Copyright 2000 Federal News Service, Inc.
Federal News Service

March 9, 2000

HEARING OF THE HOUSE BANKING AND FINANCIAL SERVICES COMMITTEE

REP. JIM LEACH (R-IA): The committee will come to order. The committee meets this morning to focus attention on money laundering and the law enforcement regulatory challenges created by the proliferation in recent years of so-called offshore secrecy havens. We are appreciative that Deputy Secretary of the Treasury Stuart Eizenstat is here to detail a legislative proposal announced last week by Secretary Somers to combat the money laundering vulnerabilities associated with some of these offshore centers, as well as to discuss the administration's other anti money laundering initiatives.

Later today the ranking member and I will be introducing the administration-crafted bill which builds in a constructive, although more limited basis, on the provisions of legislation that I introduced last fall with the co-sponsorship of Mr. LaFalce and 13 other members of this committee. I look forward to working with the administration, members of this committee, members of the other body and other interested parties to pass meaningful anti money laundering legislation this year.

Last September, when the committee met to consider issues relating to the global money laundering threat, our focus was on allegations of suspicious transfers of funds from Russia to accounts at one of America's oldest and most venerated financial institutions, the Bank of New York.

Before turning to the subject of today's hearing, I have several comments on developments in that case. Last month, the Federal Reserve and New York State Banking Department took supervisory action against the Bank of New York requiring it to implement new procedures for detecting suspicious activity. These were plainly lacking during the three-year period in which some $7 billion flowed through its accounts from dubious Russian sources. Also, former bank executive, Lucy Edwards, and her husband, Peter Berlin, entered guilty pleas in federal court to a variety of charges, including conspiracy to commit money laundering and aiding and abetting Russian banks and conducting unlawful and unlicensed banking operations in the United States.

Shortly after the guilty pleas were entered, I notified the Department of Justice of my intention to subpoena Ms. Edwards and Mr. Berlin to compel their appearances before the committee. I did so because of my belief that the Bank of New York matter raises fundamental issues that demand Congressional review, including the extent to which the U.S. financial system has contributed to the impoverishment of the Russian people by processing transactions involving the proceeds of crime and corruption in that country.

Also worthy of Congressional examination are the systemic implications of Ms. Edwards and Mr. Berlin's acknowledged participation of the scheme whereby Russian banks of questionable legitimacy and with apparent ties to powerful Russian oligarchs operated illegally in this country.

The specter of large-scale infiltration of our financial system by corrupt enterprises abroad is not one that Congress can lightly ignore. The Department of Justice, however, has expressed concerns regarding the testimony of Ms. Edwards and Mr. Berlin before Congress at this early stage of their cooperation with the government.

Consequently, I've indicated to the Justice Department that the committee is willing to refrain, at this time, from issuing subpoenas in deference to the law enforcement interest in conducting a thorough debriefing of the couple. I've also made clear to the department that the committee's patience in this regard has its limits and that we expect the department to reciprocate the committee's recognition of its legitimate institutional prerogatives by helping to make Ms. Edwards and Mr. Berlin available for Congressional questioning at the earliest possible date.

While the committee emphasis today will be on offshore secrecy havens rather than the Russian crime and corruption issues that were the focus of last fall's Bank of New York hearings, the two subjects are, in fact, highly intertwined, as recent revelations demonstrate.

For example, in testimony during last fall's hearings, it was acknowledged that the then Russian president, Boris Yeltsin's, son-in- law was the beneficial owner of two accounts at the bank's Cayman Island's branch containing in excess of $2 million. Shortly thereafter, the deputy chairman of the Russian Central Bank was quoted in The Washington Post as estimating that in 1998 alone $70 billion was transferred from Russian banks to accounts of banks chartered in Nauru, a small island in the South Pacific with a population of approximately 11,000 people.

Nauru's banking system, characterized by draconian secrecy laws and minimal regulatory oversight, was described in the 1999 State Department report as extending an open invitation to financial crime and money laundering. Nauru also figures prominently in the Bank of New York scandal. The criminal information to which Ms. Edwards and Mr. Berlin pled guilty last month states that several banks registered in various South Pacific islands, including Nauru, were used as fronts to facilitate the illegal transfer of money out of Russia into concealed Russian origin of money flowing through the Bank of New York pipeline.

Offshore jurisdictions have also been at the center of allegations of improprieties involving international monetary fund assistance to Russia and other eastern European countries. Last year it was discovered that the Russian central bank had secretly transferred billions of dollars to Finley (sp) capitalized Shell Company located in the Channel Islands. More recently, press reports indicated that Ukraine Central Bank may have engaged in similar machinations. The committee expects to examine these issues in greater detail at its March 23 hearing on international financial architecture.

As noted before, money laundering is perhaps best understood as a seemingly modest offense that opens a window onto greater crimes that can have serious geopolitical ramifications. In the case of Russia, the Bank of New York episode highlights the intractable nature of corruption in that country and underscores the need for U.S. foreign policy to align itself with the interests of the beleaguered Russian people, not the Kremlin elites or the commercial oligarchy.

Corruption is, of course, not exclusively a Russian phenomenon. The recent historical record is replete with instances in which foreign central banks and major money center banks have served as vehicles for the misappropriation or outright looting of government resources. Unfortunately, the U.S. banking system is hardly immune from the dirty monies that flow all to freely through the global economy.

For someone seeking to confer the appearance of legitimacy on illicitly derived profits, the U.S. and other established financial centers are attractive destinations. Indeed, there is little doubt that funds representing illegal flight capital are the proceeds of crime and corruption abroad enter the U.S. system in large volumes on a daily basis.

What distinguished the U.S. from many other countries that criminals or corrupt government officials use as conduits for the ill- gotten gains, however, is our insistence on transparency and the rule of law. When schemes such as the Bank of New York's circumstance come to light, institutions and individuals can be expected to be held accountable and legal mechanism ensure that the facts, as awkward or inconvenient as they may turn out to be, are exposed either to the criminal justice process or Congressional hearings or both.

The same can most assuredly not be said for some of the offshore havens that are the subject of today's hearings, where supervisory controls are often lax or non-existent and where brass plate banks and Shell corporations are permitted to operate free from any meaningful judicial or regulatory oversight. The legal regimes in many of these jurisdictions guarantee a label of secrecy or for financial institutions licensed to do business with them that far exceeds what is necessary to satisfy reasonable privacy interests or legitimate commercial concerns.

Moreover, U.S. investigators who follow money trails to some of these jurisdictions often run into dead ends, created by statutory provisions, making it a criminal offense to release information regarding clients, transactions, even a response to formal requests from duly constituted law enforcement authorities.

Even where cooperation from the local authorities is ultimately forthcoming, it is often only achieved after a period of delay and foot dragging sufficient to permit the target of the investigation to transfer the relevant assets and records to another secrecy haven.

Recent years have witnessed some progress in introducing transparency and openness in the offshore financial sector and some jurisdictions previously notorious for offering safe haven to criminal proceeds have executed mutual legal assistance treaties with the United States authorizing the exchange of information and evidence in criminal investigations.

A growing number of jurisdictions have enacted meaningful anti money laundering statutes that conform to internationally recognized standards. But even with laws on the books there remains a serious question as to whether their exists either the political will or the legal infrastructure to enforce those laws, particularly given the sheer volume of activity being conducted offshore.

Further complicating the international money laundering effort is the dynamic nature of the offshore market. No sooner does one jurisdiction commit itself to meaningful countermeasures against money laundering than another pops up in some other corner of the globe to service the business flushed out of the first locale.

Indeed, in recent years, authorities in this country have noted a migration of some savory operators from havens in the Caribbean to remote islands in the South Pacific, such as the aforementioned Nauru, that did not even register on their collective radar screen five years ago. The ever-changing face of the offshore sector presents enormous challenges for law enforcement officials and regulators struggling to keep pace with international criminal organizations.

