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27 March 2003

Treasury Official Says More Iraqi Money Uncovered Abroad

(Aufhauser also describes U.S. strategy against terrorist finance) (4060)
A U.S. Treasury Department official says hundreds of millions of
dollars of "previously unknown illegal proceeds" have been uncovered
abroad and are subject to seizure.
"That is money that can no longer be directed to promote terror," said
David Aufhauser, Treasury's general counsel. "It is money, in fact,
that has every promise of being repatriated to the people of a free
Iraq."
Aufhauser reported the disclosure without elaboration at the end of
March 27 remarks to a Security Industry Association conference in New
York about money laundering and terrorist finance.
A week earlier the Bush administration had announced that it had
seized non-diplomatic Iraqi government assets in the United States
with the intent of using the money for the benefit of the Iraqi
people. That announcement also called upon other countries to freeze
any assets of Saddam Hussein and his regime within their borders.
Aufhauser said in the larger part of his remarks that he expects other
countries will eventually follow the U.S. lead by adopting stringent
requirements on banks and financial institutions to detect flows of
money intended to finance terrorism.
"I think it likely that many countries will follow suit with
requirements for the surrender of information across borders,"
Aufhauser said. "The international financial system is so completely
stitched together today that it is impossible to protect the integrity
of domestic commerce and to assure the security of citizens without
reserving the right to examine the nature of cross-border financial
transactions."
Aufhauser also emphasized the importance of technical assistance for
developing countries on fighting terrorist finance through money
laundering.
"The failure to provide such assistance could undermine credibility
and discount the seriousness of our effort," he said.
He described technical assistance as part of the U.S. strategy against
terrorist finance that includes also reliance on the private sector
and on an international coalition.
Aufhauser said President Bush's executive order of September 2001
authorizing sanctions against non-governmental organizations and
financial institutions that facilitate financial terrorism has
effectively imposed new disciplines on those groups, foreign and
domestic.
Following is the text of Aufhauser's remarks:
(begin text)
KEYNOTE ADDRESS BY
TREASURY GENERAL COUNSEL DAVID D. AUFHAUSER
TO THE SECURITIES INDUSTRY ASSOCIATION'S
ANTI-MONEY LAUNDERING COMPLIANCE CONFERENCE
Good morning.
As we talk this morning, some of the best of our kids are being shot
at in Iraq, in part, because the system for which you and I are
responsible failed them.
For more than a decade -- after the misadventure into Kuwait in August
of 1990 -- Iraq has been an international pariah. More particularly,
it has been the subject of the most comprehensive and far-reaching
economics sanctions program ever imposed by the United Nations.
The initial impact of the program was real and, indeed, crushing.
Sanctions are a blunt and imperfect instrument. They can visit
hardship -- unacceptable hardship -- on the very people that you hope
to lift up from near enslavement by tyrants and bandits.
In the case of Iraq, the world community heard the cries of the Iraqi
people and provided relief in the form of a program known as the Oil
for Food Program. At its core, the program permitted barter trading of
Iraqi oil in exchange for humanitarian goods and services, all subject
to UN monitor and control.
The good news is that tens of billions of dollars flowed through the
program between 1996 and today, providing food, medicine, shelter and
necessities of life for the Iraqi people. It was one of the rare
programs that well served both a moral imperative and the most
fundamental physical needs of people for whom freedom is a stranger.
The bad news is that the program was viewed by the Iraqi regime as an
invitation for graft, corruption and sanctions busting. And they made
it their holiday.
Within the OFF program, they skimmed, they demanded kickbacks, they
bought brokers, they created false front companies and they banked the
money abroad in cash, or in accounts for product credit.
They also began to deal in oil -- in an open and notorious fashion --
outside of the UN sanctioned program. By pipeline or tanker truck
convoys backed up as far as the naked eye could see, the smuggled oil
produced rivers of money and credit -- a conservative GAO [General
Accounting Office of Congress] estimate is $6.0 billion in a four-year
period alone -- that were banked abroad.
