[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
COUNTERING THE FINANCIAL NETWORKS
OF WEAPONS PROLIFERATION
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON TERRORISM
AND ILLICIT FINANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
JULY 12, 2018
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-108
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
_________
U.S. GOVERNMENT PUBLISHING OFFICE
31-507 PDF WASHINGTON : 2018
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
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Shannon McGahn, Staff Director
Subcommittee on Terrorism and Illicit Finance
STEVAN PEARCE, New Mexico Chairman
ROBERT PITTENGER, North Carolina, ED PERLMUTTER, Colorado, Ranking
Vice Chairman Member
KEITH J. ROTHFUS, Pennsylvania CAROLYN B. MALONEY, New York
LUKE MESSER, Indiana JAMES A. HIMES, Connecticut
SCOTT TIPTON, Colorado BILL FOSTER, Illinois
ROGER WILLIAMS, Texas DANIEL T. KILDEE, Michigan
BRUCE POLIQUIN, Maine JOHN K. DELANEY, Maryland
MIA LOVE, Utah KYRSTEN SINEMA, Arizona
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York RUBEN KIHUEN, Nevada
WARREN DAVIDSON, Ohio STEPHEN F. LYNCH, Massachusetts
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
C O N T E N T S
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Page
Hearing held on:
July 12, 2018................................................ 1
Appendix:
July 12, 2018................................................ 41
WITNESSES
Thursday, July 12, 2018
Albright, David, Founder and President, Institute for Science and
International Security......................................... 5
Keatinge, Tom, Director, Center for Financial Crime and
Securities Studies, Royal United Services Institute............ 6
Ottolenghi, Emanuele, Senior Fellow, Foundation for Defense of
Democracies.................................................... 8
Rosenberg, Elizabeth, Senior Fellow, Center for a New American
Security....................................................... 10
APPENDIX
Prepared statements:
Albright, David.............................................. 42
Keatinge, Tom................................................ 65
Ottolenghi, Emanuele......................................... 75
Rosenberg, Elizabeth......................................... 92
Additional Material Submitted for the Record
Pearce, Hon. Stevan:
Written statement from the Center for a New American Security 100
COUNTERING THE FINANCIAL NETWORKS
OF WEAPONS PROLIFERATION
----------
Thursday, July 12, 2018
U.S. House of Representatives,
Subcommittee on Terrorism
and Illicit Finance,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:04 p.m., in
room 2128, Rayburn House Office Building, Hon. Stevan Pearce
[chairman of the subcommittee] presiding.
Present: Representatives Pearce, Pittenger, Rothfus,
Tipton, Williams, Poliquin, Emmer, Zeldin, Davidson, Budd,
Maloney, Himes, Foster, Sinema, Gottheimer, and Lynch.
Chairman Pearce. The subcommittee will come to order.
Without objection, the Chair is authorized to declare a recess
of the subcommittee at any time. Members of the full committee
who are not members of the Subcommittee on Terrorism and
Illicit Finance may participate in today's hearing and all
members will have five legislative days within which to submit
extraneous materials to the Chair for inclusion in the record.
This hearing is entitled, ``Countering the Financial
Networks of Weapons Proliferation.'' I now recognize myself for
2 minutes to give an opening statement. First of all, I want to
thank everyone for joining us today. Today's hearing will
examine the financial networks that support nuclear, chemical,
and biological weapon productions, the role of the U.S. in
counter-proliferation finance efforts, and the scope and
effectiveness of the relevant enforcement actions by the U.S.
to counter-proliferation financing.
Hostile nations often use established financial mechanisms
such as wire transfer, trade finance products, cash, checks,
and credit cards to finance their weapons programs. This is
accomplished through elaborate ownership structures consisting
of various businesses, shell corporations, and middlemen that
are often used to obscure any connection to the country
proliferating weapons.
As these bad actors continue to evolve in the ways that
they access the traditional financial marketplace, we must
ensure that our Government agencies and financial institutions
have the tools necessary to detect illicit procurement efforts.
Evidence has shown that hostile actors around the world have
pursued the proliferation of various weapons for years, as
country sanctions and even secondary sanctions are implemented,
removed, or modified, a balance must be struck.
Financial institutions should work together to prevent
illicit financing while providing agreed upon market access. In
today's hearing, I hope to discuss what methods are being used
to circumvent sanctions to finance weapons proliferation, what
tools and partnerships are working well to detect and disrupt
procurement networks, and what challenges remain for Government
authorities and financial institutions to identify
proliferation activities.
I would also appreciate any comments about deficiencies and
weaknesses in the international system and how the United
States can best assist to ensure that the funding of
proliferation can effectively be stopped in this dynamic
environment. I am especially interested in hearing about this
in light of the United States assuming the presidency of the
Financial Action Task Force this month.
I would like to thank our witnesses for being here today
and I look forward to their expert testimony on these very
important issues.
The Chair now recognizes Mr. Foster for 5 minutes for an
opening statement.
Mr. Foster. Thank you, Mr. Chairman. And I would like to
thank all of our distinguished witnesses for testifying this
afternoon. Today, the subcommittee is going to examine
strategies to disrupt the financing and procurement of weapons
of mass destruction. We are at an interesting time in our
history to say the least.
We have a number of potential threats. These include not
very well-organized groups trying to get the parts together for
a dirty bomb. We have states, for example, Iran, who are
looking to assemble a bomb factory. And we are talking also
about stolen nuclear weapons from states where the security is
not so great.
And finally, the big issue of making sure that we have
complete and verifiable denuclearization of North Korea, a much
more difficult problem where we are looking not for a bomb
factory but for a single completed bomb secreted away anywhere
in that country. And so in all but the last case, there are
significant signatures to go after and some of the most
significant ones are the financial footprints that lead to
that. And that is why this hearing is important.
For nearly a generation, nuclear weapons have threatened
our national security and global safety because of their
capability to threaten the existence of mankind. And
unfortunately, this ability is no longer unique to just nuclear
weapons. The proliferation of emerging technologies, chemical,
biological, and radiological weapons, and the related delivery
system pose a real risk to our international security.
Even today, rogue regimes and clandestine organizations
continue to exhibit the ambition to acquire materials and
technologies that can be used to build weapons of mass
destruction, which is why despite many challenges, prevention
of the distribution and financing of these weapons remains a
major U.S. policy objective.
To date, the international community has utilized a variety
of tools to accomplish this including export controls,
sanctions, anti-money laundering (AML) laws, and international
treaties. But despite these measures, proliferators have
continued to use the financial system with relative ease to
facilitate their illicit procurement of materials.
Alternative and creative sources of funding have allowed
them the ability to circumvent the global counter-proliferation
financing rules and many of the standard detection methods,
posing a major obstacle for law enforcement and the
intelligence community.
On July 1, 2018, the United States assumed the position of
the president of the Financial Action Task Force (FATF), an
inter-governmental body tasked with developing and promoting
policies to combat money laundering and terrorist financing.
This presents an invaluable opportunity for us to highlight the
criticality of this issue within the organization's already
established framework and to show leadership in important
multilateral collaborations.
Going forward, we must encourage the use of technological
innovations and policies that improve our counter-proliferation
efforts. I look forward to hearing your testimony and yield
back the balance of my time.
Chairman Pearce. The gentleman yields back. The Chair now
recognizes the gentleman from North Carolina for 3 minutes for
an opening statement.
Mr. Pittenger. Thank you, Mr. Pearce and Congressman
Foster, for holding this hearing today. Additionally, I would
like to thank all of our witnesses for coming in today to
provide us with their expertise in our efforts to counter the
financing of weapons proliferation.
As technology progresses, terrorist networks acquire new
means for acquiring the illicit financing needed to procure
weapons of mass destruction. The most important step in
protecting our national security, and that of our allies, is to
prevent these organizations from acquiring these weapons.
Traditional financial mechanisms such as cash, credit
cards, or wire transfers are often used by proliferation
networks to facilitate their funding activities. We already
know these mechanisms and must continue to ensure we are
capable of identifying their use for malicious purposes and
preventing them.
However, we must focus our efforts on ensuring we are able
to combat the use of new mechanisms that have developed with
today's technology for the purposes of financing weapons
proliferation. Such mechanisms include the use of blockchain
technology which serves as the public transaction ledger for
bitcoin, other forms of cryptocurrency, or online crowd funding
websites.
While these financial mechanisms provide various positive
and valuable opportunities, they are also very popular with
terrorist networks due to the anonymity that is associated with
their utilization. There is a global black market for nuclear
technology and material that we must work to detect and
eradicate.
Hostile state actors which have been involved with this
market pose a serious threat to our national security. States
such as Iran can also use front companies to acquire critical
nuclear technologies with use of intermediate jurisdictions in
order to obfuscate our efforts in tracing their transactions.
Learning how to better combat such practices in order to
ensure sanctions are not evaded must be a priority.
Additionally, we must strategize how to assist other nations
with their capabilities to prevent proliferation financing.
There are numerous countries which are currently not able to
successfully prevent proliferation financing, and this poses an
obstacle to global counter-proliferation efforts.
We look forward to learning how we can expand our efforts
in combating illicit finance for weapons proliferation. Thank
you, Mr. Chairman. I yield back the balance of my time.
Chairman Pearce. Gentleman yields back. Today, we welcome
the testimony of our witnesses. Mr. David Albright is a
physicist, is founder and President of the non-profit Institute
for Science and International Security in Washington, DC.
Notably, the institute publishes the Peddling Peril Index that
ranks countries according to their capabilities and
demonstrated success in implementing strategic export controls
to prevent nuclear trafficking.
Mr. Albright has been called the go-to guy for media
seeking independent analysis of Iraq's weapons program. In June
1996, he was the first non-governmental inspector of the Iraqi
nuclear program. Prior to founding the Institute for Science
and International Security in 1993, Mr. Albright was a senior
staff scientist at the Federation of American Scientists and a
member of the research staff of Princeton University's Center
for Energy and Environmental Studies.
Mr. Albright received Masters of Science in physics from
Indiana University in 1980, Masters of Science in mathematics
from Wright State University in 1977, and a Bachelor of Science
from Wright State University, 1975.
Mr. Tom Keatinge is Director of the Center for Financial
Crime and Security Studies at the Royal United Services
Institute for Defense and Securities Studies, better known as
RUSI. RUSI is headquartered in London and is the oldest defense
and security think tank in world. Mr. Keatinge primarily
researches areas including terror finance, counter-
proliferation finance, new approaches to tackling financial
crimes in human trafficking, as well as corruption and the
implementation of financial sanctions. Prior to joining RUSI in
2014, he was an investment banker at JPMorgan for 20 years.
Mr. Keatinge has a Masters in intelligence and
international security from Kings College London. This is Mr.
Keatinge's first Congressional testimony in the United States.
Thank you for traveling all this way to speak to us. And stop
by New Mexico and spend money out there, too, on the way home.
Mr. Ottolenghi is a Senior Fellow at the Foundation for
Defense of Democracies or FDD, an expert at its Center on
Sanctions and Illicit Finance. At FDD, he focuses on Iran's
history of sanctions evasion. His researches examine Iran's
Islamic Revolutionary Guard Corps including its links to the
country's energy sector and procurement networks.
Prior to joining FDD, Dr. Ottolenghi headed the Trans-
Atlantic Institute in Brussels and taught Israel studies at St.
Anthony's College, Oxford University. He obtained his PhD in
Political Theory at the Hebrew University of Jerusalem preceded
by undergraduate studies in political science at the University
of Bologna.
Ms. Elizabeth Rosenberg is a Senior Fellow and Director of
Energy and Economics and Security Program at the Center for New
American Security, CNAS. In this capacity, she publishes and
speaks on the national security and foreign policy implications
of energy market shifts and the use of sanctions and economic
statecraft.
She has testified before Congress on energy and financial
issues and we welcome her back. From May 2009 through 2013, Ms.
Rosenberg served as a senior advisor to the assistant secretary
for terrorist financing and financial crimes and then to the
undersecretary for terrorism and financial intelligence at
Treasury. She received an MA in Near Eastern Studies from New
York University and a BA in politics and religion from Oberlin
College.
