USA Patriot Act
Better Interagency Coordination and Implementing Guidance for Section 311 Could Improve U.S. Anti-Money Laundering Efforts Gao ID: GAO-08-1058 September 30, 2008Since September 11, 2001, the United States has established tools to address the threat to the U.S. financial system of money laundering and terrorist financing. One such tool is Section 311 of the USA PATRIOT Act of 2001, which authorizes the Secretary of the Treasury (Treasury) to prohibit U.S. financial institutions from maintaining certain accounts for foreign banks if they involve foreign jurisdictions or institutions found to be of primary money laundering concern. To make this finding, Treasury examines several factors and generally issues a proposed rule announcing its intent to apply Section 311 restrictions. GAO was asked to examine (1) the process used to implement Section 311 restrictions, (2) the process Treasury follows to finalize or withdraw a proposed rule, and (3) how Treasury assesses the impact of Section 311. GAO reviewed financial and investigative U.S. government documents and met with government officials and representatives of affected banks.
Treasury's informal process to implement Section 311 was consistent with requirements in U.S. law. From 2002 to 2005, Treasury identified 11 cases--3 jurisdictions and 8 institutions--as being of primary money laundering concern and issued proposed rules for 10 of these cases. As required, Treasury consulted with the Departments of Justice and State prior to issuing the proposed rules. However, Justice and State officials said that it was difficult for them to effectively assess the evidence on some Section 311 cases because Treasury provided them limited time. In 2006, Treasury changed its process by forming an interagency working group to discuss potential threats to the U.S. financial system. But it is unclear if the new process addressed the agencies' concerns since Treasury has issued no Section 311 findings since 2005. Treasury determines whether to finalize or withdraw a proposed Section 311 rule by reviewing written comments and sometimes meeting with interested parties. The duration of a proposed rule is significant because U.S. financial institutions act immediately in response to its announcement. However, Treasury has taken years to complete this process in some cases. In April 2008, Treasury withdrew two of three notices--all open for between 3 and 5 years--after GAO discussed the cases with Treasury officials. Contributing to this lag was the absence of required timeframes for completing the action and of written guidance specifying a Treasury office to finalize the actions. Treasury views Section 311 as effective because it isolates target institutions from the U.S. financial system and encourages some foreign governments to strengthen their anti-money laundering authorities. However, some foreign government officials said that Section 311's implementation precluded their own enforcement or regulatory actions against targeted institutions as U.S. action was unilateral or provided too little information for them to act. Justice officials said that if Section 311's application is viewed as unsubstantiated, some countries may be less likely to cooperate with the U.S. government on other law enforcement matters or sanctions. Treasury officials recognized the concerns, but did not believe they diminished Section 311's effectiveness.
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
September 2008:
USA Patriot Act:
Better Interagency Coordination and Implementing Guidance for Section
311 Could Improve U.S. Anti-Money Laundering Efforts:
USA Patriot Act:
GAO-08-1058:
GAO Highlights:
Highlights of GAO-08-1058, a report to congressional requesters.
Why GAO Did This Study:
Since September 11, 2001, the United States has established tools to
address the threat to the U.S. financial system of money laundering and
terrorist financing. One such tool is Section 311 of the USA PATRIOT
Act of 2001, which authorizes the Secretary of the Treasury (Treasury)
to prohibit U.S. financial institutions from maintaining certain
accounts for foreign banks if they involve foreign jurisdictions or
institutions found to be of primary money laundering concern. To make
this finding, Treasury examines several factors and generally issues a
proposed rule announcing its intent to apply Section 311 restrictions.
GAO was asked to examine (1) the process used to implement Section 311
restrictions, (2) the process Treasury follows to finalize or withdraw
a proposed rule, and (3) how Treasury assesses the impact of Section
311.
GAO reviewed financial and investigative U.S. government documents and
met with government officials and representatives of affected banks.
What GAO Found:
Treasury‘s informal process to implement Section 311 was consistent
with requirements in U.S. law. From 2002 to 2005, Treasury identified
11 cases--3 jurisdictions and 8 institutions--as being of primary money
laundering concern and issued proposed rules for 10 of these cases. As
required, Treasury consulted with the Departments of Justice and State
prior to issuing the proposed rules. However, Justice and State
officials said that it was difficult for them to effectively assess the
evidence on some Section 311 cases because Treasury provided them
limited time. In 2006, Treasury changed its process by forming an
interagency working group to discuss potential threats to the U.S.
financial system. But it is unclear if the new process addressed the
agencies‘ concerns since Treasury has issued no Section 311 findings
since 2005.
Treasury determines whether to finalize or withdraw a proposed Section
311 rule by reviewing written comments and sometimes meeting with
interested parties. The duration of a proposed rule is significant
because U.S. financial institutions act immediately in response to its
announcement. However, Treasury has taken years to complete this
process in some cases. In April 2008, Treasury withdrew two of three
notices--all open for between 3 and 5 years--after GAO discussed the
cases with Treasury officials. Contributing to this lag was the absence
of required timeframes for completing the action and of written
guidance specifying a Treasury office to finalize the actions.
Figure: Duration of Section 311 Proposed Rules:
[See PDF for image]
Source: GAO analysis of Department of Treasury data.
[End of figure]
What GAO Recommends:
GAO recommends that Treasury establish guidance to clarify
responsibility to implement and finalize Section 311 actions.
Treasury said it will act in response to this recommendation, although
the process has been improved. Justice and State did not comment.
To view the full product, including the scope
and methodology, click on [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-08-1058]. For more information, contact Loren Yager at
(202) 512-4347 or yagerl@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Process to Implement USA PATRIOT Act Section 311 Was Consistent with
Legal Requirements, but Some Agencies Expressed Concerns about
Consultation:
Treasury's Process for Implementing Section 311 Followed Requirements
of the Law but Took Years to Finalize Some Proposed Rules:
Treasury Views Section 311 as Effective, despite Concerns Expressed by
Others about the Process:
Conclusion:
Recommendation for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Potentially Relevant Factors for Designating a
Jurisdiction or Institution as of Primary Money Laundering Concern:
Appendix III: Factors to Consider in Selecting Special Measures:
Appendix IV: Additional Information on Section 311 Cases:
Appendix V: Comments from the Department of the Treasury:
Appendix VI: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Potentially Relevant Factors to Be Considered When Designating
a Jurisdiction or Institution to Be of Primary Money Laundering
Concern:
Table 2: Issuance of Finding of Primary Money Laundering Concern,
Proposed Rule, and Final Rule for Section 311 Cases:
Figures:
Figure 1: Organization of the Terrorism and Financial Intelligence
Office:
Figure 2: Length of Time to Finalize or Withdraw Proposed Section 311
Rules:
Abbreviations:
AFMLS: Asset Forfeiture & Money Laundering Section:
BSA: Bank Secrecy Act:
FATF: Financial Action Task Force:
FBI: Federal Bureau of Investigation:
FinCEN: Financial Crimes Enforcement Network:
NCCT: Non-Cooperative Countries and Territories:
OFAC: Office of Foreign Assets Control:
TFFC: Terrorist Financing and Financial Crimes:
TFI: Office of Terrorism and Financial Intelligence:
USA PATRIOT: Uniting and Protecting America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism:
United States Government Accountability Office:
Washington, DC 20548:
September 30, 2008:
Congressional Requesters:
Countries with lax anti-money laundering regulation and enforcement
pose a national security threat to the United States because they
provide financial safe havens for criminal enterprise.[Footnote 1]
Money laundering--the process of disguising or concealing illicit funds
to make them appear legitimate--is an increasingly serious issue, with
new payment and communications technologies opening up the world to
transnational crime and creating new options for cross-border funds
transfers. Since September 11, 2001, the United States has established
a number of tools to address the threat of money laundering and
terrorist financing to the U.S. financial system. One of its new tools
was enacted in Section 311 of the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism (USA PATRIOT) Act of 2001.[Footnote 2] The goals of Section
311 include strengthening U.S. measures to prevent, detect, and
prosecute international money laundering and the financing of
terrorism. In particular, Section 311 provides a mechanism for the U.S.
government either to prohibit U.S. financial institutions from
maintaining correspondent accounts[Footnote 3] with a foreign financial
institution if the account involves jurisdictions or institutions found
to be of primary money laundering concern, or to require recordkeeping
and reporting on certain accounts. The Department of the Treasury
(Treasury) has implemented the Section 311 mechanism against eight
targeted financial institutions and three jurisdictions in eight
countries since 2002. Under the law, this mechanism was imposed in most
cases by rule-making-including notice of the proposed rule and a
comment period before the rule is finalized. However, particular
applications of Section 311 restrictions raised questions in Congress
about how effectively Section 311 was being used.
In this report, we (1) examined the process U. S. agencies used to
implement the USA PATRIOT Act Section 311 restrictions against targeted
financial institutions and countries and the results of these actions;
(2) assessed the process Treasury follows to determine whether to
finalize or withdraw a proposed rule; and (3) described how Treasury
assesses the impact of Section 311 restrictions.
To meet these objectives, we reviewed program documentation and
interviewed knowledgeable officials from key U.S. agencies at the
Department of Justice (Justice), Department of State (State), Treasury,
and the Board of Governors of the Federal Reserve System (Federal
Reserve) in Washington, D.C. We focused this performance audit on all
locations where the U.S. government has targeted financial institutions
or jurisdictions for Section 311 actions. These were Belarus, Burma,
Latvia, Macau, Nauru, Syria, Turkish Republic of Northern Cyprus, and
Ukraine. We met with U.S. and foreign government officials, and
representatives of financial institutions and financial institution
associations, and reviewed documents in Kyiv, Ukraine; Macau and Hong
Kong, China; and Riga, Latvia. We visited Kyiv, Ukraine; Macau and Hong
Kong, China; and Riga, Latvia, because they provided examples of
different applications of Section 311, specifically a targeted
jurisdiction and targeted financial institutions where Section 311
restrictions were finalized and withdrawn. Treasury provided us with
key documents it identified to show how it implemented its 311 process.
A detailed description of our scope and methodology is included in
appendix I of this report. We conducted this performance audit from
September 2007 through September 2008 in accordance with generally
accepted government auditing standards. Those standards require that we
plan and perform the audit to obtain sufficient, appropriate evidence
to provide a reasonable basis for our findings and conclusions based on
our audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives.
