[Senate Hearing 110-]
[From the U.S. Government Publishing Office]
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
YEAR 2008
----------
WEDNESDAY, MARCH 28, 2007
U.S. Senate,
Subcommittee of the Committee on Appropriations,
Washington, DC.
The subcommittee met at 3:58 p.m., in room SD-192, Dirksen
Senate Office Building, Hon. Richard J. Durbin (chairman)
presiding.
Present: Senators Durbin and Allard.
DEPARTMENT OF THE TREASURY
Office of the Secretary
STATEMENT OF HON. HENRY M. PAULSON, JR., SECRETARY
STATEMENT OF SENATOR RICHARD J. DURBIN
Senator Durbin. Good afternoon. This meeting of the Senate
Appropriations Subcommittee on Financial Services and General
Government will come to order.
We continue our budget hearings today with the Department
of the Treasury. We welcome Secretary Henry Paulson to the
hearing, along with his associates and my colleagues, who will
be joining me, I'm sure, after the rollcall vote. I apologize
for the delay in beginning, but we scheduled rollcalls and it
changed our timing.
This is a budget hearing for the Treasury Department. We'll
defer most of the questions pertaining to the Internal Revenue
Service (IRS) until April 18, when Commissioner Everson will
appear. The IRS represents 90 percent of the Treasury budget,
in terms of actual dollars; the remaining 10 percent contains
some very critical activities and programs, which we'll talk
about today.
I was pleased, during consideration of the recent
continuing resolution, we were able to provide some additional
funds for the Department. We do have a budget request for next
fiscal year from the Treasury, of about $12.140 billion, an
increase of $514 million, or 4.4 percent. Excluding the IRS,
the request for the remainder of the Department is $1.45
billion, a net increase of $16 million over the last fiscal
year, or 1.5 percent. This appears, at first glance, to be a
very tight budget for the Treasury Department.
I have a number of areas of concern, which I will save for
the question period. It is now my pleasure to welcome the
Secretary to the hearing.
Mr. Secretary, the floor is yours.
STATEMENT OF HENRY M. PAULSON, JR.
Secretary Paulson. Mr. Chairman, thank you very much.
I've submitted a longer statement for the record. I had a
shorter statement that I was going to read, and I just think,
in the interest of brevity, what I'll do is, I'll just read two
paragraphs of the shorter statement and submit that for the
record also, because, as you know, and as you've said, Treasury
has a broad and important role in maintaining the economic and
national security of this Nation and ensuring the effective
operation of the Government, and I'm continually impressed with
the caliber of professionalism of Treasury's employees,
particularly the career staff, who carry out this work every
day.
Now, we have established four priorities in this budget for
next year: maintaining the growth and competitiveness of the
U.S. economy for the benefit of all our workers and families;
investing in tax enforcement and taxpayer services, because it
is important that individuals and business pay what they owe;
promoting strong economic ties and balanced trade relationships
with foreign nations, including China; and continuing our
important contribution to the war on terror by choking off
terrorist financing and other illicit activities.
PREPARED STATEMENT
Senator Durbin. Without objection, your entire statement
will be made part of the record.
Secretary Paulson. Good.
[The statement follows:]
Prepared Statement of Henry M. Paulson, Jr.
Chairman Durbin, Senator Brownback, and members of the
subcommittee. Thank you for the opportunity to appear before you today
to discuss the President's Fiscal Year 2008 Budget for the Department
of the Treasury.
I am pleased to be here today to provide an overview of the
President's Budget for Treasury in fiscal year 2008. The President's
Fiscal Year 2008 Budget reflects the Department's budget priorities and
dedication to promoting economic growth and opportunity, strengthening
national security, and exercising fiscal discipline.
The $12.1 billion request focuses resources on key programs
necessary to promote economic growth, fund the activities of the
Federal Government and effectively fight the war on terror. The request
is $523 million above the amount provided by the fiscal year 2007
funding level, a 4.5 percent increase. By collecting the revenue due to
the Federal Government and working to reduce illicit threats to the
financial system, the Department of the Treasury contributes to the
financial integrity of the United States.
Treasury has a primary role as steward of the U.S. economic and
financial systems, including the role of the United States as an
influential participant in the international economy. Treasury promotes
financial and economic growth at home and abroad. Treasury also
performs a critical and far-reaching role in national security. The
Department battles national security threats by coordinating financial
intelligence, targeting and imposing sanctions on supporters of
terrorism, narcotics traffickers, and proliferators of weapons of mass
destruction, improving the safeguards of our financial systems, and
promoting international relationships to combat the financial
underpinnings of terrorist and other criminal networks.
Managing these complex tasks requires expanded capabilities. Fully
funding the President's Fiscal Year 2008 Budget request will allow the
Treasury Department to continue and improve its ability to study,
recommend, and support initiatives that strengthen the U.S. economy,
create more jobs for Americans, and enhance citizens' economic
security. The Department will actively work to protect the security of
pensions, reform Social Security, and improve the Federal income tax
system by providing timely, usable, and comprehensive analyses that
advance the policy process.
PROMOTING ECONOMIC GROWTH, SECURITY AND OPPORTUNITY
The Treasury Department works diligently to fulfill its role as the
administration's chief economic advisor. We strive to provide the
President with the best information available on a broad range of
domestic and international economic issues. Treasury's Offices of
International Affairs, Tax Policy, Economic Policy, and Domestic
Finance support this role through the provision of technical analysis,
economic forecasting, and policy guidance on issues ranging from
federal financing to responding to international financial crises. The
Treasury Department supports policies that stimulate U.S. economic
growth, strengthen and modernize entitlement programs, and minimize
regulatory burdens while ensuring the safety and soundness of financial
institutions.
The fiscal year 2008 budget request funds Treasury's efforts to
promote domestic and international economic growth through financial
diplomacy. Treasury stimulates economic growth and job creation by
working to open trade and investment, encouraging growth in developing
countries, and promoting responsible policies regarding international
debt, finance, and economics. Treasury supports trade liberalization
and budget discipline through its role in negotiating and implementing
international agreements pertaining to export subsidies. These
agreements open markets, level the playing field for U.S. exporters,
and provide effective subsidy reductions that save the U.S. taxpayer
millions of dollars annually. Since 1991, cumulative budget savings
from these arrangements are estimated at over $10 billion. The growth
of these activities makes it necessary to enhance policy coordination
and resources through the addition of regional experts. Treasury's
fiscal year 2008 budget request provides additional staff to support
key policy dialogues around the globe. These experts will enhance
policy coordination on international matters and will support key
policy dialogues with priority countries like China.
Treasury also remains committed to protecting the homeland from
international investments that may threaten our national security. The
Committee on Foreign Investment in the United States (CFIUS) is an
interagency group responsible for investigating the national security
implications of the merger or acquisition of U.S. companies by foreign
persons. One of my key responsibilities as Secretary is to chair this
committee, and to make sure that the interagency CFIUS process performs
as efficiently as possible. As foreign investment in the United States
has increased, so has the number of cases reviewed by CFIUS. As a
result, the fiscal year 2008 budget request provides additional
resources to support Treasury's investigations of foreign investments.
The President's fiscal year 2008 request for Treasury also includes
$28.6 million for the Community Development Financial Institutions
(CDFI) fund. CDFI fund's mission is to expand the capacity of financial
institutions to provide credit, capital, and financial services to
underserved populations and communities in the United States. In order
to ensure that the CDFI program continues to operate in the most
efficient and effective manner, Treasury is proposing to phase out the
CDFI Bank Enterprise Awards (BEA) program in 2008. There is no evidence
that the BEA program improves economic development, and we believe that
the program's goals are better served through other CDFI fund
activities.
STRENGTHENING NATIONAL SECURITY
The sponsorship of terrorism and potential acquisition of weapons
of mass destruction (WMD) by rogue regimes and non-state entities
represent grave threats to U.S. national security and the security of
all free and open societies. Terrorists, WMD proliferators and other
non-state threats require support networks through which money and
material flow. The Treasury Department draws on financial and other
all-source intelligence, and also works to utilize its unique
regulatory and law enforcement authorities, to combat national security
threats and safeguard the financial system.
The Department's Office of Terrorism and Financial Intelligence
(TFI) provides financial intelligence analysis, develops and implements
systems to combat money laundering and terrorist financing, administers
the Bank Secrecy Act, and administers and enforces the U.S.
Government's economic sanctions programs.
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 their ability to function.
Treasury's actions include:
--Freezing the assets of terrorists, proliferators, drug kingpins,
and other criminals and shutting down the channels through
which they raise and move money;
--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 2008 President's Budget will enable Treasury to
enhance these capabilities. Treasury requests funding for investments
to further the Department's national security mission in three critical
areas. First, this budget, if enacted, will enable Treasury to expand
its capacity to identify potential national security threats and to
enforce U.S. policies to counter those threats. Next, Treasury will
enhance the information technology and physical infrastructure of TFI
and its component bureaus and offices to improve data security, access,
and quality. Finally, the budget would provide funds to help integrate
TFI's Office of Intelligence Analysis into the broader intelligence
community.
Specifically, this request includes an additional $5.3 million to
respond to emerging national security threats, provide strategic policy
coordination in regions key to the fight against terrorist financing,
and to enhance implementation of sanctions against state sponsors of
terrorism and WMD proliferation. The request also includes $8.1 million
for infrastructure and information technology projects to enhance data
access, security, and quality, including construction of a Sensitive,
Compartmented Information Facility (SCIF), stabilization and
maintenance of the Treasury Foreign Intelligence Network, and the
Critical Infrastructure Protection program. Finally, $1 million is
requested for initiatives to further Treasury's integration into the
broader intelligence community.
The Financial Crimes Enforcement Network (FinCEN) is responsible
for administering the Bank Secrecy Act (BSA). The fiscal year 2008
budget request provides funding to strengthen recovery capability for
mission-critical information technology systems and emergency operation
capabilities; and improve information technology planning and
oversight.
MANAGING U.S. GOVERNMENT FINANCES
The Treasury Department manages the Nation's finances by collecting
money due the United States, making its payments, managing its
borrowing, investing when appropriate, and performing central
accounting functions. Key priorities in managing the government's
finances include maximizing voluntary compliance with tax laws and
regulations, continually improving financial management processes, and
financing the government at the lowest possible cost over time. The
fiscal year 2008 budget request provides the funding necessary to
properly administer these functions.
Collecting Taxes
Collecting taxes in a fair and consistent manner is a core mission
of the Treasury Department. Treasury's priorities in tax administration
are enforcing the Nation's tax laws fairly and efficiently while
balancing taxpayer service and education to promote voluntary
compliance and reduce taxpayer burden. In an effort to maximize tax
compliance, the fiscal year 2008 budget includes $11.1 billion for the
IRS, which is an increase of $498 million above the amount provided in
the fiscal year 2007 funding levels.
The fiscal year 2008 budget request provides funding to enhance
coverage of high-risk compliance areas, as well as to address the tax
gap, which represents the annual difference between taxes owed and
taxes collected, including a multi-year research effort that will
provide continuous feedback on noncompliance. Enforcement will focus on
critical reporting, filing, and payment compliance programs, and
highlight abusive tax avoidance transactions and high income individual
examinations involving pass-through entities (e.g., partnerships and
trusts). The IRS will also continue to reengineer its examination and
collection procedures to reduce audit time, increase yield, and expand
coverage. As in fiscal year 2006 and fiscal year 2007, the
administration proposes to include IRS enforcement increases as a
Budget Enforcement Act program integrity cap adjustment.
The IRS will continue efforts to improve services offered to
taxpayers, primarily focusing on those outside of traditional telephone
access. For example, the fiscal year 2008 request provides funding to
expand the Volunteer Income Tax Assistance program. The IRS will also
implement the Taxpayer Assistance Blueprint, a 5 year strategic plan to
deliver taxpayer service; a collaborative effort of the IRS, the IRS
Oversight Board, and the National Taxpayer Advocate.
Finally, the fiscal year 2008 request will allow the IRS to make
critical IT infrastructure upgrades. IRS will continue to invest in
technology, process improvements, and training to achieve consistent
quality service with reduced costs. The budget also includes funding
for the IRS's Business Systems Modernization program, which is designed
to provide IRS employees the tools they need to continue to administer
and improve both service and enforcement programs.
The President's budget also includes a number of legislative
proposals intended to improve tax compliance with minimum taxpayer
burden. Once implemented, it is estimated that proposals will generate
$29 billion over 10 years. These proposals are presented in detail in
the fiscal year 2008 Department of the Treasury Blue Book. The
legislative proposals fall into four categories: expand information
reporting, improve compliance by businesses, strengthen tax
administration, and expand penalties.
Treasury's Alcohol and Tobacco Tax and Trade Bureau also collects
excise taxes on alcohol, tobacco, firearms, and ammunition. In fiscal
year 2006, the bureau collected $14.8 billion in excise taxes,
interest, and other revenues on these products and also regulates the
manufacture of alcohol and tobacco products.
Ensuring Efficient Fiscal Service Operations
The fiscal year 2008 budget request provides the funds necessary
for Treasury to meet its responsibilities as the Federal Government's
financial manager.
Treasury's management of the Federal Government's finances includes
making payments, collecting revenue, preparing public financial
statements and collecting delinquent debt owed to the Federal
Government through the Financial Management Service (FMS). Treasury
oversees a daily cash flow in excess of $58 billion and disburses 85
percent of all federal payments. The Department is working to improve
its payments and collections processes by moving toward an all-
electronic Treasury. In fiscal year 2006, Treasury issued 742 million
electronic payments including income tax refunds, Social Security
benefits, and veterans' benefits. Treasury is also encouraging Social
Security and Supplemental Security Income recipients to switch to
Direct Deposit through the Go Direct campaign. Direct deposit
represents a cost savings to the Federal Government, and consequently
to the American taxpayer, of 80 cents per transaction compared to a
check payment.
Treasury's Bureau of the Public Debt manages all of the public
debt, which includes marketable securities, savings bonds, and other
instruments held by State and local governments, federal agencies,
foreign governments, corporations, and individuals. To improve debt
management and offer better customer service, Treasury offers
TreasuryDirect, an electronic, web-based system that electronically
issues securities to retail customers and enables investors to manage
their accounts on-line.
The budget also includes three legislative proposals for FMS that
are estimated to save the Federal Government over $3 billion over 10
years. These proposals will allow the government to trace and recover
federal payments sent electronically to the wrong account, eliminate
the 10-year limitation on the collection of delinquent non-tax federal
debts, and remove the disincentive for the IRS to refer tax debts to
FMS for collection.
STRENGTHENING FINANCIAL INSTITUTIONS
One of the principal objectives of the Treasury Department is to
enable commerce. The Department is responsible for the safety and
soundness of national banks and federally-chartered savings
associations. The Treasury Department also produces the coins and
currency needed for commerce, and guards against counterfeiting and
other misuse of our money. While the Office of the Comptroller of the
Currency (OCC), the Office of Thrift Supervision (OTS), the U.S. Mint
(Mint), and the Bureau of Engraving and Printing (BEP) are funded
through direct annual appropriations, their contribution to Treasury's
mission cannot be understated.
Treasury, through OCC and OTS, maintains the integrity of the
financial system of the United States by chartering, regulating, and
supervising national banks and savings associations. In fiscal year
2006, OCC and OTS oversaw financial assets held by these financial
institutions totaling $8.1 trillion.
The Mint and BEP are responsible for producing the Nation's coins
and currency, respectively. In fiscal year 2006, the Mint and BEP
produced 16.2 billion coins and 8.2 billion paper currency notes,
respectively. The Mint issued five new quarters for the 50 State
Quarters program and BEP introduced the new $10 currency note into
circulation. Also, despite significant increases in the price of
metals, the Mint was able to return $750 million to the Treasury
General Fund in fiscal year 2006.
Managing Treasury Effectively
Treasury is committed to using the resources provided by taxpayers
in the most efficient manner possible. The Department will drive
improved results through decision-making that considers performance and
cost. The Treasury Department strives to serve its stakeholders in the
most effective way while working to leverage resources across the
Department and across government.
Funding requested in Treasury's departmental offices and
Department-wide Systems and Capital Investments Program (DSCIP) is
sought for building a strong information technology infrastructure,
ensuring that Treasury remains a world-class organization that meets
the President's standard of a citizen-centered, results-oriented
government.
The DSCIP account funds technology investments to modernize
business processes throughout Treasury, helping the Department improve
efficiency. In fiscal year 2008, Treasury requests $18.71 million for
ongoing modernization and critical information technology
infrastructure projects, and for investment in other new technologies
that will improve efficiency and service to the American people. The
budget request includes:
--$6 million to begin work on a Treasury-wide Enterprise Content
Management System. The initial system will meet the business
requirements of the Office of Foreign Assets Control and the
Financial Crimes Enforcement Network;
--$2 million for the continued stabilization of the Treasury Secure
Data Network; and
--$4 million to improve Treasury's FISMA performance, strengthen the
Department's overall security posture, leveraging the
President's management agenda, including the E-Government
initiatives, across the Department.
This budget request also includes funding for the Office of the
Inspector General and the Treasury Inspector General for Tax
Administration. These offices play important oversight roles in the
overall management of the Department and the fair administration of the
Nation's tax laws.
