Jansen Judiciary Anti-terrorism Testimony

Statement of J. Bradley Jansen Before the House Judiciary Committee On the Anti-Terrorism Act of 2001 September 24, 2001 Mr. Chairman, members of the Committee, thank you for allowing me the opportunity to present testimony on the Anti-Terrorism Act of 2001. My name is Brad Jansen. I am the Deputy Director of the Center for Technology Policy at the Free Congress Foundation, a Washington, DC based think-tank focusing on the culture of American conservatism and our Constitutional liberties. While there is no single, simple answer to the problems associated with the tragedies of September 11th, 2001, I would congratulate the Committee for moving so quickly to begin the process of addressing these questions. I would also like to commend Attorney General John Ashcroft both for what he has done and what he has wisely chosen not to do. Then I would like to offer a few comments on the specifics of the proposed legislation. The Attorney General, along with Paul O’Neill, secretary of the Treasury, earlier this month released The 2001 National Money Laundering Strategy1 which demonstrates that they have been working to evaluate honestly the current policies, including their failures, in order to “raise standards of performance and create a basis for measuring success”2 even before this tragedy. Perhaps if the reforms proposed in this strategy had been implemented, and resources reallocated to more effective uses, it would have helped to prevent the tragedies. 1

The 2001 National Money Laundering Strategy, (Prepared by The Office of Enforcement, U.S. Department of Treasury, in consultation with the U.S. Department of Justice), Foreword. 2

2 This bill, and our national anti-money laundering strategy overall, must be viewed in a broader context and judged by its likelihood of meeting its goal of preventing future terrorist attacks against the United States. Administration Plan to Address Money Laundering Concerns Previous to the tragedy, the Attorney General and the secretary of the Treasury had already done the heavy lifting necessary to make the financial infrastructure component against terrorism more effective. The goals of The 2001 National Money Laundering Strategy include: 1. Focus efforts on major money laundering organizations and systems, 2. Measure effectiveness of anti-money laundering efforts, 3. Addresses cooperative public-private efforts and regulatory measures, 4. Coordinate efforts with state and local governments, and 5. Strengthen international cooperation. The strategy calls for resources to be focused on the disruption and dismantling of large-scale criminal enterprises3 through “aggressive enforcement, measured accountability, preventative efforts, and enhanced coordination.”4 Importantly, the strategy recognizes that “we do not have a system in place that objectively evaluates which strategies have proven to be the most effective. Without objective means to measure our enforcement efforts, law enforcement cannot articulate measurable goals or be held accountable for its efforts and results.”5

3

Ibid, pg. 1. Ibid, pg. ix. 5 Ibid, pg. x. 4

3 Given the public statements of the Attorney General, the secretary of the Treasury, and Larry Lindsey, the President’s economic advisor, I am confident that the Administration will take the lead in the Financial Action Task Force (FATF) to revise its Forty Recommendations to incorporate better the importance of policy effectiveness, regulatory burden, privacy and other civil liberties. In addition, national security concerns as a result of economic dislocations have not been adequately considered. It is important to remember that the Administration’ plan recognizes that we already have established anti-money laundering programs for terrorists.6 Acknowledge Administration wisdom It is important to credit the Administration not only for the farsighted reforms they are instituting in the money laundering strategy, but also to acknowledge their wisdom of not rushing to judgment regarding other proposals. For example, the incorporation of the Money Laundering Abatement Act (S. 1371) and International Counter-Money Laundering and Foreign Corruption Act (S. 398) in the bill not only could have detracted from the effectiveness of the proposal, but they could have serious net negative unintended consequences. We would be giving up our privacy and other civil liberties and likely reduced our economic and national security as well. These proposals, part of a global “Know Your Customer” campaign, are considered more problematic by financial institutions because they impose requirements to know more about their customers than can be easily determined. The proposals have been widely debated and popularly rejected in this country. 6

Ibid, pg. 9.

