Foreign Regimes' Assets: The United States Faces Challenges in Recovering Assets, but Has Mechanisms That Could Guide Future Efforts

Foreign Regimes' Assets: The United States Faces Challenges in
Recovering Assets, but Has Mechanisms That Could Guide Future
Efforts (14-SEP-04, GAO-04-1006).

For many years, the United States has used economic sanctions,
including the freezing of foreign regimes' assets, when such
regimes have been determined to be a threat to the nation. In
light of recent efforts to "recover"--or target, identify,
freeze, and transfer--Iraqi assets, GAO was asked to examine
overall U.S. efforts to recover foreign regimes' assets. This
report (1) describes the approach the U.S. government uses to
recover foreign regimes' assets, (2) examines the challenges the
United States faces in recovering foreign regimes' assets, and
(3) examines the mechanisms the United States has used to recover
Iraqi assets and their applicability to future efforts.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-1006
ACCNO: A12484
TITLE: Foreign Regimes' Assets: The United States Faces
Challenges in Recovering Assets, but Has Mechanisms That Could
Guide Future Efforts
DATE: 09/14/2004
SUBJECT: Foreign governments
Foreign policies
Intergovernmental fiscal relations
Sanctions
Search and seizure
Tangible assets
Iraq

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GAO-04-1006

United States Government Accountability Office

GAO Report to Congressional Requesters

September 2004

FOREIGN REGIMES' ASSETS

The United States Faces Challenges in Recovering Assets, but Has Mechanisms That
Could Guide Future Efforts

GAO-04-1006

Highlights of GAO-04-1006, a report to congressional requesters

GAO recommends that the Departments of State and the Treasury (1) work
with U.S. intelligence and law enforcement agencies to improve target
identifiers and (2) develop and document lessons learned from the Iraq
effort that could assist with future efforts. State agreed with these
recommendations. Treasury did not comment on them. GAO also recommends
that Treasury seek legislative authority to allow financial regulators to
share complete information from their examinations with OFAC. Treasury
said it was working on this issue and is uncertain that a legislative
change is needed to allow OFAC access to information from financial
regulators' examinations.

www.gao.gov/cgi-bin/getrpt?GAO-04-1006. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact Joseph A. Christoff at (202) 512-8979 or
[email protected], or Davi M. D'Agostino at (202) 512-8678 or
[email protected].

September 2004

FOREIGN REGIMES' ASSETS

The United States Faces Challenges in Recovering Assets, but Has Mechanisms That
Could Guide Future Efforts

The approach the U.S. government takes to recover foreign regimes' assets
varies depending on the foreign policy and national security goals
pursued. Treasury officials stated that the goal of economic sanctions is
to freeze assets of a sanctioned jurisdiction or targeted designee and
prohibit U.S. persons from dealing with them. In certain cases, once the
foreign policy goals of the sanctions are met, the assets are returned to
a country. The Departments of Justice, State, and the Treasury, as well as
intelligence and law enforcement agencies, work together in the targeting
process. Identifying the location of financial assets throughout the
international financial system requires the cooperation of U.S. and
foreign financial institutions. The United States has procedures to freeze
assets of targeted regimes located in the United States or under the
control of U.S. persons. Pursuant to executive orders issued by the
President under various authorities, Treasury's Office of Foreign Assets
Control (OFAC) issues regulations that can require assets to be frozen and
transactions to be blocked and administers sanctions programs.

U.S. government agencies and financial institutions involved in recovering
targeted regimes' assets face a number of challenges. First, U.S. agencies
may not be able to readily obtain accurate and complete information on
targeted entities, such as the spelling of names, addresses, and dates of
birth. Financial institutions can also lack complete identifying
information on their clients. Second, the laws of some foreign governments
complicate the ability of overseas branches of U.S. financial institutions
to comply with OFAC regulations. In these situations, the U.S. government
encourages the relevant foreign governments to allow U.S. financial
institutions to freeze or transfer assets in a manner consistent with U.S.
law or Treasury issues a license to allow U.S. financial institutions to
comply with local laws. Third, OFAC's ability to monitor financial
institutions' compliance with its regulations is limited because it relies
on financial regulators to monitor financial institutions' OFAC compliance
programs.

The United States has used a variety of legal authorities and coordinating
bodies in its recent effort to recover Iraqi assets; some of these
mechanisms could be applied to future efforts. The USA PATRIOT Act of 2001
allowed the United States to take ownership of $1.9 billion of Iraqi
assets and transfer them for use in Iraq reconstruction efforts. United
Nations Security Council Resolution 1483 has resulted in the transfer of
about $847 million in frozen Iraqi assets to a fund for Iraq. However,
factors that include existing claims against the assets and other
countries' laws have slowed the transfer of an additional $2.9 billion
held in other countries. In addition, some mechanisms developed to combat
money laundering and terrorist financing might be applicable to recovering
foreign regimes' assets. Although the U.S. government has used various
legal authorities and coordinating bodies to recover foreign regimes'
assets, it has yet to compile lessons learned from past efforts that could
guide future efforts.

Contents

Letter

Results in Brief
Background
The U.S. Government's Approach to Recovering Foreign Regimes'

Assets Varies Depending on the Goals Pursued U.S. Government Agencies and
Financial Institutions Face a Number of Challenges in Recovering Foreign
Regimes' Assets Mechanisms the United States Has Used to Recover Iraqi
Assets

Could Be Applicable in Future Efforts Conclusion Recommendations for
Executive Action Agency Comments and Our Evaluation

1 2 5

18 27 29 29

Appendixes

Appendix I: Appendix II: Appendix III:

Appendix IV: Appendix V: Appendix VI: Appendix VII:

Appendix VIII:

Objectives, Scope, and Methodology

Targeted Foreign Regimes Since 1979

Key U.S. Legal Authorities Used to Recover Foreign Regimes' Assets

Efforts to Recover Iraqi Assets

Roles of U.S. Entities in Recovering Iraqi Assets

Comments from the Department of State

Comments from the Department of the Treasury

GAO Comments

GAO Contacts and Staff Acknowledgments

GAO Contacts
Staff Acknowledgments

32 35

52 55

56 56 56

Table Table 1: Targeted Foreign Regimes Since 1979

Figures Figure 1: The United States' Approach to Recovering Foreign

Regimes' Assets 7

Figure 2: Assets Frozen in the United States 47

Figure 3: Assets Seized in Iraq 47

Figure 4: Assets Identified and Frozen in Other Countries 48

Figure 5: Hidden Iraqi Assets 49

Contents

Abbreviations

CPA Coalition Provisional Authority
DFI Development Fund for Iraq
FATF Financial Action Task Force
FBI Federal Bureau of Investigation
FIU financial intelligence unit
IEEPA International Emergency Economic Powers Act
NEA National Emergencies Act
OFAC Office of Foreign Assets Control
OIG Office of Inspector General
SDN Specially Designated Nationals
SEC Securities and Exchange Commission
U.N. United Nations
UNPA United Nations Participation Act
USA PATRIOT Act Uniting and Strengthening America by Providing

Appropriate Tools Required to Intercept and Obstruct Terrorism Act

This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

United States Government Accountability Office

Washington, D.C. 20548

September 14, 2004

The Honorable Michael G. Oxley
Chairman
The Honorable Barney Frank
Ranking Minority Member
Committee on Financial Services
House of Representatives

The Honorable Sue W. Kelly
Chairwoman
The Honorable Luis V. Gutierrez
Ranking Minority Member
Subcommittee on Oversight and Investigations
Committee on Financial Services
House of Representatives

The United States has used economic and trade sanctions, including the
freezing of financial assets and blocking of transactions, to achieve
various
U.S. foreign policy and national security goals. These sanctions can be
targeted against foreign countries, terrorists, international narcotics
traffickers, and those engaged in the proliferation of weapons of mass
destruction, among others. Some foreign regimes, whose assets were
frozen by the United States, had accumulated billions of dollars in
illegal
assets. For example, in March 2004, we reported that, between 1997 and
2002, Saddam Hussein's regime accumulated an estimated $10.1 billion
through oil smuggling and surcharges against oil sales and illicit
commissions from commodity suppliers.1

In light of recent efforts to recover Iraqi assets, you asked us to
examine
overall U.S. efforts to recover foreign regimes' assets. In this report,
we use
"recovering foreign regimes' assets" to refer to the process of targeting,
identifying, freezing, and, in some cases, transferring assets to
legitimate
governments of targeted nations.2 This report focuses on U.S. government

1GAO, Recovering Iraq's Assets: Preliminary Observations on U.S. Efforts
and Challenges, GAO-04-579T (Washington, D.C.: Mar. 18, 2004).

2Targeting is the process of determining whose financial assets will be
sought. Identifying is the process of ascertaining the accounts in which
the assets are located. The freezing process prevents the movements of the
assets, and the transferring process transmits them to accounts of a new
government.

procedures to recover assets of foreign regimes targeted under economic
sanctions. It (1) describes the approach the U.S. government uses to
recover foreign regimes' financial assets, (2) examines the challenges the
United States faces in recovering foreign regimes' assets, and (3)
examines the mechanisms the United States has used to recover Iraqi assets
and their applicability to future efforts. This report does not examine
other methods such as criminal prosecutions, civil and criminal asset
forfeiture proceedings, asset sharing, and restitution authority, which
are enforced by the Department of Justice.

We reviewed documents from the U.S. government, United Nations, and
private firms, including testimonies, reports, and relevant laws. We
interviewed key U.S. government officials from multiple U.S. government
agencies. We also interviewed private firm representatives that specialize
in asset recovery, representatives of U.S. financial institutions
responsible for complying with orders to freeze assets and block
transactions, and trade associations representing segments of the U.S.
financial services industry.

We conducted our work from May 2003 to August 2004 in accordance with
generally accepted government auditing standards. (See app. I for
additional information on our scope and methodology.)

Results in Brief The approach the U.S. government takes to recover
foreign regimes' assets varies depending on the foreign policy and
national security goals pursued. Officials at the Department of the
Treasury stated that the goal of economic sanctions is to freeze assets of
a sanctioned jurisdiction or targeted designee and prohibit U.S. persons
from dealing with the subject of the sanctions. In most cases, once the
foreign policy goals of the sanctions are met, economic sanctions result
in the return of assets to a country, as in the case of Afghanistan.
Historically, most asset recovery efforts have focused on targeting the
financial assets of a country's government; however, since September 11,
2001, these efforts have focused increasingly on individuals and groups
associated with targeted regimes. The Departments of Justice, State, and
the Treasury, as well as intelligence and law enforcement agencies, work
together in the targeting process. Identifying the location of financial
assets throughout the international financial system requires the
cooperation of U.S. and foreign financial institutions. The United States
has procedures to freeze assets of targeted regimes located in the United
States or under the control of U.S. persons. Pursuant to executive orders
issued by the President under various

authorities, Treasury's Office of Foreign Assets Control (OFAC) issues
regulations that can require assets to be frozen and transactions to be
blocked and administers sanctions programs.

U.S. government agencies and financial institutions involved in recovering
foreign regimes' assets face a number of challenges. First, U.S. agencies
may not be able to readily obtain accurate and complete information on
targeted entities, such as the spelling of names, addresses, and dates of
birth. In some instances, according to agency officials, such identifiers
are classified to protect the sources of the information. Financial
institutions can also lack complete identifying information on their
clients, such as dates of birth. For both reasons, it can be difficult for
financial institutions to accurately or expeditiously identify and freeze
accounts of targeted entities. Second, according to Treasury officials,
some foreign countries' domestic legal systems do not allow their
governments to freeze targeted assets and, in some cases, prohibit the
transfer of assets to a newly constituted government. These prohibitions
affect branches of U.S. financial institutions located in these countries.
OFAC officials stated that the United States works diplomatically to
encourage the relevant foreign governments to allow U.S. financial
institutions to freeze or transfer assets in a manner consistent with U.S.
law or, conversely, the Treasury issues a license to allow U.S. financial
institutions to comply with local laws. Third, OFAC's ability to monitor
financial institutions' compliance with its regulations is limited because
it does not have supervisory authority over financial institutions and,
thus, relies on financial institution regulators to monitor financial
institutions' OFAC compliance programs. In April 2002, Treasury's Office
of Inspector General recommended that Treasury inform Congress that OFAC's
ability to ensure financial institution compliance with foreign sanctions
would be enhanced through a legislative change that would enable bank
regulators to share information from their compliance examinations with
OFAC. OFAC agreed that its legislative authority could be improved, but as
of August 2004, Treasury had not acted on this recommendation.