CONCLUSION
Mr. Chairman, thank you again for the opportunity to come here
today to discuss with you and the committee the President's Fiscal Year
2008 Budget request for Treasury. I look forward to working with you
and the members of the committee in ensuring that Treasury maximizes
its resources and funding so that the American people can be assured
that their tax dollars are being used in the most effective way
possible. I would be more than happy to answer any questions.
COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS PROGRAM
Senator Durbin. Let me zero in on a few issues that I think
I'd like to raise.
The first relates to the community development financial
institutions (CDFI). Since its inception, CDFI has sought to
increase the availability of credit, investment capital, and
financial services to relatively poor urban and rural
communities. The fund pursues these objectives by augmenting
the private resources for investment in economic development,
housing, banking services. It works with two sets of partners
in boosting such investment: private financial institutions,
certified by the CDFI as community development financial
institutions, and private equity groups.
Now, the administration's budget request includes a request
for $28.5 million for this CDFI fund. This is an improvement
over last year's budget request, but it is a reduction of
nearly 50 percent from the fiscal year 2007 amount of $54.5
million. And $12.2 million of your fiscal 2008 request consists
of administrative costs which are necessary, but really don't
provide the capital that we're talking about for these
institutions.
I'd like to ask you--and I'm going to give you just an
illustration of why I think this needs to be discussed.
According to the Treasury's own calculations, every dollar the
Federal Government invests in the CDFI funds leads to another
$27 in non-Federal fund investment. So, meeting the CDFI
community request of $100 million, instead of the Treasury
Department request of $28.5 million, would cost the Government
only an additional $71.5 million, but would provide needy
communities over $1.9 billion. That's based on the Treasury's
calculations.
Based on the data provided by the Opportunity Finance
Network, which advocates on behalf of CDFIs, and on
calculations made by my staff, here's the difference that $1.9
billion into inner-cities, rural communities, and Native
American reservations would mean: 28,000 jobs, 6,000 new
businesses, 64,000 extra housing units, and 1,000 new or
improved community facility projects. Isn't that worth $71
million?
Secretary Paulson. Mr. Chairman, first of all, thanks for
your question. Second, this is a good program, so we're not
debating this. As you've pointed out, we increased our request
this year, and did it meaningfully, although below the funded
level. It's something I've looked at carefully, myself. We'd be
happy to work with you on this. We have a few differences,
maybe, on which parts are the most valuable parts of the
program. And so, we can talk about that. But I agree with your
basic assertion that this is a good program.
Senator Durbin. I'm going to get into this a little more
with you directly in conversation----
Secretary Paulson. Sure.
Senator Durbin [continuing]. To talk about this, because I
think I've made a point for the record, and you've----
Secretary Paulson. We would like----
Senator Durbin [continuing]. Left an opening for further
discussion.
Secretary Paulson. And we'll work with you--we've got
someone new that's running this. I'd be happy to send her up to
work with----
Senator Durbin. Good.
Secretary Paulson [continuing]. Your staff, and would be
happy to get involved, myself.
INFORMATION TECHNOLOGY MANAGEMENT
Senator Durbin. Thank you.
The inspector general, in his October 16, 2006, memorandum
to you concerning management and performance challenges facing
the Department, indicated that the Department has difficulties
in managing large acquisitions of mission-critical systems and
other capital investments. What changes have you made to
improve your performance in managing the Department's
information technology (IT) projects? Why will this year be
better?
Secretary Paulson. Well, let me say, the report happens to
be right, that there are problems, and there have been
problems. And it's not easy to correct them all at once. I
would say part of them relate to having the right people in the
right jobs. We're looking for a new Assistant Secretary of
Management, and I think we're close to announcing something
there. We're also looking for a new CIO for the Department. And
getting those people in place, when we find them, will be
important. But it also takes, I think, an integrated approach
to this. Bureau heads and key managers have to also buy into
this and recognize that managing the IT programs has got to be
part of their day-to-day business. It takes training, and we've
instituted a number of things in the training area. So, I would
say I've been here 8 months; before I came, I had Senator Bond
take me aside and tell me there were problems. And he was
right.
Senator Durbin. Since you've been here 8 months, and you
come from some of the highest levels of the private sector,
it--I don't have that same life experience that you've had. I
continue to be puzzled, in Federal agency after Federal agency,
why they have such a difficult time with information
technology. Does the private sector go through the same pain?
Secretary Paulson. Well, I would say this. In the private
sector, I don't believe I knew a CEO that said, ``I'm really
happy with my IT. I know that I'm spending all the money
properly, that we're getting and doing everything we should,
that it's working as well as it should.'' And I know, in the
company I came from, we felt a big part of it. The IT
professionals, the CIOs, were important, but every manager had
to take responsibility for it, and it couldn't be something
separate, it had to be part of their business. I know it is
difficult in the private sector when you can offer a lot of
money. I know people work for a lot of things, and one of the
things I've learned since coming here is how hard people work,
how Treasury's got great people and great career people, and
the people that are filling in, in these jobs right now, are
doing a good job. But it is not easy to find people who are
really qualified. And then, the change of culture to make it
work isn't easy. But I think the Government overall has
problems, and to the best of my judgment, maybe Treasury has a
few more problems than some other areas, but I haven't been in
some of the other areas. But we're on top of them, and we're
doing everything we can. And I think we're making some
progress.
BANK SECRECY ACT DIRECT
Senator Durbin. Let me move to another issue. In June 2004,
Treasury established the Bank Secrecy Act (BSA) Direct
Retrieval and Sharing Program. This program was designed to
make it easier for law enforcement to access and analyze BSA
data and to improve our overall data management.
Secretary Paulson. Right.
Senator Durbin. On July 13, 2006, the Financial Crimes
Enforcement Network (FinCEN) halted the program due to problems
with its main contractor. Robert Werner, then director of the
program, testified, in September, that the Financial Crimes
Enforcement Network is initiating a replanning effort, in his
words, for the retrieval and sharing component of the Bank
Secrecy Act Direct. Where does this stand, at this point? Tell
me about your efforts to improve the sharing of BSA data
between Treasury and law enforcement.
Secretary Paulson. Well, I think we're making progress.
But, again, this is in some ways, the same answer to the
question that I gave that--in other words, our IT and
technology programs throughout Treasury had issues and weren't
up to snuff. We've got this up and going. I think we're making
progress, in terms of sharing information. I think it's working
pretty well. But I'm not going to tell you that we didn't have
systems problems.
Senator Durbin. This predates your arrival.
Secretary Paulson. Right.
Senator Durbin. This has been an ongoing issue for 4 years.
And we have tried to, with Director Mueller, at the Federal
Bureau of Investigation (FBI), and so many other agencies,
Homeland Security. I really, kind of, focused on a theme,
because I couldn't execute it with any personal knowledge, but
the theme was to upgrade information technology and the
opportunities for sharing information when it came to security
and law enforcement. And what you've just said--I'm not
surprised, but it's the same thing that's been said before. And
I hope that your expertise in the private sector will help
break through some of these problems.
Secretary Paulson. We're making progress. I would say this.
I gave you the negative. The positive is, if I've been
surprised on anything on the upside, it's been the quality of
the professionals--career professionals who we have at Treasury
that are doing this job. And the work that gets done is first-
class work, even when we don't have the best systems. And we're
approaching this, and we're determined to make some progress
here.
TREASURY FOREIGN INTELLIGENCE NETWORK
Senator Durbin. I believe you've identified the Treasury
Foreign Intelligence Network as your top IT development
priority. What's the current status of that system?
Secretary Paulson. I think we're back on track. It's
operating. Again, with any of these systems, I'm not going to
tell you, with 100 percent certainty, until we get our new
Assistant Secretary of Management, and our new CIO in place,
but we've done a bit more work----
Senator Durbin. What is the timetable for filling those
spots?
Secretary Paulson. Soon. I think we're weeks away, knock on
wood, from being able to get an Assistant Secretary of
Management in place, and I think it may take a little bit
longer on the CIO.
TERRORIST FINANCING
Senator Durbin. One of your critical responsibilities
relates to terrorism and financing of terrorism, in the Office
of Terrorism and Financial Intelligence (TFI). They seek to
integrate the operations and resources of the Office of
Terrorist Financing and Financial Crime, the Office of Foreign
Assets Control, the Financial Crimes Enforcement Network, and
others. Two basic responsibilities of TFI, gather and evaluate
financial intelligence, and, two, enforce various financial
laws and regulations relative to that intelligence. What do you
see as some of the major challenges facing the Office of
Terrorism and Financial Intelligence?
Secretary Paulson. First of all, this is a very important
area, and we've got first-class people. Part of what we ask for
in our budget is money to build the new SCIF, and to hire and
train additional people, because we've got first-rate
individuals that work very hard, so that is obviously part of
it. The team, I believe, works quite well with others in the
intelligence community and, in a number of programs, we play a
support role, working with colleagues at State or elsewhere. I
think the teamwork is good there. But this area, like anything
else, comes down to having the right people in the right jobs,
and asking--are they trained well? And are they thinking
creatively? And are they working as part of a team? You're
talking about an area that I think is as well managed as any
area at Treasury, with first-rate professionals.
Senator Durbin. Mr. Secretary--before I turn it over to my
colleague Senator Allard--there's an article in yesterday's
Washington Post; it spoke of private business, such as rental
and mortgage companies, car dealers, checking the names of
customers against a list of suspected terrorists and drug
traffickers, made publicly available by the Treasury
Department, sometimes denying services to ordinary people whose
names are similar to those on the list. The Office of Foreign
Asset Control (OFAC) list of specially designated nationals has
long been used by banks and other financial institutions to
block financial transactions of drug dealers and other
criminals, but an Executive order issued by President Bush
after the September 11 tragedy has expanded the list and its
consequences in unforeseen ways. Businesses have used it to
screen applicants for home and car loans, apartments, and even
exercise equipment, according to interviews in a report by the
Lawyers Committee for Civil Rights of the San Francisco Bay
area. To what extent is this list put out by the Office of
Foreign Asset Control creating problems for average consumers
in this country?
Secretary Paulson. That's a very good question, and it's
something we've talked about and had a number of meetings
about. Clearly, these activities that we have to disrupt
terrorist financing, to deal with weapons proliferation, and to
deal with other illicit activities, are very important. So,
we're very careful, in terms of when we publish the list, to
get the name right and to have the birth date. And then, what
you're dealing with is this. These sanctions need to be public,
and so you'll have a number of credit bureaus which will take a
look at the list and then, if there's a name that's similar or
if the name may be the same, but doesn't have the same birthday
or whatever, they'll put a flag by it. And then, in some
instances, you'll find examples of businesses or others that
just don't want to be bothered, or for whatever reason, aren't
as careful as they should be in denying credit.
Senator Durbin. Well, it seems like that would create a
pretty serious hardship on some people--innocent people.
Secretary Paulson. It does, and it's something we're
concerned about. Now, what we do is, we've got a hotline that
is open 24 hours a day. There are many, many, many calls. And
Treasury is very quick about this. There are people that call
because the name is similar, but not exact, or the name is the
same but there's a different birth date. And these things get
answered and get cleared up very quickly. So, how do we do
this, and have you got any ideas? We ask ourselves, what can we
do? We've got people manning these hotlines. There are
literally thousands and thousands. The number that sticks in my
mind is 90,000 calls over the last year, which received very
quick answers. Whenever you have any list with sanctions,
there's room for confusion if people don't use it properly. And
Treasury's doing everything they can to make sure it is used
properly.
Senator Durbin. Let me recognize the Senator from Colorado.
Senator Allard. Well, thank you, Mr. Chairman, for holding
this hearing.
I understand, in your opening remarks, you said you're
going to have a separate hearing on the Internal Revenue
Service. And I'm going to have some questions then, but I do
have an opening statement I'd like to have made a part of the
record, if we might.
Senator Durbin. Without objection. We will also insert the
statement from Senator Brownback.
[The statements follow:]
Prepared Statement of Senator Wayne Allard
I would like to thank Chairman Durbin for holding today's
hearing.
The Treasury Department encompasses a number of important
responsibilities, ranging from managing the government's
accounts and the public debt; creating coins, currency, and
stamps; supervising banks and thrifts; managing and promoting
the domestic economy; promoting international trade and
finance; detecting and preventing terror finance, money
laundering, and other financial crimes; to administration of
the tax code and collection of taxes owed. The breadth of these
responsibilities perhaps belies the size of the $12.1 billion
budget request.
While there are a number of areas of interest within the
Treasury Department, I have the opportunity to delve into many
of them on the Banking Committee; therefore, I intend to use my
time today to examine some current practices of the Internal
Revenue Service.
For some time now I have been concerned by increasingly
hostile IRS actions towards conservation easements. Colorado
has been a national leader in this area, so it is particularly
worrisome to my constituents that the IRS is targeting
legitimate easements for audits. It would appear that the IRS
is attempting to dramatically narrow the number of legitimate
conservation easements by applying a standard that has been
struck down by federal courts two different times.
While I support investigation and enforcement of legitimate
fraud, we must not target honest taxpayers, and Colorado's
reputation should not be tarnished. There is a significant need
for conservation easements in Colorado, and a few abuses should
not end the charitable tax credit for everyone.
I have been in communication with the IRS over this matter
for some months, however, I have been very frustrated that I am
unable to get answers to my questions on this matter.
Therefore, I will follow up with the Secretary in more detail
during the question and answer period.
I would like to thank Secretary Paulson for appearing
before the subcommittee. I recognize that he has a very busy
schedule, so I appreciate his presence and look forward to his
testimony.
------
Prepared Statement of Senator Sam Brownback
Good afternoon. I want to thank you, Chairman Durbin, for
your leadership of this new subcommittee. I look forward to
working together with you during this coming year as we make
funding decisions and provide oversight to the various agencies
within this subcommittee's jurisdiction.
Secretary Paulson, thank you for appearing before our
subcommittee today. I look forward to hearing the details of
your fiscal year 2008 budget request and the key efforts that
your Department will be undertaking this year.
Looking at the President's budget, I am pleased that it
assumes the continuation of the President's tax cuts, which
have helped our economy rebound from recession to its current
robust health. I am also pleased that the economy is continuing
to grow steadily and am encouraged that the President's budget
projects a balanced budget in 2012.
Mr. Secretary, the lion's share of your budget--
approximately 90 percent--is for the Internal Revenue Service.
I understand that you are seeking additional resources to close
the so-called ``tax gap.'' Certainly, we must ensure that taxes
which are owed are collected. However, I remain concerned that
our tax system is overly complex, complicated, and burdensome.
Americans spend roughly $157 billion each year in tax
preparation to ensure they do not run afoul of the IRS. The
system is desperately in need of reform. I support a flat tax
concept that simplifies tax preparation, applies a low tax rate
to all Americans, and respects the special financial burden
carried by American families raising children. One reason we
have a ``tax gap'' may be that our tax system is so complex
that taxpayers cannot figure out what they owe.
Mr. Secretary, I want to commend your Department for its
efforts to combat terrorism. Your ``Office of Terrorism and
Financial Intelligence'' is working hard to safeguard the
financial system against illicit use and combating rogue
nations, terrorist facilitators, money launderers, drug
kingpins, and other national security threats. This is
important work and I am supportive of your efforts in this
area.
I understand that the President has asked the Treasury
Department to aggressively block U.S. commercial bank
transactions connected to the government of Sudan, including
those involving oil revenues, if Khartoum continues to balk at
efforts to bring peace to Sudan's Darfur region.
We know that Sudan's economy is largely dollar-based,
meaning many commercial transactions flow through the United
States. This fact makes Sudan vulnerable to your Department's
actions. Anticipating Treasury's actions, there have been
reports that Khartoum is exploring ways of obtaining oil
revenues that do not involve dollars, such as barter deals.
Clearly, we have an opportunity here to put greater pressure on
Khartoum to enter into peace negotiations. Mr. Secretary, I am
whole-heartedly supportive of these efforts and I would like to
hear what actions you plan to take in the coming weeks and
months.
Mr. Secretary, I look forward to hearing your testimony
this afternoon. Your Department has an important role as the
steward of our financial systems and in promoting our
participation in the international economy.
Thank you for your leadership, Mr. Chairman. I look forward
to working with you this year.
TAX ENFORCEMENT
Senator Allard. And I do want to ask a few questions
related to the Internal Revenue Service, because it's an
evolving issue in Colorado, and very important, and that has to
do with conservation easements. The Congress passed some
specific legislation providing for conservation easements,
which is an incentive to have open space, you know, in your
State. And what is happening in the State of Colorado is that
the commissioners there, or the enforcers there, have--seem to
be taking enforcement action that's over and beyond what's
provided for in the legislation. They're being--they're
interpreting it in a more strict way. It's, twice, gone to the
courts, have been on--and the Internal Revenue has been
overruled in the courts on two cases. And so, my question is,
is why--after they've been overruled twice in the courts, why
they're continuing to push this. I hope that you're aware of
this. If you're not--and, if you are, somewhat, I'd like to get
a response; if not, we can follow up with this when we're
having the hearing on the Internal Revenue Service.
Mr. Secretary, do you have a response to that?
Secretary Paulson. I'm not familiar with the issue, but I
think you're right to follow up with Commissioner Everson. I
think he would be the appropriate person to talk with about
that.
Senator Allard. Well, I hope you have him adequately
briefed, and tell him that I'm going to be waiting for him.
