International Finance: Treasury Has Reduced the Number of	 
Attaches Overseas (23-SEP-05, GAO-05-1010).			 
                                                                 
The number of financial attaches that the Department of the	 
Treasury (Treasury) deploys overseas dropped from approximately  
30 in 1981 to 7 at the beginning of fiscal year 2005. Treasury	 
has traditionally used financial attaches to monitor and gather  
information on international economic and financial developments 
to help shape U.S. international economic policy and to promote  
U.S. national interests. These attaches are part of the U.S.	 
mission overseas and are typically stationed in U.S. embassies in
key countries. Since at least 1981, however, the number of	 
financial attaches placed overseas has been declining in response
to changing conditions. Due to congressional interest in these	 
financial attaches, this report describes (1) the role of	 
financial attaches and (2) the process Treasury uses to determine
attache placement. In commenting on this report, Treasury	 
considered our report to be fair and accurate. Both Treasury and 
the Department of State provided technical comments, which we	 
incorporated where appropriate. 				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-1010					        
    ACCNO:   A37977						        
  TITLE:     International Finance: Treasury Has Reduced the Number of
Attaches Overseas						 
     DATE:   09/23/2005 
  SUBJECT:   Americans employed abroad				 
	     Diplomats						 
	     Economic policies					 
	     Foreign governments				 
	     International relations				 
	     National policies					 
	     Policy evaluation					 

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GAO-05-1010

                 United States Government Accountability Office

                     GAO Report to Congressional Requesters

September 2005

INTERNATIONAL FINANCE

              Treasury Has Reduced the Number of Attaches Overseas

                                       a

GAO-05-1010

Contents

  Letter

Results in Brief
Background
Attaches Generally Provide Macroeconomic and Financial Policy

Perspectives; Role in Afghanistan and Iraq Includes Economic
Reconstruction

Treasury Has Begun to Formalize the Process for Determining Attache Posts,
but Budget Constraints Limit the Number of Attaches

Agency Comments and Our Evaluation 1 2 3

9

14 20

Appendixes

    Appendix I: Objectives, Scope, and Methodology 21 Appendix II: Comparison
    of Financial Attaches and Technical Advisors 23 Appendix III: GAO Contact
                                                 and Staff Acknowledgments 24

Table Table 1:	Key Differences between Treasury's Financial Attache vs.
Technical Advisor

Figures Figure 1:

Figure 2: Figure 3:

Figure 4:

Figure 5:

Estimated Total International Affairs Staff vs. Financial
Attaches (1981-2005) 4
Locations of Financial Attaches in Fiscal Year 2005 6
Estimated Expense Categories for Cost Per Financial
Attache for FY 2005 8
Organizational Chart of Treasury Offices and the Office of
International Affairs 16
Treasury's Process and Criteria to Establish Financial
Attache Posts 18

Contents

Abbreviations

CSCS Capital Security Cost-Sharing
DAS Deputy Assistant Secretary
ESF Exchange Stabilization Fund
G-8 Group of Eight
IA (Treasury's) Office of International Affairs
ICASS International Cooperative Administrative Support Services
IFI International Financial Institution
IMF International Monetary Fund
OECD Organization for Economic Cooperation and Development

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
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separately.

A

United States Government Accountability Office Washington, D.C. 20548

September 23, 2005

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

The Honorable Deborah Pryce

Chairman

The Honorable Carolyn B. Maloney

Ranking Minority Member

Subcommittee on Domestic and International Monetary Policy, Trade, and
Technology Committee on Financial Services House of Representatives

The number of financial attaches that the Department of the Treasury
(Treasury) has posted overseas dropped from approximately 30 in 1981 to 7
at the beginning of fiscal year 2005. Treasury has traditionally deployed
financial attaches overseas to monitor and gather information on
international economic and financial developments to help shape U.S.
international economic policy and to promote U.S. national interests.
These attaches are part of the U.S. mission overseas and are typically
stationed in U.S. embassies in key countries. Since at least 1981,
however, the number of financial attaches placed overseas has been
declining in response to Treasury's changing needs and budgetary
constraints.

In response to congressional interest in these financial attaches, this
report describes (1) the role of financial attaches and (2) the process
Treasury uses to determine attache placement.

