[Senate Hearing 109-676]
[From the U.S. Government Publishing Office]
S. Hrg. 109-676
MONEY LAUNDERING AND TERROR
FINANCING ISSUES IN THE MIDDLE EAST
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
ON
MONEY LAUNDERING AND TERROR FINANCING ISSUES IN THE MIDDLE EAST,
FOCUSING ON THE FINANCIAL ACTION TASK FORCE, THE USE OF CHARITIES TO
FUND TERRORISM, AND THE PRESIDENTIAL EXECUTIVE ORDER (13224) WHICH
ALLOWS THE UNITED STATES TO FREEZE THE ASSETS OF CERTAIN ORGANIZATIONS
__________
JULY 13, 2005
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Skip Fischer, Senior Professional Staff Member
John V. O'Hara, Senior Investigative Counsel
Virginia Snider, Staff Assistant
Martin J. Gruenberg, Democratic Senior Counsel
Stephen R. Kroll, Democratic Special Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
----------
WEDNESDAY, JULY 13, 2005
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Bunning.............................................. 2
Senator Sarbanes............................................. 12
Senator Hagel................................................ 16
WITNESSES
Stuart Levey, Under Secretary, Office of Terrorism and Financial
Intelligence, U.S. Department of the Treasury.................. 3
Prepared statement........................................... 39
E. Anthony Wayne, Assistant Secretary for Economic and Business
Affairs, U.S. Department of State.............................. 5
Prepared statement........................................... 45
Response to written questions of Senator Shelby.............. 94
Nancy Powell, Acting Assistant Secretary for International
Narcotics and Law Enforcement, U.S. Department Of State........ 12
Response to written questions of Senator Shelby.............. 96
Dennis M. Lormel, Senior Vice President, Anti-Money Laundering
Corporate Risk International, Fairfax, Virginia................ 21
Prepared statement........................................... 55
Steven Emerson, Executive Director, The Investigative Project on
Terrorism (ITP), Washington, DC................................ 23
Prepared statement........................................... 62
Mahmoud A. El-Gamal, Ph.D., Chair of Islamic Economics, Finance
and Management, and Professor of Economics and Statistics, Rice
University-Houston, Texas...................................... 27
Prepared statement........................................... 87
(iii)
MONEY LAUNDERING AND TERROR FINANCING ISSUES IN THE MIDDLE EAST
----------
WEDNESDAY, JULY 13, 2005
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:02 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Richard C. Shelby (Chairman of
the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The hearing will come to order.
For the last 2 years, the Committee has been conducting a
series of hearings into the issues of money laundering and
terror financing. During these hearings, the Committee and the
public have had an opportunity to hear from a number of
witnesses, both government and private sector, on continuing
weaknesses in our financial system to exploitation by criminals
and terrorists and on measures taken and yet to be taken to
address those weaknesses. A continuing series of instances of
major banks here in the United States being the target of civil
and/or criminal proceedings in response to marked failures to
comply with anti-money laundering statutes and regulations have
served to keep us vigilant to the problems that continue to
exist, not just with the banks and financial institutions
themselves, but with the regulatory structure that is supposed
to provide oversight and prevent many of these transgressions.
Most recently, the New York branch of Arab Bank was cited
with a consent order for its failure to exercise due diligence
with regard to its customer base and for its failure to file
suspicious activity reports, despite the enormous volume of
financial transactions involved in an indisputably high risk
region of the world. It is the Committee's concern that some of
these transactions involved known terrorists and terrorist
organizations, including the Islamic Resistance Movement, or
Hamas, and Al Qaeda.
At the core of the Arab Bank case sits the Saudi Committee
for the Support of the Al Quds Intifada, a known conduit for
money destined for terrorist organizations in the West Bank and
Gaza. The New York branch of Arab Bank case is currently the
subject of a Department of Justice investigation, so there is
little specific about it that the Government witnesses here
today, specifically Under Secretary Levey, can say, but I raise
the issue for the obvious evidence it provides of the failure
of the Federal regulators to adequately supervise that bank and
for the bank itself to comply with U.S. regulations. The
parallels to the Riggs Bank case are striking, and frankly are
disturbing.
I am particularly disturbed by the continued funding of
terrorist activities for, in addition to the obvious threat to
innocent civilians both here and abroad, two recent and glaring
reasons. On June 15, the BBC aired a report on the Spanish
police raid on a number of apartments used by suspected Al
Qaeda terrorist cells, cells possibly implicated in the March
11 terrorist attacks that killed almost 200 people in Madrid.
Particularly striking about the BBC footage, and possibly
little noticed, were the stacks of freshly minted $100 bills
totalling tens of thousands of dollars, sitting in one of the
apartments. I have to ponder where the considerable cache of
brand-new bills originated. Terrorism is extremely cost-
effective. How many more deaths would have been attributed to
that currency?
A second and more recent incident struck a little closer to
home. At 9:30 in the morning, as you know, of July 7, I was
meeting with the National Terrorist Financial Investigation
Unit of Scotland Yard in London with some of my staff who are
here today. Fifteen minutes into that meeting, the synchronized
bombing of the City of London subway and bus systems occurred,
resulting in deaths of around 50 innocent victims and the
maiming and wounding of perhaps 700 more. The coincidental
timing of my discussions of terrorism with British security
officials as emergency vehicles raced to the scenes of
devastation served to bring home once again the fragility of
life and the threat under which we all live from the scourge of
international terrorism.
And, while the struggle against terror financing is but one
component of the broader war against terrorism, it is an
absolutely essential component. Money is the lifeblood of
terrorism. And the Middle East is ground zero for much of the
money raised and moved in support of terrorist activities. It
is not, however, the only place where money is raised and
moved. The terrorist underground in London responsible for last
week's attacks and the breath of terrorist fundraising in the
United States are broad and deep. It is my hope that the
witnesses here today will help us to shed light on the extent
of the continuing challenge and what we can and are doing to
confront it.
Our first panel today includes Stuart Levey, Under
Secretary of the Treasury for Terrorism and Financial Crimes
and a regular visitor here; Anthony Wayne, Interim Under
Secretary of State for Economic, Business, and Agricultural
Affairs, and Nancy Powell, Acting Assistant Secretary of State
for International Narcotics and Law Enforcement and a former
Ambassador to Pakistan. Secretaries Levey and Powell,
Ambassador Powell, we all welcome you.
Senator Bunning, do you have an opening statement?
STATEMENT OF SENATOR JIM BUNNING
Senator Bunning. Yes, I do. Thank you, Mr. Chairman first
of all for holding this important hearing, and I would like to
thank all our witnesses for testifying today.
Last week's dastardly attack in London showed the world
once again that terrorists will continue to attack the
innocent. We must stay vigilant in the war on terror. We must
continue to take the fight to the terrorists and fight them on
all fronts. One of the most important fronts in the war on
terror is on the financial front. We must do everything we can
to dry up the financing of the terrorist organizations. We must
continue to track down those who perform these terrorist acts,
but we also must hit terror organizations where it hurts them
the most: In their pocket books.
No matter how many terrorists we have captured, as long as
terrorism has a funding source, there will always be another
waiting to step in and take their place. The United States
needs to be able to investigate and prosecute terrorist
financiers wherever they hide. To do this, we must have the
cooperation and support of the international community.
We have made some progress in finding and blocking some of
these funds, but there is a lot more we must do. We must turn
off the terrorism funding faucet and force these terrorists to
dry up and wither away. I hope our witnesses today will give us
an update on our progress in cutting terrorist funding. I hope
they will shed light on how far we have come, where we still
have problems, and what else we can do.
And just as an aside, I had a military LA who was a major
in the Marine Reserves, and he was sent to Fallujah. His
reserve unit was recalled. And I continue to get emails from
him, and he said Senator, the biggest thing you have to do is
cut off their money. And if we can do that, we can defeat these
terrorists.
So, I am looking for information from you today.
Thank you very much, Mr. Chairman.
Chairman Shelby. Thank you, Senator Bunning.
Secretary Levey, Secretary Wayne, Secretary Powell, your
opening statements will be made part of the record in their
entirety. You proceed at your risk,as you know.
[Laughter.]
We will start with you, Secretary Levey. Welcome back to
the Committee. You have spent a lot of time here, as much as we
do.
STATEMENT OF STUART LEVEY
UNDER SECRETARY, OFFICE OF TERRORISM
AND FINANCIAL INTELLIGENCE
U.S. DEPARTMENT OF THE TREASURY
Mr. Levey. Yes; it is a pleasure to be here, Mr. Chairman.
Chairman Shelby, Senator Bunning, thank you for inviting to me
testify here today about the progress that we are making in the
fight against terrorist financing and money laundering in the
Middle East. This Committee's commitment to and, Mr. Chairman,
your personal leadership on this issue has been vital to our
work, and I thank you for it.
It is an honor to be testifying here today beside my State
Department colleagues and particularly Under Secretary Wayne.
Since September 11, 2001, Tony Wayne has been a tireless and
effective advocate for U.S. interests in these matters around
the world, including in the Middle East. We often speak about
the excellent interagency cooperation we have in this area, and
Tony is a personal exemplification of that.
I am also pleased to be testifying in the same hearing with
my former colleague, Dennis Lormel. Dennis was a pioneer at the
FBI in creating its terrorist financing capacity after
September 11, and I was grateful to be his colleague at the
Justice Department.
As you mentioned, today's hearing comes less than a week
after the terrible attacks in London, and I would like to
express my condolences to the families of the victims. The
brave resolve of the British people that they have shown is the
proper defiant response to those terrorists who seek to disrupt
our way of life. Last week's cowardly acts also remind us that
our commitment to combat terrorists and their supporters must
never waver. As you know, Senator Bunning, we must fight them
on all fronts. There is too much at stake.
Some have questioned the value of our efforts to fight
terrorist financing, suggesting that individual attacks can be
carried out with small amounts of money. But operating a
terrorist organization requires more than explosives.
Terrorists need money to acquire safe haven, train members,
purchase false travel documents, pay operatives and their
families as well as to plan and stage attacks. Undermining the
terrorist money flow by deterring donors, freezing assets, and
arresting facilitators degrades their overall capability.
Following the money continues to be one of the most
valuable sources of intelligence we have for investigating
terror networks, for a simple reason: Money trails do not lie.
Financial intelligence tends to be very reliable. I am happy to
report that our efforts as an interagency team are beginning to
show results. Terrorist groups like Al Qaeda and Hamas are
feeling the pinch and do not have the same easy access to money
that they once did. With respect to terrorist financing in the
Middle East, my written testimony addresses recent developments
across a number of countries in the regions. I do not have the
time to review these developments in this statement, but I
would like to at least provide a brief overview of our
engagement with Saudi Arabia, in which I know this Committee
has a particular interest.
The Committee is well-aware that the challenges posed by
terrorist financing from within Saudi Arabia are among the most
serious we have faced. Today, we believe that private Saudi
donors may be a significant source of terrorist funding,
including for the insurgency in Iraq. Saudi Arabia-based and
funded organizations also remain a key source for the promotion
of ideologies used by terrorists and violent extremists around
the world to justify their hate-filled ideology and agenda.
Saudi Arabian charities, including the IIRO, WAMY, and the
Muslim World League continue to cause us concern. We have
pursued a strategy of sustained pressure and cooperation with
Saudi Arabia to address these and other challenges. Saudi
Arabia has responded with increased counterterrorism
cooperation, particularly since the Riyadh bombings in May
2003. At this point, the Saudi Arabian Government takes
seriously the threat that terrorism poses within the Kingdom
and around the world, including the United States.
Positive developments have included the formation of a
joint terrorist financing task force, led by the FBI on the
U.S. side, to foster timely information exchange and selected
joint action with the United States. There has also been
significant increased regulation of much of Saudi Arabia's
charitable sector. There is much yet to be done, and I can
assure you that we are fully committed to this engagement. I
have recently expressed my concern on a variety of these issues
to Saudi officials and look forward to working with them to
resolve them.
At the same time, we cannot allow ourselves to lose sight
of the other concerns out of a single-minded focus on one
country. There are many terrorist financing challenges that we
face in the Middle East and that we need to work on with all of
the countries in the region, including Saudi Arabia. Perhaps
the most pressing, which was alluded to indirectly by Chairman
Shelby, is the problem of cash and cash couriers.
Particularly in the Middle East, where cash is a prominent
part of the culture, this is a serious danger, and cash is
being used to fund the deadly insurgency in Iraq as well. It is
critical that Gulf countries and countries throughout the
Middle East lower their reporting thresholds for cross border
transfers of cash and enforce these provisions aggressively.
The creation of the Middle East-North Africa FATF is a
tremendous step in the right direction in pursuing these sorts
of standards, but we are clearly at the very beginning of the
process. Some Middle Eastern countries have not passed adequate
money laundering laws. Some have failed to take action on cash
couriers. Some have no control over their informal Hawala
sectors, and some have not yet established financial
intelligence units.
Our most important task in the Middle East is to ensure
that these standards are not only adopted but they are also
implemented and enforced. We do not measure 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 this process to be impatient and impatient
for progress on all of these fronts, and I can assure you that
I am. We look forward to continuing our work with you on these
issues, and I would be happy to answer your questions.
Chairman Shelby. Secretary Wayne.
STATEMENT OF E. ANTHONY WAYNE
ASSISTANT SECRETARY FOR ECONOMIC
AND BUSINESS AFFAIRS
U.S. DEPARTMENT OF STATE
Mr. Wayne. Thank you very much, Mr. Chairman, Senators
Hagel and Bunning. It is a great pleasure to be here again.
Thank you for your continued attention to these issues. It is
very important to us, and I can tell you that this cluster of
issues remains a high priority for the Department of State.
The main theme of my written testimony, and of the little
excerpt I will give orally now, is really that we have made
significant strides in bolstering the political will and the
ability of governments in the Middle East and South Asia to act
against terrorism and terrorist finance, but clearly, we need
to do much more.
We face a resilient, an adaptable, and a ruthless foe. As
you were in London, Mr. Chairman, I was in Gleneagles at the G-
8 Summit, and in Gleneagles, we were, of course, all struck by
the impact of this horrible attack in London. And we worked
very quickly to reshape, to a degree, the good work that had
already been done by the G-8 experts on counterterrorism to
help to put out a strong statement on the steps that we in the
G-8 can take ahead. And we look forward to working very closely
with our UK colleagues as they have now also taken on the
mantle of presidency of the European Union.
I saw that Chancellor Gordon Brown announced yesterday that
tackling terrorist finance was going to be one of his
priorities in the EU Presidency. And fortunately, Under
Secretary Levey and I have been working with the British and
with the EU seriously in preparation for this. And we think
there is much good that can be done to tighten up that
cooperation across the Atlantic.
Similarly, I just flew back in last night from Amman, where
I had met with Jordanian and Iraqi ministers. Though the agenda
was economic, you are not surprised, at all, I know, that
terrorism came up regularly. In fact, my Iraqi colleagues
reminded me that they faced the horror of these terrorist
attacks every day, and they urged us to do all we could to help
them diminish and eliminate these attacks that they are facing.
So, I come sit here today reinforced in my dedication to
work to ensure that our interagency process strikes the right
balance of priorities and uses the right mix of tools in our
effort to keep funds out of the hands of terrorists. Our
partnership with the Department of the Treasury is extremely
important in this effort. We have worked very closely together,
and it is only in working together, not just the two of us but
with the rest of the interagency community, that we are being
effective, both at home and abroad. I particularly am pleased
to be testifying with Under Secretary Stuart Levey, who does
bring a persistence and an impatience, as he said, to the
process, which keeps us all moving in a positive direction, and
of course, Ambassador Powell has worked on the very front lines
of fighting terrorism and is now fulfilling an important post
as my colleague at the Department of State.
The many agencies in the U.S. Government bring a range of
tools to this effort, as you well know, and we are most
effective when we are able to ensure that we do have clear
overall direction to assure information sharing, to choreograph
all the value added and the tools that each of our colleagues
from the U.S. Government brings together. We have worked over
the past several years to devise a very effective interagency
process now directed by the National Security Council that
helps us to really maximize the impact we can have.
One of the critical methods we have used in working the
financing of terrorism is the process of designating
individuals and groups for asset freeze and for ban on travel.
This has several benefits, which I would just like to
underscore. Of course, it makes it a lot harder for those
groups and individuals to gather money and to use the formal
financial system. It also informs those unwitting donors around
the world and particularly in the region we are considering
today where they have often thought they were giving to good,
charitable causes. It helps make them more alert, and it makes,
of course, more cautious those who knew exactly what they were
doing but thought they had found a safe way to do it.
When we decide to designate a terrorist or a financier, the
Department of State leads the interagency effort to get the
broadest possible international support for that designation.
That, of course, as you very well know, is essential to the
very effectiveness of designations, because if other countries
do not act to look for these individuals, to look for these
accounts, to look for these groups, it is not going to have
much impact. Most of the money is flowing elsewhere, not
through the United States.
We have had success in building partnerships throughout the
region that we are talking about today in joining us and going
to the United Nations to designate people. Saudi Arabia has
joined us; India has joined us; Jordan and Iraq have joined us;
and even, in one case, Syria joined us, and this was the
designation that took place of an individual who was supporting
terrorism in Iraq.
In this process, we realize that if we are more successful
at tightening up the use of the formal system, as Stuart Levey
indicated, terrorists will try to find other means to try to
get their money around. They use cash couriers. They are using
alternative remittance systems. They are using charities. And
we need to be just as smart and to help our partners be just as
smart in tracking down and in stopping these alternative means
of moving the money forward.
So we worked very hard to provide types of training to
governments around the world and particularly in this region in
such areas as trade based money laundering and customs training
and antiterrorist financing techniques; we have done case
studies with bank examiners; we have taught law enforcement
officials general finance investigative skills, all in the
effort to have a more effective financial coalition.
Let me just mention a few highlights from the country-
specific work that we have been doing. In recent months, the
Government of Saudi Arabia, as we are reminded on a regular
basis in the press, has continued a very vigorous
counterterrorism effort on the ground, apprehending terrorists
and their supporters, but it has also continued to publicize
not only its counterterrorism efforts but also to speak out
denouncing terrorism inside Saudi Arabia, which is very
important.
Homeland Security Advisor Townsend and I attended in
February of this year an international counterterrorism
conference which was organized by the Saudi Government in
Riyadh. That conference declared, as its final outcome, that
there can be no justification for terrorism.
Since then, the Saudis have continued an effort to educate
the public about the dangers and ills of terrorism. They have
also continued to fight on the ground. Just recently, on June
28, they issued a new list of 36 most-wanted terrorists in the
Kingdom to replace the earlier list, where they had acted
effectively. At least one of these new individuals has been
killed and another has surrendered since the list was released.
The Saudis report that they have seized $8 million to $10
million as part of their efforts. They called at the February
conference for establishing an international counterterrorism
center in Riyadh to help cement cooperation among countries in
curbing all aspects of terrorism, including the financing of
terrorism. They are also continuing to work to create a fully
operational financial intelligence unit. Saudi officials say
this unit could be up and running in the next 2 to 3 months. We
will continue to encourage and support that process and also
encourage the Saudi FIU to join the Egmont Group, which is the
group of financial intelligence units around the world, as you
know, in 2006.
As Under Secretary Levey mentioned, Saudi Arabia and the
United States have been working for a year and a half now in
the context of a joint task force on terrorist financing, which
is led by the FBI on the United States side. Much good work has
been done, but there also remains much work to achieve.
We believe the Saudi Arabian Government is implementing its
new approach to charity regulation. At present, we are told
that no charity in Saudi Arabia can move its assets located in
Saudi Arabia outside of the country without government
approval. We continue to stress in our discussions with the
Saudis the need for full implementation of the new charity
regime, which would include the establishment of a fully
functioning charities commission.
We also believe that appropriate regulatory oversight is
needed of organizations headquartered in the Kingdom, such as
the Muslim World League, the International Islamic Relief
Organization, and the World Assembly of Muslim Youth. The
Saudis tell us they recognize this need, and at present,
neither the IIRO or WAMY are able to move money from their
accounts to recipients outside of Saudi Arabia. The Saudis tell
us these organizations are subject to the same restrictions
that apply to domestic Saudi charities.
In Kuwait, the government has formed a new ministerial
committee to develop strategies to combat terrorism and
extremism. It recently forbade its ministries and other
institutions from extending official invitations to 26 clerics
who reportedly signed a statement in support of jihad in Iraq.
The government is drafting new legislation specifically to
criminalize terrorist finance and to strengthen its anti-money
laundering and terrorist finance regime. The government has
accepted assistance from the Department of Justice's Office of
Overseas Prosecutorial Development Assistance and Training,
OPDAT, to review this legislation. Our embassy is working
closely with the Departments of the Treasury, Justice, the
Federal Reserve, and others, to look at counterterrorism
training packages we can make available.
The UAE is a very aggressive partner in enforcing anti-
money laundering regulations. In 2004, it enacted legislation
criminalizing terror finance. It has also been one of the
leaders in trying to tackle the hawala phenomenon. In April of
this year, it hosted a third international conference to find
ways to prevent the use of the hawala system by terrorist
financiers. We work very closely with the UAE and have a very
intense and regular dialogue with their officials.
I was just in Jordan, and there raised with the Minister of
Finance and the Central Bank Governor the urgency of having the
parliament pass a new anti-money laundering law which will
significantly strengthen the legal authority there to tackle
terrorist financing. Both express their commitment to do so and
their hope that the parliament will act in this summer's
special session.
Turning to Pakistan, let me just note that we, of course,
all welcome the concrete actions that it has taken to implement
its U.N. Security Council resolutions, the freezing of over $10
million of Al Qaeda assets, and the terrorists they have
apprehended, including Abu Faraj al-Libbi, Al Qaeda's
operational leader. We are also encouraged that Pakistan is
showing increased concern about the infiltration of terrorist
groups into charitable organizations.
We have provided Pakistan with assistance in drafting its
anti-money laundering and counterterrorism financing law, and
we are urging that a strong law be passed by parliament and put
into action. As soon as that happens, we have additional
training assistance that we will be able to make available to
help a financial intelligence unit to get up and running.
At the same time that we are dealing with these specifics
to go after terrorist financing, we are also trying to address
the longer-term goal of improving economic prosperity and
employment opportunities in these priority countries, and as
you remember, the September 11 Commission pointed out that we
cannot neglect the need to encourage prosperity and development
in these countries.
The G-8 countries in Gleneagles just reiterated their
support for the broader Middle East and North Africa
initiative, which is aimed exactly at doing that and supporting
reform and growth and prosperity in the broader Middle East,
working with the governments of the region and civil society
groups and business throughout that region.
Our development policies reflecting the President's
National Security Strategy are also an important part of this
effort. I might just cite, this is true across the region, but
in Pakistan, we have specifically designed our development
policies to help create alternatives for youth who might
otherwise be susceptible for recruitment into terrorist
organizations.
As the September 11 Commission report noted, practically
every aspect of U.S. counterterrorism strategy relies on
international cooperation. Given that money gets into the hands
of terrorists flowing all around the world, the only way that
we are going to be successful in drying up their financial
resources is through continued active U.S. engagement in
countries around the globe.
We hope that our efforts and assistance in these areas will
result in better coordination. We look forward eagerly to the
Saudi's financial intelligence unit and the charities
commission becoming effective operational bodies. We look
forward eagerly to Pakistan and Jordan passing strong anti-
money laundering legislation and to Kuwait drafting its new
legislation and putting it forward.
We need universal and rigorous implementation across the
region to prevent terrorist financing. We need to have an
active and effective foreign financial intelligence units. We
need to have more activism in tackling cash couriers. We need
stricter regulations on money service businesses and hawalas.
We need tighter controls on NGO's and charities, and we need
countries to implement international conventions. As Under
Secretary Levey mentioned, the Financial Action Task Force and
its new regional counterpart, the MENA FATF, is going to be
very important in this one effort.
Finally, sir, your support is very important in this, both
in providing the resources we need to go forward in this effort
but also in you reaching out to your colleagues around the
world and encouraging them to cooperate, to take the tough
decisions sometimes to put the laws in place and then to
implement those laws. We have found it to be extremely
effective when you and your colleagues travel and actually
raise these issues with senior government officials and
sometimes even the not so senior ones who are charged with
taking this work forward. So we very much encourage you to do
that.
I look forward to your questions and thank you again.
Chairman Shelby. Secretary Levey, in your statement, you
referenced the continued problems with Saudi cooperation on the
issue of international charitable organizations like the
International Islamic Relief Organization and the World
Association of Muslim Youth. The Saudis have refused to
acknowledge these organizations as a Saudi problem, arguing
instead that they are multilateral organizations headquartered
in Saudi Arabia but otherwise autonomous. They have gone so far
as to suggest that their relationship to these organizations is
identical to that between the United States and the
headquarters of the United Nations. It is a far reach.
Could each of you--start with you, Secretary Levey and then
Secretary Wayne, comment on the measures the United States is
currently taking to address this rather significant weakness in
Saudi Arabia's antiterror finance regime? The March 2005
International Narcotics Control Strategy Report states with
respect to Pakistan--Ambassador Powell, you know a lot about
that as former ambassador there--the following: A nexus of
private, unregulated charities has also emerged as a major
source of illicit funds for international terrorist networks.
That is a very serious statement about a country on the
front lines of the war on terror with which we maintain a
difficult but essential alliance. Share your thoughts regarding
the Saudi-based charities and Pakistan's terrorist links to
charities. We will start with you, Secretary Levey.
Mr. Levey. Thank you for that question, Mr. Chairman.
As you indicated, I did treat these charitable
organizations based in Saudi Arabia in my statement and my
written testimony, and I have indicated that the IIRO, Muslim
World League, and WAMY continue to cause us concern on several
fronts. One, as Mr. Wayne pointed out, we have been told that
these organizations are no longer free to send money abroad
from Saudi Arabia, and that would be a very positive
development if it were fully implemented. We continue to have
concerns about whether it is fully implemented.
Two, and this is perhaps a positive point, there was a time
when they were setting up this charities commission that we
have been talking about where it appeared as if they intended
to exempt these organizations from the oversight of that
charities commission.
This is one of the successes of our engagement. It is easy
for me to say that, because I was not personally responsible
for the success. I think Mr. Wayne, Fran Townsend, and Juan
Zaratti were, but we have now gotten assurances that these
organizations will be subject to the oversight of that
Commission, which I think is a very positive development.
But as you note in your question, Mr. Chairman, this is
exactly the analogy that we have been given, which is that
these organizations are akin to the United States relationship
with the United Nations.
Chairman Shelby. You do not buy that, do you?
Mr. Levey. I do not buy that. I do not think anyone is
buying that, and I have expressed my very strong skepticism of
that analogy to the Saudi Government. The perhaps positive
response to that was, okay, well, we are willing to work with
you to try to control these organizations abroad.
I think it is important that we all recognize that these
organizations are very, very much tied to Saudi Arabia; that
their history is very tied in with Saudi Arabia; and while the
Saudi Arabians may be able to say that they do not have
technical control over branches of these organizations abroad,
they certainly have influence that they can bring to bear, and
I hope that they will follow through on their commitment to
work with us to try to do that.
Chairman Shelby. Thank you.
Secretary Wayne, do you have any comments on that?
Mr. Wayne. Only to say, Chairman, that as we have engaged
with the Saudis, we have stressed the point that if there are
significant sources of money either being raised in your
country or coming into your country, they need to be regulated.
And that is the key challenge here, and that is a challenge
that every sovereign government needs to take on.
Chairman Shelby. It is particularly a challenge in the
Islamic world, is it not?
Mr. Wayne. It is, because there has not been a tradition of
claiming donations in any way as we sometimes do for taxes, or
there was more of a duty, and you did the giving of money
anonymously. So there has been an evolution in how you think
about charitable giving and how you track it.
