[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
DISMANTLING THE FINANCIAL INFRASTRUCTURE OF GLOBAL TERRORISM
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
OCTOBER 3, 2001
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-46
75-656 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2002
____________________________________________________________________________
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Ohio JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
C O N T E N T S
----------
Page
Hearing held on:
October 3, 2001.............................................. 1
Appendix:
October 3, 2001.............................................. 65
WITNESSES
Wednesday, October 3, 2001
Eizenstat, Hon. Stuart E., former Deputy Secretary of the
Treasury....................................................... 47
Gurule, Hon. Jimmy, Under Secretary for Enforcement, U.S.
Department of the Treasury..................................... 15
Lackritz, Marc E., President, The Securities Industry Association 45
Lormel, Dennis, Chief, Financial Crimes Section, Criminal
Investigations
Division, Federal Bureau of Investigation...................... 20
Moynihan, John F., Partner, BERG Associates, LLC................. 49
O'Neill, Hon. Paul H., Secretary, U.S. Department of the Treasury 7
Warren, Mary Lee, Deputy Assistant Attorney General, Criminal
Division, U.S. Department of Justice........................... 19
Yingling, Edward L., Deputy Executive Vice President and
Executive Director of Government Relations, American Bankers
Association.................................................... 44
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 66
Bachus, Hon. Spencer......................................... 69
Bereuter, Hon. Doug.......................................... 70
Carson, Hon. Julia........................................... 105
Ford, Hon. Harold Jr......................................... 107
Israel, Hon. Steve........................................... 108
Kelly, Hon. Sue W............................................ 109
LaFalce, Hon. John J......................................... 114
Chertoff, Hon. Michael, delivered by Mary Lee Warren......... 131
Eizenstat, Hon. Stuart E..................................... 179
Gurule, Hon. Jimmy........................................... 121
Lackritz, Marc E............................................. 164
Lormel, Dennis............................................... 140
Moynihan, John F............................................. 198
O'Neill, Hon. Paul H......................................... 117
Yingling, Edward L........................................... 150
Additional Material Submitted for the Record
Bereuter, Hon. Doug:
Department of the Treasury letter dated August 29, 2001...... 72
Financial Action Task Force on Money Laundering Report, June
22, 2001................................................... 75
Kelly, Hon. Sue W.:
``Terror on a Budget,'' Wall Street Journal, Sept. 20, 2001.. 111
America's Community Bankers and Independent Community Bankers of
America, joint prepared statement.............................. 204
DISMANTLING THE FINANCIAL INFRASTRUCTURE OF GLOBAL TERRORISM
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WEDNESDAY, OCTOBER 3, 2001
U.S. House of Representatives,
Committee on Financial Services,
Washington, DC.
The committee met, pursuant to call, at 10 a.m., in room
2128, Rayburn House Office Building, Hon. Michael G. Oxley,
[chairman of the committee], presiding.
Present: Chairman Oxley; Representatives Leach, Roukema,
Bereuter, Bachus, Castle, Kelly, Weldon, Riley, Manzullo,
Shadegg, Fossella, Miller, Cantor, Grucci, Capito, Tiberi,
Lucas of Oklahoma, Ney, Paul, Gillmor, Biggert, Green, Shays,
Ferguson, Rogers, LaFalce, Frank, Kanjorski, Waters, C. Maloney
of New York, Gutierrez, Watt, Bentsen, Sandlin, Lee,
Schakowsky, Moore, Gonzalez, Lucas of Kentucky, Clay, Israel
and Ross, J. Maloney of Connecticut, Hooley, Sherman, Mascara,
Inslee, Capuano, Ford, Shows, Crowley.
Chairman Oxley. The hearing will come to order.
Today, the Committee on Financial Services meets to hear
testimony on the issue of terrorist financing and money
laundering. We remember today the thousands of people who died
in the four attacks in September. The terrorists used American
freedoms and American dollars against us. They executed their
plans with access to our financial systems, including credit
cards, ATMs, local checking accounts and wiring money overseas.
The best way for our committee to commemorate the victims'
lives is to take every step possible to ensure that the gates
to the financial services system in this country are locked to
terrorists.
Today, along with Ranking Member LaFalce and other Members
of this committee, I will introduce bipartisan legislation that
will demonstrate to our friends and enemies here and abroad
that the United States Congress stands shoulder to shoulder
with the President in his campaign to dismantle the financial
infrastructure of terrorism and to ``starve terrorists of
funding.''
I applaud the President and our distinguished witness
today, Treasury Secretary Paul O'Neill, for taking swift action
to block terrorist assets that may be located here in the
United States and to warn foreign banks that the U.S. is poised
to block their assets in this country and deny them access to
U.S. markets if they refuse to freeze terrorist assets
overseas.
The Secretary is also to be commended for setting up a new
Foreign Terrorist Asset Tracking Center, which I hope will
become a model for interagency cooperation in law enforcement
and in the sharing of financial intelligence.
Finally, I applaud the Administration for sending us its
legislative proposals, many of which are included in our bill.
This crime was not about money, but about mass murder, so
we have a major challenge before us. Many in Congress and in
the financial services sector are asking questions like: ``What
is terrorist financing?'' For example, are terrorist
organizations moving funds into the U.S. banking system through
third-party correspondent accounts at major U.S. banks, or are
they relying more on cash transfers through underground money
services businesses?
How did they get credit cards, checking accounts, and the
like, without raising suspicion? If the attacks could be
executed without leaving an obvious financial trail, what might
be missing now? And finally, the chilling question, is it
possible that terrorist financing is continuing undetected in
the United States?
These are urgent questions, and our goal today is to learn
the answers and to craft effective legislation to stop it
whenever, wherever and however it happens.
I am not convinced our money laundering laws are adequate
to address the particular features of terrorist financing we
have witnessed. The current money laundering regime seems
better designed to detect the kind of money laundering
associated with the crimes that generate significant proceeds.
It does not appear to be particularly well-suited to cash an
unconventional terrorist operation.
We know, too, that there are limitations to what we can
expect from Federal laws that allow for the freezing of
terrorist assets. Osama bin Laden and his organization, al
Qaeda, have been on Treasury's blocking list for a couple of
years. Any financial role bin Laden and his organization played
in those horrific acts appears to have escaped detection and to
have fallen below our financial radar.
The committee's work on money laundering will produce
effective, targeted solutions to the immediate problems we
encounter following the events of September 11. We will not
throw in the legislative kitchen sink for no clear purpose.
This is our first important step on money laundering, but it
will be, by no means, our last.
With that in mind, Members of this committee will introduce
today comprehensive anti-terrorism and money laundering
legislation that focuses on three major goals: One, bolster law
enforcement's ability to find and destroy the financing of
terrorist organizations, whether in banks or in underground
``hawala'' systems; two, establish a Government-industry
partnership to stop terrorist funding in real time; and three,
track any terrorist money kept in secret offshore havens and
increase foreign cooperation with U.S. efforts.
Today marks the beginning of the legislative process on
this comprehensive package, which should be enacted before
Congress adjourns this year. It is time for the civilized
international community to exclude financial outlaws, whether
they are bin Laden's terrorist operatives or shadowy offshore
banks, from access to the international financial system. This
is the time and this is the place to draw that line.
The time has expired, and I yield to the gentleman from New
York, the Ranking Member, Mr. LaFalce.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 66 in the appendix.]
Mr. LaFalce. Thank you Mr. Chairman. I ask unanimous
consent to put my entire statement in the record.
Chairman Oxley. Without objection, all the Members'
statements will be made part of the record.
Mr. LaFalce. Money laundering represents a serious threat
to global, political and economic security. The International
Monetary Fund has estimated the amount of money laundered
annually to be between $600 billion to $1.5 trillion, or 2 to 5
percent of the world's annual gross domestic product. Since the
1970s, I have been very concerned about this, but the events of
3 weeks ago demonstrate that the very safety of our citizens
depends on effective national and international anti-money-
laundering policies. There is a need for a new, concerted anti-
money-laundering offensive, internationally and domestically.
The President's action to freeze assets of persons and
organizations associated with bin Laden, al Qaeda and other
terrorist organizations was a very important first step in
cutting off bin Laden and other terrorists from the funds that
sustain them. However, if we are to lead the world in this
fight against terrorism, we must ensure that our own anti-
money-laundering laws are up to the difficult task at hand. And
yesterday, Chairman Oxley and I agreed that we will work
together on a bipartisan basis to enact legislation as soon as
possible that will give the United States the tools it needs to
combat international money laundering and to disrupt the
funding of international terrorist organizations. I look
forward to working with the Chairman and all the other Members
of this committee and the Administration to develop most
expeditiously sound legislation.
I am pleased to see that the initial draft of this
bipartisan bill includes the International Counter-Money
Laundering and Foreign Anticorruption Act that I worked on last
year with Chairman Leach, members of the Clinton
Administration, including Ambassador Eizenstat, who will be
testifying in a later panel, which was adopted by our Banking
Committee last year on a bipartisan vote of 33-to-1.
The International Counter-Money Laundering and Foreign
Anticorruption Act would greatly enhance the tools available to
combat money laundering in the United States and raise anti-
money-laundering standards globally. While most of the debate
at that time was focused on the importance of the bill in the
context of combatting drug trafficking and organized crime, the
Clinton Administration also designed the bill to be useful in
disrupting terrorist funding. That bill fills a gap in the
authorities of the Secretary of the Treasury to respond to
money laundering threats from institutions in foreign
jurisdictions with an inadequate or nonexistent anti-money-
laundering enforcement regime.
Right now, as I understand it, we have but two limited
options. At the one end of the scale, the Treasury Secretary
can issue informational advisories to U.S. financial
institutions about specific offshore jurisdictions, but these
orders do not impose specific requirements, so they are often
inadequate to address the complexity of money laundering. At
the other end of the scale, the President can issue blocking
orders under the International Emergency Economic Powers Act
following a Presidential finding of a national security
emergency, which operate to suspend financial and trade
relations with the offending targets.
The President appropriately invoked this authority on
September 24 when he blocked transactions with foreign banks
that did not cooperate with his order to freeze the assets of
bin Laden, his associates and related entities. But invocation
of the International Emergency Economic Powers Act is not
always appropriate, because the United States might not want to
block all transactions with an offending target, such as a
country, or because our concern centers around the inadequacy
of anti-money-laundering regimes in a foreign country. So the
Act which I reintroduced earlier this Congress with
Representative Velazquez, Representative Roukema, and so forth,
would provide the Treasury Secretary with the ability to
fashion measured, precise and cost-effective ways to address
this problem.
It is unfortunate that neither the full House nor the
Senate took up the bill that we reported out last year, almost
unanimously. I hope we will enact that as part of the bill. But
there are many other proposals that others have made that are
worthy of inclusion in a comprehensive legislative package.
Congresswoman Roukema has an excellent bill which I have co-
sponsored that addresses the inadequacies of our bulk cash
smuggling laws. National due diligence standards to help
prevent the use of fraudulent identification in the opening of
bank accounts should also be considered.
I think that we should provide for better coordination of
anti-money-laundering efforts within the Federal Government and
for enhancing the ability of law enforcement agencies to obtain
important investigative information from financial
institutions. I look forward to working with the Administration
in developing this package. I thank you.
Chairman Oxley. I thank the gentleman.
The Chair now recognizes the gentleman from Alabama, Mr.
Bachus, the Chairman of the Financial Institutions
Subcommittee.
Mr. Bachus. Thank you.
I thank the Chairman for having this hearing, and,
Secretary O'Neill, I want to thank you and the President for
the decisive action that you took last week to block and freeze
terrorist assets, both in this country and around the world. I
am gratified, and I think all America is, to hear the Treasury
is receiving a high degree of cooperation from our allies and
that you are following the money trail and that they are
assisting you in helping to choke off the sources of this
terrorist funding. So a job well done.
From what investigators have pieced together of the
evidentiary trail thus far, there are still more questions than
answers on how the operation that culminated in the horror of
September the 11th was bankrolled. But what we do know suggests
that we should place a much higher priority on non-traditional
or ``underground'' banking systems. These systems fall largely
outside the scope of the formal reporting and recordkeeping
requirements that have been the backbone of the Government's
anti-money-laundering efforts for the last three decades.
While we need to give our law enforcement officials the
additional tools they need to uncover and root out the
financial infrastructure of terrorism, we also must make sure
that the existing tools are being used effectively and wisely.
As Chairman of the Banking Committee's Oversight
Subcommittee in the 104th and the 105th Congresses, I chaired a
number of hearings which examined the operations of the
Financial Crimes Enforcement Network, FinCEN, which is the
Government's lead agency in collecting and analyzing financial
intelligence. Those hearings yielded troubling findings,
substantiated by several GAO studies that I commissioned, and I
would direct the Secretary's attention to those at some time.
They suggest that more can and must be done to enhance and to
coordinate the Government's efforts to track dirty money that
fuels narco-traffickers, international terrorists and other
large criminal organizations.
The President's Executive Order freezing and blocking
terrorist assets was a powerful first step. It sends a strong
message, a message that we will track down and cut off
terrorist blood money wherever we can find it. Congress needs
to examine other measures, including an approach similar to the
one I put forward in the context of the genocide taking place
in Sudan. That is, conditioning access to U.S. financial
markets on other countries' willingness to assist us in the
financial war on terrorism declared by our President.
I want to conclude, Mr. Chairman, by thanking the members
of the staff who have basically worked for 16 and 18 hours
putting together this effort; the cooperation we received from
Treasury and law enforcement agencies. And I want to, in
particular, commend Jim Clinger for his work. Thank you.
[The prepared statement of Hon. Spencer Bachus can be found
on page 69 in the appendix.]
Chairman Oxley. Thank the gentleman.
The Chair now recognizes the Ranking Member of the
committee, the gentlelady from California, Ms. Waters.
Ms. Waters. Thank you very much. Mr. Chairman, thank you
for calling this hearing on money laundering. It is crucial
that we take steps to ensure the terrorist funding is cut off
at its source.
I have been working on money laundering issues for years,
and I believe that the time has come. The time for action is
long overdue. I have long maintained that the way to capture
criminals is to follow the money. If we deny these criminals,
terrorists, drug traffickers and bloody dictators access to the
world markets, they will not be able to function.
Money laundering has become an indispensable element of
drug trafficking, for example, and other criminal activities as
organized crime has expanded its economic influence both
domestically and internationally. Without the ability to
manipulate our financial institutions, the illegal drug trade,
for example, would be brought to its knees. If there were no
drug profits, there would be no drugs on the street.
Similarly, the terrorists took advantage of the weaknesses
in our financial system. They had credit cards and somehow paid
significant sums of money for flying lessons. Some of them even
may have profited from the advance knowledge of September 11 by
selling airline and insurance stocks short.
I don't understand how these individuals, some of whom were
suspected associates of bin Laden, were able to reside in the
United States virtually undetected. Their financial
transactions left a trail, a trail that must be followed, and
we must ensure that every financial institution that is a part
of that trail fully cooperates with law enforcement to root out
the sources. We must close the loopholes in our financial
system that permit illegal activities to flourish undetected.
We must punish America's financial institutions that launder
money, whether it is tied to financing terrorism or other
illegal activities.
The day is over when our own financial institutions are too
big to touch. According to a 1990 report by the Financial
Crimes Enforcement Network, FinCEN, drug profits have injected
an estimated $100 billion into the financial systems of the
United States. Nonetheless, information I received from the
U.S. Department of Justice states that no U.S. or foreign
depository institution, none, not one, has ever lost its
license as a result of money laundering activities in the
United States of America, although many institutions have
received substantial penalties for money laundering activities.
For some of these institutions, penalties were merely the cost
of doing business.
We need to focus national and international attention on
the money laundering vulnerabilities of private banking
relationships and the concentration accounts used by some
private bankers. In an October 28, 1999, letter, Citibank
private bank division defined private banks as ``banks which
provide specialized and sophisticated investments and other
services to wealthy families and individuals.'' The letter went
on to say that ``private banks are inevitably exposed to the
risk that an unscrupulous client will attempt to launder
proceeds of illegal activities through the bank.''
This is stating the situation mildly. A 1998 GAO report on
private banking detailed how known drug trafficker and
international criminal Raoul Salinas was able to transfer
between $90 to $100 million of proceeds through Citibank's
private banking system. In November of 1999, the Senate's
Committee on Governmental Affairs Permanent Subcommittee on
Investigations presented revealing accounts of how Raoul
Salinas and other private banking customers were able to
launder funds through Citibank's private banking system.
According to the subcommittee Minority staff report, a key
problem area within the private banking system is the use of
concentration accounts. Concentration accounts are bank
accounts maintained by financial institutions in which funds
from various bank branches and bank customers are commingled
into one single account. Banks have used concentration accounts
as a convenient internal banking transfer mechanism. However,
by combining funds from various sources into one account and
then wire-transferring those funds into separate accounts, the
true ownership and identity of the funds are temporarily lost,
and, more importantly, the paper trail is effectively ended.
Law enforcement officials have stated that one of the
biggest problems they encounter in money laundering
investigations, particularly where there is an international
flow of funds, is the inability of investigators to reconstruct
an audit trail for prosecution purposes. This was a major
obstacle in the case of Citibank and Raoul Salinas and has also
presented problems for law enforcement in the Bank of New York
money laundering scandal. In a sound practices guideline paper
issued in 1997, the Federal Reserve Bank of New York reported
the use of concentration accounts----
Chairman Oxley. Could the gentlelady sum up, please? We
want to get to the Secretary.
Ms. Waters. Well, let me just say that until we deal with
our own banks here in the United States, we can't begin to talk
about forcing other banks in other countries to clean up their
acts. I am still waiting on reports that I have requested on
the investigation of the money laundering schemes of Raoul
Salinas and Citibank, and since that time Citibank has
continued to purchase banks that they know launder money, and
they launder drug money.
This is tell the truth time, and I want to see what we are
going to do right here before we talk about what we are going
to do offshore.
Chairman Oxley. The gentlelady's time has expired.
We now turn to the distinguished Secretary of the Treasury,
Mr. O'Neill. Thank you for appearing before the committee. The
Chair would inform the Members, the Secretary has another
obligation on the other side of the Capitol, but we will keep
you as long as we possibly can, but we understand the time
constraints as well.
Thank you again. Obviously your appearance today shows a
strong interest in the money laundering issue from the highest
levels of this Administration, and we appreciate your testimony
today.
STATEMENT OF HON. PAUL H. O'NEILL, SECRETARY, U.S. DEPARTMENT
OF THE TREASURY
Secretary O'Neill. Thank you, Mr. Chairman, Congressman
LaFalce and Members of the committee. Thank you very much for
inviting me to be with you today. Under Secretary Gurule is
with me and will appear on the next panel and will provide more
details on our view of actions that could usefully be taken.
And I do want to make a special point of saying to the
committee, to the Chairman and to the committee Members, how
much we appreciate the interaction we have had with you and the
leadership that you have shown over the years in working on
these issues. Now is the time when we have to bring all of
these things to bear, because this issue of financial affairs
and movement of money of terrorists and suspected terrorists is
a very important and essential part of the broad-front war the
President has indicated we are going to wage against these evil
people.
We believe money can be as lethal as a bullet. If we are to
deter and prevent future calamities, and if we are to root out
terrorists that threaten to do violence to our people and our
communities, we have to enlist the active help of financial
institutions to hunt down the financial benefactors who
underwrite murder and mayhem. We have already made an excellent
start with the President's Executive Order and the adoption of
the United Nations Security Council resolution. The U.N.
resolution represents a confirmation by the global community
that an aggressive hunt for terrorist funds is underway and
merits the cooperation of all countries.
The importance of this global campaign cannot be
overstated. Building an action-taking coalition for the
financial campaign against terrorism is as important as a
military campaign. We have set a deliberate course to prosecute
that campaign. First we are engaged in an effort to identify
the potential financial intermediaries of suspected terrorists
and their associates. The interagency task force that we chair
includes the CIA, the Departments of State and Justice, the FBI
and the NSC.
