Tue Oct 21 2014 12:02:29 +0200 CEST
29 Feb 2012

Treasury’s Cohen at Conference on Anti-Money Laundering, Financial Crimes

U.S. Department of the Treasury
Remarks by Under Secretary David Cohen
At the SIFMA Anti-Money Laundering & Financial Crimes Conference
February 29, 2012

(As Prepared for Delivery)

INTRODUCTION

 It is a great pleasure to be here this morning to address SIFMA’s Anti-Money Laundering and Financial Crimes Conference.  This feels a bit like a home-coming for me.  I joined the Treasury Department almost exactly three years ago today.  But for several years before, I sat where you sat, advising financial institutions – banks, broker-dealers, investment advisers, and others – in anti-money laundering and sanctions compliance issues.

So I not only have many friends, former colleagues, and even former clients in this room, I also have a keen appreciation for the challenges you face as well as the importance of the work you do.  Indeed, having now had the great honor of serving in the Treasury Department for three years, my appreciation for the indispensable role of the financial industry in our efforts to protect the integrity of the financial system has only grown.

Today marks my one year anniversary serving as Under Secretary for Terrorism and Financial Intelligence.  Looking back, it has been an action-packed twelve months for my office, including the adoption of several new sanctions programs, ranging from Libya to Syria to transnational organized crime; the implementation of an array of new measures to increase the financial and economic pressure on Iran; continuing efforts to stem financial support to terrorist organizations, including al Qaeda and its increasingly worrisome affiliates and allies in Yemen, Somalia, and the Maghreb; and steady progress in disrupting the financial support networks of drug kingpins and their associates.

It has also been a year in which important anti-money laundering regulatory steps have been taken, including final rules regarding money services businesses and prepaid access; a finding that the Lebanese Canadian Bank and the entire jurisdiction of Iran are primary money laundering concerns under Section 311 of the USA PATRIOT Act; a proposed rule requiring the reporting of the international transport of prepaid access products; and, just today, the publication of an advance notice of proposed rulemaking for a customer due diligence requirement for financial institutions.

This has driven home for me the important role of the Treasury Department, with our unique tools and competencies, in combating illicit finance and advancing our national security and foreign policy goals.  And it has also reinforced my respect for the role of the financial sector – including the firms represented by SIFMA and each of you – in helping to achieve those goals.

So I would like to spend a few minutes this morning illustrating this by focusing on three cases where the complementary efforts of the Treasury Department and the financial industry have been, and will continue to be, crucial: first, the sanctions we imposed on Libya, which contributed to the fall of a ruthless dictator and the liberation of the Libyan people; second, the very powerful set of sanctions that we have imposed on illicit actors in Iran, which are a key part of our dual-track strategy designed to bring about a peaceful resolution to the very serious and well-founded concerns about Iran’s nuclear program; and third, our plans to increase financial transparency, specifically through stronger and clearer customer due diligence requirements, that will contribute to our overall mission of protecting the integrity of the financial system and advancing our country’s national security and foreign policy goals.

The Libyan Sanctions Program

At this time last year, the movement that began in Tunisia demanding relief from an authoritarian, unresponsive and repressive government had taken root next door in Libya, where the Libyan people, suffering under more than four decades of erratic and abusive rule by Colonel Qadhafi, began an uprising against his oppressive regime.

As the Libyan opposition grew in scope and strength, Colonel Qadhafi recognized that his grip on power was threatened.  He responded by unleashing the Libyan military on the Libyan people.

Working closely with our allies around the world, the United States moved rapidly to support the Libyan people in a variety of ways – including by launching a major economic sanctions program against Colonel Qadhafi and the Government of Libya.

The objective of our sanctions program was threefold: first, to deprive Colonel Qadhafi of the resources necessary to sustain his violent assault against his own people; second, to preserve Libya’s wealth for the Libyan people; and third, to make clear to Colonel Qadhafi and his regime allies that they were isolated and their days were numbered.

