[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF THE
DEPARTMENT OF TREASURY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
JUNE 16, 2004
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-94
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
MARK GREEN, Wisconsin JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona MIKE ROSS, Arkansas
VITO FOSSELLA, New York CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MELISSA A. HART, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
TOM FEENEY, Florida DAVID SCOTT, Georgia
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey CHRIS BELL, Texas
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Oversight and Investigations
SUE W. KELLY, New York, Chair
RON PAUL, Texas, Vice Chairman LUIS V. GUTIERREZ, Illinois
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
MARK GREEN, Wisconsin DENNIS MOORE, Kansas
JOHN B. SHADEGG, Arizona JOSEPH CROWLEY, New York
VITO FOSSELLA, New York CAROLYN B. MALONEY, New York
JEB HENSARLING, Texas JIM MATHESON, Utah
SCOTT GARRETT, New Jersey STEPHEN F. LYNCH, Massachusetts
TIM MURPHY, Pennsylvania ARTUR DAVIS, Alabama
GINNY BROWN-WAITE, Florida CHRIS BELL, Texas
J. GRESHAM BARRETT, South Carolina
C O N T E N T S
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Page
Hearing held on:
June 16, 2004................................................ 1
Appendix:
June 16, 2004................................................ 43
WITNESSES
Wednesday, June 16, 2004
Bodman, Hon. Samuel W., Deputy Secretary, Department of the
Treasury....................................................... 6
Fox, William J., Director, Financial Crimes Enforcement Network,
Department of the Treasury..................................... 24
Jardini, Nancy J., Chief, Criminal Investigation, Internal
Revenue Service................................................ 29
Newcomb, R. Richard, Director, Office of Foreign Assets Control,
Department of the Treasury..................................... 26
Schindel, Dennis S., Acting Inspector General, Department of the
Treasury....................................................... 30
APPENDIX
Prepared statements:
Kelly, Hon. Sue W............................................ 44
Oxley, Hon. Michael G........................................ 46
Bodman, Hon. Samuel W........................................ 47
Fox, William J............................................... 57
Jardini, Nancy J............................................. 71
Newcomb, R. Richard.......................................... 89
Schindel, Dennis S........................................... 112
Additional Material Submitted for the Record
Gutierrez, Hon. Luis V.:
Office of Inspector General Report, ``Safety Soundness, and
Accessibility of Financial Services''...................... 128
Bodman, Hon. Samuel W.:
Written response to questions from Hon. Luis V. Gutierrez.... 161
Fox, William J.:
Written response to questions from Hon. Luis V. Gutierrez.... 177
Schindel, Dennis S.:
Written response to questions from Hon. Luis V. Gutierrez.... 186
OVERSIGHT OF THE
DEPARTMENT OF TREASURY
----------
Wednesday, June 16, 2004
U.S. House of Representatives,
Subcommittee on Oversight and Investigation,
Committee on Financial Services,
Washington, D.C.
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.
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.
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.
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.
This meant that it would either be inadequately funded to
fulfill its mission--ensuring the safety and soundness of
national banks and protecting the deposit insurance system--and
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 institution--and I do mean eventually,
because they have a long history of dragging their feet in a
completely unacceptable way--in 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.
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.
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.
Mr. Inslee?
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.
Thank you.
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?
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.
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.
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 undersecretary--it would be one of only three
that would be in the Department; there are two now--together
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.
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.
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.
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.
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.
Thank you.
[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.
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.
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.
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.
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 organization--and
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.
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.
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.
Thank you.
[Recess.]
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.
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 problem--and
to be sure, you have certainly defined a problem here, Madam
Chairman, there is no doubt about that--there 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 have--you will get a chance to talk to Mr. Fox and
hear what it is he has in mind subsequently--but 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.
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.
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
some--I 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.
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 not--I 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.''
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
during--I 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.
To be more specific in answering your question, the goal of
reducing by half the cost of remittances comes, I believe--I
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.
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 have--maybe
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.
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 encourage--since 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.
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.
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.
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
identification--passport, 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?
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 license--the 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.
Chairwoman Kelly. Thank you.
Mr. Royce.
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.
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 you--like 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.
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.
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.
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.
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.
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.
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.
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 oversight--exercising 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.
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.
Mr. Newcomb?
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.
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 countries--
Cuba, North Korea, Iran, Libya, Iraq, Sudan and Syria--as
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.
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.
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.
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.
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.
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.
Mr. Schindel.
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.
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.
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.
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.
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.
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 Act--the 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.
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 is--you 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.
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.
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.
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.
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.
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.
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?
Mr. Schindel. Well, I think the penalties probably--I
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.
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.
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.
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.
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.
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?
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.
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
that--that is a very good thing, in my view, by the way--as
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.]
A P P E N D I X
June 16, 2004
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