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Report to Congressional Requesters: 

United States Government Accountability Office: 

GAO: 

September 2008: 

USA Patriot Act: 

Better Interagency Coordination and Implementing Guidance for Section 
311 Could Improve U.S. Anti-Money Laundering Efforts: 

USA Patriot Act: 

GAO-08-1058: 

GAO Highlights: 

Highlights of GAO-08-1058, a report to congressional requesters. 

Why GAO Did This Study: 

Since September 11, 2001, the United States has established tools to 
address the threat to the U.S. financial system of money laundering and 
terrorist financing.  One such tool is Section 311 of the USA PATRIOT 
Act of 2001, which authorizes the Secretary of the Treasury (Treasury) 
to prohibit U.S. financial institutions from maintaining certain 
accounts for foreign banks if they involve foreign jurisdictions or 
institutions found to be of primary money laundering concern. To make 
this finding, Treasury examines several factors and generally issues a 
proposed rule announcing its intent to apply Section 311 restrictions. 

GAO was asked to examine (1) the process used to implement Section 311 
restrictions, (2) the process Treasury follows to finalize or withdraw 
a proposed rule, and (3) how Treasury assesses the impact of Section 
311. 

GAO reviewed financial and investigative U.S. government documents and 
met with government officials and representatives of affected banks. 

What GAO Found: 

Treasury’s informal process to implement Section 311 was consistent 
with requirements in U.S. law. From 2002 to 2005, Treasury identified 
11 cases--3 jurisdictions and 8 institutions--as being of primary money 
laundering concern and issued proposed rules for 10 of these cases. As 
required, Treasury consulted with the Departments of Justice and State 
prior to issuing the proposed rules. However, Justice and State 
officials said that it was difficult for them to effectively assess the 
evidence on some Section 311 cases because Treasury provided them 
limited time. In 2006, Treasury changed its process by forming an 
interagency working group to discuss potential threats to the U.S. 
financial system. But it is unclear if the new process addressed the 
agencies’ concerns since Treasury has issued no Section 311 findings 
since 2005. 

Treasury determines whether to finalize or withdraw a proposed Section 
311 rule by reviewing written comments and sometimes meeting with 
interested parties. The duration of a proposed rule is significant 
because U.S. financial institutions act immediately in response to its 
announcement. However, Treasury has taken years to complete this 
process in some cases. In April 2008, Treasury withdrew two of three 
notices--all open for between 3 and 5 years--after GAO discussed the 
cases with Treasury officials. Contributing to this lag was the absence 
of required timeframes for completing the action and of written 
guidance specifying a Treasury office to finalize the actions. 

Figure: Duration of Section 311 Proposed Rules: 

[See PDF for image] 

Source: GAO analysis of Department of Treasury data. 

[End of figure] 

What GAO Recommends: 

GAO recommends that Treasury establish guidance to clarify 
responsibility to implement and finalize Section 311 actions. 

Treasury said it will act in response to this recommendation, although 
the process has been improved. Justice and State did not comment. 

To view the full product, including the scope
and methodology, click on [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-08-1058]. For more information, contact Loren Yager at 
(202) 512-4347 or yagerl@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Process to Implement USA PATRIOT Act Section 311 Was Consistent with 
Legal Requirements, but Some Agencies Expressed Concerns about 
Consultation: 

Treasury's Process for Implementing Section 311 Followed Requirements 
of the Law but Took Years to Finalize Some Proposed Rules: 

Treasury Views Section 311 as Effective, despite Concerns Expressed by 
Others about the Process: 

Conclusion: 

Recommendation for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Potentially Relevant Factors for Designating a 
Jurisdiction or Institution as of Primary Money Laundering Concern: 

Appendix III: Factors to Consider in Selecting Special Measures: 

Appendix IV: Additional Information on Section 311 Cases: 

Appendix V: Comments from the Department of the Treasury: 

Appendix VI: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Potentially Relevant Factors to Be Considered When Designating 
a Jurisdiction or Institution to Be of Primary Money Laundering 
Concern: 

Table 2: Issuance of Finding of Primary Money Laundering Concern, 
Proposed Rule, and Final Rule for Section 311 Cases: 

Figures: 

Figure 1: Organization of the Terrorism and Financial Intelligence 
Office: 

Figure 2: Length of Time to Finalize or Withdraw Proposed Section 311 
Rules: 

Abbreviations: 

AFMLS: Asset Forfeiture & Money Laundering Section: 

BSA: Bank Secrecy Act: 

FATF: Financial Action Task Force: 

FBI: Federal Bureau of Investigation: 

FinCEN: Financial Crimes Enforcement Network: 

NCCT: Non-Cooperative Countries and Territories: 

OFAC: Office of Foreign Assets Control: 

TFFC: Terrorist Financing and Financial Crimes: 

TFI: Office of Terrorism and Financial Intelligence: 

USA PATRIOT: Uniting and Protecting America by Providing Appropriate 
Tools Required to Intercept and Obstruct Terrorism: 

United States Government Accountability Office: 

Washington, DC 20548: 

September 30, 2008: 

Congressional Requesters: 

Countries with lax anti-money laundering regulation and enforcement 
pose a national security threat to the United States because they 
provide financial safe havens for criminal enterprise.[Footnote 1] 
Money laundering--the process of disguising or concealing illicit funds 
to make them appear legitimate--is an increasingly serious issue, with 
new payment and communications technologies opening up the world to 
transnational crime and creating new options for cross-border funds 
transfers. Since September 11, 2001, the United States has established 
a number of tools to address the threat of money laundering and 
terrorist financing to the U.S. financial system. One of its new tools 
was enacted in Section 311 of the Uniting and Strengthening America by 
Providing Appropriate Tools Required to Intercept and Obstruct 
Terrorism (USA PATRIOT) Act of 2001.[Footnote 2] The goals of Section 
311 include strengthening U.S. measures to prevent, detect, and 
prosecute international money laundering and the financing of 
terrorism. In particular, Section 311 provides a mechanism for the U.S. 
government either to prohibit U.S. financial institutions from 
maintaining correspondent accounts[Footnote 3] with a foreign financial 
institution if the account involves jurisdictions or institutions found 
to be of primary money laundering concern, or to require recordkeeping 
and reporting on certain accounts. The Department of the Treasury 
(Treasury) has implemented the Section 311 mechanism against eight 
targeted financial institutions and three jurisdictions in eight 
countries since 2002. Under the law, this mechanism was imposed in most 
cases by rule-making-including notice of the proposed rule and a 
comment period before the rule is finalized. However, particular 
applications of Section 311 restrictions raised questions in Congress 
about how effectively Section 311 was being used. 

In this report, we (1) examined the process U. S. agencies used to 
implement the USA PATRIOT Act Section 311 restrictions against targeted 
financial institutions and countries and the results of these actions; 
(2) assessed the process Treasury follows to determine whether to 
finalize or withdraw a proposed rule; and (3) described how Treasury 
assesses the impact of Section 311 restrictions. 

To meet these objectives, we reviewed program documentation and 
interviewed knowledgeable officials from key U.S. agencies at the 
Department of Justice (Justice), Department of State (State), Treasury, 
and the Board of Governors of the Federal Reserve System (Federal 
Reserve) in Washington, D.C. We focused this performance audit on all 
locations where the U.S. government has targeted financial institutions 
or jurisdictions for Section 311 actions. These were Belarus, Burma, 
Latvia, Macau, Nauru, Syria, Turkish Republic of Northern Cyprus, and 
Ukraine. We met with U.S. and foreign government officials, and 
representatives of financial institutions and financial institution 
associations, and reviewed documents in Kyiv, Ukraine; Macau and Hong 
Kong, China; and Riga, Latvia. We visited Kyiv, Ukraine; Macau and Hong 
Kong, China; and Riga, Latvia, because they provided examples of 
different applications of Section 311, specifically a targeted 
jurisdiction and targeted financial institutions where Section 311 
restrictions were finalized and withdrawn. Treasury provided us with 
key documents it identified to show how it implemented its 311 process. 
A detailed description of our scope and methodology is included in 
appendix I of this report. We conducted this performance audit from 
September 2007 through September 2008 in accordance with generally 
accepted government auditing standards. Those standards require that we 
plan and perform the audit to obtain sufficient, appropriate evidence 
to provide a reasonable basis for our findings and conclusions based on 
our audit objectives. We believe that the evidence obtained provides a 
reasonable basis for our findings and conclusions based on our audit 
objectives. 

Results in Brief: 

To implement USA PATRIOT Act Section 311, Treasury used an evolving 
informal rule-making process that followed requirements set forth in 
U.S. law and modified this process after 2005.[Footnote 4] However, 
while Treasury's process from 2002 through 2005 considered statutory 
factors established in Section 311,[Footnote 5] its process for 
consulting with two U.S. agencies on findings of primary money 
laundering concern sometimes made it difficult to provide meaningful 
consultation during certain key phases of the process, according to 
relevant agency officials. For the purpose of using the new Section 311 
authority, Treasury independently developed a list of targeted 
financial institutions derived from several sources. It next researched 
evidence for each targeted institution on the list to consider factors 
established in Section 311. As a result, Treasury issued a finding in 
the Federal Register that each of the eight financial 
institutions[Footnote 6] were of primary money laundering concern and a 
proposed rule announcing its intent to apply restrictions on the 
institutions. Before the proposed rule was issued for public comment, 
Treasury provided it to Justice and State, agencies with expertise in 
money laundering and international affairs, for consultation on the 
finding, as required by the act. However, in some cases, these agencies 
had limited time available to review documentary evidence--as little as 
2 days--and in one case limited access to facilities for discussing 
classified information within the short time frames, according to 
Justice and State officials. In the absence of operational guidance 
with set time frames for this consultation requirement, officials of 
these agencies expressed concern over the amount of time and procedures 
they had for consultation. Starting in 2006, Treasury changed its 
targeting procedures and, with Justice, established an interagency 
working group to discuss potential threats to the U.S. financial system 
at an earlier stage in the process. However, it is unclear whether the 
new procedures improved this aspect of consultation because Treasury's 
current targeting process has not resulted in any new Section 311 
findings since 2005. 