And--hope I don't have--I hope I can be here, but I'm going to
make every effort to be here, because I think this is really
important.
Secretary Paulson. Good.
Senator Allard. And then, also--and it's not that I don't
think we ought--shouldn't be doing more to enforce our tax
laws; I think we ought to be doing more. And I--you know,
we're--there's actual--in the budget, more money, with the idea
there's going to be more strict enforcement on collecting from
those who are not paying their taxes.
PART PROGRAM
Now, in regard to that, you're familiar with the PART
Program? This is the President's program, where he asked the
agencies to set up goals and objectives; and then, if you don't
meet those goals and objectives, or if you don't even bother to
set those up, then there's a rating system that goes into that.
And that is--you can find that PART Program rating on the
Internet, by the way; you go to--the ExpectMore.gov--and if you
go there, you'll find that there's one of your agencies that is
rated as ineffective. If you were--if it was a classroom, that
would be an ``F.'' And it's the Internal Revenue Service earned
income tax credit compliance (EITC). Have you looked at that
particular program? Why is it ineffective?
Secretary Paulson. Well, I would, respectfully, disagree,
because this is something that I have looked at and spent some
time with. I have actually spent some time with a number of
people in the House and in the Senate, have gone out to a
center, with John Lewis and Charlie Rangel, and here's the
issue with the EITC.
Senator Allard. Now, this is the compliance aspect of EITC.
Secretary Paulson. I understand that.
Senator Allard. Yes.
Secretary Paulson. I'm going to get to that. And I'm going
to say you should take a look sometime at the form and 53 pages
of instructions. This is an area where it's easy to make
mistakes. I sometimes get questions from the other side, which
say, ``Tell us why Everson and the IRS have so many people
auditing this area, as opposed to the high net worth.'' And, I
explain it's a totally different function. The audit is done
from remote locations, and it is just looking at the forms, and
checking for mistakes and errors and inconsistencies, which is
a very different type of function. And it's not possible to
transfer those people to do other things. So, we're doing our
best. And we have quite an outreach program this year to help
with the education, and we will, hopefully, as we move into the
next tax season, find ways to simplify the form and make it
easier. But, again----
Senator Allard. Well, I think that's key. And that was
going to be my next question. You know, we need to--it seems to
me like that needs to be simplified, and, hopefully, that
that's within your purview to do that, and more clearly define
goals and objectives so people understand where they're going
to be, and put it in terms in which they can be measured.
Secretary Paulson. Right. And you should ask, when he's
here, because, he's spent a lot of time on this, himself--
Commissioner Everson.
Senator Allard. Now, there are some programs under your
purview that show ``results not demonstrated.'' And the way
those are explained to me is, those agencies have done nothing,
or very little, to try and set up any measurable goals and
objectives. And, in the Treasury, we have global environment
facility of the Internal Revenue Service, healthcare, tax
credit administration, Internal Revenue Service tax collection,
Tropical Forest Conservation Act--are just a few that is
named--are listed on here. Why aren't those agencies--why
haven't they done anything at all to try and comply with PART?
Why is their rating ``results not demonstrated?''--and that's
what that means, that they haven't been able to put together a
management objectives program.
Secretary Paulson. Well, I can't, again, accept the
assertion that, with these programs or these areas, we don't
have people that are working to achieve objectives. And if you
would like to pick any of those programs that are of particular
interest to you, I'd be happy to discuss it further and have
the people involved come up and spend some--
Senator Allard. Well, they're of interest to me, because
I'm on the Budget Committee and I'm on the Appropriations
Committee.
Secretary Paulson. Right.
Senator Allard. And I want to--I want to see taxpayer
dollars spent on programs where we get results that has more--
--
Secretary Paulson. Right.
Senator Allard [continuing]. We don't want programs out
there running that have empty promises.
Secretary Paulson. Well, I----
Senator Allard. And so, the reason for this whole program
is that we have--the taxpayer dollars are going to programs
that create measurable results, so that, as policymakers, we--
and, as you know, this is--this evaluation is done by the
Office of Management and Budget (OMB). And I suggest that maybe
you sit down with them, see what you need to be doing, and--I'm
just--what I'm trying to do, on this hearing, is to highlight
it for you----
Secretary Paulson. Right.
Senator Allard [continuing]. So that next year when you
come in, you won't be--you'll know that we'll be looking at
these--that this makes a difference in our thinking.
Secretary Paulson. Well, let me give you an example, just
on one of the programs, which is the global environmental fund.
This is a multilateral fund that deals with environmental
issues. And, in that case, we, the U.S. Government, have
underfunded our request and our obligation, globally. And so,
this is one where I know we had held back, because we had felt
that certain objectives weren't being met. This year, we
decided to fund it more fully, because we felt it was
appropriate. And so, that's one. In terms of how someone in
PART did the analysis, I can't comment on it.
Senator Allard. Well----
Secretary Paulson. I can just tell you that we looked very
carefully at everything we put in the budget.
Senator Allard. Well, we get down to the----
Secretary Paulson. Right.
Senator Allard. I mean, I commend you for looking at that
and evaluating it, and maybe it does need more money.
Secretary Paulson. Right.
Senator Allard. And--but it would be interesting, now, to
look at this program, next year, to see if the more money that
you put in there got spent wisely. And if they--and I would
hope that, on these international agencies, that you expect
accountability in taxpayer dollars when they go into them.
Secretary Paulson. We do. We expect accountability, and
there's also a point, on some of these things, that, if we want
to be global leaders, and if we want to play the role that
people would like us to play at some of these multilateral
organizations, that we have to put some money on the table. So,
it's a tradeoff.
ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS
Senator Allard. Mr. Chairman, I have one more question, if
you have time for that.
Would you like--let's see, on--the 2008 budget proposed
creating an additional Assistant Secretary in the Office of
International Affairs (OTA). Would you comment on why this is
necessary, and what this position will be doing now that you're
not currently doing?
Secretary Paulson. Yes. This, to me, of all the things to
defend, is the easiest. When I look at the role that I believe
you should want Treasury to play in the world, and I look at
the wide variety of issues that we're dealing with right now--
you know, the strategic/economic dialogue with China; there's
just a wide variety of things where we want to play a major
role when we're dealing with our economic partners around the
world--and if a man from Mars came down and looked at this in
today's world and said, ``They've got one assistant secretary
in the international area,'' and then looked at the things that
this man has on his plate, and the complexity of some of these
issues, CFIUS being one of them, you know, the Committee on
Foreign Investment----
Senator Allard. CFIUS?
Secretary Paulson. Yes.
Senator Allard. The ports.
Secretary Paulson. Yes. I would just simply say the level
and the complexity of the issues we've got--Europe, Latin
America, Asia--investment issues, trade issues--this is an
important job. My Assistant Secretary for International right
now is in Korea, helping Sue Schwab and her team with some
investment provisions in an FTA they're trying to negotiate.
It's a perfectly reasonable thing for him to be doing, but
there's three or four other things he's not doing because he's
there. And when I look at how other agencies are staffed, to
me, this would be an important job to fill. And the interesting
question, to me, is not why there's not two, it's why there's
maybe not three. So, we went in, and have requested another
assistant secretary.
Senator Allard. Well, thank you for your responses to my
questions, and we'll follow up on the stuff on Internal Revenue
on that hearing.
PART PROGRAM
I just--on all the--Mr. Chairman, on all these hearings
that we have where we have the Secretaries show up who are in
charge of the various Departments, I'm making an effort to sort
of sensitize everybody to how important the PART Program is,
because, as policymakers here on the congressional side, budget
and appropriators, it's shedding information. And we get
particularly concerned, I think, when we see something that's
rated as ineffective. And if we--even worse yet, in my mind,
is, we see an agency that is not demonstrating results, which,
to me, lacks--shows a lack of effort.
Secretary Paulson. Let me just make one additional comment.
I do believe we should focus on performance, and we should have
to justify performance. One of the things I learned in the
private sector, how you measure that performance and who
actually measures the performance, makes the difference. And
so, sometimes--and I'm not making any comment about PART or any
other program, this is just a general observation. Some of the
performance measurements that I've looked at are not worth the
paper they're printed on. We will take responsibility. We know
we need to answer to you, and to others, for performance, and,
on any of these things, we're just happy to spend the time, and
I'm not saying we're perfect----
Senator Allard. Yes.
Secretary Paulson [continuing]. Because I found plenty of
issues, but----
Senator Allard. Well, if that's the case, I'd hope you'd
sit down with----
Secretary Paulson. Right.
Senator Allard [continuing]. OMB and work that out.
Secretary Paulson. Right. Right.
Senator Allard. Thank you.
Thank you, Mr. Chairman.
Senator Durbin. Thank you, Senator.
FINANCIAL REPORTING
Mr. Secretary, the Office of Foreign Assets Control and the
Financial Crimes Enforcement Network have been overwhelmed by a
backlog of financial reports filed by financial institutions,
prompted by a desire to err on the side of caution.
Secretary Paulson. Right.
Senator Durbin. The result is said to be an abundance of
filings reporting only nominally suspicious activity or
transactions. First, is this the case? How would you
characterize the magnitude of the backlog there? And what
percentage of suspicious activity reports received are actually
examined?
Secretary Paulson. Well, let me say that this is an area
where one thing I've learned to do is listen. As we look at
competitiveness in the financial services industry, and capital
market's competitiveness, one issue we need to look at is
regulation, and, is there a cost benefit? You know, are we
putting too many requirements under its institutions?
Senator Durbin. So, what do you think?
Secretary Paulson. This has been an area that has been
cited, and it's one we're in the process of looking at right
now.
Senator Durbin. Can you explain to me----
Secretary Paulson. I don't know what we have--sometimes if
you build a haystack too big, you can't find the needle. And
I'm not saying we've done that, but we've got a new head of
FinCEN, we've got a very outstanding young man, and he's got
his hands full. But this is one thing that we will be looking
at, at Treasury, and, again, talking to others at the Fed and
elsewhere.
IRAQ THREAT FINANCE CELL
Senator Durbin. Can you explain to us what the Iraq threat
finance cell is and how it's operating?
Secretary Paulson. No, sir.
Senator Durbin. I'll give you a chance to respond to that
in writing, if you would, please.
Secretary Paulson. Yes.
[The information follows:]
Iraq Threat Finance Cell
The Department of the Treasury broadened its unique
intelligence role overseas through the Baghdad-based Iraq
Threat Finance Cell (ITFC). Since its establishment in late
2005, the ITFC has paid significant dividends. Co-led by the
Departments of the Treasury and Defense, the ITFC collects,
analyzes, and disseminates timely and relevant financial
intelligence to the war-fighter. U.S and Coalition military
commanders have come to depend on this intelligence to help
combat the Iraqi insurgency and disrupt terrorist, insurgent,
and militia financial networks.
FINANCIAL REPORTING
Senator Durbin. Some critics question whether U.S. economic
sanctions and financial regulation, as you've just said, place
too much burden on financial institutions and international
banks without providing sufficient guidance and training to
implement the measures in a cost-effective way. One estimate
from 2003 suggested the annual cost of U.S. anti-money
laundering efforts for businesses was upwards of $7 billion. Do
you agree that U.S. counterterrorist financing efforts have
placed too much burden on the private sector?
Secretary Paulson. As I said to you, I thought I tried to
answer the question, you know, the first time you asked it--
which is that this is something we're looking at. There is a
cost benefit. We need to get it right. Those activities are
very important, they're critical to our national security. So,
what we need to judge is, is there a way where we could reduce
the burden and get a better, more effective result? Okay?
Because----
Senator Durbin. That's being studied now?
Secretary Paulson. That's being studied now--because the
goal is to stop terrorism, to stop illicit financial
activities. And it's a very important goal. And these programs
have been very successful. So, the question we're now asking
is, what's the right balance? You've asked the question, and I
obviously think it's a good question, because I've asked the
question, myself, and we're looking at it.
Senator Durbin. I always like it when----
Secretary Paulson. We really don't have an answer yet.
Senator Durbin. I always like it when my questions are
complimented. Thank you.
SUDAN POLICY
Let me ask you another. You and I had a conversation in my
office about Sudan and Darfur, and I expressed my concern about
this situation which President Bush has, I think, accurately
characterized as a genocide. We talked about things that we can
do, as a Nation, to put pressure on Khartoum, the Sudanese
Government, to allow U.N. peacekeepers to come in and provide a
rescue effort for these poor people.
I'd like to ask you, if you can, to tell me what the
Treasury Department of the United States can do to help in this
situation. Can we block Sudanese transactions that flow through
U.S. banks, so that we can reduce the resources that the
Sudanese Government can bring to bear against its own people?
And what resources would you need to accomplish that, if
possible?
Secretary Paulson. Well, let me say, as you mentioned, we
had a chance to talk about this. I've talked with the President
a number of times about this. As you know, he's very committed
and very passionate; talked with Secretary Rice, as she and
Special Envoy Natsios are leading the efforts, Treasury is
playing a support role, and, I believe, an important support
role. We've had sanctions in place since 1997. You've
identified one of the things we can do, which is to identify
and disrupt dollar payments to Sudapet or other entities in
Sudan, particularly those that go through the U.S. financial
system. I think you will see, sometime in the weeks and months
ahead, some actions taken that will show you that we're being
active and diligent. I press people all the time, as does the
President, to be creative, to think out of the box.
I know one thing we would like, and we're thinking it
through, and we'll have some legislative suggestions. But right
now, if we find a financing that is going through the U.S.
banking system, we'd like the flexibility to charge a larger
fine, because $50,000 per transaction may not be enough, when
you run into a major transaction.
And so, there will be some things. And I do think this is
one area, Mr. Chairman, where, knowing your commitment, we've
had people up, briefing you, as much as you want to talk to our
people. We're committed. If you've got ideas, we want to
explore them and work with you, because this is very important.
Senator Durbin. We had a classified briefing with Special
Envoy Natsios just last week.
Secretary Paulson. Yes.
Senator Durbin. And we're working with him, and I won't go
any further in my statements at this hearing, but if the
Treasury Department needs additional resources at any point, we
want to be there to help.
Secretary Paulson. Right. And I think Treasury might have
been there when you had that----
Senator Durbin. Yes, I believe you were.
Secretary Paulson. We had people there, so----
ECONOMY AND WAGES
Senator Durbin. I'd like to ask you some general questions
about the economy, because I think you have a unique
perspective, having come from the private sector, now in the
administration, dealing with some of the policy decisions that
are being made. Our economy has clearly grown over the last
several years, but there is ample evidence that the benefits of
this growth have not been spread evenly across our population.
Income inequality has been rising. Wages are not keeping up
with productivity. And many families feel like they're being
left behind. What do you think we should do to ensure that
Americans benefit from the growth of our economy?
Secretary Paulson. I think that is an important question,
and one that I'm focused on. I would say this. When I came
here, in July, and looked at the numbers--and, as a matter of
fact, the first time I spoke on the economy, I talked about
this issue--and it was my best judgment then that this was a
time very much like the mid-1990s, and that if we kept adding
new jobs and the top line stayed strong and productivity
remained high, you would see that start to translate itself
into real income growth for the average worker. And we've seen
some real tangible signs of that. So, real income is now up 2
percent over last year. So, there's some positive movement.
But to get to your fundamental question, and the
fundamental question really is that in this country, and in
many other countries around the world, there's been a trend,
that now goes back for almost three decades, which is the
widening divergence between the top and the bottom. And there
are different theories about this. Some people point to trade.
I really believe that, by far, the biggest driver is technology
and that what we're seeing--and there's been very, very major
changes in productivity increases as a result of technology--
and those people that are able to use technology and leverage
themselves through technology, and have the skills that are
most in demand, are getting the greatest benefits. So, I've got
to believe that there are ways to do a better job than we, as a
Nation, are doing. And I know this is something the President's
talked about. It's education, but, more than education, longer-
term education, it's training and skill development. And so, I
do think, as I travel around the world and talk with people in
other industrial nations, they're all focused on the same
things.
HOUSING MARKET
Senator Durbin. Could I ask you about a specific issue that
came up last week in hearings on the Hill? It relates to the
basic desire of people to own a home, and people with limited
financial resources get involved in some pretty risky borrowing
with the subprime lending----
Secretary Paulson. Right.
Senator Durbin [continuing]. To buy--to build a home, and
some of them guessed wrong, they weren't able to keep up with
the payments and now have been overwhelmed by the situation.
The banks are unhappy, the consumers, the homeowners are
unhappy, and a lot of us in the Senate are unhappy when we hear
from them.
What's your view on the volatility in the subprime lending
market? And how much impact do you think this'll have on our
economy, as a whole? And can the Treasury do anything to
address this issue?
Secretary Paulson. I'll take a few minutes on this one,
because it's very important, and, in some ways, it's
complicated.
But let's begin with the fact that we are making--and I
believe it will be a successful transition, but a transition
from an economy that was growing at an unsustainable level to
one that's going to be growing at a more sustainable level.
There are a number of positive signs. Inflation seems to be
relatively contained. The labor market remains strong. We've
had exports growing faster than imports for four quarters now.
And the consumer is hanging in there. But there's been a major
correction in housing. And, of course, housing was growing at a
level way above what was sustainable, for a number of years.
And it's quite a significant correction. And it has impacted a
lot of people.
