[Senate Hearing 109-1073]
[From the U.S. Government Publishing Office]
S. Hrg. 109-1073
EXAMINING TREASURY'S ROLE IN COMBATING
TERRORIST FINANCING FIVE YEARS AFTER 9/11
=======================================================================
HEARINGS
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
ON
WHERE THE GOVERNMENT HAS PROVED SUCCESSFUL, LESS THAN SUCCESSFUL, AND
WHAT IT HAS LEARNED AS A RESULT TO IMPROVE ON ITS EFFORTS TO COUNTER
THE FINANCING OF TERRORISTS, WHETHER STATE-SPONSORED OR NOT, AS WELL AS
THOSE SEEKING WEAPONS OF MASS DESTRUCTION
__________
TUESDAY, SEPTEMBER 12, 2006
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida
William D. Duhnke 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
Travis Tedrow, Legislative Assistant
Stephen R. Kroll, Democratic Special Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
C O N T E N T S
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TUESDAY, SEPTEMBER 12, 2006
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Martinez.............................................
Senator Allard...............................................
WITNESSES
Daniel L. Glaser, Deputy Assistant Secretary of Terrorist
Financing and Financial Crimes, Department of Treasury.........
Prepared Statement...........................................
Adam J. Szubin, Director of the Office of Foreign Assets Control,
Department of Treasury.........................................
Prepared Statement...........................................
Robert W. Werner, Director, Financial Crimes Enforcement Network.
Prepared Statement...........................................
Eileen C. Mayer, Director, Fraud/Bank Secrecy Act of Small
Business/Self Employment Division, Internal Revenue Service....
Prepared Statement...........................................
EXAMINING TREASURY'S ROLE IN COMBATING TERRORIST FINANCING FIVE YEARS
AFTER 9/11
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TUESDAY, SEPTEMBER 12, 2006
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met in room SDFF09538, Dirksen Senate Office
Building, Hon. Richard Shelby, Chairman of the Committee,
presiding.
OPENING STATEMENT OF SENATOR RICHARD SHELBY
Chairman Shelby. The Committee will come to order.
Five years ago yesterday the United States was attacked and
our nation was changed forever. On that day, we were united in
our shock and horror as we watched people we knew meet an
unimaginable fate. As the days passed, however, our collective
anger and outrage gave way to a national determination to see
our enemy for who they really were and bring them all to
justice.
With a unanimous sense of urgency, the instruments of the
Federal Government were marshaled toward that end. Both the
President and the Congress worked hand in hand to not only find
those responsible, but also to ensure, to the best of our
ability, that it would never happen again. One component of
that joint effort was to combat the means by which terrorist
organizations and their supporters raised and moved the money
required to carry out their attacks.
Since September 11, 2001, this Committee, the Committee on
Banking, has conducted a series of hearings into the Federal
Governmenta'as structure and diligence in waging the war
against terror financing, as well as its criminal component,
money laundering. During this time, a number of banks and other
financial institutions have continued to violate Federal laws
and regulations intended to prevent money laundering and terror
financing.
In addition, the issue of State support for terrorism is a
continual reminder of the scale of the challenges that lie
ahead. There is no question, then, that there have been
successes in the effort at impeding the flow of money used to
fund terrorist operations. Cooperation with other nations and
the financial services industry have seriously reduced the flow
of money to organizations like Al Qaeda and Hamas.
International charities, once a key source of illicit
revenue are now monitored much more closely, and in the
instances of those found to be actively supporting terrorist
organizations are shut down. Much remains to be done, however.
While we must continue our current efforts to stop the flow of
money to terrorists, we must be mindful of our enemiesa'a
ability to adapt and to defeat our efforts.
For example, charities closed by governments have
resurfaced under new names. Exploitation of formula banking
systems have been replaced by the increasing use of buck cash
couriers.
And of particular concern to this Committee, the use of
shell and front companies continue to constitute a serious
weakness in even our own anti-money laundering and terror
finance regulatory regimes. This hearing continues the Banking
Committeea'as examination of the structure of the Federal
Government to combat terror financing, as well as the
challenges confronting us abroad.
Today we will focus on the Department of Treasury. A future
hearing, as part of our ongoing oversight, will include a
broader spectrum of agencies with responsibilities for
combating terror financing and money laundering.
For 5 years we have been spared another attack, and it is
not because our enemies no longer have an interest in attacking
us. Quite the contrary. They hope to inflict even greater
damage the next time. Five years can feel like a long time,
memories fade, life goes on, and we tend to get complacent. Al
Qaeda is not complacent. They plan every day for the next
attack and we must continue to do everything within the law to
stop it.
Since 9/11, the Departmenta'as increased focus on combating
terror finance has been a work in progress. We will hear today
about that progress from key officials from the financial front
war on terror.
Daniel Glaser is the Deputy Assistant Secretary for
Terrorism Financing and Financial Crimes.
Robert Werner is Director of the Financial Crimes
Enforcement Network, which is responsible for the
administration of the Bank Secrecy Act, one of the key
statutory and regulatory regimes for combating money laundering
and terror finance.
Adam Szubin is the Director of the Office of Foreign Assets
and Control, which administers and enforces U.S. economic
sanctions.
Eileen Mayer is the Director of Fraud and Bank Secrecy Act
at the Internal Revenue Servicea'as Small Business, Self-
employment Division.
We thank all of you for your service. We thank you for
appearing before the Committee today. Senator Sarbanes sends
his regret. He is unable to be with us today, but we have
Senator Hagel and I am sure we will have others.
Senator Hagel, any opening statement?
Senator Hagel. No, Mr. Chairman. Thank you.
Chairman Shelby. All of your prepared statements will be
made part of the hearing record.
We will start with you, Mr. Glaser.
STATEMENT OF MR. DANIEL L. GLASER, DEPUTY ASSISTANT SECRETARY
OF TERRORIST FINANCING AND FINANCIAL CRIMES, DEPARTMENT OF
TREASURY
Mr. Glaser. Chairman Shelby, Senator Hagel, distinguished
members of the Committee, thank you for the opportunity to
speak today about the Treasury Departmenta'as efforts and
achievements in the financial war on terrorism, and to discuss
the challenges that lay ahead. This Committee has played an
important role in ensuring that we have the necessary
authorities to combat terrorist financing.
Indeed, over the last 5 years, we have witnessed a
revolution in the role the finance ministries can play in
international security affairs. We have increased substantially
our understanding of vulnerabilities in the international
financial system, and how terrorists and other illicit
financial--
Chairman Shelby. Can you bring your mic just a little
closer to you, please? Thank you.
Mr. Glaser. We have increased substantially our
understanding of vulnerabilities in the international financial
system, and how terrorists and other illicit financial networks
exploit those vulnerabilities.
At the same time, we have steadily enhanced our skill and
sophistication in applying the financial tools that we have at
our disposal to close those vulnerabilities, disrupt and
dismantle illicit financial networks, and apply pressure on the
States that provide terrorists support and comfort.
The U.S. has led the way in this development of financial
authorities through the establishment of the Treasury
Departmenta'as Office of Terrorism and Financial Intelligence,
the first office of its type in the world. TFIa'as mission is
to marshal the Departmenta'as policy, enforcement, regulatory,
and intelligence functions in order to sever the lines of
financial support to international terrorists, WMD
proliferators, narcotics traffickers, and other threats to our
national security.
We seek to meet this responsibility by striving to reach
two overarching goals. First, identifying and closing
vulnerabilities in the U.S. and international financial system.
And second, identifying, disrupting, dismantling the financial
networks that support terrorists, organized criminals, WMD
proliferators, and other threats to international security.
