*EPF207 06/11/2002
Text: U.S.-led Coalition to Take on Informal Terrorist Finances
(Partners to play leadership roles, Treasury's Dam says) (3440)
The United States and its coalition partners must search out terrorist finances outside the mainstream financial systems as they enter the next phase of the fight against terrorist financing, Under Secretary of Treasury Kenneth Dam says.
Speaking June 8 to the Council on Foreign Relations in New York, he said that, in response to public designation and blockings of terrorist assets that characterized the first phase, terrorists started using informal institutions and opportunities for keeping and transferring their assets.
In the second phase, Dam said, the focus of counter-terrorist efforts needs to be on hawala networks, corrupted charitable organizations and fraudulent traders rather than on banks, and U.S. coalition partners need to play increasingly prominent roles in this campaign.
Dam emphasized that preserving the benefits of the hawala systems while preventing their abuse by terrorists, not banning them, is the right solution. It can be achieved through regulatory measures, he added.
Hawalas are unofficial, trust-based networks for moving money inexpensively across national borders. They are popular in developing countries and among certain ethnic communities in developed countries.
Preventing terrorists from using charities as a cover for supporting terrorism while ensuring the integrity of charitable mission will be another challenge, Dam said.
He said countries are pursuing these two goals by freezing the flow of funds through organizations corrupted by terrorist supporters and increasing the transparency and oversight of other charities.
Dam said that the coalition is also making some progress in preventing terrorists from using legitimate trade as a means to funnel their money.
He said the U.S. administration is working with private sector partners on developing monitoring systems that would allow legitimate merchants to identify and report suspicious transactions.
Dam also cited both domestic and international actions aimed at improving the regulatory environment so that terrorist money will not find safe haven easily.
But the Treasury official emphasized that blocking the assets of publicly designated terrorist organizations remains an important weapon in the fight against terrorism.
The United States knows, he said, that al-Qaida is having financial difficulties as a result of blocking orders freezing over $115 million in terrorist assets.
However, not enough progress has been made on other groups and people who wittingly support terrorism through charities, Dam added.
Following is the text of Dam's remarks as prepared for delivery:
(begin text)
June 8, 2002
THE FINANCIAL FRONT OF THE WAR ON TERRORISM -- THE NEXT PHASE
Kenneth W. Dam
Deputy Secretary of the Treasury
Delivered to the Council on Foreign Relations
New York, New York
The financial front of the war on terrorism has entered a new phase. This new phase is characterized by increased leadership by our coalition partners and increased focus on means of financing terrorism outside the mainstream financial system. At the same time, the United States must and will remain vigilant in preventing terrorists from abusing its financial system.
Today, I shall describe how the financial front of the war on terrorism has evolved toward this new phase.
The first phase of the financial front of the war on terrorism was dominated by public designations of terrorists and terrorist supporters and attempts to freeze their accounts. To be sure, this was -- and remains -- an important aspect of the fight. We must close the world's financial system to known terrorists and their financiers.
To date, we have had considerable success. Since September 11, we and our coalition partners have publicly designated 210 terrorists or terrorist supporters. We have frozen over $115 million around the world. 166 countries and jurisdictions have blocking orders in force.
We still have work to do on this effort. Not every country has joined us in blocking every identified terrorist or terrorist supporter. Also, we have to make sure that countries do more than just add names to a list. We need to -- and we do -- continually follow up with them to ensure that their regulators and financial institutions are out there giving teeth to their blocking orders.
Designations and blockings dominated the early phase of the financial front of the war on terrorism for several reasons.
First, the United States and many other countries (but by no means all) could quickly put in place a legal infrastructure to carry out the designations and blockings. In the United States, all that was immediately necessary was to promulgate an executive order invoking the President's authority under the International Emergency Economic Powers Act to go after not just terrorists but also their financial supporters, to announce the designations, and to transmit the blocking orders to U.S. financial institutions.
