[Senate Hearing 109-986]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-986
 
                        A CURRENT ASSESSMENT OF
                     MONEY LAUNDERING AND TERRORIST
                 FINANCING THREATS AND COUNTERMEASURES

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                                   ON

   A CURRENT ASSESSMENT OF MONEY LAUNDERING AND TERRORIST FINANCING 
                       THREATS AND COUNTERMEASURE

                               __________

                             APRIL 4, 2006

                               __________

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


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                            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 Staff Professional

              John V. O'Hara, Senior Investigative Counsel

              Stephen R. Kroll, Democratic Special Counsel

           Gretchen Adelson, Democratic Legislative Assistant

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         TUESDAY, APRIL 4, 2006

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Crapo................................................     3
    Senator Sarbanes.............................................    15
    Senator Carper...............................................    17

                               WITNESSES

Stuart Levey, Under Secretary, Office of Terrorism and Financial 
  Intelligence, U.S. Department of the Treasury..................     5
    Prepared statement...........................................    44
E. Anthony Wayne, Assistant Secretary for Economic and Business 
  Affairs, U.S. Department of State..............................     8
    Prepared statement...........................................    49
Michael Morehart, Chief, Terrorist Financing Operations Section, 
  Counter-terrorism Division, Federal Bureau of Investigation....    28
    Prepared statement...........................................    61
    Response to written questions of:
        Senator Crapo............................................    71
        Senator Bunning..........................................    71
        Senator Stabenow.........................................    75
Kevin Delli-Colli, Deputy Assistant Director Financial & Trade 
  Investigations Division, Office of Investigations, U.S. 
  Immigration and Customs Enforcement, U.S. Department of 
  Homeland Security..............................................    33
    Prepared statement...........................................    65
    Response to written questions of Senator Bunning.............    76

                                 (iii)


                        A CURRENT ASSESSMENT OF



                     MONEY LAUNDERING AND TERRORIST



                 FINANCING THREATS AND COUNTERMEASURES

                              ----------                              


                         TUESDAY, APRIL 4, 2006

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:25 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 more than 2 years now, the Committee has been closely 
monitoring the Government's initiative under both the USA 
PATRIOT Act and the Bank Secrecy Act to stem the tide of money 
laundering while also attempting to starve terrorists of 
funding.
    During the course of hearings held on the subject, the 
Committee and the public have heard the Government and private 
sector witnesses testify on a number of areas in our financial 
system that remain open to exploitation by criminals and 
terrorists alike and on the measures taken and yet to be taken 
to address such weaknesses.
    The purpose of today's hearing is to get a current 
assessment from the Government on the traditional and emergent 
money laundering and terrorist financing threats facing the 
Nation and to examine the measures and the degree to which 
these threats are being countered. We will focus specifically 
on the analysis and findings of three reports: The U.S. Money 
Laundering Threat Assessment, the final report of the September 
11 Commission recommendations, and the International Narcotics 
Control Strategy Report, or INCSR, as it is known.
    In what appears to be one of the Government's best 
cooperative efforts yet, the U.S. Money Laundering Threat 
Assessment presents findings on traditional money laundering 
derived from the input of more than 16 Federal entities. The 
report is a valuable tool and in and of itself is a benchmark 
of Government efforts to address trends in the prevention of 
money laundering. Although terrorist financing is not directly 
covered by the report, the Committee fears that some of these 
money laundering techniques are becoming increasingly employed 
by terrorist groups and their allies in criminal gangs around 
the world.
    The original September 11 Commission's report, issued in 
the summer of 2004, recommended that vigorous efforts to track 
terrorist financing must remain front and center in the U.S. 
counterterrorism efforts. The September 11 Commission's final 
report is a report card of sorts on the Government's overall 
efforts in the war on terror, a very poor report card for the 
most part. But the Commissioners did see fit to give a grade of 
A- to the Government's counterterrorism financing efforts, the 
highest grade of the report, in fact.
    Increasingly, there is widespread international recognition 
that terrorist financing cannot be ignored, and the Government 
has made progress in tracking terrorist funding, which, in 
turn, has provided critical intelligence behind the 
understanding of terror networks, enabling them to be 
disrupted. Yet, we must not forget that we are approaching the 
5-year mark of the horrors of the September 11 attacks. The 
excellent work made on understanding the vastness of the money 
laundering threat, together with this grade from the 
Commissioners, surely cannot mean that we are doing so well in 
our efforts that the United States can relax or slow its pace 
in the fight against terrorist financing. In fact, what 
successes we may have realized as a Nation have caused 
terrorists out there to continue to learn and to adapt.
    More than ever, it is now imperative that our Government 
move swiftly from the lessons learned to a plan of action. We 
must always be ready to reassess our thinking on these threats 
and to ask ourselves whether we are moving in the right 
direction or whether policy and operational resources are 
properly aligned.
    Importantly, throughout this period, the Committee has 
remained ever mindful that as the Government moves forward in 
its fight against money laundering and terror financing that 
sometimes, competing interests among national security, law 
enforcement, and business are examined so that our financial 
system does not endure over-regulation. It must be reaffirmed, 
however, that national security concerns should never be 
subjugated to commercial interests.
    In this context, the currency transaction report is being 
reviewed for possible reform. Last month, this Committee heard 
from industry, the regulators, and the Financial Crimes 
Enforcement Network on this subject. In essence, FinCEN and the 
regulators agreed that each could support some movement on this 
issue if the interests of law enforcement were not compromised.
    It is very important for this Committee to receive a clear 
statement of the law enforcement point of view on the record 
here. While law enforcement has routinely testified to the 
importance of the currency transaction report in various forms, 
there appear to be some outstanding questions with respect to 
the nature of the law enforcement perspective. To this point, 
law enforcement may not have been as clear as it could have 
been by speaking in terms of the value of the BSA information 
being important as a whole without segregating the importance 
of the CTR.
    We have invited law enforcement officials here to speak 
about their role in fighting against money laundering and 
terror financing today. We can ask law enforcement why the 
currency transaction report is important to its mission in that 
fight. Moreover, law enforcement will once again have the 
opportunity to explain what trouble, if any, it has with a 
significant reduction in the number of CTR's currently being 
filed, whether it results from a new exemption process or some 
other vehicle.
    The importance of law enforcement's opinion cannot be 
overestimated in this case when this Committee has not seen any 
independent, quantifiable analysis to support such a 
significant reduction in CTR filings. While we are concerned 
with the possibility of undue burden on the private sector, it 
should be emphasized that efforts to roll back the current, 
carefully constructed legal protection of the current system be 
measured against the resulting harm caused to the investigative 
capabilities of law enforcement.
    The Committee will hear today from a panel of Government 
experts who, at one level or another, take the battle for our 
Nation's financial security to the enemy. We shall hear from 
both policy makers and some of the financial soldiers who 
conduct the actual operations in this war.
    Our two panels today include, I will go on the first panel 
first, Stuart Levey, Under Secretary of the Treasury for 
Terrorism and Financial Crimes and our most regular visitor 
here, Anthony Wayne, Assistant Secretary of State for Economic, 
Business, and Agricultural Affairs. Our second panel will have 
Michael F.A. Morehart, Chief of the FBI's Terrorist Financing 
Operations Section and Kevin Delli-Colli, the Deputy Assistant 
Director of Financial and Trade Investigations at Immigration 
and Customs Enforcement.
    Gentlemen, I appreciate all of you being here today. I am 
sorry we were a little late getting here, but votes on the 
Senate floor take precedence.
    Senator Crapo.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman, and I 
first of all want to thank you for holding this hearing, it is 
a very critical issue, and indicate that I agree very strongly 
with the statement that you just made.
    It must be understood that we do not want to relax or slow 
our effort to combat terrorist financing, and we must always 
understand that national security takes the first position and 
the highest priority when we are trying to evaluate the 
effectiveness of the procedures and processes which we are 
implementing.
    We must not compromise law enforcement, and I think it is 
important we have this hearing so we can hear from law 
enforcement. I say that in the context of the effort that, as 
you know, Mr. Chairman, you have asked me to help lead in terms 
of regulatory reform of our financial institutions and the 
system we have in our country which often does create a 
significant series of regulatory burdens for our financial 
industry and those who are engaged in it.
    The banking industry continues to identify the filing of 
currency transaction reports, what we call CTR's, as a top 
regulatory expense; in fact, last month, when we had a hearing 
on financial regulatory reform, a number of the industry 
witnesses before our Committee raised the filing of CTR's to be 
the top item of all the items that we are considering with 
regard to regulatory reform that needs attention.
    The regulators said that many bankers feel that the 
exemption process is not effective; that it is too complex and 
labor intensive, and it is subject to second guessing by bank 
examination personnel, and it was stressed to me that one of 
the important things for any exemption is that we provide 
certainty. In fact, I asked some of those who were before me 
why it was that the financial institutions did not take 
advantage of existing exemptions in the law more commonly. And 
the answer that I was given is that the penalty for guessing 
wrong or for making a mistake on claiming the exemption is so 
high that there are very few who are even willing to try to go 
down that road.
    So one of the things that I think we hopefully can try to 
achieve is some certainty for the financial institutions with 
regard to the existing standards, which we have already 
identified to be adequate or workable.
    The U.S. Money Laundering Threat Assessment published that 
the number of CTR's filed annually now tops 13.1 million, and 
FinCEN's estimates are that it takes about 25 minutes for a 
report for filling in recordkeeping results in the industry, 
and we also indicate that there is apparently on the whole a 
devoting of about 5.5 million staff hours of work to handling 
the CTR's in 2005.
    The American Bankers Association conducted a survey, which 
demonstrates that the industry paid about $187 million in wages 
for this staff time, with three-quarters of the filing for 
business customers who have been with the bank for over a year. 
Based on the ABA's survey, the industry spent about 4 million 
staff hours and over $140 million on filing notices on 
established customers in the year 2005.
    And again, I come back to the points that the Chairman has 
made: If this is all necessary for our national security, then, 
our national security takes the highest priority. But the 
question I think we need to address here is whether we are 
implementing a system effectively with the least amount of 
burden for the industry which we expect to carry this burden. 
The bankers believe that CTR's have been overtaken by more 
important and effective enforcement tools such as enhanced 
customer identification programs, increased suspicious activity 
reporting and the use of the 314(a) process, and my 
understanding is that the 314(a) inquiry process that we put 
into place in the USA PATRIOT Act has been a particularly 
effective tool, since it allows law enforcement to identify all 
accounts that are suspect and not just those where large cash 
activities have occurred. The banks have been very responsive 
to these inquiries, and arrests and convictions have occurred.
    Now, again, my point in raising these statistics and these 
arguments is that I do not myself know where the right line is, 
and again, as the Chairman has indicated, we want to make sure 
that we have no slowdown or relaxation of our efforts to combat 
terrorist financing. At the same time, if we can improve the 
way that we are operating the system without sacrificing 
security, then, I think we need to give a very strong look at 
how we can do so.
    And I am very interested in the information that we will 
receive from law enforcement today, and again, Mr. Chairman, I 
thank you for holding this hearing.
    Chairman Shelby. Thank you, Senator Crapo. We also 
appreciate what you are doing in the areas of deregulation of 
so many laws and, I hope, regulations that are not relevant to 
today's environment.
    Senator Crapo. Mr. Chairman.
    Chairman Shelby. Yes.
    Senator Crapo. Mr. Chairman, I would like to also indicate 
that as usually happens, I have about five conflicting schedule 
items this morning. I may not be able to stay long enough to 
ask all my questions, and so I would ask if I could submit some 
in writing.
    Chairman Shelby. We will open it for the record.
    Senator Crapo. All right; thank you.
    Chairman Shelby. Mr. Secretary, we appreciate you being 
here with us. We will start with you. And you might, and I am 
sure you will get into this, but we have the old cost-benefit 
analysis in everything, and we know that we are doing a lot 
better in fighting the war on terrorism and money laundering. 
We know the reports: the September 11 Commission, they do not 
give out good grades for nothing. But the fight goes on.
    But there is more than just the thought; this is very 
expensive and burdensome to the banking community, and is it 
necessary? I am sure you will get into this.

                   STATEMENT OF STUART LEVEY

              UNDER SECRETARY, OFFICE OF TERRORISM

                  AND FINANCIAL INTELLIGENCE,

                U.S. DEPARTMENT OF THE TREASURY

    Mr. Levey. Thank you very much, Mr. Chairman.
    Mr. Chairman, Senator Crapo, thank you for the opportunity 
to speak to you today about the progress we are making in 
combating terrorist financing and money laundering. It is a 
privilege for me to be a regular visitor to this Committee, as 
the Chairman noted.
    In the last 4 months, we have seen assessments of our 
progress in both of these areas: The September 11 Commission 
Public Discourse Project's evaluation of our terrorist 
financing efforts, and the U.S. Government's first-ever Money 
Laundering Threat Assessment. These assessments and this 
hearing provide an opportunity to take stock of how we are 
doing on these issues.
    As you noted, Mr. Chairman, the September 11 Commission's 
Public Discourse Project awarded its highest grade, an A-, to 
the U.S. Government's efforts to combat terrorist financing. 
This praise truly belongs to the dedicated individuals in both 
my organization, the Office of Terrorism and Financial 
Intelligence, as well as our partner agencies: The State 
Department, the FBI, ICE, and others, who are aggressively 
tracking and combating this threat. You will not find a more 
talented and dedicated group of people on the working level, 
the soldiers fighting this.
    But in my view, reducing the U.S. Government's wide ranging 
efforts against terrorist financing to a single letter is 
necessarily only going to tell a small part of the story. There 
is much being done to combat terrorist financing, including 
intelligence collection, enforcement action, capacity-building, 
and systemic improvements to safeguard the world's financial 
system.
    Our theater of engagement spans the world, from money 
changing tables in Kabul, to the jungles of South America's 
tri-border area, to the compliance offices of the world's most 
sophisticated banks. No single letter grade can convey this 
complex picture. What we focus on as measures of success are 
the intelligence reports we receive, although often 
fragmentary, that speak of the difficulties terrorists are 
having raising and moving money.
    In recent months, we have seen at least one instance of 
what we look for most: A terrorist organization indicating that 
it cannot pursue sophisticated attacks because it lacks 
adequate funding. That is clearly a success. But we can also 
point to successes in specific systemic areas as well. We have 
made real progress in combating terrorist abuse of charities 
through a combination of enforcement actions, prosecutions, and 
active engagement with the legitimate financial charitable 
sector.
    One terrorist-supporting charity, the Islamic African 
Relief Agency, once provided hundreds of thousands of dollars 
to Osama bin Laden. Since its designation, IARA country offices 
have felt the pressure, and its leaders are worried about the 
organization's survival. And other corrupt charities have been 
shut down as well.
    We have also seen success in preventing terrorist 
financiers by deterring would-be donors. In my opinion, if we 
are to succeed in our fight against terrorist financing, we 
need potential donors to know that responsible governments will 
treat them as the terrorists they are. Those who reach for 
their wallets to fund terrorism must be pursued and punished in 
the same way as those who reach for a bomb or a gun.
    In that regard, I was heartened by a recent statement from 
Saudi Arabian Foreign Minister Prince Saud al Faisal, who 
publicly called for those who supported terrorism to be held to 
account. If Saudi Arabia and others in the region see this 
commitment through, it will send a powerful message of 
deterrence to would-be terrorist financiers.
    In other arenas of this fight, we are not where we need to 
be, in my opinion. State sponsors of terrorism like Iran and 
Syria present a difficult problem, because they provide not 
only money and safe haven to terrorists but also a financial 
infrastructure through which terrorists can move, store, and 
launder their funds.
    While this is a daunting challenge, the impact of our 
actions over the past year with respect to Syria show that we 
can make progress in isolating state sponsors of terrorism. 
Among other things, we finalized the designation of the 
Commercial Bank of Syria under Section 311 of the USA PATRIOT 
Act, enacted through the leadership of this Committee, and we 
did that in part because of the risk of terrorist financing 
posed by a bank owned and controlled by an active defiant State 
sponsor of terror like Syria.
    Progress, though, requires the active cooperation of 
responsible financial institutions not only in the United 
States but also around the world. The recent announcement by 
UBS that it would cut off all business with Iran and Syria 
provides a notable example of a financial institution making 
clear that the business of terrorist states is just not worth 
the risk.
    I would note that our allies and the world's financial 
institutions are beginning to apply this approach not just to 
terrorism but to WMD proliferation networks as well.
    By capitalizing on a growing international consensus that 
these activities have no place in the legitimate global 
financial system, we have been able to apply effective pressure 
to counteract these threats. For example, confronted with North 
Korean conduct ranging from WMD proliferation to the 
counterfeiting of U.S. currency and other illicit behavior, the 
Treasury targeted several North Korean proliferation firms 
under a new Executive Order, 13382, which applies the same 
tools we use against terrorist financing to proliferation.
    We also took regulatory action under Section 311 of the USA 
PATRIOT Act to protect our financial systems against Banco 
Delta Asia, a Macanese bank that was handling a range of North 
Korean illicit activities with barely a pretense of due 
diligence or control.
    As a result of our actions and revelations about North 
Korea's illicit activities, a number of responsible 
jurisdictions and financial institutions have taken steps to 
ensure that North Korean entities engaged in illicit conduct 
are not receiving financial services. Our combined actions have 
been described as causing, ``a ripple effect around the 
world,'' constricting the flow of dirty cash into Kim Jong Il's 
regime.
    These examples should be of particular note to this 
Committee as it demonstrates the impact of the financial tools, 
many of which were created through the leadership and vision of 
this Committee and in particular in the USA PATRIOT Act.
    In addition to the threats posed by terrorist financing or 
proliferation of WMD, money laundering is, as you note, Mr. 
Chairman and Senator Crapo, it is a serious threat in its own 
right to our national and economic security. Money laundering 
enables crime and contributes to an erosion of confidence in 
our legal and financial systems.
    The release of the Interagency Money Laundering Threat 
Assessment in December 2005 was a great accomplishment for our 
Government. Sixteen Federal bureaus and offices from across the 
law enforcement, regulatory, and policy community came 
together, with each office bringing its own perspective and 
experiences to the table. The group pulled together arrest and 
forfeiture statistics, case studies, regulatory filings, 
private and Government reports, and field observations from 
those in the trenches.
    The completed threat assessment provides policymakers 
across the Government with an accurate picture of how money is 
being laundered in and through the United States. And while 
this Interagency Money Laundering Threat Assessment is an 
excellent development, it is, of course, only the beginning of 
the process. We now need to build on the cooperation that went 
into the assessment to craft effective ways to counteract the 
vulnerabilities identified, and by effective ways, I think I am 
referring exactly to what you are referring to, Senator Crapo, 
through a legitimate cost-benefit analysis that will be able to 
do better now that we have an accurate picture. We are better 
able to cure the problem now that we have assessed it.
    And that work is already ongoing. I agree completely with 
your assessment, Mr. Chairman, that we need to stay vigilant 
and also your comments on that, Senator Crapo, and I thank you 
again for holding this hearing and for your sustained 
commitment to these issues.
    I would be happy to take your questions.
    Chairman Shelby. Thank you.
    Secretary Wayne, welcome again to the Committee.

