February 2004; GAO-04-464R, Financial Crimes Investigations

November 2003; GAO-04-163, Terrorist Financing: U.S. Agencies Should Systematically Assess Terrorists' Use of Alternative Financing Mechanisms

September 2003; GAO-03-813, Combating Money Laundering: Opportunities Exist to Improve the National Strategy

Under Strategic Considerations, a more analytical and longer-term view of these issues is offered.

Tactical Considerations

The following sections select particular aspects of the current fight against money laundering and terrorist financing for comments and questions.

Reference Procedure for Terrorist Leads

". . . to identify financial leads or investigations with a nexus to terrorism or terrorism financing . . . ."

After a lead has been identified by DHS/ICE, then:

". . . all appropriate DHS leads relating to money laundering and financial crimes will be checked with the FBI . . . to enable the Section Chief of TFOS and the Deputy Section Chief of TFOS . . . to determine which leads should be provided to TFOS . . ."

It appears that the procedure which operates from leads to field investigations is as follows:

Identification of possible terrorist financing lead. Reference to Joint Vetting Unit (JVU). Reference to Terrorist Financing Operations Section (TFOS) Chiefs. Reference to TFOS operations. Reference to National Joint Terrorism Task Forces (NJTTF). Reference to Joint Terrorism Task Forces (JTTF) in the field.

Leads which arise within the FBI itself may skip the first two steps.

Three questions arise:

Is this the correct procedure?

From a sampling of the cases that have thus far gone through this or a similar procedure, what is the time taken from identification of a terrorist financing lead to reference to a JTTF field team?

Are investigations ongoing through this or a similar reference process or are they effectively retarded or placed on hold, pending case disposition?

In essence, is this process, or whatever process is operative, a matter of hours, days, weeks or months?

Federal Bureau of Investigation

In the May 2003 "Memorandum of Agreement" between the Department of Justice and the Department of Homeland Security regarding collaborative procedures concerning terrorist financing investigations, the Federal Bureau of Investigation (FBI) is designated to:

". . . lead terrorist financing investigations and operations."

In the March 2003 "Memorandum of Understanding Between the Intelligence Community, Federal Law Enforcement Agencies, and the Department of Homeland Security Concerning Information Sharing," provision is made to:

". . . ensure that all appropriate information and intelligence relating to terrorist financing is shared . . . ."

The FBI's responsibility is designated to begin at the point of "investigation" rather than in the development of "intelligence."

Jules Kroll, Chairman of Kroll Associates, the private investigation firm in New York, recently made the following observations:

I do think it is inappropriate and relatively ineffective for law enforcement agencies to be in the intelligence gathering business. I believe that most big city police departments do a good job investigating and making cases. I would say the same thing about the FBI. That is different than intelligence gathering work. The intelligence process takes a different mindset, a different set of behavior, a different set of analytical tools. I think we have to look at this really, really hard. On a national basis, I don't think that intelligence gathering domestically should be conducted by the FBI.

Are there any sensitivities that need to be addressed on these issues? Are there intelligence monitoring or oversight concerns that need to be addressed?

Two-and-a-Half Year Performance Review

From nearly nothing in place in September 2001, the United States, with the cooperation of allies and a largely sympathetic world community, has managed to push much of the financial resources of al Qaeda and selected other terrorist organizations out of the legitimate financial system. David Aufhauser, until recently General Counsel at the U.S. Treasury Department, put it as follows:

In broad strokes, al Qaeda is two-thirds less rich than they were when we started. Their budget is one-third of what it was when we started.

By any measure, this is a major accomplishment, with much of the credit belonging to the agents and personnel of Operation Green Quest. The enormous concentration of attention on this aspect of the global dirty money problem - terrorist financing - accounts for the good measure of success.

