Nonproliferation, 
if I could help her organize this joint hearing today. And I 
know this is unusual for us to come together across committees 
but, in fact, I think the paramount importance of this issue, 
the challenges we are facing, dictate that we work together.
    The 9/11 Commission, frankly, recommended for us a number 
of changes in Congress. And one of those key aspects that they 
focused on was tracking terrorist financing. They said that 
that must remain front and center in U.S. counterterrorism 
efforts.
    Now, terrorist organizations such as Al Qaida have 
allegedly used a variety of methods to finance their operations 
that stretch across the globe, including the misuse of some 
Islamic charities, including wealthy donors, including Hawalas 
and financial institutions--as Chairwoman Kelly is 
highlighting--drug trafficking and conflict diamonds.
    These are the major methodologies used by terrorist 
organizations.
    Tracking terrorist financing has proven an effective way 
not only to disrupt terrorist plots and organizations, but also 
to glean intelligence on terrorist operatives. As a matter of 
fact, it is one of the best ways.
    And on top of that, it is one of the best ways to get 
convictions, because once you have the paper trail, once you 
have the hard evidence financially, you have got the ability to 
indict and convict.
    However, because of its complexity and variety of methods, 
terrorist finance has been a hard target for the United States.
    As we will hear today, there has been progress in the fight 
against terrorist financing. For instance, the administration 
reports that funds that flow to Hamas have seen a substantial 
reduction. However, there is a long road ahead, and terrorists 
are constantly changing their financing tactics.
    The larger challenge is checking the ideology fueling 
terrorism. Charities continue to provide a variety of important 
functions in the Middle East and around the globe.
    A major goal of these charities, however, for some of them, 
is to spread a radical version of Wahhabist beliefs. And just 
as there is Christianity and the Christian identity movement, 
there is Wahhabism and there is radical Wahhabist ideology.
    And, thus, some Gulf state charities have funded several 
madrassas in Africa, in Southeast Asia, South Asia, Central 
Asia and Europe that teach jihad.
    And I have spoken with local leaders in a number of these 
countries--Uzbekistan, Kyrgyzstan--and I will give you one 
example, Chairwoman, in terms of Kyrgyzstan. There was a 
madrassa set up; 13 young men went to that madrassa in order to 
get an education. They found out they were learning jihad. When 
they tried to leave, they were all decapitated.
    And as the assembly member representing that district told 
me, in Kyrgyzstan, he said, ``This is not a local Kyrgi custom. 
This is a radical custom that is being imported and taught 
here. And it is being done with petro dollars funding it from 
the United States and the rest of the world, and you need to 
cut off that flow of financing that is setting up and using 
these jihadi schools.''
    It came home a little bit to me when I was on the southern 
border, by the way, a couple of weeks ago talking to a border 
patrol agent who had intercepted someone from Kyrgyzstan who 
had trained in jihad in Afghanistan and was coming over our 
border.
    So eventually this does come back to haunt us in terms of 
national security.
    Algeria, Chad, same situation--West Africa, East Africa, 
most of the countries that I have visited there have raised 
this as a key problem in those societies.
    And it is these radical madrassas that are fueling the next 
generation of jihadists and perpetuating what some African 
leaders call a generational struggle between the vision of the 
elders in the community and the youngsters.
    So experts I have spoken with measure the amount of 
spending to support the building of madrassas worldwide in the 
hundreds of millions, if not billions annually, and a certain 
portion of this goes to the teaching of radical Wahhabist 
beliefs.
    Much of this, as I said, is our own petro dollars, and this 
has to be part of our dialogue with countries in the region at 
every level. And this is just as much an issue of public 
diplomacy as it is terror finance.
    Of course, those who are working to spread this ideology of 
terror are often depending on Muslims seeking to fulfill the 
Zakat requirements of their faith.
    We need to do everything we can to shine the light on those 
who seek to prey on fellow Muslims who are simply seeking to 
fulfill their religious obligations. Protecting the charitable 
community from terrorist abuse is of paramount importance and 
we need to work together with the Muslim community to do that.
    Significant international cooperation through bilateral 
relationships and multilateral institutions will be key to stem 
the flow of money to terrorist groups and extremist causes.
    Countries in the region have taken some first steps, yet 
many still do not have terrorist financing laws or have 
established financial intelligence units. And we have a lot of 
leverage to force the establishment of financial intelligence 
units and we should use it.
    Some have put laws on the books but enforcement remains in 
question. These issues will require our constant engagement.
    While progress has been made, I think there is little 
question that our enemies have a large lead.
    Thank you very much, Chairwoman Kelly.
    Chairman Kelly. Thank you, Chairman Royce.
    Mr. Guttierez?
    Mr. Gutierrez. Good afternoon.
    Thank you, Chairwoman Kelly, for this hearing. I have 
enjoyed working with you on many issues including those related 
to terrorist financing and I trust we will continue to do so in 
the future.
    I believe we need greater communication between the 
regulators and the industry regarding the filing of suspicious 
activity reports or SARs.
    While the quantity of SARs has grown exponentially to 
defensive filing, the Treasury's Inspector-General recently 
found that the quality of SARs is severely lacking: 62 percent 
of the SARs examined revealed problems in data quality, 
including incomplete, inappropriate and/or inconsistent 
information.
    The Inspector-General's report indicated that FinCEN needs 
to prioritize this issue. And I look forward to hearing from 
Undersecretary Levy about his ideas for improvement in this 
area.
    I also would like to hear from the witnesses whether it 
makes sense to put the families of suicide bombers on OFAC 
lists to prevent payments for martyrdom. Will this place too 
high a penalty on families that may have been unaware of their 
relatives' activity? Or is this justifiable in the fight 
against terrorism?
    I am pleased that guidance was finally issued on April 26th 
for banks regarding money service businesses. While I would 
prefer that banks provide these services directly to consumers 
until enough banks and credit unions enter this market, and 
hopefully follow the fine example of Bank of America and offer 
no-cost remittances products, MSBs will be necessary to fill 
the gaps in service for many communities.
    This morning, the committee held a hearing about breaches 
in data security in private sector companies.
    While I am very concerned about that issue, I find it even 
more disturbing that Treasury has had ongoing problems with its 
own information security.
    It is rare that I agree completely with any of my 
colleagues, but specifically, Mr. Sensenbrenner. But on this 
issue, he stated on April 20th, he called Treasury's failure to 
securer taxpayer and bank security data as completely 
unacceptable.
    Mr. Sensenbrenner went on to say, ``It needs to be 
corrected immediately.'' Mr. Sensenbrenner is absolutely right, 
and I would like to know what is being done in that area.
    I would be receptive to requests for more I.T. funding, but 
I am not convinced that it would be spent sufficiently.
    The Inspector-General recently found that getting 
Treasury's HR Connect, high-tech personnel system up and 
running cost $173 million, substantially more than similar 
human resource computer systems at two other agencies.
    For example, at the U.S. Coast Guard, it spent $24 million, 
and the Agricultural Department, which spent $15 million, 
according to the audit report prepared by the Treasury 
inspector-general for tax administration.
    Furthermore, they are paying about $22 million annually to 
run HR Connect, far more than the $5 million to $6 million paid 
by the Coast Guard and the Agricultural Department to operate 
their system.
    The I.G. calculated that the $41 million may have been 
wasted in the development of the HR Connect. The contractor on 
that project was paid $109 million, and I would like to know 
who that contractor is, whether this contract was bid 
competitively, why the costs were so high and where the funds 
for the project came from.
    Finally, I am troubled that the assistant secretary for the 
Office of Intelligence and Analysis--and issue I have raised 
before--a position created more than 2 years ago continues to 
remain unfilled. I would hope that this office and its 
functions are a priority for Treasury and that this vacancy 
does not continue much longer.
    This chronic understaffing appears to be rampant throughout 
Treasury and may be the reason for some of the problems I 
mentioned earlier.
    I have been very supportive in the past for budgetary 
increases for Treasury, particularly in the area of terrorist 
financing. However, I would like to know how these funds are 
being spent to fill these vacancies, both in the area and 
overall. And I would like to know where and for what purpose 
these funds are being used.
    As of 2 months ago, press reports indicated that fully one-
third of the senior policy positions at Treasury were vacant. 
While I am heartened that a few of these posts now have 
nominees, I would like to see more progress in this area.
    Thank you again, Ms. Kelly, for calling this hearing. And I 
look forward to the testimony of the witnesses.
    Chairman Kelly. Thank you, Mr. Gutierrez.
    Mr. Sherman?
    Mr. Sherman. Thank you, Chairwoman Kelly and Chairman Royce 
and Mr. Gutierrez, for holding these important hearings.
    I know that Chairwoman Kelly has been concerned with this 
issue generally and with the particular case of the Arab Bank, 
which she talked about.
    The Arab Bank has been ordered by the OCC to cease most of 
its banking activities and faces lawsuits by the relatives of 
Americans killed by Palestinian terrorists in the intifada.
    I commend her for holding these hearings, and look forward 
to future hearings specifically focused on the Arab Bank.
    It is an important case, that case of the Arab Bank, 
because it points out two of the most difficult problems facing 
us in the struggle against terrorism.
    One is the flood of Saudi money finding its way into the 
hands of terrorists and used to support certain madrassas and 
other organizations, which while not terrorist organizations 
themselves, teach a proterrorist line.
    The second is the willingness of some people--even people 
outside the Arab and Muslim world in some cases--to feel that 
the word terrorism does not apply to those who try to kill 
Israeli civilians.
    Now, let us look at the Saudis. Whatever positive 
developments the administration will tell us about today, Saudi 
cooperation preventing terrorism seems to apply only to those 
terrorists who have attacked Saudi Arabia's ruling elite.
    It certainly does not apply--and in fact the opposite 
applies--where you have Palestinian groups such as Hamas, 
Islamic jihad and others who are widely recognized as terrorist 
organizations by the civilized world, but who are supported by 
the Saudi royal family and those it has enriched.
    We should be very careful who we hold hands with. Saudi 
Arabia is not concerned about America. The Saudi Government is 
certainly not concerned about the Israeli civilians and the 
Indian civilians killed by Islamic terrorists. They are 
concerned solely with their own survival.