Treasury determines whether to finalize or withdraw a proposed rule 
under Section 311 by reviewing written comments and other information 
it receives from interested parties in a process consistent with rule- 
making requirements in the Administrative Procedure Act. However, 
Treasury has taken years to complete this process for some cases, in 
part because (1) there are no requirements for it to designate time 
frames for when to complete the action and (2) agency officials were 
unclear about lines of authority designating which office within 
Treasury is responsible for finalizing or withdrawing proposed rules. 
The duration of a proposed rule was significant because, in all the 
cases we reviewed, U.S. financial institutions took immediate action on 
the basis of an announced finding and proposed restrictions, 
effectively implementing them before they were finalized.[Footnote 7] 
Once a finding and notice of proposed rule-making are published in the 
Federal Register, interested parties have 30 days to provide written 
comments on the proposed rule to Treasury. The agency reviews the 
comments it receives, considers them in its decision to finalize or 
withdraw the proposed rule, and may sometimes meet with representatives 
of the targeted financial institution and foreign government to discuss 
their written comments or to receive additional information. However, 
Treasury has taken as long as 5 years to complete these actions for 1 
of 11 cases and as little as 4 to 5 months for 4 cases. As of February 
2008, it had not completed action on three cases, which had remained 
open for between 44 and 60 months beyond a 30-day comment period. By 
April 2008, Treasury withdrew two of the notices of proposed rule- 
making and officials said they are actively considering completing the 
third. Officials at one Treasury office, identified by its officials as 
being involved in making the determination to complete the Section 311 
process, were not aware these cases were still open until we brought 
this to their attention. Officials of a second Treasury office, which 
Treasury attorneys identified as responsible for implementing Section 
311, were aware that these three cases were open, as their status was 
listed on the office Web site, but these officials did not believe that 
they were responsible for finalizing or withdrawing them. Treasury 
officials said that it has no written guidance specifically on 
implementing Section 311 to clarify these responsibilities pursuant to 
management control standards.[Footnote 8] 

Treasury views Section 311 restrictions as effective, despite 
acknowledging concerns expressed by U.S. and foreign government 
officials, and representatives of financial institutions about the 
process. Section 311 restrictions are intended to achieve (1) the anti- 
money laundering goal of isolating target financial institutions from 
the U.S. financial system and (2) a broader national security goal of 
encouraging foreign governments to strengthen their anti-money 
laundering laws and regulations, according to Treasury officials. 
Treasury views Section 311 actions as effective in achieving the anti- 
money laundering goal because U.S. financial institutions responded 
immediately to notices that Treasury intended to issue a rule 
prohibiting them from continuing business with a targeted foreign 
institution. An immediate response makes good business sense to protect 
banks from risks to their reputation and possible government penalties. 
Treasury views Section 311 as effective in achieving the broader 
national security goal because several foreign governments have 
strengthened their anti-money laundering laws and regulations in 
response to Section 311 actions targeted against financial institutions 
in their jurisdictions. However, Treasury does not view concerns about 
Section 311's implementation as having an impact on the achievements of 
Section 311. For example, some foreign government officials we visited 
expressed concern with the implementation of Section 311 as not 
affording them an opportunity to bring their own law enforcement or 
regulatory actions against targeted financial institutions and not 
being given sufficient information to do so. Justice officials said 
that in cases where application of Section 311 is perceived as 
unsubstantiated, countries may be less likely to cooperate with the 
U.S. government on other sanctions or law enforcement matters. 

We are recommending that the Secretary of the Treasury establish 
implementing guidance for Section 311 of the USA PATRIOT Act that would 
specify the responsibilities and activities of offices within Treasury 
for implementing and finalizing Section 311 actions. 

Treasury said that it will take action to clarify its Section 311 
processes in response to this report's recommendation, even though it 
emphasized that the current coordination and implementation of Section 
311 within Treasury components today has been significantly improved. 
Although Treasury said that it has well-defined mechanisms in place to 
implement Section 311, it nonetheless stated that the Under Secretary 
of the Office of Terrorism and Financial Intelligence will ensure that 
mechanisms for implementing Section 311 are clarified in response to 
this report and its recommendation. Justice and State had no comments 
on this report. 

Background: 

Section 311 is one of many legal and regulatory resources that the 
United States uses to combat money laundering and financial crime. U.S. 
laws and programs aimed at combating money laundering include the Bank 
Secrecy Act (BSA), which includes Section 311 and authorizes Treasury 
to promulgate regulations on the reporting and recordkeeping of certain 
financial transactions; economic and trade sanctions implemented by the 
Office of Foreign Assets Control (OFAC); and several Justice programs 
focused on anti-money laundering. The United States is also a member of 
the Financial Action Task Force (FATF), an intergovernmental body that 
has created a comprehensive global framework for anti-money laundering 
efforts and has called for countermeasures against countries that are 
not complying with this framework. 

These laws and programs, including Section 311, are part of a broad 
U.S. money laundering strategy. Issued most recently in 2007, this 
strategy states that it reflects the U.S. government's ongoing 
commitment to attack money laundering and terrorist financing on all 
fronts, including the formal and informal components of both the 
domestic and international financial systems.[Footnote 9] The strategy 
focuses on three major goals: (1) to more effectively cut off access to 
the international financial system by money launderers and terrorist 
financiers; (2) to enhance the federal government's ability to target 
major money laundering organizations and systems; and (3) strengthen 
and refine the anti-money laundering regulatory regime for all 
financial institutions to improve the effectiveness of compliance and 
enforcement efforts. The strategy includes, among other items, a 
commitment to target countries and financial institutions that 
facilitate money laundering and terrorist financing, including using 
the full range of measures provided by Section 311 of the USA PATRIOT 
Act. 

USA PATRIOT Act Section 311 is currently implemented by Treasury's 
Financial Crimes Enforcement Network (FinCEN). Until 2004, the Office 
of Terrorist Financing and Financial Crime (TFFC) implemented Section 
311, according to Treasury officials. Both offices report to Treasury's 
Office of Terrorism and Financial Intelligence (TFI). This office 
contains intelligence and enforcement functions and has the stated twin 
missions of safeguarding the U.S. financial system against illicit use 
and combating national security threats. Figure 1 shows the 
organization of TFI. 

Figure 1: Organization of the Terrorism and Financial Intelligence 
Office: 

This figure is a diagram showing the organization of the terrorism and 
financial intelligence. 

[See PDF for image] 

Source: Department of the Treasury. 

[End of figure] 

Section 311 allows Treasury to require domestic financial institutions 
and agencies to take certain special measures outlined in the provision 
if it finds reasonable grounds to conclude that a designated foreign 
jurisdiction, financial institution, or class of transactions is of 
"primary money laundering concern."[Footnote 10] In making a finding 
that a jurisdiction is of primary money laundering concern--in addition 
to any information that the Secretary of the Treasury might deem 
relevant--the Secretary is to consider seven potentially relevant 
factors. These additional factors include the extent to which the 
jurisdiction offers special bank secrecy or regulatory advantages to 
nonresidents as well as the substance and quality of the bank 
supervisory and anti-money laundering laws in the jurisdiction. In 
making a finding that an institution, transaction, or type of account 
is of primary money laundering concern, the Secretary is to consider-in 
addition to any information the Secretary determines is relevant-three 
potentially relevant factors, including the extent to which the 
institution is used to facilitate money laundering and the extent to 
which it is used to facilitate legitimate business. For a list of all 
potentially relevant factors Treasury is required to consider, see 
appendix II. According to the law, the Secretary of the Treasury must 
consult with State and Justice before designating an institution, 
jurisdiction, or class of transactions is of primary money laundering 
concern.[Footnote 11] 

Once an institution is designated as being of primary money laundering 
concern, the Secretary of the Treasury is required to consult with a 
variety of parties including the Secretary of State, the Chairman of 
the Board of Governors of the Federal Reserve System, and other 
appropriate federal agencies,[Footnote 12] to determine which of the 
five available special measures to apply. The first four special 
measures relate to requirements put on U.S. financial institutions or 
agencies for record keeping, reporting, and collection of certain 
financial information.[Footnote 13] The fifth special measure prohibits 
U.S. financial institutions or agencies from opening or maintaining 
correspondent accounts or payable through accounts for or on behalf of 
a foreign bank if the account involves a designated jurisdiction or 
institution.[Footnote 14] This special measure may be imposed only by 
regulation. In selecting which special measures to apply, the Secretary 
is required to consider four factors. These factors are listed in 
appendix III. 

The Administrative Procedure Act, which governs federal rule-making, 
generally requires that notice of proposed rule-making be published in 
the Federal Register.[Footnote 15] It also requires that, after the 
notice is given, the agency provide interested persons an opportunity 
to participate in the rule-making through submission of written data, 
views, or arguments. After consideration of these submissions, the 
agency is required to incorporate in the rules adopted a concise 
general statement of their basis and purpose. 

Process to Implement USA PATRIOT Act Section 311 Was Consistent with 
Legal Requirements, but Some Agencies Expressed Concerns about 
Consultation: 

To implement USA PATRIOT Act Section 311, Treasury used an evolving 
informal rule-making process that was consistent with requirements in 
Section 311 and resulted in 11 cases in eight countries from 2002 
through 2005. However, Treasury's process for consulting with two U.S. 
agencies on findings of primary money laundering concern sometimes made 
it difficult to provide meaningful consultation during certain key 
phases of the process, according to Justice and State officials. In the 
absence of established time frames, officials of these agencies 
expressed concerns about the amount of time they had for consultation 
about Section 311 findings. In addition, Treasury did not include these 
other agencies with expertise in money laundering and international 
affairs in developing its initial list of targeted financial 
institutions. Starting in 2006, Treasury changed its targeting 
procedures and, with Justice, established an interagency working group 
to discuss potential threats to the U.S. financial system at an earlier 
stage in the process. However, it is unclear whether the new procedures 
improved consultation because Treasury's current process has not 
resulted in any new Section 311 findings since 2005. 

Treasury Developed Informal Rule-making Process to Implement USA 
PATRIOT Act Section 311: 

To implement USA PATRIOT Act Section 311, Treasury generally pursued 
the following steps from 2002 through 2005 that evolved over time: 

1. Identified target jurisdictions (countries) and financial 
institutions that presented a potential threat to the U.S. financial 
system because of money laundering or terrorist financing where Section 
311 might be applied. 

2. Conducted research to determine which of these jurisdictions or 
financial institutions were "of primary money laundering concern" and 
determined which special measures should be applied. 

3. Drafted a finding and special measures, usually in a notice of 
proposed rule-making. 

4. Reviewed the proposed rule for legal sufficiency. 

5. Consulted with relevant agencies (Justice, State, the Federal 
Reserve, and other agencies) on a finding and the application of 
special measures. 

6. Obtained clearance to proceed from Treasury's management. 

7. Published a finding or notice of proposed rule-making in the Federal 
Register. 

8. Received and reviewed comments. 

9. Consulted, if applicable, with Justice, State, and the Federal 
Reserve, on the application of special measure 5. 

10. Finalized or withdrew the proposed rule, as appropriate. 

Treasury officials said that they had no single established process to 
implement Section 311, but developed informal rule-making processes 
that evolved over time. Prior to 2004, all work on Section 311 cases 
was conducted by the Office of Enforcement and was primarily the 
responsibility of Treasury's Deputy Assistant Secretary for Terrorist 
Financing and Financial Crime and his staff. At the beginning of 2004, 
Treasury officials told us a decision was made to move the function of 
building an administrative record of the supporting evidence associated 
with each Section 311 case and proposed rule to FinCEN. However, TFFC 
is still involved in making the determination of when a proposed rule 
should be published, finalized, or withdrawn, according to Treasury 
officials. 

