SPEAKERS CONTENTS INSERTS
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OVERSIGHT OF THE
DEPARTMENT OF TREASURY
Wednesday, June 16, 2004
U.S. House of Representatives,
Subcommittee on Oversight and Investigation,
Committee on Financial Services,
The subcommittee met, pursuant to call, at 2:07 p.m., in Room 2128, Rayburn House Office Building, Hon. Sue Kelly [chairwoman of the subcommittee] presiding.
Present: Representatives Kelly, Paul, Garrett, Oxley (ex officio), Gutierrez and Inslee. Also present were Representatives Royce and Sanders.
Chairwoman KELLY. [Presiding.] This hearing of the Subcommittee on Oversight and Investigations will come to order.
The war against terrorism is the single most important challenge facing the federal government today. Our task is made difficult by the insidious methods of our enemies and also by the bureaucratic inertia inherent in a fundamental reorganization of our government's priorities.
This hearing today is important because we will examine the specific difficulties faced by the Treasury Department in adapting to its new critical purpose in battling the illicit funding networks upon which our enemies rely.
It is evident that the fight against terror financing must go well beyond ensuring compliance with the Bank Secrecy Act, but this law is at the foundation of our efforts. When that law is flouted as egregiously as it was in the Riggs case, or as consistently as the inspector general suggests, then it is our duty to respond so that such failures are bad memories instead of perpetually looming possibilities. We cannot afford to ignore any problems in the system charged with the enforcement of our anti-money-laundering law.
Page 2 PREV PAGE TOP OF DOC I believe the fragmented nature of our anti-money-laundering system is structurally not capable of keeping pace with the demands of the war on terror. I believe that we ought to establish a single office dedicated to ensuring the compliance with the Bank Secrecy Act.
To those who would resist this proposal, I would hope that there is at least recognition of the need to establish a vigilant watch tower above the vast expanse of bureaucracies that are currently responsible for the Bank Secrecy Act. There must be a unifying center to our anti-money-laundering efforts.
Mr. Fox's recent proposals to strengthen FinCEN's role in BSA compliance, including the establishment of an examination program office, are important steps in that direction. But if we are going to fully establish the integrated, accountable oversight regime we clearly need, FinCEN should be equipped not just for observation, but also for action.
FinCEN needs the compliance examination capabilities it currently lacks. Its efforts should be reinforced with criminal investigative powers that are largely absent from our anti-money-laundering system. Through FinCEN, although it has been given a statutory responsibility for the Bank Secrecy Act, it has few resources, and it is easily marginalized by the frontline regulators.
If you consider the 6-year lag between when the OCC first noticed problems at Riggs and when FinCEN was made aware of them, that is a tremendous lag. A clean money compliance force at FinCEN could unify our anti-money-laundering responsibilities and even broaden our efforts by examining financial sectors that currently have no regulator.
With the ability to deploy its own examiners to trouble spots and literally look over the shoulder of the regulators, FinCEN could ensure a strong focus on high-risk transactions, such as those that occurred under our own nose at Riggs with their Saudi clientele.
And as we read reports about the Saudi Embassy's continuing search for a bank to replace Riggs, the establishment of these new powers could provide greater certainty to our hopes that the era of free-wheeling, unregulated Saudi cash infusions to Islamic militants in our own country are over.
Page 3 PREV PAGE TOP OF DOC On a related note, I hope that Treasury will give serious consideration to the proposal made yesterday by the Independent Task Force on Terrorist Financing. Among its recommendations were that Congress enact a Treasury-led certification regime on terrorist financing that will annually report to Congress the efforts of their other countries to combat terror funding and would impose sanctions on countries that failed to perform up to standard.
A system like this could provide a useful lever in securing better cooperation from recalcitrant governments such as the Saudis who have facilitated the flow of funding to terrorist organizations, despite their protests to the contrary.
This administration has done a remarkable job in getting the Saudis to enact the reforms that we have seen recently, but we must never forget that we are dealing with a government that has been a chief financial supporter of the fanaticism that led to the murder of more than 3,000 people on September 11th.
I am also very deeply concerned by the circumstances surrounding the UBS case, in which flagrant mismanagement of a U.S. currency depot overseas resulted in our currency being shipped to countries currently under U.S. sanctions. While the Fed was clearly the frontline regulator responsible for the failure, we need to examine ways to ensure that the Treasury Department sanctions are enforced and that the ECI program is implemented properly.
I am interested in learning more about how OFAC and the other Treasury assets might be better utilized in the future.
On a final note, I am very interested in how Treasury intends to handle the pending expiration of the Terrorism Risk Insurance Act. While TRIA was designed as a temporary bridge to the development of a functional private-sector terrorism insurance market, a recent study by the General Accounting Office concluded that there is not a sustainable marketplace for this coverage after the program expires.
In addition, the NAIC, representing 51 bipartisan state insurance commissioners, agrees that we must act this year to avoid the market disruptions that we are already beginning to see.
Page 4 PREV PAGE TOP OF DOC Given the state of the insurance marketplace and the continuing threat of terror, I believe it is in the best interest of the American people that we consider retaining a systematic approach in place to protect our country's economic security.
In fact, I recently sent a letter to Secretary Snow, signed by 183 of my colleagues, urging the Treasury Department to extend the make-available provision which expires at the end of this fiscal year and to support the overall continuation of this critical program.
There is broad, bipartisan support in this committee and in the House for doing so, and I hope to learn more from Treasury as to how they intend to handle this matter.
I thank you, and I look forward to today's testimony.
I want to just simply say that, without objection, all members' opening statements will be made part of the record.
And I turn to you, Mr. Gutierrez.
[The prepared statement of Hon. Sue W. Kelly can be found on page 44 in the appendix.]
Mr. GUTIERREZ. Thank you.
Good afternoon, and thank you very much, Chairwoman Kelly, for calling this hearing. We have been having a series of these oversight hearings, and this one about the Department of Treasury is very important. There are a number of areas of concern which I hope we can address today.
As you know, I have been very troubled by the actions of the OCC. I believe that their preemption rules issued earlier this year represent an unprecedented expansion of federal preemption authority without appropriate congressional authorization.
In February, the members of our full committee adopted these concerns as part of the committee's budget views and estimates, along with the fact that the OCC's budget did not increase to reflect its significant absorption of states' responsibilities.
Page 5 PREV PAGE TOP OF DOC This meant that it would either be inadequately funded to fulfill its missionensuring the safety and soundness of national banks and protecting the deposit insurance systemand its congressionally mandated functions, or that it would be giving short shrift to these new consumer protection duties it was taking over from the States.
None of these alternatives is acceptable.
Since that time, it has become clear that the OCC has not even been living up to its primary responsibility, which makes it even more illogical to give them additional responsibilities which are currently being ably performed by the States, especially since almost every instance where the OCC eventually took action against an institutionand I do mean eventually, because they have a long history of dragging their feet in a completely unacceptable wayin any case, in almost every instance where they eventually took action against an institution, the initial problem was often brought to their attention by either the FBI or an attorney general or even the bank itself.
I am very glad that the inspector general is here today. And I am particularly interested in the report issued on May 28th regarding material loss reviews of failed institutions. I am disturbed by the OCC's significant supervisory weaknesses identified in that report, and I ask that it be made part of the record.
[The following information can be found on page 128 in the appendix.]
I trust that the I.G.'s office will also be conducting a thorough investigation of the Riggs matter so that we can determine why the OCC failed to discover wrongdoing, failed to act when the FBI and the press alerted them to the problem, and why the OCC failed to disclose material information to Congress when it testified on the matter before this subcommittee and the Senate.
I believe the OCC has proven time and time again that it needs more direct supervision from the I.G.'s office, Treasury and Congress.
Page 6 PREV PAGE TOP OF DOC To that end, I strongly support your efforts, Madam Chair, to crackdown on criminal activity in our financial system. And I cannot imagine why the OCC would not welcome the assistance, since they are clearly not excelling in this area.
But that is not enough. Not only does the OCC need additional assistance in the form of the I.G. and the State attorneys general and state banking supervisors enforcing against banks, but the OCC clearly needs stronger oversight and accountability from both Treasury and Congress.
Therefore I also intend to introduce legislation to make the OCC an appropriated agency so they can be more accountable to Congress for their actions. I hope my colleagues will support me in this effort.
Regarding other issues, I would like to hear about the investigation into the use of Treasury staff to analyze the tax-cut analysis and how that rhetoric ended up on the RNC Web page along with Secretary Snow's investment.
I will ask questions about these and other issues later in the hearing. And I yield back the balance of my time and thank the Chairwoman once again for calling this hearing. I am looking forward to the testimony of the witnesses.
Chairwoman KELLY. Thank you very much, Mr. Gutierrez.
Mr. Oxley, our Chairman?
Mr. OXLEY. Thank you, Chairwoman Kelly, for convening today's oversight hearing to review functions and activities of the Department of the Treasury, with Deputy Secretary Samuel Bodman; in particular, its efforts to deal with money laundering and terrorist financing.
Mr. Bodman, welcome to the committee. It is good to have you with us today, particularly on the issue of terrorism financing.
This subject continues to be an urgent one for all of us. Those who are current in their newspaper reading saw the recent news of a federal grand jury indictment of Nuradin M. Abdi, most recently of Columbus, Ohio.
Page 7 PREV PAGE TOP OF DOC This four-count indictment in the plot to attack a central Ohio shopping mall should remind us all of the seriousness of our work on these issues. Clearly, Mr. Abdi was being funded somehow. I doubt if he was working a 9-5 job.
And I would remind everybody that we are working to protect innocent Americans from murder. This mission will continue to require our complete dedication. Clearly, if terrorists can target Columbus, Ohio, they can target anyplace in our country.
Additionally today, I hope we will discuss recent and current activities of the Department, as well as talk about the status of the regulated financial sectors.
Clearly, we could spend endless hours reviewing issues within Treasury's charter, considering the breadth of Treasury's mission. With the focus on the jurisdiction of this committee, however, I hope you can share your thoughts on at least a few of these issues.
I look forward to your comments on the new Office of Terrorism and Financial Intelligence, as well as government-sponsored enterprises, the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
In addition to the Deputy Secretary, we have with us today a panel of four distinguished public officials to talk about the pressing need for the effective collection, accurate integration and prompt analysis of information related to the movement of funds related to terrorist financing. So let me offer my thanks to our distinguished witnesses for their time and effort to appear and to answer our questions.
Again, my thanks to Chairwoman Kelly for her leadership on these important issues of oversight. And I yield back.
[The prepared statement of Hon. Michael G. Oxley can be found on page 46 in the appendix.]
Chairwoman KELLY. Thank you very much, Mr. Chairman.
Page 8 PREV PAGE TOP OF DOC Mr. INSLEE. Thank you.
I just want to thank the Chair for being so diligent in giving this opportunity. It really is something that is very important.
Just a brief comment: I am looking forward to testimony about our current status, particularly the Saudi Arabia situation in regard to those families involved in the hijackings of September 11th and their exit from this country and our follow-up in that regard. So I look forward to that testimony.
Chairwoman KELLY. Thank you.
I want to go back to a bit of business here. So without objection, I ask that the I.G. report to which Gutierrez referred in his opening statement be placed in the record.
Without objection, so ordered.
Mr. GUTIERREZ. I simply ask unanimous consent that the gentlemen from Vermont, Mr. Sanders, should he arrive at the subcommittee, be allowed to be part of the committee proceedings.
Chairwoman KELLY. So moved.
Mr. Garrett, have you an opening statement?
Then let us proceed.
On our first panel, the subcommittee is pleased to have with us today the Deputy Secretary of the Treasury, Dr. Samuel Bodman.
President George W. Bush nominated Samuel Wright Bodman to be the Deputy Secretary of the Treasury on December 9, 2003, and the U.S. Senate confirmed him on February 12, 2004. Dr. Bodman previously served as the Deputy Secretary of the Department of Commerce beginning in 2001. A financier and executive by trade, with three decades of experience in the private sector, Dr. Bodman manages the day-to-day operations of the Cabinet agency.
Page 9 PREV PAGE TOP OF DOC Without objection, sir, your written statement will be made part of the record. You will be recognized for a five-minute summary of your testimony. Thank you so much for appearing here today.