Each of you are going to be recognized for 5 minutes to
give an oral presentation of your testimony. Without objection,
each of your written statements will be made part of the
record. Mr. Albright, you are recognized for 5 minutes.
STATEMENT OF DAVID ALBRIGHT
Mr. Albright. Thank you, Chairman Pearce and Ranking Member
Foster, for the opportunity to testify today. As the chairman
mentioned, my institute recently published a report ranking the
export control systems of 200 countries and territories based
on their capabilities and performance in five areas addressing
export control legislation, international commitments, illicit
procurement detection, enforcement, and financing of
proliferation.
Preventing proliferation financing, albeit not a
traditional component of a review of national export control
systems, is one of the most important aspects for detecting and
stopping exports of sensitive goods. To measure a country's
ability to prevent proliferation financing, we used a set of
criteria that indicate a country's susceptibility to being
exploited or involved in proliferation financing including
violations of international sanctions.
These criteria are based on countries' financial regulatory
systems and counter illicit financing programs from which the
main source of data for the index is a Financial Action Task
Force, FATF. Our research for the 2017 ranking revealed that
preventing proliferation financing is one of the counter-
proliferation areas most in need of improvement. This effort
would benefit significantly from a closer integration with
export controls.
In the ranking of a country's ability to prevent
proliferation financing, no country achieved two-thirds of the
available points and only two received more than half the
available points. About one-third of all countries achieved
negative scores. Among others, significant illicit financial
flows, big black markets, and high levels of corruption
indicate that those countries are likely places where front
companies find it relatively easy to finance nefarious
activities.
Other countries performed poorly due to having excessive
bank secrecy, providing tax havens, or simply lacking
regulations and effective institutions. A preliminary update
for 2018 on preventing proliferation financing show similar
results. Countries still performed poorly and only three
countries received 50 percent and more of the possible points.
Iran performs particularly poorly in the index including on
proliferation financing where it ranked on the bottom. Iran has
been given extended time to fulfill its action plan
requirements set out by the FATF and to comply with FATF
standards. Recent actions have confirmed a deep involvement of
Iran's financial system in illicit activities. As a result, we
recommend the re-imposition of FATF counter-proliferation
measures against Iran.
The institute has developed a range of other
recommendations while producing the Peddling Peril Index and
working with proliferation financing experts to develop the
index's methodology.
One of the most critical recommendations is that countering
proliferation financing needs to be integrated into other
aspects of counter-proliferation including export controls. And
I would like to highlight five other recommendations.
All countries should work closely with FATF and its
regional bodies to improve their efforts to prevent
proliferation financing. Each country should conduct a risk
assessment of proliferation financing and its agencies should
address any gaps identified.
Each government should have adequate legislation in place
that includes an effective system of coordination among the
departments working on proliferation financing, such as well-
resourced investigative financial intelligence units and
effective outreach to financial institutions.
Countries' financial institutions need to be able to
monitor, detect, report, and act upon suspicious financial
transactions. Countries should help financial institutions
identify and freeze suspicious transactions.
Because of the difficulty of accomplishing this goal, the
U.S. Government should launch an inter-agency study to improve
communication and information sharing with financial
institutions, including insurance companies, and to develop
better solutions for automated counter-proliferation financing
screening tools.
FATF is in a unique position to drive many of the
abovementioned recommended actions and changes and should do
so. Financing of proliferation should be treated broadly and as
a separate subject to money laundering and terrorist financing.
At the plenary meetings, the FATF working group should
discuss adjusting the language in several of the existing 40
FATF recommendations to extend them beyond terrorist financing
and money laundering to include proliferation financing. Thank
you for the opportunity to testify. I am happy to answer any
questions.
[The prepared statement of Mr. Albright can be found on
page 42 of the appendix.]
Chairman Pearce. Thank you, sir.
Mr. Keatinge, you are recognized for 5 minutes now.
STATEMENT OF TOM KEATINGE
Mr. Keatinge. Chairman Pearce, Ranking Member Foster, and
distinguished members of the subcommittee, thank you for
inviting me to testify today, my first opportunity to do so.
Given my home base in London and the focus of RUSI's counter-
proliferation finance research is on Southeast Asia and Sub-
Saharan Africa, my testimony and contribution will necessarily
address, to a greater extent, the international CPF
architecture as promoted by bodies such as the U.N. and the
Financial Action Task Force rather than the policies laid out
the U.S. domestic agencies.
However, as has been mentioned with the U.S. taking over
presidency of the Financial Action Task Force the next 12
months, the U.S. has a key role to play in strengthening this
weak architecture. You will be familiar with the CPF
requirements set forth by the FATF standards and the
evaluations undertaken by the FATF. The U.S. evaluation was
published in December 2016.
As indicated by the table provided in my written
submission, the international CPF effort is disappointing. Two-
thirds of assessed countries are non or only partially
compliant with the requirements to be able to impose targeted
financial sanctions without delay. And 70 percent of assessed
countries have a low or moderate level of effectiveness,
meaning they suffer from major shortcomings.
It is clear that notwithstanding the prioritization of CPF
in 2012 by the FATF, the global community still has
considerable work to do to harden the financial system against
abuse by proliferators. And it is important to note that
compliance with FATF standards alone does not result in
effective CPF controls.
In fact, FATF's recommendations are now increasingly out of
touch with other international obligations on CPF. U.N.
sanctions against North Korea incorporate measures that go
beyond list-based sanctions implementation and focus, to a
greater extent, on activity-based obligations to counter-
proliferation finance.
How do we secure the financial system against abuse by
proliferators? Proliferation activities are made possible by
the international financial system. Reports from the U.N. panel
of experts highlight that Pyongyang is using greater ingenuity
in accessing formal banking channels to support illicit
activities in WMD (weapons of mass destruction) proliferation
and continues to access the international financial system
because of critical sanctions implementation deficiencies.
The role played by the financial sector in disrupting
proliferation finance has received greater attention in recent
years. Some governments maintain that financial institutions
have both the capability to detect and an obligation to disrupt
financial transactions in support of illicit WMD proliferation.
However, government initiatives on counter-proliferation
finance vary widely between jurisdictions and often in our
experience are nonexistent. Our research reveals extensive gaps
in knowledge, awareness, and capabilities of banks and perhaps
more worryingly, highlights considerable misunderstanding with
regards to the risks posed by proliferators, often conflating
CPF activity with sanctions compliance.
It is therefore important that financial institutions take
time to better understand and mitigate proliferation financing
risk. But it's not just in banking where vulnerability exists.
As actual sanctions have been increasingly applied to North
Korea, it is undertaking creative, deceptive activity to secure
funding from the sale of coal and it is also undertaking at sea
ship-to-ship transfers to secure the energy products it needs.
These activities bring into scope other industries needed
to secure the integrity of the international supply chain that
would benefit from engagement with national governments such as
shipping companies, commodity brokers, and insurance companies,
all of which lag the banking sector in terms of awareness of
and capability and commitment to the global CPF agenda. Whilst
the banking sector must continually strive to improve its
standards, a whole system approach is need in order to maximize
disruption opportunities.
To conclude, as evidence by the FATF's evaluation data and
the detailed reports that the U.N. panel of experts on North
Korea, 6 years since the FATF introduced CPF as a third leg of
focus alongside money laundering and terrorist financing,
global CPF efforts are fragmented at best and ineffective and
non-existent at worst.
Furthermore, the current FATF standards related to CPF are
weak and simplistic. They do not require countries to assess
their proliferation financing risks, they focus merely on the
implementation of targeted financial sanctions and they are not
risk-based in their application.
In sum, the global architecture for disrupting
proliferation finance requires improved design and
implementation. In my submission, I have set forth
recommendations to the private sector, international
organizations such as the FATF, the U.S. Government and
international governments that I hope we can discuss further
during the session. Thank you once again for the opportunity to
testify today.
[The prepared statement of Mr. Keatinge can be found on
page 65 of the appendix.]
Chairman Pearce. Thank you, sir. Mr. Ottolenghi, 5 minutes.
STATEMENT OF EMANUELE OTTOLENGHI
Mr. Ottolenghi. Chairman Pearce, Ranking Member Foster, and
distinguished members of the subcommittee, I want to thank you
for the opportunity to have me here to testify. The Islamic
Republic of Iran has been under U.S. sanctions since late 1979.
From 2006 to 2016, Iran's nuclear and ballistic missile
programs were the target of a United Nations sanction regime
which the United States, the European Union, and their western
allies subsequently expanded with their own set of far-reaching
measures.
Initially designed to punish and prevent proliferation
attempts, sanctions eventually became wider in scope, targeting
Iran's energy industry, financial sector including its Central
Bank, shipping, aviation, insurance, and oil exports.
Beginning in January 2016, the Joint Comprehensive Plan of
Action or JCPOA granted Iran's sanction relief though not to
non-nuclear sanctions. Due to the president's May 2018 decision
to withdraw from the JCPOA, Iran again faces U.S. sanctions
including secondary sanctions, which are already causing
numerous international companies to withdraw from the Iranian
market.
Iran is therefore likely to ramp up its sanction evasion
efforts. Sanctions significantly inhibit Tehran's ability to
trade with the world, still, Iran has adapted, engaging
sanctions enforcers in a complex and evolving cat and mouse
game. To put it bluntly, for Iran, sanctions are temporary
roadblocks, not insurmountable obstacles.
By building bypass roads, Iran turns crisis into
opportunities. As a result, Iran has been able to mitigate
sanctions impact on its efforts to advance its nuclear and
ballistic missile programs. My written testimony illustrates
how Iran evaded sanctions in the past offering typologies as
well as case studies.
Let me briefly outline some of these practices. Procurement
usually relies on a triangular structure of front companies
operating overseas, Iranian proxies establish fronts in a
foreign country to procure dual use technologies. Once
incorporated, companies buy locally or from a third country.
The buyer then ships the procured goods to a final destination
in Iran or fictitiously sells them to another front company in
another country before final delivery.
These cases typically involve small companies which will
shut down once they have accomplished their mission. For longer
term procurement and finance operations, Iran relies more on
permanent and more complex corporate structures across
different jurisdictions. Their link with an Iranian parent
entity is purposely made less obvious.
Iranian senior corporate managers often fictitiously resign
their government jobs to seek business ventures overseas on
behalf of the regime, quickly emerging as proprietors of
business empires with no formal ties with Iran. A regime proxy
with no formal connection to past employers provides plausible
deniability.
Former regime procurement agents interviewed by FDD
confirmed that Iranian state companies have increasingly
entrusted their most capable senior management with significant
sums to invest in industrial assets abroad.
This includes ownership of western factories which gives
Iran access to knowledge and technology. This was the case in
2013 of MCS International in Germany. Regime agents bought the
factory to lay their hands on a dual use flow forming machine
that MCS production line used to shape gas cylinders. Such
machines are also critical in the production of uranium
enrichment centrifuges.
Iran's evasion of financial sanctions follows the same
playbook. The regime first established and then sought to
purchase banks outside Iran to facilitate prohibited banking
transactions adding successive layers of obfuscation to cover
its tracks.
This was the case for example with InvestBank in the
Republic of Georgia. The network associated with the bank used
shell companies in Canada, the U.S., Georgia, Lichtenstein,
Switzerland, Turkey, New Zealand, and the UAE to launder
billions of dollars according to U.S. court documents while
also procuring and shipping technology to Tehran, likely on an
airline owned by the network.
Regime has also been very capable of exploiting loopholes
in sanctions legislation. One such case was the gas for gold
scheme its proxies ran through Turkey and which I describe at
length in my written statement.
The regime will not hesitate to invest significant
resources to facilitate these activities and empower its
agents. A typical ancillary service its agents rely upon is the
acquisition of passports of convenience usually through costly
citizenship by investment schemes to be able to travel,
incorporate companies, and open bank accounts hassle-free.
Iranian sanction evasion activity follows established
patterns, financial institutions and intelligence practitioners
can study these typologies to identify actors in transactions
that are potentially harmful to the integrity of the financial
system or pose challenges to international security. Treasury
plays a key role in this regard, its designations have helped
expose Iranian efforts to circumvent sanctions.
