Foreign Regimes' Assets
The United States Faces Challenges in Recovering Assets, but Has Mechanisms That Could Guide Future Efforts Gao ID: GAO-04-1006 September 14, 2004For many years, the United States has used economic sanctions, including the freezing of foreign regimes' assets, when such regimes have been determined to be a threat to the nation. In light of recent efforts to "recover"--or target, identify, freeze, and transfer--Iraqi assets, GAO was asked to examine overall U.S. efforts to recover foreign regimes' assets. This report (1) describes the approach the U.S. government uses to recover foreign regimes' assets, (2) examines the challenges the United States faces in recovering foreign regimes' assets, and (3) examines the mechanisms the United States has used to recover Iraqi assets and their applicability to future efforts.
The approach the U.S. government takes to recover foreign regimes' assets varies depending on the foreign policy and national security goals pursued. Treasury officials stated that the goal of economic sanctions is to freeze assets of a sanctioned jurisdiction or targeted designee and prohibit U.S. persons from dealing with them. In certain cases, once the foreign policy goals of the sanctions are met, the assets are returned to a country. The Departments of Justice, State, and the Treasury, as well as intelligence and law enforcement agencies, work together in the targeting process. Identifying the location of financial assets throughout the international financial system requires the cooperation of U.S. and foreign financial institutions. The United States has procedures to freeze assets of targeted regimes located in the United States or under the control of U.S. persons. Pursuant to executive orders issued by the President under various authorities, Treasury's Office of Foreign Assets Control (OFAC) issues regulations that can require assets to be frozen and transactions to be blocked and administers sanctions programs. U.S. government agencies and financial institutions involved in recovering targeted regimes' assets face a number of challenges. First, U.S. agencies may not be able to readily obtain accurate and complete information on targeted entities, such as the spelling of names, addresses, and dates of birth. Financial institutions can also lack complete identifying information on their clients. Second, the laws of some foreign governments complicate the ability of overseas branches of U.S. financial institutions to comply with OFAC regulations. In these situations, the U.S. government encourages the relevant foreign governments to allow U.S. financial institutions to freeze or transfer assets in a manner consistent with U.S. law or Treasury issues a license to allow U.S. financial institutions to comply with local laws. Third, OFAC's ability to monitor financial institutions' compliance with its regulations is limited because it relies on financial regulators to monitor financial institutions' OFAC compliance programs. The United States has used a variety of legal authorities and coordinating bodies in its recent effort to recover Iraqi assets; some of these mechanisms could be applied to future efforts. The USA PATRIOT Act of 2001 allowed the United States to take ownership of $1.9 billion of Iraqi assets and transfer them for use in Iraq reconstruction efforts. United Nations Security Council Resolution 1483 has resulted in the transfer of about $847 million in frozen Iraqi assets to a fund for Iraq. However, factors that include existing claims against the assets and other countries' laws have slowed the transfer of an additional $2.9 billion held in other countries. In addition, some mechanisms developed to combat money laundering and terrorist financing might be applicable to recovering foreign regimes' assets. Although the U.S. government has used various legal authorities and coordinating bodies to recover foreign regimes' assets, it has yet to compile lessons learned from past efforts that could guide future efforts.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-04-1006, Foreign Regimes' Assets: The United States Faces Challenges in Recovering Assets, but Has Mechanisms That Could Guide Future Efforts
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Report to Congressional Requesters:
September 2004:
FOREIGN REGIMES' ASSETS:
The United States Faces Challenges in Recovering Assets, but Has
Mechanisms That Could Guide Future Efforts:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-1006]:
GAO Highlights:
Highlights of GAO-04-1006, a report to congressional requesters
Why GAO Did This Study:
For many years, the United States has used economic sanctions,
including the freezing of foreign regimes‘ assets, when such regimes
have been determined to be a threat to the nation. In light of recent
efforts to ’recover“”or target, identify, freeze, and transfer”Iraqi
assets, GAO was asked to examine overall U.S. efforts to recover
foreign regimes‘ assets. This report (1) describes the approach the
U.S. government uses to recover foreign regimes‘ assets, (2) examines
the challenges the United States faces in recovering foreign regimes‘
assets, and (3) examines the mechanisms the United States has used to
recover Iraqi assets and their applicability to future efforts.
What GAO Found:
The approach the U.S. government takes to recover foreign regimes‘
assets varies depending on the foreign policy and national security
goals pursued. Treasury officials stated that the goal of economic
sanctions is to freeze assets of a sanctioned jurisdiction or targeted
designee and prohibit U.S. persons from dealing with them. In certain
cases, once the foreign policy goals of the sanctions are met, the
assets are returned to a country. The Departments of Justice, State,
and the Treasury, as well as intelligence and law enforcement agencies,
work together in the targeting process. Identifying the location of
financial assets throughout the international financial system requires
the cooperation of U.S. and foreign financial institutions. The United
States has procedures to freeze assets of targeted regimes located in
the United States or under the control of U.S. persons. Pursuant to
executive orders issued by the President under various authorities,
Treasury‘s Office of Foreign Assets Control (OFAC) issues regulations
that can require assets to be frozen and transactions to be blocked
and administers sanctions programs.
U.S. government agencies and financial institutions involved in
recovering targeted regimes‘ assets face a number of challenges. First,
U.S. agencies may not be able to readily obtain accurate and complete
information on targeted entities, such as the spelling of names,
addresses, and dates of birth. Financial institutions can also lack
complete identifying information on their clients. Second, the laws of
some foreign governments complicate the ability of overseas branches of
U.S. financial institutions to comply with OFAC regulations. In these
situations, the U.S. government encourages the relevant foreign
governments to allow U.S. financial institutions to freeze or transfer
assets in a manner consistent with U.S. law or Treasury issues a
license to allow U.S. financial institutions to comply with local
laws. Third, OFAC‘s ability to monitor financial institutions‘
compliance with its regulations is limited because it relies on
financial regulators to monitor financial institutions‘ OFAC compliance
programs.
The United States has used a variety of legal authorities and
coordinating bodies in its recent effort to recover Iraqi assets; some
of these mechanisms could be applied to future efforts. The USA PATRIOT
Act of 2001 allowed the United States to take ownership of $1.9 billion
of Iraqi assets and transfer them for use in Iraq reconstruction
efforts. United Nations Security Council Resolution 1483 has resulted
in the transfer of about $847 million in frozen Iraqi assets to a fund
for Iraq. However, factors that include existing claims against the
assets and other countries‘ laws have slowed the transfer of an
additional $2.9 billion held in other countries. In addition, some
mechanisms developed to combat money laundering and terrorist financing
might be applicable to recovering foreign regimes‘ assets. Although the
U.S. government has used various legal authorities and coordinating
bodies to recover foreign regimes‘ assets, it has yet to compile
lessons learned from past efforts that could guide future efforts.
What GAO Recommends:
GAO recommends that the Departments of State and the Treasury (1) work
with U.S. intelligence and law enforcement agencies to improve target
identifiers and (2) develop and document lessons learned from the Iraq
effort that could assist with future efforts. State agreed with these
recommendations. Treasury did not comment on them. GAO also recommends
that Treasury seek legislative authority to allow financial regulators
to share complete information from their examinations with OFAC.
Treasury said it was working on this issue and is uncertain that a
legislative change is needed to allow OFAC access to information from
financial regulators‘ examinations.
www.gao.gov/cgi-bin/getrpt?GAO-04-1006.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Joseph A. Christoff at
(202) 512-8979 or christoffj@gao.gov, or Davi M. D'Agostino at (202) 512-8678 or dagostinod@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
The U.S. Government's Approach to Recovering Foreign Regimes' Assets
Varies Depending on the Goals Pursued:
U.S. Government Agencies and Financial Institutions Face a Number of
Challenges in Recovering Foreign Regimes' Assets:
Mechanisms the United States Has Used to Recover Iraqi Assets Could Be
Applicable in Future Efforts:
Conclusion:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Targeted Foreign Regimes Since 1979:
Appendix III: Key U.S. Legal Authorities Used to Recover Foreign
Regimes' Assets:
Appendix IV: Efforts to Recover Iraqi Assets:
Appendix V: Roles of U.S. Entities in Recovering Iraqi Assets:
Appendix VI: Comments from the Department of State:
Appendix VII: Comments from the Department of the Treasury:
GAO Comments:
Appendix VIII: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Table:
Table 1: Targeted Foreign Regimes Since 1979:
Figures:
Figure 1: The United States' Approach to Recovering Foreign Regimes'
Assets:
Figure 2: Assets Frozen in the United States:
Figure 3: Assets Seized in Iraq:
Figure 4: Assets Identified and Frozen in Other Countries:
Figure 5: Hidden Iraqi Assets:
Abbreviations:
CPA: Coalition Provisional Authority:
DFI: Development Fund for Iraq:
FATF: Financial Action Task Force:
FBI: Federal Bureau of Investigation:
FIU: financial intelligence unit:
IEEPA: International Emergency Economic Powers Act:
NEA: National Emergencies Act:
OFAC: Office of Foreign Assets Control:
OIG: Office of Inspector General:
SDN: Specially Designated Nationals:
SEC: Securities and Exchange Commission:
U.N.: United Nations:
UNPA: United Nations Participation Act:
USA PATRIOT Act: Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act:
Letter September 14, 2004:
The Honorable Michael G. Oxley:
Chairman:
The Honorable Barney Frank:
Ranking Minority Member:
Committee on Financial Services:
House of Representatives:
The Honorable Sue W. Kelly:
Chairwoman:
The Honorable Luis V. Gutierrez:
Ranking Minority Member:
Subcommittee on Oversight and Investigations:
Committee on Financial Services:
House of Representatives:
The United States has used economic and trade sanctions, including the
freezing of financial assets and blocking of transactions, to achieve
various U.S. foreign policy and national security goals. These
sanctions can be targeted against foreign countries, terrorists,
international narcotics traffickers, and those engaged in the
proliferation of weapons of mass destruction, among others. Some
foreign regimes, whose assets were frozen by the United States, had
accumulated billions of dollars in illegal assets. For example, in
March 2004, we reported that, between 1997 and 2002, Saddam Hussein's
regime accumulated an estimated $10.1 billion through oil smuggling and
surcharges against oil sales and illicit commissions from commodity
suppliers.[Footnote 1]
In light of recent efforts to recover Iraqi assets, you asked us to
examine overall U.S. efforts to recover foreign regimes' assets. In
this report, we use "recovering foreign regimes' assets" to refer to
the process of targeting, identifying, freezing, and, in some cases,
transferring assets to legitimate governments of targeted
nations.[Footnote 2] This report focuses on U.S. government procedures
to recover assets of foreign regimes targeted under economic sanctions.
It (1) describes the approach the U.S. government uses to recover
foreign regimes' financial assets, (2) examines the challenges the
United States faces in recovering foreign regimes' assets, and (3)
examines the mechanisms the United States has used to recover Iraqi
assets and their applicability to future efforts. This report does not
examine other methods such as criminal prosecutions, civil and criminal
asset forfeiture proceedings, asset sharing, and restitution authority,
which are enforced by the Department of Justice.
We reviewed documents from the U.S. government, United Nations, and
private firms, including testimonies, reports, and relevant laws. We
interviewed key U.S. government officials from multiple U.S. government
agencies. We also interviewed private firm representatives that
specialize in asset recovery, representatives of U.S. financial
institutions responsible for complying with orders to freeze assets and
block transactions, and trade associations representing segments of the
U.S. financial services industry.
We conducted our work from May 2003 to August 2004 in accordance with
generally accepted government auditing standards. (See app. I for
additional information on our scope and methodology.)
Results in Brief:
The approach the U.S. government takes to recover foreign regimes'
assets varies depending on the foreign policy and national security
goals pursued. Officials at the Department of the Treasury stated that
the goal of economic sanctions is to freeze assets of a sanctioned
jurisdiction or targeted designee and prohibit U.S. persons from
dealing with the subject of the sanctions. In most cases, once the
foreign policy goals of the sanctions are met, economic sanctions
result in the return of assets to a country, as in the case of
Afghanistan. Historically, most asset recovery efforts have focused on
targeting the financial assets of a country's government; however,
since September 11, 2001, these efforts have focused increasingly on
individuals and groups associated with targeted regimes. The
Departments of Justice, State, and the Treasury, as well as
intelligence and law enforcement agencies, work together in the
targeting process. Identifying the location of financial assets
throughout the international financial system requires the cooperation
of U.S. and foreign financial institutions. The United States has
procedures to freeze assets of targeted regimes located in the United
States or under the control of U.S. persons. Pursuant to executive
orders issued by the President under various authorities, Treasury's
Office of Foreign Assets Control (OFAC) issues regulations that can
require assets to be frozen and transactions to be blocked and
administers sanctions programs.
U.S. government agencies and financial institutions involved in
recovering foreign regimes' assets face a number of challenges. First,
U.S. agencies may not be able to readily obtain accurate and complete
information on targeted entities, such as the spelling of names,
addresses, and dates of birth. In some instances, according to agency
officials, such identifiers are classified to protect the sources of
the information. Financial institutions can also lack complete
identifying information on their clients, such as dates of birth. For
both reasons, it can be difficult for financial institutions to
accurately or expeditiously identify and freeze accounts of targeted
entities. Second, according to Treasury officials, some foreign
countries' domestic legal systems do not allow their governments to
freeze targeted assets and, in some cases, prohibit the transfer of
assets to a newly constituted government. These prohibitions affect
branches of U.S. financial institutions located in these countries.
