[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

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate/
                            senate05sh.html






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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. *
---------------------------------------------------------------------------
    * 1APowerPoint presenatation held in Committee files.
---------------------------------------------------------------------------
    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.
                               ----------
                 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.
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