Terrorist Financing: Current Efforts and Policy Issues for Congress

Congressional research reportAug 20, 2004

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Order Code RL32539

CRS Report for Congress

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Terrorist Financing: Current Efforts

and Policy Issues for Congress

August 20, 2004

Martin A. Weiss, Coordinator

Analyst in International Trade and Finance

Foreign Affairs, Defense, and Trade Division

Congressional Research Service ˜ The Library of Congress

Terrorist Financing:

Current Efforts and Policy Issues for Congress

Summary

On July 22, the 9/11 Commission Report was released. One of its

recommendations is that the priority of the U.S. strategy to combat terrorist financing

should shift from freezing assets to following terrorists’ money trails in order to gain

intelligence leads. This recommendation has led to widespread discussion of the

overall U.S. effort to combat terrorist financing. This report provides an agency by

agency survey of U.S. efforts and presents numerous policy issues. This report will

not be updated.

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Legislation on Terrorist Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

The Bank Secrecy Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

The International Emergency Economic Powers Act . . . . . . . . . . . . . . 3

The Money Laundering Control Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

The Annunzio-Wylie Anti-Money Laundering Act . . . . . . . . . . . . . . . . 4

The Money Laundering Suppression Act . . . . . . . . . . . . . . . . . . . . . . . 5

The Money Laundering and Financial Crimes Strategy Act . . . . . . . . . 5

Title III of the USA PATRIOT Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

The Intelligence Community . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

The Interagency Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Financial Regulators and Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

The Offices within the Department of the Treasury . . . . . . . . . . . . . . 14

The Financial Institution Regulators . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Internal Revenue Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Departments of Homeland Security and Justice . . . . . . . . . . . . . . . . . . . . . . . . . 24

Bureau of Customs and Border Protection (CBP) . . . . . . . . . . . . . . . . . . . . 24

Role in Terrorist Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Capabilities and Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Measures of Success and Accomplishments . . . . . . . . . . . . . . . . . . . . 25

Relationships and Coordination with other Agencies . . . . . . . . . . . . . 26

Bureau of Immigration and Customs Enforcement (ICE) . . . . . . . . . . . . . . 26

Role in Terrorist Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Capabilities and Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Measures of Success and Accomplishments . . . . . . . . . . . . . . . . . . . . 28

Relationships and Coordination with other Relevant Agencies . . . . . 28

U.S. Secret Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Secret Service Involvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Caveats and Their Meaning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

The Federal Bureau of Investigation (FBI) . . . . . . . . . . . . . . . . . . . . . . . . . 31

The FBI Mission to Counter Money Laundering . . . . . . . . . . . . . . . . . 32

The FBI Mission to Counter Terrorist Financing . . . . . . . . . . . . . . . . 33

TFOS Resources and Capabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Information Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

FBI Measures of Success and Related Accomplishments . . . . . . . . . . 35

Relationships to and Coordination with Other Agencies . . . . . . . . . . . 36

Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) . . . . . . . . . . 38

ATF’s mission and roles related to terrorist financing . . . . . . . . . . . . 38

Capabilities and resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Measures of success and accomplishments . . . . . . . . . . . . . . . . . . . . . 38

ATF coordination with other federal agencies . . . . . . . . . . . . . . . . . . . 39

Drug Enforcement Administration (DEA) . . . . . . . . . . . . . . . . . . . . . . . . . . 39

DEA’s responsibilities with regard to terrorist financing . . . . . . . . . . 39

DEA resources devoted to combating terrorist financing . . . . . . . . . . 40

Measures of Success and Accomplishments . . . . . . . . . . . . . . . . . . . . 40

DEA Coordination with Other Federal Agencies . . . . . . . . . . . . . . . . 40

The Department of State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Regulating the International System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Financial Action Task Force (FATF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Assessing Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Conclusion: Policy Issues for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

List of Tables

Table 1. Middle Eastern Compliance with Counter-Terrorist Finance

Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Terrorist Financing: Current Efforts and

Policy Issues for Congress

Introduction1

Since the September 11, 2001 attacks, there has been significant interest in

terrorist financing. Following the attacks, the administration stated its goal of

“starving the terrorists of funding and shutting down the institutions that support or

facilitate terrorism.”2 In the months immediately following the attacks, substantial

funds were frozen internationally. After this initial sweep, the freezing of terrorist

assets slowed down considerably. As of November 2002, analysts noted that of the

roughly $121 million in terrorist assets frozen worldwide, more than 80% of that had

been blocked in the first three months following the attacks.3 Over the next year and

a half, an additional $80 million was frozen, bringing the current total to roughly

$200 million.4

According to the 9/11 Commission: the United States must “[e]xpect less from

trying to dry up terrorist money and more from following the money for intelligence,

as a tool to hunt terrorists, understand their networks, and disrupt their operations.”5

According to Commission Chairman Thomas Kean, “[r]ight now we have been

spending a lot of energy in the government trying to dry up sources of funding.”

Kean further noted that, “[o]bviously if you can dry up money, you dry it up, but we

believe one thing we didn’t do effectively is follow the money. That’s what we have

to do.”6

While the goals of freezing terrorist funds and tracking them for intelligence are

not mutually exclusive, they tend to emphasize different strategies and approaches.

For example, the FBI and other intelligence agencies have a history of gathering

intelligence by monitoring financial transactions and relationships over extended

This section was prepared by Martin A. Weiss/FDT.

Statement of Secretary Paul O’Neill on Signing of Executive Order Authorizing the

Treasury Department to Block Funds of Terrorists and their Associates, September 24, 2001.

CRS Report RL31658, Terrorist Financing: The U.S. and International Response, pg. 1.

Testimony of Samuel W. Bodman, Deputy Secretary U.S. Department of the Treasury

Before the Senate Committee on Banking, Housing and Urban Affairs, April 29, 2004.

Executive Summary, Final Report of the National Commission on Terrorist Attacks Upon

the United States, July 2004,pgs. 18-19, available at

[http://www.9-11commission.gov/report/911ReportExec.pdf ]

See Laura Sullivan, “U.S. Split on Tracing, Freezing Terror Funds,” Baltimore Sun, Aug.

2, 2004.

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periods of time, for example in its investigations of the Mafia, and then using laws

against financial crimes to eventually arrest the perpetrators. The Department of the

Treasury, by contrast, has traditionally favored freezing terrorist assets as soon as

possible. This tension is echoed by Jonathan Winer, a former Deputy Assistant

Secretary of State for International Law Enforcement under President Bill Clinton,

“[t]here is a big ideological divide right now between the asset freezers and the

people who want to follow the money as it changes hands. There’s no easy answer

one way or another.”7 Effectively combating terrorist financing requires effective

coordination of many different elements of national power including intelligence

gathering, financial regulation, law enforcement, and building international

coalitions. “There are a number of areas where jurisdiction is blurred,” according to

one senior official.8

Congress has taken an active interest in this debate on terrorist financing,

holding numerous hearings over the past few years, both in the House, and in the

Senate. This report responds to this increased interest in terrorist financing by

analyzing the roles of relevant U.S. agencies and departments involved in tracking

and seizing terrorist financing.

This report focuses on U.S. efforts to combat financing for terrorist acts against

the United States. For a discussion of the U.S. overall terrorism strategy, see CRS

Report RL32522: U.S. Anti-Terror Strategy and the 9/11 Commission Report. For

a discussion of the full 9/11 Commission recommendations, see CRS Report

RL32519: Terrorism: Key Recommendations of the 9/11 Commission and Recent

Major Commissions and Inquiries and CRS Report RL32501: 9/11 Commission

Recommendations: New Structures and Organization. For a discussion of terrorist

financing in general, see CRS Report RS21902: Terrorist Financing: The 9/11

Commission Recommendation and CRS Report RL31658: Terrorist Financing: The

U.S. and International Response, and CRS Report RL32499: Saudi Arabia: Terrorist

Financing Issues.

Legislation on Terrorist Financing9

“Money laundering” has traditionally been understood to mean the process by

which “dirty” money derived from illegal activity is disguised as legitimate — or

“clean” — by virtue of how it is distributed among financial institutions. The federal

government began to target money laundering in 1970, with the passage of the Bank

Secrecy Act (BSA) and subsequent amendments. In the years following the

enactment of the BSA, Congress added criminal and civil sanctions for money

launderers. The threat posed by terrorists, however, forced Congress in 2001 to bring

terrorist financing — which often is accomplished with legally-derived funds —

within the range of activities punishable under the federal money laundering laws.

What follows is an overview of these laws.

Ibid.

Lauren Shepherd, “Nominees stalled by turf battle,” The Hill, June 9, 2004.

This section was prepared by Nathan Brooks/ALD

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The Bank Secrecy Act. Congress laid the foundations for the federal antimoney laundering (AML) framework in 1970 when it passed the BSA,10 the major

money laundering provisions of which make up the Currency and Foreign

Transaction Reporting Act (CFTRA). The BSA framework focuses on financial

institutions’11 record- keeping, so that federal agencies are able to apprehend

criminals by tracing their money trails. Under this statute and subsequent

amendments to it, primary responsibility rests with the financial institutions

themselves in gathering information and passing it on to federal officials. CFTRA

also contains civil12 and criminal13 penalties for violations of its reporting

requirements.

Under CFTRA, financial institutions must file reports for cash transactions

exceeding the amount set by the Secretary of the Treasury in regulations.14 The

Secretary has set the amount for filing these currency transaction reports (CTRs) at

$10,000.15 The Secretary also requires financial institutions to file suspicious activity

reports (SARs) for transactions of at least $5,000 in which the bank suspects or has

reason to suspect the transaction involves illegally-obtained funds or is intended to

evade reporting requirements.16

CFTRA contains significant requirements related to foreign-based monetary

transactions. Citizens are required to keep records and file reports regarding

transactions with foreign financial agencies, and the Treasury Secretary must

promulgate regulations in this area.17 The statute also requires the filing of reports

by anyone who exports from the United States or imports into the United States a

monetary instrument of more than $10,000.18

The Internal Revenue Service has certain authorities and responsibilities under

the BSA (see p.20).

The International Emergency Economic Powers Act. Under the

International Emergency Economic Powers Act19 (IEEPA), enacted in 1977, the

President has broad powers pursuant to a declaration of a national emergency with

P.L. 91-508 (codified, as amended, at 12 U.S.C. § 1829b; 12 U.S.C. §§ 1951-1959; 31

U.S.C. § 5311 et seq.).

“Financial institution” is defined very broadly to include, inter alia, banks, thrifts, credit

unions, pawn brokers, broker-dealers, insurance companies, auto dealers, travel agencies,

casinos, the United States Postal Service, etc. 31 U.S.C. § 5312(a)(2).

Id. at § 5321.

Id. at § 5322.

31 U.S.C. § 5313(a).

31 C.F.R. § 103.22(b)(1).

31 C.F.R. § 103.18.

31 U.S.C. § 5314.

31 U.S.C. § 5316.

Title II of P.L. 95-223 (codified at 50 U.S.C. § 1701 et seq.).

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respect to a threat “which has its source in whole or substantial part outside the

United States, to the national security, foreign policy, or economy of the United

States.”20 These powers include the ability to seize foreign assets under U.S.

jurisdiction, to prohibit any transactions in foreign exchange, to prohibit payments

between financial institutions involving foreign currency, and to prohibit the

import/export of foreign currency.21

The Money Laundering Control Act. Congress criminalized money

laundering in 1986 with the passage of the Money Laundering Control Act.22

Defining money laundering as conducting financial transactions with property known

to be derived from unlawful activity in order to further or conceal such activity, the

act made three specific types of money laundering illegal: 1) domestic money

laundering; 2) international money laundering; and 3) attempted money laundering

uncovered as part of an undercover sting operation.23 If the transaction is for an

amount in excess of $10,000, the government does not have to show that the

defendant knew the transaction in question was meant to further or conceal an illegal

act, only that the defendant knew the property was procured via illegal activity.24

The Annunzio-Wylie Anti-Money Laundering Act. With the passage of

the Annunzio-Wylie Anti-Money Laundering Act25 in 1992, Congress increased the

penalties for depository institutions that violate the federal AML laws. In addition

to authorizing the Secretary of the Treasury to require filings of the aforementioned

SARs, the act made it possible for banking regulators to place into conservatorship

banks and credit unions that violate these laws.26 In addition, the act gave the Office

of the Comptroller of the Currency (OCC) the power to revoke the charters of

national banks found to be guilty of money laundering or cash reporting offenses,27

and gave the Federal Deposit Insurance Corporation (FDIC) the authority to

50 U.S.C. § 1701(a). Under the Trading With the Enemy Act of 1917 (40 Stat. 411;

codified, as amended, at 50 U.S.C. app. § 1 et seq.), the President has broad economic

sanctioning authority during wartime. IEEPA extended these powers to situations in which

the President declares a national emergency.

50 U.S.C. § 1702. Relying on the powers granted in IEEPA, President Bush on September

23, 2001, issued Executive Order 13224, authorizing the Department of the Treasury to

designate individuals and entities as terrorist financiers, who are then denied access to the

U.S. financial system. The Treasury Department’s Office of Foreign Assets Control

(OFAC) maintains this specially designated nationals (SDN) list, which can be found at

[http://www.ustreas.gov/offices/eotffc/ofac/sdn/] (last visited July 2, 2004).

P.L. 99-570, § 1352 (codified, as amended, at 18 U.S.C. §§ 1956-1957).

18 U.S.C. § 1956.

18 U.S.C. § 1957. For these section 1957 crimes involving transactions over $10,000, a

much larger group of transactions are included than are illegal under section 1956.

Title XV of P.L. 102-550 (codified at various sections of Titles 12 and 31 of the U.S.

Code).

12 U.S.C. § 1821(c)(5)(M); 12 U.S.C. § 1786(h)(1)(C).

12 U.S.C. § 93(c).

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terminate federal insurance for guilty state banks and savings associations.28 The

Annunzio-Wylie Act also introduced federal penalties for operating money

transmitting businesses29 operating without licenses under state law.30

The Money Laundering Suppression Act. In the early 1990’s it became

apparent that the number of CTRs being filed greatly surpassed the ability of

regulators to analyze them. So, in 1994, Congress passed legislation31 mandating

certain exemptions from reporting requirements in an effort to reduce the number of

CTR filings by 30%.32 In addition, the act directed the Treasury Secretary to

designate a single agency to receive SARs filings.33 Under this statute, money

transmitting businesses are required to register with the Treasury Secretary. In

addition, the act clarified the BSA’s applicability to state-chartered and tribal gaming

establishments.34

The Money Laundering and Financial Crimes Strategy Act. Congress

in 1998 directed the Treasury Secretary to develop a national strategy for combating

money laundering.35 As part of this strategy, the Treasury Secretary — in

consultation with the U.S. Attorney General — must attempt to prioritize money

laundering enforcement efforts by identifying areas of the U.S. as “high-risk money

laundering and related financial crimes areas” (HIFCAs).36 In addition, the Treasury

Secretary may issue grants to state and local law enforcement agencies for fighting

money laundering in HIFCAs.37

Title III of the USA PATRIOT Act. In the wake of the terrorist attacks of

September 11, 2001, Congress passed the USA PATRIOT Act.38 Congress devoted

12 U.S.C. § 1818(w).

These are those businesses engaged in check cashing, currency exchange, money

transmission or remittance, money order/traveler’s check redemption, etc. See id. at § 5330

note.

18 U.S.C. § 1960.

Title IV of P.L. 103-325 (codified at various sections of Title 31 of the U.S. Code).

31 U.S.C. § 5313 note.

Id. at § 5318 note.

12 U.S.C. § 5312(a)(2)(X).

P.L. 105-310 (codified at 31 U.S.C. § 5340 et seq.).

31 U.S.C. § 5342. As of July, 2003, six such areas had been designated: New York/New

Jersey; San Juan/Puerto Rico; Los Angeles; the southwestern border, including Arizona and

Texas; the Northern District of Illinois (Chicago); and the Northern District of California

(San Francisco). See Bureau of Justice Statistics Special Report: Money Laundering

O f f e n d e r s , 1 9 9 4 -2 0 0 1 , N C J 1 9 9 5 7 4 ( J u l y 2 0 0 3 ) , a v a i l a b l e a t

[http://www.ojp.usdoj.gov/bjs/pub/pdf/mlo01.pdf] (Last visited July 2, 2004).

31 U.S.C. § 5354.

P.L. 107-56. The acronym stands for “United and Strengthening America by Providing

Appropriate Tools Required to Intercept and Obstruct Terrorists.”