    That means that the Saudi Government will work against 
terrorism very narrowly, only against those groups that 
threaten the Saudis. Their support is not terribly deep. When 
it suits them, they will provide subsidies even to those groups 
that are at war with them.
    There is a tendency of the Saudi Government to buy off 
terrorists and to try to pacify those who support terrorists by 
showing those terrorist supporters that they are on their side, 
by aiding those terrorist groups who kill Israeli civilians, 
Indian civilians or just about anybody other than the Saudi 
elite.
    If you are in the business of fighting terrorism, first and 
foremost, you have to know who a terrorist is. We need 
definitions and lists.
    Hamas is not considered a terrorist organization by the 
Saudis. Thus, one of the most infamous terrorist organization 
can be funded and is funded by Saudi civilians, by the Saudi 
royal family. No amount of cooperation will be effective if we 
do not even agree on what problem we are trying to fight 
against.
    Second, the Saudis are not alone in supporting Palestinian 
terrorists. In fact, much of the world does not want to 
confront the truth.
    However you feel about the politics of their cause, the 
preferred weapon of Palestinian extremists is the suicide 
bomber who blows himself up in the midst of civilians.
    The United Nations is not able to come up with a definition 
of terrorism, because much of the world will not accept the 
definition of terrorism that does not exclude all Palestinian 
extremists from the definition, no matter what terrorist acts, 
no matter what barbarous acts that they engage in.
    Who expects any country to fight the funding of Palestinian 
or other terrorists if they do not believe that these groups 
are, in fact, terrorists?
    But as we focus on what others are doing abroad, we must 
also focus on what is going on in our own country. ``Jihad in 
America'' first broke the story as a PBS documentary last 
decade. It was produced by Steve Emerson, who now heads the 
investigative project.
    That show demonstrated what continues to be true today, and 
that is millions of dollars being raised from residents and 
citizens of the United States for the purpose of supporting 
terrorism in the Middle East.
    We have to be particularly vigilant of certain charitable 
groups, whose donors are getting tax deductions, when those 
groups operate substantially in the Middle East.
    New organizations can be formed by filing a few papers by 
the IRS. And the presumption is that they are entitled to tax 
deductions until such time as the IRS proves they are not.
    We may have to have a different rule for those groups who 
operate primarily in the Middle East, and that is that the IRS 
will have to investigate before tax exempt status and 
deductibility status can be presumed by contributors.
    Charities and NGOs operating in Palestinian territories 
ought to be subject to this greater scrutiny simply because so 
many of them, in the guise of providing charity, instead reward 
suicide bombers and their families.
    Helping widows and orphans sounds good. Earmarking funds 
for the widows and orphans of suicide bombers is nothing more 
than cash support for terrorism. And yet it is being done not 
only with U.S. dollars--private U.S. dollars--but private U.S. 
dollars subsidized through our tax system.
    I look forward to focusing on this problem further. I, 
myself, have to go to another hearing soon. And I will read 
that portion of the testimony I am not here to see live.
    I thank my colleagues again for holding this hearing.
    Chairman Kelly. Thank you very much, Mr. Sherman.
    Mr. Garrett, you have--Mr. Weller, do you have an opening 
statement?
    Who else do we have out there?
    Mr. Barrett, do you have an opening statement?
    Mr. Barrett. No.
    Chairman Kelly. We are all clear over there?
    Does anybody have an opening statement? Let me put it that 
way.
    Mr. Lynch?
    Mr. Lynch. Thank you, Madam Chair.
    Just briefly, I want to thank yourself and my friend Mr. 
Royce and the ranking members here, Mr. Gutierrez and Mr. 
Sherman, for holding this hearing.
    And I want to thank Mr. Levey and Mr. Simons for coming 
forward to help us with our work.
    Several weeks ago I was in Ramallah with Abu Allah, the new 
prime minister of the Palestinian Authority. And I see our 
problem now in two lights: One, we have to deny resources to 
terrorists and those organizations who would support terrorism; 
but secondly, we need to find a way to make sure that the 
resources that should be properly finding their way into the 
hands of legitimate charities in the Middle East get to their 
rightful destinations and are used for proper purposes.
    Some of the estimates I got when I was in the West Bank 
several weeks ago have the unemployment rate in Gaza and the 
West Bank among Palestinians between the ages of 17 and 35 at 
somewhere in the area of 40 percent.
    And that also is a source of terrorism--or a source of 
receptivity to extremism and possibly terrorism.
    So we have got to address both these problems. One is to 
deny those resources to known terrorist entities and people 
that would support that, but also to try to reduce the number 
of young Arab men that are unemployed--and young women who are 
unemployed--and so to sort of mitigate the circumstances that 
would give rise to extremism in that region.
    So we are hoping that the gentlemen here today will be able 
to help us with that problem. And I am looking forward to 
hearing the testimony of the witnesses.
    Thank you, Madam Chair.
    Chairman Kelly. Thank you, Mr. Lynch.
    Ms. Berkley?
    Ms. Berkley. Thank you, Madam Chairman, and I also want to 
thank Chairman Royce and Ranking Member Sherman and Ranking 
Member Gutierrez for allowing me to participate in this 
hearing. I am not a member of either of these subcommittees, 
but I am a member of the Subcommittee on the Middle East, where 
we have seen and investigated the dangers of terrorism and 
extremism.
    I want to give special thanks to Chairwoman Kelly, who has 
authored a bill that takes a very strong stance against State 
funding and State support for terrorism, and I am proud to be 
an original co-sponsor of that legislation.
    Tracking and ending terrorist financing must remain at the 
forefront of any American counterterrorism effort.
    We must make sure that terrorist organizations like Al 
Qaida, Hamas and Hezbollah, organizations that seek nothing but 
death and destruction for us and our allies, especially the 
State of Israel, do not have the financial means to carry out 
their missions of chaos and destruction.
    We must stop the flow of money that might fund another 9/
11-style attack.
    After a March 2003 terrorist attack in Netanya that wounded 
35 people, a local Islamic charity paid the bomber's family 
over $14,000. The bomber's father said that he believed the 
money was paid by Islamic Jihad.
    That money was funneled from terrorist fund-raisers into 
accounts in the Middle East through a Jordan Arab bank. That 
same bank is believed to be aiding and abetting terrorist 
groups and is implicated in the transfer of more than $20 
million to over 45 suspected terrorist groups.
    It has also been accused of conspiring to commit terrorist 
acts with organizations such as Hamas, Islamic Jihad and the 
al-Aqsa Martyrs Brigade.
    How many suicide bombings are funded? We do not know.
    How many more of these terrorist funding streams exist but 
remain undetected by law enforcement? We do not know.
    I was pleased to learn of a recent action of the Office of 
Comptroller of the Currency when it downgraded the Arab bank's 
status in the United States, but I remain very concerned that 
not enough is being done to stem the tide of terrorist money or 
Islamic money being channeled into terrorist organizations.
    When I think of the Saudis--and I blanch when they are 
called our so-called allies in our war against terrorism--the 
irony of this is that the Saudis, in my opinion, are the 
biggest exporters of terrorism and the biggest financiers of 
terrorists.
    They have the worst record on the planet when it comes to 
women's rights and human rights and religious rights. They are 
the largest purveyors of anti-Semitism in the world. And this 
is what we call our ally in our war against terrorism--the very 
nation that is the perpetrator of our terrorist attacks, 
especially on 9/11.
    If one says that this is old and that there is a new 
relationship with the Saudis, and now after being attacked 
themselves they have, shall we say, found religion and are as 
concerned about the terrorists as the United States, I would 
like to draw your attention to something that happened just 
last week in Saudi Arabia when the Saudi chief justice publicly 
encouraged donations to the families of suicide bombers and 
donations in support of terrorism. Apparently, the Saudis have 
not yet gotten the word that they are our allies in our war 
against terrorism.
    One of the solutions to ending the financing of terrorism 
worldwide lies in the approach taken in a bill that will soon 
be before this committee, sponsored by Congresswoman Kelly.
    By requiring that nations comply with the requirements of 
the International Convention for the Suppression of the 
Financing of Terrorism, the United States can hold the rest of 
the world to a firm and identifiable standard. Nations must be 
required to adopt measures and pass laws that will prevent 
funds from being used in whole or in part in order to carry out 
terrorist attacks.
    It also makes clear that political, philosophical, 
ideological, racial, ethnic or religious considerations are not 
justifications for criminal acts.
    By withholding 50 percent of bilateral aid and refusing to 
support any multilateral aid, the United States will send a 
strong message that financing of those who support violence is 
not acceptable.
    Our focus here must not only be domestic, but international 
as well. Our European and Asian allies must take similar steps.
    Are they requiring tighter regulations and controls on 
banks and other financial institutions? Are they also willing 
to withhold multilateral assistance and place pressure on 
nations that do not cooperate in what has become another front 
in the global war on terror?
    These and other questions need to be answered.
    Legislation like the one introduced by Chairman Kelly 
offers a good solution.
    Stiffer financial controls and exerting our influence on 
other nations also is a solution. However, we must pressure our 
allies to match our actions.
    I want to thank you, Chairman Kelly, for calling this 
hearing. And I am anxious to hear from our witnesses.
    Chairman Kelly. Thank you, Ms. Berkley.
    Mr. Schiff, have you an opening statement?
    Mr. Schiff. Madam Chair, in the interest of time, again, 
the witnesses, I will be happy to waive my opening statement.
    Chairman Kelly. Thank you very much.
    Without objection, all members' opening statements will be 
made part of the record.
    I would like to call our first panel: the Honorable Stuart 
Levey, undersecretary for enforcement in the Department of the 
Treasury, and the Honorable Paul Simons, the principal deputy 
assistant secretary, the Bureau for Economic and Business 
Affairs at the Department of State.
    Gentlemen, we welcome you. And we are very happy that you 
have been willing to share some time with us today.
    I would like to begin with you, Undersecretary Levey. I 
would like to hear your opening statement.

      STATEMENT OF HON. STUART LEVEY, UNDER SECRETARY FOR 
            ENFORCEMENT, DEPARTMENT OF THE TREASURY

    Mr. Levey. Thank you very much, Chairwoman Kelly and 
Chairman Royce, distinguished members of the subcommittees. 