But as Under Secretary Levey has said, we have seen an
evolution in thinking as we have worked with our colleagues in
Saudi Arabia. They have now said that, in fact, they are
applying their current restrictions on all charitable giving to
these organizations and that they realize that there does need
to be a regulatory oversight of them. They are still at work in
that process as they are at work in setting up their charities
commission, but you can be assured it will continue to be a
very high level topic in our work, and I do want to give praise
to Homeland Security Advisor Fran Townsend for continuing this
very high level dialogue with the Saudis persistently for a
long period of time now to achieve this progress and to build
this partnership.
Chairman Shelby. Ambassador Powell, do you have a comment
on the Pakistani aspect of that?
COMMENTS OF NANCY POWELL
ACTING ASSISTANT SECRETARY FOR
INTERNATIONAL NARCOTICS AND LAW ENFORCEMENT,
U.S. DEPARTMENT OF STATE
Ms. Powell. If I can comment briefly, the observation in
the report was based on a number of sources but includes the
conclusions of an interagency team that looked at training and
technical needs that Pakistan has. I would also like to report
that Pakistan has created a Center for Philanthropy. It is a
government institution that was designed to register all of the
nongovernmental organizations in Pakistan and to create a
framework for primarily ensuring that they were not fraudulent
organizations, that those giving to them could be assured that
their money would be used for the purposes stated.
I met frequently along with other senior members of the
embassy staff with the director of the center to encourage that
it cover areas to make sure that the charities in Pakistan were
not engaged in activities or vulnerable to being used by the
terrorists, even if they had legitimate activities. I would
also like to suggest that although, as Secretary Wayne
reported, the law has not been passed on money laundering and
other areas of concern in Pakistan, it is out of the cabinet
committee now as of last week and will be considered by
parliament. In the interim, particularly the Securities and
Exchange Commission equivalent and the Bank of Pakistan have
used their extensive regulatory authority to try to address
some of these concerns, including this one.
Chairman Shelby. Senator Sarbanes.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Thank you very much, Mr. Chairman. Could
I take a moment or two for an opening statement?
Chairman Shelby. Proceed as you wish.
Senator Sarbanes. First of all, Mr. Chairman, I want to
commend you for once again scheduling an oversight hearing on
this very important issue. I fully share your commitment for
the Committee to follow this matter closely, and of course, the
tragic events in London and yesterday's suicide bombing in
Israel give this hearing special immediacy.
A number of countries are making progress in putting in
place formal anti-money laundering systems, but the real
question is the implementation of those laws. I mean, they put
them into place, but the question is what is being done to
carry them out and to enforce them and what is the degree to
which there is cooperation with counterterrorism and anti-money
laundering efforts around the world. I take it--I saw you
nodding--you would agree with that, Secretary Levey; is that
correct?
Mr. Levey. Very much so.
Senator Sarbanes. And of course, you have a number of
obstacles to meaningful progress: Lack of trained examination
or enforcement personnel; the absence of sophisticated
financial regulatory infrastructure; even disagreements about
the definition of terrorists.
I am concerned that a number of smaller countries,
particularly in the Gulf region, seem to want to create these
offshore financial free trade areas or financial centers as a
way to secure revenues. But these arrangements may well be an
invitation to organized criminals, terrorists, and those
seeking to evade regulatory controls to hide their funds, and I
think it is very important to keep our eye on that subject.
Now, Secretary Levey, having gotten from you the
observation that implementation is extremely important, I now
want to ask you this question: We are nearing the fourth
anniversary of the enactment of the USA PATRIOT Act. Section
312, which dealt with correspondent accounts, was a major part
of Title III of the Act.
A proposed rule under Section 312 was published in May
2002, more than 3 years ago. But despite repeated statements to
this Committee that Treasury recognizes the importance of the
rule, it has not yet been finalized. This is all the more
surprising because the Federal Reserve Board has issued at
least two cease-and-desist orders identifying correspondent
banking failures in major international banks.
Why, specifically, has Treasury not acted, and is the rule
being held up for some reason? When will this regulation be
finally issued?
Mr. Levey. I was tempted to say I learned my lesson against
nodding, but I had a feeling I was going to get asked that
question anyway. Let me assure you, Senator Sarbanes, that
there is no one who wants to see this rule put out more than I
do.
Senator Sarbanes. Well, then, what is the hold-up?
Mr. Levey. On the one hand, it is a complicated rule. As
you indicated, the proposed rule was put out approximately 2
years before I got to the Treasury Department, and it was one
of my priorities when I got there to take a look at it and to
provide input to see what adjustments I wanted to advocate for
within the Department.
What I can tell you is that there is no holdup on the rule.
The current status of it is that we have now sent it to the
regulators for review pursuant to the consultation requirement
that we have under this section. I have learned the hard way in
other contexts not to promise a particular timetable on when
the rule will be finished, but that is the current status of
it. I hope it will be a prompt review by the regulators and
that we will be able to issue it very soon.
Senator Sarbanes. This law was signed on October 26, 2001.
Mr. Levey. You are absolutely right, Senator.
Senator Sarbanes. It will be 4 years this October. And it
required you to not later than 100 days after the date of
enactment to delineate by regulation the due diligence portions
of the rule, and that was done. And then, everything came to a
stop.
Mr. Levey. That is an accurate representation of what has
happened. We have done the guidance but----
Senator Sarbanes. Do you think if I were the official of
one of these countries we are trying to get to put in an anti-
money laundering scheme and to implement it, and you went over
and were pushing me hard to do this thing, do you think I would
be within reasonable bounds if I said, well, now, Mr.
Secretary, what about this regulation you were supposed to put
in effect under Section 312? You do not seem to have done that
in your own country. How can you be giving me a hard time about
what I should do?
Mr. Levey. I do not want to make light of it, Senator, and
I understand precisely the point you are making. I do think
that we have a fairly robust anti-money laundering system, so
that when I go around the world, and Mr. Wayne goes around the
world, and we ask for reforms that we are speaking from a
position of authority and credibility. But you make an
excellent point that we need to do our work here as well.
Senator Sarbanes. We could enhance it a little bit, I
think.
Now, let me ask you: Has the Treasury Department met with
representatives of Islamic NGO's to discuss terrorist financing
under the guise of charitable giving? Have there been such
meetings, and what were their results?
Mr. Levey. Actually, Senator, we have done a fair amount of
the type of activity that you refer to. We have made it a
priority to reach out to the Muslim community, particularly
with respect to charitable giving. As I think Mr. Wayne
indicated, our goal here is not to stop charitable giving. Our
goal here is to stop the use of charitable organizations for
funding terrorism.
A great majority of the people who give money to these
organizations are pure of heart, and they want their money to
go to real humanitarian causes. And so, we have done what we
can to try to help the charitable community protect itself from
that abuse and so that people who have good intentions can send
their money to real humanitarian causes without fear that it is
going to be devoted to terrorism.
Just yesterday, as part of this effort, we put on our
website a very comprehensive summary of all the actions that we
have taken as a Treasury Department with respect to charitable
organizations since September 11. It identifies all the
charitable organizations that we have designated pursuant to
13224, the Executive Order for terrorist financing, and it
gives a summary of why we have designated them, all of the
aliases and AKA's that the charitable organizations go by so
that people have a resource to go to in order to make sure that
they are not giving money to an organization that we have
identified as being a supporter of terrorism.
This is something that we did in response to requests from
the Islamic community here in the United States saying that
this would be a resource that they would appreciate, and we are
doing that. We are also just about to issue another set of
voluntary best practices for charitable organizations, things
that we suggest that they can do to protect themselves from
this abuse.
While these are voluntary, they have had a real impact in
the charitable community here in the United States, where they
have been viewed as almost obligatory, which I think is a
positive thing, and we will continue to try to do this.
Senator Sarbanes. Thank you, Mr. Chairman.
Chairman Shelby. Senator Bunning.
Senator Bunning. Thank you, Mr. Chairman.
Mr. Levey, what are some of the other ways that charities
or the terrorists are raising money if it is not through
charitable organizations? What are the other major sources of
fundraising that you have now spotted or, for that matter, the
nontraditional fundraising areas that you have focused on?
Mr. Levey. Well, Senator Bunning, I think there are really
two answers to your question, two categories to the answer. One
would be how they are raising it and how they are moving it.
Terrorist organizations have traditionally looked to in
addition to charities, they have looked to simply wealthy
donors to give money directly. And that still remains a
problem.
They have also raised money through petty crime. We have
had a number of--I should not say petty crime; sometimes petty
crime; sometimes not so petty crime. But we have had a number
of cases here in the United States where we have been able to
show that terrorist organizations were funding themselves
through criminal activity here; a very prominent case in North
Carolina where Hezbollah was raising money through counterfeit
cigarette operations. But they may also be just having
operatives live where they intend to attack and having
legitimate sources of income, which is also a possibility that
we need to be aware of.
In terms of the way they move money, as I think I discuss
in my written testimony, we see that one of the successes of
our actions is that we have driven terrorist organizations out
of the easy ways of moving money, simply wiring money back and
forth to each other and using the traditional banking system.
That is, in one sense, a success; in another sense, it is a
challenge, because now, they move money in ways like cash
couriers or Hawalas that are a little bit harder, present a
challenge in order for us to regulate those sources.
Senator Bunning. I have heard from some bankers, not a
great deal but most of them know their customers, and they have
a pretty good idea when something fishy is going on in one of
their banks, but they are burdened by what they think are
regulations that could be better focused on possible illegal
activities.
Is the Department of the Treasury working with banks to see
if they can better focus on accounts when given the activities
that seem irregular where it is more likely that something of a
suspicious nature is occurring?
Mr. Levey. Actually, Senator Bunning, we are doing a great
deal of just the type of activity that you are talking about,
and I would like to commend my Director of FinCen, Bill Fox,
who does this with great energy. We have spent a lot of time
not only reaching out to the banking community but also really
listening to them and acting in response to what we have heard.
Senator Bunning. You are listening, actually, to bankers?
That is not what I have heard.
Mr. Levey. I beg to differ, Senator. Just yesterday, for
example, the Justice Department amended its U.S. Attorneys'
Manual to provide that all prosecutions and deferred
prosecutions for violations of the Bank Secrecy Act will now
have to be approved by the Criminal Division in Washington.
That sounds like an awfully technical thing, but I think the
banking community is going to find it significant, because it
will ensure that prosecutions and deferred prosecutions brought
by the Justice Department will only be undertaken after there
is an opportunity for the kind of good consultation between
Justice and Treasury that I believe will occur, and the banking
community, as you might imagine is very, very sensitive to and
cognizant of prosecutorial decisions made by the Justice
Department as well as to enforcement decisions made by
regulators and the Treasury.
Senator Bunning. I am going to ask the question one more
time. Maybe you missed the question. Are you consulting with
bankers?
Mr. Levey. Yes.
Senator Bunning. Yes?
Mr. Levey. Yes.
Senator Bunning. Big money center banks only or other
bankers?
Mr. Levey. Other bankers as well; both myself, Mr. Fox more
so than myself spent a lot of time with bankers, making
speeches, going to conferences. I am surprised to hear that
bankers are saying that they do not feel that they are----
Senator Bunning. Well, maybe they are not big enough.
Maybe, a $300 million bank is not big enough for money
laundering.
Mr. Levey. That is not true. There are significant
vulnerabilities in small banks as well, and we spend time
reaching out to them as well.
Senator Bunning. My time has run out.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Hagel.
STATEMENT OF SENATOR CHUCK HAGEL
Senator Hagel. Mr. Chairman, thank you.
I want to pursue the line of Senator Bunning's questions,
and I am going to ask a couple of specific questions in regard
to the exchange that you just had with Senator Bunning.
I have been told that as you have done in your Financial
Crime Enforcement work, FinCen, and the Office of Terrorist
Financing and Financial Crimes is experiencing a backlog
because of some of the administrative process that is underway.
My first question is is there a backlog of financial reports in
those two offices?
Mr. Levey. What I think you may be referring to is
suspicious activity report filings with FinCen.
Senator Hagel. That is right.
Mr. Levey. I would not say that there is a backlog so much
as there has been a big increase in suspicious activity report
filings, which is something that we are taking very seriously.
We want to make sure that we do not have banks filing
suspicious activity reports when they do not really believe
that there is suspicious activity, because that degrades the
process and makes it less valuable.
But I think we also have to remember that the Bank Secrecy
Act data that is filed in these suspicious activity reports is
extremely valuable, and we want to make sure that we do not
take steps that cut off the Government from extremely valuable
data that is filed through suspicious activity reports. Just
last month, the head of the Terrorist Financing Section at the
FBI testified before the House that they have 88,000 suspicious
activity reports that they are looking at that are related to
terrorism investigation subjects. That is the kind of thing
that I do not think we can afford to lose.
Senator Hagel. Let me ask it another way, specifically, is
there a backlog or is there not a backlog in these two offices
of reports?
Mr. Levey. I do not believe that there is what I would call
a backlog.
Senator Hagel. What would you call it?
Mr. Levey. And I will actually clarify that these reports
are filed with the Financial Crimes Enforcement Network and not
with my office, the Office of Terrorism Financial Intelligence.
They are filed with FinCen. They are getting a larger volume of
information, and it is presenting challenges for them to
process it. They are also pursuing an information technology
fix called BSA Direct, which should be online in October, which
should greatly improve their ability to manage this data.
Senator Hagel. So is there a backlog, or is there not a
backlog? You are up-to-date? You are not up-to-date?
Mr. Levey. I guess I do not know exactly whether all of the
information is being entered as timely as I would like.
Senator Hagel. Well, would you not think that that is
fairly important? If you need more resources, have you asked
for more resources in order to enter timely information and to
make sure it is current?
Mr. Levey. It is part of our budget request.
Senator Hagel. Because it does not do us much good if it
just lays around or if it is not, in many cases, real time, I
would suspect.
Mr. Levey. This information, though, is not just laying
around. It is being put out to the law enforcement community so
that they can review it as well.
Senator Hagel. But if there is any kind of a backlog, how
does that happen?
Mr. Levey. All of the SAR's that are filed are provided to
the law enforcement community, and they can review them. There
are SAR review teams in various cities.
Senator Hagel. Well, let me get to a point that Senator
Bunning was making, and I hear this from many bankers, that in
fact, one of the reasons that you may be experiencing, as you
noted, an increase in these suspicious activity reports is that
these smaller banks, medium-sized banks are filing them because
they are filing them to protect and will err on the side of
caution, thinking that they really do not have much to report
but because of the field examiners overinterpreting the Bank
Secrecy Act, they will get hit with violations.
Now, is that a problem? Is that something that concerns
you? Is it something we need to look at? What is your take on
that?
Mr. Levey. I think that phenomenon is a concern, and you
are exactly right. One of the problems that we have had is that
while we are trying to set policy in Washington, as you know,
it does not always translate out into the field. We have a
problem where banks are filing on precisely the types of
transactions that you have mentioned, where they do not really
think it is suspicious, but they think look, I do not want to
be second guessed down the road.
Senator Hagel. Well, what are we doing about that in the
way of educating field examiners? Are the field examiners
overinterpreting the Bank Secrecy Act?
Mr. Levey. Well, as a matter of fact, we just put out, and
I do not remember exactly the date, but within the last few
weeks, though, a set of comprehensive exam procedures where we
were trying to unify the way all the regulators will handle
these exams so you will not have the problem you referred to;
you will not have one examiner or one agency interpreting the
rules differently from others. And there was a comprehensive
set of exam procedures that was put out jointly by FinCen as
well as all the regulators to try to address exactly this
problem. This is something that we have been taking very
seriously and trying very hard to fix.
Senator Hagel. Well, I would say--my time is up, Mr.
Chairman--that as is the case with Senator Bunning and I
suspect other colleagues on this Committee as well as other
Senators, they are hearing from the bankers, and their bankers
think that we are wasting our resources, time, and focus on
these kinds of procedural issues when there is nothing there
and taking our eye off of the real threats.
And when you come back before this Committee, Mr.
Secretary, and I will follow up in a letter next week so we can
get into a little more detail, and maybe you can come in and
talk about this, we do not want this to drag on like has been
the case with Senator Sarbanes' questions to you: It takes 4
years to get a law implemented. I do not know what service you
are doing our country or doing anyone when we let things drift
to that extent.
So, I will ask if you can come in and see me, and I will
formally send a letter over to the Secretary and ask for more
detailed information.
Mr. Levey. I look forward to the meeting.
Senator Hagel. Thank you.
Mr. Levey. Because this is not something we have let drift.
Senator Hagel. Thank you.
Mr. Levey. And I would be happy to tell you that.
Chairman Shelby. Thank you, Senator Hagel.
Secretary Levey, you mentioned the United States-Saudi
Joint Terrorist Finance Task Force in your opening statement.
The Banking Committee staff visited Saudi Arabia in February
and came away with a rather pessimistic view of status of that
task force. In short, rather than being a formalized, side-by-
side, day-to-day operation, it is their conclusion that it is
more of an ad hoc arrangement involving the same individuals
from both sides who meet regularly but hardly work together on
a daily basis.
Could you expand here your comments for the Committee in
terms of how well the joint task force, in your opinion, is
working? Is the responsiveness of the Saudi half of the
arrangement conducive to the level of cooperation necessary to
accomplish the task force mission, and are there political,
cultural, or bureaucratic gaps between the two sides that limit
its effectiveness?
Mr. Levey. Thank you, Mr. Chairman.
I should start by saying that one of the very positive
things that has developed with the Committee is that I have
developed a kind of relationship with the staff where I am able
to get that kind of feedback, and I apologize: I meant to treat
this particular issue, because I had heard about this concern
after the trip.
I do think, and I have double checked since I heard these
concerns, that the joint terrorist financing task force that
you alluded to in Saudi Arabia is something that we consider a
very positive development. You are correct that it is not a
side-by-side physically arrangement, but that, we think would
be a rather unusual situation.
There are not very many countries where we are working day-
to-day, side-by-side with our security and intelligence
services in the same room. There is good cooperation on cases
that are being worked both that we bring leads to them and we
work cooperatively with them. That is not to say that this
cannot be improved. There are certainly improvements that we
are looking to make. We think that the way we like to describe
it is that the groundwork is laid for the cooperation, and we
would like to see it broadened and deepened.
But considering where we were with Saudi Arabia before
2003, I think we should--and I am not one to throw this kind of
phrase around lightly--I think we should be looking at this as
a success.
Chairman Shelby. Is there a difference between the attitude
in Saudi Arabia in cooperating with us when something has gone
wrong in their Kingdom and we are helpful dealing with
terrorists against their own Government as opposed to our
concerns here on our own interests?
Mr. Levey. I can only speak in generalities, but I think we
have had cooperation on both of those categories.
Chairman Shelby. You think it is better, but you do not
think it is on the level of the British-American cooperation,
do you?
Mr. Levey. Maybe I should defer that--I am scared of
causing a diplomatic incident, but you are probably right about
that, Senator.
Chairman Shelby. The position of the United States. with
regard to the Palestinian Relief and Development Fund, also
known as InterPal, is that it is unambiguously a financial
supporter of the Islamic resistance movement. Yet the British
Government has repeatedly investigated InterPal and come to the
conclusion that it has no evidence of funding going through
that organization to the military wing of Hamas.
Their position is, as I understand it, is that InterPal
funds go to social welfare activities carried out by Hamas with
little or no leakage to terrorist activities. I would like to
know how you know that, and could you comment for the Committee
on the British position on InterPal, and will it change after
last week?
Mr. Levey. Well, I have to say that it is an ironic
question after the one you just asked.
Chairman Shelby. Yes.
Mr. Levey. Because this is one where perhaps our closest
ally and we have a disagreement.
Chairman Shelby. Sure.
Mr. Levey. And that happens, and that is perhaps healthy,
although this one is frustrating to me. As you indicate, we
believe InterPal to be a conduit, one of the principal
charities that was used to hide the flow of funds to Hamas. We
think that we designated it domestically here. I have raised it
repeatedly with my----
Chairman Shelby. They have also raised a lot of money in
the United States of America, have they not?
Mr. Levey. Well, InterPal is a British----
Chairman Shelby. I know that, but I am speaking Hamas has.
Mr. Levey. Oh, yes, you are absolutely right, and we have
taken action with respect to the charitable organizations in
the United States that we have been able to definitively tie to
Hamas, and we have shut them down. But as you indicate, this is
one where we disagree with the British, and we hope to see this
change.
Chairman Shelby. The Emirate of Dubai prides itself on the
free trade zones as an important component in its effort to
become the regional financial and commercial center of the
Persian Gulf. Of particular pride to the emirate and of
particular concern to this Committee is the Dubai International
Financial Centre, which Dubai hopes will facilitate its
transformation into the region's premier financial services
hub.
The attraction of a free trade zone, of course, is its
emphasis on a minimal regulation of commerce involving both
commercial goods and money, developments at variance with U.S.
goals of greatest regulation in that region. Is this a concern,
Secretary Wayne, shared by your office and others? And if so,
what have you done or what can you do to address this potential
weakness in the anti-money laundering regime? Seems like that
they are using this some as a transit point for nuclear
components headed for sanctioned terrorist-supporting countries
and a lot of other things. Does this concern you?
Mr. Wayne. Well, yes; having the United Arab Emirates, the
various points through which financial resources and other
goods and services pass have been a point of concern for us. It
has also been a point of concern for the authorities in the UAE
and in the specific emirates. So what we have worked to do is
set up a number of effective partnerships, as we have been
trying to do in other places, really, on an interagency basis,
coordinated in our embassy but working both at the Federal
level and at the emirate level to tackle these several
different challenges, whether it be related to weapons of mass
destruction, terrorist financing, or other export control
dangers.
We have a very intense dialogue with the UAE. We have
beefed up the presence at our embassy, which now includes
Homeland Security, former U.S. Customs, which is now called
Immigration and Customs Enforcement, ICE, personnel, in order
to build a practical relationship with the different
authorities both Federal and in the individual emirates. And we
have found a very receptive set of partners on the side of both
the authorities in Dubai and at the Federal level in Abu Dhabi.
And so, our intention is to keep making this an even more
effective partnership than we have had. As I mentioned earlier,
at the level of terrorist financing, the central bank
authorities in the UAE have been among the very most forward
leaning and aggressive in the region at putting very effective
and tough controls in place.
Chairman Shelby. Senator Bunning, do you have any questions
at this time?
Senator Bunning. No.
Chairman Shelby. I want to thank the panel. I have a number
of questions for the record that we will get to you, and we
hope you would answer them promptly.
We appreciate your appearance here today.
Senator Sarbanes, do you have any questions of this panel?
Senator Sarbanes. Not at this time.
Chairman Shelby. Okay; thank you.
Thank you.
Our second panel will include Mr. Dennis Lormel, former
Section Chief of Financial Crimes Division, Federal Bureau of
Investigation, and currently Senior Vice-President, Anti-Money
Laundering, Corporate Risk International; Mr. Steven Emerson,
Executive Director of the Investigative Project and a long time
tracker of the sources of funds provided to terrorist
organizations; and Dr. Mahmoud El-Gamal, Chair of Islamic
Economics Finance and Management, Rice University, and former
Department of the Treasury Islamic Scholar in Residence.
Dr. El-Gamal is not here to testify on sources of terrorist
financing. He is here to educate us and enlighten us on Islamic
banking practices and whether the gradual spread of Islamic
banking poses challenges to the United States in understanding
the movement of funds in the Islamic world that may be unique
to the western style of banking currently prevalent throughout
much of the Islamic world.
I thank all of you for your appearance today. Your written
testimony will be made part of the hearing record in its
entirety, and we will let you proceed summarizing--Mr. Lormel,
thank you for your appearance, and we will start with you, if
you are ready, sir.
STATEMENT OF DENNIS M. LORMEL
SENIOR VICE PRESIDENT, ANTI-MONEY LAUNDERING
CORPORATE RISK INTERNATIONAL, FAIRFAX, VIRGINIA
Mr. Lormel. Thank you, Senator.
Very quickly, I would like to thank the Committee for the
invitation, and like we have heard in the first panel, commend
you guys for the work you do. It is really important. And I
would like to lead off on that, on the questions that Senator
Bunning and Senator Hagel were concerned about.
You notice in my written testimony, I specify in there that
those are some areas that the Committee should be looking at
for additional follow-up. I think I have developed a unique
perspective since leaving the Bureau. I work very closely with
the financial community, and I think there is a middle ground
that needs to be established there, Senator, and I do think
there is communication, but I also think that the feedback is
insufficient, so it is an area that really is an area that
needs follow-up.
But moving on, I wanted to just summarize some of the
things I put in my written statement just in terms of some of
the dimensions that we need to look at in terrorist financing.
We should not be looking at terrorist financing as just kind of
one dimensional. It is multidimensional in terms of on one
hand, activities and individuals, because we are looking at
financing of activities in terms of operations, in terms of the
fundraising, in terms of the use of the funds beyond that:
Technical support, administrative support, and then, in terms
of individuals, in terms of operatives, in terms of suicide
bombers, in terms of fundraisers, facilitators, and donors.
And each of those dimensions requires a different kind of
funding mechanism. When I deal with bankers now, I ask them who
are you most likely to deal with, and in what capacity are you
likely to deal with those people? And they need to focus their
compliance and know your customer practices in that regard. And
then, from an investigative standpoint, and this is important,
because when you are trying to measure accomplishments and
where we are in the war on terrorism in terms of terrorist
financing, I think you need to break that down into three
dimensions, one of them certainly being being strategic; one of
them tactical; and one of them historic.
And in terms of strategic, I think Stuart Levey at Treasury
in putting his operation together is doing a good job, because
he recognizes the need for strategic intelligence, and he is
trying to put a component together, and it needs to have some
time to develop its credibility and resources, and I know that
the FBI, right after September 11, we recognized that, we put
an entity together. And in Stuart's testimony, he talked about
FinCen and their putting together BSA Direct, and it plays
right back to Senator Hagel's concern about suspicious activity
reporting.
Suspicious activity reports are critically important. The
information they contain can link, and as Stuart said, the
person who took my place at the FBI, Mike Morehart, testified
before the House last month that with this new robust
capability we have in terms of analytical capability with
SAR's, they came up with 88,000 hits, and I think that is
really something that has a lot of potential in the future, and
I recommend that you get a briefing on that.
And in terms of the other recommendations I made, I would
be very happy to work with your staff, with some of the ideas
that I had or with what my perspectives are in that regard.
Moving on to the Middle East and your concerns, because,
Senator, you asked questions; I will go right to the Joint
Terrorism Task Force. It is not a formal task force and it was
not set up to be that way. The dynamics were such that we did
not have that ability.
Chairman Shelby. Is it more of an ad hoc group?
Mr. Lormel. Well I would say it is more than ad hoc.
Chairman Shelby. A grade above that?
Mr. Lormel. Yes, I would put it above that, but I also know
that it has come a long way, and I think the starting point was
we provided a lot of training, as Tony Wayne said, to different
countries in the Middle East and the region, particularly the
UAE. The model in the UAE is very good. We sent teams over
there to train, and based on that training, we established good
will. And what the UAE showed us was not only did they
implement laws, but I think they also have the wherewithal, at
least the intent to follow-up, implement, and oversee those
laws, where with the Saudis, the issue is transparency, and are
they genuine, or are they disingenuous, and that is a big
question and certainly a big challenge for my former colleagues
in dealing with them.
And I know, having been involved in that process that Fran
Townsend, David Aufhauser, and people like that, Cofer Black
put incredible pressure and persuasion on them to continue to
move forward. But going back to the task force for a second,
Senator, I think it is more than ad hoc. It is certainly not
the best case scenario. It is a good case scenario, and the
bottom line is that there is a good exchange of information
going on there; whether or not the people sit side-by-side,
they do meet regularly, and they are exchanging useful
information, and that is the important factor there. And
overall, in the Middle East, as I mentioned, the UAE and
Bahrain were very good partners in terrorist financing with us,
and I think it is important that we mention here the Middle
East North Africa Financial Action Task Force that was formed,
that the Financial Action Task Force the World Bank and the IMF
have recognized that formation, and I think that is a very
positive move: 14 countries in the region participating in that
particular task force, and I think what we are going to see, as
we see here in the United States when you talk about
accomplishments, accomplishments that are kind of incremental
in being achieved. And I think that is a process we are going
to see, and I think it will be a very good thing in dealing
with the regulators and with the law enforcement community.
