[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





                            OVERSIGHT OF THE
                         DEPARTMENT OF TREASURY

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 16, 2004

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-94



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California                 RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut       STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona             MIKE ROSS, Arkansas
VITO FOSSELLA, New York              CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
MELISSA A. HART, Pennsylvania        JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
TOM FEENEY, Florida                  DAVID SCOTT, Georgia
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey            CHRIS BELL, Texas
TIM MURPHY, Pennsylvania              
GINNY BROWN-WAITE, Florida           BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director
              Subcommittee on Oversight and Investigations

                     SUE W. KELLY, New York, Chair

RON PAUL, Texas, Vice Chairman       LUIS V. GUTIERREZ, Illinois
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
MARK GREEN, Wisconsin                DENNIS MOORE, Kansas
JOHN B. SHADEGG, Arizona             JOSEPH CROWLEY, New York
VITO FOSSELLA, New York              CAROLYN B. MALONEY, New York
JEB HENSARLING, Texas                JIM MATHESON, Utah
SCOTT GARRETT, New Jersey            STEPHEN F. LYNCH, Massachusetts
TIM MURPHY, Pennsylvania             ARTUR DAVIS, Alabama
GINNY BROWN-WAITE, Florida           CHRIS BELL, Texas
J. GRESHAM BARRETT, South Carolina


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 16, 2004................................................     1
Appendix:
    June 16, 2004................................................    43

                               WITNESSES
                        Wednesday, June 16, 2004

Bodman, Hon. Samuel W., Deputy Secretary, Department of the 
  Treasury.......................................................     6
Fox, William J., Director, Financial Crimes Enforcement Network, 
  Department of the Treasury.....................................    24
Jardini, Nancy J., Chief, Criminal Investigation, Internal 
  Revenue Service................................................    29
Newcomb, R. Richard, Director, Office of Foreign Assets Control, 
  Department of the Treasury.....................................    26
Schindel, Dennis S., Acting Inspector General, Department of the 
  Treasury.......................................................    30

                                APPENDIX

Prepared statements:
    Kelly, Hon. Sue W............................................    44
    Oxley, Hon. Michael G........................................    46
    Bodman, Hon. Samuel W........................................    47
    Fox, William J...............................................    57
    Jardini, Nancy J.............................................    71
    Newcomb, R. Richard..........................................    89
    Schindel, Dennis S...........................................   112

              Additional Material Submitted for the Record

Gutierrez, Hon. Luis V.:
    Office of Inspector General Report, ``Safety Soundness, and 
      Accessibility of Financial Services''......................   128
Bodman, Hon. Samuel W.:
    Written response to questions from Hon. Luis V. Gutierrez....   161
Fox, William J.:
    Written response to questions from Hon. Luis V. Gutierrez....   177
Schindel, Dennis S.:
    Written response to questions from Hon. Luis V. Gutierrez....   186

 
                            OVERSIGHT OF THE
                         DEPARTMENT OF TREASURY

                              ----------                              


                        Wednesday, June 16, 2004

             U.S. House of Representatives,
       Subcommittee on Oversight and Investigation,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 2:07 p.m., in 
Room 2128, Rayburn House Office Building, Hon. Sue Kelly 
[chairwoman of the subcommittee] presiding.
    Present: Representatives Kelly, Paul, Garrett, Oxley (ex 
officio), Gutierrez and Inslee. Also present were 
Representatives Royce and Sanders.
    Chairwoman Kelly. [Presiding.] This hearing of the 
Subcommittee on Oversight and Investigations will come to 
order.
    The war against terrorism is the single most important 
challenge facing the federal government today. Our task is made 
difficult by the insidious methods of our enemies and also by 
the bureaucratic inertia inherent in a fundamental 
reorganization of our government's priorities.
    This hearing today is important because we will examine the 
specific difficulties faced by the Treasury Department in 
adapting to its new critical purpose in battling the illicit 
funding networks upon which our enemies rely.
    It is evident that the fight against terror financing must 
go well beyond ensuring compliance with the Bank Secrecy Act, 
but this law is at the foundation of our efforts. When that law 
is flouted as egregiously as it was in the Riggs case, or as 
consistently as the inspector general suggests, then it is our 
duty to respond so that such failures are bad memories instead 
of perpetually looming possibilities. We cannot afford to 
ignore any problems in the system charged with the enforcement 
of our anti-money-laundering law.
    I believe the fragmented nature of our anti-money-
laundering system is structurally not capable of keeping pace 
with the demands of the war on terror. I believe that we ought 
to establish a single office dedicated to ensuring the 
compliance with the Bank Secrecy Act.
    To those who would resist this proposal, I would hope that 
there is at least recognition of the need to establish a 
vigilant watch tower above the vast expanse of bureaucracies 
that are currently responsible for the Bank Secrecy Act. There 
must be a unifying center to our anti-money-laundering efforts.
    Mr. Fox's recent proposals to strengthen FinCEN's role in 
BSA compliance, including the establishment of an examination 
program office, are important steps in that direction. But if 
we are going to fully establish the integrated, accountable 
oversight regime we clearly need, FinCEN should be equipped not 
just for observation, but also for action.
    FinCEN needs the compliance examination capabilities it 
currently lacks. Its efforts should be reinforced with criminal 
investigative powers that are largely absent from our anti-
money-laundering system. Through FinCEN, although it has been 
given a statutory responsibility for the Bank Secrecy Act, it 
has few resources, and it is easily marginalized by the 
frontline regulators.
    If you consider the 6-year lag between when the OCC first 
noticed problems at Riggs and when FinCEN was made aware of 
them, that is a tremendous lag. A clean money compliance force 
at FinCEN could unify our anti-money-laundering 
responsibilities and even broaden our efforts by examining 
financial sectors that currently have no regulator.
    With the ability to deploy its own examiners to trouble 
spots and literally look over the shoulder of the regulators, 
FinCEN could ensure a strong focus on high-risk transactions, 
such as those that occurred under our own nose at Riggs with 
their Saudi clientele.
    And as we read reports about the Saudi Embassy's continuing 
search for a bank to replace Riggs, the establishment of these 
new powers could provide greater certainty to our hopes that 
the era of free-wheeling, unregulated Saudi cash infusions to 
Islamic militants in our own country are over.
    On a related note, I hope that Treasury will give serious 
consideration to the proposal made yesterday by the Independent 
Task Force on Terrorist Financing. Among its recommendations 
were that Congress enact a Treasury-led certification regime on 
terrorist financing that will annually report to Congress the 
efforts of their other countries to combat terror funding and 
would impose sanctions on countries that failed to perform up 
to standard.
    A system like this could provide a useful lever in securing 
better cooperation from recalcitrant governments such as the 
Saudis who have facilitated the flow of funding to terrorist 
organizations, despite their protests to the contrary.
    This administration has done a remarkable job in getting 
the Saudis to enact the reforms that we have seen recently, but 
we must never forget that we are dealing with a government that 
has been a chief financial supporter of the fanaticism that led 
to the murder of more than 3,000 people on September 11th.
    I am also very deeply concerned by the circumstances 
surrounding the UBS case, in which flagrant mismanagement of a 
U.S. currency depot overseas resulted in our currency being 
shipped to countries currently under U.S. sanctions. While the 
Fed was clearly the frontline regulator responsible for the 
failure, we need to examine ways to ensure that the Treasury 
Department sanctions are enforced and that the ECI program is 
implemented properly.
    I am interested in learning more about how OFAC and the 
other Treasury assets might be better utilized in the future.
    On a final note, I am very interested in how Treasury 
intends to handle the pending expiration of the Terrorism Risk 
Insurance Act. While TRIA was designed as a temporary bridge to 
the development of a functional private-sector terrorism 
insurance market, a recent study by the General Accounting 
Office concluded that there is not a sustainable marketplace 
for this coverage after the program expires.
    In addition, the NAIC, representing 51 bipartisan state 
insurance commissioners, agrees that we must act this year to 
avoid the market disruptions that we are already beginning to 
see.
    Given the state of the insurance marketplace and the 
continuing threat of terror, I believe it is in the best 
interest of the American people that we consider retaining a 
systematic approach in place to protect our country's economic 
security.
    In fact, I recently sent a letter to Secretary Snow, signed 
by 183 of my colleagues, urging the Treasury Department to 
extend the make-available provision which expires at the end of 
this fiscal year and to support the overall continuation of 
this critical program.
    There is broad, bipartisan support in this committee and in 
the House for doing so, and I hope to learn more from Treasury 
as to how they intend to handle this matter.
    I thank you, and I look forward to today's testimony.
    I want to just simply say that, without objection, all 
members' opening statements will be made part of the record.
    And I turn to you, Mr. Gutierrez.
    [The prepared statement of Hon. Sue W. Kelly can be found 
on page 44 in the appendix.]
    Mr. Gutierrez. Thank you.
    Good afternoon, and thank you very much, Chairwoman Kelly, 
for calling this hearing. We have been having a series of these 
oversight hearings, and this one about the Department of 
Treasury is very important. There are a number of areas of 
concern which I hope we can address today.
    As you know, I have been very troubled by the actions of 
the OCC. I believe that their preemption rules issued earlier 
this year represent an unprecedented expansion of federal 
preemption authority without appropriate congressional 
authorization.
    In February, the members of our full committee adopted 
these concerns as part of the committee's budget views and 
estimates, along with the fact that the OCC's budget did not 
increase to reflect its significant absorption of states' 
responsibilities.
    This meant that it would either be inadequately funded to 
fulfill its mission--ensuring the safety and soundness of 
national banks and protecting the deposit insurance system--and 
its congressionally mandated functions, or that it would be 
giving short shrift to these new consumer protection duties it 
was taking over from the States.
    None of these alternatives is acceptable.
    Since that time, it has become clear that the OCC has not 
even been living up to its primary responsibility, which makes 
it even more illogical to give them additional responsibilities 
which are currently being ably performed by the States, 
especially since almost every instance where the OCC eventually 
took action against an institution--and I do mean eventually, 
because they have a long history of dragging their feet in a 
completely unacceptable way--in any case, in almost every 
instance where they eventually took action against an 
institution, the initial problem was often brought to their 
attention by either the FBI or an attorney general or even the 
bank itself.
    I am very glad that the inspector general is here today. 
And I am particularly interested in the report issued on May 
28th regarding material loss reviews of failed institutions. I 
am disturbed by the OCC's significant supervisory weaknesses 
identified in that report, and I ask that it be made part of 
the record.
    [The following information can be found on page 128 in the 
appendix.]
    I trust that the I.G.'s office will also be conducting a 
thorough investigation of the Riggs matter so that we can 
determine why the OCC failed to discover wrongdoing, failed to 
act when the FBI and the press alerted them to the problem, and 
why the OCC failed to disclose material information to Congress 
when it testified on the matter before this subcommittee and 
the Senate.
    I believe the OCC has proven time and time again that it 
needs more direct supervision from the I.G.'s office, Treasury 
and Congress.
    To that end, I strongly support your efforts, Madam Chair, 
to crackdown on criminal activity in our financial system. And 
I cannot imagine why the OCC would not welcome the assistance, 
since they are clearly not excelling in this area.
    But that is not enough. Not only does the OCC need 
additional assistance in the form of the I.G. and the State 
attorneys general and state banking supervisors enforcing 
against banks, but the OCC clearly needs stronger oversight and 
accountability from both Treasury and Congress.
    Therefore I also intend to introduce legislation to make 
the OCC an appropriated agency so they can be more accountable 
to Congress for their actions. I hope my colleagues will 
support me in this effort.
    Regarding other issues, I would like to hear about the 
investigation into the use of Treasury staff to analyze the 
tax-cut analysis and how that rhetoric ended up on the RNC Web 
page along with Secretary Snow's investment.
    I will ask questions about these and other issues later in 
the hearing. And I yield back the balance of my time and thank 
the Chairwoman once again for calling this hearing. I am 
looking forward to the testimony of the witnesses.
    Chairwoman Kelly. Thank you very much, Mr. Gutierrez.
    Mr. Oxley, our Chairman?
    Mr. Oxley. Thank you, Chairwoman Kelly, for convening 
today's oversight hearing to review functions and activities of 
the Department of the Treasury, with Deputy Secretary Samuel 
Bodman; in particular, its efforts to deal with money 
laundering and terrorist financing.
    Mr. Bodman, welcome to the committee. It is good to have 
you with us today, particularly on the issue of terrorism 
financing.
    This subject continues to be an urgent one for all of us. 
Those who are current in their newspaper reading saw the recent 
news of a federal grand jury indictment of Nuradin M. Abdi, 
most recently of Columbus, Ohio.
    This four-count indictment in the plot to attack a central 
Ohio shopping mall should remind us all of the seriousness of 
our work on these issues. Clearly, Mr. Abdi was being funded 
somehow. I doubt if he was working a 9-5 job.
    And I would remind everybody that we are working to protect 
innocent Americans from murder. This mission will continue to 
require our complete dedication. Clearly, if terrorists can 
target Columbus, Ohio, they can target anyplace in our country.
    Additionally today, I hope we will discuss recent and 
current activities of the Department, as well as talk about the 
status of the regulated financial sectors.
    Clearly, we could spend endless hours reviewing issues 
within Treasury's charter, considering the breadth of 
Treasury's mission. With the focus on the jurisdiction of this 
committee, however, I hope you can share your thoughts on at 
least a few of these issues.
    I look forward to your comments on the new Office of 
Terrorism and Financial Intelligence, as well as government-
sponsored enterprises, the Office of the Comptroller of the 
Currency and the Office of Thrift Supervision.
    In addition to the Deputy Secretary, we have with us today 
a panel of four distinguished public officials to talk about 
the pressing need for the effective collection, accurate 
integration and prompt analysis of information related to the 
movement of funds related to terrorist financing. So let me 
offer my thanks to our distinguished witnesses for their time 
and effort to appear and to answer our questions.
    Again, my thanks to Chairwoman Kelly for her leadership on 
these important issues of oversight. And I yield back.
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 46 in the appendix.]
    Chairwoman Kelly. Thank you very much, Mr. Chairman.
    Mr. Inslee?
    Mr. Inslee. Thank you.
    I just want to thank the Chair for being so diligent in 
giving this opportunity. It really is something that is very 
important.
    Just a brief comment: I am looking forward to testimony 
about our current status, particularly the Saudi Arabia 
situation in regard to those families involved in the 
hijackings of September 11th and their exit from this country 
and our follow-up in that regard. So I look forward to that 
testimony.
    Thank you.
    Chairwoman Kelly. Thank you.
    I want to go back to a bit of business here. So without 
objection, I ask that the I.G. report to which Gutierrez 
referred in his opening statement be placed in the record.
    Without objection, so ordered.
    Mr. Gutierrez?
    Mr. Gutierrez. I simply ask unanimous consent that the 
gentlemen from Vermont, Mr. Sanders, should he arrive at the 
subcommittee, be allowed to be part of the committee 
proceedings.
    Chairwoman Kelly. So moved.
    Mr. Garrett, have you an opening statement?
    Then let us proceed.
    On our first panel, the subcommittee is pleased to have 
with us today the Deputy Secretary of the Treasury, Dr. Samuel 
Bodman.
    President George W. Bush nominated Samuel Wright Bodman to 
be the Deputy Secretary of the Treasury on December 9, 2003, 
and the U.S. Senate confirmed him on February 12, 2004. Dr. 
Bodman previously served as the Deputy Secretary of the 
Department of Commerce beginning in 2001. A financier and 
executive by trade, with three decades of experience in the 
private sector, Dr. Bodman manages the day-to-day operations of 
the Cabinet agency.
    Without objection, sir, your written statement will be made 
part of the record. You will be recognized for a five-minute 
summary of your testimony. Thank you so much for appearing here 
today.