Thank you for inviting me to testify here today about the 
progress the U.S. Government has made in its fight against 
terrorist financing in the Middle East.
    Your personal leadership and that of these subcommittees 
has been vital to our shared work to keep our nation safe, and 
I am grateful for it.
    In the Office of Terrorism and Financial Intelligence, the 
office I head at the Treasury Department, we are working 
tirelessly to track and disrupt the flow of funds to terror in 
every area of the globe.
    Today, however, I would like to focus on the work we are 
doing in the Middle East and in particular with respect to 
charity.
    Terrorist groups have long exploited charities, using the 
sentimental appeal of widows and orphans to finance the murder 
and maiming of innocents. Charities are vulnerable for several 
reasons, as I have explained in the written testimony I 
submitted to the committee.
    As the Chairwoman stated in her opening statement, there 
are no simple solutions to this problem. That said, the U.S. 
Government has confronted the problem head on.
    Since 9/11, we have designated dozens of corrupt charities, 
including the Holy Land Foundation, the Al-Haramain Islamic 
Foundation, the Islamic African Relief Foundation, and many 
others. We have truly worked as a team, coordinating criminal 
actions with designations and diplomatic engagement to get the 
maximum impact.
    I am pleased to inform the committees of another 
significant action that we are taking just today. This 
afternoon, we designated the Elehssan Society, including all of 
its branches, as a charitable front for the brutal terrorist 
group, the Palestinian Islamic Jihad.
    Elehssan masquerades as a charity while actually helping to 
finance hideous acts of terror against the Israeli people and 
other innocents.
    As we have repeatedly demonstrated, we will not hesitate to 
act against those who enable murderers, regardless of how they 
disguise themselves.
    The impact of U.S. sanctions, such as these designations, 
carries tremendous weight in and of itself. In most cases, our 
actions prevent foreign designated entities from carrying out 
transactions in U.S. dollars, the international currency of 
choice.
    But recently we are also seeing that the ramifications of 
these actions extend much further than we had previously known.
    Some foreign private banks are now voluntarily using our 
list of designated parties as a screen to protect them from 
processing transactions from terrorists and criminals, even 
when not required by their domestic law.
    Such practices give a wide-ranging effect to our actions 
and represent a real success.
    Nor should the deterrent value of these actions be 
overlooked. In contrast to terrorist operatives, who may be 
willing to die for their hateful ideology, terrorist financiers 
typically have something to lose, whether it is property, 
occupation, family or social position.
    Being publicly identified as a financier of terror 
threatens an end to all of that.
    Our reporting confirms that once-willing donors are now 
thinking twice or balking altogether before sending money to 
terrorist groups. This, too, is a success.
    We recognize that the enforcement actions have sometimes 
also cut off sources of relief to communities in need. Our goal 
is not to deter charitable giving, but instead, as Chairman 
Royce suggests, to protect the charitable sector such that 
donors' generosity is not abused.
    As you know, the assistant secretary has shown devoted 
leadership on this issue.
    This work has been especially important with the Arab and 
Muslim communities in the United States where the corruption of 
Islamic charities by terrorist groups has created a real 
problem.
    As Mr. Lynch suggested in his statement, this predicament 
is especially acute in the Palestinian territories where Hamas 
and other terrorist groups have intermingled ostensibly 
legitimate activities with terrorism.
    There is a particularly urgent need in this region to 
create safe channels of assistance that will not be subverted 
by terrorists.
    It is important for the prospect of peace in the region 
that a social safety net be provided in the territories by an 
entity or entities that are not subverted by terrorist 
organizations.
    I have explored this idea with President Abbas and the 
Palestinian territories and other Palestinian-Israeli 
officials. I was gratified to receive support and agreement 
from all involved. We are currently working with the 
Palestinian Authority to develop options through which such aid 
could be provided, and I am hopeful that we will be able to do 
so.
    A further promising development in the Middle East is the 
emergence, as the Chairwoman indicated, of the Middle East-
North African Financial Action Task Force or the MENA-FATF. 
Launched in November 2004, this FATF-style regional body of 14 
member countries has taken on the charge of developing regional 
solutions to terrorist financing and money laundering, based on 
the global guidelines set out by FATF.
    The expectation is that this will set standards and hold 
countries to those standards. This is a tremendous step in the 
right direction. But we are clearly only at the very beginning 
of the process.
    Many of these countries have not passed their own money 
laundering and terrorist financing laws; others have not 
established financial intelligence units; others have control 
over their informal hawala sectors; and others have failed to 
implement standards to stop the illicit flow of money through 
cash couriers.
    Our most important task in the Middle East to ensure that 
these standards are not only adopted, but they are implemented 
and enforced. We cannot measure our success by the number of 
laws put on the books but by changes made on the ground.
    Real progress will come in the form of border stops, cash 
seizures, account blockings, arrests and the like.
    It is my job in that process to be impatient for progress, 
and I can assure you that I am.
    We look forward to continuing our work with you on these 
issues, and I look forward to answering your questions.
    [The prepared statement of Hon. Stuart Levey can be found 
on page 70 in the appendix.]
    Chairman Kelly. Thank you very much, Mr. Levey.
    Mr. Simons?

STATEMENT OF PAUL SIMONS, PRINCIPAL DEPUTY ASSISTANT SECRETARY, 
 BUREAU FOR ECONOMIC AND BUSINESS AFFAIRS, DEPARTMENT OF STATE

    Mr. Simons. Thank you, Madam Chair.
    Chairman Kelly, Chairman Royce, distinguished members of 
the subcommittees, we very much appreciate the opportunity to 
be with you here this afternoon to talk about Middle Eastern 
terrorist financing issues.
    As Undersecretary Levey has noted, we have a very strong 
interagency process in place and, a rich toolbox of vehicles 
with which to encourage improved performance with our allies 
across the Middle East.
    Improving and strengthening the political will in key 
Middle East countries is a high priority for the State 
Department.
    My full statement contains details of what we are doing 
with individual countries. I thought I would just very briefly 
review a couple of the tools that we have available that we 
have been able to build up since 9/11.
    First, the international designation process: Mr. Levey 
indicated we have a new designation today.
    I think it is important to note that not only is the U.S. 
utilizing the designation process through the United Nations, 
through Resolutions 1267 and 1373, but we have encouraged our 
partners in the Middle East themselves to propose and to join 
us in designations. Iraq, Syria Jordan, Saudi Arabia, Algeria 
and Kuwait, have all availed themselves of this technique, and 
we intend to encourage it further.
    Secondly, as you mentioned, Madam Chair and as 
Undersecretary Levey mentioned, we have the multilateral 
standard-setting process through the FATF--the Financial Action 
Task Force--and the new MENA-FATF efforts.
    And we are moving a long way to use this multilateral 
vehicle, as well as the mutual evaluation process within that 
vehicle, to get countries on board to upgrade their terrorist 
finance regimes.
    Third, we carry out bilateral capacity-building through 
technical assistance programs that are run through Treasury and 
the State Department. And we have come a long way there, too, 
over the last 4 years.
    For example, we provided training to the Central Bank and 
the FIU in the United Arab Emirates in the areas of hawala and 
alternative remittance systems. And they in turn have become 
active in conducting their own follow-on training through a 
regional training center located in the UAE.
    Fourth, we have diplomatic engagements. Our ambassadors are 
very heavily engaged in promoting our terrorist financing 
agendas in the region.
    The Homeland Security Adviser Fran Townsend has repeatedly 
traveled to the region to indicate the high-level interest in 
the White House with both the Saudis and the UAE.
    And within every embassy we have designated a terrorist 
financing coordinating officer who basically runs an 
interagency process within our embassies to make sure there is 
good coordination.
    And finally we have law enforcement and intelligence 
cooperation with our partners in the Middle East that has been 
strengthened since 9/11.
    So I think we have come quite a long way in terms of 
building the toolbox. I believe that the effort that is 
advanced by this committee is pointing out that we still have a 
long way to go. And I think both Undersecretary Levey and I 
would agree to that.
    We have a lot of the tools available. We are moving in the 
right direction. Certainly our partners in the Middle East 
agree with us on objectives. And we are largely now in a debate 
over the pace of reform and how quickly we can move ahead.
    So in that regard we very much appreciate this hearing and 
look forward to your questions.
    [The prepared statement of Hon. Paul Simons can be found on 
page 77 in the appendix.]
    Chairman Kelly. Thank you very much, Mr. Simons.
    I would like to start questions with Undersecretary Levey.
    Sir, I am very concerned about the stories I have seen 
about terrorism transactions going through Arab Bank to the 
Middle East.
    I know you are unable to comment on the transactions 
leading up to the ongoing investigation of Arab Bank, and while 
we respect those constraints and appreciate Treasury's focus on 
worldwide compliance with money laundering laws, I remain very 
interested in making sure the public learns more about this 
case and about what our Government is doing in response to 
these deeply disturbing reports.
    I would like to know what you are doing in response to the 
revelations to make sure that the international financial 
sector is secured against the supporters of terrorism. I would 
like to know if you are working with the Jordanian government 
on this, and what you are asking of the Jordanian government 
and what their response has been.
    That is a lot of questions. I am glad to repeat them. Would 
you like me to repeat them or you think that once is enough?
    Mr. Levey. Why don't I give it a whirl, and if you think I 
have not answered them, I am sure, knowing you, that you will 
remind me.
    Let me say at the outset, Madam Chairwoman, I share the 
concerns that you have expressed. But as you also indicate, I 
am unable to comment on the particular transactions and the 
particulars of an ongoing review of Arab Bank's New York 
branch.
    FinCEN and the OCC are working together in that case. And I 
have every confidence that they will take robust, fair and 
effective action at the appropriate time.
    For our part, as you indicate, the Treasury Department is 
focused on worldwide anti-money laundering controls as part of 
our responsibility to safeguard the international financial 
system.
    International financial institutions have a key role to 
play in that process by implementing appropriate controls 
within their operations. It appears that such controls were 
indeed sorely lacking at Arab Bank across all of their global 
operation.
    I traveled to the Middle East in February, in part to 
discuss the disturbing information we had received with respect 
to Arab Bank's international operations, and also to stress to 
the Jordanians that they needed to put in place systemic 
controls--for example, passing an anti-money laundering law--to 
safeguard their own financial system.