And I would like to close with asking the Members to
consider the USA PATRIOT Act and certainly the sunset
provisions. From a lessons learned perspective, one of the
things that we learned best from September 11 was the fact that
we had to do things differently and implement and run with time
sensitive and time urgent type of investigative mechanisms and
protocols.
And we implemented some things like that, and they worked
very well, but two areas where they could work a little better
for us would be if the Bureau had administrative subpoena
authority in terrorism cases; again, from a time sensitive,
time urgent standpoint, that would be very important, and I
think the Director has made it--and I have seen his, and I know
when I was in the Bureau, he was very emphatic about the fact
that we had a mandate to protect people's civil rights, so not
to be abusive.
In the areas we did have administrative subpoena authority,
I think there is a good track record there; and then, another
area that John Pistole testified here before you back in
October or September 2003 was production of subpoenaed records
in an electronic format. There is still no standardization
there, and that is an area that if the Bureau and other
agencies could get that information in electronic format, the
analytical process could be done in a much more time sensitive,
time urgent manner, and again, I would be very happy to discuss
that in greater detail offline.
Thank you very much for the opportunity to come here.
Chairman Shelby. Mr. Emerson, do you want to sum up your
remarks?
STATEMENT OF STEVEN EMERSON
EXECUTIVE DIRECTOR, THE INVESTIGATIVE
PROJECT ON TERRORISM (ITP), WASHINGTON, DC
Mr. Emerson. Sure; thank you, Senator, and Members of the
Committee for holding the hearing; it is especially timely
after the disclosure of the fact that four relatively young
British Muslims were involved in the suicide bombing in London,
the first time suicide bombers were recruited and operated
within the European continent. And the terrorist operation by
the Islamic Jihad yesterday that killed several Israili women.
I think that it is really important, as I listen to my
distinguished colleagues on the previous panel as well as my
friend Dennis, that we ensure that we understand that terrorism
does not occur in a vacuum; that we cannot measure the
terrorism merely on the cost of calculating the price of
explosives, but rather, factoring in the larger religious
indoctrination, recruitment, religious immersion, and
training--all of the elements of a spectrum in Western
societies are essentially invisible, not subject to government
regulation, and that are legal.
And yet, it is that very type of religious extremist
ideology which creates the environment and culture by which
suicide bombers and terrorist acts occur. If one looks at the
September 11 attacks, one can see that Mohammed Atta in 1994
was a secular, young, Arab male living in Europe, and he became
immersed in a religious vortex of Wahabbist Saudi ideology and
religious extremism in Germany; it was only a short jump later
that he began volunteering for jihad.
So, I think that as we look at the price and costs of
estimating terrorist financing, we have to look at the other
factors that contribute and which are actually more
responsible. Now at this time what I would like to do is to
summarize some of the findings of my organization, the
Investigative Project on Terrorism, in assessing the results of
the war on terrorism; certainly complementing the incredibly
dedicated public servants who have been involved relentlessly
in this war. But we also have to admit that we are now behind
the curve, and there is a lot more we can do.
Unfortunately, I believe that some of the things that are
responsible for our being behind the curve are self inflicted
wounds. Some of the reasons include bureaucratic rivalries, the
compartmenta-lization of U.S. law enforcement intelligence; the
absence of mass digitization and electronic retrieval of
information.
The fact of the matter is that at present, the war on
terrorism has been fought by trying to primarily shut down
radical Islamic charities serving as fronts. In that respect,
since September 11 the U.S. Government shut down at least five
radical Islamic groups. But according to new analysis and
information that my group has uncovered, actual new terrorist-
affiliated fronts have been reconstituted by some of the
previous officers connected with the charities that were shut
down. This has not gotten the attention yet of the pertinent
addresses within U.S. law enforcement and regulatory agencies.
U.S.-based operative terrorist groups have been able to
increasingly turn to drug trafficking, organized retail theft,
black market smuggling, the production and sale of counterfeit
name goods, the production and sale of baby formula, and even
car theft rings in order to raise money for terrorist
organizations. Most recently, there has been great concern that
the number of cars and automobile exported to the Middle East
both legally and illegally--some smuggled through and some just
sold on the open market--are being used to finance terrorist
acts or actually carry out actual bombings. As has been the
case discovered in Iraq, SUV's registered in the United States
were found to be in the possession of terrorist organization.
The fact of the matter is that at present, we are hampered
by a series of factors, including the unwillingness of Western
European Nations to get their act together in consistently
opposing radical Islamic terrorist groups. The fact of the
matter is that the EU list is a wonderfully impressive list,
but it has no teeth whatsoever, because it depends upon the
individual countries.
And to the extent that Britain has been involved in trying
to shut down the financial support of terrorism, unfortunately,
its refusal to shut down InterPal is a glaring indication of
the fact that political appeasement still is an operative
factor in decisionmaking in Europe.
I would also like to note that with respect to Saudi
Arabia, as you Chairman Shelby have pointed out, I am not
hampered by any diplomatic niceties, so I will say exactly what
I believe: You asked whether the joint task force was an ad
hoc. I call it an ad or a hoc. The reality is it has done very
little. And there has been a lot of lip service paid to the
role of Saudi Arabia recently in terms of its funding, its
willingness to oversee, regulate, and stop the flow of funding
to terrorist groups. But the reality is different again, as you
pointed out very correctly--when it disclaims any type of
responsibility for its role in creating funding and still
empowering, the World Assembly of Muslim Youth or the World
Muslim League, two major $100 million charitable organizations
that were created by the Kingdom of Saudi Arabia and have line
items in Saudi Arabia's budget annually; they continue to pump
money around the world into radical Islamic mosques,
organizations, and even are affiliated with terrorist groups to
this day.
Both of these organizations are part of the Wahabbist
network that we believe have been proven beyond a shadow of a
doubt to be connected to Al Qaeda, Hamas, and other terrorist
groups. The evidence that we have collected by examining tens
of thousands of reports, publications, internal records, and
statements of both organizations clearly show overwhelmingly
that the unwillingness of Saudi Arabia to acknowledge this or
to rein them in is a major source of terrorism. It provides the
basis for young Muslims such as those in Britain and elsewhere,
and God help us if we have this in the United States, for them
to be recruited into the ideology of radical Islam that sees
jihad and suicide bombings or other terrorist acts as an
acceptable act of ``protest.''
The fact of the matter is that Saudi Arabia continues to
pump radical Islamic literature into the United States, publish
Qurans that call for incendiary incitement against the West,
against ``crusaders or Zionists,'' i.e., Jews, and they
continue to try to proselytize within prisons and the U.S.
military, which I consider to be a major national security
threat.
In summary, I would like to think that we can get ahead of
the curve, because we have all the ingredients necessary to get
ahead of the curve. We have dedicated public servants that are
incredibly hardworking. We have a vast amount of data--perhaps
too much data--and we have the technology, except we have not
put this together. And so, what I would like to suggest are a
series of recommendations that I have included at the end of my
testimony. I am not going to recite all of them, but I would
just like to mention several of them, which I think can enhance
the war on terrorism.
One. I would like to see us create dedicated teams of
forensic accountants that can be attached to roving Federal
teams much like the old Organized Crime Strike Forces. Two,
create and standardize the expertise needed to graduate new
career paths in counterterrorism finance. We do not have that
career track right now; the FBI, in its rotational process,
basically shifts agents from one field to another, from one
city to another, not long enough for them to develop the
expertise or the sources needed to cultivate, to dominate in
that arena of counterterrorism.
Three, we should create a special unit that tracks the
charities, foundations supporting terrorism, and also Islamic
extremism that operate out of the Middle East and Europe, and
that unit should collect and distribute intelligence, both
classified and open source; as well as do link analysis.
Last and perhaps even most importantly, this goes to the
heart of the whole issue of whether, in fact, militant Islam is
able to hide in the West under the veneer of serving as a
``human rights group'' or being a ``moderate group.'' I believe
that deception goes to the heart of why September 11 happened,
and that goes to the heart of how these groups continue to
operate in the United States and in the heart of Western
Europe.
I think we have to ensure that when the Government engage
in dialogue, they need to empower genuine, not ersatz, Islamic
moderates who convey to their communities that they should
cooperate with the FBI; that the United States is not engaged
in a war against Islam, which unfortunately, is message that
has been communicated repeatedly and disseminated by mainstream
Islamic groups in the United States and Europe. We should
insist that Islamic extremist groups be denounced by name; that
it is not sufficient to simply denounce suicide bombings, but
you must denounce the perpetrator and to acknowledge rather
than deny the existence of a phenomenon of radical Islamic
fundamentalism.
The denial that such a phenomenon exists by ``mainstream
groups'' which end up getting meetings with high ranking
Government officials that are legitimized as the official
spokespeople for Islamic communities does a great disservice to
the vast majority of Muslims in whose name they do not speak.
Finally, I do believe that we need to get a much more
streamlined operational process inside the U.S. Government for
the vast amount of data from open source intelligence that
needs to be disseminated, collected, and subject to link
analysis that I believe can provide us with phenomenal leads.
And time permitting, during the question and answer period, I
would like to show part of an analyst notebook PowerPoint
presentation that would, I think, show how public source
information can unravel hidden terrorist networks in the United
States. *
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* 1APowerPoint presenatation held in Committee files.
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Thank you.
Chairman Shelby. Thank you. Dr. El-Gamal.
STATEMENT OF MAHMOUD A. EL-GAMAL, Ph.D.
CHAIR OF ISLAMIC ECONOMICS, FINANCE AND MANAGEMENT,
AND PROFESSOR OF ECONOMICS AND STATISTICS
RICE UNIVERSITY-HOUSTON, TEXAS
Mr. El-Gamal. Thank you, Chairman Shelby, Ranking Member
Sarbanes, Senator Carper, and Senator Bunning. Thank you for
inviting me, and as the Chairman kindly pointed out, while I
did serve, did have the honor to serve last year for 7 months
at the U.S. Treasury as Scholar in Residence, all of the
remarks that I make and in writing are my personal views and do
not necessarily represent views at Treasury.
In fact, my role at Treasury was mainly educational. I
think it was part of due diligence. Islamic finance is a fast-
growing financial industry that was not well-understood within
Treasury, so I was appointed for a temporary period of time to
educate staff both at Treasury and other parts of the
Government and various regulators about the mechanics of
Islamic finance, and that is what I hope also to discuss today.
In a nutshell, what Islamic finance tries to do as an
industry is to provide services that adhere both to the legal
and regulatory framework within whatever country it operates as
well as classical Islamic jurisprudence, as documented in
medieval texts. So trying to adhere to basically the stricter
combination that is allowed under both legal systems creates
regulatory arbitrage opportunities which are profitable to
various financial institutions, be they funded and run by
Muslims or others.
So at the very core, Islamic finance as an industry does
not differ much from regular finance. It does the exact same
things, whether at the retail level or at the investment
banking level, and in my written statement, I have given
examples of how various types of financial services and
products are synthesized from simple contracts.
Now, this makes it, in a sense, an easier task for
regulators and law enforcement officials to subject Islamic
finance as an industry to the same standards to which regular
finance is subjected, and it should do so both here and in the
Middle East and everywhere else. Now, the negative side of
this, of course, is that the sophisticated regulatory arbitrage
methods that we invented here in the West, the United States
and the United Kingdom, mainly for tax purposes, are quite
complicated, and even here in the United States, regulators
have been hiring ex-bankers, MBA's, Ph.D.s, and so on to be
able to keep track of these complicated transactions.
So the negative side is that to the extent that regulators
and law enforcement officials in the Middle East are not as
sophisticated as their counterparts here in the West, this
poses a challenge and requires more technical assistance, more
training, both from governments and from private banks,
multinational banks who have
already been doing this, but more, definitely is needed.
On the positive side, however, since there is a large
contingency of Muslims around the world who refuse to deal with
the mainstream financial sector, inefficient as the Islamic
finance sector may be, at least it brings these transactions
potentially under full sunlight, which is the best
disinfectant, and allows us to subject those transactions to
the same regulatory and law enforcement standards.
So it is a challenge, but I think it is not one that should
cause anyone to panic. It just requires more work on everyone's
part to train law enforcement officials and regulators.
Chairman Shelby. Thank you.
Mr. Lormel, in your prepared statement, you state that as a
result of some the successes in closing down certain funding
sources in the United States like the Holy Land Foundation,
terrorist activities have placed an increased emphasis on the
use of criminal activities as a terrorist funding mechanism. As
you heard from Mr. Emerson, those charitable organizations
successfully targeted to date have been replaced by substitute
mechanisms fronting as charitable organizations.
Do you agree with Mr. Emerson's assessment? If so, is it
your opinion that the FBI's terrorist finance operations
section is adequately responding to this alleged
transformation?
Mr. Lormel. I agree in part with Steve's assessment. I do
not totally agree. I do agree that in certain instances, there
has been a reconstitution, and I also believe that there are
investigations ongoing addressing those entities, which
obviously, I am not involved in now, so I cannot speak to but I
do believe that in part, those are being addressed.
I am aware of one in particular, and I believe Steve and I
have talked about that previously, in that area, I believe
there is an ongoing investigation. I also believe that one of
the areas from an intelligence standpoint that they are looking
at are those instances where the potential for that
reconstitution exists and developing the probable cause to
initiate those investigations. I think that is one of the
challenges they confront.
And if I may, I also believe that there are mechanisms in
place from an investigative standpoint that, in terms of the
financial investigations and analytical tools that do exist
within the terrorist financing operation section that kind of
mirror exactly what Steve wants to show you here.
Chairman Shelby. Mr. Emerson, have you got a minute to
expand on your knowledge of Hamas-affiliated entities in the
United States?
Mr. Emerson. Yes.
What I want to do is just show you part of a PowerPoint,
and I just want to clarify one thing, because I do not disagree
with anything Dennis said, and I hope he did not interpret my
comments to mean that the Government was not trying to unravel
these reconstituted entities. What I was trying to point out is
that the entities and the officers associated with Hamas and
other groups have been very cagey and very sophisticated in
understanding the weaknesses of our system and understanding
that it takes time to basically mount a prosecution to the
extent you can.
Chairman Shelby. Sure.
Mr. Lormel. If I may just interject one thing in agreement
with Steve is that that adaptability factor. These terrorists,
people who are in the financial roles either as facilitators or
as fundraisers, know our system all too well, and they fully
know and they do take advantage and exploit where possible any
gap in the system.
Mr. Emerson. The reason that I wanted to show the
PowerPoint is this is all based on open source information, and
I think open source information sometimes gets discriminated
against in the Government, because once you stamp something
classified, everyone says, oh, this is wonderful, and the end
result is that we do not look at something which is right
before our eyes. These charts are based on information that my
staff had collected. If you look at the screen, you will see
the fact that Infocom, at the very top, was a web hosting
company that was shut down by the U.S. Government, its officers
convicted and associated with terrorism-related charges and
illegal exports.
The two companies that are surrounded by red borders were
reconstituted entities that we believe are Hamas-affiliated
groups. One is called Synaptix, which essentially is a web
hosting company, and it has taken the place of Infocom.
Synaptix was created by the same people who created the Holy
Land Foundation, which also has been shut down and is connected
with the Islamic Association for Palestine, which has also been
called a terrorist front.
The other entity that was created, was called
DonationForm.com, which interestingly enough, actually
processes donations for nonprofits, thereby giving the
operators of that site and that software the ability to track
other nonprofit groups and their donors.
Chairman Shelby. Where did they originate out of ?
Mr. Emerson. I believe both companies originated out of
Texas, although I would have to get back to you on the articles
of incorporation.
Chairman Shelby. Would you do that for the record?
Mr. Emerson. Absolutely; in fact, we would like to supply
this chart plus the associated backup material.
If you go to the next slide, these are Hamas front groups,
and these are different clusters. Jason, if you will, zero in
on, let us say, the Holy Land Foundation. You will see the
relationships, in a myriad listing of bars and arrows, but the
reality is with this direct information, phone numbers, dates
of birth, corporate records, virtually any type of public
source information, we are able to plug it all in and find the
lines of authority between the different entities.
If you go back to the next chart, this gives an overview
here. This is the larger overview of how these groups have been
reconstituted. And again, it is all based on open source
intelligence, which I think can be of immeasurable help to law
enforcement, because part of the problem they face in these
types of investigations is how much classified intelligence to
release. This provides the basis, I think, for helping to
ensure that prosecutions can be more efficiently mounted and
for more designations to take place in an expeditious manner.
Thank you.
Chairman Shelby. Mr. Lormel, given what is known about the
financing of terrorist operations with funds obtained through
the commission of crime and drawing on your long experience
with the Bureau, is it your opinion that the Federal Government
today possesses the legal instruments that it requires or needs
to combat these activities, or are there additional legal
authorities you believe are warranted? And if so, what?
Mr. Lormel. I believe in general, the authorities that we
currently have sufficiently deal with the criminal problems. It
is just a matter of when you take the authority, for instance,
overseas, basically, and in many of these instances, whether it
is domestic or looking at the criminal activity or criminal
activity international, it is the international side where we
are going to have the issues and the concerns and the problems
in terms of mutual legal assistance treaties or the ability to
work jointly and the able to share information or the ability
to trace information. Administrative subpoena authority in
terrorism cases would be an important tool for the FBI.
Chairman Shelby. Doctor, it is said by some that Islamic
firms, by their very nature, are less likely to engage in money
laundering and other illegal acts. What exactly is it about
their nature in particular that makes them adverse to such
acts, if that is true, and what is the Islamic banking
industry's opinion of the Hawala system? It is said that the
Islamic banking system can be thought of as bringing people
into the sunlight that you mentioned; that is, banking the
otherwise unbanked.
Would the further growth of Islamic banking in Muslim
communities diminish the influence of the Hawala, or would it
make no difference because of Islamic fee structures? What is
the picture of Islamic banking today in this country, too? What
is the licensing process like? Is it a difficult process to get
an application through the OCC, for example, and so forth?
Mr. El-Gamal. You have three questions that I counted, sir.
Chairman Shelby. Yes.
Mr. El-Gamal. The first question about Islamic
establishments, be they banks or otherwise, are they
necessarily more immune to abuse? I do not know that an
institution by virtue of calling itself Islamic would
necessarily be any more or less vulnerable to abuse by its
officers. Islam, like all religions, abhors violence, abhors
criminal activity, and so, if it is run truly Islamically,
then, it would be more likely to stay away from criminal
activities, but I do not know that the label necessarily
indicates that it adheres to the spirit of the religion rather
than just the letter.
So, I would not make a statement that any institution that
claims to be Islamic necessarily by its very nature would have
to be more immune. If run properly, it would be, but I would
not know that.
The second question was about Hawalas. The Hawala system,
as discussed in the media, is an informal money transfer
system, but in Arabic, the term is also used for regular wire
transfers. So to the extent that Islamic banks provide services
for fees, including transferring money across countries as well
as within various countries, they exercise a version of Hawala,
but it is one that is documented the way it would be documented
by other banks.
Would the spread of Islamic banking necessarily then drive
the informal Hawala sector out of business I think is a
question of cost. For that particular service, the person
demanding the service does not care whether they conduct it
through an Islamic bank or a regular bank. It is a fee-for-
service. They go; they transfer the money; they pay the fee. I
think the reason the Hawala system exists primarily for the
legitimate purposes of expatriate workers sending money to
support their families, et cetera, is that its cost structure
is much more advantageous. It is faster, and it is cheaper.
So, I believe the way to drive the informal Hawala system
out of business is to make the formal sector faster and
cheaper. There is no way about that; Islamic banks as well as
regular banks go through the same channels, and it is still
expensive. Driving at least all the legitimate transactions
through the formal system would make it a lot easier to catch
others.
The third about efforts to establish Islamic banks in the
United States; there are not any right now. There has been one
attempt to license an Islamic bank, which failed, and I do not
know if there are currently applications which are under
review, but the general view among providers of Islamic banking
is that it is an uphill battle, as well it should be.
I think licensing is the gatekeeper; it is the way to
reduce, in economist-speak, adverse selection problems, to make
sure that whoever licenses a bank is going to run that bank
according to the best standards. So the benchmark should be
high. It is difficult. I do not have first-hand information as
to whether there is anything prejudicial against it.
I know that Islamic banking products are being offered by
regular banks, but there are some services, obviously, that are
more difficult than others to offer unless you are licensed as
an Islamic bank. I do not know how much demand there is for
such an institution. I do not know exactly what the barriers
are.
Chairman Shelby. Thank you.
Senator Sarbanes.
Senator Sarbanes. Thank you very much, Mr. Chairman. I want
to thank the members of the panel for their very helpful
testimony.
Mr. Emerson, I was struck by a statement you made in your
statement right at the beginning, and I quote it. ``All of the
ingredients for a more vastly successful war on terrorism are
present but underutilized or artificially compartmented from
one another.'' And then, you go on to mention some of the
things, and then, at the end, when we look at your conclusion
and go through the steps that you think would be very helpful
that you have listed at the end, the very specific steps, which
I think is a very important contribution to this discussion, I
mean, one is struck by the fact that if you had someone within
the executive branch, I do not want to say waves a magic wand
but had the backing or the authority and the determination to
just drive these things through that they could be put in place
on that basis alone.
You would have to knock some heads in order to do it, but
there is hardly any legislation that is needed. You might need
some additional resources to do some of these things, but I
think those would be forthcoming from the Congress.
Would you agree with that perception?
Mr. Emerson. One hundred percent. I mean, if you were to
look at the flow chart of the channels of the relationships now
within Treasury all of the myriad different departments, units,
that do not have horizontal relationships, let alone the issues
of transferring, exchanging intelligence with other agencies,
with the FBI, with the CIA, with DHS, it is a vast problem.
And one reason why my organization exists is to basically
fill the gap in public source dissemination. But you are 100
percent right. If you have somebody at that higher level who
could wave that magic wand, there would not be a need for any
kind of requirement for any type of new legislation here. The
problem is getting the bureaucracies to give up--and we have
seen this in the discussion of the post-September 11 changes,
getting existing bureaucracies to give up some of the powers
and the budget authority that they might have or to expand the
budget authority of some other, higher ranking official that he
could command other agencies to share the intelligence and
streamline the whole issue of regulatory, prosecutorial,
criminal, as well as other remedial actions needed to take on
terrorist groups.
Right now, it is a massive Rube Goldberg machine. It works,
but it could work a thousand times better.
Senator Sarbanes. Let me ask you this question: How
centralized is the financing of terrorism, or how decentralized
is it? Can you work it back to just a few sources of the funds,
or do they spring up as independent operations all over the
place? Do you have a perception on that?
Mr. Emerson. I think it mirrors today the structure of
militant Islamic terrorism, which is decentralized, amorphous,
nonconnected cells, organizations, clusters of people. It
ranges everywhere from a financier in Saudi Arabia named Yassin
al-Qadi, whom the United States has designated but Saudi Arabia
has never arrested or frozen his assets, to Ahmed Rassam, the
millennium bomber, or the involvement of those cells in Madrid
that self financed their terrorist operations through criminal
fraud or drug dealing.
And so, it ranges all over. That is why it is such a
difficult problem, because there is not that one central
source, repository from where the money flows. It is coming
from all over. It is coming from the top down, and it is coming
from the bottom up. And sometimes, would-be terrorists are told
that if they want to carry out an operation, ``Self-finance it
yourself.''
Senator Sarbanes. Has that always been the case, or is that
a new development?
Mr. Emerson. Relatively new development following one, the
breakup of the Al Qaeda structure, because when one looks at Al
Qaeda and the bell curve, the highest point of its linear
structure was on September 10, 2001. And then, it essentially
was forced to disband because of what we did and how they
dispersed.
Number two, you have essentially decentralized centers of
gravity today of radical Islam around the world that did not
exist 10 years ago; it took awhile for them to germinate and
ferment. I am looking right now, for example, at a 1998 fatwa
by Osama bin Laden. I came across this this morning. I was
trying to grab things that would be interesting and relevant to
the attacks in Britain, and I found something in one of my
British folders, which was a fatwa issued on February 10, 1998,
and it was issued out of Britain, and it was a fatwa against
the United States to attack U.S. Government and British
Government institutions, armies, interests, and airports.
This fatwa called upon all Muslims to carry out attacks, no
matter where they were, against the United States and Britain.
And it was signed, interestingly enough, and very disturbingly
by more than 40 prominent organizations and Islamic centers in
Britain.
And this represents the mainstream here. These were centers
that, in part, were funded by Saudi Arabia, but to the extent
that Saudi funding has been morphed into U.S. funding or
British funding today, it no longer has that connection to
Saudi Arabia, and that is a real problem.
Senator Sarbanes. Mr. Chairman, could I just ask a question
to----
Chairman Shelby. Go ahead. Take your time.
Senator Sarbanes. The GAO stated in a report entitled
``U.S. Agencies Should Systematically Assess Terrorist Use of
Alternative Funding Mechanisms,'' issued in November 2003, the
following:
According to the FBI's terrorist financing operation
section, most if not all terrorist cases involve a financial
aspect known as a funding nexus, which is normally considered
to be a component of the overall investigation. The FBI does
not currently isolate terrorist financing cases from
substantive international terrorism cases, and its data
analysis programs do not designate the source of funding for
terrorist financing.
Could you comment on that? What about this failure to look
at terrorist financing as its own phenomenon against which
specific efforts could be directed?
Mr. Lormel. Well, I think that goes back, and quite
frankly, I was the FBI official that they dealt with on that
report, and we pointed out to them that we did not have
traditional reporting mechanisms or that prior to September 11,
there was no mechanism to track.
And even when they came in in 2003, we had not developed
that mechanism; I mean, the case tracking as such and did not
have the classifications, so we could not give them statistics,
but I think what they were looking at more in the context of
the overall report were the alternate remittance systems and
those types of cases, and that, Senator, is so difficult to
really quantify.
Mr. Emerson. If I could add one thing, one problem is the
institutional interests of the agencies doing the
investigations. For the FBI, it wants to find a crime under
which it can prosecute. And so, it is not necessarily going to
investigate a local organized crime in Cleveland that is
laundering baby food formula or counterfeit goods without a
terrorist nexus, and so, that is left to local law enforcement,
to prosecute; they can put some criminals away, but they cannot
find a terrorist nexus, and you do not have the marriage there
of the interests.
And what you really need is to go back to the first point
is to have somebody wave a wand and say we are going to make
sure you guys work together, share the intelligence, and force
you to go against, necessarily, your narrow institutional
interests. If the FBI does not prosecute, then it should go to
the Treasury for a designation. But right now, there is too
much competition right now and proprietary control over the
information.
Mr. Lormel. If I may just follow up on that, again, I
disagree in part, because I think the policy coordinating
committee within the Government addresses those issues, and
when I was involved, particularly when David Aufhauser was
General Counsel at Treasury, we had a pretty good mechanism in
place to discuss the best alternatives, and it certainly was
not formal. If there would be something formalized, it probably
would work well, Senator. But we did identify which were the
best mechanisms: Was it an investigative response? Was it a
designation response? Was it an intelligence response and in
those cases, we went ahead, and we did that.
But, you know, we have to look at--and going back to your
original question, I think terrorist financing, as such, we
stood up our operation post-September 11, and it is an
incremental process, and all of the concerns that are being
raised are very good concerns, and I think mechanisms need to
be put in place to ensure that we can come back with the
accountability and reportability in those areas, and I also
believe that or I would like to believe that those are being
addressed and that those mechanisms are being developed. And I
know that they have the institutional problems with the overall
case management system, so that exacerbates their problem.
Senator Sarbanes. Thank you, Mr. Chairman.
Chairman Shelby. Senator Bunning.
Senator Bunning. It is fascinating to listen to you
gentlemen, because since September 11, the Congress of the
United States, the Senate and the House, has cooperated and
tried to streamline the ability of our Government to single out
those things that you say were missing that are wide open on a
daily basis, Mr. Emerson.
