Combating Terrorism: Federal Agencies Face Continuing Challenges
in Addressing Terrorist Financing and Money Laundering
(04-MAR-04, GAO-04-501T).
The September 11, 2001, terrorist attacks highlighted the
importance of data collection, information sharing, and
coordination within the U.S. government. Such efforts are
important whether focused on terrorism or as an integral part of
a broader strategy for combating money laundering. In this
testimony, GAO addresses (1) the challenges the U.S. government
faces in deterring terrorists' use of alternative financing
mechanisms, (2) the steps that the Federal Bureau of
Investigation (FBI) and Immigration and Customs Enforcement (ICE)
have taken to implement a May 2003 Memorandum of Agreement
concerning terrorist financing investigations, and (3) whether
the annual National Money Laundering Strategy (NMLS) has served
as a useful mechanism for guiding the coordination of federal
efforts to combat money laundering and terrorist financing. GAO's
testimony is based on two reports written in September 2003
(GAO-03-813) and November 2003 (GAO-04-163) for the Caucus and
congressional requesters within the Senate Governmental Affairs
Committee, as well as a February 2004 report (GAO-04-464R) on
related issues for the Senate Appropriations Subcommittee on
Homeland Security.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-501T
ACCNO: A09432
TITLE: Combating Terrorism: Federal Agencies Face Continuing
Challenges in Addressing Terrorist Financing and Money Laundering
DATE: 03/04/2004
SUBJECT: Counterterrorism
Data collection
Money laundering
National preparedness
Terrorism
Interagency relations
Program evaluation
Strategic planning
National Money Laundering Strategy
******************************************************************
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GAO-04-501T
United States General Accounting Office
GAO Testimony
Before the Caucus on International Narcotics Control, U.S. Senate
For Release on Delivery
Expected at 2:00 p.m. EST COMBATING TERRORISM
Thursday, March 4, 2004
Federal Agencies Face Continuing Challenges in Addressing Terrorist Financing
and Money Laundering
Statement of Loren Yager, Director International Affairs and Trade and Richard
M. Stana, Director Homeland Security and Justice Issues
GAO-04-501T
Highlights of GAO-04-501T, a testimony before the Caucus on International
Narcotics Control, U.S. Senate
The September 11, 2001, terrorist attacks highlighted the importance of
data collection, information sharing, and coordination within the U.S.
government. Such efforts are important whether focused on terrorism or as
an integral part of a broader strategy for combating money laundering. In
this testimony, GAO addresses (1) the challenges the U.S. government faces
in deterring terrorists' use of alternative financing mechanisms, (2) the
steps that the Federal Bureau of Investigation (FBI) and Immigration and
Customs Enforcement (ICE) have taken to implement a May 2003 Memorandum of
Agreement concerning terrorist financing investigations, and (3) whether
the annual National Money Laundering Strategy (NMLS) has served as a
useful mechanism for guiding the coordination of federal efforts to combat
money laundering and terrorist financing.
GAO's testimony is based on two reports written in September 2003
(GAO-03-813) and November 2003 (GAO-04-163) for the Caucus and
congressional requesters within the Senate Governmental Affairs Committee,
as well as a February 2004 report (GAO-04-464R) on related issues for the
Senate Appropriations Subcommittee on Homeland Security.
www.gao.gov/cgi-bin/getrpt?GAO-04-501T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Loren Yager at (202)
512-4128 or [email protected] or Richard Stana at (202) 512-8777.
Thursday, March 4, 2004
COMBATING TERRORISM
Federal Agencies Face Continuing Challenges in Addressing Terrorist Financing
and Money Laundering
The U.S. government faces various challenges in determining and monitoring
the nature and extent of terrorists' use of alternative financing
mechanisms, according to GAO's November 2003 report. Alternative financing
mechanisms are outside the mainstream financial system and include the use
of commodities (cigarettes, counterfeit goods, illicit drugs, etc.), bulk
cash, charities, and informal banking systems to earn, move, and store
assets. GAO recommended more systematic collection, analysis, and sharing
of information to make alternative financing mechanisms less attractive to
terrorist groups. In response to our recommendation that the FBI, in
consultation with other agencies, systematically collect and analyze
information on terrorists' use of these mechanisms, Justice did not
specifically agree or disagree with our recommendation, but other agencies
agreed with the need for improved analysis. The Treasury agreed with our
recommendation to issue an overdue report on precious stones and
commodities, but it remains unclear how the resulting product may be used
as the basis for an informed strategy as expected under the 2002 NMLS. The
Internal Revenue Service (IRS) agreed with our recommendation to develop
and implement procedures for sharing information on charities with states
and issued IRS procedures and state guidance on December 31, 2003.