                 STATEMENT OF E. ANTHONY WAYNE

      ASSISTANT SECRETARY, ECONOMIC AND BUSINESS AFFAIRS,

                    U.S. DEPARTMENT OF STATE

    Mr. Wayne. Thank you very much, Mr. Chairman, Senator 
Crapo. It is a great pleasure to be with you here again today. 
As Assistant Secretary for Economic and Business Affairs, I 
have been actively involved in the campaign against terrorist 
financing. And I just want to underscore, as Under Secretary 
Levey has said, your continuing interest and attention to this 
important area is extremely valuable and very much appreciated.
    For the Department of State, the cutting off of funds to 
terrorists remains a very high priority. As we work on this, we 
work hand-in-hand with the National Security Council, with the 
Treasury Department, with Justice, with Homeland Security, and 
other agencies, it really is a team effort. At the State 
Department, we focus on foreign policy guidance, diplomatic 
engagement, and training and technical assistance.
    But regardless of what the task is, as we are going about 
the tackling the financing of terrorism, the U.S. Government 
team really works to underscore the importance of coordination. 
All of us involved in this fight, of course, take pride, as you 
noted, Mr. Chairman, in the September 11 Commission Public 
Discourse Project's final report on terrorist financing, and 
those of us working in the economic area are also pleased that 
the next highest mark they gave out was for work on economic 
policies.
    But what has really become clear to us is that it is our 
team effort that has served as the foundation for the 
international cooperation that was called for in the September 
11 Commission's initial report. And diplomacy is critical in 
winning the political commitment that we need from other 
countries, and in that, our embassy teams--teams not just from 
the State Department but from other agencies as well--play a 
critical role.
    We are not resting on our laurels, however. We are working 
very hard on engaging other governments and moving forward to 
put in place and then implement the steps they need to take to 
really be serious about terrorist financing and money 
laundering threats.
    According to the annual International Narcotics Control 
Strategy Report that you referred to, Mr. Chairman, there has 
been a good deal of progress over the last year. Seventeen 
countries promulgated or updated anti-money laundering and 
terrorist financing laws in 2005. The number of jurisdictions 
that have criminalized money laundering to include other crimes 
resulting in money laundering beyond narcotics increased to 172 
from 163 in 2004. Ten more countries criminalized terrorist 
financing, so the total number with those laws in place is now 
123.
    Seven more financial intelligence units became members of 
the Egmont Group, raising the global membership to 101 
countries around the world. One hundred twenty-three 
governments are now members of the Financial Action Task Force 
Styled Regional Bodies. There are seven of these around the 
world. And in 2005, the Financial Action Task Force removed 
Indonesia, the Philippines, the Cook Islands, and Nauru from 
its list of noncooperative countries and territories, as those 
countries enacted measures to meet basic international 
standards. That leaves only two countries on that list, Burma 
and Nigeria.
    Last year, the U.S. Government also provided various kinds 
of anti-money laundering and terrorist financing training to 
over 100 countries around the world. That is a total of 130 
countries where we have provided training since September 11. 
We also work with our partners in the G-8 and beyond. There are 
12 members of the G-8 Counterterrorism Action Group, which was 
established in 2003, and those countries have now provided more 
than 200 coordinated technical assistance programs to more than 
150 countries around the world.
    Now, one of the September 11 Commission's recommendations 
focused on the need to include in our comprehensive counterter-
rorism strategy policies that encourage development and open 
societies, and I just want to underscore that we have not 
neglected that. Development is central to the national security 
strategy which the President issued on March 16. In addition to 
our core AID programs, we have very important policy tools, 
including the Millennium Challenge Account, the Heavily 
Indebted Poor Country initiative, an aggressive U.S. 
multilateral and bilateral trade agenda, and our bilateral 
investment treaties, all of these aimed at promoting growth, 
new employment, and reducing poverty.
    We have also worked at the Department of State and with our 
colleagues in other agencies to address another critique of the 
September 11 Commission: Our public diplomacy efforts. In 
recent months, we have ramped up our efforts to get the message 
out before the public. When Under Secretary Levey and I and 
others travel to other countries around the world on terrorist 
financing issues, we try to make a point of meeting with local 
journalists. We provide briefings to foreign officials, 
journalists, and other professionals here in Washington.
    We have worked hard to place opinion pieces by U.S. 
Government officials on combating terrorist financing in key 
media outlets around the world. One example, recently, we did 
an op-ed on the possible misuse of charitable donations. We 
have placed that in leading newspapers in seven countries 
including Saudi Arabia, Jordan, Indonesia, Sri Lanka, and the 
leading pan-Arab newspaper, and we are going to be placing it 
in European and African capitals in the days ahead.
    As we met last July, to review where we were in this 
process before this Committee, we focused on the Middle East 
and Pakistan. I would just like to give a brief update, 
provided in more detail in my written statement on some of the 
highlights of what has happened over the last year in those 
areas but in a couple of other corners of the world, too.
    In late July, we finished successfully negotiations to 
improve the effectiveness of U.N. sanctions targeting Taliban 
and Al Qaeda. We had a unanimously adopted U.N. Security 
Council Resolution No. 1617. That resolution clarified for all 
countries in the world what it means to be associated with Al 
Qaeda. It added enhanced due process conditions, and it 
endorsed the Financial Action Task Force's standards as 
international guidance on executing effective sanctions regimes 
for all the countries in the world.
    That same Committee, the 1267 Sanctions Committee, has 
listed for sanctions over 300 persons and 100 entities, 
including 139 names that the United States has submitted, and 
this includes 35 new listings since last July, and that 
includes such groups as the Movement for Islamic Reform in 
Arabia and the Al-Aktar Trust, and seven different governments 
joined in those designations, so it is not just the United 
States acting.
    Secretary Rice enacted the United States-Saudi Strategic 
dialogue in November 2005 in Riyadh, and that has a specific 
counterterrorism working group, which includes terrorist 
financing. We are going to have a second round of that dialogue 
later this year.
    In late 2005, Saudi Arabia enacted regulations on cross-
border movement of funds. It is also working to strengthen its 
financial investigations unit, which is up and running. Saudi 
Arabia is still working to establish a charities commission to 
regulate all charitable donations leaving the Kingdom, but in 
the interim, it has maintained very strict rules for any 
charity money leaving the country.
    The United States and the United Arab Emirates established 
a joint terrorist financing coordinating committee, which we 
launched in January of this year. This is an interagency 
bilateral effort that allows high ranking officials to address 
a range of issues, including cash carriers, charities, and 
hawalas. A second meeting of this group will take place in the 
weeks ahead in Abu Dhabi. I believe my colleague Stuart Levey 
might be participating in that meeting. The UAE has also 
continued its role as organizing regional outreach on best 
practices. In November, they co-hosted a conference with my 
colleagues from the Department of Justice on investigating and 
prosecuting advanced financial crimes.
    In Iraq, we continue to work on building up the capacity in 
that government. Iraq is in the process of establishing a money 
laundering reporting office in the central bank. We are working 
to build their capacity and to implement the day-to-day 
functions of a financial intelligence unit.
    We have also worked very closely with Pakistan over the 
past year. Pakistan now has a proposed anti-money laundering 
law, which was drafted with U.S. assistance before the relevant 
parliamentary committees. Unfortunately, the lack of action on 
that law, which would set up a financial intelligence unit, has 
meant that we have been unable to accelerate some of our 
planned assistance. But we have maintained a close dialogue 
with the Government of Pakistan during the influx of resources 
that came in to meet the earthquake response and reconstruction 
needs in the last half of 2005, with a goal of avoiding 
diversion of relief money to terrorism causes.
    We are encouraged by Pakistan's concern that terrorist 
groups may be presenting themselves as charitable 
organizations. We would welcome the opportunity to provide 
technical assistance to help the Government of Pakistan meet 
international standards on preventing abuse of the nonprofit 
sector.
    In Afghanistan, we have also been working very hard to 
build up their capacity to fight the financing of terrorism. 
There is a great deal of capacity-building that needs to take 
place in that country.
    We have also worked hard in Indonesia over the last year, 
and there has been some good progress made, though performance 
in implementing U.N. sanctions remains an area for improvement. 
We have provided some training, including on the oversight of 
charities, and are assessing other areas where training might 
be appropriate.
    In Europe, our cooperation with the European Union has 
increasingly helped inform broader cooperation on terrorist 
financing issues. We set up a dialogue with the European Union 
in the September 2004. We have interagency delegations which 
meet twice a year. We have informal expert groups which get 
together and talk about judicial technical assistance and 
designation issues.
    This United States-European Union cooperation, combined 
with our bilateral cooperation with key member states of the 
European Union remains essential, as Europe remains a source 
for funding of terrorism and, as we were sadly reminded last 
July by the bombings in London, a site for terrorist 
activities.
    In the campaign against terrorist financing, Mr. Chairman, 
we are moving beyond a focus on the freeze and seize tactics 
toward a more strategic approach to building coalitions with 
close partners, where we work together with diplomacy, 
intelligence, and law enforcement tools.
    One anecdotal measure of the success of our present 
coalition building is the increasing use by terrorist 
financiers of riskier, more difficult and expensive means in 
preference to the more formal international financial system. 
Abuse of charities, of not-for-profit organizations, use of 
cash couriers, wire transfers, and other alternative remittance 
systems have become an increasing focus of our discussions and 
our cooperation with our international partners.
    I welcome very much and look forward to your questions on 
the challenges we face today and what remains ahead of us to 
do. Thank you very much, Mr. Chairman.
    Chairman Shelby. Thank you, Secretary Wayne.
    First, I have several questions for the record on behalf of 
Senator Crapo that he has asked that you answer. We will do 
that for the record; is that okay?
    I have a number of questions. I will start with you, 
Secretary Levey. North Korean counterfeiting and money 
laundering operations, especially as they may relate to that 
regime's nuclear proliferation activities, are among the more 
troubling developments of the past year, at least with regard 
to the timing of announcements of U.S. Government actions, as 
such operations have been going on for many years.
    Mr. Secretary, Treasury's designation of Banco Delta Asia 
as a primary money laundering concern and of eight North Korean 
companies for involvement with North Korean weapons of mass 
destruction programs, when taken together in the context, 
highlight the scale of the problem that we have as a challenge, 
that the country presents.
    North Korea's production for a number of years of high 
quality $100 Supernotes and the revenue generated by 
trafficking in narcotics and counterfeit goods, like 
cigarettes, I believe presents a definite threat to U.S. 
national security, Mr. Secretary.
    Would you, Mr. Secretary, share with the Committee your 
assessment of the current state of the situation with respect 
to North Korean money laundering and counterfeit operations, 
the extent that Chinese banks have been used in these 
operations, and what has been China's response? What has been 
the response of South Korea to United States efforts at curbing 
these North Korean activities, which are more than troubling, I 
am sure, to you and us.
    We will start with Secretary Levey and then Secretary 
Wayne.
    Mr. Levey. Thank you, Mr. Chairman.
    Chairman Shelby. I know it is a lot of questions in one.
    Mr. Levey. Well, I will take a cut, and if I leave 
something out, I am sure you will point it out to me and follow 
up.
    As you indicate, the threat of North Korean illicit 
activity is real. They have engaged in a number of different 
types of illicit conduct; of course, proliferation of WMD is 
the most of concern, but also, they do counterfeit U.S. 
currency.
    Chairman Shelby. And they are good at it, are they not?
    Mr. Levey. Yes, they are apparently very good at it; what 
we call the $100 bill that they create is a Supernote. It is 
very high quality; if you have not seen it, it is interesting 
to see. I think you either have to be very highly trained or--
--
    Chairman Shelby. I hope I do not have any in my billfold. 
Of course, I do not have $100.
    [Laughter.]
    Mr. Levey. The Secret Service can bring by a couple of 
samples for you.
    And this is something that has been going on, as you 
indicate, for some time. Even as we have improved the security 
measures in our $100 bill, they have followed along closely 
behind. An interesting point on that is that we changed the ink 
that we used in our $100 bill to what the Secret Service calls 
an optically variable ink that costs about $800 or $900 a pound 
to create, and we pay a great deal to have the exclusive rights 
for that ink.
    And then, right after we did that, North Korea revamped its 
currency and spent a lot of money to buy the same ink, which is 
an interesting development----
    Chairman Shelby. So you are not exclusive.
    Mr. Levey. Not any more, and it is an interesting 
development for a country that does not have any worry about 
having its currency counterfeited.
    Chairman Shelby. Who produces the ink?
    Mr. Levey. I do not think I have that information with me. 
I can follow up.
    Chairman Shelby. I hope it is not an American company.
    Mr. Levey. Well, I will follow up with you on that.
    Chairman Shelby. Okay.
    Mr. Levey. But the key point, as you indicate in your 
question, is the actions we have taken have highlighted this 
kind of activity, the proliferation, the drug trafficking, the 
counterfeiting of currency and have sent the message to 
responsible financial institutions and responsible governments 
that this is not the kind of conduct that you want to be 
associated with in your banks.
    And we have gotten cooperation across the region. As soon 
as we took these actions, I made a trip to the region. It has 
been followed up with other trips to the region to talk to our 
partners, and you asked specifically about China and South 
Korea. They have been quite cooperative with us on this. They 
recognize this is a threat not only to our financial system but 
also to the global financial system, and everyone has a stake 
in that financial system. We have gotten excellent cooperation 
from all of our partners in the region, which is why, to get 
back to the original question, that is the reason why we have 
had a real impact on this. It has been because it is not just 
unilateral United States action but multilateral action with 
other countries and cooperation from the private sector.
    That is what has, I believe, brought to bear a great deal 
of pressure on the threat we face from North Korean illicit 
activity.
    Chairman Shelby. Thank you.
    Secretary Wayne, do you have any comment?
    Mr. Wayne. No, only that we are working very closely with 
Under Secretary Levey and his colleagues and are very 
supportive of what they are doing.
    Chairman Shelby. I would like to briefly address the 
situation with Saudi Arabia, Mr. Secretary or both Secretaries. 
In the aftermath of the Riyadh bombings in May 2003, the Saudi 
Government finally, Mr. Secretary, took some meaningful steps 
to stem the flow of Saudi money to terrorist organizations.
    To the extent that most terrorist financing continues to 
involve voluntary contributions to organizations like Al Qaeda, 
Hamas, and Hezbollah as well as money funneled through 
nongovernmental organizations, however, very serious gaps 
between public statements and facts on the ground seem apparent 
to me. The State Department's Annual Money Laundering and 
Financial Crimes Report, Secretary Wayne, and a letter, 
Assistant Secretary Wayne, you sent to Congresswoman Sue Kelly 
seems to take an excessively diplomatic approach to continuing 
problems like the role of multinational charitable 
organizations located in Saudi Arabia and more directly, Saudi-
run charitable committees, including those commonly referred to 
as Account 98 and Account 111, which channel Saudi donations to 
Iraq.
    While the State Department report does note that the Saudis 
have yet to implement the National Commission for Relief and 
Charitable Work Abroad, the report's analysis leaves key 
questions unaddressed. And I will start with you, Secretary 
Levey. Could you address the issue of Saudi Arabian cooperation 
in combating terrorist financing? Is money leaving Saudi Arabia 
and ending up in terrorist coffers? Is the problem primarily 
one of bulk cash transfers, or is Saudi Arabia's financial 
system a conduit for this money? If bulk cash is the principal 
means of transferring money, are the Saudis attempting to 
address that?
    Secretary Levey first.
    Mr. Levey. Okay; Mr. Chairman, again, you have a lot there.
    Chairman Shelby. I know that there is.
    Mr. Levey. Let me see if I can cover as much of it as I 
can. First of all, I think you are right to say that the 
cooperation with Saudi Arabia has been significantly better 
since 2003, and we have seen significant improvements, both 
facts on the ground and in the tone of the relationship on 
counterterrorism.
    Chairman Shelby. Has it improved? Has it marginally 
improved?
    Mr. Levey. I think it is fair to say it has improved. And I 
have been to Saudi Arabia twice in the last 2 months. My level 
of engagement has increased greatly. I met with the new Saudi 
Arabian ambassador several times, Prince Turki, including just 
this last Friday.
    And I want to comment on all the things you raised, because 
I think there are serious concerns there that I want to raise, 
but I do want to preface it by saying that one thing I learned 
on my trip there is that when it comes to fighting Al Qaeda 
operatives in Saudi Arabia, they are really in the fight and 
really doing an excellent job.
    Chairman Shelby. In their own country or where it affects 
their own country?
    Mr. Levey. Well, it is a global threat, and when they are 
fighting Al Qaeda in Saudi Arabia, it is good for us all. And 
they are doing a good job on that, and they are taking it very 
seriously. That said, there is still, as you indicated, a 
number of concerns. To answer your one question just directly, 
is money leaving Saudi Arabia to fund terrorism abroad? Yes.
    Chairman Shelby. Is some of that money going to Iraq?
    Mr. Levey. Undoubtedly, some of that money is going to 
Iraq, and it is going to Southeast Asia, and it is going to any 
other place where there are terrorists. There is money leaving 
Saudi Arabia. I do not think that the Saudi Arabian Government 
would dispute that. They know that that is going on, and that 
is clearly the case.
    Chairman Shelby. And it is not pennies either, is it?
    Mr. Levey. No, it is not pennies. So there is a lot of work 
to do on this. As you indicate, I would say two areas of 
principal concern: One is whether charitable organizations or 
NGO's are being abused still. I think that is an area of 
concern within Saudi Arabia. We have been over this in this 
Committee several times, and you know it quite well, that while 
there are rules that are in place that are supposed to be 
filling the gap until this charity commission gets stood up, 
they have not stood up the commission yet, and while those 
rules, if they were effectively enforced, would be a good 
stopgap measure, they have not been uniformly enforced, and we 
have raised this concern several times with our Saudi 
counterparts, including the organizations that you are well 
familiar with, WAMI, the IIRO, and the Muslim World League. I 
continue to raise this, as I am sure Secretary Wayne does and 
others do, at every chance we have.
    The second, though, is something which I think we should 
start thinking about a little separately, which is the 
individual donor who may be sending money directly not through 
an NGO budget somehow otherwise providing money to a terrorist 
organization.
    Chairman Shelby. That is not being tracked, is it, in Saudi 
Arabia?
    Mr. Levey. Well, this is what I think is a work in progress 
that really needs the most attention, because as Secretary 
Wayne indicated in his testimony, they have stood up a 
financial intelligence unit. It is just starting. It is not 
where it needs to be. It is not an Egmont member. It is not a 
fully functioning FIU. But what needs to happen is they need to 
do financial investigations in a serious way in order to locate 
those deep pocket donors that are still funding terrorism 
abroad, and that is something that is a concern that has not 
happened as robustly as it needs to happen. The principle----
    Chairman Shelby. Do you have the will to do that, the 
government to have the will, considering Saudi Arabia has 
passed----
    Mr. Levey. Well, what I look at is the statement that 
Prince Saud al Faisal made that this is something that should 
be done. When I talked to the people at the high levels of the 
Government, they say yes, this needs to be done, so I see the 
right strategy to be to hold them to it and say let us do it.
    Chairman Shelby. Mr. Secretary----
    Mr. Levey. --and we are ready to help them.
    Chairman Shelby. Mr. Secretary, but is there not honestly, 
candidly here today a gap between the rhetoric of the officials 
in Saudi Arabia and the implementation of policy? Yes or no?
    Mr. Levey. I would rather say that there is a lag.
    Chairman Shelby. Lag.
    Mr. Levey. We will see if it becomes a gap.
    Chairman Shelby. Thank you, Mr. Secretary. We will come 
back in other rounds.
    Senator Sarbanes, thank you for your indulgence.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman. I want 
to welcome the witnesses before us. I do want to commend you 
for your continuing leadership in giving priority to the 
Committee's oversight with respect to money laundering and 
terrorist financing.
    Chairman Shelby. Thank you. Well, you did it yourself as 
Chairman; did very well.
    Senator Sarbanes. It is obviously a very important subject.
    I want to commend Under Secretary Levey and Under Secretary 
Wayne for their work in broadening information exchange and 
cooperation between the United States and especially countries 
in the Middle East. At the end of last year, the members of the 
September 11 Commission in reviewing progress since publication 
of their report gave the only A- of all the things they looked 
at to the Government's vigorous effort against terrorist 
financing.
    But obviously, we cannot sit on our laurels, and it remains 
a very large problem. As the money laundering threat 
assessment, I think, makes very clear, and we welcome this 
report; it is the first, as I understand it, published just a 
few months ago by the working group of the Departments of 
Treasury, Justice, Homeland Security, the Federal Reserve 
Board, and the United States Postal Service.
    This report outlines significant methods by which funds may 
be laundered: Through depository institutions, money services 
businesses, online payment systems, informal remittance 
arrangements, cash smuggling, manipulation of relationships, 
insurance products, front entities and, casinos. So, it is a 
quite broad array of ways of moving money improperly.
    There is a fair amount of clamor from some of the economic 
interests that they are being overburdened or over-regulated. 
On the other hand, we need this information, and we need to 
coordinate the information and to get at the problem. What is 
your perception with respect to that question?
    Mr. Levey. Thank you, Senator Sarbanes. I think that you 
are absolutely right to look at the breadth of the ways that 
people can launder money and that there is a range of 
vulnerabilities that are out there.
    That said, it is critical to our national security and 
economic security that we have a robust effort to stop money 
laundering, and there is really no way to do that without 
calling upon those on the front lines to work with us to 
provide us that information that is needed for us to do our 
work but more importantly for law enforcement to do its work.
    We need to have that robust fight. We need to get that 
information, but we do need to be smart about it. I think we 
should always be asking ourselves the question: Is this 
regulatory burden that we are imposing worth the cost that it 
is imposing on the private sector?
    And the Bank Secrecy Act, you know it probably better than 
anyone. It is a broad act. There is a lot of regulation 
underneath it, and we do need to continue to look at it to see 
what adjustments can be made. That is our obligation, and I 
believe that there are adjustments that can and should be made, 
but there are adjustments that probably can and should be made 
both ways. We should be looking at vulnerabilities that we 
might need to take action to regulate differently in order to 
plug those vulnerabilities, and at the same time, we should 
look at some of the regulation currently in place either to 
lift some burden or to find out from the industry, as Senator 
Crapo indicated in his opening statement, to find out from the 
industry the experience they are having, for example in not 
being able to use certain exemptions that are already in the 
law to see if we can make them more user-friendly.
    I think we need to stay flexible and continue to make those 
adjustments.
    Senator Sarbanes. I am concerned that you have not gotten 
the system fully into place yet, as I understand it, and yet, 
now there are efforts underway to kind of dismantle at least 
part of the system. The threat recognition, for example, threat 
assessment recognition is accorded to the problem of 
correspondent accounts in shell banks. Yet, the rules under 
Section 312 were in part reproposed after 4 years of review. 
What is the difficulty there with respect to implementing 
Section 312?
    Mr. Levey. Well, as you know, Senator, we have been working 
on that for some time, and we have discussed this before. We 
did issue a final rule on Section 312 in January, and we did 
repropose one provision of it, because in the intervening time, 
we had looked at that provision and decided that we wanted to 
make a change, which is something one often can do from a 
proposed rule to a final rule, but when we looked at it, we 
decided it was so significantly from what had originally been 
proposed that the only proper way to do it was to repropose and 
take comment.
    We have now completed the comment period, and the intention 
would be to have that portion that was reproposed become 
effective, finalized, and effective on the same effective date 
as the rest of the rule so that we will have complete 
implementation on that effective date in July.
    Senator Sarbanes. In July? When would that date be?
    Mr. Levey. In July.
    Senator Sarbanes. July, Mr. Chairman, I see that my time is 
up.
    Chairman Shelby. Senator Carper.

