FROM THE OFFICE OF PUBLIC AFFAIRS

I. Introduction

Mr. Chairman, Mr. LaFalce, and members of the Committee:

I am happy to be here this morning to present the International Counter Money Laundering Act of 2000. This Committee has been at the center of a growing effort to expose the serious problem of money laundering and to take effective steps to combat it. This Committee wrote the House versions of the Bank Secrecy Act, the Annunzio-Wylie Bill, and the Money Laundering Suppression Act of 1994, from which our current enforcement powers are derived. Last fall, after reports that millions of dollars in Russian criminal proceeds had been laundered through an American bank, you held widely publicized hearings which did much to focus public attention on the problem.

The legislation we are proposing today would fill a crucial gap in our authorities, and significantly enhance our ability to take calibrated, targeted action with respect to money laundering threats posed by foreign jurisdictions, institutions, or transactions. In shaping our proposals, we have benefited considerably from a study of legislative proposals that you, Mr. Chairman, and other members of the Committee, have made. We look forward to working with you and Ranking Member LaFalce with the aim of enacting effective legislation to combat international money laundering during this Congress.

Before I get to the details of the legislation, however, I want to point out that it is being proposed in the context of the National Money Laundering Strategy for 2000, which has been developed as required by the Money Laundering and Financial Crimes Strategy Act of 1998. This comprehensive document, which was released yesterday, was based on the continuing review we have conducted since last September of all programs in this area. It reflects considerable progress on a wide range of initiatives since the 1999 Strategy was published. It also announces a series of new initiatives to combat money laundering, in the areas of financial services, international policy and federal, state and local law enforcement. It sets out the specific goals we seek this year, the actions we shall take to achieve them, the time frame in which they will be taken and the specific officials in the Executive Branch that are responsible for ensuring that the goals are met. While you have requested that I focus my testimony on legislation dealing with offshore havens and the laundering of the proceeds of corruption, I shall be referring to some other aspects of the Strategy in my presentation, as well. Because they are all part of a whole, I would be most appreciative if the entire 2000 Strategy document could be made a part of the Record.

The IMF has estimated the amount of money laundering worldwide at between two and five per cent of the world's gross domestic product. Because of its very secretive nature, accurate figures on the extent of money laundering are hard to come by. But even the most conservative estimates project the magnitude of money laundering to be close to $600 billion. Regardless of the exact figures, money laundering is a serious threat to our country because it facilitates drug trafficking, organized crime and international terrorism and because it encourages corruption in foreign governments, undermining U.S. efforts to promote democratic institutions and healthy economic development internationally. Money laundering also poses a threat in and of itself, because it risks undermining the integrity of our financial system. President Clinton underscored this point in announcing Presidential Decision Directive 42 (PDD-42) when he stated that much of the problem posed by international organized crime "stems from the corrosive effect on markets and governments of their large illegal funds."

I want to state unequivocally that safeguarding the integrity of the American financial system and protecting it from abuse are fundamental commitments of this Administration. In reviewing the developments of the last six months, and deciding what new measures may be necessary to act on those commitments, we concluded that the specific legislative tools the government has available to protect the financial system from international money laundering are too limited. On one end of the scale, we have advisories, and on the other end of the scale we have formal economic sanctions under the International Emergency Economic Powers Act ("IEEPA"). There is nothing of practical utility in between.

Treasury Advisories can be effective, because they encourage U.S. financial institutions to pay special attention to transactions involving certain jurisdictions, and to file SARs - or suspicious activity reports. In two cases, that of the Seychelles in 1996 and the country of Antigua and Barbuda last year, advisories also provoked positive action on the part of the targeted governments. But advisories do not impose specific requirements, as an order or regulation would, and thus they are not sufficient to address the complexity of the international money laundering threat.

At the other end of the scale, blocking orders under the IEEPA require a Presidential finding of a national security emergency, and operate to suspend financial and trade relations with the offending targets. Such orders can affect legitimate as well as illegitimate commerce. We have used IEEPA orders effectively against drug trafficking and terrorist organizations, but the tool is not particularly well suited to dealing with under-regulated foreign financial institutions.