Results in Brief:
To implement USA PATRIOT Act Section 311, Treasury used an evolving
informal rule-making process that followed requirements set forth in
U.S. law and modified this process after 2005.[Footnote 4] However,
while Treasury's process from 2002 through 2005 considered statutory
factors established in Section 311,[Footnote 5] its process for
consulting with two U.S. agencies on findings of primary money
laundering concern sometimes made it difficult to provide meaningful
consultation during certain key phases of the process, according to
relevant agency officials. For the purpose of using the new Section 311
authority, Treasury independently developed a list of targeted
financial institutions derived from several sources. It next researched
evidence for each targeted institution on the list to consider factors
established in Section 311. As a result, Treasury issued a finding in
the Federal Register that each of the eight financial
institutions[Footnote 6] were of primary money laundering concern and a
proposed rule announcing its intent to apply restrictions on the
institutions. Before the proposed rule was issued for public comment,
Treasury provided it to Justice and State, agencies with expertise in
money laundering and international affairs, for consultation on the
finding, as required by the act. However, in some cases, these agencies
had limited time available to review documentary evidence--as little as
2 days--and in one case limited access to facilities for discussing
classified information within the short time frames, according to
Justice and State officials. In the absence of operational guidance
with set time frames for this consultation requirement, officials of
these agencies expressed concern over the amount of time and procedures
they had for consultation. Starting in 2006, Treasury changed its
targeting procedures and, with Justice, established an interagency
working group to discuss potential threats to the U.S. financial system
at an earlier stage in the process. However, it is unclear whether the
new procedures improved this aspect of consultation because Treasury's
current targeting process has not resulted in any new Section 311
findings since 2005.
Treasury determines whether to finalize or withdraw a proposed rule
under Section 311 by reviewing written comments and other information
it receives from interested parties in a process consistent with rule-
making requirements in the Administrative Procedure Act. However,
Treasury has taken years to complete this process for some cases, in
part because (1) there are no requirements for it to designate time
frames for when to complete the action and (2) agency officials were
unclear about lines of authority designating which office within
Treasury is responsible for finalizing or withdrawing proposed rules.
The duration of a proposed rule was significant because, in all the
cases we reviewed, U.S. financial institutions took immediate action on
the basis of an announced finding and proposed restrictions,
effectively implementing them before they were finalized.[Footnote 7]
Once a finding and notice of proposed rule-making are published in the
Federal Register, interested parties have 30 days to provide written
comments on the proposed rule to Treasury. The agency reviews the
comments it receives, considers them in its decision to finalize or
withdraw the proposed rule, and may sometimes meet with representatives
of the targeted financial institution and foreign government to discuss
their written comments or to receive additional information. However,
Treasury has taken as long as 5 years to complete these actions for 1
of 11 cases and as little as 4 to 5 months for 4 cases. As of February
2008, it had not completed action on three cases, which had remained
open for between 44 and 60 months beyond a 30-day comment period. By
April 2008, Treasury withdrew two of the notices of proposed rule-
making and officials said they are actively considering completing the
third. Officials at one Treasury office, identified by its officials as
being involved in making the determination to complete the Section 311
process, were not aware these cases were still open until we brought
this to their attention. Officials of a second Treasury office, which
Treasury attorneys identified as responsible for implementing Section
311, were aware that these three cases were open, as their status was
listed on the office Web site, but these officials did not believe that
they were responsible for finalizing or withdrawing them. Treasury
officials said that it has no written guidance specifically on
implementing Section 311 to clarify these responsibilities pursuant to
management control standards.[Footnote 8]
Treasury views Section 311 restrictions as effective, despite
acknowledging concerns expressed by U.S. and foreign government
officials, and representatives of financial institutions about the
process. Section 311 restrictions are intended to achieve (1) the anti-
money laundering goal of isolating target financial institutions from
the U.S. financial system and (2) a broader national security goal of
encouraging foreign governments to strengthen their anti-money
laundering laws and regulations, according to Treasury officials.
Treasury views Section 311 actions as effective in achieving the anti-
money laundering goal because U.S. financial institutions responded
immediately to notices that Treasury intended to issue a rule
prohibiting them from continuing business with a targeted foreign
institution. An immediate response makes good business sense to protect
banks from risks to their reputation and possible government penalties.
Treasury views Section 311 as effective in achieving the broader
national security goal because several foreign governments have
strengthened their anti-money laundering laws and regulations in
response to Section 311 actions targeted against financial institutions
in their jurisdictions. However, Treasury does not view concerns about
Section 311's implementation as having an impact on the achievements of
Section 311. For example, some foreign government officials we visited
expressed concern with the implementation of Section 311 as not
affording them an opportunity to bring their own law enforcement or
regulatory actions against targeted financial institutions and not
being given sufficient information to do so. Justice officials said
that in cases where application of Section 311 is perceived as
unsubstantiated, countries may be less likely to cooperate with the
U.S. government on other sanctions or law enforcement matters.
We are recommending that the Secretary of the Treasury establish
implementing guidance for Section 311 of the USA PATRIOT Act that would
specify the responsibilities and activities of offices within Treasury
for implementing and finalizing Section 311 actions.
Treasury said that it will take action to clarify its Section 311
processes in response to this report's recommendation, even though it
emphasized that the current coordination and implementation of Section
311 within Treasury components today has been significantly improved.
Although Treasury said that it has well-defined mechanisms in place to
implement Section 311, it nonetheless stated that the Under Secretary
of the Office of Terrorism and Financial Intelligence will ensure that
mechanisms for implementing Section 311 are clarified in response to
this report and its recommendation. Justice and State had no comments
on this report.
Background:
Section 311 is one of many legal and regulatory resources that the
United States uses to combat money laundering and financial crime. U.S.
laws and programs aimed at combating money laundering include the Bank
Secrecy Act (BSA), which includes Section 311 and authorizes Treasury
to promulgate regulations on the reporting and recordkeeping of certain
financial transactions; economic and trade sanctions implemented by the
Office of Foreign Assets Control (OFAC); and several Justice programs
focused on anti-money laundering. The United States is also a member of
the Financial Action Task Force (FATF), an intergovernmental body that
has created a comprehensive global framework for anti-money laundering
efforts and has called for countermeasures against countries that are
not complying with this framework.
These laws and programs, including Section 311, are part of a broad
U.S. money laundering strategy. Issued most recently in 2007, this
strategy states that it reflects the U.S. government's ongoing
commitment to attack money laundering and terrorist financing on all
fronts, including the formal and informal components of both the
domestic and international financial systems.[Footnote 9] The strategy
focuses on three major goals: (1) to more effectively cut off access to
the international financial system by money launderers and terrorist
financiers; (2) to enhance the federal government's ability to target
major money laundering organizations and systems; and (3) strengthen
and refine the anti-money laundering regulatory regime for all
financial institutions to improve the effectiveness of compliance and
enforcement efforts. The strategy includes, among other items, a
commitment to target countries and financial institutions that
facilitate money laundering and terrorist financing, including using
the full range of measures provided by Section 311 of the USA PATRIOT
Act.
USA PATRIOT Act Section 311 is currently implemented by Treasury's
Financial Crimes Enforcement Network (FinCEN). Until 2004, the Office
of Terrorist Financing and Financial Crime (TFFC) implemented Section
311, according to Treasury officials. Both offices report to Treasury's
Office of Terrorism and Financial Intelligence (TFI). This office
contains intelligence and enforcement functions and has the stated twin
missions of safeguarding the U.S. financial system against illicit use
and combating national security threats. Figure 1 shows the
organization of TFI.
Figure 1: Organization of the Terrorism and Financial Intelligence
Office:
This figure is a diagram showing the organization of the terrorism and
financial intelligence.
[See PDF for image]
Source: Department of the Treasury.
[End of figure]
Section 311 allows Treasury to require domestic financial institutions
and agencies to take certain special measures outlined in the provision
if it finds reasonable grounds to conclude that a designated foreign
jurisdiction, financial institution, or class of transactions is of
"primary money laundering concern."[Footnote 10] In making a finding
that a jurisdiction is of primary money laundering concern--in addition
to any information that the Secretary of the Treasury might deem
relevant--the Secretary is to consider seven potentially relevant
factors. These additional factors include the extent to which the
jurisdiction offers special bank secrecy or regulatory advantages to
nonresidents as well as the substance and quality of the bank
supervisory and anti-money laundering laws in the jurisdiction. In
making a finding that an institution, transaction, or type of account
is of primary money laundering concern, the Secretary is to consider-in
addition to any information the Secretary determines is relevant-three
potentially relevant factors, including the extent to which the
institution is used to facilitate money laundering and the extent to
which it is used to facilitate legitimate business. For a list of all
potentially relevant factors Treasury is required to consider, see
appendix II. According to the law, the Secretary of the Treasury must
consult with State and Justice before designating an institution,
jurisdiction, or class of transactions is of primary money laundering
concern.[Footnote 11]
Once an institution is designated as being of primary money laundering
concern, the Secretary of the Treasury is required to consult with a
variety of parties including the Secretary of State, the Chairman of
the Board of Governors of the Federal Reserve System, and other
appropriate federal agencies,[Footnote 12] to determine which of the
five available special measures to apply. The first four special
measures relate to requirements put on U.S. financial institutions or
agencies for record keeping, reporting, and collection of certain
financial information.[Footnote 13] The fifth special measure prohibits
U.S. financial institutions or agencies from opening or maintaining
correspondent accounts or payable through accounts for or on behalf of
a foreign bank if the account involves a designated jurisdiction or
institution.[Footnote 14] This special measure may be imposed only by
regulation. In selecting which special measures to apply, the Secretary
is required to consider four factors. These factors are listed in
appendix III.
The Administrative Procedure Act, which governs federal rule-making,
generally requires that notice of proposed rule-making be published in
the Federal Register.[Footnote 15] It also requires that, after the
notice is given, the agency provide interested persons an opportunity
to participate in the rule-making through submission of written data,
views, or arguments. After consideration of these submissions, the
agency is required to incorporate in the rules adopted a concise
general statement of their basis and purpose.
Process to Implement USA PATRIOT Act Section 311 Was Consistent with
Legal Requirements, but Some Agencies Expressed Concerns about
Consultation:
To implement USA PATRIOT Act Section 311, Treasury used an evolving
informal rule-making process that was consistent with requirements in
Section 311 and resulted in 11 cases in eight countries from 2002
through 2005. However, Treasury's process for consulting with two U.S.
agencies on findings of primary money laundering concern sometimes made
it difficult to provide meaningful consultation during certain key
phases of the process, according to Justice and State officials. In the
absence of established time frames, officials of these agencies
expressed concerns about the amount of time they had for consultation
about Section 311 findings. In addition, Treasury did not include these
other agencies with expertise in money laundering and international
affairs in developing its initial list of targeted financial
institutions. Starting in 2006, Treasury changed its targeting
procedures and, with Justice, established an interagency working group
to discuss potential threats to the U.S. financial system at an earlier
stage in the process. However, it is unclear whether the new procedures
improved consultation because Treasury's current process has not
resulted in any new Section 311 findings since 2005.
