Hearing on the Administration's "National Money Laundering Strategy for 2001"
Prepared Mr. Jonathan Winer
Alston & Bird
10:00 a.m., Wednesday, September 26, 2001 - Dirksen 538
Mr. Chairman and Distinguished Members of this Committee:
I am grateful for the opportunity to testify before you on the topic of domestic and international money laundering and terrorist finance. Given our national emergency, I will focus my testimony solely on what we can do to combat terrorist finance.
Mr. Chairman, there is much we do not know about terrorist finance, and about Osama bin Laden’s financial networks. However, the many shards of information we do have should concentrate our minds on the work ahead.
Before you is a chart displaying a portion of Osama bin Laden’s financial network. Every one of the more than 100 boxes on this chart reflects a publicly reported financial link of bin Laden, residing in more than 20 separate countries, in the Americas, Asia, Africa, Europe and the Middle East. Public information demonstrates terrorist funds moving through Islamic charities, travel agents, construction businesses, fisheries, import-export businesses, stock markets, chemical companies, and a number of banks. All of this is public record, and far from complete. There simply isn’t room on a single chart to include everything connected to bin Laden and related terrorist groups.
Some of these entities are now defunct, as a result of law enforcement and other operations. Others may have only marginal ties to terrorist finance. But the chart illustrates why responding to this multifaceted network will require sustained, tenacious cooperation by many, many governments.
The actions announced by the Bush Administration on Monday represent potentially significant new steps. If followed by further action, and international cooperation, they could begin to have consequences. But that will only be true if every component of the financial services sector internationally – not just banks and certainly not just U.S. banks or foreign banks with offices in the U.S. – are all subject to similar rules and obligations. An anti-terrorist finance regime must be globalized, standardized, harmonized, and it must be multi-sectoral to have impact. The U.S. cannot dictate to other countries if the consequence is that the U.S. does not achieve cooperation with others. The U.S. must integrate other national policies with our own. In financial services regulation, including dealing with terrorist finance, having varying rules for different jurisdictions, state, federal, or international, invites trouble.
While there are many steps that should be taken, I wish to focus on seven areas for action.
First, register and regulate Money Services Businesses, including Hawala institutions, as the Congress has directed the Executive Branch to do since 1993. Our failure to complete this process has created a substantial vulnerability by which terrorists can anonymously obtain cash below the radar of our financial services regulatory system. This is the Department of the Treasury’s job. It should be completed without further delay, so that non-bank money services businesses in the U.S. are subject to obligations at least as tough as those already required of banks. To be effective, these laws must then be vigorously enforced.
Secondly, increase the international pressure on countries that have yet to put into place financial regulatory and enforcement regimes that facilitate accountability and the tracing of assets. We’ve been doing this already, but we need to push harder and faster. Financial institutions that are based in jurisdictions that are not adequately regulated should not have unfettered access to our financial institutions, unless they can demonstrate that other adequate protections are in place. Adequate financial services regulation, supervision and enforcement is essential not only to discourage terrorist finance, but to protect international financial stability. The recent apparent attacks on global markets by apparent terrorist short-sellers demonstrates why being able to trace financial transactions internationally cannot be discretionary. Financial regulation and enforcement cannot stop at borders when terrorist finances do not. They must be evenly promulgated and evenly enforced.
Third, the U.S. needs to accelerate efforts to insure that every nation signs up to the UN Terrorist Finance Convention, criminalizes terrorist finance, and freezes and seizes terrorist funds and the assets of organizations that support terrorism.
Fourth, the U.S. must do more to build our terrorist finance data base from existing cases. Not merely the records associated with every terrorist prosecution should be scoured but cases that abut or adjoin terrorist activity but involve other criminal activity. The Bush Administration has announced that it has now begun this task.
Fifth, the Congress should support Presidential use of economic war powers to broaden the reach of U.S. sanctions policy in true national security emergencies, as the President announced he would do on Monday. But unilateral action is inherently insufficient. We must obtain the support of key partners including the G-8 and the European Union.
Six, the U.S. needs to secure domestic and international action against those entities that have wittingly or unwittingly provided support to terrorism, as the President committed himself to doing in his announcement Monday. These include a number of Islamic charities, some of which are prominent and otherwise do many good works. We will need to work with other governments, including many in the Middle East, to cleanse charities that have supported terrorism unwittingly and to protect them from abuses by terrorists. Other charities, who have systematically supported terrorism, should be closed down, with their assets seized and made available to assist terrorism’s victims.
