[Senate Hearing 108-683]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 108-683
 
     AN ASSESSMENT OF CURRENT EFFORTS TO COMBAT TERRORISM FINANCING
=======================================================================



                                HEARING

                               before the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 15, 2004

                               __________

      Printed for the use of the Committee on Governmental Affairs










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                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania          RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois        MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire        FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama           MARK PRYOR, Arkansas

           Michael D. Bopp, Staff Director and Chief Counsel
               David A. Kass, Chief Investigative Counsel
     Edward W. Priestop, Federal Bureau of Investigations Detailee
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
            David Barton, Minority Professional Staff Member
                      Amy B. Newhouse, Chief Clerk













                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Collins..............................................     1
    Senator Lieberman............................................     3
    Senator Coleman..............................................     5
    Senator Lautenberg...........................................     6
    Senator Akaka................................................     7
    Senator Levin................................................     8
    Senator Specter..............................................    27
    Senator Pryor................................................    29
Prepared statement:
    Senator Voinovich............................................    35

                               WITNESSES
                         Tuesday, June 15, 2004

Lee S. Wolosky, Co-Director, Independent Task Force on Terrorism 
  Financing, Counsel, Boies, Schiller and Flexner, LLP...........    11
Mallory Factor, Vice-Chairman, Independent Task Force on 
  Terrorism Financing, President, Mallory Factor, Inc............    14
Hon. David D. Aufhauser, Counsel, Williams and Connolly, LLP, 
  Former General Counsel, U.S. Department of the Treasury........    16

                     Alphabetical List of Witnesses

Aufhauser, Hon. David D.:
    Testimony....................................................    16
    Prepared Statement...........................................    46
Factor, Mallory:
    Testimony....................................................    14
    Prepared Statement...........................................    41
Wolosky, Lee S.:
    Testimony....................................................    11
    Prepared Statement...........................................    36

                                APPENDIX

Questions and responses for the Record from Senator Akaka for:
    Mr. Wolosky..................................................    51
    Mr. Factor...................................................    52
    Mr. Aufhauser................................................    53
``An Update on the Global Campaign Against Terrorist Financing,'' 
  Second Report of an Independent Task Force on Terrorist 
  Financing Sponsored by the Council on Foreign Relations, June 
  15, 2004.......................................................    54
Letter from Stanton D. Anderson, McDermott Will & Emery, dated 
  June 30, 2004..................................................   312
Response letter to Stanton D. Anderson, Esq. from William F. 
  Wechsler and Lee S. Wolosky, Esq., dated August 3, 2004, with 
  an attachment..................................................   315
















     AN ASSESSMENT OF CURRENT EFFORTS TO COMBAT TERRORISM FINANCING

                              ----------                              


                         TUESDAY, JUNE 15, 2004

                                       U.S. Senate,
                         Committee on Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:30 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Susan M. 
Collins, Chairman of the Committee, presiding.
    Present: Senators Collins, Coleman, Specter, Lieberman, 
Levin, Akaka, Lautenberg, and Pryor.

             OPENING STATEMENT BY CHAIRMAN COLLINS

    Chairman Collins. The committee will come to order.
    Good morning. Today the Governmental Affairs Committee will 
conduct a review of current efforts underway to combat 
terrorism financing.
    This is the third hearing the Committee has held during the 
past year on this issue of great global importance. The focus 
of our hearing today is a new report by the Independent Task 
Force on Terrorism Financing sponsored by the Council on 
Foreign Relations. The Council's first report, released in 
October 2002, begins with these words: ``The fog of war has 
long befuddled military and political leaders. Of all the 
battle fronts in today's war on terrorism, few are as foggy as 
efforts to combat terrorist financing.''
    As both of these reports make clear, however, this fog is 
no natural phenomenon. It is entirely manmade. Terrorism 
thrives in the shadows. It prospers by deceit and deliberate 
confusion. It is a perverted world in which murderers are 
called freedom fighters and in which building schools and 
health clinics can excuse the slaughter of innocents.
    The answer is relentless scrutiny and then taking forceful 
and effective action.
    This new report focuses primarily upon the actions taken by 
the Governments of the United States and of the Kingdom of 
Saudi Arabia. It provides an insightful analysis of the 
progress that has been made and of the challenges that remain.
    As the report observes, Saudi Arabia has, on a comparative 
basis, taken more legal and regulatory actions to combat 
terrorism financing than many other Muslim States. However, the 
size, the reach and the wealth of persons and institutions 
there with connections to violent terrorist groups put the 
kingdom on the front lines of this battle.
    There are other engines of terrorism financing, but as 
David Aufhauser, one of our distinguished witnesses, testified 
just 1 year ago, Saudi Arabia is, in many ways, the epicenter 
of terrorism financing. As the Council's first report stated, 
individuals and charities based in Saudi Arabia have been the 
most important source of funds for al Qaeda.
    A phrase that occurs again and again throughout this new 
report is political will. In some instances, it is evident and 
growing. In others it is still woefully lacking. This mixed 
result characterizes Saudi Arabia. The Saudi government 
deserves credit for undertaking considerable legislative and 
regulatory reforms. Questions remain, however, about whether 
these reforms are being consistently, effectively, and 
vigorously implemented.
    For example, the kingdom recently dissolved the notorious 
Al Haramain charity and it has created a new organization to 
coordinate and oversee private Saudi charitable giving abroad. 
This is a very positive step that should significantly diminish 
the ability of al Qaeda and other terrorist groups to raise and 
move funds using charities as conduits. There remain, however, 
serious questions. Most important, what are the Saudi's doing 
to crack down on the International Islamic Relief Organization, 
the World Assembly of Muslim Youth, and the Muslim World 
League, three of the charities alleged to have the most 
troubling terrorism connections.
    Terrorists attacking Saudi Arabia from within the country 
have been killed and many Saudi law enforcement personnel have 
given their lives. Yet this report also notes that since 
September 11, 2001 we know of not a single Saudi donor of funds 
to terrorist groups who has been publicly punished.
    Perhaps most troubling is the continued gap between what 
Saudi leaders say to the world and what some of them have to 
say to their own people. Following the al Qaeda attacks in 
early May, Crown Prince Abdullah said on Saudi TV that 
``Zionism is behind the terrorist attacks in the kingdom. . . . 
I am 95 percent sure of that.'' That astonishing and 
inflammatory remark was reiterated a few days later by the 
Saudi Foreign Minister. The Saudi Interior Minister then left 
no doubt as to the meaning when he bluntly stated that al Qaeda 
is backed by Israel.
    This is not just a lack of political will. This is 
political blindness. To say that the Kingdom of Saudi Arabia is 
a full partner in the war against terrorism while such 
inflammatory and anti-Semitic statements are being made would 
certainly be vastly premature.
    On an encouraging note, the report details significant 
progress by the U.S. Government in combating terrorism 
financing. A key recommendation of the first task force report 
in 2002 was for the Administration to centralize the 
coordination of efforts to combat terrorism financing. This has 
been accomplished to a significant degree.
    The Administration also deserves credit for prompting the 
Saudis to begin to undertake serious reforms and to extend 
meaningful cooperation to American terrorism investigations. 
The progress represented by the enactment of the Saudi legal 
reforms, the Saudi actions against al Qaeda cells in the 
kingdom, and the creation of the Joint Terrorism Financing Task 
Force should not be understated. These are indeed important 
achievements.
    But the report also finds several troubling shortcomings 
and includes a number of thought-provoking recommendations for 
change. I am particularly intrigued by the task force's 
recommendation for Congress to enact a certification regime 
that would require the President to certify whether foreign 
nations are fully cooperating with the fight against terrorism 
financing. If the President did not make this certification or 
issue a waiver in the interest of national security, non-
cooperating nations would face an array of sanctions. This type 
of regime has been employed in the war on illegal drugs. The 
report suggests that it be in place for the fight against 
terrorist funds as well.
    We, the Governments of the United States, Saudi Arabia, and 
all responsible nations, have made considerable progress in 
combating terrorism. But this struggle is not easily won and 
money remains the lifeblood of many terrorist operations. We 
must not rest until we have done everything in our power to 
halt the flow of money that breathes life into these groups. We 
must exercise relentless scrutiny and take strong action. And 
as this report emphasizes so clearly, we must have the 
sustained will necessary to win the war against terrorism.
    Senator Lieberman.

             OPENING STATEMENT BY SENATOR LIEBERMAN

    Senator Lieberman. Thank you very much, Chairman Collins 
for convening this hearing, and also, I must say, for that 
excellent opening statement.
    Our subject for today is about one of the most important 
battlefronts in our war against terror and that is the effort 
to stop the funding of terrorists. If we can succeed in choking 
off the money that sustains terrorist activities we can 
literally reduce the death and destruction the terrorists 
cause.
    The Council on Foreign Relations, in its report today, has 
done a real service. The report should help us refocus, 
reexamine and redouble our efforts to cut off the flow of money 
to international terrorist groups. Of course, that includes 
leading us to take again a hard and demanding look at financial 
support for terrorism from Saudi Arabian sources.
    Immediately after September 11, President Bush signed an 
executive order aimed at blocking terrorist funds. In one sense 
our overarching question in this hearing and our Committee's 
continuing investigations is what progress has been made in 
implementing that order.
    It is clear that in the first few months following the 
President's announcement there was very significant success. 
Over $100 million in terrorist money was blocked or frozen 
around the world. But, in the 2 years since then only $30 
million has been stopped. So that both the United Nations 
Monitoring Group on Terrorist Financing and Congress's own 
General Accounting Office concluded at the end of 2003 that 
American efforts have sadly not stemmed the flow of money to 
terror groups.
    We will want to ask our witnesses today why this has 
happened and what we can do together to make sure that we do 
cut off the flow of money. The Council on Foreign Relations 
report does suggest the beginning of a series of answers about 
where some of the problems may be.
    I thought one surprising possible cause that the report 
cites is the fact that the Administration has only used new 
authorities under the Patriot Act, the much-maligned Patriot 
Act, to crack down on the assistance of foreign financial 
institutions for terrorism only one time and that was quite 
recently against a Syrian bank. I would like to get a little 
background about why we think that has happened and whether the 
witnesses believe that there are other areas in which we can 
use that Patriot Act authority.
    Second, the Council report tells us that the coordination 
of America's efforts to block terrorist funding has bounced 
around a bit among the National Security Council, the Counsel 
of the Treasury Department, and the FBI. In fact, there have 
been five different people in charge since September 11. And, 
that uncertainty and changes in leadership may have undermined 
the coordination and the effectiveness of our anti-terror 
financing efforts.
    Leadership has now shifted, with some clarity it appears to 
me, to the National Security Council, although not through any 
formal process that would give it continuity and institutional 
permanence. I think that is greatly to be desired.
    I note for the record the nodding of at least two of the 
witnesses to that suggestion.
    I do also note that one of our witnesses today, former 
Treasury Department General Counsel David Aufhauser, believes 
that this leadership role, in fact, should reside at the 
Treasury Department. I would be interested in hearing his views 
on that matter during his testimony.
    But either way, whether at the Treasury Department or at 
the NSC, leadership has got to be made certain, and in that 
sense, institutionalized. It should no longer be left to ad hoc 
and uncertain arrangements.
    The Intelligence Committees of Congress reported a while 
back in their joint inquiry into September 11 that the tendrils 
of Bin Laden's al Qaeda terrorist network extend into as many 
as 60 countries. That means our war against this network and 
those who finance it must be just as extensive.
    The Council reports, hopefully, that 117 nations have 
signed now the International Convention to Suppress Terror 
Financing, which is up from four at the time of the September 
11 attacks. So we have gone from four countries who are 
signatories to 117. That is the good news.
    The bad news is that most of those countries, the Council 
reports, do not have either the actual tracking capabilities or 
the resources to track laundered money. I want to hear from the 
witnesses about what we can do to make that bad news better.
    In working to cut off funding for terrorism, Saudi Arabia, 
long a very important and close ally of the United States of 
America, becomes a necessary focus of attention. Bin Laden was 
a Saudi but more to the point 15 of the 19 September 11 
hijackers were Saudis and questions continue to remain about 
financial connections between Saudi money and terror funding 
within the United States.
    Before the May 2003 terrorist bombings in Riyadh many 
independent analysts, including the Council on Foreign 
Relations, have told us that Saudi officials may have talked 
the talk on cooperating with the United States in the blocking 
of terrorism financing and investigating and prosecuting of 
those who were involved in it. But then, in many cases, did not 
walk the walk. In fact, they turned a blind eye to Saudi money 
going to organizations directly or indirectly supporting 
terrorism.
    Again, I stress that is not my conclusion, that is the 
conclusion of many independent analysts. Today's CFR report 
points encouragingly to positive signs of intelligence sharing 
and law enforcement cooperation between the Saudis and the 
United States, again particularly since the May 2003 bombings 
in Riyadh. It says there is evidence that the actions taken by 
the Saudi government since then have actually hindered Bin 
Laden's financial operations and forced foreign-based terror 
groups to begin to try to raise their funds locally. That 
cooperation and progress between the United States and the 
Saudis is important and must grow.
    In fact a joint U.S.-Saudi task force on these subjects was 
established last August to help the Saudis clamp down on 
terrorism financing, but the Council report tells us jarringly 
that the work of the joint task force has not led yet to one 
public arrest or prosecution of anyone in Saudi Arabia for 
financing terrorism. And that is hard to understand, 
particularly as the Council on Foreign Relations report 
indicates that there are two Saudis named Yasin Qadi and Wa'el 
Hamza Julaidan, who have been declared financiers of terrorism 
by the U.S. Government.
    So we have made some progress in tracking and stopping 
terrorist financing but we, in Congress, still need to consider 
whether our urgent need to starve the terrorists of funding is 
being hampered by an uncertain organizational structure, by 
turf battles and perhaps by continuing defensiveness about our 
special relationship with the Saudi government and the Saudi 
ruling family.
    In a day and age of terrorism which brings death and 
destruction not just to us and others but to Saudis themselves, 
we ought to be able best to preserve our relationship with the 
Saudis with total honesty and the most aggressive joint efforts 
against terrorism.
    The CFR report and today's hearing, I hope, will begin to 
give us some answers to these questions which have become, in 
fact, life and death questions.
    Thank you, Chairman Collins.
    Chairman Collins. Thank you Senator. Senator Coleman.

