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Testimony:

Before the Caucus on International Narcotics Control, U.S. Senate:

United States General Accounting Office:

GAO:

For Release on Delivery Expected at 2:00 p.m. EST:

Thursday, March 4, 2004:

Combating Terrorism:

Federal Agencies Face Continuing Challenges in Addressing Terrorist 
Financing and Money Laundering:

Statement of Loren Yager, Director 
International Affairs and Trade and 
Richard M. Stana, Director 
Homeland Security and Justice Issues:

GAO-04-501T:

GAO Highlights:

Highlights of GAO-04-501T, a testimony before the Caucus on 
International Narcotics Control, U.S. Senate 

Why GAO Did This Study:

The September 11, 2001, terrorist attacks highlighted the importance 
of data collection, information sharing, and coordination within the 
U.S. government. Such efforts are important whether focused on 
terrorism or as an integral part of a broader strategy for combating 
money laundering. In this testimony, GAO addresses (1) the challenges 
the U.S. government faces in deterring terrorists’ use of alternative 
financing mechanisms, (2) the steps that the Federal Bureau of 
Investigation (FBI) and Immigration and Customs Enforcement (ICE) have 
taken to implement a May 2003 Memorandum of Agreement concerning 
terrorist financing investigations, and (3) whether the annual 
National Money Laundering Strategy (NMLS) has served as a useful 
mechanism for guiding the coordination of federal efforts to combat 
money laundering and terrorist financing.

GAO’s testimony is based on two reports written in September 2003 
(GAO-03-813) and November 2003 (GAO-04-163) for the Caucus and 
congressional requesters within the Senate Governmental Affairs 
Committee, as well as a February 2004 report (GAO-04-464R) on related 
issues for the Senate Appropriations Subcommittee on Homeland 
Security. 

What GAO Found:

The U.S. government faces various challenges in determining and 
monitoring the nature and extent of terrorists’ use of alternative 
financing mechanisms, according to GAO’s November 2003 report. 
Alternative financing mechanisms are outside the mainstream financial 
system and include the use of commodities (cigarettes, counterfeit 
goods, illicit drugs, etc.), bulk cash, charities, and informal 
banking systems to earn, move, and store assets. GAO recommended more 
systematic collection, analysis, and sharing of information to make 
alternative financing mechanisms less attractive to terrorist groups. 
In response to our recommendation that the FBI, in consultation with 
other agencies, systematically collect and analyze information on 
terrorists’ use of these mechanisms, Justice did not specifically 
agree or disagree with our recommendation, but other agencies agreed 
with the need for improved analysis. The Treasury agreed with our 
recommendation to issue an overdue report on precious stones and 
commodities, but it remains unclear how the resulting product may be 
used as the basis for an informed strategy as expected under the 2002 
NMLS. The Internal Revenue Service (IRS) agreed with our 
recommendation to develop and implement procedures for sharing 
information on charities with states and issued IRS procedures and 
state guidance on December 31, 2003. 

To resolve jurisdictional issues and enhance interagency coordination 
of terrorist financing investigations, the FBI and ICE have taken 
steps to implement most of the key provisions of the May 2003 
Memorandum of Agreement. According to GAO’s February 2004 report, the 
agencies have developed collaborative procedures to determine whether 
applicable ICE investigations or financial crimes leads may be related 
to terrorism or terrorist financing—and, if so, determine whether the 
FBI should thereafter take the lead in pursuing them. GAO’s report 
noted that continued progress will depend largely on the ability of 
the agencies to establish and maintain effective interagency 
relationships.

From a broader or strategic perspective, the annual NMLS generally has 
not served as a useful mechanism for guiding coordination of federal 
efforts to combat money laundering and terrorist financing, according 
to GAO’s September 2003 report. While Treasury and Justice had made 
progress on some strategy initiatives designed to enhance interagency 
coordination of investigations, most initiatives had not achieved the 
expectations called for in the annual strategies. The report 
recommended (1) strengthening the leadership structure for strategy 
development and implementation, (2) identifying key priorities, and 
(3) establishing accountability mechanisms. In commenting on a draft 
of the September 2003 report, Treasury said that our recommendations 
are important, should the Congress reauthorize the legislation 
requiring future strategies; Justice said that our observations and 
conclusions will be helpful in assessing the role that the strategy 
process has played in the federal government's efforts to combat money 
laundering; and Homeland Security said that it agreed with our 
recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-04-501T.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Loren Yager at (202) 
512-4128 or yagerl@gao.gov or Richard Stana at (202) 512-8777.