My written testimony presents a comprehensive and strategic
overview of our ongoing efforts to advance these two
overarching goals. In assessing the effectiveness of our
efforts over the past 5 years, it is clear that we are on the
right track. We have elevated the costs, risk, and difficulty
for terrorists to raise and move funds in support of their
operations. We know that our actions are having a disrupting
effect on the financial capabilities of terrorist cells and
terrorist organizations.
Through a range of actions, initiatives, and authorities we
have raised awareness and strengthened protective measures
across the international financial system and vulnerable
sectors like charities. We have also closed down terrorist
financing sources, conduits, and support networks. These
efforts have forced terrorists to devote more time, attention,
and resources to reconstructing their financial organizational
infrastructure and otherwise meet basic financial needs, and
this means less time and resources to plan and execute
terrorist attacks.
The success of our strategic approach in identifying and
disrupting terrorists and their support networks is becoming
increasingly recognized by the international community. Growing
support for targeted financial measures is evident at the
United Nations, the Financial Action Task Force, various
regional organizations, and an increasing number of our
bilateral relationships. As the international community
continues to look for effective ways to combat terrorists and
other threats to international security, much of our current
work is focused on working with these organizations and our
counterparts in finance ministries around the world to
facilitate greater capability in developing and applying
financial measures to shut down terrorists and their support
structures.
Recent developments in the international financial sector
also reflect a growing recognition of the power of financial
measures in disrupting terrorists and other international
security threats. Through our strategic outreach efforts we
have shown that Treasurya'as targeted financial measures, even
if initially applied in a unilateral fashion, can be quite
effective globally, in part because they unleash market forces.
By highlighting risks associated with terrorist financing
networks, their State sponsors, and corrupt financial
institutions, our targeted financial measures encourage prudent
and responsible financial institutions to make the right
decisions about the businesses in which they are engaging.
Recognizing the risks inherent in doing business with
terrorists and other illicit support elements, the Treasury has
targeted through its financial authorities, financial
institutions around the world have taken steps of their own to
protect against these risks. These steps by foreign financial
institutions include reconsidering the nature of their business
relationships with high risk customers, such as North Korean
and Iranian entities.
In fact, Treasury Under Secretary Levy and Assistant
Secretary Oa'aBrien this very week are in Europe and the Middle
East respectively meeting with foreign finance ministries and
financial sector authorities and private financial institutions
discussing those very matters.
As we review the developments at Treasury since 9/11 it is
clear that we have come a long way in reshaping Treasurya'as
role to focus on closing down vulnerabilities in the
international financial system and applying financial measures
to disrupt to dismantle the networks that support terrorists
and other international security threats.
I am grateful for the support that Congress has provided us
as we have refined our mission under the development of TFI
Treasury. I will be happy to answer any questions.
Thank you, Mr. Chairman.
Chairman Shelby. Mr. Szubin. Is it Szubin? How do you say
it?
STATEMENT OF MR. ADAM J. SZUBIN, DIRECTOR OF THE OFFICE OF
FOREIGN ASSETS CONTROL, DEPARTMENT OF THE TREASURY
Mr. Szubin. Yes, Sir. Szubin.
Chairman Shelby. Szubin. I got it right. Thank you.
Mr. Szubin. Chairman Shelby, Senator Hagel, members of this
Committee, thank you very much for this opportunity to discuss
the role played by the Office of Foreign Assets Control, or
OFAC, in combating terrorism since those deadly attacks of
September 11.
Over the last 5 years this Committee has demonstrated its
absolute commitment to combating terrorist financing and
ensuring that the government has all of the necessary tools to
do this work aggressively and appropriately. I am therefore
particularly pleased to be here today to introduce myself to
the members of this Committee and to thank you for your
leadership and support.
In a way, it is fitting that this hearing marks my first
public appearance as the Director of OFAC. Combating terrorist
financing has been a principle focus of mine almost since that
terrible day 5 years ago. My introduction to this area came as
an attorney in the Justice Departmenta'as Federal Programs
Branch, actually representing OFAC. Since then, I have worked
on terrorist financing issues in the Deputy Attorney
Generala'as Office, and with Under Secretary Levy here at TFI.
I can assure you that, 5 years later, my colleagues across
the government continue to display extraordinary focus,
creativity, and passion in tracking and disrupting terrorist
financing in all of its forms. Following the horrific events of
September 11th, the President issued Executive Order 13224,
authorizing the Secretaries of the Treasury and State to wield
broad financial authorities against terrorist organizations and
their support networks. In the 5 years since, OFAC has
designated approximately 375 individuals and entities as
supporters of terrorism, blocking their assets and, more
importantly, cutting them off from the U.S., and often the
international, financial system.
I would like to highlight just a few of our most recent
actions. Last month, we designated overseas branches of the
International Islamic Relief Organization, or IIRO, which is
headquartered in Saudi Arabia, as well as Abd al Hamid Sulaiman
Al-Mujil, the head of IIROa'as branch in the Eastern Province
of Saudi Arabia. These branch offices, while holding themselves
out as purely charitable organizations, were bankrolling the al
Qaeda network in Southeast Asia. We also took a string of
recent actions to disrupt and undermine Hezbollaha'as financial
network. The U.S. has, of course, long recognized Hezbollah as
a deadly terrorist organization, but the recent fighting in
Lebanon provided a stark reminder of just how dangerous and
well-supplied this terror organization is. Two weeks ago, we
designated the Islamic Resistant Support Organization, IRSO, a
Hezbollah charity, that offered donors the option of earmarking
their donations to equip Hezbollah fighters or to purchase
rockets. Just last week, OFAC designated Bayt al-Mal and the
associated Yousser Company, which together functioned as
Hezbollaha'as unofficial treasure in Lebanon. These actions,
driven by the excellent work of TFIa'as Office of Intelligence
and Analysis exposed and struck at some of Hezbollaha'as most
prominent financial entities. The world financial community is
now on notice as to their true character. Of course, one cannot
hope to apply effective financial pressure against a group like
Hezbollah, so long as it maintains massive inflows of cash from
a State sponsor of terrorism, in this case Iran. OFAC
administers a range of sanctions against Iran, the worlds
leading government sponsor of terror, aimed at limiting the
regimea'as financial reach and pressuring it to cease its
hostile and destabilizing activities.
We have historically allowed Iranian banks to access the
U.S. financial system indirectly through third country
intermediaries. This past Friday, OFAC action to cutoff
Irana'as Bank Saderat from even indirect access to the U.S.
financial system. We took this action because Bank Saderat has
been a significant facilitator of Hezbollaha'as financial
activities and has served as a conduit between the Government
of Iran and a range of Middle East terrorist groups.
One question frequently posed to OFAC is how meaningful are
these actions when the U.S. acts by itself, and a target does
not hold assets in the United States. Or, to put it another
way, are unilateral actions effective?
As it turns out, even when we initially act alone, our
sanctions can have a dramatic impact. There are two main
reasons for this. First, to paraphrase an old saying, all
financial roads today lead to New York. When a designated party
in the Gulf, for example, tries to send money to Southeast
Asia, that transfer will often pass through a United States
bank, if only for an instant. The result is, typically, that
these funds are frozen or blocked and that OFAC will receive a
phone call or a blocking report.
In addition, it is important to remember that U.S. persons
and branches situated abroad are also subject to U.S. law, and
must comply with our regulations as if they were in the United
States.
Our second force multiplier is that international financial
institutions frequently implement our sanctions voluntarily,
even when they are under no legal obligation to do so from
their host countries. These institutions may be following our
regulations and designations because they simply do not want to
be hosting the business of a terror organization, even if it is
permissible or they may be concerned of reputational harm. But
whatever the cause, the OFAC list, as it is known, is being run
on the computer screens of banks around the world.