New Discretionary Authorities. Under our proposed legislation, if the United States government believes that a certain foreign jurisdiction, a specific foreign financial institution, or a type of international transaction, poses a primary money laundering threat to this country, we will be able to take a far wider range of actions. The Secretary of the Treasury, after consultation with the Secretary of State, the Attorney General, and the Chairman of the Federal Reserve Board, could do one or more of the following:

• Require banks or other financial institutions to keep records of transactions and make them available to the government on request. These records could be kept in the aggregate or by individual transaction. Such records could prove invaluable to law enforcement and could help us better understand the specific money laundering mechanisms at work. As a corollary benefit, because such a requirement would cause U.S. institutions to increase the level of scrutiny they apply to transactions involving targeted jurisdictions or institutions, it could result in pressure on the offending foreign jurisdictions to improve their laws.
• Require financial institutions to ascertain the foreign beneficial owners of accounts in the U.S. where they are different from the owners of record. This requirement would help us dig through the layers of obfuscation, and often plain deceit, that prevent us from knowing who really holds money in U.S. banks.
• Require identification of those who are allowed to use a bank's correspondent accounts, as well as its so-called "payable through" accounts, which allow customers of a foreign bank to conduct banking operations through a U.S. bank just as if they were its own customers. These technical financial mechanisms, though perfectly legal and serving many legitimate purposes, are also abused by foreign money launderers who seek to clean their dirty money through our financial institutions. When necessary, we need to be able to find out who really benefits from these accounts, and by application of transparency, discourage abusive practices.
• Finally, where necessary in extreme cases, the Secretary would have the authority to impose conditions upon, or prohibit outright, the opening or maintaining of correspondent or payable-through accounts. Sometimes, when the threat is really serious, we need to be able to say enough is enough and cut foreign money launderers off from using U.S. financial institutions.

As you can see, our proposed legislation is designed to be graduated, targeted and discretionary -- graduated so that the Secretary can narrowly tailor the action he takes in a manner proportional to the threat he is seeking to counteract; targeted, so we can focus our response on the precise threat we confront; and discretionary, so we can integrate these tools into the bilateral and multilateral diplomatic efforts we are engaged in to persuade offending jurisdictions to change their practices. In the mean time, the information generated by these measures will enable our enforcement and regulatory personnel more effectively to understand the way these mechanisms are used and how money passes through the jurisdictions named. Hopefully, the information will also enable us to conduct more effective enforcement efforts against abuses stemming from those jurisdictions, transactions, or institutions.

The extent to which we should rely on multilateral action has been a matter of some debate over the past few months. Some have said that all our actions should be taken in concert with other countries, so that our institutions are not put at any possible competitive disadvantage. Others would mandate our government to apply certain stated measures automatically with respect to those who pose a threat. We have learned from our experience with economic sanctions, that on the one hand multilateral action is generally more effective than unilateral steps. And there may be times when the desirability of specific countermeasures is trumped by overriding national interest considerations.

On the other hand, if we believe there is a genuine threat to our own institutions, we shall be prepared use these powers unilaterally even if other nations are unprepared to join us. There may well be instances where multilateral or even bilateral action is not feasible and in which the risk of corrupt penetration of our banking system is so high we that must act ourselves. In making these choices, discretionary powers serve a very useful purpose.

Findings and Implementation Process. I would also like to outline the process we intend to use to designate foreign jurisdictions as money laundering threats. First, working with the State Department, we shall improve the processes we use to gather data about other countries' laws, regulations and practices that either combat or facilitate money laundering. We will also look at experiences from U.S. law enforcement. With this information, we shall assess the scope and type of money laundering problems we face from each jurisdiction. These assessments will be made on an annual basis.