OFAC officials stated that the United States works diplomatically to
encourage the relevant foreign governments to allow U.S. financial
institutions to freeze or transfer assets in a manner consistent with
U.S. law or, conversely, the Treasury issues a license to allow U.S.
financial institutions to comply with local laws. Third, OFAC's ability
to monitor financial institutions' compliance with its regulations is
limited because it does not have supervisory authority over financial
institutions and, thus, relies on financial institution regulators to
monitor financial institutions' OFAC compliance programs. In April
2002, Treasury's Office of Inspector General recommended that Treasury
inform Congress that OFAC's ability to ensure financial institution
compliance with foreign sanctions would be enhanced through a
legislative change that would enable bank regulators to share
information from their compliance examinations with OFAC. OFAC agreed
that its legislative authority could be improved, but as of August
2004, Treasury had not acted on this recommendation.
The United States has used a variety of domestic and international
legal authorities and coordinating bodies in its recent efforts to
recover Iraqi assets; some of these mechanisms could be applied to
future efforts. The USA PATRIOT Act amendment to the International
Emergency Economic Powers Act (IEEPA) allowed the United States to
vest--that is, take ownership of--$1.9 billion of frozen Iraqi assets
and transfer them for use in Iraq's administration and reconstruction.
Implementation of United Nations (U.N.) Security Council Resolution
1483 has resulted in the transfer of about $847 million in frozen Iraqi
assets located in other countries to a fund for Iraq as of June 2004.
However, factors--including existing claims against the assets and
other countries' laws governing the ability of these countries to
freeze and transfer assets of foreign regimes under various conditions,
such as U.N. resolutions--have slowed the transfer of an additional
$2.9 billion in Iraqi assets held in other countries. Some mechanisms
that were initially developed to combat money laundering and terrorist
financing may generally facilitate the recovery of foreign regimes'
assets. For example, in May 2004, the United States used one section of
the USA PATRIOT Act to designate a Syrian bank as a "primary money
laundering concern" and propose a rule that requires U.S. financial
institutions to sever certain accounts with a Syrian bank that was used
as a conduit for laundering proceeds from illicit Iraqi oil sales.
Although the U.S. government has used various legal authorities and
coordinating bodies to recover foreign regimes' assets, it has yet to
compile lessons learned from past efforts that could guide future
efforts.
In this report, we make recommendations to the Departments of State and
the Treasury to work with U.S. intelligence and law enforcement
agencies to improve account identifying information and develop and
document a compilation of lessons learned from the Iraq effort that
could assist with future efforts. We are also recommending that
Treasury seek legislative authority, if necessary, to allow financial
regulators to share complete information from their examinations with
OFAC.
In responding to our draft report, State agreed on the need to improve
the accuracy and completeness of account identifying information and
the need to document lessons learned from the current effort to recover
Iraq's assets. Treasury did not comment on these two recommendations.
With regard to the recommendation that it seek legislative authority to
allow financial regulators to share information from their examinations
with OFAC, Treasury stated that based on meetings it had held with
financial regulators, it is not clear that legislative changes are
necessary and that it expected to have comprehensive arrangements in
place shortly to enhance information sharing. We agree that further
information sharing between OFAC and the financial regulators would be
helpful, and we encourage Treasury to seek whatever legislative
solutions are necessary to overcome any obstacles to further
information sharing. We modified our recommendation to reflect
Treasury's efforts and reaffirm the importance of ensuring that
information sharing is enhanced.
Background:
Foreign regimes' assets can be targeted by unilateral, multilateral, or
U.N. Security Council sanctions programs. Economic sanctions programs
fall into two broad categories--(1) financial sanctions and asset
freezes and (2) trade and commercial embargoes. Sanctions are generally
used when other efforts, such as diplomacy, fail. Since 1979, the
United States has frozen the assets of governments, individuals, or
entities associated with 12 countries (see app. II). Each sanctions
program is unique, as are the circumstances and objectives.
The United States and the international community have significantly
increased the number of targeted individuals and entities over the last
decade. Until the late 1990s, targeting the financial assets of
governments, persons, and entities was normally part of a broader
sanctions program aimed at cutting off most or all economic relations
with a country. However, beginning in the late 1990s, the international
community acknowledged that broader sanctions programs can take many
years to achieve their goals and can adversely affect entire
populations of targeted countries. To reduce these impacts, in recent
years, the United States and the international community have begun
implementing sanctions that target the assets of specific persons and
entities.
The United States, working with the United Nations, has urged the
adoption of U.N. Security Council resolutions to freeze the assets of
both terrorists and sanctioned foreign regimes. For example, in October
1999, the Security Council adopted Resolution 1267, which called on all
member states to freeze the assets of the Taliban regime. In response
to the attacks of September 11, 2001, the Security Council adopted
Resolution 1373 in September 2001, requiring all U.N. member states to
freeze funds and other financial assets or economic resources of
persons who commit, attempt to commit, participate in or facilitate
terrorist acts. A subsequent resolution in January 2002 (Resolution
1390) called on all member states to freeze the assets of Osama bin
Laden and al Qaeda. Pursuant to this line of resolutions, the United
Nations has listed nearly 300 names of individuals and entities for
worldwide asset freezes. These resolutions target governments,
political leaders, individuals, or groups.
Several U.S. laws authorize the recovery of foreign regimes' assets,
including IEEPA, as amended by the USA PATRIOT Act,[Footnote 3]
National Emergencies Act (NEA), Trading with the Enemy Act (TWEA), and
the United Nations Participation Act (UNPA). These laws are generally
implemented by presidential executive orders and agency guidance that
provide entities, such as financial institutions, with specific lists
of targets to ensure that financial assets are blocked or frozen to
prevent their movement. Appendix III provides a summary of key domestic
legal authorities used to freeze foreign regimes' assets.
The U.S. Government's Approach to Recovering Foreign Regimes' Assets
Varies Depending on the Goals Pursued:
The U.S. government's approach to recovering assets of foreign regimes
varies depending on the U.S. foreign policy and national security goals
pursued. This process can involve targeting, identifying, freezing, or
blocking assets, and, in some cases, transferring assets of
governments, political leaders, individuals, or groups to legitimate
governments. Over the last decade, the efforts of the United States and
the international community have focused more on individuals and groups
associated with targeted regimes than entire countries. Assets can be
located throughout the international financial system; identifying
their location requires the cooperation of U.S. and foreign financial
institutions. The United States has procedures to freeze targeted
regimes' financial assets located in U.S. financial institutions and
has transferred assets back to a country in a few cases. Figure 1
illustrates this approach, outlines the various agencies and
institutions involved in the asset recovery process, and identifies the
legal authorities used.
Figure 1: The United States' Approach to Recovering Foreign Regimes'
Assets:
[See PDF for image]
[End of figure]
Figure 1 illustrates that the approach can involve four parts:
targeting or determining whose financial assets will be frozen;
identifying or ascertaining the accounts in which the assets are
located; freezing or immobilizing the assets; and transferring or
transmitting assets to accounts of a new government. It also identifies
the various government agencies and financial institutions that can be
involved in the approach and the legal authorities used for
implementing the approach. Additionally, figure 1 provides examples of
various outcomes of a foreign regime asset freeze: transfering of
blocked assets; unfreezing of assets in place; or vesting (taking
ownership of) and transferring assets, as illustrated by the cases of
the former Yugoslavia, Afghanistan, and Iraq.
Several U.S. Agencies Are Involved in Targeting Assets of an
Increasingly Greater Number of Foreign Regime Entities:
The Departments of Justice, State, and the Treasury, the Central
Intelligence Agency, and the National Security Council have been key
actors in foreign regime asset recovery. Domestically, the Department
of State, in consultation with the National Security Council and other
executive branch agencies, generally determines whose financial assets
will be targeted, under what authority the action will be pursued, and
whether the effort will be undertaken unilaterally or multilaterally,
as under U.N. Security Council resolutions. Once a decision is made,
the President of the United States issues an executive order that gives
U.S. executive branch agencies the authority to undertake these
actions.
The mandate of OFAC, the administrator and enforcer of U.S. economic
sanctions programs, is to require all U.S. persons, including financial
institutions, to freeze targeted assets located in the United States or
under the control of a U.S. person outside of the United States. OFAC
"targets" an individual, group, or entity by placing its name on the
Specially Designated Nationals (SDN) list.[Footnote 4] According to
OFAC officials, OFAC works with the Departments of Justice and State,
other components within Treasury, and intelligence and law enforcement
agencies to develop adequate evidence to place individuals or entities
on the SDN list. Officials at these agencies stated that this targeting
process can be completed in weeks or months, depending on several
factors, such as the availability of accurate information and the
corroboration of intelligence collected from multiple sources.
The Department of Justice's Civil Division advises OFAC on the legal
sufficiency of the evidence to comply with IEEPA requirements and would
also defend the United States against any potential lawsuits that
result from a targeting decision. OFAC then places targeted names on
its SDN list. OFAC posts updated information on its public Web site and
in the Federal Register, and provides electronic notification services
to financial institutions. In addition, third party vendors provide
subscription services that track OFAC developments, and the Federal
Reserve notifies U.S. financial institutions of updates to the SDN list
through Fedwire, an electronic system that allows it to contact
approximately 9,500 financial institutions.
OFAC also provides specific guidance to financial institutions, which
are required to comply with orders to freeze assets. In addition, OFAC
officials stated that, when appropriate, they contact some banks and
firms individually. According to OFAC officials, the office sends OFAC
personnel to the physical locations in the United States of known
commercial, real, or tangible properties of the target to serve
blocking notices to secure property. In some cases, these personnel
shut down branches and subsidiary firms controlled by the target.
In 2003, the Departments of Defense and Homeland Security, as well as
intelligence and law enforcement agencies, became more involved in
tracking foreign assets. For example, in the case of Iraq, the
Department of Defense has been on the ground assisting efforts to
locate assets of the former Iraqi regime. Department of Homeland
Security, Federal Bureau of Investigation (FBI), Internal Revenue
Service criminal investigators, and intelligence agency
representatives have worked in Iraq to identify leads to the former
regime's hidden assets. See appendix IV for more information about U.S.
efforts to recover Iraqi assets.
The Department of State coordinates with the United Nations to place
names of targets identified through the U.S. targeting process on the
appropriate U.N designation list.[Footnote 5] Internationally, OFAC
develops and corroborates evidence collected by other countries on
targets they have identified and proposed to the United Nations for
inclusion on a designation list. State works diplomatically with other
U.N. members to obtain the international consensus needed to place all
targets for which OFAC has sufficient corroborating evidence on the
U.N. lists. For example, as of June 2004, U.N. members had achieved
consensus on over 500 names of individuals and entities associated with
the Taliban, al Qaeda, and the former Iraqi regime, and had placed them
on U.N. designation lists. U.S. government officials have also
participated in international forums, such as Interlaken and Stockholm,
to discuss more effective ways of targeting economic
sanctions.[Footnote 6]
Identifying the Location of Assets Requires Domestic and International
Cooperation:
Financial assets of targets can be spread throughout the international
financial system, and identifying their location requires the
cooperation of U.S. and foreign financial institutions. U.S. government
agencies involved in recovering assets work domestically and with
foreign government counterparts and financial institutions to identify
and locate the assets of targeted foreign regimes.
U.S. intelligence and law enforcement agencies are involved in the
identification process by developing leads and working with
counterparts in other countries. For example, in 2003, the Department
of Defense's Defense Intelligence Agency provided some of the research
and analysis used to identify assets of the former Iraqi regime.
However, according to OFAC officials, if there is little reason to
believe that a regime's assets will be targeted, intelligence and law
enforcement agencies are less likely to gather the kind of information
needed by financial institutions to identify a targeted regime's
assets. This situation can pose a challenge to identifying assets in
the international financial system. According to U.S. officials and
experts on the subject of asset recovery, identifying assets also
requires the expertise of lawyers and investigators from various
jurisdictions to coordinate efforts to unravel what may be complicated
financial transactions. For example, in November 2003, the Department
of Homeland Security created the Iraqi Provisional Investigations Task
Force, which Treasury participated in, to share information obtained
from Iraqi documents and to coordinate their activities with other U.S.
government agencies. According to Treasury and State officials, the
leads have been provided to U.S. embassy officials working
diplomatically with foreign governments to recover the targeted assets.
According to U.S. officials, since September 11, 2001, contacts between
U.S. law enforcement officials and prosecutors and foreign officials
have increased. FBI legal attachés overseas and foreign police
authorities regularly share criminal intelligence.[Footnote 7]
Information to further criminal investigations and prosecutions is also
exchanged between U.S. and foreign prosecutors. Such exchanges are
facilitated through designated "central authorities" under treaties the
United States maintains with several other countries. The United States
sometimes provides sensitive information to foreign treaty partners in
response to formal requests. However, this process can be lengthy,
according to agency officials. Other countries have their own standards
of evidence, and may have limitations on whether, and how, they can
utilize information and evidence obtained from the United States. In
addition, some countries' laws require the demonstration of a criminal
act before allowing any attempts to identify assets of selected
targets.
The United States Has Procedures to Freeze Assets of Targeted Regimes
Located in the United States or Under the Control of U.S. Persons:
The United States has procedures, including domestic legal authorities
and an implementing agency, to freeze assets of targeted foreign
regimes in the United States or under the control of U.S. persons.
