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



 
  DEPARTMENTS OF TRANSPORTATION, TREASURY, THE JUDICIARY, HOUSING AND 
URBAN DEVELOPMENT, AND RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR 
                                  2007

                              ----------                              


                        THURSDAY, APRIL 6, 2006

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 9:37 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Christopher S. Bond (chairman) 
presiding.
    Present: Senators Bond, Murray, and Dorgan.

                       DEPARTMENT OF THE TREASURY

                        Office of the Secretary

STATEMENT OF JOHN W. SNOW, SECRETARY

            OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

    Senator Bond. Good morning. The Subcommittee on the 
Appropriations Committee on Transportation, Treasury, 
Judiciary, HUD and Related Agencies will come to order.
    This morning, the Senate committee will conduct its budget 
hearing on the fiscal year 2007 budget on the Department of the 
Treasury. In addition, due to the important role of the 
Treasury in fighting the war on terrorism, today's hearing also 
will focus on the Treasury's Office of Terrorism and Financial 
Intelligence. Senator Murray is on the way, but her staff has 
graciously agreed to allow me to proceed, even though she will 
miss part of my opening statement. I will promise to give it to 
her in full when she gets here later on. But because of the 
schedule, and we have a vote scheduled at 10:30, Mr. Secretary, 
if it is all right with you, we would like to finish up your 
part of the testimony by 10:15. I am going to wield the gavel 
so we can have the second panel testify before we have to go to 
the vote. If you don't mind, we will try to keep it short and 
get you out of here at 10:15 to accommodate our schedule.
    As I said, we have two panels. On the first panel, Treasury 
Secretary John Snow, and we welcome Secretary Snow back, and we 
look forward to hearing his views on the accomplishments and 
challenges facing Treasury. After Secretary Snow, we will hear 
from a second panel of high-level Treasury officials who help 
lead the Department's efforts on combatting terrorists' 
financing. Specifically, we will hear from Under Secretary for 
Terrorism and Financial Intelligence Stuart Levey, and 
Assistant Secretary for Intelligence and Analysis Janice 
Gardner.
    I have had the great pleasure of getting to know both Mr. 
Levey and Ms. Gardner through my work on the Senate Select 
Committee on Intelligence. Both have done an outstanding job of 
bringing together the unique capabilities and resources of the 
Treasury Department in intelligence gathering and analysis. The 
result has made the Department a key player and a true asset in 
the intelligence community and in the war on terrorism.
    A lot has changed at the Treasury since our hearing last 
year, Mr. Secretary. One year ago, the Department was 
floundering due to a vacancy overload at its most senior-level 
positions. Now most of these vacancies have been filled and the 
Department is currently playing a much more significant and 
visible role in many important areas, especially having 
reestablished its role as a leader in combatting elicit 
financing with regard to money laundering and terrorist 
financing.
    Mr. Secretary, I congratulate you and the President for 
responding to our concerns and filling these important 
positions. I am pleased by the Treasury's commitment to these 
important challenges, and I am especially impressed with the 
quality of leadership at the Office of Terrorism and Financial 
Intelligence, TFI. If anybody can follow all of these acronyms 
during the discussion, you are a little bit quicker than I am, 
but I have a cheat sheet to read them from.
    That said, I remain concerned about the Department's 
ability to handle its management responsibilities, particularly 
in the IT area since the Office of Inspector General continues 
to cite management as a major challenge area, especially due to 
the recent failure of the BSA Direct Information Technology 
Project. It is a critical system, intrinsic to the success of 
the Financial Crimes Enforcement Network, or FinCEN's mission, 
and I am very frustrated that it did not receive greater 
oversight and support prior to and during its development. I 
intend to ask the GAO and the Inspector General, or the OIG, to 
review this issue and to provide some specific recommendations 
for preventing this kind of problem.
    I acknowledge your current management team is relatively 
new, and to some degree they are still getting their feet wet. 
However, on your watch, Mr. Secretary, BSA Direct and other 
large capital-investment projects like the Treasury Building 
and Annex repair and restoration, HR Connect and the Treasury 
Communications Enterprise have experienced significant 
problems.
    In terms of the latest failure, BSA Direct, I am fully 
committed to working with FinCEN's director Bob Werner in 
fixing these problems, and I credit the Director for taking 
action. However, we need to understand why your team did not 
act sooner, or at least ask questions on why milestones were 
being missed and costs were exceeding the original award 
amount. Senator Murray and I expect answers, Mr. Secretary, not 
excuses.
    We also want your commitment, Mr. Secretary, to assist 
Director Werner in ensuring that these types of problems do not 
happen again. Finally, this subcommittee expects a clear action 
plan designed to address these IT management issues. The action 
plan should be submitted no later than 45 days of this hearing, 
but I expect, because I know this is a high priority for you, 
as it is for us, that it will be sooner than that.
    Let us be clear, we expect better management, better 
oversight, and better accountability from the Department or 
else the chairman, and I believe I speak for my ranking member, 
will be reluctant to appropriate any additional funds for IT 
projects at the Treasury or Treasury priorities. This is that 
important to us.
    Turning to the Treasury's budget request, the 
administration requests some $13.1 billion for the Department 
for 2007. About $11.6 billion falls under the purview of this 
subcommittee. For the THUD account, the budget requests a $24.7 
million or 0.2 percent increase over the 2006. Most of the 
Treasury's budget and the budget increases are for the Internal 
Revenue Service, which compromises some 92 percent of the 
Department's budget under the THUD Subcommittee--a significant 
budget request in a very tight budget year. We will not be 
rubber-stamping any budget proposals because we do not have the 
money to do it. Instead, a budget anchored by a demonstrated 
commitment and comprehensive justification is expected. Because 
of the budget emphasis and the importance of the IRS, the 
subcommittee plans to hold a separate hearing on the IRS later 
this month, and we will focus on the IRS at that time.
    There are a couple of IRS items, Mr. Secretary, I want to 
bring to your attention. First, the IRS budget request is 
disappointing. While the administration proposes an $18.1 
million increase for IRS in 2007, the increase is, frankly, 
insufficient in taking a serious bite out of the $340 billion 
tax gap. Further, the budget request is filled with a number of 
budget gimmicks, which, if unattained, could result in 
significant cuts to IRS programs and core services in both 
taxpayer service and enforcement.
    I also raise our serious concern with the proposed cut to 
the IRS's Business Systems Modernization, or BSM, program. BSM 
still has its challenges and risks, but led by the new 
Associate CIO and his team, BSM is beginning to show results, 
and for the administration to propose reductions to BSM now 
makes little sense to us. In fact, cutting BSM greatly damages 
the momentum built up over the past 2 years. This is a classic 
example of punishing good behavior.
    The second point we raise is with IRS proposed regulations 
on disclosure and use of taxpayer information. There appears to 
be growing concerns about taxpayer privacy being compromised by 
the proposed regulation. Some concerns seem to be based on 
misunderstandings, whereas others are legitimate issues 
regarding the disclosure of confidential taxpayer information. 
It is a complex issue, filled with a lot of land mines. 
Nevertheless, I hope that Treasury and the IRS can balance out 
the needs and problems to ensure the maximum confidentiality of 
all taxpayer information to the greatest extent possible.
    The last point I raise is on taxpayer service. The 2006 
THUD appropriations laid out some clear directives that 
restrict the IRS from reducing taxpayer services until a plan 
for adequate alternative services is provided, and the Treasury 
Inspector General for Tax Administration, TIGTA, to offer 
another acronym, provides a review. I understand the IRS is 
complying with his directive, and I am optimistic that we will 
not have problems in the future.
    My strongest area of interest within Treasury is in its 
activities in fighting the war on terror, and in particular, 
terrorist financing. The Treasury has a long and storied 
history of successfully combatting organized crime from the Al 
Capone days, to the Nazis in World War II, and more recently, 
to the drug lords of Central America. These past and ongoing 
experiences have helped the Treasury develop a unique set of 
skills in understanding, deterring, and eliminating a wide 
variety of elicit funding. For example, the Treasury's Office 
of Foreign Assets Control, or OFAC, and its predecessor 
organizations, have had a long history of administering and 
enforcing economic and trade sanctions beginning with the War 
of 1812, through the Civil War, and the First and Second World 
Wars.
    In modern times, OFAC has helped combat intelligence 
narcotics traffickers, and now as a key operational component 
of TFI, it is also taking on terrorists and WMD proliferators. 
Due to the Treasury's long experience and its unique role, 
Congress authorized the creation of the Treasury Office of 
Terrorism and Financial Intelligence, or TFI, not just to 
recognize the Treasury's expertise or reorganize existing 
intelligence, but to take the Treasury with its unique 
experience to a new level to play a greater role in the war on 
terror.
    As a part of TFI, Congress created the Office of 
Intelligence and Analysis, or OIA, which is charged with 
analyzing intelligence and financial information, producing 
high-level products for administration and Treasury officials, 
for, as we all know too well from past experiences, there is a 
lot of information available. The problem is being to put the 
information together, or connecting the dots.
    Since its creation, TFI and OIA are beginning to show some 
real results. In fact, last December, the 9/11 Commission 
graded various aspects of the Federal Government on fighting 
the war on terrorism and gave an A-minus in the area of 
combatting terrorist financing. That is a pretty good score 
compared with what everybody else got, and TFI and the Treasury 
Department deserve a lot of credit. TFI deserves credit and 
recognition for its strong role in combatting financing due to 
the excellent work in support of the Department's efforts to 
designate terrorist entities, shut down financial flows, to 
individuals from rogue regimes, and uncover clandestine 
financial networks.
    In 2005, the Department designated a number of banks and 
foreign officials in troubling areas like Syria, North Korea, 
and Iran. Last December, the Department designated Banco Delta 
Asia under section 311 of the PATRIOT Act. It is a powerful new 
tool authorizing the Department to designate various foreign 
and financial institutions as a primary laundering concern, and 
to impose sanctions. Under Secretary Levey stated that, ``Banco 
Delta Asia has been a willing pawn for the North Korean 
government to engage in corrupt financial activities through 
Macau, a region that needs significant improvement in its money 
laundering controls. By invoking our USA PATRIOT Act 
authorities, we are working to protect U.S. financial 
institutions, while warning the global community of the illicit 
financial threat posed by Banco Delta Asia.''
    This bank was a key hub, and having made visits to our 
officials and our resources in that area, I can tell it has had 
a major impact from the people doing the job in that area. They 
are telling me how important and significant this was. The DRPK 
under Kim Jong-il has bemoaned the action, stating to the 
President of China that, ``The regime might well collapse under 
the weight of U.S. sanctions.'' It would be a shame, wouldn't 
it?
    TFI has also been able to assist foreign governments in 
taking their own actions. It is creating a new unit to tackle 
terrorists financing in innovative ways. Last year we funded 
the Joint DOD/Treasury Finance Cells. The pilot cell in 
Baghdad, known as the Iraq Threat Finance Cell, ITFC, enhances 
collection, analysis, and dissemination of intelligence. Since 
I serve on both Appropriations and Intelligence, I am very 
encouraged to see OIA is up and running strong within the 
government. I believe it is key to winning the war on terror. 
It is a focal point for the Department for compartmented 
intelligence analysis and support, and the critical 
intelligence it is providing during weekly targeting meetings 
is very important. It is going to deal with the use of hawalas. 
Those are the traditional Arab money-transfer and changing 
organizations. They are now too often being used by terrorist 
organizations. We need to know how they work and how to 
regulate them. The Office of Terrorist Finance and Financial 
Crime, TFFC, is looking at the use of hawalas by terrorist 
organizations and is working with other Federal agencies and 
international counterparts, for example, in tackling illicit 
financial flows associated with Afghan narcotics.
    I am pleased with the TFI's progress, but it has to adapt 
to the continually changing efforts to defeat our efforts. Now, 
the financing is fragmented into a constellation of small 
entities, transferring smaller amounts. The experts tell us the 
9/11 attacks cost $500,000, the March 11 bombings in Spain cost 
about $15,000, and the recent attacks in London last July cost 
the terrorists as little as $2,000. Therefore, combatting 
terrorist financing has to remain front and center. It is going 
to be a critical part of our counterterrorism efforts. We have 
to anticipate the imagination of terrorists because they will 
go through any means to cause chaos.
    One final point before I close. The Committee on Foreign 
Investment in the United States, or the CFIUS process, in 
regard to the recent Dubai Ports World controversy: my strong 
opinion is that DPW was treated very badly since a perfectly 
legitimate company owned by one of our closest allies in the 
Middle East was slapped in the face. I can tell you from 
visiting with foreign officials that that has not only affected 
our allies in the UAE, but our allies around the world. There 
are definitely some significant questions about the CFIUS 
process, they are already being addressed, and I think that 
some of the intelligence concerns can be addressed by OIA 
within Treasury. Congress is going to be working on updating 
that, and I am pleased that the Senate Banking Committee is 
taking on this issue and has recently passed legislation to 
reform CFIUS. Notwithstanding any legislation, I believe that 
Treasury needs to develop a better system of communicating to 
the Hill on the deals it is considering. Mr. Secretary, we saw 
a classic example of that wonderful process on DPW of ready, 
fire, and aim. Perhaps some additional information to Congress 
would allow Congress to aim before firing, and I hope we can do 
that in the future.
    Now with apologies, I turn to my colleague, Senator Murray.

                   STATEMENT OF SENATOR PATTY MURRAY

    Senator Murray. Thank you very much, Mr. Chairman. Today we 
are joined by Treasury Secretary John Snow, and I want to 
welcome him here this morning.
    Most Americans view the Treasury Secretary as the leading 
Cabinet official for our Nation's fiscal policy. Indeed, the 
Treasury Secretary plays a critical role on overseeing our 
financial markets and coordinating policy with our 
international partners. The Secretary is responsible for taking 
the lead on tax policy and overseeing the collection of tax 
revenues.
    As members of this subcommittee, we have a special 
obligation to look at another important role of the Treasury 
Secretary, namely, as the administrator of the funds 
appropriated by this subcommittee. We have the job of 
evaluating whether the tax dollars we have appropriated have 
been well spent, and whether taxpayers have gotten value for 
their money. In that regard, the record of this Treasury 
Department is deeply disturbing. Time after time, this 
subcommittee has been required to sound the alarm about 
misguided, multimillion-dollar initiatives that have resulted 
in lengthy delays and massive cost overruns. At this hearing 
last year, I talked about the unfortunate history of the TBARR 
program--the Treasury Department's building modernization 
project. That program is now nearing completion, but not before 
it spent almost $100 million more than initially budgeted, and 
taking 3 years longer than we were promised when we made our 
initial appropriation.
    Last year we also talked about Treasury's so-called HR 
Connect program, an initiative to modernize the human resources 
information system at the Treasury Department. That initiative 
has also been plagued with costly delays and cost overruns.
    As we observe the Treasury Department's performance over 
the last year, we are faced with still more examples of 
mismanagement and waste. The Treasury Department has been 
attempting to launch a Treasury Communications Enterprise, or 
TCE, initiative. As far as we can tell, absolutely nothing has 
gone right with this program since its inception. The GAO found 
fault with the competition process, so the Treasury Department 
decided to terminate its contract and procure services through 
the General Services Administration. The Treasury Department 
then reversed its decision and decided to launch a separate 
competition process for the TCE initiative, despite the fact 
that the GSA system will have the services Treasury needs at a 
lower cost. The Treasury Inspector General found that the 
entire project was fraught with poor planning and execution. 
The Treasury IG also observed that there was little evidence of 
adequate senior management oversight of the project.
    Even more disturbing have been the missteps that directly 
affect services to taxpayers, and our ability to combat 
terrorist financing. Last year, Secretary Snow's IRS 
Commissioner proposed to eliminate more than 60 Taxpayer 
Assistance Centers across the country. I opposed that 
initiative. He intended to close those centers in order to free 
up money for enhanced tax law enforcement. Now, while I support 
efforts to collect the taxes that are owed, I do not believe 
that enhanced enforcement should come at the cost of services 
to taxpayers. Despite my opposition and that of many 
legislators, the IRS Commissioner persisted. In the end, we 
included bill language prohibiting him from closing these 
Taxpayer Assistance Centers until the Inspector General could 
review the methodology and data that he used to determine which 
centers to close.
    We now have the results from the Inspector General. He 
found that the IRS was using faulty data or data that was not 
the most current data. He also found that the IRS did not have 
the necessary management information systems to interpret this 
data. Had this been allowed to go through, the Commissioner 
would have, quite possibly, been closing the wrong Taxpayer 
Assistance Centers, leaving taxpayers who need help in the 
lurch.
    Finally, when it comes to the area of terrorist financing, 
we have the deeply troubling efforts of Treasury launching its 
new computer communications system for administering the Bank 
Secrecy Act, known as BSA Direct. As recently as February 17, 
2006, the Treasury Department maintained that this new IT 
system would be a critical and essential new tool to provide 
greater access and analytical capability. Indeed, our 
subcommittee attached such importance to this initiative that 
we provided $5 million that the Treasury Department did not 
request to expedite the deployment of this critical new system. 
Now, just this past March, a new agency head was put in charge. 
He found numerous problems surrounding this initiative and 
issued a stop-work order. It remains to be seen whether BSA 
Direct should be continued and will add any real value to our 
efforts to combat terrorist financing. It might make sense for 
Treasury to use the IRS's new BSA data management system that 
is already up and running at a fraction of the BSA Direct.
    The bottom line is this: just because the Treasury 
Department prints the Nation's money and collects the Nation's 
tax dollars, it does not give the Department the right to waste 
those dollars. This Department has an obligation to learn from 
its mistakes, and as far as I can tell, these mistakes with 
major procurements are happening over, and over, and over 
again. The Treasury Secretary is responsible for many critical 
matters of international finance. He is also responsible for 
every dollar we appropriate to his Department. I hope and 
expect that he will have clear answers for us today about why 
we continue to encounter these repeated management failures and 
waste of taxpayer dollars in the Department.
    Finally, Mr. Chairman, I want to thank you for scheduling a 
separate panel of witnesses so that we can deal with the matter 
of terrorist financing. There is certainly no greater calling 
on the part of this agency than its effort to cut off the 
financial lifeline from those terrorists who wish to do us 
harm. It is one of the reasons that I am so disturbed by the 
Department's failure in the BSA Direct program. Thank you, Mr. 
Chairman.
    Senator Bond. Thank you very much, Senator Murray. Now Mr. 
Secretary, we have outlined a few areas of concern. We would 
welcome your comments.

                   SUMMARY STATEMENT OF JOHN W. SNOW

    Secretary Snow. I thank you, Mr. Chairman, and Senator 
Murray. It is always a privilege and a pleasure to appear 
before you, to hear your comments, exchange views and get your 
insights and have an opportunity to talk to you about these 
important issues. You have raised a lot of good issues, both 
you and Senator Murray. We put in place, I think, a set of 
processes that are going to get at these issues more 
effectively.
    First of all, we have identified a pretty good team. I 
appreciate some of your good comments, frankly, on that team. 
It is encouraging to hear that from the chairman of this 
committee. So getting the right team in place, you know, you 
are right, a year ago we had vacancies across the board, and 
today, virtually all of those vacancies are filled, and filled 
with really top-flight people.
    On the IT issues, we recognize we have got to do better. We 
know that, again, getting the right people in place and the 
right management structures. I have had a lot of experience, 
Senator Murray and Mr. Chairman, over the years, probably at 
least as much as you have, in overseeing and managing IT 
systems. The Government's IT systems are more complex than any 
you ever see in the private sector, and when it comes to 
something like BSA, go to your corner software store and you 
can't pick it up off the shelf. You got to develop these 
systems on your own, and they are inherently very, very 
complex. I am not making excuses. We are going to do better. We 
have realigned the CIO under the Assistant Secretary for 
Management. We are going to apply the lessons that we have 
learned from past mistakes.
    One of those lessons is you put in place real project 
management and you understand going in what you are trying to 
accomplish. You know your requirements. You lay out your 
requirements. You have milestones. You follow the success in 
achieving those milestones, all those things that are good 
management, and providing better coordination across all the 
functions. I am confident that we are going to do better on 
that score.
    Let me say, you know this Department has changed enormously 
over the few years that I have been here. When I came in, it 
was going through that massive restructuring to create Homeland 
Security. We did not have the TFI functions fully developed, 
and I want to thank you for your support in helping us put in 
place this strong TFI function.
    What is Treasury all about? It has an important role, as 
Senator Murray said, in trying to keep the American economy on 
the right path, and in dealing with counterparts in the global 
economy. I think we do that pretty well. The American economy 
today you know is performing very well. We are growing at close 
to 4 percent for the last nearly 3 years since the Jobs and 
Growth Bill went into effect, 5 million new jobs, and I think 
we are going to continue on that good path. The Treasury 
Department's counsel with the President and putting in place 
the Tax Program of 2003 I think has a lot to do with that. So I 
hope Congress will move to extend those reductions on dividends 
and cap gains, and do it soon.
    We also have an important role in securing our country from 
terrorist threats. You have alluded to that and I will not go 
into it except to say it is a top priority with me, and I think 
we have the right people in place to drive those efforts.
    The Treasury stands at the center of the national and the 
global fiscal policy issues, the Current Account issues, global 
growth issues, all of those. We participate in the G-7 and the 
G-20 and APEC, and we lead this country's efforts at the World 
Bank and the IMF, all critically important functions. Senator 
Murray, I take seriously your comments about the deficit. We 
are a voice for restraining spending and keeping the economy 
strong to get revenues coming in, and revenues, of course, are 
now at an all time high for the United States Government, and 
on a path as a percent of GDP to achieve their historic level.
    You have raised other issues that I will look forward to 
getting into in the Q and A. On the 7216 question, that 
regulation, Mr. Chairman, you are right, that has been grossly 
misperceived in the press. It is actually a tightening of the 
rules on privacy, not a weakening of those rules. We can get 
into that later.

                           PREPARED STATEMENT

    Again, I very much value the close working relationship 
with this committee and your excellent staff. We take seriously 
their comments, we take seriously the GAO's comments, and 
working together, I think we will continue to make good 
progress at the Department. I thank you.
    [The statement follows:]

                   Prepared Statement of John W. Snow

    Chairman Bond, Senator Murray, and members of the subcommittee, I 
appreciate the opportunity to appear before you today to discuss the 
President's fiscal year 2007 budget for the Department of the Treasury.
    The President's budget for Treasury in fiscal year 2007 reflects 
the Department's dedication to promoting economic opportunity, 
strengthening national security and exercising fiscal discipline. The 
budget supports activities that help ensure all Americans will have the 
opportunity to live in a Nation that is more prosperous and more 
secure.
    The Treasury appropriations request for fiscal year 2007 is $11.6 
billion, slightly above the fiscal year 2006 enacted budget. This 
request is consistent with the President's overall goal of cutting our 
deficit in half by 2009. The Treasury Department is committed to fiscal 
austerity and to the most efficient and effective use of taxpayer 
dollars while at the same time boosting revenues through continued 
economic growth.
    Mr. Chairman, we have provided the committee with a detailed 
breakdown and justification for the President's fiscal year 2007 budget 
request for Treasury. I would like to take the opportunity today to 
highlight portions of our request and then I would be happy to take any 
questions you may have.

             PROMOTING A PROSPEROUS AND STABLE U.S. ECONOMY

    The Treasury Department plays a predominant role in the development 
and implementation of the President's goals for domestic and 
international economic growth, and the communication of his agenda. To 
reach our greatest potential, the economy must increase its rate of 
growth and create new, high quality jobs for all Americans.
    The legal and regulatory framework must also support this growth by 
providing an environment where businesses and individuals can grow and 
prosper without the burdens and costs of unnecessary taxes and 
regulations. In addition, the role of the tax system in supporting 
economic growth is critical. The economic indicators since the 
President signed the Jobs and Growth Act in May 2003 provide validity 
to this notion. Since that time, we have seen 11 straight months of 
positive business investment; nearly 5 million jobs have been created; 
the unemployment rate stands at a remarkable 4.8 percent; and now we 
are also seeing a rise in American's income and wealth. What's also 
impressive is the fact that tax revenues are surging; Federal revenues 
for fiscal year 2005 totaled $2.15 trillion--the highest level ever.
    The budget addresses the need to consider the economy when 
considering tax policy with the proposed creation of a new Dynamic 
Analysis Division within Treasury's Office of Tax Policy. Understanding 
the full range of behavioral responses to tax changes, including how 
tax changes affect the size of the economy and, eventually, tax 
revenues, is critical to designing meaningful, effective tax policy, 
and tax reform. This small expenditure will have a substantial pay-off 
for the American taxpayer.
    Treasury's Office of International Affairs also plays a key role in 
supporting growth by advancing our Nation's interests in an 
increasingly complex world economy. The office improves access to 
foreign markets for U.S. financial service firms, promotes domestic 
demand-led economic growth abroad, and fosters economic restructuring 
and stability. These activities contribute to rising standards of 
living in both the United States and other countries.
    As globalization has progressed, Treasury's on-the-ground presence 
in international finance and economic centers has steadily receded. The 
$9.4 million requested to increase Treasury's overseas presence will 
enable the Department to carry out its international mission in the 
global economy more effectively. Treasury attaches will work in tandem 
with the Office of International Affairs and the Office of Terrorism 
and Financial Intelligence to build relationships with foreign 
officials and work with local U.S. industry and agency representatives 
to advance U.S. interests. They will also provide much-needed 
intelligence and expertise to U.S. officials in Washington formulating 
policy on international economics, trade, finance, and terrorist 
finance.
    The budget also seeks $7.8 million for the Community Development 
Financial Institutions (CDFI) Fund to administer the New Markets Tax 
Credit and manage the existing loan portfolio. The budget proposes to 
consolidate CDFI's remaining programs into the Strengthening America's 
Communities Initiatives (SACI) within the Departments of Commerce and 
Housing and Urban Development.

   FIGHTING THE GLOBAL WAR ON TERROR AND SAFEGUARDING OUR FINANCIAL 
                                SYSTEMS

    While promoting financial and economic growth at home and abroad, 
Treasury performs a critical and far-reaching role in homeland 
security. The Department battles national security threats by 
coordinating financial intelligence, targeting and sanctioning 
supporters of terrorism and proliferators of weapons of mass 
destruction (WMD), improving the safeguards of our financial systems, 
and promoting international coordination to attack the financial 
underpinnings of terrorist and other criminal networks. To support 
these efforts, the President requests $388.7 million for fiscal year 
2007.
    The Office of Terrorism and Financial Intelligence (TFI) supports 
Treasury's national security efforts by safeguarding the U.S. financial 
systems against illicit use. TFI provides financial intelligence 
analysis, develops and implements anti-money laundering measures, 
administers the Bank Secrecy Act, and enforces economic and trade 
sanctions. In addition, TFI provides policy guidance for the Internal 
Revenue Service's (IRS) Criminal Investigation staff. IRS special 
agents are experts at gathering and analyzing complex financial 
information from numerous sources and applying the evidence to tax, 
money laundering, and Bank Secrecy Act violations. These agents support 
the national effort to combat terrorism and participate in the Joint 
Terrorism Task Forces and similar interagency efforts focused on 
disrupting and dismantling terrorist financing.
    Financial intelligence exposes the infrastructure of terrorist and 
criminal organizations. It provides a roadmap for investigators to find 
those who help facilitate criminal activity. These investigations lead 
to the recovery and forfeiture of illegally obtained assets and create 
broad deterrence against criminal activity. Treasury plays a crucial 
role in linking law enforcement and intelligence communities with 
financial institutions and regulators. To support these efforts, 
Treasury requests an increase of $16.9 million for the Financial Crimes 
Enforcement Network to improve coordination with State and local 
regulators, strengthen regulatory training and outreach, and enhance 
Bank Secrecy Act collection, retrieval, analysis, and sharing.
    Treasury exercises a full range of intelligence, regulatory, 
policy, and enforcement tools in tracking and disrupting terrorists' 
support networks, proliferators of weapons of mass destruction, rogue 
regimes and international narco-traffickers, both as a vital source of 
intelligence and as a means of degrading the terrorists' ability to 
function. Treasury's actions include:
  --Freezing the assets of terrorists, drug kingpins, and support 
        networks;
  --Cutting off corrupt foreign jurisdictions and financial 
        institutions from the U.S. financial system;
  --Developing and enforcing regulations to reduce terrorist financing 
        and money laundering;
  --Tracing and repatriating assets looted by corrupt foreign 
        officials; and
  --Promoting a meaningful exchange of information with the private 
        financial sector to help detect and address threats to the 
        financial system.
    The fiscal year 2007 President's budget requests $7.8 million to 
enable Treasury to continue to enhance its abilities to identify, 
disrupt, and dismantle the financial infrastructure of networks of 
terrorists, proliferators of WMD, narco-traffickers, criminals, and 
other threats. Treasury will also improve its analytical capabilities, 
to provide actionable intelligence and to target, designate and 
implement sanctions against the financiers of WMD proliferation.
    This budget request funds Treasury's national and homeland security 
mission at a level that provides increasingly effective support to the 
war on terror. Treasury will enhance this support with an increased 
international presence funded in this request. Treasury attaches 
located at critical embassies throughout the world will enable close 
liaison with the international financial institutions and foreign 
governments to promote the national and economic security interests of 
the United States.

        COLLECTING TAXES AND MANAGING THE GOVERNMENT'S FINANCES

    Treasury's strategic goal to manage the U.S. Government's finances 
effectively is the largest part of the President's fiscal year 2007 
request for the Department. The budget request of $10.9 billion--the 
majority of which is for the Internal Revenue Service--underscores 
Treasury's commitment to provide quality service to taxpayers and 
enforce America's tax laws in a balanced manner.
    The Internal Revenue Service (IRS) provides taxpayers with top-
quality services by helping them understand and meet their tax 
responsibilities through a commitment to integrity and fairness. The 
IRS supports the administration's goal of reducing the Federal deficit 
by increasing tax receipts collected through taxpayer services, 
enforcement compliance, and identifying improvements that will reduce 
the cost of revenue collection. Treasury's enforcement efforts yielded 
a record $47.3 billion in enforcement revenue in fiscal year 2005. The 
fiscal year 2007 budget will provide funding to continue the IRS's 
dedication to service and maintain efforts to improve the enforcement 
of tax laws.
    Increasing compliance with the tax code is at the heart of the 
Treasury's enforcement programs. The IRS will continue to expand 
enforcement efforts by targeting its casework and enforcement 
activities to deliver results more effectively. The IRS will continue 
to analyze tax information and data from compliance research studies to 
better understand and counter the methods and means of those taxpayers 
who fail to report or pay what they owe. The IRS is focusing on 
discouraging and deterring non-compliance such as corrosive activity by 
corporations and high-income individual taxpayers. In order to ensure 
funding for tax enforcement, the administration is again proposing a 
program integrity cap adjustment. I am pleased that the Senate Budget 
Committee included this adjustment in their Budget Resolution.
    To reinforce this effort, the budget proposes new tax legislation 
that will improve the ability of the IRS to identify underreporting and 
collect unpaid taxes, while minimizing the burden on those who comply 
with the tax code. These legislative proposals strategically target 
areas where research reveals the existence of substantial compliance 
issues. The improvements will burden the taxpayers as little as 
possible, and the changes support the administration's broader focus on 
identifying legislative and administrative changes to increase 
compliance with the tax code.
    The IRS continues to make progress with the Business Systems 
Modernization (BSM) program. BSM aims to modernize the tax system by 
providing real business benefits to taxpayers and IRS employees through 
new technology. In fiscal year 2006 and continuing in fiscal year 2007, 
BSM is revising its modernization strategy to emphasize the incremental 
release of projects to deliver business value sooner and at lower risk.
    The Treasury Inspector General for Tax Administration (TIGTA) 
continues to partner with the IRS in increasing compliance with the tax 
code by ensuring that the IRS can pursue the effective administration 
of Federal tax laws without hindrance from internal and external 
attempts to corrupt the tax system. TIGTA serves to highlight 
opportunities for cost savings in IRS operations, protect taxpayer 
rights and privacy, and generally promote the economy, efficiency and 
effectiveness of tax administration.
    The Alcohol and Tobacco Tax and Trade Bureau (TTB) also works to 
ensure that taxes due become taxes collected. TTB is the Nation's 
leader on regulating alcohol, tobacco, firearms, and ammunition excise 
taxes. The bureau is responsible for the collection of approximately 
$15 billion annually. TTB ensures that alcohol beverages are labeled, 
advertised, and marketed in compliance with the law. TTB's efforts 
assure the public that alcohol and tobacco products reaching the 
marketplace are unadulterated, thereby providing marketing and sales 
value to the industry. The budget proposes to establish user fees to 
cover a portion of the costs of these regulatory functions.
    Treasury also works to disburse, manage, and account for the 
Nation's monies as it distributes payments, finances public services, 
and balances the government's books.
    The Financial Management Service (FMS) is the government's 
financial manager and as such administers the government's payments and 
collections systems. In fiscal year 2005, FMS issued over 952 million 
non-defense payments valued at $1.5 trillion, of which 76 percent were 
made electronically. The President's budget includes proposed 
legislation that would enhance non-tax debt collection opportunities, 
including allowing FMS to collect an estimated $3.8 billion in past due 
unemployment compensation debts over the next 10 years.
    The Bureau of the Public Debt (BPD) facilitates Treasury's debt 
financing operations by issuing and servicing Treasury securities. BPD 
will continue its goals of increased efficiency and achieve its mission 
to borrow the money needed to operate the Federal Government and to 
account for the resulting debt.