A year out, I think we can confidently say that the sanctions served their purpose.  And I am delighted to say that swift action by you – the securities industry – was crucially important in bringing this about.

Let me take you back to February of last year.  The uprising in Libya began in mid-February, and by Wednesday, February 23, Qadhafi’s crackdown on the Libyan people was in full force.  Groups of heavily armed militiamen cruised the streets of Tripoli, spraying crowds with machine-gun fire.

The Treasury Department was asked to begin preparing options for economic sanctions, and we quickly began developing a comprehensive sanctions program.

And at the same time, folks in Treasury’s Office of Foreign Assets Control, including some who had worked on the Libya sanctions program from a decade ago, reached out to their contacts at U.S. financial institutions, including securities firms, and asked them to begin identifying assets controlled by the Libyan government, Qadhafi, his family and their cronies, in anticipation of a new program.

We thought that a broad-based program might capture $100 million or so in Libyan assets – not small change by any measure.  But on the afternoon of Friday, February 25, an analyst in OFAC sent around an email that stunned us all.  Our initial estimate of total assets to be frozen was off.  Way off.

We learned that just one financial institution was the custodian of Libyan assets in excess of $29.7 billion.  Another institution was holding almost $500 million in one portfolio.

The news that there were more than $30 billion in assets under U.S. jurisdiction created a fresh intensity.  If Colonel Qadhafi accessed this money, it could substantially aid his campaign of violent repression.  Freezing those assets was a top national security priority, and a draft Executive Order creating a new sanctions program was finalized later that day.

There were, of course, many other pieces were also in motion, including evacuating our personnel from Tripoli. The Administration was concerned that Qadhafi’s response to a powerful sanctions program freezing his assets could be to lash out against Americans who had not yet evacuated the country.  But a ferry sent to evacuate Embassy personnel and other Americans was stuck at the dock in Tripoli because of severe storms.

At about 8 p.m. that night, the ferry with the Americans on board left the dock and set sail for Malta, and President Obama signed the Executive Order, prohibiting transactions by US persons with Colonel Qaddafi, certain members of his family and the Government of Libya, including its Central Bank.  The Libya sanctions were under way.

Compliance teams at firms like yours – who had been waiting at their posts for the signal – swung into action that Friday night and froze Libyan assets at lightning speed.  By Monday morning, we received reports that more than $30 billion of assets under U.S. jurisdiction had been frozen.  This total swelled over the next several months to more than $37 billion.

Just as the United States reacted with unprecedented speed, so did the international community.  The day after President Obama signed the Executive Order, the UN Security Council adopted a resolution imposing sanctions on six members of the Qadhafi family, and then a few weeks later extended its sanctions to require all member states to impose an asset freeze largely identical to the sanctions we had adopted.

Securities firms here and abroad played a central role in this story.  Many frozen Libyan assets were held in securities, some in relatively simple investments in blue chip stocks and corporate bonds, and some in more sophisticated investments in private investment funds. Administering a sanctions program involving such sophisticated global investments presented multiple novel and difficult challenges, both for OFAC and for you.

For instance, many of Libya’s securities investments were held in complex structures that masked beneficial ownership information, making it difficult to determine whether the Government of Libya or members of the Qadhafi family maintained an interest.  Confirming this fact was further complicated because some of these investments spanned multiple jurisdictions, including some that do not regularly collect, or that protect, certain client information.  Nonetheless, the global effort to freeze Qadhafi’s and Libya’s assets was hugely successful.

It is important to note, of course, that sanctions alone did not bring the Qadhafi regime to an end.  Not hardly.  But U.S. and UN sanctions reinforced intense diplomatic and military efforts, including the UN arms embargo and NATO military operations that helped neutralize Qadhafi’s armed forces and protect civilians.  And most importantly, as President Obama has said, the liberation of Libya belongs to the Libyan people, who exhibited tremendous courage and perseverance during even the bleakest days of the conflict.