Treasury's OFAC, under an executive order declaring a national economic
emergency, issues regulations implementing requirements that targeted
regimes' assets be frozen and transactions involving individuals,
groups, or entities associated with these regimes be blocked. While
OFAC's regulations require compliance by all U.S. persons, compliance
by financial institutions is crucial because these institutions often
hold the targeted assets as deposits or securities or because the
institutions could be used to facilitate transactions involving the
assets. Financial institutions and their employees, as do all U.S.
persons, face criminal penalties of up to 10 years' imprisonment and,
in the absence of statutory authority in addition to IEEPA, fines of
not more than $50,000 for willful violations and civil penalties of up
to $11,000 per violation for noncompliance.[Footnote 8]
The United States Has Transferred Assets Back to a Country in Certain
Cases:
The United States has transferred assets back to the newly constituted
governments of countries in certain cases, including the former
Yugoslavia, Afghanistan, and Iraq; however, the circumstances varied in
each case.
In the case of the former Yugoslavia, according to OFAC, $237.6 million
in funds belonging to the Central Bank of the Socialist Federal
Republic of Yugoslavia that had been frozen were transferred to the
central banks of the successor states prior to sanctions being lifted.
The transfers occurred primarily in April and May 2003.
In the case of Afghanistan, funds of the Taliban regime initially
frozen in 1999 were transferred to an existing central bank account at
the Federal Reserve Bank of New York.[Footnote 9] OFAC unblocked the
account, and the Afghan government had the funds transferred to an
account in another country. According to OFAC, $217 million was
unfrozen and released to the Afghan Interim Authority in January 2002.
In the case of Iraq, under a March 20, 2003, executive order, the
United States vested funds previously blocked in the accounts of the
government of Iraq and certain Iraqi entities. The Treasury then
directed the transfer of the funds to a U.S. Treasury account held at
the Federal Reserve Bank of New York. U.S. Treasury officials issued
instructions to the Federal Reserve Bank of New York to transfer the
funds in cash installments to the Coalition Provisional Authority (CPA)
in Iraq.[Footnote 10] Between May and December 2003, $1.7 billion was
transferred to the CPA and $208 million to the Development Fund for
Iraq (DFI).[Footnote 11]
U.S. Government Agencies and Financial Institutions Face a Number of
Challenges in Recovering Foreign Regimes' Assets:
U.S. government agencies and financial institutions involved in
recovering foreign regimes' assets face a number of challenges. First,
law enforcement and intelligence agencies do not always have accurate
and complete information, such as the spelling of names, addresses, and
dates of birth, to provide to OFAC for distribution to U.S. financial
institutions and other countries' to assist in their efforts to locate
assets of targeted foreign regimes. Second, the local laws of some
foreign governments where branches of U.S. financial institutions are
located sometimes complicate efforts to freeze or transfer financial
assets. Third, OFAC's ability to monitor financial institutions'
compliance with its regulations is limited because it does not have
supervisory authority over financial institutions and relies on
financial regulators to monitor financial institutions' OFAC compliance
programs.
Target Information Needed to Locate and Freeze Financial Assets Is Not
Always Readily Available:
Law enforcement and intelligence agencies do not always have accurate
and complete information, such as the spelling of names, addresses, and
dates of birth, to provide to OFAC for distribution to U.S. financial
institutions and other countries' to assist in their efforts to locate
assets of targeted foreign regimes. The large number of names--more
than 3,500--on the OFAC SDN list compounds this problem. For example,
in the case of Iraq, U.S. officials stated that information provided by
OFAC for many of the targeted individuals lacked accurate or complete
identifiers such as dates of birth. In addition, Treasury and Defense
Department officials stated that intelligence agencies sometimes had to
declassify key account identifying information before providing it to
financial institutions. U.S. officials said this process could take
months.
According to OFAC officials, financial institutions may also lack
complete identifying information on their clients, such as dates of
birth, which makes it more difficult for them to quickly determine if a
name on the OFAC list matches an account at their institution. Before
passage of the USA PATRIOT Act, U.S. financial institutions were not
required to collect as much identifying information about their clients
as they are now. Regulations issued under section 326 of the act now
require financial institutions to collect certain identifying
information about new clients seeking to open an account, such as name,
address, and date of birth.[Footnote 12] OFAC officials stated that
during the past 15 years, and particularly since September 11, 2001,
the banking industry has developed a heightened awareness of the need
to comply with OFAC regulations. A representative of the securities
industry stated that since September 11, 2001, the securities industry
has also developed a heightened awareness of the need to comply with
OFAC regulations. According to representatives of U.S. financial
institutions we interviewed, they have undertaken an expensive and
rigorous due diligence program, which can include installing monitoring
software and training employees to detect names of targeted individuals
and entities.
To comply with OFAC's regulations, including orders to freeze assets
and block transactions, the larger financial institutions whose
representatives we interviewed used filtering and interdiction
software. Representatives of these institutions stated that a large
number of transactions initially blocked by their software are "false
positives." This means that the software has blocked transactions of
entities with names similar to those on the SDN list that should not be
blocked because the entities are not those on the SDN list. The
representatives we interviewed stated that OFAC's SDN list contains
names with multiple spellings and, in some cases, does not include
identifying information such as an address or date of birth. This
situation requires the financial institution to conduct additional
research to determine if the transactions involving those entities
should be blocked. The verification process takes time, however, and
may lead to delays in processing legitimate transactions. OFAC
recognizes that a lack of identifying information is a challenge for
financial institutions and has worked to increase the amount of
identifying information it provides to financial institutions.
An official from a trade group representing independent community banks
stated that because its members are smaller banks with fewer customers,
they generally use a manual process to comply with OFAC's regulations.
Members manually compare updates to the SDN list with lists of accounts
maintained by the banks and transactions occurring at the banks over a
specified period. Officials at the trade group noted that managers of
most independent community banks are familiar with their customers and
are thus likely to detect suspicious or unusual transactions without
the use of filtering and interdiction software. However, because OFAC
is continuously updating its SDN list, it can be difficult and time
consuming to manually screen transactions against the list. Financial
institution officials stated that an institution's decision whether to
use software or a manual process to comply with OFAC regulations is a
business decision that the institution must make based on its perceived
risk of holding accounts or processing transactions of those on the SDN
list.
Representatives of financial institutions also noted that the OFAC SDN
list does not contain the name of every individual or entity subject to
OFAC regulations. For example, the U.S. sanctions program against Iran
requires bank transactions relating to goods or services of Iranian
origin or transactions controlled by the government of Iran to be
rejected. It is difficult for financial institutions to determine if an
entity is owned or controlled by the government of Iran. Some
commercial software vendors employ staff to research data available
from the State Department, Central Intelligence Agency, and other
public sources. These staff update their database with the names of
entities known to be owned or controlled by affected governments, or
the names of government officials in countries where the sanctions
program covers government officials.
Domestic Laws of Foreign Countries Sometimes Prohibit Freezing and
Transferring Assets Located in U.S. Financial Institutions Overseas:
The laws of some foreign countries where branches of U.S. financial
institutions are located prohibit freezing of targeted assets under
U.S. unilateral sanctions. In the case of multilateral sanctions, they
may also prohibit the transfer of assets to a new government of a
targeted regime. According to OFAC officials, in the case of U.S.
unilateral sanctions, U.S. laws may conflict with the laws of the host
country and thereby complicate the recovery process. U.S. branches of
financial institutions might be exposed to legal action by the account
holders for blocking financial transactions overseas. For example, a
U.S. bank in the United Kingdom was ordered by a British court to
release a Libyan bank's assets blocked under U.S. unilateral sanctions
in 1986. The United States subsequently authorized the release of the
assets. According to an OFAC official, the process for recovering
assets subject to multilateral sanctions is usually easier because
these sanctions require international compliance.
OFAC's jurisdiction extends to all U.S. persons, which includes U.S.
citizens and permanent resident aliens, companies located in the United
States, overseas branches of U.S. companies, and, in some instances,
overseas subsidiaries of U.S. companies. If these U.S. persons are
located in a foreign country, they are also subject to the local laws
and regulations of that country. In some instances, foreign laws
conflict with OFAC regulations. According to OFAC, in these instances
and depending on the circumstances, (1) the United States works
diplomatically to encourage the foreign governments to allow U.S.
financial institutions to comply with OFAC regulations to freeze and,
in some cases, transfer the assets; or (2) OFAC issues a license
authorizing the financial institution to comply with local law.
OFAC's Ability to Monitor Financial Institutions' Compliance with Its
Regulations Is Limited:
OFAC's ability to monitor financial institutions' compliance with its
regulations, including orders to freeze assets and block transactions,
is limited because, although financial institutions are required to
comply with OFAC regulations, OFAC does not have supervisory authority
over them. Thus, OFAC relies on financial institution regulators to
monitor financial institutions' OFAC compliance programs through their
examinations.[Footnote 13] OFAC identifies transactions of U.S. persons
that involve violations of its regulations primarily through mandatory
reports it receives from financial institutions on transactions that
have been blocked. In a few cases, OFAC also learns about a financial
institution's own violations through "self-disclosure" by the financial
institution.
OFAC Identifies Violations of Its Regulations Primarily through Reports
It Receives from Financial Institutions:
According to OFAC officials, the primary way OFAC learns about
violations of its regulations is through their review of mandatory
reports filed by financial institutions. When a transaction processed
through an institution is determined to be a "true hit" against the SDN
list, it must, according to law, be blocked. The institution is
required to file a report of this blocking with OFAC within 10 business
days. These mandatory reports include such information as payment
instructions for a funds transfer. According to OFAC officials, OFAC
staff review these mandatory reports and, in every case where there has
been an indication that a U.S. party may have acted inappropriately
(such as where one bank that processes a transaction for another fails
to block a funds transfer), OFAC responded by issuing an administrative
subpoena for additional details, referring the institution for penalty
action, issuing a cease and desist order, or sending a warning letter.
According to OFAC, in every instance where a U.S. bank has acted
inappropriately, OFAC has sent information regarding the transaction to
the appropriate financial regulator. In a limited number of instances,
OFAC learns about violations of its regulations through "self-
disclosure" by financial institutions. Both OFAC and the financial
institution representatives we interviewed stated that these self-
disclosures often involve inadvertent violations of OFAC regulations,
such as when a financial institution mistakenly processes a wire
transfer it should have blocked. These improper transactions also come
to light when a second institution involved in the wire transfer
subsequent to the first institution through which the wire transfer was
sent blocks the transfer and notifies OFAC in accordance with OFAC
regulations, thus putting OFAC on notice of the first institution's
failure to block.
The financial regulatory officials we interviewed stated that, as a
matter of safety and soundness or compliance, they regularly examine
financial institutions subject to their supervision to evaluate the
sufficiency of the institution's policies, procedures, and systems to
ensure compliance with OFAC regulations. When deficiencies in such
policies, procedures, and systems are observed, the financial
regulators take the appropriate supervisory action. Financial
regulators stated they are unlikely to detect specific violations of
OFAC regulations during their examinations unless such violations are
apparent from transaction testing (i.e., testing individual
transactions for compliance with foreign sanctions). If OFAC violations
are identified during an examination, the regulators said that they
direct the institution to contact OFAC immediately, and in situations
involving enforcement actions, the regulators contact OFAC and share
pertinent information.
Treasury Has Not Acted on an Inspector General Recommendation to Seek
Legislative Authority to Increase OFAC's Access to Bank Regulators'
Examinations:
In April 2002, Treasury's Office of Inspector General (OIG) reported
that OFAC's ability to monitor financial institution compliance with
its regulations is hampered because the varied legislation under which
OFAC operates does not provide it with the authority to proactively
monitor financial institution compliance with foreign
sanctions.[Footnote 14] In its report, OIG made two recommendations to
Treasury related to OFAC's monitoring of financial institution
compliance. OIG recommended that Treasury inform Congress that (1) OFAC
lacks sufficient authority to ensure financial institution compliance
with foreign sanctions and (2) OFAC's ability to ensure financial
institution compliance with sanctions would be enhanced by ensuring
that bank regulators share information from their examinations with
OFAC. OIG stated that the second recommendation could be accomplished
by amending the Right to Financial Privacy Act to include OFAC in the
definition of "bank regulator" for the purpose of allowing bank
regulators to share information with OFAC.[Footnote 15] In response,
OFAC officials agreed that its current legislative authority could be
improved in terms of the information shared by bank regulators but
stated that, despite statutory limitations, OFAC and the financial
regulators have created an adequate compliance system.
In December 2003, the Chairman and Ranking Minority Member of the
Senate Finance Committee wrote to the Director of OFAC and asked him to
explain and clarify OFAC's position on the second OIG recommendation.
They noted that OFAC's Director had previously stated that the
recommendation is a "good first step." In his February 2004 response,
the OFAC Director stated that OFAC has engaged in discussions with
Treasury about the desirability of adopting this recommendation and
that Treasury continued to review whether certain changes in the
technical definitions of the Right to Financial Privacy Act would
further enhance OFAC's ability to ensure compliance. However, as of
August 2004, Treasury had not acted on OIG's recommendation.
Mechanisms the United States Has Used to Recover Iraqi Assets Could Be
Applicable in Future Efforts:
The United States has invoked domestic legal authorities and
international obligations and used coordinating bodies in its recent
efforts to recover Iraqi assets; some of these mechanisms could be
applicable to future efforts. Some mechanisms identified by U.S.
officials have advanced U.S. efforts to recover assets; others have
been less successful than initially expected. Some mechanisms initially
developed to combat money laundering and terrorist financing also have
applicability to foreign regime asset recovery. Other mechanisms were
not initially used in U.S. efforts to recover Iraqi assets and their
use remains limited.