                  STRENGHENING FINANCIAL INSTITUTIONS

    Treasury, through the Office of the Comptroller of the Currency 
(OCC) and the Office of Thrift Supervision (OTS), maintains the 
integrity of the financial system of the United States by chartering, 
regulating, and supervising national banks and savings associations. 
Ongoing supervision and enforcement ensure that each national bank or 
saving association is operating in a safe and sound manner, which 
enhances the reliability of the U.S. financial system. In fiscal year 
2005, OCC and OTS oversaw assets held by these insured depository 
institutions totaling $7.3 trillion.
    The United States Mint and the Bureau of Printing and Engraving 
(BEP) share the responsibility of meeting global demand for the world's 
most accepted coins and currency. Neither the U.S. Mint nor the BEP 
receive any appropriated funds from Congress. In fiscal year 2005, the 
Mint returned $775 million to the Treasury's General Fund. The U.S. 
Mint continues its work to streamline operations and remain highly 
effective, while providing coins for circulation and numismatic 
purposes. BEP continues its work of developing new methods of designing 
our currency to guard against counterfeiting. The bureau plans to 
release the redesigned $100 dollar bill later this year.

                     MANAGING TREASURY EFFECTIVELY

    The President has requested $219.8 million to ensure proper 
stewardship of the Department. Treasury is committed to using the 
resources provided by taxpayers in the most efficient manner possible.
    The Departmental Offices and Department-wide Systems and Capital 
Investments Program (DSCIP) account funds technology investments to 
modernize business processes throughout Treasury, helping the 
Department improve efficiency. In fiscal year 2007, the President's 
budget requests $34 million for ongoing modernization and critical 
information technology projects and to invest in other new technologies 
that will improve efficiency and service. Included in this request is 
$21.2 million to complete the redesign and modernization of Treasury's 
Foreign Intelligence Network (TFIN), a Top Secret/Sensitive 
Compartmented Information system critical to the support of Treasury's 
national security mission.
    Included in this budget request is $17.4 million to fund the 
Department's Office of Inspector General (OIG) audit and investigative 
programs. The budget also includes $136.5 million for the Treasury 
Inspector General for Tax Administration (TIGTA) and its efforts to 
oversee the Nation's tax administration.
    The Treasury Franchise Fund, recognized as a Financial Management 
Center of Excellence, is a self-supporting business-like entity that 
provides common administrative services to other Federal agencies on a 
fully reimbursable basis. The Fund will continue to support Treasury's 
stewardship of the Department by promoting excellence in its management 
and increase competition for government and financial services.

             TREASURY AND THE PRESIDENT'S MANAGEMENT AGENDA

    Treasury is meeting the President's challenge to improve the 
management of the Department's people and resources. On the most recent 
President's Management Agenda (PMA) scorecard, the Department achieved 
a Green progress score in five out of six initiative areas, indicating 
that plans are in place and implementation is progressing to accomplish 
the PMA objectives.
    The Office of Management and Budget's Program Assessment Rating 
Tool (PART) is intended to improve program performance. Treasury made a 
strong commitment to improve its program performance, and PART scores 
subsequently have improved. Currently, 70 percent of Treasury's PART 
evaluations have scored ``adequate'' or better and Treasury has set a 
target of 76 percent scoring ``adequate'' or better in fiscal year 
2006.
    Treasury will continue to work closely with the Office of 
Management and Budget and other stakeholders to make improvements in 
implementing the initiatives set forth in the President's Management 
Agenda.

                               CONCLUSION

    Mr. Chairman, I look forward to working with you, members of the 
committee, and your staff to maximize Treasury's resources in the best 
interest of the American people and our country as we move into fiscal 
year 2007. We have hard work ahead of us and I am hopeful that together 
we can work to make the Treasury a model for management and service to 
the American people, and continue to generate economic growth, increase 
the number of jobs for our citizens, and keep our financial systems 
strong and secure.
    Thank you again for the opportunity to present the President's 
budget for the Treasury Department today. I would be pleased to answer 
your questions.

                          INFORMATION SYSTEMS

    Senator Bond. Mr. Secretary, thank you very much. Let's get 
right to the questions.
    We have talked about BSA Direct, raising serious questions 
about the Treasury's ability to procure, manage and oversee IT. 
Can you give me your personal commitment that high-risk 
projects like the Treasury Financial Intelligence Network, 
critical for the TFA analysts to perform their jobs, will not 
experience the same problems as BSA Direct? How can you assure 
us that there will be the necessary support and resources for 
TFIN and other IT projects based on the lessons learned?
    Secretary Snow. There are lessons learned here. I think the 
major lesson learned is get those requirements well specified 
in advance, and have somebody with knowledge about IT matters 
watching it closely. I have asked the Assistant Secretary for 
Management to make that a priority, and I have asked her, 
working with the CIO, to make sure they keep me regularly 
posted on these IT projects. There are a number of them, TFIN 
and others, that will get my personal attention. They will be 
managed by people who know a lot more about the management of 
IT than I do, but as somebody who has been in this world for a 
long time, I think I can see problems, spot problems, and help 
keep us on the right track. I pledge to you I am going to do 
everything I can.

                      INCREASED OVERSEAS PRESENCE

    Senator Bond. Thank you, sir. As you know, I have supported 
the major expansion of the Overseas Attache Program. Can you 
describe your short-and long-term goals for it, how it will 
help the American people, and describe the coordination efforts 
between the Office of International Affairs and the Office of 
Terrorism and Financial Intelligence in this program?
    Secretary Snow. Absolutely, Mr. Chairman, and I appreciate 
the chance to do so.
    Treasury today has attache posts at a limited number of 
places, Baghdad, I think Kabul, Afghanistan, and Tokyo. At one 
point we had many more, and we see a real need to expand the 
number to go to critical places on the globe. The attaches 
would have a dual role. It would be advancing the objectives of 
good economic policies in those countries, but also the TFI 
objectives of coordinating on terrorist finance issues, 
coordinating on issues of putting place better regulatory 
regimes in many countries. The United States is way ahead of 
most of the rest of the world in having the PATRIOT Act and 311 
and 326 and the various rules we have that allow us to freeze, 
block and get at terrorist monies. Augmenting the effort to 
fight terrorists' finances will be a big part of these 
attaches' roles as well. And they are going to critical places 
in the Middle East as well as to financial centers around the 
world.
    Senator Bond. I am delighted to see that you are looking at 
Southeast Asia where I think there are lots of problems, and I 
would also suggest you look at Pakistan where there could be 
some real challenges.

                          IRS 7216 REGULATIONS

    Moving very quickly to 7216, do you think the proposed 
regulations adequately address consumer-protection issues? And 
how are they stronger than current regulatory protections?
    Secretary Snow. Thank you very much, Mr. Chairman. They are 
much stronger than current law. Current law does not prescribe 
the form of a warning, and 7216 does prescribe the form of a 
warning, a much stronger warning. It also puts time limits on 
the period through which the third party can use that data of 1 
year. It had been open-ended. I think the testimony of the fact 
that this protects taxpayers better is that Nina Olson, the 
National Taxpayer Advocate, has supported the issuance of these 
regulations. So I think there was a miscommunication, and the 
real facts are this tightens privacy with respect to use of 
taxpayer information.

                       OFFICE OF DYNAMIC ANALYSIS

    Senator Bond. Mr. Secretary, the budget proposes $500,000 
to create a new Dynamic Analysis Office within the Treasury. 
What types of analysis would this office conduct that is not 
being conducted now? I have a personal feeling about the need 
for this, but what is the long-term plan for the office in 
terms of funding and staffing?
    Secretary Snow. When we come to you, Mr. Chairman, with tax 
proposals, you have the right to say to us: ``What will that do 
to GDP? What will that do to growth? What will that do to 
macroeconomic variables?'' The Dynamic Analysis Office will 
develop models to enable us to answer those questions so that 
when we come forward with major tax analyses, major tax 
proposals, we will have analyses behind those proposals to 
answer questions about the broad macroeconomic effects.
    Senator Bond. I think we have seen it demonstrated that 
strict, static budget analysis leads to some very bad guesses 
about future performance.

                                TAX GAP

    Finally, I would like to ask you about the tax gap, a $345 
billion tax gap. That is the amount of money estimated that is 
owed and that is not collected. That means those of us who are 
sweating as hard as we can to pay the taxes we owe by April 15 
are carrying the burden for some slugs who are out there not 
paying the $345 billion. How can we take a bite out of that 
with the reduction in the money for the IRS?
    Secretary Snow. Mr. Chairman, the budget proposal includes 
five new specific legislative proposals that I think would 
help. The Commissioner I think you know is keen on 
strengthening enforcement and has done a good job of doing so, 
with more audits, more enforcement activity, more focus on the 
enforcement side. We always have to get that balance right, 
though, between enforcement and taxpayer service. We are just 
going to continue to do the best we can, and in Commissioner 
Everson we have somebody who is absolutely dedicated to this 
purpose.
    Senator Bond. Thank you very much, Mr. Secretary. Senator 
Murray.

                      TAX PREPARATION ERROR RATES

    Senator Murray. Mr. Secretary, let me start by addressing 
some of the problems that exist at our major tax preparation 
companies. Just 2 days ago the GAO reported that there may be 
some serious problems with the accuracy of the tax returns 
prepared by many of the private tax preparation companies. The 
GAO found that these companies often prepared returns that were 
incorrect, with tax consequences that were sometimes 
significant. Some of these mistaken returns could have exposed 
taxpayers to penalties for things like negligence and willful 
or reckless disregard of tax rules. What are you doing now to 
rectify that situation?
    Secretary Snow. This is a recurring issue, Senator, as you 
know. I think every year about this time we see newspaper 
accounts of this. I do not think it is an intent to defraud 
anybody. I think the problem that you are talking about is the 
result of the bewildering complexity of the Code itself. You 
can get 15 tax people of impeccable credentials looking at one 
tax return and coming up with 15 different results. I think 
that that is fundamental in the nature of the Code, and we have 
to address the complexity of the Code.
    Senator Murray. That could be, but still we have people who 
go to a tax preparer and believe that they know what they are 
doing, and I think it is of serious consequence if we do not 
have an aggressive agency that is doing something to help 
regulate these tax preparation companies.
    Secretary Snow. Senator, to put this in a little 
perspective, the IRS itself gives differing interpretations, so 
that the issue here, and I think it is really a serious one, is 
not an effort to defraud anybody. It is a reflection of the 
inherent complexity.
    Senator Murray. People in your agency give different 
interpretations? Is that not a problem in itself?
    Secretary Snow. It is a problem of how complex the Code is. 
My wife is a volunteer to the IRS to help elderly people and 
poor people prepare their tax returns. She came back to me 
after a session recently and said, ``John, you cannot imagine 
how bewildering and confusing the Tax Code is. How do you 
expect people to comply with the Tax Code when I, a reasonably 
intelligent person who has had a course in taxes, can hardly 
figure it out myself?'' I think that is a common refrain.
    Senator Murray. I have to disagree with you a little bit. 
It may be a complex Tax Code, but when we have private tax 
preparation companies and an IRS that has a function to make 
sure that they have the correct information, we cannot just say 
that that is an excuse for giving taxpayers penalties for being 
negligent. I think we have to do our job better, I think your 
agency has to do its job better, and I think we have to manage 
these tax preparation companies and have aggressive oversight 
with them. Do you disagree with that?
    I will tell you if a math teacher gives a complex question 
to a bunch of high school students and they come back and say: 
``Gosh, it is complex'', I do not think you would accept it, 
and I know I would not.
    Secretary Snow. Senator, every year your local newspaper 
and local newspapers all over the country go out with one tax 
return, take it to acknowledged tax experts, and the tax 
experts differ themselves on what the amount owed is. Albert 
Einstein said, and he was a pretty smart fellow, the one thing 
that he ever encountered that was entirely incomprehensible to 
human intelligence was the Internal Revenue Code. If it is 
tough for Einstein, you can see why it is tough for the rest of 
us.

                          IRS 7216 REGULATIONS

    Senator Murray. Mr. Secretary, I do not think anybody would 
disagree that the complexity of the Tax Code is a challenge for 
all of us, but it is a challenge we have to aggressively be on 
top of. Following-up on the chairman's question on the proposed 
regulations on revising section 7216, I heard you say that some 
of that improves protection of taxpayer information. That may 
well be true, but it also very clearly loosens some of the tax 
preparer companies' obligations and may very easily by just 
someone accidentally swiping their pen in the wrong place, they 
lose their private information. I would like to know from you 
if you are going to follow-up on that, if you are going to take 
a look at those regulations, take into concern that this has 
opened up the real question of whether or not taxpayers' 
private information may accidentally be used without their 
knowledge?
    Secretary Snow. Senator, absolutely. We have a duty to 
protect the information of taxpayers, and I pledge to you that 
we are going to take those responsibilities with the utmost 
seriousness. This particular regulation was actually an effort 
on the part of the IRS and the Commissioner to tighten up this 
regulation.
    Senator Murray. And I am going to be asking him about it 
next week, I assure you.
    Secretary Snow. The rulemaking is still open. We invite 
comments, we invite your comments and others to comment on it.
    Senator Murray. This has raised serious alarms.
    Secretary Snow. Right.
    Senator Murray. Since you oversee that division, I wanted 
you to be aware of it. I want to know that you are aware of it 
and I want to know that you are following up on it.
    Secretary Snow. And I align myself with your comments on 
it. It is very important that we protect taxpayer information.

                      TAXPAYER ASSISTANCE CENTERS

    Senator Murray. I just have 1 minute left here, and I want 
to ask about the reference that I made in my opening comments 
to closing some Taxpayer Assistance Centers, and we found out 
that that was based on faulty data. I would like to find out 
from you whether we should just accept the IRS's arguments on 
other recommendations, or should we now be questioning all of 
those? Since that was based on faulty data, that gives us a lot 
of concern.
    Secretary Snow. I think you have important oversight 
responsibilities, and we benefit from your challenging us and 
raising questions.
    Senator Murray. Has your Department now abandoned any of 
your plans to close any of the Taxpayer Assistance Centers?
    Secretary Snow. Yes, there will be no reduction in service 
contemplated in this budget.

                               BSA DIRECT

    Senator Murray. Let me just comment in my last 10 seconds 
here on the BSA Direct program, and I heard your comments to 
the chairman. With all due respect, I really do appreciate your 
commitment to do better on those procurements, but it is what 
we heard last year. So I would like to follow up with you, I 
know I am out of time, but hear from you what we are going to 
do to make sure we are not sitting here year after year hearing 
the same story on these complex procedures.
    Secretary Snow. Senator, the new Director, Mr. Werner, came 
in and looked at the program and saw that it was missing 
milestones and put a pause on it.
    Senator Murray. Right.
    Secretary Snow. As he follows through on his analysis, I 
will keep the committee fully posted on what we think should be 
done.
    Senator Murray. Thank you very much, Mr. Secretary.
    Senator Bond. Mr. Secretary, I said we were going to 
suspend your testimony at 10:15, but Senator Dorgan has come 
in. Senator, I apologize. We are trying to get the second panel 
on, but if you would like to take 2 minutes for your statement-
question-presentation, and then we will come back after the 
vote to question the second panel.
    Senator Dorgan. Mr. Chairman, that is fair. Senator Burns 
and I have been running another Appropriations subcommittee 
just across the hall.
    Senator Bond. I hope you are doing good things for us. We 
have some ideas.
    Senator Dorgan. We have the Missouri provision in our bill, 
so we think it is going to go pretty well.
    I will be very brief and just make two points to the 
Secretary. I understand the point has already been made about 
the sale of taxpayer information by private preparers to third 
parties. I have sent you a letter about that. Despite the 
explanations of it, I think it is a horrible idea. I think we 
ought to have a pretty aggressive public discussion about 
whether tax preparers under any condition ought to sell 
taxpayer information that they glean in preparing tax returns 
to third parties. I understand that that has been raised.

                              TAX SHELTERS

    I want to show you a picture. This is, Mr. Secretary, a 
picture of a building on Church Street in the Cayman Islands. 
It is called the Ugland House. You may be familiar with it. The 
Ugland House on Church Street is the official residence, 
according to David Evans who did a story at Bloomberg News, for 
12,748 corporations. I know they are not in there, but it's 
what they claim to be their official residence. Why would they 
claim that? There is one purpose, to avoid paying U.S. taxes. 
This is a real crisis. I do not think we have the ability, 
resources or capability at this point to nearly begin to 
address this.
    Here we are in 2006 with 12,748 companies claiming this one 
building as their residence. Trying to force these companies to 
pay taxes is like connecting the ends of two plates of 
spaghetti. The way the IRS goes about it is pretty incompetent 
in my judgment. Second, the law by-and-large favors and gives 
opportunity to companies to do this.
    I hope very much that we will at the Treasury Department 
decide to blow a hole in this kind of practice because it is 
costing us a great deal of lost revenue. It is also unfair to 
ask working families to pay their taxes and then have these 
companies park their address simply for residence purposes at a 
building in the Caymans to avoid paying taxes.
    Secretary Snow. Senator, I look forward to a chance to have 
a good discussion with you on that. The IRS has tried to 
tighten up its enforcement activities in this area, but I 
think, as you said, this also reflects the state of the law, 
and I would hope is part of the broad-based tax reform efforts 
we would look at these issues very, very closely. I agree with 
you.
    Senator Dorgan. It is both the law and enforcement. Maybe 
you and I should just fly down to Church Street at the Caymans 
and park in the lobby there and see who comes and goes from 
that building. Thanks, Mr. Secretary.
    Secretary Snow. Thank you, Senator.
    Senator Bond. Senator Dorgan, I think there is some good 
fishing down there, so maybe we could spend a couple hours down 
there and then see about the other resources.
    Mr. Secretary, thank you very much for being here. Now we 
will call Mr. Levey and Ms. Gardner, and do as much as we can 
before the vote starts.
    Senator Bond. Thank you very much, and we will begin with 
Mr. Levey. Sir.

             Office of Terrorism and Financial Intelligence

STATEMENT OF STUART LEVEY, UNDER SECRETARY
ACCOMPANIED BY:
        JANICE GARDNER, ASSISTANT SECRETARY, OFFICE OF INTELLIGENCE AND 
            ANALYSIS
        ROBERT W. WERNER, DIRECTOR, FINANCIAL CRIMES ENFORCEMENT 
            NETWORK
    Mr. Levey. Thank you, Mr. Chairman, Senator Murray, and 
Senator Dorgan. Thank you for the opportunity to speak before 
you today about the President's 2007 year request for the 
Office of Terrorism and Financial Intelligence at the Treasury 
Department. And thank you especially, Mr. Chairman, for all the 
kind remarks you made in your opening statement. I hope we can 
live up to them.
    The funding that is in the President's budget will provide 
us with the resources needed to support the Department's 
essential and growing terrorist financing, money-laundering, 
WMD proliferation, narco-trafficking, and economic sanctions 
programs, as well as the intelligence capabilities that are 
critical to the success of those programs.
    Treasury has continued, with the strong support of this 
committee, to build much needed resources for the Office of 
Terrorism and Financial Intelligence, and we have achieved some 
important successes. I attribute those successes to the 
unbelievably dedicated work force that I have been blessed 
with, and an extraordinary management team that I work with, 
including Assistant Secretary Gardner, as well as Assistant 
Secretary O'Brien who is here today, the Director of FinCEN, 
Bob Werner who is here, and the Acting Director of OFAC, 
Barbara Hammerle who is also here today, they make my job a 
very easy one.
    Over the past year alone, TFI has designated and 
financially isolated front companies, nongovernmental 
organizations, and facilitators supporting terrorist 
organizations such as al Qaeda, Jemaah Islamiyah, and Egyptian 
Islamic Jihad. We have implemented targeted financial sanctions 
under a new Executive Order aimed at North Korean, Iranian, and 
Syrian facilitators of WMD proliferation, and we have struck a 
deep blow to North Korea's illicit conduct and ability to abuse 
the international financial system to facilitate that conduct. 
Those accomplishments are only the tip of the iceberg, but they 
demonstrate without question not only that our resources are 
being put to good use, but that the Treasury Department is 
fulfilling its vitally important role.
    On terrorist financing, as you note, Mr. Chairman, the 9/11 
Commission's Discourse Project awarded its highest grade, an 
A-, to the U.S. Government's efforts to combat terrorist 
financing. This praise truly belongs to the dedicated 
individuals not only in the Office of Terrorism and Financial 
Intelligence, but our partner agencies around the government 
who aggressively track and combat this threat.
    As you know, Mr. Chairman, from your service on the 
Intelligence Committee, it is very hard to measure success in 
an area like terrorist financing. The meaningful indicators of 
our success are typically complex and not readily quantifiable, 
such as anecdotal reporting about terrorist cells having 
difficulty raising money or paying operatives. We focus on 
those intelligence reports, even though they are often 
fragmentary, and try to identify the difficulties that the 
terrorists are having raising or moving money and adjust to it. 
In recent months we have seen at least one instance of what we 
look for most, a terrorist organization indicating that it 
could not pursue sophisticated attacks because it lacks 
adequate funding.
    We have also seen success, in my view, in preventing 
terrorist financing by deterring would-be donors. In my 
opinion, if we are going to succeed in our fight against 
terrorist financing, we need potential donors to know that 
responsible governments will treat them as the terrorists that 
they are. Those who reach for their wallets to fund terrorism 
must be pursued and punished in the same way as those who reach 
for a bomb or a gun.
    This requires cooperation from other governments, and in 
that regard, I was heartened by a recent statement by the Saudi 
Arabian Foreign Minister, Prince Saud al-Faisal, who publicly 
called for those who support terrorism to be held to account. 
If Saudi Arabia and others in the region see this commitment 
through, it will send a powerful message of deterrence to 
would-be terrorist financiers.
    In other areas of this fight, to be honest, we are not 
where we need to be. State sponsors of terrorism like Iran and 
Syria present a very difficult problem, providing not only 
money and safe haven to terrorists, but also financial 
infrastructure through which terrorists can move, store, and 
launder their funds. Secretary Rice had it right when she 
referred to Iran in particular as the ``central bank of 
terror.''
    While this is a daunting challenge we face, the impact of 
our actions over the past year with respect to Syria show that 
we can make progress in isolating state sponsors of terrorism. 
Among other things, we finalized the designation of the 
Commercial Bank of Syria under section 311 of the PATRIOT Act 
in part because of the risk of terrorist financing posed by a 
bank owned and controlled by an active and defiant state 
sponsor of terror like Syria.
    Success in all of our efforts depends on cooperation from 
responsible financial institutions both in the United States 
and abroad. The recent announcement by UBS that it would cut 
off all business with Iran and Syria provides a notable example 
of a financial institution making clear that the business of 
terrorist states is just not worth the risk. Other financial 
institutions are similarly reviewing their business 
arrangements and taking special precautions to ensure that they 
do not permit terrorist financiers or WMD proliferators, which 
are increasingly able to identify and combat using our new 
authorities, access to the global financial system. On WMD 
proliferation, Mr. Chairman, the exposure of a WMD 
proliferation network headed by A.Q. Khan provided the world 
with a window into one of the most frightening scenarios that 
we face.
    The U.S. Government is doing everything in its power to 
deter, disrupt and prevent the spread of weapons of mass 
destruction and ensure especially that they do not fall into 
the hands of terrorists, and the reason for this is that 
proliferators, just like terrorists, require a substantial 
network to support them. And by cutting off the supply lines of 
that network, we can isolate the individual proliferators, 
paint a clear picture of how and with whom they operate, and 
erode the infrastructure that supports them.
    In June 2005, the President issued a new Executive order 
which allows us to do just that, essentially to apply the same 
tools that we do against terrorist financiers to WMD 
proliferators. A designation under this Executive order cuts 
the target off from access to the U.S. financial and commercial 
system, and puts the international community on notice about 
the threat it poses. Thus far, we have designed a total of 20 
entities for proliferation related to Iran, Syria, and North 
Korea. Our efforts to prepare additional designation packages 
are ongoing, and will continue through the end of this year and 
next. One of our major initiatives in the President's budget is 
a request for 10 additional analysts to work on this program.
    As you noted also, Mr. Chairman, in September 2005, we 
exercised a new authority under the PATRIOT Act, section 311 of 
the PATRIOT Act, to list Banco Delta Asia as a primary money-
laundering concern. The regulatory action against this bank 
that was facilitating a range of North Korean illicit activity 
has dealt a blow to North Korea's ability to engage in illicit 
conduct and obtain financial services to facilitate that 
conduct. As a result of that 311 action against this bank, and 
our office's subsequent and continuing outreach efforts, a 
number of responsible jurisdictions and institutions have taken 
steps to ensure that North Korean entities engaged in illicit 
conduct are not receiving financial services. In fact, press 
reports indicate that some two-dozen financial institutions 
across the globe have cut back or terminated their financial 
dealings with North Korea, thereby constricting the flow of 
dirty cash to Kim Jong-il's regime.

                           PREPARED STATEMENT

    If there is time in the questions and answers, I would like 
to explain to the committee how that worked in more detail.
    Mr. Chairman, I look forward to working closely with you 
and your staff, and thank you again for the opportunity to 
testify today.
    [The statement follows:]

                   Prepared Statement of Stuart Levey

    Chairman Bond, Ranking Member Murray, and other distinguished 
members of the subcommittee, thank you for the opportunity to speak 
before you today about the President's fiscal year 2007 request for the 
Office of Terrorism and Financial Intelligence (TFI) at the Department 
of the Treasury. This funding will provide us with the resources needed 
to support the Department's essential and growing terrorist financing, 
money laundering, WMD proliferation, narco-trafficking, and economic 
sanctions programs, as well as the intelligence capabilities that are 
critical to the success of these programs.
    As you know, TFI is a relatively new office. It was created in 2004 
to oversee the Treasury Department's enforcement and intelligence 
functions aimed at severing the lines of financial support to 
international terrorists, WMD proliferators, narcotics traffickers, and 
other criminals. The office consolidates the policy, enforcement, 
regulatory, and analytical functions of the Treasury and adds to them 
critical intelligence components by bringing under a single umbrella 
the Office of Intelligence and Analysis (OIA), the Office of Terrorist 
Financing and Financial Crimes (TFFC), the Financial Crimes Enforcement 
Network (FinCEN), the Office of Foreign Assets Control (OFAC), and the 
Executive Office for Asset Forfeiture. TFI also works closely with the 
IRS-Criminal Investigative Division in its anti-money laundering, 
terrorist financing, and financial crimes cases.
    Together, we leverage a wide range of tools to pressure 
obstructionist regimes. Using various authorities, we also have the 
ability to freeze the assets of terrorists, proliferators, and other 
wrongdoers. We use regulatory authorities to help banks and other 
institutions implement systems to detect and halt corrupt money flows. 
And, diplomatically, we work with other governments and international 
institutions, urging them to act with us against threats and to take 
critical steps to stem the flow of illicit finances.

                            KEY ACHIEVEMENTS

    As Treasury has continued--with your support--to build much-needed 
resources for this new office, we have achieved some important 
successes. Over the past year alone, TFI has designated and financially 
isolated front companies, non-governmental organizations, and 
facilitators supporting terrorist organizations, such as al Qaeda, 
Jemaah Islamiyah, and Egyptian Islamic Jihad; implemented targeted 
financial sanctions under a new Executive order against North Korean, 
Iranian, and Syrian facilitators of WMD proliferation; and struck a 
deep blow to North Korea's illicit conduct and ability to abuse the 
international financial system to facilitate that conduct. These 
efforts have required a contribution from all of TFI's components, as 
well as the hard work of other Departments and agencies.
    These accomplishments are only the tip of the iceberg, but they 
demonstrate without question not only that our resources are being put 
to good use, but that the Treasury Department is fulfilling its vitally 
important role to play in deterring and defending against our country's 
greatest national security challenges. Our financial authorities 
complement other national security instruments, providing policymakers 
with a range of options for isolating and pressuring hostile regimes, 
terrorists, and proliferators of weapons of mass destruction. When we 
are confronted with a foreign threat that is not susceptible to 
diplomatic pressure, financial authorities are among the rare tools 
short of military force that we can use to exert leverage.
    I would like to highlight some of TFI's key achievements in greater 
detail.