To resolve jurisdictional issues and enhance interagency coordination of
terrorist financing investigations, the FBI and ICE have taken steps to
implement most of the key provisions of the May 2003 Memorandum of
Agreement. According to GAO's February 2004 report, the agencies have
developed collaborative procedures to determine whether applicable ICE
investigations or financial crimes leads may be related to terrorism or
terrorist financing-and, if so, determine whether the FBI should
thereafter take the lead in pursuing them. GAO's report noted that
continued progress will depend largely on the ability of the agencies to
establish and maintain effective interagency relationships.
From a broader or strategic perspective, the annual NMLS generally has not
served as a useful mechanism for guiding coordination of federal efforts
to combat money laundering and terrorist financing, according to GAO's
September 2003 report. While Treasury and Justice had made progress on
some strategy initiatives designed to enhance interagency coordination of
investigations, most initiatives had not achieved the expectations called
for in the annual strategies. The report recommended (1) strengthening the
leadership structure for strategy development and implementation, (2)
identifying key priorities, and (3) establishing accountability
mechanisms. In commenting on a draft of the September 2003 report,
Treasury said that our recommendations are important, should the Congress
reauthorize the legislation requiring future strategies; Justice said that
our observations and conclusions will be helpful in assessing the role
that the strategy process has played in the federal government's efforts
to combat money laundering; and Homeland Security said that it agreed with
our recommendations.
Mr. Chairman and Members of the Caucus:
We are pleased to be here today to discuss some of the challenges the U.S.
government faces in addressing the problems of terrorist financing and
money laundering. The terrorist attacks of September 11, 2001, highlighted
the importance of data collection, information sharing, and coordination
within the U.S. government. Such efforts are important whether focused on
terrorism or as an integral component of a broader strategy for combating
money laundering. This is particularly true given that terrorist
financiers and money launderers may sometimes use similar methods to hide
and move their proceeds.
As requested, today, we will address three issues. First, what challenges
does the U.S. government face in deterring terrorists' use of key
alternative financing mechanisms-methods outside the mainstream financial
system-such as the use of commodities, bulk cash, charities, and informal
banking systems to earn, move, and store assets? Second, to what extent
have the two applicable law enforcement agencies-the Federal Bureau of
Investigation (FBI) and Homeland Security's U.S. Immigration and Customs
Enforcement (ICE)-taken steps to implement a 2003 Memorandum of Agreement
(Agreement) to resolve jurisdictional issues and enhance interagency
coordination of terrorist financing investigations; and, how has the
Agreement affected the mission or role of ICE in investigating money
laundering and other traditional financial crimes? Finally, how has the
annual National Money Laundering Strategy (NMLS) served as a useful
mechanism for guiding the coordination of federal efforts to combat money
laundering and terrorist financing?
Our testimony is based on two reports we have provided to this Caucus1 and
a recently issued report2 we have provided to the Congress on related
issues. We should also mention that we are in the process of conducting
additional work specifically on the issue of coordination of U.S. agencies
abroad in combating terrorist financing. We look forward to presenting
those findings to the Caucus.
Summary Our November 2003 report noted various challenges that the U.S.
government faces when addressing terrorists' use of key alternative
financing mechanisms. While we were unable to determine the extent of
terrorists' use of alternative financing mechanisms such as diamonds,
gold, and informal financial systems, we did find that terrorists earn,
move, and store their assets based on common factors that make these
mechanisms attractive to terrorist and criminal groups alike. For example,
the commodities terrorists use tend to be of high value, easy to conceal,
and hold their value over time. In addition, we described the challenges
that U.S. agencies faced in monitoring terrorists' use of alternative
financing mechanisms, such as accessibility of terrorists' close knit,
nontransparent financing networks; terrorists' adaptability to avoid
detection; and competing U.S. government priorities and demands. As a
result of our findings, we made recommendations to various U.S. agencies
to more systematically collect, analyze, and share information to make
these alternative methods less attractive to terrorist groups. In response
to our recommendation that the FBI systematically collect and analyze
information on terrorists' use of these mechanisms, Justice did not
specifically agree or disagree with our recommendation. The Treasury
agreed with our recommendation to issue an overdue report on precious
1U.S. General Accounting Office, Terrorist Financing: U.S. Agencies Should
Systematically Assess Terrorists' Use of Alternative Financing Mechanisms,
GAO-04-163 (Washington, D.C.: Nov. 14, 2003). This study was also
requested by the Ranking Minority Member, Senate Subcommittee on Oversight
of Government Management, the Federal Workforce and the District of
Columbia; Committee on Governmental Affairs. U.S. General Accounting
Office, Combating Money Laundering: Opportunities Exist to Improve the
National Strategy, GAO-03-813 (Washington, D.C.: Sept. 26, 2003). This
study was also requested by the Ranking Minority Member, Permanent
Subcommittee on Investigations, Senate Committee on Governmental Affairs.