4 The regulatory burden they would impose could be onerous at a time when the health of many actors in the financial sector calls for regulatory relief. In addition, the tragedy at the World Trade Center took a disproportionately heavy toll on the human resources of many of the companies that would be affected. The limited data that exist regarding the usefulness of the current Bank Secrecy Act data are not encouraging. Between 1987 and 1996, banks filed more than 77 million Currency Transaction Reports (CTRs) with Treasury--in that ten-year period, 7,300 defendants were charged but only 580 were convicted!7 The results for the Suspicious Activity Reports (SARs) is not more encouraging: In the five years from 1994 to 1998, the number of persons charged with money laundering as the prime offense, who were referred for prosecution by the IRS, FBI, Customs Service and DEA, fell by more than 24%.8 The Administration aims, for the first time in 30 years, to evaluate the results systemically and to reallocate resources towards their highest marginal utility. It is unlikely that these global Know Your Customer proposals would address the problem. Bin Laden reportedly has made use of an underground banking system in south Asia and east Africa known as "hawala" which would not be interrupted by the global Know Your Customer initiatives.9 The Clinton Administration’s pursuit of its global Know Your Customer initiative through the Financial Action Task Force has, in some cases, actually 7

Former Federal Reserve Board Governor Larry Lindsey (citing Department of Justice figures), “Invading financial privacy,” Financial Times, March 19, 1999, p. 20. 8 TRAC, “Money laundering cases plummeted despite flood of SARs,” Money Laundering Alert, June, 2000; The Transactional Records Access Clearinghouse (TRAC) research center at Syracuse University (www.trac.syr.edu) The number of money laundering cases produced by the principal U.S. enforcement agencies has declined dramatically despite hundreds of thousands of Suspicious Activity Reports filed and millions of wire transfer records kept by U.S. financial institutions since 1996. 9 Geitner.

5 threatened our national security. It has generated resentment over the double standard (the United States soundly rejected the domestic Know Your Customer proposal) and the lack of input in the decision making process by the small developing economies affected.10 We must be mindful of the law of unintended consequences. Most dangerously, the global Know Your Customer campaign has actually increased terrorist state influence in the Caribbean.11 In a situation where poverty and resentment breed terrorism, Libya has taken advantage of economic hardship in the region where private banking business is off 30-50% year-on-year while FATF-related costs are escalating.12 Since World Trade Center and Pentagon bombings, tourism has been severely affected in the region. The hotel occupancy rate in the Cayman Islands is less than 10%, down from a seasonal norm of around 50%, and cancellations continue to increase. Other islands in the region report a significant decline.13 Other provisions of the proposals are unlikely to yield the expected results. Since powerful encryption tools are already in the public domain, banning strong encryption that does not support key escrow would have limited success at best. In addition, “cypherpunks” and others are likely to continue to find safe havens.14

10

Voters in the Cayman Islands ousted from office nearly all of the officials who signed on to the FATF global Know Your Customer initiative; “Cayman Voters Defeat Bank Law Reformers,” American Banker, November 13, 2000. 11 Several FATF-listed countries have suffered economically and have turned to Libya for assistance; Canute James, “Libya pledge in Caribbean worries US,” Financial Times, September 12, 2001. 12 Michael L. Alberga, Myers and Alberga law office, Cayman Islands, telephone interview, September 22, 2001. 13 Ibid. 14 http://www.havenco.com/

6 Significantly, the 2000 Wiretap Report issued by the Administrative Office of the U.S. Courts that monitored wiretap operations from January 1, 2000 to December 1, 2000 discovered no investigations had been thwarted by the use of encryption technology.15 Comments on the proposed legislation Grover Norquist, president of Americans for Tax Reform, recently urged lawmakers to take the time to deliberate any anti-terrorism legislation, to disaggregate important sections that require further debate, and to “read the bills.”16 Solveig Singleton, senior analyst at the Competitive Enterprise Institute, has proposed a “red, yellow, green light” system for analysis that I find very useful: she has divided sections of the bill into parts that deserve to be passed (“green light”), parts that require changes after further deliberation (“yellow light”) and parts of the bill that should be rejected (“red light”). I would add that I generally agree with her conclusions of the specifics of the bill. Rather than take up the Committee’s time repeating each of the sections of the bill that merit passage and credit the Administration for its work on this issue, I would like to make a few comments on parts of the bill generally that warrant concern and then to comment more fully on Title IV, the Financial Infrastructure part of the bill. The Free Congress Foundation has a long-standing concern that law enforcement and intelligence resources aimed at the gross surveillance of 15

http://www.uscourts.gov/wiretap00/2000wttxt.pdf. Grover Norquist, address at the National Press Club in Washington announcing the “In Defense of Freedom” coalition of more than 150 organizations, 300 law professors, and 40 computer scientists, September 20, 2001. 16