To explain the role of financial attaches and document the placement
process for financial attaches, we interviewed officials from Treasury and
the Department of State (State) and reviewed documents including key
memorandums, budget data, and attache position descriptions provided by
Treasury. At Treasury, we interviewed officials from the Office of
International Affairs (IA), which houses financial attaches, as well as
all five current and three recently returned financial attaches, for a
total of eight officials in the financial attache role. We also contacted
State Economic Section officers in five selected locations on how
financial

attaches function in the context of U.S. missions. Lastly, we met with
officials from the Securities Industry Association, an organization that
represents various private sector financial companies. Due to time
constraints, we were not able to determine the reliability of the budget
and other data provided by Treasury. We are providing these data for
informational purposes and do not base any conclusions on them. For a more
detailed explanation of our scope and methodology, see appendix I. We
conducted our work in Washington, D.C., from June 2005 to August 2005 in
accordance with generally accepted government auditing standards.

Results in Brief	Financial attaches represent Treasury overseas and
monitor macroeconomic and financial policy issues that are relevant to
U.S. international economic policies and U.S. national interests, although
the roles and need for financial attaches have evolved. Specifically,
financial attaches conduct macroeconomic monitoring and analysis, such as
trends in host country fiscal policies and the stability of its financial
system. In addition, financial attaches monitor and try to influence
financial issues affecting the private sector, such as banking, taxation,
and corporate governance. Typically, financial attaches serve as
interlocutors with host government financial agencies such as ministries
of finance and central banks, as well as with private sector financial
entities. Financial attaches usually work in conjunction with the Economic
Section of the U.S. mission, sharing information and complementing each
other's area of focus. For example, since financial attaches tend to have
specialized knowledge of financial issues, they focus on the financial
sector, while State officials in the Economic Section focus more broadly
on other sectors of the economy. Financial attaches share the information
they collect with State and other U.S. agencies through cables as well as
through interagency embassy meetings. In Afghanistan and Iraq, financial
attaches are primarily involved in coordinating economic reconstruction
efforts such as building the capacity of the central bank and negotiating
host country debt issues with international donors. In general, the roles
of attaches have evolved over time due to changing Treasury priorities, as
well as other factors such as technological advances in communications. To
some extent, these changes have reduced the necessity of maintaining the
same number of financial attache posts overseas that Treasury had in the
early 1980's.

Treasury has recently begun to formalize its process for determining
attache placement. Previously, the placement of Treasury's attaches was
accomplished through an informal process, according to Treasury officials.

More recently, as it works with a constrained budget, Treasury has taken
steps to formalize its process by specifying placement criteria, such as
whether the United States has major financial interest in a country or
whether there is significant U.S. engagement in a country. However,
Treasury officials stated that budget constraints have been a primary
factor in determining the number of attaches in recent years. For example,
although Russia is both an important source of energy for the United
States and a Group of Eight (G-8) partner, Treasury plans to close the
Moscow financial attache post by the end of fiscal year 2005, primarily
because of budget constraints and also because this post is of a lower
priority compared with some other regions. Furthermore, according to
Treasury officials, projected rising costs of attache posts and overall
resource constraints in IA may further constrain the number of attaches in
the future.

Background	To help shape U.S. international economic policy and promote
U.S. national interests, Treasury has placed financial attaches overseas.
Financial attaches are part of IA and as such, support its mission to
serve the interests of the American people by improving financial
stability and security in emerging and world markets, enhancing the
functioning of the International Financial Institutions (IFI), and
promoting an open and transparent international trade and investment
regime.

According to Treasury officials, the number of financial attaches placed
overseas has been declining since at least 1981, as shown in figure 1.
This trend mirrors a decline in overall IA staffing levels. Treasury had
used the Exchange Stabilization Fund (ESF)1 for expenses related to
financial attaches until 1978, when Congress passed legislation
disallowing use of

1The ESF consists of three types of assets: U.S. dollars, foreign
currencies, and Special Drawing Rights. Currently, according to Treasury,
the ESF has a total of approximately $43 billion in these three assets.
The ESF can be used to purchase or sell foreign currencies, to hold U.S.
foreign exchange and Special Drawing Rights assets, and to provide
financing to foreign governments. All operations of the ESF require the
explicit authorization of the Secretary of the Treasury. The legal basis
of the ESF is the Gold Reserve Act of 1934.

this fund for administrative purposes, including payment of salaries.2
Since then, Treasury has generally funded attaches out of IA's overall
budget.

Figure 1: Estimated Total International Affairs Staff vs. Financial
Attaches (1981-2005) Number of employees

                                      300

                                      250

                                      200

                                      150

                                      100

                                       50

1981a 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Total International Affairs staff Financial attaches

Source: Treasury.

aAlthough precise data on attaches were not available prior to 1985,
Treasury estimated that it had more than 30 attaches in 1981.

