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Homeland Security

16 July 2003

New Anti-Money-Laundering Rules Effective, Official Says

Treasury's Dawson urges all countries to implement their rules

Measuring effectiveness in implementing anti-money laundering rules and sharing that information with financial institutions are two of money regulators' most important challenges, says a Treasury Department official.

Ensuring that other countries enforce the anti-money-laundering laws they enact is another challenge the United States faces as it works to reduce laundering and terrorist financing around the world, Michael Dawson, deputy assistant secretary for critical infrastructure protection and compliance policy, said July 15 to the Bankers' Association for Finance and Trade in Washington.

As part of measuring regulators' effectiveness, Treasury officials also are providing the effectiveness information to financial institutions to show them how valuable their efforts are in fighting the war on terror, Dawson said.

Dawson said U.S. money regulators also want to minimize the impact of increased anti-money-laundering rules on consumers' privacy interests.

He outlined progress made in developing and implementing anti-money-laundering rules under provisions of the U.S. PATRIOT Act. These include banning ties between U.S. banks and shell banks in other countries, establishing formal customer identification programs and requiring enhanced oversight of foreign correspondent accounts and private bank accounts. He said the rules now require U.S. financial institutions to take "special measures," such as terminating a banking relationship when there is a "primary money laundering concern."

Dawson pointed to progress made by financial institutions in Switzerland and the United Kingdom in tightening their reporting regulations for international money transactions. In Switzerland, for example, he said, the number of reports of suspicious money transactions received by the government increased 56 percent in 2002 over the previous year.

Dawson highlighted the importance of international financial institutions to expanding foreign trade and to maintaining the jobs of U.S. workers in industries that export goods and services. He added that international financial institutions -- money transmitters, banks and credit unions -- are also important in facilitating the transfers of workers' remittances, helping to raise the gross domestic product (GDP) of poor countries that receive them.

As many as 500 million people around the world participate in these types of transactions, he said, adding that workers' sent $10,000 million in remittances in 2001 to both India and Mexico and $6,400 million to the Philippines.

Remittances account for 8.9 percent of GDP in the Philippines, 16.2 percent in Nicaragua, 13.8 percent in El Salvador, 13.5 percent in Jamaica, 9.3 percent in the Dominican Republic, 8.9 percent in Honduras and 7.9 percent in Ecuador, he said.

Following is the text of Dawson's prepared remarks:

(Note: In the text "billion" equals 1,000 million.)

(begin text)

Remarks by Michael A. Dawson
Deputy Assistant Secretary, Critical Infrastructure Protection and Compliance Policy
Department of the Treasury
To the Bankers' Association for Finance and Trade
Washington, D.C.
July 15, 2003

Implementation of the USA PATRIOT Act with respect to Participation by U.S. Domestic Financial Institutions in International Financial Services

Thank you for inviting me to speak to you this evening. I am especially pleased to be here tonight because the Bankers' Association for Finance and Trade [BAFT] has been thinking about anti-money laundering issues since President Reagan was in the White House, when money laundering was finally made a crime. Indeed, since its beginning, almost exactly 82 years ago in the Summer of 1921, the BAFT has been and remains a catalyst in developing solutions in international banking legislation and regulation. And Tom Farmer has been associated with you for the last few years, and is someone who has effectively represented you and the more than 150 members of the BAFT.

Needless to say, international financial services are an important component of the U.S. and world economy. In the United States, you and your membership provide important parts of the foundation of international finance. For example, you ensure that the dollar clearing operations operate smoothly and in an orderly fashion, financing not only American trade, but much of the trade of an entire world. In addition to supporting trade, international financial services support trade, help multinational companies hedge risk, and promote economic development around the world.

It would be a mistake to conclude that international financial services are rarified products that benefit only the very wealthy or global companies. Indeed, international financial services in one way or another are part of the array of financial services offered by very small banks, and by the banks in the City of Manhattan in Riley County, Kansas, as well as by the banks on Manhattan island in New York. International financial services benefit people at all income levels within both poor and rich countries. For example, 12 million Americans work in jobs that depend on exports of U.S. products and services --- U.S. international financial services finance the trade that creates these jobs. Later in my remarks, I wish to focus on another example --- the international retail money transfer business. To borrow a description of remittances from Don Terry at the Inter-American Dialogue, this year 100 million people working abroad will send $100 billion to their families back home. For every sender, there is typically not just one recipient, but a family of recipients. Each year, therefore, as many as 500 to 600 million people benefit from the international money transfer business. That's about one out of every ten people on the planet. This helps demonstrate the reach and importance of international financial services.

Our challenge at the Treasury, as regulators, is to preserve the important contributions that international financial services make to the well being of people in the United States and around the world while ensuring that international financial services are not abused by terrorists and money launderers to exploit our financial system. This requires a risk-based approach in which we ask financial institutions to guard against real and active threats with significant consequence, rather than against threats that are imagined or of relatively little practical significance.

