[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]







                       EVALUATING THE SECURITY OF
                       THE U.S. FINANCIAL SECTOR

=======================================================================

                                HEARING

                               BEFORE THE

                       TASK FORCE TO INVESTIGATE

                          TERRORISM FINANCING

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 24, 2015

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-36
 
 
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
             Task Force to Investigate Terrorism Financing

             MICHAEL G. FITZPATRICK, Pennsylvania, Chairman

ROBERT PITTENGER, North Carolina,    STEPHEN F. LYNCH, Massachusetts, 
    Vice Chairman                        Ranking Member
PETER T. KING, New York              BRAD SHERMAN, California
STEVE STIVERS, Ohio                  GREGORY W. MEEKS, New York
DENNIS A. ROSS, Florida              AL GREEN, Texas
ANN WAGNER, Missouri                 KEITH ELLISON, Minnesota
ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
DAVID SCHWEIKERT, Arizona            DANIEL T. KILDEE, Michigan
ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine
FRENCH HILL, Arkansas














                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 24, 2015................................................     1
Appendix:
    June 24, 2015................................................    39

                               WITNESSES
                        Wednesday, June 24, 2015

Carlson, John W., Chief of Staff, Financial Services Information 
  Sharing and Analysis Center (FS-ISAC)..........................    10
Poncy, Chip, Senior Advisor, Center on Sanctions and Illicit 
  Finance at the Foundation for Defense of Democracies, and 
  Founding Partner, Financial Integrity Network..................     8
Vance, Hon. Cyrus R., Jr., District Attorney, New York County....     6

                                APPENDIX

Prepared statements:
    Carlson, John W..............................................    40
    Poncy, Chip..................................................    60
    Vance, Hon. Cyrus R., Jr.....................................    81

              Additional Material Submitted for the Record

Ellison, Hon. Keith:
    Article from the New York Times entitled, ``Homegrown 
      Extremists Tied to Deadlier Toll Than Jihadists in U.S. 
      Since 9/11,'' dated June 24, 2015..........................    86
    Southern Poverty Law Center Hate Map (Active U.S. Hate Groups 
      by State)..................................................    89
    Written responses to questions for the record submitted to 
      John W. Carlson............................................    90
 
                       EVALUATING THE SECURITY OF
                       THE U.S. FINANCIAL SECTOR

                              ----------                              


                        Wednesday, June 24, 2015

             U.S. House of Representatives,
                          Task Force to Investigate
                               Terrorism Financing,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The task force met, pursuant to notice, at 2:30 p.m., in 
room 2128, Rayburn House Office Building, Hon. Michael 
Fitzpatrick [chairman of the task force] presiding.
    Members present: Representatives Fitzpatrick, Pittenger, 
King, Stivers, Ross, Barr, Rothfus, Schweikert, Williams, 
Poliquin, Hill; Lynch, Sherman, Green, Ellison, Himes, and 
Sinema.
    Ex officio present: Representative Waters,
    Chairman Fitzpatrick. Thank you everyone for joining us 
today for the third hearing of the House Financial Services 
Committee's Task Force to Investigate Terrorism Financing. 
Today's hearing is entitled, ``Evaluating the Security of the 
U.S. Financial Sector.''
    Through the first hearings of this task force, we have 
heard about the extensive reach--both in terms of impact and 
funding--of the terror groups that the United States and allied 
nations face today. From the Middle East to South America, we 
have examined the new methods of financing that these 
organizations are utilizing to spread and carry out their 
warped ideological aims.
    Terrorist groups no longer rely solely on ``big-pocket 
donors,'' or even state sponsors, but have diversified their 
streams of revenue to include a wide array of activities. Non-
traditional funding methods--from antiques dealing and the sale 
of illicit oil in Iraq and Syria, to the drug trade and 
extortion in the Tri-Border Area of Argentina, Brazil, and 
Paraguay--have transformed these groups from regional entities 
to trans-national criminal syndicates.
    With this global scope, it is vital that the United States 
works with the international community to address these 
challenges. However, it is equally important that we look 
inward to assess the security of our own financial sector.
    That is the focus of today's hearing.
    Many groups are constantly seeking to access and exploit 
the U.S. financial system. The complexity and sheer size of our 
financial system has created avenues within which criminals may 
move, hide, and launder their funds. Many of these groups 
understand our system's weaknesses and gray areas with respect 
to beneficial ownership and customer due-diligence standards 
and they exploit it to our detriment.
    Aside from the threat of actors operating within it, the 
United States financial system itself should also be considered 
a target for terrorists.
    Over the past several years, there has been a noticeable 
rise in the number of cyber-related attacks on United States 
businesses and government agencies, launched by state and non-
state actors alike. This is attributed to the fact that such 
attacks cost very little to carry out, but have potential to 
cause severe problems and inflict great costs on the victim 
attempting to carry out the defense.
    The United States financial sector is too important for 
this task force to overlook when seeking to address the nexus 
of terrorism and finance. The continued innovation and 
evolution by our enemies highlights the importance of this 
body's role in the fight against terror.
    The United States must do better when defending our 
financial system and addressing the threats operating within 
it. The risk is too great to ignore.
    I am confident that today's dialogue between this 
bipartisan group of Members and the panel of expert witnesses 
that we have before us will help us to understand where our 
system is vulnerable and how these vulnerabilities should be 
corrected.
    At this time, I would like to recognize for 3 minutes the 
task force's ranking member, my colleague from Massachusetts, 
Mr. Lynch, who has been a valuable asset to the task force.
    Mr. Lynch. Thank you, Mr. Chairman. I want to thank the 
members of the panel as well, the witnesses, for helping the 
task force with its work.
    This is our third hearing. The first two were focused on 
the global reach of anti-terrorist financing. And I look 
forward to this third hearing which is going to actually look 
at the opportunity to evaluate the domestic security of the 
U.S. financial sector in order to better protect it from 
terrorist threats.
    It is an inward-focused perspective which I think is 
eminently necessary. It is crucial that our task force, as part 
of the Financial Services Committee, devotes resources to 
assessing the security of the U.S. financial sector. As our 
witnesses highlighted in their prepared remarks, the size and 
complexity of the financial sector makes it vulnerable for 
abuse by terrorist organizations.
    Shell companies and vulnerabilities in our financial 
system's cyber infrastructure are two areas that are 
particularly susceptible to exploitation by terrorists.
    Shell companies particularly are being used to mask the 
identities of people who actually control or profit from these 
companies, the beneficial owners. And unfortunately, the United 
States does not currently collect information on beneficial 
owners.
    As Mr. Vance, a seasoned New York County district attorney, 
described in his prepared remarks, criminals and terrorists 
exploit our inadequate incorporation procedures and the 
anonymity in those procedures in order to conceal the illicit 
conduct. This makes it hard for law enforcement to follow the 
money to the ultimate owner.
    At this point, I want to yield to Mr. Brad Sherman of 
California for a brief opening statement.
    Mr. Sherman. I have a very quick statement that relates to 
the chairman's comments about cyberattacks from state actors. 
It is a step away from the exact focus of the hearing.
    The best defense against state actors attacking our cyber 
system is a good offense. We are too politically correct to 
have a good offense. We only go after government targets, we 
only take the information for government files.
    China is uniquely vulnerable to us if we choose to be 
politically incorrect. What we need to do is gather information 
about the assets and expenditures of their top 1,000 
governmental officials, none of whom, I might add, are reported 
on personal financial disclosure statements filed with the 
ethics committee of any parliament. And if we were to expose 
even a few of the tasty tidbits, China would no longer be 
hacking into our system.
    But that is not politically correct. We will have 
bureaucrats asking us for money. They will only want to spend 
money on defense; they are a little wary of offense. And so, we 
will continue to be a punching bag, trying only to defend 
ourselves.
    I yield back.
    Mr. Lynch. I would like to also yield 1 minute for a brief 
statement to Ms. Sinema of Arizona.
    Ms. Sinema. Thank you, Chairman Fitzpatrick, and Ranking 
Member Lynch.
    The Administration has identified the financial services 
sector as critical infrastructure integral to our national 
security. Cyberattacks on U.S. critical infrastructure, 
including the financial sector, come from states, terrorists, 
criminals, and hacktivists.
    Sharing information about cyber breaches and threats is 
critical to ensuring the financial institutions and affected 
parties effectively prepare for and respond to cyberattacks. 
However, this doesn't always occur.
    Firms and industry groups have cited concerns over 
violating privacy and antitrust laws as a reason that they are 
reluctant to share information. So we must make it easier for 
the private sector to successfully access threat information 
and remove barriers to sharing within the private sector and 
with the Federal Government.
    Information sharing is an important tool for protecting 
information systems and their contents from unauthorized access 
from cyber criminals. But it is only one of the many assets of 
cybersecurity that organizations must address to secure their 
systems and information.
    I am looking forward to continuing to work with my 
colleagues on both sides of the aisle to reduce vulnerabilities 
in the cybersecurity ecosystem and strengthen measures to 
protect our critical infrastructure. And I am looking forward 
to hearing more from our witnesses today about the essential 
elements of effective cyber-threat information-sharing 
legislation.
    Thank you. I yield back.
    Chairman Fitzpatrick. I now recognize the vice chairman of 
the task force, Mr. Pittenger of North Carolina, for 1 minute 
for the purpose of making an opening statement.
    Mr. Pittenger. Thank you, Mr. Chairman.
    And thank you to Ranking Member Lynch for your continued 
efforts with this task force.
    Recent reports from the State Department and the Treasury 
Department have further highlighted the priority that we must 
place in our counter-terrorist financing efforts.
    The 2014 State Department Country Reports on Terrorism make 
it clear that terrorism is becoming more prevalent. The number 
of attacks increased by 35 percent with 3,000 more attacks in 
2014 than 2013, and fatalities increased 81 percent to 32,727 
deaths in 2014.
    And the National Terrorist Financing Risk Assessment shows 
that while we have made progress in undermining terrorist 
financing, there are still vulnerabilities in our system and 
more could be done.
    While the United States is in compliance with the majority 
of the Financial Action Task Force (FATF) recommendations, we 
have our own noncompliance issues. I look forward to continuing 
to work with this task force to achieve this, including efforts 
to increase the cooperation between the public and the private 
sector.
    I look forward to the testimony today and the views of our 
distinguished witnesses on what else can be done to stop the 
flow of money to terrorists.
    Thank you, Mr. Chairman. And I yield back.
    Chairman Fitzpatrick. We now welcome our witnesses. And I 
recognize the gentleman from New York, Mr. King, for the 
purpose of introducing the district attorney of New York 
County.
    Mr. King. Thank you, Mr. Chairman. Thank you for giving me 
this privilege because it really is a privilege to introduce Cy 
Vance to this committee.
    Cy Vance comes from a tradition of district attorneys in 
New York where his two predecessors, Frank Hogan and Robert 
Morgenthau, between the 2 of them served for more than 65 
years. So this is a very distinguished office and Cy Vance more 
than fits the bill; he more than lives up to the standards of 
that office.
    He was elected in 2009. He was re-elected with 91 percent 
of the vote in 2013. All of us can only envy that vote margin. 
But before that, he was a leading prosecutor and also had a 
very successful career in the private sector.
    The main reason he is uniquely qualified today is that his 
office, the district attorney's office located in the world 
financial capital, has been extremely active in international 
financial issues, recovering billions of dollars from 
institutions that have violated sanctions, and on the issue of 
terrorism itself; he was the first district attorney to obtain 
a terrorist conviction in New York State courts.
    It was the Pimentel case which other prosecutors, including 
the Federal Government, did not want to go near because they 
thought it could not be won. The fact is a conviction was 
obtained and it was a very, very significant conviction for the 
district attorney. So I look forward to District Attorney 
Vance's testimony here today. I can tell you--I am saying this 
as a Republican--that he is universally respected in New York 
by all political parties, by members of the bar, by police, by 
law enforcement, and by defense counsel. And his testimony 
today will be extremely illuminating and helpful.
    And Cy, it is a real privilege to have you here today.
    Mr. Chairman, I yield back.
    Chairman Fitzpatrick. Thank you.
    Welcome to the panel, Mr. Vance.
    Next, we have Chip Poncy, a founding partner of the 
Financial Integrity Network, and a senior adviser of the Center 
on Sanctions and Illicit Finance at the Foundation for Defense 
of Democracies.
    Mr. Poncy previously served as the interim head of 
financial crimes compliance from Mexico and the Latin American 
region for one of the world's largest banks. Mr. Poncy also 
served as the inaugural director of the Office of Strategic 
Policy for Terrorist Financing and Financial Crimes and as a 
senior adviser at the U.S. Department of the Treasury.
    From 2010 to 2013, Mr. Poncy led the United States 
delegation to the Financial Action Task Force where he co-
chaired a policy working group and managed United States 
participation on illicit finance expert groups.
    Mr. Poncy graduated with honors from Harvard University, 
received a masters degree in international relations from the 
Johns Hopkins School of Advanced International Studies, and 
holds a law degree from the Georgetown University Law Center.
    He also graduated from high school with Representative 
Rooney of Florida, further distinguishing himself.
    So, we welcome you.
    And finally, we have John Carlson, the chief of staff at 
the Financial Services Information Sharing and Analysis Center, 
or the FS-ISAC.
    Prior to joining the FS-ISAC, Mr. Carlson served as the 
executive vice president of BITS, the Technology and Policy 
Division of the Financial Services Roundtable. There, Mr. 
Carlson led cybersecurity, technology, and collaboration 
programs for 12 years and participated in the Financial 
Services Sector Coordinating Council.
    Mr. Carlson also served as managing director of Morgan 
Stanley's Operational Risk Department and in a variety of 
leadership roles at the Office of the Comptroller of the 
Currency, the Office of Management and Budget, the Federal 
Reserve Bank of Boston, and the United Nations Center for Human 
Settlements.
    Mr. Carlson graduated from the University of Maryland, and 
received a masters degree in public policy from the Kennedy 
School of Government at Harvard University.
    The witnesses will now be recognized for 5 minutes each to 
give an oral presentation of their testimony. And without 
objection, the witnesses' written statements will be made a 
part of the record. Once the witnesses have finished presenting 
their testimony, each member of the task force will have 5 
minutes within which to ask questions.
    On your table there are three lights: green; yellow; and 
red. Yellow means you have 1 minute remaining, and red means 
your time is up.
    The microphone is sensitive, so please make sure that you 
are speaking directly into it.
    With that, Mr. Vance, you are now recognized for 5 minutes. 
Just make sure the microphone is turned on as well.