Second, we would seek to determine whether each of the problem jurisdictions is primarily a source of criminal funds, or primarily a haven for dirty money. "Source" countries often face continuing problems of political will and capacity in dealing with what are, at root, domestic problems of crime and corruption. "Havens" tend to be characterized by under-regulated offshore financial services and excessive bank secrecy. Political will is relevant in both cases; but the distinction is crucial, in terms of the application of specific countermeasures. Training and technical assistance might be more appropriate than targeted regulatory action, for example, with respect to "source" jurisdictions.

Third, for each source country and money laundering haven, we shall ask if it has an adequate anti-money laundering regime, based on the global standards established by the Financial Action Task Force on Money Laundering ("FATF"). If not, we shall then ask whether it is improving its laws and practices. If not, we shall examine if this failure is primarily due to a lack of resources, or instead an absence of political will. It may in fact reflect a clear intention of providing no-questions-asked banking to the international underworld. In addition, our analysis will also take into account the interplay between tax evasion-a serious crime in its own right-and money laundering, since the same organizations in the same havens are often used for both activities, often by the same criminals.

The answers to these questions will go a long way in determining which countermeasure will be very influential in the determination whether a jurisdiction is designated a primary money laundering concern so that the Secretary may then impose one of the new authorities. They will also inform the decision of which counter-measures to apply in each specific case.

These factors are set forth in the 2000 National Money Laundering Strategy, in order to send a clear signal to the public, to financial institutions, and to the international community, about our concerns and our intentions. We hope and expect that many institutions and foreign governments will not wait for us to announce specific steps before they take appropriate preventive steps.

Multilateral Action. As we contemplate specific countermeasures with respect to specific jurisdictions, we shall be guided by, and actively participate in, the work of international organizations in this field. In June, the FATF is expected to publish the names of jurisdictions that substantially fail to meet its criteria for cooperation in resisting money laundering. The Financial Stability Forum, created by the G7 major industrial nations, is also reviewing the role of off-shore financial centers in the international system and encouraging them to put sound international standards into force. We shall help both organizations make their evaluations and take appropriate and coordinated countermeasures toward those jurisdictions, offshore and on shore, that fail their tests.

We shall also work with our partners in the OECD to publish its list of tax havens within the next few months. Although tax evasion and money laundering are separate crimes, the same havens are used for both, often by the same people, because the features that make a jurisdiction attractive for one, such as excessive bank secrecy and lack of transparency, make it attractive for the other.

We also can and will promote the adoption of appropriate supervisory actions in response to specified jurisdictions that fail to make progress in implementing effective international standards relating to money laundering. In multilateral forums, the banking agencies will support the development and issuance of international supervisory guidance on the reputational risks associated with money laundering and the sound practices that should be implemented to address these risks.

More broadly, Treasury and the financial regulatory agencies intend also to issue, before the end of the year, guidance to U.S. financial institutions that will assist them in identifying, on their own, those customers and transactions that pose an especially high risk of involvement with money laundering and other financial crimes. We would then expect the institutions to keep a watchful eye on these accounts.

Let me make it clear that our guidance will differ from the "know your customer" proposals made last year. First, we do not intend to issue formal regulations, and the guidance will be tailored so as to require special scrutiny only with respect to high risk accounts. Institutions already conduct due diligence with respect to a wide range of regulatory requirements; we intend to assist them in making determinations about what specific steps they need to take to comply with their existing obligation to file Suspicious Activity Reports. This obligation explicitly requires banks to be aware of transactions that are suspicious because of their size, their source, or because they are not the kind of transactions in which their customers would normally be expected to engage.

Banks should be able to identify high-risk customers - including certain so-called "private banking" customers -- without unduly interfering with normal business activities or invading the privacy of any customer. Moreover, these efforts to identify certain high-risk customers will take place in the context of the Administration's commitment, expressed by the President in the State of the Union, to propose new legislation this year to safeguard citizens' financial privacy. To assure this, we will, in preparing the details of our guidance, consult widely with all segments of the industry, with privacy advocates and with other affected groups. I personally will be heading up this initiative.