STATEMENT OF HON. SAMUEL W. BODMAN, DEPUTY SECRETARY, DEPARTMENT OF TREASURY
Mr. BODMAN. Madam Chairman, Congressman Gutierrez and members of the committee, thank you for the opportunity to be here.
I have had the pleasure of meeting with Congresswoman Kelly as well as Chairman Oxley over the last couple of weeks, and I know that they, like I, view the Treasury Department and this committee as partners in the critical effort to safeguard our nation's financial system.
As requested, I have submitted testimony that addresses a number of issues that I was asked to comment on. I would be pleased to answer questions about those.
I would like to use my time in the oral testimony to touch on two major issues of interest to our Department: first, the Department's ongoing efforts to advance our campaign against terrorist financing; and secondly, and related, the Department's role in ensuring compliance with and enforcement of the Bank Secrecy Act.
The Treasury Department has broad authorities. It has relationships and expertise in the financial area. That is really the core of what we do.
As importantly, we have a cadre of dedicated and very diligent individuals who work very hard every day, along with countless others in the U.S. government, to fight the financial war on terror and to protect the integrity of our financial system.
We have very real and concrete successes that I have seen firsthand, having arrived just four months ago.
But as the recent attacks around the world demonstrate, our enemies are numerous, they are resourceful and they are continually adapting to new circumstances. We must do the same. We must use every tool at our disposal, including those in the financial realm.
Page 10 PREV PAGE TOP OF DOC The challenges we face require unwavering political will, active and continuous leadership by senior policymakers and sustained commitments from all of us.
We are in this fight for the long term and the Treasury Department must be organized to reflect that reality.
That is why the administration has collaborated with Congress to develop a new structure in Treasury, a high-profile office led by an undersecretaryit would be one of only three that would be in the Department; there are two nowtogether with two assistant secretaries.
This office, the Office of Terrorism and Financial Intelligence, or TFI, as we call it, will bring together Treasury's intelligence, regulatory, law enforcement, sanctions and policy functions to cover this area.
The office has two major components. One assistant secretary will lead the Office of Terrorist Financing. Building on efforts already under way, this arm will function as our policy and outreach apparatus on the issues of terrorist financing, money laundering, financial crime and sanctions. It will continue to develop and help implement policies and regulations in support of the Bank Secrecy Act and the PATRIOT Act.
In the international arena, the office will advance international standards, conduct assessments, administer technical assistance and apply protective measures against high-risk jurisdictions.
The second assistant secretary will lead the Office of Intelligence and Analysis, or OIA. This office will ensure that Treasury properly analyzes relevant information to create actionable financial intelligence that the government can use effectively.
Meeting this essential mission will necessarily require increased coordination with other elements of the government, including law enforcement and regulatory agencies.
Page 11 PREV PAGE TOP OF DOC A word or two about resources: Secretary Snow has made a commitment to fund the personnel and related start-up costs for the TFI operation for the current and next fiscal year without requesting new money. And we will honor that commitment by reprioritizing existing funds.
At the same time, we will need to invest in substantial information technology and infrastructure systems to make TFI into a world-class organization, particularly on the intel side.
We are currently looking at just how much that will cost and what funding resources are available to us, such as Treasury's Asset Forfeiture Fund, in order to implement the systems for this new office as soon as possible.
You will hear more about the Department's activities in the TFI area from FinCEN Director Fox, OFAC Director Newcomb and IRS-CI Chief Nancy Jardini during the next panel.
Turning to the second topic, the related topic, the Department's efforts to ensure compliance with the BSA: The purpose of BSA, enacted in 1970, is to promote transparency and accountability in the U.S. financial system in order to preserve the integrity of that system and to protect it from criminal abuse.
Most recently, the PATRIOT Act strengthened and expanded BSA regulations to include enhanced due diligence and customer identification requirements, expanded information-sharing authorities and new industries subject to BSA obligations.
While Congress has placed the responsibility for complying with the requirements of BSA on the private sector, the businesses that fall under this framework, the Treasury is responsible for ensuring that the act is effectively implemented and administered. In other words, banks and other institutions are required by law to comply. We are charged with enforcing that compliance.
The Secretary has delegated responsibility for enforcement of this system to FinCEN. This includes the authority to pursue civil enforcement actions and monetary penalties.
Page 12 PREV PAGE TOP OF DOC However, in order for FinCEN to have the information necessary to assess compliance and to levy penalties, we rely on the regulatory oversight of eight different federal agencies to which the Secretary has delegated authority to examine institutions subject to the BSA.
Several of the eight, like the IRS, the OCC and OTS, are part of the Treasury Department, albeit with varying degrees of statutory oversight by the Secretary.
Others, like the FCC and the FDIC are fully independent agencies with no official relationship to Treasury. Therefore, the Secretary has no direct authority over them.
I say this not to imply a desire on the part of Treasury to exercise control over other agencies, but in order to make clear the operational realities of our current arrangement.
There are substantial benefits from this approach. This approach capitalizes on existing structures and on the unique expertise and examination capabilities of the regulatory agencies that already exist and are most familiar with specific financial industries.
However, there are also potentially serious risks associated with this kind of decentralized system, particularly in terms of transparency, accountability and timeliness. In other words, this type of system requires intense management.
In light of these challenges, and given recent events, the Secretary and I are directing a fresh look at the status of BSA compliance and enforcement across the U.S. financial system.
We are engaged in discussions with various regulatory agencies, both those within and outside the Treasury. We are discussing with them ways to monitor and evaluate their progress and their proficiency. We are considering methods to develop and enhance regular reporting and information-sharing.
We are working on matters related to examination policies and procedures; aggregate results of examinations across each of the regulated financial industries; deficiency trends in BSA and OFAC-related compliance; and enforcement actions contemplated in response to those deficiencies.
Page 13 PREV PAGE TOP OF DOC There are other challenges related to BSA implementation, and we are addressing those as well.
For example, the PATRIOT Act extended BSA reporting beyond the traditional banking system. There is much work to be done to be fully confident that those non-banking financial institutions are fulfilling their responsibilities.
FinCEN and the IRS have taken significant steps, for instance, in registering money service businesses. But the magnitude of the task of ensuring compliance in this area is enormous.
I would just reiterate that effective enforcement of BSA requires intense management and close coordination and communication among the regulatory agencies. Just today, for example, the bank regulators and FinCEN jointly issued guidance on accepting accounts from foreign governments and embassies.
It has long been the policy of the United States government that persons residing or working in this country should have access to U.S. banking services. And we also have had the policy that financial institutions must comply with the Bank Secrecy Act.
These policies, in our view, are not in conflict. We believe that financial institutions can provide appropriate banking services while also satisfying the BSA.
Before I conclude, let me say that the Department's acting inspector general, Dennis Schindel, and his team continue to examine a wide range of issues related to BSA compliance. I appreciate their contributions to the Department's mission, and I am very pleased that Mr. Schindel will participate in the next panel.
Despite the challenges that exist, I do think that as a general matter the government and private sector have done a good job of developing and implementing the regulatory changes to the BSA following the passage of the PATRIOT Act. I would be happy to discuss these issues in greater detail.
Page 14 PREV PAGE TOP OF DOC I thank you for the opportunity to be here, and I hope that this will be the start, Madam Chairman, of an ongoing dialogue between our Department and this committee.
[The prepared statement of Hon. Samuel W. Bodman can be found on page 47 in the appendix.]
Chairwoman KELLY. Thank you very much, Dr. Bodman.
Yesterday, the Council on Foreign Relations Independent Task Force on Terrorist Financing released a report which recommended that Congress enact a Treasury-led certification process to put more pressure on foreign nations to combat the financing of terrorist organizations.
Do you agree that a certification process for foreign countries would help ensure a greater cooperation from our counterparts?
Mr. BODMAN. First, let me say that, looking at the report that was delivered as a whole, in general I am quite supportive of what the council had to say. They made observations, suggestions, particularly with respect to Saudi Arabia and the progress that the Saudis have made, on the one hand, and on the other hand, had made observations about what improvements should be made.
With respect to that particular recommendation, I would not want to respond at this particular point in time, Madam Chairman, until I had had an opportunity to study it or think it through.
I think that the general approach that I have always favored is one of trying to utilize resources that are already there and utilize the power of persuasion, as opposed to threats and as opposed to sanctions, and that those should only be used as a last resort.
And so it would be my observation that that would be an obstacle that would have to be overcome, at least in my mind, in order to reach support for that proposition.
Page 15 PREV PAGE TOP OF DOC Chairwoman KELLY. Thank you.
As you know, the OCC has reportedly been obstructing the Treasury I.G.'s ability to investigate national banks accused of criminal activities.
I am deeply concerned that the OCC previously misled this committee, whether intentionally or accidentally, in answering a question I asked about what happened to the examiners in charge of investigating Riggs and where they are now.
The person who testified failed to admit the troubling fact that the chief examiner in charge of Riggs from 1998 to 2002 is now working at Riggs as the vice president and chief risk officer.
I am especially disappointed that the OCC would disrupt the inspector general's efforts to review and strengthen antiterrorist financing efforts.
What is the Treasury Department doing to address this dispute?
And actually, I am going to ask you a follow-up right now, so you know it is coming. There seems to be a vacuum with regard to criminal investigative powers at the Treasury. And the OCC seems intent on making sure no one fills it. Couldn't the OCC attempt to thwart the I.G.'s efforts, undermine our total efforts against terror financing?
So I have asked you two questions: What are you doing to address it? And do you think that what the OCC is doing is in fact going to help undermine our efforts against terrorist financing?
Mr. BODMAN. Let me take the questions in the order that you asked them, Madam Chairman.
The first question, if I may, I will split that in half as well, because I believe there are two issues.
One, there is in fact a difference of opinion between the OCC and the inspector general. The acting inspector general is here, and he can speak to that when he is before you. But, as I understand it, there is a difference of opinion over the authority that does or does not exist at the I.G. to investigate alleged criminal behavior on the part of specific bankers.
Page 16 PREV PAGE TOP OF DOC The OCC, for very good reasons, is very jealous, guards very jealously its independence. It has received that independence from Congress in a bill passed by Congress, signed by the President some years ago. And it is that in my mind, raises the question from time to time about what specific authorities exist for the Secretary or for others who work for the Secretary in overseeing the affairs of the bureaus that report to the Treasury under his general oversight. So that is the issue there.
In terms of the specific question that came up with respect to a Florida bank, and that is where the controversy arose. And at the present time, the Office of the General Counsel in Treasury is working to adjudicate that matter and to make a determination as to where it stands.
I will tell you, from having met with our general counsel, that this matter is uncertain, has a good deal of uncertainty about it. And that is why it is taking them some time to work out the various matters related to it. We want to get it right. And it is something that they are working very hard on.
Your second question relates to your observation that there was a vacuum with respect to the criminal investigation activities within Treasury.
I would respectfully disagree with that. The Treasury has had, when you look at the Riggs situation and you look at other problems, UBS being another case in point, has had some failings with respect to the system as it is now practiced.
It is my view, that even with the current legislative framework that we have that there are opportunities to substantially improve the management of the system under the current authorities that we have, such that we, I believe, can have a much more effective system.
As we go about doing this in the weeks and months ahead, I would expect to maintain contact with this committee and to report back to this committee as to how we are doing and what the issues are and if there is anything that we believe needs to be done that would more effectively further this.
Page 17 PREV PAGE TOP OF DOC This is a very high priority, it is a very high priority. It is not my only priority, I have to tell you, but it is a very high priority on the list of things that the Secretary gave me to do when I took this job starting four months ago.
Chairwoman KELLY. I believe that when you were here before, you testified that the IRS criminal investigation is the only entity within Treasury with a BSA criminal investigative authority.
I doubt very much that Riggs could have continued to flout the BSA last year with the OCC examiners on site if there was any real threat regarding criminal enforcement.
So I am not sure, but I think maybe it is a real mistake for them, the OCC, to be fighting a stronger criminal enforcement element in the Treasury.
Do you think this is going to impede the I.G.'s ability to investigate Riggs?
Mr. BODMAN. It strikes me that the issues related to Riggs relate to something that would certainly be fair game for the I.G. And Mr. Fox will speak to that. I hope that after we get FinCEN reorganized and itself focused with respect to its responsibilities in this area, that it would be fair game for them on an ongoing basis.
So I do not think the difference of opinion that exists vis-a-vis the Florida situation, I would not think that it would impede the I.G.'s ability to investigate the situation at Riggs.
