Hearing on the Administration's "National Money Laundering Strategy for 2001"


Prepared Testimony of the Honorable Carl Levin (D-MI)
United States Senator

10:00 a.m., Wednesday, September 26, 2001 - Dirksen 538

Thank you, Mr. Chairman, for the opportunity to testify. I'm here this morning to share with you the work of the Permanent Subcommittee on Investigations with respect to international money laundering. Over the past 3 years we've conducted an extensive investigation into the use of U.S. banks for money laundering purposes. We've held three sets of hearings and produced two extensive reports as well as a five volume record on how correspondent banking has been used as a tool for money laundering. To address the problems we've uncovered, in August I introduced -- along with Senator Grassley, Chairman Sarbanes, and Senators Kyl, DeWine, Bill Nelson and Durbin -- S. 1371, the Money Laundering Abatement Act. This bill has been referred to this committee, and I hope to work with the committee's Members to get it enacted into law.

Tightening our money laundering laws will strike a blow against terrorism, because a consensus has emerged that any effective anti-terrorism campaign must include tracking the money supply that funds terrorism and shutting it down. Disrupting terrorists' financial networks is vital to ending their ability to carry out massive terrorist operations like the September 11th tragedy.

Unlike drug and organized crime operations, terrorist acts sometimes do not generate illegal proceeds that have to be laundered. Terrorists use financial networks to collect funds from both legitimate and illegitimate sources and make them available to carry out terrorist acts. Look at what we know so far about the September 11th terrorists. According to press reports, the 19 terrorists identified by the FBI used cash, checks, credit cards and wire transfers involving U.S. banks in states such as Florida, New York and Pennsylvania. We've seen the photograph of two terrorists using a U.S. bank's ATM machine. There are also reports that the 19 terrorists left behind large unpaid credit card bills, in effect using U.S. credit card companies to help finance the September 11th attack.

The fact that these terrorists used U.S. financial institutions to accomplish their ends doesn't mean that any U.S. bank or credit card company did anything wrong; these terrorists may have met every requirement for credentials and credit histories, false though such information may prove to be. But the evidence is clear that terrorists are using our own financial institutions against us, and we need to understand our vulnerabilities and take new measures to protect ourselves from similar abuses down the road.

One of the vulnerabilities that the Permanent Subcommittee on Investigations has concentrated on is how correspondent banking is used for money laundering. Correspondent banking occurs when one bank provides services to another bank to move funds or carry out other financial transactions. For example if a bank in London has a client who wants U.S. dollars available to him or her in the United States, the London bank needs a correspondent relationship with a U.S. bank willing to make those dollars available in the United States. That means the U.S. bank has to agree to open and manage a correspondent account for the London bank.

We found that U.S. banks often perform an inadequate background review of the foreign banks seeking to open a correspondent account in the United States. Too often the U.S. banks assumed - and we heard this verbatim - that a bank is a bank is a bank. But that's not the reality. There are good banks and there are bad banks, and we found numerous situations where U.S. banks held accounts for foreign banks engaged in criminal activity or operated with such poor banking practices that they provided an open invitation for criminals to bank with them. Criminals can then use these bad banks to gain access to the U.S. banking system through their U.S. correspondent accounts. We found that current law has many holes in how it treats money laundering through correspondent accounts. So I designed my bill to close them and tighten anti-money laundering controls over correspondent banking.

Look at what we've recently learned about the al Qaeda terrorist organization headed by bin Laden. Numerous media reports have described the many corporations and businesses that bin Laden has helped establish and finance over the years. According to a 1996 State Department fact sheet, in 1991, bin Laden helped establish a bank in the Sudan called the Al Shamal Islamic Bank, allegedly providing it with initial capital of $50 million. An article dated March 16, 2000, in the Indigo Publication's Intelligence Newsletter states that bin Laden Aremains the leading shareholder@ of the bank.

Testimony provided in February 2001 at the trial concerning the 1998 terrorist bombings of the U.S. embassies in Kenya and Tanzania described the Shamal bank's use by bin Laden and al Qaeda. One bin Laden associate, Jamal Ahmed al-Fadl, who had handled financial transactions for al Qaeda, testified that al Qaeda had used a half dozen accounts at the Shamal bank; one account was in the name of bin Laden. He described a 1994 incident in which the Shamal bank was used by al Qaeda to provide al-Fadl $100,000 in U.S. $100 dollar bills which he was directed to take on a plane to an individual in Jordan, which he did. This testimony shows that, in 1994, the Shamal bank maintained accounts used by bin Laden and al Qaeda and was supplying bin Laden operatives with funds.

