[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\
---------------------------------------------------------------------------
    \1\ See http://www.fintrac.gc.ca/publications/guide/Guide8/
81_e.asp.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.]
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