[End of section]

Mr. Chairman and Members of the Caucus:

We are pleased to be here today to discuss some of the challenges the 
U.S. government faces in addressing the problems of terrorist financing 
and money laundering. The terrorist attacks of September 11, 2001, 
highlighted the importance of data collection, information sharing, and 
coordination within the U.S. government. Such efforts are important 
whether focused on terrorism or as an integral component of a broader 
strategy for combating money laundering. This is particularly true 
given that terrorist financiers and money launderers may sometimes use 
similar methods to hide and move their proceeds.

As requested, today, we will address three issues. First, what 
challenges does the U.S. government face in deterring terrorists' use 
of key alternative financing mechanisms--methods outside the mainstream 
financial system--such as the use of commodities, bulk cash, charities, 
and informal banking systems to earn, move, and store assets? Second, 
to what extent have the two applicable law enforcement agencies--the 
Federal Bureau of Investigation (FBI) and Homeland Security's U.S. 
Immigration and Customs Enforcement (ICE)--taken steps to implement a 
2003 Memorandum of Agreement (Agreement) to resolve jurisdictional 
issues and enhance interagency coordination of terrorist financing 
investigations; and, how has the Agreement affected the mission or role 
of ICE in investigating money laundering and other traditional 
financial crimes? Finally, how has the annual National Money Laundering 
Strategy (NMLS) served as a useful mechanism for guiding the 
coordination of federal efforts to combat money laundering and 
terrorist financing?

Our testimony is based on two reports we have provided to this 
Caucus[Footnote 1] and a recently issued report[Footnote 2] we have 
provided to the Congress on related issues. We should also mention that 
we are in the process of conducting additional work specifically on the 
issue of coordination of U.S. agencies abroad in combating terrorist 
financing. We look forward to presenting those findings to the Caucus.

Summary:

Our November 2003 report noted various challenges that the U.S. 
government faces when addressing terrorists' use of key alternative 
financing mechanisms. While we were unable to determine the extent of 
terrorists' use of alternative financing mechanisms such as diamonds, 
gold, and informal financial systems, we did find that terrorists earn, 
move, and store their assets based on common factors that make these 
mechanisms attractive to terrorist and criminal groups alike. For 
example, the commodities terrorists use tend to be of high value, easy 
to conceal, and hold their value over time. In addition, we described 
the challenges that U.S. agencies faced in monitoring terrorists' use 
of alternative financing mechanisms, such as accessibility of 
terrorists' close knit, nontransparent financing networks; terrorists' 
adaptability to avoid detection; and competing U.S. government 
priorities and demands. As a result of our findings, we made 
recommendations to various U.S. agencies to more systematically 
collect, analyze, and share information to make these alternative 
methods less attractive to terrorist groups. In response to our 
recommendation that the FBI systematically collect and analyze 
information on terrorists' use of these mechanisms, Justice did not 
specifically agree or disagree with our recommendation. The Treasury 
agreed with our recommendation to issue an overdue report on precious 
stones and commodities but it remains unclear how the resulting product 
may be used as the basis for an informed strategy as expected under the 
2002 NMLS. The Internal Revenue Service (IRS) agreed with our 
recommendation to develop and implement procedures for sharing 
information on charities with states and issued IRS procedures and 
state guidance on December 31, 2003.

Our February 2004 report noted that the FBI and ICE had implemented or 
taken concrete steps to implement most of the key provisions in the May 
2003 Memorandum of Agreement on terrorist financing investigations. For 
instance, the agencies had developed collaborative procedures to 
determine whether applicable ICE investigations or financial crimes 
leads may be related to terrorism or terrorist financing--and, if so, 
determine whether these investigations or leads should thereafter be 
pursued under the auspices of the FBI. However, the FBI and ICE had not 
yet issued a joint report on the status of implementation of the 
Agreement, which was required 4 months from its effective date. The 
Agreement did not affect ICE's statutory authorities to conduct 
investigations of money laundering and other traditional financial 
crimes. But, regarding terrorist financing investigations, we noted 
that the FBI and ICE have confronted and will continue to confront a 
number of operational and organizational challenges, such as 
establishing and maintaining effective interagency relationships and 
ensuring that the financial crimes expertise and other investigative 
competencies of both agencies are appropriately and effectively 
utilized.