But as indicated before, this is a cat-and-mouse game,
where one can never assume that countermeasures are the final
word as Iran will seek a way around them. This is just one of
the topics in my recommendations which I offered in my written
statement.
I do thank you for your time and the invitation once again.
And I look forward to your questions. Thank you.
[The prepared statement of Mr. Ottolenghi can be found on
page 75 of the appendix.]
Chairman Pearce. Thank you, sir.
Ms. Rosenberg, for 5 minutes.
STATEMENT OF ELIZABETH ROSENBERG
Ms. Rosenberg. Thank you, Chairman Pearce, Ranking Member
Foster, and distinguished members of this committee for the
opportunity to speak today on countering the financial networks
of weapons proliferation.
The financing of weapons of mass destruction proliferation
is a grave threat facing the United States and the global
financial system. The ability of rogue states or non-state
actors to obtain weapons of mass destruction by using illicit
financial activity and procurement networks is a major
challenge to the U.S., to U.S. foreign policy goals, to the
security of our homeland and that of our partners, and to the
integrity of the global financial system and the global
nonproliferation regime.
Countering proliferation finance must be a core part of the
policy approach to the United States' most pressing national
security concerns, specifically North Korea, Iran, and Syria.
Furthermore, the United States must lead on this issue in
international forums, doing much more than the present nascent
measures.
This essential work is undeniably challenging.
Proliferation finance is difficult to detect. It is hidden
within shell companies and among legitimate financial
transactions. Looking for it is a technically challenging
exercise at the intersection of sanctions enforcement, export
controls, financial crimes compliance, and the global nuclear
nonproliferation regime.
As counter-proliferation finance work must operate across
multiple jurisdictions, involve an array of different
constituencies with different legal and regulatory authorities
which have various privacy and data sharing obligations, and
with major differentiation in political will and technical
capacity, coordinating a truly effective international response
is not easy.
But the difficulties associated with countering the
financing of proliferation should not give the false impression
that creating a more effective policy framework is beyond the
capacity of the international community.
We know the deficiencies in the system. We certainly care
about nuclear security and we can do better. Let us start with
the regulatory regime. Compliance and oversight programs for
financial institutions have historically focused on financial
integrity threats other than proliferation finance, like anti-
money laundering and anti-corruption, and countering terrorist
financing efforts.
Proliferation, including by North Korea and Iran, is no
less significant as a security threat and must be treated as
such. If policy leaders clarify that proliferation finance is
on par with the obligation to counter terrorism, for example,
it will go a long way to raise the profile of this issue and
improve controls around it.
This can have a direct benefit in improving the ability of
vulnerable jurisdictions such as Hong Kong or Malaysia, for
example, to deny proliferators safe haven and safe passage for
their money. The United States should be the gold standard for
information sharing relevant to proliferation finance between
institutions, with governments, and across jurisdictions.
Sections 314(a) and (b) of the USA PATRIOT Act are good
models for creating the operational ability to facilitate
information sharing, but policymakers must focus on expanding
and incentivizing the use of these measures and in urging
adoption of parallel measures in other jurisdictions.
U.S. policy leaders must also work with international
counterparts to harmonize such data sharing measures with
privacy regulations so that justifiable concerns about misuse
of personal data do not prevent cooperation and disrupting and
preventing proliferation, an important law enforcement and
international security priority.
Congress has a direct role to play and encouraging more
information collection, analysis, and public disclosure around
proliferation finance. This includes supporting rigorous
customer due diligence (CDD) practices by banks, by not
allowing anonymous companies to abuse our financial system, and
by supporting a regulatory sandbox and safe harbor provisions
to incentivize creative strategies to counter proliferation
finance.
And Congress must aggressively encourage the Administration
to publicly and privately disclose proliferation finance data
and typologies including via FinCEN (Financial Crimes
Enforcement Network) advisories. Moreover, Congress should
strongly support the Administration in its new role as the
Financial Action Task Force president, as has been discussed by
several of my co-panelists here, to set tough new international
guidelines for tracking and sharing information on
proliferation finance, and for taking that action at the
national level.
I want to close by stating how grave the consequences are
for failing to appreciate the seriousness of the proliferation
finance threat. Complacency and policy inaction are weak links
that help U.S. adversaries to actively and alarmingly develop
nuclear weapons capabilities; the stakes could not be higher.
Thank you for your attention and I look forward to
answering questions you may have.
[The prepared statement of Ms. Rosenberg can be found on
page 92 of the appendix.]
Chairman Pearce. Thanks each one of you for your
presentations. I yield myself now 5 minutes for questions.
First, so just looking at the complexity of tracking the
financial aspects and the shell corporations, just everything
is very complex.
The sanctions have, it sounds like according to your
testimony, an effect, but also it is very difficult for
financial institutions to assess who the players are that are
legitimate, who are not, legitimate transactions versus those
that are gearing toward proliferation.
I guess my question is how do we get around this obscurity?
Let us back that up one section and say when a major--can we
assess that most of the compromises of our sanctions are
purposeful or just plain inability to see?
Mr. Keatinge, do you want to take a shot at that? I know it
is just going to be a guess but--
Mr. Keatinge. We are sitting here in the United States,
surrounded by a sophisticated financial system. And yes, we are
right that front companies and all of these are used to try and
obfuscate the movement of funds.
But let us not forget, look in the U.N. panel report and it
is a litany of failures in countries where it is just that they
don't understand the risk that they are faced with.
Chairman Pearce. And what would we do to drive the
understanding?
Mr. Keatinge. Your government spends a lot of money
providing technical assistance and awareness raising to
countries like Uganda, Tanzania, Mozambique, these kinds of
countries where North Korea are earning money, raising money
through providing services that they can then spend on their
proliferation ambition.
I think it is a polarized position here. There is raising
very basic standards, implementing basic understanding, which
is what we would expect the FATF to be doing. And then there is
dealing with the more complex structures and obfuscation that
the other panelists have spoken about.
And yes, there are financial institutions that will no
doubt facilitate the illicit movement of finance knowingly.
Equally, there are many financial institutions that do that
without realizing they are doing it because of the complexity
of the structures that they use.
Chairman Pearce. OK. Mr. Ottolenghi, on page two you talk
about the adapting of the purchasing system. I assume that
means that we start with a legitimate purchasing system and
then we begin to adapt and we get people who are selling to the
companies familiar and then they adapt it closer and closer to
proliferation. Is that correct?
Mr. Ottolenghi. Absolutely correct, yes.
Chairman Pearce. OK. Then is it a profit motive? Is it just
your complacency? Is it a combination of corruption and a
profit motive and complacency that would drive the companies to
continue selling? They just don't watch that close? Tell me a
little bit about that.
Mr. Ottolenghi. It is a combination. On the part of those
involved in helping, assisting Iran to procure, there is the
profit. Sometimes there is also the ideology but more often
than not the two things converge.
Chairman Pearce. It gets pretty difficult to assess
precisely. Ms. Rosenberg then, so listening to that particular
thing, do you think there would be advantage to having some
piece of the sanctions push downstream to people who, either
through carelessness or whatever, they began to feel, not the
full sanctions but, sanctions of some sort against them.
If they just didn't pay attention, they are corrupt, we can
assess their mindset. Is it possible to have the sanctions move
downstream to the places where the financing is coming from? Is
that too difficult?
Ms. Rosenberg. There are many opportunities to use
sanctions to advance our counter-proliferation objectives. A
primary focus area that we should attend to now is the lack of
political will to enforce obligations. Just because the U.N.
has sanctions, just because the United States has sanctions,
does not mean that people are following them.
Chairman Pearce. OK, let me catch you right here though,
that the U.S. has invoked sanctions on countries where we are
trying to stop the proliferation and the countries where the
will is lacked, our sanctions to North Korea or Iran or whoever
would begin to percolate downstream to those that don't have a
strong motive for interrupting. Is that too egregious?
Ms. Rosenberg. There are opportunities.
Chairman Pearce. Take a quick shot. I want Mr. Ottolenghi
to address it too.
Mr. Ottolenghi. I just want to give an example.
Chairman Pearce. Yes, let her finish. And then I will come
to you, just 19 seconds, so--
Mr. Ottolenghi. I just want to give an example which I
think illustrates the point you are making very well. Monday
Treasury targeted a service provider for Mahan Air, the IRGC
Airline, the airline that carries weapons and personnel to
Syria.
The service provider is in Malaysia. It transacts with the
airline. Last year, in this committee, I presented a list of 67
service providers that are waiting to be punished for their
support, material support to an entity sanctioned under
Executive Order 13224.
That is the action that the U.S. Government can take--
Chairman Pearce. OK. Ms. Rosenberg, wrap it up. I am over
my time here. Go ahead and finish your statement if you would.
Ms. Rosenberg. There is an opportunity by looking further
down the value chain. However, if the United States only relies
on sanctions, then we will be missing an opportunity because,
as has been pointed out before, if institutions are just
looking at a sanctions list and making sure that their clients
aren't on the list, then we are missing everyone behind those
front companies and the broader networks that are conducting
the proliferation activity.
Chairman Pearce. We will try to delve a little bit more
into that later in the hearing, but thank you very much.
Mr. Foster, 5 minutes.
Mr. Foster. Thank you.
Dr. Ottolenghi, you mentioned rather unambiguously in your
testimony that there must be no anonymous companies. Do any of
you see any path to success on nonproliferation or prevention
of proliferation financing as long as anonymous corporations
are allowed. Ms. Rosenberg?
Ms. Rosenberg. I can speak to that. I think there is an
incredible opportunity before you all today to take action on
beneficial ownership which will have a direct effect in banning
anonymous companies.
And it is through those companies that an array of
financial ills occurs through this financial jurisdiction, and
the United States as a pace setter, as a standard setter for
the entire global community, must lead and demonstrate that
anonymity in companies through which proliferation can occur is
unacceptable.
Mr. Foster. Any other comments on that? Is the logic just
that simple?
Mr. Ottolenghi. I couldn't agree more. Most of the networks
I have studied over the years involving proliferation and money
laundering for terror finance all relied on opaque
jurisdictions and anonymous companies and beneficial ownership.
It is a critical tool for their action. And we should
definitely advocate and promote more transparency.
Mr. Foster. And which countries besides the United States
are going to have to clean up their act on this?
Mr. Ottolenghi. A vast number of jurisdictions in the
Caribbean Basin are an obvious place to start. Jurisdictions
that are under U.S. sovereignty such as the Marshall Islands,
jurisdictions in Europe. In small countries like Monaco,
Andorra, Lichtenstein. These are places, the British Isles that
are not, direct part of the United Kingdom such as the Isle of
Man, such as the Channel Islands. All of these are places that
are being used and abused for this type of activity.
Ms. Rosenberg. If I may add to this, there are a handful of
countries that have received good marks on beneficial ownership
of all of them. Everyone, including those jurisdictions of
greatest proliferation concern through which we know
proliferation transactions are flowing, has an opportunity, and
indeed a national security obligation, to do more to identify
the beneficial owners behind corporate structures.
Mr. Foster. Yes. And Mr. Albright, what would it take for
the United States to get a perfect score? What are the top five
ways that we blow our grade?
Mr. Albright. In 2017, the United States was number one, so
we have a fairly tough standard. They are not fully compliant
on FATF recommendations. There is money laundering issues.
There are illicit flows of money that are at issue. I think the
way the United States can improve in our index is pretty much
in the weeds, but it did do the best of any country. And it
says that overall--
Mr. Foster. We have the highest score despite allowing
anonymous shell corporations?
Mr. Albright. Those are the kinds of things that would
lower the score.
Mr. Foster. Right. It seems like that should like blow your
score completely.
Mr. Albright. Everything is weighted and everything is--
there are a lot of parts to this. That is one important aspect.
But there are many others. And I think, and I don't want to
beat up on the United States because we see much, much worse
behavior in most of the world.
The United States, even though it has room for improvement,
it is still doing the best and is carrying water for most of
the improvements that are sought in countering financial
proliferation.
Mr. Foster. OK. What country besides the United States do
you think gets it the best? If you could say the world should
adapt the standards of X, what would X be?