7 everyone all of the time are not well spent.17 A better allocation of such resources towards more targeted investigations would, we believe, result in a higher level of professionalism of law enforcement and better results overall. As such, we share the concern of other analysts regarding several provisions of the bill including Section 105 (Use of wiretap information from foreign governments) which intimates that charges of the use of Echelon to circumvent Congressional limitations on the National Security Agency are well founded. If the NSA restraints need to be revised, that should be the subject of another debate. The immigration provisions (Title II) generate sufficient concern that their inclusion in the bill may impede its ability to move quickly through the legislative process. Other provisions that warrant greater scrutiny include grand jury secrecy, applying pen registration standard to Internet communications, so-called “sneak and peak” warrant expansion, the use of intelligence authority to circumvent probable cause requirements, Section 152’s Multi-Point Authority, and proposals to delete the requirement that certain information gathered must relate to an “agent of a foreign power.” I will focus my remarks on the specifics of the legislation in Title IVFinancial Infrastructure. Following the combined advice of Grover Noquist and Solveig Singleton, I would recommend a “green light” for Sections 401 (Laundering The Proceeds of Terrorism), 402 (Material Support For Terrorism), 17

The Free Congress Foundation website, http://www.freecongress.org/, has more information about our research including information on Echelon, http://www.freecongress.org/centers/technology/echeloninfo.htm, the Coalition for Constitutional Liberties, http://www.freecongress.org/centers/technology/ccl/, and the current online petition available at http://defendyourfreedom.org/.

8 404 (Technical Clarification Relating to Provision of Material Support to Terrorism), and 407 (Trade Sanctions Reform Act of 2000) in this bill. These “green light” sections of the bill conform to the overall anti-money laundering strategy and would not detract from the Administration’s plan to increase the effectiveness of those efforts. The benefits outweigh the risks for disaggregating the “yellow light” Sections 403 (Assets of Terrorist Organizations), 405 (Disclosure of Tax Information in Terrorism and National Security Investigations), and 408 (Extraterritorial Jurisdiction) from the bill for further consideration. Regarding Section 403, the Department of Justice, specifically including the Asset Forfeiture and Money Laundering Section, is currently developing a new series of advanced money laundering modules to take effect by December 2001.18 It is important that Congress not rush in with changes, however well meaning, that could actually detract from the success of the Administration’s reforms. As the money laundering strategy warned, “Sweeping legislative modifications often have chilling effects on law enforcement efforts because investigators and prosecutors are uncertain of the application of the legislative changes and prefer to take the approach of ‘wait and see.’”19 Already, the Executive Office of Asset Forfeiture (Treasury), the Asset Forfeiture and Money Laundering Section (Department of Justice), and law enforcement training components are attending briefings regarding changes affected by the Civil Asset Forfeiture Reform Act of 2000.20 Since the Department 18

The 2001 National Money Laundering Strategy, pg. 4. Ibid, pg. 8. 20 Ibid, pg. 3. 19

9 of Treasury announced last week that it was already beginning to seize the assets of alleged terrorists, the unnecessary and added asset forfeiture proposals here might have unintended “chilling effects” on law enforcement’s ability to do its job. It is important to note that money laundering is a derivative crime. Its status as a crime depends on the genesis of the funds involved. As time has gone on, the international community has expanded the number of predicate offences and thus the definition of the crime. Much of the change in the definition has been on an ad hoc basis as particular crimes have come to public attention.21 Attempting to seize the assets of money launderers, especially terrorists, is similarly remote. Osama bin Laden’s network of terrorists are motivated by fanaticism not wealth as most other money launderers would be. What are the financial gains from acts of terrorism? Provisions of the bill to give broad powers to law enforcement may make us no more safe but could erode our civil liberties.22 The oft-repeated warning that we may have to give up some of our civil liberties in order to safeguard us from terrorism is a false choice. Although the United States and the United Nations have attempted to freeze bin Laden’s assets since the U.S. embassy bombings in Africa in 1998, "No assets have been firmly linked to bin Laden, in the United States or 21