I can tell you that we have had, following the publicity involving Riggs, following the meetings, frankly, that I had with you, Madam Chairman, and with Chairman Oxley over the last couple of weeks, we have had a series of meetings that have involved the Secretary himself, as well as myself and the members of the various bureaus that are involved in this, including FinCEN, including OFAC, including OCC, including OTS, about the need for there to be in place a system of evaluation, of monitoring, how good a job is being done by OCC, OTS, as well as these other agencies.
Page 18 PREV PAGE TOP OF DOC And that needs to be done on behalf of the Secretary by FinCEN. And they need to get themselves organized to do that, to think that through. Mr. Fox, I think, will be in a position to speak to that.
And because he, through this new TFI organizationand hopefully we get Mr. Levey confirmed and get him in place, which will bring, frankly, a great relief to me to have someone who can work on these issues full-time, that once we get that in place, he will be reporting up through Mr. Levey to me, and that I can then ask the questions that you are asking of me, I can put to the people who are doing the work full-time.
And when the Secretary asks me, which he has done, ''Is Riggs an outlier, is Riggs a singularity,'' and my answer to him, Madam, is that I believe it is. I believe that, in general, the work that our regulators are doing with respect in the financial area is very good and it is very strong, but I do not have proof. I do not have a system in place, that I am used to from my prior experience, in my prior business life, such that I have a group of individuals that work for me that can evaluate, monitor a new program.
And so that is what we need, that is what the Secretary needs, and that is what we are trying to create.
Chairwoman KELLY. I had hoped that if you are putting FinCEN in a place of responsibility of reporting to the Secretary, that you would give them both civil and criminal ability. I would think that they would need a complete panoply at their fingertips, and I hope that that will be considered.
Unfortunately, sir, we have been called for a group of five votes.
Oh, Mr. Chairman?
Mr. OXLEY. Thank you. I thank the Chairwoman. If you could just indulge me for a couple of minutes for some questions. I cannot return. And I did want to ask Mr. Bodman some questions.
Page 19 PREV PAGE TOP OF DOC Chairwoman KELLY. By all means.
Mr. OXLEY. Thank you.
Mr. Bodman, I have some questions on the BSA. How much money on an annual basis does IRS spend inputting, maintaining and warehousing BSA data?
Mr. BODMAN. I do not happen to know that offhand, Mr. Oxley. But I would be very pleased to get you the answer.
Mr. OXLEY. Thank you.
The Canada and Australia and other newer financial intelligence units have there own computer systems up and running because they think that is the most efficient method. Shouldn't FinCEN own and operate its own computers?
Mr. BODMAN. Right now, the information on BSA, as I am sure you are aware, sir, is collected in the IRS facility in Detroit. I understand that there have been differences of view within Treasury. And, here again, my approach has been to try to get IRS and FinCEN together.
The collection of information, which numbers hundreds of thousands of bits of information, and the auditing and certification of it, is something that is done, can be done, should be done, by a group of individuals. It can be done by the IRS; I believe it can be done effectively.
But it cannot be done without oversight in the same way that FinCEN needs to have oversight and access to the Secretary to get changes made if he or the organization is not satisfied with the quality of the work being done, that, therefore, he has access and that the place can be managed.
The problem, sir, that we have is that Treasury has not had a deputy in a year and a half, and there has not been a person who has been able to take the responsibility to see to it that issues of this sort are dealt with.
Page 20 PREV PAGE TOP OF DOC It may be that you are correct. It may be that FinCEN has to start from scratch and to create its own system and have its own clerical group to collect the information, do the data entry and so forth.
I would hope, sir, that we could avoid that and make use of resources that we already have.
Mr. OXLEY. Well, I appreciate your candor on that, although I do say that there is some evidence that other countries are quite successful using that method of their own computer and information base. And obviously we will pursue this. And that is obviously one of the reasons why this series of oversight hearings that Ms. Kelly is so well doing is part of this process.
I thank you and yield back.
Mr. BODMAN. I appreciate your comments, sir. And we will certainly look into what those countries are doing. I, frankly, was unaware of it, and I will find out.
Chairwoman KELLY. Thank you very much, Mr. Chairman.
We are going to have to recess. We will, with luck, be back here somewhere in the vicinity of 3:15, 3:20. It depends on how rapidly these votes go. But the committee will stand in recess until such time as we are able to reassemble.
Chairwoman KELLY. Another bit of business we are going to do here. I ask unanimous consent that the gentleman from California, Mr. Royce, be allowed to participate in today's hearing and be able to revise and extend his remarks. Without objection, so ordered.
I am sorry, Dr. Bodman, that we had to keep you here for this, but we will try to go fast. This subcommittee has looked closely at the concept of streamlining our efforts, which was also recommended by David Aufhauser when he was the general counsel at the Treasury.
Page 21 PREV PAGE TOP OF DOC In light of the recent failures at Riggs and UBS, wouldn't it be more efficient and effective if there were a centralized body in Treasury that had compliance and audit officers who could oversee the banking regulators and other targeted areas, as well as broaden our BSA compliance efforts to new areas that do not have financial regulators?
You kind of addressed that a bit in your testimony. I wonder if you would want to enlarge on that.
Mr. BODMAN. With all due respect to Mr. Aufhauser, whom I know and have great regard for, I would respectfully disagree, at least at this point in my learning curve at the Treasury.
It is my view that whenever government finds a problemand to be sure, you have certainly defined a problem here, Madam Chairman, there is no doubt about thatthere is a tendency to create a group to solve the problem. And that, of course, tends to lead to an ever-increasing size of the government.
I would believe that with a more intensive management regime, and particularly focusing on the effect I believe that FinCEN can haveyou will get a chance to talk to Mr. Fox and hear what it is he has in mind subsequentlybut I think you will find that there is plenty of room for improvement, plenty of opportunity to create the kind of environment that would make you proud as a congresswoman to have been, at this point in time, overseeing what we are doing.
So I would like to have a go at it and to see if we cannot use all of these resources. We have all of these people who have devoted their lives and they have great expertise and know these institutions. And I would like to try to make use of them.
And by training them and training their staffs and expanding and making sure that we have a way of verifying that OCC or OTS, whoever it is, is doing what it is they are supposed to be doing, that has, frankly been the missing link, is having an outside observer, outside evaluator, outside monitor of what is going on.
Page 22 PREV PAGE TOP OF DOC So that is what I would prefer to do. At least, that is one man's view.
Chairwoman KELLY. That takes me back to some of your prior testimony when you were here before, because at that time when I asked a question of you, you indicated that some of your concern was, at that time, the fact that the OCC and the OTS are not funded by the regulated community, but instead are funded by outside sources, that that might weaken the Treasury Department's sway over their bureaus in their own department.
I am just thinking that if we had a compliance force that is within Treasury that has a greater oversight on these entities, that it might strengthen Treasury's ability to ensure that they are performing up to standard.
Certainly, Mr. Gutierrez picked that up. And he is obviously going to offer legislation to alter the structure so that these two come under the oversight surveillance of Treasury.
Basically, I think what it is we see, at least Congress, my committee, seems to see that we have a patchwork enforcement program, and there is no true center of gravity here.
So if we leave the regulators to their own devices, as we have seen, can be kind of problematic, because clearly they have not seen anti-money-laundering as being one of their main responsibilities and at least as important as their safety and soundness responsibilities. And now it is. And now we have to face that and focus on that.
So I am just going to go back to the original question: Don't you think a compliance force in Treasury that has a greater oversight over all of the eight entities, wouldn't that strengthen Treasury's ability to ensure that they are performing up to the standards that they, themselves, are requiring?
Mr. BODMAN. Let me start with the areas where I agree with you, ma'am.
Page 23 PREV PAGE TOP OF DOC One, if you leave anybody to function on their own, without outside supervision, without another pair of eyes looking at what they are doing, any institution, you are asking for trouble. Even corporate executives have found ways to create lots of trouble. So, therefore, you and I are in agreement on that.
The question is: Is there a way to take what we have now and to make it work? That is really what it gets down to. And I would agree with you that what we have been doing heretofore has been wanting. We have problems. I mentioned before that I cannot tell the Secretary, if asked, that Riggs is an outlier, or UBS is an outlier, because we do not have a mechanism for ascertaining that.
Now, when you and I talked before, and when I first met you, we chatted, and I did allude to the fact that OCC and OTS have specifically written legislation that precludes the Secretary from entering into the discussions on any matter that comes before those bodies.
It then gets down to a definition of what the word ''matter'' means. That is almost a direct quote out of the FIRA, the Financial Institution Restoration Act. And it is therefore a question of how that act links with other kinds of legislation that govern this area.
I also mentioned, you were quite right, your memory is quite accurate, that both OTS and OCC have means of financing themselves outside the normal authorization, appropriation techniques and are funded by their licensees, their clientele, if you will.
And, therefore, both of those tend to loosen the authorities that the Secretary specifically, the Department generally, has over those institutions. And we try to respect that, because that is the law.
I think it is important, however, to note that we do have someI have learned something since I saw you, and I continue to learn on this, and that there may be in the delegation process under the BSA that the Secretary undertook vis-a-vis FinCEN that, where the Secretary, back in the 1970s when this delegation of responsibility was initially made, that in connection with that, there may well be the opportunity for FinCEN to perform exactly the function that you would like performed.
Page 24 PREV PAGE TOP OF DOC And that is what I would like to hold out as an opportunity, rather than go through the exercise of trying to either get new legislation or new regulation. It may be that what we have now can be made to work. And so that is what I meant; I would like to try that and then work with you and your committee and report back as to how we are doing. That is what my hope would be.
Chairwoman KELLY. Thank you.
I wanted to ask one quick question about the TRIA situation. Given that some insurance contracts are being written right now that extend beyond the expiration of TRIA, and Treasury is not going to be reporting to Congress on this until June of 2005, do you agree that with the GAO finding that there is a mismatch between the policy calendar and the commercial insurance cycle?
Mr. BODMAN. There is a mismatch. But I have been in the insurance business, at least part of my life in the insurance business, and I have great confidence in the industry to be able to price that.
As you know, we are hopefully in the final stages of the make available study and that that hopefully in the near term will be announced, the decision on that will be announced by the Secretary. And then we have a report due, as you mentioned, next June.
And I am not prepared to comment on extending this until we know more. And hopefully, as we go through this exercise of learning more and determining whether the GAO study is correct or notI am not in a position, at least as I sit here, to tell you that I agree or disagree with what the GAO had to say.
Chairwoman KELLY. I want to simply place in your mind the fact that I had a conversation with someone who came to me and said, ''I want to buy a $4 million building in a city. I cannot do that because the mortgage people will not give me my mortgage because I cannot get terrorism reinsurance extending through the life of the mortgage.''
Page 25 PREV PAGE TOP OF DOC I am hearing this problem from the real estate people, universities, hospitals, museums. It goes on and on and on. It is a very broad spectrum of our economy that is being affected by the lack of certainty with regard to what Treasury's going to do or what this government is going to do about TRIA.
It is extremely important, I believe, so that it does not move as a dislocator in this present economic structure, that we get some certainty with regard to TRIA. And I am sure you know where my personal prejudice is on that.
I thank you very much for answering my questions. And I turn to Mr. Gutierrez.
Mr. GUTIERREZ. Thank you.
Mr. Bodman, at a recent G-8 summit in Sea Island, Georgia, and Summit of the Americas earlier this year, the Bush administration made a commitment to reduce by half, by 50 percent, the cost of remittances to consumers by the year 2008. The communiques referred to efforts to promote competition, use financial literacy efforts and help people join the financial mainstream.
Can you please outline for the subcommittee the specific policies the administration will adopt to promote competition in the remittances industry and other specific efforts that will lead to reducing the cost by 50 percent by the year 2008?
Mr. BODMAN. Yes, sir, I would be pleased to talk to you about that.
First, we do have an Office of Financial Education that has been active, those of us in the Department have been active duringI believe I am correct that April was Financial Literacy Month. And we were all out on the road all over the country working on this matter.
There is also within the government a group of governmental agencies that are all involved in financial education. We formed them into a financial education advisory group. I have met with them. So we are very active in that area.