Treasury Developed Informal Rule-making Process to Implement USA
PATRIOT Act Section 311:
To implement USA PATRIOT Act Section 311, Treasury generally pursued
the following steps from 2002 through 2005 that evolved over time:
1. Identified target jurisdictions (countries) and financial
institutions that presented a potential threat to the U.S. financial
system because of money laundering or terrorist financing where Section
311 might be applied.
2. Conducted research to determine which of these jurisdictions or
financial institutions were "of primary money laundering concern" and
determined which special measures should be applied.
3. Drafted a finding and special measures, usually in a notice of
proposed rule-making.
4. Reviewed the proposed rule for legal sufficiency.
5. Consulted with relevant agencies (Justice, State, the Federal
Reserve, and other agencies) on a finding and the application of
special measures.
6. Obtained clearance to proceed from Treasury's management.
7. Published a finding or notice of proposed rule-making in the Federal
Register.
8. Received and reviewed comments.
9. Consulted, if applicable, with Justice, State, and the Federal
Reserve, on the application of special measure 5.
10. Finalized or withdrew the proposed rule, as appropriate.
Treasury officials said that they had no single established process to
implement Section 311, but developed informal rule-making processes
that evolved over time. Prior to 2004, all work on Section 311 cases
was conducted by the Office of Enforcement and was primarily the
responsibility of Treasury's Deputy Assistant Secretary for Terrorist
Financing and Financial Crime and his staff. At the beginning of 2004,
Treasury officials told us a decision was made to move the function of
building an administrative record of the supporting evidence associated
with each Section 311 case and proposed rule to FinCEN. However, TFFC
is still involved in making the determination of when a proposed rule
should be published, finalized, or withdrawn, according to Treasury
officials.
To date, Treasury has issued findings of primary money laundering
concern against three jurisdictions and eight financial institutions in
eight countries. The first finding of primary money laundering concern
was issued in December 2002 and the most recent finding occurred in
September 2005. The three countries in these findings were: (1)
Ukraine, (2) Nauru, and (3) Burma. The eight financial institutions in
these findings were: (1) Asia Wealth Bank (Burma), (2) Myanmar
Mayflower Bank (Burma), (3) Commercial Bank of Syria (Syria), (4) First
Merchant Bank OSH Ltd. (Turkish Cyprus),[Footnote 16] (5)
Belmetalnergo/Infobank (Belarus), (6) Multibanka (Latvia), (7) VEF
Banka (Latvia), and (8) Banco Delta Asia (Macau, China).
In all of the cases above, Treasury issued a designation of primary
money laundering concern. In all cases but one,[Footnote 17] Treasury
also issued proposed rules regarding the institution or jurisdiction
designated to be of primary money laundering concern. These rules
proposed that U.S. financial institutions employ Special Measure 5,
prohibiting U.S. financial institutions covered by the rule from
opening or maintaining correspondent accounts with foreign banks if the
account involved designated institutions or jurisdictions. Of the 10
proposed rules it issued under Section 311, Treasury later withdrew 3
and finalized 6, with one rule still outstanding. For additional
information on these countries and financial institutions, see appendix
IV.
Treasury Identified Targeted Institutions Where Section 311 Might be
Applied:
To implement the key first step of targeting areas of primary money
laundering concern, according to Treasury officials, Treasury
identified jurisdictions and financial institutions from several
sources. These were multilateral organization recommendations, U.S. law
enforcement investigations, joint strategy with State, and broader
national security concerns.
For the jurisdictions it targeted from 2002 through 2005--the countries
of Burma, Nauru, and Ukraine--Treasury officials said they relied
largely on recommendations from the FATF, an international body whose
purpose is the development and promotion of national and international
policies to combat money laundering and terrorist financing, as well as
on internal Treasury research and other sources. The first opportunity
to use Section 311 arose out of the FATF's Non-Cooperative Countries
and Territories (NCCT) process, according to Treasury officials. Once a
country was placed on the NCCT list, FATF member states, including the
United States, had an obligation to advise financial institutions in
their country to give enhanced scrutiny to financial transactions with
financial institutions on the FATF NCCT list. If after a year, a
country had not taken the appropriate measures to be removed from the
NCCT list, then FATF would request that its member countries place
additional countermeasures against the country, according to Treasury
officials. Treasury officials told us that prior to the passage of
Section 311, the United States had no real countermeasures to impose on
countries when FATF called for them. After Section 311 was passed,
Treasury decided to use the provision in response to the FATF's call
for additional country countermeasures. In early 2000, FATF called for
countermeasures against Ukraine and Nauru and, in 2003, called for
countermeasures against Burma. Subsequently, Treasury responded by
invoking Section 311 against all three countries, according to Treasury
officials.
For financial institutions it targeted, Treasury used a different
approach from that used for jurisdictions. It developed a list of
possible targets for the purpose of using the new Section 311
authority, according to U.S. government officials. In 2002 and 2003,
Treasury officials said, the Office of Enforcement, which preceded
TFFC, assigned each of its five to six staff to review a region of the
world in order to review intelligence reports and identify potential
targets in each region. Ultimately, the office produced a list of over
20 banks of money laundering concern that were potential targets for
Section 311 action. Treasury officials told us that their offices
developed the list of targeted financial institutions internally. While
Treasury officials said that they did not consult other agency
officials with expertise in money laundering and international affairs
in developing the initial list of targets, Treasury developed the list
from various sources, based on material developed by other agencies.
Treasury officials identified several sources as the impetus for its
findings of primary money-laundering concern for various financial
institutions.
* The finding against one bank occurred because there was an ongoing
FBI investigation of the bank, according to Treasury officials. They
said that this case was the first opportunity Treasury had to use
Section 311 in conjunction with law enforcement.
* The findings against two other banks emerged from a concern that a
foreign government was not reforming its anti-money laundering laws,
according to Treasury officials. They said that the U.S. government had
been concerned for some time with lack of anti-money laundering
controls in the country, but had not pursued the issue until it became
apparent that anti-money laundering controls were not going to be
addressed. At that point, Treasury met with State to develop a strategy
for dealing with the country's anti-money laundering control issues.
Following the Section 311 finding, the foreign government passed
legislation to improve its national anti-money laundering controls.
* The findings against two other targeted banks emerged from several
national security working groups and were part of a higher National
Security Council strategy for these particular countries, according to
Treasury officials.
After developing the target list, Treasury conducted research to
support a finding for each targeted institution on the list. If it
determined that it had enough evidence to support a Section 311
finding, it published a proposed rule in the Federal Register
identifying the institution as being of "primary money laundering
concern."
Treasury Process for Implementing Section 311 Was Consistent with Legal
Requirements:
Treasury's process for implementing Section 311 was consistent with
requirements set forth in the USA PATRIOT Act. From 2002 through 2005,
in accordance with USA PATRIOT Act Section 311, Treasury generally
considered the seven factors outlined in Section 311 when determining
whether a jurisdiction is of primary money laundering concern,
including the quality of bank supervision and anti-money laundering
laws in the jurisdiction. For example, for the jurisdiction of Burma,
Treasury found that Burma lacked a basic set of anti-money laundering
laws and that the Burmese Central Bank had no anti-money laundering
regulations for financial institutions. For proposed rules determining
whether an institution was of primary money laundering concern,
Treasury considered the three factors outlined in Section 311 for
financial institutions. For example, Treasury determined that the
Commercial Bank of Syria was being used to facilitate or promote money
laundering because numerous transactions were indicative of money
laundering passed through that bank. Treasury also determined that any
legitimate business activity at the bank was significantly outweighed
by the apparent use of the bank to promote money laundering.
When determining which special measures to apply under Section 311,
Treasury considered the four factors required by the law. For example,
Treasury considered whether similar action was being taken by other
nations or organizations, the burden of special measures for U.S.
financial institution compliance, the impact of special measures on the
international financial system, and the effect of special measures on
U.S. national security and foreign policy when it announced Section 311
special measures for Banco Delta Asia. Appendix II provides a more
detailed description of these factors. In addition, consistent with
Section 311 of the USA Patriot Act, Treasury's process for instituting
special measure 5 was imposed only through rule-making.
Two Agencies Noted Limited Opportunities to Contribute Their Views:
While Treasury met the statutory requirements of USA PATRIOT Act
Section 311 to consult with designated agencies, Justice and State
officials expressed concerns with the amount of time they had for
consultation about Section 311 findings in the absence of established
time frames.
Officials of two U.S. agencies expressed concerns about the amount of
time they had for consulting with Treasury on Section 311 cases prior
to issuing proposed rules. Before a proposed rule was issued for public
comment, Treasury provided it to Justice and State for consultation, as
required by the act.[Footnote 18] Though the consultations fulfilled
requirements under Section 311, Justice and State officials said that
consultations often occurred under short time frames, affording them
insufficient opportunity to provide meaningful input to the Section 311
process. Treasury established no operational guidance with set time
frames for this consultation requirement. For example, one Justice
official stated that Justice generally received an e-mail from Treasury
asking Justice if it wanted to comment on a proposed rule and setting
very tight time frames--in one case as little as 1 to 2 days--with no
explanation as to why time frames were so tight. Other Justice
officials said that the short time frame required that most of the
feedback from Justice to Treasury was oral, but that in one case
neither Justice nor Treasury had access to a Sensitive Compartmented
Information Facility to discuss classified information during the time
period provided. As a result, all conversations between the two
agencies needed to be general and could not be classified. This was
problematic because one Justice official said that most of Justice's
comments regarded evidence that was highly classified. Also, short time
frames made consultation difficult because they did not allow the
relevant Justice official who had reviewed the classified evidence time
to collect comments or concerns from other officials in Justice.
Treasury officials disagreed with concerns expressed about their
consultation roles. They stated their belief that Treasury coordinates
extensively. Treasury worked with other agencies on various cases. For
example, in one case, Treasury worked for months with the intelligence
agencies in developing the case and with State, including the Secretary
of State, on the designation, according to the officials. Treasury
officials said that they also consulted with State's Undersecretary for
Economic and Business Affairs as required. In addition, Treasury
officials said that they delayed one case because of law enforcement
interests in the targeted institution and that law enforcement equities
are a primary concern for Treasury. Moreover, Treasury said that it has
accommodated other agencies' concerns and always ensured that it did
not endanger the operational interests of law enforcement and the
intelligence community. Treasury stated that it had never gone forward
with Section 311 actions without consultation or over the objections of
other agencies.