It would appear to me that the housing--because you're
dealing with the systemic impact on the economy--that it would
appear that the housing correction is at the bottom, or near
the bottom. We need to watch it longer, but that's what it
would appear. It is then not surprising, as regrettable as it
is, that you would have the issue with subprime mortgages and
other mortgage resets. And this will take longer to work its
way through the system.
Looking at it from a systemic standpoint--again, I'm going
to get to the human situation in a minute, but from the
systemic standpoint, my best judgment is that this is largely
contained. And, in terms of people that have been impacted, it
has to be a grave concern, and we need balance. I think, the
understanding of the balance, that access to credit and credit
availability made homeownership available to a good number of
people, and we need to get that balance right. At Treasury,
we're looking at it from the systemic standpoint and the impact
on the economy, but we're also asking ourselves other
questions, and we have a process going where we're talking with
the Federal regulators and other regulators at the State level,
and that you know, the regulatory structure is something that
we're looking at, at Treasury, as it relates to financial
market's competitiveness. We have a Balkanized regulatory
structure, and, in a number of areas, we have multiple
regulators sometimes competing with each other, and, in others,
there seem to be some holes where there isn't as much
regulation. So, we're looking at it from the consumer
protection standpoint, predatory lending issues, fraud issues,
and those sorts of things, and lessons learned.
But, again, I just want to emphasize, we want to take a
careful, thoughtful look at this, and we don't want to rush to
judgment or overreact, because, again, the availability of
credit has been very important to millions of Americans.
FINANCIAL CREDIT
Senator Durbin. I'd like to follow up on that. In my
lifetime, and in yours, we have gone from an environment of
usury laws to payday loans----
Secretary Paulson. Yes.
Senator Durbin [continuing]. From one extreme to the other.
Secretary Paulson. Yes.
Senator Durbin. And it strikes me that we do need some
balance here. We want to make credit available, but I think
there is credit exploitation taking place now. And I picked on
payday loans, because, in my State, that--our State--that's the
obvious place to go. But I also think it relates to credit
cards and relates to a lot of credit that's now being extended
to people, beyond their means, without real notification of the
danger that they are courting if they're not careful. So, I
hope, when you look at this, you will look at both sides of the
equation, not only the availability of credit, but the abuse of
credit by some institutions, at this point.
Secretary Paulson. You're totally right. And as with
everything in life, it's balance. It's like the question you
were asking me about the anti-money laundering laws, Do we have
the right balance? And that's the key question here.
DIALOGUE WITH CHINA
Senator Durbin. I want to ask you--last question--about
China, because you've shown an interest in China, and I've been
watching your efforts to the strategic/economic dialogue over
the past month. I thank you for bringing this issue to the
fore. And obviously we have some concerns at Capitol Hill, and
at home, and about whether the Chinese will float their
currency soon. Will they shut down the rampant intellectual
property theft that we know has robbed many American businesses
of untold revenue? Will they enforce better labor,
environmental, and human rights standards? And what steps is
the administration taking to move in these directions?
Secretary Paulson. Well, thank you for asking that
question. This is a major focus of mine, and I think, as you
know what we're doing through the strategic economic dialogue
is getting all the agencies, departments in the U.S. Government
that deal with economic issues to come together, prioritize,
and speak with one voice to the highest levels of the Chinese
Government.
Now, let me take two issues you mentioned, because we're
dealing with longer-term structural issues in the dialogue, but
we also are dealing with the pressing short-term issues, which
need to be solved. Take currency as an example. The renminbi,
clearly we need more flexibility and we need more appreciation
in the short term, and we're pushing very hard, and that's
important, in our country--and, frankly, it's important in
their country if their market's going to develop in a way in
which it's going to be good for them and good for us. But we
also need to get to the point where they can have a market-
determined currency, because many countries in the world have
managed currencies, many of them don't have market-determined
currencies. But China is, by far, the largest that doesn't have
a currency whose value is set in a competitive marketplace. And
so, they're in this situation where they're a big part of the
global economy, they're integrated into the global economy, in
terms of trade and products and services, but their financial
markets are very, very immature, they are not integrated into
the markets. And so, a big part of what I need to do, and what
I have been doing--and I was, matter of fact, in Shanghai
several weeks ago, giving a speech on the need to reform their
capital markets and open up to competition, because only when
they do that are they going to be able to get to the point
where we all want them to get, where they have a currency that
trades in a competitive marketplace. And then, the other
benefit is that right now they have a savings rate at a
precautionary level, at 50 percent. And why do their
individuals save at such a high level? Well, frankly, because
they are not getting any reasonable return on their savings.
There's over $2 trillion in Chinese banks earning 2\1/2\
percent, which is negative after taxes and after inflation. And
when you look at what we can get as a return in a savings plan,
a pension fund in the United States or other industrialized
nations that are growing at much lower levels than China, and
you translate and say, if Chinese savers in their pension plans
were able to get 8 percent, then we would have the kind of
economy they'd like to have and the kind of economy we would
have. And that's really going to be the only way we're going to
be able to satisfactorily address the trade balance program.
Now, on intellectual property, you're right, a very
sensitive issue. This is something that is handled by USTR and
Commerce through the JCCT. I do everything I can to help out,
and we deal with that negotiating and also through the World
Trade Organization (WTO) which has ways of resolving disputes,
and so, we have a number of ways to go about trying to enforce
proper laws, and this is quite important.
PRIVATE CAPITAL
Senator Durbin. I said that was the last question. It turns
out there's one I really have to go to, because it is
important, and I hope you'll forgive me for one more question.
And it's in an area that is a complex area. But the President's
working group recently released principles and guidelines on
private pools of capital.
Secretary Paulson. Right.
Senator Durbin. This principle-based framework generally
relies on market discipline to strengthen investor protection
and guard against systemic risk. Do you consider this a first
step toward addressing the challenges presented by the growth
of hedge funds? And, if so, what additional steps are being
considered? And what evidence is there that this indirect
approach to hedge-fund supervision is more effective than
direct approaches, such as those employed by the United Kingdom
Financial Services Authority, in protecting investors and
mitigating systemic risk?
Secretary Paulson. Well, again, that's a big important
question, and let me do my best to answer it in a few minutes.
First of all, there is no doubt that the global capital
markets have changed significantly over the last 5 years, in
particular. And there has been a big growth in private pools of
capital, which are often referred to as hedge funds or private
equity funds. And there's been a big increase in over-the-
counter derivatives, as opposed to exchange-traded derivatives.
As we've studied this at the President's working group,
we've all concluded that, by and large, these are positive
developments. They've helped disperse risk, make the markets
more competitive and more efficient. But they're not without
challenges. And so, we've thought about it very carefully, and,
as we addressed it, what we came out of our deliberations with
was something which I thought was quite important, because we
had members of the President's working group and other
important regulators, like the OCC, all come together and, with
one voice, say, ``This is how we want to deal with this.'' And
the focus was really in two areas--first of all, is systemic
risk, managing systemic risk. And here, there is quite a
proactive focus in dealing with the regulated entities--the
banks, the prime brokers, and others that lend money and
provide credit--and making sure that there is the proper
liquidity, its transparency, all of those sorts of things. And
then, on the investor protection end, the Securities and
Exchange Commission's (SEC) obviously got a big role to play,
in terms of their antifraud, and in terms of the threshold
levels for investors to come into these funds. And, again,
there is a big emphasis on transparency.
Now, it is our view that--to have all of the regulators
come together and, with a principles-based approach,
emphasizing market discipline, and all speaking with one voice,
would be a major development. And we're going to watch this,
continue to study it, see how things develop.
There's also a good deal of work that is really being
coordinated under Tim Geitner, at the New York Fed, dealing
with derivatives. And, again, they're dealing with a lot of the
settlement issues, clearing settlement, the infrastructure
issues, making sure that there are contracts that work in times
of stress, that sort of thing. So, there's a lot of work being
done in all of these areas, and we're going to continue to look
at them.
Senator Durbin. I'm sure that you remember the collapse of
the Long Term Capital Management Group.
Secretary Paulson. Yes.
RISK MANAGEMENT
Senator Durbin. The President's working group released a
report that contained a number of recommendations for improving
risk management practices at the financial institutions that
conduct transactions with hedge funds. What evidence is there
that these recommendations have been implemented and that such
implementation has reduced systemic risk from hedge-fund
activity?
Secretary Paulson. Well, again, that's a complicated
question. Just as an observation, I'm not going to say there's
a cause and effect--but we haven't had a financial shock since
1998. So, we need to go back to long-term capital.
I do believe, as someone who was in the financial sector
when these recommendations came out, they made a difference.
People looked at them. I think that there are real benefits,
but there are challenges. And I think what we came out with--I
was really gratified that we had all of the regulators, in the
United States--the Federal regulators--come together with a
forward-leaning approach, and we're going to watch this very
carefully, and keep looking, and, if other steps need to be
taken, we will recommend them.
SARBANES-OXLEY REQUIREMENTS
Senator Durbin. Last question, for sure. Sarbanes-Oxley.
Some of our mutual friends, in Chicago and other places, tell
me it just goes too far, too darn many requirements, too
expensive, discourages people from serving on corporate board
of directors. And some of our other friends, mutual friends,
say, ``Thank goodness for Sarbanes-Oxley''--restored the
integrity of our corporate structures after the scandals of
Enron and other companies, and were it not for that integrity,
we would just be another competitor in the global scene. We
have a primacy, because we do have tougher requirements, and
people know there's transparency and accountability. So, where
does Secretary Paulson come down on Sarbanes-Oxley?
Secretary Paulson. Well, let me say that I've given a very
long speech on the topic, which is probably too long for you to
hear today. We had a Capital Markets Competitiveness Conference
the other day, which was, I believe, quite successful. We will
have follow-up on things we're going to do in three areas, but
I'm going to try to summarize some of my thoughts for you. But,
again, it'll be very similar to what we've said in some other
things, that it's a matter of balance.
Now, if you look specifically at the Sarbanes-Oxley
legislation, I don't see--and I don't think--there have been a
number of groups that studied it, and I think they've all
concluded the same thing--it doesn't take a legislative fix.
There are very good principles in that legislation, and, matter
of fact, some of the abuses that have taken place, really, most
of them were before that legislation, as it related to some of
the abuses in the options areas and others. So, I think when
people talk about Sarbanes-Oxley, they're using that as a
shorthand for not just the law, but the implementation of the
law, and the regulatory and enforcement environment, and the
legal environment, and the fact that because the corporate
scandals were accounting scandals, for the most part, and there
were, then significant reforms, that there are also a number of
ways in which the relationship between accountants and boards
have changed, all of which are not constructive. And so, the
question is now not, are there some issues? Because there are
some issues. The question is what to do about it. And a lot of
it is balance, a lot of it is taking a risk-based approach,
looking at the cost and the benefits, and not saying, ``We want
to regulate--that if we regulate to a large extent, we can
eliminate losses or what have you.''
So, we will be coming out with some ideas that deal with,
first of all, regulatory structure, and, what are the issues
surrounding regulatory structure in the United States? We'll be
coming out with some steps that might be taken and thoughts we
have in the accounting area. A very important step has already
been led by Chairman Cox and Chairman Olson, of the SEC and
PCAOB, on the way in which something that's called section 404
of Sarbanes-Oxley is implemented, which is a very simple
provision of the bill, but has to do with an accounting
standard relating to control systems, and it's a place where
implementation was very flawed, the cost-benefit equation got
way out of balance, and it's got to be put back in balance.
So, there are the accounting issues that we'll look at, and
then look at the enforcement in the legal environment. But,
again, I think, often when people talk about Sarbanes-Oxley,
they don't really mean the bill, because if you say, ``Now,
tell me, what specifically would you change in the bill?''--
what they talk about is, there's been so much change that
happened in such a short period of time that everyone in the
private sector is still trying to digest that change and get it
in the proper balance.
Senator Durbin. Mr. Secretary, thank you for your patience.
I'm sorry we got started so late.
I want to thank all those who participated in preparing for
this hearing. I appreciate the benefit of hearing from you
about the Department. I think this forum has provided us some
insight into the Department's operations, which will help us in
our budgetary considerations.
ADDITIONAL COMMITTEE QUESTIONS
The hearing record will remain open for a period of 1 week,
until Wednesday, April 4, at noon, for subcommittee members to
submit statements and their questions for the record.
[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 Richard J. Durbin
alternative to outsourcing: fedsource--stay at treasury or move to gsa?
Question. Franchise Funds were established by Congress under the
Government Management Reform Act of 1994 to foster competition and
creativity in government. ``FedSource'' operates under the franchise
granted to the Treasury Department to provide business services to
federal agencies on a competitive, cost-reimbursable basis. It has been
reported that the Treasury Department may transfer this ability to the
General Services Administration or Defense Logistics Agency.
Mr. Secretary, can you explain to me why you are thinking about
relinquishing this program and the potential timetable for doing so?
Answer. The Treasury Department strongly supports Franchise Funds
as a means of fostering competition in government. Treasury's Franchise
Fund components will continue to offer administrative services such as
travel, procurement, personnel and accounting. Only one component,
FedSource, is affected.
The Treasury Department will transition out of the interagency
acquisition business operated by FedSource for two primary reasons:
--The original purpose of FedSource was to provide small-scale and
limited acquisition support, which met the Treasury
Department's strategic needs at the time of its creation.
However, the significant increase in activity related to
customer demand has required an increase in operational
commitment that is not compatible with the core mission and
focus of the Department. Treasury management, both at the
Department and at the Bureau of the Public Debt, has
significant concerns with the risks associated with sustaining
the current business model. In addition, recent reports by the
Treasury Inspector General and the Defense Department Inspector
General identified control weaknesses and procurement
deficiencies.
--Other government organizations (e.g., the General Services
Administration and Defense Logistics Agency) whose core
missions include providing these types of procurement services
may be better positioned to provide these services at the best
value to taxpayers.
The Treasury Department will ensure a smooth and orderly transition
process. The goal is to complete the transition, which will be managed
by the Bureau of the Public Debt, by September 30, 2008.
The Treasury Department is committed to protecting taxpayer
resources, quickly addressing management issues, and operating the
Department in the most efficient and effective way possible.
Question. For the 10th consecutive year, certain material
weaknesses in financial reporting and other limitations on the scope of
its work resulted in conditions that prevented GAO from expressing an
opinion on the federal government's consolidated financial statements.
A major factor contributing to the GAO's disclaimer is the federal
government's ineffective process for preparing the consolidated
financial statements. As reported by GAO, such weaknesses in the
consolidated financial statements preparation process impair the U.S.
government's ability to ensure that these statements were (1)
consistent with the underlying audited agency financial statements, (2)
balanced, and (3) in conformity with U.S. generally accepted accounting
principles.
Although Treasury has made progress in addressing some of these
identified weaknesses, what more can be done to timely resolve such
problems so that this area is no longer a major impediment to the
federal government receiving an opinion on its consolidated financial
statements?
Answer. Each year Treasury, through the Financial Management
Service (FMS), continues to improve its policies, procedures,
information systems and internal controls used to prepare the
government-wide consolidated financial statements (formally the
Financial Report of the United States Government or FR) and will
continue to do so. During the fiscal year 2006 audit, FMS' efforts
resulted in the resolution of approximately 60 GAO recommendations. FMS
will continue to resolve the preparation issues that are in our realm
of control. However, there are other preparation data integrity issues
that depend on accurate and consistent data being submitted by the
agencies.
FMS is working diligently on providing the agencies with guidance,
tools, and assistance to improve the accuracy and consistency of the
agency data to the point where the issues identified by GAO are
mitigated or resolved at the FR preparation level. The following
discussion provides FMS' planned actions to address those
recommendations, as well as the initiatives that FMS is implementing to
help the agencies improve their data accuracy and consistency.
Consistency with agency audited financial statements
FMS currently uses the Government-wide Financial Reporting System
(GFRS) as the principal information system to collect agency audited
financial statement information and produce significant portions of the
FR.
In fiscal year 2006, GAO acknowledged and noted improvements with
regard to consistency with agency information in the Balance Sheet, in
the Statement of Net Cost and Statement of Social Insurance, and in the
note disclosures that are directly linked to the amounts on these
principal financial statements. FMS is currently revising its policies
in fiscal year 2007 to ensure that the remaining notes are materially
traceable to agency note disclosures.
FMS has two major initiatives which will modernize longstanding
Federal accounting processes and provide agencies with methodologies
and tools to improve the accuracy and consistency of their financial
data:
--The Government-wide Accounting (GWA) Modernization project which
will replace existing government-wide accounting functions and
processes. This project will improve the reliability,
usefulness, and timeliness of the government's financial
information, provide agencies and other users with better
access to that information, and will eliminate duplicate
reporting and reconciliation burdens by agencies, resulting in
significant government-wide savings. It will also improve the
budgetary information being collected from the agencies at the
transaction level.
--The Financial Information and Reporting Standardization (FIRST)
initiative integrates budget and financial reports from Federal
Program Agencies. FIRST will improve the consistency of the
budgetary and proprietary accounting data recorded in agency
financial statements and reported to FMS through its trial
balance.