Our September 2003 report noted that the annual NMLS generally has not 
served as a useful mechanism for guiding the coordination of federal 
law enforcement agencies' efforts to combat money laundering and 
terrorist financing. While Treasury and Justice had made progress on 
some strategy initiatives designed to enhance interagency coordination 
of investigations, most initiatives had not achieved the expectations 
called for in the annual strategies. We recommended that, if the 
requirement for a national strategy is reauthorized, the Secretaries of 
the Treasury and Homeland Security and the Attorney General (1) 
strengthen the leadership structure for strategy development and 
implementation, (2) require processes to ensure key priorities are 
identified, and (3) establish accountability mechanisms. In commenting 
on a draft of the September 2003 report, Treasury said that our 
recommendations are important, should the Congress reauthorize the 
legislation requiring future strategies; Justice said that our 
observations and conclusions will be helpful in assessing the role that 
the strategy process has played in the federal government's efforts to 
combat money laundering; and Homeland Security said that it agreed with 
our recommendations.

Background:

Cutting off terrorists' funding is an important means of disrupting 
their operations. As initial U.S. and foreign government deterrence 
efforts focused on terrorists' use of the formal banking or mainstream 
financial systems, terrorists may have been forced to increase their 
use of various alternative financing mechanisms. Alternative financing 
mechanisms enable terrorists to earn, move, and store their assets and 
may include the use of commodities, bulk cash,[Footnote 3] charities, 
and informal banking systems, sometimes referred to as hawala.[Footnote 
4] In its fight against terrorism, the United States has focused on 
individuals and entities supporting or belonging to terrorist 
organizations including al Qaeda, Hizballah, HAMAS (Harakat al-Muqawama 
al-Islamiya--Islamic resistance Movement), and others. These terrorist 
organizations are known to have used alternative financing mechanisms 
to further their terrorist activities. Government officials and 
researchers believe that terrorists do not always need large amounts of 
assets to support an operation, pointing out that the estimated cost of 
the September 11 attack was between $300,000 and $500,000. However, 
government officials also caution that funding for such an operation 
uses a small portion of the assets that terrorist organizations require 
for their support infrastructure such as indoctrination, recruitment, 
training, logistical support, the dissemination of propaganda, and 
other material support.

In response to the terrorist attacks of September 11, the Departments 
of the Treasury and Justice both established multiagency task forces 
dedicated to combating terrorist financing. Treasury established 
Operation Green Quest, led by the Customs Service--now ICE in the 
Department of Homeland Security--to augment existing counterterrorist 
efforts by targeting current terrorist funding sources and identifying 
possible future sources. On September 13, 2001, the FBI formed a 
multiagency task force--which is now known as the Terrorist Financing 
Operations Section (TFOS)--to combat terrorist financing. The mission 
of TFOS has evolved into a broad role to identify, investigate, 
prosecute, disrupt, and dismantle all terrorist-related financial and 
fundraising activities. The FBI also took action to expand the 
antiterrorist financing focus of its Joint Terrorism Task Forces 
(JTTFs)--teams of local and state law enforcement officials, FBI 
agents, and other federal agents and personnel whose mission is to 
investigate and prevent acts of terrorism.[Footnote 5] In 2002, the FBI 
created a national JTTF in Washington, D.C., to collect terrorism 
information and intelligence and funnel it to the field JTTFs, various 
terrorism units within the FBI, and partner agencies.

Following September 11, representatives of the FBI and Operation Green 
Quest met on several occasions to attempt to delineate antiterrorist 
financing roles and responsibilities. However, such efforts were 
largely unsuccessful. The resulting lack of clearly defined roles and 
coordination procedures contributed to duplication of efforts and 
disagreements over which agency should lead investigations.[Footnote 6] 
In May 2003, to resolve jurisdictional issues and enhance interagency 
coordination, the Attorney General and the Secretary of Homeland 
Security signed a Memorandum of Agreement concerning terrorist 
financing investigations. The Agreement and its related procedures 
specified that the FBI was to have the lead role in investigating 
terrorist financing and that ICE was to pursue terrorist financing 
solely through participation in FBI-led task forces, except as 
expressly approved by the FBI.

Regarding strategic efforts, the Money Laundering and Financial Crimes 
Strategy Act of 1998 (Strategy Act) required the President--acting 
through the Secretary of the Treasury and in consultation with the 
Attorney General and other relevant federal, state, and local law 
enforcement and regulatory officials--to develop and submit an annual 
NMLS to the Congress by February 1 of each year from 1999 through 
2003.[Footnote 7] Unless reauthorized by the Congress, this requirement 
ended with the 2003 strategy, which was issued on November 18, 2003. 
The goal of the Strategy Act was to increase coordination and 
cooperation among the various regulatory and enforcement agencies and 
to effectively distribute resources to combat money laundering and 
related financial crimes. The Strategy Act required the NMLS to define 
comprehensive, research-based goals, objectives, and priorities for 
reducing these crimes in the United States. The NMLS has generally 
included multiple priorities to guide federal agencies' activities in 
combating money laundering and related financial crimes. In 2002, the 
NMLS was adjusted to reflect new federal priorities in the aftermath of 
September 11 including a goal to combat terrorist financing.