The United States has used a variety of domestic and international legal
authorities and coordinating bodies in its recent efforts to recover Iraqi
assets; some of these mechanisms could be applied to future efforts. The
USA PATRIOT Act amendment to the International Emergency Economic Powers
Act (IEEPA) allowed the United States to vest-that is, take ownership
of-$1.9 billion of frozen Iraqi assets and transfer them for use in Iraq's
administration and reconstruction. Implementation of United Nations (U.N.)
Security Council Resolution 1483 has resulted in the

transfer of about $847 million in frozen Iraqi assets located in other
countries to a fund for Iraq as of June 2004. However, factors-including
existing claims against the assets and other countries' laws governing the
ability of these countries to freeze and transfer assets of foreign
regimes under various conditions, such as U.N. resolutions-have slowed the
transfer of an additional $2.9 billion in Iraqi assets held in other
countries. Some mechanisms that were initially developed to combat money
laundering and terrorist financing may generally facilitate the recovery
of foreign regimes' assets. For example, in May 2004, the United States
used one section of the USA PATRIOT Act to designate a Syrian bank as a
"primary money laundering concern" and propose a rule that requires U.S.
financial institutions to sever certain accounts with a Syrian bank that
was used as a conduit for laundering proceeds from illicit Iraqi oil
sales. Although the U.S. government has used various legal authorities and
coordinating bodies to recover foreign regimes' assets, it has yet to
compile lessons learned from past efforts that could guide future efforts.

In this report, we make recommendations to the Departments of State and
the Treasury to work with U.S. intelligence and law enforcement agencies
to improve account identifying information and develop and document a
compilation of lessons learned from the Iraq effort that could assist with
future efforts. We are also recommending that Treasury seek legislative
authority, if necessary, to allow financial regulators to share complete
information from their examinations with OFAC.

In responding to our draft report, State agreed on the need to improve the
accuracy and completeness of account identifying information and the need
to document lessons learned from the current effort to recover Iraq's
assets. Treasury did not comment on these two recommendations. With regard
to the recommendation that it seek legislative authority to allow
financial regulators to share information from their examinations with
OFAC, Treasury stated that based on meetings it had held with financial
regulators, it is not clear that legislative changes are necessary and
that it expected to have comprehensive arrangements in place shortly to
enhance information sharing. We agree that further information sharing
between OFAC and the financial regulators would be helpful, and we
encourage Treasury to seek whatever legislative solutions are necessary to
overcome any obstacles to further information sharing. We modified our
recommendation to reflect Treasury's efforts and reaffirm the importance
of ensuring that information sharing is enhanced.

Background Foreign regimes' assets can be targeted by unilateral,
multilateral, or U.N. Security Council sanctions programs. Economic
sanctions programs fall into two broad categories-(1) financial sanctions
and asset freezes and (2) trade and commercial embargoes. Sanctions are
generally used when other efforts, such as diplomacy, fail. Since 1979,
the United States has frozen the assets of governments, individuals, or
entities associated with 12 countries (see app. II). Each sanctions
program is unique, as are the circumstances and objectives.

The United States and the international community have significantly
increased the number of targeted individuals and entities over the last
decade. Until the late 1990s, targeting the financial assets of
governments, persons, and entities was normally part of a broader
sanctions program aimed at cutting off most or all economic relations with
a country. However, beginning in the late 1990s, the international
community acknowledged that broader sanctions programs can take many years
to achieve their goals and can adversely affect entire populations of
targeted countries. To reduce these impacts, in recent years, the United
States and the international community have begun implementing sanctions
that target the assets of specific persons and entities.

The United States, working with the United Nations, has urged the adoption
of U.N. Security Council resolutions to freeze the assets of both
terrorists and sanctioned foreign regimes. For example, in October 1999,
the Security Council adopted Resolution 1267, which called on all member
states to freeze the assets of the Taliban regime. In response to the
attacks of September 11, 2001, the Security Council adopted Resolution
1373 in September 2001, requiring all U.N. member states to freeze funds
and other financial assets or economic resources of persons who commit,
attempt to commit, participate in or facilitate terrorist acts. A
subsequent resolution in January 2002 (Resolution 1390) called on all
member states to freeze the assets of Osama bin Laden and al Qaeda.
Pursuant to this line of resolutions, the United Nations has listed nearly
300 names of individuals and entities for worldwide asset freezes. These
resolutions target governments, political leaders, individuals, or groups.

Several U.S. laws authorize the recovery of foreign regimes' assets,
including IEEPA, as amended by the USA PATRIOT Act,3 National Emergencies
Act (NEA), Trading with the Enemy Act (TWEA), and the United Nations
Participation Act (UNPA). These laws are generally implemented by
presidential executive orders and agency guidance that provide entities,
such as financial institutions, with specific lists of targets to ensure
that financial assets are blocked or frozen to prevent their movement.
Appendix III provides a summary of key domestic legal authorities used to
freeze foreign regimes' assets.

The U.S. Government's Approach to Recovering Foreign Regimes' Assets
Varies Depending on the Goals Pursued

The U.S. government's approach to recovering assets of foreign regimes
varies depending on the U.S. foreign policy and national security goals
pursued. This process can involve targeting, identifying, freezing, or
blocking assets, and, in some cases, transferring assets of governments,
political leaders, individuals, or groups to legitimate governments. Over
the last decade, the efforts of the United States and the international
community have focused more on individuals and groups associated with
targeted regimes than entire countries. Assets can be located throughout
the international financial system; identifying their location requires
the cooperation of U.S. and foreign financial institutions. The United
States has procedures to freeze targeted regimes' financial assets located
in U.S. financial institutions and has transferred assets back to a
country in a few cases. Figure 1 illustrates this approach, outlines the
various agencies and institutions involved in the asset recovery process,
and identifies the legal authorities used.

3Uniting and Strengthening America by Providing Appropriate Tools Required
to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), Pub. L.
No. 107-56, 115 stat. 272 (2001).

whether the effort will be undertaken unilaterally or multilaterally, as
under U.N. Security Council resolutions. Once a decision is made, the
President of the United States issues an executive order that gives U.S.
executive branch agencies the authority to undertake these actions.

The mandate of OFAC, the administrator and enforcer of U.S. economic
sanctions programs, is to require all U.S. persons, including financial
institutions, to freeze targeted assets located in the United States or
under the control of a U.S. person outside of the United States. OFAC
"targets" an individual, group, or entity by placing its name on the
Specially Designated Nationals (SDN) list.4 According to OFAC officials,
OFAC works with the Departments of Justice and State, other components
within Treasury, and intelligence and law enforcement agencies to develop
adequate evidence to place individuals or entities on the SDN list.
Officials at these agencies stated that this targeting process can be
completed in weeks or months, depending on several factors, such as the
availability of accurate information and the corroboration of intelligence
collected from multiple sources.

The Department of Justice's Civil Division advises OFAC on the legal
sufficiency of the evidence to comply with IEEPA requirements and would
also defend the United States against any potential lawsuits that result
from a targeting decision. OFAC then places targeted names on its SDN
list. OFAC posts updated information on its public Web site and in the
Federal Register, and provides electronic notification services to
financial institutions. In addition, third party vendors provide
subscription services that track OFAC developments, and the Federal
Reserve notifies U.S. financial institutions of updates to the SDN list
through Fedwire, an electronic system that allows it to contact
approximately 9,500 financial institutions.

OFAC also provides specific guidance to financial institutions, which are
required to comply with orders to freeze assets. In addition, OFAC
officials stated that, when appropriate, they contact some banks and firms
individually. According to OFAC officials, the office sends OFAC personnel

4In addition to its country sanctions, OFAC publishes a list of
individuals and companies owned or controlled by, or acting on behalf of,
targeted countries. It also lists individuals, groups, and entities, such
as terrorists and narcotics traffickers designated under programs that are
not country specific. Collectively, such individuals and entities are
called "Specially Designated Nationals and Blocked Persons" or "SDNs."
Their assets are blocked, and U.S. persons are generally prohibited from
dealing with them.

to the physical locations in the United States of known commercial, real,
or tangible properties of the target to serve blocking notices to secure
property. In some cases, these personnel shut down branches and subsidiary
firms controlled by the target.

In 2003, the Departments of Defense and Homeland Security, as well as
intelligence and law enforcement agencies, became more involved in
tracking foreign assets. For example, in the case of Iraq, the Department
of Defense has been on the ground assisting efforts to locate assets of
the former Iraqi regime. Department of Homeland Security, Federal Bureau
of Investigation (FBI), Internal Revenue Service criminal investigators,
and intelligence agency representatives have worked in Iraq to identify
leads to the former regime's hidden assets. See appendix IV for more
information about U.S. efforts to recover Iraqi assets.

The Department of State coordinates with the United Nations to place names
of targets identified through the U.S. targeting process on the
appropriate U.N designation list.5 Internationally, OFAC develops and
corroborates evidence collected by other countries on targets they have
identified and proposed to the United Nations for inclusion on a
designation list. State works diplomatically with other U.N. members to
obtain the international consensus needed to place all targets for which
OFAC has sufficient corroborating evidence on the U.N. lists. For example,
as of June 2004, U.N. members had achieved consensus on over 500 names of
individuals and entities associated with the Taliban, al Qaeda, and the
former Iraqi regime, and had placed them on U.N. designation lists. U.S.
government officials have also participated in international forums, such
as Interlaken and Stockholm, to discuss more effective ways of targeting
economic sanctions.6

5In addition to the SDN list used by the United States, the United Nations
also maintains lists of individuals and entities whose assets should be
frozen. These lists are maintained pursuant to U.N. Security Council
resolutions.

6The Swiss government hosted a number of expert seminars attended by
representatives from national governments, central banks, and the U.N.
Secretariat, among others, on the targeting of United Nations financial
sanctions in 1998 and 1999. These seminars became known as the "Interlaken
Process." The German government sponsored the Bonn-Berlin process, which
took place over 2000-2001, on the design and implementation of arms
embargoes and travel and aviation bans. The Swedish government and a
Swedish university initiated the "Stockholm Process" in November 2001. It
reported on its work to the U.N. Security Council in February 2003.

Identifying the Location of Assets Requires Domestic and International
Cooperation

Financial assets of targets can be spread throughout the international
financial system, and identifying their location requires the cooperation
of U.S. and foreign financial institutions. U.S. government agencies
involved in recovering assets work domestically and with foreign
government counterparts and financial institutions to identify and locate
the assets of targeted foreign regimes.

U.S. intelligence and law enforcement agencies are involved in the
identification process by developing leads and working with counterparts
in other countries. For example, in 2003, the Department of Defense's
Defense Intelligence Agency provided some of the research and analysis
used to identify assets of the former Iraqi regime. However, according to
OFAC officials, if there is little reason to believe that a regime's
assets will be targeted, intelligence and law enforcement agencies are
less likely to gather the kind of information needed by financial
institutions to identify a targeted regime's assets. This situation can
pose a challenge to identifying assets in the international financial
system. According to U.S. officials and experts on the subject of asset
recovery, identifying assets also requires the expertise of lawyers and
investigators from various jurisdictions to coordinate efforts to unravel
what may be complicated financial transactions. For example, in November
2003, the Department of Homeland Security created the Iraqi Provisional
Investigations Task Force, which Treasury participated in, to share
information obtained from Iraqi documents and to coordinate their
activities with other U.S. government agencies. According to Treasury and
State officials, the leads have been provided to U.S. embassy officials
working diplomatically with foreign governments to recover the targeted
assets.

