[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

                               __________

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


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                            senate05sh.html






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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire        DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina       ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida

              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

                              ----------                              

                      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

                              ----------                              


                      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





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