This self-evident that an interdependent global economy with fewer and fewer barriers to capital flows international money laundering regime is only as strong as its weakest link. Accordingly, the U.S. and its allies in the anti-money laundering fight must embrace aggressive multilateral and bilateral strategies designed to encourage jurisdictions that have been missing in action in this fight to adopt the necessary legal reforms and dedicate the necessary resources to supervising their financial sectors.

In this regard, I welcome the recent announcement by the financial action task force formed 10 years by the G7 nations to coordinate international anti-money laundering initiatives and hope that it will produce later this year a list of so-called non- cooperative countries and territories that offer financial services without appropriate regulatory controls and subject to strict bank secrecy. And I'm also hopeful that we get greater cooperation and cross border investigation of financial crimes.

I'd like to turn to our ranking member, Mr. LaFalce.

REP. JOHN LAFALCE (D-NY): Thank you, Mr. Chairman. I'd like unanimous consent to put the entirety of my remarks in the record.

REP. LEACH: Without objection. So ordered.

REP. LAFALCE: Let me just make a few points. Last week, Secretary Somers highlighted three very important reasons to embark on an aggressive fight against money laundering.

First, it helps us pursue criminals who commit the underlying organized crimes that generate tainted money, such as drug trafficking, tax evasion, and fraud. It probably enables us to catch these drug traffickers, tax evaders, fraud, better than any other mechanism.

Secondly, and this is very important too, it helps us fight the foreign corruption that undermines the United States and multilateral assistance programs to promote democracy and economic development abroad. And that's extremely important, not just because the United States programs can be effective, but because the efforts to bring about democracies will or will not be successful dependent upon how we can deal with the problem of corruption. And we need to enhance our fight against money laundering in order to fight that corruption, in order to help stabilize those countries; extremely important.

And also, it helps us protect the stability of our international financial system. And it's great to have the IMS with all the debate going on about international economic architecture and what they've done right and what they've done wrong and what they ought to be doing in the future. But if the money that they do lend -- short term, long term, project specific, whatever it might be -- is going to be filtered in money laundering into corrupt hands, it's going to jeopardize the stability of the whole system. And so as we proceed legislatively we should keep these three principles in mind.

Yesterday's unveiling of the 2000 national money laundering strategy moves all of the stakeholders in this process-- the regulators, the law enforcement officials, the financial service industry, and the Congress in the right direction. Frequently we'll hear from the financial services industry that it self regulates; it self regulates well in the area of international and correspondent banking and that, therefore, no legislation is needed.

There are too many examples, too egregious, where that just hasn't worked, such as the recent one involving the laundering of Russian organized crime funds through offshore centers and United States financial institutions. We need a much better targeted, common sense approach to fill the gaps in current law.

Now, last September, Chairman Leach and I introduced a bill, HR- 2896, and today he and I and others will be building upon that effort, in large part introducing the bill developed by the Treasury Department. And I think that it offers the kind of regulatory flexibility that we need to tackle a fast-moving and remarkably adaptable class of criminals.

In crafting the bill, the Treasury Department recognized the need to provide a set of discretionary and targeted tools that could be deployed to address discreet problems in recognized, money laundering, offshore havens. For example, the secretary could identify a particular institution in a foreign jurisdiction as a primary money laundering concern. The entire foreign jurisdiction would not necessarily be singled out as a -- well, it could be, but the institution would be and the secretary would have the authority to target the specific threat posed by that institution.

We will attempt to keep in mind the need to protect legitimate commerce, that's essential, and to balance fairly burden sharing between regulators and the industry. In partnership with the administration and in partnership with the law enforcement community and the regulators and the financial services industry, I think we can enact this bill, perhaps with appropriate amendments and modification, to accomplish our goals and protect the integrity of our international financial system. I look forward to working with you, Mr. Chairman, and hearing from the administration.

Thank you very much.

REP. LEACH: Ms. Roukema.

REP. MARGE ROUKEMA (R-NJ): Thank you, Mr. Chairman. I certainly will keep my remarks brief. And certainly you, the chairman, and the ranking member, Mr. LaFalce, have made the case very clear here in your opening statements. I'd just like to add that money laundering is not a victimless crime, the money does come from drugs, illegal gambling, and a lot of other criminal activity. And the crimes affect each one of us in our daily lives and law enforcement has consistently told us that money laundering will cut down on drugs and other crimes, and I believe them -- if we take effective action.

Mr. Chairman, I also want to say, quite frankly, that I need -- and this is an upcoming issue, I mean a recurring issue -- that I believe that we have to look at the issue of correspondent banks more closely. The Bank of New York chairman, Tom Rainey (sp), told this committee last year at hearings that the correspondent banking opens the door to money laundering; I think that case has been made. Once a bank, or an entity, has access to the international payment system, the money is as good as laundered because the money can be whisked around the globe with a touch of a button, and I think that case was made.

I will be looking at this issue and other issues relating to banking relationships and hopefully we'll be holding a hearing in my own district, in New Jersey, in May. I had tentatively planned that hearing even before yesterday 's announcement by the administration -- and I believe we'll hear more from Secretary Eizenstat today -- but that proposal for the hearing in New Jersey was made before the high impact financial crime areas were identified. Sorry to say, one of those high impact areas is the New York/New Jersey area, which includes my district in New Jersey. And I certainly know that Senator Schumer will be testifying on those related subjects.

But I pledge with you, Mr. Chairman, that we must make progress in specific ways this year, that is legislative progress, and that's the reason I am an original co-sponsor of your legislation and I want to move ahead in a bipartisan way. Thank you, Mr. Chairman.

REP. LEACH: Thank you very much, Ms. Roukema. Does anyone else seek recognition for an opening statement? If not, let me turn to deputy secretary Eizenstat, who this committee is very appreciative of working with on a number of subjects, not the least of which has been that he holds the administration's principle jurisdiction on Holocaust issues. It's my view that Secretary Eizenstat is one of the preeminent public servants of this last century. Is that strong enough, Stuart? Please proceed.

SEC. EIZENSTAT: I appreciate that. Coming from you, it means a lot. Mr. Chairman, Mr. LaFalce, members, I'm very 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 a serious problem of money laundering and to take effective steps to combat it. There are a variety of measures that have been past over the last several years which this committee has been at the forefront of leading.

The legislation we're 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. Quite frankly, our legislative proposal has benefited considerably from proposals that you, Mr. Chairman, and other members of this committee have made, from which we've liberally drawn. We look forward to working with you and ranking member, LaFalce, with the aim of enacting effective legislation this year and appreciate very much the co- sponsorship that we have already from the chairman, ranking member, and from other distinguished members of this committee.

I would like to point out that this legislation is being proposed in the context of the national money laundering strategy for 2000, which we unveiled yesterday. This comprehensive document reflects considerable progress on a wide range of initiatives since our initial strategy last year. It also announces a series of new initiatives to combat money laundering in the area of financial services, international policy, and federal, state, and local law enforcement.

I would be most appreciative, Mr. Chairman, if the entire 2000 strategy document could be made part of this record.

REP. LEACH: Without objection, sir.

SEC. EIZENSTAT: The IMF has estimated that the amount of money laundering worldwide is between two and five percent of the world's total gross domestic product. By conservative estimates, that would be close to $600 billion, and it is probably more. Regardless of the exact figures, money laundering is a serious threat to our country. First, because it facilitates drug trafficking, organized crime, and international terrorism. Second, because it encourages corruption in foreign governments undermining U.S. efforts to promote democratic institutions and healthy economic development. And, third, because it is a threat in and of itself because it risks undermining the integrity of our financial system.