According to U.S. officials, since September 11, 2001, contacts between
U.S. law enforcement officials and prosecutors and foreign officials have
increased. FBI legal attaches overseas and foreign police authorities
regularly share criminal intelligence.7 Information to further criminal
investigations and prosecutions is also exchanged between U.S. and foreign
prosecutors. Such exchanges are facilitated through designated "central
authorities" under treaties the United States maintains with several other
countries. The United States sometimes provides sensitive information to
foreign treaty partners in response to formal requests.

7The FBI's legal attaches work to gain cooperation with international
police partners in support of the FBI's domestic mission. Their goal is to
link law enforcement resources and other officials outside the United
States with law enforcement in this country.

However, this process can be lengthy, according to agency officials. Other
countries have their own standards of evidence, and may have limitations
on whether, and how, they can utilize information and evidence obtained
from the United States. In addition, some countries' laws require the
demonstration of a criminal act before allowing any attempts to identify
assets of selected targets.

The United States Has Procedures to Freeze Assets of Targeted Regimes
Located in the United States or Under the Control of U.S. Persons

The United States has procedures, including domestic legal authorities and
an implementing agency, to freeze assets of targeted foreign regimes in
the United States or under the control of U.S. persons. Treasury's OFAC,
under an executive order declaring a national economic emergency, issues
regulations implementing requirements that targeted regimes' assets be
frozen and transactions involving individuals, groups, or entities
associated with these regimes be blocked. While OFAC's regulations require
compliance by all U.S. persons, compliance by financial institutions is
crucial because these institutions often hold the targeted assets as
deposits or securities or because the institutions could be used to
facilitate transactions involving the assets. Financial institutions and
their employees, as do all U.S. persons, face criminal penalties of up to
10 years' imprisonment and, in the absence of statutory authority in
addition to IEEPA, fines of not more than $50,000 for willful violations
and civil penalties of up to $11,000 per violation for noncompliance.8

The United States Has Transferred Assets Back to a Country in Certain
Cases

The United States has transferred assets back to the newly constituted
governments of countries in certain cases, including the former
Yugoslavia, Afghanistan, and Iraq; however, the circumstances varied in
each case.

In the case of the former Yugoslavia, according to OFAC, $237.6 million in
funds belonging to the Central Bank of the Socialist Federal Republic of
Yugoslavia that had been frozen were transferred to the central banks of
the successor states prior to sanctions being lifted. The transfers
occurred primarily in April and May 2003.

8These penalties apply to violations of regulations, licenses, and orders
issued pursuant to IEEPA. 50 U.S.C. S:1705. Under the Iraq Sanctions Acts,
penalties for violations of the Iraqi Sanctions Regulations are
significantly higher (up to 12 years in prison and $1 million in criminal
penalties and up to $275,000 for civil penalties).

In the case of Afghanistan, funds of the Taliban regime initially frozen
in 1999 were transferred to an existing central bank account at the
Federal Reserve Bank of New York.9 OFAC unblocked the account, and the
Afghan government had the funds transferred to an account in another
country. According to OFAC, $217 million was unfrozen and released to the
Afghan Interim Authority in January 2002.

In the case of Iraq, under a March 20, 2003, executive order, the United
States vested funds previously blocked in the accounts of the government
of Iraq and certain Iraqi entities. The Treasury then directed the
transfer of the funds to a U.S. Treasury account held at the Federal
Reserve Bank of New York. U.S. Treasury officials issued instructions to
the Federal Reserve Bank of New York to transfer the funds in cash
installments to the Coalition Provisional Authority (CPA) in Iraq.10
Between May and December 2003, $1.7 billion was transferred to the CPA and
$208 million to the Development Fund for Iraq (DFI).11

U.S. Government Agencies and Financial Institutions Face a Number of
Challenges in Recovering Foreign Regimes' Assets

U.S. government agencies and financial institutions involved in recovering
foreign regimes' assets face a number of challenges. First, law
enforcement and intelligence agencies do not always have accurate and
complete information, such as the spelling of names, addresses, and dates
of birth, to provide to OFAC for distribution to U.S. financial
institutions and other countries' to assist in their efforts to locate
assets of targeted foreign regimes. Second, the local laws of some foreign
governments where branches of U.S. financial institutions are located
sometimes complicate efforts to freeze or transfer financial assets.
Third, OFAC's ability to monitor financial institutions' compliance with
its regulations is limited because it does not have supervisory authority
over financial institutions

9The funds were transferred to the Federal Reserve Bank of New York due to
the Federal Reserve System's role as the fiscal agent for the United
States Treasury and other government agencies.

10The CPA, established in May 2003, was the U.N.-recognized coalition
authority led by the United States and the United Kingdom that was
responsible for the temporary governance of Iraq. The CPA transferred
power to a sovereign Iraqi interim government on June 28, 2004.

11On May 22, 2003, U.N. Security Council Resolution 1483 recognized the
establishment of the DFI to provide a repository for Iraqi funds to
support the reconstruction of Iraq. DFI funds consist of oil proceeds,
U.N. Oil for Food program surplus funds, and returned Iraqi government and
regime financial assets.

and relies on financial regulators to monitor financial institutions' OFAC
compliance programs.

Target Information Needed to Locate and Freeze Financial Assets Is Not
Always Readily Available

Law enforcement and intelligence agencies do not always have accurate and
complete information, such as the spelling of names, addresses, and dates
of birth, to provide to OFAC for distribution to U.S. financial
institutions and other countries' to assist in their efforts to locate
assets of targeted foreign regimes. The large number of names-more than
3,500- on the OFAC SDN list compounds this problem. For example, in the
case of Iraq, U.S. officials stated that information provided by OFAC for
many of the targeted individuals lacked accurate or complete identifiers
such as dates of birth. In addition, Treasury and Defense Department
officials stated that intelligence agencies sometimes had to declassify
key account identifying information before providing it to financial
institutions. U.S. officials said this process could take months.

According to OFAC officials, financial institutions may also lack complete
identifying information on their clients, such as dates of birth, which
makes it more difficult for them to quickly determine if a name on the
OFAC list matches an account at their institution. Before passage of the
USA PATRIOT Act, U.S. financial institutions were not required to collect
as much identifying information about their clients as they are now.
Regulations issued under section 326 of the act now require financial
institutions to collect certain identifying information about new clients
seeking to open an account, such as name, address, and date of birth.12
OFAC officials stated that during the past 15 years, and particularly
since September 11, 2001, the banking industry has developed a heightened
awareness of the need to comply with OFAC regulations. A representative of
the securities industry stated that since September 11, 2001, the
securities industry has also developed a heightened awareness of the need
to comply with OFAC regulations. According to representatives of U.S.
financial institutions we interviewed, they have undertaken an expensive
and rigorous due diligence program, which can include installing

1231 C.F.R. S:103.121-S:103.123 (2003). Under the customer identification
program rules (the "CIP Rules"), which became effective on June 9, 2003, a
financial institution is not required to collect the identification
verification information mandated by the CIP Rules with respect to persons
with accounts existing prior to the effective date of the CIP Rules,
provided that the financial institution has a "reasonable belief" that it
knows the true identity of those persons.

monitoring software and training employees to detect names of targeted
individuals and entities.

To comply with OFAC's regulations, including orders to freeze assets and
block transactions, the larger financial institutions whose
representatives we interviewed used filtering and interdiction software.
Representatives of these institutions stated that a large number of
transactions initially blocked by their software are "false positives."
This means that the software has blocked transactions of entities with
names similar to those on the SDN list that should not be blocked because
the entities are not those on the SDN list. The representatives we
interviewed stated that OFAC's SDN list contains names with multiple
spellings and, in some cases, does not include identifying information
such as an address or date of birth. This situation requires the financial
institution to conduct additional research to determine if the
transactions involving those entities should be blocked. The verification
process takes time, however, and may lead to delays in processing
legitimate transactions. OFAC recognizes that a lack of identifying
information is a challenge for financial institutions and has worked to
increase the amount of identifying information it provides to financial
institutions.

An official from a trade group representing independent community banks
stated that because its members are smaller banks with fewer customers,
they generally use a manual process to comply with OFAC's regulations.
Members manually compare updates to the SDN list with lists of accounts
maintained by the banks and transactions occurring at the banks over a
specified period. Officials at the trade group noted that managers of most
independent community banks are familiar with their customers and are thus
likely to detect suspicious or unusual transactions without the use of
filtering and interdiction software. However, because OFAC is continuously
updating its SDN list, it can be difficult and time consuming to manually
screen transactions against the list. Financial institution officials
stated that an institution's decision whether to use software or a manual
process to comply with OFAC regulations is a business decision that the
institution must make based on its perceived risk of holding accounts or
processing transactions of those on the SDN list.

Representatives of financial institutions also noted that the OFAC SDN
list does not contain the name of every individual or entity subject to
OFAC regulations. For example, the U.S. sanctions program against Iran
requires bank transactions relating to goods or services of Iranian origin
or transactions controlled by the government of Iran to be rejected. It is

difficult for financial institutions to determine if an entity is owned or
controlled by the government of Iran. Some commercial software vendors
employ staff to research data available from the State Department, Central
Intelligence Agency, and other public sources. These staff update their
database with the names of entities known to be owned or controlled by
affected governments, or the names of government officials in countries
where the sanctions program covers government officials.

Domestic Laws of Foreign Countries Sometimes Prohibit Freezing and
Transferring Assets Located in U.S. Financial Institutions Overseas

The laws of some foreign countries where branches of U.S. financial
institutions are located prohibit freezing of targeted assets under U.S.
unilateral sanctions. In the case of multilateral sanctions, they may also
prohibit the transfer of assets to a new government of a targeted regime.
According to OFAC officials, in the case of U.S. unilateral sanctions,
U.S. laws may conflict with the laws of the host country and thereby
complicate the recovery process. U.S. branches of financial institutions
might be exposed to legal action by the account holders for blocking
financial transactions overseas. For example, a U.S. bank in the United
Kingdom was ordered by a British court to release a Libyan bank's assets
blocked under U.S. unilateral sanctions in 1986. The United States
subsequently authorized the release of the assets. According to an OFAC
official, the process for recovering assets subject to multilateral
sanctions is usually easier because these sanctions require international
compliance.

OFAC's jurisdiction extends to all U.S. persons, which includes U.S.
citizens and permanent resident aliens, companies located in the United
States, overseas branches of U.S. companies, and, in some instances,
overseas subsidiaries of U.S. companies. If these U.S. persons are located
in a foreign country, they are also subject to the local laws and
regulations of that country. In some instances, foreign laws conflict with
OFAC regulations. According to OFAC, in these instances and depending on
the circumstances, (1) the United States works diplomatically to encourage
the foreign governments to allow U.S. financial institutions to comply
with OFAC regulations to freeze and, in some cases, transfer the assets;
or (2) OFAC issues a license authorizing the financial institution to
comply with local law.

OFAC's Ability to Monitor Financial Institutions' Compliance with Its
Regulations Is Limited

OFAC Identifies Violations of Its Regulations Primarily through Reports It
Receives from Financial Institutions

OFAC's ability to monitor financial institutions' compliance with its
regulations, including orders to freeze assets and block transactions, is
limited because, although financial institutions are required to comply
with OFAC regulations, OFAC does not have supervisory authority over them.
Thus, OFAC relies on financial institution regulators to monitor financial
institutions' OFAC compliance programs through their examinations.13 OFAC
identifies transactions of U.S. persons that involve violations of its
regulations primarily through mandatory reports it receives from financial
institutions on transactions that have been blocked. In a few cases, OFAC
also learns about a financial institution's own violations through
"selfdisclosure" by the financial institution.