At the beginning of fiscal year 2005, Treasury had seven3 financial
attaches dispersed across South America, Europe, the Middle East, and Asia
(see fig. 2). According to Treasury, maintaining attaches overseas cost 12

2Public Law 95-612 placed ESF administrative expenses on budget and
required that funds for such expenses be appropriated. The enactment of
this law was preceded by a 1977 GAO audit, which discussed Treasury's use
of ESF funds for administrative expenses. See GAO,

Use of Exchange Stabilization Fund Resources: Arrangement with Treasury
Provides Access to Information, ID-77-42 (Washington, D.C.: September 28,
1977).

3Currently, Treasury has five financial attaches overseas, as it recalled
the attache at the Organization for Economic Cooperation and Development
in Paris in April 2005, and the attache in Kabul returned in July 2005
after completing a short-term rotation.

percent (or $3.1 million) of IA's total budget of approximately $26
million for fiscal year 2005, although the financial attaches represented
4 percent4 of IA's total staff of 175. Treasury has assumed the full cost
for five financial attaches, while State has funded costs, excluding
salary and benefits, for financial attaches in Baghdad and Kabul. However,
Treasury expects to fund the full cost of the attache in Baghdad in fiscal
year 2006.

4This includes two attache positions funded by State in Baghdad and
Afghanistan.

According to Treasury estimates, the average annual cost of maintaining an
attache abroad is over $520,000 in fiscal year 2005.5 About 70 percent of
the annual cost per attache is comprised of nonsalary expenses such as
housing and support staff, as well as shared administrative charges and
capital security cost charges assessed by State (see fig. 3). Treasury
expects the cost to increase by about $100,000 per year in part because of
State's Capital Security Cost-Sharing (CSCS) program, which is discussed
in more detail below.6 As a result of the increase in costs, Treasury
officials estimated that by fiscal year 2008, the annual cost per attache
would exceed $800,000; and the cost of the current attache structure would
increase from $3.1 million to $5.2 million.

Treasury's financial attaches are part of the U.S. mission overseas and
are typically housed in the embassy. As such, Treasury incurs
administrative and other costs, such as sharing the cost for embassy
construction, to maintain overseas posts for financial attaches.
Administrative expenses are paid through the International Cooperative
Administrative Support Services (ICASS) cost-distribution system, operated
primarily by State, which divides cost among different U.S. government
agencies and subagencies with staff assigned to various posts.7 In
addition to ICASS, agencies are expected to help finance the cost of the
embassy construction program through the CSCS, which is expected to ensure
that agencies "rightsize" (i.e., assign only the number of staff needed to
accomplish their overseas mission). This program would require agencies to
share construction costs based on the per capita proportion of total
overseas staff and the type of space (controlled access, noncontrolled
access, or

5The 2005 average estimated costs per established attache position vary
considerably by location, ranging from about $330,000 in Buenos Aires to
more than $700,000 in Tokyo.

6State's Bureau of Overseas Buildings Operations is engaged in
construction and rehabilitation of U.S. embassies and consular compounds
abroad to make them more secure. To increase the resources required for
this effort, the Bureau has initiated the CSCS, which it expects to cut
the projected time to complete the funding for 150 new embassy and
consular compounds from 26 to 14 years. (Source:
http://www.state.gov/m/p/results/49532.htm#rightsized). For more
information on CSCS see GAO, Embassy Construction: Proposed Cost-Sharing
Program Could Speed Construction and Reduce Staff Levels, but Some
Agencies Have Concerns, GAO-05-32 (Washington D.C.: November 14, 2004).

7For more information on effectiveness of ICASS in delivering services at
U.S. overseas missions, see GAO, Embassy Management: Actions Are Needed to
Increase Efficiency and Improve Delivery of Administrative Support
Services, GAO-04-511 (Washington D.C.: September 7, 2004).

nonoffice) they need. As a result, the fiscal year 2007 construction costs
borne by non-State agencies, such as Treasury, are expected to be about
three and a half times higher than they were in fiscal year 2005.

Figure 3: Estimated Expense Categories for Cost Per Financial Attache for
FY 2005

ICASSa charges

Support staff

Otherb

Salaries and benefits Housing

Source: Treasury.

aInternational Cooperative Administrative Support Services.

bOther expenses consist of entitlements such as moving costs, and
educational and travel allowances (5 percent), Capital Security
Cost-Sharing (5 percent), allowances including nonregular compensation
such as danger pay (3 percent), travel for field and regional work
purposes (3 percent), office support including utilities and subscription
charges (3 percent), security charges, including payment for local guard
support (1 percent), and other periodic expenses such as storage (1
percent). Percentages do not add up to 100 due to rounding.