Second, we are acting on that intelligence with the
issuance of domestic blocking orders that freeze accounts and
bar all trade with terrorist associates.
Third, we are engaged with the FBI in the investigation of
the financing of the September 11 attacks and are making
significant contributions in ferreting out those who financed
those horrendous acts.
Fourth, we are engaged in an outreach to secure the
endorsement of our blocking orders by allies in the G7, the EU,
and throughout the world.
Fifth, we have begun to link the disparate databases and to
analyze the patterns of terrorist financing.
Here at home, you can help arm us with additional
legislative tools to enhance Treasury's capability to track,
block and seize those assets, to secure our borders, and to
freely share information about terrorist activity between law
enforcement and U.S. intelligence services. Our intent is
straightforward: to remove structural limitations that handicap
the Government efforts to eliminate the violence of terrorism.
To date, the President's program has produced meaningful
results. As this committee knows, we have taken action
domestically, and, just as importantly, scores of countries
have followed suit with bank freezes and pledges to take
measures to heighten scrutiny of suspicious transactions. In
our effort we are partnering with the private U.S. banking
industry which has helped us to interpret and analyze financial
data. Finally, international financial regulators have made
clear their willingness and commitment to provide us with
whatever assistance we may need to track down the assets of
international terrorists. Other countries have been asked to
provide assistance under treaties that provide Treasury and the
Justice Department with evidence in the current probe and to
share leads for the pursuit of new names. In addition, numerous
international banks have made plain that they will assist us in
any manner lawfully permitted under their respective domestic
laws.
Additionally, we have formed the Foreign Terrorist Asset
Tracking Center to help identify patterns in terrorist
financing practices discoverable only through interagency
coordination and analysis. The center joins for the first time
disparate databases from law enforcement, the intelligence
community, banking regulators and open-access data libraries.
The data is then linked to build a mosaic of terrorist
financing activity. This operation allows us to take a
different tack by sustaining a targeted effort at terrorist
financing. This approach is not limited to the episodic,
targeted and staccato-like pace of a case-specific criminal
problem. Instead, we are using intelligence and law enforcement
resources to find patterns that will allow us to address the
global problem of terrorist financing.
This is admittedly ambitious, but it is at the core of our
declared end. This hunt is not about money. It is about money
that kills. Our approach is proactive and preventative. Our
goal is to drain the financial lifeblood that allows terrorists
to finance and accomplish their deadly goals, and in doing so,
we aim to shackle their ability to strike again.
The Treasury Department is committed to this purpose. It is
for this reason that we believe the provisions of the
Administration's anti-terrorism bill are essential. In
particular, the IEEPA amendment that would protect classified
data from disclosure would remove barriers to the successful
prosecution of our cause. While I understand these provisions
are not currently a part of the House anti-terrorism package,
we are hopeful that they will ultimately be included.
In addition, I look forward to working with this committee
on some issues not addressed in the anti-terrorism package; in
particular, additional provisions to ensure more effective
sharing of information between law enforcement and intelligence
agencies.
Government should not be handcuffed in this endeavor. More
can usefully be done, and Under Secretary Gurule is prepared to
outline potential additional measures.
But my pledge to you is simple. The Treasury Department
will use every tool we have at our disposal to shut down
terrorist fundraising and dismantle their organizations one
dollar at a time. Their moral bankruptcy will be matched by an
empty wallet.
I thank you very much for the opportunity to appear, and I
look forward to your questions, Mr. Chairman.
[The prepared statement of Hon. Paul H. O'Neill can be
found on page 117 in the appendix.]
Chairman Oxley. Thank you, Mr. Secretary. It is good to
have you with us this morning.
Let me make an announcement. The Chair will recognize
Members in the following order for questioning our witnesses:
the Chair and Ranking Minority Member of the full committee,
the Chairs and Ranking Minority Members of the subcommittees,
and other Members in the order of their appearance, with
seniority determining the order of Members present at the fall
of the gavel.
Because of the size of the committee and the importance of
the issues, the time limit for our witnesses, the Chair will
vigorously enforce the 5-minute rule. The Chair appreciates the
cooperation of the Members and witnesses.
Mr. Secretary, based on what Treasury has learned in the
investigation so far, is it fair to say that the vast majority
of the financial assets used to underwrite the terrorist
operations of al Qaeda are overseas rather than in the United
States?
Secretary O'Neill. What we have seen so far, we believe
that to be true, but that doesn't mean we are not continuing to
pay attention to the possibility of financing that we don't yet
know about. But your suggestion is like what we have seen so
far, specifically the al Qaeda resources seem to be mostly in
non-U.S. accounts.
Chairman Oxley. Can you share with the committee the effect
so far that the President's September 24 Executive Order has
had in freezing known assets of terrorists and their financial
supporters?
Secretary O'Neill. Well, the President indicated the other
day on the basis of an interim report that we had identified 27
specific accounts and individuals that we wanted assets frozen.
And we have blocked assets in the U.S. The numbers are changing
on a daily basis. The figure the President used the other day
was $6 million. The amounts of money that have now been
targeted, but without a return yet from the financial
institutions that have been tasked, we are looking at something
over $13 million in the U.S. and substantially larger sums
offshore. The UK has indicated that their total blocking
numbers are $88 million, and on the same basis, if you
incorporate data even before the 11th of September that has
been blocked or challenged on the basis of authorities that
existed before and then the President's expansion, the numbers
in our case equivalent to the Brit number is something over
$250 million.
But, we are at the beginning of this phase, and your
question prompts me to say this: In discussions with the
President, he has made very, very clear how he intends to
measure our effectiveness, and that is by the number of
individuals that are identified and accounts that are
identified and by the amounts of assets that are blocked. So it
is not our intention to measure effectiveness by inputs, but by
actions taken to actually interfere with, and hopefully near-
term, close down al Qaeda's financing operations and those of
other terrorist organizations.
Chairman Oxley. You mentioned the list of 27 organizations.
I am led to believe that there is another list forthcoming.
Could you share with us exactly, or perhaps when that might be
available, and perhaps how many other groups would be involved?
Secretary O'Neill. Hopefully in the next few days we will
be adding a substantial number of additional names to the list.
As we are doing this, and I think it is pertinent to the
legislation that you are considering, and to the past
practices, for the first time there is a dedicated and
determined sharing and vetting of information between the law
enforcement and intelligence agencies that, for a variety of
reasons, has not taken place before, some blockages and some
narrowness of scope in earlier Executive Orders. This is now a
full-front effort that involves all the resources.
And I might say in furtherance of what I said about the
response of countries outside the U.S., without exception I
have had, I would guess, dozens, maybe even more than 100,
letters from Presidents, Prime Ministers and Ministers assuring
us, both at Treasury and in my role as the Treasury Secretary,
that they are fully committed to doing anything and everything
that they can, including amending their own laws where that is
necessary to do, in order to be full partners in going after
the financial networks of terrorists, individual terrorists and
terrorist groups.
We have had nothing but outstanding cooperation. Last week
I had about a 90-minute telephone call linking the Finance
Ministers of the G7, and their response was without reservation
they will be here this Saturday for a full-day meeting in the
furtherance of pursuing this objective.
And so we are getting nothing but what we ask for,
including from all the financial institutions that we have
talked to in the United States.
Chairman Oxley. The Chair's time has expired.
The gentleman from New York.
Mr. LaFalce. Thank you very much, Mr. Chairman.
Secretary O'Neill, are you familiar with the bill that was
reported out of the House Banking Committee in the last
Congress by a vote of 33-to-1 that we worked on with the
Clinton Administration? And if so, is your Administration
supportive of that bill?
Secretary O'Neill. Yes. Generally there is one provision
that the Under Secretary reminds me. I think we have filed
them, a memorandum with you indicating that we would like to
provide what we call a due process provision so that----
Mr. LaFalce. That could be accommodated.
Secretary O'Neill. With that change we are going to be fine
with what you are proposing to do.
Mr. LaFalce. OK. Good.
Now we have got this Financial Action Task Force list of
noncooperating countries and territories. Is the United Arab
Emirates on that list?
Secretary O'Neill. I don't think so. No, they are not on
that specific list.
Mr. LaFalce. Is Pakistan on that list?
Secretary O'Neill. I don't think so.
Mr. LaFalce. OK. Well, with respect to countries that are
not on that list, but whose standards might not be what we
think they should be, do we have a different list, and are we
trying to get them to improve both their laws and their
practices? I mean, I have heard and read that much of al
Qaeda's funding has come from accounts belonging to charities
and others and banks in the United Arab Emirates. And
apparently Mohamed Atta received a wire transfer of $100,000
from a bank account in Pakistan under the control of one of bin
Laden's lieutenants. And so I am just curious about that.
Secretary O'Neill. The President has said, in this war
against terrorism, that other countries and people are either
with us or against us. And as I said to you, we believe running
the financial network of the terrorists to the ground is an
essential part of waging this war, and we are going to put to
all the other nations of the world the issue of finally coming
to grips with issues that in the past were looked at under the
umbrella concept of money laundering and put each of them to
the test of providing information in a structured way that we
have said we want to do with everyone.
And as I said to you, so far, as we have put these
questions, people have been very responsive. Finance Ministers
of----
Mr. LaFalce. Mr. Secretary, I have a limited amount of
time, and I concur with the language that is being used by
virtually every country that has corresponded with you. The
question is not so much the language and the good intent. The
question is, you know, the proof is in the pudding. And so I am
just wondering--it is difficult to bring about international
harmonization of standards, and somehow we have got to do it
quickly, within weeks or so. And we have to have some
standards. We have to know whether each country, especially
certain targeted countries where the terrorists might be most
active, have in place a set of standards that we think is
adequate, and if not, we have got to get them to do it
yesterday. And that is why I am focusing in on the United Arab
Emirates and Pakistan, for example, not getting letters of good
intent.
Secretary O'Neill. The answer is I agree with you, and I am
also a results-oriented person, as your question suggests. I am
not interested in having more paper and good wishes and
resolutions. I am interested in getting action, and, yes, we
are going to work with every one of these countries, including
the list of countries that have not yet entered information-
sharing treaties with the U.S. so we can prosecute this part of
the war as diligently and successfully as I am sure the
President and the military establishment will prosecute the
more familiar part of the war.
Mr. LaFalce. Thank you, Mr. Secretary.
Chairman Oxley. The gentleman's time has expired.
The gentleman from Alabama, Mr. Bachus.
Mr. Bachus. I thank the Chairman.
Secretary O'Neill, I will be yielding my time to Mr. Riley,
but I did want to commend you for one statement. Your opening
statement, I thought, was magnificent.
Secretary O'Neill. Thank you.
Mr. Bachus. You said the hunt is not about money, it is
about money that kills. And I think that is really the essence
of what we are talking about here. Prior to September the 11th,
I said the issue is very basic: dollars or lives. And sometimes
that is going to be the choice. When it comes to a question of
dollars or lives, there should be no question. And we are going
to have that--that is going to confront us from time to time.
So thank you.
I will yield at this time my remaining time to the
gentleman from Alabama, Mr. Riley, who is very knowledgeable on
these issues.
Mr. Riley. Thank you, Mr. Bachus. I appreciate that. I have
got another meeting I was going to, but I did want to ask a
couple of questions, Mr. Secretary. Following up on Mr.
LaFalce's line of questioning, how many countries would you say
today are not being helpful?
Secretary O'Neill. So far, as I said, no one has said no.
Most have volunteered a willingness to do anything and
everything that we suggest they might do within their own
boundaries. But you all know, because you have followed this
subject for a very long time, there is a long list of countries
that don't have information-sharing treaties with the United
States so that we can track even the narrower subject of money
laundering, and I believe it is now time to put the question to
them, actually the demand to them, that we finally create a
basis so that we can follow money around the world, both for
the broader purpose of money laundering and for the specific
purpose of interdicting and confiscating the money of
terrorists and suspected terrorists.
Mr. Riley. Well, I couldn't agree with you more, Mr.
Secretary, but, again, I think Mr. LaFalce is absolutely right.
Now time is of the essence. If we could, I would love to see a
list of the number of countries that have not participated or
have been reluctant to participate.
But, because our time is short, let me ask you one other
question. Prior to September the 11th, what kind of policies
and procedures did the Treasury Department have in place that
allowed us to track the terrorist money before the attack on
New York?
Secretary O'Neill. I guess I would say, now I am thinking
about on the intelligence side, we had an ability in the
intelligence community to identify terrorists and to look at
information on a worldwide basis outside of the United States
to pursue the financial affairs of terrorists. But we had a
habit and a practice, and I think even a legal prohibition,
against using in a direct way the information collected by the
international intelligence agencies without a very complex
procedure to bring it on board in the United States and to
systematically pursue potential terrorists inside the
geographic borders of the United States.
And, you know, one of the things that is happening, as a
consequence of these terrorist acts, I think we are finally
going to use the resources of our own community and the
intelligence agencies of the rest of the world to go after
terrorists, not without protections to make sure that there
isn't overreach, but to take away the handcuffs that I think
perhaps were applied and supplied with the best of intentions
to protect individual liberties, but at a cost that made it
very difficult to systematically erase the financial sources of
terrorist operations.
Mr. Riley. Well, sir, again, prior to September the 11th,
could you categorize on a scale of 1-to-10, compared to what
you are doing today, how active your department was, or how
active this Government was, in tracking terrorist money,
knowing where the accounts were, and did we have the ability
before to do something preemptively that we should have done?
Secretary O'Neill. I think one measure of where we were is
frankly not one I like very much, but one measure of where we
are, you can look at the annual reports on so-called money
laundering activity and attempts to interdict money that was
flowing from illicit, base purposes. If memory serves me right,
last year the number was $670 million. That is a fair amount of
money. And, you know, I began, when I came asking the question,
and what did we get for it, and I was not, frankly, satisfied
that we were getting results for dollars spent.
I have a great deal of confidence that we are now going to
start seeing results for dollars spent, because at the very top
of our Government, the President of the United States has said
he wants to know how many individuals have we identified; how
many accounts have we blocked; how much money have we either
blocked or confiscated. So I think with a clarity of purpose
you are going to begin seeing results.
And I think also, as a consequence of these unbelievable
acts, the cooperation from other governments around the world
is going to be the difference between night and day. This is no
longer going to be a conversation about convenience or
something else. What I have seen from everyone that I have
talked to is a determination that the world is not going to be
a hostage to terrorists, and we are going to use every means at
our disposal, including attacking their financial sources, to
put them out of business.
Chairman Oxley. The gentleman's time has expired.
The gentlelady from California.
Ms. Waters. Thank you very much.
Mr. Secretary, I would like to see the legislation. I am
seeing it for the first time. We just got it last night. I
would like to see this be a three-pronged attack. While most of
the references in this Act are to terrorists, it should be
terrorists, drug traffickers and corrupt dictators. There is a
nexus in all of this. Even as we talk about the terrorists and
the Taliban, I don't know at this time how much drug
trafficking plays a role in this. It appears that the Taliban
is only going to be able to finance anything, even war, through
its drug trafficking, and it appears that that is on the rise
in Afghanistan. So I would like to see us talk about
terrorists, drug traffickers and corrupt dictators in all that
we do.
Number two, are you willing to shut down big banks right
here at home who are found to be laundering terrorist money,
along with--and I would like to see in that also drug money and
money that is deposited in our banks by bloody dictators. Are
you willing to shut down the big boys?
Secretary O'Neill. If I believe that we find evidence that
big banks or small banks or medium-size banks are aiding and
abetting terrorists, you bet my recommendation to the President
will be that we shut them down tomorrow morning.
Ms. Waters. Thank you.
Mr. Secretary, also, one of the biggest banks in this
country was under investigation for laundering drug money at
the same time they were under investigation they were
purchasing small banks in Latin America that had strong
representations for laundering drug money. Can you think of, or
will you think about, as we should think about, ways by which
we can discontinue the practice of our banks buying banks that
have strong representations for laundering money, because they
end up using it as an excuse. ``It is not the bank's policy,''
they will say, ``but some individual in the bank who is
misusing his or her power like a private banker,'' and so
forth. But they knew when they bought that bank that that is
what they had the reputation for doing, and the same employees
are in the bank. Are you willing to deal with that issue?
Secretary O'Neill. Not on the basis that you suggest. I
don't think that--and this is a question of protecting our
freedoms as we work the subject diligently. I don't think that
we should act on the basis of so-called reputational opinions.
I think we should operate on the basis of facts. And if we can
demonstrate through intelligence and investigation that
institutions deserve, as you say, the reputation that they
have, then I am for stopping their activity, interdicting their
activity, taking their money away. But I am not for operating
on something as flimsy as reputation, because I am wary of the
dangers that are associated with attacking individuals or
institutions on the basis of reputation.
Ms. Waters. I am not thinking about reputation in the case
of Citibank. They bought a bank called Confia. It was under
investigation by our own DEA agents, and they covered and they
documented that it was involved in laundering money, and they
bought the bank anyway.
Finally, can you give me an update or have someone give me
an update if the statute of limitations has not run on the
investigation of the Salinas money that was deposited in
Citibank, assigned a private banker who purchased all of the
assets for Salinas through the private banking situation, just
as in our book today we find that one of our U.S. bankers
helped to--testimony demonstrated how a U.S. banker was used by
bin Laden to send money from the Shamal Bank to a bin Laden
associate in Texas using a corresponding account. Essam Al
Ridi, who worked for bin Laden, testified that he received
$250,000 wire-transferred at his bank in Texas that was sent by
the Shamal Bank, which he then used to purchase a plane for bin
Laden, which he later delivered himself to bin Laden.
I want to tell you again, let me just reiterate, we have
got to clean up our act. Our banks have got to be willing to
stop taking money from every bloody dictator, terrorist-
associated persons and drug traffickers. Until we get tough on
them, other countries are not going to believe us.
Chairman Oxley. The gentlelady's time has expired.
Mr. Secretary, again, we appreciate your testimony today,
and your appearance really sent a strong signal of the
Administration's intense desire to work on a money laundering
bill, and we most appreciate it. We understand your time
constraints to go over to the other body. We appreciate your
testimony, and we look forward also to your excellent
colleague, Mr. Gurule, who will testify on the next panel.
Thank you very much.
Secretary O'Neill. Mr. Chairman, Members of the committee,
thank you all very much.
Chairman Oxley. We are pleased to have our second panel,
and let me introduce the panel as they are taking their seats.
The aforementioned, the Honorable Jimmy Gurule, Under Secretary
for Enforcement, the Department of the Treasury; Mary Lee
Warren, Deputy Assistant Attorney General, the Criminal
Division; Mr. Dennis Lormel, Chief, Financial Crimes Section,
from the Criminal Investigations Division of the FBI.
Gentlemen and lady, we appreciate your appearance today
before the committee, and Mr. Gurule, we will begin with you.
STATEMENT OF HON. JIMMY GURULE, UNDER SECRETARY (ENFORCEMENT),
DEPARTMENT OF THE TREASURY
Mr. Gurule. Chairman Oxley, Chairman LaFalce and other
distinguished Members of the House Committee on Financial
Services, permit me to begin by thanking you for inviting me to
testify before the committee on the Administration's policies
and proposals for dealing with the threats posed to the United
States and the global financial systems by international
terrorists and terrorist groups. It is an honor to meet with
you this morning as we assess the Treasury Department's
strategy to cut off the financial lifeblood of the individuals
and organizations responsible for the heinous, cowardly acts of
September 11.
Insofar as possible, my testimony today is structured along
the lines requested by you, Mr. Chairman, in your September 27
letter to Secretary O'Neill inviting him to testify. On
September 24, President Bush stated, and I quote: ``We will
direct every resource at our command to win the war against
terrorists, every means of diplomacy, every tool of
intelligence, every instrument of law enforcement, every
financial influence. We will starve the terrorists of
funding.''