Seventh, we need to strengthen international regulatory cooperation in our securities markets, and close regulatory gaps, so that no terrorist who engages in the obscene act of market manipulation in connection with an attack ever gets away with it. Countries whose bank secrecy laws, anonymous trusts and untraceable business companies are used by terrrorists need to understand there will be consequences if they do not quickly change their laws and practices to help the world trace and seize terrorist finances.
In summary, cutting off terrorist finance is like cutting off the heads of the hydra. Every time we chop off one head, more will grow back in its place. To survive, we must kill the entire beast, and that means more than a single bin Laden, or any one part of his or related terrorist finance networks. I am available to answer any questions you may have.
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Steps to be considered by United States in connection with combating terrorist finance.
- Regulating Hawala and MSB regulations. Congress directed the Administration in 1993 in the Annuzio-Wylie Act to require registration of all money services businesses. Because the Executive Branch had never regulated money services businesses, uncertainty about how best to proceed, and at what level suspicious transactions should be reported, delayed the issuance of regulations until August 1999. The Clinton Administration delayed implementation of the MSB regulations until the end of 2001. This year, the Bush Administration announced that it was delaying the MSB regulations still further, to late 2002. The Executive Branch has undertaken little focused attention on underground banking systems and money services businesses in the United States date, and U.S. government knowledge about these businesses remains limited. Actions regarding Hawala and MSB that could be considered would include:
- Requiring all MSBs to register within a very short period, rather than by late 2002. The form for MSB reporting already exists. Requiring registration immediately would transform those entities that are not registered illegal. This will inevitably include all or most Hawalas, which are unlikely to register, making them vulnerable to being shut down by law enforcement as our intelligence regarding Hawalas deepens.
- Issuing new suspicious activity reporting (SAR) requirements focused on Hawala type business to existing US financial institutions. This Advisory would be issued from FinCen and require enhanced scrutiny of transactions that involve Islamic countries and their neighbors, and which meet other indicia such as: apparent commingling of funds, dollar volume of business not commensurate with stated nature of business; substantial number of transactions to locations in the Middle East not commensurate with stated nature of business. Here, reference to existing indicia applicable to Black Market Peso Exchange could be translated into Hawala indicia.
- Issuing SAR requirements to MSBs which in turn create various specifications on possible indicia of activity involving un-registered MSBs (Hawala, Hundi, chop or "flying money" houses) and as well, separately, other possible indicia of terrorist finance.
- Reducing the threshold for MSB currency reporting requirements, which would require revised regulations to be issued by Treasury/FinCen. Originally, MSB regulations would have required a low suspicious activity reporting requirement of $500. The MSB businesses objected, and the suspicious activity reporting requirement was raised to $2,000 for some transactions, and $5,000 for others. Given what we have learned about the use of currency by the terrorists who attacked the United States, the Administration should consider revising the suspicious reporting requirement downward for Money Service Businesses, with exceptions as appropriate for larger institutions that have other, adequate controls. This lower reporting requirement could be amended as needed as experience is gained, or as we find ourselves beyond the current emergency. Lower reporting requirements for suspicious reports for money services businesses will likely push some funds out of MSBs entirely into the formal regulated US banking system. This outcome is not necessarily a negative, as our banks, thrifts, and credit unions are certainly better regulated and more accountable than money service businesses have been to date.
- Consider adding to the existing MSB form another question which would require MSBs to specify whether they handle remittances directed to foreign countries, and if so, to specify the countries where they regularly handle such remittances. This question could provide a means of focusing which MSBs may be used by those in terrorist strongholds, for early on-site inspection.
- Immediately begin on-site inspections of registered MSBs, focusing first on those that handle remittances to the Middle East. There are two possible near-term options for conducting such inspections. First, the Congress or possibly the Administration by Executive Order, could grant such authority to the examiners of the existing regulated banking industry, such as the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC). The Federal Reserve could perhaps share in this obligation. These organizations might defer their regular schedule of examinations on some institutions they already regulate to review the operations of the newly registered MSBs, when necessary, onsite. Second, the federal government could encourage State banking officials and other regulators to examine money services businesses where such they have authority at the state level. In some states, MSBs are already theoretically regulated. Nevertheless, in many jurisdictions oversight of MSBs is irregular, inadequate, or non-existent. Onsite inspections may uncover a variety of poor practices, and could provide insights as to which institutions are being used for illicit finance to terrorists. They would also likely provide information on MSBs which remain unregistered, and thus illicit, and thus provide leads to other criminal financial activity.