And, indeed, perhaps the most important revelation, I think, that we've achieved in the last couple of years is the recognition that it is just not an adjunct to other crime. It, in and of itself, is a danger to the integrity of our whole financial system, both domestically and internationally.

Safeguarding the integrity of the American financial system, and protecting it from abuse, are fundamental commitments of this administration, and we know of this committee. We concluded after a lengthy study that specific legislative tools that the government has available to protect our financial system from international money laundering, or frankly to limit it. AT one end of the scale we have advisories. At the other end, formal economic sanctions under the international emergency economic powers act, or IEEPA, and nothing in between.

Tax advisories can be effective. They can encourage financial institutions to pay special attention to transactions involving certain jurisdictions and to file suspicious activity reports. But frankly they don't impose specific requirements, as an order or a regulation would, and there's simply not a sufficient tool to address the complexity and growing breadth of the international monetary laundering threat.

At the other end of the scale are blocking orders under IEEPA, which require a presidential finding of national security emergency and operate to suspend all financial and trade relations with the offending target. This is, in a sense, a sort of financial atomic bomb. Such orders can affect legitimate, as well as illegitimate commerce in the country. Therefore, it's not in and of itself particularly well suited to deal with under-regulated foreign financial jurisdictions. So what this bill seeks to do is to fill in the gaps between only an advisory on the one hand and IEEPA sanctions on the other.

Under our proposed legislation, if the U.S. government believes that a certain foreign jurisdiction, a specific foreign financial institution, or a particular type of international transaction, poses a primary, money laundering threat to the United States, we would be able to take a far wider range of actions. The secretary of the Treasury, for example, after consultation with the secretary of State, the attorney general, and the chairman of the Federal Reserve Board, could take one or more of the following types of actions:

First, we could require banks or other financial institutions to keep records of transactions and to make them available for the government on a request. This would be invaluable to our law enforcement and would help us better understand the specific money laundering mechanisms that work. It could result, also, in pressure on the offending foreign jurisdiction to improve their laws.

Second, another tool would require financial institutions, at the discretion of the Secretary, if it was necessary, to ascertain the foreign beneficial owners of accounts in the U.S. where they're different from the owners of record. This would help dig through layers of obfuscation and, often, plain deceit and would help us know which foreigners are really holding money in the U.S. banks.

Third, another tool would 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 foreign bank to conduct banking operations through a U.S. bank, just as if they were its own customers. Many of these are, of course, completely lawful. But they can also be abused by foreign money launderers who seek to clean their dirty money through our financial institutions.

And, fourth, in extreme cases, the secretary, under the legislation we propose, would have the authority to impose conditions or, indeed, outright prohibit the opening or maintaining or correspondent or payable through accounts.

It should be clear from this description that this is not a "know your customer" bill. There is nothing in this bill, which in any way requires banks to scrutinize or monitor the domestic accounts of U.S. citizens. This bill only targets foreign jurisdictions, foreign institutions, and international transactions that pose a threat to the United States. I would note in this regard that the U.S. banking industry has been generally supportive of our approach and last week, for instance, the American banker's association was publicly supportive of this legislative proposal.

Our proposed legislation, therefore, is designed to be graduated, targeted, and discretionary. Graduated so that the Secretary can narrowly target and tailor the action that would be proportional to the threat. Targeted so that we can focus on the precise threat we confront. And discretionary so that we can integrate these tools into the bilateral and multilateral diplomatic efforts we 're engaged in to persuade offending jurisdictions to change their practices. To the extent to which we rely on multilateral action, we think this will make what we do more effective, but we are prepared to act unilaterally ourselves.

Permit me to briefly outline the process we intend to use to designate foreign jurisdictions as money laundering threats. First, we would gather data about other countries' laws, regulations, and practices that either combat or facilitate money laundering. We would look at experiences from U.S. law enforcement, and with this we would then assess the scope and type of money laundering problems we face from each jurisdictions. These assessments would 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. Political will would be relevant in both cases, but the distinction is crucial in terms of the application of specific counter measures. 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.

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, multilateral standards established by the financial action task force on money laundering or FATF, a 26 country institution created by the G7.

In addition, our analysis will all take into account the interplay between tax evasion -- serious crime in its own right -- and money laundering, since the same organizations and the same havens are also and often used for both activities, often indeed by the same criminals.

The answer to these questions would determine whether a jurisdiction abroad, a foreign institution, or an international transaction type is designed as a primary money laundering concern so that the Secretary could then impose one of the new authorities. We do actively participate in the work of international organizations.

In June, as you mentioned Mr. Chairman, the FATF is expected to publish the names of jurisdictions that substantially failed to meet its criteria for cooperation in resisting money laundering. And we have submitted a number of such countries to FATF to consider. The financial stability form, created by the G7 industrial countries, is also reviewing the role of offshore financial centers and encouraging them to put sound financial standards in force. And we 're also working with the OECD countries to publish a list of tax havens, which will also be available in the next several months.

We announced yesterday that the New York/northern New Jersey region, the city of Los Angeles, and the city of San Juan had been designated as high risk money laundering and financial primaries, and that one money laundering system, the movement and often smuggling of cash in bulk across the southwest border has received this designation. We appreciation Congressman LaFalce's and Congresswoman Velazquez's participation in that. In each, a money laundering action team would be created and coordinate the efforts of federal, state, and local enforcement. State and location authorities operating within each, what we call, HCFA will also be eligible for grants under the new financial crime, free community support program.

So in conclusion, Mr. Chairman, we have a multifaceted strategy. But what we 're in front of this committee to discuss, primarily, is our new act, which is focused on international money laundering. There are those who believe that in the world of electronic commerce, where funds travel so easily and so rapidly, that law enforcement can't possibly keep up with criminals and corrupt officials, and those who move their money for them. We strongly disagree. We have the same information technology they have, we're more motivated and dedicated than they are, and we will work to implement the authority we have and the new laws we need and we will also seek to work with other countries that realize that the threat of money laundering is a difficulty for their own economic progress and their own stabilities as societies.

Thank you very much, Mr. Chairman and members of the committee, and I look forward to your comments and questions.

REP. LEACH: Well, thank you very much, Mr. Secretary. We do have a circumstance. There are two votes on the floor. And I think rather than beginning and then stopping, it might be wiser to recess for these two votes and then we will reconvene in about 20 minutes.

SEC. EIZENSTAT: Thank you, Mr. Chairman.

REP. LEACH: The committee's in recess. (Whereupon, the committee recessed.)

REP. LEACH: Committee will reconvene. First I'd like to request unanimous consent that all members be allowed to make opening statements without objection if it's ordered.

Secondly, in terms of questioning, Mr. Secretary, the United States has done more in recent years to seek these mutual legal assistance treaties with other countries. Does it seem reasonable to you to think of having a requirement or having as evidence of jurisdictional problems countries that make these agreements with United States before they can have reciprocal banking relationships within this country? Is that a reasonable thing to point towards or not?

SEC. EIZENSTAT: I think it is a reasonable thing to point toward; it's an important objective. Just as we try to have mutual tax treaties, this would certainly give us the kind of cooperation and additional tools that we would need. And so I think fighting money laundering involves a whole range of things, of which that certainly would be one useful adjunct.

REP. LEACH: There's a lot of concern in the--of two types of level playing field. One relates between banks and other sectors of the financial community within America. And the second relates between American financial institutions and foreign. One of the pluses of the less rigid approach of the administration 's bill, as contrasted the one that we introduced earlier is that it's a little more flexible and that this can perhaps have some advantages in dealing with foreign countries in seeking comparable approaches to doing things. Do you look on international negotiations in this area as being a high priority of the administration, or is this something that we just are always reacting about?