But I remain convinced that sanctions played an important role in speeding the demise of the Qadhafi regime.  Not only did the sanctions appear to motivate some Libyan leaders, like Libya’s Foreign Minister, Moussa Koussa, to defect, the robust implementation of sanctions by firms like yours helped starve Qadhafi of the resources he needed to supply his military and pay his mercenaries, and safeguarded the wealth of the Libyan people from Qadhafi and his cronies.

Sanctions, in short, served an important purpose in Libya, and we have each of you to thank for that.

Increasingly Powerful Sanctions Against Iran

Turning to Iran, as all of you are well aware, we have been engaged in a much longer term sanctions effort when it comes to a very different – and increasingly dire – threat to international peace and security:  the threat posed by Iran’s illicit nuclear program.  And again, the effectiveness of our sanctions program depends in no small measure on the efforts of the financial community.

Iran poses a multi-faceted threat to our national security and the security of our allies.  It is the leading state-sponsor of terrorism in the world today.  It violates the human rights of its own citizens and fuels the repugnant repression taking place in Syria today.  And, of course, Iran’s illicit nuclear program threatens to undermine the stability of the Gulf region, the broader Middle East, and the global economy.

There is no question that Iran is the most pressing national security issue of our day, and we are leaning heavily on sanctions in our efforts to bring about a peaceful resolution to the situation.  We are continuing to pursue a dual-track strategy, which offers a clear choice to the Iranian regime:  either Iran’s leadership can choose to meet its international obligations and achieve greater security and prosperity for the Iranian people, or it can continue to flout its responsibilities and face greater international isolation and sanctions pressure.

We are reviewing with our P5+1 partners the offer this month from Iran’s chief nuclear negotiator, Saeed Jalili, to resume talks.  But, as Secretary of State Hillary Clinton has said, any talks must be a sustained effort.  In the meantime, we have no choice but to continue to increase the pressure on Iran, including by imposing ever more powerful sanctions.

Many of you are familiar with the range of sanctions Iran is facing, from the U.S. and the broader international community.  Since 2006, the United Nations Security Council has adopted four Chapter VII resolutions imposing sanctions with respect to Iran’s nuclear program, creating a multilateral sanctions framework targeting Iran’s illicit nuclear activities and the Iranian entities, financial institutions, and infrastructure supporting those activities.

For our part, Treasury has taken a series of actions to disrupt the Iranian nuclear program, expose Iranian banks’ deceptive financial conduct and combat Iran’s efforts to evade international sanctions.  Perhaps most notably, we have pursued a campaign to isolate Iranian banks involved in illicit activities from the international financial system, imposing sanctions on approximately two dozen Iranian banks for their connection to proliferation activities or terrorism support.  We have taken similar actions against Iran’s national shipping line, the Islamic Revolutionary Guard Corps, the Iranian intelligence service, and a host of other Iranian government entities.  And last November, we identified Iran as a “primary money laundering concern” under Section 311 of the USA PATRIOT Act, identifying the entire Iranian financial sector, including the Central Bank of Iran, as posing an illicit finance risk to the global financial system.

And we are not alone.  The European Union, South Korea, Japan, Canada, Australia, Switzerland and Norway have imposed strong sanctions against Iran.  The UK and Canada, moreover, have joined the U.S. in protecting the integrity of the international financial system by cutting off Iranian banks from their financial sectors.

This sustained, global effort has brought very substantial economic and financial pressure on the Iranian regime.  Iran’s deepening economic difficulties are reflected most dramatically in its plummeting currency, the Iranian rial.  The weakening of the rial began in earnest last fall as it began to lose value against the dollar.  Altogether since early September, the rial has lost about half of its value.  The Iranian government has tried to stem the decline of the rial, including by banning the sale of Western currency and reportedly restricting Iranian citizens’ ability to trade currency by blocking text messages containing the word "euro" or "dollar."

But the spiraling rial is not the only indicator of the troubling economic situation the Iranian regime faces.  International sanctions have disrupted Iranian trade to such an extent that, as of late last year, many Iranian banks were experiencing capital shortages.  Officials at most of Iran’s government-owned banks considered their institutions bankrupt, and the only thing keeping most Iranian banks solvent and open to customers were cash infusions from the Iranian government.  Recently, there have been reports that Iranian traders have been unable to finance the import of steel and other strategic commodities.