Attaches Generally Provide Macroeconomic and Financial Policy
Perspectives; Role in Afghanistan and Iraq Includes Economic
Reconstruction

Macroeconomic and financial policy monitoring and analysis are key
functions of financial attaches. Typically, attaches serve as
interlocutors with host government financial agencies and private sector
financial entities. They also work in conjunction with the Economic
Section of the U.S. mission, which complements the role and expertise of
financial attaches. In Afghanistan and Iraq, financial attaches are
primarily involved in coordinating economic reconstruction efforts. In
general, the roles and need for attaches have evolved over time due to
changing Treasury priorities, as well as other factors such as
technological advances in communications.

Attaches Provide a Macroeconomic and Financial Policy Perspective and
Supplement Staffing at U.S. Missions

Financial attaches provide a macroeconomic and financial policy
perspective to officials at Treasury headquarters as well as to U.S.
mission officials. In terms of macroeconomic policy, financial attaches
cover important fiscal and monetary trends and developments of the host
country or region. Financial attaches monitor and analyze financial
issues, including those affecting the private sector, such as banking,
taxation, and corporate governance. Attaches may also work on debt issues
relating to IFIs such as the International Monetary Fund (IMF), the World
Bank, and other multilateral donor organizations. Attaches work closely
with officials primarily from host government financial and regulatory
institutions such as the ministries of finance and central banks,
representatives of IFIs, and private sector financial institutions such as
investment and commercial banks. These government and private sector
contacts allow attaches to obtain information regarding changes and trends
in the economic and financial sectors. According to one Treasury official,
attaches are especially important in countries in which economic and
financial systems as well as markets are less transparent and hence
difficult to understand without close contact with relevant officials and
private sector groups in the country.

The attaches use information gleaned from their contacts to support
Treasury objectives such as promoting U.S. economic policy and national
interests by positively influencing the economic policy and regulatory
decisions of the host country, advocating the interests of U.S. financial
services companies, and providing intelligence to help shape U.S.
international economic policy. The financial attaches with whom we spoke
illustrated the impact of their efforts with the following examples:

o 	In one country undergoing financial crisis, the financial attache
reported assisting the finance ministry officials in taking actions and
developing policies necessary to generate donor support.

o 	An attache in Europe noted his role in facilitating U.S. and European
Union regulatory dialogue by staffing meetings for these discussions,
preparing briefing papers, and providing input on these developments to
Treasury and other U.S. regulatory agency officials.

o 	An attache, who had been working on improving financial regulatory
transparency of the host country government, stated that in conjunction
with U.S. embassy officials, he convinced the host country to incorporate
changes in a new law that otherwise would have increased the legal risk
for U.S. companies.

IA expects attaches to function with considerable independence within the
policy goals of Treasury, in particular, and the U.S. government in
general. However, attaches reported receiving varying degrees of
operational direction from IA. For example, in most cases, the attaches
reported close operational guidance from IA, while in another case, IA had
little involvement in directing the efforts of the attache. One of the
attaches with whom we spoke said that IA provided constructive advice
periodically, including guidance on specific technical issues that were
new to the attache.

In addition to their intelligence gathering role, the attaches also
provide logistical support for visits by Treasury officials, U.S.
government financial regulators, and others, including putting these
officials in contact with relevant host country officials. Also, since
financial attaches are part of the U.S. mission in the host country, they
brief the ambassador on economic and financial issues and may provide
specific help as requested by the ambassador.

Treasury's financial attaches usually work closely and are colocated with
officials from the Economic Section of the U.S. mission. Despite this
proximity, the role of financial attaches can vary significantly from that
of State's economic officers, in part because of differences in skills and
qualifications, as well as the differing objectives of their agencies. For
example, according to both Treasury and State officials, financial
attaches have more specialized knowledge of financial issues. In addition,
financial attaches tend to be midcareer or senior officials with several
years of experience in government or the private sector, whereas economic
officers

usually start at an entry level and work their way up to midcareer and
senior levels. However, according to Treasury and State officials,
irrespective of rank and experience, many economic officers do not have
the level of expertise on financial issues that financial attaches have
because economic officers tend to have a broader focus. Furthermore, both
Treasury and State officials said that, in large part due to their
institutional affiliation with Treasury, financial attaches tend to be
well connected to officials in host government financial and regulatory
institutions as well as IFIs and that this access would be difficult for
economic officers to replicate.