Treasury Changed Its Process for Implementing Section 311:
In early 2006, FinCEN changed Section 311 procedures in order to make
better use of the staff's time, according to a Treasury official.
Targeted assessments of financial institutions that may be of primary
money laundering concern are now prepared instead of complete Section
311 packages. This is because preparing a complete package took
considerable time, according to this official, and then had to be
assessed to determine if there was sufficient evidence to justify a
finding and proposed rule. The process now begins when a request for
preparing an assessment comes from either (1) within FinCEN, based on a
daily FinCEN review of intelligence and public materials looking for
threats to the U.S. financial system or (2) other parts of Treasury or
other agencies with suggestions for a targeted assessment. In deciding
whether or not to prepare a targeted assessment, FinCEN first considers
whether an institution has access to the U.S. financial system. If not,
FinCEN takes no action to assess it. Once an assessment is prepared, it
is presented either to the Under Secretary for Terrorism and Financial
Intelligence or to the Director of FinCEN, or both, for a policy
decision on whether further action should be taken. None of the
targeted assessments has resulted in Section 311 actions, but Treasury
said it has selected other options to address these threats.
The second change in the implementation process was the formation of an
interagency working group to review suspect banks. This group developed
over time but formally began meeting in January 2008. According to the
Chief of Justice's Asset Forfeiture & Money Laundering Section (AFMLS),
he developed an informal working relationship with Treasury, primarily
through meetings with the Deputy Assistant Secretary of TFFC, on a
monthly or bimonthly basis. This evolved into a working group to review
suspect banks for possible anti-money laundering efforts, including
Section 311 actions. This process was formalized in the first 6 months
of 2008 and the working group has met about 6 times. The Deputy
Assistant Secretary for TFFC at Treasury noted that this group gives
the Section 311 process a broader perspective on suspect banks. The
Chief of Justice's AFMLS section also said that this working group is a
significant improvement over Treasury's previous process for
identifying banks for possible Section 311 action, which had not been
clear to Justice officials. The working group also allows Justice to
learn about possible Section 311 actions early, thus alerting Justice
to actions that could impact ongoing covert operations. The Justice
official noted that one of its goals for the working group is to
maintain anti-money laundering expertise and a law enforcement
perspective, since TFFC is not a law enforcement agency. The Justice
official emphasized that the group has good potential but that it will
take another 6 months to see how well it works.
Membership in the suspect banks' working group consists of a wide
variety of organizations. The Chief of Justice's AFMLS co-chairs the
group with Treasury's Deputy Assistant Secretary for TFFC. Other
members of the group are State (representatives from its division of
International Narcotics and Law Enforcement bureau); staff from TFFC
and FinCEN, and the international division at Treasury; and components
of the intelligence community. These agencies are the core group that
now attends all meetings, but other agencies may be also asked to
attend specific meetings. State was not initially at the first meetings
of the working group but had been invited after the first few meetings
when it became clear that its input was needed.
Treasury's Process for Implementing Section 311 Followed Requirements
of the Law but Took Years to Finalize Some Proposed Rules:
It has sometimes taken Treasury years to finalize or withdraw a
proposed Section 311 rule, though these delays are not inconsistent
with requirements under the law. This has occurred, in part because (1)
there are no requirements to designate time frames for completing
actions and (2) Treasury officials were unclear about which office in
Treasury was responsible for finalizing or withdrawing proposed rules.
Nonetheless, the Section 311 proposed rules had a significant impact
because U.S. financial institutions took immediate action on the basis
of their being announced, effectively implementing them before they
were finalized.
Treasury's Timeline for Issuing Proposed and Final Rules Follows
Requirements in the Administrative Procedure Act:
Though sometimes delayed, Treasury's process for issuing proposed and
final rules follows requirements in the Administrative Procedure
Act.[Footnote 19] The Administrative Procedure Act generally requires
that agencies issue a proposed rule in the Federal Register and that
they give interested persons an opportunity to participate in rule-
making through the submission of written data, views, or arguments.
Treasury officials said they reviewed all comments they received in
response to proposed rules. Officials said that in some cases, they
also met with affected financial institutions at the institutions'
request. Treasury then determines whether to finalize or withdraw a
proposed rule. This step is important because, in contrast to a
proposed rule, a final rule imposes legal requirements on U.S.
financial institutions. However, rule-making requirements of the
Administrative Procedure Act do not place any time frames on officials
specifying by when a proposed rule must be finalized or
withdrawn.[Footnote 20]
Treasury Took Years to Finalize Some Proposed Rules:
In some cases, Treasury took years to finalize proposed rules. For
example, as of February 2008, 3 of the 11 cases it had opened still had
not been finalized, with two open for more than 3 years (44 and 49
months, respectively) and one open for 5 years (60 months). These cases
contrast sharply with other Section 311 cases where Treasury took as
little as 4 months to follow up on a finding of primary money
laundering concern or a proposed rule. Figure 2 shows the length of
time proposed rules were open for all Section 311 actions. Additional
information on the date of issuance of findings of primary money
laundering concern, proposed rules, and final rules for all Section 311
actions is in appendix IV.
Figure 2: Length of Time to Finalize or Withdraw Proposed Section 311
Rules:
[See PDF for image]
Source: GAO analysis of Department of Treasury data.
[A] A finding of primary money laundering concern was issued against
Ukraine but no proposed rule was issued. The finding of primary money
laundering concern was withdrawn approximately 4 months after it was
issued on April 17, 2003, based on Ukrainian passage of anti-money
laundering legislation, its commitment to implement this legislation,
and the FATF's decision to rescind a call for countermeasures against
Ukraine.
[B] First Merchant Finance Ltd., First Merchant International Inc.,
First Merchant Trust Ltd., and FMB Finance Ltd. are subsidiaries of
First Merchant Bank OSH Ltd. The subsidiaries of First Merchant Bank
OSH were included in the proposed rule.
[C] The finding against Infobank includes Belmetalnergo.
[End of figure]
Treasury lacks operational guidance and clear lines of authority for
finalizing proposed rules, which may have contributed to the length of
time it took to do so. Federal government management control standards
require that agencies have policies and procedures for implementing
management directives and that agencies clearly define key areas of
responsibility throughout their organization.[Footnote 21] However,
Treasury does not have policies and procedures that provide operational
guidance as to when proposed rules should be finalized or other
procedures that Treasury staff should follow when implementing Section
311 actions. In addition, we observed that there are not clear lines of
responsibility as to which office within Treasury should finalize these
proposed rules.
Treasury officials said that they follow the law and rule-making
procedures outlined in the Administrative Procedure Act when
implementing proposed rules. However, as mentioned earlier, the law
provides no time frames to which officials are expected to adhere
between the issuance of a notice of proposed rule-making and a final
rule. Instead, Treasury officials told us that the events that occur in
a case and the priorities of the office implementing the rule affect
the amount of time that elapses between when a rule is proposed and
when it is finalized. For example, one FinCEN official said that his
work on finalizing a proposed rule was delayed when another Section 311
case became a higher priority. The proposed rule in this case was
eventually finalized after more than 3 years.
Several additional factors accounted for the interval of time between
issuing findings and proposed rules and finalizing or withdrawing them.
Staff at FinCEN said that often the decision to postpone a case is made
simply because there are not enough resources to concentrate on all of
the cases at hand. For example, one official said that he was working
on resolving the proposed rule-making for one bank when another case
began. Once the second case became a priority, work on the first was
put on hold so that all staff could work on the other case, since only
a few staff within FinCEN work on Section 311 cases, according to the
official. In addition, Treasury officials said, they extended a comment
period for two banks, while in another case, they postponed final
action on an institution for several months pending completion of a law
enforcement investigation. Also contributing to the interval between a
proposed rule and a final or withdrawn rule is that Treasury monitors
financial institutions on an ad hoc basis after a proposed rule is
issued. For example, in one case FinCEN required several months in 2007
to confirm whether banks under Section 311 restrictions were still in
business and an additional 9 months to withdraw the proposed rule after
receiving the information.
Treasury officials' uncertainty about clear lines of responsibility
added to delays in finalizing proposed rules. Both FinCEN and TFFC
officials told us Treasury has prepared no written guidance outlining
the responsibilities of each bureau for administering Section 311. In
addition, it appears that the bureaus have not determined their
respective responsibilities in finalizing proposed rules. For example,
in February 2008, three proposed rules were open, with two having been
open for more than 4 years beyond the 30-day comment period. Senior
TFFC officials were not aware that these cases were still open until we
brought this fact to their attention. In contrast to TFFC, FinCEN
officials were aware that these cases were open, as their status was
listed on FinCEN's website. In addition, a lack of clear lines of
responsibility led to confusion over the responsibility for closing
these cases. FinCEN officials did not believe that they were
responsible for closing them. They stated that TFI is responsible for
deciding when to decide to finalize or withdraw a proposed rule,
although FinCEN staff may sometimes take the initiative to suggest that
a rule be finalized or postponed. TFFC officials, on the other hand,
said that FinCEN was responsible for finalizing proposed rules. TFFC
officials followed up on the proposed rules that were outstanding after
we discussed the rules with them.[Footnote 22] Although Treasury stated
that it had started action to withdraw two of the proposed rules prior
to our discussion with TFFC, Treasury documents showed that FinCEN
previously had started to draft a withdrawal notice for one case in
2005 but never completed it, and had started again in October 2007 to
draft withdrawal notices for this and a second case, before issuing
them 6 months later.
In response to our observation of unclear lines of authority, senior
FinCEN and TFFC officials said that, pursuant to law and a related
Treasury order, FinCEN is the administrator of the BSA, of which USA
PATRIOT Act amendments are a part. Therefore, FinCEN is technically
responsible for administering Section 311. The Treasury officials added
that FinCEN coordinates closely with TFFC on all aspects of Section 311
rule-making.
Proposed Rules Had an Immediate Impact on Targeted Countries and
Financial Institutions:
Despite taking years to finalize in some cases, proposed rules under
Section 311 had an immediate impact on targeted institutions and
jurisdictions. Treasury, State, and Justice officials told us that once
a proposed rule is issued, almost all U.S. financial institutions
immediately implement it voluntarily, stopping financial transactions
with designated financial institutions or jurisdictions. Federal
Reserve and Treasury's Office of the Comptroller of the Currency
officials also said that U.S. banks often treat proposed Section 311
rules as final and generally cut off all financial interactions with
the targeted institution. Federal Reserve officials noted that this
response to a proposed rule is unusual and, within the context of BSA
requirements, appears to be unique to proposed rules under Section 311.