    As it happened, on my way to Jordan, I stopped in Ramallah 
first. And there I met with a group of Palestinian bankers to 
hear their concerns about doing business in the West Bank, 
including the manager of the Arab Bank in the Palestinian 
territories.
    And what I heard from him was also disturbing. He told me 
that his banks had not filed a single suspicious activity 
report in the past 2 years across all the Arab Bank branches in 
the West Bank and in Gaza.
    When I got to Jordan, I met with the prime minister, the 
finance minister, other officials, the central bank governor 
and others. I underscored the concerns that I had when I left, 
as well as those that I discovered when I was in Ramallah, and 
stressed that, looking forward, effective controls must 
immediately be implemented to safeguard all Jordanian banks, 
including Arab Bank, against money launderers and terrorist 
financiers.
    Everyone I met with assured me they were committed to 
seeing those proper safeguards implemented in all of Arab 
Bank's branches worldwide.
    As the primary regulator of Arab Bank in Amman, the Central 
Bank of Jordan is probably in the best positioned to oversee 
the bank's procedures and reforms. And so, since I have 
returned, I have continued to engage with the Central Bank of 
Jordan as the regulator and have received on Arab Bank's 
progress in instituting those reforms.
    Frankly, I have not been entirely satisfied with what I 
have heard. But I am encouraged by the responsiveness of the 
Central Bank of Jordan, and we will continue to work with them 
to ensure that effective safeguards are implemented across Arab 
Banks' branches worldwide.
    The risks are simply too great to tolerate anything else. 
And I intend to keep the pressure on.
    Chairman Kelly. Thank you. I appreciate your comments, Mr. 
Levey.
    I intend to keep working with you, with both the Department 
of State and the Department of Treasury, because we need to 
learn all we can about this matter, because I believe that it 
will help us in moving forward, through strengthening our 
financial defenses against terrorism.
    To the extent that other members may be interested in 
talking about this particular issue, the Arab Bank issue, I 
want to let you know that I will be holding another hearing on 
this matter, where we can continue to examine the issue and the 
public will learn more about this issue as time goes on.
    Now, I have a question for both of you. In both of your 
submitted statements, the World Assembly for Muslim Youth, 
WAMY, and the International Islamic Relief Organization, the 
IIRO, are mentioned. I think it would be helpful if you could 
both elaborate as to why these particular organizations should 
be of great concern to us.
    Whichever one--Mr. Simons, you want to start with that?
    Mr. Simons. As you have mentioned, Madam Chair, and as 
several of the other members have mentioned, we have been 
working very closely with the Saudi Government over the last 
several years to persuade them to get a better handle on their 
charities situation.
    And as the Saudis have laid it out, they see two types of 
charities operating in Saudi Arabia: what they call domestic 
Saudi charities, some of which have international branches, and 
then what they look to as more multilateral organizations, such 
as WAMY and IIRO.
    We both publicly as well as privately, have indicated to 
the Saudi authorities that we believe that the same 
disciplines, in terms of oversight, ought to be applied to the 
domestic charities as well as to international charities such 
as WAMY and IIRO.
    So we believe that these are entities that need to have 
appropriate scrutiny by the Saudi authorities.
    And in that regard, we appreciate your trip and the efforts 
that you have made to interact with the Saudi Government on 
that particular issue.
    Chairman Kelly. Thank you.
    Mr. Levey?
    Mr. Levey. Well, as you indicate, Madam Chairwoman, on the 
IIRO and WAMY, these have been organizations that we have long 
been concerned about.
    And Mr. Simons is right that the Saudis have articulated 
this distinction that they say that certain organizations are 
domestic charities, others are multilateral ones. I do not 
think that we really believe that that is a valid distinction.
    The important point, though, is that when we consider the 
controls that they have put in the place or are in the process 
of putting in place with charities, on the one hand, they have 
said, ``We are setting up a charities commission,'' but it has 
not actually been made operational yet.
    When we raised that issue very vociferously, they said, 
``Okay, well, in the meantime, we are not going to let any 
charitable money leave Saudi Arabia.''
    And as I said in my statement that I submitted to the 
committee, if that is actually what happens, in the sense that 
no charitable money leaves Saudi Arabia, well, that is a 
satisfactory state of affairs for as long as it goes on.
    Frankly, I think we have significant concerns that because 
IIRO and WAMY and the Muslim World League are explicitly 
exempted from their definition of charities, we have 
significant concerns that that temporary fix is not being put 
in place with respect to these organizations and that is 
something which we intend to press on.
    Chairman Kelly. Thank you very much. I am out of time. I 
will turn now to Chairman Royce.
    Mr. Royce. Secretary Levey, good to see you again.
    And you mentioned that Saudi Arabia has worked with the 
United States to some extent to address Saudi charities, and 
you mentioned the concerns you have or measures which have not 
yet been taken--in your words, ``measures that have not yet 
been taken by the Saudi Government.''
    And I appreciate your frank assessment. And that assessment 
contrasted a bit with Secretary Simon's assessment that our 
terrorism finance cooperation with Saudi Arabia is real-time, 
ongoing and fully embedded into our day-to-day counterterrorism 
operations.
    Of course, what comes to mind is the question of why Saudi 
Arabia has not established an effective Saudi FIU, and you 
mentioned the failure to include three large multilateral 
charities under its Charity Oversight Commission, which the 
Saudis have failed to implement.
    So I guess my question is: What is the commitment of the 
Saudis moving forward on these points and what is the 
commitment of the United States on pushing these issues?
    We do have leverage. Saudi Arabia would like ascension into 
the WTO and other points of leverage.
    So how important is this issue to the United States in 
terms of utilizing what pressure we do have in order to get 
compliance on what I think a number of us feel is vital in 
terms of long-term national security interests?
    Mr. Levey. Let me respond to that, Chairman Royce.
    I think that the interagency group that works on terrorist 
financing, which Mr. Simons and I participate in actively, we 
do take it incredibly seriously. I think it is fair to say that 
there is no other country that has spent nearly as much time on 
engagement.
    And not only have we done it, the president's Homeland 
Security Adviser, Frances Townsend, has engaged on the highest 
levels with them repeatedly.
    There has been undeniable progress, particularly since the 
spring of 2003. It is a much different state of affairs. And I 
think that is what Mr. Simons was referring to in his 
statement--a much different state of affairs since that time 
than before that time.
    They have taken real-time action to capture and kill Al 
Qaida facilitators and operatives in Saudi Arabia. That is 
real.
    They have, indeed, joined us in designating organizations 
and individuals that facilitate terrorism.
    In some respects, I think it is fair to say that Saudi 
Arabia has come further than other countries in the region. And 
we have to be careful that we do not become solely focused on 
Saudi Arabia.
    But that said, and I think, as you allude to, I think they 
have come the furthest and they had the furthest to go. They 
had significant problems in these areas and they still have a 
long way to go.
    Mr. Royce. The establishment of effective Saudi FIU would 
seem to be pretty basic. And that is of grave concern to us.
    Mr. Levey. And to me as well. And I know to Chairman Kelly 
as well.
    Mr. Royce. I was going to ask Assistant Secretary Simons: 
There was a column the other week by Jim Hoagland that a 
national security policy directive is being pulled together for 
what some have started to call the global war on extremism, and 
I wondered if you could shed any light on this.
    And an essential part of this, I guess, would be an effort 
to check the charities who are working to spread radical 
Wahabist beliefs and have crossed the line over into teaching 
jihad.
    Mr. Simons. Thank you, Mr. Chairman.
    We are, indeed, in an internal deliberative process, in 
taking a look at our tools with respect to the global war on 
terrorism. There is not too much I can say about it in an open 
hearing. We might be able to talk more about it in a closed 
session.
    But I can assure you that the two issues that you 
mentioned, terrorism finance as well as how to deal with what 
is taught in the madrassas and kind of the content issue that I 
think you have elaborated here--both of those are very 
important elements in this policy review that is under way.
    Mr. Royce. Undersecretary Levey, you mentioned the 
deterrent impact that the threat of being publicly identified 
as a financier of terrorism has had on those in the financial 
community.
    Would it not make sense to go a bit further and in essence 
name and shame also the states that are not cooperating in 
anti-terrorist financing efforts?
    Such a process would then require an annual written 
certification of Congress detailing the steps that foreign 
nations have taken to cooperate in U.S. and in international 
efforts to combat terrorist financing.
    And this process, then, would be similar for what we have 
in place for compliance of foreign nations on our anti-
narcotics effort. I think everybody would agree that terror 
finance is just as important.
    And I just close by saying--well, also you might want to 
comment on what role Syria may be playing in financing of 
terrorism, on that subject.
    Thank you. And thank you very much for your good work, 
Undersecretary Levey. I appreciate that.
    Mr. Levey. Thank you. Thank you for that, Mr. Chairman.
    You raise a very complicated subject, actually, because in 
some ways we do call out countries that are not cooperative on 
terrorism--terrorism generally.
    Now, you have actually made it more particular on terrorist 
financing, and I appreciate that, because as we have discussed 
personally, or in your office, that is an issue that is 
obviously at the center of what I do, and we do go around the 
world trying to use whatever tools we can to persuade, cajole, 
coerce, whatever we have in order to get people to do more and 
better on this topic.
    On the other hand, one does not necessarily want to 
separate terrorist financing from terrorism. It is a part of 
the bigger picture, and so I think we have to be careful not to 
create a fault line that we do not really mean to create.
    But I do think that this is an issue that I would be very 
interested in exploring. And I know that there is a proposed 
bill that you and the Chairman have already introduced, which 
is something that is perhaps a topic of further dialogue 
between us, so that we can see if there is something that makes 
sense that we will be able to support.
    Mr. Royce. Thank you, Stuart.
    Chairman Kelly. Thank you.
    Mr. Gutierrez?
    Mr. Gutierrez. Undersecretary Levey, I am going to go back 
to my opening statement and the several questions that I raised 
as I read it.
    The quantity of SARs has grown. Many feel they are 
defensive filings.
    Treasury's Inspector-General's recently found that the 
quality of SARs is severely lacking. They stated that 62 
percent of SARs examined reveal problems in data quality, 
including incomplete, inappropriate or inconsistent 
information.