Balanced Consolidated Financial Statements
A major challenge in preparing balanced financial statements is
properly accounting for and eliminating unreconciled intra-governmental
transactions. Some of these transactions occur solely between two
federal agencies while others occur between the agencies and the
general fund. FMS is taking the following actions to address this
issue:
--Requiring comprehensive intragovernmental accounting data from
agencies on a quarterly basis that will allow FMS to provide
data to all federal agencies for them to better analyze and
reconcile intragovernmental differences.
--Working with the CFO Council and OMB to enforce the business rules
for intra-governmental transactions and to organize the Dispute
Resolution Committee.
--Encouraging greater auditor participation by requiring agency
auditors to more closely scrutinize intra-governmental out-of-
balance conditions with other agencies.
--Moving forward on the FIRST initiative which is being designed to
provide authoritative information contained in Treasury's
central accounting system to the agencies to facilitate the
reconciliation process for specific intra-governmental
transactions.
Compliance with GAAP
During fiscal year 2006, FMS made significant improvements in
improving overall GAAP compliance. FMS was able to significantly reduce
the number of audit findings relative to GAAP compliance. For fiscal
year 2007, FMS will
--Use the Chief Financial Officers (CFO) Council, Central Agency
Reporting Subcommittee as a forum to discuss those accounting
and reporting issues that affect the FR.
--Focus on the remaining material items with the expectation that the
findings related to these items can be closed by GAO either
this year or next year.
--Continue to revise and update the Treasury Financial Manual with
accounting, reporting, and disclosure policies and procedures
to ensure compliance of the FR with generally accepted
accounting principles (GAAP).
Question. TFI is home to the newest addition to the U.S.
intelligence community: the Office of Intelligence and Analysis (OIA).
How well is the office being integrated into the intelligence
community?
How would you characterize the degree of intelligence sharing that
takes place between Treasury and the rest of the intelligence
community?
Do any barriers to intelligence sharing exist?
Answer. Since the creation of the Treasury's Office of Intelligence
and Analysis (OIA) under the Intelligence Authorization Act of Fiscal
Year 2004, it continues to build relations throughout the Intelligence
Community (IC). In particular, OIA has developed important partnerships
within the leadership of the IC, through collaborative projects,
information sharing, and community support.
Even though OIA is one of the newest and smallest intelligence
elements in the IC, it participates on key IC committees. On April 9,
2007, Director of National Intelligence (DNI) McConnell created an
Executive Committee to serve as the principal decision-making and
advisory board for the IC. Treasury's Assistant Secretary for
Intelligence and Analysis, who manages OIA, was designated a member of
that committee. In addition, the Deputy Assistant Secretary for
Intelligence and Analysis and OIA's policy staff have been involved in
ODNI boards and committees that have been responsible for setting
policy for the IC, standards of analysis, and driving change in the IC
culture.
Through exchanges and detail assignments at the working level, OIA
has built strong relationships with IC counterparts. Since OIA was
created, it has hosted representatives from the Federal Bureau of
Investigation (FBI), National Security Agency (NSA), the United States
Central Command (CENTCOM), the Joint Warfare Analysis Center (JWAC),
and other key intelligence partners. Moreover, OIA has detailed
analysts to CENTCOM, the United States Pacific Command (PACOM), and the
United States European Command (EUCOM). The 2008 President's budget
request includes increased resources to expand OIA's detail
assignments.
A good example of how well OIA has integrated into the IC, as well
as the high degree of intelligence sharing, is found in Treasury's
Weapons of Mass Destruction (WMD) proliferation program. In order to
work on targeting and researching potential targets for Treasury
sanctions against WMD proliferators under Executive Order 13382, the
Defense Intelligence Agency (DIA), with the assistance of the Director
of National Intelligence, detailed several analysts to OIA. The DIA
analysts have helped to expand and accelerate Treasury's activities on
this program.
A key element to OIA's integration into the IC is the ability to
send and receive information relevant to Treasury's mission. Primarily
a consumer of information, OIA has regular access to the intelligence
it requires to prepare administrative records in support of targeted
financial measures against terrorist supporters. While OIA produces
very little raw information, it is producing both analytic cables and
finished analytical products for dissemination to the IC. To aid the
dissemination of those products, OIA has developed a Top Secret/
Sensitive Compartmented Information (SCI) website that can be accessed
by partners throughout the IC. Internally, OIA has access to Top
Secret/Sensitive Compartmented Information (SCI) through the Treasury
Foreign Intelligence Network (TFIN), an information technology system
that is being redesigned and updated in fiscal year 2007.
While OIA has made significant progress integrating itself into the
culture of the IC, working to be a full partner in the intelligence
enterprise, there are still some barriers that result from a continuing
lack of understanding in other IC elements about OIA's IC role and
expertise. As other IC components, however, become more familiar with
OIA, this limiting factor will become less of an issue.
Question. It has been asserted that OIA is primarily reactive,
analyzing information that is provided to TFI by U.S. and other
financial institutions.
Is TFI able to initiate or influence intelligence collection
priorities?
Answer. Treasury's Office of Intelligence and Analysis (OIA) is a
member of the Intelligence Community (IC) and provides all-source
analysis, derived from intelligence, law enforcement, regulatory, and
open sources, to Treasury and IC customers. As an IC member, OIA is
able to ensure that its intelligence needs are met through the
intelligence requirements process. In particular, OIA's involvement in
national requirements mechanisms is enhanced by experienced analysts
initiating and contributing to tactical requirements.
National Requirements
In 2005, OIA achieved a significant milestone by hiring a dedicated
collection requirements officer. This officer has ensured that Treasury
equities in financial, economic, enforcement, and other information
needs are reflected in national intelligence priorities and collection
requirements. Among the various national bodies with which OIA engages
include the U.S. SIGINT Committee and its Analysis and Production
Subcommittee, the Community HUMINT Management Office, the National
HUMINT Requirements Tasking Center, various National Clandestine
Services offices, the Open Source Center, and various CIA Directorate
of Intelligence offices. In addition, OIA's subject matter experts work
closely with the Director of National Intelligence's (DNI) Mission
Managers, particularly those at NCTC, NCPC, Iran, and North Korea, to
ensure Treasury priorities are incorporated into national collection
and analysis strategies for these hard targets.
Tactical Requirements
OIA analysts actively provide feedback and direction on
disseminated intelligence reports to ensure that information relevant
to Treasury's mission is collected. Critical partnerships developed by
Treasury in the last few years have enhanced this process. OIA analysts
regularly engage with counterparts in collecting offices across the IC.
Detail assignments and exchanges are particularly useful for
communicating Treasury needs and priorities to partner agencies. OIA,
for example, hosts several detailees from NSA to assist with its SIGINT
collection needs. Another example is the Iraq Threat Finance Cell
(ITFC) in Baghdad, which OIA co-founded and co-leads. The ITFC has
worked diligently to increase the quantity and quality of reporting on
terrorist and insurgent financing in Iraq, with considerable success.
Question. Treasury has recently completed an initial study of the
feasibility of mandating financial institutions to report cross-border
wire transfer data. The study concluded that such reporting is
technically feasible and might prove valuable in combating money
laundering and terrorist financing. The report also noted that the
proposed program could result in the filing of half a billion new
financial reports by financial institutions.
Given the additional costs that this might impose on the financial
sector, do you believe mandating the reporting of cross-border wire
transfer data is necessary and desirable?
Answer. The Intelligence Reform and Terrorism Prevention Act of
2004 contained two mandates related to the potential collection of
cross-border electronic funds transfer reports. First, the Act directed
that the Department study the feasibility of implementing a system to
receive, store, process, analyze, disseminate, and secure such data.
Second, the Act directed the Department to implement such a system if
the Secretary deemed it ``reasonably necessary.''
In its study, FinCEN concluded that the implementation of such a
system is, indeed, feasible. FinCEN also identified a number of
important policy questions that must be considered before the
Department of the Treasury can make a final determination whether such
a requirement is reasonably necessary. One of the primary concerns is
the potential cost to the financial services industry. Therefore,
FinCEN proposed conducting an additional cost-benefit analysis to
support a final decision by the Secretary whether such a requirement is
reasonably necessary. This cost-benefit analysis will directly address
the potential costs to the financial services industry, and the
potential value of the data to U.S. government efforts to combat
illicit financing. Only after assessing these issues will the
Department be able to reach a conclusion about whether mandating the
reporting of such data is necessary and desirable.
As part of the study FinCEN will:
--explore the potential, but as yet unquantified, risks to the
operations and competitiveness of the U.S. financial services
industry;
--further refine the use cases and requirements of our law
enforcement and regulatory partners, which FinCEN describes in
its Study; and
--extend the preliminary assessment of the potential value of such
data in our collective efforts to combat illicit financial
activity.
Question. Recent U.S. Executive Orders and the USA PATRIOT Act gave
Treasury a greatly expanded tool-kit to combat terrorist financing.
Subsequently, many of these measures have been used to curtail the
international financial operations of rogue states such as Iran and
North Korea.
Can these measures be used more aggressively against non-state
terrorist organizations? What operational challenges might you face?
Please discuss how Treasury's use of its new authorities is viewed
internationally, especially among our allies. Is getting foreign
countries and companies to cooperate with U.S. measures a problem?
Answer. The Department of the Treasury is acting aggressively
against non-state terrorist organizations. We actively target al Qaida-
related and Hizballah-related organizations under our relevant
Executive Orders. Additionally, Treasury continues its effort to
increase financial pressure on Hamas. A few examples of Treasury's
recent activity utilizing our expanded tool-kit to combat terrorist
financing include:
--On February 20, 2007, Treasury designated Jihad al-Bina, a Lebanon-
based construction company formed and operated by Hizballlah.
Jihad al-Bina receives direct funding from Iran, is run by
Hizballah members, and is overseen by Hizballah's Shura
Council, at the head of which sits Hizballah Secretary General
Hassan Nasrallah.
--On January 26, 2007, Treasury designated two South African
individuals, Farhad Ahmed Dockrat and Junaid Ismail Dockrat,
and a related entity for financing and facilitating al Qaida,
pursuant to Executive Order 13224. This financial measure
freezes any assets the designees have under U.S. jurisdiction
and prohibits transactions between U.S. persons and the
designees.
--On December 6, 2006, Treasury designated nine individuals and two
entities that have provided financial and logistical support to
the Hizballah terrorist organization. The designees are located
in the Tri-Border Area (TBA) of Argentina, Brazil, and Paraguay
and have provided financial and other services for Specially
Designated Global Terrorist (SDGT) Assad Ahmad Barakat, who was
previously designated in June 2004 for his support to Hizballah
leadership.
These designations, among many others, highlight Treasury's use of
authorities granted by U.S. Executive Orders.
Treasury's actions are most effective when other nations amplify
our designations with their own measures. Thus, the most significant
operational challenge has been when other states have not implemented
remedial actions against designated targets. Treasury is working to
address this issue through a variety of mechanisms, among them, the
U.S.-EU Terrorism Finance Troika and the U.S.-EU Workshop on Financial
Sanctions to Combat Terrorism. Treasury has also worked with USUN and
other elements at the United Nations to advocate for the adoption of
U.N. Security Council Resolutions aimed at combating terrorist
financing. For example, UNSCR 1735, adopted in December 2006, is a
follow-on resolution to UNSCR 1267 and it reiterates the international
community's condemnation of al Qaida, Osama bin Laden and the Taliban,
as well as the international commitment to countering terrorism and
terrorist financing via measures that include a targeted economic
sanctions regime (e.g., asset freeze and ongoing prohibition of
commercial and economic dealings), a travel ban, and a ban on the sale
or supply of arms and related material. Additionally, Treasury works
with the Financial Action Task Force (FATF) to establish standards and
commitments on targeted financial and economic measures that form a
framework for multilateral action and cooperation in the fight against
illicit financing. These efforts are bolstered through our work with
the G-7, the International Monetary Fund (IMF), the World Bank, and
FATF-Style Regional Bodies (FSRB).
Acting multilaterally and working with various foreign governments
and international organizations and companies to increase the effect of
our actions are high priorities of the Treasury Department. Treasury
has initiated strategic dialogues with all relevant parties of the
international community and we enjoy great success and continued
cooperation. Generally, foreign countries and private companies are
eager to abide by and cooperate with U.S. authorities. Recently we have
seen many international financial institutions implement their own
measures to protect themselves from deceptive conduct without waiting
for their governments to impose specific requirements and regulations.
COMMITTEE ON FOREIGN INVESTMENT IN THE UNITED STATES
Question. The Committee on Foreign Investment in the United States
is an inter-agency committee chaired by the Secretary of Treasury.
CFIUS (SIF-EUS) seeks to serve U.S. investment policy through thorough
reviews that protect national security while maintaining the
credibility of our open investment policy and preserving the confidence
of foreign investors here and of U.S. investors abroad that they will
not be subject to retaliatory discrimination.
Can you explain briefly to the Committee why the Committee on
Foreign Investment in the United States (CFIUS) was established? What
is its purpose?
In your opinion, how well is it doing at achieving its purpose?
What changes have been made in the operations of CFIUS during the
past year?
Who are the members of CFIUS?
What role does the Director of National Intelligence play in the
CFIUS process?
As you know, the House recently passed legislation aimed at
enhancing Congressional oversight of the CFIUS review process. What is
the Department's position on that bill?
Answer. CFIUS was established by Executive Order 11858 in 1975. The
Secretary of the Treasury was designated as the chairman of CFIUS. Its
original mission was to have primary continuing responsibility within
the Executive Branch for monitoring the impact of foreign investment in
the United States, both direct and portfolio, and for coordinating the
implementation of U.S. policy on such investment.
In 1988, the President, pursuant to Executive Order 12661,
delegated to CFIUS his responsibilities under section 721 of the
Defense Production Act of 1950 (``Exon-Florio'' amendment) to receive
notices of foreign mergers and acquisitions of U.S. companies, to
determine whether a particular acquisition has national security issues
sufficient to warrant an investigation, and to undertake an
investigation, if necessary, under the Exon-Florio provision. In
addition, it allows the President to take action, if necessary, to
suspend or prohibit any transaction that, in his judgment, threatens
the national security.
In essence, the purpose of CFIUS is to protect national security
while keeping our country open to investment, which is critical to a
strong U.S. economy.
In the past 20 years, CFIUS has investigated over 1,700 cases. To
the best of our knowledge, the CFIUS agencies have implemented Exon-
Florio in a manner that has achieved the national security objectives
as prescribed in the statute without compromising our open investment
policy. Investigations are conducted by analysts with expertise from
across the agencies in a professional and non-partisan manner.
CFIUS has already implemented many of the reforms proposed by
Congress. These include, among others:
--Notification.--We now inform the relevant congressional committees
of every case once deliberative action has concluded under
Exon-Florio.
--Briefings.--We are providing periodic briefings to Congressional
oversight committees on all cases once deliberative action has
concluded.
--Accountability.--At Treasury, every case is briefed to senior
policy levels, and only Senate-confirmed officials may close a
CFIUS review.
--Role of the DNI.--We have formalized the role of the intelligence
community by having the Office of the Director of National
Intelligence serve as advisor to CFIUS, facilitating a
coordinated analysis of each case by the intelligence
community.
CFIUS includes six departments and six White House agencies.
Specifically, the members of CFIUS are the Departments of Treasury,
State, Defense, Justice, Commerce, and Homeland Security, as well as
the Office of Management and Budget, the Council of Economic Advisers,
the U.S. Trade Representative, the Office of Science and Technology
Policy, the National Security Council and the National Economic
Council. Other agencies, such as the Departments of Energy or
Transportation, may be brought in when specific expertise is required
in the investigation of a transaction.
The Office of the Director of National Intelligence has a non-
policy role as advisor to CFIUS, facilitating a coordinated analysis of
each case by the intelligence community.
The Administration's position on H.R. 556 is provided in the
Statement of Administration Policy (SAP) submitted to the House on
February 27, 2007, which we attach to these responses. In sum, the
Administration regards national security as its top priority and
supports the intent of the House bill to address national security
imperatives in a post-9/11 world. We support enactment of legislation
that will improve and strengthen CFIUS to ensure the protection of
America's homeland and the strength of the U.S. economy. The SAP lays
out the Administration's concerns about several provisions of the bill.
Executive Office of the President,
Office of Management and Budget,
Washington, DC, February 27, 2007.
(house rules)
STATEMENT OF ADMINISTRATION POLICY
H.R. 556--NATIONAL SECURITY FOREIGN INVESTMENT REFORM AND STRENGTHENED
TRANSPARENCY
(REP. MALONEY (D) NY AND 58 COSPONSORS)
The Administration supports House passage of H.R. 556 and
appreciates the efforts of the House Financial Services Committee to
strengthen the Committee on Foreign Investment in the United States
(CFIUS). The Administration regards the Nation's security as its top
priority. In addition, the Administration views investment, including
investment from overseas, as vital to continued economic growth, job
creation, and building an ever-stronger America. Therefore, the
Administration seeks to improve the CFIUS process in a manner that
protects national security and ensures a strong U.S. economy and an
open investment environment that will serve as an example and thereby
support U.S. investment abroad.
In light of the President's responsibility to ensure the Nation's
security, and in the context of comity between the executive and
legislative branches, we believe the President should retain
substantial flexibility to determine CFIUS's membership and
administrative procedures and to make adjustments when national
security so requires. Accordingly, the Administration has concerns with
some of the provisions of H.R. 556 and looks forward to working with
Congress to address these concerns, to strengthen CFIUS, and to ensure
the protection of America's homeland and the strength of our economy.