Testimony also demonstrated how a U.S. bank was used by bin Laden to send money from the Shamal bank to a bin Laden associate in Texas using a correspondent account. Essam al Ridi, who worked for bin Laden, testified that he received a $250,000 wire transfer at his bank in Texas that was sent by the Shamal bank, which he then used to purchase a plane for bin Laden and which he later delivered himself to bin Laden. Transactions like this one were the focus of our recent investigation into correspondent banking and money laundering, and that is what I want to focus on this morning - how criminals, including terrorist organizations, can use the correspondent accounts of foreign banks to gain access to the U.S. financial system. The Shamal bank's website currently lists an extensive correspondent network including banks in Europe and the United States. I have a chart that shows some of the correspondent banks listed on the Shamal bank's website. Three of the banks are U.S. banks - Citibank, American Express, and the Arab American Bank which was recently acquired by the National Bank of Egypt. Thankfully all three banks told us that the correspondent accounts they had with the Shamal bank are either closed or have been largely inactive since 1997 or 1998. This followed action taken by the U.S. government in November 1997 to add Sudan to its official list of countries that support terrorism.

But the Shamal bank's website also lists as correspondents major banks in other countries, including Credit Lyonnais in Switzerland, Commerz Bank in Germany, ING Bank in Indonesia, and Standard Bank in South Africa, each of which also has correspondent accounts with U.S. banks, and that's a problem.

First, we have to ask how the Shamal bank was able to open its correspondent accounts in the United States when U.S. banks are supposed to exercise due diligence about their customers; the bank is located in the Sudan, a country known for lawlessness and weak-to-nonexistent banking regulation and anti-money laundering controls; and the bank is also known to be associated with bin Laden. Under the legislation I have sponsored, U.S. banks would have to exercise enhanced due diligence, that means they would have to take an extra hard look at any bank from the Sudan and could accept a Sudanese bank as a customer only if the U.S. bank were convinced the Sudanese bank was completely above board and had appropriate money laundering controls.

Second, we need to look at the current status of the Shamal bank's correspondent accounts in other countries. We learned in our Subcommittee investigation that bad banks can Anest@ in other foreign banks and obtain access to U.S. banks that way. They can open a correspondent account with a foreign bank that already has a U.S. correspondent account, and then take advantage of the correspondent chain to access the U.S. financial system. This chart shows how bin Laden could be using the Shamal bank to gain access to U.S. banks through the banks' correspondent networks. We talked to four of these correspondent banks in countries other than the United States, and they indicated to us that they still have Shamal bank correspondent accounts that are not frozen. While at least three of these accounts have reportedly experienced little activity and one was reported to law enforcement a few weeks ago, all of these accounts are still open and could be used at any time. That means any customer of the Shamal bank - including a member of bin Laden's organization - could penetrate the U.S. banking system by going through one of these other correspondent accounts.

The Shamal bank is, of course, not the only bank of concern. Testimony in the criminal trial identified several other banks with accounts being used by al Qaeda. Press reports indicate that Barclays Bank in London has already closed one suspect account, and banks in countries as diverse as Switzerland, the United Arab Emirates, Malaysia and Hong Kong are checking their records for suspicious activity. Banks in Afghanistan also warrant scrutiny, as indicated by this Bankers Almanac printout which lists nine banks with offices in Afghanistan, including two with correspondents in the United States and elsewhere. While the U.S. accounts may, again, be inactive, given the absence of Afghan banking and anti-money laundering controls and the elevated status of bin Laden and al Qaeda in Afghan society, we need to ask how these banks were able to open correspondent accounts in the first place and what steps, if any, its correspondents have taken to ensure terrorist funds were not and are not moving through them.

Another possibility is that bin Laden has set up his own shell banks to handle terrorist activities. Shell banks are unaffiliated with any other bank and have no physical presence in any jurisdiction. They are licensed by a handful of jurisdictions around the world including Nauru, Vanuatu and Montenegro. This chart shows how shell banks can be used to gain entry to the U.S. banking system. My Subcommittee's investigation found that shell banks carry the highest money laundering risks in the banking world because they are inherently unavailable for effective oversight. There is no office where a bank regulator or law enforcement official can go to observe bank operations, review documents or freeze funds. Essentially no one but the shell bank's owners know what the bank is up to. Our staff report provides four detailed case histories of shell banks that opened U.S. correspondent accounts and used them to move funds related to drug trafficking, bribe money and financial fraud money. The possibility that terrorists are using such banks to conduct their operations is one that cannot be ignored.

Some good news is that more countries than ever before have passed anti-money laundering laws requiring their financial institutions to know their customers and report suspicious activity. More countries have empowered law enforcement to freeze suspect assets. New technologies can scan millions of financial transactions to link seemingly unrelated transactions and detect suspicious patterns and transactions. Financial intelligence units have been established in over 50 countries with the authority, technology and resources to identify and investigate suspicious activity. They have, in turn, formed the Egmont Group and developed international protocols for sharing financial information. And new groups, like the 6-country Gulf Cooperation Council which includes Saudi Arabia and the United Arab Emirates, have joined the fight to stop criminals from exploiting international financial systems.