According to OFAC officials, the primary way OFAC learns about violations
of its regulations is through their review of mandatory reports filed by
financial institutions. When a transaction processed through an
institution is determined to be a "true hit" against the SDN list, it
must, according to law, be blocked. The institution is required to file a
report of this blocking with OFAC within 10 business days. These mandatory
reports include such information as payment instructions for a funds
transfer. According to OFAC officials, OFAC staff review these mandatory
reports and, in every case where there has been an indication that a U.S.
party may have acted inappropriately (such as where one bank that
processes a transaction for another fails to block a funds transfer), OFAC
responded by issuing an administrative subpoena for additional details,
referring the institution for penalty action, issuing a cease and desist
order, or sending a warning letter. According to OFAC, in every instance
where a U.S. bank has acted inappropriately, OFAC has sent information
regarding the transaction to the appropriate financial regulator. In a
limited number of instances, OFAC learns about violations of its
regulations through "self-disclosure" by financial institutions. Both OFAC
and the financial institution representatives we interviewed stated that
these self-disclosures often involve inadvertent violations of OFAC
regulations, such as when a financial institution mistakenly processes a
wire transfer it should have blocked. These improper transactions also
come to light when a second

13Bank regulators currently examining U.S. banks for their compliance with
OFAC regulations include the Office of the Comptroller of the Currency,
Office of Thrift Supervision, Federal Reserve Board, Federal Deposit
Insurance Corporation, and National Credit Union Administration.
Securities regulators currently examining U.S. securities firms for their
compliance with OFAC regulations include the Securities and Exchange
Commission, New York Stock Exchange, and National Association of
Securities Dealers.

institution involved in the wire transfer subsequent to the first
institution through which the wire transfer was sent blocks the transfer
and notifies OFAC in accordance with OFAC regulations, thus putting OFAC
on notice of the first institution's failure to block.

The financial regulatory officials we interviewed stated that, as a matter
of safety and soundness or compliance, they regularly examine financial
institutions subject to their supervision to evaluate the sufficiency of
the institution's policies, procedures, and systems to ensure compliance
with OFAC regulations. When deficiencies in such policies, procedures, and
systems are observed, the financial regulators take the appropriate
supervisory action. Financial regulators stated they are unlikely to
detect specific violations of OFAC regulations during their examinations
unless such violations are apparent from transaction testing (i.e.,
testing individual transactions for compliance with foreign sanctions). If
OFAC violations are identified during an examination, the regulators said
that they direct the institution to contact OFAC immediately, and in
situations involving enforcement actions, the regulators contact OFAC and
share pertinent information.

Treasury Has Not Acted on an In April 2002, Treasury's Office of Inspector
General (OIG) reported that

Inspector General OFAC's ability to monitor financial institution
compliance with its

Recommendation to Seek regulations is hampered because the varied
legislation under which OFAC

Legislative Authority to Increase operates does not provide it with the
authority to proactively monitor

OFAC's Access to Bank financial institution compliance with foreign
sanctions.14 In its report, OIG

Regulators' Examinations made two recommendations to Treasury related to
OFAC's monitoring of financial institution compliance. OIG recommended
that Treasury inform Congress that (1) OFAC lacks sufficient authority to
ensure financial institution compliance with foreign sanctions and (2)
OFAC's ability to ensure financial institution compliance with sanctions
would be enhanced by ensuring that bank regulators share information from
their examinations with OFAC. OIG stated that the second recommendation
could be accomplished by amending the Right to Financial Privacy Act to
include OFAC in the definition of "bank regulator" for the purpose of

14U.S. Department of the Treasury, Office of Inspector General, Foreign
Assets Control: OFAC's Ability to Monitor Financial Institution Compliance
Is Limited Due to Legislative Impairments (Washington, D.C.; Apr. 26,
2002).

allowing bank regulators to share information with OFAC.15 In response,
OFAC officials agreed that its current legislative authority could be
improved in terms of the information shared by bank regulators but stated
that, despite statutory limitations, OFAC and the financial regulators
have created an adequate compliance system.

In December 2003, the Chairman and Ranking Minority Member of the Senate
Finance Committee wrote to the Director of OFAC and asked him to explain
and clarify OFAC's position on the second OIG recommendation. They noted
that OFAC's Director had previously stated that the recommendation is a
"good first step." In his February 2004 response, the OFAC Director stated
that OFAC has engaged in discussions with Treasury about the desirability
of adopting this recommendation and that Treasury continued to review
whether certain changes in the technical definitions of the Right to
Financial Privacy Act would further enhance OFAC's ability to ensure
compliance. However, as of August 2004, Treasury had not acted on OIG's
recommendation.

Mechanisms the United States Has Used to Recover Iraqi Assets Could Be
Applicable in Future Efforts

The United States has invoked domestic legal authorities and international
obligations and used coordinating bodies in its recent efforts to recover
Iraqi assets; some of these mechanisms could be applicable to future
efforts. Some mechanisms identified by U.S. officials have advanced U.S.
efforts to recover assets; others have been less successful than initially
expected. Some mechanisms initially developed to combat money laundering
and terrorist financing also have applicability to foreign regime asset
recovery. Other mechanisms were not initially used in U.S. efforts to
recover Iraqi assets and their use remains limited.

15The Right to Financial Privacy Act, 12 U.S.C. 3401-3418, with certain
exceptions, prohibits agencies from transferring to another agency
financial records originally obtained in compliance with the act that can
be identified with the financial records of a particular customer. The act
contains an exception that allows supervisory agencies, including
financial institution regulators, to share customer financial records.

The United States Has Used Legal Authorities, International Obligations,
and Coordinating Bodies to Recover Iraqi Assets

IEEPA and USA PATRIOT Act Allowed the United States to Vest Iraqi Assets

May 2003 U.N. Resolution Requiring Members to Transfer Frozen Assets to
Iraq Has Not Yet Achieved Its Goals

The United States has invoked domestic legal authorities and international
obligations and used coordinating bodies in its efforts to recover Iraqi
assets. Legal authorities and international obligations that the United
States invoked in pursuit of Iraqi assets include IEEPA and U.N. Security
Council resolutions respectively. Although there has been some success in
bringing about the return of Iraqi assets, multilateral implementation of
U.N. Security Council Resolution 1483 has faced challenges that have
limited its effectiveness. The working group the United States established
to coordinate the U.S. effort to recover Iraqi assets might be used as a
model for future efforts, but the U.S. government has not documented the
mechanisms used in past efforts that could serve as an evaluative basis
and guide for future efforts.

In October 2001, section 106 of the USA PATRIOT Act (P.L. 107-56), amended
section 203 of IEEPA (50 USC 1702) to authorize the President, when the
United States is engaged in armed hostilities or has been attacked by a
foreign country or foreign nationals, to confiscate any property, subject
to the jurisdiction of the United States, of any foreign person, foreign
organization, or foreign country that the President determines has
planned, authorized, aided, or engaged in such hostilities or attacks.
Before the adoption of section 106, the President could confiscate assets
under the Trading with the Enemy Act, but only after a formal declaration
of war.16 The President invoked section 203 of IEEPA when he issued a
March 20, 2003, executive order vesting assets of the former Iraqi regime.
The executive order allowed the United States to vest about $1.9 billion
of frozen Iraqi assets and transfer them to the appropriate authorities
for use in Iraq.

The United States worked with the U.N. Security Council to pass Resolution
1483 on May 23, 2003, to pave the way for the transfer of Iraqi assets
held in other countries to the DFI. However, for a variety of reasons,
implementation of the resolution has not yet resulted in the transfer of
all frozen assets back to Iraq. U.S. officials did not anticipate the
extent of delays in returning the Iraqi assets to the DFI due to existing
claims against the assets and the domestic authorities of countries
holding the assets. State Department officials stated that they used
experience from past U.N. Security Council resolutions to help develop
Resolution 1483.

16Section 106 also amended IEEPA to protect the confidentiality of
classified information submitted in court in cases involving national
security or terrorism.

Treasury and State Department officials said that although they
anticipated some difficulties, they thought Resolution 1483 would
facilitate the recovery and transfer of frozen assets more quickly than it
did because it contained a provision they believed would facilitate the
transfer of Iraqi assets to the DFI. However, other countries' domestic
legal authorities have slowed asset transfers in some instances. Treasury
and State officials stated that they worked to find alternative means of
facilitating countries' transfer of assets to the DFI in instances where a
lack of legal authorities has been a problem. However, as of June 2004,
other countries had transferred about $847 million of the $3.7 billion in
frozen funds worldwide. Large amounts of frozen assets had not been
transferred from some of the countries.

Paragraph 23 of Resolution 1483 directs member states to freeze and
transfer funds "without delay" unless the funds are subject to a prior
judicial, administrative, or arbitral lien or judgment. The paragraph
further states that unless otherwise addressed, claims made by private
individuals or nongovernmental entities on transferred funds may be
presented to the government of Iraq. Paragraph 23 also provides that the
funds generally enjoy privileges and immunities equivalent to those
enjoyed by the United Nations. New or unsettled claims were supposed to be
made to the internationally recognized representative government of Iraq.
However, U.S. government officials stated that some U.N. members have had
difficulty implementing Resolution 1483 due to, among other factors, the
lack of (1) legal authority to implement it in their jurisdiction, (2) an
OFAClike government entity to assist in identifying assets, and (3)
sophisticated financial systems to freeze assets. The existence of
business community and third party claims has also complicated the
process. Finally, according to officials at the U.S. Mission to the United
Nations, some countries have expressed concern over the lack of
transparency of the DFI. As a result, they have been reluctant to transfer
assets to it. Taken together, these challenges have decreased the
immediate effectiveness of Resolution 1483 and have hindered the United
States and others in the international community in implementing the
resolution.

U.S. Government Formed Established in March 2003, the Iraqi Assets Working
Group has focused on the Iraqi Assets Working coordinating asset recovery
efforts for Iraq. Treasury leads the working Group to Coordinate U.S.
group. Its present members include officials from the Departments of
State,

Justice, Defense, and Homeland Security; law enforcement agencies
andEfforts to Recover Iraqi the intelligence community; and the National
Security Council. The former Assets CPA was also a member during the time
of the CPA's existence. The

working group has brought together expertise from across the government to
coordinate the U.S. government's efforts to recover Iraqi assets.
According to public statements, the working group's goals are to

o exploit documents and key financial figures in Iraq to better
understand fund flows;

o secure the cooperation of jurisdictions through which Iraqi funds have
flowed so that working group members can exploit financial records and
uncover the money trail;

o secure the cooperation of jurisdictions in which Iraqi assets may
reside to locate, freeze, and repatriate the assets;

o engage the financial community in the hunt for Iraqi assets generally,
and specifically to secure the cooperation of financial institutions
through which Iraqi funds have flowed or still may reside;

o develop a system to facilitate the fluid repatriation of funds; and

o prepare for potential sanctions against uncooperative jurisdictions
and financial institutions.

Little Documentation of Past Neither Treasury nor State Department
officials we interviewed knew U.S. Government Asset Recovery whether the
U.S. government had used a similar coordinating body for any Efforts Is
Available to Guide of its previous asset recovery efforts. These agency
officials did not have Future Asset Recovery Efforts any documentation of
mechanisms used in past efforts. In addition, one

State official stated that when he started to work on the effort to
recover Iraqi assets, he found little documentation of prior efforts to
guide him.

According to OFAC officials, once a sanctions program is terminated, they
no longer maintain historical information on it. When we asked OFAC
officials for documentation of their past freezing and transferring
regulations and the results of these efforts, they were unable to respond
in a timely manner.

Both Treasury and State officials have stated that they believe the
collective efforts to recover Iraq's assets, including efforts undertaken
as part of the working group, afford the United States an opportunity to
develop and institutionalize lessons learned for future recovery efforts.
Treasury officials stated that they have begun to use the working group as
a

model for new asset recovery efforts and are considering creating an
umbrella interagency mechanism to oversee future efforts.

