[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
Available at: http: //www.access.gpo.gov /congress /senate/
senate05sh.html
U.S. GOVERNMENT PRINTING OFFICE
39-713 PDF WASHINGTON DC: 2007
---------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866)512-1800
DC area (202)512-1800 Fax: (202) 512-2250 Mail Stop SSOP,
Washington, DC 20402-0001
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.