March 22, 2006
JS-4132

Prepared Remarks by Daniel Glaser,
Deputy Assistant Secretary
--The Importance of AML/CFT Controls in
Financial Institutions--
Before the International AML/CFT Inaugural
Conference of the
U.S./MENA Private Sector Dialogue

Cairo, EGYPT – Good morning. Thank you for the opportunity to speak to you today and help launch this important initiative. The fact that you are all here underscores a growing trend across the globe: the importance of the international financial community in combating a range of international threats. The international community is looking to finance ministries and financial institutions to take a leading role in protecting our financial system from those who abuse it to support a range of illicit conduct, including money laundering, terrorist financing, weapons proliferation, narcotics trafficking and other criminal behavior. We are uniquely positioned to hinder and over time eliminate these illicit activities from finding safe haven in our financial systems. This can be achieved only through vigilance, acuity and cooperation. Today's conference is the first of its type between our regions. We have, sitting in the same room, a collection of experts and practitioners from the U.S. and MENA financial systems asking the difficult questions about building anti-money laundering and counter-terrorist financing (AML/CFT) regimes, and sharing expertise. Through conferences like this, I hope that we not only share our current experiences but also ultimately devise new solutions to the challenges that we all face in our roles as custodians of the international financial system.

I would like to thank several pivotal people for hosting this conference and making it a reality here in Cairo: the Arab Republic of Egypt's Prime Minister Ahmed Nazif; the Union of Arab Banks Chairman of the Board of Directors, Dr. Joseph Torbey; and the UAB's Director for Conferences, Wissam Fattouh. This conference would not have been possible without the support of the Middle East North Africa Financial Action Task Force's (MENAFATF) President Mahmoud Abdel-Latif, and the Chairman of the U.S./MENA Private Sector Dialogue (PSD) Dr. Muhammad Baasiri. Also supporting the conference are the Union of Arab Banks, the MENAFATF, the Arab Banker's Association of North America, the Banker's Association for Finance and Trade, senior-level bankers and industry experts from both the U.S. and the MENA region, and the U.S. Treasury Department. I am also pleased that representatives from almost every U.S. regulatory agency were able to join us today, including from FinCEN, OFAC, the Fed and the OCC.

In my capacity as an official of the U.S. Treasury Department, I want to share some reflections on the role of the private sector in international security. The international community is coming to realize that the financial sector plays an instrumental role in preventing abuse of its system by reducing vulnerabilities and proactively attacking the financial networks of nefarious and dangerous actors. This realization is clearly manifested in the work of the United Nations Security Council, which is turning increasingly to targeted financial measures as an integral component of its response to international security crises. Merely reciting the recent U.N. Security Council resolutions that contain significant financial components makes this trend clear:

• UNSCR 1267/1617 – Al Qaida, Taliban, and Usama bin Ladin;
• UNSCR 1373 – Global terrorism;
• UNSCR 1483 – Senior officials of the former Iraqi regime;
• UNSCR 1532 – Charles Taylor, Jewell Howard Taylor, and Charles Taylor Jr.;
• UNSCR 1540 – Proliferators of weapons of mass destruction;
• UNSCR 1636 – Suspects in the Hariri assassination.

We will undoubtedly receive more of these calls to financial action, and this reality has serious implications for financial institutions worldwide. To meet our responsibilities effectively, we must strengthen our existing tools, creatively apply new ones, and ask every part of the financial community to lead by example. For our part, the U.S. Treasury Department is responding to this challenge by undertaking a variety of new initiatives and actions. And we will be looking to you as experts and practitioners in an important region to solicit your support and creative solutions for confronting the challenges of our time.

The U.S. Treasury Department, like other Finance Ministries, has three main goals:

• Encouraging open and free financial markets,
• Maintaining flexible exchange rates, and
• Protecting the U.S. and international financial system from abuse.