United Nations, 1998; “Financial Havens, Banking Secrecy and Money Laundering, Issued as: Double issue 34 and 35 of the Crime Prevention and Criminal Justice Newsletter, Issue 8 of the UNDCP Technical Series, page 12, This study was prepared on behalf of the United Nations under the auspices of the Global Programme against Money-Laundering, Office for Drug Control and Crime Prevention, by: Jack A. Blum, Esq., Prof. Michael Levi, Prof. R. Thomas Naylor and Prof. Phil Williams, pg. 81, https://www.imolin.org/finhaeng.htm. 22 Geitner, Paul, “Global effort to find bin Laden's millions could come up short,” The Associated Press, September 21, 2001.

10 elsewhere, and hence none are frozen at this time"23 according to a Congressional report issued the day before the attacks on the World Trade Center and the Pentagon. Regarding Section 405, Dan Mitchell of the Heritage Foundation has written extensively illustrating the powers the Administration already has to exchange tax information.24 His arguments also add a cautionary note to some of the problems associated tax information exchange. It is unclear why the emergency powers currently available to disclose tax records are insufficient. Again, this section should be disaggregated and debated more fully in a separate vehicle. In addition, while the risk of abuse of collected and exchanged data is always a concern, in the technological age, it is one of great importance. Government officials may abuse their access and data integrity is threatened.25 Some employees have used government databases to stalk women.26 Others have stolen identities for credit card fraud.27 The more data is exchanged, the greater the likelihood that the data will be abused. This section does not address important issues of access and accountability sufficiently. In addition,

23

Ibid. Mitchell, Daniel J., Heritage Foundation Backgrounder No 1460, “A Tax Competition Primer: Why Tax Harmonization and Information Exchange Undermine America's Competitive Advantage in the Global Economy,” July 20, 2001, http://www.heritage.org/library/backgrounder/bg1460.html. 25 Harper, Jim, Privacilla.org Reveals Government Information-Sharing Practices, Government Exchange and Merger of Citizens' Personal Data Called "Systematic and Routine," March 12, 2001, http://www.privacilla.org. 26 Elrick, M. L., “Police say suspended cop abused database: Detective says he checked on wife before her fatal shooting,” Detroit Free Press, August 8, 2001, http://www.freep.com/news/mich/lein8_20010808.htm. http://www.nccprivacy.org/handv/010810villain.htm 27 FDIC press release, “Former FDIC Employee Sentenced in Identity Fraud Scheme,” June 1, 2001, http://www.fdic.gov/news/news/press/2001/pr4101.html. 24

11 network security issues need to further examined to prevent unauthorized access by computer crackers. Adopting this section without fully considering these questions could cause more harm than good. Should terrorist groups infiltrate the weakest link of a large network, the results could be disastrous. There are already indications that terrorist cells use credit card fraud and identity theft to finance their operations.28 The Extraterritorial Jurisdiction Section 408 is applied too broadly, instead of narrowly to terrorist cases, and would be open to abuse. The implications of the section may be more complex than they appear in the bill. The “red light” Section 406 (Restraint of Property Subject to Criminal Forfeiture) should be rejected. The language definitely needs to be narrowed to apply to terrorist cases. Currently, it could apply to all cases. Law enforcement already has the authority to seize terrorist assets without trial. The expanded power to seize assets without trial for any alleged crime not only goes beyond the scope of the bill but goes beyond what Congress should allow. It permits pretrial restraint and seizure of any defendant’s legitimate, untainted property, and could interfere with a defendant’s ability to retain counsel. Nearly every circuit has rejected the restraint of substitute assets. No evidence is required to get the restraining order, and there is no right to a hearing before or after the restraining order is entered. While Section 406 would not aid law enforcement’s ability to combat terrorism, the marginal effect may be to increase the sometimes-corrupting 28

Geitner.