              OPENING STATEMENT OF SENATOR COLEMAN

    Senator Coleman. Thank you, Chairman Collins. And thank you 
for your commitment to relentless scrutiny of this issue by 
holding a series of hearings on the report by the Council on 
Foreign Relations regarding terrorist financing.
    Just two observations. One, it is clear that a new 
framework for the U.S.-Saudi relationship needs to be put into 
play focusing on accountability, accountability for terrorist 
financing. We have to see concrete results.
    Second, in light of last week where we had a celebration of 
the life of Ronald Reagan and his optimism and belief that we 
would win the Cold War, and we did, I have the same optimism 
that we are going to win this struggle against terrorism, the 
same optimism. But it is going to take resolve, it is going to 
take commitment. This report and these series of hearings go a 
long way to bolstering that optimism and making it a reality.
    So again, I look forward to hearing the witnesses' 
testimony. Thank you for your leadership.
    Chairman Collins. Senator Lautenberg.

            OPENING STATEMENT OF SENATOR LAUTENBERG

    Senator Lautenberg. Thank you, Madam Chairman, for holding 
this important hearing.
    President Bush has said it, that money is the lifeblood of 
terrorism. And if we want to win the global war on terrorism, 
it is critical that we find out who is financing terrorism, how 
they are doing it, what we can do to stop it. And I am 
disappointed that we do not have any Administration official 
available to us today but these are good witnesses, Madam 
Chairman, and I am sure we will learn a lot.
    Cooperation between Congress and the Administration is 
imperative. And we face a daunting challenge when it comes to 
attacking the financial infrastructure that makes terrorism 
function. That is why I am puzzled that we did not take an 
obvious step a few weeks ago when I offered an amendment to the 
Department of Defense Authorization Bill to close the loophole 
that allows American companies to do business through foreign 
subsidiaries with nations that sponsor terrorism.
    I salute Chairman Collins for her vote. The amendment was 
defeated 49 to 50 and I am grateful that the Chairman was one 
of three Republicans to support the amendment. And I hope that 
she has the capacity to convince the rest of the caucus of the 
amendment's merits because I will keep offering it until the 
Senate adopts it.
    For the life of me, I do not know how we can condone U.S. 
companies doing business with rogue states like Iran. 60 
Minutes had a segment just a few months ago detailing an 
interest that, for instance, Halliburton had with a sham 
foreign subsidiary in the Grand Caymans so that it could sell 
oil field equipment to Iran. Nothing more, by the way, than an 
address, a drop station. There was nothing else there. But it 
enabled Halliburton to do business with Iran and other rogue 
states.
    I have had members of my staff look into this and sure 
enough they found evidence of the business activity that 
existed between this subsidiary and a London-based subsidiary 
of the National Iranian Oil Company called Kala Limited. The 
State Department has verified that Iran supports Hamas and 
Hezbollah and Islamic Jihad.
    I was in Israel some years ago when a terrorist attack by 
Islamic Jihad killed eight people. And I was there just a few 
weeks ago when a terrorist killed 10 people in the port city of 
Ashtarak. And we cannot forget when Hezbollah attacked the 
Marine barracks in Beirut, killing 241 of our soldiers.
    Does it make sense for an American company to help Iranians 
produce oil more efficiently when they use those extra profits 
to finance terrorist groups that have killed Americans? I went 
to four viewings and funerals last week in the State of New 
Jersey, people who died in the service of their country. And to 
think that an American company could be helping to finance 
indirectly those terrorist organizations is a national 
disgrace. We had a chance to close that loophole and we failed.
    I am also concerned, as was suggested by Chairman Collins 
and by the Ranking Member, Senator Lieberman, about the 
complicity that seems to be in existence in Saudi Arabia and 
without criticism coming sufficiently from the Administration. 
Saudi Arabia still has not designated groups like Hamas as 
terrorist organizations. And as much as 60 percent of Hamas' 
annual budget is donated from Saudi sources. And although the 
Saudis have passed some anti-money-laundering laws, they do not 
seem to be enforcing them.
    So I appreciate that we have a delicate relationship with 
countries like Saudi Arabia. But if we are going to protect 
Americans, which is the primary concern, here and abroad from 
the scourge of terrorism, we have got to find out who is 
financing it even if we disturb some of our buddies in the 
process.
    I thank you, Madam Chairman, for holding this hearing.
    Chairman Collins. Senator Pryor.
    Senator Pryor. I do not have any opening statement. Thank 
you.
    Chairman Collins. Thank you, Senator. Senator Akaka.

               OPENING STATEMENT OF SENATOR AKAKA

    Senator Akaka. Thank you very much, Madam Chairman.
    I want to commend you for having this hearing and we hope 
that it will strengthen our capability to address the threats 
and challenges of terrorism financing.
    I have a statement that I would like to place in the 
record. I just want to thank you again for holding this hearing 
and I look forward to hearing our witnesses and working with my 
colleagues on this important problem. Thank you.
    [The prepared statement of Senator Akaka follows:]
              PREPARED OPENING STATEMENT OF SENATOR AKAKA
    Madam Chairman, thank you for holding this hearing. I hope it will 
help to strengthen our capability to address the threats and challenges 
of terrorism financing.
    Last July, Mr. Pistole, from the Federal Bureau of Investigation 
reminded this Committee that identifying and dismantling the financial 
structures of terrorist groups is critical to preventing future 
attacks. We must heed Mr. Pistole's words especially as terrorist 
attacks continue to rise.
    It is disheartening that almost three years after September 11, 
terrorist groups, including al Qaeda, continue to maintain 
sophisticated financial networks. What is more alarming is that sources 
attribute at least 60 percent of Hamas and al Qaeda funds to Saudi-
based entities. Most of these funds are diverted from charities and 
businessmen to terrorist groups and are used to execute attacks or to 
entice new recruits.
    Earlier this month, Saudi Arabia pledged it would dissolve the Al-
Haramain Islamic Foundation, which U.S. officials allege to be al 
Qaeda's largest financial supporter, contributing $50 million on an 
annual basis. The National Commission for Relief and Charity Work 
Abroad will merge the assets of Al-Haramain and other Saudi-based 
charities into one account and ensure their legitimate use. But, Saudi 
officials have not yet specified whether the Commission will oversee 
charities with known terrorist connections.
    I am concerned that this may be another promise that the Saudis 
cannot fulfill.
    Last May, the Saudi government announced it would establish the 
High Commission for Charities to address Saudi-based groups financing 
terrorism. As of February of this year, no proposed budget or staff 
existed for this Commission. Furthermore, no action has been taken 
against Al-Haramain's former leader, Al-Aqil, despite Saudi Arabia's 
promises to conduct criminal proceedings.
    In addition, Saudi officials have not provided sufficient support 
to the Saudi Arabian Monetary Agency nor has the Saudi government 
created a financial intelligence unit.
    Today, many view the U.S. and Saudi Joint Task Force on Terrorism 
Financing as a test of Saudi Arabia's responsiveness to terrorism. This 
collaboration will be an opportunity to gauge the Saudi's willingness 
to block the flow of money from its general and elite populations to 
terrorist organizations. I hope this task force will mark the beginning 
of progress.
    I look forward to hearing from our witnesses and to working with my 
colleagues to address this critical issue.
    Thank you.