SEC. EIZENSTAT: No, it is a very high priority. We are working through a number of different institutions. We're working with the OACD to identify international tax savings. We're working as one of the leaders of the FATF process. And in that FATF process, which is a 26 country effort, there are 25 criteria that have been identified by FATF as criteria by which they would judge, along with us as a member, those foreign jurisdictions that are lax in their oversight, that have excessive bank secrecy and that are potential risks to the rest of the financial system.

And so that would give us the opportunity to target multilaterally our efforts. So this is something we're very much involved with.

With respect to the issue you were describing of discretion, let me indicate why the absence of discretion could actually complicate rather than advance our goals. For one thing, it is important to have the kind of discretion so that the response we make is proportionate to the actual problem. Second, it is important that a jurisdiction that is identified by, for example, the FATF process, abroad or unilaterally by ourselves, be given the opportunity to bring their own practices in line with internationally accepted standards. If the first thing you do is hit them over the head with the maximum sanction, you're not giving them the opportunity to do so.

In addition, the automaticity that would come from the absence of discretion, could actually complicate your ability to be tough with countries because it would be less of a likelihood to name a particular country if you knew that the only thing you could do with it before graduated tools was the sort of maximum tool of cutting them off and doing business in the United States.

We have every tool at our disposal and the legislation that you and Mr. LaFalce have cosponsored. And we have every intention of using it in the appropriate circumstance. So we think that it is critical to have discretion. Discretion does not mean an action. There is tremendous pressure from Congress, within our own administration, across the board, all departments, and through the FATF process to begin taking action. And I think in June when FATF, for the first time, names actual countries, this will be a real first in the fight against money laundering.

REP. LEACH: The driving concern that I have had is to upgrade the significance of money laundering that's involved in public corruption as it relates to public officials. And I just would like to lay on the record, and as you take a discretionary approach, can I be assured that the department is going to make this of seminal significance to your efforts?

SEC. EIZENSTAT: You can absolutely be assured of that. But may I add just one additional fact to my assurance? And that is that we have a companion bill, which we worked with the Department of Justice on, which has taken the lead -- which is also dealing with money laundering. It was introduced on the last day of the last session. And it would specifically amend our existing domestic enforcement authorities, Mr. Chairman, so that we added foreign corruption, corruption by foreign officials, as a predicate offense. Currently-- this may be hard to believe but it is unfortunately the case--if a foreign official, a Maputo (sp) or a Milosevic or any such person were to take ill gotten goods stripped from his country and put them in a U.S. financial institution we would not be able to go after that as money laundering because it's not now a predicate offense.

REP. LEACH: I appreciate that. The reason I raise it, this was a provision in the bill that we'd introduced but was taken out of the bill that you've come back with. And would you have objection of our putting this back in?

SEC. EIZENSTAT: No, sir, quite the contrary.

SEC. STUART EIZENSTAT: Fine. Thank you. Mr. LaFalce.

REP. JOHN LAFALCE (D-NY): Thank you very much. Secretary Eizenstat, as I look over the Congress, both in the House and the Senate, and I'm trying to figure out how we're going to proceed, I'm concerned with possible difficulties on both the left and the right; and on the right the difficulties could be from either conservatives or libertarians.

I think our primary difficulty might be, maybe I'm wrong, from Libertarians who would see your proposals as something similar to the "know your customer" rule or welling in nature. The potential difficulties I see from the left is a possible distrust of government, distrust that if you are given discretion that you won't use it because of political reasons, you won't use it because of personal reasons, you won't use it for whatever reason, and therefore let's apply it across the board in a very automatic pilot, rigid way. To a certain extent you've addressed, in your response to the chairman's questions, that latter concern that I envision from the left. Certainly, if you want to expand upon that, please do so.

The one thing you didn't mention-- it's been my experience that whenever you have mandatory provisions you inhibit the effectiveness of law enforcement because you inhibit the ability to target the resources. One example, right now we have a law on the books, passed in 1996, part of the immigration law, that said if you're going to cross the northern or southern border you must stop every single individual and document them. Well, you would have a three to four day wait and you wouldn't be able to target the individuals that you really want to target. You divert your time, attention, and resources, energies, et cetera. I would be concerned that that might be the case if we just have this automatic pilot approach without discretionary tools. I'd like you to comment on that.

But then I'd also like you to deal with what I anticipate as the libertarian argument, "Let's get the government out of this," "know your customer" type stuff. "We had to stop them once, we're going to have to stop them again." Would you please comment?

SEC. EIZENSTAT: Thank you very much, Mr. LaFalce. Let me respond in the following ways. First, as I emphasized in my opening statement, there is no fair interpretation of this proposed legislation which would indicate that this is in any way, shape, or form a "know your customer" bill. It does not require U.S. banks to monitor or scrutinize domestic accounts of U.S. citizens; it targets foreign jurisdictions, foreign institutions, and foreign international transactions. And I think that, again, one validation of that is the support or this approach that the U.S. banking industry has shown. For persons, therefore, to be identified would be foreign beneficial owners hiding behind false fronts and Americans who own, or open accounts at domestic institutions would not be affected.

In addition, we are going through a separate process now in which I think it 's clear we've learned the lessons from the difficulties last year of the "know your customer" proposal. That's been completely withdrawn. What we're looking at now, and then only with the widest consultation, with both privacy groups and banks and financial institutions is: first, that we don't intend to issue any formal regulations; we're talking about guidance; second, unlike the "know your customer" proposal last year, which was regulatory rather than guidance, it also covered virtually all accounts. The guidance we're looking at would only require special scrutiny with respect to high-risk accounts. But that's completely separate from the legislation itself. That's something that's being done just domestically; it has no relevance to this.

One additional point is on the privacy point. We recognize, obviously, the need to protect individual privacy. And the Treasury Department and FINSEN (sp) are very sensitive to that. We built very strong systems to narrow the scope of the data that FINSEN receives to protect its confidentiality. FINSEN has imposed a comprehensive set of legal and technological restrictions to ensure the proper use of the information. And the information, which is provided to the government, can't be used for any purpose other than law enforcement. We have our own working group on privacy in this area. We a review, which is due in May, that will describe our existing protections in the privacy area. And we expect, in November, to have proposals for even stronger, improved, privacy protections.

On the on the hand, the points you make about automaticity is that when you run anything on automatic pilot, you have the potential for real problems. Even airplanes, when they're put on automatic pilot, have a pilot who's got the ability to turn that off. We want to make sure that we don't, unwittingly, by automaticity, put foreign jurisdictions under such a target that they don't have the opportunity to correct their lack of supervision, or excessive secrecy; that we don't have a stepped set of tools to encourage them to do so and that, in fact, the cause of the automaticity there may be a reluctance to even name such a jurisdiction.

So, we very much appreciate the leadership that Senator Schumer and others have provided in this area, we want to work very closely with him and those who want legislation in this area, but we have to make sure that it is proportionate to the particular problem. And, again, discretion in no way here means inaction.

REP. LEACH: Ms. Roukema.

REP. ROUKEMA: Thank you, Mr. Chairman. I want to go back to this question that I alluded to in my opening statement on how the Bank of New York at a prior hearing identified the correspondent banking opening the door to money laundering.

And you have referenced -- it is my understanding, let me say -- that the administration wants to give Treasury the authority to declare which countries are off limits to U.S. banks and for correspondents accounts.

Now, you made reference to it in your opening statement, I believe, but can you give me a little more specificity about how that would work? And do the U.S.
-- I'm sorry -- how can you describe what examination procedures the U.S. federal banking agencies could or would follow and what changes in legislation do we need in order to permit and implement this approach so that we can close off this avenue for money laundering? We need a little more specificity on that and I don't know whether or not our legislation deals with it adequately.

SEC. EIZENSTAT: First let me say that Secretary Somers mentioned himself in his March 2nd speech a number of jurisdictions, from Russia to Nauru (sp) and others in between that are either sources or havens. And to show our seriousness of purpose, Secretary Somers has just sent a letter to the first deputy prime minister of Russia in which we stressed the critical importance of them enacting any money laundering legislation which comes up to FATF standards. That's literally just been sent.

