FROM THE OFFICE OF PUBLIC AFFAIRS

November 10, 2003

I am very pleased to be with you today as you meet to discuss the Investment Company Institute and mutual fund industry’s involvement in the comprehensive efforts to secure the financial system against rogue capital.  The events of September 11^th and the attacks we have seen worldwide since then – including this weekend’s attacks in Riyadh – demonstrate, time and again, that we are engaged in a long term battle against those who both despise and strive to destroy our way of life. 

I appreciate the opportunity to speak with you because in this post-9/11 world, you, and the financial community at large, are a vital partner in our efforts.  Certainly, the Treasury has needed to call on its established relationships in the private sector and to cultivate new ones to ensure we are doing everything in our power to prevent additional catastrophic attacks and to protect the financial mediums around the world from terrorist and criminal taint.

I was recently in Saudi Arabia with Secretary Snow, where we met with government officials, to discuss, among other things, the common terrorist threat we face and the measures we are taking to combat terrorist financing and money laundering.  In our meeting with Crown Prince Abdullah, he said something that has deep resonance for those of us who have been working on these issues for over two years now.  He said quite plainly that the US Treasury and Finance Ministries are the greatest enemies of the terrorists.

Aside from being flattering to our work, I believe his words carry great truth on several levels. 

Since September 11th, we have led a global campaign to identify, disrupt, and dismantle the sources and means of funding for al Qaida and global terrorism.  As this Administration has declared, the bankers of terror will be bankrupted and will be held accountable for their facilitation of murder.  The world’s attention is now focused on the short and long-term threats of terrorist financing and has created a global system that is now seized of this issue.  It is clear that the world now looks at the problems of terrorism and complex criminal enterprises through the prism of financial disruption and deterrence. 

International terrorist groups need money to attract, support, and retain adherents throughout the world as well as to secure the loyalty of other groups that share the same goals. Thus, they need to devise schemes to raise, collect, and distribute money to operatives preparing for attacks. Their fundraising schemes and the movement of money internationally makes the terrorist funds vulnerable to detection if we have the right safeguards in place.  It is now an accepted axiom worldwide that when you track and stop tainted money, you can dismantle international networks and save lives.

In this regard, we have designated over 330 individuals and entities as terrorists or terrorist supporters and have worked with other governments to freeze over $136 million and seize well over $60 million.  Over 170 countries have taken relevant freezing measures and other steps to ensure that terrorists are deprived of the means and channels of funding.

These actions not only capture funds found in the formal financial system at the time blocking actions are taken but they serve to cut off those channels from the formal financial system and deter like-minded supporters.  This cooperative system also signals an enormous success in garnering international support in our efforts.  In our actions and in our words, the Treasury Department and Finance Ministries have shown quite clearly that in this war, financial intermediaries and facilitators who infuse terrorist organizations with money, materiel, and support will be held accountable along with those who perpetrate terrorist acts.

These have been our most public and striking efforts, but we have also undertaken wide-scale reform of international standards of transparency and accountable in all sectors.  In conjunction with the Financial Action Task Force, we worked to promulgate the Eight Special Recommendations on Terrorist Financing.  In these Special Recommendations, the Finance Ministries of the world have drawn their attention to the international risks that are specific to terrorist financing.  For example, the Special Recommendations require jurisdictions to register or license informal banking sectors, like hawalas, which have operated under the radar of government scrutiny until now.  Countries like the United Arab Emirates have taken proactive and important steps to inject transparency into this sector. 

In addition, the Special Recommendations point out the need to set out new ways to monitor the non-profit sector.  One of the heinous revelations of the post 9/11 world is the fact that al Qaida and like-minded terrorist groups have co-opted charities worldwide to raise money and to facilitate their agenda.  We have taken steps not only to freeze the assets of 24 such charities, but we have worked with our international partners to ensure that charitable giving is not corrupted.  Countries like Saudi Arabia have taken significant strides in controlling and monitoring a previously unregulated medium of financial activity.  The worldwide actions to shine the light of oversight on these previously unregulated financial sectors are a success story that goes largely untold.