To date, Treasury has issued findings of primary money laundering 
concern against three jurisdictions and eight financial institutions in 
eight countries. The first finding of primary money laundering concern 
was issued in December 2002 and the most recent finding occurred in 
September 2005. The three countries in these findings were: (1) 
Ukraine, (2) Nauru, and (3) Burma. The eight financial institutions in 
these findings were: (1) Asia Wealth Bank (Burma), (2) Myanmar 
Mayflower Bank (Burma), (3) Commercial Bank of Syria (Syria), (4) First 
Merchant Bank OSH Ltd. (Turkish Cyprus),[Footnote 16] (5) 
Belmetalnergo/Infobank (Belarus), (6) Multibanka (Latvia), (7) VEF 
Banka (Latvia), and (8) Banco Delta Asia (Macau, China). 

In all of the cases above, Treasury issued a designation of primary 
money laundering concern. In all cases but one,[Footnote 17] Treasury 
also issued proposed rules regarding the institution or jurisdiction 
designated to be of primary money laundering concern. These rules 
proposed that U.S. financial institutions employ Special Measure 5, 
prohibiting U.S. financial institutions covered by the rule from 
opening or maintaining correspondent accounts with foreign banks if the 
account involved designated institutions or jurisdictions. Of the 10 
proposed rules it issued under Section 311, Treasury later withdrew 3 
and finalized 6, with one rule still outstanding. For additional 
information on these countries and financial institutions, see appendix 
IV. 

Treasury Identified Targeted Institutions Where Section 311 Might be 
Applied: 

To implement the key first step of targeting areas of primary money 
laundering concern, according to Treasury officials, Treasury 
identified jurisdictions and financial institutions from several 
sources. These were multilateral organization recommendations, U.S. law 
enforcement investigations, joint strategy with State, and broader 
national security concerns. 

For the jurisdictions it targeted from 2002 through 2005--the countries 
of Burma, Nauru, and Ukraine--Treasury officials said they relied 
largely on recommendations from the FATF, an international body whose 
purpose is the development and promotion of national and international 
policies to combat money laundering and terrorist financing, as well as 
on internal Treasury research and other sources. The first opportunity 
to use Section 311 arose out of the FATF's Non-Cooperative Countries 
and Territories (NCCT) process, according to Treasury officials. Once a 
country was placed on the NCCT list, FATF member states, including the 
United States, had an obligation to advise financial institutions in 
their country to give enhanced scrutiny to financial transactions with 
financial institutions on the FATF NCCT list. If after a year, a 
country had not taken the appropriate measures to be removed from the 
NCCT list, then FATF would request that its member countries place 
additional countermeasures against the country, according to Treasury 
officials. Treasury officials told us that prior to the passage of 
Section 311, the United States had no real countermeasures to impose on 
countries when FATF called for them. After Section 311 was passed, 
Treasury decided to use the provision in response to the FATF's call 
for additional country countermeasures. In early 2000, FATF called for 
countermeasures against Ukraine and Nauru and, in 2003, called for 
countermeasures against Burma. Subsequently, Treasury responded by 
invoking Section 311 against all three countries, according to Treasury 
officials. 

For financial institutions it targeted, Treasury used a different 
approach from that used for jurisdictions. It developed a list of 
possible targets for the purpose of using the new Section 311 
authority, according to U.S. government officials. In 2002 and 2003, 
Treasury officials said, the Office of Enforcement, which preceded 
TFFC, assigned each of its five to six staff to review a region of the 
world in order to review intelligence reports and identify potential 
targets in each region. Ultimately, the office produced a list of over 
20 banks of money laundering concern that were potential targets for 
Section 311 action. Treasury officials told us that their offices 
developed the list of targeted financial institutions internally. While 
Treasury officials said that they did not consult other agency 
officials with expertise in money laundering and international affairs 
in developing the initial list of targets, Treasury developed the list 
from various sources, based on material developed by other agencies. 

Treasury officials identified several sources as the impetus for its 
findings of primary money-laundering concern for various financial 
institutions. 

* The finding against one bank occurred because there was an ongoing 
FBI investigation of the bank, according to Treasury officials. They 
said that this case was the first opportunity Treasury had to use 
Section 311 in conjunction with law enforcement. 

* The findings against two other banks emerged from a concern that a 
foreign government was not reforming its anti-money laundering laws, 
according to Treasury officials. They said that the U.S. government had 
been concerned for some time with lack of anti-money laundering 
controls in the country, but had not pursued the issue until it became 
apparent that anti-money laundering controls were not going to be 
addressed. At that point, Treasury met with State to develop a strategy 
for dealing with the country's anti-money laundering control issues. 
Following the Section 311 finding, the foreign government passed 
legislation to improve its national anti-money laundering controls. 

* The findings against two other targeted banks emerged from several 
national security working groups and were part of a higher National 
Security Council strategy for these particular countries, according to 
Treasury officials. 

After developing the target list, Treasury conducted research to 
support a finding for each targeted institution on the list. If it 
determined that it had enough evidence to support a Section 311 
finding, it published a proposed rule in the Federal Register 
identifying the institution as being of "primary money laundering 
concern." 

Treasury Process for Implementing Section 311 Was Consistent with Legal 
Requirements: 

Treasury's process for implementing Section 311 was consistent with 
requirements set forth in the USA PATRIOT Act. From 2002 through 2005, 
in accordance with USA PATRIOT Act Section 311, Treasury generally 
considered the seven factors outlined in Section 311 when determining 
whether a jurisdiction is of primary money laundering concern, 
including the quality of bank supervision and anti-money laundering 
laws in the jurisdiction. For example, for the jurisdiction of Burma, 
Treasury found that Burma lacked a basic set of anti-money laundering 
laws and that the Burmese Central Bank had no anti-money laundering 
regulations for financial institutions. For proposed rules determining 
whether an institution was of primary money laundering concern, 
Treasury considered the three factors outlined in Section 311 for 
financial institutions. For example, Treasury determined that the 
Commercial Bank of Syria was being used to facilitate or promote money 
laundering because numerous transactions were indicative of money 
laundering passed through that bank. Treasury also determined that any 
legitimate business activity at the bank was significantly outweighed 
by the apparent use of the bank to promote money laundering. 

When determining which special measures to apply under Section 311, 
Treasury considered the four factors required by the law. For example, 
Treasury considered whether similar action was being taken by other 
nations or organizations, the burden of special measures for U.S. 
financial institution compliance, the impact of special measures on the 
international financial system, and the effect of special measures on 
U.S. national security and foreign policy when it announced Section 311 
special measures for Banco Delta Asia. Appendix II provides a more 
detailed description of these factors. In addition, consistent with 
Section 311 of the USA Patriot Act, Treasury's process for instituting 
special measure 5 was imposed only through rule-making. 

Two Agencies Noted Limited Opportunities to Contribute Their Views: 

While Treasury met the statutory requirements of USA PATRIOT Act 
Section 311 to consult with designated agencies, Justice and State 
officials expressed concerns with the amount of time they had for 
consultation about Section 311 findings in the absence of established 
time frames. 

Officials of two U.S. agencies expressed concerns about the amount of 
time they had for consulting with Treasury on Section 311 cases prior 
to issuing proposed rules. Before a proposed rule was issued for public 
comment, Treasury provided it to Justice and State for consultation, as 
required by the act.[Footnote 18] Though the consultations fulfilled 
requirements under Section 311, Justice and State officials said that 
consultations often occurred under short time frames, affording them 
insufficient opportunity to provide meaningful input to the Section 311 
process. Treasury established no operational guidance with set time 
frames for this consultation requirement. For example, one Justice 
official stated that Justice generally received an e-mail from Treasury 
asking Justice if it wanted to comment on a proposed rule and setting 
very tight time frames--in one case as little as 1 to 2 days--with no 
explanation as to why time frames were so tight. Other Justice 
officials said that the short time frame required that most of the 
feedback from Justice to Treasury was oral, but that in one case 
neither Justice nor Treasury had access to a Sensitive Compartmented 
Information Facility to discuss classified information during the time 
period provided. As a result, all conversations between the two 
agencies needed to be general and could not be classified. This was 
problematic because one Justice official said that most of Justice's 
comments regarded evidence that was highly classified. Also, short time 
frames made consultation difficult because they did not allow the 
relevant Justice official who had reviewed the classified evidence time 
to collect comments or concerns from other officials in Justice. 

Treasury officials disagreed with concerns expressed about their 
consultation roles. They stated their belief that Treasury coordinates 
extensively. Treasury worked with other agencies on various cases. For 
example, in one case, Treasury worked for months with the intelligence 
agencies in developing the case and with State, including the Secretary 
of State, on the designation, according to the officials. Treasury 
officials said that they also consulted with State's Undersecretary for 
Economic and Business Affairs as required. In addition, Treasury 
officials said that they delayed one case because of law enforcement 
interests in the targeted institution and that law enforcement equities 
are a primary concern for Treasury. Moreover, Treasury said that it has 
accommodated other agencies' concerns and always ensured that it did 
not endanger the operational interests of law enforcement and the 
intelligence community. Treasury stated that it had never gone forward 
with Section 311 actions without consultation or over the objections of 
other agencies. 

Treasury Changed Its Process for Implementing Section 311: 

In early 2006, FinCEN changed Section 311 procedures in order to make 
better use of the staff's time, according to a Treasury official. 
Targeted assessments of financial institutions that may be of primary 
money laundering concern are now prepared instead of complete Section 
311 packages. This is because preparing a complete package took 
considerable time, according to this official, and then had to be 
assessed to determine if there was sufficient evidence to justify a 
finding and proposed rule. The process now begins when a request for 
preparing an assessment comes from either (1) within FinCEN, based on a 
daily FinCEN review of intelligence and public materials looking for 
threats to the U.S. financial system or (2) other parts of Treasury or 
other agencies with suggestions for a targeted assessment. In deciding 
whether or not to prepare a targeted assessment, FinCEN first considers 
whether an institution has access to the U.S. financial system. If not, 
FinCEN takes no action to assess it. Once an assessment is prepared, it 
is presented either to the Under Secretary for Terrorism and Financial 
Intelligence or to the Director of FinCEN, or both, for a policy 
decision on whether further action should be taken. None of the 
targeted assessments has resulted in Section 311 actions, but Treasury 
said it has selected other options to address these threats. 