As a result, our unilateral actions are anything but, and
can have a decisive impact against terrorist supporters, WMD
facilitators, and narcotics traffickers. In all of these
arenas, OFAC is working hand in hand with the other
organizations testifying today; with TFIa'as Office of
Intelligence and Analysis and our interagency colleagues
brought together under the leadership of Under Secretary Levy,
our offices provide a range of financial authorities that allow
us to take focused and effective action to disrupt, deter, and
disable threats to our national security.
OFAC will continue to draw on all of its resources to keep
our country safe. I look forward to continuing our work with
you on these important issues, and I would be happy to answer
your questions.
Chairman Shelby. Mr. Werner.
STATEMENT OF MR. ROBERT W. WERNER, DIRECTOR, FINANCIAL CRIMES
ENFORCEMENT NETWORK
Mr. Werner. Chairman Shelby and distinguished members of
the Committee, I appreciate the opportunity to appear before
you today to discuss the Financial Crimes Enforcement
Networka'as ongoing initiatives in efforts to combat money
laundering and terrorist financing in the post-9/11 world.
This hearing is especially appropriate following
yesterdaya'as fifth anniversary of the vicious terrorist
attacks against this country. In fact, my difficulties getting
to todaya'as hearing due to a suspicious vehicle closing the
closing of Constitution Avenue is just another reminder of the
world we live in today.
As the Director of finCEN, which is the agency responsible
for administering the Bank Secrecy Act, the United States
primary anti-money laundering, counterterrorist financing
regulatory regime, I welcome the opportunity to work with the
members of this Committee in our united fight to safeguard the
U.S. financial system against financial crime.
I am also pleased to be testifying with my colleagues from
other components of Treasury. Each of these offices plays an
important role in the global fight against money laundering and
terrorist financing, and our collaboration on these issues has
greatly improved the effectiveness of our efforts.
As I discuss in greater detail in my written testimony,
FinCEN has aggressively worked on multiple fronts to fulfill
its mission, which is to safeguard the financial industry from
illicit financial activity. This is achieved through a broad
range of interrelated activities, including administering the
Bank Secrecy Act, supporting law enforcement, intelligence, and
regulatory agencies through the sharing and analysis of
financial intelligence, and building global cooperation and
technical expertise among financial intelligence units
throughout the world.
The BSA data received through currency transaction reports,
suspicious activity reports, and other forums have proved to be
highly valuable to our law enforcement customers who use the
information on a daily basis as they work to investigate,
uncover, and disrupt the vast networks of money launderers,
terrorist financiers, and other criminals.
FinCENa'as ultimate goal is to increase the transparency of
the U.S. financial system so that money laundering, terrorist
financing, and other economic crime can be deterred, detected,
investigated, prosecuted, and, ultimately, prevented. Our
ability to tie together and integrate our regulatory,
international, and law enforcement efforts assists us to
achieve consistency and effectiveness when administering the
Bank Secrecy Act.
I understand the Committee would like to discuss a number
of issues today, so in the interest of time, Mr. Chairman, I
would like to conclude by thanking you and the members of this
Committee for all of the support and guidance you have provided
over the past 5 years, and I look forward to answering your
questions.
Thank you.
Chairman Shelby. Ms. Mayer.
STATEMENT OF MS. EILEEN C. MAYER, DIRECTOR, FRAUD/BANK SECRECY
ACT OF SMALL BUSINESS/SELF EMPLOYMENT DIVISION, INTERNAL
REVENUE SERVICE
Ms. Mayer. Good morning Chairman Shelby, Senator Hagel, and
Senator Martinez. I am pleased to be with you this morning to
discuss the IRS role in administering the BSA and helping to
detect and disrupt terrorist financing.
As you know, IRS is responsible for examining for BSA
compliance all financial institutions currently not examined by
a Federal functional regulator. These entities include money
service businesses, such as check cashers, wire remitters, and
issuers of travelera'as checks, casinos, certain credit unions,
dealers in jewelry and precious metals, and certain insurance
companies.
The largest of these groups is the MSB. No one is sure just
how big the universe of MSBs may be or how many of them are
required to register with FinCEN under the BSA. What we do know
is that currently there are more than 27,000 registered MSBs.
The IRS is committed to our important role in enforcing the
BSA. As evidence of that, in late 2004, we created the Office
of Fraud Bank Secrecy Act within the Small Business Self-
employed Division. That is the office I now head. The creation
of this organization includes the dedication of a full-time
staff of field agents whose sole responsibility is to examine
MSBs, casinos, and other entities covered by the BSA but not
monitored by traditional Federal regulators. Today there are
approximately 350 BSA examiners in the field.
With the full support of the Commissioner, we are working
diligently to increase the field staff to 385 and expect to be
at that level in the not too distant future. Then we will work
to keep the number there.
This dedicated workforce is reflected in the number of
Title 31 exams we have been able to conduct. In fiscal year
2005 we examined 3,680 MSBs. This year, we have far exceeded
that total and expect to examine over 6,000 by the end of the
fiscal year. In addition, we have put special emphasis on our
case building process, which was redesigned and launched at the
beginning of this fiscal year.
Because we could never examine all entities that fit into
the categories of non-bank financial institutions over which we
have jurisdiction, case building based on risks is essential.
We are also leveraging our resources with those of the States.
In late April, Commission Everson announced agreements with 33
States and Puerto Rico to begin sharing BSA information. These
agreements allow the United States and participating States to
join forces and share information as we work to insure that
MSBs are complying with their Federal and State
responsibilities.
We recognize, Mr. Chairman, that the money service business
industry provides valuable financial services, especially to
individuals who may not have ready access to the formal banking
sector. It is longstanding Treasury policy that a transparent,
well-regulated money service business sector is vital to the
health of the worlda'as economy.
We find it regrettable that the compliant MSBs are being
rejected by banks over fears of potential noncompliance with
BSA requirements. Our examinations do not support those fears.
Of the thousands of MSBs we have examined in the last two
fiscal years, there have been only a very small percentage that
examiners believed merited referral to FinCEN for consideration
of civil penalties or the IRS CI for possible criminal
penalties. Indeed, for the most part, the violations that we
find in the MSB industry are minor or technical in nature and
can be corrected easily, and usually are.
Finally, I would like to quickly address BSA direct in what
we are doing now that FinCEN has issued a permanent stop work
order on its construction of what they call the retrieval and
sharing portion of the system. Our people have been working
very hard with FinCEN since early this year to transfer all of
their law enforcement customers to the new IRS currency,
banking, and retrieval web-based system, known as Web CBRS.
CBRS houses all of the BSA and U.S.A. PATRIOT Act data,
which is filed pursuant to FinCEN regulations. The IRS began
developing a web application for CBRS approximately 5 years
ago. The implementation of Web CBRS is on or ahead of schedule.
On September 30th, the IRS intends to take the old integrated
data base management system offline. At that point, Web CBRS
will be the only firsthand source of the Bank Secrecy Act and
U.S.A. PATRIOT Act available.
We are committed to continue our cooperation with FinCEN to
improve the usefulness of BSA data that is available through
Web CBRS. The key to this process is having clear requirements
from FinCEN and the funding for development.
Mr. Chairman, I appreciate being asked to speak this
morning, and I am happy to respond to any questions you or the
Committee may have.
Chairman Shelby. Thank you. I am going to first recognize
Senator Hagel.
I have a lot of questions for the record, but I will--
Senator Hagel.
Senator Hagel. Mr. Chairman, thank you.
And to our witnesses, we appreciate your efforts and good
work and please convey to your colleagues our appreciation, as
well.
Mr. Szubin, you noted in your testimony, which has received
considerable attention in the press, that the Treasury has
suspended the ability of the Iranian-owned bank to deal with
any of our U.S. financial system organizations.