The United States Has Used Legal Authorities, International
Obligations, and Coordinating Bodies to Recover Iraqi Assets:
The United States has invoked domestic legal authorities and
international obligations and used coordinating bodies in its efforts
to recover Iraqi assets. Legal authorities and international
obligations that the United States invoked in pursuit of Iraqi assets
include IEEPA and U.N. Security Council resolutions respectively.
Although there has been some success in bringing about the return of
Iraqi assets, multilateral implementation of U.N. Security Council
Resolution 1483 has faced challenges that have limited its
effectiveness. The working group the United States established to
coordinate the U.S. effort to recover Iraqi assets might be used as a
model for future efforts, but the U.S. government has not documented
the mechanisms used in past efforts that could serve as an evaluative
basis and guide for future efforts.
IEEPA and USA PATRIOT Act Allowed the United States to Vest Iraqi
Assets:
In October 2001, section 106 of the USA PATRIOT Act (P.L. 107-56),
amended section 203 of IEEPA (50 USC 1702) to authorize the President,
when the United States is engaged in armed hostilities or has been
attacked by a foreign country or foreign nationals, to confiscate any
property, subject to the jurisdiction of the United States, of any
foreign person, foreign organization, or foreign country that the
President determines has planned, authorized, aided, or engaged in such
hostilities or attacks. Before the adoption of section 106, the
President could confiscate assets under the Trading with the Enemy Act,
but only after a formal declaration of war.[Footnote 16] The President
invoked section 203 of IEEPA when he issued a March 20, 2003, executive
order vesting assets of the former Iraqi regime. The executive order
allowed the United States to vest about $1.9 billion of frozen Iraqi
assets and transfer them to the appropriate authorities for use in
Iraq.
May 2003 U.N. Resolution Requiring Members to Transfer Frozen Assets to
Iraq Has Not Yet Achieved Its Goals:
The United States worked with the U.N. Security Council to pass
Resolution 1483 on May 23, 2003, to pave the way for the transfer of
Iraqi assets held in other countries to the DFI. However, for a variety
of reasons, implementation of the resolution has not yet resulted in
the transfer of all frozen assets back to Iraq. U.S. officials did not
anticipate the extent of delays in returning the Iraqi assets to the
DFI due to existing claims against the assets and the domestic
authorities of countries holding the assets. State Department officials
stated that they used experience from past U.N. Security Council
resolutions to help develop Resolution 1483.
Treasury and State Department officials said that although they
anticipated some difficulties, they thought Resolution 1483 would
facilitate the recovery and transfer of frozen assets more quickly than
it did because it contained a provision they believed would facilitate
the transfer of Iraqi assets to the DFI. However, other countries'
domestic legal authorities have slowed asset transfers in some
instances. Treasury and State officials stated that they worked to find
alternative means of facilitating countries' transfer of assets to the
DFI in instances where a lack of legal authorities has been a problem.
However, as of June 2004, other countries had transferred about $847
million of the $3.7 billion in frozen funds worldwide. Large amounts of
frozen assets had not been transferred from some of the countries.
Paragraph 23 of Resolution 1483 directs member states to freeze and
transfer funds "without delay" unless the funds are subject to a prior
judicial, administrative, or arbitral lien or judgment. The paragraph
further states that unless otherwise addressed, claims made by private
individuals or nongovernmental entities on transferred funds may be
presented to the government of Iraq. Paragraph 23 also provides that
the funds generally enjoy privileges and immunities equivalent to those
enjoyed by the United Nations. New or unsettled claims were supposed to
be made to the internationally recognized representative government of
Iraq. However, U.S. government officials stated that some U.N. members
have had difficulty implementing Resolution 1483 due to, among other
factors, the lack of (1) legal authority to implement it in their
jurisdiction, (2) an OFAC-like government entity to assist in
identifying assets, and (3) sophisticated financial systems to freeze
assets. The existence of business community and third party claims has
also complicated the process. Finally, according to officials at the
U.S. Mission to the United Nations, some countries have expressed
concern over the lack of transparency of the DFI. As a result, they
have been reluctant to transfer assets to it. Taken together, these
challenges have decreased the immediate effectiveness of Resolution
1483 and have hindered the United States and others in the
international community in implementing the resolution.
U.S. Government Formed the Iraqi Assets Working Group to Coordinate
U.S. Efforts to Recover Iraqi Assets:
Established in March 2003, the Iraqi Assets Working Group has focused
on coordinating asset recovery efforts for Iraq. Treasury leads the
working group. Its present members include officials from the
Departments of State, Justice, Defense, and Homeland Security; law
enforcement agencies and the intelligence community; and the National
Security Council. The former CPA was also a member during the time of
the CPA's existence. The working group has brought together expertise
from across the government to coordinate the U.S. government's efforts
to recover Iraqi assets. According to public statements, the working
group's goals are to:
* exploit documents and key financial figures in Iraq to better
understand fund flows;
* secure the cooperation of jurisdictions through which Iraqi funds
have flowed so that working group members can exploit financial records
and uncover the money trail;
* secure the cooperation of jurisdictions in which Iraqi assets may
reside to locate, freeze, and repatriate the assets;
* engage the financial community in the hunt for Iraqi assets
generally, and specifically to secure the cooperation of financial
institutions through which Iraqi funds have flowed or still may reside;
* develop a system to facilitate the fluid repatriation of funds; and:
* prepare for potential sanctions against uncooperative jurisdictions
and financial institutions.
Little Documentation of Past U.S. Government Asset Recovery Efforts Is
Available to Guide Future Asset Recovery Efforts:
Neither Treasury nor State Department officials we interviewed knew
whether the U.S. government had used a similar coordinating body for
any of its previous asset recovery efforts. These agency officials did
not have any documentation of mechanisms used in past efforts. In
addition, one State official stated that when he started to work on the
effort to recover Iraqi assets, he found little documentation of prior
efforts to guide him.
According to OFAC officials, once a sanctions program is terminated,
they no longer maintain historical information on it. When we asked
OFAC officials for documentation of their past freezing and
transferring regulations and the results of these efforts, they were
unable to respond in a timely manner.
Both Treasury and State officials have stated that they believe the
collective efforts to recover Iraq's assets, including efforts
undertaken as part of the working group, afford the United States an
opportunity to develop and institutionalize lessons learned for future
recovery efforts. Treasury officials stated that they have begun to use
the working group as a model for new asset recovery efforts and are
considering creating an umbrella interagency mechanism to oversee
future efforts.
Mechanisms Developed to Combat Money Laundering and Terrorist Financing
Strengthen Financial Systems Worldwide:
Some mechanisms that were initially developed to combat money
laundering and terrorist financing may facilitate foreign regime asset
recovery by strengthening financial systems worldwide. In one instance,
a USA PATRIOT Act provision had direct applicability and was used to
sever a foreign bank's access to the U.S. financial system. Other USA
PATRIOT Act provisions have a more indirect effect on asset recovery by
strengthening U.S. financial institutions' anti-money laundering
systems and making it more difficult to hide assets. U.S. officials
stated that other mechanisms, such as the Financial Action Task Force
(FATF)[Footnote 17] and technical assistance the U.S. government
provides to other countries to strengthen their anti-money laundering
systems, help strengthen countries' financial systems and thus
indirectly facilitate asset recovery.
Some USA PATRIOT Act Provisions May Facilitate Asset Recovery by Making
It More Difficult to Hide Assets in the U.S. Financial System:
Title III of the USA PATRIOT Act contains expanded provisions of U.S.
law to prevent, detect, and prosecute terrorist financing and
international money laundering at financial institutions already
covered by prior laws and extended these requirements to other
financial service providers not covered under prior laws.[Footnote 18]
Treasury officials believe that a number of the act's provisions have a
preventive effect that strengthens the anti-money laundering safeguards
of financial institutions and thus facilitates the recovery of foreign
regimes' assets. More generally, to the extent that the act's
provisions help strengthen the anti-money laundering systems of U.S.
financial institutions, increase transparency, enhance customer due
diligence, and increase reporting of suspicious financial activity, the
provisions make it more difficult to use the U.S. financial system to
hide illicit funds.
In May 2003, the United States used one section of the act to
discourage a foreign bank from illegally holding Iraqi assets. Section
311 of the act authorizes the Treasury Department to designate specific
foreign financial institutions, jurisdictions, transactions, or
accounts to be of "primary money laundering concern." Under this
section, Treasury may require domestic financial institutions with
links to jurisdictions or institutions of "primary money laundering
concern" to take specific measures, such as increased record keeping.
This section also allows the United States to restrict or prohibit
access to the U.S. market. According to Treasury officials, financial
institutions may stop dealing with other financial institutions located
in a jurisdiction of "primary money laundering concern" to avoid the
increased record-keeping requirements established by Section 311.
In May 2004, under Section 311, Treasury issued a notice of proposed
rule making to impose "special measures" against a Syrian bank as a
"financial institution of primary money laundering concern." These
special measures will include severing correspondent accounts with the
bank.[Footnote 19] Treasury based this action, in part, on its belief
that the institution had been used by terrorists and to launder
proceeds from the illicit sale of Iraqi oil.
Treasury officials stated that other USA PATRIOT Act provisions could
facilitate asset recovery efforts in the future. For example, Treasury
officials stated that Section 312 regulations, when finalized, will
increase the due diligence that financial institutions are required to
exercise with regard to certain accounts of foreign financial
institutions or wealthy foreign individuals. According to a Treasury
official, one collateral benefit of this provision has been the
creation of databases to identify "politically exposed persons" and
their associates.[Footnote 20]
FATF and Technical Assistance to Help Countries Combat Money Laundering
and Terrorist Financing Indirectly Facilitate Asset Recovery:
State and Treasury officials noted that FATF has played a part in
foreign regime asset recovery through its role of identifying
international best practices and issuing standards. State Department
officials said that the United States' involvement in FATF has
strengthened the ability of countries to implement asset freezes.
Treasury officials agreed with State on the indirect role FATF plays
and stated that some of the best practices adopted by FATF could have
relevance to asset recovery efforts by enhancing other countries'
abilities to recover assets. Treasury officials also stated that
Treasury has tried to encourage other countries through FATF to search
for hidden Iraqi assets.
The United States has worked with FATF to adopt and implement measures
designed to counter criminals' use of the financial system.[Footnote
21] In 1990, FATF produced a paper, "Forty Recommendations," intended
to assist countries in their anti-money laundering efforts. These
recommendations, which have been revised twice, were intended for
universal application. FATF expects them to be accepted and implemented
by governments wanting recognition in the international community as
jurisdictions that combat money laundering. Following the terrorist
attacks of September 11, 2001, FATF issued new international standards
to combat terrorist financing--the "Eight Special Recommendations." The
objective of these measures, when implemented by countries worldwide,
is to deny terrorists and their supporters access to the international
financial system by encouraging financial institutions to implement
record keeping and other safeguards. The FATF recommendations on both
money laundering and terrorist financing are designed to assist
countries in making their financial systems more transparent and less
vulnerable to misuse. FATF encourages nonmembers to implement both the
FATF Forty Recommendations on anti-money laundering and the Eight
Special Recommendations on anti-terrorist financing.
Treasury officials stated that, in their view, FATF, in and of itself,
was not a mechanism for recovering foreign regimes' assets. The
Treasury representative to FATF stated that FATF is more of a process
by which countries cooperate with each other than an organization with
extensive personnel to recover assets. It has a small secretariat and
relies on members to do the majority of its work. Treasury's
representative to FATF commented that the United States is also looking
into ways for FATF to maintain a database of information on members'
laws relating to anti-money laundering and bank secrecy. The
representative was not aware of an effort to collect information on
laws related to foreign regime asset recovery but stated that this is a
task FATF might be able to do. However, he cautioned that FATF still
had the limitations cited above.
In addition to its participation in FATF, the U.S. government has
provided technical assistance to governments to improve their capacity
to combat money laundering and terrorist financing. State officials
stated that technical assistance of this type could help countries
recover assets of foreign regimes within their borders because it helps
them develop the necessary legal authorities and investigative
abilities to locate hidden assets.
Use of Other Mechanisms for Asset Recovery Has Been Limited:
The United States' use of some other mechanisms to recover foreign
regimes' assets has been limited. For example, Treasury officials
stated that the Egmont Group provides a valuable channel for exchanging
information with other countries.[Footnote 22] However, the Egmont
Group was not fully integrated in the search for Iraqi assets. Also,
although not involved in Iraq, private sector firms have played a role
in past asset recovery efforts and could potentially be used in future
efforts.
Treasury Did Not Initially Use the Egmont Group to Obtain Information:
Treasury officials stated that the Egmont Group provides a valuable
channel through which countries, through their financial intelligence
units (FIUs), can exchange financial investigative information. FIUs
are specialized governmental agencies that countries have created as
they develop systems to combat money laundering.[Footnote 23] The U.S.
government did not initially use the Egmont Group in its efforts to
recover Iraqi assets because, according to Treasury officials, Treasury
and State decided to work diplomatically through high-level financial
ministry contacts. Treasury officials stated that this method of
exchanging information worked well.[Footnote 24] In the Iraq case,
Treasury officials stated they already knew where many of the hidden
Iraqi assets were located. They noted that Egmont is primarily intended
for use in facilitating the exchange of information in ongoing U.S. and
foreign criminal investigations. The officials noted that, with Iraq,
there was no such investigation. In March 2004 congressional testimony,
a Treasury official stated that the Egmont Group had been used more
recently to exchange information related to the financial activities of
the former Iraqi regime and to communicate specific Iraqi asset law
enforcement-related inquiries to other countries.[Footnote 25]
U.S. Agencies Have Not Involved Private Sector Firms in Foreign Regime
Asset Recovery Efforts:
Private sector firms have played roles in some instances of foreign
regime asset recovery through civil lawsuits, investigative efforts, or
both; however, they have not played a role in recovering Iraq's assets.