The Treasury and State officials whom we contacted reported little or no
overlap in activities of the financial attache with the economic officers
in U.S. missions. These officials reported that financial attaches focus
on financial issues, while economic officers often cover other sectors of
the economy. Some State officials in the field who currently work with
financial attaches noted that without those attaches, the Economic Section
can do some of the reporting on financial issues, but it will not be at
the level of technical details that financial attaches can provide. Most
attaches noted that their work complements that of the Economic Section.
In Afghanistan and Iraq, where Treasury has recently placed financial
attaches, the attaches noted that there is a good working relationship
with the Economic Section, and that division of labor is necessitated by
the large number of issues confronting the mission. Additionally,
according to State, in U.S. missions where State officials assume the
deputy attache role, information sharing occurs regularly between State
and Treasury. However, another attache noted transition difficulties with
the Economic Section when the financial attache post was established.

Attaches Assist with Reconstruction Efforts in Afghanistan and Iraq

Treasury's financial attaches in Afghanistan and Iraq have undertaken
roles that are different from their counterparts in areas without
conflict. Since these two countries do not have well-functioning financial
systems, financial attaches in these countries have been involved in
coordinating and guiding technical assistance provided to the host
countries on financial and economic issues through U.S. government
entities such as Treasury's Office of Technical Assistance and the U.S.
Agency for International Development. (See app. II for a description of
the differences between financial attaches and the Office of Technical
Assistance's technical advisors.)

Treasury's access to multilateral agencies such as the World Bank and IMF,
as well as bilateral donors, has enabled financial attaches to coordinate
the efforts of international donors and creditors in Iraq and Afghanistan.
For example, former Treasury attaches in Afghanistan stated that they were
closely involved in debt reduction negotiations between the Afghan and
Russian governments. The Treasury attache in Iraq has been involved in
discussions on Iraqi debt and reconstruction with creditors such as the
IMF and the Paris Club.8 Furthermore, the two financial attaches in
Afghanistan, who were posted there at different times, were involved in
designing donors' economic assistance strategy as well as the Afghan
government's national development strategy. One of the attaches stated
that he provided advice on topics such as bank supervision and bank
reconstruction, private sector growth, tax administration and policy, and
government debt issuance.

The Treasury attache in Baghdad heads the Iraq Reconstruction Management
Office for Fiscal and Financial Affairs, which is engaged in providing
technical assistance to Iraqi financial and regulatory institutions,
including the Ministry of Finance and central bank. According to the
attache, this office is involved in implementing initiatives such as the
national payments system that was designed by the now defunct Coalition
Provisional Authority in Iraq. The new payments system, reported the
attache, is intended to increase the efficiency and effectiveness of the
Iraqi government as well as the private sector by enabling electronic
payments instead of the current cash-based payment system, which was both
a logistical challenge and a security risk. Additionally, as the director
of fiscal and financial reconstruction, the attache reported managing the
efforts of experts (hired on short-term contracts by State) in helping the
Iraqi government with budget formulation and execution. This office is
also coordinating with the Iraqi Ministry of Finance to administer and
close out contracts issued by the Coalition Provisional Authority, as well
as transfer assets-such as schools constructed by the U.S. government-to
the Iraqi government.

8The Paris Club is an informal group of official creditors whose role is
to find solutions to the payment difficulties experienced by debtor
countries. Paris Club creditors agree to provide a country with debt
relief through a postponement and, in the case of concessional
rescheduling, a reduction in debt service obligations.

The Roles and the Need for Financial Attaches Have Evolved

The roles and the need for financial attaches have evolved over time due
to changing Treasury priorities and budgetary considerations, as well as
factors such as improved communications technology, wider range of
information sources, and increased frequency of meetings among economic
and finance officials from industrialized countries. Senior Treasury
officials stated that while they do not have a sufficient number of
financial attaches to adequately cover key financial markets, Treasury
does not need as many financial attaches as it had in the early 1980's,
due in part to these technological advancements (see fig. 1).

Improvements in communications technology have affected the type of work
done by attaches, and, according to attaches, Treasury expects them to
provide more nuanced information or detect subtle economic and financial
trends that may not be captured by other information sources. Issues such
as countering terrorist financing and money-laundering efforts are now of
higher priority to Treasury and are part of the portfolio of issues for
current financial attaches.9 Furthermore, while budgetary considerations
have contributed to fewer financial attaches in the field, they are
expected to cover broader regions. For example, the attache in Buenos
Aires currently covers countries throughout South America. The attache in
Frankfurt covers the various member countries of the European Union, in
addition to German financial and regulatory entities.