   STATEMENT OF THE HONORABLE CYRUS R. VANCE, JR., DISTRICT 
                   ATTORNEY, NEW YORK COUNTY

    Mr. Vance. Good morning, Chairman Fitzpatrick, Ranking 
Member Lynch, Representative King, and members of the Task 
Force to Investigate Terrorism Financing.
    As the head elected law enforcement official for New York 
County, which is a target for terrorism from around the world, 
I want to thank you for taking on this crucial issue, and for 
the opportunity to talk to you and with you today.
    I came to share with you the perspective of State and local 
law enforcement on nontransparent beneficial ownership and the 
ease with which criminals and terrorists can operate 
anonymously in our jurisdictions.
    As Representative King indicated, because of my office's 
location in Manhattan as a global financial capital, our office 
has the responsibility to interrupt terrorism financing and 
other financial crime. And for decades, our office has 
conducted investigations that rely on financial tracing and 
analysis to root out these crimes along with money laundering, 
sanctions violations, human trafficking, cyber crime, and other 
frauds.
    Like many in white-collar law enforcement, our way of doing 
business is to identify the money and to follow the money, 
which in most cases means issuing subpoenas for records from 
financial institutions and pursuing the leads that those 
records provide. But sometimes those records lead nowhere.
    I want to share an anecdote which should be disturbing. It 
is not, unfortunately, uncommon.
    While I was preparing for my testimony here, an 
investigator in my office entered the phrase ``incorporate 
Delaware company'' into a Google search. And she called an 
incorporation services vendor that appeared in her search 
results.
    Putting on her best accent, she stated that she lives in 
France, that she wanted to incorporate a company in Delaware, 
but that she wished to remain anonymous because of ``estate 
issues'' in her country. And she was told that wouldn't be a 
problem. A corporation could be set up in 5 minutes; she needed 
to provide only a name and an email address.
    And that interchange, I believe, highlights starkly what I 
and my colleagues know very well: That criminals currently can 
and do make use of our lax incorporation procedures and the 
anonymity those procedures permit in order to carry out and 
conceal illegal conduct.
    On a nearly daily basis, we encounter a company or a 
network of companies involved in suspicious activity, but we 
are unable to glean who is actually controlling and benefiting 
from those entities and from their illegal activity. In other 
words, we cannot identify the criminal.
    And that is not because entities are incorporated in an 
offshore tax haven like the Cayman Islands. That country 
actually collects beneficial ownership information. Often, that 
entity is instead incorporated in the United States, and it is 
incorporated in the United States precisely because we don't 
collect beneficial owner information.
    And in this important way, a prosecutor sitting in the 
Cayman Islands is better positioned to root out terrorism 
finance in her own markets than I am in ours.
    Too frequently, an anonymous incorporation record spells 
the end to our investigative road. And when we are able with 
much time and effort to overcome that obstacle, we often find 
that the criminals have purposely relied on our lax 
incorporation requirements.
    Recently, for example, a New York County grand jury 
indicted eight individuals in a sprawling pump-and-dump 
securities fraud scheme in which stock promoters and company 
insiders reverse-merged private companies with no publicly 
traded securities into existing public shell companies.
    They concealed their control of the shell companies by 
using nominees to purchase them and to hold the publicly traded 
shares in their names. But the scheme's mastermind appears 
nowhere in the incorporation documents and held none of the 
company's shares in his name.
    As in so many of our cases, disguised beneficial ownership 
is precisely what enabled this scheme.
    The perils of anonymous incorporation go well beyond 
securities fraud. Shell companies doing business in New York 
can be used to disguise the activities of entire foreign 
governments.
    In 2006, my office was investigating the Alavi Foundation, 
a not-for-profit organization which owned a 60 percent stake in 
a 36-story office building in midtown Manhattan. The remaining 
40 percent was owned by the Assa Corporation, a New York 
incorporated entity, and by Assa Company Limited, which was 
incorporated in the Channel Islands.
    We ultimately determined that the Assa entities were merely 
shells being used to disguise the building's actual owner, a 
bank called Melli. Bank Melli, as you may be aware, is wholly 
owned by the government of Iran. It was designated by the 
Office of Foreign Assets Control (OFAC) as a key financier to 
Iran's nuclear and ballistic missiles program and as a banker 
to the country, the Revolutionary Guard, and the Quds Force.
    The building generated substantial rental income which was 
diverted to the shell companies and from there to Bank Melli.
    My office routinely collaborates with foreign law 
enforcement to incapacitate cross-border threats. But time and 
time again, we find that our international partners are better 
situated to assist us in thwarting terrorism and financial 
crime than vice versa.
    It is detrimental to those partnerships when we have to 
tell our international law enforcement friends that we can't 
assist them in taking down U.S.-incorporated terrorist 
enterprises because information about the owners of the 
entities formed in our own States is beyond our reach.
    A simple requirement to identify beneficial owners on State 
incorporation forms would vastly improve the capacity of 
American law enforcement to attack terrorism finance and 
disrupt terror plots.
    Thank you for the opportunity to testify today.
    [The prepared statement of District Attorney Vance can be 
found on page 81 of the appendix.]
    Chairman Fitzpatrick. Mr. Poncy, you are now recognized for 
5 minutes.

 STATEMENT OF CHIP PONCY, SENIOR ADVISOR, CENTER ON SANCTIONS 
     AND ILLICIT FINANCE AT THE FOUNDATION FOR DEFENSE OF 
 DEMOCRACIES, AND FOUNDING PARTNER, FINANCIAL INTEGRITY NETWORK

    Mr. Poncy. Chairman Fitzpatrick, Vice Chairman Pittenger, 
Ranking Member Lynch, and other distinguished members of the 
task force, I am honored by your invitation to testify today, 
particularly with such a distinguished panel.
    There are important steps that this task force can take to 
strengthen the security of our financial system, the integrity 
of our economic markets, and our national and collective 
security.
    Such steps will help combat terrorism, transnational 
organized crime, WMD proliferation, and corrupt elites by 
denying these and other national security threats access to the 
financial services they require.
    These steps will also strengthen our ability to identify, 
pursue, and disrupt illicit financing networks that fuel and 
enable these threats. These steps must focus on addressing 
systemic challenges to our financial integrity. Such challenges 
stem largely from weaknesses in implementing global anti-money-
laundering and counter-terrorist financing standards, standards 
that U.S. leadership has helped create through the Financial 
Action Task Force, or FATF.
    These global standards direct countries to implement 
comprehensive anti-money-laundering, counter-terrorist 
financing regimes that deliver financial transparency and 
financial accountability.
    Financial transparency allows us to track and trace illicit 
financing across an increasingly globalized financial system. 
Financial accountability ensures that our financial 
institutions implement the systems and controls required to 
deliver financial transparency.
    Financial accountability also ensures the aggressive 
pursuit, disruption, and deterrence of illicit financing 
activity, actors, and assets that infiltrate our system.
    In an increasingly globalized financial system, economy and 
threat environment, we must pursue a global approach to 
achieving these objectives. Such an approach must build upon 
our success in leading the global implementation of the 
international framework for anti-money laundering and combating 
the financing of terrorism (AML/CFT) regimes that deliver 
financial transparency and accountability.
    This requires legislation and rulemaking to close key gaps 
in implementing a number of FATF global standards essential to 
achieving financial transparency here at home.
    It also requires continued aggressive enforcement and a 
strengthened partnership with the financial sector to 
facilitate compliance with financial transparency requirements. 
And it requires additional resources to expand targeting of 
illicit financing networks.
    This committee can strengthen U.S. leadership in overcoming 
these challenges by taking the following 10 steps that will 
significantly enhance financial transparency and 
accountability.
    One, adopt legislation expanding the purposes of the Bank 
Secrecy Act (BSA) to explicitly include protecting the 
integrity of the financial system. Such legislation is required 
to underscore the importance of partnership with the financial 
institutions that comprise our financial system.
    Two, adopt legislation to require the disclosure and 
maintenance of meaningful beneficial ownership information in 
our company formation processes. Such legislation is required 
to address the chronic abuse of legal entities that mask the 
identities and illicit financing activities of the full scope 
of criminal and illicit financing activities in actors.
    Three, collaborate with the Treasury Department to consider 
legislation that strengthens the information-sharing provisions 
of Section 314 of the USA Patriot Act. Such action may assist 
in addressing systemic challenges to financial integrity posed 
by information-sharing constraints.
    Four, support the issuance of Treasury's proposed rule on 
customer due diligence, consistent with that of standards. Such 
action is required to address the systemic challenges posed by 
CDD practices that fall below global standards here in the 
United States and particularly with respect to beneficial 
ownership.
    Five, support Treasury's consideration to extend AML/CFT 
preventive measures to investment advisers and financial 
intermediaries and real estate transactions, consistent again 
with global standards.
    This action is required to help address the systemic 
challenges created by gaps in our financial system that are not 
covered by AML/CFT regulation. This includes a blind spot with 
respect to more than $66 trillion of assets under management, 
held by investment advisers that currently sit outside the 
scope of AML/CFT regulation in our markets.
    Six, support Treasury's consideration of lowering the 
record-keeping and travel-rule thresholds, consistent with that 
of standards.
    Seven, provide protective resources for Treasury to enhance 
examination and supervision of BSA-covered industries that lack 
a Federal functional regulator.
    Eight, provide protective resources for the IRS and 
Department of Justice to enhance financial investigations of 
illicit financing networks. Such action is needed to strengthen 
the systemic pursuit of illicit financing networks of the 
criminal investigative and prosecutorial authorities that are 
the best suited and the best trained to support this mission.
    Nine, provide protective resources for Treasury to enhance 
targeting of primary money-laundering concerns under Section 
311 of the Patriot Act and targeting of illicit financing 
networks under national security authorities. Such action is 
needed to give the Treasury the resources it requires to 
continue applying targeted financial measures that effectively 
disrupt a growing range of criminal and national security 
threats.
    And ten, provide protective resources for Treasury to 
develop foreign capacity in critical financial centers to 
support the effective implementation of targeted financial 
measures.
    These 10 steps outline the foundation for an action plan 
that this committee can move forward with to strengthen our 
financial integrity and the effectiveness of our counter-
illicit-financing mission.
    Once again, I am honored to testify here today in support 
of those who, across our government and financial services 
industries, fight every day to protect our financial integrity. 
They are literally the best in the world in advancing this 
mission and their continued success will require your ongoing 
support. Thank you.
    [The prepared statement of Mr. Poncy can be found on page 
60 of the appendix.]
    Chairman Fitzpatrick. Thank you.
    Mr. Carlson, you are now recognized for 5 minutes.