Officials explained that U.S. banks may be taking this action because
the proposed rule is associated with a finding of primary money
laundering concern and, in many instances, Treasury issued a finding
together with a notice of proposed rule-making. Because it makes good
business sense to protect banks from risks to their reputation and
possible government penalties, banks may discontinue business with
other banks labeled a primary money laundering concern to reduce their
reputational risk. Banks may be concerned that continuing business with
a bank labeled as of "primary money laundering concern" would
negatively impact their reputation. Moreover, U.S. financial
institutions must take publicly available information into account when
implementing their anti-money laundering programs and assessing risks.
In addition, banks are generally given a short time frame to come into
compliance with rules under Section 311 once they are finalized, so
they may cut off all financial interaction with a targeted entity when
the proposed rule is issued to ensure that they have minimized their
risk of non-compliance.
Foreign government officials and representatives from targeted
financial institutions in countries we visited also agreed that
proposed rules have an immediate impact on these institutions and
jurisdictions. Foreign government officials told us that, following the
issuance of proposed rules, U.S. correspondent accounts of targeted
banks were immediately closed. Bank representatives also told us that
the proposed rules had a significant impact on their business. Bank
managers from one targeted institution stated that the banks' deposits
had decreased by one third of their original amount 3 days after the
proposed rule was issued. In another case, a bank lost approximately 80
percent of its business as a result of a proposed rule, according to a
bank representative. Attorneys for targeted financial institutions with
whom we spoke emphasized that the amount of time between the proposed
and final rule is important to targeted institutions since a long delay
can weaken a bank financially. One legal representative noted that long
delays between the proposed and final rule can put a bank in a
financial position where it cannot afford to take legal action in U.S.
court opposing special measures if a rule is finalized against it.
Treasury Views Section 311 as Effective, despite Concerns Expressed by
Others about the Process:
Treasury views Section 311 restrictions as effective, despite concerns
expressed by others about the process. Section 311 restrictions are
intended to achieve (1) the anti-money laundering goal of isolating
target financial institutions from the U.S. financial system and (2) a
broader national security goal of encouraging foreign governments to
strengthen their anti-money laundering laws and regulations, according
to Treasury officials. Treasury views Section 311 actions as effective
in achieving both goals because U.S. financial institutions respond
immediately to proposed rules, and several foreign governments have
strengthened their laws and regulations in response to proposed rules.
However, Treasury does not view the long-term impact of proposed and
final rules, including negative foreign perceptions of their
implementation, as outweighing the observable achievements of Section
311.
U.S. Agencies and Foreign Governments View Section 311 as Effective:
U.S. and foreign government officials with whom we spoke said that they
consider Section 311 to be an effective anti-money laundering tool and
to have had a significant impact on target financial institutions and
countries. According to Treasury officials, Section 311 restrictions
are intended to achieve (1) the anti-money laundering goal of isolating
target financial institutions from the U.S. financial system and (2) a
broader national security goal of encouraging foreign governments to
strengthen their anti-money laundering laws and regulations.
Several U.S. government officials said that Section 311 was effective
in achieving the first goal of isolating targeted financial
institutions or jurisdictions from the U.S. financial system. For
example, one State official said that the imposition of Section 311 was
very effective for the majority of countries targeted because financial
systems in other countries were so closely tied to the U.S. financial
system. Generally, the imposition of a Section 311 action, beginning
with the issuance of a proposed rule, caused U.S. banks to voluntarily
cut off transactions with the targeted financial institutions even when
proposed rules were not finalized. In addition, the action has a
chilling effect on foreign investment through the bank or in the
country because the banking industry pays close attention to the
actions of U.S. financial institutions, according to the official.
Several U.S. and foreign government officials said that Section 311 was
effective in achieving the second goal because it influenced some
foreign governments to strengthen their anti-money laundering laws and
regulations. Officials specifically cited the Latvia, Macau, and
Ukraine cases as examples of this. For example, one Treasury official
noted that, after the Section 311 action occurred, the government of
Latvia worked closely with the U.S. Embassy and State to address
problems related to financial crime which had caused Treasury to issue
the Section 311 findings. While foreign government officials in these
countries did not dispute the statement, some said either that their
governments had already started to strengthen their laws and
regulations when the Section 311 action occurred, or that they had
responded as much or more to other actions, such as the FATF call for
countermeasures, than to the U.S. restrictions.
Concerns about Section 311 Exist Both in the United States and Abroad:
Despite the achievements observed from initial monitoring of Section
311 actions, we identified several concerns about the impact of Section
311's implementation. U.S. embassy officials with whom we spoke and
representatives of one targeted institution indicated that the impact
of the proposed rule continued on the institution and the country even
after the rule had been withdrawn. A number of U.S. banks have avoided
holding correspondent bank accounts with any banks in the country since
the Section 311 restriction was issued, according to embassy officials.
They noted that the issuance of Section 311 creates a large stigma
against banking with both the targeted banks under the proposed rule
and other banks in the country where the proposed rule was targeted.
Embassy officials said that several U.S. businessmen in the country
have been told by U.S. bankers that they decided to withdraw from doing
business in the country because of the Section 311 action. Foreign
banking officials stated that the proposed rule continued to impact the
country even though it was not targeted at the country specifically,
and the United States had acknowledged the government's efforts in the
anti-money laundering arena. One representative of a foreign
institution pointed out that the consequences of Section 311 action
against his country continue and may not have been intended. For
example, American banks continue to be hesitant to do business with his
country's banks and many have cut off business altogether. The official
said that he believes this is because American banks do not believe
that guidelines are clear as to what anti-money laundering standards
they should be following. In order to minimize the risk of
noncompliance with their regulators, many banks have stopped business
with his country's banks altogether, regardless of whether they believe
that a bank is following U.S. anti-money laundering standards.
Foreign regulatory and law enforcement agencies in some countries we
visited said that how Section 311 actions were implemented did not
provide them sufficient opportunity or information from U.S. government
sources to prosecute crimes or regulate the targeted banks. For
example, foreign government officials in one country that we visited
noted that there were many steps that the government's monetary
authority could have undertaken to put pressure on the targeted
institution to improve its anti-money laundering controls. These
actions might have solved the problem to the extent that the U.S.
government would not have had to take action, according to the
officials. The officials said that the monetary authority has the
ability to obtain information from financial institutions, attach
conditions to institutional operation, work with the Financial
Intelligence Unit[Footnote 23] to investigate financial crimes, and, in
more drastic situations, appoint an advisor or director to take over a
private bank. Treasury officials said that it discussed Section 311
actions with foreign government representatives when appropriate and
provided ample notice that a Section 311 action was forthcoming in some
cases. In some instances, however, such communications would be
inappropriate, according to Treasury officials. Treasury officials
noted that it is obligated under the USA PATRIOT Act to consider "the
extent to which that jurisdiction is characterized by high levels of
official or institutional corruption" when making a finding that a
jurisdiction is of primary money laundering concern.
Justice officials said that in cases where application of Section 311
is perceived as unsubstantiated, it harms the United States. Countries
may be less likely to cooperate with the U.S. government on other
sanctions or law enforcement matters if they feel that the United
States is acting in an unreasonable or unsubstantiated manner regarding
Section 311 or that the United States cannot articulate the standards
used to reach such a decision. In addition, when countries distrust
actions the United States has taken under Section 311, their trust in
U.S. actions in other areas is undermined. A Justice official noted
that there are times when Justice needs to request the assistance of
others based on classified information and sometimes it cannot
immediately reveal this information or its source. In these cases,
Justice needs foreign governments to trust the United States and act on
its requests. If trust in the U.S. government has been eroded due to
actions that appear to be unsubstantiated, then foreign governments may
be less likely to cooperate with Justice investigations.
In addition, some U.S. government officials, foreign government
officials, and representatives of banks in countries we visited,
characterized the imposition of Section 311 special measures as a
"political tool" and as sanctions. They saw Section 311 actions to be
more like unilateral U.S. sanctions used for political purposes than
law enforcement mechanisms used for anti-money laundering
purposes.[Footnote 24] Some similarities between Section 311 actions
and sanctions--such as their being unilateral, designation of targeted
persons or institutions, announcement of these designations in the
Federal Register, prohibition of certain financial transactions, and
denial of access to the U.S. financial system for designated parties--
may contribute to this perception. Also, an official of Treasury's
Office of the Comptroller of the Currency said that the only other
process in his view that was similar to the Section 311 process is
Treasury's OFAC sanctions process. Under such sanctions, according to
the official, banks also automatically stop doing business with an
institution once it is cited.
Treasury officials acknowledge that this perception exists but maintain
that Section 311 is an anti-money laundering mechanism, not a sanction.
In testimony in April 2008,[Footnote 25] the Under Secretary of the
Treasury for Terrorism and Financial Intelligence stated:
Treasury adopted a new strategy of using targeted, conduct-based
financial measures aimed at particular bad actors. I intentionally
refer to these targeted actions as "financial measures" rather than
"sanctions" because the word "sanctions" often evokes such a negative
reaction. These targeted financial measures are proving to be quite
effective, flying in the face of a widely-held historical view that
dismisses sanctions as ineffective, harmful to innocents, or both. In
the case of broad, country-wide sanctions that are often perceived as
political statements, it can be difficult to persuade other governments
and private businesses to join us in taking action.
Treasury reiterated its view that Section 311 actions are not sanctions
despite the perception that they are by some U.S. officials and foreign
governments. Senior Treasury officials regularly work to educate the
public and foreign governments that these actions are not sanctions,
according to Treasury officials. Treasury's OFAC administers the U.S.
sanctions programs, which operate under very different authorities.
Finally, some U.S. government officials and foreign government
officials we met with in countries where financial institutions had
been targeted felt that there were several financial institutions of
greater money laundering concern that had not been targeted and
suggested that Treasury targeted financial institutions that were
politically expedient rather than financial institutions that were of
the greatest concern. For example, officials we spoke with about two
countries we visited where financial institutions were identified for
Section 311 actions told us that other banks in those countries had
anti-money laundering controls that were as bad as, or worse than the
banks that were targeted. They noted that it was not clear why Treasury
chose the banks it chose as targets for Section 311 action. Treasury
officials explained that it was important for Treasury to have
flexibility in implementing Section 311 and that Treasury could have
targeted other banks in one country, for example, that were larger than
those it targeted. However, Treasury did not want to undermine the
country's financial system but that, by selecting the smaller banks, it
would still send the message to government authorities that they needed
to reform the country's anti-money laundering systems.