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Thanks, Mr. Chairman, and to each of our 
witnesses, welcome. Thank you for joining us and for your 
testimony.
    I am going to telegraph a pitch and let you know a question 
I am going to ask in a couple of minutes. It deals with the 
transaction reports; deals with the suspicious activity reports 
in the case of regulatory relief legislation which we may be 
considering here later this year.
    I think Senator Crapo may have raised this in his 
statement; I do not know that he actually asked a question 
relating to it, but I plan to. And so, just put that in the 
back of your minds, if you will, and what I would like to do, 
you can tell here today, we are in and out with other hearings 
and things going on, and I just wanted to ask each of you, take 
maybe a minute or so and, I have not read your testimony. I may 
not read your testimony, although my staff person, Hillary 
Jockman, right behind me here, has read it carefully.
    But just take a minute or two and just tell me, cover the 
key points that you would have us walk away from here to 
remember. Do it rather briefly each of you. Secretary Levey, 
why don't you start first?
    Mr. Levey. Senator Carper, I do welcome that opportunity.
    I think the key points that I would like to convey to this 
Committee is the value that we are seeing not just in the 
United States but internationally from increased transparency 
in the global financial system and the increased international 
coalition that includes not just governments, our partners 
abroad but also the private sector in saying that the financial 
system should not be abused by criminals, terrorist financiers, 
WMD proliferators.
    It is essentially, we have put in place a fairly robust 
regulatory regime in the United States. It is not complete yet, 
as Senator Sarbanes points out, but it is pretty robust. And 
what we are seeing is agreement around the world and agreement 
from responsible financial institutions that it is really 
important not to allow those who want to engage in illicit 
activity to have access to financial services.
    Senator Carper. Good.
    Mr. Levey. And that has real effect on the bad guys who 
want to use it.
    Senator Carper. All right; thank you.
    Secretary Wayne.
    Mr. Wayne. Senator, just to build on that same theme, I 
think the key point is this is a long-term effort. We have made 
a good start at building an international coalition but to 
start where we have coalition members with different 
capacities, with different legal frameworks and then with a 
different understanding of how to put those legal frameworks in 
place.
    We need to keep working to solidify that coalition and to 
take it in new directions, both to build capacity as we may be 
doing in the Persian Gulf area. For example, a number of those 
countries are now just putting in cash declaration systems, 
that we have had for quite awhile, to get at the bulk cash 
issue that you raised, Mr. Chairman, but also to help us work 
together to adapt as the terrorists and their financiers are 
adapting to use new means of getting their funds around.
    And we just have to keep broadening and deepening this over 
time in law enforcement, in intelligence, in diplomatic 
channels, and that is the path we are on, and we need to keep 
at it.
    Senator Carper. Good; all right; thank you.
    Now to my other question: Take, if you will, I have a 
couple of minutes left here, so I am going to ask you just to 
go through this quickly. Take just a moment and just remind us 
of when do these currency transaction reports have to be filed, 
when do the suspicious activity reports need to be filed, and 
then, I want to ask you to consider: We had testimony here I 
guess a couple of weeks ago. Folks came in and testified from 
financial institutions, and they said we have customers who 
come in; they are regular customers; they come in routinely, 
deposit large amounts of money. We know them. We have known 
them for years, and we do not know that it makes a lot of sense 
for us to continue to file these reports for those people.
    That is one of the ideas that we will be considering if we 
take up regulatory relief, and I would like to have your 
comments on that question or a variation of that question, if 
you will.
    Mr. Levey. I think I will save Secretary Wayne from that, 
since I think it really falls more to me.
    The basic point, and as with any regulation, there are lots 
of exceptions and details to this.
    Senator Carper. Start with the first part of my question. 
When do they have to be filed?
    Mr. Levey. Yes, when do they have to be filed? Suspicious 
activity reports generally have to be filed by those who are 
covered by that regulation whenever they recognize suspicious 
activity, but they are not filed, and this is the key 
difference between them and currency transaction reports, they 
are not filed that day. They are not instantaneous; they are 
not automatic.
    Currency transaction reports are filed promptly upon a 
currency transaction above the threshold occurring unless it 
falls into one of the exceptions that are in the rule. That is 
the basic background. The question that I think you want me to 
address is whether we are getting too many currency transaction 
reports and therefore putting too much burden on the private 
sector.
    Senator Carper. We hear it is too much burden on the 
private sector. They are not sure for what purpose, and the 
second part of it is in terms of the enforcement, the people 
who are doing the enforcement, are they getting actually more 
reports than they need to spend time looking at the ones that 
are not really going to give them anything in terms of valuable 
information, and they do not take enough time to look at the 
stuff they should be examining?
    Mr. Levey. Well, I think what we have found is that, and 
there will be a law enforcement panel to follow up on this, 
that the currency transaction reports have turned out to be 
quite valuable to law enforcement. The FBI, for example, puts 
them in their database, and they find that a huge number of 
them are matching up with ongoing investigations, and they are 
providing leads and actionable leads in those investigations.
    And the thing that is interesting, Senator Carper, is that 
it is not just the ones that are of a higher threshold; in 
other words, where the transaction is of a higher amount. It is 
also very much the ones that are just over the $10,000 
threshold, which, of course, suggest that one of the easy 
things that people think about to do to reduce the number of 
filings would actually be not particularly effective, which 
would be to raise the threshold.
    Having said that, I think that everyone who looks at this 
in good faith would agree that too many currency transaction 
reports are being filed. Some of them are being filed that are 
not particularly useful to law enforcement. I want to make a 
point here that that does not really bother law enforcement 
that much.
    Chairman Shelby. Explain what you mean by that, not very 
useful; that is important. I think that is some of the issue 
Senator Crapo is raising.
    Mr. Levey. It is what Senator Carper was getting at, that 
some of them are filed for customers where we know, where the 
customer, they know that it is not particularly suspicious; 
there is no real potential for it to be a law enforcement lead.
    The difficult issue is how to identify which ones those 
are, because it is not just the ones that are between $10,000 
and $15,000, for example. And that poses a real problem. When I 
say law enforcement does not mind, it is because the way law 
enforcement uses the currency transaction reports is 
essentially through electronic searching. And so, they are able 
to search the data, whether there is x number of CTR's in the 
database or 10x number of CTR's in the database.
    So in order for us to help the private sector get out from 
underneath this burden, I think we need to come up with a way 
to either try to identify which ones are not particularly 
useful or to try to make the current exemptions that already 
exist in the regulations more user-friendly, because for 
whatever reason, and actually, Senator Crapo identified what 
the financial sector is saying about this, there are exemptions 
that already exist that are not being used to their full 
extent, either because there is too much burden in applying of 
right exemption or because they are second guessed by the 
regulator if they file an exemption; someone says wait, that 
person should not have been exempt.
    This is something where we really need to keep working on 
this so that we can try to identify a good way forward. One 
proposal that is out there that I think is a good one is to let 
the GAO do an investigation. It is not usually what I come up 
and ask for, but in this case, I think it is a really good idea 
to have the GAO take a look at this and see if they can help us 
identify ways that would both reduce the burden but not take 
away from law enforcement what is valuable and what is 
important to our national security.
    Senator Carper. All right; good, well, thanks a lot. Thanks 
for that recommendation, too.
    Thanks, Mr. Chairman.
    Chairman Shelby. Thank you, Senator.
    Secretary Levey, I have a number of questions. FinCEN 
reports that about half a billion dollars of suspicious 
activity reports were filed on average for each of the last 
years on the convergence of shell corporations, Eastern 
European countries, and the use of correspondent bank accounts. 
The FBI believes that U.S. shell companies are being used to 
launder as much as $36 billion a year from Russia and others.
    The New York State Banking Department recently noted a 
spike in the volume of shell company wire transfer activity 
through high risk correspondent bank accounts, both in terms of 
dollar amounts and the number of transactions. Mr. Secretary, 
do you think the advantages of using these corporate structures 
for legitimate business purposes are now being outweighed by 
the potential for their abuse? Has Treasury worked up any 
specific steps which can be taken to reduce the risk to our 
financial system while preserving the advantage of their 
corporate structure for their legitimate business use as 
opposed to illegitimate use? Is that a concern to you?
    Mr. Levey. Well, yes, Mr. Chairman, it is. And I want to 
start by saying there are legitimate uses for the corporate 
form.
    Chairman Shelby. There are.
    Mr. Levey. And we want to be sure that we do not deprive 
the business community of something that is critically 
important. So it is not a question--I think the question that 
you asked about are there ways to reduce this risk----
    Chairman Shelby. Absolutely.
    Mr. Levey. --is really the way to approach this rather 
than----
    Chairman Shelby. And meet your goal of combating terrorist 
financing, money laundering, criminal activity, all that.
    Mr. Levey. Absolutely; that is exactly the point.
    Almost all of the things that we try to do in the financial 
system to prevent money laundering can be generally described 
as trying to increase transparency in the system, so that when 
there is a law enforcement investigation going on, people do 
not run into dead ends; they can see what is behind; they can 
understand who really is involved in the transaction, who 
really owns a corporation, who really owns the account.
    Chairman Shelby. Does that get to know your customer, 
maybe?
    Mr. Levey. That is exactly what know your customer rules 
are all about. So we generally want financial institutions to 
know who their customers are and who is behind them.
    The problem with these shell companies is that they create 
situations where you get to that corporate form, and the 
investigator does not know what is behind that. I have actually 
had experience where I was traveling in a country where they 
were just standing up their ability to do money laundering 
investigations, and I sat down and said, well, what can we do 
to help, thinking that they were going to ask for technical 
assistance or something, but they said can you do something 
about these shell companies in the United States, because all 
my investigations are running into something where I cannot get 
behind that shell company?
    We are working on this. As you know, this is one of the 
things in the threat assessment. There are a number of things 
that are possible to be done here that we are considering, but 
one thing that we have already started to do, which I think may 
be the most fruitful avenue, which is to talk to the States.
    I am sure that the States do not really want to be in a 
race to the bottom in terms of the level of lack of scrutiny 
they put into this process, and so, we have talked with the 
National Association of Secretaries of State, pointed out this 
problem. I want to work with them on this. This is not 
something, though, I think, Mr. Chairman, that we have to be 
careful here; you know, State corporate law is the way our 
country is organized. You know that a lot better than I do. And 
we have to be careful not to overstep what is appropriate for 
us to do in this area. If we can work on this cooperatively----
    Chairman Shelby. In other words, you do not want to destroy 
legitimate business entities.
    Mr. Levey. And our Federal system where that is handled on 
the State level.
    Chairman Shelby. Right.
    Mr. Levey. But we want to work with the States 
cooperatively to see if we can improve on this.
    Senator Sarbanes. Well, if the States are going to provide, 
in effect, a loophole, then, we have a serious problem on our 
hands, do we not?
    Chairman Shelby. We cannot have that. He is right.
    Senator Sarbanes. I see in your report, you say legal 
jurisdictions, whether States within the United States or 
entities elsewhere that offer strict secrecy laws, lax 
regulatory and supervisory regimes and corporate registries 
that safeguard anonymity are obvious targets for money 
launderers.
    A handful of U.S. States offer company registrations with 
cloaking features such as minimal information requirements and 
limited oversight that rival those offered by offshore 
financial centers. And then, you go on to detail the problems 
that this raises. Is that not correct?
    Mr. Levey. Absolutely, Senator Sarbanes, but my point is 
just that this is something which I have--at least in the first 
instance would like to let the States, you know, talk to the 
States, point out this issue to them. It might be something 
well-known to people on this Committee who have been studying 
this and working on this for a long time, but I do not know if 
this is raised on the radar screens of the people who make 
these rules in these States, and I would like to see if we can 
work with them cooperatively to close this----
    Senator Carper. Mr. Chairman, would you yield?
    Chairman Shelby. I will yield, Senator Carper.
    Senator Carper. I would just say that I think you are on 
the right track there. And that is the consultation that I 
think is well advised and would be appreciated.
    Thank you.
    Chairman Shelby. You can tell when you have a former 
governor on the panel.
    [Laughter.]
    Secretary Levey, I think Senator Sarbanes raises an 
important point, though. Terrorist financing deals with 
national security. We cannot afford, I believe, to let the 
States create a loophole that would be used to abuse our 
financial system or to aid and abet money laundering, criminal 
activity, terrorist financing in any way. I know there is a 
delicate balance there, but national security will trump all of 
that; I hope so anyway.
    Mr. Levey. I completely agree, and if we end up not getting 
cooperation on this----
    Chairman Shelby. Absolutely.
    Mr. Levey. But the first step, I think, should be----
    Chairman Shelby. Sure, we understand. Like Senator Carper, 
former Governor of Delaware, he understands that.
    Secretary Levey and Secretary Wayne, investigations have 
linked black market cigarette sales, I mentioned this earlier, 
which are on the rise in the United States to Mexican gangs and 
Asian mafia groups, where some of these rings also have 
lucrative links to such groups as Al Qaeda, Hamas, and 
Hezbollah. There are persistent reports of heroin trafficking 
financing, terror, coming from Congressional factfinders and 
American generals alike. You have seen that.
    DEA statistics show that nearly half of the 41 groups on 
the Government's list of terrorist organizations are tied to 
narcotics trafficking. The FBI has reported that there is 
evidence that U.S. automobile theft rings in the United States 
have smuggled cars out of the country as part of a widespread 
criminal network that includes terrorists and insurgents.
    In the triborder area of South America that you referenced 
earlier, the State Department reports, Secretary Wayne, that it 
is concerned that proceeds from narcotics and piracy of goods 
may be used to raise funds for terrorist groups like Hezbollah.
    James G. Conway, the legal attache at our embassy in Mexico 
has said, ``where you find terrorists, you often find some kind 
of criminal activity.'' My questions, I am going to ask three 
of them, Secretary Wayne and Secretary Levey: One, is the world 
now seeing the birth of a new hybrid of organized crime/
terrorist organization combination? Two, from a terrorist 
financing perspective, what do these examples mean to the 
funding of future operations or even the movement of funds 
themselves? And three, considering the dizzying array of 
jurisdiction, how does this affect coordination among State, 
Federal, and international agencies?
    Secretary Levey first and then Secretary Wayne. I know that 
is a mouthful, but these are important issues.
    Mr. Levey. No, absolutely, Mr. Chairman. I think one of the 
things that we have seen is that as Al Qaeda is becoming more 
fragmented, we are having more self-funding cells of Al Qaeda, 
and sometimes, those are being funded through criminal 
activity, and I think that is part of what you have referenced 
in your question. I think that first of all, there is a silver 
lining to that. There is a positive side to that, which is 
that, one, it indicates that the network has been degraded in a 
certain way.
    But second and perhaps more importantly, engaging in crime 
by a terrorist operative is a vulnerability, because it gives 
law enforcement a chance to do what our law enforcement now has 
as its highest mission, which is to prevent. If you can 
prosecute someone for credit card fraud or some petty crime and 
prevent a terrorist attack, that is a huge victory.
    Chairman Shelby. But in the aggregate, credit card fraud is 
billions of dollars, is it not? I mean, it might be small 
transactions, but it is billions of dollars, as you know.
    Mr. Levey. And the problem of financial crime is broader, 
but I just want to make the point that if, in fact, terrorists 
are turning more and more to criminal activity, that is 
something that gives us an opportunity that we would not have 
if they simply were being funded by either a State sponsor or a 
donor, because they are engaging in activity that allows us to 
preempt them and take them off the street, quite frankly.
    The other point that I would make in response to your 
question is that it does highlight the importance of 
international cooperation by law enforcement. And I know both 
from my time at Justice and from my close coordination with Mr. 
Morehart and Mr. Delli-Colli, who are going to testify later, 
that this is something that our law enforcement agencies 
understand well, and a lot of our international cooperation on 
law enforcement is, first of all, everyone wants to stop crime, 
but it also has this counterterrorism purpose to it, because, 
you know, international crime is also a way to fund 
international terrorism.
    But the last point I would make is that this Committee is 
very focused on terrorist financing, and I think we have to be 
very clear when we talk about terrorist financing, that it is 
still our belief, that while there is criminal proceeds going 
to terrorism, that is not, I would say that is not--when I 
think about what money is going to terrorist organizations, 
there are still state sponsorship and private donors that are 
of greater concern, and it is certainly in greater amounts.
    And I want to make sure that, of course, everyone wants to 
fight crime, and it is worth doing even if they were not 
funding terrorism, but when we focus on terrorist financing, I 
want to make sure that we keep our eye on the highest priority, 
which is to stop those efforts.
    Chairman Shelby. Secretary Wayne, do you have any comments?
    Mr. Wayne. Yes, thank you, Senator.
    Just to add that to underscore what Under Secretary Levey 
said, we have noticed this trend, that as we have been more 
successful in cutting the normal channels for large flows of 
money, people have turned to self-financing. And so, we have 
recognized also in our own work with our colleagues, 
particularly in the law enforcement agencies, that we need to 
think through those challenges also, and we have particularly 
seen in Europe with a number of the terrorist acts that have 
gone on there evidence that there was local financing of these 
by illicit activities. So it is an area that we have to pay 
attention to.
    We have also, in the triborder area, noted that this is a 
particular area where there is a lot of illegal commerce going 
on. We have not seen any evidence that there is terrorist 
activity going on but----
    Chairman Shelby. There is a lot of money coming out.
    Mr. Wayne. But we have seen money flowing back to 
Hezbollah, particularly in one case.
    Chairman Shelby. And a lot of money, is it not.
    Mr. Wayne. And potentially a lot of other money there.
    So we have focused, and Under Secretary Levey's colleagues 
Assistant Secretary O'Brien has recently been down there, and 
our embassies have been working hard on this. We focused on 
getting the Governments of Brazil, Paraguay, and Argentina to 
put the right kind of legislation in place to train their 
people up to really take this on.
    Chairman Shelby. Are you making any progress there?
    Mr. Wayne. Well, I think we are.
    Chairman Shelby. Are they capable of doing this? Do they 
have the will to do this in the triborder area?
    Mr. Wayne. In Argentina, they just passed a law recently to 
stiffen up their----
    Chairman Shelby. What about Brazil?
    Mr. Wayne. And Brazil is also showing more interest in 
this, and they are actually taking leadership in the regional 
FATF-like body there.
    Chairman Shelby. What about Paraguay?
    Mr. Wayne. Paraguay, we just raised this. I had several 
ministers from Paraguay here last week. There is a law that 
would tighten up a new money laundering law would go into 
place. It is going to their parliament. They are very committed 
to getting it passed. They said President Duarte is committed 
to getting it passed.
    And there is no doubt they very much appreciation the 
technical assistance we have also been providing them to help 
tackle these kinds of problems. So this is an area where we are 
paying attention, and it is important to look. And there are 
similar areas like that in other parts of the world where we do 
need to pay attention also.
    Chairman Shelby. Secretary Levey, would you just touch 
briefly again on--I am going to ask the question--how involved, 
to your knowledge, is--well, how much money is flowing from 
Saudi Arabia into Iraq to aid the terrorists? Is there any way 
to put a handle on that?
    Mr. Levey. I do not have a number that would be reliable or 
authoritative on that.
    Chairman Shelby. But it is real money, is it not?
    Mr. Levey. I am sure that there is money that is going from 
Saudi Arabia to Iraq. I want to say, and this is important, I 
think the Government of Saudi Arabia has been very supportive 
to us in helping us with the insurgency.
    They also do view, quite frankly, and this feeds into your 
other theme, Mr. Chairman, they view the potential of returning 
insurgents to Saudi Arabia as a real threat inside of Saudi 
Arabia, and so, they have been working with us quite closely on 
that issue, and they also want to see the insurgency defeated.
    Chairman Shelby. What is the role of Iran in all this 
financing of terrorism? We know it is real.
    Mr. Levey. I think the Secretary of State, Mr. Wayne will 
correct me if I am wrong, I think she referred to Iran as the 
central banker of terror.
    Chairman Shelby. Central banker of terror.
    Mr. Levey. And I think that fits it well.
    Chairman Shelby. And you have no cooperation there, of 
course.
    Mr. Levey. Of course not.
    Chairman Shelby. Secretary Levey, you were recently in 
Turkey yourself. Could you provide quickly an assessment on 
that country's level of cooperation? How would Turkey rate if 
graded by the Financial Action Task Force today on cooperation 
in our fight against criminal activity and terrorism?
    Mr. Levey. Give me just a moment, Mr. Chairman.
    Chairman Shelby. Go ahead.
    Mr. Levey. As you indicated, I was there, and I know that 
you were also there.
    Chairman Shelby. I was there last spring.
    Mr. Levey. We followed each other fairly closely.
    The direct answer to your question is we are going to find 
out how they are going to do in a FATF evaluation.
    Chairman Shelby. We will evaluate it.
    Mr. Levey. They are about to get evaluated either late this 
year or early in 2007. I have to say, and normally, I like to 
say, oh, I went and visited a country, and then, there were 
improvements, and I take credit in some bizarre way for what 
happened.
    Chairman Shelby. It is more complicated than that, is it 
not?
    Mr. Levey. In this instance, I think, while we have raised 
the issue, and we have gotten higher level attention there, 
there are still some significant problems with their law. The 
most striking to me is that the definition of terrorism in 
Turkey, it is not a terrorist act unless it targets a Turkish 
citizen.
    And when you think about the international coalition that 
is viewing terrorism as a global problem, that is really out of 
step. They also have not established a money laundering 
predicate for terrorist financing of international terrorist 
organizations. Another one, they have the possibility of filing 
suspicious transaction reports in their system, but there is no 
safe harbor for the person filing it. So when you think about 
what that means, you are the banker, and you file it, your 
customer can come after you for filing the suspicious 
transaction report. Of course, that is a huge disincentive to 
doing that.
    And at least at the time I visited, and I have not heard 
that this has improved, they had had no successful money 
laundering prosecutions in Turkey. And given the huge drug 
trafficking that is there and the success that they have had on 
the law enforcement side against drug trafficking, that is a 
problem.
    Having said all that, we do have indications that this is 
something that they take seriously and are making moves to 
improve. I hope that the FATF evaluation is a good deadline for 
them. And I know also that we have gotten good cooperation on 
certain issues. I can think of one off the top of my head of a 
very significant Al Qaeda operative who was taken down and 
disrupted in Turkey. And so, you know, if you take a step back, 
you know, that is something that is perhaps more important than 
anything else.
    Chairman Shelby. An unnamed Treasury official was recently 
quoted in U.S. News and World Report as noting with respect to 
the scale of money laundering and terrorist financing in the 
Middle East and North Africa that as much as half the economies 
of the nations in the region were ``off the books.'' Is that 
about right? Or would you be surprised?
    Mr. Levey. I know why that person is unnamed. I cannot 
verify that. I have no idea where----
    Chairman Shelby. You have a lot of work to do in that area, 
though, do you not?
    Mr. Levey. We do have a lot of work to do in that area, but 
I am not going to embrace that comment.
    Chairman Shelby. You are not going to dispute it either, 
are you?
    Mr. Levey. I do not have the facts to dispute it, but I 
doubt it. I think that is pretty--that might be----
    Chairman Shelby. That half is too much.
    Mr. Levey. Okay; the half is too much.
    Chairman Shelby. Senator Sarbanes, thank you.
    Senator Sarbanes. Mr. Chairman, I will be brief. I know we 
have another panel coming.
    As your report makes clear, there are quite a number of 
agencies and departments of our Government that are involved in 
dealing with this problem. How do we coordinate all this work? 
How do we assure that there is a coordinated plan and 
coordinated implementation?
    Mr. Levey. Well, if I can take that, I am sure Assistant 
Secretary Wayne will want to do that, too, this is something 
which we have worked on very hard and I think we have been 
quite successful on. Certainly, we have coordination through 
the National Security Council, as a lot of other topics do, 
where we come together and discuss terrorist financing 
priorities, and we also all recognize that terrorism financing 
is part of a larger mission of counterterrorism.
    Senator Sarbanes. How often do you come together for this 
discussion?
    Mr. Wayne. At different levels, we come together at 
different times. We meet every couple of weeks at assistant 
secretary, under secretary level. There are weekly meetings at 
working level and office director and deputy assistant 
secretary level. Periodically, there are higher level meetings 
that come together, and then, somewhat less periodically, 
deputies level meetings that come together.
    Senator Sarbanes. Who chairs these meetings?
    Mr. Wayne. The National Security Council chairs the 
assistant secretary level meetings that take place every 2 
weeks.
    Senator Sarbanes. Who is that?
    Mr. Wayne. Juan Zarate who chairs those meetings at the 
National Security Council.
    Senator Sarbanes. Okay.
    Mr. Wayne. We then have other meetings that handle 
specialized areas that are chaired by different agencies. The 
State Department, for example, calls together every 2 weeks an 
interagency group to talk about coalition building issue: How 
can we get a certain country to work with us more efficiently? 
What is the kind of approach we need to build that cooperation?
    There are other groups that get together to talk about 
other topics which we would not bring out in this hearing 
necessarily. But it is a very complex system that we 
continually are trying to improve to make it more effective.
    Senator Sarbanes. And does the National Security Council 
oversee the implementation by the various agencies? Who ensures 
that there is follow-through in carrying out the tasks?
    Mr. Wayne. As a general matter, that is the case, although 
I think it is worth noting that with the new National 
Counterter-rorism Center that was created under the leadership 
of Admiral Redd, that will be one of the functions that will be 
taken on, a monitor to make sure that particular actions are 
followed through and then assess the effectiveness to help us 
plan for the future.
    And that is a new addition, obviously, to the whole 
counterter-rorism architecture, if you will, in the Government 
that is being stood up. You know, it started from scratch, as I 
am sure you know, and they are working hard to stand that up. 
But that will be, I think, one of the functions that it is 
slated for them to take on.
    Senator Sarbanes. How often does this issue go to levels 
above your levels within your Departments?
    Mr. Levey. The issues within our Departments?
    Senator Sarbanes. No, the money laundering issue becomes 
the subject of attention of officials in your Departments above 
the level of those of you that are here today.
    Mr. Levey. In my Department, all the time. I discuss these 
issues, particularly the terrorism issues and the issues we 
discussed about North Korea, but also, any of the national 
security issues, I discuss them regularly with Deputy Secretary 
Kimmitt and Secretary Snow.
    Senator Sarbanes. And how often do Snow and/or Kimmitt meet 
at a higher level with--well, do you discuss them above your 
level, Mr. Wayne?
    Mr. Wayne. Yes, particularly if we are going to take major 
action or public action. By law, of course, this needs to be 
coordinated between the Secretary of State and the Secretary of 
the Treasury when we are taking a public designation.
    Senator Sarbanes. This coordination that happens every 2 
weeks at your level, as I understand it, is that correct? Not 
just the two of you but the other agencies, too.
    Mr. Wayne. The larger group.
    Senator Sarbanes. How often does such a meeting occur at 
levels above your level, an interagency, interdepartmental 
meeting?
    Mr. Levey. I think that on particular issues such as some 
of the ones we have discussed, although I probably should not 
name those issues in this forum, the deputies and principals 
meet regularly, every week, sometimes twice a week, and there 
will be a slice of what we have discussed will be part of 
particular meetings. And so, there is discussion of 
particularly counterterrorism issues that occur at the 
deputies' and principals' levels. I cannot tell you exactly how 
often, but there are NSC meetings a couple of times a week.
    Senator Sarbanes. I am trying to get at whether those 
people meet to discuss the money laundering issue.
    Mr. Levey. I would say that the money laundering issues are 
rarely discussed at the principals level in an NSC-type 
setting. There are different components of it that may come up 
in particular meetings, but it comes up more episodically, 
depending on the broader issue being discussed.
    Chairman Shelby. Secretary Levey, as you know, you are 
Treasury. We were surprised at the lack of the attention on the 
highest levels, the Secretary of the Treasury and the Deputy 
Secretary of Treasury Kimmitt, Snow and Kimmitt, as far as the 
Committee on Foreign Investment, CFIUS, was concerned.
    I know this is different from CFIUS but at the same time 
very important. We believe that you, both of you, are very 
involved, but we hope, and I think Senator Sarbanes is on to 
something here, that the Deputy Secretary of the Treasury and 
the Secretary of the Treasury should be hands-on with you and 
your staff as to what is going on with money laundering, 
criminal activity, terrorist financing on that level; so should 
the Secretary of State, I believe.
    Senator Sarbanes. I agree with that.
    Chairman Shelby. I think that is a good question that he 
raised here.
    Senator Sarbanes. Thank you.
    Chairman Shelby. Because no one knew, according to their 
statements, that the Dubai Ports thing had been approved: The 
Secretary of the Treasury, the President of the United States, 
the Deputy Secretary; nobody. We cannot have that anywhere 
anymore. They have to be hands-on. Am I right?
    Mr. Levey. You are right.
    Chairman Shelby. Senator Sarbanes is right on point.
    Mr. Levey. --that my two bosses are very focused, 
particularly on these national security issues, and they are 
very up to speed.
    Senator Sarbanes. Well, but they are not engaged in the 
kind of interagency discussion and focus at the highest levels 
that this issue warrants, it seems to me.
    Mr. Levey. I do not know what particular periodic meetings 
you think are appropriate, but they do, these issued are 
discussed at deputies' and principals' meetings in the context 
of other issues. And so, if there will be some broader issue, 
there will be the terrorism, the money laundering issue that 
will come up in that context, and that is not rare.
    Chairman Shelby. Thank you.
    Thank you, gentlemen. We will continue to work with you as 
we have in the past.
    Chairman Shelby. We have another panel, Mr. Michael 
Morehart, Chief, Terrorist Financing Operations Section, 
Federal Bureau of Investigation; Mr. Kevin Delli-Colli, 
Assistant Director, Financial Investigations, Immigration and 
Customs Enforcement, Department of Homeland Security.
    Gentlemen, we will welcome both of you here. Your written 
testimony will be made part of the record, as it always is at 
the hearing here, and Mr. Morehart, we will start with you. 
Welcome to the Committee.

                 STATEMENT OF MICHAEL MOREHART

         CHIEF, TERRORIST FINANCING OPERATIONS SECTION,

                   COUNTERTERRORISM DIVISION,

                FEDERAL BUREAU OF INVESTIGATION

    Mr. Morehart. Thank you. Good morning, Chairman Shelby, 
Ranking Member Sarbanes, and other distinguished Members of the 
Committee.
    On behalf of the FBI, I am honored to appear before you 
here today to discuss the FBI's efforts to disrupt and 
dismantle national and international money laundering 
operations and the operational impact of the successful 
utilization of information obtained from the financial sector. 
Chief among the investigative responsibilities of the FBI is 
the mission to proactively neutralize threats to the economic 
and national security of the United States.
    Whether motivated by criminal greed or radical ideology, 
the activity underlying both criminal and counterterrorism 
investigations is best prevented by lawful access to financial 
information by the law enforcement and intelligence 
communities.
    In the criminal greed model, the FBI utilizes a two-step 
approach to deprive the criminal of the proceeds of his or her 
crime. The first step involves aggressively investigating the 
underlying criminal activity, which establishes the specified 
unlawful activity requirement of the Federal money laundering 
statutes. And the second step involves following the money to 
identify the financial infrastructures used to launder the 
proceeds of that criminal activity.
    In the counterterrorism model, the keystone of the FBI's 
strategy is countering the manner in which terror networks 
recruit, plan, and effect operations, each of which requires a 
measure of financial support. The FBI established the Terrorist 
Financing Operations Section of the Counterterrorism Division 
on the premise that the required financial support of terrorism 
includes the generation, movement, storage, and expenditure of 
resources, which are oftentimes identifiable and traceable 
through records published by financial institutions.
    The analysis of financial records provides law enforcement 
and the intelligence community real opportunities to 
proactively identify criminal enterprises and terrorist 
networks and disrupt their nefarious designs. Money laundering 
has a significant impact on the global economy. The 
International Monetary Fund estimates that money laundering 
could account for 2 to 5 percent of the world's gross domestic 
product. In some countries, people eschew formal banking 
systems in favor of informal value transfer systems such as 
hawalas or trade-based money laundering schemes such as the 
Colombian Black Market Peso Exchange.
    There are several more formalized venues the criminals use 
to launder the proceeds of their crimes, the most common of 
which is the U.S. banking system, followed by cash-intensive 
businesses like gas stations and convenience stores, offshore 
banking, shell companies, bulk cash smuggling operations, and 
casinos, for example. Money services businesses such as money 
transmitters and issuers of money orders or stored value cards, 
for that matter, serve an important and useful role in our 
society but are also particularly vulnerable to money 
laundering activities.
    The FBI currently has over 1,200 pending cases involving 
some aspect of money laundering, with proceeds drawn from a 
variety of traditional criminal activities as well as 
terrorism. By first addressing the underlying criminal activity 
and then following the money, the FBI has been able to make 
significant inroads into the financial infrastructure of 
domestic and international criminal and terrorist 
organizations, thereby depriving the criminal element of 
illegal profits from their schemes.
    In recent years, the international community has become 
more aware of the economic and political dangers of money 
laundering and has formed alliances on several fronts to share 
information and join investigations. As our predecessors Under 
Secretary Levey and Assistant Secretary Wayne mentioned, those 
include the Egmont Group, and I will not go into an explanation 
of that, as they already have, as well as the FATF's.
    Congress has also assisted our efforts by passage of the 
USA PATRIOT Act. As Section 319(a) of the USA PATRIOT Act now 
permits the Government to seize assets held in U.S. 
correspondent accounts in lieu of criminal proceeds deposited 
abroad in a foreign bank. Access to financial information 
significantly enhances the ability of law enforcement and 
members of the intelligence community to thwart the activities 
of terrorists.
    The lack of complete transparency in the financial 
regulatory system is a weakness on which money launderers and 
facilitators of terrorism rely and has proven to be critical to 
the financing of global terrorism. Limited access to financial 
records inhibits law enforcement's ability to identify the 
financial activities of terror networks.
    Efforts to detect terrorist activity through financial 
analysis are further complicated by the fact that the funding 
of terrorism may differ from traditional money laundering, 
because funds used to support terrorism are sometimes 
legitimately acquired; that is, for example, charitable 
contributions and business proceeds.
    Overcoming these challenges in our efforts to prevent 
terror acts has required increased cooperation with the private 
financial and charitable sectors. Records produced and 
maintained by financial institutions pursuant to the Bank 
Secrecy Act, otherwise known as BSA, are of considerable value 
to these critical efforts.
    As I previously testified to the U.S. House of 
Representatives Committee on Financial Services, the FBI enjoys 
a cooperative and productive relationship with FinCEN, the 
purveyor of BSA information. This cooperation has broadened the 
FBI's access to BSA data, which in turn has allowed us to 
analyze this data in ways that were not previously possible.
    When BSA data is combined with the sum of information 
collected by the law enforcement and intelligence communities, 
investigators are better able to connect the dots and thus are 
able to identify the methodology employed to transfer currency 
or move value.
    Sometimes, the investigative significance of BSA data 
filings cannot be appreciated until the BSA data is compared to 
predicated law enforcement and intelligence information that 
may not be of public record. Such critical information can be 
biographical and descriptive information, the identification of 
previously unknown associates and co-conspirators, and in 
certain instances, the location of a subject by time and place.
    The value of BSA data cannot be overstated. The importance 
of access to that information has already proven invaluable on 
both the micro level; that is, individual case level, as well 
as the macro or strategic level. BSA data has proven its 
utility in counterterrorism matters, and any contemplated 
change to the underlying reporting requirements of the BSA 
should be measured and carefully considered before such action 
is taken.
    Either increasing the transaction amount at which CTR's, 
otherwise known as currency transaction reports, would be 
generated or abolishing the recordation requirement altogether 
in certain instances would deprive law enforcement of what has 
proven to be valuable intelligence.
    Recent analysis on the macro level of the impact of BSA 
data provided by FinCEN to the FBI reinforces the investigative 
significance of that data; for example, for the years 2000 
through 2005, 38.6 percent of all CTR's filed reported amounts 
between $10,000 and $14,999. For the same period, roughly 18 
percent of all CTR's filed reported amounts between $15,000 and 
$19,999. CTR reporting amounts between $20,000 and $25,000 
comprised nearly 11 percent of CTR's for that same time period. 
For the amounts $25,000 to $30,000, they comprised about 6.2 
percent of all CTR's. And CTR's between $30,000 and $35,000 
were about 4.7 percent of all CTR's. Transaction amounts 
reported between $35,000 and $100,000 accounted for 19 percent, 
and CTR's reporting more than $100,000 accounted for about 2 
percent during that same time period.
    To determine the operational impact, the value, that is, of 
BSA data relative to FBI investigations, a sample of FBI 
records for the years 2000 through 2005 were matched by exact 
name and date of birth to almost 13,000 CTR's reported in that 
same time period. This statistical sample, if you extrapolated 
it to the universe of CTR's allowed us to conclude that in 
excess of 3.1 million CTR's were pertinent to FBI 
investigations during that time period.
    The breakdown of the sample CTR's deemed relevant to those 
FBI investigations revealed some of the following: About 29 
percent of the CTR's reported transactions between $10,000 and 
$15,000, and 20 percent reported transactions between $15,000 
and $20,000, thereby nearly half the transactions were for 
amounts between $10,000 and $20,000. The remainder was for 
transactions between $20,000 and $35,000.
    The $10,000 CTR threshold was established in 1973. Since 
that time, technology associated with the movement of money has 
advanced significantly. As a result, the movement of funds 
through electronic means has now become the standard. It should 
be noted that CTR's are not required for the electronic 
movement of funds.
    The practical effect on law enforcement activities of an 
increase in the CTR threshold reporting amount would be to 
severely limit or even preclude law enforcement access to 
financial data associated with cash transactions that would not 
otherwise be reported. In other words, the filing of CTR's at 
the current reporting threshold ensures a degree of 
transparency, as was mentioned by Under Secretary Levey, in the 
financial system that would not otherwise be available to us.
    Another topic of importance with respect to the filing of 
CTR's is the seasoned customer exemption. As you are aware, the 
BSA allows financial institutions to seek CTR filing exemptions 
pursuant to what is known as the designated exempt persons 
protocol. We are opposed to any such exemption for long-term, 
well-established, and documented customers that would be for a 
class of customer beyond the current regulatory regime, which 
includes ineligible, nonlisted businesses such as money service 
businesses. We would also caution against the use of a 
specified time period as a primary requirement for the 
exemption under the DEP.
    While Section 314(a) requests and suspicious activity 
requests, otherwise known as SAR's, are extremely valuable 
tools, the notion that these tools are a substitute for the 
intelligence gleaned from currency transaction reporting is 
inaccurate. CTR's are objective reports, the document an event 
in time providing such information as the identity of the 
transactor or transactors, the bank name, the account number, 
the account owner, and the dollar amount.
    Additionally, these reports are available for at least a 
10-year period, and investigators and analysts have the ability 
to directly query these reports when necessary. In contrast, 
the 314(a) process is only used in the most significant 
terrorism and money laundering investigations and only after 
all other financial leads have been exhausted, which includes 
reviewing CTR's.
    The banks are only required to review accounts maintained 
by named subjects during the preceding 12 months and 
transactions conducted within the last 6 months, in sharp 
contrast to the 10 years of data provided by CTR's. Moreover, 
SAR's are only available on select matters, where a bank 
official has made a subjective determination that a particular 
transaction or activity is suspicious. Although the banks are 
doing an outstanding job of reporting suspicious activity, 
SAR's are not a substitute for the objective transaction 
reporting provided by CTR's.
    Any decision to change the working of the seasoned customer 
exemption we would recommend should be taken with great care. 
This is particularly so because of the steadily increasing 
ability of the Bureau to use this data to meaningfully track 
national security threats and criminal activity. Though 
information on the evolution of this capability is not 
appropriate for public discussion at this time, we would be 
happy to provide nonpublic briefings on it and have already 
done so to some of your staffs.
    The Bureau and the Administration are committed to working 
with this Committee and the Congress to ascertain whether 
certain categories of CTR's could be eliminated without harm to 
our investigative and/or intelligence collection capabilities 
and if so to find effective methods to stop the filing of those 
and only those CTR's that would not be of use to us, but we 
should not eliminate the filing of any category of CTR's absent 
a study of the utility of the category that is under 
consideration.
    In conclusion, BSA data has proven invaluable. It has 
proven its worth not only in traditional criminal 
investigations but also in our counterterrorism efforts. Our 
experience shows that counterter-rorism activities are 
relatively inexpensive to carry out and the majority of CTR's 
of value to law enforcement and intelligence communities are 
typically those that are prepared at or near the current 
reporting requirements, as I previously gave some examples.
    To dramatically alter CTR reporting requirements without 
carefully and independently studying this matter we believe 
could be devastating and a significant setback to our 
investigative and intelligence efforts relative to both the 
global war on terrorism and traditional criminal activities.
    Thank you, gentlemen.
    Chairman Shelby. Yes, sir, go ahead.