    Chairman Collins. Thank you, Senator. Senator Levin.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Madam Chairman, thank you, and thank you for 
your continuing leadership in this effort.
    Since the September 11 attacks, this Committee has focused 
needed attention on the role of Saudi Arabia and the Saudia-
based charitable organizations and terrorist financing. Today's 
hearing is the third in a series focusing on this issue over 
the past year. And I commend you again, Madam Chairman, for 
sustaining this Committee's strong oversight tradition for this 
critical issue.
    Today's hearing focuses on a report authorized by the 
nonpartisan Council on Foreign Relations. It builds on a prior 
Council report issued nearly 2 years ago. It offers a number of 
important and practical suggestions including revitalizing the 
international effort led by the Financial Action Task Force to 
convince jurisdictions to strengthen their anti-money 
laundering efforts and improving the U.S. Government's sharing 
of terrorist financing information with U.S. financial 
institutions so that they can do a better job.
    I want to focus just for a moment on one of the primary 
topics examined in the report and that is the role of Saudi 
Arabia. Right now, Saudi Arabia has two primary exports to the 
rest of the world: Oil and an extreme form of Islam that 
advocates hatred and violence to achieve its ends. Two exports, 
both having a huge impact on the world.
    The report before us today does not shy away from the 
reality of that second export. It describes the ``fundamental 
centrality that persons and institutions based in Saudi Arabia 
have had in financing militant Islamic groups on a global 
basis.''
    And then it repeats a statement that was made in its 
earlier report which is worth repeating, and that is that ``it 
is worth stating clearly and unambiguously what official U.S. 
Government spokespersons have not. For years individuals and 
charities based in Saudi Arabia have been the most important 
source of funds for al-Qaeda; and for years Saudi officials 
have turned a blind eye to that problem.''
    Madam Chairman, because of the number of witnesses that we 
have I would ask that the balance of my statement be placed in 
the record at this time.
    [The prepared statement of Senator Levin follows:]
              PREPARED OPENING STATEMENT OF SENATOR LEVIN
    Terrorists need money to carry out acts of terrorism. They need 
money for explosives, for communications, for travel, and for all the 
other details involved in carrying out plans for mass murder and 
mayhem. Global terrorist organizations need global financing. They need 
to be able to transfer funds across international lines, move money 
quickly, and minimize inquiries into their finances, their activities, 
and their supporters.
    Since the September 11 attack, stopping terrorist financing has 
become a U.S. priority. This Committee has contributed in a significant 
way to that priority. First, prior to the attack, the Committee's 
Permanent Subcommittee on Investigations conducted a 3-year anti-money 
laundering investigation which produced extensive hearings and reports, 
documented little known methods for transferring illegal funds into the 
United States, and identified ways to strengthen U.S. laws to stop 
money laundering and terrorist financing. In early 2001, I introduced a 
bipartisan bill, S. 1371, with specific legislative proposals for 
strengthening U.S. anti-money laundering laws. The Senate Banking 
Committee utilized them in Title III of the USA Patriot Act, which was 
enacted into law in October 2001, 6 weeks after the September 11 
attack.
    Additionally, since the attack, this Committee has focused needed 
attention on the role of Saudi Arabia and Saudi-based charitable 
organizations in terrorist financing. Today's hearing is the third in a 
series focusing on this issue over the past year, and I commend 
Chairman Collins for sustaining the Committee's strong oversight of 
this critical issue. In the last Committee hearing on this topic, a key 
government official stated that ``in many ways, [Saudi Arabia] is the 
epicenter'' for financing of al Qaeda and other terrorist movements. 
Today's hearing focuses on a report that carries much the same message.
    This report is authored by the nonpartisan Council on Foreign 
Relations. It builds on a prior Council report issued nearly 2 years 
ago, and addresses both the global campaign against terrorist financing 
and the additional steps that need to be taken by the United States and 
Saudi Arabia to combat terrorist financing. It offers a number of 
important and practical suggestions, including revitalizing the 
international effort led by the Financial Action Task Force to convince 
jurisdictions to strengthen their anti-money laundering efforts and 
improving the U.S. Government's sharing of terrorist financing 
information with U.S. financial institutions so they can do a better 
job.
    I want to focus for a moment on one of the primary topics examined 
in the report and that is the role of Saudi Arabia. Right now, Saudi 
Arabia has two primary exports to the rest of the world: Oil and an 
extreme form of Islam that advocates hatred and violence to achieve its 
end.
    The report before us today does not shy away from this reality. It 
describes ``the fundamental centrality persons and institutions based 
in Saudi Arabia have had in financing militant Islamist groups on a 
global basis.'' It repeats a statement made in its earlier report:

        ``It is worth stating clearly and unambiguously what official 
        U.S. Government spokespersons have not: For years, individuals 
        and charities based in Saudi Arabia have been the most 
        important source of funds for al-Qaeda; and for years, Saudi 
        officials have turned a blind eye to this problem.''

The report cites with approval Saudi actions over the past 2 years to 
overhaul its anti-money laundering laws, increase its oversight of 
Saudi charities, and disrupt al Qaeda cells within the country. But it 
also faults Saudi Arabia for failing to prosecute a single individual 
involved with terrorist financing and for continuing to export radical 
extremism even while curbing it domestically.
    For too long, Saudi Arabia has made a Faustian deal with the 
extremists who preach hatred and violence to achieve their ends, hoping 
that the violence these extremists advocate would not bloody the sands 
of Saudi Arabia itself. But recent events indicate that Saudi Arabia is 
beginning to reap what it has helped to sow worldwide, and that no one 
is safe from those who advocate terrorism to achieve their aims. The 
list of tragic events in Saudi Arabia resembles those in other 
countries ravaged by terrorism, with repeated bombings, kidnappings, 
and senseless death and destruction. On May 12 and November 9 of last 
year, for example, al Qaeda operatives bombed housing complexes used by 
foreign workers living in Riyadh, leading to the deaths of more than 50 
individuals. This year saw an attack on Riyadh's General Security 
building followed by two attacks on Saudi oil facilities with the 
latter resulting in 22 fatalities. Now rumors allege a plot to kill 
Crown Prince Abdullah.
    The report before us today advocates building a new framework for 
U.S.-Saudi relations that will include a frank acknowledgment of 
terrorist financing issues and the need to end Saudi support for 
radical extremism that condones violence. The plain fact is that, to 
stop terrorism, Saudi Arabia needs to stop financing radical clerics 
and madrassas that preach violence and hatred. It needs to publicly 
prosecute those who foment and finance terror. Ultimately, the Saudi 
government needs to recognize that it is not sufficient to selectively 
oppose terrorist groups that pose an immediate threat. The presence of 
any terrorist organization, regardless of its immediate focus, is a 
threat to all nations. For that reason, Saudi Arabia as well as our 
European allies need to cease funding for all terrorist groups, 
including Hamas and the charities that support it.
    Of course, it is not just Saudi Arabia that needs to do more to 
fight terrorist financing. There is plenty that we in the United States 
need to do here at home. The report's recommendation that the U.S. 
conduct an analysis of Federal agencies to determine ``who is doing 
what, how well and with what resources,'' is another way of saying that 
our current anti-money laundering and terrorist financing efforts are 
scattered, duplicative, and inefficient. There is no one top official 
in charge, little coordination, and less accountability.
    The unfolding scandal at Riggs National Bank is another measure of 
our own weak anti-money laundering enforcement. Bank regulators 
recently imposed a $25 million fine on Riggs for its inadequate anti-
money laundering efforts, but at the same time apologized for their own 
lax oversight in allowing Riggs to continue its failed policies and 
procedures for more than five years. Riggs has managed bank accounts 
not just for Saudi officials, but also for more than 100 other 
governments around the world. Recently, Riggs announced its intention 
to close many Embassy-related accounts due to high money laundering 
risks and the bank's inability to monitor them. These Embassies are now 
looking to open accounts at other banks. Federal regulators recently 
held a meeting with major U.S. banks to explain their expectations for 
managing these Embassy accounts. While the regulators insist this 
meeting was intended to spread the word about the need for due 
diligence, the media reported that others apparently interpreted the 
meeting as signaling regulatory support for taking on these accounts.
    These mixed signals are a huge mistake. One of the lessons of the 
Riggs scandal must be that Embassy bank accounts can no longer operate 
with minimal scrutiny. Our banks and bank regulators must establish new 
rules and expectations. Embassy officials need to realize they can no 
longer engage in substantial cash transactions with no questions asked. 
Multiple Embassy accounts can no longer be opened with little or no due 
diligence. Suspicious transactions must be explained and justified. It 
can't be business as usual. Our security and the world's security 
depends upon it.
    The 2002 report by the Council on Foreign Relations made a positive 
contribution to the fight against terrorist financing by saying a 
number of things that needed to be said openly and clearly and by 
making reasonable and practical suggestions. This second report has the 
potential to do the same. I thank today's witnesses for their service 
to our nation in contributing to this report and look forward to 
hearing their testimony today.

    Chairman Collins. Thank you, Senator Levin.
    I am delighted to welcome our witnesses this morning. We 
are extremely fortunate to have three such qualified experts to 
testify before us.
    Lee Wolosky previously worked as the Director of 
Transnational Threats at the National Security Council. He is 
currently Counsel at the law firm of Boies, Schiller and 
Flexner and is an Adjunct Professor of International Affairs at 
Columbia University. Mr. Wolosky is also the Co-Director of the 
Independent Task Force on Terrorist Financing sponsored by the 
Council on Foreign Relations.
    Mallory Factor is the President of Mallory Factor Inc., an 
independent merchant bank and financial relations firm that he 
founded in 1976. Mr. Factor has also worked as a Professor at 
the School of Continuing and Professional Studies at New York 
University and he serves as Vice-Chairman of the Task Force on 
Terrorist Financing.
    We are also pleased to have with us for a second time David 
Aufhauser, who is now a member of the law firm of Williams and 
Connolly. He previously served as General Counsel of the 
Treasury Department from March 2001 to November 2003. At the 
Treasury Department, in addition to his responsibilities as 
General Counsel, Mr. Aufhauser served as the Chairman of the 
National Security Council's Policy Coordinating Committee on 
Terrorist Financing.
    Thank you all for being with us today. We look forward to 
hearing your testimony. We will begin with you, Mr. Wolosky.

 TESTIMONY OF LEE S. WOLOSKY,\1\ CO-DIRECTOR, INDEPENDENT TASK 
  FORCE ON TERRORISM FINANCING, COUNSEL, BOIES, SCHILLER AND 
                          FLEXNER, LLP

    Mr. Wolosky. Thank you very much. Madam Chairman, Senator 
Lieberman and distinguished Members of the Committee, thank you 
for your kind words about our report and for your continuing 
leadership on terrorist financing issues.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Wolosky appears in the Appendix 
on page 36.
---------------------------------------------------------------------------
    This Committee's sustained attention to these issues is 
critically important to our Nation.
    We are honored to report to you today on the Second Report 
of the Independent Task Force on Terrorist Financing sponsored 
by the Council on Foreign Relations. I have served as co-
director of this bipartisan initiative since its founding in 
the Summer of 2002.
    Our report is the result of the hard work of a number of 
dedicated individuals of both political parties to seek to 
further vital national interests. I wish to thank our Chairman, 
Maurice Greenberg, for his unwavering support of the task 
force. I would also like to thank our Vice-Chairman, Mallory 
Factor, and our Co-director and Co-author, William F. Wechsler, 
for all they have done to make the task force a success.
    Finally, I am also grateful to Council President, Richard 
Haas, for his support and assistance to our work and it is an 
honor, let me add, to testify beside David Aufhauser, who 
served our country with dedication and distinction. Many of the 
positive developments in this area since September 11 are the 
direct fruits of his vision and leadership.
    I will discuss the background of our second report and its 
findings. Mallory Factor will then discuss the report's 
recommendations.
    Since the report, along with its various appendices, is 
almost 200 pages in length we will only be able to highlight 
core points and findings. We will ask that the full report and 
its appendices be entered into the record and we will look 
forward to a fuller discussion of various aspects of the report 
in response to your questions.\2\
---------------------------------------------------------------------------
    \2\ The report entitled ``An Update on the Global Campaign Against 
Terrorist Financing,'' appears in the Appendix on page 54.
---------------------------------------------------------------------------
    In our first report, released in October 2002, we concluded 
``It is worth stating clearly and unambiguously what official 
U.S. Government spokespersons have not, for years individuals 
and organizations based in Saudi Arabia have been the most 
important source of funds for al-Qaeda and for years Saudi 
officials have turned a blind eye to this problem.''
    We recommended the encouragement of the Saudi regime to 
strengthen significantly its efforts to combat terrorist 
financing. In this regard, we noted a recent historical record 
of inattention, denial, and half measures.
    We urged the U.S. Government to confront directly the lack 
of political will in Saudi Arabia and elsewhere through the 
institution of a declaratory policy that would permit or compel 
U.S. officials to speak more frankly about the nature of the 
problem.
    The reaction to the release of the task force's initial 
report was reflective of then-prevailing mindsets. The Saudi 
Arabian Foreign Minister, for example, told CNN that the report 
was ``long on accusation and short on documented proof.''
    The U.S. Treasury Department spokesperson called the report 
``seriously flawed.''
    The status quo changed on May 12, 2003 when al Qaeda bombed 
housing compounds in Riyadh used by Americans and other foreign 
residents, prompting more comprehensive Saudi action against 
terrorism. Public statements and actions by both the United 
States and Saudi Arabia since May 2003 have evidenced in many 
respects a more urgent approach to terrorist financing.
    For example, Saudi Arabia has announced a profusion of new 
laws, regulations and institutions regarding money-laundering, 
charitable oversight and the supervision of the formal and 
informal financial services sector. Critically, for the first 
time, the Saudi Arabian government decided to use force to hunt 
and kill members of domestic al Qaeda cells, including, in one 
case, a financier known by the name of Swift Sword.
    Saudi Arabia has markedly improved its tactical law 
enforcement and intelligence cooperation with the United 
States. The Bush Administration acted quickly to take advantage 
of the newfound political will in Saudi Arabia to renew and 
reinvigorate U.S. efforts to combat terrorist financing.
    The Bush Administration also moved toward a more 
declaratory policy. On June 26, 2003, for example, David 
Aufhauser testified before the Congress that in many respects 
Saudi Arabia was an ``epicenter'' of terrorist financing.
    As a result of these and other activities, al Qaeda's 
current and prospective ability to raise and move funds with 
impunity has been significantly diminished. These efforts have 
likely made a real impact on al Qaeda's financial picture, and 
it is undoubtedly a weaker organization as a result.
    Indeed, in many respects, the views expressed in the task 
force's first report are now widely held at home and abroad. 
But although much work has been done, much work remains.
    Although Saudi Arabia has made significant improvements in 
its legal and regulatory regime, it has not fully implemented 
its new laws and regulations. Because of that, opportunities 
for the witting or unwitting financing of terrorism persist.
    Indicia of implementation and enforcement are generally 
unavailable. We are concerned that the unavailability of such 
indicia may negatively impact the deterrent effect presumably 
intended by these measures. As our report was going to press, 
for example, we were unable to find evidence to suggest that 
the announced High Commission of Oversight of Charities was 
fully operational. Moreover, its composition, authority, 
mandate and charter remain unclear, as do important metrics of 
its likely effectiveness, such as staffing levels, budget, and 
the training of its personnel.
    The mandate and authority of the High Commission of 
Oversights of Charity is also unclear, relative to that of the 
Saudi National Entity for Charitable Work Abroad which was 
first announced in February of this year and which was the 
subject of a press conference in Washington a few days ago.
    At least one other key body, Saudi Arabia's Financial 
Intelligence Unit, is also not yet fully operational. Reliable, 
accessible metrics are lacking with respect to many of the 
other newly announced legal, regulatory and institutional 
reforms. We find this troubling given the importance of these 
issues to the national security of the United States.
    Additionally, despite the flurry of laws and regulations, 
we believe that there have been no publicly announced arrests, 
trials or incarcerations in Saudi Arabia in response to the 
financing of terrorism. As a result Saudi Arabia has yet to 
demand personal accountability in its efforts to combat 
terrorist financing and, more broadly and fundamentally, to 
delegitimize these activities.
    Against its poor historical enforcement record any Saudi 
actions against financiers of terrorism are welcome. But action 
taken in the shadows may have little consistent or systemic 
impact on ingrained social or cultural practices that directly 
or indirectly threaten the security of the United States.
    Not only have there been no publicly announced arrests in 
Saudi Arabia related to terrorist financing, but key financiers 
remain free and go unpunished. In sum, we find it regrettable 
and unacceptable that since September 11, 2001 we know of not a 
single Saudi donor of funds to terrorist groups who has been 
publicly punished.
    Finally, as Senator Levin indicated, Saudi Arabia continues 
to export radical extremism. As a core tenet of its foreign-
policy, Saudi Arabia funds the global propagation of Wahabism, 
a brand of Islam that, in some instances, supports militancy by 
encouraging divisiveness and violent acts against Muslims and 
non-Muslims alike.
    This massive spending is a key part of the terrorist 
financing problem. We are concerned that it is helping to 
create the next generation of terrorists and therefore 
constitutes a paramount strategic threat to the United States.
    Saudi Arabia has begun to crack down on domestic extremism, 
most dramatically through education reform and the banishment 
or reeducation of scores of radical Wahabi clerics. But our 
task force found there is little evidence of effective action 
to curb the ongoing export of extremism.
    We have made a number of findings that I hope we can 
discuss. In the interest of time, however, Mallory Factor will 
now address the report's recommendations, after which I would 
be happy to entertain any questions.
    Chairman Collins. Thank you. Mr. Factor.