    The Inspector-General's report indicated that FinCEN needs 
to prioritize this issue.
    I would like to hear you comments for ideas and improvement 
in this area.
    Mr. Levey. Thank you for that question.
    I am familiar with the inspector-general report that you 
refer to, and obviously it has raised certain concerns.
    One of the things that I think is also worth pointing out 
is that the inspector-general, who has been very--the Office of 
the Inspector General in the Treasury--has been very helpful. 
They focused a lot of attention on the whole bank secrecy act 
system, and I think has made excellent suggestions over the 
years.
    And we have responded to those recommendations, I think, in 
a way that everyone involved thinks is very cooperative, 
including with respect to this report.
    We are committed to making the improvements that you refer 
to. I should maybe take a step back and say that, with respect 
to FinCEN's ability to get high data quality in SAR filings and 
Bank Secrecy Act filings, I think that when we are fully on 
board with the BSA-direct project that Director Fox is working 
on, I would say, it is fair to say tirelessly, in order to get 
that up and running by October of 2005, frankly with the great 
support of this committee. That will be very helpful on that 
side as well.
    And also as we continue to increase electronic filing, one 
of the advantages--electronic filing has another advantage, 
which is that data quality is improved by the simple fact that 
you have electronic filing.
    Mr. Gutierrez. I guess maybe--because we are going to have 
5 minutes--you might, if you could respond more elaborately in 
terms of how you seen FinCEN prioritizing this issue and the 
exact responses that are going to be taken.
    I would like to go to another issue that I raised.
    The committee held a hearing this morning on breaches in 
data security in private sector companies. And, as I said, it 
is very rare when I agree completely with Mr. Sensenbrenner, 
but on this issue, he said, on April 20th, he called Treasury's 
failure to secure taxpayer and the Bank Secrecy Act data, 
``completely unacceptable.''
    Mr. Sensenbrenner went on to say, ``It needs to be 
corrected immediately.''
    What is your response to Mr. Sensenbrenner's comments on 
Treasury and your information-gathering and the secrecy around 
it?
    Mr. Levey. Well, all I can say on that issue is that I very 
much agree that keeping the integrity of the Bank Secrecy Act 
data that, as you know, initially comes into the IRS, is 
extremely important. We take it very seriously.
    And again, it is something that the BSA-direct system would 
hopefully handle better from FinCEN's perspective. To the 
extent this is a question that goes to----
    Mr. Gutierrez. What measures are you taking to respond to 
what Mr. Sensenbrenner called as ``completely unacceptable''?
    Mr. Levey. I think it would be best to give you a completer 
answer in writing, because this is something that I think the 
IRS is the entity that should be responding.
    Mr. Gutierrez. I will look forward to that.
    I want to ask you about the inspector-general, again.
    He found that getting Treasury's HR Connect, another high 
tech personnel system, up and running costs $173 million. He 
compared that to the $24 million that was spent at Agriculture, 
$15 million that was spent at the Coast Guard.
    He furthermore talked about $22 million annually to run HR 
Connect--far more than the $5 million to $6 million. So he made 
a comparison between what Treasury spent, both in terms of the 
system--$173 million--versus $24 million and $15 million--and 
in terms of $5 million to $6 million to run. This would be your 
$22 million.
    And the I.G. calculated that $41 million may have been 
wasted in development of HR Connect.
    So could you give us the name of the contractor on the 
project that was paid $109 million? And I would like to know if 
the contractor is and whether the project was bid competitively 
and why the costs were so high, and just as importantly, where 
the funds for this project came from.
    Mr. Levey. I am sure that this will not be a satisfying 
answer to you, but I know I am not the right person to answer 
that question. And we will have to have the department respond.
    Mr. Gutierrez. And I raise this as an issue because I know 
that when there is not sufficient money and when large amounts 
of money are spent like this, I guess my concern is money being 
transferred from one area of Treasury to another area of 
Treasury. I did not bring it up, the I.G. looked at it and 
examined it. I am using their report and their data.
    And then I know I raised some issues--and my time is up--so 
if you could put in writing about the Office of Intelligence 
and Analysis and the assistant secretary, who is going to fill 
that job. I have raised this before. And other kinds of 
positions which have remained vacant, if you could give us a 
time line on how you see those positions being filled so that I 
am sure you will be better equipped to fight this war on 
terrorism.
    Thank you very much for your comments, Mr. Levey.
    Chairman Kelly. Thank you very much, Mr. Gutierrez.
    Mr. Garrett?
    Mr. Garrett. Thank you.
    You had indicated earlier during your testimony with regard 
to another organization, ostensibly a charitable organization 
that has now been found to be in actuality a terrorist front, 
if you will--I guess besides looking at those organizations 
themselves, what action by either you or other agencies are 
taken for here and abroad the wealthy individuals who are 
contributing in supplying the funds to those organizations? If 
you can just briefly touch on that--under the Patriot Act.
    Mr. Levey. Well, the Patriot Act does a lot of things, but 
this is something we had before the Patriot Act.
    If we designate an entity under this executive order, under 
IEEPA, which is a separate statute, it is a crime in United 
States domestic law for U.S. persons to contribute money to 
this organization.
    Mr. Garrett. Is that a known standard? What is the mens rea 
requirement for the individual who donates to that 
organization?
    Mr. Levey. For a criminal prosecution there is a mens rea. 
You must have criminal intent. It is still an OFAC violation to 
have any transaction with a person who is on any of the OFAC 
designation lists, including this one.
    Mr. Garrett. Is that any different under the Patriot Act, 
for an individual to be contributing to organizations?
    Mr. Levey. I do not believe that the Patriot Act affected 
that.
    Mr. Garrett. So it is still, as far as you know, it is 
still----
    Mr. Levey. There may be a change in penalties. I think it 
is possible. I am trying to think back to my time at the 
Justice Department where there were a number of penalty 
enhancements in the Patriot Act, but the basic crime of 
contributing money to a terrorist organization or designated 
terrorist existed prior to the Patriot Act.
    Mr. Garrett. And I assume the answer to this question is 
no, but I will throw it to you. Is there any mechanism for a 
charitable organization--let us say it is a legitimate 
charitable organization--to go to anyone, yourself or 
otherwise, to get themselves designated truly as a charitable 
organization and not one that anyone has to worry about them 
being a terrorist organization?
    Mr. Levey. Well, there is an answer to your question, which 
is not quite a one-word answer, which is, if we designate an 
organization and they want to be delisted, and they can come 
back. And we have had individuals, at least one individual I am 
thinking of in particular, that we have delisted after 
designating as a terrorist. We have resisted suggestions from 
many people that we create a white list of charitable 
organizations for a lot of reasons.
    We do not think that is the right way to go. We think that 
charities should be policing themselves instead of looking for 
us to come up with a white list. But the answer to that is, no, 
there is no list of charities that we endorse.
    Mr. Garrett. You obviously understand the reason why people 
come with that question, because they feel that they are now 
the subject of being criminal prosecutions or otherwise by 
giving to the charities. And if they are trying to do their 
best to make sure that they are not, just because they are not 
on the list, if they had given to that charity 2 months ago 
before your designation, thinking that it was a charitable 
organization, they now may be suspects for what they are doing.
    The other question: You must have--and we have had a number 
of people come before us on this area, money laundering, what 
have you--and the amount of data that you must have to review 
and collect is just--is probably mindboggling. And is that the 
case?
    Mr. Levey. Well, luckily it is not just me.
    Mr. Garrett. But it goes to a question that was raised by 
the other side of the aisle. Fortunately, we are moving in the 
right direction. In the banking industry, there is a more 
formalized customer I.D. program that is now in place.
    Despite some of their testimony elsewhere, we see that the 
SARs reports, that there is a more proactive and a more robust 
program as far as the SARs reports, that that is going in the 
right direction as well.
    And there is also the 314a response, back and forth, that 
are getting under those programs as well.
    So in light of moving in the right directions on all of 
those fronts, my question to you is, doesn't it seem that where 
we are now with the CTRs, the cash transaction reports, that 
they are basically redundant and may be provided you with more 
data than is useful, that, A, it is redundant and more than you 
are going to be able to deal with anyway, and that we do not 
really need the CTRs at this point--more time on the SARs?
    Mr. Levey. I am sorry. I think that our position on that is 
that it is not an either/or situation. It is not either use 
314a and cash transactions report--or use 314a and SARs or use 
the cash transaction reports. We think it should be a both/and, 
and we are best off by using both methods.
    I do agree that the--first of all, are moving in the right 
directions with respect to getting better SARs. There is, you 
know, bumps on the road, but I think we are generally headed in 
the right direction.
    And 314a is a fabulous tool which, frankly, we intend to 
and are trying to use more robustly than we have in the past. 
Just in the last few weeks, FinCEN set up a secure Web site 
that can be used to push information to the financial sector 
under 314a, and now we have to take the next step and actually 
do that.
    But the CTR reports that you refer to still do, from what 
we have been able to learn in the last few months, they still 
do provide very valuable information. I have not been privy to 
what all law enforcement agencies are doing with them, but I am 
familiar with the FBI's experience and it still proves to be a 
very valuable source of leads for the FBI.
    Mr. Garrett. Perhaps I would assess then, if not here but 
in the future, if you will be able to provide us in writing 
some example to substantiate that.
    Mr. Levey. I would be happy to.
    Mr. Garrett. Thank you.
    Chairman Kelly. Thank you.
    We have just been called for a vote, but I would like to 
turn to you, Mr. Lynch, if we can keep it for 5 minutes, we can 
still, at least, get your questions in.
    Mr. Lynch. All right. Thank you, Madam Chair.
    Gentlemen, I do not want you to take this criticism the 
wrong way. I appreciate all the work that you are doing, no 
question about it. And I know that you are doing everything 
possible and that we are still trying to devise tools to be 
more effective.
    But this September will be the fourth anniversary of the 
attacks on September 11th, and this process is taking too long. 
That we do not have a financial intelligence unit in Amman yet, 
we do not have one yet in Riyadh. I do not believe we have one 
in Beirut, Cairo.
    It is tough when we hear--and I appreciate your work at 
this. This is not criticism of you. It is of others who need to 
cooperate.
    But when we find out that we do not have one SAR from any 
bank in Ramallah--that is your testimony--that is troubling. 
