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The War on Terrorism: The Financial Front [Rush Transcript; Federal News Service]

Speakers: David D. Aufhauser, Global General Counsel, UBS Investment Bank, Sue E. Eckert, Senior Fellow, The Watson Institute for International Studies, Brown University, and John B. Taylor, Mary and Robert Raymond Professor of Economics,, Stanford University
Presider: Maurice Sonnenberg, Senior International Adviser, Bear Stearns & Co./Greenberg Traurig LLP
January 10, 2007
Council on Foreign Relations

Council on Foreign Relations, New York City, New York

January 10, 2007

MAURICE SONNENBERG: Good afternoon. First of all, let me thank you on behalf of the Council for attending today. And I can tell you we've got quite an exciting program.

Let me first start by introducing Sue Eckert. Sue Eckert was formerly the assistant secretary of Commerce in the Clinton administration. Her responsibility was basically export control policy and defense industrial programs. Currently, she is a senior fellow at the Watson Institute at Brown University, and has a forthcoming book entitled, "Countering the Financing of Global Terrorism."

To the left of her is John Taylor. John served as U.S. undersecretary of the Treasury in charge of international affairs. That included such activities as currency markets, trade and financial services, international debt, and oversight over IMF and World Bank activities. Currently, he is the Raymond Professor of Economics at Stanford University, and he's also a senior fellow at the Hoover Institute.

I would add now that I've just finished reading a book of his. It is brilliantly written, very informative. And it's called, "Global Financial Warriors." And I gather it's on sale outside. (Laughter.) I highly recommend it, particularly to those members of the fourth estate who are here who need a little more knowledge on some of the subjects that don't generally get printed that are in his book.

Lastly, David Aufhauser. David served as general counsel to the U.S. Department of Treasury. He had 1,400 lawyers reporting to him; such agencies as the Bureau of Alcohol, Tax and Regulation; FinCEN, known as Financial Crimes and Enforcement Network; the Office of Foreign Asset Control, known as OFAC; the U.S. Mint; and the Office of Terrorist Financing. He had a direct role in matters involving the U.S. Bank Secrecy Act, and implementation of the Patriot Act in these areas. He currently is managing director of UBS, and serves as general counsel to their Investment Bank.

So, let's begin.

John -- and then let's add into it -- how would you measure progress today in this area, and where do you think we need to go in this area? Particularly, we look at terrorist financing and we find it a rather cheap way to commit an act. Would you like to just give us a general view on that, please?

JOHN B. TAYLOR: Well sure. I think maybe one place to begin is with what's actually happening right now. You may have seen in today's papers, the Journal and The New York Times, a report of an action against an Iranian bank, Bank Sepah, for dealing with missile activity -- financing missile activity in Iran. And this is a continuation, if you like, of a very much renewed focus on using the financial system to combat terrorism, broadly speaking. And all our evidence is this is successful and actually a very important part of the war on terror.

The effort, I think, began -- you can think of this recent action reported this morning, taken yesterday, as a continuation of something that began right round 9/11. Basically, I think the world changed in many ways around 9/11, but in this particular case there was much more effort to focus on using the financial system to combat terrorism. It's actually one of the main topics of the book that Maurice mentioned. The first chapter of my book is "The First Shot" -- called "The First Shot in the War on Terror" -- and it is when on September 24th, 2001, the president took action to freeze the assets of al Qaeda. And since then, it's expanded and gone in different directions -- actually, one of the most successful international cooperation efforts I've ever seen, as a student of international financial for quite a while. So that's the first place to begin. Think of this as a longer process, I think.

And you're right, Maurice, the focus has been mainly on the formal financial system: freezing assets; also tracing assets, tracing the money through the financial system -- the intelligence aspect of this. So part of the -- one of the programs set up back in 2001 was the program to use the SWIFT system to track information through the financial system. And it's another example of international cooperation.

So it seems to me that if you like measures of performance, this has been going well. Actually, objectively speaking, the 9/11 commission gave report cards to the various things that are going on in the war on terror, and speaking as a professor now, they're tough graders. They gave a lot of F's. We don't give too many F's anymore in academia. They gave a lot of F's, and they gave some D's. They gave some C's. They're so tough they only gave one grade in the A range, an A minus, and that was for this activity of terrorist financing. So someone else thinks it's working well. In fact, the Council on Foreign Relations had a report in 2002 which gave this activity high marks, if you like, so I think it's important.

Now, in terms of where yo go from here, maybe talk about that later, but it's still more outside of the financial system; formerly the hawala dealers, the cash carriers, that you need to focus more on. But I think -- in fact, one of the purposes for me doing this book was to document, you know, where it's been successful and where it hasn't and why. And I think now this is a timely period to look at this. You've got the president speaking tonight about issues in this area. The new Congress wants to implement the 9/11 recommendations as part of their agenda.

Well, I would say let's be sure that we don't forget this part of it; because it is successful, it needs to bolstered, if anything funded more, because I think it can be very powerful.

SONNENBERG: David and Sue, do you want to add anything to that?

DAVID D. AUFHAUSER: A little more color to John's remarks. First, his book really is good; you ought to read it. (Laughter.)