- Prosecute unregistered MSBs for failure to register.
- Seize records and assets of unregistered MSBs who fail to register.
- If deemed necessary, increase the penalties substantially for MSB failure to register or to report suspicious transactions involving currency.
- Amend existing MSB regulations to explicitly describe Hawala type institutions as included within MSBs. This could make it easier to demonstrate intentional non-compliance in prosecutions, rather than accidental failure to register.
- Enhanced Scrutiny of Financial Institutions in Underegulated Jurisdictions, especially those in the Middle East. Banks in major money centers in the world have put into place increasingly strong constraints against the placement of illicit funds. Some banks based in the Middle East, operating globally, have equally good systems for preventing money laundering and terrorist finance. However, to date there has been little to no money laundering enforcement in the Middle East. Historical reasons abound. For example, in oil rich states, those controlling oil resources have often preferred to require less financial transparency as a means of discouraging oversight by others within their country or outside it. In some oil rich countries, income taxes do not exist, and without such taxes some governments have had less incentive to maintain accounting, auditing, and financial standards to trace funds. Endemic corruption in other countries has further impeded transparency and oversight. Currently in the Middle East, the only countries with money laundering laws of any significant scope are Cyprus, Israel, Lebanon, and the United Arab Emirates. Each of these countries has a history of money laundering and lack of financial transparency. For many years, until it cleaned up its financial services sector in response to pressure from the European Union, the U.S. and others, Cyprus was one of the world’s centers for terrorist finance. In the remainder of the Gulf States, as well as in Algeria, Nigeria, Sudan, Egypt, among other countries, there remains little obstruction to many forms of financial crime and little to no scrutiny that would prevent money laundering. A week before the attack on the United States, Nigeria and Egypt were already placed on the list of non-cooperative countries by the Financial Action Task Force, as Israel and Lebanon had before them. The U.S. should consider undertaking a twin regulatory and diplomatic approach in relation to the financial institutions of those countries that place no barriers to the placement of terrorist funds. The regulatory approach would require enhanced scrutiny of financial transactions coming from these countries. A concurrent diplomatic approach would require countries without money laundering laws or their enforcement to enact and enforce such laws or face sanctions from the U.S. such as enhanced scrutiny by US financial institutions. Actions the U.S. could consider in pursuit of this objective might include:
- Asking the Financial Action Task Force to speed its consideration of sanctions against non-cooperative countries such as Nigeria and Egypt and to hold emergency meetings to consider further multilateral measures to combat terrorist finance; these could include enhanced efforts against underground banking systems such as the Hawala as specified above.
- Asking Pakistan and the Gulf States to regulate Hawala without delay. Every country in world should be asked, and as appropriate, required to register Hawalas.
- Advising countries that have failed to put money laundering laws into place of the immediate steps needed to provide tightened scrutiny and record keeping on financial transactions as mechanism to deal with the problem that institutions in these countries have been used wholesale for the placement of terrorist funds.
- Advising countries that do not have the capacity to discourage the placement of terrorist funds in their financial institutions of the U.S. intention to place enhanced scrutiny on such institutions. The U.S. needs to consult with these countries regarding the possible market implications of reduced access to U.S. upon failure to impose measures against money laundering. Any actual enforcement decisions need to be rendered on a case-by-case basis to insure that financial institutions that have put into place strong anti-terrorist and anti-money laundering compliance programs do not suffer from sanctions.
Asking each country that has yet to sign on to the Terrorist Finance Convention to demonstrate their opposition to terrorism by signing, ratifying, and implementing this Convention without delay.
Seeking commitments by other countries to put into place sanctions similar to those the U.S. has promulgated in connection with its use of the International Emergency Economic Powers Act (IEEPA).
Instructing US executive directors at World Bank and IMF to vote against funding to states that do not sign up to Terrorist Finance Convention and to promise to implement it.
Asking Finance Ministries of U.S. allies to similarly make action against terrorist finance a precondition to receiving support from the World Bank and similar international financial institutions. Concerted efforts by the major donor efforts to channel funds in relationship to anti-terrorist efforts and to deny funds to jurisdictions that fail to take such steps could provide substantial incentives for appropriate action against terrorist finance.
Asking Interpol in Lyon, France to undertake immediate efforts at pooling expertise on terrorist finance and to make recommendations for further global actions to combat terrorist finance; request experts at Europol in the Hague, and the World Customs Organization in Paris, do the same, as well as the G-7/G-8 process.
