Progress is being made in the war on terrorism, and one powerful weapon in our arsenal has been the worldwide effort by the United States and other countries to locate and dismantle terrorist financing. We're told that about $80 million dollars in suspected terrorist funds have been frozen worldwide since September 11th. In addition, terrorist profit centers have been disrupted, from wire transfer activities at U.S. banks to sales of honey to hawalas and other enterprises still under investigation. $80 million is a lot of money – many times over what it cost al Quaeda to bring down the World Trade Center – and taking this money out of terrorist hands and depriving them of new income is as important as destroying their training camps, taking apart their command structure, and eliminating their military weaponry.
I'd like to discuss two topics this morning. First I'd like to make some observations about the ongoing implementation of the new anti-money laundering law and, second, I'd like to give you a preview of some of the latest anti-money laundering work that the Permanent Subcommittee on Investigations is doing.
Last year, Congress enacted the toughest new anti-money laundering law in 15 years. My hat is off to this Committee for the key role it played. Congratulations are due in particular to Chairman Sarbanes who, not only committed the Committee to drafting a bill in record time and won unanimous bipartisan support for the Committee draft, but also, after the anthrax scare closed three Senate office buildings, hosted about 50 Congressional staffers in his Capitol Hill office in all night sessions until the bill got done. I also want to thank him, Senator Stabenow, Senator Gramm, and the other Committee members for their careful consideration of the anti-money laundering work done by my Subcommittee, for including my staff every step of the way, and for including so much of the Levin-Grassley bill in the final legislation.
This year, 2002, is key to the effectiveness of the new law. We all know that regulations can strengthen, weaken or alter the intent of enacted legislation, and dozens of implementing regulations are due throughout the calendar year. So far, the Treasury Department has done a good job meeting the deadlines and writing proposed regulations on shell banks, foreign bank ownership, and suspicious activity reporting by securities firms. Particularly important has been the Department's willingness to meet head on the requirement in the law to extend anti-money laundering obligations to all U.S. financial institutions, not just banks. It hasn't shied from that requirement and, equally important, the proposed regulations have been careful not to start down the road of making exceptions or special rules for various players in the financial community. Instead, everyone has been made subject to essentially the same anti-money laundering requirements. Also important was the signal sent by the Department's prompt and straightforward implementation of the December deadline for closing shell bank accounts.
So at this stage I have had few complaints about how the Treasury Department has been implementing the new anti-money laundering law. That is not the same as saying I have no concerns. One issue that has come up repeatedly, for example, are provisions that appear to postpone compliance with the law's requirements. We must hold to the dates set in the law. We don't have the luxury of time. Osama bin Laden and al Quaeda haven't quit; there is plenty of evidence that they still may strike; and, if they do, they will again try to use our financial institutions against us. That's why it is more important than ever that we seal the cracks in our anti-money laundering defenses as quickly and as completely as possible, and why we need to continue to push U.S. financial institutions to get their anti-money laundering programs up and running now. I urge the Committee to hold the Department's feet to the fire on the compliance deadlines.
Some of the biggest implementation challenges are looming as, over the course of the next six months, the Department will issue regulatory guidance on the law's requirements for money laundering programs, enhanced due diligence reviews, customer verification, and identification of beneficial owners. How these complex issues are addressed will determine whether the new anti-money laundering law lives up to its potential. A good start has been made, and this oversight hearing sends the right message about how important these issues are and how many people are watching to make sure they are handled the right way.
One of the biggest changes wrought by the new law has been to extend anti-money laundering obligations to all U.S. financial institutions, not just banks. One of the key financial sectors affected by these new obligations is the securities industry, which is also the recent focus of my Subcommittee's anti-money laundering efforts.
Last year, a GAO report I requested identified a number of gaps and inadequacies in the anti-money laundering efforts in the U.S. securities field. The study showed that thousands of U.S. securities firms do not have even basic anti-money laundering controls in place. It also indicated that, while some large securities firms have voluntarily established sophisticated anti-money laundering programs, those programs are the exception rather than the rule in the industry. The intent of the GAO report was to help the securities industry evaluate what needs to be done next to strengthen their anti-money laundering controls.
This year, to get a better sense of the foreign financial institutions and offshore businesses that have U.S. securities accounts, the Subcommittee is surveying 22 large and small U.S. securities firms with a variety of clients and services.
Foreign financial institutions carry higher money laundering risks because, by the nature of their business, they handle the money of their clients and transfer these third party funds through their U.S. securities accounts. U.S. securities firms often have limited information about these third parties. Businesses in offshore jurisdictions that have corporate and bank secrecy laws and issue offshore licenses, and businesses in jurisdictions that have been designated as noncooperative with international anti-money laundering efforts, pose even greater risks. These offshore and noncooperative jurisdictions are identified and discussed in the State Department's key anti-money laundering publication, the International Narcotics Control Strategy Report, which expresses concern at the growing use of these jurisdictions for criminal purposes, from terrorism to narcotics trafficking to tax evasion. That's why the new anti-money laundering law requires U.S. financial institutions to conduct enhanced due diligence reviews of foreign financial institutions in offshore or noncooperative jurisdictions to ensure that the foreign financial institutions they do business with are legitimate enterprises and not conduits for terrorists or other criminals.