Second, you can't emphasize enough the comment that John made that 9/11 presented a different paradigm in terms of defending the country because it literally altered the DNA of threat or of war. And we quickly, in the administration -- and it wasn't us exclusively -- realized that you needed a different kind of alliance to fight these kinds of wars, and that bullets and blood wasn't all that could be thrown at it.

The financial borders quickly became a focus of the president's concern, and Paul O'Neill and John and myself. And if you think about it, there are three or four reasons why it's so open to use in this new war.

One is it's useful for targeting specific transfers of funds for which you have intelligence and believe the funds are intended to kill people, and therefore, you might be able to stop a calamity.

Two, it's extremely useful in tracing and investigating mere suspicions so that you might also similarly prevent a calamity that you don't yet have definition on, and the reason it's useful is that the evidence that the financial system coughs up is actually true and correct; it doesn't lie. There's not much room, wiggle room for it being false or suspect, as opposed to the kind of evidence you might get out of extreme measures in interrogation rooms.

The third reason is, while it's foolish to think that you might be able to deter the kind of person who would strap a bomb on their back and walk into a restaurant and commit suicide to kill people, there was some sense that there was still room for some "in terrorem" deterrent effect to fight terrorism in the world of finance because there was evidence that -- at the beginning anyway -- that there was a centralized banking source of funds; and that those people enjoyed their plausible deniability of connection, and that if you could unmask them and shame them and perhaps threaten their assets, you could have a profound impact on deterring actually the planning and the execution of acts of terrorism.

A final point why it became such a singular focus, particularly of the president who got it the first day, John, after 9/11, was that it's difficult -- and this may be a bias or prejudice of being in the financial community now -- it's difficult to think of another area of commerce or personal enterprise outside of personal relationships and families where the element of trust, and the element of integrity, and the virtue of a good name has more value and where it can evaporate overnight.

And when John alluded to -- and therefore, you have for the first time the possibility of arming us with an asymmetrical force to fight the asymmetrical force that we see in terrorism. So when John spoke about the action taken against the bank in Iran, I don't know much more than you do about it, having read the papers, but I know a lot more about the action that preceded it, which was its precedent, which is the action the Treasury Department took several months ago against the Banco Delta Asia in Macau. That was an exercise under the Patriot Act, in terms of the wisdom of the Patriot Act, exercise on the Patriot Act of a rule-making by the Treasury Department, a mere proposed rule. It hasn't gone final.

Well, the Treasury Department put out a record of substantial evidence that North Korea had engaged in substantial counterfeiting activity, drug activity and profiting from proliferation. On the basis of that, they also discovered that much of the money generated from those three otherwise pedestrian kinds of criminal conduct were being deposited into this bank in Macau, and that the bank in Macau had just basically been bought to be blind and not to exercise any kind of due diligence on the nature and the character of the money that was flowing through it. And they used that bank not only for a deposit base but, of course, for access to the international financial markets through various correspondent banks around the world.

The announcement of the proposed rule-making resulted in the following, and this is an enormous power and a strangling power. Every correspondent relationship with that bank with regard to North Korea's funds ceased around the world, because no international bank or money center bank wanted to be associated possibly with the activity that had been disclosed. Second, because of that, there was a run on the bank locally. Third, as a consequence, the Macau banking authorities put the bank into receivership and froze the $24 million of funds that the North Koreans had there.

And I might say, I think the government of Macau did that for another reason. The proposed rule-making focused on the Bank of Macau as a primary money-laundering concern, which is a term of art in U.S. law. But it probably forecast that the jurisdiction itself might be named as a primary money-laundering jurisdiction, which has profound commercial and financial impact on a jurisdiction and really shuts it down. And Macau was looking at that at the very time when they were building 12 casinos and the like, and it wouldn't have been a very good idea.

So you have this exercise of (Section) 311 strangling literally North Korea's access to the financial marketplace. And if you think about it, what an elegant and powerful tool to put in the hands of fighting terror. And terror in this case is the proliferation activity of North Korea.

And I think you're going to see more of it. Today's activity in Iran is proof of it. There's more that John alluded to, but I'll let Sue answer, and then we'll talk

SONNENBERG: Sue, do you want to answer that, or shall I go to the next question?

SUE E. ECKERT: Well, let me, if I could, just add to it, because I think that there is a great amount of agreement that the effort that was undertaken after September 11th was a very impressive global effort to focus on these important issues and the importance of financing on terrorism. And they have been largely successful. I think that you have seen through their 9/11 commission but also the Public Discourse Project, et cetera, that they have had very real effects. And that's been very important for our security as well.

However, there also have been some issues or some critiques of the current system. What we have seen is the shutting down of the formal sector. I mean, I think that that's largely to the -- the result of the good work that has been undertaken by the U.S. and the UN, the U.S. working multilaterally.

However, there are issues with regard to implementation. There are issues from -- that stem from some of the early legal designations that have complicated the use of the tool. The tool of financial sanctions and freezes is a very potent tool. And I think, as both John and David have spoken, this is something which is going to remain an important part -- and in fact is forevermore an important part -- of our security.

But there's also been issues where we need to take stock of what we have achieved to this point. The book that my colleague Tom Biersteker -- who was a member of the Council on Foreign Relations task force that looked at terrorist financing several years ago -- what we have done is to try to assess five years after what has happened, what's been the response, and where we might need to make some changes.