2U.S. General Accounting Office, Investigations of Terrorist Financing,
Money Laundering, and Other Financial Crimes, GAO-04-464R (Washington,
D.C.: Feb. 20, 2004). Our study was mandated by Title I of the Senate
Appropriations Committee report on the Department of Homeland Security
Appropriations Bill for 2004; Senate Report 10886 (July 2003).
stones and commodities but it remains unclear how the resulting product
may be used as the basis for an informed strategy as expected under the
2002 NMLS. The Internal Revenue Service (IRS) agreed with our
recommendation to develop and implement procedures for sharing information
on charities with states and issued IRS procedures and state guidance on
December 31, 2003.
Our February 2004 report noted that the FBI and ICE had implemented or
taken concrete steps to implement most of the key provisions in the May
2003 Memorandum of Agreement on terrorist financing investigations. For
instance, the agencies had developed collaborative procedures to determine
whether applicable ICE investigations or financial crimes leads may be
related to terrorism or terrorist financing-and, if so, determine whether
these investigations or leads should thereafter be pursued under the
auspices of the FBI. However, the FBI and ICE had not yet issued a joint
report on the status of implementation of the Agreement, which was
required 4 months from its effective date. The Agreement did not affect
ICE's statutory authorities to conduct investigations of money laundering
and other traditional financial crimes. But, regarding terrorist financing
investigations, we noted that the FBI and ICE have confronted and will
continue to confront a number of operational and organizational
challenges, such as establishing and maintaining effective interagency
relationships and ensuring that the financial crimes expertise and other
investigative competencies of both agencies are appropriately and
effectively utilized.
Our September 2003 report noted that the annual NMLS generally has not
served as a useful mechanism for guiding the coordination of federal law
enforcement agencies' efforts to combat money laundering and terrorist
financing. While Treasury and Justice had made progress on some strategy
initiatives designed to enhance interagency coordination of
investigations, most initiatives had not achieved the expectations called
for in the annual strategies. We recommended that, if the requirement for
a national strategy is reauthorized, the Secretaries of the Treasury and
Homeland Security and the Attorney General (1) strengthen the leadership
structure for strategy development and implementation, (2) require
processes to ensure key priorities are identified, and (3) establish
accountability mechanisms. In commenting on a draft of the September 2003
report, Treasury said that our recommendations are important, should the
Congress reauthorize the legislation requiring future strategies; Justice
said that our observations and conclusions will be helpful in assessing
the role that the strategy process has played in the federal government's
efforts to combat money laundering; and Homeland Security said that it
agreed with our recommendations.
Background
Cutting off terrorists' funding is an important means of disrupting their
operations. As initial U.S. and foreign government deterrence efforts
focused on terrorists' use of the formal banking or mainstream financial
systems, terrorists may have been forced to increase their use of various
alternative financing mechanisms. Alternative financing mechanisms enable
terrorists to earn, move, and store their assets and may include the use
of commodities, bulk cash,3 charities, and informal banking systems,
sometimes referred to as hawala.4 In its fight against terrorism, the
United States has focused on individuals and entities supporting or
belonging to terrorist organizations including al Qaeda, Hizballah, HAMAS
(Harakat al-Muqawama al-Islamiya-Islamic resistance Movement), and others.
These terrorist organizations are known to have used alternative financing
mechanisms to further their terrorist activities. Government officials and
researchers believe that terrorists do not always need large amounts of
assets to support an operation, pointing out that the estimated cost of
the September 11 attack was between $300,000 and $500,000. However,
government officials also caution that funding for such an operation uses
a small portion of the assets that terrorist organizations require for
their support infrastructure such as indoctrination, recruitment,
training, logistical support, the dissemination of propaganda, and other
material support.
In response to the terrorist attacks of September 11, the Departments of
the Treasury and Justice both established multiagency task forces
dedicated to combating terrorist financing. Treasury established Operation
Green Quest, led by the Customs Service-now ICE in the Department of
Homeland Security-to augment existing counterterrorist efforts by
targeting current terrorist funding sources and identifying possible
future sources. On September 13, 2001, the FBI formed a multiagency task
3The use of bulk cash refers to smuggling currency, travelers checks, or
similar instruments across borders by means of a courier rather than
through a formal financial system.