    STATEMENT OF JOHN W. CARLSON, CHIEF OF STAFF, FINANCIAL 
   SERVICES INFORMATION SHARING AND ANALYSIS CENTER (FS-ISAC)

    Mr. Carlson. Great. Thank you very much, Mr. Chairman.
    My name is John Carlson, and I am the chief of staff of the 
Financial Services Information Sharing and Analysis Center (FS-
ISAC). FS-ISAC is a not-for-profit formed in 1999 in response 
to Presidential Decision Directive 63 of 1998.
    My written statement includes some details on our 16-year 
history, our 6,000 member organizations, what we do, and how we 
engage with the United States and others around the globe.
    Briefly, we play a critical role in sharing cyber and 
physical threat information, conducting coordinated contingency 
planning exercises, managing rapid response communications for 
both cyber and physical events, such as Hurricane Sandy of 
2012, and fostering collaborations with other key sectors and 
government agencies.
    Thank you for inviting me to testify today at this hearing 
on evaluating the security of the U.S. financial sector.
    The current security threat environment continues to evolve 
and intensify. It affects all institutions regardless of size 
and type. Increasingly other sectors such as retailers and 
health care providers and, yes, even our own Federal 
Government, face these same threats.
    We see malicious cyber actors with increasing 
sophistication and growing persistence. These actors vary 
considerably in terms of motivation and capability. They range 
from nation states conducting espionage and sponsoring what we 
call distributed denial of service (DDOS) attacks, advanced 
cyber criminals who seek to steal money, terrorists looking to 
finance their activities, and hacktivists intent on making 
political statements.
    There are numerous tactics that malicious cyber actors use 
to target financial institutions. Among these, the following 
are concerning: targeted spear phishing campaigns; ransom-ware 
attacks; distributed denial of service attacks; a new one, 
business email compromise leading to fraudulent wire transfers; 
supply chain risks; a blending of physical and cyberattacks 
like we have seen in some of the attacks going after ATM 
networks; and of course, insider threats which oftentimes yield 
the most damaging results.
    The quote often attributed to Willy Sutton that he robbed 
banks because that is where the money is, reminds us why 
financial institutions are often the subject of cyberattacks. 
However, that quaint quote does not capture the entirety of the 
situation we face today.
    We are also observing that financial institutions are being 
targeted in response to international conflicts. Perhaps the 
best visible example of this was the DDOS attack several years 
ago when an organization backed by a foreign country targeted 
dozens of financial institutions over many months.
    The persistent, organized attacks were very disruptive. The 
only silver lining is that they resulted in unprecedented 
levels of information sharing among financial institutions and 
with the U.S. Government.
    For example, the information shared by firms that were 
attacked during the first wave benefited firms targeted during 
the second, third, and fourth waves. They also resulted in 
elevating cyber to a CEO-level issue, where it remains today.
    The financial sector is increasingly concerned with the 
potential for attacks that could undermine the integrity of the 
financial system through data manipulation and destruction.
    In response, my organization, working with others, has 
launched a task force with over 80 representatives from firms 
and government agencies to develop best practices on how to 
mitigate and respond to potential destructive malware attacks.
    These are serious concerns and we are addressing them in a 
serious manner. We are investing in the future and fostering 
collaborations to better match the threat environment.
    For example, last year we launched with the Depository 
Trust and Clearing Corporation, Soltra Edge, a game-changing 
new service that automates cyber threat information sharing. 
Soltra Edge leverages two open standards: the Structure Threat 
Information eXpression, or STIX; and the Trusted Automated 
eXchange and Indicator Information, also called TAXII, that the 
Department of Homeland Security funded and the MITRE 
Corporation developed.
    I certainly don't want to leave you with the impression 
that the financial sector needs more regulation to address the 
cyber challenge. In my written statement, I explain the extent 
to which the financial sector is regulated based in part on the 
Gramm-Leach-Bliley Act of 1999, as well as extensive 
supervisory guidance that regulators have issued over the past 
15 years.
    I also explain how our sector's strong risk management 
culture and our leadership in collaborating with other sectors 
and government agencies is critical to our success in repelling 
these attacks.
    Let me conclude by saying that the information-sharing 
practices that our sector uses today are working well to the 
point that other sectors are looking to us for guidance and 
best practices. However, much more needs to be done given the 
increasing risks our sector and country faces.
    I outline in my written statement some recommendations for 
actions for the Congress and the Administration that could 
supplement these efforts. In short, the Congress can play a 
constructive role by enacting cyber-threat information-sharing 
legislation, which I know the House has passed, and it is 
awaiting action in the Senate; encouraging financial regulators 
to harmonize regulatory requirements; and supporting other 
efforts by the Administration to enhance information sharing 
and cyber protections.
    Thank you for the opportunity to testify.
    [The prepared statement of Mr. Carlson can be found on page 
40 of the appendix.]
    Chairman Fitzpatrick. We thank the panel of expert 
witnesses for your opening statements here to the task force.
    At this point, each of the Members will be recognized for 5 
minutes for the purpose of asking questions.
    I now recognize myself for questions.
    Mr. Poncy, in your testimony you mentioned actions, and you 
have mentioned this in the past as well, actions that could be 
taken by the United States to meet the FATF global standards, 
customer due diligence rule, you have mentioned lowering the 
travel record-keeping threshold from $3,000 to $1,000. What are 
the obstacles the United States Treasury Department is 
encountering which are prohibiting adoption of some of these 
rules at this point? Is it lack of resources? Is it political 
will? What do you believe it is?
    Mr. Poncy. Thank you, Congressman. Two great questions, and 
I think the answer is a combination of a lack of understanding 
of the importance of those rulemakings to protecting our 
financial integrity, and a stretch of resources that are 
required to advance our counter-illicit-financing mission.
    The Treasury Department, the investment of the Treasury 
Department to manage the security of the financial system is a 
fraction of the investment that is made across our national 
security infrastructure. That is no secret. Main Treasury is 
very small. It operates like a professional firm.
    It also has responsibility to manage the integrity of not 
just the U.S. financial system, but in today's globalized 
economy, pretty much the global financial system. The people at 
the Treasury Department work harder than any of the folks that 
I have worked with throughout my career.
    To ask them to continue the expansion of this mission, due 
to its success, what started as a counterterrorism financing 
campaign built on the back of AML systems and has now expanded 
to include threats against transnational organized crime, WMD 
proliferation, grand-scale corruption, cyber crime, is being 
done with the same group of people who were working 24-hour 
shifts to combat terrorism financing after 9/11. They need more 
resources. It is just that simple.
    But in addition to that, they need support, not only of the 
Congress, but of the general public. The American Bankers 
Association and the American Bar Association have been visibly 
absent from supporting Treasury's role in customer due 
diligence. This is evident in the comments with respect to the 
rulemakings that Treasury has proposed.
    Some of the concerns they have raised are important 
concerns. Treasury has engaged in historic outreach on these 
rulemakings. In the 40-year history of the BSA, the Treasury 
Department had never conducted a cross-country campaign in New 
York, Washington, Miami, Chicago, or L.A. with banks, with 
broker dealers, with insurance companies, with futures 
commissions merchants, with money service businesses, to 
understand the challenges of implementing customer due 
diligence and to get it right.
    I would submit that the proposed rule that Treasury issued 
last July gets it right. Getting that rule from a proposed rule 
to a final rule requires more visibility and more support from 
the Congress and from the general public. Thank you.
    Chairman Fitzpatrick. Mr. Vance, you have been one of the 
Nation's leaders ringing the bell on the whole issue of 
beneficial ownership. You are doing it as a law enforcement 
professional working with mainly State, city, county, and other 
law, and there is some intersection with Federal agencies.
    Recently, the Treasury issued a notice of rulemaking on 
this subject of beneficial ownership. I was wondering if you 
were familiar with that notice and if you have any comments on 
that?
    Mr. Vance. In all honesty, Congressman, I am not familiar 
with it in detail, so I don't want to mislead you before I 
answer the question.
    Chairman Fitzpatrick. What it would do, is ease compliance 
burdens compared with the advanced notice of proposed 
rulemaking which would have forced institutions to verify that 
beneficial owners listed by an account holder were actually the 
entity's beneficial owner.
    Mr. Vance. Congressman, our issue is our ability to access 
that information for State prosecutors. So if we have to go to 
the IRS, for example, to get that information, current law does 
not permit us to just go to the IRS and obtain information that 
we can then use to investigate.
    So I think that is a step, but my preference, as I indicate 
in my testimony, is that there be a 50-State solution to this 
whereby beneficial ownership is required upon incorporation and 
that will give prosecutors like myself equal and direct access 
through grand jury subpoenas to information that is vital for 
us to protect our communities.
    Chairman Fitzpatrick. I am going to ask each of you, if you 
can make one suggestion on the issue of information sharing, we 
will start with Mr. Carlson, a suggested amendment or change to 
Section 314 of the USA Patriot Act, what would it be?
    Mr. Carlson. I don't know the specifics on Section 314, but 
I think in general we are looking for protections to share 
information so you are not held liable for sharing that 
information, as well as protections from disclosure, such as 
the Freedom of Information Act, if you are sharing information 
with the government.
    I think within the financial sector, we actually have 
developed a mechanism to share that kind of information, but we 
need further protections in order to encourage others to start 
sharing and to give them some legal cover in case they do share 
and that information gets released.
    Chairman Fitzpatrick. Mr. Poncy, could you quickly suggest 
a recommendation?
    Mr. Poncy. Thank you, Congressman. There are two elements 
of Section 314 that bear re-examination. One is that 316B 
allows financial institutions to share information related to 
combating financial crime and achieving safe harbor from 
different types of liability associated with information 
sharing.
    But the type of information sharing that is anticipated 
under 314 is not necessarily the most expansive imaginable. 
What we want, what we need is to have our best compliance teams 
sitting in our global banks working with one another to map 
illicit financing networks.
    We know a lot of people who do this. They used to do this 
at the Treasury Department. They used to do this at the FBI. 
They used to do this in the Manhattan DA's office. And they are 
some of the best investigators in this we have. They cannot sit 
down with one another with their customer data and link this up 
to figure out where illicit networks are penetrating our 
institutions.
    So one is the kind of information sharing that we are 
talking about.
    And two is what is a permissive allowance perhaps should be 
a requirement.
    So those would be two suggestions to start.
    Chairman Fitzpatrick. Thank you.
    My time has expired.
    I would like to recognize the ranking member of the full 
Financial Services Committee, Ms. Waters of California.
    Ms. Waters. Thank you very much.
    I would like to address this question to Mr. Cyrus Vance.
    The Patriot Act allowed FinCEN to temporarily exempt 
certain categories of entities and institutions from having to 
establish a basic anti-money-laundering program that entails 
developing internal policies, procedures, and controls, 
designating a compliance officer, providing for ongoing 
employee training, and an independent audit function to test 
programs.
    Today, nearly 14 years after the Patriot Act was passed, 
there are a number of categories of institutions that remain 
exempt from these basic requirements. The list of exempted 
entities includes pawn brokers, travel agencies, sellers of 
vehicles, including automobiles, airplanes and boats, persons 
involved in real estate closings and settlements, private 
bankers, commodity pool operators, commodity trading and 
advisers, and investment companies.
    Do you believe it is time for Treasury to revisit whether 
the exemptions for the entities I just listed continue to be 
appropriate?
    Mr. Vance. I do, Congresswoman. I think you answered your 
question by asking it. We have 5 years--much more experience 
now as a result of the Patriot Act and I think some of the 
categories of industry that you talk about are now ones that 
should be looked at in order to consider whether they should be 
included.
    Ms. Waters. Thank you very much.
    Let me go to Mr. Poncy.
    I understand that you were at Treasury, is that right?
    Mr. Poncy. That is right, ma'am.
    Ms. Waters. And so the question that I just asked, could 