And I think that in that regard, going forward, we know that al Qaeda and the nature of the terrorist threat have changed. The nature of the funding for the terrorists have changed.

And therefore it's a legitimate time to look and see whether the regulatory policy that's still primarily focused at the formal financial sector is the appropriate and the most effective way to proceed, or are there ways that we can in fact enhance it?

In this regard, looking at issues going forward, such as cash, issues that we've seen in Iraq, and most recently in Lebanon; looking at informal mechanisms, such is informal value transfer systems; looking at trade diversion, which is an issue which has not received a great deal of attention, but under-invoicing, things like that; the use of commodities, any kind of illicit activity, which we've increasingly seen terrorists move from the formal sector into the informal sector and to criminal self-financing mechanism.

So it's time -- where we have come out largely is it's that there's been very good success but there's also an opportunity to re-evaluate whether or not we can move forward in a more effective way, and that's hopefully some of the issues that we'll get into.

SONNENBERG: Why don't we follow up on that a little more, and that is, let's talk about the donors, the fundraisers and the facilitators.

Now, you've done that in the formal sector, so I wanted to press this a little more. In Anbar province, for example, it's come out -- there are something like 72 Export-Import Banks that are engaged in business, primarily as phony companies. They set up the profits of which then go into -- ironically, it's in a Sunni province, which means that in the Shi'a area of Iraq, their activity is even greater, the hawala system.

And the question of it being international -- for example, 9/11 is an international. Bali's probably international. But Madrid and London are local. Would you go into some of that? Why don't we start with you, and then just go down with the rest of the panel.

ECKERT: Well, I think -- and in fact that's exactly the point that was being made, that what we have to do is continually adapt the regulatory policies to the way the terrorists are actually raising funds.

As we saw in Madrid and London, those were financed largely through criminal activities, and there was not transborder movement of funds. And I think it's also -- one thing that's important to keep in mind is that the objective of stemming the financing of terrorism, I think, everyone can agree on. It's a very important and growing part of our security. However, there are limits to what we can expect of the tool. It's a powerful tool, but it does not -- you know, it is used in conjunction with intelligence, law enforcement and military action, and so there are limits to what we can expect to achieve, based on some of the problems that you've identified.

In fact, that -- that's the situation that we've most recently experienced is had all of the recommendations of the 9/11 commission and all of the regulatory action that was taken after 9/11 been in place, we still would have had a number of the activities not found. So it points to the fact that we have to do is have a regulatory system that constantly re-evaluates what the risks are and makes appropriate adaptations.

SONNENBERG: John or David, any additions?

TAYLOR: A couple of comments.

First of all, regarding Anbar province -- I think about it a lot these days, because my son's in the Marines there at this point in time. But the specifics on the financial areas in Iraq, I think you have to realize that given all the security problems that we have there that the financial system is working remarkably well. It's really amazing. And I think that's largely because of this activity that took place right after the military action began, which was to set up a new central bank and provide a new currency, which is really also part of the financial aspects of this war, quite frankly, is to make sure the financial system is working as best it can in such a difficult environment.

You can imagine -- people from my office went to Baghdad in April of 2003, and I have a picture of what the central bank looked like in April of 2003. It was a blown -- it looked the South Bronx 25 years ago. It was unbelievable. And they went in there and they got the bank running again, a whole new currency. And that's one reason why just last week you read an article in Newsweek that's called "The Mother of All Surprises." What's "The Mother of All Surprises"? The Iraq economy is doing remarkably well, given the difficult situation.

So on the financial side, I think you have to think about these other positive things as well. And I -- when you say there's a bunch of Ex-Im Banks working in Anbar province, my first thought is, "Terrific. They're getting some business activity." But I realize there's some bad to that, too, you know.

ECKERT: (Laughs.)


AUFHAUSER: Look, I have a trite answer.

First, you do what you can do, is the answer. The focus on the recorded banking system has been enormously productive and helpful, and it has succeeded in making the transfer of value to kill people more difficult. It's no longer possible to do it by hitting a button and having a digital transfer of what's the equivalent of a bomb.

A lot of it was the profit of the SWIFT program that John alluded to. And I'll just take a slight detour because I think it's relevant to your question of localization of finances and where we go next.

SWIFT, for those of you who don't know, is a consortium of hundreds of banks that handle principally cross-border but not exclusively cross-border transfers of value. They have 200 different messaging systems that cover everything from wire transfers by individuals to bank-to-bank transfers to precious metals deals to trade confirmations. Every kind of conceivable possible electronic transfer of value in connection with a transaction of finance is handled through SWIFT. They handle about 80 percent of the traffic in the world. It is overseen, significantly and importantly from the legal matter, by the central banks of the world and by the participating money center banks.

The program with SWIFT was a front-door program which was lauded by The Washington Post and eventually lauded by the ombudsman of The New York Times, the paper that eventually disclosed it, as being an extraordinarily useful intelligence program that had been crafted with sensitivity to civil liberties.

And in particular, the elements of the program -- and I recite these because I think it's important to know that intelligence in this area can proceed in a responsible fashion and without -- without serious criticism. The architecture that we put together -- John, I and others in the Treasury Department, along with our colleagues in other agencies -- was the following.