What we would do with respect to the particular provision you mentioned is that correspondent accounts can be, in many instances, perfectly legitimate. But it also serves as an avenue for abuse. So what we want to be able to do is have the discretion when our law enforcement authorities, FINSEN and others, believe that it is necessary to be able to identify those who use a bank's correspondent accounts and, if necessary, to cut those opportunities off in terms of dealing with U.S. institutions. So, when necessary, we need to be able to find out who really benefits in the accounts and that the, we think, transparency of identifying beneficial ownership can be very important in this instance.

REP. ROUKEMA: Well, will you help us with our own legislation as to where that discretion has to be tightened up or more precisely defined? Correct me if I'm wrong, but I sense that there is not precision in the law now --

SEC. EIZENSTAT: That is correct.

REP. ROUKEMA: -- that gives them the authority. So we need your help in defining that statutorily.

SEC. EIZENSTAT: Our legislation that we've sent up has a very specific provision dealing with this, and I think it provides precisely the kind of direction that you would be seeking.

REP. ROUKEMA: All right. Thank you. Let me just ask briefly, I think you've gone into this, but, again, being from New Jersey--and, by the way, Senator Schumer I'm sure will be addressing this--but being from New Jersey I am deeply interested in what is the administration recommending in terms of increased prosecutors and increased personnel to deal with these high impact financial crime areas, aside from, of course, what Senator Schumer's doing? What is the Treasury recommending?

SEC. EIZENSTAT: First, we have for the first time a unified account of $15 million in our budget to deal specifically with money laundering. Second, we have an existing amount of $2.5 million for so-called SEFA (sp) grants. And we 've asked in this budget for double that amount. This would permit technical assistance, computer assistance, analysis, training of local prosecutors to better sensitize them to money laundering -- because oftentimes, unfortunately, money laundering is just viewed as an incidental effect of narcotics or organized crime when, in fact, as I stated, it is a problem in and of itself.

The designation that we made yesterday of New York and northern New Jersey as a HIFCA (sp) area means that we will be creating a action team of federal, state, and local prosecutors who will act in the same way that similar bodies work in the organized crime area to maximize the cooperation of all prosecutors of all of our intelligence capability. And so we think it will be a very effective tool.

Now being a so-called HIFCA doesn't guarantee that you'll receive one of these SEFA grants, but certainly it makes one a strong candidate for it. So the combination of having an action team and, where appropriate, having this kind of grant assistance for training of local officials for computer assistance, for technical assistance, we think will help the localities deal with this growing problem.

REP. ROUKEMA: Thank you, that's all very positive and we certainly look forward to working with you and lobbying you on giving us the top priority. Thank you.

REP. LEACH: Thank you, Ms. Roukema. Ms. Waters.

REP. MAXINE WATERS (D-CA): Thank you very much. I'd like to thank the (size) and staff for being here today and for the work that has been done to address an area that many of us have been encouraging the administration to get more involved in. There are so many contradictions.

Before talking about the drug trafficking aspects of this, I have been talking with you and your shop about corrupt money. And you have defined that a little bit differently. But, again, I'd just like to say publicly that it's an absolute contradiction for us to talk about debt relief for many of these poor countries -- and that includes Africa and many in Central America -- when, in fact, some of our own banks are holding more corrupt money in the banks than we can give in debt relief.

And I do want very much for your shop, if that's your responsibility, to get that money and get it back to those countries, particularly Nigeria where we're trying to support democracy. And let us not pretend as if we don't have the power to somehow do that. We've got to work on that. That's one part of what I consider money laundering, even though it may not be considered drug money laundering, it is corrupt money that's been stolen from countries that need to be returned to them so that we don't ask our American taxpayers to continue to support a debt relief which we all believe in.

Secondly, Secretary Eizenstat, I don't see that part of our problem is that we don't know who's laundering the drug money. And it's not as if we have to have a lot more money placed into systems to simply identify. I requested some time ago, and I'm looking at a long list of banks and financial institutions that have been identified for laundering drug money, and of course they just get fined. And nobody gets put out of business.

We know who they are. Even as we move forward and -- one of these sting operations that we had, Operation Casablanca, at the same time that we were moving on banks in Mexico because of the laundering of drug money, Citibank was purchasing CONFEA (sp) and CONFEA was a notorious bank for laundering drug money. And at the time that they were purchasing them I -- it's hard for me to believe that a big bank like Citibank, or whatever, does not have enough capability to do due diligence, that they wouldn't know that that's a dope money laundering bank.

So I have a whole list of them. We show them doing business in our country. We have fined them and guess what? Paying fines is simply a cost of doing business as it relates to the laundering of drug money in our country.

And while I'm interested in identifying so-called "high drug intensity" areas, et cetera, I want us to start with hope. I've been working for three years on Raoul Salinas' drug money: $180 million deposited in Citibank. "Know your customer" was not even thought about; there was not even a card on him to identify where he lived. He was assigned a private banker.

I've been trying desperately to get us to talk about what we're going to do about private banking and understanding how it works in all of these banks and concentration accounts, where the identity is lost once they pull that money. And, guess what, I also had an amendment in the money laundering bill prevention act of 1999 that simply said that our banks would not be allowed to do business with off shore banks and others that we know launder drug money. We know they launder drug money in Antigua.

Part of the monies that were deposited in Citibank by Raoul Salinas was sent to these concentration camps and off to the offshore banks. Whether it's Cayman Islands or Antigua, we can just say no. If you do business with them, then you 're a part of them. And you shouldn't do business with them, and we're going to penalize you for doing business.

Now, again, we can spend a lot of money and talk about how we develop processes for doing-- what? We know how to identify them; and, again, I've got this whole list here. I don't know if you've seen this-- from 1997 to 1999 of just scores of banks that laundered drug money that we penalized. And we do some forfeiture and we do some civil penalties and all of that.

So I guess my question to you is this, are we prepared to get tough and are we going to start at home or are there banks that are too big to touch? Where is the case on Raoul Salinas and the $180 million? And are we going to get in a period of time where time is going to run out on that case for us to do something? Are we prepared to get tough? Are we prepared to put anybody out of business? And are we prepared to stop American banks from wire transferring money off from these banks into offshore banks knowing that they're just dealing with -- they're havens for the drug traffickers.

And, let me just add, are we willing, given -- I have so many Mexico banks here who are known for drug trafficking that we've penalized because they do business in our country and they're just paying money because it's the cost of doing business, but this administration is going to fight for certification. What are we talking about? Are we prepared to get tough?

And let me tell you why I'm so adamant and passionate about it. Every day in inner cities of America, young men are going to prison for having five grams of crack cocaine; mandatory five years in federal prison -- mandatory. We've got undercover agents out there, we've got people getting caught up in this, but guess what? If they weren't able to launder that dope money that crack would not be in these inner cities.

And I tell you, it is absolutely unconscionable and immoral for us to keep talking about, we have a war on drugs and we're cleaning it up, while we're throwing more and more into a prison system that does nothing but warehouse them, does nothing for rehabilitation, sets them up as the problem, and the problem is the big boys. Who's willing to touch them? I'm really fed up. And it 's not you, this is not a personal attack on you, it's not a personal attack on anybody. But it is an identification of the contradictions that exist in this country that allows this stuff to continue. And the victims, who are getting caught up in this and overcrowding the prisons and spending more and more money on the prisons, and these big boys are getting away. Who's willing to take on Citibank? I want to know.

SEC. EIZENSTAT: That has two parts. The first you started off with was on foreign corruption. You and I have both been to Nigeria, within a few months of each other, and indeed we discussed your trip before you went.