The importance of this final goal can not be underscored enough, and complements our efforts to achieve the first two. It is at times suggested that there is a trade-off between developing and implementing strong AML/CFT controls, on the one hand, and maintaining a healthy financial sector, on the other. The reality is that a healthy financial sector cannot exist without the implementation of authorities to protect it from abuse. In fact, healthy financial sectors, effectively protected from such abuse, bring with it increased investment and are more attractive to international markets.

To achieve the goal of protecting the U.S. financial system from abuse, the U.S. Treasury Department engages in two interrelated efforts:

• Identifying and closing illicit finance vulnerabilities in the U.S. and international financial system;
• Disrupting and dismantling financial networks that support international illicit activity, including terrorism, organized crime, weapons of mass destruction proliferation and narcotics trafficking.

In fact, the U.S. Treasury Department has reorganized significantly to meet these challenges. We have established the Office of Terrorism and Financial Intelligence, which combines and integrates the efforts of the Treasury Department policy, intelligence analysis, sanctions enforcement, and AML/CFT regulatory offices. Working together we bring to national security discussions our insight into financial transactions, our connections with the private sector, and a set of financial tools that can be deployed to apply pressure on a great range of targets. We work closely with counterparts in the law enforcement, diplomatic, and the intelligence communities to strangle the funds that support international terrorist groups, criminal organizations, narcotics traffickers and weapons proliferators.

The first type of activity mentioned above involves adopting protective measures to safeguard our systems from abuse, including by creating strong anti-money laundering and counter-terrorist financing regimes. In the U.S. our AML/CFT regime is built primarily on the Bank Secrecy Act, as amended by the USA PATRIOT Act. In addition to strengthening our standard AML/CFT controls, the Patriot Act provides us with some unique authorities. Worth mentioning in this forum are Section 314 and Section 311.

Section 314 mandates increased information sharing among the Treasury Department, law enforcement, and financial institutions. This allows for increased information exchange not only between the government and financial institutions, but also among financial institutions themselves once they have notified the Treasury Department that they will do so. I highlight this provision because it underscores the need for all elements of the financial community, between the public and private sectors, and among private financial institutions themselves to exchange information on an ongoing basis. We must create a culture of information-sharing within and among our institutions in order to act quickly and effectively.

Section 311 authorizes the U.S. Treasury Department to protect the U.S. financial system from the illicit activities of jurisdictions and institutions we find to be of "primary money laundering concern." Section 311 is based on the recognition that the global financial system is interconnected, and that our domestic efforts to protect the U.S. financial system can be rendered ineffective if criminals can gain access through vulnerable points of entry in the international financial system. Section 311 enables the Treasury Department to identify vulnerable points in the international financial system and to instruct U.S. financial institutions to take defensive measures.

To date, we have utilized Section 311 to designate a total of three jurisdictions and nine financial institutions, including entities in Macau, Latvia, Burma, Syria, and the "Turkish Republic of Northern Cyprus." A recent case worth noting was the September 2005 designation of Banco Delta Asia (BDA) in Macau for facilitating a variety of illicit activities, including on behalf of North Korea. BDA financially facilitated North Korean front companies and government agencies engaged in narcotics trafficking, currency counterfeiting, production and distribution of counterfeit cigarettes and pharmaceuticals, and the laundering of proceeds therefrom.

Our designation of BDA has produced encouraging results. Jurisdictions in the region have begun conducting investigations and taking necessary steps to identify and cut off illicit North Korean business. Responsible financial institutions are also taking a closer look at their own operations, terminating or declining to take on such business. These are welcome steps - but our continued and constant vigilance will be needed to ensure these results do not wane. We also recently finalized our Section 311 rule regarding the Commercial Bank of Syria along with its subsidiary, the Syrian Lebanese Commercial Bank.

These measures have had far-reaching effect that we believe will preserve the safety and soundness of our financial sector. When used judiciously and appropriately, Section 311 has the dual effect of protecting the U.S. financial sector from abuse and undermining the financial networks that support criminal activity worldwide. We encourage all countries to think about ways to develop this type of authority, which will provide you the leverage and flexibility to protect your systems from abuse.

