FROM THE OFFICE OF PUBLIC AFFAIRS

March 17, 2005
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Key Note Address of Assistant Secretary
Juan C. Zarate
Securities Industry Association Anti-Money
Laundering Compliance Conference

NEW YORK, NY – Thank you for inviting me and other Treasury officials – including FinCEN Director Bill Fox and Office of Foreign Assets Control (OFAC) Director Bob Werner – to speak today with you. We all recognize that the Securities Industry Association is an important partner of ours on a series of critical issues – especially on the matters related to money laundering and terrorist financing. With an employee base of over 790,000 personnel, which manages accounts of nearly 93 million investors, the securities industry finds itself, along with its private sector associates, on the front lines in the defense of the financial system.

This discussion today comes amidst important changes underway in how the private sector and the government view their roles and responsibilities in preventing money laundering and terrorist financing. The tragic events of 9/11 catalyzed serious paradigmatic shifts that have required a rethinking of how the private sector and government interact – and in particular how we at the Treasury Department ensure the security of our financial system. 

The fundamental premise of this shift is that the financial system is less vulnerable to abuse if there is greater domestic and international accountability and transparency in financial transactions and dealings. Whether it is in the securities sector or in the money service business context, the anti-money laundering regime must now be applied – judiciously and in a balanced manner – but applied nonetheless. Our ability to prevent flows of capital from reaching the hands of terrorists, organized criminals and rogue international actors not only affects our national security but also our direct economic interests.

As Secretary Snow has remarked, application and enforcement of the Bank Secrecy Act is a critical part of that responsibility.  Though the transition to a higher level of due diligence and practices may sometimes be challenging, its purpose – to better protect us and our financial system from the taint of terrorist financing, money laundering, and financial crime – is an essential one. Certainly, we know that the private sector is hard at work adjusting to the expansion and deepening of the Bank Secrecy Act and the anti-money laundering laws and expectations.

There is no question that these responsibilities bring with them new costs and burdens. These are issues that we must consistently monitor and balance with the benefits incurred by requiring financial institutions to engage in due diligence and reporting. This balancing is at the heart of what the Treasury Department must do, and it is an assignment that requires the direct engagement of the private sector. This is precisely why Secretary Snow has directed us to ensure that the Bank Secrecy Act is not only being enforced aggressively, but also that we are doing so fairly and judiciously.

At the end of the day, we know that the true guardians of the financial system do not work in the halls of the Treasury building, but they are working in the brokerage houses, at teller windows and in casas de cambio. The private sector is the prime gatekeeper of the financial system. That's why this conference, and others like it, is extremely important as we talk about evolving trends in money laundering and terrorist financing and the expanded requirements under the law.

This recasting of responsibilities – for the government and the private sector – has taken shape in the context of our overarching war against terrorist financing. Terrorist groups and networks, like organized criminal enterprises, need money to exist. They are dependent on resources to finance everything from day-to-day necessities, like food and shelter, to long-term activities, including recruitment, training and ultimately acts of terror. This is a war where we have successfully disrupted and dismantled the financial infrastructure of terrorist operations. We have choked off money channels depended on by terrorist supporters, captured or killed key terrorist facilitators and deterred donors from supporting al Qaida and other like-minded terrorist groups. All in all, we have made it harder and costlier for al Qaida and other terrorist groups to raise and move money around the world.

These are accomplishments credited to the private sector as well as government agencies. The due diligence and entries to barrier of tainted capital have made it harder and costlier to move money in the formal financial system. The private sector has had much to do with this success. You can be confident that the information provided to us by the financial community – pursuant to the Bank Secrecy Act – is extremely valuable.  We use it every day around the country.  It helps those of us in the government to find leads, develop cases, understand trends, inform our regulations and educate the regulators and the public.  That's why proper filing of SARs – without defensive filing – is an important issue for us and one which we frequently address.  The publication by FinCEN of SAR Activity Reviews gives a clear sense of the valuable information we see in what your institutions and others produce. 

The responsibilities of the private sector to ensure compliance with our anti-money laundering laws and OFAC sanctions are issues we take seriously. The enforcement actions that we have seen over the past few months are a reflection of this. However, it is important to note that these have resulted not simply because there is a heightened environment for monitoring of such activities. Instead, we have seen institutions with fundamental, systemic failures to apply the basic standards of anti-money laundering systems.  This was certainly the case with Riggs, where the lax or non-existent anti-money laundering controls and practices led to a record fine of $25 million.  With UBS, we saw a straightforward decision to ignore its obligation to honor OFAC related regulations and restrictions – resulting in a $100 million fine and punitive action by Swiss authorities.

That is why we have worked very hard, through FinCEN, to make certain that the regulatory community and the Treasury are working together to ensure consistent examinations and enforcement.  This is also why Secretary Snow has called upon us to work with the Department of Justice on these matters as well.  Diligence in FinCEN and OFAC compliance matters must be taken seriously.  This relates not only to sound practices, but also to fundamental issues of national security.

In this new environment, we, as the government, have critical responsibilities, too.  Because terrorist financing transactions may bear no inherent suspicious or identifying trademarks, it is particularly important that we share more information with the financial sector, so as to allow it to recognize accounts and transactions of interest.  This will be especially useful as we expand the reach of our regulations to new segments of the financial sector.  This will not be an easy task, however.  Much of the information relevant to terrorist financing is classified.  Moreover, law enforcement is correctly reticent about sharing information that could compromise an investigation.  We also need to be acutely sensitive to the privacy and reputational interests of our citizens and ensure that appropriate controls are in place to safeguard information. 

