[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

                              ----------                              
                                                                   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
                             
                             
                             
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]