Nigeria's a very good example of a country that was stripped bare by corruption, an impoverished country that's the fifth largest oil producer; you had to wait hours in line for gasoline at a gas station. And there is, in the new administration of President Oversonjo (sp) a real desire to attack corruption. There's a new coalition for Africa with 11 countries that has proposed a new set of guidelines to attack corruptions because they realized that corruption is the enemy of development.

We are working with those countries to try to support that. But beyond that, we have not only a focused study going on with what we call "attacking kleptocracy," which is the use of illegal funds by leaders but we're going further -- and this was the response to the chairman's earlier question.

In separate legislation that we introduced last year and has been reintroduced this year, we would like to add foreign official corruption as a predicate crime because right now if, for example, President Oversonjo's predecessor or Mr. Milosevic had taken corrupt funds, funds that they stripped bare from their own country, and put them in a U.S. financial institution, we could not go after that under our money laundering laws because foreign official corruption is not a predicate crime.

So we suggested adding foreign corruption, as well as arms trafficking and other things that are not currently predicate crimes, so that we can use our money laundering authorities to do that. And we hope we will have support from the Congress to add a foreign official corruption as a predicate crime.

Second, with respect to the concern you expressed about going after domestic banks, obviously shutting off a bank, cutting its license off is an extraordinarily consequential act to take because of the impact it can have on innocent account holders. But I want to assure Congresswoman Waters that we intend to be tough on money laundering. We've charged a number of domestic financial institutions with money laundering and related violations from the Bank of New England to the First Bank of Georgia and many more.

Just on March the 7th, just a couple of days ago, the president of a New York bank, the MTD Bank of New York, was indicted for a money laundering scheme involving defrauding the government of Argentina. We have a very real intention to make this a major priority, we intend to be tough, and we think that the strategy that we laid out yesterday, which has both this international bill that we're discussing today as well as a variety of domestic actions, is indicative of our willingness to be tough.

REP. WATERS: Mr. Chairman-- unanimous consent for one more minute.

REP. LEACH: Let me say to the gentle lady, while your time has gone over, you 've raised some of the most important questions for the committee. And please proceed.

REP. WATERS: Thank you very much. One, on the monies that are stolen from governments such as Nigeria, what responsibility can Treasury take without having laws that would, perhaps, get at that to use just the power of that important office to say to Citibank, "A bunch of boys stole the money, it's in your bank. They're in prison because not only did they steal the money, they murdered the wife of one of the leaders who had been elected and thrown in jail. Just give the money back to Nigeria, let the bunch of boys then try and get it back."

I mean, why can't we say to Citibank, "You ought to give the money back." And that goes for other countries that they've been taking the corrupt money for years from -- why can't we just tell them to do that?

SEC. EIZENSTAT: This is a good question. You mentioned the Salinas matter as well, which I know you've had a special interest in. What we are now doing, and we announced this in our strategy yesterday, is we're embarking on a very accelerated effort to reach out to our financial institutions. And this will lead to guidance that will be provided to them of how to identify high-risk accounts, like the ones you mentioned.

It may be private banking accounts, it may be accounts over a certain amount of money, or it may be accounts in which people opened the accounts with large amounts of cash. So we're looking at ways in which we can provide guidance to sensitize banks to look at those precise types of accounts.

We hope very shortly, within the next couple of months, after this outreach program, to be able to announce to you ways in which that guidance would work and ways in which these activities could be better looked at. And last, I want to assure you that the suspicious activity reports; these require, require, this is mandatory, when a bank, whether it's Citibank or Bank of New York or any bank anywhere in the country, has any reason to believe that a particular transaction or account is suspicious, they are required to file with FINSEN, which is a part of the Treasury department, a report of that transaction.

And I want to assure you that those SARs as we call it, Suspicious Activity Reports, don't go on a shelf and just lie there. They go to all our
enforcement-- the FBI gets it, Customs gets it, FINSEN gets it. And I could list to you one case after another, organized crime, a syndicate that was broken in Chicago, smuggling rings for cigarettes, which these SARS have helped identify.

REP. WATERS: Well, the problem is just what you described, Secretary. For example, at Citibank the most notorious are the most well known, private banker perhaps in the world-- indicated that they were not suspicious of Raoul Salinas because he was the brother of the president.

And surely, just because he had $180 million in cash didn't mean that there was anything wrong with that.

At the same time, we're watching the reports come out of Mexico day in and day out about people being murdered on the streets; they even threatened the drug czar when he was down there. And they killed one of our DEA agents. And people are missing. And it goes on and on and on, but they didn't have any reason to be suspicious about this $180 million cash. So those reports are only generated when you ware suspicious. Well, if they're not suspicious and they don 't generate those reports then what are you going to do?

SEC. EIZENSTAT: Well, obviously, our first lines of defense against money laundering are the financial institutions themselves. But we hope, again, with this new guidance that we're going to propose, that it will sensitize banks so that type of situation is viewed from the start, from the start, as a suspicious activity. And we share both your concern and your passion.

REP. LEACH: Thank you, Ms. Waters; and since the Treasury also has accountability for the Secret Service, the chair would certainly entertain having the Secret Service travel with you if you ever go to Mexico.

REP. WATERS: I just left. You know I'm not scared of anybody.

REP. LEACH: Mr. Barr.

REP. BOB BARR (R-GA): Thank you, Mr. Chairman. In your remarks, Mr. Eizenstat, on page 7 you say that, "This summer we hope to issue our final rules for casinos and card clubs. We have also been working with the FCC and we expect to publish proposed rules covering SAR reporting by brokers and dealers and securities later this year." To what extent do you anticipate those rules regarding reporting by brokers and dealers will track the current SAR rules and requirements regarding banks? Do you anticipate that there will be differences?

SEC. EIZENSTAT: Thank you, Congressman. I know this is an area where you've been most interested and shown a lot of leadership, which we have appreciated. We expect by the end of the year working with the Securities and Exchange Commission to have rules out.

Because broker/dealers are in a different situation and because we're still trying to assess whether or not these types of transactions that brokers and dealers engage in are really subject to the same abuses as other MSBs--money service businesses, or casinos--I don't want to say to you that the SAR requirements would be identical. We want to make sure we tailor it to the particular need.

The SEC has a great sensitivity as well to the industry that it regulates, and we're cooperating with them. So it is certainly something that is going to be a serious effort, it is a proposed rule by that time, but I wouldn't want to say that it will simply duplicate the others because we want it tailored to the particular need and the particular concern of that industry.

REP. BARR: And to the extent that you can, will you be working with this committee in developing those -

SEC. EIZENSTAT: Absolutely. We will be very transparent. And let me just say that one of the reasons that at our roll out strategy, for the strategy for 2000, Jim Sloan, who's the head of FINSEN, announced our money service business rules, our MSB rules, with more to come on casinos and later on brokers and dealers, is because we want to try to create a level playing field as well for banks. We don't want banks the only ones who are required to file SAR's. It's not fair to them. It's important that they do so, but it's not fair to them.

And second and equally important is that we would only be doing a part of the job if we put the burden on them because the more we crack down on those who are using our depository institutions for money laundering, the more likely it is that money launderers and criminals are going to use these other avenues, MSB's or casinos, for their money laundering. So we want to make sure in that respect to that we're closing loopholes that exist. And we will work very closely with the committee-- and particularly with you because I know of your interest.

REP. BARR: Thank you. Could you just take a couple of minutes on a different matter? But just sort of think out loud and weigh the policy pros and cons with regard to requiring foreign financial institutions, particularly foreign banks, from being required by U.S. law, if there were such a U.S. law, to make them subject as a condition of doing business in this country to the identical record keeping regulations and proposals that laws and regulations the U.S. banks are subject to.