It is that last statement by the President that has been
the mandate for the Department of the Treasury, starving
terrorists of funding. The strategy that we can employ to
accomplish that goal is a multistep process. It includes the
following: The Department of the Treasury is intensely involved
in investigating and identifying targets; second, identifying
assets for potential blocking or seizure; third, identifying
methodologies, systems, techniques used to move funds for
operational support of these terrorist organizations; fourth,
the sharing of information with appropriate law enforcement
personnel, specifically the FBI and Department of Justice
officials; and lastly, application of an array of authorities,
regulatory tools and law enforcement initiatives to deprive
terrorists of access to their funds within the United States.
With respect to the first question that you have asked the
Department of the Treasury to address today, the financial
networks and operations of terrorist groups, let me say the
following: The schemes used by these terrorist organizations to
move money that underwrites these terrorist activities are
challenging and complex, to say the least. Make no mistake
about it. It is very complex, varied schemes that are used, and
they defy easy definition. So I don't want to create any
unreasonable expectations with respect to the ease in
identifying these systems of operation.
Certainly, we know from our investigation that in some
instances these organizations use charitable organizations that
on the one hand are involved in raising funds for humanitarian
and legitimate activities, but at the same time are involved in
raising funds that are used to underwrite terrorist activities.
They use front companies, businesses, banks, and underground
money transfer systems such as the ``hawala'' system, which we
are actively investigating. And, of course, they attempt to
smuggle bulk cash in and out of the country to support their
activities.
And so our strategy with respect to undermining these
financial networks must be multilayered, must attempt to
address and confront these diverse and varied schemes. There
isn't a kind of single, one-fits-all type of strategy that we
can implement if we intend to be successful in dismantling
these operations.
What are the tools that we are currently using to dismantle
these financial networks? Secretary O'Neill spoke briefly about
IEEPA, the International Emergency Economic Powers Act. This is
the principal tool that is being used to stop terrorism
financing. President Bush issued Executive Order 13224 on
September 24 declaring a national emergency under IEEPA with
respect to acts of terrorism and threats of terrorism committed
by foreign terrorists against the United States. This Executive
Order is important for a number of reasons. First, it expands
the coverage of existing Executive Orders from terrorism in the
Middle East to global terrorism. Further, it expands the
targeted groups to include those who provide financial or other
support or services to terrorist groups or persons associated
with terrorist groups. So it is much broader in its scope and
coverage.
It further makes clear our ability to block U.S. assets and
deny access to the U.S. financial markets to foreign
institutions that refuse to assist the United States in
tracking and freezing terrorist assets abroad.
With respect to this Executive Order, we have put in place
the means to carry out the goals of the Executive Order. The
vehicle that is being used for this purpose is the Foreign
Terrorist Asset Tracking Center that is being administered by
the Office of Foreign Assets Control.
Its goal is to identify the source of funding for terrorist
organizations and to cut off the cash flow to these groups. It
has been in operation, as you know, a short period of time.
However, I do believe that the progress that we are making with
respect to the tracking center is substantial, and the early
news is certainly encouraging, and we are very optimistic about
with respect to the future effectiveness and success that is
going to be realized by use of the Foreign Terrorist Asset
Tracking Center.
As the Secretary stated, its value is multifold. It brings
together and accesses multiple databases, law enforcement
databases, intelligence community databases, public source
information, and the Bank Secrecy Act databases, which include
currency transaction report information and suspicious activity
report information. So we are pulling together, coordinating
the utilization of these important bases of information and
doing so in a coordinated fashion with the law enforcement
community and the intelligence community.
One additional tool that we are using in this war against
these financial terrorist networks is the Bank Secrecy Act. As
you know, the Bank Secrecy Act is administered by the Financial
Crimes Enforcement Network, or FinCEN. The Bank Secrecy Act
permits us with a database--the data that is collected via the
Bank Secrecy Act permits us to develop linkages between
individuals and particular banks and particular bank accounts
with respect to specific transactions. It gives us a much
clearer picture of who is involved in the financial network.
And, of course, we are sharing the information that we are
learning through FinCEN with the Federal Bureau of
Investigation and Department of Justice prosecutors and
officials. So it is one other important tool that is available
to us.
At the same time, Treasury enforcement bureaus are actively
engaged in investigating the terrorist acts of September 11th,
including the United States Customs Service, which has
extensive expertise in the area of anti-money-laundering; IRS-
C.I., which, again, has extensive knowledge and expertise with
respect to investigating complex money laundering schemes,
following the money, following the paper. We are working
closely with IRS and the Secret Service. So we have a strong
intra-agency cooperative effort. And again, these agencies,
Treasury bureaus are working closely with the Department of
Justice and the Bureau.
What additional legislation is needed? Well, let me address
that in general terms initially, and I am happy to respond in a
more specific way during the question-and-answer session. There
are current laws on the books that make it difficult for law
enforcement to do its job with respect to investigating these
financial networks. For example, there are some provisions that
permit access to relevant data by Department of Justice
officials, but prohibit or deny access to the same information
by the Department of the Treasury law enforcement officials.
And it seems to me that if the evidence or the information is
relevant for criminal justice law enforcement purposes, it
should be accessible at the same time by FinCEN, by the Office
of Foreign Assets Control, and by the Foreign Terrorist Asset
Tracking Center.
Currently, laws on the books do not permit the sharing of
that information by Treasury bureaus. At the same time, there
is information that Treasury may access, but is prohibited from
sharing with the intelligence community. So we can share it
internally within Treasury, but we are prohibited from sharing
it with the intelligence community. And, again, I think these
are obstacles and hurdles that make it difficult to do the job
that we need to do in an expeditious and efficient way.
And the Secretary commented on IEEPA and the importance of
being able to defend, let's say, a blocking action in court by
being able to submit in camera, ex parte to a judge, the
classified information that was used to support a blocking
order. If we don't have that ability, it really places the
tracking center in a quandary, if you will, because they are
having to decide whether or not to block accounts based upon
classified information. And if the fear is that we may have to
disclose this classified information, then the question is
perhaps we shouldn't block the account. Or if we block the
account, maybe we should block it on information other than
classified information. And so the underlying evidentiary basis
for the blocking is not as strong as it otherwise would be. Or
if we block the account, we may find ourselves in a situation
at court where the blocking order is being challenged where--
because it is classified information, and if we are ordered to
disclose it, we may then have to make a decision to withdraw
the blocking order, because we can't disclose the classified
information in open court.
So, we certainly would welcome your support with respect to
amendments to the IEEPA legislation to fix this problem.
Lastly, let me just comment briefly on the extent of
international cooperation. There isn't much that I can add to
what the Secretary stated in his statement. The cooperation has
been--first of all, the activity has been aggressive, and it
has been on multiple fronts. The effort has first and foremost
been one of seeking cooperation with our allies to block
accounts that we believe are linked to terrorist activities,
and the response has been quite positive.
With respect to the Financial Action Task Force, we are
undertaking efforts to ensure that banks that maintain accounts
that are linked to terrorist organizations, that that is
prohibited conduct under the 40 recommendations of FATF, and
that may serve as a basis to have such a country listed on the
list of noncooperating countries and territories.
These are just a few of the things that we are undertaking
at this time. And again, thank you for the invitation. I am
happy to answer any questions that you have at the appropriate
time. Thanks very much.
[The prepared statement of Hon. Jimmy Gurule can be found
on page 121 in the appendix.]
Chairman Oxley. I thank you.
Our next witness, Mary Lee Warren from the Justice
Department, speaking for Michael Chertoff.
STATEMENT OF HON. MICHAEL CHERTOFF, ASSISTANT ATTORNEY GENERAL,
CRIMINAL DIVISION, DELIVERED BY MARY LEE WARREN, DEPUTY
ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, DEPARTMENT OF
JUSTICE
Ms. Warren. Thank you, Mr. Chairman, and I appreciate the
opportunity to appear today before this distinguished committee
to discuss the Administration's strategy to attack the
financial lifeblood of these individuals and organizations
responsible for the September 11th attack. Mr. Chertoff, the
Assistant Attorney General for the Criminal Division, regrets
not being here today, but the White House has tasked him with
other anti-terrorism matters today.
Let me report for my part that we are making substantial
progress toward unraveling the network that provided the
financial support for the attacks of September 11th.
Unfortunately, our work is made much more difficult, because
many of our existing money laundering laws are out of date. As
this committee well knows, those laws that were originally
enacted in 1986 sought to address what was then a domestic
problem of money laundering. It is now an international, global
problem of money moving across borders, being transferred
electronically and smuggled from time to time.
The seriousness of this problem has been repeatedly
underscored in the days since the attack. Press reports have
indicated that some of the money was drawn from other crimes,
that cash was smuggled, and that money moved electronically.
The terrorists, and certainly other international organized
criminals, are fully aware that the United States, among other
countries, is ill-equipped to permit the international
cooperation necessary to restrain and forfeit the funds as they
move around the globe. We need to modernize our money
laundering laws to be able to respond to today's threats of
terrorism as well as the international crime problem today.
Our present laws are simply inadequate to deal with these,
or with the variety of new methods that our criminals are now
using to move money across borders, of moving money as proceeds
of crimes they committed abroad into the United States, and
money that is the profits of crimes here moved out of our
country. To meet this challenge we must do all we can to
prevent foreign criminals, first of all, from using our banking
system to hide their dirty money; and second, we must ensure
that criminals who commit crimes here and send their money
abroad will also be subject to the confiscation and
prosecutions necessary.
Our Federal courts must be able to enforce foreign
judgments of forfeiture. When crimes have been found and
forfeiture ordered by a foreign court, we are able to enforce
those judgments if it is a drug case, but not for any other
crime, including terrorism, today. Such enforcement is in the
broad interest of international justice, but it is also in our
own justice interest. Foreign courts will be less likely to
work with us and cooperate on enforcement of our judgments if
we cannot provide the same reciprocal authority.
In addition, we must take steps to crack down on the ease
with which foreign criminals use correspondent accounts of
foreign banks maintained here in U.S. banks to hide the profits
of their crimes. We must prevent fugitives from hiding behind a
corporate veil or ``front'' from challenging those forfeitures.
They can't do it in their own right while they are on the run.
They shouldn't be able to do it behind a corporate front.
We also have to take new steps to address the most recent
methods that money launderers have employed to hide the
proceeds of their domestic crimes by moving that money abroad.
The success that we have had in enforcing the Bank Secrecy Act
has led criminals to deal increasingly in cash. Hoards of cash
are routinely moved across borders, and couriers move that cash
interstate. They conceal it in many different ways and move
through many types of transportation. It should be a violation
of Federal law for a person to transport such currency knowing
that it is derived from crime or that it is intended to be used
for an unlawful purpose. Similarly, it should be a crime to
smuggle cash across borders to avoid the reporting requirements
that we have.
The Money Laundering Act of 2001, which the Attorney
General sent to Congress on the 18th of this month, contains
many of these and numerous other provisions intended to update
our money laundering laws to address today's globalization of
crime. We are gratified to see that many of these provisions
are incorporated in the House bill.
The inadequacy of our present laws has been brought into
sharp and sad relief by the horrific events of September 11th
and the ensuing reports of the means by which the terrorists
financed their crimes, but this is a problem that goes beyond
terrorism in this era of globalization. We must find ways to
make our laws keep pace with the methods employed by all those
who would prey upon our citizens. We look forward to working
with this committee and your colleagues in the House and those
in the Senate in realizing our shared commitment to an
effective anti-money-laundering regime in the United States.
Thank you very much. I look forward to your questions.
[The prepared statement of Hon. Michael Chertoff can be
found on page 131 in the appendix.]
Chairman Oxley. Thank you, Ms. Warren.
Agent Lormel.
STATEMENT OF DENNIS M. LORMEL, CHIEF, FINANCIAL CRIMES SECTION,
CRIMINAL INVESTIGATIONS DIVISION, FEDERAL BUREAU OF
INVESTIGATION
Mr. Lormel. Thank you, sir. On behalf of the FBI, I would
like to express my gratitude to the committee to afford us the
opportunity to participate today. I have submitted a written
statement for the record which broadly addresses the issues
your invitation letter asked me to address.
The terrorist acts of September 11th were among the most
horrific crimes ever committed. We in the FBI are deeply
committed to conducting a comprehensive investigation. Director
Mueller has committed the full resources of the FBI to this
initiative. An important adjunct component of the investigation
has been the formation and inclusion of a multiagency financial
review group. My colleagues here at the table have both
referenced some of the initiatives, and we will get into a
little more detail on that.
From the financial investigative standpoint, our mandate is
to conduct a collateral investigation consistent with the
terrorism investigation, and certainly to rely on our friends
in Treasury in accomplishing this. My oral comments will
briefly touch on the specific questions you asked me to
address.
First, the description of the financial networks and
operations of the terrorist groups involved in the September
11th attack. Mr. Gurule and Ms. Warren each made some
references to them. I don't think it is appropriate to get into
specifics; however, it is important to note there was a
financial network and a support mechanism that supported the
hijackers responsible for the September 11th attack. We are
conducting, as I mentioned, an exhaustive and comprehensive
financial investigation in this regard, unlike anything we have
done before. I applaud the committee for your efforts and your
initiative in addressing this issue and recognizing the
importance of cutting off the lifeblood of financial support to
the terrorist organizations.
Second, you asked about the FBI's strategy for identifying
and taking action against those involved in financing the
individuals and the organizations involved in the terrorist
attacks. Again, I don't think it is appropriate because of the
ongoing nature of the investigation to comment specifically on
that, but I would like to specifically emphasize that there is
a partnership among the Federal law enforcement community
including the Department of Justice and the Department of
Treasury and coupled with the financial services community, the
financial institutions of America, and the general businesses,
the general business community itself. In fact, personally I
find it very heartening the response and the cooperative
initiatives that we are receiving.
You asked about vulnerabilities and high-risk areas in the
financial services sector. There are a number of those areas,
and, again, my colleagues have addressed those a little bit,
but certainly the areas of wire transfers, correspondent
banking, money service businesses. You referenced the
``hawala'' system. Traditional fraud schemes; certainly the use
of false identification, credit card fraud, insurance fraud and
traditional fraud schemes are what are prevalent here. We have
seen that with the hijackers in this case.
As an aside, I would also like to address a vulnerable area
which is internet gambling. The internet gambling and online
capabilities have become a haven for money laundering
activities. We believe there is a huge potential for offshore
sites being utilized to launder money, and there are examples
of pending cases, particularly in our organized crime program,
involving enterprises using these types of services as conduits
for money laundering.
You asked about any obstacles the FBI is encountering in
its efforts to obtain the cooperation of U.S. financial
institutions. I would like to say that in my 25 years of
experience, I have never seen the level of cooperation and
support toward law enforcement that we are encountering in this
particular case. The responsiveness of the financial industry,
financial services sector and the entire business community has
been most heartening and symbolic of the spirit of patriotism
that has galvanized the country.
You asked about the extent to which the current law
provides the necessary tools for the FBI and other law
enforcement agencies to stop the financial operations of the
terrorist groups. Again, my colleagues here at the table have
addressed those issues, and I will certainly defer to their
comments. I have articulated in my written statement that the
FBI strongly supports the Money Laundering Act of 2001, which
the Justice Department submitted to Congress. We are encouraged
by what we have seen in your write-up, sir. And we concur with
Ms. Warren's testimony. Enactment of these proposals would
greatly assist our efforts to fight terrorism as well as a wide
variety of financial crimes.
If I may just make one anecdotal comment. Mr. Gurule
commented about the machinations and some of the prohibitions
that we deal with in dealing with sharing of information. In
our financial review group, FinCEN is an active partner, yet we
have some problems that we are trying to overcome in sharing
information and taking full advantage of the capabilities and
databases that FinCEN offers us, and that would certainly be an
area we would like to see pursued.
You asked about the degree to which the FBI, FinCEN,
Customs, DEA and other law enforcement agencies are working
collaboratively to end terrorist funding. In conjunction with
the Assistant Attorney General Mr. Chertoff and his staff, to
include Ms. Warren, the Financial Crimes Section of the FBI
recognized the importance of establishing a financial review
group to participate in the immediate criminal and terrorist
investigation as well to establish a template for future
terrorist and significant criminal enterprise investigations
that certainly we have to coordinate with the Department of the
Treasury.
In order to succeed, the financial review group will
require the full participation of the Federal law enforcement
community. Secret Service, the Internal Revenue Service, the
Customs Department, the Postal Inspection Service, FinCEN, the
CIA, and the National Drug Intelligence Center are full
partners in our financial review group, kind of an ad hoc task
force if you would. We have reached out to the entire Inspector
General community and have gotten their pledge of support, and
they are reviewing their databases for any type of linkage and
nexus to the terrorist groups.
It should be noted that there are myriad agencies in
addition to the agencies I have mentioned here that participate
in the terrorist side of the investigation. This is a very
unique case for the FBI because it is first time, I believe,
that we have a fully integrated financial component in a
terrorist investigation.
You asked about the nature and extent of international
collaboration on law enforcement. Again, based on my
experience, the full international coordination and cooperation
is unprecedented. The worldwide law enforcement community has
rallied to support our investigative efforts.
In conclusion, cutting off the financial lifeblood of the
individuals and organizations responsible for the September
11th acts of terrorism is a vital step in dismantling the
organization and preventing future terrorist attacks. With the
assistance of Congress, the combined resources of the Federal
law enforcement community and law-abiding people throughout the
world, we are confident we can succeed in this challenging
mission.
With that, sir, we are all available for questions.
[The prepared statement of Dennis M. Lormel can be found on
page 140 in the appendix.]
Chairman Oxley. Thank you, Agent Lormel, and thanks to all
of our witnesses.
The Chair now recognizes the Vice Chairlady of the full
committee, Mrs. Roukema.
Mrs. Roukema. I thank the Chairman.
I have been listening very carefully here, and I want you
to know about my own background on this subject not only with
bulk cash smuggling, but the McCollum-Roukema bill of 2 or 3
years ago, Congressman McCollum, formerly a Member of this
panel as well as a major senior representative of the judiciary
panel probably. And that bill went noplace, but it is my
understanding from the Attorney General that their proposal and
the proposal that I hope we are going to be marking up
hopefully next week here in this committee and the one that is
reflected in the Senate is 90 percent of what we were doing at
that time.
Now, what does that have to do with our hearing here today?
I was more than a little disappointed that Secretary O'Neill
had to leave before we were able to ask him with more
specificity what he would be recommending. I would like to know
a little bit more from this panel with specificity what we
should be doing to get corrective legislation.
I was concerned that, Mr. Gurule--I am sorry, Mr. Gurule,
people mispronounce my name all the time, too--but, Mr. O'Neill
implied that we have the legal authority to close some of these
money launderers down tomorrow. I don't believe that. I don't
believe that that is possible. But I wonder if Mr. Gurule would
please help us, when you say the Bank Secrecy Act permits--you
made it sound as though that is adequate. I don't believe that
is adequate, and I think we need additional legislation. And
you did indicate that Treasury, law enforcement, the current
law restricts Treasury and law enforcement cooperation. You did
indicate that.
Now, are you familiar with not only the bulk cash smuggling
portion of our legislation, which I am forcefully advancing,
but the more comprehensive proposal that we and the Senate hope
to get passed? Could you please give us your assessment of that
legislation not only in terms of bulk cash smuggling, but also
in terms of how we are going to facilitate information
gathering and the cooperation as was already stated about the
correspondent banking and wire transfers that I believe the FBI
representative here today referenced? Could you give us your
help on that, please?
Mr. Gurule. Certainly. Since taking office as Under
Secretary for Enforcement, I have identified money laundering
as the top priority for the enforcement office at the Treasury.
The first task upon becoming Under Secretary was the
development and publication of the 2001 National Money
Laundering Strategy, and that was released just a few weeks
ago. It was released in September, and it sets forth a very
comprehensive strategy with respect to anti-money-laundering
efforts.
With respect to legislation specifically, I have had an
opportunity to review the bill that has been prepared by the
Department of Justice, and I think that the provisions that are
contained therein are important provisions, necessary
provisions in terms of strengthening our current anti-money-
laundering laws.