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Title III of this act to combating terrorist financing.39 Given that funds used to

finance terrorist activities are often not derived from illegal activities, prosecution for

funding terrorist activities under the pre-USA PATRIOT Act money laundering laws

was difficult. Title III, however, made providing material support to a foreign

terrorist organization a predicate offense for money laundering prosecution under

section 1956 of Title 18 of the U.S. Code.40

Under Title III, the Treasury Secretary may require domestic financial

institutions to undertake certain “special measures” if the Secretary concludes that

specific regions, financial institutions, or transactions outside of the U.S. are of

primary money laundering concern.41 In addition to retaining more specific records

on financial institutions, these special measures include obtaining information on

beneficial ownership of accounts and information relating to certain payablethrough42 and correspondent accounts.43 The Treasury Secretary is also empowered

to prohibit or restrict the opening of these payable-through and correspondent

accounts,44 and U.S. financial institutions are required to establish internal procedures

to detect money laundered through these accounts.45 In addition, financial

institutions and broker-dealers are prohibited from maintaining correspondent

accounts for foreign “shell banks,” i.e., banks that have no physical presence in their

supposed home countries.46 Institutions are subject to fines of up to $1 million for

violations of these provisions.47

Title III allows for judicial review of assets seized due to suspicion of terroristrelated activities and the applicability of the “innocent owner” defense,48 although the

government is permitted in such cases to submit evidence that would not otherwise

be admissible under the Federal Rules of Evidence, if following those rules would

This Title is called the International Money Laundering Abatement and Anti-Terrorist

Financing Act. For a more detailed discussion of Title III of the USA PATRIOT Act, see

CRS Report No. RL31208, International Money Laundering Abatement and Anti-Terrorist

Financing Act of 2001, Title III of P.L. 107-56, by M. Maureen Murphy.

18 U.S.C. § 2339B.

31 U.S.C. § 5318A(a).

“Payable through accounts” are generally checking accounts marketed to foreign banks

who would not otherwise have the ability to offer their customers access to the U.S. banking

system.

“Correspondent accounts” are bank accounts established with a U.S. financial institution

to receive deposits or otherwise handle financial transactions of a foreign financial

institution.

31 U.S.C. § 5318A(b).

31 U.S.C. § 5318(i).

31 U.S.C. § 5318(j).

31 U.S.C. § 5321(a)(7); 31 U.S.C. § 5322(d).

An “innocent owner” under federal law is one who either did not know of the illegal

activity or, upon learning of the illegal activity, did all that was reasonable to terminate use

of the property in question. 18 U.S.C. § 983(d).

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jeopardize national security.49 Title III also allows for jurisdiction over foreign

persons and financial institutions for prosecutions under sections 1956 and 1957 of

Title 18 of the U.S. Code.50

The USA PATRIOT Act permits forfeiture of property traceable to proceeds

from various offenses against foreign nations.51 The act also permits forfeiture of

accounts held in a foreign bank if that bank has an interbank account in a U.S.

financial institution; in essence, law enforcement officials are authorized to substitute

funds in the interbank account for those in the targeted foreign account.52 Forfeiture

is also authorized for currency reporting violations and violations of BSA

prohibitions against evasive structuring of transactions.53

Title III requires each financial institution to establish an AML program, which

at a minimum must include the development of internal procedures, the designation

of a compliance officer, an employee training program, and an independent audit

program to test the institution’s AML program.54 In order to allow for meaningful

inspection of financial institutions’ AML efforts, Title III requires financial

institutions to provide information on their AML compliance within 120 hours of a

request for such information by the Treasury Secretary.55 Also, financial institutions

applying to merge under the Bank Holding Act or the Federal Deposit Insurance Act

must demonstrate some effectiveness in combating money laundering.56 Financial

institutions are allowed to include suspicions of illegal activity in written

employment references regarding current or former employees.57

Title III extends the SARs filing requirement to broker-dealers,58 and gives the

Treasury Secretary the authority to pass along SARs to U.S. intelligence agencies in

order to combat international terrorism.59 Anyone engaged in a trade or business who

receives $10,000 cash in one transaction must file a report with the Financial Crimes

Enforcement Network (FINCEN) identifying the customer and specifying the amount

and date of the transaction.60 In addition, the USA PATRIOT Act makes it a crime

to knowingly conceal more than $10,000 in cash or other monetary instruments and

P.L. 107-56, § 316 (codified at 18 U.S.C. § 983 note)

P.L. 107-56, § 317.

18 U.S.C. § 981(a)(1)(B).

18 U.S.C. § 981(k).

31 U.S.C. § 5317(c).

31 U.S.C. § 5318(h).

31 U.S.C. § 5318(k)(2).

12 U.S.C. § 1842(c)(6); 12 U.S.C. § 1828(c)(11).

12 U.S.C. § 1828(w).

P.L. 107-56, § 356 (codified at 31 U.S.C. § 5318 note).

P.L. 107-56, § 358 (codified at 31 U.S.C. § 5319; 15 U.S.C. § 1681v).

31 U.S.C. § 5331. This is a separate requirement than the one codified at 31 U.S.C. §

5313.

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attempt to transport it into or outside of the U.S. This offense carries with it

imprisonment of up to five years, forfeiture of any property involved, and seizure of

any property traceable to the violation.61

Significantly, the USA PATRIOT Act requires financial institutions to establish

procedures so that these institutions can verify the identities and addresses of

customers seeking to open accounts, and check this information against governmentprovided lists of known terrorists.62 Title III also allows the Treasury Secretary to

promulgate regulations that prohibit the use of concentration accounts to disguise the

owners of and fund movements in bank accounts.63

While FINCEN was created by the Treasury Department in 1990,64 under Title

III, FINCEN has statutorily-based authority to conduct its duties within the Treasury

Department.65 Significantly, the act requires FINCEN to maintain a highly secure

network so that financial institutions can file their BSA reports electronically.66

The Intelligence Community67

The Foreign Terrorist Asset Tracking Group (FTATG) is an autonomous

interagency analytic group whose mission is to assess intelligence, and provide the

National Security Council’s Policy Coordinating Committee (PCC) “targeting

reports” on individuals and groups suspected of financially supporting terrorists.

Policy makers evaluate the reports, which contain background information on the

target, and recommendations on possible action, including freezing assets belonging

to the implicated party.

The FTATG staff currently consists of five temporarily detailed analysts from

five agencies: the Federal Bureau of Investigation (FBI), Immigration and Customs

Enforcement (ICE), the National Security Agency (NSA), and the Central

Intelligence Agency (CIA), and the Department of State (State). The Group is

headed by a Director and a Deputy Director, although both positions are vacant.

Although housed at the Central Intelligence Director’s (DCI) Counterterrorism

Center (CTC) at CIA, FTATG is independent of the Center. Its analysts, however,

rely principally on information furnished by the intelligence community and law

enforcement agencies in making their assessments.

Id. at § 5332.

31 U.S.C. § 5318(l).

31 U.S.C. § 5318(h)(3). “Concentration accounts” commingle the bank’s funds with those

in individual accounts, making it difficult to determine who owns specific funds and why

funds are being moved.

Treasury Order 105-08 (April 25,1990).

31 U.S.C. § 310.

P.L. 107-56, § 362 (codified at 31 U.S.C. § 310 note).

This section was prepared by Al Cummings, FDT.

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President Bill Clinton announced in May 2000 the creation of the Foreign

Terrorist Asset Tracking Center (FTATC) as part of a $300 million counterterrorism

initiative, $100 million of which was to be used to target terrorist financing.68

Congress authorized funding in October 2000.69

The initiative followed the disruption of various Osama Bin Laden-sponsored

terrorist plots at the end of 1999 — a series of terrorist attacks planned for the

Millennium against the U.S. and its interests. Although the plots were disrupted,

Clinton Administration officials concluded that the CIA had been unable to find or

disrupt al Qaeda’s money flows,70 and vowed in March 2000 to crack down on

terrorist organizations and curtail their fund-raising.71

The NSC staff decided that one possible solution to targeting terrorism

financing was to establish an all-source terrorist-financing intelligence analysis

center, and NSC counterterrorism official Richard A. Clarke in March 2000

advocated that the center be established at the Department of the Treasury.72 Neither

the Treasury Department nor the CIA, however, was willing to commit resources.73

Before 9/11, the Treasury Department did not view terrorist financing as important

enough to mention in its national strategy for money laundering.74 Nevertheless, the

Treasury Department was assigned the task of standing up the new center. National

Security Advisor Condoleezza Rice said that she had determined by spring of 2001

that terrorist financing proposals were a good option, so Treasury continued to plan

See Douglas Farah, “Blood From Stones: The Secret Financial Network of Terrorism,”

Broadway Books, New York, New York, May 2004, p. 193.

See Myron Levin and Josh Meyer, “Officials Fault Past Efforts on Terrorist Assets,” Los

Angeles Times, Oct. 16, 2001.

Farah, p. 186. According to the 9/11 Commission, although the CIA’s Bin Laden unit had

originally been inspired by the idea of studying terrorist financial links, “few personnel

assigned to it had any experience in financial investigations. Any terrorist-financing

intelligence appeared to have been collected collaterally, as a consequence of gathering

other intelligence. This attitude may have stemmed in large part from the chief of this unit,

who did not believe that simply following the money from point A to point B revealed much

about the terrorists’ plans and inventions. As a result, the CIA placed little emphasis on

terrorist financing.” See P. 184 of the Commission’s report.

See The 9/11 Commission Report, National Commission on Terrorist Attacks Upon the

United States, July 22, 2004, p. 185.

Shortly after Clarke and the NSC decided to advocate the create of FTATC, The National

Commission on Terrorism (the National Commission is often referred to as the “Bremer

Commission,” after its chairman, L. Paul Bremer) recommended in June 2000 that the

Secretary of the Treasury should create a unit within the Treasury Department’s Office of

Asset Control that blended the expertise of Treasury agencies and the CIA, FBI and NSA

and was dedicated to the issue of terrorist financing. The Commission further recommended

the Center should support more aggressive efforts by OFAC to freeze the assets of those

individual or groups funding terrorists.

Farah, p. 186.

Ibid.

CRS-10

to establish an office for 24 financing analysts.75 But the Treasury Department failed

to follow through on the establishment of the FTATG.76 On the eve of September

11, 2001, 16 months after its announced creation, nine months after President Bush

took office, and despite post-9/11 declarations to the contrary, FTATC had funds

appropriated, but no people hired, no security clearances, and no space to work.77

Treasury officials, meanwhile, complained that CIA had adopted a posture of “benign

neglect” toward the FTATC and characterized the CIA as believing that financial

tracking had limited utility.78

Three days after the September 11th terrorist attacks against the U.S., Treasury

officials hastily stood up the FTATC,79 under the Department of the Treasury’s

Office of Foreign Asset Control (OFAC). A Treasury spokeswoman reportedly

denied there was any undue delay in launching the Center, citing the logistical

difficulties of bringing together representatives of a number of investigative agencies.

Senator Charles E. Grassley, however, reportedly expressed concern as to whether

the delay “is indicative of larger problems.”80

The Center originally was comprised of the same member agencies as

Operation Green Quest, a multi-agency, financial enforcement initiative that the

Department of the Treasury announced on October 25, 2001, to identify, disrupt,

dismantle and ultimately “bankrupt” terrorist networks and their sources of funding.81

Operation Green Quest was intended to serve as the operation and investigative arm

for OFAC, FTATC and FINCEN.82 FTATC’s mission was to analyze individual and

group targets identified through the Green Quest initiative.83

In December 2002, the Senate Select Committee On Intelligence endorsed

efforts to develop elements within the Intelligence Community designed to exploit

financial intelligence and noted that the Treasury Department’s FTATC showed

promise as a vehicle to address this need. But the Committee expressed concern

about the Center regarding, “[the] extent it will function as an element of the

9/11 Commission Report, footnote 88, p. 505.

Ibid.

See Myron Levin and Josh Meyer, “Officials Fault Past Efforts on Terrorist Assets,” Los

Angeles Times, Oct. 16, 2001.

Ibid.

Green Quest was led by the following Treasury Department agencies: U.S. Customs

Service Department of the Treasury agencies) the Internal Revenue Service, the Financial

Crimes Enforcement Network (FINCEN), the Office of Foreign Assets Control, and the

Secret Service. (Since then, the newly created Department of Homeland Security has

absorbed some of those agencies). FBI and Department of Justice representatives also

participated in Green Quest.

See U.S. Customs press release October 25, 2001, announcing Operation Green Quest.

See prepared comments of Treasury Undersecretary James Garule, October 25, 2001,

announcing the Green Quest initiative.

CRS-11

Intelligence Community, has been coordinated adequately with the Director of

Central Intelligence nor reviewed by this Committee.”84 The Committee directed the

DCI and the Treasury Secretary to prepare jointly a report “assessing the feasibility

and advisability of establishing an element of the federal government to provide for

effective and efficient analysis and dissemination of foreign intelligence related to

the financial capabilities and resources of international terrorist organizations. The

report should include an assessment of the FTATC as a vehicle for addressing such

a need and, if appropriate, a plan for its continued development.”85

The following year, the Senate intelligence committee complained that the

Executive Branch had failed to provide the report to the Committee,86 noting that

Congress had by statute as part of the USA PATRIOT Act again requested that the

DCI and Treasury Secretary provide a report on FTATC.87

The congressional intelligence committees in the FY2003 intelligence bill

established the FTATC under the direction of the DCI, and placed the Center within

the CIA.88

By the time the FY2003 intelligence authorization bill had been signed into law

in November 2002, the Bush Administration already had moved FTATC from the

Treasury Department’s OFAC to CIA, housing it in the DCI’s counterterrorism

center (CTC), but keeping it independent of CTC. FTATC also was renamed the

Foreign Terrorist Asset Tracking Group (FTATG) by the PCC. Its first two directors

were ICE detailees, with the position now vacant. Since the Center was moved from

under the control of the Treasury Department’s OFAC, Treasury has not detailed

analysts to FTATG. FINCEN also does not currently detail analysts to FTATG.

Although FTATG historically developed its own targets, its five analysts now serve

as targeting research arm of the PCC, assessing targets provided by the PCC.

There is a growing debate within law enforcement circles over how best to

curtail terrorist financing. On one side are those who advocate that U.S. agencies

freeze more assets. On the other are those who assert that it is more important to

follow the money trail. Among those in the latter camp are the members of the 9/11

Commission, who argue that the information about terrorist money helps authorities

See Senate Report 107-63, p. 10.

Ibid, pp. 10-11.

See Senate Report 107-49, p. 18.

See P.L. 107-56, Section 906.

See P.L. 107-306, Section 341. The act also requires that the Treasury Secretary submit

a semiannual report describing operations against terrorist financial networks, noting the

total number of asset seizures and designations against individuals and organizations found

to have financially supported terrorism; the total number of applications for asset seizure

and designations of individuals and groups suspected of financially supporting terrorist

activities, that were granted, modified or denied; the total number of physical searches of

those involved in terrorist financing; and whether financial intelligence information seized

in these cases has been shared within the Executive Branch.

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to understand the terrorist networks, search them out, and disrupt their operations.89

“...[T]rying to starve the terrorists of money is like trying to catch one kind of fish by

draining the ocean,” the Commission asserted in its recent report.90

But some U.S. officials, while not disagreeing with the Commission, contend

that the U.S. has to adopt both approaches, and that with regard to freezing assets,

has to become even more aggressive since attacking financial sources affects the

long-term ability of Al Qaeda to mount terrorist attacks.91

In the meantime, the PCC is reviewing the FTATG’s mission and is expected

to issue new guidelines governing the Group’s operations.

Whether its mission is to help freeze assets of those individuals or organizations

funding terrorism, or to “follow the money” in hopes of learning more about terrorist

activities, with five analysts FTATG appears to have limited resources to do either.

One could question the commitment to FTATG and its mission given that FTATG

has operated without a director for five months, and no longer has OFAC or FINCEN

analysts within its ranks.

A further question is whether the FTATG is focusing enough attention on the

contention that there is trade in diamonds in West Africa by Al Qaeda and other

terrorist groups (i.e., that they are using diamonds to fund terrorist activities).92 Some

argue that the Intelligence Community (IC) has dismissed the reporting on terrorist

ties to diamond trading in that area. They assert that the IC is failing to recognize the

national security threat posed by armed groups, operating beyond state control, that

are now the de facto rulers of growing swaths of sub-Saharan Africa, Asia and Latin

America. The IC, they assert, also is failing to focus adequate resources on the nowidentifiable presence of al Qaeda and other terrorist groups such as Hezbollah in

places such as West Africa, where they finance their activities. The terrorist groups

See the 9/11 Commission Report, National Commission on Terrorist Attacks Upon the

United States, July 22, 2004, p. 382.