In cases where corrupt leaders have stolen from their countries,
private sector firms have been hired to locate those assets and file
suit to have the assets returned to their country of origin. Officials
from firms involved in some of these efforts stated that they have
developed considerable expertise that has allowed them to effectively
recover assets. According to representatives of private law firms,
civil litigation may be the most effective mechanism for recovering the
stolen assets of corrupt government officials because such proceedings
are public, serving to shame the individuals involved in stealing or
concealing the assets.
Representatives of private sector firms cautioned that efforts of this
sort face challenges that can limit the involvement of private sector
firms in recovering assets. For example, locating assets and suing for
their return is expensive. Countries differ significantly in the laws
that apply to recovering a regime's assets, and pursuing assets in
these countries would require expertise in the laws of each country. In
many cases, the new government sues to recover assets. For example, in
1999, the government of Nigeria--after the 1998 death of General Sani
Abacha, the former President--sought the return of assets stolen from
the country during the Abacha regime. Nigeria had to hire those with
the expertise to pursue the assets in the foreign countries in which
they were invested. The legal requirements of other countries had to be
met before the assets could be returned to Nigeria. Some countries
required the posthumous criminal conviction of Abacha in Nigeria before
funds that he had invested overseas could be returned. The case was
resolved when the government of Nigeria negotiated a settlement with
members of Abacha's family in which it agreed not to prosecute the
family in exchange for some of the stolen funds.
Cases that have involved private sector efforts include the following:
* In 1985, Congress retained a private firm to investigate reports that
Philippines President Ferdinand Marcos and his wife had secretly
amassed millions of dollars in private wealth. The investigation
confirmed that the Marcoses held assets located in the United States
and overseas that were worth almost a billion dollars.
* In 1986, the Haitian government hired a private firm to locate
hundreds of millions of dollars appropriated by former dictator Jean-
Claude "Baby Doc" Duvalier. The investigations led to the seizure of
bank accounts in New York, London, Luxembourg, Paris, and Geneva.
* After the 1988 terrorist attack on Pan Am flight 103 over Lockerbie,
Scotland, plaintiffs sued the government of Libya on behalf of the
victims.[Footnote 26] This resulted in a negotiated settlement in 2003.
* In 1990, the Kuwaiti government hired a private firm to investigate
the financial network used by Saddam Hussein to hide assets in the
West. The firm was able to link Hussein to millions of dollars in
assets held in others peoples' names in the United States and Europe,
exposing some of his front companies and agents.
In the more recent case of Iraq, however, assets in the United States
were vested and U.N. Security Council Resolution 1483 sought to protect
assets in other countries from the types of claims that would result
from civil suits. Private firm representatives stated that these
actions removed the incentive for parties to pursue litigation.
Treasury officials stated that U.S. government investigators were
better positioned than the private sector to pursue Iraqi assets
because they had access to classified information and the expertise to
interpret what they found. They also stated, however, that private
investigators might be useful in helping analyze large volumes of
documents and other records.
Conclusion:
The U.S. government, led by the Treasury and State Departments, has
achieved important successes in its current effort to recover assets of
the former Iraqi regime. However, the challenges it has faced in this
and other asset recovery efforts have complicated the process and could
be addressed in a number of ways. For example, improvement of the
adequacy of account identifying information supplied by intelligence
and law enforcement agencies could enable U.S. financial institutions
to more accurately freeze assets in response to OFAC freeze orders in
the future. Informing intelligence and law enforcement investigators of
the kinds of information needed at the earliest possible stage and
faster declassification of intelligence information could expedite the
process.
The ability of OFAC, as the U.S. agency charged with administering and
enforcing economic sanctions against targeted foreign regimes and other
designated groups and individuals, to ensure financial institution
compliance with its sanctions could be enhanced if financial regulators
shared information from their examinations with OFAC. This information
could assist OFAC in enforcing its regulations by alerting it to
financial institutions at a higher risk of not complying with its
regulations. Treasury has not acted on a recommendation made by its
Office of Inspector General over 2 years ago to seek legislative
authority that would facilitate OFAC's access to information from bank
regulators' examinations.
Recent efforts to quickly recover assets of the former Iraqi regime
have not been as successful as initially expected, in part, because of
existing claims against the assets and because other countries'
domestic legal authorities have impeded their ability to freeze and
transfer assets of foreign regimes under various conditions, such as
U.N. resolutions. U.S. officials have worked with some foreign
governments to make the required legislative changes and have worked to
devise alternative mechanisms for the assets to be transferred. Our
efforts to obtain information on coordinating or other mechanisms used
in past asset recovery efforts were unsuccessful, in part, because we
found little documentation of these past cases. U.S. officials stated
that they have learned a great deal in the Iraq case and that the
mechanisms used in this effort could apply to future cases. Documenting
the government's lessons learned from the Iraq case would provide a
critical road map to ensure that the United States implements a
thorough and well-considered asset recovery effort in the future.
Recommendations for Executive Action:
To improve the U.S. government's readiness to move forward quickly in
future asset recovery efforts, we are making three recommendations:
* The Departments of the Treasury and State should work with U.S.
intelligence and law enforcement agencies to improve the accuracy and
completeness of account identifying information needed by financial
institutions to identify and freeze assets of foreign regimes.
* The Department of the Treasury should seek legislative authority, if
necessary, to enhance OFAC's ability to ensure financial institution
compliance with sanctions by allowing financial regulators to share
complete information from their examinations with OFAC.
* The Departments of the Treasury and State should develop and document
a compilation of lessons learned from the current effort to recover
Iraq's assets that could assist in appropriately institutionalizing and
leveraging all mechanisms available for future efforts.
Agency Comments and Our Evaluation:
We received written comments on this report from the Departments of
State and the Treasury. These comments and GAO's evaluation of them are
reprinted in appendixes VI (State) and VII (Treasury). The Departments
of Defense, Homeland Security, Justice, State, and the Treasury, the
Securities and Exchange Commission, Office of the Comptroller of the
Currency, and the Federal Reserve Board also provided technical
comments that GAO discussed with relevant officials and included in the
text of the report, where appropriate.
State agreed with our recommendations regarding the need to improve the
accuracy and completeness of account identifying information and
document lessons learned from the current effort to recover Iraq's
assets. State stated that it would continue to work with foreign
governments, Treasury, and U.S. intelligence and law enforcement
agencies to improve target identifiers. State also stated that it would
be desirable to work with the Department of the Treasury as well with
their Missions to the United Nations and Iraq to develop and document
lessons learned that might serve as a guide to future efforts. Although
Treasury did not comment directly on either of these recommendations,
it stated that it will continue to strive, to the extent applicable and
permitted by law, to overcome the challenges of repatriating assets
presented by diverse international legal constraints.
With regard to whether it should seek a legislative change to allow
financial regulators to share information from their examinations with
OFAC, Treasury maintained that this issue has not affected the U.S.
government's ability to recover regime assets but that further
information sharing between OFAC and the regulators would be helpful.
Treasury stated that it had discussed this issue with federal
regulators and, based on these meetings, it is uncertain whether
legislative changes are necessary to enhance information sharing
between OFAC and the financial regulators. Treasury further stated that
it expects that comprehensive arrangements will be in place shortly to
enhance information sharing between OFAC and the financial regulators.
We agree that further information sharing between OFAC and the
financial regulators would be helpful, and we encourage Treasury to
seek whatever legislative solutions are necessary to overcome any
obstacles to further information sharing. We modified our
recommendation to reflect Treasury's efforts and reaffirm the
importance of ensuring that information sharing is enhanced.
Unless you publicly announce its contents earlier, we plan no further
distribution until 30 days after the date of this report. At that time,
we will send copies of this report to the Secretaries of Defense,
Homeland Security, State, and the Treasury; the Attorney General; the
Chairmen of the Federal Reserve Board and the Securities and Exchange
Commission; the Comptroller of the Currency; and interested
congressional committees. We will also make copies available to others
on request. In addition, this report will be available at no cost on
GAO's Web site at [Hyperlink, http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact Joseph Christoff at (202) 512-8979 or Davi M. D'Agostino at
(202) 512-8678. GAO contacts and key contributors to this report are
listed in appendix VIII.
Signed by:
Joseph A. Christoff, Director:
International Affairs and Trade:
Signed by:
Davi M. D'Agostino, Director:
Financial Markets and Community Investment:
[End of section]
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
The objectives of our report were to (1) describe the approach the U.S.
government uses to recover foreign regimes' financial assets, (2)
examine the challenges the United States faces in recovering foreign
regimes' assets, and (3) examine the mechanisms the United States has
used to recover Iraqi assets and their applicability to future efforts.
To address all of these objectives, we interviewed key U.S. government
officials from multiple U.S. government agencies. The agencies
included:
* the Department of the Treasury (Executive Office for Terrorist
Financing and Financial Crimes; Office of Foreign Assets Control;
Financial Crimes Enforcement Network; and Internal Revenue Service-
Criminal Investigation);
* the Department of State (Bureau of Economic and Business Affairs;
Bureau of International Organization Affairs; Bureau for International
Narcotics and Law Enforcement Affairs; and United States Mission to the
United Nations);
* the Department of Justice (Criminal Division's Asset Forfeiture and
Money Laundering Section, Counterterrorism Section, and Office of
International Affairs; Civil Division; and Federal Bureau of
Investigation Terrorist Financing Operations Section and Legal Attaché
Program);
* the Department of Homeland Security (Bureau of Immigration and
Customs Enforcement); and:
* the Department of Defense (Office of the Under Secretary of Defense
for Policy and Defense Intelligence Agency).
To address our first objective of describing the approach the U.S.
government uses to recover foreign regimes' assets and our second
objective of examining the challenges the United States faces in
recovering these assets, we reviewed documents from the U.S.
government, the United Nations, and a nonprofit research organization,
including testimonies, reports, and relevant laws. We also interviewed
representatives of several large U.S. financial institutions
responsible for complying with Treasury's Office of Foreign Assets
Control's (OFAC) regulations to freeze assets and block transactions,
two trade associations representing segments of the U.S. financial
services industry, two financial regulatory agencies, and two self-
regulatory organizations.
To address our third objective of examining the mechanisms U.S.
officials identified for use in recovering Iraqi assets and their
applicability to future efforts, we defined mechanisms to include legal
authorities and coordinating bodies that Treasury Department officials
said have been or could be used for asset recovery. Relevant legal
authorities we reviewed included the International Emergency Economic
Powers Act (IEEPA), sections in Titles I and III of the USA PATRIOT
Act,[Footnote 27] and United Nations Security Council Resolutions 1267,
1373, 1483, 1518, and 1546. Our discussion of foreign laws and
regulations is based on interviews and other secondary sources.
Furthermore, we reviewed documents describing the mission and
operations of coordinating bodies that could be used to recover foreign
regimes' assets, such as the mission statements of the Egmont Group and
Financial Action Task Force.
To identify and describe the role of the Iraqi Assets Working Group, we
interviewed officials from the Department of the Treasury and relied on
public statements describing this group's goals and activities. To
identify and describe U.S. efforts to provide technical assistance to
other countries, we interviewed officials from the Department of State
and reviewed the United States' report to the U.N. Security Council
committee established to oversee implementation of Resolution 1267.
Finally, to determine the role and use of private firms in efforts to
recover assets, we interviewed representatives of law firms and a
consulting firm that have been involved in past cases of asset
recovery. We discussed with these representatives not only their
involvement in past cases, but also the extent to which they have been
or thought they could be used in the current case involving Iraq.
To help describe the activities of the Iraqi assets working group, a
key coordinating body used to recover the assets of the former Iraqi
regime, we requested the minutes of the working group's meetings.
Treasury officials noted that the working group's minutes were
classified and also related to matters that remained sensitive. As a
result, they did not provide us with these minutes. Due to the
sensitivity of the matters in this particular situation and the nature
and timing of our engagement, we relied on public statements and
interviews with Treasury officials describing the group's goals and
agency officials' general descriptions of the working group's minutes
to meet our reporting objectives.
We conducted our work in Washington, D.C., and New York City from May
2003 to August 2004 in accordance with generally accepted government
auditing standards.
[End of section]
Appendix II: Targeted Foreign Regimes Since 1979:
The United States, acting unilaterally, through the United Nations
(U.N.), or both, has sought to freeze the assets of targeted foreign
regimes to achieve a range of foreign policy and national security
goals. The table below identifies the foreign regimes against which
asset freezing sanctions were first imposed in 1979 or later (even if
those sanctions were subsequently lifted), the time frame in which the
asset freeze was or is in effect, the body (United States, United
Nations, or both) that imposed the freeze, U.S. executive orders used
to implement the freeze, stated reasons for the freeze, and amount of
assets frozen by the United States as of June 2004.[Footnote 28]
Table 1: Targeted Foreign Regimes Since 1979:
Foreign regime: Afghanistan; (Taliban);
Time frame: 1999-present[B];
Body imposing asset freeze: Both the United States (see executive
orders) and the United Nations in Resolutions 1267, 1333, 1373, 1390,
and 1455;
U.S. executive orders used to implement freeze: Executive Orders 13129
and 13224;
Stated reasons for freeze: To prevent access to the assets by the
Taliban, a group not officially recognized as the formal government of
Afghanistan by the U.S. or U.N. and to pressure the Taliban to
extradite Osama bin Laden;
Amount of assets frozen by the United States[A]: $217 million[C].