     STATEMENT OF HON. SAMUEL W. BODMAN, DEPUTY SECRETARY, 
                     DEPARTMENT OF TREASURY

    Mr. Bodman. Madam Chairman, Congressman Gutierrez and 
members of the committee, thank you for the opportunity to be 
here.
    I have had the pleasure of meeting with Congresswoman Kelly 
as well as Chairman Oxley over the last couple of weeks, and I 
know that they, like I, view the Treasury Department and this 
committee as partners in the critical effort to safeguard our 
nation's financial system.
    As requested, I have submitted testimony that addresses a 
number of issues that I was asked to comment on. I would be 
pleased to answer questions about those.
    I would like to use my time in the oral testimony to touch 
on two major issues of interest to our Department: first, the 
Department's ongoing efforts to advance our campaign against 
terrorist financing; and secondly, and related, the 
Department's role in ensuring compliance with and enforcement 
of the Bank Secrecy Act.
    The Treasury Department has broad authorities. It has 
relationships and expertise in the financial area. That is 
really the core of what we do.
    As importantly, we have a cadre of dedicated and very 
diligent individuals who work very hard every day, along with 
countless others in the U.S. government, to fight the financial 
war on terror and to protect the integrity of our financial 
system.
    We have very real and concrete successes that I have seen 
firsthand, having arrived just four months ago.
    But as the recent attacks around the world demonstrate, our 
enemies are numerous, they are resourceful and they are 
continually adapting to new circumstances. We must do the same. 
We must use every tool at our disposal, including those in the 
financial realm.
    The challenges we face require unwavering political will, 
active and continuous leadership by senior policymakers and 
sustained commitments from all of us.
    We are in this fight for the long term and the Treasury 
Department must be organized to reflect that reality.
    That is why the administration has collaborated with 
Congress to develop a new structure in Treasury, a high-profile 
office led by an undersecretary--it would be one of only three 
that would be in the Department; there are two now--together 
with two assistant secretaries.
    This office, the Office of Terrorism and Financial 
Intelligence, or TFI, as we call it, will bring together 
Treasury's intelligence, regulatory, law enforcement, sanctions 
and policy functions to cover this area.
    The office has two major components. One assistant 
secretary will lead the Office of Terrorist Financing. Building 
on efforts already under way, this arm will function as our 
policy and outreach apparatus on the issues of terrorist 
financing, money laundering, financial crime and sanctions. It 
will continue to develop and help implement policies and 
regulations in support of the Bank Secrecy Act and the PATRIOT 
Act.
    In the international arena, the office will advance 
international standards, conduct assessments, administer 
technical assistance and apply protective measures against 
high-risk jurisdictions.
    The second assistant secretary will lead the Office of 
Intelligence and Analysis, or OIA. This office will ensure that 
Treasury properly analyzes relevant information to create 
actionable financial intelligence that the government can use 
effectively.
    Meeting this essential mission will necessarily require 
increased coordination with other elements of the government, 
including law enforcement and regulatory agencies.
    A word or two about resources: Secretary Snow has made a 
commitment to fund the personnel and related start-up costs for 
the TFI operation for the current and next fiscal year without 
requesting new money. And we will honor that commitment by 
reprioritizing existing funds.
    At the same time, we will need to invest in substantial 
information technology and infrastructure systems to make TFI 
into a world-class organization, particularly on the intel 
side.
    We are currently looking at just how much that will cost 
and what funding resources are available to us, such as 
Treasury's Asset Forfeiture Fund, in order to implement the 
systems for this new office as soon as possible.
    You will hear more about the Department's activities in the 
TFI area from FinCEN Director Fox, OFAC Director Newcomb and 
IRS-CI Chief Nancy Jardini during the next panel.
    Turning to the second topic, the related topic, the 
Department's efforts to ensure compliance with the BSA: The 
purpose of BSA, enacted in 1970, is to promote transparency and 
accountability in the U.S. financial system in order to 
preserve the integrity of that system and to protect it from 
criminal abuse.
    Most recently, the PATRIOT Act strengthened and expanded 
BSA regulations to include enhanced due diligence and customer 
identification requirements, expanded information-sharing 
authorities and new industries subject to BSA obligations.
    While Congress has placed the responsibility for complying 
with the requirements of BSA on the private sector, the 
businesses that fall under this framework, the Treasury is 
responsible for ensuring that the act is effectively 
implemented and administered. In other words, banks and other 
institutions are required by law to comply. We are charged with 
enforcing that compliance.
    The Secretary has delegated responsibility for enforcement 
of this system to FinCEN. This includes the authority to pursue 
civil enforcement actions and monetary penalties.
    However, in order for FinCEN to have the information 
necessary to assess compliance and to levy penalties, we rely 
on the regulatory oversight of eight different federal agencies 
to which the Secretary has delegated authority to examine 
institutions subject to the BSA.
    Several of the eight, like the IRS, the OCC and OTS, are 
part of the Treasury Department, albeit with varying degrees of 
statutory oversight by the Secretary.
    Others, like the FCC and the FDIC are fully independent 
agencies with no official relationship to Treasury. Therefore, 
the Secretary has no direct authority over them.
    I say this not to imply a desire on the part of Treasury to 
exercise control over other agencies, but in order to make 
clear the operational realities of our current arrangement.
    There are substantial benefits from this approach. This 
approach capitalizes on existing structures and on the unique 
expertise and examination capabilities of the regulatory 
agencies that already exist and are most familiar with specific 
financial industries.
    However, there are also potentially serious risks 
associated with this kind of decentralized system, particularly 
in terms of transparency, accountability and timeliness. In 
other words, this type of system requires intense management.
    In light of these challenges, and given recent events, the 
Secretary and I are directing a fresh look at the status of BSA 
compliance and enforcement across the U.S. financial system.
    We are engaged in discussions with various regulatory 
agencies, both those within and outside the Treasury. We are 
discussing with them ways to monitor and evaluate their 
progress and their proficiency. We are considering methods to 
develop and enhance regular reporting and information-sharing.
    We are working on matters related to examination policies 
and procedures; aggregate results of examinations across each 
of the regulated financial industries; deficiency trends in BSA 
and OFAC-related compliance; and enforcement actions 
contemplated in response to those deficiencies.
    There are other challenges related to BSA implementation, 
and we are addressing those as well.
    For example, the PATRIOT Act extended BSA reporting beyond 
the traditional banking system. There is much work to be done 
to be fully confident that those non-banking financial 
institutions are fulfilling their responsibilities.
    FinCEN and the IRS have taken significant steps, for 
instance, in registering money service businesses. But the 
magnitude of the task of ensuring compliance in this area is 
enormous.
    I would just reiterate that effective enforcement of BSA 
requires intense management and close coordination and 
communication among the regulatory agencies. Just today, for 
example, the bank regulators and FinCEN jointly issued guidance 
on accepting accounts from foreign governments and embassies.
    It has long been the policy of the United States government 
that persons residing or working in this country should have 
access to U.S. banking services. And we also have had the 
policy that financial institutions must comply with the Bank 
Secrecy Act.
    These policies, in our view, are not in conflict. We 
believe that financial institutions can provide appropriate 
banking services while also satisfying the BSA.
    Before I conclude, let me say that the Department's acting 
inspector general, Dennis Schindel, and his team continue to 
examine a wide range of issues related to BSA compliance. I 
appreciate their contributions to the Department's mission, and 
I am very pleased that Mr. Schindel will participate in the 
next panel.
    Despite the challenges that exist, I do think that as a 
general matter the government and private sector have done a 
good job of developing and implementing the regulatory changes 
to the BSA following the passage of the PATRIOT Act. I would be 
happy to discuss these issues in greater detail.
    I thank you for the opportunity to be here, and I hope that 
this will be the start, Madam Chairman, of an ongoing dialogue 
between our Department and this committee.
    Thank you.
    [The prepared statement of Hon. Samuel W. Bodman can be 
found on page 47 in the appendix.]
    Chairwoman Kelly. Thank you very much, Dr. Bodman.
    Yesterday, the Council on Foreign Relations Independent 
Task Force on Terrorist Financing released a report which 
recommended that Congress enact a Treasury-led certification 
process to put more pressure on foreign nations to combat the 
financing of terrorist organizations.
    Do you agree that a certification process for foreign 
countries would help ensure a greater cooperation from our 
counterparts?
    Mr. Bodman. First, let me say that, looking at the report 
that was delivered as a whole, in general I am quite supportive 
of what the council had to say. They made observations, 
suggestions, particularly with respect to Saudi Arabia and the 
progress that the Saudis have made, on the one hand, and on the 
other hand, had made observations about what improvements 
should be made.
    With respect to that particular recommendation, I would not 
want to respond at this particular point in time, Madam 
Chairman, until I had had an opportunity to study it or think 
it through.
    I think that the general approach that I have always 
favored is one of trying to utilize resources that are already 
there and utilize the power of persuasion, as opposed to 
threats and as opposed to sanctions, and that those should only 
be used as a last resort.
    And so it would be my observation that that would be an 
obstacle that would have to be overcome, at least in my mind, 
in order to reach support for that proposition.
    Chairwoman Kelly. Thank you.
    As you know, the OCC has reportedly been obstructing the 
Treasury I.G.'s ability to investigate national banks accused 
of criminal activities.
    I am deeply concerned that the OCC previously misled this 
committee, whether intentionally or accidentally, in answering 
a question I asked about what happened to the examiners in 
charge of investigating Riggs and where they are now.
    The person who testified failed to admit the troubling fact 
that the chief examiner in charge of Riggs from 1998 to 2002 is 
now working at Riggs as the vice president and chief risk 
officer.
    I am especially disappointed that the OCC would disrupt the 
inspector general's efforts to review and strengthen 
antiterrorist financing efforts.
    What is the Treasury Department doing to address this 
dispute?
    And actually, I am going to ask you a follow-up right now, 
so you know it is coming. There seems to be a vacuum with 
regard to criminal investigative powers at the Treasury. And 
the OCC seems intent on making sure no one fills it. Couldn't 
the OCC attempt to thwart the I.G.'s efforts, undermine our 
total efforts against terror financing?
    So I have asked you two questions: What are you doing to 
address it? And do you think that what the OCC is doing is in 
fact going to help undermine our efforts against terrorist 
financing?
    Mr. Bodman. Let me take the questions in the order that you 
asked them, Madam Chairman.
    The first question, if I may, I will split that in half as 
well, because I believe there are two issues.
    One, there is in fact a difference of opinion between the 
OCC and the inspector general. The acting inspector general is 
here, and he can speak to that when he is before you. But, as I 
understand it, there is a difference of opinion over the 
authority that does or does not exist at the I.G. to 
investigate alleged criminal behavior on the part of specific 
bankers.
    The OCC, for very good reasons, is very jealous, guards 
very jealously its independence. It has received that 
independence from Congress in a bill passed by Congress, signed 
by the President some years ago. And it is that in my mind, 
raises the question from time to time about what specific 
authorities exist for the Secretary or for others who work for 
the Secretary in overseeing the affairs of the bureaus that 
report to the Treasury under his general oversight. So that is 
the issue there.
    In terms of the specific question that came up with respect 
to a Florida bank, and that is where the controversy arose. And 
at the present time, the Office of the General Counsel in 
Treasury is working to adjudicate that matter and to make a 
determination as to where it stands.
    I will tell you, from having met with our general counsel, 
that this matter is uncertain, has a good deal of uncertainty 
about it. And that is why it is taking them some time to work 
out the various matters related to it. We want to get it right. 
And it is something that they are working very hard on.
    Your second question relates to your observation that there 
was a vacuum with respect to the criminal investigation 
activities within Treasury.
    I would respectfully disagree with that. The Treasury has 
had, when you look at the Riggs situation and you look at other 
problems, UBS being another case in point, has had some 
failings with respect to the system as it is now practiced.
    It is my view, that even with the current legislative 
framework that we have that there are opportunities to 
substantially improve the management of the system under the 
current authorities that we have, such that we, I believe, can 
have a much more effective system.
    As we go about doing this in the weeks and months ahead, I 
would expect to maintain contact with this committee and to 
report back to this committee as to how we are doing and what 
the issues are and if there is anything that we believe needs 
to be done that would more effectively further this.
    This is a very high priority, it is a very high priority. 
It is not my only priority, I have to tell you, but it is a 
very high priority on the list of things that the Secretary 
gave me to do when I took this job starting four months ago.
    Chairwoman Kelly. I believe that when you were here before, 
you testified that the IRS criminal investigation is the only 
entity within Treasury with a BSA criminal investigative 
authority.
    I doubt very much that Riggs could have continued to flout 
the BSA last year with the OCC examiners on site if there was 
any real threat regarding criminal enforcement.
    So I am not sure, but I think maybe it is a real mistake 
for them, the OCC, to be fighting a stronger criminal 
enforcement element in the Treasury.
    Do you think this is going to impede the I.G.'s ability to 
investigate Riggs?
    Mr. Bodman. It strikes me that the issues related to Riggs 
relate to something that would certainly be fair game for the 
I.G. And Mr. Fox will speak to that. I hope that after we get 
FinCEN reorganized and itself focused with respect to its 
responsibilities in this area, that it would be fair game for 
them on an ongoing basis.
    So I do not think the difference of opinion that exists 
vis-a-vis the Florida situation, I would not think that it 
would impede the I.G.'s ability to investigate the situation at 
Riggs.
    I can tell you that we have had, following the publicity 
involving Riggs, following the meetings, frankly, that I had 
with you, Madam Chairman, and with Chairman Oxley over the last 
couple of weeks, we have had a series of meetings that have 
involved the Secretary himself, as well as myself and the 
members of the various bureaus that are involved in this, 
including FinCEN, including OFAC, including OCC, including OTS, 
about the need for there to be in place a system of evaluation, 
of monitoring, how good a job is being done by OCC, OTS, as 
well as these other agencies.
    And that needs to be done on behalf of the Secretary by 
FinCEN. And they need to get themselves organized to do that, 
to think that through. Mr. Fox, I think, will be in a position 
to speak to that.
    And because he, through this new TFI organization--and 
hopefully we get Mr. Levey confirmed and get him in place, 
which will bring, frankly, a great relief to me to have someone 
who can work on these issues full-time, that once we get that 
in place, he will be reporting up through Mr. Levey to me, and 
that I can then ask the questions that you are asking of me, I 
can put to the people who are doing the work full-time.
    And when the Secretary asks me, which he has done, ``Is 
Riggs an outlier, is Riggs a singularity,'' and my answer to 
him, Madam, is that I believe it is. I believe that, in 
general, the work that our regulators are doing with respect in 
the financial area is very good and it is very strong, but I do 
not have proof. I do not have a system in place, that I am used 
to from my prior experience, in my prior business life, such 
that I have a group of individuals that work for me that can 
evaluate, monitor a new program.
    And so that is what we need, that is what the Secretary 
needs, and that is what we are trying to create.
    Chairwoman Kelly. I had hoped that if you are putting 
FinCEN in a place of responsibility of reporting to the 
Secretary, that you would give them both civil and criminal 
ability. I would think that they would need a complete panoply 
at their fingertips, and I hope that that will be considered.