Are you telling me why do you not come and tell us exactly
what to do if it is so dang easy? Why are we messing it up by
creating a Department of Homeland Security or a number one
intelligence coordinator for the Government? Why are they not
able to focus in on the obvious things that you are able to
focus in on?
Mr. Emerson. In part, Senator, it is because I do not
answer to a bureaucratic management, and I am not suggesting
that these are ``bureaucrats'' in any pejorative sense, because
the people involved, like Dennis and others and tens of
thousands of agents, analysts, and investigators from local law
enforcement to Federal are phenomenally dedicated, and the
cases they have made are phenomenal.
But stepping back, I can see how agencies do not share;
there are bureaucratic rivalries. I can recite case after case
that have been stalled out because of the absence of sharing,
and I deal with agents and investigators in the field all the
time. To a certain extent, they can confide in you more than
they can confide in their superiors, because there is nothing
that can be done institutionally at this point, unless there is
a----
Senator Bunning. Why?
Mr. Emerson. Because the nature of bureaucracies is
essentially to become reconstituted when there is an external
stick, such as the reconstitution of our national security and
homeland bureaucracy, and that was DHS. And that was a good
faith effort, and I think it has been working out quite well.
But I also think we can improve tremendously the issue of the
exchange of information and the issue of rationalizing our
priorities.
Senator Bunning. That is what we are trying to do. Where
have we failed? Tell us where we have failed.
Mr. Emerson. I think unfortunately, where we have failed is
that there are too many different centers of gravity that have
control over the information that they believe----
Senator Bunning. But we put one person in charge of
homeland security. We have put one person in charge of
intelligence gathering, so one person is responsible.
Mr. Emerson. But they are not responsible for all counter-
terrorism and financial issues, and that is spread over at
least five to seven different departments. And those
departments, in turn, have different division chiefs and heads,
and honestly, they all try to make it work, but in the end, the
fact of the matter is that they are operating under different
lines of authority. And yes, within DHS they try to rationalize
it----
Senator Bunning. How do you correct it?
Mr. Emerson. I have made some recommendations. I am not
going to come up and suggest I have a panacea here, but I think
that one, going back to Senator Sarbanes, perhaps there really
is a need for some type of financial intelligence terrorism
czar; number two, I think there should be an open source
directorate of information, because I think that there is a
terrible bias against using open source information. Let me
give you a good example: Why is it that my organization, with
no more than 10 to 15 analysts, come up with some of these
discoveries before some Federal agency with multibillion dollar
budgets? Remember that I am not tasked with stopping the next
bomb coming across the border or the next airplane that----
Senator Bunning. But if you stopped their money, you might
be.
Mr. Emerson. You might be, but that is a long range
investigation. What we need to do is to detach some of the
agents and analysts in the field from that immediate day-to-day
struggle with stopping that next terrorist bomb, which is the
immediate priority that they are tasked with, and being able to
step back and say, all right, I am going to insulate myself
from those day-to-day picture and look at that long range
pressure and start crunching a lot of data coming in. It will
take 6 months to a year before I may come up with anything.
But at the end of that one year, I will come up with all
these new link analysis discoveries that will make our lives a
lot safer in the next 5 years, and that long range detachment
is difficult right now in the environment in which we live, and
I am not suggesting it is done out of maliciousness or----
Senator Bunning. No, I disagree with that, because the fact
of the matter is there should be plenty of people that we can
task to do that job within a department and task them to do it
with open source information. If you know where those terrorist
groups have relocated with the same names and the same
gathering ability of monies for terrorist groups only different
entities, my God, you should be able to put it up on the wall
and do it.
Mr. Emerson. You should be. The only thing I would add is
that sometimes, the fear of collecting data that is not
actionable or that it does not come under the criminal
oversight is a fear sometimes within bureaucracies that they
might be accused of invading the rights of Americans by looking
at data about where they live and which is freely available on
certain databases that are commercially--
Senator Bunning. In other words, do you think that maybe
the USA PATRIOT Act should be improved on?
Mr. Emerson. Yes, I do believe that, absolutely.
Senator Bunning. Mr. Chairman, I think that we should get
all the information we can from these three people and hand it
over to the Department of Homeland Security and our
intelligence czar, who is supposed to be coordinating our fight
to stop terrorist financing, because that is the head, and if
you kill the head, the body will die.
Chairman Shelby. You have it right.
Doctor, I would like to ask you another question. Is it
Shar'ia, is that what you call it, Shar'ia arbitrage? Your
presentation makes it abundantly clear that the tradition
underlying Islamic finance is to organize money according to
the moral and ethical standards of the Quran. But as I listen
to the discussion on all of the layering of transactions, I
still see it merely as an avoidance of charging interest in the
name of what you call Shar'ia arbitrage.
In order to compete with Western institutions, I read that
many Islamic banks stress that taking and paying interest is
worse than many other sins. What I am wondering is if the real
nature of financial transactions is being thinly disguised,
could an unhealthy culture of anxiety and guilt result here?
Could this function as another brake on the integration of
Muslims into the Western societies that many, you know millions
live in now and function in now every day?
Mr. El-Gamal. That is a very difficult question. The first
part is easier to address. Legal systems evolve with very
strange trajectories, and so, while the moral content of the
law of usury, which is not only Quranic but also Biblical, that
moral tradition was interpreted differently in different
traditions, and the vast majority of Muslim jurists adhere to a
particular interpretation as to what constitutes interest in
what types of contracts.
To the extent that economists like myself or sophisticated
financial observers will say, well, this is just relabeling is
beside the point. In the religious realm, there is a long
history of suspension of reason, that this is religiously
accepted because I say so. The important question is the one
you posed at the end, would the spread of Islamic banking, in a
sense, create an Islamic sub-economy as one writer, Timur
Kuran, once wrote an article called ``Islamic Economics and the
Islamic Sub-Economy.''
It would be very dangerous if that were to happen. The
history of Islamic banking is not alarming in the sense that
the providers of Islamic banking do not have to be Muslim, and
the recipients or the customers of Islamic banking do not have
to be Muslims. Islamic banks like to advertise that they have
customers who are non-Muslims, and certainly, multinational
banks like Citigroup, UBS Warburg, Credit Suisse, and so on
have been offering Islamic banking.
So the fear that there is this disintegration of Muslims
from society because of the spread of Islamic banking may be
more theoretical than practical, but it is a point very much
worth stressing that integration is important.
Chairman Shelby. Mr. Lormel, I appreciate your attention
here.
As a former leading Federal official in the war on terror
financing and one of the fathers of the TFFOS, the Committee
would be interested, for the record, in an expansion of your
opening comments with regard to SAR's, suspicious activity
reports, and currency transaction reports. Industry feels, and
we hear from them, unfairly burdened by the reporting
requirements, and the problem of defensive filing of SAR's is
clearly out of control.
As a retired Federal official with the FBI and currently in
private industry, could you provide your thoughts on the value
of SAR's and CTR's to the effort of combatting money laundering
and terror financing, and have your views on the matter
changed? Have they evolved since you entered private practice?
In other words, there are thousands of SAR reports coming in
now, and how do you differentiate?
Mr. Lormel. I think my level of sensitivity to the
financial sector has changed.
Chairman Shelby. Sure.
Mr. Lormel. Particularly understanding their frustrations
on some of the issues, but I think it is really a
multidimensional----
Chairman Shelby. And a cost burden on the industry.
Mr. Lormel. Absolutely. It is one of the factors and
clearly one of the principal factors. But I think the defensive
filing plays right to the issue of inconsistent regulations or
examinations, and I think that, in part, has caused the
defensive filing.
But as Stuart Levey pointed out, on June 30, the regulators
and FinCen came out with a new manual for examinations, so
there has to be a lot of training and an awful lot of
interaction between the banking community and the regulators in
terms of implementation of the standards in that regard.
But on both sides, I go out and speak at a number of
conferences involving bankers, and one of the areas where the
Government was absolutely remiss is we did not provide feedback
on the value of SAR's. So, I would look to go and talk to the
compliance people and those bankers, in particular, who have
the issues and concerns. And you need to balance the benefit
and burden, and I think that is a very sensitive area, and that
is where both sides need to get back together.
But it is critically important to understand that SAR's do
play a very important role. The information, particularly now--
my former section in TFFOS and what Bill Fox is doing at FinCen
in terms of BSA Direct are going to create very robust
capabilities in being able to analyze and cull out information
from those SAR's that will link directly to terrorism cases or
to potential cases that will be critically important, and there
is a disconnect, because we do not go back, and particularly in
those instances where the SAR was important, we do not go back
to the financial institution and say hey, thank you for filing
that SAR, because at the end of the day, we were able to do A,
B, C, and D as a result.
So that is one of those areas where these needs to be a
better middle ground, and I know there is tremendous dialogue
between the American Bankers Association and FinCen in
particular in dealing with those issues and to a much lesser
degree, the Bureau.
When I was involved at the Bureau, we had working groups,
and Senator, your concern about were you just dealing with the
major banks? At one point, we were, but then, we reached out
for mid-size banks and smaller banks to get them involved and
find out what associations we needed to deal with. And
unfortunately, there is not enough continuity in that process,
and there needs to be, and there certainly needs to be a lot
more.
Now, the area of CTR's, I know the ABA is looking to have--
they do not see the necessity of CTR's being filed, but again,
we derive some benefit out of that. I think there is a middle
ground that should be looked at, and I think there should be
some consensus between financial institutions the law
enforcement community and the regulators in terms of the
benefits and thresholds
And again, with the bank fraud working groups that exist, I
think those issues are being addressed, but it would be
certainly an issue that this Committee should look at pretty
strongly.
Chairman Shelby. Thank you.
Senator Bunning, do you have anything else?
Senator Bunning. I have one more question. Mr. Emerson, so
that we do not continue to add to the bureaucracy, I would like
for you to write me a nice letter and explain how exactly I can
get a czar to do exactly what you want done, in other words,
somebody who is above all of the other bureaucrats and is
responsible for terrorist financing and the discovery thereof.
Mr. Emerson. I would be very happy to do so.
Senator Bunning. Would you do that?
Mr. Emerson. Without doubt, I will get that to you
immediately.
Senator Bunning. Thank you.
Chairman Shelby. Gentlemen, thank you for your insights and
also for your patience here. The hearing is adjourned.
[Whereupon, at 12:09 p.m., the hearing was adjourned.]
[Prepared statements, response to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF STUART LEVEY
Under Secretary, Office of Terrorism and Financial Intelligence
U.S. Department of the Treasury
July 13, 2005
Chairman Shelby, Ranking Member Sarbanes, and other distinguished
Members of the Committee, thank you for the opportunity to speak before
you today about terrorist financing and money laundering in the Middle
East. I welcome this Committee's ongoing focus on this pressing topic,
and your dedication to help stop the flow of funds to our Nation's
enemies.
This hearing comes less than a week after the terrible attacks in
London and I would like to express my sincerest condolences to the
families of the victims. The brave resolve that the British people have
shown resonated around the world in defiant response to cowards who
seek to disrupt our very way of life. These acts of terror serve as a
tragic reminder that our resolve to combat terrorism and terrorist
financing must not waver.
As I approach the end of my first full year as Under Secretary of
the Office of Terrorism and Financial Intelligence at the Treasury
Department, I am constantly assessing our progress in the fight against
the financing of terrorism. To be sure, we have achieved some important
successes in this fight. We can point to multiple successes which
reflect the excellent coordination and teamwork of all U.S. Government
agencies over the past year. Thanks to the State Department's
leadership and concerted work with us, we are witnessing a growing
consensus in the world about the need to address terrorist financing in
tangible ways. We have seen the culmination of a number of critical
prosecutions investigated by the FBI-led Joint Terrorism Task Forces
and prosecuted by the Department of Justice, as I will discuss later in
this testimony. We at Treasury have designated numerous supporters of
terrorism--including particularly significant figures such as Adel
Batterjee--acting in close coordination with our interagency and
international counterparts. We have used Section 311 of the USA PATRIOT
Act judiciously and effectively against primary money laundering
concerns, and we are seeing real results. One of the most promising
developments is the President's issuance of Executive Order 13382,
which applies the same methods we have used successfully to block
assets of terrorist supporters to those who aid in the spread of
weapons of mass destruction. Our other interagency partners--especially
in the intelligence community--are constantly working to stem the tide
of terrorist financing, with little glory or recognition for their
tireless efforts. Our collective drive to hold financial supporters of
terror personally responsible as terrorists is creating the desired
pressure and deterrence. In the end, we are starting to see encouraging
results: Terrorist groups like Al Qaeda and Hamas are feeling the pinch
and do not have the same easy access to funds that they once did.
Our most significant progress has been in bringing about a change
in mind-set. There is now near-unanimous recognition among nations that
terrorist financing and money laundering pose threats that cannot be
ignored and there is widespread agreement upon a shared set of
standards to combat these dangers. We will not accept the protest that
ideological differences or bureaucratic obstacles excuse nations from
the obligation to comply with global standards. As we were all brutally
reminded by the attacks in London last week, we are facing a global
threat with global implications. All civilized nations must meet their
basic responsibilities to prevent the financing and support of
terrorism.
At the same time, we recognize that the range of threats and
institutional frameworks across different countries necessitates
flexibility and a range of approaches. We cannot apply a ``one-size-
fits-all'' approach to terrorist financing, nor can or should we try to
force countries to adopt a ``U.S. model.'' So long as internationally
established principles are given real effect, in law and in practice,
there is room for a variety of approaches. Indeed, we learn from the
successes and failures of others. Each country and institution presents
unique challenges that require nuanced solutions.
The Middle East rightfully captures our attention at Treasury, and
in the interagency community, as it is both a well-spring of and a
target for terrorist financiers and those who spread extremist
ideologies that justify and fuel terrorism.
Terrorism is increasingly targeted at innocents in the Middle East.
Recent terrorist attacks in Turkey, Morocco, Saudi Arabia, Kuwait, and
Qatar should be impetus to drive change throughout the region. Where
the threat of terrorism does not generate the will to take effective
action, however, my office, working in close cooperation with all of
our interagency counterparts, will push for action.
It would not be feasible to include a complete catalogue in this
testimony of all of our engagements in multilateral forums and
bilateral discussions with respect to terrorist financing in the Middle
East. Instead, I would like to try give the Committee a general
description and some examples that show how we are simultaneously (1)
driving the adoption and implementation of common global standards to
prevent terrorist financing and money laundering, and (2) pressing
individual countries and the private sector to do more to combat the
terrorist threat we all face.
Common Approaches
In our common approach to the Middle East, one important objective
is to persuade each country to attach the necessary priority to anti-
money laundering and counter-terrorist financing. This is not only
important from an enforcement perspective, but also a prerequisite for
any country looking to attract international business and investment.
For the most part, countries are increasingly recognizing this and
looking to comply with global standards and reassure international
businesses and investors.
I made a trip to Libya last month, representing the highest level
delegation to visit that country since the lifting of sanctions eleven
months ago. While there, I met with Colonel Qadhafi, the Central Bank
Governor, and the Minister of Finance and pressed Libya to adopt anti-
money laundering and counter-terrorist financing reforms as it attempts
to emerge from isolation and engage increasingly in the world's
financial community. The Libyan financial sector is in its infancy, but
as it develops, I conveyed that the United States expects anti-money
laundering and terrorist financing initiatives to be high on their
agenda as part of an overall counterterrorism strategy.
We are also seeing that countries are responsive to the type of
pressure that comes from international standard-setting bodies. The
Financial Action Task Force (FATF) sets the global standards for anti-
money laundering and counter-terrorist financing, and it is also
through this venue that we promote results. Treasury, along with our
counterparts at State, Justice, and Homeland Security, has taken an
active role in this 33-member body which articulates international
standards in the form of recommendations, guidelines, and best
practices to aid countries in developing their own specific anti-money
laundering and counter-terrorist financing laws and regulations. FATF
maintains the authority and has demonstrated its willingness to take
collective actions against jurisdictions that pose a threat to the
financial system. We do our part to promote the multilateral effect of
FATF standards through focused bilateral engagement.
As an example, I recently visited Turkey to speak with the Finance
Minister, Justice Minister, and several other high-level members of the
Turkish Government. While Turkey is not part of what we generally refer
to as the Middle East, its geographic location--bordering on Syria,
Iran, and Iraq--makes it an important part of our strategy when we
think about the threat of terrorism emanating from the Middle East.
Turkey has been a key NATO ally and has a long and painful history of
fighting terrorism within its borders. I expressed our appreciation for
the close cooperation we have enjoyed with the Turkish Government in
combating terrorism and in many other areas. However, as a FATF member
since 1991, Turkey's current anti-money laundering and counter-
terrorist financing regimes need significant improvement. Turkey is
looking to address these issues, and I encouraged Turkey to redouble
its efforts to comply with FATF standards in advance of its mutual
evaluation scheduled for early next year. Turkey is too important a
partner to us, and too important a regional power to let its anti-money
laundering and counter-terrorist financing regimes fall out of step. We
look forward to seeing Turkey succeed in its reform efforts over the
coming months.
Although not a member of FATF, Jordan, another regional ally, is
working hard to bring its anti-money laundering and counter-terrorist
financing practices up to international standards. The government has
submitted a new AML law to the Parliament, which may consider it in its
extraordinary session this summer. I visited Jordan this past February
in large part to encourage them to pass this law and implement it as
quickly as possible. These steps will inure to their own economic
benefit--bolstering the health and attractiveness of their financial
sector--while also aiding in the global fight against terrorist
financing. Given Jordan's prominent role in the financial sector of the
West Bank and Gaza, these improvements are also important to reduce the
potential for terrorist financing in those areas of strategic concern.
The success and force of FATF lie not only in the mutual evaluation
process to which it holds its own members, but also in the emergence of
FATF-style regional bodies (FSRB's) that agree to adopt FATF standards
and model themselves accordingly on a regional level. The Middle East
and North Africa body, or ``MENA FATF'' is one of the newest and
potentially most effective organizations to emerge. Launched in
November 2004, this 14-member body held its first plenary session in
Bahrain in April 2005 and is preparing for its second plenary session
in September of this year, currently scheduled to take place in Beirut.
It remains too early to tell how effective MENA FATF will be, but the
indications so far demonstrate considerable enthusiasm and energy. This
body is already working on a process to assess its members for
compliance with international standards and have formed working groups
to address key issues like cash couriers, charities, and hawala. We
support this initiative and hope that it will succeed on the difficult
road that lies ahead of it.
The Egmont Group is an international body comprised of financial
intelligence units (FIU's) across the globe. It is another example of a
body that demands that its members comply with certain standards and
maintain those standards over time. Treasury's Financial Crimes
Enforcement Network is currently working closely with Saudi Arabia,
Jordan, and Kuwait to develop their FIU's; we have seen some progress
to date and are eager to see it develop further.
Implementation
Adoption of legislation and regulations is meaningless without
strong and effective implementation. Some countries, eager to curry
favor with their neighbors or the international community, may believe
that adopting an anti-money laundering and counter-terrorist financing
law will keep observers at bay. Such half-steps will neither fool nor
satisfy the United States and the international community. We will
continue to press for effective implementation, including
investigations, prosecutions, designations, and other demonstrable
actions.
Private Sector
Collective pressure to implement international standards has been
effective in the drive to bring countries on board with anti-money
laundering and counter-terrorist financing efforts. At the same time
that we are pressing at the government level, though, we are also
working with the international private sector. The potential, both for
information exchange and for combating the flow of illicit funds, is
enormous. As but one example, we have seen financial institutions in
the Middle East and elsewhere voluntarily checking accountholders and
transactions against Treasury's list of designated entities, as well as
other lists, and using that information to determine whether or not to
take on business or process a transaction. This means that the rigorous
efforts by Treasury and the U.S. Government to identify and isolate key
sponsors of terrorism, as well as sponsors of weapons proliferation,
are being given wide effect in private banks in the Middle East and the
world.
We have also solicited the cooperation of some of the larger and
more responsible financial institutions to advocate for reforms among
their colleagues and in their various host countries. These
institutions typically exhibit diligent anti-money laundering and
terrorist financing practices even when their host countries do not
require it. This puts these institutions at a competitive disadvantage
vis-a The ``legitimate'' activities of these charities, such as the
operation of schools, religious institutions, and hospitals, can--
if abused--create fertile recruitment grounds, allowing terrorists
to generate support for their causes and to propagate extremist
ideologies.
Charities attract large numbers of unwitting donors along with
the witting, thus increasing the amount of money available to
terrorists.
To the extent that these charities provide genuine relief,
which nearly all of them do, they benefit from public support and
an attendant disinclination by many governments to take enforcement
action against them.
Charitable funds are meant to move in one direction only;
accordingly, large purported charitable transfers can move without
a corresponding return of value and without arousing suspicion.
International charities naturally focus their relief efforts
on areas of conflict, also prime locations for terrorist networks.
Such charities provide excellent cover for the movement of
personnel and even military supplies to and from high-risk areas.
The U.S. Government has confronted this problem head on in a
coordinated manner. We have thus far designated more than 40 charities
worldwide as supporters of terrorism. Two notable examples are our
actions against the U.S. branches of the Al Haramain Islamic Foundation
and the Islamic African Relief Agency (IARA), both Al Qaeda-linked
charities that were operating in the United States. In both cases, law
enforcement agents executed search warrants while Treasury's OFAC
simultaneously blocked the organizations' assets, stopping the flow of
money through these groups. Thanks to the work of the State Department,
we have persuaded other nations to join us in bringing these and other
charities to the United Nations Security Council for designation, and
to shutter these dangerous organizations in their respective countries.
Designations and law enforcement actions are making an impact and
are serving as a valuable deterrent. Anecdotal evidence suggests that
once-willing donors are now thinking twice or balking altogether at
sending money to terrorist groups. In this regard, I would note that
one advantage we enjoy in the terrorist financing arena is the strength
of deterrence--our targets have something to lose. In contrast to
terrorist operatives who may be willing to die for their hateful cause,
terrorist financiers typically live public lives with all that entails:
property, occupation, family, and social position. Being publicly
identified as a financier and supporter of terror threatens an end to
all of this, lending our actions a real deterrent impact.
Hawala
Hawala, a relationship-based system of money remittances, plays a
prominent role in the financial systems of the Middle East.
Domestically, we have worked with our interagency partners to ensure
that money service businesses like hawalas, register with the Financial
Crimes Enforcement Network and comply with applicable anti-money
laundering provisions. On the one hand, we are reaching out to this
sector to educate businesses about their legal obligations. Enforcement
of the USA PATRIOT Act's criminal provisions against operating an
unlicensed money service business also plays a key deterrent role. Just
this week, an ICE investigation led to a guilty plea by an unlicensed
money service business, who had sent millions of dollars to Syria and
other countries. While we are making progress, the effective regulation
of money service businesses continues to present a significant
challenge. Internationally, Treasury leadership in the FATF has brought
the issue of hawala to the forefront, resulting in the implementation
of FATF Special Recommendation VI, which requires all FATF countries to
ensure that individuals and entities providing money transmission
services must be licensed or registered, and subjected to the
international standards set out by FATF. Regionally, the UAE is playing
a key leadership role on this issue. We will continue to insist that
hawala be subjected to appropriate regulation and oversight.
Cash Couriers
As governments apply stricter oversight and controls to banks, wire
transmitters, and other traditional methods of moving money, we are
witnessing terrorists and criminals resorting to bulk cash smuggling.
FATF Special Recommendation IX was issued in late 2004 to address this
problem and it calls upon countries to monitor for cross-border
transportation of currency and to make sanctions available against
those who make false declarations or disclosures in this regard. This
recommendation has already prompted changes in legislation abroad. On
the domestic front, Treasury is working with the interagency community,
particularly the Department of Homeland Security's Immigration and
Customs Enforcement (ICE) and Customs and Border Protection (CBP), to
deter, disrupt, and apprehend cash smugglers. We are also looking into
technologies that will allow us to detect secreted concentrations of
cash, as well as tools that will allow us to track the movement of
physical cash around the world.
Case Studies
Syria
As a serious national security threat and a state sponsor of
terrorism, Syria has been the object of targeted Treasury action for
some time. Syria continues to meddle in Lebanon's affairs, allows the
Iraqi insurgency to be partially funded and fueled from within its
borders, and allows terrorist organizations and supporters to flourish
there as well. At Treasury, we are addressing this threat with a
spectrum of targeted actions aimed at reversing this course.
On June 30, we designated Ghazi Kanaan, the current Syrian Minister
of Interior, and Rustum Ghazali, the Chief of Syrian Military
Intelligence for Lebanon pursuant to E.O. 13338 for their role in
supporting Syria's military and security presence in Lebanon and
support for terrorism. This was a very important first step at
identifying high-level Syrian officials who are interfering in
Lebanon's political developments. With respect to the Iraq insurgency,
in January of this year, we designated the Syria-based supporter of Abu
Mus'ab al-Zarqawi, Sulayman Darwish, pursuant to E.O. 13224 for acting
as one of Zarqawi's operatives in Iraq and serving on his Advisory
Council. The Syrian Government joined us in codesignating this
individual at the United Nations pursuant to UNSC 1267. On June 17, we
designated Muhammad Yunis Ahmad, pursuant to E.O. 13315, for providing
funding, leadership and support from his base in Syria to several
insurgent groups that are conducting attacks in Iraq. We also
designated the Syria-based SES International Corporation and two
associated individuals, General Zuhayr Shalish and Asif Shalish
pursuant to E.O. 13315 for their support to senior officials of the
former Iraqi regime. SES acted as false end-user for the former Iraqi
regime and facilitated Iraq's procurement of illicit military goods in
contravention of UN sanctions. Finally, President Bush specifically
designated Syria's Scientific Studies Research Center (SSRC) as one of
the eight entities (the others were in North Korea and Iran) designated
pursuant to the newly issued Executive Order 13382, which blocks the
property of proliferators of weapons of mass destruction and their
supporters. SSRC is the Syrian Government agency responsible for
developing and producing nonconventional weapons and the missiles to
deliver them. While it has a civilian research function, SSRC's
activities focus substantively on the acquisition of biological and
chemical weapons.
Separately, in May of last year, we issued a proposed rule,
designating the Commercial Bank of Syria (CBS) as a ``primary money
laundering concern,'' pursuant to Section 311 of the USA PATRIOT Act.
The designation was premised on concerns about financial wrongdoing at
that bank, including terrorist financing. In connection with the
proposed rule, we presented a series of demands to Syrian authorities,
ranging from reform of their banking sector to immediate, effective
action to cut off the flow of funds across the Syrian border to the
Iraqi insurgency.
We will continue to use the tools available to us to press Syria to
take concrete actions to address our concerns.
Saudi Arabia
We have pursued a strategy of sustained pressure and cooperation
with Saudi Arabia to address a number of challenges. This Committee is
by now well-aware that Saudi Arabia has increased its counter-terrorism
cooperation since the Riyadh bombings in May 2003, marked by ever more
intense Saudi efforts to confront directly violent extremism in the
Kingdom. The Committee is also well-aware that the challenges posed by
terrorist financing from within Saudi Arabia are among the most
daunting we have faced. Wealthy Saudi financiers and charities have
funded terrorist organizations and causes that support terrorism and
the ideology that fuels the terrorists' agenda. Even today, we believe
that Saudi donors may still be a significant source of terrorist
financing, including for the insurgency in Iraq.
Saudi Arabia-based and funded organizations remain a key source for
the promotion of ideologies used by terrorists and violent extremists
around the world to justify their hate-filled agenda. The Saudi
Government has taken seriously the threats posed to both the Kingdom
and the United States by all of these issues, and we have worked with
and offered guidance to help confront the real threat of terrorist
support. As a result, among other things, the Kingdom has made changes
to its charitable system and regulations to address certain
vulnerabilities. This progress is the result of focused interagency
attention and cooperation, led by Homeland Security and
Counterterrorism Advisor Frances Fragos Townsend's consistent and
direct outreach.