With similar efforts, the United States could also deplete the resources and disrupt the networks of drug dealers and other criminal syndicates who between them probably move more than $5,000 of dirty money for every $1 of terrorist money that moves. Should it ever be found that resources which are applied to investigating and dismantling terrorist financing become available for other deployment, then attacking these criminal organizations with equal resolve would well serve U.S. interests. Terrorists groups and criminal groups have been closely allied in recent years and indeed have incorporated each other's tactics into their own operations. Every group that is put out of business - drug, other criminal syndicates and terrorists -- reduces the universe of those who would harm the United States.

Alternative Financing Mechanisms

GAO's November 2003 report on Terrorist Financing states the following:

U.S. government officials both within and among agencies remain divided over whether there is sufficient evidence to establish a current link between al Qaeda and the diamond trade.

Douglas Farah, former Washington Post journalist and author of a forthcoming book, Blood from Stones: The Secret Financing Network of Terror, is the most knowledgeable American on the subject of diamonds and al Qaeda. He recently commented as follows:

The reason I came across this story was that I was on the ground in West Africa, something that the intelligence agencies were not at that time. They couldn't possibly know what was going on in the bush of West Africa. They had nobody on the ground there. Without people on the ground, you're not going to find out what's going on, and nobody cared at that point, because it didn't seem relevant. Their essential reaction has been that we didn't know this happened, so it didn't happen. It's been very difficult to get people to think outside of the box on this or try and reframe their thinking into how terrorism would actually operate. We still love to look at bank records. We still love to look at wire transfers. We still love to do all these things that we understand and that we know and that make sense to us.

Farah's thesis is either entirely convincing or sufficiently convincing to serve as the basis for a working hypothesis spurring further consideration. Al Qaeda's turn to diamonds, gold, drugs, the hawala system and more requires that the United States be as creative and quick witted as its adversaries. Are we thinking like terrorists, doing a good enough job anticipating their logical reactions to our actions?

Strategic Considerations

Dirty money is money that is illegally earned, illegally transferred or illegally utilized. If it breaks laws in its origin, movement or use, then it merits the label.

There are three forms of dirty money - criminal, corrupt and commercial.

The criminal component, which includes terrorists' money, is identified by a very broad range of "specified unlawful activities," meaning that if a person knowingly handles the proceeds of such activities, then a money-laundering offense has been committed.

The corrupt component stems from bribery and theft by foreign government officials.

The commercial component is money that intentionally breaks laws and evades taxes.

Drugs Crimes of violence, including terrorism Bank fraud Corruption And certain treaty violations

Two other types of crimes can be added to the list - mail fraud and wire fraud - if a mailed communication goes through the United States or if a wire transfer is handled within the U.S. clearing house system.

Racketeering Securities fraud Credit fraud Forgery Embezzlement of private funds Non-violent burglary Trafficking in counterfeit, contraband or stolen goods Alien smuggling Slave trading Sexual exploitation Prostitution Virtually all forms of tax evasion And more

This is at the heart of America's money-laundering issue, this difference between what we criminalize if it occurs within our borders and what we criminalize if it occurs beyond our borders. This is where the core of the problem rests.

An example can serve to clarify the point. Suppose an American banker or financial executive or businessperson goes to a foreign country to call on potential customers. Take Singapore for purposes of illustration. The American calls on a wealthy gentleman in Singapore who says to him the following:

I'm a businessman. I make my money by smuggling aliens, both female and male, out of western China and southern Russia and putting them into the sex trade and into sweat shops in Thailand, Korea, Japan and elsewhere. I have a great deal of money on deposit here in Singapore, but I would prefer to have it in the United States under the management of an organization such as yours. Can you take my money?

The question is, is there a violation of U.S. anti-money laundering laws in taking this kind of money? The answer is no. Handling such proceeds does not violate U.S. anti-money laundering legislation.

This example is especially edifying when it is taken a step further. Suppose the Singapore-based businessman uses these aliens he's bringing out of China and Russia to smuggle drugs into Southeast Asia. And suppose these drugs are supplied by al Qaeda. There is no clear-cut requirement for the American to ask more detailed questions that might lead to knowledge of this businessman's ancillary activities.

