Money-Laundering Rules Awash in the Bureaucracy

WASHINGTON -- Millions of dollars in terrorist-tainted money may be making its way through U.S. banks and financial institutions because of the government’s inability to ensure that its sanctions are being followed, financial and law enforcement experts say.

The problem, highlighted in a confidential report to Congress that is raising concerns among lawmakers, has threatened to derail efforts to shut down Osama bin Laden’s money pipeline--a primary goal of the Bush administration’s war on terrorism.

The report warns that many financial institutions--one in four, according to a survey by the Treasury Department inspector general--do not have computer software in place to determine whether they are doing business with banned terrorists or affiliates. Some institutions do not even have written guidelines or staff assigned to ensure compliance, and dozens of banned transactions have been allowed to proceed without detection, investigators found.

Compounding the problem is miscommunication between the U.S. government and the financial sector about what is allowed. Banking executives complained in interviews that there is widespread confusion over what the Treasury Department expects them to do in the stepped-up effort to track and seize terrorist-tainted money, and the simplest of tasks--like how to spell “Mohammed”--has caused banks no shortage of frustration.

“I just don’t think [the Treasury Department’s asset seizure arm] was designed for a job like this. What you’re asking the financial sector to do is very, very different from anything we’ve had to do in the last 30 years,” said an executive at a major bank who asked not to be identified.

“There’s terrorist money in the system. It could be a taxi stand in New Jersey that’s running a front, it could be somewhere else, but it’s there,” the executive said.

In a letter sent Wednesday to Treasury Secretary Paul H. O’Neill, Sen. Charles E. Grassley (R-Iowa) said he was concerned by “serious gaps” in the Treasury Department’s efforts “to disrupt the financial lifeblood of terrorists, drug kingpins, criminals and rogue nations.”

The Treasury’s Office of Foreign Asset Control, or OFAC, has played a central role since Sept. 11 in the U.S. effort to cut off the flow of terrorist money, by freezing $34 million in suspected terrorist assets and putting 210 groups and individuals on “blocking” lists.

But Grassley, a senior member of the Senate Finance and Judiciary committees, told O’Neill that “with the stakes to our national security and the war on terrorism so high, OFAC must close these gaps

The Treasury Department did not respond to requests for comment. In a written response to the inspector general, however, department officials disagreed with many findings and said the financial sector’s compliance with Treasury regulations “as a whole is very high.” Aggressive efforts to educate the financial sector, along with the banks’ “desire to avoid negative publicity” if they are found in violation of U.S. sanctions, have driven the compliance, OFAC director R. Richard Newcomb said.

While the report recommended broadening OFAC’s powers to close gaps, Newcomb said the office’s authority is sufficient “to reasonably ensure compliance.”

The inspector general’s study dealt largely with data compiled before the Sept. 11 terrorist attacks on the World Trade Center and the Pentagon, but officials said questions raised about Treasury’s ability to ensure compliance with its own rules have broad ramifications for the war on terrorism. The April 26 report has been circulated confidentially among members of Congress in recent weeks, but the department has declined to release it publicly. A copy was obtained by The Times.

The stakes are high: Authorities have identified more than $4 billion worth of assets in the United States tied to designated state sponsors of terrorism, with $3.5 billion blocked as a result of economic sanctions against terrorist countries, the inspector general’s report said. The blocking of most of those assets pre-dated Sept. 11.

Investigators found that, while the Treasury Department has made inroads in getting financial institutions to detect and prevent violations of foreign sanctions, the department cannot be sure that its sanctions are being obeyed.

Because of statutory limitations, OFAC does not randomly audit financial institutions to see if they are complying with U.S. sanctions, and the agency must rely on banking regulators to detect problems, investigators said.

Moreover, the inspector general found that statistical errors and outdated policies at OFAC call into question the accuracy of the Treasury Department’s data on the thousands of financial transactions blocked each year.

The Treasury Department and the financial sector face the complicated and perhaps unachievable task of identifying suspicious activities among billions of financial transactions around the country every day, experts say.

The Sept. 11 hijackers managed to carry out the attacks on a modest budget of perhaps half a million dollars, opening U.S. bank accounts, using credit cards and staying largely within the law. There was little to arouse suspicion.

“These were very low dollar amounts--a couple of thousand dollars here and there in a checking account. It wasn’t going to be on anyone’s radar screen,” said John Byrne, senior counsel for the American Banking Assn.

In the case of suspected “20th hijacker” Zacarias Moussaoui, for instance, Moussaoui deposited $32,000 in an Oklahoma bank in early 2001, and the bank filed a cash transaction report with the government as required, a government source said. Moussaoui, now facing the death penalty on conspiracy charges, kept other transactions below the $10,000 reporting requirement and did not do anything else to attract interest, the FBI said.

“He wasn’t a known bad guy. The problem when you’re trying to track the terrorist money is that you need to not only know the transaction took place, but the name [of the person making the transaction] has to mean something,” the government source said. “We don’t know how big the problem is. It could be millions or tens of millions that’s getting through.”

Based on a limited survey of 102 financial institutions, the inspector general found 74 banned transactions that went through despite U.S. sanctions in 2000--the last year for which data were available. But officials said the magnitude of the problem may be much greater.

Several financial sector executives complained that part of the problem is that the Treasury Department has adopted a “one-way street” mentality, demanding increased accountability from financial service firms but sometimes not providing the information to carry out the task.

Congress has subjected a broader range of businesses to federal accountability requirements for reporting certain types of transactions in an effort to spot terrorist money, but executives say confusion remains about exactly what type of transactions are covered, how often screening should be done, and whose orders in Washington they should be following.

“One of the biggest problems I’m hearing from our members is they’re not sure what they’re supposed to be doing or following,” the American Banking Assn.’s Byrne said.

“There’s a lot of things [the Treasury Department] can do around the edges rather than just say to the banks, ‘Look it up, look it up, look it up.’ ”

Byrne said the Treasury Department has promised to post answers to commonly asked questions on its Web site in coming weeks. That should help, he said, but, “there is an inherent difficulty in getting answers.... There are a million things we need to know.”

Particularly frustrating are the many variations on Arabic names that may be subject to blocking orders. (Bin Laden’s first name, for instance, is spelled “Usama” by the FBI.)

The problem has become so vexing that money-laundering expert James R. Richards posted tips for deciphering names of Al Qaeda suspects on the Web, at www. mlprevention.homestead.com.

“This isn’t a perfect system,” Byrne said. “We all need to get better at understanding how this process works.”