Mechanisms Developed to Combat Money Laundering and Terrorist Financing
Strengthen Financial Systems Worldwide

Some USA PATRIOT Act Provisions May Facilitate Asset Recovery by Making It
More Difficult to Hide Assets in the U.S. Financial System

Some mechanisms that were initially developed to combat money laundering
and terrorist financing may facilitate foreign regime asset recovery by
strengthening financial systems worldwide. In one instance, a USA PATRIOT
Act provision had direct applicability and was used to sever a foreign
bank's access to the U.S. financial system. Other USA PATRIOT Act
provisions have a more indirect effect on asset recovery by strengthening
U.S. financial institutions' anti-money laundering systems and making it
more difficult to hide assets. U.S. officials stated that other
mechanisms, such as the Financial Action Task Force (FATF)17 and technical
assistance the U.S. government provides to other countries to strengthen
their anti-money laundering systems, help strengthen countries' financial
systems and thus indirectly facilitate asset recovery.

Title III of the USA PATRIOT Act contains expanded provisions of U.S. law
to prevent, detect, and prosecute terrorist financing and international
money laundering at financial institutions already covered by prior laws
and extended these requirements to other financial service providers not
covered under prior laws.18 Treasury officials believe that a number of
the act's provisions have a preventive effect that strengthens the
anti-money laundering safeguards of financial institutions and thus
facilitates the recovery of foreign regimes' assets. More generally, to
the extent that the act's provisions help strengthen the anti-money
laundering systems of U.S. financial institutions, increase transparency,
enhance customer due diligence, and increase reporting of suspicious
financial activity, the provisions make it more difficult to use the U.S.
financial system to hide illicit funds.

In May 2003, the United States used one section of the act to discourage a
foreign bank from illegally holding Iraqi assets. Section 311 of the act
authorizes the Treasury Department to designate specific foreign financial
institutions, jurisdictions, transactions, or accounts to be of "primary

17FATF is an intergovernmental policy body focused on combating money
laundering and terrorist financing.

18The International Money Laundering and Financial Anti-Terrorism Act of
2001, Title III, USA PATRIOT Act, Pub. L. No. 107-56.

money laundering concern." Under this section, Treasury may require
domestic financial institutions with links to jurisdictions or
institutions of "primary money laundering concern" to take specific
measures, such as increased record keeping. This section also allows the
United States to restrict or prohibit access to the U.S. market. According
to Treasury officials, financial institutions may stop dealing with other
financial institutions located in a jurisdiction of "primary money
laundering concern" to avoid the increased record-keeping requirements
established by Section 311.

In May 2004, under Section 311, Treasury issued a notice of proposed rule
making to impose "special measures" against a Syrian bank as a "financial
institution of primary money laundering concern." These special measures
will include severing correspondent accounts with the bank.19 Treasury
based this action, in part, on its belief that the institution had been
used by terrorists and to launder proceeds from the illicit sale of Iraqi
oil.

Treasury officials stated that other USA PATRIOT Act provisions could
facilitate asset recovery efforts in the future. For example, Treasury
officials stated that Section 312 regulations, when finalized, will
increase the due diligence that financial institutions are required to
exercise with regard to certain accounts of foreign financial institutions
or wealthy foreign individuals. According to a Treasury official, one
collateral benefit of this provision has been the creation of databases to
identify "politically exposed persons" and their associates.20

FATF and Technical Assistance State and Treasury officials noted that FATF
has played a part in foreign

to Help Countries Combat regime asset recovery through its role of
identifying international best

Money Laundering and Terrorist practices and issuing standards. State
Department officials said that the

Financing Indirectly Facilitate United States' involvement in FATF has
strengthened the ability of

Asset Recovery countries to implement asset freezes. Treasury officials
agreed with State on the indirect role FATF plays and stated that some of
the best practices adopted by FATF could have relevance to asset recovery
efforts by enhancing other countries' abilities to recover assets.
Treasury officials

19A correspondent account is an account established by a financial
institution for a foreign bank to receive deposits and make payments or
other disbursements on behalf of the foreign bank, or to handle other
financial transactions related to the foreign bank.

20The term "politically exposed persons" applies to persons who perform
important public functions for a state. These persons can include heads of
state, government and cabinet ministers, senior judges, and members of
ruling royal families, among others.

also stated that Treasury has tried to encourage other countries through
FATF to search for hidden Iraqi assets.

The United States has worked with FATF to adopt and implement measures
designed to counter criminals' use of the financial system.21 In 1990,
FATF produced a paper, "Forty Recommendations," intended to assist
countries in their anti-money laundering efforts. These recommendations,
which have been revised twice, were intended for universal application.
FATF expects them to be accepted and implemented by governments wanting
recognition in the international community as jurisdictions that combat
money laundering. Following the terrorist attacks of September 11, 2001,
FATF issued new international standards to combat terrorist financing- the
"Eight Special Recommendations." The objective of these measures, when
implemented by countries worldwide, is to deny terrorists and their
supporters access to the international financial system by encouraging
financial institutions to implement record keeping and other safeguards.
The FATF recommendations on both money laundering and terrorist financing
are designed to assist countries in making their financial systems more
transparent and less vulnerable to misuse. FATF encourages nonmembers to
implement both the FATF Forty Recommendations on antimoney laundering and
the Eight Special Recommendations on anti-terrorist financing.

Treasury officials stated that, in their view, FATF, in and of itself, was
not a mechanism for recovering foreign regimes' assets. The Treasury
representative to FATF stated that FATF is more of a process by which
countries cooperate with each other than an organization with extensive
personnel to recover assets. It has a small secretariat and relies on
members to do the majority of its work. Treasury's representative to FATF
commented that the United States is also looking into ways for FATF to
maintain a database of information on members' laws relating to anti-money
laundering and bank secrecy. The representative was not aware of an effort
to collect information on laws related to foreign regime asset recovery
but stated that this is a task FATF might be able to do. However, he
cautioned that FATF still had the limitations cited above.

21FATF was established in 1989 as a policy-making body that works to
generate the political will to bring about national legislative and
regulatory reforms in the areas of anti-money laundering and
anti-terrorist financing. Its current mandate extends through the end of
2004, but its work will continue if the member governments agree that this
is necessary.

In addition to its participation in FATF, the U.S. government has provided
technical assistance to governments to improve their capacity to combat
money laundering and terrorist financing. State officials stated that
technical assistance of this type could help countries recover assets of
foreign regimes within their borders because it helps them develop the
necessary legal authorities and investigative abilities to locate hidden
assets.

Use of Other Mechanisms for Asset Recovery Has Been Limited

Treasury Did Not Initially Use the Egmont Group to Obtain Information

The United States' use of some other mechanisms to recover foreign
regimes' assets has been limited. For example, Treasury officials stated
that the Egmont Group provides a valuable channel for exchanging
information with other countries.22 However, the Egmont Group was not
fully integrated in the search for Iraqi assets. Also, although not
involved in Iraq, private sector firms have played a role in past asset
recovery efforts and could potentially be used in future efforts.

Treasury officials stated that the Egmont Group provides a valuable
channel through which countries, through their financial intelligence
units (FIUs), can exchange financial investigative information. FIUs are
specialized governmental agencies that countries have created as they
develop systems to combat money laundering.23 The U.S. government did not
initially use the Egmont Group in its efforts to recover Iraqi assets
because, according to Treasury officials, Treasury and State decided to
work diplomatically through high-level financial ministry contacts.
Treasury officials stated that this method of exchanging information
worked well.24 In the Iraq case, Treasury officials stated they already
knew where many of the hidden Iraqi assets were located. They noted that
Egmont is primarily intended for use in facilitating the exchange of
information in ongoing U.S. and foreign criminal investigations. The
officials noted that, with Iraq, there was no such investigation. In March

22The Egmont Group began in 1995 when a number of financial intelligence
units (FIUs) established an informal group to cooperate on the exchange of
law enforcement information. As of June 23, 2004, the Egmont Group had 94
members. The group is named for the location of the first meeting-the
Egmont-Arenberg Palace in Brussels, Belgium.

23Treasury's Financial Crimes Enforcement Network is the FIU for the
United States.

24The Treasury and State Departments are working with foreign governments
to encourage them to transfer frozen Iraqi funds to the Development Fund
for Iraq. According to State Department officials, since March 2003, State
has sent more than 400 cables to other countries requesting that they
transfer the Iraqi funds.

2004 congressional testimony, a Treasury official stated that the Egmont
Group had been used more recently to exchange information related to the
financial activities of the former Iraqi regime and to communicate
specific Iraqi asset law enforcement-related inquiries to other
countries.25

U.S. Agencies Have Not Involved Private sector firms have played roles in
some instances of foreign regime

Private Sector Firms in Foreign asset recovery through civil lawsuits,
investigative efforts, or both;

Regime Asset Recovery Efforts however, they have not played a role in
recovering Iraq's assets. In cases where corrupt leaders have stolen from
their countries, private sector firms have been hired to locate those
assets and file suit to have the assets returned to their country of
origin. Officials from firms involved in some of these efforts stated that
they have developed considerable expertise that has allowed them to
effectively recover assets. According to representatives of private law
firms, civil litigation may be the most effective mechanism for recovering
the stolen assets of corrupt government officials because such proceedings
are public, serving to shame the individuals involved in stealing or
concealing the assets.

Representatives of private sector firms cautioned that efforts of this
sort face challenges that can limit the involvement of private sector
firms in recovering assets. For example, locating assets and suing for
their return is expensive. Countries differ significantly in the laws that
apply to recovering a regime's assets, and pursuing assets in these
countries would require expertise in the laws of each country. In many
cases, the new government sues to recover assets. For example, in 1999,
the government of Nigeria-after the 1998 death of General Sani Abacha, the
former President-sought the return of assets stolen from the country
during the Abacha regime. Nigeria had to hire those with the expertise to
pursue the assets in the foreign countries in which they were invested.
The legal requirements of other countries had to be met before the assets
could be returned to Nigeria. Some countries required the posthumous
criminal conviction of Abacha in Nigeria before funds that he had invested
overseas could be returned. The case was resolved when the government of
Nigeria negotiated a settlement with members of Abacha's family in which
it agreed not to prosecute the family in exchange for some of the stolen
funds.

25U.S. Department of the Treasury, testimony of Juan C. Zarate, Deputy
Assistant Secretary, Executive Office for Terrorist Financing and
Financial Crimes, U.S. Department of the Treasury before the House
Financial Services Subcommittee on Oversight and Investigations, March 18,
2004.

Cases that have involved private sector efforts include the following:

o In 1985, Congress retained a private firm to investigate reports that
Philippines President Ferdinand Marcos and his wife had secretly amassed
millions of dollars in private wealth. The investigation confirmed that
the Marcoses held assets located in the United States and overseas that
were worth almost a billion dollars.

o In 1986, the Haitian government hired a private firm to locate
hundreds of millions of dollars appropriated by former dictator
Jean-Claude "Baby Doc" Duvalier. The investigations led to the seizure of
bank accounts in New York, London, Luxembourg, Paris, and Geneva.

o After the 1988 terrorist attack on Pan Am flight 103 over Lockerbie,
Scotland, plaintiffs sued the government of Libya on behalf of the
victims.26 This resulted in a negotiated settlement in 2003.

o In 1990, the Kuwaiti government hired a private firm to investigate
the financial network used by Saddam Hussein to hide assets in the West.
The firm was able to link Hussein to millions of dollars in assets held in
others peoples' names in the United States and Europe, exposing some of
his front companies and agents.

In the more recent case of Iraq, however, assets in the United States were
vested and U.N. Security Council Resolution 1483 sought to protect assets
in other countries from the types of claims that would result from civil
suits. Private firm representatives stated that these actions removed the
incentive for parties to pursue litigation. Treasury officials stated that
U.S. government investigators were better positioned than the private
sector to pursue Iraqi assets because they had access to classified
information and the expertise to interpret what they found. They also
stated, however, that private investigators might be useful in helping
analyze large volumes of documents and other records.

Conclusion The U.S. government, led by the Treasury and State
Departments, has achieved important successes in its current effort to
recover assets of the former Iraqi regime. However, the challenges it has
faced in this and other

26The party pursuing asset recovery can also be private citizens that have
suffered injury from the actions of a regime.

asset recovery efforts have complicated the process and could be addressed
in a number of ways. For example, improvement of the adequacy of account
identifying information supplied by intelligence and law enforcement
agencies could enable U.S. financial institutions to more accurately
freeze assets in response to OFAC freeze orders in the future. Informing
intelligence and law enforcement investigators of the kinds of information
needed at the earliest possible stage and faster declassification of
intelligence information could expedite the process.