However, Saudi Arabian charities, particularly the International
Islamic Relief Organization (IIRO), the World Association of Muslim
Youth (WAMY), and the Muslim World League (MWL) continue to cause us
concern. The Kingdom of Saudi Arabia announced that it would freeze all
international transfers until it had established an oversight
commission to regulate its charitable sector. While that would
represent a satisfactory short-term solution if implemented fully, it
is important that the announced commission take shape. As we have
stated previously to our Saudi counterparts, these three charities must
fall under the commission's oversight. I recently conveyed my views on
these issues to Saudi officials, and was met with positive indications
that they wish to redress these lingering concerns. I will keep this
Committee informed of progress in this area.
At the same time, it must be noted that there have been real and
tangible improvements in Saudi Arabia's cooperation on terrorism
financing issues. Through the Joint Terrorist Financing Task Force
(JTFTF), we have built the foundation for consequential and timely
information exchange as well as selected joint action. We expect to
continue building on the initial success of the JTFTF and look forward
to broadening the cooperation in that area. In fact, the preliminary
success of the JTFTF has prompted us to consider applying a similar
model to our efforts elsewhere in the Gulf.
Our work on cash couriers offers another example of the need for
continuing work with Saudi Arabia. Cash couriers present a serious
danger, particularly because of their use to fund the deadly insurgency
in Iraq. It is critical that Saudi Arabia and other Gulf countries
lower reporting thresholds for cross-border transfers of cash and
enforce these provisions aggressively. We intend to work with Saudi
Arabia and others in the Gulf to pursue that goal.
Palestinian Territories
With respect to the Palestinian territories, we continue to grapple
with the problem of charities being abused to support terrorism. Groups
such as Hamas, Palestinian Islamic Jihad (PIJ), and others have
infiltrated the charitable sector in the territories and have corrupted
badly needed relief organizations. We have been very aggressive in
acting against such charities. Most recently, Treasury designated a PIJ
charitable front, the Elehssan Society on May 4. The Elehssan Society
served as the fund-raising arm of PIJ in Gaza and the West Bank and
distributed funds to the families of PIJ prisoners and suicide bombers.
Just this February, PIJ claimed responsibility for a terrorist attack
in Tel-Aviv that killed 5 and wounded over 50. We will continue to
pursue this organization and any that rise up to take its place. The
Justice Department has played a vital role in this arena. In April, for
example, the Department of Justice secured the conviction of three
brothers linked to the Holy Land Foundation for their conduct in
concealing the continuing ownership interests of Hamas leader Mousa Abu
Marzook in their closely held private company.
We recognize that enforcement actions have sometimes cut off
sources of relief to communities in need and inadvertently decreased
the support of charities and donors that deliver funds to legitimate
causes. Our goal is not to deter charitable giving but instead to
protect the charitable sector such that donors' generosity is not
abused and they feel safe in providing their contributions. Therefore,
there is therefore a particularly urgent need in this region for safe
channels of assistance that donors can be assured will not be subverted
by terrorists. When I traveled to the region in February, I discussed
this problem with both Israeli and Palestinian officials. In speaking
with President Abbas and in several follow-up meetings with Finance
Minister Fayyad, I noted serious commitment on their part to cutting
off the flow of funds to terrorism, and welcomed the message they
expressed that responsibility for accountable financial systems begins
with the government. The Israelis were also strongly of the view that
it would be advantageous for all involved to find a way to provide
needed humanitarian aid, outside the control of Hamas or any other
terrorist group. We are currently working with the Palestinian
Authority to develop options through which such aid could be provided
in a safe and effective manner.
Conclusion
To combat terrorist financing and money laundering over the long-
term, we are vigorously and effectively promoting international
standards and encouraging countries in the Middle East to adopt
appropriate legislation and to implement those laws. We are also taking
the necessary actions to build political will at the highest levels of
every government to combat the financing of terrorism. Still, we have a
long way to go in the battle against terrorist financing in the Middle
East, both in terms of robust implementation of those standards and in
responding to specific threats and circumstances. Thank you again for
holding this hearing and for your sustained commitment to this topic. I
would be happy to take your questions.
PREPARED STATEMENT OF E. ANTHONY WAYNE
Assistant Secretary for Economic and Business Affairs
U.S. Department of State
July 13, 2005
Mr. Chairman, distinguished Members of the Committee, thank you for
the opportunity to discuss with you the contribution of the Department
of State to U.S. Government efforts to combat money laundering and the
financing of terrorism in the Middle East and South Asia. My colleague,
Ambassador Nancy Powell, Acting Assistant Secretary for the Bureau of
International Narcotics and Law Enforcement Affairs is also here, and
she can answer any questions on money laundering that you may have.
Combating money laundering and the financing of terrorism are vital
tasks and high priorities for the Department of State. Your interest
and attention to this key area is extremely valuable and much
appreciated.
The main theme that you will hear throughout my presentation today
is that we have made significant strides at bolstering the political
will and ability of governments in the Middle East and South Asia to
act against the common threat of
terrorism and the financing of terrorism but that we need to do more.
We face a resilient, adaptable and ruthless foe and must constantly
anticipate and help the countries of these key regions prepare for the
next move before it happens. This is why your hearing today is
especially important.
Mr. Chairman, your letter to the Secretary noted that your
Committee is particularly interested in the Department of State's
perspective on the interagency effort to execute this component of the
war on terror. I have been working on the U.S. Government's campaign
against terrorist finance since right after September 11, 2001 and
agree with the September 11 Commission's view that the current
interagency structure has improved the coordination and effectiveness
of our ability to block funds to terrorists. Our efforts to combat
terrorist finance serve many objectives and employ many tools. My goal
today is to sketch for you the role the Department of State plays in
the overall interagency process that aims to strike the right balance
of priorities and use the right mix of tools in our efforts to keep
funds out of the hands of terrorists in the Middle East and South Asia.
Tracking Terrorist Finances
The two major policy strategies utilized by the Administration in
the terror finance area are: Freezing the assets of terrorist
financiers and using information about terrorist financiers to disrupt
the terrorist networks themselves. As terrorists largely operate
internationally, a key component of the fight is to build international
cooperation. To achieve this goal, our approach has been to draw as
appropriate on a wide range of flexible policy tools, including:
Bilateral and multilateral diplomacy;
Law enforcement and intelligence cooperation;
Public designations of terrorists and their supporters for
asset-freeze actions;
Technical assistance; and
Concerted international action through multilateral
organizations and groups, notably the Financial Action Task Force
on Money Laundering (FATF) and the United Nations.
Effective diplomacy is a key element in winning the political
commitment from which cooperation in other areas flows. Our diplomats
are the overseas eyes, ears, and voices of the U.S. Government in
dealing with foreign governments and financial institutions on
terrorism finance. Our diplomats meet additional responsibilities in
the many countries where we have no resident legal or Department of
Treasury attache. With enhanced cooperation, intelligence and law
enforcement officers are able to follow the money trail. With
international cooperation on asset-freezes (as well as travel bans and
arms embargoes under UN resolutions), we force terrorists into less
reliable and more costly means of moving money. Designations also chill
support for terrorism--it is one thing to write a check or transfer
money to terrorists when no one is looking; it is quite another to
realize that such actions can bring unwanted official attention and
lead to prosecution. Public identification of charitable groups that
funnel some of their donations off to support terrorists has also
proven a powerful tool to discourage further donations and to encourage
other governments to monitor more effectively the activities of
nongovernmental organizations.
Since September 11, we have ramped up our efforts and made
substantial progress. We also acknowledge that much remains to be done.
Since September 11, 2001, we have:
Developed a broad and strong international coalition against
terrorist financing;
Ordered the freezing of the U.S. assets of 400 individuals and
entities linked to terrorism;
Submitted and supported the submission by other countries,
including Saudi Arabia and several of our other Middle Eastern
partners, of over 300 Al Qaeda- or Taliban-linked names to the UN
1267 Sanctions Committee (also known as the Al Qaeda/Taliban
Committee) for sanctions, including asset-freezing, thereby
requiring all countries to act against these names;
Worked closely with concerned agencies to designate three
financiers of the Zarqawi network, or Al Qaeda in Iraq, since the
beginning of 2005 pursuant to E.O.13224. The designations of Bilal
Mansur al-Hiyari on April 13, 'Ayyad al-Fadhli on February 15, and
Sulayman Kahlid Darwish on January 25 are helping stem the funding
of the Iraqi insurgency;
Designated Jama'at al-Tawhid wa'al-Jihad (JTJ) both as a
Foreign Terrorist Organization and separately under E.O. 13224 on
October 15, 2004 for having ties to the al-Zarqawi network. At the
request of the United States, the United Kingdom, Jordan, and Iraq,
this organization was also listed by the UN 1267 Sanctions
Committee on October 18. On November 30, the USG amended the
previous designation of Jama'at al-Tawhid wa'al-Jihad (JTJ), to
include its new alias Tanzim Qa'idat al-Jihad fi Bilad al-Rafidayn
and all its possible translations. On December 2, Japan, joined by
the United Kingdom and Germany, submitted to the Sanctions
Committee the new alias Tanzim Qa'idat al-Jihad fi Bilad al-
Rafidayn and all its possible translations and transliterations.
The USG fully supported those efforts.
Designated charities funding Hamas for asset freeze; and taken
action against Saudi terrorism financiers and financial support
networks;
Frozen approximately $147.4 million and seized approximately
$65 million in assets located internationally, including in the
United States;
Through our embassies, formally approached world governments
internationally to freeze the assets of each and every name we
designate;
Supported changing national laws, regulations and regulatory
institutions around the world to better combat terrorist finance
and money laundering; including working with the European Union,
APEC, the Organization of American States, and the Financial Action
Task Force and their Members to strengthen their counterterrorism
finance regimes; and
Made it harder for terrorists and their supporters to use both
formal and informal financial systems.
Effective U.S. Government Coordination
Key to our success in tackling terrorism finance in the Middle East
and worldwide is effective U.S. interagency coordination. A Policy
Coordination Committee (PCC), chaired by the National Security Council,
ensures that these activities are well-coordinated. This strong
interagency teamwork involves the intelligence agencies and the law
enforcement community, led by the FBI, as well as State, Treasury,
Homeland Security, Justice, and Defense collectively pursuing an
understanding of the system of financial backers, facilitators and
intermediaries that play a role in this shadowy financial world. As
appropriate, PCC members also draw on the expertise of financial
regulators. The overarching lesson I draw from my experience since
September 11 is the importance of overall direction of the terrorist
finance effort by a body that can direct all of the USG participants in
the process to find the right blend of instruments to use on a case-by-
case basis. The NSC is ideally placed to play this coordinating role
against terrorist finance, as it has traditionally done in other
national security areas.
Treasury develops and coordinates financial packages that support
public designations of terrorists and terrorism supporters for asset
freeze action. Treasury also leads our outreach to FATF and the
international financial institutions. Justice leads the investigation
and prosecution in a coordinated campaign against terrorist sources of
financing. And, State initiates asset-freeze designations of terrorist
groups and shepherds the interagency process through which we develop
and sustain the international relationships, strategies and activities
to win vital international support for and cooperation with our
efforts, including through UN action. These efforts include the
provision of training and technical assistance in coordination with
Justice, Treasury, Homeland Security, and the financial regulatory
agencies. The U.S. Government's task has been to identify, track, and
pursue terrorist financing targets and to work with the international
community to take measures to thwart the ability of terrorists to raise
and channel the funds they need to survive and carry out their heinous
acts.
Our diplomatic posts around the world are essential partners in
implementing this global strategy. They have each designated an
official, generally the Deputy Chief of Mission, as the Terrorism
Finance Coordination Officer (TFCO). These officers chair interagency
meetings at posts on a regular basis, not only to evaluate the
activities of their host governments, but also to develop and propose
individual strategies on most effectively getting at specific targets
in their regions. The increased level of interagency cooperation we in
Washington are seeing on this front is generating new embassy
initiatives focused sharply on terrorist finance. The ability of
diplomats at our embassies to develop high-level and immediate contacts
with host officials in these efforts has built broad responsiveness
around the world to various targeting actions.
U.S. Asset Freezing (E.O. 13224) Actions
One of our tools to prevent terrorism is to starve its
practitioners of financial resources. A key weapon in the effort to
disrupt terrorist financing has been the President's Executive Order
(E.O.) 13224, which was signed on September 23, 2001. That order,
issued pursuant to the International Emergency Economic Powers Act and
other authorities, provided new authorities that have been fundamental
to an unprecedented effort to identify and freeze the assets of
individuals and entities associated with terrorism. Under that order,
the Administration has frozen the assets of 400 individuals and
entities on 65 separate occasions. The agencies cooperating in this
effort are in daily contact, examining and evaluating new names and
targets for possible designation resulting in asset freezing. However,
our actions in relation to E.O. 13224 are not taken in isolation. We
consider other actions as well, including developing diplomatic
initiatives with other governments to conduct audits, exchange
information on records, law enforcement and intelligence efforts; and
shaping new regulatory initiatives. While using E.O. 13224 to designate
entities and
organizations as ``specially designated global terrorists'' is the
action that is most publicly visible, it is by no means the only action
or the most important in seeking to disrupt the financing of terrorism.
Foreign Terrorist Organizations
A second tool the Secretary of State has in the war on terrorist
finance is the designation of Foreign Terrorist Organizations (FTO).
The Congress gave the Secretary of State this authority in 1996, and 40
organizations are currently designated as FTO's. In addition to
requiring the freezing of FTO assets by U.S. financial institutions
that know they control or possess FTO funds, this authority renders FTO
members who are aliens inadmissible to the United States, and permits
their removal under certain circumstances. Once an organization is
designated as an FTO, it becomes a criminal offense to knowingly
provide material support or resources to the organization. Offenders
are subject to prison terms of up to 15 years (or, if death results
from the offense, life imprisonment). The designation of groups under
this authority is one of the steps most widely recognized by the
American public in the war on terrorism and terrorist finance.
United Nations Actions
Even before September 11, the UN Security Council (UNSC) had taken
action to address the threat of terrorism. It had adopted resolutions
1267 and 1333, which collectively imposed sanctions against the
Taliban, Osama bin Laden and Al Qaeda. Following September 11, the UNSC
stepped up its counterterrorism efforts by adopting Resolutions 1373
and 1390. Among other things, Resolution 1373 requires all states to
prevent and suppress the financing of terrorist acts and to freeze the
assets of terrorists and their supporters. It also imposes travel
restrictions on these individuals. Resolution 1390 (strengthened by
Resolutions 1455 and 1526) expanded sanctions, including asset freezes,
travel restrictions, and arms embargos, against Osama bin Laden, and
members of the Taliban and Al Qaeda and those associated with them. The
UN 1267 Sanctions Committee maintains and updates a list of individuals
and entities subject to these sanctions, which all states are obligated
to implement.
Through these actions, the UNSC has sent a clear and strong message
underscoring the global commitment against terrorists and their
supporters and obligating UN Member States to implement asset freezes
and other sanctions. This is extremely important, because: (1) most of
the assets making their way to terrorists are not under U.S. control;
and (2) when the 1267 Sanctions Committee designates individuals or
entities associated with Al Qaeda, all 191 UN Member States are
obligated to implement against those persons the applicable sanctions,
which include asset freezes. The 1267 Sanctions Committee has listed
over 300 persons and over 100 entities that are subject to the
sanctions. With respect to South Asia, we recently convinced the UN
1267 Sanctions Committee to list Pakistani supporters of Al Qaeda for
worldwide asset freeze and travel ban.
In January, then-Treasury Assistant Secretary Zarate and I met with
the 1267 Committee to detail U.S. implementation of the resolution's
asset freeze, travel ban, and arms embargo provisions. At this meeting
I proposed several ideas aimed at
reinforcing current sanctions, including enhancing the sanctions list,
promoting international standards, and furthering bilateral and
multilateral cooperation. The Committee is actively encouraging other
members to make similar presentations. In mid-May, the UK addressed the
Committee on their implementation efforts, with an emphasis on
oversight of charitable organizations. In July, Dutch and Australian
officials addressed the Committee on their implementation efforts. We
have also begun initial discussions with other Security Council Members
on further steps to strengthen the implementation and reach of these UN
sanctions in the context of a new resolution that the Council will
consider this month; the United States is taking the lead in drafting
that resolution.
In those cases where the U.S. Government decides to propose the
inclusion of a terrorist and/or the terrorist's financier on the 1267
Committee list, State plays a key role in recommending how best to gain
the broadest international support. First, we need to be sure that we
can make an effective public case. This is much more difficult and
time-consuming than it sounds--but is crucial to the success of this
approach. Often, strong cases are based heavily on classified
information, and we must weigh competing priorities. If we go to the UN
to propose a designation and the unclassified information standing
alone is weak, other Member States will not support us. On the other
hand, there are often compelling reasons not to declassify further
information. The Department and our embassies help the interagency team
strike the right balance by providing advice and insights on what it
will require for a designation to gain international approval. Once a
designation proposal is decided, the Department seeks international
support in the form of potential cosponsors and must garner unanimous
support from members of the UN Committee. When a new name goes onto the
Committee's list, we bring it to the attention of world governments to
ensure that they are able to take effective and quick action against
the designee.
Improving National Laws, Regulations, and Standards
In addition to advances on the UN front, we have witnessed
considerable progress on the part of countries around the world to
equip themselves with the instruments they need to clamp down on
domestic terrorist financing. Since September 11, about 90 countries in
every region of the world, including the Middle East and South Asia,
have either adopted new laws or regulations to fight terrorist
financing or are in the process of doing so. This is an ongoing process
with many countries refining their laws and regulations to assure they
have all of the tools needed to combat terrorist financing.
To ensure that these new laws and regulations are effective, the
United States has worked very closely with the Financial Action Task
Force (FATF), a multinational organization whose 33 members are devoted
to combating money laundering. In 2003, FATF revised its 40
Recommendations to combat money laundering to include terrorist
financing provisions. These Recommendations along with the
complementary Special Recommendations on Terrorist Financing, adopted
in 2001, provide a framework for countries to establish a comprehensive
regime to fight money laundering and terrorist financing. The two
guiding principles the FATF has identified as critical to fighting
terrorist finance are cooperation with the UN (respecting, ratifying,
and implementing antiterrorist treaties and resolutions) and
identifying, defining, and criminalizing terrorist financial activity.
The FATF continues to provide critical guidance on the development
of comprehensive regimes to attack the full range of financial crimes,
including terrorist financing. In October 2004, the FATF added Special
Recommendation IX on terrorist financing (to those approved in 2001),
addressing the problem of cash couriers. It also continues its efforts
to clarify and refine these Special Recommendations by publishing
interpretive notes and best practices guidelines to help regulators,
enforcers, financial institutions, and others better understand and
implement the most technical recommendations. The FATF has also worked
closely with the IMF and World Bank to develop a common methodology to
incorporate FATF's Recommendations into the financial sector reviews
that all three entities undertake.
The FATF-Style Regional Bodies (FSRBS) worked throughout the year
to adapt the Recommendations to their particular regional requirements.
The FATF approved two new FSRBS in 2004, (bringing the total to eight
FSRBS): The Eurasian Group (EAG) and the Middle East and North African
Financial Action Task Force (MENA FATF). These two new groups filled in
critical gaps in global coverage, and the United States is an observer
in both. The EAG was inaugurated on October 6, 2004 by six member
states: Belarus, China, Kazakhstan, Kyrgyz Republic, Russia, and
Tajikistan. Seven jurisdictions and nine international organizations
were admitted as observers. EAG's second plenary was held just this
past April in Shanghai, China. The fourteen founding members of MENA
FATF are Algeria, Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco,
Oman, Qatar, Saudi Arabia, Syria, Tunisia, the UAE, and Yemen. The
group was inaugurated on November 29, 2004, and held its inaugural
plenary meeting the next day. Another plenary session was held in mid-
April in Bahrain at which the MENA FATF agreed to begin the first round
of mutual evaluations in 2006.
FATF is also working cooperatively with the UN Counterterrorism
Committee (CTC) and the G-8-initiated Counterterrorism Action Group
(CTAG) to conduct assessments of selected countries' needs for
technical assistance to improve local ability to combat terrorist
financing. FATF has conducted six of these assessments: Morocco, Egypt,
Nigeria, Cambodia, Indonesia, and Tunisia. FATF did not conduct an
assessment in Thailand as was requested because a recent IMF survey had
been done, or in Cote d'Ivoire due to political instability there. The
UAE did not accept a FATF assessment, indicating to the USG that a
prior United States-conducted assessment was enough. CTAG donors have
established a gaps/assistance matrix based on the counterterrorism
finance needs identified in FATF's assessment. Although donors made a
good start in meeting the needs of these countries, CTAG agreed that
sustained assistance over time would be required to close the gaps.
We have seen substantial progress in securing countries' commitment
to strengthen their anti-money laundering laws and regulations, which
is inextricably linked to combating the financing of terrorism. In
large part due to FATF's focus and our technical assistance and
diplomatic pressure, governments pass amendments to improve their
ability to combat terrorist financing. For instance, the Indonesian
Parliament passed important amendments to its anti-money laundering law
on September 16, 2003 that will improve the country's ability to take
actions against terrorist financing. Similarly, it was FATF's efforts,
in conjunction with our diplomacy and technical assistance, which led
the Philippines to pass legislation in March 2003 that will
significantly increase that country's ability to carry out meaningful
antiterrorist financing measures. FATF advises on whether such
regulations and legislation meet international standards and are
effective instruments to combat money laundering and terrorist
financing.
In addition to providing countries with the guidance they need to
develop effective regimes, FATF also places pressure on difficult
countries via its Non-Cooperating Countries and Territories (NCCT)
program, which provides for listing countries that are noncooperative
with respect to internationally accepted anti-money laundering
practices. FATF's NCCT program creates an incentive for States to
vigorously address their legal and regulatory environments to allow
appropriate action against money laundering. Nigeria and the
Philippines, for instance, in December 2002 and February 2003
respectively, took meaningful legislative steps to strengthen their
anti-money laundering laws to avoid imposition of FATF measures. Our
extensive efforts with the Philippines and Indonesia also played a key
role in their removal from the FATF Non-Cooperative Countries and
Territories list.
As we, together with others in the international community, began
to look into how terrorist groups raised and moved their funds, the
fact that much of this took place outside regular banking systems
quickly became apparent. As a result, international efforts underway to
set standards for tackling terrorist financing are also addressing how
to prevent charities and not-for-profit organizations from being abused
by those with malicious intentions and also how to help keep cash
couriers and alternative remittance systems, such as ``hawala,'' from
being used to finance terrorism. The FATF, which has already addressed
some of these issues through its Special Recommendations on terrorist
financing, is now working to develop guidelines and standards on wire
transfers and regulation of charities and nongovernmental
organizations. Setting new standards and norms in these areas is key to
making our international efforts more effective.
Economic Tools
U.S. policies to counter terrorism do include economic policies
that encourage development. An important tactic to stamp out terrorism
is to improve the economic prosperity and employment opportunities in
priority countries. Extremism and terrorism thrive in countries that
lack freedom, political expression, and economic and educational
opportunity. People, especially youth, who live in poverty and have no
voice are more likely to be susceptible to extremist ideologies and to
join terrorist organizations. To support the reforms already underway
in the region, the United States and its G-8 partners joined at the
2004 Sea Island Summit to launch the Broader Middle East and North
Africa (BMENA) Initiative in partnership with governments and civil
society groups from the region. BMENA includes initiatives to increase
democratic participation, promote the development of civil society,
fight illiteracy, and support job-creating small businesses. These
reforms will allow the people of the Broader Middle East more
opportunity to have a say in the direction their societies are taking
and help combat extremism.
As a matter of United States policy, development is central to the
President's National Security Strategy. Well-conceived and targeted aid
is a potential leveraging instrument that can help countries implement
sound policies, reducing any attraction that anti-Western terrorist
groups may have in failing states.
The Millennium Challenge Account represents a new compact for
development--a new way of doing business. It provides assistance to
those countries that rule justly, invest in their people and encourage
economic freedom. Good governance, which attracts investment and allows
the private sector to flourish, not foreign aid, is the key to economic
development. U.S. trade and investment flows to the developing world
dwarf our foreign aid. Unutilized capital in developing countries,
owing to weak policies and poor property rights, is estimated to be as
high as $9 trillion.
Debt relief for the poorest countries is another element of our
development strategy. Our long-standing support for the Heavily
Indebted Poor Countries (HIPC)
initiative promotes debt sustainability and enables the poorest
countries to devote additional resources to reducing poverty and
promoting economic growth.
Our aggressive multilateral and bilateral trade agenda to open
agricultural and nonagricultural markets and liberalize financial
services, transportation, telecommunications, and government
procurement all support development. Free trade and open markets can be
drivers for greater prosperity and job opportunities, especially for
the young people in these key regions who are thirsting for a stake in
the future. Under the President's vision for a Middle East Free Trade
Area (MEFTA) by 2013, the United States has concluded a bilateral free
trade agreement with Jordan. Agreements with Morocco and Bahrain should
go into effect in the near future; and Free Trade Agreement (FTA) talks
with Oman and the United Arab Emirates have just been launched. We also
have Trade and Investment Framework Agreements (TIFA), which typically
serve as precursors to an FTA, in place with most Arab countries. We
are also aiming to conclude a TIFA with Afghanistan. The United States
is working with countries in both the Middle East and South Asia, such
as Saudi Arabia and Afghanistan, to assist them in their efforts to
join the World Trade Organization and become more fully integrated into
the global trading system.
Bilateral Investment Treaties (BIT's) are another tool to promote
the adoption of market-oriented economic policies that can promote
growth and new employment opportunities. Historically, investors in
many countries in the Middle East and South Asia have too often faced
discrimination or otherwise been treated in a biased and nontransparent
manner by host governments. As a result, foreign investors have turned
elsewhere. Our bilateral investment treaties address this problem by
assuring that certain core investment protections are available to
investors, and by providing access to an independent, nonpolitical
mechanism for investors to enforce those protections. We have held two
rounds of BIT negotiations with Pakistan since February, with a further
round likely in August. Saudi Arabia has expressed interest in
exploratory discussions on possible BIT negotiations, and we have also
identified Algeria as a possible BIT candidate.
Capacity Building
On the technical assistance front, the interagency Terrorist
Finance Working Group (TFWG), chaired by the State Department, has
provided over $11.5 million in Foreign Assistance funding to provide
technical assistance and training to develop and reinforce
counterterrorist financing/anti-money laundering (CTF/AML)
regimes of frontline states, many of which are in the Middle East and
South Asia regions. To date, over twenty U.S. Government offices and
agencies participating in the TFWG, which include the Justice,
Treasury, and Homeland Security Departments and financial regulatory
agencies, have provided assistance to eighteen countries on five
different continents including Saudi Arabia, the UAE, Kuwait, Qatar,
Jordan, and Egypt in the Middle East and Bangladesh and Pakistan in
South Asia regions. These comprehensive training and technical
assistance programs include legislative drafting, financial regulatory
training, Financial Intelligence Unit (FIU) development, law
enforcement training, and prosecutorial/judicial development.
We have provided several countries in the Gulf and South Asia with
different types of training related to sound counterterrorist finance
practices, including the detection of trade-based money laundering
(moving money for criminal purposes by manipulation of trade
documents), customs training, antiterrorist finance techniques, and
case studies for bank examiners, and general financial investigative
skills for law enforcement/counterterrorist officials. Our
international partners have welcomed this type of training, and we plan
to provide it to other vulnerable jurisdictions in other regions.
Burden sharing with our key coalition partners is an emerging
success story. For instance, the Governments of Australia, New Zealand
and the United Kingdom, as well as the EU, and the Asian Development
Bank, have significant technical assistance initiatives underway in
countries such as the Philippines, Indonesia, Pakistan, Malaysia, and
Egypt. We have also funded the UN Global Program Against Money
Laundering to place a yearlong mentor in the Philippines to assist with
further development of its FIU. Despite its importance in the overall
counterterrorism effort, and all the discussions about it, relatively
few dollars are devoted to training and technical assistance for AML
and CTF. Congress could strengthen this tool by fully supporting the
Administration's funding request for this crucial task.