                 STATEMENT OF KEVIN DELLI-COLLI

                   DEPUTY ASSISTANT DIRECTOR,

          FINANCIAL AND TRADE INVESTIGATIONS DIVISION,

           U.S. IMMIGRATION AND CUSTOMS ENFORCEMENT,

              U.S. DEPARTMENT OF HOMELAND SECURITY

    Mr. Delli-Colli. Good afternoon, Chairman Shelby, Ranking 
Member Sarbanes. My name is Kevin Delli-Colli, and I am the 
Deputy Assistant Director for Financial and Trade 
Investigations at U.S. Immigration and Customs Enforcement, 
ICE. I appreciate the opportunity to share with you how ICE is 
applying its financial investigative authorities to attacking 
criminal enterprises that violate our Nation's borders and 
homeland security.
    ICE is the largest investigative component within DHS. 
Working overseas, along our Nation's borders, and throughout 
the Nation's interior, ICE agents are demonstrating that our 
unified customs and immigration authorities constitute a 
powerful tool for combating international money laundering and 
transnational crimes. During fiscal year 2005, ICE 
investigations led to the seizure of nearly $1 billion in 
currency and assets and the arrest of over 23,000 individuals.
    The 2005 U.S. Money Laundering Threat Assessment 
represented a remarkable interagency effort to identify 
vulnerabilities and methods employed by criminal organizations 
to move and store their illegal funds.
    ICE was pleased to participate in the interagency working 
group and provide information and insights relevant to the 
threat assessment, especially in the area of bulk cash 
smuggling, illegal money service businesses, and trade-based 
money laundering.
    A number of the money laundering trends we have developed 
in response to the Bank Secrecy Act and the robust anti-money 
laundering programs instituted by the U.S. financial industry. 
As a result, criminal organizations are increasingly forced to 
resort to bulk cash smuggling, trade-based money laundering, 
and other schemes to move their illegal proceeds.
    As the opportunity to exploit U.S. financial institutions 
diminishes, the smuggling of currency out of the United States 
has become a preferred method of moving proceeds across our 
borders. ICE special agents have used the bulk cash smuggling 
statute with great effect, having arrested 330 individuals 
since its passage in October 2001. In addition, ICE and our 
sister agency, Customs and Border Protection, CBP, have worked 
together to seize over $160 million involved in these 
violations.
    However, ICE's enforcement of bulk cash smuggling does not 
end at the border. In August 2005, ICE partnered with CBP and 
the State Department to initiate a joint training program known 
as Operation Firewall with our Mexican counterparts. As a 
result, Mexican authorities seized over $30 million in cash and 
negotiable instruments, including the single largest bulk cash 
seizure in Mexico of $7.8 million.
    ICE and Mexican authorities continue to investigate these 
seizures to tie them to larger investigations in the United 
States, Mexico, and Latin America. The State Department 
continues to fund these international efforts, and we are 
grateful for their support.
    In addition to our efforts to combat bulk cash smuggling, 
ICE works aggressively to address other financial methods used 
to move illicit funds out of the United States, such as the use 
of unlicensed money service businesses or MSB's. While many 
MSB's provide a legitimate service to their customers, those 
acting illegally evade Federal reporting and recordkeeping.
    Since the passage of the USA PATRIOT Act, ICE 
investigations of unlicensed MSB's have resulted in over 170 
arrests. Because of ICE's expertise in customs matters, our 
special agents are highly effective at combating trade fraud 
and trade-based money laundering. Trade can be used to transfer 
proceeds in a variety of ways, such as overvaluing the cost of 
imported goods to disguise illegal proceeds as legitimate 
payment for those goods, converting proceeds into merchandise, 
which is then shipped abroad and sold for local currency. Even 
hawalas use trade transactions as a way to balance their 
accounts.
    To detect and combat trade based money laundering, ICE has 
established a trade transparency unit or TTU. The ICE TTU 
analyzes trade and Bank Secrecy Act data to identify anomalies 
relating to cross-border trade that is indicative of money 
laundering or trade fraud. The ICE TTU initiates and supports 
investigations related to trade-based money laundering.
    In addition to analyzing U.S. trade data, ICE has begun 
exchanging trade data with foreign counterparts. ICE and 
participating governments are for the first time able to see 
both sides of trade transactions for commodities entering and 
leaving their countries. This truly makes trade transparent and 
greatly assists in the detection of money laundering and 
customs frauds.
    Currently, ICE has TTU agreements with Colombia, Paraguay, 
Brazil, and Argentina. Both the Department of the Treasury and 
the Department of State have provided valuable support to this 
initiative. ICE will continue to aggressively apply our 
authorities to combating international money laundering and the 
methods and means used to move illegal proceeds across our 
borders.
    This concludes my remarks, and I thank this Committee and 
its distinguished Members for their continued support of ICE's 
investigative endeavors. I would be pleased to answer your 
questions.
    Chairman Shelby. Mr. Morehart.
    Mr. Morehart. Yes, sir.
    Chairman Shelby. Can changes to categories of CTR's and 
certain exemptions be implemented without having an adverse 
effect on the investigative abilities of the FBI? And if so, 
what are they? Do you have any idea there? Measured changes, 
not wholesale, radical changes, perhaps?
    Mr. Morehart. We are a proponent of certainly reviewing the 
legislation, Senator. We recognize that it is a burden on 
financial institutions to file those documents. That is 
something we have thought about quite a bit, and we have worked 
with our interagency partners including Treasury, FinCEN--the 
Financial Crimes Enforcement Network--as well as DHS, ICE, and 
others to try to assess that. I think it requires more study.
    We do feel that there are those CTR filing requirements 
that could be done away with that are not of value to us; for 
example, CTR filing requirements such as the Wal-Marts of the 
world and the Giant Foods and the Best Buys and those large, 
well-established commercial enterprises that, quite candidly, 
are of little or no value to law enforcement, we have no 
objection whatsoever to developing protocols that would 
alleviate that type of filing requirement, and I am sure there 
are others that I am not familiar with.
    Nevertheless, I would suggest that, yes, sir, there are 
areas that we could alleviate some of those burdens. My only 
suggestion, sir, in all humility would be that I think it needs 
a thorough scrubbing, if you will, sound study to make sure 
that we do not, if I may characterize it, as remove some of 
those dots of which we speak connecting the dots, which is our 
primary goal, without some forethought, because it may allow us 
the inability then later on to connect dots.
    Chairman Shelby. It could cripple you, could it not?
    Mr. Morehart. It could, sir.
    Chairman Shelby. Briefly, how significant is the 
investigative significance of BSA data, with particular 
attention to the significance of the CTR data?
    Mr. Morehart. I think it is of immeasurable value.
    Chairman Shelby. Immeasurable.
    Mr. Morehart. Yes, sir.
    Chairman Shelby. Very important to the FBI in your law 
enforcement.
    Mr. Morehart. Absolutely, yes, sir.
    Chairman Shelby. Organized crime, terrorist financing, 
money laundering, all of it, right?
    Mr. Morehart. Yes, sir, and I think that, because of the 
informational tools that we have available as to now, the 
computer programs and so forth that we have been able to 
develop over the last couple of years, its import is just 
starting to become known. We have a long way to go, Senator, 
certainly to develop those things further, but the value is 
increasing every single day.
    From 2 years ago to today, just an immeasurable improvement 
and awareness on our part of the value of that data.
    Chairman Shelby. Of course, you have heard this said that 
the BSA data has been characterized as clogging up the works 
with useless information; that there is just too much 
information to be adequately analyzed even. Would you tell the 
Committee a little something, if you could, about the data 
mining capability of the FBI and explain how the FBI has 
expanded its utilization of this data.
    Mr. Morehart. Yes, sir.
    Chairman Shelby. Without getting into particulars.
    Mr. Morehart. Yes, sir, I would be happy to.
    About 2 years ago, we developed a program, a tool, if you 
will, a database called Investigative Data Warehouse. The 
Investigative Data Warehouse, during my last testimony in May 
to the House, I basically characterized it as Google on 
steroids, and I think that still stands today.
    Essentially, what it brings together is not only BSA data, 
and we work very closely with FinCEN, as I mentioned, and they 
provide us, actually, all the data to put into that computer 
mainframe along with databases from a variety of other 
agencies, including the FBI.
    And the way that database simply works is this, one of the 
benefits is rather than have to go to multiple databases now 
and conduct individual searches, we can search all databases 
with one search, and it has saved us literally thousands if not 
hundreds of thousands of hours doing that. In addition, that 
database has allowed us to query that data, and what would have 
taken individuals months or years to do, we can now do in 
minutes. We can take one name and query it through the database 
and pull all BSA data, for example, out on that one name. The 
value of that is immeasurable.
    Chairman Shelby. I am in another Committee, in the 
Appropriations Committee, I chair the Committee over the 
Justice Department, the FBI; tomorrow, we will have a hearing 
with the Director over the modernization of the technology in 
the program.
    Mr. Morehart. Yes, sir.
    Chairman Shelby. Would that help you even more to mine this 
data?
    Mr. Morehart. Well, I am not a computer expert by any 
stretch, Senator, and I do not know the cost of those things. I 
assume they are significant.
    Chairman Shelby. They are very expensive----
    Mr. Morehart. Yes, sir.
    Chairman Shelby. But they are necessary, I think.
    Mr. Morehart. Yes, sir, and I would honestly have to defer 
that to the people in the FBI that know more about the cost of 
those things and what is needed.
    Chairman Shelby. Mr. Morehart, could you describe for the 
Committee, the history of Operations Royal Charm and Smoking 
Dragon, if you could? These operations, as I understand it, 
targeted Chinese organized crime syndicates involving millions 
of dollars in counterfeit U.S. currency as well as counterfeit 
cigarettes and revenue derived from narcotics trafficking?
    Mr. Morehart. Well, I am not intimately familiar with 
either of those, sir, and I would have to----
    Chairman Shelby. Could you do it for the record? Could you 
get this for the record?
    Mr. Morehart. I could, sir, yes, sir.
    Chairman Shelby. Including an assessment of the nexus 
between the activities targeted in these two law enforcement 
operations and the North Korean activities discussed with the 
previous panel; I think you were here.
    Mr. Morehart. Yes, sir.
    Chairman Shelby. And are Chinese triads involved in efforts 
that threaten the integrity of the United States financial 
system, are they connected in any way to terrorist 
organizations? We would like to have that for the record.
    Mr. Morehart. We would be happy to get that for you, sir.
    Chairman Shelby. Do that.
    Triborder region; we got into that on the other panel. 
Could you share some--you might not want to share everything 
and should not--the scale of the terrorist fundraising 
activities in the triborder region of South America? How 
important is this? How big is this? I have been to that area.
    Mr. Morehart. Yes, sir.
    Chairman Shelby. I understand it is wide open. A lot of 
money is being raised for legitimate reasons.
    Mr. Morehart. Right.
    Chairman Shelby. Legitimate Muslim charities, but there is 
no real analysis of a lot of that.
    Mr. Morehart. Yes, sir.
    Chairman Shelby. Is that a concern?
    Mr. Morehart. Certainly, it is a concern. I, too, am 
familiar with the triborder area. I have worked closely with 
Treasury, with Under Secretary Levey and his staff on that 
particular issue; obviously, Brazil, Paraguay, Argentina, and 
Chile, for that matter, are of a concern.
    Chairman Shelby. Should you put more resources there?
    Mr. Morehart. Well, that is a difficult question to answer, 
sir. I think that assessment is needed first. I do not believe 
in sending resources out, obviously, without a targeted 
mission--and not suggesting that we do not have a strategy in 
place, but I will say this, Senator: I am very limited on what 
I can say on that particular topic from an investigative 
standpoint.
    Chairman Shelby. But it has to be on your menu, has it not?
    Mr. Morehart. It is, sir.
    Chairman Shelby. Estimates show that the prepaid card 
market will reach about $347 billion by next year. By the end 
of this decade, the global market could top $2 trillion.
    Mr. Morehart. Yes, sir.
    Chairman Shelby. That is a lot of money. Here is a 
scenario, for example, involving two of the emerging threat 
types that were identified in the threat assessment: You steal 
someone's credit cards, buy something, goods online, and resell 
the stolen goods online in exchange for what they call e-gold, 
a digital currency; then, use that currency to buy prepaid 
credit cards, also online, which will allow you to spend the 
proceeds anonymously anywhere in the world, as I understand it.
    This transaction allegedly moves some $25 million of 
illicit funds for the Eastern European clients of an unlicensed 
money services business. These are prepaid cards. Some of them 
are described as cash on steroids. What kind of priority has 
law enforcement set for this type of money laundering activity? 
This is very resourceful thinking on the part of criminal and 
terrorist activity.
    Mr. Morehart. Yes, sir. I would have to agree that it is of 
great concern to law enforcement. I am sure that Mr. Delli-
Colli would agree. It is not something we take lightly. As a 
matter of course, anti-money laundering protocols usually 
established by banks prohibit that type of activity; in other 
words, it is along the lines of knowing your customer. When you 
apply for, let us say, a stored value card of any type, a 
preloaded credit card, typically, you are going to know who 
your customer is.
    Chairman Shelby. This has been going on more and more, has 
it not? It is a growth area; is that right?
    Mr. Delli-Colli. That is correct; as a matter of fact, that 
scenario that you described, actually, we had a case that was 
very similar to that in our San Diego office, where Secret 
Service and ICE working together identified an identity theft 
ring that was stealing credit card identities.
    They then used those credit cards to purchase stored value 
cards from Best Buy, the Targets, and things of that nature. 
They then used those stored value cards to purchase mobile 
telephone, Boost mobile telephone cards; smuggled them into 
Mexico; sold them for profit in Mexico. So you are already 
seeing that kind of activity occurring with stored value cards.
    Chairman Shelby. It is hard to trace, though.
    Mr. Delli-Colli. It is.
    Chairman Shelby. It is not impossible, as you know.
    Mr. Delli-Colli. It is not impossible. However, as these 
systems, I think, progress and advance and get more commonly 
used, I mean, in effect, they are cash, and I think our current 
reporting requirements at the border, if you will, do not 
necessarily take that into account. What if you take out more 
than $10,000 in aggregate in stored value cards and move them 
internationally? And I do not think our laws have actually 
taken that into consideration yet, because obviously, they were 
written before this technology existed.
    Chairman Shelby. Go ahead.
    Mr. Morehart. If I may add, Senator, I will say this: We 
work closely with many members of the financial services 
industry. They are aware of those issues, and we work closely 
together to solve some of those problems. And while I cannot 
get into details, I can tell you in one instance where we had a 
stored value card that we were pretty sure was being used by 
terrorist elements that we were able to dismantle.
    Chairman Shelby. That is good.
    Mr. Morehart. Yes, sir.
    Chairman Shelby. Good work.
    My last question: The threat assessment has identified 
about a dozen traditional and emerging threats. From a law 
enforcement perspective, Mr. Morehart, could you provide us 
with a ranking of the top five most serious threats to our 
financial system today, in your opinion?
    Mr. Morehart. That is a very tough question, sir, and I 
would have to ask your forbearance in having an opportunity 
to----
    Chairman Shelby. Would you do this for the record?
    Mr. Morehart. I would, sir.
    Chairman Shelby. That would be fine.
    Mr. Morehart. I would have to think about it a bit.
    Chairman Shelby. Senator Sarbanes, thank you for your 
indulgence.
    Senator Sarbanes. Certainly, Mr. Chairman.
    First of all, I want to say I think this has been an 
extremely helpful panel. I want to commend both of you for your 
very forthright statements.
    Mr. Morehart. Thank you, sir.
    Senator Sarbanes. I would like to ask first, what clearance 
process did you go through in order to present this statement 
to the Committee today?
    Mr. Morehart. I am sorry--the clearance process, sir?
    Senator Sarbanes. Yes.
    Mr. Morehart. You mean vetting?
    Senator Sarbanes. Yes.
    Mr. Morehart. Virtually every agency--I think Kevin will 
agree with me--every other agency we deal with had an 
opportunity to look at it. DOJ looked at it. Our Office of 
Congressional Affairs from the FBI looked at it and obviously 
made suggestions and agreed or disagreed, if you will, with the 
comments therein.
    Senator Sarbanes. All right.
    Mr. Delli-Colli.
    Mr. Delli-Colli. It was the same. We draft the statement 
within the programmatic area, which is my area. It gets 
reviewed and approved within the Office of Investigations. It 
then goes to the Department, and it gets submitted to OMB for 
interagency approval. As a matter of fact, I reviewed both 
Secretary Levey and Secretary Wayne's statements as well as Mr. 
Morehart's prior to it being cleared, and I am sure they read 
mine.
    So it goes through this process to make sure that everybody 
looks at it and understands what the other agency is going to 
testify to.
    Senator Sarbanes. Would Director Mueller have reviewed your 
statement?
    Mr. Morehart. I do not think so, sir, but I cannot answer 
that question. I would not know.
    Senator Sarbanes. Mr. Delli-Colli, would Secretary Chertoff 
have reviewed your statement?
    Mr. Delli-Colli. I know it was reviewed by the Department. 
I do not know who at the Department actually reviewed it. I do 
know that Assistant Secretary Julie Mars reviewed it.
    Senator Sarbanes. The first suggestion I have to make to 
you is I think you should go back and bring the statements to 
the attention of the Director and of the Secretary with this 
message that there is a lot of move of foot to portray these 
suspicious activity reports and currency transaction reports as 
overloading the system. It is too much and so forth and so on. 
And that is a refrain that is generally heard, because that is 
a very open refrain, and, you know, lots of people across the 
country can raise that concern.
    Now, your difficulty is much of what you would say about 
the effectiveness of these is you cannot reveal it in a public 
session, particularly the specifics, so you have to do 
generalized things like these percentages and so forth and so 
on. But nevertheless, what comes through to me, at least from 
your statements, is the very high utility of these reports.
    In fact, Mr. Delli-Colli, you, I think to save time, at the 
end compressed and went over quickly this section about ICE use 
of Bank Secrecy Act data at the end of your statement.
    Mr. Delli-Colli. Yes.
    Senator Sarbanes. But it is really quite a very strong 
statement, I thought, and for instance, ``The so-called 
`placement' of funds into the financial system is the most 
vulnerable stage of the money laundering process for criminal 
organizations. Generally, individuals and businesses conducting 
legitimate transactions have no reason to structure deposits or 
withdrawals to avoid the current $10,000 threshold for filing 
of a CTR. The CTR requirement leads criminals to deliberately 
structure deposits in the banking system in order to avoid the 
reporting requirements in the hopes of avoiding suspicion and 
detection.'' And then, you go on, they have to make multiple 
financial transactions, and it gives indicators to law 
enforcement to detect illegal activity, which, of course, 
addresses this argument we hear, well, they will just put it 
into smaller pieces, and they will go ahead and do the job as 
though the reporting serves no purpose.
    But as you point out, even at below $10,000, it creates a 
pattern which you can pick up which I take it is highly 
relevant to your activities; is that correct?
    Mr. Delli-Colli. Extremely relevant, sir. A lot of the 
argument concerning the CTR's is that law enforcement is not 
doing anything with the CTR's. And as Mr. Morehart pointed out, 
you know, the actual analysis of the CTR data is important.
    But I think sometimes what gets overlooked in the whole 
argument is that the mere fact that we have this reporting 
requirement is one of the most important things that we have to 
do with respect to our anti-money laundering regime. It 
actually puts in a defensive barrier, and the Bank Secrecy Act, 
for all intents and purposes puts law enforcement in 
partnership with the financial industry to combat money 
laundering, terrorist financing, and other financial crimes.
    And that mandatory reporting threshold is the single 
biggest barrier that criminals have to get around. And by them 
having to take, you know, do anything they can to avoid that 
filing, their actions can be detected.
    The other thing that we get asked a lot is that, well, the 
314(a) process, where you can come back and request financial 
institutions to look to see if they have any account activity 
on John Smith, for instance, usurps the value of the CTR, 
because we have the 314(a) process.
    I would argue that that could not be further from the 
truth. The 314(a) process is used sparingly, only in the most 
significant money laundering cases with respect to ICE as well 
as the FBI with, you know, terrorism investigations. I believe 
ICE has taken advantage of the 314(a) process more than any 
other Federal agency. We have used it 214 times for a total of 
maybe 1,200 subjects.
    Compare that to how many times we used the CTR database: In 
2005 alone, ICE special agents queried the CTR database 450,000 
times. You would not want that process transferred to the 
314(a) process. The CTR data is extremely important. Each one 
of these Bank Secrecy Act databases is not a separate 
stovepipe. They all work hand-in-hand, whether it is the CMIR 
process, the SAR, or CTR.
    Oftentimes, it is the CTR that puts the emphasis on the 
suspicious activity report. It actually provides the wow 
factor. In a case in point, we had a SAR that was filed at a 
casino by someone wiring money in and then cashing it out for 
chips playing poker for a little bit and then coming back and 
converting the money back to cash.
    And it seemed suspicious, but what really got the 
investigators into the investigation was when they started 
looking at the CTR's associated with that person and found that 
that casino as well as other casinos had filed more than $10 
million in CTR's. That was the wow factor that said hey, we 
need to investigate this.
    We look at CMIR's, at people reporting money coming into 
the country. The U.S. banks are still where people want their 
money to be placed, and the money gets smuggled out. We are 
seeing people bringing money back in, reporting the money, and 
we can match those reports up with transactional data at banks 
showing that if you brought $10,000 in on Monday and deposit it 
into a financial institution on Tuesday, and it leads us to the 
bank accounts where this activity might be occurring.
    Mr. Morehart. Senator, may I add one thing?
    Senator Sarbanes. Sure.
    Mr. Morehart. On the 314(a) process, I agree with 
everything that my colleague just said regarding CTR's and 
314(a). I would just like to add one thing, that assuming that 
the 314(a) process is going to replace or overcome any filings 
that are not made if the CTR reporting requirements are changed 
presupposes that law enforcement or the intelligence community 
knows about the target or the individual that would have been 
mentioned on that CTR.
    So that is to say that we may not know that there is a John 
Smith out there if there is not a CTR filed. There may not be 
any reason to submit a 314(a), and that is why I spoke earlier 
of taking away the dots. That would be a dot that was taken 
away where we may not then know of a bad guy, either 
traditional criminal activity related or I would argue perhaps 
even more importantly from a terrorism standpoint.
    Senator Sarbanes. Well, of course, there are some exemption 
provisions currently in the law which are designed to deal with 
very legitimate actors who say, well, we are always confronted 
with this problem. And I am not quite clear why that exemptive 
authority has not been pursued as opposed to the effort to, in 
effect, weaken or alter the basic framework. Do you have any 
observations on that point?
    Mr. Morehart. Senator, I do not know why the DEP process is 
not used more than it is. That is a dilemma that we have been 
actually talking about trying to figure out how--we did some 
analysis using our information technology tools and BSA data, 
for that matter, on that particular topic. And since, over the 
period 1999 to 2004, DEP filings by financial institutions have 
roughly remained the same. With the exception of 2000 that 
showed a spike up to about I think it is 160,000, they remained 
pretty much between 40,000 and 60,000 every year.
    So it really has not changed much, and even though you 
would expect as our economy grows that the number of 
transactions would increase, the DEP filings have not. Now, I 
do not know whether that is some filing difficulty in terms of 
the different phases you have to go through or whether the 
vetting process is difficult, but I certainly would think that 
collectively, those are things that we could all look at to try 
to make it a bit easier. No expert on DEP filings am I, I 
guess, is what I am trying to say from a regulatory standpoint, 
but I have looked at the Form 110, the FinCEN 110 that you fill 
out of the bank would fill out to file a DEP exemption, and it 
is not that difficult to fill out.
    I do not know where the regulatory issue would come in 
after that, but I would think that it would be something 
worthwhile looking at, perhaps, if I might suggest that; 
perhaps it could be made a little bit simpler, and they might 
use it more often. But again, I am not versed from the 
regulatory standpoint all that would be required on that form. 
It is just a thought.
    Mr. Delli-Colli. My concern would be with respect to the 
exemptions or, you know, increasing how they are used or 
changing the way that exemptions are administered is that I do 
not think we want to get to a point where the exemption is the 
norm, and the CTR filing is the exception. It is, again, 
because the fact that the placement is the most difficult part 
of the money laundering equation, we need to keep that barrier 
there and have that barrier be as large a fence as possible to 
have to overcome.
    Also, the definition of the examples I keep hearing that we 
do not have a problem with is the Wal-Marts, the Best Buys, the 
big, large publicly traded firms; but also, in the legislation 
that is proposed, they are talking about sole proprietors, 
which can take into a lot of types of businesses that are of 
concern to law enforcement: Electronics business, appliance 
businesses, things that individuals and companies that are 
selling products that are the types of products that are used 
in the Black Market Peso Exchange, for instance. So you do not 
want to lose that whole sector of the CTR's.
    The other thing is that even if there is an exemption, the 
investigative interest does not go away, and I would argue that 
what could happen, if we have too many exemptions, and we are 
aware that okay, I know that company A has an exemption, and 
that must have been because they have had at least one currency 
transaction of more than $10,000 in the past year, I wonder if 
they have 1,000 transactions or only two, and chances are you 
are going to see an increase in grand jury subpoenas going back 
to the banks and then asking for all the transaction data 
associated with that bank account, and that might create a 
greater burden on the banks to have to comply with the grand 
jury subpoena process, not to mention putting a burden on the 
grand jury process itself.
    Mr. Morehart. If I may add, Senators, in terms of the 
business eligibility for exemption, if you will, for lack of a 
better way to describe it, 701 out of H.R. 3505 basically says 
every business entity, as my colleague suggests, is eligible 
for exemption. I would caution that that should be closely 
looked at, because as we know, in law enforcement, there are 
certain types of businesses out there that are traditionally 
used by criminals for criminal--either moving money, money 
laundering, or to be complicit in some type of criminal 
activity. And some of those would be exempt from filings, which 
is of great concern to us.
    Senator Sarbanes. Thank you very much for your testimony. I 
mean, we are paying some significant cost to try to address 
this financing issue, but I think you have laid out a very 
strong argument today of the utility of it, and I think it is 
important to hear that. I mean, I go to the airport; I have to 
empty everything out of my pocket; I take off my belt then, I 
take off my shoes. Then, I go through. Hopefully, there is not 
something that makes the buzzer ring, and then, I have to get 
dressed again in order to go on my way, and that is a price I 
pay to try to heighten our security.
    People complain about it, but the rationale is there. You 
are getting complaints, but you have laid out a strong 
rationale here for the utility of this reporting system. So 
thank you.
    Thank you, Mr. Chairman.
    Chairman Shelby. I just want to add a few remarks to what 
Senator Sarbanes said. I think this has been a good panel 
today, both of them. We appreciate what you do.
    Mr. Morehart. Thank you, sir.
    Chairman Shelby. Most people never say thank you for that. 
It is a tough job. But we have to balance this, but we know 
there is a cost for freedom; there is a cost for security. 
Thank you very much.
    The hearing is adjourned.
    Mr. Morehart. Thank you.
    Mr. Delli-Colli. Thank you.
    [Whereupon, at 12:42 p.m., the hearing was adjourned.]
    [Prepared statements and response to written questions 
supplied for the record follow:]
                   PREPARED STATEMENT OF STUART LEVEY
    Under Secretary, Office of Terrorism and Financial Intelligence
                    U.S. Department of the Treasury
                             April 4, 2006
    Chairman Shelby, Ranking Member Sarbanes, and other distinguished 
Members of the Committee, thank you for the opportunity to speak to you 
today about our progress in combating terrorist financing and money 
laundering. In the last 4 months, we have seen assessments of our 
progress in both of these arenas--the September 11 Commission Public 
Discourse Project's evaluation of our terrorist financing efforts and 
the U.S. Government's first-ever Money Laundering Threat Assessment. 
These assessments and this hearing provide an opportunity to take stock 
of how we are doing with respect to two of the leading concerns of my 
office. I welcome this Committee's ongoing focus on these threats, and 
your continued support for our efforts to help stop illicit flows of 
money.
Terrorist Financing
    The September 11 Commission's Public Discourse Project awarded its 
highest grade, an A-, to the U.S. Government's efforts to combat 
terrorist financing. This praise truly belongs to the dozens of 
intelligence analysts, sanctions officers, regional specialists, and 
regulatory experts in the Treasury's Office of Terrorism and Financial 
Intelligence (TFI) who focus on terrorist financing, along with their 
talented colleagues in other agencies--law enforcement agents who 
investigate terrorism cases, Justice Department prosecutors who bring 
terrorist financiers to justice, foreign service officers in embassies 
around the world who seek cooperation from other governments and many 
others from the intelligence community. You will not find a more 
talented and dedicated group of people, with no trace of ego and a 
total focus on the mission.
    The September 11 Commission Public Discourse Project did not 
provide a detailed explanation of the reasoning behind its conclusions 
but I am certain that one contributor to the high mark was the close 
interagency teamwork that has been a hallmark of our Government's 
efforts in this arena. Along with my colleagues here today--the State 
Department, FBI, and DHS--as well as the intelligence community and 
Deputy National Security Adviser Juan Zarate, we have forged a team 
with complementary strengths and outlooks but a single mission and 
great mutual respect. That teamwork translates into effectiveness. We 
have continued to improve our ability to track key targets and to take 
the most appropriate action against the terrorist target. Sometimes 
that means that the Treasury will take public action, sometimes it 
involves persuading another country to take action, and sometimes we 
decide to continue to collect intelligence to better map out the 
terrorist network. From the formation of TFI, we have been committed to 
that philosophy, resisting the application of metrics to our activities 
that would distort our incentives, for example, by emphasizing the 
number of terrorism designations.
    In my view, reducing the USG's wide-ranging efforts against 
terrorist financing to a single letter is necessarily going to tell 
only part of the story. So much is being done to combat terrorist 
financing, including intelligence collection, enforcement actions, 
capacity building, and systemic improvements to safeguard the U.S. and 
global financial systems. Our theater of engagement literally spans the 
world, from the money changing tables of Kabul to the jungles of South 
America's Tri-Border Area, from the finance ministries of the world to 
the compliance offices of the world's most sophisticated banks. In some 
of these areas we have attained far greater success than in others, 
perhaps because of deeper intelligence penetration, the availability of 
more effective tools, or closer partnership with certain host 
governments. No single grade will be able to convey this nuance.
    The indicators that we find meaningful are typically complex and 
not readily quantifiable, such as anecdotal reporting about terrorist 
cells having difficulty raising money or paying salaries or benefits. 
In recent months, we have seen at least one instance of what we look 
for most--a terrorist organization indicating that it cannot pursue 
sophisticated attacks because it lacks adequate funding.
    Usually, though, the information we receive is not as clear. As an 
example, one interesting trend that we have witnessed is a decrease in 
the average amount of transactions that we learn about. Obviously, we 
are only privy to a subset of the total transactions, but this 
observation carries across various financial conduits and terrorist 
organizations and we have no reason to believe that it is 
unrepresentative. Interpreting this indicator is more difficult. It 
could reflect an overall decrease in the amount of money moving to and 
from terrorists. Just as easily, it could indicate that terrorists are 
breaking their transactions out into smaller sums, fearing 
interception. Alternatively, the trend could be an outgrowth of a 
movement by terrorist organizations away from banks toward less formal 
mechanisms, like cash couriers. These couriers may offer concealment, 
but some get caught and some get greedy, and so it is very risky to 
entrust them with large sums of money. Any of these alternatives would 
indicate that our efforts are having an impact and this trend may bear 
out our assessment that terrorists who fear using the banking system do 
not have a ready and reliable alternative for moving large sums of 
money. We will continue to monitor developments, but I hope this 
provides a sense of how complex a task it is to assess the overall 
impact of our efforts to combat terrorist financing.
    In specific areas, we can point to more concrete indicators of 
success. We have made dramatic progress in combating terrorist abuse of 
charities. Prior to September 11 and even afterwards, terrorists used 
charities as safe and easy ways to raise and move large sums of money. 
Al Qaeda and Hamas, in particular, relied on charities to funnel money 
from wealthier areas to conflict zones with great success. Through a 
combination of law enforcement and regulatory actions against several 
corrupt charities, both at home and abroad, we have taken out key 
organizations and deterred or disrupted others. In tandem, active 
engagement with the legitimate charitable sector has succeeded in 
raising transparency and accountability across the board.
    We have thus far designated more than 40 charities worldwide as 
supporters of terrorism, including several U.S. charities such as the 
Holy Land Foundation, the Global Relief Foundation, the Benevolence 
International Foundation, the Al Haramain Islamic Foundation, and the 
Islamic African/American Relief Agency (IARA). The impact of these 
actions is serious, and sometimes decisive. IARA once provided hundreds 
of thousands of dollars to Osama bin Laden. More recently, IARA country 
offices have experienced increased pressure and its leaders have 
expressed concern about the organization's future.
    Our most recent action targeted KindHearts, a purported charity in 
Ohio that was supporting Hamas. In that instance, we took coordinated 
action with DOJ prosecutors and the FBI, which executed a search 
warrant at the moment that we froze the group's assets. Although we 
generally do not disclose specific blocked asset information, 
KindHearts has stated that over one million dollars of its assets were 
blocked. Overall, engagement with the charitable sector combined with 
enforcement actions against bad organizations have radically altered 
the dynamic, leaving dirty charities isolated and imperiled.
    A second conduit where we have seen a shift is donations from 
private individuals, another primary source of terrorist funds. Unlike 
charities, individual donors to terrorist organizations do not need to 
maintain a public profile and are considerably harder to track. Our 
advantage in pursuing donors, however, is the heightened power of 
deterrence. A person who is willing to commit a suicide bombing cannot 
be deterred by fear of punishment. Even those wealthy donors who 
sympathize with an extremist cause, however, may well be unwilling to 
support it at risk of losing their reputation, their assets, and 
potentially their freedom. As financial investigators track donations 
back to their sources and wealthy individuals are held to account, we 
have begun to change the risk calculus of donors and narrowed the set 
of individuals who are willing to take that chance.
    Accountability and deterrence have been an area of particular focus 
for me. I believe we need to heighten our deterrence of donors by 
treating terrorist financiers as the terrorists that they are. Those 
who reach for their wallets to fund terrorism must be pursued and 
punished in the same way as those who reach for a bomb or a gun. In 
that regard, I was heartened by a recent statement from Saudi Arabian 
Foreign Minister Prince Saud al-Faisal, who said that ``[t]he 
extremists who condone, support, incite, or legitimize terrorism should 
be held accountable for the criminal consequences of their message of 
hatred and intolerance.'' If Saudi Arabia and others in the region see 
this commitment through, it will send a powerful message of deterrence 
to would-be terrorist financiers.
    Another important measure of our progress is an increase in the 
number of countries approaching the U.N. Security Council to seek the 
designation of terrorist supporters. This global designation program, 
overseen by the U.N.'s 1267 Committee, might be the most powerful tool 
for global action against supporters of Al Qaeda. It envisages 191 UN 
member states acting as one to isolate Al Qaeda's supporters, both 
physically and financially. Increasingly, countries have begun to look 
to this committee, and administrative measures in general, as an 
effective complement to law enforcement action. In 2005, 18 member 
states submitted names for the committee's consideration, many for the 
first time, and we will continue to support this process and encourage 
others to do so as well.
    In other arenas of this fight, however, we are not where we need to 
be. State sponsors of terrorism, like Iran and Syria, present a vexing 
problem, providing not only money and safe haven to terrorists, but 
also a financial infrastructure through which terrorists can move, 
store, and launder their funds. While this is a daunting challenge, I 
believe that the Treasury Department's tools, combined with cooperation 
from responsible financial institutions, can make a difference. In the 
past year, for example, we have designated top Syrian officials, 
including the then-interior minister Ghazi Kanaan and the head of 
Syrian Military Intelligence, Assaf Shawkat, in part for their support 
to terrorist organizations. Also, on March 9, we issued a final rule 
under Section 311 of the USA PATRIOT Act confirming that the Commercial 
Bank of Syria (CBS) is a ``primary money laundering concern'' and 
forbidding U.S. financial institutions from holding correspondent 
accounts for CBS. Among our reasons for that action was the risk of 
terrorist financing posed by a significant bank owned and controlled by 
an active and defiant state sponsor of terror like Syria.
    We have ample reason to believe that responsible financial 
institutions around the world pay close attention to such actions and 
other similar indicators and adjust their business activities 
accordingly, even if they are not required to do so. A recent example 
of interest was the announcement by the international bank UBS that it 
intended to cut off all business with Iran and Syria. Other financial 
institutions are similarly reviewing their business arrangements and 
taking special precautions to ensure that they do not permit terrorist 
financiers or WMD proliferators access to the global financial system. 
As discussed below with respect to North Korea, this voluntary action 
by responsible firms in the private sector can have tremendous impact.
    Another difficult problem we face is that couriers continue to move 
terrorist money across the world's borders with insufficient scrutiny. 
New international standards for impeding cash smuggling, issued by the 
Financial Action Task Force in 2004, are a very positive step, but we 
still have an enormous distance to go in ensuring that trained and 
capable border agents are implementing these rules. In these and other 
areas, there is a great deal still to be done.
    So long as terrorists are able to fund their organizations, we will 
not be satisfied or complacent. Reading intelligence about terrorist 
attacks planned and frustrated every week, I understand how much hangs 
in the balance.
The Strength of Financial Measures
    Before turning to our domestic money laundering challenge, I wanted 
to briefly highlight for the Committee some of the lessons we have 
learned in the last year about the power of financial measures to 
effectively counteract national security threats, especially when they 
are implemented multilaterally by governments and private financial 
institutions. Just as terrorist organizations require money to survive, 
WMD proliferation networks do as well. By capitalizing on a growing 
international consensus that these activities have no place in the 
legitimate global financial system, we have been able to apply 
effective pressure to counteract these threats.
    Executive Order 13382, issued by the President in June 2005, 
authorizes the Treasury and State Departments to target key nodes of 
WMD proliferation networks, including their suppliers and financiers, 
in the same way we target terrorist financiers. A designation under 
this Executive Order cuts the target off from access to the U.S. 
financial and commercial systems and puts the international community 
on notice about the threat the target poses.
    Thus far, we have designated 11 North Korean entities, 6 Iranian 
entities, and 1 Syrian entity engaged in proliferation activity. Just 
last week, the Treasury designated two more proliferators, the Swiss 
company Kohas AG and its President, Jakob Steiger. Kohas AG acts as a 
technology broker in Europe for the North Korean military and has 
procured goods with weapons-related applications. Nearly half of the 
company's shares are owned by a subsidiary of Korea Ryonbong General 
Corporation, a previously designated North Korean entity that has been 
a focus of United States and allied counterproliferation efforts.
    The impact of these actions depends on the extent of international 
cooperation. As in the terrorism context, the international community 
has called for cooperative efforts to isolate proliferators 
financially, as set forth in U.N. Security Council Resolution 1540 and 
the G-8 statement at Gleneagles. The Treasury and State Departments are 
engaging intensively with our international partners to see that these 
broad principles are turned into reality.
    Confronted with North Korean conduct ranging from WMD 
proliferation-related activities to currency counterfeiting and other 
illicit behavior, the Treasury took two significant steps in the past 
year, one offensive and one defensive. Offensively, we targeted several 
North Korean proliferation firms under Executive Order 13382, as 
described above. Defensively, we took regulatory action to protect our 
financial system against Banco Delta Asia (BDA), a Macanese bank that 
was handling a range of North Korean illicit activities without any 
pretense of due diligence or control. Indeed, BDA officials 
intentionally negotiated a lower standard of due diligence with regard 
to the financial activities of North Korean clients. We employed 
Section 311 of the USA PATRIOT Act to cut off this troubling 
institution's access to the U.S. financial system.
    As a result of our actions and the revelations about North Korea's 
illicit activities, a number of responsible jurisdictions and 
institutions abroad have likewise taken steps to ensure that North 
Korean entities engaged in illicit conduct are not receiving financial 
services. The combined effect has been described as causing a ``ripple 
effect around the world,'' constricting the flow of dirty cash into Kim 
Jong-Il's regime.
    This example should be of particular note to this Committee as it 
demonstrates the impact of financial tools, some of which were created 
through the leadership and vision of this Committee.
Money Laundering
    While distinct from the threats posed by terrorist financing or 
proliferation of weapons of mass destruction, money laundering is a 
serious threat in its own right to our national and economic security. 
Money laundering enables crime and contributes to an erosion of 
confidence in our legal and financial systems.
    The U.S. Money Laundering Threat Assessment represents an 
unprecedented step forward for the U.S. Government's efforts to combat 
money laundering in the United States. For years, dedicated regulators, 
policymakers, law enforcement agents, and prosecutors from across the 
Government have worked to safeguard our financial system against abuse, 
and to pursue and punish those who laundered illicit proceeds. Never 
before, however, had so many of the agencies that face these issues 
come together to share their findings and to sketch out a joint 
assessment of the depth and contours of America's money laundering 
threat.
    The aim of the Threat Assessment was to provide policymakers, the 
law enforcement community, regulators, and supervisors with a picture 
of how money is being laundered in and through the United States. It 
was also intended to identify the priorities to be addressed in this 
year's National Money Laundering Strategy. Ultimately, we cannot 
successfully treat a problem until we have diagnosed it.
    Sixteen Federal bureaus and offices from across the law 
enforcement, regulatory, and policy communities came together, with 
each office bringing its own perspective and experiences to the table. 
The interagency working group pulled together arrest and forfeiture 
statistics, case studies, regulatory filings, private and government 
reports, and field observations from those in the trenches.
    The report analyzes more than a dozen money laundering methods, 
identifying how each method functions, any geographic or other 
concentrations of activity, the legal/regulatory backdrop, and 
vulnerabilities. The Threat Assessment does not tout our successes--it 
is a candid look at the serious challenges we face.
    Key findings of the Money Laundering Threat Assessment include the 
following:

 Financial institutions remain key guardians of our country's 
    financial system. Once illegal proceeds get into the formal 
    financial system, they can be moved instantly by wire or disguised 
    through commingling with legitimate funds. With the advent of 
    internet and remote banking, financial institutions face increased 
    challenges in ascertaining the identity of customers and the 
    sources of funds.
 Criminals and money launderers have exploited corporate 
    vehicles and trusts to disguise beneficial ownership and hide their 
    activities. When state registries impose minimal information 
    requirements and exercise lax oversight over the shell companies 
    and trusts they register, it can be difficult or impossible for 
    financial institutions to verify who is using a commercial account 
    and for what purpose.
 Money Services Businesses (MSB's) make up a vast and varied 
    alternative system to banks. Many MSB's operate without Federal 
    regulatory supervision due to their failure to register with U.S. 
    authorities. Some of these unregistered MSB's are informal money 
    remittance services or check cashers that are operated as a side 
    business by small retailers.
 Casinos are cash-intensive businesses that can be used to 
    launder funds. Casinos have been subject to anti-money laundering 
    regulations longer than any industry other than banking. But the 
    money laundering threat posed by casinos has grown with the rapid 
    increase in tribal gaming. Last month, the Financial Crimes 
    Enforcement Network (FinCEN) announced its first enforcement action 
    under the casino provisions of the Bank Secrecy Act (BSA) against 
    an individual and an Indian tribe for a broad range of BSA 
    violations.
 Certain sectors of the insurance industry have undergone a 
    transformation. While traditional insurance policies remain an 
    important part of the life insurance business, agents and brokers 
    now offer a range of financial products that can be readily 
    purchased, transferred, and sold, and that are more akin to 
    investment funds than traditional insurance policies. This 
    evolution has created new opportunities for money laundering.
 Some of the largest and most complex methods of money 
    laundering harness trade into and out of the United States. Trade-
    based money laundering takes many forms including the Black Market 
    Peso Exchange, which poses a particular challenge to law 
    enforcement because it separates the crime from the cash early in 
    the money laundering process. Under this scheme, drug dealers are 
    able to hand off their illicit dollars in the United States to 
    professional money launderers, who make clean currency available in 
    Colombia or elsewhere.
 Smuggling cash out of the United States for deposit elsewhere 
    is a well-established money laundering method and appears to be on 
    the rise because of the barriers criminals face attempting to 
    launder cash domestically. Bulk cash smuggling is most often used 
    to launder the proceeds from illegal drug sales. Cash associated 
    with drugs typically flows out of the United States across the 
    southwest border into Mexico, retracing the route that the drugs 
    took entering the United States. Drugs and illicit proceeds also 
    cross our northern and other borders.

    It is only natural that, as we survey the various money laundering 
threats, we focus in on emerging technologies and new transaction 
methods. These developments certainly warrant our close attention. I 
would emphasize, though, that--in terms of dollar volume--some of the 
oldest methods of money laundering, particularly bulk cash smuggling, 
remain the most common.
    The overall picture that emerged from the Threat Assessment is both 
sobering and promising. Large amounts of dirty money are circulating 
through the United States as criminals exploit money laundering methods 
old and new. At the same time, there has been considerable progress. 
The approach of U.S. law enforcement and regulatory agencies has 
undergone a sea change over the past decade, such that money laundering 
is now treated as an independent and primary priority across all 
relevant agencies. Perhaps most encouraging are interagency initiatives 
and task forces that, when properly coordinated, focus the talents, 
expertise, and resources of multiple agencies to bear problem to great 
effect.
    While the interagency Money Laundering Threat Assessment is an 
excellent development, it is, of course, only the beginning of the 
process. We now need to build on the cooperation that went into the 
assessment to craft effective ways to counteract the vulnerabilities 
identified. That work is already ongoing. For example, to get the upper 
hand on the Black Market Peso Exchange and other trade-based money 
laundering schemes, Immigration and Customs Enforcement, with the 
support of the State and Treasury Departments, is working with U.S. 
trading partners and countries vulnerable to money laundering to create 
trade transparency units. These units allow countries to compare import 
and export logs to uncover anomalies that may indicate money 
laundering, and represent a serious advance in our worldwide anti-money 
laundering efforts.
    We also continue to extend the Bank Secrecy Act, as amended by the 
USA PATRIOT Act, to financial sectors deemed to be the most vulnerable 
to money laundering and/or terrorist financing. We recently issued 
regulations requiring dealers in precious metals, stones and jewels, as 
well as certain segments of the insurance industry to establish anti-
money laundering programs. A regulation also requires the insurance 
industry to file suspicious activity reports. We are presently working 
on regulations that would apply to other vulnerable financial 
industries.
    As this Committee knows well, we have worked hard to respond to the 
threat posed by certain types of correspondent and private banking 
operations. We recently published regulations to implement Section 312 
of the USA PATRIOT Act. The rule requires certain U.S. financial 
institutions to establish due diligence policies, procedures, and 
controls to detect and report money laundering through certain 
correspondent and private banking accounts. Having sought additional 
comment on the provision of Section 312 requiring ``enhanced due 
diligence'' for identified, high-risk foreign banks, a top priority is 
to complete this rulemaking by finalizing this last provision. We are 
currently examining options for responding to the other vulnerabilities 
identified in the assessment.
    While the Money Laundering Threat Assessment focused, by design, on 
domestic money laundering, in today's global economy, we cannot ignore 
the threat posed by money laundering abroad. To this end, the United 
States, with Treasury as its head of delegation, has taken a leadership 
role in the Financial Action Task Force (FATF) to establish and 
promulgate international standards for combating money laundering and 
terrorist financing. We and our colleagues devote continuous effort to 
shaping and ensuring implementation of these standards, through 
comprehensive assessments as well as international training and 
assistance. Over 150 nations now suscribe to FATF's standards and have 
committed to meeting them.
    The Treasury Department has also worked closely with the 
International Monetary Fund and the World Bank Group to promote member 
country programs against money laundering and terrorist financing. By 
the end of 2005, the IMF and World Bank had conducted more than 50 
assessments of member countries' compliance with the FATF standards and 
had provided technical assistance on related projects in more than 125 
countries. In addition, Treasury continues to encourage the regional 
multilateral development banks to conduct internal risk assessments 
similar to those undertaken by the World Bank in order to identify 
additional areas where antimoney laundering and counter-terrorist 
financing measures could be strengthened.
    We are also working directly with the private sector in priority 
regions. Last month, members of my staff helped to organize an 
extraordinary conference in Cairo, where private sector bankers and 
public sector regulators from the United States met with their 
counterparts from Egypt, Saudi Arabia, Kuwait, and Lebanon to share 
concerns and approaches to combating money laundering and terrorist 
financing. Representatives from American Express, Citibank, J.P. Morgan 
Chase, and Pershing gave generously of their time, meeting with some 
350 bankers from the Middle East and North Africa. This conference 
marked the beginning of what we hope will be an ongoing dialogue that 
will parallel and augment our work with public sector counterparts.
Conclusion
    The threats of terrorist financing and money laundering remain 
serious and very real. I am encouraged, however, by our progress. Over 
the past few years, there has been increasing accord in the 
international community about the threats posed by these activities to 
national and economic security and their corrosive effect on the global 
financial system. There is also an increasing recognition of the power 
of financial measures to disrupt and isolate the sources of these 
threats. If responsible nations employ financial measures in a 
coordinated and consistent manner, we can make a decisive difference.
    Thank you again for holding this hearing and for your sustained 
commitment to these issues. 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
                             April 4, 2006
    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. As Assistant Secretary of 
State for Economic and Business Affairs, I have been actively involved 
in our campaign against terrorist financing. Your interest and 
attention to this important area is extremely valuable, and much 
appreciated.
    This vital task is a high priority for the State Department. With 
the new challenges posed by the post-September 11 world, the Department 
of State has played a critical role, in Washington and overseas, in 
building and sustaining the international cooperation essential to 
keeping funds from use by terrorists and terrorist organizations. 
However, interagency cooperation is vital and essential to success in 
this endeavor.
    In my remarks today, I would like to review in general terms what 
we have accomplished since September 11 in the international fight 
against terrorist financing. I would also like to sketch for you the 
role of the Department of State in this effort, and to update the 
Committee on recent regional developments as well as those in key 
multilateral institutions.
    Finally, I would like to say a few words on what we see as some of 
the key challenges moving forward.
What We have Accomplished Since September 11
    Mr. Chairman, all of us involved in the fight against terrorist 
financing can rightfully take pride that the September 11 Commission's 
Final Report accorded the U.S. Government's efforts against terrorist 
financing its highest marks. In the 4\1/2\ years since September 11, we 
have built a new set of structures and mechanisms within the U.S. 
Government to combat terrorist financing. This is an interagency 
process that works.
    That team effort by the U.S. Government has also served as the 
foundation for the international cooperation, called for in the 
Commission's initial Report, which the Administration has worked hard 
to develop in a variety of settings and with a variety of tools. Our 
efforts encompass building political will of partners, public outreach, 
sanctions implementation, law enforcement, intelligence-gathering, 
financial regulation, standard-setting, and training and technical 
assistance.
    Since terrorists largely operate internationally, a key component 
of the fight is to build international cooperation. Diplomacy is 
critical to winning the political commitment from which cooperation in 
other areas flows, and our embassy teams play vital roles in this 
effort.
    With cooperation, intelligence and law enforcement officers can 
follow the money. With international cooperation on asset freeze 
designations (as well as travel bans under U.N. resolutions), we force 
terrorists into less reliable and more costly means of moving money.
    We have, for example, worked with foreign partners to:

 Implement the sanctions mandated by U.N. Security Council 
    Resolutions 1267 and 1373 to expose and isolate terrorist 
    organizations and their supporters.
 Utilize law-enforcement tools to prevent, investigate, and 
    prosecute terrorist financiers.
 Collect and analyze financial intelligence in order to 
    understand and dismantle terrorist networks, and expose their 
    operations.
 Build capacity to develop and effectively enforce a robust 
    legal regime against terrorists and their supporters.
 Support development of high-quality international standards, 
    especially through the Financial Action Task Force on Money 
    Laundering and Terrorist Financing (FATF).

    As the Commission acknowledges, there is still much to do. But our 
shared goal remains the same: Building an international coalition to 
deny access to the global financial system to terrorists, terrorist 
organizations, their financiers and supporters.
    Since September 11, I have traveled to the political and financial 
centers of Europe, capitals of key strategic partners such as Saudi 
Arabia, other Gulf states and Pakistan, as well as to the United 
Nations in New York, as part of our diplomatic effort to build this 
international coalition. Colleagues who are here with us today, and 
others from many U.S. agencies, have undertaken similar missions to 
those and other parts of the world.
    We have also welcomed a steady stream of visitors to the United 
States who engage various levels at State and other U.S. Government 
agencies on terrorist financing issues. These include senior officials 
at the highest levels of government as well as mid-level officials and 
journalists sponsored by the United States on International Visitor 
Grants.
    International cooperation remains fundamental to our common 
endeavors for the simple reason that most of the funds used to support 
terrorism are located outside the jurisdiction of the United States. 
International cooperation is essential to initiatives in fields ranging 
from intelligence and law enforcement coordination to targeted 
financial sanctions to norms and standards of financial regulation.
    Our experience in the years since September 11 reinforces the 
conviction that we will be successful in detecting, disrupting, and 
dismantling terrorist financial networks only through active 
cooperation with partners around the globe.
The Changed Landscape
    One anecdotal measure of the success of this coalition can be seen 
in the increasing use by terrorist financiers of nontraditional 
financing channels in preference to the formal international financial 
system. This means terrorist networks are increasingly relying on 
riskier, more difficult, and expensive means to finance their 
operations.
    But it is also further evidence that we face a resilient and 
adaptable foe, and signals a new phase in our campaign against 
terrorism finance. Already, abuse of such financing instruments as 
charities and not-for-profit organizations, cash couriers, wire 
transfers, and other alternative remittance systems have become an 
increasing focus of our discussions with international partners, as 
have criminal means of raising money.
Role of the Department of State
    The Department of State's contribution to Administration efforts to 
safeguard the international financial system from terrorist financing 
and money laundering focus on achieving three key objectives:

 Designation. Blocking assets and cutting off worldwide 
    channels of terrorist financing;
 Standard-setting. Establishing international standards; and
 Capacity and commitment. Ensuring global compliance with 
    international standards.

    Our work is based on close cooperation with the National Security 
Council, Treasury, Justice, Homeland Security, and other agencies, and 
includes foreign policy guidance, diplomatic engagement, and training 
and technical assistance. In some cases, State will lead, in others 
Treasury, or DHS, or Justice may take the lead, for example, but we 
strive to approach them all as a coordinated team.
    State officials lead or take part in a wide variety of regional and 
bilateral initiatives and multiagency diplomatic missions relating to 
money laundering and terrorist financing. They are also active 
participants in key multilateral institutions including FATF and the 
FATF-style regional bodies (FSRB's), the U.N. 1267 Sanctions Committee 
and the U.N. Counterterrorism Committee, the UN Office of Drug Control 
(UNODC), the G-8 Roma-Lyon Group and the Organization of American 
States.
    Leadership of our efforts to combat money laundering and terrorist 
financing engages the resources of three State Department functional 
bureaus, in cooperation with a cross-section of other bureaus and U.S. 
diplomatic missions:

 The Bureau of International Narcotics and Law Enforcement 
    Affairs (INL) has primary responsibility within State for 
    international anticrime issues, including programs to combat money 
    laundering and other financial crimes.
 The Office of the Coordinator for Counterterrorism (S/CT) 
    plays a lead role in our domestic designation program, and shares 
    responsibility with INL for coordinating U.S. AML/CFT capacity-
    building programs overseas.
 The Bureau of Economic and Business Affairs (EB) coordinates 
    terrorist financing policy, and coalition building on terrorist 
    financing, including on U.N. sanctions under Resolution 1267.
Designation
    Overall, the key role that the Department of State can play is to 
help build political will in other countries to staunch the financing 
of terrorism. As part of this broader effort we focus on two tasks to 
help identify and interdict terrorist assets:

 Public designation of terrorists and terrorist organizations; 
    and
 Work with partners abroad to freeze the assets of terrorists 
    and their supporters.