TESTIMONY OF MALLORY FACTOR,\1\ VICE-CHAIRMAN, INDEPENDENT TASK 
 FORCE ON TERRORISM FINANCING, PRESIDENT OF MALLORY FACTOR, INC

    Mr. Factor. Madam Chairman, Senator Lieberman, and 
distinguished Members of the Committee, I am honored to testify 
here today on the recommendations of the Independent Task Force 
of the Council on Foreign Relations on Terrorist Financing, of 
which I serve as Vice-Chair.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Factor appears in the Appendix on 
page 41.
---------------------------------------------------------------------------
    This subject is of critical importance to the security of 
our Nation and the world. Madam Chairman, and Senator 
Lieberman, I would like to commend you for your interest in and 
leadership on these very important issues and thank you for 
inviting us to appear before you today.
    I would also like to thank and commend Lee Wolosky for his 
tireless work and dedication to this project. Achievements of 
our bipartisan task force are a direct result of Lee Wolosky's 
dedication to this project and his superior judgment in matters 
involving this task force.
    The Bush Administration has made significant progress in 
its approach to terror financing since September 11. Our 
report, which is based on publicly available information as 
well as discussions with current and former Administration 
officials, finds that the Administration's effort, combined 
with those of Saudis and other international partners, has 
significantly diminished al Qaeda's current and prospective 
ability to raise and move funds.
    Our task force makes the point that there is still much 
work to be done. It also sets forth a framework of 
constructive, forward-looking recommendations for improving 
U.S. efforts against terrorism financing.
    We note that Saudi Arabia has also made progress since May 
2003 by putting in place new anti-money laundering laws 
designed to impede the flow of funds from Saudi Arabia to 
terrorist groups. These laws have a number of exceptions and 
flaws which would weaken their effectiveness in curbing terror 
financing if fully implemented.
    The real problem is that we could not find evidence of 
significant enforcement and implementation by Saudi Arabia of 
several of these new laws. Quite simply, many key financiers of 
global terror continue to operate, remain free and go 
unpunished in Saudi Arabia.
    Our task force report generally reaffirms the 
recommendations made in the task force's first report and makes 
nine new recommendations. Although my written testimony 
explains each of these recommendations, I will discuss only 
four recommendations now. However, I welcome the opportunity to 
discuss any of them in response to your questions.
    First, our task force urges U.S. policymakers to build a 
new framework for U.S.-Saudi relations. We recognize that 
historically the United States has maintained a policy of 
noninterference in the domestic affairs of Saudi Arabia. 
Recently, however, al Qaeda, a terrorist organization rooted in 
Saudi Arabian domestic affairs, has killed and threatened 
Americans both at home and abroad. Saudi Arabia is now involved 
in a kind of civil war with extremists. This civil war has 
global implications.
    We propose a new framework for U.S.-Saudi relations which 
would recognize certain Saudi domestic issues that impact U.S. 
security. These issues, such as terrorist financing and the 
global export of Islamic extremism, can no longer be off the 
table.
    We acknowledge that this transition is already underway but 
our recommendation is still out in front of the 
Administration's public statements on this issue. We believe 
that the U.S. Government must engage the Saudis openly and 
unequivocally to confront the ideological, religious and 
cultural issues that fuel al Qaeda, its imitators and its 
financiers throughout the world.
    Second, and this was already brought up by Senator 
Lieberman, we believe that the Executive Branch should 
formalize its efforts to centralize the coordination of U.S. 
measures to combat terrorist financing. We commend the 
Executive Branch for centralizing the coordination of terrorist 
financing issues in the White House as we recommended in our 
original task force report. The sound allocation of 
responsibility to the White House needs to be formalized and, 
as Senator Lieberman said, institutionalized. And we believe 
this should be done through a national security presidential 
directive or some measure similar to that.
    Third, we recommend that Congress enact a Treasury-led 
certification regime specifically on terrorist financing. Many 
countries have taken steps to improve their anti-money 
laundering and counterterrorist fighting regimes but many have 
not. We understand that certification systems should be used 
sparingly. They can strain relations with foreign governments 
and require expenditures of resources. The fight against 
terrorist financing is sufficiently important, however, to 
warrant its own certification regime. This will ensure that 
stringent requirements are maintained specifically with respect 
to foreign nations' policies and practices on terrorist 
financing.
    Such a certification system would require the Executive 
Branch to submit to Congress on an annual basis a written 
certification, classified if necessary, detailing the steps 
that foreign nations have taken to cooperate in United States 
and international efforts to combat terrorist financing. This 
would be similar in some ways to the Saudi Arabia 
Accountability Act of 2003, S. 1888, sponsored by Senator Arlen 
Specter and co-sponsored by Chairman Collins and others. The 
Act would provide a good starting point for a terrorist 
financing certification regime if it were narrowed to focus 
solely on the financing of terrorism and expanded to apply to 
other nations.
    Sanctions for non-certification could include smart 
sanctions such as denial of U.S. foreign assistance and 
limitations on access to the U.S. financial system.
    Fourth, we recommend that the National Security Council and 
the White House Office of Management and Budget conduct a 
cross-cutting analysis of the budgets of all U.S. Government 
agencies as they relate to terrorist financing. We believe it 
is crucial that the U.S. Government keep a central accounting 
of all financial and human resources expended by the government 
in combating terrorist financing. We understand this cross-
cutting analysis could take a significant amount of work on the 
part of NSC and OMB. However, it is crucial for government 
leaders to gain clarity about who is doing what, how well they 
are doing, and with what resources.
    We commend Jody Myers, a former NSC staffer, for suggesting 
a similar cross-cutting analysis in his Senate testimony given 
last month.
    I thank you for your time and I look forward to your 
questions.
    Chairman Collins. Thank you, Mr. Factor. Mr. Aufhauser.

TESTIMONY OF HON. DAVID D. AUFHAUSER,\1\ COUNSEL, WILLIAMS AND 
 CONNOLLY, LLP, FORMER GENERAL COUNSEL, U.S. DEPARTMENT OF THE 
                            TREASURY