SEC. EIZENSTAT: Well, that obviously is the goal. And may I say that we're trying to do it in a variety of ways. First of all, we're working through what is called the FATF process, Foreign Action Task Force. This is 26 countries, a task force created by the G7 countries a decade ago, and this has been an extremely useful process. They have 40 recommendations of actions that should be taken with respect to supervision, with avoiding excessive bank secrecy, and countries are being asked to come up to those standards.

We're working, for example, with Mexico, with Israel, with Russia to try to come up to those standards. When I was in Israel just a couple of months ago I met with Finance Minister Shokad (sp), and I pointed out to him that Israel, for example, does not now meet those FATF standards. They have legislation in the Knesset to try to do so. So we're talking about countries across the board that we want to bring up to these FATF standards.

Second, to show you that there's bite to this, Austria, which is a member of FATF, has been told that if by June of this year it doesn't begin the process of ending its refusal to identify the names and owners of savings accounts that it will be expelled from FATF.

Third, by June of this year we expect that FATF, having taken referrals from ourselves and eight other countries of countries we believe are potential money laundering havens, that they will list those countries specifically, at least some of them. And once that's done, and you have an international spotlight, that will be very consequential.

And, last, once that process is completed and countries are listed are listed through the FATF process, we would then be expected to act on our own to back up that. And one of the reasons that we want this graduated and targeted set of tools in our bill is so that when that list comes out we have a variety of tools that we can target to the particular country. You couldn't just use one set of tools for all of them and say, well, we're just going to cut you off completely. But we want a graduated set of tools, including the ones that you asked about.

REP. BARR: But then what are you saying then is, you're agreeing with me then, as a general policy matter there should be no problem with making foreign banks, as a condition of doing business in the United States, being subject to the same laws and regulations that U.S. financial institutions are subject to with regard to information that they're required to obtain from depositors and customers in the retention of those records?

SEC. EIZENSTAT: In general, again what we would like to do is bring all countries up to the FATF standards, which include that measure of disclosure and supervision.

REP. BARR: Thank you.

REP. LEACH: Thank you. Ms. Maloney.

REP. CAROLYN B. MALONEY (D-NY): And thank you, Mr. Eizenstat, for appearing before the committee and for your continued work in this area and in another very important area, the holocaust asset issue.

As communications tools transform financial services, the United States and this committee must continue to update money-laundering laws to contend with these obvious new threats. In the long term, the ability to transfer capital globally over the Internet or other electronic system is a revolutionary development.

Resources can be increasingly shifted to more efficient uses across the world, spurring competition and benefiting consumers. But this system is also being used to anonymously move massive amounts of money for corrupt purposes. The ability of launderers to hide their criminal proceeds has a far-reaching effect beyond the financial system.

Money laundering in Russia has greatly complicated international financial institution lending and other aid. The laundering of drug money from South America facilitates a system that undermines democracy in the region and finances the flow of drugs to the U.S., which my colleague, Ms. Waters, underlined. And recent laundering cases at some of the most revered institutions in the U.S. should be a warning enough. If large scale money laundering can occur at institutions like the Bank of New York, other cases are likely going undiscovered, and we are probably just seeing the tip of the problem.

I believe the Treasury proposal, giving the Department discretionary authority to ask institutions to collect detailed information on customers from countries that are considered to be havens, is a thoughtful step in the right direction. But I am a cosponsor of the Leach/LaFalce bill that was introduced last year, and that legislation went a step farther in requiring entities that open U.S. accounts for foreign entities to identify all beneficial owners of accounts.

Some critics of the Treasury proposal argue that discretionary authority for the department to ask for information on customers is simply not enough. They argue that because of the burden associated with determining beneficial owners, regulators may be under great pressure not to institute such burdens, and banks may decide not to ask the information. So how do you address this?

SEC. EIZENSTAT: Well, let me mention two aspects of your question. The first is, when you talk about the Internet and the fact that this provides opportunities for additional money laundering, I was struck by Senator Schumer's very excellent point in his testimony in which he mentions how easily his own search through the Internet determined -- and he mentions a particular Internet site in which -- Senator, if I may quote your excellent testimony -- in which the site offers an offshore bank account in a particular Baltic state and says that no country, especially not the EU or the U.S. have the powers to request, of course, information from the authorities. So the Internet is being used to entice people to, in effect, hide ill-gotten goods. And our concern is particularly the use of that then in U.S. financial institutions.

So this is a growing problem, it requires the kind of international response as well as our own response that our legislation would provide.

Second, with respect to the issue of discretion, again, I very much respect Senator Schumer's legislation and what was, last years, Congressman Leach and Congressman LaFalce bill. I'm very pleased that this year they're endorsing our legislation. But let me again go to the issue of discretion versus automaticity. I would first note that the legislation that was introduced last year only covers offshore accounts. Our legislation is, in that sense, broader; it covers all banks, including, for example, Russia or other countries and jurisdictions.

Second, all the tools that would be in the legislation introduced last year, which you referred to, are tools that would be in our tool kit if our legislation, now the new Leach/LaFalce bill, were to be passed. And we have no disinclination to use those tools.

Third, it's important to be able to go up a chain of tools. If you start with an atomic bomb, which is in effect saying no one who has inadequate supervision can do any correspondent relationships with the U.S, you don't give us the opportunity to use a variety of diplomatic efforts and less restricted tools to change that conduct.

And we ought to be given that opportunity before we take such a dramatic step. And, indeed, the step is so dramatic that one danger is that it may encourage other administrations to be unwilling to even name a country because the consequences of naming are so automatic and so egregious. This ought to be not the first but one of the other opportunities if they show that they're not willing to take action in response to our other tools.

I can assure you as well that there is a complete agreement in this administration, including in the State Department as well where I worked for two years, that this money laundering problem is a detriment not just to the United States but to the country itself which is either the source or the haven for
it-- that it is a destabilizing impact on those countries, that it is a deterrent to their growth. So I don't think you'll find any disinclination.

But we need the discretion to target in a proportionate way -- each country's not going to be in the same situation -- to target in a proportionate way and raise their level up to that which we think is necessary and adequate.

REP. LEACH: Mr. Secretary, if I could interrupt for a second and ask if there could be some accommodation for a minute. We have a vote on and we have about five minutes where we have to leave for the vote.

But Ms. Velazquez, Senator Schumer has requested if he could come now he could give his statement and then we could turn to you. But that is your discretion. I think it's important in timing. Senator Schumer has been delayed quite a bit here, and he has another appointment. Would that be all right with the two of you?

REP. MALONEY: Mr. Chairman, if I could ask him to put in the records to accommodate you. My second question is, how the Treasury proposal would have applied to the Bank of New York case, and how would the Treasury's new powers under the proposal have prevented the laundering by the Berlins. If we could see an exact example -- I understand we don't have time now -- but if you could get that back to the record in writing, if that's possible, to accommodate the great senator from the great state of New York.

REP. WATERS: He's not here.

REP. MALONEY: He's not here.

REP. LEACH: We have a second request, which is that the senator would ask if we could end with you and that he would then come after you when we return.

REP. MALONEY: That's fair.

REP. LEACH: Let me turn to Ms. Velazquez.

SEC. EIZENSTAT: May I say, we're pleased to answer that question. I would answer it now if the time permitted, but will obviously do it in writing.

REP. LEACH: And this will be the last question of this round and we'll excuse the secretary after Ms. Velazquez. I apologize; you'll only have about four minutes.

REP. NYDIA M. VELAZQUEZ (D-NY): Sure. I've been here all morning, but it's okay. I will be submitting some other written questions to Mr. Eizenstat. But I 'm pleased that New York was selected as one of the first HCFA (sp). But I'm concerned that New York City and northern New Jersey are designated as one HCFA. I understand that criminals know no boundaries. But in my work I have found that investigative resources should be focused where the heart of the problem is. Criminal improprieties such as drug trafficking and money laundering generate about $15 billion per year for New York City underground economy. And, as you know, the New York area, particularly Queens and Manhattan, have been consistently recognized by the Treasury Department as in need of intensive investigative action.