At the same time that financial attache roles have evolved, changing
economic conditions of countries have also altered the need for attaches
in certain posts. For example, one State official in a U.S. mission stated
that the need for an attache in that country has decreased as the country
has achieved greater economic stability over time. In addition, according
to one Treasury official, forums such as meetings of the Group of Seven
industrialized nations provide officials in financial and regulatory
institutions opportunities to meet more often and hence may decrease the
reliance on financial attaches for information exchange. However, Treasury
officials also said that while the need for financial attaches in
industrialized nations may have declined, the need for attaches in
developing countries seems to have increased. Treasury officials
emphasized the need for attaches to engage with emerging markets such as
China, India, and Brazil

9Treasury has recently drafted a plan for inclusion in its fiscal year
2007 budget proposal for having attaches jointly funded by IA and the
Office of Terrorism and Financial Intelligence. According to Treasury,
this would allow for not only a greater number of financial attaches, but
would also allow a greater focus on combating terrorist financing.

and to combat terrorist financing in the Middle East and elsewhere,
describing these as major Treasury priorities and U.S. policy imperatives.

Treasury Has Begun to Formalize the Process for Determining Attache Posts,
but Budget Constraints Limit the Number of Attaches

Until recently, Treasury determined attache placement through an informal
process, according to Treasury officials. More recently, as it works with
a constrained budget, Treasury has taken steps to formalize its process by
specifying placement criteria. However, Treasury officials stated that
budgetary considerations have been the primary factor in determining the
number of attaches in recent years, and projected rising costs are likely
to constrain the number of attaches in the future.

In the Past, Treasury Used Informal Process to Determine Attache Posts

The determination of attache posts has been rather informal, according to
Treasury officials, as Treasury has tried to respond to changing needs.
These officials went on to say that, although less structured, this
process still allowed Treasury to place attaches in posts where it had key
priorities. For example, when the Argentine financial crisis occurred in
late 2001, the financial attache in Mexico City was moved to Buenos Aires
in response to the emergency and changing priorities in Latin America.
Treasury officials stated that IA management conducts much of the
discussion surrounding attache placement through informal e-mails and
conversations. According to IA officials, they prefer to use an informal
method because the process of opening or closing of attache posts is
sensitive for several reasons. First, the presence of an attache in a
country is considered indicative of the country's relative importance to
the United States and thus holds symbolic value. Second, financial attache
positions are highly coveted within Treasury, and officials told us that
they use the possibility of attaining a financial attache position as a
recruiting tool. Furthermore, external stakeholders may express a
particular interest in maintaining a certain financial attache post. For
example, the U.S. ambassador to the Organization for Economic Cooperation
and Development (OECD) stated that maintaining a financial attache
position at the OECD, which Treasury closed in April 2005, supports a
variety of U.S. interests.

During the most recent cycle of determining attache placement, Treasury
officials reported considering the views of both external and internal
stakeholders. The former included U.S. mission officials as well as the
private sector, and the latter included office directors and Deputy
Assistant

Secretaries (DAS). The private sector officials with whom we spoke, for
example, made it known through various meetings with Treasury officials
that they wanted a financial services expert on the ground in key
financial market countries. These officials also support legislation to
allow more flexible funding of financial attaches.10 In terms of internal
stakeholders, figure 4 shows the organizational chart for IA and its
location with respect to other Treasury offices. IA officials said that
office directors made their preferences known to their respective DAS by
way of narrowly distributed internal memorandums, rather than through a
formal report or even a department-wide memorandum. Each DAS, in turn,
sent his or her preferences via memorandum to the Under Secretary for
International Affairs and to the Secretary. The Secretary of the Treasury
makes the final decision on placing attaches.

10See H.R. 3058, 109th Cong., 1st Sess., which would allow the Secretary
of the Treasury to transfer funds from within Treasury accounts for any
costs necessary to pay for both career and non-career Senior Executive
Service positions and support staff in locations of economic strategic
interests throughout the world.

      Figure 4: Organizational Chart of Treasury Offices and the Office of
                             International Affairs

                  Sources: GAO and Department of the Treasury.

Treasury Has Taken Steps to Formalize Some Aspects of the Process

Treasury has recently begun to take steps to formalize certain aspects of
the process to determine attache placement. As of June 2005, Treasury
decided to formally review the necessity of financial attache posts either
every 2 years or upon the conclusion of the attache's term of service.
Treasury officials reported that they have established criteria for
determining priority posts for attache placement (see fig. 5). These
criteria include the following:

o 	Whether the United States has major financial interest in the country,
including regulatory issues and emerging markets;

o 	Whether there is significant U.S. military or political engagement such
as in Iraq and Afghanistan;

o 	Whether the country is difficult to cover from Washington, D.C., due to
time differences or language barriers; and

o 	Whether Treasury has a congressional mandate to place a financial
attache in a certain post.