    Unfortunately, sir, we have been called for a group of five 
votes.
    Oh, Mr. Chairman?
    Mr. Oxley. Thank you. I thank the Chairwoman. If you could 
just indulge me for a couple of minutes for some questions. I 
cannot return. And I did want to ask Mr. Bodman some questions.
    Chairwoman Kelly. By all means.
    Mr. Oxley. Thank you.
    Mr. Bodman, I have some questions on the BSA. How much 
money on an annual basis does IRS spend inputting, maintaining 
and warehousing BSA data?
    Mr. Bodman. I do not happen to know that offhand, Mr. 
Oxley. But I would be very pleased to get you the answer.
    Mr. Oxley. Thank you.
    The Canada and Australia and other newer financial 
intelligence units have there own computer systems up and 
running because they think that is the most efficient method. 
Shouldn't FinCEN own and operate its own computers?
    Mr. Bodman. Right now, the information on BSA, as I am sure 
you are aware, sir, is collected in the IRS facility in 
Detroit. I understand that there have been differences of view 
within Treasury. And, here again, my approach has been to try 
to get IRS and FinCEN together.
    The collection of information, which numbers hundreds of 
thousands of bits of information, and the auditing and 
certification of it, is something that is done, can be done, 
should be done, by a group of individuals. It can be done by 
the IRS; I believe it can be done effectively.
    But it cannot be done without oversight in the same way 
that FinCEN needs to have oversight and access to the Secretary 
to get changes made if he or the organization is not satisfied 
with the quality of the work being done, that, therefore, he 
has access and that the place can be managed.
    The problem, sir, that we have is that Treasury has not had 
a deputy in a year and a half, and there has not been a person 
who has been able to take the responsibility to see to it that 
issues of this sort are dealt with.
    It may be that you are correct. It may be that FinCEN has 
to start from scratch and to create its own system and have its 
own clerical group to collect the information, do the data 
entry and so forth.
    I would hope, sir, that we could avoid that and make use of 
resources that we already have.
    Mr. Oxley. Well, I appreciate your candor on that, although 
I do say that there is some evidence that other countries are 
quite successful using that method of their own computer and 
information base. And obviously we will pursue this. And that 
is obviously one of the reasons why this series of oversight 
hearings that Ms. Kelly is so well doing is part of this 
process.
    I thank you and yield back.
    Mr. Bodman. I appreciate your comments, sir. And we will 
certainly look into what those countries are doing. I, frankly, 
was unaware of it, and I will find out.
    Chairwoman Kelly. Thank you very much, Mr. Chairman.
    We are going to have to recess. We will, with luck, be back 
here somewhere in the vicinity of 3:15, 3:20. It depends on how 
rapidly these votes go. But the committee will stand in recess 
until such time as we are able to reassemble.
    Thank you.
    [Recess.]
    Chairwoman Kelly. Another bit of business we are going to 
do here. I ask unanimous consent that the gentleman from 
California, Mr. Royce, be allowed to participate in today's 
hearing and be able to revise and extend his remarks. Without 
objection, so ordered.
    I am sorry, Dr. Bodman, that we had to keep you here for 
this, but we will try to go fast. This subcommittee has looked 
closely at the concept of streamlining our efforts, which was 
also recommended by David Aufhauser when he was the general 
counsel at the Treasury.
    In light of the recent failures at Riggs and UBS, wouldn't 
it be more efficient and effective if there were a centralized 
body in Treasury that had compliance and audit officers who 
could oversee the banking regulators and other targeted areas, 
as well as broaden our BSA compliance efforts to new areas that 
do not have financial regulators?
    You kind of addressed that a bit in your testimony. I 
wonder if you would want to enlarge on that.
    Mr. Bodman. With all due respect to Mr. Aufhauser, whom I 
know and have great regard for, I would respectfully disagree, 
at least at this point in my learning curve at the Treasury.
    It is my view that whenever government finds a problem--and 
to be sure, you have certainly defined a problem here, Madam 
Chairman, there is no doubt about that--there is a tendency to 
create a group to solve the problem. And that, of course, tends 
to lead to an ever-increasing size of the government.
    I would believe that with a more intensive management 
regime, and particularly focusing on the effect I believe that 
FinCEN can have--you will get a chance to talk to Mr. Fox and 
hear what it is he has in mind subsequently--but I think you 
will find that there is plenty of room for improvement, plenty 
of opportunity to create the kind of environment that would 
make you proud as a congresswoman to have been, at this point 
in time, overseeing what we are doing.
    So I would like to have a go at it and to see if we cannot 
use all of these resources. We have all of these people who 
have devoted their lives and they have great expertise and know 
these institutions. And I would like to try to make use of 
them.
    And by training them and training their staffs and 
expanding and making sure that we have a way of verifying that 
OCC or OTS, whoever it is, is doing what it is they are 
supposed to be doing, that has, frankly been the missing link, 
is having an outside observer, outside evaluator, outside 
monitor of what is going on.
    So that is what I would prefer to do. At least, that is one 
man's view.
    Chairwoman Kelly. That takes me back to some of your prior 
testimony when you were here before, because at that time when 
I asked a question of you, you indicated that some of your 
concern was, at that time, the fact that the OCC and the OTS 
are not funded by the regulated community, but instead are 
funded by outside sources, that that might weaken the Treasury 
Department's sway over their bureaus in their own department.
    I am just thinking that if we had a compliance force that 
is within Treasury that has a greater oversight on these 
entities, that it might strengthen Treasury's ability to ensure 
that they are performing up to standard.
    Certainly, Mr. Gutierrez picked that up. And he is 
obviously going to offer legislation to alter the structure so 
that these two come under the oversight surveillance of 
Treasury.
    Basically, I think what it is we see, at least Congress, my 
committee, seems to see that we have a patchwork enforcement 
program, and there is no true center of gravity here.
    So if we leave the regulators to their own devices, as we 
have seen, can be kind of problematic, because clearly they 
have not seen anti-money-laundering as being one of their main 
responsibilities and at least as important as their safety and 
soundness responsibilities. And now it is. And now we have to 
face that and focus on that.
    So I am just going to go back to the original question: 
Don't you think a compliance force in Treasury that has a 
greater oversight over all of the eight entities, wouldn't that 
strengthen Treasury's ability to ensure that they are 
performing up to the standards that they, themselves, are 
requiring?
    Mr. Bodman. Let me start with the areas where I agree with 
you, ma'am.
    One, if you leave anybody to function on their own, without 
outside supervision, without another pair of eyes looking at 
what they are doing, any institution, you are asking for 
trouble. Even corporate executives have found ways to create 
lots of trouble. So, therefore, you and I are in agreement on 
that.
    The question is: Is there a way to take what we have now 
and to make it work? That is really what it gets down to. And I 
would agree with you that what we have been doing heretofore 
has been wanting. We have problems. I mentioned before that I 
cannot tell the Secretary, if asked, that Riggs is an outlier, 
or UBS is an outlier, because we do not have a mechanism for 
ascertaining that.
    Now, when you and I talked before, and when I first met 
you, we chatted, and I did allude to the fact that OCC and OTS 
have specifically written legislation that precludes the 
Secretary from entering into the discussions on any matter that 
comes before those bodies.
    It then gets down to a definition of what the word 
``matter'' means. That is almost a direct quote out of the 
FIRA, the Financial Institution Restoration Act. And it is 
therefore a question of how that act links with other kinds of 
legislation that govern this area.
    I also mentioned, you were quite right, your memory is 
quite accurate, that both OTS and OCC have means of financing 
themselves outside the normal authorization, appropriation 
techniques and are funded by their licensees, their clientele, 
if you will.
    And, therefore, both of those tend to loosen the 
authorities that the Secretary specifically, the Department 
generally, has over those institutions. And we try to respect 
that, because that is the law.
    I think it is important, however, to note that we do have 
some--I have learned something since I saw you, and I continue 
to learn on this, and that there may be in the delegation 
process under the BSA that the Secretary undertook vis-a-vis 
FinCEN that, where the Secretary, back in the 1970s when this 
delegation of responsibility was initially made, that in 
connection with that, there may well be the opportunity for 
FinCEN to perform exactly the function that you would like 
performed.
    And that is what I would like to hold out as an 
opportunity, rather than go through the exercise of trying to 
either get new legislation or new regulation. It may be that 
what we have now can be made to work. And so that is what I 
meant; I would like to try that and then work with you and your 
committee and report back as to how we are doing. That is what 
my hope would be.
    Chairwoman Kelly. Thank you.
    I wanted to ask one quick question about the TRIA 
situation. Given that some insurance contracts are being 
written right now that extend beyond the expiration of TRIA, 
and Treasury is not going to be reporting to Congress on this 
until June of 2005, do you agree that with the GAO finding that 
there is a mismatch between the policy calendar and the 
commercial insurance cycle?
    Mr. Bodman. There is a mismatch. But I have been in the 
insurance business, at least part of my life in the insurance 
business, and I have great confidence in the industry to be 
able to price that.
    As you know, we are hopefully in the final stages of the 
make available study and that that hopefully in the near term 
will be announced, the decision on that will be announced by 
the Secretary. And then we have a report due, as you mentioned, 
next June.
    And I am not prepared to comment on extending this until we 
know more. And hopefully, as we go through this exercise of 
learning more and determining whether the GAO study is correct 
or not--I am not in a position, at least as I sit here, to tell 
you that I agree or disagree with what the GAO had to say.
    Chairwoman Kelly. I want to simply place in your mind the 
fact that I had a conversation with someone who came to me and 
said, ``I want to buy a $4 million building in a city. I cannot 
do that because the mortgage people will not give me my 
mortgage because I cannot get terrorism reinsurance extending 
through the life of the mortgage.''
    I am hearing this problem from the real estate people, 
universities, hospitals, museums. It goes on and on and on. It 
is a very broad spectrum of our economy that is being affected 
by the lack of certainty with regard to what Treasury's going 
to do or what this government is going to do about TRIA.
    It is extremely important, I believe, so that it does not 
move as a dislocator in this present economic structure, that 
we get some certainty with regard to TRIA. And I am sure you 
know where my personal prejudice is on that.
    I thank you very much for answering my questions. And I 
turn to Mr. Gutierrez.
    Mr. Gutierrez. Thank you.
    Mr. Bodman, at a recent G-8 summit in Sea Island, Georgia, 
and Summit of the Americas earlier this year, the Bush 
administration made a commitment to reduce by half, by 50 
percent, the cost of remittances to consumers by the year 2008. 
The communiques referred to efforts to promote competition, use 
financial literacy efforts and help people join the financial 
mainstream.
    Can you please outline for the subcommittee the specific 
policies the administration will adopt to promote competition 
in the remittances industry and other specific efforts that 
will lead to reducing the cost by 50 percent by the year 2008?
    Mr. Bodman. Yes, sir, I would be pleased to talk to you 
about that.
    First, we do have an Office of Financial Education that has 
been active, those of us in the Department have been active 
during--I believe I am correct that April was Financial 
Literacy Month. And we were all out on the road all over the 
country working on this matter.
    There is also within the government a group of governmental 
agencies that are all involved in financial education. We 
formed them into a financial education advisory group. I have 
met with them. So we are very active in that area.
    To be more specific in answering your question, the goal of 
reducing by half the cost of remittances comes, I believe--I 
was not involved personally in setting the agenda at Sea 
Island, but I believe it must have come from the experiences of 
the Inter-American Development Bank, which has been 
specifically successful in reducing the cost of remittances 
from the United States to Latin America, including the 
Caribbean, with specific focus on Mexico.
    And there it has been done largely by being very aggressive 
with the financial community and making it known to them that 
there was opportunity there. It turns out that the very high 
fees that were being charged in the early days, some 15 percent 
I think as an order of magnitude, were there because only one 
company was serving that market. And the IDB worked hard, 
others worked hard in order to develop that. And that has now 
come from 15 percent down to 7 percent.
    They, within IDB and with respect to Latin America, have--
--
    Mr. Gutierrez. Well, let me just say, Mr. Bodman, maybe you 
could submit in writing for the committee the specific policies 
that the administration is going about specifically to reduce, 
what steps are going to be taken to achieve it by 2008. Because 
it still costs you $14.95 to send $100, Western Union or 
MoneyGram.
    And we still do not know what the cost of the transaction 
truly is, since we do not know what the exchange rate is. You 
know, you and I, we get a great exchange rate when we are down 
vacationing somewhere in Latin America, because we use our card 
from our bank. Well, do not think that the other companies have 
the same exchange rate when you walk into an exchange company, 
a remittance company.
    Mr. Bodman. We will be happy to give you a specific 
policy----
    Mr. Gutierrez. Let me ask you----
    Mr. Bodman. If I could just reiterate, sir, if I may. 
Forgive me for interrupting you, but I do want to reiterate 
that at least my understanding is that the cost of remittances 
from the United States to Latin America now averages 7 percent, 
not 15 percent.
    It started out at 15 percent, your number is quite right, 
14 percent, 15 percent. It is now 7 percent, on average.
    Mr. Gutierrez. But when Western Union and MoneyGram got 
sued, it could be as high as 19 percent.
    Mr. Bodman. That could be.
    Mr. Gutierrez. Well, it was. We checked it on a daily 
basis. It was easy to check. You send $100. You call the hotel 
in Mexico City. You see what the exchange rate at the hotel 
was. You see how many pesos arrived for your $100. Voila, 19 
percent.
    Mr. Bodman. I understand, sir.
    Mr. Gutierrez. And we have not done anything specifically, 
legislatively or from a matter of public policy to put the 
MoneyGrams and the Western Unions in check, other than 
obviously get trial lawyers, thank God they exist, to sue them 
in court and embarrass them to change their policies.
    But anyway, let me ask you a specific question about an 
area where Treasury is going to have an opinion. Recently 
Ranking Member Frank and others asked banking regulators 
whether it is permissible under current regulations to provide 
CRA credit to regulated financial institutions for offering of 
low-cost remittances services.
    The regulators agree that this is possible. Do you support 
this effort? And what will the Treasury Department do to 
encourage financial institutions to enter the remittances 
market so they can offer lower-cost alternatives to consumers?
    I guess the point being that the cheapest way is to get rid 
of the middle people and to get people into financial 
institutions and give them what I imagine you and I have--maybe 
you do not have an ATM card, but I imagine you have one, I have 
one. And that is really the cheapest way to send money. So we 
get ATM card, send it down to our brothers, sisters, family 
members. And they go to a local financial institution, $1.25, 
$1.50, $2, they can pull out $200.
    As you can see, we can get it down to 1 percent, and we can 
get the best exchange rate possible, which is the bank rate 
that you are getting from your bank.
    What about using this as a CRA criteria, how do you see 
that, and giving them credit for that?
    Mr. Bodman. I cannot speak to the CRA issues, sir. I would 
be happy to examine that and give you some specific written 
response to your question.
    I would reiterate that the way the IDB has been successful 
is to introduce competition for exactly the reasons that you 
mentioned. And they have been successful.
    And it is not down to 1 percent, but their goal is to get 
it down to 3 percent. And they have done it strictly through, 
just as you suggested, sir, encouraging and making it known 
that one can make a lot of money----
    Mr. Gutierrez. Well, I will tell you what. Then maybe we 
would agree that if we could encourage--since the money flows 
from here to there and not vice versa, the billion dollars a 
month goes from the United States to Mexico, for example, and 
30 percent of the gross national product of Guatemala and El 
Salvador, even sometimes more, comes from here to there.
    Maybe if Treasury would adopt the position and encourage 
financial institutions and encourage the regulators and support 
us in this effort, so that when somebody is getting their CRA 
evaluation they get credit for having gone out to the community 