12 influence on law enforcement itself that asset forfeiture has demonstrated in the War on Drugs.29 Conclusion The Administration is right to recognize that our strategy should be crafted in a way that enjoys broad bipartisan support.30 It added, “If anti-money laundering initiatives are not making a significant difference in disrupting money laundering activity, principles of good government mandate that law enforcement discontinue those efforts.”31 According to the American Bankers Association, the cost of meeting all the regulations required by the U.S. government may total $10 billion a year for only 932 money laundering convictions in 1998--more than $10 million per conviction.32 Based on several years’ statistics, one British law professor calculated that the United Kingdom government has stopped only 0.004% of the criminal money that flowed through the City of London. The professor concluded: "Money launderers do not have a statistically significant chance of being caught, hence the deterrent effect of such laws is negligible." 33

29

GAO Report, “DRUG CONTROL: INS and Customs Can Do More To Prevent Drug-Related Employee Corruption,” March 1999; GAO Report, “LAW ENFORCEMENT: Information on Drug-Related Police Corruption,” May 1998; CATO Report, “The Ominous Growth of Paramilitarism in American Police Departments,” July 25, 2001; Department of the Treasury report, “An Assessment of Vulnerabilities to Corruption and Effectiveness of the Office of Internal Affairs, U.S. Customs Service,” February 1999. 30 The 2001 National Money Laundering Strategy, pg. 15. 31 Ibid, pg. 16. 32 Rahn, Richard W., “End the ‘Bank Anti-Secrecy’ Assault on Financial Privacy,” On Point, Competitive Enterprise Institute, No. 63, May 10, 2000, http://www.cei.org/OnPointReader.asp?ID=980. 33 Bauman.

13 When one considers such notable failures of our current money laundering regime to detect Robert Hansen, Aldrich Aimes and The Bank of New York scandals, it is hopeful that the private sector and the Administration were taking constructive, far-reaching steps even before the recent tragedy. The private sector is responding quickly to the terrorist attack on America and has fundamentally changed the banking agenda. Issues such as money laundering, bank security and privacy have all become issues of prime importance.34 Banking secrecy has long been considered an essential safeguard of the citizen against the power of dictatorship.35 It is certainly true that many countries of the world do not safeguard civil liberties. The question is then how to address the importance of privacy and other civil liberties with the requirements of law enforcement. 36 These questions will be better addressed after the Administration’s plan has been implemented. We should resist the temptation to micromanage those efforts and risk short-circuiting the process. One of the most important changes we are undergoing is the rapid advancement and dissemination of new technologies and how it relates to money laundering enforcement that the Administration plan already considers.37 We need to recognize that privacy is also a security issue.

34

E.g., America’s Community Bankers, “Shaping the Future of Community Banking,” Compliance Conference in Cleveland September 30-October 3, 2001, and upcoming “InfoPipelines,” www.AmericasCommunityBankers.com. 35 “Nowhere to hide,” Financial Times, June 25, 2000. 36 Bauman, Bob ,“The Money Laundering Farce Must End,” Commentary in Sovereign Society ALetter, 37 The 2001 National Money Laundering Strategy, pg. 28.

14 It is important that we continue to work together with our allies. For example, the changeover to the Euro creates a unique opportunity. We could follow the lead of Italy and institute an amnesty for smuggled cash38 as well offer to clean the slate for hopefully soon to be former terrorist states who pledge to reform their ways and cooperate fully as we aim to root out terrorism. As Paul Weyrich, observed, "After this horrendous series of attacks our new FBI Director has suggested that we may have to limit some of our freedoms in order to deal with terrorists. The truth is that if we further emasculate our Constitution the terrorists will have achieved the greatest victory imaginable. Their triumph won't just be the thousands of people they killed, the triumph will be if they see our democratic institutions crumble."39 I urge the Committee to take the necessary steps to deny victory to the terrorists.

38

Johnson, Jo, “Italy plans an amnesty for cash smuggled overseas,” Financial Times, August 21, 2001. 39 Weyrich, Paul M., “Don’t Let the Terrorists Achieve Their Greatest Victory,” Free Congress Commentary, September 12, 2001.