One, we would issue a subpoena so that it would always be subject to review of law. Two, it would be for information which was clearly within U.S. domain. Three, we would consult about the scope of the subpoena with the lawyers that represented the company. Four, we would equally consult with the technical advisers that sat on a board over the company, who represented the most senior and sophisticated people in the central banks of the world. Five, from time to time we would have direct and personal recourse to the senior central bankers of the world to demonstrate the compelling nature of the information that was being developed.

Six, from time to time we would be summoned to the board of SWIFT to demonstrate how useful the material had been. Seventh, we agreed that access would be limited, stored, if you will, in a safe vault, limited to a certain amount of identified people, and those people themselves could not ping the data, could not conduct searches without logging a documented reason why they were doing so and the basis for it. Something less than probable cause, but something still real and in good faith. And then finally, we agreed with the company that they could pick an outside auditing firm to make sure that the architecture that I just recited was, in fact, honored. And it proceeded.

And -- you have to take this a little bit as an article of faith -- what it produced was remarkable and saved lives and enhanced the national security of nations across the world. And you don't have to take my word for it, by the way, because, as I just stated, we had to time and time again demonstrate that to the overseers and the fiduciaries of SWIFT, who are, understandably, agnostic, hard, cynical, careful people who demanded hard evidence, both with respect to the merits of the information that was developed and equally that it wasn't being abused for anything other than fighting bad guys in the terrorist world.

Now, the reason I think that program was so enormously helpful, and continues to be helpful notwithstanding the disclosures, is that it exploited not just rifle-shot attempts to identify intelligence that we already knew, but it helped map out connections between people even through the most innocent of transactions, people that we might have had suspicions about and would therefore lead us into better definitions and understandings of cells and plots and conspiracies. And in some cases that kind of work, tedious work in mapping people's associations, led to the demise of all sorts of bad plots.

It's particularly important today, going back to Maurice's question, because when John and I started our work at Treasury, there was a general consensus that al Qaeda's banking network was a centralized banking network. They had a central banker, they had books and records. They did know where money was being apportioned. They did do risk analysis and reward analysis for where they applied their resources. Since that time, largely because of the success of the program against that, it's become balkanized and atomized and it's practically nihilistic today. So as a consequence, you get the Madrid train bombing financed through pedestrian criminal activity, which was in that case the sale of hashish and the sale of phony immigration cards for Moroccans. Similar local financing activities took place in the London subway bombings and bus bombings of several months ago.

That underscores three things to me in terms of the way forward, Maurice. One is, we have to get local police more actively trained on financial and forensic analysis in this area. Two, we have to get them better integrated with the national intelligence network. And three, going back to SWIFT, we actually need more points, or data points. The earlier criticism of the 9/11 commission was that the FBI and the CIA weren't connecting the dots. I suggest to you there aren't enough dots out there today. We have plenty of coordination. What we need is hard, actionable intelligence.

And so, when you get to the hawala networks, by way of example, there is only one way to fight the hawala networks, and that is to penetrate them, to penetrate them, and to become a member of them, and to follow them, and to profit from them. And there have been recent public revelations of that activity in Pakistan by the British, to great success.

And beyond that, we need continuing access to the kind of universal financial information that SWIFT coughs up, and that -- you know, you can take other examples of the credit cards of the world. They're processed, basically, in five nodes around the world. And if you can capture that information and access it in the same responsible manner that you access the SWIFT information, you might be able to do this associational plotting that I suggested to you, even in the absence of hard evidence of yet another calamity that's being planned.

SONNENBERG: One point I might add. The acronym spans the Society of Worldwide Interbank Financial Telecommunications -- SWIFT. (Laughter.)

John, do you want to add anything before I go to the audience here?

TAYLOR: No, I'm ready. Yep.

SONNENBERG: All right.

ECKERT: Could I --

SONNENBERG: Oh yes, sorry.

ECKERT: I just -- just following up on David's point, because I think there are a couple -- two issues I would just like to note where I think that it's important to recognize progress.

One is that, largely as a result of the U.S. initiative, we have a multilateral regime, if you will, in place to deal with terrorist financing now. The United Nations -- the 1267 Committee, the committee dealing with al Qaeda-Taliban sanctions, has made remarkable progress in moving forward, and not only in identifying terrorists -- al Qaeda, Taliban, et cetera -- but freezing the assets and making it more difficult for them to use the formal sector. The UN has developed -- it's easy to bash the UN, if you will, for all the things it's not effective at. In this particular area, I really think that we can claim a great deal of success of working multilaterally. The number of countries that now have signed the Convention on Suppression of Terrorist Financing has increased dramatically. The number of countries that have a formal financial intelligence unit to do the kind of issues that David has talked about has -- now exceeds over a hundred. And this is basically -- prior to 9/11 and prior to these actions, there was very little attention by, particularly, other governments focused on these issues. So I think that we should claim as a very big success, and something we need to take account of and, in fact, work aggressively to ensure that these steps have moved forward.

The second is the role of the private sector. The U.S. government -- no government freezes assets. It's the banks. It's the financial institutions that take the specific actions to implement the terrorist financing program. And therefore, what previously existed in terms of a relationship with the financial community is something which is evolving, in which I hope, and under the guidance of these gentlemen, has started a really innovative and new approach to sharing information with the private sector.