Terrorist Finance
    The 9/11 Commission's Public Discourse Project awarded its highest 
grade, an A-, to the U.S. Government's efforts to combat terrorist 
financing. This praise truly belongs to the dozens of intelligence 
analysts, sanctions officers, regional specialists, and regulatory 
experts in the Treasury's Office of Terrorism and Financial 
Intelligence (TFI) who focus on terrorist financing, along with their 
talented colleagues in other agencies--law enforcement agents who 
investigate terrorism cases, Justice Department prosecutors who bring 
terrorist financiers to justice, foreign service officers in embassies 
around the world who seek cooperation from other governments and many 
others from the intelligence community. You will not find a more 
talented and dedicated group of people, with a complete focus on the 
mission.
    Teamwork across agencies has translated into effectiveness. We have 
continued to improve our ability to track key targets and to take the 
most appropriate action against the terrorist target. Sometimes that 
means that the Treasury will take public action, sometimes it involves 
persuading another country to take action, and sometimes we decide to 
continue to quietly collect intelligence to better map out the 
terrorist network. From the formation of TFI, we have been committed to 
that philosophy, resisting the application of metrics to our activities 
that would distort our incentives, for example, by emphasizing the 
number of terrorism designations.
    The meaningful indicators of our success are typically complex and 
not readily quantifiable, such as anecdotal reporting about terrorist 
cells having difficulty raising money or paying salaries or benefits. 
In recent months, we have seen at least one instance of what we look 
for most--a terrorist organization indicating that it cannot pursue 
sophisticated attacks because it lacks adequate funding.
    Typically, though, the information we receive is not as clear. As 
an example, one interesting trend that we have witnessed is a decrease 
in the average amount of transactions that we learn about. Obviously, 
we are only privy to a subset of the total transactions, but this 
observation carries across various financial conduits and terrorist 
organizations and we have no reason to believe that it is 
unrepresentative. Interpreting this indicator is more difficult. It 
could reflect an overall decrease in the amount of money moving to and 
from terrorists. Just as easily, it could indicate that terrorists are 
breaking their transactions out into smaller sums, fearing 
interception. Alternatively, the trend could be an outgrowth of a 
movement by terrorist organizations away from banks towards less formal 
mechanisms, like cash couriers. These couriers may offer concealment, 
but some get caught and some get greedy, and so it is very risky to 
entrust them with large sums of money. Any of these alternatives would 
indicate that our efforts are having an impact and this trend may bear 
out our assessment that terrorists who fear using the banking system do 
not have a ready and reliable alternative for moving large sums of 
money. We will continue to monitor developments, but I hope this 
provides a sense of how complex a task it is to assess the overall 
impact of our efforts to combat terrorist financing.
    In specific areas, we can point to more concrete indicators of 
success. We have made dramatic progress in combating terrorist abuse of 
charities. Prior to 9/11 and even afterwards, terrorists used charities 
as safe and easy ways to raise and move large sums of money. Al Qaeda 
and Hamas, in particular, relied on charities to funnel money from 
wealthier areas to conflict zones with great success. Through a 
combination of law enforcement and regulatory actions against several 
corrupt charities, both at home and abroad, we have taken out key 
organizations and deterred or disrupted others. In tandem, active 
engagement with the legitimate charitable sector has succeeded in 
raising transparency and accountability across the board.
    We have thus far designated more than 40 charities worldwide as 
supporters of terrorism, including several U.S. charities such as the 
Holy Land Foundation, the Global Relief Foundation, the Benevolence 
International Foundation, the Al Haramain Islamic Foundation, and the 
Islamic African/American Relief Agency (IARA). The impact of these 
actions is serious, and sometimes decisive. IARA once provided hundreds 
of thousands of dollars to Osama bin Laden. More recently, IARA country 
offices have experienced increased pressure and its leaders have 
expressed concern about the organization's future.
    Our most recent action targeted KindHearts, a purported charity in 
Ohio that was supporting Hamas. In that instance, we took coordinated 
action with DOJ prosecutors and the FBI, which executed a search 
warrant at the moment that we froze the group's assets. Although we 
generally do not disclose specific blocked asset information, 
KindHearts has stated that over $1 million of its assets were blocked. 
Overall, engagement with the charitable sector combined with 
enforcement actions against bad organizations have radically altered 
the dynamic, leaving dirty charities isolated and imperiled.
    Another important measure of our progress is an increase in the 
number of countries approaching the U.N. Security Council to seek the 
designation of terrorist supporters. This global designation program, 
overseen by the U.N.'s 1267 Committee, is a powerful tool for global 
action against supporters of al Qaeda. It envisages 191 U.N. Member 
States acting as one to isolate al Qaeda's supporters, both physically 
and financially. Increasingly, countries have begun to look to this 
committee, and administrative measures in general, as an effective 
complement to law enforcement action. In 2005, 18 Member States 
submitted names for the Committee's consideration, many for the first 
time, and we will continue to support this process and encourage others 
to do so as well.
    In other arenas of this fight, however, we are not where we need to 
be. State sponsors of terrorism, like Iran and Syria, present a vexing 
problem, providing not only money and safe haven to terrorists, but 
also a financial infrastructure through which terrorists can move, 
store, and launder their funds. While this is a daunting challenge, I 
believe that the Treasury Department's tools, combined with cooperation 
from responsible financial institutions, can make a difference. In the 
past year, for example, we have designated top Syrian officials, 
including the then-interior minister Ghazi Kanaan and the head of 
Syrian Military Intelligence, Assaf Shawkat, in part for their support 
to terrorist organizations. Also, on March 9, we issued a final rule 
under Section 311 of the PATRIOT Act confirming that the Commercial 
Bank of Syria (CBS) is a ``primary money laundering concern'' and 
forbidding U.S. financial institutions from holding correspondent 
accounts for CBS. Among our reasons for that action was the risk of 
terrorist financing posed by a significant bank owned and controlled by 
an active and defiant state sponsor of terror like Syria.
    We have ample reason to believe that responsible financial 
institutions around the world pay close attention to such actions and 
other similar indicators and adjust their business activities 
accordingly, even if they are not required to do so. A recent example 
of interest was the announcement by the international bank UBS that it 
intended to cut off all business with Iran and Syria. Other financial 
institutions are similarly reviewing their business arrangements and 
taking special precautions to ensure that they do not permit terrorist 
financiers or WMD proliferators--which we are increasingly able to 
identify and combat using a new authority--access to the global 
financial system.
WMD Proliferation
    The exposure of the WMD proliferation network headed by A.Q. Khan--
father of Pakistan's nuclear bomb and, more recently, nuclear 
technology dealer to Libya, Iran, and North Korea--provided the world 
with a window into one of the most frightening scenarios that we face. 
The U.S. Government is doing everything in its power deter, disrupt, 
and prevent the spread of weapons of mass destruction and ensure that 
they do not fall into the hands of terrorists. Treasury plays a key 
role in this effort.
    Proliferators, like terrorists, require a substantial support 
network. By cutting off the support lines of that network, we can 
isolate individual proliferators, paint a clearer picture of how, and 
with whom, they operate, and erode the infrastructure that supports 
them. In June 2005, the President issued Executive Order 13382, which 
allows us to do just that.
    This Executive Order authorizes the Treasury and State Departments 
to target key nodes of WMD proliferation networks, including their 
suppliers and financiers. A designation under this Executive Order cuts 
the target off from access to the U.S. financial and commercial systems 
and puts the international community on notice about the threat it 
poses. Based on evidentiary packages prepared primarily by OFAC, the 
President initially designated a total of eight entities in North 
Korea, Iran, and Syria. Continuing investigations by OFAC resulted in 
the subsequent designation of eight additional North Korean, and two 
additional Iranian, entities. And, just last week, Treasury designated 
two more proliferators, Kohas AG and its president, Jakob Steiger. 
Kohas AG, a Swiss company, acts as a technology broker in Europe for 
the North Korean military and has procured goods with weapons-related 
applications. Nearly half of the company's shares are owned by a 
subsidiary of Korea Ryonbong General Corporation, a previously-
designated North Korean entity that has been a focus of U.S. and allied 
efforts to stop the spread of controlled materials and weapons-related 
goods, particularly ballistic missiles.
    OFAC's efforts to prepare additional designation packages--with the 
support of the Office of Intelligence and Analysis--are ongoing and 
will continue throughout fiscal years 2006 and 2007. In fact, one major 
OFAC initiative for 2007, which I will discuss shortly, relates 
directly to the WMD program.
    This new authority provides a powerful tool to combat the financial 
underpinnings of WMD proliferation and also underscores the President's 
commitment to work with our international partners to combat this 
threat. We hope our program can provide a model for other governments 
to draw upon as they develop their own laws to stem the flow of 
financial and other support for proliferation activities, as called for 
in U.N. Security Council Resolution 1540 and by the G-8 at Gleneagles.
    The Treasury and State Departments have been engaged in aggressive 
international outreach in order to promote this important concept. 
Assistant Secretary Pat O'Brien, Deputy Assistant Secretary Daniel 
Glaser, and I have met with our counterparts in a number of countries 
in Europe, Asia, and the Middle East to urge them to ensure that U.S.-
designated proliferators are not able to do business in their countries 
and to develop their own 13382-like authorities.
    Although our WMD program is in its early stages, and while I am 
limited in what I can say in this public forum, I am pleased to be able 
to assure you that, through cooperation with both governments and the 
private sector, we are already seeing an impact on our targets. Indeed, 
this program has significantly enhanced the U.S. Government's overall 
counterproliferation efforts.
Section 311 Designation of Banco Delta Asia SARL
    In September 2005, not long after the President signed this new WMD 
Executive Order, the Treasury Department used a separate authority--
Section 311 of the USA PATRIOT Act (PATRIOT Act)--to list Banco Delta 
Asia SARL (BDA) as a ``primary money laundering concern.'' This 
regulatory action against a bank facilitating a range of North Korean 
illicit activities has dealt a blow to Pyongyang's ability to engage in 
illicit conduct and obtain financial services to facilitate that 
conduct. Along with our offensive targeting of several entities under 
E.O. 13382 for supporting North Korea's WMD and missile proliferation-
related activities, it has frustrated North Korea's efforts to conduct 
proliferation-related transactions.
    Section 311 authorizes the Secretary of the Treasury--in 
consultation with the Departments of Justice and State and appropriate 
Federal financial regulators--to find that reasonable grounds exist for 
concluding that a foreign jurisdiction, institution, class of 
transactions, or type of account is of ``primary money laundering 
concern'' and to require U.S. financial institutions to take certain 
``special measures'' against those jurisdictions, institutions, 
accounts, or transactions. Potential measures include requiring U.S. 
financial institutions to terminate correspondent relationships with 
the designated entity. Such a defensive measure effectively cuts that 
entity off from the U.S. financial system. It has a profound effect, 
not only in insulating the U.S. financial system from abuse, but also 
in notifying financial institutions and jurisdictions globally of an 
illicit finance risk.
    The success of the BDA action offers an instructive case study of 
the impact of this authority. BDA provided financial services for over 
20 years to North Korean government agencies and front companies, some 
of which were engaged in illicit activities, including currency 
counterfeiting, narcotics trafficking, production and distribution of 
counterfeit cigarettes and pharmaceuticals, and the laundering of the 
associated proceeds. We also know that North Korean entities engaged in 
WMD proliferation, including Tanchon Bank--the primary financial 
facilitator of North Korea's ballistic missile program--held accounts 
at BDA. BDA tailored its services to the needs and demands of North 
Korean entities with little oversight or control. In fact, bank 
officials intentionally negotiated a lower standard of due diligence 
with regard to the financial activities of these clients.
  --BDA helped North Korean agents conduct surreptitious, multimillion 
        dollar cash deposits and withdrawals without question for the 
        basis of those transactions.
  --BDA knowingly accepted counterfeit currency from North Korean 
        companies. In that regard, it is worth noting that the U.S. 
        Secret Service has been investigating North Korean 
        counterfeiting since 1989, and, over the past 16 years, has 
        seized more than $48 million in high quality U.S. currency, or 
        ``supernotes.''
  --A well-known North Korean front company that has been a client of 
        BDA for over a decade has conducted numerous illegal 
        activities, including distributing counterfeit currency and 
        smuggling counterfeit tobacco products. In addition, the front 
        company has also long been suspected of being involved in 
        international drug trafficking.
    Treasury's ongoing investigation of BDA has not only confirmed our 
original concerns about BDA's complicity in facilitating this type of 
conduct, but has shed additional light on the wide spectrum of North 
Korea's corrupt and dangerous activities, as well as its vast illicit 
financial network.
    As a result of the 311 action against BDA and TFI's subsequent and 
continuing international outreach efforts, a number of responsible 
jurisdictions and institutions have taken proactive steps to ensure 
that North Korean entities engaged in illicit conduct are not receiving 
financial services. Press reports indicate that some two dozen 
financial institutions across the globe have cut back or terminated 
their financial dealings with North Korea, constricting the flow of 
dirty cash into Kim Jong Il's regime.
    Treasury's efforts with respect to Banco Delta Asia, specifically, 
and combating North Korea's illicit activities, more generally, are 
ongoing. The Internal Revenue Service--Criminal Investigation Division 
is leading an investigation to exploit underlying North Korean account 
information at Banco Delta Asia provided by the Macau authorities. This 
investigation will allow the United States to gain an even greater 
understanding of the illicit activities highlighted in our Section 311 
designation, and to uncover additional leads regarding DPRK entities of 
concern. Additionally, TFI officials continue international outreach 
efforts to raise awareness of North Korea's illicit conduct, explain 
the actions that Treasury has taken, and encourage governments and 
institutions to not to do business with individuals and entities 
engaged in illicit conduct. By all accounts, that outreach is working.

              OVERVIEW OF THE FISCAL YEAR 2007 TFI REQUEST

    The 2007 request of $135.2 million for TFI, including $89.8 million 
for the Financial Crimes Enforcement Network, provides critical funding 
to expand TFI's ability to combat terrorist financing and other key 
national security challenges. It will allow us to continue and build 
upon these past achievements and current efforts. I know the members of 
the subcommittee are aware of this request in detail, so I will just 
touch on a few important highlights of new initiatives.

Office of Intelligence and Analysis
    TFI's Office of Intelligence and Analysis (OIA) was created to 
focus expert analytical resources on the financial and other support 
networks of terrorists, WMD proliferators, and other key national 
security threats. Over the past year, OIA has assumed an increasingly 
important role in the Treasury's efforts to combat key national 
security threats in Iran, Syria, and North Korea. OIA's top strategic 
priority is to provide policymakers with relevant intelligence and 
expert analysis to support policy formulation and carry out the 
Treasury's role in the war on terror. Other OIA strategic priorities 
include providing intelligence support to senior Treasury officials on 
the full range of economic and political issues and communicating with 
other members of the Intelligence Community.
    As Assistant Secretary Janice Gardner will describe shortly, the 
2007 request provides funding for OIA to continue its efforts to build 
Treasury's intelligence capabilities by improving its key 
infrastructure and adding to its analytic breadth and expertise.

Office of Foreign Assets Control
    The Office of Foreign Assets Control (OFAC) administers and 
enforces economic and trade sanctions based on U.S. foreign policy and 
national security goals against targeted foreign countries, terrorists, 
international narcotics traffickers, and those engaged in activities 
related to the proliferation of weapons of mass destruction. Since 
receiving expanded designation authority in 2001, the United States has 
designated 428 terrorist-related individuals and entities; 320 of those 
designations have been carried out in coordination with our allies and 
designated at the United Nations. The fiscal year 2007 budget provides 
additional resources for OFAC to monitor and update existing 
designations and track the development of new support structures and 
funding sources. It includes:
  --Ten additional positions to continue to implement and administer 
        the new Executive Order 13382, combating the proliferation of 
        weapons of mass destruction.
  --Fifteen additional positions to monitor and update existing 
        terrorist designations. This is critical given that Specially 
        Designated Global Terrorists and their support networks 
        continuously seek new ways of evading U.S. and international 
        sanctions by changing the names and locations of front 
        companies and altering their financing methods.

Office of Terrorist Financing and Financial Crime
    As the policy development and outreach office for TFI, the Office 
of Terrorist Financing and Financial Crime (TFFC) collaborates with the 
other elements of TFI to develop policy and initiatives for combating 
money laundering, terrorist financing, WMD proliferation, and other 
criminal activities both at home and abroad. TFFC works across the law 
enforcement, regulatory and intelligence communities and with the 
private sector and its counterparts abroad to identify and address the 
threats presented by all forms of illicit finance to the international 
financial system. TFFC advances this mission by promoting the 
transparency of the financial system and by developing and facilitating 
the global implementation of targeted financial authorities to identify 
and intercept those illicit actors that operate within the financial 
system. TFFC's efforts focus on:
  --developing and facilitating the implementation of global anti-money 
        laundering and counter-terrorist financing standards, primarily 
        by working with and through the Financial Action Task Force the 
        various regional bodies, including the IMF and World Bank and 
        each of the regional development banks;
  --promoting the development of effective targeted financial sanction 
        regimes and the use of other targeted financial authorities 
        through the G7, G20, FATF, United Nations, European Union, and 
        bilaterally with countries of strategic importance;
  --addressing financing mechanisms of particular concern by developing 
        AML/CFT protective measures, initiatives, and best practices in 
        vulnerable sectors such as charities, alternative value 
        transfer systems and emerging payment systems; and
  --conducting direct outreach to the domestic and international 
        private sector to facilitate and improve development and 
        implementation of sound AML/CFT controls.
    In all of these areas, TFFC relies on and works closely with other 
elements of TFI, the Treasury Department, the interagency and 
international communities to effectively combat the threats that 
illicit finance presents to the international financial system. 
Recently, for example, TFFC worked closely with 16 Federal bureaus and 
offices from across the law enforcement, regulatory, and policy 
communities to produce the U.S. Government's first-ever Money 
Laundering Threat Assessment. This working group pulled together arrest 
and forfeiture statistics, case studies, regulatory filings, private 
and government reports, and field observations. The report analyzes 
more than a dozen money laundering methods and serves as a first step 
in a government-wide process to craft strategic ways to counteract the 
vulnerabilities identified.
    The fiscal year 2007 request continues the administration's support 
of TFFC's important efforts.

Treasury Overseas Presence
    Treasury attaches serve as the U.S. Treasury's representatives in 
key economies overseas. Because of their technical expertise, Treasury 
attaches enjoy unique access to foreign Ministries of Finance and 
Central Banks. This access provides the U.S. Government with a direct 
channel to key decisionmakers on economic policy issues, including 
foreign exchange policy and financial service regulatory policies. 
Working in tandem with TFI and Treasury's Office of International 
Affairs, Treasury attaches will be working to prevent the abuse of the 
international financial system for terrorist finance, money laundering, 
or other illicit purposes.
  --Treasury proposes to increase its overseas presence from 5 attaches 
        to 18 attaches in fiscal year 2007.

Financial Crimes Enforcement Network
    TFI's Financial Crimes Enforcement Network (FinCEN) helps to 
safeguard the U.S. financial system from the abuses of financial crime, 
including terrorist financing, money laundering, and other illicit 
activity. This is accomplished primarily through the Bank Secrecy Act, 
which requires financial institutions to report financial transactions, 
such as suspicious activities that may be indicative of financial 
crimes. FinCEN also supports law enforcement, intelligence, and 
regulatory agencies through sharing and analysis of financial 
intelligence, and building global cooperation with financial 
intelligence units (FIUs) in other countries. The fiscal year 2007 
request provides additional resources to FinCEN to streamline data 
processing and enhance its e-filing capabilities to increase the ease 
of compliance with regulations and improve its abilities to track 
users' needs. It includes:
  --Enhancing components of the BSA Direct Umbrella System, including 
        electronic filing and secure access components. Although FinCEN 
        has entered a stop work order with respect to development of 
        the data storage and retrieval component of the BSA Direct 
        system in order to permit it to assess delays in deploying this 
        component, both the electronic filing component and secure 
        access components are presently operational and need to be 
        upgraded to allow direct input of the BSA filings into the 
        collection system and meet expanded user base.
  --Development funding for FinCEN's Cross-Border Wire Transfer System 
        Initiative. The authorizing language (Section 6302 of the 
        Intelligence Reform Act of 2004 (S. 2845 Public Law 108-458)) 
        presents the Bureau with two tasks: (1) a feasibility study to 
        be completed as soon as practicable; and (2) the implementation 
        of enabling regulations and a technological system for 
        receiving, storing, analyzing, and disseminating the reports, 
        to be completed by December 2007. The feasibility study will 
        address whether it is possible to complete the development and 
        implementation of the system by the statutory deadline of 
        December 2007. We anticipate delivery of the study to the 
        Secretary of the Treasury by late spring 2006.

                               CONCLUSION

    Mr. Chairman, the Treasury Department--working closely with other 
Departments and agencies across the U.S. Government--is playing a key 
role in deterring and defending against the greatest threats to our 
security. Indeed, we have achieved some important successes in our 2-
year history. I look forward to working closely with you, other members 
of the committee, and your staff to ensure that TFI has the resources 
it needs in fiscal year 2007 to build upon that success. Together we 
can work to maximize the Treasury Department's ability to protect the 
American people.
    Thank you again for the opportunity to testify today.

    Senator Bond. Thank you, Mr. Levey.

                      STATEMENT OF JANICE GARDNER

    Ms. Gardner. Good morning, Chairman Bond and Ranking Member 
Murray. I thank you for the opportunity to testify today on the 
budget for the Office of Intelligence and Analysis.
    I would like to request a copy of our report for fiscal 
year 2006 to 2008, our Strategic Direction, to be entered into 
the record. We produced this report for your committee in 
response to the conference report accompanying the fiscal year 
2006 appropriations bill. The report defines our mission, 
establishes strategic objectives, and outlines OIA's priorities 
and direction for the next several years.
    Senator Bond. Without objection.
    [The information follows:]

    
    
    
    Ms. Gardner. In addition, it describes the role that OIA 
plays in the Treasury Department's intelligence activities, and 
expands on OIA's efforts to better integrate the office with 
the rest of the Intelligence Community.
    As you know, OIA was established by the intelligence 
authorization bill in 2004, and prior to the creation of OIA, 
Treasury did not have an in-house dedicated intelligence 
analytical element. Our mission is to support the formulation 
of policy and execution of Treasury's authorities, and it is 
twofold. One is to support TFI in providing expert analysis of 
intelligence on financial and other support networks for 
terrorist groups, proliferators, and other key national 
security threats. But also to provide timely, accurate and 
focused intelligence on the full range of economic, political, 
and security issues for the Secretary, the Deputy Secretary, 
and the Office of International Affairs.
    While we are still a fairly new entity, we have taken a 
number of significant steps in 2005 toward building the robust 
intelligence and analytical program necessary to fulfill our 
mission. We are trying to transform Treasury from a passive 
consumer of analytical and intelligence products, to becoming a 
full member of the Intelligence Community, and we are building 
a foundation to become a true center of expertise on material 
support to terrorist organizations.
    The funding allocated by Congress for fiscal year 2006 is 
allowing us to make significant additional improvements in a 
number of areas. For example, we have completed a research and 
production plan for fiscal year 2006 to help guide our 
activities during the upcoming year. The plan was coordinated 
with our primary customers including within TFI, but also the 
entire Intelligence Community and the National Security Council 
to ensure that our priorities are aligned with the 
administration.
    In particular, we are trying to improve our understanding 
of insurgency financing in fiscal year 2006 primarily through 
the Baghdad-based Iraq Threat Finance Cell that you had 
mentioned, Mr. Chairman, for which Treasury serves as the co-
lead with CENTCOM at DOD. ITFC was established to enhance the 
collection, analysis, and dissemination of intelligence to 
combat the Iraqi insurgency, and that kind of intelligence is 
really critical to support and strengthen U.S. and Iraqi 
coalition efforts to disrupt and eliminate financial and other 
material support to the insurgency. In fact, the Treasury's 
presence in Iraq on ITFC is already paying some dividends. More 
and better detailed information on the insurgency financing 
issues is becoming available. In addition, the financial 
intelligence analysts have provided great support to the 
military in identifying trends and patterns in insurgency 
financing in the context of a cash-based economy like Iraq.
    The funding request for fiscal year 2007 will enable OIA to 
continue its efforts to build our intelligence capabilities by 
improving key infrastructure and adding to our analytical 
breadth and depth on terrorist financing and the financial 
underpinnings of other national security threats.
    Let me just briefly mention the initiatives that we have. 
The first one was one that you had mentioned, the Treasury 
Foreign Intelligence Network, which is the sole source of top 
secret information into the Treasury Department. When TFI was 
created, our counterterrorism-related responsibilities were 
expanded dramatically, and the current system has not been 
modified or updated to keep pace with changes in either 
intelligence user or technological requirements. The operating 
system is no longer supported, and our frequent crashes have 
been preventing senior Treasury officials from receiving 
intelligence in a timely manner. What we will be doing in 
response to some of your concerns on the IT management, we have 
tried to leverage the expertise of the Intelligence Community, 
so they are helping us so that we are not reinventing the 
wheel, and we are taking off-the-shelf software and hardware. 
We are also using the CIA to help do the project management for 
us, so we have two levels of oversight. We have asked the DNI's 
office, the Director of National Intelligence, to also take a 
look. They have a new CIO, and they are coming also to take a 
look at us to make sure that we are on the right track. So we 
are ensuring that we do have the proper project management 
discipline in place that the Secretary has mentioned.
    In addition to TFIN, we have an initiative for All Source 
Analysis Capability. As Under Secretary Levey mentioned, over 
the past year as OIA has grown, policy makers both at Treasury 
and at the White House have become more aware of Treasury's 
capabilities, and OIA has increasingly been tasked with 
addressing the most pressing national security issues. Given 
our small size, we have gone from zero analysts in the 
beginning of fiscal year 2005, to 53 analysts, and will 
hopefully have 15 more. Bringing these new analysts on board as 
quickly as possible is essential to our continued success, and 
these additional positions will allow us to engage in increased 
analytical exchanges with other national security and 
Intelligence Community agencies, and this also includes our 
effort to sustain the effort in Baghdad.

                           PREPARED STATEMENT

    Finally, one more initiative that is important is our 
secure space. As you know, OFAC also is going to be growing in 
terms of its terrorism and WMD designation programs, and 
together we are going to try to make sure that we have the 
secure space available to house these new analysts.
    Thank you very much for your continued support, and for 
your comments this morning.
    [The statement follows:]

                  Prepared Statement of Janice Gardner

    Chairman Bond, Ranking Member Murray, and members of the 
subcommittee, I thank you for the opportunity to testify today on the 
Office of Intelligence and Analysis' 2007 budget request. The 
Department of the Treasury greatly appreciates the committee's support 
to this point for our efforts to establish and build the Office of 
Intelligence and Analysis (OIA).
    I request that a copy of OIA's report on its fiscal year 2006-2008 
strategic direction be entered into the record. We produced this report 
for your committee in response to the conference report accompanying 
the fiscal year 2006 appropriations bill. OIA was required to submit a 
report that detailed ``how OIA will implement the purpose of the Office 
as intended by the Congress.'' OIA's report defines its mission, 
establishes strategic objectives, and outlines OIA's priorities and 
direction for the next several years. In addition, it describes the 
role that OIA will play in the Treasury Department's intelligence 
activities, and expands on OIA's plans to better integrate the office 
into the Intelligence Community (IC). We hope that the committee 
members will find the report to be helpful as they consider OIA's 2007 
budget request.
    I will discuss a number of the themes covered in the OIA report in 
my prepared remarks today. I will provide some background on our 
office, provide an overview of the significant progress we made in 
fiscal year 2005, update you on where we stand with our fiscal year 
2006 efforts, and explain how we would plan to use the funds we have 
requested in fiscal year 2007.

                           BACKGROUND ON OIA

    OIA was established by the Intelligence Authorization Act for 
fiscal year 2004. The Act specifies that OIA shall be responsible for 
the receipt, analysis, collation, and dissemination of foreign 
intelligence and foreign counterintelligence information related to the 
operation and responsibilities of the Department of the Treasury. Prior 
to the creation of OIA, Treasury did not have an in-house intelligence 
analytic element.
    On April 28, 2004, Secretary of the Treasury John Snow established 
the Office of Terrorism and Financial Intelligence (TFI) by Treasury 
Order, which placed OIA within TFI. As the Assistant Secretary, I 
report directly to Under Secretary Levey, who heads TFI.
    OIA's mission is to support the formulation of policy and execution 
of Treasury authorities by:
  --Producing expert analysis of intelligence on financial and other 
        support networks for terrorist groups, proliferators, and other 
        key national security threats, and
  --Providing timely, accurate, and focused intelligence on the full 
        range of economic, political, and security issues.

                SIGNIFICANT PROGRESS IN FISCAL YEAR 2005

    While OIA is still a fairly new entity, it took a number of 
significant steps in 2005 towards building the robust intelligence and 
analytic program necessary to fulfill its critical mission. Moving the 
OFAC Foreign Terrorist Division (FTD) analysts to OIA was instrumental 
in transforming Treasury from a passive consumer of analytic and 
intelligence products to a full contributing member of the IC. OIA has 
been using the expertise of these analysts--as well as that of the new 
hires--as a foundation for a true center of expertise on material 
support to terrorist organizations. As a result, OIA has considerably 
improved its analytic coverage and capability in priority areas, such 
as Iraqi insurgency funding.
    OIA's top priority, as we mentioned in our report to your 
committee, is to help translate intelligence into policy. OIA analysts 
conduct ``all source'' analysis, regularly reviewing a broad range of 
information from the IC, including human and signals intelligence 
reports, other agencies' analytic assessments, as well as open source 
information. OIA's role in this regard is to then ensure that the 
current intelligence information and analysis are incorporated into all 
aspects of policy deliberations. OIA took several steps in 2005 to 
address this objective.
  --Perhaps most significantly, OIA initiated weekly targeting 
        sessions, which are led by Under Secretary Levey and include 
        officials from OIA, OFAC, and FinCEN as well. At these 
        sessions, potential targets are presented and discussed. The 
        participants assess the full range of potential Treasury 
        actions, including designation, and then assign follow up 
        action.
  --OIA also began producing analytic papers for Under Secretary Levey, 
        primarily on nongovernmental organizations (NGOs), which may be 
        providing support to terrorists. Under Secretary Levey has 
        passed a number of these papers to the foreign governments 
        where these NGOs are based, asking them to take appropriate 
        action. He has then followed up to ensure that the governments 
        are taking the necessary steps to put a halt to this activity.
    In addition to these diplomatic papers, in 2005 Treasury's 
intelligence office prepared a number of other all source intelligence 
analytic products on terrorist financing and other national security 
threats. In fact, OIA has disseminated over 50 cables to the IC over 
the past year. OIA analysts also participated in the drafting and 
coordination on a variety of IC analytic products. These include:
  --National Intelligence Estimates;
  --CIA studies; and
  --Articles for senior administration officials, such as the Senior 
        Executive Intelligence Brief.
    There were two key reasons why OIA was able to improve its 
capability to produce all source intelligence analytic products. First, 
Treasury--through OIA--is becoming far better integrated into the IC 
than it has been in the past. In 2005, OIA hired its first full time 
Requirements Officer, who has played a key role in bringing OIA into 
the IC. This officer is sending in specific questions and inquiries on 
behalf of all Treasury entities, including OFAC, to the IC. In these 
``requirements submissions'' Treasury includes comprehensive background 
information as well as a detailed statement of Treasury's intelligence 
gaps to help focus the IC on Treasury's needs. In response to these 
detailed requirements, Treasury has received a greatly increased level 
of tailored support from the IC.
    Second, OIA has also built its analytic expertise and improved its 
access to intelligence information by establishing detail arrangements 
with various intelligence, law enforcement and military agencies. These 
detail assignments include:
  --Military.--OIA has analysts detailed to 3 of the military 
        commands--CENTCOM, PACOM, and EUCOM--and a military officer 
        from CENTCOM is assigned to OIA. OIA also has an established 
        liaison relationship with SOUTCOM. SOCOM is also preparing to 
        assign an officer to OIA.
  --Law Enforcement.--The FBI has detailed an intelligence analyst to 
        OIA.
  --Intelligence.--A representative from NSA is assigned to OIA to 
        provide support to senior Treasury officials.
    In 2005, OIA also began to build its analytic expertise and 
coverage in another key area--proliferation financing. The Treasury 
Department's ability to target proliferators of weapons of mass 
destruction (WMD) was enhanced in June, 2005 with the issuance of 
Executive Order 13382. This order applies the same tools Treasury has 
used to successfully block the assets of terrorist supporters to those 
who aid in the spread of WMD. OIA analysts were integrally involved in 
supporting OFAC in developing the designation targets listed in the 
annex of the Executive Order, and continue to assist OFAC investigators 
in identifying intelligence reporting that may be useful to support 
future designations.

        BUILDING ANALYTIC COVERAGE AND DEPTH IN FISCAL YEAR 2006

    The funding allocated by the Congress for fiscal year 2006 is 
allowing OIA to make significant additional improvements in a number of 
areas this year. For example, the additional personnel and the 
infrastructure improvements funded in fiscal year 2006 are enabling OIA 
to increase its analytic coverage and to further develop its expertise 
on the financial aspects of key threats to U.S. national security, 
including terrorism and WMD proliferation.
    In fiscal year 2006, OIA analysts will be completing strategic 
research papers on high priority terrorist and proliferation financing 
topics. OIA has completed a research and production plan for fiscal 
year 2006 to help guide OIA's activities during the upcoming year. The 
plan was coordinated with OIA's primary customers, including TFFC, 
OFAC, and FinCEN, and is consistent with IC, NSC, and Treasury 
priorities.
  --Terrorist Financing.--Over the past several years, the terrorist 
        threat has become far more decentralized in nature, and many 
        terrorist groups affiliated with al Qaida increasingly pose a 
        serious threat to U.S. national security. In fiscal year 2006, 
        OIA will continue to develop its analytic expertise and expand 
        its analytic coverage on the financial and other support 
        networks of the various terrorist groups and networks bent on 
        attacking the United States and its allies.
  --Insurgency Financing.--OIA will attempt to improve its 
        understanding of the insurgency financing in fiscal year 2006, 
        primarily through the Baghdad-based Iraq Threat Finance Cell 
        (ITFC) for which Treasury serves as the co-lead with Department 
        of Defense. ITFC was established to enhance the collection, 
        analysis and dissemination of intelligence to combat the Iraqi 
        insurgency. Such intelligence is critical to support and 
        strengthen U.S., Iraqi and Coalition efforts to disrupt and 
        eliminate financial and other material support to the 
        insurgency.
    --In fact, the Treasury presence in Iraq on the ITFC is already 
            paying dividends. More and better detailed information on 
            the insurgency finance issues is becoming available. In 
            addition, the financial intelligence analysts have provided 
            great support to the military in identifying trends and 
            patterns in insurgency financing in the context of a cash-
            based economy.
  --Rogue Regimes/Proliferation Financing.--Over the past year, OIA has 
        assumed an increasingly important role in Treasury's effort to 
        combat national security threats, including rogues regimes 
        involved in WMD proliferation, such as Iran, Syria, and North 
        Korea. In fiscal year 2006, OIA is continuing to build on its 
        nascent effort in this critical area.
    To accommodate its rapid growth, and to achieve the ambitious goals 
that have been laid out for OIA, we have developed a hiring strategy to 
ensure that we are recruiting a high quality work force with the 
appropriate skill mix. OIA has been taking advantage of a number of 
different recruiting fora and using a variety of Federal recruiting 
programs, such as the Presidential Management Fellows Program. In terms 
of our analytic hires, OIA is hiring all source analysts with a variety 
of experience, ranging from junior analysts directly out of graduate 
school to senior analysts with years of relevant experience. OIA is 
also targeting analysts with prior IC and financial sector experience, 
as well as relevant regional/area expertise.
    OIA is also targeting economists in its fiscal year 2006 hiring 
efforts. The Treasury Department has made significant strides over the 
past several years designating terrorism--and more recently 
proliferation--targets. Developing a better assessment of the economic 
impact of the sanctions is essential in determining whether Treasury is 
focusing on the appropriate types of targets. This kind of analysis is 
extremely valuable not only for Treasury policymakers, but for 
policymakers elsewhere in the government as well. It can help shed 
light on what policy tools the U.S. Government should use--and are 
likely to be effective--against particular countries or targets.
    In sum, we believe that we are on track to succeed with our rapid 
expansion, and that we will make--and are already making--major strides 
in fiscal year 2006 to continue transforming OIA into a center of 
analytic expertise on the issue of financial and other support networks 
for terrorist, proliferators, and other key national security threats.

                    FISCAL YEAR 2007 BUDGET REQUEST

    The funding request for fiscal year 2007 would enable OIA to 
continue its efforts to build Treasury's intelligence capabilities by 
improving its key infrastructure and adding to its analytic breadth and 
expertise.
    Our key initiatives in our fiscal year 2007 request include:
    TFIN.--The modernization of Treasury's Foreign Intelligence Network 
(TFIN), the sole information technology system in the Department 
authorized for Top Secret information. With the creation of Treasury's 
Office of Terrorism and Financial Intelligence (TFI) and OIA, the 
Department's counterterrorism-related responsibilities were expanded 
dramatically. A new information technology architecture was required to 
support this broader, Congressionally-mandated mission. The current 
system is unstable and has not been modified or upgraded to keep pace 
with the changes in intelligence, user, or technological requirements. 
The operating system is no longer supported and the entire system is at 
risk of catastrophic failure. The frequent system crashes have been 
preventing senior Treasury officials from receiving intelligence 
reporting from other agencies in a timely manner. In addition, the 
system's performance issues have been hampering the ability of 
Treasury's intelligence analysts to perform their jobs.
    Ultimately, the upgraded TFIN system will allow Treasury to 
interact seamlessly within the IC and provide Treasury analysts with 
the common software tools used throughout the Community. It will allow 
timely and efficient collaboration with other intelligence analysts in 
the IC, other government departments/agencies, and the Department of 
Defense.
    ITFC.--Our request will allow Treasury to sustain its co-lead role 
in the Baghdad-based ITFC. Two Treasury officers have already been 
assigned temporarily to Iraq, where they conducted the initial 
assessment or ``Phase I''. ``Phase II,'' which calls for the assignment 
of Treasury personnel to Iraq on an ongoing basis to bolster the all-
source intelligence analysis on the insurgency, is now in progress. 
Improving the U.S. Government's understanding of the insurgency funding 
is a key goal for our office, and I as mentioned earlier, this 
interagency initiative is already paying important dividends.
    All Source Analysis Capability.--The additional analysts OIA is 
requesting in fiscal year 2007 will allow OIA and Treasury to further 
increase the depth and breadth of its analytic coverage and expertise 
in priority areas, such as terrorist financing, and proliferation 
financing. Over the past year, as OIA has grown and policymakers--both 
at Treasury, in the White House and elsewhere--have become more aware 
of its capabilities, OIA has been increasingly tasked with addressing 
the most pressing national security issues. Given its small size and 
increasing importance, bringing new analysts on board as quickly as 
possible is essential for OIA's continued success. These additional 
positions would also allow OIA to engage in increased analyst exchanges 
with other national security and IC agencies, in accordance with the 
Intelligence Reform and Terrorist Prevention Act of 2004.
    Secure Space.--As the committee is aware, in addition to the 
proposed OIA growth, the Office of Foreign Assets Control (OFAC) is 
expanding its terrorism and WMD designations programs. Both OIA and 
OFAC's expansion is necessary, in part, as a result of the June 2005 
Executive Order, giving the Treasury Department additional authority to 
target proliferators of WMD. The highly classified work of these 
expanding units can only be accomplished in specially constructed 
secure areas, known as Sensitive Compartmented Information Facilities 
(SCIFs). Once the fiscal year 2006 hires have been assigned their work 
spaces in existing SCIFs, there will be no available SCIF space 
remaining in the Department. Both OIA and OFAC are requesting 
additional positions in fiscal year 2007; the Secure Space Initiative 
is directly linked to that request. Given the lack of remaining 
available SCIF space in the Treasury Department, we will have to build 
additional SCIF space to accommodate any fiscal year 2007 OIA and OFAC 
hires. Adequate security infrastructure is critical to protecting the 
intelligence and national security functions of the Department. 
Approval of this initiative will ensure Treasury personnel have the 
required secure workspaces to support the mission of disrupting and 
dismantling the financial infrastructure of the terrorists and 
isolating their support networks.