Ibid.

Sullivan, Aug. 2, 2004.

See Douglas Farah, “Al Qaeda’s Growing Sanctuary,” Washington Post, July 14, 2004,

p. A19. With regard to the West Africa diamond trade, the 9/11 Commission took the

opposite view, suggesting that it had seen no persuasive evident that al Qaeda funded itself

by trading in African conflict diamonds. See p. 171 of the Commission’s report. See also

Overview of the Enemy: Staff Statement No. 15, of the National Commission on Terrorist

Attacks Upon the United States (Keane Commission), pp. 9-10. This statement suggests that

although “...al Qaeda frequently moved its money by hawala, an informal and ancient trustbased system for moving funds...no persuasive evidence exists that al Qaeda relied on the

drug trade as important source or revenue, or funded itself through trafficking in diamonds

from African states engaged in civil wars.” Douglas Farah questions the Commission’s

conclusion, citing what he characterizes as an extensive record reflecting the contrary. See

Douglas Farah website at [http://www.DouglasFarah.com/blog/].

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are betting that Western intelligence services do not have the capacity, resources or

interest to track their activities there.93

The Interagency Process94

The National Security Council (NSC) is responsible for the overall coordination

of the interagency framework for combating terrorism including the financing of

terrorist operations. Given divergent concerns among various departments and

agencies only the NSC may be in a position to choose among alternative approaches

and make tactical decisions when disagreements emerge. The NSC staff inevitably

has a significant influence on the decisionmaking process although great reliance is

placed on interagency Policy Coordination Committees (PCCs) some of which are

headed by departmental officials and some by the National Security Adviser.

A PCC specifically on terrorist financing was not included in the list of PCCs

published by the White House in February 2001, but media accounts indicate that a

PCC for this issue was established in the aftermath of the events of September 11.95

The General Counsel of the Treasury Department has been designated the leader of

the interdepartmental group. Treasury undoubtedly has a central role in halting

terrorist financing, but some observers question whether a Treasury General Counsel

is the best choice for the coordinating diplomatic and intelligence efforts in this area.

Accordingly, it has been argued that a new position on the NSC staff should be

established — a special assistant to the President for combating terrorist financing.

The individual, who would not have departmental responsibilities, would chair

meetings of the PCC on terrorist financing and would be assisted by a team of

directors on the NSC staff in coordinating and directing all Federal efforts on the

issue. This team would “focus its attention on evaluating the all-source intelligence

available on terrorist organizations, conducting link analysis on the organizations

with information and technical intelligence available from other departments and

agencies, and developing tactics and strategies to disrupt and dismantle terrorist

financial networks.”96

There are, however, arguments that can be made against establishing new

positions on the NSC staff. Size of the White House staff and expanding the span

of control of the National Security Adviser are one set of issues. Another question

is the desirability of having tactics and strategies developed by the NSC staff rather

than operating departments. For instance, the Tower Board established in the wake

of the Iran-Contra affair in the Reagan Administration, recommended that “As a

general matter, the NSC Staff should not engage in the implementation of policy or

Ibid.

This section was prepared by Richard Best/FDT.

Lee S. Wolosky, “Breakdown: the Challenge to Eliminating Al Qaeda’s Financial

Networks,” in Beyond the Campaign: the Future of Countering Terrorism, ed. by Bryan Lee

Cummings, (New York: Council for Emerging National Security Affairs, 2004), p. 150.

Council on Foreign Relations, Report of an Independent Task Force, Terrorist Financing,

New York, 2002, pp. 32-33.

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the conduct of operations. This compromises their oversight role and usurps the

responsibilities of the departments and agencies.”97 Arguably, the best approach

would have the PCC develop strategies against terrorist financing, resolve interdepartmental disagreements on tactics, and bring differences to the attention of the

NSC for resolution. It may be, however, that the perspectives of agencies and

departments are so different that there need to be arrangements more permanent than

regular PCC meetings to maintain requisite coordination. Others would argue that

while a separate staff within the larger NSC staff may not be necessary, it would be

better to have the PCC headed by the National Security Adviser or her/his designee

rather than an official with other important responsibilities and loyalties.

Financial Regulators and Institutions98

The nation’s financial institutions, their regulators, and certain offices within the

U.S. Department of the Treasury share primary responsibility for providing

information on financial transactions for the purpose of detecting, disrupting, and

preventing the use of the nation’s financial system by terrorists and terrorist

organizations. Historically, such information has aided law enforcement authorities

in dealing with money laundering to hide the gain from crimes, and is now being

used to track possible terrorist financing.

The Offices within the Department of the Treasury. Offices within

Treasury include the Office of Terrorism and Financial Intelligence (TFI, formerly

the Executive Office for Terrorist Financing and Financial Crimes), established in

April 2004. TFI is charged with developing and implementing strategies to counter

terrorist financing and money laundering both domestically and internationally. It

participates in developing regulations in support of both the BSA and USA

PATRIOT Acts. It also represents the United States at international bodies that focus

on curtailing terrorist financing and financial crime, including the Financial Action

Task Force (FATF) whose “Forty Recommendations” and “Eight Special

Recommendations” are the basic framework for anti-money laundering and terrorist

financing efforts internationally. Two offices with anti-terrorist financing

responsibilities within TFI are the Office of Foreign Assets Control (OFAC) and the

Financial Crimes Enforcement Network (FINCEN).

FINCEN originated in the Treasury in 1990 as the data-collection and analysis

bureau for the BSA. It provides a government-wide, multi-source intelligence

network under which it collects SARs and CTRs from reporting financial institutions

(with assistance from the IRS), tabulates the data in a large database that has been

maintained since 1996, and examines them to detect trends and patterns that might

suggest illegal activity. FINCEN then reports what it finds back to the financial

community as a whole to aid further detection of suspicious activities. There have

U.S., President’s Special Review Board, Report, February 26, 1987, p. V-4. The Board

consisted of former Senators John Tower and Edmund Muskie, and Brent Scowcroft, a

previous (and future) National Security Adviser.

This section was prepared by Walter Eubanks and William D. Jackson/G&F.

CRS-15

been seven SAR Activity Reviews issued since October 2000, the most recent dated

August 2004. Such reports are a part of FINCEN’s outreach and education efforts

on behalf of financial regulators and law enforcement agencies. While FINCEN has

no criminal investigative or arrest authority, it uses its data analysis to support

investigations and prosecutions of financial crimes, and refers possible cases to law

enforcement authorities when warranted. It also submits requests for information to

financial institutions from law enforcement agencies in the conduct of criminal

investigations. FINCEN reports 285 such requests to more than 33,000 institutions

between mid-February 2003 and July 2004.

According to Treasury testimony, a terror hotline established by FINCEN after

9/11 resulted in 853 tips passed on to law enforcement through April 2004. In the

same time period, financial institutions filed 4,294 SARs involving possible terrorist

financing, of which 1,866 had possible terrorist financing as their primary impetus.99

The Inspector General (IG) of the Department of the Treasury has conducted a

series of audits of the FINCEN SAR database and raised some potentially troubling

issues. The IG found that the database lacks critical information and is filled with

inaccuracies. An analysis of a sample of 2,400 SARs, for example, determined that

most of the reports did not detail the specific actions that led to suspicion, did not

give a location for possible illegal transactions, or omitted the narrative description

required in the reports entirely. As recently as June 2004, the IG testified that

subsequent audits revealed little or no improvement.100

Subsequently, FINCEN announced it would collect information from the

financial regulators and others responsible for BSA compliance on their examination

procedures, cycles and resources; on any significant deficiencies in reporting by

financial institutions; and other data including both formal and informal actions taken

by regulators to correct reporting failures by financial institutions. FINCEN has also

created an internal Office of Compliance to support the work of the financial

regulators.

The Office of Foreign Assets Control is designed primarily to administer and

enforce economic sanctions against targeted foreign countries, groups, and

individuals, including suspected terrorists, terrorist organizations, and narcotics

traffickers. OFAC acts under general presidential wartime and national emergency

powers as well as legislation, to prohibit financial transactions and freeze assets

subject to U.S. jurisdiction. OFAC also has responsibility for listing those persons,

groups, or countries whose transactions are to be blocked or assets frozen by financial

institutions. OFAC has close working relations with the financial regulatory

Testimony of Daniel L. Glaser, Director, Executive Office for Terrorist Financing and

Financial Crimes, U.S. Department of the Treasury, before the House Government Reform

Committee, Subcommittee on Criminal Justice, Drug Policy and Human Resources, May

11, 2004. [http://www.treas.gov/press/releases/js1539.htm]

100

Testimony of Dennis S. Schindel, Acting Inspector General, U.S. Department of the

Treasury, before the House Committee on Financial Services, Subcommittee on Oversight

and Investigations, June 16, 2004.

CRS-16

community and maintains telephone “hotlines” through which it receives real-time

guidance on in-progress financial transactions. OFAC also works closely with the

Federal Bureau of Investigation, and with the Department of Commerce’s Office of

Export Enforcement, and cooperates with the United Nations in imposing UN

sanctions on foreign governments.

According to Treasury Secretary John Snow, OFAC has frozen assets of 29

entities linked to the Al Qaeda network since 9/11, and has helped identify between

two and three hundred additional entities and individuals as possible terrorists. The

work of OFAC is credited with freezing $139 million in terrorist assets worldwide

since 9/11. The most recent IG audit was completed in April 2002 and concluded

that OFAC is limited because of its reliance on regulators’ examinations of the

financial institutions that supply data under the BSA. The IG recommended that

Treasury inform Congress that OFAC lacked sufficient authority to ensure financial

institutions comply with foreign sanctions after finding instances in which

institutions either did not have databases on foreign sanctions, or did not update

them. Further, some institutions did not routinely follow guidance in processing

rejected financial institutions and did not report blocked assets.101

The Financial Institution Regulators.

The Treasury delegates

responsibility for examining financial institutions for compliance with the BSA to the

financial regulators of those institutions. These regulators are already responsible for

the safety and soundness examinations of the institutions they supervise, and

generally conduct their BSA examinations concurrently with those routine

inspections. When there is cause do so, however, any of the regulators may carry out

a special BSA examination.

The primary regulators for depository financial institutions are all participants

in the Federal Financial Institutions Examination Council (FFIEC). FFIEC

prescribes uniform principles, standards, and reporting forms for all banking and

other depository institution examinations. It also works to promote uniformity in all

depository supervision. As a result, all the depository financial institutions follow

similar procedures in enforcing the BSA. FFIEC is currently forming an additional

Working Group to enhance coordination of regulatory agencies, law enforcement,

and private financial institutions to strengthen current arrangements. All, including

the non-depository regulators, are also part of the National Anti-Money Laundering

Group (NAMLG), first formed in 1997 by the Office of the Comptroller of the

Currency to set up guidelines for depositories to follow with respect to training of

employees to detect illegal transactions, a system of internal controls to assure

compliance, independent testing of compliance, and daily coordination and

monitoring of compliance. The continuing purpose of the group, which also includes

the Department of Justice and banking industry trade groups, is to identify

institutions at high risk of being used for money laundering or terrorist financing.102

101

102

Schindel, page 4.

Financial institutions that are not federally regulated, such as check cashers, money

transmitters, issuers of travelers’ checks, casinos, and other gaming institutions, are

overseen by the Small Business and Self-Employed Taxpayers Division of the Internal

(continued...)

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The Office of the Comptroller of the Currency is the regulator for just over

2,000 nationally chartered banks and the U.S. branches and offices of foreign banks.

The OCC conducts on-site examinations of each national bank at least three times

within every two-year period. Along with loan and investment portfolios, they

review internal controls, internal and external audits, and BSA compliance.

According to the OCC, they conducted about 1,340 BSA examinations of 1,100

institutions in 2003, and nearly 5,000 BSA examinations of 5,300 institutions since

1998.103

When the OCC finds violations or deficiencies in filing SARs and CTRs, it may

take either formal or informal action. Not generally made public, informal actions

result when examiners identify problems that are of limited scope and size, and when

they consider managements as committed to and capable of correcting the problems.

Informal actions include commitment letters signed by institution management, or

memoranda of understanding, and matters requiring board attention in the

examination reports. Formal enforcement actions are made public because they are

more severe. Such actions include cease and desist orders and formal agreements

requiring the institution to take certain actions to correct deficiencies. Formal actions

may also be taken against officers, directors and other individuals, including removal

and prohibition from participation in the banking industry, and civil fines. From

1998 through 2003, the OCC issued a total of 78 formal enforcement actions based,

at least in part, on BSA problems. The number of informal enforcement actions has

been characterized as “countless.”104 The most recent case of severe BSA problems

involved Riggs Bank. In this case, according to the OCC, deficiencies had been

noted for many years before a $25 million penalty was imposed in May 2004.

The Federal Reserve System (Fed) supervises about 950 state-chartered

commercial banks that are members of the system and more than 5,000 bank holding

companies and financial holding companies. Along with the OCC, it also supervises

some international activities of national banks. The Fed uses both on-site

examination and off-site surveillance and monitoring in its supervision process.

Each institution is to be examined on-site every 12 to 18 months. In-house

examiners are to examine larger institutions continuously. The Board of Governors

of the Fed coordinates the examination and compliance activities of the 12 regional

banks. In early 2004, the Fed created a new section within the Board’s Division of

Banking Supervision and Regulation — the Anti-Money Laundering Policy and

Compliance Section — to improve control.

According to the Fed, from 2001 through 2003, they took 25 formal

enforcement actions against financial institutions under the BSA. In every case, the

examination process identified violations that were severe enough to require

102

(...continued)

Revenue Service.

103

Testimony of Deputy Chief Counsel Daniel P. Stipano, Office of the Comptroller of the

Currency, Subcommittee on Oversight and Investigations, Committee on Financial Services

of the U.S. House of Representatives, June 2, 2004.

[http://financialservices.house.gov/media/pdf/060204ds.pdf]

104

Stipano, page 9.

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action.105 Recent public action involved a $100 million fine against UBS for

transmitting U.S. currency to trade-sanctioned nations through the Fed of New

York’s own systems.106 It also sanctioned the holding company for Riggs Bank by

mandating greater compliance; another financial holding company subsequently

bought the operations of Riggs and is retiring the bank’s name.107

The Federal Deposit Insurance Corporation (FDIC) regulates about 4,800

state-chartered commercial banks and 500 state-chartered savings associations that

are not members of the Fed. They also insure deposits of the remaining 4,000

depository institutions without regulating them. The FDIC examines its supervised

institutions about once every 18 months. The FDIC also serves as the point of

contact for FINCEN to communicate identities of suspected terrorists to banking

regulators and institutions.

Since 2000, the FDIC has conducted almost 1,100 BSA examinations and from

2001, has issued formal enforcement actions (cease and desist orders) against 25

institutions and bans or civil fines against three individuals for violations. The FDIC

also has taken 53 informal actions since 2001. The IG of the FDIC has audited the

FDIC twice, covering the period 1997 through September 2003. to assess the FDIC’s

BSA examinations, and its implementation of the USA PATRIOT Act. The IG

generally concluded that FDIC examiners have insufficient guidance for BSA

examinations, which were inadequate. During the audit period, 2,672 institutions

were cited for BSA failures to report, and 458 had repeat violations. Further many

citations were for serious violations such as a failure to comply with record-keeping

and reporting requirements for CTRs.108 While some transactions of over $10,000

are exempt — such as regular and routine business, including meeting payroll or

depositing receipts, by known customers — the citations involved unambiguous

requirements to report. In 30% of the cases, the FDIC was found to have waited until

the next examination to follow up on BSA violations and taken more than a year in

71% of the cases to act, with many violations taking five years before the FDIC

acted.

The Office of Thrift Supervision (OTS) supervises about 950 federally

chartered savings associations, savings banks, and their holding companies (thrifts).

Like the OCC, the OTS is located within, but is independent of the Treasury. The

OTS is to conduct on-site examinations of each institution at least three times every

105

Testimony of Susan S. Bies, Member, Board of Governors of the Federal Reserve

System, Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, June

3, 2004. [http://banking.senate.gov/_files/bies.pdf]

106

R. Christian Bruce, “Fed Fines Switzerland’s UBS for Illegal Dollar Transactions,”

BNA’s Banking Report, May 17, 2004.

107

Karen L. Warner, “Riggs Bank Disregarded AML Obligations; Regulators Lax on

Deficiencies, Report Says,” BNA’s Banking Report, July 19, 2004.