Now it's not gone to the degree I'm sure, everyone is happy with. But banks can't implement and enforce this program unless they know who are the people against that we're trying to impose these sanctions?

So moving forward, which is where Maurice has asked us to focus, I really think that more needs to be done to focus on what the costs have been, but how we can be more effective in working with the private sector to address their concerns to enforce this.

AUFHAUSER: Can I just add --

SONNENBERG: One -- quick.

AUFHAUSER: -- one example of a partnership of banks? It's a short and interesting story.

When we moved into Iraq, we needed hard cash dollars to distribute to the pensioners. It was John's strong advice, and he was right, to keep the government propped up and going. We had frozen well north of a billion dollars years earlier, in the first war with Iraq, in the early 1990s here in the U.S. A large number of money center banks had claims of offset against those funds that had not yet been prosecuted by the banks. Under the International Emergency Economic Powers Act, the president has an extraordinary power to take previously frozen assets and vest it to himself -- take ownership for the first time of the frozen assets, and then do with it as he will.

Well, we had the president do that by executive order. We took that money. We bundled it. We put it in 747s. We flew it over to Iraq, and it was distributed. And it was absolutely necessary to sustain the first several weeks of peace, particularly with pensioners and civil servants, in Iraq.

That's all in John's book, by the way. (Laughter.) Yeah.

TAYLOR: It is. (Laughter.)

AUFHAUSER: And before we did that, I called counsel for the banks into the Treasury Department. And I said, "I don't think it's in the country's interest and I don't think it's in your client's interest to contest this activity, notwithstanding your claims of offset. There will come a time when the statutes have not passed, and so you're not time barred, to raise these questions in a court of law, but not now." And the financial community behaved in the most responsible fashion and agreed to stand down, and we proceeded without litigation.

SONNENBERG: Let us move now to the questions. First of all, name and affiliation when you stand up. Second, this program is on the record.

Back there. First question.

QUESTIONER: Chris Isham with ABC. A question for John and David. You mentioned briefly Iraq on the positive side. On the negative side, of course, the insurgents continue to be extremely well financed. What do we know about the financing, where the money is coming from? And what steps have you taken to try to intercept that financing?

TAYLOR: Well, of course, a lot of the financing is in kind, if you like. There's the suicide bombers themselves and IEDs coming in through -- down the Euphrates River from Syria. The actual cash is part of illicit activities of the kinds that David indicated. It's very hard to get your hands around it. It's a lot of currency. The formal transfer system, automatic payment system in Iraq doesn't really exist enough to be a way to move money around, so it's largely currency related. Very hard to get at. And so I have no specific proposals there.

I think the main thing with respect to this activity now on the financial side in Iraq is to work harder to get the financial system working. There's still a problem of paying Iraqi soldiers. And they get paid in cash, they want to go bring their money back to their families, and even in another province sometimes. So more work on the automatic payment system would help with respect to that.

And then in addition, I think, the idea of the economy doing better. It's a very important to work on, whether it's through a jobs program or not. It seems to me that if you get the economy moving -- and there are so many entrepreneurs there, so many people who want to do business. You know, I've been to Iraq many times for my job, and when I first went there, people were buying and selling things in the street. It was pretty safe in June 2003. I went back a few months later, it wasn't so safe, but there were still people buying and selling things in the street. Then I went back a year ago, still not very safe, worse, and people buying and selling things in the street, and building things. So there's this power of the economy to make things better if we can just get the security side better.

AUFHAUSER: Chris, I've been out of the game a while, so this is all caveated by being hearsay and third hand, so it may not be reliable. But there's a continuing belief that substantial funds are flowing in from Iran and in particular Hezbollah sources, continuing anecdotal stories that Hezbollah goes down to the tri-border area in South America and shakes down the Shi'a diaspora down there and gets money and uses it to fund part of the insurgency from the Shi'a point of view.

And there continues to be substantial reason to believe that there are significant Sunni funding sources for the Sunni insurgency, particularly out of Saudi Arabia. There's a belief -- credited belief that throughout the '90s, notwithstanding the incursion into Kuwait by Saddam Hussein and the threat against Saudi Arabia, that once that that was settled, that a significant amount of Saddam Hussein's money came from not only the graft associated with the oil-for-food program, but sources within Saudi Arabia who wanted to help stem the tide of a Shi'a crescent from Iran to Damascus.

ECKERT: Just briefly on this point, I think you're right that the insurgency is well funded, and it's primarily cash. And that also argues that we're not going to get at that largely through the formal-sector focus, but new ways of addressing it are being addressed. For example, in the Financial Action Task Force, the multilateral group that is looking at international standards, cash has become an important part of that work.

In addition to that, you also have the recent resolution by the United Nations Security Council vis-a-vis Iran. Now this is relatively new and breaking new territory in terms of Iran, and there was -- it took a great deal to get to the point that we have right now, but there are prohibitions on companies and anyone financing activities, Iranian entities, which are involved in weapons of mass destruction. So again, there are new ways -- there are ways that we have to address this problem, but it relies on multilateral cooperation.


QUESTIONER: Benn Steil, Council on Foreign Relations. I accept fully that the type of methods that the panel has described can be very effective against dollar-based international transactions. My concern is about non-dollar based international transactions, particularly transactions that are taking place and will take place in euros.