These developments have better prepared the world to identify and freeze terrorist assets, trace connections from terrorist cells to those directing their activities, deny access to terrorist-affiliated businesses and foundations, and provide valuable evidence of the financing of terrorist acts.

Much more needs to be done. The Administration established a new interagency task force focused exclusively on rooting out terrorist assets and by expanding the country's official list of known terrorists and terrorist-affiliated businesses and foundations. That's a good step. Congress needs to take the next step by strengthening and modernizing our outdated and inadequate anti-money laundering laws. Here are a few key areas where change is needed.

  • First, Congress needs to stop unscrupulous individuals and foreign banks from gaining entry to the U.S. banking system through U.S. correspondent accounts. As I said earlier, my bill would require U.S. banks to exercise enhanced due diligence when opening accounts for offshore banks, banks in jurisdictions with poor anti-money laundering controls, or for foreign persons with $1 million or more in a private bank account and it would outright prohibit U.S. banks from opening correspondent accounts for foreign shell banks.

  • Second, Congress needs to eliminate a forfeiture loophole in U.S. law that now makes its almost impossible for U.S. law enforcement to freeze suspect funds in U.S. correspondent accounts opened for foreign banks. Under current law, in order for law enforcement to seize the funds of a criminal with money in a U.S. correspondent account, the law enforcement agency has to prove that the foreign bank with the correspondent account was involved in the criminal activity. That's because the money in the correspondent account is treated as the foreign bank's money and not the money of the foreign bank's depositors. My bill would change the law to treat money that is attributable to an individual depositor but held in a U.S. correspondent account as the depositor's money and make it subject to the same civil forfeiture rules that apply to depositor's funds in other U.S. bank accounts.

  • Third, we need to make it easier for prosecutors to prosecute money laundering cases. My bill would provide such basic improvements as simpler pleading requirements, clear long-arm jurisdiction over foreign money launderers acting inside the United States, easier ways to serve legal papers on foreign banks with U.S. accounts, and the assistance of court-appointed federal receivers to find money laundering assets hidden at home or abroad.

  • Fourth, we need to make bulk cash smuggling a crime. There is currently no statutory basis for seizing bulk cash from a terrorist transporting it over our borders or on U.S. roads or common carriers, even though seizing cash from terrorists could go a long way to disrupting their operations. Legislation introduced by Congresswoman Roukema addresses this issue, and it deserves our support and enactment into law.

  • Fifth, we need to increase the number of financial institutions required to report suspicious activity when they see it, particularly stock brokers. Media reports indicate that terrorists may have used stock trades to profit from the September 11th attack. Suspicious activity reports provide vital leads and evidence for law enforcement, and we are the only G-7 country that doesn't require all of our brokerage firms to file them right now. Past administrations have promised but failed to issue regulations requiring these reports, in part due to lobbying by financial institutions that don't want to have to spend the time and resources to fill out the paperwork. Well, times have changed and shown all too clearly the high cost of not reporting suspicious activity. The President ought to require these reports by January 1, 2002. If he doesn't, Congress should.

  • Sixth, we need to give the Treasury Secretary greater flexibility to take measures against foreign banks and foreign countries believed to be involved in money laundering. Right now, we have only two weapons - blocking a bank's assets or issuing a voluntary advisory urging U.S. banks not to do business with the suspect country or institution. We need more tools, such as options for requiring specific know-your-customer or reporting requirements, as set out in S. 398 introduced by my friends Senator Kerry, Senator Grassley and others.

    New anti-money laundering legislation is an essential companion to the Executive Order issued by the President earlier this week. The Executive Order is an emergency measure; these bills go beyond emergency measures to prevent terrorists and other criminals from gaining entry to the U.S. banking system in the first place. U.S. banks would be barred from opening correspondent accounts for shell banks, and they would be required to do a lot more homework on foreign banks before letting them into the United States. Had our legislation been in place earlier, it's possible the Shamal bank would never have obtained a correspondent account in the United States.

    Finally, let's not forget the need to galvanize the international community to join us in our efforts to chase down terrorist assets and deny terrorists access to international financial networks. We need to convince other countries to enact the same anti-money laundering controls we are talking about today.

    The conclusion is clear: stronger laws are critical if we are to stop terrorists and other criminals from benefitting from the safety, soundness, efficiency and profitability of the U.S. banking system. We must deny terrorists access to our banks, to our credit cards, to our stock brokers and to all of the other modern financial tools we've developed to move money around the world.

    I ask unanimous consent to include in the hearing record a letter from the Department of Justice supporting my bill, letters of support from the Drug Enforcement Agency, the Federal Deposit Insurance Corporation, the Attorney Generals for the states of Michigan, Arizona and Massachusetts, and other materials relevant to my testimony.


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