The ability of OFAC, as the U.S. agency charged with administering and
enforcing economic sanctions against targeted foreign regimes and other
designated groups and individuals, to ensure financial institution
compliance with its sanctions could be enhanced if financial regulators
shared information from their examinations with OFAC. This information
could assist OFAC in enforcing its regulations by alerting it to financial
institutions at a higher risk of not complying with its regulations.
Treasury has not acted on a recommendation made by its Office of Inspector
General over 2 years ago to seek legislative authority that would
facilitate OFAC's access to information from bank regulators'
examinations.

Recent efforts to quickly recover assets of the former Iraqi regime have
not been as successful as initially expected, in part, because of existing
claims against the assets and because other countries' domestic legal
authorities have impeded their ability to freeze and transfer assets of
foreign regimes under various conditions, such as U.N. resolutions. U.S.
officials have worked with some foreign governments to make the required
legislative changes and have worked to devise alternative mechanisms for
the assets to be transferred. Our efforts to obtain information on
coordinating or other mechanisms used in past asset recovery efforts were
unsuccessful, in part, because we found little documentation of these past
cases. U.S. officials stated that they have learned a great deal in the
Iraq case and that the mechanisms used in this effort could apply to
future cases. Documenting the government's lessons learned from the Iraq
case would provide a critical road map to ensure that the United States
implements a thorough and well-considered asset recovery effort in the
future.

Recommendations for Executive Action

To improve the U.S. government's readiness to move forward quickly in
future asset recovery efforts, we are making three recommendations:

o The Departments of the Treasury and State should work with U.S.
intelligence and law enforcement agencies to improve the accuracy and
completeness of account identifying information needed by financial
institutions to identify and freeze assets of foreign regimes.

o The Department of the Treasury should seek legislative authority, if
necessary, to enhance OFAC's ability to ensure financial institution
compliance with sanctions by allowing financial regulators to share
complete information from their examinations with OFAC.

o The Departments of the Treasury and State should develop and document
a compilation of lessons learned from the current effort to recover Iraq's
assets that could assist in appropriately institutionalizing and
leveraging all mechanisms available for future efforts.

Agency Comments and Our Evaluation

We received written comments on this report from the Departments of State
and the Treasury. These comments and GAO's evaluation of them are
reprinted in appendixes VI (State) and VII (Treasury). The Departments of
Defense, Homeland Security, Justice, State, and the Treasury, the
Securities and Exchange Commission, Office of the Comptroller of the
Currency, and the Federal Reserve Board also provided technical comments
that GAO discussed with relevant officials and included in the text of the
report, where appropriate.

State agreed with our recommendations regarding the need to improve the
accuracy and completeness of account identifying information and document
lessons learned from the current effort to recover Iraq's assets. State
stated that it would continue to work with foreign governments, Treasury,
and U.S. intelligence and law enforcement agencies to improve target
identifiers. State also stated that it would be desirable to work with the
Department of the Treasury as well with their Missions to the United
Nations and Iraq to develop and document lessons learned that might serve
as a guide to future efforts. Although Treasury did not comment directly
on either of these recommendations, it stated that it will continue to
strive, to the extent applicable and permitted by law, to overcome the
challenges of repatriating assets presented by diverse international legal
constraints.

With regard to whether it should seek a legislative change to allow
financial regulators to share information from their examinations with
OFAC, Treasury maintained that this issue has not affected the U.S.
government's ability to recover regime assets but that further information
sharing between OFAC and the regulators would be helpful. Treasury stated
that it had discussed this issue with federal regulators and, based on
these meetings, it is uncertain whether legislative changes are necessary
to enhance information sharing between OFAC and the financial regulators.
Treasury further stated that it expects that comprehensive arrangements
will be in place shortly to enhance information sharing between OFAC and
the financial regulators. We agree that further information sharing
between OFAC and the financial regulators would be helpful, and we
encourage Treasury to seek whatever legislative solutions are necessary to
overcome any obstacles to further information sharing. We modified our
recommendation to reflect Treasury's efforts and reaffirm the importance
of ensuring that information sharing is enhanced.

Unless you publicly announce its contents earlier, we plan no further
distribution until 30 days after the date of this report. At that time, we
will send copies of this report to the Secretaries of Defense, Homeland
Security, State, and the Treasury; the Attorney General; the Chairmen of
the Federal Reserve Board and the Securities and Exchange Commission; the
Comptroller of the Currency; and interested congressional committees. We
will also make copies available to others on request. In addition, this
report will be available at no cost on GAO's Web site at
http://www.gao.gov.

If you or your staffs have any questions about this report, please contact
Joseph Christoff at (202) 512-8979 or Davi M. D'Agostino at (202)
512-8678. GAO contacts and key contributors to this report are listed in
appendix

VIII.

Joseph A. Christoff, Director International Affairs and Trade

Davi M. D'Agostino, Director Financial Markets and Community Investment

Appendix I

Objectives, Scope, and Methodology

The objectives of our report were to (1) describe the approach the U.S.
government uses to recover foreign regimes' financial assets, (2) examine
the challenges the United States faces in recovering foreign regimes'
assets, and (3) examine the mechanisms the United States has used to
recover Iraqi assets and their applicability to future efforts.

To address all of these objectives, we interviewed key U.S. government
officials from multiple U.S. government agencies. The agencies included

o the Department of the Treasury (Executive Office for Terrorist
Financing and Financial Crimes; Office of Foreign Assets Control;
Financial Crimes Enforcement Network; and Internal Revenue
Service-Criminal Investigation);

o the Department of State (Bureau of Economic and Business Affairs;
Bureau of International Organization Affairs; Bureau for International
Narcotics and Law Enforcement Affairs; and United States Mission to the
United Nations);

o the Department of Justice (Criminal Division's Asset Forfeiture and
Money Laundering Section, Counterterrorism Section, and Office of
International Affairs; Civil Division; and Federal Bureau of Investigation
Terrorist Financing Operations Section and Legal Attache Program);

o the Department of Homeland Security (Bureau of Immigration and Customs
Enforcement); and

o the Department of Defense (Office of the Under Secretary of Defense
for Policy and Defense Intelligence Agency).

To address our first objective of describing the approach the U.S.
government uses to recover foreign regimes' assets and our second
objective of examining the challenges the United States faces in
recovering these assets, we reviewed documents from the U.S. government,
the United Nations, and a nonprofit research organization, including
testimonies, reports, and relevant laws. We also interviewed
representatives of several large U.S. financial institutions responsible
for complying with Treasury's Office of Foreign Assets Control's (OFAC)
regulations to freeze assets and block transactions, two trade
associations representing segments of the U.S. financial services
industry, two financial regulatory agencies, and two self-regulatory
organizations.

Appendix I
Objectives, Scope, and Methodology

To address our third objective of examining the mechanisms U.S. officials
identified for use in recovering Iraqi assets and their applicability to
future efforts, we defined mechanisms to include legal authorities and
coordinating bodies that Treasury Department officials said have been or
could be used for asset recovery. Relevant legal authorities we reviewed
included the International Emergency Economic Powers Act (IEEPA), sections
in Titles I and III of the USA PATRIOT Act,1 and United Nations Security
Council Resolutions 1267, 1373, 1483, 1518, and 1546. Our discussion of
foreign laws and regulations is based on interviews and other secondary
sources. Furthermore, we reviewed documents describing the mission and
operations of coordinating bodies that could be used to recover foreign
regimes' assets, such as the mission statements of the Egmont Group and
Financial Action Task Force.

To identify and describe the role of the Iraqi Assets Working Group, we
interviewed officials from the Department of the Treasury and relied on
public statements describing this group's goals and activities. To
identify and describe U.S. efforts to provide technical assistance to
other countries, we interviewed officials from the Department of State and
reviewed the United States' report to the U.N. Security Council committee
established to oversee implementation of Resolution 1267. Finally, to
determine the role and use of private firms in efforts to recover assets,
we interviewed representatives of law firms and a consulting firm that
have been involved in past cases of asset recovery. We discussed with
these representatives not only their involvement in past cases, but also
the extent to which they have been or thought they could be used in the
current case involving Iraq.

To help describe the activities of the Iraqi assets working group, a key
coordinating body used to recover the assets of the former Iraqi regime,
we requested the minutes of the working group's meetings. Treasury
officials noted that the working group's minutes were classified and also
related to matters that remained sensitive. As a result, they did not
provide us with these minutes. Due to the sensitivity of the matters in
this particular situation and the nature and timing of our engagement, we
relied on public statements and interviews with Treasury officials
describing the group's goals and agency officials' general descriptions of
the working group's minutes to meet our reporting objectives.

1Uniting and Strengthening America by Providing Appropriate Tools Required
to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), Pub. L.
No. 107-56, 115 stat. 272 (2001).

Appendix I
Objectives, Scope, and Methodology

We conducted our work in Washington, D.C., and New York City from May 2003
to August 2004 in accordance with generally accepted government auditing
standards.

Appendix II

Targeted Foreign Regimes Since 1979

The United States, acting unilaterally, through the United Nations (U.N.),
or both, has sought to freeze the assets of targeted foreign regimes to
achieve a range of foreign policy and national security goals. The table
below identifies the foreign regimes against which asset freezing
sanctions were first imposed in 1979 or later (even if those sanctions
were subsequently lifted), the time frame in which the asset freeze was or
is in effect, the body (United States, United Nations, or both) that
imposed the freeze, U.S. executive orders used to implement the freeze,
stated reasons for the freeze, and amount of assets frozen by the United
States as of June 2004.1

Table 1: Targeted Foreign Regimes Since 1979 U.S. executive

Amount of assets

Body imposing orders used to Stated reasons for Foreign regime Time frame
asset freeze implement freeze freeze

frozen by the United Statesa

Afghanistan 1999-presentb Both the United Executive Orders To prevent access to the $217 millionc
(Taliban) States (see executive 13129 and 13224 assets by the Taliban, a
orders) and the group not officially
United Nations in recognized as the formal
Resolutions 1267, government of
1333, 1373, 1390, Afghanistan by the U.S.
and 1455 or U.N. and to pressure
the Taliban to extradite
Osama bin Laden

Angola 1993-2003 Both the United Executive Orders To preserve the unity, No amounts
(UNITA) States (see executive 12865 and 13098 sovereignty, and reported
orders) and the territorial integrity of
United Nations in Angola and promote
Resolutions 1173 and international peace and
1176 stability in the region
Haiti 1991-1994 Both the United Executive Orders To return democracy to $121 million at the
States (see executive 12775, 12853, Haiti and democratically time of releasee
orders) and United 12917, and 12920 elected President Jean-
Nations in Bertrand Aristide to his
Resolutions 841 and office
917d

1This table does not include the regimes of North Korea and Cuba, even
though the United States still has active asset freezes against them.
Those freezes were authorized in 1950 and 1963, respectively, under the
Trading with the Enemy Act, while the freezes against the regimes listed
in this table have been authorized under the International Emergency
Economic Powers Act.