Areas of Focused Cooperation
The Administration is actively involved in combating terrorist
financing through partnerships we have established throughout the
Middle East and South Asia. These activities rely on the full range of
tools in our toolkit.
Saudi Arabia
We are working on this approach with many countries, but I want to
highlight for you the range of activities in Saudi Arabia, where we
have used each of these elements in a process steered by the NSC-led
Terrorist Finance PCC. We have instituted a regular high-level
diplomatic effort to urge enhanced emphasis by the Saudis on combating
terrorist finance. Homeland Security Advisor Frances Townsend has
traveled regularly to Saudi Arabia to engage with the highest-level
Saudi authorities on this issue. The U.S. Ambassador to Saudi Arabia
and his staff also reinforce these messages in their daily dialogue
with a wide range of Saudi officials.
We have jointly designated, with the Saudis, over a dozen Saudi-
related entities and multiple individuals under UNSCR 1267.
As part of a State-led interagency assistance program, Federal
banking regulators have provided specialized anti-money laundering and
counter terrorist financing training to their Saudi counterparts.
Demonstrating its commitment to address systemic factors
contributing to the flow of funds to terrorists, Saudi Arabia is
working to establish a Charities Commission to regulate all charitable
donations leaving the Kingdom. Saudi Arabia has made important changes
to its banking and charity systems to help strangle the funds that
support Al Qaeda. Saudi Arabia's new banking regulations place strict
controls on accounts held by charities. Saudi Arabia has also ordered
an end to the collection of donations at mosques and instructed retail
establishments to remove charity collection boxes from their premises.
These steps have been extremely
challenging for the Saudi government, but they have been ordered
because it understands that terrorists are more likely to use funds
collected anonymously and without an audit trail than those that move
through regular banking channels. We believe that Saudi actions have,
in fact, significantly reduced the flow of cash from Saudi Arabia to Al
Qaeda and other terrorist groups in the region.
The Saudi Government has continued to publicize counterterrorism
efforts and to speak out denouncing terrorism. The declaration from the
February 2005 International Counterterrorism Conference, hosted by the
Saudi Government, in Riyadh stated that there can be no justification
for terrorism and called for greater religious tolerance. Homeland
Security Advisor Townsend led a large U.S. interagency delegation to
the conference and spoke at the plenary session, emphasizing the need
to block the financing of terrorism. I participated in the working
group on terrorist finance. The Saudi Government plans to establish an
international counterterrorism center in Riyadh which can further
international efforts at curbing all aspects of terrorism, including
terrorist finance. We plan to continue to work with the Saudis on ways
to make this center most effective. On the issue of greater religious
tolerance, the Saudi Government, on its own initiative, recently
completed a comprehensive revision of textbooks to ``remove
objectionable language,'' and these new textbooks are now being used in
Saudi schools. In 2005, the Saudis intensified their wide-ranging
antiterror public relations campaign. The campaign condemns terrorism
and encourages moderation through statements by politicians and
religious leaders. A mix of television programs, advertisements, and
billboards depict the graphic results of terrorism to send a strong
antiterror message to the Saudi public. For the last 4 years, the State
Department has sponsored special International Visitors programs for
Saudi religious educators, to expose them to the nature of U.S.
religious diversity and the role of religion in U.S. society. Two
groups of 10 had visited so far in fiscal year 2005, with another group
of 10 scheduled in the fall.
Saudi Arabia has been working with us for a year and a half in the
context of the Joint Task Force on Terrorist Financing, led on the U.S.
side by the FBI. As part of the State-led interagency counterterrorist
financing assistance program, experts from the FBI and IRS have
completed a training module designed to strengthen the financial
investigative capabilities of the Saudi security forces, with more
advanced courses to follow. The Department of Homeland Security's
Bureau of Immigration and Customs Enforcement (ICE) will provide a week
of cash courier-related training to Saudi customs officials starting
July 16. That being said, this remains a work in progress. We have
reason to believe that the new task force on terrorist financing will
be effective, but we need to see results.
We believe the Saudi Arabian Government is implementing its new
charity regulations, but there too, we continue to stress in our
discussions with the Saudis the need for full implementation, including
a fully functioning Charities Commission. Additionally, appropriate
regulatory oversight of organizations headquartered in the Kingdom such
as the World Muslim League, the International Islamic Relief
Organization (IIRO) and the World Assembly of Muslim Youth (WAMY) is
absolutely necessary. The Saudi Government is working to train
personnel to staff its nascent Financial Intelligence Unit (FIU) and we
will encourage the Saudi FIU to join the Egmont Group in 2006. On June
19, a Ministry of Interior spokesman announced that a ``special
department for tracing illegal financial activities in the Kingdom''
(the FIU) will be completed soon. The September 2003 FATF mutual
assessment of Saudi Arabia found that the Kingdom has taken essential
steps--closer bank supervision, tighter banking laws, enhanced
oversight--critical to curbing terrorist financing and money
laundering. On June 14, for example, the Council of Ministers adopted a
recommendation that private donations to beneficiaries outside the
Kingdom be channeled only through the National Commission for Relief
and Charitable Work Abroad. There is more to do, and we will continue
to press ahead with our efforts with the Saudi Arabian Government and
with other governments in the region.
Beyond these activities, the Saudis are also continuing to fight
terrorism on the ground. On June 28, Saudi Arabia issued a new list of
36 ``most wanted'' terrorists in the Kingdom. At least one has been
killed and one has surrendered since the list was released.
Other Gulf States
The governments of the Arabian Peninsula are themselves on the
front lines in the war on terrorism, and have become essential partners
of the United States in countering the threat of terrorism in the
region. We have developed highly cooperative and mutually beneficial
relations with the Gulf States in the areas of law enforcement,
intelligence sharing, and terrorist finance. However, there is still
more that can be done. We will continue high-level engagement and will
focus on sustaining the capacity of these governments to effectively
address the terrorist threat.
Our efforts to combat the financing of terrorism are working, and
now Al Qaeda and other terrorist groups are increasingly resorting to
cash couriers to move their funds across borders to fund their
terrorist activities. The USG is working with the governments in the
Gulf to combat the illicit use of cash couriers, which is especially
pertinent to these cash-based economies. We have recently provided
training to the Saudi Customs Service to identify cash couriers. We
look forward to supporting these governments as they enhance their cash
courier regulations. Additionally, FATF issued Special Recommendation
IX in October 2004, under which member countries should ensure that
they have measures in place to detect, and appropriately sanction,
those moving currency if suspected of money laundering or terrorist
financing.
The Gulf States have made significant progress to improve their
ability to combat terrorist financing and have worked closely with us
in this area. These nations have diligently implemented UNSC sanctions.
Kuwait formed a ministerial committee to develop strategies to
combat terrorism and extremism, and forbade Kuwaiti Ministries and
other institutions from extending official invitations to 26 Saudi
clerics who reportedly signed a statement in support of Jihad in Iraq.
There are regular consultations between United States and Kuwaiti
officials on ways to strengthen measures to combat money laundering and
terrorist finance. During a recent visit to Kuwait by Treasury Deputy
Assistant Secretary Daniel Glaser, the Kuwaitis discussed some of the
additional measures they are taking to combat terrorist financing. The
GOK has formed a working group to draft a new piece of legislation that
would specifically criminalize terrorist finance and strengthen
Kuwait's anti-money laundering/terrorist finance (AML/TF) regime. The
legislation is intended to address weaknesses in Kuwait's current
antiterrorist finance legal regime (absence of a law specifically
criminalizing terrorist finance; prohibition of direct information-
sharing by the Financial Intelligence Unit (FIU) without prior case-by-
case approval of the Public Prosecutor's Office; lack of restrictions
on cash couriers). The USG has offered, and the GOK has accepted, USDOJ
Office of Overseas Prosecutorial Development, Assistance, and Training
(OPDAT) assistance in reviewing Kuwait's legislation. GOK officials
have also indicated that they may ask the IMF and FinCEN for
assistance. The Embassy is also working with the Department of Justice,
the Federal Reserve, and other agencies on a counterterrorism training
package for the Government of Kuwait.
In November 2004, Bahrain hosted the inaugural meeting of the
Middle East and North Africa (MENA) FATF, which will promote the
implementation of the FATF Recommendations to combat money laundering
and terrorist finance. In April 2005, Bahrain hosted a 2-day plenary
session of the MENAFATF followed by a 2-day anti-money laundering/
counterterrorist finance workshop cohosted by the World Bank and IMF.
The UAE aggressively enforces anti-money laundering regulations and
in 2004 enacted legislation criminalizing terror finance. In April, the
UAE hosted the third international conference where ways to prevent use
of the hawala (informal money transfer) system by terrorist financiers
was discussed. We sent U.S. delegates and a speaker to this conference,
and over 400 participants from 74 different countries attended.
Conference attendees included representatives from financial
institutions, Central Banks, law enforcement agencies, FATF, the IMF,
and the World Bank, as well as other international officials involved
in regulating money transfer systems. The government registers hawala
dealers.
Oman has implemented a tight anti-money laundering regime that
monitors unusual transactions. Financial institutions plan to verify
customer identities using sophisticated biometrics technology.
Qatar has enacted laws to combat terrorist financing and to monitor
all domestic and international charity activities.
Yemen routinely cooperates with United States law enforcement and
took action against Al Qaeda by arresting several individuals suspected
of Al Qaeda ties and prosecuting the perpetrators of several terrorist
acts, including the 2002 attack on the USS Cole.
We have conducted Anti-Terrorism Assistance (ATA) programs with all
of the Arabian Peninsula states.
Now that MENAFATF is set up, it needs to become an effective,
practicing institution. Members of MENAFATF should all set up
operational FIU's, conduct mutual assessments, establish best
practices, and meet overall FATF standards.
Jordan
The Government of Jordan has cooperated with us on a wide range of
terrorist finance issues, including designations at the UN. We urge
passage of the new anti-money laundering legislation, which will
strengthen significantly Jordan's legal basis for tackling the
financing of terrorism and its international cooperation on AML and
counter-terrorism financing cases.
Syria
In May 2004, Treasury designated the Commercial Bank of Syria (CBS)
as a ``primary money laundering concern'' pursuant to Section 311 of
the USA PATRIOT Act and proposed to implement a special measure against
the bank. Since then, we have worked with the Syrian Government and the
CBS to strengthen their anti-money laundering controls and their
cooperation with the U.S. on money laundering and terrorist financing
issues. We have not implemented the special measure, which would
require U.S. financial institutions to sever their correspondent
relationships with CBS, pending an assessment of Syrian progress toward
resolving United States concerns. In addition, the Syrians joined us on
the submission of Sulayman Khalid Darwish to the UN 1267 Committee.
However, the Syrian Government needs to do more to address United
States concerns about Syria's continued efforts to influence Lebanese
political developments, its pursuit of WMD, and the use of Syrian
territory by those supporting terrorism and the insurgency in Iraq. On
June 9, the Treasury Department designated a Syrian-based entity and
its two managers pursuant to EO 13315, which is aimed at blocking the
property of the former Iraqi regime or those who acted for on its
behalf. On June 29, the Treasury Department designated another Syrian
entity pursuant to its newly issued Executive Order on WMD
Proliferation Financing. On June 30, the Treasury Department designated
two Syrians for an assets freeze pursuant to the provision in EO 13338
that is aimed at financially isolating those individuals and entities
contributing to the Syrian Government's military and security presence
in Lebanon.
South Asia
South Asia, and especially Pakistan, is a priority region for
counterterrorist financing, due to the presence of Al Qaeda and other
terrorist groups, porous borders, and cash-based economies that often
operate through informal mechanisms, such as hawala. All countries in
the region need to improve their terrorist financing regimes to meet
international standards, including the establishment of functioning
Financial Intelligence Units. Both political will and technical
assistance are needed to make this region a more effective partner.
Turning to Pakistan specifically, we welcome the concrete actions
it has taken to implement its obligations under UN Security Council
Resolutions, including the freezing of over $10 million of Al Qaeda
assets. Pakistan has also apprehended terrorists, including Abu Farraj
Al Libbi, Al Qaeda's operational leader. We are encouraged by
Pakistan's concern about the infiltration of terrorist groups into
charitable organizations, and would welcome the opportunity to provide
technical assistance to help Pakistan meet international standards on
preventing abuse of its nonprofit sector.
We have provided Pakistan assistance on drafting an anti-money
laundering/counterterrorist financing (AML/CTF) law that meets
international standards, but this legislation is still awaiting
parliamentary consideration. As soon as a law that meets international
standards is enacted, we will be able to accelerate training efforts,
including assistance for the establishment of a Financial Intelligence
Unit (FIU). In the absence of an anti-money laundering and
counterterrorism financing law, the State Bank of Pakistan has
introduced FATF-compliant regulations in know-your-customer policy,
record retention, due diligence of correspondent banks, and reporting
suspicious transactions. Also in compliance with FATF recommendations,
the Securities and Exchange Commission of Pakistan has applied know-
your-customer regulations to stock exchanges, trusts, and other nonbank
financial institutions. All settlements exceeding Rs 50,000 ($840) must
be performed by check or bank draft, as opposed to cash.
Afghanistan recently passed anti-money laundering and
counterterrorist financing legislation, and many efforts are being made
to strengthen police and customs forces. However, there remain few
resources and little expertise to combat financial crimes, or to
produce meaningful financial intelligence, and they have requested the
United States for assistance in building capacity to do so.
Arrangements are underway to send an assessment team. The most
fundamental obstacles continue to be legal, cultural, and historical
factors that many times conflict with more Western-style proposed
reforms to the financial sector generally.
In India, the Prevention of Money Laundering Act (PMLA) became
effective on July 1. The Act provides the statutory basis for the
Financial Intelligence Unit (FIU) to perform its functions. It
criminalizes money laundering and requires banks and other financial
institutions and intermediaries to report individual transactions
valued over $23,000 to the FIU. Two accounts belonging to terrorist
individuals/entities have been identified, but the Government of India
(GOI) has not frozen any assets to date. It is aware of the UN 1267
Committee list, however, and has conducted investigations. India has
indicated that it wants to join FATF. However, at a recent FATF Plenary
meeting in Paris, concerns were raised regarding India's ability to
provide effective international cooperation in a timely manner, and to
extend mutual legal assistance. The GOI maintains tight controls over
charities, which are required to register with the government. The
November 2004 amendment of the 1967 Unlawful Activities (Prevention)
Act criminalized terrorist financing.
Speaking generally, South Asian countries lack sophisticated tools
to combat the financing of terrorism. Not one country in the region is
a member of the Egmont Group of countries with operational FIU's, which
is unusual given the large numbers and regional spread of Egmont's
membership. Anti-money laundering programs also tend to be absent or
not up to international standards. Nonetheless, there is a degree of
interest in all countries of the region, and we have seen some
progress.
Efforts are underway to develop and implement international AML/CTF
standards bilaterally and regionally through such organizations such as
the Asia Pacific Group on Money Laundering (APG). Bilaterally the
United States has conducted training and technical assistance
assessments for most countries in South Asia. We have provided AML/CTF
legal drafting assistance, financial regulatory training, and FIU
development support. In Bangladesh we support a Resident Legal Advisor
to assist authorities in drafting and implementing AML/CTF laws as well
as providing specialized training for prosecutors and other law
enforcement officials.
Designations and Asset Freezes: Only Part of the Picture
The international designations and asset freeze process has helped
us develop and deepen a set of invaluable long-term relationships with
our interagency and international partners. Through this collaborative
international effort, we have built cooperation and the political will
necessary to fight terrorism, both through designations and asset
freezes, as well as through operational law enforcement actions. As
described above, U.S. Government agencies meet regularly to identify,
track, and pursue terrorist financing targets and to determine, on a
case-by-case basis, which type of action is most appropriate.
Designation for asset freezing should not come at the expense of taking
appropriate law enforcement action. On the contrary, the two approaches
frequently complement each other. There are cases where operational law
enforcement action can be initiated quickly to trace, prosecute, and
shut down terrorists. In other cases, for instance where long-term
investigations are under way, the better option may be to designate for
asset freezing in order to stop the flow of money that might be used to
carry out terrorist activity until law enforcement actions can be
taken.
We have used multilateral asset freezes, together with technical
assistance and the FATF multilateral standard setting process, as
valuable devices to isolate terrorist financiers, drive them out of the
formal financial system, and unite the international community through
collective action. In these cases, designations are
preventative, making it harder for terrorists and their supporters to
operate. We continue to work together with our international partners
to strengthen the multilateral designation process. By carefully
working with our allies, we seek to build international consensus,
thereby preventing unwanted delays in the process. We urge all foreign
governments to fulfill their UN obligations to freeze assets without
delay. In cases where an individual or entity assumes a new name, we
initiate action to designate the alias, thwarting their efforts to
simply continue ``business as usual'' under a new name. These actions
prevent open fundraising, diminish support to illicit charities, and
act as an element of diplomacy to demonstrate international resolve.
In the fight against global terrorism, the Administration must
continue to use vigorously all of the tools at its disposal--including
designations/asset freezing, law
enforcement/intelligence cooperation, and the establishment and
enforcement of international norms and standards. Given that the money
that gets into the hands of terrorists flows around the world, the only
way we will be successful in drying up their financial resources is
through continued, active U.S. engagement with allies, friends, and
other countries around the globe. We must continue to broaden and
deepen our efforts worldwide. These efforts have paid off--and they
will continue to do so.
The Department of State plays a pivotal role in, and adds great
value to, this broadening and deepening of international cooperation.
Officers in our embassies and in Washington bring their experience to
bear in judging the best approach to a specific terrorist or group in a
specific country or region. Their political, economic, and cultural
expertise allows them to weigh the pros and cons of various approaches
given the other political and economic dynamics of the countries whose
help we are enlisting in the war against terrorism. There are no ``off-
the-shelf '' answers in this field. Each case is different, and the
State Department is uniquely placed to help weigh options and craft
tailor-made strategies to produce effective action.
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PREPARED STATEMENT OF DENNIS M. LORMEL
Senior Vice President, Anti-Money Laundering
Corporate Risk International, Fairfax, Virginia
July 13, 2005
Good morning Chairman Shelby and distinguished Members of the
Committee. Thank you for affording me the opportunity to participate in
this forum. I applaud the time, attention and consideration you have
committed to the extremely complex issue of terrorist financing. In my
previous position as Chief, Terrorist Financing Operations Section
(TFOS), Counterterrorism Division (CTD), Federal Bureau of
Investigation (FBI), I testified and/or participated in numerous
Congressional hearings and briefings. In addition, in many instances, I
was responsible for preparing the written statements of other FBI
executives in hearings which focused on terrorist financing. This is a
subject which is extremely important to me because I have witnessed
first hand investigative successes which have disrupted or deterred
funding intended to support terrorist activities. I am an ardent
believer that terrorist financing is a critical component of the war on
terrorism.
Terrorist financing is every bit as challenging today as it was in
the immediate aftermath of September 11, 2001 and as it was one year
ago. Law enforcement, regulators, and intelligence agencies here, in
the United States, and abroad, have achieved noteworthy and meaningful
accomplishments. New proactive and progressive methodologies have been
developed and implemented in furtherance of such efforts. However,
lingering concerns and the resiliency of terrorists to adapt to change,
coupled with the ease of exploitation of systemic vulnerabilities in
the financial sector will perpetuate the challenge of addressing the
issues presented by terrorist financing.
By way of background, immediately following September 11, I was
responsible for the formation and oversight of the FBI led,
multiagency, Financial Review Group, which evolved into the TFOS. In
that capacity, my perspective was government and investigative driven.
In my current position, as Senior Vice President, Anti-Money Laundering
(AML), Corporate Risk International, I continue to address AML and
terrorist financing issues. My perspective has shifted to one that is
industry and compliance driven. This provides me with a unique
understanding of the responsibilities, sensitivities, challenges, and
frustrations experienced by the Government and financial sectors in
dealing with AML and terrorist financing considerations.
One fact is quite evident; those responsible for addressing
terrorist financing in government and in industry share the desire and
resolve to deny terrorists funding mechanisms. The level of cooperation
between the Government and the financial sector has been consistently
outstanding since September 11. Overall, financial firms have been
vigilant with respect to AML and terrorist financing compliance
consideration. However, an area of concern, which warrants this
Committee's continued scrutiny, pertains to the issues involving the
benefits and burdens of Bank Secrecy Act (BSA) reporting requirements.
Such issues include adequacy of suspicious activity reporting, lack of
guidance by regulators, consistency of regulatory examinations, and
feedback from the Government to the financial sector concerning results
of suspicious activity reporting. Interested parties on both sides of
this issue need to do more to establish a middle ground in terms of
better understanding their respective sensitivities and balancing the
benefits and burdens of BSA reporting requirements. The Financial
Crimes Enforcement Network (FinCEN) and the American Bankers
Association (ABA) have taken a leadership role in addressing and
resolving these issues through the Bank Secrecy Act Advisory Group.
Bill Fox, Director, FinCEN and John Byrne, Director, Center for
Regulatory Compliance, ABA, deserve recognition for visibly leading
this effort in a responsible manner. As a result of the regulators and
industry constructively addressing the issue of inconsistent regulatory
examinations, the Bank Secrecy Act/Anti-Money Laundering
Examination Manual was released on June 30, 2005. This was an important
step forward in ensuring consistent future bank examinations are
conducted and in emphasizing the responsibility of banking
organizations concerning AML and terrorist financing BSA compliance.
Although financial activity that supports terrorism is often
simplistic, terrorist financing presents a myriad of complex
challenges. By its nature, in most applications, the movement of funds
to support terrorism is through legal and undetectable means. We should
be mindful that terrorist financing encompasses a wide variety of
activities. There are fundraising mechanisms, operational and
administrative support mechanisms, and other considerations, which
require use of the formal and informal financial systems. This variance
is exacerbated by the range of positions and responsibilities
individual terrorists and terrorist supporters assume to include
leaders, fundraisers, financiers, facilitators, operatives, and suicide
bombers. Financial requirements and funding flows for the full gamut of
terrorists and terrorist supporters vary according to factors to
include their role, location, culture, and affiliations. This is
particularly true with respect to the Middle East.
Terrorist and terrorist financing warning signs are constantly
evolving due to changing dynamics in world events, such as the global
response to terrorism and the ability of terrorists to adapt to
changing dynamics. Like characteristic indicators, warning signs are
nonstatic. For example, in response to the September 11 terrorist
attacks, the U.S. and international community took decisive steps to
disrupt and dismantle terrorist groups and their financing. In return,
terrorists adapted new methodologies to exploit systemic
vulnerabilities. The same cycle was repeated following other
significant terrorist activities, such as in the aftermath of the
Madrid bombings of March 11, 2004. As the investigation into the London
bombings of July 7, 2005, unfolds, it will be important to assess the
methodologies employed by the terrorist group responsible for the
attack, to include the operation, logistical support, communications,
and financing.
One of the true challenges in dealing with terrorist financing is
the recognition of the dynamics of change and understanding that
terrorist and terrorist financing methodologies will constantly change
to avoid detection. As this Committee continues hearings addressing
terrorist financing, it is recommended you assess mechanisms developed
by Government agencies and the private sector to identify emerging
trends adapted by terrorist and criminal elements. In view of the
international response to the London bombings, terrorist groups will
likely be challenged to again adapt to changing dynamics.
Lessons learned since September 11 should play a significant role
in formulating future detective and preventive measures. First, we must
understand vulnerabilities in terms of systemic societal
vulnerabilities and areas of vulnerability to terrorist interests.
Systemic vulnerabilities represent systemic weaknesses that terrorists
and criminal elements, especially fraudsters, exploit in furtherance of
their activities. It is incumbent that individuals and entities
responsible for controls recognize such weaknesses and implement
mechanisms to minimize such exploitation.
The unfortunate reality is that terrorists will always have access
to financing. We cannot be discouraged by this fact and must use every
tool in our arsenal to disrupt and minimize funding flows to
terrorists. The greater the level of disruption the more difficult it
is for terrorists to raise funds and carry out terrorist operations. On
September 25, 2003, former Treasury General Counsel David Aufhauser
stated before this Committee ``Money is the fuel for the enterprise of
terror. It may also be its Achilles' heel. It can leave a signature, an
audit trail, which, once discovered, might well prove the best single
means of identification and capture of terrorists and pinpointing their
donors. Financial records are literally the diaries of terror. Stopping
the flow of money to terrorists may be one of the very best ways we
have of stopping terror altogether. That is a dramatic statement, but
it is not possible to overstate the importance of the campaign against
terrorist financing. If you follow and stop the money, you have gone a
long way to diminish the killing and destruction.''
Like terrorism itself, terrorist financing is not limited to the
homeland but is global in scope. In dealing with terrorist financing,
all solutions must be considered. Outreach initiatives between
government and private sectors within the U.S. and internationally is
important in establishing frameworks for cooperation and information
sharing.
In view of the combination of law enforcement, regulatory, and
diplomatic actions taken in the U.S. and internationally, certain of
the lucrative funding sources, such as charity and wealthy donors, have
significantly diminished. Anecdotal information points to the
difficulty terrorists have in raising, moving and storing money. This
has been particularly true in the Middle East where cases such as Holy
Land Foundation, Al-Haramain Islamic Foundation and the Islamic
American Relief Agency have achieved significant deterrence value. As a
result, there has been a greater reliance on criminal activities as a
terrorist funding mechanism. This is noteworthy because it exposes
terrorists to greater risk of detection.
Since September 11, terrorist financing methodologies have been
changing. Terrorists rely on two tracks of funding, the formal and
informal financial systems. To operate in western society, terrorists
must rely more on formal mechanisms. To operate in less advanced
financial venues, such as Afghanistan, more informal mechanisms are
used. Following September 11, Al Qaeda took steps to exploit informal
financial structures in the Middle East and other venues, and to use
formal facilities on a more limited basis because of the investigative
scrutiny and international pressure placed on the formal banking
system. As just illustrated, the degree one system is used in
preference over the other depends on a number of factors to include
culture, sophistication of the banking system in various parts of the
world, accessibility, timing, situational considerations, the level of
investigative scrutiny, and other factors. Whichever system is used,
terrorists move funds with the intent to avoid attention and detection.
The specific regulatory and investigative focus on terrorist
financing surfaced following September 11. Prior to that, there were no
consistent and continuous mechanisms to prevent or deter terrorists
from raising and moving funds. Anti-terrorist financing efforts, both
domestically and internationally, have consistently improved and
evolved with growth and maturation in an incremental fashion. It should
be noted that mechanisms developed and implemented in the U.S. have
been in the forefront worldwide. For example, the template established
by the FBI's TFOS, has been mirrored by numerous countries. Even with
being further advanced, it is incumbent that U.S. agencies continue to
enhance their capabilities on a steady incremental basis with a focus
on emerging trends.
Agencies should gauge, assess, and utilize financial information in
three dimensions, strategic, tactical, and historic. Accomplishments
should also be measured in accordance with these dimensions. Strategic
financial information is intelligence oriented and should be used for
trend analysis. This is an area that is emerging and whose law
enforcement and intelligence functionality has not reached it's
potential. Stuart Levey, Under Secretary Terrorism and Financial
Intelligence, U.S. Department of the Treasury, is in the process of
developing a strategic intelligence capability, collateral to his
primary responsibility of cutting off the flow of support to
international terrorist groups. It is important that Under Secretary
Levey strive to articulate to the government community the strategic
mission and value of his recently formed entity in order to establish a
sense of credibility and fraternity.