108

Testimony of Davi M. D’Agostino, Director of Financial Markets and Community

Investment of the United States General Accounting Office, before the Committee on

Banking, Housing, and Urban Affairs, U.S. Senate, June 3, 2004.

[http://banking.senate.gov/_files/dagostino.pdf]

CRS-19

two years. Data on actions taken are from the Treasury IG’s audit of OTS actions

covering a period from January 2000 through October 2002. During that time,

examiners found substantive problems at 180 thrifts, and took written actions against

11. According to the IG, in five cases the action was not timely, was ineffective, and

did not even address all violations found. The IG also took exception to the extent

to which the OTS relied on moral suasion instead of money penalties to gain

compliance: in a sample of 68 violations, for example, the OTS took such actions in

47 cases but failed to make any positive difference in compliance in 21 of those

cases.

The National Credit Union Administration (NCUA) currently regulates 9,369

federally chartered credit unions and another 3,593 federally insured, state-chartered

credit unions. Most credit unions are small and considered to have limited exposure

to money laundering activities. In at least one case, however, penalties were assessed

against a credit union for CTR deficiencies. In 2000, the Polish and Slavic Federal

Credit Union in New York City was assessed $185,000 for willful failure to file

CTRs and improperly granting exemptions from such filings for some customers.109

In 2003, the NCUA examined 4,400 credit unions and participated with state

regulators in another 600 examinations of state-chartered institutions. They found

334 BSA violations in 261 credit unions. Most deficiencies were inadequate written

policies, inadequate customer identification, or inadequate currency reporting

procedures. NCUA reported that 99% of violations were corrected during or soon

following the on-site examinations. NCUA actions are generally informal but may

involve memoranda of understanding.110

The Securities and Exchange Commission (SEC) regulates to protect

investors against fraud and deceptive practices in securities markets. It also has

authority to examine institutions it supervises for BSA compliance. This covers

securities markets and exchanges, securities issuers, investment advisers, investment

companies, and industry professionals such as broker-dealers. The SEC supervises

more than 8,000 registered broker-dealers with approximately 92,000 branch offices

and 67,500 registered representatives. The depth and breadth of the securities

markets are such that they could arguably prove to be an efficient mechanism for

money laundering.

The SEC’s approach to BSA monitoring and enforcement is a joint product of

the NAMLG and modified from that used by depository institution regulators. Much

of the securities industry is overseen by self-regulating organizations (SROs), such

as the New York Stock Exchange. Thus, most examinations are carried out jointly

by the SEC’s Office of Compliance Inspections and Examinations (OCIE) and the

relevant SRO. The SEC does not make public its findings of BSA violations.

Agency efforts are focused on educating the securities industry on its compliance

responsibilities. This may be in part because compliance rules for the industry are

109

110

Ibid.

Testimony of JoAnn M. Johnson, Chairman of the National Credit Union Administration,

before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, June 3, 2004.

[http://banking.senate.gov/_files/johnson.pdf]

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relatively recent. For example, FINCEN and the SEC released specific regulations

for customer identification programs for mutual funds in June 2003.

The Commodity Futures Trading Commission (CFTC) protects market users

and the public from fraud and abusive practices in markets for commodity and

financial futures and options. The CFTC delegates BSA examinations to its

designated self-regulatory organizations (DSROs), of which the most prominent are

the National Futures Association (NFA), the Chicago Board of Trade, and New York

Mercantile Exchange. NFA membership covers more than 4,000 firms and 50,000

individuals. The regulatory process generally starts at registration, when the SRO

screens firms and individuals seeking to conduct futures business. The DSROs

monitor business practices and, when appropriate, take formal disciplinary actions

that could prohibit firms from conducting any further business. Covered businesses

include all registered futures commission merchants, “introducing brokers,”

commodity pool operators, and commodity tracing advisers, who are required to

report suspicious activity and verify the identity of customers, as well as monitor

certain types of accounts involving foreigners.

According to the CFTC, in 2003, the NFA conducted 365 examinations of the

180 futures commission merchants and 605 introducing brokers. Those examinations

resulted in 238 audit reports of which 54 reflected anti-money laundering deficiencies

at nine merchants and 45 brokers. Primary deficiencies cited were failures to comply

with annual audit and training requirements.111

Internal Revenue Service112

In order to help finance its operations and a multitude of defense and nondefense programs, the federal government levies income taxes, social insurance

taxes, excise taxes, estate and gift taxes, customs duties, and miscellaneous taxes and

fees. The federal agency responsible for administering all these taxes and most of

these fees, except customs duties, is the Internal Revenue Service (IRS). In

discharging that responsibility, the IRS receives and processes tax returns and related

documents, processes payments and refunds, enforces compliance with tax laws and

regulations, collects delinquent taxes, and provides a variety of services to taxpayers

mainly intended to answer questions, help them understand their rights and

responsibilities under the tax code, and resolve problems in ways that seek to avoid

protracted and costly litigation.

In light of this mission, some may find it surprising that the IRS also is involved

in current efforts by the federal government to detect, disrupt, and prevent the flow

of funds to international terrorist groups, especially those expressing antipathy

toward the United States. This involvement is rooted in the agency’s responsibility

for tax law enforcement and might best be described as providing critical analytical

and resource support in investigations (many of which involve other federal agencies)

111

CFTC communication with CRS August 2004.

112

This section was prepared by Gary Guenther/G&F

CRS-21

focused on money laundering and the diversion of funds from tax-exempt charities.

Such a role takes advantage of the deep reservoir of expertise and experience the

agency has amassed as the primary enforcer of federal tax laws and the primary

investigator of criminal violations of those laws and laws dealing with the detection

and prevention of money laundering. For the IRS, money laundering has long

represented a possible avenue for tax evasion.

IRS’s contribution to the government’s campaign to detect and eliminate the

sources of international terrorist financing draws mostly on resources tied to tax law

enforcement. By all available accounts, three operating divisions are involved to

varying degrees in this campaign: Criminal Investigation (CI), the Small Business

and Self-Employed Taxpayers Division (SBSE), and the Tax-Exempt and

Government Entities Division (TEGE).

The lead division in resource commitment seems to be CI, whose main function

is to investigate possible criminal violations of the tax code. In recent decades,

Congress and the Treasury Department have taken steps to expand the CI’s scope of

authority to include investigations of possible violations of anti-money laundering

and financial reporting statutes. As a result, the division has acquired the capability

to counter the attempts of individuals and organizations (including charities) to evade

taxes on legal income or to launder money obtained through illicit activities with the

use of nominees, cash, multiple bank accounts, layered financial transactions

involving multiple entities, and the movement of funds offshore. Recent

developments suggest that efforts are underway to adapt this capability to the special

requirements of tracing and dismantling the sources of terrorist financing.

Among other responsibilities, the SBSE and TEGE Divisions enforce

compliance with certain sections of the tax code; the SBSE also enforces compliance

by certain non-banking financial institutions with the reporting requirements of the

Bank Secrecy Act of 1970 (BSA). Some employees from both divisions are involved

in various ways with terrorist financing investigations. SBSE agents conduct

examinations of money service businesses to ensure that they comply with reporting

requirements under the Bank Secrecy Act of 1970, and they refer possible violations

to CI and Treasury’s Financial Crimes Enforcement Network (FINCEN) for

investigation. Some of the cases they refer may be related to terrorist financing.

Additionally, agents from the Exempt Organizations branch (EO) of the TEGE

Division assist other government agencies in their investigations of charities that may

have diverted funds to support international terrorist groups. In FY2004, the EO is

undertaking an educational program to help charities put in place effective internal

controls to prevent the unintended diversion of assets to terrorist groups. And in

FY2005, the EO hopes to receive funding to establish the Exempt Organization

Fraud and Financial Transactions Unit, whose main tasks would include combating

the diversion of charitable assets to fund terrorist activities and increasing the data

on the flow of funds from donors to charitable organizations available to the CI and

other law enforcement agencies.113

113

See IRS Strategic Plan 2005 [http://www.irs.gov/pub/irs-utl/strategic_plan_05-09.pdf]

2009,

available

CRS-22

Undergirding the IRS’s contribution are the skills, education, and technology

possessed by CI special agents and certain financial information the agency collects

under a variety of tax and anti-money laundering statutes.

CI special agents must have academic backgrounds in accounting and business

finance before they undergo rigorous training in criminal investigation techniques,

forensic accounting, and financial investigations. Some also receive specialized

training in methods of combating terrorist financing from prosecutors with the

Department of Justice’s Counterterrorism Section. In FY2004, the IRS employs

2,750 special agents, of whom about 100 serve as computer investigative specialists

trained to use special equipment and techniques to preserve digital evidence and to

recover financial data. Recent congressional testimony indicates that a total of 140

special agents and 20 support personnel currently are assigned to work on counterterrorism investigations.114 Twelve of these agents (along with one agent from the

TEGE Division) are involved in a pilot anti-terrorism initiative taking place at the

Garden City Counterterrorism Lead Development Center in Garden City, NY. The

initiative, which is directed by the CI, seeks to supply research and project support

to anti-terrorist financing investigations being conducted by the Joint Terrorism Task

Forces (JTTF) led by the FBI or by CI special agents. Special agents have focused

their investigations on the members of known terrorist groups who might have

violated tax, money-laundering, and currency laws and individuals connected to taxexempt organizations who might be raising funds to support terrorist groups.

Available information suggests that they excel at unraveling complex financial

transactions by analyzing key pieces of detailed financial information and assembling

them in the manner of a jigsaw puzzle to form a coherent picture emphasizing

expenditures, life-style changes, and acquisition of assets.

Owing to its enforcement authority, the IRS has direct access to financial

information that can be especially useful in detecting and tracking tax evasion and

various financial crimes, including the movement of illegally obtained money

through domestic financial institutions to international terrorist groups. Under

Section 6050I of the Internal Revenue Code, firms not covered by the BSA must

report to the IRS customer purchases of more than $10,000 paid in cash.115 Under

Section 5314 of the BSA, U.S. residents and citizens and any firms with domestic

business operations having transactions with foreign financial institutions must file

a form known as the Report of Foreign Bank and Financial Accounts (FBAR) with

the IRS giving important details about those transactions. And since December 1992,

the IRS has had the authority to monitor and enforce compliance with the BSA

reporting requirements by non-banking and financial institutions not overseen by

other federal agencies; these institutions include money service businesses, casinos,

114

See written statement of Nancy Jardini, Chief of the CID, submitted to the Subcommittee

on Oversight and Investigations of the House Committee on Financial Services for a hearing

h e l d

o n

J u n e

1 6 ,

2 0 0 4 .

A v a i l a b l e

a t

[http://www.financialservices.house.gov/medial/pdf/061404nj.pdf], visited on July 22, 2004.

115

The BSA requires banks and non-bank financial institutions such as casinos and checkcashing operations to file reports on currency transactions exceeding $10,000. Such

information is intended to help the IRS enforce compliance with the tax code and make it

possible to detect and prevent attempts to launder money obtained through illegal activities.

CRS-23

and non-federally insured credit unions. The IRS is also responsible for processing

and storing electronically BSA documents collected by all federal agencies (including

FBARs, currency transactions reports, and suspicious activity reports) in a computer

data base known as the Currency Banking Retrieval System. Although all these

documents are made available to other law enforcement and regulatory agencies, the

IRS appears to be the largest user. According to recent congressional testimony by

Nancy Jardini, Chief of the CID, data culled from BSA documents have played

important roles in 26% of the 150 investigations into terrorist financing being

conducted by special agents as of June 2004.116

The IRS shares its investigative resources with a variety of federal agencies as

part of the effort to detect and thwart the flow of funds to international terrorist

groups. It is in the early stages of forging a working relationship with the recently

formed Office of Terrorism and Financial Intelligence in the Treasury Department,

and it has established a cooperative relationship with Treasury’s Office of Foreign

Assets Control, FINCEN, and Working Group on Terrorist Financing and Charities.

In addition, the IRS is taking part in numerous inter-agency initiatives whose aims

include tracking and disrupting the flow of funds to international terrorist groups.

Among the noteworthy initiatives are the Organized Crime Drug Enforcement Task

Force Program, the Defense Intelligence Agency Center, the Anti-Terrorism

Advisory Council created by the Attorney General, the FBI’s JTTF and Terrorist

Financing Operations Section, the High Intensity Money Laundering and Related

Financial Crime Area Task Forces, and the Terrorist Finance Working Group led by

the State Department. Besides the FBI, the federal law enforcement agencies

involved in these initiatives include the Bureau of Alcohol, Tobacco, Firearms and

Explosives; the Drug Enforcement Agency; and Immigration and Customs

Enforcement.

There is no evidence that the IRS has developed a formal, systematic, publicly

accessible method for evaluating the cost-effectiveness of its contributions to the

campaign against terrorist financing. The lack of such a method makes it difficult to

address some important policy issues. It is not clear, for example, to what extent the

agency’s input complements or duplicates work done by other agencies, yields

financial information that results in the elimination of specific sources of terrorist

financing, or can be regarded as a worthwhile investment of public resources.

Nonetheless, the IRS does make an effort to keep track of the number of anti-terrorist

financing investigations its agents are involved in and their outcomes. According to

recent congressional testimony by Dwight Sparlin, the Director of Operations, Policy,

and Support for CI, between October 1, 2000, and early May 2004, the CI conducted

372 such investigations “in partnership with other law enforcement agencies.”117 Of

these, over 100 led to criminal indictments; another 120 were referred to the Justice

116

See written statement of Nancy Jardini submitted to the Senate Banking, Housing, and

Urban Affairs Committee for a hearing held on April 29, 2004. Available at

[http://www.banking.senate.gov/_files/jardini.pdf], visited on July 22, 2004.

117

See written statement of Dwight Sparlin submitted to the Subcommittee on Criminal

Justice, Drug Policy, and Human Resources of the House Government Reform Committee

for a hearing held on May 11, 2004. Available at [http://www.reform.house.gov/CJDPHR],

visited on July 22, 2004.

CRS-24

Department for prosecution; and the remaining 150 or so were still being worked on

by CI special agents.

In recent congressional testimony, some senior IRS officials have stated that

combating terrorist financing is one of the agency’s highest priorities. Yet the current

allocation of funds among major IRS operations does not appear to reflect such a

commitment. In FY2004, the IRS is receiving $10.184 billion in appropriated funds.

Of this total, $4.171 billion (or 41%) is set aside for tax law enforcement, the budget

account from which the IRS funds most of its contribution to the federal

government’s campaign to seek out and destroy terrorist financing networks. While

there is no specific item in the IRS budget for resources dedicated to countering

terrorist financing, the agency estimates that its spending for this purpose in FY2004

falls somewhere between $20 and $25 million.118 The upper end of the range

amounts to 0.6% of its budget for tax law enforcement and slightly more than 0.2%

of its total budget.

Departments of Homeland Security and Justice

Bureau of Customs and Border Protection (CBP)119

The Bureau of Customs and Border Protection (CBP) is the principal agency

responsible for the security of the nation’s borders. CBP was established March 1,

2003 with the creation of Department of Homeland Security (DHS). CBP is

primarily composed of the inspection staffs of the legacy U.S. Customs Service,

Immigration and Naturalization Service (INS), and the Animal and Plant Health

Inspection Service (APHIS). CBP’s primary mission is interdicting illicit or illegal

cross-border traffic while efficiently processing the flow of legitimate or low-risk

traffic across the border. CBP enforces more than 400 laws and regulations on behalf

of many federal agencies, including those that relate to terrorist financing.

Role in Terrorist Financing. CBP’s role in the national effort to combat

terrorist financing is confined to its inspection and interdiction activities along the

border at or between ports of entry. In this role CBP intercepts illicit material and

contraband illegally entering or exiting the country. CBP interdicts inbound illicit

currency during the course of its inspection operations at and between ports of entry.

To prevent illicit financial proceeds from reaching terrorist or criminal groups outside

the U.S., CBP has developed two outbound programs that specifically relate to

terrorists and terrorist financing: the Currency Program, and the EXODUS program,

run by CBP’s Outbound Interdiction Security staff.

The mission of CBP’s Outbound Interdiction and Security activities is to enforce

U.S. export laws and regulations. This mission includes (among other things):

interdicting illegal exports of military and dual-use commodities; enforcing sanctions

118

The estimates were obtained through an e-mail exchange with Floyd Williams of the IRS

Congressional Liaison Office on July 22, 2004.