Page 26 PREV PAGE TOP OF DOC To be more specific in answering your question, the goal of reducing by half the cost of remittances comes, I believeI was not involved personally in setting the agenda at Sea Island, but I believe it must have come from the experiences of the Inter-American Development Bank, which has been specifically successful in reducing the cost of remittances from the United States to Latin America, including the Caribbean, with specific focus on Mexico.
And there it has been done largely by being very aggressive with the financial community and making it known to them that there was opportunity there. It turns out that the very high fees that were being charged in the early days, some 15 percent I think as an order of magnitude, were there because only one company was serving that market. And the IDB worked hard, others worked hard in order to develop that. And that has now come from 15 percent down to 7 percent.
They, within IDB and with respect to Latin America, have
Mr. GUTIERREZ. Well, let me just say, Mr. Bodman, maybe you could submit in writing for the committee the specific policies that the administration is going about specifically to reduce, what steps are going to be taken to achieve it by 2008. Because it still costs you $14.95 to send $100, Western Union or MoneyGram.
And we still do not know what the cost of the transaction truly is, since we do not know what the exchange rate is. You know, you and I, we get a great exchange rate when we are down vacationing somewhere in Latin America, because we use our card from our bank. Well, do not think that the other companies have the same exchange rate when you walk into an exchange company, a remittance company.
Mr. BODMAN. We will be happy to give you a specific policy
Mr. GUTIERREZ. Let me ask you
Mr. BODMAN. If I could just reiterate, sir, if I may. Forgive me for interrupting you, but I do want to reiterate that at least my understanding is that the cost of remittances from the United States to Latin America now averages 7 percent, not 15 percent.
Page 27 PREV PAGE TOP OF DOC It started out at 15 percent, your number is quite right, 14 percent, 15 percent. It is now 7 percent, on average.
Mr. GUTIERREZ. But when Western Union and MoneyGram got sued, it could be as high as 19 percent.
Mr. BODMAN. That could be.
Mr. GUTIERREZ. Well, it was. We checked it on a daily basis. It was easy to check. You send $100. You call the hotel in Mexico City. You see what the exchange rate at the hotel was. You see how many pesos arrived for your $100. Voila, 19 percent.
Mr. BODMAN. I understand, sir.
Mr. GUTIERREZ. And we have not done anything specifically, legislatively or from a matter of public policy to put the MoneyGrams and the Western Unions in check, other than obviously get trial lawyers, thank God they exist, to sue them in court and embarrass them to change their policies.
But anyway, let me ask you a specific question about an area where Treasury is going to have an opinion. Recently Ranking Member Frank and others asked banking regulators whether it is permissible under current regulations to provide CRA credit to regulated financial institutions for offering of low-cost remittances services.
The regulators agree that this is possible. Do you support this effort? And what will the Treasury Department do to encourage financial institutions to enter the remittances market so they can offer lower-cost alternatives to consumers?
I guess the point being that the cheapest way is to get rid of the middle people and to get people into financial institutions and give them what I imagine you and I havemaybe you do not have an ATM card, but I imagine you have one, I have one. And that is really the cheapest way to send money. So we get ATM card, send it down to our brothers, sisters, family members. And they go to a local financial institution, $1.25, $1.50, $2, they can pull out $200.
Page 28 PREV PAGE TOP OF DOC As you can see, we can get it down to 1 percent, and we can get the best exchange rate possible, which is the bank rate that you are getting from your bank.
What about using this as a CRA criteria, how do you see that, and giving them credit for that?
Mr. BODMAN. I cannot speak to the CRA issues, sir. I would be happy to examine that and give you some specific written response to your question.
I would reiterate that the way the IDB has been successful is to introduce competition for exactly the reasons that you mentioned. And they have been successful.
And it is not down to 1 percent, but their goal is to get it down to 3 percent. And they have done it strictly through, just as you suggested, sir, encouraging and making it known that one can make a lot of money
Mr. GUTIERREZ. Well, I will tell you what. Then maybe we would agree that if we could encouragesince the money flows from here to there and not vice versa, the billion dollars a month goes from the United States to Mexico, for example, and 30 percent of the gross national product of Guatemala and El Salvador, even sometimes more, comes from here to there.
Maybe if Treasury would adopt the position and encourage financial institutions and encourage the regulators and support us in this effort, so that when somebody is getting their CRA evaluation they get credit for having gone out to the community and offered measures that allow remittances cost to be lowered.
Suggestion. You can get back to us in writing on it.
Mr. BODMAN. Be happy to, sir.
Mr. GUTIERREZ. Thank you.
Last thing, just a small question. Maybe you will be able to answer this one.
Page 29 PREV PAGE TOP OF DOC Is it true that the internal Web at Treasury is still very vulnerable to hackers and that the documents in former Secretary O'Neill's book are still readily available to hackers through Treasury's Web?
We understand that there are a lot of problems in security over at Treasury on the Web site. Does the problem really exist? And, if it does, what are you doing to correct the security issues there?
Mr. BODMAN. There are problems with respect to the security of the IT systems at Treasury, sir. One of my first acts when I arrived four months ago was to order that the chief information officer of the Department report directly to me. Within a month, the person who was the CIO chose to resign and has left.
Yesterday morning was the first day of work of our new chief information officer, a man named Ira Hobbs. He has 22 years of experience, having worked at the Department of Agriculture. He is a very gifted man, very experienced man.
I met with him this morning with all of the bureau heads, as well as with the heads of all the Department offices. His first assignment is to deal with the questions related to the security of the Department's IT operation. It has my
Mr. GUTIERREZ. Is he doing it all on his own? Are you hiring outside people?
Mr. BODMAN. No, we have people in the Department who are capable of dealing with information security. We have a CIO office.
Mr. GUTIERREZ. I guess since the last guy left after getting the message to take care of this after three months and the new guy just started, I think you said yesterday or today
Mr. BODMAN. That is right.
Mr. GUTIERREZ.and it has not been fixed, maybe we should look externally to fix it.
Page 30 PREV PAGE TOP OF DOC Thanks a lot for the answer.
Mr. BODMAN. Thank you.
Chairwoman KELLY. Thank you, Mr. Gutierrez.
Dr. Bodman, I understand that you have a time limit in appearing before this committee. I wonder if you have the ability to allow me to at least let Mr. Royce and Mr. Garrett have at least a two-minute time period with which to ask questions. Is that going to be possible for you?
Mr. BODMAN. I do have a meeting back at the Department. But I would certainly want to entertain questions from both of the Representatives.
Chairwoman KELLY. Thank you very much.
Well, then I call on you, Mr. Garrett.
Mr. GARRETT. Thank you. Then I will get right to it, and I thank the Secretary here for being with us.
Based upon your testimony, one of the objectives you say of the Department, of course, is for those who are living and working in the United States to have access to financial services.
And on reading your testimony, you were saying that Treasury's job is to make sure that private-sector institutions fulfill their legal responsibilities. And it is noted that the BSA places the actual responsibility for compliance in several different areas on the private sector, one of which is for checking the identity of customers to financial services.
We have had a number of hearings on money laundering, terrorism, use of our financial services. And one of the things that came out of that is easy access to the banking, financial institutions was one of the critical weaknesses that the terrorists exploited back on September 11th, and that is one of the areas that is being focused on in the future.
I have a piece of legislation in right now, Financial Customer Verification Improvement Act, that goes to this point, because under the system that we have existing is that individuals are able to use documentation issued not by this government or any entity in this government, but by outside governments, most specifically consular cards.
Page 31 PREV PAGE TOP OF DOC And that would seem to fly in the face of everything that we are trying to do and the responsibilities of private institutions, as far as identifying the customers who are coming into those financial institutions.
What is the Department doing to try to address this problem? And why, up to this point in time, have we not limited the ability to use those cards?
Mr. BODMAN. It is the Department's view, sir, that those decisions are best made by the institutions in question and not by the bureaucracy of this department. This is a highly technical question related to the capability of any document being used to demonstrate that the person carrying the document is represented by that document.
Having lived my life at the Commerce Department before I came over here, I can tell you that they are doing the technical work on this. And we, the U.S. government, have a couple of years of work to even set the standards for being able to do that for our own employees. It is going to be a major undertaking to do that.
Treasury, I think wisely, I can tell you, as a newcomer, took the position that these decisions are best made by the institution that has to form the judgment, does this card represent the individual who is carrying it and does the information that is provided by that individual match up with the card?
Mr. GARRETT. Since I do not have much time, who would be using that card, other than an illegal individual, immigrant?
Because if you were anyone other than an illegal immigrant into this country, you would have some form of other legal identificationpassport, visa, work permit or something of that sort.
So is there anyone who would be using that type of card that is not an illegal immigrant?
And my second question: If that is true, isn't it incumbent upon Treasury to make that known to the private institutions, that only illegal immigrants are the individuals who will be using those cards?
Page 32 PREV PAGE TOP OF DOC Mr. BODMAN. If Treasury believed your proposition, then I would guess that there may be an obligation of Treasury to inform people. But, in my judgment, there are plenty of people who are not illegal immigrants that would be using cards. People do not like carrying their passports around in order to identify. Even U.S. citizens who are living abroad, members of government, have identification cards that they use to identify themselves when they are living abroad.
So I think that there are lots of people that would have these cards, because for convenience, it is a way, just like a driver's licensethe primary way we have of identifying ourselves as we go about our day-to-day lives here including getting on aircraft is a driver's license.
You can then query what the ability is to counterfeit the driver's license, depending on which state it might come from. You have different quality driver's licenses and so on.
So, I mean, this is very complicated, what you are onto, and I think an important issue. But the technology of it is a very important part of it.
And I do think that, if I may say so, sir, the claim that only illegal immigrants would be using such a card is, in my judgment, incorrect.
Mr. GARRETT. I guess, it is not that they would be the only ones who may be using it, but they would be the only ones who have an exclusive need for it, whereas anyone else would have some other form of identification.
And if Treasury is charged to make sure that the banks are making the best possible approach to verify, then perhaps there should be some responsibility say that other identification should first be demanded.
Well, my time is up. And I thank you very much.
Mr. BODMAN. Thank you for your comments, sir.
Page 33 PREV PAGE TOP OF DOC Chairwoman KELLY. Thank you.
Mr. ROYCE. Madam Chairwoman, I would like to begin by commending your leadership, in particular, on combating terrorism finance. And I think you have used your position on this committee and in this Congress to very diligently pursue this matter, and I am appreciative.
As I have said before, and nothing has changed to alter my thinking, I am greatly concerned about how this government is set up to fight the way Islamic terrorists are financing their engines of hate and murder.
I think the Treasury Department needs to be the lead agency for fighting terror finance. As I see it, the Treasury needs to have first-rate capabilities in three distinct areas: in financial intelligence, in compliance, in enforcement. If one of the components is missing, then the other two become much less effective.
I applaud the current efforts of Treasury to build up its resources. But today I think it is fair to describe the Department's compliance resources as scarce.
And I think it is fair to say that its financial intelligence unit's ability to provide actual information is certainly not there yet. And as a result, we have seen some enforcement, but clearly not enough.
And I think the argument that we do not want to overspend in this area is not a very credible one with me, because this is the one area where government, frankly, needs to be spending money right now to protect property and to protect human life. And if we were to do a calculation on 9/11, it would be in the hundreds of billions of dollars. And so I did not quite understand that response, in response to some comments that former Deputy Secretary Aufhauser had made before.
But let me say that I applaud your efforts, Mr. Bodman. And I am very encouraged to have someone with your proven management skill and expertise at the Treasury.
Page 34 PREV PAGE TOP OF DOC That being said, I think that the Treasury, and you in particular, should have the central role fighting terror finance. And I would like to learn more from you today about Treasury's role on the NSC's Policy Coordinating Committee on Terror Finance on the PCC.
In your appearance before the Senate Banking Committee in April, you were asked about the PCC. And in answering the question, you said that Treasury did not need to chair the PCC. And I must tell you that I am troubled by Treasury's position in this regard.
One of the things I hope to do is to get you to check some of your premises and maybe rethink some of your positions. Mr. Garrett asked you a rather pointed question.
I want you to think about what would happen if we have another 9/11 and we find out that falsified documents like the ones he worries about were used by those here illegally in this country by, let's say, another deputy of Osama bin Laden to carry out an attack.
I would like you to think about the fact that many of us believe that Treasury was supposed to be the lead agency in the war on terror finance. And I thought that you were supposed to be the person accountable in the government. And I think that, just like Defense runs combat and State runs diplomacy, I cannot understand how it should not be that Treasury would not run the war on terror finance.