and offered measures that allow remittances cost to be lowered.
    Suggestion. You can get back to us in writing on it.
    Mr. Bodman. Be happy to, sir.
    Mr. Gutierrez. Thank you.
    Last thing, just a small question. Maybe you will be able 
to answer this one.
    Is it true that the internal Web at Treasury is still very 
vulnerable to hackers and that the documents in former 
Secretary O'Neill's book are still readily available to hackers 
through Treasury's Web?
    We understand that there are a lot of problems in security 
over at Treasury on the Web site. Does the problem really 
exist? And, if it does, what are you doing to correct the 
security issues there?
    Mr. Bodman. There are problems with respect to the security 
of the IT systems at Treasury, sir. One of my first acts when I 
arrived four months ago was to order that the chief information 
officer of the Department report directly to me. Within a 
month, the person who was the CIO chose to resign and has left.
    Yesterday morning was the first day of work of our new 
chief information officer, a man named Ira Hobbs. He has 22 
years of experience, having worked at the Department of 
Agriculture. He is a very gifted man, very experienced man.
    I met with him this morning with all of the bureau heads, 
as well as with the heads of all the Department offices. His 
first assignment is to deal with the questions related to the 
security of the Department's IT operation. It has my----
    Mr. Gutierrez. Is he doing it all on his own? Are you 
hiring outside people?
    Mr. Bodman. No, we have people in the Department who are 
capable of dealing with information security. We have a CIO 
office.
    Mr. Gutierrez. I guess since the last guy left after 
getting the message to take care of this after three months and 
the new guy just started, I think you said yesterday or today--
--
    Mr. Bodman. That is right.
    Mr. Gutierrez.--and it has not been fixed, maybe we should 
look externally to fix it.
    Thanks a lot for the answer.
    Mr. Bodman. Thank you.
    Chairwoman Kelly. Thank you, Mr. Gutierrez.
    Dr. Bodman, I understand that you have a time limit in 
appearing before this committee. I wonder if you have the 
ability to allow me to at least let Mr. Royce and Mr. Garrett 
have at least a two-minute time period with which to ask 
questions. Is that going to be possible for you?
    Mr. Bodman. I do have a meeting back at the Department. But 
I would certainly want to entertain questions from both of the 
Representatives.
    Chairwoman Kelly. Thank you very much.
    Well, then I call on you, Mr. Garrett.
    Mr. Garrett. Thank you. Then I will get right to it, and I 
thank the Secretary here for being with us.
    Based upon your testimony, one of the objectives you say of 
the Department, of course, is for those who are living and 
working in the United States to have access to financial 
services.
    And on reading your testimony, you were saying that 
Treasury's job is to make sure that private-sector institutions 
fulfill their legal responsibilities. And it is noted that the 
BSA places the actual responsibility for compliance in several 
different areas on the private sector, one of which is for 
checking the identity of customers to financial services.
    We have had a number of hearings on money laundering, 
terrorism, use of our financial services. And one of the things 
that came out of that is easy access to the banking, financial 
institutions was one of the critical weaknesses that the 
terrorists exploited back on September 11th, and that is one of 
the areas that is being focused on in the future.
    I have a piece of legislation in right now, Financial 
Customer Verification Improvement Act, that goes to this point, 
because under the system that we have existing is that 
individuals are able to use documentation issued not by this 
government or any entity in this government, but by outside 
governments, most specifically consular cards.
    And that would seem to fly in the face of everything that 
we are trying to do and the responsibilities of private 
institutions, as far as identifying the customers who are 
coming into those financial institutions.
    What is the Department doing to try to address this 
problem? And why, up to this point in time, have we not limited 
the ability to use those cards?
    Mr. Bodman. It is the Department's view, sir, that those 
decisions are best made by the institutions in question and not 
by the bureaucracy of this department. This is a highly 
technical question related to the capability of any document 
being used to demonstrate that the person carrying the document 
is represented by that document.
    Having lived my life at the Commerce Department before I 
came over here, I can tell you that they are doing the 
technical work on this. And we, the U.S. government, have a 
couple of years of work to even set the standards for being 
able to do that for our own employees. It is going to be a 
major undertaking to do that.
    Treasury, I think wisely, I can tell you, as a newcomer, 
took the position that these decisions are best made by the 
institution that has to form the judgment, does this card 
represent the individual who is carrying it and does the 
information that is provided by that individual match up with 
the card?
    Mr. Garrett. Since I do not have much time, who would be 
using that card, other than an illegal individual, immigrant?
    Because if you were anyone other than an illegal immigrant 
into this country, you would have some form of other legal 
identification--passport, visa, work permit or something of 
that sort.
    So is there anyone who would be using that type of card 
that is not an illegal immigrant?
    And my second question: If that is true, isn't it incumbent 
upon Treasury to make that known to the private institutions, 
that only illegal immigrants are the individuals who will be 
using those cards?
    Mr. Bodman. If Treasury believed your proposition, then I 
would guess that there may be an obligation of Treasury to 
inform people. But, in my judgment, there are plenty of people 
who are not illegal immigrants that would be using cards. 
People do not like carrying their passports around in order to 
identify. Even U.S. citizens who are living abroad, members of 
government, have identification cards that they use to identify 
themselves when they are living abroad.
    So I think that there are lots of people that would have 
these cards, because for convenience, it is a way, just like a 
driver's license--the primary way we have of identifying 
ourselves as we go about our day-to-day lives here including 
getting on aircraft is a driver's license.
    You can then query what the ability is to counterfeit the 
driver's license, depending on which state it might come from. 
You have different quality driver's licenses and so on.
    So, I mean, this is very complicated, what you are onto, 
and I think an important issue. But the technology of it is a 
very important part of it.
    And I do think that, if I may say so, sir, the claim that 
only illegal immigrants would be using such a card is, in my 
judgment, incorrect.
    Mr. Garrett. I guess, it is not that they would be the only 
ones who may be using it, but they would be the only ones who 
have an exclusive need for it, whereas anyone else would have 
some other form of identification.
    And if Treasury is charged to make sure that the banks are 
making the best possible approach to verify, then perhaps there 
should be some responsibility say that other identification 
should first be demanded.
    Well, my time is up. And I thank you very much.
    Mr. Bodman. Thank you for your comments, sir.
    Chairwoman Kelly. Thank you.
    Mr. Royce.
    Mr. Royce. Madam Chairwoman, I would like to begin by 
commending your leadership, in particular, on combating 
terrorism finance. And I think you have used your position on 
this committee and in this Congress to very diligently pursue 
this matter, and I am appreciative.
    As I have said before, and nothing has changed to alter my 
thinking, I am greatly concerned about how this government is 
set up to fight the way Islamic terrorists are financing their 
engines of hate and murder.
    I think the Treasury Department needs to be the lead agency 
for fighting terror finance. As I see it, the Treasury needs to 
have first-rate capabilities in three distinct areas: in 
financial intelligence, in compliance, in enforcement. If one 
of the components is missing, then the other two become much 
less effective.
    I applaud the current efforts of Treasury to build up its 
resources. But today I think it is fair to describe the 
Department's compliance resources as scarce.
    And I think it is fair to say that its financial 
intelligence unit's ability to provide actual information is 
certainly not there yet. And as a result, we have seen some 
enforcement, but clearly not enough.
    And I think the argument that we do not want to overspend 
in this area is not a very credible one with me, because this 
is the one area where government, frankly, needs to be spending 
money right now to protect property and to protect human life. 
And if we were to do a calculation on 9/11, it would be in the 
hundreds of billions of dollars. And so I did not quite 
understand that response, in response to some comments that 
former Deputy Secretary Aufhauser had made before.
    But let me say that I applaud your efforts, Mr. Bodman. And 
I am very encouraged to have someone with your proven 
management skill and expertise at the Treasury.
    That being said, I think that the Treasury, and you in 
particular, should have the central role fighting terror 
finance. And I would like to learn more from you today about 
Treasury's role on the NSC's Policy Coordinating Committee on 
Terror Finance on the PCC.
    In your appearance before the Senate Banking Committee in 
April, you were asked about the PCC. And in answering the 
question, you said that Treasury did not need to chair the PCC. 
And I must tell you that I am troubled by Treasury's position 
in this regard.
    One of the things I hope to do is to get you to check some 
of your premises and maybe rethink some of your positions. Mr. 
Garrett asked you a rather pointed question.
    I want you to think about what would happen if we have 
another 9/11 and we find out that falsified documents like the 
ones he worries about were used by those here illegally in this 
country by, let's say, another deputy of Osama bin Laden to 
carry out an attack.
    I would like you to think about the fact that many of us 
believe that Treasury was supposed to be the lead agency in the 
war on terror finance. And I thought that you were supposed to 
be the person accountable in the government. And I think that, 
just like Defense runs combat and State runs diplomacy, I 
cannot understand how it should not be that Treasury would not 
run the war on terror finance.
    I understand that this battle requires that all 
governmental agencies work closely together, but that is the 
case in all major undertakings in government.
    In my view, we need clear, visible leadership. I do not 
think the NSC is the place for that. The NSC has not spent any 
time up here testifying on these issues to the American people.
    And I would like to give you the chance to voice your views 
on this subject, but afterwards, I would just like you--like I 
try to do. After 9/11, I tried to check a lot of my premises 
about the way in which government was organized to handle some 
of these challenges. And I just urge you to think about how we 
could reorganize Treasury.
    And I know that may put a lot more responsibility and 
certainly additional resources into Treasury. But we have a 
chair of this committee that is dedicated to try to rethink 
some of the fundamentals. And my intent here is to, over time, 
enlist your support in helping us do that.
    Mr. Bodman. Well, I am not sure where to start, sir.
    First, I believe that we are showing visible leadership 
with respect to the war on terror, terrorist finance, for the 
reasons that I have already commented on, some of the 
suggestions of the Chairperson.
    I will take your suggestion. I will rethink my positions, 
if that is what you have asked me to do, I will certainly do 
that. I would do that anyway. Frankly, this is a major 
responsibility, and I would tell you, based on our experiences 
to date, our system is less than perfect. We do have holes in 
the system, and we are attempting to deal with them.
    There are a number of hurdles that have to be overcome. I 
will not bother you with trying to enumerate them. Just suffice 
it to say that they are there, and we are attempting to deal 
with them.
    I do not consider the chair of the PCC to be a hurdle. We 
have very good relations. I think it is a good thing, frankly, 
that the NSC is taking, that the White House is taking strong 
role in this, a leadership role. We have an active role. We are 
deeply involved in the deliberations of that committee, which 
meets every couple of weeks.
    More importantly, we have a counterterrorism security group 
that meets almost every day, four, five days a week, every 
morning. And a number of my colleagues are involved with that, 
in looking at specific threats that are here and looking at the 
financial aspects of that. These are matters where specific 
issues are brought up and are dealt with on a day-by-day basis, 
and we are deeply involved in that as well.
    So I am quite proud of the work that has been done by the 
people of this department, and I would not want to leave here 
without saying that to you.
    Having said that, I would reiterate, there are barriers, 
there are issues. I mentioned some of these before to the 
Chairwoman. And as you requested, sir, I will reassess my 
thinking----
    Mr. Royce. And think also about the economic argument 
there, or the budgetary argument about resources, because the 
risk premiums, frankly, paid in our financial markets as a 
consequence of 9/11 are very high.
    And I would argue that it would be well worth the 
investment to put more resources into Treasury for your efforts 
on financial intelligence and compliance and enforcement. And I 
would be up here asking for those resources and finding ways 
that you can really be the lead agency in this battle against 
terror finance.
    And I thank you for your appearance here today.
    And, Madam Chair, thank you again for all you do on this 
committee.
    Chairwoman Kelly. Thank you very much, Mr. Royce.
    I agree with what Mr. Royce has been saying here. We need 
to get the resources to you, sir. We need to get whatever you 
need for you. And we stand willing to do that.
    Our concern, I think, is pretty clear. It is that the 
agencies that are currently under control of the Treasury are 
not really communicating very well, or enough, with each other, 
and that there is right now a lack of strong leadership from a 
centralized office with not only civil, but criminal regulatory 
ability.
    I hope you will think through what can be done to rapidly 
centralize and make more precise the oversight ability of 
Treasury. And I emphasize ``rapidly.'' We do not have the 
luxury of time when it comes to terror and terrorism's response 
into this nation of ours. The sooner we get this done, the 
better. We stand willing to help you in any way possible.
    And with that said, I want to thank you very much for your 
appearance here today.
    The Chair notes that some members may have additional 
questions for the panel which they may wish to submit in 
writing. So without objection, the hearing record will remain 
open for 30 days for members to submit written questions to 
these witnesses and to place their responses in the record.
    I thank you, Dr. Bodman, especially for your indulgence of 
a few more minutes here and for the time that you have spent 
here with us today. We look forward to working with you, sir. 
Thank you so much for giving us your time.
    With that, you are excused.
    Mr. Bodman. Thank you very much.
    Chairwoman Kelly. While this panel is leaving, I will 
introduce the second panel. We have with us witnesses from 
FinCEN, OFAC, the IRS and the acting Treasury inspector 
general.
    William J. Fox was appointed by Treasury Secretary John 
Snow to be the fourth director of the Financial Crimes 
Enforcement Network on December 1, 2003. Prior to his 
appointment as FinCEN's director, Mr. Fox served as Treasury's 
associate deputy general counsel and acting deputy general 
counsel.
    Since September 11, 2001, he has also served as the 
principal assistant and senior adviser to Treasury's general 
counsel on issues relating to terrorist financing and financial 
crime.
    Mr. Fox was recognized for his work on these issues with a 
meritorious rank award in October of 2003.
    We have Mr. R. Richard Newcomb. He is the director of the 
Office of Foreign Assets Control, OFAC, the agency within the 
U.S. Treasury Department that is responsible for implementing 
and enforcing economic sanctions and embargo programs ordered 
by the President.
    Following the terrorist attacks of September 11, 2001, OFAC 
is the primary U.S. government body responsible for 
implementing economic sanctions to isolate and impede 
terrorists and their support networks.
    Since assuming this position in January of 1987, Mr. 
Newcomb has played a leadership role in ensuring that these 
programs are fully and effectively developed, implemented, 
administered and enforced.
    We have Ms. Nancy Jardini, she is chief counsel of 
investigation at the Internal Revenue Service. In January of 
this year, IRS-CI, as it is called in shorthand, is the 
agency's law enforcement division.
    Ms. Jardini is the first woman in CI's 85-year history to 
lead the organization. She directs a nationwide staff of about 
4,500 employees, including more than 2,900 special agents. CI 
special agents investigate and assist in the prosecution of 
criminal tax, money laundering and narcotics-related financial 
crime cases.
    And finally we have Mr. Dennis S. Schindel. He is the 
acting inspector general of the Department of Treasury. Mr. 
Schindel has been with the Department of Treasury since 1972.
    Prior to his designation as the acting inspector general, 
Mr. Schindel was the deputy inspector general assisting the 
inspector general, providing leadership and direction to the 
Office of the Treasury of Inspector General since March of 
2001.
    I thank you for your appearance before the subcommittee.
    Without objection, your full written statements will be 
made part of the record. And you will each be recognized for a 
five-minute summary of your testimony.
    Thank you so much.
    Let us begin with you, Mr. Fox.