Establishment and Membership of CFIUS
The President should retain the flexibility to determine and adjust
the appropriate Executive Branch membership of CFIUS and their roles.
H.R. 556 should not mandate that CFIUS have Vice Chairs, nor that CFIUS
include members of the Executive Office of the President. Further, the
President should retain the flexibility to determine roles and
responsibilities of CFIUS and its members. For example, the
Administration opposes any language in Section 6 that would call for
the designation of a lead agency or agencies to represent other
agencies or the Committee in negotiating, entering into, imposing,
modifying, monitoring, or enforcing mitigation agreements.
Deliberations and Decision-Making of the Committee
The Administration is concerned that the legislation imposes
procedural requirements, such as roll call voting and motions, which
are ill-suited for executive bodies such as CFIUS and are inconsistent
with the vesting of the executive power in the President. Given the
bill's reporting requirements, such procedures will deter the full and
open interagency discussion that is required to consider CFIUS cases
properly.
The Administration fully shares Congress' goal of ensuring senior-
level accountability for CFIUS decisions. The Administration supports
requiring the Secretary, Deputy Secretary, or an Under Secretary of the
Treasury to sign CFIUS decisions at the conclusion of a second-stage
(45-day) investigation, as H.R. 556 provides. With respect to cases for
which CFIUS concludes its action at the end of the first-stage (30-day)
investigation, the Administration supports the House Financial Services
Committee's decision to authorize delegation of this authority.
However, in view of the volume and variety of cases and to ensure that
our most senior officials are able to focus on those cases that do
raise national security concerns, this authority should be further
delegable to other officials appointed by the President and confirmed
by the U.S. Senate.
The Administration believes that the current 30-day and 45-day time
frames for first-stage and second-stage investigations provide CFIUS
with sufficient time to examine transactions. The possibility of
extensions may discourage foreign investment by generating uncertainty
and delay for the parties to proposed transactions. The Administration
therefore opposes allowing CFIUS to extend the second stage (45-day)
investigation period. The Administration notes that the current CFIUS
practice of encouraging parties to transactions to consult with CFIUS
prior to filing provides CFIUS with additional time and flexibility to
examine complex transactions.
The Administration supports the role of the intelligence community
as an independent advisor to CFIUS and appreciates the bill's inclusion
of a provision that ensures that the Director of National Intelligence
(DNI) is provided adequate time to complete the DNI's analysis of any
threat to the national security of a covered transaction. However,
language in H.R. 556 also appears to provide the DNI with the ability
to force a second-stage (45-day) investigation if the DNI has
identified particularly complex intelligence concerns and CFIUS was not
able to satisfactorily mitigate the threat. Such a policy role would be
inconsistent with the independent advisory role of the DNI envisioned
in the legislation and supported by the Administration.
Notification and Reports to Congress
The Administration supports enhanced communication with Congress on
CFIUS matters to better facilitate Congress' performance of its
functions. CFIUS should be required to notify Congress of transactions
only after all deliberative action is concluded, as H.R. 556 provides.
As discussed above, roll call voting, particularly if reported outside
the Executive Branch, would deter the full and open interagency
discussion that is required to consider CFIUS cases, and reporting on
internal Executive Branch deliberations, including the positions of
individual CFIUS members, should not be required.
Authorities of CFIUS
The Administration believes current law and regulations give the
President and CFIUS adequate authority to gather all information needed
to conduct CFIUS investigations. The Administration is concerned that
provisions of the bill that provide CFIUS with additional statutory
authority to collect evidence and require the attendance and testimony
of witnesses and the production of documents would make the CFIUS
process more adversarial and less effective.
The Administration believes its ability to protect national
security would be enhanced by a statutory grant of authority to impose
civil penalties for a breach of a mitigation agreement. This authority
to seek civil penalties, which could be calibrated to the seriousness
of the noncompliance, would be a useful and effective tool for
enforcing those agreements.
Presidential Review and Decision
The Administration supports requiring the President to make the
final decision on a case only when CFIUS recommends that a transaction
be blocked or when CFIUS fails to reach a consensus after a second-
stage investigation. Requiring Presidential action in a broader set of
cases would undermine the President's ability to determine how best to
exercise Executive Branch decision-making authority.
The Administration looks forward to working with Congress on these
important issues.
OVERSEAS ATTACHE PROGRAM
Question. Overseas attaches work in tandem with the Office of
International Affairs and the Office of Terrorism and Financial
Intelligence, as well as the relevant U.S. Embassies, to build
relationships with foreign officials and to work with local U.S.
industry, market and agency representatives.
What are the main purposes of the overseas attache program?
To what extent are they involved with your anti-terrorism program?
How many attaches do you currently have around the world?
You are in the process of expanding the program and we gave you
additional funds in the recent 2007 CR to do it. How far do you intend
to expand the program in 2007 and 2008?
What qualifications are you seeking in candidates to fill these
jobs?
Answer. The attache program is essential for several priorities,
including those related to:
--Building Treasury's expertise on economic and financial sector
issues and fostering stronger substantive dialogues that can
advance U.S. Government objectives.
--Identifying policy or regulatory barriers to U.S. firms and
exports, particularly in the area of financial services.
--Strengthening cooperation with other countries to implement U.N.
resolutions and U.S. enforcement actions to prevent and punish
money laundering, terrorism and proliferation financing, and
other financial crimes.
--Coordinating closely with other U.S. agencies and multilateral
donors (such as the IMF and World Bank) to advance economic
growth and development. This is particularly important in
countries with a large U.S. Government presence, such as Iraq
and Afghanistan.
As of April 2007, Treasury has eight attaches in China, Japan,
Southeast Asia (Singapore), Afghanistan, Iraq, Belgium, Brazil, and
Egypt. We expect to place an attache in India in the coming months.
Treasury is planning to open another nine attache posts during fiscal
year 2007-fiscal year 2008, tentatively slated to include Abu Dhabi,
Istanbul, Riyadh, Islamabad, Johannesburg, Mexico City, London,
Jakarta, and Tel Aviv.
To fill these positions, Treasury has been seeking professionals
who can represent Treasury effectively within the U.S. Embassy and with
senior officials of their counterpart countries, enhancing the
effectiveness of Treasury's policy engagement. These tasks require a
variety of substantive and interpersonal skills, including those
related to macroeconomic analysis, financial sector development, and
money laundering and the financing of terrorism. The precise nature of
the substantive expertise will vary by country. For example, in Japan
knowledge of macroeconomic and financial sector issues in a mature
economy is critical. In contrast, experience with emerging markets and
development issues is more important in attache posts such as Egypt and
in Southeast Asia. In other posts, the principal focus will be on
terrorist financing issues, putting a premium on familiarity with
financial sector issues and U.S. Treasury authority to fight financial
crimes.
ESTABLISHMENT OF DYNAMIC TAX OFFICE AT TREASURY
Question. In last year's budget request, Treasury requested
$513,000 to set up a Dynamic Analysis Division within the Office of Tax
Policy.
Are you making the same request in this year's budget?
Can you tell us how such an office would work and what its purpose
would be?
Answer. The initial request to establish a Dynamic Analysis
Division within the Office of Tax Policy was included in the
President's 2007 budget request; however, due to the CR, the request
was not enacted. A similar request is therefore included in this year's
budget. If funded, Treasury would hire a director and several staff for
the division. The purpose of the division, as the name suggests, would
be to conduct dynamic analysis of tax proposals. Dynamic analysis
incorporates a broad range of behavioral responses to tax changes and
provides an estimate of how those tax changes affect aggregate labor
supply, savings and national income in both the near term and the long
run. This analysis would improve the policy making process by providing
information to policy makers about the economic effects of tax
proposals. Treasury already provides estimates of revenue and
distributional effects of tax proposals, but does not normally provide
estimates of the effects of tax proposals on national savings or
output. Treasury's analysis will help inform and complement the type of
dynamic analysis currently being done by the Joint Committee on
Taxation and the Congressional Budget Office.
In analyzing the revenue effect of potential tax policy changes,
Treasury routinely considers how taxpayers might respond to the
changes, but does not consider how the overall economy might be
affected in its official scoring of tax proposals. Dynamic scoring of
tax proposals would take dynamic analysis a step further by estimating
how the change in economic activity translates into changes in tax
receipts. Under the current proposal, Treasury would commit to
conducting dynamic analysis of major tax policy changes, but not to
dynamic scoring. Treasury plans to continue to rely on their
traditional approach for ``official'' estimates of the revenue effect
of the tax proposals, and to present dynamic analyses as supplemental
information.
PERSONALLY IDENTIFIABLE INFORMATION
Question. In the past year, there have been numerous incidents
regarding the loss or theft of federal computers and disk drives at
different agencies where the names and social security numbers of
citizens may have been compromised. In one incident, VA reported the
loss of a notebook computer that contained Personally Identifiable
Information for 26 million veterans. Other incidents were reported by a
number of federal departments.
What is the Department doing to protect Personally Identifiable
Information?
Is the Department in compliance with the OMB recommendations on
this? If not, what are its plans to become compliant and by when?
Answer. The protection of sensitive personal and taxpayer
information is of critical importance to the Department as is our
ability to fulfill the Department's responsibilities to our citizens.
The Department has an important obligation to exercise
extraordinary diligence in handling Personally Identifiable Information
entrusted to our care and is taking aggressive actions to avoid it
being compromised. Towards protecting Personally Identifiable
Information, approximately 90 percent of Treasury laptops, including 99
percent of IRS laptops, have been encrypted (in accordance with FIPS
140-2 encryption standards) including installation of an automatic full
disk encryption solution. Additionally, some of the remaining 10
percent of Treasury laptops have limited encryption already installed
(e.g., specific folder encryption.) We are planning for a 99 percent+
completion rate by the end of June. We are also working to provide
enhanced protection to other portable IT devices, specifically
including Blackberries, which contain Personally Identifiable
Information.
Additionally, in response to recommendations of the President's
Identity Theft Task Force and the Office of Management and Budget,
Treasury is in the process of establishing a Personally Identifiable
Information Risk Management Group (PIIRMG). The Department is currently
identifying points of contact as well as membership consistent with
those identified in the Task Force recommendations and anticipates the
initial PIIRMG kick-off meeting in the coming weeks. The establishment
of the PIIRMG is an important component of our risk management efforts
in the area of Personally Identifiable Information, particularly as
Treasury Bureaus establish the capability to assess any Personally
Identifiable Information-related incident that may occur and make
recommendations for corrective and risk-reduction action to the PIIRMG.
Following OMB's recent memorandum titled ``Safeguarding Against and
Responding to the Breach of Personally Identifiable Information,'' over
the next 120 days Treasury will review and reduce its current holdings
of PII reduce them to the minimum necessary for the proper performance
of a documented agency function. Treasury will also, within 120 days,
review its use of social security numbers (SSN) in agency systems and
programs to identify instances in which collection or use is
superfluous, as well as establish a plan in which it will eliminate the
unnecessary collection and use of SSN within eighteen months.
INFORMATION SECURITY
Question. The Inspector General has noted that the Department needs
to improve its information security program and practices to achieve
compliance with the Federal Information Security Management Act and OMB
requirements. The Act, as you know, was meant to bolster computer and
network security within the Federal Government and affiliated parties
(such as government contractors) by mandating yearly audits. The IG's
2006 evaluation disclosed deficiencies that constitute substantial
noncompliance with the Act.
What steps are you taking to come into compliance with that Act?
Answer. Providing adequate security for the Federal government's
investment in information technology (IT) is a significant undertaking
and the Department is working towards improving its posture in this
area. Our on-going efforts include taking steps to refine systems
inventory for completeness and consistency, issuing Treasury policy in
support of FISMA requirements, and strengthening the process for
security remediation efforts.
In the area of inventory management, the Department has defined the
inventory of major information systems (including national security
systems) operated by or under the control of the Department, as
originally required by the Paperwork Reduction Act of 1995. As an
indication of our progress, for the first time, in the OIG's 2006 FISMA
evaluation, it was noted that ``[a]ll agency systems were accounted for
on the inventory.'' Furthermore, Treasury issued Department-wide
guidance on major and minor systems to ensure a consistent Treasury-
wide approach in compiling system inventories.
Treasury policy, in support of our FISMA compliance efforts, seeks
to secure the information and information systems that support the
operations and assets of Treasury, including those provided or managed
by another agency, contractor, or other source on behalf of the
Department. Clarifying guidance has been issued for contractor systems
to ensure those systems are consistently and completely identified in
the Department's systems inventory and that they comply with security
requirements. Policy has also been issued to address acceptable system
configuration requirements and to define our vulnerability management
policy. Developing policy and ensuring compliance across the Department
is an ongoing effort, but an area in which progress is being made.
In order to strengthen Treasury's remediation efforts, and come
into compliance with FISMA, the Department is developing a process for
planning, implementing, evaluating, and documenting remedial action
(Plan of Actions & Milestones, or POA&M) to address any deficiencies in
the information security policies, procedures, and practices. In 2006,
our POA&M process was judged to be effective, a significant improvement
from 2005. Lastly, the Department continues to work to make progress in
improving the quality of the certification and accreditation of its
systems, testing of security controls and contingency plans, incident
reporting, and employee training on systems security. The President's
2008 budget request includes significant investments in information
security, including $21 million for the IRS' Computer Security Incident
Response Center and network infrastructure security.
Question. Secretary Paulson, I understand that the United States is
currently negotiating an OECD convention called the Large Aircraft
Sector Understanding, which deals with the financing terms of aircraft,
and that the negotiations are near conclusion. However, I have heard
from U.S. industry that they do not believe their concerns have been
addressed in the context of the negotiations. I am advised that the
U.S. industry has prepared a comprehensive text that outlines its major
concerns.
Given that the health of the U.S. aerospace industry is critical to
the economy, the national security and the technological base of the
United States, I respectfully request that you meet with the industry
group that prepared the report to discuss the negotiations, and that
you and your team at Treasury carefully review the industry position
before agreeing to critical provisions put forward by the EU, which
could hinder the ability of American companies to compete.
Answer. The U.S. Government negotiating team, led by Treasury, has
been in continuous contact with industry throughout the negotiating
process. That process has been underway for over two years. We will
continue to consult intensively before reaching a final agreement. Over
the past two months, the Deputy Secretary, Under Secretary, and
Assistant Secretary have all met with industry representatives to
gather their views.
These consultations have occurred primarily through the Department
of Commerce-led Aerospace Industry Trade Advisory Committee (ITAC) and
the Aircraft Working Group (AWG--an international industry group for
which Boeing serves as Vice Chairman). The AWG has met with OECD
negotiators on a number of occasions, and has also provided formal
written recommendations on the important competitive elements of an
agreement. Treasury has followed appropriate procedures for reviewing
the ITAC's recommendations, and the positions taken by the U.S.
negotiators to date are in full accord with those recommendations.
Treasury officials and substantive experts met several times with
key industry representatives, including meetings as recently as the
week of April 16th. In these meetings, the detailed industry-
recommended text was thoroughly examined point-by-point, and U.S.
negotiators worked with this text in discussions with other negotiators
at the OECD the week of April 23.
I can assure you that the provisions of this new agreement will
ensure that U.S. industry will remain fully competitive. We will
support an agreement that provides a level playing field for our
exporters. The agreement will also sharply limit the ability of foreign
governments to provide subsidized financing for their aerospace
industries' exports. By limiting these subsidies, we will also limit
subsidies that are currently provided to foreign airlines and that
disadvantage our domestic airline industry, which does not have access
to such subsidies.
______
Questions Submitted by Senator Sam Brownback
Question. You've asked for some increases in your budget in the
areas of Terrorism and Financial Intelligence and in the International
economic policy area. Can you tell me a little bit about the Treasury's
work in these areas and why these increases are important?
Answer. The Terrorism and Financial Intelligence and International
economic policy areas budget increases reflect the Department of the
Treasury's expanding mission in these areas.
Terrorism and Financial Intelligence
The Treasury, and the Office of Terrorism and Financial
Intelligence, in particular, has requested additional resources to
increase the implementation of strategies and employment of targeted
financial measures to disrupt and dismantle the financial networks that
support terrorism, WMD proliferation, and organized crime. Targeted
financial measures developed since 9/11 to combat terrorist support
networks can and should be used to disrupt and dismantle the networks
that support other threats. These types of financial measures have
proven effective, in part because they unleash market forces by
highlighting the risks and encouraging prudent and responsible
financial institutions to make the right decisions about the business
in which they are engaged. Treasury uses designations strategically to
disrupt specific sources, means, and mechanisms of terrorist financing,
including radical ideologues, charities and other sources and conduits
of terrorist financing and support.
The fiscal year 2008 President's budget requests additional
analysts and production officers for the Office of Intelligence and
Analysis to support Treasury's ability to address emerging national
security threats. This request will allow Treasury to establish a
permanent intelligence production structure, an essential component to
the timely and accurate production of intelligence information. In
addition to this initiative, OIA is seeking additional funds and
personnel to expand the Department's ability to coordinate on
terrorist-financing and WMD proliferation matters, and to improve OIA's
working relationships with foreign intelligence services.