In other words, this individual is an admitted alien smuggler and an unadmitted drug smuggler and terrorist facilitator, and he's about to do business with the United States.

Note that this individual does not have to clean his money. All he has to do is make it look like his money does not fall into one of the very few prohibited categories under U.S. law.

With U.S. anti-money laundering definitions as porous as they are, it's little wonder that U.S. Treasury Department officials estimated on background that 99.9 percent of the foreign criminal and terrorist money that is presented for deposit in the United States gets into safe and secure accounts. In other words, our anti-money laundering efforts at the point of deposit are unsuccessful 99.9 percent of the time.

The idea that is at the heart of our anti-money laundering efforts is flawed. The idea that we can successfully curtail a few classes of dirty money that we don't want, while at the same time cultivating and facilitating a much broader range of dirty money that we are willing to accept, is ultimately unworkable.

Many bankers and executives say that they would not accept such funds as I have described, regardless of whether or not the funds are proscribed under U.S. law. Then it would be appropriate for these bankers and executives to join with the administration in supporting a broadening of the list of offshore specified unlawful activities presently not included in U.S. law.

Eventually, the United States must consider the kind of anti-money laundering coverage that prevails in Canada and has been adopted by the European Union to be enacted by its member countries. The Canadian anti-money laundering law, for example, eliminates any distinction between what occurs in-country or out-of-country and refers instead to:

"an act or omission anywhere that, if it had occurred in Canada, would have constituted a designated offence."

For anti-money laundering to be effective, it must cover the whole of the dirty-money issue.

Facilitating Structures

All three forms of dirty money - criminal, corrupt and commercial - use the same mechanisms to move through the international financial system:

False documentation Dummy corporations Tax havens Offshore secrecy jurisdictions Shell banks Trade mispricing Numbered accounts Concentration accounts High-value portable commodities Informal transfer systems And more

The U.S. Patriot Act contains many provisions helpful in the fight against dirty money. It adds handling the proceeds of foreign corruption to the list of specified unlawful activities. It bars transfers from shell banks into the United States or through other banks into the United States. And it strengthens methods by which the United States can seek out and seize terrorist money.

The Patriot Act does not, however, materially change the structure that is available to and utilized by drug dealers, other criminals, terrorists and tax evaders. Essentially, the mechanisms that have been used for years, with the exception of transfers originating in shell banks, are still used.

As stated earlier, the United States has done a creditable job of pushing the resources of certain identified terrorist organizations largely out of the legitimate financial system. We have not, however, made it any more difficult to recreate the type of entities and mechanisms that have contributed to the handling of terrorists' proceeds in the past. Still available to be used by terrorists, and every other type of criminal and tax evader, are the dummy corporations, nominee directors, veiled shareholders, tax havens, financial secrecy jurisdictions, trade mispricing arrangements, foundations, flee clauses, and much more.

These same types of arrangements are, of course, also used by tax evaders in the United States to send proceeds offshore.

After September 11, 2001, the United States traced accounts utilized by al Qaeda and shut many of these accounts down. This was an after-the-fact process. Yet, little prevents al Qaeda or another terrorist organization from forming a new set of dummy corporations and banks and repeating the processes used to finance past attacks. The available structural options remain intact.

Eventually the United States must consider carefully the implicit cost-benefit equation. Do the supposed benefits arising from offshore mechanisms utilized to hide money, evade taxes and facilitate inflows to the United States offset the costs of use of these same systems by drug dealers, criminal syndicates, corrupt officials, foreign tax evaders and, worst of all, terrorists?

Can the case be made that dirty money or any part of it is good for America? If the case cannot be made, then I assume all Americans are in agreement. We don't want it.

David Aufhauser, referred to earlier, recently said the following:

I actually believe it's impossible - impossible - to overstate the importance of the war on terrorist financing when you speak about the war on terror.

If this view is shared by all, then everything - everything-that contributes to terrorists financing should be on the table.