4According to the 2002 NMLS, informal value transfer systems (referred to
here as "informal banking systems") are known by a variety of names
reflecting ethnic and national origins predating the emergence of modern
banking and other financial institutions. These systems provide mechanisms
for the remittance of currency or other forms of monetary value-most
commonly gold-without physical transportation or use of contemporary
monetary instruments.
force-which is now known as the Terrorist Financing Operations Section
(TFOS)-to combat terrorist financing. The mission of TFOS has evolved into
a broad role to identify, investigate, prosecute, disrupt, and dismantle
all terrorist-related financial and fundraising activities. The FBI also
took action to expand the antiterrorist financing focus of its Joint
Terrorism Task Forces (JTTFs)-teams of local and state law enforcement
officials, FBI agents, and other federal agents and personnel whose
mission is to investigate and prevent acts of terrorism.5 In 2002, the FBI
created a national JTTF in Washington, D.C., to collect terrorism
information and intelligence and funnel it to the field JTTFs, various
terrorism units within the FBI, and partner agencies.
Following September 11, representatives of the FBI and Operation Green
Quest met on several occasions to attempt to delineate antiterrorist
financing roles and responsibilities. However, such efforts were largely
unsuccessful. The resulting lack of clearly defined roles and coordination
procedures contributed to duplication of efforts and disagreements over
which agency should lead investigations.6 In May 2003, to resolve
jurisdictional issues and enhance interagency coordination, the Attorney
General and the Secretary of Homeland Security signed a Memorandum of
Agreement concerning terrorist financing investigations. The Agreement and
its related procedures specified that the FBI was to have the lead role in
investigating terrorist financing and that ICE was to pursue terrorist
financing solely through participation in FBI-led task forces, except as
expressly approved by the FBI.
Regarding strategic efforts, the Money Laundering and Financial Crimes
Strategy Act of 1998 (Strategy Act) required the President-acting through
the Secretary of the Treasury and in consultation with the Attorney
General and other relevant federal, state, and local law enforcement and
regulatory officials-to develop and submit an annual NMLS to the Congress
by February 1 of each year from 1999 through 2003.7 Unless reauthorized by
the Congress, this requirement ended with the 2003 strategy, which was
issued on November 18, 2003. The goal of the Strategy Act was to increase
coordination and cooperation among the various
5According to the FBI, the first JTTF came into being in 1980, and the
total number of task forces has nearly doubled since September 11, 2001.
Today, there is a JTTF in each of the FBI's 56 main field offices, and
additional task forces are located in smaller FBI offices.
6See GAO-03-813.
7Pub. L. No. 105-310, 112 Stat. 2941 codified as 31 U.S.C. S:S: 5340-42,
5351-55 (1998).
U.S. Government Faces Significant Challenges in Deterring Terrorists' Use of
Key Alternative Financing Mechanisms
regulatory and enforcement agencies and to effectively distribute
resources to combat money laundering and related financial crimes. The
Strategy Act required the NMLS to define comprehensive, research-based
goals, objectives, and priorities for reducing these crimes in the United
States. The NMLS has generally included multiple priorities to guide
federal agencies' activities in combating money laundering and related
financial crimes. In 2002, the NMLS was adjusted to reflect new federal
priorities in the aftermath of September 11 including a goal to combat
terrorist financing.
The U.S. government faces myriad challenges in determining and monitoring
the nature and extent of terrorists' use of alternative financing
mechanisms. Terrorists use a variety of alternative financing mechanisms
to earn, move, and store their assets based on common factors that make
these mechanisms attractive to terrorist and criminal groups alike. For
all three purposes-earning, moving, and storing-terrorists aim to operate
in relative obscurity, using mechanisms involving close knit networks and
industries lacking transparency. More specifically, first, terrorists earn
funds through highly profitable crimes involving commodities such as
contraband cigarettes, counterfeit goods, and illicit drugs. For example,
according to U.S. law enforcement officials, Hizballah earned an estimated
profit of $1.5 million in the United States between 1996 and 2000 by
purchasing cigarettes in a low tax state for a lower price and selling
them in a high tax state at a higher price. Terrorists also earned funds
using systems such as charitable organizations that collect large sums in
donations from both witting and unwitting donors. Second, to move assets,
terrorists seek out mechanisms that enable them to conceal or launder
their assets through nontransparent trade or financial transactions such
as the use of charities, informal banking systems, bulk cash, and
commodities that may serve as forms of currency, such as precious stones
and metals. Third, to store assets, terrorists may use similar commodities
because they are likely to maintain value over a longer period of time and
are easy to buy and sell outside the formal banking system.