you please give us your take on that?
    Mr. Poncy. Thank you very much. And I am always happy to 
have the Manhattan district attorney take the words out of my 
mouth. I couldn't agree more.
    I certainly think it is time to re-examine it, but it is 
important how we do it.
    The limited resources we have over our regulatory system 
are such that even for sectors that we have nominally 
regulated, we cannot ensure their integrity.
    So we have at the moment BSA regulation requirements over 
high-priced commodity merchants and dealers. There is no 
Federal regulator over that. It is the same for money service 
businesses and insurance companies.
    One of the recommendations that I have in my testimony is 
that we invest targeted resources to strengthen oversight of 
sectors that are already covered so that they actually 
understand and implement the obligations that are already on 
the books.
    The second recommendation that I have in my testimony is to 
do exactly what you suggested, to examine the coverage of the 
financial system with existing requirements.
    In particular, the investment adviser sector is one that 
controls $66 trillion of assets under management, that is 
``trillion,'' with a ``t.'' That is 5 times our GDP. That 
sector does not have any AML/CFT obligations right now, so I 
would start there.
    And then I have also recommended taking a look at financial 
intermediaries involved in real estate closings. All of us have 
seen the exposes in New York and Miami and elsewhere about 
high-luxury properties going to offshore interests often on the 
back of corrupt proceeds. If we want to stop those activities, 
then I suggest that we start with those two sectors in 
particular.
    And I know the Treasury Department is strongly considering 
that. Again, it is a question of resources and a question of 
public visibility. So, support to the Treasury Department for 
what is already an effort to try to get ahead of this might 
help the Administration get over the fence.
    Ms. Waters. In your testimony, you also stated that the 
long string of U.S. enforcement actions against global banks 
and other financial institutions in recent years underscores 
the U.S. commitment to global anti-money-laundering and 
counterterrorism financing regime and financial integrity.
    And then you say it also raises questions about the state 
of industry compliance and the cultural commitment to 
compliance on critical national security matters across the 
banking sector.
    I want to tell you that I was very surprised. We spent 
quite a bit of time on HSBC Bank. And of course, there was a 
big fine against them. But when we began to delve deeply into 
how they manage their controls, and we had staff go up to HSBC 
and get the regular tour and all that, we had a whistleblower, 
we were surprised at what we consider was a lack of really 
tough controls that were absolutely managed and overseen by 
those at the very highest levels.
    So what about that? And why do you think we have such a 
commitment if we have these banks that are still involved with 
money laundering and they get a slap on the wrist with some 
fines?
    Mr. Poncy. That is such a fantastic question. I would spend 
the whole hearing on that if I could. It is an incredibly 
important one. I will try to be brief, starting with what we 
know.
    One, the United States enforcement community is stronger 
than any community in the world by a long shot. Many of the 
banks, including HSBC, are foreign banks that operate within 
the United States.
    Our law enforcement combined with our supervisors is 
frankly the only enforcement game in town, and this is in a 
global financial system that we are connected to. So let's 
start with the recognition that despite the challenges that we 
face, we are operating in a global environment in which we are 
already putting tremendous pressure on institutions that 
operate here versus offshore. And we are competing with those 
same institutions.
    Second, our law enforcement efforts have substantially 
changed the efforts of financial institutions that are 
operating in the United States. So when you look at these 
monitor shifts and you look at these injunctive actions and 
enforcement actions that the Manhattan district attorneys 
office, that the Southern District of New York, Eastern 
District of New York and others have taken, there is no doubt 
in my mind, I have been in these banks, that they are a 
different place than they were 5 years ago. And that is 
entirely owing to our enforcement commitment.
    The question you raised, though, is important, and this is 
in my testimony. It is not clear whether the current 
enforcement environment that is so essential is going to be 
enough to change a global challenge of compliance, a culture of 
compliance that is questionable across not just the global 
banking industry, the global banking industry, these are our 
best, right? These are the ones who can block and tackle.
    What about the non-banks? What about capital markets? What 
about money service businesses?
    So it is just the beginning of the answer to your question, 
but it deserves more time.
    Chairman Fitzpatrick. Thank you, Mr. Poncy.
    The gentlelady's time has expired.
    Mr. Pittenger, you are recognized for 5 minutes.
    Mr. Pittenger. Thank you, Mr. Chairman.
    Mr. Poncy, in my discussions with the officials at FATF, I 
have raised the concerns about the compliance of the other 34 
member countries with the 40 recommendations. And they come 
back to me and say the question asked by so many of these 
countries is the U.S. compliance, particularly as it relates to 
the beneficial ownership.
    Would you speak to the importance of our compliance and how 
this affects our other member countries in causing them to be 
in greater compliance?
    Mr. Poncy. Thank you, Congressman. That is a great 
question. The strength of our financial system, the integrity 
of it, rests upon our leadership globally. And the work that we 
have done in FATF and the credibility that we have achieved 
through our work at FATF and the work that we do back here at 
home is second to none.
    But people are always looking at the United States 
naturally as a position of leadership and of vulnerability in 
an economy that we dominate as to how is the United States 
doing and is the United States practicing what it is preaching.
    And when it comes to beneficial ownership, we have work to 
do.
    I want to go back to, and this answers your question, 
Congressman Pittenger, some of what Congressman Fitzpatrick was 
asking about, customer due diligence versus what the Manhattan 
district attorney Cyrus Vance has mentioned about company 
formation reform. These are two ends that are both essential to 
achieve transparency on beneficial ownership.
    They do it in different ways and they are not mutually 
exclusive; in fact, they are both absolutely necessary to 
comply with FATF and to achieve financial transparency.
    On the one hand, anybody who wants access to financial 
services should be somebody that we know who they are. That is 
what customer due diligence is supposed to do. We need the 
Treasury rule out to meet FATF standards and have confidence 
that our banks and our financial institutions understand the 
people they do business with. That is one element.
    The other element that the FATF is concerned with, with the 
United States, concerns company formation, which Mr. Vance has 
discussed. And to achieve compliance with that requirement 
requires us to reform company formation processes.
    I know Mr. Vance's testimony and mine both recommend 
legislation to fix this. It will require legislation, and there 
are a number of ways to do it. But the point is that there are 
now solutions on the table that require action.
    If we achieve compliance with beneficial ownership 
requirements, both with respect to customer due diligence and 
company formation, we will have addressed the overwhelming 
concern from FATF with U.S. compliance. And at that point, that 
strengthens our hand to continue to demand that other countries 
step forward on other matters.
    Mr. Pittenger. That is really the point I wanted to make. 
You emphasized the impact it has on our ability to lead and 
cause accountability from our other member countries.
    Mr. Poncy. Exactly.
    Mr. Pittenger. Mr. Carlson, you referenced business email 
compromise. Have you seen evidence of the hacking of CFOs to 
exploit their system with wire transfers? Do you see this as a 
concern and possibility that terrorist organizations would 
deploy this type of method for financing their own operations?
    Mr. Carlson. I don't know to what extent it involves 
terrorist organizations, but we did issue last Friday a joint 
advisery with the FBI and the Secret Service on this new type 
of wire fraud, to try to alert the community that this is going 
on and to also provide some tips on how they can prevent it.
    So we are seeing this where oftentimes a CEO or CFO is 
going on vacation, someone will get access to their email 
accounts, divert the email account, and then instruct the staff 
to transact a wire transfer. And it does require going through 
and developing some stronger controls around validating the 
request and confirming the request, particularly when you are 
talking about large dollar transactions and transfers that 
oftentimes are difficult to pull back or impossible to pull 
back, particularly if they are going overseas.
    So we are seeing some evidence of that, but we are trying 
to be proactive and working in partnership with law enforcement 
to raise awareness and to provide guidance.
    Mr. Pittenger. Thank you.
    Mr. Vance, regarding cyber, do we have the proper and 
necessary authorities in place to be able to bring justice to 
those who are involved in the cyber war? And are those 
mechanisms in place to close out this behavior?
    And if so, would Section 311 be a proper a method to use in 
that regard?
    Mr. Vance. Congressman, I first would say that it is the 
Federal Government that to date has been responding to foreign 
attacks on American institutions and companies. And so, I 
cannot speak for the Federal Government.
    And quite honestly, Section 311 is not something that I am 
familiar with, and I don't want to answer a question that--
    Mr. Pittenger. I'm sorry. Maybe I should direct it to Mr. 
Poncy.
    Chairman Fitzpatrick. The gentleman's time has expired.
    Mr. Pittenger. Thank you.
    Chairman Fitzpatrick. So we will move to the ranking member 
of the task force, Mr. Lynch, for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    Thank you all for your testimony. You have been very 
helpful.
    Mr. Vance, the centrality of New York and Manhattan as a 
global financial center gives us some leverage and some ability 
to impact money flows to some of these terrorist organizations. 
So it gives us a little bit of leverage as well as the fact 
that the major reserve currency is the American dollar, the 
U.S. dollar.
    So we are having negotiations right now with Iran, ongoing, 
about reducing the sanctions, and the negotiations have really 
centered around the nuclear development within Iran. And the 
sanctions seem to be being weighed as a consequence of 
eliminating the possibility of developing a nuclear weapon in 
Iran.
    However, in practice, through Section 311 with the special 
measures there and 314, we have been able to use the legitimate 
banking system as a way to sanction Iran for funding terrorist 
activity. It is a totally different direction that they go in.
    Actually, back in the day, I don't know if they still do 
it, Iran used to carry a line item in their budget for 
Hezbollah and Hamas, a direct line item for funding those 
terrorist organizations. I am not sure they still do that. I 
wouldn't be surprised.
    So we have this difficult, this Gordian knot that we are 
trying to untie here, the idea that the Administration has said 
we will lower sanctions against Iran if they agree to cease and 
desist from developing a nuclear weapon.
    However, the institutions that will benefit from the 
reduction in sanctions are the very same banks, Bank Melli and 
others and their central bank, that have been guilty of 
financing not only Hezbollah and Hamas, but also Al-Shabaab and 
Boko Haram and other groups throughout the Middle East, the 
Taliban more recently.
    Is there a way--this is a tough question and you can all 
have a crack at it--to make that framework operate the way we 
wish? In other words, even though the Administration might say, 
okay, they have done away with their nuclear program and we 
feel we have verified that, I think there are a lot of banks 
out there that are going to keep those sanctions in place 
because they don't want to be tainted with the fact that they 
are now financing some of these terrorist organizations.
    It is a dilemma that we are facing here. And while I would 
like to eliminate the nuclear threat, certainly there are a 
whole lot of other things in play here that I am not so 
comfortable with.
    Please.
    Mr. Vance. Congressman, I would just say from my perch in 
Manhattan having done now eight of these cases involving 
foreign banks and terror funding and interruption of that 
financing, that much more than simply the dollar fines that 
have been taken as a result of the misconduct, but it has 
changed, I believe, significantly the attitude in foreign 
banking toward dealing with the American banking system, State 
and Federal.
    So I think it has been, from my perspective, it has 
achieved what we wanted to achieve, which is honest banking as 
well as not having rogue regimes and countries being able to 
move money around the world, let alone through New York.
    I have seen--even though I am a State and not a Federal 
person, and even though I am not an expert on foreign policy, I 
can draw a direct connection between the positions that we have 
taken in enforcement and the impact on a country like Iran 
which is a present and real danger, not just for the region, 
but for our country.
    Mr. Lynch. Mr. Poncy?
    Mr. Poncy. Congressman, thank you. This is a hugely 
important question that is being debated now on the front pages 
for good reason.
    There are three points I would make.
    First, obviously if the Administration can secure a deal in 
which we eliminate the threat of nuclear proliferation from our 
greatest proliferation threat, Iran, that is something we 