And I just question, even with the establishment of this Middle 
East and North African Financial Task Force, are the tools in 
place for us to--even though we have got at least signals of 
willingness now--and I am not sure how genuine those are--do we 
have auditors in place who are actually going to be able to 
tell us whether or not we are getting compliance?
    You know, is this the real--in terms of what we are 
expecting from these other nations? I know it is a tough thing 
for you to judge. You are a couple of good guys, and you are 
trying to do the right thing. And I am not critical at all of 
your performance. I am just recognizing the difficulty at hand.
    And my question would be: What can we do here? What can 
Madam Chair do and Democrats and Republicans?
    This is, fortunately, one of the issues we actually are all 
together on. So it is not partisanship in this case that gets 
in the way. It is really how best to help you. Are there tools 
that we could give you or provide to you that would allow you 
to be more effective and remove some of the obstacles that you 
have?
    We have a strong relationship with Jordan. I was in Amman 
last month. And I know that we have given the blessing to a lot 
of NGOs to locate their Iraq-related activity in Amman. We have 
got the Iraqi policy academies in Amman, Jordan. We have got 
all this cooperation with them.
    And they have a lot to lose, quite frankly, by not 
cooperating--similar to the Saudis.
    Are there things that we are not using that could be 
helpful to you in your task?
    Mr. Levey. I think maybe we should both answer this one, 
since it certainly applies to both of our departments.
    Let me say, I appreciate the spirit of the question. I 
always get a little nervous when someone starts, ``Do not take 
this as personal criticism.''
    But I do appreciate--and both of these subcommittees have 
been very helpful to us and it has not been a partisan issue at 
all. I do think that, with respect to some of these countries--
I should first say: I am as impatient as you are.
    I always say to the people I work with that I can only 
bring two things to this job: I am very impatient and I worry a 
lot. And those are the two things that I think are the most 
important characteristics that I need.
    Mr. Lynch. And you are young. That might help as well at 
the rate we are going.
    Mr. Levey. Well, I do not know.
    But first of all, some of these countries are setting up 
FIUs. We have good FIUs in Lebanon and in Egypt that are doing 
good work. I believe we are going to get an FIU quite soon in 
Jordan. Certainly the atmosphere with Jordan is, as you say, 
very, very cooperative.
    So I think that there is a real--certainly a large number 
of people in these countries ``get it.'' And I am told that the 
discussion at the MENA-FATF, which one of my deputy assistant 
secretaries, Danny Glazer, went to, was very, very forward 
leaning and strong.
    But as I said in my testimony, it is not standard setting 
that we need. We need standard setting plus implementation and 
enforcement. Though I have to say, we are not going to get 
implementation and enforcement until we get the standards set 
and the laws passed, because it is hard to pressure a 
government to take action if they do not have the legal 
infrastructure in place to do it.
    In terms of tools that we need--and we had the exchange 
that I had with Mr. Royce--I certainly appreciate the attempt 
being made to try to fashion a tool that would give us more 
leverage. The tool given to us in the Patriot Act, Section 311 
of the Patriot Act, has proved to be fantastic, really a 
powerful tool.
    As I put in my written testimony, the impact of a proposed 
rule on the Government of Syria, when we did a proposed rule 
designating the Commercial Bank of Syria as a primary money 
laundering concern, has been--I have to say, I, frankly, was 
surprised at how powerful the response was. But I am now coming 
to understand just how powerful that tool is.
    Whether there are additional ones, I think is the kind of 
dialogue that we should continue with respect to the attempt 
being made by Mrs. Kelly and Mr. Royce on their bill.
    Mr. Lynch. Thank you.
    Chairman Kelly. Thank you, Mr. Lynch.
    We have been called for a vote. There are some members who 
have additional questions for this panel. They may wish to 
submit them in writing.
    I also have additional questions for this panel which I 
will submit for writing.
    So without objection, the hearing record for this panel 
will remain open for members to submit written questions to 
these witnesses and place their responses in the record.
    We thank you both very much for your appearance today. 
Since we have been called for a vote, we will be adjourning 
for--we will go into recess for approximately 20 minutes, and 
then we will resume for the second panel.
    Thank you both, gentlemen, for your patience and for 
appearing here today.
    Mr. Levey. Thank you very much.
    [Recess.]
    Chairman Kelly. Thank you very much for your forbearance in 
our taking the time to vote. I appreciate the fact that the two 
of you are here and welcome you.
    Just to let you know, the other members may have a little 
difficult time getting back. One of the elevators transporting 
members to and from the floor in the Capitol is broken and one 
of the trolleys seems to be down. So it is a little more 
difficult for us to get moving around right now.
    But we welcome you.
    We have panel two, the second panel, Mr. John Byrne, the 
director of the Department of Compliance from the American 
Banking Association, and Mr. Zahid Bukhari. He is the director 
of the American Muslim Studies program and a fellow at the 
Center for Muslim-Christian Understanding in the School of 
Foreign Service at Georgetown University.
    We welcome both of you and look forward to your testimony.
    Let us begin with you, Mr. Byrne.

 STATEMENT OF JOHN BYRNE, DIRECTOR, DEPARTMENT OF COMPLIANCE, 
                  AMERICAN BANKING ASSOCIATION

    Mr. Byrne. Thank you, Madam Chairwoman. ABA appreciates 
this opportunity to discuss how the financial industry is 
addressing compliance with the USA Patriot Act and all the laws 
covering financial institutions' anti-money-laundering 
obligations.
    To update members on the various industry AML challenges, 
we offer the following three observations and recommendations: 
Number one, the detection of terrorist financing by banks or 
other financial institutions, whether through charities or any 
other entity, will not be successful without effective 
government intelligence and continued private sector 
involvement in organizations such as the Financial Action Task 
Force.
    Two, whether in terms of BSA compliance or how banks work 
with MSBs, effective compliance with evolving AML requirements 
necessitates accompanying guidance. For example, it is 
counterproductive to label an entity or a country ``high risk'' 
without also issuing guidance on how to mitigate that risk.
    And three, until the financial sector receives improved 
guidance and a more balanced approach to examiner oversight, 
the volume of suspicious activity reports that banks submit to 
regulators will continue to skyrocket, frustrating government 
efforts to accurately detect genuine threatening activity.
    We have previously emphasized to Congress and this 
subcommittee that the banking agencies need to reach agreement 
on how the financial services industry will be examined for 
compliance under the Patriot Act. We are pleased to note that 
there is formal movement on coordination of exam procedures and 
these final procedures are now due out June 30th.
    ABA is also pleased that the agencies are exhibiting a 
commitment to greater consistency in 2005. For example, not 
only has FinCEN Director William Fox expressed public support 
for uniform assessments, but he has also directed the Bank 
Secrecy Act Advisory Group to form a subcommittee on exam 
issues.
    This subcommittee, co-chaired by ABA and the Federal 
Reserve Board, has met several times--as recently as April 
29th--to discuss the pending interagency exam procedures.
    Uniform exam procedures will assist with industry concerns 
about exam inconsistency and the continued threat of zero 
tolerance by these same errant examiners.
    Terrorist financing: As Congress reviews how to best to 
detect terrorist financing conducted through charities, it must 
be restated that the financial profile for this crime gives no 
direction to the financial sector on what could be done to 
prevent this activity in the absence of additional government 
information.
    This crime is difficult, if not impossible, to discern, as 
it often appears as a normal transaction. We have learned from 
many government experts that the financing of terrorist 
activities often can occur in fairly low dollar amounts and 
with basic financial products. Guidance in this area is 
essential if there is to be effective and accurate industry 
reporting.
    The bottom line is that terrorist financing can only be 
deterred with government intelligence. A renewed commitment by 
law enforcement to real information sharing must become a 
priority, not a second thought.
    The financial industry continues to struggle over how to 
assess what types of risks are relevant to spotting terrorist 
financing. To date, the only public examples are the typologies 
listed by FATF for charities or non-government organizations, 
NGOs. The FATF warning indicators in this area do not, in our 
opinion, offer any real insight as to what types of activities 
are inherent to risky charities as opposed to risks in any 
other entity.
    We believe that government organizations, such as FATF, 
could benefit from developing typologies after active 
consultation with the private sector, a goal that the ABA is 
pursuing through an organization that we are part of, the 
International Banking Federation.
    There appears to be progress in this area, but we urge 
Congress to recommend to FATF that there be formal opportunity 
for the financial sector to be part of the FATF efforts in the 
areas of money laundering and terrorist financing.
    Finally, in deference to Undersecretary Levey, I must 
disagree with his answer to one of the questions regarding 
currency transaction reporting.
    As ABA has previously testified, again before this 
subcommittee, the 35-year-old law that relates to cash 
transaction reporting has become redundant and lost its 
usefulness. We believe that the time has come to dramatically 
address this reporting excess by eliminating CTR filings for 
transactions conducted by seasoned customers through their bank 
accounts.
    We would note that the purpose of Title 31 in establishing 
the Bank Secrecy Act regulatory regime is to require certain 
reports or records when they have ``a high degree of usefulness 
for the prosecution and investigation of criminal activity, 
money laundering, counterintelligence and international 
terrorism.''
    ABA and its members strongly believe that the current CTR 
reporting standards have long departed from this goal of 
achieving a high degree of usefulness. We believe that CTR 
filing has been rendered virtually obsolete by several 
developments. We now have formalized customer I.D. programs 
under section 326 of the Patriot Act. We also have more robust 
suspicious activity reporting, and when we finally do address 
the problem of defensive filing, those forms will be more 
carefully crafted and certainly, the guidance will be improved.
    And the Government use of the 314a inquiry process, we 
think is a valuable addition from the Patriot Act that does 
help banks detect and look for terrorist activity through 
individual entities when those entities are named.
    We believe that combined improved monitoring conducted by 
institutions as part of their SAR processes with better minding 
of SAR data by law enforcement as well as judicious use of the 
314a process yields a much more effective approach to law 
enforcement investigation of patterns of fraud, money 
laundering and terrorist funding.
    Consequently, we believe the time has come to recognize the 
redundancy of CTR filings for seasoned customers and to 
eliminate this inefficient use of resources by bankers and, 
more appropriately, by law enforcement.
