FROM THE OFFICE OF PUBLIC AFFAIRS

Note of Thanks

I would first of all like to thank Thomas Vartanian, Roland Brandel, John Douglas, and John Muller for their invitation to speak before you today. As I examine the many interesting discussions that will be held during the next two days, and the many distinguished speakers, I know that you will all find this to be a valuable opportunity. I note that your conference will focus on such interesting issues as cybercrime, insurance against risks of the new economy, privacy issues, and many others. I know that you will find this conference not only professionally valuable, but also intellectually interesting. In addition, I hope that all of you will take the opportunity to informally share information and expertise as you work to help your financial institution clients with the many complex issues raised by money laundering and terrorist related asset seizures.

On October 26, 2001, President Bush signed into law the Patriot Act. On that date, the President noted that this legislation "will help counter a threat like no other our nation has ever faced. We've seen the enemy, and the murder of thousands of innocent, unsuspecting people.

They recognize no barrier of morality. They have no conscience. The terrorists cannot be reasoned with."

This legislation is markedly different from previous anti-money laundering legislation. It requires that all of us, whether in the government or in the private sector, work together and cooperate, and it specifically charges us in the government to be more responsive to financial institutions and to work harder to communicate with you. As we face such an unprecedented threat, we in the government must be even more willing to share knowledge and insights with the public, just as we require that financial institutions share their knowledge of potentially suspicious activities with us.

I recognize that such measures require much from all of us, from government, from financial institutions, and from the public. However, let me describe what we are doing and how it will benefit our common goal - to make the laundering of funds and the financing of terrorist activity as difficult as possible.

Let me start with the premise that tools to combat terrorist financing, money laundering and related illicit activities are present as building blocks in the federal structure. The Federal government has dedicated criminal investigators, hard-working prosecutors, the ability to seize assets and block the movement of funds to known terrorist groups, and the ability to interdict goods entering or leaving the country.

September 11^th has had us focus even more on how to best organize the basic elements of anti-money laundering and anti-terrorist efforts. These building blocks are being put together in ways that demonstrate to the world our national resolve to combat terrorist financing. The basic elements of asset forfeiture, sanctions lists issued by the Office of Foreign Assets Control, the use of highly skilled criminal investigators, and a close working relationship with the financial services sector have all been in place. What the Treasury has done is to assemble these constituent elements in innovative ways that signal our intention to address terrorist financing in the most rigorous ways possible under the law. With the use of these tools, senior decision-makers at the Treasury and elsewhere in the Administration are able to see links and connections about which no one was previously aware.

The overriding purpose is the creation of a picture, through the use of all our legal powers, that provides the Treasury with the ability to pinpoint vulnerabilities and weaknesses of those who may be working to finance terrorist operations and launder criminal proceeds.

Suspicious activity reporting is one of the most effective tools that we have to create that picture for prosecutors and law enforcement officials. At the heart of suspicious activity reporting are the efforts of financial institutions, examining information, in order to provide the Nation with information on potential illegal activities.

Banks have been required now to file suspicious activity reports for more than five years, and Congress has mandated that we extend this obligation to other industries. Moreover, prior to the Patriot Act, the Treasury had specifically endorsed the application of suspicious activity reporting to additional financial service providers.

I wish to touch upon the proposed regulation to require securities brokerage firms to report suspicious activities to the Treasury. Published on December 31, 2001, we will accept comments on it until March 1, 2002. The purpose of this regulation - to prevent the criminal abuse of the securities brokerage industry - is one that I have heard many in the financial services industry support, and for many years.

This regulation would impose an affirmative obligation on all securities brokers and dealers to report suspicious activities. As you know, final regulations are required to be issued by July 2, 2002. There are certain exceptions in the proposed rule, for reporting stolen or counterfeit securities, for example, or for reporting certain securities violations by firm employees. However, what is significant is that the proposed regulation creates a "level playing field" with those financial services industries already required to report suspicious activities.

