March 9, 2000
TREASURY DEPUTY SECRETARY STUART EIZENSTAT HOUSE COMMITTEE ON BANKING
AND FINANCIAL SERVICES
Mr. Chairman, Mr. LaFalce, and members of the Committee:
I am happy to be here this morning to present the International
Counter Money Laundering Act of 2000. This Committee has been at the
center of a growing effort to expose the serious problem of money
laundering and to take effective steps to combat it. This Committee
wrote the House versions of the Bank Secrecy Act, the Annunzio-Wylie
Bill, and the Money Laundering Suppression Act of 1994, from which our
current enforcement powers are derived. Last fall, after reports that
millions of dollars in Russian criminal proceeds had been laundered
through an American-bank, you held widely publicized hearings which
did much to focus public attention on the problem.
The legislation we are proposing today would fill a crucial gap in our
authorities, and significantly enhance our ability to take calibrated,
targeted action with respect to money laundering threats posed by
foreign jurisdictions, institutions, or transactions. In shaping our
proposals, we have benefited considerably from a study of legislative
proposals that you, Mr. Chairman, and other members of the Committee,
have made. We look forward to working with you and Ranking Member
LaFalce with the aim of enacting effective legislation to combat
international money laundering during this Congress.
Before I get to the details of the legislation, however, I want to
point out that it is being proposed in the context of the National
Money Laundering Strategy for 2000, which has been developed as
required by the Money Laundering and Financial Crimes Strategy Act of
1998. This comprehensive document, which was released yesterday, was
based on the continuing review we have conducted since last September
of all programs in this area. It reflects considerable progress on a
wide range of initiatives since the 1999 Strategy was published. It
also announces a series of new initiatives to combat money laundering,
in the areas of financial services, international policy and federal,
state and local law enforcement. It sets out the specific goals we
seek this year, the actions we shall take to achieve them, the time
frame in which they will be taken and the specific officials in the
Executive Branch that are responsible for ensuring that the goals are
met. While you have requested that I focus my testimony on legislation
dealing with offshore havens and the laundering of the proceeds of
corruption, I shall be referring to some other aspects of the Strategy
in my presentation, as well. Because they are all part of a whole, I
would be most appreciative if the entire 2000 Strategy document could
be made a part of the Record.
II. The Need for Additional Discretionary Authorities
The IMF has estimated the amount of money laundering worldwide at
between two and five per cent of the world's gross domestic product.
Because of its very secretive nature, accurate figures on the extent
of money laundering are hard to come by. But even the most
conservative estimates project the magnitude of money laundering to be
close to $600 billion. Regardless of the exact figures, money
laundering is a serious threat to our country because it facilitates
drug trafficking, organized crime and international terrorism and
because it encourages corruption in foreign governments, undermining
U.S. efforts to promote democratic institutions and healthy economic
development internationally. Money laundering also poses a threat in
and of itself, because it risks undermining the integrity of our
financial system. President Clinton underscored this point in
announcing Presidential Decision Directive 42 (PDD-42) when he stated
that much of the problem posed by international organized crime "stems
from the corrosive effect on markets and governments of their large
I want to state unequivocally that safeguarding the integrity of the
American financial system and protecting it from abuse are fundamental
commitments of this Administration. In reviewing the developments of
the last six months, and deciding what new measures may be necessary
to act on those commitments, we concluded that the specific
legislative tools the government has available to protect the
financial system from international money laundering are too limited.
On one end of the scale, we have advisories, and on the other end of
the scale we have formal economic sanctions under the International
Emergency Economic Powers Act ("IEEPA"). There is nothing of practical
utility in between.
Treasury Advisories can be effective, because they encourage U.S.
financial institutions to pay special attention to transactions
involving certain jurisdictions, and to file SARs -- or suspicious
activity reports. In two cases, that of the Seychelles in 1996 and the
country of Antigua and Barbuda last year, advisories also provoked
positive action on the part of the targeted governments. But
advisories do not impose specific requirements, as an order or
regulation would, and thus they are not sufficient to address the
complexity of the international money laundering threat.
At the other end of the scale, blocking orders under the IEEPA require
a Presidential finding of a national security emergency, and operate
to suspend financial and trade relations with the offending targets.