In my discussions with U.S. government officials -- private discussions -- they do confirm that there does appear to be evidence of large international transactions shifting into euros specifically to avoid the U.S. banking system and to avoid detection and enforcement activity by the U.S. government.

If this is the case, won't these methods be undermined in the long term? And could this not even perhaps -- and I would direct this question particularly to John -- undermine the international role of the dollar more broadly?

AUFHAUSER: Well, first of all, the freezing activity which began right after 9/11 big time -- 172 countries joined that effort -- that was not all in dollars. I mean, you had an account in euro or an account in Brazil real, those would be frozen as part of the operation too. So it doesn't necessarily have to be dollars.

What I think you're referring to now is how it's more difficult to get cooperation, and I would say sometimes, gee, if we were trying to do what we're doing now with Iran back in September-October 2001, I bet we would have had a lot more cooperation because it was amazing then. You'd never seen -- I mean, as I said, I had never seen such cooperation ever in terms of everybody -- you know, calling on the phone, "What can we do to help?" You just hardly had to ask. So it's now, I think, tougher. But in principle, that same cooperation could deal with the issue you're referring to, to broaden it out beyond dollars, but to euros or yen or whatever country you're talking about.

With respect to shifting out of dollars, this has been a long concern we've always had; that by this activity -- first, it was with respect to the Middle East and the holdings of dollars in the Middle East. So we watched it very carefully. It's not been -- the magnitudes are not enough to really notice that much, quite frankly. Of course, there's a broadening of diversification away from dollars over time, and that's been going on for a long time, but not really a noticeable change.

But I would just, you know, finally say, I think the fact that these efforts to stop funds or to break transactions are so important doesn't mean we should also be emphasizing that we have an open capital system in America, we want to promote free flows of capital generally, and I think every -- my sense is every time someone on the enforcement side of the house or the terrorist financing side of the house would emphasize a freeze or a blockage, someone else on the other side of the Treasury would be promoting openness and free markets and that kind of thing.

SONNENBERG: Lady right here.

QUESTIONER: Thank you. Joanna Weschler with Security Council Report. I was actually surprised how late the UN was mentioned in this conversation, and it was only mentioned by Sue Eckert. And I would like to know whether the other two panelists share Sue's rather optimistic and positive assessment of the effectiveness of the Security Council sanctions, especially given the amount of resources, energy and time that goes into management of those sanctions.

But I also wanted to ask Sue Eckert, who probably knows about this issue more than anybody else I can think of, about the political controversy that some of these measures have created and the challenges that have been brought, including legal challenges around the world, to the sanction systems, and whether you think this is dangerous to the system of sanctions as a whole.

TAYLOR: So on the UN, to give example, after 9/11, there was a sanctions effort at the UN


TAYLOR: But what we found is not so much that there was agreement to freeze. It was really the implementation of this.

And so because of -- I mean, it's so different for an official in a government to say, "Yes, we will do something" -- high-level official, finance minister -- and getting it done. I mean, that's -- you know, just think how tough government is to get things done anywhere. So you really have to monitor this very carefully.

So what we did was set up what we called a war room in the Treasury to monitor each country's performance. And in fact the UN used our facility to help track what was going on.

So now it seems to me it's same kind of thing. There's a Security Council resolution passed on December 23rd. It's pretty -- it has freezing. It's pretty weak, quite frankly. It could have a lot more teeth. But at the least we ought to monitor what's been agreed to, because it will even have less teeth if we don't watch that carefully. And I think we need to push the UN in that direction.

ECKERT: I think, if I could just -- I think implementation is a key, and I think that that's -- that everyone agrees. I think, you know, my assessment -- I'm not sure I'm up to beat (sic) in terms of the effectiveness entirely of the UN effort. I think that we have gone a long way to putting in place the legal and regulatory infrastructure in other countries to prevent terrorist financing. And then the question really is in the enforcement and implementation, and that's something that we continually need to monitor to try to bring pressure on.

There are things, though, that we have done, or actions as a result of the initial rush to designations that have complicated use of the tool. And that is in the immediate aftermath of 9/11, there were some designations that the 9/11 commission noted had lesser evidentiary standards that have caused problems -- legal problems and challenges in Europe all the way to the Court of International Justice. I mean, it's -- there are significant legal issues, the effect of which has been to deter some countries from providing additional names. Some countries have indicated, based -- their legislature has indicated until there's an effective process to be table to petition for de-listing, that they are no longer -- or that they're not able to bring new names forward.

Now, this is an enormously important issue because it goes to the effectiveness of the regime. If we can't get other countries to continue to add names to the regime, to alter, to freeze, et cetera, then it's not going to be effective.

There has been progress, I think. And most of the problems that have been noted really go back to the very early designations. The U.S. process and through the UN of making designations of terrorist entities has improved significantly. And I think that if we can clear up some of these early problems of designations, then the legal challenges hopefully will be resolved.

And this is not just an issue for Europe. I note too there was a decision in a California court last month which fundamentally challenges the broad authority, under IEEPA, of the executive orders freezing terrorist assets.

So this is an issue we need to be concerned about for the continued efficacy of the sanctions tool.

TAYLOR: You can't overstate the importance of -- there are two vexing issues. One is, where there is evidence of a compelling nature, frequently the revelation of it can compromise important intelligence sources. So you refrain from sharing it.