All of the firms contacted by the Subcommittee immediately agreed to respond to the survey and have cooperated in this effort, although many that gave us initial survey responses have agreed to refine or revise certain aspects of the data they submitted to make the data more comparable and detailed. To date, ten of the survey responses are entirely complete.
This preliminary survey information indicates the existence of significant money laundering risks in the securities field that need to be addressed. The first indication of the extent of the problem came to us right after the survey went out. All but a few firms called back and indicated that they would be unable to provide an accurate count of their offshore clients, because their data systems didn't identify offshore entities, despite the higher money laundering risks involved. The surveyed firms agreed to undertake an analysis of their client information and provide the best estimates they could to enable us to develop overall estimates of the U.S. securities accounts held by offshore entities.
Over the last two months, firms provided us with the following good faith estimates. All 22 of the firms indicated that they have numerous offshore clients. Of the ten firms with completed survey responses, none had less than 300, and one firm had more than 16,000 offshore entities as clients. Altogether, those firms show a total of over 45,000 offshore entities as clients, consisting of over 38,000 offshore corporations and trusts, 4400 offshore banks, 2160 offshore securities firms, and 670 offshore insurance companies. While the data reflects the fact that offshore entities may open accounts at more than one securities firm, the bottom line is that tens of thousands of offshore entities, which are highly vulnerable to money laundering, now have accounts at U.S. securities firms.
The survey responses also give some estimates about how much money offshore clients are putting into their U.S. securities accounts. The data indicates that the 45,000 offshore entities at the ten firms have, altogether, about $140 billion in assets in their U.S. securities accounts, with most of that, about $137 billion, coming from offshore corporations and trusts. The next biggest category is offshore banks with about $2 billion in their U.S. securities accounts. Offshore insurance companies have about $280 million, and offshore securities firms have about $235 million. Looking at the individual survey responses shows that the smallest amount of these assets at any one firm is about $90 million, while the most at any one firm is $67 billion.
The survey has identified only four foreign shell bank accounts at U.S. securities firms, all four of which are required to have been closed by the end of the year under the new law. Foreign shell banks are those banks that have no physical presence in any jurisdiction and which carry the highest money laundering risks in the banking world. Another category of interest is foreign banks in countries that have been designated by the Financial Action Task Force or FATF as noncooperative with international anti-money laundering efforts. The data shows that five firms have accounts for about 400 of these high risk foreign banks, with the number ranging from a low of about 50 to a high of about 140 at any one securities firm. These 400 foreign banks have about $375 million in assets in their U.S. securities accounts, with two-thirds of that total, about $255 million, at just two of the U.S. securities firms.
A third category of interest is money service businesses outside of the United States, such as foreign money exchange houses that deal in foreign currencies, cash checks and wire funds. This category includes, for example, the Dubai money houses that transmitted funds for the 19 al Quaeda terrorists. The preliminary survey information indicates that only three firms have money service business clients.
The preliminary information collected by the Subcommittee demonstrates that the securities industry, like the banking industry, has clear money laundering risks that need to be addressed. These risks include tens of thousands of high risk clients and hundreds of billions of dollars in high risk funds. The good news is that, as a whole, these high risk accounts represent only about 2% of all accounts. That means that they represent a small enough number of accounts that a focused anti-money laundering effort ought to be able to monitor their transactions, identify suspicious activity, and alert law enforcement in order to possible terrorists or other criminals attempting to use U.S. securities accounts to carry out their illegal activities.
The Subcommittee data also indicates that the U.S. Treasury Department is on the right track in its decision to apply the same anti-money laundering rules to U.S. securities firms as apply to U.S. banks. I also applaud the Department's decision to apply the rules to U.S. insurance companies that are registered as broker-dealers and sell annuities. While many insurance products present low risks for money laundering, some products such as annuities sold to offshore shell corporations present very different risks that require appropriate controls.
Which brings me to a final point – the need for to focus our anti-money laundering efforts on the highest risks. It is important to realize that this principle is embedded in the new law, which is designed to focus scarce resources on the worst problems – such as shell banks, offshore jurisdictions, and noncooperative countries. With respect to the provisions that will be applied across the board to all U.S. financial institutions – the requirements for anti-money laundering programs and client verification – the law does not require a one-size-fits-all approach. For example, it permits, and I hope the regulators will include in the regulations, a direction to all U.S. financial institutions to engage first in a money laundering analysis to identify their risk areas and then to design programs that focus on those risks.
Congratulations again on holding this very important oversight hearing on
this landmark legislation.
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