Conclusion:
U.S. government officials consider Section 311 to be an effective tool
in restricting access to the U.S. financial markets for financial
institutions or jurisdictions that are of primary money laundering
concern and in encouraging foreign governments to strengthen their anti-
money laundering laws and regulations. While using Section 311 has
helped achieve success towards these goals in specific instances,
shortcomings in Treasury's implementation of the law may be preventing
the law from achieving a greater potential. Without written operational
guidelines to clarify when to complete the Section 311 actions or clear
lines of authority for which office is responsible for completing the
action, Treasury has taken years to complete the Section 311 process
for certain cases. Because a proposed rule applying Section 311 in
practice has had the same effect as a final rule, Treasury may lack
incentive to finalize or withdraw such rules. More expeditious
completion of Section 311 cases could be an important counterbalance to
concerns about the Section 311 process by affected jurisdictions,
financial institutions, and other parties.
Recommendation for Executive Action:
In order to improve implementation of the Section 311 process, we
recommend that the Secretary of the Treasury establish implementing
guidance for Section 311 of the USA PATRIOT Act. This guidance should
specify the responsibilities and activities of offices within Treasury,
including the Office of Terrorist Financing and Financial Crime and the
Financial Crimes Enforcement Network, for implementing and finalizing
Section 311 actions.
Agency Comments and Our Evaluation:
We provided a draft of this report to Justice, State, and Treasury.
Justice and State had no comments on this report.
Treasury said that it will take action to clarify its Section 311
processes in response to this report's recommendation, even though it
emphasized that the current coordination and implementation of Section
311 within Treasury components today has been significantly improved.
It noted that some of the report's conclusions were based on actions
that occurred years ago and that current coordination and
implementation of Section 311 within components of Treasury's Office of
Terrorism and Financial Intelligence have addressed those actions.
Although Treasury said that it has well-defined mechanisms in place to
implement Section 311, it nonetheless stated that the Under Secretary
of the Office of Terrorism and Financial Intelligence will ensure that
mechanisms for implementing Section 311 are clarified in response to
this report and its recommendation.
We appreciate Treasury's commitment to continuously improve the
implementation of Section 311 as an important tool against money
laundering and believe this is responsive to our recommendation
regarding the need to specify the responsibilities and activities of
offices within Treasury for implementing and finalizing Section 311
actions. As our report noted, Treasury has modified the Section 311
process since its inception, and the current process for its use
differs in some significant ways from the process that Treasury used
for previous Section 311 cases. We have made some additional
modifications in our report to reflect technical comments that Treasury
provided for clarification.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies to interested
congressional committees, and the U.S. Attorney General, and the
Secretaries of State and Treasury. We will also make copies available
to others upon request. In addition, this report will be available at
no charge on the GAO Web site at [hyperlink, http://gao.gov]. If you or
your staff has any questions concerning this report, please contact me
at (202) 512-4347 or at yagerl@gao.gov. Contact points for our Office
of Congressional Relations and Public Affairs may be found on the last
page of this report. Staff acknowledgments are listed in appendix VI.
Signed by:
Loren Yager:
Director, International Affairs and Trade:
List of Requesters:
The Honorable Ileana Ros-Lehtinen:
Ranking Member:
Committee on Foreign Affairs:
House of Representatives:
The Honorable Christopher H. Smith:
Ranking Member:
Subcommittee on Africa and Global Health:
Committee on Foreign Affairs:
House of Representatives:
The Honorable Mike Pence:
Ranking Member:
Subcommittee on the Middle East and South Asia:
Committee on Foreign Affairs:
House of Representatives:
The Honorable Edward R. Royce:
Ranking Member:
Subcommittee on Terrorism, Nonproliferation and Trade:
Committee on Foreign Affairs:
House of Representatives:
The Honorable Dan Burton:
Ranking Member:
Subcommittee on the Western Hemisphere:
Committee on Foreign Affairs:
House of Representatives:
The Honorable Joseph R. Pitts:
House of Representatives:
[End of section]
Appendix I: Scope and Methodology:
To examine the process U.S. agencies used to implement the USA PATRIOT
Act Section 311 restrictions against targeted financial institutions
and countries, we interviewed knowledgeable officials from the Treasury
offices of Terrorist Financing and Financial Crimes (TFFC) and the
Financial Crimes Enforcement Network (FinCEN), as well as officials
from State, Justice, and the U.S. Federal Reserve System who had been
involved in the Section 311 process. We reviewed Section 311 of the USA
PATRIOT Act and the Administrative Procedure Act in order to identify
mandated requirements in law that Treasury must follow when it issues
and finalizes a proposed rule. We focused this performance audit on
locations where the U.S. government has targeted financial institutions
or jurisdictions for Section 311 actions. These were Belarus, Burma,
Latvia, Macau, Nauru, Syria, Turkish Republic of Northern Cyprus, and
Ukraine. We also met with foreign government officials in Riga Latvia;
Kyiv, Ukraine; and Macau and Hong Kong, China; as well as with
representatives of financial institutions in these countries that had
been targeted for Section 311 actions. These countries provided
examples of different applications of Section 311, specifically a
targeted jurisdiction and targeted financial institutions where Section
311 restrictions were finalized and withdrawn. We developed a data
collection instrument for Treasury to more quickly identify relevant
documents, including memoranda and emails. This helped us confirm that
Treasury followed the steps in its Section 311 process for each of the
cases for Belarus, Burma, Latvia, Macau, Nauru, Syria, Turkish Republic
of Northern Cyprus, and Ukraine. We also reviewed unclassified and
classified documents, including financial and investigative records,
that Treasury compiled in its evidentiary files for each case; State
cable traffic and its annual International Control Strategy Report on
money laundering and financial crimes; and reports and guidance issued
by the multinational Financial Action Task Force.
To assess the process Treasury used to determine whether to finalize or
withdraw a proposed rule, we interviewed knowledgeable officials from
TFFC and FinCEN, as well as officials from State, Justice, and the
Federal Reserve who were involved in the 311 process. We also discussed
this aspect of the Section 311 process with representatives of relevant
financial institutions in New York and Washington, D.C; Riga, Latvia;
Kyiv, Ukraine; and Macau, China. We reviewed public comments on
proposed rules that were issued under USA PATRIOT Act, Section 311. We
also met with officials of Ernst and Young, and Deloitte Touche
Tomatsu, two independent audit organizations that were hired by
targeted financial institutions to help them reform their anti-money
laundering controls. We reviewed documents identified by Treasury
through our document collection instrument as being key documents
related to the implementation of Section 311 in Belarus, Burma, Latvia,
Macau, Nauru, Syria, Turkish Republic of Northern Cyprus, and Ukraine.
To determine how Treasury assessed the impact of Section 311
restrictions, we spoke with knowledgeable officials from TFFC and
FinCEN as well as officials from State and Justice who had been
involved in the 311 process. We also met with foreign government
officials in Riga, Latvia; Kyiv, Ukraine; and Macau and Hong Kong,
China; as well as with representatives of financial institutions in
Latvia, Ukraine, and Macau that were impacted by 311 actions. Also, we
reviewed documents identified by Treasury through our document
collection instrument as being key documents related to the
implementation of Section 311 in Belarus, Burma, Latvia, Macau, Nauru,
Syria, Turkish Republic of Northern Cyprus, and Ukraine. We also
reviewed documentation, including sensitive and classified cable
traffic, which State provided for several 311 cases. State and Treasury
provided us with a combination of classified and unclassified documents
related to the cases.
We conducted this performance audit from September 2007 through
September 2008 in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform
the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Potentially Relevant Factors for Designating a
Jurisdiction or Institution as of Primary Money Laundering Concern:
The following table lists information the Secretary of the Treasury is
required to consider, in addition to any information that the Secretary
determines is relevant, when designating a jurisdiction or institution
to be of primary money laundering concern under USA PATRIOT Act Section
311.
Table 1: Potentially Relevant Factors to Be Considered When Designating
a Jurisdiction or Institution to Be of Primary Money Laundering
Concern:
Factors to Be Considered When Designating a Jurisdiction: 1. Evidence
that organized criminal groups, international terrorists, or entities
involved in the proliferation of weapons of mass destruction or
missiles have transacted business in the jurisdiction;
Factors to Be Considered When Designating an Institution: 1. The extent
to which such financial institutions, transactions, or types of
accounts are used to facilitate or promote money laundering in or
through the jurisdiction including any money laundering activity by
organized criminal groups, international terrorists or entities
involved in the proliferation of weapons of mass destruction or
missiles.
Factors to Be Considered When Designating a Jurisdiction: 2. The extent
to which the jurisdiction or financial institutions operating in that
jurisdiction offer bank secrecy or special regulatory advantages to non-
residents or non-domiciliaries of that jurisdiction;
Factors to Be Considered When Designating an Institution: 2. The extent
to which such institutions, transactions, or types of accounts are used
for legitimate business purposes in the jurisdiction.
Factors to Be Considered When Designating a Jurisdiction: 3. The
substance and quality of the administration of the bank supervisory and
counter-money laundering laws of the jurisdiction;
Factors to Be Considered When Designating an Institution: 3. The extent
to which such action is sufficient to ensure, with respect to
transactions involving the jurisdiction and institutions operating in
the jurisdiction, than the purposes of this subchapter continue to be
fulfilled and to guard against international money laundering and other
financial crimes.
Factors to Be Considered When Designating a Jurisdiction: 4. The
relationship between the volume of financial transactions occurring in
that jurisdiction and the size of the economy of the jurisdiction;
Factors to Be Considered When Designating an Institution: [Empty].
Factors to Be Considered When Designating a Jurisdiction: 5. The extent
to which that jurisdiction is characterized as an offshore banking or
secrecy haven by credible international organizations or multilateral
expert groups;
Factors to Be Considered When Designating an Institution: [Empty].
Factors to Be Considered When Designating a Jurisdiction: 6. Whether
the United States has a mutual legal assistance treaty with that
jurisdiction, and the experience of United States law enforcement
officials and regulatory officials in obtaining information about
transactions originating in or routed through or to such jurisdiction;
Factors to Be Considered When Designating an Institution: [Empty].
Factors to Be Considered When Designating a Jurisdiction: 7. The extent
to which that jurisdiction is characterized by high levels of official
or institutional corruption;
Factors to Be Considered When Designating an Institution: [Empty].