    State shares responsibility, and works closely together with 
Treasury, for designations under U.S. Executive Order 13224. 
Designations under this order result in asset-blocking and a 
prohibition on transactions with the designated individual or entity. 
The Administration has frozen the assets of 436 individuals and 
entities on 76 separate occasions pursuant to this order.
    State has responsibility, in consultation with Treasury and 
Justice, for designation of Foreign Terrorist Organizations (FTO's). 
These designations make it a crime to provide material support to the 
designated organization, subject its members, representatives, and 
material supporters to exclusion from the United States, and block FTO 
assets held in U.S. financial institutions. Forty-two organizations are 
currently designated as FTO's.
    We also work with Justice and Homeland Security to designate groups 
for the Terrorism Exclusion List. Such an action makes individual 
aliens providing support to, or associated with, these organizations 
inadmissible to or, if appropriate, subject to deportation from the 
United States. Many of the groups on this list are banks, NGO's, and 
other organizations found to have provided support to terrorist 
organizations.
    Internationally, State coordinates U.S. diplomatic engagements on 
terrorist financing, including nominations of individuals and entities 
associated with Al Qaeda, Osama bin Laden or the Taliban for mandatory 
sanctions under UNSCR 1267. We also lead U.S. initiatives to build 
international support for the U.N. 1267 sanctions process. The 1267 
Sanctions Committee has listed over 300 persons and over 100 entities, 
including 139 names submitted by the United States.
    Overseas, American diplomats are engaged in regular dialogue in 
support of U.S. strategies against terrorism and financial crime. We 
have instructed that at each mission, a senior official chair regular 
interagency meetings to develop and propose strategies aimed at 
building a broad international coalition through cooperation with host 
governments against the financing of terrorism, including on 
designation, asset blocking, and capacity building.
Standard-Setting
    In the area of international standard-setting, the Treasury 
Department leads U.S. efforts in the Financial Action Task Force, but 
State participates in its plenary and working group meetings to 
establish high-quality international standards in the areas of money 
laundering and terrorist financing. We work hand in glove with the 
Treasury and Justice Departments in this effort, including through 
diplomatic support provided by missions overseas in pushing the 
importance of the FATF criteria to host governments.
    Treasury has provided invaluable leadership within the U.S. 
Government on our efforts to effectively utilize FATF to address 
terrorist financing. The FATF 40+9 Recommendations provide the 
international framework for a comprehensive national legal regime. FATF 
continues to clarify and refine these Recommendations through 
Interpretive Notes and best practices guidelines agreed by its 33 
members.
    State, along with Treasury and Justice, each funds a one-third 
share of the annual U.S. contribution to FATF. State's INL bureau 
provides the only U.S. funding support for FATF-style regional bodies 
(FSRB's) that, among other activities, adapt FATF Recommendations to 
regional requirements.
    State has also sponsored an initiative in the Organization of 
American States to update the Inter-American Drug Abuse Control 
Commission (CICAD) Model Regulations on Money Laundering to reflect 
FATF standards and U.N. Security Council resolutions on terrorist 
financing.
Capacity and Commitment
    The Department of State has been active in U.S. efforts to support 
global compliance with international standards, particularly in three 
areas:

 Assessing compliance with these standards;
 Providing capacity-building assistance for key countries in 
    need; and
 Engaging governments and institutions on implementing measures 
    to prevent terrorist financing and money laundering.
Assessments
    The Department of State is a strong proponent of the FATF-style 
regional bodies (FSRB's) in their work adapting FATF standards to meet 
regional requirements. In Washington, we work closely on this endeavor 
with Treasury, the U.S. agency with policy lead on FSRB's, and Justice. 
Our overseas missions provide diplomatic support for the FATF and FSRB 
processes.
    For example, to support global efforts to assess compliance with 
international standards, the Department's INL bureau has recently begun 
to earmark contributions through its funding mechanism for the FSRB's, 
and requiring statements of goals, objectives, and measures of 
performance from the recipient bodies.
    We have supported Treasury in sharing best practices to combat 
money laundering and terrorist financing with international financial 
institutions including the IMF, the World Bank and the Inter-American 
and Asian Development Banks. We welcome last year's agreement by the 
FATF, IMF and World Bank to develop a common methodology to incorporate 
the FATF 40+9 into their country financial sector reviews.
Capacity Building
    To help build global capacity, we work bilaterally and regionally 
as well as through multilateral organizations to develop, coordinate 
and implement anti-money laundering and counter-terrorist financing 
assistance programs.
    State takes an active role in planning, funding and delivery of 
U.S. training and technical assistance to a selected group of some two-
dozen countries where financial systems are particularly vulnerable to 
abuse by terrorists. This process demands close interagency 
cooperation, and we have been working hard to improve the process.
    These bilateral assistance programs utilize a comprehensive model 
aimed at developing or reinforcing legal, judicial, financial 
regulatory, financial intelligence, and law enforcement capabilities. 
Programs encompass legislative drafting, FIU development, judicial and 
prosecutorial training, financial supervision, and financial crime 
investigative training, as well as the funding of long-term resident 
advisers, and are increasingly focused on addressing abuse of 
alternative remittance systems, nonprofit organizations and cash 
couriers.
    Last year, the U.S. Government provided anti-money laundering and 
terrorist financing training to more than 100 countries, and a total of 
over 130 since September 11. Some of this training was done on a 
regional basis, through International Law Enforcement Academies 
(ILEA's) in Budapest, Gaborone, and Bangkok. Altogether, the United 
States has helped established five ILEA's to combat drug trafficking, 
criminality, and terrorism.
    Other regional programs have included a partnership with the United 
Kingdom and European Union to develop and implement the recently 
completed 5-year Caribbean Anti-Money Laundering Program, and a similar 
program recently established for the 14 non-FATF members of the Pacific 
Island Forum. In Latin America, the United States has provided funds to 
the CICAD Money Laundering Group of Experts and to the 3+1 Group in 
South America.
    State also leads the U.S. delegation to the G-8 Counter-Terrorism 
Action Group (CTAG) to coordinate the international provision of 
antiterrorism training and technical assistance. CTAG donors have 
established a gaps/assistance matrix based on the counterterrorism 
finance needs identified in FATF assessments of key countries, and 
agreed that sustained assistance over time is required to close the 
gaps. By mid-2005, 12 members of the CTAG, including the United States, 
had provided more than 200 coordinated technical assistance programs to 
more than 150 countries.
Implementation
    Engaging other governments on the importance of implementing 
measures against terrorism finance and money laundering has been a 
cornerstone of our diplomatic strategy following September 11. 
Components of this engagement have included bilateral diplomacy, 
technical assistance, and work through multilateral institutions such 
as FATF and the United Nations.
    In 2005, 17 countries promulgated or updated anti-money laundering 
and terrorist financing laws in 2005. The number of jurisdictions that 
have criminalized money laundering to include predicate crimes beyond 
narcotics increased to 172 from 163 in 2004. Ten more countries 
criminalized terrorist financing, bringing the total number of 
countries with such laws to 123. In addition, seven more financial 
intelligence units (FIU's) became members of the Egmont Group, raising 
its global membership to 101, and 123 governments are members of the 
seven FATF-style regional bodies (FSRB's).
    U.S. Government assistance programs, coordinated with our 
embassies, continue to include programs to help governments to make the 
necessary legal and regulatory changes to ensure compliance with 
international standards and expectations.
    State's INL bureau played a key role with Treasury and Justice in 
development of the FATF Non-Cooperative Countries and Territories 
(NCCT) process to reduce the vulnerability of financial systems to 
money laundering. Targeted Department assistance programs have 
contributed to removal of all 6 Western Hemisphere and 15 of the other 
17 NCCT's from the FATF list. In 2005, FATF removed the Cook Islands, 
Indonesia, Nauru, and the Philippines from the list, leaving only Burma 
and Nigeria as remaining NCCT's.
    State assistance to the United Nations Office on Drugs and Crime 
(UNODC) Global Program against Money Laundering has provided mentoring 
and other assistance for promoting compliance with FATF Recommendations 
and reinforcing of national anti-money laundering institutions capable 
of combating the financing of terrorism.
    The Department's annual International Narcotics Control Strategy 
Report (INCSR) assesses the global money laundering situation and 
national as well as multilateral anti-money laundering efforts in a 
separate volume on money laundering and financial crimes that also 
addresses terrorist financing.
    This report features summaries and comparative analyses on more 
than 200 governments, and is recognized worldwide as a standard 
reference for identifying critical weaknesses in anti-money laundering 
systems. The State Department, on behalf of the more than a dozen 
contributing agencies, was gratified that September 11 Commission Co-
Chairman Lee Hamilton testified before the House Financial Services 
Committee to the INCSR's usefulness.
Additional Contributions
    In addition to the aforementioned, the Department of State 
contributes to efforts in areas which, although related more directly 
to our larger counterterrorism efforts, support U.S. efforts against 
the financing of terrorism. These include, most prominently, economic 
policies favorable to development, and public diplomacy.
Economic Tools
    This discussion of the Department's role has focused on direct 
actions that we are taking to fight terrorism and terrorist financing. 
But there are longer-term, indirect actions that can help to address 
the economic conditions that support terrorist rhetoric and 
recruitment.
    One of the recommendations of the September 11 Commission focused 
on the need to include in our comprehensive counterterrorism strategy 
policies to encourage development and open societies to improve the 
lives of those who might otherwise turn to terrorism. In the post-
September 11 world, it is now clear as never before that the national 
security of the United States and the economic development of the 
world's poorest countries are inextricably linked.
    As a matter of U.S. policy, development is central to the National 
Security Strategy, which the President issued on March 16 this year. It 
states: ``Development reinforces diplomacy and defense, reducing long-
term threats to our national security by helping us build stable, 
prosperous, and peaceful societies.'' In addition to our core AID 
programs, examples of policy tools aimed at promoting this goal 
include:
    The Millennium Challenge Account (MCA) provides assistance to 
reduce poverty through economic growth in those countries that rule 
justly, invest in their people, and encourage economic freedom. The MCA 
is based on the finding, and common sense notion, that aid is most 
effective when invested in countries that are committed to good 
governance and already have good policies in place.
    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.
    Both the MCA and HIPC reflect the President's National Security 
Strategy, which states: ``Improving the way we use foreign assistance 
will make it more effective in strengthening responsible governments, 
responding to suffering, and improving people's lives.''
    An aggressive U.S. multilateral and bilateral trade agenda to 
liberalize global markets also supports our development goals, 
especially in realizing the President's bold vision of a Middle East 
Free Trade Area (MEFTA)--concluding Free Trade Agreements with Oman, 
Bahrain, and Morocco (the last already in force), developing special 
export zones in Egypt and Jordan, and considering others in Pakistan 
and Afghanistan. Saudi Arabia became a full member of the World Trade 
Organization in December 2005.
    Bilateral Investment Treaties (BIT's) support adoption of market-
oriented policies that can promote growth and new employment. For 
example, we are negotiating a high-standard BIT with Pakistan that 
supports the adoption of market-oriented policies that can promote 
growth and new employment and reduce poverty.
Public Diplomacy
    The Department of State is also working to address the September 11 
Commission's critique of U.S. public diplomacy efforts aimed at 
countering terrorism.
    In recent months, we have ramped up our efforts to get our message 
before the public. When I have traveled to discuss terrorism finance 
issues, I also met with local journalists. When I could not travel to 
speak at a conference on terrorist financing last November in Madrid, I 
made arrangements to address participants through videoconferencing. I 
know my colleagues from Treasury and other departments are making 
similar outreach efforts.
    State also provides briefings on combating terrorism finance to a 
mix of foreign professionals--including law enforcement, legislators 
and government officials, judges, attorneys, and journalists from many 
parts of the world. These have been very lively sessions that have 
given us an opportunity to clarify misunderstandings and garner greater 
support for meeting U.S. objectives.
    We are making a concerted effort to place opinion pieces by U.S. 
Government officials in key media outlets throughout the world. This 
year we have placed opinion pieces in every continent in multiple 
languages reaching millions of foreign readers, including a recent 
placement in pan-Arab newspapers. The number of readers we reach is 
only part of the story--the fact is these opinion pieces do influence 
changes in foreign legislation and spur more effective law enforcement 
efforts overseas.
    The most recent opinion piece discusses concern over misuse of 
charitable donations and explains the steps which governments can take 
to both protect those who donate to charities and to regulate 
charitable organizations in a way that facilitates rather than 
hindering their work. This piece has been placed in leading newspapers 
in Saudi Arabia, Jordan, Indonesia, and Sri Lanka, as well as the pan-
Arab Ash-Sharq al-Awat, and will be published in European and African 
capitals in the days ahead.
    We regularly provide targeted talking points for U.S. embassies to 
use to educate the public and government officials about the risks and 
links between terror financing, money laundering, arms trade and drug 
smuggling. We also provide ongoing training to U.S. foreign service 
officers and other U.S. government officials on the public diplomacy 
aspects of discussing terror financing issues with overseas audiences.
Recent Developments
    Mr. Chairman, when we last met in July 2005, my remarks focused on 
money laundering and terrorist financing in the Middle East and 
Pakistan. At this time, I would like to take a few minutes to update 
the Committee on developments in these areas, as well as provide an 
overview of issues in other regions and international organizations 
where the Departments of State, Treasury, and other agencies, as well 
as U.S. diplomatic missions, have been active.
    Key recent developments include:

 U.N. Security Council adoption of measures to strengthen 
    international sanctions against the Taliban and Al Qaeda.
 Thirty-five new listings for sanctions under UNSCR 1267, 
    including the Movement for Islamic Reform in Arabia (MIRA) and Al-
    Akhtar Trust International, sponsored by seven different 
    governments including the United States.
 International consensus at the Financial Action Task Force on 
    implementing oversight of nonprofit organizations.
 Inauguration of the United States-Saudi Strategic Dialogue and 
    the United States-UAE Terrorist Financing Coordinating Committee.
 Adoption of best practices papers on charities, cash couriers, 
    and hawala by the Middle East and North Africa Financial Action 
    Task Force (MENAFATF).
 Ongoing anti-money laundering programs aimed at strengthening 
    existing law and building effective financial intelligence units; 
    the Saudi financial intelligence unit is now fully operational.
 Regular dialogue with the European Union on terrorism finance 
    issues.
 EU adoption of legislation on money laundering and regulation 
    of cash couriers, and guidance on oversight of charities.
United Nations
    During my testimony last July, I briefly touched on work we were 
doing in New York to improve the effectiveness of the U.N. sanctions 
regime targeting the Taliban and Al Qaeda. Later that same month, those 
negotiations resulted in the unanimous adoption by the Security Council 
of UNSCR 1617.
    This resolution extends the mandate of the 1267 Sanctions 
Committee's Monitoring Team: The eight experts, including one American, 
who are its eyes and ears. It also clarified what constitutes 
association with Al Qaeda, adds enhanced due-process provisions to the 
listing process and ``strongly urges all member states to implement the 
comprehensive international standards embodied in the FATF 40 
Recommendations on Money Laundering and the FATF Nine Special 
Recommendations on Terrorist Financing.''
    This outcome benefited from teamwork by a State/Treasury/Justice 
team that worked intensively to develop the language in 1617 and garner 
international support for the resolution.
    UNSCR 1624, a resolution related to the incitement of terrorist 
acts, was adopted unanimously in September at a Security Council summit 
as part of the U.N.'s response to terrorism. We are currently 
discussing the elements of a strategy to drive effective implementation 
of this resolution internationally.
FATF and FATF-Style Regional Bodies
FATF
    With strong leadership by Treasury, the USG team has worked 
successfully to build cooperation and promote best practices.
    The Financial Action Task Force adopted an Interpretative Note to 
guide members' implementation of its Special Recommendation VIII on 
oversight of nonprofit organizations at its February 2006 meeting in 
Cape Town. Agreement followed months of negotiation, where Treasury led 
the U.S. team, and represents international consensus on common 
priorities and procedures to avoid abuse of the sector by terrorist 
financiers.
    FATF also agreed to establish an ad-hoc process to address 
outstanding membership questions, including the appropriate size of the 
organization and other governments' interest in joining.
    The two new FAFT-style regional bodies (FSRB's) recognized by FATF 
in 2004, the Middle East and North African Financial Action Task Force 
(MENAFATF) and the Eurasia Group (EAG), brought the total number of 
FSRB's to eight. The United States holds observer status with each. 
Both have been active putting programs into operation.
MENAFATF
    MENAFATF has already proven itself one of the most engaged of the 
regional bodies. It has formed several active working groups and issued 
commendable best practices papers in the areas of bulk cash smuggling, 
supervision of charities, and underground banking. Mutual evaluations 
will get underway this year.
    MENAFATF held its most recent plenary in Cairo March 22-23, and 
supported March 24-25 the United States-MENA Private Sector Dialogue on 
Combating Laundering and Terrorist Financing.
Eurasia Group (EAG)
    The Eurasia Group (EAG) is working to compile a comprehensive list 
of regional training and technical assistance needs and donors. It is 
also establishing a regional training center in Moscow to be managed by 
its Russian-led secretariat. Mutual evaluations will begin this year.
    Charter members of the EAG include Belarus, China, Kazakhstan, 
Kyrgyzstan, Russia, Tajikistan, and Uzbekistan. Ukraine was added as a 
member at the most recent plenary in Moscow in December.
Middle East
Gulf States
    We are continuing high-level interagency engagement with all the 
Gulf States, focusing on sustaining their capacity to effectively 
address the terrorist threat. The U.S. Government has conducted Anti-
Terrorism Assistance (ATA) programs with all the states of the Arabian 
Peninsula.
    The Gulf States have made significant progress in improving their 
abilities to combat terrorist financing, and have worked closely with 
us in this area. They have diligently implemented U.N. Security Council 
sanctions.
    While there is more that can be done, we have developed highly 
cooperative and mutually beneficial relations with the Gulf States in 
the areas of law enforcement, intelligence sharing, and terrorist 
finance. We are presently working with them to combat the illicit use 
of cash couriers, which is especially pertinent to these cash-based 
economies.
Saudi Arabia
    We continue to engage Saudi Arabia through regular, high-level 
diplomatic meetings to urge enhanced emphasis on combating terrorist 
finance. I want to highlight for you a number of cooperative activities 
we are currently engaged in with Saudi counterparts:
    This past year, we established the United States-Saudi Strategic 
Dialogue, which Secretary Rice inaugurated during her November 2005 
visit to Riyadh. The Dialogue includes a number of working groups, 
including one dedicated to counterterrorism, which will creatively 
address terrorist finance, among other key issues. A second round of 
the Dialogue is scheduled to take place in the United States later this 
year.
    Saudi Arabia is working to establish a charities commission to 
regulate all charitable donations leaving the kingdom. We continue to 
stress the need for appropriate regulatory oversight of all charitable 
organizations headquartered there, such as the World Muslim League, the 
International Islamic Relief Organization (IIRO), and the World 
Assembly of Muslim Youth (WAMY). Senior Saudi officials have 
reiterated, as recently as last week, that existing regulations prevent 
unauthorized bank money transfers by charities from leaving Saudi 
Arabia.
    In late 2005, the Government of Saudi Arabia enacted stricter 
regulations on the cross-border movement of funds. Money in excess of 
$16,000 must be declared upon entry and exit from the country. While 
the regulations were effective immediately, Customs staff training is 
continuing, as highlighted by recent discussions with senior Saudi 
officials. A cash declaration process is also now in place.
    The Saudi Government is also working to strengthen its nascent 
Financial Investigations Unit (FIU), established in 2005 and now up and 
running and receiving reports from Saudi financial institutions. We 
have consistently urged the Saudis to accelerate the FIU's membership 
in the Egmont Group of financial intelligence units in order to 
facilitate the international sharing of financial information. The 
Financial Crimes Enforcement Network (FinCEN), the U.S. financial 
intelligence unit, is working with the Saudi unit on the Egmont 
application process and plans to sponsor it when it qualifies.
Kuwait
    Kuwait is currently working to revise and strengthen its anti-money 
laundering law to specifically criminalize terrorist financing. We 
expect that draft legislation to be ready for review by the cabinet and 
parliament by the summer.
    Kuwait's Ministry of Social Affairs has dismantled all unlicensed 
charity kiosks, some of which had been linked to terror financing.
    In December 2005, Kuwaiti Customs, in conjunction with DHS, hosted 
a conference to train Kuwaiti officials on preventing terror financing.
UAE
    The United States-UAE Joint Terrorist Financing Coordinating 
Committee (JTFCC) was launched in January 2006. This interagency, 
bilateral effort allows high-ranking U.S. officials to work directly 
with their UAE counterparts to address a range of issues, including 
cash couriers, charities, and hawala. The second JTFCC meeting will 
take place in the weeks ahead in Abu Dhabi.
    Since 2000, the UAE Government has frozen $1.3 million of funds in 
17 different accounts based on U.N. sanctions. It has also been a 
leader in setting up new standards for controlling hawala. The UAE 
passed an antiterror law in July 2004, encouraged attendance at the 
Middle East Law Enforcement Training Center and has signed all 12 U.N. 
Counterterrorism Conventions.
Iraq
    In Iraq, we continue to work hard to support government capacity-
building across the spectrum. Iraq is in the process of establishing a 
Money Laundering Reporting Office in the Central Bank of Iraq (CBI) to 
collect, analyze, and disseminate information on financial transactions 
subject to financial monitoring and reporting, including suspicious 
activity reports. The United States is working with the CBI to build 
this capacity and to implement the day-to-day functions of a financial 
intelligence unit.
    The USG aims to help Iraq modernize its banking system, establish 
international standards in its banking regulations and implement and 
enforce existing laws to combat terrorism financing.
    USG assistance to the Central Bank includes providing technical 
advice on international accounting standards, bank supervision, and 
licensing. A performance and management assessment of all the state-
owned banks was completed this year to establish a baseline for 
restructuring the banks. The USG is also assisting the GOI with 
developing a new national payments system that will help increase 
transparency in the banking system and help the Central Bank in its 
supervisory role.
    We are providing assistance to Iraq's private sector banks in the 
area of cashflow-based lending, strengthening private banking 
associations, and helping private international banks to register in 
Iraq.
    We are also working with Iraq to ensure that any new legislation 
that replaces or enhances the current anti-money laundering act (CPA 
Order 93) will meet international standards.
Jordan
    The Jordanian Government has submitted draft anti-money laundering 
and bank secrecy legislation for approval by Parliament and is working 
to strengthen its anti-money laundering and terrorist finance controls.
    The U.S. Government, in coordination with the Government of Jordan, 
has assigned a Treasury Attache to Amman to provide technical 
assistance and training to Jordanian banking and law enforcement 
officials, as well as to others in the region.
    We have a robust ATA program in place with Jordan, and excellent 
cooperation in the areas of law enforcement and intelligence-sharing. 
We are also negotiating a Millennium Challenge Account threshold 
program to improve governance and business climate.
Syria
    On March 9, 2006, Treasury issued a final rulemaking that prohibits 
all U.S. financial institutions from maintaining or opening 
correspondent accounts used by or on behalf of the Commercial Bank of 
Syria (CBS), pursuant to Section 311 of the USA PATRIOT Act, due to 
CBS's involvement in money laundering and terrorist financing.
    The international community has been clear about what it expects of 
Syria: The government must end the flow of weapons and funds to 
terrorist groups, such as Hizballah, within Lebanon; it must work to 
curb the flow of foreign fighters into Iraq; and it must close the 
offices of Palestinian terrorist groups in Damascus.
Lebanon
    On March 23, 2006, the Department of the Treasury designated al-
Manar, a satellite television operation owned and controlled by 
Hizballah, as a terrorist organization pursuant to E.O. 13224. The 
order also designated al-Nour Radio and the parent company of both 
groups, the Lebanese Media Group (LMG). Hizballah, a designated foreign 
terrorist organization, works through and with these entities to raise 
funds, recruit, and otherwise support terrorist activities.
South Asia
Pakistan
    Pakistan's proposed anti-money laundering legislation, drafted with 
U.S. assistance and approved in cabinet last year, remains in 
Parliament. We are concerned that some elements may not meet 
international standards, and are trying to engage the Pakistani 
Government to correct deficiencies. Lack of action, including 
establishment of a financial intelligence unit, leaves us unable to 
accelerate planned assistance.
    In the absence of legislation, Pakistani banking and securities 
regulators have introduced regulations to improve oversight consistent 
with Financial Action Task Force regulations.
    We welcome the concrete actions Pakistan has taken in response to 
U.N. Security Council Resolutions, including the freezing of over $10 
million of Al Qaeda assets. However, the presence of Al Qaeda, other 
terrorist groups and front organizations, porous borders, and 
widespread informal, cash-based financial networks mean Pakistan will 
remain a focus of concern for some time.
    We are encouraged by Pakistan's concern that terrorist groups may 
be presenting themselves as charitable organizations. We would welcome 
the opportunity to provide technical assistance to help the government 
meet international standards on preventing abuse of the nonprofit 
sector. Involvement in post-earthquake relief efforts by front 
organizations for terrorist entities designated by the 1267 Committee 
raises serious concerns that funds from international donors for 
earthquake relief and reconstruction could be diverted. We have shared 
these concerns with Pakistan and have made clear the types of steps the 
government needs to take to prevent this from happening.
    For example, we worked extensively with USAID, which in turn worked 
with its contractors to make sure that no subcontracts were awarded to 
terrorist groups. USAID and the Department also worked with private 
sector donors and NGO's to this end. Treasury contributed guidelines on 
this subject, which are posted on Treasury's website.
Afghanistan
    Afghanistan has made significant progress in creating and enacting 
a legal framework to combat money laundering and the financing of 
terrorism in the formal banking sector. However, 25 years of armed 
conflict devastated physical infrastructure and human capacity in all 
economic sectors. Commercial banks have only recently reopened in major 
cities, and the country's informal financial sector remains large and 
well-established.
    The Central Bank's primary challenge is to extend formal regulatory 
oversight to the informal financial sector. It has the legal authority 
to do so, but many foreign exchange dealers and money service providers 
see the requirements as overly burdensome.
    Under legislation adopted in 2004, Afghanistan has set up a 
financial intelligence unit, and an embedded U.S. Treasury adviser is 
working with the Central Bank to help the FIU become fully operational. 
The FIU is working with the informal financial sector to implement 
regulations, but full implementation will require enforcement capacity 
which the Ministry of Interior and the Attorney General's office do not 
currently possess.
    President Bush has expressed strong support for working with 
Afghanistan and Pakistan to establish Reconstruction Opportunity Zones 
(ROZ's), with the idea of greater commercial opportunities and jobs as 
an alternative to extremist recruitment. We envision that a defined 
range of products in these ROZ's would receive duty-free entry into the 
United States, including some products that are not currently eligible 
for duty-free treatment under GSP. The recently launched United States-
Afghanistan Partnership includes an economic prosperity component and 
highlights both ROZ's and Business Building Bridges initiatives.
    Additionally, we are working with the Multilateral Development 
Banks and the Governments of the South and Central Asian countries to 
promote regional cooperation and economic integration.
East Asia
Indonesia
    We continue to see results from counterterrorism finance and anti-
money laundering assistance provided by Washington agencies in the wake 
of the 2002 attack in Bali:

 Indonesia's financial intelligence unit has been fully 
    operational since October 2003, receiving and analyzing suspicious 
    transaction reports; over 20 cases have been successfully 
    prosecuted.
 The Indonesian National Police has established a specialized 
    counterterrorism unit that includes financial investigators who 
    have received counterterrorism finance and anti-money laundering 
    training.
 The Indonesian Central Bank has put in place rules and 
    procedures to enhance anti-money laundering compliance for private 
    sector banks.

    A U.S. Resident Legal Advisor at Embassy Jakarta is assisting the 
Indonesian Government in implementing anti-money laundering legislation 
and preparing cases to prosecute financial crimes. Changes in its legal 
regime led to removal of Indonesia from the Financial Action Task 
Force's Non-Cooperating Countries and Territories list in February 
2005.
    Partly due to lack of interministerial coordination, Indonesia's 
performance in implementing U.N. sanctions provides an area for 
improvement. We have provided some training, including on oversight of 
charities, and are assessing other areas where training might be 
appropriate.
    The Millennium Challenge Corporation is currently negotiating a 
threshold program with Indonesia that would attack corruption, 
particularly in the judiciary.
Europe
European Union
    Cooperation with the European Union is increasingly guided by the 
United States-European Union dialogue on terrorism finance issues, 
established in September 2004 in fulfillment of 2004 United States-
European Union summit commitments. This process brings key players 
together for regular review of current issues, and provides a framework 
for joint expert-level projects in areas including prosecution, law 
enforcement, designation, and technical assistance.
    The United States interagency delegation, which I chair, meets with 
representatives of key European Union institutions during each 6-month 
European Union Presidency to set direction and assess progress.
    Informal expert groups of judicial, technical assistance and 
designation professionals have begun organizing joint work programs. 
They have organized United States-European Union workshops on judicial 
and designation issues, and conducted a joint financial sector 
assessment in Tanzania. In November, they held a workshop on 
implementing FATF standards for asset freezing, with follow-up meetings 
planned this year on enforcement and listing/de-listing issues.
    Discussions are also ongoing aimed at compiling a shared database 
on treatment of classified information in the United States and 
European Union states. However, attempts to implement a 2004 summit 
agreement to analyze frozen accounts depend on member states' 
willingness to provide Europol with the necessary authority.
    We are also engaging the EU through key member states and 
international organizations. Resolving differences of approach with 
respect to the use of administrative or preventive freezing and 
criminal proceedings remains a key challenge. However, with prodding by 
FATF and the UK's EU Presidency last fall, more EU member states are 
taking steps to put legal authorities in place to freeze terrorist 
assets independent of EU action.
    Over the last year, the EU has moved forward with legislation to 
implement the FATF Special Recommendations on Terrorist Financing. It 
adopted new measures on money laundering, which also addressed 
terrorism finance issues, and on regulation of cash couriers. 
Legislation covering wire transfers is currently before the European 
Parliament.
    The European Commission issued guidance to member state governments 
last December on oversight of charitable organizations, and has invited 
U.S. participation in a conference this fall on preventing abuse of the 
nonprofit sector.
Russia
    With legislation and enforcement mechanisms in place, cooperation 
with Russia is improving:

 United States and Russian law enforcement agencies have worked 
    together on a number of high-profile money laundering cases, 
    resulting in successful prosecutions in the Russian courts.
 The United States and Russian financial intelligence units 
    (for the United States, Treasury's Financial Crimes Enforcement 
    Network) have established a productive working relationship, 
    sharing sensitive financial information on suspicious transactions 
    almost daily.
 The United States-Russia Counterterrorism Working Group (CTWG) 
    meets twice a year to review bilateral cooperation on a range of 
    counterterrorism issues, including terrorism finance.

