Uncovering Diaries of Terror

Securities Industry AssociationAnti-Money Laundering Compliance Conference March 27, 2003

Keynote Address by David D. Aufhauser, general counsel, U.S. Treasury

Good morning. As we talk this morning, some of the best of our kids are being shot at in Iraq, in part, because the system for which you and I are responsible failed them.

For more than a decade -- after the misadventure into Kuwait in August of 1990 -- Iraq has been an international pariah. More particularly, it has been the subject of the most comprehensive and far-reaching economics sanctions program ever imposed by the United Nations.

The initial impact of the program was real and, indeed, crushing. Sanctions are a blunt and imperfect instrument. They can visit hardship -- unacceptable hardship -- on the very people that you hope to lift up from near enslavement by tyrants and bandits.

In the case of Iraq, the world community heard the cries of the Iraqi people and provided relief in the form of a program known as the Oil for Food OFF Program. At its core, the program permitted barter trading of Iraqi oil in exchange for humanitarian goods and services, all subject to UN monitor and control.

The good news is that tens of billions of dollars flowed through the program between 1996 and today, providing food, medicine, shelter and necessities of life for the Iraqi people. It was one of the rare programs that well served both a moral imperative and the most fundamental physical needs of people for whom freedom is a stranger.

The bad news is that the program was viewed by the Iraqi regime as an invitation for graft, corruption and sanctions busting. And they made it their holiday.

Within the OFF program, they skimmed, they demanded kickbacks, they bought brokers, they created false front companies and they banked the money abroad in cash, or in accounts for product credit.

They also began to deal in oil -- in an open and notorious fashion -- outside of the UN sanctioned program. By pipeline or tanker truck convoys backed up as far as the naked eye could see, the smuggled oil produced rivers of money and credit -- a conservative GAO estimate is $6.0 billion in a four year period alone -- that were banked abroad.

That money -- and those credits --were the purchase for the goods and services that armed Iraq (against all reason and international law) with the wherewithal and the will to develop weapons of mass destruction -- the very weapons or capabilities that we seek now (with the blood of our children) to deny them.

That is the cost of turning a blind eye to laundered funds.

You all witnessed a second cost when the World Trade Center vanished before your eyes.

I was in Cambridge, England on September 11 attending an international conference on money laundering. The college was populated with Attorneys General, Chief Justices, Ministers of Police, and even General Counsels. It had the trappings of a sober and serious affair, but in truth there was a lot of self-congratulation. The law enforcement community had been on the trail of money laundering for more than a decade, and had much to crow about. Elaborate computer screens, predictive models, profiles of conduct, capture and indictment evidenced that we were gaining a lead on a tough issue.

The assaults on New York and Washington silenced the gathering. It wasn't just the awfulness of the video replaying its unspeakable carnage. It was the realization that we -- the professionals charged with the responsibility of policing the international financial system -- had been looking at the world through the wrong end of a telescope. Money had been spirited around the globe, by means and measures and in denominations that mocked detection. The more serious threat to our well being was now clean money intended to kill, not dirty money looking for a place of hiding. I relate both these stories to you to underscore how important your job is. Lilly Tomlin has a line. When we were all young, we wished that we would be somebody some day. Now that we are a little older, we only wish that we had been more specific.

We all share laughter at the line because every man and woman has some regret about the forks in the road that we have taken in life. But I doubt seriously if any one present this morning has regret about their charge, because it has never been more important. As challenging as the task is, you are the right people for the right job at the right time and I am honored to be here to talk to you about how we see your job and the war on terror. Let me go back to my time in Cambridge.

I caught a jump seat on a military plane back to Washington thinking that the Treasury Department would do the orthodoxy in war: collect revenues, sell war bonds and send money across the river to the Pentagon. But this is a profoundly uncommon war. There is no known sovereign; no uniformed army; no hill to take; no target that is out-of-bounds. It is shadow warfare and the primary source of the stealth and mobility necessary to wage it is money. It is the fuel for terror's enterprise. It is also, however, its Achilles' heel. It leaves a signature.