I just would like to ask you what stories, research, or statistics can you point to that indicate the need for the New York/New Jersey area to be designated as a single HCFA rather than two separate HCFAs.

SEC. EIZENSTAT: Yes. We went through a very exhaustive study, Congresswoman
-- and I very much appreciated your participation yesterday in our roll out strategy -- to determine that New York and New Jersey should be considered a HCFA area itself rather than designating one or the other. This was very exhaustive, done inner agency, done because of the following: you have an integrated economic region; you have things like the Port of New York/New Jersey, which is an entry point for much of the drugs and drug money that come in.

We have an experience with the El Dorado task force, which is a New York/New Jersey enterprise. And it was our belief that you simply couldn't stop at the Hudson River, that this is an integrated economic region and that means it's not only integrated for lawful activities, but it is integrated, unfortunately, for unlawful activities. And if we only dealt with New York we would only be dealing with part of the problem.

REP. VELAZQUEZ: Okay, now, Mr. Secretary, will Treasury place a limit on the amount of grants, funds to be disbursed within a single HCFA?

SEC. EIZENSTAT: The only limit to what can be provided is the upper limit of the amount of HCFA money we have, $2.5 million this year, we've asked for $5 million next year. But there's no particular limit per applicant.

REP. VELAZQUEZ: Thank you. Thank you, Mr. Chairman.

REP. LEACH: Let me thank the secretary and also say to Ms. Velazquez, we're going to have two votes in a row. The committee will reconvene at 12:30, at which point Mr. Schumer will commence. And Ms. Velazquez, I will turn to you first if you have further comments or questions you might want to make after Senator Schumer testifies. Thank you very much for your testimony, Mr. Secretary. The committee's in recess until 12:30.

(Whereupon, a recess is taken.)

REP. LEACH: The committee will reconvene. And before doing so, let me make a couple of announcements-- one, an apology to Senator Schumer. Let me say that the committee protocol is that senators and members go first. And it's my understanding that this was not abided to in this circumstance, and I am very
apologetic-- and particularly so because Senator Schumer is a graduate of this committee, he's gone on to bigger and better things, and, more importantly, is one of Congress's leading authority on the issues under discussion, as well as a number of other subjects. And so I apologize to one of Capitol Hill's most esteemed representatives. And let me just further say, and in welcoming Chuck that just personally I'm always appreciative of having such a good friend come and testify before this body. So please proceed as you see fit.

SEN. CHARLES SCHUMER (D-NY): Thank you, Mr. Chairman. And first let me say I appreciate, as always, your graciousness and courtesy. The committee had offered to let me testify first and it was my decision, I couldn't do it at 10:00 this morning. So I very much appreciate that. Second, I realize it's a lot better being on that side of the table than this side of the table, having come here and testified, because the schedule is such-- I've now, after 18 years on this committee, having a great time-- I have sympathy for all the witnesses who have sat here and heard the buzzers go off for votes and everything else -- and very much appreciate that.

And, finally, I want to thank you, Chairman Leach, for your leadership, your decency, your sense of both moving things forward and bipartisanship; it's an honor to be here before you. And so I didn't mind. It's great to be back in the same room, it's great to have all the memories back, but it's terrific to see you as chairman as well.

I also want to commend you for your leadership on this particular issue. It's not an exaggeration to say it's in good part due to your efforts that industry and regulators are finally recognizing the importance of money laundering. And I want to thank the whole committee. It's good to be back in the old committee room even for a little while. As I said, I spent many, many hours in this room legislating. And some of the highlights of my career occurred in this room.

I'd like to divide my remarks, Mr. Chairman, into three parts: first, outlining the problem; second, a brief discussion of the Leach/Schumer/Coverdale proposal; and, third, my comments on the Treasury proposal.

First, the problem. Over the last year this committee has conducted a vigorous and ongoing investigation into money transfers from Russia through United States financial institutions that has cast a sharp and indicting light on the business of money laundering by U.S. financial institutions. It's important that we do everything we can to fight money laundering domestically if we expect to exercise leadership on this issue internationally. But the reality is that the laundering of money through U.S. banks is really a drop in the bucket compared to the huge sums that are transferred and hidden in offshore banking centers located in places as far flung as the tiny islands of the pacific.

It's in these mostly obscure places--like Vanuatu and Nauru in the South Pacific and St. Vincent in Anguilla and the Cayman Islands in the Caribbean--that much of the estimated $4.8 trillion in hidden assets is stashed. And, according to Treasury's FINSEN unit, nearly all of that money is hidden to cover up some crime, whether it's the more benign, but still pernicious crime of tax evasion, or the more ruthless crimes of international drug smuggling, terrorism, organized crime, and the illegal financing of military regimes.

The reason offshore banks are magnets for the lion's share of illegal money is very simple, they offer a service that U.S. banks and other reputable institutions around the world don't, total secrecy. The common thread in these offshore financial centers are not that they do a better job but they conceal better than anybody else. There are laws that make it a crime in most of these countries to divulge any information about the bank officers, depositors, transfers, or any financial activity relating to banks, to law enforcement, without exception. So a drug dealer, terrorist, or tax evader who wants total inoculation from the law will put his dollars in these banks, not in American institutions where the risk of getting caught is much greater.

In exchange for total secrecy, these offshore jurisdictions charge a fee. The island of Anguilla, for example, charges $60,000 to open a bank, and $20,000 per year to keep it there. False credit cards, bogus country passports, and even phony nobility titles intended to hide identity, and even bestow a thin veneer of respectability are sold a la carte. Today, Anguilla, with a population of 11,000 has 300 chartered banks. By comparison, New York State, the financial center of the universe, at least in our opinion, has 154 chartered banks.

The Cayman Islands, which has recently enacted stricter standards in order to stem the flow of illegal money is still the fifth largest banking center in the world, behind New York, London, Tokyo, and Hong Kong. Did the Cayman Islands become such a large banking center because of their proficiency at financial transactions? Absolutely not. Did they even become such a banking center because of tax laws? No. It's very simple; they become these huge centers because they hide all information about the money that goes in and comes out.

One of the reasons for the growth in offshore money laundering is the Internet. The Internet allows fast, anonymous, and cheap movement of money around the globe with the click of a mouse. It used to be that if you wanted to launder money in one of these offshore banks there would have to be some kind of personal involvement. Now, on the Internet, there isn't. Typing "offshore" into the Yahoo search engine produces 30,074 sites designed to attract dirty money.

Again, type "offshore" into the Yahoo search engine; 30,074 sites designed to attract dirty money. And some of these sites are incredibly brazen. I have blown up the web pages of some of them so that the committee might look at them. One of them is "WWW.OFFSHORESECRETS.COM." The blue one over there -- I'm not sure the committee can see it.

As you can see, or as you will see in a second, this website offers an offshore bank account in an unnamed "Baltic state" and boasts that, "No country, especially not the EU or the US have the powers to request or coerce information from the authorities." And they note that, "The almost universal need for producing documentary proof that you are a fit person to operate a bank account has been virtually eliminated." And there are thousands of these sites that say, yes, "Yes. I want to order my own bank now." I think that's underneath the chart
-- the green one -- it says "offshore financial freedom."

And yet despite the fact that the nexus of every international crime is money laundering, Maxine Waters -- I don't always agree with her, but on this issue she is right -- very little has been accomplished to stop it, mostly because law enforcement is on its own fight to another country's domestic law; law enforcement is just completely on its own. But the U.S. has leverage to compel countries to change their laws. And the bill that you, and the House, and myself, and Mr. Coverdale have introduced in the Senate would apply that pressure.

There are three fundamental provisio