Second, public designations highlighted the need for countries without adequate legal infrastructures to enact laws and regulations that would allow them to close their financial systems to terrorists. When we started our effort even countries like Canada and Japan did not have legislation criminalizing terrorist fundraising. Many countries lacked the legal infrastructure to adopt and implement blocking orders on terrorist assets. Public designations by the U.S. and our allies highlighted these deficiencies and prompted countries to address them.
Third, joint designations provided an opportunity to highlight international cooperation in the financial front of the war. We were pleased, for example, when the EU [European Union] independently designated several new terrorists and terrorist organizations at the end of 2001. (The EU made another such designation on May 2, 2002.) We were also pleased by the joint designation we made with Saudi Arabia on March 11 and another joint designation with the G7 on April 19. These have been no insignificant accomplishments. The public sees the end product -- joint designations. But what the public doesn't see is the intense consultations and exchanges going on before and after the events.
The opportunity to highlight international cooperation is particularly important because the financial front of the war on terrorism cannot be won without it. As I have said many times, you can't bomb a foreign bank account. You need the cooperation of the host government to investigate and freeze that foreign account. Increasingly, our strategy to enlist the aid of foreign governments is working.
This brings me to a fourth reason why public designations and blockings dominated the first phase: other actions take time. It takes time to persuade other governments to take a leadership role in the effort. The United States made its first public designation on September 24, 2001. It took even the EU another three months to take the lead with its own independent designation. It also takes time for governments to adopt laws and implement regulations that they need to curtail terrorist financing. In addition, it takes time to cultivate new sources of information about terrorist finances that will lead us to terrorist financiers and, even more valuably, sometimes to terrorists themselves. So, the "long sales cycle" of these other actions is another reason why public designations and asset freezings dominated the first phase of the financial front of the war.
Before describing the next phase of the war, let me be clear. Public designations remain an important -- an essential -- weapon in the fight against terrorism. We will continue to make them and we will continue to scour our financial system for terrorist assets. Likewise, we will continue to encourage our coalition partners to take the lead in making their own designations. We will also continue to encourage our partners to ensure that they follow through on their blocking orders and give them teeth.
While public designations will remain important, we are entering a new phase of the war. This new phase will be dominated by greater leadership by our coalition partners and greater focus on means of financing terrorism outside of the mainstream financial system. Public designations and blockings will not dominate this new phase to the degree that they did the early phase.
There are several reasons why public designations and blockings should not be expected to dominate the next phase.
First, public designations are, by their very nature, public. Terrorists learn about them and adapt their behavior accordingly. They will avoid keeping their money in the United States or other financial centers with effective rules and regulations to thwart them. They will use informal methods of moving their money. They may avoid storing value in currency at all, instead preferring commodities like gold or diamonds, converting the commodities to cash only as needed. Provided the United States and the international community remain vigilant in policing their financial systems, we expect that terrorists increasingly will avoid keeping their money in large amounts in single accounts in the mainstream financial system. Over time, therefore, we anticipate that public designations will not "catch" as much money as they did initially.
Second, those "long sales cycles" are coming to an end. We are seeing foreign governments increasingly play leadership roles in taking action against terrorist financiers.
Foreign governments have acted privately to stop individuals from donating money to suspect groups.
Foreign governments have arrested terrorist financiers or, as in the case of Pakistan, cooperated in successful U.S. efforts to capture them. Foreign governments are taking steps to regulate hawala dealers. Hawala systems (in some countries called hundi systems) are efficient, inexpensive, trust-based methods of moving money that do not leave large paper trails.
Foreign governments are making progress in preventing terrorists from using hawalas to move money. During a conference on hawalas in the UAE [United Arab Emirates] on May 15-16, a number of governments agreed to take steps to regulate and monitor hawalas to ensure that they are not abused. After the conference, on May 28, the Dubai Gulf News reported that the UAE will soon require hawalas to be licensed and regulated. The Times of India also reported that India is taking steps to crack down on unlicensed money transmitters.
I wish to emphasize one point. We do not think that banning hawalas altogether is the answer. Hawala dealers provide an important service. They transfer money at low cost to populations that are not supported by formal financial services. We are working with our coalition partners to preserve the benefits of the hawala system while at the same time preventing their abuse by terrorists.