U.S. Government Faces Significant Challenges in Deterring Terrorists' 
Use of Key Alternative Financing Mechanisms:

The U.S. government faces myriad challenges in determining and 
monitoring the nature and extent of terrorists' use of alternative 
financing mechanisms. Terrorists use a variety of alternative financing 
mechanisms to earn, move, and store their assets based on common 
factors that make these mechanisms attractive to terrorist and criminal 
groups alike. For all three purposes--earning, moving, and storing--
terrorists aim to operate in relative obscurity, using mechanisms 
involving close knit networks and industries lacking transparency. More 
specifically, first, terrorists earn funds through highly profitable 
crimes involving commodities such as contraband cigarettes, counterfeit 
goods, and illicit drugs. For example, according to U.S. law 
enforcement officials, Hizballah earned an estimated profit of $1.5 
million in the United States between 1996 and 2000 by purchasing 
cigarettes in a low tax state for a lower price and selling them in a 
high tax state at a higher price. Terrorists also earned funds using 
systems such as charitable organizations that collect large sums in 
donations from both witting and unwitting donors. Second, to move 
assets, terrorists seek out mechanisms that enable them to conceal or 
launder their assets through nontransparent trade or financial 
transactions such as the use of charities, informal banking systems, 
bulk cash, and commodities that may serve as forms of currency, such as 
precious stones and metals. Third, to store assets, terrorists may use 
similar commodities because they are likely to maintain value over a 
longer period of time and are easy to buy and sell outside the formal 
banking system.

The true extent of terrorists' use of alternative financing mechanisms 
is unknown, owing to the criminal nature of the activity and the lack 
of systematic data collection and analysis. The limited and sometimes 
conflicting information available on alternative financing mechanisms 
adversely affects the ability of U.S. government agencies to assess 
risk and prioritize efforts. U.S. law enforcement agencies, and 
specifically the FBI, which leads terrorist financing investigations 
and maintains case data, do not systematically collect and analyze data 
on terrorists' use of alternative financing mechanisms.[Footnote 8] The 
lack of such a method of data collection hinders the FBI from 
conducting systematic analysis of trends and patterns focusing on 
alternative financing mechanisms. Without such an assessment, the FBI 
would not have analyses that could aid in assessing risk and 
prioritizing efforts.

Moreover, despite an acknowledged need from some U.S. government 
officials and researchers for further analysis of the extent of 
terrorists' use of alternative financing mechanisms, U.S. government 
reporting on these issues has not always been timely or comprehensive, 
which could affect planning and coordination efforts. For example, the 
Departments of the Treasury and Justice did not produce a report on the 
links between terrorist financing and precious stone and commodity 
trading, as was required by March 2003 under the 2002 NMLS. Moreover, 
we found widely conflicting views in numerous interviews and available 
reports and documentation concerning terrorists' use of precious stones 
and metals.

In monitoring terrorists' use of alternative financing mechanisms, the 
U.S. government faces a number of significant challenges including 
accessibility to terrorist networks, adaptability of terrorists, and 
competing demands or priorities within the U.S. government. First, 
according to law enforcement agencies and researchers, it is difficult 
to access or infiltrate ethnically or criminally based networks that 
operate in a nontransparent manner, such as informal banking systems or 
the precious stones and other commodities industries. Second, the 
ability of terrorists to adapt their methods hinders efforts to target 
high-risk industries and implement effective mechanisms for monitoring 
high-risk industry trade and financial flows. According to the FBI, 
once terrorists know that an industry they use to earn or move assets 
is being watched, they may switch to an alternative commodity or 
industry. Finally, competing priorities create challenges to federal 
and state officials' efforts to use and enforce applicable U.S. laws 
and regulations in monitoring terrorists' use of alternative financing 
mechanisms. For example, we reported to you in November 2003 the 
following:

* Although the Internal Revenue Service (IRS) agreed with us in 2002 to 
begin developing a system, as allowed by law, to share with states data 
that would improve oversight[Footnote 9] and could be used to deter 
terrorist financing in charities, the IRS had not made this initiative 
a priority. The IRS had not developed and implemented the system, 
citing competing priorities.