    STATEMENT OF WILLIAM J. FOX, DIRECTOR, FINANCIAL CRIMES 
        ENFORCEMENT NETWORK, DEPARTMENT OF THE TREASURY

    Mr. Fox. Thank you, Madam Chairman, Congressman Gutierrez 
and distinguished members of this committee.
    I appreciate the opportunity to appear before you today to 
discuss our vision for the Financial Crimes Enforcement 
Network. This is my first opportunity to appear before a House 
committee. And I would like you to know that I consider it a 
great honor.
    We very much appreciate your leadership and the commitment 
of the House Financial Services Committee, particularly this 
subcommittee, on the important issues that are the focus of 
today's hearing.
    We also appreciate the diligent work of your staff, both 
majority and minority. They have been great to work with. And, 
in my view, they are serving you very well.
    I have a prepared statement, which we have submitted. And I 
will try to keep these remarks very brief.
    Madam Chairman, I was appointed FinCEN's fourth director in 
December 2003. Before I came to FinCEN, I was the principal 
assistant to David Aufhauser, as he led the Treasury Department 
and the government on issues relating to the financing of 
terror.
    Working with David, I quickly gained a very keen 
appreciation for the importance of what has been referred to as 
the financial front of this war. That importance can be stated 
quite simply: Money does not lie.
    A good part of the time, financial intelligence is 
actionable intelligence. It can be extremely useful for 
identifying, locating and capturing terrorists and defining 
their networks. And, just as important, financial intelligence 
can lead to effective, strategic action that stops or disrupts 
the flow of money to terrorists and their networks, which in 
turn serves to halt or impede terrorists operations.
    The Financial Crimes Enforcement Network is right in the 
middle of these two aspects of exploiting financial 
information.
    The women and men of FinCEN have been learning about, 
understanding and exploiting financial information for almost 
14 years. My job is clear: to lead FinCEN in a direction that 
ensures we are the gold standard when it comes to collecting, 
understanding, analyzing, employing and disseminating financial 
information to combat terrorism and financial crime.
    Let me tell you what I found my first 180 days on the job. 
I found an agency populated with highly motivated employees 
with diverse and, in many ways, specialized talents and skills 
who are very dedicated to FinCEN and its mission.
    But I have also found an agency facing many significant 
challenges. Let me highlight a couple of specifics.
    An important and fundamental challenge facing FinCEN 
relates to the security and dissemination of the data we have 
been charged with safeguarding, the data collected under the 
Bank Secrecy Act. FinCEN must ensure that this data is properly 
collected, is kept secure and is appropriately, efficiently and 
securely disseminated to law enforcement, intelligence and 
regulatory agencies.
    This is one of FinCEN's core responsibilities. We believe 
our BSA Direct Project, which is discussed at length in my 
statement, will address many of these issues. In my view, this 
project is critical to our future success.
    Another of FinCEN's core responsibilities relates to the 
administration of the Bank Secrecy Act. As you know, FinCEN is 
the delegated administrator of the Bank Secrecy Act. Through 
that delegation, FinCEN is answerable to the Secretary of the 
Treasury for ensuring that the ultimate goals of that act are 
achieved.
    While we eagerly accept this responsibility, the 
responsibility is not ours alone. The federal bank regulators, 
as well as other agencies such as the Securities Exchange 
Commission, the Commodities Future Trading Commission and the 
Internal Revenue Service, have been delegated responsibility to 
supervise and examine financial institutions for Bank Secrecy 
Act compliance.
    Indeed, presently, implementation of the Bank Secrecy Act's 
regulatory regime involves eight different federal agencies and 
three SROs. This unusual structure is both a strength and a 
weakness. The weaknesses are obvious and sometimes are clearly 
manifested.
    To diffuse responsibility across so many bureaucracies can 
cause, and indeed on occasion has caused, inconsistency in 
application, lack of clarity of purpose and, most importantly, 
diffusion of accountability.
    However, if managed properly, we believe this structure 
could also be a strength, because it builds upon existing 
expertise, knowledge base and examination functions of 
regulators who know their industries best. The structure 
leverages resources where resources would otherwise be 
completely insufficient and possibly duplicative.
    I view it, Madam Chairman, as my responsibility to work 
with my colleagues in these agencies to help manage this 
structure in a manner that builds on our strengths that our 
diverse partners bring to the table.
    In other words, administration of the Bank Secrecy Act in 
this context really means oversight--exercising oversight 
coordination and ensuring consistency of application.
    In my view, of all the challenges facing FinCEN, there are 
no challenges as important as the proper and appropriate 
implementation of the Bank Secrecy Act regulatory regime. We 
have several ideas on how to better manage and coordinate the 
implementation of this regime, and we have outlined those in my 
written statement, so I am not going to recite them again here.
    What I want you to know, Madam Chairman, is that I clearly 
understand how important this set of issues is to the success 
of our country's anti-money-laundering and counterterrorist 
financing efforts.
    The implementation of this risk-based regularity system is 
a delicate matter that demands balance, consistency and 
clarity. The cornerstone of the Bank Secretary Act, suspicious 
activity reporting, requires financial institutions to make 
judgment calls. If we fail in properly implementing this 
regime, if we get it wrong, then the system will fail.
    For example, if as regulators we are either too aggressive 
or too passive in supervising and examining the financial 
industries that we regulate, there could be two equally 
unacceptable outcomes.
    Compliance should not be about second-guessing individual 
judgment calls on whether a particular transaction is 
suspicious. If we are overzealous in our supervision and 
examination, financial institutions, as conservative 
institutions, will merely defensively file on anything and 
everything to protect themselves from regulatory risk.
    If, on the other hand, we are too lax when it comes to 
ensuring institutions are implementing these programs, proper 
reporting will not be generated.
    Either scenario represents a failure.
    Madam Chairman and distinguished members of this committee, 
you should know that you have my commitment, and the commitment 
of the women and men at FinCEN, to do all in our power to 
ensure the implementation of this critical regulatory regime 
does not fail.
    Again, Madam Chairman, we appreciate the committee's 
continued support and your focus on these critical issues. I 
hope our presence here today will add to this important 
conversation.
    I will be happy to answer any questions that you may have.
    [The prepared statement of William J. Fox can be found on 
page 57 in the appendix.]
    Chairwoman Kelly. Thank you very much, Mr. Fox.
    Mr. Newcomb?