So, on one hand, with respect to new legislation, again,
the provisions articulated there are ones that we view quite
favorably. In addition, as the Secretary stated, we have had an
opportunity to review the Kerry bill or the House version that,
of course, has been submitted sponsored by Congressman LaFalce,
and we believe that the authority, the discretionary authority,
that is set forth in that bill with respect to the Secretary of
the Treasury being able to impose special measures where there
is a finding of a primary money laundering concern is
important. It is valuable.
The one caution, the one objection that we have raised with
respect to that is the need for a due process provision, which
I believe, if I understand Congressman LaFalce, he supports as
well. We have been working with the staff of Senator Sarbanes,
who is the Chairman of the Banking Committee, the staff of
Senator Gramm, who is the Ranking Member. We have been working
cooperatively there in an effort to craft what that due process
provision should look like and what process should be due under
the circumstances that are set forth therein. So there, again,
is another specific example of where I think we can support
legislative initiatives that are currently being undertaken.
Chairman Oxley. The gentlelady's time has expired.
The gentleman from New York, Mr. LaFalce.
Mr. LaFalce. Thank you very much.
Mr. Gurule, I thank you for your endorsement of the bill
that I have introduced so long as we can come up with some due
process provisions. I do want to caution you, however, that the
same bill was held up in the Senate last year by one
individual, the former Chairman of the Senate Banking
Committee. I caution you that it is possible to come in with
due process provisions that will choke the effectiveness of the
bill. And so I would encourage your staff to work with my staff
in coming up with some reasonable due process provisions.
Next point: Your office is extremely important. It is
responsible for money laundering, but it is also responsible
for the Customs Bureau. And as a northern border Congressman, I
have the following questions. First of all, do we know how many
of the 19 or so hijackers who were killed may have come in from
Canada, if at all, if any?
Number two: Do we know if any came in illegally as opposed
to legally from wherever they came?
And number three: There has been a gross inadequacy over
the years in the number of Customs and Immigration personnel on
the northern border. We have increased the amount of traffic
exponentially, and we have fewer personnel. Second, the Customs
Department has had on the books for about a decade what is
known as a proposal for ACE, an automated commercial
environment, that would cost in excess of a billion dollars,
but we are woefully behind the times in implementing that. Is
there any way that we can make a giant leap forward both with
respect to numbers of personnel and to an automated commercial
environment that would: A, enhance our security and: B,
facilitate the flow of traffic?
Mr. Gurule. I think that was four questions, so let me see
how I can respond to them and take them in order.
Let me first comment that I am pleased to announce that the
U.S. Customs Service has a new Commissioner as of last week.
Robert Bonner was sworn in as the new head of the Customs
Service. Mr. Bonner is someone that I worked closely with when
he was a U.S. attorney for the U.S. Attorney's Office in Los
Angeles and I was a Federal prosecutor heading up the drug
section, deputy chief there.
The issues that you raised with respect to ACE, the issue
that you raised with respect to the inadequacy of Customs
inspectors at the northern border are issues that Commissioner
Bonner and I are addressing. Clearly, both of those are
important, and I agree with you. I think the numbers in terms--
--
Mr. LaFalce. There is $40 billion that we have
appropriated, a significant portion of which can be used in the
absolute discretion of the President. Is your office putting in
for a significant portion of that for more personnel and the
most expeditious of ACE that is possible?
Mr. Gurule. With respect to additional Customs Service
inspectors, yes. They are being addressed, and there will be
and there is a request in there for additional inspectors.
With respect to the ACE program, the Secretary has spoken
on that as well. We are going to do everything that we can to
ensure that it is implemented. We understand and appreciate the
importance of it.
Mr. LaFalce. I want you to come back to me with the--when
ACE was first suggested, how much it would cost in toto, what
the implementation plans are for it right now, and what the
most ambitious implementation plan for it could be if you had
all the financial resources you need; second, the number of
additional personnel that you have requested of the
Administration for the northern border.
Now, what about individuals coming in from Canada? Have we
identified any as having come in from Canada at all?
Mr. Gurule. I am not aware of any.
Mr. LaFalce. Of those who have come in, the 19 hijackers,
do we know if any have come in illegally, or did they all come
in quite legally, or do we know that?
Mr. Gurule. Perhaps that question may be better addressed
with Mary Lee Warren.
Mr. LaFalce. Mary Lee, your answer.
Ms. Warren. The best that comes to my recollection at the
moment, they came in legally, but then overstayed their visas
or went beyond the authority of their visa.
Mr. LaFalce. They all came in legally. So it wasn't a
question of a deficiency of a border question to your present
knowledge?
Ms. Warren. At the moment not to my knowledge, but I remind
you that Ressam, who came in, who was captured at the time of
the Millennium, came across the Canadian border.
Mr. LaFalce. I am well aware of that. I am talking about
these 19.
Mr. Lormel. If I may follow up. We don't believe that any
of them came in through Canada. They may have all had
legitimate identification, but some of it may have been
counterfeit. That is a possibility and certainly is something
we are looking at.
Chairman Oxley. The gentleman from Nebraska, Mr. Bereuter.
Mr. Bereuter. Thank you, Mr. Chairman. I would like to use
my time for comments directed to the panel or the people they
work for.
First, Mr. Lormel, I want to tell you that one of your
highest priorities is to protect the American citizens here and
abroad against terrorism. It is an important but lower priority
to bring these terrorists to courts. You must share information
with the intelligence agencies and with the other domestic
agencies and not put your first priority on simply protecting
information so that you can prosecute terrorists.
I hope that change in attitude can affect the FBI. I know
Mr. Mueller had only been there 6 days when this terrorist
attack happened.
I, too, am disappointed that Secretary O'Neill is not here,
but I understand perfectly. Just want to say if you will take
this back to him, Mr. Gurule, that, first of all, I appreciate
his statement that you are going to use every tool at your
disposal, and that the President has given you the authority
under an EPA to go after the U.S. assets of foreign banks that
refuse to freeze terrorist assets abroad.
I have an interesting nexus between my service on this
committee and service on the Intelligence Committee where I am
doing my second tour as Vice Chairman, and I would like to say
that we have notoriously had insufficient cooperation between
the law enforcement agencies and the intelligence agencies in
this country. It has been going on for decades. That has to be
corrected.
I wrote a letter to Secretary O'Neill on August 2nd to
clarify the position of Treasury with respect to the Financial
Actions Task Force, which is an international effort primarily
focused on OECD, and he clarified that indeed the
Administration is very supportive of identifying the
noncooperative countries and territories. I hope you will keep
the pressure on those countries and territories. We have to
have their cooperation.
With respect to Treasury's Office of Foreign Assets
Control, my experience with them gives me only minimum at the
most--minimum confidence that they are the entity that should
be placed with some responsibility for pursuing this important
task for Treasury. I hope that the Secretary will look, Mr.
Gurule, at Section 116 in our draft legislation which relates
to the Financial Crime Enforcement Network. I think Section 116
has to go forward, and I hope that Treasury will support it. I
am not at all enthused, and I think many people on the staff
and Members here in this committee are not enthused, about the
organizational structure that you are coming up with.
Finally, I want to say that within our Government we have
information about a relatively small number of financial
managers and lawyers and law firms in the world, primarily in
Europe, but also in the United States, that are facilitating
the movement of massive amounts of money for drug trafficking,
for international criminal syndicates and for terrorist
organizations, and we need to come down hard on those. The
Treasury bureaucracy, I hope, will be fully behind an effort to
come down on those groups. Among the few Americans are people
who actually live and work in Manhattan. And if they survive a
terrorist attack, I hope they never have a peaceful night of
sleep in the future.
So you have got your work cut out for you, and I think you
can count on the Congress to give you the tools. I only regret
that you are coming to us--not you personally, but Treasury is
coming us to and Justice is coming to us so late in the game.
We all have some catching up to do. We all have some
responsibilities. But I hope you will understand that we want
to work cooperatively. We will work cooperatively to try to
close the loopholes that do exist.
And, finally, I would say to all of you as key
representatives for our Government, I hope you are going to
investigate whether you are getting the degree of cooperation
you need from the U.S. Postal Service on this matter as well,
because I understand there are some real problems there.
Thank you, Mr. Chairman.
Mr. Lormel. May I make a couple of observations? First, a
couple of comments that you made at the outset about the
investigation and the interagency cooperation, your points are
well taken. I think that the playing field has changed forever,
and I believe firmly that there is a growing consensus and a
sharing as allowable in terms of the investigation. Mr. Mueller
has made it his top priority to look at future activities, and
in that regard that is the primary investigative focus right
now.
In terms of Postal, from our involvement with Postal, they
have been nothing but absolutely cooperative and a full
partner. In fact, we are relying heavily on some of their
databases.
Chairman Oxley. The gentlelady from California, Ms. Waters.
Ms. Waters. Yes. I would like to ask any of the members of
the panel who would like to answer, what do you know about
private banking and concentration accounts, and do you think
there are loopholes that we can close?
Mr. Gurule. Well, in terms of loopholes that we can close,
my view is that with respect to criminal investigations
involving money laundering, that everything should be on the
table. I mean, if there is any vehicle that is being used to
conceal criminal proceeds to make it appear that the funds were
generated from legitimate activity, we need to follow the money
trail, wherever it leads us. If it leads us to a concentration
account, then so be it. If it leads us to a bank, and if the
bank officials are knowingly complicitous----
Ms. Waters. Yes, I know. Reclaiming my time. Are you in
favor of closing down concentration accounts as a method of
operation where you lose the identity of the persons who have
money in those accounts, usually transferred or operated or
handled by private bankers?
Mr. Gurule. Not based on that alone. What I would want to
know is whether or not these accounts--just because they
create--or perhaps there is a possibility of misuse, I don't
believe that.
Ms. Waters. Do you know what a concentration account is?
Mr. Gurule. Yes.
Ms. Waters. Would you describe it for us?
Mr. Gurule. I think you described it quite well in terms of
different sources of funds that are being directed into a
particular account intermingled, commingled, if you will, and
then the monies are being distributed into separate entities or
separate accounts.
Ms. Waters. Does the money lose its identity?
Mr. Gurule. Perhaps.
Ms. Waters. Do you think that is a problem?
Mr. Gurule. It might be.
Ms. Waters. If you tried to freeze assets and follow the
money line for traffic evidence and money launderers, do you
think it is important to be able to follow the money? If you
lose the identity of the account, doesn't that cause you some
problems?
Mr. Gurule. It does. It complicates law enforcement's
mission.
Ms. Waters. Don't you want to do something about that?
Mr. Gurule. In a particular case I certainly would. If
there was evidence that that system was being used to further
criminal activity, absolutely.
Ms. Waters. Well, you need to know that there are some
bankers who are coming forward and saying, yes, it is bad, and
they are going to voluntarily stop using concentration
accounts. Will you please take a look at that?
Second, would you describe to us what is expected of
private bankers in relationship to know your customer? In the
case of Raul Salinas, there was not even a card on file to tell
us where he lived, where he got his money from. He had a
private banker that was assigned to him who purchased cars and
homes, and so forth, and so forth. Are private bankers required
to follow know your customer rules, laws, and so forth? How do
they escape that?
Mr. Gurule. You want me to comment on which of the many
questions that you asked?
Ms. Waters. I wouldn't have asked you if I didn't want you
to comment. Please do your best.
Mr. Gurule. Know your customer certainly is important, and
it is certainly important with respect to aggressive and
successful enforcement of money laundering.
FTAF, as you know, is a multilateral organization that the
U.S. Treasury and the Department of Justice are actively
involved in. We have assumed a strong leadership role with
respect to FTAF.
One of the 40 recommendations is the know your customer
recommendation. It is one that we support. It is a measurement
by which countries are measured in terms of their cooperation
and whether or not the banking systems have an aggressive
banking regulatory regime that is not vulnerable to money
laundering.
Ms. Waters. I yield back the balance of my time.
Chairman Oxley. The gentlelady yields back.
The gentlelady from New York, Mrs. Kelly.
Mrs. Kelly. Thank you, Mr. Chairman. I just have a couple
of questions. One is about an article in the September 20th
Wall Street Journal, I have a copy of this, and I would like to
enter it into the record, Mr. Chairman. I would like unanimous
consent to do that.
Chairman Oxley. Without objection.
[The information can be found on page 111 in the appendix.]
Mrs. Kelly. It talks about the bin Laden network, and it
refers to a money exchange called ``hawala.'' Hawala is
something that bothers me a great deal, because I don't see
how--given the nature of the beast, how you are going to be
able to address that with regard to drying up any money that is
being moved. How would you combat this? I am throwing this out
to each of you. I have only 5 minutes, and I really want to ask
another question as well as a follow-up, because in this
article it talks about the bin Laden networking run on a
shoestring. Other people say that bin Laden's network is
extremely wealthy, that he has put a lot of money into it, and
there is lot of money there. I need a clarification on that as
well.
Could we start with you, Mr. Lormel?
Mr. Lormel. Yes, ma'am. I am not familiar with the article,
number one. I will just speak from an investigation.
Mrs. Kelly. Are you familiar with ``hawala''?
Mr. Lormel. Yes.
Mrs. Kelly. Have you any idea what we can do to try to stop
or reach into that to regulate it?
Mr. Lormel. In terms of regulation no, ma'am, I would
defer to the Department of Justice. But in terms of
investigation, certainly we will do everything in terms of
tracking back and exploiting all of our databases and
exploiting the expertise of all of our fellow agencies in terms
of tracking it back.
Mrs. Kelly. Mr. Gurule.
Mr. Gurule. Hawala, as you stated, and accurately so,
certainly complicates the ability to follow the money, because
based upon a hawala system, money can be exchanged without the
money ever being transferred from a foreign country into the
United States.
Mrs. Kelly. Therefore you have no record anywhere, and you
can't go to a database and try to extract it?
Mr. Gurule. It depends. I am not sure, up to that the
point. But what if the request in the foreign country is for,
let's say, $25,000 to be transferred by a hawala dealer in the
United States to someone that is associated with a terrorist
organization, unless that $25,000 is being kept in a shoe box
in the broker's business in the United States, you are right,
in that situation there would be no money trail. But if the
hawala dealer in the United States has to go to a bank to
withdraw $25,000 to make the payment in the United States,
certainly that would generate a CTR and might, in addition,
generate a suspicious activity report that would be submitted
to FinCEN.
So, I am not convinced that we need to throw up our hands
and despair that there is no way that we can trace the money. I
think it makes it more complicated, you are absolutely right.
It may make it necessary for us to rely upon informants more
than we have with respect to these types of money laundering
operations. But it is a challenge. It certainly poses a
challenge.
Mrs. Kelly. I am surprised that you would assume that
someone would have to go to a bank to withdraw something like
$25,000. Having been on this committee for a little while, we
have had other hearings that indicate there is a lot of cash
that is lying around in suitcases and so forth. There is no way
to find that because there is no record.
Mr. Gurule. I agree.
Mrs. Kelly. I would suggest that there be some thinking
about how we combat this. I also want to know if any of you can
give me any information about whether you think that the bin
Laden network was actually run on a shoestring rather than
having a great deal of money pumped into it?
Mr. Lormel. I think that is highly speculative. I believe
that there were clearly monies--and significant amounts of
monies--coming directly to the 19 terrorists from the support
mechanisms. In some regard, they will be linked to Mr. bin
Laden.
With regard to your concerns about the hawala accounts, we
are in the front end of our investigation. What we are seeing
is a pattern of cash activity which I believe----
Mrs. Kelly. Flight school cost $20,000. They had to get
that money somewhere.
Mr. Lormel. Yes. Right on the front end, ma'am, they wired
over $100,000 in to Mr. Atta a year ago, and we are aware of
that. And we tracked that back to accounts in the UAE.
Mrs. Kelly. Just want to make one final statement. We know
that there is a problem with agencies sharing information, but
if you don't trust each other to share information, how can we
trust you to protect us?
Mr. Lormel. I don't believe it is a matter of trust,
ma'am. I think that is what the heart of this hearing is about.
It is the ability to share information. I don't believe for a
second, and I represent the financial section at headquarters
with the Bureau, we have no qualm about sharing information. We
went out at the outset of this investigation specifically to
bring in our fellow agencies because we need their expertise,
and I don't believe it is a matter of the sharing as much as
the regulatory concerns as to what we can share.
Chairman Oxley. The gentlelady's time has expired.
Mr. Frank.
Mr. Frank. On the point of sharing, and Mr. Gurule
mentioned the constraints currently on the sharing information,
the anti-terrorism part of the legislation does include, as you
know, sections that greatly increase the ability to share tax
information, but it does look to me like we have dealt with
that. On that subject I want to thank you, Mr. Gurule, and
maybe stress there is one thing you ought to share with the
Justice Department, and that was the very commendable concern
you and Secretary O'Neill showed for adding due process
provisions to this kind of regulatory legislation. Frankly,
when some of us in the Judiciary Committee held up the anti-
terrorism bill for exactly that purpose, we had to explain that
to people. So I agree that providing due process provisions is
a very important thing to do.
People should understand that is one of the things that was
happening in the Judiciary Committee on anti-terrorism, because
obviously we don't think that due process is only important for
people with money and not for people without it. So we are
putting it in both places.
I want to return in my question to a point that the
gentlemen from Nebraska raised, and that is the question of the
OECD approach. What bothered me, frankly, was earlier in July--
I am sorry, too, that with we could only get 45 minutes or 50
minutes from the Secretary--he told Senator Levin's committee
that he was not at this point in favor of sanctions to force
compliance from countries that were allowing total bank
secrecy. And what particularly disturbed me was that was raised
in a September 24th press conference, and Ari Fleischer was
asked about this whole question, the OECD has been going after
tax havens, the Administration hasn't shown support, is it
changing, his answer, and his answer troubles me. It is, ``I
think you should not confuse the two issues. One deals with
domestic laws and dealing with tax consequences and tax dodgers
or tax evasions. This deals with terrorism.''
In fact, what we are talking about is total secrecy of
financial assets, and that can be for purposes of tax evasion
or drug money or terrorism. So this separation, this notion
that worrying about the tax havens--and maybe we shouldn't call
them tax havens, we should call them total bank secrecy
entities--seeing that not related to terrorism is disturbing to
me. I wonder if you would comment on that.
Mr. Gurule. First, make no mistake that the Department of
the Treasury and Secretary O'Neill are deeply committed to
investigating and prosecuting tax fraud.
Mr. Frank. Excuse me. We only have 5 minutes. You have got
to get specific. OECD, is, in fact, that notion of bank secrecy
relative to terrorism or not?
Mr. Gurule. I believe that is certainly has the potential.
With respect to how to go about confronting the problem, I was
going to say that the Secretary has undertaken to engage with
our foreign counterparts information, and tax-sharing
agreements so that we have the information that is needed to
aggressively prosecute cases. He made that commitment to
Senator Levin, and we are well on our way.
Mr. Frank. But he also said to Senator Levin that at this
point he did not want to threaten sanctions. I think that is a
mistake. The question is has there--we are not just talking
about tax fraud. That is what he said. We are talking about--
Mr. Gurule, you have got to wait. We are not just talking about
tax fraud. I asked you about bank secrecy. You went back to tax
fraud. I quote, for instance, Mr. Chertoff, who noted in
Senator Levin's committee, ``We are dealing not only with the
issues of Americans who put money in these banks, we are
talking about foreign criminals who put money in these banks
and then move them into the United States.''
In other words, this is not a tax haven issue only.
Allowing this total bank secrecy which the OECD was going after
has to do with exactly what we are talking about, leaving aside
the tax issue. The Secretary said, well, he didn't want to
threaten sanctions yet against these countries that would not
put an end to that. I want to know what the status of that is.
Mr. Gurule. I don't think that is--that is not what the
Secretary said. The Secretary said that he doesn't want to go
ahead and impose sanctions based upon a requirement of uniform
tax rates; that simply because there isn't a uniform tax rate,
that all----
Mr. Frank. I am sorry, but that is not an accurate
representation because we were not talking only about uniform
tax rates. Indeed that wasn't specifically part of it. I read
the testimony. The Secretary seemed to be saying that he was
not ready to threaten sanctions for a period of time on the
question of secrecy. I am not now talking about taxes.