Much of the intelligence of war is, in fact, suspect -- the product of treachery, deceit, custodial interrogation, bribery and encrypted talk. But financial audit trails do not lie. They are diaries of terror. And they reveal the secrets necessary to stem tithes intended to underwrite acts of terror. Detecting that "giving" is a daunting task. It requires extensive international cooperation, an extraordinary display of civic responsibility by the world banking community and regulatory regimes that do not sacrifice focus in the interest of the appearance of being comprehensive -- the obvious tension in breathing life into the Patriot Act.

When I deplaned in Washington, Secretary O'Neill was returning to Andrews from Japan. We joined up and went to a meeting at the White House which made plain four imperatives:

First, there would be a punishing response to the sponsor of the terror. Today, of course, there is no Taliban in Afghanistan. Second, the homeland was to be secure. Third, a global hunt and a global fight required a global community to endorse the effort. And, fourth, a principal vehicle for security and global cooperation was to be a war on the financial underwriters of terror. So we returned to Treasury to map out a campaign.

First, the private sector. Financial intermediaries must assume the responsibility of keeping the system clean. It is the license to do business. They are the gatekeepers and are in the best position to assess risk, gauge bona fides, and detect early warning. We -- your government -- will turn a deaf ear to the excuse of professional discretion and we will point to, and damn blind indifference.

Second, the need for an international coalition. The assets that we seek to freeze, the cash flow that we strive to dry up and the books and records that we hope to audit are far beyond the waters that define our borders. The problem is international in scope and it would be feckless to proceed alone. Joint international action is necessary to eliminate country arbitrage and a gaming of the international financial system.

Third, capacity building. Long-term strategic planning is frequent victim to immediate needs for survival and defense.

But this is war without end. Resources need to be devoted to promote far-reaching structural change, particularly in emerging and developing nations. Systems of regulatory oversight are sorely required, for example, to insure that the mission of charity is not betrayed and that the efficiencies of hawalas are not purchased at the cost of becoming the next bar in Star Wars where a universe of scoundrels retire for respite and the planning of the next gig.

These are important points. When we talk about terrorist financing, we do not limit ourselves to identifying the sometimes de minimus funds required to execute an act of terror. Our focus is the funding of the whole of the enterprise -- recruiting, training, transport, arming, targeting, housing, planning, executing and escaping -- and it defines how we go about our business.

Only a small measure of success in the campaign is counted in the dollars of frozen accounts. The larger balance is found in the wariness, caution, and apprehension of donors; in the renunciation of any immunity for fiduciaries and financial intermediaries; in pipelines that have gone dry; in the flight to old ways of transfer -- e.g., gold, diamonds, bulk cash, contraband -- and the ability to focus our resources on those avenues of last resort; and in the gnawing awareness that the symmetry of borderless war means that there is no place to hide the capital that underwrites terror.

Specifics help. Two core principles control. The man who finances terror is responsible for terror. And the intermediary who facilitates the transit of such funds is responsible for asking and accountable for indifference.

Presidential Power

At home here, the President is authorized by statute to freeze assets and prohibit trade with persons, entities or states associated with "an unusual and extraordinary threat to national security, foreign policy and the economy of the U.S." The President declared such a threat on September 24, 2001 and signed an Executive Order to that effect. The Order explicitly targets terrorist financing and casts a global net for reaching bankers of terror.

Indeed, the Order effectively imposes a duty of care upon the managers and fiduciaries of NGOs, foreign financial institutions and professional service companies. Each risk economic sanction if they facilitate -- even unwittingly -- terrorist financing.

I want to more fully detail the breadth of the Order:

(i) It is global in scope. (ii) It is expressly aimed at terrorist financing. (iii) It ensnares knowing and active participants in acts of terror, and more importantly, those "otherwise associated with" the financing of terrorism. (iv) No intent, mens rea or showing of scienter is required for the latter. (v) It is as generous a standard of culpability as can exist in jurisprudence --- strict liability for failing to know what is going on.

The Order was drafted with the express intention of empowering the President and the Secretary of the Treasury to reach even the unwitting fiduciaries of financial intermediaries -- be they directors, officers, employees, counselors or shareholders of suspect institutions. The actual exercise of the outer boundaries of the power has yet to be tested.

But its mere assertion has proven to be an effective tool in imposing new discipline upon domestic and foreign parties.

Indeed, the threat here may well eclipse all need for the exercise of the power. We have gone to institutions abroad whose missions -- be it commerce or charity -- have been violated by individual wrongdoers, branches or simply poor management. We have encouraged those institutions to reform, and we have given them technical assistance to do so.