We do this best, we believe, by setting targets rather than by micromanagement of your operations by regulation, and by fostering a system in which transparency exists. Indeed, President Jefferson wrote to Treasury Secretary Gallatin in 1803 that transparency in financial institutions "gives a chance for the public eye penetrating into the sanctuary of those proceedings and practices." What President Jefferson said 200 years ago about the importance of transparency in the financial system is as true today.

In my remarks tonight, I will report on our progress in implementing the provisions of the USA PATRIOT Act that bear on international financial services. I will also share some observations on the degree to which other important financial centers have followed suit. I will then focus on a specific international financial service --- remittances --- international transfers of money by people working abroad in the U.S. to their families back home. I will conclude with some suggestions about next steps and future directions.

Implementation of the Provisions of the USA PATRIOT Act that Bear on International Financial Services.

President Bush noted on October 26, 2001, that the USA PATRIOT Act "will give intelligence and law enforcement officials important new tools to fight a present danger." Title III of this Act gives the Treasury the responsibility to forge those new tools within the financial services sector, balancing the national needs to be vigilant against money laundering and terrorist financing, while ensuring that these tools actually work and can be meaningfully operated in the reality of modern financial institutions.

I want to focus my remarks on our progress in implementing provisions of the USA PATRIOT Act that bear most directly on international financial services. I should note, however, that in a very real sense virtually all of the regulations we issue under the USA PATRIOT Act impact international financial services in one way or another.

Starting immediately after passage of the Act, the Treasury began efforts that resulted in late 2001 in the implementation of Sections 313 and 319 with a ban on ties by U.S. banks with foreign shell banks. The banking industry responded heroically by providing its energy, thoughts, and best efforts to ensure that we had quickly up and in place a ban on all such activities, both direct and indirect. Shell banks had been abused on many occasions by criminals, and it was time for the government and the banking industry to act to stop their perfidious activity.

Indeed, your industry was able to help us craft a meaningful process for certifications that would in fact meet the two goals of stopping these activities and doing so in a way that was workable. In so doing, you were not only furthering the responsibilities set before you by law, but were also doing a service for the American people.

A further area of effort was the establishment of formal customer identification programs pursuant to Section 326 of the PATRIOT Act. Although the implementation of this effort is still underway, I want to note the superb quality of comments provided by the industry, and your ready willingness to meet with us to clarify or shed light on all comments made.

We finalized these requirements in May, thanks to the many excellent points made, and are working to consider areas where we can further be of assistance in clarifying the intent of the regulations issued. I would also note here the tremendous assistance provided to us by all those within the regulatory community, including the independent regulatory agencies. The joint 326 rule is, I am told, one of the largest, most complicated joint rulemakings that our experts can remember.

Another tool is the requirement under Section 312 of the PATRIOT Act that we promulgate rules requiring enhanced due diligences for foreign correspondent accounts and private banking accounts. I know that this topic is of intense interest to many of you. Our rulemaking is still in progress, however, and I can't tell you anything about what the final rule will say. What I can tell you is that we appreciate the many fine comments we have received, and that we are working on finalizing these regulations.

Still another important tool is the authority under Section 311 of the PATRIOT Act to require U.S. financial institutions to take one or more special measures with respect to a "primary money laundering concern." This is an extremely powerful tool. Our General Counsel, David Aufhauser, has called this the "smart bomb" of terrorist financing. It can be directed against a country, an institution, or a practice. And it can require special measures ranging from increased recordkeeping and recording obligations, to enhanced due diligence, to termination of banking relationships. We have used this extremely powerful tool, most notably with regard to Nauru, and stand ready in appropriate circumstances to use it again. While we are mindful of the fact that such measures should be used sparingly, and not generally as a first resort, we will not hesitate to use these extraordinary special powers again if the circumstance warrants its use.

Progress of Other Financial Centers in Improving Their Anti-Money-Laundering and Anti-Terrorist Financing Rules.

As we increase the anti-money-laundering and anti-terrorist financing burdens on U.S. financial institutions, we must ensure that other jurisdictions are following suit. This is for two reasons. First, raising the obligations for U.S. financial institutions will do little good if money launderers or terrorists can, as the 2002 National Money Laundering Strategy notes, "escape detection merely by moving funds to countries with weak anti-money laundering regimes." Second, the obligations raise costs for U.S. financial institutions serving legitimate customers. Unless other jurisdictions impose similar obligations on their institutions, our institutions will suffer a competitive disadvantage.

Fortunately, other jurisdictions are following suit.

In Switzerland, for example, the number of reports on suspicious money transactions received by the Swiss government increased by 56 percent in 2002. Interestingly, for the first time, the majority of reports have originated from the non-banking sector. Both the marked increase and the fact that reports from the banking sector no longer predominate, are attributed by the Swiss to a change and tightening of reporting regulations on international money transactions. This is another example of the importance of various countries working together and learning from one another benefits us in the United States, as well as those abroad.