                               CONCLUSION

    Thanks again for your continued support for OIA and TFI. We 
appreciate the confidence that your committee has shown in our office 
to this point. We believe that the resources that we requested in 
fiscal year 2007 will enable OIA to take the next steps in building the 
type of robust intelligence capability that Congress envisioned when 
you created our office.
    That concludes my prepared remarks. I would be happy to answer any 
questions.

                            TFI AUTHORITIES

    Senator Bond. Thank you very much, Ms. Gardner. Mr. Levey, 
I am delighted to hear that our allies are now saying that we 
ought to hold financiers to account. You may know I am from 
Missouri which is called the ``Show Me'' State. A lot of times 
I keep thinking about that old country music song, ``I Want a 
Lot Less Talk and a Whole Lot More Action.'' Would you please 
tell us when you start seeing the action? Words are nice.
    Let me ask you to explain in a little more detail how TFI 
has had an impact on combatting terrorist financing and what 
new powers you have that Treasury could not do before TFI was 
created, and what additional resources you may need from this 
committee or from the Intelligence Committee.
    Mr. Levey. I think maybe we should do that by discussing 
the initiatives that we have asked for, in addition to the ones 
that Assistant Secretary Gardner laid out for our Intelligence 
Office which are critical in order to answer the increased 
demand. I want to highlight one thing that she said, which is 
that success breeds demand in this. People are seeing that the 
actions that we take in terms of looking at the financial 
system and trying to both make it impervious to illicit 
activity on the one hand, but also to target illicit activity 
within it on the other to identify the bad actors and call them 
out and get financial institutions to say they are going to 
stop doing business with them. People are seeing that that is 
really valuable, and so they are asking us to do more and more 
on different important issues, both with respect to WMD 
proliferation and terrorism.
    In order to do that, one of the most important things we 
need is the intelligence capability to support it. We need to 
be able to come up with the analysis, identify the right 
targets, know the right networks, so that we can exercise our 
authorities wisely. This is, I think, attributable to the fact 
that we have this Intelligence Office that Assistant Secretary 
Gardner leads and that she has been building, but we need to 
continue to build it, both in terms of personnel and in terms 
of the infrastructure to support it which is the TFIN network 
and secure space.
    In addition, we need to be able to continue to build up 
OFAC to follow through on the tactical actions, and so our 2007 
budget request includes additional analysts for WMD 
proliferation and terrorism. On the terrorism issue in 
particular, what those are for, Mr. Chairman, is to follow up 
on entities that are already designated, because one thing we 
know, as you indicated in your opening statement, is that these 
terrorist entities are very capable and flexible, and we have 
to be flexible, too. So once we designate someone or an entity, 
we need to follow up and see how that network is reformulating 
itself so that we continue to follow up. If we do not do that, 
then our designation is not nearly as effective. So one of the 
things we have asked for is support for that.

                      BANCO DELTA ASIA DESIGNATION

    Senator Bond. I think you asked for more time to explain 
how the impact of the Banco Delta Asia expands. Would you tell 
us about the follow up on that as well?
    Mr. Levey. I would love to be able to do that. In fact, we 
have prepared a diagram. I don't know if you can see that. Do 
we need to move it closer to you, Senator Murray or Mr. 
Chairman?
    Senator Bond. You don't happen to have it on a little handy 
cheat sheet, do you?
    Mr. Levey. Yes, we do.
    Senator Bond. That might be a lot easier.
    Mr. Levey. What this chart shows is how our office works 
when it works well, and I think this not only a case study, but 
it is a successful case study.
    What we have on the left side with the overlapping circles 
is TFI, all the different aspects of TFI. You have OFAC, you 
have the Office of Intelligence Analysis, FinCEN, you have our 
Policy Office led by Assistant Secretary O'Brien, and you have 
the IRS which supports us on financial investigations. OIA has 
the responsibility for pulling all that together through an 
integrated intelligence analysis. We were looking at North 
Korean illicit conduct, trying to figure out who were we going 
to put pressure on North Korean illicit conduct, and through 
Janice's leadership we were able to pull all of that together 
and identify what targets we should go after.
    We identified a bank in Macau which is a jurisdiction that 
has money-laundering problems in many ways, but this particular 
bank was facilitating a wide range of illicit activity on 
behalf of the government of North Korea, engaged in 
counterfeiting of U.S. currency, they are engaged in narcotics 
trafficking, they are engaged in other sorts of criminal 
conduct, and they were using this bank in order to facilitate 
that. Not only that, this bank had negotiated a deal with the 
government of North Korea and these entities that in exchange 
for fees paid to the bank, they would apply a lower standard of 
due diligence which is a very tempting thing for someone who is 
engaged in illicit conduct.
    We identified this bank and we designated it under the 
PATRIOT Act as a primary money-laundering concern. That is the 
second column. After we all get together and sit down and look 
at the intelligence analysis. In fact, we have a meeting this 
afternoon to do this with another target, where we all sit down 
together and say: ``What is the best way to get at this 
problem?''
    In this situation, we identified two things to do to get at 
the North Korean illicit conduct. The first is the top item, 
designating the bank under section 311 of the PATRIOT Act. The 
second one is the Executive order designations below, which is 
the Executive order that I mentioned in my opening statement 
that the President issued to give us the power to target and 
freeze the assets of WMD proliferators. We designated a number. 
Actually, at this point the President himself designated in the 
initial Executive order North Korean entities of proliferation 
concern under that Executive order.
    One of those entities that was designated was Tanchon Bank 
which is a North Korean bank that is the primary financial 
facilitator for KOMID which is the North Korean military 
procurement entity, which happened to have a number of accounts 
and to be a big customer of Banco Delta Asia, so it all came 
together quite nicely.
    Senator Bond. Mr. Levey, we need to get on with the 
questions. I would say that Banco Delta Asia was what you would 
call a full-service bank.
    Mr. Levey. A full-service bank.
    Senator Bond. They certainly had it all. I am going to turn 
now to Senator Murray for questions.
    Mr. Levey. Thank you, Mr. Chairman.

                               BSA DIRECT

    Senator Murray. Thank you very much, Mr. Chairman. I want 
to go back to some previous discussion about the BSA Direct 
program very quickly before I ask you some other questions. 
That program in the past was presented to us as a critical 
program to combat terrorist financing. Now that this program 
appears to be kind of on life-support, can you tell us what 
impact that failure will have on your efforts to monitor 
compliance with the Bank Security Act?
    Mr. Levey. Senator Murray, just to preface this, you are 
right to have all the concerns that you have expressed about 
the BSA Direct Program, and you are right that we have come to 
this committee and asked for money for, and support, and we 
appreciate the support, and what has happened is a 
disappointment to me as I know it is to you. The new Director 
of FinCEN, Bob Werner who certainly deserves no blame for this, 
I want to make sure people understand that. Bob Werner is the 
new Director who came in to a tough situation, identified these 
problems, and after consulting with me, took the appropriate 
action which is to put a temporary work stoppage in place so 
that we could assess exactly where the project is and make sure 
that we do not continue to spend money if the project is not 
going to succeed.
    Senator Murray. Why did it take the appointment of a new 
Director to find out that we were way off track?
    Mr. Levey. The answer to that is that that is an excellent 
question, and I want to know the answer to that, too. I think 
as the chairman put it in his opening statement, he is going to 
ask for people to look at this, and I think that that is 
appropriate. We need to find out, and I also want to find out 
the answer to that question, and figure out if there is 
anything I should have been doing better so that I can make 
sure that I do not make whatever mistakes I may have made 
again.
    Senator Murray. Is this going to move forward now, or are 
we going to pull the plug?
    Mr. Levey. What we need to do is, under this temporary stop 
work order, it gives us 90 days to assess it to determine what 
is the best next step. The reason we did this now, or the 
reason that Director Werner recommended that we do this now, 
and I think it was the right decision, is that by doing this 
temporary stop work order, we are able to make sure that we do 
not have a loss of service to our customers in the interim. 
That is, of course, of the highest priority. We are hopeful 
that we are going to be able to do this assessment and get 
through the project without ever losing our customer service. 
Frankly, we are going to look at the idea I think you mentioned 
in your opening statement about what benefit we can draw upon 
and what leverage we can apply to the IRS systems that might be 
used.
    Senator Murray. Did I hear you say you are in a 90-day 
review?
    Mr. Levey. Yes.
    Senator Murray. I assume that at the end of that, if you 
are moving forward, you are going to be able to guarantee to us 
that you will get all the functionality out of that new system 
that we were originally promised?
    Mr. Levey. I will give you a complete briefing on the 
functionality that will be obtained by the new process and 
exactly how much it will cost. I think that the chairman's 
suggestion that we give an action plan on BSA Direct, in 
whatever time period you think is appropriate, Mr. Chairman, we 
will do it, is exactly what is called for.
    Senator Murray. Given all of that, do you still stand 
behind the request for $12.5 million for this in 2007?
    Mr. Levey. I think the request is $2.4 million. With your 
permission, Senator, I would want to refer that question to 
Director Werner. If it is easier, we can respond in writing and 
do that promptly.
    Senator Murray. Is he in the room?
    Mr. Levey. Yes, he is right here.
    Senator Murray. If you would not mind, Mr. Chairman.
    Senator Bond. I was going to ask Director Werner to come 
forward. The GAO has raised questions about it and you have 
raised a very good question.

            BSA DIRECT AND THE CROSS-BORDER WIRE INITIATIVE

    Senator Murray. And with the cross-border wire request as 
well, it is a $12.5 million request.
    Mr. Levey. With the cross-border wire it is, yes.
    Senator Bond. Mr. Werner, if you will state your full name 
and title for the record, please.
    Mr. Werner. My name is Robert W. Werner, and I am the 
Director of Financial Crimes Enforcement Network.
    Senator Murray. Did you say the new Director?
    Mr. Werner. New Director. Good morning, Mr. Chairman, and 
Madam Ranking Member. You are correct, the cost is $2.4 
million, I think it is $2.473 million, relates to the BSA 
Direct components. That includes the secure outreach, the BSA 
electronic filing, and the BSA Direct retrieval and storage 
component, and then there is $10 million separately requested 
for the cross-border study.
    While the cross-border wire study is related to BSA Direct 
because ultimately the data would be folded into that program, 
it is really very distinct at this point. Right now we are in 
the middle of a feasibility study for the cross-border wire. 
Given the massive amount of data involved in that, if the 
Secretary were to approve the feasibility study and decide to 
go forward with it, that would require tremendous augmentation 
to existing systems. So the fact of the matter is, we are going 
to have a retrieval and storage component for BSA Direct, but 
whether we are able to have the full range of functionality 
that was originally planned in the current retrieval and 
storage project, it is too early to say. But we will not have 
disruption of service to our customers because at this point we 
are also transitioning to the IRS's Web CBRS system, so we will 
have a functioning system. Part of what we are reassessing is 
what exactly the requirement needs are and revalidating those.
    Senator Murray. This committee will need to know whether 
you stand by that number or where you are on that fairly soon, 
so I hope you stay in touch with the committee on that.
    Mr. Werner. We absolutely will, and I can tell you now that 
the electronic filing component is not involved in the stop 
work order and is about $1.3 million of that. In addition, the 
secure outreach which, again, is an operational functioning 
system and not part of the stop work, is close to about 
$500,000. So the remainder does relate to the retrieval and 
storage component, and we will keep you very closely apprised 
of that.
    Senator Murray. I appreciate that. Thank you, Mr. Chairman.
    Senator Bond. Thank you very much, Senator Murray. The GAO 
has raised a lot of questions that I know Director Werner is 
going to have to answer, and we are going to have to answer. So 
I think this is a work in process, and I think 45 days, if you 
can make it, is a good timeline to let us know what you found, 
where you are going to go, and how you can make some chicken 
salad out of what you have been presented.
    Mr. Werner. We will absolutely keep you briefed. I think at 
this point we are projecting having a written report hopefully 
sometime in June, but I think within 45 days we will certainly 
have a much better idea of where we are and what some of the 
options are.

                 TREASURY FOREIGN INTELLIGENCE NETWORK

    Senator Bond. Thank you very much, Mr. Werner. Turning to 
Ms. Gardner, your work I know is extremely important. The DNI 
has emphasized to us how critical your information is, and we 
want to know how we can help you get the work done. I do not 
want to see all of your time taken up as an IT manager because 
you have very important work to do. So we will look forward to 
discussing that with you as the process goes forward.
    Now I would like to ask, Ms. Gardner, if you can elaborate 
on the importance of upgrading the Treasury Foreign 
Intelligence Network, TFIN, especially in terms of how it can 
help you improve the way that OIA performs its job, and when do 
you expect TFIN to be complete?
    Ms. Gardner. Thank you, Mr. Chairman. I appreciate the 
opportunity to talk about TFIN because it is very near and dear 
to my heart. We do need this capability in order to deliver all 
of the things that Under Secretary Levey promised that we would 
be able to do.
    The TFIN system was actually built in the 1990's, and it 
was built in-house, and so it was great at the time, but 
clearly we need something more now. What we have done is try to 
take this in two steps. One is, first, to stabilize the current 
system. That delivery will be on April 18 so that the system 
crashes that we have been experiencing hopefully will stop. 
Then the next phase is actually the upgrade to increase 
capabilities. When the system was built in the mid-1990's, we 
were just a liaison shop. We did not have analysts doing 
analytical work. So now we need to be able to put all the bells 
and whistles of analytical tools, link analysis tools, data 
retrieval, all those things on there.
    I think that we have segmented it in a way so that all the 
deliveries will be rolling out over the next year. If we do get 
the budget request in 2007, we are hoping that we will be able 
to finish all of the phases by the end of the fiscal year with 
the slight possibility that the Disaster Recovery Site will 
probably be at initial operating capability, but not at full 
operating capability until maybe early first quarter 2008.

INTERNATIONAL TERRORIST FINANCING COOPERATION AND THE BANCO DELTA ASIA 
                              DESIGNATION

    Senator Bond. Thank you. Mr. Levey, I was going to ask you 
about collaboration with international partners, but I had to 
cut you off after you just got through the first two columns in 
your magnificent chart. Let's pick up back on the chart. I 
would like to know in addition to the particular North Korean 
Banco Delta Asia, how you are working with the United Nations, 
the Financial Action Task Force, and other successes, and your 
challenges, in that area.
    Mr. Levey. Interestingly, I think right where I stopped is 
where I was going to get to intelligence cooperation, so I will 
be able to try to answer two questions at once.
    After we took these actions that I described earlier, the 
next step is to go and talk to our partners around the world 
and say this is a threat not only to our financial system, it 
is a threat to the global financial system, and the answer to 
your question on how that international cooperation is working, 
Mr. Chairman, is it is working very well. We are getting a huge 
amount of cooperation internationally when we are able to 
identify illicit conduct and say this is illicit conduct, it is 
a threat to our financial system and to yours. And we are 
getting cooperation not just from governments, but from private 
financial institutions, and that was the reference I made to 
UBS in my opening statement.
    In the BDA case in particular, I made a trip out to Asia, 
and then Mr. O'Brien's Deputy also made a trip out to Asia, and 
we were able to persuade governments in the region that this 
was a threat to them as well. They took action to put a lot of 
pressure on this illicit financial network, and they took 
relevant steps that pushed this North Korean illicit financial 
activity out of their banking system and left it with no place 
to go, or searching for a place to go.
    Then the last thing is monitoring follow-up, and it comes 
back to Janice Gardner's work, which is, now we need to see 
where they are going to try to put their money into the system. 
What is their next target? They are going to try to access the 
financial system in another way, and we have to stay on top of 
it so that we do not just have a temporary victory.
    More broadly, Mr. Chairman, the cooperation internationally 
particularly on terrorist financing has been excellent. We have 
a growing number of states using the U.N. system on terrorist 
financing and designating names which is a real important 
development, and we are continuing to build on that I think 
through Mr. O'Brien's leadership. He has been doing a lot of 
good, hard work and spending a lot of time on the road.

     TFI REDUNDANCY CONCERNS AND DIFFERENCES BETWEEN TFI COMPONENTS

    Senator Bond. One last question. During the early days of 
TFI there were concerns about the possible redundancy and OIA 
acting as an operational vice analytical unit. Can you explain 
how you have addressed these concerns, and explain the 
differences between FinCEN, OFAC, TFFC, OIA, and any other 
agencies you have?
    Mr. Levey. Mr. Chairman, I know that that has been a 
concern. As you know, when I have come to talk to you in your 
capacity on the Intelligence Committee, and I have already 
shown you this in private, this indicates how we work. It is a 
generalized example of what the North Korean Illicit Finance 
process is. On the left you see there are particular threats 
that we feel we need to take action against, and that is where 
our intelligence function comes in. They are to pull together 
all the information that we need in order to determine what 
steps to take. That is not an operational activity, that is 
classic intelligence analysis, presenting the information to 
the policy makers so that we can make a choice.
    The middle, without going through all the acronyms there, 
but what that is is a sampling of the tools available to us as 
an organization, either through OFAC, through FinCEN, through 
international outreach, through TFFC which is Assistant 
Secretary O'Brien's organization. We sit down and we go through 
one of those meetings, we have one this afternoon, as I 
mentioned, and we will say: ``What can we do?'' We choose what 
we think is the right thing to do, and then we go out and do 
it. We have operational components of what we do in the sense 
that we are not just developing this information to learn about 
it, but to act on it, and then we act.
    Then the bottom arrow is, after we act, again, just like we 
are doing with North Korea, the challenge is to see if our 
action had any effect. To be honest with you, sometimes they 
are more effective than others. We have to learn not only when 
we take an action, if it was not as effective as we had hoped, 
why not, what is the next step so we can learn to do better, 
and that is, again, where our Intelligence Office comes in.

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Bond. As followers of the Senate know, all those 
bells and whistles means that a vote has started. In closing, I 
appreciate all the hard work and time you and your good 
leadership team have put in to combatting terrorist financing 
and other illicit financing efforts. I support and recognize 
the importance of the 2007 budget request, but I need your help 
to make sure you succeed, especially in making sure that TFIN 
does not experience the same problems that BSA Direct has 
experienced.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]

           Questions Submitted by Senator Christopher S. Bond

                               MANAGEMENT

    Question. As I noted in my opening statement, I remain concerned 
about the Department's management especially since the OIG continues to 
cite management as their No. 1 concern in their annual challenges 
report and due to the recent information technology failure with BSA 
Direct.
    How are you addressing this concern, especially on the need for 
effective corporate leadership in resolving serious deficiencies at the 
bureau level? Please include specific examples in your response.
    Answer. The Department is committed to exercising strong corporate 
leadership over all components of the Treasury Department--through the 
policy offices' supervisory and oversight relationships with our 
bureaus, as well as through the discipline of the traditional 
management functions such as human resources, information technology 
(IT), procurement, budget, strategic planning, and financial 
management. With nearly a full complement of senior officials now in 
office at Treasury, our ability to emphasize corporate management has 
been greatly enhanced.
    In describing Treasury's corporate management challenge, the 
Inspector General emphasized the need to provide IRS and bureau 
oversight and ``ensure consistency, cohesiveness, and economy among all 
bureaus in achieving Treasury's goals and objectives.'' Over the past 9 
months, the Assistant Secretary for Management and Chief Financial 
Officer (ASM/CFO) has instituted a better process for coordinating 
Department-wide management issues. The Bureau Heads' Council has been 
restructured to serve as one of the primary tools of this coordinated 
management effort. The Council has become an arena for discussing best 
practices, cohesive policies and strategic priorities based on the 
President's Management Agenda (PMA), Treasury goals, and bureau goals. 
Participation is now limited to bureau principals, the ASM/CFO, and the 
Deputy Secretary to ensure vigorous discussion and extensive exchanges 
between participants in order to provide thoughtful recommendations to 
the appropriate Department officials. This reinvigorated Council has 
addressed operations, management, Homeland Security Presidential 
Directive-12 (HSPD-12), OMB Circular A-123, the Working Capital Fund, 
annual budget submissions, the Department's strategic plan, and 
Emergency Preparedness. These discussions have led to the creation of 
sub-groups, comprised of a bureau head ``champion'' as chairman and 
other interested bureau heads as members. These sub-groups are 
addressing issues raised during the Council meetings and providing 
monthly updates upon which they make recommendations to the appropriate 
officials.
    Other examples of how Treasury provides effective corporate 
oversight and leadership across management functions include:
  --The majority of Treasury IT projects are succeeding, including most 
        of the systems mentioned at the April 6, 2006, Senate 
        Appropriations Committee hearing. For example, Treasury's HR 
        Connect system was recently named a Federal Human Resources 
        Management Line of Business (HR LoB) Shared Service Center 
        (SSC) by the Office of Personnel Management and the Office of 
        Management and Budget (OMB). The HR LoB is one of the 
        Presidential E-Government lines of business, which designates 
        agency centers of excellence to provide government-wide 
        servicing for core functions. Currently, the Department's HR 
        Connect program services Treasury, the Department of Housing 
        and Urban Development (HUD) and components of the Departments 
        of Justice and Homeland Security.
  --Treasury migrated HUD to HR Connect last year on time and within 
        budget, adding an estimated 10,000 employees to the system. 
        Both HUD and industry recognized Treasury for the cost-
        effective and smooth transition. Treasury clearly has addressed 
        its past problems with the HR Connect program and continues to 
        drive towards enhanced performance and operating efficiency.
  --Treasury has made significant improvement across the core IT 
        management areas measured under the Expanding E-Government (E-
        Gov) Initiative of the President's Management Agenda. For the 
        first time since the establishment of the PMA in 2002, Treasury 
        improved its overall E-Gov status from Red to Yellow in the 
        first quarter of fiscal year 2006. The improved PMA score was 
        based on Treasury's meeting key requirements and performance 
        metrics. These key requirements and performance metrics 
        included developing Treasury-wide IT capital planning policy, 
        maturing the Departmental Enterprise Architecture, and meeting 
        quarterly milestones for Presidential E-Gov Initiative 
        implementation. This was accomplished in large measure by the 
        efforts of all bureaus through the Treasury Chief Information 
        Officers' Council and its sub-councils.
  --The Alcohol and Tobacco Tax and Trade Bureau's (TTB) recent 
        successful migration from the Bureau of Alcohol, Tobacco and 
        Firearms and Explosives (ATF) infrastructure is an example of 
        proper oversight and assistance between the Department and a 
        Treasury bureau. When ATF was divided into two organizations in 
        2003 (ATF became part of the Department of Justice while TTB 
        remained a Treasury bureau), all IT resources remained with 
        ATF. These IT resources included 100 percent of all capital 
        assets, infrastructure, IT support personnel, and resources to 
        continue development of core business applications. Treasury's 
        senior management team worked closely with TTB bureau 
        executives in developing and implementing smart sourcing 
        strategies. TTB accomplished the migration of its entire IT 
        infrastructure off of ATF in 6 months, which is an extremely 
        aggressive schedule for a migration of this scale. In fact, the 
        migration was completed well ahead of schedule and within an 
        extremely tight budget.
  --With respect to the Treasury Communications Enterprise (TCE) 
        procurement, Treasury senior management is engaged in the 
        procurement and the issues raised by the Government 
        Accountability Office (GAO) were resolved. The Department is 
        working closely with Treasury's Inspector General and Treasury 
        senior management to improve documentation for the program.
  --To address the new requirements in the Office of Management and 
        Budget (OMB) Circular A-123, ``Management's Responsibility for 
        Internal Control,'' the Treasury Chief Financial Officers' 
        Council formed a cross-bureau and office working group that 
        developed a comprehensive methodology to identify, document, 
        test, and assess internal controls. The work group, established 
        in November 2004, includes permanent participation from 22 of 
        Treasury's 24 financial reporting entities involving 8 bureaus 
        and 6 offices, including advisory participation from the Office 
        of the Inspector General. As a result, Treasury has devised 
        collective financial reporting internal controls, established 
        uniform documentation methods, developed comprehensive test 
        approaches and test plans, and completed over 70 percent of the 
        required testing to date.
    Part of the corporate leadership response for improving management 
at the bureau level is to institute a Program Contract Review (Review). 
This Review will be added to the quarterly Capital Planning and 
Investment Control (CPIC) process, and will require Contracting 
Officers to certify that high impact contracts and contracts related to 
high impact programs are on target with respect to performance 
(schedule and quality), budget (cost or price), and the required 
qualifications of the Program Manager, Contracting Officer, and 
Contracting Officer's Technical Representative. The goal of the Review 
will be to ensure improved communication and coordination among the 
bureau-level professionals responsible for different functional aspects 
of contract management and mission delivery, and to provide a mechanism 
for early problem visibility and resolution at the bureau and corporate 
levels, as needed. Initially, the Review will focus on high impact 
information technology programs and related contracts already in the 
CPIC database, and will expand to include a review of all high impact 
acquisitions, including non-IT acquisitions.
    This approach will support the introduction of Earned Value 
Management (EVM) techniques into our contract portfolio, and will help 
ensure that Treasury managers follow the sound business practices 
associated with EVM. It builds on the management platform to strengthen 
cross-disciplinary support and oversight within two already-established 
governance processes, CPIC and the Office of Procurement Executive's 
(OPE) Evaluate & Monitor Program, designed to ensure that Treasury's 
procurement organizations are in compliance with the law, good 
practice, and are promoting continuous improvement.
    The Evaluate and Monitor Program, managed by the Office of the 
Procurement Executive, will provide improved corporate oversight of and 
support to Treasury's operational acquisition organizations, including 
high impact acquisitions. An Acquisition Bulletin, AB 06-04, http://
www.treas.gov/offices/management/dcfo/procure- 
ment/policy/ab06-04.pdf, was recently issued requiring all bureaus to 
identify ongoing, planned, or anticipated procurement actions, defined 
by the following criteria:
  --Acquisitions with an estimated value of more than $10 million;
  --Acquisitions with an estimated value more than $1 million if the 
        proposed acquisitions involve more than one bureau, excluding 
        Administrative Resource Center (ARC) support of other Treasury 
        bureaus;
  --Acquisitions that require a review by the Treasury Technical 
        Investment Review Board (TIRB);
  --Competitive sourcing actions under OMB Circular A-76;
  --Acquisition actions that may be controversial or otherwise 
        sensitive such that they warrant the attention of the Senior 
        Procurement Executive, for example, relevant protests or 
        claims, or acquisitions in which interest or inquiries have 
        been expressed by either the White House or Congress, Inspector 
        General (OIG or TIGTA) or Government Accountability Office 
        (GAO).
    The Evaluate & Monitor Program is increasing its staffing to 
improve oversight. Current staffing is 6 FTE, and oversight and support 
have been improving commensurately.
  --The Program/Contract Review, AB 06-04, and the Evaluate & Monitor 
        Program have been reviewed and approved by the Treasury 
        Acquisition Council (TAC). The Office of the Procurement 
        Executive chartered the TAC in April 2005 to improve governance 
        of the acquisition function. The TAC is comprised of the bureau 
        Chief Procurement Officers, the Treasury CIO, and the Deputy 
        CFO. It is chartered to coordinate cross-cutting policy and 
        management issues, develop and implement innovative acquisition 
        approaches, share best practices and lessons learned, oversee 
        and track progress against improvement goals, and make other 
        decisions on issues that have a potential for Treasury-wide 
        impact on acquisition and financial management programs.
    The Department also remains focused on enhancing project management 
capability by establishing a Treasury-wide training program. In line 
with OPM and OMB guidance, Treasury's existing IT capital planning 
policy outlines the skills and competencies required for project 
managers based on project scope and complexity. Currently, bureau CIOs 
are required to certify that project managers for major investments are 
qualified according to these guidelines. This initiative, which 
supplements bureau training programs, will include a project management 
course focused on Treasury-specific policy and procedures to ensure 
consistent implementation across the Department.

                            BSA DIRECT/TFIN

    Question. The recent problems exposed with the Financial Crimes 
Enforcement Network's new system called ``BSA Direct'' raises serious 
questions about the Treasury's ability to procure, manage, and oversee 
information technology projects.
    How can I be confident that other high-risk projects such as the 
``Treasury Foreign Intelligence Network'' system (TFIN) will not 
experience the same problems as BSA Direct? Are you personally 
committed to providing the necessary support and resources for TFIN and 
other IT projects and that you will ensure that the lessons learned 
from BSA Direct will be applied to TFIN and other IT projects?
    Answer. The Treasury Foreign Intelligence Network (TFIN) is the 
sole source of Top Secret/Sensitive Compartmented Information 
intelligence at the Department of the Treasury. Stabilizing and 
modernizing the TFIN system is one of the Department's highest 
priorities.
    From a system development view, BSA Direct involves the design and 
development of a new and complex database application and data 
warehouse, while the TFIN concept and design is based on best practices 
already in use within the Intelligence Community.
    An effective governance structure has been in place for TFIN since 
the inception of the project to ensure mission, business, and technical 
objectives are achieved. This governance structure consists of the: (1) 
TFIN Executive Board comprised of senior officials from the Office of 
Terrorism and Financial Intelligence and the Office of the Chief 
Information Officer (OCIO), and (2) TFIN Steering Committee comprised 
of project management and technical leads from stakeholder offices. 
These governance structures facilitate coordination, track project 
status, and support executive decision-making. OCIO hired a dedicated 
project manager to oversee the TFIN project.
    Treasury has established additional oversight as well. The 
Assistant Secretary for Management and Chief Financial Officer (ASM/
CFO), the Chief Information Officer (CIO), and the Assistant Secretary 
for Intelligence and Analysis (OIA) are committed to ensuring the 
project's successful completion. The ASM/CFO and CIO are engaged fully 
with the Assistant Secretary for Intelligence and Analysis, the 
system's major stakeholder. These officials and their staffs are 
working closely together to manage the development of TFIN, meeting 
regularly to resolve quickly problems that might affect the cost and 
schedule of the system. Treasury also is working closely with and 
receiving direct support and assistance from the Intelligence 
Community.
    This executive level engagement will continue throughout the 
project and we expect Treasury to complete the system on time and 
within budget. For example, the TFIN platform was stabilized 
successfully according to schedule and budget. Treasury and the 
Intelligence Community have identified TFIN as a critical investment. 
As such, the TFIN investment is subject to additional reporting 
requirements beyond the quarterly ``Control'' review conducted as part 
of the IT capital planning and investment control processes.
    The Department also is implementing specific initiatives to improve 
IT investment and contract management. These actions are focused on 
promoting greater accountability for IT management in the bureaus at 
the project management level, improving the reliability of information 
being reported by the bureaus, and establishing additional processes 
through which to assess and validate project performance. To highlight 
a number of the key initiatives, the Department is: (1) requiring 
bureau CIOs to certify the qualifications of their project managers and 
the accuracy of investment reporting; (2) establishing a more rigorous 
process for justification and reporting is established when bureaus 
request baseline change requests for their major investments; (3) 
implementing a program for reviewing the top 50 investments and 
contracts within the Department; and (4) expanding the independent 
verification and validation program at the corporate level to assess 
the accuracy of bureau project and investment reporting.