should all support. The way that is done has to be very 
carefully crafted in a way that ensures that we have 
verification of the commitments that Iran can make, that Iran 
makes in that deal. And that is within the province of the 
Administration. And obviously, I wish them success in that.
    But second, assuming that deal goes through and that it is 
verifiable, there is the question of how you unwind sanctions 
that have been imposed for a variety of derogatory behaviors, 
to your point.
    And it will require very careful consideration not just by 
the Administration, but by banks to think about, what was the 
basis for the sanctions on Iran in the first place?
    Long before proliferation, there was terrorism, to your 
point. They are still a state sponsor of terror. They are 
subjected to more terrorism financing and counter-terrorist 
financing controls than any other country around the world.
    They are also subjected to intensive and preventive 
measures associated with money laundering and corruption.
    These activities and human rights abuses and other bases 
for sanctions continue, regardless of whether or not there is 
an agreement on nuclear proliferation. That has to be a 
consideration in how sanctions are unwound.
    And lastly, the AML obligations will continue to exist, 
even in the absence of sanctions, through which financial 
institutions should take very good care in how they deal with 
any Iranian financial institutions.
    Chairman Fitzpatrick. Mr. Carlson, can you respond quickly?
    Mr. Carlson. I am not an expert on the AML rules. I do know 
that when we have these conflicts with countries like Iran, 
they do show up in my domain in terms of cyberattacks and 
responding to those issues.
    So we are interconnected. Obviously, the financial services 
industry implements the rules that you put in place and that 
the Treasury Department puts in place.
    I will say there is a growing concern within the industry 
around the compliance burden of a lot of these AML anti-
terrorism laws. We at the same time are encouraging the 
Administration to do more, to create more of a deterrence 
against cyberattacks. And we know there is an Executive Order 
that was issued in April that basically leverages the AML and 
sanctions rule in order to do that.
    We generally support it, but we have some concerns about 
the implementation and the additional burden it puts on the 
industry.
    Mr. Lynch. Thank you.
    Chairman Fitzpatrick. I now recognize the gentleman from 
New York, Mr. King, for 5 minutes.
    Mr. King. Thank you, Mr. Chairman.
    District Attorney Vance, actually all the members of the 
panel, but District Attorney, you supported in the last 
Congress the Incorporation Transparency and Law Enforcement 
Assistance Act which was introduced by Congresswoman Maloney. 
And I was a cosponsor. I believe Chairman Fitzpatrick was a 
cosponsor, and the ranking member of the full committee, Ms. 
Waters, was a cosponsor.
    Basically, that would just require companies with fewer 
than 20 employees and/or less than $5 million in revenue to 
file information with Treasury disclosing beneficial ownership. 
And this is intended for the purpose of cracking down on shell 
companies.
    Now, that and also the FinCEN rule have been opposed by the 
American Bankers Association. And I know Congresswoman 
Maloney's legislation, which I supported then and support now, 
has been looked upon as too much of a regulatory burden.
    Can you address that and how much of a burden this is and 
how this would compare with other requirements that are imposed 
on the banking community?
    Mr. Vance. Let's just start, Congressman, with the issue of 
currency transaction reports. As in most cases, when there is a 
regulation that is going to be applied to an industry, industry 
usually, many industries, cry that the world is going to end 
and that it is going to be too expensive and it is going to 
drive businesses out of business or away from America.
    We have learned how to live with currency transaction 
reports and it has been a powerful investigative tool in 
ordinary crime as well as terrorism.
    Now, I understand that at least under one bill as drafted 
there would be an interim period where these rules would be 
applied to the States. There would be funding for the States in 
order to cover the costs of making this transition.
    And so from my perspective, that all seems reasonable and 
appropriate and that the additional burden placed on a 
corporation by checking off one box and filling out a couple of 
names seems a small price to pay when the benefit is law 
enforcement, where necessary, being able to investigate and 
prosecute crimes that are impacting not just our government, 
but our citizens, and many of those investigations relate to 
terrorism.
    There are also--I understand people oppose it, but I also 
know that at least with regard to the Senate bill, there were 
many who supported it, including the Main Street Alliance, the 
American Sustainable Business Council, the National Money 
Transmitters Association, and on and on. There were many folks, 
including all of law enforcement, who supported that bill. So 
there is support and opposition, but I think the support is 
powerful.
    Mr. King. I know that the Federal Law Enforcement Officers 
Association, FLEOA, Fraternal Order of Police strongly 
supported it.
    Mr. Poncy, can you comment on that?
    Mr. Poncy. Thank you, Congressman.
    I would just say that this happens often, but the proposed 
legislation that you are referring to was, in my view, terrific 
and would have gone a long way toward addressing the abuse of 
legal entities that we have seen and that Mr. Vance has 
outlined so eloquently.
    The challenge in part is that you have two ways to get this 
beneficial ownership information, right? One is through company 
formation reform. And there are a lot of ways to do that, 
including the proposed legislation that you have cosponsored in 
the past.
    Another is through requiring banks to obtain beneficial 
ownership information when customers seek access to the 
financial system.
    Both of these requirements are necessary. These are not 
either/or.
    So for example with the banks, the banks frankly on company 
formation, company formation reform is the bank's friend 
because there is no burden to the banks on that. That is a 
burden on States, on incorporation processes that will deliver 
the information that Mr. Vance is describing and should help 
banks because at that point there is more information for banks 
to then obtain from their customers.
    Curiously, the banking industry has been somewhat absent 
from supporting the bill, but they don't directly oppose it 
because it is not their burden. It will ultimately accrue to 
their benefit.
    And part of the reason why they may not be supportive is 
because if that goes through it will be easier for Treasury to 
get its rule out that requires banks to get that information 
when it is available, right?
    So the two of these are related, but they are distinct and 
they are both essential. So I would simply recommend, and I 
have this in my testimony, that both ends of this become a 
priority to this committee.
    One, let's table and adopt meaningful legislation to obtain 
beneficial ownership information that can be available to law 
enforcement in the company formation process.
    There are a couple of different ways to do that. You are 
familiar with them. That needs to move forward. There is some 
burden associated with it, but it is nowhere near the benefit 
that reform would achieve not just for law enforcement, but 
frankly for our financial institutions that we are now hitting 
with enforcement action after enforcement action to manage 
risk.
    And the second piece is to get Treasury to move on the 
customer due diligence rule with the support that it needs so 
that we require banks to obtain that information.
    With those two elements in place, we comply with FATF 
standards, we increase our credibility globally, we manage risk 
to the financial system and we give law enforcement what it 
needs to pursue illicit financing networks.
    Chairman Fitzpatrick. The gentleman's time has expired.
    Mr. King. Thank you, Mr. Chairman.
    Chairman Fitzpatrick. We now recognize the gentleman from 
California, Mr. Sherman, for 5 minutes.
    Mr. Sherman. This task force is focusing on terrorist 
financing that includes not only the non-state actors, but 
Syria, Iran, and certain other governments.
    I would hope, Mr. Chairman, that we would get 
Administration witnesses here that can focus particularly on 
Iran, whether the 24 Iranian banks that have been sanctioned 
will continue to be sanctioned under this nuclear deal, whether 
the Iranian banks will continue to be denied access to the 
SWIFT system, and whether those banks found to be of money-
laundering concern not because of the Iranian nuclear program, 
but for other reasons, will continue to be listed.
    I would love to ask these witnesses, but asking them what 
the Administration will do may not be a good use of time.
    But Mr. Vance, you identified that an Iranian bank, a 
sanctioned Iranian bank, ended up being the beneficial owner of 
certain property in New York. Have you seized that property?
    Mr. Vance. Actually, the Federal Government did. The 
Southern District of New York, which came along later and 
proceeded on the Federal asset forfeiture, and that occurred--
    Mr. Sherman. If the Federal Government would stop objecting 
to the victims of Iranian terror suing the Iranian government, 
that could be used as a source to finance those victims.
    Enforcement in this area requires prosecution. One thing 
that is related is a number of Swiss and other foreign banks 
have been hit with multi-hundred-million-dollar, in some cases 
billion-dollar, fines for conspiring with very wealthy 
Americans to allow those Americans to have secret bank 
accounts. Those secret bank accounts were for tax evasion, not 
avoidance.
    So we get a chunk of money from the banks, we will get a 
chunk of money from the--I will call them taxpayers, but I 
guess I would call them non-taxpayers, these folks have also--
and of course, we aren't prosecuting any of them, so we are not 
going to really effectively deter this in the future.
    Those who cheat on their Federal taxes always do so on 
their State and City income tax returns as well.
    Are you getting the information about those who have 
deliberately defrauded your State and City? And are you 
prosecuting them?
    Mr. Vance. Congressman, the answer is, to date, no. But in 
terms of what our current investigative posture is going 
forward, I think I can just indicate that is something we are 
looking at.
    Mr. Sherman. The IRS has a policy of providing State tax 
collection agencies with information. And the too-big-to-jail 
should not apply to those who, on their Federal and usually 
State tax returns, check a box saying, I have no foreign bank 
accounts, and in fact have foreign bank accounts so significant 
that we get a billion-dollar fine from the bank just for 
hosting that account.
    Another area is we need the retailers to do a better job of 
holding onto the private information about credit cards. Does 
it make sense for us to impose liability on the retailer or to 
stick with the current system in which all the costs of these 
data breaches of credit card numbers are borne by the financial 
institutions?
    Does any witness have a comment on that?
    Mr. Carlson?
    Mr. Poncy. Thank you, Congressman. Again, a hugely 
important question.
    But in looking at the information sharing and liability 
issues, there is a tension, right? Because on the one hand, we 
want to make sure that institutions, whether retail or 
financial, that have sensitive personal information protect 
that information. That policy interest is well-established and 
obviously justifiable.
    At the same time, liability for sharing that information is 
exactly what prevents us from putting together the information 
that we need to connect the dots.
    Mr. Sherman. Yes, I am not saying that they should be 
liable for sharing the information with you. They should be 
liable for unintentionally sharing the information with 
criminal gangs based in Russia who are now selling my credit 
card information.
    I want to sneak in one more question with Mr. Vance. But he 
may want to answer this for the record.
    Perhaps you could give us a proposed statute requiring 
States to register beneficial ownership of closely held 
corporations keeping in mind that we may have to, for 
federalism reasons, exclude those corporations that have only 
beneficial owners within the borders of those States, but also 
letting us know whether this would really be useful or whether 
people would just form a Cayman Islands entity which would then 
be the sole and disclosed owner of the Delaware corporation.
    Chairman Fitzpatrick. If the gentleman could answer 
quickly, or make a proposal to the committee in writing, 
whichever you prefer.
    Mr. Vance. Very good, thank you.
    Chairman Fitzpatrick. Thank you.
    The Chair now recognizes the gentleman from Florida, Mr. 
Ross, for 5 minutes.
    Mr. Ross. Thank you, Mr. Chairman.
    Gentlemen, we know that Iran is a major exporter of 
terrorism and that their Islamic Revolutionary Guard has helped 
Hezbollah in training, not in cyber, but has helped in many 
ways.
    Is there any known threat or at least perceived threat that 
Iran is in the process of training for cyber terrorism 
purposes?
    Mr. Poncy. Congressman, I am not aware of any known, but it 
is clear as a state sponsor of terror, we, as you know, have 
grave concerns about the terrorism financing activity of Iran 
well beyond the nuclear proliferation concerns that are the 
subject of the deal.
    Mr. Ross. Correct. In fact, they have been described, 
Tehran has been described as being the central bank of 
terrorism. So is it more likely than not that we would expect 
that not only the United States, but even our allies may be 
subject to cyber terrorism that has been brought about through 
Iran?
    Mr. Vance. I would say that it is greatly within the realm 
of possibility.
    Mr. Ross. Speaking with regard to what Mr. Sherman was 
talking about in terms of beneficial ownership information, 
there is a Federal issue, there is a reason that people 
incorporate in Delaware and it has to do with the State 