Mr. Albright. I think the European Union, those countries
tended to rank much better than others.
Mr. Foster. Do they allow anonymous shell corporations in
the EU?
Mr. Albright. I don't know.
Mr. Keatinge. We have a transparent company registry in the
United Kingdom as opposed to the Caribbean islands that were
mentioned. I would say, as someone not from these shores, the
fact that the U.S. allows such opacity in company ownership
does not do the reputation, or at least the message that the
United States tries to deliver internationally on illicit
finance, does not help that message, get taken on board by
countries that can turn and say, but hang on a minute. You have
this opacity in the United States.
Mr. Foster. Yes. And are anonymous land transactions a big
part of the problem? Both in the U.S. and worldwide. Which is
something that countries are split on and some allow them and
some don't.
Mr. Keatinge. For illicit finance in general, clearly the
ability to own a property in anonymous fashion is a huge
problem. It's a huge problem in the United Kingdom and a huge
problem elsewhere. Specific to proliferation finance, I don't
know the answer to that.
Mr. Foster. All right. Thank you.
Chairman Pearce. The gentleman's time has expired. The
Chair now recognizes Mr. Pittenger for 5 minutes.
Mr. Pittenger. Thank you, Mr. Pearce. I thank each of you
for coming today for your expertise. It is very valued and
appreciated.
One of the outcomes of the JCPOA was the allowing Iranian
Banks through the SWIFT authority to operate. How serious of an
outcome is that?
Mr. Albright. Yes. I can answer, Emanuele can too. One of
the--first the Iranian Banks are tied into illicit procurement
networks. By removing the sanctions it also made it much easier
for those banks to continue or expand illicit activity.
Mr. Pittenger. Would re-imposing the element that allowed
those banks and preventing them from operating, as they were
not able to prior to that agreement. Would that assist in our
efforts?
Mr. Albright. I think--
Ms. Rosenberg. I can speak to that. The United States has
plans to re-impose sanctions removed on implementation day
under the JCPOA. That will involve putting back on the list
those Iranian banks that were designated. Having them back on
the U.S. SDN list (Specially Designated Nationals and Blocked
Persons List) means, and because of the secondary nature of
them, any country or company or person anywhere in the world
providing material support to those SDN entities will face
enforcement actions for violating those sanctions. That has the
effect of de-swifting those same banks.
Mr. Pittenger. Thank you.
Mr. Ottolenghi, you mentioned Uganda and several other
countries who are not engaged with us. Let me clarify, was that
a matter of will or the lack of capabilities? I know OTA works
with certain countries to help them enhance the capabilities
and the financial systems, Egypt, for example, right now is
really responding to be very supportive with OTA.
Is our concern out there in the field with other countries
and our allies, the lack of interest or the lack of technical
capabilities in software?
Mr. Ottolenghi. I think it's a mixture of both usually. You
will find good political will but lack of capacity in some
countries and plenty of capacity and lack of political will in
others. And one country that comes to mind where there is
capacity, but there is no will, is Turkey.
Mr. Pittenger. Yes.
Mr. Ottolenghi. Turkey is a country where in November 2012,
at the height of the sanction regime, Iran had approximately
2,600 companies incorporated through foreign direct investment,
many of which linked to the regime. Today that number has
skyrocketed to--I quote the exact figure in my written
statement I think is around 4,600--
Mr. Pittenger. Quickly, how many countries do you see out
there that given the right capabilities, technology, and
software, would they be willing to raise their standards and
their collaboration with us? How short are we in the process of
fully engaging the willing countries to be supportive in
getting the technology they need?
Mr. Ottolenghi. Again, I think it is a question of
allocation of resources and prioritizing. And the challenge in
some of these countries are quite frankly overwhelming. It is
not just improving their ability to conduct effective anti-
money laundering and counterterrorism compliance in the banks.
It is about better training and providing technology to
border controls and customs. The challenge is large and big.
And so, I think that it should start from testing the political
will of these countries to engage in programs that can improve
their ability to enforce sanctions and cooperate better with
the United States.
Mr. Pittenger. We host these forums for partner members. We
just had one in Berlin this past week. And we found that
private sector is a very important element, the banks, the
software companies, and others that have come in and after one
such meeting we had in Buenos Aires 100 members of one company
were down and became very supportive with Argentina to try to
get them up to speed.
And I think what I am trying to determine is how much
opportunity do we have out there that OTA could be better
engaged with those who want to participate in a stronger way?
Mr. Keatinge. If I may, we require the private sector to
implement these sanctions on our behalf, talking to governments
and expecting governments in many of these countries to
communicate that effectively to their private sector is
frankly, if not a fool's errand, then, extremely difficult to
do.
You really need to engage with the banks and others in
these countries to bring to their attention what they should be
being told by their own governments.
Mr. Pittenger. Thank you. My time has expired.
Chairman Pearce. The gentleman's time has expired.
The Chair now recognizes the gentlelady from the
neighboring State to New Mexico, to the west, Ms. Sinema for 5
minutes.
Ms. Sinema. Thank you, Chairman Pearce and thank you to our
distinguished witnesses for being with us today.
As residents of a border State, Arizonians are deeply
concerned about the national security threats we face. Rogue
states and terrorist organizations are developing weapons of
mass destruction that threaten our homeland.
Drug cartels like Sinaloa and other international criminal
syndicates traffic illegal weapons across our southern border
and endanger our communities. We must be tough and smart to
combat these threats.
Secure borders and a strong military, enduring and
collaborative relationships with our allies, and strategically
applied sanctions are all essential tools to keep us safe from
the likes of North Korea, ISIS, and other dangerous entities.
We must do more. Cracking down on weapons proliferation is
essential to our national security and that is why I worked
with Congressman Tipton of Colorado to introduce H.R. 6332, the
Improving Strategies to Counter Weapons Proliferation Act.
Our legislation improves the Federal Government's ability
to stop the financing of rogue states, transnational criminal
organizations, and terrorist groups. Our bill facilitates
development of intelligence products that financial
institutions, the intelligence community and law enforcement
can use to identify and stop transactions linked to weapons
proliferation.
We shouldn't let a terrorist organization get away with
building a dirty bomb or chemical weapon because our government
wasn't using all of the tools at its disposal. And we must do
everything possible to keep Arizona families safe.
With that, I have two questions for Ms. Rosenberg with the
Center for New American Security. My first question, Ms.
Rosenberg. Our bill's reporting requirement improves the types
of intelligence products FinCEN offers to financial
institutions.
Given your expertise, could you elaborate on the kinds of
unique insights that FinCEN has that financial institutions,
the intelligence community, and law enforcement might not have
on their own?
Ms. Rosenberg. The information that FinCEN gathers as
supplied to it by all manner of reporting institutions, banks,
first and foremost among them, money services business,
important in border States in particular, brings together
information on suspicious activity and cash movements.
And when this information is aggregated in FinCEN and is
accessible by the law enforcement community and intelligence
community, there is an opportunity to look broadly for trends
here. This may include structuring or other activities, the
footprint of which you can see for drug cartel activity, for
example, or our other illicit activity.
Now, there are plenty of authorities and opportunities for
FinCEN to gather this information, to analyze it, for the law
enforcement community to do that and to use these intelligence
products to go after these concerns in various ways, with
sanctions and with law enforcement activity.
But the United States would be in a better position, and
FinCEN data would be better, and there will be even more
reporting to FinCEN, if there was more disclosure about the
entities, the companies that are doing these cash transactions
and that are making these wire transactions.
With more information, for example, information that would
be generated by the beneficial ownership requirements that this
Committee has put forward in draft form in this Congress, in
the FinCEN database and accessible to the law enforcement and
intelligence community, there would be even better insights.
Ms. Sinema. Thank you.
My second question is related to legal small arms and light
weapons that are trafficked across our southern border. This is
a dangerous and persistent problem in my State of Arizona. The
flow of these weapons across the border is often carried out by
violent drug cartels like the Sinaloa who threaten communities
all across our State.
We must be doing more to stop groups like Sinaloa in their
cross border trade in humans, drugs, and weapons. How could
FinCEN's intelligence products assist law enforcement in
cracking down on these drug cartels? And could these
intelligence products be useful in helping financial
institutions combat structuring, which cartels like Sinaloa use
to avoid our current anti-money laundering regime?
Ms. Rosenberg. You brought up a good point about the cross
border money flows related to small arms and other criminal
activity across the border. Right now the United States doesn't
have a requirement for reporting cross border financial
transactions. That's something that Australia and Canada do.
And it has been the basis for those countries to track illicit
activity, including proliferation finance which is the topic of
this hearing today.
The United States could pursue that, and it has been
floated. There is a draft rule that has been put out and
considered but not taken forward.
That rule would be a huge asset for combating cross border
criminal activity including small arms transfers and the money
moving with them.
Ms. Sinema. Thank you so much. Chairman, my time has
expired.
Chairman Pearce. The gentlelady's time has expired. The
Chair now recognizes Mr. Rothfus for 5 minutes for questions.
Mr. Rothfus. Thank you, Mr. Chairman.
Dr. Ottolenghi, Iran and its terror proxy Hezbollah are
currently engaged in hostile or criminal actions around the
world and most notably against Israel and her allies. The Trump
Administration's decision to withdraw from the JCPOA was wise
in my opinion. Before the JCPOA when nuclear related sanctions
were in place in Iran, was there an increased awareness on
Iran's illicit procurement efforts?
Mr. Ottolenghi. Based on my research which is all open
source, I can tell you two things. One, that Iran's
proliferation networks which preexisted the JCPOA and which, if
Iran had intended to genuinely dismantle it or walk away from
its nuclear weapons ambitions and rejoin the international
community as a responsible player, those networks would have
been dismantled, would have been taken apart, would have been
shut down.
We have evidence that none of that happened. That those
networks continue to be active and networks that were targeted
by sanctions prior to the JCPOA have been reconstituted in some
cases. That gives you a sense of the intention.
The second point is that, of course, Iran's proxies have
continued and even expanded dramatically their efforts to
continue to raise cash through cooperation with criminal
cartels across the world from Latin America to West Africa in
an effort to finance their terrorism and their military
activities in the Middle East.
On both accounts, you can see that the JCPOA has not in any
way pushed Iran to become more responsible on either
proliferation or terror finance.
Mr. Rothfus. Has there been any evidence of Iran seeking
illicit goods or technology outside agreed upon channels since
JCPOA went to effect in January 2016?
Mr. Ottolenghi. By all means, yes, I believe that the
latest U.N. report on this matter highlights a number of
procurement attempts that were done outside the accepted or the
procurement channel organized by the JCPOA.
We are aware of some procurement attempts of what we think
is dual use technology. We cannot share it publicly, but I
would be happy to brief the members in private. There is by all
means plenty of evidence that Iran has continued to seek
technology that could be put to use for nefarious purposes.
Mr. Rothfus. What impact will President Trump's May 8, 2018
announcement of the exit of the U.S. from the JCPOA have on
proliferation financing?
Mr. Ottolenghi. I think that you will see as I said the
ramped-up attempts by Iran to procure and also to just evade
sanctions on a broad front in order to keep its own economy
afloat. I think that there are two differences between the
situation now, the current situation and the situation before
2006 when the U.N. sanctions regime began and created
international consensus for economic pressure against Iran.
The first is that, of course, this time the United States
right now does not have the international community going along
with it on withdrawing from the JCPOA, but on the other hand,
you have 10 years of experience of U.S. secondary sanctions
that are very vividly in the mind of the international
financial sector, the business community and so on.
And we are seeing already that regardless of steps taken
and countermeasures by the European Union or other countries
that want to preserve the JCPOA, the vast majority of global
business is walking away from Iran because they just do not
want to take the risk of finding themselves on the wrong side
of U.S. authorities.
Mr. Rothfus. A recent staff report from the Permanent
Subcommittee on Investigations reveal that contrary to
Congressional testimony of Obama-era officials, the U.S.
Department of the Treasury authorized a specific license
allowing a conversion of $5.7 billion in oil revenue held by
Bank Muscat in Omani riyals to euros, which would necessitate a
conversion to the U.S. financial system. What do you make of
the Treasury Department's issuance of this license?