Secrecy helps tax evasion, but secrecy enables a lot of
other things. That is my problem with Ari Fleischer. He seems
to, again, equate the anti-bank secrecy thing to the tax
evasion issue. So, from the standpoint of bank secrecy, should
we not be threatening sanctions right away against these
countries?
Mr. Gurule. We are against bank secrecy. I think our
position on that is clear. With respect to the role we played
if FTAF, I think it is further clear based upon the Secretary's
statements with respect to these tax information----
Mr. Frank. Sanctions if they don't comply. Has the time
come to threaten sanctions against countries that continue to
maintain the kind of secrecy that frustrates our efforts to
find out where that money is?
Mr. Gurule. It is a hypothetical. I would want to look at
the particular----
Mr. Frank. It is not hypothetical. I am talking about the
world today. There are countries that refuse to sign those
treaties that still have bank secrecy. Not hypothetical. It is
real. There are countries that still maintain that secrecy.
Should we threaten them with sanctions against their banking
situations here if they don't immediately comply?
Mr. Gurule. FTAF may have to implement sanctions,
countermeasures, and further list these countries that are not
complying on the list of noncooperating countries and
territories. And the U.S. has been at the forefront of that
effort, as has the Department of the Treasury.
Chairman Oxley. The gentleman's time has expired.
The gentleman from Iowa, Mr. Leach.
Mr. Leach. Thank you, Mr. Chairman. I want to express my
appreciation for the thoughtful legislation you have just
proffered. I would also like to express my appreciation for the
comments of the FBI present on two scores; one, the cooperation
of U.S. financial institutions in this probe, and second, the
notion that internet gambling has many difficulties, but one of
them is that it is a money laundering haven, and that is
something that the committee has to bear in mind.
I want to note that, as the committee Members know, last
year we passed legislation both in this area of money
laundering as well as on internet gambling. And at other levels
of the Congress and other parts of the Congress, this was
pretty highly objected to, even though it had strong votes from
this committee, and objected to by industry representatives in
particular. And I think we all have to recognize that there is
a burden involved in implementing money laundering and internet
gambling kinds of approaches.
On the other hand, ironically, the people that opposed this
legislative approach yesterday are those most in need of
protection today. And I stress this as strongly as I can,
because if you look at vulnerabilities in our society, this is
obviously very significant. But if you look at American
institutions most vulnerable in the world today, there are
diplomatic outposts, and there are financial services outposts,
and it strikes me that for the financial industry to continue,
if they choose to, to object to approaches that do involve some
extra burden on constraining terrorism and narco-trafficking,
that not only weakens the fabric of our society, but puts in
jeopardy the very lives of the people most identified with
democratic market-oriented kinds of values that are globalist
in nature.
And so I just have a couple of questions, one to the
Justice Department. You know, when it comes, for example, to
internet gambling, we have the Wire Act and other prohibitions
that might well apply. But many of us have come to the
conclusion that one of the most effective tools to deal with
internet gambling relate to prohibitions and financial
instruments. And I understand that is the Justice Department's
position. Is that the case?
Ms. Warren. That is correct. But beyond that, I mean, in
principle we support the provision as written. There are a few
suggestions we might make in subprovisions, but in principle we
support it.
Mr. Leach. I appreciate that.
Second, as we look around the world--and Mr. Frank, I
think, was going at a point that I think many on this committee
shared his concern about the United States is always in a
difficult position if it acts alone in that there is a lot of
international cooperation that is needed, but also the United
States is in a difficult position if it doesn't have model laws
that can be looked at by other countries. And it strikes me
that if we don't enact that kind of legislation here at home,
we are going to have a very hard time expecting other countries
to enact similar approaches in their lands.
And so, to some degree, when we deal with legislation, it
is simply an expression of how it affects our sovereign laws.
But by the same token, as we deal with legislation that is
often looked at as models for our societies, and it puts the
Treasury in particular, but not alone, in a position of saying
to other countries, ``We have done this, why don't you follow a
similar pattern?'' Does that make sense to you, representative
from the----
Mr. Gurule. Well, it certainly does, and that is a position
that we have taken with respect to the Executive Order on
blocking assets. I think it is important that this new
Executive Order be signed by the President that the Foreign
Terrorist Asset Tracking Center be up and operating in order to
block assets. Having established that foundation, then we have
much greater credibility when we reach across to our allies and
ask them to do the same with respect to blocking of assets in
foreign bank accounts.
So, by analogy, certainly it holds true. We need to be the
model. We need to demonstrate strong leadership with respect to
criminal justice issues and enforcement of our laws.
Mr. Leach. Thank you.
Ms. Warren. If I could just add something to that, also.
When we are lagging behind, that sets a very poor example. One
of those instances is that we cannot enforce foreign forfeiture
judgments, but we ask other countries to do that for our
judgments. They have many foreign crimes as predicates to their
money laundering act. We have very few. We need to increase
those to be the leader that we need to be.
Chairman Oxley. The gentleman's time has expired.
The gentleman from Pennsylvania, Mr. Kanjorski.
Mr. Kanjorski. Thank you very much, Mr. Chairman. A couple
of observations. Actually just one. One of the successes
learned at Treasury from the IRS is the award for performance.
If I remember reading somewhere, almost two-thirds of the
successful prosecutions occur because either the accountants or
the spouses become the informant. Now, it would seem to me that
if you are serious about using that methodology with tax
collection, why can't you create an informant's reward for
money laundering? An informant would get to keep half the
proceeds if he or she turns the perpetrator in. I don't think
you are going to be able to cover all the cases of information
you will get from bank employees or from cohorts of the
smugglers themselves. Quite frankly, it may upset the entire
money laundering scheme in this country and abroad and probably
be quite rewarding. Why hasn't someone thought about that
stimulus?
Mr. Gurule. Actually we do have that authority.
Mr. Kanjorski. Well, it is good you have the authority. How
about implementing it?
Mr. Gurule. Well, absolutely. I don't necessarily want to
go into specific cases with specific individuals other than to
say that with respect to some major Federal money laundering
investigations, those money laundering investigations were made
possible, the success possible, based upon cooperating
informants and cooperating informants that were ultimately paid
for their services.
Mr. Kanjorski. Well, they may be paid, but that is on a
one-by-one or an ad hoc basis. Why don't we make it a public
policy in the Treasury of the United States and the Justice
Department that if people come forward in the laundering of
illegal money in this country or externally, then they are
going to get a 30 or 50 percent reward. Let's see what we can
upset. There must be an awful lot of people in the drug
countries that would love to retire to Miami Beach if they
could stop the transfer of $100 million in drug money. There
must be an awful lot of people in Mexico or Colombia that would
like to do the same thing. I would also imagine that some of
the lawyers that were talked about in New York with their level
of ethics, they may just as easily turn on their clients
instead of getting fees to get rewards as being informants. So
why don't we use that mechanism?
Mr. Gurule. I agree with you. I was a Federal and State
prosecutor for 10 years and was deputy chief of the major
narcotics section in Los Angeles, and we had to rely
extensively on informants to make these important cases.
Mr. Kanjorski. Nest week, I am going to see if the Treasury
announces they are going to pay informants, announce the
amount, and let it be publicly known. Come forth if you have
any ideas.
The next thing I want to do is off the subject. We are
talking about what laws we can pass, what rules and regulations
and simplicity. And I get to worry about implementation. I am
not sure, particularly at Treasury, that Congress is going to
get all of the laws we pass implemented. I will tell you why,
and I would like you to take the message back.
Besides money laundering and security, we have a problem
with the economy in the United States. I mean, Congress is
trying to put together fiscal programs, and one of the things
that disturbed me is we passed a fiscal program last year in
the omnibus bill called the New Markets Initiative, and the law
said it had to be implemented in 120 days, and that would have
ended April 15. Now, I know we had a change in Administration,
but it is now more than 150 days since the law was on its face
to be implemented, and it is still not implemented. The New
Markets Initiative is a major economic development tool and a
fiscal tool to help the economy. And if Treasury can't
implement these acts, I am not certain any powers we give you
will be able to be implemented.
Now we are going into a meeting this afternoon that I would
like to favorably report back that this program will be
implemented. We have already lost the first year of the billion
dollars in credits under the Initiative. We are into the second
year, another a billion-and-a-half. That is $2.5 billion in tax
credits that are to be released, and we are thinking of
doubling or tripling that amount to help the economy. Mr.
Gurule, can you tell me on behalf of Treasury when I can tell
my colleagues that this is a worthwhile activity for us to
undertake because it will be done?
Mr. Gurule. With respect to the issues that you raise
involving domestic policy, I am happy certainly to take those
concerns back to the Under Secretary for Domestic Policy, Peter
Fisher, and have him prepare a more specific response, to your
questions.
With respect to your general concerns about the Treasury's
ability to get the job done, make no mistake about it, we are
going to get the job done. We are going to get the job done
with respect to these terrorists and undermining and
dismantling their financial networks, seizing accounts, and
convincing our foreign counterparts to do the same. We are
committed to that, and the job will get done.
Mr. Kanjorski. I am going to test you on that, on the fact
of offering rewards publicly for money laundering, and see how
fast that gets out on the street.
Chairman Oxley. The gentleman's time has expired.
The gentlelady from New York, Mrs. Maloney.
Mrs. Maloney. Thank you Mr. Chairman.
I would first like to thank all of the panelists and their
agencies and really the entire Administration for your
extraordinary efforts in New York in the wake of the attack,
especially the FBI. Some of my neighbors told me that the FBI
agents saved their lives rushing them out of buildings, rushing
them out of the vicinity before the buildings fell, and I am
aware of one agent that fell and died, and I want to express
our appreciation. I know I speak for many New Yorkers for all
that you have done to help us during this tremendously
difficult time.
I have always been of the opinion that the country needs
stricter money laundering laws and enforcement. Whether it's
terrorism or the drug war, cutting off the money that funds
criminal activities is sometimes the most effective way for the
Government to stop unlawful acts. I would like to know if you
have any proof if hawala was involved in the September 11
attack, that medieval financing system. Do you have any
indication that that was involved?
Mr. Lormel. No, ma'am, not at this juncture. Certainly
there a lot of questionable cash transactions that we are
looking at and questionable cash that we are looking at, but at
this point we have no direct correlation.
Mrs. Maloney. But it seems from listening to your testimony
today that we are talking about all types of high-tech sharing
of information, sort of Star Wars technology. But what we are
really looking at is a Middle Age financing system that seems
the prevalent way that they are moving their monies. The bank,
the al Shamal Bank, has correspondent accounts with European
and other non-U.S. banks, and what steps has the Administration
taken to identify these banks, and what steps have you taken to
prevent money from al Shamal banks from entering the U.S.
banking system?
Mr. Gurule. Well, the Foreign Terrorist Asset Tracking
Center is the vehicle that is being used to identify monies,
bank accounts that are linked or associated with terrorists and
terrorist organizations, and more specifically, we are taking
advantage of and examining all relevant sources of
intelligence, law enforcement intelligence, CIA intelligence
information, classified information, Bank Secrecy Act
information, as well as open-source public records information.
So we are looking at a multiple array of different sources to
make those determinations. We are doing it now. And as the
Secretary stated, in addition to the 27 individuals and
entities that were listed a little over a week ago, we
anticipate that in the next couple of days that there will be
others that will be added to that list and a significant number
of others and additional accounts being blocked with respect to
this first group and this anticipated second group.
With respect to a particular bank and a particular one that
you mention, I would prefer not to comment publicly on anything
that specific.
Ms. Warren. Could I just comment on correspondent banking
generally? We could do a lot better in law enforcement with
some additional tools, and one of those that we have suggested
is that if a foreign bank is going to maintain a correspondent
account in a U.S. bank, that they must also have a
representative for acceptance of service of subpoenas here in
the U.S. so that we don't have to try to find a bank that has
no physical existence anywhere in the world. If they are going
to do that kind of business in a U.S. bank, they need to have
someone who will accept service of process and can respond to
our investigative inquiries.
Mrs. Maloney. Sounds like a good idea to me. I would say
there is a great deal of bipartisan support and cooperation now
during this time of crisis, and really you should use all of
your leverage for increased funding or whatever tools you feel
you need to get the job done to track these people down.
Some of our allies and some of our friends in the
international community have told us that they will only
support U.S. military action in Afghanistan if we can prove
that bin Laden is responsible for the attacks. And could you
comment, any of you who wish to comment, on how existing laws
have contributed to your efforts to prove that the hijackers
are tied to al Qaeda and the Osama bin Laden network?
Ms. Warren. Maybe if I could just----
Mrs. Maloney. Specifically, how have you tied him to the
hijackers?
Ms. Warren. That I won't be able to do, but I can tell you
that we do use the financial side to not only track the money,
but also to prove associations. The ways they work together,
the people who share accounts, draw money from another's
account, that it is as good as evidence of a conspiracy and
association as it is a financial tracking system. So we use
that kind of information, both ways. In this particular case, I
cannot comment.
Chairman Oxley. The gentlelady's time has expired.
The Chair recognizes the gentleman from Nebraska Mr.
Bereuter.
Mr. Bereuter. Mr. Chairman, I would ask unanimous consent
that a letter of August 2 to Secretary O'Neill and his response
of August 29 be made a part of the record and, incorporated by
reference, the latest report of the Financial Action Task Force
on Money Laundering dated June 22, 2001.
Chairman Oxley. Without objection.
[The information can be found on page 72 in the appendix.]
Chairman Oxley. The gentleman from Texas, Mr. Gonzalez.
Mr. Gonzalez. Thank you very much, Mr. Chairman. A couple
of questions and comments from the witnesses. You say there are
impediments to the sharing of the information. I have always
just been under the impression that once the appropriate law
enforcement agency or department zeroes in on somebody and
identifies them as a suspect, then all sorts of doors would be
open regardless of the other agency or department that may be
in possession of information as a result of the regulatory
obligations. My understanding is what you are asking for now is
not necessarily being privy to that information once you have
established that somebody is a suspect, but rather more of a
coordination between departments, agencies and so on, with all
the information that they may be gathering in the regulatory
duty or responsibilities that would not be privy to law
enforcement agencies, for instance.
What I am saying is the FBI or the Department of Justice
can't make certain requests of financial institutions for the
sake of making the request for that kind of information and
such. Treasury can in the regulatory scheme of things, which is
appropriate. So we would be expanding that universe of
individuals or parties that would be privy to this information
in the past; would we not? So I suspect that you want this
coordination so that you can have this information-gathering
facilitated to identify individuals in such suspicious
activities.
Now, what you are also saying is now we can't have that
without some sort of due process consideration. I am not really
sure what we mean by due process today. I mean, it is always in
the eye of the beholder, and at the present time my question is
I am not really sure about our vision being 20/20 under the
circumstances. So I am looking at potential abuses, misuse.
What do you all see is the downside, the potential abuse of
what we are contemplating in doing? Because we are going to do
it because we have to do it, and there has to be some sort of a
downside, and no one has addressed that. So I would want you
all to tell me what you see is the potential abuses of opening
up all of the information that different departments might have
that at one time you weren't sharing for all the obvious
reasons.
The second question is if, in fact, we had moved forward
with everything that you are asking, and had this been in place
prior to September 11, would it have prevented the occurrence,
the criminal acts of September 11? And I would like your views
or whatever your thoughts are on that.
Mr. Gurule. Let me respond first to your question with
respect to the legislative proposals that we are supporting or
considering or asking you to consider. It isn't simply a
question of coordinating. I mean, coordination is certainly
important here. But, for example, with respect to Section 6103,
the sharing of tax record information, the Department of
Justice, upon an application to a judge, to a Federal judge,
may obtain tax record information in furtherance of a criminal
investigation, but that information is limited to the
Department of Justice attorneys; I mean, in terms of its
sharing, cannot be shared outside of the Department of Justice
attorneys in furtherance of that investigation.
So, if Treasury went to the Department of Justice and said,
``Gee, this information would be very helpful to the blocking
efforts underway involving the Foreign Terrorist Asset Tracking
Center,'' DOJ would say, ``We would like to help, but we can't,
because we are prohibited under Section 6103 from sharing that
information because it is not in furtherance of our criminal
investigation. It is in furtherance of this blocking effort
that you are involved in.'' So they can't do it.
We could take a look at grand jury secrecy information as
well under Rule 6(c), what FinCEN is doing, or the use that
FinCEN would be making of grand jury information with respect
to its use for comparing and analyzing Bank Secrecy Act
information, or the use that would be made of that information
with respect to the Foreign Terrorist Asset Tracking Center
would not necessarily be part of the criminal investigation,
and therefore, the Department of Justice would say, we would
like to help, but we can't.
And so these are ways in which the Department of the
Treasury is being handcuffed in its ability to investigate
these kinds of cases as aggressively as possible.
With respect to whether, you know, if we had these laws
prior to September 11, would it have prevented, I mean, we can
only speculate. I mean, there are some other issues here with
respect to airport security that obviously need to be
considered. But I think the point is that it certainly would
have made it more difficult. I think we would have the ability
to be more proactive in terms of disrupting the ability of
these organizations to fund their operations, and, therefore,
they are valuable tools that we need, and we need them now.
Chairman Oxley. The gentleman's time has expired.
The gentlelady from Illinois, Ms. Schakowsky.
Ms. Schakowsky. Were Secretary O'Neill here, I really had a
message for him that I hope, therefore, you will relay back to
him. The amount of money that we are going to need to
investigate and fight this terrorist attack, and all the other
costs associated with the attack, is just immense, and we need
to spend the money. But it seems to me that as we are
rethinking the spending side of the ledger, we also ought to be
looking at revenue; that many of us who are concerned that the
$1.7 trillion, whatever it was--some of us think more--tax
cut--feared that it left no cushion to deal with emergencies or
possible economic downturn, and in the last few weeks, now we
see that we face both. And as we take money from the Social
Security and Medicare Trust Funds to pay for this, it seems to
me that it is time to rethink the tax cut that gave the
wealthiest Americans such a disproportionate amount of that, in
my view, and particularly since Social Security is only paid
for on wages up to $80,000 a year. So those people are paying a
disproportionate amount, it seems. So I would hope that we
would step back as we are stepping back on spending and look at
revenue as well.
You answered in part my question. You know, this whole
attack has been estimated, at least in press accounts, to cost
about $500,000. Relative to the amount now that we are looking
at spending in response, it seems like such a small amount of
money, and I wanted to ask you what specifically are the new
tools that we need that would have addressed this specific
incident, not some hypothetical future incident, but what could
we have done on the investigative and the enforcement side that
would have made us safer and protected us from this attack that
we absolutely need to have?
Throughout this morning we have talked about some, and I
wonder if you could just quickly enumerate those things that
you think would have, could have perhaps prevented this.
Ms. Warren. One of the new tools we are looking at is just
expansion of the foreign predicates for money laundering. We
could have looked at a lot of these individuals on--and
certainly the larger organization on money laundering crimes if
we had those foreign predicates. Terrorism at the moment is not
a predicate to money laundering. We have used other violent
crimes as substitutes in some instances, but it should be
declared a predicate.
There are other parts of the proposed legislation that I
think would assist as well, and one was raised in the inability
to share information. One bit of information that might be
corrected by the proposed legislation and the legislation as
drafted by this committee is to move the 8300 reporting
requirements out of Title 26 into Title 31 so that information
can be shared broadly with law enforcement so that we can look
at who is purchasing an aircraft in cash, or paying for other
things with large amounts of cash, against other databases that
we already have. We might find them on our drug registers. We
might find them elsewhere. But that information now is kept
separately under the Tax Code and not available broadly to law
enforcement. So there are more ways that we could get more
information that would help us.
Ms. Schakowsky. Let me ask you this: Are there things that
were left on the table in the way of tools that we need to now
make sure that we are making better use of? And it would seem
to me there are those who think that there were intelligence
failures, but are there tools of investigation that we did not
fully utilize that we, in addition to new ones, need to be
concentrating on?