    Russia spearheaded creation of the EAG in 2004. With United States 
support, Russia has led efforts to make the Eurasia Group (EAG) an 
effective FATF-Style Regional Body. The United States has detailed a 
Treasury advisor to the EAG to support Russia's efforts to bring EAG 
members' legal systems up to international standards.
    However, our views and Russia's have sometime diverged regarding 
the U.N. 1267 Sanctions Committee's listing process, and we are working 
to improve our coordination on these issues. In other respects, Russia 
has been a key partner in UN counterterrorism initiatives. United 
States cooperation with Russia produced the initial draft of UNSCR 
1617. Russia also played a key role in our shared effort with the other 
permanent members of the Security Council to convince China to approve 
the resolution's endorsement of the FATF 40+9 Recommendations.
Latin America
Triborder Area
    Although there is no credible information indicating that Islamic 
terrorist cells are planning attacks in Latin America or the Caribbean, 
the United States Government remains concerned that Hizballah and HAMAS 
fundraisers are active among the large Muslim communities of the 
largely uncontrolled Triborder Area (TBA) of Argentina, Brazil, and 
Paraguay.
    We remain concerned that proceeds from narcotics and piracy of 
goods may be used to support Hizballah in the three TBA countries. In 
September 2005, the Department of State provided $750,000 to the 
Department of Homeland Security's U.S. Immigration and Customs 
Enforcement (ICE) to establish trade transparency units (TTU's) in 
these countries. The TTU's will enable the TBA countries and the USG to 
compare trade data declared at origin and destination of trade 
transactions; discrepancies will alert authorities to the possibility 
of fraud, money laundering, or terror financing. Each TTU will be a 
vetted unit that includes representative of the customs service, 
financial intelligence unit, law enforcement agencies and, where 
applicable, the judiciary.
    We have been working with all three countries to strengthen their 
capabilities to deal with financial crimes in other ways:
    On March 30, Argentina's Chamber of Deputies passed long-delayed 
money laundering legislative reforms. The U.S. Embassy in Buenos Aires 
has engaged in an extended lobbying campaign to for passage of the law, 
which was earlier approved by the Senate. Argentine press reports have 
highlighted the role of both the United States and the FATF in pressing 
for the changes. Coincidentally, passage occurred during a high-level 
visit by the FATF President and Executive Secretary.
    The Brazilian Government is currently drafting legislation that 
would criminalize terrorist financing, refine its anti-money laundering 
regime, and provide administrative authority to freeze financial 
transactions. I understand Assistant Treasury Secretary O'Brien's 
recent visit to Brazil included consultations on this issue. He also 
visited Paraguay and Argentina to promote cooperation.
    I raised the importance we attach to passage of Paraguay's anti-
money laundering legislation during high-level meetings with Paraguayan 
officials last month in Washington, echoing Assistant Secretary 
O'Brien's message in Asuncion. The law, drafted with U.S. assistance, 
would criminalize and enable effective prosecution of money laundering, 
but has languished in Congress for almost 2 years, although it may be 
gaining traction. A $35 million Millennium Challenge Account threshold 
program, approved in February, would accelerate effective 
implementation of the law as well as fight corruption and illicit 
commerce.
    While it remains unclear whether and to what extent intellectual 
property (IP) piracy is a vehicle for terrorist groups to raise funds, 
the State Department is providing significant bilateral training and 
technical assistance to the Paraguay in combating rampant intellectual 
property piracy in the Tri-Border region, provides IP training to 
Brazilian police, and plans to involve Paraguay, Brazil, and Argentina 
in regional training to strengthen cross-border customs cooperation.
Africa
South Africa
    South Africa is the major financial center in the region, and has a 
strong track record of cooperation with the United States in exchanging 
information relating to money laundering and terrorist financing.
    Its legislation for dealing with money laundering and terrorist 
financing has been in place since May 2005 and stands out in a region 
where few countries have adequate legal or regulatory regimes in place. 
It provides the government with investigative and asset-seizure powers 
in case of suspected terrorist activity, and is applicable to 
charitable and nonprofit organizations as well as financial 
institutions.
    Detailed implementation of this legislation remains a work in 
progress. The USG interagency continues to engage the South African 
Government to undertake measures to control cross-country currency 
movement, fully implement the new legislation and take steps to 
regulate alternate remittance systems.
The Challenges Ahead
    In my presentation today I have attempted to emphasize two themes: 
(1) we continue to make progress with partners throughout the world 
against the common threat of terrorism and its financing; and (2) there 
is much that remains to be done.
    In closing, I would like to return to the idea that we have entered 
a new phase in the campaign against terrorism finance. We are moving 
far beyond a focus on freeze-and-seize tactics toward a more strategic 
approach on building coalitions with close partners to make it 
progressively harder for terrorist-linked money to be collected and 
moved. Areas that are becoming increasing prominent in our discussions 
include:

 Non-traditional financing mechanisms, including cash couriers, 
    Islamic banking, hawala, and other alternative remittance systems.
 Non-profit organizations, including front organizations and 
    charities set up to funnel funds to terrorist organizations.
 Corruption, financial crime, and trade-based schemes in 
    support of terrorist activities and organizations.
 State sponsors of terrorism and their role in terrorist 
    financing.

    Our work in these areas will build on the coalition that has come 
together since September 11 to safeguard the international financial 
system. We will continue to adapt use of multilateral sanctions, 
establishment of international standards, and technical assistance 
cooperation to changed circumstances, but our shared goal remains the 
same: Isolate terrorist financiers, insulate the financial system, and 
unite the international community through collective action.
    I welcome your thoughts on these and other key challenges as we 
move forward.
    Thank you very much.
                               ----------
                 PREPARED STATEMENT OF MICHAEL MOREHART
             Chief, Terrorist Financing Operations Section,
       Counterterrorism Division, Federal Bureau of Investigation
                             April 4, 2006
    Good morning Chairman Shelby, Ranking Member Sarbanes, and 
distinguished Members of the Committee. On behalf of the Federal Bureau 
of Investigation, I am honored to appear before you today to discuss 
the FBI's efforts to disrupt and dismantle national and international 
money laundering operations and the operational impact of the 
successful utilization of information obtained from the financial 
sector.
Introduction
    Chief among the investigative responsibilities of the FBI is the 
mission to proactively neutralize threats to the economic and national 
security of the United States of America. Whether motivated by criminal 
greed or a radical ideology, the activity underlying both criminal and 
counterterrorism investigations is best prevented by access to 
financial information by law enforcement and the intelligence 
community.
    In the ``criminal greed'' model, the FBI utilizes a two-step 
approach to deprive the criminal of the proceeds of his crime. The 
first step involves aggressively investigating the underlying criminal 
activity, which establishes the specified unlawful activity requirement 
of the Federal money laundering statutes, and the second step involves 
following the money to identify the financial infrastructures used to 
launder proceeds of criminal activity. In the counterterrorism model, 
the keystone of the FBI's strategy against terrorism is countering the 
manner in which terror networks recruit, train, plan, and effect 
operations, each of which requires a measure of financial support. The 
FBI established the Terrorist Financing Operations Section (TFOS) of 
the Counterterrorism Division on the premise that the required 
financial support of terrorism inherently includes the generation, 
movement, and expenditure of resources, which are oftentimes 
identifiable and traceable through records published by financial 
institutions.
    The analysis of financial records provides law enforcement and the 
intelligence community real opportunities to proactively identify 
criminal enterprises and terrorist networks and disrupt their nefarious 
designs.
Traditional Criminal Money Laundering Investigations
    Money laundering has a significant impact on the global economy and 
can contribute to political and social instability as well, especially 
in developing countries or those historically associated with the drug 
trade. The International Monetary Fund estimates that money laundering 
could account for 2 to 5 percent of the world's gross domestic product. 
In some countries, people eschew formal banking systems in favor of 
Informal Value Transfer systems such as hawalas or trade-based money 
laundering schemes such as the Colombian Black Market Peso Exchange, 
which the Drug Enforcement Administration estimates is responsible for 
moving $5 billion worth of drug proceeds per year from the United 
States to Colombia. Hawalas are centuries-old remittance systems 
located primarily in ethnic communities and based on trust. In 
countries where modern financial services are unavailable or 
unreliable, hawalas fill the void for immigrants wanting to send money 
home to family members, or unfortunately, for the criminal element to 
launder the proceeds of illegal activity.
    There are several more formalized venues that criminals use to 
launder the proceeds of their crimes, the most common of which is the 
U.S. banking system, followed by cash intensive businesses like gas 
stations and convenience stores, offshore banking, shell companies, 
bulk cash smuggling operations, and casinos. Money services businesses 
such as money transmitters and issuers of money orders or stored value 
cards serve an important and useful role in our society, but are also 
particularly vulnerable to money laundering activities. A review of 
Suspicious Activity Reports filed with the Financial Crimes Enforcement 
Network (FinCEN) indicated that approximately 73 percent of money 
services business filings involved money laundering or structuring.
    The transfer of funds to foreign bank accounts still presents a 
major problem for law enforcement. Statistical analysis indicates that 
the most common destinations for international fund transfers are 
Mexico, Switzerland, and Colombia. As electronic banking becomes more 
common, traditional fraud detection measures become less effective, as 
customers open accounts, transfer funds, and layer their transactions 
via the Internet or telephone with little regulatory oversight. The 
farther removed an individual or business entity is from a traditional 
bank, the more difficult it is to verify the customer's identity. With 
the relatively new problem of ``nesting'' through correspondent bank 
accounts, a whole array of unknown individuals suddenly have access to 
the U.S. banking system through a single correspondent account. Nesting 
occurs when a foreign bank uses the U.S. correspondent account of 
another foreign bank to accommodate its customers. A foreign bank can 
conduct dollar-denominated transactions and move funds into and out of 
the United States by simply paying a wire processing fee to a U.S. 
bank. This eliminates the need for the foreign bank to maintain a 
branch in the United States. For example, a foreign bank could open a 
correspondent account at a U.S. bank and then invite other foreign 
banks to use the account. The second-tier banks then solicit individual 
customers, all of whom would have signatory authority over the single 
U.S. correspondent account.
    The FBI currently has over 1,200 pending cases involving some 
aspect of money laundering, with proceeds drawn from criminal 
activities including organized crime, drug trafficking, fraud against 
the government, securities fraud, health care fraud, mortgage fraud, 
and domestic and international terrorism. By first addressing the 
underlying criminal activity and then following the money, the FBI has 
been able to make significant inroads into the financial infrastructure 
of domestic and international criminal and terrorist organizations, 
thereby depriving the criminal element of illegal profits from their 
schemes.
    In recent years, the international community has become more aware 
of the economic and political dangers of money laundering and has 
formed alliances on several fronts to share information and conduct 
joint investigations. Members of the Egmont Group, a consortium of 
Financial Intelligence Units of which the United States is a member, 
can access a secure website developed by FinCEN to share vital 
information on money laundering between participating countries. In a 
further demonstration of international cooperation, over 150 nations 
have now adopted stringent anti-money laundering standards promulgated 
by international Financial Action Task Forces. Congress has also 
assisted our efforts by passage of the USA PATRIOT Act, as Section 
319(a) of the Act now permits the government to seize assets held in an 
U.S. correspondent account in lieu of criminal proceeds deposited 
abroad in a foreign bank. Illegal proceeds deposited in offshore 
accounts are much more difficult for U.S. law enforcement to reach.
    As it relates to international money laundering enforcement, the 
FBI is an active participant in the Financial Action Task Force (FATF). 
Since its creation, the FATF has spearheaded the effort to adopt and 
implement measures designed to counter the use of the financial system 
by criminals. It established a series of recommendations in 1990, which 
were revised in 1996 and in 2003, to ensure that they remain up-to-date 
and relevant to the evolving threat of money laundering. These 
recommendations set out the basic framework for anti-money laundering 
efforts and are intended to be of universal application. All member 
countries have their implementation of the forty recommendations 
monitored through a two-pronged approach: An annual self-assessment 
exercise and the more detailed mutual evaluation procedure. The FBI 
participated in the recent FATF mutual evaluation of the U.S. anti-
money laundering compliance.
Terrorism Investigations
    Access to financial information significantly enhances the ability 
of law enforcement and members of the intelligence community to thwart 
the efforts of terrorists. The lack of complete transparency in the 
financial regulatory system is a weakness on which money launderers and 
facilitators of terrorism rely and has proven to be critical to the 
financing of global terrorism and the provision of funds for terrorist 
attacks. Limited access to financial records inhibits law enforcement's 
ability to identify the financial activities of terror networks. 
Efforts to detect terrorist activity through financial analysis are 
further complicated by the fact that the funding of terrorism may 
differ from traditional money laundering because funds used to support 
terrorism are sometimes legitimately acquired, for example, charitable 
contributions and business proceeds. Overcoming these challenges in our 
efforts to prevent acts of terror has required increased cooperation 
with partner law enforcement agencies, the intelligence community, and 
the private financial and charitable sectors.
    Records produced and maintained by financial institutions pursuant 
to the Bank Secrecy Act (BSA) are of considerable value to these 
critical efforts. As I have previously testified to the U.S. House of 
Representatives Committee on Financial Services, the FBI enjoys a 
cooperative and productive relationship with FinCEN, the purveyor of 
BSA information. This cooperation has broadened the FBI's access to BSA 
information which, in turn, has allowed us to analyze this data in ways 
not previously possible. When BSA data is combined with the sum of 
information collected by the law enforcement and the intelligence 
communities, investigators are better able to ``connect the dots'' and, 
thus, are able to identify the methodology employed to transfer 
currency or move value. The result of this collaborative relationship 
and access to financial intelligence is a significant improvement in 
the efficiency with which we interact to address the investigation of 
terrorist financing matters.
    The ability to quickly and securely access and compare BSA data to 
classified intelligence and law enforcement information is critical. 
Sometimes the investigative significance of a BSA filing cannot be 
appreciated until the items included on the document are compared 
against predicated law enforcement or intelligence information that may 
not be of public record. Such critical information can be biographical 
and descriptive information, the identification of previously unknown 
associates and co-conspirators, and, in certain instances, the location 
of a subject by time and place. Abundant examples exist of activities 
noted in BSA reports which have added value to counterterrorism 
investigations, oftentimes in ways that could not have been predicted 
from the reports alone. BSA data allows for a more complete 
identification of the respective subjects such as personal information, 
nonterrorism related criminal activity, previously unknown businesses 
and personal associations, travel patterns, communication methods, 
resource procurement, and Internet service providers.
    The value of BSA data to our efforts cannot be overstated; the 
importance of access to that information has already proven invaluable 
on the micro, or individual case level, as well as the macro, or 
strategic level. BSA data has proven its great utility for 
counterterrorism matters, and any contemplated change to the underlying 
reporting requirements of the BSA should be measured and carefully 
considered before such action is taken. Either increasing the 
transaction amount at which a Currency Transaction Report (CTR) would 
be generated or abolishing the recordation requirement altogether would 
deprive law enforcement of what has proven to be valuable intelligence.
    Recent analysis on the macro level of the impact of BSA data 
provided by FinCEN to the FBI reinforces the investigative significance 
of the BSA data as follows:

 For the years 2000 through 2005, 38.6 percent of all the CTR's 
    filed reported amounts between $10,000 and $14,999.
 For the same time period, 18.5 percent of all the CTR's filed 
    reported amounts between $15,000 and $19,999.
 CTR's reporting amounts between $20,000 and $24,999 comprised 
    10.8 percent of all CTR's filed during the time period.
 CTR's reporting amounts between $25,000 and $29,999 comprised 
    6.2 percent of all CTR's filed.
 CTR's in the amounts between $30,000 and $34,999 comprised 4.7 
    percent of all CTR's filed.
 Transaction amounts reported between $35,000 and $100,000 
    comprised 19 percent of the total CTR's.
 CTR's reporting $100,000 and more equaled less than 2 percent 
    of all CTR's filed.

    To determine the operational impact of BSA data relative to FBI 
investigations, a sample of FBI records for the years 2000 through 2005 
were matched by exact name and date of birth or by exact Social 
Security number to almost 13,000 CTR's reported in the same time 
period.\1\ This statistical sample, when extrapolated to the universe 
of CTR's, concludes that in excess of 3.1 million CTR's were pertinent 
to FBI investigations during that time period. The breakdown of the 
sampled CTR's deemed relevant to FBI investigations reveals:
---------------------------------------------------------------------------
    \1\ Based on the random sampling of FBI investigative records from 
the whole of FBI investigative records for the years 2000 through 2005, 
it is statistically attestable that a comparison of each investigative 
record to all CTR's for the years 2000 through 2005 would demonstrate 
that more than 3.1 million CTR's directly impact FBI investigations 
with an error rate of less than 1 percent, plus or minus. This number 
is conservative as the matching process used exact name and date of 
birth or exact Social Security number and not the host of other 
identifiers available to investigators, such as telephone numbers or 
addresses.

 29.2 percent of the CTR's reported transactions in amounts 
    between $10,000 and $14,999.
 20.2 percent reported transactions in amounts between $15,000 
    and $19,999.
 10.2 percent reported amounts between $20,000 and $24,999.
 6.2 percent reported amounts between $25,000 and $29,999.
 6.0 percent reported amounts between $30,000 and $34,999.
 28 percent reported between $35,000 and $100,000.
 Less than 1 percent that reported over $100,000.
 72 percent of the reported CTR's deemed pertinent to FBI 
    investigations were in amounts less than $35,000.

    The $10,000 CTR reporting threshold was established in 1973. Since 
that time, technology associated with the movement of money has 
advanced significantly. As a result, the movement of funds through 
electronic means has now become the standard. It should be noted that 
CTR's are not required for the electronic movement of funds. The 
practical effect on law enforcement activities of an increase to the 
CTR threshold reporting amount would be to severely limit or even 
preclude law enforcement access to financial data associated with cash 
transactions that are not otherwise documented. In other words, the 
filing of CTR's, at the current reporting threshold, ensures a degree 
of transparency in the financial system that would not otherwise be 
available.
    Another topic of importance with respect to the filing of CTR's is 
the ``seasoned customer'' exemption. As you are aware, the BSA allows 
financial institutions to seek CTR filing exemptions pursuant to the 
``Designated Exempt Persons'' (DEP) protocol. We are opposed to any 
such exemptions for long-term, well-established, and documented 
customers that would be for a class of customer beyond the current 
regulatory regime, which includes ineligible nonlisted business, such 
as money service businesses. We would also caution against the use of a 
specified time period as the only requirement for exemption under the 
DEP.
    While Section 314(a) requests and Suspicious Activity Reports 
(SAR's) are extremely valuable tools, the notion that these tools are a 
substitute for the intelligence gleaned from currency transaction 
reporting is inaccurate. CTR's are objective reports that document an 
event in time, providing such information as the identity of the 
transactor, the bank name, account number, account owner, and dollar 
amount. Additionally, these reports are available for at least a 10-
year period, and investigators and analysts have the ability to 
directly query these reports when necessary.
    In contrast, the 314(a) process can only be used on the most 
significant terrorism and money laundering investigations, and only 
after all other financial leads have been exhausted, which include 
reviewing CTR's. The banks are only required to review accounts 
maintained by the named subject during the preceding 12 months and 
transactions conducted within the last 6 months, in sharp contrast to 
the 10 years of data provided by the CTR's. Moreover, SAR's are only 
available on select matters where a bank official has made the 
subjective determination that a particular transaction or activity is 
suspicious. Although the banks are doing an outstanding job on 
reporting suspicious activity, SAR's are not a substitute for the 
objective transaction reporting provided by CTR's. All three tools, 
collectively, are of tremendous value.
    Any decision to change the working of the seasoned customer 
exemption should be undertaken with great care, so as not to deprive 
our law enforcement and intelligence personnel of highly valuable data 
points. This is particularly so because of the steadily increasing 
ability of the Bureau to use these data points to meaningfully track 
national security threats and criminal activity. Though information on 
the evolution of this capability is not appropriate for public 
discussion, we are happy to provide nonpublic briefings on it and have 
done so already for some members of your staffs.
    The Bureau and the Administration are committed to working with 
this Committee and the Congress to ascertain whether certain categories 
of CTR's can be eliminated without harm to our investigative 
capabilities and, if so, to find effective methods to stop the filing 
of those, and only those, CTR's. But we should not eliminate the filing 
of any category of CTR's absent study of the utility of that category. 
Simply put, our adversaries are patient and will wait years, if 
necessary, to accomplish their mission.
Conclusion
    In conclusion, BSA data has proven invaluable to our 
counterterrorism efforts and has also proven its worth in traditional 
criminal investigations. Our experience shows that terrorism activities 
are relatively inexpensive to carry out and that the majority of CTR's 
of value to the law enforcement and intelligence communities are 
typically those that are prepared at or near the current reporting 
requirements. To dramatically alter currency transaction reporting 
requirements--without careful, independent study--could be devastating 
and a significant setback to investigative and intelligence efforts 
relative to both the global war on terrorism and traditional criminal 
activities.
                               ----------
                PREPARED STATEMENT OF KEVIN DELLI-COLLI
  Deputy Assistant Director Financial & Trade Investigations Division,
  Office of Investigations, U.S. Immigration and Customs Enforcement,
                  U.S. Department of Homeland Security
                             April 4, 2006
Introduction
    Chairman Shelby, Ranking Member Sarbanes, and distinguished Members 
of the Committee on Banking, Housing, and Urban Affairs, my name is 
Kevin Delli-Colli and I am the Deputy Assistant Director for Financial 
and Trade Investigations within the Office of Investigations, U.S. 
Immigration and Customs Enforcement (ICE). I appreciate the opportunity 
to share with you today how ICE is applying its financial investigative 
authorities and capabilities to identify, dismantle, and disrupt 
criminal enterprises that threaten our Nation's borders and homeland 
security.
The ICE Mission
    Among the Department of Homeland Security law enforcement agencies, 
ICE has the most expansive investigative authorities and the largest 
number of investigators. ICE's mission is to protect the American 
people by combating terrorists and other criminals who seek to cross 
our borders and threaten us here at home. The men and women of ICE 
accomplish this by investigating and enforcing the Nation's immigration 
and customs laws. Working overseas, along the Nation's borders and 
throughout the Nation's interior, ICE agents and officers are 
demonstrating that our unified immigration and customs authorities 
constitute a powerful tool for identifying, disrupting and dismantling 
criminal organizations that violate our Nation's borders. During fiscal 
year 2005, ICE investigations led to the seizure of nearly $1 billion 
in currency and assets from the criminals who exploit our borders. 
Every dollar of criminal proceeds seized is one less dollar criminals 
can use to fuel their businesses.
    By leveraging the full potential of our immigration and customs 
laws, ICE makes it harder for potential terrorists and transnational 
criminal groups to move themselves, their supporters or their weapons 
across the Nation's borders through traditional human, drug, 
contraband, or financial smuggling networks, routes, and methods.
Leveraging Authorities
    ICE has powerful tools for investigating the broad array of 
financial crimes that have a nexus to our borders. Since its creation 
in March 2003, ICE has capitalized upon its unified customs and 
immigration authorities to combat border, public safety, homeland and 
national security violations that fall within our broad jurisdiction.
    One of the most significant outcomes to arise from combining these 
law enforcement authorities at ICE has been the aggressive application 
of financial investigative methods to disrupt and dismantle criminal 
organizations involved in immigration and human smuggling violations. 
By leveraging these authorities, ICE is now identifying, dismantling, 
and seizing the profits of criminal organizations that once thrived and 
generated extensive wealth from violating immigration laws. Corrupt 
foreign nationals, who violated the trust of their countrymen and 
plundered their country's financial assets, once fled to the United 
States and applied for political asylum and were beyond the reach of 
immigration officials. Now, as Politically Exposed Persons under ICE 
jurisdiction, Special Agents arrest them for their financial crimes and 
seize their assets for return to the governments they victimized.\1\
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    \1\ The ICE-led Foreign Public Corruption Task Force was 
established at the SAC Miami to address foreign public corruption and 
related money laundering through U.S. financial institutions, and other 
investments. A primary goal of the task force is to raise awareness 
within ICE field offices to foreign corruption, and deliver training to 
foreign governments in identifying public corruption and related 
proceeds laundered through U.S. financial institutions. The PEP Task 
Force has already delivered extensive training in Central and South 
America, and is conducting approximately 30 investigations.
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    Our Special Agents in the field are demonstrating that financial 
investigations are a very powerful tool in our efforts to combat the 
multibillion dollar business of human smuggling and trafficking both at 
the border and throughout the Nation's interior. We are now able to go 
``up-stream'' against these smuggling and trafficking conspiracies and 
take down their leadership and seize their assets.
Battling the Business of Border Crimes
    ICE Special Agents operate with the understanding that the criminal 
activities we see are, at their core, criminal business enterprises. 
The criminal conspiracies to smuggle drugs, people, and contraband 
across the border in both directions are sustained by earning and then 
moving the money raised by the criminal activity. For example, it is 
estimated that the cross-border human smuggling from Mexico into the 
United States nets hundreds of millions of dollars for criminal gangs--
and the drug trade, billions.
    The related crimes that we see, including money laundering, murder, 
manslaughter, extortion, hostage taking and robberies, are some of the 
methods employed by criminals to maximize profit through violent means, 
while sustaining and growing their criminal enterprises. Most of these 
activities are predicated--at some stage--upon the illegal movement of 
people, goods, or money across the Nation's borders. This understanding 
of the criminal business model drives the ICE strategy of penetrating 
the financial architecture that supports continued criminal activity. 
ICE investigations identify cashflow routes, assets and holdings, and 
the means by which organizations seek to move the proceeds of their 
illegal activity. In so doing, ICE strikes at the heart of the criminal 
organization by targeting the financial infrastructure that permits 
criminal enterprises to flourish.
U.S. Money Laundering Threat Assessment
    Under the leadership of the Department of the Treasury, the 2005 
U.S. Money Laundering Threat Assessment (MLTA) constitutes the Federal 
interagency collaborative effort to identify vulnerabilities and 
methods employed by transnational criminal organizations to move and 
store their illegal funds. ICE was pleased to participate in the 
interagency working group, and provide information and insights 
relevant to the MLTA. We are proud of our contributions to this 
important and useful document, and are fully engaged in collaborating 
on the upcoming National Money Laundering Strategy.
The ICE Assessment
    As the financial, regulatory and law enforcement communities 
continue to tighten the enforcement of Anti-Money Laundering (AML) laws 
and regulations, criminal organizations are increasingly forced to 
resort to bulk cash smuggling, trade-based money laundering, and other 
schemes to move their illicit proceeds across our borders in both 
directions. With nearly 23,000 arrests across more than 24,000 cases in 
fiscal year 2005, ICE Office of Investigations has a substantial 
universe of information and opportunity to extract both tactical and 
strategic information on transnational crime and its financial 
infrastructure. The ICE Cornerstone initiative takes a systemic, rather 
than case-by-case, approach to the investigation of cross-border 
financial and trade crime. Through Cornerstone, ICE partners with the 
private sector, law enforcement, and the regulatory community to 
identify and eliminate vulnerabilities within the U.S. financial and 
trade systems that could be exploited by terrorists and criminal 
organizations. ICE is educating the private sector on red flag 
indicators of suspect criminal behavior indicative of these illicit 
schemes, and taking proactive steps to close vulnerabilities once 
identified.\2\ ICE also focuses on the alternative financing mechanisms 
that terrorist and other criminal organizations use to earn, move, and 
store funds.
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    \2\ The ICE-led El Dorado Task Force in New York identified a 
significant vulnerability in money laundering conducted via 
independently owned ATM's in and around the Greater New York area. This 
vulnerability was briefed to the NY State Banking authorities, the 
industry supplying the machines and other stakeholders. NY State 
Banking Authorities introduced State legislation to regulate the 
independently owned ATM industry.
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    Since July 2003, ICE Special Agents have given over 2,000 
presentations to over 40,000 business leaders, government officials, 
and law enforcement officers, worldwide, generating over 200 
investigations directly attributable to Cornerstone outreach and 
education.
Bulk Cash Smuggling
    A number of the money laundering trends we have observed have 
developed in response to the robust anti-money laundering programs 
instituted by the U.S. financial industry in response to Federal 
legislation and regulation. As the opportunity to exploit our 
traditional domestic financial institutions diminishes, criminal 
organizations are turning to nontraditional and riskier methods to 
gather and move their proceeds, such as bulk cash smuggling. The 
ability of criminal business enterprises to advance their business 
model rests directly upon their ability to take possession of the money 
they have earned through their criminal activities.
    The smuggling of bulk currency out of the United States has become 
a preferred method of moving illicit proceeds across our borders, 
forcing criminal organizations to devise methods for avoiding detection 
during the movement of this bulk cash across our borders. In response 
to this trend, Congress criminalized the act of smuggling large amounts 
of cash into or out of the United States in the USA PATRIOT Act. 
Specifically, Title 31 U.S.C. 5332--Bulk Cash Smuggling--makes it a 
crime to smuggle or attempt to smuggle over $10,000 in currency or 
monetary instruments into or out of the United States, with the 
specific intent to evade the U.S. currency-reporting requirements 
codified at 31 U.S.C. 5316. ICE Special Agents have used the Bulk Cash 
Smuggling statute with great effect, arresting over 330 individuals for 
Bulk Cash Smuggling violations. In addition to these arrests, ICE and 
U.S. Customs and Border Protection (CBP) have worked together to seize 
over $160 million in funds involved in these bulk cash smuggling 
violations. Whenever possible, these cases are developed into larger 
conspiracy cases to reach the highest levels of the smuggling 
organizations.
    ICE's enforcement of the Bulk Cash Smuggling law does not end at 
our Nation's borders. In August 2005, ICE partnered with CBP and the 
State Department to initiate a joint training program for our Mexican 
counterparts on the methods used to smuggle bulk currency. As a direct 
result of this hands-on training, our Mexican counterparts seized over 
$30 million in cash and negotiable instruments in violation of the 
Mexican currency-reporting laws, during pulse and surge operations 
conducted over a 9-month period. The day after this highly successful 
joint operation, known as Operation Firewall, was launched in August 
2005, the single largest bulk cash seizure in Mexico of $7.8 million 
dollars was realized. ICE has worked with our Mexican counterparts to 
tie these seizures to larger investigations conducted in Mexico, the 
United States, and other South American countries. In March 2006, 
building on the proven success of this initiative in Mexico, pulse and 
surge operations commenced again, resulting in two seizures totaling 
over $7 million dollars within the first few days of the operation. The 
State Department continues to fund these international efforts and we 
are grateful for its support.
Money Services Businesses
    In addition to our efforts to combat bulk cash smuggling, ICE works 
aggressively to identify and investigate other financial methods that 
criminals use to move their illicit funds out of the United States--
such as the use of unlicensed money services businesses (MSB). These 
unlicensed businesses operate outside of the traditional banking system 
and governmental oversight, and have been long recognized by law 
enforcement as vulnerable for exploitation by terrorists and other 
criminals. The enhancements in Title 18 U.S.C. 1960, Prohibition of 
Unlicensed Money Transmitting Business, enacted through the USA PATRIOT 
Act, provided ICE with the authority to investigate unlicensed money 
remitters.
    While many MSB's provide a legitimate service to their customers, 
those acting illegally evade Federal reporting and recordkeeping 
requirements. In an effort to address this vulnerability and force more 
transparency within the MSB industry, ICE is aggressively investigating 
illegal MSB's and has implemented an MSB/Informal Value Transfer System 
(IVTS) initiative built upon a three-tiered strategy of identification, 
compliance, and prosecution. The goal is to identify as many unlicensed 
MSB's as possible, investigate and prosecute any MSB that is linked to 
an ongoing ICE criminal investigation or meets Federal prosecution 
guidelines for violation of 18 U.S.C. 1960, and work with the IRS and 
the Financial Crimes Enforcement Network (FinCEN) to educate and bring 
into compliance those unlicensed MSB's not within prosecutorial 
guidelines of the initiative. Since the start of our MSB initiative in 
January 2006, ICE has identified over 80 suspected unlicensed MSB's and 
opened 55 formal investigations.
    ICE's unified immigration and customs investigative authorities and 
capabilities give our Special Agents the ability to identify and close 
the homeland security vulnerabilities generated by and related to 
unlicensed MSB's money laundering activities.
    Specifically, ICE is leveraging information it generates during 
immigration-related enforcement activities to identify and investigate 
unlicensed MSB's used by undocumented individuals to move money around 
the world. Investigations of individuals engaged in benefit fraud, the 
manufacture and sale of false immigration documents, human smuggling 
and trafficking activities, narcotics trafficking, or other 
transnational crimes have a significant potential to uncover unlicensed 
MSB's. Since the passage of the USA PATRIOT Act, ICE investigations of 
unlicensed money services businesses have resulted in over 171 arrests 
and the seizure of over $25 million in currency.
Trade-Based Money Laundering
    Because of ICE's experience and continuing expertise in customs 
matters, our Special Agents are highly effective in investigating and 
combating trade and trade-based money laundering. Criminal enterprises 
have long misused international trade mechanisms to avoid taxes, 
tariffs, and customs duties. Alternative remittance systems, such as 
hawalas, have also long utilized trade to balance payments between 
hawaladars. As both the formal international financial system and money 
services businesses become increasingly regulated, scrutinized, and 
transparent, criminal money launderers and potentially terrorist 
financiers are more likely to use fraudulent trade-based practices in 
international commerce to launder, earn, move, and integrate funds and 
assets.
    Trade-based money laundering is defined as: The use of trade to 
legitimize, conceal, transfer, and convert large quantities of illicit 
cash into less conspicuous assets or commodities. In turn, the tangible 
assets or value are transferred worldwide in an effort to avoid 
financial transparency laws and regulations. The ICE Trade Transparency 
Unit (TTU) identifies anomalies related to cross-border trade that 
present indications of international trade-based money laundering. The 
TTU generates, initiates and supports investigations and prosecutions 
related to trade-based money laundering, the illegal movement of 
criminal proceeds across international borders, alternative money 
remittance systems, and other financial crimes. By sharing trade data 
with foreign governments, ICE and participating governments are able to 
see both sides, import and export, of commodities entering or leaving 
their countries. This truly makes trade transparent and will assist in 
the identification and investigation of international money launderers 
and money laundering organizations. Other benefits of trade 
transparency include: Assisting developing nations in the potential 
identification of smuggling routes or public corruption, and reduction 
of smuggling that feeds the Black Market Peso Exchange laundering 
system.
    The Data Analysis and Research for Trade Transparency System 
(DARTTS) is a proprietary ICE system that helps our Special Agents 
analyze foreign and domestic trade data and Bank Secrecy Act 
information. ICE Special Agents employ DARTTS to identify discrepancies 
in trade and financial data that may indicate money laundering, customs 
fraud and other transnational crimes. The ICE Trade Transparency Unit 
(TTU) develops investigative leads from analysis through DARTTS and 
facilitates the dissemination of investigative referrals to field 
entities.
    ICE launched the first TTU in Colombia to share information, better 
assess risks, and conduct intelligence-based investigations. Using 
State Department funding from Plan Colombia, ICE provided support to 
Colombian authorities and initiated trade-based data exchanges. Under 
this program, U.S. investigative leads are vetted by the TTU and 
disseminated to ICE SAC offices for investigation. Colombian leads are 
disseminated to our Columbian counterparts for investigation. Recently, 
ICE with funding from the State Department, provided 215 computers and 
other equipment to Colombia's Customs Service to increase trade 
transparency and combat trade-based money laundering, drug trafficking, 
contraband smuggling, tax evasion, and other crimes between Colombia 
and the United States.
    Using the joint resources of ICE and Colombian TTU's, ICE 
implemented a Black Market Peso Exchange (BMPE) initiative, involving 
the analysis of companies and/or subject(s) involved in BMPE schemes. 
This initiative allows United States and Colombian authorities to 
exchange information and data for ultimate criminal or civil action, to 
target Colombian peso brokers, United States exporters, Colombian 
importers, and financial accounts facilitating BMPE activity.
    As part of United States efforts in the Tri-border area (TBA) of 
Paraguay, Brazil, and Argentina, ICE is working with the United States 
Departments of State and Treasury and the Governments of Argentina, 
Brazil, and Paraguay to establish TTU's in those three countries. These 
initiatives are at various stages of development.
Digital Money Laundering
    While the majority of border-related money laundering continues to 
take the form of conventional methods, such as bulk cash smuggling, 
money services business, and trade related activities, the rapid pace 
of technology is continuing to open a new horizon of opportunity for 
money launderers in the form of digital money laundering.
    Internet payment services such as PayPal, BidPay, e-gold and E-
Dinar represent new methods to transfer funds globally. For example in 
2004, PayPal executed 339.9 million payments totaling $18.9 billion in 
value. These significant and growing mechanisms to transfer funds and 
value globally in an instant provide new capabilities for those engaged 
in money laundering.
    Often these kinds of services and transactions routinely cross 
several international jurisdictions. Some do not require customers to 
establish their identities. Some accept cash in order to open accounts. 
And some Internet payment conveyances keep few or no records. Others 
with substantial record keeping may reside safely beyond the reach of 
U.S. law enforcement. Merely determining which country has jurisdiction 
over these services can often present severe challenges to law 
enforcement. The proliferation of these services, in combination with 
prepaid value cards that can be used to withdraw cash from ATM's 
worldwide, poses very significant opportunities for the illicit 
movement of money and value outside the boundaries of current 
regulatory regimes.
    These emergent systems and technologies represent a significant 
challenge to our ability to force transparency into the movement of 
money and bearer instruments across our borders, and are not addressed 
by the currency and monetary instrument reporting requirements as 
presently structured.
ICE Use of Bank Secrecy Act Data
    Law enforcement uses the entire array of Bank Secrecy Act documents 
in a variety of ways. ICE has a long history of collecting, analyzing, 
and utilizing Bank Secrecy Act data in criminal investigations. ICE's 
use of Currency Transaction Report (CTR's) data is a valuable analytic 
tool for detecting illegal activity, developing leads, and furthering 
investigations.
    The so-called ``placement'' of funds into the financial system is 
the most vulnerable stage of the money laundering process for criminal 
organizations. Generally, individuals and businesses conducting 
legitimate transactions have no reason to structure deposits or 
withdrawals to avoid the current $10,000 threshold for the filing of a 
CTR. The CTR requirement leads criminals to deliberately structure 
deposits into the banking system in order to avoid the reporting 
requirement in the hopes of avoiding suspicion and detection. Because 
criminals must structure their illicit proceeds, they are forced to 
make multiple financial transactions to place the illicit proceeds into 
financial institutions. This forces the criminal organization to expend 
additional time and effort, and it provides law enforcement with 
indicators used to detect illegal activity.
    In an effort to circumvent the CTR requirement, international 
criminal organizations have employed numerous ``peripheral employees'' 
to ``smurf'' their illicit proceeds into financial institutions. U.S. 
law enforcement has learned to exploit the inherent weaknesses created 
by this process, as it provides law enforcement with a greater number 
of targets for interdiction efforts, undercover opportunities, and 
confidential source development.
    In the course of our investigations, CTR's are used to establish 
links between persons and businesses, to identify co-conspirators, 
potential witnesses, and to reveal patterns of illegal activity. CTR 
information has been utilized to meet the probable cause requirement 
necessary to obtain search and/or arrest warrants. CTR's link 
individuals and businesses to financial institutions and provide this 
information so the investigator can utilize the information for 
subpoenas. CTR's can also provide critical information relating to 
asset identification. Most importantly, as mentioned above, the CTR 
requirement causes violators to deliberately structure deposits into 
the banking system, which is a significant red-flag indicator of 
criminal activity. To illustrate how important CTR's are to ICE 
investigations, ICE Special Agents queried CTR records over 454,000 
times just in fiscal year 2005. ICE has many examples of investigations 
that were initiated, enhanced, or perfected because of access to the 
Bank Secrecy Act repertoire of documents.
Conclusion
    All forms of illegal movement of money and other financial 
instruments across our borders, and through our financial institutions, 
along with the generation of illegal proceeds from crimes that violate 
our customs and immigration laws constitute threats to the Federal 
revenue, our economy, our allies, and our national security.
    While financial crimes themselves are a direct threat, they also 
sustain and support the illicit activities of terrorists or other 
criminals. By aggressively enforcing our Federal laws against money 
laundering, particularly those related to transna-tional crimes, ICE 
Special Agents are working to close existing vulnerabilities in our 
border and homeland security.
    Although the majority of cross border-related money laundering we 
see today is by known methods, this illegal business is evolving in 
dangerous ways. Specifically, the advance of ``digital currency'' 
offers potential violators a new horizon of opportunities for money 
laundering. ICE Cybersmuggling Center is working with other agencies to 
address this emerging threat. This technology is evolving faster than 
the regulatory infrastructure can keep pace.
    While ICE is a new agency, with newly unified immigration and 
customs authorities, many of our Special Agents continue to build upon 
their deep experience with financial investigations and immigration 
enforcement. We are aggressively applying our financial investigative 
authorities and capabilities across the full ICE portfolio, in order to 
identify and close vulnerabilities in our border and homeland security. 
At the same time, we are bringing to bear the best of our former 
agencies' expertise, cultures, and techniques, while building a new 
Federal law enforcement agency that is greater and more effective than 
the sum of its parts. In case after case, ICE Special Agents are 
putting into practice the powerful advantages that flow from our 
unified authorities, and are putting them to great use on behalf of the 
American people. The net result is a greater contribution to the 
Nation's border security, which is a critical element of national 
security.
    My colleagues at ICE are grateful for the chance to serve the 
American people and, on their behalf, I thank this Committee, its 
distinguished Members, and Congress for the continued support of ICE 
investigative endeavors.
    I would be pleased to answer your questions.
        RESPONSE TO A WRITTEN QUESTION OF SENATOR CRAPO 
                     FROM MICHAEL MOREHART