Mr. Ottolenghi. I really can't speak to this matter or on
behalf of the Treasury Department, if any of my colleagues
would like to add.
Mr. Rothfus. Let me ask you this, despite urging from OFAC,
two U.S. banks declined to convert the money, citing compliance
and reputational risk, what implications for proliferation
finance could such conversion have had?
Again, two U.S. banks declined to convert the money, citing
compliance and reputational risk, what implications for
proliferation finance could such a conversion had it taken
place have had?
Mr. Ottolenghi. It would give Iran access to dollars, and
the ability to transact in dollars, it would give legitimacy to
these types of transactions. The whole purpose of the financial
sanctions regime is to deny Iran access to legitimate financial
avenues for financial transactions of the global level. The
whole idea of de-swifting Iran is not so much that you are
going to shut down their banks or prevent them from buying and
selling, but it is basically pulling the plug on an
international platform that allows for millions of transactions
and legitimate transactions on a daily basis.
It makes it extremely difficult for Iran to transact, and
it makes it easier for financial institutions to avoid being
exposed to these types of transactions. When you allow these
transactions to go through nevertheless, you expose your
financial system to reputational risk.
Chairman Pearce. The gentleman's time has expired. The
Chair now would recognize the gentleman, Mr. Lynch. You have
the floor, sir.
Mr. Lynch. Thank you, Mr. Chairman.
I want to thank the witnesses, very thoughtful testimony.
It is ironic though and somewhat counterintuitive, so we talk
about these sanctions against Iran, and against Russia, but we
allow them, we allow them set up shell corporations in the
United States to purchase property, to purchase aircraft,
because we don't have any way of telling who owns the property.
You have Iranians who have bought high rises in New York City,
you have Russian oligarchs that have bought a lot of property
in Florida.
And because we refuse, we thump our chests every time we
assert sanctions, but the reality of the situation is that we
don't know who is buying property here in the United States, we
don't have a public registry like the U.K. Is that right, Ms.
Rosenberg?
Ms. Rosenberg. I certainly agree that is an enormous
problem. Anonymous companies, and the ability for those
transactions you have described to occur, as well as the
ability for U.S. financial institutions to bank entities, the
beneficial owner or the natural person behind which they are
not sure, is an enormous financial crime vulnerability, not
just for proliferation finances we are discussing today, but
across an array of potential financial criminal activity.
There is a new customer due diligence rule that has just
gone live. However, I am concerned by some efforts to slow walk
the implementation of that, and you all are poised to encourage
its urgent implementation. It is one of the few tools available
at present, given that there is a massive gap in beneficial
ownership information, to try and understand who customers of
financial institutions are. I would encourage you all to look
aggressively at the need to implement it immediately.
Mr. Lynch. Thank you. Mr. Keatinge. Do you think I would be
helpful if the United States as a leader, a global leader,
adopted a system where they required people to disclose who
they were when they purchased property in the United States or
do business here in the United States?
Mr. Keatinge. Without doubt. I think you have to put
yourself in the position of those countries around the world
that are visited by U.S. Treasury officials telling them to do
certain things in order to strengthen the integrity of the
global financial system. And those things that they are being
asked to do are absolutely right. But do what I say not what I
do, is often the cry.
The other thing I would like to say is when I arrived
yesterday, I had to show my passport, United States knew I was
coming, I filled out all the forms in advance, to Liz's point,
I don't think you know what money is coming into this country,
we have the same problem in our own country, and that to me is
a national security issue, if you don't know what money is
coming this country, you don't know how that money is then
going to be used to manipulate this country. Understanding what
money is entering your country I think is an important security
consideration. Forget money laundering.
Mr. Lynch. Thank you. I think we are the laggards in this,
I was speaking for the United States and our financial system,
so you have the U.K., and I think a couple of other countries,
Denmark is another one that has a public registry, so you can
actually go online and figure out who owns what company or real
estate. It is public. And you have 20 other countries in the EU
that have committed to adopting this system, so the world is
moving toward this more transparent system, but we here in the
United States are keeping this nontransparent, this opaque
corrupt system, in operation.
I know that Mrs. Maloney has a bill on beneficial
ownership. I have one on aircraft because we have a running
problem here where we had someone affiliated with Hezbollah
that actually registered an aircraft you think after 9/11 we
would be concerned about that. But, we have Hezbollah
registering aircraft here in the United States because we don't
require beneficial ownership.
I love the tough talk about the sanctions, but the fact of
the matter is, we are not doing our job to protect the American
people and to protect our financial system because we don't
require beneficial ownership information when investments and
real estate purchases are made here in the United States. I
thank you for your testimony and I yield back.
Chairman Pearce. The gentleman yields back. The Chair now
recognizes the gentleman looking for balance in life, that
would be Mr. Poliquin. Five minutes. It is not a new quest.
Mr. Poliquin. Thank you, Mr. Pearce, very much, I
appreciate it. Now, gentlemen, a couple of years ago, the House
of Representatives voted strongly against the Iran nuclear
deal, I was one of the people who voted against that, it then
went over to the Senate, and never received a vote. I am sure
we all recall that deal allowed about $150 billion in cash to
be released to the folks that run the Iranian regime. It kept
the nuclear arms program intact and this to a country that
chants on a regular basis, Death to America.
My question to you and will start with you Mr. Ottolenghi,
do you think American families, now we are looking 2 years
beyond when that deal was put into effect by the prior
Administration, do you think American families are less or more
safe today as a result of that deal, and why?
Mr. Ottolenghi. A large premise of that deal was that Iran
would moderate its behavior and become, over time, a more
responsible interlocutor in the region. I think that the
evidence is in plain sight that the opposite has happened, as a
consequence of releasing resources to the Iranian regime,
returning Iran from the cold into the fold of the international
community. Iran has become more aggressive in its behavior, in
its posture, and it has been allowed to wreak havoc in the
region even more so than it did before.
Mr. Poliquin. Therefore, we would both conclude that
American families are less safe?
Mr. Ottolenghi. We are less safe.
Mr. Poliquin. Is that correct? And we were also told that
if the United States pulled out of that deal, it would be
impossible to re-impose sanctions on the country of Iran, is
that true? And would those sanctions be effective?
Mr. Ottolenghi. The United States doesn't need the rest of
the world to have permission to impose or re-impose, expand,
elaborate, extend sanctions against Iran. I think that the key
will be how credible the threats and the deterrence of
sanctions are as we move forward. And for that, you need the
Executive Branch to be willing to vigorously enforce sanctions,
and punish those who will challenge and violate U.S. law.
Mr. Poliquin. Mr. Keatinge, I have introduced a bill in
this committee called the Iranian Leaders Asset Transparency
Act, you might not be familiar with that. It received a
significant bipartisan vote here in the House, and has not gone
anywhere in the Senate. It effectively looks at the 70 or 80
individuals that run the Iranian government, whether it be
political leaders or military leaders, it requires the United
States Treasury Department to post on its website the assets
that are held by those 70 to 80 individuals, post them in not
only English but the three languages that are practiced in
Iran, such that the world can see the assets accumulated
illegally in many cases by these individuals and not reaching
their people.
Do you think that's a good or a bad idea to show the world
how the Iranian people have been ripped off by these folks that
chant Death to America?
Mr. Keating. I think the transparency of asset ownership by
any politician, any leader is an important--is an important
consideration. The posting of that kind of list, you see the
impact that the posting of the list of Russian names had
certainly in Europe when the treasury posted that list early in
the year, people sat up and took note, OK, are these people
likely to be subject to sanction by the United States, we
perhaps just stood clear of them and some of them were
subsequently sanctioned, but transparency of political
leadership asset ownership anywhere in the world is a critical
issue.
Mr. Poliquin. Mr. Keatinge, also to continue please, are
the demonstrations the best of your ability still continuing in
Iran?
Mr. Keatinge. As reported, yes, but I don't know them in
detail.
Mr. Poliquin. Anybody have any further--Mr. Albright, any?
Ms. Rosenberg? Any idea?
Ms. Rosenberg. I too read about them in the newspapers. I
have no personal knowledge of that.
Mr. Poliquin. OK. Thank you very much, Mr. Pearce, I yield
back my time. Thank you.
Chairman Pearce. Thank you. The gentleman's time has
expired. The gentleman from North Carolina, Mr. Budd, is
recognized for 5 minutes.
Mr. Budd. Thank you, Mr. Chairman. I want to thank all our
witnesses today, and Ms. Rosenberg, I want to give you a
special thank you and a shout out for your help through CNAS'
assistance with our virtual currency task force legislation
H.R. 5036, really appreciate it, so thank you again. And, Ms.
Rosenberg, we have financial sanctions on proliferators to stop
them from raising and moving money for their nuclear weapons
programs. In your own opinion, are these sanctions enough to
stop the proliferation finance or is the problem a lack of
enforcement of these sanctions?
Ms. Rosenberg. Thank you for the question and your kind
words. They are not enough, sanctions are not enough, and it is
not just because there are no sanctions. Surely there's more
opportunity to impose more sanctions to expose and go after
proliferation activities where it occurs.
But as we were discussing earlier, there is a broader
approach toward counter-proliferation activities than just
looking at a set of sanctions. It exposes a vulnerability that
we have, because if we know as we do, that North Korean
proliferators, Iranian proliferators are good at using front
companies and shell companies, and trusted agents who change
their names, then it is a near impossible task to keep that
sanctions list up to date so that we can be sure that we are
not providing a means for moving money, for raising money, to
proliferators. As the United Nations has pointed out in calling
for a broader approach to counter-proliferation activity and
counter-proliferation finance, we must look at the nature of
the conduct, not just specific entities.
Mr. Budd. Thank you. If sanctions are not enough, what
would you suggest Congress do to counter this threat?
Ms. Rosenberg. One set of immediate things that Congress
can do and that you all are very well placed to do is to take
action to promote transparency for companies, for entities that
would use the U.S. financial system, not just to prevent
proliferation activities moving through the U.S. financial
system, and by the way, we know that is occurring, that North
Korea has even in the recent past, moved money through the U.S.
financial system.
We must safeguard our financial system, and also serve as a
standard for other jurisdictions internationally. As Tom was
just saying, transparency is our friend here, and that can be
accomplished through beneficial ownership legislation, through
requiring more information in cross border payments, knowing
who brings what kind of money into this country, and removes it
again. And also, in encouraging aggressive implementation of
the CDD rule.
Mr. Budd. I appreciate you are mentioning North Korea.
Thank you. And now I will switch over on North Korea, to Mr.
Albright. Can you discuss how North Korea most regularly
accesses the global financial system? And according to Ms.
Rosenberg, even the U.S. system?
Mr. Albright. Typically, the North Koreans, if they are
going to use banks, they are going to use Chinese banks, I
think one of the challenges has been for Administrations to
sanction those banks. You can--obviously China is deeply
opposed that, but I think--if things don't work out well with
North Korea, and it is--and I wouldn't give it a 50/50 chance
that they will, namely the negotiation succeed, and I think it
is very important for Congress to be willing and prepared to
pass even harsher sanctions going after even what Chairman
Pearce called going after these secondary, second row of
sanctions violators.
And I think there has been legislation that has been
drafted and discussed that it could help the game, because in
the end it is not just a question of going after entities--the
tactics change, countries adapt to the sanctions, so you
constantly have to refresh them and think of new ways to
improve them. And I think the U.S. Congress and particularly
the House of Representatives has been a major leader in coming
up with new sanctions approaches that are or have been quite
effective.
Mr. Budd. Thank you, Mr. Albright, just to continue and
since you narrowed it down to China and their financial
institutions, what do they do to help with North Korea's access
to critical components and technology? It is something you have
insight into?
Mr. Albright. They haven't done enough. It is better than
it was a couple years ago, but, the concern now is just that
some of the actions China took will diminish--China is their
shop--it is North Korea's shopping market, and it is not just
Chinese, it is American, German, British, you name it,
companies are there. And they are selling goods to China, and
the North Koreans are masters at acquiring fairly sensitive
goods for their nuclear and missile programs and to be able to
exploit China's weak export controls.