The second change in the implementation process was the formation of an 
interagency working group to review suspect banks. This group developed 
over time but formally began meeting in January 2008. According to the 
Chief of Justice's Asset Forfeiture & Money Laundering Section (AFMLS), 
he developed an informal working relationship with Treasury, primarily 
through meetings with the Deputy Assistant Secretary of TFFC, on a 
monthly or bimonthly basis. This evolved into a working group to review 
suspect banks for possible anti-money laundering efforts, including 
Section 311 actions. This process was formalized in the first 6 months 
of 2008 and the working group has met about 6 times. The Deputy 
Assistant Secretary for TFFC at Treasury noted that this group gives 
the Section 311 process a broader perspective on suspect banks. The 
Chief of Justice's AFMLS section also said that this working group is a 
significant improvement over Treasury's previous process for 
identifying banks for possible Section 311 action, which had not been 
clear to Justice officials. The working group also allows Justice to 
learn about possible Section 311 actions early, thus alerting Justice 
to actions that could impact ongoing covert operations. The Justice 
official noted that one of its goals for the working group is to 
maintain anti-money laundering expertise and a law enforcement 
perspective, since TFFC is not a law enforcement agency. The Justice 
official emphasized that the group has good potential but that it will 
take another 6 months to see how well it works. 

Membership in the suspect banks' working group consists of a wide 
variety of organizations. The Chief of Justice's AFMLS co-chairs the 
group with Treasury's Deputy Assistant Secretary for TFFC. Other 
members of the group are State (representatives from its division of 
International Narcotics and Law Enforcement bureau); staff from TFFC 
and FinCEN, and the international division at Treasury; and components 
of the intelligence community. These agencies are the core group that 
now attends all meetings, but other agencies may be also asked to 
attend specific meetings. State was not initially at the first meetings 
of the working group but had been invited after the first few meetings 
when it became clear that its input was needed. 

Treasury's Process for Implementing Section 311 Followed Requirements 
of the Law but Took Years to Finalize Some Proposed Rules: 

It has sometimes taken Treasury years to finalize or withdraw a 
proposed Section 311 rule, though these delays are not inconsistent 
with requirements under the law. This has occurred, in part because (1) 
there are no requirements to designate time frames for completing 
actions and (2) Treasury officials were unclear about which office in 
Treasury was responsible for finalizing or withdrawing proposed rules. 
Nonetheless, the Section 311 proposed rules had a significant impact 
because U.S. financial institutions took immediate action on the basis 
of their being announced, effectively implementing them before they 
were finalized. 

Treasury's Timeline for Issuing Proposed and Final Rules Follows 
Requirements in the Administrative Procedure Act: 

Though sometimes delayed, Treasury's process for issuing proposed and 
final rules follows requirements in the Administrative Procedure 
Act.[Footnote 19] The Administrative Procedure Act generally requires 
that agencies issue a proposed rule in the Federal Register and that 
they give interested persons an opportunity to participate in rule- 
making through the submission of written data, views, or arguments. 
Treasury officials said they reviewed all comments they received in 
response to proposed rules. Officials said that in some cases, they 
also met with affected financial institutions at the institutions' 
request. Treasury then determines whether to finalize or withdraw a 
proposed rule. This step is important because, in contrast to a 
proposed rule, a final rule imposes legal requirements on U.S. 
financial institutions. However, rule-making requirements of the 
Administrative Procedure Act do not place any time frames on officials 
specifying by when a proposed rule must be finalized or 
withdrawn.[Footnote 20] 

Treasury Took Years to Finalize Some Proposed Rules: 

In some cases, Treasury took years to finalize proposed rules. For 
example, as of February 2008, 3 of the 11 cases it had opened still had 
not been finalized, with two open for more than 3 years (44 and 49 
months, respectively) and one open for 5 years (60 months). These cases 
contrast sharply with other Section 311 cases where Treasury took as 
little as 4 months to follow up on a finding of primary money 
laundering concern or a proposed rule. Figure 2 shows the length of 
time proposed rules were open for all Section 311 actions. Additional 
information on the date of issuance of findings of primary money 
laundering concern, proposed rules, and final rules for all Section 311 
actions is in appendix IV. 

Figure 2: Length of Time to Finalize or Withdraw Proposed Section 311 
Rules: 

[See PDF for image] 

Source: GAO analysis of Department of Treasury data. 

[A] A finding of primary money laundering concern was issued against 
Ukraine but no proposed rule was issued. The finding of primary money 
laundering concern was withdrawn approximately 4 months after it was 
issued on April 17, 2003, based on Ukrainian passage of anti-money 
laundering legislation, its commitment to implement this legislation, 
and the FATF's decision to rescind a call for countermeasures against 
Ukraine. 

[B] First Merchant Finance Ltd., First Merchant International Inc., 
First Merchant Trust Ltd., and FMB Finance Ltd. are subsidiaries of 
First Merchant Bank OSH Ltd. The subsidiaries of First Merchant Bank 
OSH were included in the proposed rule. 

[C] The finding against Infobank includes Belmetalnergo. 

[End of figure] 

Treasury lacks operational guidance and clear lines of authority for 
finalizing proposed rules, which may have contributed to the length of 
time it took to do so. Federal government management control standards 
require that agencies have policies and procedures for implementing 
management directives and that agencies clearly define key areas of 
responsibility throughout their organization.[Footnote 21] However, 
Treasury does not have policies and procedures that provide operational 
guidance as to when proposed rules should be finalized or other 
procedures that Treasury staff should follow when implementing Section 
311 actions. In addition, we observed that there are not clear lines of 
responsibility as to which office within Treasury should finalize these 
proposed rules. 

Treasury officials said that they follow the law and rule-making 
procedures outlined in the Administrative Procedure Act when 
implementing proposed rules. However, as mentioned earlier, the law 
provides no time frames to which officials are expected to adhere 
between the issuance of a notice of proposed rule-making and a final 
rule. Instead, Treasury officials told us that the events that occur in 
a case and the priorities of the office implementing the rule affect 
the amount of time that elapses between when a rule is proposed and 
when it is finalized. For example, one FinCEN official said that his 
work on finalizing a proposed rule was delayed when another Section 311 
case became a higher priority. The proposed rule in this case was 
eventually finalized after more than 3 years. 

Several additional factors accounted for the interval of time between 
issuing findings and proposed rules and finalizing or withdrawing them. 
Staff at FinCEN said that often the decision to postpone a case is made 
simply because there are not enough resources to concentrate on all of 
the cases at hand. For example, one official said that he was working 
on resolving the proposed rule-making for one bank when another case 
began. Once the second case became a priority, work on the first was 
put on hold so that all staff could work on the other case, since only 
a few staff within FinCEN work on Section 311 cases, according to the 
official. In addition, Treasury officials said, they extended a comment 
period for two banks, while in another case, they postponed final 
action on an institution for several months pending completion of a law 
enforcement investigation. Also contributing to the interval between a 
proposed rule and a final or withdrawn rule is that Treasury monitors 
financial institutions on an ad hoc basis after a proposed rule is 
issued. For example, in one case FinCEN required several months in 2007 
to confirm whether banks under Section 311 restrictions were still in 
business and an additional 9 months to withdraw the proposed rule after 
receiving the information. 

Treasury officials' uncertainty about clear lines of responsibility 
added to delays in finalizing proposed rules. Both FinCEN and TFFC 
officials told us Treasury has prepared no written guidance outlining 
the responsibilities of each bureau for administering Section 311. In 
addition, it appears that the bureaus have not determined their 
respective responsibilities in finalizing proposed rules. For example, 
in February 2008, three proposed rules were open, with two having been 
open for more than 4 years beyond the 30-day comment period. Senior 
TFFC officials were not aware that these cases were still open until we 
brought this fact to their attention. In contrast to TFFC, FinCEN 
officials were aware that these cases were open, as their status was 
listed on FinCEN's website. In addition, a lack of clear lines of 
responsibility led to confusion over the responsibility for closing 
these cases. FinCEN officials did not believe that they were 
responsible for closing them. They stated that TFI is responsible for 
deciding when to decide to finalize or withdraw a proposed rule, 
although FinCEN staff may sometimes take the initiative to suggest that 
a rule be finalized or postponed. TFFC officials, on the other hand, 
said that FinCEN was responsible for finalizing proposed rules. TFFC 
officials followed up on the proposed rules that were outstanding after 
we discussed the rules with them.[Footnote 22] Although Treasury stated 
that it had started action to withdraw two of the proposed rules prior 
to our discussion with TFFC, Treasury documents showed that FinCEN 
previously had started to draft a withdrawal notice for one case in 
2005 but never completed it, and had started again in October 2007 to 
draft withdrawal notices for this and a second case, before issuing 
them 6 months later. 

In response to our observation of unclear lines of authority, senior 
FinCEN and TFFC officials said that, pursuant to law and a related 
Treasury order, FinCEN is the administrator of the BSA, of which USA 
PATRIOT Act amendments are a part. Therefore, FinCEN is technically 
responsible for administering Section 311. The Treasury officials added 
that FinCEN coordinates closely with TFFC on all aspects of Section 311 
rule-making. 

Proposed Rules Had an Immediate Impact on Targeted Countries and 
Financial Institutions: 

Despite taking years to finalize in some cases, proposed rules under 
Section 311 had an immediate impact on targeted institutions and 
jurisdictions. Treasury, State, and Justice officials told us that once 
a proposed rule is issued, almost all U.S. financial institutions 
immediately implement it voluntarily, stopping financial transactions 
with designated financial institutions or jurisdictions. Federal 
Reserve and Treasury's Office of the Comptroller of the Currency 
officials also said that U.S. banks often treat proposed Section 311 
rules as final and generally cut off all financial interactions with 
the targeted institution. Federal Reserve officials noted that this 
response to a proposed rule is unusual and, within the context of BSA 
requirements, appears to be unique to proposed rules under Section 311. 
Officials explained that U.S. banks may be taking this action because 
the proposed rule is associated with a finding of primary money 
laundering concern and, in many instances, Treasury issued a finding 
together with a notice of proposed rule-making. Because it makes good 
business sense to protect banks from risks to their reputation and 
possible government penalties, banks may discontinue business with 
other banks labeled a primary money laundering concern to reduce their 
reputational risk. Banks may be concerned that continuing business with 
a bank labeled as of "primary money laundering concern" would 
negatively impact their reputation. Moreover, U.S. financial 
institutions must take publicly available information into account when 
implementing their anti-money laundering programs and assessing risks. 
In addition, banks are generally given a short time frame to come into 
compliance with rules under Section 311 once they are finalized, so 
they may cut off all financial interaction with a targeted entity when 
the proposed rule is issued to ensure that they have minimized their 
risk of non-compliance. 