In that same vein, the international community has taken steps to toughen anti-money laundering standards.  We certainly know that criminals and terrorists alike use similar channels to move and launder money.  That is why we have focused much attention on how the world views the problem of money laundering and anti-money laundering controls.  This year, for example, the FATF completed the revision of the 40 Recommendations on Money Laundering.  The changes reflect many of the concepts that we now hold essential to a vibrant AML regime.  For example, key changes to the 40 Recommendations include:  (1) enhanced due diligence with respect to correspondent banking accounts; (2) increased scrutiny for politically exposed persons; and (3) prohibition on the use of shell banks. 

Again, these changes are having real effects.  Countries like Russia, which was previously considered a non-cooperative country on these matters, have made wholesale changes to their laws and financial practices.  Transparency and accountability are now the modus operandi of the international community.

Domestically, we have worked to expand our anti-money laundering regime, in a smart and effective way.  Title III of the USA PATRIOT Act supplied Treasury with a host of new and important weapons to both systematically eliminate known risks to our financial system as well as to identify and nullify new risks that develop. The tragic events of September 11 have taught us three key lessons about financial crime:

(1) although distinct in important respects, our ability to combat terrorist financing is inextricably linked with our ability to combat money laundering generally;

(2) we must remain vigilant in our continuing efforts to identify the new ways in which criminals and terrorists will attempt to use our own financial system to fuel their enterprises; and

(3) the ability of governmental entities to obtain and share financial information is critical to our success in identifying and bringing down terrorist networks.

Title III of the PATRIOT Act reflects these lessons, providing us with the mechanisms, the authority, and the initiative to take the steps necessary to protect our financial system.

As former General Counsel David Aufhauser indicated recently, once complete and if properly enforced, these changes will go far to prevent not only the laundering of illicit proceeds, but also aid the financial system in preventing the use of clean money to finance terror.  The Act’s principal focus on financial intermediaries, the international gateways to the US financial system, the expansion of due diligence and monitoring requirements, enhanced reporting obligations, and renewed commitment to information sharing comprise the elements of a comprehensive anti-terrorist financing regime.  While the end goal of devising systems capable of proactively identifying potential terrorist financing activities remains elusive, we are creating the necessary infrastructure within financial institutions that will one day support such systems.

For example, several sections of the Act focus on the correspondent account, the international gateway to the US financial system.  These provisions require financial institutions to conduct greater due diligence both before opening such accounts and while they are open.  The scrutiny given to these accounts not only augments the audit trail, but also serves to deny certain foreign financial institutions access to the US financial system in the first place.  Uniform customer identification regulations recently issued will require all financial institutions to take important steps to verify the identity of their customers.  Additionally, we have created a system pursuant to section 314(a) of the Act to enable law enforcement to locate quickly the accounts and transactions of those suspected of money laundering or the financing of terrorism.  While we are still working closely with law enforcement and the financial community on the operation of the system, since its creation, the system has been used to send the names of well over 250 persons suspected of terrorism financing to financial institutions.  This has resulted in 1,739 matches that were passed on to law enforcement.

A particularly important provision is Section 311 of the Act, which provides the Secretary with the necessary ability to protect the US financial system against specific terrorist financing threats posed by foreign financial institutions, accounts, transactions, or even entire jurisdictions.  The Secretary can require US financial institutions to take appropriate countermeasures against such threats, countermeasures which include requiring the termination of any correspondent accounts involving the threat.  We have utilized this authority in the money laundering context – against Nauru and the Ukraine -- and we are presently considering its use against financial institutions in connection with the financing of terrorism, money laundering, and other financial crimes. 

Since its passage, Treasury, the Financial Crimes Enforcement Network (FinCEN), the financial regulators, and the Department of Justice have worked together to draft and issue extensive regulations that implement the Act’s provisions.  As David Aufhauser recently outlined, among other things, we have published regulations that --

(i)         Permit and facilitate the sharing of critical information between law enforcement and the financial community, as well as among financial institutions themselves;

(ii)        Close off our financial borders to foreign shell banks, require additional due diligence for correspondent accounts maintained for foreign financial institutions, and require foreign banks with correspondent accounts in the United States to supply the name of a US agent for service of process as well as the identities of their owners;

(iii)       Require US financial institutions to establish customer identification and verification procedures for all new accountholders;

(iv)       Expand the universe of financial institutions reporting potentially suspicious activities to FinCEN; and

(v)        Expand our basic anti-money laundering regime to include a wide range of financial service providers, such as the securities and futures industry and money services businesses.