                  RESPONSE TO GAO REPORT ON BSA DIRECT

    Question. Two days ago, the GAO issued a review of FinCEN's fiscal 
year 2007 budget request. GAO asserted that ``FinCEN has experienced 
cost, schedule, and performance issues while developing the retrieval 
and sharing component of the BSA Direct project, which raise questions 
about the project's future. Therefore, the assumptions made by FinCEN 
when developing the request for new BSA Direct initiatives may no 
longer be valid, calling into question the need for this funding.'' I 
agree with GAO that the BSA Direct problems raise some serious 
questions about FinCEN's ability to spend effectively the $12.5 million 
in additional funding in the budget request. Providing these new funds 
appears to be ``throwing good money after bad.''
    What is your response? If BSA Direct cannot be salvaged, do you 
intend to recommend to the Congress that the ``Cross-Border Wire 
Transfer System Initiative'' is not feasible and should not be funded 
for fiscal year 2007?
    Answer. The $12.5 million in requested additional funding 
referenced in the GAO report includes $2.5 million for BSA Direct and 
$10 million for a separate, but related, Cross-Border Wire Transfer 
System.
    BSA Direct is an overall umbrella project composed of three 
components: electronic filing (e-filing), secure access, and retrieval 
and sharing. Of the $2.5 million requested for the BSA Direct umbrella 
components, $1.3 million is for enhancements to the e-filing component, 
$0.5 million is to meet the customer base of the secure access system, 
and $0.7 million is for the retrieval and sharing component.
    The electronic filing and the secure access components have been 
operational for a number of years. Electronic filing reduces the cost 
to collect BSA data from a range of $0.76-$7.15 per paper form to an 
average of $0.21 per electronic form submitted. The system is used by 
more than 300 of the largest financial institutions in the United 
States. Planned upgrades to the e-file system in fiscal year 2007 will 
allow: direct input of the BSA filings into the collection system; 
added features such as reference number assignment, error notification 
and other correspondence; improved editing of certain types of filing 
errors; and options for single form filing.
    The secure access component serves as a gateway to FinCEN's 
services, including access to BSA data, analytical products, and online 
training and support for Federal, State and local law enforcement and 
regulatory users through secure electronic communication. In fiscal 
year 2007, FinCEN anticipates a significant increase in the user base 
for this system, regardless of the status the retrieval and sharing 
component.
    The retrieval and sharing component is being developed by EDS and 
it alone is the subject of the recent stop work order. This component 
was designed to provide a data warehouse with 10 years of enhanced BSA 
data and additional analytical tools.
    The fiscal year 2007 budget request of $10 million for a Cross-
Border Wire Transfer reporting system allows upfront discussions with 
Congress in the event the Treasury Secretary approves the collection of 
cross-border wire transfer data. The authorizing language (Section 6302 
of the Intelligence Reform Act of 2004 (S. 2845 Public Law 108-458)) 
charges FinCEN with two tasks: (1) a feasibility study to be completed 
as soon as practicable; and (2) the implementation of enabling 
regulations and a technological system for receiving, storing, 
analyzing, and disseminating the reports, to be completed by December 
2007. This request does not represent an assumption that the Treasury 
Secretary or Congress will authorize the development of the system, but 
was submitted out of an abundance of caution and the concern that, if 
approved, resources would be needed for an implementation that would 
begin during fiscal year 2007.
    The technical alternatives analysis that FinCEN will present in the 
feasibility study rests on the premise that any conceptual system must 
be flexible enough to incorporate existing, planned, and future data 
sources--this includes BSA Direct. FinCEN's study will consider whether 
and how to create a new system to accommodate the cross-border funds 
transfer data and other BSA data. The criteria applied by FinCEN in its 
study of the collection and storage of electronic funds transfer 
reporting are that the system must:
  --integrate multiple data sources, including existing BSA data 
        systems;
  --require minimum or no alteration to existing BSA data sources;
  --enable the concurrent query of the multiple data systems by the 
        users in a transparent fashion; and
  --accommodate the addition of future data sources with minimum or no 
        alteration to the existing or planned BSA data sources.
    FinCEN currently is working to complete its feasibility study and 
anticipates submitting a report to the Secretary of the Treasury in the 
coming weeks. The feasibility study will outline alternative approaches 
to developing the system and will provide order of magnitude estimates 
of the costs involved. These alternatives will address the risks and 
our concerns if we attempt to implement this system by December 2007, 
as required in the legislation.
    While the study still is underway, a preliminary conclusion is that 
it is not feasible to complete the development and implementation of 
the system by December 2007. Due to the complexities of implementing a 
cross-border wire transfer reporting requirement, which would involve 
developing and issuing new regulations as well as developing the 
necessary information technology infrastructure to receive, warehouse 
and analyze the data received, FinCEN will need the time and resources 
to develop its project management capabilities before it can undertake 
this effort. The study will outline the organizational resources that 
FinCEN will need to manage successfully the development of this 
project.

                         CIO AND CFO OVERSIGHT

    Question. The Department of the Treasury spends over $2 billion 
annually on information technology. What percentage of this investment 
portfolio does the Treasury CIO directly oversee?
    Answer. The ASM/CFO and CIO oversee Treasury's entire investment 
portfolio through formal and informal channels.
    Formally, the ASM/CFO meets monthly with the bureau heads to review 
corporate management issues, including IT management concerns, and 
agree upon enterprise directions and implementation approaches. As an 
example, the Department's HSPD-12 initiative, which will meet the 
requirements of the whole Treasury Department, is being led at this 
level.
    From an IT perspective, the Treasury CIO oversees the entire 
Treasury Information Technology (IT) investment portfolio. As Chair of 
Treasury's Technical Investment Review Board (TIRB), which is comprised 
of bureau CIOs, oversight is provided through a formal Capital Planning 
and Investment Control (CPIC) process, which we have developed over the 
last 2 years. The process is multi-layered with both quarterly and 
annual reporting.
    The CPIC process for each fiscal year includes a review of proposed 
new investments (Pre-Select), decisions regarding the composition of 
the IT portfolio to be submitted to OMB (Select), quarterly reviews of 
the portfolio's health (Control), and assessments of steady state 
investments (Evaluate).
    As part of the Control phase of the CPIC process at Treasury, all 
IT investments are reviewed quarterly to ensure compliance with cost, 
schedule, security, risk management, and project manager requirements 
and guidelines. For non-performing investments, where cost, schedule, 
or performance fails planned targets by 10 percent, the project 
managers must submit corrective action plans to the CIO. In addition, 
Treasury has established a formal baseline change request process to 
oversee all changes to established IT investment baselines. Finally, we 
now are asking bureau CIOs to certify cost and schedule performance 
information provided to the TIRB on quarterly basis.
    Informally, both the ASM/CFO and the CIO work directly with their 
bureau counterparts on a day-to-day basis to ensure that the 
Department's high priority projects succeed. For example, the ASM/CFO, 
CIO, and the rest of the Treasury management team work directly with 
bureau stakeholders to implement the President's Management Agenda. 
Within the E-Government area, this has included the implementation of 
government-wide payroll, grants, and recruitment systems across 
Treasury.
    Question. How specifically does this oversight occur?
    Answer. The Treasury CIO reports directly to the Assistant 
Secretary for Management and Chief Financial Officer (ASM/CFO).
    Question. How does the CFO ensure adequate performance and 
accountability by the CIO? What specific criteria does the CFO use to 
measure the performance of the CIO?
    Answer. The ASM/CFO ensures performance and accountability by the 
CIO through a rigorous performance planning process for the CIO's 
individual performance plan. The CIO's specific performance commitments 
include: strengthening corporate management for the Department, 
including addressing control weaknesses and management challenges 
identified by the OIG and TIGTA, progress in meeting President's 
Management Agenda requirements for the Expanding E-Gov initiative, and 
improving enterprise IT operations. The CIO must meet specific 
performance metrics agreed upon in each of these areas.

                     IT BUSINESS CASE DOCUMENTATION

    Question. The Government Accountability Office (GAO) recently 
reported that the business case documentation required for major IT 
investments is unreliable based on a review of five agencies, including 
the Department of the Treasury. GAO subsequently recommended that 
agencies improve the reliability of these business cases.
    What specific actions is the Treasury CIO taking to improve the 
accuracy and reliability of the Department's IT business cases?
    Answer. Treasury is taking actions to promote greater 
accountability across the Department's IT management, including steps 
to improve the reliability of information being reported, and 
establishing additional processes to assess and validate program 
performance and reporting.
    We are developing, updating, and institutionalizing Treasury-wide 
policies and guides to improve documentation for major IT investments. 
For example, over the past year Treasury has issued formal guidance on 
Treasury Capital Planning and Investment Control Policy, Earned Value 
Management, Alternatives Analysis, and Baseline Change Request Policy. 
We are revising overall Treasury IT policy to incorporate minimum life 
cycle documentation requirements for all major IT projects. This 
documentation will ensure project managers are developing and 
maintaining the detailed background records required for effective 
program management.
    In addition, we now are integrating the efforts of the Office of 
the CIO and the Senior Procurement Executive in overseeing IT projects 
and establishing an on-going capability for independent validation and 
verification of IT investments, as discussed in more detail in response 
to Senator Bond's first question.

      CIO'S OVERSIGHT OF BUREAU PROJECT MANAGEMENT TEAMS AND CIOS

    Question. The Treasury CIO told committee staff that his 
responsibilities include reviewing and certifying the qualifications of 
every Treasury bureau CIO and their project management teams and that 
he has the authority to remove a CIO or project management team if they 
do meet his qualifications.
    How often does the CIO review and certify the qualifications of 
each bureau CIO and project management team? What criteria does he use 
to determine their qualifications? Has the CIO ever removed a bureau 
CIO or project management team? If so, please provide specific 
information on when this occurred and the reasons for the removal.
    Answer. To clarify, the Treasury CIO does not have the independent 
authority to remove a bureau CIO or project team, nor does he certify 
the qualifications of each bureau CIO.
    In January 2006, the Treasury CIO established a policy pursuant to 
which each bureau CIO must certify to corporate management the 
qualifications of its project managers for major investments. The 
policy was based on guidance issued by the Office of Personnel 
Management and Office of Management and Budget (OMB M-04-19) that 
requires requesting agency CIOs to ensure that major investments are 
managed by qualified project managers. This certification is required 
each time there is a new investment added to the IT portfolio or when 
there is a change in the project manager for a major project. Treasury 
Capital Planning and Investment Control guidelines require major IT 
investment project managers to be qualified in accordance with the 
Federal CIO Council Workforce and Human Capital for IT Committee's 
Federal IT Project Manager Guidance Matrix. Project managers must 
document the knowledge, skills, abilities, and experience that qualify 
them to manage a major IT investment.
    The Treasury CIO is continuing to strengthen project management 
within the Department. A formal Treasury-wide training program is being 
established to provide project managers with critical skills and 
competencies in terms of best practices and earned value management 
concepts. This program will enhance bureau training initiatives. For 
example, the program will include a course focused on Treasury-specific 
policy and procedures to ensure consistent implementation across the 
Department.
    The Treasury CIO also is working with FinCEN and the IRS to address 
specifically a number of critical investments within those bureaus. 
Treasury CIO management is participating in the selection of new bureau 
CIOs, including advising the FinCEN Director on the selection of a new 
FinCEN CIO, as well as participating in the selection of a new CIO for 
the Bureau of Engraving and Printing (BEP). Where issues or concerns 
arise with bureau IT performance, the ASM/CFO and the Treasury CIO 
directly engage bureau heads.

                 ROLES AND RESPONSIBILITIES OF THE CIO

    Question. Please describe for the record, the roles and 
responsibilities of the Treasury CIO and specifically how these roles 
and responsibilities aligned with each requirement specified in the 
Clinger Cohen Act, E-Gov Act, and Paperwork Reduction Act.
    Answer. As outlined by the Government Accountability Office, the 
Chief Information Officer has 13 major areas of responsibility. The 
Treasury CIO is responsible for:
  --Information Technology/Information Resources Management (IT/IRM) 
        strategic planning [44 U.S.C. 3506(b)(2)]
  --IT capital planning and investment management [44 U.S.C. 3506(h) 
        and 40 U.S.C. 11312 & 11313]
  --Information security [44 U.S.C. 3506(g) and 3544(a)(3)]
  --IT/IRM human capital [44 U.S.C. 3506(b) and 40 U.S.C. 11315(c)]
  --Information collection/paperwork reduction [44 U.S.C. 3506(c)]
  --Information dissemination [44 U.S.C. 3506(d)]
  --Records management [44 U.S.C. 3506(f)]
  --Privacy [44 U.S.C. 3506(g)]
  --Statistical policy and coordination [44 U.S.C. 3506(e)]
  --Information disclosure [44 U.S.C. 3506(g)]
  --Enterprise architecture [40 U.S.C. 1401(3)]
  --Systems acquisition, development, and integration [44 U.S.C. 
        3506(h)(5) and 40 U.S.C. 11312]
  --E-Government initiatives [44 U.S.C. 3506(h)(3) and the E-Government 
        Act of 2002]
    The following table lists a selection of the major requirements 
within the Clinger-Cohen Act, the E-Gov Act, the Paperwork Reduction 
Act, and the corresponding role and responsibility of the Treasury CIO.

------------------------------------------------------------------------
                Requirement                         Treasury CIO
------------------------------------------------------------------------
Clinger-Cohen Act:
    Provide IT related advice and other     Reports to ASM/CFO. Advises
     assistance to the agency head and       and consults with ASM/CFO
     other senior management personnel.      and other Treasury
                                             leadership regarding IT
                                             management.
                                            Oversees Treasury-wide IT
                                             capital planning process.
    Develop, maintain, and facilitate       Leads the development and
     implementation of a sound and           implementation of the
     integrated IT architecture.             Treasury Enterprise
                                             Architecture.
    Promote effective and efficient design  Chairs the Treasury CIO
     and operation of all major              Council and Treasury
     information resources management        Technical Investment Review
     processes.                              Board.
                                            Promotes policy and process
                                             improvements to enhance
                                             Departmental IT oversight
                                             and management.
------------------------------------------------------------------------
E-Gov Act:
    Participate in the functions of the     Participates in the Federal
     Federal CIO Council.                    CIO Council and is co-chair
                                             of the IT Workforce
                                             Committee.
    Monitor the implementation of IT        Leads E-Government program
     standards . . . including common        which incorporates
     standards for interconnectivity and     Enterprise Architecture,
     interoperability, categorization of     Enterprise Solutions, and
     Government electronic information,      Presidential E-Government
     and computer system efficiency and      functions.
     security.
     . . . Develop citizen and              Manages and oversees
     productivity-related performance        Treasury performance of E-
     measures for use of E-Government and    Government requirements as
     IT in meeting agency objectives,        outlined in the President's
     strategic goals, and statutory          Management Agenda and the
     mandates.                               Department's IT strategic
                                             planning process.
     . . . Comply with OMB E-Guidance,      Oversees compliance and
     particular emphasis on agency head      dissemination of OMB
     communicating guidance to key agency    guidance and policy
     executives.                             regarding IT.
     . . . Establish and operate IT         Assesses and determines the
     training programs.                      strategy for ensuring
                                             adequate IT workforce
                                             capabilities; develops and
                                             promotes IT training
                                             programs for the
                                             Department.
    Agencies must conduct Privacy Impact    Serves as the Department's
     Assessments for new IT investments      Chief Privacy Official;
     and on-line information collections.    manages the Department's
                                             Privacy Impact Assessments
                                             and information collection
                                             functions.
    Requires each agency to develop,        Leads Treasury computer
     document, and implement an agency-      security program, including
     wide information security program to    overall FISMA compliance.
     provide information security for the    In this role, develops,
     information and information systems     maintains, and facilitates
     that support operations and assets      implementation of
     (FISMA).                                Departmental IT guidance,
                                             including policies,
                                             procedures, manuals, and/or
                                             guidelines relative to the
                                             Department of the
                                             Treasury's unclassified
                                             computer security programs
                                             of all Departmental
                                             elements and classified and
                                             sensitive but unclassified
                                             telecommunications
                                             security.
------------------------------------------------------------------------
Paperwork Reduction Act:
    Overall responsibility for information  Leads comprehensive IT
     resources management.                   management organization
                                             comprised of IT capital
                                             planning, IT strategic
                                             planning, enterprise
                                             architecture, E-Government,
                                             Cyber Security, Information
                                             Management,
                                             Telecommunications, and
                                             Enterprise Solutions.
    Establish an effective information      Serves as the senior
     collection and records management       official managing the
     program.                                Department's comprehensive
                                             information collection and
                                             records management
                                             functions. Certifies all
                                             Treasury information
                                             collection requests and
                                             prepares the Department's
                                             annual Information
                                             Collection budget.
------------------------------------------------------------------------

                                 CFIUS

    Question. The Committee on Foreign Investment in the United States 
or CFIUS has become a controversial issue over the past year with the 
Unocal and DPW deals. Even though both deals ended up collapsing due to 
political pressure, I believe that there are some lessons learned from 
these two experiences that need to be addressed.
    Senator Shelby has taken the lead in reforming the legislation 
governing CFIUS. However, I believe the Treasury and the administration 
could take some steps outside of legislation that could improve the 
process. For example, I think that the Office of Intelligence and 
Analysis is uniquely positioned to provide intelligence support for the 
CFIUS process.
    What steps is Treasury taking to avoid some of the mistakes from 
the past year? In particular, how are you improving communication with 
the Congress so that we learn about these potentially controversial 
deals prior to the media learning about them?
    Answer. The administration supports reform of the CFIUS process and 
has already begun to take steps to address the concerns expressed by 
members of Congress. First, the administration is committed to 
improving communication with Congress concerning CFIUS matters and 
shares the view that Congress should receive timely information to help 
meet its oversight responsibilities. Treasury is now promptly notifying 
Congress of every review upon its completion, and the administration is 
working hard to be responsive to Congressional inquiries. The 
administration also has offered to conduct quarterly briefings for 
Congress on CFIUS matters. These quarterly briefings were scheduled to 
begin before the issues with respect to the DP World transaction became 
the subject of Congressional and media attention. I look forward to 
your suggestions on how to foster better communication.
    Second, the administration supports a high level of political 
accountability for CFIUS decisions and is committed to ensuring that 
senior, Senate-confirmed officials play an integral role in examining 
every transaction notified to the committee. Improvements to the CFIUS 
process should also ensure that senior U.S. officials are focused on 
national security issues. CFIUS agencies are briefing at the highest 
levels in their respective agencies. On-going, high-level engagement 
occurs regularly on CFIUS issues at Treasury and other CFIUS agencies.
    Third, the administration and the Treasury Department also agree 
that the committee can carry out its role more effectively by 
strengthening the role of the intelligence community in the CFIUS 
process, which is essential in a complex and changing national security 
environment. The Director of National Intelligence (DNI) has begun to 
do so by assigning an all-threat assessment responsibility to the 
National Intelligence Council and ensuring that all relevant 
intelligence community agencies and activities participate in the 
development of final intelligence assessments provided to the 
committee, including Treasury's Office of Intelligence Analysis. The 
committee recently formalized the role of the Office of the DNI, which 
plays a key role in all CFIUS reviews and investigations by 
participating in CFIUS meetings, examining every transaction notified 
to the committee, and providing broad and comprehensive threat 
assessments. The DNI already contributed greatly to the CFIUS process 
through reports by the Intelligence Community Acquisition Risk Center 
concerning transactions notified to the committee, but formalizing its 
place in the process--and strengthening the threat assessments provided 
to the committee--represent an enhancement of the intelligence 
community's role. The DNI does not vote on CFIUS matters and should 
not, because the role of the DNI is to provide intelligence support and 
not to make policy judgments based upon that intelligence.

                                IRS BSM

    Question. The budget request proposes a major increase in funding 
for BSA Direct of some $12.5 million but proposes a major cut to the 
IRS's Business Systems Modernization program of some $30 million. The 
GAO just issued a report noting the problems with BSA Direct and the 
Treasury OIG just issued a report praising the IRS's management of its 
IT contractors.
    Given what we now know about the problems at FinCEN and BSA Direct 
and the improvement at the IRS, do you agree that the budget request 
for FinCEN is a case of rewarding bad behavior while the request for 
IRS is a case of punishing good behavior? How do you reconcile these 
contradictions? Are you still committed to BSM?
    Answer. The $12.5 million in requested additional funding for BSA 
Direct referenced in the GAO report includes $2.5 million for BSA 
Direct and $10 million for a separate, but related, Cross-Border Wire 
Transfer System.
    Of the $2.5 million requested for BSA Direct, $1.8 million is for 
enhancements to meet the needs of the expanding user base for the e-
filing and secure access components, both of which have been 
operational and successful for a number of years, with the remaining 
$0.7 million for continued development of the retrieval and sharing 
component.
    The problems noted in GAO's report have come to light and are being 
addressed. FinCEN Director Werner proactively has initiated an 
assessment of the BSA Direct retrieval and sharing component, presently 
scheduled to be completed in July, to determine the extent of the 
problems with the project and the next steps that need to be taken with 
regard to BSA Direct. The Office of the CIO is working closely with 
FinCEN on this effort.
    The $10 million requested in fiscal year 2007 for the Cross-Border 
Wire Transfer System is submitted in accordance with Section 6302 of 
the Intelligence Reform Act of 2004 (S. 2845, Public Law 108-458), 
which charges FinCEN with two tasks: (1) a feasibility study to be 
completed as soon as practicable; and (2) the implementation of 
enabling regulations and a technological system for receiving, storing, 
analyzing, and disseminating the reports, to be completed by December 
2007. FinCEN will submit a report on the results of the feasibility 
study to the Secretary in the coming weeks, and has included this 
funding request to allow development of the system to begin in 2007, 
should the Secretary recommend and Congress authorize doing so.
    The administration continues to be committed to the IRS Business 
Systems Modernization program. We are pleased with the Treasury 
Inspector General for Tax Administration's recognition of the progress 
that the IRS BSM program has made over the past 2 years to improve its 
performance on delivering projects and releases on time and on budget, 
while meeting or exceeding scope expectations. In fiscal year 2006 and 
continuing into fiscal year 2007, BSM is revising its modernization 
strategy to emphasize the incremental release of projects to deliver 
business value sooner and at a lower risk. The President's budget 
request for BSM for fiscal year 2007 aligns with this revised strategy 
and provides the level of resources the administration believes 
necessary to deliver the fiscal year 2007 BSM program requirements.

                 DYNAMIC ANALYSIS OFFICE OF TAX POLICY

    Question. The budget request proposes some $500,000 to create a new 
``dynamic analysis office'' within the Treasury.
    What types of analysis would this office conduct that is not being 
conducted at Treasury or other Federal agencies? What is the long-term 
plan for this office in terms of funding and staffing?
    Answer. The administration has very limited capabilities to conduct 
dynamic analyses of tax policy changes. The budget request would create 
a new Dynamic Analysis Division within the Treasury Department's Office 
of Tax Policy to conduct dynamic analyses of major tax policy changes. 
The dynamic analyses would focus on the macroeconomic effects of tax 
policy changes. The new Division would not, at least initially, conduct 
dynamic scoring of tax policy changes, which would take dynamic 
analysis one step further and estimate how the macroeconomic changes 
affect government revenues.
    While the fiscal year 2007 budget request for $513,000 is for the 
upcoming fiscal year, Assistant Secretary Pack sent a letter on June 8, 
2006 to Chairman Bond and Ranking Member Murray proposing that this 
initiative be accelerated into this fiscal year. The acceleration of 
this new Division into fiscal year 2006 would be funded within the 
existing appropriation for this fiscal year. The request for fiscal 
year 2007 would remain unchanged, funding three full-time positions for 
1 full year rather than the estimated six positions for 6 months.

                TREASURY COMMUNICATIONS ENTERPRISE (TCE)

    Question. Have the deficient items identified in the TCE bid 
protest been addressed and corrected? In particular, what measures are 
being taken to ensure the reasonableness of the price evaluation?
    Is the Treasury's office of the Chief Information Officer properly 
structured and staffed to provide adequate oversight to major systems 
acquisitions such as TCE?
    Answer. The issues raised on the TCE bid protest have been 
addressed fully. In October 2005, Treasury released an amended Request 
for Proposal, which clarified what is required of vendor price 
proposals. Furthermore, in evaluating vendor proposals, the evaluation 
team is working in close concert with both Internal Revenue Service 
(IRS) legal counsel as well as Treasury's Office of the General Counsel 
(OGC) to ensure that they are following all appropriate rules and 
regulations.
    The Office of the Chief Information Officer (OCIO) is qualified 
fully to provide effective oversight to major acquisitions such as TCE. 
The TCE procurement is being executed through the IRS Office of 
Procurement, which has extensive experience in conducting acquisitions 
the size and scope of TCE. The OCIO senior management works in close 
concert with IRS Procurement, IRS legal counsel, Treasury OGC, and 
Treasury senior management to provide adequate oversight and management 
of the acquisition. This collective leadership team meets weekly to 
monitor the status of the TCE procurement.
    The ASM/CFO also established a focused leadership group to provide 
advice and recommendations on the business case documentation and on 
the strategy for TCE. This group includes the Treasury CIO, Senior 
Procurement Executive, Deputy Chief Financial Officer, Assistant 
General Counsel, and ASM/CFO senior advisors.

                    IRS OVERSIGHT BOARD NOMINATIONS

    Question. There are currently three vacancies on the IRS Oversight 
Board. I fully support Chairman Wagner and believe that these vacancies 
must be filled quickly to ensure that the Board has a quorum to meet 
and conduct its legislatively-mandated oversight responsibilities.
    Has the administration identified individuals to fill these 
vacancies? When can we expect these nominations to be formally 
submitted to the Senate?
    Answer. On May 1, 2006, the President nominated 4 outstanding 
individuals to fill the vacant or expired seats on the IRS Oversight 
Board. They are:
  --Paul Cherecwich, Jr., of Utah, to be a Member of the Internal 
        Revenue Service Oversight Board for a term expiring September 
        14, 2009, vice Charles L. Kolbe, term expired;
  --Donald V. Hammond, of Virginia, to be a Member of the Internal 
        Revenue Service Oversight Board for a term expiring September 
        21, 2010, vice Robert M. Tobias, term expired;
  --Catherine G. West, of the District of Columbia, to be a Member of 
        the Internal Revenue Service Oversight Board for a term 
        expiring September 14, 2008, vice Karen Hastie Williams, term 
        expired; and
  --Deborah L. Wince-Smith, of Virginia, to be a Member of the Internal 
        Revenue Service Oversight Board for a term expiring September 
        14, 2010, vice Larry L. Levitan, term expired.

                            STANDING UP TFI

    Question. During the early days of TFI, there were concerns about 
possible redundancy and OIA acting as an operational vice analytical 
unit.
    Please explain how you have addressed these concerns and explain 
the differences today between FinCEN, OFAC, TFFC, OIA, etc.
    Answer. The four components of TFI--the Financial Crimes 
Enforcement Network (FinCEN), the Office of Foreign Assets Control 
(OFAC), the Office of Intelligence and Analysis (OIA), and the Office 
of Terrorist Financing and Financial Crime (TFFC)--play distinct but 
complementary roles in fulfilling the overall mission of safeguarding 
the financial system from criminal abuse and applying measures to 
combat key national security threats, including terrorism, the 
proliferation of weapons of mass destruction, and money laundering. 
FinCEN is the U.S. Financial Intelligence Unit (FIU). Its mission is to 
administer and enforce the Bank Secrecy Act (BSA) and to receive, 
analyze, and disseminate, both domestically and internationally, 
financial intelligence, including suspicious activity reports, to 
detect criminal activity so that it can be prevented and prosecuted 
criminal activity. OFAC administers and enforces economic and trade 
sanctions, which are based on U.S. foreign policy and national security 
goals against targeted foreign countries, terrorists, international 
narcotics traffickers, and those engaged in activities related to the 
proliferation of weapons of mass destruction. In putting together 
packages for designation under Treasury's various sanctions 
authorities, OFAC engages in investigations, analysis, and research 
involving intelligence, law enforcement, and open source information 
and, as appropriate, extensive field work. As the policy development 
and outreach office for TFI, TFFC works with the Treasury Department, 
the U.S. Government interagency community, and its counterparts in 
Finance Ministries around the world, as well as directly with the 
private sector to develop and advance policy and specific actions to 
combat terrorist financing, WMD proliferation, money laundering, and 
other criminal activities. TFFC leads and coordinates U.S. 
representation at international bodies dedicated to fighting terrorist 
financing and financial crime such as the Financial Action Task Force 
(FATF) and increases our multilateral and bilateral efforts in this 
field. TFFC also promotes the development of effective targeted 
financial sanction regimes and the use of other targeted financial 
authorities through the G7, G20, FATF, United Nations, European Union, 
and bilaterally with countries of strategic importance.
    OIA is Treasury's in-house intelligence analytic unit, focusing on 
counterterrorism, counterproliferation, and other national security 
threats. OIA's mission is to support the formulation of policy and 
execution of Treasury authorities by providing: (1) expert analysis and 
intelligence production on networks that provide financial and other 
support to terrorist groups, proliferators, and other key national 
security threats; and (2) timely, accurate and focused intelligence 
support on the full range of economic, political, and security issues. 
We envision that as OIA evolves, it will be widely viewed as a center 
of analytic expertise on such networks. The TFI components' 
counterterrorism efforts are closely coordinated, both at daily senior 
staff meetings, and perhaps even more importantly, at weekly targeting 
meetings. The targeting meetings, which are led by TFI's Under 
Secretary, include senior officials from all of the TFI components. At 
these sessions, based on a review of the relevant intelligence, 
potential targets are presented and discussed. The participants assess 
the full range of potential Treasury actions, including designation, 
and decide on follow up direction and assignments. OIA will continue to 
host and participate in these sessions in the future, which have proved 
to be an effective mechanism for translating intelligence information 
into policy action.

                    COORDINATION WITH OTHER AGENCIES

    Question. With the establishment of TFI, I am curious to know how 
this new office is coordinating its intelligence activities with other 
Federal agencies and the Office of the Director of National 
Intelligence.
    How are you working and communicating with the intelligence 
community, especially with the Office of the Director of National 
Intelligence and other key intelligence agencies such as the Department 
of Homeland Security, the Department of Justice and the Federal Bureau 
of Investigation to make sure that efforts are not being duplicated?
    Answer. OIA is the primary Treasury office responsible for ensuring 
that the Department is fully integrated with the Intelligence Community 
(IC). Our recently completed report on OIA's fiscal year 2006-2008 
strategic direction makes clear that enhancing Treasury's integration 
into the IC has been--and will remain--one of OIA's top priorities. OIA 
has been working closely with the Office of the Director of National 
Intelligence since it was created. The DNI has been very supportive of 
OIA, and has been of great assistance to OIA at a number of key 
junctures. OIA has aligned its priorities with those set forth by the 
Director of National Intelligence in the National Intelligence 
Strategy. OIA's goals and direction align with key DNI objectives in a 
number of areas, including: strengthening analysis, WMD proliferation, 
keeping policymakers informed, and building an integrated intelligence 
capability. During its short tenure, OIA has already made great strides 
in integrating TFI specifically, and Treasury more generally, into the 
IC, and it will continue to build on these efforts. As a result of its 
improved integration into the IC, OIA analysts are now participating in 
the drafting and coordination of a variety of IC analytic products. 
These include: National Intelligence Estimates, CIA studies, Senior 
Executive Intelligence Briefs and Presidential Daily Briefs. OIA has 
also initiated both formal and informal analytic exchanges with its 
intelligence and law enforcement partners. The FBI and OIA, for 
example, are now working on a joint analytic project, which they intend 
to complete this year. The additional personnel OIA is now hiring--and 
those it is requesting in fiscal year 2007--will allow OIA to further 
increase its contributions to IC products, and to produce additional 
finished intelligence pieces for dissemination to the IC.

                           OFAC DESIGNATIONS

    Question. Pursuant to the Treasury's new designation authority to 
sanction proliferators of weapons of mass destruction, please provide 
the committee an explanation of the Office of Foreign Assets Control's 
designation process.
    Answer. OFAC follows a three-step process in pursuing designations, 
which consists of: identifying the target; constructing and de-
conflicting an evidentiary package; and publicly announcing the 
designation. Like its colleagues in law enforcement and the 
intelligence community, OFAC follows leads. If the initial 
investigation of a lead shows promise, then OFAC investigators move 
into the second stage of the designation process--the evidentiary 
process.
    In the WMD proliferation context, as well as in OFAC's other 
programs, such as the successful counter-narcotics programs, OFAC 
engages in investigation and research using intelligence, law 
enforcement and open source information and, as appropriate, field 
work. Once this evidence is collected, OFAC's investigators draft an 
evidentiary document analyzing and summarizing the information acquired 
through their research. This ``summary'' document describes how the 
information provides OFAC reason to believe that the target meets the 
specific criteria for designation. After an evidentiary package has 
been thoroughly reviewed within OFAC, it is reviewed by Treasury's 
attorneys to ensure that OFAC has met its evidentiary threshold, and by 
the Department of Justice's Civil Division, which represents OFAC in 
court if its designations are challenged.
    The next formal stage of OFAC's process involves interagency 
coordination. In most cases, OFAC engages informally with colleagues in 
a variety of agencies throughout the investigation process. In fact, 
initial targets are suggested through an interagency working group, and 
closely coordinated and vetted within appropriate agencies in the early 
stages of development. OFAC also works closely with colleagues in OIA 
and from elsewhere in the Intelligence Community. Nonetheless, OFAC 
goes through a more formal coordination phase designed to de-conflict 
its proposed designations with the operational and policy interests of 
other agencies and to ensure that the targets are consistent with and 
further the strategic national security and foreign policy goals of the 
United States. Executive Order 13382 specifically directs that 
designations by Treasury or State be undertaken in consultation with 
one another, as well as in consultation with Justice and other relevant 
agencies.
    Once this thorough interagency review process has been completed, 
the final evidentiary package is presented for signature by the 
Director of OFAC. At the same time that the package is provided to the 
Director of OFAC for consideration, two other important processes are 
in motion. First, OFAC's team of compliance officers and information 
technology professionals work closely with OFAC investigators to 
prepare the information about a target for possible public 
dissemination through OFAC's List of Specially Designated Nationals and 
Blocked Persons (SDN list). The SDN list is used by thousands of 
companies around the country and around the world to screen real-time 
transactions and accounts for the possible involvement of an OFAC 
target. The second process occurs if and when OFAC investigators become 
aware that a designation target has a presence in the United States. At 
that point, OFAC investigators from both the Designation Investigations 
Division and the Enforcement Division prepare an operation to block any 
property that can be identified.