My first question about this issue, is this an expansion of
the current sanctions regime on Iran?
Mr. Szubin. Yes, Sir.
Senator Hagel. Why was this action not taken prior to your
announcement last week?
Mr. Szubin. The timing of any of our actions of this nature
is obviously driven by a range of factors, which are going to
include intelligence, foreign policy, and, of course, our
regulatory programs here at Treasury.
We took this action on Friday because we have particular
concerns about this bank, Bank Saderat, acting, as I mentioned,
as a facilitator of Hezbollaha'as financial activity and,
although the information is not information I can discuss in
this setting, it is compelling and disturbing--and acting as a
conduit for the government of Iran support to groups like, of
course, Hezbollah, but also Hamas, Palestinian Islamic Jihad,
and the PFLPGC.
On that basis we have said that Bank Saderat can no longer
have any dealings with anyone in the United States, even
indirect. That will mean, also, that Bank Saderat will be
cutoff from its ability to access the U.S. dollar.
Senator Hagel. And has Treasury planned to pursue similar
sanctions against Iranian financial institutions?
Mr. Szubin. I cannot discuss what we may or may not be
planning for the future. What I can say is that, as Mr. Glaser
mentioned, our Under Secretary Stuart Levey is, at this moment,
in Europe, and our Assistant Secretary, Pat Oa'aBrien, is in
the Gulf discussing with our allies the range of actions that
we can be considering together to take against the government
of Iran.
Of course, Irana'as behavior, in terms of both supporting
terrorism and its WMD pursuit is something that we believe
should be of concern to all civilized nations. It is
tremendously more impactful when we act in a unified form. That
is what is driving those trips that I mentioned. It is also--I
believe this Saderat action is going to be high up on the list
of actions that they will be discussing with their
counterparts.
Senator Hagel. Would you say that our allies are in
complete agreement with our actions on this particular
decision, as well as other actions that may be taken regarding
financial institutions in Iraq?
Mr. Szubin. Our action against Bank Saderat is obviously
very fresh. It was just taken this past Friday. I will be very
interested to hear the reports from Under Secretary Levey and
Assistant Secretary Oa'aBrien as to our alliesa'a responses and
reactions to it.
I can say that I believe our allies do share our concerns
about the threat that is behind this action, namely Irana'as
support for terrorist groups and Irana'as pursuit of WMD.
Obviously, those two trends that Iran continues to follow are
disturbing each in their own right, but, when merged together,
present the prospect of Iran supplying a weapon of WMD to
terrorism, which is our paramount concern. And I think our
allies are sensitive to that, as well.
Senator Hagel. Would you single out any of our allies who
have not been particularly helpful?
Mr. Szubin. I would not want to do that. No, Sir.
Senator Hagel. Because that is not the case?
Mr. Szubin. Well, as I said, I think we have received broad
support. I think that support has extended throughout the
world. Under Secretary Levey has been traveling on previous
trips to meet with counterparts in the Gulf, in Europe, in
Asia, and I can tell you, there is quite grave concern
throughout the world about what is going on there.
Senator Hagel. What about China and Russia?
Mr. Szubin. I, myself, have not been on those trips, but I
would actually defer to Mr. Glaser who has been on recent trips
to discuss some of these issues.
Senator Hagel. Mr. Glaser.
Thank you.
Mr. Glaser. Thank you, Senator.
I think Director Szubin is exactly correct. There is an
increased sensitivity throughout the world, I think among all
governments, that Iran is using the international financial
system to fund both its WMD programs and to engage in terrorist
financing, and to engage in other destabilizing activities
throughout the world, and particularly in the Middle East.
I think what you are seeing now with the Bank Saderat
action being the first action, and we are, of course, going to
be continuing to monitor the international financial sector to
look for other potential actions that there is an increased
focus now on taking action to deal with that. We are just
really beginning this effort to put direct pressure on illicit
Iranian activity in the international financial system.
I think that the jury is very much still out on achieving a
complete international consensus on it, but I do think the
initial signs are very positive. I think the important point to
emphasize here, and what is really unique and innovative about
what we are trying to do right now is not only the outreach we
are doing to international and to foreign governments, but the
direct outreach that we are doing to the international
financial sector, to the actual financial institutions and you
are seeing a market reaction to that. Banks such as UBS have
publicly stated that they are going to be cutting down on their
Iranian business. Other banks in Europe have publicly stated
that they are going to be cutting on their Iranian business.
And what you are seeing is a market reaction to information
that we are putting out there and actions that we are taking
that is going to make it increasingly difficult for Iran to do
business anywhere, be it in Europe, be it in Asia.
As I said, we are just at the beginning of this, but I
think this is a very promising strategy. And, as Adam said, it
is precisely what the Under Secretary and Assistant Secretary
are pursuing right now in Europe and in the Middle East.
Senator Hagel. Do we communicate this in any way to Iran,
decisions we are contemplating, decisions we are making,
decisions we are going to make?
Mr. Glaser. Well, I suppose that would be a question that
the State Department can answer better than I can. We certainly
-
Senator Hagel. The Treasury does not.
Mr. Glaser. We certainly do not give Iran advance notice
when we are going to take action to disrupt their financial
networks. No, absolutely not.
Senator Hagel. Anyone else want to add to this?
Thank you, Mr. Chairman.
Chairman Shelby. Thank you.
Senator Martinez.
STATEMENT OF SENATOR MEL MARTINEZ
Senator Martinez. Mr. Chairman, thank you very much.
Senator Martinez. Mr. Glaser, I just want to follow up on
Senator Hagela'as question. How can we effectively have a
sanctions regime if it is not applied by other nations,
particularly the significant trading partners of Iran?
Mr. Glaser. Well, it is a great point. And certainly
anything that we do becomes more effective the more countries
that do it, and we work very, very hard to work multilaterally
with our partners and allies. We are working on that in the
United Nations right now.
As I have said, we have very, very high level Treasury
officials who are in Europe and the Middle East. Secretary
Paulson will be in Singapore at the bank fund meetings next
week. This is very, very high on his agenda, as well. We are
doing everything we can to achieve international action on
this.
That said, we believe that the actions that we take can
have a direct impact even when they are initially applied
unilaterally for a couple of reasons. I think Director Szubin
hit on a couple of these. First of all, we do control access to
dollar clearing, and when we take action with respect to a
particular financial institution that conducts international
transactions, that is a very, very powerful action and it is a
very important thing that we have the ability to take away from
them and make it--again, disrupt their activity. And that is
what we are trying to do; we are trying to disrupt financial
networks.
Second, I do think it is important to shine the light on
these bad actors. And that leads into what I was discussing
with Senator Hagel, which is that the new dynamic that we see
is that the actions that we take unleash market forces and
create dynamics within the international financial system that
makes it increasingly difficult for bad actors such as Iran to
find efficient and effective financial services.
I think you see that most directly with the actions we have
taken with respect to North Korea and North Korean entities.
And I think what you are finding is a lot of the systemic
structural things that we have worked so hard to create over
the years, the anti-money laundering compliance programs, the
counterterrorist financing compliance programs, the focus on
the risk-based approach. All of this now is feeding into that
system, and you have a situation in which we can take actions
here and it has a ripple effect throughout the global
community. And I think we are becoming more and more
sophisticated in how we apply that.
Senator Martinez. Yes, that brings another point, because a
lot of bankers in my State of Florida complain that some of the
anti-money laundering compliance is overly burdensome and,
frankly, disruptive of normal business transactions because of
the amount threshold being so low and things like that.
What can I say to those bankers in terms of the necessity
for the continuing of the same level of regiment, and is there
any opportunity for there to be relief in some sense which does
not impair our overall effort?