That money -- and those credits -- were the purchase for the goods and
services that armed Iraq (against all reason and international law)
with the wherewithal and the will to develop weapons of mass
destruction -- the very weapons or capabilities that we seek now (with
the blood of our children) to deny them.
That is the cost of turning a blind eye to laundered funds.
You all witnessed a second cost when the World Trade Center vanished
before your eyes.
I was in Cambridge, England, on September 11 attending an
international conference on money laundering. The college was
populated with Attorneys General, Chief Justices, Ministers of Police,
and even General Counsels. It had the trappings of a sober and serious
affair, but in truth there was a lot of self-congratulation. The law
enforcement community had been on the trail of money laundering for
more than a decade, and had much to crow about. Elaborate computer
screens, predictive models, profiles of conduct, capture and
indictment evidenced that we were gaining a lead on a tough issue.
The assaults on New York and Washington silenced the gathering. It
wasn't just the awfulness of the video replaying its unspeakable
carnage. It was the realization that we -- the professionals charged
with the responsibility of policing the international financial system
-- had been looking at the world through the wrong end of a telescope.
Money had been spirited around the globe, by means and measures and in
denominations that mocked detection. The more serious threat to our
well being was now clean money intended to kill, not dirty money
looking for a place of hiding. I relate both these stories to you to
underscore how important your job is.
Lilly Tomlin has a line. When we were all young, we wished that we
would be somebody some day. Now that we are a little older, we only
wish that we had been more specific.
We all share laughter at the line because every man and woman has some
regret about the forks in the road that we have taken in life. But I
doubt seriously if any one present this morning has regret about their
charge because it has never been more important. As challenging as the
task is, you are the right people for the right job at the right time
and I am honored to be here to talk to you about how we see your job
and the war on terror.
Let me go back to my time in Cambridge.
I caught a jump seat on a military plane back to Washington thinking
that the Treasury Department would do the orthodoxy in war: collect
revenues, sell war bonds and send money across the river to the
Pentagon.
But this is a profoundly uncommon war. There is no known sovereign, no
uniformed army, no hill to take, no target that is out of bounds.
It is shadow warfare and the primary source of the stealth and
mobility necessary to wage it is money. It is the fuel for terror's
enterprise. It is also, however, its Achilles' heel. It leaves a
signature.
Much of the intelligence of war is, in fact, suspect -- the product of
treachery, deceit, custodial interrogation, bribery and encrypted
talk. But financial audit trails do not lie. They are diaries of
terror. And they reveal the secrets necessary to stem tithes intended
to underwrite acts of terror.
Detecting that "giving" is a daunting task. It requires extensive
international cooperation, an extraordinary display of civic
responsibility by the world banking community and regulatory regimes
that do not sacrifice focus in the interest of the appearance of being
comprehensive -- the obvious tension in breathing life into the
Patriot Act.
When I deplaned in Washington, Secretary O'Neill [former Treasury
Secretary Paul O'Neill] was returning to Andrews [Air Force Base] from
Japan. We joined up and went to a meeting at the White House which
made plain four imperatives:
First, there would be a punishing response to the sponsor of the
terror. Today, of course, there is no Taliban in Afghanistan.
Second, the homeland was to be secure.
Third, a global hunt and a global fight required a global community to
endorse the effort.
And, fourth, a principal vehicle for security and global cooperation
was to be a war on the financial underwriters of terror.
So we returned to Treasury to map out a campaign. First, the private
sector. Financial intermediaries must assume the responsibility of
keeping the system clean. It is the license to do business. They are
the gatekeepers and are in the best position to assess risk, gauge
bona fides, and detect early warning. We -- your government -- will
turn a deaf ear to the excuse of professional discretion, and we will
point to and damn blind indifference.
Second, the need for an international coalition. The assets that we
seek to freeze, the cash flow that we strive to dry up and the books
and records that we hope to audit are far beyond the waters that
define our borders. The problem is international in scope and it would
be feckless to proceed alone. Joint international action is necessary
to eliminate country arbitrage and a gaming of the international
financial system.
Third, capacity building. Long-term strategic planning is frequent
victim to immediate needs for survival and defense. But this is war
without end. Resources need to be devoted to promote far-reaching
structural change, particularly in emerging and developing nations.