   STATEMENT OF RICHARD NEWCOMB, DIRECTOR, OFFICE OF FOREIGN 
           ASSETS CONTROL, DEPARTMENT OF THE TREASURY

    Mr. Newcomb. Madam Chairman, thank you for the opportunity 
to testify on the Office of Foreign Assets Control's efforts to 
combat terror support networks, which forms an important part 
of the Treasury Department and our government's national 
security mission.
    I will begin with an overview of our overall mission and 
conclude with our strategies for addressing the threat of 
international terrorism.
    The primary mission of the Office of Foreign Assets Control 
is to administer and enforce economic sanctions against 
targeted foreign countries and groups and individuals, 
including terrorists and terrorist organizations, narcotics 
traffickers, who pose a threat to the national security, 
foreign policy or economy of the United States.
    We act under the general presidential wartime and national 
emergency powers, as well as specific legislation, to prohibit 
transactions and freeze assets subject to U.S. jurisdiction.
    Economic sanctions are intended to deprive the target of 
the use of its assets and deny the target access to the U.S. 
financial system in the benefit of trade, transactions and 
services involving U.S. markets.
    We currently administer and enforce some 28 economic 
sanctions programs pursuant to presidential and congressional 
mandates. These programs are crucial elements in preserving and 
advancing the foreign policy and national security objectives 
of the United States and are usually taken in conjunction with 
diplomatic, law enforcement and occasionally military action.
    Our historical mission has been the administration of 
sanctions against target governments that engage in policies 
inimical to U.S. foreign policy and national security, 
including regional destabilization, severe human rights abuses 
and repression of democracy.
    Since 1995, the executive branch has increasingly used the 
statutory powers to target international terrorist groups and 
narcotics traffickers. Many so-called country-based programs 
are part of the U.S. government's response to the threat posed 
by international terrorism.
    The Secretary of State has designated seven countries--
Cuba, North Korea, Iran, Libya, Iraq, Sudan and Syria--as 
supporting international terrorism. Three of these countries 
are subject to comprehensive economic sanctions: Cuba, Iran and 
Sudan. Comprehensive sanctions have been imposed in the past 
against Libya, Iraq and North Korea.
    In addition, effective May of this year, the President 
issued a new executive order which prohibits specific types of 
transactions with Syria, due to its continued support for 
terrorism and other reasons.
    OFAC administers also a growing number of list-based 
programs, targeting members of government regimes and other 
individuals and groups whose activities are inimical to U.S. 
national security and foreign policy interests. In addition to 
our terrorism and narcotics trafficking programs, these include 
sanctions against persons destabilizing the western Balkans and 
against the regimes in Burma and Zimbabwe.
    OFAC also administers programs pertaining to 
nonproliferation, including the protection of assets relating 
to disposition of Russian uranium and trade in rough diamonds.
    OFAC as an organization has grown over the past 18 years 
from an office with about 10 employees administering a handful 
of programs to an operation of 144 employees with some 28 
programs.
    To accomplish our objectives, we rely on good, cooperative 
working relationships with other Treasury components and other 
federal agencies, particularly the State and Commerce 
Departments and Justice Department, law enforcement agencies, 
the intelligence community, domestic and international 
financial institutions, the business community and foreign 
governments.
    We are an organization which blends regulatory, national 
security, law enforcement and intelligence into a single entity 
with many mandates but a single focus: effectively implementing 
economic sanctions programs against foreign adversaries when 
imposed by the President or the Congress.
    In order to carry out our mission, the organization is 
divided into 10 divisions with offices in Miami, Mexico City, 
Bogota and, soon to be opened this summer, an office in Manama, 
Bahrain.
    Our licensing, compliance and civil penalties divisions 
serve as OFAC's liaison with the public and figure prominently 
in promoting the transparency of our operations.
    Our enforcement division provides crucial liaison with law 
enforcement community, while our international programs and 
foreign terrorist divisions are primarily devoted to narcotics 
and terrorism programs and the preparation of evidentiary 
material to support our designation process.
    Briefly, I would like to talk about our vision for the 
future and the important challenges we face at the Office of 
Foreign Assets Control.
    In order to meet the increasing demand placed on us and to 
fulfill our multiple missions against governmental and 
organizational targets, particularly a recent critical role in 
countering international terrorism and narcotics trafficking, 
we are seriously addressing several specific challenges facing 
our component divisions.
    For example, our civil penalties division is expanding the 
transparency of our civil penalty enforcement process by 
developing an automated system to report enforcement actions.
    Our compliance division is in the process of building new 
customer interaction capabilities with a state-of-the-art 
automated telephone system, enhanced hot-line capabilities and 
improved Web-based forms to allow the public to transmit 
detailed live transaction data for our real-time analysis and 
response.
    We expect that the new automated reporting systems we are 
developing will allow financial institutions and others to 
provide more quickly comprehensive information on interdicted 
transactions.
    We are building a new specially designated national 
database that will allow wide access to declassified target 
information and permit our analysts to directly link from the 
name on our SDN list to underlying declassified evidentiary 
material for easier access.
    We intend in the near future also to make a new data 
feature available on our Web site that will allow users of our 
specially designated nationals list to more easily shop for 
information that is tailored to their specific compliance 
needs.
    Madam Chairman, I would like to thank you and the committee 
for giving me the opportunity to speak on these issues. This 
concludes my oral remarks today, and I am very pleased to 
answer any questions you may have.
    [The prepared statement of R. Richard Newcomb can be found 
on page 89 in the appendix.]
    Chairwoman Kelly. Thank you very much, Mr. Newcomb.
    Now, Ms. Jardini?

  STATEMENT OF NANCY JARDINI, CHIEF, CRIMINAL INVESTIGATION, 
                    INTERNAL REVENUE SERVICE

    Ms. Jardini. Thank you very much, Madam Chairman.
    It is a pleasure for me to be here with my colleagues from 
FinCEN, OFAC and the Treasury Inspector General's Office to 
discuss our work and our interactions with one another.
    I also very much appreciate the opportunity to highlight 
the unique and specialized skill of the Internal Revenue 
Service Criminal Investigation Division and discuss our efforts 
to investigate financial fraud and money laundering wherever it 
occurs.
    The fundamental mission of criminal investigation, or CID, 
as it is known, is to serve the American public by detecting 
and investigating criminal violations of the Internal Revenue 
Code and related financial crimes, most importantly money 
laundering.
    To that end, we recruit only individuals who have an 
educational background in accounting and business and, through 
rigorous training, shape them into law enforcement 
professionals who are experts in forensic accounting, financial 
investigations and computer forensics. These highly skilled 
special agents are devoted to following the money in tax and 
money-laundering and related investigations that involve 
sophisticated schemes and complex transactions that span the 
globe.
    The unique sophistication of our special agents is in 
demand throughout the law enforcement community, because we add 
value to every financial investigation. These are precisely the 
same skills that make such a valuable contribution in 
unraveling organized crime, narcotics trafficking and global 
terror financing networks.
    In addition to bringing significant technical expertise to 
these investigations, there is often an important nexus between 
tax crimes, Bank Secrecy violations, money laundering and 
terrorism.
    Indeed, money laundering is tax evasion in progress. It is 
criminals hiding their ill-gotten gains from the authorities, 
most particularly the IRS. Just as corporate executives, drug 
kingpins and terrorists employ various methods to move money, 
the IRS is using various means to detect them.
    One of those is to exploit effectively the Bank Secrecy 
Act. We in CI lead 41 suspicious-activity report review teams 
nationwide. These teams are comprised of federal, state and 
local law enforcement officials who evaluate between 12,000 and 
15,000 SARs each month.
    In addition, last year alone, just the criminal 
investigation division of the IRS spent over $60 million 
evaluating BSA data, which led to over 1,000 investigations in 
the criminal arena.
    Another unique analytical contribution CID is making in the 
financial crimes arena is the counterterrorism project that we 
are piloting in Garden City, New York. When fully operational, 
the center will use advanced analytical technology and data 
modeling of tax and other information, such as the wealth of 
information contained in BSA data, to support ongoing joint 
investigations and proactively identify potential patterns and 
perpetrators.
    The center analyzes information not available to, nor 
captured by, any other federal law enforcement agency.
    So far, the lead development center has helped identify 
individuals, entities and relationships between them previously 
unknown to law enforcement.
    As an example, the lead development center began compiling 
and analyzing financial data that culminated in the linking of 
several individuals and businesses, some of whom are or were 
under criminal investigation, one with ties to Al Qaida.
    With no identifiers other than listed names, the center 
established significant connections to individuals and 
businesses potentially involved in illegal activities, 
including international heroin smuggling and Iraqi artifacts 
smuggling.
    The scope of this criminal enterprise was previously 
unknown prior to the analytical work done by CI at the Garden 
City Lead Development Center.
    Because this type of financial analysis is not duplicated 
in any other law enforcement agency, we are encouraged and 
enthusiastic about the unique contribution we are able to make.
    In conclusion, the men and women of IRS-CI, some of the 
most skilled financial investigators in federal law 
enforcement, are proud of the role we have had in these 
successes. For all of us, it is one of the great rewards of 
public service.
    We thank you for inviting us here today. And I welcome your 
questions. Thank you.
    [The prepared statement of Nancy J. Jardini can be found on 
page 71 in the appendix.]
    Chairwoman Kelly. Thank you very much.
    Mr. Schindel.