After we established the TFOS at the FBI, the importance of
strategic intelligence was a primary consideration. We established a
Financial Intelligence Unit, to produce actionable financial
intelligence. A component of this unit was the Proactive Exploits
Group. This group has evolved into a new unit, that has developed and
implemented advanced technological and data mining capabilities. It's
ability to access and analyze BSA information, in conjunction with
FinCEN, and other data sources, has come to fruition and is generating
significant intelligence information that is actionable intelligence
and can be utilized to initiate new investigations or supplement
ongoing investigations. The value of this intelligence cannot be
understated. Often times it is a traditional financial crime that
enables the FBI to execute search warrants, make arrests, and in
certain instances gain the cooperation of terrorist subjects. The
robust data mining search capabilities of the Proactive Exploits Group
have enabled the FBI to identify and link pertinent data from multiple
date sources in a time sensitive, effective and efficient manner. I
encourage the Committee request a briefing about the emerging
capabilities of the Proactive Exploits Unit at the TFOS, FBI.
FinCEN is acutely aware of the differences between money laundering
and terrorist financing. In its quest to effectively differentiate
between the two, yet be able to collect and assess data to detect both
money laundering and terrorist financing, FinCEN developed BSA Direct.
The system, which is in the design and implementation phases, will
assist investigators at identifying anomalies, trends, and patterns.
BSA Direct will assist in the process of connecting the dots and
ferreting out money laundering and terrorist financing. It relies on
data mining and analytical applications with improved access for law
enforcement and regulators. It is anticipated that the BSA Direct
initiative will be the cornerstone of FinCEN's technology
architectures.
FinCEN Director Bill Fox considers his agency to be a ``collector''
of information. He believes it to be critically important to collect
the best quality of information and to share it with all constituencies
in furtherance of efforts to diminish money laundering and terrorist
financing. This underscores the critical importance of
Suspicious Activity Reports (SAR's). Individuals responsible for
completing and submitting SAR's should ensure they are thoroughly
completed.
This is one area where the Government and the financial sector need
to do a better job. The financial sector must move away from filing
defensive SAR's and ensure SAR's contain thorough descriptive
information. The Government, especially FinCEN and the FBI, has
developed more robust data mining capabilities, which can better link
descriptive data to terrorism investigations. In turn, the government
must do a better job of delineating new and emerging capabilities to
industry. In addition, the Government should more consistently provide
financial firms feedback concerning the investigative benefits derived
from information reported in SAR's.
The area that has generated the most significant level of success
has been the tactical investigative application of financial
information. In this context, financial information is used in a
tactical operational capacity. For instance, during my tenure at the
TFOS, FBI, we had a mechanism to track financial transactional
information which assisted a foreign intelligence service in preventing
six potential terrorist attacks in their country. The tracking and
tracing of financial information is an incredibly powerful financial
investigative tool. The tactical dimension is best suited to proactive
investigative techniques.
The historic approach is the most challenging because it is
reactive and relies on historic tracing of funds. As money is moved
from point of origination to point of receipt, the ability to trace
funds into the hands of terrorists becomes increasingly remote. This is
especially true when attempting to trace funds through conduits such as
charities and banks in the Middle East to groups such as Hamas and
Hezbollah, who are adept at disguising the end beneficiary of funds.
There is a school of thought which subscribes to the theory that
terrorist financing is not a significant component of the war on
terrorism and has limited impact. In part, that may be true when
looking at the historic dimension of terrorist financing. However, when
taken in context with the strategic and tactical dimensions, terrorist
financing plays a critically important role in the war on terrorism.
One of the most significant lessons learned in the post-September
11 environment is the importance of developing and implementing time
sensitive investigative techniques, particularly time sensitive
financial investigative techniques. The immediacy and severity of
terrorist threats require investigative strategies that present a sense
of urgency. More often than not, circumstances cause investigative
strategies to the threats at hand to be reactive and not proactive.
More focus must be dedicated to developing proactive investigative
techniques. One area where proactive investigative strategies can be
implemented is in terrorist financing. From a tactical standpoint,
strategies have been implemented which allow the near real time
tracking of financial transactions. To reiterate, this is a truly
powerful technique. It requires close coordination and cooperation
between law enforcement and the financial community. As mentioned
above, this methodology was used to assist another country to prevent
potential terrorist acts.
With specific focus on the Middle East, U.S. Government agencies
have made a consistent, for the most part coordinated, and concerted
effort to establish and maintain viable working relationships with
countries in that region. With respect to Al Qaeda, and the threat to
the region caused by Al Qaeda, most countries have been more willing to
openly cooperate with the United States. A prime example of this is
Saudi Arabia. In the aftermath of the May 12, 2003, bombings in Riyadh,
the Saudis became consistently engaged in the war on terrorism, whereas
before that, they were less consistent and more selectively engaged.
Countries such as Kuwait and Qatar have been formidable partners. The
recent threats posed by Al Qaeda in those venues have appeared to
strengthen their spirit of cooperation. In my experience, Jordan,
Israel, and Oman have been strong allies in combating terrorism. With
respect to the broader terrorist financing issues, the United Arab
Emirates (UAE) and Bahrain have been outstanding to deal with. Being
two of the principal financial centers in the region, their level of
cooperation has been critically important to the United States. As an
example, shortly after September 11, the UAE passed strong AML
provisions. In addition, they openly accepted training enabling them to
better implement and enforce AML and antiterrorism regimes. In
conjunction with the U.S. State Department's Coalition Building
initiative, the Internal Revenue Service (IRS) and the FBI's TFOS
provided a series of two week training courses in the UAE focused on
financial investigative techniques to include money laundering and
terrorist financing. The resulting goodwill led to development of a
close working relationship with the Central Bank in the UAE. This
enabled the FBI's TFOS to gain direct access to important banking
records.
As was the case in the United States, countries in the Middle East
and throughout the world have improved their ability to address
terrorist financing in an incremental fashion. The Financial Action
Task Force (FATF) is the most important vehicle in the world for
promoting uniform standards for governmental action against money
laundering. In November 2004, countries in the Middle East and North
African (MENA) region established the MENAFATF. The FATF, World Bank
International Monetary Fund and other groups have endorsed the
formation of the MENAFATF. The purpose of its establishment was to
create a platform for member states to better join forces with the
international community in the global fight against money laundering
and terrorist financing. One of the initial areas of focus for the
MENAFATF has been on the unregulated informal value transfer system
(frequently referred to as hawala or hundi). This system is one of the
most vulnerable areas for exploitation by criminals and terrorists. The
informal value transfer system is especially prevalent throughout the
MENA region and has grown throughout the world. The 14 founding members
of MENAFATF are Algeria, Bahrain, Egypt, Jordan, Kuwait, Lebanon,
Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, the UAE, and Yeman.
Lebanon currently holds the MENAFATF presidency and is leading it
commendably. Lebanon has progressed as a country in building anti-money
laundering and counter-terrorist financing mechanisms.
Qatar will be receiving training through a private security
consulting firm, which will include anti-money laundering and terrorist
financing components. Kuwait, the UAE, Bahrain, and Egypt have taken
active leadership roles in the MENAFATF.
Issues and concerns involving most countries in the Middle East in
their relations with the United States is not one of will or desire.
Their resolve for dealing with money laundering and terrorist financing
is generally strong. The issue is rather one of capacity in terms of
limited resources and capability. This is where a sustained training
initiative is critical to the incremental capacity building necessary
for these countries to progress. This specialized training places a
strain on the U.S. Government agencies involved, particularly State,
the IRS and the FBI.
Concerning organizations such as Hezbollah, Hamas and Palestinian
Islamic Jihad (PIJ), which have active fundraising mechanisms in the
United States, international consensus is lacking as to whether they
are terrorist organizations. Clearly, the United States has designated
them as such. The lack of consensus makes it more challenging to
receive information in certain instances. This is an area that the U.S.
Government must continue to push vigorously and regularly in an effort
to gain international consensus recognizing these groups as terrorist
organizations. This will become increasingly more difficult as Hamas
and Hezbollah, in particular, become more engaged in political
processes. With respect to Hezbollah, Hamas, and PIJ, the United States
has a very close working relationship with the Israelis. This is
especially true in matters concerning terrorist financing.
Saudi Arabia is one of the U.S. Government's most important, yet
heavily criticized, allies in the war on terrorism. Since the May 12,
2003, Al Qaeda attacks in Riyadh, the Saudis have been aggressively
involved in fighting Al Qaeda. Saudi Arabia has been one of the most
significant funding mechanisms for terrorist organizations, especially
Al Qaeda. The Saudis have enacted strong legislation concerning money
laundering and charitable giving in order to attempt to stem the flow
of funding to terrorists. They formed a Charities Commission to
regulate the giving and distribution of money for charitable purposes.
The Saudis have taken actions against charities to diminish the flow of
funds to terrorists. This was best illustrated by the closure of Al-
Haramain Islamic Foundation, the largest Saudi Charity. The Saudis have
received FATF acknowledgement for steps they have taken. However, the
Saudis are by their nature a closed society and as such lack
transparency. This is a matter of culture rather then intent. In any
case, the lack of transparency is a source of ongoing concern for the
United States. The State Department and National Security Counsel (NSC)
have worked very closely with the Saudis to ensure they do more then
merely enact laws and make statements about establishing certain
mechanisms, such as creation of a Financial Intelligence Unit (FIU).
Their lack of transparency makes this a daunting challenge. Recently,
Representative Sue Kelly (R-NY), took the Saudis to task in a hearing
she chaired in the House Financial Services Committee, Subcommittee on
Oversight and Investigations, and through a follow up letter and
subsequent visit to Saudi Arabia for failure to take substantive
actions such as establishment of a FIU. The Saudis, to their credit,
responded by providing their view and inviting Representative Kelly to
Saudi Arabia for further discussion. The Saudis have since identified
officers trained in financial crimes by the FBI through the Joint
Terrorism Financing Task Force (JTFTF) who have been designated for
assignment to the FIU. However, the FIU does not appear to be
functional at this juncture. A measure of the Saudis resolve concerning
formation of an FIU will be for them to join the Egmont Group, which
members consist of FIU's from 101 countries, who share information and
support for their respective AML programs. MENAFATF countries who are
members of the Egmont group include the UAE, Bahrain, Egypt, Lebanon,
and Qatar.
In May 2003, Saudi Arabia and the United States agreed to establish
the JTFTF, mentioned above. The purpose of the JTFTF was to establish a
mechanism for the consistent, continuous and timely exchange of
financial information of mutual benefit. The JTFTF is located in
Riyadh. FBI and IRS personnel are assigned in a capacity to facilitate
the exchange of information in a timely manner. The functionality of
the JTFTF is not a best case scenario situation but one that is a good
case scenario. The FBI and the Saudis are satisfied with the
information exchange and spirit of cooperation. An early sign of the
Saudis desire to succeed in this initiative was the Saudis willingness
to accept comprehensive financial training from the FBI and IRS. This
training was considered a foundation building step. Since then, the
flow of information has improved over time and benefited
counterterrorism investigations.
As numerous FBI and DOJ representatives have recently testified, to
include Director Mueller and Attorney General Gonzalez, at various
House and Senate hearings, the USA PATRIOT Act has served as an
invaluable tool and has contributed to significant investigative
results. It is incumbent that Congress renew those provisions due to
``sunset'' at the end of the year. This will ensure that investigative,
intelligence, and regulatory agencies maintain the level of ability to
proactively prevent or deter terrorist activities.
Terrorist financing investigations must consistently be conducted
in a time sensitive, time urgent manner. Two areas where this Committee
can be of assistance in that regard include supporting Congressional
approval for the FBI to issue administrative subpoenas in terrorism
cases and encouraging financial institutions to provide law enforcement
with the production of financial records in electronic format.
The FBI has administrative subpoena authority for investigations of
crimes to include drug trafficking, health care fraud, and child
exploitation. Such authority is lacking for terrorism cases. Approval
of administrative subpoenas for terrorism investigations would enhance
the FBI's ability to conduct time sensitive, time urgent
investigations. The Bureau has a proven record of issuing
administrative subpoenas in an appropriate manner. The FBI, as Director
Mueller has consistently stated, is mindful of and dedicated to
protecting the civil rights of the American people.
Testimony I was responsible for preparing for current FBI Deputy
Director John Pistole for a hearing before this Committee on September
25, 2003, discussed the importance of production of financial records
in electronic format. Again, in this era of time sensitivity, time
urgency, the ability to work with electronic documents instead of paper
documents is critical. Comments extracted from Mr. Pistole's statement
continue to be relevant today:
``One of the biggest challenges facing law enforcement when it
comes to financial records analysis is the unavailability of
financial records in electronic format . . .. Future law
enforcement investigations would be significantly enhanced if
financial institutions were to develop and adopt standards of
best practices for the storage and production of financial
records in electronic format. Countless hours and resources on
the part of private industry and the government could be saved
if these records were stored and produced in a format that
eliminated the need for investigators to reinput or type the
information back into financial analysis programs . . ..
However, as long as relevant records remain in paper form
whether held by the financial institution or the government,
investigators are impeded in their timely dissemination and
analysis. This can have an impact on our preventative
efforts.''
I encourage the Committee to address this issue in greater depth
with investigative agencies and the financial sector. This is one of
those areas where a middle ground needs to be better identified that
best addresses the interests and concerns of the two sides.
Timely and actionable information sharing initiatives are
critically important keys to succeeding in preventing terrorist attacks
and diminishing their ability to raise and move funds. There must be
continued consistent communications, cooperation and coordination in
the interagency and business communities across all lines domestically,
as well as internationally. All sectors must develop and maintain
strong working relationships. In certain instances, this will require
establishment of a middle ground to address impediments. Through risk
and vulnerability assessments, as well as through other mechanisms, we
must continue to identify emerging trends and systemic vulnerabilities.
Agencies and institutions must adapt and implement methodologies to
counter such trends and vulnerabilities. A final thought is that
regular candid operational assessments should be performed in order to
sustain the level of scrutiny necessary to disrupt and prevent
terrorist activities, and to ensure the most forward thinking deterrent
methodologies are developed and effectively employed.
PREPARED STATEMENT OF MAHMOUD A. EL-GAMAL, Ph.D.
Chair of Islamic Economics, Finance and Management, and
Professor of Economics and Statistics, Rice University--Houston, TX
July 13, 2005
Chairman Shelby, Ranking Member Sarbanes, and distinguished Members
of the Committee, thank you for inviting me to speak to you today about
the modes, strengths and weaknesses of Islamic finance as practiced in
the Middle East, narrowly defined.
The conclusion of my analysis, as presented below, is that there is
no reason--in theory--to suspect that Islamic finance would be
particularly immune or particularly vulnerable to abuse by money
launderers or terrorist financiers. In this regard, it is important to
recognize that Islamic finance utilizes relatively sophisticated
financial methods--originally devised for regulatory arbitrage
purposes--to synthesize modern financial practices from simple
contracts such as leases and sales. The emergence of those
sophisticated regulatory arbitrage techniques in the United States and
other developed economies has prompted regulators and enforcement
agencies in those countries to increase the level of sophistication of
their staff (hiring Ph.D. economists, MBA's, ex-bankers, etc.).
Unfortunately, regulators and enforcement officials in the middle-
east may possess significantly lower levels of sophistication than
Islamic finance practitioners who utilize state-of-the-art regulatory
arbitrage techniques. Moreover, the Islamic finance industry has been--
thus far--largely self-regulating. This suggests that
development of a comprehensive regulatory framework for Islamic
finance, and training regulators and enforcement officials in the
region, should be priorities for governments in the region, as well as
international financial institutions and other governments providing
technical assistance.
U.S. Treasury Efforts to Understand Islamic Finance
Islamic finance has attracted increasing levels of interest and
scrutiny in Washington recently, due to its phenomenal growth, but
especially following the terrorist attacks of September 11, 2001.
Shortly after those attacks, then Secretary of Treasury O'Neill and
Under Secretary Taylor visited Bahrain--one of the main centers of
Islamic finance in the Gulf Cooperation Council (GCC) region. They met
with various leading practitioners of Islamic finance in the area at
Citibank's facility in Manama. Needless to say, the primary concern
that prompted interest at the time was fear that Islamic finance may
invite disproportionate participation of terrorist financiers, and/or
exhibit particular vulnerabilities to abuse thereby.
Having learned some of the basics about Islamic financial practices
and regulation during the Secretary and Under Secretary's visit to
Bahrain, U.S. Treasury organized an ``Islamic Finance 101'' workshop in
April 2002, to educate Government as well as Capitol Hill staffers
about this fast-growing industry. Also, Treasury Secretary Snow and
then Under Secretary Taylor attended the Second International Islamic
Finance Conference held in Dubai, September 2003, where they gained
additional information and understanding about Islamic finance.
Following that second visit, Treasury decided to create a post of
``Scholar-in-Residence on Islamic Finance'', which I had the privilege
to occupy June through December 2004. During my tenure at Treasury, I
provided more than a dozen workshops for staffers of U.S. Departments,
Government agencies, regulators, and House staffers. In addition, we
coordinated our staff efforts with those of World Bank and
International Monetary Fund staffers, the latter having simultaneously
and independently increased their involvement in Islamic finance. The
interest of International Financial Institutions in Islamic finance
aims--in part--to ensure the
application of best practices in anti-money laundering and combating
the financing of terrorism. Those efforts also aim to integrate Islamic
finance within a regulatory framework that ensures systemic stability
and economic efficiency at national, regional, and global levels.
In the remainder of this written statement, I shall describe
briefly the roots of Islamic finance, its current modes of operation in
the Middle East, and its emerging regulatory framework in the region.
Before I proceed, I need to highlight two limitations of my testimony
before you:
1. I cannot quote any accurate figures regarding the size of
this industry, or its rate of growth, mainly due to the lack of
official and/or credible statistics from reliable and objective
sources. Recent media reports quoted British Financial Services
Authority estimates of assets under management in Islamic
finance in the range of US$200 to US$500 billion. Other semi-
official statements by GCC officials suggested that ``Islamic''
deposits account for 10 percent to 20 percent of total deposits
in those countries. However, with Islamic banking being
practiced by dedicated Islamic banks as well as conventional
banks, and with no official and publicly available data, one
cannot rely excessively on those guesstimates.
2. I recognize that one of your objectives for this hearing is
to obtain a better understanding of the implications of Islamic
financial modes of operation and regulatory framework for
efforts to combat money-laundering and terrorist financing
worldwide. I shall try my best to answer your questions in this
regard. However, I must admit that my understanding of this
area, and any statements that I may make about the relative
vulnerability or immunity of Islamic financial institutions to
abuse by money launderers and terrorist financiers, must be--
like myself--academic in nature.
Historical Roots of Islamic Finance
The Canonical Texts of Islam--echoing and elaborating on Biblical
Texts--forbade ``usury'' under the name riba (equivalent to the Hebrew
term ribit), classically interpreted as any interest charge on matured
debts or loans. While some Islamic scholars have argued for more
restrictive definitions of the forbidden riba, the vast majority of
contemporary Muslim jurists and scholars have equated the classical
term ``riba'' with ``interest.'' This equation has led to paradoxical
statements about Islamic finance being ``interest-free.'' In fact,
Islamic finance replaces interest on loans and pure debt instruments
(for example bonds) with interest characterized as rent in leases or
price mark-up in sales.
As Islamic finance began to take shape in the mid 1970's, jurists
also considered the more subtle prohibition of gharar (excessive risk
or uncertainty), which impacts modern forms of insurance, management
tools for credit and interest rate (rate of return) risks, derivatives,
etc. Islamic finance as practiced today aims to mimic modern financial
practices (banking products, insurance products, money and capital
market instruments, etc.) with variations on classical (medieval)
contract forms that were deemed devoid of forbidden riba and gharar.
The historical roots of Islamic finance date back to the 1950's and
1960's, and the theoretical literature from that period continues to
shape the industry's rhetoric to this day. Islamic finance was mainly
envisioned by leaders of Islamist movements, such as Abu al-'A`la al-
Mawdudi, Sayid Qutb, and M. Baqir al-Sadr. They created a field of
study known as ``Islamic economics'', which subsequently flourished
particularly in Pakistani and Indian-Muslim areas, and coincided with
political independence movements in various Muslim countries.
This literature gave rise to numerous hypotheses about how Islamic
finance would operate within an ``Islamic economy'', one envisioned to
thrive in an ``Islamic society'', ostensibly arising in newly
independent nations like Pakistan. The main paradigm that emerged
suggested that all finance would be interest-free, based on the sharing
of profits and losses. In particular, bank-alternatives were envisioned
to function on an equity basis, like mutual funds. Instead of lending,
Islamic banks were envisioned to engage in equity participations with
their clients, thus sharing in their profits and losses. The bank's
funds would in turn be raised through equity participation in the
bank's portfolios of investments, thus ``depositors'' would share in
the pooled profits or losses of the bank.
When the oil boom of the 1970's made Islamic banking a reality,
emerging Islamic banks--following a series of reported losses on their
financing--quickly learned to abandon profit and loss sharing in favor
of debt-based forms of financing. Thus, conventional bank loans were
replaced in Islamic banks with receivables from credit sales or leases.
More recently, other assets of conventional banks (including corporate
and sovereign bonds, asset backed securities, etc.) have been
replicated through Islamized structures. On the liabilities side,
however, Islamic banks have continued to maintain that ``investment
depositors'' must share in the banks' profits and losses, and Islamic
finance promoters have continued to speak of profit and loss sharing
generally as ``the ideal Islamic form of financing.''
Contemporary Methods of Islamic Finance
Contemporary Islamic finance emerged in the mid-1970's, with
funding from the oil-rich GCC region, following the first oil price
shock of 1973 (the industry has been booming in recent years, mainly
fueled by high oil prices). Among the first Islamic financial
institutions were Kuwait Finance House, Dubai Islamic Bank, and Faisal
Islamic Banks in Egypt and Sudan. The GCC region remains to-date the
primary financier of Islamic finance worldwide. In addition, countries
such as Saudi Arabia, which had originally resisted the growth of
Islamic finance within its own borders, have recently allowed the
``Islamization'' of some of their largest retail banks, including
National Commercial Bank of Saudi Arabia.
Indeed, while some of the earliest Islamic banks were pioneered and
funded by Saudis (Prince Muhammad b. Faisal Al-Saud and Sheikh Saleh
Kamel), those pioneers were not allowed to operate Islamic banks within
Saudi Arabia. The first Islamic bank in Saudi Arabia (and the largest
in the Middle East) was Al-Rajhi, which was only allowed to operate on
the condition of avoiding the use of ``Islamic'' in its name. In recent
years, excess liquidity in Saudi Arabia (due to high oil prices and
repatriation of funds after September 11, 2001) was migrating to
Bahrain and Dubai--which established themselves as competing centers of
Islamic banking in the region, attracting to Islamic finance
international financial providers such as Citi, HSBC, Credit Suisse,
UBS, etc. To retain those funds, Saudi Arabia finally allowed the
current trend of Islamization of its banking system to emerge. Given
contemporary Islamic banks' abilities to emulate most operations of
conventional banks, it is likely that banking systems within the GCC
will become mostly or completely ``Islamized'' within few years.
Financing Modes--Murabaha (Credit Sale with Mark-Up)
As mentioned in the previous section, Islamic banks started from
their earliest days in the late 1970's to mimic the asset structures of
conventional banks. The instrument of choice to replace loans was
murabaha (cost plus) financing. Under this arrangement, the bank would
first purchase the property desired by its customer, and then sell it
on credit at a mark-up price determined by market interest rates
(typically tied to the London Inter-bank Offer Rate--LIBOR; the
industry in GCC is heavily staffed and influenced by London-trained
bankers). Many innovations were introduced in this practice to
eliminate the bank's risk exposure beyond normal banking risks (such as
interest-rate, credit and liquidity risks). For instance, Islamic banks
were permitted to obtain binding promises by virtue of which customers
were obliged to buy financed properties from the bank once the latter
acquired them--thus eliminating nonbanking commercial risks.
In the early years of Islamic banking, this transaction was used
mainly for financing the purchase of durable goods (for example
automobiles, real estate, etc.), which made it tantamount to an
elaborate form of secured lending.\1\ However, the practice was soon
utilized for trade financing, within which it can be used easily to
synthesize conventional loans. For instance, a customer can obtain
financing for the purchase of $10 million-worth of aluminum or diamonds
(owing the bank, say, $11 million at a later date), and then sell the
commodities to obtain cash--thus obtaining credit without formally
violating the prohibition on interest-based loans.
---------------------------------------------------------------------------
\1\ Indeed, when this practice was applied in the United States by
United Bank of Kuwait, the OCC interpreted both murabaha financing, and
lease-based ijara financing (discussed below) as forms of secured
lending, see: OCC interpretive letters #806 of 1997 and #867 of 1999 at
www.occ.treas.gov.
---------------------------------------------------------------------------
Financing Modes--Tawarruq (Credit Sale at Markup Followed
by Spot Sale)
A retail banking variation on this multitrade synthetic-loan
transaction has emerged in recent years in GCC countries under the name
of tawarruq (literally: Monetization--of the traded commodity). Under
this form, the bank commonly performs all the necessary transactions to
synthesize a loan: Purchasing the commodity in its own name, selling it
to the customer on credit, and then selling it on behalf of the
customer for its cash price. Banks now have standing agreements with
commodities dealers for repeated use of their commodities in this type
of transaction, thus reducing transaction costs through large trading
volumes/frequencies, and logistical economies of scale. In addition,
agreements with dealers eliminate residual market risks (associated
with commodity prices) to which banks and customers may be exposed in
murabaha financing followed by independent cash-sale of the financed
property.
It is noteworthy that tawarruq was only deemed acceptable by a
small minority of Islamic jurists, most of whom later rejected its
systematic use by Islamic banks. Despite that general rejection by the
majority of jurists, this practice has been one of the fastest growing
forms of retail Islamic finance in the GCC.
Financing Modes--Ijara (Operating Lease)
Responding to criticism of credit-sale financing as thinly veiled
interest-based lending, Islamic bankers slowly migrated to lease
financing as a favorite alternative form of secured lending. In some
instances, operating lease forms adopted by Islamic financial
institutions also provided tax benefits in western jurisdictions, where
they were eventually used to structure corporate leveraged buyouts for
subsequent private placement to GCC investors.
More recently, the volume of lease-based Islamic financing has also
increased due to its potential for securitization. In this regard, the
majority of Muslim jurists have maintained that accounts receivable
(for example from credit sales) represent debts, which may not be
securitized or traded in secondary markets. In contrast, they argued,
lease receivables represent rent based on ownership of underlying
physical assets, and thus may be traded in secondary markets. The most
significant application of this paradigm has been in the area of
Islamic bond-alternatives.
Financing Methods--Lease-Based Long-Term Bonds
The Monetary Authority of Singapore recently estimated that the
outstanding volume of Islamic sukuk (an Arabic term meaning
certificates or bonds) worldwide stood at US$30 billion at end 2004.
Long-term bonds are obviously intended for trading on secondary
markets, and thus the structure of choice is lease-based. For instance,
the US$700 million issuance by the State of Qatar (Qatar Global Sukuk)
in December 2003 was structured as follows: A special purpose vehicle
(SPV) was created for the bond (sukuk) issuance. The SPV issued the
certificates and used their proceeds to buy some land in a medical
complex from the State of Qatar. The SPV then leased the land back to
the State of Qatar, thus collecting principal and interest in the form
of rent, which was passed through to the certificate holders. At lease-
end, the SPV is obliged to give the land back as a gift to the State of
Qatar. In other structures, the SPV is forced to sell the land back to
the lessee. Similar bond structures have been used by the governments
of Malaysia and Pakistan, the German State of Saxony-Anhalt, Dubai
Civil Aviation Authority, World Bank, among other governments and
corporations.
While such lease-based certificates may--in principle--have
financial risks different from conventional bonds, the legal structures
are typically constructed to eliminate all such differences. Thus, in
their justification of the A+ rating that they granted the Qatar Global
Sukuk discussed above, Standard & Poors' analysts argued that the only
relevant risk based on the sukuk's legal structure is the sovereign
credit risk of the State of Qatar. In other words, despite the
complicated structure, the end result is in fact replication of
conventional bonds, on which the issuer (corporate or sovereign) pays
the same interest it would have paid on regular bonds (or nearly the
same, accounting for higher transaction costs).