Appendix II Targeted Foreign Regimes Since 1979

(Continued From Previous Page)

U.S. executive Amount of assets Body imposing orders used to Stated
reasons for frozen by the Foreign regime Time frame asset freeze implement
freeze freeze United Statesa

Iraq 1990-present Both the United Executive Orders To end Iraq's invasion of $2.1 billionf States (see executive 12722, 12724, and Kuwait and restore orders) and the 13315 sovereignty, United Nations in independence, and Resolutions 661, territorial integrity to 1483, and 1546 Kuwait; disarm Iraq of

weapons of mass destruction; and assist in the reconstruction of Iraq

Libya 1986-present Both the United Executive Order To end Libya's support $1.25 billionh States (see executive 12543 for international orders) and the terrorism United Nations in Resolution 883g

The former Yugoslavia 1992-1996; 1998-Both the United Executive Orders 2003i States (see executive 12808, 12846, orders) and the 13088, 13121 United Nations in Resolution 942j

To preserve the territorial integrity of all states of the former Yugoslavia; reaffirm the need for a lasting peace settlement by all Bosnian parties; promote international peace and security; provide stability in the region; and maintain progress in Bosnia and Herzegovina in implementing the Dayton peace agreement

$237.6 millionk

Burma 2003-present United Statesl Executive Order To take additional steps Data not availablem 13310 with regard to the Burmese government's repression of the democratic opposition

Zimbabwe 2003-present United Statesn Executive Order To respond to certain $800,000 13288 members of the Zimbabwean government undermining democracy, the rule of law, and political and economic stability in the region

Appendix II Targeted Foreign Regimes Since 1979

(Continued From Previous Page)

U.S. executive Amount of assets Body imposing orders used to Stated
reasons for frozen by the Foreign regime Time frame asset freeze implement
freeze freeze United Statesa

Iran 1979-1981; 1995-United States Executive Orders 1979-1981: to force $23.3 milliono present 12170, 12959, and Iran's release of

13059 American hostages and settle expropriation claims. 1995-present: to end Iran's support for international terrorism and pursuit of weapons of mass destruction

Panama 1988-1989 United States Executive Order To remove General $296.8 millionp 12635 Manuel Noriega from power

Sudan 1997-present United States Executive Order To end Sudan's support $28.4 millionq 13067 for international terrorism, its efforts to destabilize neighboring governments, and the prevalence of human rights violations

Syria 2004-present United States Executive Order To end Syria's support of $0r 13338 terrorism, continued occupation of Lebanon, pursuit of weapons of mass destruction and missile programs, and subversion of United States and international efforts to stabilize and reconstruct Iraq

Source: United Nations, U.S. Treasury Department Office of Foreign Assets Control, and Institute for International Economics.

aTreasury's Office of Foreign Assets Control maintains data on the amount of assets frozen in all blocking programs. These amounts are included in the Treasury's annual Terrorist Assets Report if a regime is determined by the Secretary of State to be a state sponsor of terrorism.

bSanctions against the government of Afghanistan have been lifted. However, a freeze of the assets associated with the Taliban, Osama bin Laden, and al Qaeda remain in effect.

cThese assets were unfrozen and released to the Afghan Interim Authority in January 2002.

dThe United States began asset freezing sanctions against Haiti unilaterally in 1991 and the U.N. followed with multilateral sanctions in 1993.

eOver $55 million was released during the period of sanctions at the request of the recognized government of Haiti, and with the certification of the Department of State, for expenditures related to the operations of the Haitian government in the United States and worldwide.

f$1.93 billion was vested under Executive Orders 13290 and 13315. Approximately $120 million was paid out in claims and another $40 million remains blocked.

gThe United States began asset freezing sanctions against Libya unilaterally in 1986 and the U.N. followed with multilateral sanctions in 1993. Currently, only limited U.S. sanctions remain in effect against Libya.

Appendix II Targeted Foreign Regimes Since 1979

hOf this amount, $5.4 million is blocked in U.S. banks' foreign branches.

iCertain diplomatic and consular assets and assets of the National Bank of Yugoslavia remain blocked.

jThe United States began asset freezing sanctions against the former Yugoslavia unilaterally in 1992, and the U.N. followed with multilateral sanctions in 1994 that were lifted in 1996. The United States' asset freezing sanctions were lifted in 1996. However, the United States imposed another round of unilateral sanctions from 1998 to 2003.

kThis amount represents assets of the National Bank of Yugoslavia returned to the successor states of the former Socialist Federal Republic of Yugoslavia. In addition, amounts representing blocked wire transfers were released by General License, and the New York State Banking Department was licensed to take possession of assets of Beogradska Banka, New York Agency and Jugobanka, New York Agency as part of bankruptcy proceedings against the two institutions.

lThe European Union imposed multilateral asset freezing sanctions against Burma in 2000, prior to the United States' asset freezing action in 2003.

mThe sanctions became effective in July 2003, just after the cut off date for U.S. holders of property to report blocked property. The most recent report was due June 30, 2004.

nThe European Union imposed multilateral asset freezing sanctions against Zimbabwe in 2002, prior to the United States' asset freezing action in 2003.

oThis figure represents the amount-mostly diplomatic and consular property-remaining blocked from the 1979-1981 sanctions. During the period of the 1979-1981 sanctions, over $12 billion in Iranian property was blocked.

pThe assets were unfrozen and released to the legitimate government of Panama in 1989.

qOf this amount, $100,000 is blocked in U.S. banks' foreign branches.

rNo Syrian individuals or entities had been formally targeted by the United States for an asset freeze as of June 2004. Therefore, no Syrian assets have yet been frozen.

Appendix III

Key U.S. Legal Authorities Used to Recover Foreign Regimes' Assets

International Emergency Economic Powers Act (IEEPA)

Provides broad authority to the President to declare a national emergency to deal with an unusual and extraordinary threat, which has its source in whole or in part outside the United States, to the national security, foreign policy, or economy of the United States (50 U.S.C. S:S: 1701-06). The act gives the President substantial authority over foreign trade, including authority over property in which a foreign country or national thereof has any interest with respect to any property, subject to the jurisdiction of the United States (50 U.S.C. S: 1702). In October 2001, section 106 of the USA PATRIOT Act (P.L. 107-56), amended section 203 of IEEPA (50 U.S.C. S: 1702) to authorize the President to confiscate any property subject to the jurisdiction of the United States of a foreign person, organization or country that the President has determined to have planned or engaged in armed hostilities against the United States and vest all "right, title, and interest" in a designated agency or individual.

Trading with the Enemy Act of 1917 (TWEA)

Provides the President with authority under certain circumstances to confiscate and vest foreign assets subject to the jurisdiction of the United States, but only after a congressional declaration of war (50 U.S.C. App. S:S:1-44).

United Nations Participation Act (UNPA)

Authorizes the President to apply economic sanctions, including freezing of assets, called for by United Nations Security Council Resolution (22 U.S.C. S: 287c).

National Emergencies Act (NEA)

Imposes procedural limitations on Presidential declarations of national emergency under which foreign assets have been blocked or frozen. A national emergency declared under the act automatically terminates on the anniversary of the declaration of the emergency unless the President publishes in the federal register and transmits a notice to Congress stating that the emergency continues in effect (50 U.S.C. S:S: 1601-51).

Source: GAO.

Appendix IV

Efforts to Recover Iraqi Assets

After Iraq invaded Kuwait in 1990, the United Nations imposed sanctions
against the Iraqi regime; however, in 1996, the United Nations and Iraq
agreed on the Oil for Food Program, thereby enabling Iraq to pay for
humanitarian items. We estimated that between 1997 and 2002, Saddam
Hussein's regime accumulated at least $10.1 billion in surcharges on oil
sales and illicit charges from suppliers exporting goods to Iraq through
the Oil for Food program. In its recent efforts to recover assets of the
former Iraqi regime worldwide, the U.S. government has engaged the
services of a variety of U.S. agencies and recently developed domestic and
international tools to recover these and other hidden assets. U.S.
recovery efforts have had varying results.

Estimated Revenue Obtained Illegally by the Former Iraqi Regime Exceeds
$10 Billion

In August 1990, Iraq invaded Kuwait, and the United States froze Iraqi
assets. Shortly after, the United Nations also imposed sanctions against
the regime. Security Council Resolution 661, approved in 1990, prohibited
all nations from buying Iraqi oil and selling Iraq any commodities except
food or medicines. The resolution also required member states to block the
transfer of Iraqi assets from their countries. The United States amended
its sanctions consistent with the resolutions. Other nations similarly
froze Iraqi government assets in their countries.

In December 1996, the United Nations and Iraq agreed on the Oil for Food
Program, which allowed Iraq to sell a set amount of oil to pay for food,
medicine, and infrastructure repairs. Iraq's oil revenue was placed in a
U.N.-controlled escrow account. From 1997 through 2002, we estimate that
the former Iraqi regime acquired $10.1 billion in illegal revenues-$5.7
billion in oil smuggled out of Iraq and $4.4 billion in surcharges on oil
sales and illicit charges from suppliers exporting goods to Iraq through
the Oil for Food program.1 This estimate is higher than our May 2002
estimate of

1This estimate is in constant 2003 U.S. dollars.

Appendix IV
Efforts to Recover Iraqi Assets

$6.6 billion2 because it includes (1) oil revenue and contract amounts for
2002, (2) updated letters of credit from prior years, and (3) newer
estimates of illicit commissions from commodity suppliers.

Oil was smuggled out through several routes, according to U.S. government
officials and oil industry experts. Oil entered Syria by pipeline, crossed
the borders of Jordan and Turkey by truck, and was smuggled through the
Persian Gulf by ship. Jordan maintained trade protocols with Iraq that
allowed it to purchase heavily discounted oil in exchange for up to $300
million in Jordanian goods. Syria received up to 200,000 barrels of Iraqi
oil a day in violation of the sanctions. Oil smuggling also occurred
through Turkey and Iran.

In addition to revenues from oil smuggling, the Iraqi government levied
surcharges against oil purchasers and commissions against commodity
suppliers participating in the Oil for Food program. According to some
Security Council members, the surcharge was up to 50 cents per barrel of
oil and the commission was 5 percent to 15 percent of the commodity
contract.

In our 2002 report, we estimated that the Iraqi regime received a 5
percent illicit commission on commodity contracts. However, a September
2003 Department of Defense review found that at least 48 percent of 759
Oil for Food contracts were potentially overpriced by an average of 21
percent.3 Food commodity contracts were the most consistently overpriced,
with potential overpricing identified in 87 percent of the contracts by an
average of 22 percent. The review also found that the use of middlemen
companies potentially increased contract prices by 20 percent or more.
Defense officials found 5 contracts that included "after-sales service
charges" of between 10 percent and 20 percent.

In addition, interviews by U.S. investigators with high-ranking Iraqi
regime officials, including the former oil and finance ministers,
confirmed that the former regime received a 10 percent commission from
commodity suppliers. According to the former oil minister, the regime
instituted a fixed

2GAO, Weapons of Mass Destruction: U.N. Confronts Significant Challenges
in Implementing Sanctions Against Iraq, GAO-02-625 (Washington, D.C.: May
23, 2002).

3The Defense Contract Audit Agency and the Defense Contract Management
Agency, Report on the Pricing Evaluation of Contracts Awarded under the
Iraq Oil for Food Program

(Washington, D.C.; Sept. 12, 2003).

Appendix IV
Efforts to Recover Iraqi Assets

10 percent commission in early 2001 to address a prior "compliance"
problem with junior officials. These junior officials had been reporting
lower commissions than what they had negotiated with suppliers and
pocketing the difference.

The United Nations Security Council Has Adopted Three Recent Resolutions

The United Nations Security Council has adopted three recent resolutions
regarding Iraq-1483, 1518, and 1546. The United States and other U.N.
Security Council members adopted Resolution 1483 to assist in the
reconstruction of Iraq and the establishment of a new Iraqi government.
This resolution lifted trade sanctions initially imposed on Iraq in 1990;
provided for the transfer of the U.N.'s Oil for Food Program to the
Coalition Provisional Authority (CPA) over a 6-month period; sought to
freeze assets of the former government of Iraq, Saddam Hussein, other
senior officials, and their immediate families (the former regime); noted
the establishment of a Development Fund for Iraq (DFI); and required all
U.N. members to transfer assets frozen in their countries to the DFI.
Unlike recent resolutions regarding the Taliban and terrorists worldwide,
Resolution 1483 did not establish a committee to oversee its
implementation. On November 24, 2003, the United States and other U.N.
Security Council members adopted Resolution 1518, which established a
committee to identify individuals and entities whose assets were to be
frozen under Resolution 1483. On June 8, 2004, the U.N. Security Council
adopted Resolution 1546, which anticipated the end of the occupation of
Iraq, the dissolution of the CPA, and endorsed the formation of a
sovereign interim Iraqi government.