Mr. Werner. Let me try and handle that, OK? We administer--
FinCEN administers the Bank Secrecy Act.
We have had extensive engagement with many of your
constituents, and we have gone to conferences put on by FUBA
and other trade groups. We recognize that this is a tension
within the system, but I think that what we have begun to do is
get better--the burden is obviously clear to the industry
because they are the ones with grappling with implementing the
risk-based approach. But we are getting better at doing is
articulating the value that the government and that the
industries are deriving from these systems.
It is really a two-tiered approach. The AML programs that
the institutions are putting in place result in a prophylactic
effect for those institutions, which is very, very important.
And beyond that, the programs also result in the collection and
reporting of information through FinCEN to the U.S. Government.
And that information has also proved to be extremely valuable,
not only in terms of specific investigations and case work, but
in understanding systemic vulnerabilities to the system, which
has then been able to impact our regulations.
What we understand we need to do is to continue to assess
and reassess that burden benefit balance. But going forward,
what I think we need to recognize is that, post-9/11, a lot of
the BSA compliances--it is a relatively young system. I think
as we are working through a lot of the issues associated with
it, we are getting to the point where it is being tailored in a
way where institutions are going to understand how they can
play their part while at the same time permitting legitimate
business to flow through the system.
Senator Martinez. It is a continuing source of complaints,
and I understand that we are asking you to try to do two
things. On the one hand, curtail the use of illegal funds for
purposes that we do not want to see funded, but also to allow
business these normal transactions to take place.
Mr. Szubin, I wanted to first of all commend you on the
great work that your office has been doing as it relates to
Cuba enforcement, which I think is an important consideration
and one that had really been relegated to--maybe just to be
ignored, but this Administration has had a prominent shift.
My question to you is, with all of the other
responsibilities that you have, do you have sufficient
personnel to cover all of the things that you are trying to do,
because the world is complicated? Is it feasible? Is it
possible? Are you sufficiently staffed to be able to undertake
the mission that you have been given, which is incredibly
important?
Mr. Szubin. Thank you, Senator. The world and the world
financial system is, as you say, an increasingly complicated
place, and we need to stay abreast with, if not ahead of, those
who are trying to avoid all of the financial measures that we
are putting in place, be they narco-traffickers, terrorists, or
regimes that are under our sanctions programs.
We are pleased that the Presidents budget for fiscal year
2007 supports an OFAC request for significant resources for us
to continue our work against terrorists and against State
sponsors of terrorism, as well as against WMD proliferation,
which are our two main focus areas.
We believe, with those additional resources, we will be
able to continue to do our job effectively.
Senator Martinez. Thank you, Mr. Chairman.
Chairman Shelby. Thank you, Senator.
I have a number of questions I will get into in a minute,
but following up in the theme of Senator Hagel, I saw the other
day, and it was rather troubling to me, I believe it was
announcement by Total, the large French oil company, that they
had no intention of ceasing doing business in Iran. In other
words, they were going straight into it.
And to do that, they are going to have some financing of
some banking, probably some French banks. I know that is not
the subject of this hearing today, but that is troubling
because if we do not have the support of our allies in all
aspects, if it is sanctions, or money laundering, or everything
else, then it makes your challenge that much greater. Although,
I know in a lot of areas, we do, and a lot of it you are not at
ease and should not talk about in a public hearing here today.
But having said that, I have got a number of questions for
the record.
I will start with you, Mr. Werner.
The 9/11 Commission Report emphasized that quick access to
financial information is necessary to identify and disrupt
terrorist operations directed against the U.S. Cross-border,
wire transfers contain a treasure trove of information we know
is useful to counterterrorist investigators such as yourself.
Today, we have learned from your testimony that FinCEN has
completed at least its initial outreach on the cross-border
issue to the financial community and law enforcement.
FinCEN has also learned lessons from the regimes used in
Canada and Australia. It seems to me that capturing information
from the hundreds of thousands--maybe millions, I do not know--
of daily wire transfers is a much larger logistical and
progressing challenge faced by either Canada or Australia
because of the size of our financial institutions.
Is there an initial conclusion yet, the question is, that
the process and technology is available to make the adjustment
here? In other words, do you have the technology to do it? Do
you need it?
Mr. Werner. Mr. Chairman, you are quite right. Although
Canada and Australia have found tremendous value in their
cross-border--
Chairman Shelby. They have
Mr. Werner. --programs, the number of transactions--
Chairman Shelby. They have been quite useful to us.
Mr. Werner. It has. But the number of transactions that
they deal with, as you point out, are considerably less than is
involved in the U.S. system. I think that we estimate that we
could have as many as 500 million transactions annually that
would be captured by this requirement.
And so, being very mindful of that, as we have looked at
the value, we also have tried to be very realistic about what
it will take to build an infrastructure that can accommodate
that kind of information. We believe it is feasible, but as we
move our recommendations forward through Treasury, it is going
to be very important for the Secretary and other policymakers
in Treasury to, again, do that cost benefit analysis--
Chairman Shelby. Do you have a timeline involved? You might
not want to say, but--
Mr. Werner. We hope as quickly as possible, because the
schedule for implementing the program, if it goes ahead, is
very aggressive. It is a complicated issue, and I think we
forwarded only very recently our study--
Chairman Shelby. Can you do that in-house? Do you have the
personnel do that in-house, or will you have to reach out, or
have you made that decision yet?
Mr. Werner. We would not be able to implement that system
with in-house. That would have to be through contracted
services.
Chairman Shelby. That is good.
Mr. Glaser, front companies. The trail of many financial
crimes leads through front or shell companies, as you pointed
out. These companies are routinely used, as well, for the
illegal acquisition of military-sensitive technologies.
The Pakistani and former Iraqi nuclear weapons programs
both relied on the use of front companies to evade restrictions
or sanctions. The nuclear black market--Dr. Khan made extensive
use of such companies. North Korean front companies played a
central role in the counterfeiting and are still doing it--and
money laundering activities.
More mundane financial crimes like that involving a trade-
based laundering and tax evasion scheme involving Brazilian men
utilized front companies in Delaware, Panama, and the British
Virgin Islands.
Given the importance of front and shell companies to the
successful execution of all manner of illicit activities, is it
your opinion that Congress should consider measures to restrict
their use, and how would we do this if we are working with you?
Mr. Glaser. Thank you for your question, Mr. Chairman.
I think you have touched on a very important issue, and I
think that it is important for all of us to be focusing on this
issue and sort of grappling--
Chairman Shelby. Would you focus on that with the IRS, for
example? You would be dealing with them.
Mr. Glaser. Sure. The question that you asked I would say
has two parts to it. You discussed some foreign shell
companies, and then shell companies domestically here in the
United States.
I think on the foreign end of it--what the Treasury is
trying to achieve--I think what the international community is
trying to achieve is a level of transparency in the financial
system that shell companies tend to work against. The
designations that OFAC does are only made more effective if we
know who is really behind these companies, and how we can get
to the people who are actually manipulating the front companies
and conducting their illicit activities through those
companies. And that is not only true for Treasury designations,
that is true for law enforcement activities.
What we try to do internationally is set international
standards and assess countries against those standards to the
FATF. I think that has been relatively successful, although
there are clearly some hold outs. One of the main problems,
frankly, is shell companies here in the United States. It is
something that we have long been aware of. We frequently
receive complaints about it from foreign law enforcement
officials. It has been identified as a problem by the GAO. It
has been identified as a problem, I think, very significantly,
in the money laundering threat assessment that the U.S.
Government just put out. I think probably the first time the
U.S. Government has articulated that so clearly and
emphatically.