Foreign government officials and representatives from targeted 
financial institutions in countries we visited also agreed that 
proposed rules have an immediate impact on these institutions and 
jurisdictions. Foreign government officials told us that, following the 
issuance of proposed rules, U.S. correspondent accounts of targeted 
banks were immediately closed. Bank representatives also told us that 
the proposed rules had a significant impact on their business. Bank 
managers from one targeted institution stated that the banks' deposits 
had decreased by one third of their original amount 3 days after the 
proposed rule was issued. In another case, a bank lost approximately 80 
percent of its business as a result of a proposed rule, according to a 
bank representative. Attorneys for targeted financial institutions with 
whom we spoke emphasized that the amount of time between the proposed 
and final rule is important to targeted institutions since a long delay 
can weaken a bank financially. One legal representative noted that long 
delays between the proposed and final rule can put a bank in a 
financial position where it cannot afford to take legal action in U.S. 
court opposing special measures if a rule is finalized against it. 

Treasury Views Section 311 as Effective, despite Concerns Expressed by 
Others about the Process: 

Treasury views Section 311 restrictions as effective, despite concerns 
expressed by others about the process. Section 311 restrictions are 
intended to achieve (1) the anti-money laundering goal of isolating 
target financial institutions from the U.S. financial system and (2) a 
broader national security goal of encouraging foreign governments to 
strengthen their anti-money laundering laws and regulations, according 
to Treasury officials. Treasury views Section 311 actions as effective 
in achieving both goals because U.S. financial institutions respond 
immediately to proposed rules, and several foreign governments have 
strengthened their laws and regulations in response to proposed rules. 
However, Treasury does not view the long-term impact of proposed and 
final rules, including negative foreign perceptions of their 
implementation, as outweighing the observable achievements of Section 
311. 

U.S. Agencies and Foreign Governments View Section 311 as Effective: 

U.S. and foreign government officials with whom we spoke said that they 
consider Section 311 to be an effective anti-money laundering tool and 
to have had a significant impact on target financial institutions and 
countries. According to Treasury officials, Section 311 restrictions 
are intended to achieve (1) the anti-money laundering goal of isolating 
target financial institutions from the U.S. financial system and (2) a 
broader national security goal of encouraging foreign governments to 
strengthen their anti-money laundering laws and regulations. 

Several U.S. government officials said that Section 311 was effective 
in achieving the first goal of isolating targeted financial 
institutions or jurisdictions from the U.S. financial system. For 
example, one State official said that the imposition of Section 311 was 
very effective for the majority of countries targeted because financial 
systems in other countries were so closely tied to the U.S. financial 
system. Generally, the imposition of a Section 311 action, beginning 
with the issuance of a proposed rule, caused U.S. banks to voluntarily 
cut off transactions with the targeted financial institutions even when 
proposed rules were not finalized. In addition, the action has a 
chilling effect on foreign investment through the bank or in the 
country because the banking industry pays close attention to the 
actions of U.S. financial institutions, according to the official. 

Several U.S. and foreign government officials said that Section 311 was 
effective in achieving the second goal because it influenced some 
foreign governments to strengthen their anti-money laundering laws and 
regulations. Officials specifically cited the Latvia, Macau, and 
Ukraine cases as examples of this. For example, one Treasury official 
noted that, after the Section 311 action occurred, the government of 
Latvia worked closely with the U.S. Embassy and State to address 
problems related to financial crime which had caused Treasury to issue 
the Section 311 findings. While foreign government officials in these 
countries did not dispute the statement, some said either that their 
governments had already started to strengthen their laws and 
regulations when the Section 311 action occurred, or that they had 
responded as much or more to other actions, such as the FATF call for 
countermeasures, than to the U.S. restrictions. 

Concerns about Section 311 Exist Both in the United States and Abroad: 

Despite the achievements observed from initial monitoring of Section 
311 actions, we identified several concerns about the impact of Section 
311's implementation. U.S. embassy officials with whom we spoke and 
representatives of one targeted institution indicated that the impact 
of the proposed rule continued on the institution and the country even 
after the rule had been withdrawn. A number of U.S. banks have avoided 
holding correspondent bank accounts with any banks in the country since 
the Section 311 restriction was issued, according to embassy officials. 
They noted that the issuance of Section 311 creates a large stigma 
against banking with both the targeted banks under the proposed rule 
and other banks in the country where the proposed rule was targeted. 
Embassy officials said that several U.S. businessmen in the country 
have been told by U.S. bankers that they decided to withdraw from doing 
business in the country because of the Section 311 action. Foreign 
banking officials stated that the proposed rule continued to impact the 
country even though it was not targeted at the country specifically, 
and the United States had acknowledged the government's efforts in the 
anti-money laundering arena. One representative of a foreign 
institution pointed out that the consequences of Section 311 action 
against his country continue and may not have been intended. For 
example, American banks continue to be hesitant to do business with his 
country's banks and many have cut off business altogether. The official 
said that he believes this is because American banks do not believe 
that guidelines are clear as to what anti-money laundering standards 
they should be following. In order to minimize the risk of 
noncompliance with their regulators, many banks have stopped business 
with his country's banks altogether, regardless of whether they believe 
that a bank is following U.S. anti-money laundering standards. 

Foreign regulatory and law enforcement agencies in some countries we 
visited said that how Section 311 actions were implemented did not 
provide them sufficient opportunity or information from U.S. government 
sources to prosecute crimes or regulate the targeted banks. For 
example, foreign government officials in one country that we visited 
noted that there were many steps that the government's monetary 
authority could have undertaken to put pressure on the targeted 
institution to improve its anti-money laundering controls. These 
actions might have solved the problem to the extent that the U.S. 
government would not have had to take action, according to the 
officials. The officials said that the monetary authority has the 
ability to obtain information from financial institutions, attach 
conditions to institutional operation, work with the Financial 
Intelligence Unit[Footnote 23] to investigate financial crimes, and, in 
more drastic situations, appoint an advisor or director to take over a 
private bank. Treasury officials said that it discussed Section 311 
actions with foreign government representatives when appropriate and 
provided ample notice that a Section 311 action was forthcoming in some 
cases. In some instances, however, such communications would be 
inappropriate, according to Treasury officials. Treasury officials 
noted that it is obligated under the USA PATRIOT Act to consider "the 
extent to which that jurisdiction is characterized by high levels of 
official or institutional corruption" when making a finding that a 
jurisdiction is of primary money laundering concern. 

Justice officials said that in cases where application of Section 311 
is perceived as unsubstantiated, it harms the United States. Countries 
may be less likely to cooperate with the U.S. government on other 
sanctions or law enforcement matters if they feel that the United 
States is acting in an unreasonable or unsubstantiated manner regarding 
Section 311 or that the United States cannot articulate the standards 
used to reach such a decision. In addition, when countries distrust 
actions the United States has taken under Section 311, their trust in 
U.S. actions in other areas is undermined. A Justice official noted 
that there are times when Justice needs to request the assistance of 
others based on classified information and sometimes it cannot 
immediately reveal this information or its source. In these cases, 
Justice needs foreign governments to trust the United States and act on 
its requests. If trust in the U.S. government has been eroded due to 
actions that appear to be unsubstantiated, then foreign governments may 
be less likely to cooperate with Justice investigations. 

In addition, some U.S. government officials, foreign government 
officials, and representatives of banks in countries we visited, 
characterized the imposition of Section 311 special measures as a 
"political tool" and as sanctions. They saw Section 311 actions to be 
more like unilateral U.S. sanctions used for political purposes than 
law enforcement mechanisms used for anti-money laundering 
purposes.[Footnote 24] Some similarities between Section 311 actions 
and sanctions--such as their being unilateral, designation of targeted 
persons or institutions, announcement of these designations in the 
Federal Register, prohibition of certain financial transactions, and 
denial of access to the U.S. financial system for designated parties-- 
may contribute to this perception. Also, an official of Treasury's 
Office of the Comptroller of the Currency said that the only other 
process in his view that was similar to the Section 311 process is 
Treasury's OFAC sanctions process. Under such sanctions, according to 
the official, banks also automatically stop doing business with an 
institution once it is cited. 

Treasury officials acknowledge that this perception exists but maintain 
that Section 311 is an anti-money laundering mechanism, not a sanction. 
In testimony in April 2008,[Footnote 25] the Under Secretary of the 
Treasury for Terrorism and Financial Intelligence stated: 

Treasury adopted a new strategy of using targeted, conduct-based 
financial measures aimed at particular bad actors. I intentionally 
refer to these targeted actions as "financial measures" rather than 
"sanctions" because the word "sanctions" often evokes such a negative 
reaction. These targeted financial measures are proving to be quite 
effective, flying in the face of a widely-held historical view that 
dismisses sanctions as ineffective, harmful to innocents, or both. In 
the case of broad, country-wide sanctions that are often perceived as 
political statements, it can be difficult to persuade other governments 
and private businesses to join us in taking action. 

Treasury reiterated its view that Section 311 actions are not sanctions 
despite the perception that they are by some U.S. officials and foreign 
governments. Senior Treasury officials regularly work to educate the 
public and foreign governments that these actions are not sanctions, 
according to Treasury officials. Treasury's OFAC administers the U.S. 
sanctions programs, which operate under very different authorities. 

Finally, some U.S. government officials and foreign government 
officials we met with in countries where financial institutions had 
been targeted felt that there were several financial institutions of 
greater money laundering concern that had not been targeted and 
suggested that Treasury targeted financial institutions that were 
politically expedient rather than financial institutions that were of 
the greatest concern. For example, officials we spoke with about two 
countries we visited where financial institutions were identified for 
Section 311 actions told us that other banks in those countries had 
anti-money laundering controls that were as bad as, or worse than the 
banks that were targeted. They noted that it was not clear why Treasury 
chose the banks it chose as targets for Section 311 action. Treasury 
officials explained that it was important for Treasury to have 
flexibility in implementing Section 311 and that Treasury could have 
targeted other banks in one country, for example, that were larger than 
those it targeted. However, Treasury did not want to undermine the 
country's financial system but that, by selecting the smaller banks, it 
would still send the message to government authorities that they needed 
to reform the country's anti-money laundering systems. 

Conclusion: 

U.S. government officials consider Section 311 to be an effective tool 
in restricting access to the U.S. financial markets for financial 
institutions or jurisdictions that are of primary money laundering 
concern and in encouraging foreign governments to strengthen their anti-
money laundering laws and regulations. While using Section 311 has 
helped achieve success towards these goals in specific instances, 
shortcomings in Treasury's implementation of the law may be preventing 
the law from achieving a greater potential. Without written operational 
guidelines to clarify when to complete the Section 311 actions or clear 
lines of authority for which office is responsible for completing the 
action, Treasury has taken years to complete the Section 311 process 
for certain cases. Because a proposed rule applying Section 311 in 
practice has had the same effect as a final rule, Treasury may lack 
incentive to finalize or withdraw such rules. More expeditious 
completion of Section 311 cases could be an important counterbalance to 
concerns about the Section 311 process by affected jurisdictions, 
financial institutions, and other parties. 