The true extent of terrorists' use of alternative financing mechanisms is
unknown, owing to the criminal nature of the activity and the lack of
systematic data collection and analysis. The limited and sometimes
conflicting information available on alternative financing mechanisms
adversely affects the ability of U.S. government agencies to assess risk
and prioritize efforts. U.S. law enforcement agencies, and specifically
the FBI, which leads terrorist financing investigations and maintains case
data, do not systematically collect and analyze data on terrorists' use of
alternative
financing mechanisms.8 The lack of such a method of data collection
hinders the FBI from conducting systematic analysis of trends and patterns
focusing on alternative financing mechanisms. Without such an assessment,
the FBI would not have analyses that could aid in assessing risk and
prioritizing efforts.
Moreover, despite an acknowledged need from some U.S. government officials
and researchers for further analysis of the extent of terrorists' use of
alternative financing mechanisms, U.S. government reporting on these
issues has not always been timely or comprehensive, which could affect
planning and coordination efforts. For example, the Departments of the
Treasury and Justice did not produce a report on the links between
terrorist financing and precious stone and commodity trading, as was
required by March 2003 under the 2002 NMLS. Moreover, we found widely
conflicting views in numerous interviews and available reports and
documentation concerning terrorists' use of precious stones and metals.
In monitoring terrorists' use of alternative financing mechanisms, the
U.S. government faces a number of significant challenges including
accessibility to terrorist networks, adaptability of terrorists, and
competing demands or priorities within the U.S. government. First,
according to law enforcement agencies and researchers, it is difficult to
access or infiltrate ethnically or criminally based networks that operate
in a nontransparent manner, such as informal banking systems or the
precious stones and other commodities industries. Second, the ability of
terrorists to adapt their methods hinders efforts to target high-risk
industries and implement effective mechanisms for monitoring high-risk
industry trade and financial flows. According to the FBI, once terrorists
know that an industry they use to earn or move assets is being watched,
they may switch to an alternative commodity or industry. Finally,
competing priorities create challenges to federal and state officials'
efforts to use and enforce applicable U.S. laws and regulations in
monitoring terrorists' use of alternative financing mechanisms. For
example, we reported to you in November 2003 the following:
8Once a U.S. law enforcement agency (for example, the Drug Enforcement
Administration, ICE, etc.) identifies a terrorist nexus in an
investigation it is to notify the FBI. Information is to be shared through
the FBI-led JTTFs in the field or the National JTTF in FBI headquarters.
Agencies have representatives at each other's locations to facilitate
information sharing.
o Although the Internal Revenue Service (IRS) agreed with us in 2002 to
begin developing a system, as allowed by law, to share with states data
that would improve oversight9 and could be used to deter terrorist
financing in charities, the IRS had not made this initiative a priority.
The IRS had not developed and implemented the system, citing
competing priorities.
o The Department of the Treasury's Financial Crimes Enforcement Network
(FinCEN) officials stated the extent of the workload created under the
2001 Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act)10
initially increased the amount of work required and may have slowed
efforts to take full advantage of the act concerning the establishment of
anti-money laundering programs. FinCEN anti-money laundering program rules
for dealers in precious metals, stones, or jewels were proposed on
February 21, 2003, and had not been finalized when we recently contacted
FinCEN on February 24, 2004.
o FBI officials told us that the 2002 NMLS contained more priorities
than could be realistically accomplished, and Treasury officials said that
resource constraints and competing priorities were the primary reasons why
strategy initiatives, including those related to alternative financing
mechanisms, were not met or were completed later than expected.
As a result of our earlier findings:
o We recommended that the Director of the FBI, in consultation with
relevant U.S. government agencies, systematically collect and analyze
information involving terrorists' use of alternative financing mechanisms.
Justice agreed with our finding that the FBI does not systematically
collect and analyze such information, but Justice did not
9The appropriate state officials can obtain details about the final
denials of applications, final revocations of tax-exempt status, and
notices of a tax deficiency under section 507, or chapter 41 or 42, under
the Internal Revenue Code. However, IRS does not have a process to
regularly share such data. See U.S. General Accounting Office, Tax-Exempt
Organizations: Improvements Possible in Public, IRS, and State Oversight
of Charities, GAO-02-526 (Washington, D.C.: Apr. 30, 2002).