I understand that this battle requires that all governmental agencies work closely together, but that is the case in all major undertakings in government.
In my view, we need clear, visible leadership. I do not think the NSC is the place for that. The NSC has not spent any time up here testifying on these issues to the American people.
And I would like to give you the chance to voice your views on this subject, but afterwards, I would just like youlike I try to do. After 9/11, I tried to check a lot of my premises about the way in which government was organized to handle some of these challenges. And I just urge you to think about how we could reorganize Treasury.
Page 35 PREV PAGE TOP OF DOC And I know that may put a lot more responsibility and certainly additional resources into Treasury. But we have a chair of this committee that is dedicated to try to rethink some of the fundamentals. And my intent here is to, over time, enlist your support in helping us do that.
Mr. BODMAN. Well, I am not sure where to start, sir.
First, I believe that we are showing visible leadership with respect to the war on terror, terrorist finance, for the reasons that I have already commented on, some of the suggestions of the Chairperson.
I will take your suggestion. I will rethink my positions, if that is what you have asked me to do, I will certainly do that. I would do that anyway. Frankly, this is a major responsibility, and I would tell you, based on our experiences to date, our system is less than perfect. We do have holes in the system, and we are attempting to deal with them.
There are a number of hurdles that have to be overcome. I will not bother you with trying to enumerate them. Just suffice it to say that they are there, and we are attempting to deal with them.
I do not consider the chair of the PCC to be a hurdle. We have very good relations. I think it is a good thing, frankly, that the NSC is taking, that the White House is taking strong role in this, a leadership role. We have an active role. We are deeply involved in the deliberations of that committee, which meets every couple of weeks.
More importantly, we have a counterterrorism security group that meets almost every day, four, five days a week, every morning. And a number of my colleagues are involved with that, in looking at specific threats that are here and looking at the financial aspects of that. These are matters where specific issues are brought up and are dealt with on a day-by-day basis, and we are deeply involved in that as well.
So I am quite proud of the work that has been done by the people of this department, and I would not want to leave here without saying that to you.
Page 36 PREV PAGE TOP OF DOC Having said that, I would reiterate, there are barriers, there are issues. I mentioned some of these before to the Chairwoman. And as you requested, sir, I will reassess my thinking
Mr. ROYCE. And think also about the economic argument there, or the budgetary argument about resources, because the risk premiums, frankly, paid in our financial markets as a consequence of 9/11 are very high.
And I would argue that it would be well worth the investment to put more resources into Treasury for your efforts on financial intelligence and compliance and enforcement. And I would be up here asking for those resources and finding ways that you can really be the lead agency in this battle against terror finance.
And I thank you for your appearance here today.
And, Madam Chair, thank you again for all you do on this committee.
Chairwoman KELLY. Thank you very much, Mr. Royce.
I agree with what Mr. Royce has been saying here. We need to get the resources to you, sir. We need to get whatever you need for you. And we stand willing to do that.
Our concern, I think, is pretty clear. It is that the agencies that are currently under control of the Treasury are not really communicating very well, or enough, with each other, and that there is right now a lack of strong leadership from a centralized office with not only civil, but criminal regulatory ability.
I hope you will think through what can be done to rapidly centralize and make more precise the oversight ability of Treasury. And I emphasize ''rapidly.'' We do not have the luxury of time when it comes to terror and terrorism's response into this nation of ours. The sooner we get this done, the better. We stand willing to help you in any way possible.
And with that said, I want to thank you very much for your appearance here today.
Page 37 PREV PAGE TOP OF DOC The Chair notes that some members may have additional questions for the panel which they may wish to submit in writing. So without objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and to place their responses in the record.
I thank you, Dr. Bodman, especially for your indulgence of a few more minutes here and for the time that you have spent here with us today. We look forward to working with you, sir. Thank you so much for giving us your time.
With that, you are excused.
Mr. BODMAN. Thank you very much.
Chairwoman KELLY. While this panel is leaving, I will introduce the second panel. We have with us witnesses from FinCEN, OFAC, the IRS and the acting Treasury inspector general.
William J. Fox was appointed by Treasury Secretary John Snow to be the fourth director of the Financial Crimes Enforcement Network on December 1, 2003. Prior to his appointment as FinCEN's director, Mr. Fox served as Treasury's associate deputy general counsel and acting deputy general counsel.
Since September 11, 2001, he has also served as the principal assistant and senior adviser to Treasury's general counsel on issues relating to terrorist financing and financial crime.
Mr. Fox was recognized for his work on these issues with a meritorious rank award in October of 2003.
We have Mr. R. Richard Newcomb. He is the director of the Office of Foreign Assets Control, OFAC, the agency within the U.S. Treasury Department that is responsible for implementing and enforcing economic sanctions and embargo programs ordered by the President.
Following the terrorist attacks of September 11, 2001, OFAC is the primary U.S. government body responsible for implementing economic sanctions to isolate and impede terrorists and their support networks.
Page 38 PREV PAGE TOP OF DOC Since assuming this position in January of 1987, Mr. Newcomb has played a leadership role in ensuring that these programs are fully and effectively developed, implemented, administered and enforced.
We have Ms. Nancy Jardini, she is chief counsel of investigation at the Internal Revenue Service. In January of this year, IRS-CI, as it is called in shorthand, is the agency's law enforcement division.
Ms. Jardini is the first woman in CI's 85-year history to lead the organization. She directs a nationwide staff of about 4,500 employees, including more than 2,900 special agents. CI special agents investigate and assist in the prosecution of criminal tax, money laundering and narcotics-related financial crime cases.
And finally we have Mr. Dennis S. Schindel. He is the acting inspector general of the Department of Treasury. Mr. Schindel has been with the Department of Treasury since 1972.
Prior to his designation as the acting inspector general, Mr. Schindel was the deputy inspector general assisting the inspector general, providing leadership and direction to the Office of the Treasury of Inspector General since March of 2001.
I thank you for your appearance before the subcommittee.
Without objection, your full written statements will be made part of the record. And you will each be recognized for a five-minute summary of your testimony.
Thank you so much.
Let us begin with you, Mr. Fox.
STATEMENT OF WILLIAM J. FOX, DIRECTOR, FINANCIAL CRIMES ENFORCEMENT NETWORK, DEPARTMENT OF THE TREASURY
Mr. FOX. Thank you, Madam Chairman, Congressman Gutierrez and distinguished members of this committee.
Page 39 PREV PAGE TOP OF DOC I appreciate the opportunity to appear before you today to discuss our vision for the Financial Crimes Enforcement Network. This is my first opportunity to appear before a House committee. And I would like you to know that I consider it a great honor.
We very much appreciate your leadership and the commitment of the House Financial Services Committee, particularly this subcommittee, on the important issues that are the focus of today's hearing.
We also appreciate the diligent work of your staff, both majority and minority. They have been great to work with. And, in my view, they are serving you very well.
I have a prepared statement, which we have submitted. And I will try to keep these remarks very brief.
Madam Chairman, I was appointed FinCEN's fourth director in December 2003. Before I came to FinCEN, I was the principal assistant to David Aufhauser, as he led the Treasury Department and the government on issues relating to the financing of terror.
Working with David, I quickly gained a very keen appreciation for the importance of what has been referred to as the financial front of this war. That importance can be stated quite simply: Money does not lie.
A good part of the time, financial intelligence is actionable intelligence. It can be extremely useful for identifying, locating and capturing terrorists and defining their networks. And, just as important, financial intelligence can lead to effective, strategic action that stops or disrupts the flow of money to terrorists and their networks, which in turn serves to halt or impede terrorists operations.
The Financial Crimes Enforcement Network is right in the middle of these two aspects of exploiting financial information.
The women and men of FinCEN have been learning about, understanding and exploiting financial information for almost 14 years. My job is clear: to lead FinCEN in a direction that ensures we are the gold standard when it comes to collecting, understanding, analyzing, employing and disseminating financial information to combat terrorism and financial crime.
Page 40 PREV PAGE TOP OF DOC Let me tell you what I found my first 180 days on the job. I found an agency populated with highly motivated employees with diverse and, in many ways, specialized talents and skills who are very dedicated to FinCEN and its mission.
But I have also found an agency facing many significant challenges. Let me highlight a couple of specifics.
An important and fundamental challenge facing FinCEN relates to the security and dissemination of the data we have been charged with safeguarding, the data collected under the Bank Secrecy Act. FinCEN must ensure that this data is properly collected, is kept secure and is appropriately, efficiently and securely disseminated to law enforcement, intelligence and regulatory agencies.
This is one of FinCEN's core responsibilities. We believe our BSA Direct Project, which is discussed at length in my statement, will address many of these issues. In my view, this project is critical to our future success.
Another of FinCEN's core responsibilities relates to the administration of the Bank Secrecy Act. As you know, FinCEN is the delegated administrator of the Bank Secrecy Act. Through that delegation, FinCEN is answerable to the Secretary of the Treasury for ensuring that the ultimate goals of that act are achieved.
While we eagerly accept this responsibility, the responsibility is not ours alone. The federal bank regulators, as well as other agencies such as the Securities Exchange Commission, the Commodities Future Trading Commission and the Internal Revenue Service, have been delegated responsibility to supervise and examine financial institutions for Bank Secrecy Act compliance.
Indeed, presently, implementation of the Bank Secrecy Act's regulatory regime involves eight different federal agencies and three SROs. This unusual structure is both a strength and a weakness. The weaknesses are obvious and sometimes are clearly manifested.
Page 41 PREV PAGE TOP OF DOC To diffuse responsibility across so many bureaucracies can cause, and indeed on occasion has caused, inconsistency in application, lack of clarity of purpose and, most importantly, diffusion of accountability.
However, if managed properly, we believe this structure could also be a strength, because it builds upon existing expertise, knowledge base and examination functions of regulators who know their industries best. The structure leverages resources where resources would otherwise be completely insufficient and possibly duplicative.
I view it, Madam Chairman, as my responsibility to work with my colleagues in these agencies to help manage this structure in a manner that builds on our strengths that our diverse partners bring to the table.
In other words, administration of the Bank Secrecy Act in this context really means oversightexercising oversight coordination and ensuring consistency of application.
In my view, of all the challenges facing FinCEN, there are no challenges as important as the proper and appropriate implementation of the Bank Secrecy Act regulatory regime. We have several ideas on how to better manage and coordinate the implementation of this regime, and we have outlined those in my written statement, so I am not going to recite them again here.
What I want you to know, Madam Chairman, is that I clearly understand how important this set of issues is to the success of our country's anti-money-laundering and counterterrorist financing efforts.
The implementation of this risk-based regularity system is a delicate matter that demands balance, consistency and clarity. The cornerstone of the Bank Secretary Act, suspicious activity reporting, requires financial institutions to make judgment calls. If we fail in properly implementing this regime, if we get it wrong, then the system will fail.
Page 42 PREV PAGE TOP OF DOC For example, if as regulators we are either too aggressive or too passive in supervising and examining the financial industries that we regulate, there could be two equally unacceptable outcomes.
Compliance should not be about second-guessing individual judgment calls on whether a particular transaction is suspicious. If we are overzealous in our supervision and examination, financial institutions, as conservative institutions, will merely defensively file on anything and everything to protect themselves from regulatory risk.
If, on the other hand, we are too lax when it comes to ensuring institutions are implementing these programs, proper reporting will not be generated.
Either scenario represents a failure.
Madam Chairman and distinguished members of this committee, you should know that you have my commitment, and the commitment of the women and men at FinCEN, to do all in our power to ensure the implementation of this critical regulatory regime does not fail.
Again, Madam Chairman, we appreciate the committee's continued support and your focus on these critical issues. I hope our presence here today will add to this important conversation.
I will be happy to answer any questions that you may have.
[The prepared statement of William J. Fox can be found on page 57 in the appendix.]
Chairwoman KELLY. Thank you very much, Mr. Fox.
STATEMENT OF RICHARD NEWCOMB, DIRECTOR, OFFICE OF FOREIGN ASSETS CONTROL, DEPARTMENT OF THE TREASURY
Mr. NEWCOMB. Madam Chairman, thank you for the opportunity to testify on the Office of Foreign Assets Control's efforts to combat terror support networks, which forms an important part of the Treasury Department and our government's national security mission.