Foreign regime: Angola; (UNITA);
Time frame: 1993-2003;
Body imposing asset freeze: Both the United States (see executive
orders) and the United Nations in Resolutions 1173 and 1176;
U.S. executive orders used to implement freeze: Executive Orders 12865
and 13098;
Stated reasons for freeze: To preserve the unity, sovereignty, and
territorial integrity of Angola and promote international peace and
stability in the region;
Amount of assets frozen by the United States[A]: No amounts reported.
Foreign regime: Haiti;
Time frame: 1991-1994;
Body imposing asset freeze: Both the United States (see executive
orders) and United Nations in Resolutions 841 and 917[D];
U.S. executive orders used to implement freeze: Executive Orders 12775,
12853, 12917, and 12920;
Stated reasons for freeze: To return democracy to Haiti and
democratically elected President Jean-Bertrand Aristide to his office;
Amount of assets frozen by the United States[A]: $121 million at the
time of release[E].
Foreign regime: Iraq;
Time frame: 1990-present;
Body imposing asset freeze: Both the United States (see executive
orders) and the United Nations in Resolutions 661, 1483, and 1546;
U.S. executive orders used to implement freeze: Executive Orders 12722,
12724, and 13315;
Stated reasons for freeze: To end Iraq's invasion of Kuwait and restore
sovereignty, independence, and territorial integrity to Kuwait; disarm
Iraq of weapons of mass destruction; and assist in the reconstruction
of Iraq;
Amount of assets frozen by the United States[A]: $2.1 billion[F].
Foreign regime: Libya;
Time frame: 1986-present;
Body imposing asset freeze: Both the United States (see executive
orders) and the United Nations in Resolution 883[G];
U.S. executive orders used to implement freeze: Executive Order 12543;
Stated reasons for freeze: To end Libya's support for international
terrorism;
Amount of assets frozen by the United States[A]: $1.25 billion[H].
Foreign regime: The former Yugoslavia;
Time frame: 1992-1996; 1998- 2003[I];
Body imposing asset freeze: Both the United States (see executive
orders) and the United Nations in Resolution 942[J];
U.S. executive orders used to implement freeze: Executive Orders 12808,
12846, 13088, 13121;
Stated reasons for freeze: To preserve the territorial integrity of all
states of the former Yugoslavia; reaffirm the need for a lasting peace
settlement by all Bosnian parties; promote international peace and
security; provide stability in the region; and maintain progress in
Bosnia and Herzegovina in implementing the Dayton peace agreement;
Amount of assets frozen by the United States[A]: $237.6 million[K].
Foreign regime: Burma;
Time frame: 2003-present;
Body imposing asset freeze: United States[L];
U.S. executive orders used to implement freeze: Executive Order 13310;
Stated reasons for freeze: To take additional steps with regard to the
Burmese government's repression of the democratic opposition;
Amount of assets frozen by the United States[A]: Data not available[M].
Foreign regime: Zimbabwe;
Time frame: 2003-present;
Body imposing asset freeze: United States[N];
U.S. executive orders used to implement freeze: Executive Order 13288;
Stated reasons for freeze: To respond to certain members of the
Zimbabwean government undermining democracy, the rule of law, and
political and economic stability in the region;
Amount of assets frozen by the United States[A]: $800,000.
Foreign regime: Iran;
Time frame: 1979-1981; 1995-present;
Body imposing asset freeze: United States;
U.S. executive orders used to implement freeze: Executive Orders 12170,
12959, and 13059;
Stated reasons for freeze: 1979-1981: to force Iran's release of
American hostages and settle expropriation claims; 1995-present: to end
Iran's support for international terrorism and pursuit of weapons of
mass destruction;
Amount of assets frozen by the United States[A]: $23.3 million[O].
Foreign regime: Panama;
Time frame: 1988-1989;
Body imposing asset freeze: United States;
U.S. executive orders used to implement freeze: Executive Order 12635;
Stated reasons for freeze: To remove General Manuel Noriega from power;
Amount of assets frozen by the United States[A]: $296.8 million[P].
Foreign regime: Sudan;
Time frame: 1997-present;
Body imposing asset freeze: United States;
U.S. executive orders used to implement freeze: Executive Order 13067;
Stated reasons for freeze: To end Sudan's support for international
terrorism, its efforts to destabilize neighboring governments, and the
prevalence of human rights violations;
Amount of assets frozen by the United States[A]: $28.4 million[Q].
Foreign regime: Syria;
Time frame: 2004-present;
Body imposing asset freeze: United States;
U.S. executive orders used to implement freeze: Executive Order 13338;
Stated reasons for freeze: To end Syria's support of terrorism,
continued occupation of Lebanon, pursuit of weapons of mass destruction
and missile programs, and subversion of United States and international
efforts to stabilize and reconstruct Iraq;
Amount of assets frozen by the United States[A]: $0[R].
Source: United Nations, U.S. Treasury Department Office of Foreign
Assets Control, and Institute for International Economics.
[A] Treasury's Office of Foreign Assets Control maintains data on the
amount of assets frozen in all blocking programs. These amounts are
included in the Treasury's annual Terrorist Assets Report if a regime
is determined by the Secretary of State to be a state sponsor of
terrorism.
[B] Sanctions against the government of Afghanistan have been lifted.
However, a freeze of the assets associated with the Taliban, Osama bin
Laden, and al Qaeda remain in effect.
[C] These assets were unfrozen and released to the Afghan Interim
Authority in January 2002.
[D] The United States began asset freezing sanctions against Haiti
unilaterally in 1991 and the U.N. followed with multilateral sanctions
in 1993.
[E] Over $55 million was released during the period of sanctions at the
request of the recognized government of Haiti, and with the
certification of the Department of State, for expenditures related to
the operations of the Haitian government in the United States and
worldwide.
[F] $1.93 billion was vested under Executive Orders 13290 and 13315.
Approximately $120 million was paid out in claims and another $40
million remains blocked.
[G] The United States began asset freezing sanctions against Libya
unilaterally in 1986 and the U.N. followed with multilateral sanctions
in 1993. Currently, only limited U.S. sanctions remain in effect
against Libya.
[H] Of this amount, $5.4 million is blocked in U.S. banks' foreign
branches.
[I] Certain diplomatic and consular assets and assets of the National
Bank of Yugoslavia remain blocked.
[J] The United States began asset freezing sanctions against the former
Yugoslavia unilaterally in 1992, and the U.N. followed with
multilateral sanctions in 1994 that were lifted in 1996. The United
States' asset freezing sanctions were lifted in 1996. However, the
United States imposed another round of unilateral sanctions from 1998
to 2003.
[K] This amount represents assets of the National Bank of Yugoslavia
returned to the successor states of the former Socialist Federal
Republic of Yugoslavia. In addition, amounts representing blocked wire
transfers were released by General License, and the New York State
Banking Department was licensed to take possession of assets of
Beogradska Banka, New York Agency and Jugobanka, New York Agency as
part of bankruptcy proceedings against the two institutions.
[L] The European Union imposed multilateral asset freezing sanctions
against Burma in 2000, prior to the United States' asset freezing
action in 2003.
[M] The sanctions became effective in July 2003, just after the cut off
date for U.S. holders of property to report blocked property. The most
recent report was due June 30, 2004.
[N] The European Union imposed multilateral asset freezing sanctions
against Zimbabwe in 2002, prior to the United States' asset freezing
action in 2003.
[O] This figure represents the amount--mostly diplomatic and consular
property--remaining blocked from the 1979-1981 sanctions. During the
period of the 1979-1981 sanctions, over $12 billion in Iranian property
was blocked.
[P] The assets were unfrozen and released to the legitimate government
of Panama in 1989.
[Q] Of this amount, $100,000 is blocked in U.S. banks' foreign
branches.
[R] No Syrian individuals or entities had been formally targeted by the
United States for an asset freeze as of June 2004. Therefore, no Syrian
assets have yet been frozen.
[End of table]
[End of section]
Appendix III: Key U.S. Legal Authorities Used to Recover Foreign
Regimes' Assets:
International Emergency Economic Powers Act (IEEPA).
Provides broad authority to the President to declare a national
emergency to deal with an unusual and extraordinary threat, which has
its source in whole or in part outside the United States, to the
national security, foreign policy, or economy of the United States (50
U.S.C. §§ 1701-06). The act gives the President substantial authority
over foreign trade, including authority over property in which a
foreign country or national thereof has any interest with respect to
any property, subject to the jurisdiction of the United States (50
U.S.C. § 1702). In October 2001, section 106 of the USA PATRIOT Act
(P.L. 107-56), amended section 203 of IEEPA (50 U.S.C. § 1702) to
authorize the President to confiscate any property subject to the
jurisdiction of the United States of a foreign person, organization or
country that the President has determined to have planned or engaged in
armed hostilities against the United States and vest all "right, title,
and interest" in a designated agency or individual.
Trading with the Enemy Act of 1917 (TWEA).
Provides the President with authority under certain circumstances to
confiscate and vest foreign assets subject to the jurisdiction of the
United States, but only after a congressional declaration of war (50
U.S.C. App. §§1-44).
United Nations Participation Act (UNPA).
Authorizes the President to apply economic sanctions, including
freezing of assets, called for by United Nations Security Council
Resolution (22 U.S.C. § 287c).
National Emergencies Act (NEA).
Imposes procedural limitations on Presidential declarations of national
emergency under which foreign assets have been blocked or frozen. A
national emergency declared under the act automatically terminates on
the anniversary of the declaration of the emergency unless the
President publishes in the federal register and transmits a notice to
Congress stating that the emergency continues in effect (50 U.S.C. §§
1601-51).
Source: GAO.
[End of table]
[End of section]
Appendix IV: Efforts to Recover Iraqi Assets:
After Iraq invaded Kuwait in 1990, the United Nations imposed sanctions
against the Iraqi regime; however, in 1996, the United Nations and Iraq
agreed on the Oil for Food Program, thereby enabling Iraq to pay for
humanitarian items. We estimated that between 1997 and 2002, Saddam
Hussein's regime accumulated at least $10.1 billion in surcharges on
oil sales and illicit charges from suppliers exporting goods to Iraq
through the Oil for Food program. In its recent efforts to recover
assets of the former Iraqi regime worldwide, the U.S. government has
engaged the services of a variety of U.S. agencies and recently
developed domestic and international tools to recover these and other
hidden assets. U.S. recovery efforts have had varying results.
Estimated Revenue Obtained Illegally by the Former Iraqi Regime Exceeds
$10 Billion:
In August 1990, Iraq invaded Kuwait, and the United States froze Iraqi
assets. Shortly after, the United Nations also imposed sanctions
against the regime. Security Council Resolution 661, approved in 1990,
prohibited all nations from buying Iraqi oil and selling Iraq any
commodities except food or medicines. The resolution also required
member states to block the transfer of Iraqi assets from their
countries. The United States amended its sanctions consistent with the
resolutions. Other nations similarly froze Iraqi government assets in
their countries.
In December 1996, the United Nations and Iraq agreed on the Oil for
Food Program, which allowed Iraq to sell a set amount of oil to pay for
food, medicine, and infrastructure repairs. Iraq's oil revenue was
placed in a U.N.-controlled escrow account. From 1997 through 2002, we
estimate that the former Iraqi regime acquired $10.1 billion in illegal
revenues--$5.7 billion in oil smuggled out of Iraq and $4.4 billion in
surcharges on oil sales and illicit charges from suppliers exporting
goods to Iraq through the Oil for Food program.[Footnote 29]This
estimate is higher than our May 2002 estimate of $6.6 billion[Footnote
30]because it includes (1) oil revenue and contract amounts for 2002,
(2) updated letters of credit from prior years, and (3) newer estimates
of illicit commissions from commodity suppliers.
Oil was smuggled out through several routes, according to U.S.
government officials and oil industry experts. Oil entered Syria by
pipeline, crossed the borders of Jordan and Turkey by truck, and was
smuggled through the Persian Gulf by ship. Jordan maintained trade
protocols with Iraq that allowed it to purchase heavily discounted oil
in exchange for up to $300 million in Jordanian goods. Syria received
up to 200,000 barrels of Iraqi oil a day in violation of the sanctions.
Oil smuggling also occurred through Turkey and Iran.
In addition to revenues from oil smuggling, the Iraqi government levied
surcharges against oil purchasers and commissions against commodity
suppliers participating in the Oil for Food program. According to some
Security Council members, the surcharge was up to 50 cents per barrel
of oil and the commission was 5 percent to 15 percent of the commodity
contract.
In our 2002 report, we estimated that the Iraqi regime received a 5
percent illicit commission on commodity contracts. However, a September
2003 Department of Defense review found that at least 48 percent of 759
Oil for Food contracts were potentially overpriced by an average of 21
percent.[Footnote 31] Food commodity contracts were the most
consistently overpriced, with potential overpricing identified in 87
percent of the contracts by an average of 22 percent. The review also
found that the use of middlemen companies potentially increased
contract prices by 20 percent or more. Defense officials found 5
contracts that included "after-sales service charges" of between 10
percent and 20 percent.
In addition, interviews by U.S. investigators with high-ranking Iraqi
regime officials, including the former oil and finance ministers,
confirmed that the former regime received a 10 percent commission from
commodity suppliers. According to the former oil minister, the regime
instituted a fixed 10 percent commission in early 2001 to address a
prior "compliance" problem with junior officials. These junior
officials had been reporting lower commissions than what they had
negotiated with suppliers and pocketing the difference.
