Chairman Sarbanes, Senator Gramm, and Members of the Committee:
I appreciate the opportunity to appear before the Committee today to discuss the Administration's approach to the financial war on terrorism, as well as the progress made in implementing the financial provisions of the USA PATRIOT Act.
I am pleased to be at the witness table in the company of Senators Levin, and Grassley, and Chairman Mike Oxley of the House Financial Services Committee, on which I serve as Ranking Member. All of us came together last year at a crucial time in our nation's history, and in the wake of the most egregious acts of terrorism ever on U.S. soil, to enact far-reaching and meaningful anti-money laundering laws. Today, we examine the progress made thus far in implementing the new powers granted to the law enforcement and intelligence agencies under the PATRIOT Act. My testimony today will address the following:
Strengthening Global Regulation
Prior to enactment of the PATRIOT Act, successive Treasury Secretaries were limited in their ability to take pro-active action on money laundering matters. The Secretary could either issue non-binding informational advisories to U.S. financial institutions, or take the extreme approach of invoking sweeping, and often disruptive, economic sanctions. Because both approaches were impractical - and largely ineffective - neither was invoked with any regularity.
To address this challenge, the Clinton Administration's Treasury and I crafted legislation in the 106th Congress to grant the Secretary new, more practical authorities. The House Banking Committee passed this bill, HR 3886, on a vote of 31 to 1, but it was never allowed to advance to full House consideration. In March 2001, Senator Kerry and I both introduced a similar bill to accomplish this in the 107th Congress. Our legislation created a range of new measures the Secretary could employ with precision against specific money laundering threats.
After the tragic events of September 11th, the need for stronger, more effective measures became quite clear. As a result of the PATRIOT Act, which includes our legislation, the Treasury Secretary's new, more flexible anti-money laundering powers will enable law enforcement to tackle with much more effectiveness abuses of our financial system by terrorists and criminals.
Under the PATRIOT Act, the Secretary can identify a region, a particular institution, and even a foreign jurisdiction as an area of primary money laundering concern and impose a series of special measures. The Secretary can prohibit certain transactions with certain countries or regions, or require the collection of certain information. This information could be enormously useful in tracking the financial dealings of terrorists, or in blocking the opening of accounts in the U.S. by banks and other financial institutions from such jurisdictions.
To date, the Administration has not used the new law, to my knowledge, to declare any parts of the world, through which terrorists funneled their cash, as areas of primary money laundering concern. To be sure, the Administration has touted its success in seizing the U.S. assets of terrorist organizations, which we are told now amount to nearly $80 million. But, it is clear that the more we learn about terrorists' financial networks, and the various countries through which their money passed, the more compelling it becomes for the new measures to be invoked. But according to the Treasury Department, the Secretary has not yet imposed a single special measure against these jurisdictions. Not one.
In terms of adopting a special measure under the PATRIOT Act, it seems to me that many candidates exist. Reports have surfaced that countries such as Saudi Arabia, Sudan, Egypt, and others have served as conduits and sources for terrorist funds. And we must not forget that countries such as Lebanon, Russia, Israel, Guatemala, the Philippines, Hungary, and others have been named by the Financial Action Task Force as non-cooperative jurisdictions in the fight against money laundering. The United Arab Emirates, which has been linked to al Qaeda funding, recently adopted anti-money laundering laws, but it remains to be seen whether it will be enforced effectively. Clearly, whether it is to fight terrorism, organized crime, or drug trafficking, there are many opportunities for the Treasury to invoke even the mildest measures under the PATRIOT Act.
I am sensitive to the need to respect U.S. diplomatic prerogatives. I also understand that the Bush Administration may be reluctant to threaten special sanctions against a country that is cooperating with our current efforts to disrupt the financing of al Qaeda and our investigation of the September 11th attacks. However, if countries that are linked to terrorist funding do not adopt permanent reforms now to strengthen their anti-money laundering regimes, and vigorously enforce these laws, then these countries will once again become the terrorists' portal into the global financial system. By failing to impose, or even to threaten to impose, special measures, I fear that the Bush Administration is missing an opportunity to seek permanent changes in these countries.
Regulations Under the PATRIOT Act
While the special measure provisions became fully operative on October 26, 2001, if the United States government is to fully utilize those provisions, the Treasury must undertake rulemaking in two areas. Section 311 of the PATRIOT Act requires the Treasury Secretary to issue two sets of regulations. The first set, defining "beneficial ownership", is needed to implement record keeping requirements that are designed to help law enforcement ferret out who owns and controls the funds transferred to U.S. banks and other U.S. financial institutions from jurisdictions with weak financial controls.
The other set of regulations is intended to define the term "correspondent account" for non-banks. Without this definition, any special measure ordered by the Treasury Secretary would have gaping holes. It would almost of necessity apply only to banks, and not other financial institutions, such as broker/dealers and money transmitters. These definitions are also needed to fully implement another important section of the PATRIOT Act, namely, the heightened due diligence requirements of section 312.
I understand that Treasury has been engaged in informal discussions with industry about the regulations. Congress intended that Treasury would seek the input of industry in crafting these regulations. However, that process should be a public and transparent process. In this way the Congress and the people can judge whether the regulations were crafted without inappropriate accommodations to industry.
I understand that the Treasury Department has been given many additional responsibilities under the new legislation, and I appreciate the work that has been done to date. However, if the Bush Administration is serious about implementing these new anti-money laundering provisions, it should proceed as soon as possible to complete the regulatory work in an open and transparent process.
Prior to September 11th, the Bush Administration showed little interest in the enactment of new anti-money laundering laws. In fact, to the contrary, in August 2001 the Treasury and Justice Departments completed a National Money Laundering Strategy in August 2001 (which was actually release after September 11th) that was grossly deficient. The Congress and the American people need assurances from the Administration that it is committed to fully implementing the new anti-money laundering laws, and that its support for these laws will not fade after the current crisis has ended.
The FBI has identified Internet gambling as a very serious money laundering threat. We must address this threat through legislation that clarifies that the Federal Wire Act already prohibits Internet gambling and adds a new prohibition against the use of credit cards and other payment methods to pay for wagers over the Internet. Congress must adopt a strong anti-Internet gambling bill this year.
Voluntary Efforts Are No Substitute for Compliance
I have also become aware of what have been characterized as voluntary efforts regarding terrorist funding by some in the financial services industry to coordinate and share information with Federal law enforcement agencies. There is no question that financial institutions are the first line of defense against money launderers.
However, while I believe that these voluntary arrangements are laudable, and contribute to the overall fight against money laundering, I welcome these efforts with a certain amount of caution. The Federal government must ultimately be in charge of this effort, and there must be public accountability for the voluntary program, if we are to insure that is designed to further the Federal government's public policy interests.
Moreover, such voluntary efforts cannot serve as a substitute for compliance with the PATRIOT Act and other laws. The current arrangement cannot be a substitute for the law, which is why it is so vital for the success of this legislation that the Administration issue the PATRIOT Act regulations - and issue them now.
Looking to the Future
All of us have contributed in meaningful ways to the enactment of the PATRIOT
Act this past year, and all of us are hopeful that, by destroying terrorism's
international financial networks, it will help the American people regain the
confidence and sense of security that is the hallmark of our great nation. Chairman
Sarbanes, I commend your leadership in holding this hearing, and appreciate the
opportunity to present my views on these very important matters. Thank you.
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