Recommendation for Executive Action: 

In order to improve implementation of the Section 311 process, we 
recommend that the Secretary of the Treasury establish implementing 
guidance for Section 311 of the USA PATRIOT Act. This guidance should 
specify the responsibilities and activities of offices within Treasury, 
including the Office of Terrorist Financing and Financial Crime and the 
Financial Crimes Enforcement Network, for implementing and finalizing 
Section 311 actions. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to Justice, State, and Treasury. 
Justice and State had no comments on this report. 

Treasury said that it will take action to clarify its Section 311 
processes in response to this report's recommendation, even though it 
emphasized that the current coordination and implementation of Section 
311 within Treasury components today has been significantly improved. 
It noted that some of the report's conclusions were based on actions 
that occurred years ago and that current coordination and 
implementation of Section 311 within components of Treasury's Office of 
Terrorism and Financial Intelligence have addressed those actions. 
Although Treasury said that it has well-defined mechanisms in place to 
implement Section 311, it nonetheless stated that the Under Secretary 
of the Office of Terrorism and Financial Intelligence will ensure that 
mechanisms for implementing Section 311 are clarified in response to 
this report and its recommendation. 

We appreciate Treasury's commitment to continuously improve the 
implementation of Section 311 as an important tool against money 
laundering and believe this is responsive to our recommendation 
regarding the need to specify the responsibilities and activities of 
offices within Treasury for implementing and finalizing Section 311 
actions. As our report noted, Treasury has modified the Section 311 
process since its inception, and the current process for its use 
differs in some significant ways from the process that Treasury used 
for previous Section 311 cases. We have made some additional 
modifications in our report to reflect technical comments that Treasury 
provided for clarification. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to interested 
congressional committees, and the U.S. Attorney General, and the 
Secretaries of State and Treasury. We will also make copies available 
to others upon request. In addition, this report will be available at 
no charge on the GAO Web site at [hyperlink, http://gao.gov]. If you or 
your staff has any questions concerning this report, please contact me 
at (202) 512-4347 or at yagerl@gao.gov. Contact points for our Office 
of Congressional Relations and Public Affairs may be found on the last 
page of this report. Staff acknowledgments are listed in appendix VI. 

Signed by: 

Loren Yager: 

Director, International Affairs and Trade: 

List of Requesters: 

The Honorable Ileana Ros-Lehtinen: 
Ranking Member: 
Committee on Foreign Affairs: 
House of Representatives: 

The Honorable Christopher H. Smith: 
Ranking Member: 
Subcommittee on Africa and Global Health: 
Committee on Foreign Affairs: 
House of Representatives: 

The Honorable Mike Pence: 
Ranking Member: 
Subcommittee on the Middle East and South Asia: 
Committee on Foreign Affairs: 
House of Representatives: 

The Honorable Edward R. Royce: 
Ranking Member: 
Subcommittee on Terrorism, Nonproliferation and Trade: 
Committee on Foreign Affairs: 
House of Representatives: 

The Honorable Dan Burton: 
Ranking Member: 
Subcommittee on the Western Hemisphere: 
Committee on Foreign Affairs: 
House of Representatives: 

The Honorable Joseph R. Pitts: 
House of Representatives: 

[End of section] 

Appendix I: Scope and Methodology: 

To examine the process U.S. agencies used to implement the USA PATRIOT 
Act Section 311 restrictions against targeted financial institutions 
and countries, we interviewed knowledgeable officials from the Treasury 
offices of Terrorist Financing and Financial Crimes (TFFC) and the 
Financial Crimes Enforcement Network (FinCEN), as well as officials 
from State, Justice, and the U.S. Federal Reserve System who had been 
involved in the Section 311 process. We reviewed Section 311 of the USA 
PATRIOT Act and the Administrative Procedure Act in order to identify 
mandated requirements in law that Treasury must follow when it issues 
and finalizes a proposed rule. We focused this performance audit on 
locations where the U.S. government has targeted financial institutions 
or jurisdictions for Section 311 actions. These were Belarus, Burma, 
Latvia, Macau, Nauru, Syria, Turkish Republic of Northern Cyprus, and 
Ukraine. We also met with foreign government officials in Riga Latvia; 
Kyiv, Ukraine; and Macau and Hong Kong, China; as well as with 
representatives of financial institutions in these countries that had 
been targeted for Section 311 actions. These countries provided 
examples of different applications of Section 311, specifically a 
targeted jurisdiction and targeted financial institutions where Section 
311 restrictions were finalized and withdrawn. We developed a data 
collection instrument for Treasury to more quickly identify relevant 
documents, including memoranda and emails. This helped us confirm that 
Treasury followed the steps in its Section 311 process for each of the 
cases for Belarus, Burma, Latvia, Macau, Nauru, Syria, Turkish Republic 
of Northern Cyprus, and Ukraine. We also reviewed unclassified and 
classified documents, including financial and investigative records, 
that Treasury compiled in its evidentiary files for each case; State 
cable traffic and its annual International Control Strategy Report on 
money laundering and financial crimes; and reports and guidance issued 
by the multinational Financial Action Task Force. 

To assess the process Treasury used to determine whether to finalize or 
withdraw a proposed rule, we interviewed knowledgeable officials from 
TFFC and FinCEN, as well as officials from State, Justice, and the 
Federal Reserve who were involved in the 311 process. We also discussed 
this aspect of the Section 311 process with representatives of relevant 
financial institutions in New York and Washington, D.C; Riga, Latvia; 
Kyiv, Ukraine; and Macau, China. We reviewed public comments on 
proposed rules that were issued under USA PATRIOT Act, Section 311. We 
also met with officials of Ernst and Young, and Deloitte Touche 
Tomatsu, two independent audit organizations that were hired by 
targeted financial institutions to help them reform their anti-money 
laundering controls. We reviewed documents identified by Treasury 
through our document collection instrument as being key documents 
related to the implementation of Section 311 in Belarus, Burma, Latvia, 
Macau, Nauru, Syria, Turkish Republic of Northern Cyprus, and Ukraine. 

To determine how Treasury assessed the impact of Section 311 
restrictions, we spoke with knowledgeable officials from TFFC and 
FinCEN as well as officials from State and Justice who had been 
involved in the 311 process. We also met with foreign government 
officials in Riga, Latvia; Kyiv, Ukraine; and Macau and Hong Kong, 
China; as well as with representatives of financial institutions in 
Latvia, Ukraine, and Macau that were impacted by 311 actions. Also, we 
reviewed documents identified by Treasury through our document 
collection instrument as being key documents related to the 
implementation of Section 311 in Belarus, Burma, Latvia, Macau, Nauru, 
Syria, Turkish Republic of Northern Cyprus, and Ukraine. We also 
reviewed documentation, including sensitive and classified cable 
traffic, which State provided for several 311 cases. State and Treasury 
provided us with a combination of classified and unclassified documents 
related to the cases. 

We conducted this performance audit from September 2007 through 
September 2008 in accordance with generally accepted government 
auditing standards. Those standards require that we plan and perform 
the audit to obtain sufficient, appropriate evidence to provide a 
reasonable basis for our findings and conclusions based on our audit 
objectives. We believe that the evidence obtained provides a reasonable 
basis for our findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Potentially Relevant Factors for Designating a 
Jurisdiction or Institution as of Primary Money Laundering Concern: 

The following table lists information the Secretary of the Treasury is 
required to consider, in addition to any information that the Secretary 
determines is relevant, when designating a jurisdiction or institution 
to be of primary money laundering concern under USA PATRIOT Act Section 
311. 

Table 1: Potentially Relevant Factors to Be Considered When Designating 
a Jurisdiction or Institution to Be of Primary Money Laundering 
Concern: 

Factors to Be Considered When Designating a Jurisdiction: 1. Evidence 
that organized criminal groups, international terrorists, or entities 
involved in the proliferation of weapons of mass destruction or 
missiles have transacted business in the jurisdiction; 
Factors to Be Considered When Designating an Institution: 1. The extent 
to which such financial institutions, transactions, or types of 
accounts are used to facilitate or promote money laundering in or 
through the jurisdiction including any money laundering activity by 
organized criminal groups, international terrorists or entities 
involved in the proliferation of weapons of mass destruction or 
missiles. 

Factors to Be Considered When Designating a Jurisdiction: 2. The extent 
to which the jurisdiction or financial institutions operating in that 
jurisdiction offer bank secrecy or special regulatory advantages to non-
residents or non-domiciliaries of that jurisdiction; 
Factors to Be Considered When Designating an Institution: 2. The extent 
to which such institutions, transactions, or types of accounts are used 
for legitimate business purposes in the jurisdiction. 

Factors to Be Considered When Designating a Jurisdiction: 3. The 
substance and quality of the administration of the bank supervisory and 
counter-money laundering laws of the jurisdiction; 
Factors to Be Considered When Designating an Institution: 3. The extent 
to which such action is sufficient to ensure, with respect to 
transactions involving the jurisdiction and institutions operating in 
the jurisdiction, than the purposes of this subchapter continue to be 
fulfilled and to guard against international money laundering and other 
financial crimes. 

Factors to Be Considered When Designating a Jurisdiction: 4. The 
relationship between the volume of financial transactions occurring in 
that jurisdiction and the size of the economy of the jurisdiction; 
Factors to Be Considered When Designating an Institution: [Empty]. 

Factors to Be Considered When Designating a Jurisdiction: 5. The extent 
to which that jurisdiction is characterized as an offshore banking or 
secrecy haven by credible international organizations or multilateral 
expert groups; 
Factors to Be Considered When Designating an Institution: [Empty]. 

Factors to Be Considered When Designating a Jurisdiction: 6. Whether 
the United States has a mutual legal assistance treaty with that 
jurisdiction, and the experience of United States law enforcement 
officials and regulatory officials in obtaining information about 
transactions originating in or routed through or to such jurisdiction; 
Factors to Be Considered When Designating an Institution: [Empty]. 

Factors to Be Considered When Designating a Jurisdiction: 7. The extent 
to which that jurisdiction is characterized by high levels of official 
or institutional corruption; 
Factors to Be Considered When Designating an Institution: [Empty]. 

Source: USA PATRIOT Act. 

[End of table] 

[End of section] 

Appendix III: Factors to Consider in Selecting Special Measures: 

The following are the factors the Secretary of the Treasury is required 
to consider when selecting special measures for jurisdictions, 
financial institutions, international transactions, or types of 
accounts of primary money laundering concern under USA PATRIOT Act 
Section 311. 