Mr. Lormel. From the standpoint of lessons learned, I think
what we will see more emphasis on predictive financial analysis
and profiling, for lack of a better word, but I think that
there is a predictive analytical tool out there that perhaps we
need to focus on collectively as the law enforcement community
in terms of proactively looking to deter or prevent any future
activities.
This was a very well-planned act that took an incredible
period of time to carry off. And I think when the template is
set, and we are able to really go back and do a study of how
they conducted and the characteristics that they followed, we
can do and implement, I think, predictive analytical steps that
will help us identify future such attacks.
Chairman Oxley. The gentlelady's time has expired.
The gentleman from Texas, Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman. Let me say at the
outset I know Mr. LaFalce brought up the issues of the Customs
Service. And after September 11, I met with the Customs Service
personnel who worked the Port of Houston Authority. And I think
this is true elsewhere. I would hope that the Administration,
when we work the final Treasury-Postal bill, will accept the
higher figures of either the House or the Senate bill than what
was in the original budget request. I think the original budget
request was about a 4.6 percent increase in the Customs Service
budget. The Senate passed a 12 percent increase, the House a 17
percent increase, and obviously, things have changed since this
past March or February when the new Administration submitted
their budget requests. But if we are going to want to enhance
our security, we obviously are going to have to pay for it. So
I would hope that would you take that back to your superiors.
We heard some talk from both the previous Chairman and Mr.
LaFalce about the bill that we passed last year in this
committee, and it never went beyond that committee, and I
supported it. Most of the Members supported it, and I would
support it again. All right. A lot of that bill is in the draft
bill that I have looked at today, it appears, with some
modifications. And I want to raise a couple of issues about
that. But before I do, Ms. Warren, in response to an earlier
question, you talked about the ability--in order to enhance
cooperation with other nations in tracking and freezing assets,
that we should enhance our ability to freeze assets that might
be the result of, or would be part of, a foreign judgment
against a U.S. party. Now, I don't necessarily disagree with
that, but I think it does raise some concerns that we should
look at very closely.
There was some discussion about the OECD and their efforts
to fight laundering and corruption, and some saw that as a way
to equalize tax levels throughout the industrialized world, and
there was some objection to that in the Administration and
throughout this town. But I would hope you all would look very
closely at that, that we are not in some way ceding some rights
of U.S. citizens that we do not want to cede. And I assume you
all are doing that. And you don't need to respond. If you want
to, you can, but I just--that is something that I--you know
more than I, but I would hope you would look at that.
Ms. Warren. Let me just offer some of the safety provisions
in that, enforcing foreign judgments of confiscation, of
forfeiture. First of all, the Attorney General must certify
that the judgment was obtained according to due process, and it
cannot proceed without that kind of certification from the
Attorney General. And the second, the forfeiture must be for a
crime that we recognize, either through our extradition
relationship or on our predicate list.
Mr. Bentsen. I appreciate that.
Now, I also want to ask you about the way your bill is
drafted, and this is an issue that came up with us last year,
and I pulled the file from last year. I have got a letter from
a State banking association, I won't say which State it is, but
that raised a great deal of concerns about how the bill was
drafted and the enhanced requirements. And the gentleman from
the FBI raised the issue of CTRs and SARs and what--and I don't
think you quite said this, but I at least interpreted or
inferred that you might be saying whether the levels were
accurate. But in your bill on the one hand you talk about
enhancing the criminal penalties for failure to file SARs or
CTRs, and then in another section of the bill, you raise the
concern that too many CTRs are being filed for otherwise
exempted persons or accounts, and that, if, in fact, that it
requests a study, and, in fact, that there might be some
additional penalty for those institutions which file, I don't
want to say, erroneous, but unnecessary CTRs.
And I understand what you are getting at, but I just want
to warn you where you are going to hear a great deal of
criticism from otherwise law-abiding institutions that are
going to say that, in our efforts to help in tracking the money
laundering of terrorists or drug traffickers or others, we are
going to get hit with an avalanche of regulations that will
make it impossible for us to conduct our business. And, again,
I would urge you--again, I supported the bill last year, and I
am going to support the bill this year, because I think we need
to do these things. But I would urge you to take a very hard
look at that.
I read the testimony of the banking institutions that are
going to be here next, and they don't quite say this, and we
are all being cautious because we do want to be together, and
we want the Administration to succeed in this effort. But I
would urge you to take a very hard look at how you approach
those issues going forward.
Chairman Oxley. The gentleman's time has expired.
Let me ask Mr. Gurule, under my time, we have provisions in
the bill that Mr. LaFalce and I will be introducing later today
that attempt to address the obstacles to information-sharing
among the agencies that you identified in your testimony. To
the extent that there are specific areas that we have not
addressed in the bill, can I have the Treasury's commitment
that you will work with us over the next few days to make sure
that those necessary revisions are made?
Mr. Gurule. Certainly. Absolutely.
Chairman Oxley. Thank you.
Ms. Warren, what is the Department's position on the Leach-
authored internet gambling provisions of the bill that we are
going to be introducing today?
Ms. Warren. In principle we support it. We can offer some
suggestions on some of the subparts. For example, I believe
there is a requirement before instituting a civil injunctive
action for the Attorney General to seek either advice or
consultation with the bank regulators. We believe we should be
able to go right into court.
Chairman Oxley. Thank you.
Agent Lormel, in prior hearings and staff investigations on
the issue of internet gambling, we have heard from law
enforcement officials that there is a link between offshore
internet gambling and money laundering. A lax regulation of
offshore internet gambling operations would seem to lend itself
to the possibility that large amounts of terrorists' funds
could be laundered through these sites with relative impunity.
What are your comments in that regard?
Mr. Lormel. Well, sir, it is certainly a possibility and a
concern, as we have seen here. This network of terrorists, if
you use them as a model, they have certainly exploited the
system, our system, as well as they could, and that is a very
attractive and lucrative area of financing and potential
financing. So it certainly is a concern, and we certainly
should be vigilant in monitoring that. And certainly, beyond
the terrorism, the network of enterprises that certainly do
exploit that particular area is something we must look at.
Chairman Oxley. I won't ask you to discuss specifics, but
is the Bureau pursuing any cases that involve a linkage between
internet gambling and money laundering?
Mr. Lormel. Yes, sir. There are a minimum of two pending
investigations as we speak that I am aware of. It is more in
keeping with our organized crime side of the house, which is
not my area of expertise, but from my prior assignment in
Pittsburgh, I am aware of a case that we actually worked in our
shop out there.
Chairman Oxley. And are you pursuing any cases linking
organized crime to internet gambling?
Mr. Lormel. I believe so, sir, yes.
Chairman Oxley. Thank you.
The gentleman from New York.
Mr. LaFalce. I thank you, Mr. Chairman.
The bipartisan bill which Chairman Oxley and I are working
on, hopefully to be introduced sometime this week, is a work in
progress, very much so. For example, there has been an
agreement to include the money laundering bill that was
authored by myself and Chairman Leach with the assistance of
Stu Eizenstat of the Clinton Administration and passed this
committee. But, while I have agreed to go along with some due
process provisions, it is due process provisions that I would
find productive to the approach of the bill rather than
counterproductive. And I am recalling that Senator Gramm
unilaterally stopped this bill in the last Congress on the
Senate side. So I am a little concerned about your negotiations
with him. I would prefer you be negotiating with some of us who
are promotive of the bill.
Second, something similar is true with respect to internet
gambling. I offered the bill that created the national
commission to study the problems of gambling, and I introduced
legislation to effectuate the recommendations with respect to
internet gambling. And the former executive director of that
commission endorsed my bill. My bill is not the one that is
included in the draft so far, and I am very, very fearful that
the bill that is presently in the draft could be
counterproductive. I mean, if we are going to say that we will
choke off credit for unlawful gambling, then we have to define
unlawful gambling, and we don't. Or if the State defines
something as lawful and we are not preemptive, or if an
offshore entity permits some type of gambling lawfully and we
do not make it unlawful, then the provisions of our bill can be
counterproductive.
I am also concerned that we have to act expeditiously, and
knowing the huge gambling industry that is out there that has
hampered internet gambling legislation in the past, I am not
sure whether we will be able to move expeditiously with such a
provision in this bill.
So my first question, and I do want to get around to
Justice so I can go into the subject of short-selling and FBI
pursuits of illegal short-selling, taking advantage of this
situation, or inappropriate use, or use of information about
short-selling to detect individuals that might have been
involved in.
My first question is to Justice, though, on internet
gambling. Are you aware that the principal intent of the bill
could be counterproductive if the wording of the bill is not
helpful?
Ms. Warren. Well, I understand your point. Perhaps the best
thing that can I offer, and both for Justice and Treasury at
this time, that we are more than willing to have our staffs
work with your staff to try and find these problems and iron
them out in the next minutes, hours, days.
Mr. LaFalce. Understand there is a fundamentally different
approach between saying we are going to choke off credit for
internet gambling unless the following conditions are met and
to say we will not choke off credit unless it is deemed
unlawful. Very different approaches.
With respect to FBI, what are you doing to detect
inappropriate short-selling that may have taken place in
connection with airline stocks, insurance stocks, and so forth?
Mr. Lormel. That is a very good observation. One of the
very first things we did in forming our financial review group
was to have a team specifically designated to look at that
particular area. The team has coordinated with all of our field
offices and with all of the regulatory agencies, particularly
SEC, for any such activity.
To date there are no flags or indicators that the people
that were associated with this particular attack, nor are there
any indications that people took advantage of this. That is
certainly not to say that didn't happen, and there are
certainly some rumors out there to that effect, but we are
fully exploring that. And as I said, we have a team totally
dedicated to that aspect of the investigation.
Chairman Oxley. The gentleman's time has expired.
And, again, we thank all of you for your participation
today. It has been most helpful.
The Chair will call the third panel. While they are making
their way up, let me introduce the panel. Mr. Edward Yingling,
Deputy Executive Vice President of the American Bankers
Association; Mr. Marc E. Lackritz, President of the Securities
Industry Association; Ambassador Stuart E. Eizenstat, former
Deputy Secretary of the Treasury; and Mr. John F. Moynihan,
partner of BERG Associates.
Gentlemen, thank you, and we appreciate your appearance
today. Thank you all for your appearance.
Let us begin with Mr. Yingling.
STATEMENT OF EDWARD L. YINGLING, DEPUTY EXECUTIVE VICE
PRESIDENT, AMERICAN BANKERS ASSOCIATION, ACCOMPANIED BY JOHN
BYRNE, SENIOR COUNSEL AND COMPLIANCE MANAGER, AMERICAN BANKERS
ASSOCIATION
Mr. Yingling. Mr. Chairman, thank you for inviting ABA to
testify today on this critical issue. Accompanying me is John
Byrne, Senior Counsel with ABA. He is responsible for ABA's
efforts on money laundering and is a well-known expert in this
field.
We were all shocked and saddened by the events of September
11, and we mourn for those who lost their lives that day and
their families. The financial community was particularly hard
hit by the attack. Nevertheless, the banking system continued
to run smoothly and consumer confidence in the system held
steadfast. We are proud of our preparedness and response. We
are also proud about how we have assisted law enforcement
agencies in tracking the money trail of terrorists, and we
immediately instituted the account freeze order announced by
the President. Today we reaffirm our pledge to support fully
efforts to find and prosecute perpetrators of these acts and
their supporters. We commend you, Mr. Chairman, for holding
this hearing and moving so quickly to address this issue.
Today, I would like to emphasize three points. First, the
banking industry strongly supports efforts to track the flow of
money that finances terrorism, and we will do everything in our
power to help shut that flow down. It takes close coordination
with the Government to identify individuals and groups
suspected of illegal activities. While banks facilitate $2
trillion a day in transactions, a large volume flows outside
traditional banking channels. Dealing with these flows is
critical. We believe that by forging an aggressive public-
private partnership, we will make significant progress in the
fight against terrorism.
Second, it is important to understand there is already a
strong base in law and regulation to prevent money laundering
through the U.S. banking system. In my written statement I
outline extensive laws and regulations already applicable. A
feel for the extent of current laws is given by the fact that
banks filed over 12 million currency transactions reports last
year.
Our third point is that we are committed to strengthening
and extending current law where needed. By working together we
can assure that any new laws maintain the right balance, one
that is both effective and that protects the due process
concerns of Americans.
Let me touch on a few of our recommendations. The ABA
strongly supports the President's initiatives announced on
September 24, and we will continue to fully implement them as
more names are added to the freeze list and as international
efforts are extended.
The ABA strongly supports the 2001 national money
laundering strategy recently announced by the Treasury and
Justice.
The ABA recommends advanced training for law enforcement
agents in techniques for combatting money laundering and
investigating financial transactions of terrorists.
ABA strongly supports expanding money laundering laws to
all providers of financial services including those in the
nontraditional channels. This is essential for effectiveness.
The ABA strongly supports the expansion of money laundering
laws recommended in recent days by the Attorney General.
The ABA strongly supports provisions that would make
currency smuggling a criminal offense.
The ABA strongly supports giving the Secretary of the
Treasury more flexible authority to designate matters that
should be subject to special treatment because they raise money
laundering concerns. However, we do suggest that bank
regulators be included in the process and that a public comment
be required. We believe our suggestions will make the authority
even more effective.
And finally, ABA strongly recommends that improved
methodologies be developed for identifying individual account
holders, particularly for non-U.S. Citizens.
We hope our recommendations are helpful to the committee,
and we pledge to work with you on an expedited basis as you
move forward. Thank you.
[The prepared statement of Edward L. Yingling can be found
on page 150 in the appendix.]
Mr. Tiberi. [Presiding.] Thank you.
Mr. Lackritz.
STATEMENT OF MARC E. LACKRITZ, PRESIDENT, SECURITIES INDUSTRY
ASSOCIATION
Mr. Lackritz. Thank you, Mr. Chairman.
I am Marc E. Lackritz, President of the Securities Industry
Association, and I am pleased to appear before you today to
testify about strengthening the means to cut off the financial
activities of terrorists or terrorist organizations. We
strongly commend the committee for holding these hearings.
I also want to take this opportunity to express the very
deep appreciation of everyone in our securities industry for
the heroic firemen, policeman, FBI agents and other rescue
workers who made unimaginable sacrifices, including their lives
in far too many instances, trying to save the lives of others.
The atrocities of September 11 also inflicted a terrible
toll on the securities industry. While that day was a grievous
one for our Nation and our business, our industry has shown
remarkable resilience, reopening the bond markets 2 days after
the attacks and the equity markets the following Monday. In
fact, the New York Stock Exchange handled record trading
volumes in the first trading session after the attacks, and
NASDAQ handled almost a record volume. We, in cooperation with
our regulators, our self-regulatory organizations, utilities
and data facilities, have all pulled together magnificently in
this difficult time, and I have never been prouder to represent
this industry.
SIA and our member-firms have long been strong supporters
of the Government's anti-money-laundering efforts. Public trust
and confidence in our industry is our most important asset, and
we are fully committed to completely eliminating any possible
money laundering from the securities industry. Securities firms
presently are subject to a number of statutory and regulatory
requirements that enable the Federal Government to better
identify and combat money laundering.
Since 1970, broker-dealers have been subject to certain
Federal anti-money-laundering laws imposing reporting and
recordkeeping requirements. Like banks, securities firms have
been required by the Bank Secrecy Act to report currency
transactions over $10,000. Most major broker-dealers also file
suspicious activity reports with the Treasury Department.
Further, securities firms, like banks, are subject to the
provisions of various sanctions programs administered by the
Office of Foreign Assets Control, known as OFAC.
While the securities industry has been subject to many
specific rules, many firms have gone beyond these requirements
and developed their own anti-money-laundering programs. Most
firms on their own initiative have developed a policy of
prohibiting or restricting the receipt of currency or cash
equivalence at the firm. Firms also have procedures when an
account is opened, pursuant to self-regulatory organization
know your customer rules, to obtain information pertaining to
the customer. As a matter of good business practice, many
securities firms go beyond the know your customer rules and
suitability rules and seek even more information.
Many firms, particularly large firms, have adopted special
procedures and written software programs to monitor
transactions and detect even very sophisticated patterns of
money laundering. For many years we in our firms have worked
very closely with regulatory agencies and Members of Congress
on anti-money-laundering initiatives. Among other things, we
have worked with financial regulators to develop regulations
extending the requirements to file suspicious activity reports
to all broker-dealers, and we have worked with the SEC on its
examination program for anti-money-laundering compliance, and
we have also taken additional systems that I have outlined in
my written testimony.
I would like to now turn to what our industry is doing in
response to the President's September 24 order freezing U.S.
assets of and blocking transactions with 27 individuals and
organizations. We immediately sent notice of that order to our
member firms and posted it on our website and have asked firms
to check their records for individuals or organizations named
in that order or in the list of names issued by the FBI. Many
of our firms have received requests from self-regulatory
organizations for information on certain trading in securities
that occurred before September 11, and they are responding to
those requests. Firms are going beyond those requests, however,
and are examining and looking for unusual trading patterns in
equities, fixed income, options and futures in certain
industries.
SIA is also supportive of the need to have further anti-
money-laundering legislation and would welcome any legislative
tools that will enable our members to combat money laundering.
To the extent any legislation imposes additional due diligence
obligations, we think it is important to provide flexibility
with respect to those requirements.
We also think legislation should facilitate communication
between broker-dealers and between banks and broker-dealers
when they are investigating suspicious activity. Presently
brokerage firms are constrained from sharing with each other or
with banks information they have received which they believe
may be suspicious.
We support the expansion of the Bank Secrecy Act Advisory
Group's mandate to include terrorism and other issues related
to the security of our financial system. Alternatively we would
support the creation of a joint industry-government task force
to examine these issues.
We have had a long and constructive working relationship
with regulators and Congress on preventing money laundering,
and we look forward, Mr. Chairman, to continuing those efforts.
Thank you very much.
[The prepared statement of Marc E. Lackritz can be found on
page 164 in the appendix.]
Mr. Bachus. Thank you.
Ambassador Eizenstat.
STATEMENT OF HON. STUART E. EIZENSTAT, FORMER DEPUTY SECRETARY
OF THE TREASURY
Mr. Eizenstat. Mr. Chairman, Mr. LaFalce, I want to thank
you for the leadership that you have shown in the last Congress
and in this one, Mr. LaFalce, and the fact that you and
Chairman Oxley are going to have a joint bill I think is a
tremendous step forward.
Money laundering is the financial side of crime, and money
launderers are the criminals' investment bankers. The IMF has
estimated that the amount of money laundered annually is
between $600 billion and $1.5 trillion, or 2 to 5 percent of
the world's annual GDP, and at least a third of that amount, up
to half a trillion dollars annually, is thought to pass through
U.S. financial institutions at least once on its clandestine
journey.
Now we are brought face to face with another aspect of the
criminal financial system that is used by merchants of terror.
Terrorists must have money to pay for weapons, travel,
training, and even benefits for the family members of suicide
bombers. We shouldn't be misled by the supposed low cost of the
September 11 atrocities.
The fact is, huge amounts of money are raised by the
central operations of bin Laden and al Qaeda to support
terrorism around the world. Terrorists raise funds in many ways
through financial donors, through so-called charitable
organizations by relying on state sponsors of terrorism, by
making investments, some legal, and by the commission of crime.
Each of these is camouflaged at each step.
The fight to curtail money laundering has always been a
product of bipartisan consensus and should remain so, and
hopefully an Oxley-LaFalce bill will be a further indication of
that.
The fact is, we have too few tools to protect the financial
system from international money laundering. On one end of the
spectrum, the Secretary of the Treasury can issue advisories,
as we did in the summer of 2000, to encourage U.S. financial
institutions to pay special attention to transactions involving
certain jurisdictions, but they are only advisories. At the
other end of the spectrum, IEEPA, the International Emergency
Economic Powers Act, following a Presidential finding of a
national security emergency, can be used for a full-scale set
of sanctions and blocking orders to suspend financial and trade
relations with the offending targets. President Clinton issued
two of these, one in 1995 and the other in 1998, and President
Bush, a week ago Monday, invoked IEEPA, appropriately sending a
forceful and blunt message.