Such orders can affect legitimate as well as illegitimate commerce. We
have used IEEPA orders effectively against drug trafficking and
terrorist organizations, but the tool is not particularly well suited
to dealing with under-regulated foreign financial institutions.
III. Proposed Legislation and Implementation
New Discretionary Authorities. Under our proposed legislation, if the
United States government believes that a certain foreign jurisdiction,
a specific foreign financial institution, or a type of international
transaction, poses a primary money laundering threat to this country,
we will be able to take a far wider range of actions. The Secretary of
the Treasury, after consultation with the Secretary of State, the
Attorney General, and the Chairman of the Federal Reserve Board, could
do one or more of the following:
1. Require banks or other financial institutions to keep records of
transactions and make them available to the government on request.
These records could be kept in the aggregate or by individual
transaction. Such records could prove invaluable to law enforcement
and could help us better understand the specific money laundering
mechanisms at work. As a corollary benefit, because such a requirement
would cause U.S. institutions to increase the level of scrutiny they
apply to transactions involving targeted jurisdictions or
institutions, it could result in pressure on the offending foreign
jurisdictions to improve their laws.
2. Require financial institutions to ascertain the foreign beneficial
owners of accounts in the U.S. where they are different from the
owners of record. This requirement would help us dig through the
layers of obfuscation, and often plain deceit, that prevent us from
knowing who really holds money in U.S. banks.
3. Require identification of those who are allowed to use a bank's
correspondent accounts, as well as its so-called "payable through"
accounts, which allow customers of a foreign bank to conduct banking
operations through a U.S. bank just as if they were its own customers.
These technical financial mechanisms, though perfectly legal and
serving many legitimate purposes, are also abused by foreign money
launderers who seek to clean their dirty money through our financial
institutions. When necessary, we need to be able to find out who
really benefits from these accounts, and by application of
transparency, discourage abusive practices.
4. Finally, where necessary in extreme cases, the Secretary would have
the authority to impose conditions upon, or prohibit outright, the
opening or maintaining of correspondent or payable-through accounts.
Sometimes, when the threat is really serious, we need to be able to
say enough is enough and cut foreign money launderers off from using
U.S. financial institutions.
As you can see, our proposed legislation is designed to be graduated,
targeted and discretionary -- graduated so that the Secretary can
narrowly tailor the action he takes in a manner proportional to the
threat he is seeking to counteract; targeted, so we can focus our
response on the precise threat we confront; and discretionary, so we
can integrate these tools into the bilateral and multilateral
diplomatic efforts we are engaged in to persuade offending
jurisdictions to change their practices. In the mean time, the
information generated by these measures will enable our enforcement
and regulatory personnel more effectively to understand the way these
mechanisms are used and how money passes through the jurisdictions
named. Hopefully, the information will also enable us to conduct more
effective enforcement efforts against abuses stemming from those
jurisdictions, transactions, or institutions.
The extent to which we should rely on multilateral action has been a
matter of some debate over the past few months. Some have said that
all our actions should be taken in concert with other countries, so
that our institutions are not put at any possible competitive
disadvantage. Others would mandate our government to apply certain
stated measures automatically with respect to those who pose a threat.
We have learned from our experience with economic sanctions, that on
the one hand multilateral action is generally more effective than
unilateral steps. And there may be times when the desirability of
specific countermeasures is trumped by overriding national interest
On the other hand, if we believe there is a genuine threat to our own
institutions, we shall be prepared use these powers unilaterally even
if other nations are unprepared to join us. There may well be
instances where multilateral or even bilateral action is riot feasible
and in which the risk of corrupt penetration of our banking system is
so high we that must act ourselves. In making these choices,
discretionary powers serve a very useful purpose.
Findings and Implementation Process. I would also like to outline the
process we intend to use to designate foreign jurisdictions as money
laundering threats. First, working with the State Department, we shall
improve the processes we use to gather data about other countries'
laws, regulations and practices that either combat or facilitate money
laundering. We will also look at experiences from U.S. law
enforcement. With this information, we shall assess the scope and type
of money laundering problems we face from each jurisdiction. These
assessments will be made on an annual basis.