We have also asked for access to books and records, impressing upon them the need for urgency and the reward of good citizenship. Rarely has the answer been no.

The alternative is known to invite economic sanction aimed not only at the institution, but its individual sponsors. Plainly stated, the privilege of doing business with America now carries a reciprocal obligation to cooperate in the war on terror. International Coalition This kind of muscular talk, particularly in this town, risks a criticism of unilateralism.

But as I have already said, solo performance in the campaign against financial terrorism is recognized as a conceit and a fool's errant.

Without international cooperation and coordination, an order to freeze assets borders on political theater. So a great deal of our resources focused quickly on building a coalition of nation-states committed to the principles reflected in the President's Order. The result has been a remarkable series of international resolutions that mirror the spirit and intent of the U.S. initiative.

UN Security Council Resolutions 1267, 1333 and 1390 jointly criminalize terrorist financing and require implementation of regimes to detect, deter and freeze terrorist funds. The resolutions represent the codification of international law.

Their directive is literally the law of nations and has been critical in dispelling the myth that the pursuit of terrorist funding is uniquely American. Indeed, the resolve of the United Nations has been echoed and seconded in countless multilateral forums, including APEC, the G7, the G8, the G20, and the FATF.

Of equal importance has been the work of both the World Bank and the International Monetary Fund. They are independently engaged in country assessments intended to strengthen counter-terrorist finance regimes and to provide technical assistance when helpful. The importance of the latter cannot be overstated. By any measure, we have forged an international coalition committed against terrorist financing.

But with the commitment comes compelling obligations to provide technical assistance to many Gulf, African and Southeast Asia countries that lack effective financial regulatory regimes over NGOs, money remittance providers and banks. The failure to provide such assistance could undermine credibility and discount the seriousness of our effort.

The U.S. has sponsored many such missions, and looks forward to the counsel and partnership of allies in future assistance programs. To date, more than 169 countries have pledged to block terrorist assets and, importantly, have agreed to pursue the intermediaries who facilitate the transfer of terrorist funds.

There is substantial dividend if we jointly teach many of them how to fulfill the pledge with implementing legislation, and the resources to enforce such measures. The tally of over $125 million blocked to date is a good report, but we harbor no illusions.

Our enemies remain in funds. So we return to first principles -- the duties of fiduciaries, and that is where you come in.

The Gatekeepers

Even with the most cohesive of international coalitions, and the most sophisticated of enforcement capabilities, the risk of penetration of the international financial system remains real. We need knowledgeable gatekeepers, and the Patriot Act anoints some of you as the keyholders.

The Act focuses on our financial borders, and compels the fiduciaries of U.S. financial institutions to know with whom they are doing business.

At core, it codifies best practices in establishing and monitoring cross-border commercial relationships and promotes the free exchange of information between government and the private sector in the pursuit of terrorist financing. I am the first to acknowledge that it is an imperfect antedote to terrorist financing -- that at best, it's a proxy of a system of regulation passed in the immediate aftermath of September 11 to capture something new and unimagined -- money intended to kill our neighbors in the heart of our homeland.

But Treasury, as is its duty and obligation, has chosen to "vote" with the proxy, acknowledging that you -- each free standing and distinct regulatory community -- are more knowledgeable and smarter than us about the risks of violent purpose corrupting, abusing or gaming your system.

We have encouraged risk based anti-money laundering rules that leave substantial discretion, invite comment and encourage directional change. Not surprisingly, the Act is singularly focused on the flow of funds from abroad. The premise is simple: if a US financial institution chooses to do business with a foreign entity, there is risk and it is incumbent upon the institution to mitigate that risk.

Moreover, self-policing is sensible, fair and smart.

Indeed, as I have already said, few are better qualified to assess risk unique to their business, and to tailor programs of maximum effect at minimum cost. Similarly, foreign financial institutions seeking access to the U.S. market must be prepared to provide U.S. financial enterprises with information sufficient to make the judgment that no one is being misled by kleptocrats, thieves or terrorists. The willingness to share such cross-border information is now a license required to do business in America.