Now they did clamp down, and that was a positive sign, but
there are some signs that they are weakening, and I think if
things don't go well, one of the things that is going to have
to be done is to make sure that China understands that it can
no longer be a marketplace for the North Korean WMD and missile
programs.
Mr. Budd. Thank you. My time has expired, but before I
yield, if you would add in any of your further answers that you
are able to, just anything you would suggest to the legislative
branch or the Executive Branch that we can do to address some
of the shortcomings. Thank you again. I yield back.
Chairman Pearce. Thank you. And just for those of you still
here, it is the Chair's intention to go to a second round and I
think that is going to be the focus of the round, so if you can
hang around. New Mexico neighbor to the north now, Mr. Tipton,
Colorado, is recognized for 5 minutes.
Mr. Tipton. Thank you, Mr. Pearce. I thank the panel for
taking the time to be here. I think we have a pretty evident
case lined out, particularly the doctor had lined out some of
the complex webs that we see in terms of being able to create
shell corporations, that are going to be able to seek
financing, but part of the challenge obviously is when you get
those smaller sized corporations, we do get into the financial
institutions, that are facing some reputational risk,
institutional risk, when it comes to frankly funding illicit
firearms and weapons with perhaps not even the knowledge that
they are actually doing that.
And that--Ms. Rosenberg, if you maybe speak to really here
in the U.S., we have a pretty robust system to be able to
identify and counter some of the elicit finance that does go
on. But when it comes to our smaller financial institutions, do
you believe that there is an actual awareness that exists in
some of the contemporary realities that we really face with the
proliferation finance, and in the threats that they have?
Ms. Rosenberg. I should start by saying the United States
is best in class when it comes to identifying potential
proliferation activities, to analyzing this, to taking law
enforcement or sanctions action. But that is not enough. We
still witness a North Korean nuclear program that is very
dangerous and scary. We must do more even if the United States
is best in class.
There are a few institutions that sit atop the best in
class status, some of the major U.S. global banks, financial
institutions, and corporations have their own financial
intelligence units, and are able to proactively look for
patterns of proliferation, and communicate that directly to our
law enforcement community. We are in their debt, those two
constituencies.
However, these smaller companies that you have mentioned or
financial institutions, regional credit unions, we have seen in
a number of instances, that they don't have the staff, the
awareness, or the compliance culture to recognize when certain
kinds of financial abuse comes through their system. However,
not all of them have direct international relationships, they
must go through some of these bigger money center banks in
order to conduct international transactions. That becomes a
check on their activities, but it is really up to the Federal
and State level banking supervisors and regulators to help them
to understand and to follow the law and to identify and stop
proliferation activity where it may occur and affect them.
Mr. Tipton. Do you have some direct suggestions along those
lines? You had spoken a little bit transparency obviously, and
we understand certainly that some of the corresponding banking
connectivity that's going to be there, but just being able,
some actions that the smaller institutions institutionally
could take, or is it simply a matter of scale, size, and
dollars?
Ms. Rosenberg. And understanding risk. The United States
has a risk-based approach to its financial supervision, and the
Fed, the OCC that oversee the biggest financial institutions
and those they supervise have a rock solid understanding of
what that looks like. But risk is different for different
institutions, of course, there are smaller regional banks in
the United States that have much broader exposure to Latin
America, for example. Even while they are not the biggest money
center banks, they should have a good sense of their risk. Who
is coming to Miami? Who is structuring transactions in the
United States and buying anonymously real estate in that
market?
Understanding their risk well, is up to their regulators at
the State level. Federal regulations can help them calibrate
their risk appropriately. We should emphasize that banks must
understand the particular risk they have with their footprint
and their orientation for financial activities. It is different
for every financial institution.
Mr. Tipton. Would you maybe share with us a couple of your
thoughts. Just focus a little bit on the SARS (suspicious
activity report) reports that American banks are required to be
able to submit to FinCEN and do you think we have sufficient
information about how the SARs reports are used by law
enforcement, to be able to combat proliferation financing?
Ms. Rosenberg. Do you have sufficient information? I don't
know what kind of briefings that FinCEN gives to you, I would
encourage you to have a full and frank conversation with them.
It is not just them, because they administer the BSA (Bank
Secrecy Act) and collect BSA data, and I think any law
enforcement officer looking at terrorism finance or
proliferation finance might take issue that these SARS are
FinCEN SARs. They belong to the entire law enforcement and
intelligence community, and they should be empowered to have
access to them and to use them.
Mr. Tipton. This can probably just be a yes or no, but do
you think it would be helpful to know more about what kind of
suspicious activity reports, what they use the actions for when
the reports are made?
Ms. Rosenberg. Yes, on proliferation finance, because it
will signal to them that you care, it will give a demand signal
to them, and the financial institutions that they oversee, that
must submit the SARs to know that this is a priority, that they
must look for and take action on.
Mr. Tipton. Great. Thank you and my time is expired. Thank
you, Mr. Pearce.
Chairman Pearce. The gentleman's time has expired. Now,
before I recognize Mr. Davidson, I would like to inquire our
panels if you are able to stay around for a second round, does
your time allow that? Also, in direct for us as members, of
what I am going to do on this next round. What I am going to do
on this next round after, we are going to take the two more
with five questions each? And then I think there is a consensus
among the minority and majority that we would really like to
hear from you specific suggestions.
And so we are going to go through, one, two, three, four,
with one specific. And if your specific it sort of general and
not picking on you Mr. Rosenberg, but you said, if we were
going to do something, it has to be on transparency, then give
us two things on transparency. I will give you one big item and
two sub items.
And then I would like the questions to delve into this
where we see from a policymaker's point of view what it is that
these experts are suggesting that we do if we want to ratchet
up the pressure on this financing of weapons of mass
destruction one or two notches, we can reach for the sky, but
it is not going to happen between now and the end of the year.
We might get a specific bill with specific recommendations
that is lightning quick, and if you have one chance to do
something before the session ends, what would you do, so that's
where we are going after the two or 5 minutes here. Please be
prepared, you have to be concise, we have a vote series coming
up.
Mr. Davidson, make it a good 5 minutes, sir.
Mr. Davidson. Thank you, chairman. Thank you for our
witnesses, and Mr. Albright, it is great to have an Ohio-
educated Wright State grad in the room which is not in the
district, but adjacent and Oberlin also a great Ohio education
system. And I assume the rest of you by your resumes are all
sufficiently well-educated as well.
Thanks for your expertise in the matter, but I want to
spend a little bit of time specifically to deal with Iran, and
the threat of weapons of mass destruction, weapons
proliferation in Iran, but also how they might deploy them.
Under the previous Administration, as part of negotiating the
JCPOA, there was Operation Cassandra, activities involving
fundraising, potentially other activities, and I just wonder
if--I apologize for the potential error in your name, Mr.
Ottolenghi, could you address that?
Mr. Ottolenghi. Absolutely. The, Iran remains the main
sponsor financially of Hezbollah, but over the past decade or
so, Hezbollah's budget has grown exponentially and dramatically
for its needs because of its involvement in Syria after 2011,
because of its obligation to reconstruct the destroyed south of
Lebanon after the war in 2006, while Iran's contribution has
become unreliable due to the increased pressure of sanctions.
Hezbollah has developed networks and cooperation with
criminal syndicates across the globe to finance these
activities through this type of convergence. Narco-terrorism is
the word most commonly used. This activity is yielding, in our
conservative estimate that I have based on open source research
done by some of my colleagues, to about $300 million a year,
out of an estimated budget of about a billion dollars a year.
People who were involved in the Project Cassandra over a
decade would probably estimate that the contribution to
Hezbollah's finances through these type of illicit activities
is dramatically larger. We are talking about a global criminal
syndicate that cooperates with local criminal syndicates,
affecting the security and the wellbeing of our societies this
is not just a national security issue, it is about our
neighborhoods and our lifestyle, and the safety of society.
Mr. Davidson. If we look at how they are doing this, not
just what they are doing, how much of this is conventional
movement of money, wire transfers and whatnot between Iran and
proxy groups and how much is moved by Hawala networks or cash?
Mr. Ottolenghi. I don't have accurate estimates, but I can
say based on my research that a significant part of these
funding activities go through trade-based money laundering that
is conducted through front companies, transacting through or
with the assistance of regular banking institutions, money
exchange houses, but it is mostly wired into the formal global
financial system. And a lot of it goes through the United
States.
Mr. Davidson. Thank you.
Mr. Albright, one of the things that we are wrestling with
is because of these front companies, knowing the beneficial
ownership and if all this data was used for good purposes to
only catch criminals, there would still be a burden of who has
to collect it and monitor it. In the current system the
government has effectively nationalized parts of our banks and
commissioned them as law enforcement officers to collect lots
of data.
While this data is very valuable for national security,
some approaches would have the burden shifted from banks out to
every company that there is reporting requirements, that they
fill out every year, over and above the other forms and
documents that they fill out every year.
What is your best recommendation as we prepare to
transition into? How might we best know the beneficial
ownership of corporations and balancing the right to privacy
that is perhaps unique to America because of the fourth
amendment?
Mr. Albright. I think that transparency is important and it
has been discussed, better than I can do, by other witnesses. I
would add though that we don't have a good system here for
companies to report like banks do. There are all kinds of
suspicious transactions that occur and the system has not been
established here, as in let us say in Britain and Germany, for
companies to easily pass on those suspicious reports.
FBI, ICE do a great job of collecting things, but we don't
have a routine system like the SAR system--
Mr. Davidson. Where we do for banks. Thank you and valid
point. Hopefully that informs our debate going forward and my
time is expired.
I yield, chairman.
Chairman Pearce. The gentleman's time is expired.
The Chair now recognizes Mr. Emmer for 5 minutes.
Mr. Emmer. Thank you, good Chair. Thanks to the panel.
Following up on where my colleague and my friend, Mr. Davidson
was headed, I have major concerns even though the area that we
are trying to address today is incredibly important to our
national security, I think you can become a prisoner of your
need for security, and I really am troubled at the tone that
suggests that U.S. citizens should give up more of their
privacy rights and the private entities and my colleague just
said banks being nationalized as part of the Federal law
enforcement.
They do. They become an extension of Federal law
enforcement activities. And it sounds even from the panel at
times as though the United States is a problem when in fact
this is about third-party facilitators. This is about countries
and entities in other countries that are breaking the law and
we need to focus on them and figure out how we stop them from
doing that. The best example was North Korea earlier. The
problem isn't North Korea. We know North Korea is going to
break the law. The problem is China or anyone that would aid
North Korea in that activity.
I am not saying that I am adamantly opposed to doing
certain things on our end. But it seems to me that should be
the secondary phase. The focus should be on those that are
committed to breaking the law, supporting international
criminals, crime networks, terrorists and the proliferation
issue that we are talking about.
Ms. Rosenberg, I think somebody commented or started to go
into this a little earlier, do you believe that our banks
currently understand the contemporary realities of the
proliferation, late in the day, finance threats that they face?
Ms. Rosenberg. Thank you for the question. A number of the
big U.S. and biggest global banks certainly understand the
nature of the threat. And what should be concerning to us is
that even when they understand it, they know that they may be
incapable of getting after it.
They may be asked by a client to host a set of
transactions, and will look at a particular customer, or host
or facilitate a lot of shipping transactions. They may be given
a list by the U.S. Coast Guard of vessels that may be involved
in illegal ship-to-ship transfers, and have to make a decision
about whether they should provide services to the shipping
agent or the flagging registry.
What decision are they to make? They have inadequate
information about potential proliferation activity. That is the
concerning part. Even the people who know that they have
inaccurate information, which is to say nothing about those who
are committed to breaking the law and are utterly unconcerned
about facilitating proliferation activities.
Mr. Emmer. Right. That goes to the next question which I
think the chairman touched on a little bit early in this
questioning and it goes to what you just talked about. They are
given a list by U.S. Customs.
If banks screen against sanctions lists, not necessarily
the type that you just said, but that could be included, I
suppose, does that put them in a position to understand whether
or not proliferation is--that they are involved or is that the
whole topic of this hearing is that they can't be sure that is
what they are dealing with? Does that make sense?