Along with hawalas, charities will be the subject of increasing focus. This is an important and sensitive issue. As many of you know, charity is a central pillar of Islam. Indeed, in many parts of the world charities provide much of the social infrastructure -- orphanages, hospitals, and schools. At the same time, there is no denying that some legitimate charities have been penetrated by terrorists or terrorist supporters -- possibly by only a few managerial employees -- who misdirect a portion of the charity's funds for terrorist ends. There are also organizations that are primarily organized and directed to abuse charitable status for terrorist ends. Some groups threaten not only their targets, but their donors, extracting "donations" as "protection" against reprisals. Our challenge is to prevent terrorists from using charities as a cover for supporting terrorism while ensuring that charitable giving and charitable works continue.
We are pursing these two goals by freezing the flow of funds through charities that have been corrupted by terrorist supporters and increasing the transparency and oversight of charities around the world. Thus far, a number of charities around the world have been designated and their assets frozen -- our joint designation with Saudi Arabia of two regional Al Haramain offices is a good example of what is beginning to occur. Also, we are asking countries, bilaterally and through multilateral bodies, to evaluate their regulatory and enforcement oversight of non-profits. Indeed, the multilateral Financial Action Task Force or FATF will take up this issue at its meeting later this month. In addition, we are working to disseminate international best practices for ensuring the accountability of charitable organizations. Finally, we are calling upon private watchdog groups to continue and expand their important work on ensuring transparency in charitable operations, and to broaden their focus beyond their historical emphasis on fraud and waste to include the threat posed by terrorist abuse of charities. We have been gratified by the positive response that these initiatives have received from other governments and the charitable community.
We are also beginning to make some progress in preventing terrorists from using otherwise legitimate trade in goods and services as a means to funnel money to terrorists. Our Customs Service uses techniques developed in the drug war to look for movements of goods at abnormal prices. Customs used this technique to support the designations of three Yemen-based honey businesses tied to Osama Bin Laden. In addition to designating businesses linked to terrorism, we also work to ensure that legitimate merchants are able to identify suspicious transactions so that they can report the transactions and take steps to prevent such transactions in the future. We work to educate the business community, especially those industries that are particularly vulnerable to this type of trade-based laundering activity, just as we have done in the drug war through our program to fight the Colombian-based Black Market Peso Exchange.
Finally, across the world, the international coalition is acting to improve the regulatory climate more generally. We have taken important steps in this regard in the United States with the passage in October 2001, of the USA PATRIOT Act. The Act gives us important new tools in the fight against terrorism. I shall highlight just three.
First, the Act requires U.S. financial institutions to terminate correspondent accounts maintained for foreign shell banks and to take reasonable steps to ensure that they do not indirectly provide banking services to foreign shell banks. Treasury provided interim guidance on this requirement, suggesting that financial institutions obtain certification from all foreign banks with correspondent accounts in the U.S. to the effect that
(1) those foreign banks are not themselves shell banks; and
(2) those foreign banks do not maintain accounts for shell banks.
We worked closely with the private sector to make this interim guidance as effective as possible, and the final rule, when issued, will benefit considerably from this input.
Second, the Act required most financial institutions to have an anti-money laundering program in place by April. Money service businesses, broker-dealers in securities, and credit card operators are now all required to have comprehensive anti-money laundering programs in place. We are now working with the insurance industry, hedge funds and other financial sectors to develop appropriate rules for those businesses as well.
Another point worth noting is that the Act allows for in camera judicial review of any classified information we use to freeze terrorist assets. This gives us greater ability to freeze terrorist assets without fear that intelligence sources and methods will become compromised during judicial review.
I should mention one very important partner in our effort to clean up the regulatory environment in the United States -- the private sector. Many of the leaders of financial services companies in New York lost employees or friends in the September 11 attacks. They understand that the terrorists targeted the World Trade Center in an effort to strike at our financial nerve center. The cooperation we have received from these business leaders and their employees has been invaluable. Among other things, they have worked with us to maximize the effectiveness of the new regulations while minimizing their impact on legitimate transactions.
