Testimony of Under
Secretary for Terrorism and Illicit Finance David Cohen before the
Senate Committee on Homeland Security and Governmental Affairs Permanent
Subcommittee on Investigations on “U.S. Vulnerabilities to Money
Laundering, Drugs, and Terrorists
July 25, 2012
As prepared for delivery
Chairman Levin, Ranking Member Coburn, distinguished
members of the Subcommittee, thank you for inviting me to testify today.
I am pleased to have the opportunity to discuss the importance of the
Department of the Treasury’s efforts to identify and combat money
laundering and terrorist financing vulnerabilities in the U.S. banking
sector. I would also like to commend this Subcommittee for the
leadership it has demonstrated historically and again today by focusing
much-needed attention on these critically important issues.
At the outset, it is important to recognize that the United States
maintains one of the strongest and most effective anti-money laundering
and counter-terrorist financing (AML/CFT) regimes in the world. But the
scale, efficiency and sophistication of the United States’ financial
system—particularly its banking sector—make it a prime target for those
who seek to conceal and move illicit money. This involves not just money
launderers, of course, but terrorists, proliferators, drug lords and
organized crime figures, who must, at some point, rely on the financial
system to move or launder the illicit funds supporting or derived from
their operations.
Recent enforcement actions against financial institutions in the United
States are a powerful reminder to us that challenges remain. To meet
these challenges, we closely monitor evolving threats and work to adapt
and strengthen our anti-money laundering and counter-terrorist financing
and sanctions policies, regulations and authorities. This work is a key
component of our government’s national security efforts—it serves to
protect the integrity of our financial system from abuse by terrorists,
drug traffickers and other illicit actors and gives us tools to impede
and halt their dangerous activities.
Several primary authorities and activities drive the Treasury
Department’s work to combat money laundering and terrorist financing.
They include our role through the Financial Crimes Enforcement Network (FinCEN)
as administrator of the Bank Secrecy Act (BSA), which enables us to
impose special regulatory measures and requirements to combat money
laundering and terrorist financing on a broad array of financial
institutions. They also include authorities delegated to us by Executive
Orders issued pursuant to the International Emergency Economic Powers
Act (IEEPA) to impose financial and economic sanctions, based on
all-source intelligence, to disrupt and dismantle illicit financial
networks, such as those that support weapons of mass destruction,
proliferation, drug traffickers, transnational organized criminal groups
and terrorists. Given the maturity, scope and depth of the anti-money
laundering and counter-terrorist financing regime today, Treasury works
closely with its interagency partners in the regulatory, law
enforcement, and national security communities, as well as the private
sector, to combat the various illicit financing threats we face.
Furthermore, given the increasingly global nature of the financial
system, our efforts to strengthen our own anti-money laundering and
counter-terrorist financing regime rely on cooperation and collaboration
with international counterparts.
Nature and Scope of the Threat
Financial crime and associated money laundering activity are difficult
to measure with great precision. But by any estimate, the total amount
of illicit money moved through and concealed within the U.S. financial
system is massive—in the hundreds of billions—even if it represents only
a small percentage of the funds in the financial system.
The sheer volume of money moving through the banking system makes banks
the primary and most important line of defense against money laundering
and terrorist financing. Therefore, our regulatory framework was built
to require banks and other financial institutions to take a number of
precautions against financial crime, including the establishment of AML
programs and reporting and record keeping requirements to provide useful
information to law enforcement and national security authorities for the
purpose of combating the full range of illicit finance. This includes
screening clients and transactions against Treasury’s Specially
Designated Nationals (SDN) List—a list of drug traffickers,
proliferators, terrorists and other illicit actors or entities—to help
ensure that funds associated with these actors do not enter the
financial system. This regulatory framework aids banks in identifying
and managing risk, provides valuable information to law enforcement, and
creates the foundation of financial transparency required to apply
targeted financial measures against the various national security
threats that seek to operate within the financial system.
However when these safeguards are not stringently enforced, money
launderers, terrorist financiers and other illicit actors are able to
take advantage of the U.S. financial system. Some recent civil
enforcement actions by FinCEN and the federal banking regulators
illustrate how this can occur:
· In one case, failure to effectively monitor foreign correspondent
banking relationships with high-risk customers and file suspicious
activity reports (SARs) resulted in the processing of $420 billion in
cross-border financial transactions with thirteen high-risk Mexican
casas de cambio from 2004-2007, through wire transfers, bulk cash and
pouch and remote deposits, including millions of dollars subsequently
used to purchase airplanes for narcotics traffickers.
· In several cases, foreign banks “stripped” out the names of Iran or
other sanctioned entities in transactions routed through the United
States, resulting in billions of dollars of benefits to sanctioned
parties. A Swiss bank developed elaborate procedures to alter payments
and used code names to disguise identities of sanctioned entities. A
Dutch bank used misleading payment messages, shell companies and even
advised sanctioned clients on how to conceal their involvement in U.S.
dollar transactions.
· One bank’s failure to have a written AML policy and inadequate
procedures to ensure the timely reporting of suspicious activity
resulted in the processing of billions of dollars through accounts
controlled by thirteen Mexican casas de cambio in just one year without
filing suspicious activity reports.