    Mr. Aufhauser. Thank you, Madam Chairman.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Aufhauser appears in the Appendix 
on page 46.
---------------------------------------------------------------------------
    I just wish I could get back to Maine as often as I have 
gotten back to this room since I left the government.
    Chairman Collins. We would welcome you back anytime.
    Mr. Aufhauser. In early 1996, Osama bin Laden was living in 
exile in the Sudan. He was at war with the House of Saud policy 
that countenanced the presence of U.S. military troops on Saudi 
soil. And he was already plotting mayhem sufficient enough to 
warrant the establishment of a special issue station at the CIA 
devoted exclusively to divining his ambitions and his designs. 
Still, he was largely regarded as the son of a rich man and 
principally a financier of terror. In fact, the original name 
for the special-purpose unit at the agency was TFL, Terrorist 
Financial Links.
    It turned out actually that bin Laden was a hapless 
businessman. His ventures failed and were not the principal 
source of al Qaeda's wealth. Rather, he tapped something far 
deeper and more dangerous, hate preached and taught in places 
of despair, married to rivers of unaccounted for funds that 
flowed across borders in the counterfeit name of charity and 
faith. In so doing, bin Laden managed to leverage the tactic of 
terror into a malevolent dogma embraced by an army of madmen.
    How we got here is instructive to where we ought to go 
next.
    In 1974, a disgraced president was driven from office for 
lies and deceits. In 1977, an international extralegal cartel 
literally dimmed the lights of the White House, demonstrating 
profound new powers abroad not tied to guns and bullets. And in 
1979, the nadir of U.S. influence--the Shah transformed into a 
stateless person, hostages held captive for more than a year; a 
failed rescue mission and the Soviet invasion of Afghanistan.
    Tied to that significantly was the takeover of the Grand 
Mosque in Mecca, challenging the sole claim to legitimacy of 
the Saudi Royal family as the guardians of the faith. A United 
States seen as impotent to protect its allies and citizens 
abroad held little promise to the threatened Saudi monarchy.
    So it understandably responded with a vengeance of its own, 
retaking the mosque and directing an unfathomable wealth of 
petro-dollars--by some estimates that I read while I was still 
in the Administration north of $75 billion--to demonstrate that 
it is the true and rightful champion of Islam. It did so by 
underwriting schools, mosques, call centers, and charities 
throughout the Islamic diaspora. Wherever there was need they 
came as teachers, as providers of social welfare and safety 
nets, and as holy men. But what they taught was unforgiving, 
intolerant, uncompromising and austere views of a faith that 
became kindling for Osama bin Laden's match.
    At the same time I want to note that there was a parallel 
explosion in the growth of Gulf and Western State-sponsored 
NGOs, in Eastern Europe, Africa, the Middle East, and Southeast 
Asia. Much like the Saudi model of outreach, these 
organizations rushed in to fill a vacuum left by the abdication 
of responsibility by sovereign powers to solve issues not 
uncommon or unlike what we see going on in the Sudan today.
    Again through the delivery of default government civilian 
services of the most basic type--schools, welfare, medical 
aid--these NGOs, once proud of the principal of neutrality, 
have become the principal medium of thought and teaching in 
those areas.
    And an air and patina of legitimacy attached to these 
extralegal, non-sovereign entities and a cover frequently, 
unwittingly was established to disguise charitable money 
corrupted for terrorist purposes.
    All of these extralegal non-sovereign international 
entities need more policing, not just of the application of 
their proceeds, but what they teach and what they preach and 
the consequence of it. And nowhere is that more telling than 
when you focus on Saudi Arabia.
    It will take a generation, and to be frank a clearheaded 
program of public diplomacy that, for example, condemns legal 
sophistries that would justify torture, to recapture hearts and 
minds poisoned by false teachings of hate. What can be done and 
should be done to scale back the violence in the interim is to 
deplete the resources made available to kill innocent people. 
No tool is more useful in doing so than stopping the funding of 
terrorism. The Council on Foreign Relations and this Committee 
are to be commended for the profile given to the subject.
    As for al Qaeda, the organization is broken, its central 
bank severely challenged. Yet today it is more lethal than the 
day that it brought down the twin towers in Manhattan. It is 
more a movement than an organization today, less predictable 
with less explicit design. There are autonomous cells, catering 
to acts of near nihilism, increasingly funded through 
pedestrian local criminal activity. And they threaten sudden 
and senseless death without any purpose. And they do so 
everywhere today, in Bali, in Istanbul, the London subway 
system, Casablanca, Baghdad, New York, and Washington.
    We know we cannot bunker and guard every school, 
marketplace, shopping center, airport, train station, or place 
of worship. So new elements of national power are required to 
prevent more killing and another calamity. None are more 
central to the prevention of a calamity than intelligence and 
the disruption of the lines of logistical support for terror. 
Money informs and defines both. It informs and defines both 
with a degree of integrity, reliability, insight, and impact 
that is without peer.
    Many of you have heard me testify before that most of the 
intelligence and information we get in the war on terrorism is 
suspect, the product of treachery, deceit, custodial 
interrogation, and now we learn the product of torture. But the 
money records do not lie. They are diaries. They are 
confessions never intended to see the light of day and they 
lead to trails of plots not unlike the plot to use ricin in the 
London subway system which was stopped because of the 
exploitation of the money trail.
    By the way, for those of you who do not know ricin, if made 
well, is 10 times more lethal than VX gas.
    September 11 brought a group of us together in the 
Administration to tackle the subject of terrorist financing 
with demonstrable successes. Today there is a new vocabulary 
about it and it includes new laws, new standards of 
professional and fiduciary conduct, extraordinary commitments 
of multilateralism at the UN, World Bank, IMF, and within the 
G8, 10, and 20, as well as APEC, greater capacity building 
abroad which I think was alluded to by Senator Lieberman, more 
sophisticated intelligence and a greatly enhanced partnership 
with the private sector.
    But the effort remains at best a proxy, in my judgment, for 
the real thing. Terrorism permits murder to masquerade under 
religious sanction altering the whole DNA of war by placing a 
premium on the death of women and children. Until it is an act 
of shame to provide money for any such purpose the blood will 
flow. Accordingly, we must return to first principles: Terror 
must be defined, at the UN and elsewhere, in a manner to 
condemn money intended to kill civilians for political purpose.
    We must also disrupt not only the funding of terror but the 
funding of the teaching of hate because it is the crucible for 
terror.
    And we must address the deficit of hope that haunts much of 
the Islamic world with debt reduction and meaningful economic 
aid and development assistance, the very reasons I joined the 
Treasury Department. Paul O'Neill had a metaphor that I liked, 
even as quixotic as it sounded, our ambition was to build a 
well in every village.
    Of more immediate purpose within the jurisdiction of this 
Committee, the assets and cash flow that we seek to freeze and 
disrupt are located abroad. International cooperation is 
therefore critical and it requires a new mindset in 
intelligence that will inform both the nature and the manner of 
collection.
    Our new secrets must be collected with the intention of 
sharing them and strong enough to withstand a measure of 
judicial scrutiny abroad. That is a sea change and it is a sea 
change required by the developing jurisprudence of terrorism 
and its singular and unprecedented focus on prevention rather 
than punishment.
    In addition, if Madrid has any lessons terrorism funded 
through criminal activity--and that was the case in Madrid--
local law enforcement must be integrated more directly with the 
national intelligence community to facilitate a two-way 
dialogue of increasingly equal value.
    Finally, we must vest an agency of the U.S. Government with 
the power to direct and execute the campaign against terrorist 
financing. The NSC is simply not the appropriate place to 
direct a theater of war.
    The man who straps a bomb to his chest as he enters a 
marketplace is implacable. He is beyond redemption and cannot 
be deterred. It would be the height of irony and a promise of 
future tragedy if we permit the orthodoxy of how we have 
organized ourselves in the past and how we have collected and 
acted upon intelligence in the past to deter us from responding 
in the future.
    Thank you.
    Chairman Collins. Thank you for your eloquent statement.
    Mr. Wolosky, Mr. Aufhauser mentioned the money trail. The 
money trail often leads from prominent Saudi individuals to 
Islamic charities to terrorist groups. That is why the Saudi 
crackdown and increased regulation of Islamic charities that 
have been too often used as a conduit to terrorist groups is so 
important.
    However, it appears that some of the Saudi regulations 
explicitly exempt three of the charities that I mentioned in my 
opening statement that are alleged to have strong ties to 
terrorist groups, and that is the International Islamic Relief 
Organization, the World Assembly of Muslim Youth, and the 
Muslim World League.
    Is there any reason for those three charities to be treated 
differently from some of the others where the Saudis have, in 
fact, cracked down? I am thinking, for example, the regulations 
generally restrict Saudi charities from sending monies overseas 
and yet those three charities are exempt from that regulation. 
Is there any reason that they should be treated differently?
    Mr. Wolosky. That is a very good question and thank you, 
Senator, for it.
    There are issues concerning not only the laws and 
regulations that have been passed by Saudi Arabia relating to 
these issues but also their scope and their implementation. The 
issue that you point out, I believe, relates to this body of 
law which is the body of law that governs bank accounts that 
are opened and operated within Saudi financial institutions. 
And specifically, there is a provision of law 300-1-6-5 which 
appears on its face to exempt from its purview the three 
specific organizations that you have identified, which 
collectively account for billions of dollars in international 
disbursements, from the body of law of which it is a part and 
which restricts or prohibits disbursements by Saudi-based 
charitable institutions abroad.
    It is an open question and it is one that I would encourage 
this Committee to pursue, and certainly our task force will 
pursue it. But it certainly appears to be a case where the 
exemption might swallow the rule.
    In addition, I would like to point out that there are 
questions regarding the scope of the purview of the new 
institutions that are being created to regulate Saudi 
charities. And in that regard, I note that in a press 
conference just a few days ago in Washington a new entity was 
announced into which all Saudi charities were going to be 
dissolved, at least that is what was indicated by the Saudi 
spokesperson.
    However, when pressed for specific charities he indicated 
not only Al Haramain, which was a primary focus of the press 
conference, but a bunch of what I would consider relatively 
minor organizations, namely the Committee to Support the 
Afghans, the Committee to Support the Bosnians, the Committee 
for Relief in Kosovo, the Crossover Relief Fund, and the 
Committee to Support the Palestinians.
    I certainly welcome the inclusion of these organizations 
within the new entity that has been established to regulate 
charitable giving abroad but really what was not mentioned were 
those three multibillion-dollar organizations which are a 
significant part, and should be in my judgment, a significant 
part of any overall Saudi efforts to regulate charitable giving 
abroad.
    Chairman Collins. Thank you.
    Mr. Aufhauser, the money trail often leads back to very 
high-profile wealthy individuals living freely in Saudi Arabia. 
In fact, the report notes three prominent men whom the Treasury 
Department has listed as specifically designated global 
terrorists, and I believe two of the three were added to that 
list while you were at the Treasury Department as General 
Counsel.
    In your judgment, why are not Saudi leaders cracking down 
and arresting and making an example of these prominent 
individuals who are the source of considerable funding for 
terrorist groups?
    Mr. Aufhauser. Let me answer it in a somewhat roundabout 
way because I think your opening statement alluded to the Joint 
Terrorism Task Force, about which I was vainly proud at the 
time I left the Treasury Department, as being a singular 
success.
    The ambition of that task force was to take our body of 
knowledge of their domestic citizens, including prominent 
merchants of Jetta or Riyadh and to ally it with, for the first 
time that I am aware in our history of cooperation with 
domestic law enforcement compulsory process powers of the Saudi 
government so that they could take what I will call our package 
of intelligence and remold it and morph it into a package of 
evidence sustainable in a court of law and that would permit a 
judicial action of a criminal nature.
    Mind you, they did take the action of freezing assets so 
they have done the regulatory administrative measures we asked 
of them with regard to those three miscreants.
    The disappointment about the Joint Terrorism Task Force is 
that it apparently has not been used to date to complement the 
intelligence that we have shared on those three gentlemen and 
on others, but rather its resources appear to have been 
redirected to the forensic demands of the bombings. So we have, 
with some irony, new zeal in the pursuit of terror in Saudi 
Arabia but at a substantial cost to less resources devoted to 
the export of terror.
    Chairman Collins. Thank you. Senator Lieberman.
    Senator Lieberman. Thanks very much, Chairman Collins.
    Let me focus on one interesting aspect of your report which 
is about the failure to use a part of the Patriot Act, Section 
311. It gives Treasury anti-money laundering special measures 
to prosecute terrorist financing in countries with inadequate 
banking regulations and, in fact, to restrict any bank charity 
business or country that engages in money laundering from using 
U.S. markets.
    Your report today states that these special prosecutorial 
powers have still not been used, or perhaps used recently, once 
against a Syrian bank.
    Why is that, and what can we do to get the folks in the 
Administration and in the Treasury Department, to use these 
powers more aggressively? Mr. Wolosky or Mr. Aufhauser, 
whichever one of you would like to answer.
    Mr. Wolosky. I do not know. I cannot speak to why they have 
not been used more broadly. As you point out, our first report 
in October 2002 urges the U.S. Government to use more 
aggressively the special measures contained in Section 311 of 
the Patriot Act to prohibit or restrict the access of certain 
foreign jurisdictions or specific foreign financial 
institutions from the U.S. financial system under the powers in 
that act.
    Certainly it has been the case that to the extent that you 
use classified material to support those designations you have 
to have concerns about challenges to your designations under 
the Administrative Procedures Act in court in such a way that 
you might have to reveal the classified information.
    Fortunately, there have been changes to the law since the 
enactment of Section 311 to protect classified information from 
disclosure. So any historical concerns in that regard that 
might have existed with respect to the use of this aspect of 
the Patriot Act, I believe, are mitigated.
    Senator Lieberman. What can you tell us about the recent 
use of Section 311 of the Patriot Act against the Syrian bank? 
Just briefly.
    Mr. Wolosky. What I can tell you is that it is the first 
instance of the use of that provision of the Patriot Act in 
respect to terrorist financing.
    Senator Lieberman. What were the circumstances? Is that 
publicly available?
    Mr. Wolosky. Is not publicly--the specific basis for the 
designation, I do not believe, is in the public record.
    Senator Lieberman. Mr. Aufhauser, I want to get you into 
this discussion based on your previous experience, but I would 
also begin by raising this question. I presume that Section 311 
of the Patriot Act could be used to leverage or compel 
cooperation from Saudi banks, for instance, by giving them a 
very strong economic incentive to cooperate or run the risk of 
losing U.S. business and being unable to do business in the 
United States.
    Mr. Aufhauser. Let me give you the benefit of my 
perspective. First, Lee is right, not laying any responsibility 
at the door of Congress. It took about 9 months for you all to 
grant an evidentiary privilege that protected classified 
information in any Section 311 action.
    IEPA gave it to us automatically in freeze orders but not 
under the Patriot Act. It was one of the first things I asked 
for but it took a while to wind its way through the uncharted 
course of Congress.
    Second, it is not really fruitful to name and shame a bank 
as a mere act of political theater. If it does not have 
substantial correspondent banking relationships with the United 
States, it is merely political theater. But that informed a lot 
of judgments about what I will call bad banks, and the Treasury 