jurisdiction that they have.
    The cumbersome way that we legislate here and the length 
that it takes, absent a crisis, we tend to just react at the 
time. And so, being able to promulgate legislation that would 
address the concerns in order to make sure that we have 
beneficial ownership information available for our law 
enforcement and others is monumental.
    Is there any effort being made through the States so that 
we preserve at least their ability to control the incorporation 
process, but then to require that they also have information 
pertaining to beneficial ownership interests?
    Mr. Vance. Congressman, I am not aware, with the exception 
of two or three States, that there has been any interest in 
this beneficial ownership question at all. And I think the 
trend is very much in the opposite direction.
    The reason we were so grateful that the Federal legislators 
were looking at this was because we believed that--
    Mr. Ross. I think it is absolutely important.
    And I think, Mr. Poncy, you raised some good points in your 
testimony that this at least gives us the ability, while all of 
the other countries require this, but we don't. And I think we 
have to look at our States for that.
    Also as an aside to that, the regulatory process, as much 
as I hate to see it used the way it has been used here for the 
last 6 years, might be the only avenue pursued in which we can 
require that this information be made available at least at the 
banking level. Wouldn't you agree?
    Mr. Poncy. Absent regulation, it won't happen.
    Mr. Ross. Right.
    Mr. Poncy, you have talked about our programs and AML and 
CTF and trying to get stronger, more enforcement because there 
is so much out there that we don't know.
    What can be done specifically with some of our allies and 
making sure that these programs are done globally?
    And specifically, if I could ask you to speak on our 
relationship with Turkey in regard to that.
    Mr. Poncy. There is no question that we have a global 
challenge outside the United States in understanding and 
implementing what we call broadly targeted financial measures. 
That includes conduct-based sanctions on terrorism, 
proliferation, state-based sanctions against Iran, the Russian 
regime, and others, and regime-based programs.
    Mr. Ross. But we are being somewhat undermined, are we not, 
by some of our allies with these programs?
    Mr. Poncy. The first point is that there is a global lack 
of capacity on this in general because of a lack of 
understanding that is owing to a lack of political will.
    Mr. Ross. Right.
    Mr. Poncy. The second point is that within that lack of 
capability, there are different levels of challenges. One level 
is associated with our best partners, the EU, and legal 
restrictions that any time that you see a significant 
designation the EU is challenged for violation of human rights. 
And those challenges are winning, they are winning more often 
than not.
    The viability of our sanctions programs and partners across 
the EU is in serious jeopardy. It has been for quite some time.
    You take away the dollar clearing leverage in the United 
States and our sanctions programs wouldn't exist outside the 
United States. So that is challenge number one.
    Challenge number two is in allies of ours that do not see 
politically sanctions the way that we see them. So the EU may 
see that politically, but is legally incapable of supporting 
it.
    A country like Turkey doesn't politically agree with a lot 
of our sanction programs.
    Mr. Ross. Correct.
    Mr. Poncy. And for those, those represent different 
vulnerabilities.
    Mr. Ross. And any suspension of sanctions for any reason is 
not going to lead to an opportunity to snap them back 
instantaneously because there is going to be a sense of 
dependency, a sense of investment of capital and resources that 
would prevent any snap back.
    I see my time has expired.
    Thank you.
    Chairman Fitzpatrick. The Chair now recognizes the 
gentleman from Minnesota, Mr. Ellison, for 5 minutes.
    Mr. Ellison. Yes, I want to thank the chairman and ranking 
member and also our panel and my colleagues who have asked a 
lot of great questions today, and so good that they took some 
of the questions I was going to ask. But I do have some.
    We have talked a lot about terrorism abroad, incredibly 
appropriate, but as the last few days have shown us, we have 
terrorism domestically, too.
    And I guess my question is, can you share with us what sort 
of focus has been done to address these organizations? We are 
about to bury nine people in these coming few days, and while 
it is not clear whether or not this particular incident was the 
result of an orchestrated group, there is indication that he 
relied on services from a group.
    And of course, we do know that in the case of several other 
attacks that they were affiliated. And these organizations do 
have money and resources and used them to do what they do.
    Not only do we think about the horrible events at Mother 
Emanuel, but there were three people killed at a Jewish 
community center and assisted living facility in Kansas City 
not too long ago, and six people were murdered in a Sikh temple 
in Wisconsin.
    The Southern Poverty Law Center publishes a hate map of 
internal hate groups that I think I have asked to be posted up 
there. And some of these groups may be inciting violent action 
as we saw in South Carolina.
    So my question to the panel is, how are financial 
institutions responding when some of these neo-Nazi groups, 
White nationalist groups, Klan groups, anti-government groups 
try to access the financial system? And do these financial 
institutions report such groups to regulatory agencies?
    Mr. Vance. Congressman, in New York City, in Manhattan, I 
have not experienced the problem you are talking about.
    But if I can answer the bigger, broader question briefly, 
the terrorism threat has evolved to what is currently today a 
real risk of homegrown violent extremists operating in our 
communities.
    What I think we can do is to make sure that there is the 
highest level of partnership between Federal investigators and, 
increasingly, local investigators.
    We are blessed to have a New York City Police Department 
that created competency in counterterrorism under Ray Kelly, 
that has continued under Commissioner Bratton. But the reality 
is that the Federal Government cannot do it all. It needs more 
hands and eyes and ears on street corners in every city in 
America.
    And our office has taken the challenge that we are going to 
find a way to support this counterterrorism mission by 
essentially developing leads, building cases independent of the 
Federal Government having to come up with those leads. And then 
the Federal Government can screen them and we can decide 
whether the case is a Federal case or a State case.
    But in the evolving threat, I believe that we need to see 
increased leadership from the Federal Government to bring into 
their anti-terrorism efforts the work not just of local police 
departments, but of prosecutors. Prosecutors around the country 
at the State level would be very happy to help in this regard. 
But many do not know where to begin.
    Mr. Ellison. Mr. Poncy, is this on our radar screen? We are 
very appropriately focused on some of these foreign terrorists 
and groups that even come here and commit acts of terror for 
various motivations. But some of these historic groups are 
still a problem. Are we tracking them financially?
    Mr. Poncy. Thank you, Congressman. First, let me just say 
that I, in the strongest possible terms, support everything Mr. 
Vance has said.
    I do think, when you look at historically what we have done 
since 9/11, the focus is clearly on foreign terrorist 
organizations. Our immediate focus after 9/11 was on what 
infiltration those organizations may have in our local 
communities. And so, we took immediate action, as you may 
recall, against a number of--
    Mr. Ellison. Mr. Poncy, Mr. Poncy, I definitely think what 
you are saying is incredibly important. But one part, in these 
last 9 seconds, is that we do think about the 9/11 and the 
aftermath and we are right to do so. But are we having a broad 
approach to all the terrorist threats and not just the Islamic 
ones? Although I want you to go after them, too, I also want 
you to go after these other groups. And are we doing that 
financially?
    Mr. Poncy. I think we are trying. The challenge is that our 
effort is aimed at organizational capacity, right? So rogue 
terrorists, the only way to stop that is through what Mr. Vance 
has said. And it doesn't mean that we shouldn't act and it 
doesn't mean financial institutions don't have a role.
    It is just to say that our ability to stop rogue terrorist 
acts, even inspired acts, as Mr. Vance has said, homegrown 
violent extremism of any stripe, really requires partnership at 
a local level. There is no substitute for that.
    Chairman Fitzpatrick. The gentleman's time has expired.
    The gentleman from Kentucky, Mr. Barr, is recognized for 5 
minutes.
    Mr. Barr. Thank you, Mr. Chairman.
    And Mr. Poncy, a question to you about the Society for 
Worldwide Interbank Financial Telecommunications or the SWIFT 
system, which as you know enables the transfer of trillions of 
dollars globally on an annual basis. It helps international 
transfers flow smoothly.
    As part of the U.S.-led sanctions against Iran, and 
pursuant to a law approved by the European Union in March of 
2012, the SWIFT system disconnected all Iranian banks targeted 
by the United States and our European allies. These banks were 
targeted for their role in enabling Tehran to avoid sanctions 
and engage in illicit activities such as transferring funds and 
materiel to their proxies, Hezbollah and the like.
    My understanding is, in the course of these negotiations 
with Iran, one of the very first concessions in terms of the 
sanctions relief that Iran is seeking is reconnecting Iranian 
banks to the SWIFT system.
    So my question is, do you think that SWIFT access is useful 
leverage in terms of imposing sanctions? And how significantly 
has the disconnection to the SWIFT system impacted the Iranian 
banking sector?
    Mr. Poncy. Great questions. And there can be no doubt that 
was a monumental movement in what was a series of movements in 
a campaign to intensify financial pressure on the Iranian 
regime. That was a signature moment and it required the full 
support of our European colleagues to take that action.
    What led to that support was ongoing concern over the 
proliferation of nuclear technology and the building of a 
missile development program and nuclear technology in Tehran.
    The challenge that we are now facing, in many respects, is 
aside from the negotiations that are happening, about which I 
have an opinion, but it is not an expert one by any view, but 
obviously we should all hope that we can achieve an outcome 
where proliferation is no longer a threat.
    If that happens, two things are going to happen. One is the 
ongoing concerns that Iran presents to us, the threats that 
have led to over 40 years of sanctions, including, for the most 
part, for activities above and beyond proliferation financing, 
there has been no discussion of that activity because that is 
not what is in the confines of the deal.
    It is within the confines of the risks that our financial 
institutions need to worry about. It is also within the 
confines of sanctions programs that we have on the books.
    It is not within the confines of the pressure that led to 
the de-SWIFT'ing, so to speak, of Iranian banks.
    So if I were to prognosticate, if a deal moves forward in 
which commitments from Iran are credible on nuclear 
proliferation, the SWIFT program will go back into place. That 
does not mean that our sanctions necessarily are pulled back on 
nonproliferation activity and it certainly doesn't mean that 
our financial institutions shouldn't be watching, managing, 
monitoring, and preventing illicit financing transactions 
associated with any engagement with Iranian financial 
institutions.
    Mr. Barr. Let me ask you this question. Would reconnecting 
Iranian banks to the SWIFT system, in your judgment, lead to 
significantly increased risk that financing would flow to 
Hezbollah, Hamas, some of these proxies that Iran has allied 
itself with?
    Mr. Poncy. Unless there are controls associated with how 
they are plugged back in, unless there are controls associated 
with how they engage with our financial institutions, I would 
continue to worry about those risks.
    Mr. Barr. Let me shift gears a little bit to the Obama 
Administration's announcement on a change to hostage policy. 
And while not directly related to the financial system, it 
could have an impact on the financial system in terms of family 
members now being allowed to negotiate with loved ones' captors 
and accessing the financial system in order to transmit ransom.
    At first glance, the policy would appear to raise 
incentives for terrorist organizations to take Americans 
hostage. And also, what impact would this potentially have on 
the financial system? Any opinions about the policy and the 
risks that it may pose?
    Mr. Poncy. Thank you, Congressman. I had a few moments with 
Congressman Pittenger on this. And this is the worst dilemma 
imaginable, right, where you have to decide whether or not you 
allow families whose loved ones are kidnapped, and frankly with 
the beheadings we have seen I think any of us would do whatever 
we could in our power to save our loved ones. Asking the 
government to step in and aggressively enforce a policy against 
that is difficult.
    On the other hand, we all know that kidnapping for ransom 
is an increasing part of how these terrorist organizations 
finance their operations. It is a hellish dilemma.
    What I would argue, because I am not in a position to judge 
frankly what our policy is on this, is that understanding that 
kidnapping for ransom (KRF) is on the rise, understanding that 
puts us in an incredibly difficult position, that we need to go 
to our allies and say we understand why this is a difficult 
dilemma, we also know that state-sponsored, effectively 
allowance and support of ransom payments that facilitate KFR 
contribute to the problem, why don't we develop a strategy for 
how to deal with territories that are under the control of 