10The U.S. PATRIOT Act, enacted shortly after the terrorist attacks of
September 11 expanded the ability of law enforcement and intelligence
agencies to access and share financial information regarding terrorist
investigations.
specifically agree or disagree with our recommendation. However, both ICE
and IRS senior officials have informed us that they agree that law
enforcement agencies should have a better approach to assessing the use of
alternative financing mechanisms.
o We recommended that the Secretary of the Treasury and the Attorney
General produce the report on the links between terrorism and the use of
precious stones and commodities that was required by March 2003 under the
2002 NMLS based on up-to-date law enforcement investigations. The Treasury
responded that the report would be included as an appendix in the 2003
NMLS. Precious stones and commodities were given a small amount of
attention in an appendix on trade-based money laundering within the 2003
NMLS that was released in November 2003. It remains unclear as to how this
will serve as a basis for an informed strategy.
o We recommended that the Commissioner of the IRS, in consultation with
state charity officials, establish interim IRS procedures and state
charity official guidelines, as well as set milestones and assign
resources for developing and implementing both, to regularly share data on
charities as allowed by federal law. The IRS agreed with our
recommendation, and we are pleased to report that the IRS expedited
efforts and issued IRS procedures and state guidance on December 31, 2003,
as stated in its agency comments in response to our report.
Federal Agencies Have Taken Steps to Coordinate Investigations of Terrorist
Financing, but Operational and Organizational Challenges Still Exist
In May 2003, to resolve jurisdictional issues and enhance interagency
coordination, the Attorney General and the Secretary of Homeland Security
signed a Memorandum of Agreement concerning terrorist financing
investigations. The Agreement and its related procedures specified that
the FBI was to have the lead role in investigating terrorist financing and
that ICE was to pursue terrorist financing solely through participation in
FBI-led task forces, except as expressly approved by the FBI. Also, the
Agreement contained several provisions designed to increase information
sharing and coordination of terrorist financing investigations. For
example, the Agreement required the FBI and ICE to (1) detail appropriate
personnel to each other's agency and (2) develop specific collaborative
procedures to determine whether applicable ICE investigations or financial
crimes leads may be related to terrorism or terrorist financing. Another
provision required that the FBI and ICE jointly report to the Attorney
General, the Secretary of Homeland Security, and the Assistant to the
President for Homeland Security on the status of the implementation of the
Agreement 4 months from its effective date.
In February 2004, we reported to the Senate Appropriations' Subcommittee
on Homeland Security that the FBI and ICE had implemented or taken
concrete steps to implement most of the key Memorandum of Agreement
provisions.11 For example, the agencies had developed collaborative
procedures to determine whether applicable ICE investigations or financial
crimes leads may be related to terrorism or terrorist financing-and, if
so, determine whether these investigations or leads should thereafter be
pursued under the auspices of the FBI. However, we noted that the FBI and
ICE had not yet issued a joint report on the status of the implementation,
which was required 4 months from the effective date of the Agreement.
By granting the FBI the lead role in investigating terrorist financing,
the Memorandum of Agreement has altered ICE's role in investigating
terrorism-related financial crimes. However, while the Agreement specifies
that the FBI has primary investigative jurisdiction over confirmed
terrorism-related financial crimes, the Agreement does not preclude ICE
from investigating suspicious financial activities that have a potential
(unconfirmed) nexus to terrorism-which was the primary role of the former
Operation Green Quest. Moreover, the Agreement generally has not affected
ICE's mission or role in investigating other financial crimes.
Specifically, the Agreement did not affect ICE's statutory authorities to
conduct investigations of money laundering and other traditional financial
crimes. ICE investigations can still cover the wide range of financial
systems-including banking systems, money services businesses, bulk cash
smuggling, trade-based money laundering systems, illicit insurance
schemes, and illicit charity schemes-that could be exploited by money
launderers and other criminals. According to ICE headquarters officials,
ICE is investigating the same types of financial systems as before the
Memorandum of Agreement.
Further, our February 2004 report noted that-while the Memorandum of
Agreement represents a partnering commitment by the FBI and ICE- continued
progress in implementing the Agreement will depend largely on the ability
of these law enforcement agencies to meet various operational and
organizational challenges. For instance, the FBI and ICE face challenges
in ensuring that the implementation of the Agreement does not create a
disincentive for ICE agents to initiate or support terrorist financing
investigations. That is, ICE agents may perceive the Agreement
11See GAO-04-464R.