119

This section was prepared by Jennifer Lake/DSP

CRS-25

and embargoes against specially designated terrorist groups, rogue nations,

organizations and individuals; and interdicting the illicit proceeds from narcotics and

other criminal activities in the form of unreported and smuggled currency. Outbound

Interdiction and Security is also responsible for enforcing the International Traffic in

Arms Regulations (ITAR) for the Department of State, the Export Administration

Regulations (EAR) for the Department of Commerce, and sanctions and embargoes

for the Department of the Treasury’s Office of Foreign Assets Control. As a part

of the Currency Program, dedicated outbound currency teams work to interdict the

illicit flow of money to terrorist, criminal, and narcotics trafficking organizations.

Under the EXODUS program, CBP enforces the ITAR, EAR, and OFAC regulations.

Capabilities and Resources. CBP enforces more than 400 laws at the

border. Those associated with criminal violations include violations of 18 U.S.C.

1956 and 1957 (money laundering); 18 U.S.C. 541 (entry of goods falsely classified);

18 U.S.C. 542 (entry of goods by means of false statements); and 18 U.S.C. 545

(smuggling goods into the U.S.).

Data regarding budget and resources devoted to terrorist financing specifically

are not readily available. However, general data regarding CBP operations are

available. CBP has more than 38,000 employees. Of these, nearly 17,800 are front

line inspectors. CBP’s budget for FY2004 is $5.9 billion and $6.2 billion has been

requested for FY2005.

CBP has developed an Outbound Currency Interdiction Training (OCIT)

program to support its currency interdiction mission. This training includes

instruction and practical exercises to provide specialized knowledge in currency

interdiction, and has an anti-terrorism component. In FY2003, OCIT trained 56

inspectors. In FY2003, CBP also conducted land-border outbound training, which

also included currency interdiction training. In addition, CBP has the largest Canine

Enforcement Program in the country with more than 1,200 teams assigned to 79 ports

of entry, and 69 Border Patrol Stations. Some of these canines have been trained to

detect currency, according to CBP.

Measures of Success and Accomplishments. In FY2003 CBP

Interdiction and Security (Outbound) operations made 1,337 seizures of unreported

and bulk smuggling of currency valued at $51.7 million, representing a 3.8%

decrease in the number of seizures, but an increase of 14.4% in the value of seizure

over FY2002. This same unit also made a total of 993 seizures valued at $110.2

million for violations of: the ITAR for the Department of State, the EAR for the

Department of Commerce, and sanctions and embargoes for the Department of the

Treasury’s OFAC. These seizures represent a 12.5% increase in the number of

seizures, and a 62.9% increase in the value of seizures compared to FY2002. CBP’s

Canine Enforcement Program was responsible for seizures of U.S. currency worth

$27.9 million in FY2003. According to recently reported statistics, CBP makes 5

currency seizures valued at more than $226 thousand on an average day.

In terms of relevant performance measures, CBP sets targets based on the value

of outbound currency seizures, and on the effective percentage of outbound

enforcement targeting. In FY2003 CBP’s seizure target was $49 million, and the

actual seizure amount was $51.7 million. Also, in FY2003, CBP’s Outbound

CRS-26

targeting enforcement effectiveness (measured by percent effective) target was 9%,

while actual targeting effectiveness was 5.74%.120

Relationships and Coordination with other Agencies. CBP maintains

relationships and coordinates with many agencies in the performance of its border

security missions. These include other DHS agencies including ICE, Coast Guard,

and the Transportation Security Administration (TSA); as well as those agencies

whose statutes and regulations CBP enforces at the border, for example the

Departments of the Treasury and State. CBP’s National Targeting Center houses

staff from a number of agencies including ICE, Coast Guard; the U.S. Department

of Agriculture; TSA; and the FBI. In addition, CBP’s Office of Intelligence (OINT)

supports CBP front line operations in detecting and interdicting terrorists and

instruments of terror. OINT maintains a variety of important relationships with other

intelligence agencies including ICE; Information Analysis and Infrastructure

Protection (IAIP); the FBI; the Central Intelligence Agency; the joint venture

Terrorist Threat Integration Center (TTIC); and the FBI-led Terrorist Screening

Center (TSC).

Bureau of Immigration and Customs Enforcement (ICE)121

The Bureau of Immigration and Customs Enforcement is the main investigative

branch of the Department of Homeland Security. Established in March, 2003 during

the reorganization that followed the creation of DHS, ICE is composed of the

investigative components of the legacy U.S. Customs Service (Customs), the legacy

U.S. Immigration and Naturalization Service (INS); the Federal Protective Service,

the Federal Air Marshals, and the Air and Marine Interdiction Operations of legacy

Customs. ICE’s work on financial investigations is conducted by the Financial

Investigations Division (FID). FID’s mission is to investigate financial crimes, and

to work closely with the financial community to identify and address vulnerabilities

in the country’s financial infrastructure. FID is organized into two primary sections:

the Financial Investigative Program (FIP); and Cornerstone.

Role in Terrorist Financing. In the aftermath of the September 11, 2001

terrorist attacks, legacy Customs launched a multi-agency task force called

“Operation Green Quest.” Green Quest was the focus of Customs efforts to counter

terrorist financing operations. With the creation of DHS, and the subsequent creation

of ICE and CBP, legacy Customs investigative resources were combined with

investigative assets of the legacy INS. While Operation Green Quest continued past

the date of the creation of DHS, as investigations continued it was discovered that

there was (the potential if not actual) overlap between cases being pursued by ICE

under Green Quest, and cases being pursued by the Federal Bureau of Investigation

under its Terrorist Financing Operation Section (TFOS). In an attempt to avoid

overlap, and to delineate the lines of investigative priority and responsibilities, the

Secretary of Homeland Security and the Attorney General signed a Memorandum of

120

Outbound enforcement targeting effectiveness is the total number of positive

examinations divided by the total number of targeted examinations conducted. For more

information see, DHS, Performance and Accountability Report FY2003, p. 157.

121

This section was prepared by Jennifer Lake/DSP

CRS-27

Agreement in May, 2003. This MOA designated the FBI as the lead investigative

agency with respect to terrorist financing investigations.

Concerned about the potential loss of expertise held by ICE agents, the MOA

also contained provisions to ensure that ICE, while not the lead agency on terrorist

financing investigations, nonetheless was able to play a significant role. The MOA

provided that ICE and the FBI detail appropriate personnel to the other agency.

Recent GAO reports and testimony indicate for example, that an ICE manager serves

as the Deputy Section Chief of TFOS, and that an FBI manager is detailed to ICE’s

FID.122 The MOA further specified that the two agencies develop collaborative

procedures to determine whether ICE investigations or leads are related to terrorism

or terrorist financing. To this end, ICE created a vetting unit, staffed by both ICE and

FBI personnel, to conduct reviews and determine any links to terrorism in ICE

investigations or financial leads. If a link is found, the case or lead is referred to the

FBI’s TFOS, where the FBI and FBI-led JTTFs assume a leadership role in the

investigation with significant support from DHS investigators.

As mentioned above, ICE has combined the authorities and jurisdictions of the

legacy Customs Service, and legacy INS. ICE created the Financial Investigations

Division (FID), and reorganized it into two primary programs, FIP and Cornerstone,

to harness its full investigative potential. FIP’s mission is to oversee efforts in

accordance with and in support of the National Money Laundering Strategy. These

efforts include investigations targeting drug and ‘non-drug’ money laundering

(human smuggling, telemarketing fraud, child pornography, and counterfeit goods

trafficking); and other financial crimes. FIP also runs the Money Laundering

Coordination Center (MLCC), which serves as the central clearinghouse for domestic

and international money laundering operations within ICE. Cornerstone’s mission

is to coordinate and integrate ICE’s financial investigations to systematically target

the “methods by which terrorist and criminal organizations earn, move, and store

their illicit funding.” Cornerstone applies a three-pronged approach involving:

mapping and coordinating the investigation and analysis of financial, commercial,

and trade crimes; close collaboration with the private sector to identify and eliminate

vulnerabilities; and gathering, assessing and distributing intelligence regarding these

vulnerabilities to relevant stakeholders. The ICE Office of Intelligence supports all

of ICE’s investigations, and supports the financial investigations through its Illicit

Finance Unit, in the Intelligence Operations Branch at ICE headquarters.

ICE has investigatory jurisdiction over violations of 18 U.S.C. 1956 and 1957

that derive from the jurisdiction formerly vested in the legacy Customs Service,

which was a part of the Treasury Department. ICE has jurisdiction over criminal

violations including international transportation of financial instruments including

those involving unlicenced money transmitters, smuggling bulk currency, and

transactions to evade currency reporting requirements; laundering proceeds derived

from drug smuggling, trade fraud, export of weapons systems and technology, alien

smuggling, human trafficking, and immigration document fraud.

122

See, General Accounting Office, Combating Terrorism: Federal Agencies Face

Continuing Challenges in Addressing Terrorist Financing and Money Laundering, GAO-04501T, (Washington: Mar. 4, 2004);

CRS-28

In addition, ICE has 37 attache offices in foreign countries, all of which are

involved in financial investigations. ICE also leads a Foreign Political Corruption

Unit (which conducts joint investigations with representatives of the victimized

foreign government), focused on combating the laundering of proceeds deriving from

foreign political corruption, and bribery or embezzlement. ICE also provides training

and assistance to foreign governments through the International Law Enforcement

Academy (ILEA) and programs sponsored by the Department of State’s Bureau of

International Narcotics Law Enforcement (INL). ICE has provided money

laundering-related training through ILEA schools located in Bangkok, Thailand;

Gaborone, Botswana; and Romania. ICE provides INL sponsored training on

financial investigations to countries identified by State’s Terrorist Finance Working

Group, including United Arab Emirates, Qatar, and Brazil. The Organization of

American State (OAS), Inter-American Drug Abuse Control Commission (CIDAD)

Program, specifically requested ICE to conduct the money laundering/financial

investigations module at the Andean Community Counterdrug Intelligence School,

that will provide training for law enforcement officers from five South American

countries.

Capabilities and Resources. According to the most recent FY2005 DHS

Congressional Budget Justifications, ICE’s Financial Investigations Division had

2,150 FTE in FY2003 and was appropriated more than $287 million for its

operations. For FY2004 ICE estimates it will have 2,311 FTE, and has requested

2,442 FTE for FY2005. FID received $283 million in FY2004, and has requested

$314 million for FY2005.123 According to a recent GAO report, as of February 2004,

a total of 277 ICE personnel were assigned full-time to JTTFs. This total breaks out

to 161 former INS agents, 59 Federal Air Marshals, 32 former Customs Service

agents, and 25 Federal Protective Service agents.124

Measures of Success and Accomplishments. While data are not readily

available specifically concerning ICE investigations related to terrorist financing,

data are available regarding financial investigations in general. According to recent

testimony, since ICE’s inception on March 1, 2003, ICE financing investigations

have resulted in “more than 1,300 arrests, 720 indictments, 560 convictions, and

seized approximately $150 million.”125 More current data posted by ICE on its web

page indicate that during the period between March 1, 2003 and April 30, 2004, ICE

seized more than $324 million in currency and made more than 1,705 arrests under

Operation Cornerstone.

Relationships and Coordination with other Relevant Agencies. The

breadth of ICE’s financial investigative responsibilities require ICE to maintain

strong relationships with other U.S. agencies involved in financial investigations

123

Department of Homeland Security. FY2005 Congressional Budget Justification,

“Immigration and Customs Enforcement” ICE-37.

124

GAO-04-710T. This report also noted that this total does not include agents assigned to

JTTFs on a part-time basis, nor does it include agents who will be assigned to JTTFs in

connection with vetted cases moving to the JTTFs from ICE.

125

Testimony of ICE Director of Operations Michael T. Dougherty, before the Senate

Caucus on International Narcotics Control, Mar. 4, 2004.

CRS-29

including the FBI; Internal Revenue Service, Secret Service, the Drug Enforcement

Administration, State Department, and others. As noted above, ICE also maintains

significant relationships with foreign governments and international organizations.

U.S. Secret Service126

The United States Secret Service — now a part of the Department of Homeland

Security (DHS), where it is to be “maintained as a distinct entity”127 — had been

housed, since its inception as a small anti-counterfeiting force in 1865, in the

Department of the Treasury.128 As a result of its missions and responsibilities, the

Service’s roles in combating terrorism and financial crimes are manifold, extending

to anti-terrorist financing.129 These can be direct, through participation in relevant

interagency task forces and its own investigations of financial crimes, or indirect,

through its activities and operations in seemingly unrelated areas. (Protective and

security duties, for instance, might uncover terrorist financing arrangements behind

potential assaults; or examination of identity theft might disclose the use of credit

cards by terrorist cells.)

126

This section was prepared by Fred Kaiser/G&F

127

This autonomy was granted in the legislation establishing DHS (P.L. 107-296, Sec. 821

(2002)).

128

The variety and prominence of Secret Service activities in the broad field of domestic

security date to its birth during the Civil War, when the Secret Service was created as a

small special investigative force to combat massive counterfeiting operations. Later, its

assumption of presidential protection (since expanded to numerous other security

assignments) occurred in the mid-1890s, because of credible threats against President

Grover Cleveland and his family. For background and citations on this history, see

Frederick M. Kaiser, “Origins of Secret Service Protection of the President,” Presidential

Studies Quarterly, vol. 18, winter 1988.

129

Descriptions and overviews are in: U.S. Secret Service, Strategic Plan, 2003-2008,

Budget Request, FY2005 (2004), and Mission Statement (2003), available at

[http://www.secretservice.gov]. Recent congressional hearings have also provided

information, available at each panel’s website: U.S. Congress, House Committee on

Financial Services, Terrorist Financing, hearings, 108th Cong., 2nd sess., May 4, 2004;

Senate Committee on Banking, Housing, and Urban Affairs, Counterterror Initiatives and

Concerns in the Terror Finance Program, hearings, 108th Cong., 2nd sess., May 29 and June

3, 2004; and Senate Committee on Governmental Affairs, An Assessment of Current Efforts

to Combat Terrorism Financing, hearings, 108th Cong., 2nd sess., June 15, 2004. Other

sources are: U.S. Department of Homeland Security, Interim Strategic Plan, 2003-2008

(2003), available at [http://www.dhs.gov/dhspublic]; U.S. Department of the Treasury,

Executive Office for Terrorist Financing and Financial Crime, Mission Statement, 2004,

available at [http://www.treasury.gov/offices/eotffc/]; and recent reports and testimony from

the U.S. General Accounting Office, Anti-Money Laundering: Issues Concerning

Depository Institution Regulatory Oversight, GAO04-833 (2004); Investigating Money

Laundering and Terrorism Financing, GAO-04-710T (2004); Combating Terrorism:

Federal Agencies Face Continuing Challenges in Addressing Terrorist Financing and

Money Laundering, GAO-04-501T (2004); and Terrorist Financing: U.S. Agencies Should

Systematically Assess Terrorists’ Use of Alternative Financing Mechanisms, GAO-04-163

(2003).

CRS-30

Even though the Secret Service no longer resides in the Treasury Department,

the agency is still connected to its previous departmental home and certain

responsibilities. This occurs because the Secret Service’s authority, mandates,

functions, and jurisdiction were continued when it was moved intact to its new

residence.

Secret Service Involvement. Secret Service involvement in combating

terrorist financing is an outgrowth of its two principal missions — protection and,

especially, criminal investigations — and it is connected with several Service

responsibilities, functions, and activities.130 The agency’s mission statement on

criminal investigations summarizes these:

The Secret Service also investigates violations of laws relating to counterfeiting

of obligations and securities of the United States; financial crimes that include,

but are not limited to, access device fraud, financial institution fraud, identify

theft, computer fraud; and computer-based attacks on our nation’s financial,

banking, and telecommunications infrastructure.131

Flowing into this main stream are several tributaries from within the Service,

including a Counterfeit Division. But the most relevant for combating terrorist

financing is the Financial Crimes Division, which, among other matters, covers

financial institution fraud, money laundering, forgery, and access device fraud.132

The division has also been involved in numerous task forces consisting of other

federal agencies as well as subnational government entities:

Several of these task forces specifically target international organized crime

groups and the proceeds of their criminal enterprises ... These groups are not only

involved in financial crimes, but investigations indicate that the proceeds

obtained from financial fraud are being diverted toward other criminal

enterprise.133

The task forces can also extend to international components or connections. Task

forces involving the Financial Crimes Division include CABINET (Combined

Agency Interdiction Network), INTERPOL (International Criminal Police

Organization), the Financial Crimes Task Force, the Asian Organized Crime Task

Force, and the West African Task Force.134

Caveats and Their Meaning. Several important caveats to any examination

of Secret Service activities as well as efforts to combat terrorist financing are in

order. One is that authoritative, detailed, and comprehensive information about the

Secret Service and its operations in the public record is lacking. This results, of

130

Secret Service, Strategic Plan, 2002-2005.