Source: USA PATRIOT Act.
[End of table]
[End of section]
Appendix III: Factors to Consider in Selecting Special Measures:
The following are the factors the Secretary of the Treasury is required
to consider when selecting special measures for jurisdictions,
financial institutions, international transactions, or types of
accounts of primary money laundering concern under USA PATRIOT Act
Section 311.
1. Whether similar action has been or is being taken by other nations
or multilateral groups.
2. Whether the imposition of any particular special measure would
create a significant competitive disadvantage, including any undue cost
or burden associated with compliance for financial institutions
organized or licensed in the United States.
3. The extent to which the action or the timing of the action would
have a significant adverse systemic impact on the international
payment, clearance, and settlement system, or on legitimate business
activities involving the particular jurisdiction, institution, class of
transactions, or type of account.
4. The effect of the action on United States national security and
foreign policy.
[End of section]
Appendix IV Additional Information on Section 311 Cases:
The following table shows the dates for each finding of money
laundering concern, proposed rule, and final rule issued in cases to-
date where the U.S. government has applied USA PATRIOT Act Section 311.
Table 2: Issuance of Finding of Primary Money Laundering Concern,
Proposed Rule, and Final Rule for Section 311 Cases:
Section 311 case: Country of Ukraine;
Date of finding of primary money laundering concern: 12/26/02;
Date of notice of proposed rule: N/A[A];
Date proposed rule finalized or withdrawn: N/A[B];
Time between proposed rule and finalization or withdrawal (months):
N/A[C];
Status of rule: N/A[D]; Special measure: 1 --4[E].
Section 311 case: Country of Nauru;
Date of finding of primary money laundering concern: 12/26/02;
Date of notice of proposed rule: 04/17/ 03;
Date proposed rule finalized or withdrawn: 4/18/08;
Time between proposed rule and finalization or withdrawal (months): 60;
Status of rule: Withdrawn;
Special measure: 5.
Section 311 case: Country of Burma;
Date of finding of primary money laundering concern: 11/25/03;
Date of notice of proposed rule: 11/25/ 03;
Date proposed rule finalized or withdrawn: 4/12/04;
Time between proposed rule and finalization or withdrawal (months): 5;
Status of rule: Finalized;
Special measure: 5.
Section 311 case: Asia Wealth Bank (Burma);
Date of finding of primary money laundering concern: 11/25/03;
Date of notice of proposed rule: 11/25/03;
Date proposed rule finalized or withdrawn: 4/12/04;
Time between proposed rule and finalization or withdrawal (months): 5;
Status of rule: Finalized;
Special measure: 5.
Section 311 case: Myanmar Mayflower Bank (Burma);
Date of finding of primary money laundering concern: 11/25/03;
Date of notice of proposed rule: 11/25/03;
Date proposed rule finalized or withdrawn: 4/12/04;
Time between proposed rule and finalization or withdrawal (months): 5;
Status of rule: Finalized;
Special measure: 5.
Section 311 case: Commercial Bank of Syria (Syria);
Date of finding of primary money laundering concern: 5/18/04;
Date of notice of proposed rule: 05/18/04;
Date proposed rule finalized or withdrawn: 3/09/06;
Time between proposed rule and finalization or withdrawal (months): 22;
Status of rule: Finalized;
Special measure: 5.
Section 311 case: First Merchant Bank OSH Ltd[G] (Turkish Republic of
Northern Cyprus);
Date of finding of primary money laundering concern: 8/24/04;
Date of notice of proposed rule: 08/24/04;
Date proposed rule finalized or withdrawn: 4/10/08;
Time between proposed rule and finalization or withdrawal (months): 44;
Status of rule: Withdrawn;
Special measure: 5.
Section 311 case: Infobank (includes Belmetalnergo) (Belarus);
Date of finding of primary money laundering concern: 8/24/04;
Date of notice of proposed rule: 08/24/04;
Date proposed rule finalized or withdrawn: Incomplete;
Time between proposed rule and finalization or withdrawal (months):
N/A[F];
Status of rule: Incomplete;
Special measure: 5.
Section 311 case: Multibanka (Latvia);
Date of finding of primary money laundering concern: 4/21/05;
Date of notice of proposed rule: 04/21/05;
Date proposed rule finalized or withdrawn: 7/12/06;
Time between proposed rule and finalization or withdrawal (months): 15;
Status of rule: Withdrawn;
Special measure: 5.
Section 311 case: VEF Bank[A] (Latvia);
Date of finding of primary money laundering concern: 4/21/05;
Date of notice of proposed rule: 04/ 21/05;
Date proposed rule finalized or withdrawn: 7/12/06;
Time between proposed rule and finalization or withdrawal (months): 15;
Status of rule: Finalized;
Special measure: 5.
Section 311 case: Banco Delta Asia (Macau);
Date of finding of primary money laundering concern: 9/15/05;
Date of notice of proposed rule: 09/ 15/05;
Date proposed rule finalized or withdrawn: 3/14/07;
Time between proposed rule and finalization or withdrawal (months): 18;
Status of rule: Finalized;
Special measure: 5.
Source: Treasury.
[A] Treasury did not issue a proposed rule for Ukraine.
[B] Treasury withdrew the finding of primary money laundering concern
on April 17, 2003. However, there was no proposed rule issued.
[C] There was no proposed or final rule for Ukraine. However, there was
4 months between the time the finding of primary money laundering
concern was issued and withdrawn.
[D] The finding of primary money laundering concern was withdrawn and
no proposed rule was issued in this case.
[E] Treasury did not issue special measures for Ukraine. However, the
finding of primary money laundering concern stated that Treasury
intended to issue a proposed rule with one or more of special measures
1 through 4.
[F] This proposed rule has been open for 49 months as of the date of
this report. Treasury officials stated that they are reviewing whether
or not to finalize or withdraw this proposed rule.
[G] First Merchant Finance Ltd., First Merchant International Inc.,
First Merchant Trust Ltd., and FMB Finance Ltd. are subsidiaries of
First Merchant Bank OSH Ltd. The subsidiaries of First Merchant Bank
OSH were included in the proposed rule.
[End of table]
[End of section]
Appendix V: Comments from the Department of the Treasury:
Department Of The Treasury:
Washington, D.C.:
Under Secretary:
September 22, 2008:
Loren Yager, Ph.D.:
Director:
International Affairs and Trade:
United States Government Accountability Office:
441 G Street NW:
Washington, DC 20548:
Dear Dr. Yager:
Thank you for the opportunity to review the draft Government
Accountability Office (GAO) report entitled "USA PATRIOT Act: Better
Interagency Coordination and Implementing Guidance for Section 311
Could Improve U.S. Anti-Money Laundering Efforts." The report examines
the implementation and impact of an important tool at our disposal to
protect the U.S. financial system from significant vulnerabilities:
Section 311 of the USA PATRIOT Act. As is evident in your report,
Treasury has used this authority since its enactment in 2001 to protect
the U.S. financial system from a wide range of threats – from money
laundering vulnerabilities in foreign jurisdictions in Asia, Eastern
Europe and the Middle East to North Korea-related illicit financial
activity. The continued improvement of the use of this powerful, but
relatively new, authority is a top priority for the Treasury
Department. We welcome your review with an eye toward helping us
improve the effectiveness of this tool.
Your report has confirmed our own views that the instances in which
Section 311 has been applied by the Treasury Department have furthered
its purpose of protecting the integrity of the U.S. financial system.
We appreciate the report's determination that the Treasury Department
process for implementing Section 311 was consistent with the legal
requirements of the USA PATRIOT Act and the Administrative Procedure
Act (APA), including regarding consultation with other agencies. In the
interest of improving the accuracy and completeness of your report, we
have submitted under separate cover suggested corrections to address
areas of the report that are factually incorrect or otherwise
imprecise. I would like to respond to the report's conclusion that more
formal guidance and coordination in exercising Section 311 authorities
is needed. As explained below in more detail, we believe that the
Treasury Department has well-defined working mechanisms in place to
implement Section 311. Nonetheless, I am taking the occasion of this
report and the recommendations it offers to re-clarify these
mechanisms.
The report explains how the exercise of the Section 311 authority has
evolved significantly from the time the initial actions were begun,
through the establishment of the Office of Terrorism and Financial
Intelligence (TFI) in 2004, and the subsequent operational development
of TFI. As part of its mission to enhance national security, TFI
harnesses all of the Treasury Department's authorities and resources to
identify and address threats to the United States and vulnerabilities
in the financial system that terrorist and other criminal organizations
can exploit.
Although I was not interviewed, given the GAO's concerns about the
relationship between TFI's offices on the question of Section 311
implementation and my role as the senior official within TFI, I believe
I am best situated to clarify any misconceptions. In my view, our
application of Section 311 has not only been, as you concluded,
consistent with all legal requirements and extremely effective, but
also that there is now a clear understanding within TFI about how to
employ this and other tools for specific issues and targets. In
practice, TFI successfully combines the expertise and knowledge of its
components, as well as other government agencies, to get the fullest
picture of potential targets. I chair several meetings each week with
the leadership of TFI components, where we examine the information
available to us about various threats and explore what authorities
should be employed to address them. I have made it a priority to
approach this process in an integrated way in which we first try to
understand the nature of the vulnerability or threat and then determine
what tool or tools we should use. Although Section 311 is a critically
important authority that Treasury can apply, there are numerous other
actions that we may take to effectively respond to a particular threat
or vulnerability. Each TFI office brings unique capabilities and
information to the table in this process. Just as one example, our
Office of Intelligence and Analysis (OIA) is a critical part of this
process through its expert analysis of information from the
intelligence community. We also draw upon the expertise of other
agencies in this process. On occasion this may mean arranging special
briefings from subject matter experts in other departments. In
addition, as you recognized, the Office of Terrorist Financing and
Financial Crimes (TFFC), co-chairs with the Justice Department an
interagency working group to enrich consultations on vulnerabilities in
the international financial system associated with particular
institutions or jurisdictions.