Systems of regulatory oversight are sorely required, for example, to
insure that the mission of charity is not betrayed and that the
efficiencies of hawalas are not purchased at the cost of becoming the
next bar in Star Wars where a universe of scoundrels retire for
respite and the planning of the next gig.
These are important points. When we talk about terrorist financing, we
do not limit ourselves to identifying the sometimes de minimus funds
required to execute an act of terror. Our focus is the funding of the
whole of the enterprise -- recruiting, training, transport, arming,
targeting, housing, planning, executing and escaping -- and it defines
how we go about our business.
Only a small measure of success in the campaign is counted in the
dollars of frozen accounts. The larger balance is found in the
wariness, caution, and apprehension of donors; in the renunciation of
any immunity for fiduciaries and financial intermediaries; in
pipelines that have gone dry; in the flight to old ways of transfer --
e.g., gold, diamonds, bulk cash, contraband -- and the ability to
focus our resources on those avenues of last resort; and in the
gnawing awareness that the symmetry of borderless war means that there
is no place to hide the capital that underwrites terror.
Specifics help. Two core principles control. The man who finances
terror is responsible for terror. And the intermediary who facilitates
the transit of such funds is responsible for asking and accountable
for indifference.
Presidential Power
At home here, the President is authorized by statute to freeze assets
and prohibit trade with persons, entities or states associated with
"an unusual and extraordinary threat to national security, foreign
policy and the economy of the U.S." The President declared such a
threat on September 24, 2001, and signed an Executive Order to that
effect.
The Order explicitly targets terrorist financing and casts a global
net for reaching bankers of terror. Indeed, the Order effectively
imposes a duty of care upon the managers and fiduciaries of NGOs
[non-governmental organizations], foreign financial institutions and
professional service companies. Each risk economic sanction if they
facilitate -- even unwittingly -- terrorist financing.
I want to more fully detail the breadth of the Order.
(i) It is global in scope.
(ii) It is expressly aimed at terrorist financing.
(iii) It ensnares knowing and active participants in acts of terror,
and, more importantly, those "otherwise associated with" the financing
of terrorism.
(iv) No intent, mens rea [guilty intent] or showing of scienter
[knowledge] is required for the latter.
(v) It is as generous a standard of culpability as can exist in
jurisprudence -- strict liability for failing to know what is going
on.
The Order was drafted with the express intention of empowering the
President and the Secretary of the Treasury to reach even the
unwitting fiduciaries of financial intermediaries -- be they
directors, officers, employees, counselors or shareholders of suspect
institutions.
The actual exercise of the outer boundaries of the power has yet to be
tested. But its mere assertion has proven to be an effective tool in
imposing new discipline upon domestic and foreign parties. Indeed, the
threat here may well eclipse all need for the exercise of the power.
We have gone to institutions abroad whose missions -- be it commerce
or charity -- have been violated by individual wrongdoers, branches or
simply poor management. We have encouraged those institutions to
reform, and we have given them technical assistance to do so. We have
also asked for access to books and records, impressing upon them the
need for urgency and the reward of good citizenship. Rarely has the
answer been no. The alternative is known to invite economic sanction
aimed not only at the institution, but its individual sponsors.
Plainly stated, the privilege of doing business with America now
carries a reciprocal obligation to cooperate in the war on terror.
International Coalition
This kind of muscular talk, particularly in this town, risks a
criticism of unilateralism. But as I have already said, solo
performance in the campaign against financial terrorism is recognized
as a conceit and a fool's errand. Without international cooperation
and coordination, an order to freeze assets borders on political
theater.
So a great deal of our resources focused quickly on building a
coalition of nation-states committed to the principles reflected in
the President's Order.
The result has been a remarkable series of international resolutions
that mirror the spirit and intent of the U.S. initiative. UN Security
Council Resolutions 1267, 1333 and 1390 jointly criminalize terrorist
financing and require implementation of regimes to detect, deter and
freeze terrorist funds. The resolutions represent the codification of
international law. Their directive is literally the law of nations and
has been critical in dispelling the myth that the pursuit of terrorist
funding is uniquely American.