131

Secret Service, Mission Statement.

132

Ibid., Financial Crimes Division statement,

[http://www.secretservice.gov/financial_crimes.shtml].

133

Ibid.

134

Ibid.

available

CRS-31

course, from the high degree of secrecy and sensitivity surrounding them. The public

submissions from the Service itself or from its adoptive parent, the Department of

Homeland Security, are usually general in scope, limited in detail, and short on

specifics. (The Secret Service, however, does provide more information directly to

Members and committees of Congress in executive session or otherwise in

confidence, through reports, hearings, meetings, and briefings.)

A second qualification is that the federal involvement in combating terrorist

financing has been and probably still is evolving, involving a number of different

entities and connections among them. (As noted above, for example, Treasury’s

Office of Terrorism and Financial Intelligence emerged only recently.) Changes over

time have occurred, affecting organizational structure, agency duties and operations,

interagency coordinative arrangements, networks consisting of federal along with

subnational and private organizations, and informal relationships. Similar changes

might occur again with the same impact.

A third caveat is that actual practice might not conform to expected practice and

that formal institutional arrangements might differ from informal undertakings.

Consequently, some of the accounts in the public record might not adequately

describe on-going interrelationships, activities, and operations; their scope and range;

their effectiveness and results; or their comparative importance.

Collectively, these qualifications have meaning for the Secret Service’s role and

responsibilities in combating terrorist financing. These are not specified in detail in

the public record, a gap that leads to uncertainty and even some confusion about

them. In addition, the roles may have been transformed since the Service’s move into

Homeland Security and out of Treasury, where the lead agency (and several related

bureaus) are headquartered. The roles or practices may continue to change under

certain circumstances: for instance, if Treasury’s bureaus and offices increase their

responsibility and operations; if the reverse occurs, whereby TFI calls upon the Secret

Service for additional involvement; or if the Secret Service’s own priorities are

altered, to elevate, as an illustration, the protective mission while reducing criminal

investigations.

The Federal Bureau of Investigation (FBI)135

The Federal Bureau of Investigation is the lead agency in the Department of

Justice which has the dual mission of protecting U.S. national security and combating

criminal activities. As a statutory member of the U.S. Intelligence Community, it is

charged with maintaining domestic security by investigating foreign intelligence

agents/officers and terrorists who pose a threat to U.S. national security. The FBI’s

criminal investigative priorities include organized crime and drug trafficking, public

corruption, white collar crime, and civil rights violations. In addition, the FBI

investigates significant federal crimes including, but not limited to, kidnaping,

extortion, bank robberies, child exploitation and pornography, and international child

abduction. The FBI also provides training and operational assistance to state, local,

135

This section was prepared by Todd Masse/DSP

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and international law enforcement agencies.

Its two top priorities are

counterterrorism and counterintelligence, respectively.

Due to its dual law enforcement and national security missions, the FBI has the

responsibility and jurisdiction to counter both criminal money laundering and

terrorist-related financing. According to the FBI, “...Within the FBI, the investigation

of illicit money flows crosses all investigative program lines.”136 As mentioned

above, while there are some similarities between money laundering and terrorist

financing at the tactical or operational level — that is the methodologies by which

fungible resources are stored and transferred — there are also differences between

these two areas, not the least of which is the end use of the financial resources. What

follows is a description of the FBI’s organization, capabilities, and relationships to

and coordination with other agencies with respect to money laundering and terrorist

financing.

The FBI Mission to Counter Money Laundering. The FBI has primary

jurisdiction over the bulk of specified criminal offenses associated with money

laundering in statute.137 In general, investigations involving money laundering fall

under the purview of its Criminal Investigative Division. The Division’s Financial

Crimes Section (FCS) and Money Laundering Unit (MLU) specialize in tracing illicit

proceeds — “following the money” — that criminals seek to hide in multiple

transactions in legitimate commerce and finance. Indeed, the investigative

techniques developed by the FCS were used to trace the movements and commercial

transactions of the 9/11 hijackers.138

The MLU works with federal, state, and local agencies — often through federal

task forces — to identify and document emerging money laundering trends and

methods. The MLU analyzes suspicious activity reports (SARs) and other criminal

intelligence to generate new investigations and contribute to ongoing

investigations.139

In 2001, the FBI accounted for over one-quarter of criminal cases (423) referred

to the U.S. Attorneys for prosecution in which money laundering was the primary

charge,140 but such cases only accounted for a small percentage (1.4%) of the 30,708

cases referred by the FBI for prosecution in that year.141 The FBI was also the lead

136

See Testimony of Gary M. Bald, Acting Assistant Director for Counterterrorism Division,

FBI, Before the Senate Caucus on International Narcotics Control, March 4, 2004.

137

18. U.S.C. § 1956(c)(7).

138

U.S. Department of Justice, Executive Office for United States Attorneys, “Terrorism

Financing,” in United States Attorneys’ Bulletin, July 2003, Volume 51, Number 4, p. 8.

139

Federal Bureau of Investigation, “About the Money Laundering Unite” web page, go to

[http://www.fbi.gov/hq/cid/fc/ml/m._about.htm].

140

Such cases involved charges under 18 U.S.C. §§ 1956, 1957, and 1960; and 31 U.S.C.

§§ 5313, 5316, and 5324.

141

U.S. Department of Justice, Office of Justice Programs, Bureau of Justice Statistics,

Money Laundering Offenders, 1994-2201, by Mark Motivans, Ph.D., July 2003, p. 5.

CRS-33

agency for Title 18 U.S.C. money laundering referrals (376),142 but such cases do not

include those involving providing material support to foreign terrorists and

international financial transaction offenses.143

The FBI Mission to Counter Terrorist Financing. The Department of

Justice/FBI jurisdiction and authority to investigate cases of terrorist financing as

crime distinct from money laundering date to 1994 with the enactment of the first

“material support” legislation.144 The material support laws were subsequently

enhanced with the enactment of the USA PATRIOT Act. A variety of other legal

tools are also used in the investigation and prosecution of terrorist financing

activity.145

Pursuant to its national security mandate, the FBI has long had responsibility for

tracking terrorist financing either in response to a terrorist attack, or in a manner that

would prevent such an attack. However, according to the FBI, “...Prior to the events

of 9/11/2001, [the FBI] had no mechanism to provide a comprehensive, centralized,

focused and pro-active approach to terrorist financial matters.”146 It was not until

April 2002, that the various elements of the FBI tracking terrorist financing were

integrated under the Terrorist Financing Operations Section (TFOS) of the FBI’s

Counterterrorism Division. According to the FBI, the mission of TFOS is to:

conduct full financial analysis of terrorist suspects and their financial support

structures in the United States and abroad; coordinating joint participation,

liaison and outreach efforts to appropriately utilize financial information

resources of private, government and foreign entities; utilizing FBI and Legal

Attache expertise to fully exploit financial information from foreign law

enforcement, including the overseas deployment of TFOS personnel; working

jointly with the intelligence community to fully exploit intelligence to further

terrorist investigations; working jointly with prosecutors, law enforcement, and

regulatory communities; and developing predictive models and conducting data

142

Such cases involved charges under 18 U.S.C. §§ 1956, 1957, and 1960.

143

18 U.S.C. §§ 2339A and 2339B, 50 U.S.C. 1701 and 1702.

144

See 18 U.S.C. Section 2339A, which defines “material support or resources” for terrorist

activities as “currency or monetary instruments or financial securities, financial services,

lodging, training, expert advice or assistance, safehouses, false documentation or

identification, communications equipment, facilities, weapons, lethal substances, explosives,

personnel, transportation, and other physical assets, except medicine or religious materials.”

145

Some of these laws include 18 U.S.C., Section 956 concerning conspiracies within the

United States to kill/maim persons and destroy specific property abroad; 18 U.S.C., Section

2339B concerning the provision of material support to designated foreign terrorist

organizations; and 50 U.S.C., Sections 1701 and 1702 concerning transactions undertaken

in violation of United States economic sanctions (generally known as violations of the

International Emergency Economic Powers Act). See U.S. Department of Justice, Executive

Office for United States Attorneys “Terrorist Financing,” in United States Attorneys’

Bulletin, July 2003, Volume 51, Number 4, p. 31.

146

See Testimony of John S. Pistole, Executive Assistant Director for Counterterrorism and

Counterintelligence, Before the Senate Committee Banking, Housing and Urban Affairs,

September 25, 2003.

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analysis to facilitate the identification of previously unknown terrorist

suspects.147

TFOS Resources and Capabilities. Due to the sensitive, if not classified,

role of some of the activities of the TFOS, there is little publicly available

information about the resources dedicated to this function at the FBI. In terms of the

types of professionals working within TFOS, FBI testimony indicates that there is a

mixture of financial intelligence analysts and law enforcement officers. According

to the FBI, in order to analyze existing financial and other information for

counterterrorism purposes, TFOS, working with the Counterterrorism Section of the

Department of Justice’s Criminal Division, works to identify potential electronic data

sources controlled by domestic and foreign governments, as well as the private sector

that may be valuable in its efforts. Once identified TFOS attempts to create the

legally appropriate protocols to access and analyze this information in order to

provide reactive and proactive operational, predictive and educational support to

investigators and prosecutors. According to the FBI, some of the projects and

initiatives associated with information technology exploitation include:

The Proactive Exploits Group (PEG). This TFOS group serves as

a proactive unit by working closely with document exploitation

personnel to generate investigative leads for TFOS and other FBI

investigative divisions. The PEG has conducted a survey of

available data mining and link analysis software for use in TFOS

activities.

The Suspicious Activity Report Project. The SAR Project

attempts to identify potential terrorists through the mining of

existing databases for “...key words, patterns, individuals, entities,

accounts and specific numeric indicators (i.e. Social

Security...passport, telephone etc.).148 This research and analysis is

conducted independent of whether the reported SAR has a nexus to

terrorism.

The Terrorist Risk Assessment Model. Under this project, the FBI

is attempting to identify potential terrorists and terrorist financing

activities through the use of “predictive pattern recognition

algorithms,” or profiles of historical financial transactions that are

associated with terrorist activities.149

147

See Testimony of Michael F. Morehart, Section Chief, Terrorist Financing Operations

Section, Counterterrorism Division, FBI, Before the Congressional Committee on

Government Reform, Subcommittee on Criminal Justice, Drug Policy, and Human

Resources, May 11, 2004.

148

See Testimony of Carl Whitehead, Special Agent in Charge, Tampa Division, FBI,

Before the House Committee of Government Reform, Subcommittee on Government

Efficiency and Financial Management and Subcommittee on Technology and Information

Policy and the Census, December 15, 2003.

149

Ibid.

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Information Access. According to the FBI, the TFOS has developed

substantial contacts domestically and internationally that have enhanced its access to

near real-time information to advance the TFOS mission. Domestically, through

outreach to the private sector, and with appropriate legal process, the FBI has access

to, among other information: “...Banking, Credit/Debt Card Sector, Money Services

Businesses, Securities/Brokerages Sector, Insurance, Travel, Internet Service

Providers, and the Telecommunications Industry.”150 Internationally, TFOS

investigators have supported numerous investigations which have led to the

exchange of investigative personnel between the FBI and numerous foreign countries

or agencies. For example, according to the FBI, the United Kingdom, Switzerland,

Canada, Germany, and Europol have all detailed investigators to the TFOS on

temporary duty.151 Moreover, the State Department has requested that the FBI-TFOS

lead an interagency team to provide a TFOS-developed training curriculum to other

countries requesting assistance in further developing their existing investigative

programs, legislative and legal regimes, and financial oversight controls to counter

terrorist financing.

FBI Measures of Success and Related Accomplishments. A review

of publicly available FBI documents and official testimony suggests that the FBI

measures its success in countering terrorist financing through numerous measures,

to include the deterrence, disruption, or prevention of terrorist attacks; the

identification of previously unknown (“sleeper”) terrorist suspects, terrorist

organizations, and terrorist supporters; enhancing the understanding of a terrorist

attack after it has occurred by analyzing existing financial information gathered

through the case and liaison; the development and generation of additional terrorism

leads and investigations; the number of arrests, indictments and convictions for

activities in violation of the aforementioned and related statutes; the closure of

domestic and international non-governmental organizations and charities with

linkages to designated terrorist organizations; and the seizure and/or blockage of

terrorist assets. Given these self-determined criteria for assessing performance, in

public remarks, the FBI has articulated its various successes in working with foreign

and domestic law enforcement and intelligence agencies to achieve its goals. Some

of the often cited FBI successes in terrorist financing include (1) the disruption and

dismantlement of a Hezbollah procurement and fund-raising network relying on

interstate cigarette smuggling; (2) FBI support to a U.S. Treasury, Office of Foreign

Asset Control investigation that led to the blocking of assets of the Holy Land

Foundation for Relief and Development (HLF), which, according to the FBI, had

been linked to the funding of Hamas terrorist activities, and (3) the shutting down of

the U.S.-based Office of the Benevolence International Foundation (BIF) after it was

determined through FBI - OFAC cooperation that the charity was funneling money

to Al Qaeda.152

Notwithstanding these FBI successes, some would argue that measuring the

progress and performance of any one agency with respect to stanching terrorist

150

See Testimony of John Pistole, September 25, 2003.

151

Ibid.

152

See Testimony of Gary M. Bald, March 4, 2004.

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financing may be analogous to measuring U.S. performance in the broader war

against terrorism. Quantitatively speaking, and with substantial assistance from the

FBI and its domestic and international partners, approximately $200 million has been

blocked and seized,153 although here are no known and reliable measures for the

aggregate size of the international funding pools which may support terrorism.

Qualitatively speaking, and with support from the FBI and other federal agencies,

while bank transactions are now being more closely monitored domestically than any

time prior to 9/11, such activities may only have driven flows of financial resources

into non-bank-related or alternate financing channels, such as hawalas.154

According to the FBI, in order to address some of the concerns raised by the

Government Accountability Office with respect to alternative financing mechanisms,

it has developed intelligence requirements related to known indicators of terrorist

financing activity.155 Theoretically, such requirements should cause the FBI’s field

collectors (largely its special agents located at the 56 FBI field offices156) to proactively collect intelligence on alternative mechanisms of financing terrorism.

Secondly, according to the FBI, the TFOS Program Management and Coordination

Unit (PCMU) has been tasked with “tracking various funding mechanisms used by

different subjects on ongoing investigations - to include alternative financing

mechanisms.”157

Relationships to and Coordination with Other Agencies. The FBI

participates in, and leads some, domestic and international groups the primary

153

See Testimony of Juan C. Zarate, Deputy Assistant Secretary, Executive Office for

Terrorist Financing and Terrorist Crimes, U.S. Department of the Treasury, Before the

House International Relations Committee, Subcommittee on Middle East and Central Asia,

March 24, 2004.

154

See General Accounting Office, Terrorist Financing: U.S. Agencies Should

Systematically Assess Terrorists’ Use of Alternate Financing Mechanisms, November 2003,

(GAO-04-163). See also Overview of the Enemy: Staff Statement No. 15, of the National

Commission on Terrorist Attacks Upon the United States (Keane Commission), pp. 9-10.

This statement suggests that although “...al Qaeda frequently moved its money by hawala,

an informal and ancient trust-based system for moving funds...no persuasive evidence exists

that al Qaeda relied on the drug trade as important source or revenue, or funded itself

through trafficking in diamonds from African states engaged in civil wars.” For more

information on hawalas, see The Hawala Alternative Remittance System and Its Role in

Money Laundering, a report produced by the U.S. Treasury, Financial Crimes Enforcement

Network, in cooperation with Europol.

This report may be found at

[http://www.ustreas.gov/offices/eotffc/key-issues/hawala/FINCEN-Hawala-rpt.pdf].

155

For an assessment of the FBI’s intelligence reform since 9/11/2001, see CRS Report

RL32336, FBI Intelligence Reform Since September 11, 2001: Issues and Options for

Congress, by Alfred Cumming and Todd Masse, April 6, 2004.

156

For a listing of the locations of the 56 field offices, and overseas Legal Attache Offices,

respectively, see [http://www.fbi.gov/contact/fo/fo.htm] and

[http://www.fbi.gov/contact/legat/legat.htm] or CRS Report RL32095, The Federal Bureau

of Investigation: Past, Present and Future, by William Krouse and Todd Masse, October

2, 2003, appendices I (field offices) and III (Legal Attache Offices).

157

See Testimony of John Pistole, March 4, 2004.

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function of which is to coordinate the activities related to terrorist financing.