    Changing the thinking about mandating the collection of 
routine cash data would have the following benefits: The vast 
majority of the over 13 million CTRs would stop; wasteful SARs 
would cease; bank systems and resources could be redirected; 
regulatory criticism for technical mistakes with CTR filings 
would end; and finally, law enforcement could redirect its 
resources to better evaluate SARs.
    In conclusion, we have been in the forefront of industry 
efforts to develop a strong public-private partnership in the 
areas of money laundering and now terrorist financing.
    This partnership has achieved much success, but we know 
that more can be accomplished. We commend the Treasury 
Department, the banking agencies, and FinCEN for their recent 
efforts to ensure a workable and efficient process.
    We obviously will continue our support for these efforts.
    Thank you, and I would be happy to answer any questions.
    [The prepared statement of John Byrne can be found on page 
57 in the appendix.]
    Chairman Kelly. I thank you, Mr. Byrne. I think what you 
have just said is very, very important. I would hope that 
someone from Treasury is sitting here taking notes.
    We turn now to you, Mr. Bukhari.

 STATEMENT OF ZAHID BUKHARI, DIRECTOR, AMERICAN MUSLIM STUDIES 
  PROGRAM FELLOW, CENTER FOR MUSLIM-CHRISTIAN UNDERSTANDING, 
        SCHOOL OF FOREIGN SERVICE, GEORGETOWN UNIVERSITY

    Mr. Bukhari. Thank you, Chairman Kelly.
    Thank you for giving me this opportunity to state the 
significance of Zakat in everyday Muslim life, and also to 
express the concerns of the American Muslim community on the 
efforts of starving terrorists of money.
    I was asked to address three specific questions, and I will 
do it one by one. But bear with me. I will sing a little 
different song, so please bear with me.
    The first question was raised said: What role does the 
Islamic charitable obligation, or Zakat, play in everyday 
Muslim life?
    Charity is an integral part of all religions. It is also a 
fundamental obligation of all Muslims to share their wealth 
with the poor and needy members of the society.
    Zakat, calculated at 2.5 percent of total savings, assets 
per year in the Sunni tradition, is one of the five pillars 
prescribed in Islam.
    The emphasis in Islam is not only on faith, but also on 
practice. Belief in God is not acceptable if one does not give 
charity to the poor or hungry people.
    It is strongly recommended that Muslims should give as 
charity more than the obligative Zakat. It is called Sadaqa. 
And there is a Jewish term almost sounding like that, meaning 
like that. Sadaqa is another act of charity.
    The difference between Zakat and Sadaqa is the nature of 
the giving. Zakat is compulsory and Sadaqa is voluntarily, and 
it can consist of anything from monetary gifts to acts of 
kindness, even a smile.
    The Islamic traditions discourage publicizing the acts of 
generosity. For that reason, Muslims give Zakat and other 
Sadaqa without any fanfare and only for their own salvation on 
the day of judgment.
    Another difference, I think, with Islam and the other 
religions about this issue of Zakat is, as a spiritual and 
philosophical matter, the ownership does not exist in Islam. 
All wealth and properties belong to God. A person is a trustee 
of his and her wealth and property and has the responsibility 
to spend and manage its wealth.
    In that sense, the poor have a right to part of it. On the 
day of judgment, each person will be asked about his or her 
acts of charity, including visits to the sick and 
responsibility to one's neighbors.
    Among the Muslim communities all over the world, the Zakat 
has always been an effective tool for alleviating poverty, 
redistributing the wealth and resources among all sectors of 
the society, and establishing the system of social justice.
    But Islamic law has described a detailed set of rules and 
regulations for the collection and management of the Zakat 
money. According to the Koran, there is Chapter 9 and 60, there 
are eight specific categories where the Zakat money could be 
spent, and very briefly: for the poor, for the needy, for 
employees involved in the collection and administration of 
Zakat, for freeing captives, for relieving those in debt, for 
those who are traveling, for the sake of God, for Allah.
    This is where the public goods including education, health 
and infrastructure fall.
    And very interestingly, the last category is for winning 
the hearts and minds of others. That is also a part of Zakat, 
is another item.
    In America, the potential of the Zakat collection by the 
Muslim community is estimated by one economist around $1 
billion per year. And every kind of the Zakat, Zakat-al-Fitr, 
that is the charity for the Ramadan feast at the end of 
Ramadan, the month and the festival of Eid al-Fitr is also 
estimated within $35 million to $40 million each year. And that 
was distributed for the poor of the society and the community.
    The other Sadaqa, the other charity, is more than that, 
annual Zakat and annual Zakat-al-Fitr.
    At this point, let me also briefly talk about the American 
Muslim community. It is the most diverse and influential 
community in the world. Here we have, in America, Muslims from 
80 different countries. And no other country on the planet has 
this type of diversity.
    Only compared in the parallel is the annual Hajj in Saudi 
Arabia, where we have 2 million Muslims coming from more than 
100 countries. But next to that, only we have in America this 
type of diverse Muslim community.
    A small replica of the Muslim world is living in the U.S. 
today. We have representation of all the religious schools of 
thought and intellectual trans-political ideologies. There are 
a large number of highly qualified professionals, fellows and 
experts in all fields in the American Muslim community.
    And I was also involved, before this American Muslim 
Studies Program, in a project map, Muslims in the American 
Public Square. It was funded by the Pew Charitable Trust. So we 
compiled a ``who's who'' among American Muslims, and that will 
be published this year. We publish this volume, ``Muslims' 
Place in the American Public Square.'' And we are publishing 
another volume about Muslims engaging the quality and the 
society here in America.
    Comparing with the national average, the community is much 
younger, more educated, and have higher income level.
    The American Muslim community is also becoming politically 
mature. In a national survey conducted in 2004 by the Project 
MAPS and Zogby International, 58 percent of the Muslim 
respondents said that they were profiled or discriminated after 
the September 11th, 2001.
    However, an overwhelming majority, more than 90 percent, 
also favored their participation in the American political 
process, interfaith activities and giving money to non-Muslim 
charitable organizations.
    So there is the first question about the Zakat.
    The second question was raised: How have terrorists used 
this obligation in American-based charities to fund illegal and 
dangerous activities aimed at the United States?
    Chairman Kelly. Mr. Bukhari, we will enter your entire 
written statement as a part of the record, but we would like 
you to sum up now please. Each of you were invited to testify 
for 5 minutes, and you have been talking for 5 minutes. If you 
could sum up, I would appreciate that. Thank you.
    Mr. Bukhari. I gave the written statement, but very briefly 
I will say that right now, unfortunately, at this time Muslims 
are facing this dilemma. There is a shadow of suspicion on the 
Muslim charity that every act of Muslim charities is the act of 
terrorism.
    And that shadow of suspicion should be removed. The Muslim 
community and the Muslim charitable organizations, they are 
doing their best. They have established a national council of 
Muslim for nonprofit recently. They are doing their work in 
international arena, in the domestic.
    So I think the main concern is that that shadow of 
suspicion should be definitely removed.
    And we are ready; we can facilitate. Any agency of the 
Government should work with the Islamic organizations, 
charitable organizations and the needy people all over the 
world.
    For example, there are a lot of questions raised by 
Palestine today. But then one statement was made that millions 
of dollars by American Muslim community have been raised for 
terrorists. I simply very respectfully say that this is not 
true--absolutely not true.
    So we would like to facilitate--that any agency of the 
Government work with the American Muslim charitable 
organizations, work in the Palestinian or anywhere in the world 
to make that the money should be spent where the money should 
be spent, for the needy and the people--those who are very 
hopeless over there.
    So that is right now the crisis at this time, that this 
shadow of suspicion should be removed and the proper working 
mechanism should be developed for the partnership of the 
American Muslim community.
    [The prepared statement of Zahid H. Bukhari can be found on 
page 53 in the appendix.]
    Chairman Kelly. I thank you both very much for your 
testimony.
    Mr. Byrne, you mentioned you think CTRs are redundant and 
not useful. You also suggest that banks are having to file many 
too many SARs reports.
    If you were sitting in the position that Chairman Royce and 
I are sitting, what would you to do help clarify both of those 
things in terms of helping Treasury give banks more clarity and 
more certainty about both of those reports and the way that 
they file them?
    Mr. Byrne. Madam Chairwoman, the issue of suspicious 
reporting is an interesting one because we actually are very 
active with the Treasury's Bank Secretary Advisory group, and 
through the efforts of Bill Fox at FinCEN they have really made 
the system much more transparent.
    We are starting to get better example of trends through the 
SAR activity review, which, as you know from my testimony, I am 
part of that. But, more importantly, topologies and examples 
typically come back now through FinCEN and Treasury with some 
assistance from the private sector.
    So the SAR guidance is getting better. I think the real 
answer there is for you to perform oversight on how the 
examination of banks is going to occur, kind of post these new 
exam procedures through 2005 and 2006, and see if the banking 
industry has, in their view, felt that they have been treated 
fairly in terms of their SAR programs and procedures--more of 
an oversight on how our programs work.
    In the CTR area, this has been an issue for me for quite a 
while. In fact, I wrote a law review article back in 1990 that 
we thought then that CTRs really needed to change their focus.
    But now, in 2005, law enforcement will sit in front of you 
and say, ``All data is valuable.'' Well, it is just not the 
case.
    I think you need a very comprehensive review of where 
currency reports have been going--13 million a year--70 percent 
of them are on Wal-Marts and J.C. Penneys and retail stores 
that serve no value.
    The minimal amount that might be on something that they are 
investigating--law enforcement--really kind of supplements 
their ongoing investigation.
    So it is another area where I think you should demand a 
very careful review of where that process is.
    But do not look at CTRs in a vacuum. Look at what we are 
doing today with suspicious reporting, with wire transfer 
record keeping, with customer ID, and look at it in that 
context. Where does CTRs fit in with all the other information 
that banks are providing?
    If you do it that way, they are going to have to be frank 
about CTRs--where they fit in.
    And again, my educated guess is they will respond and say, 
``All information is valuable.'' We just do not believe that is 
the case.
    Chairman Kelly. Mr. Byrne, I wonder if you would be willing 
to send this committee a copy of that article that you wrote?
    Mr. Byrne. I will be happy to. It was before the days of 
electronic--so we will copy it and send it through.