* The Department of the Treasury's Financial Crimes Enforcement Network 
(FinCEN) officials stated the extent of the workload created under the 
2001 Uniting and Strengthening America by Providing Appropriate Tools 
Required to Intercept and Obstruct Terrorism Act (USA PATRIOT 
Act)[Footnote 10] initially increased the amount of work required and 
may have slowed efforts to take full advantage of the act concerning 
the establishment of anti-money laundering programs. FinCEN anti-money 
laundering program rules for dealers in precious metals, stones, or 
jewels were proposed on February 21, 2003, and had not been finalized 
when we recently contacted FinCEN on February 24, 2004.

* FBI officials told us that the 2002 NMLS contained more priorities 
than could be realistically accomplished, and Treasury officials said 
that resource constraints and competing priorities were the primary 
reasons why strategy initiatives, including those related to 
alternative financing mechanisms, were not met or were completed later 
than expected.

As a result of our earlier findings:

* We recommended that the Director of the FBI, in consultation with 
relevant U.S. government agencies, systematically collect and analyze 
information involving terrorists' use of alternative financing 
mechanisms. Justice agreed with our finding that the FBI does not 
systematically collect and analyze such information, but Justice did 
not specifically agree or disagree with our recommendation. However, 
both ICE and IRS senior officials have informed us that they agree that 
law enforcement agencies should have a better approach to assessing the 
use of alternative financing mechanisms.

* We recommended that the Secretary of the Treasury and the Attorney 
General produce the report on the links between terrorism and the use 
of precious stones and commodities that was required by March 2003 
under the 2002 NMLS based on up-to-date law enforcement investigations. 
The Treasury responded that the report would be included as an appendix 
in the 2003 NMLS. Precious stones and commodities were given a small 
amount of attention in an appendix on trade-based money laundering 
within the 2003 NMLS that was released in November 2003. It remains 
unclear as to how this will serve as a basis for an informed strategy.

* We recommended that the Commissioner of the IRS, in consultation with 
state charity officials, establish interim IRS procedures and state 
charity official guidelines, as well as set milestones and assign 
resources for developing and implementing both, to regularly share data 
on charities as allowed by federal law. The IRS agreed with our 
recommendation, and we are pleased to report that the IRS expedited 
efforts and issued IRS procedures and state guidance on December 31, 
2003, as stated in its agency comments in response to our report.

Federal Agencies Have Taken Steps to Coordinate Investigations of 
Terrorist Financing, but Operational and Organizational Challenges 
Still Exist:

In May 2003, to resolve jurisdictional issues and enhance interagency 
coordination, the Attorney General and the Secretary of Homeland 
Security signed a Memorandum of Agreement concerning terrorist 
financing investigations. The Agreement and its related procedures 
specified that the FBI was to have the lead role in investigating 
terrorist financing and that ICE was to pursue terrorist financing 
solely through participation in FBI-led task forces, except as 
expressly approved by the FBI. Also, the Agreement contained several 
provisions designed to increase information sharing and coordination of 
terrorist financing investigations. For example, the Agreement required 
the FBI and ICE to (1) detail appropriate personnel to each other's 
agency and (2) develop specific collaborative procedures to determine 
whether applicable ICE investigations or financial crimes leads may be 
related to terrorism or terrorist financing. Another provision required 
that the FBI and ICE jointly report to the Attorney General, the 
Secretary of Homeland Security, and the Assistant to the President for 
Homeland Security on the status of the implementation of the Agreement 
4 months from its effective date.

In February 2004, we reported to the Senate Appropriations' 
Subcommittee on Homeland Security that the FBI and ICE had implemented 
or taken concrete steps to implement most of the key Memorandum of 
Agreement provisions.[Footnote 11] For example, the agencies had 
developed collaborative procedures to determine whether applicable ICE 
investigations or financial crimes leads may be related to terrorism or 
terrorist financing--and, if so, determine whether these investigations 
or leads should thereafter be pursued under the auspices of the FBI. 
However, we noted that the FBI and ICE had not yet issued a joint 
report on the status of the implementation, which was required 4 months 
from the effective date of the Agreement.

By granting the FBI the lead role in investigating terrorist financing, 
the Memorandum of Agreement has altered ICE's role in investigating 
terrorism-related financial crimes. However, while the Agreement 
specifies that the FBI has primary investigative jurisdiction over 
confirmed terrorism-related financial crimes, the Agreement does not 
preclude ICE from investigating suspicious financial activities that 
have a potential (unconfirmed) nexus to terrorism--which was the 
primary role of the former Operation Green Quest. Moreover, the 
Agreement generally has not affected ICE's mission or role in 
investigating other financial crimes. Specifically, the Agreement did 
not affect ICE's statutory authorities to conduct investigations of 
money laundering and other traditional financial crimes. ICE 
investigations can still cover the wide range of financial systems--
including banking systems, money services businesses, bulk cash 
smuggling, trade-based money laundering systems, illicit insurance 
schemes, and illicit charity schemes--that could be exploited by money 
launderers and other criminals. According to ICE headquarters 
officials, ICE is investigating the same types of financial systems as 
before the Memorandum of Agreement.