Domestically, it is a participant in the National Security Council’s Policy

Coordination Committee on Terrorist Financing (established in late 2001) which

meets at least once a month to coordinate the United States Government’s activities

to counter terrorism financing. It is also a participant in the State Department-chaired

Terrorist Financing Working Group (TFWG) which identifies, prioritizes and assists

those countries whose financial systems may be vulnerable to manipulation for

terrorist purposes; other agencies participating in this group include the Departments

of the Treasury and Homeland Security. The interagency FBI-led Joint Terrorism

Task Forces, of which there are currently 84, play the lead role in investigating

terrorist financing activities. In addition to representatives from federal law

enforcement agencies, the JTTFs also include participation of many state and local

law enforcement officers.

As mentioned earlier, a Memorandum of Agreement was signed in May 2003

by the Attorney General and Secretary of Homeland Security to de-conflict and

clarify the terrorist financing activities of the FBI and DHS, particularly the Bureau

of Immigration and Customs Enforcement. Under the MOA, generally, the FBI was

designated the lead agency for the investigation of terrorist financing, and DHS was

enabled to focus its law enforcement activities on protecting the integrity of the

financial system. A process was established whereby existing DHS terrorist financing

investigations (largely part of legacy U.S. Customs’ “Operation Green Quest”) would

be reviewed jointly to determine if there was a nexus to terrorism. If a joint

determination was made by the FBI and DHS that there was a nexus to terrorism, the

case would be transferred to the FBI-led JTTF. Because DHS - ICE law enforcement

officers are on the JTTF, they would continue to play an important role in the

investigation. If a joint determination was made that there was no nexus to terrorism,

the case would remain with DHS- ICE, and likely become a part of “Operation

Cornerstone,” ICE’s effort to identify and work to resolve vulnerabilities in the U.S.

financial system that may be exploited by terrorists.

Internationally, in addition to its 45 Legal Attache Offices which conduct law

enforcement and intelligence liaison, the FBI formed the International Terrorism

Financing Working Group (ITFWG). Composed of law enforcement and intelligence

agency representatives from the United Kingdom, Canada, Australia, and New

Zealand, the ITFWG works to coordinate information and intelligence sharing with

respect to national efforts to counter terrorist financing.158 Moreover, the FBI is a

participant in the Joint Terrorist Financing Task Force, based in Riyadh, Saudi

Arabia to gather information about financing activities having a potential nexus to

the Kingdom of Saudi Arabia and other countries or non-state terrorist groups

operating in the Near East region. The information gathered is provided to the FBI’

TFOS, and subsequently to the FBI-led JTTFs in the United States for investigation,

as appropriate.159

158

See Testimony of Gary M. Bald, March 4, 2004.

159

See Testimony of Juan C. Zarate, March 24, 2004.

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Bureau of Alcohol, Tobacco, Firearms and Explosives

(ATF)160

ATF’s mission and roles related to terrorist financing. On January 24,

2003, the Bureau of Alcohol, Tobacco and Firearms’ law enforcement functions were

transferred from the Treasury Department to the Department of Justice, and became

the Bureau of Alcohol, Tobacco, Firearms and Explosives. ATF enforces the federal

laws and regulations relating to alcohol, tobacco, firearms, explosives and arson by

working directly and in cooperation with others to: 1) Suppress and prevent crime

and violence through enforcement, regulation, and community outreach; 2) Ensure

fair and proper revenue collection and provide fair and effective industry regulation;

3) Support and assist federal, state, local, and international law enforcement; and 4)

Provide innovative training programs in support of criminal and regulatory

enforcement functions.

In supporting the DOJ’s primary strategic goal of preventing terrorism and

promoting national security, the ATF participates in joint terrorism task force

initiatives, as well as other interagency counterterrorism mission partnerships.

Operations and intelligence data in firearms trafficking and explosives accountability

have shown that terrorist organizations may be shifting to tobacco and alcohol

commodities to fund their criminal activities. As it relates to terrorist financing, the

ATF seeks to reduce and divest criminal and terrorist organizations of monies

derived from illicit alcohol diversion and contraband cigarette trafficking activity.

Specifically, the mission of the ATF’s Alcohol and Tobacco Diversion Program

is to: 1) Disrupt and eliminate criminal and terrorist organizations by identifying,

investigating and arresting offenders who traffic in contraband cigarettes and illegal

liquor; 2) Conduct financial investigations in conjunction with alcohol and tobacco

diversion investigations in order to seize and deny further access to assets and funds

utilized by criminal enterprises and terrorist organizations; 3) Prevent criminal

encroachment on the legitimate alcohol and tobacco industries by organizations

trafficking in counterfeit/contraband cigarettes and illegal liquor and; 4) Assist local,

state, and other federal law enforcement and tax agencies in order to thoroughly

investigate the interstate trafficking of contraband cigarettes and liquor.

Capabilities and resources. Teams of ATF auditors, special agents and

inspectors are all involved with performing complex investigations of multi-state

criminal violations of federal law. According to the ATF 2003 Performance and

Accountability Report, if a broad definition of counterterrorism activities is used to

include providing homeland security, in FY2003 ATF spent $359.3 million, or 61

percent, of its net costs on the counterterrorism/homeland security effort.

Measures of success and accomplishments. In 2003, ATF conducted

295 investigations involving the trafficking of illicit or counterfeit tobacco

160

This section was prepared by Cindy Hill/DSP

CRS-39

products.161 In four of these investigations, the ATF was able to confirm ties to

terrorist organizations. For example, ATF investigated an organization in North

Carolina that was trafficking cigarettes to Michigan and utilizing some of the profits

to fund the Hezbollah in the Middle East. ATF efforts contributed to the indictment

of 18 defendants associated with this operation.

ATF coordination with other federal agencies. In preventing unlawful

trafficking in firearms and explosives and the diversion of alcohol and tobacco as

financial means in support of terrorist activities, ATF continues to work in

conjunction with all responsible law enforcement agencies to support terrorismrelated investigations. ATF is represented at the National Drug Intelligence Center,

El Paso Intelligence Center (EPIC), Federal Crime Enforcement Network (FINCEN),

INTERPOL, the FBI Counterterrorism Center, Central Intelligence Agency,

Department of Homeland Security, Defense Intelligence Agency, and the National

Joint Terrorism Task Force. ATF is also represented at the executive level in the FBI

Strategic Intelligence Operations Center and is involved in the Law Enforcement

Information Sharing (LEIS) group. ATF maintains a Memorandum of Understanding

with six Regional Information Sharing Systems (RISS) agencies, which represents

thousands of state and local law enforcement agencies.

Drug Enforcement Administration (DEA)162

DEA’s responsibilities with regard to terrorist financing. DEA’s

mission is to enforce the treaties, laws, and regulations that seek to eliminate the

manufacture, distribution, sale, and use of illegal drugs. The size of the worldwide

market in illicit drugs — estimates range from $300-$500 billion per year —

provides ample opportunities for drug proceeds to be diverted to terrorist ends

through money laundering activities and other financial schemes.163

Statutorily, DEA has authority to investigate monetary transactions resulting

from unlawful drug activities under the primary U.S. money laundering statutes (18

U.S.C.1956 and 1957) and the applicable civil and criminal forfeiture statute (18

U.S.C. 981 and 982). Jurisdiction under these statutes was granted to the Attorney

General (as well as the Secretary of the Treasury and the Postmaster General) and

delegated to DEA (and the FBI). DEA’s enforcement jurisdiction is contingent upon

the funds involved being derived from the trafficking of illegal narcotics. DEA also

exercises authority under 18 U.S.C. 1960, the illegal money remitter statute, and 31

U.S.C. 5332, dealing with bulk cash smuggling when the funds involved in the

violations are derived from trafficking of illegal narcotics. Both of these criminal

statutes also have applicable forfeiture statutory provisions.

161

Department of Justice Alcohol, Tobacco, Firearms and Explosives. ATF Performance

and Accountability Report — 2003, p. 1.

162

163

This section was prepared by Mark Eddy/DSP

For an analysis of the links between drug trafficking and terrorism, see CRS Report

RL32334, Illicit Drugs and the Terrorist Threat: Causal Links and Implications for

Domestic Drug Control Policy, by Mark A.R. Kleiman.

CRS-40

Operationally, DEA Administrator Karen Tandy has mandated that every DEA

investigation will have a financial investigative component. Thus, any DEA

investigation could potentially discover monetary links to terrorist entities. Within

DEA’s infrastructure, the following components are specifically designated with

anti-money laundering responsibilities:

The Office of Financial Operations at DEA headquarters has overall

program responsibility for all DEA financial investigative efforts;

The Financial Intelligence Unit at DEA headquarters provides

analytical support to the Office of Financial Intelligence;

The Financial Section at the Special Operations Division (SOD) is

a multi-agency section that coordinates multi-district, complex

money-laundering wiretap investigations; and

Each of DEA’s 21 Field Divisions as well as the Bangkok, Bogotá,

and Mexico City Country Offices have Financial Investigative

Teams.

DEA resources devoted to combating terrorist financing. There are

45 positions in DEA authorized to support counter-terrorism efforts. Since FY2002,

DEA has received funding from the FBI to reimburse DEA for counter-terrorism

related investigative and analytical support provided through the Special Operations

Division-Special Coordination Unit (SOD-SCU). DEA received, via reimbursable

agreement from the FBI, $7.7 million in FY2002, $11.4 million in FY2003, and $6.3

million in FY2004.

Measures of Success and Accomplishments. DEA does not maintain

specific statistics related to terrorist financing. DEA’s investigations, however, are

routinely directed at activities involving narcotics and precursor materials that have

the potential to fund terrorist organizations. Examples are Operation Mountain

Express and Operation Northern Star, investigations that uncovered possible links

between the trafficking of pseudoephedrine (a methamphetamine precursor) in the

United States and Middle Eastern groups with terrorist connections.164

DEA Coordination with Other Federal Agencies. The SOD-SCU is

responsible for coordinating all responses to terrorism-related requests for SOD

assistance and is responsible for sharing tactical and/or investigative information with

other appropriate federal agencies. For the purpose of information exchange at the

headquarters level, SCU personnel have been assigned to the National Joint

Terrorism Task Force and the Department of Homeland Security. Domestic field

investigations that identify extremist/terrorist information are documented in a

teletype and/or DEA-6 Report of Investigation (ROI) and are immediately passed to

the local FBI office and, if applicable, to JTTFs in the field. This information, as

appropriate, is also passed to state and local enforcement counterparts. Foreign

164

Information on both investigations can be found on the DEA Website

[http://www.usdoj.gov/dea/].

CRS-41

Country Office investigations that identify extremist/terrorist information are

documented in a teletype and/or ROI and immediately passed to the respective U.S.

government agencies that are part of the local country team (e.g., State Department,

Regional Security Officer, Military Attaché, FBI Legal Attaché, etc.).

Documentation on domestic and foreign office investigations that identify

extremist/terrorist information is also provided to the SOD-SCU along with the

names of all individuals to whom the information was passed and their contact

information.

All “cooperating sources” utilized in DEA investigations are debriefed quarterly

regarding their knowledge of any terrorist-related information, including money

laundering. This information is documented on a DEA Form 6 Report of

Investigation using the protocols outlined above.

The Department of State165

The Office of the Coordinator for Counterterrorism (S/CT) within the

Department of State implements some key activities to help identify and stop terrorist

financing and acts as the lead in coordinating U.S. government agencies in these

efforts. Within S/CT is the Counterterrorism Finance and Designation Unit. State’s

Bureau for Economic and Business Affairs (EB) also works closely with the

Coordinator for Counterterrorism to freeze assets of terrorists and terrorist

organizations.

The “finance” part of the Unit coordinates the delivery of technical assistance

and training to foreign governments to help them improve their ability to investigate,

identify and interdict the flow of funds to terrorists.

The “designation” part of the Unit leads and coordinates with the Departments

of the Treasury and Justice to designate foreign terrorist organizations, as well as

individual terrorists.

The Department of State’s S/CT and Bureau for International Narcotics and Law

Enforcement Affairs (INL) co-chair the Terrorist Finance Working Group (TFWG)

which is made up of numerous agencies throughout the U.S. government.166

Funding for counterterrorism activities within State is designated for the Office

of the Ambassador-at-large for Counterterrorism ($1.788 million for FY2003,

estimated $1.703 million for FY2004 and a request of $1.720 million for FY2005).

In addition, there is funding for worldwide security upgrades for the Office of the

Ambassador-at-large for Counterterrorism in State (FY2003 — none, FY2004 —

165

166

This section was prepared by Susan Epstein/FDT.

The interagency working group includes other offices and bureaus in the Departments of

State, the Treasury, Justice, and Homeland Security, as well as the National Security

Council, Central Intelligence Agency, and the Federal Reserve Board.

CRS-42

$2.968 million, and for 2005 request — $2.968 million). The budget does not break

down funding levels to specific activities such as the freezing of assets.

Regulating the International System167

The U.S. government has taken various domestic actions in order to increase its

ability to counter the threat of terrorist financing. In addition to these domestic

efforts, the U.S. government has worked with other countries, on a multilateral and

bilateral basis, to create international rules, standards, and best practices to prevent

terrorist financing.

Given the significant overlap between international money laundering and

terrorist financing, the international community has addressed these crimes with a

similar set of measures and policies. In 1988, the United Nations (UN) General

Assembly passed the Vienna Convention Against Illicit Traffic in Narcotic Drugs and

Psychotropic Substances (the Vienna Convention), the first international agreement

to criminalize money laundering. A more important component of the agreement,

some argue, is that it includes a mutual assistance clause mandating that governments

collaborate with each other in money laundering investigations.168 In order to

facilitate cooperation on anti-money laundering issues among various nations, the

Group of Seven (G-7) created the Financial Action Task Force (FATF) in 1989 in

order to help countries implement the Vienna Convention.

Several recent conventions on terrorist financing have been negotiated. Most

prominent among these was the UN’s International Convention for the Suppression

of the Financing of Terrorism (ICSFT), which entered into force on April 10, 2002.

As of March 2004, 132 countries had signed the convention and 112 were full parties

to the agreement.169 The convention requires each country to criminalize the funding

of terrorist activities under its domestic law and to seize or freeze funds used or

allocated for terrorist purposes. Countries must ensure that their domestic laws

require financial institutions to implement measures that identify, impede, and

prevent the flow of terrorist funds. Finally, countries are required to prosecute or

extradite individuals suspected of involvement in the financing of terrorism and to

cooperate with other countries in the investigation and/or prosecution of those

suspected of engaging in these acts.

United Nations Security Council Resolution (UNSCR) 1373, was adopted on

September 28, 2001. It established numerous measures to combat terrorism, in

addition to calling on member countries to become parties to the International

Convention for the Suppression of the Financing of Terrorism. It focused on areas

167

This section was prepared by Martin A. Weiss/FDT.

168

Ian Roberge, “The Internationalization of Public Policy and the Fight Against Terrorist

Financing,” Paper presented at the International Studies Association Conference, Montreal,

Canada, 2004, pg.12.

169

[http://www.unausa.org/newindex.asp?place=http://www.unausa.org/policy/newsactio

nalerts/advocacy/fin_terr.asp]

CRS-43

of financing, intelligence sharing, and limiting terrorists’ ability to travel. The

resolution also required states to criminalize Al Qaeda financial activities and to

freeze the group’s monetary assets; it mandated exchanges of intelligence, among

other arrangements. UNSCR 1373 was passed under Chapter VII of the UN Charter,

making compliance mandatory for all member-states and giving the Security Council

enforcement powers.

UNSCR 1267, passed in October 1999, set up the “1267 Committee,” to

monitor the sanctions imposed on then Taliban-controlled Afghanistan for its support

of Osama Bin Laden and Al Qaeda. These sanctions require U.N. member states,

among other things, to freeze assets of persons and entities listed by the 1267

committee. The Council has revised and strengthened these sanctions since 1999. On

January 30, 2004, the Council, in Resolution 1526 (2004), further strengthened and

expanded the Committee’s mandate by requiring that states freeze economic

resources derived from properties owned or controlled by Al Qaeda and the Taliban

and also that states cut the flow of funds derived from non-profit organizations and

alternative/informal remittance systems to terrorist groups.