terrorist organizations or where terrorist organizations 
operate that we know create risks of KFR.
    It is no secret that if you go into ISIS-controlled 
territory, KFR risks go up. It is no secret that if you are 
operating in areas controlled by Boko Haram, KFR goes up. These 
are well-known, established facts.
    The real question is, what are we doing to deliver 
necessary relief and assistance to these areas in ways that 
allow our NGOs in to service needs that we recognize, in ways 
that protect them and others from this sort of activity?
    I don't know that we have done enough thinking about that 
as a global community. And I do know that is something that the 
Financial Action Task Force members are looking at. How do we 
deal with terrorism financing associated with territory that is 
under the control of terrorist organizations? It is the biggest 
dilemma we face.
    Chairman Fitzpatrick. The gentleman's time has expired.
    Mr. Rothfus of Pennsylvania is recognized for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman.
    Mr. Poncy, what can the U.S. Government do to improve the 
implementation of effective AML/CFT programs among financial 
institutions with foreign correspondent banking relationships?
    Mr. Poncy. That is hugely important. I am sure Mr. Vance 
could tell you that every enforcement case that I can think of 
that has grabbed the headlines in recent years has been one in 
which foreign correspondent relationships are key. And that 
happens for a couple of reasons that I tried to allude to 
earlier in my remarks.
    One is that our enforcement environment is so far above any 
other enforcement environment in the financial system that when 
financial institutions seek to clear dollars, and they must 
move through New York or through the U.S. financial system to 
do that, as a general matter, they encounter a different level 
of compliance concerns associated with the enforcement actions 
we have taken.
    What that means is that the correspondent relationships 
that are essential to clearing dollars become the pathway that 
exposes our financial system to all forms of illicit finance.
    And the enforcement actions that we have seen repeatedly 
bear that out, whether it is for violation of sanctions 
programs and stripping activity, whether it is for violation of 
AML controls and the taking of drug money through cash without 
appropriate customer due diligence, it is through our 
correspondent relationships that this dirty money enters our 
system. So it is critical to protecting our financial 
integrity.
    This Congress did an incredible job post 9/11, the Congress 
in general, in giving us authority as a government, giving the 
government authority under Section 312 of the Patriot Act to 
strengthen corresponding controls. And I would say that as a 
general matter, we have done a pretty good job at that.
    At the same time, I would say that the complexity of flows 
that are moving through those correspondent relationships bears 
stronger compliance programs. And that is exactly what many of 
the enforcement actions that have been taken to date have 
insisted on, is looking at stronger programs to monitor and 
manage risks associated with clearing dollars and any other 
form of correspondent activity that is flowing through our 
banks.
    Where this game is headed and where I think concerns need 
to be focused is in the non-banking space. What happens with 
respect to correspondent relationships between non-bank 
financial institutions? How are those being managed? And what 
kind of risks are we seeing?
    Mr. Rothfus. Yes. I want to raise this. On June 12, 2015, 
The New York Times published an article that described how 
tough it is to impose and administer economic sanctions in an 
effective and meaningful way. It identified individuals and 
organizations that are crowdfunding the separatist conflict in 
eastern Ukraine.
    Individuals who are designated by both the United States 
and European Union for economic restrictions are freely raising 
donations, channeling funds to Sberbank, a prohibited state 
bank in Russia, to buy equipment and stand up modern combat-
ready military units fighting the Ukrainian central government.
    Because correspondent transactions are permitted with 
otherwise restricted banks, Visa, PayPal and Western Union, the 
article claims, have all facilitated the crowdfunding.
    How can government agencies here and in Europe effectively 
impose economic sanctions when targeted entities can evade the 
effort?
    Mr. Poncy. The activity you are referring to, Congressman, 
I am not familiar with the specifics, but I can tell you that 
Sberbank, because it is subjected to a different kind of 
sanctions program, it is an SSI-designated entity. What that 
means is that there are sanctions against Sberbank with respect 
to debt and equity instruments that are used to benefit 
Sberbank.
    But those sanctions are calibrated to put financial 
pressure on the Russian regime in a way that changes their 
behavior in the Ukraine. But they are not designed to cut 
Sberbank off from the financial system. And there are a lot of 
reasons for that.
    But it does complicate efforts to then address what might 
be activity that offends or sanctions against Russia and parts 
of Ukraine for the activity that is going on there if that 
activity is not part of a specific targeted financial sanction 
program.
    And the Sberbank designation is really not a designation 
against Sberbank as much as it is against a Russian regime that 
we are trying to, through financial pressure, change its 
behavior.
    So it continues to represent a gateway that is permissible 
under the current sanctions programs and frankly is necessary 
to maintain what are complicated capital market flows between 
Eastern Europe and Russia on the one hand and the U.S. market.
    If those flows are squeezed through additional sanctions, 
that may have collateral consequences beyond that of what you 
are describing.
    I know the Administration has historically looked at this 
very closely. It is a very complicated set of measures. But I 
will say that the advent of this program, the SSI program, is 
exactly where sanctions needs to go, to target specific types 
of activity in addition to general actors that enter our 
financial system.
    Mr. Rothfus. If I could jump in really quick, going back to 
this issue of beneficial ownership and disclosure, are there 
any legitimate business reasons for an entity not to want to 
have its beneficial owner's identity made public?
    If Mr. Vance, and maybe Mr. Poncy could comment on that?
    Mr. Vance. Yes. I think there are understandable and 
legitimate reasons. It may be, for example, that someone, an 
individual is a well-known individual and does not want his or 
her identity made public and, therefore, a target of harassment 
or cyber bullying there. And the same would apply for 
businesses.
    But the fact that there is a legitimate reason to want to 
remain anonymous does not mean, in my opinion, that there 
should not be an availability of the Federal Government, or 
State government to get this information by subpoena and have 
the other information remain in confidence at the State and not 
disclosed publicly.
    Chairman Fitzpatrick. The gentleman's time has expired.
    Mr. Schweikert of Arizona is recognized for 5 minutes.
    Mr. Schweikert. Thank you, Mr. Chairman.
    Can I ask us all to sort of take a step backwards and say, 
what if I had this amazing ability to see money that is moving 
to all types of bad actors, whether it be money flowing from 
drug cartels, terrorist financing, bad actors out of Russia or 
wherever we may deem it, what would that money look like?
    My fear is that much of the conversation we have had in 
here is money moving through fairly formal channels. How much 
of that bad-actor money, let's just call it that to make up a 
title, is moving in commodities?
    It was a decade or two ago we used to hear the stories of 
diamond exchanges that were just a way of moving value. 
Informal networks of deposit here and somehow it pops up in the 
rural areas in Pakistan.
    And I would like to start with Mr. Vance. Are we making a 
mistake in believing that a sanctions regime, a regulatory 
regime, an ID'ing, an intelligence regime that focuses on 
formal networks doesn't just move the money to informal?
    Mr. Vance. I think we are not fully attacking the problem 
if we are only looking at financial institutions as the group 
whose behavior we are trying to change.
    In our jurisdiction in Manhattan, we have a number of 
investigations moving money in the manner you describe, 
informal bases, not through official, organized entities that 
we believe are going to fund terrorist activities elsewhere in 
the country.
    We have a number of them in ongoing investigations, and so 
I can't quantify that, Congressman, in terms of how big that 
number is in either New York City or the country. But I think 
it is something, again, that every, that large metropolitan 
prosecutors should be looking at to support the efforts that 
are being done by Federal prosecutors.
    Mr. Schweikert. I want to do a hop and then back one.
    Mr. Carlson, one of my fears here is we come up with both 
legislation in support for the Administration, we squeeze down 
and we make a more robust system of bad actors moving cash that 
is right under our nose that we cannot smell. Mixed metaphors.
    You have done compliance with, what, large institutions in 
the past. When you started to clamp down, did that money just 
stop or did you see it moving to other types of activities?
    Mr. Carlson. I don't have any personal experience to 
comment on that. I do know at least from where I sit that what 
we certainly need is better mechanisms to share information 
around these bad actors and how they are affecting 
institutions' critical infrastructure, other parties.
    Because right now we are in the world of playing constant 
defense in a constant flow of attacks, and so we feel like we 
are fighting this a little bit with our hands tied behind our 
backs in terms of not having all the tools that we could have 
to at least share the information so that we can take 
appropriate steps to respond.
    I think in response to some other questions that were 
raised, we certainly need a greater role for deterrence, and 
that includes obviously enforcement in terms of what you 
require reputable businesses to do to enforce it.
    But that is where I think the Congress needs to provide 
resources to law enforcement to go after these parties and to 
prosecute and not always go after the institutions that are 
implementing policy.
    Mr. Schweikert. But my fear is, do we end up enforcing and 
create a more robust mechanism that just goes right around our 
back door?
    Mr. Poncy?
    Mr. Poncy. It is a great question. I will make four quick 
points. The first is the game of illicit finance is a cops-and-
robbers game that will never end, right? So in many respects, 
what we are chasing will always be there, it is a question of 
where it is and how disruptive we can be.
    Our objectives, in this campaign, as long as there are bad 
guys in the world, there will be bad-guy financing. Our 
objectives are to make it costlier, riskier, and more difficult 
for these guys to operate, get the money they need, move it 
from place one to place two. That is our objective.
    In that respect, moving people out of the formal banking 
system to make it harder for them to deal with value transfer 
is a sign of success, but it is not the end of the road.
    Mr. Schweikert. But in a world of technology where this is 
now my bank, it is cracking down on the institutions.
    I constantly wonder, and I know I am almost out of time, 
whether much of this resource we should be really doubling down 
on the financiers, the people who use their wealth and treasure 
for bad acts, and the receivers of that.
    So possible success on the barbells and not necessarily 
those who are in the middle of the transfer.
    Thank you. I yield back, Mr. Chairman.
    Chairman Fitzpatrick. The gentleman's time has expired.
    The gentleman from Texas, Mr. Williams, is recognized for 5 
minutes.
    Mr. Williams. Thank you, Mr. Chairman.
    Mr. Vance, you mentioned specifically that your office has 
supported the Incorporation Transparency and Law Enforcement 
Assistance Act previously.
    As a former secretary of state myself, of Texas, our 
association has previously opposed this legislation due to 
concerns over implementation costs. In fact, State secretaries 
have advocated for the collection of ownership entity 
information by the best paper trail that already exists for 
Federal tax filings and customer due diligence requirements for 
the U.S. financial institutions at no additional cost to 
taxpayers or businesses.
    So in addition, this proposal expands regulatory authority 
into an area that has traditionally been the jurisdiction of 
the States.
    I would like to hear your comments on the concerns we hear 
from the association.
    Mr. Vance. I understand, Congressman, that there are 
questions of cost and that there will be some additional costs 
in various States for implementation of the beneficial 
ownership rule.
    What I would respond to is I think we have to measure the 
benefits versus the detriments. I personally, having listened 
to the arguments of those who oppose this legislation, I am 
more persuaded that the benefit of enabling our law enforcement 
officials to identify illegal money movement is outweighed by 
the incremental additional costs.
    I respect the fact that will occur, but that occurs, I 
think, in any regulatory scheme that is imposed upon the 
States.
    Mr. Williams. Return on investment.
    Mr. Vance. Yes. I think you will get good return on 
investment criminally, in terms of criminal prosecution.
    Mr. Williams. Next question also to you, Mr. Vance. Based 
on your experience as a prosecutor, what are the challenges 
associated with prosecuting terrorist financing-related cases?
    Mr. Vance. I am speaking from a State perspective. We are 
not like a typical State prosecutor's office because we do a 
lot of this work and most don't. But I still am not the Federal 
Government.
    So one problem from where I sit is the ability to trace 
money once it gets to Lebanon or some other jurisdiction where 
we no longer have eyes and ears on the ground.
    We have been involved in a number of cases where we believe 