Q.1. As you know, the House overwhelmingly passed legislation 
that included Section 701 exception from currency transaction 
reports for seasoned customers. Section 701 attempts to provide 
relief for banks without weakening the Bank Secrecy Act (BSA). 
To be exempted, the account has to be for a business, not an 
individual; the business account has to be open for at least 12 
months; and currency transactions must have been conducted 
previously. In addition, the bank has to notify the Treasury 
Department of the customers that have been exempted, and 
Treasury can reject or revoke an exemption. Therefore, Treasury 
has the final say with respect to the exemption if there are 
issues with a particular customer. If enacted, the amendment 
will be revisited in 3 years, and the Secretary of the Treasury 
can recommend to Congress any legislative action that may be 
deemed necessary. Do you have concerns with Section 701? If so, 
what are those concerns?

A.1. As indicated during this hearing, the FBI believes the 
financial sector's use of the Designated Exempted Persons 
process should be examined. This review should address the 
current use of the Bank Secrecy Act (BSA) and Currency 
Transaction Report requirements to determine whether the 
financial sector fully uses the regulatory exemptions currently 
available. If this review reveals the need for legislation, the 
FBI recommends additional notice be afforded before new 
requirements are imposed.

       RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 
                     FROM MICHAEL MOREHART

Q.1. The Money Laundering Threat Assessment admits that our 
agencies do not have a single definition of money laundering. 
What progress has been made since the report to reach a common 
understanding, and what needs to be done to get there?

A.1. Title 18 U.S.C. Sec. Sec. 1956 and 1957 impose criminal 
sanctions for money laundering, prohibiting the disguising of 
proceeds from criminal activities to conceal their illicit 
origins. Because all Federal law enforcement agencies use these 
authorities in pursuing money laundering investigations, the 
FBI is unaware of a misunderstanding among the agencies 
regarding the elements of this crime. In fact, the FBI has 
concurred with the goals and objectives of the National Money 
Laundering Strategy articulated by the Treasury Department and 
is, along with the Drug Enforcement Administration, Department 
of Homeland Security Immigration and Customs Enforcement, and 
U.S. Postal Service, a signatory to a multilateral agreement 
allocating responsibilities for money laundering investigations 
among the various Federal law enforcement agencies. Success in 
stemming the flow of illegal funds throughout the world depends 
on the law enforcement community's achievement of several key 
objectives: Blocking and confiscating terrorist assets 
worldwide; establishing and promoting international legal 
standards that are adopted by other countries to safeguard 
their financial infrastructures from abuse; facilitating the 
international exchange of relevant information; and 
investigating and prosecuting the violators to the fullest 
extent of the law.

Q.2. Does the CIA cooperate with you? Do you get up-to-date 
intelligence on suspected money laundering for terrorists from 
CIA intelligence?

A.2. Information sharing is critical to the efforts of the U.S. 
Government in addressing terrorism and other criminal matters, 
and the CIA and the FBI cooperate well. Both organizations 
understand that the value of intelligence cannot be maximized 
unless it can be filtered, analyzed, and disseminated to those 
who can make the best use of it. The FBI's Interagency 
Financial Operations Unit is co-located with the CIA and is 
responsible for coordinating and enriching Headquarters' 
activities and field investigations through its partnership and 
collaboration with the appropriate CIA components responsible 
for financial intelligence.

Q.3. One finding in the Money Laundering Threat Assessment is 
that relatively few money services businesses have registered 
with the Financial Crimes Enforcement Network. What can be done 
to increase registration, what problems are created by that 
lack of registration, and is action needed from Congress to get 
more businesses registered?

A.3. The FBI defers to the Treasury Department's Financial 
Crimes Enforcement Network (FinCEN) with respect to the 
implications of FinCEN registrations.

Q.4. What evidence are we seeing of connections between 
organized crime, drug rings, and terrorist groups?

A.4. The FBI continues to gather intelligence and actively 
investigate drug trafficking, including its use as a source of 
terrorism funding. Through the Joint Terrorism Task Forces, the 
FBI has partnered with investigative, regulatory, and 
intelligence agencies to identify the genesis of funding for 
terrorist groups. In addition, a multiagency Drug Enforcement 
Administration (DEA) unit receives information from drug 
investigations across the country and forwards to appropriate 
agencies for further development or tactical use any 
information related to possible terrorism. While the FBI has 
not identified clear connections between drug trafficking and 
terrorism funding in the United States, there are indications 
of such connections outside the United States.
    For example, Afghanistan has historically been a major 
source of heroin throughout the world. While FBI investigations 
have not revealed systemic support of terrorism from regional 
drug trafficking, local drug traffickers in the region may be 
affiliated with extremist groups. A joint FBI/DEA investigation 
in 2003 resulted in the arrests of 6 Afghan and Pakistani 
subjects involved in an extensive drug ring. The investigation 
revealed that heroin, grown and processed in Afghanistan and 
Pakistan, was being shipped to the United States, and profits 
from its sale were laundered through businesses and returned to 
suspected associates of terrorist organizations in that region. 
A direct link between drug traffickers' profits and the 
financing of terrorist activities has, however, not been 
proven.
    Another example of the connection between illegal drugs and 
terrorism is found in some regions of Colombia. FBI and DEA 
investigations indicate that these regions continue to produce 
cocaine and heroin, shipping them to the United States and 
using sales proceeds to fund various groups, including the 
Revolutionary Armed Forces of Colombia, a designated terrorist 
organization. In addition, the Spanish National Police have 
recently reported that investigation of the March 11, 2004 
Madrid train bombings indicates partial funding of these 
terrorist attacks with the proceeds from drug trafficking.

Q.5. What are the main methods of organized retail theft used 
by terrorists? Is the stealing of baby formula for Hamas a 
major problem in the United States?

A.5. The FBI has conducted numerous investigations of criminal 
activities having a possible nexus to terrorism. These include 
investigations into:

 cigarette smuggling operations in which large 
    quantities of minimally taxed or tax-free cigarettes may 
    have been smuggled to Detroit, Michigan, to evade the 
    Michigan State sales tax;
 whether terrorist organizations have benefitted from 
    the sale of counterfeit clothing, fragrances, and 
    electronics;
 whether stolen credit cards have been used for the 
    benefit of terrorist cells; and
 the possible use of stolen telephone and credit cards 
    to communicate with terrorist support organizations in such 
    places as Pakistan, Afghanistan, and Lebanon.

    The theft of baby formula appears to be most prevalent 
among Middle Eastern immigrant groups of lower economic status. 
While some of those participating in this activity are 
Palestinian, the FBI does not have specific information linking 
Hamas or other Palestinian terrorist groups to this criminal 
scheme.

Q.6. Recently, the FBI and State Department sent officials to 
speak at a conference cosponsored by the International 
Institute of Islamic Thought, part of the network of northern 
Virginia Saudi businesses and charities that was raided by 
Federal officials in 2002 for suspected ties to Islamic 
terrorist groups[.] Why do the State Department and the FBI 
send representatives to speak at conferences sponsored in the 
United States by suspected money launderers for Islamic 
militants?

A.6. The FBI has not been able to confirm the attendance of FBI 
officials at the referenced conference. There are, though, many 
reasons we might want to address such a group, including the 
benefits to us of: Supporting the other conference sponsor; 
improving relations with attendees who are in a position to 
assist us; and learning more about the organization or its 
activities through this proximity.

Q.7. Which terrorist groups are the most active in the United 
States in money laundering?

A.7. The FBI is not able to identify the terrorist groups most 
active in the United States with respect to money laundering. 
While the FBI's counterterrorism investigations deal with a 
wide variety of criminal activities that generate illegal 
proceeds, it is difficult to directly correlate these illegal 
proceeds with specific terrorist activities.

Q.8. Are there any problems or confusion in tracking the 
movement of funds caused by illegal aliens and legal guest 
workers sending money to their home countries? If Congress 
passes a guest worker program that increases guest workers, 
will that create more problems?

A.8. Without addressing the possible broad implications of a 
guest worker program, and focusing solely on the narrow issue 
of tracking funds in such an environment, the FBI generally 
finds that minimizing the number of undocumented residents 
improves the ability to track their fund transfers. This is 
true because informal transfer vehicles are often used by those 
who do not have access to the regulated financial sector due to 
a lack of proper identification; those who conduct financial 
transactions anonymously; and those who avoid scrutiny of the 
law enforcement and intelligence communities by circumventing 
the recordkeeping and reporting requirements of the established 
financial sector. Undocumented residents are likely to use, for 
example, the Informal Value Transfer System (IVTS), which 
allows for the transfer of value without the identifications 
and reporting required by regulated financial institutions. 
Because guest workers would have legal status, and therefore 
would have the identification, source of income, and other 
documentation required by the regulated financial sector, they 
would presumably be less likely to use the IVTS.

Q.9. How much is counterfeiting of goods a problem? Where do 
the proceeds go to?

A.9. While the counterfeiting of goods presumably contributes 
to terrorism financing as well as to the provision of funds for 
other purposes, the FBI has neither tracked the degree to which 
counterfeiting is used relative to other funding sources nor 
prepared an analysis of how these funds are distributed.

Q.10. What were the results of the investigation into the 
hundreds of Saudi bank accounts held by Riggs Bank in 
Washington?

A.10. In August 2003, the FBI requested records relating to 
approximately 100 Riggs Bank accounts to assist investigators 
in identifying a possible link to terrorist activity. While the 
FBI did obtain from these records some information that was 
beneficial in other ongoing investigations, these records did 
not reveal a direct nexus to terrorism. The FBI also obtained 
records relating to a Citibank account held by the Saudi 
Arabian Monetary Agency (SAMA), which is the central bank of 
the Kingdom of Saudi Arabia. SAMA issues currency, acts as a 
banker for the Saudi Government, and is the government's 
investment authority. These records, which covered a 3-year 
period, also did not reveal a link to terrorism. In June 2004, 
Riggs Bank informed the Saudi embassy that their Riggs Bank 
accounts would be closed.

Q.11. I understand that the second wave of post-September 11 
attacks were to be self-financed by credit card fraud. Would 
any of you care to elaborate on this? Or on the particular 
trend we have now seen with terrorist groups that are told to 
``self-finance'' their operations?

A.11. Intelligence suggests that overseas groups may fund their 
own terrorism activities using a variety of criminal schemes. 
An example of this is the 2004 Madrid train bombings, which 
reportedly were funded by the proceeds of illegal drug sales 
along with income from legitimate jobs held by members of the 
terrorist group. The FBI's domestic investigations of myriad 
criminal activities have not, however, provided an evidentiary 
link indicating that the proceeds from these illegal activities 
are being used directly to fund terrorism in the United States.

Q.12. How much revenue do Hamas and Hezbollah get from money 
laundering in the United States?

A.12. Money laundering, including money laundering accomplished 
to fund Hamas and Hezbollah, is investigated by the FBI when we 
develop information concerning this illegal activity. However, 
by their nature money laundering and other forms of terrorist 
financing are pursued in secrecy and the FBI is not aware of 
all such funding schemes. We cannot, therefore, provide an 
estimate of revenues derived by Hamas and Hezbollah through 
money laundering.

Q.13. Is the smuggling of cars and SUV's to the Middle East an 
increasing problem? If so, please detail the scope of the 
problem and how you are dealing with it. Are SUV's actually 
being illegally smuggled out of the United States to serve as 
suicide bomb vehicles in Iraq or Saudi Arabia?

A.13. FBI investigations have shown that some cars sold on a 
secondary market have been legally purchased in the United 
States and then shipped overseas. To date, though, it has not 
appeared that these vehicles were illegally smuggled out of the 
United States for the specific purpose of being used in car 
bomb attacks in Iraq, Saudi Arabia, or elsewhere.

      RESPONSE TO A WRITTEN QUESTION OF SENATOR STABENOW 
                     FROM MICHAEL MOREHART

Q.1. As I understand it there are a number of different systems 
in place to detect suspicious activity. These include enhanced 
customer identification programs, increased suspicious activity 
reporting, and the use of the 314(a) process. It seems that 
these programs have been successful in gathering the 
appropriate data and are generally supported throughout the 
industry. Specifically, it is my understanding that the 314(a) 
inquiry process that we put in place as part of the USA PATRIOT 
Act has been a particularly effective tool since it allows law 
enforcement to ask for detailed information on suspected 
accounts.
    The question that I have is about duplicative efforts 
involved in CTR reporting. One thing I hear from bankers all 
across the country is the time, expense, and overall regulatory 
burdens they face in filing countless CTR's on legitimate 
businesses. What suggestions do you have to minimize the data 
that is gathered on businesses that we know, trust, and have a 
legitimate track record with financial institutions?

A.1. The FBI suggests the financial sector review and make full 
use of the Designated Exempted Persons protocol. Greater use of 
this process would reduce the banking sector's need to file BSA 
reports on well-established, long-term customers.

       RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 
                     FROM KEVIN DELLI-COLLI

Q.1. The Money Laundering Threat Assessment admits that our 
agencies do not have a single definition of money laundering. 
What progress has been made since the report to reach a common 
understanding, and what needs to be done to get there?

A.1. There is a common definition for money laundering as 
defined by statute. The comment in the MLTA was directed at the 
ways different Federal agents capture statistics related to 
money laundering. By statute a money laundering offense arises 
from financial transactions that promote or are proceeds of 
Specified Unlawful Activity (SUA). An SUA is a specific Federal 
offense such as drug smuggling, bank fraud, credit card fraud, 
or intellectual property rights violation. Statistics are often 
captured and reported as the SUA.

Q.2. Does the CIA cooperate with you? Do you get up-to-date 
intelligence on suspected money laundering for terrorists from 
CIA intelligence?

A.2. Yes, ICE receives appropriate information from the 
intelligence community, including the CIA, in accord with 
accepted laws and practices that govern the sharing of 
intelligence information.

Q.3. Is the smuggling of cars and SUV's to the Middle East an 
increasing problem? If so, please detail the scope of the 
problem and how you are dealing with it. Are SUV's actually 
being illegally smuggled out of the United States to serve as 
suicide bomb vehicles in Iraq or Saudi Arabia?

A.3. The Middle East is a strong market for the legitimate sale 
and export of large-model vehicles and American made SUV's. 
Hundreds of millions of dollars worth of large-model American 
made vehicles are legitimately exported to Middle East 
countries, including Saudi Arabia, Iraq, and Kuwait annually. 
There have been instances in which criminal organizations have 
illegally exported SUV's and other vehicles destined for the 
Middle East. There is no indication that this is an increasing 
problem, nor is there any anecdotal evidence that such vehicles 
were used in suicide bombs in Iraq or Saudi Arabia.

Q.4. Are there any problems or confusion in tracking the 
movement of funds caused by illegal aliens and legal guest 
workers sending money to their home countries? If Congress 
passes a guest worker program that increases guest workers, 
will that create more problems?

A.4. A number of issues arise from the movement of funds: The 
repatriation of wages by illegal aliens and legal guest 
workers, the remittance of funds by U.S. citizens to offshore 
locations, and the placement of illicit proceeds. Illegal 
aliens frequently lack the proper identification required by 
traditional financial institutions to transact business. They 
in turn utilize money services businesses (MSB's) and nonbank 
money transmitters, many of which cater to ethnic populations.
    Although guest workers would have legal identification and 
may chose to use depository institutions for banking purposes, 
they like many other current legal immigrants may still turn to 
licensed and unlicensed money services businesses for remitting 
funds and cashing checks. Almost by definition, it is harder to 
accurately track the flows of monies through less regulated 
channels, even if the monies are all legitimate and are not 
being used for any criminal purpose.
    MSB's are not required to obtain positive identification 
for transactions under $1,000. ICE investigations have revealed 
numerous instances of unscrupulous agents of licensed MSB's and 
unlicensed MSB operators willing to conduct financial 
transactions well in excess of this amount without proper 
identification or with false identification.
    The lack of formal customer relationships and the transient 
nature of the customer base are two complicating factors in 
tracking the movement of funds through MSB's.

Q.5. How much is counterfeiting of goods a problem? Where do 
the proceeds go to?

A.5. Counterfeiting of goods is a significant problem for the 
United States. Current estimates indicate that U.S. trademark 
and copyright holders lose as much as $250 billion annually to 
counterfeiting and piracy. The U.S. Chamber of Commerce 
estimates that overall, 750,000 U.S. jobs a year are lost to 
intellectual property theft. To help combat the international 
problem of counterfeiting and piracy, ICE hosts the National 
Intellectual Property Rights Coordination Center to provide 
coordination, assistance, and training to trademark holders; 
Federal, State and local law enforcement; and foreign 
governments. The IPR Center is a joint effort of ICE, CBP, and 
the FBI, and it also serves as a deconfliction center for IPR 
investigations. ICE relies on its 26 ICE Special Agent in 
Charge Offices in the United States to conduct IPR 
investigations, and 56 ICE Attache Offices located worldwide, 
which assist ICE in developing and coordinating transnational 
IPR investigations. For instance, ICE conducted the first two 
undercover IPR investigations in the People's Republic of China 
with Chinese authorities, and both resulted in the dismantling 
of international counterfeiting rings, and the prosecution of 
Chinese and United State citizens.
    ICE investigations have revealed an increased involvement 
by organized crime groups in the trafficking of counterfeit 
merchandise due to high profits and perceived low risks. 
Organized crime groups may use the proceeds of counterfeiting 
to further other crimes, such as gambling, human trafficking, 
and money laundering. Since fiscal year 2001, China has been 
the leading source of IPR-infringing goods seized by DHS; 
however, the number of source countries is increasing.
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