Financial Action Task Force (FATF)

The Financial Action Task Force is an inter-governmental body that develops

and promotes policies and standards to combat money laundering (the so-called Forty

Recommendations) and terrorist financing (Eight Special Recommendations on

Terrorist Financing).170 It is housed at the Organization for Economic Cooperation

and Development(OECD) in Paris. FATF currently has 33 members.171 According

to its most recent mandate (May 2004, renewed until 2012):

FATF will continue to set anti-money laundering and counter-terrorist financing

standards in the context of an increasingly sophisticated financial system, and

work to ensure global compliance with those standards. FATF will enhance its

focus on informal and non-traditional methods of financing terrorism and money

laundering, including through cash couriers, alternative remittance systems, and

the abuse of non-profit organizations.172

FATF sets minimum standards and makes recommendations for its member

countries. Each country must implement the recommendation according to its

particular laws and constitutional frameworks. In 2001, FATF released Eight Special

Recommendations on Terrorist Financing. These are very focused, and reflect a

more nuanced understanding of how terrorist groups raise and transmit funds. The

eight recommendations are:

170

Take immediate steps to ratify and implement the relevant United Nations

instruments.

See CRS Report RS21904: The Financial Action Task Force: An Overview.

171

See FATF website for a list of member countries and observer organizations

[http://www1.oecd.org/fatf/]

172

FATF Mandate Renewed for Eight Years, May 14, 2004,

available at [http://www1.oecd.org/fatf/pdf/PR-20040514_en.pdf]

CRS-44

Criminalize the financing of terrorism, terrorist acts and terrorist

organizations.

Freeze and confiscate terrorist assets.

Report suspicious transactions linked to terrorism.

Provide the widest possible range of assistance to other countries’ law

enforcement and regulatory authorities for terrorist financing

investigations.

Impose anti-money laundering requirements on alternative remittance

systems.

Strengthen customer identification measures in international and domestic

wire transfers.

Ensure that entities, in particular non-profit organizations, cannot be

misused to finance terrorism.173

Assessing Compliance

Early in its existence, FATF sought compliance with its guidelines in the

international system (not just among FATF members) through a self-assessment

program and a peer-evaluation process. This peer evaluation process has been

successful in getting some FATF members to improve their anti-money laundering

and counter-terrorist finance laws.

Through the evaluation process for the Forty Recommendations, FATF

identifies non-cooperative countries and territories (NCCTs) in the fight against

money laundering. The current list of NCCTs includes Cook Islands, Indonesia,

Myanmar, Nauru, Nigeria, and the Philippines.174 Some question whether “naming

and shaming” is a good approach, and note that it may even prove counter productive by signaling that a country is a good provider of black market money

laundering services, and making it harder for the target country to change course.175

Others argue that it is a necessary first step, but to be effective, countries must be

offered technical assistance packages from the IMF or World Bank, or other

international agencies to improve their legal and regulatory mechanisms.

Recently, FATF decided that it will no longer conduct self-assessment exercises

based on previous exercises, but will initiate follow-up reports to mutual evaluations.

The third round of mutual evaluations based on the new methodology is expected to

begin in late 2004. There are no current plans for FATF to complete a similar list for

countries that do not meet the Eight Special Recommendations.

173

Financial Action Task Force Terrorist

[http://www1.oecd.org/fatf/TerFinance_en.htm]

Financing,

available

174

Non-Cooperative Countries and Territories (NCCTs) Organization for Economic

Cooperation and Development website, available at

[http://www1.oecd.org/fatf/NCCT_en.htm]

175

Donato Masciandaro, Combating Black Money: Money Laundering and Terrorism

Finance, International Cooperation and the G8 Role, Universite de Lecce Economics

W o r k i n g

P a p e r

N o .

5 6 / 2 6 ,

a v a i l a b l e

a t

[http://papers.ssrn.com/sol3/papers.cfm?abstract_id=561183]

CRS-45

During 2003-2004, the IMF and the World Bank undertook a twelve-month

pilot program that evaluated 33 countries and assessed their compliance with the

FATF 40 + 8 recommendations.176 In addition, eight countries were assessed either

by FATF or one of the FATF Style Regional Bodies.177 At the G-7 meeting in Boca

Raton during February 2004, finance ministers requested the IMF to make the

AML/CFT178 assessments a normal component of its economic surveillance reports.

In March 2004, the IMF and World Bank agreed to make permanent the pilot

program, after a review. The three main findings of the IMF and World Bank pilot

program were:

Many countries show a high level of compliance with the original FATF

Forty Recommendations but compliance with the newer Eight Special

Recommendations on Terrorist Financing is weaker. The necessary

legislation to implement many of the new recommendations has not yet

been adopted in the countries assessed.

Wealthier countries generally have well developed financial institutional

regimes but require additional work on terrorism finance issues.

Middle-income jurisdictions generally have well developed legal and

institutional frameworks but frequently have gaps in implementation of the

regime. Many lower-income countries have put in place the essential legal

elements of an AML/CFT regime but implementation remains a challenge

due to insufficient resources and training.

Implementation weaknesses identified include poor coordination among

government agencies, ineffective law enforcement, weak supervision,

inadequate systems and controls among financial firms, and shortcomings

in international cooperation.179

The IMF and World Bank also offered conclusions regarding seven of the Eight

Special Recommendations:

Ratification and Implementation of UN Instruments. Almost one-third

of the assessed countries failed to comply with this recommendation.

Seven jurisdictions were found in material non-compliance (lack of

176

International Monetary Fund and the World Bank, “Twelve-Month Pilot Program of

Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)

Assessments,” available at [http://www.imf.org/external/np/aml/eng/2004/031004.pdf]

177

The 41 countries assessed were Bangladesh, Honduras, Malta, Mauritius, Hong Kong

SAR, United Kingdom, FYR Macedonia, Mozambique, Romania, Tanzania, Anguilla,

British Virgin Islands, Guernsey, Isle of Man, Jersey, Liechtenstein, Montserrat, Czech

Republic, Israel, Jordan, Oman, Austria, Japan, Kuwait, Singapore, Algeria, Kenya,

Bahamas, Belize, Bermuda, Cayman Islands, Labuan (Malaysia), Turks & Caicos, South

Africa, Russia, Germany, Swaziland, Bolivia, Ecuador, Chile, and Azerbaijan.

178

179

Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT)

International Monetary Fund, “IMF Executive Board Reviews and Enhances Efforts for

Anti-Money Laundering and Combating the Financing of Terrorism” Public Information

Notice No. 04/33, available at [http://www.imf.org/external/np/sec/pn/2004/pn0433.htm]

CRS-46

ratification of the ICSFT), and six were found non-compliant (failing to

ratify the ICSFT and to implement UNSCR 1373).

Criminalizing the Financing of Terrorism and Associated Money

Laundering. Serious weaknesses were found in more than a third of the

countries. This special recommendation was one of the least observed

FATF recommendations. Among the countries assessed, fourteen were

found non-compliant and four materially non-compliant. In countries rated

non-compliant, terrorist financing was not criminalized at all, nor was its

prosecution possible under any other offense.

Freezing and Confiscating Terrorist Assets. Deficiencies were found

in around a third of the countries assessed. There were six countries rated

materially non-compliant and eight rated non-compliant. The Bank and

Fund concluded that non-compliance resulted either from a lack of explicit

legal authority to freeze funds or assets, or the lack or inadequacy of

powers that would enable the authorities to seize assets, even if the legal

provisions were in place.

Reporting Suspicious Transactions Related to Terrorism. Forty

percent of countries exhibited weaknesses in this area. Countries showed

a lack of legal and institutional measures that would require making a

report to competent authorities when there is a suspicion that financial

transactions are linked to terrorist financing.

International Cooperation. The mutual assistance and extradition in

financing of terrorism-related cases is one of the least observed

recommendations, almost half of the jurisdictions exhibited serious

deficiencies. The World Bank and International Monetary Fund found, not

surprisingly, that countries that had deficiencies with Recommendation 1

(criminalization of terrorist financing) and Recommendation 3 (freezing,

seizure, and confiscation of terrorist funds) also had problems with

international cooperation. This provides evidence for the assertion that

lack of domestic law is a major cause of ineffective international

cooperation.

Alternative Remittance. In most of the countries assessed, alternative

remittance systems were not considered macro-economically relevant. Of

the countries assessed, half were found deficient because money or value

transfer systems were not required to be licensed or registered; or because

preventive measures requirements were not extended to them; or because

there was no effective regime for monitoring and enforcing compliance

with AML/CFT requirements.

Wire Transfers. Due to ambiguity about whether the standard was or was

not fully in force, this recommendation was not evaluated consistently

across the sample countries. Of the rated countries, 12 were considered to

be compliant, while 21 were materially non-compliant or non-compliant.

CRS-47

Weaknesses were largely due to lack of formal requirements that complete

originator information be included on all wire transfers.180

Experience under the pilot program with both assessments and with technical

assistance considerably deepened collaboration between the IMF and World Bank,

on one side, and the FATF and the FATF Style Regional Bodies (FSRBs) one the

other. Recommendations for the IMF and World Bank on how to improve

monitoring include the need for close coordination with FATF and FSRBs on the

timing of assessments, more equitable sharing of the assessment burden among

agencies, and broadening the responsibilities of IMF and World Bank staff for the

supervision and integration of assessment missions to insure comprehensive and high

quality assessments.

In addition to the pilot program, AML/CFT work has permeated IMF and World

Bank activity. Numerous IMF products, including annual economic reports (Article

IV Assessments) and the Reports on Standards and Codes, and Financial Sector

Assessment Program reports consider issues relevant to terrorist financing.181 None

of these reports constitutes a binding agreement. The legal basis for the IMF and

World Banks’ work on these issues is through its technical assistance function. The

IMF and World Bank may offer advice and guidance, but it is the responsibility of

the national governments to implement and enforce any new laws suggested by

FATF’s, IMF’s, or the World Bank’s recommendations.

Some analysts assert that the Middle East and North Africa are not properly

represented in the IMF sample. Of the 41 countries assessed in the pilot program,

three are in the Middle East or North Africa — Jordan, Oman, and Algeria. An

assessment of numerous Islamic countries’ compliance with international counter

terrorist finance standards was undertaken by the Watson Institute for International

Studies at Brown University under the auspices of the Council on Foreign Relations

(CFR) Independent Task Force on Terrorist Financing. This report created four

criteria to assess relative performance on counter terrorist finance work: (1) the

establishment of a legal framework, (2) the administrative infrastructure, (3) the

range of regulatory mechanisms, and (4) the evidence of enforcement.182 Table 1

shows the report’s findings:

180

International Monetary Fund and World Bank, Twelve Month Pilot Program of AntiMoney Laundering and Combating Terrorist Financing of Terrorism (AML/CFT)

Assessments, Joint Report on the Review of the Pilot Program. March 10, 2004.

181

See William E. Holder, “The International Monetary Fund’s Involvement in Combating

Money Laundering and the Financing of Terrorism,” Journal of Money Laundering Control,

Spring 2003, pg. 383-387.

182

See Council on Foreign Relations Independent Task Force on Terrorist Financing ,

“Update on the Global Campaign Against Terrorist Financing” Appendix C, “A

Comparative Assessment of Saudi Arabia with Other Countries of the Islamic World.”

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Table 1. Middle Eastern Compliance with Counter-Terrorist

Finance Activity

Relative Degrees of Compliance and Implementation

Strongest

Weakest

Legal Framework

Indonesia,

Morocco,

Saudi

Arabia,

Tunisia

Administrative

Infrastructure

Regulatory

Measures

Enforcement

UAE,

Yemen

Jordan,

Malaysia,

Pakistan

Egypt,

UAE,

Yemen

Egypt,

Indonesia,

Malaysia,

Morocco,

Saudi

Arabia,

UAE,

Yemen

Egypt,

Malaysia,

Saudi Arabia

Jordan,

Pakistan,

Tunisia

Pakistan,

Saudia

Arabia, UAE

Indonesia,

Jordan,

Pakistan,

Tunisia

Indonesia,

Morocco,

Yemen

Morocco

Egypt, Jordan,

Malaysia, Tunisia

Source: Council on Foreign Relations Independent Task Force on Terrorist Financing, "Update on

the Global Campaign Against Terrorist Financing" Appendix C, "A Comparative Assessment of Saudi

Arabia with Other Countries of the Islamic World."

According to the Watson Institute’s report, Saudi Arabia’s compliance with the

guidelines established by FATF is “among the most robust in the sample.”183 A

similar assessment of Saudi Arabia was reached by FATF in 2004.184 The FATF

2004 annual report states that Saudi Arabia’s legal and regulatory system is

“compliant or largely compliant with most of the FATF 40+8 Recommendations”

According to the report, Saudi Arabia has established a Permanent Committee on

Combating the Financing of Terrorism to coordinate its policy response and the

Saudi Anti-Financial Crime Unit (SAFCU). This is to serve as a clearinghouse for

investigative information and international cooperation. At the time of the FATF

review, the SAFCU was not operational.185

183

Ibid, pg. 8.

184

See “Kingdom of Saudi Arabia: Executive Summary - FATF Recommendations for

Anti-Money Laundering and Combating the Financing of Terrorism” in Annex C of the

report Available at [http://www1.oecd.org/fatf/pdf/AR2004-Annexes_en.PDF].

185

See CRS Report RL32499, Saudi Arabia: Terrorist Financing Issues.

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Conclusion: Policy Issues for Congress186

While the current campaign against terrorist finance reportedly has diminished

terrorists’ abilities to gather and transmit finances, significant funds still appear to be

available. Efforts to further regulate and introduce transparency into the global

financial system are welcome steps; yet they will not completely reduce terrorists’

striking capacity because most of the proposed measures cannot with certainty

separate out terrorists from other types of lawbreakers. Terrorists’ ability to exploit

non-bank mechanisms of moving and storing value, as well as their decentralized

self-supporting network of cells represent additional constraints on law enforcement.

These constraints and concerns lead to numerous policy questions that may be

relevant for Congress as it debates both a U.S. strategy to counter terrorist financing

and on how to reorganize the U.S. government in order to best implement this

strategy. Among those questions are:

186

187

Should the U.S. strategy emphasize freezing assets or following

financial trails? More importantly, should the U.S. government

release a strategy document similar to the National Money

Laundering Strategy devoted specifically to countering terrorist

financing? Although freezing assets has been successful to date in

blocking around $200 million dollars, over the past two years,

officials have noticed a major change in how terrorists move money

around. Increasingly, they are relying on informal methods such as

alternative remittance systems, smuggling commodities or precious

metals, or simply transporting large amounts of cash. In this case,

immediately freezing assets may prove counterproductive, if

valuable intelligence could be gained if and when terrorist financing

is spotted in the formal financial sector.

Has the legislation that Congress passed regarding terrorist financing

(primarily Title III of the USA PATRIOT Act) been implemented in

a timely way? According to some, many financial institutions

including insurance companies, loan and finance companies, and

hedge funds, among others, have yet to receive formal guidance

from the Treasury Department on how to implement anti-money

laundering and terrorist financing guidelines.187

Are the resources currently devoted to combating terrorist financing

adequate? There is no clear presentation of each federal agency’s

budget allocation for combating terrorist financing. House Report

108-599, the 2005 Foreign Operations Bill, referred to the Senate

Committee on Appropriations on July 19th, 2004, states, among other

This section was prepared by Martin A. Weiss/FDT.

See Jonathan M. Winer, Testimony before the U.S. Senate Committee on Finance on

“U.S. Government Efforts Against Terrorist Finance And Nominations of Stuart Levey and

2004,

available

Juan

Zarate,”

May

19th

[http://finance.senate.gov/hearings/testimony/2004test/051904jwtest.pdf].

CRS-50

things, that the National Security Council and the Office of

Management and Budget should conduct a cross-cutting analysis of

the budgets and activities of all United States government agencies

as they relate to terrorist financing, and submit a report, not less than

90 days after the enactment of the 2005 Appropriations Act,

summarizing this information, with a classified annex if necessary.

188

Does the current architecture of the U.S. government display clear

jurisdiction among the various federal departments and agencies

involved in the fight against terrorist financing? What future efforts

can be put in place to further inter-departmental and inter-agency

coordination on both policy-setting and enforcement? How well are

the functions of the panoply of new and legacy departments and

agencies being coordinated? Who is best suited to coordinate these

functions?

How well is the congressional oversight mechanism designed to

assess federal performance on countering terrorist financing? The

Senate Banking and Finance Committees agreed to joint jurisdiction

over the Treasury’s Office of Terrorism and Financial Intelligence.

Many other Committees have potential relevance in the overall fight

against terrorist financing. According to Former Representative Lee

Hamilton, Vice Chairman of the 9/11 Commission, over 88 separate

committees and subcommittees have oversight of the Homeland

Security Department alone.188 Reform of congressional jurisdiction

is an historically tricky issue, yet some argue that reevaluating how

Congress oversees the fight against terrorism and terr

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