These criteria, however, are not given equal weight, according to Treasury
officials. For example, officials noted that Treasury would consider major
U.S. financial interest in a country of more importance than whether a
country is more difficult to cover from Washington, D.C. Furthermore, U.S.
military and political engagement geared toward reconstruction efforts, as
is the case in Afghanistan, tend to be shorter term. The relative
importance of that criterion, therefore, may be temporary and eventually
give way to other criteria. Irrespective of the process, however, Treasury
officials noted that they continue to consider the IA's overall budgetary
resources and other IA priorities before determining priority posts for
financial attache placement. For example, although Russia is both an
important source of energy for the United States and is a G-8 partner,
Treasury plans to close the Moscow financial attache post by the end of
fiscal year 2005 because of budget constraints and also because this post
is of lower priority compared with some other regions.

 Figure 5: Treasury's Process and Criteria to Establish Financial Attache Posts

                                  Source: GAO.

To further formalize the process, IA defined the term of service for a
financial attache as per a memorandum signed by the Secretary of the
Treasury in June 2005. According to this memorandum, an attache can
normally expect to serve at a post for a period of 2 years. In the past,
some financial attaches have stayed at a post for 5 years or more.
Treasury officials noted that limiting the term of attaches would allow IA
to provide more employees the professional development opportunity
afforded by the attache position. Furthermore, rotating staff more often
through financial attache positions could be used as an incentive for
employee retention.

Rising Cost of Overseas Treasury's overall IA budget has implications for
the number of financial Presence Constrain the attache posts it can
maintain overseas. Specifically, a relatively constant IA Number of
Financial budget, coupled with the increasing cost of maintaining attaches
overseas,

has forced Treasury to make trade-offs between the number of
financialAttache Posts attaches and the number of IA staff at
headquarters, according to Treasury

officials. In addition, these officials said that the demands on IA
resources have gone up considerably, while the overall staffing level of
this office has been declining since at least 1981 (as shown in fig. 1).
Treasury officials cited a study, conducted by a private company in 2002,
that recommended a minimum IA staffing level of 220. Currently, however,
this office has a staffing level of 175. Treasury officials noted that
understaffing at headquarters has limited IA's flexibility in reassigning
staff to important areas and adopting a strategic approach. For example,
there are three desk officers for Africa, and on average each desk officer
covers 10 to 20 countries. IA officials noted that it is difficult to
cover so many countries effectively. Furthermore, one financial attache
also noted that IA may not be effectively using the information that
attaches provide.

Treasury officials said that they expect the cost of maintaining overseas
posts to increase due to cost-sharing programs such as ICASS and CSCS.
Hence, one of the trade-offs Treasury officials are considering is to
reduce the number of attaches to two by fiscal year 2008. Although they
are considering reducing the overall number of attache posts, Treasury
officials are planning to open new posts and close some existing ones in
response to changing priorities. However, Treasury officials noted that
closing some existing posts would significantly reduce their ability to
carry out policy mandates in those regions. In at least one such proposed
closure, Treasury expects both the host government and a U.S. private
sector industry association to lobby strongly against the closure of the
attache office. State officials as well representatives from the industry
association confirmed this response.

Reducing the number of attache positions, however, would allow Treasury to
send staff from Washington overseas on temporary duty more often,
according to Treasury officials, as the cost of sending an employee on
temporary duty every 2 months would be less than half the cost of
maintaining an attache position. At the same time, Treasury officials
noted that relying primarily on short-term travel rather than maintaining
an attache position overseas may not allow staff to develop the necessary
contact and expertise in the given region. According to the OECD
ambassador, a group of senior Treasury officials could travel for
ministerial meetings, but the U.S. mission to the OECD needs a financial
attache weeks or months in advance to undertake the preparatory work
leading up to those meetings. Two attaches with whom we spoke also
expressed concerns about Treasury's ability to fund more travel. Treasury
officials in Washington noted that IA's overall travel budget in fiscal
year 2005 is capped internally at $1.2 million, and IA has noted other
program priorities

for which funds saved from attache post closures would be used. These
other priorities include more engagement with key emerging markets in Asia
and focusing on economic development initiatives in the Middle East, by
hiring economists at headquarters that focus on these regions and issues.
Given these other IA priorities, according to Treasury officials, travel
fund limits may further restrict the attache functions that could be
undertaken by staff in Washington.

Agency Comments and 	We provided a draft of this report to the Departments
of the Treasury and State. Treasury considered our report to be fair and
accurate. Both

Our Evaluation	Treasury and State provided technical comments, which we
have incorporated where appropriate.