The Office of Terrorist Financing and Financial Crimes, the policy
and outreach apparatus for TFI, develops and implements strategies,
policies and initiatives to identify and address vulnerabilities in the
United States and the international financial system and to disrupt and
dismantle terrorist and WMD proliferation financial networks.
Treasury's request would give the Office of Terrorist Financing and
Financial Crimes (TFFC) additional resources to devote specific policy
advisors to critical regions in the Western Hemisphere, Africa, and the
Middle East-South Asia nexus. Countries in these regions continue to
provide a financial base for terrorists. Additional advisors would
allow TFFC to meet multiple strategic objectives, including enhancing
the Treasury Department's ability to disrupt terrorist financial and
support networks and building the capacity of foreign governments to
combat terrorist financing. Without adequate full-time staff dedicated
to these region-specific issues, U.S. strategic priorities and specific
Treasury responsibilities cannot be addressed in a comprehensive or
strategic manner.
TFFC has also requested additional resources to increase our
development of strategies toward rogue regimes and their corresponding
networks. North Korea, Syria, and Iran pose a constant threat to U.S.
national security, and Treasury is tasked with applying all appropriate
financial measures towards pressuring these rogue regimes, isolating
them from the international financial system, and disrupting their
financial networks.
Treasury's request would fund additional policy advisors to cover
North Korea, Syria, and Iran and would allow the Treasury Department to
leverage tactical successes to develop ongoing strategic approaches to
bring additional financial pressures. These positions would become the
focal point for interagency efforts to bring financial pressures to
bear against these rogue regimes, enhancing Treasury's ability to meet
its strategic objectives and U.S. strategic priorities. In addition to
achieving sustained, focused pressure on Iranian, Syrian, and North
Korean WMD proliferation finance, criminal and terrorist financing
activities, Treasury would establish future strategies on emerging
regimes of concern (e.g., Venezuela). These positions would also
provide TFFC the ability to provide support and guidance to senior NSC
officials dealing with the relevant issues. This initiative is
consistent and in support of Executive Orders 13338 and 13382 and
Section 311 of the USA PATRIOT Act.
The Office of Foreign Assets Control (OFAC), an office within TFI,
is responsible for administering and enforcing economic 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. Treasury's request would also give OFAC additional
resources to implement U.S. economic sanctions policy. OFAC is
committed to combating terrorist networks and state sponsors of
terrorism. New Executive Orders with respect to Sudan and Syria were
issued in 2006, and the Administration is also extensively engaged with
respect to Iran. Each new Executive Order and/or OFAC designation of
terrorists and their financial networks brings with it increasing
demands on OFAC's enforcement, licensing, compliance and administrative
support components. Additional resources in these areas are requested
to match the increased tempo of new Executive Orders and Treasury
designations.
In addition, the WMD sanctions program is a Presidential national
security priority and these resources will be used to strengthen OFAC's
ability to track, identify and designate financiers and other
supporters of WMD proliferation. Publicizing the designations, and
assigning resources to enable OFAC to engage in outreach to the private
sector and with government agencies, will greatly assist the Treasury
Department in effectively isolating financiers and facilitators of WMD
proliferation from the United States and international commercial
communities. This request will also provide OFAC with additional
resources to generally expand its enforcement capacity in support of
investigation and blocking activities, which are critical to the
enforcement of sanctions.
International Affairs
With the increasing importance of global economics and dynamics,
the Department of the Treasury is increasing its international focus.
First, the Executive Direction area is seeking additional positions and
funding to effectively manage the U.S.-China Strategic Economic
Dialogue (SED) and maximize the likelihood of progress on issues of
concern to the United States such as the Chinese currency, energy and
the environment, and intellectual property rights. The SED reflects the
growing relationship between the economies of the United States and
China, and is structured to provide a focused framework for addressing
such issues of concern.
Additionally, the Department of the Treasury, in its role as chair
of the interagency Committee on Foreign Investment in the United States
(CFIUS), has seen its responsibilities increase exponentially. CFIUS is
responsible for monitoring and evaluating the impact of foreign
investment in the United States, including for national security
implications. In addition, CFIUS is the President's designee under
Exon-Florio. In that capacity, CFIUS conducts in-depth national
security investigations of transactions notified to CFIUS under Exon-
Florio. The 2008 request includes additional resources to match the
growth in transactions submitted for CFIUS review.
The increase in CFIUS activity is described below:
--CFIUS investigated 113 transactions in 2006--a 74 percent increase
over the number of transactions for 2005 (65) and 85 percent
more than the annual average (61). This increase can be
attributed to a rise in cross-border merger and acquisition
activity, an increase in international investor awareness of
CFIUS and its role, and higher scrutiny of the security
concerns posed by acquisitions of U.S. businesses by foreign-
owned companies.
--The percentage of transactions that proceeded to a 45-day second-
stage investigation also increased significantly last year, to
seven from two in 2005. Second-stage investigations require
significant involvement of very high-level officials and
commitment of staff resources.
--CFIUS member agencies negotiate security agreements with the
parties to a transaction in order to mitigate national security
concerns raised by the transaction. In 2006 alone, 16
agreements were negotiated, which was 35 percent of all CFIUS-
related agreements negotiated since 1997. Last year CFIUS also
prepared two reports on notified transactions recommending to
the President how the case should be resolved. This is the
largest number since 1990, when four such reports were sent.
Each mitigation agreement and report to the President requires
significant resources.
--CFIUS anticipates an even greater number of transactions to be
filed in 2007 and plans to continue to conduct thorough reviews
in the context of an open investment policy. We have received
approximately 65 filings and negotiated five mitigation
agreements to date in 2007.
--CFIUS has also increased its reporting to Congress, providing the
relevant committees with information pertaining to every case
once deliberative action has concluded. We also provide
periodic briefings to Congressional oversight committees on all
cases for which deliberative action has concluded.
As you well know, the Department of the Treasury received funds in
fiscal year 2007 to expand its overseas presence through the
establishment of Treasury attaches in countries such as Iraq, China and
Afghanistan. Funding is requested for the full fiscal year 2008 cost
and FTE realization from this fiscal year 2007 initiative.
The attache program is essential for several priorities, including
those related to:
--Building Treasury's expertise on economic and financial sector
issues and fostering stronger substantive dialogues that can
advance U.S. Government objectives.
--Identifying policy or regulatory barriers to U.S. firms and
exports, particularly in the area of financial services.
--Strengthening cooperation with other countries to implement U.N.
resolutions and United States enforcement actions to prevent
and punish money laundering, the financing of terrorism, and
other financial crimes.
--Coordinating closely with other United States agencies and
multilateral institutions (such as the IMF and World Bank) to
advance economic growth and development. This is particularly
important with places with a large U.S. Government presence,
such as Iraq and Afghanistan.
Question. Please explain how you plan to block U.S. commercial bank
transactions connected to the government of Sudan?
Answer. The United States has maintained comprehensive economic
sanctions with respect to Sudan since 1997. Under Executive Order 13067
of November 3, 1997, implemented through the Sudanese Sanctions
Regulations, 31 C.F.R. Part 538, the United States government already
requires U.S. persons to block all property and interests in property
of the Government of Sudan. All major U.S. banks, including their
foreign branches, and the U.S. offices of foreign banks, have programs
in place to detect and block such transactions as they are processed.
Treasury is working actively to enhance implementation and compliance
to ensure that it is as responsive as possible.
On October 13, 2006, the President issued Executive Order 13412 to
implement the Darfur Peace and Accountability Act of 2006. E.O. 13412
continues the countrywide blocking of the Government of Sudan's
property and interests in property and prohibits all transactions by
U.S. persons relating to Sudan's petroleum and petrochemical
industries. E.O. 13412 also removes the regional government of Southern
Sudan from the definition of Government of Sudan.
In addition to these targeted sanctions, OFAC administers a
targeted sanctions program against persons in connection with the
conflict in Sudan's Darfur region. This program stems from Executive
Order 13400 of April 26, 2006, in which the President ordered the
blocking of four individuals listed in the Annex to the order, and of
additional persons who meet the specified criteria set forth in the
order.
Question. Last year, the Department identified the following as the
three most immediate challenges for TFI: (1) the need for additional
resources to more aggressively pursue core objectives, (2) leveraging
its authorities most effectively to deal with Iran and Syria, and (3)
building the information technology systems necessary to effectively
and efficiently carry out TFI's mission. Could you give us an update of
where Treasury stands in meeting these challenges?
Answer. Treasury has taken significant steps forward in addressing
key national security threats, particularly terrorism and WMD
proliferation, but there is still important work to be done on these
and other emerging threats. The requested resources will improve
Treasury's ability to expand its coverage of current national security
threats and allow the Department to adapt to new emerging threats.
The fiscal year 2008 President's budget requests additional
analysts and production officers to support Treasury's ability to
address emerging national security threats. In fiscal year 2005, when
OIA was created, the Office focused on developing a process for
exploiting current intelligence. In fiscal year 2006, OIA improved its
strategic analytic capability and developed a research program, which
was coordinated with IC partners. In the current fiscal year, OIA is
concentrating on building breadth and depth to its analytic cadre, so
that OIA can better address some of the national security threats that
have developed in the past year. Still, to fulfill the intent of
Congress and Treasury leadership when they created the Office, OIA must
increase the systemic analysis of issues underlying key national
security threats. This request will also allow Treasury to establish a
permanent intelligence production structure, an essential component to
the timely and accurate production of intelligence information. In
addition to this initiative, OIA is seeking additional funds and
personnel to expand the Department's ability to coordinate on
terrorist-financing and WMD proliferation matters, and to improve OIA's
working relationships with foreign intelligence services.
The fiscal year 2008 President's budget requests additional
resources to support the Office of Foreign Assets Control (OFAC), an
office within TFI,which is responsible for administering and enforcing
economic 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. The fiscal year 2008
request would give OFAC additional resources to implement U.S. economic
sanctions policy combating terrorist networks and state sponsors of
terrorism. New Executive Orders with respect to Sudan and Syria were
issued in 2006, and the Administration is also extensively engaged with
respect to Iran. Each new Executive Order and/or OFAC designation of
terrorists and their financial networks brings with it increasing
demands on OFAC's enforcement, licensing, compliance and administrative
support components. Additional resources in these areas are requested
to match the increased tempo of new Executive Orders and Treasury
designations. In addition, resources are requested to strengthen OFAC's
ability to track, identify and designate financiers and other
supporters of WMD proliferation. The WMD sanctions program is a
Presidential national security priority. Publicizing the designations,
and assigning resources to work with the U.S. public will greatly
assist the Treasury Department in effectively isolating financiers and
other supporters of WMD proliferation.
The Treasury Department has drawn upon its full range of
authorities and influence to combat threats including WMD proliferation
and terrorism. The strategies we have employed to combat the threats
posed by Iran and Syria are good examples of the ways in which
financial authorities are effective in dealing with state sponsors of
terrorism.
Iran
Formal Measures
Treasury has acted both formally and informally to combat the
threat emanating from Iran, which includes a threat to the
international financial system. Iran's dangerous activities, including
the sponsorship of terrorism and the pursuit of a nuclear weapons
program, rely on access to financial networks and financial systems.
Our efforts to attack the financial roots of these threats work to
simultaneously protect our own financial institutions as well as the
international financial system.
First, it must be noted that the United States has a longstanding
country sanctions program against Iran. These commercial and financial
sanctions, which are administered by the Treasury's Office of Foreign
Assets Control (OFAC), prohibit U.S. persons from engaging in a wide
variety of trade and financial transactions with Iran or the Government
of Iran. They prohibit most trade in goods and services between the
United States and Iran, and any post-May 7, 1995, investments by U.S.
persons in Iran. U.S. persons are also prohibited from facilitating
transactions via third-country persons that they could not engage in
themselves.
Beyond these general country sanctions, we are relying more and
more on ``targeted'' measures directed at specific individuals, key
members of the government, front companies, and financial institutions.
These measures are aimed at specific actors engaged in specific
conduct. Some require financial institutions to freeze funds and close
the accounts of designated actors, denying them access to the
traditional financial system. At times, the action includes bans on
travel or arms transfers, which further confine and isolate those
engaged in illicit activities. To maximize the effect, we try to apply
these measures in concert with others. Whenever possible, we act with a
partner or a group of allied countries.
The United States is using various types of targeted measures to
combat Iran's pursuit of nuclear weapons and development of ballistic
missiles, as well as its support for terrorism. First, while under our
general Iran country sanctions program Iranian financial institutions
are prohibited from directly accessing the U.S. financial system, they
are permitted to do so indirectly through a third-country bank for
authorized payments, including payments to another third-country bank.
In September 2006, we cut off one of the largest Iranian state-owned
banks, Bank Saderat, from any access, including this indirect, or ``u-
turn,'' access to the U.S. financial system. This bank, which has 25
foreign branch offices, is used by the Government of Iran to transfer
money to terrorist organizations. Iran has used Saderat to transfer
money to Hizballah. Iran and Hizballah also use it to transfer money to
E.U.-designated terrorist groups, such as Hamas, the PFLP-GC, and the
Palestinian Islamic Jihad. Since 2001, for example, a Hizballah-
controlled organization received $50 million directly from Iran through
Saderat.
We have also acted against 19 entities and individuals supporting
Iran's WMD and missile programs, including another Iranian bank, Bank
Sepah, using Executive Order 13382. That Executive Order, signed by
President Bush in June of 2005, authorizes the Treasury and State
Departments to target key nodes of WMD and missile proliferation
networks, including their suppliers and financiers, in the same way we
target terrorists and their supporters. A designation under E.O. 13382
effectively cuts the target entity or individual off from access to the
U.S. financial and commercial systems and puts the international
community on notice about the threat they pose to global security as a
result of their activities. Specifically, such a designation freezes
any assets that the target may have under U.S. jurisdiction and
prohibits U.S. persons from doing business with it.
Senior Treasury officials have traveled all over the world, sharing
a U.S. list of Iran-related designations with foreign government
counterparts and private sector representatives, and stressing the
importance of ensuring that these proliferators are not able to access
the international financial system. Our list of targeted proliferators
is incorporated into the compliance systems at major financial
institutions worldwide, who have little appetite for the business of
proliferation firms and who also need to be mindful of U.S. measures
given their ties to the U.S. financial system.
The Treasury's designation of Iran's state-owned Bank Sepah under
E.O. 13382 in January of this year is particularly significant because
it makes it more difficult for the regime to hide behind its banks to
support its proliferation activities. Like certain other Iranian banks
and entities, Bank Sepah has engaged in a range of deceptive practices
in an effort to avoid detection, including requesting that other
financial institutions take its name off of transactions when
processing them in the international financial system.
Informal Measures
Aside from these ``formal'' actions, the Treasury has engaged in
unprecedented, high-level outreach to the international private sector,
meeting with more than 40 banks worldwide to discuss the threat Iran
poses to the international financial system and to their institutions.
Secretary Paulson kicked off this effort last fall in Singapore, in
discussions during the annual IMF/World Bank meetings, where he met
with the executives from major banks throughout Europe, the Middle
East, and Asia. Secretary Paulson, Deputy Secretary Kimmitt, Under
Secretary for Terrorism and Financial Intelligence Stuart Levey, and
Assistant Secretary for Terrorist Financing and Financial Crimes
Patrick O'Brien have continued to engage with these institutions
abroad, as well as in Washington and New York.
Through this outreach, we have shared information about Iran's
deceptive financial behavior and raised awareness about the high
financial and reputational risk associated with doing business with
Iran. Our use of targeted measures has aided this effort by allowing us
to highlight specific threats. We share common interests and objectives
with the financial community when it comes to dealing with threats.
Financial institutions want to identify and avoid dangerous or risky
customers who could harm their reputations and business. And we want to
isolate those actors and prevent them from abusing the financial
system.
By partnering with the private sector, including by sharing
information and concerns with financial institutions, we are
increasingly seeing less of a tendency to work around sanctions.
As evidence of Iran's deceptive practices has mounted, financial
institutions and other companies worldwide have begun to reevaluate
their business relationships with Tehran. Many leading financial
institutions have either scaled back dramatically or even terminated
their Iran-related business entirely. They have done so of their own
accord, many concluding that they did not wish to be the banker for a
regime that deliberately conceals the nature of its dangerous and
illicit business. Many global financial institutions have indicated
that they have limited their exposure to Iranian business. A number of
them have cut off Iranian business in dollars, but have not yet done so
in other currencies. It is unclear whether this is just a first step
toward phasing out the business entirely. Regardless of the currency,
the core risk with Iranian business--that you simply cannot be sure
that the party with whom you are dealing is not connected to some form
of illicit activity--remains the same. Scaling back dollar-business
reduces, but does not eliminate, the risk.
As further evidence of the change in tide, a number of foreign
banks are refusing to issue new letters of credit to Iranian
businesses. And in early 2006, the OECD raised the risk rating of Iran,
reflecting this shift in perceptions and sending a message to those
institutions that have not yet reconsidered their stance.
Additionally, many other companies have scaled back on their
investments or projects in Iran, concluding that the risks of expanding
operations in the country are too great. Multinational corporations
have held back from investing in Iran, including limiting investment in
Iran's oil field development. These companies have done their risk
analyses, and they have realized that the Iranian regime's behavior
makes it impossible to know what lies ahead in terms of Iran's future
and stability.