The United States was just reviewed by the Financial Action
Task Force, a 300 page assessment of our anti-money laundering
regime, which was, by and large, very, very positive, and I
think deservedly so, though with some criticisms in it, as
well. We are criticized, actually, fairly severely on the issue
of shell companies.
So, I think that there is a growing recognition that this
is something that we should all be looking at. In the money
laundering strategy that we are going to be issuing very
shortly we do address this issue. I do not think anybody is
saying that we have any silver bullet, right now. One of the
problems is that corporate law is not Federalized in this
country, so it becomes a State by State issue for us.
I think we do need to be doing more outreach with the
States. I think we do, working with FinCEN, need to explore
some of the opportunities that the Bank Secrecy Act might
afford us. And I certainly think a dialog with Congress is also
very important on looking at some other potential solutions.
So, I think you have put your finger on a very important
issue. It is one that we are becoming increasingly focused on.
Maybe it is overdue. I do think there are any number of
solutions that we might have at our disposal for this.
Chairman Shelby. Prepaid cards. It is a big business. Much
has been made, of late, concerning this $64 billion dollar
prepaid card boom. $64 billion.
Of particular concern are so-called open system cards that
can be used at almost any retailer, or even as ATM cards that
not only can be replenished, but will allow someone to withdraw
the amount put on the card anywhere in the world, is my
understanding.
In one case, for example, a Mexican criminal caught at the
border used stolen credit cards to transfer funds onto prepaid
card. I mean, they are very resourceful people. The question,
then, here is whether those cards can be used for more
frightening purposes. If they can be used for that, you know,
they can be used for something else.
The 9/11 hijackers were identified by their bank accounts,
card signatures, and wire transfers. Had those terrorists used
prepaid cards to cover those expenses, would the government
have been able to identify the terrorist today?
Mr. Glaser. Well, thank you again, Mr. Chairman--
Chairman Shelby. Is that troubling to you, the use of these
cards?
Mr. Glaser. Stored-value cards and other new payment
systems are an important issue and I think that we need to
focus on them for the same reason why we need to focus on shell
companies, and that is because, if not set up properly, they
could tend to reduce the level of transparency in the
international financial system. And that, in turn, works
against our ability to take effective action against money
laundering, or terrorist financing, or WMD proliferation.
The thing with store-value cards and any of these new
technologies is that they are very important commercial
vehicles. They are very important. They are very efficient,
useful financial tools that we want people to be using. So, we
have to draw a balance between insuring that everyone has
access to these useful financial commodities.
Chairman Shelby. For legitimate reasons.
Mr. Glaser. For perfectly legitimate reasons. And that we
have a regulatory structure.
I think that there are some examples in which you see new
payment systems being created almost along the contours of our
regulatory policy to try to find the cracks and holes in that.
That is a constant examination that we are doing. Again, we are
doing it internationally. I know Director Werner is doing this
within FinCEN, and it is something that I know FinCEN is quite
focused on.
Chairman Shelby. Mr. Werner, the Wells Fargo inquiry.
When did FinCEN and the Federal banking regulators conclude
a memorandum of understanding for information sharing about
banks under examination for BSA deficiencies?
Mr. Werner. The MOU was completed at the end of September
of 2004.
Chairman Shelby. When did FinCEN learn the OCC, Office of
Comptroller of the Currency, examination of Wells Fargo, and
was there consultation with FinCEN before any decision was made
regarding the potential for BSA enforcement actions up to and
including a cease and desist order?
Mr. Werner. I think we first learned of a potential Wells
Fargo issue from the OCC in December of 2004. I think we
actually learned of the informal action the OCC had taken in
June of 2005. And I think the report on the Wells Fargo case
points out some disconnects of how our MOU was working at that
time, but I am happy to be able to report that we have resolved
that. There was a misunderstanding on the operative language on
the MOU.
Chairman Shelby. Given the findings of the Treasurya'as
Inspector Generala'as recent report on the OCCa'as supervision
of Wells Fargo concerning the timely communication of OCC to
FinCEN about potential BSA enforcement actions, what we have
been talking about, can you comment here on whether FinCEN is
satisfied with the level of cooperation it received from the
Office of the Comptroller of the Currency?
Mr. Werner. Thank you, Mr. Chairman, because I would like
the opportunity to address that, because I think the Wells
Fargo case actually turned out to be a positive thing for the
development of FinCEN and the OCCa'as relationship. I think
that case really highlighted the fact that the MOU terms had
not been fully engaged by both agencies.
In the wake of that case, we really have been able to
resolve a lot of the ambiguities in our relationship and the
way we exchange information.
Chairman Shelby. Do you think the relationship has improved
considerably?
Mr. Werner. Dramatically. Comptroller General Dugan has
been very engaged with me since I have become the Director of
FinCEN. Not only has he been very active in communicating with
me, but he has taken the time to come over to FinCEN and
receive presentations. It has been very improved.
Chairman Shelby. Is FinCEN generally satisfied with the
supervision and enforcement programs of the OCC--and you said
yes, but other regulatory banking agencies in the BSA area?
Mr. Werner. Again, in general--
Chairman Shelby. A lot of people operating here.
Mr. Werner. Yes, sir.
In general, I think the answer to that is yes. As we have
heard from comments from members of the Committee, it is a very
complicated regulatory regime where we are having to balance
the burden to our industry with the benefits of the system. It
is a risk-based system.
So that, in order to have that function properly, we really
have to make very difficult judgments, sometimes, about what
level of enforcement action we take with respect to
deficiencies we see in the systems. And I think the regulators
working with FinCEN have come a long way in the last few years
to really begin to gain consistency in the system and a better
way of applying it.
Chairman Shelby. That is good.
How is Treasurya'as use of the tools found in the PATRIOT
Act and in Executive Orders viewed internationally today, 5
years after 9/11, and what difficulties has Treasury faced in
getting international institutions to cooperate?
For example, last year at this time, I believe you spoke at
the IMF and commented and commented that too many countries
have blocked assets on non-Al Qaeda terrorist and terrorist
groups, as required--too few countries. I am sorry. I will
correct myself. Too few countries have blocked assets on non-Al
Qaeda terrorist and terrorist groups as required by the United
Nations resolution.
What is the record today? Where are we, Mr. Glaser?
Mr. Glaser. Excuse me, Mr. Chairman.
I think, as I said in my opening statement, I think we, in
the U.S., and we, in the Treasury Department, have really been
leading the international community and have been quite
innovative in the way we have thought and think about the
application of financial measures, either targeted financial
sanctions or other authorities that we have in the PATRIOT Act,
for example, Section 3.11FF09FF09how we apply those. And I
think it has been well received by the international community.
I think that a lot of countries are a bit behind us in the
application of these types of financial tools. But I think
that, for example, if you look at the United Nations and you
look at the United Security Council, how the U.N. Security
Council reacts to international security crisis, be it
terrorism in SCR 1267 and 1373, be it WMD proliferation in
1540, the assassination of Hariri in 1636, North Korea in
16905.
Time after time after time, all of these U.N. Security
Council resolutions have financial components to it. That is
because I think we have been doing a good job of persuading
people and persuading countries that this is an important
component.
Now, I think that countries have a lot of work to do, and I
think what I said at the IMF in the speech that you are
referring to still stands. You know, countries have an
obligation under U.N. SCR 1373 to block and freeze the assets
of global terrorist organizations, all global terrorist
organizations. I think that, particularly when you look at an
organization like Hezbollah, there has not been enough common
action in the international community to block those assets.
That is something; again, we have worked very, very hard giving
speeches at the IMF, but also going to these countries and
dealing with people directly and trying to persuade them that
they have this international obligation. They have the tools.