                           BIGGEST CHALLENGES

    Question. What are the three most immediate challenges for TFI?
    Answer. The three most immediate challenges for TFI are: (1) the 
need for additional resources to more aggressively pursue core 
objectives, including combating the financial underpinnings of weapons 
of mass destruction (WMD) proliferation; (2) leveraging our authorities 
most effectively to deal with terrorist-sponsoring regimes Iran and 
Syria, and working in partnership with governments and the private 
sector to do so; and (3) building the information technology systems 
necessary to effectively and efficiently carry out our mission.
    First, with respect to resources, Treasury has continued--with the 
support of your subcommittee--to build the new Office of Terrorism and 
Financial Intelligence. As TFI has grown in size, the demand for our 
expertise and capabilities has expanded as well. The President's budget 
for fiscal year 2007 includes funding for the component offices of TFI 
to meet this demand. For example, it provides OFAC with additional 
positions to implement and administer the WMD sanctions program, as 
well as to monitor and update existing terrorism designations. It 
provides funding for OIA to continue its efforts to build Treasury's 
intelligence capabilities by improving its key infrastructure and 
adding to its analytic breadth and expertise. And it provides FinCEN 
with additional resources to streamline data processing and enhance its 
e-filing capabilities to increase the ease of compliance with 
regulations and improve its abilities to track users' needs.
    Second, TFI continues to be challenged to leverage its capabilities 
to deal with terrorist-sponsoring regimes Iran and Syria. TFI has at 
its disposal a broad range of tools to pressure obstructionist regimes 
and freeze the assets of terrorists, proliferators, and other 
wrongdoers. We have regulatory authorities to help banks and other 
institutions implement systems to detect and halt corrupt money flows. 
And, we continue to work with other governments and international 
institutions to achieve collective action against threats and to take 
critical steps to stem the flow of illicit finances. The combination of 
these various measures contributes to the U.S. Government's overall 
ability to deter and defend against key threats. The dynamic situation 
in the Middle East requires close and sustained attention and careful 
coordination across the interagency and the international community to 
ensure that these capabilities, or, in some cases, the threat to take 
certain measures, are exercised most efficiently and effectively.
    Finally, TFI continues to be challenged to meet its internal 
information technology requirements, and the fiscal year 2007 budget 
request, if approved, will move us toward being able to do so. For 
example, Treasury's Foreign Intelligence Network (TFIN), the sole 
information technology system in the Department authorized for top 
secret information has not been modified or upgraded to keep pace with 
the changes in intelligence, user, or technological requirements. TFIN 
lacks appropriate analytical tools and a robust disaster recovery 
capability. The fiscal year 2007 budget provides funding to upgrade 
this critical system. Additionally, OFAC has a demonstrated need for an 
Enterprise Content Management (ECM) system to provide electronic 
document, records and case management functions. The fiscal year 2007 
budget request of $627,000 will assist OFAC and Treasury's Office of 
the Chief Information Officer (OCIO) in continuing their joint efforts 
to develop a pilot approach to an ECM system within the context of a 
government-wide/department-wide enterprise solution.
                                 ______
                                 
              Questions Submitted by Senator Thad Cochran

    Question. The New Markets Tax Credit (NMTC) Program relies upon the 
decennial census to qualify areas as eligible for NMTC financing. 
Employing 2000 Census Bureau data, only a few census tracts along 
Mississippi's devastated coast line qualify as ``Low-Income 
Communities''. A re-measurement, not contemplated in the current 
statute would likely qualify them under the program's guidelines. In 
addition, I understand that Secretary Snow has the discretion under the 
Job Creation Act of 2004 to designate ``targeted populations'' as a 
group to be treated as a ``Low-Income Community''.
    Will the Community Development Financial Institutions Fund, with 
the Secretary of the Treasury, designate the census tracts or targeted 
population of the most heavily damaged areas as ``Low-Income 
Communities'' by conducting either a re-measurement of census tracts in 
the Katrina-affected areas or employing the targeted population 
discretionary tool which currently exists?
    Answer. The CDFI Fund, the Internal Revenue Service (IRS) and NMTC 
Program participants rely upon Census Bureau data to determine whether 
projects are located in NMTC-qualifying Low-Income Communities (LICs). 
To our knowledge, the Census Bureau has not announced plans to re-
assess the areas damaged by Hurricane Katrina and provide updated 
census information. Absent new data from the Census Bureau, the CDFI 
Fund does not have any means available to provide a re-measurement of 
these areas.
    Although new census data won't be available, the Secretary may 
designate ``Targeted Populations'' as LICs. Pursuant to The American 
Jobs Creation Act of 2004, Targeted Populations may include low-income 
persons as well as other persons that ``otherwise lack adequate access 
to loans or equity investments'' (i.e., persons who have historically 
been denied access to loans, equity investments or financial services 
due to factors that are unrelated to their investment or credit 
worthiness such as gender, race, ethnicity, national origin and creed).
    The CDFI Fund, in conjunction with the IRS, is developing guidance 
to implement this new Targeted Populations provision. As part of this 
process, we are considering whether and under what circumstances 
residents of the Hurricane Katrina Gulf Opportunity (GO) Zone could 
potentially be included as a Targeted Population. We hope to publish 
guidance on this matter before the end of June 2006.
    Question. Of the $8 billion of NMTC Allocations made to date, a 
very small amount of NMTC allocation ($15 million of the total $8 
billion) has been made to Community Development Entities (``CDEs'') 
based in Mississippi, and little other NMTC allocation has made its way 
into the State from allocatees based outside Mississippi. The residents 
of Mississippi suffered much devastation from the Katrina Hurricane.
    Instead of allocating $1 billion of NMTCs to the entire GO Zone, 
will the Community Development Financial Institution Fund (CDFI) and 
Secretary of the Treasury consider designating a pro-rata (based on pro 
rata storm population in the Katrina affected areas) amount to be spent 
in each State?
    Answer. The NMTC, unlike other credits such as the Low-Income 
Housing Tax Credit, is a non-apportioned Federal tax credit. That is to 
say, NMTCs are not apportioned to States on a pro-rata basis. Rather, 
they are awarded to intermediary entities known as Community 
Development Entities (CDEs) throughout the country that apply to the 
CDFI Fund under annual competitive allocation rounds. While the GO Zone 
Act of 2005 provided an additional allocation of $1 billion for use in 
the recovery and redevelopment of the Hurricane Katrina GO Zone, it did 
not specifically authorize or otherwise instruct the CDFI Fund to 
convert the allocation authority into an apportioned Federal tax credit 
to be issued by the affected States.
    Question. Six hundred million dollars of the supplemental $1 
billion allocation created for the benefit of the GO Zone is being 
allocated under rules which do not open the opportunity for interested 
groups in Mississippi to participate in its redevelopment through this 
incentive. In March 2006, some of my constituents learned that to be 
considered for the $600 million, an entity would have had to have 
submitted an application for NMTCs in September 2005, 3 months before 
the $1 billion supplemental was signed into law. To submit an 
application for NMTCs, an entity would have had to file to become a CDE 
1 week before Hurricane Katrina landed onshore. This implementation of 
the program disadvantaged participants inside the State of Mississippi 
who would like to be involved in its rebuilding.
    For Mississippi CDEs that did apply for NMTCs in this round, will 
the CDFI Fund and Secretary of the Treasury work with applicants to 
make revisions necessary to their applications to ensure that they 
receive minimum threshold scores, qualifying them for allocations?
    How will the CDFI Fund and Secretary of the Treasury open this 
process to those in Mississippi who would like to compete for the $600 
million of NMTCs? Will it hold a special competition (either completely 
open or with limitations) for the $600 million? Will the $600 million 
be allocated pro rata among the governors of the three States for 
State-created CDEs, allocations of which could then be allocated to 
other CDEs in the State?
    Answer. The process for allocating the $600 million of GO Zone 
allocation authority through the 2006 allocation round was described in 
a revised Notice of Allocation Availability (NOAA) published on March 
10, 2006. The Treasury Department has no plans to amend these 
procedures.
    The GO Zone Act of 2005 made available $1 billion of additional 
allocation authority to be allocated as follows: $300 million through 
the 2005 NMTC allocation authority; $300 million through the 2006 
allocation authority; and $400 million through the 2007 allocation 
authority. As you are aware, this legislation was enacted in late 
December 2005--approximately 6 months after the 2005 NMTC award 
decisions had been finalized. The $300 million of additional 2005 GO 
Zone allocation authority was therefore added to the $300 million of 
2006 GO Zone allocation authority, thus enabling the CDFI Fund to 
allocate up to $600 million of allocation authority through the 2006 
allocation round. This is an addition to the $3.5 billion of allocation 
authority that was already available through that round.
    When the GO Zone Act was passed in December 2005, the application 
deadline for the 2006 round of NMTC allocation authority had expired. 
The Treasury Department decided not to re-open the round to accept 
additional applications, as this would likely lead to delays of 6 
months or more in making available the allocation authority to the GO 
Zone applicants. The Treasury Department felt that it was critical that 
these resources be made available as soon as possible in the affected 
areas.
    In determining not to accept additional applications, the Treasury 
Department took into account the make-up of the 2006 round applicant 
pool. The CDFI Fund received a total of 254 applications, including 65 
that were submitted by organizations that indicated their intent to 
serve the GO Zone as part of their principal markets. This included 16 
applicants (requesting a total of $2.59 billion in allocation 
authority) that were headquartered in the GO Zone, 13 of which had 
received deadline extensions (some as long as 12 weeks) in the wake of 
Hurricane Katrina. Based on this data, the Treasury Department was 
confident that there would be a high number of qualified CDEs 
headquartered both inside and outside of the GO Zone that would be able 
to make effective use of the credits.
    Finally, we believe the GO Zone legislation addresses your concern 
that local entities be involved in the redevelopment process. The 
legislation requires that, in making the GO Zone allocation 
determinations, CDEs must demonstrate that they have a significant 
mission of recovery and redevelopment in the GO Zone. The CDFI Fund 
will consider each applicant's track record of redevelopment in the GO 
Zone, as well as the extent to which it has resources (physical 
resources as well as personnel) deployed in the GO Zone and/or is 
partnering with local entities in the GO Zone.
    Question. There is some evidence that a preponderance of NMTC 
financing, both loans and investments, have been directed to real 
estate businesses. There also seems to be less NMTC financing being 
directed to small business lending and venture capital investing. Both 
venture capital and small business lending would be helped if 
regulations governing the reinvestments of capital could be made more 
flexible--both in terms of the substantially all threshold for 
reinvestment and in terms of the eligible uses of reinvested funds in 
terms of geographic area and investments activity.
    What regulatory changes are you contemplating to ensure more use of 
the NMTC for small business and venture capital projects?
    Answer. The CDFI Fund has collected NMTC transaction level data on 
transactions completed in 2004 through its Community Investment Impact 
System. Data on 2005 transactions is due June 30, 2006. The 2004 data 
indicates that of the 280 transactions reported in 2004, 28 percent 
were business investments and 72 percent were real estate transactions.
    The Treasury Department is aware of the desire to see more use of 
the NMTC Program to support small business lending and venture fund 
investing. The NMTC statute does not prioritize allocations among the 
various types of potential uses such as real estate development, 
business loans or venture investing. However, the NMTC statute does 
require that substantially all of a qualified equity investment be used 
to make qualified low-income community investments throughout a 7-year 
period. We are told that investors prefer the certainty of real estate 
transactions both as a matter of mitigating economic risk and as a 
matter of compliance with the 7-year investment period rule.
    The CDFI Fund will award a contract to evaluate the use of the NMTC 
Program, including evaluating its use in financing small business and 
venture fund investments. One element of the evaluation will include an 
assessment of investor behavior and preferences in the NMTC Program. 
The Fund expects to have information late this fall or early in 2007. 
The CDFI Fund anticipates that subsequent to the issuance of this 
assessment and the statutorily-mandated GAO study due in 2007, the CDFI 
Fund will work collaboratively with the Office of Tax Policy and the 
Internal Revenue Service to study appropriate statutory and/or 
regulatory improvements to the program, if the program is extended.
    Question. It is my understanding that urban areas claim 
approximately two-thirds focus of the NMTC program's resources, in 
terms of percentage of allocations and actual funds. The one-quarter 
share of funds first devoted to rural geographies has shifted to 
suburban areas. Only one-sixth of resources were targeted to rural 
communities in the last round.
    What can you do to ensure that more of the credit reaches rural 
communities?
    Answer. At the time of application submission, applicants are asked 
to estimate the percentage of activities that will be undertaken in 
rural areas. Through three allocation rounds, awardees have estimated 
that approximately 17 percent of their transactions would be undertaken 
in rural areas, which is consistent with the percentage of the U.S. 
population that resides in rural areas (17.4 percent, according to 2000 
census data).
    In addition, the CDFI Fund has completed an analysis of 
transactions undertaken by awardees as of fiscal year end 2004, and has 
determined that approximately 19 percent of the $1.3 billion of 
investments closed that year were undertaken in rural communities. The 
CDFI Fund has also analyzed the application trends in the 2005 
application round, and determined that there is no selection bias 
against applications submitted by organizations serving rural areas. In 
other words, CDEs focusing activities primarily in rural markets 
received awards in a rate consistent with their application rate.
    That being said, the CDFI Fund will continue its efforts to provide 
more outreach in markets that do not appear to be benefiting from NMTC 
investments.
    Question. I have constituents who are concerned about the use of 
credit to subsidize transactions that would otherwise move forward 
without the credit. NMTC should drive capital into new deals not 
feasible in conventional markets.
    What is being done to make sure that the NMTC is being used to 
subsidize transactions that would not occur without the credit?
    Answer. Historically we know that low-income communities have not 
been able to access capital on the terms needed to finance businesses 
and real estate developments. Based upon preliminary transaction data 
provided by allocatees through the CDFI Fund's Community Investment 
Impact System (CIIS), which is required as a matter of compliance with 
the Fund's allocation agreement, as well as anecdotal accounts of the 
use of the credits, the CDFI Fund believes that the NMTCs have been 
very effective at bringing capital into transactions that would not 
otherwise be financed.
    To obtain an allocation through what has been a very competitive 
application process in each of the four rounds conducted to-date, the 
CDFI Fund gives each applicant the opportunity to commit that it will 
go above and beyond minimal program requirements. For instance, while 
all allocatees are required to invest substantially all (generally 85 
percent) of the qualified equity investments they receive in low-income 
communities, most applicants have committed to invest NMTC proceeds in 
areas characterized by severe economic distress (i.e., areas that have 
significantly higher poverty rates and lower median family incomes than 
those minimally required under the NMTC Program; areas that have 
unemployment rates at least 1.5 times the national average; and/or 
areas that have been designated for economic development through other 
governmental programs such as Brownfields, Empowerment Zones and 
Renewal Communities). Of the 41 allocatees that received awards under 
the 2005 round, 37 indicated that at least 75 percent of their 
activities will be provided in these areas of severe economic distress, 
and 21 indicated that 100 percent of their activities will be provided 
in such areas. The CDFI Fund will require these allocatees, through 
their allocation agreements, to meet the benchmarks identified in their 
applications.
    Similarly, the CDFI Fund requires its allocatees to provide 
products with non-conventional features, even though this would not 
otherwise be required under the program regulations. Such features 
include, among other things: equity and equity-equivalent terms and 
conditions; subordinated debt; below market interest rates; and reduced 
origination fees. In the 2005 allocation round, all 41 allocatees 
indicated that at least 75 percent of their loans and investments will 
have particularly flexible or non-traditional features, and 36 of the 
41 allocatees indicated that 100 percent of their loans and investments 
will have particularly flexible or non-traditional features. Thus, the 
CDFI Fund ensures that the commitments made in the applications will be 
kept through the allocation agreements.
    We believe these requirements help ensure that the investments 
being made through the NMTC Program are not in the locations or not on 
the terms and conditions that the marketplace would normally finance. 
Additionally, the CDFI Fund is about to engage an independent 
contractor in a long-term, longitudinal evaluation of the NMTC Program. 
This evaluation will enable the CDFI Fund and Congress to more fully 
understand and measure the benefits of the tax credit in low-income 
communities throughout the country.
    Question. The Internal Revenue Service (IRS) regulations 
implementing the New Markets Tax Credit Program place an onerous 
regulatory burden on allocatees seeking to use their credits to make 
investments in CDEs or intermediary activities. Specifically, the 
regulations require the ``direct tracing'' of tax credit investor 
proceeds to specific activities or projects; thus, making it difficult 
to use as loan or equity capital. Most CDEs that are CDFIs are small 
and already have significant reporting burdens required to maintain 
their CDE/CDFI certification status. The reporting burden has a 
disproportionate impact on rural or other communities that are 
typically served only by small- or medium-sized CDE/CDFIs and has 
effectively locked them out of accessing these important Federal 
resources.
    What can the Treasury Department or IRS do to eliminate the direct 
tracing requirements for allocatees seeking to use their credits to 
make investments in Community Development Entities (CDEs) that are also 
CDFIs?
    Answer. The NMTC statute requires that for an equity investment to 
be qualified, substantially all of the cash must be used to make 
qualified low-income community investments throughout a 7-year period. 
The tracing requirements are necessary to ensure that the statutory 
requirements are met. Recognizing the difficulty in such tracing, a 
safe harbor is provided for determining the use of the cash.
                                 ______
                                 
              Questions Submitted by Senator Patty Murray

                TREASURY COMMUNICATIONS ENTERPRISE (TCE)

    Question. In 2004, the Treasury Department launched the procurement 
of a new Treasury Communications Enterprise--or ``TCE''. TCE was 
envisioned to allow data, voice, and video technologies in a single 
network. Your budget told us that it would be worth $10 billion over a 
10-year period.
    Every aspect of this procurement appears to have been botched by 
your Department. You awarded the contract to AT&T but shortly 
thereafter, several unsuccessful bidders won a bid protest before the 
GAO because your Department altered the basis upon which the bidders 
prepared their proposals. Your Department was also found to have 
understated the cost of the winning bid and failed to fairly evaluate 
the prices of the competing bids.
    In response to GAO's decision, you decided to terminate the 
contract with AT&T and acquire the services through the GSA. Then, late 
last year, you reversed course again and announced that you would 
proceed with your own independent procurement. For some reason, having 
failed once with an independent procurement, you are now going forward 
with one even though the GSA is in the midst of its own similar 
procurement for much of the rest of the government. The GSA maintains 
that all the services you will need will be provided by their system.
    When the Treasury Inspector General looked into this program, he 
found that poor planning and execution of TCE resulted in numerous 
delays and increased costs. They also found little evidence of adequate 
senior management oversight of the project.
    Mr. Secretary, what explains all the problems that have plagued 
this program? Why did you reverse course and decide not to proceed with 
the GSA procurement? What critical capabilities will your system have 
that the GSA's system will not?
    Answer. The contract award for TCE in December 2004 was protested 
by the losing bidders. Due to the considerable interest in Treasury's 
ability to use GSA's Networx program, Treasury and GSA entered into a 
Memorandum of Understanding (MOU) on December 2, 2004. The MOU stated 
that Treasury would evaluate the GSA's Networx services 3 years after 
the award of TCE. The losing bidders argued that this MOU materially 
altered the basis under which option years would be awarded. The 
protest was upheld by GAO in March 2005. Treasury did not intend nor 
did it believe the MOU impacted the procurement, as the Department 
already intended to seek the best value for the government by 
evaluating other service for the option years. Consistent with 
effective IT management and procurement principles, the goal was to 
evaluate the TCE contract and determine the most cost-effective long 
term strategy.
    Subsequent to the sustained protest, Treasury conducted a second 
Acquisition Alternatives Analysis in consultation and cooperation with 
GSA. Treasury once again considered government-wide contract 
alternatives and scrutinized carefully these options in light of the 
protest decision. Treasury and GSA worked to refine the alternatives 
analysis and reach consensus on the best approach to move forward with 
the replacement for the expiring contract, Treasury Communications 
System (TCS). The Treasury and GSA post-protest analysis confirmed 
Treasury's conclusions of the initial analysis. Based on the estimated 
schedule for the award of Networx and a review of other GSA options to 
serve as a bridge between TCS and Networx, the finding was that a 
Treasury-led full and open competition was the most reasonable decision 
based on contract structure, cost, and most importantly, transition 
risk.
    Existing GSA contracting vehicles could not accommodate easily the 
managed service requirements for TCE. To support the managed services 
model, the GSA contracts would have required modifications, which would 
have increased time, cost, and complexity to support a managed services 
solution. The near-term expiration of GSA contracting vehicles would 
have required an additional competition and a second transition once 
the new contracting vehicle--GSA's planned Networx program--was 
awarded. Two transitions within a 2-year timeframe represented 
unacceptable risks of potential service interruptions and threat to 
Treasury's ability to fulfill its mission responsibilities. Using a GSA 
contract vehicle also was a significantly more expensive option due to 
GSA overhead and the costs associated with waiting for Networx.
    Concurrently, the Office of the Inspector General completed an 
audit of the TCE procurement, which found that planning documentation 
was not cohesive or comprehensive. While the project had the full 
support of Treasury senior officials, who were briefed regularly on 
TCE, we recognize that the supporting documentation did not reflect 
consistently and clearly senior management decisions to the extent 
necessary for management review and audit. Treasury subsequently has 
undertaken specific actions to address the audit findings.
    Question. Why hasn't your CIO done a better job of managing this 
project and all the other troubled IT projects in your agency?
    Answer. Treasury is taking the necessary steps to address the 
Inspector General's (IG's) findings and recommendations. Upon receipt 
of the report, the ASM/CFO directed a team of IT, procurement, and 
legal executives to develop corrective actions that address all of the 
IG's findings and recommendations. Specifically, the Department has 
greatly improved the TCE documentation, and also is strengthening 
documentation requirements for all major Treasury IT projects.
    Department-wide efforts are underway to strengthen IT investment 
oversight for the Treasury IT portfolio as a whole. Over the past 2 
years, the Treasury CIO has been leading efforts to mature the IT 
capital planning process within the Department. Treasury has made 
demonstrated progress in: (1) formalizing and standardizing the 
quarterly review process of the health of the IT portfolio, (2) 
establishing Department-wide Capital Planning and Investment Control 
(CPIC) process and Contract Earned Value Management policy guidance, 
and (3) instituting the use of a common investment portfolio management 
tool.
    Other examples of how Treasury is providing effective corporate 
oversight and leadership of IT management include:
  --The majority of Treasury IT projects are succeeding, including most 
        of the systems mentioned at the April 6, 2006, Senate 
        Appropriations Committee hearing. For example, Treasury's HR 
        Connect system was recently named a Federal Human Resources 
        Management Line of Business (HR LoB) Shared Service Center 
        (SSC) by the Office of Personnel Management and the Office of 
        Management and Budget (OMB). The HR LoB is one of the 
        Presidential E-Government lines of business, which designates 
        agency centers of excellence to provide government-wide 
        servicing for core functions. Currently, the Department's HR 
        Connect program services Treasury, the Department of Housing 
        and Urban Development (HUD) and components of the Departments 
        of Justice and Homeland Security.
  --Treasury migrated HUD to HR Connect last year on time and within 
        budget, adding an estimated 10,000 employees to the system. 
        Both HUD and industry recognized Treasury for the cost-
        effective and smooth transition. Treasury clearly has addressed 
        its past problems with the HR Connect program and continues to 
        drive towards enhanced performance and operating efficiency.
  --Treasury has made significant improvement across the core IT 
        management areas measured under the Expanding E-Government (E-
        Gov) Initiative of the President's Management Agenda (PMA). For 
        the first time since the establishment of the PMA in 2002, 
        Treasury improved its overall E-Gov status from Red to Yellow 
        in the first quarter of fiscal year 2006. The improved PMA 
        score was based on Treasury's meeting key requirements and 
        performance metrics. These key requirements and performance 
        metrics included developing Treasury-wide IT capital planning 
        policy, maturing the Departmental Enterprise Architecture, and 
        meeting quarterly milestones for Presidential E-Gov Initiative 
        implementation. This was accomplished in large measure by the 
        efforts of all bureaus through the Treasury Chief Information 
        Officers' Council and its sub-councils.
  --The Alcohol and Tobacco Tax and Trade Bureau's (TTB) recent 
        successful migration from the Bureau of Alcohol, Tobacco and 
        Firearms and Explosives (ATF) infrastructure is an example of 
        proper oversight and assistance between the Department and a 
        Treasury bureau. When ATF was divided into two organizations in 
        2003 (ATF became part of the Department of Justice while TTB 
        remained a Treasury bureau), all IT resources remained with 
        ATF. These IT resources included 100 percent of all capital 
        assets, infrastructure, IT support personnel, and resources to 
        continue development of core business applications. Treasury's 
        senior management team worked closely with TTB bureau 
        executives in developing and implementing smart sourcing 
        strategies. TTB accomplished the migration of its entire IT 
        infrastructure off of ATF in 6 months, which is an extremely 
        aggressive schedule for a migration of this scale. In fact, the 
        migration was completed well ahead of schedule and within an 
        extremely tight budget.
    The Department also remains focused on enhancing project management 
capability by establishing a Treasury-wide training program. In line 
with OPM and OMB guidance, Treasury's existing IT capital planning 
policy outlines the skills and competencies required for project 
managers based on project scope and complexity. Currently, bureau CIOs 
are required to certify that project managers for major investments are 
qualified according to these guidelines. This initiative, which 
supplements bureau training programs, will include a project management 
course focused on Treasury-specific policy and procedures to ensure 
consistent implementation across the Department.
    However, it is clear that there still remains work to be done. 
Treasury is implementing specific actions to promote greater 
accountability across the Department's IT management, improve the 
reliability of information being reported, and establish additional 
processes through which to assess and validate program performance and 
reporting. These efforts are being undertaken Treasury-wide, with 
engagement of the leadership across the senior management, IT, and 
procurement communities.
    Question. Mr. Secretary, last year in a question for the record, I 
asked whom you held responsible for this botched procurement. The 
answer never identified anyone. So, now I want to ask you in person.
    Who in your department is to be held responsible for this waste of 
taxpayer dollars?
    Answer. Ultimately, as Secretary, I am responsible for the use of 
all Treasury resources. I rely on the ASM/CFO and the CIO to execute 
this responsibility related to major IT investments. I am confident 
that they are taking the necessary steps to provide a solution that is 
cost effective and meets Treasury's business needs.
    The Treasury Department's telecommunications infrastructure is 
critical to many functions such as: online tax filing and processing, 
the auction and purchase of Treasury securities, toll-free telephone 
taxpayer assistance, the disbursement of social security and veterans' 
benefits, and the collection of payments and delinquent debt owed to 
the U.S. Government.
    A Treasury-led full and open competition represents the most cost-
effective use of taxpayer dollars, as well as the most responsible 
approach in mitigating the risk of service interruption that would 
impair Treasury's ability to carry out its mission.
    Given that no GSA alternative was available at the time it was 
needed, Treasury had to use a sole-source justification to continue to 
receive telecommunications services. In addition, GSA delayed the 
Networx contract awards multiple times, which now are scheduled for 
March and May of 2007. After those awards, there will be an additional 
delay before any agency can receive services under Networx in order for 
the agency, including Treasury, to conduct a competition among vendors 
in the Networx program.
    If TCE were shut down, Treasury would face a potential gap in 
service from the time the current contract expires, i.e., September 
2007, to the time the final Treasury site is transitioned to Networx. 
To avoid this gap, Treasury would need to use a second sole-source 
justification to extend the current contract long enough to bridge to 
services under Networx, possibly until the first or second quarter of 
fiscal year 2009. This is a best-case estimate assuming: (1) no Networx 
protests and (2) that Treasury is the first agency in line for 
competition and transition needed to obtain services from a winning 
Networx vendor.
    Treasury's extension of its current telecommunications contract 
also would pose the risks: (1) a protest of a second sole-source 
justification and a significant cost increase by the current provider; 
(2) termination of service, should the current provider decide to 
shutdown the existing telecommunications infrastructure for its own 
business reasons; or (3) considerable time and cost to move sites that 
already have been transitioned to the TCE vendor back to the current 
telecommunications provider.
    If TCE were shut down, Treasury would be required to end the TCE 
contract under the contract's ``Termination for Convenience'' clause. 
That would make Treasury liable to the contractor for termination 
costs, such as equipment investment, minimum order costs, work in 
progress costs, and other costs allowed under a termination for 
convenience. Treasury also might be liable for the significant sunk 
investment to build the infrastructure necessary to provide TCE 
services.
    In addition, Treasury currently is spending an estimated $3.3 
million per month for telecommunications services above the estimated 
TCE monthly costs. The Department will continue to incur this 
additional cost until it completes the transition to TCE or Networx.

             BSA DIRECT--WHY DID NO ONE SPOT THE PROBLEMS?

    Question. Mr. Secretary, you heard me discuss the recent problems 
discovered with the BSA Direct program. That program was supposed to be 
the key tool for your agency to combat terrorist financing by ensuring 
compliance with the Bank Secrecy Act.
    In our appropriations bill last year, our committee directed you to 
report to us if there were to be any significant delays with this 
program. On February 17 of this year, your agency listed the continued 
development of BSA Direct as a major accomplishment of the agency. Your 
staff told us that the project was on track and would start functioning 
at the end of April.
    Less than 1 month later, the new director of the Financial Crimes 
Enforcement Network issued a ``stop work'' order for BSA Direct and 
required a top-to-bottom review because the project had failed to meet 
major performance milestones.
    How did this happen and who are you holding responsible for this 
failure?
    Answer. In February 2006, as the various commercial software 
products were integrated and tested, a number of system performance 
issues surfaced. Due to these performance issues, the system still was 
not fully tested by mid-March, and so a contingency plan had to be 
implemented to ensure continued access by our customers to the BSA 
data.
    FinCEN Director Robert Werner issued a 90-day ``stop work'' order 
directing FinCEN to perform an assessment of the BSA Direct Retrieval 
and Sharing component in order to ensure that the best product is 
developed at the best price, while also taking advantage of already 
developed technology. An assessment team chaired by the FinCEN BSA 
Direct project manager and including representatives from the Treasury 
CIO's office, FinCEN's Acting CIO, subject matter and information 
technology experts from FinCEN, as well as three support contractors on 
the BSA Direct project was created in March 2006. This assessment team 
will assess and refine core requirements for BSA information retrieval, 
dissemination, sharing, and analysis; determine if this component of 
BSA Direct can be salvaged and/or leveraged by other alternatives; and 
define the path to ensure business continuity. The team expects to 
deliver a report to the FinCEN Director by July 2006, following a 
recent 30-day extension of the ``stop work'' order. This time frame 
will allow the assessment team to offer specific recommendations based 
on detailed conclusions that are supported by clear, concise and 
credible evidence.
    Throughout this assessment period, FinCEN will be working with the 
IRS to ensure that there is no disruption of service to its customers 
in the law enforcement community. BSA Direct users will continue to 
have access to BSA data via the current FinCEN Secure Outreach web 
site, and will use the IRS WebCBRS (Currency and Banking Retrieval 
System) for retrieval and online analysis of information.

                OVERALL MANAGEMENT OF TREASURY PROJECTS

    Question. Mr. Secretary, at last year's hearing, when we discussed 
the mismanagement of major procurements in your Department, I thought 
that part of the problem might have been the many vacancies that you 
had in senior positions at the Department. Now, it's a year later and 
many of those vacancies have been filled.
    Looking forward, can we expect to see these costly, wasteful 
mistakes come to a stop?
    Answer. The Department has experienced a number of organizational 
changes and vacancies over the past few years. This turnover, indeed, 
has precipitated questions regarding the management of major 
procurements by the Department. With the new team recently put in 
place, we are working diligently to implement Treasury-wide IT capital 
planning and contract management policies consistently throughout the 
Department. These efforts are focused on promoting greater 
accountability across the Department's IT management, instituting 
standards for documentation for major projects, and establishing 
additional processes through which to assess and validate program 
performance and reporting. The Treasury CIO is working closely with the 
Office of the Inspector General to address the Management Challenges 
identified in the fiscal year 2005 Performance and Accountability 
Report. Actions include strengthening Treasury-wide IT capital planning 
policy and guidance, establishing minimum documentation requirements 
for major projects, and improving the reliability of investment 
reporting through an expanded independent verification and validation 
program. We believe these efforts will address key areas for 
improvement across the full life cycle of IT investments from 
acquisition, to steady state, to project closure.
    Question. In particular, your agency is telling us that its new 
Treasury Foreign Intelligence Network will have a total cost of $30 
million.
    Can you guarantee us that the cost will not grow dramatically for 
this program like it has for so many others?
    Answer. The President's fiscal year 2007 budget requests $21.2 
million to implement an accelerated deployment schedule to strengthen 
quickly Treasury's ability to fulfill its expanded intelligence role 
and to operate as a full partner in Intelligence Community activities. 
The $21.2 million will fully fund the needed upgrades to TFIN, which is 
scheduled to be completed by the end of fiscal year 2007. This brings 
the total cost of developing the TFIN core network and disaster 
recovery capabilities to $37 million.
    An effective governance structure has been in place for TFIN since 
the inception of the project to ensure mission, business, and technical 
objectives are achieved. This governance structure includes the: (1) 
TFIN Executive Board comprised of senior officials from the Office of 
Terrorism and Financial Intelligence and the Office of the Chief 
Information Officer (OCIO), and (2) TFIN Steering Committee comprised 
of project management and technical leads from stakeholder offices. 
These governance structures facilitate coordination, track project 
status, and support executive decision-making. OCIO hired a dedicated 
project manager to oversee the TFIN project.
    Treasury has established additional oversight as well. The 
Assistant Secretary for Management and Chief Financial Officer (ASM/
CFO), the Chief Information Officer (CIO), and the Assistant Secretary 
for Intelligence and Analysis (OIA) are committed to ensuring the 
project's successful completion. The ASM/CFO and CIO are engaged fully 
with the Assistant Secretary for Intelligence and Analysis, the 
system's major stakeholder. These officials and their staffs are 
working closely together in managing the development of TFIN, meeting 
regularly to resolve quickly problems that might affect the cost and 
schedule of the system. For example, on April 24, we implemented 
successfully the new stabilized TFIN platform. This executive level 
engagement will continue throughout the project. We expect Treasury to 
complete the system on time and within budget. Treasury also is working 
closely with and receiving direct support and assistance from the 
Intelligence Community.
    From a Departmental IT investment management perspective, Treasury 
has identified TFIN as a critical investment internally, as has the 
Intelligence Community. As such, the TFIN investment is subject to 
additional reporting requirements beyond the quarterly ``Control'' 
review conducted as part of the IT capital planning and investment 
control.
    The Department also is implementing specific initiatives to improve 
IT investment management, including the expansion of independent 
verification and validation resources to assess accuracy of project and 
investment reporting. We do not anticipate requesting additional funds 
from the Congress for the development of the TFIN system.