In addition to the efforts we pursue to protect our system from abuse, our second charge is to undermine illicit support networks which depend on the international system to conduct their dangerous activity. Perhaps the most important tool at our disposal is targeted financial sanctions. In the U.S. we have developed a range of flexible measures to target those involved in vast networks supporting terrorist activity, weapons proliferation and narcotics trafficking. In the terrorism context, we have designated over 400 individuals as supporters of terrorism through our domestic authority, Executive Order 13224. This authority corresponds with United Nations Security Council Resolutions 1267 and 1373, both of which address the need to isolate and freeze the assets of global terrorists and their support networks.

We are also focused on the threat of weapons proliferation. U.N. Security Council Resolution 1540 calls on all states to develop and implement authorities to combat proliferation, including by denying proliferators and their supporters access to the financial system. The U.S. has taken a first step by applying targeted financial sanctions to proliferators just as we have to terrorists and their support networks. Issued by President Bush last June, Executive Order 13382 authorizes the freezing of assets of WMD proliferators and their supporters, and forbids U.S. persons from engaging in commercial transactions with them. Under that Executive Order, we have designated eleven North Korean entities, six Iranian entities, and one Syrian entity engaged in WMD proliferation activity. We are actively investigating other entities of concern. When any one of these designated entities attempts to complete a transaction, their assets will be blocked as soon as they come into contact with a U.S. financial institution.

This is a powerful proposition. Not only are we able to block an entity's assets that comes into contact with the U.S. financial system, but we are able to disrupt future transactions and exercise a powerful deterrent on those who would transact business with that entity. This is why we prefer to use the term "targeted financial sanction" rather than the more common term of "asset freeze," which tends to focus only on the first element of this power tool.

When the international community works in concert in applying targeted financial sanctions, designated entities – be they terrorists, weapons proliferators, or other international threats – are squeezed out of the international financial system. We are confident that these types of targeted measures are having wide effect, and we hope that all countries will realize the importance of implementing these UN resolutions comprehensively. The threats that we face can be effectively addressed in the financial system with relevant and innovative tools, many of which the UN has already authorized. It is now our job to resolutely and proactively implement them.

Government-to-government engagement on illicit financing has been a centerpiece of our policy for many years. That ongoing conversation has been productive and has set the stage for increased coordination in our public sectors. But it is our private sectors that sit on the front lines, protecting our financial systems from the threats we face. This conference is a testament to your critical role in the fight against money laundering, terrorist financing, and other illicit financing working to gain access to our financial systems. Our financial sectors must work in lockstep together to make our respective efforts as effective as possible.

There is no question that a strong AML/CFT regime provides the necessary framework for regulators, policy makers, law enforcement authorities, and financial institutions to thrive in a secure environment. While a sound framework is necessary, the implementation of its principles and measures reflects true leadership. An effective application of authorities requires governments to ensure that their financial sectors remain transparent, accountable, and well protected. This will only work if banks themselves effectively implement the international standards and best practices of due diligence, record keeping, AML/CFT compliance, and other measures that are expected of globally recognized financial institutions. This also requires a healthy private-to-public sector dialogue so that financial institutions can continue to educate government on the application of regulations, while governments can educate the private sector on global threats to their institutions and the methodologies to combat them. As I mentioned earlier, there is real value to information exchange among private financial institution themselves, a fact which this conference highlights. We should be encouraging our own private financial institutions to exchange information and ideas with each other as well as with institutions in other jurisdictions.

Today's inaugural conference marks the beginning of an on-going dialogue between the private sectors of our region, supported by elements of our official sector. As you discuss strategies and compare current best practices over the next two days, I ask that you also think about how we can creatively address the challenges that face us. The international community is looking to us because we can do something to protect our financial systems. We are buttressed by support at the UN as reflected in the many Security Council resolutions that address our most critical international security concerns. These resolutions recognize the influence and ability of the financial sector to play a key role in addressing these threats. We can not afford to be content with our current progress. We must maximize the capacity of this inter-regional initiative and use it to advance innovative solutions to the daily threats to our global financial community.