In this connection, special attention should be paid to corrupt public officials who try to launder money and other assets they have stolen from their own people. We will continue to seek legislation we first called for last year to make public corruption by a foreign a predicate offense under the anti money laundering laws. This change would have a significant effect, both in ensuring that our own financial institutions applied enhanced scrutiny to activity in accounts they manage on behalf of foreign officials, and in providing our prosecutors tools necessary to bring to justice foreign officials who have looted their countries. The change would also provide U.S. prosecutors with tools to assist investigations of foreign governments to bring such "kleptocrats" to justice. We will also continue to urge other countries to make public corruption a predicate offense, in order to implement the international treaties and standards that have been negotiated and will be in the future.

I would like now to highlight a few of the other activities covered in our 2000 Strategy Report which may be of special interest to members of the Committee.

HIFCA Designations. We announced yesterday that the New York / Northern New Jersey region, the city of Los Angeles and the city of San Juan have been designated as High Risk Money Laundering and Financial Crime areas. In addition, one money laundering system -- the movement (and often smuggling) of cash in bulk across the Southwest border -- has also received this designation. These are the first designations under the 1998 Strategy Act. In each, a money laundering action team will be created or identified and will proceed this year to launch concentrated enforcement activities that will coordinate the efforts of federal, state and local law enforcement. State and local authorities operating within each HIFCA will also be eligible for grants under the new Financial Crime Free Communities Support program ("C-FIC").

Suspicious Activity Reporting for MSBs. Yesterday, we issued final regulations requiring filing of suspicious activities reports by money services businesses that transfer funds or deal in money orders or traveler's checks. They were developed after significant consultations with representatives of the industry, state regulators and law enforcement officials. The regulations will significantly expand the ability of law enforcement to focus its efforts on money laundering activity occurring through non-bank financial institutions. It will help level the playing field in SAR reporting for institutions providing financial services to the public.

This summer, we hope to issue our final rules for casinos and card clubs. We have also been working with the SEC, and we expect to publish proposed rules covering SAR reporting by brokers and dealers in securities later this year. The securities industry is generally not used in the "placement" stage of money laundering because of near-universal policies against currency transactions. It also requires special rules and systems to ensure conformity with existing examination and enforcement programs of securities regulators. Nevertheless, the services and products the industry provides, including the efficient transfer of funds between accounts and to other financial institutions, the liquidity of securities, and the ability to conduct international transactions provide opportunities for money launderers to obscure and move illicit funds.

Gatekeepers. We are aggressively pursuing programs aimed at the lawyers, accountants and auditors who function as "gatekeepers" to the financial system. While legal rules properly insulate professional consultations from overly broad scrutiny and create a zone of safety within which professional can advise their clients, those rules should not create a cover for criminal conduct. We have published materials for the accounting profession that highlight money laundering risks in various industries. We are considering how existing accounting standards, on such subjects as illegal acts by clients, internal controls and fraud, can incorporate money laundering safeguards. By the end of this year, after outreach to a range of professional associations, we expect to have developed recommendations on ways to impress upon gatekeepers their professional responsibilities in this regard.

In order to ensure that we are able to fully implement this year's Strategy, we have asked for a $15 million, centralized account in our 2001 budget. These funds, which are in addition to our normal budget request, will be used to provide grants to state and local enforcement agencies, and to support a number of key Strategy initiatives.

VI. Conclusion

There are those who believe that in the new world of electronic commerce, where funds travel so fast and so easily, law enforcement cannot possibly keep up with criminals and corrupt officials and those who move their money for them. I strongly disagree. We have the same information technology they have. We are more dedicated than they are. We will work to implement the authority we have and the new laws we seek, and we will seek the help of other nations that realize the threat money laundering presents to their own economic progress, and the stability of their own societies. We shall work harder and with more resourcefulness than our adversaries to track their activities, eliminate their havens, bring them to justice and eliminate the scourge of money laundering from our societies.

Thank you, Mr. Chairman, for inviting me to testify before this Committee today. I would be happy to answer questions from you and the other members of the Committee.