The concept of suspicious activity reporting by securities brokerages is not new, and has been endorsed by the International Organization of Securities Commissioners and by the Financial Action Task Force - the leading international body with a focus on money laundering and terrorist financing. Many larger securities firms already come under such requirements, either because of laws in other nations, or because of an affiliation with a bank. Moreover, the Treasury has endorsed the concept of suspicious activity reporting for many years, and we believe that, given the significant levels of funds moving through securities firms, such a measure is warranted.

Many securities firms already have anti-money laundering programs in place, and many have stated publicly that they voluntarily file suspicious activity reports when they suspect money laundering may be occurring. The securities industry has taken a leadership role, even in the absence of any formal regulatory requirement, to aggressively analyze and report suspicious activity to the authorities. Many securities brokerage firms have systems and controls in place that rival those of other industries for which such controls already exist as required by law.

The current regulatory proposal is just that - a proposal - and we welcome and hope that comments will be made by all of you on ways to improve or refine this regulatory proposal before it becomes final. We are anxious to understand what potential concerns may exist, including special issues applicable to smaller securities brokers, specialist firms, and the relative obligations of clearing and introducing brokers. The goal of our efforts is to get this right. We need the expertise of the financial services industry in formulating a regulation that accomplishes both the public goal of thwarting money laundering and terrorist financing, and the goal of doing this in a way that yields the best possible result with the least unnecessary use of resources.

Another regulatory proposal we have issued, requires the termination of correspondent account activities by securities brokerage firms with foreign shell banks. Banks have been under a statutory obligation to terminate correspondent banking activities with foreign shell banks since December 25, 2001. The proposed rule was published on December 28, 2001, and the comment period for this proposal closes on February 11, 2002. A shell bank is a bank, licensed under the authority of any government that has no physical presence, including employees, in the jurisdiction in which it is licensed as a bank. The proposal would require securities brokers to terminate any correspondent accounts with such foreign shell banks. For purposes of this proposed regulation, the term "correspondent account" includes many types of transaction, clearing, and settlement accounts.

This regulation would assist banks and securities brokers in determining whether a foreign bank client is, in fact, a foreign shell bank, and provide guidance on ways to make such a determination and thereby be compliant with the statute.

The statute also makes it unlawful to offer correspondent account services indirectly to a foreign shell bank. As such, banks and securities brokerages are provided in this proposed rule with an optional method to determine whether their foreign bank clients, in turn, offer services to foreign shell banks. The proposed rule does not require the adoption of this method, but rather offers it as an option. The questionnaire, which would be sent by the bank or securities firm to its foreign bank clients, asks such clients whether they service foreign shell banks, using the correspondent accounts of the U.S. bank or securities broker. Treasury is aware that in many cases it may be difficult for a bank or securities broker to independently determine what types of client relationships a foreign bank may have. This questionnaire is intended to be a way for U.S. banks and securities firms to satisfy their obligation to have some level of knowledge as to whether the U.S. firm is indirectly affiliated with foreign shell banks.

Foreign shell banks have often been noted as being tied to money laundering and other illegal activities, and this rule seeks to hinder that process. I know that you have long supported measures to prohibit criminal activity, and we look forward to your comments and suggestions on this proposal as well.

Other efforts underway at the Treasury involving the Patriot Act include a discussion of the types of identifying customer information needed when opening an account, and what types of information are most helpful in preventing future acts of money laundering or terrorist financing, and in prosecuting criminals who do engage in such illegal acts.

Section 326 authorizes and requires the Treasury to issue, jointly with other Federal regulators, minimal client identification requirements by October 26, 2002. Such requirements are extremely important to identifying accurately the clients of a securities brokerage firm. Such minimal requirements should be consistent among various financial services industries, so that a client of one type of financial services firm cannot direct funds or marketable assets among other types of financial services firm, without having had minimal client identification standards applied.

Challenging issues to be confronted will include: how to identify clients who may only engage in Internet transactions for which no physical face-to-face meeting is ever necessary; how to ensure that the needs of smaller financial institutions are appropriately considered; and whether there are any "level playing field" issues (i.e. whether specific industries will be required to raise their standards to meet those of other regulated financial institutions). In addition, the current identification requirements among various types of financial services providers, such as banks, securities brokers, mutual funds, futures firms, and insurance firms all vary somewhat, and we need to understand what those requirements are and what differences exist. Treasury Domestic Finance is taking a leading role, along with Treasury Enforcement, in chairing this intra-governmental effort in order to ensure that the best possible results are achieved, on a timely basis, and with due consideration of the many issues involved.