Further, our February 2004 report noted that--while the Memorandum of 
Agreement represents a partnering commitment by the FBI and ICE--
continued progress in implementing the Agreement will depend largely on 
the ability of these law enforcement agencies to meet various 
operational and organizational challenges. For instance, the FBI and 
ICE face challenges in ensuring that the implementation of the 
Agreement does not create a disincentive for ICE agents to initiate or 
support terrorist financing investigations. That is, ICE agents may 
perceive the Agreement as minimizing their role in terrorist financing 
investigations. Additional challenges involve ensuring that the 
financial crimes expertise and other investigative competencies of the 
FBI and ICE are effectively utilized and that the full range of the 
agencies' collective authorities--intelligence gathering and analysis 
as well as law enforcement actions, such as executing search warrants 
and seizing cash and other assets--are effectively coordinated. 
Inherently, efforts to meet these challenges will be an ongoing 
process. Our interviews with FBI and ICE officials at headquarters and 
three field locations indicated that long-standing jurisdictional and 
operational disputes regarding terrorist financing investigations may 
have strained interagency relationships to some degree and could pose 
an obstacle in fully integrating investigative efforts.

On a broader scale, as discussed below, we also have reported that 
opportunities exist to improve the national strategy for combating 
money laundering and other financial crimes, including terrorist 
financing.[Footnote 12]

Opportunities Exist to Improve the National Strategy for Combating 
Money Laundering and Other Financial Crimes, Including Terrorist 
Financing:

The 1998 Strategy Act required the President--acting through the 
Secretary of the Treasury and in consultation with the Attorney General 
and other relevant federal, state, and local law enforcement and 
regulatory officials--to develop and submit an annual NMLS to the 
Congress by February 1 of each year from 1999 through 2003. Also, in 
2002, the NMLS was adjusted to reflect new federal priorities in the 
aftermath of September 11 including a goal to combat terrorist 
financing. Unless reauthorized by the Congress, the requirement for an 
annual NMLS ended with the issuance of the 2003 strategy.[Footnote 13]

To assist in congressional deliberations on whether there is a 
continuing need for an annual NMLS, we reviewed the development and 
implementation of the 1999 through 2002 strategies. In September 2003, 
we reported to this Caucus that, as a mechanism for guiding the 
coordination of federal law enforcement agencies' efforts to combat 
money laundering and related financial crimes, the annual NMLS has had 
mixed results but generally has not been as useful as envisioned by the 
Strategy Act. For example, we noted that although Treasury and Justice 
had made progress on some NMLS initiatives designed to enhance 
interagency coordination of investigations, most had not achieved the 
expectations called for in the annual strategies, including plans to 
(1) use a centralized system to coordinate investigations and (2) 
develop uniform guidelines for undercover investigations. Headquarters 
officials cited differences in the various agencies' anti-money 
laundering priorities as a primary reason why initiatives had not 
achieved their expectations.

Most financial regulators we interviewed said that the NMLS had some 
influence on their anti-money laundering efforts because it provided a 
forum for enhanced coordination, particularly with law enforcement 
agencies. Law enforcement agency officials said the level of 
coordination between their agencies and the financial regulators was 
good. However, the financial regulators also said that other factors 
had more influence on them than the strategy. For example, the 
financial regulators cited their ongoing oversight responsibilities in 
ensuring compliance with the Bank Secrecy Act[Footnote 14] as a primary 
influence on them. Another influence has been anti-money laundering 
working groups, some of which were initiated by the financial 
regulators or law enforcement agencies prior to enactment of the 1998 
Strategy Act. The officials said that the U.S. government's reaction to 
September 11, which included a change in government perspective and new 
regulatory requirements placed on financial institutions by the USA 
PATRIOT Act, has driven their recent anti-money laundering and 
antiterrorist financing efforts. Although the financial regulators said 
that the NMLS had less influence on their anti-money laundering 
activities than other factors, they have completed the tasks for which 
the NMLS designated them as lead agencies over the years, as well as 
most of the tasks for which they were to provide support to the 
Treasury.