Opportunities Exist to Improve the National Strategy for Combating Money
Laundering and Other Financial Crimes, Including Terrorist Financing
as minimizing their role in terrorist financing investigations. Additional
challenges involve ensuring that the financial crimes expertise and other
investigative competencies of the FBI and ICE are effectively utilized and
that the full range of the agencies' collective authorities-intelligence
gathering and analysis as well as law enforcement actions, such as
executing search warrants and seizing cash and other assets-are
effectively coordinated. Inherently, efforts to meet these challenges will
be an ongoing process. Our interviews with FBI and ICE officials at
headquarters and three field locations indicated that long-standing
jurisdictional and operational disputes regarding terrorist financing
investigations may have strained interagency relationships to some degree
and could pose an obstacle in fully integrating investigative efforts.
On a broader scale, as discussed below, we also have reported that
opportunities exist to improve the national strategy for combating money
laundering and other financial crimes, including terrorist financing.12
The 1998 Strategy Act required the President-acting through the Secretary
of the Treasury and in consultation with the Attorney General and other
relevant federal, state, and local law enforcement and regulatory
officials-to develop and submit an annual NMLS to the Congress by February
1 of each year from 1999 through 2003. Also, in 2002, the NMLS was
adjusted to reflect new federal priorities in the aftermath of September
11 including a goal to combat terrorist financing. Unless reauthorized by
the Congress, the requirement for an annual NMLS ended with the issuance
of the 2003 strategy.13
To assist in congressional deliberations on whether there is a continuing
need for an annual NMLS, we reviewed the development and implementation of
the 1999 through 2002 strategies. In September 2003, we reported to this
Caucus that, as a mechanism for guiding the coordination of federal law
enforcement agencies' efforts to combat money laundering and related
financial crimes, the annual NMLS has had mixed results but generally has
not been as useful as envisioned by the Strategy Act. For example, we
noted that although Treasury and Justice had made progress on some NMLS
initiatives designed to enhance interagency coordination of
investigations, most had not achieved the expectations called for in the
12See GAO-03-813.
13The 2003 NMLS was issued on November 18, 2003.
annual strategies, including plans to (1) use a centralized system to
coordinate investigations and (2) develop uniform guidelines for
undercover investigations. Headquarters officials cited differences in the
various agencies' anti-money laundering priorities as a primary reason why
initiatives had not achieved their expectations.
Most financial regulators we interviewed said that the NMLS had some
influence on their anti-money laundering efforts because it provided a
forum for enhanced coordination, particularly with law enforcement
agencies. Law enforcement agency officials said the level of coordination
between their agencies and the financial regulators was good. However, the
financial regulators also said that other factors had more influence on
them than the strategy. For example, the financial regulators cited their
ongoing oversight responsibilities in ensuring compliance with the Bank
Secrecy Act14 as a primary influence on them. Another influence has been
anti-money laundering working groups, some of which were initiated by the
financial regulators or law enforcement agencies prior to enactment of the
1998 Strategy Act. The officials said that the U.S. government's reaction
to September 11, which included a change in government perspective and new
regulatory requirements placed on financial institutions by the USA
PATRIOT Act, has driven their recent anti-money laundering and
antiterrorist financing efforts. Although the financial regulators said
that the NMLS had less influence on their anti-money laundering activities
than other factors, they have completed the tasks for which the NMLS
designated them as lead agencies over the years, as well as most of the
tasks for which they were to provide support to the Treasury.
In our September 2003 report, we noted that our work in reviewing national
strategies for various crosscutting issues has identified several critical
components needed for their development and implementation, including
effective leadership, clear priorities, and accountability mechanisms. For
a variety of reasons, these critical components generally have not been
fully reflected in the development and implementation of the annual NMLS.
For example, the joint Treasury-Justice leadership structure that was
established to oversee NMLS-related activities generally has not resulted
in (1) reaching agreement on the appropriate scope of the
14Currency and Foreign Transactions Reporting Act (commonly referred to as
the Bank Secrecy Act), Pub. L. No. 91-508, 84 Stat. 1114 (1970) (codified
as amended in 12 U.S.C. S:S: 1929(b), 1951-1959; 31 U.S.C. S:S: 5311-5330.
strategy; (2) ensuring that target dates for completing strategy
initiatives were met; and (3) issuing the annual NMLS by February 1 of
each year, as required by the Strategy Act.
Also, although the Treasury generally took the lead role in
strategy-related activities, the department had no incentives or authority
to get other departments and agencies to provide necessary resources and
compel their participation. And, the annual strategies have not identified
and prioritized issues that required the most immediate attention. Each
strategy contained more priorities than could be realistically achieved,
the priorities have not been ranked in order of importance, and no
priority has been explicitly linked to a threat and risk assessment.