Page 43 PREV PAGE TOP OF DOC I will begin with an overview of our overall mission and conclude with our strategies for addressing the threat of international terrorism.
The primary mission of the Office of Foreign Assets Control is to administer and enforce economic sanctions against targeted foreign countries and groups and individuals, including terrorists and terrorist organizations, narcotics traffickers, who pose a threat to the national security, foreign policy or economy of the United States.
We act under the general presidential wartime and national emergency powers, as well as specific legislation, to prohibit transactions and freeze assets subject to U.S. jurisdiction.
Economic sanctions are intended to deprive the target of the use of its assets and deny the target access to the U.S. financial system in the benefit of trade, transactions and services involving U.S. markets.
We currently administer and enforce some 28 economic sanctions programs pursuant to presidential and congressional mandates. These programs are crucial elements in preserving and advancing the foreign policy and national security objectives of the United States and are usually taken in conjunction with diplomatic, law enforcement and occasionally military action.
Our historical mission has been the administration of sanctions against target governments that engage in policies inimical to U.S. foreign policy and national security, including regional destabilization, severe human rights abuses and repression of democracy.
Since 1995, the executive branch has increasingly used the statutory powers to target international terrorist groups and narcotics traffickers. Many so-called country-based programs are part of the U.S. government's response to the threat posed by international terrorism.
The Secretary of State has designated seven countriesCuba, North Korea, Iran, Libya, Iraq, Sudan and Syriaas supporting international terrorism. Three of these countries are subject to comprehensive economic sanctions: Cuba, Iran and Sudan. Comprehensive sanctions have been imposed in the past against Libya, Iraq and North Korea.
Page 44 PREV PAGE TOP OF DOC In addition, effective May of this year, the President issued a new executive order which prohibits specific types of transactions with Syria, due to its continued support for terrorism and other reasons.
OFAC administers also a growing number of list-based programs, targeting members of government regimes and other individuals and groups whose activities are inimical to U.S. national security and foreign policy interests. In addition to our terrorism and narcotics trafficking programs, these include sanctions against persons destabilizing the western Balkans and against the regimes in Burma and Zimbabwe.
OFAC also administers programs pertaining to nonproliferation, including the protection of assets relating to disposition of Russian uranium and trade in rough diamonds.
OFAC as an organization has grown over the past 18 years from an office with about 10 employees administering a handful of programs to an operation of 144 employees with some 28 programs.
To accomplish our objectives, we rely on good, cooperative working relationships with other Treasury components and other federal agencies, particularly the State and Commerce Departments and Justice Department, law enforcement agencies, the intelligence community, domestic and international financial institutions, the business community and foreign governments.
We are an organization which blends regulatory, national security, law enforcement and intelligence into a single entity with many mandates but a single focus: effectively implementing economic sanctions programs against foreign adversaries when imposed by the President or the Congress.
In order to carry out our mission, the organization is divided into 10 divisions with offices in Miami, Mexico City, Bogota and, soon to be opened this summer, an office in Manama, Bahrain.
Page 45 PREV PAGE TOP OF DOC Our licensing, compliance and civil penalties divisions serve as OFAC's liaison with the public and figure prominently in promoting the transparency of our operations.
Our enforcement division provides crucial liaison with law enforcement community, while our international programs and foreign terrorist divisions are primarily devoted to narcotics and terrorism programs and the preparation of evidentiary material to support our designation process.
Briefly, I would like to talk about our vision for the future and the important challenges we face at the Office of Foreign Assets Control.
In order to meet the increasing demand placed on us and to fulfill our multiple missions against governmental and organizational targets, particularly a recent critical role in countering international terrorism and narcotics trafficking, we are seriously addressing several specific challenges facing our component divisions.
For example, our civil penalties division is expanding the transparency of our civil penalty enforcement process by developing an automated system to report enforcement actions.
Our compliance division is in the process of building new customer interaction capabilities with a state-of-the-art automated telephone system, enhanced hot-line capabilities and improved Web-based forms to allow the public to transmit detailed live transaction data for our real-time analysis and response.
We expect that the new automated reporting systems we are developing will allow financial institutions and others to provide more quickly comprehensive information on interdicted transactions.
We are building a new specially designated national database that will allow wide access to declassified target information and permit our analysts to directly link from the name on our SDN list to underlying declassified evidentiary material for easier access.
Page 46 PREV PAGE TOP OF DOC We intend in the near future also to make a new data feature available on our Web site that will allow users of our specially designated nationals list to more easily shop for information that is tailored to their specific compliance needs.
Madam Chairman, I would like to thank you and the committee for giving me the opportunity to speak on these issues. This concludes my oral remarks today, and I am very pleased to answer any questions you may have.
[The prepared statement of R. Richard Newcomb can be found on page 89 in the appendix.]
Chairwoman KELLY. Thank you very much, Mr. Newcomb.
Now, Ms. Jardini?
STATEMENT OF NANCY JARDINI, CHIEF, CRIMINAL INVESTIGATION, INTERNAL REVENUE SERVICE
Ms. JARDINI. Thank you very much, Madam Chairman.
It is a pleasure for me to be here with my colleagues from FinCEN, OFAC and the Treasury Inspector General's Office to discuss our work and our interactions with one another.
I also very much appreciate the opportunity to highlight the unique and specialized skill of the Internal Revenue Service Criminal Investigation Division and discuss our efforts to investigate financial fraud and money laundering wherever it occurs.
The fundamental mission of criminal investigation, or CID, as it is known, is to serve the American public by detecting and investigating criminal violations of the Internal Revenue Code and related financial crimes, most importantly money laundering.
To that end, we recruit only individuals who have an educational background in accounting and business and, through rigorous training, shape them into law enforcement professionals who are experts in forensic accounting, financial investigations and computer forensics. These highly skilled special agents are devoted to following the money in tax and money-laundering and related investigations that involve sophisticated schemes and complex transactions that span the globe.
Page 47 PREV PAGE TOP OF DOC The unique sophistication of our special agents is in demand throughout the law enforcement community, because we add value to every financial investigation. These are precisely the same skills that make such a valuable contribution in unraveling organized crime, narcotics trafficking and global terror financing networks.
In addition to bringing significant technical expertise to these investigations, there is often an important nexus between tax crimes, Bank Secrecy violations, money laundering and terrorism.
Indeed, money laundering is tax evasion in progress. It is criminals hiding their ill-gotten gains from the authorities, most particularly the IRS. Just as corporate executives, drug kingpins and terrorists employ various methods to move money, the IRS is using various means to detect them.
One of those is to exploit effectively the Bank Secrecy Act. We in CI lead 41 suspicious-activity report review teams nationwide. These teams are comprised of federal, state and local law enforcement officials who evaluate between 12,000 and 15,000 SARs each month.
In addition, last year alone, just the criminal investigation division of the IRS spent over $60 million evaluating BSA data, which led to over 1,000 investigations in the criminal arena.
Another unique analytical contribution CID is making in the financial crimes arena is the counterterrorism project that we are piloting in Garden City, New York. When fully operational, the center will use advanced analytical technology and data modeling of tax and other information, such as the wealth of information contained in BSA data, to support ongoing joint investigations and proactively identify potential patterns and perpetrators.
The center analyzes information not available to, nor captured by, any other federal law enforcement agency.
So far, the lead development center has helped identify individuals, entities and relationships between them previously unknown to law enforcement.
Page 48 PREV PAGE TOP OF DOC As an example, the lead development center began compiling and analyzing financial data that culminated in the linking of several individuals and businesses, some of whom are or were under criminal investigation, one with ties to Al Qaida.
With no identifiers other than listed names, the center established significant connections to individuals and businesses potentially involved in illegal activities, including international heroin smuggling and Iraqi artifacts smuggling.
The scope of this criminal enterprise was previously unknown prior to the analytical work done by CI at the Garden City Lead Development Center.
Because this type of financial analysis is not duplicated in any other law enforcement agency, we are encouraged and enthusiastic about the unique contribution we are able to make.
In conclusion, the men and women of IRS-CI, some of the most skilled financial investigators in federal law enforcement, are proud of the role we have had in these successes. For all of us, it is one of the great rewards of public service.
We thank you for inviting us here today. And I welcome your questions. Thank you.
[The prepared statement of Nancy J. Jardini can be found on page 71 in the appendix.]
Chairwoman KELLY. Thank you very much.
STATEMENT OF DENNIS SCHINDEL, ACTING INSPECTOR GENERAL, DEPARTMENT OF THE TREASURY
Mr. SCHINDEL. Thank you, Madam Chairman, for the opportunity to testify.
In your invitation letter, you ask that I address several issues. Briefly, they include BSA compliance efforts by the various regulators, OCC and OTS oversight of BSA compliance by banks and their private banking and trust operation, usefulness of the FinCEN database, and concerns we have resulting from our review of the OFAC sanctions program.
Page 49 PREV PAGE TOP OF DOC Let me say that oversight of Treasury's role in combating terrorist financing is among our highest-priority work. In fact, we designated it as one of Treasury's six most significant management challenges.
While Treasury takes its BSA responsibilities seriously, in almost every area we have audited, we have identified problems significant enough to impact Treasury's ability to effectively carry out its role in combating terrorist financing and money laundering.
I will briefly highlight our work.
With regard to BSA compliance by the regulators, our work is limited to OCC and OTS. In one of our early audits issued in January 2000, we reported that OCC needed to improve BSA compliance exams. We found that many of the exams in our sample lacked sufficient depth to adequately assess a bank's compliance. Over half the exams we reviewed did not have documentation to determine whether an adequate BSA exam was conducted.
We also reported that OCC rarely referred BSA violations to FinCEN and that OCC procedures did not require examiners to review SARs filed by the banks.
More recently, we issued a report in September of 2003 on BSA enforcement actions at OTS. We found that OTS was not aggressive in taking enforcement actions against thrifts in substantial non-compliance with BSA requirements.
Specifically, while OTS examiners identified substantive BSA non-compliance at 180 of 986 thrifts that they examined, OTS issued written enforcement actions against only 11. For most of the thrifts, OTS exercised moral suasion and relied on thrift management to comply with the BSA requirements. We found that that approach did not work more than 30 percent of the time. And in some instances, subsequent BSA exams found that compliance actually got worse.
On the issue of oversight of BSA compliance in private banking and trust operations, we completed an audit at OCC in November of 2001. We found that OCC needed to focus greater attention on private banking and trust operations when conducting BSA compliance exams.
Page 50 PREV PAGE TOP OF DOC In 60 percent of the exams we tested, OCC examiners did not cover the bank's private banking operations. Even where OCC did include private banking and trust operations in their BSA compliance exams, more than 30 percent of the time the examiners did not fully comply with OCC's own BSA examination guidelines. Exams often lacked sufficient testing of high-risk transactions commonly associated with money laundering.
With regard to the subcommittee's questions on FinCEN's database, we completed two audits on the accuracy and reliability of the FinCEN database for SARs and we have one in process. These audits have consistently shown that the SAR database lacked critical information, included inaccurate information or contained duplicate SARs.
In the more recent audit, which we issued in December 2002, we found that regulatory and law enforcement officials generally felt that the database was useful. However, they indicated that its usefulness would be enhanced if it contained more complete and accurate SAR data.
We found that incomplete or inaccurate data resulted because filers disregarded instructions, did not always understand the violations or were concerned with personal liability. We made several recommendations to include more editing, more mandatory fields, more feedback to filers, revisions to the SAR form and more efforts to eliminate duplicate SARs in the system.
Before I discuss my concerns with OFAC's foreign sanctions program, I want to briefly comment on some limited work that we have done on referrals to FinCEN.
In October of 2002, we issued an audit report on FinCEN's efforts to deter and detect money laundering in casinos and its related enforcement actions. IRS is responsible for BSA compliance exams of casinos. Overall we found that FinCEN was inconsistent and untimely in its enforcement actions against casinos for BSA violations referred to them by IRS.
At the time, FinCEN was embarking on a new enforcement approach focused on fostering casino compliance through education and outreach. IRS officials apparently did not fully agree with several aspects of this approach, but their disagreements were not resolved.
Page 51 PREV PAGE TOP OF DOC We reported our concern that IRS might be reluctant to refer future BSA violations to FinCEN. Our concern was subsequently reiterated by the Treasury inspector general for tax administration in a report that they issued in March of 2004.