Specific USA PATRIOT Act provisions have given us new tools to help thoughtfully fulfill our obligations to the private sector and the American public at large. With Section 314 of the PATRIOT Act, we are mandated to share information with and within the financial sector; that is, both vertically – between the government and the industry – and horizontally – providing a safe harbor that allows industry members to share with each other.  Treasury has implemented this section by creating a "pointer" system for law enforcement.  The system gives the appropriate authorities, in the right circumstances, the ability to work with FinCEN to transmit the names of persons of interest to the financial sector to determine whether those institutions possess any relevant transaction or account information. 

The system has been successful, and law enforcement has affirmed its value. You have seen the statistics we publish about the number of cases that have been helped using this tool. Given its importance, FinCEN recently announced the establishment of a secure web-based 314a communications system.  This is an important mechanism that will allow us to share even more information – more quickly and freely – to allow you to make better risk-based decisions.

We are also now in a position to use powers under the authorities of Section 311 of the PATRIOT Act – not only to protect the U.S. financial system, but also to notify the financial community of the concerns we have regarding money laundering risks.  It is important to remember that the movement of money in the 21st century knows no borders, and that terrorist financing and money laundering have global reach.  Financial transparency worldwide is required if we are to be effective in combating these scourges. 

Section 311, which we have now used on eight occasions, allows us to protect our financial system from illicit funds emanating from jurisdictions that do not retain internationally recognized standards of anti-money laundering and counter-terrorist financing.  Section 311 gives the Secretary of the Treasury the authority to prevent jurisdictions and foreign financial institutions found to be of "primary money laundering concern" from doing business with the United States.  Importantly, it also sounds an alarm with banks and governments worldwide, alerting them to designated parties and their illicit activities.  

Our responsibilities for greater information sharing apply in the OFAC context as well. Our policies, standards and relevant information regarding the application of our sanctions policies – in the trade and financial contexts – need to be elucidated well for all industries. Compliance with OFAC programs is a cornerstone of our ability to affect access to the U.S. markets and flows of dollars to rogue elements in the international community. That is why Director Werner has launched an outreach effort with the private sector to ensure a close working relationship that enhances the effectiveness of all of OFAC's sanctions programs.     

Thus, we have a responsibility to the private sector to provide as much information and guidance as possible to ensure the proper application of these preventative systems. The Treasury – through FinCEN and OFAC – must help drive this process, along with our regulatory brethren at the federal and state levels.      

In addition, the expansion of our anti-money laundering regime to new financial sectors has played a critical role in insulating our financial system against the movement of tainted capital from within the U.S. and abroad.  The PATRIOT Act has provided us with numerous mechanisms to assist in this effort, such as those found in Sections 313, 319 and 326.  The first two sections are aimed at preventing money laundering and terrorist financing through correspondent accounts maintained by U.S. banks and securities brokers on behalf of foreign banks.  Specifically, Section 313 expressly prohibits shell banks from participating in the U.S. financial system and insists upon strict record-keeping regarding the ownership of each non-U.S. bank that maintains a correspondent account with a U.S. institution.  Section 319 allows the U.S. to seize criminal assets through inter-bank accounts when foreign bank secrecy laws prevent law enforcement cooperation.

In addition, the application of Section 326 requirements to ensure that proper customer identification and due diligence requirements are implemented by the financial sector is important in ensuring legitimate entry into the financial system.

Beyond determined implementation of BSA and PATRIOT Act provisions, it is essential that we establish an embedded ethos as we move forward on efforts such as information sharing between financial institutions and government authorities, and directly between individual financial institutions.  With this in mind, Treasury relies heavily on the Bank Secrecy Act Advisory Group (BSAAG) as a forum in which to discuss controversial issues and emerging threats.  BSAAG is comprised of high-level representatives from financial institutions, federal law enforcement agencies, regulatory authorities and others from the private and public sectors.  Through the BSAAG and other regulatory and educational seminars and programs, Treasury maintains a close relationship with U.S. financial institutions to ensure a smooth exchange of information related to money laundering and terrorist financing.  We will continue to use this forum and opportunities such as this to talk about concerns the financial community has and steps we can take together to address emerging threats to all of us.

We are also improving our information sharing and collaboration internationally through the establishment of the "Buddy Bank" initiative.  This program's goal is to create a culture of anti-money laundering compliance internationally in the private sector – through private sector mentoring.  We are in the process of developing such projects in Latin American and Africa, so as to ensure that the private sector around the world is fully capable to deal with and engage in the anti-money laundering campaign.  We are glad to have strong partners within the private sector who are exploring the constructive and creative roles they can play internationally. 

All of this represents the evolution of the post-9/11 environment – where the public and private sectors have to work hand in glove and share responsibility for the issues of money laundering and terrorist financing.  In this new environment, you and your colleagues in the financial community are the guardians of the financial system.  Your role of witnessing and monitoring the entry and movement of capital around the world comes with great responsibility.  Your role and ours has evolved, and we must continue to work together to ensure full accountability. 

Much is at stake in the battle against money laundering and terrorist financing. I thank you for your help in meeting the important challenges we face and for the opportunity to speak with you today.