    Chairman Kelly. Good. Okay.
    Chairman Royce and I both introduced H.R. 1952 that would 
create a terror finance certification regime to try to enable 
the private institutions to know which countries are the 
countries of concern.
    And I did not get the time to ask Secretary Simons about 
what they are doing on this front. But I would be very 
interested in whether you think that H.R. 1952 might be a 
useful tool for you.
    Mr. Byrne. Having not read the bill, but I heard your 
description of it, it is basically setting up something similar 
to the noncooperative country designations of FATF, but only on 
terrorist financing.
    Obviously, in the abstract, designating a country as 
higher-risk is useful. The only caveat I would offer is that we 
have seen, specifically in the area of the MSBs--and, as you 
know, banks were told that MSBs were inherently risky and they 
gave us no real way to mitigate that risk--if you designate a 
country as noncooperative in the terrorist financing area, are 
you telling the banks to completely stay away from the 
relationship, are you telling us to just simply enhance our due 
diligence to work with Treasury or whomever to make better 
decisions?
    I would only suggest that we have seen some examples--for 
example, in the country of Latvia. Latvia is seen as a country 
that has a lot of problems.
    The problem with that designation is that many U.S. banks 
have simply distanced themselves from relationships there. And 
perhaps that was too broad a response on our part, because we 
really have no way to mitigate the risk.
    So I would just urge that, however you proceed with the 
legislation, understand that if you designate something risky, 
we will react, but we will react broadly and probably distance 
ourselves completely without some more direction.
    Chairman Kelly. I understand that one of the problems that 
the Treasury has and all the regulators in the financial area 
have is to maintain a certain oversight in such a way that they 
are not closing down channels that they need to be looking at.
    I am interested even with the MOU that just came out on 
SARs. Don't you think maybe there could be a place for safe 
harbor for financial institutions that really made an honest 
mistake? I do not see in the way that the SAR reports are being 
used right now that we have got any place, any safe harbor, any 
placeholder for a bank that made an honest mistake, can come in 
and correct it and get on beyond it. What do you think about 
that?
    Mr. Byrne. Well, there are a couple of issues here.
    First, we are filing today a comment letter to the FDIC and 
the other agencies on the overall regulatory burden relief 
project--the acronym is EGRPRA. And one of the many 
recommendations we are making besides the CTR recommendation 
that we are talking about today has to do with the multiple 
filing of suspicious activity reports.
    What happens today, what has added to the multiplicity of 
filings--if I file a suspicious report tomorrow on a particular 
entity, we have been directed every 90 days, if that account is 
still active, to continue to file on the same activity even if 
there has been no additional information. We do not think that 
is very useful. And we think that is adding to the problem.
    The safe harbor, in the early 1990s--again, unfortunately, 
I have been here way to long--but in the early 1990s, we 
supported a provision crafted by this committee that gives a 
safe harbor from litigation if an individual wanted to pursue 
an action against the institution.
    So this is not a safe harbor from the Government, this is, 
if we file on an entity and the entity decides to litigate, we 
are protected because we have made a decision, right or wrong, 
to file a suspicious report. So there is a safe harbor from 
that.
    But in terms of the Government, we do think they need to 
give us better deference on our SAR filings. And one area that 
it could help--and maybe it is not a safe harbor per se--but if 
a bank has made a decision not to file a suspicious activity 
report, I have heard too many times from our members that we 
get criticized for failure to file even though we looked up the 
activity, documented why we did not file and actually working 
hard to not file something defensively. Examiners have been 
critical of that.
    We need deference paid to the bank that had a program that 
looked at the activity and at the end of the day made a 
decision not to file. You can call it a safe harbor, you can 
call it due deference, in that area, I think it will be very 
helpful.
    Chairman Kelly. Thanks, Mr. Byrne. I am hearing that from 
my bankers that I represent as well.
    I am out of time. I would like to turn now to Chairman 
Royce.
    Mr. Royce. Thank you, Chairwoman Kelly.
    Let me just begin by asking the doctor: Do you have a view 
about Treasury's outreach?
    You know, the Treasury Department is attempting to resolve 
some of the issues that you brought up in your testimony, 
trying to sit down with the community and work out a resolution 
of some of these sensitive areas. And I just wondered if you 
had a feeling of how that was going with the Treasury 
Department.
    Mr. Bukhari. I think that outreach effort is commendable. 
And that their encouragement and also the leadership of, too, 
our national Muslim organizations, AMPAC and ISNA.
    Recently the Muslim community formed the National Council 
of American Muslims, nonprofit. It is a good development.
    But I would like to go beyond that. And that is an issue, 
for example, of when the other relief organizations, three or 
four relief organizations, they were banned. And the assets and 
the bank accounts are frozen--millions of dollars. Among those 
there was Zakat money. That is a very much religious 
obligation.
    We also got on some of these that want to make a pool of 
Muslim organizations and leave their Zakat money to be spent on 
their intended objectives.
    But that was not approved. And that Zakat money was dried 
up. And their Zakat money was paid for the expenses of 
litigation and lawyers and all sort of these.
    Other point is that here the American Muslim community, we 
are not only losing public diplomacy all over the world, but 
here, too. This Muslim community could become a partner.
    Mr. Royce. And that is why we hope that the Treasury 
Department succeeds in resolving some of these issues.
    At the same time, one of the questions I think is, as the 
United States government makes this assertion that some Islamic 
charities have been manipulated by individuals who have 
provided some form of support for organizations that are 
involved in jihadist activity. The question becomes a little 
more complicated.
    And I think we understand one of the reasons why is because 
not everyone has the view, not all scholars have the same view, 
with respect to the definition of the obligation. And that is 
one of the things that is debated.
    It is a minority view. But nevertheless, there are some 
scholars, and one in particular, Yusef Kardawi in Egypt, and he 
says that Zakat payments must be for the benefit of members of 
one of eight specific categories of recipients defined in the 
Koran. And you have defined that list.
    And that is admirable, that the goal is to assist people in 
need.
    But when he comes to the injunction to support those who 
are working in the cause of God, there is a little different 
interpretation, but it makes a big difference in terms of 
application by that standard.
    And that is one of the things we are wrestling with, 
because if that is extended to, say, financial or material 
support should be given to groups that claim to fight on behalf 
of Muslims in, let us say, Chechnya or Iraq or the Palestinian 
territories or other conflict zones, then we are into a 
different category, a whole different area.
    And you have a few of these Islamic scholars, such as the 
Egyptian cleric Yusef Kardawi that I mentioned, that have made 
these arguments. You have many scholars who have condemned the 
direct solicitation and the use of charitable funds for any 
violent purposes.
    But those Muslims seeking to fulfill these requirements 
make donations to Islamic charitable organizations and relief 
agencies, and they fund religious education programs and yet 
you do have the consequence, as Yusef Kardawi says, that some 
interpret this as fighting for such purposes in those occupied 
territories is in the way of Allah for which Zakat must be 
spent.
    And so I think that is what gives rise to the difficulty. 
And part of the dialogue is to figure out how the Treasury 
Department can work with the community in order to make this 
work, but with the reality that some, a minority, of scholars 
have reached a different conclusion. And that is what gives 
pause. That is what leads to concerns.
    How have those who have a commitment to the original 
interpretation, that charitable purposes means charitable 
purposes, how do they work to counter these radical beliefs?
    I know a number of people are countering those beliefs, and 
I thought I would give you an opportunity, Doctor, to expound 
on that.
    Mr. Bukhari. Thank you, Chairman Royce.
    We can go a little bit back. For example, when--I am from 
Pakistan, also, originally from Pakistan, now American citizen. 
In the 1980s, when the Muslims were fighting jihad against 
Soviet Union, at that time everything was encouraged--means the 
funding was encouraged.
    So probably that song is still singing. But I think, very 
respectfully I will say that a mechanism could be definitely 
defined and made here in America, because I think American 
Muslim community has a very unique position. As I said, this is 
a very highly professional, scholars and religious leaders are 
here, and we can work out. The unfortunate thing is that they 
are not the partner of the American policy-makers to convey the 
message.
    So if some mechanism with any government agency, even 
Congress or any other government agency, with the Islamic 
charitable organizations, things could be worked out very 
easily. On the recipient end, any recognized institution will 
receive that funding. Nobody else will receive that funding, 
and that funding will go only for charitable purpose.
    I think any mechanism in the Muslim community, the American 
Muslim community will welcome this type of intervention and we 
would like to facilitate this type of intervention.
    Nobody wants that his money--absolutely no Muslim will like 
to have that his money will be spent in any type of terrorist 
activity.
    So I think whatever the obligation other or whatever other 
leaders are saying, that the Muslim community is self-
sufficient here, they can make a decision on that.
    To some extent we have done our homework. But right now we 
need help from the Congress and from the Government agency to 
work out any mechanism.
    Mr. Royce. As I said earlier--well, it is certainly the 
case that in the American Muslim community you have some of the 
highest percentages of advanced degrees of any communities, and 
there is an enormous gulf, as I said earlier, between 
Christianity and the Christian identity movement. To quote Mark 
Twain, ``It is the difference between lightning and the 
lightning bug.'' And likewise, there is an enormous gulf 
between those who are assisting charities--charitable giving, 
good works--and those few individuals who have an alternative 
vision with respect to jihad.
    I think it is important that the community work with 
Treasury to try to resolve and define these issues.
    And I think for those who are speaking out in order to 
counter the radical voices that have this view that is not the 
traditional view, that is important work as well.
    And so my hope is that Treasury can move forward with 
methodology and means that can help resolve this and find some 
solutions.
    And I thank you for appearing as a witness today.
    Chairman Kelly. I thank both of you.
    Dr. Bukhari, I am very pleased that you are here, that you 
have shared some time with us. And I share my colleagues' 
concerns.
    Mr. Byrne, I look forward to working with you on some of 
the issues you have raised. We thank you very much for 
appearing here today.
    The Chair notes that some members who were not able to get 
back may have additional questions for this panel which they 
may wish to submit in writing.
    So without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses and to place their responses in the record.
    Thank you very much.
    This hearing is adjourned.
    [Whereupon, at 4:51 p.m., the subcommittee was adjourned.]



                            A P P E N D I X


                              May 4, 2005


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