Ms. Rosenberg. Yes. Perhaps, let me put it this way: All
major global banks, not just U.S. banks, major regional banks
as well, adopt sanctions lists from the United States, United
Nations, et cetera. They are screening transactions against
this list.
If they get a hit and it is a known proliferator, they
could realistically assume that they have a much bigger problem
than one person who tripped.
And even if they say understanding their obligation is not
to provide material support to that entity and close their
account, they may know that person will go down the road and
open an account at the next bank.
They are aware of the problem. They have some limited tools
and certain jurisdictions where these banks are prevented from
talking to one another about proliferation activity they notice
in their own ledger of accounts, that is a problem.
Mr. Emmer. Wow. That is a great point and I was going to
ask you because it would have led in to the next question. What
are the gaps in the financial institutions' responses to
counter-proliferation finance? But I have ran out of time and
perhaps after the hearing, we can follow up with the panelists.
I really appreciate it. I yield back.
Chairman Pearce. The gentleman yields back.
OK. We are going to shift the process just a bit here. You
see the hustle over in the corner there. Each one of you are
going to get one statement up there, OK? It needs to be tight.
You are going to put your statement up there. If it is a
general statement like transparency, then, you are going to
have an A and a B under it, fair enough? And then, we are going
to try to probe that from this side because we are the ones
that have to try to figure out the policy. You all know the
process and you know everything.
We are just trying to take a great, big leap today. We are
running out of legislative time in the year. If we are going to
do anything in this year almost it has to be very quick. We are
just going to go right down the row.
Mr. Albright? And this is going to be much more open here,
not the 5 minutes. If you have questions from this end, then,
flag me and let me know. But let us get the statements up
there. Mr. Albright, what would your statement be?
Mr. Albright. Alright.
Chairman Pearce. And Molly is going to keep with every--
Mr. Albright. I would say first of all, the Government, the
Congress should require a report from the Executive Branch on
revising the reporting, like under SARs, how to educate the
banks if they don't understand the goods. But again, they are--
am I speaking too quickly?
Chairman Pearce. Yes. Help her out--help get the text
exactly right up here. We are taking steps that would generally
take us weeks to get this done. OK.
Mr. Albright. Review SARs and other reporting requirements
by financial institutions and develop methods for banks to
better understand the strategies being used by illicit networks
and the goods that are being sought.
Chairman Pearce. Right.
Has that got you close enough with the script? Get this a
little bit bigger just the font, if you can over there. We are
going to let you come back--OK, there we go. And you can read
it right behind you if you want.
Mr. Albright. The SARs, what is in the SARs? An example
would be--I don't think there is a box on SARs where you check
that there is suspected activity related to proliferation.
Chairman Pearce. Make sure we have it right, we will come
back and tighten it up after we get everybody and generalized.
Are we ready to move on to the second one? Molly, are you
ready to go?
Kristine, excuse me. Kristine, excuse me, I am getting
mixed up here.
Mr. Keatinge, are you ready to go on your statement?
Mr. Keatinge. I would suggest that the right body--you have
to apologize, my knowledge of your system is not as it should
be. You have Section 314(a) and 314(b) of the USA PATRIOT Act,
which allows for information sharing from the public sector,
the Government, to the private sector. We should be seeing that
actively used to share information with the private sector such
that they can actually understand the threat that they are
trying to counter. Information sharing needs to be the
cornerstone of this initiative.
Chairman Pearce. OK. Let her catch up.
Mr. Keatinge. Sorry.
Chairman Pearce. Let us--somebody help out down there. That
is 314(a) and (b).
Mr. Keatinge. 314(a) and (b) of the PATRIOT Act.
Chairman Pearce. To be used more actively and you had much
more descriptive language there. Go ahead.
Mr. Keatinge. To ensure that the financial system is able
to combat the threat of proliferation finance.
Chairman Pearce. All right. Mr. Davidson, I expect the
question here in a minute, but we are going to get all four.
OK. You are going to see the process playing out.
Mr. Ottolenghi, now, tell me again what--you just passed
some significant roadblock or some hurdle in your quest for
permanent status here. Tell us what that is and we are going to
give you a big round of applause here.
Mr. Ottolenghi. It is commonly called the green card.
Chairman Pearce. Yes. OK, all right.
Mr. Ottolenghi. It came yesterday.
Chairman Pearce. Congratulations.
Mr. Ottolenghi. Thank you.
Chairman Pearce. Thanks for working through that and we
appreciate you being here.
Mr. Ottolenghi. It is an honor and it is an honor and a
privilege to have it.
Chairman Pearce. We thank you. All right, what is your
statement?
Mr. Ottolenghi. My statement is that the United States
should address urgently Iran's abuse of foreign passports by
denying access to the visa waiver program to any country that
sells its citizenship for investments. And it could make
exceptions if countries are willing to share on an ongoing
basis names and due diligence packages done on those to whom
they sold their passports.
This is a technique that the Iranians have used in order to
evade sanctions, establish front companies. It speaks again to
the issue of transparency and I think that by leveraging this
tool, the United States would devalue this program or
discourage people--
Chairman Pearce. She is running a little bit behind you.
These Italian guys, they run fast. Take a look at the script
and tell her what you need to fill in and look behind you if
you can't see it. You have the script here behind you and on
the side. Take a look and see what we need to get to catch your
idea completely.
Mr. Ottolenghi. Yes. The United States should address
Iran's abuse of foreign passports by denying access to the visa
waiver program, the program that allows people to apply for a
visa electronically.
Chairman Pearce. Yes. Any country that allows--
Mr. Ottolenghi. Any country that sells its citizenship.
Chairman Pearce. Yes. Iran would be the main focus, but any
country that does this, that sells or facilitates the illegal
use of passports should be denied access to the visa waiver
program or any other--
Mr. Ottolenghi. No. No, not the illegal use, but that they
sell their citizenship through investment programs.
In other words, people who instead of taking up residency
like I just did, just bring money in and in exchange, within a
matter of weeks or months become citizens of that country.
Mr. Foster. Could you give us a brief list of the countries
that currently do that?
Mr. Ottolenghi. There are a number of Caribbean nations.
The best known ones are Saint Kitts and Nevis which were
actually the target of a FinCEN advisory in May 2014 and the
advisory spoke to the fact that this program was being abused
by Iranian citizens with the purpose of evading sanctions.
Other countries in the region, the Republic of Dominica,
Antigua and Barbuda, Saint Lucia, but also other countries
including Malta, a member of the European Union which has
recently created an investment program to give people
citizenship. And it has become the center of a very dramatic
case involving money laundering for Iran by an Iranian national
with a Saint Kitts and Nevis passport that was recently
detained at Dallas International Airport upon coming into the
country in March 2018.
Chairman Pearce. OK.
OK. We need to--Ms. Rosenberg.
Ms. Rosenberg. Mr. Pearce, in your bill, H.R. 6068, Section
10, please transform the study requirement on beneficial
ownership to a binding requirement to collect and report
beneficial ownership in the corporate formation process.
Chairman Pearce. OK.
Did you get it, Kristine?
Mr. Foster. This would be as the corporations are
established or on an ongoing basis with the duty to report any
change?
Ms. Rosenberg. I would love both.
Chairman Pearce. And by the way, we are in deep in
discussion today after talking to Secretary Mnuchin on that one
section of the bill to make it much tighter, but that is--OK,
so, now I would like for each of you four to take a look and if
you want to, we just got them in random order. If you agree
that any of these should be placed at the top of the list, that
you look at someone else's statement and think that should be
at the top of the list, I would like for you all to reorient
those now and then we are going to go kind of questions from up
here.
Mr. Albright. Can we edit ours?
Chairman Pearce. Say again.
Mr. Albright. Can we edit them or should we do that after?
Chairman Pearce. Yes, please do. Yes. Edit and this is the
time where you should really get it more accurate. It is the
reason we are putting them up here exactly for that reason.
Yes.
Mr. Albright. Alright--
Chairman Pearce. Kristine, can you follow what they are
saying there.
Mr. Albright. Executive branch to review the information
sought in the SARs.
Chairman Pearce. Sought, S-O-U-G-H-T. Sorry.
Mr. Albright. Yes, sought in the SARs from banks and other
FIs. And how to more effectively--and then, so, how to more
effectively educate FIs to better understand.
Chairman Pearce. Alright. Any other--this is precisely the
reason we got here because again this process would take weeks,
trust me between you all and us, just the way it works.
Any other amendments, anybody want to tighten it up? Do you
want to amend it?
Ms. Rosenberg. I will amend briefly.
Chairman Pearce. Sure.
Ms. Rosenberg. I will take your excellent suggestion, Mr.
Ranking Member, and add not just upon incorporation but let us
be sure that we are following it on a continuing basis, so,
evaluating beneficial ownership.
Chairman Pearce. All right. Kristine, are you getting that?
Ms. Rosenberg. Thank you.
Chairman Pearce. Make sure we got it. Is that good?
Mr. Foster. Yes. I think there is a grammar problem. You
can put ``and on a continuing basis''.
Chairman Pearce. Yes. Right, which articles of corporation
for a small company can change tomorrow? My wife owns the
company and when we bought it, we changed from complete
ownership here to one person to us. And if it is not on an
ongoing basis, then, we have not done it.
Alright, so, everybody comfortable here?
Alright, Mr. Davidson, I know you already have a question
on 314(a) and (b). Ask the question, push just a light bit,
sir.
Mr. Davidson. Yes, so, 314(a) and (b) and the PATRIOT Act
really stretched the bounds of U.S. privacy protections, not
something that the U.K. seems to enjoy or appreciate much. But,
I can appreciate from the intelligence gathering perspective
why we would want to share this information.
But, let me illustrate some of the activities that happened
in the U.S. and how do we get this balance right in your
estimation. The safeguards are important. Under the previous
Administration, there were reputational risk directives given
by regulators that said we really don't think you should bank
with this company because they sell weapons or something, which
is perfectly legal in the United States, but not appreciated by
the previous Administration.
Companies that had strong balance sheets were told that
because of reputational risk, we can't bank you. That meant
that they lost access to that bank. Once you start sharing all
the information across the market, these are law abiding
companies that could face a scenario where they are not just
locked out of their current bank. They are locked out of the
U.S. banking system. When we are targeting illicit finance, we
want these people to be locked out of the U.S. system to the
extent that we want to block their actions from happening and
we want them to use the U.S. financial system so that we can
actually detect their activities.
There is a paradox there. How do we get this right and
protect the things that we established and supported in the
PATRIOT Act while protecting our founding documents and
principles?
Mr. Keatinge. The issue of de-risking that you refer to is
something that I have studied extensively and it is not just
weapons companies. It is charities, money service businesses,
et cetera, et cetera. At the heart of much of the de-risking
and I don't know the case you refer to, but at the heart of
much of the de-risking is a lack of knowledge and understanding
on the part of the banking system.
Charities are a risk, OK? We get rid of all charities. What
about if you were told charities X, Y, and Z for this
demonstrated reason are a risk? OK. Then, we don't get rid of
all charities. We just get rid of charity X, Y, and Z.
We have something in the United Kingdom called the Joint
Money Laundering Intelligence Taskforce which is a taskforce
where banks and the Government sit together and talk about
financial crime risk in a way that makes the financial system
in the U.K. understand the nature of the risk that the
Government sees, that the authorities see in a more effective
way than simply just saying ``We are not going to deal with
anybody from country X or country Y.''
The risk that you point out isn't entirely fair risk, but
that is why this has to be done as a partnership rather than
just a direction from the State to say, ``This company blank is
bad.'' Why is it that company X or company Y presents a risk?
And the way that I would categorize this is that historically,
the financial system and Governments have operated a parent-
child relationship. Thou shall not file a suspicious activity
report and you won't get any feedback, by the way.
OK. We have to continue to have that relationship, but
there is also a partnership relationship which needs to be
developed. And for the complex, challenging issues like
proliferation finance, we will fail until we embrace
partnership, because the banks will never be able to solve this
on their own. Channels for sharing information in the
appropriate way should be encouraged so that we don't get this
blanket knee-jerk reaction such as de-risking.