Department does have an informal bad banks initiative going on 
right now, focusing particularly on banks that are implicated 
in the export of nuclear materials, the improper export of 
nuclear materials.
    Senator Lieberman. The financing of those exports?
    Mr. Aufhauser. Trade financing and the like of those 
exports.
    Third, where we thought we had problems with banks, and 
again this is an important distinction I made earlier with 
Senator Collins, intelligence is called intelligence because it 
is not fact. It is inference based on being a truffle hound and 
digging something up which is suggestive.
    We have gone abroad and sought the domestic assistance of 
countries and regulators to reform suspect banks. It is a 
better way then merely using the blunderbuss of a nuclear 
Section 311 action against a bank that does not otherwise 
maintain correspondent accounts.
    Senator Lieberman. So, in other words, it is not worth 
using because it will not really hurt them because they do not 
have correspondent relationships with U.S. institutions?
    Mr. Aufhauser. In many instances, you are talking about 
rather minor banks that do not have correspondent 
relationships.
    Now the Syrian banks in question do have correspondent 
relationships with several New York banks. They are modest in 
scope but the gravimen of the Syrian banks was believed by the 
Administration to be so grave, particularly--they were the 
principal conduits for the UN Oil for Food Program frauds, for 
the smuggling of unsanctioned oil out of Iraq and for using 
some of those funds or placing them in the hands of Hezbollah.
    So it was a very strong case and not withstanding the 
modest ties with New York banks, it was decided that it should 
be pursued.
    Senator Lieberman. How about the Saudi banks? Do they tend 
to have correspondent relations with U.S. banks that might 
bring them within Section 311?
    Mr. Aufhauser. Yes, and they also have, interestingly, 
substantial correspondent relationships, even more substantial 
correspondent relationships, with European banks.
    There is an open legal question--I think, frankly, it falls 
against us, I actually asked my staff to look at it at one 
juncture--whether the Patriot Act Section 311 permits what I 
call a secondary boycott. That is if we say a bank in Saudi 
Arabia, following your hypothetical, is to be barred from 
correspondent banking in the United States, can we say that any 
bank that does banking with it abroad is similarly barred? I 
think the way the act is written now, the answer to that is no.
    Senator Lieberman. So, bottom line, you would say that in 
some cases it does not make sense to use Section 311 of the 
Patriot Act because the banks do not have correspondent 
relations here. But, generally, would you counsel that it be 
used more aggressively?
    Mr. Aufhauser. I will do more than counsel. I will tell 
you, in the next calendar year, because of the bad banks 
initiative that I mentioned, there will be substantial actions 
taken against miscreant banks under Section 311.
    Senator Lieberman. Good. Thank you, my time is up.
    Chairman Collins. Senator Coleman.
    Senator Coleman. Thank you. Mr. Aufhauser, in your 
testimony you noted that if Madrid has any lessons, local law 
enforcement must be integrated more directly with the national 
intelligence community to facilitate a two-way dialogue of 
increasingly equal value. Do you have any specific 
recommendations as to how we accomplish that?
    Mr. Aufhauser. Perhaps, but let me build down. One of the 
questions that you all said you were going to pose here is what 
are the Treasury Department's equities at the table if you were 
going to have terrorist financing, one general and one command 
post and an aggregation of resources.
    One of the problems I found at the Treasury Department in 
pursuing terrorist financing is it was not a fully integrated 
member the intelligence community. So is was not always made 
aware of the full panoply of counterterrorism activity and 
relationship that was going on with any country that I was 
visiting.
    So, as a consequence, you could find yourself across the 
table from folks who thought they were trading different poker 
chips and equities about cooperation when I was demanding 
cooperation for terrorist financing.
    As a consequence of that, I pushed, and Secretary Snow 
pushed, for the creation of an Assistant Secretary for 
Intelligence so that we could be more integrated into the 
intelligence community, subject to oversight by the 
Intelligence Committee here on the Hill.
    That was passed by Congress, I think wisely passed, and 
someone will soon be named to that post.
    Obviously something less formal was in the offing for the 
integration of local law enforcement but getting them to the 
table with the information that they are developing about the 
petty crimes that are perhaps tied to terror, and marrying that 
information with what the Federal Bureau of Investigation and 
what the CIA is developing, is absolute critical in my 
judgment.
    Madrid was financed with false passports, smuggled aliens, 
and the sale of hashish, all of it known to the local police 
and most of it not known to the national intelligence 
officials. National intelligence officials were aware of 
activity at the area. If the two had been married, maybe 
something could have been prevented. It is not unlike the 
quandary we find the 9/11 Commission facing.
    Senator Coleman. The challenge we have, though, is how to 
marry that. I come from a local prosecutor perspective, 
Attorney General's Office in Minnesota. We have our Joint Task 
Force now and we seem to be making headway. But both 
structurally and practically there are barriers. I am looking 
for practical suggestions on how to overcome those.
    Mr. Aufhauser. Let me give you one possible vehicle. FinCEN 
is responsible for the compilation of currency transaction 
reports and suspicious activity reports. It is all put into a 
computer and it is all made available by access to local cops, 
cops in Toledo or cops in Minneapolis. If they have an inquiry 
about Aufhauser, they can ping the FinCEN database.
    That FinCEN database is in the process of also being 
married, in a more secure sense, with what the agency is 
developing from abroad. This is also being married, in a more 
secure sense, with what has been developed by the FBI with 
regard to intelligence issues, terrorism issues.
    If local law enforcement could somehow have classified 
online access to that kind of information it might materially 
advance our defense of the Nation.
    In addition, this is most important and I am talking to you 
like a local prosecutor, you guys have to share towards 
Washington, too. Because I am finding, from what I am reading 
and what happened in Madrid, is that the better information was 
known locally.
    Senator Coleman. That is very helpful.
    I am trying to somehow weigh Mr. Factor's testimony with 
Mr. Wolosky's. Mr. Factor, you noted what I would say 
structural changes in the relationship dealing with the Saudis, 
that if we had a certification regime that would be helpful, 
that you recommend the Saudi's fully implement new laws and 
regulations.
    The concern I have in terms of dealing with terrorist 
financing, as does Mr. Wolosky, listening to your testimony, 
there seems to be a fundamental lack of commitment on the part 
of the Saudis to actually confront this evil.
    Are looking for structural changes enough? Or are we simply 
changing the shape of the box?
    Mr. Wolosky. It is a good question. It is a difficult 
question. Of course, we are reporting to you on the same 
report, so the fact that our testimonies are somewhat 
schizophrenic is a reflection of the fact that much has been 
done, as I said, but much work remains.
    As you point out, we do recommend a fundamental change in 
the nature of the bilateral relationship. As Mallory described, 
one which is more declaratory and one which focuses--or at 
least does not put off of the table--issues that historically 
have been considered purely domestic ones in Saudi Arabia. We 
have come to the conclusion, as have many Americans and Members 
of this Committee, that after the murder of 3,000 Americans 
with respect to issues that implicated domestic Saudi problems 
and concerns, that those issues can no longer be off of the 
table.
    But your question is a good one. Ultimately, in issues of 
political will, as we have pointed out in our report and in our 
testimonies, welcome the aggressive pursuit of al Qaeda cells. 
We condemn the fact that financiers have not been arrested. 
Those are different issues. They go to issues in my judgment, 
and in our report's judgment, of political will.
    It is relatively easier to go after people who are socially 
marginalized, members of cells. It is much more difficult to go 
after financiers who are members of the economic and political 
establishment.
    Mr. Factor. I would add on to that that it may seem 
schizophrenic but it really is not, it is very consistent. We 
are calling for a new framework for U.S.-Saudi Arabian 
relations.
    For decades U.S.-Saudi Arabia relations have been built 
upon a consistent framework well understood by both sides. 
Saudi Arabia would be a constructive actor with regard to the 
world's oil and markets and regional security issues. And the 
United States would help provide for the defense of Saudi 
Arabia, work to address the Israeli-Palestinian conflict, and 
not raise any significant questions about Saudi Arabian 
domestic issues, either publicly or privately.
    That has changed. We have to bring these things into the 
open light of day. We are an open society, they are an opaque 
society. If you want to change, you need political will to have 
those changes, as Madam Chairman pointed out.
    And we have to work with them to force that issue.
    Senator Coleman. Thank you, Madam Chairman
    Chairman Collins. Thank you. Senator Lautenberg.
    Senator Lautenberg. Thank you, Madam Chairman.
    Once again I want to express gratitude for the fact that 
you are holding this hearing. We have a very good panel of 
witnesses. Their statements are extremely interesting and I 
think you have furthered the cause and the fight against 
terrorism. I greatly respect and appreciate that.
    I want to get a couple of things out in public view. Mr. 
Aufhauser, I am sure you heard about the amendment that we 
passed, and as I mentioned in my opening remarks, that would 
shut down subsidiaries, either real or sham, that are then in 
turn used to do business with rogue states.
    Have you been aware in your previous government service or 
since then that these things exist?
    Mr. Aufhauser. Yes.
    Senator Lautenberg. Is it important----
    Mr. Aufhauser. In a broader context, if I can say. 
Generally speaking, the economic sanctions laws and OFAC 
regulations for which I was responsible have enormous loopholes 
for subsidiary conduct abroad.
    Senator Lautenberg. So let me extend your comment a little 
bit and say I take an implication there that we ought to close 
it down wherever we can do it?
    Mr. Aufhauser. If you believe in the effectiveness of the 
economic sanctions programs which are part of our law, yes.
    Senator Lautenberg. It was disappointing that we lost that 
amendment by a single vote but that is what happened.
    Mr. Wolosky, are we doing enough--and Mr. Factor may have 
just mentioned--to put public pressure on the Saudis? Do you 
think that we can ratchet that up substantially for the benefit 
of the elimination of this financing route that encourages 
terrorism?
    Mr. Wolosky. Certainly we can, in some instances, yes. The 
report recognizes that some issues are best dealt with 
privately. But it also strongly urges a more declaratory policy 
when the U.S. Government finds significant and enduring 
shortcomings in the response of Saudi Arabia to terrorist 
financing issues.
    Benchmarks need to be set out publicly if they are not 
being met privately. Individuals, who the United States has 
designated as terrorist financiers and has indicated in no 
uncertain terms part of the al Qaeda financial network, and who 
have not been incarcerated in Saudi Arabia, those are the very 
issues that need to be brought to the fore of our public 
statements and respect of these matters.
    Senator Lautenberg. The private discussions do not have the 
same effect. And I think we ought to declare once and for all 
that if Saudi Arabia has to dial 911, as they did in 1990, do 
not call us. The phone is going to be out of order. And that we 
have to say that every dollar, let the word go out of this 
Committee and across the media. Let the word go out that if you 
contribute to anything that encourages terrorism that it is 
pointing a gun at the head of our people. And we are going to 
think of it that way and our punishment is going to be swift 
and full.
    It is bothersome as the devil to me that--and I was early 
on the ground in the Gulf War, and I have been to Iraq since 
then, and I know a lot of people associated with the Saudi 
government and had some semi-friendly relationships with them.
    But for them to pass off the blame, it is in print and the 
news, when the Crown Prince Abdullah statement after the May 24 
attack at Yanbu says ``Zionism is behind terrorist actions in 
the kingdom. . . . I am (95%) sure of that.'' And the Foreign 
Minister then affirms these comments, says the affirmation of 
these comments is again absolutely correct, 95 percent. And 
then Adel Jubeir declined to repudiate these statements at a 
June 2, 2004 press conference. And the State Department has 
been silent on them. And they have to speak out.
    I think Mr. Aufhauser made a very important statement. He 
talked about the fact that we have to recognize that this is 
far beyond the normal activities that we see these oblique 
apologies, etc. Because it is inherent in the culture. When you 
teach little kids to hate other little kids, that is the 
beginning of the end. It is the end of their lives and the end 
of peaceful lives around the country. And we have to make sure 
that they understand that in public terms, and denounce that 
kind of educational thrust. It just is not going to work and it 
is not helpful.
    I would ask one last question here. I know that you have 
seen the report that was issued in the New York Times, on June 
12. It talks about some internal dispute within the task force. 
And perhaps some redaction or reduction in terms of the 
comments that the task force report was going to carry.
    Mr. Factor, I would ask you, you are very much a part of 
the activities that go on in our government and I say that 
respectfully, and you are also a businessman that knows very 
much about how things operate in terms of financing and 
investor relationships and things of that nature.
    So when you see a report issued and it is suggested that 
you thought maybe this report was too critical, is that the 
context of the article that was printed in the New York Times 
that suggested there was dissension and some alteration made by 
you to get this report in acceptable fashion for the 
Administration, as well as for the mission?
    Mr. Factor. I can only answer that this report is a 
consensus report. We all had various beliefs and feelings and 
we talked those out very thoroughly. Our project directors' 
position was to try to reach a consensus and try to put 
together the fairest, most accurate, bipartisan report 
possible. We believe we have achieved that. And I believe all 
of us unequivocally support the findings and recommendations in 
this report and we are very proud of it.
    There were many discussions on a host of topics. We 
solicited information from a host of people--the 
Administration, Saudi Arabia. We, at one point, planned a trip 
over there which never came about. It is very common for all 
task forces at the Council on Foreign Relations to solicit 
input from the subjects of those task forces. So this is a 
common thing.
    Senator Lautenberg. Even after the report is complete, a 
report is not complete?
    Mr. Factor. A report is not complete until everybody signs 
off on it.
    Senator Lautenberg. Thank you.
    Chairman Collins. Thank you, Senator.
    Mr. Wolosky, before I turn to Senator Specter, I want to 
give you an opportunity to discuss the issue that was just 
raised, as well, since you were one of the two principal 
authors of the report.
    Mr. Wolosky. Thank you.
    First, I would like to respond to another point that 
Senator Lautenberg made concerning the anti-Semitic statements 
made by the Crown Prince and consistently reaffirmed by other 
Saudi officials, including just a few days at a press 
conference in Washington. In my view, and in the view of our 
task force, they call into question the commitment of Saudi 
Arabia as a reliable partner in the war on terror. They cloud 
its efforts in moral uncertainty. And they must be immediately 
retracted.
    The U.S. Government, the President of the United States, in 
my view, should immediately condemn those statements and urge 
the Saudis to condemn those statements.
    I personally was very distressed to see a senior State 
Department official stand by on June 2 in Washington and not 
repudiate those comments in response to a question from a 
reporter. In my view, that is a disservice to many people and 
to the war on terror.
    Now as to the New York Times report, as I have discussed 
with your staff, I wish to clarify that the language that was 
in the first draft of the report I distributed to the full task 
force membership on May 2, 2004 was as follows: ``There is 
insufficient evidence to conclude Saudi Arabia has fully 
implemented its new laws and regulations and important 
questions remain. As part of Saudi Arabia's offer of assistance 
to the work of our task force, we sought to visit Riyadh to 
discuss, among other things, the state of the implementation of 
these new laws, regulations and oversight mechanisms.''
    Senator Lautenberg. Madam Chairman, I appreciate the 
clarification. Thank you.
    Chairman Collins. I thought it might be helpful to you, 
Senator.
    Senator Lieberman. Madam Chairman, I join you. Tomorrow 
morning, when we open our New York Times, I expect the 
headlines to say ``Times Snookered.''
    Chairman Collins. Senator Specter.