Second, we would seek to determine whether each of the problem
jurisdictions is primarily a source of criminal funds, or primarily a
haven for dirty money. "Source" countries often face continuing
problems of political will and capacity in dealing with what are, at
root, domestic problems of crime and corruption. "Havens" tend to be
characterized by under-regulated offshore financial services and
excessive bank secrecy. Political will is relevant in both cases; but
the distinction is crucial, in terms of the application of specific
countermeasures. Training and technical assistance might be more
appropriate than targeted regulatory action, for example, with respect
to "source" jurisdictions.
Third, for each source country and money laundering haven, we shall
ask if it has an adequate anti-money laundering regime, based on the
global standards established by the Financial Action Task Force on
Money Laundering ("FATF"). If not, we shall then ask whether it is
improving its laws and practices. If not, we shall examine if this
failure is primarily due to a lack of resources, or instead an absence
of political will. It may in fact reflect a clear intention of
providing no-questions-asked banking to the international underworld.
In addition, our analysis will also take into account the interplay
between tax evasion -- a serious crime in its own right-and money
laundering, since the same organizations in the same havens are often
used for both activities, often by the same criminals.
The answers to these questions will go a long way in determining which
countermeasure will be very influential in the determination whether a
jurisdiction is designated a primary money laundering concern so that
the Secretary may then impose one of the new authorities. They will
also inform the decision of which counter-measures to apply in each
These factors are set forth in the 2000 National Money Laundering
Strategy, in order to send a clear signal to the public, to financial
institutions, and to the international community, about our concerns
and our intentions. We hope and expect that many institutions and
foreign governments will not wait for us to announce specific steps
before they take appropriate preventive steps.
Multilateral Action. As we contemplate specific countermeasures with
respect to specific jurisdictions, we shall be guided by, and actively
participate in, the work of international organizations in this field.
In June, the FATF is expected to publish the names of jurisdictions
that substantially fail to meet its criteria for cooperation in
resisting money laundering. The Financial Stability Forum, created by
the G7 major industrial nations, is also reviewing the role of
off-shore financial centers in the international system and
encouraging them to put sound international standards into force. We
shall help both organizations make their evaluations and take
appropriate and coordinated countermeasures toward those
jurisdictions, offshore and on shore, that fail their tests.
We shall also work with our partners in the OECD to publish its list
of tax havens within the next few months. Although tax evasion and
money laundering are separate crimes, the same havens are used for
both, often by the same people, because the features that make a
jurisdiction attractive for one, such as excessive bank secrecy and
lack of transparency, make it attractive for the other.
We also can and will promote the adoption of appropriate supervisory
actions in response to specified jurisdictions that fail to make
progress in implementing effective international standards relating to
money laundering. In multilateral forums, the banking agencies will
support the development and issuance of international supervisory
guidance on the reputational risks associated with money laundering
and the sound practices that should be implemented to address these
IV. Guidance to U.S. Financial Institutions
More broadly, Treasury and the financial regulatory agencies intend
also to issue, before the end of the year, guidance to U.S. financial
institutions that will assist them in identifying, on their own, those
customers and transactions that pose an especially high risk of
involvement with money laundering and other financial crimes. We would
then expect the institutions to keep a watchful eye on these accounts.
Let me make it clear that our guidance will differ from the "know your
customer" proposals made last year. First, we do not intend to issue
formal regulations, and the guidance will be tailored so as to require
special scrutiny only with respect to high-risk accounts. Institutions
already conduct due diligence with respect to a wide range of
regulatory requirements; we intend to assist them in making
determinations about what specific steps they need to take to comply
with their existing obligation to file Suspicious Activity Reports.
This obligation explicitly requires banks to be aware of transactions
that are suspicious because of their size, their source, or because
they are not the kind of transactions in which their customers would
normally be expected to engage.
Banks should be able to identify high-risk customers -- including
certain so-called "private banking" customers -- without unduly
interfering with normal business activities or invading the privacy of
any customer. Moreover, these efforts to identify certain high-risk
customers will take place in the context of the Administration's
commitment, expressed by the President in the State of the Union, to
propose new legislation this year to safeguard citizens' financial
privacy. To assure this, we will, in preparing the details of our
guidance, consult widely with all segments of the industry, with
privacy advocates and with other affected groups. I personally will be
heading up this initiative.