And so there has to be a process in place in courts, as there are in the U.S., where that can be shared without compromising what you seek to protect.

The second is, if you apply standard civil justice evidentiary rules for final judgments, something like evidence clearing -- by clear preponderance of the evidence, the process is feckless and a fool's errand. You either sign on to this as being a purpose of preventing, rather than punishing, or you don't.

And so I would submit that both the U.S., which has done this pretty elegantly, but more importantly, the countries in Europe, which have -- were more and more difficult to convince. For example, with Hamas, when we designated them as a terrorist entity, the justice and the courts systems in Europe said prove that the dollar given is a dollar that's going to killing somebody as opposed to a dollar that's going to build hospitals. And the breakdown on Hamas's expenditure of funds is something -- 80/20. But since money's fungible, that's a high level of proof, and it's a fool's errand.

So it's very important that the dialogue continue, that we either get consensus that the -- there's a different juridical framework for the freezing of assets on less than perfect proof, and then clear it up afterwards if you think legitimately you're preventing terror.


QUESTIONER: Bob Lifton. Unquestionably, there's no price tag on trying to stop terror. But one can question who should bear the price. And I have a bias. I sit on the board and the executive committee of a bank which is part of a subsidiary of a foreign bank. And the cost to the banking system is enormous of carrying out this program. And my question to you all is, as you devise this plan, did you ever think of sharing the costs with the -- from a federal government point of view rather than putting all the costs in on the banking system?

AUFHAUSER: (Laughs, laughter.) I think this is -- no, it's a very serious point, and believe me, we have always taken it seriously. I hear very much dollar figures from -- CEOs come and say here's how much this is costing my bank. So it is large.

I think -- but it's always -- the follow-up is always if we knew this was useful, as you say it is, the costs -- if we knew this was useful, we'd have much less problems with it.

So I think the first thing is for -- maybe through communications like this for the government to say how this is being used. These are not papers that are just piling up in some box somewhere that no one ever uses. This is actually actionable intelligence that we can use. I think that will go a long way.

The second considerable matter -- balancing the benefits and the costs. But -- and on top of that, try to find ways to make it less costly. I think the government could pay a lot more attention to listening to the complaints -- I'm sure you have more details -- give those details to the Treasury. And if I were still there, we'd take them very seriously.


AUFHAUSER: We're also -- you know -- adding more to that -- one is it's a sort of a hard-knocks rule, but your institution and my institution can afford it, even if it's costly.

Number two is --

MR. : (Off mike.) (Laughter.)

AUFHAUSER: Number two, what you can't afford is for something bad to happen through your bank.

And number three, the government needs to become more refined and take what was a clumsy -- admittedly clumsy approach on 9/12, 2001, and continue to refine it.

One of my last crusades at Treasury -- and John was part of it -- was the suspicious activity reports which get filed. They become the default mechanism every time you don't know somebody, and so the government gets tens of thousands of SARs every day or every month, most of which are hardly useless. And unfortunately, the bank examiners go in and they measure compliance by the easiest possible proxy, which is how many SARs did you file last month? And so it gets to be a venomous cycle which has to be cured.

The last thing is the government -- I wish what John said was right; it's still not right -- the government doesn't exploit all that information that comes in. It still doesn't have control. It still goes into a library without a card catalog. So --

ECKERT: Well, and if you look at -- I mean, there have been enormous fines on banks recently for not filing SARs. But that's led to the effect of too many SARs, suspicious activity reports coming in, and diluting the effectiveness. So that's why we need to look at new ways of working with the private sector, the financial community, to share intelligence, to share information about what we know to get at and maybe even to create some new mechanisms whereby, you know, good users or -- if you will, have some different mechanisms applied in terms of the reporting or the compliance program.

SONNENBERG: The lady in the back, in the middle.

QUESTIONER: Tina Bennett, Janklow & Nesbitt. I just had a question about offshore banks, because there was concern even before 9/11 about offshore banking as being a place of secrecy haven and facilitating a lot of money laundering and other undesirable activity. Are they cooperating with these programs?

TAYLOR: I'd say it's improved a lot compared to before. And many countries have signed on, many countries have joined the Egmont Group and created financial intelligence units.

But, David, do you want to add to that?

AUFHAUSER: You know, Stu Eizenstat, when he was at Treasury, is credited with really breathing life into something called the Financial Action Task Force, which is a consortium of about 30 to 40 countries -- I've lost the exact number -- who collectively judge the bona fides of legitimate due diligence in AML regimes and execution of regimes of countries around the world.

And those countries that they think are suspect, that are deliberately permitting suspect funds flows to go into their countries, are named and shamed in a formal process. And that naming and shaming process, by the way, has the same real world impact as what I described earlier about the Macau bank, Delta Asia Bank. Which, by the way, if you take a step back, is extraordinary. This FATF group is an extralegal, extra-jurisdictional, cross-border group with no formal authority. And yet, by the power of naming and shaming an institution -- like for a while Israel was on the list -- saying, "Your regime for money laundering is lower than acceptable international standards" -- the impact on Israel was immediate, and Israel, within six months, was up to snuff. They've done the same in Russia. I think the jury's out about Russia -- (laughter) -- but they did the same.