We are sending copies of this report to the Secretaries of the Treasury
and
State, and interested congressional committees. We will make copies
available to other interested parties upon request. In addition, this
report
will be available on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact
me
at (202) 512-4347 or [email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. GAO staff who made major contributions to this report are
listed in appendix III.

Loren Yager
Director, International Affairs and Trade

Appendix I

                       Objectives, Scope, and Methodology

To explain the role of financial attaches, we interviewed officials at the
Department of the Treasury's (Treasury) Office of International Affairs
(IA) in Washington, D.C., as well as contacted all five current financial
attaches posted overseas. In addition, we interviewed three former
financial attaches who recently returned to Washington. We reviewed
position descriptions and other Treasury documents on financial attaches.
Treasury officials provided us with data on the number of total IA staff
from 1981 to 2005 and the number of attaches from 1985 to 2001. Treasury
was not able to provide precise figures for attaches prior to 1985 but did
give us an estimate for the number of attaches in 1981. We did not assess
the reliability of these data because we used them as background to our
researchable objectives. In addition, since Treasury officials could not
provide accurate locations prior to fiscal year 2002, we are unable to
authoritatively comment on how changes in attache posts have paralleled
Treasury's changing priorities or lack thereof. Furthermore, we
interviewed officials from the Department of State (State), as well as
obtained information from officials in four U.S. missions, of which three
have financial attaches, to assess the role of financial attaches within
the context of U.S. missions and understand how the State Economic Section
of U.S. missions either works with financial attaches or substitutes for
them in locations that lack a financial attache. Due to time constraints,
we could only contact State officials in five posts, including one post
where there is not a financial attache. As a result, we are unable to
comprehensively describe the extent to which State Economic Sections
currently fulfill the financial attache role in U.S. missions that lack a
financial attache.

To document the financial attache placement process, we interviewed
officials from IA and reviewed relevant memorandums and documents. To
understand how resource requirements and budgetary considerations affect
attache placement decisions, we reviewed various planning, cost, and
budget-related documents provided by Treasury. To assess the reliability
of the cost data, we considered the specific expense categories for
reasonableness, and compared the categories to other sources of data when
that was possible. However, we were unable to determine fully the
reliability of the cost data due to time constraints. We are using these
data to provide details into Treasury's position about the high costs of
maintaining attaches overseas. No conclusions rely upon these data. To
obtain the perspective of the private sector on the financial attache
placement and role, we interviewed officials from the Securities Industry
Association. We also interviewed the U.S. ambassador to the Organization
for Economic Cooperation and Development, where Treasury recently

Appendix I
Objectives, Scope, and Methodology

closed an attache post. Additionally, due to time constraints and the
scope of this engagement, we did not undertake any travel to relevant
financial attache posts. We conducted our work in Washington, D.C., from
June 2005 to August 2005 in accordance with generally accepted government
auditing standards.

Appendix II

Comparison of Financial Attaches and Technical Advisors

While some financial attaches have served in the capacity of technical
advisors with Treasury's Office of Technical Assistance, and other
attaches, specifically those in Afghanistan and Iraq, see their role as
guiding and coordinating the efforts of technical advisors, the role of a
financial attache differs in some key respects from a technical advisor,
as summarized in table 1 below:

Table 1: Key Differences between Treasury's Financial Attache vs.
Technical Advisor

Financial attache Technical advisor

Primarily engaged in broad policy functions relating to economic Advises
other governments on specific issues such as pension
and financial issues, such as influencing host country policies and
reforms, money-laundering, etc.
regulations, as well as helping shape U.S. economic policy; relies
on networks of contacts within key host country institutions

Advocates U.S. interests and policies Does not engage in advocacy of U.S.
interests

Tends to work closely and is colocated with U.S. embassy officials,
especially in the Economic Section

Tends to be located in host country institutions, such as the Ministry of
Finance, administering technical advice

Primarily stationed in areas where the United States has significant
economic and financial interest

Not necessarily in locations where the United States has the greatest
financial interests

In the past, some financial attaches have stayed at a post for 5 Duration
of assignments range from months to several years
years or more (new policy would make a typical posting for a 2-year
term)

          Source: Based on information provided by Treasury officials.

Appendix III

                     GAO Contact and Staff Acknowledgments

                    GAO Contact Loren Yager, (202) 512-4347

Staff In addition, Anthony Moran, Assistant Director, as well as Judith
Williams, Acknowledgments Mona Sehgal, and Ernie Jackson made key
contributions to this report.

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