U.S. Efforts to Recover Iraq's Assets Involve Many Agencies and Use
Recently Developed Domestic and International Authorities

The United States has tapped the services of several U.S. agencies and
used recently developed U.S. and international authorities in its efforts
to recover Iraqi assets worldwide. About 20 entities, including those of
the Departments of Defense, Homeland Security, Justice, State, and the
Treasury, intelligence agencies, law enforcement agencies, and the
National Security Council, are involved in recovering Iraqi assets.

To lead the asset recovery efforts, the United States created an
interagency coordinating body headed by the Department of the Treasury.
This group, the Iraqi Assets Working Group, has developed a strategy to
identify, freeze, seize, and transfer former regime assets to Iraq. The
working group's goals include exploiting documents and key financial
figures or information on fund flows, working with other jurisdictions
where funds are located to recover assets, working with the financial
community, developing a system

Appendix IV
Efforts to Recover Iraqi Assets

to facilitate fund repatriation, and prepare for potential sanctions
against uncooperative jurisdictions and financial institutions. The
working group is leveraging the expertise of U.S. officials involved in
efforts to recover assets of terrorists and money launderers.

Provisions in the USA PATRIOT Act amended IEEPA to allow the President to
confiscate foreign property subject to U.S. jurisdiction in times of
"ongoing hostilities" or if the United States is attacked. These
provisions gave the President authority, invoked through an executive
order, to confiscate the property of the former Iraqi regime and to vest
title to these assets. In addition, according to the State Department,
U.N. Security Council Resolution 1483 was an important vehicle for
requiring other countries to transfer assets to Iraq. On May 22, 2003, the
U.N. Security Council adopted Resolution 1483, which (1) noted the
establishment of the DFI, a special account in the name of the Central
Bank of Iraq; and (2) required member states to freeze and immediately
transfer to the DFI all assets of the former Iraqi government and of
Saddam Hussein, senior officials of his regime, and their family members.
The resolution also included a unique immunity provision to protect the
assets from new claims.

U.S. Efforts to Recover the Former Iraqi Regime's Assets Have Had Varying
Results

The United States Transferred Nearly $1.9 Billion in Vested Assets to Iraq

In 2003, the U.S. government quickly vested Iraq's assets held in the
United States and transferred them to Iraq. Similarly, the U.S. military
seized assets recovered in Iraq of the former Iraqi regime. The CPA has
used most of the vested and seized assets for emergency salary and pension
payments to Iraqi civil servants, reconstruction projects and other
ministry operations. U.S. officials noted that some other countries'
efforts to transfer Iraqi funds have been slowed by their lack of
implementing legislation.

On August 2, 1990, in compliance with a Presidential executive order,
Treasury's OFAC issued regulations to financial institutions requiring
them to freeze Iraqi assets in the United States. More than 30 banks in
the United States identified and froze accounts with $1.4 billion in Iraqi
assets.4 These institutions held assets in accounts that accumulated
interest.

4In addition, according to OFAC, more than $480 million was frozen in U.S.
financial institutions abroad.

Appendix IV
Efforts to Recover Iraqi Assets

The United States Seized More Than $900 Million in Iraq

Other Countries Have Transferred about $847 Million to the DFI

In March 2003, the President invoked authorities, including the enhanced
authority in IEEPA, as amended by provisions in the USA PATRIOT Act, and
issued an executive order confiscating Iraqi government assets held by
U.S. financial institutions and vesting them in the U.S. Treasury. The
order resulted in the vesting in the Treasury of about $1.9 billion of the
former regime's assets in the names of the government of Iraq, the Central
Bank of Iraq, Rasheed Bank, Rafidain Bank, or the State Organization for
Marketing Oil. All U.S. financial institutions holding such funds were
ordered to transfer those funds to the Federal Reserve Bank of New York,
and 23 banks did so by electronically transferring the funds. Between May
and December 2003, the United States transferred more than $1.7 billion to
Iraq and $208 million to the DFI.

With respect to the $1.7 billion transferred to the CPA, according to
Treasury and Federal Reserve officials, Treasury instructed the Federal
Reserve Bank of New York to release portions of the funds to the
Department of Defense (DOD) upon the Office of Management and Budget's
approval of the CPA's spending plans. As of July 2004, the former CPA had
disbursed about $1.68 billion of the $1.7 billion for emergency needs in
Iraq, including salaries for Iraqi civil servants and pensions, and for
ministry operations.

The CPA informed us in June 2004 that the U.S. military, in coordination
with U.S. law enforcement agencies, had seized about $927 million of the
regime's assets in Iraq. The U.S. military seized about $894 million in
Iraqi bonds, U.S. dollars, euros, and Iraqi dinars, as well as quantities
of gold and jewelry. This amount included $750,000 found with Saddam
Hussein when he was captured. Department of Homeland Security agents
seized an additional $32 million. The CPA was authorized to use these
seized funds for humanitarian and reconstruction efforts in Iraq. As of
July 2004, the former CPA disbursed used about $799 million for
reconstruction activities, including projects, ministry operations, and
liquefied petroleum gas purchases.

To encourage other countries to transfer the funds to Iraq, the Secretary
of the Treasury requested that the international community identify and
freeze all assets of the former regime. Additionally, Treasury and State
officials said they have engaged in diplomatic efforts to encourage
countries to report and transfer the amounts of Iraqi assets they had
frozen. For example, since March 2003, State officials told us they have
sent more than 400 cables to other countries requesting that they transfer
funds to the DFI.

Appendix IV
Efforts to Recover Iraqi Assets

According to Treasury, other countries have frozen about $3.7 billion in
Iraqi assets. About $2 billion was frozen since March 2003. Treasury
officials reported that, as of June 2004, other countries and the Bank for
International Settlements had transferred about $847 million to the DFI.
Treasury officials noted that the remaining assets have not been
transferred to the DFI because some countries do not have the necessary
legislation to effect the transfer. Other countries are holding about $955
million pending adjudication of claims. U.N. Security Council Resolution
1483 requires the immediate transfer of Iraqi funds identified and frozen
in these accounts to the DFI.

According to U.S. officials, Treasury and State continue to leverage the
U.S. government's relations with finance ministries and central banks to
encourage the transfer of Iraqi assets to the DFI. Treasury and State have
worked with countries holding Iraqi assets either to assist them in
developing legislation that would allow them to transfer Iraqi assets they
hold to the DFI, or to identify other ways they can transfer the assets
without violating their own laws. For example, in one case, an Iraqi bank
owning an account holding Iraqi assets located overseas formally requested
in writing a transfer of the funds to the DFI. The country holding the
assets was able to comply with the request and transferred the funds
without having to pass legislation. In another instance, a "mirror"
account was set up in the DFI and the funds from a country were
transferred to that account. Therefore, the funds were never technically
transferred out of the originating account. Some of the remaining frozen
Iraqi funds are located in financial institutions in Iraq's neighboring
countries or Europe.

Limited Progress Has Been Made Although the United States has made
progress in identifying hundreds of

in Recovering Hidden Assets of individuals, entities, and accounts
associated with the former Iraqi regime,

the Former Iraqi Regime limited progress has been made in recovering the
regime's hidden assets. Because the former Iraqi regime used a network of
front companies, trusts, and cash accounts in the names of the family
members of the former regime's leaders and associates, it has been
difficult to identify how much remains hidden in the international
financial system. U.S. government officials have cited estimates ranging
from $10 billion to $40 billion in illicit earnings, although it is not
clear what earnings went to whom.

According to U.S. government officials, U.S. government asset recovery
efforts have focused on exploiting documents in Iraq, interviewing key
financial figures, and convincing other countries to cooperate in
identifying and freezing illicit funds that have flowed through or still
reside in their countries. For example, Department of Homeland Security
agents have

Appendix IV
Efforts to Recover Iraqi Assets

exploited Central Bank of Iraq records for leads regarding Saddam
Hussein's procurement network to further investigations of U.S. entities
that conducted illegal transactions with Iraq. Internal Revenue Service
criminal investigators have conducted interviews of former finance
ministry individuals and exploited financial documents of the regime to
obtain leads on the location of targeted assets. The Defense Intelligence
Agency provides some of the research and analysis used to identify assets
of the former Iraqi regime.

In addition, according to Treasury and State officials, they are
coordinating efforts to gain the cooperation of other countries. For
example, U.S. investigators have identified over 2,600 accounts that
potentially belonged to the former regime in other countries. State
officials are working through their overseas embassies to get the
cooperation of these countries to return the funds to the DFI.
Anticipating the end of the occupation of Iraq and the reassertion of the
full sovereignty of Iraq, the United States also supported the adoption of
U.N. Security Council Resolution 1546 on June 8, 2004, which continues the
obligations of U.N. member states to freeze and transfer certain funds,
assets, and economic resources to the DFI in accordance with Resolutions
1483 and 1518 adopted in 2003.

Appendix V

Roles of U.S. Entities in Recovering Iraqi Assets

Figure 2: Assets Frozen in the United States

Source: GAO.

Figure 3: Assets Seized in Iraq

Source: GAO.

Appendix V Roles of U.S. Entities in Recovering Iraqi Assets

Figure 4: Assets Identified and Frozen in Other Countries

Source: GAO.

Appendix V Roles of U.S. Entities in Recovering Iraqi Assets

Figure 5: Hidden Iraqi Assets

Source: GAO.

Appendix VI

Comments from the Department of State

Appendix VI
Comments from the Department of S at te

Appendix VII

Comments from the Department of the Treasury

Note: GAO comments supplementing those in the report text appear at the end of this appendix.

See comment 1.

Appendix VII
Comments from the Department of the
Treasury

See comment 2. Now on p. 33.

See comment 3.

Appendix VII
Comments from the Department of the
reasuT ry

Appendix VII
Comments from the Department of the
Treasury

The following are GAO's comments on the Department of the Treasury's
letter dated September 2, 2004.

GAO Comments 1.

We incorporated the updated amounts of Iraqi assets (1) transferred by
other countries to the Development Fund for Iraq, (2) frozen currently by
other countries, (3) held by other countries pending adjudication of
claims, and (4) transferred by the United States to the Development Fund
for Iraq.

Treasury took exception to our statement regarding their reluctance to
share the Iraqi Assets Working Group meeting minutes with us. Treasury
stated that it did not provide these meeting notes because they are
classified and related to ongoing matters that remained sensitive at the
time of the request. We note that GAO has statutory access to classified
information and is required by law to maintain the same level of
confidentiality as the agency from which we get the information. Due to
the sensitivity of the matters in this particular situation and the nature
and timing of our engagement, we relied on public statements and
interviews with Treasury officials describing the group's goals and agency
officials' general descriptions of the working group's minutes to meet our
reporting objectives.

Treasury commented that the issue of whether OFAC should have access to
the financial regulators' compliance examinations of financial
institutions is important and is being discussed within Treasury and with
the federal banking regulators, but maintained that this issue has not
affected the U.S. government's ability to recover regime assets. Treasury
also commented that it is uncertain that legislative changes are necessary
to enhance information sharing between OFAC and the financial regulators.
Treasury said it is pursuing the issue and it expects that comprehensive
arrangements will be in place shortly to enhance information sharing
between OFAC and the financial regulators. We agree that further
information sharing between OFAC and the financial regulators would be
helpful, and we encourage Treasury to seek whatever legislative solutions
are necessary to overcome any obstacles to further information sharing.

Appendix VIII

GAO Contacts and Staff Acknowledgments

GAO Contacts Joseph A. Christoff, (202) 512-8979 Davi M. D'Agostino, (202)
512-8678

Staff Thomas Conahan, Lynn Cothern, Philip Farah, Rachel DeMarcus, Ronald
Ito, Barbara Keller, Sarah Lynch, Zina Merritt, Tetsuo Miyabara, Marc

Acknowledgments Molino, and Mark Speight made key contributions to this
report.

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