In our September 2003 report, we noted that our work in reviewing 
national strategies for various crosscutting issues has identified 
several critical components needed for their development and 
implementation, including effective leadership, clear priorities, and 
accountability mechanisms. For a variety of reasons, these critical 
components generally have not been fully reflected in the development 
and implementation of the annual NMLS. For example, the joint Treasury-
Justice leadership structure that was established to oversee NMLS-
related activities generally has not resulted in (1) reaching agreement 
on the appropriate scope of the strategy; (2) ensuring that target 
dates for completing strategy initiatives were met; and (3) issuing the 
annual NMLS by February 1 of each year, as required by the Strategy 
Act.

Also, although the Treasury generally took the lead role in strategy-
related activities, the department had no incentives or authority to 
get other departments and agencies to provide necessary resources and 
compel their participation. And, the annual strategies have not 
identified and prioritized issues that required the most immediate 
attention. Each strategy contained more priorities than could be 
realistically achieved, the priorities have not been ranked in order of 
importance, and no priority has been explicitly linked to a threat and 
risk assessment. Further, although the 2001 and 2002 strategies 
contained initiatives to measure program performance, none had been 
used to ensure accountability for results. Officials attributed this to 
the difficulty in establishing such measures for combating money 
laundering. In addition, we noted that the Treasury had not provided 
annual reports to the Congress on the effectiveness of policies to 
combat money laundering and related financial crimes, as required by 
the Strategy Act.

In summary, our September 2003 report recommended that--if the Congress 
reauthorizes the requirement for an annual NMLS--the Secretary of the 
Treasury, working with the Attorney General and the Secretary of 
Homeland Security, should take appropriate steps to:

* strengthen the leadership structure responsible for strategy 
development and implementation by establishing a mechanism that would 
have the ability to marshal resources to ensure that the strategy's 
vision is achieved, resolve disputes between agencies, and ensure 
accountability for strategy implementation;

* link the strategy to periodic assessments of threats and risks, which 
would provide a basis for ensuring that clear priorities are 
established and focused on the areas of greatest need; and:

* establish accountability mechanisms, such as (1) requiring the 
principal agencies to develop outcome-oriented performance measures 
that must be linked to the NMLS's goals and objectives and that also 
must be reflected in the agencies' annual performance plans and (2) 
providing the Congress with periodic reports on the strategy's results.

In commenting on a draft of the September 2003 report, Treasury said 
that our recommendations are important, should Congress reauthorize the 
legislation requiring future strategies; Justice said that our 
observations and conclusions will be helpful in assessing the role that 
the strategy process has played in the federal government's efforts to 
combat money laundering; and Homeland Security said that it agreed with 
our recommendations.

Our review of the development and implementation of the annual 
strategies did not cover the 2003 NMLS, which was issued in November 
2003, about 2 months after our September 2003 report. While we have not 
reviewed the 2003 NMLS, we note that it emphasized that "the broad 
fight against money laundering is integral to the war against 
terrorism" and that money laundering and terrorist financing "share 
many of the same methods to hide and move proceeds." In this regard, 
one of the major goals of the 2003 strategy is to "cut off access to 
the international financial system by money launderers and terrorist 
financiers more effectively." Under this goal, the strategy stated that 
the United States will continue to focus on specific financing 
mechanisms--including charities, bulk cash smuggling, trade-based 
schemes, and alternative remittance systems--that are particularly 
vulnerable or attractive to money launderers and terrorist financiers.

Concluding Observations:

To be successful, efforts to disrupt terrorists' ability to fund their 
operations must focus not only on the formal banking and mainstream 
financial sectors but also on alternative financing mechanisms. The 
2003 NMLS, which was issued last November includes a focus on 
alternative financing mechanisms; however, it is too soon to determine 
how well these efforts are working. We were pleased that IRS 
implemented our recommendation by expediting the establishment of 
procedures and guidelines for sharing data on charities with states. We 
continue to believe that implementation of our other two 
recommendations would further assist efforts to effectively address 
vulnerabilities posed by terrorists' use of alternative financing 
mechanisms.

Also, regarding investigative efforts against sources of terrorist 
financing, the May 2003 Memorandum of Agreement signed by the Attorney 
General and the Secretary of Homeland Security represents a partnering 
commitment by two of the nation's premier law enforcement agencies, the 
FBI and ICE. In the 9 months since the Agreement was signed, progress 
has been made in waging a coordinated campaign against sources of 
terrorist financing. Continued progress will depend largely on the 
ability of the agencies to establish and maintain effective interagency 
relationships and meet various other operational and organizational 
challenges.