The United Nations Security Council Has Adopted Three Recent
Resolutions:
The United Nations Security Council has adopted three recent
resolutions regarding Iraq--1483, 1518, and 1546. The United States and
other U.N. Security Council members adopted Resolution 1483 to assist
in the reconstruction of Iraq and the establishment of a new Iraqi
government. This resolution lifted trade sanctions initially imposed on
Iraq in 1990; provided for the transfer of the U.N.'s Oil for Food
Program to the Coalition Provisional Authority (CPA) over a 6-month
period; sought to freeze assets of the former government of Iraq,
Saddam Hussein, other senior officials, and their immediate families
(the former regime); noted the establishment of a Development Fund for
Iraq (DFI); and required all U.N. members to transfer assets frozen in
their countries to the DFI. Unlike recent resolutions regarding the
Taliban and terrorists worldwide, Resolution 1483 did not establish a
committee to oversee its implementation. On November 24, 2003, the
United States and other U.N. Security Council members adopted
Resolution 1518, which established a committee to identify individuals
and entities whose assets were to be frozen under Resolution 1483. On
June 8, 2004, the U.N. Security Council adopted Resolution 1546, which
anticipated the end of the occupation of Iraq, the dissolution of the
CPA, and endorsed the formation of a sovereign interim Iraqi
government.
U.S. Efforts to Recover Iraq's Assets Involve Many Agencies and Use
Recently Developed Domestic and International Authorities:
The United States has tapped the services of several U.S. agencies and
used recently developed U.S. and international authorities in its
efforts to recover Iraqi assets worldwide. About 20 entities, including
those of the Departments of Defense, Homeland Security, Justice, State,
and the Treasury, intelligence agencies, law enforcement agencies, and
the National Security Council, are involved in recovering Iraqi assets.
To lead the asset recovery efforts, the United States created an
interagency coordinating body headed by the Department of the Treasury.
This group, the Iraqi Assets Working Group, has developed a strategy to
identify, freeze, seize, and transfer former regime assets to Iraq. The
working group's goals include exploiting documents and key financial
figures or information on fund flows, working with other jurisdictions
where funds are located to recover assets, working with the financial
community, developing a system to facilitate fund repatriation, and
prepare for potential sanctions against uncooperative jurisdictions and
financial institutions. The working group is leveraging the expertise
of U.S. officials involved in efforts to recover assets of terrorists
and money launderers.
Provisions in the USA PATRIOT Act amended IEEPA to allow the President
to confiscate foreign property subject to U.S. jurisdiction in times of
"ongoing hostilities" or if the United States is attacked. These
provisions gave the President authority, invoked through an executive
order, to confiscate the property of the former Iraqi regime and to
vest title to these assets. In addition, according to the State
Department, U.N. Security Council Resolution 1483 was an important
vehicle for requiring other countries to transfer assets to Iraq. On
May 22, 2003, the U.N. Security Council adopted Resolution 1483, which
(1) noted the establishment of the DFI, a special account in the name
of the Central Bank of Iraq; and (2) required member states to freeze
and immediately transfer to the DFI all assets of the former Iraqi
government and of Saddam Hussein, senior officials of his regime, and
their family members. The resolution also included a unique immunity
provision to protect the assets from new claims.
U.S. Efforts to Recover the Former Iraqi Regime's Assets Have Had
Varying Results:
In 2003, the U.S. government quickly vested Iraq's assets held in the
United States and transferred them to Iraq. Similarly, the U.S.
military seized assets recovered in Iraq of the former Iraqi regime.
The CPA has used most of the vested and seized assets for emergency
salary and pension payments to Iraqi civil servants, reconstruction
projects and other ministry operations. U.S. officials noted that some
other countries' efforts to transfer Iraqi funds have been slowed by
their lack of implementing legislation.
The United States Transferred Nearly $1.9 Billion in Vested Assets to
Iraq:
On August 2, 1990, in compliance with a Presidential executive order,
Treasury's OFAC issued regulations to financial institutions requiring
them to freeze Iraqi assets in the United States. More than 30 banks in
the United States identified and froze accounts with $1.4 billion in
Iraqi assets.[Footnote 32]These institutions held assets in accounts
that accumulated interest.
In March 2003, the President invoked authorities, including the
enhanced authority in IEEPA, as amended by provisions in the USA
PATRIOT Act, and issued an executive order confiscating Iraqi
government assets held by U.S. financial institutions and vesting them
in the U.S. Treasury. The order resulted in the vesting in the Treasury
of about $1.9 billion of the former regime's assets in the names of the
government of Iraq, the Central Bank of Iraq, Rasheed Bank, Rafidain
Bank, or the State Organization for Marketing Oil. All U.S. financial
institutions holding such funds were ordered to transfer those funds to
the Federal Reserve Bank of New York, and 23 banks did so by
electronically transferring the funds. Between May and December 2003,
the United States transferred more than $1.7 billion to Iraq and $208
million to the DFI.
With respect to the $1.7 billion transferred to the CPA, according to
Treasury and Federal Reserve officials, Treasury instructed the Federal
Reserve Bank of New York to release portions of the funds to the
Department of Defense (DOD) upon the Office of Management and Budget's
approval of the CPA's spending plans. As of July 2004, the former CPA
had disbursed about $1.68 billion of the $1.7 billion for emergency
needs in Iraq, including salaries for Iraqi civil servants and
pensions, and for ministry operations.
The United States Seized More Than $900 Million in Iraq:
The CPA informed us in June 2004 that the U.S. military, in
coordination with U.S. law enforcement agencies, had seized about $927
million of the regime's assets in Iraq. The U.S. military seized about
$894 million in Iraqi bonds, U.S. dollars, euros, and Iraqi dinars, as
well as quantities of gold and jewelry. This amount included $750,000
found with Saddam Hussein when he was captured. Department of Homeland
Security agents seized an additional $32 million. The CPA was
authorized to use these seized funds for humanitarian and
reconstruction efforts in Iraq. As of July 2004, the former CPA
disbursed used about $799 million for reconstruction activities,
including projects, ministry operations, and liquefied petroleum gas
purchases.
Other Countries Have Transferred about $847 Million to the DFI:
To encourage other countries to transfer the funds to Iraq, the
Secretary of the Treasury requested that the international community
identify and freeze all assets of the former regime. Additionally,
Treasury and State officials said they have engaged in diplomatic
efforts to encourage countries to report and transfer the amounts of
Iraqi assets they had frozen. For example, since March 2003, State
officials told us they have sent more than 400 cables to other
countries requesting that they transfer funds to the DFI.
According to Treasury, other countries have frozen about $3.7 billion
in Iraqi assets. About $2 billion was frozen since March 2003. Treasury
officials reported that, as of June 2004, other countries and the Bank
for International Settlements had transferred about $847 million to the
DFI. Treasury officials noted that the remaining assets have not been
transferred to the DFI because some countries do not have the necessary
legislation to effect the transfer. Other countries are holding about
$955 million pending adjudication of claims. U.N. Security Council
Resolution 1483 requires the immediate transfer of Iraqi funds
identified and frozen in these accounts to the DFI.
According to U.S. officials, Treasury and State continue to leverage
the U.S. government's relations with finance ministries and central
banks to encourage the transfer of Iraqi assets to the DFI. Treasury
and State have worked with countries holding Iraqi assets either to
assist them in developing legislation that would allow them to transfer
Iraqi assets they hold to the DFI, or to identify other ways they can
transfer the assets without violating their own laws. For example, in
one case, an Iraqi bank owning an account holding Iraqi assets located
overseas formally requested in writing a transfer of the funds to the
DFI. The country holding the assets was able to comply with the request
and transferred the funds without having to pass legislation. In
another instance, a "mirror" account was set up in the DFI and the
funds from a country were transferred to that account. Therefore, the
funds were never technically transferred out of the originating
account. Some of the remaining frozen Iraqi funds are located in
financial institutions in Iraq's neighboring countries or Europe.
Limited Progress Has Been Made in Recovering Hidden Assets of the
Former Iraqi Regime:
Although the United States has made progress in identifying hundreds of
individuals, entities, and accounts associated with the former Iraqi
regime, limited progress has been made in recovering the regime's
hidden assets. Because the former Iraqi regime used a network of front
companies, trusts, and cash accounts in the names of the family members
of the former regime's leaders and associates, it has been difficult to
identify how much remains hidden in the international financial system.
U.S. government officials have cited estimates ranging from $10 billion
to $40 billion in illicit earnings, although it is not clear what
earnings went to whom.
According to U.S. government officials, U.S. government asset recovery
efforts have focused on exploiting documents in Iraq, interviewing key
financial figures, and convincing other countries to cooperate in
identifying and freezing illicit funds that have flowed through or
still reside in their countries. For example, Department of Homeland
Security agents have exploited Central Bank of Iraq records for leads
regarding Saddam Hussein's procurement network to further
investigations of U.S. entities that conducted illegal transactions
with Iraq. Internal Revenue Service criminal investigators have
conducted interviews of former finance ministry individuals and
exploited financial documents of the regime to obtain leads on the
location of targeted assets. The Defense Intelligence Agency provides
some of the research and analysis used to identify assets of the former
Iraqi regime.
In addition, according to Treasury and State officials, they are
coordinating efforts to gain the cooperation of other countries. For
example, U.S. investigators have identified over 2,600 accounts that
potentially belonged to the former regime in other countries. State
officials are working through their overseas embassies to get the
cooperation of these countries to return the funds to the DFI.
Anticipating the end of the occupation of Iraq and the reassertion of
the full sovereignty of Iraq, the United States also supported the
adoption of U.N. Security Council Resolution 1546 on June 8, 2004,
which continues the obligations of U.N. member states to freeze and
transfer certain funds, assets, and economic resources to the DFI in
accordance with Resolutions 1483 and 1518 adopted in 2003.
[End of section]
Appendix V: Roles of U.S. Entities in Recovering Iraqi Assets:
Figure 2: Assets Frozen in the United States:
[See PDF for image]
[End of figure]
Figure 3: Assets Seized in Iraq:
[See PDF for image]
[End of figure]
Figure 4: Assets Identified and Frozen in Other Countries:
[See PDF for image]
[End of figure]
Figure 5: Hidden Iraqi Assets:
[See PDF for image]
[End of figure]
[End of section]
Appendix VI: Comments from the Department of State:
United States Department of State:
Assistant Secretary and Chief Financial Officer:
Washington, D.C. 20520:
Ms. Jacqueline Williams-Bridgers:
Managing Director:
International Affairs and Trade:
Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548-0001:
AUG 30 2004:
Dear Ms. Williams-Bridgers:
We appreciate the opportunity to review your draft report, "FOREIGN
REGIMES ASSETS: The United States Faces Challenges in Recovering Assets
but Has Mechanisms that Could Guide Future Efforts," GAO Job Code
320201.
The enclosed Department of State comments are provided for
incorporation with this letter as an appendix to the final report.
If you have any questions concerning this response, please contact
Edward Goff, Deputy Director, Bureau of Economic and Business Affairs,
at (202) 647-7677.
Sincerely,
Signed by:
Christopher B. Burnham:
cc: GAO - Zina Merritt:
EB - Shaun Donnelly:
IO - Kim Holmes:
State/OIG - Mark Duda:
Department of State Comments on GAO Draft Report:
FOREIGN REGIMES ASSETS: The United States Faces Challenges in
Recovering Assets but Has Mechanisms that Could Guide Future Efforts,
(GAO-04-1006, GAO Code 320201):
GAO Recommendation I:
The Departments of the Treasury and State should work with U.S.
intelligence and law enforcement agencies to the extent possible to
improve the accuracy and completeness of account identifying
information needed by financial institutions to identify and freeze
assets of foreign regimes.
State Reply:
We agree with the objective of improving the accuracy and completeness
of account identifying information needed by financial institutions to
identify and freeze assets of foreign regimes, and will continue to
work with foreign governments, Treasury, U.S. intelligence and law
enforcement agencies to that end. We meet regularly with all concerned
agencies and thoroughly review all names with which we are concerned to
ensure that identifying information is as complete and accurate as
possible.
GAO Recommendation III:
The Departments of the Treasury and State should develop and document a
compilation of lessons learned from the current effort to recover
Iraq's assets that could assist in appropriately institutionalizing and
leveraging all mechanisms available for a future effort.
State Reply:
* The Department agrees that it would be desirable to work with the
Department of Treasury as well as with our Missions to the UN and Iraq
to develop and document lessons-learned that may serve as a guide to
future efforts.
GAO Recommendation 11 regarding Treasury authorities only applies to
Treasury.
[End of section]
Appendix VII: Comments from the Department of the Treasury:
DEPARTMENT OF THE TREASURY:
WASHINGTON, D.C.
ASSISTANT SECRETARY:
September 2, 2004:
Ms. Davi M. D'Agostino:
Director, Financial Markets and Community Investment:
General Accounting Office:
Washington, DC 20548:
Dear Ms. D'Agostino:
We are pleased to have worked directly with you and your staff over the
past several months as you prepared to draft the General Accounting
Office's report, Foreign Regimes' Assets: The United States Faces
Challenges in Recovering Assets, But Has Mechanisms that Could Guide
Future Efforts. Thank you for offering the Treasury Department the
opportunity to review the draft report and to provide comments.
