Alternative financing mechanisms  enable terrorists to earn, move, and store their assets and may include the  use of commodities, bulk cash, charities, and informal banking systems,  sometimes referred to as hawala. U.S. Government Faces Significant Challenges in Deterring Terrorists’ Use of Key Alternative Financing Mechanisms

The U.S. government faces myriad challenges in determining and  monitoring the nature and extent of terrorists’ use of alternative financing  mechanisms. As a result of our earlier findings:    We recommended that the Director of the FBI, in consultation with  relevant U.S. government agencies, systematically collect and analyze  information involving terrorists’ use of alternative financing  mechanisms. Justice agreed with our finding that the FBI does not  systematically collect and analyze such information, but Justice did not  specifically agree or disagree with our recommendation. It remains unclear as to how this will serve as a  basis for an informed strategy. The IRS agreed with our  recommendation, and we are pleased to report that the IRS expedited  efforts and issued IRS procedures and state guidance on December 31,  2003, as stated in its agency comments in response to our report. Federal Agencies Have Taken Steps to Coordinate Investigations of Terrorist Financing, but Operational and Organizational Challenges Still Exist

In May 2003, to resolve jurisdictional issues and enhance interagency  coordination, the Attorney General and the Secretary of Homeland  Security signed a Memorandum of Agreement concerning terrorist  financing investigations. In February 2004, we reported to the Senate Appropriations’  Subcommittee on Homeland Security that the FBI and ICE had  implemented or taken concrete steps to implement most of the key  Memorandum of Agreement provisions. For example, the agencies had  developed collaborative procedures to determine whether applicable ICE  investigations or financial crimes leads may be related to terrorism or  terrorist financing—and, if so, determine whether these investigations or  leads should thereafter be pursued under the auspices of the FBI. In September 2003, we  reported to this Caucus that, as a mechanism for guiding the coordination  of federal law enforcement agencies’ efforts to combat money laundering  and related financial crimes, the annual NMLS has had mixed results but  generally has not been as useful as envisioned by the Strategy Act. For  example, we noted that although Treasury and Justice had made progress  on some NMLS initiatives designed to enhance interagency coordination of  investigations, most had not achieved the expectations called for in the  annual strategies, including plans to (1) use a centralized system to  coordinate investigations and (2) develop uniform guidelines for  undercover investigations. In summary, our September 2003 report recommended that—if the  Congress reauthorizes the requirement for an annual NMLS—the Secretary  of the Treasury, working with the Attorney General and the Secretary of  Homeland Security, should take appropriate steps to    strengthen the leadership structure responsible for strategy  development and implementation by establishing a mechanism that  would have the ability to marshal resources to ensure that the  strategy’s vision is achieved, resolve disputes between agencies, and  ensure accountability for strategy implementation;  link the strategy to periodic assessments of threats and risks, which  would provide a basis for ensuring that clear priorities are established  and focused on the areas of greatest need; and   establish accountability mechanisms, such as (1) requiring the  principal agencies to develop outcome-oriented performance measures  that must be linked to the NMLS’s goals and objectives and that also  must be reflected in the agencies’ annual performance plans and (2)  providing the Congress with periodic reports on the strategy’s results. In commenting on a draft of the September 2003 report, Treasury said that  our recommendations are important, should Congress reauthorize the  legislation requiring future strategies; Justice said that our observations  and conclusions will be helpful in assessing the role that the strategy  process has played in the federal government’s efforts to combat money  laundering; and Homeland Security said that it agreed with our  recommendations. While we have not  reviewed the 2003 NMLS, we note that it emphasized that “the broad fight  against money laundering is integral to the war against terrorism” and that  money laundering and terrorist financing “share many of the same  methods to hide and move proceeds.” In this regard, one of the major  goals of the 2003 strategy is to “cut off access to the international financial  system by money launderers and terrorist financiers more effectively.”  Under this goal, the strategy stated that the United States will continue to  focus on specific financing mechanisms—including charities, bulk cash  smuggling, trade-based schemes, and alternative remittance systems—that  are particularly vulnerable or attractive to money launderers and terrorist  financiers. Continued progress will depend largely on the ability of  the agencies to establish and maintain effective interagency relationships  and meet various other operational and organizational challenges.
Why GAO Did This Study

The September 11, 2001, terrorist attacks highlighted the importance of data collection, information sharing, and coordination within the U.S. government. Such efforts are important whether focused on terrorism or as an integral part of a broader strategy for combating money laundering. In this testimony, GAO addresses (1) the challenges the U.S. government faces in deterring terrorists' use of alternative financing mechanisms, (2) the steps that the Federal Bureau of Investigation (FBI) and Immigration and Customs Enforcement (ICE) have taken to implement a May 2003 Memorandum of Agreement concerning terrorist financing investigations, and (3) whether the annual National Money Laundering Strategy (NMLS) has served as a useful mechanism for guiding the coordination of federal efforts to combat money laundering and terrorist financing. GAO's testimony is based on two reports written in September 2003 (GAO-03-813) and November 2003 (GAO-04-163) for the Caucus and congressional requesters within the Senate Governmental Affairs Committee, as well as a February 2004 report (GAO-04-464R) on related issues for the Senate Appropriations Subcommittee on Homeland Security.

What GAO Found

The U.S. government faces various challenges in determining and monitoring the nature and extent of terrorists' use of alternative financing mechanisms, according to GAO's November 2003 report. Alternative financing mechanisms are outside the mainstream financial system and include the use of commodities (cigarettes, counterfeit goods, illicit drugs, etc.), bulk cash, charities, and informal banking systems to earn, move, and store assets. GAO recommended more systematic collection, analysis, and sharing of information to make alternative financing mechanisms less attractive to terrorist groups. In response to our recommendation that the FBI, in consultation with other agencies, systematically collect and analyze information on terrorists' use of these mechanisms, Justice did not specifically agree or disagree with our recommendation, but other agencies agreed with the need for improved analysis. The Treasury agreed with our recommendation to issue an overdue report on precious stones and commodities, but it remains unclear how the resulting product may be used as the basis for an informed strategy as expected under the 2002 NMLS. The Internal Revenue Service (IRS) agreed with our recommendation to develop and implement procedures for sharing information on charities with states and issued IRS procedures and state guidance on December 31, 2003. To resolve jurisdictional issues and enhance interagency coordination of terrorist financing investigations, the FBI and ICE have taken steps to implement most of the key provisions of the May 2003 Memorandum of Agreement. According to GAO's February 2004 report, the agencies have developed collaborative procedures to determine whether applicable ICE investigations or financial crimes leads may be related to terrorism or terrorist financing--and, if so, determine whether the FBI should thereafter take the lead in pursuing them. GAO's report noted that continued progress will depend largely on the ability of the agencies to establish and maintain effective interagency relationships. From a broader or strategic perspective, the annual NMLS generally has not served as a useful mechanism for guiding coordination of federal efforts to combat money laundering and terrorist financing, according to GAO's September 2003 report. While Treasury and Justice had made progress on some strategy initiatives designed to enhance interagency coordination of investigations, most initiatives had not achieved the expectations called for in the annual strategies. The report recommended (1) strengthening the leadership structure for strategy development and implementation, (2) identifying key priorities, and (3) establishing accountability mechanisms. In commenting on a draft of the September 2003 report, Treasury said that our recommendations are important, should the Congress reauthorize the legislation requiring future strategies; Justice said that our observations and conclusions will be helpful in assessing the role that the strategy process has played in the federal government's efforts to combat money laundering; and Homeland Security said that it agreed with our recommendations.