We are also pleased to have with us for a second time David Aufhauser, who is now a member of the law firm of Williams and Connolly. He previously served as General Counsel of the Treasury Department from March 2001 to November 2003. At the Treasury Department, in addition to his responsibilities as General Counsel, Mr. Aufhauser served as the Chairman of the National Security Council's Policy Coordinating Committee on Terrorist Financing.

Thank you all for being with us today. We look forward to hearing your testimony. We will begin with you, Mr. Wolosky.

TESTIMONY OF LEE S. WOLOSKY,1 CO-DIRECTOR, INDEPENDENT TASK FORCE ON TERRORISM FINANCING, COUNSEL, BOIES, SCHILLER AND FLEXNER, LLP

Mr. WOLOSKY. Thank you very much. Madam Chairman, Senator Lieberman and distinguished Members of the Committee, thank you for your kind words about our report and for your continuing leadership on terrorist financing issues.

This Committee's sustained attention to these issues is critically important to our Nation.

We are honored to report to you today on the Second Report of the Independent Task Force on Terrorist Financing sponsored by the Council on Foreign Relations. I have served as co-director of this bipartisan initiative since its founding in the Summer of 2002. Our report is the result of the hard work of a number of dedicated individuals of both political parties to seek to further vital national interests. I wish to thank our Chairman, Maurice Greenberg, for his unwavering support of the task force. I would also like to thank our Vice-Chairman, Mallory Factor, and our Co-director and Co-author, William F. Wechsler, for all they have done to make the task force a success.

Finally, I am also grateful to Council President, Richard Haas, for his support and assistance to our work and it is an honor, let me add, to testify beside David Aufhauser, who served our country with dedication and distinction. Many of the positive developments in this area since September 11 are the direct fruits of his vision and leadership.

I will discuss the background of our second report and its findings. Mallory Factor will then discuss the report's recommendations.

Since the report, along with its various appendices, is almost 200 pages in length we will only be able to highlight core points and findings. We will ask that the full report and its appendices be entered into the record and we will look forward to a fuller discussion of various aspects of the report in response to your questions.2

In our first report, released in October 2002, we concluded "It is worth stating clearly and unambiguously what official U.S. Government spokespersons have not, for years individuals and organizations based in Saudi Arabia have been the most important source of funds for al-Qaeda and for years Saudi officials have turned a blind eye to this problem."

1 The prepared statement of Mr. Wolosky appears in the Appendix on page 36.

2 The report entitled "An Update on the Global Campaign Against Terrorist Financing," appears in the Appendix on page 54.

We recommended the encouragement of the Saudi regime to strengthen significantly its efforts to combat terrorist financing. In this regard, we noted a recent historical record of inattention, denial, and half measures.

We urged the U.S. Government to confront directly the lack of political will in Saudi Arabia and elsewhere through the institution of a declaratory policy that would permit or compel U.S. officials to speak more frankly about the nature of the problem.

The reaction to the release of the task force's initial report was reflective of then-prevailing mindsets. The Saudi Arabian Foreign Minister, for example, told CNN that the report was "long on accusation and short on documented proof."

The U.S. Treasury Department spokesperson called the report "seriously flawed."

The status quo changed on May 12, 2003 when al Qaeda bombed housing compounds in Riyadh used by Americans and other foreign residents, prompting more comprehensive Saudi action against terrorism. Public statements and actions by both the United States and Saudi Arabia since May 2003 have evidenced in many respects a more urgent approach to terrorist financing.

For example, Saudi Arabia has announced a profusion of new laws, regulations and institutions regarding money-laundering, charitable oversight and the supervision of the formal and informal financial services sector. Critically, for the first time, the Saudi Arabian government decided to use force to hunt and kill members of domestic al Qaeda cells, including, in one case, a financier known by the name of Swift Sword.

Saudi Arabia has markedly improved its tactical law enforcement and intelligence cooperation with the United States. The Bush Administration acted quickly to take advantage of the newfound political will in Saudi Arabia to renew and reinvigorate U.S. efforts to combat terrorist financing.