              OPENING STATEMENT OF SENATOR SPECTER

    Senator Specter. Thank you, Madam Chairman, and thank you 
for scheduling these hearings.
    I compliment the Council on Foreign Relations for 
undertaking this kind of study. I am very interested in all of 
your findings.
    I focus for just a moment on the one that Saudi Arabia, 
whose people and organizations contribute 60 percent of the 
annual budget of Hamas, does not recognize Hamas as a terrorist 
organization. Mr. Factor or Mr. Wolosky, do you know what their 
factual basis is for that kind of a statement, when Hamas 
admittedly target civilians?
    Mr. Factor. I do not know what their basis is for that. I 
can only speculate.
    Senator Specter. Mr. Wolosky.
    Mr. Wolosky. My own personal view is that one man's 
terrorist is another man's freedom fighter.
    Senator Specter. That is a fine generalization of another 
era, but not when civilians are targeted.
    Mr. Wolosky. It is not my view, Senator. It is my sense of 
what the Saudi position on Hamas is. I firmly believe that 
Hamas is a terrorist organization.
    I also think that there is a misconception. David Aufhauser 
has used the word sophistry in understanding what Hamas is. The 
sophistry lies in the fact that it is true that Hamas provides 
social services in Palestinian territories. However, it is also 
a terrorist organization that kills innocent people. A vast 
majority of its funds have come from Saudi Arabia in recent 
years. Only relatively recently has that begun to change at the 
official level, although private Saudi contributions to Hamas 
must continue to be strictly monitored.
    Our report recommends, in fact it goes very far on this 
issue, and it recommends that as a mandatory matter of 
international law, the United Nations Security Council pass a 
resolution that specifically designates Hamas as a terrorist 
organization and obligates all member states to close down 
Hamas organizations and fronts.
    Senator Specter. Mr. Aufhauser, let me ask you a different 
question, and that is what more could the Administration do in 
a very active way to motivate the Saudis or compel the Saudis 
or sanction the Saudis into doing a better job on fighting 
terrorism?
    Mr. Aufhauser. Well, they have come a long way, as you know 
from testimony I have given before committees that you have sat 
on, as outlined by Lee and Mallory and the Council. Some 
extraordinary systemic changes. But what is missing is a sense 
of personal accountability and follow-through.
    Also, on the broader scale, and I think far more important 
to us, far more important to us than personal accountability of 
one or two bad actors, is to stop the funding of the teaching 
of hate. And I think there should be a concerted Administration 
policy and campaign.
    Senator Specter. Mr. Factor, thank you for the statement in 
your opening statement about the Saudi Arabia Accountability 
Act, which was cosponsored by the Chairman, and I am the 
principal sponsor, to provide a good starting point for 
focusing on terrorist financing certification regime.
    Mr. Aufhauser, the Administration at first opposed the 
Syrian Accountability Act and then moved from opposed to 
neutral. And I think finally ended up perhaps inferentially 
supportive, although the formal neutral position was never 
changed.
    What do you think the prospects are for the Administration 
to move to neutral or to support the Saudi Arabia 
Accountability Act? Or somewhere in between.
    Mr. Aufhauser. I would just be guessing, Senator, but there 
is an institutional prejudice, understandable and I think to be 
lauded, at the Treasury Department to only have economic 
sanctions programs that are really quite enforceable and with 
real-world impact. And so they are studied about whether or not 
what has been proposed can be pursued and whether it can be 
effective.
    Can I just say one thing about Hamas?
    Senator Specter. Sure.
    Mr. Aufhauser. It is reprehensible that they are not 
treated as a terrorist organization by the Saudis, I agree, but 
some historical perspective helps. For 6 years we have urged 
our European counterparts to join us in naming Hamas as a 
terrorist organization. And it was only September of last year 
that they finally joined us as another school bus was blown up 
in Jerusalem.
    Even now, immediately after the designation of Hamas as a 
terrorist group by the Europeans, we then went to our European 
allies and said here are four organizations that are 
transmitting money directly to Hamas. And we were turned down 
in the freezing of those assets by all of them because they are 
still not use to the idea. They still cling to what I said 
before, the sophistry that the social welfare program of Hamas 
somehow excuses money that goes to killing.
    The recent raids by the Israelis on banks, four banks in 
the West Bank, and the actual seizure physically of money 
intended for rejectionist groups, was intended to send a signal 
to a new funding source of Hamas, and that is Iran and Syria, 
getting back to your Syrian issue.
    And informed intelligence sources tell me that for whatever 
reason, the money going to Hamas from Saudi Arabia has 
substantially dried up. Nobody can divine the reason. But it 
has been supplemented by money from Iran and Syria flowing 
through even more dangerous rejectionist groups in the West 
Bank.
    Senator Specter. Thank you very much. My time has expired. 
I thank you, Madam Chairwoman.
    Chairman Collins. Thank you Senator. Senator Pryor.