Syria
As in Iran, we have taken a combination of steps to address Syria's
problematic behavior and the threats posed by Syria. Under Executive
Order 13338, Treasury is applying targeted financial sanctions that
provide for the blocking of the assets of individuals and entities
that, among other things, contribute to Syria's support of
international terrorism, military or security presence in Lebanon,
pursuit of weapons of mass destruction and missile programs, and
undermining of U.S. and international efforts in Iraq. E.O. 13399
provides for the blocking of individuals and entities who were involved
in the assassination of the former Lebanese Prime Minister Rafik Hariri
or certain other bombings or assassination attempts in Lebanon since
October 1, 2004
In addition, four Syrian entities are subject to an asset freeze
under the WMD proliferation sanctions program that was established in
June 2005. The Scientific Studies and Research Centre (SSRC) was named
by the President in the annex of Executive Order 13382. SSRC is the
Syrian government agency responsible for developing and producing non-
conventional weapons and the missiles to deliver them. While it has a
civilian research function, SSRC's activities focus substantively on
the acquisition of biological and chemical weapons. The three
additional entities meet the criteria for designation under E.O. 13382
because they are subordinates of SSRC.
Second, we took action pursuant to the USA PATRIOT Act's Section
311 to protect the U.S. financial system against the Commercial Bank of
Syria (CBS). Criminals and terrorists have utilized CBS to facilitate
or promote money laundering and terrorist financing, including the
laundering of proceeds from the illicit sale of Iraqi oil and the
channeling of funds to terrorists and terrorist financiers. In March
2006, Treasury issued a final rule, pursuant to Section 311,
designating CBS as a primary money laundering concern. This additional
step required U.S. financial institutions to close correspondent bank
accounts with CBS, which essentially halted U.S. business with CBS.
As a result of these U.S. enforcement measures against Syria-based
entities engaging in illicit financial activity, international
financial institutions have reassessed their business relationships
with Syria and a number of Syrian entities.
Responding to the need for information technology systems, funding
for Enterprise Content Management (ECM) will be used to implement a
pilot enterprise-wide ECM project for the Department, initially meeting
the critical and urgent business needs of the Office of Foreign Assets
Contract (OFAC) and the Financial Crimes Enforcement Network (FinCEN).
The project, which is under the oversight of the Department's Chief
Information Officer, will be designed to meet Department-wide ECM
requirements, thereby minimizing duplication of effort and
infrastructure investments by capitalizing on Department and
government-wide efforts.
Treasury is also currently in the midst of a multi-year project to
upgrade the Treasury Foreign Intelligence Network (TFIN), which is the
Department's system authorized for both Top Secret and Sensitive
Compartmented Information. Treasury has made significant progress in
stabilizing the system and as a result, Treasury analysts are already
using IT tools like Intellipedia and classified Instant Messaging to
better cooperate with counterparts across the IC.
Treasury's CIO is currently modernizing TFIN to enhance the
analytical work flow and add additional analytic tools. In fiscal year
2008, the Department has requested $3 million for operations and
maintenance, to ensure the system is maintained and upgraded as
necessary.
Question. With the establishment of TFI, how are intelligence
activities coordinated with other federal agencies and the Office of
the Director of National Intelligence?
Answer. The Department of the Treasury's analytic efforts are
guided by its research and production plan, which was created to ensure
that its analytic priorities were consistent with those of the DNI, the
National Security Council (NSC), and the Treasury Department. This plan
is also extensively coordinated throughout the IC. Because of this
coordination and through other bilateral exchanges, opportunities for
joint projects with IC partners have grown since OIA was created in
2005.
--In early 2006, Treasury and the Federal Bureau of Investigation
(FBI) worked in concert to preserve the assets of Toledo-based
NGO KindHearts, as the NGO and its officers faced allegations
of terrorism finance.
--Treasury co-founded and co-leads, with the Department of Defense,
the Iraq Threat Finance Cell (ITFC) in Baghdad, Iraq. The
ITFC's mission is to enhance the collection, analysis, and
dissemination of intelligence to combat the financing of
terrorist and insurgent groups in Iraq. ITFC participating
agencies include other members of the IC, as well as FBI,
Secret Service, and IRS Criminal Investigations.
--Treasury collaborated with other IC agencies to identify and map
Iranian Weapons of Mass Destruction (WMD) proliferation
networks, while supporting the targeting of WMD proliferation
entities for Treasury action.
Question. What progress has been made on cross-border currency
transactions, wire transfers, and effective oversight with other
countries?
Answer. Systems for the collection, storage, processing, analysis,
and dissemination of cross-border electronic funds transfers are in
place. Both the Australian and Canadian governments, through their
financial intelligence units, have imposed cross-border electronic
funds transfer reporting requirements on their financial services
industries.
Canada
The Financial Transactions and Reports Analysis Centre of Canada
(FINTRAC) is Canada's financial intelligence unit.
FINTRAC first required the reporting of cross-border electronic
funds transfers (``EFT'' reporting) in June 2002. Initially, FINTRAC
required only reports of international funds transfers made using
certain SWIFT messages. Effective March 31, 2003, FINTRAC expanded the
international EFT reporting requirement to cover all forms of
international EFT regardless of system or message format. FINTRAC
receives almost all of its international EFT reports electronically;
FINTRAC's regulations permit for paper filing where the reporting
institution can certify that they lack the capability to file
electronically, but FINTRAC officials noted that this rarely happens.
To facilitate the electronic filing of these reports, FINTRAC
established a ``batch file transfer format'' that informs financial
institutions of the appropriate report content and form. In turn,
reporting institutions must implement their own systems for converting
the institutions' non-SWIFT data to the proper format prior to
submission. For non-SWIFT EFTs, FINTRAC has also developed an online
form that is generally used by smaller institutions. For both SWIFT and
Non-SWIFT messages, FINTRAC has established minimum mandatory data
fields (17 fields for outgoing SWIFT messages; 8 fields for incoming
SWIFT messages; 11 fields for both outgoing and incoming Non-SWIFT
messages) that must be included in the report (again, FINTRAC dictates
the format of the batch submission, but distinguishes between mandatory
fields and those fields).\1\
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\1\ See http://www.fintrac.gc.ca/publications/guide/Guide8/
81_e.asp.
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More than 300,000 entities and persons are potentially subject to
the EFT reporting requirement in Canada, but many do not conduct
business that reaches the thresholds in the law and thus, need not
report. In addition, not all types of regulated institutions are
currently required to report. However, the Department of Finance has
issued a public consultation paper recommending that Parliament amend
existing law to require all regulated entities to report cross-border
EFTs. As noted above, FINTRAC permits reporting institutions to report
by batch file and by single report through either a web-based interface
or client software distributed by FINTRAC. Currently 56 entities report
via the batch process, with the others using the online reporting
mechanism.
In total, FINTRAC receives approximately 590,000 international EFT
transaction records per month.
--In 2003-04, FINTRAC received 2.7 million SWIFT EFT reports and 3.9
million Non-SWIFT EFT Reports.
--In 2004-05, FINTRAC received 3 million SWIFT EFT reports and 4.1
million Non-SWIFT EFT Reports.
--60 percent of all the FINTRAC reports are submitted by banks.
--FINTRAC's international EFT data store contains approximately 15.6
million records.
Australia
The Australian Transaction Reports and Analysis Centre (AUSTRAC) is
the financial intelligence unit of the Australian government.
AUSTRAC first required the reporting of cross-border electronic
funds transfers (International Funds Transfer Instructions or ``IFTI''
reporting) in 1992.\2\ Generally, AUSTRAC requires the institutions
``who are senders of IFTIs transmitted out of Australia; or who are
receivers of IFTIs transmitted into Australia'' submit reports of those
transactions.
---------------------------------------------------------------------------
\2\ The IFTI reporting provisions are set out in section 3 and
sections 17B to 17F of the FTR Act. The prescribed details in relation
to IFTIs are contained in Regulation 11AA of the Financial Transaction
Reports Regulations 1990 (FTR Regulations); see also AUSTRAC
Information Circular No. 2, available at http://www.austrac.gov.au/
text/guidelines/circulars/pdfs/
AIC%2002%20%20International%20Funds%20Transfer%20Instructions.pdf.
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AUSTRAC accepts IFTI reports in one of two formats. First, AUSTRAC
accepts reports containing properly formatted SWIFT instruction
messages from those institutions that use the SWIFT system. Second,
AUSTRAC established a batch file transfer format and requires the
reporting institutions to implement their own systems for converting
the institutions' non-SWIFT data to the proper format prior to
submission. For both SWIFT and Non-SWIFT messages, AUSTRAC has
established minimum mandatory data fields that must be included in the
report.
AUSTRAC permits reporting institutions to report by batch file and
by single report through a web-based interface operated by AUSTRAC.
This interface enables institutions to upload prepared files
automatically, provides an interface for the manual upload of prepared
batch files, and provides a form for extremely low volume reporting
institutions to submit their data. In addition, AUSTRAC developed and
distributes to financial institutions a Microsoft Excel macro that will
convert certain electronic records to the prescribed data format for
upload to the AUSTRAC systems. AUSTRAC officials told us that the
largest four institutions in Australia account for approximately 80
percent of the IFTI reporting, while a second tier of approximately 20
institutions account for the majority of the remaining reports.
In total, AUSTRAC receives approximately 9 to 10 million IFTI
records per year.
--In 2003-04, AUSTRAC received approximately 4 million inbound and
approximately 4.5 million outbound IFTI reports.
--In 2004-05, AUSTRAC received 4.2 million inbound IFTI reports and
approximately 5.5 million outbound IFTI reports.
--The most recent figures reveal that in the course of a year,
approximately 78 percent of the IFTI reports are in SWIFT
format and 22 percent in non-SWIFT format.
--AUSTRAC's data store contains approximately 70 million records
dating from 1995 to present; 55 million of those are IFTI
reports.
Question. I understand that the United States is near concluding
negotiations on the ``Large Aircraft Sector Understanding,'' dealing
with the financing terms of aircraft. I have been informed that the
U.S. industry does not believe their concerns have been addressed in
the context of the negotiations. They are troubled that agreeing to the
provision put forward by the EU could hinder their ability to compete.
Would you be willing to meet with the industry group to discuss their
concerns?
Answer. The United States Government negotiating team, led by
Treasury, has been in continuous contact with industry throughout the
negotiating process. That process has been underway for over two years.
We will continue to consult intensively before reaching a final
agreement. Over the past two months, the Deputy Secretary, Under
Secretary, and Assistant Secretary have all met with industry
representatives to gather their views.
These consultations have occurred primarily through the Department
of Commerce-led Aerospace Industry Trade Advisory Committee (ITAC) and
the Aircraft Working Group (AWG--an international industry group for
which Boeing serves as Vice Chairman). The AWG has met with OECD
negotiators on a number of occasions, and has also provided formal
written recommendations on the important competitive elements of an
agreement. Treasury has followed appropriate procedures for reviewing
the ITAC's recommendations, and the positions taken by the U.S.
negotiators to date are in full accord with those recommendations.
Treasury officials and substantive experts met several times with
key industry representatives, including meetings as recently as the
week of April 16th. In these meetings, the detailed industry-
recommended text was thoroughly examined point-by-point, and U.S.
negotiators worked with this text in discussions with other negotiators
at the OECD the week of April 23.
I can assure you that the provisions of this new agreement will
ensure that U.S. industry will remain fully competitive. We will not
support any agreement that does not provide a completely level playing
field for our exporters. The agreement will also sharply limit the
ability of foreign governments to provide subsidized financing for
their aerospace industries' exports. By limiting these subsidies, we
will also limit subsidies that are currently provided to foreign
airlines and that disadvantage our domestic airline industry, which
does not have access to such subsidies.
Question. Treasury's Office of Intelligence Analysis was
established in fiscal year 2005. Since that time, how has it
contributed to overall intelligence collection?
Answer. The Treasury's Office of Intelligence Analysis (OIA) is
primarily an analytic component. Through its membership in the
Intelligence Community (IC), OIA has also been instrumental in driving
collection on financial issues in the intelligence requirements
process. At the national level, OIA created and filled a dedicated
collection requirements officer position. This individual ensures that
Treasury equities in financial, economic, enforcement, and other areas,
are reflected in national intelligence priorities and collection
requirements. At the working level, OIA analysts actively provide
feedback and direction on disseminated intelligence reports to ensure
that information relevant to Treasury's mission is collected. OIA
analysts regularly engage with counterparts in collecting offices
across the IC.
Treasury also is the program office for the Terrorist Financing
Tracking Program (TFTP). Using its authorities, Treasury has access to
certain very limited and targeted data streams that provide information
about the financial activities of known terrorists.
Additionally, Treasury co-founded and co-leads, with the Department
of Defense, the Iraq Threat Finance Cell (ITFC) in Baghdad, Iraq. The
ITFC's mission is to enhance the collection, analysis, and
dissemination of intelligence to combat the financing of terrorist and
insurgent groups in Iraq. ITFC participating agencies include other
members of the IC, as well as FBI, Secret Service, and IRS Criminal
Investigations.
Question. What key ways is your Department proposing to employ to
close the ``tax gap?'' You stated in a Finance Committee hearing that
this is not a pot of gold. How big is the gap and what will it cost to
close it?
Answer. The tax gap is the difference between the amount of tax
imposed on taxpayers for a given year and the amount that is paid
voluntarily and timely. The tax gap represents, in dollar terms, the
annual amount of noncompliance with our tax laws. Based in part on the
results of a National Research Program (NRP) analysis of approximately
46,000 individual tax returns for Tax Year 2001, the IRS has estimated
that the gross tax gap for Tax Year 2001 was $345 billion. After
collections and late payments, the net tax gap for that year is
estimated to be $290 billion. Although the IRS will never be able to
audit its way out of the tax gap, considerable progress has been made
in improving compliance as indicated by growth in enforcement revenues
in recent years.
In September 2006, the Treasury Department released a document
titled ``A Comprehensive Strategy for Reducing the Tax Gap.'' The
strategy builds upon the demonstrated experience and current efforts of
the Treasury Department and IRS to improve compliance. See http://
www.treasury.gov/press/releases/reports/otptaxgapstrategy%20final.pdf
for a copy of this report. This strategy includes detailed legislative
proposals, along with new initiatives to reduce opportunities for
evasion, a commitment to research, continual improvements in
technology, enhanced enforcement programs and taxpayer service
programs, increased outreach and education and enhanced coordination
and partnering with stakeholders.
The tax compliance strategy is reflected in the President's fiscal
year 2008 budget request which includes sixteen legislative proposals
to begin to address the tax gap with minimum impact on taxpayers. These
proposals include requiring basis reporting on sales of securities;
information reporting on merchant payment card reimbursements;
increased information reporting for certain government payments for
property and services; and implementing standards to clarify when
employee leasing companies can be held liable for their clients'
Federal Employment taxes.
In addition, the fiscal year 2008 budget request provides:
--$205 million to expand enforcement activities, a majority of which
will go to improve compliance among small business and self-
employed (SB/SE) individual taxpayers. It will also fund
implementation of the legislative proposals described above.
--$20 million to enhance taxpayer service, including expansion of
volunteer tax assistance and research to determine the effect
of service on taxpayer compliance.
--$41 million for research that will update estimates of reporting
compliance. Unlike the past, the IRS will conduct an annual
study of compliance among 1040 filers that will provide fresh
compliance data each year, and by combining samples over
several years will provide a regular update to the larger
sample size needed to keep the IRS' targeting systems and
compliance estimates up to date.
--$143 million for information technology that includes upgrades for
critical infrastructure to prevent business operation
disruptions and upgrades of IT security.
The IRS and Treasury Department will continue to work with OMB on
future funding needs to support the implementation of its tax gap
strategy.
Question. If we simplified our tax code with, for example, a flat
income tax, what effect would there be on revenue receipts and revenue
collection?
Answer. There are at least three potential effects on receipts from
substituting a flat income tax for our current income tax. First,
initial receipts under a flat tax could differ from those under the
current income tax due to estimation error. There is some flat tax rate
that initially would bring in the same amount of revenue as our current
income tax. Depending on how much the flat tax base differs from the
tax base of the current income tax, however, there may be more or less
significant error in estimating the revenue-neutral flat tax rate. This
error could be positive or negative. Second, a greatly simplified
income tax could reduce the so-called ``tax gap.'' Taxpayers who fail
to understand the highly complex provisions of the current tax code are
unlikely to be compliant with those provisions. While this
noncompliance could result in overpayment or underpayment of taxes,
there is strong belief that, on net, it results in underpayment. The
complexity of our current tax code also is thought to provide
opportunities for some taxpayers to intentionally underpay their taxes.
Hence, a dramatically simplified income tax could result in a higher
level of tax compliance, contributing to revenue collections. Third,
under a truly flat income tax--that is, a tax with a single tax rate--
revenues likely would grow more slowly than under our current income
tax. As real incomes increase, our current progressive income tax taxes
the higher real incomes at higher effective tax rates, resulting in tax
receipt growth that exceeds income growth. Under a true flat tax, tax
receipt growth would be more likely to equal, or nearly equal, income
growth.
SUBCOMMITTEE RECESS
Senator Durbin. The subcommittee hearing is recessed.
Thank you.
[Whereupon, at 5:01 p.m., Wednesday, March 28, the
subcommittee was recessed, to reconvene subject to the call of
the Chair.]