                          STOP THE WINE TAX!!

    Question. Last year, your Department proposed almost $30 million in 
new and increased user fees on the wine and alcohol industry. We, in 
our wisdom, did not adopt your recommendation. Yet, again, this year, 
you are proposing those same user fees.
    These don't appear to be new fees to provide new services to the 
industry. Rather, they are just new taxes proposed so you can eliminate 
some appropriated funding in your Department.
    Why are you proposing these fees again when you know they are not 
likely to be approved?
    Answer. The user fees proposed for TTB are intended to recover the 
costs in providing regulatory services to the alcohol industry. TTB 
issues permits to industry members engaged in the business of 
producing, importing, or wholesaling alcohol. Additionally, TTB must 
pre-approve all labels for alcohol products bottled, sold, or imported 
in interstate commerce. TTB must also approve certain formulas and 
statements of process for alcohol products, and may perform certain 
laboratory tests. These services ultimately protect both the general 
public and industry against misleading labels, adulterated alcohol, and 
dishonest persons entering the alcohol business, and promote fair 
competition among industry members. Since these regulatory efforts 
provide value to the industry, the industry should pay for the benefits 
it receives.
    Charging fees for services to industry can also provide incentives 
that lead to increased efficiency. For example, in calendar year 2005, 
71 percent of applications for approval of alcoholic beverage labels 
were filed on paper instead of electronically. Fees will encourage 
industry to file electronically and reduce unnecessary Certificate of 
Label Approval submissions.
    Question. Washington State is home to more than 400 wineries and 
350 wine grape growers--which is more than California's Napa Valley. 
They play an ever-increasing role in the Washington State economy--
especially in rural communities throughout the State. I believe these 
increased fees will severely hinder growth of the wine industry here in 
the United States.
    Can you outline for this committee what new benefits these user 
fees will provide the industry? Isn't it true that, once these new fees 
are assessed, the wineries will not be getting any new services above 
the ones they are getting today?
    Answer. Industry members will not receive any new services under 
this proposal. However, industry is currently receiving benefits from 
the services TTB provides and should pay for those benefits.

           ESTABLISHMENT OF A DYNAMIC TAX OFFICE AT TREASURY

    Question. Your fiscal year 2007 budget request includes an 
additional $513,000 and 3 FTE for a Dynamic Analysis Division within 
the Office of Tax Policy at Treasury.
    What resources are you dedicating towards this effort this year--do 
you plan to reprogram any resources to stand it up sooner?
    Answer. We would like to accelerate this initiative into fiscal 
year 2006 and Assistant Secretary Pack sent a letter to this effect to 
Chairman Bond and Ranking Member Murray on June 8, 2006. Establishing 
this new Division now will enhance and facilitate our capabilities to 
perform dynamic analyses of the macroeconomic effects of major tax 
policy changes, which, as you know, are particularly important to the 
work currently underway at the Treasury Department on tax reform. The 
acceleration of the new Division into fiscal year 2006 would be 
accomplished with no impact on our fiscal year 2006 funding; that is, 
it will be funded within the Office of Tax Policy's existing 
appropriation. The funding that we requested in the fiscal year 2007 
budget also would be unaffected.
    Question. Is it your intention should you receive this funding in 
fiscal year 2007 that dynamic scoring would be instituted into the 
government's budgeting?
    Answer. This dynamic analysis initiative will allow us to examine 
the effect that tax policy changes have on the size of the economy and 
major macroeconomic variables, such as GDP, the size of the capital 
stock, and total compensation. Dynamic scoring would take this one step 
further and estimate how the change in the size of the economy 
translates into higher or lower tax revenues. We envision that the 
initiative will, at least initially, focus on dynamic analysis, not 
dynamic scoring. Conventional revenue estimates, which do not take into 
account changes in the size of the economy, will continue to be 
produced. The Department needs to develop the capability for and 
experience with dynamic analysis before it can consider dynamic scoring 
of tax policy changes.

                   HYPOCRISY OF CHINA VS. CUBA POLICY

    Question. Mr. Secretary, do you believe that our Nation's policy of 
constructive engagement with China, and particularly our trade 
relationship with them, has helped us press our case for democracy, 
open markets and human rights?
    If you believe that our Nation's policy of constructive engagement 
with China has been a positive force change in that country, why is 
this administration doing exactly the opposite with Cuba?
    Answer. When formulating U.S. foreign policy, different 
considerations come into play; and sanctions regimes are designed to 
respond to country-specific concerns.
    While the United States remains concerned about the democracy and 
human rights record in China, we must also recognize that China is in 
the midst of an historic transformation from a centrally-planned 
economy to a market economy. Increasing openness to trade and foreign 
investment is central to this process, as is the integration of China 
into the institutions (and the responsibilities) that govern the global 
trading system. Chinese leaders at the highest level have stressed 
their commitment to financial sector reform and openness, a major focus 
in Treasury's engagement with China. On his visit to Washington last 
month, President Hu stated that his country will not only ``continue to 
advance the reform of the RMB exchange rate regime,'' but also ``take 
positive steps in expanding market access, increasing imports, and 
strengthening the protection of intellectual property rights.'' We will 
continue to leverage our trade relationship to work towards open 
markets in China, which is in both our interests. There is still a long 
way to go.
    Cuba has a brutal dictatorship that is increasing pressure on 
opposition groups. In addition to engaging in political repression, the 
Cuban government is actually reducing the limited economic openings for 
small-scale entrepreneurs in Cuba. U.S. policy towards Cuba remains to 
hasten the rapid transition to democracy and a free-market economy. As 
set forth in the Libertad Act, U.S. policy is to take steps to remove 
the economic embargo of Cuba when the President determines that a 
transition to a democratically elected government in Cuba has begun. 
The State Department is best placed to respond specifically to 
questions about the administration's policy toward Cuba.
     are the russians allies when it comes to combating terrorism?
    Question. A senior official in Russia's Foreign Ministry said last 
week that, as chair of the G-8, Russia will put forward a number of new 
initiatives to combat international terrorist financing.
    Have you been in contact with the Russian government to help shape 
this agenda, and if so, what new initiatives should we expect out of 
the Russians in this area?
    Answer. Yes, Treasury has been in contact with Russian counterparts 
regarding the G-8 Anti-Money Laundering/Combating the Financing of 
Terrorism (AML/CFT) agenda. For example, AML/CFT issues were discussed 
in the most recent G-8 Finance Sous Sherpas on May 11. Russia will be 
hosting an experts meeting from May 31 through June 1, 2006, which will 
focus on working with the Financial Action Task Force (FATF) style 
Regional Bodies (FSRBs) to implement AML/CFT standards. Russian 
proposals in this area are consistent with ongoing bilateral and 
multilateral AML/CFT initiatives. In particular, Russia has stressed 
the importance of enhancing the effectiveness of the FSRBs by 
increasing IMF and World Bank coordination with the regional bodies and 
by increasing support for their mutual efforts.
    The United States and Russia agree that it is crucial for countries 
to continue to develop strong AML/CFT programs. We agree that the work 
of the FSRBs to promote implementation of the FATF AML/CFT standards is 
instrumental to these efforts, as is the support of the International 
Financial Institutions. We see merit in Russia's proposals to enhance 
cooperation between these groups.
    Question. On a related matter, Russia, as you know, does not 
officially consider Hamas a terrorist organization. In fact, Russia was 
one of the first countries to invite Hamas on an official visit 
following the terrorist group's victory in the Palestinian legislative 
elections.
    How do disagreements between nations in the definition of who is a 
``terrorist'' affect our efforts to stop the flow of terrorist-related 
finances?
    Do you worry that the Russians' efforts in this area might 
undermine our own efforts and those of other allies?
    Answer. United Nations Security Council Resolution (UNSCR) 1267 
requires all countries to freeze the assets of individuals and entities 
related to Usama Bin Laden, Al Qaeda and the Taliban. UNSCR 1373 
requires all countries to freeze the assets of individuals and entities 
that support global terrorism, but leaves it to member states to 
determine which groups fall within its scope. Many countries, including 
the United States and members of the European Union, have designated 
Hamas as a terrorist organization. Unfortunately, not all countries 
have followed this lead.
    As with any sanctions program, the extent to which a terrorist 
designation is multilateralized renders it more or less effective. This 
certainly applies to Hamas. We will continue to work, both bilaterally 
and multilaterally, to ensure that terrorist organizations find no 
financial safe haven and that these organizations are to the greatest 
extent possible deprived of access to the international financial 
system.

                DISRUPTING TERRORIST FINANCING NETWORKS

    Question. Treasury now has at its disposal, increased resources to 
disrupt terrorists' financial support networks and you continue to seek 
more such resources. In fact, the majority of the fiscal year 2007 
requested increases go for these purposes.
    What kind of progress have you been able to make on cross-border 
currency transactions, wire transfers, and effective oversight of 
alternative payment systems such as ``hawalas'' with other countries?
    Answer. In the area of traditional wire transfers, we believe that 
every major bank in the United States has access to the tools necessary 
to implement a robust compliance program to interdict transactions 
potentially violative of OFAC regulations. OFAC has also made 
considerable progress in the area of cross-border Automated Clearing 
House (ACH), actively working with industry and with the Federal 
Reserve's Gateway to develop new standards to increase the transparency 
of the parties involved in such transactions. OFAC, along with FinCEN, 
is coordinating with both Federal and State regulators to address money 
laundering issues within informal value transfer systems. It has, for 
example, pursued a number of cases, both criminally and civilly, with 
regard to hawalas acting illegally in sending funds to sanctioned 
countries, particularly Iran.
    FinCEN continues to oversee and better ensure compliance with the 
Bank Secrecy Act with respect to cross-border currency transactions, 
wire transfers and transactions conducted in the United States by, for, 
or on behalf of alternative payment systems such as hawalas. All of 
these types of transactions are subject to certain reporting, and 
record-keeping requirements under the Bank Secrecy Act. FinCEN also 
will continue to evaluate the need for further rule making under the 
Bank Secrecy Act to better safe guard our financial system from 
criminal abuse.
    Additionally, we have been addressing actively these issues with 
other countries through our membership in the Financial Action Task 
Force (FATF) and its network of FATF-Style Regional Bodies (FSRBs). 
FATF and its FSRBs include approximately 150 countries that have agreed 
to implement the FATF Forty Recommendations on Money Laundering and 
Nine Special Recommendations on Terrorist Financing.
    Last year, TFI led the effort within the FATF to adopt Special 
Recommendation (SR) IX. SR IX requires FATF/FSRB members to take steps 
to detect the physical cross-border transportation of currency and 
negotiable instruments and to stop or restrain funds that are suspected 
to be related to terrorist financing or money laundering. FATF/FSRB 
member countries also are required under Special Recommendation (SR) VI 
to implement measures to ensure that money remitters are licensed or 
registered, apply appropriate AML/CFT controls (including customer 
identification, recordkeeping, and Suspicious Activity Report (SAR) 
reporting), and to take administrative, civil or criminal action 
against violators. In the United States, money transmitters (including 
alternate payment systems such as hawaladars) are required to register 
with the Financial Crimes Enforcement Network (FinCEN); adopt AML 
programmatic policies, procedures and controls; identify customers; and 
report suspicious activity.
    With respect to wire transfers, SR VII requires countries to 
transmit full originator information with cross-border wires, providing 
law enforcement authorities with ready access to information needed to 
track illicit funds. These requirements complement those contained in 
the Travel and Recordkeeping Rules that govern wire transfers in the 
United States.
    As co-chair of the FATF's Working Group on Terrorist Financing, the 
U.S. Government plays a key role in the implementation of these Special 
Recommendations. TFI also works within the interagency to provide 
assistance to other jurisdictions in implementing the FATF 40+9.

              HOW MUCH CAN REALISTICALLY BE ACCOMPLISHED?

    Question. Terrorist cells are increasingly self-financing through 
criminal activity such as drug trafficking, counterfeiting intellectual 
property, insurance claim fraud to name a few, as opposed to wire 
transfers. There are strong indications that terrorist operations do 
not require exorbitant sums of money. The bombings of the U.S.S. Cole 
and those in Bali, Madrid and London, are all estimated to have cost 
$50,000 or less, and the 9/11 bombings were estimated to cost $500,000. 
Experts in terrorist financing have said that the cost of terrorist 
attacks is decreasing exponentially.
    Are we reaching a point of diminishing returns because terrorists 
are avoiding the transfer mechanisms that we are good at tracking?
    Answer. Treasury's approach to combating terrorist financing is 
two-fold: first, we seek to identify and close vulnerabilities in the 
international financial system; second, we seek to identify, disrupt 
and dismantle the financial networks that support terrorist 
organizations.
    We are meeting this responsibility through a number of initiatives 
involving various sectors. For example, we are working through 
organizations such as the FATF and the IMF and World Bank to ensure 
that all countries are taking effective measures to prevent terrorist 
abuse of such mechanisms as charities, cash couriers, wire remitters, 
and informal funds transfer providers.
    The imposition of sanctions by the United States and its 
international partners against terrorists, terrorist organizations and 
their support structures is a powerful tool with far-reaching effects 
that goes beyond the blocking of terrorist assets. Designating 
individuals or organizations as SDGTs (Specially Designated Global 
Terrorists), SDTs (Specially Designated Terrorists), or FTOs (Foreign 
Terrorist Organizations) notifies the U.S. public and the world that 
these parties are either actively engaged in or supporting terrorism or 
that they are being used by terrorists and their organizations to 
support the terrorist agenda. Notification also serves to expose and 
isolate these individuals and organizations and denies them access to 
the U.S. financial system, and in the case of a United Nations (U.N.) 
designation, the global financial system. In addition, the imposition 
of economic sanctions can assist or complement the law enforcement 
actions of other U.S. agencies and/or other governments.
    As long as terrorists, terrorist organizations and their support 
structures continue to target the United States and its allies, we must 
make every effort to combat them; targeted sanctions are one of the 
tools employed by the United States. Terrorists are becoming more 
sophisticated at attempting to evade sanctions. Such activity 
necessitates our continuing efforts to identify, expose and target 
morphed or reformed terrorist organizations, front companies, and 
agency relationships that may be developed to evade sanctions and allow 
them access to the United States and international financial systems. 
Unless the United States and its allies apply constant and unrelenting 
pressure, terrorists will immediately exploit any opportunities that 
become available. Denying terrorists, especially their financial 
supporters, the convenience and benefits of using traditional 
legitimate economic and financial systems has created another barrier 
to their activities and has impeded their support networks. Removing 
those hurdles to the funding of their infrastructures will not produce 
a benefit because they will be able to revert to using unprotected 
traditional systems. Keeping those barriers in place requires 
undiminished commitment by Treasury at the same time that the 
alternative systems that terrorists and their supporters may choose to 
use become another target set for action by the U.S. Government. It 
gains us nothing in the war on terrorism to remove security from the 
front gate because the terrorists have started trying to tunnel beneath 
the fence. Consequently, in the War on Terror, there are arguably no 
diminishing returns, because stopping or impeding even one terrorist 
act saves lives and adds to the national and economic security of the 
United States and its allies.

                 PROGRESS WITH CHARITABLE ORGANIZATIONS

    Question. Charitable organizations can be exploited by terrorists 
because there is little government oversight, donations are largely 
anonymous, and these funds are collected by both charitable groups and 
the government in lieu of taxes for religious, social, and humanitarian 
purposes. The financial and operating structures of charitable 
organizations are not easily understood.
    How have you been able to deal with this and are you considering 
measures that will produce transparency in charities?
    Answer. Treasury has taken an active role in preventing widespread 
abuse of the charitable sector by terrorists to raise and move funds 
and provide logistical support. Curtailing such abuse is a critical 
element in the U.S. Government's national and international strategy to 
combat terrorist financing generally, as underscored in the 2002 and 
2003 National Money Laundering Strategies, numerous U.S. Government 
counter-terrorist financing strategies, and various international 
resolutions and standards.
    The U.S. Government has developed a comprehensive strategic 
approach to combat the risk of terrorist financing in the charitable 
sector. Collectively, these measures include: a coordinated oversight 
system comprised of Federal, State, and private elements; targeted 
investigations, prosecutions, and designations; international 
engagement; and extensive outreach engagements with the private sector.
    Under the coordinated oversight prong, Treasury has promulgated 
effective measures for monitoring charitable organizations' compliance 
with U.S. law through its terrorist-related designations pursuant to 
Executive Orders (EO) 13224 and 12947. As of May 2006, the United 
States has designated 41 charities under EO 13224 and EO 12947 because 
of their support for terrorist activity. This includes five U.S.-based 
charities and 36 additional international charities (two of which have 
branch offices located in the United States). On February 19, 2006, the 
United States blocked the assets of a sixth U.S.-based charity pending 
further investigation, which has the effect of freezing all assets 
located within U.S. jurisdiction and prohibiting U.S. nationals from 
transacting with the charity. These designations serve a multitude of 
purposes aside from blocking the flow of funds to terrorist 
organizations or purposes, including putting other charities and donors 
on notice of the designation, deterring donors or charities that may 
otherwise have funded terrorist organizations, and forcing terrorist 
organizations to use alternative, riskier financing mechanisms.
    To increase awareness of the risk of terrorist financing in the 
U.S. charitable sector and to provide charities with measures they can 
take to protect themselves, Treasury's Office of Terrorist Financing 
and Financial Crime (TFFC) has undertaken an extensive outreach 
program. In response to numerous dialogues with the sector on how they 
might better adopt practices to protect themselves from such abuse, and 
protect the integrity of charitable giving and the confidence of 
donors, in November 2002, the Treasury Department released the Anti-
Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based 
Charities (Guidelines), which were revised and released in draft form 
to solicit public comment in December 2005. The Guidelines provide 
measures for charities to take in order to protect themselves against 
the risks of terrorist financing.
    The Guidelines follow a risk-based approach that balances the 
demands of applying these protective measures with the particular 
operational risks of each charity and with an understanding that 
terrorist financing risks vary between charities. They encourage 
charities to enact and practice sound governance and fiscal policies, 
which includes detailed record-keeping, as well as to collect 
information on and vet key employees, members of the governing body, 
and potential grantees. There is also guidance on the adoption of 
specific practices that help better facilitate compliance with OFAC 
sanctions programs, including those that address terrorist financing, 
and provide information on directing inquiries and/or suspicions and 
referrals to the appropriate State and Federal law enforcement 
authorities. Moreover, the issuance of the Guidelines initiated a 
strong, ongoing dialogue with the sector, which reinforced the sector's 
awareness of the risks of terrorist abuse it faced, and led to a 
greater understanding of the available resources and measures that 
could help to protect against such risk.
    The Guidelines also led to a strong engagement with the American 
Muslim charitable community, which often faces heightened risks due to 
the high-risk regions in which many American Muslim charities operate. 
TFFC has facilitated meetings with other watchdog and intermediary 
organizations (such as ECFA and BBB-WGA, etc.) in an effort to 
facilitate the creation of the National Council for American Muslim 
Non-profits (NCAMN). Launched in March of 2004, NCAMN is a proactive 
initiative of the American Muslim charitable community and is working 
to create standards of transparency and accountability similar to other 
intermediaries that it can apply to organizations under its purview, 
including relief organizations, mosques, Islamic schools, etc. TFFC's 
parallel engagement with the American Muslim charitable sub-sector and 
the larger charitable sector have resulted in charities adopting more 
proactive approaches to protect their assets and the integrity of their 
operations.
    TFFC has also acted as an integral component of overall U.S. 
engagement with the international community. Specifically, TFFC has 
helped to shape international policy on charities through its work with 
the FATF. It recently took part in negotiations for the FATF's 
Interpretive Note to Special Recommendation VIII on non-profits, which 
is the practical application of the international standard to curb 
terrorist abuse of non-profit organizations. This Interpretive Note was 
adopted by the FATF member countries at the February 2006 Plenary. TFFC 
will continue to engage with the FATF, its regional-style bodies, and 
individual member countries to encourage implementation of national 
standards that encourage transparency and accountability in the 
charitable sectors of those jurisdictions.
    Finally, OFAC has a section of its website dedicated to charitable 
organizations and will shortly be publishing suggestions for analyzing 
sanctions risk with regard to both donations and grant-making.

        IS TREASURY TARGETING NON-CONVENTIONAL FUNDING SOURCES?

    Question. GAO has recommended that the administration pay closer 
attention to non-financial mechanisms used by terrorist financiers to 
generate and distribute funds.
    To what extent is the Treasury Department, and its Office of 
Terrorism and Financial Intelligence (TFI) in particular, interested in 
and able to concentrate on non-conventional money-generating and money-
moving networks such as the trade in commodities--gold, diamonds, 
cigarettes, and gemstones?
    Answer. TFI examines all forms of financial networks that support 
terrorist, WMD and other illicit activity, including trade-based money 
laundering and potentially illicit trade in commodities.
    FinCEN recently issued an interim final rule that requires dealers 
in precious metals, stones or jewels to establish and maintain anti-
money laundering programs to prevent and detect money laundering and 
terrorist financing. In addition, the Bank Secrecy Act requires all 
trades and businesses in the United States to report the receipt of 
cash, or cash equivalents, in excess of $10,000 to FinCEN. This 
information is captured on the FinCEN/IRS 8300 form which also provides 
a ``suspicious transaction'' box to alert law enforcement and 
regulatory agencies to the possibility of criminal activity. Perhaps 
most importantly, the Bank Secrecy Act has many reporting and 
recordkeeping requirements on banks, money service businesses, broker 
dealers and other financial institutions in the United States 
including, but not limited to, the reporting of cash and suspicious 
transactions by customers. Since all types of non-conventional money-
generating or money-moving networks use banks or other types of 
financial institutions to place and move funds, financial activities by 
these entities are reported, or otherwise available to, law 
enforcement, intelligence and regulatory authorities. Attempts to evade 
the Bank Secrecy Act by way of ``structuring'' or bulk-cash 
transportation also make criminals vulnerable to detection by law 
enforcement.
    Additionally, TFFC is working with the relevant FATF-style Regional 
Bodies (FSRBs) to examine trade-based money laundering and to craft 
innovative solutions. TFFC has worked extensively with the interagency 
community, particularly Immigration and Customs Enforcement (ICE) at 
the Department of Homeland Security, to understand and counteract the 
trade-based money laundering employed by Colombian narcotics groups 
through the Black Market Peso Exchange. TFFC and ICE have worked 
through international organizations such as the FATF to develop 
typologies of trade-based money laundering and continue to collaborate 
with international partners and exchange trade-based data as a means of 
identifying trade-based money laundering networks and taking 
appropriate responsive action.
    Finally, OFAC focuses on any entities that meet the criteria for 
designation under Executive Orders and statutes it implements. Insofar 
as such entities include non-conventional money generating/moving 
entities, OFAC investigates the ways in which such entities are moving 
money in connection with individuals and entities on OFAC's List of 
Specially Designated Nationals and Blocked Persons (SDN list). Thus, 
OFAC's focus is not on any one kind of entity, but rather on any entity 
moving value for the benefit of a narcotics trafficker's or terrorist's 
or WMD proliferator's organization.

              WHAT ABOUT ADDRESSING OFFSHORE BANKS, ETC.?

    Question. It has been suggested that the U.S. Government is 
neglecting the role played by offshore banks, shell companies, and 
business fronts in funding terrorism. Do you agree?
    Answer. No. FinCEN requires financial institutions to establish and 
maintain adequate anti-money laundering programs with systems and 
controls, training, testing and designated personnel to detect and 
report suspicious activity, including terrorist financing. Offshore 
banks, shell companies and business fronts have long been acknowledged 
as high risk entities. As such, these entities are subject to elevated 
due diligence standards by financial institutions to ensure compliance 
with the suspicious activity reporting requirement of the Bank Secrecy 
Act. Failure to develop an adequate anti-money laundering program and 
failure to report suspicious activity involving offshore banks, shell 
companies and business fronts has resulted in very significant civil 
money penalties by FinCEN. See http://www.fincen.gov/
reg_enforcement.html.
    Title III of the USA PATRIOT Act provides the U.S. Government with 
powerful tools to prevent these entities from being utilized by 
terrorists to raise and move funds. Section 312 requires financial 
institutions to apply enhanced due diligence policies and procedures to 
correspondent accounts maintained for certain foreign banks operating 
under offshore banking licenses. Section 313(a) prohibits U.S. 
financial institutions from providing correspondent accounts in the 
United States to foreign banks that do not have a physical presence in 
any country. It also requires these financial institutions to take 
reasonable steps to ensure that correspondent accounts provided to 
foreign banks are not being used to provide banking services indirectly 
to foreign shell banks and financial institutions are required to 
obtain certification to this effect.
    The U.S. Government has also taken action against jurisdictions 
with respect to their offshore sectors. Under the provisions of Section 
311, the U.S. Government determined Nauru to be a jurisdiction of 
primary money laundering concern and proposed instituting special 
measures against it in 2002 for its failure, among other things, to 
adequately supervise its offshore banking sector. The U.S. Government 
has also been pursuing cases where offshore banks have attempted to 
manipulate U.S. branches, affiliates, and correspondents by using the 
U.S. financial system to route transactions in violation of our 
sanctions. We are working diligently with the banking community and 
with international regulators to ensure transparency in transfers such 
as cover payments where there is little information about underlying 
transactions. We also have extensive outreach and educational programs 
in place to address manipulation of check-clearing and trade finance 
mechanisms.
    The U.S. Government participates actively in international bodies 
such as the Financial Action Task Force (FATF) and the Offshore Group 
of Banking Supervisors (OGBS) that promote effective implementation of 
international anti-money laundering and counter-terrorist financing 
standards in offshore financial centers.
    OFAC has been pursuing cases where offshore banks have attempted to 
manipulate U.S. branches, affiliates, and correspondents by using the 
U.S. financial system to route transactions in violation of our 
sanctions. We are working diligently with the banking community and 
with international regulators to assure transparency in transfers such 
as cover payments where there is little information about underlying 
transactions. We also have extensive outreach and educational programs 
in place to address manipulation of check clearing and trade finance 
mechanisms.
    Question. Can Treasury play an expanded role in this area?
    Answer. Treasury continues to monitor jurisdictions and 
institutions overseas to identify offshore sectors and activities that 
could pose potential threats to the U.S. financial system. We will 
utilize the authorities made available to us by Congress under the Bank 
Secrecy Act (BSA) as amended by the USA PATRIOT Act including section 
311, the International Emergency Economic Powers Act (IEEPA) and other 
statutes to address these specific threats through targeted economic 
and financial sanctions, rulemaking and the issuance of advisories, 
alerts and reports to industry.

               TREASURY'S OFFICE OF INTELLIGENCE ANALYSIS

    Question. Ms. Gardner, the 9/11 Commission stated that terrorist 
financing had not been a priority for either domestic or international 
intelligence collection and, as a result, intelligence reporting on the 
issue was not up to par.
    How has Treasury's relatively new Office of Intelligence Analysis 
contributed to overall intelligence collection?
    Answer. While Treasury's Office of Intelligence and Analysis (OIA) 
is primarily an analytical unit, it has already begun to play a role in 
improving the Intelligence Community's (IC) collection efforts on 
terrorist financing. In 2005, OIA hired a full-time Requirements 
Officer, who submits requirements and evaluations on behalf of all 
Treasury entities, including OFAC and FinCEN, to the IC. In these 
requirements submissions, Treasury includes comprehensive background 
information as well as a detailed statement of Treasury's intelligence 
gaps to help focus the IC on Treasury's needs. In response to these 
detailed requirements, Treasury has received a greatly increased level 
of tailored support from the IC. OIA is in the process of hiring 
another Requirements Officer to help with its growing responsibilities 
in this area. OIA has played a particularly significant role in 
improving IC collection on the Iraqi insurgency. OIA is serving as the 
co-lead with the Department of Defense on the Baghdad-based Iraq Threat 
Finance Cell (ITFC). The Treasury presence in Iraq on the ITFC is 
already paying dividends. More and better detailed information on 
insurgency finance issues is becoming available, due in part to the 
increased analytic focus on this issue. In addition, the financial 
intelligence analysts have provided great support to the military in 
identifying trends and patterns in insurgency financing in the context 
of a cash-based economy.

                       WHERE DO WE GO FROM HERE?

    Question. Mr. Levey and Mrs. Gardner, the 9/11 Commission report 
suggests that the strategy for terrorist financing should shift from 
seizing assets to gathering intelligence since it may not be achievable 
or cost effective to attempt to deny terrorists funding. Terrorists are 
increasing seeking more informal ways of moving money and terrorist 
networks themselves are becoming more decentralized and self-
supporting.
    What, do you believe, is the appropriate combination of goals to 
address terrorist financing?
    Answer. The imposition of sanctions by the United States and its 
international partners against terrorists, terrorist organizations and 
their support structures is a powerful tool with far-reaching effects 
that goes beyond the blocking of terrorist assets. Designating 
individuals or organizations as SDGTs (Specially Designated Global 
Terrorists), SDTs (Specially Designated Terrorists), or FTOs (Foreign 
Terrorist Organizations) notifies the U.S. public and the world that 
these parties are either actively engaged in or supporting terrorism or 
that they are being used by terrorists and their organizations to 
support the terrorist agenda. Notification also serves to expose and 
isolate these individuals and organizations and denies them access to 
the U.S. financial system, and in the case of a U.N. designation, the 
global financial system. In addition, the imposition of economic 
sanctions can assist or complement the law enforcement actions of other 
U.S. agencies and/or other governments.
    As long as terrorists, terrorist organizations and their support 
structures continue to target the United States and its allies, we must 
make every effort to combat them and targeted sanctions is one of the 
tools employed by the United States. Terrorists are becoming more 
sophisticated at attempting to evade sanctions. Such activity 
necessitates our continuing efforts to identify, expose and target 
morphed or reformed terrorist organizations, front companies, and 
agency relationships that may be developed to evade sanctions and allow 
them access to the United States and international financial systems. 
Unless the United States and its allies apply constant and unrelenting 
pressure, terrorists will immediately exploit any opportunities that 
become available.
    Denying terrorists, especially their financial supporters, the 
convenience and benefits of using traditional legitimate economic and 
financial systems has created another barrier to their activities and 
has impeded their support networks. Removing those hurdles to the 
funding of their infrastructures will not produce a benefit because 
they will be able to revert to using unprotected traditional systems. 
Keeping those barriers in place requires undiminished commitment by 
Treasury at the same time that the alternative systems that terrorists 
and their supporters may choose to use become another target set for 
action by the U.S. Government. It gains us nothing in the war on 
terrorism to remove security from the front gate because the terrorists 
have started trying to tunnel beneath the fence. Subsequently, in the 
War on Terror, there are arguably no diminishing returns because even 
stopping or impeding only one terrorist act saves lives and adds to the 
national and economic security of the United States and its allies.
    Question. Given these trends and given the fact that we don't have 
unlimited dollars, how can we get the most for the money spent?
    Answer. Treasury focuses on two goals regarding terrorist 
financing: to identify and close vulnerabilities in the international 
financial system and to identify, disrupt and dismantle the financial 
networks that support terrorist organizations. The overall impact of 
these effects is to make it costlier, riskier, and less efficient for 
terrorists to move their funds through the international financial 
system. Treasury gets the most for the money spent by focusing on these 
two strategic priorities. Therefore, the extent to which terrorists are 
forced to rely on more cumbersome and less reliable methods of funds 
movement is a measure of success. The response to this development, 
however, is to redouble our efforts to target all financial channels, 
both formal and informal.
    Treasury will continue to apply its authority, in coordination with 
the inter-agency national security infrastructure, to disrupt the 
financing of terrorism and deter terrorist operations.

  DO BANKING AGENCIES COMPLY WITH FINCEN'S BANK SECRECY REQUIREMENTS?