Another way in which we have acted to improve the regulatory climate generally is to reach Tax Information Exchange Agreements with several tax haven jurisdictions: the Bahamas, the British Virgin Islands, the Cayman Islands, the Netherlands Antilles, and Antigua & Barbuda. We expect to enter into more of these bilateral agreements in the coming months. As we make it harder for tax evaders to find safe haven in off shore financial centers, those centers move toward cleaner, better regulated systems and improve their regulatory climate generally. The end result is fewer places where terrorists can hide their money.
Another important effort is the work of the Financial Action Task Force, which established eight Special Recommendations for terrorist financing. The FATF action plan requires jurisdictions to engage in a self-assessment and to take steps to bring their systems up to these standards. As in the money laundering context, we expect that these recommendations and the FATF process will prompt countries to make substantive changes to their laws and regulations or risk being "named and shamed" as non-cooperative. Other nations have joined us in raising the regulatory hurdles to terrorist financing. Here is just a sampling of one day's activity based on a search of foreign media on June 5, 2002. On June 4, 2002, Belgrade's Politika reported that Sebia's law on the prevention of money laundering will go in effect on July 1 and require the reporting of currency transactions over 600,000 dinars to a newly established Federal Commission for the Prevention of Money Laundering. Bucharest's Rompres reported on June 5, 2002, that customer identification and suspicious activity reporting requirements are in force as of June 4, 2002. On June 5, Tokyo's Jiji Press reported that Japan enacted a law criminalizing terrorist financing. On June 4, Seoul's Yonhap reported that Korea's Financial Intelligence Unit joined the 58 member Egmont Group -- an international association of financial intelligence units dedicated to sharing information about financial crimes. This is just a sampling. Every day, the international press contains similar items about the progress other countries are making in improving the regulatory climate. Just yesterday, the Washington Post reported that Qatar has just adopted an anti-money laundering law.
Public designations will, however, remain and important weapon in our arsenal. For one thing, public designations reinforce our private diplomatic efforts. Governments who fear the political consequences of public designation of one of their citizens have a strong incentive to do something privately about that citizen's behavior. In some cases, we have seen governments act to stop citizens from supporting groups associated with terrorism so as to avoid the domestic and international political consequences that public designation of that citizen would have. Since our goal is to prevent and disrupt -- not to build a long public list -- we have not only accepted that result but have made it clear that our goal is results, not public announcements.
I have reviewed what is, to be sure, a lot of activity. But our objective is not to generate a lot of activity. Our objective is to prevent attacks and disrupt terrorist operations.
So how are we doing?
We know that we are having an impact. We have frozen over $115 million dollars. We know that al-Qaida is having some financial difficulty. We know that some potential donors to terrorists are reluctant to give money for fear of the consequences. We see encouraging signs that the world is erecting regulatory barriers to terrorist financing. Almost daily, we receive word of a new money laundering law, a new arrest, a new regulation that will make life more difficult for terrorists and root them out so that they can be captured or otherwise disrupted.
At the same time, we know that al-Qaida's financial needs are greatly reduced -- they no longer have to support the Taliban government and they no longer bear the cost of maintaining training camps. We have also not made enough progress against people who donate funds to charities knowing that their donations will be used to support terrorism. In addition, although we have made some progress on groups other than al-Qaida, we still have much more work to do against other terrorist groups of global reach.
In the physical war, the Vice President and others have made clear that there is nothing that a free and open society like the United States can do to protect itself 100 percent against future attacks. The same is true in the financial front of the war. We can never be 100 percent sure that terrorists are not transferring money one way or another. Doing so would come at too great a cost to the economies of our interdependent world.
Accordingly, just as in the physical war, we must take the battle to the terrorists themselves. We cannot limit ourselves to improving the protections of the U.S. financial system, or even to improving the protections of the world's mainstream financial systems. While those are necessary, they are not sufficient. We must also search out terrorist finances outside of the mainstream financial systems -- in the hawala networks, in corrupted NGOs [non-governmental organizations], and in fraudulent trade patterns. And, more than ever, this effort must be led by our coalition partners.
(end text)
(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)
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