In this connection, special attention should be paid to corrupt public
officials who try to launder money and other assets they have stolen
from their own people. We will continue to seek legislation we first
called for last year to make public corruption by a foreign a
predicate offense under the anti money laundering laws. This change
would have a significant effect, both in ensuring that our own
financial institutions applied enhanced scrutiny to activity in
accounts they manage on behalf of foreign officials, and in providing
our prosecutors tools necessary to bring to justice foreign officials
who have looted their countries. The change would also provide U.S.
prosecutors with tools to assist investigations of foreign governments
to bring such "kleptocrats" to justice. We will also continue to urge
other countries to make public corruption a predicate offense, in
order to implement the international treaties and standards that have
been negotiated and will be in the future.
V. Other National Money Laundering Strategy Initiatives
I would like now to highlight a Pew of the other activities covered in
our 2000 Strategy Report which may be of special interest to members
of the Committee.
HIFCA Designations. We announced yesterday that the New York/Northern
New Jersey region, the city of Los Angeles and the city of San Juan
have been designated as High Risk Money Laundering and Financial Crime
areas. In addition, one money laundering system the movement (and
often smuggling) of cash in bulk across the Southwest border has also
received this designation. These are the first designations under the
1998 Strategy Act. In each, a money laundering action team will be
created or identified and will proceed this year to launch
concentrated enforcement activities that will coordinate the efforts
of federal, state and local law enforcement. State and local
authorities operating within each HIFCA will also be eligible for
grants under the new Financial Crime Free Communities Support program
Suspicious Activity Reporting for MSBs. Yesterday, we issued final
regulations requiring filing of suspicious activities reports by money
services businesses that transfer funds or deal in money orders or
traveler's checks. They were developed after significant consultations
with representatives of the industry, state regulators and law
enforcement officials. The regulations will significantly expand the
ability of law enforcement to focus its efforts on money laundering
activity occurring through non-bank financial institutions. It will
help level the playing field in SAR reporting for institutions
providing financial services to the public.
This summer, we hope to issue our final rules for casinos and card
clubs. We have also been working with the SEC, and we expect to
publish proposed rules covering SAR reporting by brokers and dealers
in securities later this year. The securities industry .is generally
not used in the "placement" stage of money laundering because of near
universal policies against currency transactions. It also requires
special rules and systems to ensure conformity with existing
examination and enforcement programs of securities regulators.
Nevertheless, the services and products the industry provides,
including the efficient transfer of funds between accounts and to
other financial institutions, "the liquidity of securities, and the
ability to conduct international transactions provide opportunities
for money launderers to obscure and move illicit funds.
Gatekeepers. We are aggressively pursuing programs aimed at the
lawyers, accountants and auditors who function as "gatekeepers" to the
financial system. While legal rules properly insulate professional
consultations from overly broad scrutiny and create a zone of safety
within which professional can advise their clients, those rules should
not create a cover for criminal conduct. We have published materials
for the accounting profession that highlight money laundering risks in
various industries. We are considering how existing accounting
standards, on such subjects as illegal acts by clients, internal
controls and fraud, can incorporate money laundering safeguards. By
the end of this year, after outreach to a range of professional
associations, we expect to have developed recommendations on ways to
impress upon gatekeepers their professional responsibilities in this
In order to ensure that we are able to fully implement this year's
Strategy, we have asked for a $15 million, centralized account in our
2001 budget. These funds, which are in addition to our normal budget
request, will be used to provide grants to state and local enforcement
agencies, and to support a number of key strategy initiatives.
There are those who believe that in the new world of electronic
commerce, where funds travel so fast and so easily, law enforcement
cannot possibly keep up with criminals and corrupt officials and those
who move their money for them. I strongly disagree. We have the same
information technology they have. We are more dedicated than they are.
We will work to implement the authority we have and the new laws we
seek, and we will seek the help of other nations that realize the
threat money laundering presents to their own economic progress, and
the stability of their own societies. 'We shall work harder and with
more resourcefulness than our adversaries to track their activities,
eliminate their havens, bring them to justice and eliminate the
scourge of money laundering from our societies.
Thank you, Mr. Chairman, for inviting me to testify before this
Committee today, I would be happy to answer questions from you and the
other members of the Committee.