Once TFI has determined through this process that Section 311 is the
appropriate authority to respond to a particular threat or
vulnerability, the responsibility for regulatory actions under Section
311 authority is clear. The Secretary has delegated responsibility for
administration of the BSA, as amended to include the authority of
Section 311, to the Director of the Financial Crimes Enforcement
Network (FinCEN), pursuant to Treasury Order 180-01 of September 26,
2002. This responsibility includes the drafting of a finding of primary
money laundering concern, the drafting of a notice of proposed
rulemaking (NPRM) to impose special measures, the administration and
review of the NPRM public notice-and-comment period and evaluation of
comments received, and, as appropriate on the basis of the
administrative record, finalization of a rule or in some cases
withdrawal of the proposed rulemaking. Other regulatory
responsibilities of FinCEN related to Section 311 rulemaking but not
addressed in the report include ensuring compliance of U.S. financial
institutions with the statutory and regulatory requirements, and
consideration of enforcement actions in the event of failures to
comply. All of the foregoing are consistent with FinCEN's broader
exercise of its regulatory authorities for the administration of the
BSA, to make the U.S. financial industry vigilant and hostile to abuse
by criminals, terrorist financiers and other illicit actors. In
carrying out its regulatory responsibilities, FinCEN collaborates with
and relies upon the expertise of its sister offices within TFI.
While the report places great focus on the finalization of Section 311
rulemakings, it is important to keep in mind that the rulemaking action
is not an end in itself. The most successful exercise of Section 311
would be where the underlying threat is eliminated, making the final
regulatory action itself unnecessary. It is often the case that a money
laundering concern derives at least in part from deficiencies in the
laws of a foreign jurisdiction. Your report makes clear that individual
Section 311 actions we have taken have helped prompt other countries to
address and remedy certain deficiencies we identified. In that sense,
effective implementation of our strategy to address a particular
vulnerability often goes well beyond the regulatory process. Indeed,
complementary to, yet distinct from, a Section 311 action, TFI, and
TFFC in particular, will often develop a multi-faceted strategy
(sometimes involving coordinated action with other agencies and even
other governments) to address the identified deficiencies. Examples,
either alone or in combination, might include educating the responsible
government on the risks and vulnerabilities, offering technical
assistance, and providing support or applying political pressure on the
regime to improve the legal framework. Even where the jurisdiction
recognizes such deficiencies, addressing them appropriately can be
expected to take time.
It is important to keep in mind that dynamic when one considers the
time period that can elapse between the issuance of a proposed rule
under Section 311 and the finalization (or withdrawal) of that proposed
rule. As your report explained, there is no legal requirement under
Section 311, the APA, or otherwise in the context of most Government
rulemakings generally, to finalize proposed rules within a specific
time period. To attempt to establish a formulaic approach would not
further the purpose of Section 311. A final Section 311 rule is not
meant to be a retroactive punitive measure, but instead a proactive
measure to protect against risks. We will thus continue to take into
account in considering whether and when to finalize a rule, the extent
to which we see good faith progress towards mitigating underlying
risks, under the unique circumstances of each case.
Finally, I would like to address the report's observations on
consultation with other agencies for Section 311 actions. Most, if not
all, Section 311 actions have been the result of months of interagency
coordination. I can personally attest to the fact that this
consultation has sometimes involved coordination at the highest levels
of the relevant agencies. While we do not dispute that some individuals
in other agencies might have had varying degrees of involvement across
the range of Section 311 cases, we do not agree that the Treasury
Department's processes for consultation of Section 311 actions hindered
any agency's ability to provide meaningful input to those actions.
Treasury has not only consistently sought and received valuable input
from other agencies, we have responded to it. In some instances, we
have delayed proposed Section 311 actions, sometimes for months, due to
the concerns of other agencies. In other cases, we have determined,
based on the input of other agencies, that another course of action
would be more appropriate than using Section 311. As the report notes,
we have met in each case all statutory requirements for the use of this
authority, including requirements for consultation with other agencies
on proposed Section 311 actions. We also have consistently sought input
from other agencies earlier, and more often, than we are required to do
so, believing that input from a wide spectrum of experts can often
increase the chance of success of a Section 311 action.
For the foregoing reasons, we believe that some of the report's
conclusions on these issues may have drawn in significant part from
actions begun years ago that do not accurately reflect the coordination
and implementation of Section 311 within TFI today. Although I believe
this is a matter of agreement among all of TFI's leadership, I have
reconfirmed with TFI's component offices the importance of continuing
to operate in this manner as we go forward and will ensure that these
mechanisms are re-clarified in response to this report and its
recommendation.
Thank you for your efforts on this important issue, and should you have
any additional questions, please do not hesitate to contact me or my
staff.
Sincerely,
Signed by:
Stuart A. Levey:
Under Secretary:
Office of Terrorism and Financial Intelligence:
[End of section]
Appendix VI: GAO Contact and Staff Acknowledgments:
GAO Contact:
Loren Yager at (202) 512-4347 or yagerl@gao.gov.
Staff Acknowledgments:
Anthony P. Moran, Assistant Director; Jeffrey D. Phillips; Lucia
DeMaio; Karen A. Deans; Etana Finkler; Mary E. Moutsos; Mark C.
Speight; and David S. Dornish made key contributions to this report.
[End of section]
Footnotes:
[1] National Money Laundering Strategy for 2007 (U.S. Government,
Washington, D.C.: 2007).
[2] Pub. L. 107-56, 115 Stat 272 (Oct. 26, 2001).
[3] A correspondent account is an account established by a banking
institution to receive deposits from, make payments on behalf of, or
handle other financial transactions for another financial institution.
[4] Throughout this report, implementation refers to all aspects of the
Section 311 process, including targeting, publishing findings of
primary money laundering concern and notices of proposed rule making,
and publishing final rules and withdrawals.
[5] For example, one factor to consider is the substance and quality of
the administration of the bank supervisory and counter-money laundering
laws of the jurisdiction.
[6] In targeting the three jurisdictions--the countries of Burma,
Nauru, and Ukraine--Treasury cited recommendations from the Financial
Action Task Force (FATF), an international body whose purpose is the
development and promotion of national and international policies to
combat money laundering and terrorist financing as well as internal
Treasury research and other sources, according to Treasury officials.
[7] Financial institutions typically act immediately to comply with
these proposed rules.
[8] Federal management control standards require that the agency's
organizational structure clearly define key areas of authority and
responsibility and establish appropriate lines of reporting. GAO,
Standards for Internal Control in the Federal Government, GAO/ AIMD-00-
21.3.1 (Washington, D.C.: November 1999).
[9] U.S. Department of the Treasury, U.S. Department of Justice, and
U.S. Department of Homeland Security. The 2003 National Money
Laundering Strategy. This strategy was updated in 2007 as outlined in
the 2007 National Money Laundering Strategy (Washington, D.C.)
[10] All Section 311 actions applied as of the date of this report
concerned jurisdictions or institutions only.
[11] Justice, State, and Treasury officials described this consultation
role as reviewing and commenting on the evidence and documentation used
to support a finding of primary money laundering concern.
[12] In addition, under Section 311, the Secretary of the Treasury is
required to consult with the Securities and Exchange Commission, the
Commodity Futures Trading Commission, the National Credit Union
Administration Board, as well as other agencies and interested parties
as the Secretary finds appropriate. Federal Reserve officials said that
their agency's consultation role, and that of these other agencies, is
to comment on technical language in the rule related to banking
supervision, rather than to provide feedback on whether the finding is
justified. Officials said that when reviewing a draft rule, the Federal
Reserve considers (1) what the effect of the proposed rule will be on
the banking industry and (2) whether the language in the rule is clear
enough that its banks can easily understand and implement it.
[13] The first four special measures cover record keeping and reporting
of certain financial transactions, collection of information relating
to beneficial ownership, collection of information relating to certain
payable through accounts, and collection of information relating to
certain correspondent accounts.
[14] A payable through account is an account, including a transaction
account, opened at a depository institution by a foreign financial
institution by means of which the foreign financial institution permits
its customers to engage, either directly or through a sub account, in
banking activities usual in connection with the business of banking in
the United States.
[15] Regulatory proposals or proposed amendments to existing
regulations are known as "proposed rules." Notices of public hearings
or requests for comments on proposed rules are published in the Federal
Register, on the Web sites of the regulatory agencies, and in
newspapers and other publications. Once a regulation takes effect, it
becomes a "final rule" and is printed in the Federal Register, the Code
of Federal Regulations, and usually is posted on the Web site of the
regulatory agency.
[16] Subsidiaries of this bank included First Merchant Finance Ltd.,
First Merchant International Inc., First Merchant Trust Ltd., and FMB
Finance Ltd.
[17] For Ukraine, Treasury issued a finding and announced its intention
to issue a proposed rule applying special measures 1 through 4.
However, Treasury did not issue a proposed rule and withdrew the
finding against Ukraine 4 months later, based on Ukraine's passing anti-
money laundering legislation, its commitment to implement this
legislation, and the FATF's decision to rescind a call for
countermeasures against Ukraine.
[18] In making a finding that reasonable grounds exist for concluding
that a jurisdiction, financial institution, transaction, or type of
account is of primary money laundering concern the Secretary of the
Treasury is required to consult with the Secretary of State and the
Attorney General. When selecting special measures, the Secretary of the
Treasury is required to consult with the Chairman of the Board of
Governors of the Federal Reserve System, any other appropriate federal
banking agencies, the Secretary of State, the Securities and Exchange
Commission, the Commodity Futures Trading Commission, the National
Credit Union Administration Board, and in the sole discretion of the
Secretary, such other agencies and interested parties as the Secretary
may find to be appropriate.
[19] In the two earliest uses of Section 311 cases, Treasury first
issued findings of money laundering concern prior to making a
determination as to whether to issue a proposed rule. In one of these
cases (Nauru) it followed this finding with a proposed rule. In the
other case (Ukraine), Treasury rescinded the finding of primary money
laundering concern.
[20] See 5 U.S.C. § 553.
[21] GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
[22] Two of these proposed rules were subsequently withdrawn in April
2008. One proposed rule is still incomplete, but Treasury officials
said they are currently consulting with other agencies about whether to
issue a final rule.
[23] Financial Intelligence Units are special government agencies that
were created in several countries around the world to deal with the
problem of money laundering.
[24] A U.S. "sanction" is any unilateral restriction or condition on
economic activity with respect to a foreign country or foreign entity
that is imposed by the United States for reasons of foreign policy or
national security. For example, financial sanctions may be targeted
against persons designated as either weapons of mass destruction
proliferators or global terrorists, depending on which set of sanctions
is employed, and any transactions with them by U.S. persons are
prohibited. According to Treasury, the goal of this action is to deny
sanctioned parties' access to the U.S. financial and commercial
systems. Treasury or State can make designations under these financial
sanctions, which are published in the Federal Register.
[25] Testimony before the Senate Committee on Finance, Under Secretary
for Terrorism and Financial Intelligence Stuart Levey (Washington,
D.C.: Apr. 1, 2008).
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