Key provisions of the Patriot Act are known to most of you:

* It prohibits transactions with shell banks, * Requires off shore banks to nominate agents for service of process, * Authorizes interbank accounts to be frozen to reach the assets of terrorist suspects maintained abroad in correspondent banks, * Requires enhanced due diligence for private banking accounts in excess of $1.0 million and when dealing with prominent political figures and their families, * It further requires U.S. financial institutions to examine the quality of the regulatory regime abroad and publicly available information about institutions seeking to establish correspondent relationships and, finally * Empowers the U.S. Treasury Department to subpoena records held abroad by any correspondent bank.

As draconian as that all sounds, I think it likely that many countries will follow suit with requirements for the surrender of information across borders. The international financial system is so completely stitched together today that it is impossible to protect the integrity of domestic commerce and to assure the security of citizens without reserving the right to examine the nature of cross border financial transactions. This places a great burden and responsibility on each of you.

There is, I suppose, an alternative that would remove the burden of all compliance. Let me be more specific. After a long and trying day, a colleague who assists in the terrorist financing campaign said to me that we were going about things all wrong. We were looking for needles in haystacks -- the trick, he said, was in removing the hay. He explained.

We have the technological capability today to take thousands of photographs a second over hostile territory -- every second, of every minute, of every day. That is a large amount of digital photographic data. Stored in a high-speed computer, married to algorithms invented by the smartest of people, the computer can be trained to think and to extrapolate from the data supplied to it. So, on any single day of the week, you can approach a computer screen and ask to be shown the anomalies -- i.e., what is different about this second, this minute and this day from any other day of the year. If it were photography of relevant quadrant in Afghanistan, the screen before you will go blank, all but for a tire tread that leads to what was once thought to be solid rock, but is now identified to be a cave and target for assault.

The analogy in the financial world is the real time production of electronic commerce to a central storage facility. If we joined all such information, and challenged it with formulas intended to detect anomalies, it is conceivable that the two wire transfers to Dubai from a small town in the U.S. in Maryland by Mohammed Atta days before the September 11 attacks would have set off a blinking yellow light that said something is amiss -- check it out before people lose their lives.

Even if it were doable, I do not recommend this tack. It would forfeit the intellectual capital and professional judgment of each of you and that is too high a price. I know. Because I have heard would-be donors and their fear of detection through your vigilance.

* * *

George Schultz dropped by the Treasury Department a while back. He was Secretary of everything at some point -- Director of the Office of Management & Budget, Secretary of Labor, Secretary of Treasury and Secretary of State. He had a particular fondness for the Treasury Department because the Coast Guard was still part of the Department in his days, and that meant you that he had a fleet of jets and vessels to command. His longest tenure, however, was at the State Department.

He tells this story: After each new Ambassador was confirmed by the Senate, Secretary Schultz would invite them to his elaborate and impressive office on the seventh floor of the State Department. It was to be an occasion of congratulation, presentation, and the award of a Presidential commission in the presence of family and friends.

Schultz, however, had some mischief about him. He would invite each ambassador delegate to a corner of his office and tell them that they had yet one more test to pass before the privilege of assuming the title of Ambassador. Now this came, mind you, after White House vetting, FBI investigations, hearings before the Senate Foreign Relations Committee, and full Senate confirmation.

Most of us would have enough of tests by then. Schultz led each Ambassador-designate to that corner of his office. He would then spin a detailed, beautifully appointed globe of the world and simply say, "point to your country." In five years and a countless number of Ambassadors, only one candidate passed the test. It was Mike Mansfield, Ambassador-designate to Japan, a member of the US Senate for thirty years, and a majority leader for close to a decade.

Without missing a beat, Mansfield -- who knew something of Schultz's mischief -- stopped the spinning globe with his hand over the outline of the United States of America. "Here," he said. "This is my country."

That same sense of bearing and moral compass is at the center of your professional lives today. Remember the Schultz story as the tugs and pulls of your own business world spin, sometimes, seemingly out of orbit. As for Iraq, I am happy to report this morning that someone else has found their bearing in response to Treasury's overtures.

Hundreds of millions of dollars of previously unknown illegal proceeds have been uncovered abroad in a matter of days, and are now subject to seizure. And more is to come in multiples that may dwarf those numbers. That is money that can no longer be directed to promote terror. It is money, in fact, that has every promise of being repatriated to the people of a free Iraq.

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