The problem is, however, there is nothing in between these
two ends of the spectrum, and there are other situations where
we will not want to block all transactions or in which our
concern centers on underregulated foreign financial
institutions or holes in the foreign counter-money-laundering
effort. We need these more flexible tools, and that is what
H.R. 1114, which Mr. LaFalce has introduced, and what the
discussion draft seems to provide. There would have to be a
finding of primary money laundering concern, and that would
then trigger, subject to very significant protections which I
will get to in a moment, special recordkeeping, customer
identification requirements, especially important being the
identification of foreign beneficial owners of accounts opened
in the U.S. and permitted through correspondent or payable-
through accounts.
H.R. 1114 and the discussion draft is carefully tailored
against real abuse. Actions would be graduated in the sense
that the Secretary could act in a manner proportional to the
threat. They would be targeted so the Secretary could focus his
or her response to particular facts and circumstances, and they
would be discretionary so the Treasury could integrate any
possible action into bilateral and multilateral diplomatic
efforts.
On the due process concern, which has been mentioned
several times, the fact is that the bill you passed last year
in H.R. 1114, Mr. LaFalce does have significant due process
already built into it; namely, the Secretary, for one thing,
can only act after consulting with other members of the
Cabinet, including the Secretary of State and Attorney General.
But more important, the Secretary's determination there is a
primary money laundering concern is itself fully reviewable
under the Administrative Procedure Act in court by any bank
which feels that that determination is inappropriate.
Importantly, the legislation would not jeopardize privacy.
The focus of the legislation is not on American citizens, but
on foreign jurisdictions, foreign financial institutions and
certain classes of transactions with or involving a
jurisdiction outside the U.S. It is narrowly tailored and does
not burden financial institutions.
Let me close by just saying that there ought to be a whole
range of steps that we take in addition to passing this
legislation promptly and giving the Secretary of the Treasury
the authority that is required. First, in addition to this,
additional crimes should be added, including terrorism,
official bribery, arms trafficking and certain crimes of
violence which are now not predicate crimes and, therefore,
against which we cannot use money laundering tools. So we
should broaden the number of predicate crimes.
Second, we should level the playing field for U.S. banks by
assuring, as Mr. Lackritz, I think, appropriately said, that
broker-dealers and casinos are covered. The regulations for
that have been delayed. They need to be promptly issued so that
broker-dealers and casinos know the rules under which they are
playing.
Third, the hawala system, which clearly was a part of the
bin Laden process here, the informal money traders should be
required to register. There is a hawala in every major city in
this country, and they are facilitating terrorism in many
cases. This is an age-old practice that goes back decades, if
not centuries, in the Middle East and South Asia, but if they
are going to operate in the United States, they should be
required to register.
Fourth, diplomatic efforts should be marshaled to bring
foreign money laundering regimes up to international standards.
The so called FATF process has been successful, but it needs to
be accelerated with particular attention to the Arab world.
Fifth, we should identify and publicize foreign world banks
as we identify those countries whose own regimes don't come up
to international standards.
And last, we should apply much greater scrutiny to
charitable organizations in the United States and particularly
encourage our friends abroad in the Gulf and in the Arab world
to more closely check Pan Islamic charities or so-called
charities which are often front groups for terrorism.
This kind of multiplicity of actions is necessary to deal
with the problem, and certainly this committee can take an
important first step by trying to pass the same legislation you
did last year and by moving on the joint legislation that Mr.
LaFalce and Mr. Oxley are considering cosponsoring this year.
Thank you.
[The prepared statement of Hon. Stuart E. Eizenstat can be
found on page 179 in the appendix.]
Mr. Bachus. Mr. Moynihan.
STATEMENT OF JOHN F. MOYNIHAN, PARTNER, BERG ASSOCIATES, LLC
Mr. Moynihan. Mr. Chairman and Members of the committee, I
want to thank you for inviting me here today for this very
important hearing. For the record, my name is John Moynihan,
and I am founding member and owner of the consulting firm BERG
Associates. Among other things, BERG offers our clients
services that assist them in prevention and detection of money
laundering and other related forms of financial crime. My
experience in this area of investigative expertise derives from
my professional background both in public and private sector,
which I have summarized in my written statement which I have
submitted for the record.
Let me begin by stating that the Achilles heel of any
criminal organization is its financial infrastructure. If you
can break the link between a terrorist like Osama bin Laden and
Pablo Escobar and his money, you have greatly impacted on his
ability to succeed in realizing his stated objective.
Mr. Chairman, today there is much that we do not know about
the financial dealings of Osama bin Laden and his surrogates
across the globe. However, we do understand how informal money
markets work.
Unregistered, unlicensed money remittance businesses: In
the United States there exist many individuals at international
business corporations that have opened bank accounts at U.S.
banks for the purpose of engaging in the unlicensed exchange of
monies and/or for the remittance of these monies to recipients.
These accounts, which are used by these persons and businesses,
are opened as mainstream retail accounts or through the private
banking departments. These accounts can generate millions and
sometimes billions of dollars in transactions within a given
year.
So what exactly is being accomplished by these underground
banking systems? The underground banking system provides the
following services or benefits: one, a source of money; two, a
system for aiding in avoiding of taxes; three, a system for
moving wealth anonymously; four, a system to move money to
support or sustain criminal activity.
The underground banking system thrives in the United States
because the people who move money know how to exploit the key
vulnerabilities in our financial and banking system. If I may,
I would like to present an example. One, a man from a Middle
Eastern company sells perfume in Boston. He sells wholesale and
retail and collects payments in checks and cash for deposits
into his regular checking account.
Second, a second man, with cash or checks, wishes to send
his money home to a South American country. He approaches the
perfume seller. He purchases from the perfume seller either,
one, a check in dollars that is not filled in on the payee
line, or, two, perfume for resale in a South American country.
Three, if the South American man purchases checks, he
carries this check to his country and sells it to an
intermediary broker, a money exchanger, at a discount to the
value of the check. He in turn receives the local currency
sought. The money exchanger can now resell the check to another
customer seeking these dollars. Given that the check has not
been endorsed and the payee section has not been filled in, the
check can be sold to anyone or used to pay for anything.
Fourth, if the South American man purchased perfume, and he
does not want to pay import duties, he smuggles the perfume
into the country and resells it, thus accomplishing his goal of
converting his dollars from Boston to local currency without
paying duties or exchange fees for just converting the funds.
Fifth, the Boston perfume man now has his customer's funds,
and he wants to accumulate his wealth in his country of origin
in the Middle East without paying taxes. He, therefore, sells
the funds received to an intermediary in the Middle East who is
seeking to purchase dollars. Upon the sale of these dollars,
the intermediary instructs the perfume man where he or his
agent can pick up the local Middle Eastern currency.
Six, the Middle Eastern intermediary tells the perfume man
a number or code, and it is to be used by the man who purchased
the dollars in the Middle East with the local currency.
Seventh, the Middle Eastern intermediary tells his Middle
Eastern customer the code and where to pick up the dollars in
the U.S. All transactions are complete and everybody wins.
My recommendations: The issue of underground banking and
payment systems must be immediately addressed by the
Legislature. The Federal law criminalizing the act of engaging
in money exchanging without a license should be promulgated.
Although 18 U.S.C. 1960, Subsection (b)(1)(B) provides for
violations for people who fail to comply with the money
transmitting registration requirement, the regulations have not
been promulgated, and therefore, law enforcement has had to
rely on 18 U.S.C. 982 for criminal forfeitures. It is
recommended that 18 U.S.C. 1960 be included in the civil
forfeiture statute, 18 U.S.C. 981.
As well, such underground banking should be identified as a
specified unlawful activity so as to be able to seize and
forfeit real property and funds that facilitate the activity.
This will significantly hinder persons who are engaging in
underground banking from delivering monies to person as a
favor, for those people will fear criminal sanctions.
Second, if it is the intent of the Congress to add to
existing forfeiture laws a component addressing terrorism, the
assets associated with the terrorist groups that are identified
should be forfeited using guidelines prior to CAFRA 2000. There
exists a carve-out section to this law, to the existing civil
forfeiture statute.
Under present conditions, the reality is that it is going
to be incredibly difficult to investigate and develop the kind
of evidence required to meet the burden of proof with regard to
identified terrorist assets. Without the use of hearsay
evidence, barred under the new law, there is a very high
probability that there won't be much more evidence. The truth
is if we believe differently, then we are fooling ourselves and
being somewhat naive.
Three, future laws to combat money laundering and illegal
transfers of funds must address all identified forms of this
activity, including those involved through banking financial
institutions and the sale of goods and services. Additionally,
said laws must be flexible enough to allow U.S. law enforcement
agencies to address new and creative forms of money laundering
as they appear.
Fourth, ensure that the United States Drug Enforcement
Administration plays a vital role in the investigation of these
terrorists. The people who appear to be responsible for these
acts are not religious. They are thugs and criminals who have
distorted religion and hijacked the country. Osama bin Laden's
accomplices are clearly protected by the Taliban, a group of
fanatics who have distorted the Islam faith and want us to
think that they are religious and acting as a government over
Afghanistan.
The reality is that Afghanistan is the major producer of
heroin, and the verdict is out on what role the Taliban plays
in this heroin trade. The DEA has the best international
informant and intelligence-gathering capability on
transnational drug crime. They are expert on the collection and
presentation of conspiracy evidence.
Mr. Chairman, Members of the committee, this concludes my
remarks. I would be pleased to answer any questions that you
may have.
[The prepared statement of John F. Moynihan can be found on
page 198 in the appendix.]
Mr. Bachus. I appreciate your testimony, and I will
commence questions, and then we will go to other Members of the
committee.
Ambassador Eizenstat, let me direct the first question to
you. I can recall back in 1997 as Oversight Chairman the
Treasury Department trying to come up with new money laundering
business regulations, and we still don't have those regulations
in place. Law enforcement has given sort of short shrift to
addressing these underground-type movements of money, hawalas
and others. Why is it that the Treasury Department has taken
years to put these requirements in place?
Mr. Eizenstat. I am not familiar with the particular
regulations you refer to.
Mr. Bachus. Yeah. The MSB regulations.
Mr. Eizenstat. I think that the Treasury was so preoccupied
with the Financial Modernization Act and all the requirements
that it had that that may have delayed action, but certainly
there should be movement on this. And there should be movement
on covering the regulations which have also been delayed in
covering broker-dealers and casinos and others.
And I agree very much also with Mr. Moynihan that we need
to take much firmer action to license and register and
criminalize if they don't, those informal underground money
exchangers or the so-called hawala system.
Mr. Bachus. Some have argued that terrorist funding differs
in significant ways from traditional money laundering. And what
I mean by that, if you have drug traffickers, they take dirty
money and they try to convert it into clean money. With
terrorist organizations, they are taking basically clean
money--we talked about money given to charities--and converting
that to dirty money, or money used for dirty purposes to kill
people.
Do you agree, and if so, are money laundering statutes ill-
suited to deal with the kind of terrorist operations that we
are now confronted with?
Mr. Eizenstat. Well, first I think terrorism, particularly
as organized by bin Laden and al Qaeda, represent a level of
sophistication that one rarely sees in drug traffickers,
although they are also very sophisticated, but even more so.
And they differ in the following ways as well, Mr. Chairman.
That is, with respect to drug traffickers, they are making, as
you indicate, their money illegally at the outset. Here, money
is being organized through so-called lawful donations, and
those donations through charitable organizations, which the
donors in some cases know to be fronts for terrorist
organizations, and others do not. They are advertised as being
for Bosnian orphans, for example, or for Gazans. Get very
wealthy donors to make presumably lawful contributions.
So that is why we need the legislation that Mr. LaFalce and
Mr. Oxley are talking about. But in addition, we need a much
broader net. We need to get foreign financial institutions to
come up to international standards. We need to have our
diplomacy work to get the Gulf States and Arab countries to
look through these charitable organizations. We need them to
educate their own citizens about being careful not to donate to
such organizations. We need a kind of panoply of powers that I
have talked about in addition to going after the registration
of hawalas, because you are quite right. This is a
qualitatively different set of problems.
Mr. Bachus. All right.
Mr. Moynihan, let me ask you a question. There have been
news reports that some of the funding associated with the
hijackers can be traced to formal banking networks,
particularly in Islamic banks like al Shamal in the Sudan and
banks in the United Arab Emirates. Do those banks handle funds
for bin Laden, al Qaeda or charitable groups that have been
associated with al Qaeda?
Mr. Moynihan. I can't say precisely right now, but the
commentary on the unlicensed money remitters, unlicensed
banking that goes on in this country is prolific. I am very
involved with my own clients and with the United States
Government as an expert for cases in helping them dismantle
these things.
What I think needs to be recognized here is that there are
different groups of people within the hijackers. There are
those people who might have been more organizers of the
efforts, and others who might have been more underlings of the
efforts. The crime that was committed on 9/11/01, in my
opinion, was only the conclusion to the crime that began last
February in 1993. To investigate this case, I think people
should recognize that maybe the reason they went after the
World Trade Center is they tried it one time before and failed.
They didn't bring the building down.
To go further in this investigation, people might want to
look back at that time period and shortly thereafter for those
people who were involved at that time period or those
associations. Money laundering is only about relationships and
association, and that might be the time period I would suggest
people start to look and bring that forward. You might find
people that were involved in this incident on 9/11 having been
in this country, in geographical areas, having somewhat of a
loose affiliation or some relationships to those previous acts.
This was just a culmination of it, and that is where I would
suggest people should look.
Mr. Eizenstat. Mr. Bachus, may I just add one more point to
your very important question about the difference in terrorism
and other criminal activities, and that is, in addition to the
donors and the charitable organizations, in most instances drug
traffickers and other criminals don't have overt state
sponsorship. In the case of terrorism, they do. State sponsors
provide money, provide sanctuary, provide camps for training,
provide facilities without which terrorist groups would have a
great difficulty operating.
Mr. Bachus. You know, Ambassador, I was surprised after
these attacks to again read actual information that we had
before, but I think none of us focused on with the same
attention, that many of these terrorist organizations were
receiving $100 million or more a year from certain Middle
Eastern countries, and this was a yearly annual funding of
these organizations. So you are talking about very well-funded
organizations, and, obviously, it took state sponsored funding.
Mr. LaFalce.
Mr. LaFalce. I will yield to Mr. Frank.
Mr. Frank. I have a meeting with the Governor of
Massachusetts in a few minutes, so I appreciate this.
Mr. Eizenstat, particularly with your experience, I want to
get back to the OECD issue, because the Administration had
taken the position that that had to be reconsidered, and they
had watered down the support, and the Secretary of the Treasury
did tell Senator Levin in July that he thought he would like a
chance to negotiate before deciding whether or not they were
going to try to implement sanctions.
But part of my problem with the approach is over and above
the question of taxes, part of the problem that I tried to get
across to Mr. Gurule, and I think, frankly, he kind of
reinforced the mistake, I asked him about it, and he said,
well, we are working hard on tax evasion. Part of the problem
is collapsing the OECD effort into that single issue of tax
evasion.
And, again, I was unhappy to see Mr. Fleischer's answer.
Just last week he was asked about this. The question, the OECD
has been going after tax havens for a while. The Administration
hasn't shown a whole lot of support for that effort. Mr.
Fleischer: I think you should not confuse the two issues. One
deals with domestic laws in dealing with tax consequences and
tax dodgers or tax evaders. This deals with terrorism.
And the problem, of course, is that once you have bank
secrecy, you don't know whether it is just your garden variety
tax evader or somebody else. I mean, isn't that the problem?
Mr. Eizenstat. Yes. And I--frankly, some of the pre-
September 11 signals both on money laundering and on tax havens
were very discouraging. With respect to the OECD effort on tax
havens, this is part and parcel of the problem. That is
terrorists, terrorist organizations and other criminals will
seek out those jurisdictions to put their money in whose bank
laws have no questions asked, who don't have to file suspicious
activity reports, and they will also seek to hide from taxation
their ill-gotten goods by going to tax havens so that there is
a definite relationship.
And the other point, Mr. Frank, which you properly raised,
it is in the OECD, and this will never be successful, the whole
effort to attack this problem, unless it is done
multilaterally. Otherwise, for one thing, we are disadvantaging
our own institutions, but it will simply squeeze money to
jurisdictions that don't abide by them. So they ought to be
considered as simply problems, and both should be addressed.
Mr. Frank. I would hope that would mean that we have to
tell other countries that are refusing to end this total bank
secrecy and refusing to allow their financial institutions to
be used to provide total cover that they will be subject to
sanctions if their financial institutions will not have the
access to ours, and that up until September 11 the
Administration hasn't been willing to say.
Let me just say to reinforce this, just to paraphrase some
comments, because I had been reading the uncorrected
transcript, I acknowledge, of the eleven hearings, but
Assistant Attorney General Chertoff, whose deputy testified,
saying essentially we are dealing not only with Americans who
put money in these banks, we are talking about foreign
criminals who put money in the bank and then move them into
United States; for example, not a tax issue, but an issue of
using that anonymity for criminal purposes. And District
Attorney Morganthau, I think, the world's oldest living
prosecutor, says for all of these defendants the principal
attraction of doing business in offshore havens was not the
nonexistent tax rates. They sought to take advantage of other
benefits that provided tax haven jurisdictions, strict bank and
corporate secrecy, lack of transparency, lack of any meaningful
law enforcement supervision.
So again we want to be clear. The OECD effort is an
essential part of an anti-terrorism fight. It is not simply an
anti-tax fight.
Mr. Eizenstat. Yes, and I would also say that those
countries which are tax havens tend to be those countries which
have the most lax money laundering laws.
Mr. Frank. Thank you.
One other point I just want to make, because I was confused
about this, I have been asked by some members of the press, and
that is, you know, what is the legislative status here. And I
think we ought to be clear. The Administration has clearly
decided that there are two levels of urgency here. I am on the
Judiciary Committee. At 2:00 we will be marking up a
compromised version of the Anti-terrorism Act. It did not
include, as submitted by Attorney General Ashcroft or as
amended by the Republicans and Democrats on the Judiciary
Committee, any money laundering pieces. It did deal with one of
the things that Under Secretary Gurule mentioned, and that was
the lack of sharing information. And the bill that will be
marked up in Judiciary as a compromise does explicitly
authorize sharing of tax information for appropriate
legislative purposes. It has got a 2-year sunset for people who
are worried about how that will work out.
So the use by the Justice Department and others in fighting
terrorism of tax information will now be clearly allowed in
this bill, but, at least to date--and I am told the Judiciary
Committee has a lot of the jurisdiction here, and I have been
at all these Judiciary Committee meetings and conversations--we
have not been asked by the Administration to take any action on
the money laundering issue.
Now, that is apparently coming, but people should
understand that, that the money laundering piece, much of which
is under the jurisdiction of the Judiciary Committee, isn't
part of the anti-terrorism bill and wasn't part of the anti-
terrorism bill as requested. So probably there is a second
order. I would hope, because it now looks as if the Judiciary
Committee will be voting out the first part of the anti-
terrorism package that the Attorney General sent us, that the
Administration will now show some eagerness to get the other
part through.
And I would just say in closing, finally, Mr. Chairman, I
appreciate this. I was pleased, and I want to repeat this, when
Secretary O'Neill and Under Secretary Gurule said they liked
Mr. LaFalce's bill as long as it had due process protection.
That is what we said about Ashcroft's bill on the Judiciary
Committee, and I think we ought to be very clear what is due
process source for money laundering is due process source for
the anti-terrorism bill, too. That is one of the reasons why we
did not instantly enact what the Attorney General asked us, but
held it back to put in precisely the kind of due process
provisions that he has asked for and that Mr. LaFalce agrees
should be in there.
Thank you, Mr. Chairman.
Mr. Bachus. I thank you.
Mr. LaFalce.
Mr. LaFalce. Thank you very much, Mr. Chairman.