Indeed, the resolve of the United Nations has been echoed and seconded
in countless multilateral forums, including APEC, the G7, the G8, the
G20, and the FATF [Asia Pacific Economic Cooperation forum, Group of
Seven major industrialized countries, G-7 plus Russia, group of 20
industrialized and emerging market countries, and Financial Action
Task Force].
Of equal importance has been the work of both the World Bank and the
International Monetary Fund. They are independently engaged in country
assessments intended to strengthen counter-terrorist finance regimes
and to provide technical assistance when helpful.
The importance of the latter cannot be overstated. By any measure, we
have forged an international coalition committed against terrorist
financing. But with the commitment comes compelling obligations to
provide technical assistance to many Gulf, African and Southeast Asia
countries that lack effective financial regulatory regimes over NGOs,
money remittance providers and banks. The failure to provide such
assistance could undermine credibility and discount the seriousness of
our effort. The U.S. has sponsored many such missions, and looks
forward to the counsel and partnership of allies in future assistance
programs.
To date, more than 169 countries have pledged to block terrorist
assets and, importantly, have agreed to pursue the intermediaries who
facilitate the transfer of terrorist funds. There is substantial
dividend if we jointly teach many of them how to fulfill the pledge
with implementing legislation, and the resources to enforce such
measures.
The tally of over $125 million blocked to date is a good report, but
we harbor no illusions. Our enemies remain in funds.
So we return to first principles -- the duties of fiduciaries, and
that is where you come in.
The Gatekeepers
Even with the most cohesive of international coalitions, and the most
sophisticated of enforcement capabilities, the risk of penetration of
the international financial system remains real. We need knowledgeable
gatekeepers, and the Patriot Act anoints some of you as the
keyholders.
The Act focuses on our financial borders, and compels the fiduciaries
of U.S. financial institutions to know with whom they are doing
business. At core, it codifies best practices in establishing and
monitoring cross-border commercial relationships and promotes the free
exchange of information between government and the private sector in
the pursuit of terrorist financing.
I am the first to acknowledge that it is an imperfect antidote to
terrorist financing -- that at best, it's a proxy of a system of
regulation passed in the immediate aftermath of September 11 to
capture something new and unimagined -- money intended to kill our
neighbors in the heart of our homeland.
But Treasury, as is its duty and obligation, has chosen to "vote" with
the proxy, acknowledging that you -- each free standing and distinct
regulatory community -- are more knowledgeable and smarter than us
about the risks of violent purpose corrupting, abusing or gaming your
system. We have encouraged risk-based anti-money laundering rules that
leave substantial discretion, invite comment and encourage directional
change.
Not surprisingly, the Act is singularly focused on the flow of funds
from abroad.
The premise is simple: if a U.S. financial institution chooses to do
business with a foreign entity, there is risk and it is incumbent upon
the institution to mitigate that risk. Moreover, self-policing is
sensible, fair and smart. Indeed, as I have already said, few are
better qualified to assess risk unique to their business, and to
tailor programs of maximum effect at minimum cost.
Similarly, foreign financial institutions seeking access to the U.S.
market must be prepared to provide U.S. financial enterprises with
information sufficient to make the judgment that no one is being
misled by kleptocrats, thieves or terrorists. The willingness to share
such cross-border information is now a license required to do business
in America.
Key provisions of the Patriot Act are known to most of you.  It
-- Prohibits transactions with shell banks,
-- Requires off-shore banks to nominate agents for service of process,
-- Authorizes interbank accounts to be frozen to reach the assets of
terrorist suspects maintained abroad in correspondent banks,
-- Requires enhanced due diligence for private banking accounts in
excess of $1.0 million and when dealing with prominent political
figures and their families,
-- It further requires U.S. financial institutions to examine the
quality of the regulatory regime abroad and publicly available
information about institutions seeking to establish correspondent
relationships and, finally
-- Empowers the U.S. Treasury Department to subpoena records held
abroad by any correspondent bank.