We all need to better understand what steps firms are currently taking to deter criminal abuse by those seeking to hide or disguise their identity when using securities brokerage houses. Such knowledge can inform the process of determining whether and how to cure any potential weaknesses that could be exploited by criminals.

Another effort involves an examination of anti-money laundering programs within securities brokerage firms, as required by Section 352 of the Patriot Act. By April 24, 2002, banks, securities brokerage firms, investment companies, and many other types of financial institutions will be required to have in place anti-money laundering programs. Of course, some financial institutions, including banks and credit unions are already required to have such programs in place. The statute states that such programs must have: appropriate policies, procedures and controls; a compliance officer to assume responsibility for the program; training of employees regarding their duties pursuant to the program; and an independent audit to test the operation of the program. The statute further authorizes Treasury to refine or augment these minimal requirements by regulation.

The types of such anti-money laundering programs will no doubt vary with the type of financial institution, its size and characteristics, and the market it serves. Financial institutions that markets heavily to overseas customers may need to have a more robust internal program than a small community financial institution.br

We also need to examine issues between different types of financial institutions. Just as banks and credit unions are required to have anti-money laundering programs that are quite similar, so too, one might expect that certain securities brokers would have anti-money laundering programs very similar to those of a futures commission merchant. Consistency when appropriate can be a unifying factor bringing together disparate activities. Yet I am reminded that we must create workable rules that can adapt to the rapidly changing nature of the financial marketplace. Mark Twain asked, "Who is the really consistent man? The man who changes." Financial institutions have seen enormous change during the last few decades, and we must ensure that rules that we create are able to operate in an environment of change.

In the area of promulgating regulations that clarify the obligation to have anti-money laundering programs, Treasury Domestic Finance shares the lead with Treasury Enforcement. We are examining what regulations, if any, should be promulgated to clarify or augment the existing statutory responsibilities. This includes an examination of the application of this requirement to the insurance industry and mutual funds.

Cooperation will be important for everyone. Banks and other financial service providers that are experienced with federal money laundering requirements can provide useful expertise to industry sectors that will be grappling with these requirements for the first time. I am encouraged because I have heard repeatedly that while individual financial institutions of all types earnestly and strenuously compete for market share and profitability in general, in their anti-money laundering efforts, these same firms work just as hard to cooperate with one another and to share insights, tips, and advice on how to stay at the head of the pack, and cheer each other on.

We all have much to learn from each other in the area of anti-money laundering and the deterrence of terrorist financing, including which types of measures are most effective, and which balance benefits with resources available most effectively. At the Treasury, our ability to promulgate useful and effective regulations in these areas benefits greatly from the experience of the financial services industry, and their regulators.

We will all continue to heed the President's call regarding terrorism, that "[o]urs will be a broad campaign, fought on many fronts." One of those fronts that President Bush has described is the financing of terrorist activities and the money laundering that accompanies it. To all of you that have and are serving in that campaign, and to those of you serving on the financial fronts, you deserve and have our thanks. While you may never receive a medal for your efforts, your contributions have been and continue to be valuable, and are recognized.

Prior to, September 11^th, many Americans thought of international enforcement efforts to stop money laundering and terrorist financing as applying to crimes committed in remote, foreign locations and therefore irrelevant to our daily lives. The tragedy of September 11 made us all aware of how important such efforts are to protect the homeland. We have done a great deal since September 11^th, and we will all undoubtedly be called upon to do more. We must continue to build upon a framework of cooperation, trust, and shared responsibility in order to stop the financing of terror and the laundering of funds that support terror.

Finally, it is my hope that as we all proceed with our many tasks, we pause to thank one another for the hard work and Herculean efforts that have characterized our post-September 11 resolve to stamp out money laundering and terrorist financing. Many in the financial services sector lost offices, friends, or colleagues on September 11^th. Our mutual goal is to ensure that this does not happen again. I thank you all.