The Bush Administration also moved toward a more declaratory policy. On June 26, 2003, for example, David Aufhauser testified before the Congress that in many respects Saudi Arabia was an "epicenter" of terrorist financing.

As a result of these and other activities, al Qaeda's current and prospective ability to raise and move funds with impunity has been significantly diminished. These efforts have likely made a real impact on al Qaeda's financial picture, and it is undoubtedly a weaker organization as a result.

Indeed, in many respects, the views expressed in the task force's first report are now widely held at home and abroad. But although much work has been done, much work remains.

Although Saudi Arabia has made significant improvements in its legal and regulatory regime, it has not fully implemented its new laws and regulations. Because of that, opportunities for the witting or unwitting financing of terrorism persist.

Indicia of implementation and enforcement are generally unavailable. We are concerned that the unavailability of such indicia may negatively impact the deterrent effect presumably intended by these measures. As our report was going to press, for example, we were unable to find evidence to suggest that the announced High Commission of Oversight of Charities was fully operational. More

over, its composition, authority, mandate and charter remain unclear, as do important metrics of its likely effectiveness, such as staffing levels, budget, and the training of its personnel.

The mandate and authority of the High Commission of Oversights of Charity is also unclear, relative to that of the Saudi National Entity for Charitable Work Abroad which was first announced in February of this year and which was the subject of a press conference in Washington a few days ago.

At least one other key body, Saudi Arabia's Financial Intelligence Unit, is also not yet fully operational. Reliable, accessible metrics are lacking with respect to many of the other newly announced legal, regulatory and institutional reforms. We find this troubling given the importance of these issues to the national security of the United States.

Additionally, despite the flurry of laws and regulations, we believe that there have been no publicly announced arrests, trials or incarcerations in Saudi Arabia in response to the financing of terrorism. As a result Saudi Arabia has yet to demand personal accountability in its efforts to combat terrorist financing and, more broadly and fundamentally, to delegitimize these activities.

Against its poor historical enforcement record any Saudi actions against financiers of terrorism are welcome. But action taken in the shadows may have little consistent or systemic impact on ingrained social or cultural practices that directly or indirectly threaten the security of the United States.

Not only have there been no publicly announced arrests in Saudi Arabia related to terrorist financing, but key financiers remain free and go unpunished. In sum, we find it regrettable and unacceptable that since September 11, 2001 we know of not a single Saudi donor of funds to terrorist groups who has been publicly punished. Finally, as Senator Levin indicated, Saudi Arabia continues to export radical extremism. As a core tenet of its foreign-policy, Saudi Arabia funds the global propagation of Wahabism, a brand of Islam that, in some instances, supports militancy by encouraging divisiveness and violent acts against Muslims and non-Muslims alike.

This massive spending is a key part of the terrorist financing problem. We are concerned that it is helping to create the next generation of terrorists and therefore constitutes a paramount strategic threat to the United States.

Saudi Arabia has begun to crack down on domestic extremism, most dramatically through education reform and the banishment or reeducation of scores of radical Wahabi clerics. But our task force found there is little evidence of effective action to curb the ongoing export of extremism.

We have made a number of findings that I hope we can discuss. In the interest of time, however, Mallory Factor will now address the report's recommendations, after which I would be happy to entertain any questions.

Chairman COLLINS. Thank you. Mr. Factor.

TESTIMONY OF MALLORY FACTOR,1 VICE-CHAIRMAN, INDEPENDENT TASK FORCE ON TERRORISM FINANCING, PRESIDENT OF MALLORY FACTOR, INC

Mr. FACTOR. Madam Chairman, Senator Lieberman, and distinguished Members of the Committee, I am honored to testify here today on the recommendations of the Independent Task Force of the Council on Foreign Relations on Terrorist Financing, of which I serve as Vice-Chair.

This subject is of critical importance to the security of our Nation and the world. Madam Chairman, and Senator Lieberman, I would like to commend you for your interest in and leadership on these very important issues and thank you for inviting us to appear before you today.

I would also like to thank and commend Lee Wolosky for his tireless work and dedication to this project. Achievements of our bipartisan task force are a direct result of Lee Wolosky's dedication to this project and his superior judgment in matters involving this task force.