    STATEMENT OF DENNIS SCHINDEL, ACTING INSPECTOR GENERAL, 
                   DEPARTMENT OF THE TREASURY

    Mr. Schindel. Thank you, Madam Chairman, for the 
opportunity to testify.
    In your invitation letter, you ask that I address several 
issues. Briefly, they include BSA compliance efforts by the 
various regulators, OCC and OTS oversight of BSA compliance by 
banks and their private banking and trust operation, usefulness 
of the FinCEN database, and concerns we have resulting from our 
review of the OFAC sanctions program.
    Let me say that oversight of Treasury's role in combating 
terrorist financing is among our highest-priority work. In 
fact, we designated it as one of Treasury's six most 
significant management challenges.
    While Treasury takes its BSA responsibilities seriously, in 
almost every area we have audited, we have identified problems 
significant enough to impact Treasury's ability to effectively 
carry out its role in combating terrorist financing and money 
laundering.
    I will briefly highlight our work.
    With regard to BSA compliance by the regulators, our work 
is limited to OCC and OTS. In one of our early audits issued in 
January 2000, we reported that OCC needed to improve BSA 
compliance exams. We found that many of the exams in our sample 
lacked sufficient depth to adequately assess a bank's 
compliance. Over half the exams we reviewed did not have 
documentation to determine whether an adequate BSA exam was 
conducted.
    We also reported that OCC rarely referred BSA violations to 
FinCEN and that OCC procedures did not require examiners to 
review SARs filed by the banks.
    More recently, we issued a report in September of 2003 on 
BSA enforcement actions at OTS. We found that OTS was not 
aggressive in taking enforcement actions against thrifts in 
substantial non-compliance with BSA requirements.
    Specifically, while OTS examiners identified substantive 
BSA non-compliance at 180 of 986 thrifts that they examined, 
OTS issued written enforcement actions against only 11. For 
most of the thrifts, OTS exercised moral suasion and relied on 
thrift management to comply with the BSA requirements. We found 
that that approach did not work more than 30 percent of the 
time. And in some instances, subsequent BSA exams found that 
compliance actually got worse.
    On the issue of oversight of BSA compliance in private 
banking and trust operations, we completed an audit at OCC in 
November of 2001. We found that OCC needed to focus greater 
attention on private banking and trust operations when 
conducting BSA compliance exams.
    In 60 percent of the exams we tested, OCC examiners did not 
cover the bank's private banking operations. Even where OCC did 
include private banking and trust operations in their BSA 
compliance exams, more than 30 percent of the time the 
examiners did not fully comply with OCC's own BSA examination 
guidelines. Exams often lacked sufficient testing of high-risk 
transactions commonly associated with money laundering.
    With regard to the subcommittee's questions on FinCEN's 
database, we completed two audits on the accuracy and 
reliability of the FinCEN database for SARs and we have one in 
process. These audits have consistently shown that the SAR 
database lacked critical information, included inaccurate 
information or contained duplicate SARs.
    In the more recent audit, which we issued in December 2002, 
we found that regulatory and law enforcement officials 
generally felt that the database was useful. However, they 
indicated that its usefulness would be enhanced if it contained 
more complete and accurate SAR data.
    We found that incomplete or inaccurate data resulted 
because filers disregarded instructions, did not always 
understand the violations or were concerned with personal 
liability. We made several recommendations to include more 
editing, more mandatory fields, more feedback to filers, 
revisions to the SAR form and more efforts to eliminate 
duplicate SARs in the system.
    Before I discuss my concerns with OFAC's foreign sanctions 
program, I want to briefly comment on some limited work that we 
have done on referrals to FinCEN.
    In October of 2002, we issued an audit report on FinCEN's 
efforts to deter and detect money laundering in casinos and its 
related enforcement actions. IRS is responsible for BSA 
compliance exams of casinos. Overall we found that FinCEN was 
inconsistent and untimely in its enforcement actions against 
casinos for BSA violations referred to them by IRS.
    At the time, FinCEN was embarking on a new enforcement 
approach focused on fostering casino compliance through 
education and outreach. IRS officials apparently did not fully 
agree with several aspects of this approach, but their 
disagreements were not resolved.
    We reported our concern that IRS might be reluctant to 
refer future BSA violations to FinCEN. Our concern was 
subsequently reiterated by the Treasury inspector general for 
tax administration in a report that they issued in March of 
2004.
    The last area the subcommittee asked me to address was my 
concerns with OFAC's foreign sanctions program. In April 2002 
we reported that OFAC was limited in its ability to directly 
monitor financial institution compliance with foreign sanction 
requirements. While OFAC devotes considerable effort to 
increasing awareness of the foreign sanctions requirements, 
like FinCEN, OFAC is dependent on the regulators to examine for 
compliance.
    Our tests have found gaps in the regulators' testing for 
compliance with OFAC sanctions requirements. While most of the 
exams included some coverage of compliance with OFAC's sanction 
requirements, almost none of them included transaction testing. 
Transaction testing is the most effective way to determine 
whether a prohibited transaction was allowed in violation of an 
OFAC sanction order.
    Also, because OFAC is not a bank supervisory agency, it 
cannot dictate the requirements of how institutions ensure 
compliance. We found that the extent of foreign sanction 
compliance efforts varied among the various financial 
institutions.
    In conclusion, I would like to make a few observations. 
While the BSA compliance process is dependent on many federal 
and non-federal regulators, ultimately it is Treasury's 
responsibility, primarily through FinCEN, to ensure that there 
is adequate compliance and law enforcement is getting what they 
need. In this regard, Treasury can do a better job.
    The universe of BSA filers is expanding. This will result 
in disbursing BSA compliance monitoring among even more 
regulatory bodies. One of FinCEN's challenges has been ensuring 
that the regulators of these various BSA filers provide 
adequate and effective BSA compliance monitoring.
    To this end, FinCEN's approach has been focused on 
consensus-building, rather than leading, an approach that has 
met with limited success. I believe that for the current 
regulatory structure to work, it must be effectively managed 
through a cohesive effort that transcends the stovepipes of the 
individual regulators.
    FinCEN needs to take a more aggressive leadership role in 
that effort and require from all those involved in the 
regulatory structure an approach that, while risk-based, is 
thorough and intolerant of non-compliance. FinCEN also needs to 
be more engaged in analyzing the results produced by the 
various regulators so that it can be more proactive in 
addressing gaps in compliance monitoring.
    This type of approach would also apply to programs for 
which OFAC is responsible, since it also relies on other 
regulators to administer its programs. The newly created 
Treasury Office of Terrorism and Financial Intelligence, to 
which FinCEN and OFAC will report, can perhaps be the vehicle 
to pull all this together and establish a regulatory structure 
for BSA and the OFAC sanction programs that is strong, 
effective and accountable.
    I would be pleased to answer any questions the subcommittee 
may have.
    [The prepared statement of Dennis S. Schindel can be found 
on page 112 in the appendix.]
    Chairwoman Kelly. Thank you very much, Mr. Schindel. I 
appreciate the fact that you are speaking very strongly here. 
And I hope that the people sitting in this panel with you will 
take your reports back. And perhaps, Mr. Fox, since he is new 
at the agency, will read that report and take it to heart.
    Mr. Fox, in light of the failures at Riggs Bank and UBS, 
what do you think? Do you think it would be beneficial if 
FinCEN had a compliance and audit team that could oversee the 
banking regulators and then broaden our BSA compliance efforts 
into those new areas?
    Mr. Fox. No question, Madam Chairman.
    Chairwoman Kelly. No question, yes or no?
    Mr. Fox. No question, yes.
    Chairwoman Kelly. You think you would really like----
    Mr. Fox. I would like to tell you, I mean, that is part of 
our plan. I mean, we have new leadership in our regulatory 
programs division. And one of the things we are doing is 
standing up what we are calling an examination program unit 
that is really meant to more aggressively oversee and ensure 
that the regulators, the disparate regulators that are out 
there ensuring this act is complied with, are actually doing 
their job and making sure of it.
    I think that is important on a couple levels. Again, one of 
the great challenges, Madam Chairman, I think is to ensure 
consistency in this area. I have seen, since I have been 
director of FinCEN, even differences in approach between bank 
regulators, not to mention, you know, differences in approach 
between bank regulators and SEC and maybe the SEC and an SRO.
    You know, each regulatory agency brings with it a history 
and a culture that cause inconsistencies. So we have to work 
very hard to make sure that that is minimized as much as 
possible.
    But I could not agree with you more. And it is a plan that 
we have.
    Chairwoman Kelly. Does FinCEN currently have the authority 
to actively examine the frontline BSA regulators and to conduct 
spot checks on their performance? I mean, I really do not know. 
Do you have that?
    Mr. Fox. Well, as I understand this, ma'am, the Bank 
Secrecy Act--the authority to supervise and examine these 
institutions has been delegated to various agencies by the 
Treasury. The responsibility for administering the Bank Secrecy 
Act has been delegated by the Secretary to FinCEN.
    Generally, when you delegate an authority, you retain that 
authority as well. And if you read the delegation that is in 
our regulations, it has been in place since 1972.
    You know, it is pretty broad. I mean, the Secretary of the 
Treasury still, and now FinCEN because of that, still retains a 
lot of authority here.
    So we are certainly going to test that and make sure that 
the regulators are performing.
    We are thinking of various things, things like requiring 
reports; going in and actually finding out about how they are 
conducting these examinations; conducting joint examiner 
training; ensuring that examination procedures are consistent 
and actually make BSA as important maybe as safety and 
soundness.
    So we are very keen to do that. And we think we have the 
authority right now to be able to do that.
    I will tell you if we learn soon that we do not, we will be 
back to you, and I will be back to the Deputy Secretary. 
Because I do not think we can do an effective job administering 
the act without that.
    Chairwoman Kelly. Mr. Fox, do you think you are going to 
need some more personnel to do that in FinCEN? Do you have 
enough people to do what you have outlined?
    Mr. Fox. No. But, you know----
    Chairwoman Kelly. Well, that was the short answer.
    Mr. Fox. What we are going to do honestly is--you know, one 
of the things that we are trying to do at FinCEN right now is 
to really re-look at what it is FinCEN is supposed to be doing 
and maybe redirect some of the assets that we are working on 
some things that maybe we should not be doing.
    For example, I think that is why our technology projects 
are so important to us, because I think that will free up some 
people that we can redirect and put on programs like this.
    And I was not part of the budget process for either this 
year or next year. But you can be assured that in future budget 
processes that we are going to be asking for additional help in 
that regard, again because I think you simply need human bodies 
to be able to do this work.
    Chairwoman Kelly. Thank you.
    Mr. Schindel, I would like to go to you. As you probably 
know, I recently sent you a letter asking that you examine the 
regulatory environment that allowed the failure at Riggs to 
occur. I specifically asked you to look at relevant OCC 
documents that I have not been allowed to view.
    Do you anticipate that this dispute that is going on with 
OCC will interfere with your efforts to review those documents 
and to examine the conduct of the OCC personnel in the Riggs 
case?
    Mr. Schindel. The short answer is that I do not.
    When there was an article that came out a week ago that 
quoted the comptroller, Mr. Hawke, as indicating that they were 
doing a lessons-learned review and also looking into whether 
there was undue influence on the lead examiner as a result of 
him subsequently taking a job with Riggs bank, when I read 
that, I immediately contacted our counsel and our head of 
investigations and asked that they reach out to OCC and let 
them know that we did not think it would be appropriate for 
them to investigate whether there was undue influence, that 
that was in our domain.
    We received assurances that we would get their full 
cooperation in conducting such an investigation, and we have 
opened up that investigation.
    Chairwoman Kelly. And so you feel that you will be able to 
see those documents?
    Mr. Schindel. Yes.
    Chairwoman Kelly. Do you have any time line for how long 
this overall review is going to take?
    Mr. Schindel. I really do not. We have just initiated it.
    Chairwoman Kelly. But you are doing the review, not OCC. It 
is not an internal review.
    Mr. Schindel. Correct. OCC is still, I believe, continuing 
with their lessons learned review of Riggs and their 
examination of it. And I am not saying that that is 
inappropriate, and that is probably a good thing for them to 
do.
    We will probably, if we have the resources, come in behind 
that effort and take our own look at it using what they have 
developed.
    Chairwoman Kelly. From what I understand, there are some 
other things, investigations, that are going on where OCC is 
simply not cooperating. I wonder if you would be good enough to 
explain those circumstances and discuss what information you 
are being blocked from getting access to.
    Mr. Schindel. Well, primarily we had initiated a couple 
efforts to engage in looking at potential bank fraud activities 
and a couple bank failures, one in particular involving 
Guarantee National Bank in Tallahassee, Florida.
    It was our understanding that there were some concerns 
regarding OCC's access to information from the bank. And we 
were concerned that this presented a possible obstruction of 
the bank examination process.
    We were down at that bank to join the FDIC as they engaged 
in the process of closing down that bank so that we could join 
that effort and look at that issue in particular. OCC reached 
out to the assistant U.S. attorney in Tallahassee and raised 
concerns that we did not have an appropriate jurisdiction. And 
the AUSA was, I guess, concerned enough that it raised a 
question that they requested that we step off joining that 
investigation until that could be sorted out.
    And as you know, Dr. Bodman has indicated that this whole 
issue of our jurisdiction, we are hoping to resolve it through 
the Treasury counsel.
    Chairwoman Kelly. What do you think the implications are of 
the effort by the OCC to block this?
    Mr. Schindel. Well, I understand that they have some 
concerns about their responsibilities to protect the Right to 
Financial Privacy Act data that we might have to obtain in 
investigations like this or other investigations we might do.
    We just do not feel that our access to Right to Financial 
Privacy Act information is a matter of concern. We think we 
have access to that information. And we hope to get that 
resolved.
    Chairwoman Kelly. I want to just pursue one follow-up here. 
Is the OCC's resistance in cooperating with you, the Treasury 
inspector general, an isolated instance? Or are there other 
cases besides these that I have raised, that I happened to know 
about?
    Are they not cooperating with investigations by other 
inspectors general or with law enforcement as well?
    Mr. Schindel. Well, we would be the only inspector general 
that would be conducting investigations regarding OCC. I cannot 
speak to their level of cooperation with the FBI or the Justice 
Department on other bank fraud cases that those law enforcement 
agencies are engaged in.
    But there has been at least one other bank investigation 
that we were involved in, in the Midwest where they also, 
again, reached out to the AUSA's office and raised questions 
about our jurisdiction. And, similarly to the Tallahassee 
situation, we were asked to step off of that investigation.
    Chairwoman Kelly. Dr. Bodman did not indicate that he had 
any real time line on this. Do you have any kind of an idea how 
quickly this is going to be resolved?
    Mr. Schindel. I do not. I know that we have formulated the 
issues, both my office and OCC, for the general counsel that we 
think need to be answered. The general counsel has now pushed 
back to both us and OCC to provide some additional information 
on those issues.
    So it is being worked. I would say it is somewhat slow from 
my perspective. But, I am sure, I am confident that it is going 
to get resolved.
    And one thing I can tell you is I will keep this committee 
informed on the outcome.
    Chairwoman Kelly. Good, thank you. We would appreciate 
that.
    Mr. Newcomb, I just wanted to ask you a question about UBS. 
The UBS-ECI contracts, there are indications that we have found 