Finally, from a broader or strategic perspective, the annual NMLS has 
had mixed results in guiding the efforts of law enforcement and 
financial regulators in the fight against money laundering and, more 
recently, terrorist financing. Through our work in reviewing national 
strategies, we identified critical components needed for successful 
strategy development and implementation; but, to date, these components 
have not been well reflected in the annual NMLS. The annual NMLS 
requirement ended with the issuance of the 2003 strategy. If the 
Congress reauthorizes the requirement for an annual NMLS, we continue 
to believe that incorporating these critical components--a strengthened 
leadership structure, the identification of key priorities, and the 
establishment of accountability mechanisms--into the strategy could 
help resolve or mitigate the deficiencies we identified.

Mr. Chairman, this concludes our prepared statement. We would be happy 
to respond to any questions that you or Members of the Caucus may have.

GAO Contacts and Staff Acknowledgments:

For further information about this testimony, please contact Loren 
Yager at (202) 512-4128 or Richard M. Stana at (202) 512-8777. Other 
key contributors to this statement were Christine M. Broderick, Danny 
R. Burton, Barbara I. Keller, R. Eric Erdman, Kathleen M. Monahan, 
Tracy M. Guerrero, and Janet I. Lewis.

FOOTNOTES

[1] U.S. General Accounting Office, Terrorist Financing: U.S. Agencies 
Should Systematically Assess Terrorists' Use of Alternative Financing 
Mechanisms, GAO-04-163 (Washington, D.C.: Nov. 14, 2003). This study 
was also requested by the Ranking Minority Member, Senate Subcommittee 
on Oversight of Government Management, the Federal Workforce and the 
District of Columbia; Committee on Governmental Affairs. U.S. General 
Accounting Office, Combating Money Laundering: Opportunities Exist to 
Improve the National Strategy, GAO-03-813 (Washington, D.C.: Sept. 26, 
2003). This study was also requested by the Ranking Minority Member, 
Permanent Subcommittee on Investigations, Senate Committee on 
Governmental Affairs.

[2] U.S. General Accounting Office, Investigations of Terrorist 
Financing, Money Laundering, and Other Financial Crimes, GAO-04-464R 
(Washington, D.C.: Feb. 20, 2004). Our study was mandated by Title I of 
the Senate Appropriations Committee report on the Department of 
Homeland Security Appropriations Bill for 2004; Senate Report 108-86 
(July 2003).

[3] The use of bulk cash refers to smuggling currency, travelers 
checks, or similar instruments across borders by means of a courier 
rather than through a formal financial system.

[4] According to the 2002 NMLS, informal value transfer systems 
(referred to here as "informal banking systems") are known by a variety 
of names reflecting ethnic and national origins predating the emergence 
of modern banking and other financial institutions. These systems 
provide mechanisms for the remittance of currency or other forms of 
monetary value--most commonly gold--without physical transportation or 
use of contemporary monetary instruments.

[5] According to the FBI, the first JTTF came into being in 1980, and 
the total number of task forces has nearly doubled since September 11, 
2001. Today, there is a JTTF in each of the FBI's 56 main field 
offices, and additional task forces are located in smaller FBI offices. 

[6] See GAO-03-813.

[7] Pub. L. No. 105-310, 112 Stat. 2941 codified as 31 U.S.C. §§ 5340-
42, 5351-55 (1998).

[8] Once a U.S. law enforcement agency (for example, the Drug 
Enforcement Administration, ICE, etc.) identifies a terrorist nexus in 
an investigation it is to notify the FBI. Information is to be shared 
through the FBI-led JTTFs in the field or the National JTTF in FBI 
headquarters. Agencies have representatives at each other's locations 
to facilitate information sharing.

[9] The appropriate state officials can obtain details about the final 
denials of applications, final revocations of tax-exempt status, and 
notices of a tax deficiency under section 507, or chapter 41 or 42, 
under the Internal Revenue Code. However, IRS does not have a process 
to regularly share such data. See U.S. General Accounting Office, Tax-
Exempt Organizations: Improvements Possible in Public, IRS, and State 
Oversight of Charities, GAO-02-526 (Washington, D.C.: Apr. 30, 2002).

[10] The U.S. PATRIOT Act, enacted shortly after the terrorist attacks 
of September 11 expanded the ability of law enforcement and 
intelligence agencies to access and share financial information 
regarding terrorist investigations.

[11] See GAO-04-464R.

[12] See GAO-03-813.

[13] The 2003 NMLS was issued on November 18, 2003. 

[14] Currency and Foreign Transactions Reporting Act (commonly 
referred to as the Bank Secrecy Act), Pub. L. No. 91-508, 84 Stat. 
1114 (1970) (codified as amended in 12 U.S.C. §§ 1929(b), 1951-1959; 
31 U.S.C. §§ 5311-5330.