I thank you all for testifying, especially Ambassador
Eizenstat. It is always a pleasure to see you and to work with
you. I thank you for your comments about the administrative
procedures, and the fact of the matter is that we have heard
nothing from the Administration with respect to so-called due
process. I think they were just responding to concerns that
were expressed in the Senate, and they said, yes, we will be
glad to have some. I see no language whatsoever that they think
improved upon the bill, and that is one of the difficulties in
trying to do it quickly. But we will be vigilant on that point.
You made the statement, Mr. Ambassador, that hawala exists
in every single major city in America, and, Mr. Moynihan, you
made some suggestions for dealing with underground illegal
banking. I need a better handle on that. Can you better explain
what the difference between the hawala system and underground
banking is, if any? Is it one and the same? Is there something
different about it? To what extent would your existing law
work? The proposals that we have fashioned thus far deal with
it. Is it necessary to go beyond that? Because, you know, we
don't want to come up with a solution to a decade ago problem.
We want to come up with a solution to today's modus operandi.
Mr. Eizenstat. Well, I'll let Mr. Moynihan deal with some
of the underground banking systems. But the hawala system is a
system which would operate as follows. Someone would go to a
hawala in, say, Pakistan, Karachi, and these are often families
that have been in the business for decades or centuries, passed
along, oftentimes completely legally. And, say, we have a
customer who is going to pick up $5,000 in cash in Chicago or
Buffalo. And this should be honored, and he will have this
identification number which we are now giving you. That person
then comes into Buffalo, picks up the $5,000 in cash, and there
is no actual movement of money between Pakistan and Buffalo.
There is no wire transaction. All there is--``hawala'' means
``trust,'' and so there is ultimate accounting that will go on
between those two hawala dealers so that it is a system that
depends on informality and personal trust, and there seems to
be little doubt that some of the cash which was used at the end
of this process for the atrocity that was carried on probably
came through that kind of hawala system.
But we ought not to be daunted in going after money
laundering by the difficulty of getting at that, because that
$5,000 will, in turn, have come from a hierarchy that at the
central level has raised tens of millions of dollars by state
sponsorship, by charitable organizations, and that will have
touched, through investments and other ways, the actual
financial system.
Mr. LaFalce. Now, the system of trust, though, has to be
verified or accounted for. So there has to be some type of
verification that the $5,000 was given in order for it to be
accounted for wherever it originated.
Mr. Eizenstat. Yes, but the verification is often, Mr.
LaFalce, not by a paper transaction, not by a paper trail. It
would be by perhaps a personal phone call or some other
indication.
Mr. LaFalce. There has got to be some method of
communication though. There has to be some method of
communication.
Mr. Eizenstat. Yes, there is.
Mr. LaFalce. Either in person or electronically.
Mr. Eizenstat. There is, because there has to be accounting
at the end of the day.
Mr. LaFalce. Yeah. Yeah.
Mr. Moynihan.
Mr. Moynihan. Mr. LaFalce, I think there is so many
permutations on what goes on, and we have to start at that
point. It could be as simple as a guy who owns a gas station
down the street here who wants to secrete his wealth in
Pakistan or Iran or whatever, and he just flat out doesn't want
to send a wire transfer over there because he is afraid
someone's going to see it at the Fed. He just doesn't want
anybody to know what he is doing. So he offers that money that
he has earned here, cash, for sale simply through the internet,
maybe a message and putting it on the street, making a phone
call to someone who he knows on the other end who is either an
intermediary or someone who seeks out an intermediary. It is
merely a system of swapping money. That is it.
What is unique about the hawala, from my experience in
doing these cases, unlike Colombian drug traffickers who
generally will set up a contract, I have experienced this with
a number of DEA cases that I do, they will set up a contract
and broker the money at a discount some time out. It could be
either a spot transaction, but generally it goes out 30, 60, 90
days, and you earn different discounts based upon how far it
goes and the form of the money.
The hawala is different in that it is still underground. It
is still the gas station owner engaging in unlicensed money
exchange, and that is why I made the suggestion that should be
criminalized across the board. People should just not be using
their checking accounts to make money on money. If you sell
gas, sell gas. If you want to be a money exchanger, go get
licensed. That is not what goes on. But here, in the hawala, it
is more of a loose affiliation, and, as the Ambassador has
said, it is based on trust. These people make these swaps and
exchanges of money in volumes you just can't imagine. It is
huge. It is massive. It is everywhere. It is not reported.
People trust it, and if those hawala participants aren't
satisfied, they are back out of it, and they use somebody else.
There is so many people who do it.
The last thing I will say on this, of grave concern, from
the cases that I have been----
Mr. LaFalce. If it is that widespread, it would seem to me
that the more widespread it is, the more detectable it would
be, assuming we had widespread usage, utilization of undercover
agents.
Mr. Moynihan. That is the key. The techniques have to
change. The techniques for penetrating those organizations have
to change. One of my partners in my business, Larry Johnson,
has been seen on the television all week, and he keeps using
the term, ``you are not going to catch these rats by not
getting into the sewer.'' And that is true. These cases are not
being made in the Vatican. If you want to make these cases, you
have got to get down and get dirty with these people, and if
you won't, the techniques are not going to work, and that is
why it has proliferated.
Mr. Eizenstat. We have had some experience with similar
systems. For example, the so-called black market peso system
operates in some respects in the way that Mr. Moynihan was
describing with respect to imports. In fact, oftentimes major
American companies have their products used as part of the
exchange, and we had a meeting last year at the Justice
Department with the Attorney General and others, and we had
some of the major corporations come in to alert them to the
fact that their products were being used as part of this
process.
The hawala system operates in a sense even more
underground, and it will require human intelligence and
penetration if we are going to be successful at rooting that
out. And, again, all of these things we are talking about,
including legislation, are not going to end the practice per
se. What we want to do is throw sand into the gears, make it
more difficult, complicated, make people come up from the
subterranean level they operate, take greater risks and disrupt
the process.
Mr. Bachus. Thank you.
Ambassador Eizenstat, we actually had hearings on the black
market peso back, I think, in 1997.
Mr. Eizenstat. Yes. We appreciate it.
Mr. Bachus. A lot of that is categorized as trade
mispricing, too, to avoid taxes. And I think some U.S.
corporations have spoken up against the practice.
Mr. Eizenstat. They have. But now that they have been
alerted to it, they are trying to be much more sensitive about
suspicious transactions involving their products.
Mr. Bachus. And that, obviously, is something that ought to
be brought into this.
Mr. Yingling, without divulging any investigative details,
can you tell us whether or not any banks that are members of
the ABA have found and frozen any of the accounts of the
parties that were named in the President's Executive Order?
Mr. Yingling. We understand that there are several that
have, but they don't report to us on an ongoing basis about it.
They report to law enforcement.
Mr. Bachus. I would ask Mr. Lackritz. Can you tell us
whether any securities firms have found and frozen any accounts
of the persons named in the President's Executive Order?
Mr. Lackritz. I can't tell you right now. They are in the
middle of doing searches for all that information now, and as
Mr. Yingling said, they don't have the obligation to report to
us. I don't have that information at this time.
Mr. Bachus. Does it concern you? And I am sure that you
heard the testimony of Under Secretary Gurule about the al
Qaeda operatives using brokerage accounts.
Mr. Lackritz. Well, absolutely. It concerns us, and, in
fact, our members have all been working with the self-
regulatory organizations and the SEC in terms of going back
into unusual trading patterns prior to September 11. But, yes,
of course that would concern us.
Mr. Bachus. OK. What are some of the operational
differences between a securities firm and a bank that we in
Congress should be mindful of as we craft legislation
preventing money laundering?
Mr. Lackritz. Well, I think that they are very different
businesses, and I suspect Mr. Yingling would be happy to point
out some of the differences between banking and securities.
But, in general, the relationship with customers is very
different in the sense that, generally speaking, when customers
open accounts with securities firms, there is an ongoing
relationship that is fairly frequent, and there is many points
of contact on a regular basis where professionals from the
industry will be talking to the customer about what has
happened.
In addition, when the account is actually opened, our firms
are subject to know your customer rules. I think it is Rule 401
of the New York Stock Exchange, and I think it is 3110 of the
NASD, have know your customer requirements for our firms when
they open accounts, and that is to assure that our firms, in
fact, follow suitability obligations which they have owing
their customers to make sure that their recommendations are
suitable for that customer in the account.
In addition, the industry has a number of obligations under
the regulation to make reports on a regular basis to self-
regulatory organizations. For example, U-4 reports about
employees, U-5 reports when they are terminated articulate
reason for dismissal or reasons why something hasn't worked
out.
In addition, we have forms called RE3s to report possible
rule violations. We also have to report to our self-regulatory
organization and the SEC.
And finally, Mr. Chairman, I would just suggest that the
regulatory regimes that deal with banking and securities
philosophically are very different and are grounded on very
different assumptions. Banking regulation tends to be more
focused on safety and soundness of the financial system, and as
a result there is a lot of oversight and review of individual
decisions by bankers. On the securities side the philosophy has
to do with disclosing material fast, protecting the integrity
of the marketplace, protecting the investors, and let
competition determine the outcome, and as a result there are
very substantial differences in that respect.
Mr. Yingling. And if I could just comment, I think there
are differences along the lines that Mr. Lackritz just
outlined. But, we do believe that it is very important to
extend the rules beyond the banking system, and we just had a
long discussion about the underground system. We are not going
to be effective if we don't do that. But it is very important
that this be done in a flexible manner where the expertise of
the regulators and the various industries can come into play to
design the right response.
And I think one of the big advantages of the approach in
Congressman LaFalce's bill that was worked out in the Banking
Committee last year, and Ambassador Eizenstat was involved in
that, is that the way it is written, it does give that kind of
flexibility. Therefore, you can identify the different types of
transactions or relationships or groups or countries, and you
can identify different responses to each.
There is, on the Senate side, as you may know, similar
legislation that is in the process of being looked at. And we
support, Mr. LaFalce, the kind of approach that you are talking
about. We have a couple of suggestions which we will get to
you, but there is an alternative out there that is very rigid,
and we think that is a big mistake because you are going to end
up with situations where in some cases you need a fly swatter,
and you are going to have a sledgehammer; then in other cases
you need a tank, and you are going to have a sledgehammer. So,
we think the approach that you are working on is the right
approach, as opposed to a very rigid approach written into law.
Mr. Bachus. We do hope to incorporate flexibility in how
you deal with your clients. You know, why, I mean, there are
varying ways in which firms conduct their business and take
that into effect. And, Mr. Yingling, you actually--in your
written testimony, not in your oral testimony, but you made
some suggestions on how the legislation should be modified. So
we will take those into account.
Mr. Moynihan, we earlier had testimony from the FBI, and
Mr. Lormel mentioned the offshore internet gambling sites and
abuse there. You have been in the trenches. I would like to get
your opinion on any possible nexus between internet gambling
and money laundering and, you know, what we could do in that
regard.
Mr. Moynihan. In my firm, with my partner Bobby Evers and
Larry Johnson, we travel the globe doing anti-money-laundering
initiatives and investigations of internet gambling and the
banks associated with that. We have done a considerable amount
of work on it.
One of the keys that we have found has been where the
actual CPU that drives and conducts the transactions is
actually located. For example, you might have a person in New
York City who gets on his computer to play a sports book game.
He thinks he is playing it in the Bahamas because that is where
it was advertised out of, but traditionally in many cases that
CPU is resting in Belize. The transactions will actually be
transacting in that particular country, where, in fact, in that
country where they are looking for hard currency and they try
to drive hard currency into that location. They want this
business. They want this business.
And as the Ambassador said, a bilateral approach to this is
very important because we may recognize ourselves as the First
World economic type of situation, and other nations want to
rise to that level of economic activity quickly because they
watch the television and they visit Disneyland. They want to
get there as fast as they can. That is just the reality of it.
So they are going to offer things that we want, whether it is
drugs or whether it is internet gambling.
So the internet gambling situation is as complex as it
gets, because the participants in the gambling aren't
necessarily participating in the way that they think they are.
They think they are participating in the Bahamas. They are not.
They are not, and their credit card might be clearing through a
bank somewhere else. So it is multi-jurisdictional.
Mr. Bachus. Thank you.
Mr. Yingling, let me ask you one other question. In the
money laundering bill that we have drafted, there is a
provision that would prohibit the U.S. banks from having
correspondent accounts with offshore shell banks. Do you all
have any objection to that?
Mr. Yingling. We do not have any objection to that. We had
some questions about making sure we have a clear definition of
what a shell bank is so we know what the rules are. We haven't
had a chance to look at it in detail, but I think you have a
good definition in there, so we are supportive of that.
Mr. Bachus. Thank you.
Mr. LaFalce, do you have any questions?
Mr. LaFalce. Just to the extent that any of you are
involved in future discussions or deliberations with respect to
internet gambling, I want to, first of all, make one point. I
have yet to discern anything that is at all socially redeeming
about the concept of internet gambling, so to even sanction a
little bit of it causes me some difficulty.
Second, please help impress upon others that the
legislation that they enact could have negative rather than
positive consequences if it is inappropriately drafted. And to
say that internet gambling is permitted unless it is
specifically deemed unlawful would require a finding of
unlawfulness in virtually every State or the entire United
States or offshore jurisdictions, and so forth. That is not the
approach to take.
I do want to ask Mr. Yingling a question, and then I will
conclude. You know, one way that terrorists can help shut down
the economy of the United States is by going to its
transportation network. That could include airlines, buses,
borders, and so forth. But another way would be to choke off
its source of credit. And as we try to have redundancy and
backup systems for our stock exchanges, and we were able to get
them up in a relatively short period of time, what group within
ABA, for example, discusses the redundancy of the capacity to
make sure that credits, credit cards, ATM machines, and so
forth, are able to function and not shut off at some choke
points?
Mr. Yingling. It is a very good question and one that is
maybe the other shoe here, if you will. We have the money
laundering side of it that we need to work on, and we have the
securities side of it. We are very proud of what happened in
the immediate aftermath after the attack in terms of the way
the banking system was able to respond. Mr. Lackritz in his
statement talked about the great job the securities industry
did.
Part of that, quite frankly, was a result of preparing for
the changeover in the Millennium--all the work we did there
that a few days afterwards everybody scratched their head and
said, ``Well, maybe we did more than we needed to.'' A lot of
that work was building in redundancy, and a lot of that work
was making sure we had contingency plans.
There is no one group to address your point--although John
Byrne sitting behind me is an expert in security and does a lot
of work in that regard--because we are many different
industries--for example, the credit card industry, and we are
the clearing industry for a lot of what goes on in the
securities area. We also transport cash around, so we have to
cut across many different aspects of our business.
We have been talking internally about the need to really
address this question in a comprehensive fashion. We have had
preliminary discussions with Treasury about the need to do
this. We have actually talked with the SIA about the importance
of getting the key groups together and reviewing everything we
are doing in security.
Mr. LaFalce. I would encourage you to create some type of a
committee or a task force, and so forth, because if we couldn't
use the credit cards, if businesses couldn't, you know, our
economy is really devastated. If we couldn't have an effective
clearinghouse system, our economy would be devastated. And I
think that this is an extremely important issue, and I don't
know that we have a problem. I hope we don't. And it may have
been anticipated, but it is something that I think should be
looked into very seriously.
Mr. Yingling. We will definitely do this, and we have also
on a very preliminary basis raised the issue with Governor
Ridge that this ought to be done in a comprehensive fashion. We
agree completely with your concerns.
Mr. Eizenstat. If I could just reinforce what has been
said, the backup systems and the work which was done for the
Y2K exercise really proved themselves, because with the
disaster that occurred, the fact that the securities markets
and banking system were able to get back on their feet so
quickly meant that there were sufficient backup systems. The
firm which handled all the bond work, much of the bond work,
for example, used their London system. So a lot of that
investment, although no one realized it would be for this, did
come in handy.
Mr. LaFalce. All right. Thank you very much.
Mr. Bachus. Mr. Leach.
Mr. Leach. Let me first start with the big picture in terms
of the financial services community here. I think it has to be
underscored and underscored, and that is that despite this kind
of instant stability in the United States, A, dependent on
financial services and, B, our financial services community is
incredibly stable, and that is the big picture, and that is
wonderful and all that that represents. The financial community
ought to take pride. This is for a good cause, and it is
principally private sector.
Having said that, there is a trauma on some little picture
issues that you can have some big pictures ramifications, and
that is the history of the 20th century has been one that too
much regulation has been helpful, and we all recognize that. On
the other hand, there is some regulation that is prudential. We
don't normally think of this in the national security vein, but
suddenly it has been a national security vein.
So issues like money laundering have implications in
tracking accountability of people who have committed crimes.
They also have some implications for preventing crimes before
they are led forth, and that can be in the realm of terrorism.
It can be narco-trafficking. It can be corruption of many
different levels. And I think that the financial community is
going to have to rethink the position they took in the last
Congress on objecting to some legislative approaches that were
on the table at the time.
I have been particularly surprised that the banking
community hasn't been leading the charge on everything to do
with internet gambling. In fact, I have been so startled with
that, Mr. Yingling, I cannot tell you. The approach that
originally confronts one is that based upon that, why should we
take accountability, and that is a very reasonable question.
Why should the banks be the principal law enforcement for
internet gambling?
But it ends up, for whatever reason, all other approaches
have proved to be frail, if not lacking, in virtually any
capacity to me. For example, many of us believe current laws
preclude internet gambling, and yet they are unenforceable. And
so the only way that we know to bring some enforcement is
through putting some prohibitions in through financial
instruments. I would wish there were other approaches.
But I will tell you, forgetting everything you do with
terrorism, the implications of internet gambling for credit
card companies is going to be stunning new losses as people are
headed out with these credit cards. There are people that get
hooked on it, and it looks like a small percentage of the
American public easily gets hooked on internet gambling. It is
going to be very devastating on the credit card industry. It is
going to be very devastating for certain parts, with losses.
Now we come to the issue of terrorism. It appears that
there is a role for money laundering, and it also is pretty
evident, perhaps, not tied to the events of last month that
gambling is historically a wonderful technique for money
laundering. Internet gambling in particular is a good technique
for money laundering.
It is also of interest in terms of terrorism that the
country that we are most interested in today is the country
that has become one of the leading heroin producers in the
world, if not the leading heroin producer. And money laundering
is traditionally a narco-trafficking circumstance. And so the
linkage of narco-trafficking and the potential of terrorism is
not direct, but there is a tangential link that I think we all
have to be concerned with.
But I would, as strongly as I can, tell you that when I
talk to small bankers, they all are appalled by internet
gambling. When I talk to big bankers, there is no support for
internet gambling. And yet the body of conversation has gone to
the assemblage of institutions that represent financial
institutions. Some of the bigger credit card companies have
been in desperate opposition to anything that involves dealing
with financial instruments and internet gambling. And I think
that is a true mistake, and I think people ought to think about
this in a very deep way, not only the implications for the
issues of the week, but what it is going to mean for our
economy if this internet gambling takes off to the degree that
most people now assume it is going to. I think we are at the
last edges of the timetable to try to bring it down.
We worked very carefully with the Treasury in the last
Congress, and I am pleased that they came out with the approach
that seemed relatively realistic. I am very disappointed that
in the bowels of the legislative channels, opposition was
brought to bringing this kind of approach to the floor. But I
really think all of you are going to have to think this through
much deeper, much more carefully.
Finally, with regard to money laundering, I don't think it
is, by any means, the answer to terrorism, but it is one of the
tools that can be applied. And I would only stress what I did a
little bit earlier. It is self-evident. The institutions of
finance abroad and in the United States of America can be
vulnerable to terrorism in the years ahead. And I think,
frankly, supporting legislative efforts of this nature is about
as prudential as anything I know of, and I just am really,
truly calling for a real look within the financial community at
both of these issues.
I don't want to ask for a response. I know you all have
difficulties because you represent a processed way of reaching
decisions, but I am really hopeful that this is thought of in a
new kind of parameter. Thank you.
Chairman Oxley. Gentlemen, thank you for your testimony,
and I know you have answered numerous questions. The hearing is
now adjourned.
[Whereupon, at 1:50 p.m., the hearing was adjourned.]
A P P E N D I X
October 3, 2001
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