The last area the subcommittee asked me to address was my concerns with OFAC's foreign sanctions program. In April 2002 we reported that OFAC was limited in its ability to directly monitor financial institution compliance with foreign sanction requirements. While OFAC devotes considerable effort to increasing awareness of the foreign sanctions requirements, like FinCEN, OFAC is dependent on the regulators to examine for compliance.
Our tests have found gaps in the regulators' testing for compliance with OFAC sanctions requirements. While most of the exams included some coverage of compliance with OFAC's sanction requirements, almost none of them included transaction testing. Transaction testing is the most effective way to determine whether a prohibited transaction was allowed in violation of an OFAC sanction order.
Also, because OFAC is not a bank supervisory agency, it cannot dictate the requirements of how institutions ensure compliance. We found that the extent of foreign sanction compliance efforts varied among the various financial institutions.
In conclusion, I would like to make a few observations. While the BSA compliance process is dependent on many federal and non-federal regulators, ultimately it is Treasury's responsibility, primarily through FinCEN, to ensure that there is adequate compliance and law enforcement is getting what they need. In this regard, Treasury can do a better job.
The universe of BSA filers is expanding. This will result in disbursing BSA compliance monitoring among even more regulatory bodies. One of FinCEN's challenges has been ensuring that the regulators of these various BSA filers provide adequate and effective BSA compliance monitoring.
To this end, FinCEN's approach has been focused on consensus-building, rather than leading, an approach that has met with limited success. I believe that for the current regulatory structure to work, it must be effectively managed through a cohesive effort that transcends the stovepipes of the individual regulators.
Page 52 PREV PAGE TOP OF DOC FinCEN needs to take a more aggressive leadership role in that effort and require from all those involved in the regulatory structure an approach that, while risk-based, is thorough and intolerant of non-compliance. FinCEN also needs to be more engaged in analyzing the results produced by the various regulators so that it can be more proactive in addressing gaps in compliance monitoring.
This type of approach would also apply to programs for which OFAC is responsible, since it also relies on other regulators to administer its programs. The newly created Treasury Office of Terrorism and Financial Intelligence, to which FinCEN and OFAC will report, can perhaps be the vehicle to pull all this together and establish a regulatory structure for BSA and the OFAC sanction programs that is strong, effective and accountable.
I would be pleased to answer any questions the subcommittee may have.
[The prepared statement of Dennis S. Schindel can be found on page 112 in the appendix.]
Chairwoman KELLY. Thank you very much, Mr. Schindel. I appreciate the fact that you are speaking very strongly here. And I hope that the people sitting in this panel with you will take your reports back. And perhaps, Mr. Fox, since he is new at the agency, will read that report and take it to heart.
Mr. Fox, in light of the failures at Riggs Bank and UBS, what do you think? Do you think it would be beneficial if FinCEN had a compliance and audit team that could oversee the banking regulators and then broaden our BSA compliance efforts into those new areas?
Mr. FOX. No question, Madam Chairman.
Chairwoman KELLY. No question, yes or no?
Mr. FOX. No question, yes.
Chairwoman KELLY. You think you would really like
Mr. FOX. I would like to tell you, I mean, that is part of our plan. I mean, we have new leadership in our regulatory programs division. And one of the things we are doing is standing up what we are calling an examination program unit that is really meant to more aggressively oversee and ensure that the regulators, the disparate regulators that are out there ensuring this act is complied with, are actually doing their job and making sure of it.
Page 53 PREV PAGE TOP OF DOC I think that is important on a couple levels. Again, one of the great challenges, Madam Chairman, I think is to ensure consistency in this area. I have seen, since I have been director of FinCEN, even differences in approach between bank regulators, not to mention, you know, differences in approach between bank regulators and SEC and maybe the SEC and an SRO.
You know, each regulatory agency brings with it a history and a culture that cause inconsistencies. So we have to work very hard to make sure that that is minimized as much as possible.
But I could not agree with you more. And it is a plan that we have.
Chairwoman KELLY. Does FinCEN currently have the authority to actively examine the frontline BSA regulators and to conduct spot checks on their performance? I mean, I really do not know. Do you have that?
Mr. FOX. Well, as I understand this, ma'am, the Bank Secrecy Actthe authority to supervise and examine these institutions has been delegated to various agencies by the Treasury. The responsibility for administering the Bank Secrecy Act has been delegated by the Secretary to FinCEN.
Generally, when you delegate an authority, you retain that authority as well. And if you read the delegation that is in our regulations, it has been in place since 1972.
You know, it is pretty broad. I mean, the Secretary of the Treasury still, and now FinCEN because of that, still retains a lot of authority here.
So we are certainly going to test that and make sure that the regulators are performing.
We are thinking of various things, things like requiring reports; going in and actually finding out about how they are conducting these examinations; conducting joint examiner training; ensuring that examination procedures are consistent and actually make BSA as important maybe as safety and soundness.
Page 54 PREV PAGE TOP OF DOC So we are very keen to do that. And we think we have the authority right now to be able to do that.
I will tell you if we learn soon that we do not, we will be back to you, and I will be back to the Deputy Secretary. Because I do not think we can do an effective job administering the act without that.
Chairwoman KELLY. Mr. Fox, do you think you are going to need some more personnel to do that in FinCEN? Do you have enough people to do what you have outlined?
Mr. FOX. No. But, you know
Chairwoman KELLY. Well, that was the short answer.
Mr. FOX. What we are going to do honestly isyou know, one of the things that we are trying to do at FinCEN right now is to really re-look at what it is FinCEN is supposed to be doing and maybe redirect some of the assets that we are working on some things that maybe we should not be doing.
For example, I think that is why our technology projects are so important to us, because I think that will free up some people that we can redirect and put on programs like this.
And I was not part of the budget process for either this year or next year. But you can be assured that in future budget processes that we are going to be asking for additional help in that regard, again because I think you simply need human bodies to be able to do this work.
Chairwoman KELLY. Thank you.
Mr. Schindel, I would like to go to you. As you probably know, I recently sent you a letter asking that you examine the regulatory environment that allowed the failure at Riggs to occur. I specifically asked you to look at relevant OCC documents that I have not been allowed to view.
Page 55 PREV PAGE TOP OF DOC Do you anticipate that this dispute that is going on with OCC will interfere with your efforts to review those documents and to examine the conduct of the OCC personnel in the Riggs case?
Mr. SCHINDEL. The short answer is that I do not.
When there was an article that came out a week ago that quoted the comptroller, Mr. Hawke, as indicating that they were doing a lessons-learned review and also looking into whether there was undue influence on the lead examiner as a result of him subsequently taking a job with Riggs bank, when I read that, I immediately contacted our counsel and our head of investigations and asked that they reach out to OCC and let them know that we did not think it would be appropriate for them to investigate whether there was undue influence, that that was in our domain.
We received assurances that we would get their full cooperation in conducting such an investigation, and we have opened up that investigation.
Chairwoman KELLY. And so you feel that you will be able to see those documents?
Mr. SCHINDEL. Yes.
Chairwoman KELLY. Do you have any time line for how long this overall review is going to take?
Mr. SCHINDEL. I really do not. We have just initiated it.
Chairwoman KELLY. But you are doing the review, not OCC. It is not an internal review.
Mr. SCHINDEL. Correct. OCC is still, I believe, continuing with their lessons learned review of Riggs and their examination of it. And I am not saying that that is inappropriate, and that is probably a good thing for them to do.
We will probably, if we have the resources, come in behind that effort and take our own look at it using what they have developed.
Page 56 PREV PAGE TOP OF DOC Chairwoman KELLY. From what I understand, there are some other things, investigations, that are going on where OCC is simply not cooperating. I wonder if you would be good enough to explain those circumstances and discuss what information you are being blocked from getting access to.
Mr. SCHINDEL. Well, primarily we had initiated a couple efforts to engage in looking at potential bank fraud activities and a couple bank failures, one in particular involving Guarantee National Bank in Tallahassee, Florida.
It was our understanding that there were some concerns regarding OCC's access to information from the bank. And we were concerned that this presented a possible obstruction of the bank examination process.
We were down at that bank to join the FDIC as they engaged in the process of closing down that bank so that we could join that effort and look at that issue in particular. OCC reached out to the assistant U.S. attorney in Tallahassee and raised concerns that we did not have an appropriate jurisdiction. And the AUSA was, I guess, concerned enough that it raised a question that they requested that we step off joining that investigation until that could be sorted out.
And as you know, Dr. Bodman has indicated that this whole issue of our jurisdiction, we are hoping to resolve it through the Treasury counsel.
Chairwoman KELLY. What do you think the implications are of the effort by the OCC to block this?
Mr. SCHINDEL. Well, I understand that they have some concerns about their responsibilities to protect the Right to Financial Privacy Act data that we might have to obtain in investigations like this or other investigations we might do.
We just do not feel that our access to Right to Financial Privacy Act information is a matter of concern. We think we have access to that information. And we hope to get that resolved.
Page 57 PREV PAGE TOP OF DOC Chairwoman KELLY. I want to just pursue one follow-up here. Is the OCC's resistance in cooperating with you, the Treasury inspector general, an isolated instance? Or are there other cases besides these that I have raised, that I happened to know about?
Are they not cooperating with investigations by other inspectors general or with law enforcement as well?
Mr. SCHINDEL. Well, we would be the only inspector general that would be conducting investigations regarding OCC. I cannot speak to their level of cooperation with the FBI or the Justice Department on other bank fraud cases that those law enforcement agencies are engaged in.
But there has been at least one other bank investigation that we were involved in, in the Midwest where they also, again, reached out to the AUSA's office and raised questions about our jurisdiction. And, similarly to the Tallahassee situation, we were asked to step off of that investigation.
Chairwoman KELLY. Dr. Bodman did not indicate that he had any real time line on this. Do you have any kind of an idea how quickly this is going to be resolved?
Mr. SCHINDEL. I do not. I know that we have formulated the issues, both my office and OCC, for the general counsel that we think need to be answered. The general counsel has now pushed back to both us and OCC to provide some additional information on those issues.
So it is being worked. I would say it is somewhat slow from my perspective. But, I am sure, I am confident that it is going to get resolved.
And one thing I can tell you is I will keep this committee informed on the outcome.
Chairwoman KELLY. Good, thank you. We would appreciate that.
Page 58 PREV PAGE TOP OF DOC Mr. Newcomb, I just wanted to ask you a question about UBS. The UBS-ECI contracts, there are indications that we have found that the Fed saw hints of OFAC-related problems at UBS early in the ECI program. And they had some conversations with the bank early on.
Were those concerns communicated to OFAC? And with that hint of there possibly being problems, shouldn't OFAC have been involved right away?
Mr. NEWCOMB. Madam Chairman, the Federal Reserve Bank of New York brought this to our attention when they first saw currency moving in the Iraq situation, post-invasion, when dollars were moving from countries nearby. And they began an investigation which led to UBS.
They notified us very shortly thereafter, last summer, July of 2003. And they were faced with a situation where the bank was deliberately telling them stories which were not true. And not only were they not true, there seems to have been an attempt to falsify what was, in fact, told.
They kept us informed. And then in the winter of last year, in January, they gave us information of what had taken place. And before a penalty was rendered against UBS, the general counsel of the Federal Reserve Bank of New York and executive vice president came and spoke with us, laid out what he intended to do, the $100 million penalty.
That was a penalty for a foreign institution. It was an institution over which we do not have jurisdiction. There is a continuing matter that I cannot talk about where there may have been U.S. involvement that we are continuing to work with the Justice Department, U.S. Attorney's Office to determine if in fact there was any U.S. involvement.
Important thing here that I want to stress is, following that meeting we had with the general counsel of the Fed, I have met on three occasions with the Fed, and we have a program in place as a direct result of seeing the possibilities of these ECI contracts being abused in this manner and are planning a compliance visit to all eight of the ECI institutions beginning next month and then expanding that to other financial institutions, the largest 15 or so financial institutions that, though they are not ECI contractors and even though they may not be subject to U.S. jurisdiction, because they do have branches operating in the United States, we are going to be providing visitations to them with the possibility of follow-up audits wherever we have jurisdiction.
Page 59 PREV PAGE TOP OF DOC So the situation is being addressed in a very robust manner.
Chairwoman KELLY. Thank you very much.