Chairman Pearce. Mr. Foster.
Mr. Albright. Can I add to this? Because, actually in the
commodity world it is the same problem. If you just go through
and check, do your corporate compliance responsibilities, if
you just go and do it by a sanctions list, you may meet the
letter of the law but you are not going to accomplish anything.
You need to have to apply some intelligence to it internally
and that is often missing in the banks.
But, unfortunately, what complicates it here is that--and
you see it also in the commodity side--is that the United
States system puts roadblocks in the way of Government
intelligence sharing and that doesn't exist in Britain, doesn't
exist in Germany.
Chairman Pearce. OK.
Mr. Albright. A system I am much more familiar with.
Chairman Pearce. Let us move to Mr. Foster and then if you
can hold that comment--
Mr. Albright. And then, so, if you need to change the law
to allow--and from the reports we get from the U.S.
intelligence community that you have to change the law to more
mandate the intelligence community to share information with
commercial industry on these key kinds of non-proliferation
questions.
Chairman Pearce. Mr. Foster. Thanks.
Mr. Foster. Yes. This is something that we actually get
into in the whole issue of the consolidated audit trail on a
related thing which in its eventual plan will have beneficial
owner identified behind every stock trade that is made, which
there are sorts of interesting money laundering strategies
having to do with international stock trades where you agree to
lose money in this market and win money in this market in a
different country, and very complicated things are possible and
maybe even being done.
And the only way that the regulators are able to imagine
dealing with that is to have in the fullness of time for every
completed trade and in fact, every bid and offer, the
beneficial owner identified behind that, and moreover, only the
regulator that sees everything can net it out. You can't ask
one broker to identify whether or not there is some weird
manipulation going on based on the fraction of the data they
see.
Similarly, a bank may see completely legitimate operations
from everything that they can see and not know that the prices
are bogus for the goods that are being traded. And so,
ultimately, if you have to solve this problem, it gets more and
more intrusive.
And so, my question--the only system that you can write
down that you know will work is that the Government sees every
financial transaction in the place, which smells a lot like
China, where certainly on the commercial side, where everyone
pays by cellphone and everyone assumes the Government sees
every dime that is spent by consumers in China.
And we seem to be--when you try to write a system that
might work, you rampantly are led down that road. There has to
be some single entity that can run massive software because no
set of humans could do this--massive software to look for
patterns of suspicious activity and they have to have access to
everything from all countries. And, boy, that scares me.
Is there any way out of that conundrum or is that really
the only system that will eventually work?
Mr. Albright. I think there is a way. I think--again, I
don't want to oversell it, but I know on the idea of Government
industry cooperation, one way around that is to actually have
it. This in our country, it is much too dominated by police
officers whether FBI are showing up with handcuffs in their
pocket and they are the ones having the discussion with the
banks or the companies and it is intimidating.
It should be the intelligence system. It can be, I hate to
use the word, a front. We want to get around some of the quirks
of our system. And you want to have a discussion between our
best intelligence people and the people who are dealing with
the financial system and also with the goods that these--and
that gets around a lot of this. And I think Britain has done an
excellent job on this and I don't think they are--
Mr. Foster. But in Britain, does the Government have access
to all financial transactions if it wants to see them?
Mr. Keatinge. No. No. It doesn't. Obviously--
Mr. Foster. There is a de minimis threshold. And so, how do
you avoid large numbers of de minimis threshold under de
minimis threshold type transactions for example unless you--
someone has to add them up.
Mr. Keatinge. The way the U.K. is trying to develop this is
by involving the financial sector in discussions around certain
forms of threat, whether it is human trafficking, terrorist
finance, whatever it might be, educating the financial sector
on what to look for. And then, wanting them to go back into
their systems and say, ``Right, given this information, this
understanding, guidance we have been given by law enforcement
or by intelligence services, now, let us interrogate our data
ourselves.''
They are not handing over all the transactions undertaken
by one of the big banks. They are being guided.
Mr. Foster. This is a huge burden. You don't have small
banks, but we do here.
Mr. Keatinge. We do. We have small banks. Don't worry.
Mr. Foster. OK. Wouldn't this be just a colossal burden
that every transaction, they have to say, ``Might this be some
weird flavor of dual use goods that we are unaware of?'' Do
they have to have someone trained in dual use technology at
every small bank?
Mr. Keatinge. The system that we have created over the last
25 years or so puts a huge burden on the banks, on all banks
full stop. We would not create the system that we have today if
we started with a blank sheet of paper today. The way I think
we are trying to address that as I say is by making the
assessments risk-based, so, don't spend all your time trying to
find everything all the time.
Focus on this particular area, this particular theme, this
lead and that is what we are trying to do in the U.K. through
this thing, the Joint Money Laundering Intelligence Taskforce,
just trying to empower the banking system to be smarter at
interpreting their own data themselves.
Chairman Pearce. Ms. Rosenberg.
Ms. Rosenberg. If I may offer a comment following up to
this and it comes through the theme we have been discussing and
to your question.
Chairman Pearce. On 314(a) and (b), yes.
Ms. Rosenberg. Right, on information sharing, if you will.
There are some bright spots of partnership in the United
States. If I may just offer a note of praise to your
legislation, Mr. Pearce, prioritizing the financial criminal
threats. That is an excellent innovation in our current system
and it will help get better at evaluating risk and
understanding what are the supervisory priorities, what is the
risk.
To the issue about information sharing, I would like to
offer some praise for the outstanding work of TFOS at the FBI
working on terrorism financing in the United States. They have
managed in what is legitimately a fairly chilly relationship
between regulated financial entities in the United States and
the regulators to bridge a number of divides, to have excellent
working relationships with financial institutions and with the
intelligence community in order to speak together and gather
information pursuant to terrorist threats, Orlando, San
Bernardino, Las Vegas, ones that affect us here at home,
foreign fighters that also affect us, and security concerns
outside our borders.
And they have managed to pioneer a unique relationship in
our financial system, in our law enforcement community, where
they are able to use official subpoenas and official tools to
gather information and also relationships of trust and
constructive exchange between these constituencies to do
excellent work.
I hope that model can be used also in the counter-
proliferation sphere, where WMD folks work on that issue in the
law enforcement community and others. This is a bright example
I think we should hold up and praise and try to see emulated
elsewhere in the law enforcement community.
Chairman Pearce. OK.
Mr. Davidson.
Mr. Davidson. Yes. Thank you and thanks for the note. I am
glad that you called some attention to and praise for our
existing law enforcement folks whether they are in Treasury or
Department of Justice or Homeland Security. We have had some
really great capabilities and by and large, these people are
there doing the right things and looking for better tools to be
effective in it.
And frankly, the banks, it is amazing to me how
enthusiastic they have been about trying to help with national
security. Certainly, they do have true reputational risk and
some fraud that they want to protect, but a lot of it is just
genuine desire to make sure that they help the cause of
securing our country.
I guess, to Mr. Foster, I think you highlighted the point
that where the state of technology and everything is, to truly
know what is going on. If you really wanted to write good
algorithms, you would probably want to know every transaction
and who is the beneficial owner of every transaction. We are
doing it with stocks with the consolidated audit trail. We
could easily do it with everything else as long as it is not
cash.
If it is digital, it theoretically could be done. And at
this point, you have pushed ``We have to collaborate more with
the banks. We have to collaborate more with the banks.'' And if
they don't collaborate sufficiently enough, now, they really
have reputational risk. You are not being good deputies, OK?
And we are not here yet and in many cases though, we have
approached it. If you think about where the logical end of this
might be, it is almost like the Government is actually putting
brownshirts into the organization and when the bank needs some
more, they just call up and send more brownshirts in. That is
where we could go to.
Why not just let the Government operate it? It is such a
synergistic partnership. It is approaching other ideologies
that the world is seeing become very abusive that we have tried
to use civil liberties to protect against and in the U.S., the
bill of rights is that bulwark. I guess that is the Pandora's
Box we are all reluctant to. And the premise that as you
highlighted in 6068, the base language that we are going to
criminalize every--the least sophisticated businesses, less
than $5 million in revenue, less than 20 employees, if they
don't fill out this form, if you changed companies and you
added a new shareholder, you didn't go get permission from the
Government--or, not really permission, just disclosure. But
then, it turns into permission.
This is a system we have worked hard in America to reject
and help the world reject and it seems in the name of security,
we are trading away an awful lot of liberty and I guess that is
the concern. Hopefully, we get it right. I appreciate your
input and I think you added a lot to some of that dialog. We
will probably have it offline with some of the--
Mr. Albright. Can I add--can I respond in some ways to it
because--
Chairman Pearce. Yes, please do.
Mr. Albright. I have been involved in trying to set up big
data systems at the Department of Homeland Security on querying
essentially U.S. exports. We have hundreds of millions that
have to be queried and you set up big data systems to try to
understand it better and ferret out illicit networks. One has
an acronym of BEEP.
The problem in the banks is that I don't think you could do
what you are most fearful of. I don't think you could digitize
and assess all the banking information that is taking place.
The numbers are just too vast. Maybe if there is--in the
future, maybe that is possible. But I think that what you
mentioned about being a good citizen I think is the driver and
should be the driver, that the banks want to be good citizens
fundamentally and are willing to voluntarily or meet the
requirements of the law to provide certain information.
I think it is the job of the Government to make sure that
information is what is really needed and to be able to guide
the banks on how to do the searches. That is part of the
problem is the banks don't know how to do these searches. And I
think it is the responsibility of the Government to step in and
try to help resolve that, essentially, that search problem. And
cooperation I think is the key, not getting more data because I
don't think in the Government we can actually process it in an
effective manner. It is so much.
Chairman Pearce. Mr. Budd, do you have a question?
Mr. Budd. I just want to elaborate a little bit on Mr.
Albright. Number one, we have the banks very concerned about
the SARs and how much information and compliance cost that they
have. With this potential review, one of the problems with the
banks is that they are so demoralized by having to put all this
information in the system and comply with it, but they don't
know if it actually does anything.
Would the banks be a part of this? Would they understand?
Would they narrow it down? Would they change the SARs to make
the banks know that they are actually accomplishing a mission
here?
Mr. Albright. Yes. And I think you certainly would want to
talk to the banks a lot about this about what is in their mind
is useful. In a sense, they are the first line of defense and
they understand criminal activity, non-ethical activity. And
so, they are--
Mr. Budd. Let me interrupt. The SARs actually--are there
other questions that you think would be better on the SARs or
does it need an overhaul?
Mr. Albright. One is--and again, I am not--I don't know. I
haven't confirmed this, but I am reading from a colleague's
article that there is no check box on the SARs if the banks
suspect the activity is related to proliferation.
When we think that for what we are talking about, that
would be a critical check box and that would educate the
companies, too, of what to look for. I also think there has to
be some give and take. Our system has such levels of
classification. I know it is hard.
Mr. Budd. True.
Mr. Albright. But there has to be a way to tell the banks
who in a sense the bad guys are and how are they operating
today, a lot of times, these lists are how they operated
yesterday, not today and I think you have to find a way to
share the intelligence information in real-time so these banks
then become better lookouts and a better frontline of defense.
Mr. Budd. We are essentially telling the banks how to
comply.
I am sorry, Mr. Pearce, but we tell them how to comply, but
does that compliance lead to us catching more bad guys? I don't
know. That is something we should certainly take a look at.
Chairman Pearce. But at the end of the day, it looks like
that there is a fairly large consensus that some form of
beneficial ownership actually needs to be reported. We have to
solve that problem among us here, among us policymakers here. I
think that probably is going to begin to address in the largest
way possible this financing of threats that come through
weapons of mass destruction or whatever the process is of
breaking the sanctions. Again, a very thorny problem, but we
are dedicated to it.
I very much appreciate you spending the extra time with us
and addressing these extra questions. I appreciate the focus
here to give us really good talking points for this second
round of questions. Thank you again for your time and for your
testimony 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.
This hearing is adjourned.
[Whereupon, at 4:10 p.m., the subcommittee was adjourned.]
A P P E N D I X
July 12, 2018
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