               OPENING STATEMENT OF SENATOR PRYOR

    Senator Pryor. Thank you, Madam Chairman.
    I would like to join all my colleagues on the Committee in 
thanking you for your leadership on this issue.
    If I may follow-up with some of Senator Specter's 
questions, Mr. Aufhauser, something you said a few moments ago. 
You said that they need to stop funding the teaching of hate. 
That is a foreign concept, I think, to us here in America. 
Could you elaborate on that a little bit and explain to the 
Committee exactly what you mean by that?
    Mr. Aufhauser. Sure. Wahabism, which is the strain of Islam 
that they endorse and champion, is very austere, very severe, 
very uncompromising and very intolerant of differences in 
views, and can easily be morphed into religious sanction for 
violence.
    And it is taught by clerics who are sent out globally with 
funding from the Ministry for Islamic Affairs, which in my 
judgment is a much more important audience to talk to about our 
future then the Ministry of Internal Security or Defense in 
Saudi Arabia.
    Indeed, on my last trip to Saudi Arabia, we met with the 
Minister for Islamic Affairs and he affirmed that they need to 
do some trimming of their clerical group to weed radical 
extremists out of it. Unfortunately, their first focus has been 
domestically and not those who have already been exported 
abroad.
    Senator, one last thing. I had a dinner with the prime 
minister of one of the Southeast Asian countries who said he 
will not let an Islamic cleric into his country anymore. The 
reason is they teach a hate which becomes a bullet.
    Senator Pryor. Let me follow-up on something you said, that 
they have focused internally first, within Saudi Arabia. But 
apparently, there is not much evidence to show that they are 
trying to curb the export of terrorism and extremism. Is that 
fair to say, for Saudi Arabia?
    Mr. Aufhauser. I hope I am not sounding too legalistic--to 
me, this is a very important thing. I chaired a group in the 
situation room at the White House every Wednesday morning, and 
it was a group of terrific men and women from every agency of 
any relevancy, where we would review what we had learned in the 
preceding 7 days about terrorist financing.
    We had a mountain of evidence about the financing of the 
teaching of hate, who was funding it, where it was going, what 
they were teaching in the schools, who the converts were, what 
social welfare they were pursuing, what the threat was in 
pursuing something more militant.
    And we had a modest pile over here on my right hand which 
was evidence of the funding of an act of terror.
    So there is a distinction between fundamental and extremism 
and an act of terror that gives us the power to try to act 
abroad in policing things.
    The problem with the Saudi model today is it is a blizzard 
of this funding for folks who teach people that I am their 
enemy. There is even something more dramatic--it is not the 
Saudis, but the Iranians that fund a radio station out of 
Beirut called al-Manar, to the tune of about $110 million a 
year. That funding helps al-Manar publish and broadcast every 
day a screed that says Jews and Americans should be killed.
    Now should we not stop that funding of that broadcast?
    That is not an act of terror. But it is no different from 
lighting a match in a parched forest.
    Senator Pryor. I know that you would never speak for any of 
these countries and you would never presume that, but I would 
like to get your impressions, if we can focus on Saudi Arabia, 
on why they have not cracked down internally? I am just 
assuming there are domestic reasons, domestic political reasons 
that they may fear a backlash within their own country for 
doing this. I would like to get your impressions on that.
    Mr. Aufhauser. The most immediate reason for no activity on 
terrorist financing is they are singularly focused on the guys 
who are trying to kill them within their confines. They are not 
looking for financiers. They are looking for terrorists. If he 
happens also to be a financier, he is a dead man.
    So they are devoting virtually every police and 
intelligence and military resource they have to ferreting out 
terrorists within their own cells.
    That has drawn away, as I said earlier, ironically the 
focus that we wanted them to have. I cannot blame them. I will 
tell you that. But for the moment it has drawn away literally 
every resource from looking at people who export--I think it 
was Senator Levin who said Saudi Arabia exports two things, a 
counterfeit religion and oil. He is only two-thirds right. They 
also export money.
    And that money is the purchase for terror. And we would 
like them to refocus on that.
    Senator Pryor. Madam Chairman, since I have just a few 
seconds left, I would like to ask the other two witnesses to 
respond to that last question about Saudi Arabia. Why, in your 
impressions--not to speak for them, but your impressions about 
why they are reluctant to crack down internally or at least why 
they have not done so to date?
    Mr. Factor. I believe that they have a civil war on their 
hands which is their first and foremost interest. They also 
have not had enormous pressure put on them to open up their 
society. And they fear for their own regime being toppled. So 
putting all of those three things together, what is being 
exported is a secondary issue.
    I believe the conclusion they need to come to very rapidly 
is that that civil war will never be solved as long as they are 
exporting money that could be used for terrorism.
    And last, the political will of the country has to 
establish that no cause, however legitimate, justifies the use 
of terror. Indeed, the use of terror delegitimizes even the 
most worthy cause. They have to build political will on that, 
which they are not doing doing.
    Mr. Wolosky. I largely agree with these two comments.
    First, I do think they are trying to crack down internally. 
They are fighting a civil war because it threatens the 
leadership of their country. It threatens their lives. And they 
are dedicating resources to fight that civil war.
    They are also cracking down internally, at least there are 
suggestions that they are cracking down internally, on the 
extremism that is propagated within Saudi Arabia. Our report 
makes a distinction between the propagation of extremism within 
Saudi Arabia and its export outside of Saudi Arabia.
    Within Saudi Arabia we have seen the remarkable spectacle 
in the past year, for instance, of clerics, extremist clerics, 
going on television to renounce their old views. That is a 
rather remarkable occurrence within the cultural and social 
context in which it has occurred.
    Externally, we find very little evidence of action being 
taken in respect to this pile, the pile that evidences the flow 
of billions of dollars in support of the propagation of 
extremism internationally. And our report says that 
constitutes, that export of extremism constitutes a strategic 
threat to the United States.
    I think we are the first group to go that far in 
characterizing that financial flow in that manner.
    Senator Pryor. Thank you, Madam Chairman.
    Chairman Collins. Thank you.
    We have had a vote just called. So I am going to do one 
final quick round of a question each, and then we will adjourn 
the hearing. I do thank you for your very valuable testimony.
    Mr. Factor, as you know from our discussions, I am 
particularly interested in the recommendation of the report 
that we pass legislation creating a certification whereby the 
President would certify the compliance of nations with an 
effort to halt terrorism financing.
    Some people have expressed concerns that would be too 
narrow a test for nations to have to pass. They say that the 
war against terrorism is a broad war being fought on many 
fronts and that it would be a mistake to just look at this one 
factor.
    Could you comment on whether you think the separate 
analysis of compliance with the effort to halt terrorism 
financing is appropriate? Or should the certification be a 
broader assessment?
    Mr. Factor. It is our belief on the task force that the 
certification should be for terrorist financing. I am not going 
to suggest that other certifications might not be needed or 
necessary, or for that matter might be unnecessary. But we 
believe that if you follow the money, if you check out the 
money, if you are sure where the money is going and how it is 
going, you will have the opportunity to cut down on the 
abilities of terrorists to operate throughout the world. We 
believe a certification regime specifically on terrorist 
financing is necessary and called for.
    We also believe that we would give waivers to the President 
obviously and the information can be classified. But we need to 
name and shame and bring the open light of our society and the 
discussion that our society allows forward. The only way we 
will do it is not by getting it confused in a broader regime.
    Chairman Collins. Thank you. Senator Lieberman.
    Senator Lieberman. Thanks very much, Chairman Collins.
    I am going to submit a few questions to the witnesses for 
answers in writing, but I did want to ask this summary 
question.
    In your report in October 2002, this language has already 
been quoted, you said, ``it is worth stating clearly and 
unambiguously what official U.S. Government spokespersons have 
not for years, individuals and charities based in Saudi Arabia 
have been the most important source of funds for al Qaeda and 
for years Saudi officials have turned a blind eye to this 
problem.''
    So, your report and testimony today certainly suggest that 
maybe the Saudi officials, probably the Saudi officials, are no 
longer turning a blind eye. But there are problems, as you have 
documented on how fully they are following through.
    So, my baseline question for this report, now June 2004. 
Would the conclusion of October 2002 be essentially the same, 
which is that individuals and charities based in Saudi Arabia 
have been the most important source of funds for al Qaeda and 
also the other terrorist groups? Or, has that changed?
    Mr. Wolosky. Historically, of course, that has been true 
and it has been affirmed.
    Senator Lieberman. Is it true today?
    Mr. Wolosky. It is a difficult analysis because of the more 
diffuse nature of al Qaeda. Al Qaeda is no longer an 
organization that has a highly centralized command and control 
mechanism, and that includes its financial components both 
input and output. It is a much more diffuse movement.
    And also that relates to the issue of propagation of 
extremism which we in this report--again, I think for the first 
time, although it certainly was implicit in the response of the 
U.S. Government that David described--are saying is a key part 
of the terrorist financing problem.
    Senator Lieberman. I think that is a very important point 
today. It is not that we do not know about the export of 
extremism, but you are saying that while they may have 
curtailed the funding to some extent, or at least not turned a 
blind eye to it, as long as they continue to export extremism 
then there is trouble.
    Mr. Factor or Mr. Aufhauser, do you want to add anything to 
that?
    Mr. Factor. I would like to add that we know very well 
that, for example, the Muslim World League, IIRO, the 
International Islamic Relief Organization, and the World 
Assembly of Muslim Youth, known by the acronym WAMY, still 
operates.
    I believe funding to al Qaeda has been stopped to a 
significant extent. But there is funding to numerous other 
organizations and other organizations may be picking up what al 
Qaeda was doing, in terms of operations.
    Mr. Aufhauser. Can I add one thing? I want to put a 
spotlight on a reservation put at the front of the Committee's 
report, which is that you can become Saudi-centric when you 
talk about terrorist financing and it is a grave danger. They 
have done remarkable things and they should be given credit for 
it. There remain substantial issues in Saudi Arabia.
    But all that I learned before I left and what I have 
learned since I left suggest that terrorist financing is alive 
and well from Iran and Syria and increasingly local criminal 
activity, and also substantial amounts flowing into the 
occupied territories from Western Europe still.
    I would suggest that the spotlight be shifted, if there is 
only one spotlight, on what is the more immediate threat right 
now to homeland security here and to security in the Middle 
East, which I think is money from other sources.
    Senator Lieberman. Thank you, very much. You have done a 
great public service here and I thank you for it.
    Chairman Collins. Thank you, Senator Lieberman, for your 
leadership on this issue and your participation in the 
Committee's ongoing work examining the sources of terrorism 
financing.
    I want to thank all three of our witnesses today. You have 
done remarkable work. We appreciate your expertise and your 
sharing your wisdom and knowledge with the Committee.
    The hearing record will remain open for 15 days for the 
submission of any additional questions. We would ask you to 
return those as quickly as you can.
    I also want to thank our staff for their work on this 
important hearing. The hearing is now adjourned.
    [Whereupon, at 12:29 p.m., the hearing was concluded.]
                            A P P E N D I X

                              ----------                              

           PREPARED STATEMENT OF SENATOR GEORGE V. VOINOVICH
    Good morning. I would like to thank the Chairman, Senator Collins, 
for convening this hearing today to examine an issue that is extremely 
important to our national security--our progress in efforts to deny 
terrorists the resources they seek to perform deadly attacks against 
Americans and our allies at home and abroad.
    The tragic events of September 11, 2001 brought home to all of us 
the urgent need to cut off funding for terrorist organizations such as 
al Qaeda. More than 2\1/2\ years later, it is imperative that we 
continue to make this a top priority of the U.S. Government. Simply 
stated, we cannot afford to be complacent in our efforts.
    Last month, Attorney General John Ashcroft and Secretary of 
Homeland Security Tom Ridge reminded the American people of al Qaeda's 
unrelenting desire to again attack Americans on U.S. soil. The 
potential impact is not limited to those living in our country's 
largest cities. Just yesterday, Federal officials unsealed an 
indictment against a Somali man living in Columbus, Ohio. The charges 
against this man include conspiring with al Qaeda to blow up a shopping 
mall in Ohio's capital city. This is a chilling reminder of what is 
possible, and again underscores the need to redouble our efforts to 
deny terrorists the financial resources that they desire.
    Today, an Independent Task Force on Terrorist Financing sponsored 
by the Council on Foreign Relations will release its second report on 
our progress in this effort. We are glad to have two individuals who 
serve on this task force, Lee Wolosky and Mallory Factor, with us this 
morning. I look forward to hearing their thoughts on how we can step up 
our efforts at home to disrupt and destroy the financial network of al 
Qaeda and other terrorist organizations. I also look forward to their 
views on how we can enhance cooperation with other countries to deny 
terrorists the funding that they seek--particularly Saudi Arabia.
    I would also like to welcome David Aufhauser, who served as former 
General Counsel at the U.S. Department of Treasury. I look forward to 
his candid views on how we are doing in this effort here at home, where 
the men and women at the Treasury Department and other Federal, State 
and local agencies serve on the front lines in the effort to disrupt 
and destroy terrorists' financial networks.
    As my colleagues are aware, since 1999, I have worked to express 
the urgency of the Federal Government's human capital challenges and 
their impact on critically important government functions, such as 
national security. With strong bi-partisan support from this Committee, 
I have championed a series of legislative reforms in Congress, which 
should have a significant impact on the way the Federal Government 
manages its people in the coming years.
    In March 2001, the Subcommittee on Oversight of Government 
Management held a hearing entitled, ``National Security Implications of 
the Human Capital Crisis.'' Our panel of distinguished witnesses 
included former Defense Secretary James Schlesinger, member of the U.S. 
Commission on National Security in the 21st Century. Secretary 
Schlesinger discussed a comprehensive evaluation on national security 
strategy and structure that was undertaken by the Commission. Regarding 
human capital, the Commission's final report concluded:
    ``As it enters the 21st Century, the United States finds itself on 
the brink of an unprecedented crisis of competence in government. The 
maintenance of American power in the world depends on the quality of 
U.S. Government personnel, civil and military, at all levels. We must 
take immediate action in the personnel area to ensure that the United 
States can meet future challenges.''
    Secretary Schlesinger added further: ``. . . it is the Commission's 
view that fixing the personnel problem is a precondition for fixing 
virtually everything else that needs repair in the institutional 
edifice of U.S. national security policy.''
    This remains true as our government looks to deny terrorists, whose 
purpose is to inflict grave harm on the United States, the resources 
that they seek. I again thank Chairman Collins for convening this 
hearing, and I look forward to the testimony of our witnesses.



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