The impact of the sanctions has attracted the attention of the highest levels of Iran’s leadership, with the Supreme Leader, Ayatollah Khamenei, recently referring to the sanctions in a speech broadcast to the nation as “painful and crippling.” Likewise, President Ahmadinejad acknowledged a few weeks earlier that “our banks cannot make international transactions anymore.”

And there is more to come.  The United States, along with our partners in the European Union and elsewhere, are entering a new phase in our sanctions effort by actively working to reduce Iran’s revenues from its oil exports and to isolate the Central Bank of Iran.

For our part, we are working to implement fully the new sanctions under Section 1245 of the National Defense Authorization Act, which was signed into law by President Obama on December 31.  Under this new law, foreign banks risk losing direct access to the U.S. financial system if they engage in certain types of transactions involving the CBI.  Indeed, today marks day 60 since the law was enacted, which means that foreign private banks that, after today,  engage in significant transactions with the CBI unrelated to the purchase of oil risk losing their correspondent account access to U.S. financial institutions.  Come June 28, 180 days after enactment, these sanctions apply to any foreign banks engaged in significant transactions with the CBI for the purchase of Iranian oil.  But the law provides a powerful incentive for countries that import oil from Iran to reduce those imports – namely, if they significantly reduce their Iranian oil imports over time, their banks are protected from the possibility of sanctions for their transactions with the CBI.

Section 1245 encourages a multilateral action to cut ties to the CBI and reduce Iran’s oil revenues in a timed, phased manner.  Echoing this theme, in January the European Union announced that it would ban imports of Iranian crude oil and petroleum products, freeze the assets of the Iranian Central Bank, and take additional action against Iran’s energy, financial, and transport sectors.  On February 3, Norway followed suit, announcing that it would implement the EU’s January 23 sanctions on Iran.

As we work to implement the full range of sanctions in our toolbox, we will also continue to identify and expose Iran’s illicit activity that is so dangerous and damaging to international peace and security.  As has been the case for years, we expect Iran to work to evade the sanctions that it faces, and preventing this will require continued vigilance by both governments and financial institutions.

One of the keys to thwarting Iran’s efforts to evade sanctions – and the broader illicit activities of Iran and others who abuse the international financial system – is to enhance financial transparency.  Standards related to customer due diligence are the touchstone of financial transparency, and I would like to spend a few minutes explaining our efforts to strengthen those standards here in the United States.

Promoting Financial Transparency

Financial transparency has long been recognized as central to efforts to combat all manner of illicit financial activity, from proliferation financing to terrorist financing to more traditional forms of financial crime like money laundering and securities fraud.  Put simply, financial transparency shines light where criminals and sanctions evaders seek to hide.

And this is yet another area where the role played by financial institutions is so critical.  At the most basic level, financial transparency depends on effective customer due diligence undertaken by financial institutions.  This includes identifying their customer, understanding the purpose and nature of the business relationship, and conducting ongoing due diligence in order to monitor for suspicious activity.

But that may not be enough to conduct truly effective customer due diligence – to be able to achieve real financial transparency.  For that, a financial institution must do more than “know” its immediate customer, the account holder.  It must know and understand the beneficial owner of the customer, who is ultimately calling the shots and who stands to gain from activity in the account.

In the abstract, this proposition should not be controversial at all.  Everyone in this room knows only too well how sophisticated – and some not-so-sophisticated – criminals seek to disguise their ownership and control of the proceeds of illicit activity through shell companies, front companies, intermediaries, nominees and seemingly impenetrable legal structures.

As the Financial Action Task Force (“FATF”) has observed, our tools to pierce through this financial fog are not as robust as they could be.  This is a systemic vulnerability in our efforts to combat financial crime.