Chairman Shelby. How can this Committee help you in this
regard? I know we cannot do everything, but we are very
supportive in what you are doing.
Mr. Glaser. And we very much appreciate your support, Mr.
Chairman, very genuinely. I think that holding hearings like
this and shining light on these issues is what needs to be
done.
The infrastructure is there, both here, in the
international community, and in many countries. Some countries
do not have what they need, but most of the big countries. What
we need to do is continue to engage, continue to emphasize how
important these are, continue to take action, and continue to
lead the way, because I think we very much have been doing
that.
Chairman Shelby. But you have got some work to do,
havena'at you?
Mr. Glaser. We have a lot of work to do.
Chairman Shelby. Mr. Werner, sharing information
technology.
Two years ago, the Commissioner of the Small Business
Division of IRS responded to a question before this Committee
regarding the relationship between FinCEN and the IRS in future
application of the BSA Direct project. I know these are all
technical things we are dealing with--tedious. Commissioner
Brown commented at that time that the IRS is the biggest user
of the data in the system and that he hopes to continue to be
considered a``aa preferred customer of FinCEN.a''a It is a new
system.
Information technologies today are the key to the future
abilities of all of your agencies to collect and process
information related to possible money laundering and terror
finance schemes. The failure of the BSA Direct program to meet
its budget and schedule represents a serious setback in that
regard, at least with respect to the way the program was
described to this Committee.
With the increased reliance on the IRS systems that the
BSAa'as direct demise will entail, is there any reason to
believe that FinCENa'as ability to execute its mission will be
impaired? In other words, what lessons do you draw from the BSA
Direct debacle?
Mr. Werner. Thank you, Sir.
Chairman Shelby. I know that is a lot of stuff.
Mr. Werner. It is, but I understand what you are asking,
Sir.
The BSA Direct data storage and retrieval component, which
is what we had to terminate the contract on, was a
disappointment to not be able to achieve that vision.
Fortunately, our great partnership with the IRS did allow us to
transition to their Web CBRS system. That system will take care
of the immediate needs of the vast majority, probably close to
90 percent or more of our external BSA gateway users.
What it does not do is it is not a substitute for the
overall concept that FinCEN had envisioned regarding a data
warehouse and being able to do data cleansing and some other
more advanced analytical technologies. And what we need to do
now is to regroup at FinCEN, reengage on our requirement study
and figure out exactly how to move forward from here. That may
involve partnering with the IRS on that component or it may
not, depending on what their capabilities and their own
strategic initiatives involve.
What I can tell you, though, Sir, is that, again, trying to
make lemonade out of lemons, it was a very instructive failure
for FinCEN as an agency.
Chairman Shelby. What have you learned?
Mr. Werner. What we learned is that very smart, innovative,
entrepreneurial people can not necessarily tackle a project of
that scope and technical capacity and make it work just by the
sheer force of their will.
What FinCEN needs and is now building is a project
management office and a more rigorous strategy for analyzing
information technology products and other products in terms of
going forward in a much more--we had to grow up. We had gone
from an office to an agency, and a growing agency. We need to
put in place policies and procedures that reflect the
complexity of our business. We are now in the process of doing
that.
Chairman Shelby. During the past 5 years, the FBI has
considerably upgraded its law enforcement financial
intelligence capacity. Treasury has built an Office of
Intelligence and Analysis.
Given that fact, what role does FinCEN now play in the
analysis of information for law enforcement, which was
FinCENa'as original mission?
Mr. Werner. Yes, Sir.
What we are finding, actually, is that there is an even
more advanced role for us to play because the kind of work that
OIA and FBI and others are doing has allowed us to begin to
remove ourselves from the mere data retrieval business and
think about what value added we can really play in working with
our customers.
The FBI is a great example because their IDW, now, is
allowing them to make a lot of interesting associations with
BSA data. I can give you an example. The other day they did a
demonstration for me and what they showed me is that they went
through suspicious activity reports that were coded terrorist
suspicious activities and they matched them against their
active investigation case file. What they found is a 20 percent
match, which I was astounded at, because, as you know, Sir,
terrorist financing is awfully difficult to detect. To see a
transaction and understand that the terrorist financing encoded
it that way, my expectation would be that you would get a lot
fewer examples of true open investigations. And so, to have
that kind of correlation really stunned us.
I looked at that and said, where FinCEN can now provide
tremendous value is to pull those suspicious activity reports,
match them to the institutions that are successfully filing
them, examine their programs, and, if there are commonalities
in those programs, and my guess is that there will be, we can
then feed that back to the industry.
And that is the kind of dynamic communication the industry
is begging for and that we have been looking to provide. So,
this advancement in technology really is just opening new ways
for us to take further advantage of BSA data.
Chairman Shelby. Are you encountering any staff recruitment
or retention problems, given that FinCEN is competing--you all
compete out there--with other regulatory agencies, such as OCC,
FDIC, and Federal Reserve, and so forth?
Mr. Werner. That is a very interesting question, Sir,
because we expect competition--
Chairman Shelby. Will you be competing for quality people?
Mr. Werner. Yes, Sir. Competing with the private sector is
one thing. Generally, people make a philosophic decision to
work for the public sector. But we do, in fact--we are
experiencing recruiting problems because our regulatory peers,
which are the Federal banking agencies, they are on a separate
pay scale.
I think we see that reflected in applicant pools for our
positions in the regulatory area.
Chairman Shelby. Mr. Glaser.
In this October--we are talking about GAO, now--referring
to the October 2005 report. In this October 2005 report on
better strategic planning needed to coordinate U.S. efforts to
deliver counterterrorism financing training and technical--it
is a big mouthful, there.
The GAO said that bureaucratic battles between Federal
agencies are hampering the governmenta'as efforts, at least in
the area of cooperation and foreign assistance and training.
You were reported as saying that interagency cooperation had
been good, but admitted--as you have been candid with us--that
the report pointed out that it could be better. It is an
ongoing work, and that there was a strong commitment to make
sure that the process is adjusted.
What has Treasury done, Sir, to date, to make these
adjustments? In a related development, the Congressional
Research Service noted that there was no common criteria among
agencies for measuring success of governmentwide anti-terrorism
efforts.
You want to comment on that?
Mr. Glaser. Sure. I would be happy to, Senator.
With respect to the GAO report, again, just to clarify on
that report. That report focuses specifically on the provision
of technical assistance related to terrorist financing, not on
our efforts on terrorist financing broadly. And I think, as I
said before, it was a fair report that did shine the light on
some difficulties that we were having in the interagency
community.
I think there has two things happening since then that has
improved matters. Internally, within Treasury, what have we
been doing? And I think that what we have been doing
internally, within Treasury is bringing the process of
delivering technical assistance more tightly into the
policymaking realm.
We have an Office of Technical Assistance that has a new
Deputy Assistant Secretary, Larry McDonald, who is fantastic.
He just started at the end of 2005. We are coordinating, in
TFI, much, much more closely with Larry and with his team to
make sure that the decisions as to the provision of technical
assistance on terrorist financing more accurately reflect
Treasury and U.S. Government priorities.
I think more importantly than that is what the State
Department has been doing, because the State Department
certainly has the lead, overall, in the delivery of technical
assistance. The provision of technical assistance is an arm of
U.S. foreign policy. And what the State Department has done is
really elevate the matter to the personal direction of
Ambassador Crumpton. Ambassador Crumpton has revived an
interagency group on technical assistance related to terrorism
broadly. I think that that is an important point.
Ambassador Crumptona'as group does not just focus on
terrorist financing but focuses broadly on all technical
assistance related to terrorism, be it terrorist financing, be
it customs, be it military assistance. Whatever assistance that
might be necessary. It is all looked at comprehensively and
strategically and looked at regionally, rather than just this
exceptionalism that I think previously existed with respect to
terrorist financing.