As draconian as that all sounds, I think it likely that many countries
will follow suit with requirements for the surrender of information
across borders. The international financial system is so completely
stitched together today that it is impossible to protect the integrity
of domestic commerce and to assure the security of citizens without
reserving the right to examine the nature of cross-border financial
transactions.
This places a great burden and responsibility on each of you. There
is, I suppose, an alternative that would remove the burden of all
compliance.
Let me be more specific. After a long and trying day, a colleague who
assists in the terrorist financing campaign said to me that we were
going about things all wrong. We were looking for needles in haystacks
-- the trick, he said, was in removing the hay. He explained. We have
the technological capability today to take thousands of photographs a
second over hostile territory -- every second, of every minute, of
every day. That is a large amount of digital photographic data.
Stored in a high-speed computer, married to algorithms invented by the
smartest of people, the computer can be trained to think and to
extrapolate from the data supplied to it. So, on any single day of the
week, you can approach a computer screen and ask to be shown the
anomalies -- i.e., what is different about this second, this minute
and this day from any other day of the year. If it were photography of
relevant quadrant in Afghanistan, the screen before you will go blank,
all but for a tire tread that leads to what was once thought to be
solid rock, but is now identified to be a cave and target for assault.
The analogy in the financial world is the real time production of
electronic commerce to a central storage facility. If we joined all
such information, and challenged it with formulas intended to detect
anomalies, it is conceivable that the two wire transfers to Dubai from
a small town in the U.S. in Maryland by Mohammed Atta days before the
September 11 attacks would have set off a blinking yellow light that
said something is amiss -- check it out before people lose their
lives.
Even if it were doable, I do not recommend this tack. It would forfeit
the intellectual capital and professional judgment of each of you, and
that is too high a price. I know because I have heard would-be donors
and their fear of detection through your vigilance.
George Schultz dropped by the Treasury Department a while back. He was
Secretary of everything at some point -- Director of the Office of
Management & Budget, Secretary of Labor, Secretary of Treasury and
Secretary of State. He had a particular fondness for the Treasury
Department because the Coast Guard was still part of the Department in
his days, and that meant you that he had a fleet of jets and vessels
to command. His longest tenure, however, was at the State Department.
He tells this story.
After each new Ambassador was confirmed by the Senate, Secretary
Schultz would invite them to his elaborate and impressive office on
the seventh floor of the State Department. It was to be an occasion of
congratulation, presentation, and the award of a Presidential
commission in the presence of family and friends.
Schultz, however, had some mischief about him. He would invite each
ambassador delegate to a corner of his office and tell them that they
had yet one more test to pass before the privilege of assuming the
title of Ambassador. Now this came, mind you, after White House
vetting, FBI investigations, hearings before the Senate Foreign
Relations Committee, and full Senate confirmation. Most of us would
have enough of tests by then.
Schultz led each Ambassador-designate to that corner of his office. He
would then spin a detailed, beautifully appointed globe of the world
and simply say, "Point to your country."
In five years and a countless number of Ambassadors, only one
candidate passed the test. It was Mike Mansfield, Ambassador-designate
to Japan, a member of the U.S. Senate for thirty years, and a majority
leader for close to a decade. Without missing a beat, Mansfield -- who
knew something of Schultz's mischief -- stopped the spinning globe
with his hand over the outline of the United States of America.
"Here," he said, "this is my country."
That same sense of bearing and moral compass is at the center of your
professional lives today.
Remember the Schultz story as the tugs and pulls of your own business
world spin, sometimes, seemingly out of orbit.
As for Iraq, I am happy to report this morning that someone else has
found their bearing in response to Treasury's overtures. Hundreds of
millions of dollars of previously unknown illegal proceeds have been
uncovered abroad in a matter of days, and are now subject to seizure.
And more is to come in multiples that may dwarf those numbers.
That is money that can no longer be directed to promote terror. It is
money, in fact, that has every promise of being repatriated to the
people of a free Iraq.
(end text)
(Distributed by the Office of International Information Programs, U.S.
Department of State. Web site: http://usinfo.state.gov)