1. Whether similar action has been or is being taken by other nations 
or multilateral groups. 

2. Whether the imposition of any particular special measure would 
create a significant competitive disadvantage, including any undue cost 
or burden associated with compliance for financial institutions 
organized or licensed in the United States. 

3. The extent to which the action or the timing of the action would 
have a significant adverse systemic impact on the international 
payment, clearance, and settlement system, or on legitimate business 
activities involving the particular jurisdiction, institution, class of 
transactions, or type of account. 

4. The effect of the action on United States national security and 
foreign policy. 

[End of section] 

Appendix IV Additional Information on Section 311 Cases: 

The following table shows the dates for each finding of money 
laundering concern, proposed rule, and final rule issued in cases to- 
date where the U.S. government has applied USA PATRIOT Act Section 311. 

Table 2: Issuance of Finding of Primary Money Laundering Concern, 
Proposed Rule, and Final Rule for Section 311 Cases: 

Section 311 case: Country of Ukraine; 
Date of finding of primary money laundering concern: 12/26/02; 
Date of notice of proposed rule: N/A[A]; 
Date proposed rule finalized or withdrawn: N/A[B]; 
Time between proposed rule and finalization or withdrawal (months): 
N/A[C]; 
Status of rule: N/A[D]; Special measure: 1 --4[E]. 

Section 311 case: Country of Nauru; 
Date of finding of primary money laundering concern: 12/26/02; 
Date of notice of proposed rule: 04/17/ 03; 
Date proposed rule finalized or withdrawn: 4/18/08; 
Time between proposed rule and finalization or withdrawal (months): 60; 
Status of rule: Withdrawn; 
Special measure: 5. 

Section 311 case: Country of Burma; 
Date of finding of primary money laundering concern: 11/25/03; 
Date of notice of proposed rule: 11/25/ 03; 
Date proposed rule finalized or withdrawn: 4/12/04; 
Time between proposed rule and finalization or withdrawal (months): 5; 
Status of rule: Finalized; 
Special measure: 5. 

Section 311 case: Asia Wealth Bank (Burma); 
Date of finding of primary money laundering concern: 11/25/03; 
Date of notice of proposed rule: 11/25/03; 
Date proposed rule finalized or withdrawn: 4/12/04; 
Time between proposed rule and finalization or withdrawal (months): 5; 
Status of rule: Finalized; 
Special measure: 5. 

Section 311 case: Myanmar Mayflower Bank (Burma); 
Date of finding of primary money laundering concern: 11/25/03; 
Date of notice of proposed rule: 11/25/03; 
Date proposed rule finalized or withdrawn: 4/12/04; 
Time between proposed rule and finalization or withdrawal (months): 5; 
Status of rule: Finalized; 
Special measure: 5. 

Section 311 case: Commercial Bank of Syria (Syria); 
Date of finding of primary money laundering concern: 5/18/04; 
Date of notice of proposed rule: 05/18/04; 
Date proposed rule finalized or withdrawn: 3/09/06; 
Time between proposed rule and finalization or withdrawal (months): 22; 
Status of rule: Finalized; 
Special measure: 5. 

Section 311 case: First Merchant Bank OSH Ltd[G] (Turkish Republic of 
Northern Cyprus); 
Date of finding of primary money laundering concern: 8/24/04; 
Date of notice of proposed rule: 08/24/04; 
Date proposed rule finalized or withdrawn: 4/10/08; 
Time between proposed rule and finalization or withdrawal (months): 44; 
Status of rule: Withdrawn; 
Special measure: 5. 

Section 311 case: Infobank (includes Belmetalnergo) (Belarus); 
Date of finding of primary money laundering concern: 8/24/04; 
Date of notice of proposed rule: 08/24/04; 
Date proposed rule finalized or withdrawn: Incomplete; 
Time between proposed rule and finalization or withdrawal (months): 
N/A[F]; 
Status of rule: Incomplete; 
Special measure: 5. 

Section 311 case: Multibanka (Latvia); 
Date of finding of primary money laundering concern: 4/21/05; 
Date of notice of proposed rule: 04/21/05; 
Date proposed rule finalized or withdrawn: 7/12/06; 
Time between proposed rule and finalization or withdrawal (months): 15; 
Status of rule: Withdrawn; 
Special measure: 5. 

Section 311 case: VEF Bank[A] (Latvia); 
Date of finding of primary money laundering concern: 4/21/05; 
Date of notice of proposed rule: 04/ 21/05; 
Date proposed rule finalized or withdrawn: 7/12/06; 
Time between proposed rule and finalization or withdrawal (months): 15; 
Status of rule: Finalized; 
Special measure: 5. 

Section 311 case: Banco Delta Asia (Macau); 
Date of finding of primary money laundering concern: 9/15/05; 
Date of notice of proposed rule: 09/ 15/05; 
Date proposed rule finalized or withdrawn: 3/14/07; 
Time between proposed rule and finalization or withdrawal (months): 18; 
Status of rule: Finalized; 
Special measure: 5. 

Source: Treasury. 

[A] Treasury did not issue a proposed rule for Ukraine. 

[B] Treasury withdrew the finding of primary money laundering concern 
on April 17, 2003. However, there was no proposed rule issued. 

[C] There was no proposed or final rule for Ukraine. However, there was 
4 months between the time the finding of primary money laundering 
concern was issued and withdrawn. 

[D] The finding of primary money laundering concern was withdrawn and 
no proposed rule was issued in this case. 

[E] Treasury did not issue special measures for Ukraine. However, the 
finding of primary money laundering concern stated that Treasury 
intended to issue a proposed rule with one or more of special measures 
1 through 4. 

[F] This proposed rule has been open for 49 months as of the date of 
this report. Treasury officials stated that they are reviewing whether 
or not to finalize or withdraw this proposed rule. 

[G] First Merchant Finance Ltd., First Merchant International Inc., 
First Merchant Trust Ltd., and FMB Finance Ltd. are subsidiaries of 
First Merchant Bank OSH Ltd. The subsidiaries of First Merchant Bank 
OSH were included in the proposed rule. 

[End of table] 

[End of section] 

Appendix V: Comments from the Department of the Treasury: 

Department Of The Treasury: 
Washington, D.C.: 
Under Secretary: 

September 22, 2008: 

Loren Yager, Ph.D.: 
Director: 
International Affairs and Trade: 
United States Government Accountability Office: 
441 G Street NW: 
Washington, DC 20548: 

Dear Dr. Yager: 

Thank you for the opportunity to review the draft Government 
Accountability Office (GAO) report entitled "USA PATRIOT Act: Better 
Interagency Coordination and Implementing Guidance for Section 311 
Could Improve U.S. Anti-Money Laundering Efforts." The report examines 
the implementation and impact of an important tool at our disposal to 
protect the U.S. financial system from significant vulnerabilities: 
Section 311 of the USA PATRIOT Act. As is evident in your report, 
Treasury has used this authority since its enactment in 2001 to protect 
the U.S. financial system from a wide range of threats – from money 
laundering vulnerabilities in foreign jurisdictions in Asia, Eastern 
Europe and the Middle East to North Korea-related illicit financial 
activity. The continued improvement of the use of this powerful, but 
relatively new, authority is a top priority for the Treasury 
Department. We welcome your review with an eye toward helping us 
improve the effectiveness of this tool. 

Your report has confirmed our own views that the instances in which 
Section 311 has been applied by the Treasury Department have furthered 
its purpose of protecting the integrity of the U.S. financial system. 
We appreciate the report's determination that the Treasury Department 
process for implementing Section 311 was consistent with the legal 
requirements of the USA PATRIOT Act and the Administrative Procedure 
Act (APA), including regarding consultation with other agencies. In the 
interest of improving the accuracy and completeness of your report, we 
have submitted under separate cover suggested corrections to address 
areas of the report that are factually incorrect or otherwise 
imprecise. I would like to respond to the report's conclusion that more 
formal guidance and coordination in exercising Section 311 authorities 
is needed. As explained below in more detail, we believe that the 
Treasury Department has well-defined working mechanisms in place to 
implement Section 311. Nonetheless, I am taking the occasion of this 
report and the recommendations it offers to re-clarify these 
mechanisms. 

The report explains how the exercise of the Section 311 authority has 
evolved significantly from the time the initial actions were begun, 
through the establishment of the Office of Terrorism and Financial 
Intelligence (TFI) in 2004, and the subsequent operational development 
of TFI. As part of its mission to enhance national security, TFI 
harnesses all of the Treasury Department's authorities and resources to 
identify and address threats to the United States and vulnerabilities 
in the financial system that terrorist and other criminal organizations 
can exploit. 

Although I was not interviewed, given the GAO's concerns about the 
relationship between TFI's offices on the question of Section 311 
implementation and my role as the senior official within TFI, I believe 
I am best situated to clarify any misconceptions. In my view, our 
application of Section 311 has not only been, as you concluded, 
consistent with all legal requirements and extremely effective, but 
also that there is now a clear understanding within TFI about how to 
employ this and other tools for specific issues and targets. In 
practice, TFI successfully combines the expertise and knowledge of its 
components, as well as other government agencies, to get the fullest 
picture of potential targets. I chair several meetings each week with 
the leadership of TFI components, where we examine the information 
available to us about various threats and explore what authorities 
should be employed to address them. I have made it a priority to 
approach this process in an integrated way in which we first try to 
understand the nature of the vulnerability or threat and then determine 
what tool or tools we should use. Although Section 311 is a critically 
important authority that Treasury can apply, there are numerous other 
actions that we may take to effectively respond to a particular threat 
or vulnerability. Each TFI office brings unique capabilities and 
information to the table in this process. Just as one example, our 
Office of Intelligence and Analysis (OIA) is a critical part of this 
process through its expert analysis of information from the 
intelligence community. We also draw upon the expertise of other 
agencies in this process. On occasion this may mean arranging special 
briefings from subject matter experts in other departments. In 
addition, as you recognized, the Office of Terrorist Financing and 
Financial Crimes (TFFC), co-chairs with the Justice Department an 
interagency working group to enrich consultations on vulnerabilities in 
the international financial system associated with particular 
institutions or jurisdictions. 

Once TFI has determined through this process that Section 311 is the 
appropriate authority to respond to a particular threat or 
vulnerability, the responsibility for regulatory actions under Section 
311 authority is clear. The Secretary has delegated responsibility for 
administration of the BSA, as amended to include the authority of 
Section 311, to the Director of the Financial Crimes Enforcement 
Network (FinCEN), pursuant to Treasury Order 180-01 of September 26, 
2002. This responsibility includes the drafting of a finding of primary 
money laundering concern, the drafting of a notice of proposed 
rulemaking (NPRM) to impose special measures, the administration and 
review of the NPRM public notice-and-comment period and evaluation of 
comments received, and, as appropriate on the basis of the 
administrative record, finalization of a rule or in some cases 
withdrawal of the proposed rulemaking. Other regulatory 
responsibilities of FinCEN related to Section 311 rulemaking but not 
addressed in the report include ensuring compliance of U.S. financial 
institutions with the statutory and regulatory requirements, and 
consideration of enforcement actions in the event of failures to 
comply. All of the foregoing are consistent with FinCEN's broader 
exercise of its regulatory authorities for the administration of the 
BSA, to make the U.S. financial industry vigilant and hostile to abuse 
by criminals, terrorist financiers and other illicit actors. In 
carrying out its regulatory responsibilities, FinCEN collaborates with 
and relies upon the expertise of its sister offices within TFI. 