The Treasury Department, which is charged with protecting the U.S. and
international financial system, has been at the forefront of
international attempts to freeze and recover foreign regimes' assets,
as in the case of Iraq. Along with our inter-agency partners such as
the State Department, we have used Treasury-specific expertise and
contacts along with authorities like the International Emergency
Economic Powers Act (IEEPA), the USA PATRIOT Act, and UN Security
Council Resolutions (UNSCR) to prevent illicit assets from being
hidden, laundered, or misused. By building interagency and
international cooperation, we have demonstrated an ability to locate
missing or hidden funds and, in the case of Iraq, to help repatriate
much of those assets to the Iraqi people. Through determination and
creativity, the U.S. government will continue to strive, to the extent
applicable and permitted by relevant law, to overcome the challenges of
repatriating assets presented by diverse international legal
constraints.
Per your request, the following are our comments on the GAO draft
report:
* The total amount of Iraqi assets frozen around the world is over $5.8
billion, and over $2.7 billion of that amount has been repatriated to
the Iraqi people. The report notes that implementation of UN Security
Council Resolution 1483 has resulted in the transfer of about $802
million in frozen Iraqi assets located in other countries. The report
should state that total assets transferred by other countries to the
DFI amount to approximately $847 million, from over fifteen
jurisdictions. Because of the recent transfer of sovereignty to the
interim Iraqi government, there are no recent updates regarding DFI
transfers. In addition, we are constantly refreshing our numbers to
reflect newly frozen assets and actions taken.
- Total assets frozen by other countries broken down by amounts
reported in 1991 and since March 2003, amount to approximately $3.7
billion, of which nearly $2 billion was frozen since March 2003.
- Based on our current estimates, the existing amount being held by
other countries for which there are pending claims is approximately
$955 million.
- The total amount of assets transferred by the United States to Iraq
total over $1.9 billion - including approximately $208 million
transferred to the Development Fund for Iraq (DFI) and $1.7 billion
that was transferred to Iraq under Executive Order No. 13290.
* We worked diligently with the GAO team to provide requested documents
as appropriate and spent numerous man hours over the course of several
months to ensure that the GAO staff received relevant information and
briefings from officials throughout the Treasury Department - including
from the Executive Office for Terrorist Financing and Financial Crimes
(TFFC), Office of International Affairs, Office of Foreign Assets
Control (OFAC), the Financial Crimes Enforcement Network (FinCEN), the
Criminal Division of the IRS (IRS-CI), and the Office of General
Counsel.
On page 36, in reference to the Iraqi Assets Working Group, the report
states that "Because the Departments of State and Treasury did not
permit us to review the working group's minutes, we could not
corroborate either these statements or general descriptions with
documentary evidence that supports a full accounting of the group's
activities and results." The report should state that the GAO was
informed that it would not be provided the working group's notes
because the notes were classified. In addition to being classified, the
notes related to numerous ongoing matters that remained sensitive at
the time of the request.
* Compliance with OFAC regulations and requirements is essential to
ensure that our nation's economic sanctions are enforced properly. The
report describes how OFAC's ability to monitor financial institutions'
compliance with its regulations is limited because it currently does
not have access to OFAC compliance examinations performed by financial
regulators, despite an April 2002 Treasury IG report recommending that
Congress be approached about fixing the problem (through amendments to
the Right to Financial Privacy Act). The question of whether OFAC
should have access to more information in this context is an important
one that is being discussed within the Treasury Department and with the
federal banking regulators, but this issue has not affected the U.S.
government's ability to recover and repatriate regime assets.
In general, OFAC and Treasury are confident that the manner and level
of compliance and monitoring that occurs in the current system, in
close coordination with the federal banking regulatory community,
functions well and the overall level of compliance by the financial
community is very high; however, further information sharing between
OFAC and the regulators would certainly be helpful in the
administration of sanctions programs. We are aggressively pursuing the
issue and have held an ongoing series of meetings with the regulators,
both individually and as a group. Based on those meetings, it is not
clear that legislative changes are necessary, but at a minimum, we
expect that comprehensive arrangements will be in place shortly to
enhance information sharing.
* Also attached to this document are more technical comments and
corrections to the GAO report.
Once again, thank you for offering the Treasury Department the
opportunity to review this GAO report. If you have any questions or
concerns, please feel free to contact me.
Sincerely,
Signed by:
Juan C. Zarate:
Assistant Secretary of the Treasury:
Terrorist Financing and Financial Crimes:
The following are GAO's comments on the Department of the Treasury's
letter dated September 2, 2004.
GAO Comments:
1. We incorporated the updated amounts of Iraqi assets (1) transferred
by other countries to the Development Fund for Iraq, (2) frozen
currently by other countries, (3) held by other countries pending
adjudication of claims, and (4) transferred by the United States to the
Development Fund for Iraq.
2. Treasury took exception to our statement regarding their reluctance
to share the Iraqi Assets Working Group meeting minutes with us.
Treasury stated that it did not provide these meeting notes because
they are classified and related to ongoing matters that remained
sensitive at the time of the request. We note that GAO has statutory
access to classified information and is required by law to maintain the
same level of confidentiality as the agency from which we get the
information. Due to the sensitivity of the matters in this particular
situation and the nature and timing of our engagement, we relied on
public statements and interviews with Treasury officials describing the
group's goals and agency officials' general descriptions of the working
group's minutes to meet our reporting objectives.
3. Treasury commented that the issue of whether OFAC should have access
to the financial regulators' compliance examinations of financial
institutions is important and is being discussed within Treasury and
with the federal banking regulators, but maintained that this issue has
not affected the U.S. government's ability to recover regime assets.
Treasury also commented that it is uncertain that legislative changes
are necessary to enhance information sharing between OFAC and the
financial regulators. Treasury said it is pursuing the issue and it
expects that comprehensive arrangements will be in place shortly to
enhance information sharing between OFAC and the financial regulators.
We agree that further information sharing between OFAC and the
financial regulators would be helpful, and we encourage Treasury to
seek whatever legislative solutions are necessary to overcome any
obstacles to further information sharing.
[End of section]
Appendix VIII: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Joseph A. Christoff, (202) 512-8979:
Davi M. D'Agostino, (202) 512-8678:
Staff Acknowledgments:
Thomas Conahan, Lynn Cothern, Philip Farah, Rachel DeMarcus, Ronald
Ito, Barbara Keller, Sarah Lynch, Zina Merritt, Tetsuo Miyabara, Marc
Molino, and Mark Speight made key contributions to this report.
(320201):
FOOTNOTES
[1] GAO, Recovering Iraq's Assets: Preliminary Observations on U.S.
Efforts and Challenges, GAO-04-579T (Washington, D.C.: Mar. 18, 2004).
[2] Targeting is the process of determining whose financial assets will
be sought. Identifying is the process of ascertaining the accounts in
which the assets are located. The freezing process prevents the
movements of the assets, and the transferring process transmits them to
accounts of a new government.
[3] Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT
Act), Pub. L. No. 107-56, 115 stat. 272 (2001).
[4] In addition to its country sanctions, OFAC publishes a list of
individuals and companies owned or controlled by, or acting on behalf
of, targeted countries. It also lists individuals, groups, and
entities, such as terrorists and narcotics traffickers designated under
programs that are not country specific. Collectively, such individuals
and entities are called "Specially Designated Nationals and Blocked
Persons" or "SDNs." Their assets are blocked, and U.S. persons are
generally prohibited from dealing with them.
[5] In addition to the SDN list used by the United States, the United
Nations also maintains lists of individuals and entities whose assets
should be frozen. These lists are maintained pursuant to U.N. Security
Council resolutions.
[6] The Swiss government hosted a number of expert seminars attended by
representatives from national governments, central banks, and the U.N.
Secretariat, among others, on the targeting of United Nations financial
sanctions in 1998 and 1999. These seminars became known as the
"Interlaken Process." The German government sponsored the Bonn-Berlin
process, which took place over 2000-2001, on the design and
implementation of arms embargoes and travel and aviation bans. The
Swedish government and a Swedish university initiated the "Stockholm
Process" in November 2001. It reported on its work to the U.N. Security
Council in February 2003.
[7] The FBI's legal attachés work to gain cooperation with
international police partners in support of the FBI's domestic mission.
Their goal is to link law enforcement resources and other officials
outside the United States with law enforcement in this country.
[8] These penalties apply to violations of regulations, licenses, and
orders issued pursuant to IEEPA. 50 U.S.C. §1705. Under the Iraq
Sanctions Acts, penalties for violations of the Iraqi Sanctions
Regulations are significantly higher (up to 12 years in prison and $1
million in criminal penalties and up to $275,000 for civil penalties).
[9] The funds were transferred to the Federal Reserve Bank of New York
due to the Federal Reserve System's role as the fiscal agent for the
United States Treasury and other government agencies.
[10] The CPA, established in May 2003, was the U.N.-recognized
coalition authority led by the United States and the United Kingdom
that was responsible for the temporary governance of Iraq. The CPA
transferred power to a sovereign Iraqi interim government on June 28,
2004.
[11] On May 22, 2003, U.N. Security Council Resolution 1483 recognized
the establishment of the DFI to provide a repository for Iraqi funds to
support the reconstruction of Iraq. DFI funds consist of oil proceeds,
U.N. Oil for Food program surplus funds, and returned Iraqi government
and regime financial assets.
[12] 31 C.F.R. §103.121-§103.123 (2003). Under the customer
identification program rules (the "CIP Rules"), which became effective
on June 9, 2003, a financial institution is not required to collect the
identification verification information mandated by the CIP Rules with
respect to persons with accounts existing prior to the effective date
of the CIP Rules, provided that the financial institution has a
"reasonable belief" that it knows the true identity of those persons.
[13] Bank regulators currently examining U.S. banks for their
compliance with OFAC regulations include the Office of the Comptroller
of the Currency, Office of Thrift Supervision, Federal Reserve Board,
Federal Deposit Insurance Corporation, and National Credit Union
Administration. Securities regulators currently examining U.S.
securities firms for their compliance with OFAC regulations include the
Securities and Exchange Commission, New York Stock Exchange, and
National Association of Securities Dealers.
[14] U.S. Department of the Treasury, Office of Inspector General,
Foreign Assets Control: OFAC's Ability to Monitor Financial Institution
Compliance Is Limited Due to Legislative Impairments (Washington, D.C;
Apr. 26, 2002).
[15] The Right to Financial Privacy Act, 12 U.S.C. 3401-3418, with
certain exceptions, prohibits agencies from transferring to another
agency financial records originally obtained in compliance with the act
that can be identified with the financial records of a particular
customer. The act contains an exception that allows supervisory
agencies, including financial institution regulators, to share customer
financial records.
[16] Section 106 also amended IEEPA to protect the confidentiality of
classified information submitted in court in cases involving national
security or terrorism.
[17] FATF is an intergovernmental policy body focused on combating
money laundering and terrorist financing.
[18] The International Money Laundering and Financial Anti-Terrorism
Act of 2001, Title III, USA PATRIOT Act, Pub. L. No. 107-56.
[19] A correspondent account is an account established by a financial
institution for a foreign bank to receive deposits and make payments or
other disbursements on behalf of the foreign bank, or to handle other
financial transactions related to the foreign bank.
[20] The term "politically exposed persons" applies to persons who
perform important public functions for a state. These persons can
include heads of state, government and cabinet ministers, senior
judges, and members of ruling royal families, among others.
[21] FATF was established in 1989 as a policy-making body that works to
generate the political will to bring about national legislative and
regulatory reforms in the areas of anti-money laundering and anti-
terrorist financing. Its current mandate extends through the end of
2004, but its work will continue if the member governments agree that
this is necessary.
[22] The Egmont Group began in 1995 when a number of financial
intelligence units (FIUs) established an informal group to cooperate on
the exchange of law enforcement information. As of June 23, 2004, the
Egmont Group had 94 members. The group is named for the location of the
first meeting--the Egmont-Arenberg Palace in Brussels, Belgium.
[23] Treasury's Financial Crimes Enforcement Network is the FIU for the
United States.
[24] The Treasury and State Departments are working with foreign
governments to encourage them to transfer frozen Iraqi funds to the
Development Fund for Iraq. According to State Department officials,
since March 2003, State has sent more than 400 cables to other
countries requesting that they transfer the Iraqi funds.
[25] U.S. Department of the Treasury, testimony of Juan C. Zarate,
Deputy Assistant Secretary, Executive Office for Terrorist Financing
and Financial Crimes, U.S. Department of the Treasury before the House
Financial Services Subcommittee on Oversight and Investigations, March
18, 2004.
[26] The party pursuing asset recovery can also be private citizens
that have suffered injury from the actions of a regime.
[27] Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT
Act), Pub. L. No. 107-56, 115 stat. 272 (2001).
[28] This table does not include the regimes of North Korea and Cuba,
even though the United States still has active asset freezes against
them. Those freezes were authorized in 1950 and 1963, respectively,
under the Trading with the Enemy Act, while the freezes against the
regimes listed in this table have been authorized under the
International Emergency Economic Powers Act.
[29] This estimate is in constant 2003 U.S. dollars.
[30] GAO, Weapons of Mass Destruction: U.N. Confronts Significant
Challenges in Implementing Sanctions Against Iraq, GAO-02-625
(Washington, D.C.: May 23, 2002).
[31] The Defense Contract Audit Agency and the Defense Contract
Management Agency, Report on the Pricing Evaluation of Contracts
Awarded under the Iraq Oil for Food Program (Washington, D.C; Sept.
12, 2003).
[32] In addition, according to OFAC, more than $480 million was frozen
in U.S. financial institutions abroad.
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