That has had a tremendous impact. I think that things are
improving. I am not going to say that everything has been
perfect. We are working through the issues that the GAO
demonstrated, but I think that we can really very honestly say
that there has been a very strong effort at the highest levels,
both at Treasury and at State to look at these problems in the
face and to do what we can to address them.
With respect to the second part of your question, on
unified performance measures--it is always going to be hard to
measure our performance in fighting terrorist financing. By
nature, it is a surreptitious activity. If we knew where it was
going on we would eliminate it.
I think there has been an effort really led by the NSC and
by the NCTC to create global, broad goals and objectives within
the U.S. Government and coordinate those and attach performance
measures to those. I mean, we have been very much a part of
that, and it is certainly our hope and expectation that that is
going to provide more of a baseline for us to be able to
measure the effectiveness of our actions. But that is always
going to be a big challenge for us.
Chairman Shelby. Thank you.
Senator Allard.
STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. Thank you, Mr. Chairman. I want to thank
you for holding this hearing.
Currently, banks have some significant legal and
reputational risks if they fail to report suspicious activity.
Accordingly, they file a fair number of reports. And, as a
result, I think the bottom line we have to ask is, do we need
to improve on the quality of those reports filed, and maybe not
too much on the quantity of filings, because, when we look at
this, we see more than 13 million currency transaction reports
filed each day. They have increased 45 percent last year to
nearly 1 million, I guess.
Compliance costs for financial institutions are
substantial. Have we looked at what we can do to streamline
this process?
Mr. Werner. Senator, I am the Director of FinCEN, so let me
respond to your question.
We are always looking--we are constantly reassessing and
assessing the regulatory system because we are trying to get
that burden benefit balance right. Having said that, the
reports that are filed with FinCEN are of extreme value to law
enforcement, to the regulatory community, to the intelligence
community. That does not mean that every individual form that
is filed with us will lead to an investigation or prosecution
but, in the aggregate, the data that we are seeing come in to
our system is extremely useful, not only in individual case
work, but also in doing vulnerability assessments and doing
threat assessments and feeding back to inform us on our
regulatory scheme.
And what we are--with new developing technologies that
FinCEN and other agencies are developing, we are only getting
better at exploiting that data and making use of it. That is
not to say that we do not have to engage in aggressive outreach
with the industry. We do. Because there is a very innocent
quality in terms of peoplea'as understanding of how to file
forms and what they should be putting in the narratives as
suspicious activity reports. So, we are engaging in aggressive
outreach to try and improve that quality.
In addition, we want to make sure that people understand
what their obligations are, because we really do not want
people to be overfilling, either. Having said that, at this
point, we are not seeing a lot of defensive filing. For the
most part, the forms that we see filed are good forms and they
are ones that should be filed. And even after enforcement
actions, where we see a spike in activity, when we have gone
back and analyzed those spikes, what we see is those are good
filings. Institutions are going back and looking at their
records and filing as a result of it.
While I take your point as an incredibly important one,
which is that we need to continue to assess and reassess the
system, I think that, at this point, that is something that we
are doing.
Senator Allard. Well, I know that constituents in the State
of Colorado have expressed concerns about, quote, defensive
filings. I feel like the bank has felt like, well, we
understand that this is a common sense thing, but we feel like,
just to cover our tail, we have to go ahead and file these
reports. I know you are denying that here, but my personal
experience has indicated there are some people out there that
feel that--both in the banking industry as well as consumers of
banking services--feel that some of those reports are defensive
in nature, and probably do not contribute an awful lot. It is
pretty obvious, if you look at their record, that it is not
tied to any terrorist activity.
Mr. Werner. Sir, I am sure that there is defensive filing
going on. I have no doubt of that. But I think in the
aggregate, the data base that we see has a lot of very, very
good, very important information, not just for terrorist
financing but for other sorts of illicit finance, narcotics
trafficking, money laundering, and other sorts of fraud.
When the FBI, through their IDW--and this is terrorist
financing--matched the return of Bank Secrecy Act information
to their queries, although, initially, the Bank Secrecy Act
made up something like 15 percent of their data base, they were
finding that it was as high as a 50 percent return on queries
were related to Bank Secrecy Act information.
So, we have no doubt that there is a high correlation
between the filings we are getting and the illicit activity out
there.
Senator Allard. Now, I assume that you are all
participating in the PART Program, which is the
Administrations--that is what the Administration calls the
programs put in place as a result of our oversight that we pass
here. It is Government Results and Accountability Act. I
believe that is what we refer to it, here. It is where you
actually set up goals and objectives and you measure your
performance against those goals and objectives.
I am curious on these enforcement programs, what kinds of
goals and objectives do you put out there? I hope they are not
of the nature of, well, we got a greater appropriation than we
did last year in our program, because that does not measure
performance. I hope that somewhere in those goals and
objectives that you are actually asking yourself, well, how
many--this fact led to how many arrests? Did we increase the
number of arrests--where we can actually see performance? How
are you coming out on these performance measures?
Mr. Werner. Well, we do not tie performance measures just
into arrests because, as I said before, the Bank Secrecy Act--
its value goes well beyond merely individual prosecutions. It
also goes into vulnerability, systemic trends that we look at,
threat assessments--
Senator Allard. So how do you put that down as measurable
goals and objectives?
Mr. Werner. What we have done is we have created a survey
system where we go out to our customers, our law enforcement
partners, and survey them on the value of the data to their
investigations and their work. That includes not just the data
itself, but also the analysis that we provide them. In that
respect, we get a very high percentage of positive response to
those queries.
Senator Allard. Do you survey banks, too?
Mr. Werner. We do also survey banks. We do. For regulatory
guidance and hotline response times and things like that.
Senator Allard. But on your performance measures, do you
survey banks?
Mr. Werner. Yes, we do. That is part of our survey.
Senator Allard. So you do not just do law enforcement?
Mr. Werner. No.
Senator Allard. Which I think is important. I am not going
to minimize that. I think that we have to do more to counteract
terrorism, and I think the financial institutions--you know, on
the Commission, the one area that we got an a``aAa''a on is on
financial institutions, as far as the terrorists were
concerned. We want to keep up those kinds of efforts. But on
the other hand, I do hope we maintain a proper balance here,
also.
And so, you know, I have received some concerns in this
area, and that is the reason for the questions that I posed for
you today, to make sure that you are actually taking a good
evaluation of these programs and making sure that we are not
putting unnecessary rules and regulations out there that do not
contribute to measurable results.
Thank you, Mr. Chairman.
Chairman Shelby. Thank you, Senator Allard.
I have a number of questions for the record, and we have
some members that were in other Committees that could not be
here. We will keep the record open for some questions relevant
to what you do.
We appreciate your appearance today and we will continue to
work with you and give you your tools to continue this fight.
It is not going to go away.
Thank you. The meeting is adjourned.
[Whereupon, at 11:26 a.m., the hearing was adjourned.]
[Prepared statements supplied for the record follow:]
PREPARED STATEMENT OF DANIEL L. GLASER
Deputy Assistant Secretary of Terrorist Financing and Financial Crimes,
Department of Treasury
September 12, 2006
______
PREPARED STATEMENT OF ADAM J. SZUBIN
Director of the Office of Foreign Assets Control, Department of
Treasury
September 12, 2006
______
PREPARED STATEMENT OF ROBERT W. WERNER
Director, Financial Crimes Enforcement Network
September 12, 2006
______
PREPARED STATEMENT OF EILEEN C. MAYER
Director, Fraud/Bank Secrecy Act of Small Business/Self Employment
Division, Internal Revenue Service
September 12, 2006