The rub, of course, is what to do about it.  How do we move from our current paradigm, which is focused on making sure that your customer is who she says she is, to one focused on knowing who your customer really is?  How do we do that in a way that is neither unduly burdensome nor exceedingly complex in its own right? And how do we establish a clear and consistent customer due diligence obligation while also retaining the flexibility of a risk-based approach that allows financial institutions to allocate risk mitigation and compliance resources most effectively?

Along with industry, colleagues across the government, and foreign counterparts, we have been working hard on this problem for several years now, led by the tireless efforts of the Treasury’s Chip Poncy.  We believe the solution lies in a three-part approach that includes the following elements: revised international standards, just issued earlier this month by the FATF, that clarify the global standards related to customer due diligence and the transparency of legal entities and trusts; legislation that would enhance law enforcement’s access to meaningful beneficial ownership information for legal entities formed in the United States; and a clearer customer due diligence regulatory requirement, including an express obligation to collect beneficial ownership information.

I want to focus today on the domestic regulatory element of this strategy.

We believe that a tailored obligation to collect beneficial ownership information as part of the customer due diligence process will enhance our ability to combat money laundering, terrorist financing and other financial crimes.  With reliable beneficial ownership information in hand, financial institutions, including securities firms, will be able to develop better customer risk profiles, thus improving their ability to identify transactions prohibited by OFAC regulations and to monitor for suspicious activity.   Beneficial ownership information not only will help protect your firms against the risk of involvement in illicit finance, it will provide more useful information to law enforcement to pursue those who are engaged in financial crime.

Accordingly, today the Financial Crimes Enforcement Network (FinCEN) issued an Advance Notice of Proposed Rulemaking (“ANPRM”) designed to solicit public comment on a wide range of questions relating to the development of a possible customer due diligence regulation.  The ANPRM specifically asks for input on how a customer due diligence rule would include a requirement that certain financial institutions, including those now subject to a Customer Identification Program rule, identify and verify the beneficial owners of their customers.

As we move forward, we are committed to doing so together, in a manner that is both sensitive to regulatory burden and calculated to improve the quality of anti-money laundering, sanctions compliance, and countering terrorist financing.  Accordingly, the ANPRM seeks information as to how we can best strengthen our current customer due diligence regulatory expectations in a way that maximizes the benefit of financial transparency while minimizing the burden on customers of providing, and financial institutions collecting and verifying, this information.

Moreover, the ANPRM seeks your input on how a customer due diligence rule should address specific features of the securities industry, such as omnibus accounts.  We understand that your business has unique complexities and nuances that make a ‘one-size-fits-all’ approach potentially problematic.  While we seek to promote consistency across sectors, we will look closely at sectoral differences as we carefully balance the costs and benefits.

Your responses to these and the other questions posed in the ANPRM will be instrumental as we move forward to consider whether and how to implement a customer due diligence rule with a specific beneficial ownership component.  Regardless of precisely how we resolve this regulatory issue, we remain convinced that we can – and, indeed, must – improve financial transparency so that, together, we do an even better job of combating illicit financial activity.

In conjunction with the ANPRM, Treasury is also working closely with the federal functional regulators and law enforcement to engage industry on ways that we can improve financial transparency.  With respect to the securities industry and capital markets more broadly, we will continue to work together with the SEC, the CFTC and the self-regulatory organizations to enhance our understanding of the illicit financing vulnerabilities that we face.  This will inform our discussions with industry in determining the best ways to strengthen our regulatory framework through CDD.

CONCLUSION

In closing, I would like to thank you once again for inviting me here to speak with you about Treasury’s ongoing efforts to combat threats to the integrity of the financial system. The challenges that lie ahead are complex and the issues are serious, but I am reassured by the dedication and intelligence that is brought to these tasks by each of you.  I can assure you that Treasury stands ready to continue to work with you as we continue to chart this path forward, and that I am enormously optimistic that we will continue to make good progress together.

Thank you.

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Distributed by the Embassy of the United States of America, Brussels, Belgium. Web sites: http://belgium.usembassy.gov; http://www.uspolicy.be.

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