Our work is not yet finished in this field.  We are now completing several regulatory packages that have direct relevance to your industry. 

We are using the USA PATRIOT Act and the implementing regulations to combat terrorist financing.  While it is still premature to evaluate their impact, we do have some indication of their effectiveness.  For example, the section 314(a) system has been used in many cases and has resulted in a substantial number of leads.  The additional reporting and recordkeeping authorities have enhanced the database FinCEN uses for its research and analysis in supporting terrorism investigations – since September 11^th, FinCEN has supported 2,692 terrorism investigations.  The Terror Hotline established by FinCEN has resulted in 789 tips passed on to law enforcement.  Since the World Trade Center Attacks, FinCEN has made 519 proactive case referrals to law enforcement based upon an analysis of information in the Bank Secrecy Act database.  With the expansion of the suspicious activity reporting regime, financial institutions have filed 2,655 suspicious activity reports (“SARs”) reporting possible terrorist financing.  In addition to passing these reports on to law enforcement, FinCEN has and will continue to analyze the SARs to report on systemic patterns in the financing of terrorism. 

What has been essential in all of these efforts has been the partnership we have felt with the private sector.  As we have often said, the financial community, and especially those who are coming into the regulatory fold, are on the front lines of the battle to secure the financial system.  Since passage of the Act, the willingness of the financial community to work with us in this fight has been remarkable.  Cooperation comes in the form of formal and informal feedback on new regulations, one-on-one assistance with specific investigations, and the proactive identification of potential instances of the movement of funds to finance terrorism.  While we expect the financial community to join us in this fight -- and they have done so -- we also recognize and appreciate these efforts, from the largest of financial institutions to the smallest of the community banks.

We also recognize a responsibility on the part of the government, and the Treasury in particular, to provide better service and contact to ensure the efficient, smart, and effective implementation of the regulatory system.  We will need the help of the financial community as we move forward, but there are certain things that the Treasury and US government must do in the coming months:

1. We must ensure that the regulatory burden is commensurate with the identified risks.  Much of this calculus will depend on the interaction we have with the private sector to ensure that the regulations in place are effectively targeted and implemented.
2. The government must strive to improve the feedback it provides to the financial community.  From the 314(a) process to general trend analysis, feedback on the importance and usefulness of your efforts will help you make necessary adjustments and cost calculations for your compliance systems and concomitant proactive efforts and investments.
3. The government and the private sector must build on the important information sharing underway.  Financial information, well developed and analyzed, helps uncover the footprints of criminal activity.  The PATRIOT Act, at its heart, is a piece of legislation that intends to break down artificial walls to allow for the sharing of timely information.  In this respect, the private sector, itself, needs to take greater advantage of the ability to share information with your counterparts.
4. The government must ensure that we are using technology to help us amplify the use of financial information and reporting that is flowing into FinCEN and the law enforcement community.  We need to ensure that relevant, suspicious financial information and trends are being analyzed and tracked in the most cost-effective manner possible.

All of this will further engender cooperation between the financial community and the government in a manner that further allows you to serve vigilantly on the front lines.

For those of us who have been working on these issues since 9/11, it is clear that a centerpiece of the Treasury and Finance Ministries’ ability to stem the flow of illicit capital through the financial system is the relationship we share with the private sector.  It is this perhaps that the Crown Prince noted when he stated that we are the greatest enemies of the terrorists.  We have certainly taken important steps to freeze assets and to make structural reforms.  But perhaps more importantly, the Treasury and the Finance Ministries have the strength of the relationship with the private sector upon which to call and the expertise and diligence of the financial community upon which to rely.

Thank you again for the kind invitation to speak with you today.  We look forward to continuing to work with you and the mutual fund industry.

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