Financing Methods--Forward-Sale-Based Short-Term Bills
For short-term (bill-type) government bonds, the lease-based
structure imposes excessive transaction costs. Thus, Bahrain Monetary
Agency (BMA) has pioneered the issuance of sale-based bills known as
sukuk al-salam (certificates of prepaid forward sales). In those
structures, BMA collects the proceeds of bill sales as prepayment of a
forward price for the purchase of some commodity (say aluminum).
Ostensibly, BMA promises to deliver aluminum at the bill maturity date.
However, BMA also promises to arrange for the aluminum to be sold on
the sukuk-holders' behalf at a predetermined price (equal to the
collected proceeds plus interest based on the appropriate LIBOR plus
credit spread). Those bills have been traditionally held to
maturity--mostly by Islamic banks looking for permissible instruments
to manage liquidity. In its effort to develop a liquid Islamic money
market, BMA has recently announced the development of a repo
(repurchase) facility structure that will allow for liquid trading of
those bills.
Islamic Mutual Funds
Perhaps the easiest segment of the Islamic finance industry to
develop was that of equity investment in mutual funds that shun certain
types of stocks. Providers of those funds exclude stocks of ``sin
industries'' (casinos, breweries, etc.), as well as other industries
whose primary business is deemed un-Islamic (for example participating
in certain types of genetic research potentially leading to human
cloning). In addition, stocks of companies that pay or earn excessive
interest are excluded through various screens (for example, debt to
moving average of market capitalization, or receivables as a percentage
of revenues, exceeding certain thresholds.)
Within the remaining universe of securities, conventional portfolio
management techniques are utilized. It is interesting to note that
despite the high publicity received by those Islamic mutual funds and
their index-provider licensors (for example, Dow Jones Islamic
Indexes), the total volume of assets managed by those Islamic funds
remains very small (compared, for instance, to the estimated US$1
trillion of Saudi funds being invested in U.S. assets). One traditional
explanation of this phenomenon has been that customers who prefer
``Islamic'' structures may have relatively low levels of risk
tolerance, and the bulk of high net worth individuals and institutional
investors (with more tolerance for financial risks) in the GCC are too
sophisticated to participate in costlier ``Islamic finance'' (for
instance, the most famous Saudi investor, Prince Al-Walid b. Talal, is
not known to have shown much interest in the industry).
Islamic Investment Banking
More sophisticated investors with an appetite for Islamic finance
often invest in United States and other western equities through
investment banking and private equity boutiques. Those Islamic
investment bankers often operate independent or semi-independent
branches in the home countries of target companies, and use ``Islamic''
forms of leverage (for example lease-based as discussed above) in their
acquisitions. Their generated assets are then privately placed through
their GCC-based home institutions and networks of investment advisers.
Advanced Financial Structures
To address the high level of risk aversion among retail GCC Islamic
investors, Islamic financial practitioners have developed complicated
financial structures to replicate payoffs that normally require trading
in derivative securities (which is not permitted by the vast majority
of Muslim jurists). For instance, Al-Rajhi and National Commercial Bank
in Saudi Arabia both provided protected-principal index participation
structures to their clients in the early 2000's.
Those structures involved a partner or adviser, who is typically a
conventional investment bank, with no qualms about trading in
derivative securities. The partner or adviser provided investors full
or partial protection of their principal (which is tantamount to a put
option), and was compensated with a portion of returns and/or returns
above a certain threshold (which are tantamount to call options). In
some instances, call options were also directly synthesized from
earnest-money-like down-payment trades known as `urbun, and used in
those protected-principal structures. In all cases, providers
highlighted the fact that the principal was not ``guaranteed'' by the
provider, and thus positive returns did not represent forbidden riba.
With investment bankers pursuing fees from new structures, Islamic
finance providers have most recently begun marketing ``Islamic hedge
fund'' structures that promise ``absolute returns.'' It has been
interesting to note that some of the indirect publicity associated with
one of those ``Islamic hedge funds'' has been--purposefully or
otherwise--playing on the confusion caused by the misnomer ``hedge
fund'' (translated literally as sanadiq al-tahawwut). In one web
article and at two conferences in the middle-east, I have witnessed two
jurists associated with an ``Islamic hedge fund'' actively providing
examples of hedging, and arguing that ``hedge funds'' are vehicles for
investors to hedge their market exposure.
Insurance Alternatives
The majority of jurists deem conventional insurance contracts to be
impermissible due to two reasons. First, the high-quality debt
instruments in which insurance companies normally invest their premiums
(for example bonds, mortgage backed securities, etc.) are deemed
forbidden based on riba. Second, the insurance contract itself is
deemed by those jurists to be a form of gambling (since the insured
pays a premium, but knows not whether he will ever file a claim), and
hence forbidden based on the canonical prohibition of gharar.
To solve both problems, providers of a cooperative insurance form--
known by the Arabic name takaful--have emerged. To solve the first
problem, premiums are invested in Islamic variations on bonds, asset-
backed securities, etc., like the ones discussed earlier. To solve the
second problem, the relationship between insurer and insured is not
viewed as a commutative financial contract (in which the uncertainty
associated with claims would deem the contract impermissible). Instead,
the takaful company is said to pay claims based on voluntary
contribution (tabarru`), as a form of social cooperation.
Paradoxically, none of those companies ostensibly providing cooperative
insurance are in fact structured in a mutual corporate form. Instead,
the companies are commercially owned by stockholders, but offer binding
promises to policyholders that they will make ``voluntary
contributions'' whenever valid claims are filed by an insured party.
Investment Accountholders at Islamic Banks
A number of thorny issues regarding corporate governance have been
raised by the quasi-equity position of investment account holders at
Islamic banks. The most important issue, which has been under study in
a working group of the recently created Islamic Financial Services
Board (IFSB, based in Kuala Lumpur, Malaysia) relates to protection of
those investment account holders (IAH's). In this regard, IAH's lack
the protections of fiduciary depositors (who are creditors and first
claimants on the Islamic bank's assets, but earn no interest), but also
lack the protections of shareholders (who are equity holders
represented on the bank's board of directors).
Paradoxically, the solution through mutual corporate structures
(for example as used by mutual savings banks and credit unions in the
United States.) has not been a subject of serious discussion in the
industry, despite having been utilized in the earliest days of Islamic
finance in Pakistan in the 1950's. One explanation is that growth in
Islamic finance has been driven by profitability of providing financial
products to a trapped market segment with minimal competition, while
mutual structures are oftentimes implemented in nonprofit settings.
Issues Related to Criminal Financing
Investment Accountholders' Liability
For the purposes of this hearing, one must address two aspects of
Islamic bank liability structure that relate to potential criminal
financial abuses, especially in the aftermath of the September 11, 2001
terrorist attacks: (1) Are investment account holders to be deemed
owners of the Islamic financial institutions; and if so, how
responsible can they be held for any criminal financial activities in
which the institution may engage? (2) In case of dissolution of an
Islamic bank (perhaps due to its prior engagement in criminal financial
activities), what is the seniority of investment accountholders' claims
on the bank?
The answer to the second question is a difficult one that has been
the subject of intense study at the Islamic Financial Services Board.
It is clear that IAH's theoretically have lower seniority than
fiduciary depositors (who receive no return on their deposits), but
higher seniority claims relative to shareholders. However, since
management determines the magnitudes of profits or losses disbursed to
the IAH's, and consequently the amounts assigned to the residual
claimant shareholders, it is not clear how liquidation would in fact
take place. The Islamic Financial Services Board and the Accounting and
Auditing Organization for Islamic Financial Institutions (AAOIFI) have
attempted so far to reduce this problem by setting transparency
standards for the mechanisms used to assign profit and loss
distributions. However, the final standards have yet to be set on
issues of ownership, control, and seniority of claims to Islamic bank
assets.
The answer to the first question may seem at first to be rather
straightforward: Since investment accountholders lack operational
control of the bank's activities (even if in some cases they can
earmark their funds for investment in specific sectors), it would seem
most unlikely that they can be held responsible for the bank's illegal
or criminal activities. On the other hand, complications might arise
from differences of views on what constitutes criminal financial
activities. For instance, an Islamic bank may be known to disburse
charitable contributions on behalf of its customers in certain venues.
In this regard, it is no secret that certain charitable organizations
and destinations of funding thereof were (and in some cases may
continue to be) viewed differently by different governments and
different bankers.
This issue is clearly relevant for all Islamic banks' and Islamic
financial providers' customers (mutual funds may also disburse
charitable zakat contribution on behalf of investors). Moreover, it is
also a valid concern for most Muslims whose charitable contributions
are disbursed by specialized institutions.
Solutions to this problem require addressing the thorny issue of
harmonizing standards of anti-money laundering and terrorist financing
agencies worldwide, and establishing clear criteria upon which Islamic
charities and financial institutions can rely in their future dealings.
Significant convergence has occurred over those issues, but some
confusion continues to this day.
Relative Vulnerability to Abuse
It seems rather naive to think that a group intent on committing
criminal activities would favor Islamic financial venues, especially
since they are likely to come under closer scrutiny in that domain
following the terrorist attacks of September 11. On the other hand, it
is natural to ask whether the mechanics of Islamic finance make it
particularly vulnerable to abuse by money launderers and terrorist
financiers. In this regard, one cannot escape the fact that regulatory-
arbitrage methods used in Islamic finance to camouflage interest and
other factors deemed forbidden by the industry (an activity that I have
labeled Shari`a-arbitrage) bear striking resemblance to methods used in
criminal financial activity in recent years. The ``asset (or
commodity)-based'' nature of Islamic finance, which the industry
advertises as its main virtue, may in fact be viewed as a source of
weakness, since multiple-hop commodity and asset trading at losses or
profits is a standard method used to hide the source (in money
laundering) or destination and transmission route of funds (in
terrorist financing).
Of course, one must remember that this is merely a historical
accident. The most sophisticated methods used by Islamic financiers to
hide debt and by criminal financiers to hide sources or destinations of
funds, as well as the routing of those transactions through offshore
financial centers, are simply methods of the regulatory-arbitrage
structured-finance revolution of the 1980's, meant initially to
capitalize on various tax and regulatory advantages. Due to the
increased utilization of those methods, bankers, regulators and law
enforcement officials have grown more sophisticated in analyzing such
dealings, and uncovering the underlying objectives of their parties.
With offshore centers also applying increasingly better prudential
standards, the risk of abuse has been diminished greatly, though
obviously not eliminated.
In this regard, one must admit that regulators and law enforcement
officials in the Middle East are relatively unsophisticated in dealing
with those complicated financial structures, at least compared to their
western counterparts. In this regard, technical assistance through
direct intergovernment interactions, indirect private sector
initiatives of multinational banks, and involvement of the World Bank
and International Monetary Fund, have all contributed to increased
awareness.
On the other hand, with the possible partial exception of Malaysia,
I am not aware of any country that has a comprehensive regulatory
framework for Islamic financial institutions. Such a comprehensive
framework would have to take into account peculiarities of Islamic
finance: For example, assets and commodities used as degrees of
separation in purely financial dealings, resembling ``layering''
methods of criminal financiers. Laws passed for regulation of Islamic
banks in GCC (for example in Kuwait, Bahrain, etc.) appear to be simple
augmentations of conventional bank regulations, with the additional
provisions of appointing a religious ``Shari`a supervisory board'',
etc. However, conventional bank regulators in those countries generally
lack the sophistication required to understand complicated financial
dealings fully.
There may not be major cause for concern, since central bankers in
the GCC region, where the bulk of Islamic finance takes place, are
among the most sophisticated in the Middle East. That being said,
regulatory standards and talents in the region continue to lag behind
those in advanced countries, and Islamic finance does exist in a number
of countries with inferior regulatory infrastructures, and does operate
across borders--seeking regulatory arbitrage opportunities.
My recommendation in the short-run would be to bring all Islamic
finance under the same standards applied to conventional financial
practice through a simple conversion operation: Reduce all Islamic
transactions for regulatory and enforcement purposes to their
conventional counterparts. This has been the approach, for instance,
partially used in Turkey with relative success. For the longer-term, we
need to enhance and support efforts by AAOIFI and IFSB toward
developing a set of standards for Islamic finance that harmonize their
accounting and regulatory methods with best accepted international
standards.
Concluding remarks
In conclusion, Islamic finance differs from conventional finance
only superficially. However, that superficiality entails degrees of
separation through superfluous trades and leases that make regulation
and law enforcement more challenging. There is no reason in theory to
assume that Islamic finance would be more or less vulnerable to abuse
by criminal financiers, based on its utilization of those methods. On
the other hand, fighting criminal financing in the traditional banking
sector of the Middle East is already a significant challenge, due to
limited human resources and regulatory infrastructure. The extreme
measures that can be (and are occasionally) taken to eliminate criminal
financing in that region could also stifle legitimate financial
activity--in a region that is in desperate need for enhanced economic
efficiency and job creation.
To the extent that Islamic finance utilizes more sophisticated
financial structures, the challenge faced by regulators and law
enforcement agencies in the region is increased. The goal should be
eliminating criminal activities, while fully allowing legitimate
financial activity. toward that end, more coordination with regulators
and enforcement agencies, including technical assistance and
involvement in development of standards, remains crucial at this time.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM E. ANTHONY WAYNE
Q.1. Can you comment on the ramifications for the war on
terrorism of the disparate approaches to enforcing regulations
or freezing the assets of individuals designated by the United
States but not by the United Nations?
A.1. Approaches to freezing terrorist assets in the United
States and in other countries differ somewhat, but the general
goal of denying funding for terrorists is broadly shared. Many
prominent financial institutions worldwide, including several
in the Middle East, vet customers and transactions by using
both the UNSC 1267 Sanctions Committee and OFAC lists. While
using both lists may not be required by host government
regulation, it has the practical impact of extending the reach
of U.S. designations far beyond U.S. borders. Moreover, the
European Union (EU) and the United States continually work
together to expand cross-coverage on the EU Financial Sanctions
and OFAC lists. In general, there are some variations on both
lists, but this is the result of differences in authorities,
and not ethnic or religious biases.
In addition, United Nations Member States have obligations
to freeze terrorist assets that go further than those of the
United
Nations 1267 Sanctions Committee list, as it is limited to
those associated with the Taliban, Al Qaeda, or Osama bin
Laden. UNSC Resolution 1373 requires Member States to ``Freeze
without delay funds and other financial assets or economic
resources of persons who commit, or attempt to commit,
terrorist acts or participate in or facilitate the commission
of terrorist acts; of entities owned or controlled directly or
indirectly by such persons; and of persons and entities acting
on behalf of, or at the direction of such persons and entities,
including funds derived or generated from property owned or
controlled directly or indirectly by such persons and
associated persons and entities.'' However, UNSC Resolution
1373 does not have a mechanism for listing specific names and
thereby creating an international obligation to freeze assets
belonging to specific individuals and entities. The OFAC list
also includes terrorists and their supporters not associated
with Osama bin Laden, Al Qaeda, or the Taliban, thereby
underscoring our commitment to put an end to the financing of
terrorism in line with the obligations of UNSC Resolution 1373.
In August 2005, the United Nations Security Council adopted
UNSC Resolution 1617, which improves the international
community's efforts to combat terrorism by more clearly
identifying those who may be listed by the UNSC 1267 Sanctions
Committee. It also extends the mandate of the Analysis and
Monitoring Team by
assisting the United Nations Security Council to oversee the
implementation of these sanctions originally imposed by UNSC
Resolution 1267 and successor resolutions. The United States
worked closely with other members of the United Nations
Security Council in the drafting of UNSC Resolution 1617, which
passed unanimously. The UNSC 1267 Sanctions Committee continues
to update the consolidated list of individuals and entities
associated with the Taliban, Osama bin Laden, or Al Qaeda.
Q.2. Have improvements in the Saudi financial and law
enforcement communities improved to the point where senior
members of the world's deadliest terrorist organization can no
longer apply for and receive credit cards?
A.2. Since the May 2003 terrorist bombings in Riyadh, Saudi
Arabia has dramatically strengthened its efforts to combat
terrorism and the financing of terrorism, including more
rigorous banking regulations, thus making it more difficult for
terrorists to obtain access to credit cards and other financial
services. At the same time, United States-Saudi counter-
terrorism cooperation has increased to an unprecedented level,
particularly in financial regulation and law enforcement. The
United States and Saudi Arabian Governments established a Joint
Task Force on Terrorism Finance (JTFTF) in Saudi Arabia in
August 2003. The task force is mainly composed of FBI officials
with representation from the Internal Revenue Service (IRS).
The Saudi Arabian Monetary Agency (SAMA), the Saudi Arabian
Central Bank, established a counter-terrorism finance program,
including enhanced due diligence and ``know your customer''
policies, which is enforced throughout the Kingdom. In August
2003, the Saudi Arabian Government adopted a law making money
laundering and terrorist financing criminal offenses. To
further enhance the countering of terrorism finance, the Saudi
Arabian Government recently established a Financial
Intelligence Unit (FIU). Once the FIU meets Egmont standards,
Saudi Arabian FlU officials plan to apply for membership to the
Egmont Group of FIU's.
Since 2003, the FBI provided training for Saudi Arabian law
enforcement officials to assist them in combating more
effectively the financing of terrorism and money laundering.
While efforts to improve the implementation of the Saudi
Arabian counter-terrorist financing and anti-money laundering
regimes need to continue, the results the Saudi Arabian
Government shows in these areas will be important indicators of
its commitment to deprive terrorists of access to financial
services in the Kingdom.
Q.3. Secretary Levey, Secretary Wayne, a lot has been made of
the conflict diamond story. Can you tell us if representatives
of Hezballah or Al Qaeda were ever present in West Africa and
engaged in any way with the diamond, precious metal, or other
commodity business? To your knowledge, has Hezballah or Al
Qaeda ever used diamonds, precious metals, or other commodities
as a vehicle to move money out of the formal financial sector
and into a less obvious medium of exchange?
A.3. Hezballah continues to engage in fundraising activities,
particularly in West Africa. We have found no evidence to
confirm allegations that Al Qaeda engaged in trade in diamonds
to finance
terrorist operations. The September 11 Commission's Terrorist
Financing Staff Monograph concluded that there is some evidence
that specific Al Qaeda operatives may have traded in precious
stones, but it cannot be extrapolated from the evidence that Al
Qaeda has funded itself in that manner. We are continuing to
coordinate with other agencies to monitor these allegations.
RESPOSNE TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM NANCY POWELL
Q.1. Organized crime is a factor in money laundering in places
like Dubai and Israel. Yet, it does not receive much attention,
and information on organized crime groups, particularly the
Russian and Indian organizations operating in Dubai, has been
difficult to come by. What is the known extent of organized
crime in the Middle East and how much of a factor is it in
money laundering? Is there a nexus between organized criminal
activity and terrorism?
A.1. United States Government analysts believe that criminal
organizations with international networks centered in Turkey,
Pakistan, India, the United Arab Emirates, and Cyprus operate
within a centuries-old commercial tradition of moving
contraband merchandise through the South Asia, Middle East, and
Eastern Mediterranean regions. These groups use major
commercial centers--such as Istanbul and Dubai--to ship their
illicit gains to and from Europe and to launder their illicit
proceeds both through formal and informal financial sectors.
The analysts agree that the extent of organized crime activity
in the region is increasing, although the exact dimension is
not known.
Since the collapse of the Soviet Union, Israel has been a
significant operating area for Russian criminal organizations.
Prior to the passage of an anti-money laundering law in 2000,
strict bank secrecy laws made Israel a money-laundering haven.
According to Israeli police sources, organized crime groups
have invested some $4.5 billion in Israel since the 1990's. A
number of U.S. Government analysts have pointed to growing ties
between some terrorist groups and organized crime syndicates.
Dawood Ibrahim, whom the U.S. Treasury placed on its terrorism
list in 2003, has pursued dual careers as both a crime lord and
terrorist leader.
Q.2. Secretary Wayne, Ambassador Powell: Pakistan has recently
strengthened its anti-money laundering regime through the
passage of longer prison sentences if convicted. The most
recent International Narcotics Control Strategy Report is
critical of Pakistan's failure to have an effective anti-money
laundering statutory regime in place despite its role in the
trans-shipment of narcotics from Afghanistan.
In your observation, will the recently announced actions
represent a significant improvement in Pakistan's approach to
combating money laundering and terrorist financing? Is the will
there, in the first place, on the part of the Pakistanis? What
is the status of Pakistan's financial intelligence unit?
A.2. There is significant political will at the highest level
of the Government of Pakistan to combat crime, corruption, and
terrorism and to reform Pakistan's financial sector.
Pakistan's draft anti-money laundering law was approved by
the Cabinet and sent to the Parliament. However, the draft law
has serious deficiencies and loopholes. For example, money
laundering itself is not an autonomous crime and can only be
brought forth if the defendant has been convicted of a
predicate crime.
The draft mandates the creation of a Financial Intelligence
Unit (FIU), but only financial institutions are required to
report suspicious transactions. Non-financial institutions,
professions, and businesses such as legal and accounting firms
and money remittance businesses, are excluded from reporting
requirements.
Terrorist financing is not explicitly mentioned in the
draft law; nor is it an autonomous crime in Pakistan. Pakistan
is not a party to the 1999 UN Convention against the
Suppression of the Financing of Terrorism. We will continue to
request that the Government of Pakistan criminalize the
financing of terrorism and become a party to all relevant
United Nations terrorist-related conventions and resolutions,
and we will continue to offer advice and assistance to the
Government of Pakistan in order to bring its anti-money
laundering law into compliance with international standards.
Q.3. Ambassador Powell, you are now here in your capacity as
acting assistant secretary for International Narcotics and Law
Enforcement. I would be remiss, however, were to ignore your
recent history as U.S. Ambassador to Pakistan.
As you know, the relationship of some in the Pakistani
Inter-Services Intelligence Agency to the Taliban is extremely
close. While President Musharaff has proven a committed ally in
the war on terrorism, and has recognized problems with the ISI
relationship to the Taliban, are there continuing problems in
working with the ISI in combating the Taliban and Al Qaeda
allies?
A.3. Since my service in Pakistan ended approximately 1 year
ago, I am not in a position to respond to the issues raised in
the question. I would refer you to the Department's Bureau of
South Asian Affairs.
Q.4. The countries of the Gulf Cooperating Council, known as
the GCC region, are the primary financiers of Islamic finance
worldwide. In that connection, it seems likely, as Dr. El-Gamal
will soon point out on the next panel, that the banking systems
within the GCC will become mostly or completely ``Islam-ized''
within a few years. This is a thorny issue to the extent that a
number of countries, even non-GCC countries, may not have the
technical sophistication to enforce strong anti-money and
terrorist finance programs.
The questions coming to my mind are: What are your
individual assessments of the capability of the GCC regulatory
and enforcement authorities, generally, to effectively manage
the problems of money laundering and terrorist financing? Which
of your agencies have sufficiently trained personnel in the art
of Islamic financing to render regulatory and enforcement
assistance to nations practicing this form of finance? Which of
your agencies will actually be involved in providing assistance
to the GCC, and any other country that may request it? Do we
need more than one agency involved in extending this
assistance?
A.4. The capabilities of the GCC countries to counter money
laundering and terrorist financing have improved substantially
since September 11. Bahrain and the UAE have the most
comprehensive anti-money laundering and counter-terrorist
financing regimes in the GCC. Bahrain and the UAE played key
roles in establishing the Middle East and North Africa
Financial Action Task Force, and Bahrain hosts its Secretariat.
As of September 2005, three countries--Bahrain, Qatar, and the
UAE, aided by United States assistance--have Financial
Intelligence Units that belong to the Egmont Group, and three
other GCCC countries are working to establish FIU's that meet
the Egmont Group's standards for membership.
All GCC countries have criminalized money laundering beyond
drugs and all are taking steps to better monitor and control
charities.
However, only three GCC members--Qatar, Saudi Arabia, and
the UAE--have criminalized terrorist financing.
Bahrain is the leader in the Gulf in regulating and
monitoring Islamic banking. Through its Monetary Agency,
Bahrain endeavors to establish the same strict monitoring
system for its 28 Islamic banks as it employs with non-Islamic
banks. Bahrain is home to the Accounting and Auditing
Organization of Islamic Financial Institutions that sets
standards for accounting, auditing, and transparency for
Islamic financial institutions throughout the region. As a
demonstration of its leadership in this rapidly expanding area,
Bahrain hosted the first international Islamic financial
conference in May of this year.
All Islamic banks throughout the world, including the
growing number within the United States, also come under the
domain of a Shariah Advisory Board of Islamic Scholars.
The Advisory Board reviews Islamic banks' investments to
ensure that these banks are operating in consort with Shariah
law. Given the uneven quality of regulation for non-Islamic
banks throughout the Gulf region, it is reasonable to assume
that regulation of the Islamic banks is also uneven.
The rapid expansion of Islamic banking and financing
globally, including in the United States, requires adherence to
international standards regarding prudential supervision of
Islamic banks and their adherence to international standards
regarding anti-money laundering and terrorist financing. While
the U.S. Government has few experts in Islamic banking, we have
many experts in prudential supervision and adherence to money
laundering and terrorist financing standards. These experts
have provided advice globally for several decades. In an effort
to assist Islamic banking and financial institutions in their
compliance with international standards, a team of banking and
financial service regulators from the Federal Reserve and
Department of the Treasury's Office of the Comptroller of the
Currency could assist in advising in prudential supervision and
compliance with anti-money laundering and terrorist financing
standards.
The Department of the Treasury's Financial Crimes
Enforcement Network (FinCEN) could assist in the establishment
of Financial Intelligence Units in those Gulf countries that do
not have them, as well as instruct Islamic banks and financial
institutions how to report suspicious transactions to existing
FIU's. Another Treasury expert could offer advice on adherence
to international money laundering and terrorist financing
standards.
A Justice attorney could advise on the drafting of any
required laws and regulations.
We will contact both Bahrain and Malaysia requesting that
they host a weeklong seminar for United States Government
experts. The seminar would discuss Islamic banking/financing
and international standards.
After this seminar, the United States team and the Islamic
experts could jointly provide training to Gulf and North Africa
countries that requested such training.
Q.5. The Department of State's ``International Narcotics
Control Strategy Report'' (INCSR) released in March 2005, was
critical of both Pakistan's failure to have an effective anti-
money laundering (AML) regime and its role in the transshipment
of narcotics from Afghanistan. Recently, however, Pakistan has
announced measures to strengthen its AML regime, the imposition
of longer prison sentences among these measures.
Would you please identify the proposed AML measures and
explain how close those measures are to being enacted? In your
observation, will the measures represent a significant
improvement in Pakistan's approach to combat money laundering
and terrorist financing? Is the political and national will
present, in the first place, on the part of the Pakistani?
Finally, please provide an update on the status of Pakistan's
Financial Intelligence Unit.
A.5. There is significant political will at the highest level
of the Government of Pakistan to combat crime, corruption, and
terrorism and to reform Pakistan's financial sector. Pakistan's
draft anti-money laundering law was approved by the Cabinet and
sent to the Parliament. However, in spite of our repeated
efforts to assist the Government of Pakistan in constructing a
law that comports with international standards, the draft has
serious deficiencies. For example, money laundering itself is
not an autonomous crime and can only be brought forth if the
defendant has been convicted of a predicate crime. The draft
mandates the creation of a Financial Intelligence Unit (FIU),
but only financial institutions are required to report
suspicious transactions. Non-financial institutions,
professions, and businesses such as legal and accounting firms
and money remittance businesses, are excluded from reporting
requirements.
Terrorist financing is not explicitly mentioned in the
draft law; nor is it an autonomous crime in Pakistan. Pakistan
is not a party to the 1999 UN Convention against the
Suppression of the Financing of Terrorism. We will continue to
request that the Government of Pakistan criminalize the
financing of terrorism and become a party to all relevant
United Nations terrorist-related conventions and resolutions,
and we will continue to offer assistance to the Government of
Pakistan so that its anti-money laundering law comports with
international standards.