While the report places great focus on the finalization of Section 311 
rulemakings, it is important to keep in mind that the rulemaking action 
is not an end in itself. The most successful exercise of Section 311 
would be where the underlying threat is eliminated, making the final 
regulatory action itself unnecessary. It is often the case that a money 
laundering concern derives at least in part from deficiencies in the 
laws of a foreign jurisdiction. Your report makes clear that individual 
Section 311 actions we have taken have helped prompt other countries to 
address and remedy certain deficiencies we identified. In that sense, 
effective implementation of our strategy to address a particular 
vulnerability often goes well beyond the regulatory process. Indeed, 
complementary to, yet distinct from, a Section 311 action, TFI, and 
TFFC in particular, will often develop a multi-faceted strategy 
(sometimes involving coordinated action with other agencies and even 
other governments) to address the identified deficiencies. Examples, 
either alone or in combination, might include educating the responsible 
government on the risks and vulnerabilities, offering technical 
assistance, and providing support or applying political pressure on the 
regime to improve the legal framework. Even where the jurisdiction 
recognizes such deficiencies, addressing them appropriately can be 
expected to take time. 

It is important to keep in mind that dynamic when one considers the 
time period that can elapse between the issuance of a proposed rule 
under Section 311 and the finalization (or withdrawal) of that proposed 
rule. As your report explained, there is no legal requirement under 
Section 311, the APA, or otherwise in the context of most Government 
rulemakings generally, to finalize proposed rules within a specific 
time period. To attempt to establish a formulaic approach would not 
further the purpose of Section 311. A final Section 311 rule is not 
meant to be a retroactive punitive measure, but instead a proactive 
measure to protect against risks. We will thus continue to take into 
account in considering whether and when to finalize a rule, the extent 
to which we see good faith progress towards mitigating underlying 
risks, under the unique circumstances of each case. 

Finally, I would like to address the report's observations on 
consultation with other agencies for Section 311 actions. Most, if not 
all, Section 311 actions have been the result of months of interagency 
coordination. I can personally attest to the fact that this 
consultation has sometimes involved coordination at the highest levels 
of the relevant agencies. While we do not dispute that some individuals 
in other agencies might have had varying degrees of involvement across 
the range of Section 311 cases, we do not agree that the Treasury 
Department's processes for consultation of Section 311 actions hindered 
any agency's ability to provide meaningful input to those actions. 
Treasury has not only consistently sought and received valuable input 
from other agencies, we have responded to it. In some instances, we 
have delayed proposed Section 311 actions, sometimes for months, due to 
the concerns of other agencies. In other cases, we have determined, 
based on the input of other agencies, that another course of action 
would be more appropriate than using Section 311. As the report notes, 
we have met in each case all statutory requirements for the use of this 
authority, including requirements for consultation with other agencies 
on proposed Section 311 actions. We also have consistently sought input 
from other agencies earlier, and more often, than we are required to do 
so, believing that input from a wide spectrum of experts can often 
increase the chance of success of a Section 311 action. 

For the foregoing reasons, we believe that some of the report's 
conclusions on these issues may have drawn in significant part from 
actions begun years ago that do not accurately reflect the coordination 
and implementation of Section 311 within TFI today. Although I believe 
this is a matter of agreement among all of TFI's leadership, I have 
reconfirmed with TFI's component offices the importance of continuing 
to operate in this manner as we go forward and will ensure that these 
mechanisms are re-clarified in response to this report and its 
recommendation. 

Thank you for your efforts on this important issue, and should you have 
any additional questions, please do not hesitate to contact me or my 
staff. 

Sincerely,

Signed by: 

Stuart A. Levey: 

Under Secretary: 

Office of Terrorism and Financial Intelligence: 

[End of section] 

Appendix VI: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Loren Yager at (202) 512-4347 or yagerl@gao.gov. 

Staff Acknowledgments: 

Anthony P. Moran, Assistant Director; Jeffrey D. Phillips; Lucia 
DeMaio; Karen A. Deans; Etana Finkler; Mary E. Moutsos; Mark C. 
Speight; and David S. Dornish made key contributions to this report. 

[End of section] 

Footnotes: 

[1] National Money Laundering Strategy for 2007 (U.S. Government, 
Washington, D.C.: 2007). 

[2] Pub. L. 107-56, 115 Stat 272 (Oct. 26, 2001). 

[3] A correspondent account is an account established by a banking 
institution to receive deposits from, make payments on behalf of, or 
handle other financial transactions for another financial institution. 

[4] Throughout this report, implementation refers to all aspects of the 
Section 311 process, including targeting, publishing findings of 
primary money laundering concern and notices of proposed rule making, 
and publishing final rules and withdrawals. 

[5] For example, one factor to consider is the substance and quality of 
the administration of the bank supervisory and counter-money laundering 
laws of the jurisdiction. 

[6] In targeting the three jurisdictions--the countries of Burma, 
Nauru, and Ukraine--Treasury cited recommendations from the Financial 
Action Task Force (FATF), an international body whose purpose is the 
development and promotion of national and international policies to 
combat money laundering and terrorist financing as well as internal 
Treasury research and other sources, according to Treasury officials. 

[7] Financial institutions typically act immediately to comply with 
these proposed rules. 

[8] Federal management control standards require that the agency's 
organizational structure clearly define key areas of authority and 
responsibility and establish appropriate lines of reporting. GAO, 
Standards for Internal Control in the Federal Government, GAO/ AIMD-00-
21.3.1 (Washington, D.C.: November 1999). 

[9] U.S. Department of the Treasury, U.S. Department of Justice, and 
U.S. Department of Homeland Security. The 2003 National Money 
Laundering Strategy. This strategy was updated in 2007 as outlined in 
the 2007 National Money Laundering Strategy (Washington, D.C.) 

[10] All Section 311 actions applied as of the date of this report 
concerned jurisdictions or institutions only. 

[11] Justice, State, and Treasury officials described this consultation 
role as reviewing and commenting on the evidence and documentation used 
to support a finding of primary money laundering concern. 

[12] In addition, under Section 311, the Secretary of the Treasury is 
required to consult with the Securities and Exchange Commission, the 
Commodity Futures Trading Commission, the National Credit Union 
Administration Board, as well as other agencies and interested parties 
as the Secretary finds appropriate. Federal Reserve officials said that 
their agency's consultation role, and that of these other agencies, is 
to comment on technical language in the rule related to banking 
supervision, rather than to provide feedback on whether the finding is 
justified. Officials said that when reviewing a draft rule, the Federal 
Reserve considers (1) what the effect of the proposed rule will be on 
the banking industry and (2) whether the language in the rule is clear 
enough that its banks can easily understand and implement it. 

[13] The first four special measures cover record keeping and reporting 
of certain financial transactions, collection of information relating 
to beneficial ownership, collection of information relating to certain 
payable through accounts, and collection of information relating to 
certain correspondent accounts. 

[14] A payable through account is an account, including a transaction 
account, opened at a depository institution by a foreign financial 
institution by means of which the foreign financial institution permits 
its customers to engage, either directly or through a sub account, in 
banking activities usual in connection with the business of banking in 
the United States. 

[15] Regulatory proposals or proposed amendments to existing 
regulations are known as "proposed rules." Notices of public hearings 
or requests for comments on proposed rules are published in the Federal 
Register, on the Web sites of the regulatory agencies, and in 
newspapers and other publications. Once a regulation takes effect, it 
becomes a "final rule" and is printed in the Federal Register, the Code 
of Federal Regulations, and usually is posted on the Web site of the 
regulatory agency. 

[16] Subsidiaries of this bank included First Merchant Finance Ltd., 
First Merchant International Inc., First Merchant Trust Ltd., and FMB 
Finance Ltd. 

[17] For Ukraine, Treasury issued a finding and announced its intention 
to issue a proposed rule applying special measures 1 through 4. 
However, Treasury did not issue a proposed rule and withdrew the 
finding against Ukraine 4 months later, based on Ukraine's passing anti-
money laundering legislation, its commitment to implement this 
legislation, and the FATF's decision to rescind a call for 
countermeasures against Ukraine. 

[18] In making a finding that reasonable grounds exist for concluding 
that a jurisdiction, financial institution, transaction, or type of 
account is of primary money laundering concern the Secretary of the 
Treasury is required to consult with the Secretary of State and the 
Attorney General. When selecting special measures, the Secretary of the 
Treasury is required to consult with the Chairman of the Board of 
Governors of the Federal Reserve System, any other appropriate federal 
banking agencies, the Secretary of State, the Securities and Exchange 
Commission, the Commodity Futures Trading Commission, the National 
Credit Union Administration Board, and in the sole discretion of the 
Secretary, such other agencies and interested parties as the Secretary 
may find to be appropriate. 

[19] In the two earliest uses of Section 311 cases, Treasury first 
issued findings of money laundering concern prior to making a 
determination as to whether to issue a proposed rule. In one of these 
cases (Nauru) it followed this finding with a proposed rule. In the 
other case (Ukraine), Treasury rescinded the finding of primary money 
laundering concern. 

[20] See 5 U.S.C. § 553. 

[21] GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). 

[22] Two of these proposed rules were subsequently withdrawn in April 
2008. One proposed rule is still incomplete, but Treasury officials 
said they are currently consulting with other agencies about whether to 
issue a final rule. 

[23] Financial Intelligence Units are special government agencies that 
were created in several countries around the world to deal with the 
problem of money laundering. 

[24] A U.S. "sanction" is any unilateral restriction or condition on 
economic activity with respect to a foreign country or foreign entity 
that is imposed by the United States for reasons of foreign policy or 
national security. For example, financial sanctions may be targeted 
against persons designated as either weapons of mass destruction 
proliferators or global terrorists, depending on which set of sanctions 
is employed, and any transactions with them by U.S. persons are 
prohibited. According to Treasury, the goal of this action is to deny 
sanctioned parties' access to the U.S. financial and commercial 
systems. Treasury or State can make designations under these financial 
sanctions, which are published in the Federal Register. 

[25] Testimony before the Senate Committee on Finance, Under Secretary 
for Terrorism and Financial Intelligence Stuart Levey (Washington, 
D.C.: Apr. 1, 2008). 

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