ECKERT: FATF has had enormous success, I think that that is very true. But it also focuses on the legal and regulatory structure on paper. There is an issue in terms of paper compliance. And it's, again, something that we need to continually work at, because what happens on paper and what happens in effect sometimes are very different. Most recently, the FATF took Nigeria off the list of non-cooperating countries. And one has to wonder exactly how effective Nigeria's antiterrorism and counterterrorist and anti-money-laundering policies are.

SONNENBERG: We've got time for two or three fast ones.

The gentleman there.

QUESTIONER: Jon Hartzell, KWR International. Mention was made earlier on about significant financial flows still coming out of Saudi Arabia, presumably in support of terrorism. Could you comment -- I know this is on the record, but could you comment on the state of cooperation and capability on the part of the Saudi authorities to control these; monitor, identify, control, cut off these kinds of flows?

AUFHAUSER: My information is not current to be sure about the details on this. But my observation over a two- or three- or four-year period is the cooperation from the Saudis in this area has improved. At the beginning, it was a bit of a struggle, but now it's much better. And in particular, for example, some charities that we knew were funding terrorist groups, originally there was some reluctance to shut those down or agree. But after a year or so, there was a joint designations, if you like. The United States and Saudi Arabia came together and jointly said this charity is funding terror. So it's improved a lot.

But with respect to what's happening right now, or funds going directly by cash into Iraq, I can't say anything else.

SONNENBERG: Five attacks in the last two years in Saudi Arabia has brought them much closer to where we would hope they're going.

Next question.


QUESTIONER: Peter Garber, Deutsche Bank. David, you alluded to some residual liability that the government might face if, under a presidential order, it seized frozen assets and then spent them in accord with something that the president deems proper. You kind of trailed off about what the liability -- (laughter) -- of the government would be vis-a-vis the remaining claimants against that country. And I wonder if you could flesh that out and --

AUFHAUSER: No. (Laughter.) Actually, no legitimately. I haven't looked at the subject in years. Two is, I don't think it would be appropriate if I did. But three is, I think the government wins.

ECKERT: One point on that, though, is that you have a situation where a lot of European countries do not have safe harbor for companies that comply with the blocking statutes and -- that we have in the United States in terms of our legal basis. So there's an issue of is there more that can be done to try to provide that protection to companies.

TAYLOR: If I had to play a lawyer, I'm not sure whether the rights of set-off were perfected in the right way.

Can I just do one thing on this?

SONNENBERG: Beg your pardon?

TAYLOR: One thing David alluded to earlier is the money frozen back in 1990-91, $1.7 billion, which was vested and actually used to pay Iraqis in April 2003. David found a way to add some clauses to the executive order that really allowed that money to be used without recourse from the individuals at that time. So it was a very clever idea. And in fact, it's one of the reasons why we were able to use roughly $2 billion of Saddam's money frozen earlier to pay people after he left.

What we didn't vest -- was it Peter? Is that what you said? What we didn't vest were claims that had already been made and reconciled in a court.

SONNENBERG: The gentleman there.

QUESTIONER: Lansing Lamont, American Trust for the British Library. As a non-banker, I'd like to ask you a simple retail question. What kind of monies are we talking about here? What, for example, in total or specifically does it cost in cash to buy and smuggle into a target country a conventional bomb versus what does it take to devise and smuggle into a target country a nuclear device? What does it take, if you can estimate it, to organize a three-man cell in a target country?

AUFHAUSER: Some of the costs are very low, to be sure. To have a whole organization and a lot of transportation and flights, that's more expensive. I think ultimately -- in fact, the dollar magnitudes of the amounts frozen are in the overall scheme of things not large. Number of accounts, a few thousand accounts, that sounds large, but in the overall scheme of things. So that's why I think you have to think about either the intelligence that you're gathering through this system, through following the money, or the fact that you're making it difficult for people to finance large transactions.

For example, it's not cheap to build an intercontinental ballistic missile or a long-range missile that can carry a nuclear warhead. That's not cheap. That takes money. And that's the kind of things that the actions, for example, yesterday the Treasury took are referring to.

ECKERT: The cost of 9/11, the attacks on 9/11, were estimated to be between $300,000 and $500,000, but that was the most expensive. Since then the attacks that we've seen in Bali and London, Madrid, et cetera, have -- they're not -- doesn't cost a lot. It costs under $10,000, some of the estimates have been. So, you know -- but it's important also, though, for the deterrent effect, too, because a large amount of funding for terrorists came through charities prior to 9/11. And there is a deterrent effect of those entities -- or of those end users making sure that they don't want to be involved in that anymore, sort of the reputational issue that David alluded to.

TAYLOR: I'm glad you asked the question, because maybe it's a good way to end this. The bulk of the money that I followed in three years of following this could not be directly tied to an intended act of killing, but all of it could be tied to an intended act of teaching hate in various schools and places, in fomenting discord. Now, I know I'm on dangerous territory here because this is a very difficult task, but what do you do about the funding of schools that teach our differences to the point of promoting violence? That's something none of us has faced up to.

SONNENBERG: Unfortunately, we've reached the hour where I must terminate. Otherwise, I'll get a private lecture from our esteemed chairman, Pete Peterson. (Laughter.) So let us thank this panel. It was brilliant and wonderful. (Applause.)







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