The Bush Administration has made significant progress in its approach to terror financing since September 11. Our report, which is based on publicly available information as well as discussions with current and former Administration officials, finds that the Administration's effort, combined with those of Saudis and other international partners, has significantly diminished al Qaeda's current and prospective ability to raise and move funds.

Our task force makes the point that there is still much work to be done. It also sets forth a framework of constructive, forwardlooking recommendations for improving U.S. efforts against terrorism financing.

We note that Saudi Arabia has also made progress since May 2003 by putting in place new anti-money laundering laws designed to impede the flow of funds from Saudi Arabia to terrorist groups. These laws have a number of exceptions and flaws which would weaken their effectiveness in curbing terror financing if fully implemented.

The real problem is that we could not find evidence of significant enforcement and implementation by Saudi Arabia of several of these new laws. Quite simply, many key financiers of global terror continue to operate, remain free and go unpunished in Saudi Arabia.

Our task force report generally reaffirms the recommendations made in the task force's first report and makes nine new recommendations. Although my written testimony explains each of these recommendations, I will discuss only four recommendations now. However, I welcome the opportunity to discuss any of them in response to your questions.

First, our task force urges U.S. policymakers to build a new framework for U.S.-Saudi relations. We recognize that historically the United States has maintained a policy of noninterference in the domestic affairs of Saudi Arabia. Recently, however, al Qaeda, a terrorist organization rooted in Saudi Arabian domestic affairs, has killed and threatened Americans both at home and abroad. Saudi

1 The prepared statement of Mr. Factor appears in the Appendix on page 41.

Arabia is now involved in a kind of civil war with extremists. This civil war has global implications.

We propose a new framework for U.S.-Saudi relations which would recognize certain Saudi domestic issues that impact U.S. security. These issues, such as terrorist financing and the global export of Islamic extremism, can no longer be off the table.

We acknowledge that this transition is already underway but our recommendation is still out in front of the Administration's public statements on this issue. We believe that the U.S. Government must engage the Saudis openly and unequivocally to confront the ideological, religious and cultural issues that fuel al Qaeda, its imitators and its financiers throughout the world.

Second, and this was already brought up by Senator Lieberman, we believe that the Executive Branch should formalize its efforts to centralize the coordination of U.S. measures to combat terrorist financing. We commend the Executive Branch for centralizing the coordination of terrorist financing issues in the White House as we recommended in our original task force report. The sound allocation of responsibility to the White House needs to be formalized and, as Senator Lieberman said, institutionalized. And we believe this should be done through a national security presidential directive or some measure similar to that.

Third, we recommend that Congress enact a Treasury-led certification regime specifically on terrorist financing. Many countries have taken steps to improve their anti-money laundering and counterterrorist fighting regimes but many have not. We understand that certification systems should be used sparingly. They can strain relations with foreign governments and require expenditures of resources. The fight against terrorist financing is sufficiently important, however, to warrant its own certification regime. This will ensure that stringent requirements are maintained specifically with respect to foreign nations' policies and practices on terrorist financing.

Such a certification system would require the Executive Branch to submit to Congress on an annual basis a written certification, classified if necessary, detailing the steps that foreign nations have taken to cooperate in United States and international efforts to combat terrorist financing. This would be similar in some ways to the Saudi Arabia Accountability Act of 2003, S. 1888, sponsored by Senator Arlen Specter and co-sponsored by Chairman Collins and others. The Act would provide a good starting point for a terrorist financing certification regime if it were narrowed to focus solely on the financing of terrorism and expanded to apply to other nations. Sanctions for non-certification could include smart sanctions such as denial of U.S. foreign assistance and limitations on access to the U.S. financial system.

Fourth, we recommend that the National Security Council and the White House Office of Management and Budget conduct a cross-cutting analysis of the budgets of all U.S. Government agencies as they relate to terrorist financing. We believe it is crucial that the U.S. Government keep a central accounting of all financial and human resources expended by the government in combating terrorist financing. We understand this cross-cutting analysis could take a significant amount of work on the part of ÑSC and OMB.