· Inadequate AML staffing and procedures at another bank resulted in
deficient monitoring and subsequent processing of large volumes of
traveler’s checks and third party checks indicative of money laundering,
including through sequentially numbered instruments.
On account of these and other substantial vulnerabilities in anti-money
laundering and counter-terrorist financing and sanctions compliance, the
United States government has instituted criminal fines and forfeitures
totaling more than $4.6 billion in approximately 20 BSA and IEEPA
criminal prosecutions of financial institutions over the past 6 years.
These civil and criminal enforcement actions reveal not only how illicit
financiers abuse our banking system, but also how compliance with our
anti-money laundering and counter-terrorist financing and sanctions
requirements is critical to protecting our financial system from such
abuse.
Improving Our AML/CFT Regime
These cases also point to significant vulnerabilities in the framework
and enforcement of anti-money laundering and counter-terrorist financing
requirements that require immediate attention. Treasury is working
together with its interagency partners and the private sector to better
understand the anti-money laundering and counter-terrorist financing and
compliance challenges faced by financial institutions, clarify U.S.
government expectations of financial institutions, and strengthen the
overall anti-money laundering and counter-terrorist financing regulatory
regime. I will briefly outline just a few of our efforts.
Ongoing Targeting of Illicit Actors
One of the most important activities for which my office is responsible
is the listing of illicit actors on OFAC’s SDN list. As banks and
financial institutions screen their business dealings against the
sanctioned entities on this list, they are able to prevent the entrance
of terrorist funds, drug-trafficking proceeds or other illicit money
into our formal financial system, or freeze transactions by designees
where they occur. All major global banks, and many smaller foreign ones,
screen transactions against the OFAC list to protect themselves, even
though they are not required to do so. This markedly amplifies the
impact of our sanctions by preventing the movement of illicit funds by
terrorists, organized crime figures or proliferation networks outside of
U.S. jurisdiction. We watch closely for illicit actors evading
anti-money laundering and counter-terrorist financing controls at banks
in the U.S. and abroad and for their attempts to seek “back door” entry
into the financial system, including through the various evasive tactics
evident in the cases described above.
Customer Due Diligence Advance Notice of Proposed Rulemaking
Customer due diligence, and the financial transparency it facilitates,
is central to our efforts to combat all manner of illicit financial
activity, from proliferation and terrorist financing to more traditional
forms of financial crime like money laundering and securities fraud.
Treasury issued an Advance Notice of Proposed Rulemaking (ANPRM) on
March 4 to clarify, consolidate and strengthen customer due diligence
requirements for financial institutions, including an obligation to
collect beneficial ownership information. This rulemaking will improve
financial institutions’ ability to detect suspicious activity and
provide more useful information to law enforcement. The comment period
for the ANPRM closed on June 11 and Treasury will hold the first in a
series of public hearings to collect additional comments on July 31. Our
engagement with industry in the customer due diligence rulemaking
process is facilitating a broad understanding of higher risk type
accounts and transactions with respect to money laundering and terrorist
financing, and how we can work with industry and our interagency
partners to better identify and manage such risks, including through
more effective anti-money laundering and counter-terrorist financing
safeguards.
Enhancing Transparency in the Company Formation Process
Criminals can easily disguise their ownership and control of illicit
proceeds through shell companies and other seemingly impenetrable legal
structures. We are working closely with you, Mr. Chairman, and other
members of Congress to enact legislation requiring disclosure of
beneficial ownership information in the company formation process.
Promoting and Strengthening the Global AML/CFT Framework
Helping to strengthen anti-money laundering and counter-terrorist
financing regimes abroad has a direct benefit to the safety and
integrity of the U.S. financial system, given the global nature of money
laundering and the terrorist financing threat and the relationships
between banks abroad.
The Office of Terrorism and Financial Intelligence (TFI) works with
others in the U.S. government to strengthen the global anti-money
laundering and counter-terrorist financing framework as a foundation for
the effective implementation of sound financial controls worldwide.
Several intergovernmental and international organizations, such as the
Financial Action Task Force, the IMF, the World Bank, the United
Nations, and various FATF-style regional bodies, collectively develop,
assess and facilitate jurisdictional implementation of measures that are
essential to combating various forms of illicit finance. Treasury and
its interagency partners play a key leadership and participatory role in
these organizations as well as other organizations that support our
capacity building objectives, lending technical expertise in
standard-setting, evaluation and policy recommendations related to the
combating of money laundering, terrorist and proliferation financing.
One of the key substantive accomplishments that we have achieved in
developing the global anti-money laundering and counter-terrorist
financing framework is to integrate targeted financial sanctions against
terrorist financing and proliferation finance into the global standards
for combating money laundering. This is some of the most innovative work
my office conducts and an area in which we are able to urge the
international community forward in highly constructive ways.
Conclusion
I began today’s testimony by noting that the U.S. is home to one of the
strongest anti-money laundering and counter-terrorist financing systems
in the world. In order to continue in this role, we must push ourselves
to identify where we can do better, and work tirelessly to get there.
I look forward to continuing work with this committee to this end.