    Question. Last year, I asked how regulatory agencies can seriously 
comply with the required exchange of bank secrecy data when there is no 
penalty if they don't comply. The Department's answer was to say that 
an unprecedented level of cooperation has been reached with the banking 
agencies and that including a penalty provision would have undermined 
this cooperation.
    So, can you say that up through today, since the enforcement action 
against Riggs National Bank, all the banking agencies have been fully 
cooperative?
    Answer. Yes. The Riggs National Bank matter served notice of the 
problems that can arise with respect to an absence of cooperation, 
unintentional or otherwise, among Federal agencies with parallel or 
overlapping jurisdiction. Based partly on the Riggs matter, FinCEN 
entered into Memoranda of Understanding (MOU) with the Federal banking 
agencies in October 2004. FinCEN has and will continue to enter into 
MOU with other Federal and State agencies, as appropriate. The MOU 
ensure that FinCEN receives timely notice of all significant Bank 
Secrecy Act (BSA) related findings, and ensure cooperation among the 
stakeholder agencies with respect to compliance with, and enforcement 
of, the anti-money laws of the United States.
    In accordance with Memoranda of Understanding with FinCEN, all 
Federal and State law enforcement and regulatory agencies are required 
to safeguard BSA data acquired from FinCEN from unauthorized 
disclosures. In order to ensure the effectiveness of the safeguards, 
FinCEN conducts inspections of agencies that receive BSA data.
    In regard to information flowing to FinCEN from the Federal banking 
agencies, we have instituted systems and controls to ensure the data is 
not disseminated to unauthorized personnel. In fact, the Memoranda of 
Understanding with the Federal banking agencies of October 2004 contain 
an explicit provision prohibiting the unauthorized disclosure of BSA 
and other ``confidential supervisory information'' by FinCEN to 
unauthorized parties.
    In addition, 31 U.S.C. 5318(g)(2) prohibits any director, officer, 
employee or agent of a financial institution to notify any person 
reported on a suspicious activity report that such a report has been 
filed with FinCEN. This same section prohibits any officer or employee 
of any Federal, State or local government from doing the same, other 
than as necessary to fulfill official duties. Furthermore, government 
employees are subject to a host of legal and administrative sanctions 
for unauthorized disclosures of protected information, including BSA 
information.
    Question. FinCEN recently stood-up its Office of Compliance, among 
other things, to analyze Bank Secrecy Act examination data provided by 
regulators.
    What is your assessment of how successful FinCEN has been with its 
analysis of bank secrecy data and have results been demonstrated?
    Answer. FinCEN provides a broad range of analyses of Bank Secrecy 
Act (BSA) data to Federal, State, local and foreign law enforcement and 
regulatory customers. These analyses play an important role in 
safeguarding the financial system from the abuse of financial crime, 
including money laundering, terrorist financing, and other illicit 
activity. Specifically, FinCEN analysis of BSA data identifies 
relationships among targets of law enforcement investigations, 
identifies patterns of funds movement, and identifies the locations of 
suspects and their assets. FinCEN analysts also enhance BSA data with 
all-source information in providing findings and options to customers. 
FinCEN has developed a suite of analytical tools that enable analysts 
to conduct complex mining of BSA data, and to depict results with 
graphic displays of data relationships and financial flows.
    In fiscal year 2005, FinCEN provided BSA data analysis in response 
to 1,436 requests from domestic and foreign law enforcement, regulatory 
and intelligence customers. For the first half of fiscal year 2006, 
FinCEN provided analysis in response to 742 customer requests. FinCEN's 
customers for this work also include foreign financial intelligence 
units (FIUs) that are members of the Egmont Group of FIUs, comprising 
101 participating countries. The Egmont Group is committed to a global 
effort to combating money laundering and terrorist financing through 
FIU cooperation and information exchange. During the past 5 years, 
Egmont FIU case requests to FinCEN have grown 32 percent annually on 
average. FinCEN also works with financial regulators, including 
FinCEN's own regulatory component (FinCEN's Regulatory Policy and 
Programs Division), the Federal banking supervisory authorities, the 
Internal Revenue Service, and 41 State banking supervisory agencies. 
FinCEN's BSA data analysis in response to these requests supports 
pending enforcement actions against particular non-compliant 
institutions, and also supports possible Bank Secrecy Act policy 
enhancements. This type of analysis has identified compliance issues 
previously undetected in certain depository institutions and money 
services businesses and, since August 2005, has supported at least six 
significant enforcement actions against three banks, one broker-dealer 
firm, a casino and a money services business.
    FinCEN's BSA data analysis for regulatory customers also provided 
filing trends and patterns and identified vulnerabilities in certain 
financial industry segments. For example, information gleaned from the 
study of Suspicious Activity Reports (SARs) relating to the insurance 
industry was used in developing new insurance regulations. FinCEN's BSA 
data analysis also supports guidance to the private sector, including 
``The SAR Activity Review--Trends, Tips & Issues'', as well as the bi-
annual publication of ``The SAR Activity Review--By the Numbers'', a 
compilation of numerical data gathered from Suspicious Activity Reports 
filed by all institutions with mandatory suspicious activity reporting 
requirements. Financial industries members widely use both analytical 
publications.
    The large volume of customer requests to FinCEN for analysis is one 
important measure of the effectiveness of FinCEN's BSA data analysis. 
Another important measure is customer satisfaction. FinCEN's most 
recent survey of customer satisfaction, which was conducted by an 
independent evaluator from August to October 2005, included a 
statistically valid sample of the FinCEN customers of four types of 
analysis products (investigative target reports, investigative case 
reports, SAR activity review, and strategic analysis products). The 
survey results indicated 73 percent of FinCEN's customers found 
FinCEN's analytic support valuable.
    The effectiveness of FinCEN's analysis of BSA data also is 
highlighted in the outcomes of specific cases. Recent examples of 
effective outcomes include the following:
  --FinCEN completed a proactive targeting case initiated based on a 
        Suspicious Activity Report that alleged possible terrorist 
        financing based on suspicious wire transfers. The bank referred 
        to numerous instances of the company being identified as a 
        front or shell company for Hezbollah. The report explored 
        potential connections between Islamic terrorism fund-raising 
        and narcotics money laundering through an examination and 
        analysis of Bank Secrecy Act information on a company located 
        in South America, and a company believed to be affiliated in 
        Central America.
  --A geographic threat assessment was completed on the Southwest 
        Border based on analysis of all BSA data forms for counties 
        bordering Mexico. The threat assessment was requested by the 
        Texas Department of Public Safety's (DPS) Directed Intelligence 
        Group in an effort to identify money laundering hot spots. The 
        DPS is working toward intelligence-driven operations and 
        investigations, and with this threat assessment of money 
        laundering hotspots will be able to direct and train their 
        intelligence collection efforts much more effectively. 
        Recently, criminal investigators in Texas noted that 
        debriefings of suspects in the southwest border region 
        indicated suspects were under pressure to find crossing points 
        other than Laredo, Texas, and El Paso, Texas, because of the 
        increased observation that those locations have been receiving 
        as a result of the FinCEN assessment.
  --FinCEN examined SARs through one of its BSA search and analysis 
        tools to identify activity associated with the suspicious 
        remittance of U.S. dollars to Colombia via Automated Teller 
        Machines (ATMs). Research identified a cluster of 11 
        interrelated SARs associated with a man and a woman located in 
        the United States who were depositing and transferring funds 
        into or through 36 accounts at 8 U.S. banks. SARs indicated 
        that a large percentage of the funds were subsequently remitted 
        back to Colombia through ATMs at the rate of 57 to 157 
        withdrawals per day. Currency Transaction Reports (CTR) and 
        Currency and Monetary Instrument Reports (CMIR) verified 
        statements made by the man that the funds were derived from 
        cash imported from Colombia. This activity, initially provided 
        to law enforcement as an investigative referral, provided only 
        a snapshot of what could be a much larger pattern of activity.
  --FinCEN supported an Immigration and Customs Enforcement (ICE) field 
        office effort to identify unlicensed/unregistered remittance 
        businesses in a specific geographic area of Virginia. FinCEN 
        found no viable targets through the SAR targeting method of 
        querying key words in the SAR narratives, e.g., ``wire 
        transfer,'' ``remittance,'' ``hawala,'' etc. As a result, 
        FinCEN downloaded CTRs filed by banks in the specified area, 
        and after conducting analysis of the CTRs through an ad hoc 
        database, was able to identify seven targets.
  --FinCEN utilized CTR targeting in support of an ICE investigation 
        into alleged willful negligence by a large bank. The 
        investigation was initiated after it was discovered that the 
        bank had not filed SARs on large, suspicious cash deposits by a 
        convicted heroin money launderer. FinCEN focused its efforts on 
        finding other individuals or businesses that had conducted 
        similar activity through the same and other banks in the 
        geographic area. Through the use of CTRs, FinCEN profiled the 
        activity of the heroin money launderer then identified similar 
        activity by downloading all CTRs where the number and amount of 
        CTR activity was similar to that of the money launderer. The 
        effort resulted in an extensive list of targets that resulted 
        in a number of ``spin-off'' investigations by ICE and IRS-CI.
        fincen's registration of money service businesses (msbs)
    Question. The Treasury IG has found that a little over 1 year ago, 
only a small number of the Money Service Businesses (MSBs) such as 
Western Union and post offices that do money orders, had registered 
with FinCEN as required by the Money Laundering Suppression Act of 
1994. As of a few months ago, FinCEN's published list of MSBs had only 
increased a little bit, not much of an improvement.
    What is being done to improve this registration effort?
    Answer. Since the implementation date of the registration 
requirement for money services businesses on December 31, 2001, it is 
clear that identifying the universe of businesses subject to our money 
services businesses-anti-money laundering regulatory regime is one of 
the greatest challenges we face as an agency. Finding ways to enhance 
compliance with the registration requirement has been one of our 
focuses since the inception of the registration concept.
    FinCEN developed and is implementing a comprehensive strategy in 
fiscal year 2006 for addressing the challenges posed by the 
identification and registration of money services businesses. The 
success of our efforts to increase registration, and therefore 
establish transparency in this segment of the financial services 
industry, will depend in large part upon our approach to 
communications, education, and industry outreach. We are in the process 
of upgrading our money services business internet website, translating 
the current instructional brochures into various foreign languages, 
fully implementing the Bank Secrecy Act resource center, and developing 
and implementing a comprehensive education program for the Internal 
Revenue Service examiners, our State regulatory partners and the 
industry.
    Over the past several years, we have devoted considerable resources 
to conduct aggressive outreach and education campaigns concerning Bank 
Secrecy Act (BSA) requirements. Despite those efforts, some in the 
industry, particularly those that offer these services only as an 
ancillary component of their primary business, appear to be unfamiliar 
with or unaware of their obligations under the BSA. At the same time, 
as indicated by the volume of requests for administrative rulings and 
numerous questions received at industry conferences, it is apparent 
that the current regulatory framework would benefit by more clarity 
that can be provided through the development and issuance of guidance, 
such as advisories, frequently asked questions, and the like.
    Therefore, we have stepped up our efforts to clarify the 
expectations that accompany these requirements. For example, on April 
26, 2005, FinCEN published guidance to the money services business 
industry which clearly established the expectations for compliance with 
the registration, anti-money laundering program, recordkeeping and 
reporting requirements of the Bank Secrecy Act. On the same date, 
FinCEN and the Federal banking agencies published joint guidance to 
banking organizations that explained these expectations to entities 
providing banking services to money services businesses. On February 3, 
2006, we published guidance to reinforce and clarify the registration 
requirements for money services businesses.
    Question. Now that more than 4 years have passed since the 
registration requirement became effective, how many MSBs have been 
penalized for non-registration or failure to register?
    Answer. To date, we have not penalized a money services business 
for failure to register under the Bank Secrecy Act. However, we have 
supported efforts by the Internal Revenue Service (IRS) to upgrade its 
Bank Secrecy Act (BSA) examination capabilities by providing revisions 
to the IRS examination manual for non-bank financial institutions, and 
by providing instruction on risk-based examination procedures at IRS 
examiner training programs. We believe that these efforts are beginning 
to show positive results. During fiscal year 2005, the IRS conducted 
examinations of 3,700 entities for compliance with the BSA, including 
registration. Furthermore, since July 28, 2005, the Office of 
Compliance at FinCEN referred 27 suspected unregistered money services 
businesses to the IRS's Small Business/Self-Employed Division for 
possible examination.
    FinCEN has, however, recently penalized a money services business 
for violating various provisions of the Bank Secrecy Act. On May 9, 
2006, FinCEN issued a civil money penalty in the amount of $10,000 
against a money services business located in Tampa, Florida. FinCEN 
determined that this money services business failed to develop and 
implement a written anti-money laundering program reasonably designed 
to ensure compliance with the Bank Secrecy Act which led, in turn, to a 
failure to file 80 currency transaction reports. In fact, the money 
services business had a zero currency transaction reporting compliance 
rate during the period of the BSA deficiencies.
    Question. How has the registration program for MSBs enhanced 
FinCEN's ability to identify potential terrorist financing, money 
laundering, and other financial crimes?
    Answer. The registration requirement is one of many Bank Secrecy 
Act (BSA) requirements that enables FinCEN to further its mission of 
safeguarding the financial system from abuses of financial crime, 
including terrorist financing, money laundering and other illicit 
activity. The registration requirement facilitates transparency and 
critical identifying information about the thousands of money services 
businesses operating in the United States, including readily available 
information on agent outlets of the major money service business 
companies. In cases involving non-compliant money services businesses, 
we can compel immediate corrective action with registration. In cases 
involving egregious or willful failure to register under the BSA, we 
can seek and impose appropriate remedies.
    As a natural by-product, the registration requirement also enables 
banks, which money services businesses must eventually use, to gauge 
the level of knowledge and compliance with the anti-money laundering 
and terrorist financing provisions of the BSA. Upon discovery of 
suspected criminal activity or non-compliance with the BSA by money 
services business customers, banks can file suspicious activity reports 
to enable law enforcement and regulatory agencies to respond 
appropriately.

CAN THE PRESIDENT'S NEW COMMUNITY DEVELOPMENT PROGRAM FILL THE ROLE OF 
                               CDFI FUND?

    Question. Secretary Snow, you mention in your opening statement 
that the President is only requesting $7.8 million for the Community 
Development Financial Institutions (CDFI) Fund, which was funded at $55 
million last year. The funding that the President is requesting will 
only support the New Markets Tax Credit program. The other CDFI Fund 
activities he proposes to consolidate with other community development 
programs as part of the Strengthening America's Communities Initiative 
(SACI). As you know, the President made a similar proposal last year, 
which the Congress rejected.
    The other programs within the CDFI Fund are critical in bringing 
financial services and private investment into underserved communities. 
For every dollar that the Federal Government spends, these CDFIs are 
able to attract $20 in private sector investment. These funds are used 
to support programs that help support the creation of small businesses, 
assist with homeownership, even bring ATMs to communities. In my home 
State of Washington, one CDFI, the Cascadia Revolving Loan Fund has 
used grant money to increase its capacity and support innovative 
programs like their Child Care Fund which offers financing and 
technical assistance to child care providers so that they can open 
their own child care centers and bring quality child care to these 
communities.
    Since the CDFI Fund helps to bring capital and financial services 
to communities and individuals that traditional banks view as too 
risky, how will the President's proposed community development program 
specifically address this need for access to financial institutions in 
underserved communities?
    Answer. The proposed Strengthening America's Communities Initiative 
(SACI) for fiscal year 2007 differs substantially from the fiscal year 
2006 SACI envisioned model. Last year, 18 community and economic 
development programs, which included three of the CDFI Fund's monetary 
award programs and the Department of Housing and Urban Development's 
Community Development Block Grant (CDBG) Program, among others, were to 
be consolidated under the aegis of the Department of Commerce. This 
proposal was rejected by Congress.
    The fiscal year 2007 SACI proposal has the CDBG Program remaining 
at HUD with revised eligibility criteria; with the exception of the 
Economic Development Administration, all of the other community and 
economic development programs have been zeroed out with no new program 
funding (or substantially reduced funding) and no planned program 
transfers to HUD or the Department of Commerce.
    Thus, the President's proposed fiscal year 2007 budget eliminates 
the Fund's three monetary award programs and provides $7.8 million to 
administer only the NMTC Program and the portfolio of existing awards.
    Question. Instead of developing a new program to serve this 
purpose, wouldn't it make more sense to continue one that is successful 
in meeting these needs?
    Answer. While there are numerous community development programs, we 
believe a more focused SACI program would provide better results to 
individuals and communities.
                                 ______
                                 
            Questions Submitted by Senator Richard J. Durbin

                           THE NATIONAL DEBT

    Question. In my opening statement, I talked briefly about the 
ramifications of the massive amount of our national debt that is 
currently held by foreign governments. I alluded to the fact that I 
wanted to talk a bit more about China in particular. Here's why: 
according the Associated Press, earlier this week a vice chairman of 
China's parliament suggested that China should stop buying U.S. 
Treasuries and should take steps to reduce its holdings in those bonds.
    Mr. Secretary, if foreign governments start dumping our debt, won't 
that destabilize our economy? Won't that destabilize the whole 
international financial system, which for years now has relied upon 
American demand to fuel economic growth? What do you think will happen 
if China starts selling?
    Answer. The market for Treasury securities is large, liquid, and 
deep. China could reduce its rate of accumulating Treasury securities, 
even substantially, without significantly affecting U.S. financial 
markets. Despite recent large purchases, China's holdings of Treasury 
securities are still modest relative to the size of the market. China's 
holdings of Treasury securities are estimated to be 7.8 percent of the 
$4.1 trillion in Treasury securities not held by U.S. Government and 
Federal Reserve accounts at the end of March.
    Chinese investors bought around $98 billion in Treasury securities 
to their portfolios in the 12 months through March 2006. This is around 
$400 million per trading day. The daily turnover in the Treasury market 
is over $500 billion. The Chinese authorities have subsequently stated 
that they do not plan to change the proportion of U.S. Treasury 
securities purchased for or held in their foreign reserves.
    In this regard, it is notable that net purchases of U.S. securities 
by all foreign official institutions have declined substantially from 
the peak year 2004 without exerting a significant influence on U.S. 
financial markets. Foreign official purchases of long-term reached $236 
billion in 2004, before falling to $111 billion in 2005.

                              THE TAX GAP

    Question. Mr. Secretary, it's tax time. As my constituents in 
Illinois are racing to get their taxes filed before the deadline in a 
couple of weeks, good people assume that they should pay their taxes 
because it is the right thing to do, because everyone needs to do their 
part. But in 2001, an estimated $353 billion in Federal revenues has 
been lost because some people decided not to pay or to underpay their 
taxes. That works out to $16 out of every $100 owed. This so-called 
``tax gap'' has likely gotten even worse since 2001.
    I don't think that Treasury should make it their mission to track 
down every last dollar owed to the government, because that is too 
expensive for the government to do that and would lead to unnecessary 
hassling of good, honest families that are trying their best to pay 
their taxes correctly. But $353 billion is a big, big number. We simply 
have too much debt outstanding to ignore this problem.
    What is Treasury going to do to close this gap?
    Answer. Our tax gap estimates are derived from a National Research 
Program (NRP) study of Tax Year 2001 individual income tax returns. The 
final estimates from that study showed that the gross tax gap was $345 
billion while the net tax gap, what's left after enforcement and late 
payment collection, is $290 billion. This is a voluntary compliance 
rate of 83.7 percent.
    The IRS is committed to increasing the voluntary compliance rate to 
85 percent by 2009 and is taking several steps to achieve this goal. 
First, and perhaps most importantly, the IRS must continue the balanced 
approach of emphasizing both service and enforcement as the best means 
to achieve compliance. From a service perspective, the IRS is 
increasing its focus on electronic tax administration. Large businesses 
and large tax exempt organizations are already required to e-file. In 
the most recent filing season, over 70 million individual taxpayers 
filed their returns electronically. This number rises every year. E-
filing is a win-win for both the taxpayer and the IRS. For the 
taxpayer, there is less chance of error on a return prepared and filed 
electronically. Plus, the taxpayer receives a quicker refund and a 
notice that the return has been received. For the IRS, the marginal 
cost for an e-file return is $0.28 as compared to $2.65 for paper 
returns. This cost savings allows the IRS to re-direct resources to 
other areas.
    IRS is also putting in place a Taxpayer Assistance Blueprint, an 
ambitious program designed to improve the overall level of service 
provided to taxpayers.
    From an enforcement perspective, IRS is making good use of the 
additional $442 million included in the fiscal year 2006 IRS budget for 
enforcement. It is focusing those resources to maximize the use of each 
dollar dedicated to enforcement. Specifically, the IRS is:
  --Increasing the coverage of high-risk compliance issues to address 
        the largest portion of the tax gap--the underreporting of tax--
        across all major compliance programs;
  --Looking at complex high-risk issues in abusive tax avoidance 
        transactions, promoter activities, corporate fraud and 
        aggressive transactions, all resulting in increased corporate 
        and high income audit coverage;
  --Improving our ability to identify compliance risks within the tax 
        exempt communities; and
  --Leveraging our resources with those of the States to address common 
        tax gap issues such as more timely data matching, increased use 
        of State data for IRS enforcement actions and the development 
        of complementary Federal/State enforcement strategies based on 
        the NRP data.
    Second, the IRS is trying to find ways to increase third party 
information reporting. This will allow the IRS to match what a third 
party reports with what the taxpayer reports on his or her income tax 
return. The NRP study showed that there is a high correlation between 
items subject to information reporting systems and taxpayers' reporting 
of such items on their tax return. Where there is no third party 
reporting, the compliance rate drops dramatically. As a result, it is 
incumbent on us to find ways to increase information reporting that 
will not overly burden either the taxpayer or the entity that is 
required to report. A good example of this is the proposal in the 
President's fiscal year 2007 budget to require reporting of aggregate 
payment card reimbursements made to retail merchants each year. This 
will allow the IRS to match payments made to retail merchants by a 
payment card issuer to what the merchant reports as income on his or 
her income taxes.
    Third, we must become more efficient in resource utilization. One 
of the benefits of the NRP study is that it will allow us to refine our 
audit selection formulas for several examination classes. In addition, 
these formulas will help us better calibrate the resources in our 
various business units so they can operate more efficiently and impose 
less of a burden on compliant taxpayers. We do not have the resources 
to return to the high audit rates of the past, but we are using the NRP 
results to manage our compliance programs more effectively and to 
design pre-filing activities that help taxpayers comply with the law.
    Fourth, we need to change the law in several critical areas. I have 
already mentioned the legislative proposal in the President's fiscal 
year 2007 proposed budget to require payment card issuers to report 
aggregate payments made to retail merchants. There are four other 
specific legislative proposals included in the President's fiscal year 
2007 proposed budget designed to reduce the tax gap also included. They 
are:
  --Clarify the circumstances in which employee leasing companies and 
        their clients can be held jointly liable for Federal employment 
        taxes;
  --Expand information reporting to certain payments made by Federal, 
        State and local governments to procure property and services;
  --Amend Collection Due Process procedures for employment tax 
        liabilities; and
  --Expand to non-income tax returns the requirement that paid return 
        preparers identify themselves on such returns and expand the 
        related penalty provision.
    In conclusion, it is safe to say that substantial reductions in the 
tax gap will only be achieved through fundamental reform and 
simplification of the tax laws. Achieving significant reductions, 
absent such reform, would necessitate draconian measures that would 
involve the IRS in the lives of taxpayers in ways that they would never 
accept. But we can and will make improvements in the mean time as 
embodied in our goal of 85 percent compliance by 2009.

                        WORKER MISCLASSIFICATION

    Question. Mr. Secretary, I am concerned with how many contractors 
currently misclassify their workers as independent contractors rather 
than employees. Contractors do this so they have no responsibility for 
the withholding of State, Federal, and social security taxes from 
employee's paychecks, as that responsibility rests on the worker. These 
contractors gain an additional competitive advantage in that they avoid 
all the insurance costs of having employees.
    Workers are then paid in cash by the contractor, and all too often, 
the worker does not declare any income, and does not pay any of the 
required taxes. The loss of tax revenues has been estimated at over 
$400 billion per year.
    Not only is this misclassification issue shortchanging various 
State and Federal agencies, and therefore the general public who relies 
on programs such as social security and Medicare, but it is putting 
honest contractors and honest workers out of business. The cheating 
contractors can do business at 24 percent less cost than honest 
contractors, and honest contractors and workers have a hard time 
competing for jobs.
    In my home State of Illinois, this is a growing problem that has to 
be addressed immediately. From the years 2001-2004, State of Illinois 
Audits found that 17.3 percent of Illinois employers audited had 
misclassified workers as independent contractors. In 2004 alone, the 
rate of misclassification was 21 percent--67,745 employers statewide 
and 7,478 in construction. This results in $158 million in lost income 
tax in Illinois alone in 2004, $18 million of which is lost from the 
construction sector.
    Are you aware of this misclassification issue? If so, are you 
planning on stepping up enforcement efforts to catch the cheats who 
game the system at the cost of the general public and honest 
contractors?
    Answer. Misclassification of workers has been a long-standing issue 
for the Internal Revenue Service (IRS).
    There is currently no estimate for the portion of the tax gap 
attributable to misclassification of workers, however, we believe it is 
significant. The portion of the tax gap attributable to employment 
taxes is estimated to be $54 billion. Of the Federal tax gap, $109 
billion is attributable to underreporting of business income. Schedule 
C income, which is subject to little or no third-party reporting or 
withholding, has a net misreporting percentage of 57.1 percent. This 
includes the misclassification of workers. As you can surmise, 
noncompliance with Federal employment tax laws also affects State 
budgets, State unemployment compensations funds, and Workman's 
Compensation pools.
    It is important to note that the misclassification of workers can 
run the gamut from employers who are just not aware of their employment 
tax requirements to intentional noncompliance.
    We are planning on stepping up enforcement in this area. The IRS 
has increased its efforts over the past few years to address the 
employment tax gap. In fiscal year 2005, 33,748 employment tax returns 
were examined, an increase of 85 percent compared to fiscal year 2004. 
Worker classification issues were raised in approximately 2,400 of 
these examinations. Our work plans for fiscal year 2006 called for 
increasing employment tax examinations of which approximately 5,800 
will address worker classification issues. We are currently increasing 
our Employment Tax staff which will allow us to perform additional work 
in the future.
    The most egregious worker classification issues are identified 
through the Employment Tax Worker Classification Examination Program 
which identifies employers who may be misclassifying workers based on 
filing of Forms 1099.
    Additionally, several other initiatives are in process to address 
the misclassification issue including:
  --The Social Security Administration (SSA) processes corrections to 
        individual earnings records (including situations where 
        earnings are missing from the record). Each week, SSA refers a 
        listing of workers whose earnings have been corrected to the 
        IRS. Some of the employers identified did not file income tax 
        or employment tax returns, and further investigation often 
        reveals the employers paid the workers in cash and also did not 
        file Forms 1099-MISC.
  --As the Administrator of the Bank Secrecy Act (BSA), the Financial 
        Crimes Enforcement Network (FinCEN) requires depository 
        institutions and other industries vulnerable to money 
        laundering to file Currency Transaction Reports (CTRs) which 
        report cash transactions of $10,000 or more. Acting as FinCEN's 
        agent under the BSA, these reports are transferred to the IRS 
        Detroit Computer Center and entered into a database called the 
        Currency and Banking Retrieval System (CBRS) which is accessed 
        by FinCEN's law enforcement customers. The IRS also uses 
        FinCEN's BSA data to identify employers who cash large checks 
        in a pattern consistent with using the money to fund employee 
        cash payrolls or pay incorrectly classified workers in cash 
        with little or no accounting thereof. We are increasing the 
        number of audits we conduct based on this information in fiscal 
        year 2007.
    We have also used IRS databases to compare wage and labor 
deductions on business returns with corresponding employment tax return 
filings. Where the appropriate employment tax returns are not filed, an 
employment tax examination is considered with a potential worker 
classification issue. We are planning an increase in these audits in 
fiscal year 2007 as well.
    Workers who feel they should be classified as employees can file 
Form SS-8, Determination of Worker Status, with the IRS. After an 
exchange of information with the employer, the IRS makes a 
determination of worker status and refers the more egregious employers 
to the field for possible examination. In the past 3 years, workers 
filed more than 17,000 Forms SS-8. This is a source of worker 
misclassification cases that we use to identify employers for 
examination.
    We also have misclassification cases under investigation as part of 
our emphasis on abusive transactions and abusive schemes. As an 
example, we have identified a corporation that targets other client 
companies and assists them, for a fee, in converting all their 
employees to independent contractors.

                         ENFORCEMENT PRIORITIES

    Question. Mr. Secretary, let's discuss the law enforcement that 
Treasury conducts for a moment. I'm told that a professor and a 
graduate student from Southern Illinois University were recently 
targeted for scrutiny by your Office of Foreign Assets Control because 
they were going to travel to Cuba. I presume that these two individuals 
were singled out for scrutiny because they also happen to be public 
officeholders in Illinois, but they were traveling under the Cuba 
license that SIU has held since 2000.
    I don't expect you to have intimate knowledge of every case that 
Treasury investigates, but I do want to ask you about your enforcement 
priorities.
    Shouldn't Treasury and all of its offices be focusing more on 
chasing terrorists, and focusing less on harassing pre-approved 
university travelers to Cuba? Do you believe that Treasury's 
enforcement resources are being allocated properly right now?
    Answer. Please be assured that Treasury allocates its investigatory 
and enforcement resources according to national security priorities 
established by the administration. Terrorism is, by everyone's measure, 
the No. 1 priority. Although OFAC does not comment on open 
investigations, it is important to keep in mind that each license 
carries with it specific requirements including who may and may not be 
included on delegations traveling to Cuba. When OFAC becomes aware of 
potential violations, it investigates and, if warranted, takes 
appropriate action to address the situation.
    FinCEN's administration of the Bank Secrecy Act also ensures the 
proactive filing of suspicious activity reports involving potential 
terrorist financing. As evidenced by FinCEN's $24 million civil money 
penalty against Arab Bank in August 2005, financial institutions that 
fail to report suspicious transactions involving potential terrorist 
financing, which can be so critical to assisting authorities in their 
efforts to identify and prevent terrorist acts and disrupt terrorist 
networks, are subject to severe sanctions.

                          PERFORMANCE MEASURES

    Question. I've been interested for quite some time in making sure 
that we are doing everything we can to stop the flow of financial 
support that terrorists rely upon in order to wreak their havoc. As you 
know, last year the GAO completed a report which Senate Finance 
Committee Chairman Grassley and I requested, along with Senate Homeland 
Security and Governmental Affairs Chairman Susan Collins, to analyze 
the effectiveness of U.S. Government efforts to combat these terrorism 
financial networks. The GAO report made several strong recommendations 
for where the government should try to improve. I'd like to discuss two 
of those recommendations today.
    First, I think that if we can measure success appropriately then we 
will target our efforts more efficiently. The GAO report recommended 
that strong performance measures be put in place so that we can better 
assess how well we are doing in disrupting terror financing. I 
recognize that this is not an easy thing to measure, but nonetheless we 
need some benchmarks by which we can judge our progress in rooting out 
these money networks.
    After I wrote to the Treasury to ask about this last fall, I 
received a response from an Assistant Secretary a couple of weeks ago 
that stated that the Office of Foreign Assets Control had finished 
developing performance measures . . . but then he gave no indication of 
what those measures were.
    How do you plan to measure your success in disrupting the financing 
of terrorism?
    Answer. OFAC will measure the impact of Terrorism, Proliferators of 
Weapons of Mass Destruction, and Narco-Trafficking sanctions programs 
as high, medium or low impact. For this outcome performance measure, 
developed in conjunction with Treasury's Office of Strategic Planning 
and submitted in connection with the Performance and Accountability 
Report, impact is measured by their effectiveness in identifying, 
exposing, isolating, impeding, and/or incapacitating the targets (micro 
and macro) of the sanctions program as demonstrated by, but not limited 
to, the presence or absence of the following, types of actions:
  --Facilitation of law enforcement activity (domestic or foreign);
  --Facilitation of intelligence collection by intelligence community;
  --Response by the international financial community--voluntary 
        compliance;
  --Response by the international business community--voluntary 
        compliance;
  --Response by the targets (e.g. attempts to evade sanctions, attempts 
        to restructure organization, etc.);
  --Response by foreign governments;
  --Response by other government agencies;
  --Effectiveness of public exposure;
  --Deterrent effect of threat of further action; and
  --Impact on targeted network.

                           AGENCY COOPERATION

    Question. The GAO report also criticized Treasury, State, Justice, 
and other governmental departments for not working in a more 
coordinated fashion to fight terrorism funding. The report suggested 
that Treasury does not accept the idea that the State Department should 
lead this fight, nor does Treasury accept the procedures recommended by 
the State-led Terrorist Finance Working Group in delivering training 
and technical assistance abroad.
    In the departmental responses to the GAO, Treasury, State, and the 
other agencies seemed to reject the idea that there was a problem in 
coordinating our efforts to monitor, track, and eliminate sources of 
terrorist financing. Please explain to me how Treasury and the other 
agencies have improved their coordination in these areas and in 
implementing the procedures recommended by the State-led Terrorist 
Finance Working Group in delivering training and technical assistance 
abroad.
    Answer. The fight against terrorist financing is among Treasury's 
highest priorities. Treasury works closely with our partners in the 
interagency community and our counterparts abroad to ensure that 
vulnerabilities in the international financial system are closed to 
terrorists and terrorist financing networks are disrupted and 
dismantled. Though there is always more that can and must be 
accomplished, we believe that the U.S. Government's achievements in the 
fight against terrorist financing have been considerable, as reflected 
by the ``A-'' issued to the U.S. Government in the area of terrorist 
financing in the 9/11 Commission's ``Final Report Card on 9/11 
Commission Recommendations.'' The positive assessment is the result of 
all agencies within the U.S. Government working together and 
cooperating closely.
    The referenced GAO report does not focus on the fight against 
terrorism funding broadly, but rather is limited to an examination of 
interagency coordination on the provision of technical assistance 
related to terrorist financing to certain priority countries. This is a 
small, though vitally important, component of the U.S. Government's 
broad counter-terrorist financing efforts. The GAO correctly notes that 
there can be improvement in the way that the State Department--which 
has the lead in the provision of technical assistance--and agencies 
such as the Treasury Department--which has technical expertise in this 
area--interact and coordinate with each other. Since the publication of 
the GAO report, considerable effort is underway, both within Treasury 
and throughout the interagency community, to improve this process. For 
example, under State Department leadership, the Training and Assistance 
Sub Group (TASG)--a senior-level interagency group dedicated to 
overseeing the provision of counterterrorism technical assistance--has 
been reinvigorated in order to provide enhanced oversight and guidance 
to the State-led Terrorist Finance Working Group (TFWG). Moreover, more 
senior representatives have been assigned to the TFWG itself to ensure 
that it is functioning efficiently. We will continue to work both 
within Treasury and through the interagency community to improve the 
coordination and delivery of technical assistance in this vital area.

                          SUBCOMMITTEE RECESS

    Senator Bond. I thank you for coming here today, and you 
can be sure that we will be continuing to work with you, 
following your activities, helping where we can, and commenting 
where needed.
    With that, my sincere thanks to the witnesses. The hearing 
is recessed.
    Mr. Levey. Thank you, Mr. Chairman.
    [Whereupon, at 11:03 a.m., Thursday, April 6, the 
subcommittee was recessed, to reconvene subject to the call of 
the Chair.]
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