Similarly, the U.K. government has been a leader in anti-money laundering requirements, that work to balance benefits with burden. However, as the U.K. government itself as noted, there are challenges remaining in achieving that level of balance. Indeed, recent U.K proposals to examine the administrative structure of U.K. agencies devoted to countering money laundering evidence the persistent challenge of money laundering, and the need by all governments to ensure that suspicious activity reports are actually used, and that meaningful and concrete information is provided to the financial institutions charged with making reports of suspicious activity.

One challenge we face going forward is to keep our focus on anti-money-laundering and, especially, anti-terrorist financing regulations. Moving beyond these objectives and attempting to use anti-money laundering regulations to address other issues risks undermining the broad private sector and public sector support for these initiatives. A second challenge is to ensure that other jurisdictions enforce the laws they enact. Otherwise, our successes will be illusory. A third challenge is to measure the effectiveness of our domestic and international efforts to fight money-laundering and terrorist financing. Only then can we ensure that our regulations are well-calibrated to stop money-laundering and terrorist financing while expanding access to financial services and minimizing the impact on consumers' interest in privacy.

I wish to focus for a few moments on one of the most important international financial services --- remittance. As I mentioned at the beginning of my remarks about 100 million people send $100 billion to as many as 500 million people around the world. One out of every ten people on the planet participate in these transactions. They are extremely important. The numbers are staggering. In 2001, $10 billion was sent to India, by Indian workers around the world. Another $10 billion was sent to Mexico. Most of that money comes from Mexicans working in the United States, making the U.S.-Mexico remittance market the single biggest remittance market in the world. In some countries remittances amount to significant portion of GDP. In 2001, $6.4 billion was remitted to the Philippines --- that's 8.9 percent of GDP in the Philippines. Remittances are particularly significant to a number of countries in the Western Hemisphere. In 2001, remittances amount to 7.9 percent of GDP in Ecuador, 8.5 percent in Honduras, 9.3 percent in the Dominican Republic, 13.5 percent in Jamaica, 13.8 percent in El Salvador, and 16.2 percent in Nicaragua.

At Treasury, we are focused on ensuring that the regulations we promulgate under the USA PATRIOT Act do not impede competition or impose undue burdens on the businesses --- money transmitters, banks, and credit unions --- that that have stepped in to provide these important services. While remittances are very large in the aggregate, they are typically very small in any one particular instance. Even a slight increase in costs that flow from increased regulations can have a significant impact for the recipients.

As one customer told Time Magazine, in describing the significance of cost competition among financial services institutions, "[t]wo dollars is not a big difference here, but it's a big difference in Nicaragua." The lower we can keep compliance costs while at the same time preventing the use of international money transfers in money laundering and terrorist financing, the better.

Next Steps.

In the course of my remarks, I have mentioned many of the challenges that we face as we continue to implement the anti-money laundering and anti-terrorist financing provisions of the USA PATRIOT Act. I would like to close by emphasizing what I regard as one of the most important challenges --- measuring our effectiveness and sharing that information with the private sector.

As I have said before, it is in the government's interest to provide financial institutions with this information. The government, like you, wants to ensure that your resources are put to their most productive use in the financial front of the war on terrorism. We, quite literally, want to maximize the bang we get out of your bucks.  We want to sustain your institutions' commitment to the financial front of the war on terror, by showing you how valuable your efforts are. Of course, there are limits to what information we can share. We can't compromise open investigations. We can't compromise sources and methods of collecting intelligence. There are also limits to the information we have. It is difficult to quantify the deterrent impact of the regulations. It is also difficult to trace some of the specific successes in the financial front of the war on terror to the efforts of specific institutions to comply with specific provisions of the USA PATRIOT Act. Our principal challenge is to work together within these constraints to develop and share information that helps maximize the effectiveness of the regulations and sustains the strong private sector commitment to fighting terror.

I have been encouraged by recent improvements in information sharing. For example, at the most recent meeting of the Bank Secrecy Act Advisory Group, field agents described their experiences in using Section 314 requests as an investigative tool. They documented, first, that the majority of these requests were related to terrorist financing cases, alleviating a concern in the industry that the Section 314 requests would be used for less significant cases. They also explained how useful the information generated by the requests has been. Financial Crimes Enforcement Network Director James Sloan also detailed steps that we have taken to improve the Section 314 process to minimize the compliance burden on financial institutions while preserving the effectiveness of the requests as an important law enforcement tool. I wish to note, in particular, the efforts of the Bank Secrecy Act Advisory Group to improve information sharing between law enforcement and the private sector. I look forward to seeing other examples of such improved information sharing across government.

(end text)

(Distributed by the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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