Further, although the 2001 and 2002 strategies contained initiatives to
measure program performance, none had been used to ensure accountability
for results. Officials attributed this to the difficulty in establishing
such measures for combating money laundering. In addition, we noted that
the Treasury had not provided annual reports to the Congress on the
effectiveness of policies to combat money laundering and related financial
crimes, as required by the Strategy Act.
In summary, our September 2003 report recommended that-if the Congress
reauthorizes the requirement for an annual NMLS-the Secretary of the
Treasury, working with the Attorney General and the Secretary of Homeland
Security, should take appropriate steps to
o strengthen the leadership structure responsible for strategy
development and implementation by establishing a mechanism that would have
the ability to marshal resources to ensure that the strategy's vision is
achieved, resolve disputes between agencies, and ensure accountability for
strategy implementation;
o link the strategy to periodic assessments of threats and risks, which
would provide a basis for ensuring that clear priorities are established
and focused on the areas of greatest need; and
o establish accountability mechanisms, such as (1) requiring the
principal agencies to develop outcome-oriented performance measures that
must be linked to the NMLS's goals and objectives and that also must be
reflected in the agencies' annual performance plans and (2) providing the
Congress with periodic reports on the strategy's results.
In commenting on a draft of the September 2003 report, Treasury said that
our recommendations are important, should Congress reauthorize the
legislation requiring future strategies; Justice said that our
observations and conclusions will be helpful in assessing the role that
the strategy process has played in the federal government's efforts to
combat money laundering; and Homeland Security said that it agreed with
our recommendations.
Our review of the development and implementation of the annual strategies
did not cover the 2003 NMLS, which was issued in November 2003, about 2
months after our September 2003 report. While we have not reviewed the
2003 NMLS, we note that it emphasized that "the broad fight against money
laundering is integral to the war against terrorism" and that money
laundering and terrorist financing "share many of the same methods to hide
and move proceeds." In this regard, one of the major goals of the 2003
strategy is to "cut off access to the international financial system by
money launderers and terrorist financiers more effectively." Under this
goal, the strategy stated that the United States will continue to focus on
specific financing mechanisms-including charities, bulk cash smuggling,
trade-based schemes, and alternative remittance systems-that are
particularly vulnerable or attractive to money launderers and terrorist
financiers.
Concluding Observations
To be successful, efforts to disrupt terrorists' ability to fund their
operations must focus not only on the formal banking and mainstream
financial sectors but also on alternative financing mechanisms. The 2003
NMLS, which was issued last November includes a focus on alternative
financing mechanisms; however, it is too soon to determine how well these
efforts are working. We were pleased that IRS implemented our
recommendation by expediting the establishment of procedures and
guidelines for sharing data on charities with states. We continue to
believe that implementation of our other two recommendations would further
assist efforts to effectively address vulnerabilities posed by terrorists'
use of alternative financing mechanisms.
Also, regarding investigative efforts against sources of terrorist
financing, the May 2003 Memorandum of Agreement signed by the Attorney
General and the Secretary of Homeland Security represents a partnering
commitment by two of the nation's premier law enforcement agencies, the
FBI and ICE. In the 9 months since the Agreement was signed, progress has
been made in waging a coordinated campaign against sources of terrorist
financing. Continued progress will depend largely on the ability of the
agencies to establish and maintain effective interagency relationships and
meet various other operational and organizational challenges.
Finally, from a broader or strategic perspective, the annual NMLS has had
mixed results in guiding the efforts of law enforcement and financial
regulators in the fight against money laundering and, more recently,
terrorist financing. Through our work in reviewing national strategies, we
identified critical components needed for successful strategy development
and implementation; but, to date, these components have not been well
reflected in the annual NMLS. The annual NMLS requirement ended with the
issuance of the 2003 strategy. If the Congress reauthorizes the
requirement for an annual NMLS, we continue to believe that incorporating
these critical components-a strengthened leadership structure, the
identification of key priorities, and the establishment of accountability
mechanisms-into the strategy could help resolve or mitigate the
deficiencies we identified.
GAO Contacts and Staff Acknowledgments
(320258)
Mr. Chairman, this concludes our prepared statement. We would be happy to
respond to any questions that you or Members of the Caucus may have.
For further information about this testimony, please contact Loren Yager
at (202) 512-4128 or Richard M. Stana at (202) 512-8777. Other key
contributors to this statement were Christine M. Broderick, Danny R.
Burton, Barbara I. Keller, R. Eric Erdman, Kathleen M. Monahan, Tracy M.
Guerrero, and Janet I. Lewis.
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