Requesting the Basel Committee of Bank Supervisors to work with the International Monetary Fund and other appropriate institutions important to the development of international regulatory standards to meet and make recommendations on actions they can take to attenuate terrorist finance.
- Building Momentum for Ceasing Terrorist Finance Internationally. While many countries have given lip service to combating terrorist finance, aggressive, coordinated, pragmatic action against this problem has been limited. To date, the U.S. has not undertaken adequate action to stimulate immediate implementation of regimes to counter terrorist finance. Near term actions to build international capacity against terrorist finance could include the following:
- Building Intelligence From Existing Cases. In both state and federal law enforcement, there are cases involving witnesses or defendants involved in such activities as money laundering, document fraud, credit card crime, alien smuggling, trafficking in women, drug smuggling, and other crimes who may be in a position to shed light on terrorist finance, or on underground banking, or both, if the information were to be viewed as important by the law enforcement officials investigating and prosecuting the original offense. The U.S. should consider asking federal and state law enforcement agencies in jurisdictions across the nation to review cases undertaken over the past two years that involved any form of possible links to terrorist finance or to Hawala system, or to underground banking. When field offices and locals report such cases, these offices could present information pertaining to such cases, such as documents, information from transcripts or depositions, and names of possible witnesses/informants to the task force at Treasury tasked with create the integrated terrorist finance data base. This additional information could be used not only to investigate terrorism, but also to track unregistered Hawala and MSB businesses to prosecute them for failure to register in connection with the MSB initiative discussed above. Such information may also provide the basis for asset seizures and record seizures. Such information can in turn be shared with U.S. intelligence agencies as a mechanism to better target intelligence collection on terrorist finance, which can then in turn be pushed back when appropriate to law enforcement, or else dealt with in an IEEPA or national security context, as specified below.
- Broaden Information Base and Scope of Application of IEEPA. The U.S. has used the International Emergency Economic Powers Act (IEEPA) to the limits of what may be possible to target bin Laden and the Taliban within US and among U.S. based institutions. The historic effectiveness of IEEPA has been limited in two respects. First, it appears that the U.S. has yet to cover enough of bin Laden’s businesses under IEEPA, including the instruments through which he has laundered and hidden his resources. Second, IEEPA’s unilateral nature and limitation to territory of US for foreign institutions based here has impaired its effectiveness due to bin Laden’s use of financial institutions outside the U.S. Accordingly, the U.S. should urgently add names of specific terrorist support entities under IEEPA beyond the very short list provided to date. Second, the U.S. should secure the support of other countries to adopt IEEPA-like sanctions, so that terrorist finance does not simply slide from the U.S. to other countries. Harmonizing international efforts against terrorist finance is essential here for sanctions to be effective and fair. Given globalization, it makes little sense for financial institutions based in the U.S. to be subject to more stringent rules than similar institutions outside of the U.S.
- Require Enhanced Scrutiny of Islamic Charities. Contributing to charity is one of the five pillars of Islam. Islamic charities perform numerous good deeds every day, all over the world. A number of Islamic charities have, however, had either provided funds to terrorists or failed to prevent their funds from being diverted to terrorist use. While the vast majority of the uses of these charities are proper, ethical, and humane, a method to cleanse these charities of their terrorist connections must be found. The U.S. should work with foreign governments and with representatives of Islamic charities to develop programs that would provide better oversight of and controls on the uses of charitable funds within the Islamic world. The U.S. has found over the years the need to exercise substantial controls over the functioning of charities to prevent abuses. Other countries, and the Islamic charities themselves, need to undertake similar steps. If they do not, the U.S. should follow through on the commitment made by President Bush to freeze the funds of charities that have become vehicles for terrorist finance.
- Enhance cooperation among international securities regulators to trace cases involving market manipulation, especially in futures and options markets. The SEC has stated that it is investigating a possible case of market manipulation connected to the attacks on the United States, as have securities regulators of some dozen other countries. We should use any information that is gathered in these apparent cases of market manipulation by terrorism to assess the gaps within the international regulatory system that impede efficient tracing of the proceeds of such market manipulation and to close them. In addition to tracing these instances of apparent market manipulation, the Securities and Exchange Commission (SEC) and the Commodities Futures and Trading Commission (CFTC) should meet with counterparts in Japan, Hong Kong, the UK, France, Germany, Switzerland, the Netherlands and other affected jurisdictions as soon as possible to identify any weaknesses and impediments and to take collective action to improve mutual assistance in future cases of possible market manipulation by terrorists.
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