I am going to come back to this in a minute. But I understand Mr. Sanders, who has joined us, has an amendment that is going on the floor, so I am going to yield some time to him.
Mr. SANDERS. Thank you very much, Madam Chair, for allowing me to say a few words. I am not on this subcommittee. And I will be brief.
Chairwoman KELLY. Well, with unanimous consent, we approve of your presence here today.
Mr. SANDERS. Well, I appreciate that. And I am going to just go forward in one line of questioning and be as brief as I can.
Madam Chair, last September I offered an amendment to the fiscal year 2004 Treasury-Transportation appropriations bill that would prohibit the Treasury Department's proposed regulations regarding cash balance payments from taking effect for one year. That amendment passed Congress and was signed into law.
And yesterday, to its credit, the Treasury Department finally withdrew those proposed regulations for good. Now I wish that that was the end of the story, but unfortunately, it is not, which is why I am here right now.
During the consideration of my amendment, an IBM lobbyist e-mailed a document on Treasury Department letterhead that stated that the Treasury Department strongly opposed this amendment. But according to the Treasury Department, in an article that appeared in The Wall Street Journal, they never released this document and, ''It appeared to be doctored.''
Madam Chair, no one is surprised when important issues involving hundreds of billions of dollars generate a lot of controversy. But the distribution of phony documents purporting to be from the Treasury Department goes beyond even the loose ethical rules that are sometimes followed here in Washington.
Page 60 PREV PAGE TOP OF DOC Doctoring Treasury Department documents is a violation of the law and should be prosecuted to the fullest extent possible.
When Secretary Snow appeared before the full committee, he pledged to look into this matter and immediately referred it to the Inspector General's Office.
Six months later, we are still awaiting a report from the inspector general on how their investigation is going.
Madam Chair, it is my understanding that the Inspector General's Office has a draft report on this investigation that has been sitting on someone's desk for months.
It is my understanding that this report may confirm that the IBM lobbyists and the Tax Benefits Council at Treasury violated the law by doctoring Treasury Department's documents and releasing non-public information.
It is also my understanding that the Inspector General's Office may have recommended that the individuals involved be prosecuted but that the U.S. attorney at the Justice Department declined to prosecute.
Essentially, what I would like to ask Mr. Schindel, if I might, I have some questions that I would like to ask you, if I may, Madam Chair.
Mr. Schindel, were Treasury Department documents opposing my amendment doctored?
Mr. SCHINDEL. Yes.
Mr. SANDERS. If so, who doctored those documents?
Mr. SCHINDEL. The IBM employees involved.
Mr. SANDERS. Is it a violation of the law to doctor Treasury Department documents?
Mr. SCHINDEL. Yes, it is.
Mr. SANDERS. And what is the penalty for doctoring documents in a case like this?
Page 61 PREV PAGE TOP OF DOC Mr. SCHINDEL. Well, I think the penalties probablyI cannot speak specifically to that. I am sure there is a wide range of penalties.
But as to whether there will be prosecution of that issue, is something we are still vetting with the U.S. attorney's office.
Mr. SANDERS. Does the Treasury Department regard this as a serious offense?
Mr. SCHINDEL. I believe they do.
Mr. SANDERS. Did the Inspector General's Office recommend that individuals be prosecuted for doctoring those documents.
Mr. SCHINDEL. We have not made a specific recommendation yet. You are correct to say there is a draft report. It is being reviewed by my head of investigations with the investigator to be sure that we have covered all aspects. There are several aspects of this investigation involving IBM employees, lobbyist employees and Treasury employees.
Mr. SANDERS. That was my next question. Did anyone at the Treasury Department assist lobbyists in doctoring these documents? If so, who was that?
Mr. SCHINDEL. We are continuing to look into that. And that is one part of the investigation, and that is all going to be thoroughly included in our final investigative report.
I would not rule out the possibility that there is additional work that may need to be done after my head of investigations has gone over this with the investigator. We feel we are close to wrapping that investigation up, but it is in essence still ongoing.
Mr. SANDERS. It is my understanding that a report on this investigation has been drafted
Mr. SCHINDEL. Correct.
Mr. SANDERS.and has been sitting on someone's desk at the Inspector General's Office for a number of months.
Page 62 PREV PAGE TOP OF DOC Mr. SCHINDEL. Well, that part I would disagree with. And I can tell you it has not been sitting on my desk. But the head of our office of investigations has that draft and is currently going over it with the investigator. They have reached back out to the U.S. attorney's office to make sure that we have thoroughly vetted all the issues with them and that they would fully consider all the aspects of prosecution action that could be taken in this case.
Mr. SANDERS. When this report is finished, will you provide a non-redacted to me as well as the Chairwoman and Ranking Member of this subcommittee?
Mr. SCHINDEL. Sir, it is my understanding that we have clear authority to provide an unredacted copy of that report to the chairs of the various committees that have jurisdiction, but not to individual members.
Mr. SANDERS. Not to the member who authored the amendment in which there was doctoring of documents?
Mr. SCHINDEL. I understand your frustration with that issue, but the guidance that we are operating under does not take into account those unique situations.
The redacted version of the report, I would hope, would not be so heavily redacted that if you were to receive that copy that you would not be able to fully understand what was involved, who did what and what the results of the investigation
Mr. SANDERS. Just two more questions. Do I understand that you will provide a non-redacted copy to the Chairwoman?
Mr. SCHINDEL. Yes.
Mr. SANDERS. Maybe the Chairwoman would be so kind as to allow me to peek in and take a look at it.
My last question is, this really has dragged on. And can you give me, give the committee a sense of when you are going to have your final report?
Mr. SCHINDEL. I would hope that we would have the final report out within the next two months.
Page 63 PREV PAGE TOP OF DOC Mr. SANDERS. Okay, thank you very much, Madam Chair.
Chairwoman KELLY. Thank you. Thank you, Mr. Sanders.
I am going back to you, Mr. Newcomb. You have mentioned a couple of things that I have found very interesting in light of a book that I happen to be reading. You talked about the commodities that are being utilized for money transfer and money laundering.
This is a huge field. The whole business of terrorist financing and money laundering and money transfer is a huge field.
All of you sitting at this desk actually have indicated in what your statements have been how difficult it is. And especially you, Ms. Jardini, talked about the need for these highly specialized people who are in fact doing forensic work with regard to the financial ends of things.
Mr. Newcomb, I would assume that you have people in your agency doing that kind of work as well.
I would put to you a question, and that is whether or not you have enough people and if you have enough resources to cover the enormity of what this task is. We must get our arms around it. We must face down the ability of terrorists to fund the evil that they would fund.
Do you have enough people? Do you have enough resources to do this job?
Mr. Newcomb, I want to ask you that. And then I am going to go to Ms. Jardini and Mr. Fox.
Mr. NEWCOMB. Madam Chair, that is a difficult question to answer, in this regard. We are doing our job. We administer 28 programs, and we are fully employed in all of the divisions that we operate under, such that we are able to implement what we are mandated to do.
You could always do more with more people; if we had more people, we could do more. That follows.
Page 64 PREV PAGE TOP OF DOC It is a large mission. There are terrorists organizations operating worldwide, in the Middle East, North Africa, East Africa, South America, Southeast Asia and other places.
One thing we have sought to do in order to, forgive the expression, create a force multiplier is we have worked with the U.S. combatant commands and the military where we have people physically on location in six of the combatant commands working on the general staff of those organizations. That is one way to create additional positions.
I would certainly be able to say if I had more people, there is more we can do. You can always do more with more people.
But in terms of what we have, we are delivering a product that serves the Treasury Department and achieves our mandate.
Chairwoman KELLY. I just want to do a follow-up there. Do you think that the notification requirements of FinCEN and OFAC are functioning adequately?
Mr. NEWCOMB. Excuse me, Madam Chairman, what notification requirements are you referring to?
Chairwoman KELLY. Well, in light of the UBS and the Riggs situations, and in light of some of the other things that you and I know are happening out there, do you think you have adequate notification requirements?
Mr. NEWCOMB. This is a situation where, when the Fed found out about it, I am told by senior officers of the Fed, they notified us immediately. They did not know until they knew, and when they found out they were in touch with us. It was foreign jurisdiction that was located.
But just so we have learned a lesson from this, we have created a robust monitoring system, not only with the ECI contracting parties worldwide where we are going to begin with visitations to their senior officers, and then with follow-up audits in conjunction with the Fed to make sure those contractual commitments are met. We are following that in that regard.
Page 65 PREV PAGE TOP OF DOC As far as non-ECI banks, there are literally hundreds of banks that can move currency on behalf of the Federal Reserve Banks. So we need to cover that as well.
Certainly as a lesson learned, we have heard about this and we are moving forward with all due speed to take this situation in hand, so that even though, as in this situation, we did not have jurisdiction, we are seeking to extend jurisdiction we do have as broadly as possible.
I hope that answers your question. If not, I will be happy to come back again and try to
Chairwoman KELLY. I think that is a good indicator.
I am going to go back to the other question I had, which now I am going to ask Ms. Jardini, and that is whether or not you have the resources and the people that you need to do your job right now.
Ms. JARDINI. Thank you, Madam Chairman, for asking that question.
The President's 2005 budget provides for the largest hiring year ever in CI history, and we hope that it will be adopted as written. If it is passed, we will be hiring over 400 new special agents and over 200 analysts who will be assisting us in doing the important work we are going in tracking terrorist financing, as well as our overall tax administration mission.
I would like to point out to you that IRS-CI has never turned down a Treasury request and never will turn down a Treasury request to lead or to participate in any important terrorist financing investigative initiative. We have freely and generously given of our resources because of the importance of that mission and because of the strong leadership that Treasury has provided in that arena.
Furthermore, 97 percent of the terrorism investigations we are involved with we do in conjunction with our partners in federal law enforcement, primarily the joint terrorism task forces at the Justice Department and FBI.
Page 66 PREV PAGE TOP OF DOC Our work in that area is specifically governed by an MOU that we have with the FBI which outlines that our specifically talented and technical special agents should be deployed only in those cases where our expertise is most needed. And that really has been a very successful partnership.
Of the 270 open investigations that we have, 120 of those are pending at the Justice Department for prosecution. The remainder that are open and that we are actively working, 60 percent of those cases have a Title 26 tax crime involved in them; 30 percent are pure tax; 30 percent are tax and money laundering; and the final 40 percent are pure money laundering.
In addition, 25 percent of those cases involve BSA data; 18 percent of those cases involve charities, 990 tax returns and information received from the tax-exempt and government entity section of the IRS.
So we are very, very pleased with the direction that we have taken, our work in this area, and believe that with the addition of the desperately needed 408 special agents and 200 analysts we hope to receive in fiscal year 2005, we will be able to target those strategically to apply to our mission most effectively.
Chairwoman KELLY. Good. Thank you.
Mr. FOX. Madam Chairman, to go back to your original question about some of the complexities relating to money laundering, particularly as it relates to trade-based money laundering or commodities-based money laundering, again I find myself in complete agreement with the Chair. This is a very complex area and a very difficult area.
And it is an area that we are focusing on quite heavily at FinCEN.
I would like to see, as I said in my written statement, our analysts to spend a great deal more time on more complex matters and maybe a little less time on direct tactical support to law enforcement.
Page 67 PREV PAGE TOP OF DOC As Ms. Jardini has indicated, you know, I think what we are finding is that law enforcement entities out there have sort of gotten it when it comes to finance. They understand how important finance is. And I think they are developing tactical intelligence, analytic capabilities for financial information.
And it seems to me that as law enforcement agencies do thatthat is a very good thing, in my view, by the wayas they do that, that frees FinCEN up to maybe take it to a higher level or focus on things that are not being focused on. And we plan to do that.
And commodities-based money laundering and trade-based money laundering is an area that is very important. We are working very closely with the Bureau of Immigration and Customs Enforcement and other entities to try to get a handle on this.
Chairwoman KELLY. I thank you.
I really thank all of you for being here today and for your patience.
The Chair notes that some members may have additional questions for this panel which they may wish to submit in writing. So, without objection, the hearing record will remain open for 30 days for the members to submit written questions to these witnesses and to place their responses in the record.
I cannot thank you enough for your very patient answering of our questions.
And, Mr. Schindel, I hope to hear more from you soon.
Thank you. With that, this hearing is ended.
[Whereupon, at 5:21 p.m., the subcommittee was adjourned.]