we know what is going on, we can trace the money from wherever 
it is in the United States or even in South America to a Middle 
Eastern country typically, but then we lose the trail.
    So how do we develop information and allies in those 
jurisdictions, which is a tough thing, to enable us to make 
those cases?
    I think that is the biggest problem. And this is 
particularly, this is money going out to those jurisdictions, 
we are not talking about large financial institutions clearing 
dollars to us.
    Mr. Williams. Let me give you a follow-up question. To what 
extent do U.S. law enforcement investigations and subsequent 
prosecutions strategically prioritize cases involving the most 
pressing terrorist financing threats?
    Mr. Vance. I cannot speak to the Federal Government's 
prioritization, which I think raises the question of, should 
there not be more coordination between Federal prosecutors and 
regulators on discussion of these priorities with State law 
enforcement who could in fact initiate or help in achieving 
those priorities?
    So I am not privy to what the U.S. Government, what their 
list of priorities are. But if I knew them and if I was told 
how we could help in achieving them, that is what I would do.
    Mr. Williams. Okay, thank you.
    And I appreciate all of your testimony.
    Mr. Chairman, I yield back.
    Chairman Fitzpatrick. The gentleman yields back.
    The gentleman from Arkansas, Mr. Hill, is recognized for 5 
minutes.
    Mr. Hill. Thank you, Mr. Chairman.
    And I thank the ranking member.
    I also want to thank Mr. Lynch and Mr. Sherman for their 
pointed and excellent questions on Iran and Iran financing and 
I think the fallacy of the deal as we come up on the June 30th 
negotiation deadline.
    Mr. Vance, I thought Mr. Williams did a good job of talking 
a little bit about the Secretaries of State and the burdens 
there. I understand those, some States are better than others.
    I am going to ask this question as a former Deputy 
Assistant Secretary of Treasury and a banker of 35 years. So on 
the credit side of all banks, people get beneficial 
information. And if we were asked by a law enforcement officer, 
we would certainly provide that.
    So I think the real challenge then becomes on the deposit 
side under Gramm-Leach-Bliley. We do know our customers, we do 
identify them, we do have two forms of ID. But in a business we 
also verify the business exists through the Secretary of State 
function, but we don't always know beneficial owner on the 
depository side.
    One of the primary ways of finding depository ownership is 
through the tax system. Just about 6 years ago, we had a 
complete, wholesale redo of the Form 990 for private charity 
entities, which was very painful to implement.
    But we have LLCs and pass-through ownership and, by 
definition, beneficial ownership is contained in that tax 
return and public companies are, of course, public. So we are 
really talking about C corps, I guess, for IRS purposes.
    Could you reflect, as you did for Mr. Williams, on 
Secretaries of State, and talk about the use of existing IRS 
forms for determining and obtaining that information?
    Mr. Vance. Congressman, as I indicated earlier in a 
response, our State government access to those records is 
limited. And therefore, I really can't--
    Mr. Hill. From one State to the other as a district 
attorney?
    Mr. Vance. --from the Federal Government to the State. And 
so therefore, we would appreciate it if there were changes in 
Federal legislation that permitted the IRS to provide 
information directly to a local prosecutor's office upon a 
certain showing.
    That doesn't really exist now, and so therefore I can't 
comment further intelligently other than to say that access to 
Federal tax information, individual and otherwise, is not 
generally something that we at the state level get access to.
    Mr. Hill. But when you get access to it, you acknowledge 
that is where beneficial ownership lies.
    Mr. Vance. I think there will be information relevant to 
beneficial ownership. But I am still, respecting that others 
disagree, I am having a hard time just personally understanding 
that the net negative of understanding when a corporation is 
formulated who is the owner of it and identification for that 
individual.
    I don't necessarily think that is an inhibition to 
commerce, to business development. And so from my perspective, 
I don't look at that as an impediment that outweighs the 
benefits to public safety on the other side.
    Mr. Hill. But you would support some sort of beneficial 
ownership form for a C corp filing, for a private company's C 
corp filing?
    Mr. Vance. I will say I think I am going to have to 
understand more closely what the issues would be for a C corp. 
I don't pretend to understand the specifics.
    But where one would want to be is, with any filing of any 
corporation in a State, is to understand who the owner is and 
to prove that person is in fact the owner.
    Mr. Hill. Mr. Poncy, on this FinCEN Treasury proposal, it 
suggests that beneficial owners, anyone who owns more than 25 
percent of the equity interest in a company, and as somebody 
who has been doing this for 35 years, if I were hiding my 
interest, I wouldn't own 25 percent, I would own 1 percent and 
99 percent would be divided by as many people as possible.
    So I find I am not even sure as drafted it is particularly 
helpful to your mission. Do you want to comment on that?
    Mr. Poncy. Absolutely. Thank you, Congressman. There have 
been experts from both the financial system and from the 
counter-illicit-finance community for decades who have looked 
at this question of beneficial ownership in the context of the 
Financial Action Task Force, from financial centers around the 
world.
    It is a difficult problem. You can't draw a line and say 
this fixes it; I fully agree with you.
    At the same time, it is clear that if we were to obtain 
beneficial ownership information as defined in the proposal, 
which is not just 25 percent ownership, because you are right, 
that just invites structuring, I will say that means you have 
to find five guys now who are willing to front for an 
organization rather than one.
    And that is not the only element of the definition. There 
is also an element of control. And if you think about what that 
means, it means that if there are meaningful consequences to 
not presenting information, law enforcement no longer has to 
prove money laundering, they have to prove that you committed 
fraud in representing who you represent.
    That is an easier case, it is a bigger lift. And those guys 
talk about whose interests they represent when they have to go 
to jail for not disclosing that truth.
    Mr. Hill. Thank you, Mr. Chairman.
    Chairman Fitzpatrick. The gentleman's time has expired.
    The gentleman from Maine, Mr. Poliquin, is recognized for 5 
minutes.
    Mr. Poliquin. Thank you, Mr. Chairman. I appreciate the 
time.
    And thank you, gentlemen, for being here. I appreciate it.
    You folks have an awful lot of experience on the ground 
dealing with these issues. And it is so important that you help 
educate us here in Congress in making sure that our country 
stays on offense against these threats to our homeland and our 
freedoms.
    I hear on an ongoing basis the issue with regulation 
throughout our economy, in the financial services sector and 
elsewhere. Some of the numbers I looked at, gentlemen, and I am 
sure you have seen them, too, is that the annual cost of 
regulations, to comply with regulations, to our business 
community is something like $1.7 trillion per year. That is 
about 1/10 of our GDP output every year. And that is a huge 
cost, waste of time and so forth and so on.
    Now, at the same time, I know there has to be a balance 
between making sure there is proper regulation that the 
businesses can handle and pay for and in keeping us safe.
    Our economy has been, notwithstanding the problems we have 
now, the envy of the world for a very long period of time. It 
has given us the opportunity to have better lives, fatter 
paychecks, through more freedom. And the reason we have this 
strong economy that has lasted for so long, notwithstanding its 
problems, is because we have such a deep, diverse, and creative 
financial sector.
    Without this financial sector being healthy and growing, we 
do not have the economy we need to have; and therefore, we will 
not generate the tax revenues we need to protect ourselves.
    So this is absolutely critical. And I know we are all 
onboard here.
    We had a fellow who came into our office not long ago who 
is a senior manager at a financial services company. And he was 
going on about how many different regulators that he has to 
deal with when it comes to an examination dealing with 
cybersecurity. He deals with the Federal Reserve, the SEC, the 
Comptroller of the Currency, maybe FSOC, and also the FDIC.
    And I know this has been discussed earlier, gentlemen, and 
I am thrilled to death to hear that with all these problems 
that we have, it seems like we are all in agreement, is that 
why in the world can't we coordinate this examination process 
to keep our financial services sector safe, as best we can keep 
money out of the hands of terrorist organizations, but not put 
these poor folks out of business?
    Now, you folks have the experience with this, I don't.
    So Mr. Carlson, we will start with you, if you don't mind, 
sir. Do these various regulators of the financial sector have 
the personnel and the talent to make sure they can do their 
work when it comes to investigating cyber activity? And what is 
the best way to coordinate this activity among these 
institutions?
    Mr. Carlson. I think it is a qualified ``yes'' in that the 
agencies do have expertise to conduct cyber exams.
    I think an area we have been advocating that they do more 
on is to try to harmonize the requirements both at the policy 
level and at the examination level across all these different 
U.S.-based regulatory agencies.
    We have also advocated that they work with their 
counterparts overseas to also harmonize, given that many of the 
larger firms are global firms and have to deal with 
requirements in the EU and Asia as well.
    It is a huge issue in terms of cost and compliance. But 
they do have the capability.
    They are also struggling with some of the same issues we 
are struggling with in our sector, as is the government, and 
that is talent in the information technology field. There is a 
limited supply of talent and everyone is vying for those 
people.
    Mr. Poliquin. Mr. Carlson, is the information that is 
required from these regulators uniform enough? Is there enough 
overlap such that there might be uniformity when it comes to 
the type of information that is asked, the reporting 
requirements, how it is reported and so forth and so on? 
Because some of these folks come to our office and they say it 
is different for everybody, even though they are generally 
asking for the same information.
    Is that too simplistic or can that be streamlined?
    Mr. Carlson. It can be streamlined further. There are 
efforts already in place through what is called the Federal 
Financial Institutions Examination Council (FFIEC), which 
includes the Federal Reserve, the FDIC, the OCC, and the CFPB; 
they all coordinate together in terms of developing unified 
procedures.
    Mr. Poliquin. And do I hear you saying that there is one 
entity, separate from all these other institutions we have 
talked about, that coordinates this activity?
    Mr. Carlson. It is a body that then coordinates with all of 
the other bodies.
    Mr. Poliquin. And in your opinion, are they effective? And 
do they have the support they need from Congress to make sure 
they are effective?
    Mr. Carlson. They are effective. Could they do a better 
job? Yes.
    Mr. Poliquin. And how could they do a better job, Mr. 
Carlson?
    Mr. Carlson. More intensive collaboration, more engagement 
with the sector in terms of new requirements, as well as 
constantly revisiting existing requirements to make sure they 
are relevant.
    Mr. Poliquin. Okay. So this is not a resource issue, this 
is not a money issue, it is just providing some leadership--
    Mr. Carlson. Both.
    Mr. Poliquin. --making sure someone steps up and gets this 
done.
    Mr. Carlson. It is both. It is a resource issue, but it is 
also a leadership coordination effort.
    Mr. Poliquin. Do you think there is enough intense focus 
and priority from the administrative branch to make sure this 
happens, the Executive Branch?
    Mr. Carlson. There is an unprecedented level of engagement 
in the broader Administration on cybersecurity issues, from the 
White House to a multitude of agencies, from the Treasury 
Department, regulators, Homeland Security, law enforcement, 
intelligence communities. We are in a completely different 
world over the past 3 years in terms of the level of engagement 
with multiple government agencies.
    Mr. Poliquin. And do you think, is there anything that we 
can do in this committee or Congress can do to help with that 
process?
    Mr. Carlson. I think, number one, it would be immensely 
helpful to pass cyber-threat information-sharing legislation.
    Number two, it would be important to make sure that 
agencies are properly funded so they can fulfill their 
missions, whether it is law enforcement or even the regulatory 
agencies.
    And three, I think there is an importance in investing in 
R&D. It is an area where the government has really stepped back 
on kind of core R&D, particularly around technology and 
infrastructure and things of that nature.
    Mr. Poliquin. Gentlemen, thank you very much for being 
here. I appreciate it. Let's make sure we solve this problem. 
Thank you.
    I yield back my time.
    Thank you, Mr. Chairman.
    Chairman Fitzpatrick. The gentleman's time has expired.
    The Members' questions are concluded.
    Again, I would like to thank our witnesses for their 
testimony to the task force today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    And without objection, this hearing is adjourned.
    [Whereupon, at 4:24 p.m., the hearing was adjourned.]
    
    
    
    

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                             June 24, 2015
                             
                             
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