that the Fed saw hints of OFAC-related problems at UBS early in 
the ECI program. And they had some conversations with the bank 
early on.
    Were those concerns communicated to OFAC? And with that 
hint of there possibly being problems, shouldn't OFAC have been 
involved right away?
    Mr. Newcomb. Madam Chairman, the Federal Reserve Bank of 
New York brought this to our attention when they first saw 
currency moving in the Iraq situation, post-invasion, when 
dollars were moving from countries nearby. And they began an 
investigation which led to UBS.
    They notified us very shortly thereafter, last summer, July 
of 2003. And they were faced with a situation where the bank 
was deliberately telling them stories which were not true. And 
not only were they not true, there seems to have been an 
attempt to falsify what was, in fact, told.
    They kept us informed. And then in the winter of last year, 
in January, they gave us information of what had taken place. 
And before a penalty was rendered against UBS, the general 
counsel of the Federal Reserve Bank of New York and executive 
vice president came and spoke with us, laid out what he 
intended to do, the $100 million penalty.
    That was a penalty for a foreign institution. It was an 
institution over which we do not have jurisdiction. There is a 
continuing matter that I cannot talk about where there may have 
been U.S. involvement that we are continuing to work with the 
Justice Department, U.S. Attorney's Office to determine if in 
fact there was any U.S. involvement.
    Important thing here that I want to stress is, following 
that meeting we had with the general counsel of the Fed, I have 
met on three occasions with the Fed, and we have a program in 
place as a direct result of seeing the possibilities of these 
ECI contracts being abused in this manner and are planning a 
compliance visit to all eight of the ECI institutions beginning 
next month and then expanding that to other financial 
institutions, the largest 15 or so financial institutions that, 
though they are not ECI contractors and even though they may 
not be subject to U.S. jurisdiction, because they do have 
branches operating in the United States, we are going to be 
providing visitations to them with the possibility of follow-up 
audits wherever we have jurisdiction.
    So the situation is being addressed in a very robust 
manner.
    Chairwoman Kelly. Thank you very much.
    I am going to come back to this in a minute. But I 
understand Mr. Sanders, who has joined us, has an amendment 
that is going on the floor, so I am going to yield some time to 
him.
    Mr. Sanders. Thank you very much, Madam Chair, for allowing 
me to say a few words. I am not on this subcommittee. And I 
will be brief.
    Chairwoman Kelly. Well, with unanimous consent, we approve 
of your presence here today.
    Mr. Sanders. Well, I appreciate that. And I am going to 
just go forward in one line of questioning and be as brief as I 
can.
    Madam Chair, last September I offered an amendment to the 
fiscal year 2004 Treasury-Transportation appropriations bill 
that would prohibit the Treasury Department's proposed 
regulations regarding cash balance payments from taking effect 
for one year. That amendment passed Congress and was signed 
into law.
    And yesterday, to its credit, the Treasury Department 
finally withdrew those proposed regulations for good. Now I 
wish that that was the end of the story, but unfortunately, it 
is not, which is why I am here right now.
    During the consideration of my amendment, an IBM lobbyist 
e-mailed a document on Treasury Department letterhead that 
stated that the Treasury Department strongly opposed this 
amendment. But according to the Treasury Department, in an 
article that appeared in The Wall Street Journal, they never 
released this document and, ``It appeared to be doctored.''
    Madam Chair, no one is surprised when important issues 
involving hundreds of billions of dollars generate a lot of 
controversy. But the distribution of phony documents purporting 
to be from the Treasury Department goes beyond even the loose 
ethical rules that are sometimes followed here in Washington.
    Doctoring Treasury Department documents is a violation of 
the law and should be prosecuted to the fullest extent 
possible.
    When Secretary Snow appeared before the full committee, he 
pledged to look into this matter and immediately referred it to 
the Inspector General's Office.
    Six months later, we are still awaiting a report from the 
inspector general on how their investigation is going.
    Madam Chair, it is my understanding that the Inspector 
General's Office has a draft report on this investigation that 
has been sitting on someone's desk for months.
    It is my understanding that this report may confirm that 
the IBM lobbyists and the Tax Benefits Council at Treasury 
violated the law by doctoring Treasury Department's documents 
and releasing non-public information.
    It is also my understanding that the Inspector General's 
Office may have recommended that the individuals involved be 
prosecuted but that the U.S. attorney at the Justice Department 
declined to prosecute.
    Essentially, what I would like to ask Mr. Schindel, if I 
might, I have some questions that I would like to ask you, if I 
may, Madam Chair.
    Mr. Schindel, were Treasury Department documents opposing 
my amendment doctored?
    Mr. Schindel. Yes.
    Mr. Sanders. If so, who doctored those documents?
    Mr. Schindel. The IBM employees involved.
    Mr. Sanders. Is it a violation of the law to doctor 
Treasury Department documents?
    Mr. Schindel. Yes, it is.
    Mr. Sanders. And what is the penalty for doctoring 
documents in a case like this?
    Mr. Schindel. Well, I think the penalties probably--I 
cannot speak specifically to that. I am sure there is a wide 
range of penalties.
    But as to whether there will be prosecution of that issue, 
is something we are still vetting with the U.S. attorney's 
office.
    Mr. Sanders. Does the Treasury Department regard this as a 
serious offense?
    Mr. Schindel. I believe they do.
    Mr. Sanders. Did the Inspector General's Office recommend 
that individuals be prosecuted for doctoring those documents.
    Mr. Schindel. We have not made a specific recommendation 
yet. You are correct to say there is a draft report. It is 
being reviewed by my head of investigations with the 
investigator to be sure that we have covered all aspects. There 
are several aspects of this investigation involving IBM 
employees, lobbyist employees and Treasury employees.
    Mr. Sanders. That was my next question. Did anyone at the 
Treasury Department assist lobbyists in doctoring these 
documents? If so, who was that?
    Mr. Schindel. We are continuing to look into that. And that 
is one part of the investigation, and that is all going to be 
thoroughly included in our final investigative report.
    I would not rule out the possibility that there is 
additional work that may need to be done after my head of 
investigations has gone over this with the investigator. We 
feel we are close to wrapping that investigation up, but it is 
in essence still ongoing.
    Mr. Sanders. It is my understanding that a report on this 
investigation has been drafted----
    Mr. Schindel. Correct.
    Mr. Sanders.--and has been sitting on someone's desk at the 
Inspector General's Office for a number of months.
    Mr. Schindel. Well, that part I would disagree with. And I 
can tell you it has not been sitting on my desk. But the head 
of our office of investigations has that draft and is currently 
going over it with the investigator. They have reached back out 
to the U.S. attorney's office to make sure that we have 
thoroughly vetted all the issues with them and that they would 
fully consider all the aspects of prosecution action that could 
be taken in this case.
    Mr. Sanders. When this report is finished, will you provide 
a non-redacted to me as well as the Chairwoman and Ranking 
Member of this subcommittee?
    Mr. Schindel. Sir, it is my understanding that we have 
clear authority to provide an unredacted copy of that report to 
the chairs of the various committees that have jurisdiction, 
but not to individual members.
    Mr. Sanders. Not to the member who authored the amendment 
in which there was doctoring of documents?
    Mr. Schindel. I understand your frustration with that 
issue, but the guidance that we are operating under does not 
take into account those unique situations.
    The redacted version of the report, I would hope, would not 
be so heavily redacted that if you were to receive that copy 
that you would not be able to fully understand what was 
involved, who did what and what the results of the 
investigation----
    Mr. Sanders. Just two more questions. Do I understand that 
you will provide a non-redacted copy to the Chairwoman?
    Mr. Schindel. Yes.
    Mr. Sanders. Maybe the Chairwoman would be so kind as to 
allow me to peek in and take a look at it.
    My last question is, this really has dragged on. And can 
you give me, give the committee a sense of when you are going 
to have your final report?
    Mr. Schindel. I would hope that we would have the final 
report out within the next two months.
    Mr. Sanders. Okay, thank you very much, Madam Chair.
    Chairwoman Kelly. Thank you. Thank you, Mr. Sanders.
    I am going back to you, Mr. Newcomb. You have mentioned a 
couple of things that I have found very interesting in light of 
a book that I happen to be reading. You talked about the 
commodities that are being utilized for money transfer and 
money laundering.
    This is a huge field. The whole business of terrorist 
financing and money laundering and money transfer is a huge 
field.
    All of you sitting at this desk actually have indicated in 
what your statements have been how difficult it is. And 
especially you, Ms. Jardini, talked about the need for these 
highly specialized people who are in fact doing forensic work 
with regard to the financial ends of things.
    Mr. Newcomb, I would assume that you have people in your 
agency doing that kind of work as well.
    I would put to you a question, and that is whether or not 
you have enough people and if you have enough resources to 
cover the enormity of what this task is. We must get our arms 
around it. We must face down the ability of terrorists to fund 
the evil that they would fund.
    Do you have enough people? Do you have enough resources to 
do this job?
    Mr. Newcomb, I want to ask you that. And then I am going to 
go to Ms. Jardini and Mr. Fox.
    Mr. Newcomb. Madam Chair, that is a difficult question to 
answer, in this regard. We are doing our job. We administer 28 
programs, and we are fully employed in all of the divisions 
that we operate under, such that we are able to implement what 
we are mandated to do.
    You could always do more with more people; if we had more 
people, we could do more. That follows.
    It is a large mission. There are terrorists organizations 
operating worldwide, in the Middle East, North Africa, East 
Africa, South America, Southeast Asia and other places.
    One thing we have sought to do in order to, forgive the 
expression, create a force multiplier is we have worked with 
the U.S. combatant commands and the military where we have 
people physically on location in six of the combatant commands 
working on the general staff of those organizations. That is 
one way to create additional positions.
    I would certainly be able to say if I had more people, 
there is more we can do. You can always do more with more 
people.
    But in terms of what we have, we are delivering a product 
that serves the Treasury Department and achieves our mandate.
    Chairwoman Kelly. I just want to do a follow-up there. Do 
you think that the notification requirements of FinCEN and OFAC 
are functioning adequately?
    Mr. Newcomb. Excuse me, Madam Chairman, what notification 
requirements are you referring to?
    Chairwoman Kelly. Well, in light of the UBS and the Riggs 
situations, and in light of some of the other things that you 
and I know are happening out there, do you think you have 
adequate notification requirements?
    Mr. Newcomb. This is a situation where, when the Fed found 
out about it, I am told by senior officers of the Fed, they 
notified us immediately. They did not know until they knew, and 
when they found out they were in touch with us. It was foreign 
jurisdiction that was located.
    But just so we have learned a lesson from this, we have 
created a robust monitoring system, not only with the ECI 
contracting parties worldwide where we are going to begin with 
visitations to their senior officers, and then with follow-up 
audits in conjunction with the Fed to make sure those 
contractual commitments are met. We are following that in that 
regard.
    As far as non-ECI banks, there are literally hundreds of 
banks that can move currency on behalf of the Federal Reserve 
Banks. So we need to cover that as well.
    Certainly as a lesson learned, we have heard about this and 
we are moving forward with all due speed to take this situation 
in hand, so that even though, as in this situation, we did not 
have jurisdiction, we are seeking to extend jurisdiction we do 
have as broadly as possible.
    I hope that answers your question. If not, I will be happy 
to come back again and try to----
    Chairwoman Kelly. I think that is a good indicator.
    I am going to go back to the other question I had, which 
now I am going to ask Ms. Jardini, and that is whether or not 
you have the resources and the people that you need to do your 
job right now.
    Ms. Jardini. Thank you, Madam Chairman, for asking that 
question.
    The President's 2005 budget provides for the largest hiring 
year ever in CI history, and we hope that it will be adopted as 
written. If it is passed, we will be hiring over 400 new 
special agents and over 200 analysts who will be assisting us 
in doing the important work we are going in tracking terrorist 
financing, as well as our overall tax administration mission.
    I would like to point out to you that IRS-CI has never 
turned down a Treasury request and never will turn down a 
Treasury request to lead or to participate in any important 
terrorist financing investigative initiative. We have freely 
and generously given of our resources because of the importance 
of that mission and because of the strong leadership that 
Treasury has provided in that arena.
    Furthermore, 97 percent of the terrorism investigations we 
are involved with we do in conjunction with our partners in 
federal law enforcement, primarily the joint terrorism task 
forces at the Justice Department and FBI.
    Our work in that area is specifically governed by an MOU 
that we have with the FBI which outlines that our specifically 
talented and technical special agents should be deployed only 
in those cases where our expertise is most needed. And that 
really has been a very successful partnership.
    Of the 270 open investigations that we have, 120 of those 
are pending at the Justice Department for prosecution. The 
remainder that are open and that we are actively working, 60 
percent of those cases have a Title 26 tax crime involved in 
them; 30 percent are pure tax; 30 percent are tax and money 
laundering; and the final 40 percent are pure money laundering.
    In addition, 25 percent of those cases involve BSA data; 18 
percent of those cases involve charities, 990 tax returns and 
information received from the tax-exempt and government entity 
section of the IRS.
    So we are very, very pleased with the direction that we 
have taken, our work in this area, and believe that with the 
addition of the desperately needed 408 special agents and 200 
analysts we hope to receive in fiscal year 2005, we will be 
able to target those strategically to apply to our mission most 
effectively.
    Chairwoman Kelly. Good. Thank you.
    Mr. Fox?
    Mr. Fox. Madam Chairman, to go back to your original 
question about some of the complexities relating to money 
laundering, particularly as it relates to trade-based money 
laundering or commodities-based money laundering, again I find 
myself in complete agreement with the Chair. This is a very 
complex area and a very difficult area.
    And it is an area that we are focusing on quite heavily at 
FinCEN.
    I would like to see, as I said in my written statement, our 
analysts to spend a great deal more time on more complex 
matters and maybe a little less time on direct tactical support 
to law enforcement.
    As Ms. Jardini has indicated, you know, I think what we are 
finding is that law enforcement entities out there have sort of 
gotten it when it comes to finance. They understand how 
important finance is. And I think they are developing tactical 
intelligence, analytic capabilities for financial information.
    And it seems to me that as law enforcement agencies do 
that--that is a very good thing, in my view, by the way--as 
they do that, that frees FinCEN up to maybe take it to a higher 
level or focus on things that are not being focused on. And we 
plan to do that.
    And commodities-based money laundering and trade-based 
money laundering is an area that is very important. We are 
working very closely with the Bureau of Immigration and Customs 
Enforcement and other entities to try to get a handle on this.
    Chairwoman Kelly. I thank you.
    I really thank all of you for being here today and for your 
patience.
    The Chair notes that some members may have additional 
questions for this panel which they may wish to submit in 
writing. So, without objection, the hearing record will remain 
open for 30 days for the members to submit written questions to 
these witnesses and to place their responses in the record.
    I cannot thank you enough for your very patient answering 
of our questions.
    And, Mr. Schindel, I hope to hear more from you soon.
    Thank you. With that, this hearing is ended.
    [Whereupon, at 5:21 p.m., the subcommittee was adjourned.]


                            A P P E N D I X



                             June 16, 2004


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